Big Oil Exits Colombia as Political Turmoil and Violence Escalate

Colombia’s oil industry faces a significant crisis as major international energy companies withdraw from the country. This exodus follows a combination of rising violence, increased taxes, and governmental policies under President Gustavo Petro, who has introduced measures that have unsettled the market since taking office in August 2022. With the introduction of a ban on hydraulic fracturing and steep tax hikes on oil sales, the situation has deteriorated to the point where many companies deem further investment too risky.

The first major company to exit was ExxonMobil, which suspended its oil exploration and production contracts in Colombia, impacting the nation’s economically crucial hydrocarbon sector. The company’s decision was influenced by the ban on fracking, which was legislated in mid-2023, alongside escalating violence and a tax structure that increasingly burdens oil producers. By April 2023, Exxon had abandoned eight contracts, marking a substantial blow to Colombia’s energy landscape.

The Petro administration’s tax increases were aimed at addressing a growing fiscal deficit. A new tax structure was introduced in November 2022, which imposed escalating rates based on international Brent crude prices. When prices surpassed $67.30 per barrel, the tax increased to 10%, climbing to 15% for prices above $82.20. Although the Colombian Constitutional Court overturned attempts to eliminate tax deductibility for royalty payments, the overall environment remains challenging for oil businesses.

Colombia’s economic outlook has worsened, with credit ratings from both S&P and Moody’s downgraded to the lowest investment grade. The government is grappling with a projected budget shortfall of approximately $6.5 billion, compelling officials to consider further tax hikes, particularly affecting the oil sector. A temporary 1% levy on crude oil sales has been extended indefinitely, exacerbating concerns about the sustainability of operations in a country already facing substantial fiscal challenges.

The security situation in Colombia has further deteriorated, particularly in oil-rich regions. Violence has surged due to conflicts between state forces and illegal armed groups, with the National Liberation Army (ELN) and dissident factions of the Revolutionary Armed Forces of Colombia (FARC) intensifying their activities. This instability has disrupted operations and increased production costs for companies within the oil sector.

Rising levels of cocaine production have fueled much of the violence, with illegal groups fighting for control of lucrative drug trafficking routes. Colombia produced an estimated 2,664 metric tons of cocaine in 2023, with coca cultivation extending across 253,000 hectares. This surge in illicit production is directly impacting oil operations, leading to frequent clashes and disruptions in areas critical for energy infrastructure.

As the situation worsens, companies like Shell and Repsol have also announced their exit from Colombia. Shell withdrew from three offshore natural gas blocks and plans to focus on domestic energy reserves amid declining supplies. Repsol sold its interests in the Llanos Orientales basin, further indicating a retreat from the Colombian market.

The combination of political instability, increased violence, and the Petro administration’s anti-fossil fuel policies poses a serious threat to Colombia’s energy sector. With oil production expected to decline and foreign investment waning, the country may soon face an energy crisis, further straining an already fragile economy. If these trends continue, Colombia could see an escalation in poverty and insecurity, presenting significant challenges for the government and its citizens.