Colombia: Inclusion and Upgraded Governance Are the Keys to Petro’s Energy Transition Ambition

This is a shortened translation of a longer Spanish-language post.

On 7 August, Colombia turned a new page in its history. For the first time South America’s second-most populous country will be governed by a left-wing president and an Afro-Colombian vice-president who is a seasoned leader of social movements. More than 11 million citizens (50.44 percent of those voting) gave President Gustavo Petro and Vice President Francia Márquez Mina their mandate.

Petro boldly stated in his inaugural address that “we are willing to move to an economy without coal and without oil.” But how can the government and Colombians translate these green ambitions into concrete results?

In addition to addressing fiscal and energy supply challenges, the government must commit to good governance of the energy transition away from fossil fuels. The transition must include diverse voices and be transparent. Authorities must define clear policy frameworks for managing the progressive decline in production of fossil fuels, the need for economic diversification and the new governance challenges of renewable energies and transition minerals.

Petro's energy transition agenda

President Petro’s proposal to limit oil extraction has positioned him as a changemaker in the global energy transition. During his campaign, he invited other leaders in the region to form an “anti-oil bloc” to move economies away from fossil fuels and create a Latin American front to fight climate change. A few days ago, he received a letter signed by more than 80 parliamentarians from 30 countries that are part of the movement called “Call of Parliamentarians for a Future Free of Fossil Fuels” expressing their support to his proposal. Indeed, as an oil-producing and oil-dependent country, Colombia could become a laboratory for the innovation of transition policies, with much to contribute to other producing countries and global efforts to mitigate warming.

In line with Colombia’s updated commitments to the Paris Agreement—51 percent reduction in greenhouse gas emissions by 2030 and zero net emissions by 2050—during the campaign, Petro argued that Colombia should cease licensing for new hydrocarbon exploration and for large-scale open pit mines; ban the exploration and exploitation of offshore and non-conventional hydrocarbon deposits; and  stop fracking pilot projects. 

Petro also proposed promoting non-conventional renewable energy sources and earmarking the exploitation of fossil fuel reserves for domestic consumption, given their low levels (7.6 years’ worth of oil and 8 years’ worth of gas). In addition, he pointed out that Ecopetrol (which is majority state-owned), should play a fundamental role in the transition by redirecting part of its exploration budget toward a new energy transition fund.

After winning the election, Petro moderated some of these proposals. In his inaugural speech, he pointed out that although his commitment to decarbonization remains, Colombia is not a major contributor to global emissions. He also placed a greater focus on the role of international cooperation. The newly appointed finance minister, José Antonio Ocampo, has indicated that gas exploration will probably continue and that oil exports should continue in the short term. In a recent interview, the new mining minister, Irene Vélez, also commented that this process would take more than a decade and that the government would discuss the  extraction of minerals necessary for technologies needed for the energy transition.

Top-down decision-making, general exclusion of affected communities and negative project impacts have generated a high level of socio-environmental conflict in the territories where extraction takes place.

Former president Iván Duque took important steps toward the energy transition by promoting investments in renewable energies, some green hydrogen pilot projects and transition minerals. But his administration also prioritized the expansion of fossil fuel extraction. He supported the coal industry to increase its competitiveness in the Asian market, promoted offshore hydrocarbon exploration projects, and encouraged pilot fracking projects to increase gas supply. Top-down decision-making, general exclusion of affected communities and negative project impacts have generated a high level of socio-environmental conflict in the territories where extraction takes place. This perpetuated a trend that began in the early 2000s.

Four challenges to Colombia’s energy transition 

If Colombia does not initiate a broad discussion and take steps toward a just transition, in a few years it could end up with stranded assets and investments with low economic, social and environmental returns that could increase inequality. However, President Petro will have to lead this process in a scenario of great economic uncertainty linked to inflation and the risks of a global recession—in addition to the difficult fiscal situation resulting from the coronavirus pandemic.

Fiscal policy

In the past, as much as 25 percent of government income has come from hydrocarbons. Managing the progressive decline in hydrocarbon production means replacing taxes on oil and gas with new sources of revenue. 

The new government has proposed imminent tax reform with the aim of raising COP 25 trillion (approximately USD 5.5 billion). The success of this proposal will be a key indicator of how and when the government might cover the gap that would be left by an eventual reduction in oil and gas taxes and royalties. 

The redefinition of Ecopetrol’s role will be of great significance since its profits are an important contributor to the state budget. It is an efficient company that has achieved good financial results in recent years despite the pandemic and its profits will help to cover this year’s fiscal deficit. 

The energy crunch resulting from the war in Ukraine will likely sustain the recent increase in hydrocarbon prices for some time to come.

Government officials will also need to decide whether or not to maintain the commitment to the promotion of the exploitation of minerals, which have contributed less to government coffers than oil and gas. The new government has announced a mining moratorium during its first 100 days so that officials can review compliance with regulations, but in other declarations has opened the door to further exploitation of transition minerals such as nickel and copper. Should authorities further pursue those commodities, they should also develop a modern taxation framework as well as enforceable socio-environmental standards adapted to the new importance of these metals. 

Finally, the pace of the global energy transition is a key consideration for Colombia’s revenues in the short term. It is likely that in the long-term oil and coal prices will decrease. But the energy crunch resulting from the war in Ukraine will likely sustain the recent increase in hydrocarbon prices for some time to come. Petro has shown a willingness to take advantage of the boom in the short term.

Trade deficit

Another economic challenge to consider relates to the current account deficit. In 2021, the oil industry represented 33 percent of the total value of Colombian exports. Along with coal and other minerals, oil and its derivatives account for about 56 percent of the total value of the country’s foreign sales and generate annual foreign exchange earnings of about USD 20 billion. Likewise, oil license bid rounds and mining investments are a main source of foreign direct investment (USD 7.6 billion in 2020). In this context, the new minister of finance has suggested the need to continue exporting oil to avoid a problem in the balance of payments.