This is one of a series of country briefings produced by NRGI to summarize the evolving situation with respect to the pandemic and its economic impacts. The analysis it contains is subject to change with circumstances, and may be updated in due course.
- Historically prudent economic management in Colombia has resulted in sufficient fiscal space to assume debt, which has allowed the country’s government to initially respond to the pandemic crisis with decisive fiscal measures.
- Extractive industries in Colombia appear to be returning to normal, especially the oil, gas and gold sectors.
- Colombia’s thermal coal industry faces existential challenges, both internally (from labor demands and social conflicts due to environmental issues) and externally (low prices and structural decline in demand).
Summary of economic impact of the coronavirus pandemic
Colombia (along with Brazil, Peru, Argentina and Mexico) is among the Latin American countries most affected by the coronavirus pandemic. As of 4 January 2021, the country had formally registered 1.7 million cases and 44,187 deaths.
Prior to the pandemic, Colombia had a trajectory of uninterrupted economic growth since 2000, driven by high oil and coal prices, and thanks to current and previous governments’ prudent macroeconomic management. The depth of the coronavirus crisis has hit the productive sectors hard in the second and third quarter of 2020, pulling the country into economic recession. The International Monetary Fund (IMF) predicts that the economy will contract by 8.2 percent in 2020. According to the Ministry of Finance, the fiscal deficit is expected to reach 8.9 percent of GDP.
The World Bank has praised the government of Colombia for its quick and decisive response to the crisis. These measures include passing an important fiscal package of a total of more than COP 31 billion (approximately USD 8.6 billion, almost 3 percent of 2019 GDP). The package provided resources to the health system, increased transfers to vulnerable groups, applied selective measures to delay tax collection, reduced tariffs and helped companies to pay wages. The government also established special lines of credit and loan guarantees for companies that were affected by the crisis, of up to COP 72 billion (approximately USD 20 billion or 6.8 percent of 2019 GDP). To ensure adequate fiscal support, the government activated the suspension clause of the fiscal rule for 2020 and 2021.
The prudent management of the economy allowed the country to quickly access debt, internally and externally. On March 21, by decree, the government created the Emergency Mitigation Fund (FOME). The government also approved the first source from which it borrowed money: the Fondo de Ahorro y Estabilización (FAE), a sovereign wealth fund that receives a part of the royalties from the exploitation of oil, gas and mining to finance emergency fiscal spending (approximately USD 4 billion). Colombia subsequently issued sovereign debt abroad (a USD 4.3 billion 30-year bond), expanded domestic financing to USD 10.5 billion and additionally expanded the flexible credit line it has with the IMF to USD 17.2 billion.
Impact on the oil and gas sector
The oil sector represented 3.37 percent of GDP and amounted to USD 15,962 million in exports in 2019. In November 2020, oil production recovered to 757,400 barrels per day (bpd), from April production of 730,000 bpd. However, production is still far from the 2019 average level of 885,857 bpd.
Despite the sharp drop in prices in April and weak international demand, the sector’s rapid return to business as usual is also evidenced by the fact that the National Hydrocarbons Agency (ANH in Spanish) maintained its planned bidding rounds for oil blocks during 2020. ANH carried out three cycles of the permanent area allocation process (PPAA) with some delays, but signed thirty contracts for an approximate total of USD 1 billion. Colombia has a long experience in the competitive allocation of oil areas and the PPAA has allowed it to channel investments to the sector, despite limited geological potential and in the midst of a sharp decline in demand for oil globally (a result of the pandemic).
Due to its low levels of reserves and limited onshore potential, Colombia aspires to develop oil in unconventional areas. However, developing pilot projects to exploit those areas using the hydraulic fracturing technique (fracking) has caused controversy. In November, the Attorney General’s Office (Procuraduría) asked the State Council to nullify the regulations that establish the exploration and exploitation criteria for unconventional deposits because they are not compatible with the principles of precaution and sustainable development established in Colombia’s constitution. Despite this, ANH continued with the process of selecting contractors for the development of research projects in unconventional reservoirs. Ecopetrol, ExxonMobil and Drummond qualified to participate. More recently, Ecopetrol won the first assignment. According to ANH, the entire pilot process will culminate in mid-2022, and the projects will yield key information on the viability of fracking in Colombia. With falling reserves, fracking appears to be the Colombian government’s main prospect for continuing to extract oil.
Colombia’s national oil company, Ecopetrol (which is 88 percent state-owned), is the main player in the country’s oil and gas industry. (It also controls transportation and refining.) Ecopetrol has achieved asignificant recovery in the second half of 2020, following the lifting of pandemic restrictions and the recovery of oil prices. Ecopetrol’s financial results for the third quarter show positive profits for the first time in 2020, although they are 70 percent below the same period in 2019.
Impact on the mining sector
In 2019, the mining sector comprised 1.63 percent of Colombia’s GDP and a total of USD 8.24 billion in exports. The same year, Colombia exported 85 million tons of coal (USD 5.67 billion), 37 tons of gold (USD 1.75 billion) and 41 tons of nickel (USD 545 million). The government excepted the mining operations from lockdown, but still there was a fall in production due to the general quarantine and the consequent logistical difficulties. Gold and nickel mining have recovered in the third quarter of 2020. Gold shows a strong recovery driven by high prices: 14.2 tons were produced in the third quarter, well above the 8.9 tons in the same period in 2019.
However, the gold exploitation statistics might be undervalued. Using remote sensing, the Ministry of Mines and Energy, the United Nations Office on Drugs and Crime (UNODC) and the United States embassy in Colombia found that 66 percent of alluvial gold exploitation does not have technical and/or environmental permits and instead constitutes illegal activity.
Coal exploitation has fallen 47 percent in the third quarter of 2020. This is the result of various factors, including requests for suspension from two operations—PRODECO (Glencore) and CNR—as well as a 91-day strike at the main Cerrejon operation (owned by BHP Group, Anglo American and Glencore). The strike was recently resolved with a collective agreement and suspension of the proposal to modify the shifts that Cerrejon had proposed to improve its competitiveness, which included, according to information by a union representative provided to Reuters, a reduction of workers by 25 percent.
According to the minister of mines and energy, Colombia is interested in attracting large investments to exploit gold and copper (the minister does not mention coal). Within this strategy, the Chinese company Zijin-Continental Gold’s recently started its operation in Buriticá (Antioquia). This project has an estimated production of 8 tons of gold per year (21 percent of Colombia's 2019 production) and is expected to generate employment for about 2,300 people. The minister of mines and energy considers the Buriticá mine’s operation a key element in Colombia’s economic recovery.
Under this strategy, several large-scale projects are being questioned for social and environmental reasons. For example, civil society actors and local citizens are criticizing the environmental impact assessment (EIA) for the copper mining project Quebradona (Anglo Gold Ashanti). Also, the environmental licensing authority (ANLA) shelved the licensing application for the Soto Norte project (Minesa) in October 2020.
Impact on revenues
The Colombian economy fell 9 percent in the third quarter of 2020. The biggest drop was in the commerce, construction and industry sectors. The extractive sector was less impacted, while the agricultural, financial and real estate sectors showed positive growth.
In 2019, Ecopetrol achieved significant profits that yielded approximately USD 2.3 billion in dividends to the Colombian state. In the first quarter of 2020, Ecopetrol made a net profit of approximately USD 34.2 million; in the second quarter, a net profit of USD 6.7 million; and in the third quarter a net profit of approximately USD 228 million, which was still far from 2019 levels but showed a tendency to recovery.
At the beginning of September, the parliament approved the law to reform the General Royalties System, which defines the transfers of revenues to the different subnational governments and to special funds, with the objectives to increase efficiency in spending by “reducing the timeline and eliminating bottlenecks of the investment cycle.” The largest modification is on the direct distribution of royalties to producing municipalities, which more than doubled, from 11 percent to 25 percent. The law makes two additional significant allocations to poor municipalities and for “regional-level investment.” It makes these changes at the expense of the Savings and Stabilization Fund (a macro-fiscal stabilization tool funded only by royalties), which now receives only marginal allocations (4.5 percent instead of almost 25 percent).
The other major change in the 2020 reform is that it abolishes the Organos Colegiados de Administracion y Decisión (OCADs) as the decision-making body for the use of royalties at the local and department level. However, it keeps six regional OCADs that will decide the allocation of 34 percent of royalties used for regional-level investment. The Savings and Stabilization Fund has thus become marginal in terms of allocation of royalties, despite having shown its great utility at the beginning of the pandemic, when its resources financed the Emergency Mitigation Fund (FOME).
In a presentation to the congress on the biennial royalty budget the deputy minister of finance estimated that royalty incomes for 2020/2021 will be reduced to COP 15.7 billion (approximately USD 4.36 billion) compared to COP 24 billion (approximately USD 6.6 billion) in the 2019/2020 budget. The vice minister has similarly stated that the projections for oil and coal production are not optimistic. His estimates reveal that in 2020 oil production will be 787,000 bpd (11 percent less than in 2019) and coal will be 74 million tons (9.9 percent less than in 2019). Additionally, the deputy minister of finance pointed that the industries are likely to continue to decline, with projected contractions of 26 percent for in oil and 35 percent for coal by 2030, as compared to 2019 levels.
There has thus far not been a visible effect to the sector’s transparency, and there appears to be no impact on the process of the Extractive Industries Transparency Initiative (EITI). The sixth EITI report corresponding to the year 2019 has been published and is currently available on its website.
Overall, the government has been transparent about its actions in relation to the coronavirus pandemic. Entities in charge of control and supervision, such as the attorney general's office and parliament, are fully exercising their functions.
Beyond transparency, the environmental license has become a subject of strong criticism, especially for large-scale projects. Over the past several months, due to the pandemic, the government attempted to advance online processes for prior consultation with indigenous peoples. Indigenous and environmental organizations opposed the move, and the government has since changed its position.
The reform of the royalty system features changes for increasing allocations and investment priorities. The elimination of decision-making bodies (OCADs) and the strong reduction to the Savings and Stabilization Fund’s ability to finance increased allocations to producing regions could represent future setbacks for resource governance.
The coal industry is also at risk due to low prices and the global energy transition. In this context, and given the decline in oil and coal prices, Colombia needs to start thinking seriously about moving away from its reliance on these commodities for domestic income. Some sectors claim that, in order to maintain the viability of coal exports, Colombia will have to develop a differential policy to boost the competitiveness of coal, but the government has not responded to that suggestion to reduce the tax burden. If the government reduces social and environmental standards (the so-called “race to the bottom”), it will face strong opposition from civil society and international organizations, as seen with the UN special rapporteur’s recent request to cease coal exploitation in La Guajira.
Efforts to increase oil and gas reserves by attracting private capital through competitive bidding rounds and fracking pilot projects could be important short-term measures for economic reactivation. However, the medium- and long-term prospects are increasingly less positive. The reliability of fossil energy production as a source of tax revenue is decreasing, especially now that governments and corporations have set concrete goals to reduce the use of fossil fuels and promote an effective energy transition.
Finally, Colombian stakeholders are starting to discuss a new framework for developing strategic areas for mining, with competitive auctions and higher social and environmental standards. Although auctions may have many potential advantages and offer ways for the country to attract investments and maximize benefits, Colombian authorities will need to improve social and environmental licensing procedures to reduce social conflict.
In consideration of the demand for copper and gold in the context of the global energy transition, Colombia expects to further develop these minerals’ potential. This can also be an opportunity to develop mining projects with high governance standards.