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Petro walks back rhetoric; eyes renewables, gas-based transition for Colombia

07 July 2022 Keiron Greenhalgh

Incoming Colombian President Gustavo Petro is adopting a more pragmatic tone on the energy transition and future of the country's top two exports—oil and coal—than industry feared, often in comments by his choice for finance minister.

Petro, who would be the country's first leftist leader, is adopting a conciliatory stance, analysts and lawyers told Net-Zero Business Daily, including praising his immediate predecessor's support for renewable energy and a historic moment of detente between the Colombian left and right.

But when he enters office on 7 August, Petro will represent the hopes for change that led to protests across Colombia in 2021 as the cost of everyday items rose following the COVID-19 pandemic and as supply chain issues mounted.

While owning a mandate for change following his victory on 19 June, the former guerilla does not have much legislative heft, due to weak levels of support in the Congress and Senate, so is eyeing a substantial dose of continuity to start with, including advancing renewable energy programs begun by President Ivan Duque Marquez and state-owned oil company Ecopetrol shouldering a heavy clean energy and funding burden.

Petro alarmed the hydrocarbon industry with rhetoric in previous election cycles and early in this one, but his manifesto this time around was more nuanced, and, since winning the election, the former mayor of Bogota and putative finance minister Jose Antonio Ocampo have sought to damp down those fears as well as making sure their biggest revenue streams don't dry up.

In his manifesto, Petro said he planned to transform the Colombian economy's dependence on coal and oil, creating a diversified structure based on renewable energy. No longer would Colombia be reliant on the "extractivist model," he wrote, adding that "energy will be assumed as a common good" in a society previously criticized for the chasm between the top and bottom strata.

A one-time member of both Colombia's Congress and Senate, Petro warned that fracking was off the table and no new licenses for hydrocarbon exploration would be granted. The former is one stance he was sticking to as July progressed.

Ocampo sets out plans

But on 1 July, Ocampo said in an interview with a local television station that "Colombia has to explore more and look for more gas, that is essential. The gas reserves in Colombia are very short, barely enough for three years."

In addition, while there were 180 signed oil concessions, Ocampo, the former minister in 1990s right-wing governments, noted: "We have to see if that is enough, but self-sufficiency is a clear objective, we even have to continue exporting oil because if not, the balance of payments problem becomes unmanageable."

Support for Ecopetrol, meanwhile, would be maintained, the economist at Columbia University in New York added, because it was needed to support the coming energy transition. A Petro-led government needed to be smart and use existing revenues to invest in renewable energy, Ocampo said in the interview.

Those comments followed on from a 26 June column for El Espectador in which he argued Colombia's contribution to the international environmental movement must be balanced with its own development needs—an argument made by many leaders of African and Latin American nations. Colombia's progress needed a boost and increased use of natural gas as a transition fuel had to be part of that, he added.

The administration in waiting is showing more pragmatism, said Carlos Caicedo, a senior principal analyst on S&P Global's country risk team. Caicedo noted a softer tone on coal production and exports; the assessment of the country's existing oil concessions, and looking to differentiate between oil and gas; plus acknowledgement of the work the Marquez government had done on renewable energy. Gas is seen as an opportunity for Colombia, he added.

Oil, meanwhile, is vital for Colombia's economy as its top export. S&P Global's above-ground risk team estimates oil exports will constitute more than 30% of the country's total exports in 2022, with oil revenues representing about 3% of GDP.

Oil royalty transfers from the federal government represent an important revenue stream for most of Colombia's departments, with 20 of the 32 departments relying on oil revenues for at least 10% of their total income, and La Guajira relying on oil revenues for 26% of its total income, according to the analysts.

Diversifying renewable energy

Still, Petro and his team are keen to accelerate and diversify renewable power generation. Hydro-electric generation accounted for more than 80% of Colombian power output in 2021 (see graphic below), but climate change is demanding that such dependence be derisked, particularly with the example of 2021's power cuts in neighboring Brazil looming large.

COLOMBIAN POWER GENERATION IN 2021Source: S&P Global

In the manifesto, Petro argued generation of renewable energy would be accelerated and the development of wind and solar energy would be promoted. In particular, solar output in the northern department of La Guajira would be prioritized. The introduction of widespread distributed generation across the mountainous rural areas not connected to the national power grid is also a priority for Petro.

Those plans have solid foundations to build on, according to Jose Zapata, a partner at law firm Holland & Knight. There's a pipeline of projects, said the Bogota-based Zapata, and expectations are that Petro can implement the previous government's policies.

The Marquez administration's 2.8-GW target was a big ask, he said, especially with commercial operation dates of 2023. Many developers are requesting extensions, he added. The pipeline is sufficiently large that there won't be any need for expansion under Petro, he said.

Petro must be careful not to oversell the government's abilities, Zapata told Net-Zero Business Daily. A further potential problem, he said, is the lack of energy storage and a transmission grid that needs substantial upgrades.

The best conditions for wind and solar generation are in the north of the country, in states such as La Guajira, where there are more than 500 Indigenous communities, so to some extent developers are faced with same problems as their predecessors in the oil, coal, and gold industries, he said.

Communities in states such as La Guajira must be educated on the difference between extracting oil, gas, coal, or gold, and building renewable generation facilities, Zapata said.

There's always a fine balance when it comes to the environmental impact for siting any energy project, said Vinson & Elkins Partner Eamon Nolan. The challenge, the project finance specialist told Net-Zero Business Daily, is to make sure the communities that are affected are consulted with appropriately and share in the benefits of the project.

La Guajira extends to Colombia's most northerly point, abutting offshore waters with some of Latin America's best wind conditions (see map), and while offshore oil and gas development is off the cards at the moment, offshore wind has a much more amenable runway.

COLOMBIAN WIND STRENGTHSource: Global Wind Atlas

Current energy and mines minister Diego Mesa launched plans for offshore wind development at S&P Global's own CeraWeek conference in March and Zapata said Colombia's continental shelf is appropriate for bottom-fixed offshore wind development.

One problem though, Zapata said, is that regulations have been enacted to protect continental shelf ecosystems in Colombia over the past 12 years. Building on the continental shelf is not as easy as it sounds from a regulatory standpoint, he said, and where offshore wind stands is something that has yet to be discussed.

The wind and solar-heavy northern regions of the country could boost Petro's hydrogen ambitions too, Vinson & Elkins' Nolan said. Petro said in his manifesto that if he won the election then his administration would stimulate the implementation of small, medium, and large-scale hydrogen projects and their respective transportation and distribution systems. He added that there would be tax incentives for electricity supply and green hydrogen.

Colombia's fortunes when it comes to wind and solar power offer an opportunity to make the most of its geographic advantage, with hydrogen export opportunities in both the Atlantic and Pacific basins.

Ecopetrol as the catalyst

Such opportunities could be supported by a fund Petro pledged in his manifest would benefit the energy transition. The monies for the fund would come from royalties and from the elimination of some tax benefits for the hydrocarbons, coal mining, and hydroelectric sectors, he wrote.

Petro is looking more generally to raise revenue through tax reforms for higher earners (and the entrenched extractive industries) and pension reforms. He wants to move pensions to the public sector and invest those funds in promoting the energy transition. However, the worry is that such investments won't provide the returns that workers will want to see when they reach retirement age, especially as the transition projects are seen as social investments, said Zapata.

Key to that transition is Ecopetrol, just as it was for Marquez. In the manifesto, Petro said Ecopetrol "will play a leading role in the transition," guaranteeing the fuel Colombia "requires for the next 15 years," and contributing taxes, royalties, and dividends for the government to use.

Marquez was savvy, Zapata said, in positioning Ecopetrol at the forefront of change. At CeraWeek in 2021, Marquez said Ecopetrol was moving beyond oil and gas. It was the number one non-conventional power generation company in Colombia, he said.

And in October 2021, the government awarded contracts to 796.3 MW of solar projects. The energy and mining ministry said the 11 projects must be online by January 2023.

Petro aims to continue along the same path, Zapata added, in contrast to Mexican President Andrés Manuel López Obrador, who has positioned state-owned Pemex as the biggest hurdle to the country's energy transition.

But Ecopetrol also needs to change. Without significant new discoveries coming onstream, Colombia's crude production is expected to gradually decline from about 760,000 barrels a day (b/d) in 2022 to approximately 500,000 b/d in 2026, with oil revenues as a percentage of GDP falling to 1.9% in 2026, according to S&P Global's above-ground risk team. Oil exports as a percentage of total exports would fall to 9.1% by the same year, it added.

The coming weeks will provide more details though, including how much legislative support Petro can rely on (Congress returns 20 July), and who the replacement for mines and energy minister Diego Mesa will be.

Posted 07 July 2022 by Keiron Greenhalgh, Senior Editor



This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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