Petro’s anti-oil plan would end up in court: Ecopetrol

A proposal to abruptly end oil and gas exploration in Colombia it would lead to higher prices for local consumers and would be challenged in court, according to the country’s state drilling company.

Gustavo Petro, the leading candidate in the polls for the presidential elections, seeks to speed up Colombia’s transition to clean energy by ceasing exploration on the first day of his administration. While the industry must prepare for a future with lower demand for fossil fuels, the transition must be “orderly”, said the CEO of ecopetrol SA, Felipe Bayon.

“Our contracts allow us to continue exploring for the next 20 years if we want to,” Bayón said in an interview. “So even if he can supposedly come in and change everything, there are going to be challenges in the legal system not just from us but from a lot of people.”

The looming showdown between the oil and hydrocarbon industries is the latest strain in efforts to combat climate change by moving the world away from fossil fuels. Petro, the former mayor of Bogotá, says that continuing to depend on these industries is the “politics of death.” But oil and coal account for almost half of the country’s exports and are still widely used, including for cooking. Crude has risen above $90 a barrel again due to rising demand and tight supplies.

Companies around the world are reacting to changes in ESG (environmental, social and corporate governance) policies, seeking to clean up their operations and orient themselves towards new opportunities. Ecopetrol, for example, has committed to reaching net zero carbon emissions by 2050 and last year bought the government’s stake in a power transmission company.

Investors take Petro’s words seriously. Since August, when it first mentioned it would end oil exploration, Ecopetrol’s bonds have posted some of the biggest losses among emerging market oil companies. And government bond yields have hit their highest levels since the COVID-19 pandemic sent credit markets tumbling two years ago.

While Petro has not given many details about its plans for the industry, it is possible that it will simply choose to halt new bidding rounds, Daniel Guardiola and Alonso Aramburu, analysts at BTG Pactual, wrote in a report this week. It could also impose more onerous permitting rules or fail to honor existing contracts, they wrote.

“The first round of the presidential election is only four months away and we expect the energy transition to be a key issue during the campaign,” Guardiola and Aramburu wrote.

Bayón also points to the impact on consumer prices if the Andean nation is forced to import gasoline and gas, since around 80% of Colombians use gas for cooking on a daily basis. Prices would go up two or three times, he said.

“Without leaving aside the 250 billion pesos that we have given to the Government in the last decade,” said Bayón. “It is looking at people and how they will be affected in their daily lives. That’s what people need to acknowledge.”

Meanwhile, Ecopetrol is still dealing with the effects of COVID-19, with its 2021 and 2022 production still below pre-pandemic levels.

Last year, production was “less than 700,000” barrels of oil equivalent per day and this year there will be a modest increase to a range between 700,000 and 705,000 barrels, Bayón said.

Until 2024, Ecopetrol plans to invest at least US$17 billion, mainly in exploration, which will allow the company to return to pre-pandemic production levels.

The outlook looks more favorable for its U.S. project. A partnership with Occidental Petroleum Corp. in the Permian Basin is producing more than 50,000 barrels a day and should see growth this year and next, he said, adding that Ecopetrol will continue to invest there.

“It turned out to be a very good investment,” said Bayón.