President Gustavo Petro's decision to end hydrocarbon production could prove to be a gamble, as Colombia risks sacrificing key revenues to support its energy transition while access to international finance remains uncertain.
Time is of the essence for Petro, with slightly less than two years left for his administration. But he has yet to unveil an energy transition strategy to reach the country's 2050 net zero target. At the same time, he complains that progress is slow because Colombia is being punished for its fossil fuel phase-out ambitions.
Unlike other hydrocarbon producers, such as Brazil, which argue that revenues from oil and gas are key to funding their energy transition, Petro ordered an end to new hydrocarbon exploration and production contracts soon after taking office in August 2022. Even though the policy's short and medium-term impact on energy output, and revenue, is likely to be minimal, credit ratings agencies responded by downgrading Colombia's standing.
"Most of these [oil and gas] companies have an inventory of licences that lasts around seven years, so right now the oil companies have still 3-4 years of E&P in their plans," Fitch director for Latin American corporates Adriana Eraso says. But long-term growth in the country depends on managing the transition from hydrocarbon production towards renewable energy, ratings agency S&P says. The sector has accounted for 10-20pc of central government revenues in recent years. State-owned oil company Ecopetrol alone contributes about 4pc of the country's gross domestic product (GDP).
Natural gas is another cause for concern, Fitch says. Halting exploration could hit the country's output of gas, which is considered a key transition fuel in the region. "Even if Colombia is not going to be an exporter of gas, it could be self-sufficient," Eraso says, adding that it instead faces a shortage as a result of current policy plans.
Poor world problems
The country, which emerged as climate finance advocate for developing nations during last year's UN Cop 28 summit in Dubai, has long called for developed countries to help fund a shift to cleaner energy. Colombia needs $2.3bn-3.8bn/yr for emissions reduction action until 2030, under its nationally determined contribution climate plan, according to UN climate body the UNFCCC. The country will keep pushing for financial support, to be agreed at Cop 29 in Baku, to help developing countries make headway, a negotiator says. It is also pushing back on a proposal by rich nations to have emerging economies contribute. Colombia wants the target to reflect the context in which developing countries must implement the climate action — limited fiscal scope, high cost of capital and high debts.
There are other obstacles to Colombia's transition plans. Droughts have highlighted the urgency of diversifying power generation through more non-conventional renewable generation and gas-fired plants — about 70pc of its generation comes from hydro currently. And while Colombia is ramping up solar generation, it is proving nearly impossible to build more turbines in the wind-rich northern region of La Guajira, where protracted consultation processes with indigenous communities have led to delays, rising costs and cancellations.
And the government's decision to increase a tax on the sale of renewable electricity is weighing on its ability to meet green goals. The failure to put forward concrete transition plans that benefit its economy and its communities risks undermining Colombia's climate credibility, even as it hosts the UN's Cop 16 Biodiversity Conference this year. Those plans will also be key to attracting international finance for its energy transition goals.
