Colombia oil discoveries plunge 56%, growing economy relies overly on government expenditure

Colombia's hydrocarbon exploration activity contracted for the second consecutive year with discoveries plummeting 56% in 2024, raising serious concerns about the nation's energy security and fiscal outlook, according to data released by the National Hydrocarbons Agency (ANH), El Tiempo reported.

Exploratory drilling fell 35.7% last year with only 27 wells completed compared to 42 in 2023, significantly below the government's target of 40. The shortfall stems from environmental permit delays, social viability issues, and contractual complications, with six wells still in progress at year-end not counted in the final tally.

The sharp decline in exploration has yielded just seven discoveries in 2024 – all petroleum with no natural gas finds – marking a success rate of only 27%. These discoveries were concentrated in Meta, Casanare and Arauca departments, with companies including Frontera Energy, GeoPark and Parex Resources behind the finds.

"Without renewed exploration, reserves will continue diminishing, potentially compromising production levels needed to meet domestic demand," warned Frank Pearl, president of the Colombian Petroleum and Gas Association (ACP), attributing the downturn to reduced investment budgets following tax increases, licensing delays, and regulatory uncertainty.

The consequences are already visible in production figures for early 2025, with crude output declining 2% to 757,747 barrels per day (bpd) while natural gas production has plummeted 17.5% to 822mn cubic feet (23.3mn cubic metres) per day – the lowest level in over a decade. This production slump threatens royalty payments to regional governments and hampers reserve replacement efforts.

Colombia's proven oil reserves stood at 7.1 years of supply at the end of 2023, with natural gas reserves at just 6.1 years. Industry observers note that security conditions and more attractive investment terms in neighbouring countries like Ecuador and Brazil further challenge Colombia's competitiveness in the sector.

Economy expanding, public spending remains high

Meanwhile, Colombia's economy expanded by 2.7% in the first quarter of 2025, exceeding analyst forecasts of 2.5%, but experts express concerns about the quality of this growth as it relies heavily on government expenditure that requires curtailing, Bloomberg Línea reported. 

Economic analysts warn that the current growth pattern may not be sustainable despite the positive headline figures. Agricultural sector activity accelerated to 7.1% year-on-year growth. Former finance minister José Manuel Restrepo attributes this performance to "a low statistical base, falling international fertiliser prices resulting in greater value added, and favourable weather conditions."

President Petro highlighted these results as validation of his economic policies, stating: "In our campaign we said it was necessary to shift from fossil fuel extraction – coal, petroleum and gas – to an agricultural and industrial production economy."

Grupo Bancolombia notes that while the economic recovery continued at a slightly higher pace than anticipated with broad-based sectoral improvement, public administration grew by 2.8% quarter on quarter (11.6% annualised), mirroring patterns observed in late 2024.

"A significant portion of economic momentum again leveraged National Government spending, which accumulated a total deficit of approximately 1.9% of annual GDP during the first quarter," Bancolombia stated, adding that this level of public sector dynamism is neither "sustainable nor desirable."

Banco de Bogotá concurs, highlighting that "public consumption grew 4.3% annually, benefiting national activity but compromising public finance sustainability." The bank explained that national expenditure remained elevated due to execution of both 2024 budget carryovers and current year allocations.

Investment continues to be a weakness in Colombia's GDP performance. While overall investment grew 8.3%, gross fixed capital formation increased just 1.8%. BBVA Research noted that machinery and equipment investment rose 12.5% annually despite declining capital goods imports, suggesting expansion stemmed from domestic production or previous purchase backlogs.

Business confidence surveys yielded mixed signals: entrepreneurs reported improved perception of economic conditions but maintained negative assessments of the sociopolitical environment, potentially constraining larger-scale investment decisions.

Sovereign rating under threat

This comes as Colombia's sovereign rating is under threat from rising public debt, Moody's warns. Colombia faces a potential sovereign rating downgrade if its fiscal consolidation plan fails to stabilise public debt and meet fiscal rules, according to Moody's senior analyst speaking at an industry event in Bogota on May 20, Reuters reported.

Renzo Merino, sovereign risk analyst at the ratings agency, projected Colombia's economy will grow 2.5% this year, a modest expansion amidst mounting fiscal challenges. The Andean nation currently holds a Baa2 rating from Moody's, which was assigned a negative outlook in June 2024, reflecting deteriorating economic conditions that complicate fiscal management.

"The primary risk we observe is a significant fiscal deterioration compared to peer nations, potentially weakening Colombia's credit profile and leading to a reduced outlook," Merino stated during the Moody's Inside LatAm Colombia 2025 conference.

Moody's plans to reassess Colombia's sovereign rating after the government publishes its medium-term fiscal framework in June. "Government transparency with credible projections and clear adjustment mechanisms will be crucial," Merino said.

Colombia's current Moody's rating stands two notches above those from Fitch and S&P, highlighting divergent views on the nation's creditworthiness. Merino pointed to structural budget imbalances, noting that "Colombia spends considerably more than it collects," with previous spending reductions proving insufficient.

With presidential elections approaching in 2026, a critical factor will be whether the incoming administration can reverse the deterioration in public finances. The finance ministry has set a fiscal deficit target of 5.1% of GDP, which analysts widely consider unattainable.

The worsening fiscal position has influenced monetary policy, with Colombia's central bank slowing interest rate cuts, reducing the benchmark rate by just 25 basis points to 9.25% in April. Merino warned that fiscal pressures are forcing the government to take on high-cost debt with limited operational flexibility.