What does Petro mean by decarbonization?

Colombia’s first left-wing President had, in his first year, a firm stance against industries that extract massive resources from the environment, such as hydrocarbons and mining. However, oil and gas make up most of Colombia’s exports. One of Petro’s challenges is to find a way to finance his bold environmental program. His distrust for public-private partnerships will not be helpful in that regard. Foreign investors look to the new Mines and Energy Minister, seeking a friend within the government.

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Gustavo Petro, Colombia’s first-ever left-wing president, celebrated his first year in office on 7 August 2023. The most significant change he has made so far is reversing previous governments’ stance on supporting the oil and gas industry. With an eye on climate change, Petro decided not to approve new oil exploration and not allow any new oil and gas contracts. This policy has caused anxiety among economic analysts and energy sector executives.

Oil and gas exports are Colombia’s main source of foreign exchange - 36% of exports by value. The lack of new oil exploration heightens the risk of a currency crisis in a future with fewer oil exports. The decision not to explore oil and gas reserves could also increase the risk of energy shortages, as the country would be vulnerable to supply chain issues that can arise from importing energy. This risk becomes more acute in a global scenario with frequent geopolitical shocks affecting production chains and strategic commodities. In the last six years we can cite the trade war between the United States and China, the COVID-19 pandemic, and the Russian invasion of Ukraine as geopolitical events that have been significant disruptors to business activity.

Petro has the authority to change regulations in the oil sector without Congressional approval, although a radical decision, such as banning new oil/gas projects, could be challenged in the Supreme Court, energy expert Alvaro Ulloa told Southern Pulse. Still, Ulloa points out that this is a very unlikely scenario. Petro seems to be in a hurry to deliver results before his term ends in three years, as re-election is currently prohibited in Colombia. Petro’s move to position himself as an environmental champion while leading a developing country may help him stand out among global leaders.

How will Petro finance his decarbonization program?

Petro is seeking funding sources for his ambitious decarbonization agenda and broad reforms, which would expand the government's role in the economy. Sources we talked with in the business, media and political worlds said Petro is wary of free trade. During the Summit for a New Global Financial Pact, Petro said that international financial institutions must be reformed to finance energy transition efforts and mitigate the effects of climate change in poor countries. No concrete plan was solidified at the summit.

Finance expert Jorge Arturo Saza told Southern Pulse that the main funding sources available to develop Colombia’s economy are local pension funds and investment funds, as foreign investments account for only 5% of the GDP. The financial sector fears that the government will nationalize private pension funds to reform short-term spending. Still, that possibility seems remote as it lacks the required support in Congress.

Private investment firms seem to be adopting a wait-and-see approach with the government, especially after taxes increased for the sector after a 2022 reform. In addition, Colombia’s capital market is too small to finance an investment agenda as broad as decarbonizing the entire economy.

External financing could be an option for the Colombian economy, which has a very low savings rate (15% of GDP). Colombia is a signatory to the Pacific Alliance bloc, along with Mexico, Chile and Peru. These four countries began negotiations years ago to unify their stock exchange operations and regulations in the MILA index. If achieved, this would be a way to facilitate international investment in four capital markets that are individually small. Saza said he doesn't see the issue as a priority for this government. Considering that the bloc reached a stalemate after Colombia and Mexico deemed Peruvian President Dina Boluarte persona non grata, no prospect of a resolution seems likely in the next few years.

Another possibility for external funding is China. The country has been increasing its Latin America investments over the past decade, with a focus on energy, infrastructure and agriculture. A Chinese state-run company is building the first metro line in Bogota, a megalopolis of more than 8 million inhabitants. This could have a positive impact on reducing carbon dioxide in the city, which is one of the most polluted and most congested in Latin America. Still, like with many other forms of FDI, Chinese investments come with strings attached, and not all are put on the table up front. 

Daniel Pacheco, editor-in-chief of digital media outlet La Silla Vacia, told Southern Pulse that the Petro administration has yet to do anything about improving efficiency in the carbon-intensive transportation sector. This is a pending issue in a country where 45% of the vehicle fleet is more than 10 years old, which generates more pollution than newer vehicles. Bogota’s metro system is a project that dates back to the 1940s and the construction taking place is led by the Bogota city government.

There is also the possibility of funding from European Union (EU) member countries, which prioritize energy transition and seek alternative energy sources to Russian gas. Colombia has signed an agreement with Spain to invest in green hydrogen. The EU also pledged to invest USD49 billion in Latin America during the latest Community of Latin American and Caribbean States (CELAC) summit. No specific project in Colombia has been chosen yet for this initiative.

Environmentalists are a key part of the ruling coalition 

The main source of financing for Colombia’s national economy is hydrocarbons, which Petro wants to decrease. However, there is no immediate alternative source of financing in sight. Furthermore, many political observers pointed out that if investors leave, communities whose economies revolve around oil and gas projects are likely to be severely affected if those projects shut down. Considering this dilemma, many of our sources believe that Petro will have to reverse course on his ambitious decarbonization policy in favor of a slower transition.

The environmentalist caucus is a key part of the Petro coalition. Vice President Francia Marques’ political career started out with a grassroots movement of poor Afro-Colombian communities affected by extractive enterprises. In Marques’ Valle del Cauca region, mining and a hydroelectric plant acted irresponsibly, displaced local communities and affected the water supply. 

Irene Vélez was the Mines and Energy minister during Petro’s first year. Vélez’s tenure was marked by blocking new oil projects and a pro-environmentalist rhetoric. In July 2023, Vélez left the cabinet due to allegations of wrongdoing.

The new minister Osmar Andrés Camacho suggested that the government might be planning a U-turn regarding the oil and gas sector. Camacho said in an interview that the energy transition and the green reindustrialization, two mottos of the Petro administration, will be done in partnership with the existing energy sector. 

Camacho’s background raised concerns when he was nominated, due to his past affiliation with the far-left FARC party until 2018. However, it seems that he might have a more friendly view of the oil/gas industry than former minister Vélez, an environmentalist. This change of course remains to be seen.

Our analysis

When Petro talks about decarbonization, he is not talking about a set of broad policies aimed at gradually removing oil from the Colombian economy with private-sector support. Instead, he wants to block all extractivist projects. It is the first time in Colombia’s history that a government has won the presidential election with a platform critical of the oil and gas industry.

Petro is speaking to his administration’s grassroots supporters. These poor and rural communities often have a distrust of companies in extractive sectors due to historical injustice which cannot, and should not, be ignored. In some cases, they also have a longstanding history of violent conflicts with foreign companies over resources like land and water. There is a perception among social leaders that the oil industry has not delivered on the benefits it has promised to the population. Instead, they believe the sector has caused environmental damage and allowed local political oligarchies to appropriate royalties.

Colombian courts have already recognized the responsibility of companies to conduct due diligence on land-related projects. In this new environment, oil and gas companies looking to succeed in Colombia must increase their investments in due diligence, community relations, and public affairs. They will have to involve stakeholders at all levels in that process, ranging from national institutions in Bogota to social leaders in the territories where they wish to carry out projects.

[This article was edited on 14 September 2023 after a source interviewed for the piece requested a slight modification to reiterate the unlikely nature of a scenario they mentioned.]

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