The future of mining and energy production in Colombia
The future of mining and energy production in Colombia
Open PDF file: The future of mining and energy production in Colombia
Mining has a long history in Colombia, with evidence of pre-Colombian mining activities dating back thousands of years. The country is rich in a variety of minerals, including gold, copper, nickel, coal, and emeralds, and these resources have been exploited for centuries. In the colonial period, mining played a significant role in the economy of Colombia, with gold and silver being the primary minerals extracted. The discovery of large gold deposits in the Chocó region in the 19th century led to a gold rush and a rapid expansion of mining in the country. In the 20th and 21st centuries, Colombia has continued grow its production of minerals, with the mining sector contributing a significant portion of the country's export earnings. Colombia has become a major producer of gold, with several large-scale gold mines in operation.
The first coal mines in Colombia date back to the early 19th century. Coal was initially used primarily for domestic and industrial purposes, such as fuel for steam engines and heating. However, with the development of the railroad industry in the late 19th and early 20th centuries, coal began to be exported to other countries, and Colombia became a significant exporter of coal.
Oil and gas are also of critical importance to the economy of Colombia. The country has large reserves of fossil fuels, including oil and natural gas. In recent years, there has been an increase in exploration and production of these resources. The majority of oil production in the country comes from the Llanos Basin, which is located in the eastern part of the country. The gas industry is centered in the La Guajira region, which is located in the northwest of the country. The leading producer in the oil and gas sector in Colombia is Ecopetrol, followed at a great distance by Frontera Energy (revenue approximately US$20 billion versus US$1 billion).
Petroleum exports are primarily going to the US and China, while coal is mainly exported to Turkey, Chile, Europe, and Israel. Gold is mainly going to the US, Italy, the United Arab Emirates, and Hong Kong.
The current state of mining & energy in Colombia
According to data from the Colombian Mining and Energy Information System (SIEM), as of 2020 there were approximately 1,600 mining concessions in Colombia that were in operation or being developed. These concessions cover a wide range of minerals, and are operated by both domestic and foreign mining companies.
In addition to these concessions, there are also many small-scale and informal mining operations. These operations are often illegal and are not subject to the same regulatory and environmental standards as larger, formal mining concessions. Overall, Colombia is home to a diverse and active mining industry, with a range of large and small-scale operations that are focused on extracting a variety of minerals.
In order to operate in Colombia, mining companies must obtain a number of permits and approvals from the Colombian government. These permits are issued by a variety of government agencies and are intended to ensure that mining operations are conducted in a responsible and sustainable manner and that they comply with relevant laws and regulations.
In 2020, Colombia's Congress passed Law 2056, which changes the way royalties from mining projects are distributed. Under the new system, a greater share of royalties will be given to the municipalities and regions where the mining takes place, with the aim of fostering closer alignment between the interests of project developers and those of local authorities and communities. The law also streamlines the process for local and regional governments to invest these funds. A portion of the royalties, specifically 5%, must be used for environmental conservation and efforts to combat deforestation.
Since Colombia is planning to rewrite the mining code, these types of initiatives and laws are expected to continue, with the goal of benefiting the communities, avoid mining in national forests and parks of Colombia This would bring it in line with premier mining countries like Canada, the US, and Australia.
Oil & gas
A wealth of knowledge and experience about Colombia's onshore fields has been gained over the years. Unlike offshore, there is a century's worth of onshore exploration and production (E&P) knowledge to draw upon, starting with the historic La Cira and Infantas oil fields in the Middle Magdalena Basin in north-central Colombia. The majority of the country's oil and gas production has come from this region.
One advantage for foreign companies interested in Colombia's offshore resources is the low cost of entry. In Brazil, the cost of gaining access to acreage is much higher. Risk is reduced through technical evaluation agreements, which allow companies to conduct technical studies on large areas of unexplored or under-explored land without committing to expensive work. If the companies decide to proceed with drilling, they can negotiate the acreage into an exploration and production (E&P) contract that includes well commitments.
Colombia is turning to offshore exploration in deep and ultra-deep waters in an effort to add to its hydrocarbon reserves. This approach has been successful for Brazil, which has used advanced technology and significant investments to become one of the world's top oil producers. In Colombia, corporate social responsibility (CSR) has been a crucial part of the offshore oil and gas industry from the start. The government recognizes the value of a company with a strong CSR policy, and has made it a requirement for participation in competitive bidding processes for offshore areas. As a result, only the largest oil and gas companies, such as Exxon, Repsol, Shell, Petrobras, and state-owned Ecopetrol, are involved in Colombia's offshore sector. These companies have not only operational and technical expertise, but also a strong commitment to social and environmental issues.
Two offshore discoveries were recently announced. One discovery announced in August 2022, by a joint venture between Shell and Ecopetrol (50/50 JV). The companies stated that this well confirms a gas province in the Colombian Caribbean. Also Petrobras announced a gas discovery in the deep waters 32 km off the coast of Colombia. The discovery is about 76 km from the city of Santa Marta in a water depth of approximately 830 m.
Coal mining in Colombia is dominated by two foreign-owned companies: Drummond (U.S.) with its local subsidiary Drummond Colombia, and Glencore (Switzerland) with its Cerrejón and Prodeco subsidiaries. The biggest coal mines in the country are located in the north, in the departments of La Guajira and Cesar. Cerrejón is considered one of the largest open-pit coal mines globally. There are also smaller coal mines located throughout the rest of Colombia.
New government and possible changes
A new left leaning Colombian government was elected in 2022. There are investors who are concerned about what this means for the oil & gas and mining sectors. Congress passed a tax reform bill in November 2022, that will increase taxes on coal and oil companies by up to 10% and 15%, respectively.
In November 2022, Colombia’s fiscal rule committee said that income derived from hydrocarbon exploration and production in Colombia is key to the country's financial stability and its trade balance. In a statement they added: "The nation's high dependence on these transfers means that a policy of suspending the activity or disincentivizing investment in the sector represents an elevated risk for the fiscal and exchange rate sustainability of the country, with adverse effects on development and economic growth".
In October 2022, Jose Roberto Acosta, the director of public credit, stated that Colombia's government may reverse its position on prohibiting new contracts for oil exploration due to the financial benefits of the sector. This potential change in policy would be a significant shift for President Gustavo Petro's administration, which previously characterized oil and coal as harmful and pledged to move away from hydrocarbons.
Petro’s earlier comments have caused the Colombian peso to decline significantly and reach an all-time low. Despite the political uncertainty, oil drilling in Colombia has increased significantly. In an effort to address these concerns, Petro's government has agreed to modify a tax reform proposal to introduce new taxes on oil and coal at a slower pace.
The new government has also set a goal of reforming the mining sector and encourage production of minerals that are important for the energy transition. Except for one major nickel mine, there are currently no significant lithium, cobalt, or nickel deposits or discoveries in Colombia. Therefore the energy transition metals are mainly copper and silver. In addition, a new state-owned mining company was announced. Two companies, with assets seized from illegal groups will be placed under the control of this new state-owned company. In addition, the national mining company will only buy gold from informal miners who produce the yellow metal without using mercury or cyanide. With these actions the government wants to bring an end to the illegal gold trade, by offering higher prices to informal miners than those who are currently buying it.
Relative to the coal projects in Colombia, the gold, copper, and nickel projects are of much smaller impact, both from a earth moving point of view (tonnage), and also from an insitu value point of view. The table below shows the biggest mining projects in Colombia (US$ insitu value).
The international mining companies and their projects in Colombia have seen positive developments since the new government started. Some recent announcements:
With Chinese company JCHX investing $100m in Alacran, Australian company South32 receiving a 15 year extension of their major Cerro Matoso nickel mine, and Canadian company Aris Mining receiving approval for the Marmato Plan of Operations, actions by government and bigger corporates have been positive since the inauguration of President Gustavo Petro.
In terms of mining results in 2022, Colombian Mining Assocation President Juan Camilo Narino said: “This year the Colombian mining sector is going to have record exports in terms of value”. The forecast export-value for the sector in 2022, including gold and other minerals, was $22.16 billion.
On the exploration front, a number of multi-billion dollar mining companies were active in Colombia in 2022, including Rio Tinto, Zijin, Agnico Eagle, South32, AngloGold Ashanti, and IAMGOLD. The sum of all exploration in 2022 was US$125m. This means that 45% of exploration is performed by majors, and 14% by intermediates. These companies typically do very detailed due diligence before they invest time and money in a certain jurisdiction. Juniors sometimes take bigger risks, especially when the mineral endowment has a lot to offer.
All in all, base and precious metals projects managed by international companies with high technical, environmental and social standards are moving ahead and are getting their exploration and development permits.
Before the July inauguration of the new President, there were also a number of major investments into the mining industry of Colombia. Continental Gold and its Buriticá gold mine was taken over by Zijin Mining for C$1.4 billion in cash . Wheaton Precious Metals and Caldas (now Aris) announced a US$110m streaming deal on the Marmato project. The table below shows mining M&A back to 2019.
Actions by the government so far suggest that within the traditional mining sector, the government has proven itself to be supportive to those projects that contribute towards the transition metals framework. Economic lithium and nickel deposits have not been discovered to date, except for the Cerro Matoso nickel mine operated by South32. For that reason, copper and silver are the metals that stand to benefit from the push for transition metals for electrification purposes. Since Colombia is rich of gold, the transition metals may come as a by-product of gold production, or gold will come as a by-product of transition metals production.
There are major companies active in Colombia, such as Rio Tinto (UK), South32 (Australia), Zijin (China), AngloGold Ashanti (South Africa), and Agnico Eagle Mines (Canada). These companies have very high standards for corporate social responsibility and environmental policies. With Colombia updating its mining code, it is likely that Colombia moves towards a system comparable to that of the major mining countries in the world like Australia, Canada, and the United States.
On the oil and gas side, the government may reverse its position on prohibiting new contracts for oil exploration due to the financial benefits of the sector. This potential change in policy would be a significant shift for President Gustavo Petro's administration, which previously characterized oil (and coal) as harmful and pledged to move away from hydrocarbons. If the offshore discoveries prove to be significant and can be extracted in due time, the Colombian oil and gas industry may shift towards more offshore exploration and development, where environmental and safety standards are extremely high.
It is more difficult to know what will happen to the coal sector. Will the government want to phase out coal operations, or is there a future for coal in the country, now that the demand from Europe is getting much higher? It is likely that this will become more clear in the months to come.
All in all, new left leaning Colombian government could lead to positive developments for the Colombian mining sector. If the government continues to be pragmatic, investors and mining companies will be able make well informed decisions about their future mining investments and operations.
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