Alert in the oil sector due to financing law: ‘Energy crisis would worsen’

In the midst of the debate in the country over the financing bill currently in Congress, the Colombian Oil and Gas Association (ACP) issued a statement in which it expressed its “deep concern.” for the proposal of this project that seeks to increase the surcharge on the income tax on oil.

In their concept, said article could severely compromise the energy and economic future of the country and they recalled that in 2022 the National Government promoted a tax reform that included, without the support of a rigorous technical analysis, a surcharge on oil of 5, 10 and 15 additional points to the income tax, justified by high international prices.

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“As a result of this decision, this sector today has an effective income tax rate of up to 50%, while others do not even reach 30%. which shows a clear example of tax inequality,” they explained.

In this sense, the ACP warned that the tax change would increase the income tax surcharge for oil exploration by up to 5 percentage points, taking it up to 20%, without there being an economic or technical support.

“This would imply a 55% income tax for the industry, in addition to the payment of royaltieseconomic rights, social and environmental contributions and other contributions that it makes, thereby exceeding its contributory capacity and discouraging its investments in the country,” said this union.

Frank Pearl, president of the ACP, insisted that all these changes, from their concept, would generate a great risk on the economic sustainability of the projects and will affect less exploratory and development investment, therefore, also in new reserves and production future.

“As a consequence of the 2022 reform, exploratory investments have been reduced by 57%, which has led to voluntary investments falling to historic lows. Here it is important to consider that, If the sector had not been weakened, the Financing Law would not be needed,” Pearl said.

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For the union spokesperson, this trend is aggravated by new tax burdens, so, with this panorama, the end of exploratory activity in Colombia is in sight as of 2030, because additional increases in the surcharge would make exploration unfeasible.

Pearl added that “this increase also compromises production goals.” of hydrocarbons (MinHacienda in the Medium Term Fiscal Framework 2024 contemplates an average production of 750 thousand barrels per day of oil until 2035), to the extent that the increase in taxes would affect all fields, mainly those that produce “heavy and marginal crude oils, which respectively represent 54% and 10% of the national total, which would be unviable when adding the new taxes.”

He also noted that this will have effects on the approval of new development projects, which he recalled are necessary to increase production and avoid the natural decline of the fields, given the current moment and the needs to strengthen fronts such as production towards the future.

“Taking into account that 45% of the total Colombian energy matrix comes from oil and the remaining 21% from natural gas, it is undeniable that the approval of this proposal would represent a risk for Colombia’s energy security, to the extent that it to guarantee supply energy requires constant and significant investments in exploration and production,” he explained.

Beyond the fact that production falls and the oil sector may have a hard time, for these experts we must not take our eyes off the fact that royalties depend on it and, consequently, the income of the Nation.

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“In the medium term the country would be condemned to lose its self-sufficiency andn hydrocarbons, affecting the generation of royalties, jobs, productive chains in the regions and income to the nation. In this context, the detriment of the oil and gas industry would mean that, in the short term, other sectors would have to bear the burden with which this sector could no longer contribute, which in 2023 represented 20% of the current income of the company. Nation, 16% of foreign direct investment and 4.6% of GDP,” they stated.

With all of the above on the table, the Colombian Oil and Gas Association closed by calling for common sense to the members of the economic commissions of the Senate and Chamber to hold a thorough debate on the financing law and avoid resorting to lawsuits during the remaining process.