“Increase in taxes would exacerbate the energy situation in the country”: Frank Pearl

The Colombian Association of Oil and Gas (ACP) expresses its deep concern regarding the proposal to increase the surcharge on the income tax for oil, a measure that could severely compromise the country's energy and economic future.

The association recalls 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 (which averaged USD 100 per barrel that year, prices that have currently dropped to around USD 70, which is inconsistent with the proposed increase in the surcharge), among other new taxes on the oil and gas industry. As a result of this decision, this sector now has an effective income tax rate of up to 50%, while others do not even reach 30%, which is a clear example of tax inequity.

Now, the ‘Financing Law’, proposed by the government, would increase the surcharge on the income tax for oil exploration by up to 5 percentage points, bringing it - without technical-economic justification - to 20%. This would imply an income tax of 55% for the industry, in addition to the payment of royalties, economic rights, social contributions, environmental contributions, and other contributions it makes, exceeding its contributory capacity and disincentivizing its investments in the country.

For the industry, this measure represents a new change in the rules of the game that would jeopardize the economic sustainability of projects and would lead to lower exploratory and development investment, which would also affect new reserves and future production.

“As a consequence of the 2022 reform, exploratory investments have decreased by 57%, which has led voluntary investments to fall to historic lows. It is important to consider that if the sector had not been weakened, the Financing Law would not be necessary,” said Frank Pearl, executive president of ACP, adding that this trend is exacerbated by new tax burdens, so with this outlook, the end of exploratory activity in Colombia is foreseen starting in 2030, as additional increases in the surcharge would make exploration unfeasible.

Pearl added that this increase also compromises the hydrocarbon production targets (MinHacienda in the 2024 Medium-Term Fiscal Framework contemplates an average production of 750 thousand barrels per day of oil until 2035), as the increase in taxes would affect all fields, mainly those producing heavy and marginal crudes, which represent 54% and 10% of the national total, respectively, which would become unfeasible with the addition of new taxes. Likewise, the approval of new development projects, necessary to increase production and avoid the natural decline of fields, would be compromised. “Leading the country to a steep decline in production,” he emphasized.

Thus, considering 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 to Colombia's energy security, as constant and significant investments in exploration and production are required to ensure energy supply. Therefore, in the medium term, the country would be doomed to lose its self-sufficiency in hydrocarbons, affecting the generation of royalties, jobs, productive linkages 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 that this sector, which in 2023 represented 20% of the Nation's current income, 16% of foreign direct investment, and 4.61% of GDP, could no longer contribute. Furthermore, the royalty resources that finance projects in the regions to close gaps in education, health, public services, among others, and whose biennial budget 2025-2026 recently approved by Congress was 1.30 trillion, would decline significantly in the future. In summary, an additional increase in taxes threatens this industry's contributions to the country and the regions.

Finally, the Colombian Association of Oil and Gas makes a respectful call to the members of the economic commissions of the Congress of the Republic, not to approve the increase in the surcharge and any other confiscatory measure that would lead to wilting an industry fundamental to energy security, macroeconomic stability, and regional development; and to the government to strive to maintain a balance that encourages investment and development of the sector, and preserves its capacity to generate resources for the country and the territories for the benefit of energy security and the quality of life of Colombians.