What is arguably the top concern in Colombia today was stated – in English – on an Ecopetrol slide: very slow environmental licensing process. This ongoing problem and its consequences were discussed in depth by a succession of speakers at the CWC Third Colombia Oil & Gas Summit and Exhibition in Cartagena last month. It has already stymied the country’s momentum on several fronts and a number of “canaries in the coal mine” were discussed. But Colombia’s failure to move beyond seven years of reserves was the “very important topic” – as Pacific Rubiales President , Jose Francisco Arata put it – cited time and time again. And delays in permitting for seismic, wells and field development are seen as the main culprit.
Cause for Concern
Chris Spaulding, country director and Vice President of business development for Talisman Energy, noted that the last 10 years in Colombia have been “pretty darn good,” but when it comes to replacing reserves “we are in the same place we were in 1999.” He added that because of delays in receiving drilling permits, the number of rigs working in Colombia has dropped from more than 250 in 2011 to just over 200 in the first quarter of 2013. The success ratio also dropped in the past year, while the market value of oil and gas companies working exclusively in Colombia is down by 50% on the Toronto Stock Exchange. “Financial markets are concerned,” Spaulding said, “because things aren’t progressing fast enough.”
Duncan Nightingale, President for Colombia of Gran Tierra, agreed, saying investors are demanding growth from Colombia operators that they are not presently getting. In 2012, 63 Million Barrels of Oil (MMbo) of new reserves were added in Colombia, most of which were in the Llanos Basin. The average field size was just 2-3 MMbo. Nightingale noted that operators are very good at progressing reserves from 3P to 2P to 1P, but consequently Colombia has a high “burn rate” and production growth is moving at a faster pace than reserves replacement. According to Nightingale, this method of growth is not sustainable and to remain competitive Colombia cannot continue with the status quo. In 2012, Colombia produced 345 MMbo. To replace this amount, Nightingale said Colombia needs to make 115 discoveries, which would mean with the 35% success ratio posted in 2012, 328 wells would have to be drilled. If the success rate dropped to 23% the well count would need to be 500, at 18% it would be 638. While Colombia’s unconventional potential, along with its offshore prospects, is often touted as key to the country’s future, Nightingale said he believes these resources will not allow for any significant growth for at least 10 years.
The Unconventional Approach to Oil Reserves
Moderating a panel discussion on unconventionals, Ricardo Sarmiento, Vice President of assets, delivery and technical resources for Talisman, noted that a year ago Argentina was a little bit ahead of Colombia on the shale front, but today the country is far, far ahead. He said everything hinges on environmental regulations, adding “if we continue as we are, a year from now we’ll be in exactly the same place.”
Two representatives from state oil company Ecopetrol also addressed the issues of reserves and growth. Hector Manoslava, vice president of exploration and production, said companies need to look at the way they are approaching exploration, adding that 87% of discoveries in Colombia are very small. In addition to the potential presented by unconventionals and offshore, Manoslava pointed to the need to utilize Enhanced Oil Recovery to improve recovery rates, which currently hover at about 18%. Also present was Ecopetrol President Javier Gutierrez, who added the state oil company is striving to increase its recovery factor to 34% by 2020 with the implementation of infill developments, water flooding and thermal technology.
Hurry Up and Wait
Pacific Rubiales has been heavily impacted by permitting delays, and Arata said it is essential the country reverse its “seven-year trend” in replacing reserves. The company’s Rubiales field is Colombia’s sole producer of more than 100,000 bo/d, while fields yielding more than 20,000 barrels of oil per day total only about a dozen. Colombia saw its reserves peak in the early 1990’s and no giant fields have been found since then, as even Rubiales was discovered in 1992.
Arata maintained that Colombia presents big opportunities as more than 75% of its basins are underexplored, many with no seismic coverage, let alone drilling. Even the extension of the Orinoco Belt into Colombia has seen little exploration. Obviously security and logistics come into play, but without permits there can be no exploration. Echoing Spaulding’s remarks, Arata also noted that Colombia E&P share performance is well below the TSX oil index.
Keep Hope Alive
So what is to be done? Both Federico Renjifo, Minister of Mines, and Orlando Cabrales, Vice Ministrer for Energy, said the issue of slow environmental licensing is being addressed. Renjifo outlined several steps, including an “environmental assessment of alternatives.”
A cause for optimism is the fact that Colombia has become one of the top South American investment targets due largely to government cooperation. As the participation of government officials at the CWC conference illustrates, it is encouraging Colombia is not just shrugging and pointing out that it is a lot worse in other countries. And with the growth the country has experienced in recent years, the environmental ministry may simply be understaffed. The general industry consensus seems to be that constraints in Colombia will be worked out, although it may take a while. Certainly, the speakers at CWC attempted to give the government a bit of a push.
What do you think? Are you bullish on Colombia, or do you remain skeptical about the prospects for success in the country? Please leave a comment below.
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