Spotlight on Colombia: Investors See Opportunities in
Oil and Gas Exploration1
Tuesday December 10, 2013, 4:30am PDT
By Andrew Topf2+1 - Exclusive to Oil Investing News3
6
Colombia, it must be said, has not always enjoyed a good reputation as a destination for
foreign investment or tourism, due to decades of civil unrest from whose dark shadow it
has struggled to escape. However, the South American nation is opening up to
investors, particularly in the natural resources sector, where it is known to have
substantial oil and gas7 reserves along with gold8, silver9, emeralds, platinum10 and
coal11.
“International investors started hearing very good things about Colombia from about 2007;
people have noted the changes in the country, with its improved security and stable contracts,”
Cristian Ducara, general manager of Trayectoria Oil and Gas, was recently quoted in Oil and
Gas Investor12 magazine.
While Colombia does not have the large oil reserves of neighboring Brazil or Venezuela,
energy13 and petroleum (E&P) companies, along with a growing number of smaller oilfield
services firms, are increasingly putting the country on their radars. Colombia has been rated
the third easiest place to do business in Latin America, ahead of Mexico, Argentina and Brazil,
while the capital, Bogota, is increasingly seen as a regional oil and gas hub. Taking a look back
though, it is clear that Colombia’s road to international acceptability and a steady flow of
investment capital has been a rocky one.
A violent past
Most readers will recall that during the 1980s and ’90s, Colombia was considered a dangerous
and lawless place. The country attached to the isthmus of Panama, and touching the borders
of Brazil, Venezuela, Peru and Ecuador, was in the limelight for all the wrong reasons, namely
a left-wing insurgency that was all-consuming and at times shockingly violent. Aimed at
redressing perceived economic inequalities, along with a laundry list of other demands
including dampening the influence of the United States and ending the monopolization of
natural resources by multinational corporations, the rebels, led by the Revolutionary Armed
Forces of Colombia (FARC) and the National Liberation Army (ELN), turned to the drug trade
and kidnappings to fund their activities.
The government fought back by forming paramilitary groups to combat leftist political
organizations and armed guerillas, but the paramilitaries were themselves violent and
dangerous. A Wikipedia entry on paramilitarism14 in Colombia states that right-wing
paramilitaries have been responsible for 70 to 80 percent of political killings per year.
According to the BBC15, these groups are sometimes on the payroll of drug cartels and
landowners and have at times been backed by elements of the Colombian army and police.
Between the ideological extremes of the FARC and the paramilitaries, the Colombia drug
cartels plied their trade, with the majority of the cocaine processed for export destined for the
United States. In 1989, legendary drug lord Pablo Escobar, worth an estimated $3 billion,
made Forbes magazine as one of the world’s 227 billionaires, with his Medellin cartel
controlling 80 percent of the global cocaine market. Demonized by the United States and the
Colombian government, Escobar was in fact seen as a hero to many Colombians — a sort of
Robin Hood figure who funneled money to the poor; he was even elected as a representative
to Colombia’s Congress.
While forming the backdrop of Colombian politics since the 1940s, the clashes between the
government and the guerillas reached a crisis point in 1985, when leftist group M-19 stormed
the Palace of Justice in Bogota and murdered almost half of the 25 judges. The event became
seared into the collective memory of Colombians as the point when the country effectively lost
control of its democratic institutions.
Peace at last
Colombia today, however, is very different from the nation of Pablo Escobar and the drug wars
that kept tourists and investors away for years. The government of Alvaro Uribe, who served as
president between 2002 and 2010, is largely credited for facing down the guerillas and
demobilizing the paramilitaries, thereby ushering in an era of peace, opening up large swathes
of land to oil exploration, and inviting foreign investment into the country. The BBC notes that
since 2002 the government has regained much of the territory once held by rebels, and is
seeking to “shake off its image as a trouble spot associated with drugs and kidnapping.”
The current government of Juan Manuel Santos has continued to pursue peace with the
guerillas through the so-called Plan Colombia, a U.S.-funded offensive against the rebels and
drug trafficking. The two sides are currently trying to hammer out a deal through meetings in
Havana, Cuba, and last month negotiators managed to agree on two of six items up for
discussion. But while Plan Colombia is obviously a positive step towards lasting peace, it is
also vulnerable to derailment. On November 12 an apparent plot by the FARC to murder
Uribe16, who opposes the peace talks, was revealed. The plot gave ammunition to the former
leader, who is constitutionally barred from seeking another term but is running for the Senate,
and his supporters who say Colombia should not negotiate with the FARC. Santos, meanwhile,
declared in November that he will run again in the presidential elections next May. According
to The Economist17, Santos wants to sign an accord with the guerillas before the new Congress
is inaugurated in July.
It was perhaps fitting that in the same week that Santos made public his bid for re-election, oil
and gas companies were gathering in Bogota for the 24th annual Colombian Conference of Oil
and Gas. After all, it was the oil industry that helped Colombia to shake off decades of civil
unrest and set it on a path to robust economic development. Organized by the Colombian
Association of Petroleum Engineers, the technical conference and trade show attracts
companies and speakers from around the world, and is considered the most important meeting
of Colombia’s hydrocarbon sector.
Indeed, the oil industry in Colombia has always been vital to the economy; it is estimated that
oil and gas represents about a quarter of the country’s exports. The discovery of heavy oil in
the Llanos basin of Eastern Colombia in the late 1980s turned the country into a net oil
exporter, with most barrels destined for the United States. Ever since, the state-owned oil
company, Ecopetrol, has dominated oil production, in 2012 producing 754,000 barrels of oil a
day, or 70 percent of total production. The remaining 30 percent is divided among a handful of
smaller producers, including Pacific Rubiales Energy, the largest independent oil producer in
Colombia, Canadian company Gran Tierra, and Equion Energia, a joint venture between
Ecopetrol and Talisman Energy (NYSE:TLM19,TSX:TLM).
According to the US Energy Information Administration20, Colombia has about 2.4 billion barrels
of oil reserves and 4.7 trillion cubic feet of natural gas. The country does not have large
petroleum reserves by international standards – neighboring Venezuela has some 250 billion
barrels and Russia, the world’s third largest oil producer, boasts 80 billion – but what is
significant about Colombia is the amount of oil it has produced in recent years.
The EIA notes that before 2008, Colombia’s oil production was flat for several years, following
a peak of 830,000 barrels of oil a day reached in 1999. However, in the last six years, the
country has almost doubled production, and this year it reached its goal of 1 million barrels a
day.
According to a June article in The Financial Times21, Colombia’s recent oil boom can be
attributed, at least in part, to the vast pool of petroleum engineers, geologists and managers
who migrated to Colombia from Venezuela following a two-month energy industry strike in
2006 that crippled Venezuela’s economy.
“Venezuela’s loss has been, for all means and purposes, Colombia’s gain,” the FT quoted
Carlos Alberto López, a Harvard-educated Colombian energy expert, as saying. “Without [the
army of experienced Venezuelan oil workers], Colombia’s extraordinary oil boom might have
faced significant lags.”
The introduction of a new talent pool coincided with the policies of then-president Uribe, who
as mentioned above, cracked down on the guerillas, thus opening the door to foreign investors
who lustfully eyed Colombia’s petroleum reserves amid a new climate of stability and peace.
The Guardian22 notes that in order to attract investment into the energy sector, Uribe’s
government licensed large areas of the country for exploration and offered tax breaks.
Importantly, the government no longer required private firms to form partnerships with
Ecopetrol, and in fact sold shares in the state-owned company, allowing it to quadruple its
capital spending. The success of Uribe’s policies can be readily seen by the amount of foreign
cash that flowed into oil industry coffers. According to the Colombian Central Bank, between
2003 and 2011, roughly the period corresponding to Uribe’s rule, foreign direct investment in
the oil industry jumped from US$278 million to US$4.3 billion, reported The Guardian.
Replacing reserves
It would be nice to report that Colombia is floating on a sea of oil of similar expanse to Brazil or
Venezuela, but in fact, the country has limited reserves and will be forced to explore for more
oil if it wants to maintain its position as a net exporter of the fossil fuel. According to data from
ANH, the National Hydrocarbons Agency, last year 132 exploration wells were drilled in
Colombia, resulting in 150 million barrels found. However, that is still 200 million barrels short
of replacing reserves that have already been produced, according to Duncan Nightingale, the
president of Gran Tierra, as quoted in Oil & Gas Investor.
“Basic logic suggests, at current rates of discovery … that the operators need to drill more
wells to replace the reserves being produced and definitely many more exploration wells if the
desired growth targets stand a chance of being achieved,” said Nightingale.
That sentiment was echoed by Colombia’s minister of mines and energy, Amylkar Acosta
Medina, who told delegates in November at the Colombian Conference of Oil and Gas that his
ministry is focused on adding more barrels to reserves through exploration. While Medina
noted that 33 percent of Colombia’s oil reserves have come from new discoveries compared to
just 10 percent in the previous decade, he acknowledged that Ecopetrol’s feat of nearly
doubling its reserves in just five years came through increasing recovery rates at existing wells
rather than through any new findings.
He said “the big effort” currently is on discovering unconventional reservoirs that would be
tapped using hydraulic fracturing (“fracking”) methods, along with offshore reserves that remain
largely unexplored (Chevron (NYSE:CVX23) is currently the only company producing from an
offshore block). Recoverable shale oil and gas reserves in Northern South America are
estimated at about 20.2 billion barrels of oil and 222 trillion cubic feet of gas, according to the
EIA, with Colombia accounting for 6.8 billion barrels and 55 trillion cubic feet.
“After Brazil and Argentina, Colombia is the Latin American country with the greatest potential
for [unconventional oil and gas] development,” said Medina, adding that the government is
hoping by the end of the year to finalize a regulatory framework to foster the development of
unconventional plays.
Attracting investment
In terms of attracting new oil and gas investment, Colombia has been excellent at selfpromotion. According to Invest in Bogota, a partnership between the city and the Bogota
Chamber of Commerce that seeks to promote investment opportunities, nearly 40 E&P
companies have come to Colombia since 2007, with many choosing Bogota as a base of
operations. Equidistant between New York, Mexico and Sao Paulo, Invest in Bogota touts the
city as ideal for conducting business across the region. Advantages of being in Bogota include:
a qualified workforce, including a steady stream of new graduates from the city’s two
universities, the University of the Andes and the National University of Colombia; competitive
wages and infrastructure costs; and a thriving “ecosystem” of E&P companies. The city was
rated the third easiest to do business in, among other Latin American competitors, ahead of
Mexico City, Santiago, San Jose and Lima, according to Invest in Bogota.
Firms that attended last month’s trade show in Bogota, many of them oilfield services
companies, agree that Bogota and Colombia are good jurisdictions for doing business
compared to Colombia’s neighbors.
Venezuela, led by the colorful, socialist dictator Hugo Chavez until his death in March of this
year, has driven out most foreign companies, and is widely acknowledged as a failed petrostate. Argentina, another of Colombia’s direct competitors, has imposed strict limits on foreign
exchange transactions to stop capital from fleeing an economy suffering 25 percent inflation.
The measures have put Argentina at a competitive disadvantage, with its foreign exchange
reserves – money it needs to pay creditors and to buy imported goods – falling by 29 percent
so far this year, The Wall Street Journal reported25.
Tetra Tech Technologies (NASDAQ:TTEK26) a Houston-based firm focused on well testing,
recently set up an office in Bogota and has found its expansion into Colombia to be fruitful.
Sebastian Blanco, an Argentinian heading up Tetra Tech’s Bogota operation, said within a
week of arriving in Colombia his team had secured a contract – and he believes there may be
enough work for the next two years. The firm has found a market niche in providing equipment
for high-pressure gas wells.
Blanco said that Colombia has less work compared to Brazil and Argentina, but the business
climate is better. He said Colombia’s economic and political stability was a key factor in Tetra
Tech having the confidence to set up a Colombia operation, along with the Colombian
government’s open-ness to increasing oil and gas production.
Another oilfield services company, Calgary-based Calmena Energy Services (TSX:CEZ27), also
reports a positive experience in Colombia, having operated in the country for three years.
Country manager Carlos Escruceria said while 2013 has been slow, he expects more business
after the second quarter of 2014 when the Colombian government is expected to issue the next
round of environmental permits to E&P companies. Ecopetrol, the state-run oil company, is
expected to nearly double its number of drill rigs in the country from 24 to 49, which will directly
affect Calmena’s business.
“Every time Ecopetrol does something it affects the industry,” Escruceria said. “And after the
environmental permits go out next year, there’s going to be be a big demand [for oilfield
services].”
He also said the industry is awaiting a successful conclusion of the peace process currently
underway, along with the results of elections next spring. “After that everything is going to be
steady. You’re going to know what’s going to happen, good or bad.”
Roadblocks remain
But while most companies see Colombia as a better place to do business than say Venezuela
— whose anti-business climate under Chavez will take years if not decades to alter — they
also blame the Colombian government for dragging its heels on issuing environmental permits
that oil companies need to begin exploration and issuing sub-contracts. With more companies
seeking permits for exploration and production, wait times in some cases have doubled.
However, in its defense, the National Hydrocarbons Agency (ANH) has responded that a
logjam was inevitable after 50 blocks were awarded in 2012.
Adding to environmental permitting delays is some pushback on the part of local communities
that, due to an improved security situation, feel emboldened to protest oil and gas exploration.
Oil and Gas Investor reports that the government is taking “… measures to reduce violent
policing and hold the military accountable for human rights abuses,” but that has also “led to a
growth of vocal discontent in communities frustrated by resource exploitation in their back
yards.”
And, it must finally be noted, that while guerilla activity in Colombia and violence against
regular citizens has decreased dramatically over the years, the oil and gas industry remains an
obvious target for domestic terrorism. As recently as October, Colombia’s second most
important oil pipeline, the Cano Limon-Covenas running from inland oil fields to the Caribbean
Sea, was temporarily shut down after three bomb attacks. According to Reuters28, the attacks
on the pipeline, owned by Ecopetrol, were attributed to leftist guerillas.
In conclusion, it can be said that while there are challenges to maintaining and increasing
Colombia’s million barrels a day target, the industry is moving forward and many companies
have already positioned themselves to take advantage of the positive investment climate that
currently exists for oil and gas companies in Colombia. In fact, now may the opportune time for
firms to establish operational beachheads, so to speak, so that they are on the ground and
running once business picks up again, likely after the elections next spring. In the meantime,
here are a few energy and petroleum companies in Colombia for investors to keep an eye on:
Ecopetrol (TSX:ECP,NYSE:EC29) is the dominant player in Colombia’s oil and gas sector,
producing some 70 percent of total oil production. The company is divided into four business
segments: Exploration and Production, Transportation and Logistics, Refining, Petrochemicals
and Biofuels, and Supply and Marketing. Ecopetrol said last week that it is in talks with
Enbridge30 (NYSE:ENB31,TSX:ENB) to build a pipeline in Colombia to the Pacific coast.
According to Ecopetrol, Colombia is looking to new markets in Asia as its production increases,
but hydrocarbon demand from the United States wanes due to increased shale oil and gas
production there.
Pacific Rubiales Energy (TSX:PRE32) is the largest independent oil production company in
Colombia. Along with producing and selling natural gas and heavy crude oil, Pacific Rubiales is
also invested in oil pipelines, including the Oleoducto de los Llanos S.A. Pipeline and the
Oleoducto Bicentenario de Colombia currently under construction. In November the
company acquired Petrominerales33, an E&P company that holds several properties in the
Llanos basin, along with blocks in the Putumayo and Upper Magdalena basins.
Gran Tierra Energy (NYSE:GTE34,TSX:GTE) is the biggest producer in the Putumayo basin
and the area’s largest landowner. The Calgary-headquartered company also has operations in
Argentina, Brazil and Peru. Gran Tierra has seen explosive production growth over the past
seven years through new discoveries, according to the company, including the Costayaco field,
one of the largest oil finds in Colombia of the last decade. Gran Tierra holds an interest in 19
blocks including three awarded during the 2010 round that are pending approval by ANH.
Canacol Energy Ltd (TSX:CNE35) has 26 exploration and production contracts throughout
Colombia and Ecuador. Production in Colombia is focused on the Rancho Hermoso and
Entrerrios fields in the Llanos basin. It also has full or partial ownership of properties in the
Caguan-Putumayo and Magdelanas & Cordillera basins. Earlier this month
Canacol announced36 the results of an exploration well drilled on its LLA23 contract in the
Llanos basin. The well encountered 133 feet of net pay oil in 4 different reservoirs, and
Canacol said it is preparing to test its production potential.
Securities Disclosure: I, Andrew Topf, hold no direct investment interest in any
company mentioned in this article.
http://oilinvestingnews.com/10316-spotlight-on-colombia-investors-see-opportunity-in-oil-andgas-exploration.html