The sector is increasingly turning to unconventional sources

As of mid-2014 Colombia was on the verge of tapping its vast reserves of shale and offshore oil and gas. Exploiting these resources will help the country’s hydrocarbons sector tackle its two primary challenges: low reserves and limited production growth. Despite its position as one of the world’s leading producers, Colombia has an extremely low reserves-to-production ratio (R/P). At 2013 levels of production, oil reserves would be exhausted in about six years, with R/P being even shorter if not for stagnating production growth. Colombia’s production nearly doubled between early 2008 and the end of 2012, when output reached 1m barrels per day (bpd). But since then, growth has flatlined and in March 2014 production was 977,000 bpd.

Facing Low Reserves

Both the country’s low reserves and flat production growth are due to the fact that Colombia’s conventional reserves have been extensively explored and no major discoveries have been made in the last 30 years. Furthermore, major conventional discoveries are not expected in the future. In 2013 this situation came to a head for Ecopetrol, the state-owned oil company, whose operations have been focused almost exclusively on conventional, onshore fields where production is declining. After missing production targets, Ecopetrol saw its stock perform badly and share price fall more than 40% in 2013.

As a result, Ecopetrol and the Colombian government have been placing a new emphasis on the exploration of unconventional reserves, namely offshore and shale deposits of oil and gas. These types of fields have the potential to drastically increase Colombia’s proven reserves and they represent the next step for a modernising oil and gas sector. Efforts to explore some of these reserves have already begun and should accelerate after offshore and shale blocks are offered by the National Hydrocarbons Agency (Agencia Nacional de Hidrocarburos, ANH) in this year’s licence auction, known as Ronda 2014.

Potential In Shale

The areas of greatest potential for unconventional exploration are the Middle Magdalena Valley basin (MMVB) and several deepwater blocs in the Pacific Ocean and the Caribbean Sea. According to a 2013 US Energy Information Administration (EIA) study, Colombia has unproven, technically recoverable shale gas resources of 55trn cu feet (tcf) and shale oil resources of 6.8bn barrels. The figure for gas has increased significantly since 2011 when the EIA estimated that technically recoverable shale gas resources were 19 tcf. According to the 2013 study, “Colombia’s shale potential appears considerably brighter today based on the results of initial shale drilling, as well as the entry of major oil companies (ConocoPhillips, ExxonMobil and Royal Dutch Shell) as well as several smaller companies.”

MMVB Exploration

This activity has been the focus in the MMVB, which “contains thick deposits of the organic-rich Cretaceous La Luna Formation, mostly in the oil to wet gas windows,” according to the EIA. La Luna is one of the shale formations in the area. The MMVB is also one of Colombia’s leading basins for conventional exploitation, so much of the exploration to date has occurred within existing lease positions. Ecopetrol and Nexen, a mid-sized Canadian company, were among the first to begin exploring, with Ecopetrol running stratigraphic tests in 2011 and Nexen drilling three exploratory shale wells in 2012. Since then Canacol, another mid-sized Canadian company, has taken the lead. As of mid-2013 Canacol held three exploration assets believed to have shale oil potential. These assets cover 105,000 ha and have a mean estimate of 2.9bn barrels of recoverable crude.

Canacol has partnered with the local subsidiaries of ConocoPhillips, ExxonMobil and Shell to explore these assets. Under the terms of their partnerships, the majors underwrite the costs of wells and take the majority of the production extracted from deep underground. Canacol reserves the rights to shallower reservoirs that the company’s budget allows it to exploit independently. These joint ventures have been an effective method for quickly developing the firm’s unexplored assets and could serve as a model for future exploration. In a research note, BTG Pactual Chile, formerly known as Celfin Capital, wrote of Canacol’s partnership with ConocoPhillips, “We think this is a brilliant move for Canacol. It is a large carry that allows the company to de-risk the block at no real cost and still allows it to have full control over anything they find that is small enough to fit in their budget.”

Looking Up

Some of the initial exploratory wells deriving from these partnerships have yielded promising results. In August 2013 Canacol announced that the Oso Pardo-1 discovery well, spud in the MMVB in June 2013, reached a final stable rate of 205.3 bpd of oil with a water cut of 9.67%, and gas production 107.5m cu feet per day. The well is part of Canacol’s partnership with ConocoPhillips. In March 2014 Canacol announced that the Mono Arana-1 well, which was spud in September 2012 in the La Luna Formation of the MMVB, tested up to 590 bpd of oil without having been hydraulically fractured or drilled horizontally. This was Colombia’s most successful shale well to date. Canacol has a 20% working interest in the contract under which the Mono Arana-1 well operates; ExxonMobil holds a 70.1% interest; and Vetra Exploración y Producción Colombia has a 9.9% interest.

For its part, Ecopetrol continues to explore its assets in both the MMVB and the Catatumbo sub-basin. According to a March 2014 Bloomberg report, “Ecopetrol plans to drill 15 wells for unconventional hydrocarbons [in 2014] in the Middle Magdalena and Catatumbo areas, including nine stratigraphic wells, three exploratory wells and three productivity and study pilots.” Besides the MMVB, three other basins in Colombia hold shale potential, but have been the subjects of less exploration. The Llanos basin in the country’s east has the prospective Gacheta Formation rock shales of Cretaceous age that are equivalent to those in La Luna Formation, according to the EIA. Total organic carbon and thermal maturity “appear low,” “but the western foothills region may be richer and more thermally mature.” The Catatumbo sub-basin, which is an extension of Venezuela’s Maracaibo basin, has “extensive oil and gas potential in thick, widespread Cretaceous La Luna Shale.” Finally, the Putumayo basin in the country’s south “contains organic-rich Cretaceous shales in the Macarena Group,” according to the EIA.

Licence Auction

Ronda 2014 is set to open up these areas to increased exploration. Nineteen shale blocks, totalling 1.14m ha will be available for bids from majors. Additionally, 13 offshore blocks totalling 8.21m ha and 8 coal-bed methane blocks covering 1.9m ha will be offered. Dozens of inland, conventional blocks, about 9.5m ha, which are set to attract bids from juniors, will also be included in the round. The ANH has made clear that only bids from majors will be sought for shale blocks, a stance which has worried some industry executives. Charles Gamba, the CEO of Canacol, told OBG, “Unconventional fields usually are not offered to juniors, because they cannot compete with the majors, such as Shell and ExxonMobil. This is unfortunate because it was juniors who brought US shale to commerciality. Then the large companies came and bought the acreage from the small companies.” Gamba explained that this juniors-first approach can be a faster method for ramping up a country’s shale production. He said, “Larger corporations plan for the long term and take longer to develop their fields and that is not good for Colombia. We have spoken to the government, but the policy is clear: only majors get unconventional projects.”

Offshore Blocks

Tapping oil and gas reserves in the Pacific Ocean and in the Caribbean Sea is another component of the government’s effort to boost hydrocarbons reserves and production. Mariano Ferrari, general manager of Repsol Colombia, told OBG, “Finding hydrocarbons in the Caribbean Sea will be key to turning the tide of the oil and gas sector in Colombia. In onshore there have been no major discoveries for the last 30 years, and while these have not happened at sea yet, expectations are certainly high.”

Of the 13 offshore blocks auctioned in July 2014, 10 were in the Caribbean and three in the Pacific. Petrolero Brasileiro (Petrobras), Ecopetrol and Anadarko Petroleum Corporation, among other majors, are expected to place bids for these blocks.

Deep-Sea Exploration

In 2014 these three majors are expected to lead the way in offshore exploration. In the second half of 2014 Petrobras plans to spud a drill in its 16,000 sq km Tayrona block in the Caribbean. Petrobras operates the block with Repsol, which has a 30% working interest, and Ecopetrol, which also holds 30%. Joseba Murillas, Repsol’s exploration director for Latin America, said in January 2014 that the mean prospective resources of the block were 4 tcf of gas equivalent. Anadarko holds approximately 3m ha across six blocks in the Caribbean. In addition, the company also said that it plans to continue evaluating the results of seismic test results conducted in these blocks to guide future exploration.

Offshore Incentives

In 2014 the government showed that it is committed to encouraging increased offshore exploration. As Bloomberg reported, in March 2014 the Ministry of Mines and Energy announced that it would sweeten the terms of offshore licences offered in the 2014 auction. In the past, companies were allowed to extract 5m barrels of oil before beginning to pay royalties. Now royalties will not kick in until 200m barrels have been extracted in deepwater or 300m barrels in ultra-deep water. Additionally, “the improved terms will see the threshold above which royalties are paid increased to $82 per barrel for deepwater, from $45 [as of March 2014], and $100 for ultra-deep water,” Bloomberg reported.

For several years, it has been clear that the future growth of Colombia’s oil and gas sector would be built upon the development of unconventional reserves. In 2014 these efforts appear to be picking up steam as ongoing exploration yields promising results and more blocks with offshore potential are made available.