The unconventional: Development of previously inaccessible reserves could play a vital role in the long term

Thanks to the development of new technologies such as fracking and offshore drilling, hydrocarbons reserves previously thought inaccessible are being exploited. Colombia’s experience in developing these resources is limited, though recent auctions of unconventional blocks could open the door to extra reserves of oil and gas. The incorporation of unconventional resources in the energy matrix could play a key role in securing hydrocarbons resources in the long term, as proven reserves are rapidly depleting. At 2012 levels Colombia will exhaust its reserves of crude oil in six to seven years. In November 2012 the National Hydrocarbon Association (Agencia Nacional de Hidrocarburos, ANH) auctioned off the first unconventional exploration blocks in the hopes of attracting $500m in investments.

RESOURCES: Conservative ANH forecasts put newly discovered reserves of unconventional crude oil at 1bn barrels from 2012 to 2030, while its pessimistic scenario projects none added and its optimistic scenario sees 10bn barrels added. Given that current reserves stand at just 2.26bn barrels of crude, achieving the ANH’s conservative estimate would significantly extend the longevity of crude oil production.

On the other hand, the agency’s conservative scenario predictions of unconventional reserves of natural gas will add 2trn cu feet (tcf) to current reserves of 5.5 tcf. The pessimistic scenario would, like crude oil, result in no unconventional resources found while the optimistic forecast could see up to 10 tcf added to natural gas reserves. Meanwhile, estimates from the US Department of Energy put reserves of shale gas resources in Colombia significantly higher at 19 tcf, even though its forecast does not include numerous basins yet to be thoroughly explored. While this estimate is significantly lower than resources in the larger nations of the US (862 tcf), Argentina (774 tcf) and Brazil (226 tcf), much of these resources are confirmed.

GEOGRAPHY: In total there are seven geologic basins that could potentially hold unconventional resources, according to the ANH. However, there are four basins drawing the majority of attention when it comes to unconventional and shale resources: the Middle Magdalena Basin, the Llanos Basin, the Caguan-Putumayo Basin and the Catatumbo Basin.

The Middle Magdalena Basin, despite being one of the most explored basins, likely holds the greatest potential of the four and is a proven site for conventional resources. Located on the eastern side of the Andes Mountains, its potential for unconventional resources is currently being explored by ExxonMobil.

The Llanos Basin, which is responsible for a substantial amount of current production, is also being heavily explored for conventional and unconventional resources. Meanwhile, along Colombia’s border with Venezuela lies an extension of the giant Maracaibo Basin, the Catatumbo Basin which has already produced a dozen oil and gas fields, though it remains semi-explored. Near the border with Ecuador is the Caguan-Putumayo Basin, which has been semi-explored and yielded successful discoveries of modest oil and gas reserves. According to studies by the ANH, its proximity to the large oil fields of the Oriente Basin in Ecuador – it is in fact an extension of the Oriente – also make it a candidate for unconventional exploration.

INCENTIVES: To promote the exploration and development of unconventional resources and attract investment several incentives have been created, the largest of which is a significantly discounted royalty fee on unconventional resources. Companies exploiting unconventional resources will enjoy a 40% discount on royalties. Other incentives include exploration contracts of nine years (consisting of three three-year phases) and production contracts of 30 years. Colombia’s investment regulatory framework, particularly with regards to the energy industry, is considered fairly attractive when compared to neighbours Venezuela, Ecuador and Argentina. With improved security, this has been a primary driver of foreign direct investment in the past decade, and with new incentives for extracting unconventional deposits of hydrocarbons, interest is high.

CONTRACTS: The first unconventional blocks were auctioned in November 2012 by the ANH, with bids on 115 blocks, 13 of which consisted of offshore areas, while 31 were considered unconventional. The ANH estimates that the new contracts will see 18 exploratory wells drilled between 2013 and 2016. State-owned Ecopetrol and ExxonMobil are leading the search for unconventional resources, but several other firms have also entered the fray, like Nexen Petroleum Colombia, which started drilling for shale gas in existing blocks in late 2011. Ecopetrol is pushing to reach 25,000 bpd from unconventional resources by 2015 and 50,000 bpd by 2020. In the 2012 auction Ecopetrol placed winning bids on five unconventional blocks, three of which it holds a 100% stake in, while the other two are owned jointly with ExxonMobil. It expects to invest $46.3m in exploring the blocks, 12.5% of its $370m exploration budget for the 12 contracts it won at auction. Three unconventional blocks were awarded to Shell, while two went to Nexen, and one to Canacol and Drummond each.

RISK VS REWARD: Hydraulic fracking to release hydrocarbons reserves has drawn praise and criticism. Antifracking movements have spread across the globe as the environmental impacts have come to the forefront of the industry: the contamination of water tables with natural gas, oil and other previously dormant chemicals. Defenders of unconventional exploitation of shale reserves assert environmental concerns are overblown.

However, given the lack of alternative sources of fuel as well as the reliance of the global economy on hydrocarbons, such risks are generally outweighed by the rewards. The dangers of offshore drilling were brought to the fore after BP’s Deepwater Horizon oil spill in the Gulf of Mexico. Since then there has been very little done to suggest a more stringent regulation of the sector in the US or otherwise.

Colombia has yet to discover and exploit unconventional resources onshore or off, and perhaps as a result activism against unconventional resources is considered to be very low while governmental policy towards unconventional resources are seen as being supportive. By comparison, Brazil and Argentina are considered to have neutral policy support and moderate activism. The other threat to the development of unconventional oil and gas fields is security. Despite the improved security situation, a significant portion of untapped unconventional resources are located in areas that were once under the sole control of the Revolutionary Armed Forces of Colombia. After a period with fewer attacks on the energy industry from 2008 to 2010, attacks on oil and gas pipelines in 2012 registered the second-highest level in a decade.

If large and accessible deposits of unconventional resources are discovered, as many within the industry believe will assuredly happen soon, the interest in investing in unconventional oil and gas is expected to grow significantly. As Javier G Gutiérrez, president of Ecopetrol, told OBG, “Of the 115 blocks that have been auctioned off by the ANH in 2012, 31 were of non-conventional oil and gas, a fact which speaks highly of the potential of untapped unconventional resources in the country.”