Are Colombia's oil wells at risk of running dry?

Colombia is facing the possibility of losing its oil independence as low commodity prices and ageing active oil fields eat into its number of commercially viable reserves. Two years after the end of its oil boom, the country is now dealing with the flipside of over-reliance on its abundant, diverse natural resources, which have dictated its economic fortunes for more than a century since it emerged as a global hotspot for the banana industry in the early 20th century.

Colombia’s government is trying to breathe life into the oil investment cycle through fiscal and regulatory incentives, and is pinning its hopes on a recently discovered offshore gas field unveiled by president Juan Manuel Santos in a televised speech. However, current oil and gas prices offer little incentive for companies to embark on new exploration ventures, and mounting local opposition, combined with ongoing attacks on oil infrastructure by revolutionary groups, are damaging the prospects of Colombia’s oil industry.

Diminishing reserves

“Given the historic fall in reserves at the existing oil fields, 2021 will mark the end of the country’s 30-year-old oil self-sufficiency,” wrote the Office of the Comptroller General (CGR) of Colombia in a report in May.

After reaching more than 1 million barrels per day (b/d) in 2013 at the of peak of the previous commodity cycle, oil production in Colombia has been in decline and is expected to average 872,000 b/d at year-end 2017, according to CGR estimates. Operating costs are mounting at depleted wells and new reserves are only partially viable at current prices.

Production is likely to continue to decrease to the point that state oil company Ecopetrol, which accounts for about 55% of total crude production, will not be able to meet the demand of its refineries in Barrancabermeja and Cartagena (420,000 b/d) in 2019, the CGR estimates. Even combining Ecopetrol’s production with that of private concessionaires, the country as a whole will follow suit within two years.

The question of cost

The CGR takes into account Colombia’s high costs of exploration and production: it takes more than the current price of $50 per barrel to make investing in oil production and exploration in Colombia profitable, according to industry estimates. However, these are conservative estimates compared with those of observers betting on a gradual recovery of oil prices in international markets.

“Over the long term, we do see the market begin to stabilise around the 800,000 b/d mark as higher prices begin to encourage further development of known deposits,” says Mara Roberts Duque, senior oil and gas analyst at market intelligence firm BMI Research. “This implies that Colombia will be able to service existing refining capacity for the foreseeable future and will remain a net exporter of crude, albeit at smaller volumes than in years past.” 

State authorities have played down the risk of losing oil independence, although proven reserves fell to 1.67 billion barrels at the end of 2016, down by 32% from three years earlier, according to estimates from the Colombian Oil Association (ACP).

“Ecopetrol had reserves for 6.8 years at the end of 2016,” says Ecopetrol executive vice-president Felipe Bayon Pardo. “It’s not only a technical issue, but also an economic issue. Reserves have not disappeared altogether. They have moved from proven reserves into a holding pattern category, if you will. Recovering oil prices – this year will hopefully be higher than last year – combined with our transformation programme around efficiency that has saved about $1.4bn in the past couple of years, will allow us to bring in some of those reserves that otherwise won’t be commercial onto our books.”

An investment recovery?

Ecopetrol and major foreign oil producers active in Colombia have all set up contingency plans to achieve operative and transport cost savings of about 30%, ACP estimates, creating breathing space to put more costly wells to work.

At the same time, the government has set up three special economic zones dedicated to facilitating offshore exploration in the Caribbean Sea by offering tax and customs incentives to companies drilling offshore wells, including Ecopetrol, the US’s Anadarko and Exxon, Brazil’s Petrobras, Spain’s Repsol and Norway’s Statoil. Additionally, the government has got rid of its two-year auction system for allocating exploration rights and replaced it with a model under which companies will be allowed to bid at any time for the oil blocks authorities put out to tender.

These measures are now expected to gain some traction. After bottoming out at $2.3bn in 2016, just a fraction of the $8.3bn reported two years earlier, investment in exploration and production in Colombia is now expected to bounce back to between $4.5bn and $4.9bn in 2017.

“This increase mirrors better expectations of the oil companies, which originates in the work both the companies and the government did together to adopt measures to promote investment in exploration and production,” the ACP wrote in a note in December.

Nonetheless, it will take more than cost savings to reanimate the investment cycle in the sector and achieve the $7bn investment levels that the ACP considers adequate for the country to meet government production targets.

“In the medium term, this pace of investment will not suffice to increase reserves and keep production at current levels,” the ACP’s report concludes.

Popular discontent

While they wait for oil prices to recover to more than $50 per barrel, Colombian authorities and oil companies have to face additional challenges on the ground.

Popular discontent over the way oil companies handle water resources is mounting and has resulted in numerous popular referenda held at local level to block exploration and production activity. Although it has yet to be seen whether these will be enough to force change, or even revoke existing concession contracts, the ACP estimates that they are jeopardising production to the tune of 84,000 b/d.

The oil industry has also been the target of terrorist attacks by the National Liberation Army (ELN), the main revolutionary force active in Colombia after the Revolutionary Armed Forces of Colombia (Farc) completed its disarmament in June. In the first half of 2017 alone, the ELN carried out as many as 30 attacks on the 780-kilometre Caño Limón-Coveñas oil pipeline, the second longest in the country, forcing several production stoppages at the Caño Limón y Caricare oil fields operated by US Occidental.

“The security of assets remains tenuous in the wake of the Farc disarmament,” says BMI’s Ms Roberts Duque.

Gas hopes

If oil production in Colombia is weakening, the country’s efforts to promote the development of offshore wells have highlighted important discoveries of natural gas.

“This is the biggest discovery in 28 years… and will allow the Colombians to guarantee gas independence in the [coming] decades,” Mr Santos told the population in May when he announced the discovery of a potentially massive gas field in the Colombian Caribbean Sea by Ecopetrol and Anadarko.

However, even if the find lives up to the hype, bringing it to fruition will take up to a decade.

“It’s going to take eight to 10 years to develop,” says Ecopetrol’s Mr Bayon Pardo. “Development costs will depend on the concept we decide to follow: how many wells, how many platforms, what facilities, what’s onshore, what’s offshore, LNG, floating LNG. We will need to look at all that.”

This discovery confirms Colombia’s still-great potential for oil and gas development. The country sits on a massive pool of hydrocarbon reserves estimated to be about 47 billion barrels. If these became geologically and commercially viable, Colombia would be among the world’s top 10 oil producers. Colombian hydrocarbon reserves are vast, but not cheap, and market conditions cannot be taken out of the equation. Without a recovery in oil prices prospects remain bleak, and Colombia may have to live with the irony of possessing enormous hydrocarbon reserves, but having to rely on imports to meet its internal energy demand.