COME AGAIN

Colombia 2013 | ENERGY & MINING | REVIEW: ENERGY

An improvement in stability has led to record oil production levels, while generation projects could turn Colombia into one of the region's largest electricity suppliers. The continuation of privatization is also set to be a significant earner.

Colombia's oil producers are increasingly anticipating the post-FARC environment, with a reduction in violence working in parallel with more market-friendly conditions to boost the fortunes of state-owned Ecopetrol and other parties. The opening up of the sector, including the partial privatization of Ecopetrol and government plans to sell off several electricity assets, are also promoting a buoyant FDI environment.

Colombia surpassed the 1 million barrels of oil per day (bbl/d) production mark on December 29, 2012, a significant milestone for the country and a strong improvement on the 940,000 bbl/d average in 2012. In April 2013, the production level showed no signs of dropping. In that month, crude oil production averaged 1 million bbl/d despite some well maintenance, up 5.3% year-on-year, according to the Ministry of Mines and Energy. In 2013, the government is now targeting an average of 1.07 million bbl/d. Colombia is the fourth largest oil producer in the region and has proven reserves of 2.4 billion barrels.

Colombia's oil sector has grown thanks mainly to the expansion of Ecopetrol, in which the state has an 88.5% stake. Ecopetrol produces approximately 60% of Colombia's oil, doubling its production from 400,000 bbl/d in 2007 to 800,000 bbl/d in 2013. Ecopetrol is also taking advantage of the investor-friendly environment, teaming up on winning bids for six blocks with Anadarko, ExxonMobil, Repsol, and Hocol, including a shale gas project. “The country decided to change the investment conditions governing the sector a few years ago, and that attracted a lot of interest from large players in the sector," said Camilo F. Durán Martínez, President of ExxonMobil Colombia. As Fernando I. Sanabria, Executive Vice-President of ExxonMobil Exploration Colombia, saw the situation, “Jointly with Ecopetrol, we look forward to our future exploration efforts and participation in the development of Colombia's natural resources." Foreign companies occupy a significant part of the oil services industry, with Campetrol studies indicating that 55% are international, many of which have set up operations in Colombia following the return of companies including ExxonMobil and Shell.

A significant export commodity—oil and coal account for around 60% of Colombia's shipment basket—the continued development of the Cartagena Refinery will continue to help boost revenues in the coming years. In a $3.8 billion expansion project, capacity at the refinery is expected to more than double from 75,000 bbl/d currently to 165,000 bbl/d by the end of 2013. Expanding pipeline infrastructure could also offer gas a route into Panama and Nicaragua, while Ecopetrol and Enbridge work on a pipeline to carry oil to the Pacific coast in order to cut down on transport costs to better take advantage of Asian demand for crude.

Colombia also has the potential to boost its role as a regional electricity supplier. According to data from February 2012, 64% of the country's 13.5 GW generation capacity comes from hydroelectric plants, 32% from natural gas or coal-fired plants, and the rest from co-generation plants and minor renewables such as wind and solar. The government has outlined plans to boost generation capacity to 19 GW by 2018, an initiative in which the Colombian Energy and Gas Regulatory Commission (CREG) plays a significant part by working to create an open market. The privatization of several generation and distribution companies is also set to raise Ps3 billion in 2013, contributing to additional competition.

ECOPETROL, REFINING, & THE OIL SECTOR

The decline in violence and the rise in Ecopetrol's fortunes have been synchronous at a time when its privatization has increased its access to financing and exposure to the capital markets. Following an IPO in 2007 and foreign listing in New York in 2008, the company sought to tap into the resource-friendly Toronto market in 2010. The company has proven popular with investors, of which there are half a million, many of whom are Colombian citizens. Today, the company is the eighth-largest oil company by market capitalization. Responsible for 60% of the country's oil output, the company has an $80 billion investment plan in place to boost this to 1 million bbl/d by 2015 and 1.3 million bbl/d by 2020. Well on track, Ecopetrol has boosted production by 16% a year since 2008, giving it the confidence to venture abroad to explore blocks in Brazil, Peru, and the Gulf of Mexico, purchasing BP's stake in Noble Energy's Gunflint discovery. While 88.5% of the company is still owned by the state, 8.5% more could be put up for block sale or via a secondary public offering (SPO) in a strategy that has led for calls for Mexico's Pemex to adopt a similar strategy. Despite improved security, however, attacks on Ecopetrol installations are estimated to have cost the company 1% of its production in 2012. Despite the challenges, the appetite for new discoveries is strong. In late 2012, Ecopetrol submitted winning offers for 12 exploratory blocks in a round of bidding held by the Agencia Nacional de Hidrocarburos (ANH). The blocks represent 3.1 million hectares across the Llanos, Mid Magdalena Valley, Caguan-Putumayo, Catatumbo, and Cordillera basins, as well as offshore. Ecopetrol is set to invest $370 million in the initial exploration phase over the upcoming three years. The largest private producer in the country is Pacific Rubiales, representing over 20% of total production in the country per day. “We have 62 blocks and nine in production," said Ronald Pantin, CEO of Pacific Rubiales, adding that, “we expect the growth of the company to move up to 500,000 bbl/d over the next few years."

SERVICES, REFINING, & PIPELINES

The increasing activity of domestic and international oil giants has led to an FDI influx into the sector. According to Banco de la República data, FDI jumped from $278 million in 2003 to $4.3 billion in 2011. A significant part of this growth is tied to ancillary service providers. “There are more than 100 operators in Colombia, and in turn we have also seen dramatic growth in the number of service companies coming into the country," said Hermes Aguirre, President of the Board at Campetrol. Moving forward, Aguirre sees only growth. “Major operators that were here in the past and are now coming back, such as ExxonMobil and Shell, which will help the country's oil and gas sector develop," he concluded. Localization is also the name of the game for the country's service providers, with international service companies boasting 95% local labor rates. Foreign service firms also dominate the sector, with 55% of companies active in oil services international in origin.

The expansion of the Cartagena Refinery, which will see production boosted to 165,000 bbl/d in 2013, will also be a strong earner for owner Reficar, itself a subsidiary of Ecopetrol. Following the completion of expansion works, the refinery will allow for a higher conversion rate, more valuable products, and better integration with the petrochemicals industry.

Further infrastructure is under development in the way of pipelines. The country has three major oil pipelines, all of which are domestic, including the Caño Limón-Coveñas pipeline, the Ocensa pipeline, and the Transandino pipeline. The country's only major gas pipeline is the Trans-Caribbean gas pipeline between Venezuela and Colombia, with a proposed extension to Panama and Nicaragua. One of the most significant projects underway is the Bicentennial Pipeline, which will connect fields in Casanare with the port of Coveñas. Another significant pipeline project is Oleoducto al Pacifico, which is being developed by Ecopetrol and Canadian partner Enbridge. The pipeline is set to link the oil-rich Llanos basin across the Andes Mountains to the Pacific coast in order to access the Asian Pacific and Chinese markets. “We feel that the pipeline can save the oil industry in excess of $500 million a year in transportation costs," said Enbridge International's Regional Vice President of Latin America, John Gerez.

POWER

Colombia boasts a hydroelectric potential that could boost its status as a regional electricity exporter. A solid investment environment has provided incentive for growth in recent years, although regulatory challenges need to be overcome before Colombia can step onto center stage.

The country currently has a generation capacity of 13.5 GW, a figure the government hopes to increase to 19 GW by 2018. With many power plants under development thanks to streamlined investment incentives, only a slowdown in demand could derail efforts—residential entities are the main consumer of power in Colombia, at over 40%, although declining population growth will result in slowing demand for power.

Colombia's generation mix is changing, with gas- and coal-fired plants giving way to hydroelectric plants. As of early 2012, 64% of generation capacity was hydroelectric plants, 32% was natural gas- or coal-fired plants, and the rest was co-generation and minor renewables. While thermal power plants contributed 40% in March 2010, they only contribute 32% as of February 2012. This is also in line with a reduction in coal production of 21.4% year-on-year to 18.4 million tons in 1Q2013, according to the National Mining Agency (ANM).

In 2006, CREG instituted a reliability charge scheme, guaranteeing a fixed price to generators in times of scarcity in a move that both ensured a continued supply as well as shored up investors. According to The Oil & Gas Year, in the first round of auctions following the introduction of the measures, commitments were made on more than 4 GW of additional capacity. Slowed demand, however, means Colombia will need to look increasingly abroad for consumers in order to maintain capacity expansion. The country currently sells to Venezuela and Ecuador, and work is underway to develop a regional exchange mechanism to govern the buying and selling of electricity across borders. Panama is to become Colombia's latest electricity customer, with the two countries' grids expected to be joined and online by end-2014.

Now stepping into the spotlight, Colombia has a lot of work to do regionally in order to boost electricity exports and get its carbon production flowing. With the prospect of a more secure environment now on the table, Colombia will have no lack of investors lining up to give the country the international boost it needs if regulatory and security issues can be solved.