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Colombia 2014 | ENERGY & MINING | REVIEW: ENERGY

Colombia has had one of the world's fastest-growing oil and gas sectors in recent years, but the country will need to explore new, more complex processes to keep pace with growing demand and export obligations.

Colombia's oil and gas industry has enjoyed considerable growth over the past decade. In June 2014, Colombia produced an average of 1.01 million barrels of oil per day (bbl/d), a 3.5% increase on June 2013 figures. Since the mid-1980s, Colombia has been an oil exporter. Following new regulations introduced in 2003, it has been exporting about half of its production, primarily to the US. Colombia boasts the fifth-largest oil reserves in South America, behind powerhouses such as Brazil and Venezuela. The country depends on hydropower for the majority of its electricity needs and natural gas is becoming increasingly more important, with demand having increased by approximately 54% over the past decade.

JACKPOT STRUCK

From 2005 to 2012, Colombia's crude oil production nearly doubled, from 525,000 bbl/d to 914,000 bbl/d. In 2013, experiencing the positive effects of a decade of reforms, Colombia reached an annual output of 1 million bbl/d for the first time, putting itself one step closer in the right direction toward its goal of 1.5 million bbl/d by 2015.

The substantial production increase over this period is largely the work of former president Álvaro Uribe, who ruled from 2002 to 2010, during which time his government licensed vast territories for exploration, provided tax breaks, and no longer required private companies to partner with state-owned oil and gas firm Ecopetrol. The government also improved security for pipelines, which suffered repeated attacks from rebel forces, and sold shares in Ecopetrol, ultimately quadrupling the company's capital spending. These efforts have also led to an increase in FDI, which stood at over $16 billion in 2013, 81.6% of which went to the mining, petroleum, and hydrocarbons sectors.

To continue this trend of high output, firms have been venturing into the formerly uncharted territories of Caquetá and Putumayo, as well as employing new technology to boost oil recovery at established wells. In 2011, Colombia re-injected 56% of the country's total gross natural gas production in order to help out enhanced oil recovery (EOR) operations. Discovered in 1981, the Pacific Rubiales field revealed record levels of oil output in 1Q2014, reaching 344,000 bbl/d, up 16% from the same period last year. Compared to more advanced oil and gas sectors around the world, however, Colombia has much progress to make in utilizing EOR for declining fields.

Even though high production has been welcomed, it indicates an unresolved threat to Colombia's reserves. As of 2014, there are 2.38 billion barrels of proven oil reserves in the country. But with a surge in oil production, the growth of reserves simply cannot suffice. From 2005 to 2012, the BP Statistical Review of World Energy 2013 reported that proven oil reserves increased from 1.45 billion barrels of oil equivalent (boe) to 2.2 billion boe—just above a 50% increase. However, during this same period, oil output rose by some 80%. This has meant a decrease in Colombia's reserve life, which has shortened from 6.9 years in 2012 to 6.6 years in 2013.

GAS THREATENED

Gas output has also increased significantly. While the reserves-to-production ratio for gas is stronger than that for oil, at almost 13 years, demand is expected to rise—weather-related hydroelectric shortages have shifted weight to the power sector and new export opportunities place an added strain on reserves. By the end of 2012, Colombia had 5.7 tcf (161 bcm) of proven natural gas reserves, most of which are found in the Llanos Basin and most of which is produced in the Guajira Basin.

Colombia is able to satisfy its domestic natural gas demand, but has recently begun to export to Venezuela, where Ecopetrol pumps some 200 mcf (5.7 mcm) of gas per day. In 2012, Colombia took the leap into LNG. The Canada-based Pacific Rubiales Energy Corporation, which focuses mostly on Colombia and Peru, signed a deal with Belgium's Exmar NV to supply and liquefy as much as 69.5 mcf (2 mcm) per day over 15 years to Exmar's floating LNG terminal, which will be built on Colombia's Caribbean coast. The project is expected to begin in 2015.

Meanwhile, fears of drought stand in the way of Colombia's exports to Venezuela as well as the continued running of its hydroelectric plants. In May 2014, Colombia halted its gas sales to Venezuela in order to fill in for dry weather conditions, brought on by the El Niño weather phenomenon caused by a warming of sea-surface temperatures in the Pacific that affects wind patterns and triggers floods in some places, while inducing drought in others. Hydroelectric plants held 60% of Colombia's 14.4-GW installed electric generation capacity in October 2013 and provided 68% of electricity generated. A net exporter of electricity, Colombia sold 57.8 GWh of electricity in October 2013, of which the lion's share—89%—went to Venezuela. Like gas, hydropower is also at the mercy of climate change.

EMPHASIS ON EXPLORATION

The future of Colombia's oil and gas industry, however, remains uplifting. The Mining and Energy Planning Unit predicts that Colombia could build its reserves by more than 9 billion boe and 6 tcf (170 bcm) of gas by 2030 and the biennial bidding rounds have meant the influx of global majors with the expertise to exploit blocks over shale formations, especially with regards to gas. Colombia is expending all its options, particularly looking to offshore exploration and unconventional oil and gas, such as shale deposits. Ecopetrol is planning to invest $19 billion in exploration efforts from 2013 to 2020, with a special focus on unconventional oil and gas. The US Energy Information Administration estimates that there are 55 tcf (1.55 tcm) of shale gas and 6.8 billion barrels of shale oil in Colombia. By 2020, state-owned Ecopetrol has plans to produce 50,000 boe of unconventional resources per day. In 2014, the company plans to drill 15 wells for unconventional hydrocarbons.

In July 2014, following a successful bidding round in 2012, Colombia followed up with the auctioning off of 95 blocks, which included 19 offshore blocks in the Caribbean and in the Pacific and 18 unconventional blocks, mostly located in the La Luna shale formation. Some 27% of blocks were sold, bringing approximately $1.4 billion in investment to Colombia. The blocks sold are for the most part frontier areas, as offshore and shale have gone virtually untested until recently. The bidding round thus presented an opportunity for ambitious exploration companies to dig into Colombia's resources. Norway's Statoil entered the country for the first time as a result of the licensing round, buying a 33.33% interest alongside ExxonMobil and Repsol in the COL4 license offshore Colombia in the Caribbean Sea. Canada's Parex Resources bid the highest for the only one of 18 shale formation blocks put up for license.

The 2012 bidding round had also offered many blocks with shale potential. The Luna and Chipaque formations in the Magdalena Valley are where the highest concentration of shale gas is located, and have thus been of particular focus. For the 2012 bidding round, the government provided incentives to investors, such as 40% discount on royalty rates. Colombia has little experience in developing unconventional resources and is leaning on foreign players to bring the know-how to the table and pick up the slack of less shale-savvy local players. Such incentives have proven successful, with the likes of Canacol and Nexen from Canada, ExxonMobil, and Shell now setting the stage for shale gas fields in the country. So far, gas has been more promising in shale formations in Colombia, but interest in digging deeper for oil is rising.