Colombian bid round: old and new challenges
A combination of social disputes and competition from Guyana and Suriname is hampering Bogota’s efforts to attract further investment
Colombia’s state licensing regulator, the National Hydrocarbon Agency (ANH), announced in December the winners of the country’s second oil auction of the year. Blocks 123 and 124 in the Llanos Basin, an oil rich region in the east of the country, were awarded to a consortium headed by Latin American-focused operator Geopark—taking a 50pc stake—with Hocol, a subsidiary of the Colombian state controlled Ecopetrol, holding the remaining equity. The only other competitor for Block 124 was from Canadian firm Parex Resources.
Geopark described the expansion of its Colombian portfolio and the acquisition of the blocks, which total an area of nearly 116,000 gross acres, as “attractive, low-risk, high potential exploration acreage”.
“They have not had to deal with the continuous armed conflict that Colombia has experienced” Ramos, Crudo Transparente
The auction is the latest example of Colombia’s commitment to ratcheting up oil production. As of 2019, the country holds 2bn bl worth of proven reserves, producing an estimated 880,000bl/d—a sharp drop from the country’s 2.6mn bl/d output back in 1997. The ongoing political crisis in Venezuela, which has reduced crude production by almost half since it averaged 1.35mn bl/d in 2018, does mean, though, that Colombian output is now above its more prominent neighbour.
But several factors are impeding Colombia’s ability to ratchet up major international interest in its oil reserves. Firstly, oil produced in the Meta Department, where the Llanos Basin is located, is predominately heavy crude, with an API of between 16-30°. The grade is of limited export value to major companies as it is difficult to market, says Yessica Ramos, national director of Colombian thinktank Crude Transparente.
The discovery of significant reserves off the coast of Guyana—first announced in 2015 by ExxonMobil—and now compounded by a breakthrough find offshore Suriname, has also had a negative effect on Colombia’s upstream. The Liza project offshore Guyana has a breakeven cost of $35/bl, among the most economically competitive in the world. In contrast, Colombian crude struggles to rival this cost and offer investors comparable value.
“Suriname and Guyana are greenfield investments. These are countries where there is everything to do and companies have the opportunity to start from scratch,” says Sergio Guzmán, director and co-founder of political risk consultancy Colombia Risk Analysis. “In countries like Colombia, Ecuador and Brazil, not only is there a financial and regulatory structure but there are old, continuing problems as well.”
Ramos adds that, since Suriname and Guyana are emerging producers, oil companies are able to negotiate much more favourable terms then they can with Colombia. There is also the additional benefit of improved security.
c.880,000bl/d – Colombian production
“These two countries will be able to offer better security guarantees because they have not had to deal with the continuous armed conflict that Colombia has experienced,” says Ramos. “This guarantee makes them a more attractive investment.”
More than forty years of conflict with rebel groups such as Farc and the National Liberation Army (ELN) have repeatedly tempered investment in Colombia. Despite the historic peace deal in 2016, dissident groups continue to target oil infrastructure. While such attacks are undoubtedly a problem for investors, they are just one of myriad specific problems that different Colombian regions can pose. These include indigenous protests, environmental opposition and labour issues.
“With these types of projects there is always an asterisk, and the asterisk is almost never finance or geology because that is something companies can control,” says Guzman. “What they cannot control is political risk and in Colombia that risk is very localised. There are community issues that go back years.”
Guzman stresses that the Colombian government remains keen to attract outside investment in its oil sector as it moves forward with attempts to increase exploration and production, both onshore and offshore, and the possibility of pursuing unconventional resource.
“The government is supporting fracking even though it is not very popular. It has shown it is willing to go to bat for the extractive sector and that is positive because it demonstrates that it wants this sector to succeed,” Guzman adds.