Since the 2020 COVID-19 pandemic, Colombia’s economically crucial oil industry has struggled to recover. During 2022, Colombia only pumped an average of 754,199 barrels daily, which is significantly lower than the 885,851 barrels per day produced in 2019. This decline occurred despite former President Ivan Duque, in office from 2018 to 2022, aggressively promoting investment in Colombia’s hydrocarbon sector. The economically crucial sector is being buffeted by a multitude of headwinds that are weighing on production and deterring foreign energy investment. Leftist president Gustavo Petro, who took office on August 7, 2022, campaigned on a platform of ending hydrocarbon exploration, hiking taxes and banning hydraulic fracturing, known as fracking. When those circumstances are considered along with Colombia’s meager oil reserves, a deteriorating social license and ongoing security crisis, it is understandable why foreign energy companies are deterred from investing in the country and are even abandoning operations. In the latest news, global energy supermajor ExxonMobil announced it was exiting a joint operating agreement with Patriot Energy Oil and Gas for the 43,158-acre VMM-37 Block in Colombia’s Middle Magdalena Valley Basin.
Source: Sintana Energy.
Exxon is the operator of VMM-37 and holds a 70% working interest in the block, with Patriot owning the remaining 30% non-operated interest. The CEO of Sintana Energy, the owner of Patriot, expressed disappointment with Exxon’s decision with the supermajor having been a partner in the operation for a decade. Exxon’s decision comes at a crucial time for Colombia’s petroleum industry, with the Andean country inching ever closer to a ban on fracking which will directly impact VMM-37. There are plans to drill the Platero-1 well, which is part of the Platero fracking pilot being conducted by Colombia’s national oil company Ecopetrol, and Exxon, on VMM-37 with Patriot and the company’s owner Sintana not participating in the project.
The Middle Magdalena Valley Basin is Colombia’s oldest and most prolific oil-producing area. It is in this basin where the Andean country’s petroleum industry began with the 1918 discovery of the giant La Cira-Infantas oilfield. Over a decade ago, it was identified that the Middle Magdalena Valley Basin contains considerable unconventional oil and natural gas potential in the La Luna and Tablazo shale formations, which have been compared to the prolific Eagle Ford shale. In a September 2015 report, the U.S. Energy Information Administration determined that the Middle Magdalena Valley Basin contains risked recoverable shale oil resources of 4.7 billion barrels and 18 trillion cubic feet of shale gas.
Those numbers indicate that the successful exploitation of the basin’s unconventional hydrocarbon resources will resolve Colombia’s emerging energy crisis caused by a shortage of reserves. At the end of 2021, the Andean country possessed proven reserves of two billion barrels of oil and 3.2 trillion cubic feet of natural gas with a meager production life of 7.6 years and eight years, respectively. This short production life, along with Colombia’s economic dependence on petroleum exports and dependence on oil revenues, underscores why the country must expand hydrocarbon exploration if an energy crisis is to be avoided. Already, Colombia has been forced to significantly increase liquefied petroleum gas imports, which quadrupled during 2022, and Petro inked a deal with Venezuela’s national oil company PDVSA to import natural gas in case domestic supplies keep declining. There are fears that unless Colombia boosts proven hydrocarbon reserves and production, the Andean country will lose its energy security by as early as 2028. That is almost certain to occur if Petro proceeds with banning oil exploration.
The Platero fracking pilot has been mired in controversy since Colombia’s industry regulator, the National Hydrocarbon Agency, authorized the project in 2021. In April 2022, a Colombian court suspended the environmental permit for Ecopetrol’s nearby Kale fracking pilot and the environmental licensing process for Exxon’s Platero project. Then in early July 2022, Colombia’s highest administrative tribunal overturned the ruling giving both fracking pilots permission. Petro’s electoral victory, which saw him assume office as Colombia’s 34th president in August 2022, was followed by Ecopetrol asking the industry regulatory body, the National Hydrocarbon Agency (ANH – Spanish initials) to suspend the Kale and Platero fracking pilots for three months.
Since those events, Petro’s plans to ban fracking have moved closer to reality, with Colombia’s Senate approving a bill to prohibit the controversial hydrocarbon extraction technique on April 18, 2023. Petro, who intends to end contracting for hydrocarbon exploration, also hiked taxes for Colombia’s oil industry. Firstly, royalties were removed as an income tax deduction, and secondly, a scalable levy was placed on petroleum sales which is payable when Brent exceeds certain threshold prices. This increased the effective tax rate for drillers to an estimated 35% when no surtax is payable and a maximum of 50% when the full 15% surtax is applied when Brent exceeds $82.20 per barrel.
For the reasons discussed, Exxon’s decision to abandon the VMM-37 Block makes sense, especially with it increasingly likely that fracking will be banned in Colombia. The fallout from those legislative decisions is being magnified by the industry’s disintegrating social license and rising community unrest over oil projects. Exxon possesses alternate operations in far friendlier jurisdictions, where the tax rate is lower, and there is greater certainty regarding their future, which will deliver far higher returns. Among the most prominent is the prolific Stabroek Block in offshore Guyana, which Exxon made a priority during 2020 and plans to expand petroleum production from around 380,000 barrels per day to 1.2 million barrels daily in four years.
By Matthew Smith for Oilprice.com
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