Call it a tale of two countries. Venezuela and Colombia border each other, and have had no shortage of hostilities. The Chavista government in Venezuela has long been skeptical of the U.S.-friendly government in Bogota. The late Venezuelan President Hugo Chavez even sent troops to the border in 2010 as tensions escalated in a senseless game of brinksmanship.
The two countries have had dramatically different experiences in their respective oil sectors as well. Venezuela is blessed with some of the largest oil reserves in the world, and its high levels of production have underwritten the Chavista government since its inception.
However, mismanagement, corruption, and a lack of investment have caused the country’s oil output to plummet since 2000, down by about 1 million barrels per day. More importantly for future production prospects, Venezuela has scared away private companies and is failing to invest. It appears unlikely that it will be able to turn things around.
Colombia has taken a different approach. It has vastly fewer oil reserves – Colombia has 2.4 billion barrels of oil reserves (although potentially much more in shale), around 100 times less than Venezuela’s 298 billion barrels. As such, Colombia has had to develop a much more diversified economy.
Despite having disproportionately smaller reserves, Colombia has succeeded where Venezuela has failed. Colombia overhauled its oil sector to attract international investment, passing regulatory reforms in 2003 to open up the sector. The national oil company Ecopetrol used to have a monopoly on reserves and production. But the reform laws allowed foreign companies to take 100 percent ownership in projects and compete with Ecopetrol. That spurred exploration and investment, and over the past decade Colombia has doubled its production. Colombia has not been blessed with the abundant oil reserves that its neighbor has, but it is making the most of it. In short, Colombia punches well above its weight, while the reverse is true for Venezuela.
Growing Oil Sector
With the investment climate attractive, Colombia holds a lot of potential. For now, most of Colombia’s oil production is from conventional sources. The Rubiales heavy oil field is the country’s largest, but it is declining. Production fell from 212,000 barrels per day in 2013 down to just 163,000 barrels per day at the end of 2014.
Colombia’s shale resources hold out a lot of potential, however, and are largely unexplored at this point.
In August 2014, Colombia held an auction for 90 blocks, one-fifth of which were for shale or coalbed methane. The results were disappointing – only one block received a bid. The collapse in oil prices isn’t doing companies any favors either. Still, with a stable investment climate, it is just a matter of time before Colombia’s shale resources get developed.
There is one small company that offers upside potential on Colombia, even though the next few years might be slow given the pricing environment. Sintana Energy Inc. (CVE: SEI), a small exploration company, is targeting Colombia’s Magdalena Basin. It farmed out a drilling operation to ExxonMobil (NYSE: XOM) in 2012 on the VNM-37 prospect. The Middle Magdalena holds kerogen-rich intervals, and although the basin has been explored in the past, the advent of lower-cost unconventional drilling methods has sparked renewed interest.
The agreement with ExxonMobil called for Sintana to explore the conventional parts of the acreage (Sintana holds 100 percent), and ExxonMobil to explore unconventional portions (Sintana retains 30 percent).
Sintana provided an update on one of its wells on October 8, which was drilled by ExxonMobil. The Manati Blanco-1 well, drilled in the VNM 37 block, is targeting tight oil formations. Specifically, the company is drilling in the La Luna and the Tablazo/Paja formations. The well was successfully drilled and cased through both formations and analysis is now underway to evaluate the resource potential.
“The safe and successful completion of Manati Blanco-1 drilling operations is a major milestone for Sintana in this initial exploration phase of the VMM-37 work program,” Sintana’s CEO, Doug Manner, said in a statement.
The project is way too small to provide investors with any Colombia exposure via ExxonMobil’s stock price. But Sintana is another matter. The company’s share price jumped 5 percent after news broke that the Manati Blanco well was completed successfully. Sintana has resource potential of P50 unrisked recoverable resources of 210 million barrels of unconventional oil, and 50 million barrels of conventional oil.
Another Canadian company, Parex Resources, is also targeting the Magdalena. Parex Resources (TSE: PXT) (Market cap: $1.6 billion) announced on September 29 a farm-in agreement with Ecopetrol on a light oil field. The Aguas Blancas field holds potentially 1 million barrels of light oil.
Finally, there is Canacol Energy (TSE: CNE), yet another Canadian explorer. Canacol’s production is more weighted towards natural gas. It operates in 4 basins across Colombia, controlling 21 exploration and production contracts, accounting for 11 million barrels of recoverable oil and 362 billion cubic feet of natural gas. It was producing nearly 11,000 barrels of oil equivalent per day as of July 2015. It is on track to quadruple its gas production from the Lower Magdalena in December 2015, as new projects come online. Furthermore, Canacol is investing in the first LNG export facility in Colombia, although the project will be small-scale. With Colombia’s demand for natural gas growing quickly, Canacol will be there to profit.
Colombia also benefits from decent infrastructure. It has seven oil pipelines, with five connected to an export terminal on the Caribbean coast. A few large pipelines standout: the Ocesna pipeline is a 520-mile line with a capacity of 590,000 barrels per day; the Cano Limon pipeline stretches 485 miles and can carry 220,000 barrels per day; and the Llanos Orientales line (which connects to the Rubiales field) carries 340,000 barrels per day. Another project, the Oleoducto Bicentenario, is under construction and will have a 450,000 barrel-per-day capacity when it is completed. The country still needs improved roads, gathering facilities, and processing plants, but the bulk pipeline system is in place.
Colombia has abundant natural resources, although its oil and gas reserves are not as prolific as its neighbor Venezuela. Still, with government policy friendly to foreign investment, and the reforms over the past decade to liberalize the oil sector, Colombia is a good place to do business. It has allowed the country to become the third largest oil producer in South America.
Moreover, the government continues to improve its business climate. The government and the armed militant group FARC, which have been at war for decades, reached a diplomatic breakthrough in September. The agreement could see an end to violence that has battered the country for nearly half a century. FARC has attacked oil pipelines in the past, so the breakthrough could provide added security and assurance to oil assets. That is welcome news to foreign companies considering whether or not to invest in Colombia.
Colombia continues to grow and make strides as an emerging economy. Low oil prices are holding back investment for now, but the future looks promising for this South American nation.