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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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The Rise And Fall Of Colombia’s Shale Industry

Colombia

One of Latin America’s most stunning tales of economic development in recent years appears doomed to come to a bitter end…

Colombia’s reliance upon its abundant oil and gas reserves, which saw production surge to a just over one million barrels daily in 2015 to drive its economic miracle, appears on the brink of expiring

At the end of 2016, the Andean nation had oil reserves of a mere 1.7 billion barrels — or a 174th of neighboring Venezuela and an eighth of Brazil’s reserves — compared to over 2.3 billion barrels at the end of 2014. It’s believed that those reserves are only sufficient to support another five years of production at the current rate reported for 2017 of 854,000 barrels daily.

This has sent alarm bells ringing in Bogota, where oil revenues form an important source of government income.

The Latin American nation once generated roughly a fifth of its national income from oil revenues, royalties and taxation, but that plummeted to nearly zero in 2016 as the protracted weakness of oil heavily impacted investment in the industry as well as exports. That becomes apparent when considering that export income from petroleum exports plummeted from 55 percent of the value of total exports in 2013 to a mere third in 2017. Related: LNG: Glut Today, Shortage Tomorrow

The industry’s contribution to GDP has also fallen, declining from 8 percent in 2015 to what is estimated to be less than 6 percent in 2017. That significant decline saw the government record fiscal deficits of around 4 percent of GDP from 2015 to 2017, with indications that the fiscal deficit will be just over 3 percent in 2018.

One of the biggest issues that Bogota is facing aside from dwindling oil reserves is that there have been no major oil discoveries since the Caño Limón field in 1983. That has further amplified fears that Colombia’s much-needed oil wells are running dry. In 2017, the Latin American nation’s Office of the Comptroller General even stated, “Given the historic fall in reserves at the existing oil fields, 2021 will mark the end of the country’s 30-year-old oil self-sufficiency.”

To address the issue, the Santo government has turned to unconventional oil exploration and fracking to boost reserves and production.

That has to some extent been inspired by Argentina’s successful attempt at turning around its own ailing energy sector when the de Kirchner government nationalized YPF S.A. and pushed for a focus on the massive shale oil and gas potential of the Vaca Muerta in 2012.

Considerable shale oil and gas potential exists in three of the Andean nations’ 23 basins: the Middle Magdalena, Llanos and Catatumbo basins. The emerging belief among industry insiders is that by tapping into shale oil, they can add up to another 7 billion barrels of reserves. Most of the unconventional exploration efforts to date have been focused on the Middle Magdalena, and it’s believed that the La Luna shale formation, which is believed to be on par with the Eagle Ford shale, could hold up to 10 billion barrels of oil equivalent.

To put that in perspective, that’s almost two-thirds of the reserves held by the Vaca Muerta shale field, which has been proclaimed to be the third largest on the planet. If the potential of the La Luna can be truly realized, it will be a saving grace for Colombia’s oil industry, giving its reserves an important boost.

While there’s some activity in the basin with state-controlled Ecopetrol as well as Canadian small-cap drillers Canacol Energy and Parex Resources having amassed sizable acreages, it may take some time for exploration activities to reach the desired levels.

Related: Venezuela Is Moving From Crisis To Collapse

The prolonged weakness of oil, immense breakeven costs that some analysts claim is as high as $50 per barrel, and security issues have all taken their toll on investment in Colombia’s energy patch.

According to Reuters, investment by private oil companies in Colombia will be up to $4.9 billion in 2018, which is almost half of what it was in 2014 and nowhere near sufficient to fund the desperately needed shale oil exploration. Most of that investment will occur in lower-risk known conventional oil fields rather than riskier unconventional acreage, as smaller drillers focus on deploying capital to boost oil reserves, output and profitability.

While the peace with the largest insurgent group, the FARC, should deliver a dividend for Colombia’s energy patch, it will be limited due to the breakdown in peace talks and the ceasefire with the ELN. Since then, the Marxist inspired guerilla group has renewed its focus on attacking energy infrastructure including multiple pipeline bombings and the kidnapping of oil workers. That will not only disrupt Colombia’s oil output but also act as a deterrent for investment, particularly in riskier oil assets such as shale oil acreage.

If Colombia fails to significantly expand its oil reserves in the immediate future, it will be a significant blow for the nation’s economy, and could potentially even trigger a crisis of confidence among foreign investors, creating a vicious cycle.

By Matthew D. Smith for Oilprice.com

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