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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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Colombia Is Preparing For A Fracking Boom

It was roughly a decade ago when hydraulic fracturing, known as fracking, was identified as a crucial means for boosting Colombia’s meager hydrocarbon reserves and production. A shortage of proved crude oil and natural gas reserves along with declining production is threatening Colombia’s economy. Despite only possessing two billion barrels of proved oil reserves with a short six-year production life, Colombia is highly reliant upon petroleum production to drive the economy. During 2020, at the height of the pandemic and oil price crash, petroleum accounted for 28% of exports by income, 3% of gross domestic product, and 17% of fiscal revenue. A dearth of significant conventional oil discoveries since the late 1990s means Colombia must find alternate means of boosting crude oil and natural gas reserves if its hydrocarbon-dependent economy is to grow. In fact, a lack of significant discoveries combined with weak natural gas production due to rising decline rates at aging offshore fields and growing demand forced Bogota to start importing liquified natural gas in 2017. This shortage triggered a crisis that challenged the Andean country’s energy security, forcing the national government to work feverishly to resolve the crisis by implementing incentives aimed at promoting exploration and development activity, including paying higher than market natural gas prices at the wellhead. 

In 2018, when President Ivan Duque was championing fracking as means of addressing Colombia’s lack of hydrocarbon reserves, the Council of State, the country’s highest administrative tribunal, placed a moratorium on the controversial technique. That essentially prevented the introduction of fracking in Colombia as a means of extracting crude oil and natural gas. In 2019 the tribunal upheld the ban on fracking but roughly a week after announcing that decision clarified it did not include pilot projects. A 2020 bid to block fracking pilots failed and in September that year the National Hydrocarbon Agency (ANH – Spanish initials) finalized the regulations for selecting pilot participants. Colombia’s fracking pilots are restricted to be conducted in the Middle Magdalena Valley and Cesar-Ranchería Basins. The head of the ANH, Armando Zamora, in a March 2021 Reuters article, stated he expects the 2018 moratorium on fracking in Colombia to be lifted during 2022 when environmental regulations are modified. 

The Middle Magdalena Valley Basin, located in central Colombia between the eastern and central Andes mountain ranges, has over 40 discovered conventional oilfields with the U.S. Geological Service (USGS) predicting it holds undiscovered oil resources of up to 1.4 billion barrels.

EIA

Source: U.S. EIA.

Since 1918, when crude oil was first discovered in Colombia at the La Cira-Infantas oilfield in the basin, it has produced most of Colombia’s oil. The key fracking target in the Middle Magdalena Valley Basin is the La Luna geological formation which has been compared to the prolific U.S. Eagle Ford shale play. It is a Cretaceous age geological formation typified as a classic shale-gas system in which the rock is the source, reservoir, and seal. The USGS estimated in 2017 that the La Luna possesses undiscovered shale oil resources of up to 521 million barrels and over two trillion cubic feet of natural gas. It has been predicted that the Middle Magdalena Valley basin, in total, contains unconventional crude oil resources of up to seven billion barrels, or more than triple Colombia’s current proved reserves and 13 trillion cubic feet of natural gas. Those copious hydrocarbon resources, if proven to be commercially viable to extract, will resolve the significant economic downside posed by Colombia’s limited crude oil and natural gas reserves.

The push to bring fracking pilots online is gaining considerable momentum after a fraught 2020 where significant risks, including sharply weaker oil prices and continued community opposition, indicated they may never eventuate. National oil company Ecopetrol, which is 88.49% owned by the Colombian government, launched the Kale fracking pilot in the Middle Magdalena Valley in the department of Santander near the town of Puerto Wilches. The national oil company has budgeted almost $77 million to develop the project, with drilling scheduled to commence during the second half of 2021. Earlier this month global oil supermajor ExxonMobil also announced it had submitted a proposal for a fracking project in the Middle Magdalena Valley near Puerto Wilches. Exxon has earmarked $57 million for the project, which has yet to be approved by the ANH.

Related: Houthi Rebels Launch Missile Attack On Saudi Oil Terminal

The economic importance of developing fracking in Colombia cannot be emphasized enough. The Andean country’s peak petroleum industry body, the Colombian Petroleum Association (ACP – Spanish initials), believes commercial fracking in the Andean country could eventually add 450,000 barrels of daily production to current production and attract $5 billion of investment. That will provide an important source of revenue for a cash-strapped national government still reeling from the pandemic’s severe economic fallout and crude oil’s prolonged price slump. Bogota is struggling to restart a stalled economy which, despite being projected to grow by 4% during 2021 compared to contracting by 7.8% in 2020, will see the budget deficit blowout by almost one percent year over year to 8.6% of GDP. Unemployment is still alarmingly high with DANE, the national statistical agency, reporting it reached 17.3% in January 2021 the highest since July 2020 at the peak of Colombia’s pandemic lockdown. Those worrying numbers indicate that Colombia is still unable to shake off the profound economic aftermath of the pandemic, indicating that Bogota needs to find ways to restart the economy.

The Andean country’s considerable economic dependence on hydrocarbon extraction makes it especially vulnerable to its limited oil and natural gas reserves, including their short production life and oil price slumps. It appears that Colombia is unable to end its addiction to extracting fossil fuels to power the economy. The Andean country’s energy minister recently stated Colombia would double down on thermal coal mining, despite it being the first fossil fuel to be phased out as part of the fight against global warming. By bolstering hydrocarbon reserves and production Bogota will only further expose the economy to volatile oil prices and the immense downside which exists once peak oil demand arises, which according to some industry analysts could be in as little as seven years. Considerable community opposition to fracking remains tremendous. That, combined with the petroleum industry’s slowly waning social license and ongoing security issues, is creating considerable uncertainty which is weighing on investment in unconventional oil and gas production in Colombia. 

By Matthew Smith for Oilprice.com

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