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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’s Oil Industry Is Showing Signs Of Recovery

While the August 2020 global rig count remains significantly lower than for the same period last year, because of oil’s protracted price slump, Colombia’s economically crucial petroleum industry appears to be recovering. Baker Hughes reported on Friday that there were seven active rigs in the strife-torn Latin American country, all of the oil rigs with no active natural gas rigs. This is the third straight month where the volume of operational rigs has increased, although it is still less than a third of what it was for the same month in 2019. That can be attributed to President Duque’s reactivation of Colombia’s economy after a more than five-month lockdown, one of the world’s longest, to contain the coronavirus.

It was back in late-May 2020 that energy companies operating in Colombia began to recommence non-essential operations as the compulsory lockdown was eased to allow. crucial economic sectors to reopen. This is important for Colombia because of the Andean country’s reliance on oil production as a key economic driver. For July 2020 data from the central government’s statistical agency, DANE, showed petroleum was responsible for 25%, or $630 billion, of exports by value. This represents a steep 51% decline in the value of petroleum and derivative products which can be blamed on sharply lower oil production and substantially weaker prices.

During July, Colombia produced an average of 735,000 barrels of oil daily which, while almost 1% greater than a month earlier, was significantly lower than the 869,000 pumped for that month in 2019.

Source: Colombian Ministry of Mines and Energy.

The outlook for Colombia’s petroleum industry appeared dire when oil prices collapsed in March 2020 and the COVID-19 pandemic emerged. Capital spending and investment in Colombia’s vital oil industry fell sharply as oil companies shuttered uneconomic production because of weaker prices and suspended non-essential operations. This crisis emerged after an optimistic start to 2020. In January, Colombia’s peak industry body, the Colombian Petroleum Association (ACP Spanish acronym), predicted that annual investment would grow 23% year over year to almost $5 billion. That number was slashed by the ACP in April, as the oil price rout bit deeper, by just over $1 billion because of significant spending reductions by oil companies. This was estimated would see maintenance and development spending fall by $670 million while investment in exploration was expected to decline $370 million. Reduced exploration is particularly worrying because of Colombia’s limited oil reserves totaling just over 2 billion barrels or roughly six years of production at the current rate. The rising rig count is a positive indicator for a country heavily dependent on oil exports to generate fiscal income for the cash strapped central government and drive economic growth. In further good news, Colombia’s three largest privately-owned oil producers are ramping up production since Bogota reopened the economy in September.  Related: String Of Bearish News Shifts Sentiment In Oil Markets

At the end of June 2020, Parex Resources announced it was reactivating its exploration and development program, anticipating spending of up to $85 million during the second half of 2020. Parex stated that it would fund the complete two exploration wells at its Agua Blancas light oil property, as well as perform workovers and development drilling at the LLA-34 and Cabrestero blocks. During July 2020, Frontera, Colombia’s largest independent oil producer, elected to bring 60% of the 15,000 barrels of shut-in oil production back online. Frontera has budgeted $20 to $40 million for exploration activities during the second half of this year. It announced it would continue working with 50% partner Parex to develop the La Belleza-1 oil discovery at the VIM-1 Block in the Lower Magdalena Basin. Gran Tierra Energy indicated in its second-quarter 2020 results that it would resume operations at most of the fields it had shut in. This includes workover and development activities at its Acordionero, Costayaco, and Vonu properties. Production was to be restarted at the Suroriente Block and most of Gran Tierra’s minor fields.

The ACP stated in late August that private oil companies were ready to invest $715 million in Colombia’s oil industry over the remainder of 2020. These developments bode well for Colombia and should lead to a steady increase in the volume of petroleum produced. 

Aside from the risk of another oil price collapse, the only issue that may impact this more optimistic outlook are rising security risks in the troubled Andean country. Over the last two weeks of August more than 39 people were killed in a spate of massacres. That comes on the back of attacks on Colombia’s all-important oil pipelines. These events coupled with the ongoing murder of community leaders, the ELN, Colombia’s last remaining guerilla group, increasing its activities, the growing volume of FARC dissidents, and power struggles between various paramilitary and organized crime groups have triggered fears that the security situation will deteriorate. It is feared that this will be amplified by the detention and ongoing investigation of former President Uribe.

The outlook for Colombia’s all-important petroleum industry is improving, boding well for not only higher production but further oil discoveries as the tempo of exploration activities increases. This will act as a solid buffer against the severe economic fallout from the COVID-19 pandemic mitigating its impact on a fragile economy.

By Matthew Smith for Oilprice.com

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