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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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Could These Discoveries Revive Colombia’s Oil Industry?

Colombia

It hasn’t been all plain sailing for Colombia’s oil industry in recent years. While the government remains focused on boosting oil production to kickstart growth in its petroleum dependent economy, the industry has had an inauspicious start to 2018.

For January 2018, output came to 860,187 barrels daily which represents a 1.1 percent decline compared to a month prior, although it does represent an almost 1 percent increase over the annual daily average for 2017.

There have been signs that the Colombia’s oil production will remain under pressure, which is bad news for its petroleum dependent economy. The volume of attacks by leftist ELN guerillas since a ceasefire with the government ended in January 2018 has grown at a brisk clip. That has seen the Caño Lion pipeline, which pumps up to 210,000 barrels daily, out of commission for most of 2018 to date.

Despite Bogota talking up the prospects of Colombia’s oil industry, investment has tapered off since oil slumped in late 2014. The national hydrocarbons agency, known as the ANH, estimates that 2017 private investment in the energy patch will be between $4.5 billion to $4.9 billion. While that is higher than 2016, it is still well below its 2014 peak and what is required to lift production to over one million barrels daily.

Nonetheless, recent events indicate that the outlook is improving.

Two recent oil discoveries in the departments of Santander and Arauca will add 2,200 barrels daily to Colombia’s oil output. According to the ANH those wells have expanded reserves so that production will last for seven years before they run dry, rather than the five years forecast in December 2017. Related: Oil Market Fears: War, Default And Nuclear Weapons

Because of higher oil prices, Ecopetrol returned to profitability reporting its best financial result in four years with a net profit of $2.3 billion or roughly four times that recorded for 2016. The integrated energy major’s oil reserves grew by over 3 percent to 1.6 billion barrels expanding its production life to just over seven years. These solid results gave Ecopetrol’s cash position a substantial boost giving it the ability to prepay debt totaling $2.4 billion.

Higher cash flow and a stronger balance sheet will give the company considerable financial flexibility, including the ability to dial up its investment in exploration and development.

There will also be some short-term relief from attacks on energy infrastructure by the ELN guerillas. Late February 2018, they announced a unilateral ceasefire from 9 to 13 March as Colombians go to the polls for congressional elections. This has seen a softening of the government’s stance on peace talks, signaling that it may be willing to resume negotiations with the guerillas.

There are also signs that operating expenses in Colombia’s oil patch are falling.

In the past, high costs, which saw the breakeven price estimated at $50per barrel, along with the difficulties associated with extracting oil in the country, was deterring foreign investment.

In mid-February 2018, the Colombian Petroleum Association known as ACP released a report (note the report is in Spanish) which demonstrated that operating expenses in Colombia’s energy patch have dropped significantly. The association estimated by the end of 2018 operating expenses had fallen by 35 percent compared to two years earlier to be $16.30 per barrel. According to the president of the ANH Orlando Velandia, 80 percent of Colombia’s oilfields are profitable with oil at $42 per barrel.

Related: Analysts Expect Oil Prices To Rise This Year

Such a powerful reduction in costs, coupled with higher oil prices and the possibility of an improving security situation will help to attract further investment in Colombia’s energy patch.

While the start to 2018 has been less than positive for the Andean nation’s oil industry, there are glimmers of hope that many of the issues that exist will be resolved. That along with a little luck could see the industry attract further investment, rebuild production and make additional oil discoveries, all of which would enhance stability and increase the chance of success.

By Matthew D. Smith for Oilprice.com

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