How we see the Colombian oil and gas industry in 2018
December 20, 2017
The president of the National Hydrocarbons Agency (ANH), Orlando Velandia, said that he is positive about next year because the country’s self-sufficiency measure will not fall like it has during the past four years. According to him, the goal is to extend Colombia’s oil self-sufficiency for one or two more years, taking into account that reserves will only be enough for another four-and-a-half to five years. "What we are looking at is that, thanks to the improvement in oil prices, part of these contingent reserves will go to proven reserves and with these, we can extend Colombia’s selfsufficiency a bit more."
The country’s self-sufficiency will not continue to fall, not only because of the stabilization of international oil prices but because of the work done in enhanced recovery technologies and in developing new fields. He added that the number of explored wells tripled during 2017; going from 21 to 51. The entity highlighted the importance of the Sinú-San Jacinto (SSJ) process for next year’s production, and said that it only wanted companies “with an important financial muscle” to enter the round. Some changes were made and the ANH went from offering 600,000 hectares to about 85,000, because it thought it would be better to grant a smaller area, far away from communities, and with this assure fewer social issues for companies. Less enthusiastic than Velandia, the president of the Colombian Petroleum Association (ACP), Francisco José Lloreda, said that he looks at 2018 “with moderate optimism because there is interest from companies in making important investments in E&P that hopefully will be firmed up, but it is short term.”
With that being said, he highlighted the importance of the 35%-40% increase in investment that Colombia will receive next year; the industry invested US$3.4M during 2017 and will invest US$4.9M in 2018. When it comes to unconventional resources (UC), the Colombian Association of Petroleum Engineers (Acipet) said that it will do everything it can to inform Colombians about the real effects of this practice, which should be developed “with the best international standards to protect the natural wealth of the country." We think that a more positive attitude from the government, especially the environmental authorities, would help the gas situation and, possibly, oil.
We hear there is a consensus developing around Ecopetrol’s proposal for a ‘fracking trial.’ The ANH said its crude oil target for 2018 is ‘around’ 900mbd (900,000 barrels a day), up from this year’s 850mbd (the ELN permitting in December). Our ‘big model’ predicts around 870mbd although we have not updated it with the stable production we saw in the second half of the year. And there is cause for optimism: Geopark’s (NYSE:GPRK) LLA 34 block is already over what our model predicted earlier in 2017. In our Managing Editor’s ‘Fearless predictions’ for 2018, he looks at all these topics as well as the upcoming Presidential elections. Like the ACP, he is ‘cautiously optimistic’ but less enthusiastic than the ANH about crude oil production next year. Bottom-line: Even though Velandia’s forecasts for next year sound great, he is known for being overly optimistic when talking about the situation of the industry in Colombia, and for oversimplifying important issues. At a press conference that took place this week, he said that the only aspect Colombia needs to work on to assure a successful development of industry projects are public order issues, but left aside legal security.
We are convinced that the industry is recovering, but social and legal issues must be addressed by the next government if it wants projects like the SSJ to succeed. When it comes to fracking, like we have said before (borrowing from the ACP’s Francisco Jose Lloreda), unfortunately we have found that economics is the cause, but environment is the excuse. The next government must make a quick decision on changing the SGR (General System of Royalties), as it will be vital in discussions with regions to approve unconventional projects. Finally, we think the 2018 Presidential elections are likely to be too close to call until the counting is over. Unfortunately, there are diverging view on the extractive industries among the leading candidates. That means companies may hold back on discretional investments until the political panorama becomes clearer.
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