(BN) Colombia Is One Oil-Rich Nation Where Drilling May Not Rebound

Colombia Is One Oil-Rich Nation Where Drilling May Not Rebound

2020-05-14 10:30:00.0 GMT

By Peter Millard and Ezra Fieser

(Bloomberg) -- Colombia, an oil producer badly hurt by the global price rout,
may be one of the rare countries unable to rebound even as prices rise.
Oil industries from Mexico to Argentina have been upended by the 2020
crude price plunge. But Colombia, the third largest Latin America producer
behind Mexico and Brazil, faces a range of longterm issues that threaten an
industry that carries exceptionally high costs for both production and
transportation.
The rout came as Colombia’s biggest producer, Ecopetrol SA, has been
distracted with an ill-timed $1.5 billion investment into U.S. shale, rather than
its own fields. And the country’s main international producer, Occidental
Petroleum Corp., is over-leveraged after buying a U.S. rival just before prices
plunged. Meanwhile, Colombia is depending on a flock of junior operators
who lack the financial muscle to pump at a loss.
“Colombia’s industry opening brought second-tier players that can’t stomach
this for a long time, and they will be forced to scale down fairly rapidly,” said
Nicolas Urritia, who covers Colombia’s oil industry for Control Risks, a
consultancy. “Many of these players will simply leave. Basic production costs
can’t justify staying.”
A quarter of Colombia’s production could be lost by 2021, and they’ll never
come back if prices stay near where they are, Urritia said. Production is already
starting to suffer, according to preliminary figures from the National
Hydrocarbons Agency. It’s dropped almost 10% from the start of the year to
below 800,000 barrels per day in late April, a figure that’s more than 20% off
the 2015 peak. The high cost of producing wells is a result of the the country’s
unique geology. The oil-producing region in the east sits on a huge aquifer,
which means producers bring up more water than they do oil when they drill,
according to Fernando Valle, an analyst for Bloomberg Intelligence. “It’s really
a water field that produces a little bit of oil,” Valle said by phone. “In a field
like the Rubiales/Quifa, to produce 165,000 barrels of oil a day meant you had
to deal with over 2 million barrels of water.” Disposing of that water is where
the true costs lie, he said.
Meanwhile, Colombia’s transportation costs are some of the highest anywhere
in the global oil industry. Pipelines have been targeted by insurgents for
decades and capacity is limited. Crude is often moved by tanker truck in a
country covered in mountains.
Even before the recent downturn, Colombia’s oil industry was struggling to
boost its six years of proved reserves, the lowest in the Americas, according to
BP Plc’s 2019 Statistical Review of World Energy. The government has pushed
hydraulic fracturing as an option, but launching the technology has been
waylaid by legal troubles. Now Ecopetrol, which is responsible for the bulk of
the country’s output, is taking steps to guarantee positive cash flow at $30 to
$40 a barrel, a price range that Brent crude, the international benchmark, is
just nearing now after falling as low as $15.98 on April 22. The Bogota-based
producer plans to slash output by as much as 10% to as little as 664,000
barrels a day this year. It will cut planned investments by at least $1.5 billion
and has already started closing fields that are unprofitable under low prices
for Brent. In addition to the shut downs, drilling new wells has ground to a
halt, and Colombia’s already declining production will accelerate if expiring
wells aren’t replaced. Areas of Colombia such as he Llanos basin are similar to
U.S. shale, where consistent drilling is needed just to keep output steady.

‘Tightened Belts’

In April, Colombia shut 21 of it’s 25 active oil and gas rigs, according data
from Baker Hughes, an oil services supplier. “We’ve stepped on the brakes and
tightened our belts at the same time,” Felipe Bayon, Ecopetrol’s Chief
Executive Officer, told investors in a conference call Tuesday. He did not rule
out further cuts in production. “Clearly we need to acknowledge the dramatic
reduction in demand, the drop in prices. ”The lack of scale in Colombia has
discouraged the majors in recent years, offering a window into how the price
crash impacts junior oil producers. In the past decade, 80% of new oil reserves
in Colombia were booked by small and mid-sized producers, underscoring
their importance for the future of the industry, according to Francisco Lloreda,
the head of the Colombian Petroleum Association, a lobby known as ACP.
Better Times

In better times, companies like Frontera Energy Corp. made money from
projects overlooked or discarded by national companies or multinational
giants. Now Frontera, a Calgary-based explorer with most of its output in
Colombia, is curbing outpu by 27% to 40,000 barrels a day, according to the
company’s May 7 in earnings report. Gran Tierra Energy Inc., another Calgary-
based producer with operations in Colombia, has shut high-cost fields and
slashed spending by 70% to $80 million at most. It only expects to restore
production and drilling when prices are consistently north of $30 a barrel,
Chief Operating Officer Tony Berthelet said Tuesday in a call with analysts.
“There are no barrels from any companies in Colombia that are profitable
today,” the ACP’s Lloreda said. “Depending on the price range, we could have
a decline of 100,000 to 130,000 barrels a day this year.”

To contact the reporters on this story:

Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net;
Ezra Fieser in Bogota at efieser@bloomberg.net
To contact the editors responsible for this story:
Tina Davis at tinadavis@bloomberg.net