Sharply weaker oil prices, falling investment and dwindling oil production are weighing heavily on Colombia’s economic outlook. Last decade, the strife-torn Andean country bet its economic future on oil and became Latin America’s third-largest oil producer. A combination of deteriorating oil production and low reserves, despite promising estimates of the Andean country’s oil potential, weigh heavily on Colombia’s economy. 

By the end of 2019, Colombia’s proven petroleum reserves were a mere two billion barrels giving the country around six years of oil production. Those inadequate reserves, a lack of recent major hydrocarbon discoveries and the country’s economic dependence on petroleum hastens the need for Latin America’s third-largest oil producer to boost its oil reserves. 

In response to the dire outlook for Colombia’s hydrocarbon sector and to stave-off a looming economic crisis, President Ivan Duque’s administration is focused on expanding crucial petroleum reserves and production. In November 2018, Duque stated Colombia needed to double its proven reserves by adding two billion barrels of oil to remain energy self-sufficient and maintain economic growth. Aside from attempting to attract additional foreign investment through financial and regulatory concessions, Bogota is pushing for the commencement of unconventional (hydraulic fracturing or fracking) petroleum exploration and production.

Nevertheless, the government has found it extremely difficult to get fracking off the ground since attempting to initiate various pilots almost a decade ago. Considerable public opposition to fracking exists in Colombia. The controversial method for extracting oil from shale formations has been repeatedly blocked by Colombia’s courts on public health and environmental grounds, despite the decade long U.S. shale oil boom operating safely. 

Toward the end of 2018, Colombia’s highest administrative court the State Council placed a moratorium on fracking. Then in a surprise move, in 2019 the tribunal ruled that the temporary moratorium “does not impede the development of comprehensive investigative pilot projects.” This breathed life into the government’s and state-controlled Ecopetrol’s plans to initiate fracking pilots. Earlier this month, Duque issued Resolution 401850 establishing the technical criteria for the fracking pilots. Related: Is Nuclear Energy Making A Pandemic Comeback?
The key target of unconventional oil and gas exploration in Colombia is the La Luna geological formation in the Middle Magdalena Valley. The Valley, one of Colombia’s most prolific oil basins with over 41 fields, is thought to hold up to almost two billion barrels of conventional oil reserves. 

Middle Magdalena Valley and Geological Boundaries. 

READ ALSO  Is Russia’s Housing Market Facing a Coronavirus Bubble?

Source: National Hydrocarbons Agency (ANH).

Industry insiders and analysts compare the La Luna formation to the prolific U.S. Eagle Ford shale, which sees the geological body estimated to hold up to 10 billion barrels of oil. If true and correctly exploited, that would significantly boost Colombia’s proven oil reserves, alleviating the considerable economic hazards posed by the Andean country’s insubstantial oil reserves, short production life, and deteriorating oil output.

Middle Magdalena Valley Schematic Cross Section.

Source: National Hydrocarbons Agency (ANH).

Exploration activities, including appraisal drilling targeting the La Luna formation, have previously taken place on the VMM-2 and VMM-3 unconventional oil blocks in the Middle Magdalena Valley. They are 80% owned by international oil major ConocoPhillips with the remaining 20% interest belonging to Canacol, Colombia’s largest independent natural gas producer. 

Middle Magdalena Valley Blocks VMM-2 and VMM-3. 

Source: ConocoPhillips Colombia.

Despite oil discoveries and appraisal wells having been drilled, operations are suspended on both blocks pending the receipt of environmental permits from Colombia’s National Environmental Licensing Authority (ANLA Spanish acronym). The required permits to continue activities on those blocks probably won’t be available until the fracking moratorium is overturned, which appears some way off. 

This may be too little too late when the latest oil price collapse is considered and harsh operating environment for energy companies are considered. That price crash sparked massive spending cuts by oil companies around the world. Colombia’s five largest petroleum companies, which control 99% of the Andean country’s oil production, Ecopetrol, Frontera, Parex, Geopark and Gran Tierra responded to sharply weaker oil by slashing spending on exploration and development. This will cause crucial investment in Colombia’s oil industry for 2020 to fall from the $5 billion originally estimated by the National Hydrocarbon Agency (ANH Spanish acronym) to below $4 billion, which is less than 2019. 

Related: Renewable Energy Is Seizing Market Share During The Pandemic

For those reasons, the current difficult operating environment will stymie Colombia’s unconventional oil ambitions. Even efforts by the ANH to ease the regulatory burden won’t attract the required investment. Sharply weaker oil prices and the considerable risks involved with fracking in Colombia make investing in unconventional oil projects highly unattractive and hazardous.

The lack of confidence among foreign oil companies for investing in Colombia is amplified by the substantial security risks that exist. By the end of May 2020, there had been 27 attacks on oil pipelines by various illegal armed groups. Of greater concern is the June 2020 attack on Ecopetrol’s La Cira-Infantas oil field in Colombia’s primary oil-producing region the Llanos Basin. That worrying event saw 42 wells attacked taking up to 35,000 barrels of daily production offline and causing localized oil spills.

Those events point to the considerable animosity that exists among Colombian communities toward the hydrocarbon sector, as well as the appreciable security risks associated with operating in the strife-torn country. There is considerable public disquiet over fracking in Colombia, including substantial unease regarding the potential for water contamination and methane emissions. This is generating significant fear of unconventional oil operations, despite the U.S. history of oil extraction by hydraulic fracturing demonstrating that environmental and health risks can be suitably managed if appropriate resources are available.

If fracking is eventually approved in Colombia, the lack of social license and intense opposition will see the oil companies engaged in unconventional oil operations become targets for protests from community groups and environmentalists. That will also make them attractive objectives for Colombia’s last remaining guerrilla group, the ELN, and other illegal armed groups.

Shifting regulations, an unclear legal environment, and community disapproval of fracking make unconventional oil operations in Colombia an unappealing and hazardous investment. This is magnified by elevated security risks and low oil prices, making it uneconomic as well as highly unattractive for oil companies to invest the considerable capital required. While the commencement of unconventional oil exploration and fracking pilots in Colombia could resolve the Andean country’s energy and economic woes, they are proving increasingly elusive. This is ratcheting up pressure on Colombia’s government which is facing what could be the country’s worst economic crisis of modern times.

By Matthew Smith for Oilprice.com

More Top Reads From Oilprice.com:

READ ALSO  Investors line up for Ant Group's record $34.4 billion IPO


Via Oilprice.com