January 5, 2019//-Colombia hopes to exploit its hydrocarbons reserves to strengthen its energy and fiscal security. Abundant shale oil and gas reserves could change the outlook of the domestic industry for good – but authorities have yet to agree on the divisive subject of fracking.
Jacopo Dettoni reports.
With both the country’s energy and fiscal security hanging in the balance, Colombia’s new president, Iván Duque, is weighing up the opportunities and the challenges of developing unconventional hydrocarbons resources.
The country has long flirted with its abundant endowment of unconventional reserves, but the downturn in the oil market, followed by mounting public discomfort about contentious extraction techniques such as hydraulic fracturing, or fracking, have kept Colombian shale oil and gas well sealed beneath the ground so far.
Yet the country is facing renewed concern about its energy independence as new discoveries struggle to keep up with the depletion rate of existing wells. With the oil industry a major source of revenues for the state, the equilibrium of state finances is also at stake.
The ongoing recovery of crude prices, combined with improved efficiency of the industry, have won Mr Duque some time – but the president seems to have made up his mind about the future of the country’s unconventional resources.
“We have to make the most of the wealth of our soil to defeat the poverty above the ground,” he said when talking about unconventional resources in Bogotá in mid-November 2018.
The government appointed a committee of experts to examine the issue and assess the opportunity and the environmental risks related to fracking, but public opinion is polarised, and one of the country’s highest tribunals, the Council of State, recently said Colombia’s diverse ecosystem could be at stake – unless solid scientific evidence finds to the contrary.
“Conventional oil reserves are running low and we have seen a low rate of replacement in the past years, both in oil and gas, and this not only threatens Colombia’s energy self-sufficiency, but also worsens the macroeconomic problem. Hence the importance of incentivising the exploration and production of new geological frontiers, including unconventional resources,” Francisco José Lloreda, head of the national oil association (the ACP), said in a note in November 2018.
After reaching an average of more than 1 million barrels per day (bpd) in 2013 at the of peak of the previous commodity cycle, oil production in Colombia averaged 854,121 bpd in 2017, according to figures from the Mine and Energy Ministry. Investment into exploration also fell sharply as oil prices fell below $50 per barrel, reducing the potential to replace existing fields with new ones and even pushing the Office of the Comptroller General (CGR) of Colombia to voice its concern. “Given the historic fall in reserves at the existing oil fields, 2021 will mark the end of the country’s 30-year-old oil self-sufficiency,” the CGR wrote in a report in 2017.
The market downturn forced companies such as state-owned EcoPetrol (which accounted for about 84% of the country’s total oil production in 2017) to enhance the productivity of existing assets and rationalise its overall structure. Combined with the recovery of oil prices that began in mid-2016, this allowed EcoPetrol to expand reserves to 1.66 billion barrels with an average life of 7.1 years at the end of 2017, from reserves of 6.8 years 12 months earlier. If this gave the company, and the country as a whole, a little more breathing space, unconventional resources may be the real game changer for the national oil industry, according to Felipe Bayón, EcoPetrol’s CEO.
“We think there is potential in unconventional resources, especially in middle Magdalena valley, where we estimate somewhere between 2 billion to 7 billion barrels of reserves. The country today has 2 billion barrels of oil in reserves. If we assume that through unconventional resources and fracking we can find an extra 2 billion barrels, that would double the amount of reserves.
“It’s something that has to do with energy security and sustainability for the country; we do think unconventional can be developed responsibly. We think it can create a lot of opportunities for the country in terms of taxes, jobs and investment. We think it can be transformational, but we understand there is apprehension, so we do think it will require all the right steps to ensure we have a conversation based on science.”
Overall, the ACP estimates that each single project in unconventional resources exploitation could draw an investment of $10bn to $15bn, generate 5000 direct and indirect jobs, and $2.5bn in royalties for the state – not a minor detail for a state challenged by a precarious fiscal balance, a narrow base of taxpayers and big dependence on the oil industry to generate fiscal revenues.
A risky business
However, a large part of the Colombian population remains sceptical over the real opportunity of developing unconventional resources through fracking, emphasising instead its long-debated environmental risks, which include excessive water consumption, water contamination and increased seismic activity.
After the country’s general comptroller, Edgardo Maya Villazon, stated in August 2018 that the country is not ready to mitigate the risks associated with the development of unconventional resources, the government assembled a 10-member committee to reassess the existing regulation for the sector at the beginning of November. However, the same regulation was suspended altogether by the Council of State, the supreme tribunal over administrative issues, just a few days later.
“Permits for fracking operations can bring serious damage to the environment and human health. Before authorising fracking, it is [important] to make sure that its possible damages and risks can be classified as acceptable and manageable,” the Council of State said on November 9, freezing the concessions handed out to multinational companies including the US’s Exxon Mobil and ConocoPhillips, Canada’s Drummond, as well as EcoPetrol, for the exploration of unconventional resources. No fracking had yet taken place in the country as the companies were waiting for environmental permits to be granted.
This decision has been appealed by the Energy and Mining Ministry, while the ACP has suggested carrying out an industry pilot project on six to 12 wells to test fracking, and its environmental risks, in Colombia.
Some countries around the globe are attempting to replicate the success of fracking in the US – where shale oil and gas turned the country in a net exporter of hydrocarbons in just a few years. Others, however, are less keen, with France, Ireland and Scotland – and even some US states (New York and Maryland) banning the method altogether.
Scientific evidence is still debated and the sustainability of fracking eventually hinges on each country’s tolerance to the environmental risks that fracking brings along. Colombia has now to define its level of tolerance, while keeping an eye on energy and fiscal security, to decide whether or not to incorporate unconventional resources into its future energy matrix.