Managing director of consultants IPD Latin America John Padilla: Colombian energy sector at a crossroads
John Padilla, managing director of consultants IPD Latin America, talks to Interfax about Colombia’s investment climate.Pacific Rubiales, Colombia‘s largest private oil and gas producer, has run into political difficulties. The Rubiales oilfield for Ecopetrol Alliance - a group of around 30 organisations including trade unions and political parties - is calling for its Rubiales heavy oilfield in the Llanos Basin to be transferred to state-owned oil company Ecopetrol, local media reported in late July. Interfax asked John Padilla, managing director of IPD Latin America, if the situation is a symptom of a deteriorating investment climate.
Interfax: Could you explain what is happening at the Rubiales field?
John Padilla: The issue is extremely complex. As background, the Rubiales field contract between Ecopetrol and Pacific Rubiales will expire in mid-2016. Ecopetrol has the option to renegotiate and/or extend the contract at its sole discretion. On one hand, taking the field back has to be attractive for Ecopetrol given the increased production it would secure, particularly in light of its continued aggressive production and reserve goals.
However, taking back the field would represent an important operational commitment and require significant investment to maintain smooth operations and optimal production. Secondary recovery techniques or enhanced oil recovery will likely need to be employed at Rubiales, which will raise costs. Thus, despite political and certain organised social pressure on Ecopetrol to take the field back, all aspects and potential implications will need to be fully analysed and assessed by the state-controlled company.
The increasingly vocal pressure against a possible contract extension has principally come fr om Ecopetrol‘s [unions] and other unions supported by left-wing politicians. This new alliance has its own vested interests and the actions being taken are indicative of the shifting dynamics in various hydrocarbon regions throughout Colombia.
What we‘re definitely seeing is the re-emergence of Colombia‘s major oil sector-related unions, USO and CUT. Union power was squashed quite significantly during the previous administration, but has re-emerged under [current President Juan Manuel] Santos.
Some of the claims being made by the unions have made reference to the controversy surrounding the potential use of Pacific Rubiales‘s Synchronised Thermal Additional Recovery (STAR) technology in the Quifa field, just next to the Rubiales field.
There are political forces in Quifa that are also against the extension of the Rubiales field [contract] with Pacific Rubiales that have suggested the STAR technology is causing irreparable damage to the field‘s reserves. They state that Pacific Rubiales is intent on extracting as much crude as possible in the event the contract is not extended.
The fact of the matter is that similar levels of production are not going to be possible in the near future in Rubiales - and eventually in Quifa - simply by continuing to use identical techniques to those in place today. Whether STAR technology is the most appropriate technique to use and/or Ecopetrol wants to use something different is an entirely different discussion. But the decision on whether to use the technology or not will depend on Ecopetrol‘s assessment of the test results from the pilot project, which is currently under evaluation. There‘s a good deal of misinformation over the issue. Many have stated that STAR‘s adoption at Quifa has been killed, but it‘s my understanding any decision will be strictly dependent on the test results, which as I noted are still pending.
Q.: Is there more risk in Colombia‘s oil and gas industry?
A.: Surface risks in Colombia are becoming increasingly complicated and multi-faceted. Much of this stems from the government‘s inability to broadly demonstrate the benefits of oil and gas investment in local communities. Monies from oil activities (royalties) are not getting wh ere they need (and are supposed) to go, and local communities aren‘t seeing the tangible benefits of extractive activities. Santos‘s administration has been unable to rectify this issue. With high regional unemployment and routine misuse of funds at a departmental and municipal level, local communities frequently look straight to the companies operating in their communities. Oil and gas companies frequently get caught in the middle.
Licensing issues have not helped. Many oil and gas companies are well-informed and well-prepped in their community engagement efforts, but find themselves unable to fulfil their obligations because they haven‘t received permits to drill.
And security continues to be a challenge in many parts of the country. As one example, some companies that won blocks in the Putumayo have had no ability to even shoot seismic yet because they haven‘t been able to secure the protection of the military, which is increasingly spread too thin with the increased level of activity throughout the country.
You can‘t say there‘s a wholesale deterioration of the investment climate in Colombia, but what we frequently encounter is that companies active in the country have become increasingly frustrated. They‘re making progress, but very slowly - too slowly. Some are reporting that the local environments are becoming more toxic, and Colombia is running the risk of having these issues become long-term problems. The government needs to decide if it wants to invest more political capital to try to fix these problems and bottlenecks - environmental, social, security-related - or if it is happy with the slow and steady status quo efforts being undertaken.
Q.: Some experts have said that Colombia‘s Ronda 2014 auction was disappointing. Do you agree?
A.: The bid round was pretty indicative of the state of play right now in Colombia. The bright spot was offshore, with Anadarko saving the day by surprising everybody and moving into ultra-deepwater blocks. Onshore interest, on the other hand, was generally disappointing. ANH President Javier Betancourt and Vice Minister Orlando Cabrales have put a brave face on it. They‘ve said they were happy with offshore results, but receiving successful bids for less than 30% of all blocks on offer sets the bar at an all new low level.
Q.: What should Colombia do differently for its future bid rounds?
A.: This is the big question - there‘s limited ability to continue with the same strategy for future bid rounds. Colombia has seen some incredibly successful bid rounds since 2007. But now the country needs companies with staying power, especially in light of the imminent opening of Mexico‘s energy sector. First, Colombia would do well to guarantee that companies which are sitting on existing blocks receive the support required to get their projects moving forward. That will go a long way in helping maintain investors‘ confidence.
Secondly, it is critical to understand that government officials are under significant pressure to boost the country‘s oil and gas reserves. This was actually a key objective of Ronda 2014. But apart from the offshore block potential, the government made little progress on this front. Only one unconventional block received bids in the Ronda 2014. The release of final regulations for the sector so close to the bid date didn‘t help. Much work remains to be done on the unconventionals front for it to make the meaningful contribution to production and reserves the government is seeking.
If future bids are continued as the government has insisted, the promotion strategy will have to change. Interested companies are looking for clear commitment and tangible results of efforts underway by the government, as well as clear strategies as to how these mutual objectives are going to be achieved. It‘s back to the drawing board if you ask me.
The country has attained output of 1 million barrels of oil per day, but can this be sustained, and if so, how?
Overall, you could argue that Colombia has been lucky in recent years. The economy seems to be doing well, and it‘s projected to be Latin America‘s best-performing economy over the next couple of years. But there‘s a sense of ‘what now?‘ The government has yet to show that‘s it ready to tackle big issues such as wealth inequality, and how industry can coexist with Colombia‘s communities. The country is at a crossroads.