After a successful decade, Colombia has achieved its 1 million barrels per day goal; the challenge, however, is to maintain this. Depleting reserves leave no room for complacency, and the country must sharpen its competitive edge to encourage juniors to continue exploring.

This year marks the 10-year anniversary of the establishment of the Agencia Nacional de Hidrocarburos (ANH), the organization credited with rejuvenating the Colombian oil and gas sector. Taking advantage of the improved security situation achieved through 'Plan Colombia', the US- funded offensive against rebels and drug trafficking, the ANH-led restructuring of the oil and gas sector has brought the attention of the international investment community back to Colombia. “International investors started hearing very good things about Colombia from around 2007; people have noted the changes in the country, with its improved security and stable contracts,” says Cristian Ducara, general manager of Trayectoria Oil and Gas.

The ANH marked an impressive decade, seeing Colombia finally reaching the long-awaited one million barrels per day milestone in December 2012. Now the focus turns to maintaining that level of production in the face of aging oil fields and socio-environmental obstacles.

From a geological perspective, Colombia may not have the huge reserves of neighboring Venezuela, but as more of the nation has been freed of conflict and properly explored, numerous smaller deposits have been found which contribute to significant production. “Discoveries of heavy oil in the Llanos have completely flipped the country's future from importer to exporter, and this is a trend which will presumably extend into the medium-term. I think the oil boom was related to a certain extent to the improved security situation in the country – although the Caño Limón boom of the 1980s was able to occur amidst great instability. Nevertheless, it is great to be able to enjoy the strengthened conditions of today,” says Alberto Cisneros Lavaller, CEO and president of Venezuela-based firm Global Business Consultants.

After the major discoveries of the late 80s, such as Caño Limón, the Colombian government along with the national oil company, Ecopetrol, sought to strengthen its position in the growing sector. The subsequent restructuring of the sector to unduly favor Ecopetrol, coupled with the deteriorating security situation, led to Colombia being widely neglected by investors throughout the 90s. Still without a new discovery of significance, the birth of the ANH in 2003 saw the focus shift to the creation of an attractive fiscal regime encouraging smaller juniors to enter the market, and it was these pioneering explorers who established many of the biggest producing assets we see in Colombia today.

The bidding round (ronda) of 2012, through heightened qualification criteria, marked another shift in the Colombian oil and gas sector back to a focus on larger E&Ps. “If you consider the development of the US oil industry, especially shale, you see that the big companies are not responsible for what it is today, but rather it was the entrepreneurs who went out there with money and a new idea. Colombia seems to be forgetting this and seems to only be encouraging the big players,” says Stephen Newton, CEO of Southern Cross Energy.

Despite the concern of many in the industry, the bidding round saw ExxonMobil, Shell, ConocoPhillips and Anadarko move into the Colombian market. “While Colombia did well and was successful, the sector today is not growing as it was. Interest from junior players has withered for two reasons. The first is the problem with licensing, permits and the overall challenges of doing oil business here. The second is that the government may be becoming a bit complacent. The government feels that it made the country attractive and that this perception will continue forever,” suggested Álvaro José Rodríguez, partner of natural resources at law firm Posse Herrera Ruiz.

Meanwhile, E&P firms need to find enough support on the ground along the whole value chain. Margarita Villate, executive director of Campetrol, a chamber grouping the oilfield services sector, also gave her opinion on the areas where the government must improve: “We need clarity in the regulatory framework for new activities as non-conventionals and offshore development. We continue to need security. Environmental licensing delays are time-consuming and very costly for our members. We have a hindrance in infrastructure development, which causes higher logistical costs, and we need financial support for small and medium-sized companies, so they can acquire technology and develop their R&D departments.”

The Colombian government may be hoping a shift to the bigger players with strong corporate social responsibility records will help to solve growing social and environmental problems across the country. Nevertheless, particularly in terms of production, they need only look at the main players in the market today to see what can happen when smaller firms are given the right support and backing.

Financing

Oil and gas companies active in Colombia have traditionally looked to raise capital abroad. Colombian investors are not used to the volatility and risk associated with the oil and gas sector and the banking sector is still to develop the advanced financing mechanics we see present in more mature resource-based economies. It is difficult to remedy this quickly, however the Colombian government has implemented some innovative strategies to make financing easier for foreign companies.

“In the early 1990s, when the government was putting a renewed focus on the oil and gas sector, they realized that this was going to be a multimillion-dollar industry,” explains Carlos Miguel Chaparro, partner and oil and gas tax leader at PwC. “With Colombia's small currency market, they understood that the foreign exchange market would be in a state of chaos if companies were regularly bringing in cash to the country to fund their operations. To protect the foreign exchange market, the government restricted the E&P companies from borrowing outside of the country and making cross-border loans. Consequently, most of the project finance that I have seen in Colombia is done locally, as borrowing within the country is not an issue. But 95% of the companies fund their operations in a different way as the government has created a window for tax purposes. If a client has a branch in Colombia, the parent company in Calgary, for example, would borrow in the home country to fund the branch's operations. The parent company would then send the money to the Colombian branch as equity because you cannot push down debt. At the same time, this parent company is continuing to pay interest to the bank in Canada where the loan was taken out. What the Colombian government has done is allowed interest to be pushed down for tax purposes only. This is an interesting development for project finance because companies are able to push down this expense; however, the restriction on cross-border loans from a central banking perspective will probably remain.”

Meanwhile, as the traditional capital markets, such as the TSX, continue to struggle through this period of slow financing, there lies an opportunity for Colombia's own stock exchange, the Bolsa de Valores (BVC), to supplement such funding. “We still believe that there is opportunity for capital raisings in the Colombian market for this industry, especially for companies that are further established with predictable cash flows as opposed to venture companies,” says Juan Pablo Córdoba Garcés, president of the BVC. “We have made a lot of headway with the four oil and gas companies that are currently listed. These listings have given investors, analysts and brokers the opportunity to get involved in an industry that was relatively small five years ago. A lot of progress has been made in terms of financial knowledge within the oil and gas sector; we better understand the drivers of this field and how to analyze these companies. There is more to be done, but we have made significant progress.”

Pacific Rubiales Energy, Petrominerales and Canacol Energy have taken the step to dual-list; they join national oil company Ecopetrol to make up about 40% of the index in Colombia. If these pioneering companies continue to find success on the Colombian exchange, we are sure to see more firms list on the BVC and Colombian investors gaining confidence in the oil and gas sector.

This report was prepared by Caroline Stern, Alice Pascoletti, Ramzy Bamieh and Josie Perez of Global Business Reports. For more information contact info@gbreports.com.