Colombia defies “peak oil” but for how long?

Half a century ago, Colombia helped plant the first inklings of a theory that became known as “peak oil” — the idea that conventional oil extraction has crested.

Today, Latin America’s No. 4 crude producer is defying expectations by increasing its output. But experts say the Andean country must now find new reserves to keep up production levels and sustain its ambitious growth targets.

The cause of Colombia’s rebound has less to do with geological maturity than with politics and security — which, in many emerging markets from Iraq to Nigeria are perhaps a greater constraint to boosting production.

The story plays out in miniature at the remote Rubiales oilfield in eastern Colombia’s Llanos Basin, at a now-bustling camp torched by Marxist guerrillas a decade ago.

After languishing for years with production at a trickle, the molasses-like crude output from the field — run since 2007 by Pacific Rubiales — is set to hit 200,000 barrels per day (bpd) by the end of the year, a 5,000 percent rise since 2003, company data shows.

“There’s a clear relation between the (security) improvements in Colombia and the increase in activity and the investments that came to be able to generate important yields at this field,” said Ernesto Borda of risk consultancy Trust.

Analysts and officials say most of Colombia’s increased production over the last few years is a result of better security and improved terms and regulation — not major new discoveries that would be a blow to the theory that conventional oil output is reaching its limit.

Although discussion of “peak oil” has subsided over the past two years as alternative fuels and recession dampen demand for petroleum products, fears that existing fields could fail to maintain production are never far from the surface.

“This late-stage surge (in Colombia) is not very natural,” said Colin Campbell, one of the chief proponents of peak oil, whose years working as a geologist in Colombia in the 1960s first drew him to the issue of resource depletion.

“I’d see this particular surge as something artificial with perhaps the previous low levels being artificially constrained,” he told Reuters from his home in Ireland.

“This isn’t a technological breakthrough of any particular significance. It is much more politically inspired.”

OUTPUT, WELLS, RESERVES AND CONFLICT

Once dismissed as a failing state, Colombia is slowly turning its image around by battering leftist rebels and attracting foreign investment through loosened regulations, creating a streamlined hydrocarbons agency and lowering taxes.

“Colombia has definitely done it right by changing the fiscal terms … It’s a combination … Colombia has done things right as well as better security,” said Frederick Kozak, energy analyst with Canada-based Canaccord Genuity.

Now, national oil production has surged to 10-year highs of around 800,000 bpd mainly due to better security, heavy crude and incremental production at existing fields, experts say, rather than major new discoveries.

Analysts say Colombia will have to work hard to reach its target of 1.4 million bpd by 2015 by tapping new fields and investing in older ones, as well as battle even more to maintain those high levels for any amount of time.

“Increases in recent years have been fundamentally from better output in mature fields, more production of heavy crudes, primary and secondary recovery … 10 to 12 percent has come from new finds,” Energy Minister Carlos Rodado said.

“Production growth in the coming four years will come actually from greater recovery from mature fields and the exploitation of heavy crudes,” he said at Camp Rubiales.

Output rose from 1995 to highs of more than 800,000 bpd in the late 1990s due to increases at BP’s Cusiana and Cupiagua fields, which began to decline in 1999. National production plateaued at 500,000-615,000 bpd until last year.

Colombia’s security situation prevented a lot of new exploration and saw production rises mainly at large companies’ fields with better security, analysts say. That was until a 2002 U.S.-backed offensive against rebels opened up new areas.

That is reflected in the data. Proven reserves rose from the mid-1980s to a peak of 3.2 billion barrels in 1992, then made a slow decline to 2007 before creeping up to current levels of around 2 billon barrels.

The average number of wells drilled annually was 40 in 1980-1992, 15 in 1993-2004 and 67 in 2005-2009.

Colombia received $1.3 billion in oil sector investment in the first half of 2010, central bank figures show, and in 2007 and 2008 it hit records of $3.3 billion and $3.4 billion. That compares with only $449 million in 2002.

“One thing is the increase in oil activity, another thing is the rise in petroleum production,” Trust’s Borda said.

ARE GOALS POSSIBLE?

Analysts say Colombia’s output target of 1.4 million bpd in coming years may be possible. It is unlikely to be sustainable in the long term, though, unless more reserves are found.

“If they are to then maintain that sort of production for any length of time, one or two big, heavy oil-prone blocks close to Rubiales would probably have to come in fairly majorly,” said David Thomson, Latin America upstream analyst at Wood Mackenzie.

“There is still some significant under-explored acreage, they still have potential offshore that hasn’t been tapped into … They are finding fields, but it’s nothing to the scale of offshore Brazil or even what is potentially available up in Venezuela, where you’re talking about billions of barrels.”

Colombia — which has auctioned dozens of oil blocks over the last three years to try to boost exploration and production — is expected to account for 8.37 percent of Latin American oil supply by 2014, Research and Markets says.

State-run Ecopetrol has dominated the oil scene in Colombia while Rubiales, Gran Tierra, Alange Energy and others have also invested heavily in the nation, where around 120 firms are working in oilfields.

Ecopetrol expects to invest $20 billion in exploration and $44 billion in production in 2011-2020.

“With what we have in proven reserves, we can have peace of mind until a little after 2020. We’ll keep searching for oil in an incessant, continuous and daily way,” Rodado said.

Bogota says oil reserves could soar to 6 billion barrels over the next decade, and in May the country certified 3.1 billion barrels in proven, probable and possible reserves, double its average.

“With the country’s proven reserves-to-production ratio at end-2009 standing at just 8.1 years, the country does need to boost its reserves in order to put its energy security on a more stable footing over the long term,” said Juliette Kerr, an energy analyst with IHS Global Insight.

“There is some room for optimism as there have been several finds announced in the past three years that are worth watching, while the signing of new contracts with foreign companies and Ecopetrol’s ambitious business plan will ensure additional investment in exploration in the coming years.”

ForexPros