Canacol Energy Find Highlights Optimistic Long-Term Oil Outlook

BMI View : Canacol Energy has encountered 19 metres (m) of net oil pay at its Labrador-3 exploration well, in the Llanos basin of Colombia. This recent find adds further momentum to an increasingly dynamic Colombian oil market. Nevertheless, there are risks to Colombia's long-term prospects, as many oil discoveries remain of modest size. Our current forecast underscores this risk, with a predicted decline in oil output growth from 2019 onwards should Colombia fail to further boost investments in exploration and exploitation. Furthermore, security issues remain a significant risk to oil operators within the country.

We have already highlighted on several occasions our increasingly favourable outlook as regards Colombia's long-term oil picture. Improving security dynamics and a more liberal business environment have led to increased foreign investment in exploration and production (E&P). As such, proven reserves and oil production are rising, and should continue to do so steadily in the near-to-medium term.

Canacol Energy's recent find further highlights this possibility. Through its Labrador-3 exploration well, spud on May 21 2013, the company has encountered a total of 19 metres (m) of net oil pay. The well reached a total depth of 3,320m last month and is located in Block LLA23, approximately five kilometres (km) to the north of the corporation's Rancho Hermoso field, in the Llanos basin of Colombia.

The company announced that the oil was encountered within three reservoirs, listed in the table below. The C7 reservoir was perforated and is reported to flow at a stable gross rate of 1,460 barrels of oil per day (boep/d) of 30 degree API oil, with a 3% water cut. The well was placed on production, and will remain on a long-term production test subject to approval from the Agencia Nacional de Hidrocarburos (ANH). Canacol Energy estimates the Labrador-3 well's resources at 5mn barrels (bbl).

Labrador-3 Exploration Well Results
Reservoir Name Net Oil Pay (metres) Average Porosity
Source: Canacol Energy
C7 6.1m 24%
Middle and Lower Gacheta 1.6m 23%
Ubaque 5.2m 19%

The well is the third to be drilled in the LLA 23 Labrador discovery, where Canacol Energy already has commercial production underway. The Labrador-1 well tested on December 2012 at a rate of 1,832b/d; the Labrador-2 well tested in May at a stable rate of 1,618b/d. The company has an 80% operated working interest in the LLA23 contract with Petromont Colombia S.A, Sucursal Colombia holding the remaining 20% interest.

This discovery reinforces our view that Colombia will see an increase in oil reserves and production over the near to medium term. While Colombia currently has modest oil reserves and below-average reserves-to-production ratios, the country has a healthy oil output growth outlook. The Colombian government has successfully attracted investment by putting in place more-attractive taxation regimes and by improving the country's security dynamics. Investments in E&P are therefore increasing. Indeed, after eight consecutive years of contracting production (2000-2007), Colombian oil production has improved significantly to average 12.6% annual growth between 2008 and 2012, making Colombia the fourth largest oil producer in Latin America.

Looking ahead, we are forecasting an average production growth rate of 7.3% over 2013-2017. We forecast that oil production will rise from an estimated 0.98mn b/d in 2012 to 1.39mn b/d in 2017. We also forecast a 61.6% increase in reserves by 2017, seeing proven reserves grow from the 2012 level of 2.2bn bbl to approximately 3.2bbl in 2017. However, there is significant upside risk to the reserves forecast, as increasing foreign investment and further exploration successes (particularly offshore) could see us upwardly revise our long-term forecasts.

Growth In Oil Production And Reserves Forecast
Colombian Oil Production, LHS & Proven Oil Reserves, RHS, 2000-2022 ('000b/d & mn bbl)

Nevertheless, it should be noted that our optimistic view on Colombia's long-term oil reserve growth will require the discovery of more significant amounts of oil than current exploration campaigns are yielding. There is still much uncertainty regarding potential reserves, as vast swathes of the country remain underexplored. To date, while several oil discoveries have been made, these have tended to be of modest size. Colombia's challenge is therefore to increase its proven oil reserves in order to maintain high production levels past 2017. Hence, continued and significant investments in exploration and exploitation will be needed in the long term.

In this sense, the current Colombian licensing round is encouraging, and will most likely foster stronger E&P activity. Preliminary results indicate that the round was a success, with the ANH reporting that it received 105 offers for 49 blocks, out of a total of 115 on offer. Companies have included Royal Dutch Shell, Perenco, Pluspetrol, Hocol, Gulfsands Petroleum and OGX. State-run Ecopetrol also secured 11 blocks. The government expects the companies to invest US$2.6bn over four years and believes that the investment will help the country raise its oil reserves to a maximum of 41bn bbl by 2030 or a minimum of 7.7bn bbl. Further licensing rounds will remain important to Colombia's long-term oil reserves and production prospects.

Lastly, it must be noted that while the government has significantly improved the country's security situation over the last decade, security remains a risk, as rebel groups continue to hold large parts of the country. The Llanos region for example, where much of Colombia's future oil hopes are located, is a region where rebel groups retain a strong presence. The stalled peace talks and the increasingly frequent attacks on oil infrastructure over the past year or so are potential risks to the industry. For example, two attacks carried out by rebel groups on Colombia's No. 2 pipeline in early July have temporarily shut down the 80,000b/d Cano Limon-Covenas oil pipeline. Kidnappings and attacks on oil and gas infrastructure therefore remain a threat. If the peace negotiations do not move forwards, these types of activities are likely to continue.

This article is tagged to:
Sector: Oil & Gas
Geography: Colombia