Regulatory, legal snags weigh on Colombia shale

Colombia's emerging shale play and its promise of abundant new reserves hinge on filling out regulatory gaps and overcoming legal challenges, industry executives tell Argus.

The impact of the uncertainty on investor sentiment will face its first big test on 25 November, when the National Hydrocarbons Agency (ANH) is scheduled to award up to four pilot exploration projects for hydraulic fracturing (fracking). The four projects would entail total investment of around $600mn, with each one allowed two exploration wells. Proposals are due tomorrow.

So far only three companies have been pre-qualified to participate: Colombia's state-controlled Ecopetrol, ExxonMobil and coal mining company Drummond. Because Ecopetrol belongs to the government, and Drummond is pursuing a distinct coal-bed methane project on its existing mining acreage in Cesar department, the key actor is ExxonMobil. And the US major has been cautious so far.

"A decision to participate and develop these projects is subject to the final issuance of a complete set of regulations for the Pilot Projects of Integral Research (PPII) and the implementation of a series of necessary conditions for the development of the projects," the company told Argus.

Two other foreign companies that had been expected to participate, Canadian gas producer Canacol and US independent ConocoPhillips, are still on the sidelines for now.

Among the key regulatory uncertainties is how the pilot projects would eventually be evaluated to determine if they would qualify for commercial development, a process fraught with political implications. Assuming the projects move ahead without environmental permitting delays, the sensitive evaluation would take place around Colombia's presidential elections in mid-2022.

A separate layer of uncertainty lies in the State Council, Colombia's high administrative court that is considering the validity of existing technical regulation for commercial exploration and development issued under the previous government. In the most recent challenge on 2 November, the attorney general's office petitioned the court to invalidate 2013-14 regulation that it says is constitutionally incompatible with sustainable development.

The pilot projects, which are governed by a February 2020 decree which the State Council previously sanctioned, can move ahead regardless of the ruling on the existing technical regulation, because they are focused solely on limited exploration. But the judicial challenges still cast a shadow over future development. Environmental groups behind the legal battles want the court to shut the practice out of Colombia altogether, a position espoused by the government's political opponents.

VMM and vigor

Aspiring to replicate the US unconventional play and avoid Argentina's shale underperformance, Colombia's business-oriented government is looking to the pilots as a step toward reinvigorating the pandemic-hit economy and breaking out of a downward reserves spiral. As of December 2019, Colombia had 2.036bn bl of proven oil reserves, equivalent to just 6.3 years of production. Proven gas reserves stand at 3.1 Tcf (88bn m³), equivalent to eight years of production.

One of the unconventional blocks with potential to replenish Colombia's flagging reserves is VMM37 in the Middle Magdalena Valley basin, a mature oil province with extensive infrastructure. The block is operated by ExxonMobil with a 70pc stake. The remaining 30pc belongs to Patriot Energy, a subsidiary of Canada's Sintana Energy. While a pilot project would focus on exploring for crude in the block's unconventional formations, future production would likely include associated gas as well.

Ecopetrol has said the Middle Magdalena's unconventional play could yield 4bn-7bn bl of oil equivalent (boe) resources and 4 Tcf to 13 Tcf of gas.

Fracking advocates have said Drummond's CBM project deserves separate regulatory and judicial treatment. Drummond had already been producing coal bed methane (CBM) at the Caporo field when the State Council ordered it to halt in a December 2019 ruling. Drummond declined to comment.

Fish bowl

One of the Colombian shale play's vocal advocates is Ecopetrol chief executive and former BP executive Felipe Bayon, who maintains that the pilot projects would be conducted in a "fish bowl" to sow confidence in the process. Last year the company partnered with US independent Occidental in the Permian shale basin of Texas as a way to gain a better understanding of unconventional activity.

Reacting to the attorney general's constitutional claims this week, Colombia's oil chamber (ACP) said the pilot projects are essential to an economic recovery and should be kept above the judicial fray surrounding past regulation. "What is important for now is proceeding with the pilot projects for research, to obtain technical, environmental and social information that will shape decisions on implementing this technique and developing these unconventional resources in Colombia, based on scientific and factual information," ACP executive president Francisco Lloreda said.

By Patricia Garip