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Photo: AFP

An “Oil Boom”? For how long?

May. 10 de 2012

By: Germán Corredor Avella,
Director of the Colombian Energy Observatory (Observatorio Colombiano de Energía) - Research Center for Development (Centro de Investigaciones para el Desarrollo, CID) - Economic Sciences Faculty, Universidad Nacional de Colombia

With an average production of 900,000 barrels per day, the country's current oil reserves would be exhausted in around four years. Rather than engaging in useless debate about a bonanza, analysis must focus, for example, on the ability to find 180 million barrels per year of new exploitable reserves in order to maintain the production levels that have been achieved.

For several months, diverse media have been insisting on the existence of an oil boom that will serve as one of the big locomotives for this country's development in coming years. This has generated a rather useless debate as to whether the increase is real or if it is simply a fallacy to speak of a bonanza in a nation which, as has frequently been said, is not an oil country. It is more enriching to analyze for how long the production that has been achieved until now can be sustained.

In the light of the figures, Colombia has undoubtedly achieved a significant increase in its production. From 741,800 barrels per day in January of 2010, it reached 890,000 in March of 2011 and a bit more than 900,000 in April (see graph 1).

Those results are truly encouraging and at the same time have generated increased revenues in foreign exchange from exports along with relative tranquility regarding oil supplies for domestic consumption in the near future.

However, and without aiming to be overly pessimistic, it is worthwhile to analyze the sustainability of this scenario in the future. With an average production of 900,000 barrels per day, current reserves (see graph 2) would be exhausted in around four years. To maintain production at this level for an additional decade, it would be necessary to have around 180 million barrels in new reserves or exploitable reserves annually. This is a significant figure when we take into account that the discoveries being made in this country are of small volumes and the probability of large discoveries is relatively low.

It is even more worrisome that there is a decreasing trend in the annual level of reserves since 2000, despite a substantial rise in exploratory activity.

It would therefore appear that maintaining a level of production of around 1 million barrels per day over a reasonably prolonged period of time is not very probable, unless large-scale discoveries are made to increase the reserves, or oil provisions can be recovered in current fields that cannot be extracted using existing technologies.

The number of exploratory wells and the activity generated around them has grown in recent years. They have gone from 17 in 2000 to 110 in 2010, with a success rate of around 30%, which is quite satisfactory. However, it is not enough to increase the number of wells drilled and the percentage of achievements; the findings must also be larger, because otherwise the pace of extraction will be greater than the increase in reserves, which will inevitably lead to exhaustion and the loss of self–sufficiency over a relatively short period of time.

In that sense, the sustainability of the increase in oil production depends on the results of exploratory activity. What has been obtained until now is insufficient and it will be necessary to at least double the number of wells explored in order to have a greater probability to increase the reserves. The mechanisms developed by the National Hydrocarbons Agency (Agencia Nacional de Hidrocarburos – ANH) have been successful and as yet unexplored areas are immense, thus it is perfectly possible to achieve this increase in exploration.

Benefits

It is evident that oil production now brings significant economic benefits in terms of foreign exchange, royalties, tax receipts and, to a lesser extent, increased employment; thus the importance of working to maintain this increase, as much as possible, for a longer period. Additionally, Colombia is seeing an unusual appearance of small and medium-sized companies –able to compete with the large international companies–, dedicated to providing services ranging from basic geology, seismic, analysis of prospectives, electricity generation, drilling, the taking of measurements and logs, etc., which are the ones that best reflect technological transference and the direct added value stemming from oil activity.

Decreased production due to a falloff in reserves can lead to the shutdown of these firms, unless they are prepared to export their services, which is feasible given the high quality of national human resources. This is a fundamental task to guarantee sustainability of the sector. The same applies to the training of technicians and professionals in the universities and specialized institutes.

Collateral costs

It is also important to point out certain costs generated by oil activity. In the environmental field, despite technological improvements and greater resources aimed at forestalling such effects, hydrocarbon production continues to cause damages, particularly to bodies of water, agricultural zones, roads, etc.

In the Colombian case, this activity intensifies the lack of security, prostitution, drug addiction and other undesirable social evils. In countries such as Canada, they have been able to convert these bonanzas into better quality of life. Here that possibility remains to be seen. Corruption and lack of attention to the basic needs of the populations near the centers of production and the migrants generated by this activity have impeded truly sustainable development. In this context, sustainability appears more difficult to achieve. If the use of these considerable resources cannot be effectively and efficiently channeled, one of the best opportunities that the country has had in the last 100 years to surmount the problem of poverty and all of its nefarious consequences will have been lost.

In conclusion, more exploration, more education and training, a broader vision of external markets on the part of national oil service companies, zero corruption in the use of royalties, better projects and greater planning in the use of resources are absolutely necessary premises to be able to effectively speak of an oil bonanza, in the sense of Colombia having better living conditions for its population and better conditions for the well–being of future generations. Anything else is simply a semantic debate.



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