Global Energy Development excited about potentially transformational change of emphasis in Colombia

Colombia is the rising star of the oil and gas industry, with production set to hit 1.2 million barrels of crude a day by the end of this year.

If it hits this target, then the country will have doubled average daily output in just three years, underlining the strides it has made in a very short space of time.

An open door policy and a well constructed and trusted regulatory framework have encouraged an influx of foreign explorers and producers, including usually risk-averse majors such Shell (LON:RDSA), Chevron (NYSE:CVX) and Exxon (NYSE:XOM).

And of course improved security after decades of armed struggle has also helped.

The success of Colombia as a producer is in stark contrast with Venezuela, where the nationalisation programme under president Hugo Chavez is in the process of destroying the country’s crown jewels.

This does of course have an upside for Colombia, which has seen an influx of technical expertise and investment that has been scared away from Venezuela.

“There is a lot of buzz around Colombia, which is in the midst of an oil boom,” said Stephen Voss, managing director of Global Energy Development (LON:GED), an oil company that has been active in the country since the mid-1990s.

It is active in the Llanos Basin, a magnet for foreign investment.

However, the popularity of the area has put great strain on the local infrastructure and made it difficult and more costly for the smaller independents to ship their oil.

Another headache is disposing of the waste water from the oil production.

All of this has prompted a re-think at Global, which is moving the focus of its development efforts west over the mountain range to Colombia’s Middle Magdalena Region.

There are two reasons for this. The first is costs related. The second becomes apparent when you look at the company’s reserves statement.

Around 88 per cent of its 124.6 million barrels of 2P reserves are in the Middle Magdalena, though it is currently responsible for less than 5 per cent of the company’s production.

Unlocking the potential of the area will provide a huge lift for Global. 

This isn’t a high-risk exploration story. It is about oilfield development, and applying technological advances that weren’t around when the group originally assessed the potential of the Bolivar and Torcaz discoveries.

The group has the financial wherewithal to do the groundwork, before deciding how it will accelerate the development of these fields.

It has been profitable for eight out of the last 10 years and has increased revenues in all bar one year in the past decade. 2011 is on target to be another record revenue year, according to analysts.

The current focus of Global’s work programme in the Llanos Basin is the conversion of the abandoned Rio Verde-2 well into a water disposal well in the Llanos Basin. 

The environmental permits have been received and on completion it is expected to cut water disposal costs to around $1 a barrel of crude from $5 currently. 

After that the investment taps are being diverted to fund GED’s plans for the Middle Magdalena and specifically two re-entry programmes – Torcaz 5 and Catalina 1 – that will be crucial to the future prospects of the company.

The on-going recompletion of the Torcaz 5 is Global’s first use of a technology called CHOPS. It stands for Cold Heavy Oil Production with Sand. 

It is a process that has been used extensively in Canada to tap problematic heavy oil reservoirs with low permeability and containing sand.

Where the conventional technology screens out the sand contained in the heavy oil, CHOPS uses abrasion tolerant pumps to lift  what Voss describes as a slurry of oil, water, gas and sand up the well bore.

The mix is separated at surface and the by-products disposed of in an environmentally friendly way.

Using the traditional technology a well might initially produce 300 barrels, but there would be a very rapid decline from that level.

Studies of the CHOPS system show that at the low end it allows companies to  potentially produce at three times the conditional well production rate. More importantly that rate is sustainable over a number of months. 

The interim results of the Torcaz 5 project are expected to be released very soon and will give an indication as to whether CHOPS has what it takes to deal with Colombian heavy oil.

If it does then there are plans to revisit existing Torcaz wells 2 and 3 later this year. 

The re-entry of Catalina 1 will follow in 2012 and will test the Simiti formation, which is part of the Bolivar shale oil project.

The Bolivar Contract Area has passing similarities with the Eagle Ford and Baaken formations in Texas and North Dakota respectively. 

Voss reveals that the same horizontal drilling and fracing techniques used to commercialise the two giant North American oil formations were deployed in the 1990s in the Bolivar to great effect producing “several thousand barrels of oil a day”.

The downside, however, was the technology, being in its infancy, was incredibly expensive. 

The cost today as horizontal drilling and fraccing has become commonplace have plummeted, making wells far more economic. 

Gas chromatography suggests the existence of light oil or natural gas liquids. The former could command a premium price as it can be used to dilute the heavy oil that is prevalent in Colombia.

It promises to be an interesting and exciting 12 months for Global. The group will continue to keep the market apprised of its progress and strategy developments, Voss said.

“Before we begin a larger development project, we have to decide how many wells do we want to build and how quickly,” he added. 

“We need to address this and then decide whether we bring in a partner, or do we want to do it on our own - do it out of existing resources and cashflow.”