Gran Tierra's Grand Tour (into Ecuador)

Gran Tierra has won three blocks in Ecuador covering c.140,000 acres in the highly prospective Oriente-Putumayo Basin: Charapa, Chanangue and Iguana. The blocks are contiguous with Gran Tierra’s Putumayo position in Colombia and allows the company to extend its Colombian success on the trend across the border.

Gran Tierra will have 100% interest and operatorship on each block in exchange for a 14 well, four year work programme – management plans to commence the programme in 2020, to be fully funded from internal cash flow.  The contracts work on a sliding scale for contractor share of revenues, ranging from 87.5% at USD30/bbl to 40% at USD120/bbl.

The Charpara block sets Gran Tierra off to a good start with an existing field and historical production from the B-Limestone. As Gran Tierra matures its new acreage, there is scope to construct its own gathering infrastructure and use the export infrastructure in Ecuador. In due course, this could also be an export route for its Colombian production in the same way that Amerisur has built its own OBA pipeline from its Platanillo block to Ecuador (see Bienvenido Victor Hugo and Putumayo smart crude marketing).

The other side of the border into Ecuador has always been an exciting play. Whilst geologically the same trend, the Colombian side of the border has been underexplored due to historical above ground conflict and security issues. In contrast, Ecuador has been highly successful with many fields where nearly 6bnbbl of oil has already been produced.

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Putumayo smart crude marketing

Putumayo producers are blessed with having multiple export routes and the flexibility that affords in maximising sales netbacks.

The most direct route is the OTA pipeline to Tumaco. However this route has historically been plagued by attacks leading to downtime and the South Blend crude at Tumaco also fetches one of the biggest discounts to benchmarks vs. other region blends.

This has led to producers accessing Ecuadorian export routes through either the OCP or SOTE pipeline to Esmeraldes. At the port of Esmeraldes, the two key blends are Napo (19° API) and Oriente (24° API). Oriente being the lighter crude fetches a higher price.

Another option that has been employed is the trucking or part truck/part pipe of crude to Coveñas. At this port, the Vasconia blend fetches a good price and sells into the Caribbean market.

At the end of 2016, Amerisur completed its OBA pipeline linking its Platanillo field directly to Ecuadorian export infrastructure. Previously, Amerisur had to truck crude to a pipeline entry point to the OSO or OTA pipeline. The OBA link allowed Amerisur to reduce average transportation costs from c.USD14/bbl to below USD4/bbl. The link, despite taking many years to complete, cost USD18 million and in February 2018 Amerisur announced that the pipeline had been paid by within 15 months with cost savings achieved to that date of USD20 million.

Related link: Bienvenido Victor Hugo

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OVL and GeoPark announce strategic partnership across Latin America

ONGC Videsh, the international arm of Indian oil & gas giant ONGC, and GeoPark have entered into a long-term partnership to acquire and invest in upstream projects across Latin America. Both companies have an existing presence in the region and the partnership will help the two companies work together as a consolidator of assets to build a large scale business.

GeoPark has a sporadic portfolio throughout Latin America and has aspired to build a large portfolio. It has been semi-successful at doing so with recent growth underpinned by its Colombian position in LLA-34 (55% operator, with Parex 45%) and current production of c.30mboepd. In Chile, Argentina and Peru, GeoPark is also operator and one of the few Latin American focused E&Ps that has made an attempt at venturing beyond Colombia.

GeoPark acreage
Source: GeoPark

ONGC has a small presence in Latin America with production of c.34mboepd. It has built its position through a series of compact partnerships and assets dominated by heavy oil. ONGC aspires to build its international business noting that it announced its intention to spend USD10-12 billion in overseas acquisitions and partnerships back in 2015. It now appears to have found its niche in Latin America where it can build up a larger platform having tested the waters.

GeoPark and ONGC acreage
Source: Wood Mackenzie, OGInsights

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Amerisur putting plans in motion

Amerisur is a story of slow and steady wins the race. The company had targeted 10mbbl/d to be reached a few years ago - with current production only at c.7mbbl/d, this target has clearly fallen by the wayside. Amerisur has learnt, and is continuing to learn, that doing business in Colombia (and Ecuador) is not straightforward and getting necessary government approvals can take months and sometimes years rather than weeks - the OBA pipeline being a case in point. Layer on top of this the local community liaisons and security issues in the Putumayo Basin, one begins to understand the impediments to Amerisur's progress over the past years.

Nevertheless the Amerisur team has managed its portfolio and navigated the winding road of being a Colombian E&P carefully and is now one of a small handful of successful producers in the Putumayo Basin. As well as building up its asset base beyond what was effectively a single asset company in Platanillo, Amerisur has made good progress on the exploration and appraisal front which will set the company up for the longer term.

Amerisur is a company we continue to watch with interest and with enough patience, is a rare success story that will materialise over time.

Drilling Update

North Platanillo
At the start of 2017, Amerisur had success at Plat-22 encountering 43ft of U-sands and flowing at 800bbl/d, extending the Platanillo field north. This was followed by Plat-21 which derisked the extension further testing 430b/d.  Plat-25 came in below expectations, but was sidetracked to target better reservoir quality and additional pay thickness, and was brought on production at 180 bbl/d. In December, Plat 27 encountered net pay of 12ft in the U and 9ft in the T sands. This success could add up to 10mmbbl of reserves.

In 2018, drilling activity on Platanillo switches to the N sand stratigraphic play with the upcoming planned three-well programme targeting the 18.8mmbbl N Sand Anomaly (expected to start in Q1 2018).

Mariposa (CPO-5, Amerisur 30%, ONGC 70%)
Mariposa-1 was successfully drilled in May 2017 which flowed at 4.6mbbl/d 41API light oil. The well was drilled to a total depth of 11,556ft with an indicated 120ft net pay in the L3 Sands. The well is now producing around 3,200b/d (gross) on Long Term Test on a restricted choke.

Further drilling is planned on the block in 2018 (including Indico-1 and Sol) which could add material reserves to the portfolio.

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Canacol: Sabanas export flowline comes online

Canacol has announced that the Sabanas gas flowline is now connected. It is in the final stage of testing and gas transportation is scheduled to commence on 5^th December. The flowline has a capacity of 40mmcf/d which is expected to be reached in mid-January following completion of a second compression station - initial gas throughout is expected to be 20mmcfd. Gas will be routed from the Jobo processing facility to the Promigas export line at Bremen with the gas to be sold to consumers at Cartagena. Upon reaching the full 40mmcf/d capacity, Canacol's total gas offtake capacity will increase to 130mmcf/d.

Canacol also added that gas sales for October and November averaged 84.1mmcf/d and oil sales (including Ecuador) of 3,025 bbl/d. In December 2018, the company expects gas production capacity to increase to 230mmcf/d following the completion of the second expansion of the Promigas pipeline from Jobo to Cartagena and Barranquilla.

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Canacol on track with Sabanas pipeline

Canacol has signed an agreement for the construction, operation and ownership of the Sabanas flowline. The 82km pipeline will connect the gas processing plant at Jobo to the Promigas trunkline at Bremen.

Source: Canacol June 2017 investor presentation

The USD41 million pipeline will be funded by:

• USD30.5 million from a group of private investors
• USD10.5 million from Canacol

Canacol’s contribution has been almost entirely satisfied by costs incurred to date.
Construction is proceeding on schedule, with first gas transportation expected in December 2017. All rights of way have been acquired, tubulars are on order and civil works are to commence during August 2017.

The Sabanas flowline will provide an additional 40mmcf/d export capacity and will satisfy 40mmcf/d take-or-pay contracts entered into in 2016 with existing and new customers. Canacol will pay a tariff for use of the pipeline in line with other regulated tariffs which will be borne by gas offtakers. Canacol does not have a ship-or-pay commitment for use of the pipeline.

With the additional 40mmcf/d production, Canacol’s production will increase to a 2017 exit rate of 130mmcf/d. The end of 2018 will see another big step change in production with an additional 100mmcf/d coming onstream with the completion of the additional Promigas Jobo-Bremen pipeline.

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More success at Jacana

GeoPark today announced the successful drilling and testing of the Jacana-11 appraisal well on block LLA-34. The well, located 2.5km southwest of Jacana-6 and extends the Tigana/Jacana oilfield to the south-west edge of the block. The well reached TD of 11,618ft and did not encounter the oil-water contact.

Jacana-11 tested at c.2,100b/d (18.7 API, <1% water cut) with an ESP from the Guadalupe formation, and the well is already in production.

The Jacana Sur-2 well is the next well scheduled to be drilled and is targeting a further extension of the field in the northwest direction.

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Canacol: Second pipeline to double export capacity

Canacol has executed a major agreement with Promigas to expand the gas transmission network from Jobo to the Colombian coast by constructing a second pipeline. The project will be fully funded by Promigas and expected to commence by the end of this year. Permitting is planned to take up to 18 months with construction taking 6 months - the pipeline should be commissioned in 2018/19. The pipeline will more than double Canacol's capacity from 90mmcfpd to 190mmcfpd. Gas supply contracts have been secured for this additional capacity and the company will now need to find additional reserves to fulfil the contracts.

During 2016 Canacol raised USD36 million to accelerate drilling targeting c.100bcf reserves in the Lower Magdalena basin‎. So far the company has successfully drilled the Nispero-1, Trombon-1 and Nelson-6 near field exploration wells. By year end, the Clarinete-3 and Nelson-8 development wells are scheduled to be drilled and tested.

Canacol plans to keep one rig active in 2017 to drill through the company's prospect inventory. This drilling campaign is crucial to establish the gas reserves necessary to underpin the long term contracts. Canacol's reserve base of 79mmboe has a RLI of 12 years at current production levels, but would fall to 6 years if production rises to 190mmcfpd.

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One day in November: A Colombian visit to the UK

At the beginning of November, President Manuel Santos and his delegation from Colombia were in the UK on an official state visit. The Wednesday of that week was dedicated to showcasing Colombia’s oil & gas industry with senior members from the industry presenting in London. The next day, the delegation continued their tour in Aberdeen to build ties with the historic oil & gas city.

OGInsights attended the event and had an opportunity to speak with Germán Arce, the Minister of Energy and Mines, and Orlando Velandia, President of the ANH. They shared their views on the current state of and the outlook for the Colombian oil & gas industry.

The delegation was clearly excited to be in London and Aberdeen and keen to talk about the future of Colombian offshore oil & gas. The offshore is very early stage, but critical to sustaining the country’s longer term production levels. Before the offshore can make material progress, it was recognised that a whole supporting industry together with offshore expertise would need to be established (its offshore experience is minimal with Colombia being an onshore producer to date). For example, this would include support for offshore drilling, rig servicing, helicopter services, vessels among a much longer list of things. Forming strong ties with Aberdeen, which is seen as a “centre of excellence” in the offshore and where the North Sea industry was born, is therefore a priority for Colombia.

Barranquilla, a coastal city in northern Colombia, has been appropriately chosen and aspires to be the “Aberdeen of Colombia”. The ties between the two cities are set to strengthen and Barranquilla will call on Aberdeen’s expertise, learnings and experience as it sets to build up the city to support the emerging offshore industry in Colombia. Academics, service companies and oil & gas companies were all present at the event with the mayor of Barranquilla, the charismatic Alejandro Char, emphasising the importance of knowledge transfer and desire to “learn everything”.

To date, 22 offshore areas have been licensed: 9 TEAs which are for technical evaluation only (not drilling), and 13 exploration contracts. In total, 45 areas have been drawn up with 33 in the Caribbean and 12 in the Pacific. The infancy of the offshore, together with the lack of a supporting industry translates into high risk; however the size of the prize is large enough to attract major international players including ExxonMobil, Anadarko, Shell and Repsol.

Despite the excitement around the offshore, the importance of the onshore was not forgotten. Managing surface risk is still very much top of mind. Minister Arce elaborated on the situation - the onshore has seen a reduction in the level of attacks but an increase in social activity. He therefore encourages E&Ps to evolve their corporate social strategy away from employing on-the-ground protection to negotiation and dialogue, which is a very different skill set. In the south of the country, the ANH believes there is vast potential, underexplored in part due to militant activity and sees the continuation of peace as critical to maximising hydrocarbon recovery in the onshore.

The Colombian oil & gas industry is at a turning point, with attracting international investment very much key to advancing the industry. The government has made significant effort in opening up the country and building a business friendly environment. With the offshore on the brink of being the next frontier, the world will be keeping a close eye on Colombia and how it will use its potential new found hydrocarbon wealth.

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Canacol doesn’t lose sleep over oil prices

Canacol is distinct from its Colombian E&P peers‎, being a gas-weighted producer with operations focussed in the Lower Magdalena Basin. Its gas operations and gas offtake contracts mean that the company has a much lower exposure to oil prices. In the company's recent investor update, it noted that it would generate EBITDA of USD107 million if the oil price was zero! Given this special situation within the Colombian and wider international E&P universe, we look to dedicate a few articles looking at Canacol in more detail.

Canacol: Sensitivity to WTI
Source: Investor presentation

Canacol was initially established as a Latin American focussed E&P and listed on the Toronto stock exchange in 2009 through a reverse takeover. The company has somewhat haphazardly experimented with different strategies and now appears to have settled on one that works: gas production supplying the growing domestic market. As a result of its past, the company has now amassed a position of 23 blocks in the Magdalena, Llanos and Putumayo Basins as well as a service contract in Ecuador, through a series of acquisitions and licensing rounds. It also previously held assets in Brazil and Guyana which have now been sold off.

Key acquisitions in the company’s history include:

• Carrao Energy (November 2011) which came with LLA-23 and Middle Madalena blocks Santa Isabel, VMM-2 and VMM-3
• Shona Energy (December 2012) which had a 100% interest in Esperanza and production in four blocks across Colombia
• 100% interest in VIM-5 and VIM-9, acquired from OGX in December 2014

Esperanza and VIM-5 are now the key assets in the company’s portfolio.

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Gran Tierra the Consolidator

On 30 March, Gran Tierra announced the private offering of USD100 million convertible notes which successfully closed on 6 April. The new funds will allow Gran Tierra to accelerate its exploration programme and places the company in a strong position to act as consolidator in Colombia.

Gran Tierra completed two acquisitions in Q1 2016, building out its portfolio particularly in the Putumayo Basin of southern Colombia and supplementing its interests in the Costayaco and Moqueta fields. With development drilling on Costayaco and Moqueta due to end through Q1 2016, the company will be starting its 2016 exploration campaign shortly, commencing on the newly acquired PUT-7 block. The newly acquired assets provide ample opportunities to accelerate reserves and production growth through the drill bit.

Through a combination of acquisitions and re-investment in the core producing fields, the company is expected to increase production by c.20% from 2015 levels of 23mboepd to c.28mboepd in 2016. The company retains a strong balance sheet with c.USD180 million of cash following the recent fund raise. The company’s cash position, together with operating cash flow of c.USD100 million (if Brent averages USD40/bbl in 2016) is more than sufficient to fund its 2016 base capex budget of USD107 million and its discretionary budget of an additional USD61 million.

The peace process between the Colombian Government and the FARC is expected to conclude shortly and it is anticipated that southern Colombia, historically an area of focus for the FARC, should benefit from greater stability.

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Amerisur makes a move

 

On 26 January 2016, Amerisur announced the acquisition of Platino Energy (Barbados) Ltd, a subsidiary of COG Energy, a private E&P with a focus on Colombia. The consideration for the transaction is USD7 million which we be paid entirely in Amerisur stock, through the issuance of 22.7 million new shares. A further payment of USD500,000 in cash will also be made in respect of fixed assets. As part of the deal, COG is entitled to a 2% overriding royalty if production in the acquired blocks exceeds 5,000bopd.

The transaction adds prospective acreage (190mmbbls unrisked resources) to Amerisur’s Putumayo Basin portfolio at a limited cost with drill ready prospects close to the company’s Platanillo field. Commitments are limited to USD12 million across the next three years. New production from the blocks would have access to Amerisur’s new pipeline to Ecuador, once completed.

The acquired assets include:

• PUT-8 (Amerisur 50%) immediately west of Platanillo with 45mmbbl in unrisked resources in similar structure
• Coati Block (Amerisur 100%) holds 79mmbbl unrisked resources and the Temblon field with long-term testing potential; the next exploration well is partly carried by Canacol (part of farm-in deal for 20%, excluding Temblon)
• Andaquies Block (Amerisur 100%)

The blocks have no or limited X-factors and are covered by 2D and 3D seismic. Drilling commitments include one exploration well on PUT-8 and the Andaquies Block by May 2017 (although some environmental licenses are still to be secured).

On the export pipeline, Amerisur continues to engage with the Ecuadorean authorities to secure the final EIA approval and complete construction of their strategic pipeline connection through Ecuador. This will reduce transportation costs and increase off take capacity.

Amerisur's acquired and existing acreage
Source: Broker research

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Gran Tierra strikes again

On 15th January, Gran Tierra announced the acquisition of PetroGranada’s interest in the highly prospective Putumayo-7 Block, southern Colombia. The acquisition increases the company’s interest in the block to 100% and adds two more drill ready prospects to the inventory of lower risk prospects established through the recently closed Petroamerica acquisition.

Gran Tierra will acquire all of the issued and outstanding shares of PetroGranada (which holds 50% in Putumayo-7) for USD19 million. In addition Gran Tierra  will pay a further USD4 million if the cumulative production from the block meet or exceed 8 MMbbls. The acquisition will be funded from the company’s existing cash resources; the USD200 million debt facility will remain undrawn.

The acquisition adds 1.9mmbbls 2P reserves  and further 50% working interest in the Putumayo-7 Block (GTE now has 100%). The block holds two drill ready prospects (Cumplidor is effectively an extension of the existing Quinde West discovery on the neighbouring Surotiente block). The company expects to drill the wells later this year. Wells in the region are low cost, at less than USD10 million each and the prospects lie close to existing infrastructure, enabling for fast monetisation.

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Petroamerica’s call for cash

A sign of the times, another independent raises funding as the low oil price environment continues to hit small producers hard. On 27th October 2015, Petroamerica became the next in line to ask for cash, raising USD20 million in debentures. The expensive cost of the debt at 13.5% reflects the high risk which investors are attributing to the sector, and also that of Petroamerica. The USD20 million will consist of two USD10 million tranches, with the first expected to close on or around 16 November 2015, and the second six months later.

This fund raise comes shortly after the acquisition of PetroNova and raises the question of whether Petroamerica acquired more than it could take on. A review of the PetroNova asset base suggests that the acquisition appears sensible – the CPO-7 and CPO-13 blocks provide existing production with commitment wells not required to be drilled until July 2016 and July 2017 respectively, the Tinigua block has attractive fiscal terms (0% X-factor) although a commitment well is also required by July 2016 and Petroamerica’s Put-2 position is consolidated to 100%.

Petroamerica - PetroNova combined portfolio
Source: Petroamerica

In hindsight, it can be seen that Petroamerica’s woes stem from pre-PetroNova. At the end of 2014, the company had seven exploration wells and seismic commitments and balance sheet cash of USD73 million, out of which the redemption of a c.USD40 million debenture would be required (essentially leaving the company with c.USD33 million to fund its activities). The exploration portfolio is clearly one for a USD100/bbl oil price environment where production cash flows would have funded drilling. However, at current low oil prices, Petroamerica has been loss making – balance sheet cash as at the end of June 2015 was USD23 million; netbacks fell to USD9.1/bbl for the six months ended 30 June 2015 compared with USD54.2/bbl for the same period last year. The company has spent minimal capex in 2015 to date, conserving precious cash and only spending what it needs to maintain or manage production at its producing assets (Los Ocarros and Sur Oriente).

Some of the exploration commitment deadlines have now passed without being met (no drilling has been reported to date), yet no licences appear to have been relinquished. It is expected that Petroamerica are negotiating hard with the ANH to extend these deadlines; most likely, other cash-strapped Colombian E&Ps are doing the same. Petroamerica should be able to keep the lights on for now with the new USD20 million funding going towards satisfying the commitments. However, unless Petroamerica makes a significant discovery which it can bring onstream quickly, it will be stuck between a rock and a hard place as it continues to battle a declining production base, dwindling cash flows and a shrinking cash balance. It would not be a surprise if the company brings in partners to help with some of its commitments or raises more financing. In the meantime, Petroamerica’s case is not unique and there remains a long line of E&Ps that need more cash.

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Colombia calling: Petroamerica acquires PetroNova

Cartagena, Colombia
Source: http://www.backtrackers.nl/colombia/

The Colombian E&P landscape is characterised by a few IOCs with 100mmbbl+ of reserves (e.g. Repsol, Chevron, Occidental) and a large number of independent E&Ps. The smaller end of the scale is dominated by many small players with more than 25 companies with less than 2.5mmboe of reserves.

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Vetra: A Colombian story

Vetra Energia is a private Colombian based E&P with a sole focus on Colombia.

Its main asset is a 69.5% operated interest in the Sur Oriente block; Petroamerica is the partner on the block with 30.5% WI which it acquired through the merger with Suroco in 2014. Vetra Energia also has a 100% WI in the La Punta block and a 60% operated interest in VMM2 (40% Canacol) which contains the Mono Araña field.

In July 2013, Vetra Energia was acquired by a consortium led by ACON Investments and Capital International. The Vetra management team, along with private investors including oil & gas veteran Atul Gupta also participated in the acquisition. The Vetra management team and private investors participated through a vehicle called New VEG.

Vetra Holdings SARL was incorporated for the acquisition of Vetra Energia and is owned by the consortium members. Based on the company’s filings, the acquisition consideration is estimated to be c.USD440mm. This has largely been funded through pseudo-debt with USD265mm of Preferred Equity Certificates (“PECs”) issued to the consortium members and USD187mm of promissory notes issued to Vetra’s selling shareholders. The PECs carry no interest whereas the promissory notes carry a rate of 10% per annum.

In 2013, Vetra produced 5.6mmbbl or 15.4mbbl/d. However, latest filings with the ANH show that production had plummeted to 6mbbl/d in2014 suggesting that the consortium may have significantly overpaid for the acquisition. This view is supported by the valuation of the assets from public sources:

• Broker consensus read-through valuations of $92mm for Sur Oriente and <$1mm for the other assets
• Wood Mackenzie valuation of $63mm for Sur Oriente and <$1mm for the other assets
• Furthermore, Petroamerica recorded a write-down of $30.4mm on Sur Oriente in 2014

Sur Oriente is Vetra’s main asset and is located in the Putumayo Basin. It is owned through Consorcio Colombia Energy (“CCE”) in which Vetra holds a 69.5% interest and Petroamerica 30.5% interest. CCE holds a Crude Incremental Production Contract with Ecopetrol on Sur Oriente which entitles Ecopetrol a share of the block’s production which is determined by an R-factor. Petroamerica’s disclosure notes that Ecopetrol is entitled to 52% of production; the remaining 48% of production is shared between Vetra and Petroamerica per their interests in CCE. The block produces from three fields (Pinuna-Quillacinga, Cohembi and Quinde) and in 2014, gross production was c.14.3mbbl/d from six wells.

Production from Sur Oriente was historically trucked to the nearby Orito facilities and then exported via the Trans-Andean Pipeline (“OTA”) to the port of Tumaco on the Pacific coast where it is sold as the Colombian South Blend. In November 2014, a new export route was established for the Cohembi and Quinde fields with crude trucked to the Amazonas Station in Ecuador and transported through the Oleoducto de Crudos Pesados (“OCP”) pipeline which is expected to result in $8-10/bbl improvement in netbacks over time.

Pipeline export routes from Putumayo
Source: Petroamerica January 2015 corporate presentation

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