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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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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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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Gran Tierra's little pain

Gran Tierra is a TSX and NYSE listed E&P with a focus on Colombia. Its main assets are the Costayaco and Moqueta fields in the Putumayo Basin which accounted for 88% of the company’s Colombian NAR production of 18.4mboe/d in 2014. The company also has an exploration portfolio in Brazil (supported by minimal production of 900bbl/d NAR in 2014) and Peru. In March 2015, Gran Tierra announced that it was suspending development operations on the Bretana field in Peru following disappointing drilling results at the end of 2015; all reserves related to the development have now been re-categorised as contingent resources. Exploration activities are expected to continue in the Peru with outstanding commitments of USD160mm over the next three years.

Although the company’s flagship assets are performing strongly, there are two unwelcome pieces of information buried in the company’s 10-K filing – there is an overriding royalty on the Putumayo blocks and a legal claim filed by the ANH against Gran Tierra over royalties.

Gran Tierra entered Colombia in 2006 through the acquisition of Argosy Energy’s assets in the country (Santana, Guayuyaco, Chaza and Azar blocks). Gran Tierra increased its interests in certain assets through the subsequent acquisition of Solana Resources, most importantly, taking the interest in the Chaza block from 50% to 100% in 2008. The original interests in 2006 are subject to a third party overriding royalty under an agreement entered into between Gran Tierra and Crosby Capital in June 2006. The agreement also allows for Crosby Capital to convert its royalty into a net profit interest (“NPI”) in certain circumstances. As at the end of 2014, the following arrangements were in place with Crosby Capital:

·         10% NPI on the originally acquired 50% WI in the Costayaco and Moqueta fields which lie in the Chaza block

·         35% NPI on the 35% WI in the Juanambu field in the Guayuyaco block

·         Various overriding royalty on production in the Santana block and Guayuyaco field in the Guayuyaco block

The ANH has also filed a claim against Gran Tierra in relation to the HPR royalty. This is a royalty which is paid on top of normal royalties and is triggered when the oil sale price exceeds c.USD37/bbl and cumulative production from an exploitation area exceeds 5mmbbl. The HPR royalty affects Gran Tierra’s Costayaco and Moqueta fields which are separate exploitation areas, but lie within the same block (Chaza).

Given the two fields, Costayaco and Moqueta, are separate exploitation areas (with the company further emphasising that they are separate hydrocarbon accumulations), Gran Tierra is currently only paying the HPR royalty on the Moqueta field which has recovered in excess of 5mmbbl to date. As at the end of 2014, recovery on Costayaco had reached 4.2mmbbl and therefore Gran Tierra has not yet commenced the payment of HPR royalty on this field.

The ANH have taken a different interpretation of the Chaza contract and view that the 5mmbbl threshold should be applied to aggregate cumulative production across all exploitation contracts within the Chaza block, meaning that Costayaco would also be subject to the HPR royalty. The ANH has challenged Gran Tierra’s position with a claim of USD64mm in respect of Costayaco HPR royalties. Gran Tierra and its legal advisers do not view that the ANH claim will be successful and the company has not made a provision in its accounts for this potential liability.

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