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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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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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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