Rising Oil Prices Creates Chance for Clean Crude

The world is being rocked by energy crises. Northern Europe doesn’t have enough natural gas, India and China face coal shortages while the price of crude oil marches steadily towards $100. In the run up to COP26 it’s a brutal reminder that the global economy still runs on fossil fuels.

Yes, renewable energy and electric vehicles are advancing quickly. But the massive increase in primary energy demand – an extra 2 billion people will be living on the planet in 2050 – means that oil and gas will remain key commodities for several decades. However, hydrocarbons will come under increasing scrutiny. As countries and companies make ambitious carbon zero pledges, they will look to minimise the GHG emissions caused by their oil and gas use. And that push, for cleaner oil and gas, will favour certain producers in Latin America.

‘Clean’ oil

In this new environmentally conscious world – not all oil will be equal. Producing oil and gas from tar sands in Canada, for example, is an energy-intensive process that produces more GHG emissions than a conventional onshore field. Likewise fracking shale gas emits around 20% more GHGs than conventional natural gas.

They are broad generalisations, but the environmental profile of each barrel of oil will also be determined by the particular details of how and where it was produced. Factors such as water use, recovery methods, transport from the wellhead, all shape the overall environmental impact of that source of oil.

Diego Mesa, Colombia’s Minister of Mines and Energy, believes Colombian oil and gas producers should thrive in the new environment. “I think Colombia has a big competitive advantage as a low-emission producer because we have one of the world’s greenest power grids.” That advantage is shared by many countries in the region, which has the world’s most renewable electricity system.

Another shared advantage is that Latin America is dripping in oil and gas. Home to less than 10% of the world population, it has 20% of the oil and gas reserves. And that abundance gives it more options when it comes to producing environmentally-responsible hydrocarbons. It means there is a lot of low-hanging fruit, says Ecuador’s Minister of Environment, Water and Ecological Transition, Gustavo Manrique. “If we look at oil and gas there are existing fields that are being exploited very inefficiently. In those wells and fields, which are around half of the total, we can apply technology to boost production. That means there will be very little environmental impact for the increased production.”

Because Latin America has lots of hydrocarbon deposits and a long, rich history of E&P activity it has many neglected oil fields that can be revitalised with new technology. For example, Mesa is keen to highlight “opportunities in our mature onshore plays, such as the Llanos basin.”

Another example is Gente Oil, a privately-held E&P operating in a mature field in the Ecuadorian rainforest. In 2012 Gente won the ‘Campo Singue’ oil field. It was a marginal field that had been closed by PetroEcuador in 1997. “It was only expected to produce 2,500 barrels per day (bpd)”, says Vice President of Financial Administration, Silvana Pastor, “but we drilled 17 wells and got production to 8,500 bpd in 2014.”

Protecting the rainforest

Latin American countries share many similar opportunities but they also have the same challenges. The most difficult is that oil is often found in environmentally-sensitive areas. So, governments need to work closely with the private sector to ensure that bio-diversity is not being threatened. One egregious example of environmental damage was caused by Texaco in the Ecuadorian Amazon in the 1970s and 1990s, when it dumped billions of gallons of toxic waste materials into the rainforest. But Pastor is adamant that would be impossible today.

 “We have a sophisticated water treatment plant that is the only one of its kind in Latin America. The final water is so clean that we can inject it back into the reservoir. The plant cost us $28million and was developed for us by Schlumberger.

“We are also committed to reducing gas flaring. We have been local pioneers in reusing the gas that we produce. Our operations are not connected to the electricity grid, so our current solution is to use gas to fuel our operations and thereby limit the amount of diesel consumed by the generators. Our aim is to completely cut gas emissions or flaring in three years’ time. One local leader in this area is Repsol, which has zero gas flaring in Ecuador, and we are working with them to incorporate new solutions.”

In theory the market should reward companies that invest in environmental measures. But the government also has an important role in controlling oil and gas firms. “Something that people do not understand is that the oil and gas companies operating in the Amazon are rigorously monitored. Every three months we have to complete studies showing that the surrounding flora, fauna and air quality is not being negatively impacted by our operations. However, the neighbouring communities face no such oversight and sadly they often throw their plastic waste straight into the Amazon River. Similarly, their economic practices, such as burning forest for livestock, monoculture or housing, also cause ecological harm. We refuse to support any local economic project that will have a negative environmental impact – instead we work with schools to educate children about recycling. We also run training programmes to give community members the right skills so they can work with us.” 

Problems above ground

Latin America has lots of natural advantages to help it become a global supplier of clean hydrocarbons. Yet significant flaws in the business environment could prevent it from reaching its potential. Take Colombia, for example. At current rates of production, the country’s reserves will last less than seven years. Mesa blames the previous government. “During the five years before we came to power, Colombia didn’t sign a single E&P contract. That was reflected in falling levels of seismic, less exploration wells and lower investment. We have cleared the bottlenecks and in just three years have signed 39 new E&P contracts. Colombia Round 2021 is ongoing we hope to award 50 E&P contracts by the end of the year.”

“In Ecuador the new government of Guillermo Lasso wants to double production, but Pastor doubts that will be possible. “The Ecuadorian oil and gas industry has deep structural problems. Of the 500,000 bpd national production, only 100,000 bpd comes from the private sector. Therefore, there is not a huge amount of international investment here. To change that you need to create tax incentives. Yet tax regulation here is so complicated that creating an incentive would require a major overhaul. For example, international companies do not just pay a corporation tax on profits; they also have to pay 5% on any of the capital they want to withdraw from the country. You also have myriad contributions to regulatory agencies and ministries. Indeed, Gente Oil pays around $1.5million per year in these ‘contributions’ – and that is on top of tax. Labour rules are another problem. The law states that we have to pay overtime to people working outside the typical 9 to 5 day. That is not practical in our industry, where production is 24/7 and employees typically work 21-day periods on site. It’s also extremely difficult and expensive to remove inefficient workers.

“However, even if the government manages to change all of that – and it should do – you still have an over politicised oil and gas industry. The Controloria [equivalent to the UK’s National Audit Office) is a political organisation, typically used by the government of the day to score points against people connected with the previous administration. For example, it is trying to find problems with Gente Oil’s contract – despite the fact it is equal to the other 22 in the country – and we have an upcoming international arbitration. There is not a single large oil and gas operator in the country that hasn’t had to face the state in international arbitration. That is not healthy. Indeed, judicial security is the main reason why Colombia, which has far smaller reserves than Ecuador, has higher production.

“The fear of legal problems also paralyses the state, as public officials are unwilling to sign contracts. Indeed, the inefficiency of state institutions is also a problem. We have exciting prospects in the north of our fields that could allow us to boost production by an extra 25,000 bpd. But we haven’t been able to drill wells because we have been waiting for an environmental permit for the last four years. Ironically, part of the environmental license application included our plans to electrify our operations, which would reduce our ecological impact. This government needs to create a unified, single oil and gas vision for all of the different government institutions to follow. Because at present each ministry and agency seems to interpret our contracts differently and causes their own set of challenges to the sector.”

Ecuador’s main challenge is that we have not satisfied the needs of our people

Gustavo Manrique, Ecuador’s Minister of Environment, Water and Ecological Transition

All of these ‘above ground problems’ end up having a direct impact on production. For example, Gente Oil eventually had to scale back production to 4,000 bpd because it was never granted permission to build a pipeline to transport crude. It also discourages investors. “When our production peaked in 2014, we wanted to drill six horizontal wells”, says Pastor. “The local banks were not keen because Ecuadorian law means the state owns the oil, which prevents banks from claiming it as collateral to a loan. Meanwhile international investors were worried about the local business risk. It is telling that [owners] CDC Qatar can raise hundreds of millions of dollars for its other projects but not even a fraction of that for investing in Ecuadorian oil and gas.”

Ultimately the real losers are the Ecuadorian people, says Minister Manrique. “Ecuador’s large challenge is that we have not satisfied the many basic needs of our people. We have serious challenges in health, education and security. Perhaps the most serious is the malnutrition of one out of every three Ecuadorian children. So how do we solve that problem? We have a huge fiscal deficit, so the government can’t invest in these things on its own. But foreign investment in mining, oil and gas, carbon bonds can help us attract that investment.” Indeed, Campo Singue was expected to generate $150million in gross revenues for the Ecuadorian state but has overdelivered with $530million so far.

The LatAm INVESTOR view is that fighting climate change is so difficult that humanity will need to use all of the available technologies. Electric vehicles have an important role, but the social and environmental reality of building new copper mines in the Andes make it impossible to instantly replace internal combustion engines with electric vehicles. We need the political and business elites to be frank about our current dependence on hydrocarbons and work to make them as clean as possible. Latin America has a major role to play, both through its biofuels and its relatively clean conventional oil and gas production.