Opportunities for SMEs in the Colombian Oil Industry

As Colombia’s economy is experiencing several booms and increased investor attention, the government turns to its oil and gas sector to encourage similar levels of growth. Lots of things are going on in this space: exploration and production (E&P) reactivation, offshore activities, new offshore contracts, new processes to assign areas, fracking discussions. These activities demand huge investments, broad experience and top of the line capability.

So, where does this leave junior and medium-size E&P companies, and all size service companies, whether newcomers or already established businesses in the country?

The word is out. Small and medium companies (SMEs) have great opportunities in the recently reactivated sector, as do service companies. We explore how and why.

Oil and Gas Business – Colombia’s membership to the OECD

The Organization for Economic Cooperation and Development (OECD) is a recognized international organization that promotes the use of good public practices, in social, economic, and political matters. It’s an organization “that works to build better policies for better lives.”

The OECD focuses on promoting social inclusion, increasing productivity, and fortifying institutions, and many of its members have developed economies and the best international practices.

On May 25, 2018, the OECD accepted Colombia as a member country.

As a result, Colombia has already adopted important practices that will have a positive impact on its economy and productivity, in areas such as taxes, anti-corruption, transparency, environment, and labor. Colombia shall benefit from having better public policies, gaining trust from investors who wish to invest in the country. International visibility, credibility, and recognition will also be a plus.

Supporting small-medium enterprises

The OECD has invested substantial time and resources analyzing how SMEs work, and how they can grow sustainably. Fundamentally, this work is helping countries identify policies that increase production while understanding their productivity drivers.

As stated by the OECD, “small and medium-sized firms are central to the collective goal of increasing productive potential, reducing inequality and ensuring that the benefits from increased globalization and technological progress are shared.”

Interestingly, current trends that support the new industrial revolution such as, innovation, digitalization, inclusion, competitiveness, start-ups, entrepreneurship, workforce skills – to name a few – have everything to do with SMEs.

SME support in the oil sector

The School of Public Policy of the University of Calgary in its July 2012 Volume 5 Issue 23, on “Size, Role, and Performance in the Oil and Gas Sector,” defines types of companies in the oil and gas sector as follows:

• Emerging Juniors (EJs) are companies that annually produce between 1 and 999 barrels of oil equivalent (BOE) per day.
• Juniors are companies annually producing between 1,000 and 9,999 BOE per day.
• Intermediates annually produce between 10,000 and 99,999 BOE per day.
• Majors annually produce over 100,000 BOE per day.

Oil and gas E&P companies in the world can fall under any of these types, each contributing to a country’s economy in different ways. The OECD understands these differences and is aware of the need to have effective policies in place to allow each company to impact the sector in the most positive way.

Colombia oil sector and field facts

To date, most E&P companies operating fields in Colombia are Intermediate or Major companies. Certainly, non-conventional E&P offshore and onshore activities will fall under the Major’s wing due to the enormous capitals required to carry out such activities. In general, Majors are not interested in small fields, because these are not profitable for them.

Colombia’s National Hydrocarbon Agency (ANH) Agreement 02, dated May 18, 2017, points out a series of legal, technical, financial and environmental conditions that an E&P company wishing to operate in Colombia, needs to meet. Furthermore, the recently launched Permanent Process of Assignment of Areas (PPAA) establishes other specific conditions that must be met. Such legal framework does not necessarily allow SMEs to access E&P areas in the Colombian oil and gas sector (even if the SMEs have resources and technical capacity to do so), due to the rigorous requirements it imposes to companies wishing to operate in the country.

Colombia has inactive, unproductive or abandoned small fields with few reserves, and low production if they were to reactivate. There are at least 400 fields of the EJ type. And most of these fields are in Ecopetrol’s hands. SMEs could potentially operate these smaller fields instead.

According to experts, reactivation of these fields could bring on another 40 to 50 thousand barrels of oil per day (BOPD).

Reducing barriers for SMEs

Earlier this year, ANH Director, Luis Miguel Morelli, announced changes to Agreement No. 2, 2017 that will include the adjustment of the rigorous operational, technical and financial requirements of operating companies. This will allow SMEs to have access to smaller oil fields.

Mr. Morelli stated that he wishes to lower legal barriers to allow the entry of smaller players in the industry, so that these companies can work in smaller fields. The Liga B (B League), as ANH Director has named it, is the process that will regulate such entry and requirements.

Opportunities for every size

While the ANH issues the Liga B procedure and while the government finalizes non-conventional resources and ongoing fracking discussions, Colombia should take advantage and continue to develop conventional reservoirs. By doing this, it can increase its reserves to extend the domestic oil industry’s life span.

Recognizing the lower risk that smaller fields entail, SMEs that certainly have the know-how could request areas that are available for exploration but that do not require large investments. Through mergers and acquisitions, joint-ventures or alliances with Intermediate and Major companies, SMEs could comply with the strict rules set out under Agreement 2, and also get the opportunity to grow.

Service companies can also build on opportunities in every scenario with companies that are:

1. accessing new exploration areas in traditional basins or new ones,
2. developing new fields, or
3. carrying out E&P activities and eventually using fracking techniques whether onshore or offshore.

Colombia is still under-explored, and there are plenty of opportunities for all – in this industry, and in others. Reactivation of the sector will bring an opportunity for SMEs and a growing demand for services.

Contact us to get started

Colombia’s oil industry is set for a boost, thanks to new policies intended to reactivate the industry. This and other growing industries offer myriad opportunities for foreign investment and entrepreneurial success in Colombia and the wider region.  Now, more than ever, Colombia’s business-focused government is keen to support small and medium-sized businesses achieve their share of success in the country.

Setting up in Colombia does however require an understanding of local regulations. Entrepreneurs should seek local support and expertise in this crucial phase. Biz Latin Hub provides expert knowledge and local experience to foreign companies and investors moving into Colombia and the rest of Latin America. Our suite of market entry and back-office services is customized specifically to your business needs.

Reach out to our experienced Colombia team here at Biz Latin Hub for more information on how we can help.