Colombia seeks help to boost output

GUADUAS, Colombia -- With its unending guerrilla conflict, difficult geography and bureaucratic hurdles, Colombia has struggled for years to attract new foreign companies to explore for oil and to keep those already here.

In the last two years, the struggle has been paying off. Thirty oil companies, nine of them new to Colombia, have signed exploration contracts for nearly 50 oil fields, ranging from an offshore block in the Caribbean to potentially lucrative patches in the country's rugged Andean foothills, like this site in the Gualiva Valley.

Oil analysts say that among the factors in Colombia's favor are its proximity to refineries in the Gulf of Mexico and the country's warm relationship with the United States. Increased instability in the Middle East is another factor.

"Despite the public order problem here, and all the other problems in Colombia, there is a relative stability that the Middle East does not have right now," said Thomas Villamil, vice president for exploration at the state oil company, Empresa Colombiana de Petroleos, known as Ecopetrol.

Still, Colombia remains a minor oil player, with less than 1 percent of the world's total proven reserves.

The expansion of exploration is crucial to the country. Colombia is Latin America's third-largest oil exporter but is in danger of becoming a net oil importer if new, large discoveries of crude are not made.

The problem is that Colombia's three largest fields -- Cano Limon, Cusiana and Cupiagua -- have reached their peak of production, while some big multinationals like ExxonMobil and Royal Dutch/Shell have abandoned production in the country, drawn by the prospect of deep- sea drilling and other opportunities elsewhere.

The former Soviet republics have opened up their oil industry to foreign companies, and even Middle Eastern nations have begun to allow some foreign investment.

"The companies had more choices, and more good-looking choices, than in the past," said James L. Smith, an oil industry expert at Southern Methodist University in Dallas. "It's like a beauty contest, and depending on who is involved, Colombia could look good or not so good."

Faced with such competition, Ecopetrol, is searching for suitors. Company officials have visited dozens of countries, pitching Colombia as a country with a stable, democratically elected government that is not going to change rules arbitrarily or nationalize the oil industry. They also stress that the company is not beholden to the production quotas of the Organization of the Petroleum Exporting Countries because it is not a member.

But the big carrot has been new contract terms for oil companies, under which Ecopetrol's share of a project has dropped from 50 percent after royalties to 30 percent. In 1999, before the new contracts came into effect, only one exploration contract was signed.

Another major appeal has been the prospect of finding huge oil deposits. That is a clear possibility because Colombia is vastly underexplored. Though it has just 2.6 billion barrels in proven reserves, the same kind of rock running under this country has translated into proven reserves of 76 billion barrels for Colombia's neighbor, Venezuela.

"Everybody recognizes that it has been a good hunting ground," said Nick De'Ath, a former manager of Colombia operations for BP of Britain, which has pumped oil in the country for years. "It has the right ZIP code to find hydrocarbons."

In the last two years, that has lured small- and medium-size newcomers like Texas Star Oil and Gas, based in Houston, and Compania Espanola de Petroleos, or Cepsa, of Spain. Large companies, including Occidental Petroleum of Los Angeles and Total Fina Elf of France, which focus on regions where large deposits are likely to exist, also signed new contracts, expanding operations.

They are here even though oil companies have long been assailed by leftist rebels as exploiters of the country's natural resources. Occidental Petroleum has been hit especially hard: Its Cano Limon pipeline has been bombed more than 130 times this year.

Still, oil executives have learned the value of meeting with local leaders to win a community's trust and to invest in education or other social programs, said Jonathan Green, an analyst for IHS Energy Group, a Houston company that tracks oil industry trends. Tight security is also a must and can take up 7 percent to 10 percent of operating costs.

For companies in Colombia, Green said, "there is a hope that there will be a better situation, that if you secure a block today things are going to get better in the future, and then you've got yourself a deal."

This is clearly what Seven Seas Petroleum of Houston has been banking on since its 1996 discovery of oil in the rock-strewn mountainous outside Guaduas, a historic town. Seven Seas had operations in Australia and New Guinea, but the find encouraged the company to concentrate solely on Colombia, investing $155 million in explorations.

"When you find something that appears good, it requires, if you're a small company, that you be exceptionally focused," said Robert A. Hefner III, chief executive at Seven Seas.

Hefner is a 1957 geology graduate of the University of Oklahoma. In 1959, he formed The GHK Co., a private natural gas and oil exploration and production firm with offices in Oklahoma City. GHK is known for deep gas development in the Anadarko basin of western Oklahoma and the Texas Panhandle.

GHK began exploration in Colombia in 1992, leading to the 1996 discovery of the Guaduas Oil Field. GHK subsequently amalgamated its Colombian oil interests with Seven Seas. Hefner joined the Seven Seas board of directors and executive committee in 1996. He became chairman of the board and CEO in May,1997.

In the last few months, the company has put up oil drilling platforms, enlarged a road so it can transport heavy equipment, built a 40-mile pipeline and modernized a production plant that treats and stores 20,000 barrels of oil. Seven wells now pump a modest 7,000 barrels daily, but the company plans to expand to 15 wells soon and increase output to as much as 25,000 barrels daily. That is still modest compared with some companies that pump 100,000 or more daily in Colombia.

Production, though, could skyrocket if Seven Seas strikes it big with its new Deep Dindal contract, a $15 million project requiring drilling to 18,000 feet, twice as deep as the company has gone with its other wells.

"It could be one of the most significant finds in Colombia if we're right about our interpretation," said Russ Cunningham, a Seven Seas geologist.

Ecopetrol is also hoping for a big find here and elsewhere. Villamil says that to fill its own energy needs and remain an oil exporter, Colombia must find an additional 2.4 billion barrels within five years, and that will require $2 billion in new investments. The new contracts signed in the last two years so far represent only $700 million B and that only in the unlikely event that all the exploration blocks translate into lucrative discoveries. So Ecopetrol's goal is 60 more contracts by the end of 2003.

The new interest in exploration has not yet produced big dividends. Looking for oil takes time. And some of the companies that have come in, while hopeful of the future, are moving cautiously as they await the outcome of peace talks between the government and the rebels, said Paul Doran, Colombia analyst for the Control Risks Group in London, which advises large companies.

For instance, the Alberta Energy Co. of Canada, which is producing a small amount of oil through two new blocks, has invested just $20 million, a fraction of the $500 million the company plans to spend in the next two years in Ecuador, said Alan Boras, a company spokesman.

"We will not become an operator until we are satisfied that the security is improved," Boras said.

Still, Ecopetrol's pitch that Colombia has as many as six sites that may hold up to 900 million barrels of oil each is hard to ignore for companies like Nexen Inc., a Canadian oil company now drilling in a field estimated to hold 1.4 billion barrels.

"You got to go where the oil is good, where there is a good potential," said Larry Murphy, Nexen's senior vice president for international exploration and production.

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