A file image of an oil well in Colombia.
A well run oil company consists of a corporate structure built on top of a university. The underground is an area of constant investigation. The geological formations of hydrocarbons lasted millions of years. Scientists need to study where the biomass was “cooked,” how the hydrocarbons migrated through sand and permeable rock, and where they accumulated in porous rock. This requires auscultating the subsurface with sonar-based seismic technologies and creating maps of exploration opportunities that are confusing to the layman and enlightening to the expert.
That’s where the problem begins. It is one thing to assume the existence of hydrocarbons and quite another to demonstrate that they are present in quantities, qualities, and costs that make their extraction economical. To substantiate this, reconnaissance wells are drilled which, if successful, will allow their existence to ‘prove’, defining what is there, determining how much gas, oil or condensate is and the quality of each one. In these phases, the university combines not only geophysical, geological and reservoir knowledge, but also engineering, technological and financial knowledge, framed in the legal terms of the treaties, as well as the social and ecological terms of the environment.
The mix of exploration technology and oil production to the surface and transportation to point of sale or refinement determines the development of a field and the associated costs. This decision implies moving from some exploratory and delineation drilling to campaigns that may include tens, hundreds or even thousands of drillings, depending on the case. Some of the hydrocarbon extraction; and others for reinjecting water and gas to maintain subsurface pressure. The geometry of the field is constantly being analyzed to define the surface coordinates of where to drill to produce and improve recovery.
Companies engaged in this activity are used to working in many regions and dealing with all types of governments, legal structures, royalty systems, taxes and relationships with local communities and the environment. They are sophisticated organizations that deal with immense pressures both underground and on the surface. The first defined itself millions of years ago, and the second evolved in the heat of each new local or national government, faced with geopolitical and ideological pressures, often open blackmail, and finally faced with stiff competition from other international corporations.
The success of a country and a national hydrocarbon company depends on doing several things well. Firstly, the framework and the legal stability of the contracts to make companies with large investments and profitable in the very long term. Second, companies are run with strict capital discipline, since every wrong decision costs a lot. Third, maintaining a high quality of research and understanding of the subsoil, which depends on the quality of the “university”, continuous learning about its geological, productive and technical reality in the segments of the production chain.
One of the biggest challenges facing National Oil Companies (NOCs) in transformation processes is the migration from monopolistic and even regulatory entities to productive and competitive companies in an open market. To do this, they require a cultural shift that involves adopting management concepts from International Oil Companies (IOCs) and focusing on the long-term creation and preservation of value, the backbone of a competitive organization.
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Now let’s get down to business. Hydrocarbons are the world’s largest source of energy and will continue to be so for at least the next fifty years. The reason is in their ABCs: they are the A-abundant, B-cheapest, and C-most reliable source of energy on the planet. 8 billion people need to be fed every day, have a roof for work during the day and a home for the night, travel to work or anywhere else, heat their food three times a day and produce it at any time of the year with fertilizers dependent on essentially gas and access to hundreds of useful materials for clothing, protection, communication and comfort. All of this requires enormous amounts of energy and makes life today dependent on oil.
Latin America has the second largest proven reserves in the world and as a whole should choose to be part of the solution to the global energy problem. Recently, some countries have been plagued by methodological doubts about hydrocarbons. Everyone has their own kind of fluctuations. Some fail because of the legal framework; others for not having companies with the discipline of capital, excellence in management, and detachment from political decision-making; and others for not investing in talent, research and continuous learning in exploration, production, refining, storage, transportation, marketing, integrity and environmental management.
Let’s start with Venezuela. For nearly 70 years, it was the largest producer of hydrocarbons in the region, along with Mexico. The inability of the Chávez-Maduro governments to understand the extremely high level of complexity required for PDVSA, a model company at the time he came to power, led them from producing 2.8 million barrels of oil equivalent per day (mbped) transitioned to the current 0.7 . Destroying three quarters of the production capacity required determination and stupidity. Lost talent, the most important asset for knowledge, and deteriorated management’s decision-making process in a clumsy and adverse government context, the disaster was a matter of time. No organization is foolproof.
Mexico once surpassed Venezuela, peaking in 2004 at 3.2 mbeds of production. Today it has fallen to 1.8. Political skepticism pushed back the opening up of his extractive industry, which would have brought him capital, knowledge and risk-sharing. Several governments have opted to use PEMEX as a cash cow until they are the most indebted oil company in the world, limiting their investment capacity.
It suffers from occupational sclerosis, has a surplus workforce for its level of production and has phenomenal union power. It is dedicated to the refinement of mega-projects that are difficult to derive value from and will place a drain on the true generators of profitability and cash, namely exploration and production. There is so much oil in Mexico that these failures will slow but not reverse the decline. New leadership is essential.
Colombia currently joins this first group of oil skeptics. A country that depended on coffee until the 1970s, when it embraced attractive partnership deals, attracted world-class investments and made mega-discoveries. In the first decade of this century it sold 11.5% of its stake in the stock markets. It got on the world map of oil, arriving in 2014 to produce 1.04 mbdpe. Something really remarkable.
Recently, the maturity of its fields and the methodological doubts about whether to engage in fracking or not have meant that it has lost its momentum; With the current administration, he also risks being discouraged by an apocalyptic vision of hydrocarbons. Ecopetrol is still a well run company today. It remains to be seen whether this will remain the case in the short and medium term.
Venezuela, Mexico and Colombia reflect a mix of ideology-confusion-skepticism and, in some cases, blatant incompetence that put them out of the running. With long-term contracts and trust being critical in an industry that takes five to 10 years to explore and 10 to 20 years to produce in a basin, it’s hard to imagine how all three could regain the position and promise that they once had.
Fortunately, there is another group of countries in the region that have embraced oil and have been rewarded with huge profits: Brazil, Trinidad and Tobago and Guyana, joined by Argentina and Ecuador who believe in the present and future of this industry .
Brazil produced 3.2 mbeds in 2022 and aims to reach 4.4 mbeds in 2030. Apart from the scandals of a few years ago, Petrobras is a solid company, both scientifically and commercially. The country has competitive contracts globally and attracts the best international players to develop its sizeable offshore pre-saline basin and explore other basins.
Guyana, hand in hand with Exxon and recently other big players, has had the most notable mega discoveries in the world in recent years; It is projected to produce 0.8 mbed in 2025, surpassing Colombia. With the difference that Guyana has 800,000 inhabitants and Colombia 50 million.
Argentina opted for the so-called unconventional hydrocarbons produced by fracking in the Vaca Muerta reservoir, something Erysipelas produces for the government of AMLO in Mexico and Petro in Colombia, and recently increased its production by 30% to 0, 6mbped. Ecuador wants to increase its current 0.5 mbed to one million barrels per day.
This second group could be described as technical-optimistic-opportunistic. They are trying to use the time of high prices to strengthen their national companies and offer attractive contracts to find and extract as much oil as possible and provide resources to governments with urgent social spending.
National oil companies deserve special attention. Following the example of European and Asian companies, Petrobras, Ecopetrol and YPF have submitted to the discipline and scrutiny of the international capital markets, issuing shares on the stock exchange, submitting detailed quarterly reports, appointing technical directors and filling executive positions with people dedicated to the challenge of performance and able to face international competition. Ecuador aspires to do the same but has not had the political support to do so.
To use a football parable, this decade brings a punishment for the global oil scene. Latin America was divided into two groups. The ideologically confused skeptics on the one hand and the technical optimists-opportunists on the other. The first ones seem to choose to keep the goalkeeper and the crowd waiting and leave the ball on the penalty spot without a player kicking it. The stadium (the country) and the local industry are subject to a natural decline marked by uncertainty and distrust.
The latter have played hard, they’ve taken the penalty and converted it, they’re continuing to play for the world oil market championship, they’re aiming to increase production, they’re geopolitically positioning themselves as key suppliers and magnets for the industry, technology and knowledge they have have manipulated bring.
We don’t know if oil will be replaced by renewable energy quickly or slowly, which of course is desirable; but as long as it is profitable to produce it and to sell it, these two groups of countries will follow very different paths, at least as far as this industry is concerned. Some are based on science, good business decisions, and strong political support. Others with uncertainty in their national companies, lack of clarity in regulation and loss of learning and knowledge in this key industry.
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