Asset overview and exploration running room
Canacol Energy was launched as a private company in February 2008, initially involved in the exploration of oil assets onshore Colombia with the Capella field discovery and acquisition of the Rancho Hermoso Field in the Llanos basin. The acquisition of Shona Energy in December 2012 provided a gas leg to Canacol, leading to a series of successful gas discoveries in the Lower Magdalena, Colombia. Continued consolidation of gas assets, exploration success and licence awards enabled Canacol to amass a leading onshore position in the basin making the company a key supplier of gas along the Caribbean coast.
Canacol’s gas is sold to a range of customers and transported to customers via three main pipeline routings: 1) Promigas-owned pipeline infrastructure, notably two major trunk lines from Jobo to Cartagena with combined capacity of c 160mmscfd available to Canacol; 2) the privately owned Sabanas pipeline with 40mmscfd of capacity installed in 2017; and 3) a pipeline routed south from Jobo supplying 15–20mmscfd to a ferronickel mine.
Canacol’s YE18 2P reserve base at 559bcf equates to a reserve life of 7.1 years based on gas sales of 215mmscfd. While current contracts are typically five to 10 years in duration and are underpinned by existing reserves, Canacol is looking to add to its reserve base in order to provide the basis for expanding production capacity and extending existing gas contracts.
Exhibit 6: 2P gas reserve growth bcf
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Source: Edison Investment Research, Canacol Energy
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2019 capital commitments include an eight-well exploration, appraisal and development programme. This includes the Acordeon-1, Arandala-1 and Saxofon-1 exploration wells. Management has not disclosed prospective resources for these well locations, but conservatively assuming c 20bcf recoverable (mid-case) per appraisal/exploration location (six in total) and a 45% chance of exploration success, we estimate that this programme has the potential to add c 60bcf of reserves, and significantly higher if exploration success rates are in line with recent historical averages at c 80%.
Exhibit 7: Canacol existing gas field, prospects and leads
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The direction of exploration capital is likely to be driven by a combination of factors, including seismic data access/quality, block fiscal terms and available tax offsets/losses. A summary of key royalty terms is provided below by exploration block. The government posted tax rate is currently 33%, reducing annually by 1% before reaching a rate of 30% by 2022. This rate is before applicable offsets.
Exhibit 8: Royalty rates by exploration block with existing discoveries
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Canacol equity interest |
Production based royalty rate |
Overriding royalty |
X-Factor |
VIM-5 |
100% |
6.4% to 20% |
3.5% |
13.0% |
VIM-21 |
100% |
6.4% to 20% |
2.0% |
0.0% |
Esperanza |
100% |
6.4% to 20% |
2.0% |
0.0% |
Source: Edison Investment Research
Lower Magdalena Valley overview
The Lower Magdalena Valley (LMV) Basin is located in the north-west of Colombia and has a history of gas exploration going back to the 1950s. The LMV is a forearc basin created by the convergence of the Pacific and South American plates and is limited by the Bucaramanga–Santa Marta fault system to the east, the Central Cordillera to the south and the Romeral fault system to the west. The primary reservoir in the basin is the Cienaga de Oro (CDO) formation, which consists of thick (up to 5,000ft) marginal marine clastics of Eocene to Lower Miocene age. Rivers deposited the sands in deltaic systems, which sit directly on basement and are overlain by thick marine shales of the Porquero formation, providing an effective seal. The source of the dry gas is generally thought to be source rocks in the Porquero and the CDO. The area has experienced a complex tectonic evolution since the Cretaceous, which has produced areas of faulting and compartmentalisation.
Exhibit 9: Exploration prospects and leads
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The company produces from the CDO in the Nelson, Palmer, Trombon, Nispero and Canahuate gas fields in the Esperanza block and Clarinete and Oboe in VIM-5, while Pandereta and Chirimia are expected to come onstream imminently. Canacol also produces gas from the shallower, lower-pressured Porquero sandstones in Toronja and Breva in VIM-21 and from the Nelson-6 well. Canacol confirmed the commerciality of this new exploration play type across its acreage with the drilling of Nelson 6 in 2016, designed to assess the deliverability of interpreted by‐passed gas pay in the Porquero, as seen in offset wells within the Nelson gas field. The well encountered 41ft net gas pay with an average porosity of 19% in the primary Porquero reservoir target and flowed gas at a stable rate of 23mmscfd.
High historical exploration success rates
Canacol has achieved a high exploration success rate by identifying gas charged reservoirs from seismic data where possible. The company has benefited from the availability of extensive 2D and 3D seismic data, extending in vintage from the late 1990s to 2012 and acquired by previous operators in the region: Pacific Rubiales, OGX and Shona Energy. Canacol uses AVO methodology to look for the difference between gas-bearing and water-bearing sandstones on logs, and, once calibrated with seismic, believes it can identify gas sands down to a minimum thickness of 35ft. This process has limits, however, depending on the availability and quality of the older acquired seismic data. The company has refined this technique mainly for application in the CDO, with the Porquero at a less mature stage due to the smaller number of data points available to date.
Exhibit 10: Historical exploration and development well success rates
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Source: Canacol Energy, Edison Investment Research
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Exploration success rate dropped to 67% in 2018, with two out of the three exploration wells drilled that year producing disappointing results. Gaiteros-1 was targeting a large structure to the north of Pandereta. Although the prospect did not exhibit a fluid factor attribute, it was considered worthwhile drilling due to the very large prospect size. Despite encountering a very thick sand section, gas was not found and this lack of gas has confirmed the company’s amplitude versus offset (AVO) model. Borojo-1 did exhibit a fluid factor event, but was dry. Canacol now believes that the prospect, which was located in a downthrown fault block, had suffered due to historical production from the offset productive horst block. This has resulted in a re-prioritisation of the portfolio to avoid targeting downthrown blocks that have seen historical production updip.
Eight-well programme in 2019
In 2019, the company is planning an eight-well programme of exploration, appraisal (six wells) and development wells (two wells). The first of the exploration wells, Acordeon-1, is due to commence drilling in Q119.
Exhibit 11: Acordeon prospect depth structure and seismic section highlighting AVO event
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Acordeon-1 is located 3km from the Clarinete and Chirimia discoveries in VIM-5. The well is in a crestal position and, if successful, the company intends to immediately drill follow-up locations in nearby downthrown fault blocks (shown as A-2 and A-3 in Exhibit 11). Three further targets along the crest (Acordeon-A,-B,-C in Exhibit 11) would also be de-risked by success in Acordeon-1, and would be drilled at a later date as these would need to be from a separate drill pad that has yet to be constructed.
In the event of follow-on drilling at Acordeon, it is likely that the remaining 2019 exploration wells would be delayed into 2020. Arandala-1 sits in VIM-21 and was de-risked by 2018’s Breva-1 discovery in the Porquero. Saxofon-1 will target the CDO in VIM-5.
While Canacol already has an extensive acreage position, extending to more than 593,000 hectares, an opportunity exists to participate in upcoming licence rounds in order to expand this footprint, providing the basis for further production expansion as well as a forecast gas deficit along the Caribbean Coast.
Unconventional assets in portfolio
Canacol also holds a 20% WI in two blocks, VMM-2 and VMM-3, in the Middle Magdalena Valley Basin (MMVB), a north-south trending basin in central Colombia. The MMVB is Colombia’s most explored conventional oil and gas producing basin, with over 40 discovered oil fields that produce from Tertiary sandstone reservoirs. However, the principal source rock for the basin, the Cretaceous La Luna, is now the main focus for shale exploration in the region.
The La Luna shale is similar in age to the Niobrara shale play in the US and is organic rich, with an average TOC of 5% and also highly overpressured. In 2018 DeGolyer & MacNaughton independently assessed P50 resources of 168mmbbl in VMM-2, VMM-3 and Santa Isabel, with an upside of 263mmbbl. Operator ConocoPhillips applied for a licence to drill and frack six horizontal wells in VMM-2 and VMM-3 in late 2017 and expects permission to be granted in early 2019. Any activity will take place once ConocoPhillips is able to evaluate the experience of Ecopetrol, which is due to carry out the first multi-stage fracks in the region in 2019.