Why the world will need Latin America's clean oil in 2023

There is a widespread assumption that the world is on an irrevocable energy transition that will move us out of the oil age. The idea is correct but there is one problem – few people realise how long it will take.  Yes, we desperately need to reduce emissions of greenhouse gasses (GHGs). But that requires a gigantic, multi-decade investment programme to electrify the global economy. To build that new, all-electric infrastructure we need to use the best tools at our disposal – and at present oil and gas are, by far, the most powerful, flexible and cost-efficient fuels we have. The quickest way we can cut GHG emissions, while building our green, new world, is to use the cleanest oil and gas available.

Clean oil

Once you face the reality that the world will still be producing billions of barrels of oil per day in 2050 then the next step is to make that fuel as low-carbon as possible. And that’s where Latin America comes in. Home to 20% of the world’s oil and gas reserves, but less than 10% of its people and GDP, the region is a natural exporter. It also contains some of the ‘cleanest oil’ in the world. This concept isn’t widely understood by the general public but as ESG principles become more important for institutional investors, they are allocating their capital to energy companies that mitigate their environmental impact and have a positive social influence.

The most established measure of oil’s impact is the C02 emitted in the process of making each barrel. On that criteria South America scores very well. Each barrel of oil produced in Argentina’s Vaca Muerta shale basin, emits 15.8 kg of C02 per barrel, well below the global average. Indeed GeoPark, an NYSE-listed, independent Latin America-focused oil and gas E&P that produces oil onshore in Colombia, Ecuador and Chile emits 19.6 kg of C02 per barrel. To give some comparisons with other major oil producers, the US emits 19 kg of C02 per barrel, Russia 20 kg, Canada 36 kg and Mexico 44 kg. So, if the world still needs oil but wants to reduce emissions the solution is simple – replace the dirty oil with cleaner onshore Latin American crude.

“The energy transition can’t happen without reliable, clean oil and gas, so it doesn’t make sense to starve the industry of capital,” says Andrés Ocampo, CEO, GeoPark. Indeed, high oil prices hit renewable energy because they make it less competitive as an investment. The solution is to have thriving oil and gas companies like GeoPark that can produce low-cost energy and invest excess returns in positive social and environmental impacts. Embedded in our five-year plan is a commitment to reduce carbon emissions by 40% over the next three years. Hopefully we can do even better.”

If the world wants to cut emissions during the transition it needs companies like GeoPark to increase production. “If we implement our five-year plan, we can grow organically to between 55,000 boepd and 60,000 boepd over that period,” says Ocampo. “That growth will be delivered by developing our own assets and unlocking our high-potential portfolio. We drilled around 50-55 gross wells last year, 35-40 of which were development wells and 15 were exploration wells in core areas. It is the most ambitious exploration campaign in the history of the company and we can keep up that pace of drilling back-to-back, low-risk, high-potential wells.”

"Growing at 10% CAGR is good," says Ocampo, “but we believe we may be able to grow even more. Our average chance of exploration success is approximately 15% to 45%. If our results are better, then our annual growth will exceed 10%.”

Social footprint

That sort of scale creates a large social footprint from people living next to projects, to Colombian taxpayers hundreds of miles away. “The Colombian government is GeoPark’s largest stakeholder,” says Ocampo. “We have invested $1 billion in capex in the country and plenty more including opex.” The communities are also part of every GeoPark project. “It starts with companies realising that even though you have a state license to operate that doesn’t mean you have the full acceptance of the community,” says Ocampo. “The communities are our neighbours and we make them partners in our projects. We make sure that everyone is informed about what we are going to do, and we take seriously their views and priorities. We have committed all the necessary social investments, such as our “Sustainable Housing” program in Colombia, but that doesn’t guarantee you acceptance. The key is to involve the communities and work with them through the decision-making process and development of solutions.”

“We drilled our first well in Llanos 34 in February 2012 and a decade later we are drilling approximately 30 wells per year in the block. With a project of that scale, you need to work hard to ensure that local people’s lives are not being negatively impacted and that the community is involved and benefits from the project.  Fully 89% of our workforce in the field is hired locally and when workers don’t have the necessary skills, we train them to be part of our team. We also support the community to explore and develop businesses in areas different from the oil industry so there will a sustainable economic growth model by the time the project enters its final phase."

"It is not always the size of the project that determines the impact. An operation might look small from headquarters but it is the impact felt by the people in the territories where we operate that matters. In Llanos 34, where we have been for ten years and have drilled 150 wells, we have worked to consistently reduce our environmental footprint. We trucked most of our oil in the early years of development, but we have since built a pipeline that has reduced the impact on our neighbour’s surroundings, cut our CO2 emissions and provide additional operational reliability.”

The world needs oil and gas to fuel an energy transition that will take decades to complete. But we can’t wait that long. In the meantime, we need to reduce emissions by allocating capital to the low-carbon oil and gas producers. Well-run Latin American energy companies should benefit from the inflow of capital while helping the planet.