"The most important markets are fertilizers, and polyethylene and polypropylene"

Bnamericas Published: Monday, September 30, 2013

BNamericas discusses Colombia’s shale gas potential and the opportunities and constraints for developing its petrochemicals industry with Hernán Cavarra, chemicals analyst at Frost & Sullivan in Buenos Aires.

BNamericas: How far down the road is Colombia in developing its shale potential?

Cavarra: Though in its initial stages in Colombia like Argentina there is a big political commitment to develop shale gas. National oil company Ecopetrol has started drilling the La Luna shale play and has carried out studies in conjunction with the US Energy Information Agency and Colombia’s Universidad Industrial de Santander to define potential resources of 37Tf3 [1.05Tm3] shale gas.

Since 2011 Colombia has offered a numbered of incentives to encourage private investment in shale development as Ecopetrol looks to secure know-how and the large investments required for shale exploration and development. In 2011 the government issued a degree offering a 40% discount on royalties for unconventional projects and higher crude prices and promised to streamline contractual periods, conditions and technical frameworks.

At the end of 2012 Colombia offered around 30 blocks and more than 100 licenses for exploration and drilling which attracted interest mainly from the US and Canada due to existing trade agreements.

BNamericas: What is the potential impact of shale discoveries on the domestic chemicals and petrochemical industry?

Cavarra: It's expected by 2017 Colombia could become a net oil importer and suffer from natural gas shortages. However, if projects are successful and the country produces more natural gas, they'll have a lot of petrochemical projects. The most important markets are fertilizers, and polyethylene and polypropylene.

Ecopetrol did have a big project to develop a new refinery to produce more propylene. They also had a project to develop a world class plant to produce around 1Mt polyethylene but due to the US shale gas boom and petrochemical revival they had to scale back the project to 250,000t as the plan was to be self-sufficient and export the surplus to the US.

BNamericas: How much will shale discoveries in the US dictate investments in exploration and downstream industries in Colombia? What other constraints are there?

Cavarra: In Colombia and Peru, for example, projects have had to be scaled back as a result of the US shale boom as they were based on exports to the US. In the case of Brazil and Argentina projects are still required in order to feed their own industrialization.

Other restraints on developing the shale gas and downstream industries in Colombia include the fact neighbor Venezuela produces a lot of cheap conventional natural gas, Colombia lacks an expansive gas transport system, and historical political violence and labor unrest detract potential investors. There are also the environmental issues surrounding fracking and its impact on water which requires winning public support.

In addition if China’s growth slows, then suddenly a lot of surplus petrochemical products enter the world market and Colombia imports a lot. Free trade agreements also impact the country’s ability to develop its local industries.

However, opportunities could arise from intraregional trade and self-sufficiency projects.

BNamericas: Where is the greatest potential for investments in developing chemicals and petrochemicals?

Cavarra: Colombia’s food export market is growing which will require a lot of polyethylene and polypropylene for packaging. Fertilizer production is very important in the region, and presents opportunities as Brazil and Argentina are expected to have a scarcity in fertilizers. The pharmaceuticals industry is also growing in Colombia and therefore is another market that could benefit from the development of petrochemicals.

BNamericas: Who do you expect to be the principal players?

Cavarra: Ecopetrol is leading the way in developing projects but is open to joint ventures and private participation. Regional companies like Braskem are always looking for new opportunities in the region.

BNamericas: What can the government do to ensure the country benefits from the resources?

Cavarra: They shouldn't only focus on incentivizing extraction but also downstream industries, which provide up to 40% more income than just natural gas and crude oil exports.

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