What new initiatives is Canacol currently involved in?

GAMBA: In Colombia, the main exploration initiatives involve non-conventional shale oil in the Middle Magdalena Valley of Colombia, which really has some good potential in terms of unlocking a new type of resource for Colombia. On that plain, we partnered with ExxonMobil, Shell, and most recently, with ConocoPhillips. This is probably our largest initiative at the moment.

What are your future plans for expansion throughout Colombia and Ecuador? How do you see this progressing over long-term?

GAMBA: We currently hold interest in 26 exploration and production contracts. 25 of them are in Colombia and 1 in Ecuador. With our development and drilling program in our 7 producing oil and gas fields, we are looking to average about 8,000 BOE per day this year. Our current 2P reserves base is of 33m, which we are looking to increase by 10%, primarily through exploration and drilling. We are drilling 15 wells in total this year, both with exploration and production. We will continue these drilling programs into 2014 and 2015, with an effort to try and raise production above 15,000 barrels per day by 2015. In terms of jurisdictions, Colombia is the best place to be for us. Obviously the majority of our assets are here. We do look pretty critically at producing opportunities in both Peru and Brazil. Our long term goal, really, is to become a fairly significant player in South America and most importantly in Colombia. At the moment, with our land base and reserve base, we are about the 5th largest publicly traded producing company, excluding Ecopetrol of course. Our plans beyond 2015 are simply to continue and achieve the historical growth that we have had going forward.

Colombia currently holds roughly 2.3 billion barrels of oil reserves. As a result, the government has been focusing on the further development of the E&P segment in the oil and gas sector. What role do juniors play among the majors in Colombia’s efforts to increase exploration and production in the upstream segment? How do you see this role evolving over the next 2-5 years?

GAMBA: The juniors have a very important role in Colombia, primarily on the exploration side. It is mainly junior oil and gas companies that are doing the bulk of the exploration and in order for Colombia to replace its production, which, as you know, this year will average 1m barrels per day, it is pretty critical that new conventional and non-conventional exploration discoveries are made. The juniors’ drills, as a whole, are by far the majority of explorations each year in Colombia. So I would say that the part of the juniors is very important in this particular country. I think that as the country becomes more mature in terms of conventional production, we will see more and more juniors entering, simply because mature production and increasingly smaller field size will not be of interest to larger international exploration companies. I think that the playing field is ripe here, and this proves to be very fair for junior oil companies too, as they can compete on an equal basis with their majors. This is with the particular exception of non-conventional shale oil, which is definitely within the realm of the majors. However, I see that evolving with time. Initially, it would require the technology and experience of the majors to test and commercialize shale oil, but as it has been the case in the USA, once the concept has been proven and the technologies brought in, you will see increasingly smaller players taking a significant position with these types of resources.

Canacol currently has interests in 26 exploration and production contracts. Which contracts are proving to be the best potential for growth in production?

GAMBA: The best potentials are some of our assets in the Llanos Basin, Rancho Hermoso field, and our recent discovery on Llanos 23 of the Labrador field. These 2 assets contain significant potential for rapid production and growth in the short to mid term. The discovery we made 5 years ago in the Caguan Basin, called Capella, which we are developing with Sinochem, is one of the largest conventional heavy oil fields and contains 1.8bn barrels of heavy oil. This one has proved to be a very significant potential for our long term goal. Our plans, along with Sinochem, are to raise and put that field beyond 50,000 barrels per day in 2017. These are very significant projects, but again more in the mid to long-term type of ratio. In Ecuador, we have a non-operating working interest in some mature fields that have demonstrated a very good level of production and growth. In fact, we added 1,000 barrels, which have net in the period of the past 9 months. For the next 2 years, going forward, we look at that type of production outside of Ecuador too. Let’s say that our producing assets are such that some of them expose us to short to medium term production gains. At the same time we have a very large conventional heavy oil resource base, which will take care of the mid to long-term growth of the company.

How competitive is the energy sector in Colombia? What are Canacol’s competitive advantages over other industry players with regards to obtaining both conventional and unconventional contracts from the ANH?

GAMBA: One of our big advantages consists of the fact that we were here relatively early and we managed to acquire a very significant acreage position in the most prosperous lands prior to the real competitive phase in 2010 through 2012. We currently find ourselves with 25 contracts here in Colombia. As I mentioned, we are the 5th largest holding position of any publicly listed company here in Colombia. We happen to have a very large land positioning. We have been operating in Colombia for 5 years and have a very experienced and knowledgeable technical and exploration staff, who has been very successful in discovering new conventional oil fields and bringing them on to commercial production very quickly. So, I would say that our competitive advantage is based on our presence, the magnitude of the acre positioning and our very experienced, entirely Colombian, technical operation team here in Bogota.

What are the main challenges that you are currently facing throughout the industry? How would you describe the current state of infrastructure security throughout the energy sector?

GAMBA: In this particular cycle, Colombia is a bit of a downside with respect to oil and gas exploration and production for a variety of factors. Historically, there have been some issues with the delay in permits from the Ministry of the Environment, which has really slowed the pace of exploration in some respects. The security situation continues to be one that has to be handled very carefully on the part of foreign operators here in Colombia and that creates a market environment where we have seen the valuations come off of publicly listed E&P companies here in a significant way. Hence, it is a good market right now to make very good acquisitions over attractive metrics. Fundamentally, the outlook for oil production remains very high in Colombia, so it is an attractive destination for investment. I think that once the issues with permits and security are addressed and bettered, we will see a return of the competitiveness that dominated this area from 2009 through 2011. Three or four years ago the process to obtain a license took about 4 to 6 months, including applying and receiving a permit, drilling, and exploration. Based on the enormous amount of activity that was happening here between 2008 and 2011, the regulatory body in charge of issuing those permits simply became swamped with an exponentially increasing number of applications and the turnaround time started to drift towards the 12 to 13 month period, which is where they have stabilized. Now, fortunately, the regulator has put in additional resources and the turnaround time has started to decrease. So, hopefully in 2014, we will see a return to the 4 to 6 months type of turnaround, although it has been a problem in the past 2 years. The major challenges that we face, aside from the regulatory issue that we discussed earlier, are related to the lack of infrastructure, particularly the oil and gas pipeline at full capacity, which results in us having to transport pretty large amounts of crude oil via track to sales points as far as 300km away from producing fields, which significantly increases the expense and erodes the netback. That is quite a challenge for us. There are some oil pipeline projects ongoing. There is a pipeline project led by Ecopetrol, of which we are part of as a member of the Consorcio, called Oleoducto Bicentenario, which is going to provide another 150,000 barrels per day of export capacity out of the main producing fields based in the Llanos. This has been delayed for quite some time. However, it is going to come on stream in July or August this year. The ultimate aspect concerns the communities. It is always very important to properly manage and interact with the communities, as we draw our labour pool from there and these communities live in the areas around our operations. We always try to maintain a very careful relationship with the communities. In the recent past, as the level of investment in Colombia has increased with an increasingly large number of ongoing operations, the communities expect a larger participation, certainly in local labour, social operations, as well as various well-being projects to improve their standards of living. Those issues always have to be carefully managed, especially in light of the new royalty structure. Previously, oil-producing royalties went to the particular state in which the operations were taking place, whereas now they flow to the federal government, which redistributes them more evenly across Colombia. This is a very sound policy from the part of the federal government. However, it has resulted in some inconveniences in some of these states, as they used to have larger royalty stakes. Communities naturally tend to look towards the producing companies to make up the shortfall, which we attempt to do to the best of our capabilities. That is an issue that is going to remain. It is a relationship, which has to be handled very carefully and on a constant basis of dialogue.

What are your prospects for further collaborations or partnerships?

GAMBA: We partnered with some of the largest oil companies in the world outside of Colombia, particularly for the non-conventional shale oil play, with Exxon, ConocoPhillips, and Shell. We will be drilling 3 wells this year entirely in that resource, so we have quite a few catalysts on that front. In Colombia, we partnered also with Ecopetrol and Pacific Rubiales. We have very strong partners here in Colombia and the majors continue to be attracted to various opportunities on the exploration blocks. We are currently in a number of discussions with those partners for additional opportunities. Our portfolio is big enough and diverse enough to be of interest for a variety of players.

What new and innovative technologies is Canacol currently implementing in Colombia? What opportunities exist for the further extraction of shale oil and shale gas? How is Canacol positioning itself in order to take advantage of this situation?

GAMBA: We use pretty standard, off-the-shelf type of technology. The service companies in Colombia are exposed to the most modern type of drilling technology that exists worldwide, so we have full access to that technology. That is, horizontal drilling, directional drilling, well completion technology, pumping technology, etc. I would say that we do not do anything particularly innovative with respect to technology. We use off-the-shelf proven technology. Our innovative edge is more on our knowledge of Colombia’s geology and oil producing areas, which we have really used to put together this very diverse portfolio. It is not a technological innovation. It is more of a strategic component of our company. We got into areas that showed very good promise very early, and before they became competitive. This is one of our main advantages here in Colombia. Non-conventional areas are a very important resource. Colombia has a conventional reserve life index of 7 years, which basically means that Colombia will run out of conventional oil, at this rate of production, in 7 years. Just as the US, for the last 30 years was on the downside of a decline curve. The shale oil technology and the shale gas technology, in the US at least, have reversed that trend, where the US might indeed become the next exporter of oil and gas in the near future. Colombia would also have that type of potential. The government and the regulatory authorities, at all levels, are anxious just to get this technology deployed as quickly as possible here.

What are the opportunities available in Colombia in shale oil and shale gas? How is Canacol taking advantage of these opportunities?

GAMBA: We accumulated a net acre position of about 250,000 acres in the Magdalena Valley of Colombia, starting in 2010, based on the prospectus of those basins for thick shale oil deposits. The majors started showing up, first with Shell in late 2010, then Exxon in 2012, and recently ConocoPhillips, just now in 2013, farming into our acre and picking up additional acres of their own. So, we got in a little earlier, a little faster than other players. We managed to pick up some very nice blocks that the majors were interested in, and farmed them out on very favourable terms to us, that is, the majors take the capital risk, deploy their own in-house technological expertise in terms of proving up this resource, whereas, we are simply going to benefit from that relationship, essentially at no cost. Canacol does not have access, financially or technically, to the type of instruments that majors bring to us.

What is your general outlook for 2013 in terms of production and reserve growth? How do you see this progressing over the medium-term?

GAMBA: Currently, with our development and drilling programs, and our producing assets, we are looking to average about 8,000 barrels of oil equivalent per day. Currently, we are producing an average of 8,200 and 8,300 barrels per day, in May 2013. So we are pretty handily going to achieve that particular target. On the reserves side, we entered 2013 with 33m barrels equivalent of reserves and we are looking to grow that by at least 10%. This will be achieved through our exploration programs this year. In Colombia, we are drilling 8 exploration wells. Hopefully 1 or 2 of those will be successful, so that we can bring them into commercial production. We have both reserves and some projects to develop next year, which will continue production and growth.

Colombia is characterized by very good resource potential, a very stable fiscal environment, a very stable legal environment with respect to contracts, and very good operating netbacks. The average netback for oil in Colombia is around 60 USD per barrel, which is a very attractive netback. With the exception of oil price, of course, which is beyond anyone’s control, the netback is unlikely to change much, even next year. So I would say that internationally, for an investment destination, not just in Canacol, as there are a number of other Colombian oil and gas exploration companies listed on various exchanges, but as an investment destination in general, for oil and gas investors, Colombia should be looked at very favorably in comparison to other opportunities, both in South America and worldwide.