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My equity portfolio has been very focused on oil equities for a few years now. Generally I like to stick with companies that operate in the United States and Canada. The reason for this is simple, I just don’t possess the brainpower to fully understand the risks that various foreign jurisdictions hold.

A key rule in successful investing is if you don’t understand something, avoid it.

There is however one foreign country that I do have exposure to and may increase my exposure to. That country is Colombia.

Why Colombia? Isn’t it risky?

Yes, Colombia certainly carries more risk than investing in oil companies that operate in Alberta and Saskatchewan. But it is important to differentiate between the types of risk that an investment in Colombia is exposed to.

Physical Risk – This would be risk to facilities, workers and equipment. Investing in Colombia certainly carries this kind of risk.

Political Risk – This would be the risk that the government expropriates property or cancels existing contracts. You might be surprised to learn that this type of risk has historically been non-existent in Colombia.

Consider the following excerpt from the 2007 Annual Report For Colombian focused Petrominerales (OTCPK:PMGLF):

In the globalized world of international oil and gas investment, the concept of political risk is sometimes misunderstood. When we speak of true political risk from Petrominerales perspective, we are talking about the possibility that we might experience: expropriation or creeping expropriation of our assets; unilateral or confiscatory changes to our contracts; unilateral or confiscatory changes to the existing fiscal regime (typically increases in taxes and royalties payable); restrictions on the flow of capital or the conversion of local currency; confiscation of our assets; or political violence, or incarceration being threatened against our employees.

“The actual circumstances we have experienced in Colombia vary widely from opinions freely expressed by “experts”, investment advisors or potential investors regarding the climate for political risk in Colombia. The Colombian government’s Energy Ministry can point to a spotless record of respect for the sanctity of contracts and a more than 50-year history of attracting and respecting international investment without creating a single incident of true political risk. Many neighbouring countries in Latin America have chosen to take a more interventionist route in the oil and gas industry, but Colombia proudly stands out as a true partner with an outstanding track record. Ironically, many of our shareholders cannot look to their own governments with the same level of confidence that we have in Colombia.”

Physical risk is of course a serious concern. But companies can repair damaged pipelines and wait out road closures. The oil in the ground will still be there. Political risk is what can turn an investment into a zero, and in the case of Colombia that risk appears limited.

What Colombia offers is an ideal scenario for oil and gas exploration. That scenario is low political risk combined with extremely underexplored acreage in a highly prospective oil region. Petrominerales management has frequently stated that the geology in Colombia is very similar to the geology of Alberta. The key difference is that while Alberta and the Western Canadian Sedimentary Basin has had 500,000 wells drilled into it Colombia has only had 10,000.

There is a lot of oil in Colombia waiting to be discovered.

The history of Petrominerales shows what can happen when an oil company starts spending some capital and drills up prospective Colombian acreage.

Petrominerales acquired most of its acreage in 2005, and from a starting point of about 1,000 barrels a day of production Petrominerales has had the following average daily production figures for each of the following years (as detailed in the most recent company presentation) :

  • 2006 – 2,500 barrels per day
  • 2007 – 5,000 barrels per day
  • 2008 – 11,000 barrels per day
  • 2009 – 22,500 barrels per day
  • 2010 – 37,000 barrels per day
  • 2011 – 39,000 barrels per day

All of this oil was there just waiting for someone to direct some capital at it. Through the end of 2010 this drilling had resulted in Petrominerales being able to book 53 million barrels of proved and probable reserves, 98% of which are light oil.

That is a very impressive six years, but Petrominerales may be on the verge of another step change in reserves and production. Petrominerales currently has three separate exploration targets where work is underway any one of which if successful could increase reserves by 50% to 100%.

Target #1 – Deep Llanos Basin Foothills

Petrominerales is drilling its first of eight prospects in the Foothills region of the Deep Llanos basin. Each of these eight prospects if successful has the potential to be a 25 million barrel plus discovery. One successful discovery would add 50% to booked reserves if it comes in at the low end of its potential.

The Bromelia prospect on block 25 started drilling in October with results expect in early 2012.

Target #2 – Heavy Oil

While the prospect of a large new light oil discovery in the Foothills is very exciting, the true step change in reserves for Petrominerales is likely to come from its heavy oil block Rio Ariari.

Petrominerales has 900,000 acres that are promising for large heavy oil accumulations. According to Petrominerales the company has 5 separate 50 million barrel plus prospects. The company has already made multiple oil discoveries on the block and are currently putting together a commercial development plan.

What makes the Petrominerales heavy oil property exceptionally attractive is the royalty term that was agreed to with the Colombian government. When Petrominerales acquired this acreage they did so with a 0% additional royalty because back in 2004 Colombia was trying to stimulate interest in exploration. The average royalty on prospective heavy oil blocks nearby is 24%.

Target #3 – Peru

In addition to controlling a massive 2 million acres of prospective oil acreage in Colombia, Petrominerales also controls 5.4 million net acres in Peru.

The first exploration well at the La Colpa 2X target has commenced drilling with results expected in February of 2012. Like the Foothills prospects these Peruvian targets are of the 25 million barrel plus variety. And according the Petrominerales the company has identified 30 such prospects in Peru to go after.

Stock Price Assumes No Exploration Success

I came into 2011 owning Petrominerales after the company was spun out of Petrobank. I sold my Petrominerales shares for roughly $42 because at that price there was a considerable amount of exploration success factored in.

Since then Petrominerales like many smaller oil producers has sold off in a big way. I started buying back in around $22 because at that price the market is basically valuing only the 52 million barrels of already booked reserves and no exploration success.

Today you can get an even better price as shares are down well under $20.

Early in 2012 we should get results from the three big prospects Petrominerales is currently working on. Success on any one of them will be a major catalyst to move the stock higher. And the incredible thing about Petrominerales and other Colombian explorers is that there are plenty of additional prospects to go after once these targets have been explored.

Source: Petrominerales Has 3 Exploration Plays That Could Double Oil Reserves In 2012