Publish in Perspectives - Wednesday, July 12, 2017
With no recent major discoveries in Colombia, Ecopetrol must look beyond Colombian land for exploration, but Colombia will likely remain its main focus, experts say. (Photo: Ecopetrol)
What is Ecopetrol’s plan to expand at home and abroad?
BY ENERGY ADVISOR
Colombian state-owned oil company Ecopetrol, in partnership with Mexican state oil company Pemex, won a stake in two oil and gas blocks up for auction during Mexico’s shallow-water oil and gas tender June 19. The move was Ecopetrol’s first foray into Mexico’s oil sector. To what extent will Ecopetrol pursue investments abroad as opposed to at home? What challenges does the company face amid persistently low oil prices, and is it taking the right steps to adapt to the environment?
David Ross, global fund manager at La Financiere de l’Echiquier in Paris: With no recent major discoveries in Colombia, companies must look beyond Colombian land for exploration. For Ecopetrol, winning two shared blocks in the desirable Mexican shallow-water Southeastern basin is an encouraging start. However, these wins are not significant enough to arrest Ecopetrol’s decline. The giant Rubiales field, which provides 20 percent of Ecopetrol’s production, is in rapid decline, with production dropping by one-third over the last four years. The decline is so sharp that it is estimated that water is now 95 percent of what is being pumped, and the field may have an economic life of only five years. New production forecasts are bleak.
Ecopetrol’s own plan implies that new wells will comprise about 5 percent of its anticipated 2020 production, with enhanced recovery techniques in existing wells being the largest contributor to production. I believe Ecopetrol’s long-term plan of using cash flows from its downstream assets to support its upstream exploration and development efforts is the wrong strategy for the company. With an exceptionally low reserve life of just 6.8 years and a poor exploratory track record, Ecopetrol should stop trying to be an integrated major and instead view itself as a midstream/downstream company. Rather than continuing value-destroying exploration investments, it should use current production as a cash cow to support growth in areas of strength. Colombia is a net importer of refined products, such as gasoline and diesel; Ecopetrol should be investing more in its refining and distribution business and leave the exploration and development to more capable companies.
Jorge Lara Urbaneja, practicing at LaraConsultores: Colombia was never an important oil-producing country, even though it is adjacent to Venezuela, with the largest oil reserves in the world. It has been said that Colombian topography impedes formation of large oil deposits that attract exploration activities. This is a wrong explanation. The fact is that more than half of Colombia’s territory is flat, where most of the existing oil fields are located. Really, laws and regulations have obstructed the investment and growth of the oil industry, which requires the active and continued participation of innumerous specialized companies and individuals. But, to get the picture, there was a crude price control imposed in Colombia that banned exploration and exploitation during the 1960s, when the oil industry had its major impulse worldwide. There was a short period when Colombia’s oil industry grew because of the participation of Venezuelan entrepreneurs and experts fired by Chávez from Venezuela.
Then, Colombia was mistakenly labeled as a major oil-producing country. The truth is that Colombia is fast reducing oil production, and the reserves may be exhausted in five years. Moreover, laws and regulations like those on environmental licenses, community participation and popular decisions to ban mining and oil activities in large portions of the territory, may finish the oil industry and legal mining in Colombia in the foreseeable future. The president of Ecopetrol, who has to manage an oil company and not Colombia’s energy policies, is doing fine in pursuing this project in Mexico, a country that is back from protective and regressive oil policies.
Walter Pesenti, managing director at Berkeley Research Group: Ecopetrol is addressing the goals set forth in its 2020 business plan, allocating more than 80 percent of investments to profitable exploration and production projects. These projects will largely focus on developing key production assets and identifying Colombian onshore and offshore resources, maintaining their position in foreign assets. More than 95 percent of investments will be made in Colombia, with the remainder made abroad.
Ecopetrol had an outstanding first half of 2017. The company’s strategy is working and delivering results. It has overcome challenges to achieve profitable and safe operations, as reflected in its financial results.
Average production was 712,000 barrels of oil equivalent per day. During the year, public order situations and operational incidents have occurred, such as the temporary closure of the Caño Limón-Coveñas oil pipeline, which negatively affected production. The pipeline returned to normal on April 7. We also note the positive performance of Hocol and Ecopetrol America, which significantly increased their production by 23 percent as compared to the first quarter of 2016. Reficar completed tests of four additional plants for a total of 25 units, 74 percent of the refinery’s 34 units. The Barrancabermeja refinery saw stable operations, establishing itself as an efficient and profitable refinery.
Sales strategy helped capture market opportunities for international sales, generating a significant improvement in Ecopetrol’s export basket. The transport segment has consolidated its business integration. The reversion of the Bicentenario oil pipeline was completed, allowing it to carry crude from the Caño Limón field and thus mitigate the impact of eventual closures of the Caño Limón-Coveñas pipeline. During the quarter, successful tests were carried out on the transport of heavy crude at 600 centistokes (a measurement of viscosity), and the company will continue with the goal of extending this capacity to other oil pipeline systems.
Ecopetrol remains focused on being a profitable company, committed to the country’s development and care for the environment. It will continue to follow its strategic plan as a roadmap for delivering results aimed at value creation and sustainability.
José Vicente Zapata, partner at Holland & Knight in Bogotá, Colombia: Regarding the development of the expansion in the international market, it is important to note that Ecopetrol qualified to participate individually and jointly in the 15 offshore blocks offered by the Mexican government. It is clear that Ecopetrol has relevant increasing interests abroad, but there is no reason to [doubt] that its main objectives continue to be in Colombia. This will not change in the short term in our view. Currently, Ecopetrol faces great challenges vis-á-vis oil prices, which have involved a reduction of expenses in the different stages of the production chain, leading the company to rethink its strategy within the new realities of the marketplace.
Ecopetrol’s production is expected to be lower in 2017 than 2016, due to: 1) the temporary closure of the Caño Limón-Coveñas oil pipeline, 2) the decline of the currently active wells and 3) the reduction in sales of natural gas and a decrease in reserves.
Nonetheless, production is expected to recover in the coming years, due to increased investments (which will be used to develop the national and international exploration activities) and based on different projects that the company has decided to address to increase the recovery of the fields it currently has in operation. Ecopetrol has further approved its 2017-2020 plan, which signals a strong focus offshore as well as in mature basins. Similarly, Ecopetrol is interested in improving the operation in the main active fields that it has, such as Rubiales, Quifa, La Cira Infantas, Castilla, and Caño Sur. Regarding its international scope, Ecopetrol is interested in increasing its portfolio in the Gulf of Mexico, Brazil and Mexico (e.g. Round 2.1. in Mexico).