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Juan Carlos Echeverry assumes the CEO position of Ecopetrol as it faces lower oil prices and problems raising reserves and hitting production targets. (Photo: Colombia Government) 
Wednesday, April 1, 2015

Colombia: Ecopetrol’s Challenging Outlook

Ecopetrol’s new CEO faces major local and external challenges.

Inter-American Dialogue 

Colombia's state oil company, Ecopetrol, on March 5 named Juan Carlos Echeverry, a former finance minister in the current government, as its chief executive at a time the company is facing increasing headwinds including a lack of new discoveries and lower world oil prices as well as share prices that have fallen more than 50 percent over the last year. What are the most pressing issues Echeverry will have to address when he assumes the new position in early April? How much are lower oil prices affecting Colombia, and what are the mid- and short-term outlooks for the nation's hydrocarbons sector?

R. Kirk Sherr, member of the Energy Advisor board and president of Clearview Strategy Group, LLC: In early March, Ecopetrol followed the examples of both Petrobras and Pemex and named a
finance expert to head the company and to tackle a daunting list of problems, both near-term and long-term. Immediate issues include the full gamut of operational problems: pending labor strikes, nagging corruption investigations, asset sales to stabilize its balance sheet and community protests around local projects. Addressing these issues while maintaining production levels will be both a political and a management challenge. The underlying long-term issues, however, are more daunting: improving discovery rates and sustaining profitability after posting a loss in the fourth quarter of 2014. Considering that lower oil prices may be here to stay, this will not be easy. Like all oil companies, lower oil prices forced Ecopetrol to cut its 2015 investment budget more than 20 percent. The exploration budget was slashed by two-thirds from 2014 levels to just $503 million. At the same time, low crude prices are forcing both Ecopetrol and foreign companies to re-evaluate Colombian production costs. Unconventional development plans (shale oil) may be especially hard hit. Clearly though, both Ecopetrol and foreign operators will need to revise Colombian investment plans if crude prices remain in the $50 per barrel range. The bottom line: efforts to tackle these complex problems in a low oil price environment may force the government to take a hard look at Ecopetrol's status as a primarily state-owned company.

Daniel E. Velandia O., head of research and chief economist for Colombia at Credicorp Capital in Bogotá:
Juan Carlos Echeverry will have to address significant issues amid a tough scenario for the sector, not only because of the current environment of lower oil prices, but also due to structural difficulties in recent years. Indeed, the company's 2014 results were strongly affected by external factors such as social unrest, delays in granting licenses and violent attacks on transportation infrastructure by illegal groups. The combination of these structural problems and current oil prices implies a hard road ahead for both the oil sector and Ecopetrol in terms of their main challenges, namely, adding reserves and production. Ecopetrol currently has 8.6 years of oil reserves, well below its peers (around 11 years), while oil production has been relatively stagnant for the last three years at around 760,000 bpd. Hence, Echeverry will have to carry out the required adjustment of the company in the current scenario of low prices while dealing with the existing domestic issues in order to increase both production and reserves in the coming years. As structural issues in the Colombian oil sector are predominantly political in our view (communities and licenses), it is possible that Echeverry may achieve some advances there given his relationship with the current government. Overall, beyond Ecopetrol, the outlook for the oil sector in Colombia is challenging for the future. However, we highlight that several studies point toward a high prospectivity (including non-conventional oil) in the country, so the key is for the government and oil companies to work together on solving the social and regulatory problems that have thrown a wrench in the works for the appropriate development of the sector.


Leopoldo Olavarría, partner at Norton Rose Fulbright in Bogotá:  One of the most pressing issues that Juan Carlos Echeverry will have to address when he assumes Ecopetrol's presidency is to prepare the company to take over operations of the Rubiales field (a cash generator) after the association contract with Pacific Rubiales expires. A challenge will be to implement substantial investments in a low-price environment. If Ecopetrol implements an enhanced recovery program, it should benefit from the application of the 8 to 25 percent sliding royalty and increased company take contemplated in the soon-to-be-approved National Development Plan. Low oil prices are substantially affecting Colombia's supply chains and service contractors who are laying off workers. This in turn will likely increase labor unrest as unions become more assertive. The short-term outlook for the sector is very challenging. It will be important to give flexibility to exploration and production contractors to allow them to adapt to the current low price environment. Once Congress approves the National Development Plan, the National Hydrocarbons Agency and E&P contractors will be allowed to amend the latter's work commitments under their contracts. Success in this area will be key to ensuring that Colombia's mid-term outlook improves.


María Claudia Díaz, senior consultant at IPD Latin America in Bogotá: Echeverry takes the reins at a complex time under the scrutiny of a skeptical public. Ecopetrol stock has lost nearly two-thirds of its value over the past year due to lower oil prices and the company's inability to meaningfully increase reserves and hit production targets (1 million barrels per day in 2015). Echeverry's task becomes harder given this year's severely restricted budget. Ecopetrol is slated to take full control of Colombia's largest producing field, Rubiales, in mid-2016 (this would add 70,000 bpd). At that point, the company must choose whether to operate the field directly (as some political forces and unions advocate) or contract a third party. It could look for a partner to share the financial and operational burden. At the same time, asset sales, always a political hot potato, may be necessary. Low oil prices are hitting Colombia hard. The Ministry of Finance expects a 60 percent drop in rent from the hydrocarbons sector in 2015; Colombia government depends on oil revenues for nearly 30 percent of its budget. As a result, public spending is being slashed even as inflation is on the rise. Peso devaluation will provide some relief, but the government will look to new taxes and increased debt to fill the gap. Consistent with global trends, operators in Colombia have already cut their 2015 Capex budgets as a sizeable portion of current production is not highly economic at current prices. Although offshore drilling is the bright spot, onshore exploration projects are largely being delayed or handed back to the ANH. Add the fact that social unrest is likely to increase as a result of massive loss of jobs and that permitting remains problematic, and 2015-2016 does not look bright for the Colombian oil patch.


Republished with permission from the Inter-American Dialogue's weekly Energy Advisor

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