IT’S HAPPENING

Colombia 2015 | ENERGY & MINING | FOCUS: ECOPETROL

Ecopetrol's losses at the end of 2014 had resulted in a 40% annual decline in revenues, marking the company's first-ever recorded loss. The main reason for this was the price of oil, which fell by almost 50%.

NEW BLOOD

Ecopetrol's change in management structure, including the appointment of 37-year-old Camilo Marulanda as the Executive Vice-President, surprised some observers. Yet Marulanda has worked in the company and industry for over 15 years in all areas of operation from production to refinery. He brings a necessary perspective of the changes facing the company, many of which are unprecedented in spite of the turbulent market conditions of the past 15 years, including the Colombian commodities boom following the appointment of the now departing President Javier Gutierrez in 2006, and the alarming descent of the bourse over the past six months. The group's subsequent scaling back on the exploration has proven divisive, both from a long-term sustainability perspective, and also in terms of generating foreign investment.

STRATEGY AND BUDGETING

The roadmap and growth strategy that Ecopetrol implemented in late 2014 was aggressive, to say the least. To put it in perspective, over the past seven years the combined investments of Ecopetrol had reached $46 billion. In 2014 alone, Ecopetrol planned to invest $10.6 billion as well as an additional $69 billion between 2014-2020. And for 2015 Ecopetrol plans to invest $7.8 billion, marking a 25% YoY reduction in the budget. These ambitious projections have brought into question the future rate of production, and more contentiously, the need for continued exploration and the incorporation of new reserves.

Ecopetrol's plan to augment production to 1.3 million bpd by 2020, up from the 788,000 produced in 2013 assumes that more resources will be found, despite currently stagnant exploration conditions. However, by March 2015, the strategy conceived by Ecopetrol's management seemed to have yielded results in line with production at the country's principle reserves. Castilla and Chichimene, increased by over 8% and 25% respectively, and the costs of perforation per well fell by 40% due to ongoing austerity measures.

These prudent measures were made by the group's newly-appointed executive and board, and entailed a significant reduction in dividends paid out, the conference in late March proposed the distribution of some 70% of revenues as dividends, and the continued reduction of this rate over the next few years. A more controversial decision was Ecopetrol's announcement of the cancelation of the Campo Rubiales tender that had envisaged ceding operation to energy giant Pacific Rubiales, in favor of its own operation of the well—a field where production has been declining for some time. Unsurprisingly, this was not well received by the markets. The perceived message of Ecopetrol's keenness to usurp other companies' production in favor of stability stands to dampen investor enthusiasm for the short term.

This reluctance to give exploratory incentives has proven to be a cause for concern for organizations such as CamPetrol. The APC have been broadcasting their concerns about this strategy and the state of affairs in the industry. Following an interview with the Asociación Colombiana del Petróleo (ACP) in March, the ACP identified 11 measures that needed to be taken by the Ministry, the ANH, and Ecopetrol in order to ensure that future reserves were not at risk. The organization also found that sector players had decided to cut investment in exploration by 47%, and 22% in production for the coming year, due to the pricing crisis, the prospects of tributary reform, and the weight of operational costs. Indeed, this raises the question of whether the incorporation of future reserves is in danger.

With Juan Carlos Echeverry and Marulanda at the helm as of early April, the pressure to deliver new findings on newly integrated sites is enormous. However, the group's investments in offshore exploration at Kronos and Calasu, which are in their preliminary stages, appear promising. All eyes are on the two new leaders to meet the challenge of integrating new reserves and consolidating the company's production.