Although its importance as an oil producer pales in comparison to other Latin American countries, Colombia has managed to significantly increase output over the past decade. That raised expectations, and Colombia aimed to build on its success.
However, thus far, Colombia has fallen short.
Colombia’s main oil company, Ecopetrol SA, has lost more than $120 billion in market value since its peak in 2012. The company’s market cap is down 90 percent to about $14.5 billion today, according to Bloomberg. Back in 2012, there was a brief moment when Ecopetrol was valued higher than oil giant BP, and Ecopetrol was actually the fifth most valuable oil company in the world. Now it has fallen to 38th.
The story of Ecopetrol is one of disappointment for Colombia’s oil sector. The company used to be entirely state-owned, but was opened up years ago in order to boost production. In 2003, the company was freed from acting as the country’s energy regulator, allowing it to focus on exploration and production. A few years later it was partially privatized, opening up the company for international investment. The liberalization also allowed foreign companies to come into Colombia and take 100 percent ownership stakes in oil fields.
The moves are credited with reviving Colombia’s stagnant oil production and dramatically increasing investment. While still not a massive producer, output jumped beginning in 2007, roughly doubling to 1 million barrels per day by 2013. Related: Government Influence Over Asset Prices Growing
However, from there, Colombia’s oil production leveled off. Production has been flat since 2014, and is expected not to move by much through 2016. Ecopetrol’s failure to continue to ramp up output has disappointed its investors.
“They just haven’t found oil, it’s as simple as that,” Rupert Stebbings of Bancolombia SA, told Bloomberg. “The whole oil sector got massively over-bought, and people assumed that one day they’d hit an absolute gusher.” But they haven’t, and Ecopetrol’s stock price has plunged. The company’s share price has fallen by more than half in 2015 alone, the worst performance out of any other oil company in the world with a valuation of at least $10 billion. Related: This Oil And Gas Nation Is Doing Something It's Never Done Before
Ecopetrol announced on December 14 plans to cut spending by 40 percent and lower its production target for 2016. The dividend has been cut by two-thirds since 2012 and it could also be slashed by more than half next year.
Ecopetrol’s share price may not fall all that much further if for no other reason than there is little room left to go. “While we continue to see a number of headwinds for Ecopetrol’s investment case (most notably, poor reserves base, lack of growth and our expectations of a significant dividend cut), we believe these risks are discounted at the current share price,” Alexander Burgansky wrote in a report from Deutsche Bank AG.
But Ecopetrol has a few reasons for optimism, Deutsche Bank says. For one, the Colombian company will take over the Rubiales oil field in 2016. Currently, Ecopetrol has the rights to 60 percent of the production from Colombia’s highest-producing oil field with 40 percent under the control of the Toronto-based Pacific Exploration & Production Company. Pacific was formerly known as Pacific Rubiales, but changed its name in order to reflect a broader portfolio. Related: Tick Tock: Time Running Out for Struggling Oil and Gas Drillers
Ecopetrol decided earlier this year not to extend Pacific’s contract, so Pacific’s share of the field will revert to Ecopetrol’s control in mid-2016. That will add around 70,000 barrels per day in production to Ecopetrol’s output, but the aging field will also require investment to keep production from declining. The field has been under production since the 1980s and peaked in 2013 at 212,000 barrels per day. Since then, however, it has declined to 163,000 barrels per day.
Aside from that, however, the future is uncertain. Low oil prices will largely scare off investment. With oil prices below $40 per barrel, the global oil industry is focusing only on the most prized assets. Smaller fields, such as Colombia’s, are just not all that appetizing right now. Moreover, Ecopetrol itself does not have the resources to continue to see huge production gains.
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Colombia has the potential for shale production, but that too does not look profitable at today’s prices. For Colombia and Ecopetrol, any production gains from today’s base are likely many years away.
By Nick Cunningham of Oilprice.com
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