COLOMBIA: Two New Oil Discoveries and Investor Incentives in the Works

Bottom Line: The Colombian president unveils plans to eliminate the 8.9% tax on natural gas and other potential initiatives such as free-market gas pricing that will increase investor optimism at a time when shares in state-run Ecopetrol are sliding despite two new oil discoveries.

Analysis:  Riding the optimism over two new oil discoveries at wells in Meta that could produce over 800 barrels per day, the Colombian government  appears to be earnestly pursuing an improved investment climate to lure in more foreign oil and gas explorers and producers. Last week, state-run Ecopetrol announced that initial tests in its Meta wells showed production potential of 202 bpd of heavy crude in one and 630 bpd in another. Despite the finds, Ecopetrol shares continue to slide, in part due to sustained attacks on its infrastructure by rebels.

Over the past two weeks, Colombian President Juan Manuel Santos has met with business leaders to discuss improving the country's economic competitiveness. Those executives suggested reducing taxes on energy, and Santos appears to be heeding their advice. On 20 March, Santos unveiled plans to eliminate the 8.9% tax on natural gas as quickly as possible.

At the same time, Federico Renjifo, Minister of Mining and Energy, has discussed a number of other new energy initiatives, including the construction of a liquefied natural gas (LNG) plant on the Caribbean coast and allowing the price of gas to track with market demand once major production contracts in Guajira expire. The LNG plant would handle imports that would help offset supply issues during shortages. Santos said the Energy and Gas Regulation Commission would work on providing incentives to encourage private investors to back the construction of the plant, which should take around 2 years to complete.

Recommendation:  Is Ecopetrol a good buy? The integrated major has been performing poorly, down about 5% this year. But the new discoveries are in wells it owns 100% and exploration will continue with new potential finds. On a broader level, the government's declared moves towards improving the investment atmosphere can only be viewed as positive, assuming they will be implemented. For now, Santos has been vague about the timing of the removal of the natural gas tax. That said, we believe that the 8.9% natural gas tax cut will take effect shortly, and that within the next six months there could be new laws or regulations aimed at lowering energy prices for consumers and possibly more targeted tax cuts.