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Oxford Business Group

Oxford Business Group

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Colombia Profits From Oil Boom, But Challenges Remain

Colombian energy sector expands on the back of higher oil prices and investment

Rising oil prices and increased efficiencies have led to significant growth for Colombia’s national hydrocarbons company in the first half of 2018, highlighting a rebound for the broader sector as private investment and production expand after a recent slump.

Ecopetrol’s net profit in the second quarter rose by 170 percent year-on-year (y-o-y) to hit COP3.5trn ($1.2bn), thanks to higher crude prices and improved efficiencies, according to company accounts. This puts the state oil player on track to exceed last year’s profits of COP6.6trn ($2.2bn), itself a four-year high.

Sales were also up by 29 percent, reflecting greater production levels, which at 721,000 barrels per day (bpd) was the highest in seven quarters and up 2.8 percent on the first three months of the year.

Ecopetrol now expects to meet its production target for the year of 725,000 bpd, up from 715,000 in 2017, while it aims to drill 620 development wells this year and double the number of rigs in operation from 2017.

Improved oil prices driving increased activity

The improved performance from Ecopetrol, which accounts for approximately 60 percent of Colombia’s hydrocarbons production, has coincided with increased activity in the wider industry, encouraged by more promising global oil prices and a progressive devaluation of the Colombian peso.

Related: The Bullish Case For Gas In Europe

Brent Crude prices stayed above the $60 per barrel threshold in 2017 and averaged around $70 in the first half of 2018, levels that have enabled companies to expand production and exploration after several years of belt tightening.

As of May the average oil production across the whole sector was 854,000 bpd, up 1.6 percent compared to the same period last year, according to industry body Campetrol. Meanwhile, by the end of June 20 exploratory wells had been drilled, representing 31 percent of the year’s projected goal.

On the matter of exploration, in late February Ecopetrol discovered oil deposits in the Santander and Arauca departments, which together will add 2200 bpd to output for seven years. These were complemented by the March finds in the Lorito-1 well in the Meta department, as well as those of July in the VMM-32 block in the Middle Magdalena Valley. Ecopetrol estimates that unconventional reserves in the latter could total 7.4bn barrels, more than three times Colombia’s existing proven reserves.

Increased investment needed to maintain production levels

In terms of investment, Ecopetrol spent a third of its exploration and production (E&P) target in the first half of the year, with outlays reaching $1bn through June, out of a total $3bn-3.5bn planned for the year. Although down somewhat from earlier expectations of $3.5bn-4bn, reduced in part due to increased efficiencies and closures related to maintenance and protests in the first quarter, the company’s expenditure is considerably higher than last year’s E&P outlay of $1.8bn.

Meanwhile, in the private sector, foreign direct investment (FDI) totalled $475m in the first three months of the year, an 11.6 percent y-o-y increase, while industry group the Colombian Petroleum Association forecasts year-end private sector E&P investment to reach between $4.5bn and $4.9bn, a 30-45 percent jump on last year’s figures.

While a step in the right direction, the figures are still below 2012 FDI levels of $5.5bn, with industry representatives telling international media that annual investment of $6bn is required to increase exploration into new areas and subsequently boost reserves.

“If the country seeks to maintain stable levels of reserves in the medium to long term, it will need to attract investment into the sector today given the industry’s five-year investment cycle,” Marcela Vaca, Colombia country director of South American energy firm GeoPark, told OBG.

“Strong crude prices, a devaluating peso and improved political stability are expected to drive further investment into the industry in the second half of the year.”

Proposed changes to licensing aim to stimulate investment

In order to incentivise further foreign investment in the energy sector, the government has sought to amend the existing licensing framework.

Related: Could Tesla Thrive, Or Even Survive, Without Elon Musk?

The National Hydrocarbons Agency (NHA) is preparing to replace bidding rounds with an open contracting system, whereby private companies will be allowed to initiate exploration proposals on land that has not yet been offered by the government.

The reform comes on the back of repeated delays to oil auctions and limited exploration opportunities, both of which have stymied the signing of new contracts.

“While the private sector does not see the new proposed model as ideal, the industry’s healthy prospects means that the upcoming licencing round will nevertheless arouse interest from local and international investors,” Vaca told OBG.

The new system, which is pending approval from the NHA’s board of directors, could see 20 on- and offshore blocks offered in the near term. The new licensing law would also offer investors the potential to move to other blocks if community relations prevent work in their original holding. Currently, local groups can veto new hydrocarbons projects by way of local referenda, a system that the Colombian Petroleum Association has cited as a main obstacle to growth.

By Oxford Business Group 

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