Despite a long history of being Latin America's best-managed national oil company Colombia's Ecopetrol is swamped by uncertainty. For over a decade, the integrated energy major has been battling to significantly expand its scant proven oil reserves. Now Ecopetrol is facing many grave headwinds which could derail efforts to boost those meager reserves and softer petroleum production. Among the most serious is the plan of Colombia's first leftist President Gustavo Petro to ban hydrocarbon exploration. His electoral victory and the appointment of a political ally as Ecopetrol's Chief Executive Officer sent the company's stock into a tailspin. While the international Brent benchmark is down by 27% over the last year Ecopetrol's market value has plunged by a whopping 40% performing worse than Petrobras, Brazil's state-controlled energy company, which is facing similar headwinds seeing it shed 19%.
Ecopetrol, which is an important source of income for Colombia's government, is facing a bleak outlook. For over a decade the state-controlled energy company has been battling to bolster its proven or 1P reserves which at the end of 2022 stood at just over two billion barrels of oil while proven and probable or 2P reserves totaled 2.5 billion barrels. Ecopetrol's reserve replacement ratio, which is essentially the volume of production replaced by discoveries, extensions, and the application of enhanced recovery, fell to 104% for 2022 which was nearly half of 2021 and the lowest since 2016. Those reserves are extremely low for an international integrated energy major. In comparison, most other national oil companies operating in Latin America like Petrobras, with proven reserves of 8.9 billion barrels, possess significantly larger hydrocarbon reserves. Related: Natural Gas Prices Plunge Further Amid Rise In U.S. Stockpiles
Ecopetrol's paltry reserves can be blamed on a lack of exploration success in Colombia, where the core of the company's upstream assets are located, which has not had any world-class oil discoveries since the 1990s. A combination of geology, long-running civil conflict and operational headwinds have all weighed heavily on hydrocarbon exploration in Colombia over the last three decades. The lack of oil reserves is sharply impacting Ecopetrol's future, especially now that Colombia's President Petro, a former leftist guerrilla, intends to end awarding new contracts for hydrocarbon exploration in the Andean country.
President Petro's April 11, 2023, appointment of close ally David Roa as Ecopetrol CEO, to replace Felipe Bayon, roiled financial markets. Roa's comments later that month, where he said Ecopetrol will not push Colombia's government for new exploration contracts and that Petro's plan to end contracting for hydrocarbon exploration was responsible, alarmed investors. Those comments saw Ecopetrol's stock tumble into free-fall with the company losing as much as 8% before rebounding slightly. When Ecopetrol's scant hydrocarbon reserves are considered, it is easy to understand the significant concern Roa's comments elicited from investors, particularly when current 2P reserves will likely last less than a decade at the current rate of production.
Ecopetrol's ongoing struggle to boost oil and gas production further magnified the alarm. Ecopetrol's latest operational data indicates that the integrated energy major has yet to return to pre-pandemic production volumes. For the first quarter of 2023, the integrated energy company lifted an average of 719,000 barrels of oil equivalent per day which, while nearly 4% greater year over year, was still significantly lower than the barrels a day produced for that period during 2019. Annual 2022 output of 709,500 barrels of oil equivalent per day while 4.5% higher than a year earlier was 2% lower than the 724,800 barrels pumped daily for 2019, the last year of full production before the 2020 COVID-19 pandemic.
Of further concern for investors, was Ecopetrol's first quarter 2023 net income plunging by 14% year over year to $5,660 billion Colombian pesos or around $1.3 billion. After noting the alarm his previous comments and Ecopetrol's first quarter 2023 results caused among investors, Roa in Ecopetrol's first quarter 2023 earnings call (audio in English) issued a statement declaring he hoped more exploration contracts and oil auctions will be made available by the Petro administration. That, along with recent onshore and offshore hydrocarbon discoveries in Colombia did little to assuage investor fears with Ecopetrol's stock still languishing at levels not seen since the 2015 oil price crash.
If Petro proceeds with his plan to end issuing new contracts for oil and natural gas exploration in Colombia it not only risks the country's energy security but will threaten the existence of Ecopetrol, which will sharply impact government revenue. With Colombia's government owning 88% of Ecopetrol, coupled with it paying increased taxation revenue after Petro's November 2022 industry tax hikes, the integrated energy company is an important source of fiscal income. During 2022, Ecopetrol delivered dividends to the national government which amounted to roughly two percent of total fiscal revenue. After Petro's tax hikes, Ecopetrol's effective tax rate jumped from 34% to 44.5% and the company's first quarter 2023 income tax paid rose by a staggering 44% year over year to $5,593 billion pesos or around $1.3 billion.
Petro's ban of hydraulic fracturing in Colombia will be costly for Ecopetrol. The state-controlled energy company during September 2022 asked the ANH to suspend the Kale and Platero fracking pilot contracts for a period of 90 days. Petro's bill banning fracking has already passed Colombia's Senate and is tipped to receive final Congressional authorization in the coming months. Such a move will see Ecopetrol likely lose the investment already made in the Kale and Platero unconventional oil and gas projects. The national oil company's partner in the Kale and Platero pilots Exxon is in the process of exiting Colombia and is seeking to recoup its investment from the government. This has brought an end to speculation that unconventional oil and natural gas exploration and exploitation in Colombia will allow Ecopetrol to boost its scant hydrocarbon reserves and production.
There are signs the Petro administration may interfere even further in Ecopetrol's operations. Energy Minister Irene Velez stated in early May 2023 that the government will consider implementing policy to reduce gasoline prices rather than maintaining parity with international prices as has occurred previously. This will either be achieved through increasing fuel subsidies, which in the past were a contributing factor to Bogota's ballooning deficit, or dictating the price of domestic sales to Ecopetrol which is Colombia's largest refiner. Such a policy could weigh on Ecopetrol's profitability at a time when the integrated energy major is under pressure from a near-perfect storm of weak oil prices, intrusive government policy, and a lack of proven reserves. If Petro's administration proceeds with ceasing awarding new contracts for hydrocarbon exploration and is successful in banning fracking, then Ecopetrol's long-term future as an upstream oil producer is at stake.
By Matthew Smith for Oilprice.com
More Top Reads From Oilprice.com:
Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located… More