EcoPetrol: King for a day as changes reap rewards

The Ecopetrol SA oil refinery in Cartagena, Colombia. | Photo: Bloomberg via Getty Images

BOGOTA – Ecopetrol has long stood as Colombia’s largest company. But for just a moment this spring, the state controlled energy firm also emerged as Latin America’s biggest company – at least on paper.

In mid-May the total market value of Ecopetrol’s shares jumped to $127 billion, pushing past Brazil’s Petrobras which had a market capitalization of $124 billion.

In the real world, Petrobras dwarfs Ecopetrol. Indeed, Ecopetrol’s No. 1 status lasted all of 24 hours and was partly due to the strengthening Colombian peso and the weakening Brazilian real. Yet its time at the top, however brief, also reflected the many things Ecopetrol has done right over the years.

Following stock offers in 2007 and again last year, Ecopetrol changed its corporate structure and now behaves more like an agile private firm than a lumbering national oil company. It has been partnering with foreign petroleum firms to boost production, moves that could soon place Colombia in the million-barrels-per-day club of big-time oil nations.

All this has helped Ecopetrol rack up record production and profits in 2011, a trend that has continued this year. Profits jumped 28 percent in the first quarter compared to 2011, while hydrocarbon production reached a company record of 743,000 bpd –an 8 percent hike over the same period last year.

“In the past six or seven years, Ecopetrol has transformed from a very sleepy, bureaucratic company that was just tagging along, into a company that is now very profitable, very aggressive, and one that is providing attractive value to shareholders,” said Roger Tissot, director of Tissot and Associates, an energy advisory firm based in Canada.

“It now sets the benchmark in terms of other state oil companies in Latin America,” Tissot said. For investors “it is one of the darlings”.

The two stock offers that privatized 11.7 percent of the company, as well as Ecopetrol’s listing on the New York Stock Exchange in 2008, have brought in billions of dollars and quadrupled the company’s market capitalization. But the move also opened the door to deep management reforms.

A worker walks at Ecopetrol SA’s Barrancabermeja refinery, the country’s largest, in Barrancabermeja, Colombia | Photo: Bloomberg via Getty Images

“You can split the history of the company in two: Before the IPO and the New York Stock Exchange listing and after,” Adriana Echeverri, Ecopetrol’s chief financial officer, told Latin Trade in an interview last year. “Since then, we have become more efficient and agile. Unlike a traditional national oil company, we are able to manage Ecopetrol with more of a commercial and profits criteria.”

That’s because if the Colombian government owns less than 90 percent equity, the nation’s public-private firms no longer require congressional approval of their budgets and, to a large degree, can make their own plans.

For instance, Ecopetrol has put together a decade long $80 billion capital investment plan to build pipelines and expand the country’s refining capacity. Annual spending on such projects is 10 times what it was in the mid-2000s when political pressure and the lack of cash held the company back.

Under the new rules, Ecopetrol can sidestep salary caps and other civil service regulations. In the past, those rules made it difficult for the company to retain top executives who could command better salaries in the private sector. Now, talented executives – like Ecopetrol’s current president, the highly regarded Javier Gutierrez – often stay put.

Ecopetrol’s new status also means it can borrow money independently of the government while lender requirements have forced the company to become more transparent. Finally, the stock offers in some ways democratized Ecopetrol by giving half a million Colombians –everyone from bankers to taxi drivers who bought its stock– a stake in the company’s future, according to Juan David Pineros, of the Colombian brokerage Interbolsa.

“Ecopetrol is a source of national pride,” added Heather Berkman, a Latin America analyst at the Eurasia Group in New York. “Colombians want the company to succeed.”

Even so, Ecopetrol’s goal of nearly doubling production to 1.3 million barrels of oil equivalent per day by 2020 is no sure thing.

Amid Colombia’s oil boom, the country’s Marxist rebels have stepped up their attacks on tanker trucks, pipelines, and other infrastructure. The assaults are widely viewed as a tactic to divert government troops away from counterinsurgency operations and a way to pressure oil companies and their contractors into making extortion payments to the guerrillas.

Rebels have bombed the Cano Limon-Covenas pipeline, which is jointly operated by Occidental Petroleum and Ecopetrol, nearly two dozen times this year while rebels are still holding four Chinese oil workers of UK based Emerald Energy, who were kidnapped in 2011 in southern Caqueta department.

In addition, contamination and other problems in communities located near production and pipeline areas have prompted the Colombian government to delay the granting of environmental permits to energy companies.

“Extractive companies may need to take a more proactive approach –and may see their operations beset by protests if they don’t adequately interact with local communities,” Berkman said. “Colombia has a nascent, largely localized, but growing environmental movement.”

A stark reminder of the industry risks came last December when a natural gas pipeline, managed by Ecopetrol, exploded near the city of Manizales, killing six people. The Colombian government’s inspector general blamed Ecopetrol for the blast, citing shoddy maintenance. The company claimed the pipeline’s rupture and explosion were caused by a landslide but agreed to pay $3.7 million to the families of the victims.

Either way, Alejandro Martinez, president of the Colombian Oil Association, which is made up of petroleum companies, warned that permit delays are holding back production at Ecopetrol and other firms. He said the permit process used to take, on average, five months but now lasts a year. Cutting through the red tape, he said, would allow the country to quickly increase daily production by 60,000 barrels, he said.

But even if Ecopetrol, which produces about three quarters of Colombia’s oil, reaches its production targets, it’s unclear whether they are sustainable. In the absence of new discoveries, current reserves will keep the country self sufficient for seven or eight years. Recent finds have been relatively modest.

“Geologists are optimistic and say the country hasn’t been fully explored. But so far, the discoveries are not there,” Tissot said. “And if Colombia doesn’t have the oil potential to keep the country in the big leagues, investors can go elsewhere.”

With that in mind, Ecopetrol is expanding beyond Colombia and is now exploring in Peru, Brazil and the Gulf of Mexico. The government is also in talks with Caracas officials to allow Ecopetrol to explore for and produce oil in next-door Venezuela, home to the largest oil reserves in the world.

“So far, the Venezuela plans are just on paper,” Pineros said. “But that could be very significant in the future.”

 

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