ACP 2017 Congress: Optimism and Debate
September 28, 2017
The Colombian Association of Petroleum’s (ACP) annual congress took place in Bogotá last week and HCC attended the event. Last year, conversations were about how bad things were; this year, the environment changed into a still-cautious optimism – but at least there is optimism, despite the industry’s challenges.
ACP’s President Francisco Jose Lloreda said that the industry had a positive 1H17, as companies were able to fulfill their investment plans.
Oil firms planned to invest US$4.3B this year, which is a significant increase compared to last year’s figures. However, he acknowledged that Colombia needs higher investment amounts (between US$6B and US$7B) to maintain oil production at current levels.
He added that the sector drilled 32 exploratory wells so far and the goal is to drill 50 this year, when it only drilled 25 exploratory wells in all of 2016.
The head of the ACP said that the sector is giving attention to the wave of anti-oil and mining referendums which threaten to block the extractive industries from dozens of communities, including many where there are existing operations. The industry hopes to resolve concerns about oil through dialogue. However, there is unease in the communities for other issues.
"We have found that the issues are not referendums or social unrest against the industry, but there is discomfort about the General System of Royalties (SGR)," he said.
He recalled that producing regions changed from receiving 80% of direct royalties to only 20%, and inhabitants feel that it is unfair.
Minister of Finance (MinHacienda) Mauricio Cárdenas spoke about the draft proposal for CERTS; an investment incentive introduced in last December’s tax reform.
The idea is that exploration and production (E&P) companies will get a tax credit for certain exploration investments, which can be used when those investments start producing oil (or gas), revenues and taxable income.
The credit would be 15 cents on the dollar. That is, for every $1 of eligible investment, companies would receive 15 cents of tax credits. However, the credit would only be this large if Brent was below US$45, and would be zero if Brent was over US$60.
Cárdenas mumbled about what might happen between US$45 and US$60, but it appears the 15 cents would be prorated somehow. The idea is that the exploration incentive is only needed if oil prices are low.
The CERT’s (tax certificates) would be awarded in 2018 but could only be used in 2021 and 2022.
Perhaps the most important facts are that the total credits would be capped at US$150M, equivalent to US$1B of incremental investment, and that Ecopetrol (NYSE:EC) would also be eligible for the benefit.
Before the congress, Cárdenas also assigned a first challenge to Ecopetrol’s new CEO, Felipe Bayón.
Among Bayón's goals should be to make profits of CoP$4T, which would result in a significant increase in dividends for the company's more than 400,000 shareholders. (HCC: Cárdenas is definitely a politician. If Bayón achieves CoP$4T in profits, 88% of that will go to MinHacienda. “The company's more than 400,000 shareholders” would get a not inconsiderable benefit. But we think Cárdenas is probably more interested in the government’s haul while make political points with shareholders/voters.)
Former Ecopetrol’s president Juan Carlos Echeverry said that Bayón's various challenges include assuring offshore exploration.
According to Echeverry, "we also have to develop the oil that is in the Middle Magdalena, where there are immense reserves that will bring much wealth and prosperity to the country."
He added that the peace building process should be taken as an opportunity to start drilling in departments such as Putumayo or Arauca. "We have to enter these areas and make social investments in Meta and other departments and regions such as El Catatumbo, in Norte de Santander."
At the conference, Bayón responded by saying that ECP was able to meet all of its efficiency plan goals in 2016, when the target was to do so by 2019 (the firm achieved savings of CoP$4.8T).
He added that 90% of the firm’s investment will go to exploration and production.
Bottom-line: The situation of the sector is difficult and the challenges to overcome are huge, but companies continue with their plans and projects to contribute to the country’s economy.
As Lloreda said, the government should change the SGR, because this could help create a favorable environment for all projects, even the much-maligned unconventional ones.
Will this government do it? It is hard to believe considering a rapidly narrowing legislative window and other priorities – especially implementing peace with the Farc. Colombia’s more than 50-year conflict with this guerrilla group came to an end this year when the troops officially handed over their weapons to UN observers.
The peace building process needs to be seen as an opportunity to reach areas that could not be reached before, and bring progress to communities while exploring new and much-needed reserves for Colombia.
However, hitting Cárdenas’ fianancial target also means stopping the ‘bleeding’ on Ecopetrol’s declining oil and gas production. For that reason, we are sure that increasing reserves and developing the offshore industry in the country are at the top of Bayón’s list.