News and AnalysIs for

This Ecopetrol press release details the company’s local procurement activities by region. Local procurement has become an issue because the communities in which oil and gas companies operate have lost line of sight to the benefits having hydrocarbons activity in the vicinity. The costs – like roads clogged with tanker trucks – are readily apparent but since the reform of the royalties distribution system, only local procurement is a sure route to jobs. Translated and with commentary by Hydrocarbons Colombia.

Firstly, Pacific Rubiales shareholders should not be concerned. Management did its job and proved (1P) and probable (2P) reserves both increased over 2011 thanks to the Z-1 Block in Peru and the acquisitions of PetroMagdalena and C&C Energy in Colombia. The company has made strategic plays in Papua New Guinea, Guatemala and Guyana that are not yet reflected in either proved or probable reserves. But stepping back and looking at the Colombian results to understand what is happening with the industry as a whole, the picture is far less rosy, as seen in the above graph.

As reported by National business newspaper Portafolio, Fitch Ratings Colombia, a rating agency, estimated that the company Terpel will invest US$895 in the next five years, due to expected increases in sales.

Gran Tierra published its 4Q12 and full year 2012 results. As can be seen from the graph, 4Q12 was not a great quarter for Colombian production. The company reported lower production and higher transport costs due to the disruption of the TransAndino pipeline. Although much of the country enjoyed the Farc’s unilateral truce in 4Q12, the guerrilla’s parting gesture was to blow up the pipeline just before announcing the ceasefire. This was a major disruption that was still unrepaired in mid-December and the result can be seen in production.

Since September 27th 2011, Ecopetrol and Pacific Rubiales have disputed the interpretation of a clause in the Quifa Association Contract. According to this clause, which refers to high prices, Ecopetrol should have greater participation in the profits when oil prices rise and the cumulative production reaches 5M barrels; a figure which was reached in April 2011.

As reported by La Republica, Bank of America and JP Morgan made new recommendations to shareholders about the Ecopetrol’s share. Bank of America described the Ecopetrol’s share as “low performance” and reduced its price objective from US$3 to US$2,75, because they expect the company’s performance will continue to decline by 8% per year through 2014. Meanwhile, JP Morgan said: “The combination of a reduction in production, rising security concerns and ongoing delays in environmental permits will impact the company’s ability to deliver a significant increase in production and operations results in the medium term “.

Ecopetrol issued a brief press release with its year-end 2012 reserve figures. After rising 10% in each of the previous two years, Ecopetrol only managed a 1% increase in reserves in 2012. Revisions played an important role, representing 45Mboe or 17.5% of the additions. Enhanced recovery contributed 26% leaving new discoveries and extensions with 57% of the additions. In this early release of the numbers, the company did not separate Colombian from non-Colombian reserves. It only said that 95% came from the “mothership” versus 5% for subsidiaries which include Colombian subsidiaries like Hocol and Equion. Considering the importance the government puts on reserves and the importance of Ecopetrol to overall statistics, this result has to be a disappointment.

Last Friday Ecopetrol announced its financial results and despite the spin – “second best profits in history” – they were in fact down from 2011. Consolidated Net Income was down 4.4% over 2011 and the chart shows this was not caused by accounting, foreign exchange or other easier to rationalize explanations. These non-cash items actually improved results since Operating Income was down 6.4% and EBITDA down 3.2%: it was operations that sunk the ship. And this despite a 4.4% increase in consolidated revenues and a 4.1% increase in crude oil production. The only hero in this story is Exploration and Production which produces almost all of the profits and even it saw margin declines in 2012. Most of the other businesses Ecopetrol is involved with do not. If this were a normal company, institutional shareholders would be screaming to break it up.

A couple of weeks ago we published a variation of this graph based on the production guidance that Canacol published at that time. Canacol being Canacol the picture was not crystal clear and so we made some assumptions to fill in the blanks. Now with 4Q12 results, the picture is not perfect but it is clearer. The principal assumption that we made was that Ecuador would have what the company calls Non-Tariff production i.e. not Tariff which is their word for what amounts to an oil services contract to operate a well for a set fee per barrel. It is now clear that that is not the case and Ecuador will be only an oil services contract which the company says is higher margin than their Colombian contract.

This chart is pretty simple but then Talisman has never really reported much data on its Colombian operations, relegating it to an “includes Colombia” comment under its international operations. But this has changed over the past five or six months since Hal Kvisle was appointed CEO. The country went from being one of the company’s assets with a “For Sale” sign around its neck to being not exactly core but certainly off the auction block and meriting its own chapter in Talisman’s recently published 4Q12 results.