During last week, one of the largest transactions in the history of Colombia was confirmed: the sale of the shares held by the Nation in ISA to Ecopetrol.
On this and other issues, Bloomberg Línea spoke with the president of the majority state-owned company, Felipe Bayón. Here are edited excerpts from that conversation:
The crisis caused by the pandemic can be turned to an opportunity
“There is a history of permanent learning that Ecopetrol has had for a long time, and resilience is deeply rooted in the company’s DNA. And that is fundamental. Before, crises were every ten years. Now, they are more frequent and we have to be prepared. When the pandemic hit, we sent 85% of our people to work remotely. We decreed the operating minimum on each shift, in each facility, in each region of the country, we defined how many people we needed. In other words, we proactively went out to face the crisis. When demand falls in Colombia and gasoline, diesel and jet consumption drops, we could not stop the fields to feed only the refineries with the lowest load. We took crude for export and with China in particular we had a relationship of many years and they took those crudes. So we showed the speed of adjustment. People with the desire to contribute and clarity. In terms of having taken last year’s business plan, we achieved a good test. That worked very well.”
The severity of the lockdowns in May
“On account of all the operational adjustments derived from the pandemic, we were able to make the adjustment quickly, although the damage was great. We had an impact of just under 300 billion pesos in profit. But we were able to continue supplying fuels.”
Operating in Colombia
“We have a very good understanding of the regions and, above all, a constructive relationship. Last year we had to stop being present in many places because of the pandemic and we went through a trust-building process. This allowed us to operate much better now. It is a lesson that we apply to a different situation. For example, in Meta we were able to continue operating during the strike. We had a permanent dialogue with the mayors, with the communities, with the governor’s office and we were able to work very well, and this is the case in many parts of the country”.
Anticipation of the international market
“After the recent agreements the market has more predictability of where we are going. That is good news today after an average of US$61 per barrel in the first quarter, US$69 in the second quarter. We targeted it at US$45. So, in that order of ideas, we are going to generate much more cash. What do we see ahead? The price will remain between US$60 and US$70. It is a very wide range that can vary. We think that this year, on average, we will be around US$65 dollars and next year around US$55. We are probably conservative. I think that helps us to challenge profitability in a much deeper way, because the projects we do have to be profitable with those values. The accumulated investments up to 2023 may reach US$15 billion, that is, 60 billion pesos. That is a lot of money that will mainly reach regional economies, many places in the country. And I think that is what we are aiming at in a framework of recovery”.
“Historically, companies have said I want to have 15, 20, 25 years of reserves. I am not convinced that today that is the right answer, that it is the objective function. Venezuela has 300 years of oil reserves and that does not solve its problems”.Felipe Bayón, president of Ecopetrol
About Ecopetrol´s Reserves level
“If we look at the last three years of Ecopetrol, production replacement has been 115%. What do we want to do? To be at 100% replacement. Historically, companies used to say I want to have 15, 20, 25 years of reserves. I am not convinced that today that is the right answer, that is the objective function. Venezuela has 300 years of oil reserves and that does not solve its problems. Even so, we want to be a little higher. We have some offshore discoveries, in the Colombian Caribbean, which we want to turn into reserves. There is a concept that is becoming more and more evident in the conversations of investors and analysts: that of trapped assets, the famous stranded assets. One is told that much of the coal or oil is going to be buried and it is true. So how do you become more competitive and be able to extract those resources in a safe, efficient and ethical way?
Experience with Permian, in United States, and the fracking in Colombia
“This investment has only taken 20 months, which is very little for a long-term industry. We closed the last quarter of production for Ecopetrol with 21,000 barrels net and that means that the company (in which Occidental Petroleum is a partner) reached 43,000 barrels. And we already broke 50,000 barrels after the close of June. Wells are drilled in days, completed in days. From the point of view of efficiencies, emissions, water management, it is a very good, sustainable operation. One could say it would be great to bring that here, but the regulation, the topography is different. In terms of the pilot (which Ecopetrol is in charge of) I have said many times that this is not about doing it fast, it is about doing it well. Here we have to legitimize the process, the information, the knowledge so that the decision taken at the end is informed. The drilling would be, possibly, in 2023, and it will be done when it has to be done. The most important thing is to have the data in real time, but it is not a matter of delivering teras of information if you do not know what it means. The challenge is to do it in a pedagogical way, so that people understand what the implications of these data are. The technical experience, the fact that we have people physically there in the Permian operations, is very good at the moment of applying what is called minimum impact technology. In short, there are a lot of lessons learned to be shared and that will be fundamental”.
The transport segment and the oil pipeline tariffs
“Ecopetrol, being an integrated company, has strengths to face periods of high volatility. We saw it last year when domestic demand fell and we were able to sell crude to China. They tell us that the tariffs are very high. When prices fell we made available a significant number of economic and commercial possibilities to handle those times of lower prices. There has been flexibility and we understand the difficult, punctual moments that have happened. The companies in the sector ask for legal stability. We also advocate for legal stability in terms of rules that regulate large investments that have been made and allow the extraction of crude oil. We said that we are willing to review the issue. A study commissioned by the Ministry of Mines and Energy is on the table for comments. We believe that the study has important technical flaws. The basic issue is the principle. Legal stability cannot be applied to some people some of the time and not to others”.
What the energy power transition means for Ecopetrol
“It means four things, mainly: first, competitiveness. That the production we have of crude oil and gas be competitive, safe, efficient, ethical. That we do not reach a point where we have trapped assets. That includes having a larger presence in the gas market. The second point is diversification. How, for example, to enter hydrogen. The third axis has to do with decarbonization. Having said that we want to have zero net CO2 emissions by 2050 is a very big commitment. So we are looking at an inventory of areas that can help us to offset emissions or lower our carbon footprint, which also includes generation with non-conventional renewable energies such as solar or wind power. And the fourth point is sustainability. We have to understand how we relate to the environment, in terms of the territories, with social investment, in terms of how we make decisions in a large company, in a company that has such a presence. To the objectives on this front, we add the T. Ultimately, through technology, accelerate sustainability or put technology at the heart of being sustainable.”
Financing the purchase of ISA
“What is organic we fund in the natural course of business. We have some recent approvals that came out from the Ministry of Finance and, in terms of Isa, what we are looking at is possibly going to 100% debt for a relatively short period of time. Having said that, having today’s pricing allows for significant cash generation as well. Our interest is to optimize leverage. If you look at the gross debt to EBITDA ratio, we are going to be in a very reasonable place, from the point of view of being comfortable in terms of balance sheet and debt.
“We are in the framework of an approval that exists to lower the Nation’s participation to 80 percent and make, let’s say, an additional share issue. What is it going to depend on? On the timing in the markets being right.”Felipe Bayón, president of Ecopetrol
Issuance of shares
“We view the share issue with very good eyes, from the point of view of democratizing the ownership of the company. If you look at what we had before going public and what we have today in terms of production, reserves, refining capacity, number of wells, everything is an order of magnitude different. Ecopetrol is what it is to a great extent thanks to the democratization process that took place at the time. There were a number of resources that were made available to the administration and that have allowed us to grow. We are within the framework of an existing approval to lower the Nation’s participation to 80% and to make, let’s say, an additional share issue. What will it depend on? On the right timing in the markets. So the teams are still working. We are moving forward at a very good pace. And if the conditions are right, we will go to the market with the issuance as well.”
Ecopetrol and what differentiates it from other majority state-owned companies
“In terms of corporate governance, there is a lot of clarity about what decisions are made, how they are made, at what level of the company they are made. On the board of directors, eight of the nine members are independent. So decisions are made at the board level. There is a long-standing commitment to strengthen the company and to defend it. From the point of view of the majority shareholder, there is a medium and long-term vision that understands the relevance of Ecopetrol, that it is strengthened and that its management is independent. And this corporate governance cascades down to everything we do”.
The company of the next decades
“I see it as a company that follows a process of permanent transformation, of adapting to things that are changing. If I think about Ecopetrol in 10, 20, and 30 years, it will still be a company that produces oil and gas, with a much smaller carbon footprint and a smaller water footprint. But we will also be an integrated energy company operating in many other countries”.