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Ecopetrol announces 4Q15 and FY 2015 results

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Hydrocarbon Engineering,

Ecopetrol S.A. has announced Ecopetrol Group's (the company) financial results for the 4Q15 and full year 2015, prepared and filed in Colombian pesos (COP$) and under International Financial Reporting Standards (IFRS) applicable in Colombia.

In the opinion of Ecopetrol's CEO Juan Carlos Echeverry G.,"2015 was one of the most challenging years for the oil industry. As many other oil and gas companies, Ecopetrol undertook profound adjustments on its operations to be more efficient and face lower crude prices. The company intensified the interaction between operational and financial excellence to generate and protect its cash flow, secure its sustainability and, when price environment permits, be prepared to grow. In addition to prices other challenges were added, for example attacks on oil infrastructure, El Niño phenomenon, the closing of the Venezuelan border, the completion of key midstream and downstream projects and the devaluation of the exchange rate.

In the midst of this defying environment, the company maintained a solid operational performance while advancing the transformation of all of its business lines to increase its structural efficiency. It reduced operational costs without affecting the reliability and safety of its operations, and strengthened an organisational culture based on integrity, cooperation and creativity. This change process has been led by a new management team that leveraged Ecopetrol's strengths in order to introduce new, and more efficient ways to conduct operations throughout its entire value chain.

As of the second half of 2015, Ecopetrol began to adjust its investment plan without sacrificing production and progress in important projects; to increase its efficiency levels and reduce costs and expenses; and established a savings target of COP$1.6 trillion for the year.

As of 31 December 2015, Ecopetrol's savings totalled COP$2.2 trillion, above the initially defined target. This achievement was possible thanks to renegotiation strategies in contracts (COP$0.98 trillion) and supply (COP$0.50 trillion), and higher operational efficiencies (COP$0.72 trillion). In addition, affiliates and subsidiaries contributed with COP$0.6 trillion, for overall total savings within the group of COP$2.8 trillion. The company is working towards making these savings structural and supportive in securing its sustainability and competitiveness in the long term.

The higher efficiency achieved in 2015 enabled Ecopetrol to partially offset the impact of lower crude prices on the balance of proven reserves, which was 1849 billion bbls, 11% lower as compared to 2014. The 45% drop in prices used in reserves valuation led to an estimated reduction of 404 million bbls, which was offset by lower costs and higher efficiencies, which added approximately 275 million bbls.

At the operational level, the company presented solid results, starting with the best historic industrial safety performance, measured by the Recordable Incident Frequency Rate (RIFR) and the Accident Frequency Index (AFI), which were 0.96 and 0.49, respectively. This is the result of a permanent and systematic effort to achieve industry standards and a strong indication of Ecopetrol's commitment for people's well being.

In 2015, the group slightly surpassed the 760 000 bpd production goal, despite the low price environment, operational challenges and public order disruptions. As compared to 2014, production grew by 5000 bpd, mainly driven by the production increase at the Castilla (+17.4%) and Chichimene (+38.9%) fields, due to the entrance of new wells into production.

With regards to recovery factor increase, during 2015 eight pilot projects were initiated in water injection, solvent injection and improved water injection technologies, achieving the established goal. It's important to highlight the implementation of water injection pilot projects in fields with heavy crude, such as Castilla and Chichimene, with positive results in the intervened areas. Additional cumulative production represents a 1.2% increase in the recovery factor in the pilot area of Chichimene and 0.15% in the pilot area of Castilla.

The improvement in the recovery factor, mainly through infill drilling, will continue to be the main source of reserves growth in producing fields in coming years. Hence, it is necessary to increase well drilling efficiency, as has been done among different fields. For example, between 2014 and 2015, in Castilla, the average drilling days per well went from 34 to 26 and in Chichimene from 36 to 26.

In exploration, the discovery in May of the Kronos well in the Caribbean offshore area is considered one of the 20 largest discoveries worldwide in 2015. The exploratory campaign also included the drilling of the Calasú well (geological success) in the Caribbean Sea, and three additional wells: Muérgana Sur (sealed and abandoned), located at Llanos Orientales, Bullerengue (geological success), in the Lower Magdalena Valley, and Sea Eagle (dry well) in the US Gulf of Mexico.

By the end of 2015, the Leon 2 appraisal well was being drilled in the Gulf of Mexico deep waters, operated by Repsol, who has a 60% share, and Ecopetrol America Inc., with 40%. The well reached its final depth on 2 February 2016, and is currently under assessment.

As compared to 2014, during 2015 a growth of 2% in the transported volume was evidenced, mainly due to higher availability over the course of the year of the Caño Limón – Coveñas and Transandino systems, caused by a lower number of oil infrastructure attacks, which went from 130 in 2014 to 80 in 2015.

Tests to verify the performance of transportation systems with higher viscosity crudes through Oleoducto de los Llanos, Oleoducto de Colombia and Ocensa were successful, opening the possibility to decrease diluents consumption in 2016. This is a key aspect in increasing heavy oil production profitability, which today represents 57% of the group's total production. The tolerance increase in transportation systems from 220 centi stocks (CST) to 300 CST of viscosity allowed a decrease of US$0.75/bbl in dilution cost. The 2016 goal is to transport at 400 CST.

For refining, the major achievement was the start up of the crude unit at the Cartagena Refinery, which led the sequential entry of the plants comprising the new refinery. On 24 February the delayed coking unit started its operations, which allows reaching a 97% conversion factor. By the end of February two more plants started up: the catalytic cracking unit, that takes diesel fuels from the crude unit and produces selectively streams of higher value, and the naphtha hydrotreater unit the main function of which, is to remove sulfur from gasolines to deliver clean fuels, with less than 50 parts per million (ppm) of sulfur.

Ecopetrol expects to have all the plants in operation during the 2Q16, and gradually stabilise the refinery to take it to full capacity by the 3Q16. It's worth highlighting that the refinery made its first fuel export in November 2015 with destination to the US and the Caribbean, with a total of 200 000 bbls of virgin naphtha and 50 000 bbls of JET A1 aviation fuel.

Other important results were achieved at the Barrancabermeja Refinery, which reported a gross margin of US$16.8/bbl in 2015, as compared to US$14.6/bbl in 2014, due to a higher performance of medium distillates, the implementation of initiatives to enhance the value of LPG and residual streams, and price behaviour of refined products.

2015 also included the consolidation of a new management team, with the renewal of half of the positions with top qualified and expert personnel on their knowledge fields, with distinguished experience in the oil and gas industry. Leadership style, in line with cultural transformation, is based on knowledge, trust, communication, and teamwork. In 2016, the company will deepen its work with mid-level management and will aim for the development of future leaders with high potential, who are prepared to assume the challenges of Ecopetrol.

The company ended the year with a loss of COP$3.9 trillion, mainly due to accounting effects on the presentation of the financial statements caused by IFRS implementation. Excluding the impairment effect, the company would have reported a net income of COP$2.4 trillion. This accounting effect, as well as the exchange rate difference, constitute an impact on the expenses account that affects the financial outcome, but that does not imply a cash outflow. Impairment expenses can be reverted once market conditions turn more favourable, except in the case of goodwill impairments. Nonetheless, despite the adverse price environment and strong impact on results, the company kept its EBITDA margin at 35%, close to last year's level, and continued having in its internal cash flow generation, the main source to fund its operations


Savings aren't the foundation for the future. Investment quality is the other key factor. The company is currently strengthening the exploration and production portfolio, through an institutional change oriented to align incentives to identify the best prospectuses and place them under rigorous scrutiny and competition. A targeted and effective investment, and at lower costs, should redound in higher future reserves.

2016 is a transition year for the businesses of the group. EcoPetrol will end relevant investments in refining and transport segments. In these segments the company has enough installed capacity for the company's mid-term growth. Finalising the meaningful investments in refinery and transport means, that from 2017 onwards, close to US$1 billion of annual investments will be freed and 90% of total investment capacity will be allocated to exploration and production, while in the past five years only near 60% has been dedicated.

Breakeven prices have decreased and technical risk has been mitigated. As a result, the recognition of additional projects should improve the company's growth potential.

Finally, 2016 will be a financial excellency year focused on cash generation and preservation. The divestment process, which was analyzed and structured during 2015, will be dynamic. These will strengthen the focus on financial sustainability and will pursue protecting the company's credit rating by keeping adequate indebtedness levels.

The 2016 investment plan for COP$4.8 trillion implies a decrease of 26% as compared to the execution in 2015. This reinforces capital expenditure discipline and focus on profitable investments, as well as the opportunity to achieve higher efficiencies without affecting Ecopetrol's operation. We will manage the CAPEX depending on the crude oil price, just like a stream whose flow is regulated by locks.

The company will continue promoting its 2016 - 2017 assets divestment program to obtain resources between US$400 and US$900 million, out of a potential pool of assets of US$1.4 billion. Within this phase, the company will pursue the divestment of non-strategic assets and stock holdings, such as Propilco, EEB, ISA and some others under current analysis.

It is a priority for Ecopetrol to maintain its investment grade rating, as well as access to capital markets. Adjustments made in 2016 imply financing needs between US$1.5 and US$1.9 billion, out of which US$475 million were already obtained through loans from local and international banks. The confidence in the company and the appetite for Ecopetrol's credit has been ratified. This estimation does not include resources resulting from the divestment program, which in case of positive results would strengthen the company's cash flow.

Adapted from press release by Francesca Brindle

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