According to the most recent ACP economic report “Double covid-19 crisis and price war industry: impact for Colombia and the hydrocarbon sector,” with the current crisis it will be necessary to severely curtail investments and production of oil budgeted for 2020, and the group projects a daily drop of 35,000 barrels, which could reach 100,000 if the Brent reference crude price remains below $25 USD a barrel the rest of the year. This situation, added to the already high costs of operating in Colombia, means that the revenues per barrel fail to cover the average costs to produce oil in the country.

The ACP report, prepared based on information provided by the managers of a representative group of the private production companies, indicates that the national average of operating costs is between $20 – $25 dollars per barrel. For its part, the “break-even” or balance point to cover costs of production in Colombia is located between $40 and $45 dollars a barrel, that is, below this range, companies earn revenue that barely covers their current cost of production.

“The price crisis and high uncertainty have led companies to reduce investments, closing wells and fields, with a serious impact on employment, the contracting of goods and services and in the economic dynamics of the producing regions; this without counting the effect on the collection of royalties, taxes and contractual economic rights, and their impact on the finances of the nation,” said Francisco José Lloreda Mera, president of the ACP on a morning conference call with reporters today.

• A daily drop of around 35,000 barrels of oil is expected, which could reach 100,000 if Brent remains below $25 a barrel the rest of the year.
• ACP says that regulated oil transportation rates for pipelines represent around 45% of the total cost of operation.
• Tax revenues of the central government and the regions could fall more than 75% due to the petroleum crisis.

“The national government is aware of this, important measures have been taken, but an urgent intervention in pipeline transportation rates, as they are excessively high compared to the cost of production, are not internationally competitive, and are the main obstacle to companies in this difficult situation,” said Lloreda.

The industry leader further explained that “pipeline transportation is the only link in the chain of the sector whose cost in recent years has remained practically the same, representing around half of production costs, is not manageable by E&P companies because it is regulated by the Ministry of Energy, and various studies show that it is excessive; so it is essential that the tariffs are reviewed not only for the moment of price crisis and for the sustainability of the industry in the short term, but the current methodology should be structurally reformulated towards the future,” added Lloreda.

Measures taken to date

In order to mitigate the double crisis caused by Covid-19 and the fall in international prices, the Colombian government has advanced in actions for E&P (Exploration & Production) contracts with the National Hydrocarbons Agency (ANH) related to extension of terms and reduction of bank guarantees. Likewise, for all taxpayers, progress was made in the refund of VAT balances and flexibility in the tax schedule. Finally, additional measures were announced to defer payment of economic rights.

According to ACP, these decisions are extremely important to the industry and are expected to help preserve E&P contracts, future investment and to partially alleviate the burden on companies to support their sustainability during the crisis.

“The reduction of contributions of this sector to the national economy, which is projected at more than 75% compared to 2019, is critical at this time when more income is required to help the population more vulnerable to the economic and social emergency caused by Covid-19. We hope to continue advancing in the search for effective measures with the government that allows us to continue operating and mitigate the crisis in the sector, while preventing a devastating effect on employment and the regional & national economy,” emphasized Lloreda.

Photos courtesy ACP

With the deal, the Bogotá-based company gains a small interest in the Saturno Block.

The Brazilian government, which through its National Agency of Petroleum, Natural Gas and Biofuels (ANP) originally assigned the Saturno Block rights to Shell and Chevron last September, will receive 70.2% of the production from the block.

Shell, the operator of the exploration plan, and Chevron both hold of 45% stake of the remainder. The Bogotá-based company now holds the final 10% stake in the Saturno Block.

The block spans 1,100 square kilometers off the coast of the São Paulo and Río de Janeiro states in the central Santos Basin, which is has vast potential reserves and has enticed most of the world’s largest oil companies to bid for a stake.

The ANP has already concluded five auctions to carve up interest in the basin, with Ecopetrol winning a joint bid last September on another block in the basin with BP and CNOOC.

The company sees expanding its presence in Brazil, in addition to other recent exploration efforts in Mexico, the Gulf of Mexico, and the Caribbean, as key to replenishing its reserves, which began dwindling in recent years when Ecopetrol moved into a more conservative mode to shore up its financials amid the crash in oil prices.

“The agreement provides access the Saturno Block and is subject to approval by Brazil’s Ministry of Mines and Energy and the ANP, as well as other customary closing conditions for this kind of deals,” said Ecopetrol in a statement.

The drilling rights give the Bogotá-based company a partial interest in the Pau-Brasil block within this potentially lucrative “pre-salt” zone. The joint bid was won by Ecopetrol along with BP and CNOOC in September in a major auction that saw leading oil companies from across the world gain interest in the basin.

Photo: Felipe Bayón (second from the right) signed the contract today in Brasila. (Photo credit: Ecopetrol)

BP will be the operator of the exploration and has a 50% holding in the block. CNOOC has a 30% interest, with Ecopetrol having rights to 20%

“We are very pleased to enter into one of the most important exploration areas in the world, the Brazilian pre-salt, together with world-class partners,” said Bayón.

Brazilian President Michel Temer was on hand for the contract signing along with the head of Brazilian oil company Petrobras and several other industry officials from both Colombia and Brazil.

All shareholders of record at the close of business on January 3 will be eligible to receive the dividend, which was approved by the board of directors and is designated as an eligible dividend under the Canadian income tax act.

The dividend follows improved results in the third quarter of 2018. The Toronto-based company posted net income of $45.1 million USD in the third quarter, a turnaround from its net loss of $141.1 million USD in the third quarter of 2017 and net loss of $184.4 million USD last quarter.

READ MORE: Frontera Energy Signs Agreement with CGX Energy for Interest in Guayana Exploration Blocks

“Frontera performed well in the third quarter, generating significant cash flow and further strengthening our balance sheet in spite of production interruptions,” said Richard Herbert, chief executive officer of Frontera Energy.

The goal of the sale is to bring in cash to provide more liquidity and financial flexibility for Arrow Exploration, which operates in Colombia through its wholly owned subsidiary Carrao Energy S.A.

Arrow Exploration will be offloading a 46.9% interest in what it refers to as the the “deeper section” of the block. It is also selling a 20% interest in the “shallow section.”

Combined, the Calgary-based firm expects to see a drop of around 85 barrels per day in net production of oil.

The company expects the sale, which is subject to approval by the Colombian National Hydrocarbon Agency (ANH), to close by December 14.

The move will provide “an important boost to Arrow’s financial flexibility while retaining exposure to results of an expected capital program on the VMM-2 Block in 2019,” it said in a statement.

Interest in the two blocks, the Corentyne block an Demerara block, is currently fully held by a CGX subsidiary, CGX Resources Inc., but Frontera Energy said in a statement that it is preparing to pay a $33.3 million USD “signing bonus” as well as “one-third of the applicable costs plus an additional 8.333% of CGX’s direct drilling costs for the initial exploratory commitment wells in the two blocks” in exchange for the 33.3% interest.

The arrangement also calls for CGX, which is also headquartered in Toronto, to make a repayment of $17 million USD in debt to Frontera Energy that is currently in default. Frontera will also grant a deadline extension for other debt obligations into next year.

“This debt will be extended to March 31, 2019 and is expected to be repaid earlier by way of an offset against the $33.3 million USD signing bonus payable to CGX,” stated Frontera. It added that it will extend the bridge loan previously arranged on April 25 through September 30, 2019, and “will seek regulatory approval to amend the terms to provide Frontera the ability to have the outstanding principal amount of the loan repaid in CGX common shares, at a conversion price of the U.S. dollar equivalent of $0.29 CDN per share, at any point on or before maturity of the loan.”

Frontera Energy will also guarantee an equity financing to CGX of up to $20 million USD, “the terms of which CGX expects to announce within the next two weeks.” This will “enable CGX to settle its $7,904,037 USD of liabilities with Japan Drilling Co., Ltd,” noted Frontera.

“The cumulative effect of the transactions, if successfully completed, would satisfy approximately $34.5 million USD of CGX’s existing indebtedness and provide CGX with approximately $27.5 million USD of net cash,” stated Frontera Energy. “As a result of these transactions, Frontera could increase its ownership of outstanding common shares of CGX from its current ownership of approximately 45.6% (or 50,351,929 shares) to up to approximately 77.5% if no other shareholder participates in the equity financing and Frontera elects to exercise the conversion right attached to the bridge loan.”

The agreement remains subject to regulatory approval.

The original interest agreement in the blocks calls for drilling of the first well in the Corentyne block by November 27 of next year (and an additional exploration well by November 27, 2022). An exploration well must be drilled in the Demerara block by February 12, 2021 (and another exploration well by February 12, 2023).

“This joint venture forms an important part of Frontera’s plans to build growth for the future,” said Gabriel de Alba, chairman of the board of directors of Frontera Energy.

He added that it will lead to both Frontera and CGX being “well positioned to advance the exploration and development of the most exciting offshore basin in the world” by “combining CGX’s long history and deep roots in the country with Frontera’s technical depth and financial strength.”

The new standalone rating is two notches above junk and aligns with the big three rating agency’s sovereign rating for Colombia.

“The increase in the stand-alone credit profile is a recognition of the company’s stable operating performance, the soundness of its business plan, its solid financial profile achieved through its debt management strategy, and the reasonableness of the dividend policy it has implemented,” said Ecopetrol in a statement about the change.

Among the specific factors noted by Fitch Ratings are Ecopetrol’s stable credit profile and debt situaion. The company had a debt-to-earnings (EBITDA) ratio of 1.3x and a debt-to-reserves ratio of $8 USD per barrel at the close of the third quarter. Both of these figures have improved during the past two years, noted Ecopetrol.

READ MORE: Ecopetrol Reports Big Jump with Profits of $866 Million in the Third Quarter

Ecopetrol has also further shored up its balance sheet by procuring a $665 million USD contingent line of credit with Scotiabank and Mizuho that would give it more balance-sheet protection against oil prices that fall even further or other challenging economic conditions that cut into revenue.

The company said in a statement that it was notified on November 30 of the “force majeure event” that affected part of the NorPeruano pipeline “following a community dispute.”

The attack hit kilometer 93 of the pipeline, which is operated by Petroperú, in the Morono district, per Frontera Energy.

“The pipeline has been shut down by Petroperú as a result of damage caused by the attack,” said the firm. “As a result, Frontera has started to shut down production from Block 192, located over 200 kilometers from the site of the incident, while the authorities work to resolve the dispute and provide Petroperú access to the pipeline for repairs.”

Frontera Energy has produced an average of roughly 8,950 barrels of oil per day from Block 192 of late and hopes that the disruption will be short lived.

“It is expected that once access is granted, repairs will be completed in a short time,” stated Frontera Energy.

“Frontera performed well in the third quarter, generating significant cash flow and further strengthening our balance sheet in spite of production interruptions,” said Richard Herbert, chief executive officer of Frontera Energy.

Importantly, the Toronto-based company’s oil-price hedges have now expired, and it believes that this will be a boon for future earnings as it tries to further move beyond its most trying financial times of the past few years.

“While a necessary risk management strategy during the company’s restructuring in 2016, they have limited our ability to benefit from rising oil prices this year,” said Herbert. “Without a cap on our realized prices for the last two months of this year, we expect our exposure to Brent oil prices to increase by nearly $12 per barrel, based on recent prices, directly benefiting Frontera’s earnings and cash flow.”

The company is also optimistic about increasing its output. Frontera Energy noted that production has now risen to 65,000 barrels per day at the tail end of the quarter, and this figure is “expected to grow throughout the fourth quarter,” particularly in Colombia with the “startup of the first phase of the water-handling expansion project at Quifa SW on October 30, 2018.” This project will lift net production by up to 3,000 barrels per day, said the company in a statement.

Frontera Energy is also “making progress securing Frontera’s growth with the discovery at Acorazado-1,” which is the firm’s fourth successful exploration effort in Colombia in 2018. It expects to start a long term-test at the site before the end of the year, added Herbert.

“We have continued to accelerate our drilling activities within our existing portfolio,” said Herbert. “During the fourth quarter we expect to drill 36 wells, with 22 development wells at Quifa SW, seven water injection wells, two light and medium oil development wells on the Guatiquia block, two development wells at Zopilote Sur on the Cravo Viejo block, and three exploration and appraisal wells.”

Its Block 192 in Peru, which experienced a force majeure event on the NorPeruano pipeline, was also “restarted in early September, has consistently produced over 9,500 barrels per day since coming back on stream,” according to Frontera Energy.

The find came at the Acorazado-1 exploration well and marked the Canadian oil company’s fourth discovery in 2018, which will help set the stage for its plans to drill 34 more wells during the fourth quarter of the year, according to the firm.

The Acorazado-1 well was drilled to a depth of 15,470 feet with 356 feet of gross thickness in the Mirador formation sandstone reservoir. “Open-hole wireline logging operations identified five separate, potentially hydrocarbon-bearing sections of the Mirador formation,” said the company in a statement.

Richard Herbert, chief executive officer of Frontera, noted that though there are indications of lowered reservoir pressure, the “well has identified a part of the structure which contains resources which have never been previously drilled and developed.”

Frontera Energy, which now has an output of 65,000 barrels of oil equivalent per day in Colombia and Peru and is pushing for production growth in 2019, plans to drill exploration and appraisal wells later this year at its Coralillo-3 and Cocodrilo-1 sits on the Guatiquia block in addition the Jaspe appraisal wells in the Quifa North area.

“Frontera’s strong production profile is well-timed with the upcoming expiration of our oil hedges at the end of October, which will increase our exposure to Brent oil prices by nearly $25 per barrel based on recent prices,” added Herbert.