In another shift: El Niño who? The little boy has almost been forgotten already. Yesterday’s news. Reservoir levels, according to XM, are still only at 39.5%, but that is a long way above the 27% critical threshold seen previously, and all eyes are now on La Niña.

When it rains in Colombia, it really rains.

When pushed by colleagues about “rainy London,” I discovered that even in a normal weather pattern, Medellín receives 6x the rainfall of London. La Niña is a whole new level.

From Fedesarrollo, we saw data this week for an April improvement in retail confidence (15.3%) while industrial confidence (-3.4%) was little changed month-over-month. For choice, there was a better beat to the future outlook while both numbers were well up on April 2023. Last week we also saw a modest increase in consumer confidence (-11.4%) from the -13% in March. These numbers continue to move around month to month.

From the National Administrative Department of Statistics (DANE), we had the latest import data (March) and there was another decline of 18.8% to $4.8 billion USD. Across the board — from agriculture to manufactured goods to raw materials — there were sizable declines. And despite exports also struggling in March, the trade deficit improved to $686 billion US versus just over $1 billion USD 12 months ago. Again, this is a reflection of declining domestic demand.

READ MORE: Petro’s Reform Plans Stagnate as Colombia Sits at an Impasse

Ecopetrol was also in the news this week. Moody’s Ratings lowered its rating from ba3 to b1 and raised the outlook from negative to stable due to the increased debt requirements and cash flow situation. Reserves were also a slight concern. Also, Finance Minister Ricardo Bonilla made mention of increasing production to 1 million bpd — which would be a 30% increase from where we are today. We have heard this for years, since the days of former President Iván Duque and ex-Ecopetrol head Felipe Bayon, and it still seems fanciful. It would be most welcome news but Colombia, no doubt, but for several years now, the industry simply isn’t coming up with the new reserves it would require and needs to move on from the obsession with oil.

Never miss Rupert’s latest commentary
Follow him now on LinkedIn to see What Jumps Out

With these recent comments, Roa, who has been a public supporter and ally of President Gustavo Petro, has become yet another high-profile official questioning the oil and gas exploration ban that Petro began advocating in his campaign before the 2022 election.

“We have not said that we will not sign new search and exploration contracts,” said Roa on the call. “Hopefully there will be more, and hopefully there will continue to be a debate on this topic because exploration is what gives long-term stability as an oil company. To increase its reserves, it is necessary to have areas to explore and search for oil and gas.”

Along with moving away from oil and gas explorations in the country, Petro has stressed for a pivot towards tourism and clean energy, a plan which has been opposed by members of the country’s oil and gas industry and other pro-business sectors who believe it the revenue shortfall it would create could not be made up quickly enough to support the nation’s strategic objectives and commitments.

The ban on new exploration was also opposed by Roa’s predecessor at Ecopetrol, Felipe Bayon, who has pushed for a gradualist approach to transitioning Colombia towards clean energy in opposition to Petro’s zero consumption goals. “It’s going to take a lot of time, effort, and money to ensure that other industries take its place,” Bayon said previously on public comments.

Roa was appointed as president after Bayon resigned in January and took charge during a first quarter that saw year-over-year net profits fall by 14%.

“My priorities will be focused on maintaining value generation as we move towards an energy transition and sustainability in all our operations,” said Roa, while acknowledging the need for future oil explorations to keep the company’s medium-term growth stable while still staying committed to finding the balance between economic and environmental sustainability.

Since taking the position in April, Roa has also been looking into potentially using new technology, such as artificial intelligence, as a way of improving outputs and exploration rate success for the company up to an ambitious production rate goal of one million barrels of oil equivalent per day.

The Ecopetrol Group’s announcement of the financial report’s results occurred on March 1 during a conference call, where company CEO Felipe Bayón Pardo, enumerated the recent success that the company experienced this year.

During 2022, the Ecopetrol Group continued delivering record operating and financial results and above the targets set at the beginning of the year. This, together with environmental, social and governance actions consistent with best industry practices and standards, and in line with our commitment to generate sustainable value society and our shareholders. The above occurred within a reliable and safe operation that covers all Ecopetrol Group contractors and employees, which is reflected in a low accident rate, with a TRIF (Total Recordable Incidents Frequency) of 0.33, the lowest in Ecopetrol’s history, placing us as an international reference,” Pardo said during the report.

Felipe Bayón Pardo, the outgoing president of Ecopetrol, has served since February 2016. (Credit: Ecopetrol)

Bayón continued:

Full year 2022 reported revenues of COP 159.5 trillion, a net income of COP 33.4 trillion, an EBITDA of COP 75.2 trillion, and an EBITDA margin of 47.2%. Furthermore, the gross debt/EBITDA ratio was 1.5 times and the return on capital employed (ROACE) was 18.8%. Investments for 2022 totaled USD 5,488 million (COP 23.4 trillion), figure that falls in the top of the range set for the year (USD 4.8 – 5.8 billion or COP 20.4 – 24.7 trillion) and reflects an increase of 26.1% versus 2021.

 Our contribution to the country was outstanding: in 2022 around COP 42.4 trillion were provided to the Republic of Colombia in the form of dividends, royalties, and taxes, compared to COP 16.8 trillion in 2021. Likewise, COP 2.1 trillion were delivered to our minority shareholders.

During 2022, Ecopetrol Group was consolidated in three business lines, which we will further explain, that will continue to position us as a diversified energy group in the region.

In the Low Emission Solutions line, in 2022 the contribution of gas and its derivatives to the consolidated production was 24%. With the exploratory and development activity in the Piedemonte, in the continental Caribbean and offshore, we are contributing to the country’s energy safety, leveraging the competitive supply of gas, which is a critical energy source for local industry and residential consumption. Additionally, on the social gas front, during this year, we installed 13,447 new connections, an increase of 119% compared to 2021, confirming our commitment to expand gas access to more Colombian families.

On the hydrogen front, in 2022 Ecopetrol strengthened its position as a leader in the development of this new energy source, becoming the first company in Colombia to carry out a pilot test to produce green hydrogen under industrial conditions. In addition, we made significant advances to positively identify white hydrogen resources in Colombia, following the completion of surface and subsoil sampling in three of our basins, finding positive results. In 2022, USD 7.5 million (COP 31.9 billion) were invested in this endeavor, which confirms Ecopetrol’s commitment to the development of low-emissions hydrogen.

Finally, during the fourth quarter, we incorporated 95 MW of non-conventional renewable energy sources into our energy matrix through: i) the entry into operation of the Brisas solar eco-park with an installed capacity of 26 MW, ii) the execution of a long-term energy contract for a solar photovoltaic source with a capacity of 65 MW; and, iii) the acquisition of the Cantayús Small Hydroelectric Plant, the first hydroelectric generation asset acquired by the Ecopetrol Group, with a capacity of 4.3 MW. In 2022, we reached an operation of 208 MW, in addition to 102 MW under construction, bringing Ecopetrol closer to its target of between 400 – 450 MW by 2024.

In the Hydrocarbons line, the Ecopetrol Group achieved a Reserve Replacement Ratio of 104% in 2022, incorporating 249 MBOE, due to the management of development fields, reflected in the optimal and timely maturation of new projects, better execution capacity and implementation of expansion projects with enhanced recovery. Of the total balance of reserves, 75% were liquids and 25% were gas, while the average life of reserves is 8.4 years.

We highlight the positive performance of the production, which closed 2022 at 709.5 mboed, exceeding the annual target of 700 to 705 mboed, an increase of 4.5% compared to 2021. We also highlight December’s production exit rate, which reached 734 mboed, the highest recorded since February 2020. Among the main factors contributing to the increase in production were the following: i) production growth in Permian and Caño Sur, and ii) the increase in gas and white products volumes due to the commercial strategy and the recovery after the public order situation in 2021.

On the exploration front, during 2022, we recorded seven successful wells (four more wells than in 2021), which allowed progressing more than 50% of the prospective volumes drilled to discovered resources. Those wells are located in basins of significant interest to Ecopetrol in the country, including wells in the Colombian off-shore (Uchuva-1, Gorgon-2), Upper Magdalena Valley (El Niño-2 and Ibamaca-2ST), Middle Magdalena Valley (Morito-1), Llanos Orientales (Tejón-1) and in the Lower Magdalena Valley (Coralino-1), which will contribute to the country’s energy safety.

The downstream segment recorded a consolidated throughput of 357.5 mbd (an increase of 1.1% over the 2021 throughput, and a figure that falls in the upper bracket of the annual target set of 340 to 360 mbd), the highest in the last three years, as well as a historical annual gross margin of 21 USD/Bl. The segment’s results were supported by operational and commercial strategies that resulted in: i) adjustments in the execution of the maintenances strategy aimed at capturing the benefits from market conditions and operational stability in the refinery units and petrochemical plants, and ii) a comprehensive logistic chain plan for maximizing the consumption of domestic crude oil in the refineries. The entry into operation of the Cartagena Crude Plant Interconnection Project (IPCC for its Spanish acronym) in September 2022 is also worth noting, allowing the Cartagena refinery to increase its production capacity by 50 mbd, thus reaching 200 mbd. This expansion allows the Ecopetrol S.A to meet the country’s growing demand for fuels and contributes to Colombia’s energy safety.

In the midstream segment, the total transported volume for 2022 amounted to 1,070.7 mbd, and exceeded the year’s target of one million barrels per day. This represents an increase of 6.3% compared to 2021, mainly explained by the 5.8% increase in crude oil transported, which primarily resulted from higher production from the Llanos operations.

As part of our decarbonization strategy roadmap and in line with our commitment to achieve net zero carbon emissions by 2050, we sold four shipments of 4.0 million barrels of carbon-compensated Castilla Blend® to the United States, India and Spain. Additionally, by year-end 2022, we began selling carbon-compensated extra gasoline to wholesale distributors, thus contributing to climate change mitigation in Latin America and the region. We also conducted tests on the application of asphalt modified with recycled plastic on roads in Bogotá and Medellín, thus making concrete progress in our circular economy projects.

In the Transmission and Toll Roads line, during 2022 ISA developed projects aimed at promoting a cleaner energy matrix in the region, with the entry into operation of seven energy transmission projects, one battery project and 76 reinforcements, as well as improvements to the CTEEP network. These achievements complement the solid financial results, maintaining the growth path and guaranteeing the segment’s growth and profitability. Net income amounted to COP 2.2 trillion, an increase of 32% compared to 2021, while EBITDA stood at COP 8.6 trillion, 11% higher than in 2021.

On the commercial front, the Ecopetrol Group’s strategy continues to focus on diversifying markets and destinations, supported by stable blend qualities and a reliable supply chain. The above drove local sales volumes to increase by 11.4% in 2022 versus 2021, and exports by 2.5% during the same period. Furthermore, Ecopetrol Trading Asia (ECPTA), our subsidiary in Singapore, started operations in March 2022, and has allowed us to consolidate our crude oil exports and strengthen new relationships with customers in the Asian market.  Finally, given the performance of gasoline and diesel price spreads in the local market versus the international benchmark price, the account receivable from the Fuel Price Stabilization Fund (FEPC for its Spanish acronym), which corresponds to a cumulative balance between 2Q22 and 4Q22 for Ecopetrol and 4Q22 for Reficar, amounts to COP 26.3 trillion as of year-end 2022.

Regarding the TESG result, the following is worth highlighting:

On the environmental front, by year-end 2022 we exceeded the annual emissions reduction target (262,761 tCO2e) recording total emission reductions of 416,672 tCO2e which exceeds the year-end target by 59%. Also, in 2022, a carbon credit trading desk was created to manage the Group’s needs at a national and global level. In terms of water management, we reported positive results, with an annual reuse rate of 77.5%, compared to the total water required to operate. Finally, in 4Q22 Ecopetrol became the first company in Latin America’s hydrocarbon sector to verify its water footprint, thus reinforcing our commitment and progress towards achieving our water-neutrality target by 2045.

On the social front, we continued to positively impact the regions, in line with our commitment to improve Colombians’ quality of life and the generation of value in the territory, with contributions focused on closing inequality gaps. In that sense, this year we allocated COP 615 billion in resources for sustainable development projects and initiatives. Some of our most significant investments in education included the remodeling of nine educational institutions in the Department of Casanare, improvements to the Luis Carlos López School in Cartagena (Bolívar), and improvements and modifications to four Schools in San Vicente de Chucurí (Santander). Additionally, through the ‘Works in Lieu of Taxes’ mechanism, the Group has delivered 38 of the 59 projects assigned for a total of COP 348 billion. The assigned projects will benefit more than 1.6 million Colombians in 73 municipalities across the country, employing initiatives that seek to address the needs of the most vulnerable population by accelerating the energy transition, closing gaps in road infrastructure, supporting public education, and improving access to drinking water and basic sanitation. Since the creation of the program, the Ecopetrol Group has accumulated a total allocation of COP 558 billion.

Furthermore, we highlight the work of the Ecopetrol Group’s companies, which in 2022 procured goods and services for COP 32.6 trillion, of which COP 5 trillion came from local suppliers, and generated more than 130 thousand jobs, including over 28 thousand jobs for people with disabilities, ethnic groups, victims of the armed conflict, and individuals for whom this is their first job. This is evidence of the Ecopetrol Group’s contribution and importance to the local economy and its commitment to inclusion and business development in Colombia.

During 2022 the Company’s Science, Technology and Innovation agenda secured USD 595.7 million in benefits, which represents an increase of 71% over the USD 347.4 million certified in 2021. In December 2022  at the Caribbean Innovation Center, an agreement was signed with the Ministry of Commerce, Industry and Tourism, the Ministry of Mines and Energy, Grupo de Energía de Bogotá, Promigas, Siemens Energy, the Colombian Embassy in Germany and LATAM, to seek financing mechanisms for the development of renewable energy and green hydrogen projects in the country, reinforcing Ecopetrol’s commitment to the energy transition.

We would like to finish by highlighting the awards and recognitions received by Ecopetrol and some of its subsidiaries, including: i) the Business Merit Award granted by the Simón Bolívar University in the social responsibility and shared value category, for the implementation of the “Social Gas” program in Barranquilla (Atlántico), ii) the recognition of our commitment to the promotion of gender equality granted by the “She Is Foundation” within the framework of 2022 She Is Global Forum: Women of The Future, held in Cartagena (Bolívar), iii) recognition of the result (A-) and leadership in the Climate Change program by CDP (Disclosure Insight Action), exceeding the average performance of the industry (B) and the regional and global performance (C), and iv) recognition of the Ecoreserves by the UN (Global Compact Network Colombia – Best Practices SDG 15).

As we look ahead to 2023, we remain steadfast in our aim to contribute to the country’s energy safety, the transition to low-emission energy, and to generate sustainable value for both society and our shareholders, within a solid corporate governance and robust institutional framework.”

The full report, as well as the other presentations given during the call, are currently available on Ecopetrol’s site.

As expected, President Petro flew to Davos to be upstanding in front of the world. The discourse didn’t deviate from that expected, as Petro promoted Latin America’s capacity to convert to green energy when compared to other regions of the world – Colombia is at the forefront of that. Mining Minister Velez spoke of the urgent need to freeze oil exploration licenses and prioritize tourism and agriculture, which in time will be a good strategy but somewhat at odds with what Finance Minister Ocampo said more recently, never helpful.

Ecopetrol’s (NYSE: EC) Felipe Bayón was also in Davos as the company was invited to join the World Hydrogen Council – the only company in the region who are part of the entity. The stock itself is doing well, trading at levels not seen since before President Petro was elected.

The week started the Real Sector data for November and whilst the Manufacturing Production number (4.5%) was in line with expectations and only moderately lower than 5.3% in October the Retail Sales number was a different issue. Whilst it rose 1.7% on a headline basis, it was below the consensus of 1.9% and more concerningly once all the various elements related to vehicles are stripped out – the number was 0.4%.

On Wednesday we had the Economic Activity reading for November and it fell once again to 3% – it stood at 4.6% in October. To context that, it is the lowest reading since March 2021 when the comparable was with the low point of Covid, a clear reflection of a slowdown.

Another number that slipped under the radar was the Sept-Nov informal employment data. It stood at 58.2% on a national basis and 43.9% when measured in urban areas. Whilst there are years of work ahead to lower the numbers, these were at least lower than the previous time.

The final data of the week was the Import numbers for November – it was down 7.7% YoY but at US$6.04bn it was still a big number. The Trade Deficit of US$1.1bn was also unwelcome, if expected. Manufacturing, which is the dominant sector fell 12% and this dragged the overall number downwards. Sectors such as Vehicles, Pharma and Iron & Steel.

The markets followed those overseas which meant they were tentative. As mentioned above, Ecopetrol fared well due to China and the oil price, although now it is beginning to buttress up against its price targets. Oil also kept the Peso honest, battle has been joined at the ~$4680 resistance level but the currency appears to want to head lower still.

Please find below the LinkedIn Video :

https://www.linkedin.com/posts/rupert-stebbings-927b6316a_colombia-davos2023-economaeda-activity-7022136804069777408-Hqxy?utm_source=share&utm_medium=member_desktop

All in all – a busy week – have a good weekend.

Roops

The pilot, which will run over the next three months, uses industrial water from the refinery to produce 20 kg of high-purity green hydrogen (99.999%) daily. This pilot will allow Ecopetrol to collect information on the operation, maintenance, reliability and scalability of the technologies used.

The main objective of the pilot is to evaluate the technical and environmental feasibility, as well as the performance of the generation of green hydrogen at the Cartagena Refinery. The impact on the use of inputs such as water and electrical power will also be studied. The green hydrogen produced in the pilot will serve to improve the quality of the fuels produced in the refinery, for which gray hydrogen is currently used.

Ecopetrol says it is advancing in the acquisition of two electrolytic hydrogen generation systems with charging stations for bus and vehicle mobility applications. These initiatives are expected to be underway by early next year.

“Today we are the largest producer of hydrogen in Colombia. We use it to produce cleaner gasoline and diesel. However, we want to go further in our commitment to “SosTECnibility” and that is why we are announcing a robust portfolio of initiatives that seek the development of the industry of this energy in the country, while we advance in reducing the carbon footprint to meet the goal of being a company with net zero emissions by 2050, a fundamental step in our path towards the energy transition,” said Felipe Bayón, president of the Ecopetrol Group.

Low Carbon Hydrogen Plan

With an average annual investment close to $140 million USD by 2040, the Ecopetrol Group claims robust plans for the production of green, blue and white hydrogen for energy that will contribute between 9% and 11% to the target of reducing Scope 1, 2 and 3 emissions by 50% by 2050.

To execute this plan, the company has mapped out a route that will be developed over three horizons. The first, between 2022 and 2030, focused on the expansion of hydrogen in its own operations with industrial-scale projects and the start of applications in sustainable mobility with cars and buses.

The second, from 2030 to 2040, seeks to obtain meaningful results in the decarbonization of operations, diversify in maritime and aviation mobility with hydrogen and new opportunities commercial in the markets of Europe and Asia.

The third horizon, from 2040 onwards, is focused on the mass commercialization of the use of hydrogen and the expansion of the portfolio.

This year, Ecopetrol has budgeted $6 million USD for the development of the pilot at the Cartagena Refinery; the mobility of a bus of 50 passengers with hydrogen cell of mass transport in alliance with Fanalca; the feasibility development of new green/blue hydrogen plants in refineries of between 40 and 60 MW each, and the evaluation of white hydrogen sites in different regions of the country.

The hydrogen produced will have four applications: use in own operations, sustainable mobility, hydrogen blending with gas for thermal use and new low-carbon products for the market domestic and export.

“In September last year we presented the zero and low emission hydrogen sheet, and just 6 months later we are already putting into operation the first pilot projects of green hydrogen in the country. Today marks a historic milestone in the energy transition with the first green hydrogen molecules, the one energy called to decarbonize energy-intensive industries, and the first vehicle with hydrogen cells in Colombia. But this Ecopetrol project is just the beginning, our goal is to develop between 2 and 3 GW of electrolysis for the production of zero and low emission hydrogen in the next 10 years, with investments close to US$5.5 billion and the creation of between 7,000 and 15,000 jobs,” said Mines and Energy Minister Diego Mesa.

In words of Felipe Bayón Pardo, CEO of Ecopetrol:

“At the Ecopetrol Group we seek to attain long-term business competitiveness and sustainability. Accordingly, we have made significant progress during 2021 by consolidating our position as a leading energy and infrastructure group in Latin America, supported by our acquisition of ISA.

The Ecopetrol Group’s resilience, its ability to adapt to external impacts, the effort and drive of its more than 18,000 employees, and the coordinated work with diverse actors across the chain allowed us to guarantee the domestic fuel supply, swiftly responding promptly to an increase in demand of more than 25% with respect to pre-pandemic levels. We increased our domestic gas supply, overcoming the supply crisis, weather-related infrastructure issues, and the public order situation that affected our country during the second quarter of the year.

This February we launched our 2040 strategy, named “Energy that Transforms”. Our long-term goals, mapped in the strategy, include consolidating the Ecopetrol Group as a flexible, agile and dynamic organization, capable of rapidly adapting to constant change and the global challenges of a world striving to accelerate the generation and use of clean energy; while continue to pursue profitable growth and sustainable leadership in the Americas.

I am pleased to share the results of our Competitive Returns strategic pillar, which has enabled us to achieve annual consolidated revenues of COP 91.7 trillion, an 83.4% increase as compared to 2020; net income of COP 16.7 trillion, and EBITDA of COP 42.0 trillion (EBITDA margin of 46%), all record high results that allowed us to obtain a return on average capital employed (ROACE) of 13.6%. Fourth-quarter results were also exceptional: our consolidated revenue amounted to COP 31.8 trillion, net income of COP 6.1 trillion, and EBITDA of COP 14.0 trillion with an EBITDA margin of 44%, showcasing better results in 2021 than those years with better average crude prices.

In our Growth with the Energy Transition strategic pillar, we progressed on multiple fronts. Our reserve balance reached 2,002 million barrels of oil equivalent, an increase of 13% in comparison to 2020. For each barrel produced this year, we added two barrels to our reserves, reaching a reserves replacement ratio of 200%, the highest in the last 12 years. The average reserve life increased to 8.7 years, reflecting the Company’s remarkable management, even surpassing levels reached in the past.  Gas represented 28% of total reserve balance and reported an average life of 10.4 years.

Felipe Bayón Pardo, CEO of Ecopetrol (Credit: Ecopetrol)

In exploration, we drilled 13 wells in conjunction with our partners, exceeding the annual target of 9 wells set for 2021. Annual production from exploration assets included 65% derived from oil and 35% from gas. Domestically, in the 2021 Colombia Round, Ecopetrol S.A. was awarded three blocks in the Mid-Magdalena Valley basin, one in the Llanos Orientales basin, and – through Hocol – one in the Sinú San Jacinto basin.

In 2021 we reached an average production of 679 mboed, evidencing a recovery trend and closing the year with production for the quarter reaching 695 mboed. Within the Group’s total production, crude share increased to 79% favored by the successful drilling campaign in the Permian, where we achieved a cumulative number of 132 drilled wells and an operational peak production above 50 mboed, well beyond our expectations.

During 2021 natural gas and GLP production represented 21% of the Group´s total production, driven by the increase seen in supply in the year, reaching a combined EBITDA margin of 53%.

Regarding Unconventional Reservoirs in Colombia, we filed to ANLA the Environmental Impact Assessment for the Integral Investigation Pilot Project Kalé and moved forward in preparing the respective study for the Platero project, which was recently filed in February of this year.

In the Midstream segment, total volumes transported during the year reached 1,007 mbd, leveraged on economic recovery, with an increase of 20% in multipurpose pipelines.

In the Downstream segment, the positive trend seen throughout 2021 allowed us to close the year with a consolidated throughput of 354 mbd and a combined annual gross margin of 10.2 USD/Bl, and a record in the fourth quarter of 12.5 USD/Bl. The outstanding annual results, with record EBITDA for the segment, were supported on our operational stability in the refineries, the recovery of liquid fuel demand and its margins, Esenttia’s historic record results and the segment´s operating cost stability across all business lines.

In the commercial front, we highlight the increase from 34 USD/Bl in 2020 to 67 USD/Bl in 2021 in our crude oil basket realization price, illustrating the success of our strategy to diversify into other export destinations and to strengthen our relationship with clients. Today, the Asian market is our main export destination representing 57% of all exports.

The quarterly results for the Energy Transmission and Toll roads segment, with ISA’s results included in the Group’s fourth quarter consolidated results, amounted to COP 3.1 trillion in revenues, 0.6 trillion in net income and 16% of the EBITDA for the quarter. Some of the highlights of this last quarter for the energy business include the award of the 1,415 km high voltage direct current transmission project with a capacity of 3,000 MW at 600 kV in Chile, a project that will connect the north of the country with the metropolitan area, and the adjudication of the first large-scale energy storage project in Brazil. In the toll roads business, we highlight the completion of the construction stage and start of operations of of 100% of the 4G Cartagena-Barranquilla project.

In our Generate Value Through TESG pillar, the following advances were made:

In the environmental front, in terms of relevant decarbonization developments established the net-zero carbon emissions goal for Scopes 1 and 2 by 2050, as well as reducing by 50% our total emissions (Scopes 1, 2 and 3) by that same year. In line with these achievements, we are pleased with the progress made in renewable energy projects, with: i) the entry into operation of the San Fernando solar park with a capacity of 61 MW in October 2021, making us the largest self-generator of renewable energy in the country; and, ii) the assignment of the construction and start-up of two additional solar parks with a capacity of 66 MW, increasing total renewable capacity to 178 MW.

Consistent with our decarbonization strategy, in December we sold our first shipment of 1.0 mmbls of carbon compensated crude from Castilla Blend® to Asia, offsetting the carbon emitted in dilution, production and transportation by purchasing 32,000 carbon Verra certified carbon credits. 

In 2021 we recorded a positive progress towards our goal to achieve water neutrality, with the reusage of 74% of the water that we require in our operations. We constantly seek a balance between the water required to operate and taking actions that reduce the water footprint and counteract its impact through conservation projects.

In an effort to mitigate climate change, contribute to the protection of flora and fauna, and support the sustainable development of the territories in which we operate, the Ecopetrol Group designated nine additional eco-reserves, reaching a total of 15 zones that will contribute towards the protection of our country’s biodiversity.

Another important milestone was achieved with the awarding of Carbon Neutral certifications by the Colombian Institute of Technical Standards and Certification (Icontec) to our subsidiaries Cenit, Oleoducto de los Llanos and Oleoducto Bicentenario.

In the social front, for 2021, the Ecopetrol Group allocated social investment resources of COP 469 billion to strategic and legal investments. Additionally, investments through the “Works in lieu of Taxes” mechanism reached COP 232 billion allocated through 28 projects completed by year end, including the provision of educational facilities in 18 municipalities in Casanare and Putumayo. Social investment promoted local development to improve quality of life, thus helping to support high levels of trust in the areas in which we operate. These investments seek to boost the dynamics of local economies, promote education and access to public services.

Additionally, in our efforts to encourage economic reactivation and guarantee better living conditions for millions of Colombian families, Ecopetrol initiated a 6-month reduction of 30% in the price of LPG, a fuel used in many homes across remote areas of our country. During 2021, we installed 6.132 new connections of social gas, advancing in our objective of delivering gas to more Colombian families in vulnerable conditions.

On the corporate governance front, during the fourth quarter, Ecopetrol joined the “30% Club” (Colombia chapter), which promotes an increase in the participation of females on boards of directors and management positions in the business sector. The percentage of female participation on the boards of directors of the Ecopetrol Group increased from 18% in 2020 to 22% in 2021. Additionally, the Guidelines for the Boards of Directors of the Ecopetrol Group were updated to take account of the incorporation of new business lines, and to established the succession guidelines for Ecopetrol´s board members and its CEO. For its part, ISA and Ecopetrol were awarded the Equipares Labor Equity Seal for its commitment to implementing measures that seek gender equality.

Regarding the Cutting-edge Knowledge pillar, during 2021 we made significant progress in the Digital Transformation front, specifically in terms of digital reinvention, through a strategic portfolio that captures value and infuses innovation into each one of our processes, exceeding the capture of planned benefits, with compliance close to 137% equivalent to USD 93 million.

This year’s results allow us to begin 2022 in a solid financial position with a favorable pricing environment, a scenario that sets us on positive position to achieve the targets of the 22-24 Plan and provides better options to execute certain milestones included in the framework of our 2040 Strategy. We will continue to challenge ourselves, evolve and move further towards an integrated hydrocarbon chain, as well as towards decarbonization, electrification and diversification”.

To review the full report please visit the following link: https://www.ecopetrol.com.co/wps/wcm/connect/409c1954-ab6d-442d-b5a1-ad5c55c45515/Reporte+4T21+Ecopetrol+-+MASTER+-+ENG.pdf?MOD=AJPERES&attachment=false&id=1646181312192

Table 1: Financial Summary Income Statement – Ecopetrol Group

The figures included in this report were extracted from the Company’s unaudited financial statements. The financial information is expressed in billions of Colombian pesos (COP), or US dollars (USD), or thousands of barrels of oil equivalent per day (mboed) or tons, as noted. For presentation purposes, certain figures in this report were rounded to the nearest decimal place.

In words of Felipe Bayón Pardo, CEO of Ecopetrol:

“The results for the third quarter of 2021 confirm Ecopetrol’s technical, operational, and financial capacity to seize the favorable price environment. They also evidence the benefits of the structural adjustments that we have implemented in response to recent challenges. With the culmination of the purchase of a controlling 51.4% stake in Interconexión Eléctrica (“ISA”), the quarterly figures include the consolidated results of this subsidiary for one month, which represents a transformational milestone that allows us to present the results of the new Ecopetrol Group for the first time.

During this quarter, we continued delivering record results, with a consolidated revenue of COP 23.3 trillion, a net income of COP 3.8 trillion and an EBITDA of COP 10.4 trillion (EBITDA margin of 44%). In the first nine months of the year, our consolidated revenue amounted to COP 60.0 trillion, a net income of COP 10.6 trillion (6.3 times the net income generated throughout 2020), and an EBITDA of COP 28.0 trillion (EBITDA margin of 47%).

On the commercial front, we highlight the improvement in the realization price of our crude oil basket, which went from 38.4 USD/Bl in the third quarter of 2020 to 68.0 USD/Bl in the third quarter of 2021, demonstrating the good results of the strategy for diversification of destinations and close relation with our customers, in addition to the operational flexibility of the company by consolidating the delivery at place (DAP) mechanism. Additionally, we highlight the signing of diesel and motor gasoline supply contracts with wholesale distributors, a milestone that represents a referent for the industry and marks the beginning of a new commercial stage that consolidates the liquid fuels distribution chain in the country.

Exploration

The Liria YW12 well stands out, which proved the presence of hydrocarbons in a new structure near a production field, being a milestone that continues to drive our exploration activity in the Piedemonte Llanero. Ecopetrol and its partners completed 10 wells during the first nine months of the year, exceeding the target of 9 wells for 2021. The accumulated production of the exploratory assets accounted for more than 1.2 million boe at the end of the third quarter of 2021 (4,517 boed on average), with 67% of the production corresponding to oil and 33% to gas. Additionally, in August the Flamencos-1 and Boranda discoveries, located in the Middle Magdalena Valley, were declared commercial, which are part of the “Near Field Exploration” strategy in areas close to existing infrastructure that seeks the incorporation of production and reserves in a short period of time. In the international field, and in line with the growth and geographic diversification strategy of the Ecopetrol Group, our subsidiary, Ecopetrol Óleo e Gás do Brasil, acquired a 30% stake in the block S-M-1709, located in the Santos basin in Brazil during the “Rodada 17” bidding session organized by the National Petroleum Agency (ANP for its Portuguese acronym). The acquisition of this block, which will be operated by Shell, is focused on the basins with the highest potential in the continent.

Production

The Ecopetrol Group continues its recovery path, after experiencing a significant impact during the first half of the year associated with operating restrictions in the Castilla field and the public order situation in Colombia. During the third quarter, production reached 683.6 mboed, accounting for a growth of 3.5% when compared to the second quarter. Some of the relevant milestones of the quarter are: i) full production stabilization in the Castilla field, ii) normalization of production, previously affected by roadblocks due to public order disturbances in the second quarter of the year, and iii) the contribution from the new Flamencos-1 and Boranda commercial discoveries. Given the average production level for the quarter and the projections for the fourth quarter of the year, we estimate the 2021 yearly production to be around 680 mboed.

Natural gas and LPG

Production experienced an increase of 3.5% in the third quarter of 2021 compared to the same period of the previous year, as a result of higher sales volumes from Ecopetrol, Hocol, and Permian, primarily associated with a recovery in demand. During the third quarter, the contribution of gas and LPG to the Group’s total production was 20.6%, with a combined EBITDA margin of 60.0%.

Permian

Operations continue to advance according to plan, employing 4 drill rigs and 2 completion crews. We drilled 22 wells in this quarter, for a total of 69 so far this year. In addition, 16 new wells started production, for a total of 91 wells in production (22 in 2020 and 69 in 2021). It is worth highlighting that the level of production of the operation already exceeds 50.0 mboed, generating 24.4 mboed before royalties for Ecopetrol in the third quarter (equivalent to net 18.9 mboed after royalties).

Unconventionals

In terms of the Comprehensive Research Pilot Projects in Unconventional Reservoirs (PPII) Kalé and Platero, we continue advancing with the work schedules according to plan. On October 29, we submitted PPII-Kalé’s Environmental Impact Assessment (EIA) to the National Authority for Environmental Licensing (ANLA for its Spanish acronym), and on July 8, we conducted the first territorial dialogue and environmental monitoring as requirements for filing PPII-Platero’s EIA. To date, 450 dialogue and educational meetings have taken place within the influence area.

Midstream

In the midstream segment, during the quarter we transported 1,012.2 mbd, which represented a recovery of 52.3 mbd compared to the immediately previous quarter. The volume transported during the first nine months of the year was 993.3 mbd, a decrease of 2.0% compared to the same period of 2020, as a result of a lower production of crude oil in the country, mainly in the Llanos area.

In terms of renewable energy self-generation in the segment, in September we started operating six new solar plants at the stations of Baranoa, Miraflores, Mansilla, Tocancipá, Yumbo, and Pereira, in order to reduce approximately 513 tons of CO2 per year, also in line with our decarbonization targets by 2050. Similarly, we finished the construction of the San Fernando Solar Park last October 22, 2021, which will provide 61 MWp of available capacity and it is considered the largest renewable energy self-generation facility in the country.

Regarding transportation disputes, the agreement announced by Frontera, CENIT and Bicentenario on November 17, 2020, was approved by the Administrative Tribunal of Cundinamarca by means of an order that was notified on November 5 of 2021. It is important to mention that the agreement has a favorable opinion from the Attorney General’s Office (Procuraduría General de la Nación), received on March 24, 2021, also, it puts an end to all disputes between the parties regarding to the transportation contracts for the Bicentenario Pipeline and the Caño Limón – Coveñas Pipeline, as well as other contracts for storage and port services. With this agreement, all existing arbitration proceedings arising from these disputes are concluded.

Downstream

The downstream segment continued with the positive trend observed throughout 2021, with a consolidated throughput of 358.0 mbd and an integrated gross margin of 9.5 USD/Bl as of September 2021. This segment closed the third quarter with a throughput of 353.8 mbd and an integrated gross margin of 9.0 USD/Bl, respectively. These results are largely attributable to: i) the improvement of the refined products basket, in line with the generalized increase in demand due to the reactivation of the productive sector, ii) selling of inventories due to a favorable price environment and the positive operating performance at the Barrancabermeja refinery, iii) the adoption of commercial strategies at Esenttia to mitigate the weakening of the Polypropylene Margin, iv) the stability of Invercolsa as a result of higher natural gas sales and installations, and v) the segment’s cash cost stability. The aforementioned, despite the operational events originated at the Cartagena refinery during the quarter, which have already been solved.

ISA Acquisition

In the new electric power transmission and toll roads segment (which arose out of our acquisition of ISA) only consolidates one month of results into the quarter, we highlight the following: i) in the electric power business, the entry into operation of three projects (in Chile, Brazil, and Colombia), as well as the granting of the Environmental license for the UPME07-2017 Sabanalarga-Bolívar 500 kV project in Colombia, and ii) in the road concessions business, the construction of eight projects continued in Colombia and Chile, which will add 246 km to the existing road network.

It is important to note that a Transition Management Office (TMO) was established, which has made possible the transition process from ISA to the consolidation and reporting of the Ecopetrol Group. The main efforts in the last 12 weeks since the acquisition have been focused on ensuring compliance with the legal and regulatory requirements associated with accounting consolidation, reporting, and financial planning processes, as well as matters related to compliance and corporate governance. The next steps will be aimed at prioritizing opportunities and synergies to accelerate the capture of joint value.

Environmenta, Social, Governance

In TESG, we continued to make progress in each pillar of the strategy throughout the year.

In the environmental front, particularly in renewable energy projects, Ecopetrol was included as a relevant participant in the Colombian Hydrogen roadmap launched by the Ministry of Mines and Energy on September 30. Moreover, we highlight the contract entered with South Pole on August 6, 2021, who will be our structuring partner for the Nature-Based Solutions projects, and the Cooperation Agreement signed with The Nature Conservancy, which seeks to leverage the implementation of the Ecopetrol Group’s decarbonization plan. As of September 2021, we had fulfilled 79% of the goal established for 2021 within the framework of the “Sembrar Nos Une” national initiative with 3,149,716 trees planted.

In the social dimension, during the first nine months of the year, the Company allocated social investment resources for a total of COP 269 billion in strategic and mandatory investments. Similarly, by means of the “Obras por Impuestos” (Works in lieu of Taxes) mechanism, we completed 25 projects by the end of the third quarter, with a total value of COP 201 billion, mainly focused on the improvement of roads and endowments to student residences. Additionally, Ecopetrol’s Diversity and Inclusion Program was granted the Equipares-Icontec Silver Seal, highlighting the communications efforts carried out within the framework of this program due to its coherence, assertiveness, connection, and impact as a fundamental pillar for the strategy.

In corporate governance, the TMO team appointed within the Company has been presenting on a regular basis the developments around the successful incorporation of ISA into the Ecopetrol Group to the Board of Directors, in line with our commitment to advance in a transition that ensures the continuity of the strategy and the robustness of Ecopetrol and ISA’s governance principles. Identifying and aligning the best practices of both companies will ensure the implementation of a corporate governance structure that stands out for its experience and transparency. Last October 22 of 2021, ISA’s extraordinary General Shareholders’ Meeting took place, in which new Directors were appointed and Ecopetrol exercised its right to nominate candidates in virtue of the controlling position it currently holds on ISA.

In digital transformation, we have captured benefits in the digital agenda for a total of USD 36.5 million by the end of the third quarter of 2021, with advancements in the digital agenda, digital factories, intelligence, and innovation projects.”

Ecopetrol is the largest company in Colombia and one of the main integrated energy companies in the American continent, with more than 17,000 employees. In Colombia, it accounts for more than 60% of hydrocarbon production, and most of the hydrocarbon transportation, logistics, and refining systems, and has leading positions in petrochemicals and gas distribution. With the acquisition of 51.4% of ISA’s shares, it participates in energy transmission, management of real-time systems (XM) and the Concesión Costera Barranquilla – Cartagena. At the international level, Ecopetrol focuses on strategic basins on the American continent, with E&P operations in the United States (the Permian basin and the Gulf of Mexico), Brazil and Mexico, and through ISA and its subsidiaries it has leading positions in the transmission business in Brazil, Chile, Peru and Bolivia, in road concessions in Chile, and in telecommunications.

ISA is an international electrical grid operator with positions in the electrical infrsastructure throughout the Andes, including Argentina, Brazil, Bolivia, Chile, Peru, several Central American countries as well as Colombia. In addition to the electrical grid and transmission, ISA provides fiber optics and telecommunications services through its Internexa subsidiary, and operates highway concessions in Chile.

Through the offer and other recent investments in renewable energy, Ecopetrol seeks to diversify away from a pure-play petroleum company. While Colombia is a petroleum exporter, already approximately 80% of domestic electricity is produced via hydroelectric generation. Ecopetrol has traditionally been an upstream and midstream petroleum company with international investments, domestic and offshore oil & gas fields, and two massive refineries in Cartagena and Barrancabermeja, Colombia.

Analysis: The fact that Ecopetrol has gone public with its intentions indicates the near certainty that a deal has been agreed upon in advance within Colombia’s government. It also reveals an intention of the Colombian government to raise cash without further direct indebtedness, by selling one government asset to another, with the acquiring asset raising money in a way that does not affect government credit ratings. Remember that this comes a year after the government pulled $1 billion USD out of Ecopetrol through a special dividend.

“This decision responds to the Ecopetrol Group’s strategy that seeks to strengthen its leadership in the hydrocarbon chain in the American continent, while accelerating its energy transition with an ambitious plan to reduce emissions, grow in renewable sources, and increase gas production. and participation in other energy fields, including transmission, all leveraged on digital transformation and technological convergence,” said the company in a written statement.

The transaction would be carried out through an inter-administrative contract between Ecopetrol and the Ministry of Finance and Public Credit. To make this investment, it is not necessary to make a Public Acquisition Offer (OPA) or tender offer to ISA shareholders, to the extent that the government of Colombia would continue to be the real beneficiary of ISA’s shares and would maintain ultimate control over them.

The transaction would be financed through the issuance of new Ecopetrol shares, equity and other available financing schemes, including the divestment of non-strategic assets. This new issue, if completed, would be the largest in the history of Colombia. The financial structuring of the operation would maintain a level of Ecopetrol indebtedness aligned with its investment grade.

“This acquisition would mean a milestone in Ecopetrol’s history that would strengthen us in the national and international energy sector and allow us to accelerate the energy transition in which we are committed. It would be the birth of a stronger, more resilient conglomerate with a greater capacity to grow in the new era of clean energy,” said Felipe Bayón, president of Ecopetrol.

The investment banking divisions of HSBC and Bancolombia are assisting Ecopetrol in the acquisition effort.

Furthermore, Ecopetrol presented in its defense a medical board’s findng that “the former worker has maladaptive personality traits that limit the therapeutic response, despite the multiple pharmacological schemes ordered by psychiatry and the supportive psychotherapy carried out both for psychiatry as clinical psychology.”

The warrant states that Bayón must spend five days in jail and pay compensation of 5 Colombian monthly minimum wages (approximately $1,260 USD) to former employee Claudia Patricia Erazo for violating her rights as a former employee of the company.

Ecopetrol has appealed the charges to the Superior Court of Nariño, saying that it has in fact, complied with all obligations due to Ms. Erazo, and even paid for her health care for two years after her separation with the company. Apparently, the warrant will not be exercised while the appeal is adjudicated.

Photo courtesy Ecopetrol