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Colombia's Ecopetrol thinks big

ECOPETROL is pushing ahead with plans to plough $80bn into its operations in 2011-20

The Colombian national oil company (NOC) is hoping to take advantage of positive investor sentiment following a landslide presidential election win for the candidate seen as most likely to maintain the pro-business policies of his predecessor.

The company, in which the state has an 89.9% holding, wants to raise oil and gas production to 1.3m barrels of oil equivalent (boe/d) by 2020, compared with the 0.69m boe/d it is forecasting for 2010. On the way there, it plans to hit output of 0.87m boe/d by the end of 2011 and 1.0m boe/d by end-2015. Ecopetrol accounts for around 90% of Colombian oil and 95% of natural gas production.

Hitting the $80bn investment target – 80% of which will target exploration and production, with 78% of the total being spent domestically – is going to require extensive use of capital markets in the medium to long term. On announcing buoyant half-year results in late July, Ecopetrol said it planned to acquire $23bn of debt, as well as raising $6bn through the sale of a further 9.9% of the company, with the rest of the $80bn coming from its own resources.

Javier Gutierrez, the company's president, said earlier this year that Ecopetrol – which is listed on the Bogota and New York stock exchanges – could go ahead with a share placement as early as the beginning of next year. The firm said it might not need to take on fresh debt in the second half of 2010, if oil prices remain stable.

Net income grew by 64% in the first half of 2010 to Ps3.9 trillion ($2.1bn) from the year-earlier period, while second-quarter net profits soared by 137% to Ps1.8 trillion, bolstered by higher oil prices, increased exports and tighter non-operating spending.

The company's fund-raising prospects have been boosted by a landslide win for Juan Manuel Santos in June's presidential election run-off. Santos, who took office in August, is a former defence minister. He has pledged to maintain outgoing President Alvaro Uribe's tough security policies, which have reduced the impact of guerrilla activity by leftist rebels, his pro-commerce stance and efforts to reduce the effect of external shocks on the economy.

Uribe came to power in 2002, and in recent years, foreign investment in Colombia has been rising sharply. Investment is set to reach around $10bn in 2010, compared with around $7.5bn last year, according to the country's trade ministry.

"As under the Uribe administration, ours will be a friendly government towards investment ... our policy will be clear and stable, with rules of the game where everyone feels comfortable," Santos told an energy conference in Cartagena shortly after his election win.

Such investor-friendly utterances have fed into positive assessments of both Colombia's, and Ecopetrol's, prospects by credit ratings agencies. In early July, Standard & Poor's (S&P) affirmed its BB+ credit rating for Ecopetrol and raised its outlook for the firm to positive from stable. The move followed S&P's upgrade of the foreign currency outlook for Colombia, which provides financial backing for Ecopetrol.

"The outlook revision on Ecopetrol results from the high likelihood that the government would provide timely and sufficient extraordinary support to the company in the event of financial distress, and from its stand-alone credit profile," says Fabiola Ortiz, an S&P analyst.

The improved outlook also reflects Ecopetrol's leading position in the domestic oil and gas industry, its low production costs and its proved track record in accessing capital markets, says S&P. In May, ratings agency Moody's Investors Service described Ecopetrol and Brazil's Petrobras as the best positioned of Latin America's NOCs, given their track record in attracting private-sector capital and new technology, against a background of market-friendly government policies. But S&P cautioned that Ecopetrol's ambitious expansion plans could limit the upside for its rating, as could price volatility in the oil and gas markets.

Concerns also remain over the possible resurgence of activity by anti-government guerrillas, which could jeopardise Colombia's improving image as an investment destination. Their activity has been curtailed since 2002 by a US-backed push by the Colombian military. While Alfonso Cano, leader of the Revolutionary Armed Forces of Colombia (Farc), the largest leftist guerrilla group, recently called for talks with the new government, the Colombian police reported increased violent activity by Farc in the run up to Santos' inauguration.

Ecopetrol plans to spend $44bn boosting its reserves to 6bn boe by 2020 from 1.8bn barrels now: $10bn will be spent improving recovery factors; while $31bn will be spent on non-conventional resources, heavy crude and medium crude development, and new technology. The firm also plans to spend around $4.2bn upgrading its two refineries and $5.5bn on the petrochemicals sector, with a view to increasing production to 2.7m tonnes a year (t/y) by 2020, up from 450,000 t/y.

Ecopetrol has earmarked $20bn for exploration as part of its 2011-20 plan. Around $4.2bn of that is going to existing and recently acquired domestic blocks, while $11.5bn is allocated to international activities. Ecopetrol's three overseas subsidiaries – Ecopetrol Brazil, Ecopetrol America and Ecopetrol Peru – are set to receive $3.8bn between them for exploration.

The company has been pushing ahead with its upstream expansion programme, both at home and abroad. In July, Ecopetrol was the highest bidder for nine exploration blocks in Colombia's latest licensing round. The blocks, covering 2.8m hectares, are in Pacific and Caribbean waters. The company plans to develop the Cayos 1 and 5 blocks in the Caribbean with Repsol and YPF, the Spanish company's Argentine arm. Although the blocks are in an area also claimed by Nicaragua, that country's claim – under review in the International Court of Justice in The Hague – is weak, say analysts.

Meanwhile, Ecopetrol Peru and Korea National Oil Corporation are to invest $120m to explore two hydrocarbon concessions on Peru's central coast, says upstream regulator PeruPetro.

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