Ecopetrol S.A. (NYSE:EC) recently approved an updated strategic investment plan for the company that calls for $80 billion in capital spending through 2020 on various upstream and downstream projects across its portfolio.
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Ecopetrol is based in Colombia, and is an integrated oil and gas company with operations in both the upstream and downstream areas. The company reported proved reserves of 1.7 billion barrels of oil equivalent (BOE) at the end of 2010, and estimates that production in 2012 will average 750,000 BOE per day. Ecopetrol is transitioning to a more private ownership of the company, and is currently 88% owned by the Republic of Colombia. (Find out how to take advantage of this market without having to open a futures account. For more, see A Guide To Investing In Oil Markets.)
Ecopetrol adopted a strategic plan several years ago, and updates it regularly as conditions in the industry and economy evolve. The strategic goals in the plan include reaching a production level of 1.3 million BOE per day by 2020 and 6.2 billion BOE of reserves. The company also hopes to increase the average life of these reserves to 10 years, and boost the average recovery rate on fields to 34% through the use of enhanced oil recovery methods.
Ecopetrol is looking to achieve a three year average return on capital employed (ROCE) of 28% in the upstream, and from 9 to 13% in other operations. In the downstream area, Ecopetrol is targeting a refining capacity of 415,000 barrels per day, up from the current level of 300,000 barrels per day.
In 2012, Ecopetrol has budgeted $8.4 billion towards achieving these goals, with 94% of the capital for projects in Colombia. The company will use the balance for projects in the United States, Peru and Brazil, and is using an oil price assumption of $70 per barrel for its investment plan.
From 2012 to 2020, Ecopetrol will spend $80 billion in capital, with 85% devoted to the upstream exploration and development. Ecopetrol expects to use internally generated cash to fund 75% of this capital plan through 2020. The company will fund an additional 16% with debt financing and 9% with equity offerings.
One recent exploration success for Ecopetrol occurred in October 2011 in the deepwater area in the Gulf of Mexico, where the company has a 20% interest in a well operated by Statoil (NYSE:STO). Ecopetrol has interests in more than 100 blocks in the deepwater Gulf of Mexico, and has approved additional drilling in this area in 2012.
The deepwater Gulf of Mexico remains attractive to many operators despite increased regulation imposed after the oil spill at the Macondo prospect in early 2010. Nexen (NYSE:NXY) and CNOOC Limited (NYSE:CEO) recently entered into a joint venture in the Gulf of Mexico. The joint venture covers six deepwater exploration wells, including one currently being drilled.
The Bottom Line
Ecopetrol is investing tens of billions through 2020 in the upstream and downstream as the company hopes to move up in the rankings of global oil companies. Although this strategic plan seems achievable, Ecopetrol might consider using this multi-year growth plan to diversify away from Colombia and get more involved with international upstream projects. (For related reading, see Peak Oil: What To Do When The Wells Run Dry.)
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.