Ecopetrol: Impact of Colombia tax reform 'minimal'

Colombia's sweeping tax overhaul will have only a minor impact on the finances of state-run oil producer Ecopetrol, company executives said on Wednesday. 

Congress last week approved a bill that raises an additional 20tn pesos (US$4bn) annually, mostly through higher contributions from oil and coal producers.

"We don't believe that this tax reform fundamentally changes the valuation of our long-term projects," Ecopetrol's chief financial officer Jaime Caballero told analysts in a quarterly earnings call. 

The reform includes a surcharge on income tax for fossil fuel companies when international values of raw materials reach certain levels. 

Oil producers will be taxed an additional 5% when crude oil prices are between US$67.3/b and US$75/b. The figure rises to 10% when prices range between US$75/b and US$82.2/b, and 15% when they are higher.

"We've been looking at it in a lot of detail and the methodology that has been proposed is robust as it acknowledges the realities of prices in the sector," Caballero said.

"In a lower price environment the impact will be minimal. In a higher price environment, it will have a larger effect but will be [offset] by higher cash flow."

In addition to the surcharge, oil and gas companies will no longer be able to deduct royalty production costs from their income tax. According to Caballero, the effects of this change will be “relatively marginal,” raising Ecopetrol's effective tax rate by two to five percentage points. 

"You can think of our effective tax rate being around 33% or 35%. In a high price environment there will be a surcharge of 15%, taking the effective tax rate to 48% or 50%," he said. 

President Gustavo Petro, who became the country's first leftist leader when he took office on August 7, has said he will use the reform to finance an ambitious social spending program aimed at combating poverty and inequality. 

Critics have warned the initiative will discourage investment, particularly in the oil and coal sectors, which together accounted for almost half of Colombia's US$41.2bn export revenue in 2021.

NEW EXPLORATION BAN

In addition to raising the tax burden on fossil fuel companies, Petro has pledged to stop issuing new oil and gas exploration licenses and accelerate investments in renewable energy. 

According to the Colombian Petroleum Association (ACP), the measures could leave the country needing to import gas by 2026 and oil by 2028.  

But Ecopetrol CEO Felipe Bayón suggested he had not given up hope of acquiring new exploration licenses. 

"Our most recent conversations [with the government] have been centered on additional exploration potential beyond contracts that have already been signed," Bayón said in Wednesday's call. "We've looked at what the potential is and what the options are, including our view about what the subsurface potential could be," Bayón said. 

Petro has remained steadfast in his view that no new exploration contracts will be issued under his mandate. However, finance minister José Antonio Ocampo and energy minister Irene Vélez have suggested in recent weeks that the government's position could be reversed. 

FRACKING

One policy decision that is unlikely to change is a ban on fracking, or hydraulic fracking. In September, Ecopetrol asked hydrocarbons agency ANH for a 90-day suspension on contracts for two fracking pilots it is developing alongside US major ExxonMobil. 

The request came after the Petro administration filed a bill to congress proposing a ban on all drilling for unconventional hydrocarbon sources. 

"If congress formally decides that there won't be fracking in Colombia, we won't do it," Bayón said. “We are in discussions with ExxonMobil on how to go back on commercial agreements. If that occurs, each company will go back to having their original ownership of the areas.”

He added, "Ecopetrol will remain owners of the acreage in the long term and we'll see where that goes. We're awaiting a response from ANH and we'll take it from there, while maintaining constant communication with our partner."

The Bogotá-based firm, which is responsible for more than 60% of Colombia's crude oil production, reported a third quarter profit of 9.51tn pesos (US$1.9bn), boosted by higher prices and increased production.