Taking Peru

With the creation of its affiliate, Ecopetrol del Peru, the purchase of 50% of the Offshore International Group, and its recent entrance into the Lima Stock Exchange, Ecopetrol has demonstrated that it is interested in long-term business with its brother nation.

By Alexandra Santamaría Molano

A bambuco or Lima’s criolla music. A red snapper from the coast or the most famous ceviche in the world…Peruvian ceviche. An aguardiente from Antioquia or the extreme taste of pisco sour. Shared history. Now from natural gas from Chuchupa in La Guajira to the platforms in Talara, and from the fields in the Llanos Foothills to the Marañón and Ucayali basins, the drive of hundreds of Ecopetrol workers is joined with that of the Peruvians.

The Andes mountain range and the deep waters of the Pacific Ocean marked the paths of our ancestors and forged many of the traditions that Peruvians and Colombians share today. And these ties are now made stronger as Ecopetrol enters to form a part of Peruvian growth, considered to be one of the most solid in Latin America.

The history of Ecopetrol in Peru began in the year 2006, when the company chose Brazil, the United States, and Peru as focus countries for its international growth strategy. Since then, many tasks have been accomplished and many new challenges have been faced.

Just kilometers away, Peru offers interesting alternatives for growth for the industry and for company mergers, factors not ignored by entrepreneurs in Colombia. In the words of those looking to do business, Peru encourages economic freedom, private investment, and free competition.

Moreover, it has a stable regulatory framework that inspires confidence in investors. “Its proximity to Colombia, the cultural similarities, and the fact that in recent years favorable conditions have been created for oil investment, encouraged Ecopetrol to look for opportunities in that country,” stated the head of Ecopetrol’s Strategy and Management Unit, Hernando Zerda.

Considered an almost unexplored country, it also has attractive potential for hydrocarbon exploration and production in several of its basins.

Here to Stay

The offshore platform in Talara is the only production platform in the Pacific Basin of Latin America and the development of the natural gas export facilities in Camisea offers growth opportunities that are in no way insignificant. Interest by multinationals in participating in the oil and gas industry in Peru has been continually increasing.

“The stability of the playing rules is notable. This is confirmed by the contracts produced during previous exploratory rounds. The tax regime is favorable and the political environment is stable,” added Zerda.

Ecopetrol believes in all these advantages in the Peruvian oil marketplace. That is why it entered into cooperation agreements and technical evaluation agreements at the end of 2007, the first steps toward entering the neighboring country. For that reason it opened its affiliate in Peru on August 22, 2007, bought 50% of the Offshore International Group in February 2009, whose main asset is PetroTech Peruana, and entered the Lima stock exchange as an issuer last December.

The company estimates investments in that country in 2010 of over US $170 million. “Ecopetrol has come to Peru to stay.” With these words the General Manager of Ecopetrol del Peru, Carlos Mario Rendón, describes the company’s interest in putting roots down in its brother nation.

“Although we have already had significant growth in a very short time, we believe what we have done so far is not sufficient. We are looking for more opportunities in exploration and production -- business deals that will guarantee our long-term presence and allow us to meet the goals we have established as a business group out to 2015,” he added.

The Iguana

Ecopetrol del Peru currently holds four blocks in the Marañón basin, and one other block in the Ucayali basin. It acts as the non-operating partner of the Talisman companies in blocks 101, 134, and 158, with 30%, 45%, and 45% ownership respectively, and of Petrobras in blocks 117 (25%) and 110 (50%).

It has also just completed, together with Petrobras and Petroperú (33% each), the initial exploration of 6 technical evaluation agreement (TEA) blocks in a broad swath of the Peruvian jungle, not yet discovering technical merit for moving on to an exploration and production contract.

Next year, Ecopetrol del Peru estimates investments of US $30 million. It has projected the drilling of an exploratory well in Block 101 and 3D seismic acquisition of 400 square kilometers in blocks 134 and 158, where the operator is Talisman. “These two basins - Marañón and Ucayali – together with the Talara Basin, are the most representative of our international strategy that has several different lines in the short and longterm.

Our strategy is to bet on the proven basins, but we also want to be a part of the frontier basins,” explained the Manager of International Exploration at Ecopetrol, Enrique Velásquez Convers. He added that Peru plays an important role in meeting Ecopetrol’s goal of producing a million barrels of oil over the next five years.

Monitoring Opportunities Never Stops. The words of Rendón are a good summary of the new paths marked out in the Andes Mountains and the depths of the Pacific: “We are an aggressively growing company.” The analysis of alternatives for participating in other blocks never stops at Ecopetrol del Peru.

The contribution expected from its affiliates to the Ecopetrol mega-corporation by the year 2015 is 250 thousand barrels of oil equivalent per day. In principle, Peru is expected to contribute 40 thousand barrels per day.

“We are a race with things in common. We can identify with our goals for growth. We have been made welcome and we are grateful for the country’s hospitality and its willingness to grow and enter into new business deals,” pointed out Rendón.

Ecopetrol’s investments in Peru will
total more than US$170 million in 2010.

Petrotech’s many kilometers offshore will allow Ecopetrol to gain experience as an international operator in the waters of the Pacific.

On the Peruvian Coast

The strategy for positioning in Peru passed its second milestone with the purchase, together with the state-owned oil company of Korea, Korea National Oil Corporation (KNOC), of the company Offshore International Group, whose main asset is Petro Tech Peruana. Each company acquired 50% of that Peruvian company.

This acquisition was a fundamental step for the short-term growth of the Ecopetrol business group. Petro Tech has a strategic position on the coast of Peru, perhaps the most important Pacific coastline in South America given its length.

In total, it holds eleven blocks in that country (one in production, eight in exploration, and two pending signature) that together add up to 9.5 million hectares. Recently Petro Tech announced its investment plan for the next eight years estimated at US $2,500 million, focused on increasing production, engaging in new exploration activities, and making the business sustainable through a corporate social responsibility policy that will generate benefits for the communities in the zones where it operates.

In particular, PetroTech will drill around 500 wells, install 40 new platforms, renew equipment and installations, and expand production facilities. For lot Z-2B, the main production asset, US $1,880 million have been allocated, while another US $620 million will be invested in the rest of the lots.

All of these actions will allow the Consortium to increase production to 50 thousand barrels per day of crude oil and natural gas by 2016, representing an annual growth rate of 20%, as well as the incorporation of more than 100 million barrels of new reserves.

“We are betting on Peru. The new investment announced will permit not only an increase in the production of crude oil and gas, but will also generate more jobs and contribute significantly to the state through the payment of royalties and taxes,” pointed out the Executive Vice President of Operations at PetroTech, Nelson Alberto Castañeda.

On Board with the Stock Exchange

To complete its entrance into the Peruvian market, trading began of Ecopetrol’s “American Depositary Receipts” -ADR- on the
Lima Stock Exchange last December 3rd. This operation is not a new issue of ADRs (an ADR is a packet of 20 regular shares of the company), nor will it generate additional resources for Ecopetrol. They are the same securities listed on the New York Stock Exchange in September 2008.

“Our entrance into the Lima Stock Exchange is just one more demonstration of the confidence we have in the regulatory framework of this country,” noted in this respect Alejandro Giraldo, Director of Investor Relations at Ecopetrol. “It constitutes an opportunity for Ecopetrol to expand its position in international capital markets.”

The maximum authorized amount is 20 million ADR, or 400 million shares. GPI Valores, Securities Agent for Global Securities Colombia in Peru, processed the listing with Peru’s National Supervisory Commission of Companies and Securities, CONASEV, and with the Lima Stock Exchange, and will act as a specialist for negotiating the ADRs.

Entering the stock exchange will allow Ecopetrol to expand its number of investors, give greater liquidity to its securities, and increase the company’s visibility.