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Staying ahead in Latin America’s turbulent oil and gas market

Felipe Bayón, CEO of Ecopetrol, Colombia’s biggest company, explains how the company is transforming to stay on top.

In 2015, Felipe Bayón was on a short list of candidates for the top job at Ecopetrol, Colombia’s state-owned oil and gas company, which was losing money after a collapse in oil prices. But the board named as CEO Juan Carlos Echeverry, a former finance minister, and tasked him with returning Colombia’s biggest company to profitability. One of his first moves was to hire Bayón, a veteran of BP who had recently led that company’s International Deepwater Response.

While Echeverry slashed spending and restructured the balance sheet, Bayón professionalized the company’s workforce. Under their watch, Ecopetrol lowered its costs of production by more than 30 percent, introduced new technology, and by 2017 was once again profitable. Echeverry stepped down, and this time, Bayón was promoted to CEO.

Bayón inherited the most stable state-owned oil and gas company in Latin America. Ecopetrol is Colombia’s biggest company by revenue and contributes 2 percent to the country’s GDP. In 2018, it posted sales of 67.8 trillion Colombian pesos (US$20 billion), up 22 percent from the previous year. Ecopetrol is seen as a national flagship and invests in energy exploration and production but also in education, transport infrastructure, and many other social projects.

But the company still faces challenges in its core business at home and from global trends, not least the recent ructions in the oil market. Colombia’s oil reserves are also running low, and globally the industry is facing significant pressure to do more to protect the environment. To increase production, Ecopetrol is pursuing opportunities outside Colombia in the U.S. and Brazil, and is investing in nontraditional energy, including solar energy. (Although the Colombian courts temporarily banned fracking for gas in the country, Ecopetrol is working on fracking in the U.S. and is preparing a pilot project in Colombia.)

For now, Colombia’s government, convinced that an independent Ecopetrol is more profitable, has refrained from interfering in the company’s appointments or financial decisions. But elections are coming in 2022. Both environmentalists and opposition politicians talk of weaning the Colombian economy, which is bolstered by oil exports, off fossil fuels.

Bayón first sat down with strategy+business in his company’s Bogota headquarters before the global spread of COVID-19 and then again after the collapse of oil prices in early 2020. He explained why he believes a traditional oil and gas company has opportunity for growth, even as the world is looking for ways to reduce the use of fossil fuels and as oil prices remain volatile.

S+B: What is Ecopetrol’s outlook for growth at a time when oil prices are expected to remain weak?
BAYÓN:
I remember when I arrived in Ecopetrol in February 2016, the price of crude hit $27 or $28 a barrel, after having been at $120 a barrel. It was a very difficult period. We had to hit the brakes and tighten our belts — to mix metaphors — lowering activity and investments. To put it into context, we lost 3.9 trillion pesos ($1.18 billion) in 2015, the company’s first loss. That forced us to transform the company, and we have managed to reverse that trend. In the past, to break even, we needed the price of crude oil to be at $65 a barrel. Today, we break even at $30 a barrel. That demonstrates we have become more efficient. It’s a different company, and thanks to that, we have saved more than 13 trillion pesos ($3.25 billion).

Still, the global context is complicated. Some expect a lower demand for oil, which would hit us directly. We even estimate that the price will continue to fall. As a reference, in 2019, we prepared our budget based on $65 per barrel (for Brent crude). For the 2020 budget, we assume it will be between $50 and $60. [The average price for Brent crude in 2020 is expected to be $33 a barrel.] So we are already preparing for a price fall.

Our vision is to continue to be efficient. I believe we are well positioned in the region; we have a reputation for being flexible and agile, and for being capable of transforming ourselves. We believe that by being efficient, we can continue to grow. And that is why our investment plans are getting more ambitious, even as the price of oil is predicted to fall. [Ecopetrol announced capital investments of between $3.3 billion and $4.3 billion for 2020, down 25 percent from those in previous statements, because of COVID-19.]

We also see growth within Colombia. [Post-COVID-19 forecasts are for 1.1 percent contraction of the economy this year, which will rebound in 2021.] Ecopetrol’s role is to aid that growth by giving more people access to energy, which will allow them to perhaps start a business, study, or have access to transportation. Today, 1.6 million families cook with wood or coal, and 500,000 families do not have access to energy in Colombia. Providing energy is one of the most powerful ways to close the wealth gap in this country.

S+B: How has Ecopetrol achieved stability and profitability when other state oil companies in Latin America are struggling?
BAYÓN:
There are several factors that have helped us. The first is our ability to react very quickly to the crisis [of falling oil prices] that hit the industry. Transformation became part of the DNA of all Ecopetrol employees. We have transformed many things, from how we drill a well to how we transport our crude oil. And we still have transformation programs in 600 areas within the company.

Our vision is to continue to be efficient. I believe we are well positioned in the region; we have a reputation for being flexible and agile, and for being capable of transforming ourselves.”

The second factor, which is central, is the independence we have from our majority shareholder. The Colombian government owns 88.49 percent of Ecopetrol’s shares, yet it has respected the company’s management. And that has allowed the company to make decisions based on economic and technical reasons. Because of that, we have an excellent relationship with our majority stakeholder, but also with the 300,000 Colombians who also own a part of our company as shareholders, and the 15 million Colombians who own stocks of our company through pension funds.

The third factor is that we now produce not only oil and gas, but also alternative forms of energy. Renewable energy sources like solar panels and biomass now generate 100 megawatts of energy a year, about 5 percent of our production. That’s enough to power a city of 135,000 people. All of these factors have helped strengthen Ecopetrol and show that we are working on energy transition and making sure the company continues to be sustainable in the long term.

S+B: What is your strategy for the longer term?
BAYÓN:
First, we must have a strict capital discipline, carefully analyzing where we put every dollar and making sure it gives us the return we want. Because of that discipline, today, we have a return on assets that’s one of the highest in the industry. We generate a significant level of cash, and that has, among other things, allowed us to lower our debt. We also seek to grow our reserves and production. Last year, we produced between 720,000 and 730,000 barrels a day. This year we will produce between 750,000 and 760,000 barrels a day. [The company announced in late April that it may have to cut production.]

And last year we also formed some very important alliances abroad. In Brazil, we have made alliances with BP, China’s CNOOC, and [Royal Dutch] Shell to explore for oil; and with Shell and Total to extract oil from newly discovered wells. In the United States, we’ve partnered with Occidental Petroleum in the Permian basin to extract oil and gas from nonconventional oil reserves. In fact, in Texas, we’ve already started fracking.

The international part of Ecopetrol’s business is going to be significant. By 2026, we expect to produce about 120,000 to 140,000 barrels of oil outside of Colombia. That does not mean that Colombia is less important. But as a company, we have to maximize value for shareholders. And that is why our strategy has an international component. Strategic alliances with top-tier foreign companies are fundamental. But we will also [expand internationally] with discipline. We’ve had offers to make alliances around the world, but first we have to focus on the Americas.

S+B: What role does Ecopetrol play as a state-owned enterprise in Colombia?
BAYÓN:
Ecopetrol is in a position to generate impact in many ways. For example, in Colombia, we operate in 337 municipalities, a very large part of the country, and we have had a presence in most of these places for decades. Every dollar that we invest in a municipality has the potential to multiply by seven when [one factors] in the employment it generates in the region and the side businesses our industry supports. Ecopetrol also contributes through taxes and dividends to shareholders, and indirectly through production, which generates royalties that the government then distributes throughout the different regions of the country. In 2018, Ecopetrol contributed 23 trillion pesos ($7 billion) to Colombia. That is a very significant amount.

But we also have a strong vision of social and environmental responsibility and have a strong commitment to give back to the country. We are going to make an investment of 1.7 billion pesos ($500 million) in education, which will benefit more than 250,000 Colombians by 2022. We have also helped build and resurface more than 900 kilometers (559 miles) of roads. And we try to promote entrepreneurship, culture, sports, and technology. Ecopetrol sponsors what we call the Supérate [Aspirational] Games, for example, which allow more than 3 million Colombian children to have access to sports.

S+B: What are your priorities this year?
BAYÓN:
We will continue to do, to a large extent, what we know how to do: producing oil and gas safely, efficiently, transparently, and ethically. But we have not forgotten about transitioning to other forms of fuel. First, we want to produce more gas. Today, about 16 percent of our production is gas. We would like that to grow to 25 percent, 30 percent, or even 35 percent. Second, we are starting to produce biofuels, whether it is ethanol from sugarcane or biodiesel from palm trees.

And we recently opened the first solar farm or solar park in Castilla la Nueva, Meta, in Colombia. It generates 21 megawatts of energy and also achieves a reduction of 154,000 tons of CO2 during the life span of the pilot, which is equivalent to planting a little more than 16,000 trees. Today, as I mentioned earlier, 5 percent of the energy we produce comes from renewables. We intend to increase that to 20 percent, which will allow us not only to reduce our carbon footprint, but also to be more efficient and to produce cheaper energy.

S+B: How do you balance energy security with economic development?
BAYÓN:
It’s important for us to understand the concept of energy security. Between 1976 and 1986, Colombia was not a self-sufficient country. We had to import oil. Today, we are a self-sufficient country. We need to have our own production of hydrocarbons to accompany economic growth. Importing the amount of oil it takes to feed our refineries in Cartagena and Barrancabermeja can cost up to 12 trillion pesos ($3.6 billion) a year. That’s taxpayer money that could be used for other things. So we believe the country needs to do whatever is responsibly possible to generate options to remain self-sufficient.

If we can extract hydrocarbons from nonconventional reserves, we can have oil reserves that could last up to 30 years and gas reserves that could last 50. The government has been very responsible in looking for ways to develop these reserves. The court said nonconventional [fracking] pilot projects were allowed. And at Ecopetrol, we are working on the careful planning and design of these pilot projects because it’s not about doing things quickly, it’s about doing them right. The pilot fracking projects will work like a fishbowl — anyone can look inside to understand how we operate in areas like sustainability or water management. That way, the country can make a decision based on facts.

S+B: What role can an oil and gas company play in promoting environmental sustainability?
BAYÓN:
In the last eight years, we have managed to reduce our carbon emissions by 5 million tons. Last year alone, we reduced them by 1 million. That is good, not only because it allows our carbon footprint to be smaller, but because it’s good business. We can commercialize those tons of CO2. We are analyzing several alternatives on how to do this.

We also aim to make the best use of resources, like in a circular, or recycling, economy. For example, we reuse 59 percent of the water we use every single day. And there’s also our role in supplying gas and diesel to mass transit buses in Bogota. We produce diesel with 10 parts of sulfur per million, the lowest in the world. Bogota replaced 25 percent of its TransMilenio bus fleet with buses that can use this diesel and gas. And because of this, TransMilenio stations’ air has seen a 50 percent reduction in particulate matter.

I also think that as a company, and as an industry, we have a very important opportunity in areas like reforestation and afforestation. For example, having carbon sinks, or natural sinks, helps us mitigate the effects of CO2 emissions and their impact on the ozone layer. That is why Ecopetrol is investing 100 billion pesos ($30 million) in forest pasture programs this year. We’re thinking about helping communities with productive projects that not only benefit them but also help the environment.

S+B: CEOs in the region tell us the market for talent is tight. How are you attracting, training, and keeping talent?
BAYÓN:
The company has some very attractive compensation programs. We have a reputation of being a very good employer, so that helps us attract people. But I also believe that Ecopetrol has positioned itself as a leader in digital transformation, and of energy transition, and that has motivated people to come work for us. We are also working on programs of diversity and inclusion. Today only 23 percent of our workforce is made up of women. We are conscious that we need to do more to provide opportunities for these women, so that they don’t hit the glass ceiling.

We do have challenges going forward. We understand that there are jobs that exist today that will probably not exist in a few years. So in a sense we have to train people in ways that will make them suitable for jobs that we have not yet invented. We have strategic relationships with more than 30 universities. And we also have our own virtual university, Ecopetrol University.

S+B: How far have you progressed in using technology to transform your business?
BAYÓN:
We’re pushing for a strong digital transformation of the company. This year we are investing $126 million and have 60 employees dedicated to working on it. We are now using blockchain technology to follow our oil molecules from the moment they come out of the wells to the moment they are used in our refineries, or the moment they arrive in ports. We are also using artificial intelligence for exploration and even to drill oil and gas wells. We also use nanotechnology, developed by ourselves, to improve the flow of heavy crudes in certain parts of the country.

We have sent missions to Silicon Valley to learn how technology can help us transform the company. One of the things that I have learned from this endeavor is that we must be able to unlearn [old ways] and learn new things, to acquire new capabilities really quickly. And to do that, we have learned from Silicon Valley that we need to generate “psychologically safe spaces” so that people can fail without fear of failing. They can then fail quickly and move on to learn new things. That is a very quick way of generating change and value. It’s a change in culture that will allow us to learn how technology can help us become more efficient.

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