Ecopetrol, Colombia’s state-owned oil giant, reported a significant decline in its financial performance for the first half of 2024, highlighting pressures faced by the global oil industry amidst fluctuating commodity prices and fears of an economic recession. The company’s profits dropped by 24% in the first semester, totaling COP$7.38 trillion, down from COP$9.74 trillion in the same period last year.
This marks the third consecutive quarter in which Ecopetrol has posted a decline in earnings, signaling persistent challenges that have continued to weigh heavily on the company’s financial health. The second quarter alone saw a 17% year-on-year decline in net income, with the company recording COP$3.37 trillion, a stark contrast to its performance in the same quarter of 2023.
Ricardo Roa, President of Ecopetrol, attributed the company’s declining fortunes primarily to the drop in global oil prices, which have been on a downward trend due to a combination of factors, including concerns over a potential economic slowdown and increased oil supply from non-OPEC countries. The lower oil prices have directly impacted Ecopetrol’s revenue, which fell by more than 12% in the first half of 2024 compared to the previous year.
Additionally, the Colombian peso’s depreciation against the U.S. dollar has further exacerbated the situation. The exchange rate fluctuations had a significant impact on the company’s bottom line, with Roa noting that the peso’s variation by 600 during the first half of the year resulted in a negative impact of COP$3.3 trillion on the company’s results.
“The exchange rate has had a substantial impact on our financial performance,” Roa said during a press conference following the release of the company’s earnings. “To return to the profitability levels of 2022, we would need oil prices to rise back to $100 per barrel and the dollar to stabilize at COP 4,000,” emphasized Roa.
Ecopetrol’s production figures for the second quarter of 2024 also reflect the challenges facing the company. The group’s total production averaged 758,200 barrels of oil per day (bopd), with Ecopetrol S.A. contributing 617,000 bopd and its subsidiaries accounting for the remaining 141,200 bopd. While these figures represent a stable output, they have not been sufficient to offset the financial pressures caused by low oil prices and rising operational costs.
During the second quarter of 2023, the company drilled and completed 124 wells, an 11% increase compared to the same period last year. Despite this uptick in drilling activity, the overall economic environment, characterized by inflationary pressures and the ongoing El Niño phenomenon, has continued to challenge the company’s profitability.
The tax reform enacted by President Gustavo Petro’s administration in 2022 has also played a role in reducing Ecopetrol’s profitability. The reform included an increase in the corporate income tax surcharge from 10% to 15% in 2024, which has further strained the company’s financials. The effective tax rate for the second quarter rose to 42.4%, up from 36.5% in the first quarter of the year and 38.6% in the same period of 2023.
The Constitutional Court’s decision in May 2024 to uphold the ruling that declared Article 19 of the Tax Reform Law unconstitutional, which prohibited taking oil royalties as deductible, has compounded the company’s tax burden. This legal development has added another layer of complexity to Ecopetrol’s financial management, forcing the company to navigate an increasingly challenging regulatory environment.
In a significant strategic decision, Ecopetrol’s board recently opted not to proceed with the acquisition of a stake in CrownRock, a U.S. oil company owned by Occidental Petroleum (OXY). The proposed deal, valued at US$3.7 billion, was expected to bolster Ecopetrol’s asset portfolio but would have required significant debt financing. Roa explained that the decision was made to avoid the potential financial risks associated with taking on additional debt in a volatile market.
The decision has sparked speculation about the influence of the Colombian government, particularly President Petro, on the company’s strategic direction. Roa, however, has denied any direct involvement from the president in the decision-making process, emphasizing that it was a collective decision by the board of directors.
The downturn in Ecopetrol’s finances comes as the national government announced that it will depend on natural gas from Venezuela. The prospect of importing gas from the Maduro regime could cripple Colombia’s energy independence given the Petro government’s decision to also ban fracking and issue new oil and gas exploration licences. Although political and logistical hurdles, such as the lack of infrastructure and current electoral crisis in Venezuela could potentially complicate the gas imports, the idea remains on the table due to a 2007 commercial agreement between the two countries.
