A new approach in ColombiaDecember 9, 2015
Miguel Salazar, assurance partner of PwC Colombia, discusses the potential pitfalls the country faces in the wake of an economic crisis, and explains how companies can keep their costs low. The global downturn of oil prices has made companies throughout the hydrocarbons value chain unsteady, and in Colombia, operators are dealing with unique circumstances.
The drop in oil prices has caused companies to rethink their approaches and revise their budgets. It is important to make these adjustments in an organised fashion, with a concentration on their core strengths and long-term goals. There are five key aspects to consider: cost optimisation, access to capital, optimisation of the investment portfolio and new projects, talent and a revision of approach.
DO IT RIGHT: Choosing where to cut costs and where to continue investment is important. Optimising costs is not about short-changing the contractor. When companies demand the same services for lower prices, it results in lower levels of efficiency and negatively affects quality. Companies must be willing to pay for services and technology that will provide maximum recovery rates. Cutting corners will result in lower profits and higher costs in the long term.
At Colombia’s current rate of production and with its reserves, oil will be available for another nine years. Exploration is essential to the survival of Colombia’s energy industry. Companies should be more aggressive in their pursuit of reserves, investing more capital in offshore and unconventional resources. Though improved recovery is important, an approach that concentrates solely on production is shortsighted.
Recovery involves co-operation between government and regulators. The terms of investment often change, making companies uncomfortable. Regulations need to be clear and consistent. Unfortunately, in Colombia, the changes have not been attractive. Exploration is very risky and costly, and it should be incentivised accordingly.
SHOW ME THE MONEY: A lack of access to capital is preventing development in Colombia. The banking sector is timid. Lack of financing is becoming an increasingly important issue.
Globally, recent studies in companies with 2014 revenues greater than $100 million in exploration and production and oilfield services areas show considerable results from working capital improvements, but there is still plenty to go for. The results show both a cash opportunity and performance gaps that the industry needs to bridge.
It is estimated that up to $338 billion in cash can be unlocked by exploration and production and oilfield services companies moving into the next performance level. In the case of exploration and production, $284 billion of cash could be unlocked. Upstream companies are outpacing others as they have the greatest improvement in networking capital.
In summary, investors value efficiently run businesses, where free cashflow is maximised. However, there is significant cash tied up in working capital, restricting growth and impacting value.
Companies should partner to share costs, instead of abandoning projects and ending contracts. Companies need to return to their core values and find partners that can complement their expertise. Unfortunately, we have not seen many of these shared ventures.
DIFFICULT DECISIONS: Companies have to make internal adjustments for cost management. As a company grows, venturing into other activities is common. However, returning to the core business is important. It is about going back to basics and concentrating on what the company knows how to do.
Activities that are not part of the core business should be outsourced, and personnel should be reviewed. The most difficult thing to do is reduce the workforce, but sometimes it has to be done when projects and activities are no longer moving forward.
INVEST IN PEOPLE: In the next few years Colombia must discover new reserves. Without these discoveries, the industry will face difficulties in recovery. The government needs to react quickly and make a move in the right direction. Exploration is essential to Colombia’s ability to compete with Brazil, Argentina and Mexico. We have to make the most of our installed capacity and move towards exploration.
Colombia already has the talent necessary to make these types projects a success. However, if we do not create conditions that allow people to be successful, they will leave the country and invest elsewhere. The Mexican market is moving forward and competing for financial and human capital.
TIME TO CHANGE: Transport costs add a lot in Colombia, but they could easily be reduced with serious investment in infrastructure. Despite a high up-front cost, this type of investment would have lasting, lucrative results for the industry. Pipeline projects are a good example. The government needs to support and promote the construction of infrastructure.
Things take a lot of time here. During a National Hydrocarbons Agency congress in Cartagena, the excessively long timeframes for environmental licences were discussed. In the current market situation, the country should be more agile. The regulation is improving, but not quickly enough, considering our low reserve levels.
There are many challenges to the domestic industry’s improvement, but success is far from impossible. We can no longer get the same results employing the same approaches. We need to think bigger.
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