The Sullexis Blog
Oil Price Crisis in Colombia – Time to streamline processes, drive efficiencies and improve the bottom line
Colombia is a country with oil, but it is not typically considered an oil country. Since enacting an energy reform in 2003, Colombia has seen a significant jump in their oil production. In the past ten years, the country has gone from producing 541,000 barrels of oil per day (BOD) to 1,028,500 BOD. This increase in production led Colombia to export around 70% of the oil that was produced in 2013. With much of Colombia’s economy relying on oil, the decrease in the price is having a dramatic effect on the country. It is estimated that the country’s oil production declined by 5% in 2014, and it is expected to continue in 2015. The declining production is a direct consequence of the decrease in the price of oil among many other factors; heavy oil, a lack of pipelines, increased transportation costs caused by the heavy use of trucking, and regulatory requirements that increase the cost structures.
Oil exports are the number one foreign revenue generator for Colombia, making the country the fourth largest economy in Latin America. Those exports have provided Colombia with steady economic growth. The total oil exports tax revenue for Colombia has been near 15 Billion-COP (Colombian Peso) for the past 3 years. It is estimated that, given the production that Colombia will have in 2015 combined with the current oil price, the tax revenue will be reduced to 5 Billion-COP.
Colombian national taxes are administered by the National Tax and Customs Direction (DIAN). The immediate reaction of the Colombian tax authorities has been to increase tax rates in several areas that impact the entire economy and particularly the Oil and Gas industry. Operators such as Ecopetrol and Pacific Rubiales, which produce about 85% of the country’s crude and natural gas, have announced a reduction in their CAPEX spend by 25% and 40%, respectively. On top of that, their total spending will be reduced for Ecopetrol by 65%.
Colombia is beginning to face a number of premiums that need to be paid in order to produce oil. Colombia is still in the process of maturing its labor and environmental regulatory landscapes as well as its infrastructure, which in turn leads to increased cost. Colombia is also starting to implement expensive initiatives to relieve the social pressure caused by exploration and the Civil War. In addition to all this, Colombia’s northern neighbor, Mexico, is expected to see economic growth from their energy reform and potential around their current proven reserves. The challenges Colombia is facing combined with the Mexican energy reform could divert foreign investment from Colombia to other markets.
How to survive in this environment
The Oil and Gas supply chain in Colombia will be impacted by the current market conditions, either directly or indirectly, through the massive ripple effect that the current environment will generate. While there may not be an easy fix or silver bullet to help with the problems Colombia will face, there are ways for the country to become more efficient in their Oil and Gas practices. Colombia needs to save costs wherever possible, know what they are spending, spend less time complying with audits by making the process more efficient, and become more transparent with strategic suppliers and stakeholders. To simplify, Colombia needs to control the variables they have control over.
Colombia is about to enact a change in their Tax regulation in which companies will need to both send and receive electronic invoices. This sets the tone for one of the areas Colombia needs to tackle: the Procure to Pay (P2P) Process. They need to first make the process more efficient and then automate it. This is a cross functional process that, if best practices are followed, could impact Finance, Procurement, and Operations. As an added value, this would benefit the entire supply chain by allowing for quicker approvals and reducing Days Sales Outstanding (DSO), a key metric that P2P reduces, which in turn creates a healthier and more collaborative environment.
There are many cross-functional benefits that have been proven when implementing a P2P solution in the Oil and Gas Industry. This solution would have many positive effects in Finance, leading to reduced cost on missing payments and audits and offering early payment discounts. Improvements would also be seen in regulatory reporting. Procurement is the main area that benefits from the definition and automation of a P2P solution. Colombia could improve their Business Intelligence, relationships with vendors, effectiveness of procurement, gross margins, supplier audits, and S&G expenses. The country’s Operations would also see advancements, including improved utilization of high value employees by removing manual tasks, such as invoice approval.
Colombia may have many changes in their future, but the good news is no one needs to reinvent the wheel. There are Standards out there, such as the Petroleum Industry Data Exchange (PIDX), that have solved many of the problems that occur in the P2P Process and are actively working to solve many more. By implementing P2P best practices for Oil and Gas, Colombia has the opportunity to gain new insights into their financial commitments, enabling them tosurvive and profit in the tough economic environment they are facing.