As the old saying goes, two heads are better than one. This is especially true in the oil and gas industry where experiences outside of a traditional area of operation can lead to the valuable transfer of lessons learned.
Take, for example, the recent announcement of the joint venture (JV) between Colombia’s Ecopetrol and Occidental Petroleum. The two companies have a long history stretching back to the early 1980s.
“In September 1983, the best news for the history of Ecopetrol and some of the best news for Colombia was given: the discovery of the Caño Limón Field in association with [Occidental],” the Ecopetrol website noted.
In late July 2019, the two companies teamed up in the JV to develop 97,000 net acres of Occidental’s Midland Basin properties in the Permian Basin. Upon closing of the transaction expected at year-end, Ecopetrol will book about 160 MMboe of proved undeveloped reserves in the prolific Permian, according to a press release.
Ecopetrol will pay $750 million in cash plus $750 million of carried capital in exchange for a 49% interest in the new venture. Occidental will own a 51% interest and operate the JV. During the carry period, Ecopetrol will pay 75% of Occidental’s share of capex, according to the release. The JV allows Occidental to accelerate its development plans in the Midland Basin while retaining production and cash flow from its existing operations there.
However, the Permian Basin’s riches extend beyond oil and gas as a bedrock of knowledge to be tapped awaits. It is not just a share of future production from the development acreage that Ecopetrol will gain.
The company will second employees to the JV, enabling it to advance expertise in shale development while transferring technology and knowledge to its assets back home in Colombia.
“Exposure to shale will help strengthen Ecopetrol’s own capabilities to develop this resource domestically,” said Maria Cortez, senior research manager of Latin America upstream oil and gas for Wood Mackenzie, in a press note. “However, structural challenges, like security, environmental permits and community relations, remain unresolved and will likely postpone development.”
Michael Whitney, from Wood Mackenzie’s corporate research team, added that ventures such as this one might become more common as the Permian matures. “Strategies of this nature should become more commonplace in a world of stockpiled Permian inventory with drilling locations that wouldn’t otherwise fit into development plans for upward of a decade,” he said in the note.
The proposal is a share-for-unit exchange.
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