Recognition and measurement
Ecopetrol uses the successful efforts method to account for exploration and production of crude oil and gas activities, following the provisions of IFRS 6 – Exploration for the evaluation of mineral resources.
Exploration costs
Acquisition and exploration costs are recorded as exploration and evaluation assets until the determination of whether the exploration drilling is successful or not; if determined to be unsuccessful, all costs incurred are recognized as expenses in the consolidated statement of profit or loss.
Exploration costs are those incurred with the objective of identifying areas that are considered to have prospects of containing oil and gas reserves, including geological and geophysical, seismic costs, viability, and others, which are recognized as expenses when incurred. Furthermore, disbursements associated with the drilling of exploratory wells and those related to stratigraphic wells of an exploratory nature are charged as assets until it is determined if they are commercially viable; otherwise, they are expensed in the consolidated statement of profit or loss as dry wells expense. Other expenditures are recognized as expenses when incurred.
An exploration and evaluation asset is no longer classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration and evaluation assets are reclassified to the natural and environmental resources account after being assessed for impairment.
All capitalized costs are subjected to technical and commercial revisions at least once a year to confirm the evaluation and exploration efforts continue on the fields; otherwise, these costs are written off through to profit or loss.
Exploration costs are net of the revenues obtained from the sale of crude oil during the extensive testing period, net of cost of sales, since they are considered necessary to complete the asset.
Development costs
Development costs correspond to those costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing. When a project is approved for development, the corresponding capitalized acquisition and exploration costs are classified as natural and environmental resources and costs subsequent to the exploration phase are capitalized as development costs of the properties that contain such natural resources. All development costs are capitalized, including drilling costs of unsuccessful development wells.
Production costs
Production costs are those incurred to operate and maintain productive wells, and are part of the corresponding equipment and facilities. Production activity includes extraction of oil and gas to the surface, its gathering, treatment and processing as well as storage in the field. Production costs are expenses recorded in the consolidated statement of profit or loss as incurred unless they add oil and gas reserves, in which case they are capitalized.
Production and support equipment is recognized at cost and is part of property, plant and equipment subject to depreciation.
Capitalized costs also include decommissioning, dismantling, retiring and restoration costs, as well as the estimated cost of future environmental obligations. The estimation includes plugging and abandonment costs, facility dismantling and environmental recovery of areas and wells. Changes arising in new abandonment liability estimations and environmental remediation are capitalized in the carrying amount of the related asset.
Depletion
Depletion of natural and environmental resources is determined using the unit-of-production method per field, using proved developed reserves as a base, except in limited exceptional cases that require greater judgment by Management to determine a better amortization factor of future economic benefits over the useful life of the asset. Depreciation rates are reviewed annually, based on reserves reports and the impact of any changes is recognized prospectively in the financial statements.
Reserves are audited by internationally recognized external consultants and approved by the Company’s Board of Directors. Proved reserves consist of the estimated quantities of crude oil and natural gas demonstrated with reasonable certainty by geological and engineering data to be recoverable in future years from known reserves under existing economic and operating conditions, that is, at the prices and costs that apply at the date of the estimation.
Impairment
Assets associated to exploration, evaluation and production are subject to review for possible impairment in their carrying amount. See notes 3.2 – Asset impairment (recovery) and 4.12 - Impairment of non-financial assets.
