Operational Excellence

Positive operational results

As a company listed on the Toronto Stock Exchange (TSX), PAREX’ financial results are public and subject to annual auditing, promoting the transparency of the information provided to its stakeholders. In 2016, due to a low oil price environment, PAREX rolled out a program in which capital expenditures were lower than funds flow from operations.

Throughout the year, PAREX achieved important increases in all reserve categories. Compared to 2015, proved plus probable reserves (2P) increased by 37%, to 112 million barrels of oil equivalent (MMboe), of which 98.6% were crude. PAREX exited 2015 with 82 MMboe of 2P reserves. The 2P Reserve Life Index increased from 8 to 10 years.

Annual average net daily production increased by 8% compared to 2015, reaching 29,175 barrels of oil equivalent per day (boe/d). During the fourth quarter of 2016, net production was 31,049 boe/d, exceeding the goal of 30,000 boe/d. Forecasts for net production in 2017 are between 34,000 and 36,000 boed/d.

In 2016, PAREX carried out a successful exploration and drilling program. PAREX participated in drilling 17 gross wells (11.55 net), which resulted in 13 oil wells, 3 abandoned wells, and 1 abandoned well before reaching target depth, for a success rate of 81%.

In addition, the assessment of the Aguas Blancas Block was accelerated. Four wells were drilled and two binding agreements were signed with Ecopetrol S.A. One of the agreements was a farmin with a working interest of 50% in the Mares and Playón Blocks, both located in the Middle Magdalena Basin.

Net Production Comparison of Barrels of Oil Equivalent Per Day

Annual average net daily production increased by 8% compared
to 2015, reaching 29,175 barrels of oil equivalent per day (boe/d).

Sustainable Economic Performance

The excellent management of our asset portfolio generated profitable results during the financially challenging environment of 2016.

By the end of 2016, the Company generated funds flow from operations of COP 439,741 million (USD $144 million), increasing funds flow from operations from the 2015 comparative period of COP 357,384 million (USD $130 million). This gain was due to an increase in production volumes, which partially countered low average oil prices.

Net working capital also increased, from COP 211,241 million (USD $77 million) at the end of 2015 to COP 283,741 million (USD $93 million) at December 31, 2016. The year ended with no bank debt and an undrawn credit facility of COP 533,921 million (USD $175 million).

Discovery, Development, and Acquisition costs were USD $6.47/boe for proved developed producing reserves and USD $3.40/BOE for 2P reserves.

Currently, PAREX has a self-funded business growth model.

Environmental management system: Quality and Safety

PAREX addresses environmental protection in accordance with principles of prevention, control, mitigation, and responsible use of natural resources, aiming to keep operations clean and in compliance with environmental legislation.

Efficient operations

PAREX makes sustainable use of renewable and non-renewable resources when planning operations projects. In 2016, there was a 97% decrease in consumption of sand, gravel, and quarry materials from non-renewable sources, associated with road maintenance and construction of drilling pads. 172,632.56 m³ of these materials were used in 2015 while their use was reduced to 5,169.95 m³ in 2016.

Regarding the use of wood, there was an increase compared to 2015 (118.72 m³), reaching 2,720 m³ in 2016.

As part of the Comprehensive Solid Waste and Materials Management Plan, PAREX returns chemical product packages and packaging to suppliers. In 2016, through third parties, 689 fifty-five-gallon metal trash bins and 4,852 fifty-five-gallon plastic trash bins were reused.

Caring for water, caring for life

PAREX is committed to the efficient use of water by actively protecting water sources and implementing good water use practices. Our practices comply with environmental regulations and always prioritize a non-impact policy for the water supply on local communities.

To ensure water management and balance of the ecosystems, the Company constantly monitors water sources. In 2016, we reduced water consumption by 4.7% and the use of collection points by 20%, due to roads paving and the reduction of spraying water on roads.

97,069 m³ of water were used for residential and industrial activities. Average water consumption went from 0.015 m³ per barrel in 2014 to 0.019 m³ per barrel in 2016 due to a decrease in oil production.

With respect to purchasing water for consumption from third parties, all companies have a water concession or authorization issued by the competent authorities.

Surface water sources include the Cusiana and Cabuyarito rivers. According to monitoring activities in 2016, surface water sources did not show changes in their availability and quality conditions associated with the authorized use of operations equipment. With respect to groundwater, in 2016 PAREX collected water from nine deep wells located in Llanos 32, Llanos 16, Llanos 40, and Llanos 30 Blocks. The Company also conducted monitoring activities, which reported no changes in water conditions.

Groundwater 61%
Surfacewater 32%
Pruchase from third parties 13%
Rainwater 2%

Water collection by source in 2016 (%)

Four times more recycled water

In 2016, 0.75% of the total amount of collected water was reused. Approximately 725 m3 of this water was reused, compared to 151 m3 in 2015, showing an increase of 380%.

Regarding formation water, PAREX controls and conducts follow-ups according to environmental regulations and legislation. We conduct regular sampling that helps verify physical and chemical treatments, as well as disposal processes through the re-injection of 28,439,350 barrels in 2016.

Responsible energy consumption

Electrical power consumption reached 15.32 kWh per produced barrel in 2016, an increase from the rate of 12.13 kWh per produced barrel in 2015. Energy intensity in 2016 was 0.64 kW/boe, higher than the 0.33 kW/boe value reported in 2015. This increase was due to a lower production rate in similar operating conditions to 2014.

PAREX uses different energy sources to meet the Company’s needs, including diesel, plant-generated gas, compressed natural gas (CNG), and COESGEN. Regarding energy consumption percentages by source, there was a considerable reduction in diesel consumption compared to 2015 that was offset by the increase in plant-generated gas consumption (self-generation) and in COESGEN consumption.

Comparative Energy Consumption by Source

Zero wastewater discharge

In 2016, the Company maintained its zero-discharge commitment. Water from producing operations that has completed its reutilization cycle is treated to remove solids, oils, and potential oil residues. Final disposal is carried out by re-injecting the wastewater into authorized wells, guaranteeing zero discharge into water and soil ecosystems.

Residential, industrial, and production wastewater, which are not re-injected and require treatment before final disposal, are delivered to a third party. The contractor conducts this process effectively and responsibly, following standard procedures that comply with environmental regulations.

Producction (149 272)
Residential (43 300)
Industrial (37 874)

Wastewater Delivered to Third Parties in 2016 (Barrels)

Disposing of hazardous substances

The disposal of hazardous waste and solid waste generated by PAREX’ operations is outsourced to companies holding appropriate permits that provide collection and proper disposal services.

In 2016, recyclable, contaminated, and organic waste was reduced due to environmental management practices promoted by PAREX and reduced operations in certain fields. Ordinary waste volumes increased compared to 2015, caused by cleaning and maintenance of facility areas before terminating operations.

Oil waste generated during production enter the operational system through recirculation, either by adding chemicals or by other means. Other waste, such as chemical product packaging or containers, is returned to suppliers or delivered to companies specialized in treating and recovering these materials. Companies that carry out these activities reuse the materials to bottle the same substances.

PAREX monitors and implements controls for solid waste disposal to ensure compliance with regulations. In 2016, 47,689 barrels of drilling cuttings and sludge were produced, an increase over 2015 that was the result of an increase in drilling activities (17 gross drilled wells in 2016 versus 12 gross drilled wells in 2015). PAREX prohibits the use of benzene and sulfur in its operations.

Cortes y lodos de perforación (barriles)

Emissions

Atmospheric emissions generated by PAREX are managed according to the Protocol for the Control and Surveillance of Atmospheric Pollution Caused by Fixed Sources: Version Two (2010), issued by the Colombian Ministry of the Environment and Sustainable Development. Particulate matter, sulfur dioxide, nitrogen oxide, carbon, and carbon dioxide are measured and controlled, in compliance with the National
Environmental Licensing Authority standards for environmental management.

Emission estimations are calculated using emission factor modelling. These estimations are in line with Colombian environmental legislation, according to the specifications of each piece of equipment, including consumption and generation. The Company annually assesses the amount of pollution that can be reduced by implementing good environmental management practices.

Based on 2016 operating conditions, the air pollution load was reduced by 27,300 tons/year by using natural gas instead of diesel in Adalia, Begonia, Kananaskis, Kitaro, Kona, Maracas, Llanos 32 Facility, and Rumba, operations located in the department of Casanare and the Middle Magdalena area.

In 2015, approximately 753 tons/year of pollution load were prevented from entering the atmosphere. In 2016, this value significantly increased.

Based on 2016 operating conditions, the air pollution load was reduced by 27,300 tons/year.

Spills

At PAREX, prevention and management of the risk of environmental accidents that may affect safety are key issues. Preventing crude, chemicals, oils or fuel spills is a permanent undertaking for the protection of the environment and public infrastructure. In 2016, there were 0.7 spilled barrels per million of produced barrels, a decrease from the 1.9 spilled barrels per million of produced barrels in 2015.

Safe transportation

Road safety is a priority at PAREX. We organize awareness sessions with contractors, comply with transportation schedules agreed upon with communities, and follow road plans agreed upon with the authorities.

To encourage safe road habits and behavior by drivers responsible for vehicles transporting, PAREX and oil carriers launched safe-driving awareness campaigns in 2016.

The most important issues addressed by these campaigns were speeding, drunk-driving, fatigue, safe exiting, and distracted driving. The purpose of these activities was to mitigate accident risk and comply with road safety standards.

Due to the importance of contingency plans and their contribution to improving operations, 43 road safety awareness sessions were organized in 2016. Five hundred drivers participated, strengthening their knowledge and skills necessary to drive carefully on the roads and ensure their own safety as well as that of the environment.

Rumba Field’ access road. Aguazul, Casanare

Through CICLOP, PAREX monitors information in real time from drivers and vehicles which transport crude.

Collaborative management and effective support

Carriers are strategic partners for PAREX’ operations. They are considered an extension of our operation chain; therefore, they are expected to comply with our principles of operational excellence.

For this reason, PAREX annually audits all its transportation contractors. The Company develops relevant collaborative training, so that the contractors’ employees comply with the highest environmental, health, and safety standards while on the road. Between 2015 and 2017, a great improvement was achieved since the average audit rating increased from 58% to 73%.

Furthermore, to ensure the safety of employees and environment in transportation practices, PAREX implemented the first phase of CICLOP, a vehicle monitoring application, in 2016. This app allows PAREX to be aware of any mechanical, operating, and legal changes for the entire fleet. The system collects real-time information on drivers transporting crude oil. During this first phase, control and registration of vehicles in the app were completed for vehicles that met the legal conditions and PAREX’ Standards of Transportation of Dangerous Goods.

The second phase has also started. In this phase, the system is identifying driving habits to control drivers’ speed and working hours to help ensure the best conditions in their operations. All the vehicles and drivers providing transportation services for PAREX are, without exception, enrolled in and monitored by CICLOP.

Ongoing commitment to talent

Achieving excellent results means creating a work team that will not only incorporate PAREX values, but also adopt best practices to conduct high-level, effective operations.

At PAREX, every employee’s contribution is appreciated, acknowledging that his or her work makes the operation possible and facilitates the implementation of the corporate strategy. As a responsible and committed employer, PAREX upholds current legal labour regulations.

PAREX values employment stability and provides competitive benefits to encourage its employees’ motivation and sense of belonging, always respecting the principles of integrity and diversity, and highly regarding teamwork and openness to change.

A team for growth

During the latest financial uncertainty, PAREX not only retained all its personnel, but also added new talent. PAREX also invested in training to promote more talent development and contributions.

By the end of 2016, the Company had 261 employees, an 11% increase from 2015. The employee rotation rate remained at 9.2% due to reorganization in certain areas, and improvement in the quality of PAREX’ personnel.

Promoting inclusion and diversity

PAREX strives to provide a positive workplace, free from discrimination and harassment. The Company is strictly committed to social inclusion and promotes respect for diverse beliefs, race, color, ethnic groups, and gender. The Company values equity and implements team exercises that encourage participation, gender equality, and professional development.

In 2016, women’s participation at PAREX was as follows: 27% in management and leadership positions; 17% in supervision and professional positions; and 10% in Board of Directors positions.

Dreams come true at PAREX

Development has no limits at PAREX. Marisol Gutiérrez is living proof. After four years as part of our team, her story about her personal growth serves as an example for her children, and proves that, with determination and dedication, dreams come true.

In 2011, Marisol Gutiérrez first came to PAREX as an employee of a general cleaning and cafeteria service company. Due to her excellent performance and accountability, the Company offered her a direct job in 2013, starting with systems training and English courses.

A year later, through an internal open recruitment process, Marisol accepted a new growth opportunity as a Records Assistant in the Finance department. She was selected to take this new step and continue to develop her career.

Today, Marisol is studying Technical Management, and, as a result of her potential, she was promoted within the Finance department to Accounts Payable Filing Assistant. From that first day at PAREX, her professional development has never stopped. Her technical knowledge and skills, particularly in Excel and SAP, are continuously evolving.

Marisol is grateful to every employee who has helped her rise in PAREX. Thanks to their human touch and support throughout her career, she has been able to overcome challenges, acquire knowledge, and forge new paths for growth.

“When I first came to PAREX, I didn’t know how to use a computer. Taking on new challenges has helped me grow as an individual and develop my career. I feel so grateful to the Company because thanks to the opportunity I was given, I now serve as an example for my children. I can give them a better education, and I can show them that dreams can come true. Today, I receive more support from my husband who is very proud of me,” says Marisol.

Marisol has a bright future at PAREX. She expects to continue to learn and be assigned new responsibilities that will further her career development in the Company.

Ensuring welfare for the team and their families

PAREX is focused on being the best employer. With that in mind, the Company provides a competitive and equitable plan of benefits that provides for the well-being of its employees and meets their needs. This plan is part of our corporate Employee Benefit Plan policy that is provided to all direct employees.

One of the benefits of our plan is the SAR (Stock Appreciation Right) program, that rewards employee efforts and commitment to the continuous growth and success of PAREX’ operations. Similarly, we pay an annual performance-based bonus, based on individual goals and Company’s achievements completed during the year.

With the intention of improving employees’ and their families’ quality of life, PAREX develops sports and recreational activities, as well as business acknowledgment activities. These activities strengthen the organizational environment and culture.

Training for competitiveness

To promote continuous improvement in employee skills, PAREX offers formal and non-formal training programs. In 2016, we offered 43 programs, which were completed by 89% of the Company’s employees. Investment in training increased by 29%, from COP 320 million (USD $116,644) in 2015 to COP 412 million (USD $135,038) in 2016. The reason for this increase was a higher number of employees, and the initiative to strengthen employees’ interpersonal and leadership skills.

Non-formal training programs included English courses that increase bilingualism and help employees feel more integrated. Time invested in education and training in 2016 reached 7.5 hours per month on average per attending employee, to a total of 7,863 hours for the year. This decrease of 33% was the result of a pause in the training program during the first quarter of the year.

In 2016, PAREX focused on training leaders, coordinators, and supervisors to develop their leadership skills in addition to providing training on eight organizational competencies (quality-based achievement, innovation, teamwork, sense of urgency, adaptability to change, conflict resolution, communication and leadership).

The Company is interested in boosting the ongoing development of our human talent by providing feedback through performance reviews. Every year, each employee sets individual goals with his/her next-level manager. They also decide on the successes they want to achieve. Performance reviews allow employees to conduct self-assessment and receive their next-level manager’s opinion on the achievement of their goals, skills, competencies as well as potential areas for improvement.

La evaluación de desempeño le permite al empleado realizar una autoevaluación y recibir el concepto de su jefe inmediato acerca del cumplimiento de metas, habilidades, competencias y posibles áreas de mejora.

Talent made in Casanare

PAREX operates in areas where human talent is excellent but opportunities are not diverse. We attract that human talent by offering them a career path right where they live.

Inclusion of local human talent for better community development is not only a commitment but a conviction at PAREX. Our operations in various Colombian regions provide us with opportunities to attract competent and committed employees who help the Company define its role as a good employer.

That is the case of César Prieto, the current Corporate Social Responsibility Coordinator at PAREX. He joined the Company six years ago in his native area, Paz de Ariporo, Casanare. As a result of his dedication and excellent work ethics, he has built a high potential career and a future filled with great opportunities for his family. He is not only an example for his family, but also an example for his community. For César, “PAREX is a company that generates employment stability, allows for goal achievement, and provides a better future for our loved ones”.

However, our commitment does not stop there. In addition to employment generation, boosting the skills of our employees is key. Yaneth Ramírez, an Environmental Engineer for PAREX based in Casanare, has been trained in various key areas. Yaneth has acquired new knowledge in environmental management systems, internal auditing, emergency and first-aid crew, stakeholder management, and effective public speaking. For Yaneth, “PAREX is continuously providing training opportunities and encouraging growth within the Company”.

Having the support of local talent has been fundamental for PAREX’ growth by allowing the Company to become closer to the community, to understand their culture, and to listen to them better. Juan José Samaniego is a Corporate Social Responsibility Manager based in Tauramena, Casanare, though he was raised in Monterrey, an hour away. His familiarity with the region and the local communities has helped him become more aware of the people’s needs, faithfully transferring this to PAREX, and consolidating a channel of trust. For Juan José, “understanding the region’s idiosyncrasies has been fundamental to successfully carrying out every one of the proposed projects”.

Our commitment in all the regions where we conduct business consists of generating quality employment as a way of increasing the positive impact local talent can have in their communities.

Safety and health in the workplace

In 2016, PAREX launched industrial safety prevention campaigns with an emphasis in eye care, same-level falls, hand care, work at great heights, and chemical risk, such as Globally Harmonized System (GHS), Behavior-Based Safety (BBS) and SOS cards. Process Safety, Operational Discipline, and Critical Tasks have also been implemented.

The lost time injury frequency during this period was 1.33, based on a total of 5,257,103 worked hours.

The Company has conducted industrial hygiene assessments regarding physical agents (noise and light) and chemical pollution agents and aromatic by-products (benzene, toluene, ethylbenzene, and xylene).

Regarding ergonomics, work stations were inspected, and morbidity surveys were conducted. These activities will be useful for the implementation of illness monitoring systems.

Concerning employee health, the following actions or programs were implemented: a food innocuousness program, submission of monthly reports, medevac, training for use of on Automated External efibrillator (AED), and tobacco and alcohol consumption prevention. Job profile diagrams were updated.

PAREX’ Health and Safety in the Workplace System is certified under OHSAS 18000:2007.

“

Supervisors and managers always ensure we work safely to prevent any behaviors that may be harmful to us. On three occasions in 2016, we attended self-care talks.

”

Guillermo Chaparro

Production Assistant
Campo Rumba. Aguazul, Casanare.