Ecopetrol SA (EC) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the first and second quarter 2010 Ecopetrol earnings conference call.

My name is Noellia.

And I'll be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question and answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Alejandro Giraldo, Investor Relations Director.

Please proceed.

Okay.

Good afternoon, everyone.

And welcome to the conference call, where we will discuss Ecopetrol's operating and financial results for the second quarter and the first half 2010.

Before we begin, it's important to mention that the comments by Ecopetrol's senior management will include projections of the Company's future performance.

These projections do not constitute any commitment as to future results, nor do they take into account risks or uncertainties that could develop.

As a result, Ecopetrol assumes no responsibility in the event that future results are different than the projections of the conference call.

The conference call will be led by Mr.

Javier Gutierrez, Chief Executive Officer of Ecopetrol.

Also participating will be Adriana Echeverri, Chief Financial Officer; Hector Manosalva, Acting Executive Vice President for Exploration and Production; Claudia Castellanos, Acting Executive Vice President for Downstream; Camilo Marulanda, Vice President for Strategy and Growth; Mauricio Echeverry, General Counsel; Diego Carvajal, Vice President for Exploration; and Hector Castano, Acting Vice President for Production.

I would now turn the call now to Mr.

Javier Gutierrez, CEO of Ecopetrol.

Thank you, Alejandro.

And good afternoon.

Thank you for joining us in this conference call.

First, I will summarize the highlights of the second quarter of 2010, which will be followed by the comments from our Vice President of the operational and financial results.

Then we will comment on the key elements of our strategic plan for 2020 and finally review the outlook for the second half of 2010.

Let's turn to slide five and review the highlights of the second quarter of 2010.

The Company made progress in implementing its relevant diversification strategies, achieving solid operating and financial results.

Production from our corporate group rose 14%, driven by the development program in areas of heavy crude production, which grew 47% compared to the second quarter of 2009.

The central region located in the province of Meta reached a record production of 208,000 barrels per day.

We also increased our acreage in exploration areas in Colombia by submitting the highest bid for nine blocks in the Colombian National Hydrocarbon Agency 2010 round, which will add 2.8 million hectares in onshore and offshore areas.

These major potential resources could amount to 800 million barrels of oil equivalent.

In downstream, the hydro-treatment plan at the Barrancabermeja Refinery achieved 98% progress.

And it's expected to start operating by mid-August.

The city of Medellin began with [taking] diesel with less than 50 parts per million of sulfur with the highest standard in Latin America.

Ecopetrol supply businesses before the beginning of the operation of the hydro-treatment plant.

Regarding biofuels, our affiliate Ecodiesel began production of biodiesel on June 12th.

Exports accounted for 49% of volume sold.

Main destination for exports was the US, with 67% followed by Asia with 20%.

In transportation, activities during the second quarter were focused on infrastructure expansion of oil pipelines of multi-use pipeline expansion and reconditioning of storage capacity in intermediate stations and operating parts and ducts.

Our financial results continue to be strong.

Operating income amounted to COP2.7 trillion, 26% higher than in the second quarter of 2009, while net income amounted to COP1.8 trillion, an increase of 137% over the second quarter of 2009.

EBITDA margin was 40% and return on equity was 23% compared to 42% and 70% in the second quarter of 2009, respectively.

Finally, the Company completed a review of its strategic plan, which will lead us to a production goal of 1.3 million clean equivalent barrels per day by 2020, coupled by profitability goals on capital employed for each business segment.

Now let's review the execution of the CapEx in the first half of this year.

In slide six, we have summarized execution of our investment plan, which amounted to $6.0 billion for 2010.

Organic investments in the first half of the year increased 31% to a total amount of $1.9 billion.

There were no acquisitions during the second quarter of 2010.

Of the amount invested, 62% was allocated to upstream projects, primarily for development of heavy crude and mature fields and drilling of exploratory fields.

34% was allocated mainly in Barrancabermeja Refinery for the hydro-treatment plant and the engineering plan of the modernization plan as well as for the expansion of transportation systems.

The remaining 4% was earmarked to develop internal company initiatives.

I now turn the presentation to Hector Manosalva, who will comment on the results in the upstream business.

Good afternoon, everyone.

Slide seven shows progress made in our exploration and production (inaudible - microphone inaccessible).

The corporate group produced 594,000 barrels of oil equivalent per day against the two quarters, growing 14.5% compared to the second quarter of 2009.

As we previously mentioned it, our successful participation in the 2010 Colombia round will record an estimated investment of more than $100 million over the next three years.

Of those nine blocks, five are 100% (inaudible - microphone inaccessible) of Ecopetrol.

Four of them are located in eastern plains and one in the Tumaco basin in the Pacific coast.

The remaining part corresponds to the offshore Cayos 1 and Cayos 5 block in partnership with Repsol and YPF, the Sinu-San Jacinto block in partnership with SK Energy of Korea and the Medio Magdelana Valle 32 block joined with Cementaciones Petroleras of Venezuela.

Regarding the admission of repairs during the second quarter of 2010, the commercial approval for the Quifa Suroeste field was granted.

Development plans foresees a daily average production of around 30,000 barrels of oil equivalent per day by the end this year.

(inaudible - microphone inaccessible) reserves of Ecopetrol were 118 billions of [barrels].

Additionally, (inaudible - microphone inaccessible) was granted to expand a commercial area of the Rubiales field following an evaluation of additional potential.

Development plan calls for the production of 170,000 barrels of oil equivalent per day by the end of the 2010, estimated to be reserves for Ecopetrol were 38 millions barrel of oil.

Seismic activity was significant during the quarter.

More than 4,500 kilometers equivalent were processed in our international project out of which 94% were along the US Gulf Coast and 6% in Brazil.

In Colombia, seismic activity was primarily focused in heavy crude blocks in the Llanos Basin and Atlantic Coast offshore.

During the second quarter, five stratigraphic and one exploratory well were drilled in Colombia, out of which 402 have preliminary evidence of hydrocarbons.

Internationally drilling is undergoing in the Malbec well in Brazil in partnership with Repsol and its [parent] companies.

Along the US Gulf Coast, the [fierce] moratorium of six months stopped drilling of the Krakatoa well operated by (inaudible - microphone inaccessible) and postponed beginning of drilling of the Cobra and Logan wells also operated by (inaudible - microphone inaccessible).

Although it is expected that the Gulf operation will be subject in the near future to more restricted ration, we are hoping to adopt our strategy to the new condition.

Corporate group's production consolidated the 559,000 barrels of oil equivalent coming from Ecopetrol, 26,000 barrels coming from Hocol, and 6,000 barrels of oil equivalent per day coming from Savia Peru.

Ecopetrol's production growth was driven by heavy crude oil fields with the highest increased production were Castilla with 31%, Chichimene with 24%, and Rubiales with 107%.

Mature fields also had significant growing, mainly Casabe with 36% and La Cira-Infantas with a 25% increase.

Starting July of this year, Ecopetrol became operator of the Cupiagua and Sur Cupiagua fields open exploration of the Santiago de las Atalayas Association contract in which Ecopetrol has a 50% interest.

The current amount of the production from these fields is 26,000 barrels of oil equivalent per day.

Now I will turn over the presentation to Claudia Castellanos, who will comment on downstream results.

Good afternoon, everyone.

Let's go to slide eight to present the results and progress of downstream during the second quarter of 2010.

As previously mentioned, the hydro-treatment plant at the Barrancabermeja Refinery had 98% progress.

Once in operation, Ecopetrol will produce diesel and gasoline without sulfur content in compliance with the fuel quality regulation in Colombia.

The project to upgrade the Barrancabermeja Refinery continued in the basic expanded engineering space under the establishment of the environmental management plan to the Ministry of Environment.

The project for the development of petrochemical infrastructure achieved 68% completion of the conceptual engineering phase.

Total volume of crude and products transported increased 38% to 1.043 million barrels per day.

75% of this volume corresponded to crude and 25% to refined products.

Due to the increases in production for Ecopetrol and third parties, seven transportation systems are operating at maximum capacity, requiring expansion of the facility in the short term.

Given this constraint, between 2010 and 2011, Ecopetrol and its partners are investing $960 million for the development of several projects; for this year, the expansion to 240,000 barrels in Cano Limon-Covenas Ayacucho and increased 560,000 barrels per day in Ocensa and the Andino multipurpose pipeline between Sebastopol and Apiay with 53,000 barrels per day; for 2011, the expansion to 220,000 barrels in Oleoducto de Colombia, additional capacity of 60,000 barrels between Vasconia and Barrancabermeja, and additional capacity of 200,000 barrels per day in Oleoducto (inaudible - microphone inaccessible).

Other projects include increasing the capacity of [dump truck] discharge system in Ayacucho with 15,000 additional barrels and another in Banadia with a capacity of 40,000 barrels a day, both to be complete this year.

Storage capacity in Vasconia, Altos del Porvenir, and Ayacucho will be increased for a total of 510,000 barrels by the end of this year, as well as new buoys in the Covenas ports.

As a part of this project, during the second quarter of 2010, we increased 120,000 barrels of storage capacity in Vasconia station.

We advanced 25% in the building of a new tank of 170,000 barrels in Altos del Porvenir station.

And we made progress of 34% and 67%, respectively, in the construction of Andino and Pozos (inaudible - microphone inaccessible) Galan multipurpose pipeline.

In addition, the Company has been developing environmental studies and completing conceptual engineering for additional expansion projects that would begin operations by 2012, which will require commercial agreements with third parties in order to be approved.

Among these other expansions is Castilla-Chichimene-Apiay to 390,000 barrels per day, Apiay-Porvenir to 450,000 barrels per day, the Oriente multi-use pipeline to 120,000 barrels a day, and the Orito-Tumaco pipeline to 85,000 barrels a day, additional storage capacity in Covenas by 3,600,000 barrels and the Bicentenario oil pipeline between Casanare and Covenas with an estimated capacity of 450,000 barrels per day.

Regarding trading, volumes sold grew 15.8% when compared to the second quarter of 2009.

Local markets had a substantial increase in demand of natural gas and diesel, leaving the higher need of thermal generators during the El Nino phenomenon.

Exports grew 21% due to greater availability of crude.

These increases in volume as well as a higher level of international benchmark price offset the increase in the Castilla crude, gasoline, and diesel spread.

Related to the operating costs, the cash cost of the Barrencabermeja Refinery during the first half of 2010 was $5.49 per barrel compared to $5.33 during the same period of 2009.

The increase primarily was due to the revaluation of peso and lower run, partially offset by lower operating costs.

The refining margins for the Barrancabermeja Refinery during the first half of 2010 was $3.85 per barrel compared to $3.40 in the first semester of 2009, due to a better price of the [crude stores].

The cost per barrel kilometer transported for the first half of 2010 was COP7.9 compared to COP8.1 in the same period last year.

The lower cost came from rising in transported volumes, which offset higher operating cost and greater depreciation of the new assets that began operation.

I now turn the presentation back to Mr.

Javier Gutierrez.

Slide nine shows the main milestones reached in the area of business social management and internal consolidation during the second quarter of 2010.

Ecopetrol was ranked as the number one preferred corporation to work for in Colombia, according to the Spanish firm Monitor Empresarial de Reputacion Corporativa.

This ranking was based on opportunities for career progress and ethical values of the Company, among other factors.

Internally in line with our objective of developing world-class employees, the Company has been strengthening the developments of key technical skills among its workforce.

As a result of these efforts, by the end of this quarter, 1,373 employees now have all the skills required by our organization.

In supply chain, cost savings amounted to COP341 billion during the second quarter of 2010 due to the optimization efforts.

Ecopetrol became the first corporation in South America receiving the CIPS, Charter Institute of Purchasing and Supplies, organizational certification, allowing the Company to be benchmarked versus international supply standards.

In the HSE, the number of environmental operational incidents dropped significantly from 24 incidents during the second quarter of 2009 to nine during the second quarter 2010.

However, during second quarter of 2010, the frequency of accidents, number of accidents per million man hours, reached 1.45, above 0.74 achieved in the same quarter of last year.

Given this situation, the Company has launched additional campaigns to prevent accidents and increase management of identified control failures.

Ecopetrol also was nominated to receive the MAKE, Most Admired Knowledge Enterprises, global award in 2010.

This award is recognition to leading companies in knowledge management.

Regarding shareholders during the second quarter of 2010, social investment amounted to COP11,224 million.

I now turn the presentation to Adriana Echeverri, who will comment on the financial results.

Good afternoon, everyone.

Let's go to slide 11.

As Mr.

Gutierrez mentioned, results for the quarter remained solid with increases in operating income of 26% and net earnings of 137% compared to second quarter of 2009.

Higher prices for crude oil and an increase in volume (inaudible - microphone inaccessible) for export generated an increase in 37% in total sales compared to the second quarter of 2009.

In comparison to the first quarter of 2010, revenues increased 4.5%.

It's worth to remind that starting 2010, the condition of (inaudible - microphone inaccessible) Cartagena Refinery, crude oil and gas sales to Reficar are accounted for as exports.

The sales averaged 82,000 barrels of oil equivalents per day.

On the cost side, over the second quarter of 2010, we had a total increase of 47% when compared to same quarter for last year.

This is a combination of more variable and fixed costs.

Variable costs were higher, mainly due to a 28% increase in both price and volumes purchased from ANH.

There was also larger imports of low-sulfur diesel and naphtha used to dilute heavy crude oil.

Inventories had a negative impact on cost of around COP144 billion, mainly due to a volumetric reduction that made the balance at the end of June to be around 1.5 million barrels smaller than inventories that we had at the end of March.

Fixed costs were impacted by higher amortization and depreciation costs with two new capital stations and higher production rates.

When compared to first quarter of this year, total costs increased 16%.

This attributable to the growth of contracted services for both the direct and associated operations as well as to maintenance and reconditioning of wells, land items that usually show less execution during the first quarter every year.

Operating cost increased slightly when compared to second quarter of previous year.

We had a 65% increase in sales expenses, mainly due to compensations made to clients for less deliveries of natural gas.

As we already explained in the previous quarter, this was motivated by operational and weather factors associated with the phenomenon El Nino.

Exploration and project expenditures on their side were 40% less than the last quarter.

All these factors combined made operating income come out COP2.7 trillion and operating margin to fall to 29.5%.

Now moving into non-operating results, there was a net loss of COP286 billion in the second quarter this year compared to a loss of more than COP1 trillion observed in the second quarter last year.

In general, the impact of Colombian peso revaluation in our results is now softer because currently we have a lower net provisioning point currency of around $870 million due to dollar-denominated debt, which helped to partially offset the dollar-denominated assets position.

As a result of all this, net income in second quarter was COP1.8 trillion, which is 137% higher than in the same quarter of 2009 with a net margin of 20%.

EBITDA at the end of the second quarter was COP3.6 trillion, 29.5% higher when compared to the same period of 2009.

The main driver of EBITDA is the operating income led by the increase in volumes and price.

When compared to the first quarter of this year, EBITDA fell more than 11%, primarily due to the increase in operating cost that we already explained.

Now let's move to slide 12, where we can see our last segments report.

As expected, the exploration and production segment contributed COP1.9 trillion to net income in the second quarter, led by the increase in crude production used mainly for export markets.

EBITDA for the second quarter was COP3.5 trillion with an EBITDA margin of 64%.

Refining and petrochemical segment reported a net loss of COP187 billion during the second quarter.

Imports of premium diesel with low sulfur content to comply with environmental regulations are the main cause behind this loss.

The startup of the hydrocarbon -- the hydro-treatment plant at the Barrancabermejo Refinery will certainly have an immediate positive impact on results for the third quarter of this year and thereafter.

Transportation segment generated a net income of COP106 billion in the second quarter of this year, primarily as a consequence of the incremental volume of crude oil and products to be transported.

Results for the quarter were affected by higher maintenance and project cost as well as higher payments for increasing transported volumes through third parties' pipelines.

EBITDA for this segment for the quarter was COP190 billion.

And EBITDA margin was 26%.

The supply and marketing segment had an operational result of COP67 billion, given the outstanding trading activity with favorable margins in buy and sell hydrocarbon margins.

However, the segment had a net loss of COP59 billion for the second quarter due to an accounting adjustment during this period impacting the non-operating results.

The adjustment already was originated in an error during 2009 when COP67 billion were accounted in favor of Ecopetrol but really belonged to the ANH.

Due to this adjustment, there was a net loss in the segment for the first half of the year of COP15 billion.

As a conclusion remark and aside the results themselves, it's worth to highlight that the new structure adopted for segmental reporting has motivated lots of initiatives inside the Company as well as the (inaudible - microphone inaccessible) of key opportunities to improve not only the results of the business units but Ecopetrol's results as a whole.

Let's now move to slide 13 to have a brief overview of the cash flow and balance sheet.

As expected, the Company continues having a very strong cash generation.

The initial balance for the quarter was COP6.8 trillion.

Operations generated additional cash for COP9.5 trillion.

The sum of these sources of around COP16 trillion was more than enough to finance the operation requirements of COP5.5 trillion, organic investments of COP1.6 trillion, and dividends of COP1.3 trillion.

As a result, by the end of the quarter, our cash balance was COP8 trillion.

And consequently, there was no need to write debt.

Now in the lower section of our slide 13, you can appreciate that our balance sheet remains solid with a low level of indebtedness.

At the end of the second quarter, company's assets amounted to COP59 trillion and liabilities to COP24.5 trillion.

Those liabilities include two payment dividend installments of COP2.4 trillion and the long-term financial debt of COP5.1 trillion.

With these numbers, our gross financial debt-to-EBITDA ratio is 0.38, well below our reference of two times debt to EBITDA.

Now I turn over the presentation again to Mr.

Gutierrez.

Slide 14 shows the main results of our subsidiaries for the quarter.

Total sales for the corporate group amounted to COP10.2 trillion, aside from Ecopetrol's highest revenue gain from Reficar, Hocol, Propilco, and Ocensa.

Group net income amounted to COP1.7 trillion.

Subsidiaries with the highest net income were Hocol, Ocensa, and Propilco, Ecopetrol America Inc., and Ecopetrol do Brasil and Ecopetrol del Peru.

All of them in exploration stage have net losses during this quarter.

Group EBITDA was COP3.6 trillion with an EBITDA margin of 35%, lower than last year mainly due to the recognition of [the wells] and increase in seismic expenses for the group.

During the quarter, our affiliates contributed almost 35,000 barrels to the corporate group's production, Hocol with 26,000 barrels per day, Savia Peru with 6,000 barrels per day, and Ecopetrol America with 2,000 barrels per day.

These companies made important progress in the consolidation of the exploratory portfolio.

In June, Hocol submitted the highest bids for five blocks in the 2010 Colombian round, equivalent to 6,000 square kilometers of land, which are pending to be signed.

And Peru Petrol, the Peruvian Hydrocarbon Agency, was authorized to sign with our affiliate Savia Peru, where we hold 50% stake licensing equipment from exploration and exploitation of hydrocarbons in blocks C51 and C52.

Regarding the downstream subsidiaries, on June 15th, Reficar signed the EPC contract with CDNI for the refinery's expansion and upgrading with a mechanical completion date for the last quarter of 2012.

Propilco completed its plan to expand production capacity to 500,000 tons per year and is developing commercial strategies to increase local demand and exports.

Transport affiliates made progress in developing their aforementioned projects in Ocensa, Oleoducto de los Llanos, and Oleoducto de Colombia.

Ecodiesel began producing biodiesel in quality specifications on June 12th.

And Bioenergy signed an EPC contract for its [personnel] plan and continues to plan planting its sugarcane crops.

In slide 16, we review the key elements of Ecopetrol's strategic plan between 2011 and 2020, which will drive our company to become one of the top very largest oil companies in the world by 2020.

And I now -- I would like to turn over the presentation to Camilo Marulanda.

Okay.

Please go to slide 16.

Ecopetrol (inaudible - microphone inaccessible) strategy was reviewed from the perspective of new business challenges.

As a result of the strategic revision, the business group will operate according to three strategic guidelines -- profitable growth, organizational consolidation, and corporate responsibility.

The major goal for 2020 as a business group is to produce 1.3 million barrels equivalent of clean crude.

That is without any accidents or any environmental incidents and in harmony with the stakeholders with a result of capital employed of 17%.

For 2015, we consider the goal to produce 1 million barrels of oil equivalent per day.

In order to achieve the goals, the group must invest approximately $80 billion between 2011 and 2020.

Let's turn to slide 17, which presents the main goals of our business segments.

Regarding the upstream business, the average production for 2011 will be 750,000 barrels per day, reaching 871,000 barrels by the end of the year.

For 2015, the goal remains at 1 million barrels equivalent, while by 2020 it's expected to produce 1.3 million barrels of oil equivalent per day with a return on the capital employed of 20%.

Our reserves addition is expected to total 6 billion barrels between years 2008 and 2020.

In refining, we expect to become a leader in Latin America, focusing in the modernization and expansion of our current refineries, achieving a result of 11%.

Transport and logistic activities will continue to support development of the corporate group's value chain by developing infrastructure to transport crude and (inaudible - microphone inaccessible), mainly heavy crude with a return on capital invested between 10% and 12%.

One of the key projects is the construction of the Bicentenario pipeline starting this year.

In petrochemicals, the goal is to produce 2.7 million tons by 2020 with a return on the capital employed between 13% and 15%.

The goals depend on definitions based on market analysis and financial feasibility.

In biofuels, the goal for 2020 is to produce 450,000 tons per year, mainly coming from biodiesel production in Ecodiesel and ethanol from Bioenergy.

Finally, for natural gas, the challenge is to increase the local market and develop the business in the region with a sales goal by 2015 of 1,000 gigaBTU per day.

Let's go to slide 18, which presents the milestones in production up to 2020.

As we mentioned, major goal for the group is to produce 1.3 million barrels equivalent by 2020, while for 2015 the goal is just to produce 1 million barrels.

In 2010, average group production will be approximately 615,000 barrels per day, reaching 750,000 barrels per day for 2011.

According to the figures, required compound annual growth production rate between 2008 and 2020 is 9.5%.

Portfolio of current positions added will continue to be the main source for the group production.

Sources for the estimated growth reserves in corporation of 6 billion barrels between 2008 and 2020 are 55% from new exploration activities, 36% from revaluations, and 9% from corporate acquisitions.

Let's now analyze in slide 19 the sources and uses of the planned resources.

Corporate group investment between 2011 and 2020 are allocated as follows -- for exploration and production [$65 billion], 80% of the total investment, out of which $44 billion are allocated to production and $20 billion for exploration.

For downstream, investment will be around $16 billion distributed as follows -- $5.5 billion for refining, $5.5 billion for petrochemicals, and $5 billion for transportation.

Finally, $250 million will be invested in organizational consolidation.

Acquisitions are not included in the CapEx plan and will be analyzed case by case.

Regarding the sources of funds, the Company has several options for financing its investments, given the strength and flexibility of its balance sheet as well as its strong cash generation.

From 2011 to 2020, cash generation is expected to contribute between $50 billion and $44 billion.

Additionally, the second and third tranches of the share offering pending from capitalization process will come to approximately $30 billion based on today's prices.

The remaining resources between $20 billion and $23 billion will come from additional indebtedness.

That could be raised locally as well as internationally, depending on market conditions and the needs for the CapEx plan every year.

Let's go to slide 20, which shows the investment from 2011 to 2020.

Of the total amount of COP80 billion to be invested, 55% will be invested between 2011 and 2015 and 45% between 2016 and 2020.

Outstanding investments are evenly split, while majority of investments in refining and transportation will be secured between 2011 and 2015.

Petrochemical plant will be developed between 2016 and 2020.

Let's now take a look at the main investments by business line in slide number 21.

This slide summarizes main projects by business line, estimated date to start operations, and the required investments.

And now I would like to turn over the discussion to Mr.

Gutierrez.

Let's go to slide 23 to present the outlook for the remaining of the year.

In upstream, we estimate an average production of 615,000 barrels per day for the whole year 2010.

Also, we expect to complete the drilling of 20 exploratory wells for the year and to reach the goal of acquiring 14,700 kilometers of seismic equivalent.

In downstream, we expect to begin operations of the hydro-treatment project by mid-August as well as begin to plan biodiesel in the Barrancabermeja Refinery.

Additionally, we will finalize the standard basic engineering for the Barrancabermeja modernization plan and the conceptual engineering for the petrochemical plant.

In transportation, we plan to initiate the construction of the Bicentenario pipeline in the Llanos Orientales already mentioned.

In terms of financial performance, our EBITDA margin should remain around 40%, assuming the WTI prices remain as they are today.

And internal cash generation should be sufficient to fund organic investment.

To summarize, we are optimistic on achieving the group's goals as a whole and continue to delivering on our strategic plan.

The session is now open to questions from our participants.

Thank you.

(Operator Instructions)

Your first question comes from the line of Frank McGann from Bank of America.

Hello.

Good afternoon, everyone.

Just --

Hi, Frank.

How are you?

Good.

Thank you.

How are you?

Just a quick question on your -- the source of production growth and reserve addition -- the numbers you have are very specific and show very strong growth over the next 18 months.

I was just wondering if you could say specifically what fields you expect those to come from.

And along that lines, with production as well with the reserve addition, particularly the revaluation amount that you have here, how much of this is related to secondary recovery projects that you're implementing in your fields?

Okay.

Frank, our exploration and production part is taking the answer.

Diego, please?

Right, for the next 18 months, the increase in production announced in reserve addition are driven mainly from the heavy area.

We continue to invest in the Castilla and (inaudible - microphone inaccessible) fields and also in the Rubiales and Quifa fields.

In terms of secondary recovery, it's worth mentioning here that the [Catalas] project, which is (inaudible - microphone inaccessible) probably is going to have some production in this year but also for the next year.

Okay.

Do you have any specific amounts for some of the fields just to show the -- because just to get to 871 is a pretty big number.

That's the only reason I got wondering.

Yes, on this field, we're going to create production in Castilla from 100,000 barrels per day to the current production up to 130,000, 140,000 next year.

In Chichimene, we're going to grow from 20,000 barrels per day to 55,000 barrels per day.

In Catalas, we're going to increase production from 18,000 to 25,000 barrels per day.

In Rubiales, we're going to increase production from 122,000, which is the current production, to 130,000 barrels per day.

And in Quifa, we have a very small production of just 3,000 barrels per day today.

And that's going to increase up to 7,000 barrels per day by 2011.

Also, on top of that, we need to add the last production, which for 2011 we anticipate will be in the order of 60,000 barrels per day equivalent.

Additional.

Additional, yes.

And we also are considering the possibility to acquire some additional 75,000, 80,000 barrels per day of equivalent production, just as a project.

Okay.

Is that -- ?

And excuse me.

It is also important to mention the participation of our subsidiaries.

Right now, they are around 32,000, 33,000.

And they are going to be the next year in around 46,000 approximately.

Okay.

Great.

Thank you very much.

Okay.

Thank you, Frank.

Your next question comes from the line of Juan Dauder from Interbolsa.

-- everyone.

This is Juan Dauder.

I will -- I want to ask you about the recent news release in relation to the intention to acquire a state in [PME S29] block in [spirit of] Santos Basin in Brazil with the [stat] oil.

That's my first question.

I have two more questions.

The other one is -- what do you expect about company's products net backs as the heavy crude oil references are expecting to continue gaining ground in the basket of products.

And what kind of projects are you expecting to develop in order to face this forthcoming reality in order to preserve company's netbacks?

What do you expect in logistics, commercialization, and storage and operations?

Okay.

Okay.

Let's go with the comment in relation with the S29.

I'll take your first question.

Actually, [AMXG] in Brazil, they finally approved decision of acreage of percentage from [retro] to Ecopetrol.

That deal was closed last year.

And we have applied for decision of interest a few months ago, already was released only yesterday.

At the end of the day, the interest is going to be 40% (inaudible - microphone inaccessible), 30% (inaudible - microphone inaccessible), and 30% Ecopetrol.

Sorry, can you repeat me the stake you have in the block?

40%, 40%.

We do have 30%.

30%, excuse me.

Operator is --

40% was --

(inaudible - microphone inaccessible) with 30% of the work.

Okay.

Thank you.

And according to the netbacks question?

Okay.

Okay.

About the heavy crude, as we mentioned, we are in important projects in this moment to increase the infrastructure capacity in our pipeline between 2010 and 2011.

Related to the market, we are going to price specially where the heavy crudes are, where we see.

Juan, I think it's very important to mention that we are developing really a huge number of projects in the transportation and logistics during the period 2008-2010.

And maybe part of this information is in the slides.

It's important to mention at least two main projects from the Llanos area to connect the Rubiales field through the line Rubiales-Monterrey with a capacity of 150,000 barrels per day.

Additionally, it is also important to mention the line from Apiay to Porvenir.

Porvenir and Monterrey are very close.

And we also developed some additional projects in terms of stocking capacity and optimization of the several intermediate stations.

This year, for example, we are increasing Ocensa from a capacity from 450,000 to 560,000.

It's an increase of 100,000.

We also are developing the multipurpose line from (inaudible - microphone inaccessible) to Apiay.

We also are increasing the capacity of Rubiales-Monterrey, an increase of 200,000 barrels going to 360,000.

We also are increasing the capacity of Vasconia, Barrancabermeja, an increase of 60,000 barrels.

Maybe these are the main projects.

We also are starting a new buoy in Covenas with the idea that we have it going from a transportation capacity up at least 2 million barrels.

And maybe it's important to mention one of the main projects we are committed right now is the new line from the east part of the country from Casanare to Covenas.

It's worth to state it's aligned from [Ara 1A] that is very close to Monterrey to [Banaria] to connect with the line from [Caleomon] to Covenas.

The capacity of the line from -- the initial capacity of the Bicentenario project is going to be around 450,000 barrels.

But when we connect in the first stage with Caleomon Covenas, we're going to have an additional capacity of around 120,000, 150,000 barrels per day.

In this way, we consider that in the next October 2010, we're going to be able to overcome of the limitations we are experimenting in terms of the oil transportation.

The project develops during the period 2008-2010 represent an investment of around [$1,100 million].

The project right now under development in 2010-2011 are an additional [$1,100 million].

And the project for that period 2011-2000 represents around [$5,000 million] approximately.

These are the main projects in logistics and transportation.

Okay.

Thank you very much.

And maybe it is also additionally -- it's important also that part of all of our development of the heavy crude oil is also the expansion and the modernization of the [bald] refineries because, right now, our refineries maybe are running with a percentage of 20% of the heavy oil, 20%.

And maybe in the future, they are going to be able to run with at least 60% of the heavy crude oil as part of our project of the plan to develop the crude oil in Colombia.

And you know the differential in terms of the price is favorable, considering the crude oil difference with respect to the WTI.

Your next question comes from the line of [Juan Bendaros] from Interbolsa.

Hi.

This is Juan Bendaros from Interbolsa.

I just have one question.

Do you expect to participate or are you actually participating in any kind of negotiations with BP as they have announced that their intention is to sell some of their assets in Colombia?

And do you have any budget for a negotiation of this type, thinking about the 2020 goal?

You know what?

We have informed that we have considering any reserve in our budget for this kind of negotiations.

When we have any possibility, we go to our Board of Directors and to the Business Committee of the Board of Directors to consider it.

Okay.

But are you actually in any kind of negotiations with BP, or -- ?

No, no.

Okay.

Okay.

Perfect.

Thank you.

Your next question comes from the line of Sergio Torres from J.P.

Morgan.

Hello, everyone.

Hello, again.

Hi, Sergio.

Just wanted to -- hello.

I unfortunately couldn't ask this on the call in Spanish.

But it's good to have a second chance.

When you mentioned that --

It's our opportunity, too.

Yes, exactly.

When you mentioned that the several licenses that you obtained in the most recent round, when you mentioned that they have a potential resource base of 800 million barrels, I wonder what is the geological risk associated to that.

And whose estimates are those, are your own estimates?

Or do they come from the ANH?

Diego, take the answer, please.

Those are our own estimates.

And actually, the risk is very variable, depending on the basin in which the (inaudible - microphone inaccessible) are located.

You talk about the Cayos blocks we did with Repsol, that's a very (inaudible - microphone inaccessible) basin, where we considered (inaudible - microphone inaccessible).

And we're looking for a place very similar to the recent discoveries in Venezuela.

Now if we got to the Llanos Basin, which is a more mature basin, as a result, much lower also the reserve, a bit more than what (inaudible - microphone inaccessible) area, where recently several companies have found discoveries that could have a production very quickly.

The other block would be in the [Quino] area, which is a considered area as well, in which we are developing a new play that could have significant reserves.

(inaudible - microphone inaccessible) and the other is in the Tumaco offshore as well, which is a mature basin.

But that on the logic that we are positioned very well in terms of offshore, both in the Caribbean and in the Pacific area.

One of the blocks in the Llanos Basin we've seen is especially Llanos 37 block (inaudible - microphone inaccessible).

We think that there is a high probability of finding oil.

And all of those are included in the 800 million barrels aggregate.

Okay.

So if you were to put a weighted average of the risk rate for that number, what would that be?

And if you could mention from what are the three biggest licenses that contribute to that 800 million number?

All of the Llanos blocks contributed heavily on that.

And the less contributions are coming from the higher-risk plays, like the Cayos area and the Tumaco offshore area.

Okay.

Thank you.

Thank you, Sergio.

Your last question comes from the line of [Gustavo Gotas] from BPG.

Hello, gentlemen.

I have three quick questions for you.

First one, I just wanted to follow up on Sergio's question.

The impression I got from the answer was that the 800 million might already be a risk figure.

Just want to double check -- is that a risk figure?

Or is that a total absolute potential figure?

No, it's -- at this point, it's an absolute figure.

We haven't risked especially the Cayos area.

Okay.

Two other questions that I have.

Just one very quick question -- after all the discussion on the pipelines and the infrastructure, I was left with the impression that we might have a significant amount of potential production that is currently kind of pent up because of the lack of infrastructure.

Just wanted to confirm if that is the case and whether or not you have somewhat of an estimate for how much today is in any way impaired from being produced, just because of lack of infrastructure, just so I could help on Frank's question on where is that going to come from and how realistic the quick increase is.

Excuse me.

Can you repeat, please?

Yes, when you think of all the investments you're doing in infrastructure, my underlying assumption is that you see a potentially higher production to come from some of these heavy oil fields.

I just wanted to check with you guys if you have an estimate today of how much additional production could come in a fairly easy way just by having the infrastructure available or whether or not it's really going to demand a lot more drilling and, say, development to effectively get additional volumes online.

Okay.

Exploration and production people is going to take the answer.

But it is also important to mention previously, Gustavo, that this infrastructure is planned not only for the Ecopetrol needs.

It's considering that needs of the requirements of all the producers in this area.

And you know that there are several important companies that are having huge increments in their production in this area, like for example our associates the Pacific Rubiales, like Petrominerale, like [Cesa], like Hocol, like other companies that are in the area.

Please?

Yes, of course, today, we as Ecopetrol, we do not have any deferred production.

And the investments we're making in the infrastructure are aligned with the profile that we are foreseeing in the future.

So we hope that we're going to have reserve production.

Okay.

Perfect.

And just my last question, sorry --

Yes, go ahead, please.

But if you could, is it possible to estimate how much of an improvement we might see at the refining EBITDA when the hydrocracker is operational?

We can't talk about a special number about the margin because it depends of the cracker spread in the future.

So we expect that we are improving our margin in the next year.

But it's not possible to tell about a number.

Okay.

That's fair.

Thank you.

Ladies and gentlemen, this concludes your question and answer session.

I would now like to hand the call over to Mr.

Alejandro Giraldo for closing remarks.

Okay.

So this is the end of the call.

For additional questions, you can contact us at the Investor Relations Department.

Thanks for participating.

And good afternoon.

Thank you for your participation in today's conference.

This concludes your presentation.

And you may now disconnect.

Have a great day.