Ecopetrol SA (EC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Ecopetrol's first quarter earnings conference call.

My name is [Erin], and I'll be your coordinator for today.

(Operator instructions.)

I would now like to turn the call over to Alejandro Giraldo, IR Director.

Please proceed.

Good afternoon, everyone, and welcome to Ecopetrol's first quarter 2012 financial and operational results conference call.

Before we begin, it is important to mention that the comments by Ecopetrol's senior management could 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 from the projections on the conference call.

The call will be led by Mr.

Javier Gutierrez, CEO of Ecopetrol.

Also participating will be Adriana Echeverri, CFO, Hector Manosalva, EVP for E&P, Pedro Rosales, EVP for Downstream, Alvaro Castaneda, VP of Transportation and Logistics, and Enrique Velasquez, VP of Exploration.

I will now turn the call over to Mr.

Gutierrez.

Thank you, Alejandro.

Good afternoon.

Thank you all for joining us in this conference call.

Initially, we will provide a summary of our key financial results, the highlights of the business segments, and the milestones of internal consolidation.

Then we will close our presentation with the outlook for the second quarter, and finally, we will have a Q&A session.

So let's start with slide five to review our milestones in the first quarter.

The Company continued making progress in its growth strategies, reaching higher level of production and achieving solid operating and financial results.

The corporate group achieved, in the first quarter, a new record in production of 743,000 barrels of oil equivalent per day.

As in previous periods, the rising production came from the [Fils] and [Dejanos] region, mainly Castilla and Chichimene, operated by Ecopetrol and from the association contracts in Rubiales and Quifa.

In line with the increases in production, the transported volume grew up to 1.2 million barrels per day of crude and products.

Our sales volume grew due to the increases in the production of crude oil and natural gas.

The sale prices were higher due to both the market conditions and our successful strategy of diversifying the benchmarks and the destinations for our crudes.

Thus, we increased the use of Brent crude, our preference, and the sales to the markets in Europe and the US West Coast.

The higher prices and the increases in production led to the net income of COP4.3 trillion.

EBITDA amounted to COP8 trillion.

With regard to exploration, the companies of the Corporate Group drilled five exploratory wells in Colombia, of which three have hydrocarbon presence.

Also, it is worth to mention that Ecopetrol finalized [the] La Luna I well, our first step to test nonconventional reservoirs.

Its results are under evaluation.

Additionally, we are on track with the modernization projects of our refineries, the expansion of our transportation infrastructure.

Investments in the first quarter of 2012 total [$1,107 million], of which 63% were allocated to production, 15% to subsidiaries, 11% to transportation, 6% to exploration, 4% to refining and petrochemicals, and the remaining 1% to corporate settlement.

Moving to HSE, our initiatives are providing a consistent trend of improvement in the safety of our operations.

During the first quarter of 2012, the accident frequency rate was .99 accidents per million working hours compared with .94 in the previous quarter and 1.56 in the first quarter of 2011.

Thus, the initiatives implemented have been effective for developing a safer operation for employees and contractors.

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

Thank you, Mr.

Gutierrez.

Good afternoon, everyone.

Let's turn to slide seven.

In the first quarter of 2012, Ecopetrol had sound financial results driven by the increase in production and the higher prices of crude and products.

Starting on the left side of the slide, you can see how, in the first quarter, total sales rose compared to same quarter in 2011.

The exports, including sales to Reficar Free Trade Zones, accounted for 68% of total sales.

So those cost of sales, [loss] operating expenses, grew mainly due to the rising variable costs coming from two sources, first, from largest purchases of crude oil from the National Hydrocarbon sales (inaudible) and second, from higher imports, mainly Naphtha diluent and gasoline to supply the local market during the maintenance of the refineries in the first quarter.

Fixed costs increased mainly because of higher depreciation in contracted services related to larger production in maintenance activities.

Those increases were offset by the decrease in the operating expenses due mainly to the capitalization at the end of 2011 of the acquisition of shared stake in Cano Sur block.

Operating income amounted to COP6.9 trillion in the first quarter of 2012, equivalent to an operating margin of 45%.

In the non-operating results, the loss of COP0.5 trillion was mainly due to the adverse effect of revaluation of the Colombian peso and the impact of provisions [mainly] coming from the lower returns of the fund which caused [potential irregularities].

Total net income from the Group's subsidiaries under the equity (inaudible) amounted close to COP444 billion as follows.

(Inaudible) subsidiaries added COP290 million, refining and petrochemical subsidiaries, COP119 billion, transportation subsidiaries, COP17 billion, and corporate subsidiaries, COP17 billion.

Finally, net income amounted to COP4.3 trillion, while EBITDA amounted to COP8 trillion.

EBITDA margin was 52% and net margin was 28%.

On the next slide, number eight, we find an overview of the Company's cash flow and balance sheet as of the end of March.

The initial cash balance was COP9.2 trillion, and cash generation from operations during the quarter amounted to COP16.5 trillion.

COP7.2 trillion of the Company's total cash flow were deployed to fund operations, and COP1.3 trillion for capital expenditures.

The ending balance of cash and investments was COP17.4 trillion.

Regarding the balance sheet, total assets amounted to COP93.2 trillion, and total liabilities COP46.1 trillion.

The liabilities included the accrual of (inaudible) for a total amount of COP12.3 trillion approved by the General Shareholder's meeting and a higher provision for corporate tax that amounted to COP8.4 trillion.

Financial debt was equivalent to 6.3% of total assets and to 12.7% of total liabilities, while debt to EBITDA ratio for the last 12 months was 0.2.

During the quarter, there was no increase in financial indebtedness.

Finally, the equity decreased in the first quarter mainly as a result of the recording of the account payable of the dividends secured in the General Shareholder's Meeting held on March 22.

Now, let's turn to the main aspects of the results of the corporate group shown on slide nine.

In line with the capital results, in the first quarter of 2012, the corporate group reached solid financial results.

Total sales for the corporate group amounted to COP18 trillion compared with COP14.4 trillion in the same quarter of 2011.

Group's net income amounted to COP4.3 trillion, and EBITDA was COP8.7 trillion, while EBITDA margin was 49%.

Now, let's move on to slide 10 and [review] the main figures of our subsidiaries.

In the first quarter of the year, the highest revenue before accounting eliminations came from Reficar, with COP1.3 trillion, Hocol with COP1.1 trillion, and Equion with COP0.6 trillion.

Highest net income came from Equion, with COP219 billion, followed by Hocol with COP187 billion, and Reficar with COP117 billion.

Subsidiaries with the highest EBITDA in the quarter were Hocol with COP321 billion, Equion with COP187 billion, and Ocensa with COP148 billion.

Now I turn the conference to Enrique Velasquez, who will comment about the main results of our E&P segment.

Please let's move onto slide 12, which summarizes the highlights of the E&P segment for the corporate group.

Let us start with our production results.

In the first quarter, the corporate group achieved a gross production of 743,000 barrels of oil equivalent per day.

During the quarter, production was affected due mainly to restrictions on the availability of [transportation] infrastructure.

The production growth was led mainly by the increase in Castilla at Chichimene's fields, which accounted for 152,000 barrels per day, Rubiales and Quifa for 121,000 barrels, and [Nari] for 17,000 barrels.

Regarding exploration, the companies of the corporate group drilled 58,382 exploratory wells in Colombia, of which wells Pintado and Dorcas, drilled by Hocol, had hydrocarbon presence.

Other wells were dry, and the remaining two were under evaluation, including Tisquirama Este-1 well.

Last week, hydrocarbon presence in [this well] well was announced.

Also, as a corporate group, eight (inaudible) tests were completed, of which two had evidence of hydrocarbons, the Este-3A and the Este-6, drilled by Hocol, in the CPO-16 block.

Another well is still under evaluation.

This last one is our first initiative [aimed] to add reserves for unconventional resources.

As for the Canadian offshore activity, during the first quarter, the rig, Offshore Mischief, arrived to Cartagena.

This rig will be used to drill the wells Mapale 1 and Mapale 2 on block RC-5, operated by our subsidiary Equion.

Internationally, the appraisal well, Itauna 2, was drilled by our partner, Anadarko, in Brazil.

Also, in March, the Bureau of Ocean Energy Management, BOEM, of the US Department of Interior, officially awarded to Ecopetrol America Inc.

blocks east breaks 284, 285, 328, and 329 located in deep waters on the east break sector in the US Gulf Coast.

Additionally, the awarding of the block 623 at the Keathley Canyon sector was confirmed in February.

Those resolution allow Ecopetrol to incorporate five new blocks into the portfolio in the US Gulf Coast as a result of the lease sale 218.

Our 2012 drilling plans remain unchanged, that is to drill a total of 42 exploratory wells, 37 of them in Colombia, three in the US Gulf Coast, and two in Brazil.

Finally, let's review the financial result of the upstream segment.

Net income for the segment in the first quarter was COP4.4 trillion.

[All of our] results were driven by the higher volumes sold and better sale prices linked to benchmarks on the WTI.

EBITDA amounted to COP7.6 trillion, equivalent to an EBITDA margin of 77%.

In summary, we continue making progress in our (inaudible) to our (inaudible) goals we have set for the year.

Now, I will turn the call over to Mr.

Alvaro Castaneda, who will provide an update on our midstream operations.

Good afternoon, everyone, and please turn to slide 17.

The volume of crude [oil] transported by pipelines in the first quarter grows to 1.2 million barrels per day, of which 74% accounted for crude.

Crude and naphtha volume transported by truck reached 104,000 barrels per day in the first quarter of 2012.

Regarding the Bicentenario pipeline, the segment between Araguaney and Banadia reached a 52% progress as of March 31.

It's worth mentioning that Ecopetrol [approves] two key initiatives - first, the integrity program, which will [maintains] the current [scheme] in order to reach the higher transportation industry standard.

The budget for this initiative amounts to $489 million.

The second initiative is the contingency program, which will review the potential consequence that might affect the communities and the environment in case of a failure in our transport infrastructure.

The budget amounts to $39 million.

This initiative will enhance the [day to day] contingency management that exists in Ecopetrol to minimize the risk that similar events as the Cano Limon-Covenas crude oil pipeline and Salgar-Cartago (inaudible) pipeline happen again.

Let's review the financial results of the segment.

Net income amounted to COP88 billion in the first quarter of 2012.

Although revenues rose as a result of the higher producing volumes in Colombia, costs and expenses increase substantially due to maintenance expenses on the transaction infrastructure.

EBITDA margin was 56%, and net margin was 14%.

With this, I will turn the presentation over to Pedro Rosales, who will comment on downstream results, starting with refining.

Good afternoon, everyone.

Let's move onto slide 14.

In terms of our operation, the refinery throughputs were reduced in the first quarter of 2012, mainly due to scheduled maintenance of the bottom (inaudible) at Barrancabermeja refinery.

During the execution of such maintenance, the production of valuable products was lower, impacting the result of refining gross margin.

The higher cost of crude, which is linked to the price of our crude [export] basket, was offset the margin.

Given the high crude prices, the scheduled maintenance, and therefore lower production of valuable products, which generated the need to increase imports, the EBITDA was affected, reaching minus COP43 billion, which corresponds to an EBITDA margin of minus .8% and a net loss of COP156 billion for the quarter.

Regarding the main refining projects, the expansion and modernization of the Cartagena refinery reported a 61% progress, and the upgrading of the Barrancabermeja refinery a 10% advance.

Finally, the master plan of utilities in Barrancabermeja, which will update the infrastructure for the supply of a steamer, water and energy, reached 42% progress as of March 31.

Now please turn to slide 15 to review the sales and marketing results.

Total sales volume grew between the first quarters of 2011 and 2012 due to the rise of exports.

Exports growth was driven by higher availability of Magdalena blend crudes and the increase of natural gas sales to Venezuela.

These increases offset the reduction in local sales primarily of natural gas due to a lower consumption from thermal power plants and a new decree recently issued allowing other producers to sell their own gas royalties.

During the first quarter, we continued with the strategies of diversifying markets and referencing our [peers] to benchmarks that generate more value to the exports.

Regarding the destination of our exports, there was an increase in the market share for our crudes in the US West Coast and Europe, as well as higher sales of fuel oil to Far East.

These factors, combined with increased demand for our heavy crudes, allowed to improve $9 per barrel in the spread between our crude export basket price and Brent index.

There were no exports referenced to WTI in the first quarter of 2012.

Lastly, the sales and marketing segment presented in the first quarter a net income of COP41 billion, lower than in the first quarter of 2011.

This was the result of the higher transportation costs of crude and diluent for transporting heavy crude.

EBITDA was COP111 billion.

EBITDA margin was 3% and net margin was 1.1%.

There was also a significant non-operating impact due to the peso revaluation.

I now will turn the presentation back to Mr.

Javier Gutierrez, who will commence on the milestones of the internal consolidation initiatives and the corporate social responsibility in the first quarter of this year.

Thank you, Pedro.

Let's turn to slide 17.

I would like to start by highlighting the improvements in HSE.

The accident frequency rate in the first quarter of 2012 was .99 accidents per million working hours compared with .94 in the previous quarter and 1.56 in the first quarter of 2011.

Also, the environmental incidents from operational causes fell to four in the first quarter of this year from 11 in the first quarter of 2011.

Those encouraging results strengthen our commitment of a safe and reliable operation.

Also, it is worth to mention the technical cooperation agreement with the US Environmental Protection Agency and the Petroleum Technology Alliance of Canada for identification and evaluation of opportunities to reduce greenhouse gases and increase energy efficiency.

Regarding our stakeholders, we have two important highlights during the quarter.

First, on March 22, we held our annual Shareholder Meeting, with a record attendance of more than 16,000 shareholders and the approval of a dividend of COP300 per share payable in one installment for our minority shareholders.

The second highlight was the revision of some terms of the collective agreement different [on] compensation and wages.

This process was satisfactory for both the Company and the unions.

The agreement was signed in 2009 for a five-year period, and since the beginning, this revision was established.

Regarding science and technology, our Research Institute was officially recognized as a research center by Colciencias, the governmental agency for science, technology and innovation.

In addition, the Institute was granted by the Mexican government with patents for two additives helping improve visbreaking processes in refining and petrochemical areas.

As a final point, I would like to emphasize that Ecopetrol remains fully committed with the community affected by the incident in Dosquebradas of last December.

The Company has continued its progress in all the workstreams that is in health, housing, business and government, social, legal, and environmental.

Finally, let's review the outlook for the second quarter of 2012.

Please move on to slide 19.

During the second quarter of 2012, Ecopetrol will continue on its path to achieve all of our strategic goals for this year.

Regarding exploration, Equion, our subsidiary, will begin the drilling in the Caribbean, Colombia and offshore.

We will also complete the exploratory campaign of the quarter.

In production, we will continuing raising our production in order to achieve the goal of 800,000 equivalent barrels per day in 2012.

In transportation, we will continue achieving progress in our infrastructure projects, including the first phase of the Bicentenario pipeline together with our partners.

We expect to consolidate the two initiatives or integrity of transport infrastructure and contingency, which are key to strengthen our infrastructure and improve the reliability of our operations.

The integrity program, with a total investment of $489 million, assure a safe and reliable operation in our transportation system through a monitoring of the critical variables in the infrastructure, continuous technological [extreme] to evaluate threats and the implementation of the strengthened integrity management system.

On top of that, the contingency program intends to review the potential consequences that might affect the communities and the environment in case of any failure in our infrastructure.

Throughout the assurance of a system of attention, the contingencies efficiently dimension, implemented, and articulated, along with other local and regional organizations and institutions.

The approved budget to carry out the plan activities is $39 million.

In refining, we will continue with the progress in the modernization of the Cartagena refinery and with the arrangements in order to meet all the requirements of environmental and social aspects to continue with the execution of the operating in the Barrancabermeja refinery.

Additionally, we have scheduled maintenance at some units in the Barrancabermeja refinery.

We also shall continue all efforts to maintain the improving trend in HSE, as well as the safety and reliability of our operations.

Regarding our commercial strategy, we will increase exports volumes according to the production growth.

Locally, we will begin the activities to be prepared in order to comply with the sulfur content regulation for diesel of less than 50 parts per million across the country, which is mandatory starting January 1 of 2013.

In biofuels, we will continue with the project to produce ethanol from sugar cane through bioenergy.

Now, I open the session to questions from our participants.

(Operator instructions.) Frank McGann from Bank of America.

Yes, hi, good afternoon.

I was just wondering -- two questions, if I could.

One is on production, the trend in production during the quarter, and then maybe, perhaps, if you have some indication of where it is today or what it was in April, if we've seen an increase from the levels you had in the first quarter.

And then, the second question on the refining side, refining, if you look back three or four years, was actually a pretty good earnings contributor.

It's been much less robust, clearly, over the last couple of years, and the first quarter continued that trend.

And was just wondering, with prices essentially in line with international prices, or moving in line with international prices, when could we expect some improvement in refining?

Do we need to see the completions of the upgrades so your product mix is substantially better, or could we see some improvement over the near-term?

Thank you, Frank, again.

Hector is going to explain -- excuse me, Enrique is going to explain about the (inaudible) production in April, how we are doing (inaudible) these days.

Okay, Enrique, please?

Hi, Frank, yes.

As Mr.

Gutierrez says, our plan is to complete the goal, which is 1,800 by the end of the year.

And basically, the idea is to, I mean, maintain the fields in the production and recuperate the -- let's say, or increase better production than we'd have in the last two months.

So we expect to complete the plan.

Okay, Frank?

What about the carbon levels, Enrique?

Okay.

For the -- maybe you would just see in the report, total production for the Group is 743,000 barrels divided 626 from crude, 116 from gas, for a total equivalent, as I mentioned before, of 743,000 barrels [on the plan] per day.

Okay.

And if you look at the trend during the quarter, and then in April, has it been basically kind of flat at that level during the three months, and then into April, as well?

Yes.

Yes, for April, but our plan is to start climbing up in May.

Okay.

Which areas will see the improvements (inaudible)?

Frank, excuse me, but it is also important to mention that, really on the first quarter, we were very close to our projections, really, the difference less than 2%.

And notwithstanding that, we have some (inaudible) we previously mentioned in the transportation.

Finally, the difference, as you can see, is really small, but it is also a show of how the positive evolution in terms of the production.

Yes.

And regarding your question which activities we will complete in the next months, basically probably remember that we have some, I mean, problems in the Cano Limon-Covenas pipeline, which reduces our production in 17,400 barrels per day, as well as some minor cuts in Rubiales due to the increase in [water] cut.

So as soon as we -- and we already did -- we solve these problems where we'll, I mean, keep the momentum in order to complete the goal, okay?

Okay.

Okay.

Frank, Pedro Rosales.

About the refinery, yes, the situation of the first quarter is mainly generated by an unscheduled turnaround of the main [bottom] (inaudible) in Cartagena, which reduced the feed in almost 30,000 barrels per day.

And therefore, the production of gasoline and distillates affecting the valuable products index.

But in general, the conversion factor of our refineries, that is around 75%, give us a high dependence on the international margins to generate (inaudible).

Then, as you said, the structural solution will be generated by the modernization of our refineries.

That reduces the cost of the crude and increase the quantity and value of our products.

Then, in the near-term, we would see the results depending on the international market margin, but at the end of the projects, we will show a structural efficiency of our refineries given by the increase of the conversion factor that goes from 75% to 95%.

This is in the terms of the structural framework -- change.

But anyway, we have been implemented some initiatives to reduce the cost.

And additionally, we have been developing some maintenance activities to increase the reliability and, in general, the integrity of our refineries, and we have been improving the available capacity of both of our refineries.

Yes.

Paula Kovarsky from Itau BBA.

Hi, everyone.

Just wanted to make two questions, as well.

Just following a little bit on the production again, what would have been your recurring production in the first quarter if we were to eliminate the problems with transportation and this little problem in Rubiales?

I mean, would it be correct to assume that -- so you mentioned 17,000 barrels a day of curtailment of production due to the pipeline issue, but this was concentrated in February only.

So could you please just tell us what would have been production, I mean, according to plan, excluding those two, quotes-unquotes, non-recurring items, and then just for us to understand how far you are from the target of year-end.

And then, second question relates to the costs and expenses.

We observed a reduction in costs and expenses for -- and also in the -- on the operating costs in the first quarter of 2012 compared to the fourth quarter of 2011.

And if you could also give us some color on how recurring this reduction is, is this a new reference for costs and expenses for us to -- for [cash], going forward?

Okay.

You're right [in your consideration].

Enrique's going to confirm your estimation.

Please, Enrique?

Hi, Paula.

Regarding your question, the production without any incidents would be around 760,000--.

--Seven hundred and -- sorry?

7-6-0 thousand.

Okay.

Because the 17 are estimated in an average way.

On a quarterly basis?

For the quarter?

Yes.

And just for your information, Paula, that today production is 767,000, 7-6-7, okay?

Okay, perfect.

And then, if I may follow up on that quickly, looking at future growth in the number of barrels that Ecopetrol has to prove for between now and 2015, or even if we look until 2020 and the target of proving another six billion barrels, how comfortable is -- the Company is in the ability of proving those barrels in the short-term to support the fantastic production growth that you guys have been delivering so far?

And which would be the main sources of reserves addition in the very short-term?

Paula, as you know, our plan for the year is to drill more than 400 development wells.

So this is one of the task that we expect to accomplish in order to ship our production, yes.

I mean, as you know, almost 90% of production comes from primary recovery.

Okay, but if I look at -- I mean, it's not only about growing production.

You also have to prove the barrels to support -- you know, even to support our forecast of production growth.

So if you could perhaps comment on which are the main, I mean, two or three reserve contribution that you expect to see building into the 1.7 billion barrels of proven reserves in short-term?

Excuse me, may you explain what (inaudible) your comment?

Yes, just to understand where do you expect new proven barrels to come from.

Is it mostly a primary out of those 400 development wells that you're going to drill?

How much do you expect additional recovery factor to contribute to proving reserves in the short-term, or perhaps within the target of proving six billion barrels [until] 2020?

Yes, okay.

In the short-term--.

--Let me mention some activities that we will carry out in the next, I mean, about a year.

Okay, but -- excuse me, Enrique -- but maybe it's important to mention that you are referring to the six billion barrels that we are referring we are going to add during the next -- during the period of 10 years, okay?

Yes, perfect.

But then, I know that's the reference number, but I was just trying to get a little bit more color on the short-term targets.

Okay, that's (inaudible).

It means that we are going to add in average -- in average -- a number between 500 and 600 barrels per year approximately, and almost 3.3 [billion] barrels are going to be for the developments of our current fields, mainly primary, secondary and tertiary recovery.

And then, we expect to add reserves basically from the national and international exploration, considering parts of our current fields and new [idea].

And additionally, we also are expecting to add some reserves from the nonconventional resources.

During that first year, we are mainly adding from our current fields.

But anyway, we have been adding some from our new discoveries, and mainly in the short-term, what we are expected is to continue increasing our recovery factor, that right now we are around 18%.

And what we are trying is going to around 12 [more] percent.

It implies that -- it means that, in average, we must increase our recovery factor at another actually 1.5 per year, approximately, to be able to add the almost three point -- 2.3 million barrels from -- increase from recovery, basically.

This is as a general picture, yes.

But for this year, we are mainly supported in the primary recovery and also some project of secondary recovery, and also tertiary recovery.

But it is important to mention that we have also revealed that we are in the process of the development of Cano Sur, [what] discovery that we had last year.

As Mr.

Gutierrez says, we have 88% of field in primary recovery, but also we are undertaking EUR-[IOR] pilots in order to add reserves through secondary and tertiary recovery techniques.

For instance, we [add] pilots for water flooding in fields like [Nutra], (inaudible), Tisquirama, [Stimi] section in the [middle mark], chemical injections San Francisco field, as well as gas injection.

And as you are aware, we are starting the in-situ combustion in Chichimene and Quifa.

Okay.

Thank you.

Thank you so much.

You're welcome.

Okay, now going with the explanation about the expenses, (inaudible) expense, Adriana Echeverri, our CFO, is going to (inaudible) the answer.

Hi, Paula.

More than savings, what I do have to first take into account is that take-up (inaudible), execution of costs and expenses has certain cyclicality, so you could say.

So by the fourth quarter of every year, you will find a [climb] in costs and expenses because they're more -- the [moving part] of the executions takes place during that quarter.

That's why, when you take a look into the first quarter of next year, you find opportunities from that.

First quarter usually is characterized by low execution of product due to the fact that we are starting to send the terms of reference of different selection processes, and we are starting the contracting process of every year.

So that's why you find kind of that behavior.

So it's better try to compare the first quarter of one year with the first quarter of the next, or the last with the last.

That's the real situation that happens every year in the Company.

Caio Carvalhal.

Hi, Paula, (inaudible).

Hi, can I make the question?

This is Caio.

Excuse me?

Okay.

Hi, how are you?

Yes, sorry, I'm not sure if you want to make any comment on Paula's question, or should I put mine now?

Go ahead.

Proceed with your question.

Okay, great.

Thanks a lot.

(Inaudible) for Paula, but anyway, we are open to additional informations.

Okay.

Go ahead.

Yes.

No, truly my questions are on the operational side, as well.

I have one question referring production and another one on refining.

I think it's pretty much actually a clarification on both Frank's and Paula's question so far.

On the production side, if I understood right, the problems of that 17,000 barrels a day that you miss in production was because of the transportation issues you had with the pipeline, right?

I just want to confirm that that was the main issue.

It was transaction, or did we had any type of, let's say, lower than expected increase in production?

In addition, also on this question, if you could, just tell me -- I'm not sure if you can open that, but if you could just tell me, from the [purple] produced volumes, how much came from each one of the five or six main fields Ecopetrol controls?

And lastly, also on the production, I understood the last part of the comment mentioning about chemical injection, the in-situ combustion.

I mean, are these products performing as expected?

Because in the last guidance, we understood that four or five critical fields were under some operational upgrades that were critical to increase production.

And also, just the final comment on production, on Chichimene, you mentioned right now, like 30 seconds ago, that the in-situ combustion in Chichimene has already started.

I understood this was target only for the end of the year.

If you could, update me on how is this product status going on, I would be more than happy.

Many thanks.

Okay.

Basically, you have four questions, okay, one in relation with the [infrastructure] of the transportation, okay?

The second one is how we can [exploit] the production, yes, in the main areas that we are -- the main fields that we are operating, the next one, Chichimene, okay, (inaudible) with the combustion, but really we are (inaudible), okay, and -- these three?

Yes.

Actually, it was like five question in one, but let me, one by one, I answer you, Caio.

The first one, (inaudible), you were asking if all the differential in production came from transportation.

The answer is not.

I mean, as you know, there were some attacks on the infrastructure in Cano Limon-Covenas, okay, the first question.

Second one is the status on the Chichimene combustion in-situ.

Let me tell you, we are in the early structuring stages, and we are kind of working a customized technology for the field.

And your question regarding production by fields, okay, Castilla is almost 110,000.

I'm going to give you some rough numbers, okay?

Okay, fine.

The big numbers are fine.

Yes.

[Guahida] is, like, 60,000 barrels equivalent.

Rubiales in 97,000, and others, including [API], is like a 22, okay?

For La Cera Infantes, LCI field in middle mark is 20,000.

Casabe, in the middle mark, is 22,000, and [Nade] is 17,000, and Chichimene is 43,000 barrels -- sure, let me clarify, is Ecopetrol net working interest, okay?

Okay, perfect.

Thank you very much.

Yes, and -- well, it covered my upstream question.

On the downstream, I have to be honest, I couldn't totally understand -- understood the answer you guys gave to Frank McGann.

I mean, it really puzzles me why the downstream segment has been delivering interesting results up until two quarters ago.

My question would be shall we expect, over the next quarter 2012, the downstream segment to deliver negative results, or is -- again, I understand you guys already answered it, but I couldn't understand the answer.

Or shall we expect it to change only when you have the upgrades in Barrancabermeja, Cartagena, then?

Okay, Caio, Pedro Rosales.

Mainly, the [situation] in this quarter was generated by an unscheduled turnaround of the main plants for the processing units in Barrancabermeja refinery and at the same time in Cartagena.

That was unscheduled maintenance.

It's not a thing that we didn't consider.

It's planned, this maintenance.

It's a maintenance that is made every five years when, in this time, we have the (inaudible) and the situation.

Additionally, as we talked to Frank with the projects, we will develop new restraints on the refinery, because we can use crudes that has a lower cost and produce more products.

In this moment, we produce more than 75% of produced dollar with a higher cost than the fixed (inaudible) that is a crude, and with the projects we will increase that amount up to 95%.

Then we have an exceptional situation in the first quarter, and we expect, in the near-term, that we have better results in the refining.

But in the long-term, additionally we have an [instructural] solution that is the entrance of the projects that give us another characteristics of the refineries.

I don't know if it's clear, the answer for you.

Okay.

No, no, no, now it's clear.

Thank you very much.

Okay, thank you.

Chris Audi from Santandar.

Thank you very much.

Let me take one question at a time.

The first one, going back to the topic of costs, I was just trying to understand, when we look at some of the main costs, such as maintenance, such as labor, such as other, there was a significant decrease in these costs in first quarter versus the fourth quarter.

So I'm just trying to understand, this lower -- this new lower level that you achieve in the first quarter, is that recurring?

Is that sustainable, or not?

So that's my first question, please.

Okay, let's go to answer the first question.

Adriana is taking that.

Yes.

As I already explained to Paula Kovarsky, there is a cyclical here in (inaudible).

We have execution peaks by the last quarter every year.

That's why, when you compare (inaudible) of last quarter every year with the first quarter of next year, it will look like a decrease, which is not exactly real, but it's reflecting that the activity is higher in the last quarter as compared to the first quarter of next year.

That's why it's better to compare first quarter with the first quarter of next year and last quarter with last quarter.

Okay.

So, going forward, we should rely -- when we look at these important costs, such as maintenance, such as labor, such as other, we should expect, for example, the second quarter of this year to have figures that are closer to the fourth quarter of last year, in other words higher figures?

No.

That's what I'm saying.

Last quarter of every year reflects an increase in activity in the execution of cost and expenses that happens only by the last quarter of the year, every year.

So that's why what you have to do is compare the first quarter of this year with the first quarter of last year.

There is a marginal increase due to new activity and due to the fact that we are, for example, hiring more people for the more activities.

But the increases should not reach levels as last quarter, or the last quarter of every year.

Is that clear?

So, in other words -- so these costs in the second quarter should be higher than what we saw now in the first quarter.

Correct, which is the cycle.

Yes, but not as greater as it was during the last quarter of 2011.

Okay.

Okay, understood.

All right.

And then, the other question that I had had to do with prices for your exports of oil.

It seems like you were able to sell your exports of oil at a discount to Brent of around 5%, 6% in the first quarter, which was similar to the fourth quarter of last year, which equates to more or less a premium, if I did my calculations correctly, of around 8% to WTI this -- during this first quarter and 10% in the fourth quarter.

My question to you is, given your commercial strategy, as we look out to the second quarter, or even third quarter, do you think you will be able to maintain this level of premium of 8% to 10% to WTI, or should we consider kind of a downward move on this premium, going forward?

Okay.

Okay, Pedro Rosales.

Let me try to answer your question in two parts.

First is to emphasize that, due to the WTI disconnection from markets, that was necessary to choose another benchmarks for our crude oil sales, and then the Brent is the marker that we are using for 65% of the crude oil shipments traded today.

And the other is with Maya.

These is driven by the higher liquidity of the markers that may be a feasible option for pricing our crude.

And for example, US refiners agreed to trade their purchases against Brent or Maya.

Then, we expect that, if the trends of the market continue in the same way, we will expect similar margins that we have in the previous quarter.

But it depends, really, on the trends from the market and the evolution of some factors that are, as you know, affecting that market.

Okay, understood.

Thank you.

And just to finish up, going back to the topic of production, can you just give us an update on the progress of the Bicentenario pipeline, the first stage, if I'm not incorrect, it was supposed to start sometime in the middle of 2012.

I think construction was up to -- was progressing well, 40%, 45% of it was done.

Can you give us an update on how that's going?

And do you still expect the first phase to begin, let's say, in July of 2012, or you might take longer than that, please?

As I mentioned in the report, I'm almost sure, right now we are expecting that the Bicentenario pipeline would be starting its operation in the fourth quarter.

We have been experience some problems with the development of the construction plan mainly in the Arauca region.

Notwithstanding that, we have been completing the activities in the Capanaro regions, but due to some problems with the communities, the public order, we are expecting we aren't going to be able to be in operation until the fourth quarter of the year.

And with that, Mr.

Gutierrez, you still, despite this delay in the startup of the pipeline, you're still maintaining your production target of -- on an unconsolidated basis of 750 for 2012 despite the fact that this pipeline extension is only starting now in the fourth quarter, you are still able to maintain that target of 750 on a nonconsolidated basis and 800 on a consolidated basis for 2012?

Yes, we are.

We are developing different kind of strategies to be able to keeping our 750,000 barrels of production.

Okay.

Thank you.

[Anisha] Kapadia.

Good evening.

It's Anish Kapadia here from Tudor, Pickering, Holt.

Just going back to the production, I just wonder if you could clarify the 800,000 barrels today target.

Is that an exit rate for 2012 or an average rate for 2012?

And I just wanted to know what impact does the Bicentenario pipeline have on your production rate.

So if it's not complete, what would the maximum production be?

Anisha, the number that -- first of all, the number, 800,000, is a corporate group, okay?

That includes Ecopetrol, Hocol, Equion, and is a number that's a year number.

So what does that mean in terms of your exit rate for what you're expecting?

800 is for the group.

It supports that the contribution of our affiliate is around 50,000 barrels per day, okay?

And that way, the Ecopetrol's [enterprise] production is around 750.

And as I mentioned in the previous question, notwithstanding the delay in Bicentenario pipeline, we have been developing different strategies [that] should be able to transport the barrels, not affecting our production targets.

Okay.

Well, what I was trying to figure out was, when the Bicentenario pipeline comes onstream, what production rate should you be able to get up to at the end of the year, so what should your end-of-year rate be for the full group.

The capacity of the pipeline is designed for 450,000 barrels per day.

But in its first step, the first stage, it's going to have a capacity of around [125] barrels per day.

It's going to connect with the Cano Limon-Covenas pipeline.

It is important to remember that our participation in the Bicentenario pipeline is 65%.

In (inaudible), the pipeline capacity that corresponds to us is about 65,000, 70,000 barrels per day.

That would be the maximum impact that we would have in case of any -- regulate of the Bicentenario pipeline.

And we are, as I mentioned, developing different strategies to cover this problem.

Okay, thank you.

My second question just relates to the permitting and security situation in Colombia at present.

It seems to -- it's certainly not getting any better at the moment.

Could you just run through how you see permitting and how you see that progressing, the security side of things, especially with the Cano Limon-Covenas pipeline and the timing for permits on CPO-9?

We have been commented we have some problems (inaudible).

But at the same time, it's very satisfactory for us to confer that we have been reacting in a very positive way.

We have been developing some programs for the protection of the pipeline in conjunction with the military forces and with the different authorities.

But at the same time, we have been develop.

We have been working with the local and regional authorities.

We have been developing some plans to work with the communities to develop social investments.

And as we (inaudible) observed during the first quarter, we have had a higher availability of the Cano Limon-Covenas facility.

We compare with the availability that we have during the second semester of the 2011.

In that way, we consider that we can be reliable in terms of how we expect the evolution of the availability of the Cano Limon-Covenas pipeline.

And we maintain a very discreet program in terms of the protection and preventing activities to reduce the (inaudible) risk of any event that affect the facility.

In general, as a newspaper register, we have some problems, but, at the same time, the government, with President Santos, and the (inaudible) position have been developing a very strong program to react against different attacks that we have been (inaudible) by the groups.

And really, if we compare the number (inaudible) really we haven't had a significant increase in terms of the number of attacks to the infrastructure.

Okay.

And just on the permitting side, in terms of how the permitting situation's looking and the -- on CPO-9 in particular?

Anish, are you asking about the environmental license for the block?

Yes.

So, yes, the environmental license in terms of getting -- the procedure for getting those, how -- if that's improving at all.

Okay.

We fulfill some requirements from the Ministry, so we are expecting to get the license approved maybe in the next weeks.

Okay.

And then just one final question.

On Rubiales, could you just repeat gross production for Rubiales is at the moment, and if you still believe that you could achieve 200,000 barrels per day gross from Rubiales?

Can you repeat the question, please?

Yes, sure.

Could you just tell me where gross production on Rubiales is at the moment, and if you still believe that you can achieve 200,000 barrels a day gross production from Rubiales in the future.

Anisha, the gross production for Rubiales field is around 170,000.

And we're expecting, in short-term, to achieve 180,0000.

Regarding your question, if we were able to reach 200,000 barrels, the answer is yes.

We are working very hard in order to get the numbers.

Okay, thank you very much.

You're welcome.

Gustavo Gattass from BTG.

Hi, guys.

I had three very quick questions.

The very first one is for -- I think more for Adriana than anyone else.

I just wanted to understand, Adriana, you made it very clear that there is seasonality effect on the results.

But when I do the calculation backwards, so just looking at how much was reported in costs on a per-barrel basis, for the E&P side of the business, you guys reported about $9 a barrel.

And what I'm getting to, just doing the calculation the other way around, is about $7.

I just wanted to understand, is there anything I would say offsetting costs in the E&P side of the business this quarter that would not be recurring for the future?

Yes.

Hello, Gustavo.

There was certain events that happened in the second quarter of last year, where we had, first, estimating an expense of COP370 billion for Q2 (inaudible) project.

However, that project was then after the / with our (inaudible) auditor, reversed and capitalized.

That's why you find that reversion in there fourth quarter of 2011, and then there is a reduction of that in the fourth quarter.

And you find that effect no longer in the next -- or next period, such as the first quarter of this year.

So that's why exactly your calculations look like going up and then down.

Okay.

Thank you.

On the second point, Adriana, I think still another one for you, there was an absolutely massive improvement in working capital in this quarter.

Again, the question here is is that something that is sustainable?

Can you consider that you guys have, I would say, a near-zero working capital requirement to operate Ecopetrol, or was this, I would say, a special quarter in that sense?

Yes.

The (inaudible) increase in our working capital during this period, this first quarter, was due to mainly oil prices climbing.

And also what Pedro already commented regarding our new commercialization and marketing strategy.

So that's why we found that, for this year at least, we already have all the monies in place in order to deploy into our CapEx operations, as well as current operations of the Company.

So we find no any longer, or any more funding needs for(inaudible).

And second, we really expect that this cash flow will continue to increase these oil prices are now looking like dropping at any moment of this year, according to our estimation.

Okay.

And just the last one, I don't know who would be best for this one, but as you heard from Paula's questions, there is some level of doubt in the market with regards to how Ecopetrol might actually bring more reserves into being.

And I was just wondering, now that the SEC allows you to disclose your 2P reserves, why not disclose them?

I'm actually a little bit surprised that you didn't do it in the 20-F this year.

Do you guys see any problem in doing that?

And if not, can you tell us where your 2P reserves actually are today?

Yes.

We do not disclose 2P reserves since we are at SEC listed company and US listed company, and we are only allowed to disclose 1P reserves.

And 2P reserves are considered as a forward-looking statement since they are not developed yet first, and since the certainty of development is (inaudible) of many other factors.

So in our case, as you know, our 1P reserves are 99% audited and certified by independent auditors in the different firms, recognized in the industry, so that we are 100% sure that these reserves that we are revealing to the market are -- I mean, the more certain as we can really say.

Okay.

But Adriana, I was just confused.

I got the impression that you said, because you are SEC, I would say, regulated, you couldn't disclose.

Has that changed again?

Because I was under the impression that you are allowed now to do so.

Yes.

We are -- remember that the SEC, two years ago, said that you could reveal your 2P reserves, but you could -- but you are not obliged to.

So what we did was we make a consultation with our advisors, and they said better not, because there is no standard for that revealing, in fact.

So what really companies were doing when they revealed their 2P reserves are using their own standard, since SEC has not set any standard, in fact, to follow.

So that's why, for us, we decided, based on that, to be conservative and say our 1P reserves, which are, in our estimates, as certain as they are audited and certified by a third party.

Okay.

Thank you then, guys.

Thank you.

Nathan Piper from RBC.

Hi, good afternoon, Nathan Piper from RBC Capital Markets.

You've had an extensive questioning already, so I'll keep mine fairly short.

First of all, I wonder if you'd be a bit more specific around your contingencies for increased production if you don't have the Bicentenario onstream.

I assume you mean trucking, and perhaps that means higher costs.

But I wonder if you could be a bit more specific on that.

And secondly, on the La Luna, and indeed the unconventional potential in Colombia, when do you think you might have first commercial production from the unconventional resources in Colombia?

Thanks.

Okay.

The first one, you're right, we're planning the additional use of trucking.

But additionally, our plan to have some increases in the (inaudible) facilities of pipelines that allow us to support increasing the capacity.

But is not only the trucking.

It's the possibility to have some additional capacity in the current pipeline, mainly [at same time] (inaudible) Colombia also.

Nathan, regarding your second question, when we expect to get production from unconventionals, as you are aware, we just finished (inaudible).

For your information, we plan to drill four wells a year, and in our 2020 plan, there is a production that will come from unconventional.

But honestly, to tell you on a day to day is very complicated.

I will keep you updated about our progress in the unconventional (inaudible), okay?

Okay.

You have 27,000 barrels a day by 2015, or contribution from unconventionals.

I guess maybe how long do you think it will actually take to understand the commercial potential?

Because, clearly, unconventionals is very early stage in Colombia, and it takes time to work out how to drill it, and also then it takes time to work out how to exploit it best.

So should we safely assume that it'll be towards 2015 before we'll see any meaningful production from unconventionals?

Yes, you got it.

It's a good approximate date.

I mean, we are looking different areas.

One is we are drilling some wells -- we are planning to have some joint venture with companies with more technology and more experience than Ecopetrol in order to make a shortcut in the learning curve, okay?

Okay, thank you very much.

You're welcome.

Pedro Medeiros from Citigroup.

Hi, guys.

Thank you, hi.

I actually have three quick questions.

They're all related to almost my colleague's question about how to fulfill the guidance on reserves in the future.

And the first one is, what I understand, it could be one of the greatest contribution from the Chichimene's in-situ combustion pilot that you're running right now.

And Chichimenes currently accounts for a very low recovery rate under your overall reserves.

Can you provide us more color on what do you effectively expect to achieve on this pilot?

And when should we get these results, and how should they translate into potential commercial deployment, in a sense?

And the second question is actually related to your exploratory campaign.

Do you have any news, or can you comment on the upcoming stats for appraising and declaring the commerciality of [Logan] and Itauna?

Okay, Pedro.

Let us start for the second one, okay, if you don't mind.

Regarding the exploration, in Logan, we are working the design for Logan 2, which is going to be the appraisal well.

So hopefully we will drill Logan 2 by first or second quarter of next year.

And regarding Itauna 2, currently we are on the evaluation, the results of this well, okay?

Is clear for you?

Yes, it is clear.

Okay.

Regarding reserves, you mentioned that we are -- we have a lot of expectations in Chichimene result.

The answer is yes.

For instance, I mean, currently, we expect to produce 70,000 barrels in the current procedures.

In the in-situ based combustion, we are in the earliest stages of the project, of the pilot, so we'll let you know as soon as we progress in these initiatives.

Okay.

Can you comment on what's the current recovery rate behind the reserve contribution coming from Chichimene?

2%, Pedro.

Okay.

And one last question, if I may.

There has been a large degree of M&A activity, both in your main international expansion areas, namely in this space Peru and in Brazil.

In some cases, some of your partners are reported to be actively pursuing asset sales, as well.

Can you comment on how is Ecopetrol's position evolving towards new acquisitions, especially in light of what seems to be higher cash flow generation than it was originally, (inaudible) offline with the current oil prices?

Can you repeat the question, please?

What I wanted to understand is how is Ecopetrol looking at M&A in its main international areas.

There has been a lot of M&A, or a [fair] M&A opportunities both in Peru and in Brazil taking place, which seems to be under your strategic focus for growth.

Not really.

Right now, we are mainly oriented to the development of the current areas we have under position.

And we are not really active in looking for new M&A opportunities.

Okay.

No, that answers my question.

Thank you.

And now I'd like to turn the call over to Alejandro Giraldo for closing remarks.

Okay, thank you.

Thank you all for your participation.

And for additional questions, you can contact us at IR Department, and good afternoon.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.