Ecopetrol SA (EC) 2013 Q4 法說會逐字稿

Welcome to the fourth-quarter and full-year 2013 Ecopetrol SA earnings conference call.

My name is Richard, and I will be your operator for today's call.

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

Later we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Alejandro Giraldo, Director of Investor Relations Officer.

Mr. Giraldo, you may begin.

Good afternoon, everyone, and welcome to Ecopetrol's fourth-quarter and full-year 2013 earnings conference call and webcast.

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.

And also participating will be Hector Manosalva, Executive VP of Exploration and Production; Pedro Rosales, Executive Vice President of Downstream; Adriana Echeverri, Vice President of Growth and Strategy; Magda Manosalva, CFO; Rafael Guzman, E&P Technical and Development Vice President; Humberto Fuenzalida, Interim Vice President of Exploration; Alberto Vargas, Financial Controller; and Thomas Rueda, CFO of Cenit.

Today we will begin our presentation with the milestones of the year 2013, followed by the highlights for business segment; and we will finish the call with closing remarks and outlook for year 2014.

I will now turn the call to Mr. Gutierrez, CEO of Ecopetrol.

Thanks, Alejandro.

Good afternoon to all the participants in today's conference call.

2013 was a good year.

We grew in spite of operational restrictions, regulatory changes that affected the costs, and complex situations in the capital markets.

Some of the main achievements last year were: a new annual production record of 788,000 barrels of oil equivalent per day, 4.5% higher than in 2012.

This growth was affected by blockades of communities and transport restrictions.

8 hydrocarbon discoveries in Colombia, and the commercialities of Cano Sur and Akacias blocks announced at the end of the last year.

And 1,972 millions of barrels of proven reserves at the end of 2013 with a reserve replacement ratio of 139%.

About transportation, we completed implementation of a profitable business model and began the operation of our affiliate, Cenit, since April 2013, and also the beginning of the operation of the Bicentenario pipeline.

With regard to refining, we moved forward in the modernization plan at Cartagena refinery.

And in our commercial activity we continued our diversification marketing strategy for crude oil and products.

Furthermore, our accident frequency index reached a new lower record, and we are part of the Dow Jones Sustainability Index for three years in a row.

Looking at our financial results, EBITDA remains solid despite the lower crude oil prices, the pension provision, and the nondeductible VAT resulting from the tax reform.

Let's review in the next slide the main financial figures of Ecopetrol.

Thank you, Mr. Gutierrez.

Please go to the next slide.

Our revenues rose in 2015 due to a higher production of crude oil and natural gas, greater local demand for fuels, and the devaluation of the exchange rate.

These positive effects mitigated the drop in the sales price.

Variable costs rose mainly as a result of the increased operation of the Company, and fixed costs rose due to a higher maintenance cost and nondeductible VAT.

For this, it was necessary to make higher provisions for the pension liabilities and to adjust the value of some equity investments.

The aforementioned factors and the impact of the tax reform led to a reduction in the net income in 2013 compared with 2012.

Regardless, our EBITDA remains strong, and we'll report solid returns and EBITDA margins compared with our peers.

Go now to the next slide to explain the variation of the main lines of the income statement between 2012 and 2013.

Our sales increased due to a higher sales volume and positive effect of the devaluation of the exchange rate between 2012 and 2013.

These offset the fall in our regular sales price coming from the lower heavy crude oil prices due to a larger supply of Canadian crudes in the US Gulf Coast.

Regarding costs, variable costs rose mainly due to the implementation of the profit center model for transportation, the greater use of trucks, the higher volume of naptha and diesel purchased, and larger amortization of petroleum investments.

Fixed costs increases are the result of higher maintenance costs, primarily from the integrated program of the transportation infrastructure and due to the impact of nondeductible VAT according to the tax reform of 2012.

Operating expenses went up mainly as a consequence of higher provisions registered to reflect the difference between the value of the pension trust and the actuarial liability and a provision to address the value of equity investments, which shall be recognized according to the accounting rules.

Net operating profit was COP749 billion compared with a loss of COP580 billion in 2012, driven by the better results of our affiliates, a lower impact of the depreciation of the Colombian peso, and the reduction in health and education expenses for residents.

Finally, net income amounted to COP15.35 billion, with an EBITDA of COP28.5 trillion and an EBITDA margin of 46%.

Now I turn the presentation to Mr. Gutierrez to review the main operational results in 2013.

Please move on to the next slide to review our CapEx.

CapEx in 2013 amounted to $80.5 billion, comprising investments in both the parent Company and affiliates in proportion to Ecopetrol's stake.

In production, resources were allocated mainly for drilling activities, primarily in Rubiales and Quifa fields; and for the construction of facilities, especially in Castilla and Chichimene fields; in transport, primarily to San Fernando/Monterrey pipeline, Bicentenario pipeline, and other projects in the middle Magdalena region; and in refining, to the modernization projects of Cartagena and Barrancabermeja refineries.

Now I'll turn the conference to Rafael Guzman, who will comment about the main results of our E&P segment.

On the next slide we will review the production results.

During 2013 the corporate Group continued its growth path, achieving a record annual production of 788,000 barrels of oil equivalent per day, which represents an increase of 4.5% compared to 2012.

This increment was supported by 21,000 barrels of oil per day from Ecopetrol's direct operation and its subsidiaries, and by 13,000 barrels of oil equivalent per day from our participation in association contracts operated by our partners.

Overall, Ecopetrol SA's production reached 742,000 barrels of oil equivalent per day, which represents a 5.6% increase compared to 2012.

On the other hand, Ecopetrol's subsidiaries' production decreased 5,300 barrels of oil equivalent per day compared to the same period of 2012, mainly due to a transfer of Palermo, San Francisco, and Balcon fields from Hocol to Ecopetrol and by the normal decline of the fields.

Now we will discuss the main progress in our strategy to increase recovery factor in current fields.

Starting with primary recovery we have done in the Llanos Orientales Basin, more than 360 development wells were drilled, and about 119 workovers were conducted.

In addition, facilities were improved, mainly in Chichimene and Castilla.

All of the above enabled us to obtain 504,000 barrels of oil equivalent per day in this area.

In the mid-Magdalena, more than 390 development wells were drilled, 106 workovers executed, and facilities were upgraded in the area of Casabe.

Overall, Ecopetrol's production in this region was 107,000 barrels of oil equivalent per day.

On the other regions of the country we drilled 94 development wells, and we completed 184 workovers.

During 2013, the gas plant of Cupiagua allowed us to increase gas sales overall.

On both regions Ecopetrol reached an overall production of 130,000 barrels of oil equivalent per day.

Following, we will have a look at the progress of the nonthermal enhanced recovery projects.

In 2013 we had significant improvements of the development of the EOR/IOR strategy.

We started 7 non-thermal pilots, 2 of them located in the mid-Magdalena, Bonanza and Nutria; and the remaining 5 located in the South area, San Francisco, Dina Cretaceo, Tello, Toldado, and Yaguara.

Furthermore, we started the implementation of acquiring Checchi projects in Suria and Apiay in the Llanos region.

Finally, regarding the thermal recovery program, the Chichimene combustion pilot finalized its preliminary activities and obtained a 20% progress of our facility's construction.

The combustion pilot in Quifa was injecting air by the end of December 2013.

On the next slide we will review the exploratory results for 2013.

In 2013, Ecopetrol declared the initial commerciality for Cano Sur East and Akacias discoveries, becoming an important result and a milestone for the exploration efforts carried out in recent years in the Llanos Basin.

Additionally, during 2013 we drilled 22 exploratory wells -- A2, A3 -- 19 of them in Colombia, and the remaining 3 overseas.

The corporate Group had a technical success ratio in Colombia of 44%.

Internationally, Ecopetrol America obtained 6 blocks on Lease Sale 227 and acquired a stake in the Gunflint project.

On the other hand, Ecopetrol Brazil obtained 3 exploratory blocks in the equatorial margin basin, granted during the 11th round of Brazil.

The Llanos continued to be one of the key exploration areas for Ecopetrol.

The corporate Group drilled 52 exploratory wells; 16 of them were stratigraphic wells.

14 were A3/A2 exploratory wells, and 22 were A1 delineation wells.

Altogether, we obtained 7 discoveries: Pastinaca, Cusuco, Guainiz in Block CPO-10, Venus in CPO-11, and 3 discoveries in Block Quifa.

Finally, and aiming to continue with the evaluation of the shale's potential, we have drilled 2 stratigraphic wells in the mid-Magdalena, [Janney 261 and Ijuana].

We have also acquired information of unconventional reservoirs from the delineation well Oripaya 2 in Catatumbo.

At the end of 2013, we reached our 1p reserves inventory of 1,972 million barrels of oil equivalent, using SEC price and methodology.

The corporate Group continued consolidating the 1p reserves by increasing the proved reserves by 5.1%.

This represents a reserves replacement ratio of 139%, meaning that for every barrel of oil equivalent produced in 2013, we incorporated 1.39 barrels.

Now I'd like to pass on to Thomas Rueda, who will comment on the results of the transportation segment.

Thank you, Rafael.

During 2013, the transported volumes increased by 3.1% versus 2012, reaching 1,188,000 barrels per day.

Crude oil pipeline transportation increased by 3.6% compared to 2012, mainly due to the increase in the volumes transported in the Ayacucho Covenas system and the capacity increase in Oleoducto De Colombia from 195,000 to 236,000 barrels per day.

In addition, the volumes transported during the fourth quarter increased as a result of the Oleoducto Bicentenario's start of operations, which added approximately 60,000 barrels per day.

Out of the total volumes transported, approximately 78% belonged to Ecopetrol.

Transportation of refined products increased by 1.5% versus 2012.

Out of the total volumes transported, approximately 44% belong to Ecopetrol.

Finally, we would like to point out that during the fourth quarter, we finished the activities related to installation of a storage tank and pump units in the Vasconia Galan system, which will allow us to increase the supply reliability in the Barrancabermeja refinery.

With this, I hand over to Pedro Rosales, who will comment on the downstream results.

Thank you, Thomas.

In 2013, the throughput of our Barrancabermeja refinery was 12,500 barrels per day less than in 2012 due to a lower availability of light crudes segregated under maintenance and revamping of crude Unit 250.

The refining gross margin of Barrancabermeja was at the same level of 2012 of the lower yields of gasoline and diesel due to the processing of heavier crudes was offset by the lower cost of crude oil.

The modernization of Barrancabermeja refinery reported 18% progress at the end of 2013.

The Utilities Master Plan advanced as planned with the commissioning of a new water plant and a turbo generator.

The expansion and modernization of Cartagena refinery reached 85.7% progress, while engineering and procurement are almost completed, and consortium has an advance of 65.8%.

Cracking unit remained out of service in order to facilitate the upgrading of the unit and its integration to the project under safe conditions.

Let's review the results of the supplier marketing area.

Our sales increased between 2012 and 2013, mainly due to a larger availability of crude oil for both domestic and export sales.

The increase in domestic sales was driven by the higher demand of fuels.

Our crude oil exports grew by 11,000 barrels per day as a result of the increased production.

Fuel oil exports rose in 8,000 barrels per day, owing to a higher production for the processing of heavier crude oil at the Barrancabermeja refinery.

The price of our crude basket declined due to, first, the increased share of heavy crude oil in the basket that went to 89% from 74%; and second, the weakening of prices for heavy crudes.

It is important to mention the growth in exports to Asia, where we delivered 36% of the crude oil and 54% of products, mainly fuel oil.

Now I turn the presentation to Mr. Gutierrez, who will comment on the outlook for 2014.

Thank you.

Please go to the next slide.

The investment plan of the business Group amounts to $10.6 billion.

Upstream investments would bring an expected production of 819,000 barrels of oil equivalent per day in 2014 and the implementation of secondary and tertiary recovery pilots.

Also, the Group will drill 31 exploratory wells, including 2 in the Caribbean offshore.

Additionally, we will continue working in the development of unconventional resources in Middle Magdalena and Catatumbo regions in Colombia.

In transportation, crude oil capacity will be increased by 40,000 barrels per day, products by 70,000 barrels, and the unload truck facilities by 26,000 barrels per day.

Refining investments will be allocated to the modernization of Cartagena and Barrancabermeja refineries and the Utilities Master Plan in Barrancabermeja.

Finally, we will invest in research and development and the updating of technological infrastructure.

Now let's talk about the sources for funding the CapEx.

Out of the $10.6 billion CapEx plan, $8.4 billion will be deployed by Ecopetrol directly and through its contribution to subsidiaries.

Resources will come from the internal cash generation, the remaining of 2013 financing, divestment of nonstrategic assets, and if necessary, additional debt.

Please go to the next slide to review the main achievements of the Company since the IPO in 2007.

In 2008, we launched an ambitious plan with 3 pillars: harmony with the shareholders, continued enhancement in our operational metrics, and value added for our shareholders.

Since we have reached important milestones, among which are: first, the production of the business Group rose 97%, with an average reserve replacement ratio exceeding 100%; second, that successful implementation of a profitable business model for transportation; third, the delivery of liquid fuels with the highest quality standards in Latin America; and fourth, a consistent improvement in health, safety, and environmental performance and a higher social investment.

The growth was profitable, with high EBITDA margins and remarkable increases in net income.

These results are very competitive when compared with the oil industry.

Please go to the next slide for the closing remarks.

Colombia is a very attractive country for the oil and gas investments, providing exploration opportunities, a stable regulatory framework, and a competitive contractual scheme.

Many companies have returned to Colombia to carry out exploratory activities, and the National Hydrocarbons Agency is preparing a new round for 2014, which will entail offshore and unconventional blocks.

Ecopetrol has thrived with the country.

We have accomplished very competitive growth rates and financial results when compared with other oil and gas companies.

Our results in 2013 were good, and the 2014 business plan is very sound and will lead us towards our long-term goals.

In conclusion, I would like to send a message of optimism and confidence to our more than 420,000 shareholders, emphasizing both the important achievements made as well as the future growth strategy, which will make Ecopetrol a greater and a stronger company.

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

(Operator Instructions) Frank McGann, Bank of America.

Just two questions.

One on costs.

The costs seem to be somewhat higher in the quarter, particularly selling and administrative costs.

And I was wondering if you could -- you provided some details in the release, but perhaps go through the key drivers there.

How much of that is recurring, and how we should think of those costs in 2014 versus 2013?

And then, secondly, in terms of the refined product pricing environment, I was wondering if you could perhaps give us an update on what the status is of the Congressional actions to try to redefine how prices are set for gasoline, diesel, and other products?

Thank you for your questions.

The first one is taken by Magda Manosalva.

We have, like, a detailed explanation about the costs during 2013 to try to explain in a full way what happened.

Yes, Magda?

Okay, we have the information, additionally.

Okay.

Okay.

Hi, Frank.

Concerning the cost, we have -- as you probably saw in Slide 7, we have some impacts, principally -- mainly coming from the transportation model, as you see in the Slide 7 line variable costs.

What we have there is the impact of the change in the transportation model, which was COP2.6 trillion.

On the other hand, in fixed cost we have a total impact of COP0.7 billion, and it was mainly -- the one that was not recurrent was the tax reform.

Specifically, the costs related with the VAP we have as a result of the tax reform 2012.

On the operational expenses side, what we have is the impact of the difference between the actuarial costs we have for the pension funds and the value of the funds we have in the trust that we use to pay the pensions.

I would say that most of these costs are not recurring, but we -- especially what we are talking about here, the actuarial or pension costs, this is not recurring.

This is the terms of the market conditions.

And for the year 2013, the impact we had was very big due to the difference between, as I say, the actuarial calculation and the value in the trust.

Okay, so as we look at 2014, a lot of it will depend on what happens with the market and the assets that the pension funds have, in terms of investment and whether those need to be adjusted, or the amounts increase in the pension fund to compensate for that?

What we think that is going to happen, but we don't know, Frank, is that the treasury bonds are reaching -- or are about at equilibrium price at this time.

So we don't expect any big impact this year as this year 2013.

But it depends -- it depends, again, on market conditions.

Remember, this is a year of presidential elections, and we are not exposed to volatility.

Okay, thank you.

In relation with the gasoline prices that is cautioning the Congress, Pedro Rosales is taking the answer.

As you know, the price politics of the government considers that the price that would be recognized to the refiners, or in this case, to Ecopetrol is the equivalent to the cost opportunity price for that product, that is, the export fuel opportunity cost.

And up to this moment, the government through its ministers consider that this is a policy that will be maintained.

As you know, currently there is a proposal in the Congress that states that the fuel prices shall depend on production costs.

But as I explained, the government position considers to maintain the actual policy -- that is, to reflect the cost opportunity for that fuels.

Then we are giving to the government information and analysis to continue with that policies that we consider that will be maintained in Colombia.

Okay.

Do we know when this might be discussed in the Congress, or there might be a vote, so it could get resolved?

Or is it something that will be open for a while?

Now we are not taking activity in the Congress, because this is the period in which they are in the process for the next election that is going to be in the March 9. Maybe they are going to renew the activity in March 16 to ending the current period.

And the new Congress is going to be installed in July 20 for a new period of four years.

But right now, we don't have any additional requirements, and maybe we haven't had any additional news in relation with the possibilities of discussions during the next period that is going to be between March 16 and around June -- middle of the June, approximately.

Okay, great.

Thank you very much.

Paula Kovarsky, Itau BBA.

I also have two questions.

The first one: when we look at the key goals for 2014, you're mentioning 819 million BOE a day of average production.

I just wanted to understand if you could share with us how much is expected to come from primary recovery, and how much is expected to come from secondary recovery?

And then, still on the secondary recovery theme, if you could give us an update on the pilots, and when exactly do you expect to have the first results of the initiatives being carried by Ecopetrol?

Thank you, Paula.

Rafael Guzman is taking the answer.

In terms of enhanced recovery, what you can see is that we have sped up our developments in that area.

We executed 7 pilots, new pilots, last year.

We're going to be executing 13 this year and 14 next year and continue to increase.

On the same hand, we initiated the full implementation of 2 of these recovery projects last year.

We're going to be implementing 4 this year; and next year it will be 8; and then the following, 16.

So as you see, it's a strong progression towards getting both reserves and productions from these recovery techniques.

The results you should take from the pilot to full implementations -- that might take two years or so.

And the response from the reservoirs that -- these are not immediate.

That will take some months.

So most of the recovery increase from enhanced projects will be in the 3-, 4-year period, and so on.

Currently, our incremental oil comes mainly from primary recovery -- that is, drilling wells and adding facilities to treat both water and oil.

We have had some projects on enhanced recovery that have been going on for years, like Cira-Infantas, where you have seen a large incremental rate.

And actually, the Middle Magdalena Valley, where we see a slight increased production from 107 in the last years -- that's basically a maintenance of production from enhanced recovery projects.

But most of the new oil will come from primary recovery for this year, for 2014.

Okay, thank you.

Pavel Molchanov, Raymond James.

First one, on the Middle Magdalena: you have said in the past that the earliest commercial production could begin is 2016.

Can you envision any scenario when that would be accelerated to an earlier time frame?

Excuse me.

Can you repeat the question, please?

Of course.

You have said in the past that the earliest commercial production could begin from the mid-Magdalena shale is 2016.

Can you envision any scenario when that would happen sooner?

Thank you, Pavel.

Rafael, you are taking the answer.

Okay.

As you have seen in the past, we have been drilling stratigraphic wells to gather information.

We have done that for two years now.

This year, we continue to have our program, but given the fact that we are expecting regulations from the government this year that will allow us to drill horizontal wells and frack wells, we expect to have production tests that could be as early as this year.

However, any commercial production, we expect -- we still have a target to have it in more towards 2015/2016, okay?

But the important thing will be to have these production tests as early on as possible.

Maybe I can complement to that.

The national government, the National Hydrocarbon Agency, the Environmental Licensing Institution and the Minister of Mines and Energy, the Vice Minister as well -- they are practically ready to launch in a relatively short time all the regulations, procedures, and technical rules for the development of the unconventional activities.

And additionally, it is also important to mention that there are important players that are also doing pressure for the acceleration of the activities.

Players like Exxon, Conoco, Shell, and several of them have also a lot of interest in the development of this kind of activity in Colombia.

Maybe in the next month, we're going to have more positive news about the development of the unconventional in Colombia, given that we're going to have the possibility to obtain all the permits and licenses to develop the activity.

Okay, that's helpful.

And of the upstream -- of the E&P capital budget, $5.4 billion this year, how much will be allocated to unconventional programs?

Approximately for $200 million of the capital program will be allocated to unconventional this year.

Perfect.

Very helpful.

Thank you.

Anish Kapadia, TPH.

My first question was just on the gas market in Colombia.

Venezuela has stated that it's going to look to reverse the gas pipeline to Colombia later this year.

I acknowledge there's risk, but if this happens, what impacts would that have on your gas production, especially at Guajira?

The second question is just related to the production growth on some of your key fields.

If you look at Rubiales, Castilla, and Chichimene, I was wondering, when you look forward over the coming years, how many drilling locations do you see that you have remaining on the field?

And how many wells are you drilling on each of those fields each year?

So kind of how many years of inventory do you see?

And more specifically on Rubiales, Pacific Rubiales talks about the field kind of coming off plateau and declining very rapidly after 2016.

Where would you see that field specifically producing at in 2020?

Okay, Anish, Pedro Rosales is referring to the gas market in our relation with PDVSA in Venezuela.

Anish, about the contract with PDVSA, today that contract finished in June of 2014.

More recently that we are having some conversation with PDVSA to see if we consider an opportunity to extend the contract in a mutually beneficial way.

Colombia has had excess gas for an extension, and probably, Venezuela would need gas during some period of time until the facilities in Venezuela finish.

Then today, the contract is up to June.

But we are having some conversations to see if it's mutually beneficial to extend that up to nearest time.

Sorry, just -- if the contract was finished in June, what would be the impact on Guarjiran production?

We have some flow of gas to Venezuela.

And if that stops, we have a lower production.

But it depends on the consumption of the tariff mix in Colombia, mainly, that is the additional demand that we have in a way that is not permanent.

But maybe that assumes [cleric] to emphasizes out there.

We continue the negotiation process with PDVSA.

Yes.

Rafael Guzman is taking the answer with relation with developing of the flows.

Yes.

From our main fields in the Llanos, both Castilla, Chichimene, and also Quifa and Rubiales, we will continue with the same drilling pace that we have had in recent years.

In addition to drilling the wells, we are constructing facilities both in Chichimene and Castilla that will allow us also to increase, perhaps, the pace that we have seen up to now in those two fields.

In terms of longer-term plans for all of those fields, including Rubiales, that is something we, of course, review very carefully.

And we do have integrated plans to develop all those fields for the near- and long-term future.

Just to understand a bit better, in terms of your drilling inventory, for example, for Rubiales and Castilla -- how many years of drilling inventory have you got when you're drilling at the current rates?

And maybe to kind of put it another way, Castilla currently producing at 110,000 barrels a day or so, you want to get to 200,000 barrels a day -- how many wells would be required to do that?

Okay, for Castilla, the target, as you mentioned, is to reach 200 million barrels.

Once we have the facilities, as I said, we'll speed up the drilling.

I would say that we can have 100 to 150 wells drilled in this reservoir per year.

Felipe Gouveia, HSBC.

This is Luiz Carvalho speaking here.

I have two questions.

The first one, if you could share with us what's your strategy behind, let's say, to the bid round that will happen in Colombia.

Of course, it's something that you could keep private, but if you could share with us a bit of color -- what's your view on that, and if it's included in the CapEx for 2014?

And also, if you could share with us the breakdown of production by field for 2014 numbers?

I'll answer the first one.

And I'll ask you to repeat the second question after it, because I didn't understand that.

For the bid round, we have always participated in these bidding rounds in Colombia, and we have acquired several blocks.

The next bid round -- it's in unconventionals and offshores.

That's something we're interested in Colombia.

So at the moment, we're analyzing the data and making a decision where to participate.

Now for the second question, could you please repeat that?

Just a follow up on this first one.

Is any budget already placed in 2014 CapEx for the bid round, or it's separate?

No, that's separate.

That will be allocated once we have decided what blocks to participate.

Okay.

The second question is with regard to the breakdown of the production guidance for 2014 -- if you can share the breakdown per field?

Thank you.

Yes, for the main fields we expect to reach production for Castilla of roughly 130,000 --.

Average.

Average, yes.

For the Rubiales, our net participation close to 120,000.

Castilla, significant incremental, around 75,000 barrels.

And the other fields basically slightly increase or maintain production.

Okay, clear.

Thank you very much.

(Operator Instructions) Biraj Borkhataria, RBC Capital.

Thanks for taking my questions.

I have two, if I may, the first one on the transport division.

What are your expectations on pipeline integrity as we go into elections this year?

And second question is more broadly on your medium-term target.

When -- and you've mentioned the 1 million barrels before in 2015 (technical difficulty).

Excuse me, Biraj.

Can you repeat the second please?

Second question is on your medium-term production target.

When do you expect to hit 1 million barrels a day in production?

Okay.

Thank you, yes.

Thomas Reuda is taking the answer to the first question, yes.

Maybe -- I suppose you are referring to the security in the first question, yes?

On the -- sorry, could you repeat that?

In the first question, maybe you are referring to the security impacts?

Yes, yes, exactly.

Yes, okay.

Thomas Reuda is referring to that point.

Please, Thomas?

Yes.

Thank you very much for your question.

It's obviously a very timely and good question to ask, and it's obviously an area that concerns us significantly.

We are doing many things in order to ensure that we are impacted in a very low way from security incidents.

One thing you can do is to work with communities, and obviously, with the army in a very close manner, which is what we're doing in order to avoid from incidents from occurring.

Of course, as you say, we're going into elections.

And the expectation is for incidents to increase, and as Mr. Gutierrez was saying before, that's something we've seen already in the past few days.

However, working very close to communities and with the army is what we're doing.

And that has always proven to be very beneficial.

The second thing we're doing from an operational standpoint is to ensure that we can get to the areas that are affected in a very quick way and secure that no -- first, there's no environmental impacts that are going to harm the rivers and the communities nearby.

And second, that we can -- we don't have any impact on production which is, obviously, very important.

So we are focusing big time on security, working very close to communities and having the operational side of things very much ready to act.

Rafael Guzman is referring to the production mid-term targets.

Yes.

We continue, and we're very committed, to reach our target of 1 million barrels of oil per day by 2015, and we have clear plans to reach that.

We are currently heavily invested in both Castilla and Chichimene in both facilities and drilling.

Castilla will reach a production of 200,000 barrels per day, so that's an incremental of 80,000.

Chichimene will reach 100,000 barrels per day, incremental of roughly 40,000.

And both Cano Sur and Akacias, once we have the environmental license for development, we will immediately start building facilities and drilling.

And each one of these will reach about 24,000 barrels of oil per day, net to Ecopetrol.

With this project, again, we are reaching our target in 2015.

That's it.

Thank you very much.

Frank McGann, Bank of America.

Yes, just two things more if I could.

One, could you confirm the number?

I think you said 100,000 barrels a day in 2014 for Chichimene, which was your expected average production.

And then kind of a big-picture question: just thinking about your developments and the industry in Colombia, looking out, say, over the next 2-3 years, just in terms of costs, trends, and other things, a lot of the fields are already mature, and you've had very good success in bringing production up very sharply in recent years.

I'm just wondering how you see the overall cost trends going forward?

Are you going to start to see a significant increase in costs?

Can you hold that back, because volumes are going to be significant enough that the unit costs don't rise much?

How do you see overall cost performance going forward?

Okay.

First to clarify, the production level -- the annual average level for Chichimene will be close to 75,000 barrels per day.

Okay?

And when I mentioned -- perhaps that's your confusion -- when I mentioned that we will reach 100,000 was for 2015 in Chichimene field.

And going from a current level of 50,000 to 60,000, that's an incremental 40,000, again for 2015.

And on the other question, we still have a lot of room for infill drilling in most of our main fields, which are Chichimene, Castilla, Rubiales, and Quifa.

That's primary recovery and drilling of wells.

So we continue a large pace of drilling in these wells.

Now, in those wells and all of the -- in those fields and the oil fields in Colombia, our strategy is to move quickly into enhanced recovery, both secondary and tertiary recovery.

And as you can see in our presentations, we are speeding up that process going from 7 pilots last year, then 13 pilots next year, and continue like that.

In addition to implementation of those enhanced recoveries are also speeding up.

Last year we initiated 2; this year we'll initiate 4; the next year, 8; and the year after it, 16.

So that's a continuation of the recovery from these reservoirs.

Now the recovery projects where we inject water -- once we have the facilities, the investment will be mostly on wells and injection, so it doesn't add too much of a cost to develop on top of what has been done already.

Now, the story might be slightly different for thermal recovery, where the investments are a bit higher.

In the thermal recovery, we are at an earlier stage.

As you know, we have one pilot in Quifa.

And we will start another pilot in Chichimene.

But recoveries from these thermal pilots will come toward the end of our strategic period 2020.

Okay, great.

Thank you very much.

Diego Usme, Ultrabursatiles.

My question is about the transportation costs, and if you can help me to understand better -- in a better way this issue.

I understand according to the last answer that you gave me on the last conference call that the new model increased the cost of transportation because of the -- you are paying a fee to Cenit.

But in the future those resources or this money are going to come back to you by the way of dividends.

But that's the way in which I think that it works.

But how, in fact, it affects the cost of transportation by barrel?

And the second thing, the second question is if you can give me some color about the evolution of the requirements of diluent for 2014?

Do you think that the fact that you can incorporate Reficar, or you continue the modernization works in Reficar, are going to affect this year the cost of the diluents?

Thanks.

Thank you for your questions, Diego.

I'll answer in two parts.

The first one is going to be taken by Thomas Rueda to explain about the costs and the tariff structure, yes.

And Magda is going to explain about the impact in how they are reflected in our numbers.

Thomas, please?

In terms of the cost increase that you see in transportation in 2013, it's mainly coming from two systems; one is Ocensa, the second one is being -- is Bicentenario.

The reason why you see an increase in Ocensa is because of the decision that was taken to change Ocensa from a cost center into a more usual type of company, which is a profit center.

The decision was made to use our Ministry of Mines tariffs charged in Ocensa.

And, of course, that has had an impact on Ecopetrol.

One of the main reasons why that was done was because of the shareholder structure that existed in Ocensa was very difficult to make additional investments to grow the system.

And it was part of the conversation to do something much simpler, which is going to give Ocensa the tools to increase its capacity by around 170,000 barrels per day.

So you do see an increase in 2013, but if you analyze the situation in the next 4 or 5 years, and you look at our net present value, that situation is going to be very positive for Ecopetrol and the Group.

The second is Bicentenario.

And the reason for the increase that you see is because the cost of the (technical difficulty) was increased because of many reasons: timing, security, social unrest, etc.

And that's what you see as a cost increase.

I'm going to ask Magda to explain to you how -- due to your second question, how that comes back into the Group.

And you're right, it comes back via dividends, and Magda is going to give you the details right now.

Thank you, Thomas.

Diego, the answer to your question is that the transportation model the Company implemented in 2013 have a mutual effect on the financial statements or on the financial results of the Company.

How that works?

On one hand, we have [COP2.3 billion] concerning the higher costs, because the tariff we have to pay.

On the other hand -- this is the cost side.

On the other hand, what we have is that we are going to receive in the order of COP1.1 trillion in dividends or in participation through the participation method.

On the other hand, we have savings on taxes due to the transfer of the assets to the other company -- to Cenit, and that amounts to the $0.8 billion.

And the remaining $200 billion is related with depreciation and amortization on those assets.

So all in all, the effect on our results is neutral.

Is that clear for you, Diego?

Yes, it is clear.

Thanks.

Yes, the second question about the cost of diluents?

Yes.

This question, Pedro Rosales, please, is going to refer to the diluent, and if possible, Reficar impact.

Our diluent needs and what happened with Reficar -- what we expect is to finish the mechanical completion for all of the units in Reficar this year.

That will allow us to begin with the startup of the refinery in the first days of the next year, and we expect to have that refinery with all plants started by May of 2015.

Then we don't expect any impact this year.

What would happen in 2015 is that we will have some naphtha proceeding from Reficar that would be used if it's economically better than imports of natural gasoline.

And we would review that according to the benefits for the whole Company.

But are you seeing an increasing of requirements of diluents according to the change that you provide to heavy crudes?

No, no.

What we'll expect is that if in the way that we increase our production of heavy crudes, we need more diluent according to that, because we would need to transport by the pipelines.

And the proportional increase depends on the sales that the crude will be produced.

And then what we expect is to have a proportional increase in that volumes, depending on the incremental production of heavier crudes.

Okay, okay.

It's clear for me.

Thanks.

We have no further questions at this time.

I would now like to turn the call over to Mr. Giraldo for closing remarks.

Okay, thank you all for your participation.

For any follow-up questions, you can contact us at Investor Relations.

And have a good afternoon.

Good-bye.

Ladies and gentlemen.

(laughter)

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.