Ecopetrol SA (EC) 2014 Q1 法說會逐字稿

Welcome to the first-quarter 2014 Ecopetrol S.A. earnings conference call.

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

(Operator Instructions).

Please note that this conference is being recorded.

I will now turn the call over to Mr. Alejandro Giraldo, head of Investor Relations.

Mr. Giraldo, you may begin.

Good morning, everyone, and welcome to Ecopetrol's 2014 first-quarter 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.

This 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 VP of Downstream; Adriana Echeverri, VP 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.

We will begin the presentation with the milestones of the first quarter of the year, followed by the highlights in each of the business segments and the financial results.

We will close the call with the outlook for the second quarter of the year.

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

Thanks, Alejandro.

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

Let's review the main results of the first quarter of 2014.

Our operation was affected by difficult environmental conditions and we faced attacks on transportation, infrastructure, and blockades by some communities, which, together with the delay of some projects, led to a 3.2% reduction in production compared to the first quarter of 2013.

In spite of these adverse situations, we achieved several milestones.

In exploration, first, we announced a discovery in well Tibirita 1A located in western Cano Sur block in Colombia, which strengthens our portfolio of heavy crudes, and second, we submitted competitive bids for 11 blocks in the Lease 231 in the US Gulf of Mexico.

In production, we saw a 5% increase in the production of subsidiaries and affiliates.

We also highlight the results of the production test on Akacias that reached 10,000 barrels per day.

Further, our enhanced oil recovery pilot advanced with the starting of the water injection pilot at Galan field and chemical injection pilot at Yarigui field, both in the middle Magdalena region.

It is worth mentioning that production of 18,000 barrels per day at Cantagallo field thanks to water injection.

Regarding midstream, we completed the expansion of San Fernando-Monterrey system by 55,000 barrels per day that allowed the transportation of the larger production from the Llanos Orientales region.

In downstream, we reached an 88.9% progress in the modernization of Cartagena refinery.

Our sales volumes continued rising, mainly of middle distillate and natural gas supply domestic demand and higher exports of crude to Asia and Europe.

In the first quarter, the unconsolidated EBITDA margin of 49% was high compared with the industry levels and cash generation was in line with our budget.

It is worth noting the better results of subsidiaries and affiliates mainly of the midstream and upstream segments, reporting a 304% increase in net income during the last 12 months.

Finally, I want to highlight the attendance of more than 12,000 shareholders to our annual meeting and the approval of a dividend of COP260 per share.

Please move to the next slide to review our capital expenditures.

CapEx in the first quarter of 2014 amounted to $1.6 billion comprising investments in both the parent company and affiliates, prorated by Ecopetrol's stake.

43% of this was allocated to production mainly for drilling in Orinoquia region and for constructing facilities at Castilla, Chichimene, and Rubiales fields; 14% in exploration allocated to the acquisition of information by means of seismic programs and drilling wells; 10% to midstream, mainly for optimizing the capacity of Cano Limon-Covenas pipeline, and the construction of facilities mainly in the San Fernando-Monterrey system, Ayacucho station, and Bicentenario pipeline; 32% to refining for the modernization of Cartagena refinery.

The remaining 1% was allocated to corporate projects and research and development.

Now I turn the presentation to Rafael Guzman, who will comment on the main results of exploration and production.

Thank you, Mr. Gutierrez.

During the first quarter of 2014, seven A3 exploratory wells were drilled in Colombia.

Five of these wells were drilled by Ecopetrol S.A..

The well Tibirita 1A, drilled in the Cano Sur block, proved the presence of hydrocarbons.

The wells Golosa 1, Esti Casabe K, and [Casalakay], both developed in the middle Magdalena basin where they were still under evaluation at the end of the first quarter.

The remaining two wells were dry.

Additionally, Hocol drilled two A3 exploratory wells, which were also dry.

Internationally, it is important to highlight that Ecopetrol America Inc.

submitted the most competitive bid for 11 blocks in the Lease Sale 231 in the US Gulf of Mexico.

Furthermore, the Company was drilling four A3 exploratory wells by the end of the quarter.

Now regarding production, in the first quarter of 2014 the corporate group obtained 766,000 barrels of oil equivalent per day.

This represents a decrease of 3.2% compared to the 791,000 barrels of oil equivalent per day of the first quarter of 2013.

The main reason explaining these situations are communities blockade, operational issues, attack on transport infrastructure, and pipeline maintenance.

It is worth mentioning that during the quarter, the subsidiaries attained a production increase of 2.5 thousand barrels of oil equivalent per day, mainly through Hocol and Savia.

This represents a 5% growth with respect to the same period last year.

Finally, we continue pursuing our growth path through the development of our fields.

Particularly in Castilla, we were drilling to complete over 400 new wells by 2016.

We're constructing the facilities required to handle 4.3 million barrels of water per day and to produce 200,000 barrels of oil per day by 2015.

In Chichimene, our drilling campaign also goes ahead to reach close to 200 new development wells by 2015.

And we are building facilities to treat 360,000 barrels of water per day and achieve a production of 100,000 barrels of oil per day by 2015.

As already mentioned, the recent discovery Akacias is producing 10,000 barrels of oil per day, and we are conducting activities really to increase production in Cano Sur.

Now Thomas will comment on the results of the midstream segment.

Thank you, Rafael.

During the first quarter, the transported volumes increased by 0.5% versus the same period of 2013, reaching 1.200 million barrels per day.

Crude oil, pipeline transportation decreased by 0.4% compared to the first quarter of 2013, mainly due to the impact of the attacks against the infrastructure, in the transported volumes in the Cano Limon - Covenas and Oleoducto Transandino systems, and the lower volumes transported by Ocensa and Oleoducto de Colombia.

Out of the total volumes transported, approximately 75% belongs to Ecopetrol.

Transportation of refined products increased by 4% versus the first quarter of 2013 due to the increase in the naphtha volumes transported in the Pozos Colorados - Galan system.

Out of the total volumes transported, approximately 50% belonged to Ecopetrol.

Regarding our projects under execution during the first quarter of 2014, we completed the construction of a loop in the Apiay-Monterrey pipeline, which allows us to increase its capacity from 225,000 barrels per day to 280,000 barrels per day.

This increase is part of the San Fernando-Monterrey project and is an additional stepping stone towards increasing the capacity in this system to 390,000 barrels in 2015.

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

Thanks, Thomas.

During the first quarter of 2014, the throughput of Barrancabermeja refinery increased 6.3 thousand barrels per day compared to the same period of 2013, due to the stable operation of the process unit and higher availability of segregated light crudes.

The gross margin of this refinery increased $0.70 per barrel from $15.60 to $16.30 per barrel due to lower feedstock price, which offset the fall in the price of fuels following the performance of international indexes to which they are linked.

The expansion and modernization of Cartagena refinery reached 88.9% progress, while construction had an advance of 76.1%.

The existing units of the refinery were shut down in order to facilitate the receipt of the project in safe operating conditions and to ensure the mechanical completion of the new refinery by December 2014.

At this moment, only the utility units and the logistics facilities for imports and deliveries are in operation.

In terms of volumes sold, total sales increased by 48,000 barrels per day between the first quarter of 2013 and the same period of 2014, mainly due to higher domestic sales of natural gas and fuels.

Our crude exports grew by 16,000 barrels per day as a result of increased volume available after the shutdown of Cartagena refinery.

It is important to mention the continued increase of sales to Asia where we delivered 44% of crude exported volume and 54% of products, mainly fuel oil.

Further, the price of our bucket of crude and products fell due to weakening prices in the international markets.

Now I turn the presentation to Magda Manosalva, who will comment on the financial results for the period.

Thank you, Pedro.

Please go to the next slide.

Our sales grew during the first quarter of 2014 as a result of an increase of the volumes sold and the effect of the devaluation of the exchange rate over the dollar-denominated revenues compared to the first quarter of 2013.

This offset the drop of $8.50 per barrel in our average sales price basket.

Regarding variable costs, the rise is explained by higher transportation costs as a result of the implementation of the model of transportation as a profit center in Cenit in April 2013 and in Oleoducto Bicentenario in November 2013, as well as our later use of trucks.

Additionally, there was a relative higher cost of purchasing crude oil, natural gas and products due to the devaluation of the exchange rate.

Regarding fixed costs, the increase is due to higher maintenance costs, coming primarily from the integrity program and higher costs in work due to the increase of water cuts.

Operating expenses rose mainly because of greater exploratory expenses, particularly in seismic activities and dry wells.

Non-operating results improved compared to the first quarter of 2013, driven by an improvement of the results of companies of the corporate group.

Please go on to the next slide.

The factors described in the previous slide led to a reduction in the income before taxes during the first quarter of 2014 compared to the first quarters 2013.

Therefore, the income tax provision was lower.

Net income in the first-quarter 2014 was lower than in the first-quarter 2013, but EBITDA remains stable and the EBITDA margin remains competitive compared to other oil and gas companies.

Please move on the next slide to see Ecopetrol's cash flow.

Ecopetrol began the year with COP5.1 trillion in cash and cash equivalents.

The internal cash generation and the cash from other sources totaled COP16.5 trillion in the first quarter of 2014, which were enough to support the operations, investments, and the last installment of the 2012 dividend to the government.

The cash balance at the end of the first quarter was COP5.3 trillion.

Now, I turn the presentation to Mr. Gutierrez to present the outlook for the second quarter of 2014.

I will close the presentation with the outlook for the second quarter of 2014.

In exploration, luckily we will drill five exploratory and three appraisal wells, and one exploratory well from Hocol.

Internationally, three wells will be drilled in the US Gulf of Mexico.

Regarding production, we expect to have in operation new production facilities at Chichimene and Akacias fields.

Also, we will start the water injection pilot at Chichimene and we expect to have additional production of around 4,000 barrels per day in Cano Sur.

In midstream, we have scheduled testing the facilities for the optimization of Cano Limon - Covenas to 250,000 barrels and completed the basic engineering for the expansion of 35,000 barrels in Pozos Colorados Galan multi-purpose line.

Regarding refining, we expect to achieve around 84% progress in the construction stage of Cartagena refinery and maintain a stable operation and margins in Barrancabermeja refinery.

Additionally, we have appointed a multidisciplinary team devoted to prioritize, make viable, and execute key projects required to achieve our strategic goals.

We are working in close coordination and cooperation with the Ministry of Defense, the Ministry of State, the Ministry of Mines and Energy, the Ministry of Labor, and local authorities in order to overcome the difficulties in the operational environment.

As a closing, I want to emphasize we're optimistic and we remain committed to advancing our plan to overcome the difficulties from operation environment and to move forward with the projects that will allow us to return to the path of growth to continue delivering solid economic results.

Now I open the session to questions from our participants.

(Operator Instructions).

Christian Audi, Santander.

I had several questions, but quick ones.

The first one, what's the latest status on the Bicentenario pipeline and Cano Limon in terms of have they resumed operations, or if not, when do you expect that to happen?

Okay, Christian, good morning.

Hello.

Okay, the next question please, Christian.

How are you?

Okay, good, good.

So the other questions that I had were when we look at your production for this quarter, you listed several reasons for them being weaker, and I was wondering if you could maybe quantify these a little bit more.

In other words, when you look at your production number, how much did you lose in production due to attacks to the infrastructure, project delays, and et cetera?

And then, the other question that I had is if you could give an update on these topics about the month of April.

In other words, have attacks to infrastructure increased or decreased in April?

Have the pipeline dynamic improved or got worse?

And so, a general update for how the beginning of the second quarter has been.

Okay, thank you, Christian.

Okay, we're going to answer the questions.

The first question is taken by Thomas Rueda.

Please, Thomas.

Christian, good morning.

Thank you for your questions.

So regarding the first, Bicentenario pipeline and Cano Limon, what's the latest status, we had some very good news from last night.

The very many negotiations and conversations that have happened at the highest level in the country, and including Mr. Gutierrez, have brought some great results, which means that the U'wa indigenous tribes are going to allow Ecopetrol to enter and repair the sites that have been affected.

Of course, this is very good news because we estimate that in around five days, we will be able to resume operations through Cano Limon.

Regarding Bicentenario, Bicentenario is ready to operate, and of course, it hasn't been ready to do so given the fact that Cano Limon has not been able to transport.

So, it's very good news and we are operationally ready to start sending barrels through the system next week.

In terms of your second question, the impact on production in 2014, the impact of attacks has been around 7,200 barrels per day in the first quarter, so that's our estimate and that's the figure that we can share.

In terms of the number of attacks in April, it has been less than in the past few months; however, given the situation with the U'wa indigenous tribes, the impact of having the pipeline not working has been greater.

So in terms of numbers of attacks, it has been reduced in April.

Okay, and Rafael Guzman is going to split the different crises that has affected the production during the first quarter additionally to the information that was given by Thomas in relation with the impact of the attacks.

Rafael, please.

Yes, hello, Christian.

In addition to the 7,200-barrel negative impact that Thomas already mentioned about the attacks, we observed a negative impact of 20,500 barrels of oil per day due to community issues, which are mostly related to delays and projects.

However, at the moment in Chichimene, we have been able to start new facilities to treat water and to treat and dispose water and also to treat crude oil.

That will allow us to increase production in Chichimene and connect some new producer wells there.

In addition to these community issues, we had a negative impact of 3,200 barrels per day due to transport evacuation impact.

And finally, 20,800 barrels of negative impact also related to operational issues.

Again, these issues were mostly related to treatment of fluids in Chichimene and Castilla, and we have been working on that, and as I mentioned before, we are receiving production and increasing production in these fields.

Okay, additionally, I would like to mention, Christian, that the number of attacks to the pipelines through the Cano Limon - Covenas, five attacks, and one to Bicentenario.

It means totally six attacks.

Now you can compare with the 73 that we had in April 2013, but further of the number of the attacks to the infrastructure, what I would like to emphasize is if you observed through the impact during the first quarter, it is in line with the numbers that we have been able to keep during the last two, three years, around 7,000 barrels per day, 8,000, 9,000 barrels per day.

April is particular due to the restriction that we have to the access for the recuperation of the Cano Limon - Covenas pipeline in the place of La China in Toledo (Norte de Santander), but with the agreement that we obtained here with the participation of the government and Minister of State and the Minister of Mines and with Ecopetrol, now we're going to avoid those kind of restrictions and we have the expectation that we're going to maintain to keep in the numbers that we had maintained during the last three years.

Logically, the impact during April is going to be significant because our participation in the production of the Cano Limon, Cravo Norte, is around 31,000 barrels today, and additionally, we also have in the production of the Gibraltar gas production that is being an equivalent around 8,000 barrels per day.

But now, fortunately, God thanks, we have been able to overcome this situation and we expect to maintain in the average numbers we have kept during the last three years.

I don't know if you want any additional information in relation with the questions you asked.

No, that's very helpful, Mr. Gutierrez.

So on the back of what you all just explained, when we look at your production target for 2014, do you still feel comfortable with that target?

Do you think the risk is more on the downside or the upside to you reaching that target?

And also, do you have any plans to adjust at all your 2015 production targets, please?

Rafael is referring to this issue, please, Rafael.

Okay, Christian.

Yes, the impacts that have been explained for the first quarter are also for April, they pose a risk on reaching our target for this year; however, we have implemented and we are doing many activities to try to overcome that impact.

As I mentioned, we already have some additional treatment for both water and oil in the Chichimene field, and we're increasing the production in this field at the moment.

We expect to go from around 50,000 today to 70,000, 80,000 towards the half of the year.

In addition to that, in Castilla we are now, thanks to also to improving conditions with the communities, we're moving new rigs to have additional wells in Castilla, and also, we are working on the projects that will add capacity to treat and dispose water.

In that field, we are also expecting a significant increase of production from now on until the third quarter of the year and marching on towards our target of 2015.

In addition to that, in the Rubiales field, we are expecting additional licenses to treat and dispose water, and in addition to that, we are drilling additional wells to recover the production we had in this field, which is 210,000 barrels per day, and maintain that throughout 2015.

We continue also with the projects in other areas of the country, like the middle Magdalena Valley, and we are seeing already good benefit from our enhanced recovery technology that we are applying in several fields, water injection and chemical injection.

So in addition to that, as mentioned before, Acacias already reached 10,000 barrels of oil per day and Cano Sur, another recent discovery, we are improving the conditions, and thanks to the license we also received to treat water, we can increase the production to around 5,000 barrels per day.

So with those actions, we believe we can overcome most of the difficulties we have seen up to now in the year.

Okay, Chris, as you can observe, we have been doing a lot of efforts, many ideas, many pilots trying to overcome the difficulties, but it is important to mention that we have been confronting a lot of risk in terms of our operation, but as you can observe, we're working very hard, doing a lot of our efforts, trying to be in the fields we have been projected.

Felipe Santos, JPMorgan.

This is actually Caio Carvalhal speaking, and good afternoon, everybody.

I think some of my questions were already answered.

I would like to get a little color on how is the -- not the STAR technology specifically, by the thermal recovery in the Chichimene field.

I understand you target to start doing the secondary recovery water injection.

I am interested on the EOR extended recovery on the Chichimene field, if you have a timeline for this pilot to be tested or not?

And that will be my question for now.

Thank you.

Okay, thank you.

Rafael is going to have a good opportunity to refer in detail to the different IOR and EOR projects that we are developing to increase the production in Chichimene, second type of recovery, and third recovery.

Please, Rafael.

Okay, yes, in Ecopetrol, we have a number of opportunities for enhanced oil recovery, and some of them we have been implemented in the past, and as I was mentioning before we have already seen significant increases in production, for example in the fields of La Cira and Cantagallo that was mentioned earlier today.

But those are secondary recoveries.

Now for Chichimene in particular, it's one of our key fields.

It has a large oil original in place, and of course, our strategy is to increase the recovery factor in the field.

And we are doing it by many methods.

We're trying currently and we're injecting at the moment -- we started a pilot to inject water in Chichimene in some areas of the fields to see if that is one technology that can be used.

In addition to that, later on in this year, we will try also chemical injection with this water for Chichimene.

But nonetheless, the most ambitious project for enhanced recovery in Chichimene is the one you mentioned, thermal recovery, given that it's a heavy oil, and in some places, extra heavy oil.

We have been working on our own patented technology ECO GSI, which uses as a principal air injection in-situ-combustion.

We have had great progress in that.

We have already in play in the field all the necessary equipment to do this, this pilot.

At the moment, we are out -- we're constructing and installing this, our equipment and connecting it.

We expect that by the end of the year, we will start injecting air in the field and start the evaluation period of the pilot.

So, as you see, it's an approach that includes many technologies.

At the moment, at the early stages, so it's a pilot stage.

We continue in Chichimene with our primary recovery.

That will take us to what I said before, around 70,000 to 80,000 towards the end of the year and 100,000 barrels by 2015, which is primary recovery.

And that's why the results of the pilots will give us the basis for future investments on enhanced recovery in the field.

Thank you, Rafael.

Additionally, I would like to emphasize again that the main part of our -- or the increase of our production for the next year are mainly supported in the primary recovery, but additionally, as Rafael has already mentioned, we have many projects, several pilots in different regions, Magdalena Valley, high Magdalena Valley, additionally in different areas in which we have been working in secondary recovery, water injection, gas injection, chemical injection, and also in terms of the thermal recovery, additionally.

And that's -- to emphasize, some of those projects, we have been having some important results.

Maybe, I don't know, if Rafael mentioned about Casabe?

Yes, I mentioned.

In total, to give you more numbers, last year we started seven pilots.

This year, we will start 13 pilots, three of which have been already started.

Next year, we will complete 14 pilots, so that's the degree of activity we are seeing in enhanced oil recovery.

And with significant volumes already coming from fields, fields like La Cira, Casabe, Cantagallo, and also in the upper Magdalena Valley in San Francisco.

Thank you.

Okay, understood.

Thank you very much, sir.

Gustavo Gattass, BTG Pactual.

I have a couple of questions.

The first one that I wanted to touch on had to do with the transportation unit profitability.

We're still trying to figure out what the set of results is going to look like for the next couple of quarters, and you guys saw a tremendous recovery in EBITDA from transportation during this quarter.

I just wanted to check if this is the sort of thing that you expect to see for coming quarters or if there was something extraordinary about it in that sense?

And if I could, the second question that I had, I just wanted to hear a little bit about what you guys think will happen or how quickly things will happen in the Cano Limon field, not the pipeline.

Once the pipeline is back operational, is that field likely to become operational again very quickly or is that something that for technical reasons takes a little bit of time?

Thank you.

Okay, thank you.

Thomas Rueda is taking the first question.

Regarding -- you are absolutely right.

We have seen some tremendous recovery.

However, it is more related to the fact that in the first quarter of 2013, we didn't have Ocensa as a profit center.

It was more a cost center most of the quarter.

When you look at first-quarter 2014, all of the quarter you have Ocensa as such.

The second impact -- positive impact is having Bicentenario also onstream, and the third one is the fact that Oleoducto de los Llanos has also become a profit center.

So these three things, and this is in 1Q 2014, so all those three things added together show you the significant impact.

We are waiting for -- we're expecting for the situation to stabilize.

So to your point, you're going to see a relationship much more similar to the first quarter of 2014 and there rest of the year going to continue in very similar -- in similar ways.

We are working very hard in creating as many efficiencies in the midstream sector, and that's also part of what you are seeing there, so all in all, despite the threats that we have and that Dr. Gutierrez has alluded to in a lot of detail, we still see a very strong business in the midstream and it will continue to look like that.

If not, it will get better.

So it is great news for Ecopetrol that the midstream sector is looking pretty good.

Rafael, to the Cano Limon field, please.

Yes, once we have the pilot program back up and running, the first thing we need to do is evacuate about 800,000 barrels of oil that has been in the storage in this field.

While we are doing that, we will start restocking the field.

But we'll take no more than one week.

That's the time we estimate to initiate production from the well that was stopped during this incident.

So, no more than a week.

Okay, thank you, Rafael.

Gustavo.

Yes, if I could just follow up on one point, Thomas, during the quarter, Cenit seems to have reported 100%-plus EBITDA margin.

Is that likely to be recurring?

No, Gustavo, that's precisely what I was alluding to.

It is a result of many, many different aspects that have been, been very, very well in Cenit during the first quarter.

We do expect very high EBITDA margins.

As you know, Ocensa is a generator of very high EBITDA.

However, it's a matter of fact that, as I was saying, is a result of comparing it to the first quarter of 2013.

Not expected to see those high numbers.

As you know, it's very hard to maintain those numbers that high.

I'll try to complement Thomas' information.

I don't know -- but it is important to remember that Cenit became a commercial operation in April 1. During the first-quarter 2013, we still were working as Ecopetrol, and at that time, Cenit wasn't in commercial operation.

That's why the -- so big difference, as you observed, in terms of the financial results, additionally to the Ocensa impact in the results.

But anyway, this kind of business use to show important numbers of EBITDA margin, and we additionally, as Thomas commented, have implemented several ideas in terms to improve the efficiency in terms of the operational figures, but also in terms of the cost and different aspects of the midstream business.

That's part of the objectives that were established when we took the decision to create the new company, Cenit, as part of the things we are observing right now.

Okay, thank you.

Luiz Carvalho, HSBC.

I just want to -- first of all, my first question is with regards to the recovery projects that you mentioned a couple questions ago.

How these projects could impact your reserves looking forward?

How do you expect that the reserves could be impacted in a positive way from the water recovery and also the thermal recovery projects, and how do you think that this could play in favor of Ecopetrol?

The second one, if you give us a bit more detail on if the drought in Colombia impacted whatsoever your production.

You mentioned that 7.8 thousand barrels per day was based on operational issues.

If you give a bit more color, what was the operational issues that impacted your production during the quarter?

Thank you.

Okay, thank you.

Rafael, take it there, the answers.

Okay.

Yes, regarding of the reserve impact, the positive impact on reserves today, hence the recovery project, yes, they are a bit different from primary recovery in the fact that they take a longer time.

Basically, we have to do a pilot.

When the pilot tests positive, we will go into our application of the full implementation in the field.

And only until when you have results from the implementation in the field is when you can add the results to your books.

So, looking at that in terms of time, from the time we initiate a pilot to the time we can book reserves, it can take 2 to 3 years to add these reserves.

Now what you have seen is an increase in pilot tests that we are doing in Ecopetrol.

As I mentioned before, seven last year, 13 this year, 12, 14 next year.

So those reserves, you will see them in two, three years later down the road.

Now in terms of the reserve for thermal recoveries, in our plan we don't have much incremental reserves up until year 2020, so the combustion pilots that we have, we foresee that reserves will be added towards the end of that strategic period, that is 2019, 2020, really.

So most of the recovery -- most of the reserves adds that you see -- that you have seen open from now until 2020 will come first from primary recovery, and again that has been -- our growth has been driven by that and we still see a lot of opportunities for primary recovery.

Just to give you some numbers, of the 200,000 incremental production within Castilla -- or the target of 200,000 barrels of oil per day of Castilla and 100,000 barrels per day in Chichimene and 210,000 barrels per day in Rubiales, that all comes from primary recovery.

We're starting to see results additions and production increase from the water injection projects that we see mostly in the middle Magdalena Valley, okay?

But again, like I said, thermal recovery is more towards the end of our strategic period, 2020.

Now regarding the second question, on the operational issues we had in the first quarter, they are mostly related to, first of all, Chichimene field where we had difficulties treating and disposing of water.

As I mentioned before, we have finished and completed facilities already in April to overcome these issues and that's something that we see disappearing as we speak.

In addition to that, we had additional maintenance in tanks in Castilla that limited production.

Now those maintenances -- that maintenance has already been completed.

And the last part is our water handling in Rubiales, and as I mentioned before, we are also expecting incremental license to treat this water, and once we have the license and with additional fields, we plan to recover the levels of production that we have set up as targets.

So those are the main issues in the operational sense for the first quarter.

Just a follow-up on the first question, you released a press release a couple weeks ago mentioning that you are analyzing the Rubiales field that you have with your partnership, the contract with Pacific Rubiales from an operational point of view, in terms of use of the stock.

I don't know if you can comment something about water being -- the first operational data that you have access to, if they basically goes in line with the 30% increase in the recovery factor, which was certified by the companies -- by the third-party companies.

If you can comment just on the operational side, what is your view on the first date that you have access?

Thank you.

Excuse me, can you repeat, please?

Please can you repeat?

Just a follow-up on the first question with regards to the recovery ratio and the recovery program that you have.

You released a press release recently mentioning that you are analyzing from an operational point of view the Rubiales field and the contract that you have with Pacific Rubiales.

I just wondered if you can comment something about the operational data that you already have access with regards to the recovery ratio and the stock program in the Rubiales field, if you already have some data that shows the 30% increase in the recovery factor, as the certified -- the certification companies mentioned previously with this from Pacific Rubiales.

Thank you.

Luiz, we don't have any comments in relation with that point, and as you may be know, recently we have a press information of both companies talking about the equipment between Pacific and Ecopetrol, and it was discussed within our Board of Directors about the evaluation of the pilot, that our technical teams are going to do during the next 30-40 days.

After that, we're going to have information to reveal about these aspects.

But after that, we don't have any comments in relation with -- any comments in relation with that.

And it is also important to mention that in relation with the STAR pilot, we are developing the pilot in Quifa, not in Rubiales.

It is important to clarify.

Okay?

Yes, clear, clear.

Thank you.

I don't know if the information is complete, Luiz, please?

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

Thank you.

Anish Kapadia, TPH.

My first question was relating to the heavy oil fields.

You have hit some water injection constraints on Rubiales, and when you look forward on Rubiales post-2016, Pacific Rubiales has talked about that field declining 20% or so per annum.

I was wondering when we look at the other fields -- Castilla, Chichimene, how confident are you, firstly, that you can get to the 200,000 barrels a day on Castilla, 100,000 barrels a day on Chichimene, given the water injection constraints, and then when you get there, how long can production be held at this level or are you going to see the same very high decline rates, given the wells that you will see on Rubiales?

That's my first question.

Thank you.

Rafael, is taking the answer, please, Rafael.

Yes, with incremental oil that we produce from the field, like Rubiales and Castilla, we see an increase of water, and you have seen that.

But the first thing I would like to clarify that we have not reached any technical limitation on water injection in this field.

What we have seen is that we have been -- we have had to go to the environmental agencies to increase our permit to inject water, and then we have seen also that that has been given, that permits have been granted.

And we continue to advance it, that [sense].

We ask for more capacity or permit to inject water, and that has been -- being granted, and at the moment, we are also in the process of requesting additional capacity.

In terms of the technical operation, we continue to invest in additional facilities.

In particular for Castilla, our plan is to reach 4.3 million barrels of water per day by 2015 to accomplish the target of 200,000 barrels of oil.

In addition to that, we are working on alternative solutions.

One of those is using the water for agricultural projects, and we're working on that both in the Rubiales and Castilla field.

Any comment?

Yes, the other question is on the decline rates that you are seeing over in -- so Rubiales is expected to decline very sharply 2016 onwards.

When would you expect has Castilla, Chichimene on the primary production to start declining?

Okay, what we see in this field is the increase of water, of course, that may temporarily limit our production.

But as I mentioned before, in Rubiales we are expecting to increase our capacity to treat and dispose of water by 1.5 million barrels this year and drill additional wells that will overcome the decline we saw -- or the lower production we saw in the first quarter, and we expect to take that field to 210,000 barrels per day for the period -- for 2014 and 2015, and we have plans to go onwards from there (technical difficulty).

We apologize for the problems.

We have been connected again.

So, we will continue the questions.

I believe the next person in line was Pedro Medeiros, so please give him the line to make his question.

Anish, your line is open.

Yes, my other question was just on the Guajira field.

I was wondering, what would you expect the impact of a reversal of the pipeline to be on production from that field?

And if we can look at that alongside the other production issues, it looks like you won't meet your target of 1 million barrels a day for 2015.

If not, would you look to buy producing assets in Colombia to meet the 1 million barrel a day target?

Thank you.

Excuse me, can you repeat, please?

Sure.

The question was (multiple speakers)

What is your question in relation with the Guajira field, please?

What would be the impact of a reversal of the pipeline between Colombia and Venezuela on the Guajira field?

Okay, thank you.

And the next, please?

And just related to that, so if you see lower production from Guajira and you have had other impacts elsewhere, that means that you're going to miss your production target for next year.

Would you look to buy production to meet the target?

Okay, okay, but anyway, we're not having problems in the production in Guajira field.

I don't know to what problems you are referring.

Can you explain?

Yes.

So I believe there is an agreement with Venezuela to reverse the pipeline that sends gas from Colombia to Venezuela?

Okay, okay, thank you..

Okay, thank you, but it is independently of the operation of the field.

Okay, please, Pedro Rosales is going to explain about the reversion of the line, yes.

Okay.

Thank you, Pedro, about the -- Anish, okay, excuse me.

About the pipeline, the existing contract with Venezuela ends in June this year, but we are in talks with PDVSA in order to identify opportunities to extend the contract in a mutually beneficial way.

Notwithstanding with that, Colombia has in this moment needs that require that additional gas.

I don't know if you have the notice that the Ministry of Mines and Energy suspends from next Tuesday the supply to Venezuela because the country needs that gas to generate electricity in Colombia.

The decision was made because the probability that in the second half of this year, El Niño will reduce rainfall and therefore lower levels of hydroelectrical reservoirs would be presented.

Because of that, the generation must increase by power plants, which move with gas.

So the fuel, which under normal conditions is sent to Venezuela, will be needed, but additionally, we are moving with PDVSA to have the possibility to extend the contract.

Because, Colombia has an excess of this for an extension and Venezuela has a deficit during the same period the next one and a half or two years.

Then we don't expect any reduce in the sales of that, concerning that contract.

Anish, any comment, please?

Thank you.

Pedro Medeiros, Citigroup.

I have three quicker questions, actually.

The first one is -- well, first, I'd like to thank for the very good summary that you put out in your presentation to reconcile the issues that drove production decline year on year in the first quarter of 2014.

But very quickly and specifically, do you mind to disclose the depletion rate or how much barrels were lost by regular depletion on your fields between the first quarter of 2014 and the first quarter of 2013?

The second question is if you can give us more color on the reasons behind the much lower reported expenditure rate in the first quarter, relative to your overall $10.6 billion budget for 2014.

And actually, I have a third and last question.

Do you mind to talk about the plans for new debt acquisition for this year.

There was a recent authorization to raise $2 billion in new bonds.

Do you plan to raise that in 2014 and is there a plan to target for even more than that for the year?

Okay, and the first question, Rafael Guzman is taking the answer, with relation to the depletion of the fields.

Yes, we do have an underlying decline of all our existing fields, like they do normally in all the fields.

That decline is close to 25% year on year.

However, we in the past have been able to increase our production, despite this decline, by the projects we have completed, which are mostly primary recovery projects.

Regarding the specifics of the first quarter of the years, we don't see anything different.

That is, we are not seeing an incremental decline from what we have seen in the past.

What we observed were operational -- temporary operational issues and also community issues that delayed the start-up of some projects.

But it is not an issue of changing decline.

It is, as we see, some temporary issues that have happened and that we are working and have overcome to a great extent.

Okay, about the CapEx, Adriana Echeverri, our Strategic and Planning Vice President, is taking the answer.

Yes, Pedro.

As you know, we have a seasonal behavior of our CapEx deployment every year, depending on the contract and depending on the level of activity that we were able to make.

Currently, our CapEx expenditures are in line with the budget and in line with the plans.

However, we are currently evaluating what the effect could be of this last month in activity and the required CapEx to keep on producing on the wells that we had to stop in Castilla and in Caño Limon field.

However, the CapEx currently is in line with our budget.

Thank you, Ariana.

Magda, please comment about the last question.

Concerning the debt for this year, we have already said as we are -- we need at the beginning in the order of $1 million.

We're going to need $200 million for each dollar basket we sell in the market drops.

So, at this time, regarding the order of $2 billion a year for 2014.

For the year 2015, we still don't have the guidance, because as you probably know, we have our budgets ready by the second part of the year, so more or less in August we start our budget exercise.

And we know for sure at the end of the year what our going to be the needs for the next year.

So we don't know that number yet.

(multiple speakers).

Yes, just two quick follow-ups.

One for Adriana.

Adriana, which projects are going to be represented to drive the increase on the CapEx plan for the upcoming quarters and to reach your guidance for the year or your budget for the year, I am sorry?

And one for Magda is out of the guidance.

Is the Ocensa recent debt sale included on that guidance or is it outside of that guidance?

Thanks.

Yes, the most important projects, as you already know, are Castilla and Chichimene fields.

Okay, the last one about Ocensa.

No, the answer about Ocensa is that the recent issuance by that company is not included into the $2 billion guidance we talked about.

The $2 billion is just for Ecopetrol.

Okay, well, thank you very much.

Any additional comment?

No, no.

Thank you.

That was very good.

This concludes the question-and-answer session.

I will now turn the call back to Mr. Giraldo for closing remarks.

Thank you all for the participation.

Apologies for the technical difficulties.

If you have any additional questions, you can contact us at investor relations.

Have a good afternoon.

Bye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.