Ecopetrol SA (EC) 2014 Q2 法說會逐字稿

Good morning, everyone, and welcome to Ecopetrol's second 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.

The call will be led by Mr. Javier Gutierrez, CEO of Ecopetrol. Also participating will be Hector Manosalva, Vice President of Development and Production; Pedro Rosales, 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, Interim CEO of Cenit.

We will begin the presentation with the milestones of the second quarter of 2014, followed by the highlights by business segment, the financial result and the new structure of Ecopetrol. We will close with the outlook for the third quarter of 2014.

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. In the second quarter of 2014, the positive trend of international prices helped offset the impact that the difficult environmental conditions had on production, mainly due to disruption of operations in the Cano Limon-Covenas and Transandino pipelines and repeated communities' blockage of production fields.

In exploration, we moved forward in strengthening our international operations with the discovery of the well Rydberg in the deepwater in US Gulf of Mexico operated by Shell, and the acquisition of a 10% participation from Statoil in the blocks 38/11 and 39/11 located offshore Angola. Currently, the well Dilolo-1 is being drilled in block 39/11.

In production, we highlight the beginning of the water injection pilots in Chichimene and Casabe field and the agreement reached with Occidental to implement a steam injection pilot in the Teca-Cocorna field. Also, we highlight the 7% annual increase in production of affiliated and subsidiary companies during the quarter.

Regarding midstream, we completed the basic engineering for the 35,000 barrels expansion of Pozos Colorados-Galan line, which is required to transport important diluents to the central part of the country.

In refining, at the end of the first half of the year we reported 92.3% progress in the expansion and modernization of Cartagena refinery and 84.3% in the utilities master plan at Barrancabermeja refinery.

Regarding financials, it is worth highlighting that $2 billion international bond offering with a 31-year term and favorable yield as well as the unchanged rating of triple B with a stable outlook from Standard & Poor's.

With respect to the management model, two very important changes were implemented starting July 1st; the new organizational structure with the creation of the Chief Operating Office and the regionalization model.

Please move to the next slide to review our capital expenditures. CapEx in the first half of 2014 amounted to $3.5 billion, comprising investments in both the parent company and affiliates prorated by Ecopetrol's stake.

Out of the total invested, 48% was allocated to production, mainly for drilling in Orinoquia region and for constructing facilities at Castilla, Chichimene, and Rubiales fields. 16% has been allocated to exploration, mainly for acquisition of information by means of seismic programs and drilling of exploratory strat tests and appraisal wells; 9% to midstream; 25% has been allocated to refining for the modernization of Cartagena refinery and the utilities master plan at Barrancabermeja refinery. The remaining 1% to IT and research and development projects.

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

Thank you. During the first half of 2014, 11-A3 wildcat exploratory wells were drilled in Colombia. Nine of these wells were drilled by Ecopetrol SA. The well Tibirita-1A, drilled in the Cano Sur block, proved the presence of hydrocarbons. In the well Casabe-K, drilled in the middle Magdalena Basin, is still under evaluation, and the remaining seven wells were dry. Additionally, Hocol drilled two wells during the first quarter of the year, which were unsuccessful.

Internationally, it is important to highlight that Ecopetrol America Inc. completed the drilling of two wildcats during the second quarter. The well Deep Nansen proved the presence of hydrocarbons, but it was declared noncommercial.

The well Rydberg was under evaluation at the end of the quarter and it was later confirmed as a success. Similarly, as part of our strategy of diversifying and strengthening our portfolio of international exploration, Ecopetrol reached an agreement with Statoil to acquire a 10% in two offshore blocks, 38/11 and 39/11, in the Kwanza Basin in Angola.

The agreement includes the participation in the well Dilolo-1 in block 39/11, which started drilling in June. These agreements are subject to the approval of Sonangol E&P, the Ministry of Petroleum of Angola and the remaining partners in each block.

Now, regarding production, in the first half of 2014, the Corporate Group reached 750,000 barrels of oil equivalent per day, which represents a decrease of 4.4% compared to the 785,000 barrels of oil equivalent per day of the first half of 2013. The main reasons explaining in this situation are: attacks on transport infrastructure, communities' blockades, operational issues and pipeline maintenance.

It is worth mentioning that during the first half our subsidiaries obtained a production increase of 6% with respect to the same period last year, mainly through Hocol and Savia.

Finally, we continue with the implementation of our strategy to increase the recovery factor in our fields. An important milestone was the agreement reached during the second quarter with Occidental Andina to develop a vapor injection project in the Teca-Cocorna field. Likewise, we started a water flooding pilot for secondary recovery at the Chichimene field.

Our growth path continues focusing on the development of our fields, especially in the area of gas. Regarding Castilla, we plan to have 20 rigs by the end of the year, working to complete over 400 new wells by 2016. We are also constructing the facilities required to handle 4.4 million barrels of water per day and to produce 200,000 barrels of oil per day in this field by the end of 2015.

In Chichimene, our drilling campaign plans to reach close to 200 new development wells by 2015 and we are building facilities to treat 360,000 barrels of water per day to achieve a production of 100,000 barrels of oil per day by the third quarter of 2015.

Finally, regarding our recent discovery, Akacias and Cano Sur, we are currently conducting the activities required to increase the production to 50,000 barrels of oil equivalent per day gross and 25,000 barrels of oil per day respectively by the end of 2015.

Likewise, we maintain our execution plans for the secondary and tertiary recovery non-thermal projects, with our goal to implement 13 pilots during 2014. We expect the main contribution in terms of production and reserves from this project to be by the end of 2016 to 2019.

As we previously mentioned, during this second quarter we started the water flooding pilot at Chichimene and we plan to start six pilots in Tisquirama, Casabe, Brisas, Tello, Apiay and Suria during the next quarter.

As it can be seen in the images, the pilots that have already started are advancing according to plan, where we hope to be able to determine the viability to pass them towards a stage of implementation in the full field.

In terms of thermal recovery, our air injection pilot in Quifa is currently in its ex-post evaluation phase as agreed by the Boards of Ecopetrol and Pacific Rubiales.

We continue with our air injection pilot in Chichimene in which we expect to begin the injection process by the end of this year. On the other hand, in 2014 we plan to complete the construction and basic engineering of the vapor injection pilot in Cano Sur.

Finally, as we recently announced, we have reached an important agreement with Occidental Andina to develop a vapor injection project at the Teca-Cocorna field. The initial phase includes a pilot, which expects it will allow the development of a project to increase the production from 1,500 barrels of oil per day to more than 50,000 barrels of oil per day and improving the recovery factor of the field above 60%. In total we are planning to invest over $1,300 million.

Now, I hand over to Thomas Rueda, who will comment on the midstream results.

Thank you. During the second quarter of 2014, the transported volumes decreased by 2.4% versus the same period of 2013, reaching 1,156,000 barrels per day. Crude oil pipeline transportation decreased by 3.8% compared to the second quarter of 2013, mainly due to the impact of the attacks against the infrastructure in the Cano Limon-Covenas system and the U'wa indigenous community blockade that prevented the Cano Limon-Covenas to be repaired on time. Out of the total volumes transported, approximately 74.6% belonged to Ecopetrol.

Transport of refined products increased by 3.4% versus the second quarter of 2013, mainly due to the increase in the naphtha volumes transported in the Pozos Colorados-Galan system. Out of the total volumes transported, approximately 48.1% belonged to Ecopetrol.

Regarding our projects under execution, during the second quarter of 2014 we completed basic engineering for the Pozos Colorados-Galan project, which will allows us to increase its capacity from 95,000 to 130,000 barrels per day.

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

Thanks, Thomas. During the second quarter of 2014 the throughput of Barrancabermeja refinery increased by 11,000 barrels per day compared with the same period of 2013 due to the operational stability of the process units and higher availability of crudes for the refinery. The gross margin of this refinery was $10.9 per barrel, $0.2 per barrel less than the second quarter of 2013 as the result of the decrease in gasoline yields due to the processing of heavier crudes.

Furthermore, at the end of the second quarter the expansion and modernization of Cartagena refinery reached 92.3% progress, where construction had an advance of 84.8%. The units of the refinery remained turned off in order to facilitate the completion of the project in safe operating conditions. Only the utilities and the logistics systems for the imports and deliveries to clients are in operation.

In terms of volumes sold, total sales decreased in 70,000 barrels per day, 7.3% less than the second quarter of 2013. The reasons for this reduction were related to lower availability of crude caused by lower production in 36,000 barrels per day and fewer purchases in 17,000 barrels per day as well as an increase in inventories of 3.1 million barrels due to transportation restrictions. These effects were partially offset by higher sales of refined products and natural gas.

It is important to mention the increase in our domestic sales by 40,000 barrels per day due to higher demand of fuels, mainly gasoline, and natural gas. Meanwhile, the price of our basket of crude and products rose in $4.6 per barrel due to stronger prices in the international markets.

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

Thank you, Pedro. Please go to the next slide. Our revenues were reduced due to a lower availability of crude oil to be exported, driven by the drop in production between the second quarter of 2014 and the same period of last year. This fall was partially offset by a higher average sales price $3.3 per barrel more than in the second quarter of 2013 and by a positive effect of the devaluation of the Colombian peso over the dollar denominated revenues in the second quarter of 2014.

Variable costs rose compared with the second quarter of 2013, mainly due to: first, a higher purchase average price of crude oil products of $10.5 per barrel more following the benchmark prices, along with a relative high cost due to the devaluation of the exchange rate in the second quarter of 2014.

And second, larger transportation costs due to the beginning of operation of the Bicentenario pipeline in November of last year and the services for the dilution of heavy crude oil provided by Oleoducto de los Llanos since July of last year.

Those increases were partially offset by a lower variation of inventories due to the decreased sales in the second quarter of 2014. On the other hand, fixed costs remained almost flat, with a minor growth in maintenance and labor costs and contracted services.

Operating expenses rose slightly mainly because of greater exploratory expenses, customs and dock services, compensated by lower provisions.

Non-operating results declined mainly owing to higher expenses in dry wells from Ecopetrol America and lower income from assets divested, offset by improved results in other affiliates and the impact of the accumulated revaluation of year 2013 over the net liability position of Ecopetrol.

Please go to the next slide. Although costs were relatively stable, lower revenues lead to a reduction in the income before taxes and consequently a minor income tax provision. As a final result, net income and EBITDA were lower in the second quarter of 2014 compared with the second quarter of 2013, but EBITDA margin remained competitive compared to other oil and gas companies.

Now, I turn the presentation to Mr. Gutierrez, who will comment on the new structure of Ecopetrol.

Thanks, Alejandro. Our organizational structure was adjusted in order to improve the integration of the business chain. To meet this goal, a Chief Operating Officer was appointed and to whom the Vice Presidents of Exploration, Development and Production, Transportation and Downstream report directly.

The new area will streamline decision making with a view through processes, leveraging higher synergies and seeking assurance of operating results. Camilo Marulanda was appointed as Chief Operating Officer. He is the former CEO of Cenit, and previously held the positions in Ecopetrol of Vice President of Growth and Strategy and Vice President of Sales and Marketing. The corporate, support and compliance areas will continue to report to the Chief Executive Officer.

As mentioned previously, it is also important to highlight the regional model under which the operation was grouped into four major regions -- first, Caribbean Coast and Pacific Coast; second, Central; third, Orinoquia; and fourth, Southern. Each will have its own regional Vice President, which will help provide greater autonomy in decision making and a more agile response capability.

Now, go to the next slide to view the outlook for the third quarter of 2014. Regarding exploration in Colombia, Ecopetrol will drill three exploratory plus three appraisal wells and a spud of the offshore well, Orca, operated by Petrobras, while subsidiaries will drill three exploratory wells. Abroad, three exploratory wells will be drilled in the US Gulf of Mexico.

On production, we will have larger water treatment and a storage capacity in Chichimene and new treatment capacity in Akacias fields. We will continue making progress in water flooding, combined water and gas and chemical, enhanced oil recovery pilots in various fields.

Also, we expect to have additional production of around 4,000 barrels per day in Cano Sur with the change in the environmental license.

In midstream, we will ensure the oil supply to the Barrancabermaja refinery with the beginning of a 60,000 barrels of expansion in Vasconia-Galan pipeline that will leave its total capacity in 220,000 barrels.

Regarding refining, we will continue with the modernization of Cartagena refinery and have a maintenance in the cracking and petrochemical units of Barrancabermaja refinery. We will keep strengthening the regional management model, with a higher accountability at local levels.

As a closing remark, I want to emphasize that despite the difficult operational environment we are moving forward our strategic projects and remain optimistic about the future of the Company.

Now, I open the session to questions from our participants. Thank you so much.

(Operator Instructions).

Frank McGann, Bank of America.

Just if you could follow-up a little bit more in terms of your expectations for production in the third and fourth quarter. Obviously, the second quarter was affected by the problems with pipelines and some community issues.

What do you think so far in the third quarter and do you think you can see a rise in production as you go through the next several quarters and go into 2015? Thank you very much.

Hi, Frank. How are you?

Very thanks. And you?

Frank, Javier Gutierrez, how are you?

Good, good, thank you. And you?

Fine. Thank you, Frank. Okay, Hector Manosalva is taking the answer about the expectation for production for the next quarter. Please, Hector?

(interpreted) Good morning, Frank. Of course during the first semester we had production affected by terrorist attacks to the oil infrastructure, blockades by the community, and some operational difficulties. We foresee that for the second semester these difficulties have been overcome and this will allow us to incorporate production according to the targets of the third Q and fourth Q from the development of projects in the Castilla and Chichimene fields, where we will incorporate our infrastructure to manage crude oil and water that will enable us to increase the production volumes of these two assets.

Likewise, for the second semester we are expecting the approval of water disposal that is being expected for the Rubiales field, and likewise, this will enable us to increase the production of this asset.

And the Cano Limon field has been impacted, and we expect that for the second semester -- we hope to have a total production of the field of almost 30,000 barrels. And this will enable an important change in the production trend for the second semester.

We have foreseen for 2015 is the consolidation of the drilling campaign in the Castilla, Chichimene fields, where we will be drilling almost 600 wells in 2015, and we -- to increase the production of the Castilla field by December next year by 20,000 barrels and Chichimene field to 100,000 barrels.

In addition, we have foreseen the development of the CPO-09 Akacias field with the possibility of increasing production to 50,000 barrels. Let's remember that today in the production testing of the Akacias field, we have a production close to 10,000 barrels.

Likewise, for the next year we have foreseen to have in production the Cano Sur East, taking into consideration that in the current week we have been approved -- or the license has been approved.

The addition of these activities will enable us to consolidate the target and to have important changes in the production for the rest of this year and next year.

Okay, thank you very much. Very helpful.

Bruno Montanari, Morgan Stanley.

First, a follow-up on the production question from Frank and then a question on costs. On the production front, so if I understood it right, you are telling us that it is technically possible for Ecopetrol to increase production in the second half of the year by around 20% -- so adding, say, 155,000 barrels per day in order to reach the target for the year and then also reach the 1 million barrel per day target for 2015. Is that correct?

And then on the cost side, we have seen costs gradually moving higher, particularly on the upstream division. So I was wondering if you could give us an update on the cost reduction efforts you are implementing in order to try and recover some of the margins? Thank you very much.

Thank you, Bruno. Hector Manosalva will answer the first question.

(interpreted) Bruno, thanks. It is important to mention that the potential of the Castilla, Chichimene fields as well as Rubiales as present in these assets, that is backed by incorporating reserves that we have being developing by us of December 31st of the previous year.

From this it is important to mention that we have had some difficulties in executing projects during the first semester. But for the second semester with the availabilities in the disposal capabilities for crude oil and water in addition to these drilling campaigns, we are going to increase production of these assets during the two first quarters next year. And clearly, if we don't have any difficulties in the transportation infrastructure and social difficulties as well.

We have the path to be able to reach 200,000 barrels and 100,000 barrels. And this is the production represented in reserves and projects under execution. We have the whole technical paths in order to reach these developments plans and reach these volumes previously mentioned.

Adriana Echeverri will refer to the cost reduction initiatives.

Thank you, Bruno. As part of our strategy for cost reduction, we have different initiatives for cost reductions that started back in 2009. From 2009 to 2012, the savings that we made in the lifting cost as well as in different initiatives that were addressed to the upstream sector gave us a saving of $109 million.

From year 2012 and starting January the 1st, 2013, until year 2020, we were trying to address the most difficult point for us, which are the fluids that we are obtaining in the different fields. Those are water as well as the energy that we require not only for production, but also for the treatment of those fluids and also for the diluent for crude oil, since we are producing much more heavy crude oil in the Llanos area.

So our efforts are now concentrated in those high cost impact points or items. The most important ones are supposed to be saving around $5 per barrel until year 2020 in a very progressive way. In terms of diluent that we are trying to use different strategies, such as, for example, the studies for new treatment in the refineries so that the diluent is more efficient in terms of what we use internally, but also in the strategies for imports of those diluents.

And on the other hand, in terms of the strategies for the fluids -- and this is the treatment of water and all that -- we are supposed to have some strategies for optimization of around $2.3 per barrel in a progressive way also until year 2020. The most important strategies on those matters are the reinjection of that -- those fluids or waters so that the maximization of crude oil production in the fields is better. And in terms of the projects that we are now implementing for agro-industrial use of those waters that are produced.

There is also another project for infrastructure that will permit the modernization of current yields so that we have an improvement in technology that will guarantee some efficiency in the process of water, but also in less production of water. This last is still in study.

However, all-in-all the optimization of cost since year 2009 until year 2013 closing December 31st is more than $3.3 billion in terms of savings. That's the effectiveness of the cost optimization program and also what we are thinking in terms of the new strategies for savings in the future.

All right, that is great. Thank you very much.

Thank you, Bruno.

Gustavo Gattass, BTG.

I had a couple of questions here. Let me just start with the one that I think is probably a little bit more complex. It looks like you guys are going to have a tougher year for 2014 but that things are looking quite positive and quite appealing for 2015 onwards. I was wondering if you could talk a little bit about just how you are seeing dividends over this period. Is there a possibility that we might see a slightly more aggressive dividend policy in 2014 given that 2015 is looking so much better? That's the key question.

And I don't know if this is a quick one to answer or not, but I just wanted to check if the Chichimene water handling project is already reflected in the proven reserves or not, or if that's an upside in the event that it works well? Thank you.

Thank you, Gustavo. In relation with the dividends policy, you know that is a decision of the Board of Directors that presents the proposal to the General Assembly. And up to now we can't express any opinion in relation with this topic.

In relation with Chichimene, Hector Manosalva commented about the impact in terms of the reserves. Thank you.

(interpreted) Okay. Good morning. It is important to mention that the development plan of the Chichimene field currently includes reserves in field -- reserves that are too close spacing in the reservoir. The water injection pilot that we have implemented in that field is an upside. It is a very important upside to incorporate additional reserves given the high original oil that the Chichimene field has. So the injection pilot is an important upside for the field.

Thank you, guys.

Thank you, Gustavo.

Caio Carvalhal, JPMorgan.

I have two questions, one very specific and another one a little bit broader, part of them has already been addressed by my colleagues. The one more specific: when we look at the third quarter -- I know you mentioned in the release that the number of attacks in the first and the second quarter was about roughly 30 attacks on the pipelines per quarter.

So I would like to know if you could share with us -- maybe you are not going to be willing to share the specific number in the third quarter, but if this trend has increased or decreased quarter to-date? And also if the posted indication that you also mentioned in the press release about the June production compared to the second quarter average have been confirmed with the July production. So this is a more specific question.

The more broader question also referring to production, when I look to the evolution of Ecopetrol's share on the total Colombian production, we see a significant decline. 2011 and 2012 Ecopetrol accounted for 67% of the total Colombian production. It went down to 65% in 2013 and in the first half of 2014 we are looking to 62%. It's a significant decline.

So my question would be the increase is related to the problems with the pipeline since the most affected company is clearly Ecopetrol, so probably Ecopetrol is being more affected than the other companies in Colombia? Or, do we see a new trend and naturally we see that maybe we are looking to a new reality on Ecopetrol share, something close to 62%-63% rather than 67%, and what are the Company's initiatives to sort of revert the situation? Those are my questions. Thank you very much.

Okay. Thank you, Caio. Thomas Rueda will answer to the first question about the attacks to the infrastructure of the pipelines and mainly to Cano Limon. Please, Thomas?

Caio, thank you very much for your question. In terms of the trend, I guess the first thing I need to say, it's difficult to assess in terms of how it's going to be behaving. Obviously, we are doing everything that we can on a daily basis, working with the higher authorities, with the army, the communities, with everyone that has anything to do with where we transport in order to mitigate the attacks on our infrastructure.

There's many things that I would like to share, but our -- many, many details that we are working on, increasing troops, increasing the flights we are doing over the infrastructure, et cetera. But that's of uttermost importance.

I can tell you about trends. It's difficult to say, but in terms of the second quarter or the first half of this year versus the first half of last year, we are looking at a decrease this year in 2014. Obviously, needless to say we have had a big impact on the Cano Limon-Covenas system given that it was very difficult to repair the system. It took 2 months given the impact or the influence we had from the indigenous communities, the U'was.

That has been sorted out, but we are looking at a downward trend. We are working on everything possible to fix what's going on. We are installing equipment. We are working with the government and we are doing everything for this trend to decrease in the future and to affect production even less.

Lastly to say, we are working how to work in this environment and we are working around operational flexibility in order to reduce the impact these attacks have on the transportation.

Thank you, Thomas. Hector Manosalva will refer to the June's production. Yes, please, Hector?

(interpreted) Good morning. Certainly, in June we saw a change in the production trend. Take into consideration that we grew 5% versus the production reported in May, and in June we had the highest production during the last four months.

It is likewise important to mention that Ecopetrol has a production close to 50% of the activity developed with its associates and all the effects against -- or attacks against the infrastructure that we have in these association contracts affects directly to Ecopetrol whether it is not the operator. The level of this impacts is high.

Likewise, it is important to mention that although Ecopetrol's stake has been decreasing versus the national average, it's because we are exposed to the associated operation. But it is fair to mention as well that the production of the other companies that had a contract with the ANH has also increased.

What we have foreseen for the next quarters is a change in the production trend, obviously based on the fact that the risk of attacks against the infrastructure is an important risk in consolidating these results. However, our plans and programs are focused on having a higher growth rate and clearly for the next two quarters and next year for reaching the target that we have as a Company.

Okay. Thank you very much.

Anish Kapadia, TPH.

I had a few questions. Firstly, with the new refinery, the Cartagena refinery upgrade coming on-stream, could you give some more timing information in terms of when do you expect the ramp-up to be complete? And also from a margin and EBITDA perspective, what incremental refining margin or EBITDA uplift would you expect from the refinery based on the current condition?

And then the second question was just on again the Castilla, Chichimene ramp-up. You missed your targets so far over last year in terms of ramping up those fields. I think there has been some kind of logistical issues with the water handling. What gives you confidence that you will be able to get the water handling in place on time and what other risks are there in terms of logistical issues that can make you miss your targets? Thank you.

Thank you, Anish. Pedro Rosales will take the answer to the Cartagena refinery progress and margin.

Okay. Anish, good morning. About Cartagena, the project, as was mentioned, had an advance of 92% at the end of June with 85% more or less in construction progress. In July we closed nearly 88%. It is important to mention that the advance during the second quarter related to the mechanical completion.

We finished 9 units of 31 total units that are needed at the mechanical completion. Then we accomplished the 29% of the mechanical completion of the whole plants of the refinery. The plan is to continue receiving the remaining units progressively until late this year or early 2015.

Additionally, upon completion of the mechanical construction of units, it is estimated that the process of commissioning and startup takes about six months -- six additional months. Then we expect to have at the mid of the next year or the second half of the next year, or the beginning of that half, the startup completed for the whole refinery. After that, we estimate that Reficar will add $16 per barrel in gross margin per year. That will be accomplished at the beginning of the project.

Thank you. Hector, your comments about the question in relation with Castilla and Chichimene please?

(interpreted) Good morning, Anish. In effect for the second semester of this year and specifically the third Q of the year we will have three or four water production treatment facilities (STAP) in the Castilla field will startup and this will help us to increase water treatment up to 500 barrels per day. Seven STAPs will start in second Q of 2015 and then we are going to have additional water treatment of 2,400,000 barrels per day. And at the end of 2015, we should have water treatment of 4 million barrels.

With the startup of these projects it doesn't mean that we are going to have availability of water treatment. But these waters that are being treated, how will they be disposed of?

The Castilla field currently has a discharge license for 250,000 barrels per day. We also have a water injection license approved for 1,300,000 barrels. And in addition, we are expecting to receive water management license for third-parties of 1,500,000 barrels and that would offer us the necessary permits to manage the water that is required in order to increase the production of these fields to 200,000 barrels Castilla December next year and 100,000 barrels Chichimene also December next year.

Thank you, Anish.

Paula Kovarsky, Itau.

I just wanted to -- I mean your help to get a better understanding of the process of eventually implementing STAR in the Quifa field. So you have been through the pilot. There is an ex-post analysis of the results. But what would be the next milestones? What kind of licenses are required? Is there a need to change the contract between Ecopetrol and Pacific Rubiales to any extent? I mean, do you have to have any addition to that contract? Is this an issue? So how exactly does Ecopetrol expect this STAR project to develop and to continue in the case of Quifa?

You asked -- both companies informed recently -- basically, right now that's what officially informed -- basically, we go to the stop of the pilot, to the process of Quifa, another pilot process for that. And right now we are developing the ex-post study and we can't say anything additionally until we complete the correspondent study. This is all the information that we have in relation to the STAR and right now we don't have any additional ideas we can express in relation with that. That is the information that both companies revealed in the past week.

Yes. Then perhaps I would like to ask the question in a different way. Let's assume the two companies are okay with the results and want to move ahead. What are the next milestones then? What has to be done? What kind of licenses, what kind of addition to the contracts? Just in a hypothetical scenario.

No, we must expect --

Okay, thank you.

Okay, thank you.

Biraj Borkhataria, Royal Bank of Canada.

Just a quick one from me. For the Rubiales and Quifa fields, what levels of production do you assume in your production target for 2014 and 2015?

Okay. Thank you, Biraj. Hector, answer the question?

(interpreted) Good morning, Biraj. The Rubiales field has a production forecast for 2014 of 200,000 barrels per day. Currently, production is close to 190,000 barrels because we are waiting for approval of the water use license for equivalent to 1 million barrels. And once we receive approval of this license, then we could meet our target of 200,000 barrels a day at the end of the year.

The Quifa field has a target production of 600,000 barrels a day and we are working jointly with Pacific Rubiales, the operator of this field, to consolidate and maintain this target at end of the year.

Okay, thank you.

Gracias.

Pedro Medeiros, Citigroup.

I have a quick question on the recent acquisition in Angola. From a strategic point of view, do you mind to elaborate the evolution of your international expansion strategy? Ecopetrol is marking its entrance to Angola, now targeting pre-salt structure. This is after a significant acquisition of exploratory blocks to be operated by Ecopetrol in the Gulf of Mexico. What can we expect in terms of that strategy in the next 12 months or in 2 years timeframe? Should we wait for new acquisitions or not?

And lastly, do you mind to comment on the impact on your budget from a success case and from the current case towards the Angolan acquisition?

Pedro, may you repeat the last part of your question is in relation with the budget?

Yes.

Can you repeat the --

Sure -- sure, Javier. If you can estimate the change on your budget, on your CapEx plan related to the acquisition on Angola for drilling plus the price you pay to acquire the assets, and if you have significant impact in case there is a successful drilling out of this prospect?

Okay. Please, Hector?

(interpreted) Good morning, Pedro. In regards the Angola strategy, I'm going to describe the strategy of why we are there. The international investment strategy of Ecopetrol is based on an analysis that we have been carrying out in high potential basins, in those basins where we still have yet-to-find material. Now, the study that Ecopetrol has been carrying out in the Kwanza Basin is part of the analysis that we have been developing in the past few years.

Now, considering that this basin has the potential and with the complementary analysis from the legal and risk standpoints, we made the decision to do farm-in. It's not really an acquisition. It's a farm-in in blocks 38 and 39 in Angola and that are currently operated by Statoil. And so we closed the deal with Statoil that allowed us to buy 10% stake in these two blocks.

And so this is a strategy that obeys to an exploration test in high potential basins located offshore, and that is part of the international investment strategy of Ecopetrol.

Likewise, and by using this very same strategy, we have been strengthening our position in the Gulf, where we have blocks and objectives because these are also high potential basins. And following this exploration strategy, we have been consolidating the exploration and investment plan in the USA with results that were -- have been showing reserves and important reserves for Ecopetrol while developing this international strategy.

Now as to CapEx, we just closed a deal where we agreed to a carry in regard drilling the first Dilolo well -- Dilolo-1 well that is currently being drilled. And in addition, we also executed an agreement for an amount -- transaction amount that, given the confidentiality agreement with Statoil, we cannot disclose.

Maybe it is important to remember that the participation is 10%. 10%, yes. Okay.

Okay. Thank you so much, Hector and Javier.

Thank you. And that does conclude our Q&A session. I would like to turn it back over to management for any closing remarks.

Well, thank you all for your participation. For any additional questions, you can contact us at Investor Relations. And have a good afternoon. Good bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.