Ecopetrol SA (EC) 2014 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to Ecopetrol's third 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 commitments 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, 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, Technical Vice President; Max Torres, 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 third quarter of 2014, followed by the highlights by business segment, and the financial result. We will close with the outlook for the fourth quarter and full-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. In the third quarter of 2014, we returned to the path of growth in production with a 3% increase compared with the previous quarter due to better operational and security conditions and progress of key projects in our fields.

However, financial results were lower due to, first, the drop in international oil prices that caused a reduction of $9.4 per barrel in our export crude oil basket compared with the previous quarter and of $11.5 per barrel compared with the third quarter of 2013; and second, the effect of the Colombian currency devaluation of COP109 per $1 during September in our dollar-denominated liabilities that led to a nonoperating loss, which going forward is offset with the revenues in dollars from our exports for the whole year.

In terms of operations, we highlight important achievements in every business segment, such as the record production of 66,000 barrels per day in Chichimene field. That shows the strengthening of the direct operation of Ecopetrol plus the starting of two nonthermal recovery pilots.

In exploration, we highlight the recent announcement of the successful well Leon in the US Gulf Coast in partnership and operated by Repsol, as well as the five blocks awarded in Colombia during the 2014 National Hydrocarbon Agency round, one of them to Ecopetrol and Shell in consortium, these last one as operator and four blocks to our subsidiary Hocol.

We transported 5% more crude oil in products, driven by the higher volumes of crude oil coming from Oleoducto Bicentenario, the naphtha through Pozos-Colorados Galan system and a lower number of attacks during the quarter.

Furthermore, we reported a 94.7% progress in the modernization project of Cartagena. We exported 5% more crude oil and continue with our diversification strategy in the European and the Asian markets, recently signing an agreement for exporting crude oil to South Korea.

It is worth highlighting the $1.2 billion international bond offering as well as the unchanged rating of BBB and Baa2 from Fitch and Moody's.

Finally, we must also mention the signing of a four-year collective agreement with our unions.

Please move to the next slide to review our investments. Investments in the first nine months of 2014 amounted to $5.6 billion, comprising investments in both the parent company and affiliates prorated by Ecopetrol's stake.

Out of total invested 48% was allocated to production, mainly for drilling and for constructing facilities in the fields at the Llanos Orientales region; 24% was allocated to refining for the modernization of Cartagena refinery and the utilities master plan at Barrancabermeja refinery; 16% was allocated to exploration, mainly for acquisition of information by means of seismic programs and drilling of exploratory strat tests and appraisal wells; 11% to midstream, mainly to add capacity in Ocensa and Magdalena Medio systems, to San Fernando-Monterrey line and the optimization of Cano Limon-Covenas; and the remaining 1% to IT and research and development projects.

Now, I turn the presentation to Max Torres, our new Vice President of Exploration, who will comment on the main results of this segment.

Thank you, Mr. Gutierrez. During this year, 14 wildcat exploratory wells were drilled in Colombia. 13 of these wells were drilled by Ecopetrol SA and one by Petrobras. The wells Orca in Colombia offshore operated by the company Petrobras, Nueva Esperanza located in block CPO-09, Cacica-1 located in block Cuisinde, and Casabe-K in the Middle Magdalena Basin are still under evaluation.

The well Tibirita 1A drilled in Cano Sur block proved the presence of hydrocarbons, while the remaining wells were dry. Additionally, our subsidiary Hocol drilled three wells which were unsuccessful.

Internationally, it is important to highlight that Ecopetro America Inc completed the drilling of two wildcats, Leon, which was under evaluation at the end of the quarter, and it was recently confirmed as a discovery, and K2 number five, which is a dry hole.

Similarly, in Angola, the well Dilolo-1 in block 39/11 was drilled and declared dry. And we started the drilling of the well Jacare in block 38/11, operated by Statoil. Furthermore, five blocks were awarded in the 2014 ANH Colombia bid round, one offshore block to Ecopetrol and Shell in a consortium and four onshore blocks to our subsidiary Hocol.

Now, I pass the presentation to Mr. Rafael Guzman, who will comment on the production results.

Thank you, Max. In terms of production, during the third quarter of 2014, Ecopetrol as a Group managed to reverse the decreasing trend in production observed during the last quarter.

We had an increase close to the 20,000 barrels of oil equivalent per day, reaching a total of 755,000 barrels of oil equivalent per day.

This is explained mainly by an increase in the production of the Chichimene field. Chichimene reached a record production during the quarter of close to 66,000 barrels of oil equivalent per day due to the entry of new facilities and both producing and injecting wells. Additionally, the quarter evidenced a significant reduction in the impact of the attacks to the infrastructure.

In comparison to the same period of last year, the production of the Group is 5.7% lower. The difference is explained mainly by three factors, first, the limitations in water disposal, essentially in Rubiales; second, the temporary reduction in production in the gas fields of Guajira due to the start of the GACE IV project. This project allows us an increase in the recovery factor through the reduction of the pressure at the well head; finally, operational difficulties associated with communities blockades, which have generated delays in the entry of new facilities and new wells in several fields.

It is worth mentioning that, during the quarter, the environmental license for the development of the Cano Sur field was granted. This is an important milestone to reach 25,000 barrels of oil equivalent per day by the end of 2015.

Likewise, the approval of the license required to transfer industrial waters to third parties was granted by the competent authorities. This will allow us to reduce the limitations in the capacity to dispose water in some of the main fields, both in the medium and the long term.

Another important milestone during the quarter was the implementation of the new regional operating model, with the creation of three regional vice presidencies: Orinoquia, Central, and South, together with a fourth vice presidency in charge of assets operated by partners. This model will allow us to improve our control and operations while, at the same time, give us a closer and more effective interaction with the community.

Finally, we continue with our strategy to increase the recovery factor in our fields. Evidence of this is the starting of two new pilots during the quarter, of which we will see more detail in the next slide.

Up to September 30th, we had started two new pilots. The first of the two new pilots is for a chemical enhanced oil recovery project in Palo Grande. The second one is a gas huff and puff for a project in Provincia. With this, we reach a total of five pilots started by the third Q of this year.

Up to today, we have started an additional chemical pilot in Casabe, increases the total number to six. The Company maintains its goal to start 13 pilots in 2014 with the remaining seven pilots starting in the fourth quarter. The contribution from these pilots is important for the incorporation of reserves and incremental production, mainly between the years 2017 and 2020.

Now, let's move to the next slide. In terms of thermal recovery, our focus is mainly in our air injection pilot in Chichimene. This pilot completed the construction of the laboratory at the Institute of Colombian Petroleum, ICP, and has already moved more than 30% of the necessary equipment to the field. We expect to complete constructions of the facilities by the end of the year, which will allow us to start the injection process by the second quarter of 2015.

Finally, next quarter, we will finalize an agreement with Stanford University for research and development of thermal recovery methods.

Now, I will leave you with Thomas Rueda, who will comment on the results of the midstream sector.

Thank you, Rafael. Good afternoon. During the third quarter, the transported volumes increased by 4.9% versus the same period of 2013, reaching 1 million 232 thousand barrels per day.

Crude oil pipeline transportation increased by 5.2% compared to the third quarter of 2013, mainly due to the increase in the volumes transported through the Ayacucho-Covenas pipeline, as a result of the higher volumes received from Bicentenario pipeline, as well as the increasing volumes resulting from the lower impact of the attacks against the transportation infrastructure.

In addition, more volumes were transported by Ocensa as a result of quick wins from the so-called Delta 35 expansion project. Out of the total volumes transported, approximately 74.2% belonged to Ecopetrol.

Transportation of refined products increased by 3.9% versus the third quarter of 2013, mainly due to the increase in the naphtha volumes transported in the Pozos Colorados-Galan-Apiay system for heavy crude oil dilution. Out of the total volumes transported, approximately 50.7% belonged to Ecopetrol.

Regarding our projects under execution, during the third quarter of 2014, we completed the Vasconia-Galan 60,000 barrels per day capacity expansion in order to reach 220,000 barrels and ensure the crude oil supply to the Barrancabermeja refinery.

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

Thanks, Thomas. During the third quarter of 2014, the throughput of the Barrancabermeja refinery increased by 9,000 barrels per day compared with the same period of 2013 due to the operational stability of the process units.

The gross margin of this refinery was $15.5 per barrel, $5.3 higher than the third quarter of 2013, as the result of lower crude oil prices and higher spreads between products and crudes. We took advantage of this situation processing crude oil.

Furthermore, at the end of the third quarter, the expansion and modernization of Cartagena refinery reached 94.7% progress, highlighting the partial mechanical completion of 16 units out of 31 included in the project, which allow us to start the precommissioning process of these units. By year end, we expect to have the mechanical completion of another 13 units.

In terms of volumes sold, domestic sales increased in 35,000 barrels per day, 11% more than in the third quarter of 2013. The reasons for this growth were related to higher natural gas availability from royalties and increased thermoelectric and industrial demand of natural gas in Colombia. In addition, we sold more crude oil volumes to related companies, taking advantage of transport synergies.

The exported volume was higher in 12,000 barrels per day due to the larger crude availability resulting from the shutdown of the Cartagena refinery since March of this year and the increase in fuel oil production related to higher throughput in the Barrancabermeja refinery.

It is important to mention the continued increase of sales to Asia, where we delivered 37% of the crude oil exported volume, and to Europe, where we delivered 18%. As part of our market diversification strategy, the first supply contract of crude oil with a South Korean refinery was signed. Such volumes will be delivered in the last quarter of this year.

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

Thanks, Pedro. Please go to the next slide in order to review the drivers that led to a lower net income between the third quarter of 2014 and the same period of 2013. Net income amounted to COP2.36 trillion, COP1.6 trillion less than in the same period of 2013, explained mainly by the following aspects: first, the lower sales price in line with the decrease of international oil prices; second, the devaluation of the Colombian peso versus the dollar, mainly in September, which led to a nonoperational loss due to the valuation of our dollar liability position, which was not offset in that month by income coming from exports.

It is important to mention here that the devaluation of the peso has two opposite effects in our P&L statement, a positive flow effect, given that most of our revenues are in US dollars, and the negative stock effect due to our current liability position.

The net accumulated effect of the devaluation in our results is positive, as the sale of crude oil and products at a higher exchange rate more than offset the effect of the valuation of the net position in our balance sheet at a given moment.

Third, the higher fixed cost of transportation under ship-or-pay contracts and from the increase in transportation fees authorized by the Minister of Mines; fourth, lower net income of some subsidiaries.

Now, let's move onto the next slide to review the main lines of our P&L. Revenues decreased due the effect of a $8.9 per barrel drop in crude oil, products, and natural gas prices and 8,000 barrels reduction in sales volumes and a lower services fee charged to Cenit. The decrease was partially offset by the effect of the peso devaluation in our sales.

Variable costs decreased 7% as the net result of, first, a 29,000 barrel decrease in purchases, mainly of royalty crudes at a lower price of $3.4 per barrel; second, lower amortization and depletion costs, mainly in Rubiales, Castilla, Chuchupa, and Quifa fields.

Fixed costs rose 10% due to the higher transportation costs under ship-or-pay contracts in Oleoducto Bicentenario, higher fees approved to Cenit by the Ministry of Mines and Energy in July 2014, and maintenance costs.

Operational costs rose significantly, explained by reversal of a legal provision amounting to COP253 billion in the third quarter of 2013. Additionally, in the third quarter of 2014, we had higher expenses from exploration and from customs and port services.

Additionally, the nonoperational loss is explained mainly by, first, the effect of the Colombian peso devaluation in the mark to market of our liability position in dollars, as already explained; and second, lower net income of some companies, mainly E&P subsidiaries in Brazil and the US Gulf Coast due to unsuccessful exploration and the effect of lower oil prices.

Please go now to the next slide. The adverse aspects explained in previous slides led to a decrease in our pretax net income and therefore a lower net income tax payment provision. As a result, net income and EBITDA also decreased when compared to 2013.

I pass now to Mr. Gutierrez to present the outlook for the last quarter of 2014.

Thanks, Magda. Please go to the next slide to view the outlook for the fourth quarter and the full-year 2014.

Regarding exploration, we expect to have the final assessment of the wells Orca in the Colombian offshore and Nueva Esperanza in block CPO-09 and complete the drilling of four wells, three in Colombia, Boranda, Calypso, and Bullerengue, and Jacare in Angola in order to finalize the exploratory campaign of 2014.

On production, thanks to the higher water treatment and oil handling capacity, we will have larger production in Castilla and Chichimene fields. Also, we will close the year with 13 secondary recovery pilots.

In midstream, we will start the operation of the Delta 35 expansion in Ocensa. Regarding refining, we expect to start the precommissioning stage and close the year with the mechanical completion and the delivery of 29 out of 31 process units in Cartagena refinery.

In terms of new accounting standards, we will continue with our plan in order to implement IFRS standard reporting starting January 1st, 2015.

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

(Operator Instructions). Frank McGann, BofA Merrill Lynch.

Okay. Good afternoon. Thank you very much. Just looking at the production from Rubiales Field, which has been a source of -- I guess a negative trend for you, how you're looking at that. Obviously, the environment licenses seem to be the key culprit. Do you see that changing much over the next couple of quarters? And what do you think the trend in production will be 2015, 2016, and as you take over the field in the second half of 2016?

And should we view the short-term declines that we've been seeing actually as maybe a positive for you since, in the end, you don't produce it now, but maybe that will potentially increase the level of production that you can have later on that would be 100% benefit to Ecopetrol?

Hi, Frank. Hector Manosalva take the answer in relation with the Rubiales production perspective. Please, Hector.

(interpreted) Hi, Frank. The Rubiales field currently has a production of 170,000 barrels per day, mainly due to the fact that it doesn't have a license for water disposal, something that is being expedited before the environmental entity.

What we expect is that, with additional drilling that we have planned for the fourth quarter, the production of the field will be around 185,000 barrels. We expect that, for the first quarter, the approval of the use of water for a third party, and this will enable us to dispose of 500,000 barrels of water in the first section and, from April next year, 500,000 barrels -- additional barrels. And with these, we increase the production of the field to 190,000 or 195,000 barrels.

It is important to mention that we have reached an agreement between Ecopetrol and Pacific for the drilling campaign of 2015. And this clearly will enable us to recovery the production levels between the third and fourth quarters next year.

Thank you very much. If I could just follow up -- .

-- Frank, do you have any other comment, or is -- or the answer is - do you consider it is complete?

No, I think it's pretty clear. Thank you. Just in -- .

-- Okay -- .

-- In terms of the -- just a follow up, though. In terms of the level of production that you think you'll reach, say, by the end of next year as you drill these additional wells, will it go back to 200,000, 210,000, or what do you think the level will be towards the end of 2015?

Okay.

(interpreted) Frank, yes. We have foreseen to drill by 2015 196 wells. And that will enable us to be, by the end of 2015, with a production close to 195,000 or 200,000 barrels.

Okay. Perfect. Thank you very much.

Thank you, Frank.

Felipe Santos, JPMorgan.

Thank you, gentlemen, for the time. Just some questions on your expectations from the production basis per well that you expect for both secondary and tertiary recovery projects and how this productivity per well would be different by basin. You showed that difference of techniques in different basins in the presentation.

And just second, how your air injection and steam injection techniques would be different from the other ones that we saw and we see the companies applying in the rest of the globe. Thank you.

Thank you, Felipe. Rafael Guzman is taking the answer.

Okay, Felipe. Regarding the first question on the productivity per well, that really depends on both the technology and the reservoir we apply this technology. What we have seen in the past is that projects like -- or fields like La Cira-Infanta and Yarigui, thanks to the secondary recovery methods, we have recovered production that we have not seen in many years, sometimes 50 years back that we had not seen that production. And that's a combination of both the technology being applied and the number of wells we produce.

So, I cannot give you the specific on per-well production. But, what you can see in our previous results is the recovery of production in these fields.

Regarding the second question on the application of air injection and steam injection, that also depends on the fields. We're currently working on the project to do a pilot of air injection in Chichimene. This field is applicable, very suitable for air injection thanks to the deepness of the field, the quality of the oil, and the quality of the rock. So, we're hopeful that we will have good results from this pilot. But, we need to wait and see there.

In terms of vapor injection, we with our partners, we have applied steam injection in many fields, mostly in the fields of the Middle Magdalena Valley. And we see high recoveries of steam applied to these fields.

In addition to that, we have recently signed an agreement with Occidental to develop -- to further develop a field we have Teca, and apply steam injection. What we have seen in other companies and other countries is that steam injection can go up as high as 60% of recovery factor. And that is the type of target we have for those steam injections that we can do directly or through partners, like the case of the Teca field.

Okay. Okay. Thanks so much. And just one last question.

Felipe, excuse me. Excuse me. Hector Manosalva has some additional comments in relation with the recovery pilots.

Okay.

(interpreted) Felipe, in order to mention, currently -- just mention we are developing injection, selective water injection projects. And that enable us to have selective injection in 18 reservoirs simultaneously. And clearly, our objective is to incorporate steam injection technologies, SAGD (steam assisted gravity drainage) and ongoing steam injection.

Please, Felipe, go ahead.

No, (inaudible) just one follow up on different topic. What is your CapEx expectation for this year? And how do you see this review in the (inaudible) end of this year?

Felipe. Hi, this is Alejandro. Can you please repeat the question?

Yes. Just to see how -- what you think about achieving the CapEx expectation for the end of 2014.

Okay, Felipe. As we inform in the press release up to now, we have completed around $5.6 billion, of which around $3.3 are for direct investments in Ecopetrol's projects. And the rest is our participation in the affiliates investments.

We consider that, at the end of the year, we must be around 80% of the original budget that it was announced as $10.3 billion. In that sense, we believe we will be around $8 billion and a proportion that is going to be around $5 billion by Ecopetrol and around $3 billion our participation in the investment affiliates. This is the current projection we have in relation with the investment plan.

Great. Great. Thanks so much, guys. Thanks for your answers. Very clear.

Daniel Guardiola, LarrainVial.

Hi, good afternoon. And thank you for taking my questions. I have a couple of questions. I'm going to try to keep it brief. The first one is regarding production.

Basically, in previous quarter results, you have mentioned that production at Castilla should double by year-end 2015 up to around 200 hundred barrels per day. And that said, I would like to know why production declined by 8% during the quarter? And what measures are you putting in place to guarantee this expected growth by year-end 2015?

And my second question, which is in line with this, I would like to know if you are planning -- well, basically, when we look at production levels right now, we look at 2014 guidance, it's very difficult to achieve, 2015 guidance as well, as you will have to add around 245,000 barrels per day. And I would like to know if you could please share with us from where will come this growth, and if you're expecting to revise downward your 2015 production guidance. Thank you.

Daniel, Hector Manosalva is commented in relation with your first question.

(interpreted) Good afternoon, Daniel. In regard to production on the Castilla field, the average production of the field during this year, it has been 104,000 barrels per day. And production has not increased in these initial quarters, first quarters, because of the constraints that we have with production infrastructure, which will start operating in the fourth quarter of this year. And this will allow us to increase field production to 116,000 barrels for the fourth quarter.

And we will ramp up production, supported by the investment plan of 2015. It must be mentioned that the field has a potential to develop a growth plan up to 200,000 barrels.

Daniel, in relation with the production levels for the present quarter, basically, our goals are to increase 10,000 barrels per month during October, November, and December, if you compare with the figures at the closing of the third quarter. It is basically considering the Chichimene fields and Castilla fields continue with their production growth there with 10,000 barrels per month of increase going to the end of the year to a number of around 740,000, 745,000 barrels of Ecopetrol's production plus 51,000, 52,000 barrels per month of our affiliates. In that sense, we will be around almost 800,000 barrels as for the last month of the year for December.

And in relation with our guidance for 2015, it will be part of the information we're going to reveal to the market with the approval of the budget at the end of the year in December, basically. This is our current estimation in relation with the production for the next months.

And if I may, just to have a follow-up question regarding the leverage, just bearing in mind leverage has been increasing due to the CapEx requirements, and bearing in mind as well that the oil price scenario went down around 20 barrels per day in the last one month, I would like to know what measures are you planning to put in place actually to stop the balance sheet of the Company to go to leverage levels of 1.1, 1.2 times net debt to EBITDA.

Now, that being said, I want to be more specific. What are your thoughts on a possible spinoff of Cenit and potentially a listing of these business units?

In relation with the investments for the increase of the production for the last part of the year, basically, is the completion of the projects that we have been developed practically since half 2013. Practically all the investments are in place right now. And we are in the last steps of the projects that you -- we have been commented several times about the difficulties we have been experiencing in the region to complete those projects.

But, practically, up to now, we have completed all the majority of the projects needed to increase the levels of production in Chichimene and Castilla for the next months.

In relation with the investments from the next year 2015, as we have already mentioned, we are in the complete revision process for the strategy and also to adjust our investment plan cost and also trying to apply different criteria to continue generating value to our shareholders and different groups as we have been during the last seven years with profitability of around 20% per year.

We are totally conscious of the need to review our strategy plan to adapt to the new conditions in the market and also considering the changing in conditions in the -- in Colombia in terms of the operations and the development of the opportunities we have in our portfolios.

We have been working very hard. And as we have already mentioned maybe we are going to be able to have some announcements in relation with that at the end of the year or the beginning of 2015.

But, definitely, we are in the process to adjust our investment plans and, in that sense, to be really careful in terms of the leverage of the Company, taking care of the investment grade rating that is so important for us. And we are totally conscious of the importance to keep in that line.

And sorry, if I may, what are your thoughts on a possible spinoff of Cenit?

It hasn't been considered up to now. Maybe it is important to mention that we have been in the process to consolidate Cenit. And it is part of the processing. We have been working since several months. And there is also some additional stage because it is, for example, very much important how to align all the operational aspects, also how to optimize the cost structure of the Company because we're going to thinking one suggestion as you -- the ones you have mentioned. It is important because we try to obtain the most of the value possible that we can from one opportunity like that.

We have been working very hard in the process of the optimization. Recently, we have introduced some additional improvement in terms of the cost, it can be observed for example, right now, the EBITDA, for example, has been around 44%, with a clear improvement, if you compare with the results of the previous year.

As you can observe, we have been working very hard. But, we still have some steps, some additional steps to consider one alternative like that that could be -- that could be possible. But, we need to consolidate all the process in terms mainly of the operational aspect, but also in terms of the -- some of the regulatory matters that could be completed. But, the government, Ecopetrol, and also Cenit are working very hard in those aspects to consolidate the position of the Cenit in the market.

Thank you very much.

Paula Kovarsky, Itau.

Hi, good afternoon. Two quick questions, one on production. The outlook slide mentioned 13 nonthermal recovery pilots starting in -- still in 2014. Could you possibly share with us what do you expect to be the contribution in terms of exit production of those 13 projects? So, this is question number one.

And question number two, in terms of you know you mentioned -- you continue to talk a lot about the importance of recovery projects, be it thermal or nonthermal, in delivering the production targets, especially from 2013 onward.

So, I wonder if there's been any change into the composition of your production target, whether you know there's been some setbacks in exploration. So, is it the case that you know we should expect more contribution from those enhanced recovery projects, or you know the idea of having exploration contribution continues?

Thank you, Paula. Hector Manosalva and Rafael Guzman are taking the answers. Please, Hector.

(interpreted) Good afternoon, Paula. In effect, development of the pilots and the projects or the recovery projects, thermal and nonthermal projects and pilots, have allowed us to have important increased production. And this will continue to be so in the forthcoming years, in so far as we develop the projects.

Execution of water injection projects have allowed us to add close to 75,000 barrels per day to the basic production. And the results are clearly being forecasted with these projects.

For 2014, the technical results have not been explaining the lower production. We've just had some difficulties in terms of concluding or terminating these projects or ending the projects, due to public order issues and difficulties with the communities in order to be able to conclude the projects.

For 2015, we will have an important part of the infrastructure already operating. And this will allow us to have additional volumes from these projects. We must mention that the recovery program has foreseen an increase of the recovery factor, which is 18% currently, to a 32% recovery factor. And this includes additional 3.4 billion barrels.

To date, this program we've covered 1.3 billion, and we have foreseen to include the remaining volume by 2020. Rafael will complement this question.

Yes, perhaps what I would add on that is that the thermal recovery is expected to initiate production or contribute the production in the year 2020 or later on. We are currently in the early pilot stages of that technology, specifically the Chichimene air injection project.

Water, we have been injecting water and producing using this technology for quite some time. At the moment, we're injecting to recover oil, close to 1.3 million barrels of water, and obtaining a production over 100,000 barrels of oil per day out of it.

With the other nonthermal pilots that we have, we will be adding both reserves and production from here until the year 2020. We have in total 52 projects, pilots at the beginning that will convert into projects, and like I said, that will continuously increase the participation of the production in Ecopetrol.

Okay. Just a quick from all recovery pilots mentioned in the slide 14 regarding production are not supposed to have any specific -- a specific contribution or additional contribution in the fourth quarter? It's not quite clear to me.

No.

Or, is the 75,000 barrels a day you mentioned is during the year, or is it since the launching of the projects?

No, the figures we have mentioned is what we have been already producing through enhanced recovery techniques. But, the 13 pilots that we do this year, they will have results in a year and a year and a half. Then after that, we will have to sanction a project and do the investment.

So, it's -- we expect that production increase and reserves increase from a pilot, it takes about four to six years to come online. So, what we're doing basically at the moment is applying these techniques to the field so that the future of the fields will continue for a long time. Okay? Like I said, the total cycle time from pilot to production reserves takes four to six years.

Okay. Okay. Clear.

Contribution in 2018, 2019, 2020.

Okay. Thank you.

(interpreted) I think it's important to mention, Paula, that the increased factor recovery, recovery factor that we have been developing in the past five years will allow us to take the production to 800,000 barrels and be able to maintain a plateau production between nine and 10 years by executing these projects.

Currently, we have more than 35 fields with water injection. And there are 52 pilots that are being developed. And thermal recovery projects will start contributing to production, important contributions, as of 2018.

Okay. Thank you.

Thank you, Paula.

Gustavo Gattass, BTG.

Hi, guys. I had three quick questions for you. The first one is probably the simplest of all. I was just wondering, at this time, does Ecopetrol have any hedges on oil prices that are relevant for the Company?

The second one really has to do with the four fields that are potentially going to deliver growth, so Castilla, Chichimene, Acacias, and the Cano Sur field. I was just wondering whether, just like you talked about on Castilla, whether you could talk about the key milestones that each of these fields has for growth. So, what should we be watching for?

And lastly, I really just wanted to get just a confirmation really. From what you said, Mr. Gutierrez, I get the impression that Ecopetrol would be willing to reduce the level of spend to protect the balance sheet. I was just wondering. Is the idea of potentially raising cash to do all the investments you guys planned in the past, is it out of the question now or not? And that's really it.

Okay. Thank you, Gustavo. Magda Manosalva is taking the first question.

Yes, Gustavo. Concerning your question about the hedge we can have, we do not have hedges at this time in Ecopetrol. Normally, what happens with our current policy is that we establish if we are going to need a hedge for the next year when we have ready the budgets. So, we are going to be considering that when we have the budget for 2015 ready.

Okay. Hector is going to refer to the main milestones of the different projects in the Meta area related to the increase of the production for the next months. Please, Hector.

(interpreted) Okay. For the Castilla field, we will be concluding with 116,000 barrels production. And for the next year, the first two quarters, we foresee a growth of approximately 150,000 barrels. And for the second semester, the field growth will depend on the evacuation capacities in the field and investment decisions made for 2015.

Now, for the Chichimene field, production after the shutdown during the weekend, last weekend, to include new infrastructure, it will be close to 70,000 barrels by mid-November and close to 75,000 or 80,000 barrels by December of this year.

Now, the Acacias field, currently, as you can remember, is being in the production tests with nine delimiting wells and one discovery well and the production exceeding 10,000 barrels per day. And once we have the exploitation license for the well, for the field that we hope that will be approved by the third quarter of next year, we will start a development plan. And that will take production of the field to 50,000 barrels per day.

Now, the Cano Sur field has the exploitation license already approved. And the first quarter of next year, we'll start drilling 130 wells and construction of infrastructure that will allow us to increase production to 25,000 barrels per day.

Clearly, all of these investment projects will depend on portfolio decisions and the behavior of the price established for the investment decision.

Gustavo, in relation with the adjustment of the CapEx and the cost reduction plan, as we have already mentioned during the call, first, we are in the process of reviewing our strategy. This is an important milestone for the Company after seven very successful years of growth and revenues and profitability.

Additionally, are the current conditions in the markets. And we are totally conscious of the need to adjust of all our investment plans in exploration, in production, also in refining, and also in transport. We have been working in the last months looking for opportunities how to adjust our investment plans for the next year.

Additionally, we are also looking for opportunities to reduce our fixed costs, operational, and variable costs. We are looking for different strategies. And we are very conscious of the necessity to taking care of the cash flow to protect the financials, the sound financial condition of the Company.

We are in this process. And when we're going with the announcements to the markets in December and then with the results of the revision of the strategy, the market could observe how are the reduction and how are the adjustments in which we have been working as a result of the different alternatives we are now studying to have a new condition in terms of our investment plans and our operational needs.

And also, we are very much careful about the financing, looking for the protection of the investment rate condition that is so much important for us and also in terms of the protection of the cash flow of the Company.

This is also the mandate of our Board of Directors. And that's why we have been working very hard with the revision of the strategy during the last months. And we expect to complete the first results of this process for the beginning of the next year when we hope to be able to deliver some announcements in that address to the market.

Perfect. Thank you, guys.

This ends our Q&A session. I'll turn it back to management for closing remarks.

Okay. Thank you, all, for your participation. For any follow-up questions, please contact us in Investor Relations. And have a good afternoon. Thank you.

Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.

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.