Ecopetrol SA (EC) 2016 Q2 法說會逐字稿

Ladies and gentlemen, and welcome to your second-quarter 2016 Ecopetrol earnings call. (Operator Instructions) I would now like to introduce your host for today's conference, Lina Contreras, Head of Corporate Finance and Investor Relations.

Good morning, everyone, and welcome to Ecopetrol's earnings conference call and webcast in which we will discuss the main financial and operational results of the second quarter 2016.

Before we begin, it is important to mention that the comments by Ecopetrol's senior management in this call could include forecasts regarding the Company's future performance. These forecasts 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 predictions shared on these conference calls.

The call will be led by Mr. Juan Carlos Echeverry, CEO of Ecopetrol. Other participants include: Felipe Bayon, Executive VP; Maria Fernanda Suarez, Vice President of Strategy and Finance; Max Torres, Vice President of Exploration; Hector Manosalva, Vice President of Development and Production; Juan Pablo Ospina, Commercial and Marketing Vice President; Thomas Rueda, CEO of Cenit; Tomas Hernandez, Vice President of Refining and Processes; Rafael Guzman, Technical Vice President; and Carlos Alberto Vargas, Transformation Vice President.

We will begin the presentation with the main achievements of the second quarter 2016, followed by the highlights by business segment and the financial results under International Finance Reporting Standards. We will close with an outlook for the second half of 2016 and a Q&A session.

I will now turn the call to Mr. Juan Carlos Echeverry, CEO of Ecopetrol.

Thank you, Lina. I welcome all participants in today's conference.

April marked my first year leading Ecopetrol, a year when we witnessed a sharp drop in oil prices challenging every company of our industry. In Colombia during this period, we also witnessed a strong El Nino phenomenon impacting [development] for gas. Venezuela closed its border with Colombia, affecting the inflow of refined products, and finally, our pipeline transport infrastructure suffered attack.

In response, Ecopetrol demonstrated once again its capacity to react swiftly to these types of events. We are prepared to navigate the current price environment, although we think that at the end of this year and during 2017, prices should exhibit a slightly upward trend and hopefully stabilize in the $50 to $55 per barrel range. We successfully surpassed both El Nino and the Venezuelan border situations.

Let's go to the next slide. In the last 16 months we have comprehensively renewed our management team, attracting people with broad experience and a strong record in major international oil and gas companies. It is the case of the Chief Operating Officer, the Chief Financial Officer, the Chief Transformation Officer, as well as the Vice President of Refining, Social and Environmental Sustainability, Legal Affairs, and most Regional Vice Presidents.

Additionally, new people will soon arrive to lead in procurement and in transportation. Finally, two vice presidencies were created, engineering projects and compliance. This new team is implementing a transportation plan for the Ecopetrol Group and securing our profitability and sustainability.

Such plan comprises more than 500 staff. These initiatives have already begun to produce savings, higher productivity, and a strong financial result. We have strengthened our capital discipline (inaudible) from the engineering (inaudible) by pricing to secure existing and future projects, terminating them on time and on budget.

We also launched a new procurement model, eliminating 3,400 redundant jobs, enacting transparent simplified processes where decision-making and responsibilities lies within Ecopetrol. The Company's foremost priorities has been to protect its cash flow and to maintain its credit rating. We adjusted our investment plan in line with resource availability.

The shareholders' decision of not distributing dividends was difficult, yet necessary, to preserve financial sustainability and credibility. We have actively managed our portfolio to generate cash by selling most of our stakes in ISA and EEB and by divesting 20 minor oilfields not aligned with our long-term strategy.

In the second quarter of 2016 we obtained COP725 billion from these divestments. The social context of our operations has become more challenging. Under a new social strategy, we will strengthen local institutions and create conditions for a shared prosperity. We are certain that the end of [conflict with Farc] will open opportunities for our industry and promote prosperity and security in the regions.

Let's go to the next slide. Today we are announcing that these structural changes, along with the price improvement in the second quarter, led to solid operating and financial results as of June 2016. Net income attributable to our shareholders was COP787 billion, more than doubling our first-quarter results. In the first half of 2016, Ecopetrol obtained net income of COP1.15 trillion. This is partially the result of savings of COP390 billion in the second quarter of 2016 and COP[814] billion for the whole semester.

For the year 2016, our savings goal is COP1.6 trillion. Production was positively impacted by the reversion of the Rubiales and Cusiana oilfields. As a result, Ecopetrol currently operates 530,000 barrels per day, a level only reached by 30-something companies worldwide. The Rubiales field gave us 53,000 barrels per day of additional production, partially offsetting the impact of lowered investments in other assets and the temporary suspension of some fields.

In July, we successfully turned on the last of the 34 Reficar plants. We will work with BP in order to optimize the feedstock and the margin of these [worked out refineries].

I now turn the call over to Carlos Vargas, who will speak to you on the main achievements of the transformation plan.

Thank you, Juan Carlos. In 2015, Ecopetrol set a goal of structurally optimizing costs by COP4.5 trillion in comparison to 2014 by the end of 2020. For this a business transformation program was launched in which: first, the main levers for optimization were identified by business segment in corporate; second, for each lever initiatives and milestones were established; third, leaders with the highest technical levels were appointed for (inaudible); and fourth, vice presidency was created in order to secure the compliance and monitoring of the transformation program at the highest level.

Thus, in 2016 Ecopetrol sales exceeded its savings goal, achieving structural optimization in OpEx, CapEx, and revenues of COP2.2 trillion versus 2015. For the first half of 2016, the accumulated savings reached COP2.8 trillion.

Please let's move on to the next slide. In each segment the key operational indicators were identified to optimize and, jointly with process improvements, converting into structural sales. For example, structural savings between 12% and 20% has been achieved in upstream operating costs. In investing, cost per foot drilled has been optimized by 29%.

Another example to highlight is the transformation achieved in the supply model, which has enabled an 80% reduction in contract management costs with a much more agile and efficient model. Let's continue to the next slide.

A key element in optimizing upstream operating costs is a dilution of heavy and extra heavy crude. The dilution factor represents 23% of total costs in the upstream segment. Optimization focus is then the dilution factor, which went from mix with 20% diluent to only 16.8%. As today we have accomplished reduction of 13,800 barrels per day in diluent purchased.

To achieve these results, the dilution strategy is based upon a series of coordinated initiatives that seek to optimize the amount of diluent and the cost of this operation.

First, we have a strategy to ensure increased viscosity in the equation of heavy crude to top line. The increase in discovery went from 200 to 300 centistokes 2014-2015 period and from February 2016 to 405 centistocks. This has allowed structural savings, reducing diluent purchasing by 12,100 barrels per day as of June 2016.

Similarly, we have incorporated use of light crude, such as diluent. With this initiative, further optimization of 1,800 barrels per day in diluent has been achieved.

Secondly, we have optimized the cost of diluent logistics, decreasing transportation by tanker truck with a capacity expansion in Pozos-Galan pipeline as well as reducing the required transportation of [optimized] diluents. This allows a reduction in over 200 tanker trucks per day. As a result the accumulating savings from the dilution strategy amounts to COP726 billion during the first half of 2016 versus 2014 dilution costs.

With this, I leave you with Raphael Guzman, who will comment on production results.

Thank you, Carlos. The production of the group reached 695,000 barrels of oil equivalent per day, in line with the Company's estimation for 2016. These results are mainly explained by the effect of the rationalization of the investment activity, the natural decline of the fields, and the temporary closure of some fields during the first quarter.

We are pleased to share with you that starting in July, and thanks to the full ownership and operation of Rubiales and Cusiana fields, our company joins a select group of companies which direct and operate more than 500,000 barrels of oil equivalent per day. This operating level represents a major challenge for us for which we have been preparing for more than two years.

For the Rubiales field, we are already working to restart drilling activities. The increase in our working interest in those assets will be reflected in the third-quarter production reports.

For the quarter, we also want to highlight the sustained production levels in the Castilla field thanks to the activity performed in the first quarter and the reactivation of drilling during May. In line with the activities planned for Castilla and Rubiales fields, we are also working on drilling additional wells in other assets in our portfolio and focusing efforts on workovers. During the period, no fields were suspended in addition to Akacias and Cano Sur in the first quarter. This was achieved due to the price behavior and the cost optimization efforts carried out by the operation.

Our approach is to do a cost analysis on a well-by-well basis to guarantee profitable production from each barrel we produce. Regarding efficiencies in our segments, during the last quarter our lifting costs continued to be below 2015 levels, mainly thanks to continuity in the efficiency program and to the exchange rate effect. One of the main contributors has been the reduction in the cost of interventions per well, which has fallen 31% compared with the same period of 2014 and 26% in comparison with the first semester in 2015.

In our development costs, we continue reducing our drilling costs and plants. In Castilla and Chichimene fields, drilling time per well has been optimized by 44% and 42%, respectively, compared to 2014 levels.

Finally, and looking into the third quarter, we will focus in the execution of the project activity in Castilla, Rubiales, and La Cira fields. The consolidation of our role as operators in Rubiales and Cusiana fields and the production results from our Gulf of Mexico asset, Gunflint, where we expect a gross production well above 20,000 barrels of oil equivalent per day and where our share is 31.5%.

Now I turn over to Max Torres, who will discuss the results of exploration.

Thanks, Rafael. Exploration activities in the second quarter. The well Payero-1, located in the Niscota block, is currently being drilled, where the Ecopetrol affiliate Hocol owns 20% equity, Total 50%, and [Repsol] 30%. The operator of the block is Equion.

Also, acquisition of 228 kilometers of 2D seismic has begun in the Cardon Block, as well as the acquisition of 90 kilometers of 2D seismic in the Nogal Block, operated by the company Emerald. Both blocks located in the Caguan-Putumayo Basin.

Seismic acquired in Brazil offshore in Block offshore in block Potiguar 567 is currently being processed. This program is approximately 830 square kilometers of 3D seismic.

The outlook for the third quarter will be to complete the exploration well 501 and to initiate the drilling of the well Warrior located in the Gulf of Mexico, operated by Anadarko; holds 60% equity in the block with [NOEX] 15% and Ecopetrol the remaining 20%.

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

Thank you, Max. Good morning. During the second quarter of 2016, the total transported volumes decreased by 103,000 barrels per day, equivalent to 8.4% versus the same period of 2015, reaching 1.127 million barrels per day.

Crude oil pipeline transportation decreased by 11.3% compared to the second quarter of 2015, mainly due to the lower volumes delivered by the shippers. Approximately 69% of the volumes transported belonged to Ecopetrol.

Transportation of refined products increased by 3.1% during the second quarter of 2016 compared to the previous year, mainly due to an increase of the volumes transported through the Cartagena-Barranquilla system and through the system starting in the Barrancabermeja refinery. This outcome is the result of an increase of the fuel imports to fulfill the demand of the central region and the Venezuela border region. Approximately 18% of the refined products transported belonged to Ecopetrol.

Regarding our projects under execution, it is important to highlight the completion of the storage system in the San Fernando station with a total storage capacity of 600,000 barrels of crude oil and 220,000 barrels of diluents. The remaining activities in the San Fernando station continue as planned. These activities are part of the San Fernando Monterrey project.

In addition, during the second quarter of 2016 we finished the activities associated through the Costa Norte-Galan project, which allowed us to increase the capacity in the Pozos Colorados system from 90,000 barrels per day to 130,000 barrels per day of naphtha and refined products. The remaining projects advance as planned.

Finally, from the financial perspective, our midstream segment results showed an increase when compared to the second quarter of 2015, mainly as a result of the cost reduction initiatives implemented by the segment and the positive impact of the exchange rate over our crude oil pipeline revenues. This result was partially offset by the impact of the lower volume of crude oil transportings.

With this I hand over to Tomas Hernandez, who will comment on the downstream results.

Thanks, Thomas. During the second quarter of 2016, the start-up process of the Cartagena refinery continued and it was completed on July 11 with the start up of the Appalachian unit. With the completion of the start-up phase, the stabilization process and unit performance tests begin where design capacities are tested, operational limits are verified, and entire operations stabilized and then optimized to maximize the economic return of the refinery.

To achieve the aforementioned optimization, some actions have been identified and they are being implemented. Actions include the stabilization of the crude slate, some improvements in crude oil import logistics, and the identification of synergies between our Cartagena and Barrancabermeja refineries in operational maintenance and commercial terms.

In addition, the gross margin of the Barrancabermeja refinery was $13.50 per barrel, $3.60 lower than the second quarter 2015, mainly as a result of lower product price differentials against crude oil prices. In comparison to the first quarter this year, the result was slightly lowered due to lower price differential of the fuel oil against crude oil prices. The throughput of the Barrancabermeja refinery during the second quarter 2016 decreased by 9,700 barrels per day compared to the second quarter 2015, due to lower availability of light crude oil.

The cash operating costs of refining and petrochemicals decreased by 5% compared to the second quarter of 2015, due to the implementation of maintenance, operations, and contract services optimization strategies and a higher exchange rate of the US dollar against Colombian peso.

Now I turn the presentation over to Maria Fernanda Suarez, who will comment on the financial results for the period.

Thanks, Tomas. Good morning to all the participants on this conference call. In this quarter, very few companies in the oil and gas sector were able to register positive results; Ecopetrol is among the few able to report operating and net profit.

The operating income increased by 12% compared to the first quarter of the year, mainly due to the recovery in oil prices. Crude oil basket price improved 60% versus the first quarter, which widely offset the 4% decrease in the volume sold and the negative impact of our lower foreign exchange rates during the second quarter. Our spread relative to Brent improved by $1.20 per barrel between the first and the second quarter of 2016 thanks to a better positioning of our crude in the US market.

In addition to obtaining a larger income, we managed to reduce operating costs and expenses by 4%. This resulted in an operating income of COP2.5 trillion for the second quarter, which in turn resulted in an operating income for the first half of 2016 of more than COP4 trillion. The increase reported in the cost of sales is mainly due to a higher purchase price for crude oil and refined products, including the amount of crude required to start up the Cartagena refinery. On the other hand, operating costs were reduced by COP689 billion.

The net income increased by 117% in the second quarter compared with the first quarter of 2016, resulting in an accumulated net income for the first half of the year of more than COP1.1 trillion, which represents a 9% increase from the first quarter but is still 18% lower than the EBITDA, reported for the same quarter last year. Savings and operational efficiencies partially mitigated the impact of the 27% drop in crude oil prices in EBITDA, though compared to 2015 the EBITDA margin in 2016 remains stable at around 39%.

Let us now look at our progress in the divestment plans. During the second quarter we made significant progress in our divestment plans with successful results from the auctions of our stake in ISA and Energia de Bogota, the authorization process for the sale of Propilco, and the launch of the 2016 minor fields [round].

We allocated shares of ISA for a total value of COP377 billion. We still have 13.6 million shares remaining for sale. On June 1, we sold shares in Energia de Bogota for a total value of COP348 billion. We still have close to 87 million shares remaining.

Under the terms of (inaudible), we can hold up to two additional auctions to sell the remainder of our stakes in these companies. We also initiated a process to divest our interest in 20 minor fields through our 2016 field round. Our preference is to concentrate our technical equipment and cash resources from these deals on key development projects on Ecopetrol.

Let's move to the next slide to see the evolution of the Group's cash flow.

Ecopetrol generated COP4.1 trillion of operating cash before tax. Cash flow generation in the second quarter remained strong, thanks to increasing revenue and cost optimization applied on all operational fronts. As every year, in the second quarter of 2016 the largest portion of operating cash flow was used on tax payments including witholding tax, income tax, and wealth tax.

During the second quarter of 2015, capital investments amounted almost COP1 trillion. Divestments, in turn, amounted to COP725 billion. The net cash outflow of other investment activities amounted COP1 trillion, mainly portfolio investments of short- and long-term securities.

The flow from financing activities generated a positive effect in cash flow of more than COP900 billion, which includes the $300 million loan from the Export Development Canada, reopening of international bonds for $500 million, and interest paid. As a result, we have covered nearly 85% of the estimated financing needs for 2016, which we had anticipated at the beginning of the year to range between $1.5 million and $1.9 billion at the consolidated level.

The second quarter closed with a cash balance of nearly COP8 trillion, 4% more than in the first quarter of 2016. Lastly, it must be noted that in July Ecopetrol obtained (inaudible) and income tax reform for the FY15 of COP2.7 trillion, of which COP350 billion were offset against withholding tax and the remaining amount was received in tax reformed securities (inaudible).

Now I turn the floor over to our CEO, who will close our presentation with the prospects for the second half of the year 2016.

Thank you, Maria Fernanda. We remain committed to operational and financial excellence, greater efficiency, and lower costs, and to build a robust investment and exploration portfolio. No later than October, we will announce our revised 2020 strategy plan, an update of the one announced back in 2015 adapted to the recent evolution and volatility of international oil prices and to capital efficiency gains.

In this semester we will start drilling the Purple Angel exploration well with Anadarko in the Colombian offshore and also with this valuable partner, the Warrior well in the US Gulf of Mexico. We will drill the onshore wells, Lorito and Pegasus in the Eastern (inaudible) and Bullerengue in Lower Magdalena Valley. We hope to get the appraisal results of Leon 2 with Repsol and Payero with Hocol.

Last week we announced the increase of our production in the Gulf of Mexico from 3,700 barrels per day to more than 10,000 barrels per day. We continue working to meet the goals announced to our shareholders and the market.

With this, I open the session to questions and answers. Thank you very much.

(Operator Instructions) Frank McGann, Bank of America.

Thank you, good day. Two questions, one just on the outlook for production. How your -- the production was weak in the quarter of course, which was expected, but just how you are seeing trends in the third quarter. And should we expect further declines as you try to move to a more efficient operating business from an economic standpoint?

Then, secondly, in terms of the midstream business, the pipeline segment, how you are seeing the potential for volumes over the next 12 months as well as the potential for changes in tariff.

Frank, this is Juan Carlos Echeverry. Thank you very much for your question.

In terms of production, I would like to stress that during the last 12 months we have had like a triangle in which we have moved: first to protect cash and our EBITDA margin shows that we have been successful in that, second is to strengthen the discipline of capital; and the third one was promoting a production of reserves.

As you may understand, we focused on the first two, protecting cash and the discipline of capital, but from now on until the end of the year I think that we have a solid cash availability. We will go to fulfill our target of 715,000 barrels per day average for this year.

So we will reinitiate our drilling campaigns in Rubiales; we are finishing or completing our drilling campaign nowadays also in Castilla. We will, at the end of the year, have more than [approximately 105] wells drilled during the year, development wells, and with these we think we will accomplish our goal of an average production of 715,000 barrels per day. So this is basically our outlook for production.

Regarding the pipeline, Thomas will answer.

Good morning, thanks for your question. In terms of the outlook for the next 12 months, of course we have seen a decline happening in the past few months and we are watching in terms of how we see things developing. However, many things to highlight.

First, remember that 50% of our volumes come from the refined products and didn't see any changes in that regard. Second, we are working heavily on commercial terms to attract volumes; first from different new fields come into operation, also from trucks that are transporting volumes. As well, we've been increasing the volumes that have been trucking in the past three years into the pipelines.

And the other thing to highlight is we continue to work on reducing costs to operate and maintain our systems, so that has been working very well in the past few years. We are going to continue on that agenda in order to maintain results.

In terms of the tariffs, we ended our period negotiations between the transporters and the producers on June 30 and the result has been positive in the sense that out of 25 pipelines we have reached agreement on eight; those eight being the key systems where we transport the most volumes. And we've seen no decrease in the tariff. It has been very positive agreement between the transporters and the producers.

In terms of the remaining systems, we are waiting for the Ministry of Mines to give us their view in the next few months in terms of what sort of tariffs we're going to be seeing. I don't foresee any reduction in tariffs.

Okay, thank you very much.

Anish Kapadia, TPH.

I had a couple of questions as well, please. The first one is just kind of thinking about your reserve life and production. So your oil reserve life is only seven years and so I just wanted to get a sense of how you expect to maintain production or keep declines low given the lack of oil discoveries. It seems like improved recovery techniques will be too costly in a $50 environment. Just trying to get a sense of what kind of decline rate would you expect in 2017 with the current CapEx plans?

Than the second question is also on the transportation segment and Cenit. It's a very strong cash flow generator for yourselves. It's an asset that I would expect would get a high multiple if you had an infrastructure investor coming in to look at that asset.

I am just wondering why not look at potentially selling down a portion of that asset to then redeploy into the upstream in the current environment when there appears to be attractive upstream opportunities. Thank you.

Anish, this is Raphael Guzman. First of all, I would like to emphasize that this is -- we have mentioned in the past this is a transition year and most of the investment has gone to downstream and midstream, but for the years to come that investment will be directed to exploration and production.

Again, in exploration -- and perhaps Max can add some later on -- we are concentrated in good areas and we have had recent success. And Max, perhaps, can add to that.

But in terms of production, we have very significant and comprehensive program on increasing the recovery factor. We still have a lot of room in primary recovery, that is infield drilling. As you have seen this year, we are targeting our infield drilling in Rubiales and Castilla and Chichimene, and we will continue to do so in the next years to come.

But in addition to that, the enhanced recovery techniques that we have been testing for about four years now are giving us good results. Examples of that some oilfield projects that we have developed like La Cira and Yairgui. These fields have increased significantly production and can maintain the production.

But in the bigger fields like Castilla and Chichimene, we have injected or have been injecting water and also polymers and we are seeing again good results there. Chichimene, for example, is a field where you have seen very little investment in the last 12 months and yet the decline of this field is relatively small, less than 5%. What we expect with this program is to maintain the current levels of production or slightly increase the production. That will depend, of course, on the availability of cash to invest.

Max Torres here; VP, Exploration. Just to comment on where are we planning to get our resource base for the future. We mainly are focusing, like most companies are doing these days, on a few plays: one is Gulf of Mexico, the other one is offshore Colombia, the other one is onshore Colombia in the Llanos. And we have been quite successful in these three areas.

We have two recent discoveries in Gulf of Mexico: one with Shell, one with Repsol. We finished an appraisal well in Leon Gulf of Mexico. We had two discoveries recently in offshore Colombia, Orca and Kronos, and we are planning to drill some appraisal wells this year. That's with -- expect to be an interesting resource base for us for the future.

We also had a -- well, Orca, that we are also planning to drill an appraisal well next year, early next year. That's another interesting area that we are planning to develop.

Next year we are planning to drill probably five wells in onshore Colombia, which all of them they have the potential to deliver a resource base. Along these thoughts also the Llanos. In the CPO-09 we had a discovery of another Esperanza well, which is on trend with Chichimene and Castilla, and we are planning to drill two more wells in that area.

So in summary, I think we are targeting high potential plays and I think we can deliver our resource base for the future. Thank you.

Anish, Rafael back again. I have a comment on the cost. You mentioned that going to enhanced recovery could be more costly to develop, but one of our focus in the last month has been precisely that: reducing the cost of development. You can see that in the reduction of costs that we have achieved in drilling and also in building facilities -- something that we have done again.

There are things that we developed these enhanced recovery projects on top of the existing fields that have been developed previously, so these fields contain most of the infrastructure needed. At the end, what we are seeing is that we have the technology, we have tested it with this pilot, and we are forecasting projects that are viable even at this current price.

Anish, this is Juan Carlos Echeverry. Looking towards the next decade, Ecopetrol, based on what we have already discovered, should be a more balanced company between oil and gas. And this is crucial because we will -- we are transforming from an 85% oil company and 15% gas company towards probably a more balanced shares in oil and gas.

As Max said, we have up in the new province of gas and, hopefully, also oil in the Colombian Caribbean, so there are many alternatives as of today or at the latest tomorrow where Estancia is starting drilling with Anadarko in the Gulf of Mexico the exploration well Warrior. So there are different initiatives in this respect.

Your second question was regarding Cenit and eventual divestments. We have already announced the divestments for 2016 and 2017, which include nonstrategic assets like Empresa de Energia de Bogota or ISA. We have already sold the biggest part of those assets of what we had in our -- the shares we had.

The second is that we are divesting in the upstream 20 oil fields which are also nonstrategic to us and we are also divesting Essentia Propilco, which will take probably the next, say, nine to 12 months for completion. The possibility of selling assets in the midstream is always open. It's a recurring narrative for Ecopetrol; people ask us about this.

So in retrospect your question; it's not included right now in the 2016-2017, so it is not part of our immediate worries. It's not immediate but it always a possibility. We will keep thinking about that, but, for the time being, we have our hands full with the divestments pipeline that I've just described.

Thank you very much.

Felipe Santos, JPMorgan.

Good morning, everyone. Just two follow-ups on the previous questions and one thing on the presentation that you just made.

First, you said that you are going to be more balanced company focusing on gas and oil, likely to be 50/50. In this context, could you give us an idea of the breakeven for the gas and the new exploration that you have, both onshore and offshore? I believe that most of the discoveries offshore have been gas so far, right?

And the second question is: could you give us also the drilling CapEx per well for those 35 wells in Castilla and Rubiales and La Cira, those 24 wells that were mentioned in the slide number 10? Thank you.

This is Felipe Bayon, Chief Operating Officer. So in terms of the offshore prospects that we have described, which you are right; the discoveries we have to date are mainly gas, but that doesn't preclude that we may find liquids as well in future wells.

So currently we have discoveries up north near Guajira, Orca. We have discoveries next to Panama border, which is Kronos, and we are going to be appraising those fields. So I'm thinking actually understanding the forward program is appraisal of the Kronos cluster and then we are going to be drilling Gorgona's well. And as Max was referring earlier, we're going to have at least five more wells next year.

So I'd say that, if you think about breakeven prices, which is your question, we are seeing -- we first need to better assess potential and size of the discoveries. We are confident that this basin will become a very important basin for the Company and for the country in the decades to come, but we also need to be cautious in terms of appraising those fields, understanding the potential, and then taking it from there.

But as I said, we are very optimistic. Juan Carlos was saying that maybe this will lead to the Company being a bit more balanced in future, but this is something that we see as an opportunity going forward.

Okay, this is Rafael Guzman. Regarding the question on cost of the well, it has been a focus the past weeks -- five months, sorry, as I said before, on reducing the cost of the wells. What we expect for Rubiales is that at least we will maintain the same drilling costs that the previous operator had.

However, we have planned to introduce the good learnings that we have had in the other fields and try to reduce the cost of the wells in Rubiales from what we had seen in the past. I would not like to give you the exact number of the well, but it is very close to $1 million a well.

Okay, that's perfect. And just one follow-up. In the context of exploring more gas, what will be -- what is the Company's strategy? I believe that most of the gas -- if you have this -- how much of gas that has been commented in the press -- the idea would be to consume part of this gas and to export, right? Then the Company would be considering LNG facilities. I mean what is the Company looking forward for the gas usage and exports and selling, etc.?

Of course you understand that we are still early in this process. We have, with our partners -- our excellent partner, Anadarko, we are starting -- first, we have drilled the appraisal wells this year for [Palendio] and next year we will keep drilling in the same area in order to have the appraisal of the reported (inaudible) cluster.

Of course, it will take some time to the moment in which we could answer all the details of your question, but what we see so far is promising and we are working intensely with our partners. Probably Max wants to give you some more color on this.

Yes, Felipe. I think just to reemphasize the message; essentially we are early in the process. We have two exciting discoveries. We have a new frontier basin and I think, basically, we need to wait for these two wells to answer your questions. Obviously, it depends on the volumes.

Again, I think the results of the first two wells are very promising. We are very excited; our partner is excited as well. That's the reason we are going to drill two back-to-back wells starting mid-November.

You know, it's a lot to say in this low-price environment to be drilling deepwater wells in frontier areas, so you can extract from there that both companies are very excited and looking forward to the results. Again, if it's going to be domestic or LNG, if it brings up the volumes; we are not discarding any possibilities. Essentially, this depends on the volumes.

Next year we're going to have a better picture what are the sizes, but also Anadarko has invested a lot of money on seismic on their own wells in this basin. So essentially the message you are getting across from all these companies -- also Repsol and Petrobras -- is that this is a new and exciting frontier -- now gas, probably oil in the future -- of [promise]. Essentially, I think everybody should be paying attention on these high-potential wells in the future.

Excellent, thanks so much.

Bruno Montanari, Morgan Stanley.

Thanks for taking my questions. First, let's thank the IR team for including more information on the segments on the release. Very helpful, thanks a lot.

First question is about Rubiales. I remember hearing from the prior operator that water cut was close to 97%. If I understood correctly, you plan to sustain a production plateau for another three years. So I'm wondering how to reconcile this as the field is quite mature, so there's a lot of water disposal requirements.

Are you using Pacific's water treatment and electricity infrastructure to operate the field? And if you are, how much costs are that's adding to the operation?

My second question is about costs. You have done a great progress in the cost savings initiatives. What I wanted to understand is to which extent those cost reductions might be linked to lower energy prices, which could potentially revert in the future as oil prices recover at some point.

And if I can follow up on Frank's questions from earlier; how are you able to avoid a reduction in the pipeline tariffs when there seems to be such a strong drive in the industry to lower them? Was there any offsetting thing you gave your clients to keep flat tariffs? Maybe more rite of passage or rebates, anything of that nature? Thank you very much.

Bruno, this is Rafael to answer your question about Rubiales. Yes, Rubiales, of course, has very significant water production. In fact, it's the water that brings the oil to the well, so it's a blessing actually to have water in Rubiales rather than a curse.

There is an associated cost to treat this water and we, as now current operators, we are able to maintain and we actually have plans to reduce the cost of disposal of this water.

The water cut, as you mentioned, is very high. It's close to 95% and that is reasonable; that's what's expected for this type of field.

One thing I would mention is that this is not a mature field. It has only recovered about 9% of the original oil in place, so there is still a lot of room to improve the recovery to add reserves. Our plan is to continue drilling and we will start this in a few weeks time. We will continue drilling to be able to maintain the production of the Rubiales field.

We expect that a plateau production of about 135,000 barrels per day is reasonable for this well and it will be in line with the expected investment for this field. We do other, of course, techniques to try to reduce the water and we will be applying this to the field in the future as well.

Bruno, this is Carlos Vargas, VP of Transformation. Relating to the question that you are talking about, the cost and how we are going to maintain the cost of savings efficiencies if the price is going to increase, let me tell you that we are working three main points.

The first one is relating with identify the drivers for efficiency initiatives that we are working on. One example is the dilution cost that we identified that obviously the dilution factor is a driver in order to keep that savings all the time. In the rest of the initiatives we are doing exactly the same and that is giving us the clarity about what is the initiative that we need to follow and what is the action that we need to follow in order to continue keeping in a structural way all the savings that we have in there.

Also, we -- in order to minimize the effect of the increase of the Brent, we are normalizing the efficiencies and in that way we try to keep the drivers and the numbers in the way that we want. And the third one is relating to the processes that we are putting in place, in exploration and production in particular. The thing that we are trying to do is to combine all those initiatives in a structural way, applying all the processes in order to keep all the drivers as low as possible.

Bruno, this is Thomas from Cenit. In terms of your question regarding tariffs, a very good question. We have been sitting down with the producers for a year in order to try and reach agreements in order to work on the tariffs. We have been working on commercial agreements and, in some cases, we have reached very good results.

A bit of context: we have reached very good results in eight of the systems that we are working on. Those are eight of the most important systems where we transport 80% of the value -- of the volumes and the producer has been in agreement for the tariffs that we have settled.

Remember that there is a strong regulation behind setting the tariffs, so there's sometimes so much we can do in terms of reducing them. However, the regulator has come up with some options for the transporter and the producer to reach further commercial agreement in order to, at the end of the day, look to reduce the tariffs. We are working on that and we hope to have some sort of result in the next two months.

But finally, one additional thing which is very important. We have been working in the transportation segment in offering logistical options to the transporters in order for the producer -- in order for them to reduce their costs.

And the best example that has been presented today is the reduction of diluents used in order to transport the heavy oil. We have invested a decent amount of funds in order for the producers to be able to transport crudes that are heavier and that has been working very well in the economies of the producers. So we are working on all sorts of fronts in order to ensure that we are not going to be talking the producer and on the other hand, offering positive solutions for value creation.

That's great, thank you very much.

(Operator Instructions) Pavel Molchanov, Raymond James.

Hello and thanks for taking the question. I realize that the business plan is still a few months away, but I thought I would ask the following. Based on your current thinking through 2020, do you anticipate allocating any capital to development of the deepwater discoveries in Colombia that you have already made?

Thank you for your question; Max Torres here. Essentially, until 2020 we are going to be pricing and understanding the discoveries, so we don't anticipate capital for development, if that is your question.

We are probably going to be drilling appraisal wells and probably many exploration wells through the next few years. Probably around that time we will start taking decisions, FIDs and these kind of investment plans for the future. We expect to have, in Asia, productions around 2023/2024 of some of these discoveries, so the next two or three years are going to be -- capital is going to be allocated for exploration and appraisal of the discoveries.

I think if I've answered your question. Please let me know if this is not your question.

That's perfect and thanks for the clarity on the timing. One more question; this one is just more financial about the income tax rate. The last two quarters the effective income tax rate was more than 50%, whereas it had been generally between 30% and 40% for many years. Is there a reason why it has increased at a time of low oil prices?

Thank you for the question. Well, regarding income tax, two important things to take into consideration. First is that on the second quarter of 2016 we registered something that was rejected from the tax that we claim on the (inaudible). So we made a claim that was up to COP2.9 billion and COP200 million were rejected.

So the bad part is that we have to register that on the second quarter of 2016. The good part, as I mentioned in the presentation, is that we received devolution from the tax [shelter] of COP2.7 billion, out of which will be able to use COP2.4 billion in the coming months. If you take that out, you can expect something around 40% and 43% for the effective tax rate for the year.

Perfect, very clear. Thank you very much.

Alex Burgansky, Deutsche Bank.

Thank you very much for the call. I was wondering if you could provide a bit more details on your performance of Reficar and also, more specifically, the starting date. You mentioned in the presentation it was July, but in the report itself you state that part of the reasons for the depreciation increase was that Reficar entered into operation during the second quarter. So I just wanted to understand exactly when it entered into operation.

And, secondly, if you could perhaps provide any guidance for what type of throughputs and production you expect at Reficar this year before it goes into full capacity next year. Thank you.

Thank you very much, Alex. Tom Hernandez, Refining VP. Tell you a little bit about the process that we've been going through.

We are going -- we just completed the start-up on July 11 of the last of the 34 plants on schedule with the schedule we have set. Eight of those plants are margin-improving plants and they are all operational now. The second half of the year is going to be focused on stabilization of the plants and doing the unit performance test with the licensors, five major licensors for those plants, the 34 plants that we have in operation.

Your question around guidance on production of Reficar. We look -- as you can see, we ended up 119,000 barrels a day on the second quarter. That was up from about 110,000, 107,000 in the first quarter.

Our plan is to continue to ramp up, doing it during stabilization while we are performing the unit performance tests. We have to be very, very careful as we perform these unit performance tests in the selection of crudes, the diet to make sure that we complete those unit performance tests.

And we have -- we are targeting in the first quarter 2017 the refinery acceptance tests with the lenders. So all this second half of 2016 is focused on stabilization, making sure the plants meet design capacities. We look to continue to ramp up the rates going up from 120 and finish up -- finishing the year close towards closer to 130 in the fourth quarter. Those are our plans. That's basically what we are focused on.

It's been a very, very difficult process, as you might expect. Each refinery is a fingerprint on its own and we are finding the diets of the crudes -- which are the best for the units that we have in place. We have high-tech units, three very, very high technology units that are first in Colombia that are the high-margin producers and we feel very, very good about the performance in the start-up in the last eight months.

We started with the crude unit in December 2015, you remember, and we started all the margin-producing plants from February through July, with the alkylation unit being the last one on July 11. So we have high expectations on the stabilization in the second half of the year. And then, from then on, we move on to the optimization and looking at the high rates and fulfilling the maximum rates for the refinery in 2017.

Alex, regarding depreciation, this is Maria Suarez, CFO. I will have to say that as the project ends and the Company starts to operate and whenever each of the plants started to operated, the depreciation has started. So that will continue, as you saw it, in the second quarter.

Okay, thank you very much.

At this time I'm showing no further questions. I would like to turn the call back over to Juan Carlos Echeverry, CEO of Ecopetrol.

Thanks to you all for participating in this conference call. I want to leave you with two messages of transition.

First, 2016 looks very different to what will happen between 2017 and 2020. This year we have -- in the last 12 months we have emphasized protecting cash and the discipline of capital. From now on, we will focus on -- having secured cash, we will focus on promoting more production and reserve provisions.

Now from 2017 onwards we'll be having more cash as the investments of the mid and downstream are reduced substantially. And then we will focus on the upstream holding (inaudible) and production, so 2020 we expect to have a lot of investment on the upstream.

And after 2020, the message we have conveyed is that we will move towards being a more balanced company between oil and gas. The discoveries we have had so far in the two streams in the Colombian Caribbean, near to Panama and near to Venezuela, show that we have a new promising province where we, so far, have found gas and probably will find also liquids. After 2020 we will have, let's say, a second transition towards a more balanced company.

So with these comments -- and finally, I'm sorry, this year we are committed to have a target of production of 750,000 barrels per day. And with these comments, we thank you for participating in the conference call and for following Ecopetrol. Thank you to you all. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.