Gran Tierra Energy Inc. Q2 2009 Earnings Call Transcript

Aug.10.09 | About: Gran Tierra (GTE)

Gran Tierra Energy Inc. (NYSEMKT:GTE)

Q2 2009 Earnings Call

August 10, 2009; 10:00 am ET

Executives

Dana Coffield - President & Chief Executive Officer

Martin Eden - Chief Financial Officer

Shane O’Leary - Chief Operating Officer

Analysts

Neal Dingmann - Wunderlich Securities

David Dudlyke - Thomas Weisel Partners

Christina Lopez - Tristone Capital

Melanie van den Berge - Paradigm Capital

David Beddis - Cormark Securities

Operator

Good morning ladies and gentlemen, and welcome to the Gran Tierra Energy’s result conference call for the three and six months ended June 30, 2009. My name is Melissa and I’ll be the coordinator for today.

At this time all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session for securities, analysts and institutions. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions).

I would like to remind everyone that this conference call is being webcast and recorded today, Monday August 10, 2009, at 10 AM Eastern Day Light Time. Please be advised that in addition to historical information, certain comments made during this conference call, particularly those anticipating future financial performance, business prospect and overall operating strategies constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements might be identified by words such as anticipate, believe, estimate, expect, intent, predict and hope or similar expressions. Such statements which include estimate or forward-looking prediction and financial information or results are based on management’s current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements.

Listeners are urged to carefully review and consider the various disclosures made by Gran Tierra in its report filed with the Securities and Exchange Commission including those risks set forth in Gran Tierra Energy’s quarterly report on Form 10-Q for the quarter ended March 31, 2009, filed with Securities and Exchange Commission on May 9, 2009.

If one or more of these risks or uncertainties materialized or if the underlining assumptions prove incorrect, Gran Tierra Energy’s actual results may vary materially from those expected or projected. Listeners are urged not to place undue reliance on forward-looking statements made in today’s conference calls. Gran Tierra assumes no obligation to update those forward-looking statements other than as may be required by applicable law or regulations.

Today’s conference call also includes the non-GAAP measured funds flow from operations. The press release disseminated by Gran Tierra Energy early today includes a reconciliation of this non-GAAP item with the company’s GAAP net income loss as well as information about why management believes this material is useful in evaluating the company’s performance. All dollar amounts mentioned in today’s conference call is in the US dollars unless otherwise stated.

Finally, this earnings conference is the property of Gran Tierra Energy Inc., any copying or rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra Energy.

I will now turn the conference over to Dana Coffield, President and Chief Executive Officer of Gran Tierra. Mr. Coffield, you may go ahead.

Dana Coffield

Good morning, and thank you for joining us for Gran Tierra Energy’s second quarter 2009 results conference call. With me today is Martin Eden our Chief Financial Officer, and Shane O’Leary Gran Tierra Energy’s Chief Operating Officer.

Earlier this morning we disseminated a press release that included detailed financial information about the quarter. In addition, Gran Tierra Energy’s 2009 second quarter report on Form 10-Q for the three and six months ended June 30th, 2009, has been filed on EDGAR and will be available on our website today at www.grantierra.com.

I’m going to begin today by talking about Gran Tierra Energy’s substantial progress over the quarter, and then provide a brief overview of our plans going forward. Martin will then take a few minutes to discuss key aspects of this quarter’s financial results followed by a review of Gran Tierra Energy’s operations with Shane O’Leary. Finally, I will return with a few closing remarks.

We continue to successfully grow our production, attaining a record average production level in the second quarter of 12,611 barrels of oil per day net after royalty. This includes record levels of production in both Colombia and Argentina. Our revenue and interest grew to $58.5 million for the second quarter. Earnings were impacted by non-cash depletion, depreciation and accretion expenses of $32.7 million and foreign exchange losses of $33.7 million leading to a net loss of $28.2 million.

With that said, our ability to generate cash remains strong, with fund flow from operations for the second quarter of $36 million. Our balance sheet also remains very strong, with cash and cash equivalents of $146.5 million at June 30th, 2009 and we continue to remain debt free.

Our operations in the quarter included a combination of development and exploration activities with intend to grow our production and prepare for additional exploration and drilling activities later this year and next year to grow our reserves.

In Colombia, during the second quarter, we acquired exploration and exploitation contracts for three new blocks totaling, 235,264 acres in the Putumayo basin, for Gran Tierra Energy is one of the largest exploration landholders.

Gran Tierra Energy has a 100% working interest in these blocks, if we believe hold great potential for reserve growth for a company in the coming year. The two Piedemonte Norte Blocks are on the same geologic trend as our Costayaco field. And based on existing seismic, we have identified a number of compelling leads and prospects. We have also identified numerous leads on the new Rumiyaco Block in the central Putumayo basin.

Also during the quarter, we closed the sale of the company’s interest in the Guachiria Norte, Guachiria and Guachiria sewer blocks in Colombia. These property were sold as part of a continuous and ongoing process to high grade our portfolio of opportunities and focus our capital spending on higher impact projects within our extensive land basin.

Now, as a result of our various development activities experienced here as net after royalty production in the [frontier] grew to a 11,632 barrels of oil per day. These record levels were attained despite a disruption to Ecopetrol’s Trans Andean Pipeline between June 7th and June 20th. Which reduced our daily consolidated production to 2963 barrels of oil per day, net after royalty for 14 days.

In the current quarter, we have a gain experience and extended disruption of the pipeline that began on July 10th. Gran Tierra Energy is currently producing crude at a reduced level of approximately 600 barrels of oil per day, net after royalty in Colombia, using available trucking capacity.

Ecopetrol is working diligently to repair the Trans Andean pipeline we lay on and operate. Maintaining the operational capacity the pipeline is a top priority for both Ecopetrol and the Colombian government as they work to ensure their ability to transport Ecopetrol’s production and the production of other operators, other producers in the Putumayo basin.

In Argentina, we conducted a variety of facility upgrades and well work-overs, resulting an increase of production for the quarter to a record 939 barrels of oil per day net after royalty. In Peru, the expanded environmental impact assessments for Blocks 122 and 128 have been submitted to approving government for review and approval.

We have also begun our consultations with communities in the region all in preparation for seismic acquisition beginning early next year. Looking forward, we intend to continue development drilling in the Costayaco field to support a plateau production of 19,000 barrels of oil per day gross in the fourth quarter of 2009.

Importantly, Gran Tierra Energy is preparing to initiate a 14 well exploration and drilling campaign as scheduled beginning in the fourth quarter of 2009 and continue through 2010 with 10 exploration wells in Colombia and four exploration wells in Peru.

Now, let me turn the call over to Martin Eden to discuss the financial results. Martin?

Martin Eden

Thanks Dana and good morning. As most of you have had an opportunity to review our press release this morning, I would just like to highlight a few important items. Revenue and other income increased 77% to $58.5 million. The second quarter of 2009 compared with $33.1 million for the same period last year. This increase was the result of a 271% increase in crude oil production, partially upset by lower oil prices.

The increase in production for the second quarter was partly due to the acquisition of Solana resources. The average realized price for the quarter decreased to $50.79 per barrel from a $106.80 per barrels for the same period last year, reflecting lower taxes intermediate oil prices.

Our operating expenses increased by 138% this quarter, compared with the same period last year, we continue to see economies of scale resulting from increased production with overall operating expenses per barrel declining by 36% to $7.74 per barrel compared with $12.04 per barrel at the same period in 2008.

We continue to realize economies of scale within our general and administrative expenses. On a per barrel basis, general and administrative costs in the second quarter of 2009 decreased by 59% to $6.12 per barrel compared with $15 per barrel in the second quarter of 2008.

Depletion, depreciation and accretion expenses for the three months ended June 30th. 2009 increased to $32.7 million from $5.4 million for the same quarter in 2008, due to higher production levels as well as amortization of $24.6 million related to the fair value of property plant and equipment recorded on the acquisition and Solana resources on November 14, 2008.

On a per barrel basis, the DD&A rates has increased to $28.49 per barrel from $17.45 per barrel, reflecting the significant increase in the depleteble cost base of property plants and equipment, resulting from recording Solana assets at fair value, partially offset by an increase improved reserves.

Our foreign exchange loss of $33.7 million was recorded for the three months ended June 30th, 2009. This includes the non-cash $31.9 million unrealized foreign exchange loss resulting from the translation of a differed tax liability recognized on the purchase of Solana.

This deferred tax liability is denominated in the local currency of the Colombian foreign operations, and as a result, the foreign exchange loss has been calculated on conversion to the US dollar functional currency. The strengthening in the Colombian Peso against the US dollar results in foreign exchange losses estimates that $70,000 for each one Peso decrease in exchange rate of Colombian Pesos to one US dollar.

As a result of increased DD&A expenses and the non-cash unrealized foreign exchange loss, Gran Tierra energy recorded a net loss of $28.2 million for the second quarter of 2009 compared with a net income of $8.5 million for the same period in 2008.

Funds flow from operations was $36 million. Funds flow from operations is a non-GAAP measure based on GAAP net income or loss, adjusted for depletion, depreciation and accretion, deferred taxes, stock-based compensation, unrealized gain or loss on financial instruments and unrealized foreign exchange gains or losses. A reconciliation to net income is included in our second quarter earnings press release.

In summary, Gran Tierra Energy continues to be financially strong and fully funded, reporting cash and cash equivalence of a $146.5 million at June 30, 2009, as compared with a $176.8 million at December 31, 2008. Working capital increased to a $152.3 million at June 30, 2009, compared with a $132.8 million at December 31, 2008. The company remains debt free with an undrawn credit facility in place.

That concludes my comments. I would now like to turn the call over to Shane for an update on Gran Tierra’s operations and capital plans.

Shane P. O’Leary

Thanks Martin. Today, we have made solid progress on Gran Tierra Energy’s 2009 capital program for exploration and production development operations in Colombia, Peru and Argentina. In the Costayaco Field logging of Costayaco-8 near the end of the quarter indicated that both the Upper t sandstone of the villete formation and the Caballos formation were completely within the field’s oil column.

Subsequent to the end of the second quarter production testing of the well confirmed our findings with the Caballos interval producing oil at an average rate of 2640 barrels of oil per day and the villete t sandstone interval producing oil at an average rate of 2211 barrels of oil per day.

Costayaco-9 spotted on July 17 and the drilling operations are proceeding normally with completion expected in late August. Drilling of Costayaco-10 is scheduled to follow this year and plateau production of 19,000 barrels of oil per day gross for the Costayaco field is expected to be attained sometime in the fourth quarter of this year.

On the exploration front, we’ve completed the 2D seismic program we had planned for the Chaza Block. We plan to drill the Rio Mocoa-1 one prospect in the fourth quarter of 2009 and plan to drill the Mocoa-1 prospect in the first quarter of 2010.

In the second quarter we initiated 2D and 3D seismic programs on the Azar Block, in preparation for exploration, drilling in 2010. We’ve also initiated activities for our work overcast of Mocoa-1 in the third quarter of 2009. In the Lanos Basin, we’ve initiated a 50 square kilometer 3D seismic program on the San Pablo Block, which will replace the commitment to drill one well there this year.

We anticipate that this seismic program will allow us to better target and evaluate the perspective structures we are interested in. A 110 square kilometer 3D seismic program on the Garibay Block was acquired in the second quarter and is currently being evaluated.

In the Magdalena basin, we completed both a new 75 square kilometer seismic program over the recent Popa gas-condensate discovery, as well as a long-term production test of the Popa-2 well in the Rio Magdalena Block. The results of this work are currently under evaluation. A new compressor has been installed at the Guepaga Gas Field Magangue Block, which has forecasted average 0.8 million cubic feet of gas per day net after royalty once liquid metering is installed.

In the Catatumbo Basin of northern Colombia as a result of new mapping completed in the second quarter, the two exploration wells planned for area-B of the Catguas Block have been deferred until 2010. The drilling program will target two more perspective structures that have now been identified.

In Peru, the environmental impact assessments for blocks 122 and 128 have been submitted to the Peruvian government for review and approval, we have also begun our consultations with communities in the region. I had an opportunity to participate in some of these sessions in the field in July and I can say consultations are going very positively.

In Argentina, we conducted several successful work overs and attained a new record level of production for our Argentinean operations for the quarter. We expect to produce oil from this region at a rate of 1000 barrels of oil per day net after royalty for the balance of the year.

Gran Tierra Energy’s plan capital program for 2009 has decreased by $9 million to a $151 million for exploration and production development operations in Colombia, Peru and Argentina. This decrease is mainly due to activity deferred to 2010.

Approximately, $141 million is allocated to Colombia, with a $115 million for development drilling and associated facilities construction and approximately $26 million for and new seismic data acquisition. Approximately, $5 million is allocated to Peru for seismic operations and approximately $5 million is allocated to Argentina for production maintenance operations. We review our capital plan on an ongoing basis to focus on those projects that are material and strategic to Gran Tierra Energy.

That concludes my comments. I would now like to turn the call back over to Dana.

Dana Coffield

All right. Thank you Shane. Now, despite some challenges, Gran Tierra Energy remains on track to attain a plateau of production capability of 19,000 barrels a day gross from the Costayaco Field in the fourth quarter of 2009. Combined with our other producing assets in Colombia and Argentina, we believe Gran Tierra Energy will have a capability to attain 14,000 to 16,000 barrels a day net after royalty production this year barring interruptions to infrastructure outside of our control.

We believe we have successfully positioned ourselves to generate the cash necessary to fund future growth and to allow us to find our ongoing development and exploration program including 14 exploration wells in Colombia and Peru, beginning in late 2009 and continuing through 2010. Our balance sheet remains very strong and we expect that our cash flow and cash on hand will be more than sufficient to fully fund our capital expenditure program for the coming year.

Gran Tierra Energy has a track record of value creation through the drill business with our vast land position, extensive drilling opportunity portfolio, experienced management, on the ground operating teams and strong balance sheet, we are positioned to continue creating value through the drill business for our shareholders.

That concludes our prepared comments for this morning. We would now be pleased to answer any questions you might have. Melissa.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Neal Dingmann - Wunderlich Securities.

Neal Dingmann - Wunderlich Securities

A couple of questions; what do you see as far as ramping back the pipeline, what does that look like now, and is that just sort of temporary damage, what are we looking at today?

Dana Coffield

Yes, it is temporary, but I don’t have any specific schedule for when it will be repaired. In fact I had thought it would be repaired before this point in time. All I can say is that a comptroller is working very diligently to get it back online, but I don’t have a specific schedule.

Neal Dingmann - Wunderlich Securities

Okay, and may be I haven’t seen it yet Dana, any outline, you have now outlined kind of the exploration program for most of next year, any idea on CapEx ‘10 versus ‘09?

Dana Coffield

I don’t have a specific number for next year; we’ll do our 2010 budget in November. So, I’ll have a real number then, but I would assume our CapEx budget next year will be lower than this year, assuming no exploration success because we did have a lot of development capital this year in the Costayaco Field which we will not be seeing next year unless we make a discovery and then of course we will revise a budget accordingly.

Neal Dingmann - Wunderlich Securities

That’s I guess where I was going with that CapEx, you don’t anticipate as many or I guess as much sort of on the infrastructure and some of the cost that you incurred this year, you don’t see as many of those next year would be more just on pure exploration side.

Dana Coffield

Correct.

Neal Dingmann - Wunderlich Securities

Okay, and then just kind of a question, just wondering, it seems now you’ve matched obviously between Colombia and Peru, and even have done Argentina, obviously a pretty divers and large block, just wondering the rationale, I know in the past I have heard you comment about Brazil, wondering, what are the plans there, and I guess number two, why look there, I guess any time near term given everything you have.

Dana Coffield

We are looking new venture opportunities all the time, and that includes Colombia, Peru, Argentina and other parts of the world, although to be fair we are focusing on Latin America. If you look at the different countries in Latin America, if we were to do a new country entry, Brazil is the only one that makes sense and that it has stable regulatory environment, stable government, attractive fiscal terms and such.

Neal Dingmann - Wunderlich Securities

But it isn’t fair to say, I guess if you didn’t add anything there, you’ve got enough on your plate for the next couple of years just in Colombia and Peru alone?

Dana Coffield

Correct. Now, we are confident we can continue growing this company on our existing land base.

Neal Dingmann - Wunderlich Securities

Okay, and then wondering, just sort of cost basis, I guess here in the States, we are pretty aware of sort of what’s going on, rig costs, service cost, etc., the way they’ve come down, give us an idea. I mean you continue to see cost come down, are they stabilizing, what do you see in sort of your regions over there?

Dana Coffield

I guess I would have to say that in general, we are seeing costs coming down and availability of services increasing. It varies depending on regionally within any one country as well as country wise, but we have seen cost down by say at least 10% this year.

Neal Dingmann - Wunderlich Securities

Are you seeing improvement in the services in rigs too as well Dana?

Dana Coffield

In the availability of services in rigs, yes.

Neal Dingmann - Wunderlich Securities

What about the quality?

Dana Coffield

It’s a mix bag, some good quality, some not so good.

Operator

Your next question comes from David Dudlyke - Thomas Weisel Partners.

David Dudlyke - Thomas Weisel Partners

I would like to follow up with a question on the infrastructure in the pipeline. If you go back to February ‘08, I think since that date we’ve had three disruptions to the trends, and then of course we have that long lasting strike over the year end.

You are currently talking about 6,000 barrels a day. Is that limited in terms of your availability of trucks? Originally, at year end, you were describing an outcome whereby you foresee a trucking of about 10,000 barrels outside of the existing pipeline. I’m just wondering why you are limiting yourself to 6,000, is it just because you expect this pipeline to be reinstated in the short term?

Dana Coffield

No, normally it’s limited by truck off loading of facility, availability at Neiva.

David Dudlyke - Thomas Weisel Partners Canada

At Neiva, okay.

Dana Coffield

There are second options, but they are not economic at this time.

David Dudlyke - Thomas Weisel Partners Canada

These disruptions, as you described, it’s a temporary disruption. As I said, we’ve had three temporary disruptions, and working on the basis, but your exploration anchorage in Piedmonte area proved successful. You are going to have a lot more oil to evacuate through the Trans Andean. Do you and your board give some thought as to alternative groups? I mean you are very much beholden to that particular export, I just wonder if you’ve got any broad comments on that.

Dana Coffield

No, we are very much beholding that to that line, as is by all the other producers in Ecopetrol in the basin. So, I think it’s just going to require a control that provides enhanced maintenance and security for that pipeline to keep it open on a continuous basis in terms of building a new pipeline north to Neiva or another part of Colombia, I think for the most part that would be uneconomic proposition.

David Dudlyke - Thomas Weisel Partners

Yes, you need a lot of oil to just find that.

Dana Coffield

Yes, South into Ecuador which can be used on a short intermittent basis that’s optically viable, but if it’s required on long-term basis that maybe another option.

David Dudlyke - Thomas Weisel Partners

Okay. If I may, just moving to Peru, I just like you to clarify; you’ve got four wells in your plans for next year.

Dana Coffield

Yes.

David Dudlyke - Thomas Weisel Partners

Well, I know it in your press release they are described as, I’m presuming these are the same wells, perhaps they are not, stratographic test drilling on up to four prospects as expected to take, but are these the same wells.

Dana Coffield

Yes.

David Dudlyke - Thomas Weisel Partners

And if they are, can you perhaps define what is the stratographic test drilling as opposed to a regular exploration well?

Dana Coffield

The stratographic test well will not be used as a producer in the event that is a discovery, which is, either here nor there given that there won’t be any infrastructure at that time. So the well will be designed to run conventional logs; we’ll get a full log suite designed to test the wells, so we will get a full long test of the different reservoirs.

David Dudlyke - Thomas Weisel Partners

Okay, but it’s…

Dana Coffield

Completed as a producer.

David Dudlyke - Thomas Weisel Partners

Fair enough. Okay, and then lastly, if I may just follow up on Neal’s last point on service cost, I presume given your well program for next year, you are out there looking for an additional rig at least? Would that be correct?

Dana Coffield

In Colombia probably two additional rigs at least, and one for the Catatumbo, one for the Putumayo for the exploration drilling. And another rig for Peru of course that will be three rigs.

David Dudlyke - Thomas Weisel Partners

Okay. I guess just to clarify, what are you seeing in terms of the tenders from various players, the cost have come down for high quality rigs?

Dana Coffield

We’ve negotiated a reduced cost for our existing rig that we are using on the cost circle of drilling. We are tendering right now for the rig in the Putumayo for exploration drilling for two of the wells. But I can’t quantify any cost reductions in that regard.

Operator

And your next question come from the line Christina Lopez from Tristone Capital. Please proceed.

Christina Lopez - Tristone Capital

Good morning gentlemen, most of my questions were asked by David, but just to follow up on the rig situations. On the Chaza Block with the wells being drilled there, are you going to use the same rig that you are using in Costyaco?

Dana Coffield

No, for exploration drilling, no.

Christina Lopez - Tristone Capital

You will be bringing in a separate rig?

Dana Coffield

Yes.

Christina Lopez - Tristone Capital

And for Peru what’s your expected timing on EIA approvals?

Dana Coffield

The fourth quarter, in the fourth quarter this year sorry.

Christina Lopez - Tristone Capital

And when would you expect to have your seismic processed and then elect the locations on drilling Peru?

Dana Coffield

We’re already in the process of permitting locations based on the gravity data we have, so we’re expecting to get approval, both for the locations and the seismic in the fourth quarter.

Christina Lopez - Tristone Capital

What’s your anticipated cost per well in Peru at this point?

Dana Coffield

We expect $3.5 million per well, approximately, we haven’t actually gone up to 10, that’s our current estimate.

Christina Lopez - Tristone Capital

And that includes mobilizing the rig?

Dana Coffield

I don’t think it does, no.

Christina Lopez - Tristone Capital

Can you give any more color around the CapEx deferral and rational behind deferring some of the exploration drilling in Colombia this year?

Dana Coffield

There was no one big thing, there’s a variety of small things, one of our exploration wells we drilled was on the blocks that we sold to our Louis Energy. Two of the exploration prospects were in the Catatumbo basin, which we changed the prospects we are going to drill based on new mapping.

So we are actually going to drill two different prospects, which require new environmental permits, that environmental permit processes caused the two process to be delayed. I think those were probably the three biggest items, but it’s actually a variety of smaller things in place that as well.

Christina Lopez - Tristone Capital

Sorry, in the Catatumbo basin, the two locations, the changes in those two locations, has that been since the Q1 conference call you have changed those locations?

Dana Coffield

That’s about the time of the Q1 conference call I believe.

Christina Lopez - Tristone Capital

And what’s the rational behind the changing in the location?

Dana Coffield

We were or the previous targets were for carbonate reservoirs, because they are high kind of a risk, the carbonate reservoirs are very high or very low chances in terms of finding good porosity. We’ve identified new targets, but we’re looking at Tertiary Sandstone Reservoirs, so there’s a higher chance of success. These reservoirs are the same reservoirs that are producing in nearby fields like the [Tibu] field.

Operator

Your next question comes from Melanie Van den - Paradigm capital.

Melanie van den Berge - Paradigm Capital

Dana, I just wanted to ask about some, it looks like the exploration well at the Rio Mocoa has been deferred about a quarter, and whether or not you can talk about the general security situation whether or not about to change in Putumayo?

Dana Coffield

No, the Rio Mocoa and Magdalena are still on track for fourth quarter this year and first quarter next year. The general security environment in the Putumayo, is I would say the same, unchanged, in some areas it’s good and then along the borders it’s not good, and of course the instability along the borders is part of the problem with this recurring or extended pipeline repairs experienced by Ecopetrol. But in general, I would say the security environment remains unchanged in the area of our operations in other words, it’s reasonably good.

Melanie van den Berge - Paradigm Capital

So everything is ready to go in terms of the EIA and everything is all set up to go forward the fourth quarter drill?

Dana Coffield

Yes, well we are waiting on the permit, but it’s in process.

Operator

Your next question comes from David Dudlyke - Thomas Weisel Partners.

David Dudlyke - Thomas Weisel Partners

Just to follow up to Chritina’s question. Cost of the wells improve, I think you said 3.5 million and you said that may well at that level probably not include the mobile costs. Would I presume that that also doesn’t include testing costs or that’s just the dry well?

Dana Coffield

That would include testing.

David Dudlyke - Thomas Weisel Partners Canada

That would include, okay. Then I guess.

Dana Coffield

The estimate for the mobile was around $1 million, which is spread out between the four wells.

David Dudlyke - Thomas Weisel Partners Canada

I guess, I just need to recalibrate, because the sorts of costs for wells and that had been intimated by other players is markedly higher. Am I missing something, is it something to do with the fact that these stratographic, basically are they much smaller diameters, so you are basically using smaller casings all the way down, so you are just basically drilling them large enough to get a lock drill down?

Dana Coffield

There’s two things. One we are extraordinarily efficient, and the other is that the wells to be shallower, then most of the wells you see drilled into basin. So, looking at 2,000 to 3,000 to 4,000 foot drill depth versus 12,000 and 16,000 we are seeing in the basin.

Operator

Your next question comes from David Beddis - Cormark Securities.

David Beddis - Cormark Securities

Two quick questions for you. One, assuming repairs are completed on the pipeline, what is your productive capability today and then number two, for Martin, just quickly how long do you expect the DDN&A rates to be as high and what will they look like going forward?

Dana Coffield

Production capacity today in Colombia net after royalty would be approximately 14,000 barrels a day, but that will be changing soon though with the tying of Costayaco-8. So we are closed to that plateau production.

David Beddis - Cormark Securities

With 8?

Dana Coffield

Yes.

Martin Eden

On the question on DD&A rates, we’re expecting them to remain high as we amortize our Solana assets and our Gran Tierra assets. The thing that would reduce them is if we increase our proved reserves, but I’m not expecting a huge change over the next little while.

Operator

(Operator Instructions) Mr. Coffield there are no further question at this time, please continue.

Dana Coffield

All right, thank you. Once again I would like to thank everyone for joining us today. We look forward to sticking with you next quarter and update you on our progress. Thank you very much.

Operator

Ladies and Gentlemen this concludes the Gran Tierra Energy’s Conference Call for today. Thank you for participating, please disconnect. Have a great day.

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