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Executives

Ronald Pantin – CEO and Co-Founder

José Francisco Arata – President and Co-Founder

Carlos Perez – CFO

Analysts

Nathan Piper – RBC Capital Markets

Frank McGann – Bank of America Merrill Lynch

Paula Kovarsky – Itau Securities

Caio Carvalhal – JP Morgan

Diego Guzman – Ultraversatile

Marcus Sequeira – Deutsche Bank

Justin Anderson – Salman Partners

David Popowich – Macquarie

Daniel Guardiola – Larrain Vial

Sebastian Gallego – Corredores Asociados

Laura Salamanca – Helm

David Dudlyke – Dundee Capital Markets

Pedro Medeiros – Citigroup

Omar Escorcia – Asesores en Valores

Sergio Conti – Goldman Sachs

Pacific Rubiales Energy Corporation (OTCPK:PEGFF) Q3 2013 Earnings Call November 7, 2013 8:00 AM ET

Operator

Good morning. My name is Jonathan and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Pacific Rubiales Energy Third Quarter 2013 Results Conference Call. This call is scheduled for 90 minutes. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions)

This call contains forward-looking statements, which reflect the current expectations or beliefs of the company based on the information currently available to the company. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations are disclosed under the heading Risk Factors and elsewhere in the company's Annual Information Form dated March 14, 2013. Any forward-looking statement speaks only as of the date on which it is made and the company disclaims any intent or obligation to update any forward-looking statements. Thank you. Mr. Pantin, you may begin your conference.

Ronald Pantin

Good morning everyone. We are very proud to announce the new record quarter for the company. This will consolidate 2013 as the best ever year for Pacific Rubiales with around 30% growth in all the financial and operational indicators.

We have a production – a net production of 127,000, very close to 128,000 with a growth of 31%, that's over our guidance that is 30%. We also have a very strong revenue generation of $1.1 billion, 28% increase over last year, an EBITDA of $604 million that is a 27% increase over last year, with a 55% margin on total revenues.

$455 million, cash flow from operations that is also a 31% increase over last year. And record netback of $65 almost $66 per barrel, that's 4% higher than the second quarter. A reduction of diluent to $3.83 per barrel, that’s a 40% reduction on the second quarter of this year.

We also have the license, the environmental license for CPE-6 and Guama that we think is a very important step to the plans of the company to keep on increasing production for next year. And last but not least, is that Pacific Rubiales have been included in the Dow Jones Index for social responsibility.

In the next graph you can see, that Pacific Rubiales is a company that in six years we have had a compound growth of 62% on average gross field production. Right now, we are producing over 310,000 barrels per day. Our guidance was between 270 and 303. So we have overpassed the guidance for this year up to now for the nine months of 2013.

In the case of net production after royalty we are producing 128 that is higher than our guidance that went from 113 to 127 for the year.

Our net 2P reserves have grown annually 40% that we will not be commenting on the reserve for this year, but we have important discoveries and so also we have an important acquisition of the Petrominerales acquisition.

The adjusted EBITDA, we have had a compound annual growth 114% that’s very significant for the nine months of this year. We have $1.9 billion and we are projecting around $2.6 billion for this year.

Netbacks, we have the netback, you can see that we have right now 13% compound growth rate and 61.29 we have for the nine months of this year. So, we can see that the company – the company has a global management that with an E&P company with the growth largest worldwide.

On the next graph, you can see our production profile. Our production from the third quarter of 2012 to the third quarter of 2013. The production, the gross production have been increasing from 244 to 311 and our net production were 97,000 barrels in the third quarter of 2012 to 128,000 this quarter.

That is important – it’s important to mention that the company have to substitute very close to 7,000 barrels that we have been paying in the past – that the additional payment that we are doing to Ecopetrol for the resolution in the arbitration process.

We are right now re-compensating that, which is very close to 7,000 barrels and we have been able to compensate that and our net production now for the year for the nine months, is over our guidance of 30%.

The market in the third quarter, we see that the narrowing between the WTI and the Brent differentials, they went down to 384. However, we have a very good price, realization prices for the company of $103 per barrel. That was done because we changed we saw the trend that WTI was increasing, we changed our indexes toward trading from Brent to WTI.

Our cargos have gone mainly to the U.S. and Europe and also a little bit to Latin America and Asia. You can see the sales that we have had during the quarter of 11.4 million barrels and we have 1 million barrels that was left behind and that's due to the filling of which the bicentennial pipeline and also as I mentioned before, a payment of very close to 7,000 barrels to Ecopetrol.

As we have always said, cash is key for the company – sorry, okay, cash is key for the company and we have seen from the third quarter of 2012 to the third of this year, a growth in revenues, a very important growth in revenues growing from $870,000 to $1.1 billion this year.

You can also see that we have a very strong EBITDA in the first quarter. We have $695 million, but then we have had in the order of $600 million, $612 million of EBITDA.

As I mentioned before, we have let 1 million barrels that we used for the filling of the bicentennial pipeline and also for the payment of the VIP settlement with Ecopetrol. If we have sold those volumes our revenues would be over $102 billion and our EBITDA of $607 million.

I mentioned that because this is something the filling of the pipeline its operation done in the third quarter and the PAP settlement will end in the first quarter of this year.

In the case of netback, we have a record netback of $65.73 for the quarter, that's a record netback where you can see that have record prices of $103 in the year, but we also get our cost down. I have to give you some explanation.

We have reduced our cost in dilution cost significantly, as I mentioned before 40%. We increased our transportation cost and the reason for that is that, as you remember, in the second quarter, we have an agreement with Total, that remain ended and we can use that in the third quarter.

However, now in the fourth quarter on, we will have structural change because we have the OEC that entered into operation one month ago and also the additional capacity that we will bring from the acquisition in Petrominerales.

The STAR, looking beautiful. The STAR is increasing every day; it’s producing and increasing the recovery. Right now, we have more than doubled the recovery factor related to Quifa in the normal recovery factor in Quifa is less than 14% and here we have close to 30%.

We have done three independent analysis certification of STAR and also we have to receive two patents here in Colombia for the exclusive use of STAR technology for 20 years. With that, we expect to go commercial in the Quifa.

We are doing now we are reviewing – using the STAR extending that to the neighboring clusters. With that, we will have enough information to go immediately to do a commercial scale in the Quifa block.

A very important news, we received this week, that is the CPE-6 environmental license. CPE-6, as you know is a very important block. We have explored in more than around 300 square kilometers and we found oil in all of the blocks and we booked last year $44 million barrels of 2P reserves and we have prospects of $137 million for the best case of prospective resources.

Right now, we are immediately moving into the blocks. We are moving three rigs. We might be moving three more rigs. We had a delay in the permit, as you know, with more or less one more month that we were promised, but we don’t have that, we have been pre-manufacturing all facilities for water treatment and for oil treatment. So, we will be moving very quickly into the blocks.

We have one month delay with our (inaudible) but we are moving very quick to be able to test the well that I am sure we will be doing that, but also we will bring production immediately from CPE-6, that will be a very good news to the market.

Well, also in the infrastructure that we have already the assets for transportation and midstream. As you know, we have now the 5% of OCENSA and very close to 10% of Bicentenario coming from the acquisition of acquisition Petrominerales. Our plan as we mentioned before, is to monetize both assets.

In the case of OCENSA, we have some indicative offers that we will be acting immediately after closing very good offers. And in the case of Bicentenario, the 10% that come from Petrominerales, we will add it to our midstream – between our projects.

Those spinouts will be considered how we value of $1.2 billion to $1.4 billion and that is also ODL 35% of all the los Llanos around 33.3% initially from Bicentenario plus 9.65% coming from Petrominerales and (Inaudible) of 100%. The idea is to spinout around 40%. We already have some indicative offers, very good offers but it’s build across is conducted.

Let me talk about the acquisition of Petrominerales. Everything is going just fine. We have covered the - some regulatory aspects. So we think we are very optimistic that we will have the closing at the end of this month.

Remember, that this is a great acquisition for the strategic fit that we have between Pacific Rubiales and Petrominerales. We are adding new blocks going up to 76, 58 coming from the Pacific Rubiales and 18 from Petrominerales in Colombia.

And in Peru, we have five plus, Petrominerales four, that will be nine. Production we have 128, as we have mentioned for the quarter, Petrominerales increased the production to 23.

So if we add the two productions, it’s $151,000 barrels of net production after royalty. And in the case of reserves, we have 551 2P reserves. One very - the important aspect is, that’s for the year 2000 - for the production of that it would be part of the 2014. And in the case of reserves, we expect to have the report, as I mentioned by the end of this year.

One very important thing is the added value that we will have in the financing. We're projecting for next year $3.4 billion EBITDA plus 0.5 that is more or less the projection not increasing the actual production of Petrominerales that we think that we will be able to proceed immediately that plus some synergies that will give us an EBITDA for next year projection EBITDA for next year $4 billion, that is very important goal for the company.

Petrominerales it’s an excellent acquisition, as you know we have all this light oil fields and production that we'll be using as diluent with a very important cost saving in dilution as we have proven this year going from very close to $13 dilution, down to less than $4 dilution.

We will continue with reducing the dilution cost and also bring - as I mentioned before, transportation capacity in OCENSA and also in the Bicentenario that we will keep even when we plan to monetize. Some of them we will keep transportation through some agreements with the – contractors who are interested to buy these assets. And so, this is bringing a lot of synergies to the company.

We see that in Petrominerales, we will bring our exploration 23,000. We see a very important increase not only in the recent discoveries that is 8 million, but also in Rio Ariari. I would like to talk about Rio Ariari is that it is a very important block. It has an environmental license for exploration.

At Petrominerales with their 30 wells with a very good netbacks, I mean net pays 57 and 53 pit and we have now once we are waiting after closing to enter into Rio Ariari. We think that Rio Ariari will be an important heavy oil block here in Colombia and with the addition of CPE-6; we are very comfortable that the production and reserves coming from CPE-6 and Rio Ariari will more than substitute the pit.

In Peru, Petrominerales have five exploration blocks and that's very important because they had a very interesting discovery in Suecia and that we are planning to increase and to do the appraisal work and also to develop that well. José Francisco will talk more about Peru.

And the cost reduction initiatives, we have the electric line resource arriving to Rubiales and Quifa. We have already – ready to start energizing these lines in the next two weeks and that will be a huge saving on energy cost.

And remember, that in Rubiales right now, we have a power plant that consumes Rubiales Group and the cost savings will be 50%, but we also have more or less 50% of the energy in the field with more plants that use diesel oil and the saving for that is over 80%. So, we will be reducing significantly the cost of energy that is around 40% of our production cost.

As I mentioned before, we have also continued reducing the dilution cost. We have come from $13 to less than $4 and we will be reducing that to a minimum, because we will need to buy in the short-term natural gasoline that as you know is very costly.

And in transportation, we will have with the acquisition of Petrominerales; we will have additional capacity in the Bicentenario and also in OCENSA. So we will need to truck more oil to the coast that is very expensive as you know.

We saw during the second quarter a very important reduction in transportation. As I mentioned before, we’ll use that the agreement with Total. But now we have the Bicentenario that is, operated actually we have a very spent a cargo from Bicentenario for Vasconia.

And in the water disposal litigation project, it’s going well. The plantation where we have over 1500 hectares to 4,000 hectares going to over 4000 hectares next year and the plants of reverse osmosis are right now under construction. So, we are ready to have by the first quarter of next year and we will start having those reduction in cost for water resources.

Another very important news is the Puerto Bahia terminal. That's going very well. Actually, as you know, we signed IFC that from the World Bank. And we had over 56% equity now we have diluted down to 41%.

We will report on the fourth quarter a very important capital gain, because we entered as promoters of this port with a surprise that is around $0.70 and as you know, going down deal with the IFC was over 175 cents.

So, we will be reporting an important capital gain in the Puerto Bahia investment. So this is going very well. You are seeing the picture; the tanks are now under construction. You see that some tanks are ready. We have also very important, not only the IFC, but the interest of a shale where we have a contract for the use of the terminal.

And also very important contracts with Ecopetrol for use not only of the pipeline that connects going as with Puerto Bahia and the refinery, but also with the use of the terminal.

And last but not least, and then I will give it to – I will pass the presentation to José Francisco. His LNG project that LNG project is going very well. We have signed with Gazprom that is the very largest gas company in the world. A very good contract and actually is an agreement where we have a very good price based on Brent.

So it’s a project five years. It’s a 0.5 million tons per year contract. So that project is going very well. It's going on time and that we increased significantly the netbacks of our natural gas. It might be very close to double the netbacks that we have in the present.

So José Francisco is going to go through his department.

José Francisco

Thank you, Ronald. Good morning to everybody. During the third quarter the company continued with its exploration activities in Colombia, Guatemala and Peru, which included the drilling of three exploration wells and the acquisitions and interpretation of geophysical data including seismic, aeromagnetic and aero gravimetric surveys.

All three of the exploration wells in the third quarter were drilled in Colombia and resulted all in a new discovery. For the first nine months of 2013, the company has invested $447 million in exploration, consisting of $56 million in seismic, $376 million in drilling and $15 million in other geological and geophysical status.

Now regarding the three discoveries that we did in Colombia, the first one is located in the Quifa block, in the southeast prospect. The Quinchas, QFE-S-1X exploration well was drilled in the northeastern part of the Quifa block and it encountered 8.5 feet of net pay oil in the basal sand unit of the Carbonera Formation and a new discovery for this portion of the block.

Production testing of the well is currently underway. Also, we are presently acquiring a 721 square kilometers of 3D seismic in the northwestern portion of the block that will help us not only to continue the exploration, but also with the developing plan of these portion of the Quifa block.

The second exploratory well was drilled in the Cubiro block in the Llanos Basin. The Copa D-1 exploration was drilled in the Cubiro block and encountered 21 feet of net pay in the C-5 and C-3 units of the Carbonera Formation, a new discovery along the Copa trend.

As you recall, we have been drilling in these Copa trends with significant discoveries during the whole year. The well was completed with an initial production rate of 380 barrels per day of 40 API degree with a low water cut from the C-5 unit.

The well was drilled in lower Magdalena Basin in La Creciente block. The well LCI-1X exploration encountered 63 feet of net pay and tested gas from the Ciénaga de Oro Formation at the rate of 13.1 million cubic feet per day, confirming a new commercial gas discovery in this block.

An additional potential zone was Porquero Medio Formation and also this portion will be tested in the next few weeks. In the same La Creciente block, we are presently drilling the LCH-1X exploration well which just recently reached a TD at 11,200 feet and we are expected to run the wells during the following days.

In the Guama Block, also located in the Lower Magdalena Basin, the company commenced the operations to fracture, stimulate, and test potential zones in the previously announced Capure-1 exploration well that was drilled last quarter.

Now going to Brazil, the company is expecting regulatory approval from the Agencia Nacional do Petróleo Gás Natural e Biocombustíveis for the Evaluation Plan submitted as part of the ongoing appraisal of the oil discovery made in the Santos basin early this year.

The company expects this approval during November - during this month and plans to drill two wells. One exploratory and one appraisal well in the Kangaroo discovery during the second quarter of 2014.

This well as you can see in the picture is going to be one to be appraise the discovery that would be at the beginning of this year and the other one will be to test the West Kangaroo prospect located on the other side of the prospect.

And a contingent well also is planned to be drilled to appraise the Bilby discovery that it was drilled, the Bilby discovery was drilled immediately after the Kangaroo well.

Now the company and its partner will have various ongoing geophysical operations in the Quifa 56 and CPE-6 blocks in the Southern Llanos Basin also in the Caguan-5, Caguan-6, Tacacho and Terecay Blocks in the Putumayo Basin and also in the Cordillera 15 and in Muisca Blocks located both in the Cordillera Basin.

Going to Peru, as you know, we mentioned in the previous conference that information from both the well and Block 138 are currently been used to update in evaluation of the blocks of the block prospectivity and results of this technical study are expected to be concluded by the first quarter of 2014.

In the Block 116 in the Santiago Basin of northern Peru, Pacific Rubiales, which is now the new block operator, just finished the preparation of the drilling of the Fortuna 1X well and the rig is currently being mobilized and we expect to spud the well during the first days of December of this year.

In the Block 135, the company completed interpretation of the 2013 2D seismic survey and the exploration potential of this block is currently also under evaluation. In the Block Z-1, located on the offshore Tumbes Basin, the company is continuing with the processing and interpretation of 1,542 square kilometers of 3D seismic data.

Preliminary exploratory well location has been identified and will be used to support the environmental permitting process that is going to start pretty soon. Also, we will be integrating all the Petrominerales exploration activities in the blocks that Ronald previously mentioned within our portfolio of projects for the next year for the year 2014.

And finally, in Guatemala, we are presently drilling the Balam-1X exploratory well, with the Cretaceous Cobán Formation as the main exploratory objective. The total depth of this well is 12,650 feet, which we expected to be reached in December. We are presently drilling at 900 and 300 feet and we hope to be on schedule to reach TD at the beginning of December.

As you can see, we will have a good flow of news during the fourth quarter coming from the exploration drilling of the 2,000 wells that we plan to drill during the fourth quarter.

And now, I will pass the presentation to Carlos Perez, our CFO who will discuss about the financial results.

Carlos Perez

Thank you, José Francisco and good morning everyone. And while talking about a financial results, as Ronald mentioned before at the beginning of the presentation, we had revenues above $1 billion, exactly $1.1 billion. This represent an increase, an important of increase of $240 million, compared with the same period last year.

Year-to-date revenues totaled $3.0 billion, so we are approaching the growth for this year and we are expected to have very good results in the site the fourth quarter. Regarding the operating cost, they reached $422 million, production cost represented 42% of this amount, 27% went to transport and the diluent represented only 9% as Ronald mentioned before.

We are embarking these cost reduction initiatives and the diluent was one of the most important elements of that and we are now getting those savings in our financials. The remaining OpEx is related to the trading cost mainly, and we will talk later in the presentation. It is important to highlight this G&A. I think the G&A is $76 million it’s in line with the estimate and we are keeping – we are depending mainly on that G&A expenses.

Now that this represented a 1% less than last year and it is important to remark that we are a bigger company, but we are now growing in G&A. The adjusted EBITDA after deducting this cost is $612 million, representing a 55% margin - margin and the year-to-date EBITDA is $1.9 billion. So we are approaching again our goal for the – this year 2013.

Regarding the DD&A, it was $384 million; half of this amount is related to the Rubiales field. Now we are evaluating different options to make the structural changes to this as we are able to execute different option as lease and buyback figures to optimize our future capital share in Rubiales.

That is something we are evaluating and later we will have some news about this, but for sure we will have important impact on DD&A in the future.

After deducting all these other expenses detailed in the graph, most of the non-cash reached a net income of $80 million, $82 million and funds flow was $455 million represented $1.41, per share very similar level to prior quarters of this year.

The total year-to-date fund flow is $1.4 billion it’s a significant amount as well and we are meeting the goals for this year.

Looking at the detail of our revenues, as we mentioned before, the total was $1.1 billion including $41 million in trading. It's important to stress that in the trading we generated a profit of close to $150 per barrel and 11.4 million barrels were sold during the third quarter of this year, 2.2 million barrels more than the volume we sold in the third quarter of 2012, an important increase.

This happens despite the 1 million barrels Pacific Rubiales used for filling the oil field and for the payment as it was mentioned before.

Going to be the detail of the operating cost, we our crude oil sales averaged $103 per barrel, being the highest real exploration we got this year in the three quarters of this year.

The combined price was $ $97.29 per barrel and the total cost excluding the over cost and the over and under lift was $36.84, a slighter high compared with the second quarter of the same period last year and $0.28 lower than, the first quarter comparing with the second quarter this year. And $0.28 lower than the same period 2012,

The total operating netback as it was mentioned before, it represented a record for the company close to $66 and the combined was close to $63. It's important to determine as Ronald said in the fourth quarter, we are going to capture from this quarter, there are some important savings from the initial pits.

We are developing now as the power transmission power line and the OEC and now the OCENSA well is included in this scheme, because we will be able to reduce significantly the transportation cost.

Finally Pacific Rubiales continues to deliver very strong financial results as we’ve seen during the presentation, which are reflected in this key financial ratios, detailed in the table and I want to stress on updating – net debt to adjusted EBITDA is less than one we are keeping controlling on our debt.

As there was - if you have the opportunity to see the presentation with the EBITDA, we are going generate, we are expecting to keep our ratio similar to this after the Petrominerales acquisition is completed.

And the other indicators are very healthy and that brings that the company has growth for financing these growth and persuading for future opportunities. In summary, Pacific Rubiales is ready to meet the 2013 goals.

Thank you and now, I think we can open the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nathan Piper with RBC Capital Markets. Your line is open.

Nathan Piper - RBC Capital Markets

Thank you, and good morning. Given that we’ve only got one question I'll try and stick to that. So, given all the progress you are making on LNG, CPE-6, the Petrominerales acquisition and the upcoming production increases from Quifa Norte, by my reckoning you can replace the production you are going to lose from Pacific Rubiales.

So looking out to 2015, is that accurate that between those four different sources of new production you can replace the roughly 75,000 barrels a day after royalty that you're going to lose from Rubiales?

Ronald Pantin

I am sure of that and we have been planning for that. We think that Rubiales will be only around 10% of our reserve for the reserve report – at the end of this year. And that’s due to all the discoveries and also the acquisitions that we have had and the organic growth that we have in our blocks.

Now, have CPE-6 that as you know is a block that could be as important as Rubiales. But I would surprise for also Rio Ariari. Rio Ariari is something that is very important. As you have seen Petrominerales field pretty well with very good net pay and so we consider that that's something that will be able to develop very quickly.

However, you always have to say that we continue negotiations with Ecopetrol. The idea is to use – to start in the Rubiales field and I am very optimistic about that. I hope to be able to give in some news about this by the beginning of next year where we will have some sort of new agreement based on secondary report from Rubiales.

But still we are in conversations, but we think that this is a win-win situation not only for Rubiales and Ecopetrol, but also for Colombia.

Nathan Piper - RBC Capital Markets

Can I just check that, you've made a formal request to extend the Rubiales – expand your participation in Rubiales, I understand from Ecopetrol today in London that they've received a formal request from you in March this year, is that correct?

Ronald Pantin

It's not an extension, what we are doing is that, we are saying – you keep your primary production and what we will do is, when we see that there – all these wells will become with high water cost and in time or they will not be economic.

So with STAR and we have proven that in Quifa in the pilot project we will be able to revise those wells with a very low cost of capital. We have learned a lot not only from the pilot project in Quifa. So, we are very optimistic that we are going to get that. It’s a different - it will be a different contract and it’s not going to be an extension

Nathan Piper - RBC Capital Markets

That's clear. Thank you very much.

Operator

Your next question comes from Frank McGann with Bank of America. Your line is open.

Frank McGann – Bank of America

Hello, good morning. Just, thinking about sales in the fourth quarter next year, last quarter you had an inventory adjustment or an issue with sales this quarter, I mean, you got the sales related to filling the OBC pipeline as well as the PAP amounts. Just wondering how should think about sales relative to production as we look in the fourth quarter and into next year?

Ronald Pantin

Fourth quarter is going to be a very important quarter for the company. Remember that we expect to close the Petrominerales deal at the end of this month. So we will have to add for December all the production coming from Petrominerales. Also and you know that it's very good because we blended up with our heavy oil and Castilla that it has very good prices nowadays.

This quarter, I should mentioned Frank, last month we have this, we left behind from the second quarter, our 1 million barrels, but we used that for this quarter to filling the pipeline that is only one time that you will have. So we don't need to do it again.

And, we will end up the settlements of the debt with PAP with Ecopetrol in the first quarter of next year. So fourth quarter is going to be very strong. We see that our production is growing and we have to have the production of Petrominerales for one month.

Carlos Perez

I think, Ronald, Frank, the remaining amount we paid to Ecopetrol is 1.1 million barrels we are paying in December and well in the fourth quarter and January and that's soon to know about.

Frank McGann – Bank of America

And this should be about the same amount as you have in the third quarter this year and both of those two quarters?

Carlos Perez

Approximately, yes, approximately.

Frank McGann – Bank of America

Okay Thank you very much

Operator

Your next question comes from Paula Kovarsky with Itau BBA. Your line is open

Paula Kovarsky – Itau BBA

Hi guys. I just wanted to check a few things on this deal with Gazprom regarding LNG for the Caribbean. So just I mean as far as we could understand the plan is to sell the 70 counts a day which is the difference between capacity and production in La Creciente.

So, the first question is does the deal with Gazprom substitute in anyway, any other markets any of the target markets in the Caribbean? And if not what's exactly the total amount of cash sales that you guys forecast from 2015 onwards?

And also if you could perhaps give us a bit more color on what's the status of the sales agreement that you guys might have already signed or intend to sign with those clients sitting in the Caribbean? If I remember correctly, the idea was to substitute diesel for power generations.

So perhaps, you could also comment on how does that differ with the deal with gas the deal with Gazprom or the indexation to Brent? So just for us to be able to better understand what exactly this potential deal means?

Ronald Pantin

Yes Paula. What we did is we did a beauty contest between our parent company that came to - for that contract. And Gazprom had the best conditions and also the highest price. It's a very good contract. So we will be selling through Gazprom FOB and I don't know where they are going to take that natural gas. They might do it here in the Caribbean or they might sell it to other the markets.

The contract is based on the Brent. So it's a percentage of Brent and we are really very enthusiastic. We have the most important natural gas players in that beauty contest and we are very pleased with the result of that let's say building process.

Paula Kovarsky – Itau BBA

So just to make sure I got it, so Gazprom is going to be the off-taker of the entire production of BFSU, is that correct?

Ronald Pantin

Yes.

Paula Kovarsky – Itau BBA

So PRE is not going to sell directly into the Caribbean clients, is that right?

Ronald Pantin

Exactly right, that is right. Gazprom will buy 100% of – that contract will be 100% of our production and it's going to be FOB we will sell it to Gazprom and they would sell it to in the market.

Paula Kovarsky – Itau BBA

Okay, and then if I could just do a quick follow up question on sales for the coming quarter. You mentioned the importance of Petrominerales and the additional production. So, if you could perhaps help us understand how much of the production of Petrominerales you intend to sell and how much of the production goes into the idea of reducing diluent costs, just to help us forecast sales.

Ronald Pantin

We will do when we plan that, we just have in Colombia we just can’t sell, in two commercials one is Castilla and the other one is Vasconia. So we will be blending Petrominerales crude into those segregations either, in the Castilla that is a we sell Castilla, that is blending the Rubiales with light crude or either Vasconia that is also blending Rubiales and Quifa with light crude but in a higher amount.

Castilla is 18.5 BDSOP blend and Vasconia is 24 BDSOP blend. We will be playing with the margins. Sometimes it’s very good to sell Castilla and so more times it’s better to sell Vasconia and now we have the operational capacity to go one way or the other.

Paula Kovarsky – Itau BBA

Okay. Thank you.

Operator

Your next question comes from the line of Caio Carvalhal with JP Morgan. Your line is open.

Caio Carvalhal – JP Morgan

Thank you. Hi, good morning. I want to understand a little about the strategy behind the spin-off of the midstream assets. In the release, you mentioned that you expect for the short-term the sale of the 5% of the Ocensa pipeline you bought with Petrominerales. And at the same time, we see in the presentation that you plan to spin-off $1.2 billion to $1.4 billion of the remaining assets.

So, my question here is two-fold. One of them is why Ocensa is being done outside of the spin-off transaction. What is the rationale behind it? And second, how did you get this $1.2 billion, $1.4 billion estimate? Is this your own in-house assumption? Or these are based on some independent or third-party opinions? And that's it. Thank you.

Ronald Pantin

Okay, in the case of OCENSA, that’s something we have been approached by different firms and we like the numbers that we have seen, but we cannot do anything on to the closing for Petrominerales.

And the idea is to sell the equity and transportation rights, but keeping under an agreement - a long-term agreement the capacity or Pacific Rubiales use. And that's something that will happen almost immediately after closing with Petrominerales.

In the case of the remaining of assets that we have for the numbers that you have there between $1.2 billion and $1.4 billion is a total value of the assets. And that's something a number that had come from the valuations that we had done internally. And we are planning to go for a private placement for 40% of that.

It is not that we are going to be selling 100% of that. We will be 40% of that. And so suppose that is let's, say $1.2 billion, $1.4 billion so 40% of that will be able to monetize and also to keep on the special purpose vehicle that we will have for the midstream.

So the ideas I think the case of Petrominerales, we will sell immediately that 5% and as that the idea is to reduce the debt on the acquisition and we have seen very good numbers. And in the case of the midstream spin-off is mainly to add more value to our shareholders. As you know, the multiples that companies with lowest cash flow have is much better than the multiple that an E&P company have nowadays.

Caio Carvalhal – JP Morgan

Okay. Thank you.

Operator

Your next question comes from the line of Diego Guzman with Ultraversatile. Your line is open.

Diego Guzman - Ultraversatile

Good morning and thanks for taking my call. And I have two little questions, the first one just related with slide number 24 in which you talk about the exploration activity. It shows something like your forecast for the last quarter in CPE-6 was forecasting exploration.

But, I have a little doubt between that information and what you said in the press release. You said that you are expecting just one exploration for CPE-6 on the rest of this year. And the second one is about the arbitrage that Petrominerales have with ANH. Are you going to assume the possible unfavorable arbitrage with around $230 million of this process?

José Francisco

Okay, Diego. Let's start with the exploration activity in CPE-6. As we mentioned, we plan to drill six wells and we are ready to move the rigs. We are preparing all the logistic in order to achieve that. Initially, there will be three rigs, but we plan to bring more rigs in order to expedite the exploration activity. Among these six wells, there will be one exploratory well.

So, what you mention is one well versus the six wells is that the other wells are going to be appraisal wells. And in some cases we are going to do reentries of some of the wells that were previously drilled, but were not tested.

So our idea is to try to expedite testing some of the wells that we’re previously drilling and drill some appraisal wells in order to move the probable reserves that we booked previous there into the proven category and drill one exploratory well in order to test a new of the two zones that we haven't drilled yet. Regarding your other question Ronald is going to add something.

Ronald Pantin

Okay and the arbitration process between the ANH and Petrominerales it’s a matter of an interpretation for – if they start, it will applied to the blocks or to the oilfields. That is not only a problem for Petrominerales, but it’s for all the companies here in Colombia.

We think, that the interpretation of Petrominerales is advised interpretation and I think what’s going to happen and actually is happening right now, there will be some sort of a negotiation. But it's as an industry problem. It's not a Petrominerales problem.

So, if you see the contracts with ANH you will see that it says that when you reach over 5 million barrels in an oilfield, then you start paying the PAP. The interpretation, your interpretation that is one block, but in the contract that’s very clearly there is an on oilfield.

Diego Guzman - Ultraversatile

If you let me -- you told me a little bit explanation of the CPE-6 first, my first question is, you are still keeping your well around 3,000 barrels per day with that exploration campaign? Still are you keeping with your goal?

Nathan Piper - RBC Capital Markets

We are moving those targets for the first quarter next year. As Ronald mentioned, we had a delay on receiving the license and therefore with that delay, we won't be able to have that target of 3000 barrels per day by the year. But that target will move for next year for the first quarter of next year.

Diego Guzman - Ultraversatile

Okay. Thank you.

Operator

Your next question comes from the line of Marcus Sequeira with Deutsche Bank. Your line is open

Marcus Sequeira - Deutsche Bank

Thank you. Good morning. Just one question about transportation costs during the quarter. They were a bit higher than what you guys had expected back in April. I just wanted to know the reason and also if you – since the end of the quarter, if you have seen an increase in pipeline disruptions because of an attack or something like that? Thank you.

Ronald Pantin

Okay, yes, as I mentioned before, we had an agreement with Talisman and Total for the use of Ocensa. And that we had that in the part of the first quarter and the second quarter. But we didn't have it in the third quarter. So we have – due to that and we didn't have the Bicentenario pipeline ready.

We have to truck oil to the cost and that's why you have an increase in the transportation cost. However, now we have two very good things that are structural changes for the company.

One is the Bicentenario, it’s now operating and as I mentioned before, cargo from Bicentenario and that's operating normally. And also we will have additional capacity around 30,000 barrels more coming from the transaction of Petrominerales for their share in Ocensa.

So, now, in the fourth quarter we are using Bicentenario and after closing on that the end of this month, the closing of the Petrominerales, then we will have that additional capacity coming from Ocensa. So, you will see that we will not be transporting more oil using trucks to the Coast.

So that, then you will have a reduction in cost a significant reduction in cost even lower than in the second quarter of this year. Regarding the bombing of pipeline, remember we have never had a problem in Ocensa and - in the year of the Llanos OBC and Colombia and we have not ever from the beginning of this company delayed any cargos due to bombing of pipelines.

Marcus Sequeira - Deutsche Bank

Perfect. Thank you very much.

Operator

Your next question comes from Justin Anderson with Salman Partners. Your line is open.

Justin Anderson - Salman Partners

Yes, hey, guys. I just was hoping to have you speak to Quifa production in the quarter, Quifa Southwest production and they were down slightly from quarter over quarter. And also just wanted to get some guidance on those fields sort of over the next 12 months, where you see them going. And then the second question is just on the total cost of the exploration well on block 138 that was drilled in Peru?

Ronald Pantin

Okay. I will answer it on the production. Quifa is growing. Quifa is producing more than $60,000 per day now and it's growing now in north Quifa that we have seen also in Cajua is increasing production every day. And also as you know, we did, we bought the 50% of Sabanero, that is also increasing because we're using the different production techniques to get developed.

So you would see from the Quifa Southwest from the Cajua that Quifa North and from Sabanero an important increase even for next year but this year we will see some of that.

Carlos Perez

And regarding the cost of the wells Cajua as well, it was in the order of $60 million

Justin Anderson - Salman Partners

Okay I appreciate that but just on the decline or the slight in production is that anything like you are expecting that production to come back and grow from here?

Ronald Pantin

Decline in where, Justin?

Justin Anderson - Salman Partners

Oh just sorry Cajua and Quifa Southwest, production was just down a little bit from Q2.

Ronald Pantin

No, it's – well, right now, as I mentioned, it’s up. Right now, we are producing more from Quifa, it's a record production. We are over 60,000 almost 61,000 barrels at this moment, okay.

Justin Anderson - Salman Partners

Right, okay. So today you're producing that. All right that's it, thanks.

Operator

Your next question comes from the line of David Popowich with Macquarie. Your line is open.

David Popowich - Macquarie

So, I just had a question on STAR. Just referring to slide 15 in your current presentation, you say 2P reserves can now be booked at STAR I mean, is there anything really preventing you guys from booking reserves for at least part of Quifa at the end of this year? And just as a follow-up to that, I was just wondering, what recovery factors you get that in the (inaudible)

Carlos Perez

Yes, David. As you know, we have three different independent parties checking the oily plays and certifying the oily plays in the pilot area in the Quifa block. So therefore with that information we will be able by the ERN with our independent certifiers to certify these additional reserves since we have been producing more than double what it has been estimated at the recovery factor for primary.

So we will be able to add those kinds of reserves in the final area and then, we will start extrapolating for the rest of the block according to what's going to be the developing commercial plan for the application and implementation of STAR with the rest of the block.

You are going to see year-over-year, an increase in the reserves by the way we start implementing commercially starting Quifa. So therefore it’s not going to be one chunk of increase in reserves, but it’s going to be gradually a year-over-year you will start to see an increase due to secondary recovery in the Quifa field.

David Popowich - Macquarie

Alright and then, just generally speaking what is the recovery factor that the Quifa field is currently booked on?

Carlos Perez

It’s based on 14%.

David Popowich - Macquarie

Okay Thank you.

Operator

Your next question comes from the line of Daniel Guardiola with Larrain Vial. Your line is open

Daniel Guardiola - Larrain Vial

Hi guys. Thank you for the call I have a couple of questions. First of all, is regarding to STAR technology and its implementation large-scale in Quifa. I do understand you guys need to change the terms of the actual producing license. And I would like to know if you could please share with us the expected timing for the approval of this changing the term of the license?

My second question is regarding the tax rates, because during the last quarter we have seen very high implicit tax rates and I would like to know what kind of measures are you putting in place to actually reduce these high tax rates. Thank you.

Ronald Pantin

So we don't need a new license for Quifa. What we need is a change, a minor change for that. Remember that in the case of STAR, we used the same wells. We used the same facility.

So we don't have any impact on the environment. And we're using also structural to treat the gases that come from the wells. However, we need a minor change that now has allowed into the Colombia's new regulation. So it will be something that we can do probably very, very easy. Then Carlos Perez is going to answer you about the tax?

Daniel Guardiola - Larrain Vial

Sorry, do you have any expected timing regarding the changing the terms of the license?

Ronald Pantin

Let me tell you, tight now we have - addition to the pilot project it’s on neighboring wells that we have seen a reaction from STAR. And that's something that we will be doing. And then, after with Ecopetrol, we will see the final results. We will put a program for the commercial development using STAR in Quifa. And in one of the steps is just that to ask for this minor change in the Quifa Environmental License.

Carlos Perez

Regarding tax, as you know the rate in Colombia is 34% and in Ghana it’s roughly 27% where effective tax rate is higher than that and the main reason is because we have most some expense abroad are not enough – here in Colombia.

What we are doing is, now we move some of the holding companies, intermediate holding companies from Panama to Switzerland with the Super Holdco in Luxembourg in order to take advantage and to get also an additional deductible amounts.

That also something - now it is completed and the main reason is because Switzerland has an income tax treaty and now we are going to be able to deduct some expenses – spend or executed abroad. As all the interest payments we are paying in order to the bond holders are non-deductible now. For the first time, we're going to deduct in the fourth quarter some amount of that and we're expecting to include more and more items in order to reduce these effective rates in the future.

Daniel Guardiola - Larrain Vial

Okay. Thank you guys

Operator

Your next question comes from the line of Sebastian Gallego with Corredores Asociados. Your line is open.

Sebastian Gallego - Corredores Asociados

Hi, thanks for the presentation I just have one question on cost of operations. We have been seeing that costs are going higher faster than revenues and given then some of the projects - some delays especially like the water treatment. And Perez, if I am correct, when can we expect cost of operations are going to reduce the pace of growth? Thank you.

Ronald Pantin

Okay, Sebastian. As I mentioned before the power line is reaching the (Audio Gap)

Operator

Ladies and gentlemen this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Until that time, your lines will remain on music hold. Thank you for your patience.

Ronald Pantin

We will see that immediately when the reversal osmosis plants enter into operation, that we expect that in the first quarter. Hello can you hear me?

Sebastian Gallego - Corredores Asociados

Yeah, for the most part I wasn't able to hear your answer. If you could repeat, that will be great.

Carlos Perez

Sure sorry, we got disconnected and now we are using the equipment. What I mentioned is that the electric line is getting linked into Rubiales and Quifa in a couple of weeks and when we use that, when we will be using that electricity coming from hydro, we will have a saving of around 50% in the case when we use Rubiales Group and over 80% when we use diesel oil. And remember that 40% of our production cost is energy.

So we will have an important saving. And then for the water disposal, we are planning to have the reverse osmosis plant ready in the first quarter of next year and the saving will be instead of a disposal, we have right now in the order of $30 and - I am sorry with $0.30 per barrel of water that will be reduced to $0.14 per barrel of water. So we will see a very important decrease in and a structural decrease in the production cost.

Sebastian Gallego - Corredores Asociados

All right. Thank you.

Operator

Your next question comes from the line of Laura Salamanca with Helm. Your line is open.

Laura Salamanca - Helm

Hey, good morning. Thank you for the call and my questions has been answered. Thank you.

Operator

Your next question comes from the line David Dudlyke with Dundee Capital Markets. Your line is open.

David Dudlyke - Dundee Capital Markets

Hey, good morning, everyone. First on operating cost, if I may. You stated, since April, that you plan to reduce your operating cost by about – your oil operating costs by about $8 a barrel. If I look at those costs, whether we look at them on a core basis or including other and over they’ve, they haven't moved by much in aggregate, on core basis for about – they're almost static at $36.84 for the third quarter.

Ronald Pantin

David, our connection is not very good. David, sorry, our connection is not very good. We will have to call back to the conference because it's clearly not very good.

David Dudlyke - Dundee Capital Markets

Okay

Ronald Pantin

Are you still there? David? Hello?

Operator

David's line has currently dropped. Your next question comes from the line of Pedro Medeiros with Citigroup your line is open

Pedro Medeiros – Citigroup

Thanks for taking the questions. I actually have two or three quick questions. The first one is on the spin-off of Pacific infrastructure. Is it planned for that spin-off to be a secondary or a primary equity saver and depending on the profile, is that going to trigger dividends or you just expect that to improve your balance sheet position?

The second question is can you talk more about the plans for commercial scale tests or storing Quifa Southwest for 2014? Are you planning to deploy that into another cluster? Or there will be multiple clusters being developed in 2014?

And lastly, is it possible to talk a little bit about the potential size of Quifa prospect as on risk or risk basis?

Carlos Perez

Sorry because, the line is not good we cannot hear you we are trying to connect you to the mainline we had before. And in order to start again with the G&A. Okay? Okay.

Operator

Hello gentlemen, could you please hold five seconds? I'm trying to connect through the other line. Hold on please.

(Audio Gap)

Roberto Puente

Hello. This is Roberto Puente from Pacific Rubiales. Hello?

Pedro Medeiros – Citigroup

Hello I'm here. Well I could barely hear can you hear me well?

Roberto Puente

Yes I can hear you well. We got disconnected we need to hook up immediately to the conference.

Pedro Medeiros – Citigroup

Okay perfect. Should I repeat the questions then?

Ronald Pantin

Yes please. Starting from, David.

Pedro Medeiros – Citigroup

Okay, well it's Pedro Medeiros from Citigroup should I wait for David or?

Ronald Pantin

You can tell him that go ahead and then we can give David a chance. Okay?

Pedro Medeiros – Citigroup

Okay. Perfect. Well, I actually had three questions. The first one is on the spin-off planned for Pacific infrastructure. Is the plan for that going to be a secondary or a primary equity sale? And depending on that format, is there a chance that we would see increased dividend or an extraordinary dividend on the back of that sale?

Secondly, can you talk more about the plans for a commercial-scale task for storing Quifa Southwest? Is the plan to deploy another task in one cluster, or should we see multiple clusters being deployed in 2014 already?

And lastly, on exploration, can you give us a little bit more color on Quifa prospect S in terms of perhaps unrisked and risked volumes estimate?

Carlos Perez

Well, regarding the first question some clarification, but we are not going to spin-off Pacific Infrastructure. It’s Pacific Midstream Pacific is infrastructure is for now – or a part from the spin-off. But we are planning is to spin-off Pacific Midstream which has an interest in all ODL, Petroelectrica, Llanos.

And in this respect what we are planning is to have a private equity transaction - we - in the future something will be happening in two or three years, we will have the opportunity to go to the market, the capital market, but not for the time being.

Pacific infrastructure is being incorporated after completion of construction. But that is something we have to be responsible among the partners. Regarding the dividend inflow, that is something we have to present to the board. We don't have any proposal yet talking about these additional gains we are getting for this transaction and mentioned by Ronald with IFC. But that is something we have to submit it to the board for future decision.

José Francisco

On the closest for Quifa and STAR, the way that we are working that is we have some central production facilities for STAR. In those facilities, we have the tanks, the pre-water - compressors and the plants for the structural plants to treat the natural part of the gases.

So what we do is that, we have gas plant and then we have all this clusters that are around this plant and from there we send the gas into the air that we injected and we receive in this central processing facility for STAR, we receive all the crude and natural gas.

So the way that we have to develop this is centralize facilities for the compressing for retreating of oil and natural gas and then the clusters are the same clusters that we have right now in Quifa.

We don't have to re-intervene the well, what we might have to do is to drill some of holes for the monitoring of the fire plant. Regarding your exploration question about Quifa exploratory well we plan to drill an appraisal well starting at the beginning of next year.

However, keep in mind that this is a new area which is located in the same trend from Sabanero to Quifa Southwest. We haven't booked any reserves associated with this prospect previously.

And therefore, what the previous - the preliminary analysis that we are doing, we estimate that the potential reserves are related to this prospect to be in the order of 20 million barrels to 30 million barrels of oil. But we need to drill then the appraisal wells in order to complete the evaluation of the prospect.

Pedro Medeiros – Citigroup

Okay, thank you.

Operator

Your next question comes from the line of David Dudlyke with Dundee Capital Markets. Your line is open

David Dudlyke - Dundee Capital Markets

Okay, good morning, again. Let's try again. Yes, my question is regarding operating costs. You got this target of an $8 per barrel reduction in your oil operating costs. I look at the third quarter costs. And they're in the $37 per barrel range, whether I look at the core costs or include other and overlift.

Not much unchanged from that of average the full year 2012. Within that, I see you've made dramatic and substantial reductions in your diluent costs. And obviously, those have been offset by increases in production and transportation.

I then look at your slide 20 and I look at what you hoped to deliver in terms of power cost reductions and water disposal. And so, I guess my question is quite simple, it's, given the dramatic reduction in diluent costs to-date, how much further capacity is there to deliver against your $8 target, given that, on an overall basis, you're more or less in line with that of last year?

Ronald Pantin

Okay David sorry for interruption. And, yes, that when we said the format $8 was for a total cost, it was not only for production cost. We have been able to reduce significantly the cost of the dilution that as you know. And we will continue reducing that probably in the fourth quarter we'll be around less than $2 and as for the use of light crude instead of natural gasoline.

Transportation cost we will also be reducing and because now we have the Pacific coming from Petrominerales and also in Ocensa close the transportation capacity that pipeline capacity that we have in the OEC and Bicentenario Pipeline. And with that, we will not truck oil to the market to the coast anymore. So again, there we will have an important reduction in transportation cost.

And then in production, we will have in the order of $3 reduction and $3 to $4 reduction based on energy. Remember that, as I mentioned before, 40% of the energy – production cost is energy and we will have a reduction – a very important reduction, 50% of the energy that we use, we will have a saving of 50% and the other 50% we have a saving of over 80%.

And then on top of that, from next year, we will have then the water disposal cost that right now to inject water into the reservoirs. We need something like $0.30 per barrel of water and in this case, we will be using only $0.14 per barrel of water. So we think that the $8 pro forma that we mentioned we are going to achieve with no problem, but remember it's not only in the production cost, it was from the total cost.

David Dudlyke - Dundee Capital Markets

Okay, and so, you're confident of delivering against the $8 despite the creeping increased cost of dealing with water separation. So you're going to have increased water cut. And that obviously is the driver for…

Corporate Participant

Ronald Pantin

But we have an increase in water cost but we will have very important reduction in the energy and also a very important reduction in water disposal.

David Dudlyke - Dundee Capital Markets

Okay, well, just one quick follow-on question. If we're looking at Q4, specifically, rather than next year, how much of that cost reduction do you think you can recognize in the fourth quarter against the $37?

Ronald Pantin

Okay, as I mentioned, the electric line is probably the most important thing that we have that will be operational at the end of this month. And so we will have only one-third of that saving. But we will have in transportation cost, we will have an important savings, because in the fourth quarter, we have OBC almost from the very beginning and for December, we will have also the additional capacity coming from Petrominerales and Ocensa.

So, we will have that – that will be an important thing. The other thing is, we are also reducing the purchase of natural gasoline with the acquisition of Petrominerales. We have more light crude and we expect to reduce the dilution cost to less than $2 for this quarter.

David Dudlyke - Dundee Capital Markets

Great, okay. Thank you very much.

Ronald Pantin

Thank you, David.

Operator

Your next question come from the line of David Popowich with Macquarie. Your line is open.

David Popowich – Macquarie

Yes, thanks, guys. I just had a follow-up question about transportation costs. I mean, if I just do the simple math adding up your guys' various pipeline capacity, I don't see how we can get to kind of 120,000 barrels a day of transportation capacity on your pipeline. So, I'm just wondering if it's realistic to expect zero truck production in 2014.

Carlos Perez

Yeah okay we have right now in Ocensa the agreement that we have originally was 60,000 barrels with Petrominerales we are adding 30,000 barrels more and with what OBC, we have 43% more or120 so it will be around 50,000 more. So, we have around 140,000 plus transportation capacity by pipeline, that the cost is in the order of $12 compared to $20 to $25 if we use trucks.

David Popowich – Macquarie

And so the 60,000 barrels a day on Ocensa that, that is after you guys have ended the Total and Talisman deal then?

Carlos Perez

Yes that the one that we have from many years ago. We have 60,000 Ocensa, remember, that we have been transporting through Ocensa with this agreement that we have with Ocensa, we bought capacity back in 2009, I think.

David Popowich – Macquarie

Okay and then when does that agreement terminate or is that indefinite?

Carlos Perez

That's an agreement that ends in the 2016, but it can be - so we really don’t see any comment with that.

David Popowich – Macquarie

Okay, thank you.

Ronald Pantin

Probably David, we are probably, we are the only company that have extra capacity – transportation capacity by pipeline and we will be using that for trading. Since we can buy crude with a pretty good discount and then with that, we will be able to also add some value through trading.

David Popowich – Macquarie

Okay. Thanks Ronald.

Operator

Your next question comes from the line of Omar Escorcia with Asesores en Valores. Your line is open.

Omar Escorcia - Asesores en Valores

Good morning. Thank you for the call. My question is a very simple. I just would like to know what is the latest update that Ecopetrol has in the STAR project in order they can evaluate your proposal on the extension of the operation contract? Thank you.

Ronald Pantin

Ecopetrol is our partner and Quifa is our partner - and Quifa and they have all the information. I'm going to tell you more or less what we have as a group as a team Ecopetrol and us what resource we have. The most important thing is that we have more than doubled the recovery factor.

Another thing that is important is that we have been able to harness the platform. So we can move the platform. Another thing is that, we have been able to reduce the water cost in some cases to stop increasing in water costs.

We have had also some operational problem that we are solving, problem is very simple with metallurgical some work when this well – getting to a fire front as we will need to change the steel, because it’s very high temperatures.

Remember that those are the monitoring wells that we will be drilling in every clusters. So those wells would have to drill in every clusters that we will be using different type of fields. And also we had a problem with some emulsions that we are also solving that.

So you have, we have had some operational problems that we are solving or we have solved, but the most important thing are the dual results doubling the recovery factor the other thing is that we’re maneuvering the fire front, where we can split all the reservoir and the reduction in water cost and increasing in production.

Omar Escorcia - Asesores en Valores

Thank you very much.

Operator

Your next question come from the line of Sergio Conti with Goldman Sachs. Your line is open.

Sergio Conti - Goldman Sachs

Thanks Ronald, thanks José Francisco. Just - two very quick questions. The first on CPE-6 if I understand your call you mentioned that a target or reference for the beginning of the year of production in CPE-6 of 3,000 barrels per day and the initial activities in the area with three wells.

My question is what is - I don't know if you can provide at this moment, but if you can reference for the exit of 2014 of the number of production wells that you expect to have in CPE-6 by year end 2014? That's the first one.

The second one is about Peru, okay, and we've been seeing the production… Hello?

Ronald Pantin

Yes, you’ve seen in Peru.

Sergio Conti - Goldman Sachs

Okay, sure so, we've being seeing the production at Z1 pretty much stable and for the past two years since you acquired the asset. And so my question here is, how should I think about your offshore production in Peru for 2014 and 2015?

In your release you are informing that you have just filed for additional regulatory approvals and governmental approvals to start drilling in the area. So should it’s still stable for 2014 and potentially going up in 2015 onwards. How you're seeing the Peru offshore production? So these are the two questions. Thanks.

Carlos Perez

Okay let's start with CPE-6, Sergio. We cannot provide yet the guidance for the production for next year. We're still working on the developing plan of CPE-6, how many wells we're going to drill and what kind of production we're going to get. For sure, by the year end, we will come out with the guidance for the – corporate guidance for the whole production. We will have a better number on how much production we're going to expect by the exit of next year in CPE-6.

However we had a plan already that we are discussing with our partner to at least drill 20 developing wells in the area. But again, we're still discussing the budget for next year in the developing program and as soon we get the number and the guidance for next year, we will provide you with that number.

Ronald Pantin

Sergio, regarding the Z-1 Block in Peru, as you know we had a problem with the CX-15 platforms when they got there. We got some design problems that were solved. Right now, we -- from the CX-15. It's producing and increasing production. It’s over 600 barrels, but we estimate that it could go up to between 800 barrels and 1000 barrels per day.

We are right now drilling another well in Albacora and their platform we expect to have that well producing by December and we are now drilling the second well in Corvina and with CX-15. So, we expect to have by the end of this year in the order of 5,000 barrels coming from these ones.

From there, we will be drilling two wells at a time one from Albacora and one from CX-15 and the drilling campaigned will stay during the whole 2015. So we will see important increases in production in the Z-1 block. Also as you mentioned, we are also asking for some expedite permits to drill in the Piedra Redonda and also in the Delfin prospects. They are looking very good and we are looking for platforms to drill those wells with tender purchases.

Sergio Conti - Goldman Sachs

Ronald, just a follow-up, you provided - you referenced of 5,000 barrels per day you are talking about your 49% share or 100%?

Ronald Pantin

100%

Sergio Conti – Goldman Sachs

Okay. Thank you

Operator

There are no further questions at this time. Please go ahead, Mr. Pantin.

Ronald Pantin

Thank you very much. We have a seen a company that have been growing, probably the companies with largest growth internationally E&P company with the largest growth internationally.

Again this year, we are consolidating a growth of around 30% this quarter and what we have already go through the fourth quarter, consolidate the company in that kind of growth. 30% growth in all the financials, around 30% growth in all the financials and also in production for a company our size, it’s something that is very important.

Next year, we will have also all the additions that we have from the acquisition of Petrominerales, that as I mentioned before is not only what Petrominerales has and the new discoveries, but also Rio Ariari that we see that as a very important block.

Also, we have now CPE-6. So we see that the company will keep that trend of increasing growth that we have done during the years. The company is here to grow. We will be growing next year mainly on the organic growth.

We have enough blocks to concentrate on that and we have also the very aggressive adding value to the company using for example, financial, engineering, in the case of our assets, transportation assets and infrastructure assets. So the confidence really couldn’t be better on the fundamentals of the company. Thank you very much guys and thank you for your support.

Operator

This concludes today's conference call. You may now disconnect.

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