Ecopetrol SA Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.30.12 | About: Ecopetrol S.A. (EC)

Ecopetrol SA (NYSE:EC)

Q3 2012 Earnings Call

October 30, 2012 4:00 pm ET

Executives

Alejandro Giraldo - Investor Relations Officer

Javier Genaro Gutierrez Pemberthy - Chief Executive Officer and President

Adriana Marcela Echeverri Gutiérrez - Chief Financial Officer, Vice President of Finance and Member of Reserves Committee

Enrique Velasquez Convers - Exploration Vice-President

Alvaro Castaneda Caro - Vice President of Transportation and Member of ECP Steering Committee

Claudia Castellanos Rodríguez - Vice President of Supply and Marketing

Analysts

Paula Kovarsky - Itaú Corretora de Valores S.A., Research Division

Gustavo Gattass - BTG Pactual S.A., Research Division

Nathan Piper - RBC Capital Markets, LLC, Research Division

Anish Kapadia - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Vicente Falanga Neto - Santander, Equity Research

Caio M. Carvalhal - JP Morgan Chase & Co, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Ecopetrol's Third Quarter 2012 Financial and Operational Results Conference Call. My name is Ian, I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd like to hand the call over to Mr. Alejandro Giraldo, Head of Investor Relations.

Alejandro Giraldo

Good afternoon, everyone, and welcome to Ecopetrol's Third Quarter 2012 Financial and Operational Results Conference Call. Before we begin, it is important to mention that the comments by Ecopetrol's senior management could include projections of the company's future performance. These projections do not constitute any commitment as to future results, nor do they take into account risks or uncertainties that could develop. As a result, Ecopetrol assumes no responsibility in the event that future results are different from the projections on the conference call.

The call will be led by Mr. Javier Gutiérrez, CEO of Ecopetrol; and also participating will be Adriana Echeverri, CFO; Hector Manosalva, Executive VP for E&P; Pedro Rosales, Executive VP for Downstream; Alvaro Castaneda, VP of Transportation and Logistics; Enrique Velásquez, VP of Exploration; and Claudia Castellanos, VP Supply and Marketing.

I would now turn the call to Mr. Gutierrez.

Javier Genaro Gutierrez Pemberthy

Thank you, Alejandro. Good afternoon, thank you all for participating in this conference call. Initially, we will present the highlights of the third quarter, followed by summary of our key financial results, as well as milestones and drivers of the business segments and internal consolidation. Then we will review the outlook for the fourth quarter of 2012. And finally, we will close our presentation with a Q&A session.

So let's start to Slide 5 to review our milestones in the third quarter. In the third quarter of 2012, Ecopetrol faced up the challenges from the operation in Colombia in the oil and gas sector. The corporate group's production, including affiliates and subsidiary companies, reached in the third quarter 743,000 barrels of oil equivalent per day, mainly due to the increase in production of Chichimene, Casabe, La Cira-Infantas and other mature fields in the middle Magdelena region, as well as our affiliate Equion and Savia Peru.

On our commercial activity, in the third quarter of 2012, we had a reduction of 3% in total sales volume, mainly due to the lower sales of natural gas from third-party royalties and have reduced availability of crude oil for exports. These were partially offset by higher export prices for crude oil. Our revenues were almost 1% higher than in the third quarter of 2011, a decrease in the net income compared to 2011 was mainly due to the onetime amortization reversion of the petroleum investment of the Chichimene field in the third quarter of 2011, amounting to COP 618 billion. If these adjustment have not taken place, the net income of the third quarter of 2011 would have decreased 9% instead of 23%. We were able to achieve important milestones in the third quarter.

In Exploration and Production, it is worth mentioning the 3 discovers, one of them in the deepwaters of the U.S. Gulf of Mexico through our affiliate, Ecopetrol America Inc. The drilling of 6 A3 exploratory wells, a successful development campaign from Equion allowing this company to increase production 24%. And finally, the 13% rise of Savia Peru's production.

Regarding our commercial activity, we highlight 2 events. First, the signing of a contract to deliver heavy crude oil to one of the many refineries in India. And second, the record exports in September, reaching 17.5 million of barrels. I also remark the upgrade of the outlook of our rating from a stable to positive made by Standard & Poor's. In our corporate social responsibility, I highlight 2 relevant achievements.

For the second year in a row, we are part of the Dow Jones Sustainability World Index, and we reached a record with the lowest index of accident frequency. As you can see, though it was a less favorable quarter, we achieved significant progress in different areas and we remain confident on accomplishing our goals in 2012.

Now I will turn the presentation to Adriana Echeverri, who will comment on the financial results.

Adriana Marcela Echeverri Gutiérrez

Thank you, Mr. Gutierrez. Good afternoon, everyone. Let's turn to Slide 7, please. As mentioned, we experienced an increase during the last 12 months in the export crude oil prices of setting the lowest sales volume in Colombia and abroad. The financial market decreased to lower sales growth and the higher operational costs. Fixed costs rose mainly due to higher maintenance activities for production, transportation and refining infrastructure, as well as larger costs linked to the management of higher water cost and sediment required to maintain the production, especially in the Castilla, Rubiales and [indiscernible].

Variable costs rose mainly due to a higher cost of hydrocarbons purchases and the higher average cost of volume sold, as a result of the addition of the transportation expenses. In the operating expenses, there was a decrease of 3.8% when compared with the third quarter of 2011. That was due mainly to lower exploration and product expenses as a result of less dry wells and lower cost of seismic studies. Consequently, operating income amounted to COP 4.9 trillion in the third quarter of this year, equivalent to an operating margin of 34.5%.

In the nonoperating results, the loss of COP 204 billion was mainly due to, first, the exchange rate lag of COP 21 billion in the third quarter of 2012 over to a profit of COP 328 billion in the third quarter of last year; and second, a provision increase for losses of a pretended self-generation electricity charge for the application contract of Cusiana, Cupiaga and Kayhonor [ph]. Those charges were partially offset by the better results of the group subsidiary under the equity method, which amounted to COP 311 billion in the third quarter of 2012 compared to COP 134 billion in the third quarter of last year.

As mentioned by Mr. Gutierrez before when compared the third quarter results of 2012 and 2011, we can observe a higher decrease in the net income, due to the effect of an amortization reversion of petroleum investments in the Chichimene field made in the third quarter of 2011, amounting to COP 618 billion. If this onetime adjustment had not taken place, net income in the third quarter of 2011 would have amounted to COP 3.6 trillion instead of COP 4.2 trillion. And the variation of the net income in the third quarter of 2012 would have been minus 9.3% instead of the minus 23% that we are observing. Accordingly, net income amounted to COP 3.2 trillion, equivalent to net margin of 23% and an EBITDA margin of 44%. The return on assets amounted to 17% and the return equity, 28%.

On the next slide, #8, we find an overview of the company's cash flow and balance sheet as of the end of September 2012. The initial cost balance was COP 9.3 trillion and cash generation and other sources added COP 14.2 trillion that funded the operation, the CapEx and the payment of the second installment of dividends to the government. The ending balance of cash and investments was COP 9.4 trillion, of which COP 2.6 trillion are earmarked for the payment of the 30 installment of ordinary dividend and COP 1.3 trillion for the extraordinary dividend, both for the government. These dividend payments were scheduled for the last quarter of 2012.

The indebtedness remained low during this period, with a 12-month debt-to-EBITDA ratio of 0.2. As previously mentioned, the positive financial ratio of Ecopetrol, as well as the upgrade in the outlook of the Republic of Colombia that the rating agency Standard & Poor's improved the outlook of Ecopetrol from stable to positive in the third quarter of 2012.

Now let's turn to the main results of the affiliate subsidiaries shown on Slide #9. Group's net income amounted to COP 3.2 trillion, EBITDA was COP 6.9 trillion, while EBITDA margin was 42%. In general terms, affiliates and subsidiaries of Ecopetrol, especially those in the E&P segment, improved their results in the third quarter of 2012. The higher net income before eliminations came from Equion with COP 203 billion and from ODL with COP 165 billion. These better results are mainly due to the strong revenues of the company.

In line with this trend, higher EBITDA before eliminations came from Equion with COP 321 billion and from Hocol with COP 222 billion. The bigger losses were reported by companies, which are still in exploration stage such as Ecopetrol America Inc. with COP 72 billion and Ecopetrol Oleo e Gas Brasil with COP 13.6 billion. Finally, Reficar recorded a negative result of COP 12 billion due to a lower refining margins during the period.

Now I turn the conference to Mr. Enrique Velasquez, who will comment about the main results of our E&P segment.

Enrique Velasquez Convers

Please let's move on to Slide 11, which summarizes the highlights of the E&P segment. Let's start with our production results. In the third quarter, the corporate group achieved a gross production, including affiliates and subsidiaries of 743,000 barrels of oil equivalent per day, a 1.6% increase compared with the same quarter of the year 2011. The growth in production between the third quarters of the year 2011 -- 2012 was led mainly by the increase of 14,000 barrels per day in Semana [ph] field, 13,000 barrels in mature fields in the middle Magdalena region and 6,000 barrels in Casabe field. It is important to mention that other companies of the group as Equion and Savia have been carrying out as [indiscernible] development campaign that increased their production in 24% and 15%, respectively.

Regarding exploration, in the third quarter of the year 2012, we reported 3 discoveries. In Embrujo-1 in the east part of Caño Sur block, the other one in the Middle Magdalena valley, both of them in Colombia and [indiscernible] in the deepwaters of the U.S. Gulf of Mexico. Also, [indiscernible], which was in evaluation in the previous quarterly report show hydrocarbon presence.

Moving on financial results of the upstream segment, revenues rose 6% due mainly to high sales price equivalent. However, the high charges of amortization and depreciation, as well as the cost of the transportation of hydrocarbons, caused a drop in the net income and the EBITDA in the third quarter of this year.

Now I will turn to Alvaro Castañeda, who will present the results of the midstream segment

Alvaro Castaneda Caro

Thank you, Enrique. Let's review our operational results. In the third quarter of 2012, third quarter volumes of crude oil 6% as a result of the lack of availability of Caño Limón and Transandino pipelines; and second, the operational failure that affected the pumping station in August, causing a stoppage of around 4 days in Ocensa.

We are fully committed with the expansion project and the development of technical solution for the 14 heavy crude oil. The construction of the Phase I of Bicentenario pipeline at the end of the third quarter reported a 59% progress. We expect to [indiscernible] field in the first half of 2015.

With regard to CENIT, progress was made in 2 objectives. Deals [ph] in the process of transferring interest in Ocensa, ODC [indiscernible] and [indiscernible]; and second in the district relative to the staffing and implementation of IT solutions.

Now let's review the financial results of the segment in the third quarter of 2012. Our revenues increased due to the higher fees and a larger volume of [indiscernible]. However, the bigger cost of investments and mining led to a reduction of the net income and the EBITDA.

With this, I will turn the presentation over to Claudia Castellanos, who will comment on downstream results, starting with refining.

Claudia Castellanos Rodríguez

Good afternoon, everyone. Let's move on to Slide 13. Both the refinery throughput and the utilization factor in Barrancabermeja refinery increased in the third quarter of 2012 compared with the same quarter of 2011, mainly due to higher mechanical reliability and non-major maintenance during the quarter. Cartagena refinery had a throughput at similar levels than in the third quarter of 2011, but utilization factor decreased due to operational restrictions in the crude unit.

Regarding margins, there was an 11% drop in the gross margin of Barrancabermeja between the third quarter of 2012 and 2011 as a consequence of higher cost of crude oil, which is referred to the escrow [ph] basket of Ecopetrol that was higher during the last quarter. This situation also affected Cartagena's gross margin, with the higher impact due to the use of the larger portion of light crude oil into its feed. Regarding the main refining projects at the end of third quarter of 2012, the modernization of Barrancabermeja refinery reached 12% progress and the utility master plan, 52%. In addition, the Cartagena refinery modernization and expansion plan reached 71% progress as follow: Detailed engineering, 97%; procurement, 92%; model fabrication, 100%; and construction, which begun in October 2011, 31%.

Let's now review the financial results, which were lower than the ones of the third quarter 2011 due mainly to the decrease in the sales price of the products in the Colombian market versus the cost of crude oil. The EBITDA of the quarter was positive COP 109 billion, with a net loss of COP 95 billion.

Now please turn to Slide 14 to review the sales and marketing results. Total sales volume decreased 3% between the third quarter 2012 and 2011, mainly due to the lower sales of natural gas. This reduction was generated by the lower availability of gas royalties given that under Decree 2100 of 2011. Some gas producers begun to commercialize directly the royalties since January 2012. Additionally, as of July this year, Ecopetrol started trading the gas royalties on behalf of ANH, without ownership right over them.

It is also important to highlight that during September, Ecopetrol reached a new record in export of 70.5 million barrels, of which 15.6 million were crude oil. The main destination of our crude oil export was the U.S. Gulf Coast. It is worth mentioning that increasing share of Far East from 6.5% to 14.3% and Central America from 3.3% to 10.3%. Regarding products, the higher volume on export was to the Caribbean. Also, deliveries of fuel oil to Far East grows from 7.6% to 17.1%, and to the East and West U.S. Coast from 7.7% to 17% between the third quarter of 2012 and 2011.

I would like to highlight the export contract with one of the most important refineries in India to a total amount of 12 million barrels of Castilla crude to be delivered in 6 shipments of 2 million barrels each. Regarding the financial result, the sales and marketing segment presented in the third quarter of 2012, a 2% drop in revenue due to lower volume sold. Operational and net results were affected by the higher cost of imported diluents and the use of the trucks to move crude and diluent.

Now I turn the presentation back to Mr. Gutierrez, who will comment on internal consolidation and corporate social responsibility.

Javier Genaro Gutierrez Pemberthy

Thank you, Claudia. Let's start to Slide 16. Let's start by the remarkable results in HSE. The accident frequency rate in the third quarter of 2012 decreased to 0.65 accidents per million working hours, a new record in Ecopetrol. This result is in line with the trend of improvement of the last years. We also reduced the number of environmental incidents due to the operational causes going from 13 in the third quarter of 2011 to 5 in the third quarter of 2012.

Regarding science and technology, during the quarter, our research institute was granted one patent in Colombia and 2 in Russia. Additionally, a start of our commitments with communities, year-to-date, Ecopetrol invested COP 104 billion in corporate social responsibility initiatives, 73% more than in the same period of 2011. Out of this amount, 48% was allocated to local competitiveness, 38% to education and culture, and 14% to citizenship and democracy.

It is worth mentioning that for second year in a row, Ecopetrol is part of the Dow Jones Sustainability World Index. The assessment was better than 2011, with improvements in all the aspects, especially in the environmental area, and our score is higher than the average for the oil and gas companies in that index.

Finally, let's review the outlook for the last quarter of 2012. Please move on Slide 18. In spite of the challenges, the company expects to fulfill the goals of 2012. In exploration, we will continue with the positive dynamic of the third quarter, and we expect to drill a total of 60 wells in 2012, including those of our subsidiaries and affiliates. Regarding production, growth will continue to be led by our fields in the Llanos and the Magdalena valley. In transportation, we will complete the expansions in 3 main systems, 10,000 additional barrels per day in Oleoducto de Colombia, 27,000 barrels per day in Ayacucho-Coveñas 16 inches line and 10,000 barrels per day in Oleoducto Transandino.

Regarding the Bicentenario pipeline, we estimate to close the year with a 75% progress and complete the transition in preparation phase of CENIT in order to begin operations in the first quarter of 2013.

In refining, by the end of the year, we plan to have a progress of more than 80% in the modernization of the Cartagena refinery and to obtain the approval of the environmental plan of the Barrancabermeja modernization project. Maintenances in 2 cracking units and one polyethylene plant are scheduled for the last quarter. With these maintenances, we will assure the operational reliability and the throughput of the Barrancabermeja refinery. About our commitment to air quality and continuing improvement in quality of fields we distribute, we are ready to be the first Latin American country in which the total delivered diesel will be very low sulfur, it means with less than 50 parts per billion as of January 1, 2013.

The fourth quarter will mark milestone in the reliability of natural gas supply because of the new operation of the Cupiaga gas plant and the gas pipeline, Cupiaga-Cusiana, which will provide 140 million cubic feet per day of new supply. Also, new compression facilities and additional production in Wahida [ph] field will be in operation. We also shall continue all efforts to improve our HSE performance, as well as the safety and reliability of our operations.

With regards to financials, note that it is required for the remainder of the year of the internal cash generation of the company will form operations, investments and dividend payments. Additionally, following the guidelines of our strategic plan, we will maintain the required return on investments.

To summarize, I want to state that Ecopetrol has the ability to adapt to the environment, and that the achievements of the third quarter, together with our strong operations, give us the confidence on reporting positive results by the end of 2012 to our approximately 500,000 shareholders.

Now I open the session to questions from our participants.

Question-and-Answer Session

Operator

[Operator Instructions]

Alejandro Giraldo

[Operator Instructions]

Operator

We have a question for you here, it's from the line of Paula Kovarsky.

Paula Kovarsky - Itaú Corretora de Valores S.A., Research Division

Let me start with 2 questions then. The first one if you could just give us a little bit more color on why production was a bit of -- is more than expected this quarter and what exactly did you guys intend to do in the fourth quarter so that the target is maintained? The number for the fourth quarter looks quite challenging. Ecopetrol will have to produce like close to 900,000 barrels a day to be able to meet the target. So what are the main sources of growth? And in the case of the third quarter, in the particular case of the Rubiales field, why such a small growth, so that's question number one. And question number two, could you comment on the cash needs and if you intend to maintain dividends at current levels of 70% or if there's any plan to reduce that?

Javier Genaro Gutierrez Pemberthy

Thank you for the questions. Initially, Enrique Velasquez is going to comment in relation with the production.

Enrique Velasquez Convers

Paula, let me summarize which initiatives we are going to complete in the last quarter in order to increase production. Let's start for Castilla. In Castilla, we expect to increase around 9,000 barrels. And basically, we will carry out beginning wells in order to reach the Q1 formation, as well as to improve the facilities in that field. In Chichimene field, we expect to increase production around 13,000 barrels. And basically, the plan is to build new wells, as well as to put in place some facilities. In Rubiales, you're right, the increase looks not as high as we expected. But basically it's because, as you know, the license that we got is only for 500,000 barrels, and we filed the papers for 1 million, so we expect to increase just around 5,000 barrels. In oil fields mainly located in the Medio Magdalena region to Cassava, Gianito [ph] and others, we expect to increase 13,000 barrels per day. On the other hand, in gas, we expect to increase in Cupiagua an equivalent production of 23,000 -- 24,000 barrels per day, basically planning to start up plant in Cupiagua. In Guajira, we expect to increase an equivalent of 10,000 barrels per day and the plan is to put in production or put in working the new compression project. So basically, that I can tell you what kind of initiatives we expect to put in place.

Javier Genaro Gutierrez Pemberthy

Paula, in line with the figures that are presented by Enrique, we are confident to achieve the goal that we established for the annual average as we presented in the last quarter, considering those numbers that are presented by Enrique. In relation with the cash, I'm going to ask Adriana to answer the question. But let me, first, to present a comment in relation with the dividend policy. Maybe it's important to remember that in accordance to what is called the manifesto of the statement of the -- our -- of the government as the larger shareholder of the company, and which is established in the code of commerce, of Colombian Code of Commerce and considering that we have covered our obligations in terms of the capital of the company, the management, including the Board of Directors, have the obligation to present a proposal to distribute at least 70%, that is a number that we have been considering in our projection. But it would be necessary the administration could present to the general assembly the possibility to reduce the distribution. But up to now, we haven't considered that necessity to present that kind of request to our assembly. But if it would be necessary in the future, it would be a possibility to present. But up to now, basically, we have been active in accordance to that regulation, and that applies to the company. Adriana Echeverri, our Financial Vice President, is going to comment in terms of the cash needs. Adriana, please.

Adriana Marcela Echeverri Gutiérrez

As Mr. Gutierrez mentioned, in terms of our projections, we keep an eye on the dividend policy, which is 70% for each one of the years. Now taking into account that we have no more requirement in terms of cash given the strong cash generation of the company. What we try to do is to keep the mix of the product to have strong cash generation through the different quarters of the year. For this year, 2012, we are envisioning that we do not have any cash need for finishing the year because the cash generation is going to be enough to supply funds for not only the operations but also for CapEx and also the dividends that are still pending to be paid to the national government. So we have no indebtedness operations for this year at least. As far -- if we take into account the budget for year 2013, it has not been approved yet by the BoD. We do not yet -- we do not know yet exactly what the cash needs are going to be for year 2013.

Paula Kovarsky - Itaú Corretora de Valores S.A., Research Division

Okay, just a quick follow-up on the production question. Is there -- you mentioned Rubiales is only 5,000 barrels a day. And then Quaff, is there an expectation for Quaff to contribute as well?

Enrique Velasquez Convers

Yes, Paula, the Rubiales, 5,000, and Quaff Ecopetrol net working interest will remain with 24,000 barrels per day flat for the rest of the year.

Operator

We have another question for you. This one's from the line of Gustavo Gattass.

Gustavo Gattass - BTG Pactual S.A., Research Division

I had 2 questions here. Actually, I had a lot more, but I'll come back in the future if we can. The first thing I needed -- actually wanted to check with you guys was if you could give us any update on your in situ combustion testing at Chichimene? My impression is that it has been happening or being tried for a little while, and we haven't really heard anything on it. I was wondering if you could share some thoughts on that. And my second question, I just wanted to understand a little bit about your lifting costs. You did make a point that you are seeing higher water cuts and you did make a point that you are seeing higher transportation costs with regards to the trucks. But is there any component of the lifting cost that we're seeing right now that you think are to be offset and are going to be lowered? Those would be the 2. If I could just put in a very short one for 2013, I just want to check when we might get a production guidance for 2013 from you?

Javier Genaro Gutierrez Pemberthy

Gustavo, Enrique is going to comment in relation with the in situ combustion project in Chichimene.

Enrique Velasquez Convers

Hi, Gustavo. Let me update you about how the pilot in Chichimene is going on. Basically, the feasibility stage has been completed. That means that we carry out a lab test as well as active [ph], which is rapid temperature distillation program. We build a [indiscernible] model. We are working in the basic engineering. We started with the [indiscernible] processing. And we expect to start the detail engineering. Let's put in context the time line for this. We started the year -- we expect to complete it by the year 2014.

Javier Genaro Gutierrez Pemberthy

Gustavo, Adriana is going to refer to the lifting cost. But first, I would like to preside that we still don't have estimation for the 2013 production. We're going to consider the approval of the budget, the Board of Directors in the next November. Adriana, please.

Adriana Marcela Echeverri Gutiérrez

Yes. Gustavo, in terms of the cost, we take into account the variation the last year. The main portion for that comes from diluent, but remember that we are increasing our production of heavy crude oil. So that implies that we have to use more diluent for transportation of this product. That's the first part. 464,000 -- COP 464 million is the cost in the last year for that diluent. The second term, we have also these water treatment costs that you mentioned. And we have that particular situation for Castilla and Chichimene, which are directly operated by Ecopetrol, but we also have that for the Rubiales field. And those treatment costs of water are going to stay as we are increasing production in those fields. However, which one is the one that we are expecting to be lower? Bunker truck. As long as transportation systems are available and become more available in terms of different situations that are affecting them -- have affected them, we expect that those bunker truck of transportation be reduced. But in terms of diluent, water treatment, maintenance and so on, the ones that I already mentioned, those ones are to stay as long as we have now analyzed.

Operator

And we have another question for you. This one is from the line of Nathan Piper.

Nathan Piper - RBC Capital Markets, LLC, Research Division

And I guess I want to talk about the elephant in the living room. And the approval process in Colombia continues to stop production progress both on Castilla, Rubiales and many other projects. I wonder if you could give us a bit of color around how the approval process might change over the next 6 months? And indeed what influence Ecopetrol has in speeding up the approval process in Colombia so that the industry can continue to grow production?

Javier Genaro Gutierrez Pemberthy

Nathan, I think what is important to mention is that the environmental licenses process has been improved. And what is important to understand is that during the last year, we have like a kind of transformation process, maybe it's important to remember that a new state agency was created for the approval and development of the environmental process. It was the national authority for the environmental licensing. But additionally, it is important also to remember that the previous Minister of Household, Territory and Environment was split. And right now, the new environmental and territory minister, of which the national authority is part of, are under the process of consolidating and strengthening. But the licensing process has been improved, and practically we are not suffering any lates right now in terms of the approvals of the environmental. But what is important to mention that now we are submitted to a more rigorous process considering that the social aspect have been acquiring more importance and more relevance in terms of the communities. And the socialization process and the need in terms of the participation of the communities also is going to imply maybe additional times for the approval process. But what we have been observing during the last months is a continued improvement in terms of the process. And additionally, the government is also developing several activities to strengthening the national authority and to guarantee efficient process for the future. And additionally, we are -- we, as a company, have been more strict in terms of how we would develop the stories, how we develop the socialization process. And additionally, being more rigorous in terms of the fulfillment of all the requirements of the process. And considering we have some part, really, what we can consider -- opinion that we have right now is that the process is under improvement.

Nathan Piper - RBC Capital Markets, LLC, Research Division

Okay. I mean, obviously, due process is very important in any country. But specifically, on the Castilla and Rubiales fields which are important for your production growth targets, will -- what's your expectation on getting the appropriate approvals to allow you to install water handling? And how long, once you get the approvals, will it take to actually build the water handling facilities that'll allow you to increase production? Because clearly you're having to manage your well stock currently.

Javier Genaro Gutierrez Pemberthy

In terms of the modification of the environmental program, we are expecting that the approval of the National Environmental Authority is going to be at the end of November, the beginning of December.

Operator

And we have another question for you. This one is from the line of Anish Kapadia.

Anish Kapadia - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I had 2 questions, one on reserves and then just wanted to follow-up on a few more things on production. On the reserve side of things, I was wondering, do you think you'll be able to achieve 100% reserve replacement or more in 2012 given what seems like a relative lack of exploration success? And how much do you potentially think you can book from CPO-9 and Caño Sur? And just related to that, what is the timing for the CPO-9 test? And on the production side, I'm still struggling to see how you'll get to an average of 780,000 barrels a day. It looks like you'll meet -- or you'll need at least 850,000 barrels a day in the fourth quarter. I can see that -- I can see how you split out the growth, but it seems like there's still going to be risks from Castilla, Chichimene and Rubiales and other fields in terms of getting to that great target. So just trying to see why you're so confident that you'll get to that growth target, and if you still remain confident in your longer-term targets given the problems that you have this year?

Javier Genaro Gutierrez Pemberthy

Anish, Enrique is going to take the answer to the reserves, please.

Enrique Velasquez Convers

Anish, regarding your first question, reserves. We are pretty confident to achieve the -- our high [ph] 100% based on the current production in the field, mainly Castilla and Chichimene. Let's put it this way. Let's say that CPO-9 and Caño Sur commercialities will we -- I mean, in place next year more than the lack of success in exploration. In that sense, regarding your question, the answer is yes. We will achieve the 100% replacement rate.

Javier Genaro Gutierrez Pemberthy

We have mentioned we are confident of our guidance of 780,000 barrels of average production for 2012 if you consider the numbers to which Enrique referred, the increase of our production in several of the fields. But I would like to emphasize in the case of the Cupiagua is a new gas production plant with an initial capacity of 140 million cubic feet per day that represents around 24,000 barrels of oil equivalent per day. If you consider all these numbers and our projected increments in the rest of the fields, we are confident of the guidance of 780,000 barrels for the year.

Anish Kapadia - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. Could I just follow up on that. In terms of the production price at Castilla, Chichimene and Rubiales, where do you see each of those fields peaking out in terms of production and when?

Enrique Velasquez Convers

Okay, Anish. Expected production for Castilla, by the end of the year, is around 126,000 barrels per day. And basically, we'll achieve this number in some wells, I mean, reaching the K1 plus facilities. Chichimene, we expect to finish the year producing around 60,000 barrels of oil per day, basically with new wells and facilities. Rubiales is the one in which we got license approval for 500,000 barrels per day -- or no, actually, it's 400,000, excuse me, and we expect 1 million is the one in which you can notice the increase is not as high as expected and is 110,000 barrels per day. On the other hand, Quifa will produce 25,000 barrels per day, flat, for the rest of the year.

Operator

We have another question for you. This one is from the line of Christian Audi.

Vicente Falanga Neto - Santander, Equity Research

It's actually Vicente. You guys mentioned that your operations were interrupted for 4 to 5 days during the quarter. What happened there exactly, and how much did it affect in terms of barrels of oil per day in your average production? And then second question is a follow-up of a previous question made here. You mentioned that you expect to reduce your trucking cost. Do you guys have an estimate of how much would that be in terms of dollars per barrel?

Javier Genaro Gutierrez Pemberthy

Okay. Yes, we have an interruption at the Osensa Pisgah [ph], and it has a large impact. You consider that the current capacity that we are transporting in Osensa is around 600,000 barrels per day. And due to the problem in the [indiscernible], the facility was out of the operation by 5 days, 5 days. It means that during those days, we have shortage of around 80,000 barrels per day really, where it impacts the Ecopetrol production. But in terms of the quarter, it was 7,000 barrels per day in terms of the quarter. And in terms of the periods from January to September, it represents 2,600 for the quarter --

Adriana Marcela Echeverri Gutiérrez

7,000.

Javier Genaro Gutierrez Pemberthy

7,000, okay, for the quarter, yes. But up-to-date, it represents 2,600 barrels per day average. We consider the period from January to September. Adriana is going to refer to the trucking cost. Please, Adriana.

Adriana Marcela Echeverri Gutiérrez

Yes, Christian (sic) [Vicente] as I already mentioned in the previous question, we do not have an estimation since trucking costs increased. So it will depend on the availability of transportation systems. So the more available are Osensa , Caño de Moncoeña . In those systems where we have low transportation costs, the lower transportation cost we will have on trucking. So really, in this last quarter, we had several different impacts for different operational and some other causes that led us to have that high cost. However, I have to mention but that is not a normal behavior of that type of trucking cost, et cetera. So if nothing happens, the trucking cost in that transportation cost that we have had with the still high increase in this last quarter should not remain if the systems are available.

Operator

We have another question for you. This one is from the line of Caio Carvalhal.

Caio M. Carvalhal - JP Morgan Chase & Co, Research Division

I think most of the topics were already addressed. I just wanted a quick update on it, first to the security issue in Colombia. We -- I mean, correct me if I'm wrong, but I believe we already proceeded some improvement in the third Q, in terms of pipeline disruption, in terms of days of pipeline disruptions we had in the third Q. We saw some improvement in relation to the second Q, however, not as good as we have been seeing since 2006 or '07. My question is the indication you have so far for the fourth Q in relation to an improvement on the third Q numbers, or do you believe that -- I mean, we know we just had October, but if you could just give us some color to what this number you've seen [indiscernible] post the analysis? And also what are your perspectives? We understand that the peace talks that are happening Oslo [ph] are expect to last at least 1 year. I mean is there any type of a cease-fire or any type of suggestion of a release in disruptions during this year? Or do you expect the promise you made until the close of the negotiation?

Javier Genaro Gutierrez Pemberthy

Caio, the question, we lost your question. Can you repeat the question? We followed the part on the attacks, but we missed the last part. Please repeat.

Caio M. Carvalhal - JP Morgan Chase & Co, Research Division

Yes, I'm sorry for that. I think the connection was bad. I want an update, we understand third Q showed some improvement in relation to the second Q. I want to know but October, what is the indication for the fourth quarter if you're going to see something similar to the third quarter or even better than that? And what are the expectations for the situation until we have some conclusion of the peace talks that is starting also? I understand it's expected to last at least 1 year. So what we could expect from now on?

Javier Genaro Gutierrez Pemberthy

Okay, 2 parts. The first part, what I want to mention is that you can observe is that we have been improved in terms of the delayed production. And if you observe during the first month, we were presented a loss in production of around 10,000, 12,000 barrels per day, but the situation has improved due to the old strategies and all the world that we have developing with the authorities. And also, due to the reduction in terms of the recuperation time but also in terms of the technology and with the authorities and so on with the social activities. And in that sense, during the last quarter, the impact of the tax in terms of the production was only around 3,000 barrels per day. It means our strategies in conjunction with the works with the different authorities and the different co-relatives have resulted in a lower lost production due to the attacks to the infrastructure. On the other side, yes, in terms of the peace negotiation process, what is important to mention, there is a certain way that the government has established. The process even continue during the war. And clearly, the army in Colombia, their military forces, continue with its pressure to the guerillas, yes. And we can assure, we are not -- it is going to have an impact, a reduction or increase in terms of the attacks to the infrastructure. But really, what I can confirm is that we continue working very hard with the authorities and the severance related with this process to continue improving in terms of the lost production. Really, we can't make any commitment or any committing terms of the impact of the peace process. And maybe in that sense, we can maybe refer to the official statements that are established by the President Santos and the official in terms of the problem.

Operator

There's no further questions, so I'll hand it back to the speakers for closing remarks.

Alejandro Giraldo

Okay, well, thank you all for your participation. And for additional questions, you can contact us at Investor Relations, and good afternoon. Bye.

Operator

Ladies and gentlemen, that concludes your call. You may now disconnect. Thank you for joining us, and enjoy the rest of your day.

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