Earnings Call Transcript - EC Q1 2021

Operator, Operator

Good morning. My name is Sylvia and I will be your operator for today. Welcome to the Ecopetrol's Earnings Conference Call in which we will discuss the main financial and operations results for the First Quarter 2021. All lines have been muted. There will be a Q&A session at the end of the presentation. Before we begin, it is important to mention that the comments in this call by Ecopetrol's senior management 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 materialize. As a result, Ecopetrol assumes no responsibility in the event that future results are different from the projections shared in this conference call. The call will be led by Mr. Felipe Bayón, CEO of Ecopetrol; Alberto Consuegra, COO; and Jaime Caballero, CFO. Thank you for your attention. Mr. Bayón, you may begin your conference.

Felipe Bayón, CEO

Good morning, everyone, and welcome to our First Quarter 2021 Results Conference Call. I am pleased to share with you an outstanding set of results for the Ecopetrol Group, which demonstrate the strength of our integrated business and our ability to generate value throughout market cycles. After more than a year since the COVID-19 pandemic began, we continue to operate under challenging conditions and very strict biosafety protocols while ensuring the continuity of our operations and the well-being of our employees as our top priority. This year, Ecopetrol is celebrating its first 70 years, and the results for the first quarter provide us with a very strong beginning. The Ecopetrol Group generated the best financial figures for our first quarter since the year 2016 with a consolidated revenue of COP 17.2 trillion, an EBITDA of COP 8.2 trillion and an EBITDA margin of 48% and a net income of COP 3.1 trillion. The EBITDA for the quarter was half the EBITDA for the full year 2020, and the net income was 1.8 times the net income of the 12 months of last year. These financial results were achieved even in the midst of operating conditions that will continue to affect production levels. Alberto Consuegra, Chief Operating Officer, will expand on this later. As relevant milestones of the quarter, I want to highlight the following: first, the strengthening of the realization price for the crude export basket by 43% compared to the first quarter of 2020, evidencing our successful commercial strategy; second, the advance of our gas strategy with a production increase of 12% compared to the first quarter of 2020; third, the positive performance of our refineries with an integrated margin per barrel achieving double digits; and fourth, the announcement of our net zero carbon emissions targets for 2050 whose details I will further comment. On other matters, we highlight a successful General Shareholders Meeting in a fully virtual setting for the second time, where a dividend of COP 17 per share was approved equivalent to COP 0.7 trillion, ratifying our ability to generate profits even in very difficult conditions. We began to work in the due diligence process for the ISA acquisition and established a special committee of the Board of Directors of Ecopetrol to assess the valuation and the price of that potential transaction. In the Ecopetrol Group, we continue to learn from crisis and to overcome them in an agile, safe and efficient manner. Although there are still some risks constantly monitored, the results presented today prove that we are moving in the right track. Ecopetrol is committed to mitigate climate change. Thus, seeking to advance on the energy transition and our TESG agenda. We became the first oil and gas company in Latin America to commit to a net zero carbon emission target by 2050 for emissions in scope 1 and 2, ratifying our commitment with both the sustainable development goals and the Paris Agreement. According to our decarbonization plan by 2030, Ecopetrol seeks to reduce its CO2 emissions by 25% in scopes 1 and 2 compared to the 2019 baseline. This reduction represents between 5 million and 6 million tons equivalent of CO2 less by the year 2030, equivalent to the restoration of an area 13 times the size of a city like Bogotá in Colombia. In addition, Ecopetrol seeks to reduce 50% of its total emissions in scopes 1, 2, and 3 by 2050 compared to the 2019 baseline. Mature technologies that are currently available as well as emerging technologies were considered when setting the targets. In the short and medium term, that is 2025 and 2030, respectively, we will focus on the maturation of solar, wind and geothermal energy projects, as well as energy efficiency, reduction of routine flaring in our operations and methane emissions reduction projects. This will be complemented by a natural climate solutions portfolio under the highest standards. By 2050, we plan to develop initiatives that might include hydrogen, carbon capture use and sequestration and energy storage through batteries, ensuring both the competitiveness and value potential generation of each of these alternatives. It is important to emphasize that in the 2021, 2023 business plan, we have included already more than $600 million of investments for the decarbonization agenda, mainly testing to fund renewable energy projects as well as energy efficiency and fuels quality projects, amongst others. The short and long term initiatives and technologies included in this roadmap will always be evaluated and implemented under strict capital discipline criteria, an essential pillar of our corporate strategy.

Alberto Consuegra, COO

Thank you, Felipe. In line with your remarks, most of the operational results in the first quarter continued to show a positive trend in the recovery of the activities towards pre-pandemic levels. Regarding exploration, in 2021, the exploratory campaign kicked off with the success of Flamencos 2 and El Niño 1, two of the wells drilled in 2020. During this quarter, we completed the drilling of five wells, the LIRIA YW-12 and the Boranda Sur-2 wells are in the evaluation phase. The ESTR SN-8 well allowed further knowledge of the blocks geology. The Boranda South-1 well was sealed and abandoned since it did not reach the geological target due to technical problems, and the Moyote-1 well in the Gulf of Mexico was declared a dry hole. In Brazil, we continue to make progress in commercial viability studies and other deliverables as part of the defining phase of the development plan for the Gato do Mato discovery in the Brazilian Pre Salt. Finally, production from the exploration activity reached an average volume of 5,309 barrels of oil equivalent per day, representing an increase of 39% compared to the volume registered in the same period of the previous year. During the first three months of the year, the Ecopetrol Group's production was 675,700 barrels of oil equivalent per day. Compared to the same period of the previous year, production decreased 8.1% and 2.7% compared to the fourth quarter of 2020. In the first quarter, the good results in the Piedemonte gas assets and in the mid-Magdalena oil assets stand out. However, during this period, production was affected due to operational restrictions in the Castilla field, increasing BSW, basic sediment and water, in heavy oilfields as a consequence of the activity deceleration during 2020, divestments in Peru, and operational and public order issues. Given these impacts, we estimate the production range for the year between 690,000 and 700,000 of oil equivalent per day, and we maintain a plan that aims to resume the growth path towards the production volumes goal announced for 2021. Despite lower production volumes, EBITDA for the upstream segment in the first quarter was COP 5 trillion, which is 80% of the total EBITDA generated in 2020. The gas and LPG business had a combined EBITDA margin of 53% and contributed about 11% of the EBITDA of the upstream segment. Gas and LPG production had a 12% increase compared to the same period of the previous year, mainly due to the higher production of Piedemonte, Permian, and the strong results derived from the acquisition of Chevron's participation in the Guajira asset by Hocol. Gas and LPG production corresponded to 23% of the business group's production during the quarter. We are moving along in the design of our hydrogen strategy based on five fronts: pilots, regulation and public policy, suppliers analysis, third-party commercialization, and the groups and country's roadmaps.

Jaime Caballero, CFO

Many thanks, Alberto. The net profit of COP 3.1 trillion in the first quarter reflects the interventions carried out during the crisis and the company's ability to capture marked improvement in market conditions and in a challenging operating environment. The increase in net income compared to the first quarter of 2020 is primarily explained by higher EBITDA of COP 2.9 trillion as a result of the following factors: first, improved prices had a greater impact of the exchange rate of income and purchases of about COP 1.7 trillion; second, a positive variation in inventory valuations of nearly COP 1.3 trillion, as a result of better market prices for crude oil and products; third, a lower cost of operational activity for COP 356 billion, which includes rescheduling of activities and realized efficiencies; fourth, a decrease in labor costs and expenses of COP 39 billion, mainly related to the lower average personnel given the voluntary retirement plan of the previous year; fifth, a negative volumetric net effect of COP 257 billion, explained by lower production; sixth, higher exploration expenses of COP 130 billion mainly due to the recognition of the Moyote dry well in Mexico during February; and lastly, lower income from transportation services and others of COP 58 billion associated with the decrease in the country's production. The quarter includes the impact of three non-operational factors, an increase of COP 0.4 trillion in items such as depreciation, financial expense, and FX expense. The latter is mainly explained by the higher net liability position in dollars; a higher income tax provision of COP 0.9 trillion; and a non-recurring positive effect of COP 0.4 trillion, resulting from exchange rate adjustments due to the sale of Savia Peru. When adjusting the result for this nonrecurring event, net of taxes, the profit for the quarter stands at COP 2.8 trillion. Relative to the fourth quarter of 2020, the increase in net income is primarily explained by an additional COP 3.9 trillion in EBITDA derived from the improved margin performance and increased inventory valuation previously explained.

Ricardo de Rezende, Analyst

Hi. Good afternoon, Felipe and Alberto. Jaime, thanks for taking my question. A couple of questions on my side. The first one is a follow-up on something that you discussed on the conference call in Spanish. So looking at the ISA transaction and cash flow that should be a lot stronger than what you were expecting with Brent at $45. How does that change the funding for that transaction? Would you use all of the excess cash to help on funding the transaction? And if you had to choose, would you reduce the debt issuance or the equity issuance part of the transaction? And then the second thing is on the production on Castilla. Just a question that we had was when you look at your new guidance for the year, total production, you also mentioned on the conference call in Spanish that May, it's a very important month that could be - there could be some delays on the works that you're doing in the Castilla region. So how relevant that could be if we see, for example, a delay from May to June, how could that impact your production for the year? Thank you.

Felipe Bayón, CEO

Ricardo. Good morning, and thanks for being here today, and fully appreciate that you're both in the Spanish and in the English conference call. Really appreciate following Ecopetrol. And before we go into the detail about the questions, I want to provide some context to everyone on the call. And I think the first thing is that as has been reported, I think these are very good results for Ecopetrol in 1Q for the year in the middle of still trying circumstances. And I want to highlight two things. One, we're not out of the COVID-19 crisis and pandemic. We have the third wave currently with us in Colombia with the ICU occupation levels at very, very high numbers. And in addition to that, as I'm sure you've been following for the last eight days or a week, the country has been immersed in some social protest difficulties. So we're working with the government, with the Ministry of Mines and Energy, in ensuring that we can, as a country, provide the food, the medicine supply, and the medical supplies, as well as the fuels and gasoline and diesel to the people that require it across the country. So I just want to start it there. And the second thing is I want to acknowledge all of our employees at the group level that have been working since last year, since we went to work remotely, supporting our operations in terms of being at the fields, being at all of our transportation systems for both crudes and products, at our refineries, at our ports everywhere. So big, big kudos to them and a big thank you. And in terms of ISA, which I know it's been one of the questions, and you raising it, Ricardo. Just want to mention a couple of things. And the first thing is that in terms of the potential acquisition of a controlling stake in ISA that we've announced in January, and as I've mentioned previously, we're both doing - doing both the due diligence process, and we are negotiating the terms of a potential transaction in terms of that potential contract that we've described before. And both these activities are on track. So I think that's the first thing. And as you know, Ricardo, and everyone on the call, since both Ecopetrol and ISA are publicly listed companies, you will understand that I and we cannot share details until such processes are finished. So I think that's a very important point that I want to just put out there. In terms of sources of funding of the acquisition, I can confirm that the company continues to assess different sources. We are continuing to look at different sources, and we have different potential sources of funding for the transaction such as debt, cash and equity. The mix of those sources is not defined yet and will depend largely on the final terms of the transaction, market conditions, and our cash position. And the other thing that in terms of one of those potential sources, the equity issuance, you'll need to understand that I will not be able to comment on any specifics around the structure, the conditions, and the timings of that transaction as we have to comply with regulations that are both applicable or applicable in both - or in the markets where we trade our shares. Information on these fronts will be made available to all of you and the markets through our relevant information channels. So with that, I want to take the question around ISA. And I just wanted to upfront share with you our views on where we are in terms of process and some of the sharing of information. In terms of Castilla, and I will ask Alberto to provide a bit more detail, we've mentioned that we had some issues in Castilla. And I think - and I was saying this in our call in Spanish, that we're on the right track in terms of moving ahead with resolving those issues, which I think it's good news. And I'll ask Alberto to provide a bit more detail.

Alberto Consuegra, COO

Thanks, Felipe, Ricardo. Good morning. So the situation in Castilla, we're currently going through the evaluation of the permit reactivation with the environmental authority. And we understand this will be issued shortly, probably during the month of May. So what we have estimated so far in terms of production impact, or saying another way in terms of reducing the current gap, we see that if we sort the situation in Castilla, we will see about 6,000 to 7,000 barrels per day benefit in terms of reducing the gap against the current production level.

Luiz Carvalho, Analyst

Hi, thanks for taking the question. I'd like to touch on three points. And if you allow me to come back to, let's say, the macro conditions in Colombia, it seems to be kind of a challenging one from a fiscal perspective. So the first question is, I'm trying to understand how the management foresees any potential impact either to the oil industry or to Ecopetrol specifically in terms of any potential new shape of the taxation framework, either for, I don't know, royalties or general taxes? And also, how do you think that a potential, I don't know, decision from the controlling shareholder in order to try to increase dividends, for example, is that - or even potentially, I don't know, selling, you'd say, the 8% stake already approved by Congress. So just trying to understand a bit better how the management sees these options and if one of them or each of them are under discussion. The second question is about, I mean, coming back to the previous questions on ISA, I understand that you are analyzing a couple of options on the table right now, but just trying to get a sense in terms of how the management is concerned about any potential option that might be seen as potential, I don't know, dilutive or negative to the minority shareholders due to a potential, I don't know, already distributed independent company. And last one very quickly is if you can provide any update on the fracking in Colombia and how this can benefit the company looking forward. Thank you.

Felipe Bayón, CEO

Thank you, Luiz, and again, thanks for being with us today. In terms of the overall situation in Colombia, and I think over the presentation we're highlighting things like our refinery loads and some of the sales that we've done. If you look at gasoline and diesel, they are at pre-pandemic levels, mainly. So I think that's a very good sign of where we are and it's a reflection. It's a good proxy or thermometer of how the economy is going. And I think with the attraction of JET, we are at pre-pandemic level. So I think that's point number one. In terms of activity levels, you see our investment levels, our work fronts and the progress that we've made. And I think the results overall show that there has been recovery. And if you look at, I think, the underlying consensus is of a recovery of the economy. So I think that's the first thing I'd like to see. And I'd like to share. So in that sense, I think we are cautiously optimistic, but I'd like to put out there that clearly, there's still uncertainty around COVID. We're at this third wave. I would say in my opening remarks during the Q&A that ICU levels are at an all-time high. Vaccination programs continue to progress, and we have received a significant number of vaccines. So we're progressing with that. But I think that if you look at from our point of view, Luiz, in terms of our contribution overall prices and with what Alberto was mentioning of us solving some of the issues around production, our outlook in terms of our contribution as Ecopetrol would or could imply that there could be more royalties, more taxes, and results could eventually translate into more dividends. And I think the other thing that is important to share is that there is an approved dividend policy that distributes between 40% and 60% of net income, and the final decision will be taken at the AGM in March of next year. In terms of the taxation framework, which is the other thing that you're mentioning, and I'm sure you're following the news, but the previous tax reform project was withdrawn from the Senate and from the chamber. And that's a process that as a formality is taking place today, but I think the government has announced that the project as it was conceived initially has been withdrawn, there's no support for that. And you actually saw that there's been changes to the economic team at the government level, including the Ministry of Finance. So what I'll say is that we would need to wait for a new project to be presented and in light of what's presented provide an assessment of potential impact. So that's, I think, all I have to say about the taxation framework. And I think I've touched on the other things that you're mentioning. In terms of ISA, I will just go back to what I was saying. I just want to be very clear. In terms of the optionality, I was mentioning that we're looking at several options that would include or could include in terms of sources of funding could include debt, cash, and equity. And I was saying earlier that the actual mix of those sources or potential sources has not been defined. That's point number one. Point number two will depend on the final terms of the transaction. And point number three, it will depend on market conditions. And I was talking about this earlier. Point number four, it will or could depend on surgical precision in the decision-making process. So there's several things that will be taken into account. And I think the other thing that you were asking about is an update on fracking in Colombia. And during the presentation, we're talking about our Proyectos Piloto de Investigación Integral, our pilot project. We have continued to assess all the environmental conditions in the area that will underpin or support or inform our submission in lieu or in pursuing, sorry, of an environmental license. So we continue to progress that. We've mentioned that we're actually measuring more than 200 different variables. There are different things that we're measuring, and we'll continue to do that. We've mentioned, and I'd just like to reemphasize that and I've said this before, in terms of fracking in Colombia, this is not about doing it quickly or fast. It's about doing it well. In Spanish we would say, (audio unclear) And we've also said that it would be like operating inside the fish pool. Everybody looking inside, in terms of what we're doing, doing it openly, transparently with the stakeholders. So we're progressing in terms of the process. Luiz, thank you so much for your questions. If we can take the next one, please.

Frank McGann, Analyst

Good morning. Thank you. Just a couple of things just to follow up on some of the comments in your - based on your previous comments as well as the release. Just related to the Castilla field and the issues there, it's not - I'm not exactly clear as to what the problem is related to environmental issues or the river. If you could just explain what the problem was and what you're doing to actually overcome whatever those issues are that should, I think, you said be perhaps completed by May. And then looking towards the increasing production for the rest of the year, you also mentioned that you plan to anticipate some activities that have been planned for ‘22 and bring those into ‘21. Maybe you could provide a little bit more details on what specific areas that might be and what - how that might increase costs and CapEx in 2021? And then lastly, there's a mention in the release about concerns about - or you mentioned possible risks to - for ‘21. It's mentioned some risks associated with restrictions on water injection at the Quifa field. And I'm just wondering what the main issues and effects of that could be?

Felipe Bayón, CEO

Absolutely, Frank. And again, thanks for being here with us today. So before passing on the floor to Alberto, I'd like to say that we're making good progress in terms of solving the issues around Castilla. And I think that's good news, very strong and very synchronized work with the authorities and such. So I'm positively optimistic in terms of solving the issues in the very near term, and that's good. And in terms of activity, there are opportunities to drill additional wells. Obviously, always in the framework of being very disciplined. About the quality of the opportunities and where we deploy the capital. So Alberto, if you can take, please, the question from Frank? I'll pass over the floor to you. Thank you.

Alberto Consuegra, COO

Frank, good morning. Thanks for your question. First of all, Ecopetrol complies with the national environmental regulation and specifically for the Quifa wastewater, we are complying with all the parameters established at the national level for water discharges, but the local environmental authority, Cormacarena, has temporarily suspended their wastewater disposal permit in order to include environmental conditions and to ensure that the river flow reaches the disposal point so the adequate dilution takes place in that site. These activities have been agreed with the authority, but are currently being executed. And as Felipe mentioned, we are very optimistic that we can get the permit back sometime during the month of May. So that's the current situation there. With respect to our plans to anticipate activity and what will be the impact in terms of production. And of course, I would say that in terms of production, if we are able to grow at least 10 to 15 wells and execute about 35 well recoveries, this will provide us additional production of between 4,000 to 7,000 barrels. We have an optionality program that has identified so far about $100 million in potential additional activities, mainly associated with bringing production in this year. So that's what I can tell you right now. In terms of costs, because of this activity that we see being done throughout the year, we don't anticipate major impact in terms of our lifting costs.

Guilherme Levy, Analyst

Hi, good afternoon. Thanks for taking the question. My first one is on the lifting cost. So in the past quarters, we have seen the lifting cost trend lower compared to the level that is used to trend until 2019. So I was wondering how much of this reduction has to do with cost reductions itself and revision of contracts? And how much could be linked to higher cost wells that were perhaps closed during the peak of the crisis that were not reopened yet? And the second question is on refining. Production in this segment improved quarter-on-quarter, so I just wanted to get a sense of what the company is expecting through the end of the year? Thanks.

Felipe Bayón, CEO

Guilherme, thanks for the question. I will give you an opening on things, but then I'll ask Alberto to take on lifting costs. And I will actually also ask Jaime to give us some additional thoughts around some of the things we're doing that are aimed at dealing with the structural nature of overall cost basis for the company. So things like zero-based budgeting and some other things that we're working that we want to share with you on where we are. So I think that's point number one. And then I'll ask Walter to talk about refining. So Alberto, if you can help us with the first bit, then Jaime, and then we'll ask Walter. Please go ahead.

Alberto Consuegra, COO

Good morning, Guilherme. And what we are seeing in terms of lifting cost is that this time, at an exchange rate of $3,600, our lift costs would be in the range of $7.50 to $8.00 per barrel. So we're seeing that uplift trend because we're going to execute plant maintenance work lagging from last year's stop because of the pandemic. We're going to increase well interventions activity to ensure that we are able to manage production decline in our main fields and also, there could be additional variable costs associated with reopening of production wells in Castilla because of the water disposal issue. However, we also anticipate that we're going to be materializing efficiencies, as you mentioned, coming from optimization of our energy matrix, renegotiation of service contracts, and optimization of costs associated with water management. So all in all, we see that we're going to be able to maintain our guidance of anything between $7.5 and $8 per barrel throughout the year.

Jaime Caballero, CFO

Thanks, Alberto. And on the kind of broader cost outlook and how we're approaching it. And you might recall that in our '21, '23 plan, we spoke about this. And the broader picture is what is the challenge that we're facing? We're facing a challenge where we are increasing activity levels with a view to reach a production of 750,000 barrels a day in 2023, and in relation to that increased activity level and that increased production, unmanaged, there would be an upward trends in cost. So that's the broader challenge that we are dealing within the company. You might also recall that when we looked at that outlook, we set ourselves kind of two big targets. There's one around the total unitary cost of the company that integrates all the different variables. And there is a particular one around lifting costs, where our guidance has been that we - for this year, just like Alberto said, we have a ceiling of $8 per barrel. And for the plan, our aspiration and goal is that we never exceed $8.50 per barrel as we look into that ramp-up of activity and production over time. So that's the big picture. So what are we doing on a structural basis for this? And essentially, we've launched a program within the company around how do we want to increase our competitiveness in cost. It's called actually performance plus and in the plans that we rolled out for you and that we've shared with you, the 2021, '21, '23 plan, we actually have built in efficiencies of between COP 1.5 trillion and COP 2.2 trillion. That's the goal that we want to achieve. What are the big levers behind that? There are four fundamental levers. The first lever is operational efficiencies, and Alberto has described them. So I'm not going to cover that. There's a second, a fundamental lever, which is around supply chain. We are good at supply chain in Ecopetrol, but we think we can be better. And particularly, we have strong efforts around improving our demand management and with that, capturing better regional efficiencies. The third component is around organizational efficiency, and you might have seen in our results that we are starting to see the positive effects of the retirement plan that we launched last year. It is noticeable in the financial results. As a result of that plan, we have a smaller structure in Ecopetrol. And we believe that, that's something that will gradually continue over the coming years. And then the fourth component is, of course, digital. It's a massive lever in this program, and it's around how do we bring the benefits of technology into our processes and into the way that we operate. So all of this is part of that sustainable cost agenda. From a process standpoint, one important component is that we've fully adopted a philosophy around zero-based budgeting. We started last year with some pilots around that matter in the different segments. Those pilots were successful, and we've taken the decision to roll them out throughout the group in its totality. So bottom line on this, and we're conscious of the challenge around cost, but we feel confident that we are approaching it in a systematic way. Thank you. Now over to Walter, who is going to speak about refining.

Walter Canova, Refining Manager

Yes. Thank you, Jaime. Thank you, Guilherme, for your question regarding the downstream. I will say that, as it was communicated, we have a very solid first quarter for the downstream. On the refining side, we finished, I think, 360 KBD for the first quarter, of course, with an improvement versus the 355 KBD of the fourth quarter of last year and also an improvement versus the 345 KBD of the first quarter of 2020. And this is considering that during the first quarter, starting in February, the Cartagena refinery did planned turnaround activities, mainly on the cracking units and alkylation units. For the following months, we are projecting to sustain the 360 KBD to 365 KBD. Of course, we have a big question mark regarding the third wave for the pandemic with COVID-19. But if the situation maintains as it has been in the last month, we are projecting 360 to 365 KBD for both - total for both refineries. Regarding margins, as you saw, we finished at $10.1 per barrel for the first Q, and we think that we'll be around the high side of the 1-digit margin for the rest of the year. This is the projection for the downstream and refining business, mainly. I hope I answered your question, Guilherme.

Rodrigo Almeida, Analyst

Hi, Felipe. Thank you for the presentation. I have a couple of additional high-level questions. The first one relates to ISA. I would like to understand more about the medium to long-term strategy of the group as a whole. Any initial comments on how incorporating ISA might affect the long-term business plan would be appreciated and helpful for us. My other question concerns capital allocation and growth. Ecopetrol has expanded beyond Colombia in recent years, increasing reserves and production. Will you continue to invest in similar strategies moving forward? Are there plans for further expansions outside of Colombia? Those are my two questions. Also, congratulations again on the carbon-neutral target by 2050, which clearly demonstrates your commitment to decarbonization. Congratulations.

Felipe Bayón, CEO

Thanks, Rodrigo. I think I've made some comments around ISA and where we are and some of the things that we can disclose and talk with you. But I think - and I'll start with your last comment. When you were saying that you congratulate us on our 2050 announcement, which by the way, we do believe it's a historical announcement from Ecopetrol. There are two massive trends in the world that are around decarbonization and electrification. So in that context and with our commitment to get to net zero CO2 emissions by 2050, you can see there's very good fit in terms of what we're doing, and we're very consistent and methodical. And I think we've been advancing nicely in that sense. And if you look at some of the conversations we're having in the presentation, just go through some of our things that we're following, which is the first one, we need to be very competitive. We need to remain competitive and protect what we're doing right now. And I think just from the last question and listening to Alberto and Jaime, some of the things that we're doing short term and some of the things that we're doing structurally ensure that we remain competitive in terms of zero-based budgeting, for example, or the digital transformation, I think that's fundamental. We've talked about diversification or diversification in terms of businesses we're in. We've mentioned specifically ISA. We've talked about decarbonization. And then we've talked about TESG. And when we think about environmental, social and governance, we put technology at the heart of being a sustainable company, and it's to do with everything in terms of being, as we said, sustainable long term. And I'd just like to add the advancements and progress we've made in terms of how we report and how we share data. And if we go back to our 20-F, if we go to SCM, within the umbrella of the World Economic Forum, the only Latin American company to be part of the announcement in January around Stakeholder Capitalism Metrics, sort of endorsed by the World Economic Forum. More companies have joined. But I just want to highlight sort of the commitment from Ecopetrol or you think about SASB and TCFD, we're making very, very good progress. So I think that's your first question. The second one, in terms of capital allocation, we have a plan around the 2021-2023 program. I know you've been following the company, and we've been providing updates and providing information. When things and opportunities materialize, we've done it. And during the presentation, Alberto was giving us an update on the Permian, and we're talking about Gato do Mato and some of the things we're doing in Brazil and in the US. And I'd just like to highlight the following, which is not in the presentation, but I want to share this with you. If you think about the Permian and the performance we've had, if we step back, we started operations in - production operations, November 2019. And so it's been 18 months. And in 18 months with the crisis in March, April, May of last year, when even WTI prices sliced and dumped as they did, we ended up 1Q with 6,200 barrels of production, net Ecopetrol production, that's before royalties and 5,100 barrels after royalties. The exit rate for March was 10,000 barrels. And I think that's a very important point. And I'll give you additional data points. The first one, in April, the month of April, gross production for the JV in the Permian was 36,500 barrels, 36,500 barrels. And Ecopetrol's production in April was - average production was 17,900 barrels. And I'm spending a bit more time just to provide color around something that we announced not even two years ago and just to show where we are in terms of the progress. And the exit rate for April was 22,100 barrels for Ecopetrol. So I think this is just showing you progress that we've made. And again, thanks for your questions. We will come back. Whenever there's new things that we need to communicate. I'm going to ask Alberto to give us a bit more color around production. We've given you the 690,000 to 700,000 range, and we've given you details on where we are on Castilla and some of the things that we're dealing with. And I'll ask Alberto to provide a bit more context. Alberto, please go ahead.

Alberto Consuegra, COO

Yes, Felipe. Rodrigo, good morning. Just to complement on what Felipe said, first, there are elements of uncertainty still in our recovery plan. So rather than providing you a ramp-up by quarters, I would rather prefer to give you the generalities of the recovery plan, which basically depends on sorting the water disposal issues in Castilla and successfully bringing it into production, the anticipated 2022 work that I already mentioned. And also in being able to stabilize wells with high BSW, Basic Sediment Water content, at Chichimene, Castilla, and La Cira. This will provide us the right production levels to fill the gap, but we still will have to manage risks associated with demand constraints due to additional pandemic waves or social conflicts in our operational areas. So that's kind of the outlook for the year.

Vicente Falanga, Analyst

Thank you, Felipe, Jaime, Alberto. And congratulations on the efforts to transition to a lower emissions company. My question was - I had two. First of all, sorry to insist on Castilla, but can you provide more details on what Ecopetrol is effectively doing to expand the environmental licenses for water disposals? Are you working on irrigation projects? Or do you have to install more facilities to separate oil from water? And my second question, could you provide an update on the financing that Ecopetrol provided on midstream tariffs during the pandemic for smaller players in Colombia? When do you expect to recover these funds? And have there been any delinquency on that front? Thank you very much.

Felipe Bayón, CEO

Vicente, again, thanks for the question, and thanks for being here today. And thanks for following Ecopetrol. I'm going to ask Alberto to give us, again, a bit more detail on Castilla and what we're doing and our views on water, which is a fundamental part of our operation. And then I'm going to ask Milena López to help us with your question on some of the things that we did during last year in support of small producers in Colombia with respect to transportation tariffs. So Alberto and then Milena, please.

Alberto Consuegra, COO

Vicente, good morning. With regards to Castilla, as we already have mentioned that we are very optimistic that we're going to be able to get the permit reactivation. We already submitted the necessary paperwork for this, and we are currently executing work at the water disposal outlet at the Guayuriba river. We expect that these works will be completed throughout this month of May. And hopefully, we get the permit back. So that's kind of the situation with that. And we hope also that this type of risk, particularly with the Cormacarena authority, we are going to be able to manage it in some other adjacent fields by constructing a well - a healthy relationship with them. So we're kind of in an improved situation right now with regards to managing the water disposal issues.

Milena López, Midstream Manager

Good morning. So when we have the situation last year with lower oil prices, we engaged in a series of measures aimed at helping producers principally from a cash flow perspective. So these things basically had three components. We had payment terms that allowed producers to defer payment of transport tariffs up to six months. This was done across CENIT and its subsidiaries. We have certain measures in terms of allowing some flexibility of cheaper pay contracts in the sense that if you did not transport during the first three months or four months or you transported lower volumes, you could compensate those by transporting higher volumes in the following months in terms of giving producers some flexibility. And in certain pieces of some of our pipelines, primarily at CENIT, we also had some discounts, but generally speaking, the largest measure was allowing payment terms for up to six months, which allowed producers to smooth their cash flow during the periods of extremely low oil prices. And there were also some segments where we had payment terms that were up to 12 months. But on average, they were generally up to six months.

Andrés Duarte, Analyst

Thank you. Good morning. I wasn't able to ask during the Spanish call, so thank you for taking my questions and of course, cheers for those outstanding results. I have three short questions. The first one is related to production. You mentioned the problems that you had on this item. And I wanted to understand how did you manage to increase gas production in around 11% yearly? That's the first question. The second one is related to costs. There's a 52% increase in imported products. I wanted to understand what explains this increase? And finally, you're mentioning a goal with respect to renewable energy generation. That's around 400 megas for 2023. That's around 18% capacity, pretty large. So I wanted to understand if this capacity is limited to sell for consumption or were you expecting some regulatory changes in order to become like an actor on the local electricity market. Thank you. And again, congratulations for the results.

Felipe Bayón, CEO

Andrés, thanks for being here with us today, and I will pass on the message to the wider team. We really appreciate it. So in terms of gas, and I'm going to talk about renewables, but in terms of gas, I will ask Yeimy Baez, our Vice President for Gas, to take that question. In terms of products, I'm going to ask Pedro Manrique to take that question. And I'm going to start with your third question, which is renewables. So the first thing is that we consume the equivalent on a daily basis, the equivalent of an installed capacity of 800 megawatts. And roughly, 55% of our energy comes from self-generation and the rest is energy that we buy from the grid. So those are the numbers. The 400 megawatts, and I can confirm, it's self-generation only. So our view right now is that we will continue to increase our capacity. We've talked about San Fernando, the solar eco park from Ecopetrol that we're building, 46% progress in terms of construction, and we will continue to make announcements going forward in terms of when we have some other things landed. But yes, we're continuing with our solar programs. We're doing some geothermal options as well. And we started measuring wind near Cartagena, the Cartagena refinery. So that will continue to go ahead. So I'm going to ask Yeimy, if you can take the first question, and then please hand over to Pedro, so he can talk about the imported products. Yeimy?

Yeimy Baez, Vice President for Gas

Thank you very much, Felipe, and thank you, Andrés, for your question. As you mentioned, the gas production increased about 12% in the first quarter of 2021 versus the same period in 2020. Well, the main drivers that allow us to deliver these results were, first of all, we increased the production in our assets located in the foothills area mainly in Cupiagua, Pauto, and Floreña, and it was about 8,000 barrels equivalent per day. This is a result of increasing the operational efficiency in our gas plants, but also because we were able to materialize additional sales for power generation in Japan. Well, secondly, these results also reflect the relinquishment of the Equion license. The transition with Equion has been actually working really well, and we are being able to preserve the value and the production from those assets. And finally, of course, we are also delivering the expected value of the acquisitions of Guajira assets by Hocol. And this is actually leading us to position Hocol in a better, as an important producer in the Caribbean coast. Well, these last two effects are about 13 barrels equivalent per day, so they were pretty significant as well. Saying that it is important to know that anyway, during the first quarter, we were facing significant challenges in terms of demand, especially in the mobility use of natural gas-related with the pandemic, and we continue to see how we can manage those effects that we expect to keep going during the rest of the day. And of course, we are committed to having the gas that is required for the economic industry in Colombia. Thank you very much, Andrés.

Pedro Manrique, Products Manager

Thank you, Felipe. And thank you, Andrés for your question and for your interest in Ecopetrol. I'm going to answer firstly your question on the increases in the imported products in the first quarter of this year, 2021. First of all, we are net importers of gasoline. And the first reason why we are seeing that increase is because we had a maintenance program in our refinery system and mainly in Barrancabermeja, the FCC and the alkylation units were under maintenance. So that required additional imports. And the second reason why we had that increase is because as Felipe mentioned before, the first quarter of 2021, the local demand recovered actually to higher levels in gasoline than pre-pandemic levels. So the average that we have in this quarter was 124 KBD versus 150 KBD we had in pre-pandemic levels. So they actually recovered made us import of more gasoline. So that's basically what is driving that increase in importing products. Thank you.