Earnings Call
Ecopetrol S.A. (EC)
Earnings Call Transcript - EC Q4 2021
Operator, Operator
Good morning. My name is Hilda, and I will be your Operator today. Welcome to Ecopetrol's Earnings Conference Call, in which we will discuss the main financial and operational results for the fourth quarter and full year of 2021. All lines have been muted. There will be a question-and-answer session at the end of the presentation. Before we begin, it is important to mention that the comments in this call by Ecopetrol 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 on this conference call. The call will be led by Mr. Felipe Pardo, CEO of Ecopetrol. Alberto Granger, COO, and Jaime Caballero, CFO. Thank you for your attention. Mr. Pardo, you may begin your conference.
Felipe Pardo, CEO
Good morning, everyone, and welcome to our Fourth Quarter and full year 2021 conference call. This presentation is framed in the context of the new corporate strategy, energy that transforms. Committed to our culture of being life first, I want to begin by highlighting that in 2021 we had zero fatalities at our operations and achieved the lowest average total recordable injury frequency rate in the company's history. In 2021, we generated revenues of COP 91.7 trillion, a record EBITDA of COP 42 trillion, as well as the highest net income in the history of our company of COP 16.7 trillion. Even excluding the contribution of Interconexion Electrica SA ISA during the last four months of the year, Ecopetrol's results are still the highest in our history. These remarkable results were leveraged by the recovery of crude oil prices and magnified by our ability to adapt and respond to the challenges in the environment. The tenacity, efforts, and commitment to keep safe operations of all the employees of the Ecopetrol group, who make the impossible possible, allowed us to achieve a solid and resilient operational performance across all of our business segments, while outstanding commercial strategy materialized into better crude and product spreads. Let's move on to the next slide, please. The financial results for 2021 exceeded the targets we set for the year, creating value for all the shareholders. We highlight the solid operating cash flow generation, which funded our organic investment plan for the year and the progress in the development of our strategic assets. On the operational front, we were able to guarantee domestic fuel supply, even with an increase of more than 25% in demand when compared to pre-pandemic levels. Also, we ensured domestic gas supplies, overcoming supply price issues, climate-related infrastructure impacts, and the public order situation that affected Colombia during the second quarter of 2021. Our financial results, particularly the EBITDA margin, the ROTI, and the annual growth of net income posted an outstanding performance as compared to our peers in the industry. It demonstrates, once again, the advantages of being a diversified energy group capable of combining the benefits of the integrated hydrocarbon businesses with those of the energy transmission and infrastructure segments. Let's move on to the next slide. These historic results are aligned with, and propel, our long-term strategy, energy that transforms, which is based on four pillars aimed at consolidating the group as an agile, dynamic, resilient, and flexible organization capable of rapidly adapting to constant changes. Throughout 2021, we made important progress in our strategic agenda with the accomplishment of several milestones, some of which I want to highlight. We grew with the energy transition, resumed the positive growth path in our core businesses, and diversified those with the acquisition of ISA. We generated value through TESG, Technology Environmental Social and Governance, and set ambitious decarbonization targets by 2030 and 2050, with significant progress in water management and contributing to economic reactivation through social investments in more than 287 projects. In terms of cutting-edge knowledge, we advanced our digital transformation, with a strategic portfolio that adds value through innovation in different processes. In 2021, we captured benefits of some $93 million in our digital agenda. Finally, in the pillar of competitive returns, we achieved our ROACE that exceeded our cost of capital. Let's go to the next slide, ISA integration to the Ecopetrol group is now a reality. Its results and potential for growth and synergies have proven its value to our shareholders. In 2021, ISA reported solid operational results and continued its inorganic growth plan. The most important milestone of the year was the awarding to build and operate the Kimal-Lo Aguirre transmission line, a project that comprises more than 1,400 kilometers, and one of the most important electric power transmission projects on the continent. This will be the first direct current line in Chile that will connect the renewable projects in the North to the center and south of the country, leveraging the development of their energy mix. I would also like to highlight the acquisition of the 100% stake in the Brazilian power transmission company, BPTE, following the approval of the first large-scale energy storage projects in the Brazilian transmission system, which is expected to begin operations in November of the current year. During the last six months, we have made progress in the integration of the Ecopetrol group. By year-end, we met all the milestones set for the financial consolidation of ISA and for the contractual obligations established in the inter-administrative agreement that supports the transaction between Ecopetrol and the Colombian government. In addition to aligning the strategic KPIs between both companies, we established working groups to identify, prioritize, evaluate, and develop potential synergies in various areas, including new ventures in energy transition, ISA's entry into the U.S. market, savings in procurement, optimization of Ecopetrol's electric power infrastructure, linear infrastructure through CENIT, science, technology and innovation, environmental management, information technologies, and cybersecurity. ISA's potential for growth is very relevant, and Ecopetrol will contribute to identifying and materializing inorganic alternatives as part of our $36 billion capex pipeline already identified until the year 2030. I will now open the floor to Alberto Consuegra, who will tell us about the main operational achievements of the year.
Jaime Caballero Uribe, CFO
Thank you, Felipe. In 2021, we drilled 13 exploratory wells, surpassing our initial plan by 4. Eleven of these were in Colombia, one in the United States, and one in Mexico. By the end of the year, three wells were deemed successful. The Media-wide W12, located in PLM Mondi, had a total production of 29,725 barrels of oil as of December 31st. It was declared commercial and is set to begin extensive testing. In January 2022, we announced the discovery of the EBA Marca one exploratory well, which has an API EOA of 17 degrees. This discovery is near existing infrastructure in the block, allowing us to start production from extensive tests in the first half of the year. From the 2021 round of the National Hydrocarbons Agency, Ecopetrol secured three technical evaluation areas in the Middle Magdalena Valley and one exploration and production block in the Gernos Orientales region. We also acquired an exploration and production block in the Sinu San Jacinto basin. Cumulative production from the exploratory assets during initial tests and extensive tests reached around 1.5 million barrels of oil equivalent by year-end, averaging 4,364 barrels per day, with 65% being crude oil and 35% gas. According to our previously announced investment plan for 2022/2024, this year we plan to execute a program of 22 onshore wells and 2 offshore wells, with an investment of about $391 million. With the drilling of the Gorgon-2 well, we aim to define the development of this discovery and explore other identified opportunities in the area. Moving on, 2021 posed production challenges due to various factors, including operational restrictions in the Castilla field, public order issues in the second quarter, and seasonal impacts in Colombia and the Gulf of Mexico. Despite these challenges and the increasing contributions from assets like the Permian, fourth-quarter production rose by 11,000 barrels equivalent per day compared to the third quarter, ending the year at 679,000 barrels equivalent per day. We emphasize the reserve incorporation chart, which showed an additional 462 million barrels compared to 2020; over 60% of this increase resulted from the company’s performance, while the remaining 40% came from favorable pricing. We concluded the year with a replacement rate ratio of 200%. For 2022, we anticipate that primary crude oil production will remain dominant while focusing on secondary recovery efforts through borrowing injection, mainly for heavy crude oil assets. In conventional production, we’ll work to enhance contributions, expecting this segment to constitute 5% of total production this year. Our efforts in the Permian were noteworthy, with this segment, along with Ecopetrol America, contributing 11%. In 2022, we will strive to navigate logistical challenges and public order issues. Additionally, our average production of gas and LPG was 150,000 barrels of oil equivalent per day in 2021, up 7% from 2020 due to recovering demand, and we expect similar growth this year in domestic demand. The gas and LPG segment performed well financially, generating a combined EBITDA close to $807 million with a margin of 53%, an increase of nearly 21% year-over-year. We strengthened gas supply for the Colombian market, adding around 84 million BTUs per day, representing 9% of national demand in 2021. We celebrated the exploratory success of the Media's W12 well, along with development activities in the North Caribbean, aligning with our TESG goals. In 2021, Ecopetrol enacted a 30% reduction in LPG prices to benefit final consumers and connected over 6,100 low-income households to natural gas networks, improving their quality of life and adding more than 10,000 connections since 2019. Moving forward, on October 29, 2021, we submitted Kale's environmental impact study, starting the evaluation process for the project's environmental license. On February 15 of this year, we filed a similar study for the Platero pilot, complying with our milestones. A thorough fieldwork effort over nine months contributed to each environmental impact study, with over 200 environmental parameters assessed by teams of more than 150 individuals. Despite vandalism attempts to disrupt the public environmental hearing regarding the Kale pilot, it was successfully held electronically, allowing community participation. We remain committed to addressing the concerns of key stakeholders in an open dialogue. In the Permian basin, 2021 ended with 82 new wells in production, totaling 104 online wells and averaging 19,300 barrels of oil equivalent per day. We expect production to increase in 2022 to between 32,000 and 34,000 barrels of oil equivalent per day net for Ecopetrol prior to royalties. The water recycling facility was completed, capable of treating 65,000 barrels per day and storing 3 million barrels, allowing the joint venture to recycle approximately 7.7 million barrels in completion operations. During the fourth quarter, this plan enabled the Permian to reuse 100% of the water at South Curtis Ranch while continuing to enhance our strategic efforts with cutting-edge knowledge. We increased the number of Ecopetrol employees as secondees in the operations to 25 and achieved several operational milestones in the Permian throughout 2021, such as optimizations in spud-to-rig release, improvements in average drilling times, and record pump times that surpassed peer performance in some areas. In 2021, the volume of refined products transported grew by 20% year-over-year, driven by local demand recovery, particularly in the Galan-Sebastian corridor. Conversely, crude oil transport volume decreased by 7% due to lower production, especially in the Llanos region. The fourth quarter matched the previous year's levels, with increased volumes in the Southern corridor. We conducted eight reversal cycles of the Bicentenario pipeline during the quarter to ensure safe evacuation from the Cano Limón field after pipeline damage caused by external factors and emergency flooding. Operations resumed on November 29 after repair work, alongside the reception of fields from the Nare Association in November. Cenit executed a successful action plan to ensure safe evacuation, safeguarding processes and equipment integrity at the Vasconia station, utilizing their dilution system to ensure mixtures from naphtha fit for dispatch to Barrancabermeja refinery and Oleoducto de Colombia in Covenas. Additionally, the transported volume through the Vasconia system increased by 10,000 barrels of oil per day. Co-dilution projects in Apiay and Cusiana successfully used LPG as a diluent for crude oil, providing a cost-effective option with greater dilution capability and lower logistics expenses. On December 7, the fuel delivery at the API filler began, reducing heavy truck flow on the road by approximately 600 trucks per month, while providing alternative supply options to ensure reliability and decrease CO2 emissions. In November and December, CENIT, Oleoducto de Los Llanos, and Oleoducto Bicentenario were certified for carbon neutrality by the Colombian Institute of Technical Standards, marking them as pioneers in this recognition within the Colombian Oil and Gas sector. Our goal for 2022 is for all companies in this segment to achieve this certification. Finally, downstream operations maintained integrity and achieved remarkable financial results. This segment ensured stable local fuel supply while effectively supporting the reactivation of the productive sector and reinforcing the country's energy security. The segment recorded an annual EBITDA of 3.5 trillion pesos, achieving the highest annual EBITDA margin since 2016 at 6.9%, driven by financial discipline and cost management. In the fourth quarter of 2021, the segment reported the highest integrated gross margin from refineries in three years, reaching $12.5 per barrel. We highlighted effective execution of the shutdown plan at Barrancabermeja’s petrochemical train and crude and alkylation units. At Cartagena refinery, we're preparing for its first shutdown cycle since operations began, projected to continue throughout 2022, along with the completion of interconnection projects with the new refinery. This plan is set for the second quarter of this year, gradually incorporating benefits. In Essentia, polypropylene production achieved a historic high of about 500,000 tons, thanks to efficiency improvement projects. As of 2021, we realized efficiencies amounting to 2.9 trillion pesos, with 1.4 trillion offsetting OPEX pressures from inflation and operational reactivation. This is reflected in a total unit cost of $39.1 per barrel by year-end, representing a 6.5% increase from 2020 under normalized conditions, contrasting with a growth of 10.6% had efficiencies not been implemented. Efficiency initiatives yielded CAPEX savings of COP 833 billion, aligned with significant reductions in drilling and completion costs. The total lifting costs for 2021 showed an increase compared to the previous year. Strict cost control allowed us to decrease unit transport costs and refining expenses through strategies identified in the zero-based budget methodology initiated at the end of 2020. I will now hand it over to Jaime Caballero to discuss the main financial results for the Ecopetrol group. The financial results in 2021 were supported by a favorable pricing environment and an effective commercial strategy that allowed us to secure significant differentials for both crude and refined products. Coupled with efficiency initiatives and strong capital discipline, this led to a much higher return on average capital employed than our weighted cost of capital. It's important to note the role of consistent production from our Permian operations and the additional financial benefits from the energy transmission and Roche businesses, which achieved record EBITDA and gross refining margins. In 2021, the net income of the Ecopetrol group reached a record high of 16.7 trillion Pesos, ten times greater than that of 2020. Key highlights include a 21 trillion pesos rise in EBITDA compared to 2020, thanks to increased sales of products and gas, lower labor costs, and other expenses that minimized the impact of rising costs from economic recovery. Increased contributions came from fields such as Indiscernible and higher contract fees, among other factors. We also saw a reduction of COP 0.5 trillion in non-operating results due to lower profitability in our portfolio amid market conditions and an uptick in interest expenses related to higher leverage. Depreciation charges rose by COP 0.5 trillion due to increased capital investment and higher production from Permian. Additionally, higher income tax provisions were reported due to improved results, while nonrecurring events accounted for COP 0.5 trillion, with almost no impairment effect for 2021, in contrast to an impairment expense of COP 530 billion in 2020, along with income derived from our increased stake in the Wahid asset. The annual performance in Permian included a favorable short and medium-term price outlook for the upstream segment and the decision to expense remaining investments associated with modernizing our Barrancabermeja refinery, partially offset by the operational and financial consolidation of the Cartagena refinery. We also saw a downward volumetric outlook for the Tumaco Port and the TransAndino pipeline in the midstream segment, as well as financial effects from the agreement among Frontera, Cenit, and Bicentenario, leading to the recognition of income of 0.7 trillion pesos net of taxes. The acquisition of ISA contributed 0.3 trillion pesos to net income for the four months following its acquisition. Moving on to the commercial performance, our commercial strategy proved vital for our financial success, enabling us to leverage asset-backed trading, diversify export destinations, adopt DAP practices in negotiations, and maintain contractual flexibility. The trading margin generated $487 million across the group, driven by successful heavy crude exports, crude purchases for refinery throughput, asphalt sales, and energy efficiencies, particularly in the upstream segment. Increased gas and product sales reflected the broad recovery of economic activity, leading to demand for refined products that surpassed pre-pandemic levels. The crude oil, gas, and product baskets strengthened over the year due to rises in international prices and other strategic actions previously mentioned. Since the consolidation of ISA's financial data in September 2021 following its acquisition, we have seen significant contributions from the energy transmission and roads segment, with highlights including revenues of $4.1 trillion pesos, which is 4.5% of total group revenues, and EBITDA of 2.7 trillion pesos, contributing 6.3% of total group EBITDA. Ecopetrol's share added 262 billion pesos to net income, while the segment itself reported a net income of 135 billion pesos, attributed to exchange rate differences and financial expenses from the debt taken on for acquisition purposes. The group's assets grew by 61.7 trillion pesos, while liabilities increased by 39.6 trillion pesos. ISA's gross debt to EBITDA leverage ratio stood at 4.1 times, aligning with our investment-grade rating and stable outlook. Additionally, in accordance with IFRS, a total of 10.9 trillion pesos was recognized as the difference between ISA's net assets fair value and book value, allocated between the consolidated assets and liabilities of the company. These contributions highlight the growing importance of the energy chain and income diversification efforts. Looking at the main financial indicators for the traditional oil and gas business, EBITDA per barrel stood at $42.4, bolstered by higher crude oil and product sales prices. The net income breakeven closed at $34 per barrel due to escalating crude oil prices and increased refinery throughput amid recovering demand. Importantly, these industry-specific metrics do not account for ISA's full integration. For ISA specifically, the EBITDA margin, excluding construction, was 76.1%, reflecting effective expense management. The return on equity remained at 11.6, continuing to create value for shareholders despite net income impacts from ISA's debt management and the adjustments in deferred taxes resulting from changes in Colombia's income tax rates. Group-level indicators incorporating ISA show an EBITDA margin of 45.7%, primarily driven by rising crude oil and product prices, with the four-month contribution from ISA adding one percentage point to the margin. Return on average capital employed rebounded to double-digit levels, closing at 13.6%, supported by higher operating income, albeit partially offset by increased taxes and capital investment. The midstream segment remained a strong contributor to group EBITDA, with ISA's stable EBITDA enhancing our position against volatility in the hydrocarbon sector. The gross debt to EBITDA ratio finished at 2.3 times, below our target of 2.5 times, indicating that we maintain our standalone investment-grade criteria, even taking full account of ISA's debt acquired in connection with its recent purchase. Without the effect of ISA's acquisition, our gross debt to EBITDA would have concluded the year at 1.3 times. In terms of investments, we executed $8 billion in 2021, marking the highest level in six years. This amount included $3.2 billion in organic investment from Ecopetrol and its subsidiaries in the hydrocarbon sector, $1.1 billion related to ISA, and $3.7 billion for ISA's acquisition. Our organic capital expenditure approached the $3.5 billion target shared in the third quarter, impacted by efficiencies during development and production phases, public order challenges, COVID-19 effects on global supply chains, and delays in administrative processes affecting activities in specific regions. Our plans emphasize increasing capital intensity through projects that promote production and research growth, alongside additional opportunities in the transmission and roads domain. At the end of 2021, Ecopetrol reported a consolidated cash position of COP 17.5 trillion, providing a stronger financial starting point for 2022 than anticipated in our 2022/2024 plan. Key movements include a robust operating cash flow generation of COP 22.5 trillion, with ISA contributing COP 1.4 trillion, excluding a pending receivable balance of COP 7.8 trillion from the Fuel Price Stabilization Fund (FEPC). Investment outflows for organic activities reached COP 13.3 trillion, along with COP 14.2 trillion for the acquisition of ISA. Financing inflows supported the acquisition's cost and associated services. We also expect the liquidation and collection of COP 3.5 trillion in balances from the third quarter of 2021, consistent with the national budget plan, alongside collection of the estimated fourth-quarter balance by year-end. The final cash position accounts for COP 40.6 trillion in cash and cash equivalents, plus a short-term investment portfolio of COP 2.9 trillion. I now hand it over to Felipe for his closing remarks.
Felipe Pardo, CEO
Thank you, Jaime. In 2021, we had very important results in our TESG agenda. On the environmental front, we are pleased to announce a reduction of greenhouse gas emissions of more than 293,000 tons of CO2 equivalent, exceeding the target by 125%. Some of the initiatives that contributed to this reduction include energy efficiency projects, which have allowed us to optimize our energy mix, reduce fugitive emissions, and minimize flaring, as well as projects for self-generation in our solar farms. In order to meet our long-term goals, we made progress in the natural climate solutions fund by establishing partnerships with the Nature Conservancy, Wildlife Conservation Society, Fundacion Natura, South Pole, and the Conexion Jaguar programs sponsored by ISA. These programs offer the potential to capture more than 1 million tons of CO2 equivalent per year, which will enable carbon offsets starting in 2030. Additionally, we increased our self-generation capacity with renewables to 112.5 megawatts, which now accounts for 8% of the company's energy mix. In terms of water management, we registered a reuse rate of 74% of the water required for operations, progressing towards our goal of water neutrality. We invested COP 469 billion, roughly $120 million, in social projects that seek to promote local development and improve the quality of life in communities, consolidating high levels of trust in the areas of influence, boosting local economies, education, and access to public services. These projects supported around 1,100 rural families and 463 small and medium-sized enterprises, as well as the construction and improvement of 60 kilometers of roads, contributing to strengthening educational quality for more than 190,000 students. In terms of governance, we made progress in transparency and disclosure of information under the TCFD and SASB standards, becoming the first Colombian company to do so. Moreover, our score on the Dow Jones sustainability index increased from 66 to 68. Additionally, we joined the 30% club, an initiative that fosters greater participation of women in boards of directors and senior management positions in the business sector. Furthermore, Ecopetrol achieved the certification of a key powder Silver Seal with a 98% score. With these, we now have five companies in the Ecopetrol group with favorable processes for gender equality within this certification program. All these achievements highlight those accomplished over recent years. We have adopted OECD recommendations regarding the non-participation of public officials on the Board of Directors, the definition and application of independents and technical knowledge criteria for board members, ensuring that more than 50% of the board members are independent, along with a succession policy for the board members as well as the CEO of the company. The approval system for investing in projects was strengthened based on technical criteria, including controls, segregation of duties, and a decision-making structure that integrates the different governing bodies. Let's go to the next slide. Ecopetrol is a key player in the development of Colombia, the regions where we operate, and our stakeholders. Ecopetrol's contribution to the Colombian economy in 2021 was approximately COP 26 trillion, including dividends, taxes, and royalties to the nation, dividend stakes to minority shareholders, social and environmental investments, employee remuneration, and local procurement. We also contribute to guaranteeing energy security and leading the decarbonization roadmap for Colombia. Our efforts generate value for more than 254,000 direct shareholders and more than 18 million Colombians that are affiliated with pension funds. With our more than 18,000 employees and over 3,000 local suppliers, we continue working to be an energy company that transforms. Let's now move to the final slide. The record results achieved in 2021 reflect Ecopetrol's competitiveness and its evolution in recent years. In 2022, we will continue to focus on the profitable growth of our core businesses, the protection of the environment in which we operate, and our relationship with communities while capturing the upside of favorable crude oil prices. We will continue to move forward in consolidating the energy transmission and road concession businesses within the Ecopetrol Group. Once again, thank you for your time and interest in participating today. With this, I now open the floor for the Q&A session.
Operator, Operator
Thank you. We'll pause for just a moment to compile the Q&A roster. We have a question from David Souza from UBS. Please go ahead.
David Souza, Analyst
Hi everyone. Can you guys hear me?
Felipe Pardo, CEO
Yes, we can. We can hear you.
David Souza, Analyst
Awesome. Great. Thanks for taking my questions and congrats on the reserves. My first question, regarding the plan you just released, the 2022 to 2024 plan. You stated that you expect robust results with crude prices at $63 in 2022. And so far this year, crude has been quite above that, possibly remaining at high levels for a longer period. So our first question would be how flexible is this plan in terms of either accelerating or relocating investments? And still on this, the company generating more gas than initially expected, what will be the main goals in terms of allocating this capital? Maybe repay debt, returning capital to shareholders, broader investments as it was the case with ISA? My second question, what's your view in terms of diversifying the company's portfolio into the energy transition, because we have seen the company benefit in the short-term from high oil prices. So would the company consider delaying investments in other segments in the short term and focus more on the upstream segments to take advantage of these high crude prices? Those will be my two questions. Thank you.
Felipe Pardo, CEO
David, thanks a lot and thanks for being here today. I'm going to take the questions, and if anybody on the team wants to add something else, probably Jaime, feel free to do so. So the first thing is you rightly point out our plan is robust at $63 per barrel and we have some sensitivities in terms of what it means to have $1 or $2 on top of that forecasted or budgeted value that we've used. But the first thing I want to say is that we want to remain very disciplined and focused in terms of how we deploy the capital. I think that one of the strengths of Ecopetrol over the years, with the last two crises that we've had in these last five to six years, is our ability to remain disciplined. In that respect, capital discipline is fundamental. That’s point number one. We won't abandon capital discipline. We won't do a lot of things that may appear appealing because there's more cash for investment. Having said that, we are already increasing our capex by almost 50% from last year to this year. If you consider the inorganic components, as Jaime mentioned earlier, that would take you to over $8 billion for capex. So we are being more aggressive in terms of the number of wells, projects, and fields that we want to put into production. So I think this is relevant, keeping the focus and being very disciplined. And on that note, we do have optionality regarding higher revenues and more cash. So what can we do with that? We could prepay debt, reduce some inorganic costs, or potentially accelerate projects that could be accelerated. And remember that we are facing a worldwide context of disrupted supply chains and logistics difficulties that we must also cope with. I think all of the things you mentioned are possible. We could repay debt, return cash to shareholders, and there could be some additional inorganic opportunities. But I just want to emphasize the need to remain disciplined with capital. In terms of diversifying the portfolio, I wanted to reference the 2040 strategy that we presented to the market a couple of weeks ago; we have a framework that is comprehensive and allows for the growth of the core business within the context of energy transition, so that's our intention. I don't see us jumping around and stalling things because of that; I think it's essential to continue to be proactive and lead the region in energy transition, and that's something you'll be hearing more about from us in the coming months. I don't know if Jaime or Alberto or anybody else has anything else to add.
Jaime Caballero Uribe, CFO
Well Felipe, we were nodding here because I think you've covered the key points; our philosophy is stated in the strategy that we rolled out a few weeks ago, and our focus now is on executing that.
Felipe Pardo, CEO
Thanks, Jaime. And thanks David for your interest and for being here today.
Operator, Operator
Thank you. Our next question comes from Anne Milne, from Bank of America.
Anne Milne, Analyst
Good morning. Thank you very much for the call and for the presentation. I have two questions this morning. The first one is just to go over a little bit more in detail the 2022 capex plan. You have the great slide, I think it's Slide 20 here of where you've come from 2018 to 2021 to know a little bit more where it's going to be spent in 2022. You are increasing it, as you mentioned, to the 4.8 to 5.8, a little bit more information there. And then the second question has to do with Ecopetrol's use of electricity generation. I know you've been involved with some solar plants, and just wondering how much more can you do on the renewable side or internally using your own gas production on the electricity side a little bit more information? Thank you.
Felipe Pardo, CEO
Thank you, Ann. It's good to hear from you, and I'm going to ask Alberto to take the first part of your question around the capex details. But I'm going to start in regard to electricity generation. Today, roughly in ballpark numbers, 8% of our capacity is mainly solar if you think about renewables. We have two solar farms, and we are buying from the grid as well, and we've already announced six more solar projects coming through. Some of them will be Power Purchase Agreements, mainly (PPAs), but we'll eventually have equity-owned solar projects as well. So that's in the works, and you should be hearing more about that. We are very, very happy with what we've seen with the performance on solar, both in terms of reduced emissions and cost savings, which in both instances actually work very well. If you remember the context of the strategy, we mentioned that by 2040, we want between 25% and 40% of our capacity to come from renewables. The question now is, can we accelerate that? And I think the answer is yes. That is directionally what we want to do, but we want to accelerate that. Renewables also include wind, so we are looking at wind opportunities. The Caribbean region in Colombia is known for very strong winds, and we are conducting measurements to explore that opportunity, and we're also looking at geothermal energy, where we should be doing our first pilot soon. I’ll close by noting that last year, roughly 60% to 62% of the self-generation was done with gas. Again, can we expand? Probably yes. Can we be more efficient and close cycles? Definitely, there are opportunities in all those areas. And at that point, if you can take over some of the details regarding capex, that would be great.
Jaime Caballero Uribe, CFO
Yes, Felipe, thanks and good morning. As you mentioned, our guidance for capex in 2022 will be in the rangeof $4.8 to $5.8 billion. In oil and gas, we will be spending anything between $3.7 to $4.7 billion, and ISA in its business will account for about $1.1 billion. If you look at the upstream specifically, the range will be between $3.4 to $3.8 billion, and if you talk about exploration itself, it's going to be close to $400 million, then production will be anything in the range of $3 to $3.4 billion. For investments abroad in upstream, it will be around $800 to $850 million per year. When you look at midstream, it will fall within the range of $350 to $400 million, and refining will take about $450 to $500 million in 2022. Lastly, in terms of our TESG agenda, we will be spending around $350 million. So those will be the key figures we will be managing in 2022.
Operator, Operator
Thank you. Our next question comes from Lilyanna Yang from HSBC.
Lilyanna Yang, Analyst
Hi, good afternoon, morning, everyone. Thank you for the opportunity. I actually have generic questions. I would like to see, and sorry if you already addressed these in your initial remarks. But I would like to have color on the implications of the conflict in Ukraine on the supply chain for Ecopetrol in Colombia, or for your Permian assets. How have your priorities changed or would they change for 2022 in view of this unexpected event? And another question is on the midstream assets, if you can just give us an update on the latest and upcoming rate reviews for the crude and fuel pipeline assets? Thank you.
Felipe Pardo, CEO
Hello, Lily. Good to hear from you. In terms of the first question, I'll ask Pardo to provide more detail around implications, not only in terms of supply chain but also in terms of commercialization and trading. I’ll give my first impression on the matter. And on the midstream, I’ll ask Elena to help us with the details. So as far as the conflict is concerned, the first thing to note is that we are deeply saddened by what is happening in Ukraine, as many people are suffering, and we hope there is a resolution very soon. Before the conflict, we were already seeing some disruptions in the supply chain. There has been some pressure on some commodities and items we use in our projects, such as aluminum, steel, and copper. So we have seen price increases of roughly 10% to 15% in those areas. That said, we experienced almost COP 0.5 trillion in inflationary impacts last year, which was more than compensated by COP 3 trillion we achieved in savings. I think there will be some impacts, but it will largely depend on the duration and intensity of these supply chain disruptions. However, we are not changing our priorities. We have an aggressive plan with significant capex deployment that we need to execute timely to ensure that the time-to-market for hydrocarbons is achieved. Pedro, if you want to jump in to help us with some trading aspects, and then Alberto, if you want to provide input as well, you can do that.
Alberto Consuegra, COO
Thank you, Felipe, and thank you, Lily. Good morning, and thanks for all your question. As Felipe stated, we are seeing the impact of the conflict and are committed to continually monitoring the situation. The conflict has contributed to fluctuations in supply chains, but in the short term, we are witnessing a net positive effect on crude exports due to our position as a net exporter. This positive effect has been particularly evident in diesel and fuel oil as well, as we continue to expand our market share while mitigating supply challenges that arise from the conflict. However, the gasoline market is a different story; we are net importers, so the negative implications of escalating prices for gasoline will affect our operations. The shipping costs have also risen, but we are balancing these aspects. Overall, we find a net positive impact on our business while closely monitoring the day-to-day fluctuations.
Felipe Pardo, CEO
Thanks, Alberto. Now I'd like to ask Elena to address the midstream segment details.
Unidentified Analyst, Analyst
Yes, thank you, Felipe. And thank you, Lily. Before I go into the details, context will help in understanding the overall impact. When analyzing midstream EBITDA, approximately 20% to 25% comes from refined product pipelines, although this percentage may fluctuate based on the operational state of the refined products pipeline. The tariffs used today were established around 2003, except for one segment reset in 2011. Theoretically, these tariffs are supposed to be reset every five years, but this has yet to occur, thus we are overdue for a revision. This year, CREG, the regulatory entity for energy and gas, has published its regulatory agenda, which set for the publication for comments regarding the new methodology for refined product pipelines within the first semester of the year. Generally, this entails a series of meetings and back-and-forth with the regulatory body, with the final methodology expected to be published during the second half of the year. If everything goes according to plan, we will be submitting our tariff file, which contains all the necessary inputs for calculations, at the beginning of next year. Thus, we expect to have new refined product pipeline tariffs operational by the end of next year. This is part of the usual business routine. Regarding crude pipelines, the tariffs typically are updated every four years, and these tariffs are subject to revision in June of 2023. The Ministry of Mines and Energy has indicated in their regulatory agenda that changes to the methodology may be made, with publication anticipated in the last quarter of this year. Any changes would take effect upon the June 2023 tariffs reset.
Felipe Pardo, CEO
Thank you, Elena. Thanks, Lily.
Christian Audi, Analyst
Thank you, hello, Felipe, Jaime, Uribe, and the Ecopetrol team, congratulations on the very impressive results across the board. I had three subjects I'd like to ask you about, please. The first one, going back to capital allocation in terms of capex, are you able to anticipate capex projects or even if you wanted to do that, it can really be done in the short term, it would have to be more of 2023 onwards dynamic. In other words, you couldn't really increase capex in 2022 just because, given most of these projects are long-term engagements. And then in terms of dividends within capital allocation, you paid an extraordinary dividend, and now I was just curious if you're able to do that on a quarterly basis going forward or if it only tends to happen at the end of the year. And then in terms of your interest in inorganic growth, my understanding was that you were particularly interested in opportunities within ISA, but I was just wondering, given that prices are so high now, could that open up opportunities for you to pursue inorganic growth also in the oil and gas sector, and not just related to ISA? The second topic was costs; I want to ask about your outlook for lifting and transportation costs given what you were able to achieve in the fourth quarter. Finally, regarding corporate governance, you've made a significant amount of progress on your corporate governance front by improving and strengthening your bylaws and reports. However, we are experiencing a very dynamic, fast-changing, pre-election environment that generates a lot of noise with candidates saying things they wish they could do while whether they can be achieved is another story. I was wondering, given your solid micro story, how protected Ecopetrol is from a macro point of view, given its strong bylaws and Board setup? Thank you.
Felipe Pardo, CEO
Christian, thanks. Well, there are different angles to your questions. So I’ll provide context first. I'll ask Alberto to discuss capital allocation—can we anticipate future projects? It's likely a 2023 route rather than this year because we want to adhere to our discipline, which I previously discussed. Regarding dividend policy, I'll ask Jaime for more detail, but I can share that we've had impressive results, and I think you used a good word in describing our performance. We achieved impressive results, and in this regard, being at the top end of the dividend range within our policy is always a positive sign. As for inorganic opportunities, we always keep our eyes out for opportunities, as we've done in Brazil, as you've seen over the years with things like Gato Do Mato or some exploration blocks in the Permian. The Permian will be generating more than 30,000 barrels this year for us or 60,000 barrels for the joint venture. So from 50,000 we're going to go to 60,000 and providing $250 million in EBITDA with an EBITDA margin exceeding 80%. This flexibility will help clarify our actions. However, higher oil prices and increased cash inflows will give us more leeway, so now I'd turn it over to Alberto for additional insights.
Alberto Consuegra, COO
Thanks, Felipe. Good morning, Christian. Regarding capital allocation, our outlook for 2022 is formidable as we anticipate significant spending this year. Given our guidance for capex in 2022 is expected to fall between $4.8 billion to $5.8 billion. We're looking at an increase over prior years as we seek to drive growth, particularly in upstream investments. We will maintain discipline in order to ensure projects are effectively matured, ensuring the deployment of capex expected for 2023.
Jaime Caballero Uribe, CFO
Thank you, Alberto. Hi, Christian. Thanks for your questions. On dividends, this ties into what Alberto mentioned. We envisage an environment where the first priority remains the growth opportunities found within our 2040 strategy. And should there be excess cash after ensuring these growth opportunities, we will evaluate how to deploy that capital effectively. As you've noted, inorganic growth opportunities exist within ISA, particularly as we explore the pipeline. ISA has investments of nearly $7.5 billion committed over the next decade and could bolster our inorganic growth from those avenues as their market remains robust. Furthermore, there are intriguing opportunities within hydrocarbon businesses that we aim to prioritize, focusing on areas with high growth potential, particularly those suitable for short-cycle projects. This focus will ensure we can yield competitive returns for our shareholders. Regarding the dividend process, I personally don’t see quarterly distributions from Ecopetrol due to market volatility, and thus we remain cautious about committing to a fixed dividend structure. However, should the market conditions remain conducive throughout the second half of the year, a conversation regarding dividends could become a possibility. I hope this proves to be helpful, Christian. I will pass it back to Felipe.
Felipe Pardo, CEO
Thank you, Jaime. Regarding the corporate governance topic, I think it’s important we cover many aspects, Christian. First of all, we have engaged in substantial efforts in enhancing corporate governance in Ecopetrol for many years. This is an ongoing endeavor, and I believe we have made very positive changes in our governance structure. Having the ability toBenchmark our practices against international standards has been beneficial for us. As elections approach, monitoring their effects on our operations is crucial. While there is a pre-election atmosphere filled with uncertainty, Colombia has historically maintained its status as a dominant democratic system, thus evoking confidence in upholding the integrity of its corporate governance structure. From a corporate governance standpoint, Ecopetrol has established strong bylaws, ensuring that board selections meet technical proficiency and independence standards, targeting a representation of independent members over 50%. There is a succession plan for senior executives and the Board is focused on maintaining a long-term strategy that respects our stakeholders and generates value while adapting as necessary. Please do not hesitate to reach out if you require any more specific information.
Operator, Operator
Thank you. Our next question comes from Andres Cardona from Citi.
Andres Cardona, Analyst
Hi, everyone. I have two quick questions. The first is if you can comment on the downstream margins you see in the fourth quarter, are they sustainable or is there any current event that might affect it, possibly influenced by the chemical business? The second question is regarding the quality of the discount outlook in the context of the situation we are witnessing in Russia and Ukraine? Lastly, can you help me verify a couple of data points: what was the EBITDA for the gas segment in the fourth quarter, and what is the dilution factor as of the fourth quarter? Thank you.
Felipe Pardo, CEO
Thanks, Andres, and good to hear from you as well on this call. Alberto, let’s start with the dilution factor, then we can go to gas EBITDA. I think that might be the next point. Jaime, if you can take that one, please.
Alberto Consuegra, COO
Thanks Felipe, and hi Andres. In terms of dilution factor and how it relates to the fourth quarter specifically, we saw an increase in the dilution factor due to higher costs of diluent purchases. The dilution factor was approximately $485 per barrel for a total of $4.27 during the year 2021. We expect this to remain around the $4 per barrel range throughout 2022. With regard to EBITDA from the gas business, we maintained margins above 50% this year, achieving more than $100 million in EBITDA with a margin of 53%, as we did in 2020 and 2021, with strong results for 2021 driven by a growth of around 20%. That covers where we are.
Jaime Caballero Uribe, CFO
Sure, Alberto. Yes, our gas business delivered strong results in 2021, growing more than 20% compared with 2020 in terms of EBITDA. This business generated over $100 million in EBITDA with a margin of 53%, and it includes, of course, the fourth-quarter results, which were above 55%. This trend has been stable over the last three years. Conclusively, gas has proven to be a resilient and profitable business, which leads us to allocate more than $1.8 billion towards gas development in our 2022-2024 plan.
Felipe Pardo, CEO
Thanks, Andres.
Operator, Operator
Thank you. We will go to the next question, which comes from Bruno Montanari from Morgan Stanley.
Bruno Montanari, Analyst
Good afternoon. Thanks for taking my questions. I have a couple of follow-ups from the prior call on this one. Starting with corporate governance. Indeed, the company has made significant progress throughout the years, and I have a specific question about the proposals you are making to change the bylaws now. Specifically, there was a proposal to increase the tenure of board members from 2 to 4 years. If that is approved and it seems likely to be, does this change the existing tenure of current board members or would it apply only to those joining the team in the future? My second question pertains to the stabilization fund. I understand that the figures you’ve given regarding the expectations for collecting third and fourth-quarter values. But with demand recovering now, oil prices around $110, doesn't that imply that receivables in the fund will grow over the year and could potentially exceed the COP 7.8 trillion that we observed at year-end? Thank you very much.
Felipe Pardo, CEO
Thanks, Bruno. With respect to the FEPC and the stabilization fund, I will ask Jaime to provide a bit more color regarding those areas. Yes, we recognize that the fund balance is likely to increase. The good news is we have received funding from the government in less than 12 months in the past, and the accrual of receivables increases showcases revenue growth. Therefore, evaluating the overall context is key, noting that we ended last year with COP 17.5 trillion. Furthermore, the national budget allows for extraordinary dividends that can be utilized as proceeds toward outstanding stabilization fund receivables, which adds strategic maneuvering options. I think there are many elements at play here. Regarding the proposals around board member tenure specifically, the new proposal will apply once it is approved during the General Assembly meeting.
Jaime Caballero Uribe, CFO
Thank you, Felipe. Hello Bruno. Good to hear from you. Regarding the stabilization fund, as Felipe anticipated, higher prices likely imply a higher balance within the fund. However, it is essential to remember that this balance depends on multiple factors, including fluctuations in international prices for diesel and gasoline, domestic pricing adjustments, and FX effects. Therefore, accurately predicting the evolution of fund balances can be challenging. If current market conditions persist, we can expect the fund to grow at a rate similar to that seen in Q4 of last year. But ultimately, we’re closely monitoring this and engaging with the government about best practices to manage the fund adequately.
Felipe Pardo, CEO
Do we have additional questions?
Operator, Operator
Let me check if you have any more in the queue. I apologize for that, and please go ahead.
Felipe Pardo, CEO
I would like to note that I appreciate your engagement and look forward to connecting further on our results, performance, and future outlook.
Operator, Operator
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.