Earnings Call Transcript - EC Q1 2023

Operator, Operator

Good morning. My name is Camilla Wella, and I will be your operator here today. Welcome to Ecopetrol's Earnings Conference Call, in which we will discuss the main Financial and Operational Results for the First Quarter of 2023. 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'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 on this conference call. The call will be led by Mr. Ricardo Roa, CEO of Ecopetrol; Diana Escobar, Vice President of Sustainable Development; María Paula Camacho, Vice President of Legal Affairs and General Secretary; Yeimy Báez, Vice President of Low-emission Solutions; Alberto Consuegra, COO; and Jaime Caballero, CFO. Thank you for your attention. Mr. Roa, you may begin your conference.

Ricardo Roa, CEO

Good morning, everyone, and welcome to the earnings conference call. It's my privilege to address you today to present the Ecopetrol Group's results for the first quarter of 2023. Before I begin with the material that we have prepared for you, I would like to express my sincere gratitude to all the members of this organization for their commitment and dedication to their work. Clearly, Ecopetrol employees are fully engaged and passionate about their work. It is an honor to lead such a talented and committed team. Together, we will work to ensure that Ecopetrol continues to be a reference within the energy sector with operational excellence, financial performance, and be a global leader for the energy transition. I want to express my deep commitment to strengthen and continue Ecopetrol's 2040 strategy, which was announced at the beginning of last year, fostering the group's consolidation as a leading energy group in the region. The strategy is focused on energy that transforms, addressing the current challenges associated with the energy transition, where society must simultaneously balance three energy priorities: availability, accessibility in terms of cost and efficiency, while being environmentally responsible. For the capital group, this is possible through our four strategic pillars: growing with the energy transition, generating value through ESG, cutting-edge knowledge, and capital returns. Our 2023 plan is a key milestone for this strategy, and we are committed to effectively and efficiently implement it to achieve our goals. We aim for revenues between COP 25.3 trillion to COP 29.8 trillion to accelerate the path of transition and energy security, with production between 720,000 and 725,000 barrels of oil equivalent per day that are key for balance stability and energy supply transferred to the nation of over COP 40 trillion in 2023. All of this, in addition to increasing the impact of social investment and always seeking close and open communication with society and communities with whom we work daily in our operations. Moving on to the next slide, I would like to start by highlighting our resilience as we navigate a rapidly changing market environment in terms of price, as well as a challenging local and security situation at the beginning of the year. Our fiscal position has us at 719,000 barrels of oil equivalent per day and increased 27,000 barrels versus the fiscal year of 2022. Growth was supported by the company's operational strength and higher production from key fields such as Caño Sur, Rubiales in Texas, United States. In the first quarter of the year, we registered revenues of COP 38.9 trillion, EBITDA of COP 17.8 trillion, and net income of COP 5.7 trillion. These results reflect the effect of Brent prices translated into Colombian pesos given the devaluation of the currency. Our operational strength in the hydrocarbon business, with higher production and refining output, as well as growth in transported crude and refined products, is noteworthy. The gas LPG business recorded an EBITDA margin of 59% in the quarter. We also highlight the performance of the energy transmission and toll road segments due to new projects and adjustments in tariff indexation factors. I would also like to point out the dividend payment approved by the shareholders' general meeting of COP 24.4 trillion, equivalent to COP 593 per share, the highest in the company's history. This value will represent a dividend yield of 25%, implying a dividend payout of 73% of the 2022 net income. Furthermore, we target to reduce methane emissions by 45% by 2025 and 55% by 2030 compared to the 2019 baseline in the direct operations of the production segment. We will achieve this through detection, measurement, fugitive elimination, and reducing venting in tons and wells. Let's please move to the next slide.

Diana Escobar, Vice President of Sustainable Development

Thank you, Ricardo. In 2023, we continue to generate significant social value. It is worth emphasizing that for this year, the investment plan within the Ecopetrol Group's sustainable development portfolio amounts to a record-breaking COP 773 billion, representing a 25% increase compared to 2022. Here are some relevant milestones. During the first quarter, we made remarkable progress toward National Public Education goals, benefiting 31,000 students. In March, we selected 94 new students to grant them scholarships through the Bachilleres Ecopetrol program to pursue higher education studies. Furthermore, talented young women earned a place to participate in the program, She is an Astronaut, an initiative aimed at enhancing their skills, culminating in a transformative visit to NASA Space Center in August. Within the scope of the Ecopetrol Emprende program, we successfully completed our support for 100 entrepreneurs, micro and small-sized enterprises from Barranquilla in the Meta department. As a result, they achieved an increase of 36% in sales and expanded their customer base by 52%, aiming to narrow the national gap in access to public services. We achieved a significant milestone this quarter by connecting over 11,500 families to natural gas in Barranquilla and in the municipalities of Arauquita, Arauca, Puerto Rondón, and Cravo Norte in the department of Arauca. Moreover, I would like to emphasize our commitment to sustainability and the energy transition; in collaboration between Ecopetrol and Acentia, we proudly inaugurated the first sustainable wagon of Bogotá's mass transportation system, Transmilenio, which operates under environmental sustainability criteria. To honor our commitment to be close to the country's communities, we conducted nine social dialogues, engaging community action boards, academy, entrepreneurs, and local institutions. Additionally, we participated actively in the 2023 National Popular Communal Assembly, engaging with 5,000 members and gaining valuable insights from social leaders across the country on topics such as energy transition, dynamics of the hydrocarbon sector, popular economy, and environmental protection. In collaboration with Hocol, we coordinated the roadmap for prior consultations with the Alto Unuma Meta indigenous reserve of Puerto Gatan and indigenous communities of Ortega in the department of Tolima. These consultations are crucial for modifying Rubiales fields, the environmental license, and the injector well project. Lastly, we volunteered in revitalizing public spaces, conducted pedagogical activities for the responsible use of plastic, and installed a children's playground with seven tons of recycled plastic. Now I pass the floor to María Paula Camacho, who will enlighten us on the accomplishments in corporate governance and responsibility.

María Paula Camacho, Vice President of Legal Affairs and General Secretary

Thank you, Diana. As part of our commitment to the energy transition and in line with the Ecopetrol Group's strategy and TESG plan, the Ecopetrol General Shareholders' Meeting, which was attended by more than 3,500 people, was the first carbon-neutral General Shareholders' Meeting of Ecopetrol. In addition, we highlight the following facts: there was a three-ton decrease in CO2 emissions in the 2023 shareholders' meeting compared to the 2022 meeting. Those emissions were offset through the purchase of bonds from a REDD+ project, which prevented degradation and supported reforestation of native forest in Bajo Calima and Bahía Málaga in Buenaventura. Proper disposal of the waste generated during the event was guaranteed by providing a second line for the different objects used in the meeting, and the printing of stationary items and handouts decreased. We also created employment for mothers who head households through a Palanus company, which oversaw the production of gifts for shareholders. During the meeting, several points were reviewed and approved, including the annual corporate governance report and the integrated management report for 2022. These reports revealed the structure adopted to respond to the challenges of the 2040 strategy through the definition of three business lines: hydrocarbons, low-emission solutions, and transmission and toll roads. Additionally, the 2022 financial results and advances in the TESG pillar were presented. The Board of Directors election for the remainder of the 2021-2025 period took place, resulting in a Board with seven independent members, of which three are women for the first time. Finally, we highlight the approval of the 2023 annual human rights plan, ensuring Ecopetrol's survey of human rights risks associated with business activity in the operational area. This exercise is carried out with a two-way perspective, involving employees, suppliers, and community leaders. I will now hand the floor to Yeimy Báez to elaborate on the milestones in low-emission solutions.

Yeimy Báez, Vice President of Low-emission Solutions

Thanks, María Paula. In the first quarter of 2023, we achieved significant milestones in our portfolio of low-emission energy solutions. The natural gas and LPG business reported an EBITDA of $267 million, representing a year-over-year increase of 7% with an EBITDA margin of 59%. During the first quarter of 2023, we reached more than 160,000 equivalent barrels per day of gas and LPG production combined, attributed mainly to growth in our US operations, maintaining a 22% share of gas and LPG in the group's production mix. Alongside transportation companies, we achieved a historic milestone for Colombia by beginning the directionality of the gas pipeline in Barrancabermeja by the inner section, thanks to contractual management and the Cusiana field volumes, thus allowing us to connect our field with the northern part of the country, which in turn increases the reliability, optionality, and security of the natural gas supply in this area. As part of our ongoing effort to improve community well-being, we continue to grow our social gas program, benefiting 2,400 families from rural communities in Arauca during this quarter. Likewise, in the energy communities project portfolio program, more than 20 initiatives were highlighted, with four of them put forward for development in Putumayo, Meta, Nariño, and La Guajira. In renewable energy sources, the operation of our solar farms, including Sam Fernando, and the small hydroelectric power plant Cantayús, allows us to reduce 6,400 tons of CO2 equivalent emissions, making significant progress toward our decarbonization goals, along with reported savings of more than MXN 6,600 million, increasing 127% compared to the first quarter of 2022. Furthermore, as part of the group's decarbonization strategy and commitment to the energy transition, we signed an agreement with Total Eren in January of this year for constructing a 100-megawatt solar farm in the Rubiales field, which will reduce more than 24,000 tons of CO2 emissions per year. In our continued commitment to incorporate new non-conventional renewable energy sources into the group's portfolio, we formed an alliance with EDF, Colombia, and Refocosta to build a forest biomass plant with a 25-megawatt capacity in the municipality of Villanueva, Casanare. This energy will be supplied to the group through an agreement with our trader Gecelca, expecting a reduction of 70,000 tons of CO2 emissions per year, in addition to reforesting an area of 13,600 acres. Additionally, a memorandum of understanding was signed with Baker Hughes and Central Hidroeléctrica de Caldas to study the feasibility of developing a geothermal well in the Nereidas Valley. This will enable short and medium-term possibilities for geothermal energy generation. Regarding hydrogen, two projects have advanced to their final phase of maturity, which will add a capacity of 60 megawatts each of electrolysis with Proton Exchange Membrane (PEM) technology powered by renewable energy sources. Furthermore, at the Caribbean Innovation and Technology Center in Cartagena, we introduced the first hydrogen-powered vehicle with a Colombian license plate number. Japan and Brunei's operational green hydrogen production, storage, and recharging systems will be available for the innovation and entrepreneurship ecosystem in the fourth quarter of this year. I now turn the floor over to Alberto, who will speak about the main operational milestones.

Alberto Consuegra, COO

Thank you, Yeimy. 2023 started with two exploration successes in wells which were drilled at the end of 2022 and tested during this quarter. In Arrecife Norte, which is 100% operated by Hocol and located southeast of Montería, gas was found in the Ciena Garoto formation, and extensive testing is expected to begin in the fourth quarter of 2023. The total well operated by GeoPark in partnership with our subsidiary Hocol located in Villanueva, Casanare confirmed the presence of 35 degree API light crude oil in the Middle on formation. At the end of the quarter, the initial tests were completed, and the well is currently undergoing extensive testing to evaluate its potential. In the first quarter, we advanced 32% on the 2023 drilling campaign, having drilled eight exploratory wells out of a plan of 25, with six located in the Eastern Plains and two in the Piedmont Foothills. Regarding offshore exploration activity in Colombia, we continue to advance with the evaluation and the fulfillment plan of the Uchuva and Gorgon discoveries in the Colombian Caribbean. Additionally, contracting is underway to start drilling the Orca Norte-1 appraisal well, estimated for the end of this year. To identify prospects and mature new opportunities, Ecopetrol acquired 312 square kilometers of seismic data with the Flamenco 3D program located in Puerto Wilches and Sabana de Torres in Santander and the Middle Magdalena Valley Basin. This program generated more than 1,100 direct and indirect jobs. On the production front, we reached 719,000 barrels of oil equivalent per day during the first quarter of the year, maintaining robust results despite security issues in some regions. We highlight the incremental production of Cano Sur and our Permian subsidiary and the improved performance of Rubiales, supported mainly by the pressure support project with the reuse of production water, which allowed us to grow sustainably and contribute to the weather neutrality goal. Additionally, during the period, production was primarily affected by security issues, impacting 6,800 barrels of oil equivalent per day due to the closure of capacity fields and the shutdown of the Gibraltar gas plant during March. Blockages by third parties in the Quifa, Cano Sur, and Rubiales fields had an impact of 2,600 barrels of oil equivalent per day, and lower gas demand from external customers compared to estimates also contributed. It should be noted that the exploration and production segment contributed 48.6% of the group's EBITDA with an EBITDA margin of 42%, which is a profitable and sustainable segment that leverages the energy transition. By the end of the year, production is expected to improve, mainly in the Permian, Cano Sur, Rubiales, Piedemonte, Quifa, and Arauca assets. There are also external factors that could affect production, such as the El Niño phenomenon and environmental and public order situations that are constantly being monitored. Let's go to the next slide, please.

Jaime Caballero, CFO

Thanks, Alberto. In the Transmission and Toll Roads business segment, ISA delivered positive operating and financial results, leveraging the sustained growth of the energy business in Brazil. This was reflected in a 10% contribution of the business line to the group's revenues, 15% to EBITDA, and 4% to net income at the end of the first quarter. The following milestones stand out in the quarter: the award of 13 extensions in Brazil and eight connections, five in Brazil, two in Colombia, and one, together adding 334 kilometers of circuit to the network. Secondly, the entry into operation on reinforcement and 15 improvements in ISA CTEEP. Thirdly, the partial commercial operation of IE Itaúnas, with a right to 66% of its annual regulated revenue equivalent to $8 million. At ISA, we advanced in the construction of 31 energy transmission projects, representing more than 4,840 kilometers of additional circuits to the network, which will generate revenues exceeding $260 million when they come into operation. The construction stage of Rutas del Loa continues with an extension of 136 kilometers, which is expected to come into operation in 2024. During the first quarter of 2023, the Ecopetrol Group continued to deliver outstanding indicators amidst a more challenging price scenario compared to that observed in 2022. The royalty rate was 17.8%, underpinned by the last 12 months of operating income, benefiting from a favorable Brent-peso environment, strong operating performance, and solid results in all business units. This result partially offset higher taxes and the increase in capital employed. The EBITDA margin was 45.9%, mainly due to good operating performance across our business lines and solid product realization prices, which offset the increase in operating costs and expenses associated with higher exchange rates and inflation. Regarding EBITDA by business line, the higher contributions from transmission and low-emission solutions align with the Ecopetrol Group's Strategy for 2040, aiming for these businesses to account for between 30% and 50% of group sales. The gross debt to EBITDA indicator stood at 1.5 times, below the 2023 target of 2.1 times. The debt-to-equity ratio increased to 1.2 times due to the 16% decrease in equity associated with dividend declarations at the general shareholders' meeting, while debt increased by only 1.1%. The net income breakeven closed at $32 per barrel, mainly due to higher sales volumes and better product spreads.

Ricardo Roa, CEO

To close, I would like to highlight that we have achieved a strong start to the year, with the 2023 plan that is still on track. We have made good progress on the energy transition front and in line with the pillars of the 2040 strategy. We continue to expand into new geographic regions and strengthen our relationships with our investors and business partners. We are excited about the future with many opportunities that leverage strong corporate governance. We will continue to work hard to create value for our shareholders, employees, and communities. Thanks to everyone participating today for your time. And with this, I open the question-and-answer session.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Before we start, I will hand it over to Ecopetrol's CEO, Ricardo Roa.

Ricardo Roa, CEO

Good morning, everybody, and thank you again. Before we start the question-and-answer section, I would like to thank you again for being here. As you all know, I joined Ecopetrol two weeks ago. This is my first conference call. This is a complex industry. During the past weeks, I have been working hard with the team to get acquainted with the details of its business lines. I must mention that I have found deep technical experience and an enthusiastic team. I will happily answer your questions regarding my general vision for the company's strategy, our priorities, and how we will work with the national government to continue generating value for all our shareholders while relying on the team to provide detailed information about other topics and recent performance. I would also like to share a little bit more about myself. I am trained in electromechanics, hold a mechanical engineering degree from the National University of Colombia, and have a specialization in management engineering systems. I have the privilege of over 30 years of professional experience, mainly in the energy sector. Over the past 20 years, I have held high-level positions in energy and gas companies in Colombia, Peru, Guatemala, and Honduras. My career includes leading studies and initiatives on energy generation projects, efficiency, and strategic transformation in the companies I have worked with. My experience includes serving as CEO of Grupo Energía de Bogotá, President of Transportadora de Gas Internacional, and General Manager of Empresa Energía de Honduras. I also managed Electrificadora de Santander and directed the energy and ethanol business in a sugar mill and refinery company. Regarding my vision for Ecopetrol, I want to bring all of this experience in the gas and power sector to strengthen the execution of the 2040 Strategy. My first message to you is my full endorsement of this strategy. We will remain focused on growing the hydrocarbon business while continuously monitoring market conditions for necessary adjustments for value generation. At the same time, we will continue to work to seize opportunities within the energy transition and contribute to a well-balanced and responsible energy transition in Colombia and the regions where we operate. I value the capital's positive impact on communities near our assets. I hope to see that our strategy continues to contribute to poverty reduction in the regions where we work, which is fundamental for Colombia's environmental, social, and fiscal performance in the long term. Finally, we will continue working closely with the national government to find structural solutions for the CapEx deficit that are sustainable from a fiscal perspective while maintaining Ecopetrol's value proposition to all shareholders. Internally, we will improve our processes using technology to adhere to higher international standards. Let's continue with the question and answer session, please.

Bruno Montanari, Analyst

Good afternoon, everyone. Thanks for taking my question. And Ricardo, very welcome to Ecopetrol and here's to hoping that the company continues to follow and deliver its strategy. So I have three questions. The first one is it seems very clear that the company is accelerating and really focusing on the energy transition. I wanted to compare that with hydrocarbons. The recent news flow in the country seems to indicate that new exploration activities and even regular drilling activities will be much more limited going forward. With the fracking ban, how comfortable is Ecopetrol that it can sustain its production level in the coming years? With the maturity in April of its oil fields, isn't there a risk that only in the secondary and tertiary recall is not enough to offset the natural production decline? The second question is about your commitment to the shale JV in the US and how that aligns with a philosophy, if you will, of not being involved with fracking activities. And the third and last question is about the evolution of the FEPC in the quarter. For us, it sounded like the COP 2 billion freeze looked a bit surprising, considering international oil prices and domestic prices in Colombia. I was wondering if you could help us reconcile the balance that increased that much in the quarter and how the company sees the funding or settling the funds on top of the COP 21.6 trillion that is already on the budget. You still have about the three-year COP trillion from the 2022 values and almost COP 8 trillion from 2023. So I'm wondering if you have visibility on how that gets worked out. Thank you very much.

Alberto Consuegra, COO

Good morning, Bruno. Thanks for the questions. I will take questions one and two. Regarding exploration, as you might recall, we have stated that our 2040 strategy is based on growing our production beyond 2030. This is supported by existing E&P contracts where we have about 265 exploration opportunities. Our 2023-2025 plan includes significant investment in exploration taking advantage of those opportunities. In 2023, we have plans to drill 25 exploration wells, eight of which have already been completed. We continue to see exploration in our portfolio as vital, and part of our future resources will come from exploration. If necessary, we will have to discuss future exploration contracts with the government, particularly if we see the need to replace oil production beyond 2023 and 2024 to maintain the throughput required by our refineries. As for EOR, this will remain very important, representing about 38% to 40% of our total production. When we look at our reserve portfolio and contingent resources, most of them will come from EOR, particularly from the Castilla and Chichimene areas, where we see water injection and air injection projects. We are beginning pressure support projects in Rubiales as well. We continue to inject gas to support pressure in our Piedemonte Foothill portfolio. Therefore, EOR remains quite important, and we expect to maintain a good share of our production in the coming years. Regarding Permian and unconventionals, we recognize that we may have to suspend any activity in terms of unconventionals in Colombia, but Permit remains a crucial and highly profitable asset in our portfolio, exceeding environmental standards while we continue increasing our presence there. Last year, we acquired a position in the Delaware Basin and increased our share in the Midland Basin, resulting in a $142 million EBITDA for this quarter with an 80% EBITDA margin. It is one of the future assets that will represent the cash flow that the energy transition will require in the future. So, it is very strategic and fundamental regarding our strategy in Ecopetrol.

Jaime Caballero, CFO

Bruno, this is Jaime. Good to hear from you. I will take the third question regarding the evolution of the FEPC over the last quarter. I would quote you on your question; it seems to me that you had a lesser expectation around the balance. In our case, we were not surprised. It is important to remember that there are various elements to the formula. The international price, the reference price, and what is happening domestically are the main considerations, along with foreign exchange rates. That might explain your surprise. Directionally, what I would convey is that we had positive momentum in the balance, made possible by several adjustments on gasoline prices by the government, which were significant and actually higher than their expectations. This indicates their commitment to balance. However, some of that was offset by foreign exchange movements, which you should consider in your numbers. Now, in terms of the accumulation of FEPC, it is decreasing. Last year, at one point, we had a balance accruing at about COP 3.6 trillion per month. Our accrual rate now is around 2%, significantly less than before. Going forward, that will fluctuate based on those three variables. I would note that on the diesel front, there is some pressure due to robust diesel prices, contributing pressure on FEPC for diesel. However, on gasoline, significant relief has been observed. This results from declines in international prices, along with government interventions on domestic pricing. Regarding the settlement, the key aspect is the exchange of government dividends against the COP 21.6 trillion balance, leaving a COP 5 trillion balance related to 2022. There are two or three mechanisms for dealing with this. The most likely mechanism will involve budget surpluses that the national government has, which can be assigned toward FEPC. The alternatives would be creating new budget allocations or the possibility of extraordinary dividends affected by company performance and cash availability. That's the outlook we're seeing. I hope this helps.

Badr El Moutawakil, Analyst

Thank you so much for taking my question. Congratulations on the earnings, and congratulations, Mr. Roa for the nomination as CEO. I have a few questions, some of which were partially addressed by Mr. Caballero. The first one is to Mr. Roa. Can you let us know if you've had any recent discussions with Hacienda regarding some of the recent topics? The first one is the deficit; there is a balance pending of about COP 5 trillion. Obviously, there are surpluses, but the decision regarding the payment of this balance will play a massive role in Ecopetrol's funding. Have you had discussions with the new Minister of Finance about the potential payment in cash? My second related question is whether there have also been discussions regarding the changes in diesel and gasoline prices. We understand that the Ministry of Energy and Mines has little power over Ecopetrol, but it would be interesting to know if you are in agreement with the Ministry of Finance about the future of diesel and gasoline prices. My second question is related to CapEx. This was also partially answered regarding the focus on E&P. I was wondering if you could break down the CapEx for 2023 and 2024 by focusing on upstream, midstream, downstream, and energy transition to clarify how we’re allocating it. So, we still think about CapEx running for $6.5 billion, mostly geared toward upstream? And how are you planning to finance the CapEx growth this year? Will that involve new debt? My last question is regarding your healthy cash levels. Given your decent cash balance, are there plans to use part of that cash to repurchase some of the low cash price bonds currently in the market or for potential M&A?

Ricardo Roa, CEO

Thank you, Badr. Petrol is part of the working group with the national government, Ministry of Mines, and the Ministry of Finances to support the definition of initiatives at the regulatory, commercial, financial, and operational levels to mitigate the current impacts generated for the company. Key initiatives include the valuation of technological tools, targeting subsidies, varying tariff prices for Industrial Concession segments, and broader control over the use and destination of volumes with regulated prices, among others.

Jaime Caballero, CFO

Badr, this is Jaime. To complement Ricardo's statement, we are actively discussing this with the government. President Roa, Ricardo, and myself are meeting the Minister of Finance this afternoon to address this. You have seen the public statements made by the Minister last Monday regarding the necessity for a competitive compensation framework for producers; ensuring the right incentives for production in Colombia and maintaining the fiscal balance is paramount to any adjustments made. Our expectation is for fuel prices to continue rising; Minister Boni has expressed this clearly. Over the past nine months of President Petro's government, there has been a commitment to these price increases, which we anticipate to continue. Additionally, aggressive measures are underway to implement initiatives that will mitigate the accrual balance without impacting producer compensation. This is where subsidies focus comes into play, as our international studies suggest that the entirety of society does not need to benefit from these subsidies. They should instead be directed where most needed. In relation to CapEx, President Roa has emphasized our commitment to the 2040 strategy and plan. This year's CapEx is projected at between $5.6 billion and $6.6 billion, unchanged. Approximately 65% of that is allocated to hydrocarbons, underpinning our target for production growth. The remaining portion will be funneled into new business lines. There are no immediate changes in the CapEx structure for 2024 either. We aim to ensure efficient capital deployment across both hydrocarbons and lower emissions to achieve growth goals effectively. At present, there are no shifts in headline numbers for CapEx. Based on our cash management strategy, current cash generation remains strong, focused primarily on supporting capital growth. However, with the operational stability of performance, we have discussions around potential new debt management. We remain committed to maintaining an optimal capital structure, adhering to our leverage ratio commitment of up to 2.5 times debt to EBITDA. Thank you for your questions.

Luis Carvalho, Analyst

Hi, Ricardo, Hi Jaime, and all the executives. Please, if I may allow to ask three questions. First, regarding your main goals three to four years ahead. What main achievements would you like to see? The first question is for Ricardo. Second, regarding capital allocation, how do you prioritize among subsidies for fuel prices/investments/dividends to the government, given the limitations that you mentioned exist? The third question pertains to the past discussion on the potential sale of 8% of the company's shares. Do you think this discussion could be revisited now, considering the current environment?

Ricardo Roa, CEO

Thank you, Mr. Carvalho. Regarding the first question, the current strategy is solid and robust, responding to energy transition challenges. We will evaluate opportunities to accelerate new business related to the energy transition while maintaining capital discipline, cost efficiency, and sustainable returns for shareholders. There will be no changes in the 2023 investment plan announced last November. Regarding capital allocation, we are committed to the existing plan, focusing on sustaining growth which has been previously endorsed at all levels of governance. The priority lies in continuing to finance our investment program while managing debt services wisely. After covering these needs, we will assess dividend distributions according to our policy. Indeed, you mentioned FEPC in this context, which is managed with careful consideration. The potential sale of shares still stands as an option; the original authorization extends until 2026. While there are no immediate actions to activate this, we remain open to opportunities as market conditions permit.

German Cristancho, Analyst

Hi. Good morning, and thank you for this call. I have three questions. One is regarding oil prices. Oil prices have come down this year, and the Brent reference is close to $76 per barrel. I would like to know what oil price assumption you are using for the annual budget and if you're planning to change this for 2023. The second one is about the National Hydrocarbons Agency, which will release the reserves report during May. What should this report reveal to change your favor towards signing or allocating new exploration contracts in Colombia? The third question is, could you please give us an update about the Caribbean Sea operation? When do you expect the gas potential to be incorporated into the company's reserves?

Jaime Caballero, CFO

Hi, German, how are you? This is Jaime. I'll begin with your question about oil prices and our budget assumptions. Our current plan assumes an oil price of $81 per barrel for this year and the next three years. We have not changed this number since it was sanctioned in November, and the current price trajectory is in line with our expectations. Addressing your question on the exploration contracts, Ecopetrol has 48 exploration contracts signed and 30 exploitation contracts with near-field exploration options. These contracts provide an estimated range of 8 to 10 years of exploratory activity depending on obtaining environmental licenses and executing projects effectively. Regarding the Caribbean Sea operation, we will drill seven offshore wells beginning at the end of this year, with our commitment well in Arauca. If successful in Uchuva and Gorgon, we expect to see resources transitioning into reserves beyond 2026.

Andrés Duarte, Analyst

Hello. Thank you for taking my questions. I have three short questions. First, I want to wish Mr. Roa and the team the best of luck this year. The first question relates to gas. What’s the required average local gas price for offshore gas reserves to become economically viable? The second question relates to hydrogen. What is your production expectation or forecast for hydrogen volumes in the next couple of years? And the third question is regarding oil and gas reserves for Ecopetrol related to EOR. For 2022, the oil addition related to EOR was pretty low compared to previous years. I want to understand the expectations for reserves addition from EOR in the near future.

Jaime Caballero, CFO

Thanks, Andrés, for your questions. I will start with the first question regarding gas. Under the current regulations in Colombia, local gas prices for wellhead sales are freely set, thus not tied to any international references or benchmarks. Our resources in the Caribbean Basin are considered competitive versus other domestic sources and import gas. The price level required for these resources depends on competitiveness with the local market, facilitating further investments. Regarding hydrogen, our current hydrogen production from methane reformers stands at about 130,000 tons per year, of which 90% is gray and 10% blue. With our current projects in operations and those reaching the construction phase, we will produce about 35,000 kilograms per year, with a longer-term target of one million tons annually, reflecting a significant increase in capacity. Lastly, regarding reserves from EOR, we aim to maintain a plan that replaces 100% of our reserves each year. EOR is expected to play a critical role in future reserves as it will contribute significantly to our production base.

Ricardo Roa, CEO

Thank you, Andrés. Regarding EOR, it remains pivotal, significantly influencing our reserve addition strategy and production base for the future. Our plans are robust and ensure we utilize EOR effectively to bolster our reserves in the upcoming years.

Annie Lee, Analyst

What are your expectations for your refining business for the remainder of 2023, given declining global refining margins?

Ricardo Roa, CEO

Hello, Annie. Thank you for your question. Regarding the downstream business, we had a strong first quarter with record crude rates and high levels of EBITDA along with refining margins. While refining margins appear to be declining, they still look strong, estimated between $15 per barrel. In terms of EBITDA, we anticipate achieving between COP 400 billion to COP 420 billion in our refining business, likely on the higher side of this range. Although a turnaround at the Barrancabermeja refinery is planned for July, lasting about 30 to 40 days, crude rates will revert to maximum levels after this period. Overall, we foresee a positive outlook for 2023 with a strong focus on safety, operational availability, and OpEx performance.

Operator, Operator

Thank you, Mr. Roa. There are no further questions at this time. Thanks to everyone. This concludes our first quarter 2023 earnings conference call. Thank you for your participation. You may disconnect right now.