Ecopetrol S.A. (NYSE:EC) Q3 2022 Earnings Call Transcript

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Felipe Bayon: Thanks, Nicolas. Thanks, Andrew.

Operator: Next we have a question from Frank McGann from Bank of America. Please go ahead.

Frank McGann: Thank you very much. Just a couple of questions if I could. One, could you just confirm €“ you mentioned in the tax discussion about the ability to deduct production costs and I just you know if you meant total production costs or royalties only. And then in terms of cost inflation, what you seem to be doing or making a lot of efforts to where are you seeing the biggest effects? And are you seeing any acceleration in cost inflation as you look out over the next six to 12 months? And then your diluent volumes seemed to be much lower. And I’m just wondering, what are the expectations for diluent usage as you go forward here? And how will that maybe affect your overall cost structure? Thank you.

Jaime Caballero: Hello, Frank. Hope you’re doing well. So with regards to your first question, what €“ just to clarify it’s the cost of production associated to those specific royalties. So that’s what currently the tax regime allows you to deduct and should the reform proceed as it has been approved in the two chambers that will no longer be a deductible item. With regards to your second question about inflation, I’m going to make an overarching comment and then I’m going to pass it over to Alberto for some of the specifics. Generally, what we’re seeing so far is that we have seen an effect of around 12% to 13% in our cost base associated to inflation. We have been able to mitigate probably some four or five points of that with the existing contract strategy and through demand management and through long-term pricing and the like.

As we look into next year’s planning and certainly to the next two, three-year horizon, we are seeing an increasing pressure in that regard. Probably that 12% to 13% is going to become something along the lines of 16%, 17%, simply due to the fact of indexes kicking in. Now of course we’re not standing still. We are looking again at value chain opportunities and contract opportunities and the like. But directionally, we are seeing an increased pressure. I’m going to pass it over to Alberto, so that he can give you some further color.

Alberto Consuegra: Thanks, Jaime. When you look at our refining and transportation costs are very much in line with the plan. And this is because we have €“€“ in the case of transportation, actually transported more volumes. So we keep the indicator on the control. Where we are seeing an impact is in terms of lifting costs jumping in about 15%, compared to the second quarter of this year. So right now we have it in the lines of 9.15% of cost per barrel. But when you look at what are those areas in which we need to focus, I would say energy cost, that’s number one. The second one has to be with the cost of raw materials, particularly steel and the third one is about the cost of well services. This is subsurface well services, and intervention well intervention costs that are going higher, particularly because of what Jaime mentioned. This is about introducing the indexes in line with the inflation that we are seeing for these services. Thanks and welcome

Frank McGann: Thanks, Jaime

Operator: Thank you. Our next question comes from Hernan Goicochea from LatinFinance. Please go ahead.

Hernan Goicochea: Hello, can you hear. Hello

Jaime Caballero: Yes, we can hear, you. Yes

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