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Ecopetrol SA (NYSE:EC)
Q3 2019 Earnings Call
Oct 30, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Hilda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ecopetrol Third Quarter 2019 Results Conference Call. [Operator Instructions]

Mr. Fernando Suarez, will begin the conference today. Mr. Suarez, you may begin your conference.

Fernando Alexander Suarez -- Investor Relations

Good morning everyone, and welcome to Ecopetrol's earnings conference call and webcast in which we will discuss the main financial and operational results of Ecopetrol for the third quarter of 2019.

Before we begin, it is important to mention that the comments in this call by Ecopetrol's Senior Management can 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 Bayon, CEO of Ecopetrol. Other participants include Alberto Consuegra, Executive Vice President; Jaime Caballero, CFO; Jorge Calvache, Exploration, Vice President; Jorge Osorio, Vice President of Development and Production; Milena Lopez, CFO of Cenit; and Tomas Hernandez, Vice President of Refining and Industrial Processes.

We will begin the presentation with the main achievements of the third quarter of 2019, followed by the highlights by business segment and financial results under International Finance Reporting Standards. We will close with a Q&A session.

I will now hand over the presentation to Ecopetrol's CEO, Felipe Bayon.

Felipe Bayon Pardo -- Chief Executive Officer

Thank you, Fernando, and welcome everyone joining us at this conference call for the third quarter 2019 results. I am very pleased with the results we delivered yesterday to the market. We continue to deliver on the business plan we presented at the beginning of the year in line with our strategy of cash protection, capital discipline and growth in reserves and production.

For the first nine months of the year, we reported a net profit of COP9.2 trillion and an EBITDA of COP23.9 trillion. This equates to an EBITDA margin of 46%. At the close of the quarter, we maintain a very solid cash position of COP16 trillion even after completement of the payment of dividends to shareholders amounting COP10.1 trillion throughout the year. These results primarily reflect our positive operating performance in our businesses and the positioning of our heavy crudes in the markets to generate higher value.

All these combined with an improved average exchange rate that helped us offset the lower Brent price, which was $73 per barrel for the first nine months of the last year and $65 per barrel for the first nine months in 2019.

Let's move on to the next slide. We have been seeking value accretive opportunities for inorganic growth leading to the strengthening of our position in production and reserves. The first of these is our entry into the Midland in the Permian Basin, the most prolific in the world through a joint venture with Occidental to participate in unconventionals. The joint venture we signed allowed the company to incorporate proven reserves in the order of 160 million barrels in 2019, and gradually increase production all the way to 2027 when we see Ecopetrol with a 95,000 barrels per day share of production in the JV. October 22, we received the approval from the US authorities for this transaction. We expect to close the deal by the end of this year. Currently there are two rigs operating in the Midland. Two wells have already reached total depth, and we expect to complete these wells in November.

In 2020, we expect to see four rigs operating in the JV. As we mentioned, one of the key components of the deal is a transfer of knowledge. We are currently advancing in the selection and recruiting of the Ecopetrol personnel that will be working in the Permian. We expect that the first group will engage in the JV's operation during the first quarter of 2020.

The second deal is our recent acquisition from Shell of a 30% stake in the Gato do Mato discovery in the Santos basin of Brazilian Pre-Salt. A basin with some of the largest prospects in the world. We estimate we would be adding some 90 million barrels of contingent resources in 2020, which will be gradually incorporated into Ecopetrol's reserves balance.

Ecopetrol also estimates that its share of production from this project would be some 20,000 barrels per day of crude by 2025. Under this agreement Ecopetrol will deepen strategic position in Brazil's Santos basin. We estimate these two transactions will generate an incremental EBITDA of some COP1.4 billion per year, between the years 2022 and 2027, yielding a positive impact on ROACE.

Let's move on to the next slide to discuss unconventionals in Colombia. The development of unconventionals is one of the Group strategies for growth in production and reserves. We have respectfully, prudently and responsibly received the provision from the State Council, allowing us to advance to stage of research through the Pilot Projects as recommended by the commission of experts.

We believe this is a real opportunity for Colombia to advance on how the unconventional exploitation can be made, preserving the environment, the water and the surroundings, and then be able to make the best decision about the development of unconventionals, always taking into account the environment, social and economic aspects. As we previously mentioned, Ecopetrol has allocated $500 million over the period 2019-2021 for developing these pilots. We estimate to initiate the first pilot in the second half of 2020, subject to the regulation that it's going to be issued by government by year-end. In the meantime, we will continue working in the construction of the social environmental baselines and other recommendations given by the commission of experts.

I will now hand the floor over to Alberto Consuegra, who will comment on our principal operational achievements.

Alberto Consuegra Granger -- Chief Operating Officer

Thank you, Felipe. Third quarter operating results show the financial and operational strengths of the company, which faced a challenging environment during this period given the public order situation and market conditions. Our production is in line with the plan, reaching the business group average cumulative production of 723,000 equivalent barrels of oil per day.

For the quarter, the production was 720,000 equivalent barrels of oil per day, having been affected by security and operational events. Similarly, the Gibraltar fields which utilize secondary and tertiary recovery technologies contributed around 213,000 equivalent barrels of oil per day, approximately 30% of the Group's daily production.

On the exploratory front, the 2019 campaign has shown very positive results. Ecopetrol and its partners have completed the drilling of 13 exploratory wells so far this year. Five of which were declared successful, including Flamencos-1, which is a 100% Ecopetrol. We hope to finish our exploratory campaign with a total of 17 wells, five more than originally planned for 2019.

In the transport segment, we can highlight that 4.1% increase in transported volumes of crude oil compared to the same period in 2018. This is a result of the increase in national production and commercial strategies aimed at greater use of pipeline transport. Additionally, during the month of September, Ocensa broke the record of most oil pumped with 751,000 barrels of oil per day, and a monthly average of 704,000 barrels of oil per day for the quarter. On the other hand, transport by product pipelines remain stable during the period. We highlight the beginning of the operation of the Chinchina-Pereira variant allowing us to ensure the reliability and integrity of our operation.

In the refining segment, the refineries had a stable operation and scheduled maintenance was progressed. The Cartagena refinery in 3Q '19 reached the throughput of 160,500 barrels per day, being the highest quarterly results since its operation began.

The Barrancabermeja refinery maintained a throughput level of 228,000 barrels per day similar to that presented in 2Q '19 and benefited from stability and operational performance. However, the gross refining margin showed a decrease having been affected mainly by the international market environment.

At the end of September, the cumulative efficiencies of the year were around COP1.74 billion, mainly leveraged by drilling, completion and construction of facilities, which are focused on ensuring the profitability of investments in development, commercial operations and increase in the production of middle distillates and gasoline in refineries. All aimed at increasing revenues and our margins of both operations. These three large levers have contributed 85.1% of the total efficiencies to the period COP1.48 trillion.

The lifting cost showed a slight decrease, thanks to the cost control and greater efficiencies of the transformation plan. The results of the quarter show the operational strength of each of the segments which put us in line with the fulfillment of goals set for the end of the year.

Now I will turn the presentation over to Jorge Calvache, who will comment about the exploration results for the quarter.

Jorge Arturo Calvache Archila -- Vice President of Exploration

Thank you, Alberto. As part of the exploration campaign, three exploratory wells were drilled and completed during the third quarter with a total of 13 wells so far this year. I want to highlight, the two discoveries achieved during the third quarter that contribute to the Near Field Exploration Strategy. Flamencos-1, located in the Middle Magdalena Valley, from 30 degrees API light crude in the La Paz formation.

During in the initial production tests, the well delivered 600 barrels of oil per day. It is important to highlight the competitive and operational advantages of this well, which is in an area close to receiving stations and Barrancabermeja refinery. Additionally, the well Cosecha CW-1 sidetrack operated by Oxy that is located near the pipeline infrastructure of the [Indecipherable] confirmed the presence of hydrocarbons. A long-term production test in the Cretaceous is being carried out with an average rate of 2,727 barrels of oil per day of light crude oil at 36.7 degrees API. Currently, there are three wells in evaluation stage. Boranda-3 located in the Middle Magdalena Valley operated by Parex is in initial testing. Ecopetrol has a 50% stake. Bullerengue Southwest-1 located in the Sinu-San Jacinto basin from our subsidiary Hocol in partnership with Lewis Energy. And finally, Habanero-1 located in the Middle Magdalena Valley is also operated by Parex.

As for the seismic activity, the acquisition of 2,000 square kilometers of 3D marine seismic in the COL-5 block will start in November. This block is held 100% by Ecopetrol and is adjacent to the Kronos, Gorgon and Purple Angel discoveries. So the new seismic will be used to further progress the maturation of these discoveries, and to identify new exploration opportunities.

Now, Jorge Osorio will continue with the Group's production results.

Jorge Osorio Franco -- Vice President of Development

Thanks, Jorge. During 2019, we have been in line with our plan to produce between 720,000 and 730,000 barrels equivalent per day. The third quarter production was 720,000 barrels for a total community for the year of 723,000 barrels equivalent per day. The results of the period were affected by external events with an impact of 8,400 barrels per day. Security events affected Cano Limon Covenas pipeline and the Tibu fields and power supplies shortcuts caused by the rainy season affected the operations in Castilla, Chichimene, Akacias and Rubiales fields.

During the month of September, we have started incremental production of the API project and the commissioning and stabilization phase of the LPG plant in Cupiagua, which will contribute to the full quarter production increase. The subsidiaries achieve a production of 59,000 barrels per day, maintaining this year around 8% of the total group production. And the fields with recovery programs contributed 30% of the total production. This slide also illustrates the relevant fields that increased production compared with the third quarter of the previous year.

Now I turn to Milena Lopez, who will tell you about the results of the transport segment.

Milena Lopez -- Chief Financial Officer

Thank you, Jorge. During the third quarter of 2019, the midstream segment continued achieving positive financial results with an EBITDA reaching COP2.7 trillion. This represents increase when compared to last year's third quarter EBITDA, and an EBITDA margin of approximately 78%. During the third quarter of 2019, the segment transported higher volumes achieving 1,161,000 barrels per day, which represents a 3% growth compared to last year's third quarter volume.

The volume of crude oil transported increased 4%, mainly due to an increase in the country's overall oil production for the transportation of additional barrels that were previously transported outside of our infrastructure and to the injection of crude from the Acordeonero oilfield at Ayacucho.

During the third quarter of 2019, the volume of refined products transported remained stable when compared to the same period last year, mainly driven by higher demand in border areas which compensated for lower volumes from the Barrancabermeja refinery. We continue to focus our efforts on repairing systems that have been affected by third parties. During the quarter, there were 27 attacks on our pipeline infrastructure, as a result, there were 17 reversion cycles in the Bicentenario pipeline with a total of approximately 4.4 million barrels which guaranteed oil production.

Finally, I would like to highlight three activities executed to ensure safe operation and guarantee refine products supply to the western region of the country. First, the beginning of operations at the Chinchina-Pereira section of the Salgar-Cartago-Yumbo pipeline to eliminate geotechnical risk. Second, the installation of flexible pipelines in the Copacabana area of the Sebastopol-Yumbo pipeline to mitigate integrity risk related to potential landslides. Lastly the redesign of supply chain to permit the continuous use of the port of Buenaventura to provide fuel to this area of the country.

With this, I will hand over the call to Tomas Hernandez, who will comment on results for the Downstream segment.

Tomas Hernandez -- VP of Refining Industrial Processes

Thanks Milena. During the third quarter of 2019, thanks to process optimization initiatives focused on crude slate improvements and plant reliability and refining, the integrated crew throughput of our two refiners reached a historical maximum of 389,000 barrels per day.

The Cartagena refinery also achieved a quarterly historical crew throughput record with an average of 161,000 barrels per day exceeding by 3,000 barrels per day the result of the third quarter of the year before, while increasing the percentage of domestic crudes in the feed slate to 88% up from 80% in the third quarter of 2018. This increase in the proportion of domestic crudes had a positive impact on the cost of the refineries feed slate mitigating the strengthening of heavy and medium crude prices in the international markets.

The Barrancabermeja refinery maintained stable and reliable operations as demonstrated by the throughput increase of 2% in the third quarter of 2019 versus the previous quarter, reaching 228,000 barrels per day, benefiting from higher availability of domestic light and intermediate crude oil. In addition, during 2019 compared to 2018 our refineries have been impacted by challenging market conditions in international product price differentials versus Brent, which reached historical minimums for naphtha and gasoline, a trend that recently has improved for gasoline.

In addition, the refineries experienced higher crude price differentials versus Brent in their crude slates. These conditions have resulted in weaker refinery margins impacting our initial outlook for margin results. Along with this difficult market environment and despite Barrancabermeja refinery stable operations and higher yield of valuable products during the third quarter of 2019, the gross margin decreased by 17% compared to the same period last year, reaching $11.5 per barrel versus $13.9 per barrel in the third quarter of 2018, mainly affected by lower product prices and higher crude price differentials for the refinery feed slate. The gross margin of the Cartagena refinery in the third quarter of 2019 decreased by 31% compared to 2018, reaching $8.4 per barrel, mainly due to international market behavior and an operational event in the Alkylation unit which affected high octane gasoline production during the quarter, and has since been resolved

In our petrochemicals area, during the third quarter of 2019 Esenttia demonstrated excellent safety performance and stable operations capturing better margins with a more stable behavior of its raw material price. On the biofuels front in September, Bioenergy started the sugarcane harvest season and ethanol production.

Now I turn the presentation over to Jaime Caballero who will comment on the financial results for the period.

Jaime Caballero Uribe -- Chief Financial Officer

Thank you, Tomas. During the first nine months of the year, Ecopetrol continued to deliver sustained financial results, despite the $8 per barrel decrease in the average price of Brent crude between January and September 2019 and the same period of 2018. These results were due to a higher volume of crude oil both produced and sold. A $2 reduction in the crude oil spread, devaluation of the dollar to Colombian peso exchange rate, lower financial expenses due to the effect of debt prepayments and a lower effective tax rate. Net income closed at COP9.2 trillion and EBITDA at COP23.9 trillion. The EBITDA margin was 46%.

Year-to-date net profit breakeven stands at $31.2 per barrel, improving $5.5 as compared to the same period of 2018. The gross debt to EBITDA indicator reached 1.3 times, while the net debt EBITDA indicator stood at 1 time. Likewise ROACE remained above 13% in line with the business plan target of our ROACE above 11%.

Let us move on to the next slide to see the cash flow of the Group. At the end of September, Ecopetrol reported a cash position of COP16 trillion. Cash flow generated by the operation before the variation in working capital amounted to COP20.3 trillion. This value includes the payments received from the Fuel Price Stabilization Fund in 2019, amounting COP3.8 trillion.

The investment flow in capital activities showed an outflow of COP7.4 trillion, which is explained by a better pace of investment execution. The financing outflow of COP12.4 trillion includes the payment of dividends to shareholders for COP9.3 trillion and to non-controlling shareholders of the subsidiaries of the midstream segment for COP0.8 trillion.

The company maintained a positive free cash flow of COP12.7 trillion, which exceeds the amount of dividend payments executed this year. The company's final cash of COP16 trillion includes cash and equivalent resources of COP9 trillion and a short and long-term investment portfolio of COP6.9 trillion. Cumulative cash flow to date exceeds the available cash projection incorporated in the 2019 to 2021 business plan.

Let us move on to the next slide to see the status of the Group's investment plan. During the first nine months of the year, investment execution increased by 29% compared to the same period of the previous year, reaching $2.3 billion, mainly concentrated on the growth of the upstream segment.

We highlight the investment of $1.1 billion for drilling and completion of wells, and $0.3 billion to expand the capacity of facilities. We expect to close the year with an execution of organic investments between $3.5 billion and $3.9 billion, which would take us together with announced inorganic investments in the Permian and Brazil of between $0.9 billion and $1.1 billion to a total that would range between $4.4 billion and $5 billion for 2019.

I now give the floor to the President for his closing remarks.

Felipe Bayon Pardo -- Chief Executive Officer

Thank you, Jaime. One of Ecopetrol's strategic priorities is to grow sustainably, and in harmony with the environment. We believe long term growth requires a commitment to energy transition and operations that demonstrate good environmental practices and promotes social development. As part of our efforts to contribute to preserving the environment and reducing the impacts of our operations, we have set a decarbonization plan under which we commit to reduce greenhouse gas emissions by 20% by the year 2030, and to reduce operational vulnerability to climate change. These goals are in line with the country's commitment set in the Paris Accord of 2015.

Consistent with this, we have advanced along several initiatives. We are the first oil and gas company in Colombia that achieved the verification of the reduction of more than 1 million tons of CO2 emissions coming from our operations. Last October '18, we inaugurated the largest solar farm for self-generation in Colombia, located in the Department of Meta. It has an installed capacity of 21 peak megawatts and will supply energy for the next 15 years to the Castilla field, Ecopetrol's second largest, its operation will avoid among others, the emission of over 154,000 tons of CO2 into the atmosphere. And the self-generated energy will be 30% less expensive than the energy of the national grid.

The inclusion of solar energy is added to the power generation we already have from biomass from sugarcane and the production of biofuels based from sugar and palm tree. Last October 23rd, we ratified our commitment to energy transition in Colombia toward the allocation of 30 megawatts of energy between solar and wind in the last renewable energy auction held by the Colombian Ministry of Mines and Energy.

It is important to highlight that we have the potential to expand our energy generation portfolio based on renewable sources to over 300 megawatts in the coming years. The circular economy is another focus of our social environmental commitment. We have concentrated our efforts on activities such as recycling water in our operations. As of September 2019, we have recycled some 66 million cubic meters of water, some 4% higher than that for the same period of last year.

Let's move on to the next slide. To conclude, I would like to mention some aspects of relevance, as we close the year. We expect to close the JV with Oxy before year-end, and advanced toward the completion of Gato do Mato's purchase, which is subject to approval of the Brazilian authorities.

In Colombia, we will continue to advance in preparing for the pilot projects for unconventionals. Ecopetrol is fully committed to executing the pilots responsibly, respectfully of the environment and the communities with total transparency and within the framework of the government's decisions.

Operationally, the execution of the first nine months of the year brings us closer to the fulfillment of the goals that we announced for 2019. Fourth quarter production should be in the range between 734,000 and 740,000 barrels of oil equivalent per day, confirming the estimate that we have given in the range of 720,000 to 730,000 barrels per day. For the fourth quarter, we expect to see an improvement in refining margins, while sustaining refining throughput in the range of 350,000 to 375,000 barrels per day.

Finally, we estimate that our level of investment execution, our CapEx will be between 4.4 billion and 5 billion. This includes our inorganic investments. Thank you very much for being part of the call today.

I will open now for Q&A.

Questions and Answers:

Operator

[Operator Instructions] We have a question from Frank McGann from Bank of America.

Frank McGann -- Bank of America Merrill Lynch -- Analyst

Okay, thank you very much and good day. If I could, two questions perhaps. One is just in midstream, which continue to have strong results. The revenue increase of 35%. The factors that seem to drive it were volumes were up 3.1%. You highlighted and the peso I believe would have added about 13%. I was just wondering if there were other factors that contributed to the year-over-year increase in revenues.

And then secondly, you just highlighted, the expectation for a pretty sizable pick-up in output for the fourth quarter, as you look into the beginning of next year, 2020. I was wondering if you thought there would be continued momentum. Any thoughts on what would drive production growth as you go out over the next 12 months?

Felipe Bayon Pardo -- Chief Executive Officer

Frank. Hi, this is Felipe and thanks for the questions. Thanks for being in the call. I'll start with the upstream question and then I'll ask Milena to help us with the Midstream one. So in terms of production and how we see this sort of exiting the year -- the current year and then moving on to 2020 and beyond. So the first thing is that the range that we've signaled 720,000 to 730,000 remains. We've given at the end of the presentation some guidance around the exit rate for the year. That should be in the range or above 734,000 all the way to 740,000. But I wanted to provide a bit more color. There were a few things and one-offs related to security around Cano Limon, around Tibu a field that we closed or we shut down operations and production back in July. And we have restored both Cano Limon, we've restored Tibu, and we are in the process of actually ramping up production there. So, those one-offs have been dealt with.

The other thing that it's probably not explicit or hasn't been explicit, on Monday, this past Monday, we inaugurated the propane, butane plant in Cupiagua that should give us some 8,000 barrels of production, it's going to be between 7,000 barrels and 8,000 barrels we've actually tested the plant all the way up to 9,200 barrels. So that's good news as well. So we've dealt with the one-offs, we have some additional volumes coming through from things like Cupiagua which are very good. So that helps us go to the range that we've signaled the 734,000 to 740,000.

As we move forward, we had signaled in our business plan, the 2019-2021 business plan, that for next year will be in the 740,000 to 760,000 range, that remains unchanged. That hasn't changed, which is good news. We'll continue our internal work to pin down the forecast and the budget for next year. The activity set and budgets for next year and we'll be communicating those in time, and we'll be also working in an update to the 2020-2022 business plan. So we will be able to provide a bit more color on guidance around those. So I think and I hope that's helpful in terms of providing a bit more color around production. Milena?

Milena Lopez -- Chief Financial Officer

Hi, Frank. When you look at third quarter versus third quarter last year figures. And on top of the increase in volumes, which is approximately 3.1%, and the FX, which is up approximately 13%, you have two additional impacts. First, effective July 1st of this year, we have the new tariff for the oil pipelines. So when you look at the impact that is approximately slightly over 3% impact when you compare quarter-on-quarter. In addition to that, this quarter saw much more activity from reversion cycles at the Bicentenario pipeline. So when you compare reversions that took place during the third quarter of this year to the same period last year, we have 17 reversion cycles, which totaled approximately 4.4 million barrels of oil, which operate on a reversion basis, and that compares to five cycles where we moved 1 million barrels worth of reversion. So when we operate on a contingent basis at Bicentenario pipeline, we're basically rerouting oil and that generates additional income for the Midstream segment.

And just to give you a sense of the order of magnitude of these numbers, when you look at them at a year-to-date level, and you compare year-to-date reversion cycles versus year-to-date reversion cycles for the same period last year, the difference is much smaller. You're looking at 8.9 million barrels operated on a reversion basis this year compared to 8.3 million barrels last year. So that generates, part of the difference, you see when you look at specifically third quarter figures.

Frank McGann -- Bank of America Merrill Lynch -- Analyst

Okay, very, very clear. Thank you very much.

Operator

The next question comes from Julia Park from UBS.

Julia Park -- UBS -- Analyst

Hi, thank you for taking my questions. I have three questions, if I may. First is on the Downstream. Currently, we have been concerned with the Downstream segment as the government announced that is aiming to balance the field stabilization from liability, which we believe could lead to lower refining margins and hurt the company's results. Could you provide an update regarding this matter. Is there any color about the timeline for the government to announce a measure and how the company is dealing with the price volatility.

My second question is on the recently announced acquisition in Brazil, which we saw very positive to address the production and reserves life. However, the company did not disclose the amount paid which we recognize that the company might want to limit the disclosure due to strategic decision, but the lack of transparency may raise some concerns on the corporate governance matters, and it also it makes hard to investors to analyze if the deal was accretive from a financial perspective. Will the company provide more color under what conditions the deal was made and on its conclusion.

And my last question is regarding the upcoming bidding rounds in Brazil. Could you provide more details on Ecopetrol's interest on the two bidding rounds that will happen next week. Do you consider those assets a good fit to the company's growth portfolio? Thank you.

Felipe Bayon Pardo -- Chief Executive Officer

Julia, thanks. And I'll ask Pedro Manrique to start with the first one and then I'll take the ones on Brazil. Pedro?

Pedro Manrique -- Vice President, Commercial Marketing

Julia, thank you for your question. First of all, I would like to say that the government doesn't have any timeline to make an announcement regarding the field Stabilization Fund. Actually, they have announced that the fund will remain in place, and also they have expressed that the producers income will remain also unchanged. As a matter of fact, the government is seeking to other addition and last month we received a rather large payment of COP2 billion, and they have -- the government is working to get up to speed before the year-end. So there is no timeline and the government is not making any further announcements regarding the Stabilization Fund.

Felipe Bayon Pardo -- Chief Executive Officer

I'll take the one on Brazil. So I'd like to provide a bit more color around Gato do Mato. I think with the information that we're going to share or I'm going to share, you will be able to have a better understanding and visibility on why this is a very accretive transaction that was made by Ecopetrol. So the first thing is that, as you've pointed out in your question, the consideration or what we paid for the transaction is confidential, and that's the terms that we've agreed with Shell. But we can confirm that the transaction in itself is in line with the multiples that have been seen in similar transactions and valuations that we've seen from analyst in the sector.

The transaction itself represents a milestone for us in Brazil. And I want to spend a bit more time here. So you've seen over the last 12 to 15 months we've deepened our presence in the Pre-Salt, we've gone into Pau-Brasil initially and then Saturno, and those are two exploration opportunities that we want to drill quickly in the next 12, 18 months, that will have, if we are successful, the possibility to bring discoveries and further on production and value in the mid to long-term.

Gato do Mato provides the opportunity for us to enter first with the world-class operator Shell, with world-class partners, both Shell and Total, with a percentage equity, that's good 30% that actually provides us some materiality where there is already been three wells drilled and I'll go into a bit more detail. And it's in line with the strategy of having a stronger presence in Brazil, and especially in the Pre-Salt in one of the most prolific basins in the world.

And I'm going to share some numbers that were not in the presentation and have not been talked about before, that our numbers that we've prepared internally at Ecopetrol and I think will provide some additional guidance.

So first thing, and in line with the 90 million barrels of contingent resources that we've signaled, we envisage that over the next months, we'll be working on preparing the development plan. We will be working with the consortium on drilling an additional appraisal well in the next six to eight months that will provide some additional, very key information, and will help us inform the construction of Development Plan. In particular, all the process to acquire the FPSO, I mean to size the FPSO and then acquire the FPSO as such.

We envisage that we will be in terms of well activity aiming at a total of some eight to nine wells is something that's been discussed, includes producers, injectors, both for gas and water, and remember that we've already drilled three of those wells. The estimated CapEx over the next few years, three to four years is around $3 billion that's gross and we have a share of 30%.

Our payment will have a component of an upfront payment and there will be a carry as well. We envisage that again some of these wells that I've mentioned will be drilled over the next few years. We've signaled in the presentation that we want or we see some 20,000 barrels of production in 2025. We see that there will be production before that and that will help us to provide or bring into Ecopetrol some $200 million of EBITDA in that period. Each well we estimate, and again remember these are costs that have been prepared by our teams. We see will be in the $55 million to $60 million range.

In terms of F&D, we see a range of $19 to $21 per barrel. Lifting cost, we see $9 to $11 per barrel. We need to remind ourselves, this is light crude greater than 37 API, which is very good in terms of balancing our portfolio. Remember that we have a majority of heavier crudes, these are deepwater wells. As you know it's water depth of 1,700 meters to 2,100 meters and the top of the objectives, the reservoirs are at 5,200 meters.

So in summary, we believe it's something that will produce benefits for Ecopetrol in terms of having production in the 2024-2025 period, some 20,000 barrels, starting with the EBITDA contributions as of 2024-2025, 90 million barrels of contingent resources that we -- as soon as we go through all the approval process, we will be able to move into the [Indecipherable] part of our books, which is great news in terms of longer term for Ecopetrol, and again we're very, very happy to have the possibility to partner with world-class partners and a world-class operator that's deeply committed to Brazil.

So I hope that provides a bit more color, which is one of the things you were asking us, Julia. So hopefully that's helpful.

In terms of new businesses and the other part of your question, then if we can provide a bit more detail on the coming round. So you've seen that we've been very determined in being able to deliver against our strategy in Brazil, again with Pau-Brasil, Saturno, and now Gato do Mato, we're looking at the upcoming rounds in detail with a lot of discipline and rigor. It's something that we've been discussing for some time now. Our teams, our technical teams, commercial teams are working on this and we'll continue to review those over the next few days and they'll -- then we will be able to take some decisions. But again, as we all know assets in Brazil are very, very good. That's why we've steered our strategy toward the Pre-Salt, and we've been able to deliver around those areas. So hopefully you'll be hearing around the rounds in due course. Thanks, Julia.

Julia Park -- UBS -- Analyst

Thank you, that's very clear. Thank you very much.

Operator

The next question comes from Christian Audi from Santander.

Christian Audi -- Santander -- Analyst

Thank you Alberto, Felipe and Jaime, congratulations with the results. I had three questions. The first one, if you could provide us with a general update on the unconvention in Colombia front. You mentioned the potential pilot, but could you -- since the last conference call with the second quarter results, could you just provide us with what has changed since then and the pilot, the expectation of when that could happen, and if successful, what would be the plan for pilots thereafter.

The second question on the [Technical Issues]

Jaime Caballero Uribe -- Chief Financial Officer

[Technical Issues] sorry, I think that we will be around $10 per barrel. And again, the maintenance that I mentioned is more on the preventive side. So the cycles between maintenance will be more time which will write cost down.

Christian, to provide some kind of overall context for this cost conversation. You might recall that when we launched the business plan 2021, we spoke about, an overall target for the transformation program of around $2.6 billion. That program is on track, and we believe that there is a potential to capture all those efficiencies over the next few years. Obviously that number of $2.6 billion has a component of capex efficiencies, but most of the targets actually revolved around cost. I think that's a key message.

The other key message is that the program spans throughout the Group, and all of the segments have targets on this regard. Clearly, the production business is the one with the highest potential. We can see, while the plan has a lifting cost assumption of being between $9 and $10 per barrel, that's kind of the planning assumption. We -- as you can see from the results that we just published, we're actually well below that right now. And our efforts are aimed at sustaining that, and improving that over time. I think the other important component here is that our focus is evolving now from a strictly a lifting cost conversation to actually a unit cost conversation that goes across the Group. So in that sense, it covers a refining cash costs, it covers transportation costs, it covers corporate costs, importantly and dilution as was mentioned before.

So all in all, what I'd say is that we've been successful at arresting the increase, the trend that we had of increasing lifting costs, we've been successful at that. And we see potential going forward to improve on those trends.

Christian Audi -- Santander -- Analyst

Very clear, Jaime. And of the $2.6 billion target, are you able to quantify for us how much you have accomplished already or how much you've been able to get out of that $2.6 billion target?

Jaime Caballero Uribe -- Chief Financial Officer

Yes. So for the 2018 the number that [Indecipherable] is essentially that compiled to $600 million range, which is about COP1.8 trillion, which has been captured and we are confident that it's going to be banked in by the end of the year.

Christian Audi -- Santander -- Analyst

Right. Very good. Thank you everybody for your very complete answers.

Operator

Thank you. The next question comes from Guilherme Levy from Morgan Stanley.

Guilherme Levy -- Morgan Stanley -- Analyst

Hi, good morning. Thank you for taking the question. I have just a quick follow-up question in the Gato do Mato position. I know that you cannot disclose much regarding the amounts that we would pay, but I thought that the inorganic capex for the year increased from $0.9 billion to $1.1 billion, since the 2Q '19 results. And I just wanted you to understand that if this increase is just related to the Gato do Mato acquisition or if there might be other acquisition or disbursement that you expect to do that is behind this increase? Thank you.

Jaime Caballero Uribe -- Chief Financial Officer

Hi, Guilherme. This is Jaime here. Yes, effectively we did update a bit our guidance, considering that it was 3Q, but essentially what we're seeing is as Felipe spoke before, we are seeing an accelerated pace of execution in the Permian, one that we were not expecting in 2Q and that actually translates into higher CapEx. So what we wanted to do at this stage is to give ourselves a better space to -- within the CapEx -- the inorganic CapEx guidance to capture the higher side of that activity level that occurred in the Permian. We are not including in that figure any amounts related to Gato do Mato and that's because we do not expect closing of the transaction to occur this year.

Operator

Mr. Levy, does that answer your question.

Guilherme Levy -- Morgan Stanley -- Analyst

Okay, great. Thank you.

Operator

Thank you. The next question comes from Andres Duarte from Corficolombiana.

Andres Duarte -- Corficolombiana -- Analyst

Hello. The question I had was answered before. So thank you very much.

Operator

Thank you. The next question comes from Muhammed Ghulam from Raymond James.

Muhammed Ghulam -- Raymond James -- Analyst

Hey, guys. Thank you for taking the questions. So in July, the environmental regulator suspended one of your Shell pilots. Can you give me an update on the status and when you plan to resume activity over there?

Felipe Bayon Pardo -- Chief Executive Officer

Thanks Muhammed, this is Felipe. So I gave a bit of color earlier on, but I will highlight, I think the key messages there. So the event that we saw in July was with the development of unconventionals that we've submitted a request for an application for a permit for a license. What has changed and transpired over the last few weeks, is that there has been a clarification by the [Indecipherable] which is the highest administrative court in country, that will continue to study and assess the development of unconventionals in country, and clarified that the pilots projects is [Indecipherable] which is the integrated research pilot projects are able to continue. So that's the first thing.

The confirmation on the pilots being doable. And from that point of view, now the government and there is a bit of a schedule that we showed in the material on Page 6. The -- following the State Council clarification, the Ministry of Mines and Energy and the Ministry of the Environment are working on the detailed regulatory framework. So these are things like from a technical point of view and an operations point of view, how to conduct the activity around the pilots, the wells, the fracs everything else. From a social point of view, being able to have a framework in terms of how to communicate and be transparent with information -- timely information around our activities and potential impacts, things like the environment. So microseismicity, water qualities, affluent submissions, noise, you name it, there is all sorts of different things that we need to work.

So, in parallel with that we are doing the work to design the pilots from a technical point of view, designing the wells, the vertical and horizontal sections, completion and fracs, floor backs [Phonetic] that will allow us to have the data around the pilots. So we have not started activity, we have not -- when this happened in July, there is a new frame in which we're working with -- which is it of the clarification of the State Council and we envisage that we will be able to start operations at the back end of 2020. So I hope that provides a bit more clarity around the timing of the pilots for unconventionals and obviously, if there are follow-on questions, we can have the team also contact you and provide a bit more detail. Hope that's helpful, Muhammed.

Muhammed Ghulam -- Raymond James -- Analyst

No, that's definitely helpful. Turning to further North. So can you talk about how you plan to use the Permian JV to develop your workforce, for example, how many Ecopetrol workers are going to go to Texas?

Felipe Bayon Pardo -- Chief Executive Officer

Yes. So, a very good question. So one of the key things and aspects for the JV with Oxy in the Permian, is the transfer of knowledge and transfer of technology. So we were mentioning earlier that we've already started operation. There is a couple wells that have reached TD. We'll be fracing those wells in November. We will be ramping up the number of wells and activity at the back end of this year. Next year we envisage running with three or four rigs. In parallel, we are conducting the selection process for all the people that will be working in the JV physically in Texas. So we have estimated an initial group of 25 people that are from our staff and that will be -- we're doing that selection and recruiting process. And we envisage to have those people working in the Permian and in Houston over the next five to six months.

So at the end of 1Q beginning of 2Q, we want to be very precise in terms of the profiles and the people and the capabilities and the potential of those workers and remember that in due course the JV and our operations in the US will help us deepen our understanding around unconventionals and bring some of that back into Colombia, which is strategically long term. One of the key things on why we actually did the deal. I mean we've mentioned it's also very accretive, it's $1.1 [Phonetic] million to $1.2 [Phonetic] billion of EBITDA, north of our 2022 going forward. So it's very, very important from that point of view. Thanks Muhammed.

Muhammed Ghulam -- Raymond James -- Analyst

Yes. Okay, thank you.

Operator

Thank you. [Operator Instructions] We have no further questions. Mr. Bayon, do you have any final remarks.

Felipe Bayon Pardo -- Chief Executive Officer

Well, thanks, and thanks everyone for being part of the third quarter 2019 conference call. Thanks for the questions. We appreciate your insights. We appreciate the areas of inquiry. We had a very strong quarter. I want to acknowledge the teams around the group that helped us deliver this. We've delivered on strategy around doing the M&A portion of that with the Permian and Gato do Mato. We've advanced on the preparation for the unconventional pilot projects in Colombia. We have signaled that we want to close the year with a higher production in the 734,000 to 740,000 mboed range. We will keep our refineries at the 350,000 to 375,000 mboed or mbd range in terms of the load. We see our CapEx both organic, inorganic at the range of 4.4 billion to 5 billion. And we think that despite prices being a bit weaker -- crude prices being a bit weaker, we are strengthened, we are operationally very sound. We have the possibility of leveraging and taking advantage of the opportunities that present to ourselves, and will continue to conduct safe operations, responsible ethical operations. So appreciate your participation, thanks. And I hope you have a great day.

Operator

[Operator Closing Remarks]

Duration: 70 minutes

Call participants:

Fernando Alexander Suarez -- Investor Relations

Felipe Bayon Pardo -- Chief Executive Officer

Alberto Consuegra Granger -- Chief Operating Officer

Jorge Arturo Calvache Archila -- Vice President of Exploration

Jorge Osorio Franco -- Vice President of Development

Milena Lopez -- Chief Financial Officer

Tomas Hernandez -- VP of Refining Industrial Processes

Jaime Caballero Uribe -- Chief Financial Officer

Pedro Manrique -- Vice President, Commercial Marketing

Frank McGann -- Bank of America Merrill Lynch -- Analyst

Julia Park -- UBS -- Analyst

Christian Audi -- Santander -- Analyst

Guilherme Levy -- Morgan Stanley -- Analyst

Andres Duarte -- Corficolombiana -- Analyst

Muhammed Ghulam -- Raymond James -- Analyst

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