20-F 1 v153376_20f.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Annual Report on Form 20-F
 
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
OR
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Date of event requiring this shell company report __________________
Commission file number: 001-34175
 
ECOPETROL S.A.
(Exact name of Registrant as specified in its charter)
 
N/A
(Translation of Registrant’s name into English)
 
REPUBLIC OF COLOMBIA
(Jurisdiction of incorporation or organization)
 
Carrera 7 No. 37 – 69
BOGOTA – COLOMBIA
(Address of principal executive offices)
 
Alejandro Giraldo
Investor Relations Officer
alejandro.giraldo@ecopetrol.com.co
Tel. (571) 234 4254
Fax. (571) 234 5628
Calle 37 N.7-43 Piso.3
Bogota, Colombia
(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class
 
Name of each exchange on which registered:
American Depository Shares (as evidenced by American Depository Receipts), each representing the right to receive
   
20 Common Shares
 
New York Stock Exchange
     
Ecopetrol Common Shares par value Ps$250 per share*
 
New York Stock Exchange

*Not for trading but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the SEC.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:  None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:  None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
 
Common Shares, par value Ps$250 per share:  40,472,512,588
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
¨ Yes x No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
¨ Yes x No
 
Note:  Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
¨ Yes x No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
¨ Yes ¨ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨    Accelerated filer ¨       Non-accelerated filer x
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
¨  U.S. GAAP
¨  International Financial Reporting
Standards as issued by the

International Accounting Standards
Board
x Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
 
¨  Item 17          x  Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
¨ Yes x No
 
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
¨ Yes ¨ No

 
 

 

Table of Contents
 
   
Page
     
Forward-Looking Statements
 
1
Enforcement of Civil Liabilities
 
1
Presentation of Financial Information
 
2
Presentation of Information Concerning Reserves
 
3
ITEM 1
Identity of Directors, Senior Management and Advisors
 
4
ITEM 2
Offer Statistics and Expected Timetable
 
4
ITEM 3
Key Information
 
4
ITEM 3A
Selected Financial Data
 
4
ITEM 3B
Capitalization and Indebtedness
 
6
ITEM 3C
Reasons for the Offer and Use of Proceeds
 
6
ITEM 3D
Risk Factors
 
6
ITEM 4
Information on the Company
 
19
ITEM 4A
History and Development of the Company
 
19
ITEM 4B
Business Overview
 
20
ITEM 4C
Organizational Structure
 
59
ITEM 4D
Property, Plant and Equipment
 
60
ITEM 4.A
Unresolved Staff Comments
 
60
ITEM 5
Operating and Financial Review and Prospects
 
60
ITEM 5A
Operating Results
 
66
ITEM 5B
Liquidity and Capital Resources
 
76
ITEM 5C
Research and Development, Patents and Licenses, etc.
 
78
ITEM 5D
Trend Information
 
78
ITEM 5E
Off-Balance Sheet Arrangements
 
78
ITEM 5F
Tabular Disclosure of Contractual Obligations
 
78
ITEM 5G
Safe Harbor
 
82
ITEM 6
Directors, Senior Management and Employees
 
82
ITEM 6A
Directors and Senior Management
 
82
ITEM 6B
Compensation
 
85
ITEM 6C
Board Practices
 
86
ITEM 6D
Employees
 
86
ITEM 6E
Share Ownership
 
89
ITEM 7
Major Shareholders and Related Party Transactions
 
89
ITEM 7A
Major Shareholders
 
89
ITEM 7B
Related Party Transactions
 
90
ITEM 7C
Interests of Experts and Counsel
 
92
ITEM 8
Financial Information
 
92
ITEM 8A
Consolidated Statements and Other Financial Information
 
92
ITEM 8B
Significant Changes
 
92
ITEM 9
The Offer and Listing
 
93
ITEM 9A
Offer and Listing Details
 
93
ITEM 9B
Plan of Distribution
 
94
ITEM 9C
Markets
 
94
ITEM 9D
Selling Shareholders
 
95
ITEM 9E
Expenses of the Issue
 
95
ITEM 10
Additional Information
 
95
ITEM 10A
Share Capital
 
95
ITEM 10B
Memorandum and Articles of Incorporation
 
96
ITEM 10C
Material Contracts
 
99
ITEM 10D
Exchange Controls
 
100
ITEM 10E
Taxation
 
101
ITEM 10F
Dividends and Paying Agents
 
106
ITEM 10G
Statement by Experts
 
106
 
ii

 
ITEM 10H
Documents on Display
 
107
ITEM 10I
Subsidiary Information
 
107
ITEM 11
Quantitative and Qualitative Disclosures About Market Risk
 
107
ITEM 12
Description of Securities Other than Equity Securities
 
109
ITEM 12A
Debt Securities
 
109
ITEM 12B
Warrants and Rights
 
109
ITEM 12C
Other Securities
 
109
ITEM 12D
American Depositary Shares
 
109
ITEM 13
Defaults, Dividend Arrearages and Delinquencies
 
109
ITEM 14
Material Modifications to the Rights of Security Holders and Use of Proceeds
 
109
ITEM 15
Controls and Procedures
 
110
ITEM 16
[Reserved]
 
110
ITEM 16A
Audit Committee Financial Expert
 
110
ITEM 16B
Code of Ethics
 
110
ITEM 16C
Principal Accountant Fees and Services
 
110
ITEM 16D
Exemptions from the Listing Standards for Audit Committee
 
111
ITEM 16E
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
111
ITEM 16F
Change in Registrant’s Certifying Accountant
 
111
ITEM 16G
Corporate Governance
 
111
ITEM 17
Financial Statements
 
115
ITEM 18
Financial Statements
 
115
ITEM 19
Exhibits
 
115
SIGNATURES
 
 
117
ANNEX I DESCRIPTION OF EXPLORATION AND PRODUCTION CONTRACTS
 
A-1
 
 
iii

 
 
FORWARD-LOOKING STATEMENTS
 
This annual report on Form 20-F contains forward-looking statements of Ecopetrol S.A. (hereinafter “we”, “us”, “our”, “Ecopetrol” or the “Company”), within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.  These statements are not based on historical facts and reflect our expectations for future events and results.  Most facts are uncertain because of their nature.  Words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “should”, “plan”, “potential”, “predicts”, “prognosticate”, and “achieve”, among other similar expressions, are understood as forward-looking statements.  These factors may include the following:
 
 
·
Drilling and exploration activities
 
 
·
Future production rates
 
 
·
Import and export activities
 
 
·
Liquidity, cash flow and uses of cash flow
 
 
·
Projected capital expenditures
 
 
·
Dates by which certain areas will be developed or will come on-stream
 
 
·
Allocation of capital expenditures to exploration and production activities
 
Actual results are subject to certain factors out of the control of the Company and may differ materially from the anticipated results.  These factors may include the following:
 
 
·
Changes in international crude oil and natural gas prices
 
 
·
Competition
 
 
·
Limitations on our access to sources of financing
 
 
·
Significant political, economic and social developments in Colombia
 
 
·
Military operations, terrorist acts, wars or embargoes
 
 
·
Regulatory developments
 
 
·
Technical difficulties
 
 
·
Other factors discussed in this document as “Risk Factors”
 
Most of these statements are subject to risks and uncertainties that are difficult to predict.  Therefore, our actual results could differ materially from projected results.  Accordingly, readers should not place undue reliance on the forward-looking statements contained in this annual report.
 
ENFORCEMENT OF CIVIL LIABILITIES
 
We are a Colombian company, all of our Directors and executive officers and certain of the experts named in this annual report are residents of Colombia, and a substantial portion of their respective assets are located in Colombia.  Colombian courts determine whether to enforce a U.S. judgment predicated on the U.S. securities laws through a procedural system known as exequatur.  Colombian courts will enforce a foreign judgment, without reconsideration of the merits, only if the judgment satisfies the following requirements:
 
 
·
a treaty exists between Colombia and the country where the judgment was granted or there is reciprocity in the recognition of foreign judgments between the courts of the relevant jurisdiction and the courts of Colombia;

 
1

 

 
·
the foreign judgment does not relate to “in rem rights” vested in assets that were located in Colombia at the time the suit was filed and does not contravene or conflict with Colombian laws relating to public order other than those governing judicial procedures;
 
 
·
the foreign judgment, in accordance with the laws of the country where it was rendered, is final and is not subject to appeal and a duly certified and authenticated copy of the judgment has been presented to a competent court in Colombia;
 
 
·
the foreign judgment does not refer to any matter upon which Colombian courts have exclusive jurisdiction;
 
 
·
no proceeding is pending in Colombia with respect to the same cause of action, and no final judgment has been awarded in any proceeding in Colombia on the same subject matter and between the same parties; and
 
 
·
in the proceeding commenced in the foreign court that issued the judgment, the defendant was served in accordance with the law of such jurisdiction and in a manner reasonably designated to give the defendant an opportunity to defend against the action.
 
The United States and Colombia do not have a bilateral treaty providing for automatic reciprocal recognition and enforcement of judgments in civil and commercial matters.  The Colombian Supreme Court has in the past accepted that reciprocity exists when it has been proven that either a U.S. court has enforced a Colombian judgment or that a U.S. court would enforce a foreign judgment, including a judgment issued by a Colombian court.  However, such enforceability decisions are considered by Colombian courts on a case-by-case basis.
 
We reserve our right to plead sovereign immunity under the United States Foreign Sovereign Immunities Act of 1976 with respect to actions brought against us under United States federal securities laws or any state securities laws.
 
PRESENTATION OF FINANCIAL INFORMATION
 
In this annual report, references to “US$” or “U.S. dollars” are to United States Dollars and references to “$”, “Ps$”, “Peso” or “Pesos” are to Colombian Pesos, the functional currency under which we prepare our financial statements.  Certain figures shown in this annual report have been subject to rounding adjustments and, accordingly, certain totals or tables may not be an exact calculation of the preceding figures.  In this annual report a billion is equal to one with nine zeros.
 
The accompanying audited consolidated financial statements of Ecopetrol and our consolidated subsidiaries for the years ended December 31, 2008, 2007 and 2006 have been prepared from accounting records, which are maintained under the historical cost convention as modified in 1992, to comply with the legal provisions of the Colombian Contaduría General de la Nación or National Accounting Office or CGN, to recognize the effect of inflation on non-monetary balance sheet accounts until December 31, 2001, including shareholders’ equity.  The CGN authorized us to discontinue adjusting for inflation starting on January 1, 2002.
 
Our consolidated financial statements are prepared in accordance with accounting principles for Colombian state-owned entities issued by the CGN and other applicable legal provisions. The CGN adopted new accounting principles for Colombian state-owned entities in September 2007.  These accounting principles are known as the Régimen de Contabilidad Pública (Regime of Public Accounting or RCP).  Pursuant to CGN Communication No. 0079-101345 of September 28, 2007, RCP became effective for Ecopetrol beginning with fiscal year ended December 31, 2008.  Our consolidated financial statements at and for the year ended December 31, 2008 have been prepared under RCP.  Our consolidated financial statements for all prior years were prepared under the Plan General de Contabilidad Pública (General Governmental Accounting Plan or PGCP), the former accounting principles issued by the CGN for Colombian state-owned entities.  We refer to both RCP and PGCP as Colombian Government Entity GAAP.  Colombian Government Entity GAAP differs in certain significant respects from generally accepted accounting principles in the United States or U.S. GAAP.  Note 33 to our audited consolidated financial statements included in this annual report provides a description of the principal differences between Colombian Government Entity GAAP and U.S. GAAP as they relate to our audited consolidated financial statements and provides a reconciliation of net income and shareholders’ equity for the years and dates indicated therein. As a state-owned company, our consolidated financial statements are periodically reviewed by the CGN. However, the review of our accounts by the CGN does not constitute an audit.

 
2

 

Our consolidated financial statements include the financial results for Black Gold Re Ltd., Oleo é Gas Do Brasil Ltda., Ecopetrol Peru S.A., Ecopetrol America Inc., Andean Chemicals Ltd. and Propilco S.A., which are wholly owed by us.  Our consolidated financial statements also include the financial results of Bioenergy S.A. and ODL Finance, of which at December 31, 2008 we had a 79.14% and 65% direct interest, respectively.  Black Gold Re Ltd., Oleo é Gas Do Brasil Ltda., Ecopetrol Peru S.A. and Ecopetrol America Inc. are included in our consolidated financial statements for the years ended December 31, 2007 and 2008.  Andean Chemicals Ltd., Propilco S.A., Bioenergy S.A. and ODL Finance are included in our consolidated financial statements for the year ended December 31, 2008.  These financial statements were consolidated line by line and all transactions and significant balances between affiliates have been eliminated.
 
This annual report translates certain Peso amounts into U.S. dollars at specified rates solely for the convenience of the reader.  Unless otherwise indicated, such Peso amounts have been translated at the rate of Ps$2,243.59 per US$1.00, which corresponds to the Tasa Representativa del Mercado or Representative Market Rate for December 31, 2008, the last business day of the year.  The Representative Market Rate is computed and certified by the Superintendencia Financiera or Superintendency of Finance, the Colombian banking and securities regulator, on a daily basis and represents the weighted average of the buy and sell foreign exchange rates negotiated on the previous day by certain financial institutions authorized to engage in foreign exchange transactions.  The Superintendency of Finance also calculates the Representative Market Rate for each month for purposes of preparing financial statements and converting amounts in foreign currency to Pesos.  Such conversion should not be construed as a representation that the Peso amounts correspond to, or have been or could be converted into, U.S. dollars at that rate or any other rate.  On June 25, 2009, the Representative Market Rate was Ps$2,158.72 per US$1.00.
 
PRESENTATION OF ABBREVIATIONS
 
The following is a list of crude oil and natural gas measurement abbreviations commonly used throughout this annual report.
 
bpd
Barrels per day
boe
Barrels of oil equivalent
cf
Cubic feet
cfpd
Cubic feet per day
mcf
Million cubic feet
mcfpd
Million cubic feet per day
btu
Million British thermal units
gbtu
Giga British thermal units
gbtud
Giga British thermal units per day
gcf
Giga Cubic feet

PRESENTATION OF THE NATION AND GOVERNMENT OF COLOMBIA
 
References to the Nation in this annual report relate to the Republic of Colombia, our controlling shareholder.  References made to the Government of Colombia or the Government correspond to the executive branch including the President of Colombia, the ministries and other governmental agencies responsible for regulating our business.
 
PRESENTATION OF INFORMATION CONCERNING RESERVES
 
Information concerning the technical definitions used for the estimated proved reserves is included in this annual report.  The information provided in this annual report about our 2008 net proved reserves is based on the 2008 audited reserve reports for 89% of our total reserves prepared by experts under the U.S. Securities and Exchange Commission (“SEC”) definitions and rules.  The remaining 11% corresponds to calculations made by us internally using SEC definitions and rules.  The information regarding our proved reserves for 2007 and 2006 is based on the 2006 reserves reports prepared by experts under SEC definitions and rules at December 31, 2006 and updated by us to December 31, 2007 by applying the same rules.  See “Item 4B – Business Overview – Reserves” for additional information on our reserves estimates.

 
3

 

ITEM 1
Identity of Directors, Senior Management and Advisors
 
Not applicable.
 
ITEM 2
Offer Statistics and Expected Timetable
 
Not applicable.
 
ITEM 3
Key Information
 
ITEM 3A
Selected Financial Data
 
The following table sets forth, for the periods and at the dates indicated, our summary historical financial data, which have been derived from our consolidated financial statements, presented in Pesos.  Our consolidated financial statements for the year ended December 31, 2008 were audited by Pricewaterhouse Coopers Ltda. and our consolidated financial statements for the years ended December 31, 2007, 2006, 2005 and 2004 were audited by Ernst & Young Audit Ltda.  The information included below and elsewhere in this annual report is not necessarily indicative of our future performance.  The tables set forth below are derived from, and should be read in conjunction with, our consolidated financial statements and accompanying Notes included in this annual report.  See also Item 5 – “Operating and Financial Review and Prospects” in this annual report.
 
   
BALANCE SHEET
 
       
   
For the year ended December 31,
 
   
2008(1)
   
2008
   
2007
   
2006
   
2005
   
2004
 
   
(US$
                               
   
in thousands
except for
common share
and dividends
per share
amounts)
   
(Pesos in millions except for
common share and dividends per 
share amounts)
 
                                     
Total assets
    21,707,358       48,702.412       48,112,080       42,137,722       32,664,817       27,964,390  
                                                 
Shareholders’ Equity
    15,430,501       34,619,717       26,808,467       20,835,746       13,285,251       10,000,871  
                                                 
Number of common shares(3)
    40,472,512,588       40,472,512,588       40,472,512,588
(2)
    36,384,788,817       36,384,788,817       36,384,788,817  
                                                 
Dividends declared per share:
    0.05       115.0
(4)
    123.0
(4)
    55.0       35.7       31.8  
                                                 
Amounts in accordance with U.S. GAAP
                                               
                                                 
Total Assets
    17,963,794       40,303,388       29,698,528       26,517,482                  
Shareholders’ Equity
    12,224,040       27.425.735       20,991,031       18,015,386                  
Number of common shares(3)
    40,472,512,588       40,472,512,588       40,472,512,588       36,384,788,817                  
Dividends declared per share:
    0.05       115.0       123.0       55.0                  
 

(1)
Amounts stated in U.S. dollars have been translated for the convenience of the reader at the rate of Ps$2,243.59 to US$1.00, which is the Representative Market Rate at December 31, 2008, the last business day of the year, as reported and certified by the Superintendency of Finance.
(2)
Includes 4,087,723,771 new shares issued to the Republic of Colombia or the Nation on November 13, 2007, as a result of the capitalization of developed reserves in accordance with Decree 2625 of 2000.

 
4

 

(3)
Number of common shares include (i) a 1 to 400 stock split occurred in July 2007 which for purposes of comparability and dividends per share has been applied as if it had occurred in 2003, (ii) 48,512,147 shares issued to the Nation on April 2007 representing in-kind contributions, and (iii) 4,087,723,771 shares issued to the public in connection with our initial offering of shares in Colombia.
(4)
Represents payments made in 2008 based on net income and retained earnings for the year ended December 31, 2007.  In 2007 dividends were declared and paid on 36,384,788,817 shares.  In the same year, dividend payments to the Nation amounted to Ps$4,475,399 million of which Ps$3,052,236 million corresponded to net income and Ps$1,423,163 million to retained earnings paid prior to our initial public offering in the fourth quarter of 2007.  See  Item 5 —”Operating and Financial Review and Prospects — Pre-IPO Distribution of Retained Earnings”.
 
Colombian Government Entity GAAP differs in certain significant respects to U.S. GAAP.  For differences in net income and shareholders’ equity, see Note 33 to our consolidated financial statements “Differences between Colombian Government Entity GAAP and U.S. GAAP” and Item 5 — “Operating and Financial Review and Prospects — Principal Differences between Colombian Government Entity GAAP and U.S. GAAP.”
 
   
INCOME STATEMENT
 
       
   
For the year ended December 31,
 
   
2008(1)
   
2008
   
2007
   
2006
   
2005
   
2004
 
   
(US$
                               
   
in thousands
except for net
income per
share and
average
number of
shares
amounts)
   
(Pesos in millions except for net
income per share and average 
number of shares amounts)
 
             
Total revenue
    15,108,228       33,896,669       22,332,320       18,389,965       15,512,903       13,050,607  
                                                 
Operating income
    5,640,648       12,655,301       8,931,837       4,635,832       4,498,385       3,934,227  
                                                 
Net operating income per share
    0.14       313       291       109,207       105,969       92,679  
                                                 
Income before income tax
    7,136,422       16,011,204       7,065,304       4,891,142       4,288,330       2,916,390  
                                                 
Net income
    5,181,513       11,629,677       5,179,792       3,391,373       3,253,756       2,110,506  
                                                 
Weighted average number of shares outstanding(2)
    40,472,512,588       40,472,512,588       30,702,164,870       42,449,825       42,449,825       42,449,825  
Net income per share(3)
    0.13       287       169       79,891       76,648       49,717  
                                                 
Amounts in accordance with U.S. GAAP
                                               
                                                 
Total revenue
    15,087,076       33,849,213       22,784,694       19,461,739                  
                                                 
Operating income
    4,385,967       9,840,311       8,455,099       7,245,976                  
                                                 
Net operating income per share
    0.11       243       229       199                  
                                                 
Income before income tax and minority interest
    6,139,536       13,774,601       8,710,648       7,765,863                  
                                                 
Net income
    3,940,953       8,841,833       6,144,685       6,636,424                  
                                                 
Net income per Share
    0.10       218.47       166.42       182.40                  
                                                 
Average number of shares outstanding(4)
    40,472,512,588       40,472,512,588       36,922,352,491       36,384,788,817                  
 

(1) 
Amounts stated in U.S. dollars have been translated for the convenience of the reader at the rate of Ps$2,243.59 to US$1.00, which was the Representative Market Rate at December 31, 2008, the last business day of the year, as reported and certified by the Superintendency of Finance.

 
5

 

(2)
The weighted average number of common shares outstanding during 2007 was 30,702,164,870 as a result of the application of the 1 to 400 stock split, capitalization of reserves by the Nation and initial public offering in Colombia, which represents a net income per share of Ps$169, compared to Ps$79,891 during 2006 when the average number of shares outstanding was 42,449,825.
(3)
Net Income per share is calculated using the weighted-average number of outstanding shares at December 31 of each year, adjusted for a 1 to 400 stock split and the contribution to equity from the Nation.
(4)
Amounts calculated in accordance with U.S. GAAP which differs in certain respects with the calculation of weighted average number of shares for Colombian Government Entity GAAP.
 
Exchange Rates
 
On June 25, 2009, the Representative Market Rate was Ps$2,158.72 per US$1.00.  The Federal Reserve Bank of New York does not report a noon-buying rate for Pesos.  The Superintendency of Finance calculates the Representative Market Rate based on the weighted averages of the buy/sell foreign exchange rates quoted daily by foreign exchange rate market intermediaries including financial institutions for the purchase and sale of U.S. dollars.
 
The following table sets forth the high, low, average and period-end exchange rate for Pesos/U.S. dollar Representative Market Rate for each of the last five years and for the last six months.
 
   
Exchange Rates
 
   
High
   
Low
   
Average
   
Period-End
 
Year ended December 31,
                   
                         
2004
    2,778.92       2,316.12       2,626.22       2,389.75  
2005
    2,397.25       2,272.95       2,320.77       2,284.22  
2006
    2,634.06       2,225.44       2,357.98       2,238.79  
2007
    2,261.22       1,877.88       2,078.35       2,014.76  
2008
    2,392.28       1,652.41       1,966.26       2,243.59  
December 2008
    2,333.54       2,163.14       2,252.72       2,243.59  
January 2009
    2,386.58       2,197.72       2,252.98       2,386.58  
February 2009
    2,596.37       2,420.26       2,513.74       2,555.89  
March 2009
    2,590.97       2,335.29       2,477.21       2,561.21  
April 2009
    2,544.24       2,283.20       2,379.36       2,289.73  
May 2009
    2,288.64       2,190.45       2,229.95       2,190.45  


Source:
Superintendency of Finance for historical data.  Banco de la República or the Colombian Central Bank (www.banrep.gov.co) and internal calculation for averages.
 
ITEM 3B
Capitalization and Indebtedness
 
Not applicable.
 
ITEM 3C
Reasons for the Offer and Use of Proceeds
 
Not applicable.
 
ITEM 3D
Risk Factors
 
Below is a description of the risk factors that we face which may affect our future results and the overall performance of the Colombian oil industry.  Prospective purchasers of our shares represented by American Depositary Receipts or ADRs should carefully consider the risks described below, as well as other information contained in this annual report, before deciding to invest in our ADRs.  The risk factors described below are not the only ones that we face.  Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, may also become important factors that affect us.
 
Financial results and the operation of the business units could be affected by the occurrence of one or more of these factors resulting in a decline in the price of our shares, which may result in you losing some or all of your investment.

 
6

 

Risks relating to Colombia’s political and regional environment
 
Colombia has experienced internal security issues that have had or could have in the future a negative effect on the Colombian economy and on us.
 
Colombia has experienced internal security issues, primarily due to the activities of guerrillas, paramilitary groups and drug cartels.  In the past, guerrillas have targeted the crude oil pipelines, including the Caño Limón-Coveñas and Ocensa pipelines, and other related infrastructure disrupting our activities and those of our business partners.  On several occasions guerilla attacks have resulted in unscheduled shut-downs of the transportation systems in order to repair damaged sections and undertake clean-up activities.  These activities, their possible escalation and the effects associated with them have had and may have in the future a negative impact on the Colombian economy or on us, which may affect our customers, employees or assets.  In the context of the political instability, allegations have been made against members of the Congress of Colombia and on Government officials for possible ties with illegal groups.  This situation may have a negative impact on the credibility of the Colombian Government which could in turn have a negative impact on the Colombian economy or on us in the future.
 
Attacks or alleged attacks by the Colombian army of guerrilla positions in neighboring countries have resulted in political tension with neighboring countries.
 
A year after the Government launched attacks on a FARC camp in Ecuador, that resulted in the death of one of the members of FARC’s secretariat, the diplomatic relationships between Colombia and Ecuador are still very tense.  This political tension is heightened by the Colombian Government’s allegations that neighboring countries are supporting the guerilla groups.  On other occasions allegations have been made by Venezuela that the Colombian army has entered foreign soil while in pursuit of FARC members.  The Colombian army and air force continue to combat FARC members throughout Colombia, including Colombia’s borders.  New attacks by Colombia’s armed forces on FARC positions near Colombia’s borders could result in new and heightened tensions with its neighbors, which could have a negative impact on Colombia’s economy and general security situation.
 
Companies operating in Colombia, including us, are subject to prevailing economic conditions and investment climate in Colombia, which may be less stable than prevailing economic conditions in developed countries.
 
The market price of securities issued by Colombian companies, including us are subject to the prevailing economic conditions in Colombia.  Substantially all of our assets and operations are located in Colombia, and all of our sales are currently derived from our crude oil and natural gas production and production of our refineries located in Colombia.  In the past, economic growth in Colombia has been negatively affected by lower foreign direct investment and high inflation rates and the perception of political instability.
 
The Colombian government has changed monetary, fiscal, taxation, labor and other policies over time and has thus influenced the performance of the Colombian economy.  We have no control over the extent and timing of government intervention and policies.
 
If the perception of improved overall security in Colombia changes or if foreign direct investment declines, the Colombian economy may face a downturn which could negatively affect our financial condition and results of operation.  Furthermore the market price of our shares and ADSs may be adversely affected by changes in governmental policy, particularly those affecting economic growth, exchange rates, interest rates, inflation and taxes.
 
Developments and the perception of risk in other countries, especially emerging market countries, may adversely affect the market price of Colombian securities, including our American Depositary Shares (ADSs).
 
Securities issued by Colombian companies may be affected by economic and market conditions in other countries, including other Latin American and emerging market countries.  Securities issued by Colombian issuers are also likely to be affected by economic and political conditions in Colombia’s neighbors:  Venezuela, Ecuador, Peru, Brazil and Panama.  Although economic conditions in such Latin American and other emerging market countries may differ significantly from economic conditions in Colombia, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Colombian issuers.

 
7

 

Due to crises in several emerging market countries (such as the Asian financial crisis of 1997, the Russian financial crisis of 1998 and the Argentine financial crisis of 2001), and the recent world financial crisis, investors may view investments in emerging markets with heightened caution.  As a result of the crisis in other countries, flows of investments into Colombia were reduced.  Crises in other emerging market countries may hamper investor enthusiasm for securities of Colombian issuers.  If Latin America experiences a new slow-down or if the price for securities of Latin American issuers falls, the price for our ADSs could follow this trend and could be adversely affected.  A new financial crisis or an expansion of the current crisis could also make it more difficult for us and our subsidiaries to access the international capital markets and finance our operations and capital expenditures in the future on acceptable terms.
 
Our controlling shareholder’s interests may be different from yours.
 
The Republic of Colombia, or the Nation, is our largest shareholder controlling 89.9% of our outstanding capital stock.  Colombian law requires the Nation to maintain the majority of our outstanding capital stock, thus holding the right to elect the majority of the members of our Board of Directors.  In the future, the Nation as our controlling shareholder may undertake projects which may not be in our best interest or in the best interest of our minority shareholders, including holders of our ADSs.
 
Before we can issue any debt in the international and local capital markets, the Government, through the Ministry of Finance and Public Credit, must authorize the issuance of such debt and we must register external debt with the Colombian Central Bank.  We cannot assure you that if we were to seek such an authorization, that the Nation would issue it in a timely fashion or at all.
 
Additionally our controlling shareholder may require our Board of Directors to declare dividends in an amount that result in us having to reduce our capital expenditures thereby negatively affecting our prospects, results of operations and financial condition.
 
Our operations are subject to extensive regulation.
 
The Colombian hydrocarbons industry is subject to extensive regulation and supervision by the Government in matters including the award of exploration and production blocks by the National Hydrocarbon Agency, or Agencia Nacional de Hidrocarburos or ANH, the imposition of specific drilling and exploration obligations, restrictions on production, price controls, capital expenditures and required divestments.  Existing regulation applies to virtually all aspects of our operations in Colombia and abroad.  See Item 4B “— Business Overview — Regulation”.
 
The terms and conditions of the agreements with the ANH under which we explore and produce crude oil and natural gas generally reflect negotiations with the ANH and other governmental authorities and may vary by fields, basins and hydrocarbons discovered.
 
We are required, as are all oil companies undertaking exploratory and production activities in Colombia, to pay a percentage of our production to the Government as royalties.  The Government has modified the royalty program for crude oil and natural gas production several times in the last 20 years, as it has modified the regime regulating new contracts entered into with the Government.  The royalty regime for contracts being entered into today for crude oil is tied to a scale starting at 8% for production of up to 5,000 barrels per day or bpd and increases up to 25% for production above 600,000 bpd.  Royalties for natural gas production are also subject to a sliding scale depending on whether the field is on- or off-shore and range between 8% and 25%.
 
In the future, the Government may once again amend royalty payment levels for new contracts and such changes could have a material adverse effect on our financial condition or results of operation.

 
8

 

The Government may delay the reimbursement of the gasoline and diesel fuel subsidies.
 
The Government regulates domestic prices of liquid fuels according to international market conditions in order to align domestic prices with trends in international prices, with a one month lag.  When domestic prices of liquid fuels are lower than international parity prices, the Government is responsible for reimbursing refiners for the difference, which difference is called the fuel subsidy pursuant to Law 1151 of 2007.  In 2008, following international trends, domestic prices reached historical highs.  By the end of 2008, international prices had decreased but the Government decided not to lower domestic prices.  Instead, the Government kept domestic prices high and allocated the excess amount (paid in the domestic market with respect to international parity prices) to a Fuels Stabilization Fund (Fondo de Estabilización de Precios de los Combustibles).  Similar to the approach followed by other countries, this Fund is funded with these excess payments when international prices are low and depleted when international prices are high in order to mitigate domestic price volatility.
 
However, the calculation and payment by the Government of the 2008 price difference (fuel subsidy) was significantly delayed.
 
Pursuant to Resolution 181496 of 2008, the Ministry of Mines and Energy allows refiners in Colombia to subordinate receipt of their fuel subsidy to the fuel subsidy of other refiners.  Pursuant to this resolution, we, as well as Refineria de Cartagena S.A., entered into an agreement by which we agreed to subordinate our fuel subsidy payments corresponding to 2008 and 2009.  As a result of this agreement, we will receive our 2008 and 2009 fuel subsidy payments in 2009 and 2010, respectively.
 
We are unable to determine when we will fully collect the total amount of these fuel subsidies or any additional subsidies that become due in the future.  Any material delay in payment of these subsidies by the Government or a significant amendment to Law 1151 imposing on us additional responsibilities with respect to the subsidies could have a negative impact on our financial condition and results of operations.
 
Risks related to our business
 
Our business depends substantially on international prices for crude oil and refined products, and prices for these products are volatile.  A sharp decrease in such prices could materially and adversely affect our business prospects and results of operations.
 
Crude oil prices have traditionally fluctuated as a result of a variety of factors including, among others, the following:
 
 
·
Changes in international prices of natural gas and refined products;
 
 
·
Long-term changes in the demand for crude oil, natural gas and refined products;
 
 
·
Regulatory changes;
 
 
·
Inventory levels;
 
 
·
Increase in the cost of capital;
 
 
·
Adverse economic conditions;
 
 
·
Development of new technologies;
 
 
·
Economic and political events, especially in the Middle East and elsewhere with high levels of crude oil production;
 
 
·
The willingness and ability of the Organization of the Petroleum Exporting Countries or OPEC and its members to set production levels and prices;
 
 
·
Local and global demand and supply;

 
9

 

 
·
Development of alternative fuels;
 
 
·
Weather conditions; and
 
 
·
Terrorism and global conflict.
 
As of December 2008, nearly 97% of our revenues came from sales of crude oil, natural gas and refined products.  Most prices for products developed and sold by us are quoted in U.S. dollars and fluctuations in the U.S. dollar/Peso exchange rate have a direct effect on our Peso-denominated financial statements.
 
A significant and sustained decrease in crude oil prices could have a negative impact on our results of operations and financial condition.  In addition, a reduction of international crude oil prices could result in a delay in our capital expenditure plan, in particular delaying exploration and development activities, thereby delaying the incorporation of reserves.
 
We are exposed to the credit risks of our customers and any material nonpayment or nonperformance by our key customers could adversely affect our cash flow and results of operations.
 
Some of our customers may experience financial problems that could have a significant negative effect on their creditworthiness.  Severe financial problems encountered by our customers could limit our ability to collect amounts owed to us, or to enforce the performance of obligations owed to us under contractual arrangements.  In addition, many of our customers finance their activities through their cash flows from operations, the incurrence of debt or the issuance of equity.  Recently, there has been a significant decline in the availability of credit in the credit markets.  Consequently, the market capitalization of many of our customers has declined substantially.
 
The combination of declining cash flows as a result of declines in commodity prices, a reduction in borrowing bases under reserve-based credit facilities and the lack of availability of debt or equity financing may result in a significant reduction of our customers’ liquidity and limit their ability to make payments or perform on their obligations to us.  In addition, some of our customers may be highly leveraged and subject to their own operating and regulatory risks, which increases the risk that they may default on their obligations to us.  Financial problems experienced by our customers could result in the impairment of our assets, a decrease in our operating cash flows and may also reduce or curtail our customers’ future use of our products and services, which may have a material adverse effect on our revenues.
 
Achieving our long-term growth prospects depends on our ability to execute our strategic plan, in particular discovering additional reserves and successfully developing them, and failure to do so could prevent us from achieving our long-term goals.
 
The ability to achieve our long-term growth objectives depends on discovering or acquiring new reserves as well as successfully developing them.  Our exploration activities expose us to the inherent risks of drilling, including the risk that we will not discover commercially productive crude oil or natural gas reserves.  The costs associated with drilling wells are often uncertain, and numerous factors beyond our control may cause drilling operations to be curtailed, delayed or cancelled.
 
If we are unable to conduct successful exploration and development of our exploration activities, or if we do not acquire properties having proved reserves, our level of proved reserves will decline.  Failure to secure additional reserves may impede us from achieving our growth targets, production targets and may have a negative effect on our results of operations and financial condition.
 
In association with our business partners we have undertaken deep water drilling (between 300 and 1,500 meters depth) in two blocks in the Gulf Coast and are planning to undertake deep water drilling in nine blocks in Colombia and six blocks in Brazil.  Currently, we are acting as operators in three exploration blocks in Colombia.  Deep water drilling entails new and heightened risks as reserves are located at greater distances underneath the seabed and seismic information for these deposits is more expensive to produce.  Our lack of expertise in deep water drilling and the heightened risks and costs associated with this type of drilling may have a negative effect on our results of operations and financial condition.

 
10

 

Our crude oil and natural gas reserve estimates involve some degree of uncertainty and may prove to be incorrect over time, which could adversely affect our ability to generate revenue.
 
Historical reserves correspond to quantities estimated by us in accordance with international standards issued by the Society of Petroleum Engineers, World Petroleum Congresses and the SEC.  Estimates are based on geological, topographic and engineering facts.  Actual reserves and production may vary materially from estimates shown in this annual report, which could affect our results of operation.
 
Our drilling activities are capital intensive and may not be productive.
 
Drilling for crude oil and natural gas involves numerous risks, including the risk that we will not encounter commercially productive crude oil or natural gas reservoirs.  The costs of drilling, completing and operating wells are high or uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including:
 
 
·
Unexpected drilling conditions;
 
 
·
Pressure or irregularities in formations;
 
 
·
Security problems;
 
 
·
Equipment failures or accidents;
 
 
·
Fires, explosions, blow-outs and surface cratering;
 
 
·
Title problems;
 
 
·
Other adverse weather conditions; and
 
 
·
Shortages or delays in the availability or in the delivery of equipment.
 
Certain of our future drilling activities may not be successful and, if unsuccessful, this failure could reduce the ratio at which we replace our reserves, which could have an adverse effect on our results of operations and financial condition.  While all drilling, whether developmental or exploratory, involves risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons.  Because of the percentage of our capital budget devoted to higher-risk exploratory projects, it is likely that we may in the future experience significant exploration and dry hole expenses.
 
Increased competition from foreign crude oil companies may have a negative impact on our ability to gain access to additional crude oil and natural gas reserves in Colombia.
 
The ANH is the governmental entity responsible for promoting oil and gas investments in Colombia, establishing terms of reference for exploration rounds and assigning exploration blocks to oil and gas companies.  Prior to the enactment of Decree Law 1760 of 2003, we had an automatic right to explore any territory in Colombia and to enter into joint venture agreements with foreign and local oil companies.  Under current regulations, we are entitled to bid for any exploration blocks offered for exploration by the ANH and we compete under the same conditions as other domestic and foreign oil and gas companies, that is, we receive no special treatment.  We may also request the ANH to assign us exploration blocks which have not been previously reserved by that Agency.  Our ability to obtain access to potential production fields also depends on our ability to evaluate and select potential hydrocarbon-producing fields and to adequately bid for these exploration fields.
 
Our strategies include international expansion where we may face competition from local market players and international oil companies that have experience exploring in other countries.
 
If we are unable to adequately compete with foreign and local oil companies, or if we cannot enter into joint ventures with market players with properties where we could potentially find additional reserves, we may be conducting exploration activities in less attractive blocks.  If we fail to maintain our current market position in Colombia, our results of operations and financial conditions may be adversely affected.

 
11

 

We may be subject to substantial risks relating to our development of exploration activities outside Colombia.
 
We began exploration activities outside Colombia in 2006 through our Brazilian subsidiary, Oleo é Gas Do Brazil Ltda.  Our foreign subsidiaries have subsequently entered into a number of joint venture exploration agreements with regional and international oil companies to explore blocks in Peru, Brazil and the U.S. Gulf of Mexico.  The results of operations and financial condition of our subsidiaries in these countries may be adversely affected by fluctuations in their local economies, political instability and government actions.
 
We have limited experience exploring outside Colombia, where we are the incumbent operator.  We may face new and unexpected risks involving environmental requirements that exceed those currently faced by us.  We may also experience the imposition of restrictions on hydrocarbon exploration and export, or increases in export tax or income tax rates for crude oil and natural gas.  We may be exposed to legal disputes related to our operating or exploration activities such as the one we currently face in Brazil where the awarding of an exploration block is under dispute.
 
If one or more of these risks described above were to materialize, we may not achieve the strategic objectives in our international operations, which may negatively affect our results of operations and financial condition.
 
We may incur losses and spend time and money defending pending law suits and arbitrations.
 
We are currently a party to several legal proceedings relating to civil, administrative, environmental, and labor claims filed against us.  We are also subject to labor-related lawsuits filed by current and former employees in connection with pension plans and retirement benefits affecting the plaintiffs.  These claims involve substantial sums of money as well as other remedies.  See Notes 18 and 30 to our consolidated financial statements.
 
Our most relevant legal proceeding was brought by an association of former employees known by the acronym Foncoeco.  The former employees brought an action against us in connection with a company profit-sharing plan offered in 1962 that expired in 1975.  The plaintiffs claim that our Board of Directors had set aside a specific amount under the profit sharing plan, which was not entirely distributed to employees eligible under the plan.  The court of first instance ruled in our favor and rejected the plaintiffs’ arguments.  The plaintiffs appealed the ruling to the Tribunal Superior de Bogota or Bogota Higher Tribunal, which ordered us to present a rendición de cuentas (an accounting action) to the first instance judge based on the amounts allocated by our Board of Directors.  Pursuant to our accounting and based on the expert testimony of a witness presented by the plaintiffs who included amounts never allocated by our Board of Directors to the profit sharing plan, the first instance judge ordered us to pay Ps$541,833 million, or approximately US$260 million.  We have appealed the decision by the first instance judge to the Bogota Higher Tribunal.  Additionally, we have initiated a separate Recurso de Revisión (review proceeding) of the Tribunal’s ruling before the Colombian Supreme Court.  If we are not successful in our appeal, we may be obliged to pay the total amount of the ruling, which could have a negative impact on our results of operations.  At December 31, 2008 we had recorded a provision of Ps$100,000 million related to this claim.
 
Our operations may not be able to keep pace with the increasing demand for natural gas.
 
The demand for natural gas in Colombia has grown significantly in recent years.  As a result of this growth, demand for natural gas could exceed production capacity, resulting in possible supply shortages.  When production shortages occur, we are required to compensate industrial clients with whom we have supply contracts by paying penalties and other compensatory expenses detailed in the supply contracts.
 
Internal demand for natural gas has experienced strong growth during the last decade as a result of national campaigns for cleaner energy and cheaper tariffs for retail customers.  We may not be able to keep up with local demand and industrial commitments if demand outpaces the rate of new developments and discoveries.
 
We have long-term contracts to supply power utilities and other large customers.  In 2007, we entered into an agreement with Petróleos de Venezuela, S.A. or PDVSA to supply natural gas to Venezuela until 2012, when it is expected that Venezuela will supply us with natural gas.  It is uncertain whether Venezuela will be able to begin supplying us with natural gas by 2012.

 
12

 

If we are unable to discover new natural gas reserves or if we cannot extract existing reserves to meet our commitments and contracts and support local demand, we may be required to compensate our long-term contract customers for our failure to supply natural gas, which may have a negative effect on our financial condition and results of operation.
 
We are not permitted by law to own more than 25% of a natural gas transportation company or sell transportation capacity pipelines which may not allow us to transport new natural gas reserves to distribution points and to our customers.
 
We discovered natural gas reserves in the Cusiana and Cupiagua fields for which limited transportation capacity currently exists.  New natural gas transportation infrastructure may not be available to transport natural gas from new or existing fields to consumption areas.  Furthermore, we are prohibited by law from holding more than 25% of the equity of any natural gas transportation company or from selling transportation capacity to third parties and we cannot determine whether the necessary transportation capacity will be built by third parties to transport natural gas.  We may be required to enter into agreements with natural gas transportation companies in terms that are not favorable to us.
 
We currently have long-term supply contracts with gas-fired power plants that require us to deliver natural gas in Barrancabermeja and not at La Guajira fields.  Our ability to deliver the natural gas to these clients at the delivery point is limited by the Ballena-Barranca pipeline transportation capacity.  If we are unable to acquire the necessary transportation, we may be unable to meet our obligation with power generators, which could result in us having to pay fines.
 
If we are unable to transport natural gas discoveries to our customers or to regions where natural gas is needed, we may not be able to develop these reserves, which would not allow us to recover the capital expenditures invested to make new natural gas discoveries.
 
Results could be affected by conflicts with the labor unions.
 
In the past, we have been affected by strikes and work stoppages promoted by our labor unions.  These strikes have been both politically and contract-related, especially during collective bargaining negotiations.  In the event relations with our labor unions deteriorate, which could result in industry-general strikes, work stoppages or even sabotages, our results of operations and financial condition could be negatively affected.
 
Our collective bargaining agreement entered into with Unión Sindical Obrera de la Industria del Petróleo— USO, Asociación de Directivos Profesionales, Técnicos y Trabajadores de las Empresas de la Rama de Actividad Económica del Recurso Natural del Petróleo y sus Derivados de Colombia — ADECO, Sindicato Nacional de Trabajadores de Empresas Operadoras, Contratistas, Subcontratistas de Servicios y Actividades de la Industria del Petróleo y Similares — SINDISPETROL, three of our most significant industry labor unions, expired on June 8, 2009 but will remain in force until a new agreement is reached.  Consensual negotiations on a new collective bargaining agreement are expected to begin on July 14, 2009 and we expect that they will extend until August 2009.  If an agreement has not been reached by August 2009, the parties must submit themselves to arbitration in order to reach a solution.  However, failure or delays in reaching a new collective bargaining agreement through consensual negotiations could result in labor unrest, including a strike or work stoppages.  We have developed a contingency plan which should enable us to maintain our current levels of production during any related strike or work stoppage.  However, we cannot assure you that such labor unrest will not negatively affect our results of operations and financial condition.
 
We may experience difficulties in recruiting and retaining key personnel.
 
Compensation for oil engineers and other experienced industry personnel has risen in recent years making it harder for oil companies with smaller budgets to recruit and retain top talent.  Larger oil companies in need of qualified personnel have begun to recruit in non-traditional markets, including Colombia.  Since the enactment of Decree Law 1760 of 2003, pursuant to which private oil companies signed exploration and production agreements directly with the ANH and not with us, Colombia has become a more attractive market for regional and international oil companies.  New participants and other industry players have started searching for qualified personnel in Colombia by offering them more attractive compensation schemes, including our current employees.

 
13

 

We may need to spend additional resources in identifying and continuing to recruit highly qualified personnel.  If we are unable to recruit the necessary personnel or if we cannot retain existing personnel, we may not be able to operate adequately or meet our growth plans which could adversely affect our results of operations.
 
Interruption of activities caused by external factors.
 
We are exposed to several risks that may partially interrupt our activities.  These risks include, among others, fire disasters, explosions, malfunction of pipelines and emission of toxic substances.  As a result of the occurrence of any of the above, operational activities could be significantly affected or paralyzed.  These risks could result in property damage, loss of revenue, cost of human lives, pollution and harm to the environment, among others.  If any of these occur, we may be exposed to economic sanctions, fines or penalties.
 
We carry out and plan to carry out exploration and production activities in areas classified by the Government as indigenous reserves and afrocolombian lands.  We may not begin to explore for or produce hydrocarbons in these regions until we reach an agreement with the indigenous or afrocolombian communities living on these lands.  Generally these consultations last between four and six months, but may be significantly delayed if we cannot reach an agreement.  For example, we conduct operations in areas of the Northeastern region which are inhabited by the U’wa community.  Commencement of operations on two blocks in this region have been delayed for 16 years and seven years, respectively, and as of December 2008 we have not received approval to undertake activities in these two blocks by the indigenous authorities.  Similarly, some of our exploration operations in the Southern region have been delayed for over a year as a result of the presence of the Kofan community who oppose our presence and activities in the reservation.  If our activities endanger the conservation and preservation of these cultural minorities or their identities or beliefs, we may not be able to explore regions with good prospects.  We may face similar risks in other jurisdictions where we have initiated exploration activities which could have a negative effect on our operations.
 
Currency fluctuations and an appreciation of the Peso against the U.S. dollar could have a material adverse effect on our financial condition and results of operations because approximately 36% of our revenues are in U.S. dollars or are referenced to U.S. dollars.
 
Approximately 36% of our sales are denominated in U.S. dollars and are made in the international markets.  The impact of fluctuations in exchange rates, especially the Peso/U.S. dollar rate on our operations has been and may continue to be material.  In addition, a substantial share of our liquid assets are held in U.S. dollars or indexed to foreign currencies and have lost value as the Peso has appreciated against these currencies.  We usually do not use forwards, swaps or futures contracts to mitigate the impact of currency fluctuations as Colombian regulations do not make it attractive for us to implement a hedging strategy.
 
The Peso appreciated 11.9% and 5.4% on average against the U.S. dollar in 2007 and 2008, respectively.  This has had a material adverse effect on our results of operations.  When the Peso appreciates against the U.S. dollar, our revenues from exports, when translated into Pesos, decrease.  However, imported goods and oil services denominated in U.S. dollars become cheaper for us.
 
The Peso depreciated 1.6% against the U.S. dollar in 2006.  When the Peso depreciates against the U.S. dollar, our revenues from exports, when translated into Pesos, increase.
 
Our ability to access the credit and capital markets on favorable terms to obtain funding for our capital projects may be limited due to the deterioration of these markets.
 
We expect to make significant expenditures for the construction of additional crude oil and natural gas transportation infrastructure over the next two years.  Our ability to fund these expenditures is dependent on our ability to access the capital necessary to finance the construction of these facilities.  Domestic and global financial markets and economic conditions have been, and continue to be, weak and volatile and have contributed significantly to a substantial deterioration in the credit and capital markets.  These conditions, along with significant write-offs in the financial services sector and the re-pricing of credit risk have made, and likely will continue to make, it difficult to obtain funding for our capital needs on similar terms to our recent capital-raising transactions.  As a result, we may be forced to revise the timing and scope of these projects as necessary to adapt to existing markets and economic conditions.

 
14

 

We may be exposed to increases in interest rates, thereby increasing our financial costs.
 
As a result of our initial public offering, we became a Sociedad de Economía Mixta or mixed economy company and can now incur debt locally and in the international capital markets and can be affected by changes in prevailing interest rates.  If market interest rates increase, our financing expenses may increase, which could have an adverse effect on our results of operations and financial condition.
 
The cost of raising funds in debt and equity capital markets has increased while the availability of funds from those markets has diminished.  The cost of obtaining funds from the credit markets has increased as many lenders have increased interest rates, enacted tighter lending standards and reduced, and in some cases ceased to provide, funding to borrowers.  Due to the recent downturn in the financial markets, including the issues surrounding the solvency of many financial institutions and the recent failure, mergers and announced mergers of several financial institutions, our ability to obtain capital from credit facilities may be impaired.
 
We are subject to extensive environmental regulations in Colombia and in the other countries in which we operate.
 
Our operations are subject to extensive national, state and local environmental regulations in Colombia.  Environmental rules and regulations are applicable to our exploration, transportation, refining and production activities.  These regulations establish, among others, quality standards for hydrocarbon products, air emissions, water discharges and waste disposal, environmental standards for abandoned crude oil wells, remedies for soil, water pollution and the general storage, handling, transportation and treatment of hydrocarbons in Colombia.  Since the creation of the Ministry of the Environment in 1993 and the enactment of more rigorous laws, environmental regulations have substantially impacted our operations and business results.  Currently, all exploratory project drilling in areas that do not yet have a license must have an environmental impact assessment and must receive an environmental license from the local authorities.  The Ministry of the Environment routinely inspects our crude oil fields, refineries and other production sites and may decide to open investigations which may result in fines, restrictions on operations or other sanctions in connection with our non-compliance with environmental laws.
 
We are also subject to regional environmental regulations issued by the corporaciones autonomas regionales or regional environmental authorities, which oversee compliance with each region’s environmental laws and regulations by oil and gas companies.  If we fail to comply with any of these national or regional environmental regulations, we could be subject to administrative and criminal penalties, including warnings, fines and closure orders of our facilities.  See Item 4 – “Business Overview – Environmental Matters”.
 
Environmental compliance has become more stringent in Colombia in recent years and as a result we have allocated a greater percentage of our expenditures for compliance with these laws and regulations.  If environmental laws continue to impose additional costs and expenses on us, we may need to reduce our investments on strategic projects in order to allocate funds to environmental compliance.  These additional costs may have a negative impact on the profitability of the projects we intend to undertake or may make them economically unattractive, in turn having a negative impact on our results of operations and financial condition.
 
We are subject to foreign environmental regulations for the exploratory activities conducted by us outside Colombia.  Failure to comply with foreign environmental regulations may result in investigations by foreign regulators, which could lead to fines, warnings or temporary suspensions of our operations, which could have a negative impact on our financial condition and results of operations.
 
Our activities face operational risks that may affect the health and safety of our workforce.
 
Some of our operations are developed in remote and dangerous locations which involve health and safety risks that could affect our workforce.  Under Colombian law and industrial safety regulations we are required to have health and safety practices that minimize risks and healthy issues faced by our workforce.  Failure to comply with health and safety regulations may derive investigations by health officials which could result in lawsuits or fines.

 
15

 

We may be obliged to incur additional costs and expenses to allocate funds to industrial safety and health compliance.  These additional costs may have a negative impact on the profitability of the projects we may decide to undertake.
 
In addition, we may be subject to foreign health and safety regulations for our exploratory activities conducted outside Colombia.  Foreign health and safety regulations may be more severe than those established under Colombian law and, therefore, we may be required to make additional investments to comply with those regulations.
 
If we do not successfully integrate Propilco and the operations of any of our recent acquisitions, we may not achieve the expected benefits from such operations.
 
We acquired a controlling voting interest in Polipropileno del Caribe S.A. (Propilco) on April 7, 2008.  Although we will continue to operate Propilco as a separate business unit, obtaining the expected benefits of the acquisition will depend, in part, on our ability to manage disparate operations and to integrate distinct corporate cultures.  These integration efforts may not succeed or may distract our management from operating our existing business.  Additionally, we may not be able to enhance earnings from our other operations if we do not successfully integrate Propilco or any of our recent acquisitions into our Company.  Our failure to successfully manage this or any of the other acquisitions mentioned in Note 32 to our consolidated financial statements could adversely affect our financial condition and results of operations.
 
Our strategic plan contemplates the expansion of operations outside of Colombia where we will be subject to all of the risks associated with investments in new countries.
 
As part of our strategic plan, we have begun to operate through business partners, subsidiaries or affiliates outside of Colombia.  As of the date hereof, we have investments and subsidiaries incorporated in Peru, Brazil and the United States, and we are analyzing investments in other countries.  In connection with making investments, we are and will be subject to risks relating to unstable economic and political conditions, governmental economic actions, such as exchange or price controls or limits on the activities to be performed by us, increases in tax rates, contractual changes, and social and environmental challenges.  In addition, we have recently acquired a company in Peru and we have faced reputational risks arising from prior ownership of such company. These factors, among others that our international activities may encounter, could adversely affect our results of operations in those countries and decrease the value of our investments.
 
Risks relating to our ADSs
 
The market for our ADSs has only started to develop recently.  An active and liquid public market for our ADSs may not develop.
 
Illiquid or inactive trading markets generally result in higher price volatility and lower efficiency in the execution of sale and purchase orders in the securities markets.  The market price of the ADSs may fluctuate significantly in response to a number of factors, some of which may be beyond our control.  In the event that the trading price of our ADSs declines, you may lose all or part of your investment in our ADSs.  In addition, holders of ADSs may choose to cancel them and receive instead common shares in an amount equivalent to that of the ADSs previously held.  Cancellation of a considerable number of ADSs may significantly influence the development of an actively liquid market for our ADSs, which may have a material adverse effect on the price of our ADSs.
 
Holders of our ADSs may encounter difficulties in exercising their voting rights.
 
Holders of our common shares are entitled to vote on shareholder matters.  However, holders of our ADSs may encounter difficulties in exercising some of the rights of shareholders if they hold our ADSs rather than the underlying common shares.  For example, holders of our ADSs are not entitled to attend shareholders’ meetings, and can only vote by giving timely instructions to the Depositary in advance of a shareholders’ meeting.  Under Colombian law, we are not required to solicit proxies from our existing shareholders and, therefore, you may not receive notice in time to instruct the depositary to vote the shares.

 
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We believe that the holders of the ADSs should be able to direct the Depositary to vote the common shares separately in accordance with their individual instructions, particularly as this is the current interpretation of the Superintendencia de Sociedades or Superintendency of Corporations; this issue has been the subject of differing regulatory interpretations in the past and may be subject to differing interpretations in the future.  Under prior regulatory interpretations, the Depositary could be required to vote the underlying common shares in a single block (presumably reflecting the majority vote of the ADS holders).  In the future, the Colombian regulatory authorities may change their interpretation as to how voting rights should be exercised by ADSs holders, and if this were to occur any such limitation or loss could adversely affect the value of such common shares and your ADSs.
 
Our ADSs holders may be subject to restrictions on foreign investment in Colombia.
 
Colombia’s International Investment statute regulates the manner in which non-Colombian residents can invest in Colombia and participate in the Colombian securities market.  Among other requirements, Colombian law requires foreign investors to register certain foreign exchange transactions with the Colombian Central Bank and outlines the necessary procedures to authorize certain types of foreign investments.  Colombian law requires that certain foreign exchange transactions, including international investment in foreign currency between Colombian residents and non-Colombian residents, must be made through authorized foreign exchange market participants.  Any income or expenses under our ADR program must be made through the foreign exchange market.
 
Investors acquiring our ADRs are not required to register with the Colombian Central Bank.  Investors in ADRs who choose to surrender their ADRs and withdraw common shares would have to register their investment in the common shares as a foreign direct investment, in the event the investor does not own a portfolio of investments in Colombia; or as a portfolio investment, in the event the investor delivers such shares to a registered foreign capital investment fund.  Non-Colombian residents cannot directly hold portfolio investments in Colombia, but are able to do so through a registered foreign capital investment fund.  Investors would only be allowed to transfer dividends abroad after their foreign investment registration procedure with the Colombian Central Bank has been completed.  Investors withdrawing the common shares may incur in expenses and/or suffer delays in the application process.  The failure of a non-resident investor to report or register foreign exchange transactions with the Colombian Central Bank relating to investments in Colombia on a timely basis may prevent the investor from remitting dividends, or initiate an investigation that may result in a fine.  In the future, the Government, the Congress of Colombia or the Colombian Central Bank may amend Colombia’s International Investment Statute or the foreign investment rules, which could result in more restrictive rules and could negatively affect trading of our ADSs.
 
Additionally, Colombia currently has a free exchange rate system; however, other restrictive rules for the exchange rate system could be implemented in the future.  In the event that a more restrictive exchange rate system is implemented, the depositary may experience difficulties converting Peso amounts into U.S. dollars to remit dividend payments.
 
Holders of our ADSs are not able to effect service of process on us, our directors or executive officers within the United States, which may limit your recovery in any foreign judgment you obtain against us.
 
We are a sociedad de economía mixta organized under the laws of Colombia.  All of our directors and executive officers reside outside the United States.  All or a substantial portion of our assets and the assets of these persons are located outside the United States.  As a result, it may not be possible for you to effect service of process within the United States upon us or these persons or to enforce against us or them in U.S. courts judgments obtained in such courts predicated upon the civil liability provisions of the U.S. federal securities laws.  Colombian courts determine whether to enforce a U.S. judgment predicated on the U.S. securities laws through a procedural system known as exequatur.  For a description of these limitations, see “Enforcement of Civil Liabilities.”

 
17

 

We may claim immunity under the Foreign Sovereign Immunities Act with respect to actions brought against us under the US securities laws and your ability to sue or recover may be limited.
 
We reserve the right to plead sovereign immunity under the United States Foreign Sovereign Immunities Act of 1976 with respect to actions brought against us under United States federal securities laws or any state securities laws.  Accordingly, you may not be able to obtain a judgment in a U.S. court against us unless the U.S. court determines that we are not entitled to sovereign immunity with respect to that action.  Moreover, you may not be able to enforce a judgment against us in the United States except under the limited circumstances specified in the Foreign Sovereign Immunities Act.
 
The protections afforded to minority shareholders in Colombia are different from those in the United States, and may be difficult to enforce.
 
Under Colombian law, the protections afforded to minority shareholders are different from those in the United States.  In particular, the legal framework with respect to shareholder disputes is less developed under Colombian law than U.S. law and there are different procedural requirements for commencing shareholder lawsuits, such as shareholder derivative suits.  As a result, it may be more difficult for our minority shareholders to enforce their rights against us or our Directors or controlling shareholder than it would be for shareholders of a U.S. company.
 
The relative volatility and illiquidity of the Colombian securities markets may substantially limit our investors’ ability to sell our ADSs at the price and time they desire.
 
Investing in securities that are traded in emerging markets, such as Colombia, often involves greater risk when compared to other world markets, and these investments are generally considered to be more speculative in nature.  The Colombian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than other securities markets.  For example, the Bolsa de Valores de Colombia or BVC had a market capitalization of approximately Ps$195,700 billion (US$99.53 billion using the monthly average exchange rate for 2008) as of December 31, 2008, a 5% decrease when compared with the amount at the end of 2007, and a trading volume of approximately Ps$45,591 million (US$25.2 million, using the average exchange rate for 2008), a 44% decrease when compared to the volume in 2007.  In contrast, the New York Stock Exchange had a market capitalization of US$17.9 trillion as of December 31, 2007, and a daily trading volume of approximately US$73.1 billion in 2008.
 
At December 31, 2008 our shares had the highest trading volume in the BVC averaging 20.9 million shares traded per day representing the highest market capitalization of the BVC and 41.46% of the BVC’s total market capitalization.  Our shares represent 50.9% of the Índice General de la Bolsa de Valores de Colombia or IGBC stock market index, 18.8% of the COL20, a stock market index that includes the top 20 traded stocks in the BVC and 20% of the COLCAP, a stock price volatility index.  In addition, our shares were placed with a large number of retail investors and concentration of our shares may be low.  Consequently, it may be difficult for you to purchase large quantities of shares from a single shareholder.  We cannot assure you that a liquid trading market for our ADSs will develop or, if developed, will be maintained following this offering, which could substantially limit the ability of investors in our ADSs to sell them at the price and time you desire.
 
We are not required to disclose as much information to investors as a U.S. issuer is required to disclose.
 
We are subject to the reporting requirements of the Superintendency of Finance and the BVC.  The corporate disclosure requirements that apply to us may not be equivalent to the disclosure requirements that apply to a U.S. issuer and, as a result, you may receive less interim information about us than you would receive from a U.S. issuer.

 
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ITEM 4
Information on the Company
 
ITEM 4A
History and Development of the Company
 
Ecopetrol is a mixed economy company, organized on August 25, 1951, and existing under the laws of Colombia.  We have an unlimited duration.  Our address is Carrera 7 No. 37-69 Bogota, Colombia and our telephone number is +571 234 4000.
 
We were incorporated as the Empresa Colombiana de Petróleos S.A. as a result of the reversion of the De Mares concession to the Government by the Tropical Oil Company in 1921.  We began our operations as a governmental industrial and commercial company, responsible for administering Colombia’s hydrocarbon resources.
 
We began operating the crude oil fields at Cira-Infantas and the pipeline that connected that field with the Barrancabermeja refinery and the port of Cartagena.  Three years later, the first national seismic study was performed under the De Mares concession which led to the discovery of the Llanito crude oil field in 1960.
 
In 1961, we assumed the direct operation of the Barrancabermeja refinery and continued its transformation into an industrial complex.  International Petroleum Colombia Limited or Intercol began the construction of a new facility in Mamonal, Cartagena, where the pipeline terminal of the Andean National Corporation was already located and which also included a loading port.  In December 1957, the Cartagena Refinery began operations, and in 1974 it was acquired by us.
 
In 1970, we adopted our first by-laws that transformed us into a governmental industrial and commercial company, linked to the Ministry of Mines and Energy.  Decree Law 1760 of June 26, 2003 transformed us from an industrial and commercial company into a state-owned corporation by shares linked to the Ministry of Mines and Energy and renamed us Ecopetrol S.A. in order to make us more competitive.  Prior to our reorganization our capital expenditures program and access to the credit markets were limited by the Government which was making its decisions based on its budgetary needs and not on our growth prospects.
 
In 2006, the Congress of Colombia authorized us to issue up to 20% of our capital stock in Colombia, subject to the condition that the Nation control at least 80% of our capital stock.  On November 13, 2007, we placed 4,087,723,771 shares in the BVC, which resulted in 483,941 new shareholders and raised approximately Ps$5,723 billion for the sale of 10.1% of our capital stock.  Since September 18, 2008, our ADS’s have been trading in the New York Stock Exchange under the symbol “EC”.  Each ADS represents 20 common shares of the Company.
 
In April 2008, we completed the acquisition of Polipropileno del Caribe S.A. (Propilco), the main polypropylene supplier in Colombia, for the purchase price of approximately US$690 million, thereby increasing our market share in the petrochemical business.  We acquired 49% of Propilco’s shares directly and the remaining 51% indirectly, through our subsidiary Andean Chemicals Ltd.
 
In February 2009, we, in partnership with Korea National Oil Corporation (KNOC), acquired a 100% stake (50% for each participating company) in Offshore International Group Inc. (OIG) for the purchase price of US$900 million.  OIG is the U.S. parent of Petrotech Peruana S.A., which carries out crude oil exploration and production activities in Peru.
 
In February 2009, we entered into a memorandum of understanding with Glencore International A.C. pursuant to which we acquired in May 2009 all of its stake in Refinería de Cartagena S.A. through our subsidiary Andean Chemicals for the purchase price of US$549 million, thereby becoming the sole indirect owner of Refinería de Cartagena S.A.
 
In March 2009, we entered into an agreement with Maurel and Prom pursuant to which we acquired in May 2009 100% of its stake in its subsidiary in Bermuda, Hocol Petroleum Limited, for the purchase price of US$580 million plus US$168 million for working capital.  Hocol Petroleum Limited’s most important assets are Hocol and Homcol, two companies incorporated in the Cayman Islands with branches in Colombia involved in crude oil and natural gas exploration and production activities in Colombia.

 
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In March 2009, we entered into an agreement with Enbridge Inc., a Canadian company, pursuant to which we acquired 100% of its stake in Oleoducto Central S.A. (Ocensa) for the purchase price of approximately US$418 million, thereby increasing our ownership of Ocensa from 35.3% to 60%.
 
These recent acquisitions were funded mainly through cash on hand and cash flow from our operations.
 
Currently, we are the largest company in Colombia as measured by revenue, profit, assets and shareholders’ equity.  We are Colombia’s only vertically-integrated crude oil and natural gas company with operations in Colombia and overseas.  Our operation does not include natural gas transportation activities due to legal restrictions.
 
ITEM 4B
Business Overview
 
Strategic Plan
 
Our 2008 – 2015 Strategic Plan focuses on transforming us into a global company with emphasis on crude oil and natural gas and the development of alternative fuels.  We are committed to developing into a key player with high competitive standards, strong human resources and transparent social responsibility policies.  We intend to become one of Petroleum Intelligence Weekly’s 27 leading oil and natural gas companies.
 
Our strategic plan provides detailed initiatives for each one of our business segments.  Our main objective is to increase our reserves to 1,280 million barrels of oil equivalent or boe by 2015 and achieve a daily output of approximately 1 million boe by such date.  We are also planning on expanding our refining and conversion capacity and increasing our petrochemical production, while complying with local and international environmental standards.
 
We expect to fund our strategic initiatives through cash on hand and cash flow from operating activities.  We also expect to access the local and international capital markets to fund part of our expansion.  We currently have begun to incur long-term debt, recently entering into a Ps$2.2 billion (approximately US$1 billion) syndicated loan facility with a syndicate of local banks in May 2009.  In addition, Oleoducto de los Llanos Orientales or ODL, our indirect Panamanian subsidiary, through its Colombian branch office, Oleoducto de los Llanos Orientales Sucursal Colombia, entered into a Ps$520,000 million (approximately US$200 million) loan facility with Banco de Bogota S.A., Banco de Occidente S.A., Banco Popular S.A. and Banco AV Villas S.A., which together comprise the Grupo Aval, in March 2009.  We believe that we will be able to access local and international markets when the need arises.  We are also authorized by law 1118 of 2006 to sell an additional 9.9% of our equity, which could be used to complete funding our strategic plan.
 
We expect to achieve our strategy together with our joint venture partners with whom we have built long-term relationships.  We are also working with foreign governmental authorities in countries where we already have operation or where we intend to develop operations.
 
Exploration and Production
 
We intend to continue the expansion of our exploration and production activities and enter into new joint ventures to further develop our business.  We intend to become one of Latin America’s leading crude oil and natural gas companies.  In line with our development strategy, we intend to increase our average daily production of hydrocarbons to one million boe per day by the year 2015.  By 2015, we estimate our total investment in exploration activities at US$11 billion and in production activities at US$27 billion for a total of US$38 billion.
 
Increase our average daily production of hydrocarbons
 
Our 2008-2015 Strategic Plan contemplates estimated capital expenditures of approximately US$38 billion in exploratory and development activities in Colombia and abroad.  Our goal is to increase our reserves to 1,280 million boe by 2012 and to increase our daily output of hydrocarbons to approximately one million boe per day by 2015.  From 2008 to 2015, we estimate spending approximately US$11 billion in exploratory activities in Colombia and abroad and anticipate drilling directly and together with other oil companies approximately 300 gross wells.  We estimate that we will need to incorporate approximately 435 million boe per year of new crude oil and natural gas reserves from a combination of exploratory drilling, acquisition of reserves in place and incorporation of new reserves from existing fields to achieve our one million boe per day production target.

 
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Between 2008 and 2015, we plan to invest approximately US$16 billion in production projects, including development of mature fields, increasing production of heavy crude oil and development of natural gas fields.  In addition, during the course of the same period, we intend to invest approximately US$11 billion to execute our growth strategy by selectively entering into joint ventures with major international and regional crude oil companies to bid for new exploration and production blocks on-shore and off-shore within and outside Colombia.  In 2008, our capital expenditures in our exploration and production segment were Ps$4,911,487 million (approximately US$2.5 billion).
 
Refining
 
Expand our refining capacity in the Cartagena and Barrancabermeja refineries and increase our production of petrochemicals
 
We intend to expand and modernize our refining capacity in the Cartagena and Barrancabermeja refineries in order to reach a 95% conversion rate.  Our goal is to process approximately 650 thousand bpd by 2015.  The implementation of this initiative will allow us to increase production of refined products and improve the efficiency of and upgrade existing facilities in order to reach higher margins in our refining segment.  Our strategic plan contemplates the investment of approximately US$11 billion in the upgrade and expansion of our refineries, and in the eventual acquisition of refineries in markets where we acquire crude oil production.  We expect to invest approximately US$4 billion to increase our production of petrochemicals and reach 2.7 million tons per year by 2015, including 700,000 tons per year of polypropylene produced by Polipropileno del Caribe S.A. (Propilco).  In 2008, our capital expenditures in our refining and petrochemicals segment were Ps$776,080 million (approximately US$0.4 billion).
 
Transportation
 
Development of our transportation infrastructure
 
We plan to implement a transportation infrastructure program focused on the construction of crude oil pipelines and multipurpose transportation systems to assure our transportation capacity.  We intend to invest approximately US$1.2 billion in the construction and upgrading of our transportation infrastructure to meet our future requirements and in the conversion of existing crude oil pipelines for the transportation of heavy crude oil.  In 2008, our capital expenditures in our transportation segment were Ps$939,996 million (approximately $478 million).
 
Marketing
 
Selectively expand our activities into the retail segment
 
Our marketing strategy is focused on supplying the local market and exporting crude oil, refined products and natural gas to end-users, including refineries and wholesalers in order to improve our margins.  We are focused on increase our market participation in crude oil and refined products in the Far East.  We are currently opening new markets for our products, such as China and India.  We continue to selectively evaluate entering into retail markets in Colombia.  Our 2008-2015 Strategic Plan contemplates investments of approximately US$3 billion in the retail sector.
 
Our principal export markets in 2008 were:  the US market, which accounted for 56%; Far East 10%; Aruba 10%, Chile 5% and Europe 4%.  Currently, we maintain short-term crude oil supply contracts with Valero, ConocoPhillips and Tesoro Refining, as well as supply contracts for refined products with Refineria Dominicana de Petróleo S.A., Glencore and Berkshire, and a natural gas supply agreement with PDVSA.
 
Based on our natural gas production growth projections, we expect to increase our sales by focusing on deliveries of compressed natural gas for motor vehicles and industrial users, which have high demand.

 
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Others
 
Expand our operations in the renewable energy market
 
We intend to participate in the renewable energy market in Colombia with local investors with whom we have undertaken the development of a refinery to process palm oil for bio-fuels.  Our plan calls for investment of US$570 million in these initiatives.  See Item 4B — “Business Overview — Environmental Matters.”
 
Capital Expenditures
 
Our consolidated capital expenditures during 2008 amounted to Ps$6,704,595 million compared to Ps$3,036,962 million in 2007 and Ps$1,862,934 million in 2006.  The most significant increase in our capital expenditures has been in our exploration and production segment which increased 84% in 2008 to Ps$4,911,487 million from Ps$2,678,684 million in 2007, and 105% in 2007 when compared to Ps$1,309,361 in 2006.  We plan to meet our budgeted capital expenditures primarily through existing cash on hand, cash from operating activities and financings in the local and international financial markets.  We may access equity markets through the issuance of an additional 9.9% of our common stock as authorized by Law 1118 of 2006.
 
At May 31, 2009, our subsidiary in Peru had made capital expenditures of approximately US$2 million and our subsidiary in the Gulf of Mexico had made capital expenditures of approximately US$49 million.  These capital expenditures were funded by our own resources.  All expenditures include project evaluation, payments to advisors, operation expenditures and costs associated to assignment of exploration blocks.
 
We currently have capital expenditures commitments locally and abroad. The most significant capital expenditures are within our exploration, transportation and refining segments.  See Note 31 to our consolidated financial statements for a description of our principal commitments.
 
Overview
 
We are a vertically integrated oil company operating in Colombia and overseas.  We are majority owned by the Nation and our shares trade on the BVC under the symbol ECOPETROL and in the New York Stock Exchange under the symbol “EC”.  We divide our operations into four business segments that include exploration and production; transportation; refining; and marketing and supply.  We are the largest corporation in Colombia, as measured by assets, sales, net income and net worth, and we play a key role in the local energy supply market.  Exports of crude oil and refined-products accounted for approximately 33% of Colombia’s total exports in 2008, of which our exports accounted for 48%.
 
Overview by Business Segment
 
Exploration and Production
 
Summary
 
Our exploration and production business segment includes exploration, development and production activities in Colombia and abroad.  We began local exploration in 1955 and international exploration in 2006.  We conduct exploration and production activities directly and through joint ventures with third parties.  We are the largest producer of crude oil and natural gas, the largest operator, and at December 31, 2008, we maintained the most acreage under exploration in Colombia.
 
According to the ANH, Colombia has 23 sedimentary basins, and at December 31, 2008, we had exploratory activities in 14 of them.  The following map shows the basins where we conduct exploratory activities.

 
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We have organized our production activities into five administrative regions.  The administrative regions, and their respective 2008 results, are:
 
Northeastern Region – The Northeastern region is comprised of two areas, one located in the north of Colombia along the Atlantic coast and the other located in the Piedemonte Llanero.  The Northeastern region covers approximately 200,350 acres, and includes the natural gas fields located at La Guajira and the crude oil and natural gas fields located in Cusiana-Cupiagua.  The Northeastern region has a total production of approximately 40.4 thousand bpd of crude oil and 451.8 million cubic feet per day or mcfpd of natural gas.  At December 31, 2008, we had 438 million boe of net proved reserves of crude oil and natural gas.
 
Mid-Magdalena Valley Region – The Mid-Magdalena Valley region runs along the Magdalena river valley and covers approximately 1,282,339 acres.  The Mid-Magdalena Valley region includes the crude oil fields located in the Santander department and part of the Antioquia, Cesar and Boyacá departments near the Barrancabermeja refinery.  The Mid-Magdalena Valley region has a total production of approximately 65.8 thousand bpd of heavy and light crude oil and 27.4 mcfpd of natural gas.  At December 31, 2008, we had 221 million boe of net proved reserves of crude oil and natural gas.
 
Central Region – The Central region is located in Colombia’s central region and includes the Meta department and part of the Casanare department.  The Central region covers approximately 521,697 acres and has a total production of approximately 122.3 thousand bpd of heavy and medium crude oil and 1.7 mcfpd of natural gas.  At December 31, 2008, we had 265 million boe of net proved reserves of crude oil and natural gas.
 
Catatumbo-Orinoquía Region – The Catatumbo-Orinoquía region is located in the eastern part of Colombia and runs along the border with Venezuela covering approximately 669,616 acres.  The Catatumbo-Orinoquía region includes the Caño Limón crude oil field and the Gibraltar natural gas field with a total production of approximately 73.9 thousand bpd of crude oil and 1 mcfpd.  At December 31, 2008, we had 105 million boe of net proved reserves of crude oil and natural gas.
 
Southern Region – The Southern region is located on the southwestern region of Colombia and covers approximately 1,502,376 acres.  The Southern region includes the Orito, Guando and Neiva fields located mainly in the Cundinamarca, Huila and Putumayo departments.  The Southern region has a total production of approximately 57.9 thousand bpd of crude oil and 5 mcfpd of natural gas.  At December 31, 2008, we had 107 million boe of net proved reserves of crude oil and natural gas.

 
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The map below indicates the location of our operations in Colombia.


Strategy
 
Our main strategies in exploration and production in Colombia and abroad are to increase our crude oil and natural gas reserves and reach a production of one million boe per day in 2015, by:
 
 
·
Investing in high potential hydrocarbon areas in Colombia and abroad;
 
 
·
Selectively acquiring reserves;
 
 
·
Implementing new strategies and deploying state-of-the art technologies to increase reserve recovery of new and mature fields;
 
 
·
Investing in the development of natural gas and heavy crude oil; and
 
 
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·
Entering into new joint ventures with regional and international oil companies in Colombia and abroad.
 
Exploration
 
Our exploration plan in Colombia is focused on exploration near existing production sites; exploration in already producing basins; and exploration in frontier areas including off-shore areas with potential for large findings.  Our exploration strategy outside Colombia is focused on larger prospects.
 
In 2008, surface exploration in Colombia by acquisition of seismic data covered approximately 16,286 equivalent kilometers of which we participated in 6,789 equivalent kilometers representing a 120% increase as compared with 2007, corresponding to 2,018 kilometers of 2D seismic data and 2,807 square kilometers of 3D seismic data.  Of this amount 3,236 equivalent kilometers were directly prospected by us, 2,094 equivalent kilometers were prospected together with our business partners in Colombia, 354 equivalent kilometers were prospected together with our business partners in international fields and 1,105 equivalent kilometers were prospected by third parties under sole risk contracts.  (1 square kilometer (3D seismic data) corresponds to 1.7 kilometers (2D seismic data) of equivalent kilometers).
 
Exploration Activities in Colombia
 
We conduct exploration in Colombia on our own and through joint ventures with regional and international oil and gas companies.  We also benefit from sole risk contracts when commercial reserves are found.  In the case of sole risk contracts, we do not take any exploration risk.

 
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The following table sets forth the number of gross and net exploratory wells drilled by us and our joint venture partners, and the exploratory wells drilled by third parties under a sole risk contract for the years ended December 31, 2008, 2007 and 2006.
 
   
For the year ended December 31,
 
   
2008
   
2007
   
2006
 
Gross Exploratory Wells:
                 
                   
Owned and operated by Ecopetrol
                 
Productive(1)
    4       1       1  
Dry(2)
    6       3       2  
Total
    10       4       3  
                         
Operated by Ecopetrol in Joint Venture
                       
Productive
    1       1        
Dry
    0       2       1  
Total
    1       3       1  
                         
Operated by Partner in Joint Venture
                       
Productive
    1              
Dry
    3       5        
Total
    4       5        
                         
Net Exploratory Wells:
                       
Productive
    4.9       1.4       1  
Dry
    6.5       5.6       2.5  
Total
    11.4       7       3.5  
                         
Sole Risk(3):
                       
Productive
    8       8       14  
Dry
    12       13       16  
Total
    20       21       30  
 

(1) 
A productive well is an exploratory well that is not a dry well.
(2) 
A dry well or hole is an exploratory well found to be incapable of producing either crude oil or natural gas in sufficient quantities to justify completion as a crude oil or natural gas well.
(3) 
We do not take any risk in sole risk contracts but we benefit from successful exploratory efforts.  See Item 4 — “Overview of Exploration and Production Contractual Arrangements.”
 
In 2008, our gross and net exploratory wells drilled included two international wells drilled: one in Peru with our business partner Repsol, where we have a 49.5% ownership interest and one in the Gulf of Mexico with our business partner Shell, where we have a 25% ownership interest.  Both were dry wells.
 
The following table sets forth our current net and gross exploratory wells drilled at March 31, 2009.
 
   
For the three-month period ended March 31, 2009
 
   
Gross
   
Net
 
Number of net and gross wells drilled:
           
Joint ventures
    0       0  
Sole Risk
    0       0  
Directly Ecopetrol
    3       3  
Total
    3       3  



 
27

 

International Exploration Activities
 
Our international exploration strategy is focused on securing blocks available for exploration and entering into joint ventures with international and regional oil companies.  Exploring outside Colombia will allow us to diversify our risk and improve the possibilities for increasing our crude oil and natural gas reserves.  In December 2006, the incorporation of Ecopetrol Oleo e Gas do Brasil Ltda., our first foreign affiliate, represented a milestone in our international expansion.  With the incorporation of our first foreign affiliate, we initiated our international exploration and the consolidation as an international oil and gas company.  In 2007, two new operating subsidiaries were incorporated, Ecopetrol del Peru and Ecopetrol America Inc.
 
As of December 31, 2008, we have signed 16 agreements to participate in exploratory blocks in Peru (9), Brazil (6) and the Gulf of Mexico (1).  Our partners include, among others, Talisman, BP, Anadarko, Repsol-YPF, Petrobras, Petroperu, Petrogal, CVRD, Shell, ENI, Statoil and New Field.
 
In February 2009, we, in partnership with Korea National Oil Corporation (KNOC), acquired a 100% stake (50% for each participating company) in Offshore International Group Inc. (OIG).  OIG is the U.S. parent of Petrotech Peruana S.A., which carries out crude oil exploration and production activities in Peru.
 
In March 2009, we entered into an agreement with Maurel and Prom pursuant to which we acquired in May 2009 100% of its stake in its subsidiary in Bermuda, Hocol Petroleum Limited.  Hocol Petroleum Limited’s most important assets are Hocol and Homcol, two companies incorporated in the Cayman Islands with branches in Colombia involved in crude oil and natural gas exploration and production activities in Colombia.
 
Production
 
Our average daily production of hydrocarbons in 2008 totaled 447 thousand boe, of which 362 thousand bpd corresponded to crude oil and 85 thousand boe corresponded to natural gas.  Of our 362 thousand bpd, 172 thousand bpd came from fields we directly operate and 190 thousand bpd came from our participation in joint ventures, shared risk agreements and other contractual arrangements with our business partners.  During 2007, our average daily production of hydrocarbons totaled 399 thousand boe, of which 327 thousand bpd corresponded to crude oil and 72 thousand boe corresponded to natural gas.  Our average daily production of hydrocarbons in 2006 was 385 thousand bpd, of which 316 thousand bpd corresponded to crude oil and 69 thousand boe to natural gas.  Our production during 2008 consisted of approximately 70% light and medium crudes (with a gravity between 16º and 35º American Petroleum Institute or API) and 30% of heavy crudes, with a gravity lower than 15° API.
 
Our crude oil and natural gas production includes 110 fields directly operated by us and 184 fields in joint venture with 40 oil companies.  At December 31, 2008, we were the largest participant in the Colombian hydrocarbons industry with approximately 66% of crude oil production and approximately 56% of natural gas production.
 
We produce crude oil and natural gas in the five administrative regions.  The Northeastern region has significant production of natural gas and light crude oil while the Central region and the southern part of the Mid-Magdalena Valley region have the most significant production and prospects of heavy crude oil, and currently produce light and medium crude oil.  The Catatumbo-Orinoquía region has significant production of medium crude oil and the Southern region has production of medium and light crude oil.
 
We undertook development drilling in the five producing regions and applied new technologies, allowing us to drill 146 gross development wells operated by us in 2008, 26 more than in 2007 and 81 more than in 2006.  Of the total gross development wells drilled in 2008, seven were dry wells, two of those located in the Catatumbo-Orinoquia region, two located in the Mid-Magdalena Valley region and three were located in the Southern region.  There were five dry development wells in 2007 and no dry development wells during 2006.
 
Relevant operational activities
 
During 2008 we drilled a significant number of horizontal wells, particularly in heavy crude oil fields.  We drilled two multilateral wells in the Castilla field, located in the Central Region, during the first quarter of 2008.  In conjunction with our partner Mansarovar, we also drilled two additional wells in the Nare-Teca field located in the Mid-Magdalena Valley Region.
 
 
28

 
 
In 2008, we undertook maintenance work in our waterfloods systems in the Casabe fields, located in the Mid-Magdalena Valley Region, to improve the crude oil production of these fields from approximately 8000 bpd to 10300 bpd.  In conjunction with our partner Occidental, we also evaluated the waterfloods and water injection systems in the Cira fields, located in the Mid-Magdalena Valley region, in order to increase the recovery factor of these fields.
 
The following table sets forth the number of gross and net development wells drilled exclusively by us and in joint ventures for the years ended December 31, 2008, 2007 and 2006.
 
   
For the year ended December 31,
 
   
2008
   
2007
   
2006
 
Northeastern Region:
                 
Gross wells owned and operated by Ecopetrol
                 
Gross wells in Joint Ventures(1)
    1       2       6  
Net Wells(2)
    1       1       3  
                         
Mid-Magdalena Valley Region:
                       
Gross wells owned and operated by Ecopetrol
    90       77       45  
Gross wells in Joint Ventures
    344       153       34  
Net Wells
    285       146       62  
                         
Central Region:
                       
Gross wells owned and operated by Ecopetrol
    41       29       15  
Gross wells in Joint Ventures
    66       17       3  
Net Wells
    79       38       17  
                         
Catatumbo-Orinoquía Region:
                       
Gross wells owned and operated by Ecopetrol
    5       8        
Gross wells in Joint Ventures
    59       53       52  
Net Wells
    36       36       25  
                         
Southern Region:
                       
Gross wells owned and operated by Ecopetrol
    10       6       5  
Gross wells in Joint Ventures
    36       58       50  
Net Wells
    27       33       30  
                         
Total Gross wells owned and operated by Ecopetrol
    146       120       65  
Total Gross wells in Joint Ventures
    506       283       145  
Total Net Wells
    428       254       137  
 

(1)
Net wells correspond to the sum of wells entirely owned by us and our ownership percentage of wells owned in joint venture with our partners.
(2)
The information provided by our business partners regarding the number of wells drilled in joint ventures during 2008 was updated in February 2009.
 
Production Activities in Colombia
 
As a result of our 2008-2015 Strategic Plan and our investments in production activities, our average daily production of crude oil reached 362 thousand bpd in 2008, a 12% increase compared to 2007 and a 15% increase when compared to 2006.  The increase in average daily production is due to a 24% increase in production from fields developed with our business partners, which totaled 215 thousand bpd in 2008 from 175 thousand bpd in 2007, and a 4% reduction from fields operated by us, which totaled a 145 thousand bpd in 2008 compared to 151 thousand bpd in 2007.

 
29

 
 
The following table sets forth our average daily crude oil production, average sales price and average production costs (lifting costs) for the years ended December 31, 2008, 2007 and 2006.
 
   
For the Year ended December 31
 
   
2008
   
2007
   
2006
 
   
(thousand bpd)
 
       
Northeastern region:
                 
Joint venture operation
    40.4       47.5       58.3  
Direct operation
                 
Total Northeastern region
    40.4       47.5       58.3  
                         
Mid-Magdalena Valley region:
                       
Joint venture operation
    15.1       12.7       12.4  
Direct operation
    50.7       39.4       34.9  
Total Mid-Magdalena Valley region
    65.8       52.1       47.3  
                         
Central region:
                       
Joint venture operation
    28.6       15.3       3.7  
Direct operation
    93.7       82.8       85.7  
Total Central region
    122.3       98.1       89.4  
                         
Catatumbo-Orinoquía region:
                       
Joint venture operation
    70.9       64.9       63.8  
Direct operation
    3.0       6.0       1.9  
Total Catatumbo-Orinoquia region
    73.9       70.9       65.7  
                         
Southern region:
                       
Joint venture operation
    33.6       35.2       35.7  
Direct operation
    24.3       22.9       20  
Southern region
    57.9       58.1       55.6  
                         
Other (Includes Production tests
                       
and International assets(1))
    1.6                  
                         
Total average daily crude oil production
    361.9       326.6       316.2  
                         
Crude Oil Average Sales Price
                       
(U.S. dollar per barrel(2))
    83.98       64.76       53.39  
                         
Aggregate Average Lifting Costs of crude oil (U.S. dollars per barrel)
    8.33       7.24       5.23  
Aggregate Average Lifting Costs of crude oil (Ps$ per barrel)
    16,376       15,057       12,343  
 

(1)
Includes 1.3 thousand bpd of production from exploratory activities and 0.3 thousand bpd of crude oil production from our international fields located in the U.S. Gulf.
(2) 
Lifting costs per barrel are calculated based on total production, including royalties.
 
The increase in our crude oil lifting costs for 2008 was mainly due to an increase in crude oil production activities, both directly and in association with our business partners, an increase in well maintenance activities and the appreciation in the average exchange rate for the Peso against the U.S. Dollar.
 
 
30

 
 
The table below sets forth the volumes of crude oil purchased from our business partners and volumes of crude oil purchased from the ANH corresponding to royalties which have been received by the ANH in-kind from producers for the years ended December 31, 2008, 2007 and 2006.
 
   
For the year ended December 31,
 
   
2008
   
2007
   
2006
 
   
(million barrels)
 
                   
Crude oil purchased
                 
from the ANH
    32.6       31.0       32.8  
Crude oil purchased from our Business partners
    18.8       12.7       10.0  
Total
    51.4       43.7       42.8  

The following table sets forth our developed and undeveloped gross and net acreage of crude oil production by region for the year ended December 31, 2008.
 
   
Production Acreage at 
December 31, 2008
   
Average crude oil production for the
year ended December 31, 2008(1)
 
   
Developed and Undeveloped
   
(thousand bpd)
 
   
Gross
   
Net
       
   
(in acres)
       
Northeastern region
    200,350       120,210       40.4  
Mid-Magdalena Valley region
    1,282,339       635,944       65.8  
Central region
    521,697       330,799       122.3  
Catatumbo-Orinoquía region
    669,616       399,920       73.9  
Southern region
    1,502,376       847,454       57.9  
International
    5,760       530       0.3  
Total
    4,182,138       2,334,857       360.6  
 

(1) Does not include 1.3 thousand bpd of production from exploratory activities.
 
The following table sets forth our total gross and net productive wells by region for the year ended December 31, 2008.
 
   
At December 31, 2008
 
   
Crude Oil
   
Natural Gas
   
Natural Gas and
Crude Oil
 
   
Gross
   
Net
   
Gross
   
Net
   
Gross
   
Net
 
Northeastern region
                28       16       63       32  
Mid-Magdalena Valley region
    252       158       3       2       2146       1643  
Central region
    240       183                   108       97  
Catatumbo-Orinoquía region
    393       242                   261       176  
Southern region
    12       10       7       3       922       639  
Total
    897       593       38       21       3500       2587  

Crude Oil
 
Light crude oil
 
Light crude oil has an API gravity 25º or higher and tends to have a higher sales price in the international market.  We develop and produce light crude oil in the Cravo Norte joint venture and in the Cusiana and Cupiagua fields.  During 2008, our production of light crude oil was 89 thousand bpd, a 9.5 % decrease compared to 98 thousand bpd produced in 2007.  During 2007, our production of light crude oil decreased 8.1% when compared to 107 thousand bpd in 2006.  The decrease in production is due to the decline of the fields as they are becoming mature and the recovery level continues to be lower.

 
31

 
 
Our most productive fields are located in the Catatumbo-Orinoquía and Northeastern regions.  These fields are:
 
(i) Caño Limón.  The Caño Limón field is located in the department of Arauca.  We participate in this field through a joint venture with Occidental Petroleum.  The production of the Cravo Norte project during 2008 reached 48.2 thousand bpd, compared to 50.4 thousand bpd in 2007 and 48.3 thousand bpd in 2006.  We estimate that the Cravo Norte project has approximately 54.4 million barrels of crude oil in proved reserves.
 
(ii) Cusiana and Cupiagua.  The Cusiana and Cupiagua blocks are located in the Piedemonte Llanero and are developed in partnership with British Petroleum and Total.  The project is composed by the Cusiana, Cupiagua, Pauto, Floreña and Volcanera fields.  The production of these fields during 2008 was 40.4 thousand bpd, compared to 47.5 thousand bpd in 2007 and 58.2 thousand bpd in 2006.  We estimate that the Cusiana and Cupiagua fields have approximately 145.8 million barrels of crude oil in proved reserves and 868.9 mcf of natural gas reserves.  The first joint venture agreement with British Petroleum and Total under which we produce crude oil and natural gas in these fields will expire in 2010 and the production rights will revert to us at no additional cost.  See Item 4 — “Overview of Exploration and Production Contractual Arrangements.”
 
Heavy crude oil
 
We consider heavy crudes those having an API gravity below 15º.  We develop, upgrade and produce heavy crude in the Central and Mid-Magdalena Valley regions.  From 2000 to 2008 we invested approximately US$1,430 million to expand our production of heavy crude oil, which increased from 24 thousand bpd in 2000 to 109 thousand bpd in 2008.  Our production of heavy crudes in 2008 reached 109 thousand bpd, a 35% increase when compared to 2007 as a result of the development of the Rubiales, Castilla and Chichimene fields, in the San Fernando Region.  In 2007, our production of heavy crudes amounted to 81 thousand bpd compared to 68.5 thousand bpd in 2006 mainly as a result of the development of the Rubiales and Castilla fields.  We are committed to developing our heavy crude reserves as they are an integral part of our growth strategy.
 
Our most important heavy crude oil projects are:
 
(i) Cubarral.  The Cubarral block is located in the Central region and is composed of the Castilla and Chichimene fields with approximately 167 million barrels of developed and undeveloped proved reserves.  We decided to undertake the development of the project and selected a strategic partner for exploration in the Caño Sur Block.
 
(ii) Rubiales.  The Rubiales field is located in the Central region and is developed in joint venture with Metapetroleum.  Investments in this field during 2008 amounted to US$164 million as we and our business partner drilled 61 development wells and enlarged our fluid treatment facilities.  The Rubiales field increased Ecopetrol’s production from 10.6 thousand bpd in 2007 to 20 thousand bpd in 2008.  We expect our production share during 2009 to reach 30.3 thousand bpd.
 
(iii) Nare-Teca.  Nare-Teca field is located in the Mid-Magdalena Valley region developed in joint venture with Mansarovar, a joint venture between Sinopec from China and Oil and Natural Gas Corporation Ltd. from India.  During 2008, we invested approximately US$94 million in drilling 173 development wells and fluid treatment facilities.  We expect our production share to increase to 11 thousand bpd in 2009 and to reach a maximum of 15 thousand bpd by 2010.
 
Mature fields
 
We consider the development of mature fields an integral part of our strategy to increase average daily production and hydrocarbon reserves.  Mature fields are those fields that have reached their maximum output and have entered their final decline in production.  Approximately 70.4% of our fields are considered mature.  However, these reservoirs, discovered over 20 years ago, still have significant reserves which can be recovered through aggressive drilling campaigns and by applying new technologies.  We continue to focus our efforts on improving the productivity ratio of several directly operated mature fields and other fields currently held in joint venture with other oil companies, which will become mature in the near future.

 
32

 
 
For the last six years, we have been developing mature fields in all five regions.  As a result of these activities, we were able to reduce the rate of decline in production from mature crude oil fields which totaled 227.2 thousand bpd in 2008 compared to 227 thousand bpd in 2007 and 228 thousand bpd in 2006.
 
The table below describes the location, number and daily production of our mature fields for the periods indicated below.
 
   
At December 31,
2008
   
For the year ended December 31,
 
   
Number of fields
   
2008
   
2007
   
2006
 
         
(thousand bpd)
 
Northeastern region:
                       
Joint Venture
    5       40.4       47.5       58.2  
Direct Operation
                       
Total Northeastern region
    5       40.4       47.5       58.2  
                                 
Mid-Magdalena Valley region:
                               
Joint Venture
    15       4.1       5.2       5.4  
Direct Operation
    32       50.9       39.0       34.9  
Total Mid-Magdalena Valley region
    47       55.0       44.2       40.3  
                                 
Central region:
                               
Joint Venture
    5       1.4       1.5       1.8  
Direct Operation
    19       20.8       23.5       26.0  
Total Central region
    24       22.2       25       27.8  
                                 
Catatumbo-Orinoquía region:
                               
Joint Venture
    56       67.9       64.1       57.5  
Direct Operation
    6       4.8       5.7       5.7  
Total Catatumbo-Orinoquía region
    62       72.7       69.7       63.2  
                                 
Southern region:
                               
Joint Venture
    37       13       17.6       18.0  
Direct Operation
    32       23.9       22.9       20.0  
Total Southern region
    69       36.4       40.5       38.0