20-F/A 1 v230860_20fa.htm AMENDMENT TO FORM 20-F Unassociated Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 20-F/A
 
AMENDMENT NO. 1 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
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 13 No. 36 – 24
BOGOTA – COLOMBIA
(Address of principal executive offices)
 
Alejandro Giraldo
Investor Relations Officer
investors@ecopetrol.com.co
Tel. (571) 234 5190
Fax. (571) 234 5628
Carrera 13 N.36-24 Piso 8
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 20 common shares par value Ps$250 per share
  
New York Stock Exchange
Ecopetrol common shares par value Ps$250 per share
  
New York Stock Exchange (for listing purposes only)
7.625% Notes due 2019
  
New York Stock Exchange
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.
 
40,472,512,588 Ecopetrol common shares, par value Ps$250 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
xYes  ¨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  xNo
 
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.
 
xYes  ¨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).  N/A
 
¨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 x                               Accelerated filer ¨                                Non-accelerated filer ¨
 
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 xNo
 
 
 
 
 
TABLE OF CONTENTS
 
          Page  
             
    Explanatory Note     1  
ITEM 18.
  Financial Statements      2  
ITEM 19.
 
Exhibits
    3  
   
Signatures
    4  
 
 
i
 
 
EXPLANATORY NOTE
 
We filed our annual report on Form 20-F for the fiscal year ended December 31, 2010 (which we refer to as the Form 20-F) on July 15, 2011.  This Amendment No. 1 to our Form 20-F (which we refer to as Amendment No. 1) is being filed solely for purposes of correcting certain rounding and transposition errors made in the final preparation of certain tables that are part of Note 32 in Item 18. “Financial Statements.” No other change was made to Item 18. “Financial Statements.”
 
We believe that these corrections are not material to our financial condition, operations or prospects.
 
This Amendment No. 1 consists of a cover page, this explanatory note, Item 18 (as amended), Item 19 (as amended) and the signature pages and the required certifications of our chief executive officer and chief financial officer.
 
Except as described above, no other change has been made to the Form 20-F.  The filing of this Amendment No. 1 does not, and does not purport to, amend, update or restate the information in any other item, or exhibits to, the Form 20-F.
 
 
1
 
 
ITEM 18.
Financial Statements
 
See our audited consolidated financial statements beginning on page F-1, incorporated herein by reference.

 
2
 
 
ITEM 19.
Exhibits
 
Exhibit No.
  
Description
     
1.1
  
Bylaws of Ecopetrol S.A. dated November 6, 2007 as recorded under Public Deed No. 5314 of November 14, 2007 (incorporated by reference to Exhibit 1.1 on Form 20-F filed with the U.S. Securities and Exchange Commission on September 12, 2008 (File No. 001-34175)).
     
1.2
 
Amended and Restated Bylaws of Ecopetrol S.A., dated March 24, 2011, as recorded under Public Deed No. 560 of May 23, 2011 (incorporated by reference to Exhibit 1.2 on Form 20-F filed with the U.S. Securities Exchange Commission on July 15, 2011 (File No. 001-34175)).
     
4.1
  
Transportation Agreement between Ecopetrol S.A. and Oleoducto Central S.A., dated March 31, 1995 (incorporated by reference to Exhibit 4.1 on Form 20-F filed with the U.S. Securities and Exchange Commission on September 12, 2008 (File No. 001-34175)).
     
4.2
  
Natural Gas Transportation Agreement between Ecopetrol S.A. and Empresa Colombiana de Gas-Ecogas, dated October 6, 2006 (incorporated by reference to Exhibit 4.2 on Form 20-F filed with the U.S. Securities and Exchange Commission on September 12, 2008 (File No. 001-34175)).
     
4.3
  
Indenture, dated as of July 23, 2009, between the Company and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Form F-4 filed with the U.S. Securities and Exchange Commission on July 31, 2009 (File No. 333-160965)).
     
8.1
 
List of subsidiaries of Ecopetrol S.A. (incorporated by reference to Exhibit 8.1 on Form 20-F filed with the U.S. Securities Exchange Commission on July 15, 2011 (File No. 001-34175)).
     
12.1
  
Section 302 Certification of the Chief Executive Officer.
     
12.2
  
Section 302 Certification of the Chief Financial Officer.
     
13.1
  
Section 906 Officer Certification.
     
16.1   Letter dated July 15, 2011 of PricewaterhouseCoopers Ltda. as required by Item 16F of Form 20-F (incorporated by reference to Exhibit 16.1 on Form 20-F filed with the U.S. Securities Exchange Commission on July 15, 2011 (File No. 001-34175)).
     
23.1
  
Consent of PricewaterhouseCoopers Ltda.
     
23.2
 
Consent of Ryder Scott (incorporated by reference to Exhibit 23.2 on Form 20-F filed with the U.S. Securities Exchange Commission on July 15, 2011 (File No. 001-34175)).
     
23.3
 
Consent of Gaffney, Cline & Associates (incorporated by reference to Exhibit 23.3 on Form 20-F filed with the U.S. Securities Exchange Commission on July 15, 2011 (File No. 001-34175)).
     
23.4
 
Consent of DeGolyer and MacNaughton (incorporated by reference to Exhibit 23.4 on Form 20-F filed with the U.S. Securities Exchange Commission on July 15, 2011 (File No. 001-34175)).
     
99.1
 
Third Party Reserve Report of Ryder Scott (incorporated by reference to Exhibit 99.1 on Form 20-F filed with the U.S. Securities Exchange Commission on July 15, 2011 (File No. 001-34175)).
     
99.2
 
Third Party Reserve Report of Gaffney, Cline & Associates (incorporated by reference to Exhibit 99.2 on Form 20-F filed with the U.S. Securities Exchange Commission on July 15, 2011 (File No. 001-34175)).
     
99.3
 
Third Party Reserve Report of DeGolyer and MacNaughton (incorporated by reference to Exhibit 99.3 on Form 20-F filed with the U.S. Securities Exchange Commission on July 15, 2011 (File No. 001-34175)).
 
 
3
 
  
Ecopetrol S.A. and Subsidiaries

Consolidated Financial Statements

Years ended December 31, 2010, 2009 and 2008

 
F-1
 

Ecopetrol S.A. and Subsidiaries

Consolidated Financial Statements

Years ended December 31, 2010, 2009 and 2008

Contents

Report of Independent Registered Public Accounting Firm
F-3
   
Consolidated Balance Sheets
F-5
   
Consolidated Statements of Financial, Economic, Social and Environmental Activities
F-6
   
Consolidated Statements of Changes in Shareholders’ Equity
F-7
   
Consolidated Statements of Cash Flows
F-8
   
Notes to Consolidated Financial Statements
F-10

 
F-2
 
 
 
 
Report of Independent Registered Public Accounting Firm


To the Board of Directors
  and Shareholders of Ecopetrol S. A.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of financial, economic, social and environmental activities, of changes in shareholders´s equity and of cash flows present fairly, in all material respects, the financial position of Ecopetrol S. A. and its subsidiaries (the “Company”) at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with generally accepted accounting principles for Colombian Government Entities issued by the Contaduría General de la Nación.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management´s Report on Internal Control over Financial Reporting.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with generally accepted auditing standards in Colombia and the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

Accounting principles generally accepted for Colombian Government Entities vary in certain significant respects from accounting principles generally accepted in the United States of America.  Information relating to the nature and effects of such differences is presented in Note 32 to the consolidated financial statements.

As discussed in Note 32, the Company has restated its 2009 consolidated financial statements reconciled to accounting principles generally accepted in the United States of America to correct some errors.
 
PricewaterhouseCoopers Ltda., Calle 100 No. 11A-35, Bogotá, Colombia
Tel: (57-1) 634 0555, Fax: (57-1) 218 8544, www.pwc.com/co
 
F-3
 
 
 
 
To the Board of Directors
  and Shareholders of Ecopetrol S. A.


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers Ltda.
 
 
Bogotá, Colombia
July 15, 2011
 
 
F-4
 

Ecopetrol S.A. and Subsidiaries

Consolidated Balance Sheets

   
December 31,
  
   
2010
    
2009
  
   
(In millions of Colombian pesos)
  
Assets
            
Current Assets
            
Cash and cash equivalents (Notes 2 and 3)
   $ 3,726,778     $ 3,562,119  
Investments (Notes 2 and 4)
     327,782       462,258  
Accounts and notes receivable, net (Notes 2 and 5)
     2,736,592       2,969,120  
Inventories, net (Note 6)
     2,192,088       2,042,697  
Advances and deposits (Notes 2 and 7)
     3,620,317       3,018,779  
Deferred tax assets
     4,134       -  
Prepaid expenses (Note 8)
     21,947       62,815  
Total current assets
     12,629,638       12,117,788  
Non-current assets
                
Investments (Notes 2 and 4)
     5,177,491       3,710,739  
Accounts and notes receivable, net (Note 5)
     372,273       226,781  
Advances and deposits (Note 7)
     288,735       253,681  
Property, plant and equipment, net (Note 9)
     22,266,258       16,782,503  
Natural and environmental resources, net (Note 10)
     11,774,539       11,155,381  
Deferred charges (Note 11)
     2,040,140       1,886,529  
Other assets (Note 12)
     3,151,606       3,034,698  
Revaluations (Note 4 and 9)
     11,068,676       6,391,417  
Total assets
   $ 68,769,356     $ 55,559,517  
                 
Liabilities and Shareholders’ Equity
                
Current liabilities
                
Financial obligations (Note 2 and 13)
   $ 1,079,169     $ 437,081  
Accounts payable (Notes 2 and 14)
     4,062,602       3,280,232  
Taxes payable (Note 15)
     3,589,263       2,433,022  
Labor and pension plan obligations (Note 16)
     160,247       165,463  
Estimated liabilities and provisions (Notes 2 and 16)
     1,151,297       1,154,415  
Total current liabilities
     10,042,578       7,470,213  
Long-term liabilities
                
Financial obligations (Notes 2 and 13)
     7,833,715       5,714,354  
Accounts payable (Note 14)
     504,046       51,154  
Labor and pension plan obligations (Note 16)
     2,814,021       2,669,331  
Estimated liabilities and provisions (Notes 2 and 17)
     3,398,603       3,411,977  
Other long-term liabilities (Notes 2 and 18)
     2,362,261       2,731,220  
Total liabilities
     26,955,224       22,048,249  
                 
Non-controlling interest (Note 19)
     485,951       941,311  
Shareholders’ equity (Note 20 and see accompanying statement)
     41,328,181       32,569,957  
Total liabilities and shareholders’ equity
   $ 68,769,356     $ 55,559,517  
                 
Memorandum accounts (Note 21)
   $ 216,020,618     $ 138,884,829  

The accompanying notes are an integral part of these financial statements.

 
F-5
 

Ecopetrol S.A. and Subsidiaries

Consolidated Statements of Financial, Economic, Social and Environmental Activities

   
Years ended December 31,
  
   
2010
    
2009
    
2008
  
   
(In millions of Colombian pesos, except for net income per share
expressed in pesos)
  
                   
Revenue (Note 22)
                  
Local Sales
   $ 18,084,425     $ 14,058,534     $ 21,597,999  
Foreign Sales
     23,883,886       16,345,856       12,298,670  
Total Revenues
     41,968,311       30,404,390       33,896,669  
                         
Cost of Sales (Note 23)
     25,959,001       19,906,073       19,084,436  
      16,009,310       10,498,317       14,812,233  
Operating Expenses (Note 24)
                        
Administration
     603,523       662,336       382,101  
Selling and projects
     2,526,945       1,962,642       1,772,774  
Operating Income
     12,878,842       7,873,339       12,657,358  
                         
Non-Operating Income (Expenses):
                        
Financial income, net (Note 25)
     37,789       495,833       4,101,252  
Pension expenses (Notes 16 and 26)
     (377,626 )     (595,157 )     (1,144,925 )
Inflation gain (Note 27)
     22,030       22,355       30,473  
Other expenses, net (Note 28)
     (1,068,418 )     (545,526 )     367,046  
Income before income tax
     11,492,617       7,250,844       16,011,204  
Income tax (Note 15)
                        
Current
     3,201,041       1,948,819       3,611,020  
Deferred tax
     37,609       165,210       770,962  
      3,238,650       2,114,029       4,381,982  
Non-controlling interest
     (107,496 )     (4,761 )     455  
Net income
   $ 8,146,471     $ 5,132,054     $ 11,629,677  
Net income per share
   $ 201.28     $ 126.80     $ 287.35  

The accompanying notes are an integral part of these financial statements.

 
F-6
 

Ecopetrol S.A. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(In millions of Colombian pesos, except for the dividend per share)
For de years ended on December 31, 2010, 2009 and 2008

   
Subscribed and
paid-in capital
    
Additional
paid-in capital
    
Legal and
other
reserves
    
Incorporated
Institutional
equity and
other
    
Surplus from
equity method
    
Surplus from
revaluations
    
Public
Accounting
Application
Effect
    
Retained
earnings
    
Total
Equity
  
Balance as of December 31, 2008
   $ 10,117,791     $ 4,679,276     $ 2,432,740     $ 112,179     $ 1,481,103     $ 5,179,961     $ (1,013,010 )   $ 11,629,677     $ 34,619,717  
Distribution of dividends ($220 per share)
     -       -       -       -       -       -       -       (8,903,953 )     (8,903,953 )
Unpaid subscribed capital and additional paid-in capital
     -       24,324       -       -       -       -       -       -       24,324  
Addition to paid-in capital – Execution of warranties
     -       16,720       -       -       -       -       -       -       16,720  
Surplus from revaluations
     -       -       -       -       -       1,211,456       -       -       1,211,456  
Devaluation in property, plant and equipment
     -       -       -       -       -       -       714,205       -       714,205  
Adjustment in translation of foreign subsidiaries
     -       -       -       -       (288,956 )     -       -       -       (288,956 )
Appropriation to legal reserve
     -       -       1,163,072       -       -       -       -       (1,163,072 )     -  
Appropriation to investment programs reserves
     -       -       1,563,692       -       -       -       -       (1,563,692 )     -  
Addition to incorporated institutional equity
     -       -       -       43,350       -       -       -       -       43,350  
Unrealized income
     -       -       -       -       -       -       -       1,040       1,040  
Net income
     -       -       -       -       -       -       -       5,132,054       5,132,054  
Balance as of December 31, 2009
     10,117,791       4,720,320       5,159,504       155,529       1,192,147       6,391,417       (298,805 )     5,132,054       32,569,957  
Distribution of dividends ($91 per share)
     -       -       -       -       -       -       -       (3,682,998 )     (3,682,998 )
Unpaid subscribed capital and additional paid-in capital
     337       243       -       -       -       -       -       -       580  
Additional receivable paid-in capital
     -       (55 )     -       -       -       -       -       -       (55 )
Surplus from revaluations
     -       -       -       -       -       4,677,259       -       -       4,677,259  
Devaluation in property, plant and equipment
     -       -       -       -       -       -       (403,670 )     -       (403,670 )
Appropriation to legal reserve
     -       -       525,624       -       -       -       -       (525,624 )     -  
Appropriation to investment programs reserves
     -       -       1,047,610       -       -       -       -       (1,047,610 )     -  
Addition to incorporated institutional equity
     -       -       -       1,823       -       -       -       -       1,823  
Adjustment for effect of difference in change in surplus equity method
     -       -       -       -       (105,364 )     -       -       -       (105,364 )
Unrealized income
     -       -       -       -       -       -       -       124,178       124,178  
Net income
     -       -       -       -       -       -       -       8,146,471       8,146,471  
Balance as of December 31, 2010
   $ 10,118,128     $ 4,720,508     $ 6,732,738     $ 157,352     $ 1,086,783     $ 11,068,676     $ (702,475 )   $ 8,146,471     $ 41,328,181  

The accompanying notes are an integral part of these financial statements.

 
F-7
 

Ecopetrol S.A. and Subsidiaries

Consolidated Statements of Cash Flows
 
   
Year Ended December 31,
  
   
2010
    
2009
    
2008
  
   
(In million of Colombian pesos)
  
Cash flows from operating activities
                  
Net income
   $ 8,146,471     $ 5,132,054     $ 11,629,677  
Adjustments to reconcile net income to cash provided by operating activities
                        
Deferred Income tax, net
     37,609       165,210       770,962  
Depreciation of property, plant and equipment
     1,624,009       1,262,643       691,488  
Amortizations:
                        
Natural resources
     2,003,771       1,274,979       947,788  
Abandonment of installations
     241,842       199,939       139,795  
Health and education pension liabilities
     166,211       502,665       645,770  
Intangibles
     189,261       152,235       37,496  
Deferred charges
     107,422       94,288       73,343  
Deferred monetary correction, net
     (22,030 )     (22,355 )     (30,473 )
Provisions:
                        
Accounts receivable
     169,789       30,734       2,275  
Inventories
     9,743       33,161       49,380  
Property, plant and equipment
     227,266       127,826       -  
Legal proceedings
     125,888       271,091       62,380  
Other
     19,834       -       103,062  
Recovery of provisions:
                        
Accounts receivable
     (68,772 )     -       -  
Inventories
     (29,481 )     (118,652 )     (8,711 )
Property, plant and equipment
     (55,717 )     (17,091 )     (18,813 )
Legal Proceedings
     (80,237 )     (83,258 )     (832,788 )
Other
     (138,397 )     (5,564 )     (139,554 )
Write-off of property, plant and equipment
     3,395       -       -  
Retirement loss of property, plant and equipment
     38,945       -       -  
Write-off of natural and environmental resources
    39,668       -       -  
Write-off of other assets
     287,918       -       -  
Gain in equity method
     (82,772 )     (55,143 )     -  
Net changes in operating assets and liabilities:
                        
Decrease (increase) Debtors
     794,512       2,030,376       5,946,536  
Decrease (increase) Inventories
     (129,823 )     (291,819 )     (237,710 )
Decrease (increase) Deferred and other assets
     698,423       (1,408,834 )     (865,556 )
(Decrease) increase Accounts payable
     1,248,736       1,536,580       423,182  
(Decrease) increase Taxes payable
     (618,440 )     (1,473,446 )     988,828  
(Decrease) increase Labor obligations
     (26,737 )     37,684       (9,246,210 )
(Decrease) increase Estimated liabilities and provisions
     (64,028 )     (24,809 )     (697,407 )
(Decrease) increase Other long term liabilities
     (507,467 )     -       -  
Net cash provided by operating activities
     14,356,812       9,350,494       10,434,740  
Cash flows from investing activities:
                        
Payments and advances in acquisition of companies
     (1,163,131 )     -       -  
Payments in acquisition of companies, net of cash acquired
     -       (1,082,580 )     (1,275,049 )
Purchase of investments
     (11,808,784 )     (7,939,870 )     (27,801,568 )
Investments redemption and sale
     10,578,200       15,972,339       27,054,516  
Proceeds from sales of property and equipment
     4,751       1,927       -  
Investments in natural and environmental resources
     (3,874,824 )     (3,613,355 )     (1,844,917 )
Additions to properties, plant and equipment
     (6,445,151 )     (9,239,234 )     (4,861,067 )
Net cash used in investment activities
     (12,708,939 )     (5,900,775 )     (8,728,085 )
                         
Cash flows from financing activities
                        
Non-controlling interest
     (455,360 )     698,360       242,950  
Financial obligations
     2,761,449       6,161,793       235,720  
Received from associates - Capitalizations
     525       41,044       832,919  
Payment of dividends
     (3,789,828 )     (8,902,602 )     (4,654,340 )
Net cash used in financing activities
     (1,483,214 )     (2,001,405 )     (3,342,751 )
                         
Net increase in cash and cash equivalents
     164,659       1,448,316       (1,636,096 )
Cash and cash equivalents at beginning of year
     3,562,119       2,113,803       3,749,899  
Cash and cash equivalents at end of year
   $ 3,726,778     $ 3,562,119     $ 2,113,803  
The accompanying notes are an integral part of these financial statements.

 
F-8
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

   
2010
    
2009
    
2008
  
Attachment 1 – Cash and cash equivalents detail
                  
Cash
   $ 470     $ 82     $ 408  
Banks and savings entities
     2,124,461       1,508,846       1,395,199  
Special and in-transit funds
     555,716       1,690,815       703,577  
Temporary investments
     1,046,131       362,376       14,619  
Total cash and cash equivalents
   $ 3,726,778     $ 3,562,119     $ 2,113,803  

 
F-9
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

(Amounts are expressed in millions of Colombian pesos, except amounts stated in other
currencies, exchange rates and income per share, which are expressed in Colombian pesos – throughout these
financial statements pesos or Ps refer to Colombian pesos and U.S. Dollar refers to United States dollars)

1.
Economic Entity and Principal Accounting Policies and Practices

Reporting Entity

ECOPETROL S.A. and subsidiaries (hereinafter Ecopetrol or the Company) was organized by Law 165 of 1948 and transformed through Extraordinary Decree 1760 of 2003 (added by Decree 409 of 2006) and Law 1118 of 2006 into a state-owned company by shares and then into a mixed economy entity of a commercial character, at national level, related to the Ministry of Mines and Energy, for an indefinite period. Ecopetrol’s corporate purpose is the development, in Colombia or abroad, of commercial or industrial activities corresponding to or related with exploration, production, refining, transportation, storage, distribution, and selling of hydrocarbons, their by-products and associated products, and of subsidiary operations, connected or complementary to these activities in accordance with applicable regulations. Ecopetrol’s principal domicile is Bogotá, D.C. and it may establish subsidiaries, branches and agencies in Colombia or abroad.
 
By means of the Transformation Decree 1760 of June 27, 2003, the integral administration of the hydrocarbon reserves owned by the Colombian Nation (the Nation), and the administration of non-strategic assets, represented by shares and the participation in companies were separated from Ecopetrol. In addition, Ecopetrol’s basic structure was changed and two entities were created: a) the Agencia Nacional de Hidrocarburos (ANH) was created to hereinafter issue and develop the Colombian petroleum policy (formerly the responsibility of Ecopetrol), and b) Sociedad Promotora de Energía de Colombia S.A., which received the non-strategic assets owned by Ecopetrol.
 
Law 1118 of December 27, 2006 changed the legal nature of Ecopetrol S.A., and authorized the Company to issue shares to be placed in the equity market and acquired by Colombian individuals or legal entities. Once the shares were issued and placed, corresponding to 10.1% of the authorized capital, at the end of 2007, the Company became a Mixed Economy Entity of a commercial nature, at a national level, controlled by the Ministry of Mines and Energy.
 
Ecopetrol entered into a deposit agreement with JP Morgan Chase Bank, N.A., as depositary, for the issuance of ADRs evidencing ADSs. Each of the ADSs represents 20 common shares.
 
On September 12, 2008, Ecopetrol submitted to the Securities and Exchange Commission of the United States (SEC) an application to register and list the Company’s ADSs evidenced by ADRs on the New York Stock Exchange (NYSE).  The Company’s ADSs began trading on the NYSE under the symbol “EC” on September 18, 2008.
 
On December 3, 2009,  the National Commission for the Surveillance of Companies and Securities of Peru – CONASEV approved the listing of Ecopetrol’s ADSs on the Lima Stock Exchange and registration of such securities with the Public Registry of the Securities Market. The ADSs began trading on the Lima Stock Exchange on December 4, 2009 in the Peruvian market under the “EC” symbol.
 
On August 13, 2010, Ecopetrol began trading its Company’s ADSs in the Toronto Stock Exchange - Canada. Ecopetrol became the first Colombian company to list in the Toronto Stock Exchange.
 
On February 13, 2008, Ecopetrol S. A., as parent company, announced the registration of documentation evidencing the existence of a Corporate Group (Grupo Empresarial, the term which under Colombian law describes when a company acquires subsidiaries) considering its controlling acquisition of the following subsidiaries: Black Gold Re Limited, Ecopetrol Oleo é Gas do Brazil Ltda., Ecopetrol del Perú S.A. and Ecopetrol America Inc. Subsequently, Andean Chemicals Ltd., parent company of Bioenergy and investor in Propilco S. A., which in turn is the parent company of Compounding and Masterbatching Industry Ltda. (“Comai”), was incorporated into the Corporate Group.

 
F-10
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Likewise, in 2009 the companies ODL Finance, parent Company of ODL; Hocol Petroleum Limited, parent company of Homcol Cayman Inc. and Hocol Limited, which branch in Colombia is Hocol S.A.; Ecopetrol Transportation Company, parent company of Ecopetrol Pipelines International Ltd.; Ecopetrol Global Energy, and Refinería de Cartagena S.A., were all incorporated into the Corporate Group.
 
On September 20, 2010, Ecopetrol S.A. incorporated its subsidiary company Oleoducto Bicentenario de Colombia S.A.S into the Corporate Group.
 
By the end of 2010, the subsidiaries Ecopetrol Transportation Investment Ltd. and Ecopetrol Capital AG were established for the purpose of improving the use of the financial resources of the Corporate Group.
 
The companies consolidated by Ecopetrol in its financial statements as of December 31, 2010, 2009 and 2008 are:
 
 
Percentage of Ownership %
  
Activity
  
Subsidiaries
2010
  
2009
  
2008
        
Ecopetrol Oleo é Gas do Brasil Ltda.
100
  
100
  
100
  
Hydrocarbon exploration and exploitation.
  
-
Ecopetrol del Perú S. A.
100
  
100
  
100
      
-
Ecopetrol America Inc.
100
  
100
  
100
      
-
Black Gold Re Ltd.
100
  
100
  
100
  
Reinsurance Company of Ecopetrol and its subsidiaries.
  
-
Andean Chemicals Ltd.
100
  
100
  
100
  
Investment vehicle.
  
Bioenergy S. A., Refinería de Cartagena and Propileno del Caribe
ODL Finance S. A.
65
  
65
  
65
  
Crude oil Transportation  through pipelines.
  
ODL S. A.
ODL - Colombian Branch Office
Propileno del Caribe. Propilco S. A.
100
  
100
  
100
  
Production and selling of polypropylene resin.
  
Comai S. A.
Bioenergy S. A.
88.6
  
80
  
79.14
  
Bio-fuel production.
  
-
Ecopetrol Global Energy
100
  
100
  
-
  
Investment vehicle.
  
Ecopetrol America Inc.
Ecopetrol Transportation Company Limited
100
  
100
  
-
  
Investment vehicle.
  
Ecopetrol Pipelines International Limited, Ecopetrol Transportation Investment Ltd
Ecopetrol Pipelines International Limited
100
  
100
  
-
  
Investment vehicle.
  
Ecopetrol Transportation Investment
Oleoducto Central S. A. - Ocensa
60
  
60
  
35.29
  
Crude oil transportation through pipelines.
  
-
COMAI - Compounding and Masterbatching Industry
Ltda.
100
  
100
  
100
  
Manufacture of polypropylene compounds and master batches.
  
-
Refineria de Cartagena S. A.
100
  
100
  
49
  
Hydrocarbon refining, selling and distribution.
  
-
Hocol Petroleum Limited
100
  
100
  
-
  
Investment vehicle.
  
Hocol Limited, Hocol S. A., Homcol Cayman Inc.
Oleoducto de Colombia S. A. – ODC
66
  
66
  
43.85
  
Crude oil transportation through pipelines.
    
Oleoducto Bicentenario de Colombia SAS
55.97
  
-
  
-
  
Crude oil transportation through pipelines.
  
-
Ecopetrol Transportation Investment Ltd.
100
  
-
  
-
  
Investment vehicle.
  
-
Ecopetrol Capital AG
100
  
-
  
-
  
Financing, liquidation of financing of group companies or any other type of company and all activities related thereto.
  
-

Ecopetrol and certain of its subsidiaries develop exploration and production (“E&P”) operations through E&P, Technical Evaluation Agreements (“TEA”) and Agreements entered into with the ANH, and through Association Contracts of diverse contractual terms, with the following characteristics at December 31, 2010 closing:

 
F-11
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
   
Number of Contracts
  
Contract Type
  
Ecopetrol S. A.
    
Hocol 
Petroleum Ltd.
    
Ecopetrol Oleo é
Gas do Brasil 
Ltda.
    
Ecopetrol
America 
Inc.
    
Ecopetrol del 
Perú S. A.
  
Exploration
                              
E&P Contracts –ANH
     27       9       -       -       -  
E&P Agreements-ANH
     6       -       -       -       -  
TEA’s – ANH
     3       -       -       -       -  
Association Contracts
     7       4       10       44       5  
Production
                                        
Association
     58       8       -       1       -  
Discovered undeveloped and inactive fields
     18       -       -       -       -  
Sole risk
     -       2       -       -       -  
Incremental production
     6       2       -       -       -  
Risk participation
     3       -       -       -       -  
Technological alliance
     1       -       -       -       -  
Business collaboration
     1       -       -       -       -  
Technical services and cooperation
     1       -       -       -       -  
Shared risk participation
     1       -       -       -       -  
Production services with risk
     2       -       -       -       -  
Operation
     1       -       -       -       -  
      135       25       10       45       5  

Principal accounting policies and practices

The Contaduría General de la Nación or CGN adopted new accounting principles for Colombian state-owned entities in September of 2007. These accounting principles are known as the Regimen de Contabilidad Pública (Regime of Public Accounting or RCP). Pursuant to CGN Communication No. 20079-101345 of September 28, 2007, RCP became effective for Ecopetrol beginning with the fiscal year ended December 31, 2008. RCP is referred to herein as Colombian Government Entity GAAP.
 
Principles of Consolidation

The consolidated financial statements have been prepared pursuant to the provisions of Article 27 of the Commerce Code and Articles 23 and 122 of Decree 2649 / 1993.  The latter article states that the economic entity that holds more than 50% of the capital of other economic entities is required to provide, along with its basic financial statements, the consolidated financial statements and the accompanying notes. The Full Integration consolidation method established in External Circular No. 005 issued on April 6, 2000 by the Superintendence of Companies was used herein.
 
Presentation Basis

The preparation of the financial statements was carried out under Colombian Government Entity GAAP standards and principles issued by the CGN and other legal provisions. These principles may differ in certain aspects from those established by other standards and other control authorities, and the opinions on specific matters issued by CGN prevail over other regulations.
 
In accordance with the rules for the inspection, supervision, and/or control of Ecopetrol and the companies that apply Colombian Government Entity GAAP to record operations at the level of source documents or for purposes of standardization, a structure was established to define the accounting treatment of operations not envisioned by the CGN, which is as follows: i) Principal and permanent inspection, supervision, and control: Superintendency of Domiciliary Public Services; ii) Residual control: Superintendency of Corporations and iii) Concurrent control: Superintendency of Finance, on the activities of the Company in its capacity as issuer in the stock market. International Financial Reporting Standards (IFRS) are applied when accounting guidance under Colombian Government Entity GAAP do not address specific accounting issues applicable to the Company, while accounting standards under accounting principles generally accepted in the United States (US GAAP) are applied for accounting issues related to crude oil and natural gas reserves.

 
F-12
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The accrual method was applied for the accounting recognition of financial, economic, environmental and social facts aspects.
 
The consolidated financial statements include the accounts of the companies in which the Company holds, either directly or indirectly, more than 50% of their voting capital, or over which it has a significant influence although it is not the majority shareholder. All intercompany transactions and balances have been eliminated. The financial statements attached hereto consolidate the assets, liabilities, equity and income of the Ecopetrol subsidiaries.

Certain reclassifications have been made to prior years’ financial information to conform to the December 31, 2010 presentation.
 
Materiality Concept

An economic fact is material when, due to its nature and amount and the circumstances that surround it, its knowledge or ignorance can significantly alter the economic decisions of the users of the financial information.
 
The consolidated financial statements include specific headings in accordance with legal requirements, or those representing 5% or more of total assets, current assets, total liabilities, current liabilities, working capital, equity and results of operations, as appropriate. In addition, lower amounts are shown when they are deemed to contribute to a better interpretation of financial information.
 
Use of Estimates

The preparation of the consolidated financial statements requires that management make estimates and assumptions that could affect the recorded amounts of assets, liabilities, results of activities and the attached notes. These estimates are carried out in accordance with technical criteria pursuant to regulations and current legal provisions. Actual or market values could differ from such estimates.
 
Transactions in Foreign Currency

Transactions in foreign currency are entered into in accordance with applicable regulations and they are recorded at appropriate exchange rates on the transaction date. Balances denominated in foreign currency are reflected in Colombian pesos at the representative market exchange rates at the end of each period.
 
The adjustment for exchange differences generated by assets and liabilities denominated in a foreign currency is recorded against results of operations, except when such adjustment is charged to capital investments in controlled entities, in which case the equity is accounted.
 
The financing costs, including the exchange difference associated with assets purchased under construction, form part of the overall cost of these assets until they are ready for use.
 
The Company and its subsidiaries associated to crude oil exploration and production activities can freely deal in foreign currency provided that it complies with the provisions of the exchange regime.
 
With respect to those subsidiaries whose financial statements were originally presented in a currency other than the Colombian pesos, the financial statements were first converted into US dollars and then into Colombian pesos. Market exchange rates at December 31, 2010 were used to convert the balance sheet accounts, weighted average exchange rates were used to translate income statement accounts and historical exchange rates were used to translate equity statement accounts.

 
F-13
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Joint Operation Contracts

Joint venture or common-interest operation contracts are entered into between Ecopetrol or the Corporate Group and third parties in order to share the risk, secure capital, maximize operating efficiency and optimize the recovery of reserves. In these joint ventures, one party is designated as the operator and each party takes its share of the crude oil production according to its agreed participation. When any of the corporate group companies participates as non-operator party, it records these assets, revenues, costs and expenses on a timely basis based on information reported by the operators. When any of the corporate group companies directly operates the facilities, it records assets, revenues, costs and expenses at the same time the accounts receivable to the third party are recognized.
 
Cash and Cash Equivalents

Cash and cash equivalents are represented by highly liquid investments which have maturities of  less than ninety (90) days as of their original acquisition date.
 
Cash from operations with joint operations partners corresponds to advances from both Ecopetrol and its joint operations partners in the agreed upon participation percentages set for in the relevant joint venture contract, which will be managed in a joint exclusive-use bank account.
 
Financial Derivative Instruments

The Company enters into hedging agreements to hedge against fluctuations of international crude oil prices and exchange rates. The difference between amounts paid and income received under hedging operations is recognized as financial income or expense in the statements of financial, economic, social and environmental activities. Ecopetrol does not use these financial instruments for speculative purposes.
 
Hedging operations are carried out with banks and other counterparties with a credit risk rating higher than or equal to A+.
 
The Company makes periodic evaluations based on the market risk of hedging operations and, together with the Board of Directors and management, determines the need for extension or early termination of the subscribed contracts, when the result is ineffective vis-à-vis the hedged items. In the event of settlement, the financial and contractual effects are recognized in the results of the period.
 
Investments

The Investments are classified as: i) Liquidity Management Investments, ii) Investments for Policy Purposes and, iii) Equity Investments.
 
Liquidity management investments correspond to resources invested in debt and equity securities with the objective of obtaining profits through short term price fluctuations. Their initial recording corresponds to their historical cost and they are updated based upon valuation methodologies issued by the Colombian Superintendency of Finance.
 
Policy purpose investments are made up of debt securities of national or foreign entities, acquired in compliance with macroeconomic or internal policies of the entity, which include investments held through their maturity date and those available for sale, the former being those which are kept for at least one (1) year, as of the first day on which they were classified for the first time, or when they were reclassified.
 
Investments held to maturity are updated based on the Internal Rate of Return (IRR) included in the methodologies adopted by the Superintendency of Finance and the investments for the purpose of macroeconomic policy and available for sale should be updated based on methodologies adopted by the Superintendency of Finance for tradable investments.
 
Equity investments in controlled entities where the Company exerts significant influence are recorded using the equity method.

 
F-14
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Significant influence is defined as the power that the entity has, regardless if the percentage of ownership is less than or equal to 50%, to participate in the setting and overseeing of financing and operational policies of another entity for the purpose of obtaining profits from that entity.
 
Significant influence may be present in one or more of the following aspects:
 
·
Representation on the Board of Directors or equivalent regulatory organ of the associated entity,
·
Participation in policy-making processes,
·
Significant transactions between the investor and the associated entity,
·
Secondment of officers, or
·
Supply of essential technical information.

Equity investments in noncontrolled entities include shares of low or minimum liquidity or shares without any trading on an exchange which do not permit any type of control or the exertion of significant influence and are recognized at historical cost; changes in value arise from the periodic comparison of the cost of the investment to its net book value or its value in the stock market.
 
Equity variances generated by adjustments in conversion of the controlled entity are recognized as surplus under the equity method, without prejudice to the subaccount with a debit balance, in agreement with Resolution 193 of July 27, 2010, issued by the CGN Office.
 
Investments made in foreign currency are recognized by applying the Representative Market Exchange Rate (TRM, per its Spanish acronym) of the transaction date.  The value shall be re-expressed periodically based on the TRM, as long as this is not considered by the updating methodology. For foreign subsidiaries, the equity method shall be applied in Colombian pesos, following the translation of the foreign currency-expressed financial statements.
 
Receivables and Provisions for Doubtful Accounts

Receivables of the corporate group companies are recognized at their original amount or at the amount accepted by the debtor, which is subject to periodic updating in accordance with current legal provisions or agreed contractual terms.
 
The provision for doubtful accounts is reviewed and updated periodically in accordance with the aged analysis of balances and the evaluation of the recoverability of individual accounts. The Company carries out the necessary administrative and legal procedures to recover delinquent accounts receivable as well as the collection of interest from customers that do not comply with payment policies.
 
It is only possible to write-off accounts and notes receivable against the provisions for doubtful accounts when there is reasonable legal or material certainty of the total or partial loss of the assets.
 
Inventories

Inventories include assets extracted, in production process, transformed and acquired for any reason, to be sold, intended for transformation and consumed in the production process, or as a part of services rendered. Ecopetrol uses the perpetual inventory system.
 
Inventories are recorded at historical cost or at purchase cost, which includes direct and indirect charges incurred to prepare the inventory for sale or production conditions.
 
The valuation of inventories is measured using the weighted average method, considering the following parameters:
 
·
Crude oil and natural gas inventories for the Company’s own production, at production cost.
·
Crude oil purchases, at acquisition costs, including transportation and delivery costs incurred.

 
F-15
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

·
Finished goods inventory, at total production costs.
·
Work in progress inventory, at production costs.
·
Raw material inventory, at weighted average cost.

Raw Materials and supplies in joint ventures are controlled by the operator and reported in a joint account at acquisition costs (recorded in the original currency at average costs). Inventory consumptions are charged to the joint venture as expense or investment, as appropriate.
 
Additionally, inventories are valued at the lower of market value and average cost, and at the actual cost incurred for in-transit inventories. At the end of the year, provisions are calculated to recognize impairment, obsolescence, excess, slow-moving or loss of market value.
 
Property, Plant and Equipment and Depreciation

Property, plant and equipment are recorded at the historical cost, adjusted for inflation until 2001, which includes financial expenses and exchange differences from acquisition costs in foreign currency until the asset is put into operation, and the financial revenues corresponding to the still unused portion of financial obligations acquired to finance investment projects. When an asset is sold or retired, the adjusted cost and accumulated depreciation are written off and any gain or loss is recognized in results of operations.
 
Depreciation is calculated on the total acquisition cost using the straight-line method, based on the assets useful life. Annual depreciation rates used are:
 
   
%
  
Buildings and pipelines
     5  
Plant and equipment
     10  
Transportation equipment
     20  
Computers
     33.3  

Regular disbursements for maintenance and repairs are included as a part of expenses. Significant expenditures which improve efficiency or extend asset’s useful life are capitalized as an increased in the value of the respective asset.
 
The value of property, plant and equipment is subject to periodic update by comparing the net book value with the value determined through technical appraisals.  When the value of the asset's technical appraisal is greater than its net book value, the difference is recorded as asset reappraisal credited to the surplus on reappraisals account in equity; otherwise, it is recorded as provision for devaluations charged to results.
 
Upon termination of an association contract, Ecopetrol S. A. receives, at no cost, the property, plant and equipment, materials and the amortizable oil investments owned by the associate company.  This transaction does not affect the Company's results.  The results of the technical appraisal of the properties, plant and equipment are recognized as reappraisal in the respective assets and equity accounts.
 
The residual value is considered only for the valuation of property, plant and equipment and only in case the assets are either fully depreciated or not in operating condition.  In general, 5% of the cost on average is applied, in accordance with the practice of  the Company’s industry.  Such criterion is not applicable to assets classified as piping and buildings, as recoverable costs are considered equivalent to the removal and transportation for their retirement. Assets are depreciated at 100% of their historical cost, adjusted for inflation.

 
F-16
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Natural and Environmental Resources

The Company applies the successful efforts method of accounting for investments in exploration and production areas. The geological and geophysical seismic information is expensed as incurred, before the discovery of proved reserves.  Acquisition and exploration costs are capitalized until the time in which it is determined that exploration drilling was successful. If exploration drilling results are unsuccessful, all incurred costs are expensed.  When a project is authorized for development, the accumulated acquisition and exploration costs are transferred to the oil investments account. Costs capitalized also include the cost of asset retirement costs. Asset and liability balances related to asset retirement costs are updated annually. Production and support equipment are accounted for on a cost basis and are part of the Property, Plant and Equipment subject to depreciation.
 
Oil investments are amortized using the technical units-of-production method on the basis of royalty-free proven developed reserves per field, estimated as of December 31 of the immediately preceding year. The amortization charged to results is adjusted at the close of December, recalculating the DD&A (Depletion, Depreciation and Amortization) as of January 1 of every year, based on the reserve study updated at the end of the current year.
 
The reserves technical studies are prepared internally by the Company’s reservoirs superintendence and audited by internationally recognized external consultants, approved by the Company Reserves Committee of Ecopetrol and the Boards of Directors of each subsidiary, as applicable.  Proved reserves consist of estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, that is, prices and costs as of the date the estimate is made.
 
Since Ecopetrol became an issuer on the Colombia Stock Exchange (Bolsa de Valores de Colombia - BVC) and the New York Stock Exchange (NYSE), the Company has used the methodology approved by the SEC (Securities Exchange Commission) for the calculation of natural gas and crude oil reserves.  As per such methodology, the reference price is the arithmetical average of the WTI crude oil price over the last twelve (12) months.
 
When it is determined that a well located in an exploration zone has no proven reserves, it is considered a dry or not commercial well and accumulated costs are expensed in the same period this is known.
 
The estimation of hydrocarbon reserves is subject to several uncertainties inherent in the determination of the proved reserves, production recovery rates, the timeliness in which investments are made to develop the reservoirs and the degree of maturity of the fields.
 
In accordance with that established in Resolution 494 of December 22, 2009, issued by the National Hydrocarbon Agency (ANH) Ecopetrol complies with the delivery of information to the ANH using the SPE-PRMS, Petroleum Resources Management System, methodology.  Reserves included in the reports are audited by three independent specialized firms.
 
Deferred Charges

Deferred charges include deferred income tax, which results from the temporary differences arising due to the different ways of determining book profit and taxable income at the end of each period.
 
Other Assets

Other assets include goodwill, which corresponds to the difference between the value of purchase of the equity investments in controlled entities and their intrinsic value, which reflects the economic benefits expected to be achieved from the investment, originating in goodwill, specialized personnel, reputation of privileged credit, prestige due to sale of better products and services, favorable location and expectations of new businesses, among others.

 
F-17
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Goodwill is amortized based on methodologies of acknowledged technical value over the term in which recovery of the investment is expected.  At the close of each accounting period, goodwill shall be assessed to determine if the conditions for generation of future economic benefits still exist; otherwise, the asset shall be retired. If the book value of equity investment, plus the book value of goodwill which includes its historical cost added to all price adjustments and amortizations, is greater than the implied value, the asset shall, as a result of such difference, be retired in the related period with charge to results, and the reasons on which such decision was based shall be disclosed.
 
Software, licenses and patents are recognized at their cost of purchase, development or production. Intangible assets are amortized through the straight-line method during the periods when it is expected to receive the benefits from the incurred costs and expenses, or during the term of the legal or contractual coverage of the granted rights.
 
Advances received from Ecogas to cover Build, Operate, Maintain and Transfer (BOMT) obligations

As a result of the sale of Ecogas by the National Government, and following specific instructions from CGN, the Company recognized as deferred income the net present value of the future payments scheme, in connection with Ecopetrol´s liability related to BOMT contractors. These liabilities are due in 2017, the year when the contractual obligations end.

Revaluations

a.
Investments

Revaluations correspond to the difference between the net book value and the intrinsic value or the price quoted on a stock exchange.

b.
Property, Plant and Equipment

Valorizations and valorization surplus of property, plant and equipment correspond to the difference between net book value and the market value for real estate or the current value in use (VAU as per its acronym in Spanish) for plant and equipment, determined by specialists registered with the Colombian Real Estate Association or by suitable technical personnel, respectively.

The methodology used to appraise plant and equipment is the current value of the assets in use by going businesses (VAU) for economic valuation of assets, considering current facilities condition and their useful lives in terms of production capability and ability to generate income.

For office equipment, the historical value to the appraisal value adjustment is not mandatory when the historical value is lower than 35 current monthly legal minimum wages or when the property, plant and equipment is located in high risk areas.

Financial Obligations

Public credit operations, as controlled by the state of Colombia, correspond to any action or contract which, in compliance with legal regulations on public credit, are addressed to supply the Company with resources, goods and services under specific payment terms such as loans, issue and placement of bonds and public credit securities, and vendors’ credit.

With respect to loans, public credit operations must be recorded for the actual disbursed amount while bonds and securities placed are recorded at their nominal amount. Placement costs are booked directly under expenses.

Accounts Payable – Suppliers

Accounts payable correspond to obligations incurred by Ecopetrol with third parties in order to comply with its corporate purpose.

 
F-18
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Income Tax

The provision for income tax at year end was calculated by applying to the accounting profit before taxes the effective tax rate determined through the reconciliation of income before income tax and taxable income. The effect of timing differences involving the payment of a lower or higher income tax in the current year is recorded as a deferred tax liability or asset, as applicable, provided that a reasonable expectation exists that such differences will reverse and in the case of the deferred tax asset, that sufficient taxable income will be generated to recover the asset. The deferred tax balance was calculated at the 33% applicable rate.

Labor and Pension Obligations

The system for salaries and fringe benefits for Ecopetrol personnel is governed by the Collective Labor Agreement 01 of 1977, and in the absence thereof, by the Labor Code. In addition to fringe benefits, Ecopetrol employees are entitled to receive additional benefits covered by previous regulations that depend on the place, type of work, length of service, and basic salary. Annual interest of 12% is paid on accumulated severance amounts in favor of each employee and the payment of indemnities is provided for when special circumstances arise that result in the non-voluntary termination of the contract, and in periods other than the qualifying period.
 
The actuarial calculation includes active employees with indefinite term contract, pensioners and heirs, for pension, health care and education plan; it likewise includes pensions bonds for temporary employees, active employees and voluntary retirements.
 
All social benefits of employees who joined the Company before 1990 are the direct responsibility of Ecopetrol, without the involvement of the Colombian social security entity or institution. The cost of health services of the employee and his/her relatives registered with the Company is determined by means of the morbidity table, prepared on the basis of facts occurring during 2009. Likewise, the experience of Ecopetrol is considered for the calculation of educational allowances, based on the annual average cost of each business segment, subdivided in accordance with the class of studies: pre-school, primary, high school and university.
 
For employees who joined the Company subsequent to the enactment of Law 50 of 1990, the Company makes periodic contributions for severance, pensions and labor related injuries to the respective funds that assume all these obligations. Likewise, Law 797 of January 29 of 2003 determined that Ecopetrol employees who joined the Company as of January 29, 2003 will be subject to the provisions of the General Pension Regime.
 
By virtue of Legislative Act 01 of 2005, enacted by Congress, the pension regimes excluded from the General Social Security System in Colombia expired on July 31, 2010. In accordance with provisions therein, the decision of the Ministry of Social Protection and the analyses conducted by the labor advisers of Ecopetrol, it was concluded that those workers who complied with the age and continuous or discontinuous service time requirements of the law, the Collective Bargaining Agreement currently in force and/or Agreement 01 of 1977, prior to August 1, 2010, consolidated their right to pension, while for other workers who were not covered, it is mandatory to be affiliate with the General Pension System. The agency responsible for paying the respective pension will be the pension administrator chosen by the worker (either the Social Security Institute or private pension funds).
 
Pursuant to Decree 941 of 2002, once the actuarial calculation was approved by the Ministry of Finance in October 2008 and the mechanism for transfer (“commutation”) of the corresponding liability was approved by the Ministry of Social Protection on December 29, 2008, Ecopetrol, as of December 31, 2008 partially transferred (“commuted”) the amounts corresponding to payments from its pension liability, to autonomous pension trust funds (PAP, per its Spanish acronym). The amounts transferred, as well as their yield, cannot be used for other purposes nor may they be reimbursed to the Company until all pension obligations have been fulfilled.

 
F-19
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
The transferred liability corresponds only to pension payments; the portion relating to health care and education services remains Ecopetrol’s direct pension obligations.
 
In case the yields of the autonomous equity are not sufficient to cover 100% of the actuarial calculation as updated every year, Ecopetrol shall draw the resources to complete funding of the pension liabilities, since Ecopetrol remains liable for payment of pension liabilities transferred.
 
Through Resolution 1555 of July 30, 2010, the Superintendency of Finance replaced the Mortality Tables used to prepare actuarial calculations and stipulated that the effects from such change could be recognized gradually.  Subsequently, Decree 4565 of December 7, 2010 modified the accounting standards for amortization of the actuarial calculation which were in force up to that date. Pursuant to the new Decree, the companies that had amortized 100% of their actuarial calculation at December 31, 2009 may gradually amortize up to the 2029 the increase in the actuarial calculation for 2010 estimated by using the new Mortality Tables.
 
In view of the foregoing, Ecopetrol modified its accounting policy for amortization of the actuarial calculation of monthly pension payments, pension quotas, parts and bonds (transferred liabilities) and health bonds, and adopted a 5-year term as of 2010 to amortize the increase in the 2010 actuarial calculation.  Up to 2009, the yearly increase in the actuarial calculation was recorded as expense of the period, considering that the actuarial calculation was 100% amortized.
 
Purchase of Hydrocarbons

Ecopetrol purchases hydrocarbons from the ANH that it receives from all of the production in Colombia, at prices established according to section four of Law 756 of 2002 and Resolution 18-1709 of 2003 of the Ministry of Mines and Energy, considering the international reference prices.
 
Additionally, it purchases hydrocarbons both from partners as well as from other hydrocarbon producers in Colombia and abroad to meet the needs and operating plans of the Company.
 
Recognition of Income

Income from crude oil and natural gas sales is recognized at the time of transfer of title to the buyer, including its risks and benefits. In the case of refined and petrochemical products, income is recognized when products are shipped by the refinery; subsequently, they are adjusted in accordance with the volumes actually delivered. Income from transportation services is recognized when products are transported and delivered to the buyer in accordance with sale terms. In other cases, income is recognized at the time it is earned and a true, probable and quantifiable right to demand its payment arises.
 
Late payment interest income on the collection of accounts receivable is recognized following the prudence and realization principles.
 
By virtue of the current regulations, Ecopetrol and Reficar sell at a regulated price and the Government provides the companies with a subsidy on regular motor gasoline and A.C.P.M, granted to local consumers, which is generated by adding the differences, for every day of the month, between the producer's regulated revenues and the daily price equivalent to the U.S. Gulf reference market price, calculated as per its origin, times the volumes sold per diem.  Resolution 182439 and Decree 4839 of December 2008 establish the procedure for recognizing subsidies in the event of which these should be negative (negative value between parity and regulated prices).
 
In March 2010 the Ministry of Mines and Energy issued Resolution No. 180522 which revoked all provisions contrary to Resolutions 181496 of September 2008, 182439 of December 30, 2008 and 180219 of February 13, 2009 and modifies the formula for calculating the gasoline and diesel international reference prices.

 
F-20
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Costs of Sale and Expenses

Costs are recognized at their historical value both for goods purchased for sale and for accumulated production costs of goods produced and services rendered. Costs are disclosed according to the operation which generates them.
 
Expenses correspond to amounts required for the development of the ordinary activity and include those caused by extraordinary events. Expenses are disclosed in accordance with their nature and the occurrence of extraordinary events.
 
Costs and expenses are recognized upon transfer receipt of goods or services or when there is certainty of the occurrence of the economic fact. Fuel shortages and losses due to thefts and explosions are recorded as non- operating expenses.
 
Abandonment of Fields

The Company recognizes the liability for future environmental obligations and its corresponding entry is capitalized as the greater value between natural and environmental resources assets. The estimation includes plugging costs and abandonment of wells, dismantling of facilities and environmental recovery of areas and wells. Amortization expense is recorded as production costs, using the technical units-of-production method based on proved developed reserves. Changes resulting from new estimates of the liability for abandonment and environmental restoration are capitalized to the respective asset.

Since the extension of certain association contracts, the abandonment costs are assumed by the associates in the percentages of participation established in each contract.  Ecopetrol has not allocated funds in order to cover these obligations, with the exception of association contracts Casanare, Guajira, Tisquirama, Cravo Norte and Cravo Norte Pipeline. However, to the extent that activities are generated which are related to abandonment, these will be covered by the Company.

In 2010, the policy for estimating the portion of abandonment/retirement obligations, which are due in U.S. dollars, was changed to Colombian pesos as most payments (greater than 70%) are made in Colombian pesos.
 
Accounting for Contingencies

As of the date of these consolidated financial statements, conditions that result in losses for the Company might exist, which will only be known if future specific circumstances arise. Management, the legal Vice Presidency and legal counsel evaluate these situations based on their nature, the likelihood that they will materialize, and the amounts involved, to decide on any changes to the amounts accrued and/or disclosed. This analysis includes current legal proceedings against the Company.
 
The methodology applied to assess current legal proceedings and any contingent obligation is based on the credit system of the Nation, which is used by the Ministry of the Interior and of Justice.
 
A provision is allocated for legal proceedings when there is a first instance conviction or the risk assessment results are “Likely to lose”.
 
Risks and Uncertainties

The Company is subject to certain operational risks which are customary to this industry in Colombia and abroad, such as terrorism, product theft, crude oil international price changes, environmental damages, and variations in the estimations of hydrocarbon reserves.

 
F-21
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Memorandum Accounts

Creditor and Debtor Memorandum Accounts represent the estimation of facts or circumstances from which rights or obligations could affect the Company’s financial, economic, social and environmental position. They also disclose the value of goods, rights and obligations that must be controlled and include, additionally, the differences between the accounting information and the information used for tax purposes.
 
These accounts are not included in the Company’s balance.
 
Earnings per Share

Earnings per share are calculated based in the annual weighted average of outstanding issued shares.
 
2.
Assets And Liabilities Denominated In Foreign Currency

Transactions and balances in foreign currency are translated into Colombian pesos at the market exchange rate certified by the Superintendency of Finance of Colombia.
 
At December 31, 2010 and 2009 the consolidated financial statements of Ecopetrol include the following assets and liabilities denominated in foreign currency (which are translated into Colombian pesos at the closing exchange rates of $1,913.98 and $2,044.23 for US$1, for 2010 and 2009 respectively).
 
   
2010
    
2009
  
   
Thousands
of US$
    
Equivalent
millions of
COP
    
Thousands of
US$
    
Equivalent
millions of
COP
  
Assets
                        
Cash and cash equivalents
     822,496     $ 1,574,241       1,133,720     $ 2,317,585  
Investments
     2,400,833       4,595,146       1,602,179       3,275,223  
Accounts and notes receivables
     766,604       1,467,265       792,713       1,620,487  
Advances and deposits
     681,508       1,304,393       120,923       247,194  
Other assets
     47,498       90,910       713,950       1,459,478  
      4,718,939     $ 9,031,955       4,363,485     $ 8,919,967  
Liabilities:
                                
Financial obligations
     1,668,906       3,194,252       1,601,090       3,272,996  
Estimated liabilities and provisions
     55,081       105,423       1,519,417       3,106,037  
Accounts payable
     757,365       1,449,581       607,508       1,241,886  
Other liabilities
     422,251       808,180       503,388       1,029,041  
      2,903,603     $ 5,557,436       4,231,403     $ 8,649,960  
Net Asset Position
     1,815,336     $ 3,474,519       132,082     $ 270,007  
 
3.
Cash and Cash Equivalents

   
2010
    
2009
  
Banks and saving entities
   $ 2,124,461     $ 1,508,846  
Sight investments (1)
     1,046,131       362,376  
Special Funds (2)
     555,716       1,690,815  
Cash
     470       82  
    $ 3,726,778     $ 3,562,119  

(1)
Represented by trust rights and Time Deposits TDs (CDT), primarily of: $478,498 Ecopetrol S.A., $416,687 Ocensa, $63,460 Hocol, and $59,949 Refinería de Cartagena.
 
(2)
Includes investments in overnight operations of  $154,899 (2009 - $34), and savings in special funds in pesos and foreign currency of $400,795 (2009 - $1,690,661).

 
F-22
 
 
Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Restrictions on banks and corporations

Payment made by Ecopetrol to the Neuro Science Center of Cuba for US$98,447 is currently withheld by the ABN bank, Miami Agency (Now Banco Itau Internacional) as part of the embargo of the United States of America to Cuba following OFAC (Office of Foreign Assets Control) regulations.

4.
Investments

   
2010
    
2009
  
Current:
            
Fixed yield:
            
Investment funds administered by third parties
   $ 188,461     $ 197,485  
Bonds and securities of private or foreign entities
     132,261       60,330  
Trust funds
     5,597       77,929  
Treasury Securities – TES
     1,463       -  
Bonds issued by the Colombian Government
     -       126,375  
Hedge instruments
     -       139  
Total current
   $ 327,782     $ 462,258  
Long-Term:
                
Variable yield - Shares (2)
   $ 830,170     $ 777,503  
Fixed yield
                
Bonds and securities or foreign entities
     2,275,466       1,834,779  
Treasury Securities – TES
     1,067,799       94,252  
Bonds issued by the Colombian Government
     642,449       602,039  
Specific destination Funds – Legal contingencies
     361,607       380,463  
Other investments (1)
     -       21,703  
Total long-term
   $ 5,177,491     $ 3,710,739  

(1)
Corresponds to the redemption of securities of remaining resources derived from production of the Teca field – Cocorná Association Contract, which were incorporated into the portfolio, in accordance with the verdict issued in favor of Ecopetrol S. A. by the Arbitration Court, on the date of expiration of the association contract operated by Mansarovar Energy Colombia LTD.
(2)
Variable Income  -  Stock
 
A summary of long-term investments of variable yield as of December 31, 2010 valued under the cost method is set forth below:
 
    
Number of shares
and/or quotas
    
Participation
percentage
  
Valuation
month in
2010
  
Historical
Cost
    
Intrinsic /
Market Value
    
Revaluations
(provisions)
  
                                  
STRATEGIC
                                
Sociedad Portuaria de Olefinas
     249,992       50  
December
   $ 333     $ 390     $ 57  
Zona Franca de Cartagena S. A.
     290       10  
November
     393       745       352  
Sociedad Portuaria del Dique
     200       0.5  
November
     5       5       -  
Total strategic
                     $ 731     $ 1,140     $ 409  
                                           
NON STRATEGIC
                                          
Empresa de Energía de Bogotá
     6,310,980       7.35  
December
   $ 169,421     $ 1,101,266     $ 931,845  
Interconexión Eléctrica S.A
     58,925,480       5.32  
December
     69,550       830,850       761,300  
Total non-strategic
                     $ 238,971     $ 1,932,116     $ 1,693,553  
 
 
F-23
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
A summary of variable yield long-term investments, valued under the equity method, is set forth below:
 
Equity Share
  
Number of shares
and/or quotas
    
Participation
percentage
  
 Valuation
month in
2010
  
Historical
cost
    
Adjusted 
cost
    
Equity
method effect
  
Significant Influence
                                
Offshore International Group
     250       50  
December
   $ 404,664     $ 390,479     $ (14,185 )
Invercolsa S. A. (1)
     889,410,047       31.76  
November
     60,282       170,523       110,241  
Ecodiesel Colombia S. A.
     7,750,000,000       50  
November
     10,500       11,706       1,206  
Serviport S. A.
     53,714,116       49  
November
     2,081       7,182       5,101  
Amadine Holding(2)
     500       100  
March
     6,657       6,658       1  
Arces Group(2)
     10,001       100  
March
     6,000       3,920       (2,080 ) 
Total
                     $ 490,184     $ 590,468     $ 100,284  

Restrictions over long-term investments  – Variable income:

(1)
The 28th Bogota Civil Court issued a decision on February 8, 2007 under which Mr. Fernando Londoño was condemned to return to Ecopetrol the Inversiones de Gases de Colombia S.A. (Invercolsa) shares that he acquired, as well as the amount of dividends he was paid on those shares. This decision was confirmed by the Civil Decision Room of the High Court of Justice (Civil Court), on January 11, 2011, notified through edict dated January 17, 2011. Consequently, this decision has not been entirely finalized and is susceptible to a request for  clarification or supplementary information, as well as appealed is for annulment by the defendant.
 
In addition, the Council of State ruled in favor of Ecopetrol in a popular lawsuit and ordered the return of the shares and its dividends received from these shares to Ecopetrol, a decision which was the object of a writ for constitutional action. Upon review of the popular legal action by the Constitutional Court, the ruling of the State Council was confirmed, except as related to the dividends received by Arrendadora Financiera Bolivariana Internacional S.A. (AFIB), which the same Council had ordered to be returned to Ecopetrol; such dividends are subject to the provisions in the aforementioned civil justice rulings in accordance to which they must be returned entirely to ECOPETROL.
 
In addition, on September 10, 2009, the Administrative Court of Cundinamarca issued an order requiring the legal representative of Invercolsa to cancel the record of a pledge existing on some shares, in favor of Arrendadora Financiera Bolivariana Internacional S.A. (AFIB), after which such shares should be registered in the name of Ecopetrol. The pledge was cancelled, but the registration of the shares in Ecopetrol’s name is pending, as it was prevented by a seizure warrant and, even though the decision to release such seizure warrant by the 27th Civil Court of the Bogota Circuit currently stands, the Court has not yet notified Invercolsa officially.
 
(2)
As of December 31, of 2010 these companies were undergoing liquidation proceedings.
 
A summary of the balances of Ecopetrol’s consolidated subsidiaries as of December 31, 2010 is set forth below:
 
Company
  
Assets
    
Liabilities
    
Equity
    
Results of the
period
  
Bioenergy S.A.
   $ 120,502     $ 19,208     $ 101,294     $ (3,536 )
Black Gold Re Ltd
     236,143       12,928       223,215       12,215  
Compounding and Masterbatching Industry Ltda – COMAI
     110,107       39,527       70,580       43,243  
Ecopetrol America Inc
     950,578       27,140       923,438       (543,198 )
Ecopetrol Capital AG
     254,095       253,890       205       -  
Ecopetrol del Perú S. A.
     68,031       22,274       45,757       (94,920 )
Ecopetrol Oleo é Gas do Brasil Ltda.
     153,490       33,957       119,533       (211,460 )
Ecopetrol Transportation Investments
     681,468       18       681,450       (18 )
Hocol Petroleum Limited
     2,348,365       712,051       1,636,314       232,762  
ODL Finance S. A.
     1,854,165       1,414,707       439,458       18,553  
Oleoducto Bicentenario de Colombia S.A.S.
     271,960       1,105       270,855       (16,615 )
Oleoducto Central S.A.
     2,140,871       1,560,321       580,550       277,468  
Oleoducto de Colombia S.A.
     333,934       55,526       278,408       (6,052 )
Polipropileno del Caribe S.A.
     1,062,360       426,305       636,055       65,439  
Refineria de Cartagena
     4,201,911       1,475,395       2,726,516       (305,187 )
 
 
F-24
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
A summary of the balances of Ecopetrol’s consolidated subsidiaries as of December 31, 2009 is set forth below:
 
Company
  
Assets
    
Liabilities
    
Equity
    
Results of the
period
  
Bioenergy S.A.
   $ 64,928     $ 6,593     $ 58,335     $ (2,476 )
Black Gold Re Ltd
     230,652       5,384       225,268       14,705  
Compounding and Masterbatching Industry Ltda – COMAI.
     76,539       28,516       48,023       27,114  
Ecopetrol America Inc
     1,249,328       12,880       1,236,448       (318,609 )
Ecopetrol del Perú S.A.
     81,228       10,450       70,778       (3,347 )
Ecopetrol Oleo é Gas do Brasil Ltda.
     31,340       10,928       20,412       (139,743 )
Hocol Petroleum Limited
     1,901,317       608,693       1,292,624       330,590  
ODL Finance S.A.
     1,381,021       959,245       421,776       12,419  
Oleoducto Central
     1,773,783       63,824       1,709,959       -  
Oleoducto de Colombia
     311,550       27,090       284,460       (22,027 )
Polipropileno del Caribe S.A.
     983,246       354,652       628,594       47,712  
Refinería de Cartagena
     3,046,293       572,520       2,473,773       (127,854 )

The economic activity and the net income for companies in which Ecopetrol has investments for 2010 and 2009 are set forth below:
 
Company
  
Economic Activity
  
Net Result
2010
    
Net Result
2009
  
Interconexión Eléctrica S. A. (3)
  
Operation, maintenance, transmission and sale of electrical energy power.
   $ 305,496     $ 371,996  
Empresa de Energía de Bogotá S. A. E.S.P (1)
  
Electric power transmission
   $ 1,074,394     $ 786,888  
Invercolsa S. A.  (3)
  
Investments in energy sector companies including activities inherent to the industry and commerce of hydrocarbons and mining.
   $ 87,755     $ 71,903  
Serviport S. A. (3)
  
Provision of support services for loading and unloading of crude oil ships, supply of equipment for the same purpose, load inspections measurements.
   $ (1,637 )   $ 941  
Ecodiesel Colombia S. A.  (3)
  
Production, sale and distribution of bio-fuels and oleo-chemicals.
   $ 2,073     $ 336  
Offshore International Group (1) (2)
  
Exploration, development, production and processing of hydrocarbons
   $ 109,283     $ 69,845  
 
(1)
Information as of December 2010
 
(2)
Calculated based on the average market exchange rate (TRM) for each month.
 
(3)
Information as of November 2010
 
The classification of treasury investments depends on the use of the funds, their destination and maturity. Investments whose maturity or realization is shorter than one year are classified as current.
 
A summary of the non current fixed yield investments as of December 31, 2010 is set forth below:
 
Maturity
  
1 - 3 Years
    
3 - 5 Years
    
> 5 Years
    
Total
  
Bonds and securities of foreign entities
   $ 1,968,578     $ 306,888     $ -     $ 2,275,466  
Bonds and securities issued by the Colombian Government
     473,358       123,532       45,560       642,450  
Treasury Securities – TES
     485,038       217,793       364,968       1,067,799  
Specific destination fund
     144,035       11,872       205,699       361,606  
    $ 3,071,009     $ 660,085     $ 616,227     $ 4,347,321  
 
 
F-25
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
A summary of the non current fixed yield investments as of December 31, 2009 is set forth below:
 
Maturity
  
1 - 3 Years
    
3 - 5 Years
    
> 5 Years
    
Total
  
Bonds and securities of foreign entities
   $ 1,681,593     $ 101,843     $ 51,343     $ 1,834,779  
Bonds and securities issued by the Colombian Government
     311,367       290,672       -       602,039  
Fund for legal contingencies
     61,227       139,009       180,227       380,463  
Treasury Securities – TES
     36,149       45,905       12,198       94,252  
Other investments
     21,703       -       -       21,703  
    $ 2,112,039     $ 577,429     $ 243,768     $ 2,933,236  

5.
Accounts and Notes Receivable

   
2010
    
2009
  
Current portion
            
Customers
            
Local
   $ 868,238     $ 975,743  
Foreign
     1,282,132       1,202,517  
Other debtors
     287,594       300,586  
Price differential to be received from the Ministry of Mines and Energy (1)
     163,386       263,513  
Reimbursements and investment yields (2)
     3,141       99,798  
Doubtful accounts
     100,218       62,038  
Associations contracts – Joint operations
     60,026       85,582  
Industrial service customers
     26,241       11,965  
Accounts receivable from employees
     33,171       16,780  
Notes receivable
     13,845       14,661  
Total
     2,837,992       3,033,183  
Less allowance for doubtful accounts
     (101,400 )     (64,063 )
Total current portion
   $ 2,736,592     $ 2,969,120  
Long-term portion
                
Cavipetrol - Loans to employees (3)
   $ 245,824     $ 204,647  
Credit portfolio (4)
     20,156       22,129  
Others
     106,293       5  
Total Long-term portion
   $ 372,273     $ 226,781  

The aging determination and classification of the accounts receivable to customers as of December 31 2010, pursuant to maturity is set forth below:
 
   
  
Maturity in days
  
   
   0 – 180     181 – 360    
More than 361*
  
Current accounts receivable
   $ 1,950,537     $ 33     $ -  
Past Due accounts receivable
     92,043       99,872       7,885  
   
   $ 1,990,684     $ 99,905     $ 7,885  
   
                        
Local customers
     866,684       138       1,416  
Foreign customers
     1,175,896       99,767       6,469  
   
   $ 2,042,580     $ 99,905     $ 7,885  
 
 
F-26
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
The aging determination and classification of the accounts receivable to customers at December 31, 2009, pursuant to maturity is set forth below:
 
   
Maturity in days
  
    0 – 180     181 – 360    
More than 361*
  
Current accounts receivable
   $ 2,037,815     $ -     $ -  
Past Due accounts receivable
     127,899       5,777       6,769  
    $ 2,165,714     $ 5,777     $ 6,769  
                         
Local customers
     974,241       75       1,427  
Foreign customers
     1,191,473       5,702       5,342  
    $ 2,165,714     $ 5,777     $ 6,769  
*           Customer receivables included in doubtful accounts.
 
The changes in the allowance for doubtful accounts are set forth below:
 
   
2010
    
2009
    
2008
  
Initial balance
   $ 64,063     $ 33,679     $ 28,665  
Additions (New provisions)
     169,789       34,608       3,100  
Recoveries
     (68,772 )     (779 )     (405 )
Receivables write-off
     (60,866 )     -       -  
Adjustment to existing allowance
     (2,814 )     (3,445 )     2,319  
Ending Balance
   $ 101,400     $ 64,063     $ 33,679  
 
(1)
Correspond to accounts receivable from the Ministry of Finance and Public Credit for a total amount of $198,490 regarding the calculation of the regular motor gasoline and Diesel price differential pursuant to Resolution 180522 issued on March 29 of 2010.  As of December 31, 2009the balance comprises $228,762 corresponding to the opportunity cost and $34,751 corresponding to price differences of the regular motor gasoline and Diesel. 
 
(2)
Includes dividends receivable from Interconexión Eléctrica S. A. – ISA for an amount of $2,357 and $2,117 in 2010 and 2009 respectively. In addition, includes $96,669 as a return and yield of investments receivable at December 31, 2009.
 
(3)
By means of Leg contracts 058-80 of 1980 and 4008928 of 2006, the administration, management and control of loans granted to employees by the Company were given to Cavipetrol. In its capacity as administrator, Cavipetrol acts as custodian in its database and financial system of the detail by employee of said loans and their respective conditions.
 
The future collections of accounts receivable from Cavipetrol, as of December 31, 2010 are as follows:
 
Year
  
Amount
  
2012
   $ 26,795  
2013
     23,338  
2014
     20,647  
2015 and following
     175,044  
    $ 245,824  

There are no other important restrictions to the recovery of accounts and notes receivables’ recovery.
 
(4)
A summary of the long-term recovery credit portfolio for each of the following five years is provided below:
 

Applicable interest rate
  
Year 1
    
Year 2
    
Year 3
    
Year 4
    
Year 5
  
     
  
Dec-11 to
Nov-12
    
Dec-12 to
Nov-13
    
Dec-13 to
Nov-14
    
Dec-14 to
Nov-15
    
Dec-15 to
Nov-16
  
DTF previous month  
   $ 57     $ -     $ -     $ -     $ -  
CPI + 6    
     110       70       8       -       -  
CPI      
     37       19       19       19       97  
ECP opportunity rate -Bank Average  
     285       -       -       -       -  
DTF + 6 points  
     10       -       -       -       -  
Greater between 6% EA and PCI for  semester starting July 2009
     6,500       6,500       -       -       -  
DTF + 6.25% T.A. percent points in its equivalent to E.A, beginning on March 30, 2011
     6,425       -       -       -       -  
  Total annual recovery
  $ 13,424     $ 6,589     $ 27     $ 19     $ 97  
 
 
F-27
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

DTF:
Average of interest rates for fixed term deposits, promulgated by the Superintendency of Finance.
CPI:
Consumer Price Index, as indicated by the Colombian Government.
ECP:
Ecopetrol
EA:
Effective Annual Rate

No other significant restrictions exist for the recovery of accounts and notes receivable.
 
6.
Inventories

   
2010
    
2009
  
Finished Products:
            
Crude Oil
   $ 772,405     $ 763,800  
Fuels
     491,565       555,359  
Petrochemicals
     103,007       101,302  
Purchased Products:
                
Fuel
     165,067       84,189  
Crude oil
     91,696       23,212  
Petrochemicals
     4,081       5,704  
Raw Materials:
                
Crude oil
     157,390       74,343  
Petrochemicals
     21,753       29,045  
In-process Products:
                
Fuels
     335,613       316,129  
Petrochemicals
     10,398       19,458  
Materials for the production of goods
     53,252       93,298  
In transit materials
     5,158       21,870  
Total
     2,211,385       2,087,709  
Less allowance for  inventories
     (19,297 )     (45,012 )
Total
   $ 2,192,088     $ 2,042,697  

Below are the adjustments made to the allowance for inventories for the years ended December 31 2010, 2009 and 2008:
 
   
2010
    
2009
    
2008
  
Initial balance
   $ 45,012     $ 127,464     $ 80,971  
Adjustments to allowance, net
     (25,715 )     (82,452 )     46,493  
Ending balance
   $ 19,297     $ 45,012     $ 127,464  
 
 
F-28
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

7.
Advances and Deposits

   
2010
    
2009
  
Short-Term
            
Official entities (1)
   $ 1,674,428     $ 2,350,646  
Advances to investment projects (2)
     1,163,132       -  
Partners in joint operations (3)
     562,779       474,920  
Custom agents
     37,824       12,611  
Advances to contractors
     65,245       27,907  
Agreements (4)
     18,733       19,364  
Advances to employees
     968       1,053  
Advances to suppliers
     97,208       132,278  
Total short term
     3,620,317       3,018,779  
Long-term
                
Advances and deposits
     288,735       253,681  
Total
   $ 3,909,052     $ 3,272,460  
 
(1)
Includes transactions with the National Tax and Customs Administration - DIAN for advance income tax for 2010  in the amount totaling $1,096,649 (2009 - $1,889,555), self-withholdings, and others in the amount of $577,779 (2009 - $461,091).
 
(2)
Advances to investment project for the purchase of BP Exploration Company Colombia Limited for US$637.5 million.  The Ecopetrol participation in this transaction was 51% while Talisman participated in 49%.
 
(3)
Joint Operations:
 
  2010   2009
Contracts in which Ecopetrol is not the operator:
          
Meta Petroleum Ltd.
 $ 
     287,853
    $ 
         73,450
Chevron Petroleum Company
  
      81,171
    
      76,693
Other operations
  
      22,046
    
      61,253
Occidental de Colombia Inc.
  
      14,721
    
      10,864
Petrobras Colombia Limited
  
      12,507
    
      33,877
BP Exploration Company Colombia
  
      11,204
    
      25,845
Perenco Colombia Limited
  
      13,122
    
        1,262
CEPSA Colombia S. A.
  
        4,337
    
        7,258
Mansarovar Energy Colombia Ltd.
  
        3,753
    
        3,712
Petrobras Internacional Braspetro B.V.
  
        2,321
    
        5,042
Occidental Andina LLC
  
              -
    
      21,386
BHP Billiton Petroleum Colombia
  
              -
    
        5,111
Kappa Resources Colombia Ltd.
  
              -
    
        1,694
Talisman  Perú BV, Sucursal del Perú
  
      19,200
    
- 
Anadarko Petroleum Corporation
  
              -
    
        2,495
Petróleo Brasileiro S.A. Petrobras
  
             10
    
           120
Petrobras Energía Perú S.A.
  
        3,815
    
- 
HESS BRASIL
  
        3,142
    
- 
Contracts in which Ecopetrol is the operator:
          
Oleoducto Caño Limón
  
      47,429
    
      55,931
Other operations
  
      15,951
    
24,992
JOA Caño Sur
  
      14,816
    
        6,135
La Cira
  
        5,381
    
      51,415
Shared risk Catleya
  
              -
    
           706
Tibú
  
              -
    
        4,120
CRC 2004 – 01
  
              -
    
        1,559
Total
 $ 
    562,779
   $
       474,920
(1)
Represents the amounts delivered to personnel as advances under the personnel educational plan.
 
 
F-29
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
8.
Prepaid Expenses

   
2010
     2009  
Insurance (1)
   $ 16,514     $ 20,199  
Others (2)
     5,434       42,616  
Total
   $ 21,947     $ 62,815  

(1)
Out of the insurance policies contracted, $11,614 correspond to Ecopetrol S.A and are effective until April 2011, comprising: i) operating, with a cost of $44,258 and amortization for $33,793 as of December 31, 2010, and ii) administrative expense for $5,061 and amortization of $3,912 at the same date.
 
(2)
Includes mainly $2,490 of Hocol as an advance payment related to connection and access of the regional transmission facilities to EMSA, in Puerto Gaitán; $881 as resources for acquisition and maintenance of the vehicles assigned to top officers of Ecopetrol through a leasing handled pursuant to Contract No. 5201716 by Cavipetrol.
 
9.
Property, Plant And Equipment, Net

   
2010
    
2009
  
Plant and equipment
   $ 15,916,349     $ 13,438,144  
Construction in progress (1)
     6,955,251       6,487,411  
Agricultural plantations
     16,145       -  
Pipelines, networks and lines
     15,388,663       13,171,399  
Buildings
     3,362,595       2,184,484  
Equipment on deposit and in transit
     1,240,606       1,221,822  
Computer equipment
     343,633       313,891  
Transportation equipment and other fixed assets
     1,556,915       389,728  
Operating materials
     63,896       -  
Lands
     354,601       302,420  
Total
     45,198,654       37,509,299  
Accumulated depreciation
     (21,868,192 )     (20,226,621 )
Provision for devaluation of property, plant and equipment (2)
     (1,064,204 )     (500,175 )
Total
   $ 22,266,258     $ 16,782,503  

(1)
The representative amounts correspond to projects of Ecopetrol S.A such as the Castilla development; drilling projects of the Apiay and Yarigui wells – Direct Operation; drilling projects in the Rubiales field – Joint Operation; construction of the Chichimene Station; construction of the Pozos Colorados-Galan system, and the heavy crude oil transportation infrastructure. In the year 2010 costs were capitalized for $4,380,042, and the project for modernization of Cartagena Refinery for $1,995,138.
 
Interest derived from payments of the syndicated loan and payable bonds destined for investment projects, net of financial revenues generated by the portion of pending disbursements, adding up to $179,156 and $194,787, respectively, were capitalized during 2010; Ocensa S.A capitalized $19,646.
 
(2)
The provision for devaluation of property, plant and equipment is made up mainly by $890,607 of Ecopetrol S.A and $168,829 of the Cartagena Refinery, as the result of the appraisal performed on fixed assets.
 
Below is the activity of the allowance for property, plant and equipment in each of the years ended December 31, 2010, 2009 and 2008:
 
   
2010
    
2009
    
2008
  
                   
Initial balance
   $ 500,175     $ 1,093,458     $ 105,118  
Additions (new provisions)
     222,435       144,431       1,013,116  
Provision from business combination
     -       -       770  
Adjustment of existing provisions
     (171 )     (714,605 )     (6,733 )
Reversal of prior years provision
     (7,089 )     -       -  
Recoveries
     (54,816 )     (23,109 )     (18,813 )
Devaluation of assets before 2006
     403,670       -       -  
Ending balance
   $ 1,064,204     $ 500,175     $ 1,093,458  
 
 
F-30
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Summary of property, plant and equipment at December 31, 2010 is set forth below:
 
Type of asset
  
Adjusted cost
    
Accumulated
depreciation
    
Revaluations
    
Allowances
  
Plant and equipment
   $ 15,916,349     $ 9,774,126     $ 4,308,464     $ (408,265 )
Pipelines, networks and lines
     15,388,663       9,946,601       1,234,652       (353,284 )
Construction in progress
     6,955,251       -       -       -  
Agricultural Plantations
     16,145                          
Buildings
     3,362,595       1,277,854       1,544,947       (122,037 )
Equipment on deposit and in transit
     1,240,606       -       -       -  
Computer equipment
     343,633       252,714       39,448       (13,357 )
Transportation equipment and other fixed assets
     1,556,915       616,897       414,596       (165,542 )
Operating materials
     63,895                       (1,574 )
Land
     354,601       -       1,833,015       (145 )
Total
   $ 45,198,653     $ 21,868,192     $ 9,375,123     $ (1,064,204 )

Summary of property, plant and equipment as of December 31, 2009:
 
Type of asset
  
Adjusted cost
    
Accumulated
depreciation
    
Revaluations
    
Allowances
  
                         
Plants and equipment
   $ 13,438,144     $ 9,410,022     $ 3,506,575     $ (347,839 )
Pipelines, networks and lines
     13,171,399       9,373,243       787,908       (71,262 )
Construction in progress
     6,487,411       -       -       -  
Buildings
     2,184,484       966,755       777,504       (67,442 )
Equipment on deposit and in transit
     1,221,822       -       -       -  
Computer equipment
     313,892       239,540       30,425       (5,636 )
Transportation equipment and other fixed assets
     389,727       237,061       96,802       (7,996 )
Land
     302,420       -       162,760       -  
Total
   $ 37,509,299     $ 20,226,621     $ 5,361,974     $ (500,175 )

There are no restrictions, pledges or bonds over these assets.

10.
Natural and Environmental Resources, Net

   
2010
    
2009
  
Amortizable crude oil investments
   $ 20,245,470     $ 16,574,494  
Less: Accumulated amortization
     (10,574,904 )     (8,756,267 )
      9,670,566       7,818,227  
Plugging and abandonment, dismantling of facilities and environmental recovery costs
     3,074,552       2,942,370  
Less: Accumulated amortization
     (1,443,451 )     (1,247,047 )
      1,631,101       1,695,323  
Reservoirs and appraisals (1)
     701,590       701,590  
Less: Accumulated depletion
     (612,310 )     (598,330 )
      89,280       103,260  
Exploration in progress
     383,592       1,538,571  
Total (2)
   $ 11,774,539     $ 11,155,381  

(1)
These reserves were received from the reversals of concession contracts for $520,218 currently administered by Gerencia Sur and $181,372 by Magdalena Medio respectively.
 
(2)
The variance is affected by the developed reserves updated as of 2010 by recalculating the amortization of oil investments and abandonment costs, particularly in Rubiales, Cusiana, Guatiquía, Castilla, Petrólea and Pauto.
 
 
F-31
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

11.
Deferred Charges

   
2010
    
2009
  
Deferred income tax
   $ 1,492,942     $ 1,408,659  
Other deferred charges, net (1)
     497,826       419,342  
Charges of deferred monetary correction, net
     49,372       58,528  
    $ 2,040,140     $ 1,886,529  

(1)
Includes the investments made in execution of the Business Cooperation Contract entered into by Ecopetrol and Schlumberger, the purpose of which is to obtain incremental production in the Casabe field; such investments are amortized based on the field's technical production units.
 
12.
Other Assets

   
2010
    
2009
  
Goodwill (1)
   $ 2,508,402     $ 2,507,552  
Deposits held in trust
     294,899       258,745  
Intangibles: Trademarks, licenses, patents, software
     129,610       96,027  
Trust funds (2)
     80,490       83,342  
National Royalties Fund (3)
     79,653       76,185  
Other assets  (4)
     58,552       12,847  
    $ 3,151,606     $ 3,034,698  
(1)
Goodwill corresponds to Ecopetrol S.A. and is comprised by:
 
 
i)
$582,280 (2009 - $621,099) to the net amount between goodwill paid and the monthly amortization as of December 31, 2010 of $103,335 (2009 - $64,516), relating to the acquisition of Andean Chemicals Ltd and Polipropileno del Caribe S. A., with an estimated amortization term of 17 years and 8 months determined based on the net present value of the investment reduced by the amount of the estimated future cash flows from the time of acquisition.
 
 
ii)
$711,667 (2009 - $773,492) to the purchase of Offshore International Group, which is subject to the adjustments that may arise to the purchase price, with an  estimated term for amortization of 14 years, determined based of the valuation of the reserves in block Z2B, the only block from the time of acquisition.
 
 
At December 31, 2010, the amount payable for $284,583 (equivalent to US$148.7 million) estimated for the contractually established adjustments in the purchase price based on the WTI crude oil average price, recognized as the greater value of the goodwill.
 
 
Amortization accumulated as of December 31, 2010, amounts to $76,376 (2009 - $48,502).
 
As a result of the commercial credit analysis conducted by Offshore International Group Inc. as of December 31, 2010, Ecopetrol recorded, with charge to results, $287.7 billion as goodwill impairment.
 
 
  iii)
$471,449 (2009 - $507,255) generated as a result of the purchase of IPL Enterprises (now Ecopetrol Transportation Company) with an estimated term for amortization of 15 years determined based on Ocensa’s outstanding contractual agreements as of the date of the negotiation. The cumulative amortization as of December 31, 2010 amounts to $65,645 (2009 - $29,839).
 
 
  iv)
$743,006 (2009 - $605,706) corresponding to the acquisition of Hocol Petroleum Limited with an estimated term for amortization of 16 years determined based on the net present value of the estimated future cash flows from the time of acquisition
 
 
As of December 31, 2010,  the contractually established adjustments in the purchase price based on the WTI crude oil average price and on the exploratory results of the Huron well, for $176,590, were recognized as the greater value of the goodwill.
 
The amortization accumulated as of December 31, 2010 amounts to $62,039 (2009 - $22,750)
 
(2)
Includes (i) Contributions and share in amount of $66,853 into the National Hydrocarbons Fund created to support future hydrocarbon investment, exploration and production contracts in minor fields, projects managed by the private equity fund of  Hydrocarbons of Colombia, (ii) Contributions of $4,099 to the Procuraduria Fund created for general benefit projects in municipalities near the Cicuco field under the Company’s direct operation: Cicuco, Mompox and Talaigua Nueva (the objective of the fund is to disburse the amounts according to each project development, which will be carried out by the municipalities through agreements with Incoder and the Ministry of Environment) and (iii) Contributions of $9,538 to the Colpet, Condor and Sagoc Fund for possible contingencies in the liquidation of these former subsidiaries.
 
 
F-32
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

(3)
Corresponds to the FAEP deposits to the National Royalties Fund in favor of Ecopetrol. Its sole purpose is the payment of debts and financing for development projects and programs in hydrocarbon producing and non-producing municipalities and departments. Ecopetrol disburses amounts after the Ministry of Finance issues the corresponding approvals.
 
(4)
Includes restricted funds in amount of $37,304 (2009 - $11,815) mainly represented by legal deposits destined to attend labor, civil and tax claims.
 
13.
Financial Obligations

Financial obligations at December 31, 2010 are composed of:
 
   
2010
    
2009
  
Short-term
            
Foreign currency debt
   $ 226,726     $ 101,968  
Issued bonds
     133,285       -  
Local currency debt (1)
     719,158       335,113  
Total Short-term
     1,079,169       437,081  
Long-term
                
Local currency debt (1)
     3,962,745       2,648,009  
Issued bonds (3)
     1,000,000       3,052,500  
Foreign currency debt(2)
     2,870,970       13,845  
Total Long-term
     7,833,715       5,714,354  
Total
   $ 8,912,884     $ 6,151,435  

(1)
Includes mainly the syndicated loan with eleven local banks for an initial amount of $2,220,200, destined to finance investment programs of Ecopetrol S. A. The conditions applicable to this loan are the following:
 
Term: 7 years, including a 2 year grace period.
Payment of interest: Starting November 2009
Rate: DTF + 4% (anticipated quarterly rate)
Amortization: Every six months
Guarantee: Ecopetrol granted a closed security over the stock shares owned either directly or indirectly on the following companies, thus reaching a 120% coverage of the credit amount. The value of the stock shares for each entity is as follows:

Company
  
Amount
  
Oleoducto Central S.A.
   $ 1,110,035  
Refinería de Cartagena S.A.
     1,274,796  
Polipropileno del Caribe S.A.
     279,409  
Total
   $ 2,664,240  

The only debt covenant, which requires that the book value of the stock shares be greater than $2,220,200, was met.

(2)
On July 23, 2009, the Company issued pursuant to Rule 144A/Regulation S US$ 1.5 billion, of 7.625% unsecured and unsubordinated notes,  due in 2019 with registration rights. The notes were later registered and listed on the New York Stock Exchange with the Securities and Exchange Commission of the United States.
 
The terms of the notes are follows:

Coupon interest rate: 7.625%
Make whole on optional redemption: 50 basis point over equivalent U.S. Treasury Securities. Interest payment dates: July 23 and January 23 of each year, starting January 23, 2010.  Maturity date: July 23, 2019
Denomination: US$1,000 / US$1,000

 
F-33
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Likewise, the company is obliged to comply will covenants among which are the due and timely payment of principal and interests; the restriction on the creation of collateral guaranties by part of Ecopetrol and its subsidiaries with the exception of certain collateral guaranties duly authorized, and the obligation for presenting a purchase offer for the bonds in the event of a repurchase situation due to change of control, pursuant to the definitions of the issue documents.

(3)
Through Resolution No. 3150 of October 20, 2010, Ecopetrol S. A. was authorized by the Ministry of Finance and Public Credit to issue, subscribe and place internal government debt bonds for up to one billion pesos, aimed at financing the Investment Plan of Ecopetrol in 2010.  Subsequently, through Resolution No. 2176 of November 11, 2010, the Company obtained authorization from the Superintendency of Finance to register its internal government debt bonds with the National Register of Securities and Issuing Agencies and to place its public offering.
 
Results of the issuing and placing of internal government debt bonds:

Placed sum : 1 billion pesos
Amortization: upon maturity
Date of issue: December 1, 2010
 
Series A: Bonds in pesos with a CPI-based variable rate
   
Redemption Term
  
5 years
    
7 years
    
10 years
    
30 years
  
Rate
  
IPC + 2.80
 %   
IPC + 3.30
 %   
IPC + 3.94
 %   
IPC + 4.90
 % 
Sum (millions)
   $ 97,100     $ 138,700     $ 479,900     $ 284,300  

14.
Accounts Payable and Transactions with Related Parties

Short-term
  
2010
    
2009
  
Suppliers
   $ 1,762,461     $ 1,207,724  
Advances from Partners
     713,405       555,620  
Purchase of hydrocarbons from the Agencia Nacional de Hidrocarburos-ANH
     554,381       441,533  
Deposits received from third parties
     521,781       817,937  
Other payables
     442,115       109,952  
Reimbursement of exploratory costs
     65,028       141,775  
Dividends payable (1)
     3,431       3,510  
Insurance and reinsurance payable
     -       2,181  
Total Short-term
   $ 4,062,602     $ 3,280,232  
Long-term
                
Other payable (2)
     504,046       51,154  
Total Long-term
   $ 504,046     $ 51,154  

(1)
Corresponds to dividends payable to shareholders whose installment payment for the purchase of their stock are in arrears and whose economic and political rights have been suspended, pursuant to Article 397 of the Commercial Code, and will be restored once the installment payments are brought up to date.
 
(2)
Corresponds to Fiduciary Duty for ODL Finance in order to complete the funds required to leverage expansion projects.
 
15.
Taxes Payable

   
 
    
 
  
   
2010
    
2009
  
Income tax and other taxes
   $ 3,175,500     $ 1,940,756  
Income and VAT withholdings
     197,294       194,217  
Special tax and surcharge on gasoline (1)
     110,128       124,667  
Sales tax payable
     47,418       49,675  
Industry and commerce and other minor taxes
     58,923       123,707  
Total
   $ 3,589,263     $ 2,433,022  

(1)
This tax is levied on sales and/or consumption of regular and premium gasoline and diesel. The funds collected for this tax are paid to the National Treasury Office of the Ministry of Finance and/or regional entities. The special tax is paid on the basis of the percentage participation of each beneficiary in the national monthly consumption of regular and premium gasoline.
 
 
F-34
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Income tax provision
 
   
2010
    
2009
    
2008
  
Current income tax
   $ 3,201,041     $ 1,948,819     $ 3,611,020  
Deferred tax:
                        
Asset
     (100,899 )     (69,230 )     494,757  
Liability
     138,508       234,440       276,205  
    $ 37,609     $ 165,210     $ 770,962  
    $ 3,238,650     $ 2,114,029     $ 4,381,982  

The deferred tax asset arises mainly from timing differences between the accounting balances and the amounts accepted for tax purposes.  The deferred tax asset is calculated based on the value of accounting provisions not accepted for tax purposes which are deductible at the time of their utilization, and the value of asset inflation adjustments originated from 2004 to 2006.  The deferred tax liability results from the differences in the policy for amortization of crude oil investments which for accounting purposes are amortized by technical units of production whereas for tax purposes are amortized through the straight-line method; from the difference in the method of valuation of fixed income investment, which for accounting purposes are valued at the market price, while for tax purposes are valued by the straight-line method; and from the difference in the amortized value of the goodwill  that for tax purposes was accelerated in 2010.
 
Income tax returns may be reviewed by the tax authorities within two years of their filing date. At this date, the terms of filings for the years  2008 and 2009 are open for review.
 
Currently, differences exist with the National Tax and Customs Administration (DIAN) regarding the calculation and payment method of the first installment of the 2004 income tax returns because in the opinion of the DIAN the surtax of such years should have been included in the base. The result of this proceeding will not affect the Company’s cash flow since the amounts under discussion have been directly compensated by the DIAN by positively adjusting the Company’s balances with adjustments the Company had previously requested in unrelated cases.
 
The balance of the deferred tax asset and liability is as follows:
 
   
2010
    
2009
  
Deferred tax asset:
            
Initial balance
   $ 1,408,659     $ 1,285,648  
Additions (*)
     88,417       69,230  
Incorporated subsidiaries balance
     -       53,781  
Final balance
   $ 1,497,076     $ 1,408,659  
Deferred tax liability:
                
Initial balance
   $ 1,194,848     $ 944,816  
Additions (*)
     138,508       234,438  
Incorporated subsidiaries balance
     -       15,594  
Final balance
   $ 1,333,356     $ 1,194,848  

(*) The difference between the increase noted for 2010 for deferred tax assets and the value recorded in the income statement as deferred tax expense (income), is due to a correction recorded by Ecopetrol del Peru for an error detected in the previous year income tax adjustments.
 
The reconciliation between the accounting income and the net taxable income which is the basis for the income tax is shown below for illustrative purposes since Colombian regulations do not either require or allow filing an income tax return on a consolidated basis:

 
F-35
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
   
2010
    
2009
    
2008
  
Income before income taxes
   $ 11,492,617     $ 7,250,844     $ 16,011,204  
Monetary correction gain
     (1,921 )     (3,471 )     25,300  
Effect of tax inflation adjustment
     (99,527 )     108,615       (87,788 )
Non deductible costs and expenses
     2,184,555       1,256,081       813,248  
Special deductions and deductible tax expenses
     (3,796,230 )     (3,291,472 )     (2,837,230 )
Other taxable income
     158,949       182,199       1,085,307  
Income not constituting income or capital gains
     (160,600 )     (126,460 )     (907,847 )
Non taxable income
     (1,037,204 )     (727,029 )     (1,185,857 )
Non deductible provisions
     681,644       574,403       243,623  
Income pension trusts
     (96,695 )     -       -  
Non taxable trust funds yields
     1,001,082       (250,265 )     (890,538 )
Net exempt income
     (199,949 )     (29,540 )     (1,372,083 )
Excess of presumptive over ordinary income
     65,578       403,226       -  
Net effect of consolidation of  taxable income
     (814,687 )     (443,949 )     75,269  
Net taxable income
   $ 9,377,612     $ 4,932,722     $ 10,972,608  
Net current income tax
   $ 3,201,041     $ 1,948,819     $ 3,611,020  

The 2010 effective consolidated tax rate was 28.2% (2009 – 29.2%).  The difference between net taxable income and accounting income is mostly affected by the benefit from special deductions on investment in real productive fixed assets, which is equivalent to 30% of the actual investment made during the fiscal year (40% up to 2009).  It is important to clarify that if such assets are transferred or no longer used in the income producing activity prior to the maturity of their use lives, it shall be mandatory for the Company to reimburse the proportional value of the deduction requested in the income tax return, in the respective year of occurrence of such event.
 
As of 2004, income tax payers performing transactions with foreign related or associated parties and / or residents in countries considered tax havens, shall be obliged, for income tax purposes, to determine their ordinary and extraordinary revenues, their costs and deductions, and their assets and liabilities considering for these transactions the market prices and profit margins.  
 
Based on the opinion of the external advisors of the Company, no significant changes are foreseen for taxable year 2010 regarding compliance with the full free competition principle stated in Article  260-1 of the Tax Statute, neither adjustments are expected for the determination of the Company's income tax expense in such year.   
 
16.
Labor Obligations

   
2010
    
2009
  
Short-term
            
Vacations
   $ 63,217     $ 47,061  
Bonuses and allowances(1)
     26,487       57,022  
Severance
     39,828       42,598  
Salaries and pensions payable
     24,712       13,078  
Interest on severance
     3,884       3,347  
Others
     2,119       2,357  
Total short-term
     160,247       165,463  
Long-term
                
Health and education actuarial liabilities (2)
     2,729,318       2,583,117  
Retirement pensions joint operations
     76,725       77,826  
Others
     7,978       8,388  
Total Long-term
     2,814,021       2,669,331  
Total
   $ 2,974,268     $ 2,834,794  
(1)
The reduction effect in some fringe benefits is derived from payment of the termination benefits to 685 active employees who retired in 2010, using the $4.5 billion retirement bonus provision.  The 2009 balance included a $30 billion provision for payment of the variable compensation bonus to employees in 2010. At December 31, 2010, this provision was not recorded, as the targets to obtain the benefit were not met.
 
 
F-36
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
(2)
The health and education actuarial calculations were based on the new Mortality Tables replaced in 2010.  As a result of the change in the amortization accounting principle, the increase in the health actuarial obligation calculation amounted to $806,807, which will be amortized over 5 years as of 2010.  Up to 2009, the annual increase was recorded as period expense as the actuarial calculation was 100%  amortized.  The education actuarial liability is 100% amortized and its reduction in 2010 was recorded as income for the period.
 
The amortized health actuarial liability is indicated below:
 
 
Item
  
2010
    
2009
  
 
Health obligation actuarial calculation
   $ 2,884,559     $ 2,077,752  
 
Less – Actuarial calculation pending amortization
     (645,445 )     -  
 
Amortized actuarial liabilities
   $ 2,239,114     $ 2,077,752  

The health and education actuarial calculations were prepared using a 4.8% technical interest rate.  The variations in the amortized actuarial liability are described below:
 
   
2010
    
2009
    
Variation
  
Health
                  
Active personnel
   $ 302,553     $ 287,909     $ 14,644  
Pensioned retirees
     1,936,560       1,789,843       146,717  
Education
                        
Active personnel
     104,606       104,951       (345 )
Pensioned retirees
     385,599       400,414       (14,815 )
Totals
   $ 2,729,318     $ 2,583,117     $ 146,201  

A summary of personnel covered by the actuarial calculation for 2010 and 2009 is set below:
 
   
Headcount
  
   
2010
    
2009
  
Health care and education reserve (active and pensioned retirees)
   $ 18,337     $ 17,901  

17.
Estimated Liabilities and Provisions

   
2010
    
2009
  
Short-term
            
Provision for legal proceedings (1) (See Note 30)
   $ 663,932     $ 680,022  
Other provisions
     206,179       192,631  
Provision for pension obligations (2)
     102,478       180,797  
Provisions for contingencies (3)
     39,602       96,859  
Provision for abandonment costs (4)
     139,106       4,106  
Short-term Total
   $ 1,151,297     $ 1,154,415  
Long- term
                
Provision for abandonment, dismantling of facilities and environmental recovery costs (4)
     2,995,281       3,013,097  
Provision for royalties (5)
     391,021       380,933  
Other provisions
     12,301       17,947  
Long-term Total
     3,398,603       3,411,977  
Total
   $ 4,549,900     $ 4,566,392  
(1)
The movement of the provisions for legal proceedings is the following during the years 2009 and 2010 :
 
       
  
Number of cases
    
Provisions amount
  
Initial balance as of December 2008
     603     $ 547,942  
Additions (new provision)
     252       36,714  
Adjustments to existing provisions
     (135 )     122,691  
Recoveries
     (29 )     (27,325 )
Initial balance as of December 2009
     691       680,022  
Additions (new provisions)
     235       63,020  
Adjustments to existing provisions
     -       19,320  
Reincorporation for transfer of processes
     76       43,548  
Finished processes
     (141 )     (80,237 )
Transfer of processes
     (39 )     (61,741 )
Ending balance as of December 2010
     822     $ 663,932  
 
 
F-37
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

(2)
Corresponds to the estimated pending pension contributions of employees who joined Ecopetrol after January 29, 2003 (Law 797 of 2003) and until the first quarter of 2004, who were covered by the General Pension Regulations. In addition the provision for the contingency of losing legal actions for the protection of labor related rights.
 
(3)
It is comprised by $22,973 for probable payment claims from PDVSA for the cleaning and decontamination tasks at Maracaibo lake in Venezuela ; $14,850, related to spillages with environmental impact; $500 related to the retirement bonus for Hocol S.A. personnel, still in process; $560 related to the success commission payable to the attorney in law attending the suit filed by Industrias Crizasa against Ecopetrol S. A., and $719 related to potential liabilities in arbitration decisions.
 
(4)
The Production Vice-Presidency of Ecopetrol carried out the update to June 2010 of the estimated costs of abandonment, dismantling of facilities and environmental recovery. Variation in regard to December 2009 for $160,454  includes the effect from foreign currency exchange in the amount of $818; and the use of liabilities related to the abandonment of wells in the amount of $32,131. Within these, the most representative fields are: Casabe $9,966; Tibú $5,944, Lisama $3,525 and Cusiana $3,237.
 
Below are the movements of the provisions for the abandonment cost, facility dismantling, and environmental recovery costs; the balance is shared by Ecopetrol S.A $3,068 billion, Hocol $52 billion, and Ecopetrol America Inc. $14 billion for the years 2010, 2009 and 2008:
 
   
2010
    
2009
    
2008
  
Initial Balance
   $ 3,017,203     $ 1,964,756     $ 1,528,374  
Retirements and other
     (27,414 )     (21,964 )     (2,853 )
Additions
     282,229       1,188,670       54,418  
Changes in estimation
     -       80,243       208,131  
Transfer to short term
     (136,151 )     -       -  
Exchange rate effect
     (1,480 )     (194,502 )     176,686  
Final Balance
   $ 3,134,387     $ 3,017,203     $ 1,964,756  

* For 2010, the policy for recording liabilities related to abandonment costs, which was made in dollars, was changed to recognition in Colombian pesos, since most of the scheduled payments (above 70%) are in pesos.  Had the dollar recording process continued, the “estimated” effect of the exchange difference for 2010 would have been a reduction of $186.9 billion (representing 6%, of total estimated liabilities) and $27 billion in results as an effect of less amortization, which represents 14.5% of total amortized abandonment costs and 0.3% of net income.

(5)
Includes the provision to cover the claim from the Community of Santiago de las Atalayas and Pueblo Viejo of Cusiana, originated in Royalties Contracts N. 15, 15ª and 16 and 16ª executed with Ecopetrol, but declared null and void by the Council of State. From said amount, $90,752 corresponds to the amount initially recognized by Ecopetrol, together with the valuation of the fund where the amounts are invested and $300,269 of interest generated. The ruling on the extraordinary appeal presented by the Community is pending.
 
18.
Other Long-Term Liabilities

   
2010
    
2009
  
Deferred income tax liability
   $ 1,333,356     $ 1,194,848  
Advances received from Ecogas for BOMT obligations
     799,950       996,787  
Credit for deferred monetary correction
     169,048       200,230  
Other liabilities (1)
     59,907       339,355  
Total
   $ 2,362,261     $ 2,731,220  
 
(1)
Includes $42,118 from Hocol for remittance tax.
 
 
F-38
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

19.
Non-Controlling Interest

   
2010
    
2009
    
% of other shareholders 2010
  
Oleoducto Central S.A.
   $ 232,244     $ 684,054       40  
ODL Finance S.A.
     153,810       147,621       35  
Oleoducto de Colombia
     95,856       97,940       34.43  
Bioenergy S.A.
     11,550       11,696       11.4  
Oleoducto Bicentenario S.A.S
     (7,509 )     -       44  
Total
   $ 485,951     $ 941,311          

20.
Equity

   
2010
    
2009
  
Authorized capital
   $ 15,000,000     $ 15,000,000  
Capital to be subscribed
     (4,881,872 )     (4,881,872 )
Subscribed Capital
     10,118,128       10,118,128  
Subscribed capital pending payment
     -       (337 )
Subscribed and paid-in capital
     10,118,128       10,117,791  
Additional paid-in capital
     4,721,700       4,721,457  
Additional paid-in capital receivable
     (1,192 )     (1,137 )
Additional paid-in capital
     4,720,508       4,720,320  
Surplus from revaluations
     11,068,676       6,391,417  
Devaluation of assets
     (701,694 )     (298,024 )
Responsibilities from pending rulings
     (781 )     (781 )
Effects of RCP application
     (702,475 )     (298,805 )
Net income
     8,146,471       5,132,054  
Legal reserve
     4,117,020       3,591,397  
Appropriation for investment programs
     2,615,718       1,568,107  
Accounting clearance
     17,804       17,804  
Surplus from equity method
     1,377,240       1,287,118  
Incorporated institutional equity
     139,548       137,725  
Foreign exchange conversion adjustment
     (290,457 )     (94,971 )
Total equity
   $ 41,328,181     $ 32,569,957  

Subscribed and Paid-in-Capital
The authorized capital of Ecopetrol is $15,000,000 divided into 60,000,000,000 common shares, with $250 par value each, of which 40,472,512,588 shares have been subscribed, represented by 10.1% held by private shareholders and 89.9% held in Colombia. The value of shares under reserve amounts to $4,881,872, represented by 19,527,487,412 common shares.
 
Additional paid-in capital
Additional paid-in capital corresponds to (i) the excess over par value in the sale of shares during the 2007 initial public offering for $4,700,882 and (ii) to the value resulting in the new shares offering for the secondary market equal to $20,817 which resulted from foreclosing of guarantees of delinquent debtors pursuant to Article 397 of the Commerce Code.
 
Effects of RCP application
Corresponds to the transfer of negative balances originated from the devaluation of property, plant and equipment required by RCP since 2008.

This line-item also includes responsibilities from pending rulings related to inventory losses, as required by RCP.

 
F-39
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Legal Reserve
The legal reserve is set up with 10% of net income and it may be used to absorb losses or to be distributed at the liquidation of the Company.
 
The Company’s 2009 financial results were available at the General Shareholders’ Meeting which took place on March 25, 2010. The Company’s Shareholders decided to increase the legal reserve by $525,624 to $4,117,020.
 
The reserves also include $609,334 in occasional reserves for new explorations and $438,276 in reserves for profits not realized from Ecopetrol’s subsidiaries.
 
Incorporated Institutional Equity
Incorporated Institutional Equity corresponds primarily to the commerciality of Nare, Matambo, Garcero, Corocora, Estero, Caracara, for the Sardinas 6, Remache Norte 3, Abejas 3, Jaguar T5 and T6, Orocué, Guarilaque 7 wells,  Campo Rico for the  Candalay,  Jordan 5, Remache Norte 2 and 5, Abejas 2  and Vigia Wells, and the incorporation of the Cocorná material warehouse.
 
21.
Memorandum Accounts

   
2010
    
2009
  
Debtor / Rights
            
Exploitation Rights - Decree 727 of 2007 (1)
   $ 72,619,793     $ 46,503,863  
Other contingent rights and debtor accounts (2)
     15,562,589       11,480,671  
Costs and expenses (deductible and non-deductible)
     14,027,907       14,736,354  
Pension Trust funds (3)
     11,202,556       10,971,723  
Securities given in custody and guarantee
     4,290,149       3,045,181  
Execution of investment projects
     751,827       780,040  
Legal proceedings
     584,774       441,675  
Total
     119,039,595       87,959,507  
Creditor / Obligations
                
Legal proceedings
     32,228,241       2,283,219  
Goods received in custody (4)
     17,981,352       7,949,960  
Contractual guarantees (5)
     14,864,210       12,420,129  
Pension trust funds
     10,861,969       10,899,026  
Non-tax liabilities
     6,817,853       5,205,671  
Other contingent obligations  (6)
     7,096,874       3,403,368  
Potential obligation – pension liabilities (7)
     1,603,998       -  
Non-taxable income
     1,555,073       5,826,947  
Mandate contracts (8)
     1,433,804       1,460,073  
Assets and rights received in guarantee (9)
     1,220,162       -  
Administration Funds - Dec 1939 of 2001 and 2652 of 2002
     964,872       972,641  
Future BOMT payments
     352,615       504,288  
Total
     96,981,023       50,925,322  
    $ 216,020,618     $ 138,884,829  
 
(1)
This value corresponds to Ecopetrol´s exploration and production rights, recognized in accordance with Decree 727 of 2007, valued as of December 31, 2010 and 2009 based on the volumes of the audited reserves study and applying the average price determined in accordance with the SEC methodology.
 
(2)
Balance of the tax memorandum accounts groups the differences between the values of both equity and results accounts taken from the tax return for 2009 and the accounting balances. Differences correspond to concepts such as revaluations and provisions not accepted by tax regulations, the difference in the method for amortization of crude oil investments which for accounting purposes is made by production units and for tax purposes by the straight-line method, and the effect of the generated inflation adjustment, among others.
 
(3)
Reflects the contingent right (debt account) for resources allocated to the Pension Autonomous Equity, for payment of the commuted pension liability, in order to control the existence of liquid resources in the autonomous equity.  The commuted value (transferred) as of December 31, 2010, amounts to $11,202,556 (on commuting date at December 31, 2008 - $10,092,528), corresponds to the pension liability by pension monthly payments, parties installments and pension bonuses; health and education related items are within the pension liability of Ecopetrol.  The destination of commuted resources, as well as their yield, cannot be changed, nor  returned to the Company before complying in full with all pension liabilities.
 
 
F-40
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

A detail of the trust funds is set forth below:

   
2010
    
2009
  
Consorcio Fiducafé - Fiduprevisora - Fidupetrol
   $ 2,349,054     $ 2,299,552  
Consorcio Fiducolombia - Santander Investment
     2,206,364       1,622,860  
Consorcio Fidupopular - Fiduoccidente
     2,061,664       2,032,621  
Consorcio BBVA - Fidubogotá - Corficolombiana
     1,929,035       1,331,711  
Consorcio Fidubogotá - Fiducolpatria
     1,328,292       2,378,039  
Consorcio Fiduagraria - Fiducoldex - Helm Trust
     1,328,147       1,306,940  
Total
   $ 11,202,556     $ 10,971,723  

(4)
Comprises royalties corresponding to the balance of Ecopetrol reserves of $17,912 billion, calculated at SEC prices.  In addition, the balance is represented by the inventory of products sold, the delivery of which is pending, in the amount of $68.3 billion, and inventory of materials on consignment for own consumption at the various plants, in the amount of $293.
 
On March 7, 2007, Decree 727 to replace Decree 2625 of 2000 was issued, which includes regulations related to the valuation of reserves and the posting of State owned hydrocarbon reserves in the Financial Statements of the Company.  Furthermore, the decree stipulates the posting of hydrocarbon exploration or production rights owned.  This is posted under Memorandum Accounts pursuant to the opinion given by the CGN; nonetheless, the Memorandum Accounts are not part of the Company’s Balance Sheet.
 
(5)
Comprises contracts ending execution and entered into in pesos, dollars and Euros, updated to the market representative rate as of December 31, 2010 for $14,223,368; stand-by letters of credit, which guarantee the contracts subscribed to by Ecopetrol in the amount of $433,469, and documentary letters for $203,890.
 
(6)
Includes mainly the closed pledge for $2,664,240 on the shares owned by Ecopetrol S.A., directly or indirectly, in Oleoducto Central, Refinería de Cartagena S. A. and Polipropileno del Caribe S. A., guaranteeing 120% of the amount of the syndicated loan granted by the local banks. (See Note 14).
 
(7)
Comprises the actuarial calculation value of monthly pension payments, pension quotas, parts and bonuses as of December 31, 2009, plus the amortized portion of the increase in the 2010 actuarial calculation.  As a result of the change in the amortization accounting principle under Colombian GAAP in 2010, the $2,004 billion increase of the actuarial calculation will be amortized over 5 years as of 2010.
 
The balance of the amortized actuarial liability is comprised as follows:

 
Item
  
2010
    
2009
  
 
Actuarial calculation of monthly pension payments and bonuses
   $ 12,465,967     $ 10,899,026  
 
Less – Actuarial calculation pending amortization
     (1,603,998 )     -  
 
Amortized actuarial liabilities
   $ 10,861,969     $ 10,899,026  

The balance of pension autonomous equity funds as of December 31, 2010 exceeds the total amortized actuarial calculation as of December 31, 2010 by $340,587. Therefore, the Company did not record costs for monthly pension payments and bonuses, neither was it necessary to make additional fund transfers during 2010.
 
The balance of pension autonomous equity, the value of the actuarial calculation and the amortized value of pension liability by monthly payment is included in memorandum accounts.
 
The actuarial calculation was prepared using a 4% technical interest rate.  The growth of salaries, pensions in cash and pensions in kind was calculated using the inflation average rate calculated by DANE, the National Statistics Administrative Department, during the three-year period preceding the year of calculation.
 
Breakdown of personnel covered in the actuarial calculation updated as of December 31, 2010:
 
 
Item
  
Number of people
  
 
Bonus reserve – retired personnel
     9,845  
 
Bonus reserve – personnel to be retired after 2010
     2,967  
 
Pension reserve  (active and retirees)
     13,357  
 
 
F-41
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

 (1)
Includes the value of assets received in custody from Refinería de Cartagena S. A., to fulfill obligations acquired by virtue of the mandate agreement subscribed to between the Company and this corporation for the operation of the refinery.
 
(2)
Corresponds to the guarantees given by BP Exploration Company resulting from the purchase transaction with this company in August 2010 for US$ 637.5 million.
 
22.
Revenue

   
2010
    
2009
    
2008
  
Local sales
                  
Medium distillates
   $ 7,099,176     $ 5,738,586     $ 5,914,627  
Gasoline
     4,302,282       4,374,781       3,644,345  
Services
     1,947,829       1,113,075       921,652  
Other products
     1,763,927       833,067       1,367,766  
Natural gas
     1,159,245       1,000,517       901,414  
LPG and propane
     627,361       469,551       612,771  
Asphalts
     326,737       314,230       390,544  
Crude Oils
     117,186       18,194       4,774,401  
      17,343,743       13,862,001       18,527,520  
Recognition of price differential  (1)
     740,682       196,533       3,070,479  
      18,084,425       14,058,534       21,597,999  
Foreign sales
                        
Crude oil
     18,073,357       11,815,512       8,696,282  
Fuel Oil
     2,377,266       2,325,507       2,093,012  
Diesel
     1,638,044       551,263       246,158  
Other products
     831,129       642,877       747,650  
Gasoline
     698,068       687,206       186,197  
Natural gas
     146,063       311,734       313,348  
Propylene
     109,271       -       -  
      23,873,198       16,334,099       12,282,647  
Premium income, net
     10,688       11,757       16,023  
      23,883,886       16,345,856       12,298,670  
    $ 41,968,311     $ 30,404,390     $ 33,896,669  

(1)
Corresponds to Decree 4839 applied beginning in December 2008 which determines the price differential (value generated between the parity price and the regulated price, which may either be negative or positive).
 
23.
Cost of Sales

   
2010
    
2009
    
2008
  
Variable Cost
                  
Purchase of hydrocarbons from the ANH (1)
   $ 5,500,921     $ 4,358,408     $ 5,584,474  
Imported products
     5,680,601       2,739,681       3,470,987  
Purchase of crude oil in association and concession
     4,548,193       4,130,116       3,193,690  
Amortization and depletion
     2,245,613       1,474,918       1,087,583  
Transportation services for hydrocarbon
     540,555       637,029       581,945  
Purchase of natural gas and other products
     316,192       57,335       230,977  
Electrical power
     205,102       156,405       112,355  
Materials in process
     146,941       180,602       113,427  
Initial and final inventory
     (251,431 )     (55,042 )     (239,033 )
Insurance premium cost, net
     2,825       554       1,898  
Depreciation by production units
     55,473       48,834       -  
Adjustment in volumes and other assignments
     (377,307 )     (334,658 )     (132,040 )
      18,613,678       13,394,182       14,006,263  
Fixed Cost
                        
Services contracted with associations
     1,469,586       1,290,177       1,188,294  
Maintenance
     1,384,088       1,274,618       831,553  
Labor costs
     1,084,149       918,188       751,826  
Depreciation
     1,548,797       1,239,846       670,279  
Contracted services
     482,728       451,165       294,351  
Project expenses not capitalized
     413,692       524,441       571,941  
Materials and operations supplies
     345,326       302,534       266,134  
Taxes
     254,489       326,767       199,175  
Amortization of deferred charges, intangibles and
                        
insurance premiums
     107,422       94,288       73,343  
General costs
     236,604       7,055       23,914  
Amortization of actuarial liability
     18,442       82,812       207,363  
      7,345,323       6,511,891       5,078,173  
    $ 25,959,001     $ 19,906,073     $ 19,084,436  
 
 
F-42
 
 
Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

(1)
Corresponds to the crude oil and natural gas purchases of Ecopetrol from the Agencia Nacional de Hidrocarburos derived from national production, both under the Company’s direct operation and under the operation of third parties.
 
24.
Operating Expenses

   
2010
    
2009
    
2008
  
Administration
                  
Labor
   $ 213,739     $ 281,123     $ 189,757  
Amortization (1)
     209,000       175,032       58,705  
General expenses
     149,772       149,644       65,087  
Taxes
     19,363       9,084       3,046  
Rental and lease cost
     7,986       17,322       10,156  
Maintenance
     2,611       17,361       11,295  
Active personnel amortization of pension actuarial liability
     1,052       12,770       44,055  
      603,523       662,336       382,101  
Selling and Projects
                        
Exploration expenses (2)
     1,465,537       1,099,837       826,615  
Project expenses (3)
     321,580       296,645       86,136  
General expenses
     300,837       166,480       113,024  
Taxes
     155,662       181,109       182,886  
Pipeline transportation
     125,376       141,889       102,862  
Non-compliance gas delivery charges
     85,222       27,851       -  
Labor expenses
     69,490       43,495       26,759  
Maintenance
     1,786       5,336       5,090  
Pipeline transportation
     1,455       -       422,697  
Active personnel amortization of pension actuarial liability
     -       -       6,705  
      2,526,945       1,962,642       1,772,774  
    $ 3,130,468     $ 2,624,978     $ 2,154,875  

(1)
Corresponds to the amortization of goodwill in 2010 adding up to  $172,660, (2009 - $139,909)
 
(2)
The balance for 2010 is mainly due to Ecopetrol’s exploratory activities for $182,311, unsuccessful exploration, and seismic data acquisition and studies for $268,198.  Likewise, as well as Hocol’s seismic acquisition and other projects for $257,227 (including $179,000 in unsuccessful exploration), Ecopetrol Oleo e Gas do Brazil for $214,152 (including unsuccessful exploration in Malbec), Ecopetrol America Inc. for $482,915 (including $380,000 in unsuccessful exploration) and Ecopetrol de Peru $60,734 (including unsuccessful exploration mainly in Runtusapa).
 
The balance for 2009 corresponds to Ecopetrol’s seismic and exploratory activities for $620,982, Ecopetrol Oleo e Gas Do Brazil $138,421, Ecopetrol America Inc. $220,132, Hocol $117,856 and Ecopetrol de Peru $2,446.
 
(3)
Mainly due to non-capitalized expenses of Ecopetrol S.A. projects for $297,825, the most relevant of which are for: $35 (licensing services, consulting, per diem, socialization services and selection processes) Infrastructure $43 (Management, administration and inventory), ICP $67 (Support for investigation and laboratory services), $44 (Integrated management and Naftaductos), $47 (Recovery factor studies and minor fields characterization studies) and $43 (2010 Modernization of Barrancabermeja refinery and leading projects); Hocol $23,755.
 
 
F-43
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

25.
Financial Income, Net

   
2010
    
2009
    
2008
  
Income
                  
Exchange difference gain
   $ 4,265,882     $ 6,517,914     $ 10,863,242  
Interest and monetary correction(1)
     156,336       479,694       682,542  
Equity Method Investment Gain
     83,574       55,143       110,824  
Income on valuation of derivates (2)
     80,445       159,245       4,782  
Income on valuation of investment portfolio
     80,111       168,442       1,640,338  
Dividends in cash
     30,941       31,687       39,472  
Other
     9,202       1,802       -  
      4,706,491       7,413,927       13,341,200  
Expense
                        
Exchange difference loss
     (4,412,224 )     (6,643,557 )     (8,901,184 )
Interest
     (145,910 )     (138,801 )     (19,376 )
Hedging operations (2)
     (99,139 )     (84,492 )     (74,685 )
Other minor
     (10,101 )     (27,806 )     (6,820 )
Equity method loss
     (802 )     -       (185,606 )
Administration and securities issuance
     (526 )     (23,438 )     (52,277 )
      (4,668,702 )     (6,918,094 )     (9,239,948 )
Net
   $ 37,789     $ 495,833     $ 4,101,252  

(1)
In 2010 there were no opportunity cost recognized at Ecopetrol S.A.
(2)
A total of $11,909 in net losses on asphalt hedging were reported for 2010 at Ecopetrol S.A., along with a net refining margin of $9,971, net profit on WTI $389 and others for $1,529.  Similarly, the Cartagena Refinery reported net profit on hedging for $1,268.

26.
Pension Expenses

   
2010
    
2009
    
2008
  
Amortization of pension actuarial calculation (1)
   $ 146,717     $ 407,083     $ 986,565  
Health care services
     171,636       132,322       107,213  
Education services
     59,273       55,752       51,147  
    $ 377,626     $ 595,157     $ 1,144,925  
(1)
The reduction in expenses is derived from the change of the accounting policy for amortization of the health actuarial calculation in accordance with change in Colombian GAAP in 2010.  The reduction in the education actuarial calculation of 2010, resulting from application of the new Mortality Rates of $15,161 was accounted for as income for the year.
 
27.
Inflation Gain

In 2010 the inflation gain corresponds to the net amortization of the deferred monetary correction for $22,030 ($22,335 in 2009) and ($30,473 in 2008).
 
28.
Other Income (Expenses), Net

   
2010
    
2009
    
2008
  
Other income
                  
Recovery of provisions (1)
   $ 365,515     $ 224,565     $ 999,866  
Long-term crude oil testing
     104,970       -       -  
Expense recovery
     99,900       61,972       7,459  
Recovery of exploration costs
     40,336       148,996       -  
Income for services
     28,779       48,878       3,605  
Income from undeveloped discovered fields
     28,097       19,257       1,228  
Income from transferred rights
     19,222       28,116       -  
Income on sale of materials and plant property and equipment
     18,837       3,579       10,435  
Recovery from services to associates
     15,535       14,219       22,840  
Indemnities received
     9,253       16,305       6,367  
Other minor income
     81,716       134,885       23,003  
      812,160       700,772       1,074,803  

 
F-44
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

    2010     2009     2008  
Other expenses
                  
Provisions (2)
     (552,520 )     (462,812 )     (114,035 )
Taxes
     (343,128 )     (352,459 )     (299,673 )
Write off of goodwill (3)
     (287,662 )     -       -  
Gas pipelines availability from Bomt contracts
     (63,947 )     (89,906 )     (95,505 )
Other minor expenses
     (413,532 )     (151,034 )     (26,135 )
Fuel losses
     (140,153 )     (99,771 )     (93,854 )
Inspection quota
     (49,435 )     (26,986 )     (25,811 )
Contributions and donations
     (23,906 )     (40,497 )     (35,293 )
Loss on sale of fixed assets
     (6,295 )     193       (1,399 )
Surveillance and security
     -       (23,026 )     (16,052 )
      (1,880,578 )     (1,246,298 )     (707,757 )
    $ (1,068,418 )   $ (545,526 )   $ 367,046  
(1)
Details of recovery of provisions are as following:
 
   
2010
    
2009
    
2008
  
Legal proceedings
   $ 80,237     $ 83,258     $ 832,788  
Property, plant and equipment
     55,717       17,091       18,813  
Accounts receivable Recovery
     68,772       -       -  
Other recoveries *
     131,308       5,564       139,554  
Products and materials inventories
     29,481       118,652       8,711  
    $ 365,515     $ 224,565     $ 999,866  

* The main recoveries were: Recovery of the allowance for pension liabilities $77,116 million, ruling in favor of the Teca Field proceedings $17,946 million, recovery of the education reserve $15,161 million, allowance for payroll expenses $6,396 million and $5,859 million on the Cocorna Agreement.

(2)
The detail of provisions is as follows:
 
   
2010
    
2009
    
2008
  
Property, plant and equipment
   $ 227,266     $ 127,826     $ -  
Accounts receivable
     169,789       30,734       2,275  
Legal proceedings
     125,888       271,091       59,305  
Products and materials inventories
     9,743       33,161       49,379  
Other provisions
     19,834       -       3,076  
    $ 552,520     $ 462,812     $ 114,035  
(3)
Debit to earnings due to write off of goodwill Offshore International Inc. for $287.7 billion.
 
29.
Contingencies

Ecopetrol has recognized provisions corresponding to reasonable estimates intended to cover future situations deriving from loss contingencies or the occurrence of future events that could affect its financial position and results of operations.
 
The methodology used by the Legal Vice Presidency is based on the credit system of the Nation, which is used by the Ministry of Interior and Justice and includes an analysis of factors such as procedural risk, strength of the claim, proof of the claim, strength of the response, proof of the response, level of jurisprudence and results of first instance decision.
 
A summary of the most significant proceedings with amounts of claims greater than $10,000 for which provisions have been recognized according to the evaluations of the internal and external attorneys of the Company, as of December 31, 2010, is set forth below:
 
 
F-45
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Proceeding
  
Claim
  
Provision Amount
Dec. 2010
  
Provision Amount
Dec 2009
Foncoeco (1)
  
Profit participation fund of the employees and ex-employees of Ecopetrol S.A.
  
143,692
  
139,933
Municipio de Aguazul, Tauramena
  
Class Action. Contributions to the solidarity and redistribution of income fund as a consequence of the generation of electricity, according to the Law 142 of 1994.
  
139,688
  
139,688
Municipio de Arauca
  
Class Action. Contributions to the solidarity and redistribution of income fund as a consequence of the generation of electricity, according to the Law 142 of 1994
  
121,051
  
121,051
Departamento del Tolima
  
Class Action for the recalculation of royalties with 20% specified in Law 141 of 1994.
  
82,287
  
82,287
Consorcio Protécnica Ltda (Winding-up) - Constructora Kepler S. A. De C.V.
  
Time over run in construction said to be Ecopetrol’s fault that altered the economic and financial equilibrium of the contract against the contracting consortium.
  
10,000
  
10,000

As of December 31, 2010, the balance of the provision for legal proceedings amounts to $663,932 (2009 - $680,022).
 
(1)
Advisor report of 2005 calculated in $542,000 the damages owed by Ecopetrol in the Ordinary Civil Action filed by Foncoeco which claims that Ecopetrol must pay principal and interest on the profit participation fund for the employees of the Company which was established by the Board of Directors. It is the opinion of the Company’s management and its legal advisors that there are sufficient arguments to demonstrate that this lawsuit will not proceed, particularly because the basis of the report includes amounts not authorized by the Board of Directors, therefore, at December 2010 closing date a provision in amount of $143,692 was recorded for this proceeding.
 
30.
Commitments

Natural Gas Supply Contracts

In addition to existing contracts, the Company has entered into new natural gas sale or supply contracts with third parties, including Gecelca, Gases del Caribe, Gas Natural S. A. E.S.P., Transportadora de Gas Internacional E.S.P., among others.  As of December 31, 2010, Ecopetrol sold an average 585.96 GBTUD for COP $1,344,231 million (including exports).
 
During the first half of the year, the so called “El Niño” phenomenon caused a high generation of gas thermoelectricity countrywide and, as a consequence, such fuel sales exceeded historic levels. Additionally, pursuant to government provisions, in order to increase thermal generation levels, the Company supplied throughout the first half of 2010 an average of 2.43 KBD of diesel.
 
Options

Hedge description

Hedging operations were performed by means of the acquisition of put options.  By means of this strategy, Ecopetrol S. A. protects itself from price increase risks on the reference index.  In particular, it covers variation in the crude oil price, based on WTI Nymex reference rates.
 
Hedge instruments

Represent positions in Put Options over WTI Nymex.

Put Options

Effective date in 2011
  
Expiration date in 2011
  
Volume
  
Strike Price
    
Call Price
  
January 1
  
December 31
  
2.000.004 Bls.
   US$ 82       3.69  
 
 
F-46
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Swap-Spread

Hedge description
 
A Swap-Spread hedge was performed over the price difference between valuation indexes. Through this derivative portfolio competitive refining margins and discount factors are guaranteed for the Company on crude oil and refined products trading. 
 
Hedge instruments

Swap instruments with long and short positions.
 
Effective date in 
2011
  
Expiration date in 
2011
  
Volume
  
Fixed
spread
  
January 1
  
January 31
  
500.000 Bls.
   US$ 6.2  
January 1
  
January 31
  
100.000 Bls.
   US$ 7.6  
January 1
  
January 31
  
100.000 Bls.
   US$ 8.3  
January 1
  
January 31
  
140.000 Bls.
   US$ 9.0  
January 1
  
January 31
  
500.000 Bls.
   US$ 6.1  
January 1
  
January 31
  
100.000 Bls.
   US$ 9.0  

Earn outs in acquired companies

As part of the Company’s acquisition of Hocol Petroleum Ltd. and Offshore International Group (OIG), the Company took over future commitments, called “earn outs”, which must be recognized by the buyer to the seller, depending on the behavior of variables such as the crude oil price and the reserves.
 
Hocol Petroleum Ltd.

1.
An additional amount might have to be paid in January 2011 depending on the behavior of the crude oil average price per barrel. Below is a summary of the additional amount to be paid depending on the actual recorded WTI crude barrel price between January 1, 2010 and December 31, 2010:
 
Below US$55, the amount to be paid is zero.
Higher than US$55 and less than US$60, the amount to be paid is US$25 million. 
Higher than US$60 and less than US$65, the amount to be paid is US$40 million.
Higher than US$65, the amount to be paid is US$65 million.

This commitment was fulfilled on January 24, 2011, through a wire transfer from Ecopetrol S.A. to Maurel & Prom in the amount of US$65 million.

2.
Depending of the exploration results of the Huron well and for a period of up to two years (December 2012), 2P (proven plus probable) certified results were multiplied by a percentage (between 8% and 6%) of the WTI average period for a given period; the resulting value, up to a maximum US$50 million would be paid in the first quarter of 2013.
 
As of December 2010, an equivalent in pesos of US$65 million was recognized as an increase in goodwill due to the behavior of the average price of crude oil by barrel and an adjustment of  US$27.3 million due to for the exploration results of the Huron well.
 
Offshore International Group (OIG)

The commitment implies that if during years following the date of acquisition of the company (i.e., February 6, 2009) the crude oil average price exceeds US$60 per barrel, but is less than or equal to US$70 per barrel, US$200 million shall be paid and should the average price be greater than US$70 per barrel, the payable value amounts to US$300 million. Ecopetrol would be bound to pay 50% of the commitment.
 
As of December 31, 2010, the pesos currency equivalent of US$148.7 million was recognized as greater value of commercial credit.  The payable amount in February amounts to US$150 million.
 
 
F-47
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Ship or Pay Contracts
 
Ecopetrol S.A. and ODL Finance S.A. have entered into two contracts (Ship or pay): i) The first supports the debt (Financing Tariff) to “Grupo Aval” for 7 years and is collected through a trust fund in charge of paying the debt amortization payments, and ii) the second supports the securitization (Autonomous Equity Titles) with a validity of 7 years. From the issuance date of the titles, they shall be managed by an equity fund structured for that purpose and to which equity rights for invoicing, collecting and paying to title holders, have been transferred. Under the agreement used to pay Grupo Aval indebtedness, ODL has committed to transport 75,000 barrels of oil a day during the two-year grace period of the facility and 90,000 barrels of oil a day during the remaining five years. Under the second agreement, ODL has committed to transport 19,500 barrels of oil a day during the first phase and 39,000 barrels of oil a day during the second phase.
 
31.
Subsequent Events

Ecopetrol and Talisman acquired BP Exploration Company Colombia Limited

On  January 24, 2011, after obtaining the respective governmental authorizations, Ecopetrol S. A. and Talisman Colombia Holdco Limited concluded the acquisition of BP Exploration Company Colombia Limited, the value of which amounted to US$1,750 million. Ecopetrol has a 51% interest in the new corporation and Talisman holds the remaining 49%.
 
The shareholders announced that the new corporate name will be  Equión Energía Limited.  The corporation will maintain the property of the assets and the business that the BP affiliate used to hold in Colombia. EQUIÓN currently produces and operates nearly 90 thousand oil equivalent barrels per day (Boe).  Equion’s operation includes the holdings that BP had in the association contracts of the Llanos Foothills.  These contracts are Piedemonte, Rio Chitamena, Tauramena and Recetor, which cover the fields of Cusiana, Cupiagua in Recetor, Pauto and Floreña.
 
In addition to the above assets, the holdings in exploration and production contracts, RC4 and RC5, are added; these contracts entered into with Agencia Nacional de Hidrocarburos, are located in the Atlantic Coast in Colombia.  Furthermore, the Company operates the Cusiana gas plant, where 200 million cubic feet per day of gas are processed to meet the demand from the inner part of the country.
 
EQUION also assumes the holding that BP had in Oleoducto Central S. A.-Ocensa (24.8%), Oleoducto de Colombia (14.57%) and in the Alto Magdalena pipeline (4.25%), as well as 20% in Transgas de Occidente and the holding in the Casanare gas plants.
 
Ecopetrol established Ecopetrol Global Capital SL
 
Ecopetrol S. A. established Ecopetrol Global Capital SL., in January 2011, where it holds 100% of the equity shares, with an initial equity amounting to 3,100 Euros.  The company was incorporated in Madrid, Spain, and will operate as a foreign security holder in Spain.
 
Ecopetrol increases its share in the exploration of the Caño Sur Block

Ecopetrol S. A. and Shell Exploration and Production Colombia Caño Sur entered into an agreement whereby  Ecopetrol acquires the entire holding currently held by Shell in the exploration of the Caño Sur block located in the Llanos Orientales basin.

This agreement is subject to the approval of this holding assignment by the Agencia Nacional de Hidrocarburos, ANH.

Property Tax

According to Law 1370 of 2009, for the year 2011, the Property Tax will be the responsibility of companies, individuals and de facto corporations, who are income tax payers.  This law stipulated that the equity tax shall be effective on January 1, 2011, only once and it is to be paid in eight equal installments during the years 2011, 2012, 2013 and 2014, within the terms established by the Colombian Government.
 
 
F-48
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
On February 16, 2010, the Ministry of Finance and Public Credit issued Decree 514 applicable to accounting matters, which partially amends Decree  2649 of 1993 (which regulates General Accounting and issues accounting principles or regulations generally accepted in  Colombia).
 
Decree 514 of 2010 establishes a provisional paragraph addressing two fundamental aspects:
 
1.
The taxpayers may, once a year, charge against the equity revaluation account the value of payable installments in the respective equity tax that is set forth in Law 1370 of 2009.
 
2.
When the equity revaluation account does not have any balance or it is insufficient to charge the equity tax thereto, the taxpayers can then post in the annual income statements the value of the required installments in the respective period.
 
3.
In accordance with the foregoing and as support of Decree 2649 regarding the accounting recognition of the economic facts, the Superintendence of Corporations issued Writ  115-009819 dated January 26, concluding that the property tax is generated by the possession of the wealth on a specific date (January 1, 2011) and it must be paid in eight equal installments during the years 2011, 2012, 2013 and 2014, recognizing the operation from an accounting standpoint in accordance with that provided for in Decree 514 of 2010.
 
Based on the foregoing standards, Ecopetrol will recognize as of January 1, 2011 and up to January 1, 2014 the payable equity tax payable and the respective charge to results equivalent to 25% of the total payable value calculated on January 1,  2011. The outstanding balance shall be recognized in memorandum accounts.
 
Total annual value of equity tax and expense corresponding to payable installments, are the  following:
 
   
Total Tax
    
Year Expense
  
Ecopetrol
   $ 1,894,488     $ 473,622  
Ocensa
     31,916       7,979  
ODC
     4,598       1,149  
Bioenergy
     5,856       1,464  
ODL
     26,493       6,623  
Comai
     4,184       1,046  
Propilco
     27,304       6,826  
Reficar
     142,334       35,583  
Hocol
     59,593       14,898  
OBC
     13,780       3,445  
Equion
     37,540       9,385  
Total
   $ 2,248,084     $ 562,021  

Hocol S.A.
 
By Resolution 130 of January 18, 2011, the National Hydrocarbon Agency approved the partial assignment of 50% of the interests, rights and obligations of Hocol S.A. Lewis Energy Colombia Inc., on the exploration and production contract Clarinero, being distributed participation in this contract as follows: 50% Hocol S.A. and 50% Lewis Energy Colombia Inc.

Ecopetrol Oleo e Gas Do Brasil
 
In BM EN 29, the Malbec well drilling proved unsuccessful (it was fully expensed in 2010). The first period of the exploration phase fully complied with the Minimum Exploration Program. In April and May, the partners decided not to continue drilling in the following period and instead, returned the block to ANP (Brazilian ANH).  Therefore,  the bond value is being expensed in May 2011.

 
F-49
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Ecopetrol S.A.
 
1.
According to the second instance decision issued by the Superior Tribunal of Bogotá in January 2011, the return of 324 million shares of Invercolsa to Ecopetrol was confirmed.

After the ruling, Fernando Londoño and Arrendadora Financiera Internacional Boliviariana S.A. (AFIB) requested an appeal before the Supreme Court and AFIB offered a bond to guarantee payment of the damages that may be can caused to Ecopetrol if the sentence is not executed the sentence.

2.
The Board meeting of January 21, 2011, approved that Ecopetrol S.A. exercise the preferential right to purchase 50% of the shares of Shell Exploration & Production Caño Sur Colombia. According to the above, we made a request for the authorization of the transaction to the National Hydrocarbons Agency, who determined to perform the negotiation.

3.
Having obtained the respective licenses Ecopetrol S.A. and Talisman Colombia Holdco Limited completed in January 24, 2011 the acquisition of BP Exploration Company Colombia Limited - Today Equión Energy Limited.

In February 2011, the Puerto dry well was recognized, while in March, the Kaxan Norte dry well was recognized. The capitalized costs associated with these two exploration activities as of December 31, 2010, were $2,132 and $3,208, respectively, which were expensed as of December 31, 2010 for U.S. GAAP purposes.

It also was announced in the Press Release of the first quarter of 2011, two dry wells known stratigraphic, Zircon-1  and Amber-3

4.
Impact on tax reform 2010 on Ecopetrol

Once the 1430 Act of 2010 "Tax Reform" was approved, management analyzed the effects that this law generated for the Company and its subsidiaries in the development of its activities. The following describes the impact that these modifications had for Ecopetrol only:
 
Deduction for investment in real productive assets: The special deduction for investment in real productive assets was eliminated beginning in 2011, a standard that previously made possible a large number of company projects that were planned in the long-term.

Ecopetrol, based on the paragraph of Article 1 of the Act, upon signing the legal stability agreement with the National Government, may obtain legal stability for the deduction for up to a period not to exceed three (3) years.

Net Worth Tax (includes amendment introduced in the emergency decrees enacted under the state of emergency): Amends the estate tax base for tax years 2011, 2012, 2013 and 2014 that was created by the Act 1370 of 2009. The rate is 4.8% plus a surcharge established in the economic emergency decrees of 25% tax. Therefore, the real rate is 6%

The comprehensive tax reform had a significant impact on the finances of ECOPETROL S.A. and its Corporate Group and affects the profitability of investors for the effects of higher taxes.

Tax on financial movements, gradual elimination of GMF: The tax on financial transactions will be removed gradually from 2014. Beginning in 2014, the rate will be 2 per thousand and will gradually decrease to 1 per thousand in 2016 and 0 per thousand in 2018, at which time the tax disappears and the provisions regulating the application of same legal system.
 
 
F-50
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

5.
The Civil Division of Judicial Superior Court District of Bogotá revised the decision issued by the Civil Circuit Court 23 of Bogota, which on December 16, 2005 ordered us to pay $541,833 million, or approximately US$260 million to a former employees association known by the acronym Foncoeco, for the Company’s profit-sharing plan offered in 1962 that expired in 1975.

As of December 31, 2010, the associated estimated loss was $146,811, based on the facts and circumstances of the probable loss available on such date.

Instead, on June 22, 2011, the Bogota Higher Tribunal of second instance, ruled in our favor and reduced the amount we must pay to $6.6 million, or approximately US$3,707. Since this is not considered the final ruling in this case, this had no effect on the related provision as of December 31, 2010.
 
32.
Differences between Colombian Governmental Entity accounting principles and U.S. GAAP
 
The Company's financial statements are prepared in accordance with Colombian Government Entity GAAP (RCP).  These principles and regulations differ in certain significant respects from accounting principles generally accepted in the United States of America (U.S. GAAP), and therefore this note presents reconciliations of net income and shareholders’ equity determined under RCP to those same amounts as determined according to U.S. GAAP.  Also presented in this note are those disclosures required under U.S. GAAP but not required under RCP.
 
Restatement of previously issued financial statements

In connection with the preparation of the 2010 fiscal year-end consolidated financial statements, management concluded that for purpose of its reconciliation of Colombian Government Entity GAAP to U.S. GAAP, a material error regarding the accounting of employee benefit plans was identified in the previously issued consolidated U.S. GAAP financial information and related disclosures for the year ended December 31, 2009.  Therefore, such U.S. GAAP financial information for 2009 has been restated.  This restatement does not affect the financial information under Colombian Government Entity GAAP as of and for the year ended December 31, 2009, nor 2010 or any other prior periods, and therefore there is no impact on dividends declared and paid under the 2009 financial results, which are declared on the basis of the Colombian Government Entity GAAP financial statements.

Employee Benefit Error

This error was due to the incorrect determination of the amount of unrealized gains and losses of health, education and pension bond employee benefit plans. Due to the incorrect determination of gains and losses, the Company amortized an excess amount of actuarial losses. As such, this error led to an understatement of the Company's consolidated net income in 2009 of $1,178,563 and an overstatement of the Other Comprehensive Income - OCI by the same amount. To correct this error the Company reversed the incorrect amortization expense and decreased OCI.

 
F-51
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Other Errors

Separately, the Company’s management also corrected certain errors in the 2009 U.S. GAAP reconciliation, including errors previously identified which individually and in the aggregate, were considered not to be material to the Company’s consolidated financial information reconciled to U.S. GAAP.   These adjustments led to an overstatement of the Company´s consolidated net income reconciled to U.S. GAAP of $38,727. Below is a detail of these errors.

Purchase Price Allocation Errors - Certain errors were identified in the recording of the purchase price allocations relating to 2009 acquisitions. All of these adjustments are individually not material. Included in these purchase price allocation errors are the following:

 
·
Deferred taxes were not recorded in the purchase price allocation process relating to the fair value step up of assets. Therefore, an additional deferred tax liability was recorded.

 
·
Depreciation and amortization was not calculated correctly for the stepped up portion of assets relating to the Oleoducto de Colombia and Propilco acquisitions.  As such, an adjustment was made to increase depreciation and amortization expense.

 
·
The investment in OIG is accounted for under the equity method. However, the Company mistakenly presented goodwill and the foreign currency translation adjustment separate from the investment in equity method investee account. As such, the goodwill balance and foreign currency translation adjustment relating to OIG is now presented as part of investment in equity investee.

 
·
In connection with the OIG acquisition, certain contingent consideration liabilities were recorded.  Subsequent to initial recording, these amounts were adjusted to fair value. This adjustment was recorded as an expense in the income statement. However, given that these amounts were not settled as of December 31, 2009, and that OIG is accounted for under the equity method, these amounts should have been recorded as an increase to the investment in equity method investee’s account. As such, the expenses recorded in the income statement were reversed and the investment in equity method account on the balance sheet was increased.

Asset Retirement Obligation Errors - Two errors were identified in the Asset Retirement Obligation (ARO) calculation.   First, it was determined that the useful lives used in the formula to determine the obligation were incorrect.  Second, the 2009 amortization expense under U.S. GAAP was incorrectly booked.  The adjustment to correct the first error is a decrease in the ARO liability and a corresponding decrease in the amount capitalized as part of the asset value. The adjustment to correct the second error is a decrease in amortization expense and a decrease in the corresponding asset value.

Fixed Assets Errors - Errors in the fixed asset balances and related depreciation expense were identified.  There are certain GAAP differences in the capitalization rules between RCP and U.S. GAAP.  As such, as part of the U.S. GAAP process, fixed asset and depreciation amounts are adjusted.  During 2009, for certain fixed assets, the Company mistakenly duplicated these GAAP adjustments.   The correction of this error resulted in an increase to fixed asset balances and a decrease to depreciation expense.

Foreign Currency Translation Adjustment Errors - The foreign currency translation process for the subsidiary Reficar was applied incorrectly under U.S. GAAP.  As such, the adjustment to CTA was incorrect, as well as the individual translated line items of the balance sheet that include Reficar amounts.   The Company corrected this error by correctly applying the foreign currency translation methodology as required by U.S. GAAP.  This resulted in an increase to the CTA account, and a decrease in individual asset and liability line items.

 
F-52
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Deferred Tax Errors - Certain errors were identified in the calculation of deferred taxes. The Company  incorrectly calculated the deferred tax effect of the mark-to- market adjustments of available-for-sale securities.  In addition, included in this category are the deferred tax effects of certain of the previously discussed errors.

Classification Errors - Certain transactions included within individual line items of the 2009 balance sheet and income statement were re-classified due to classification errors.  These classification errors include the following:

 
·
The Company had previously included employee benefit plan expense as a non-operating expense.  This expense has now been classified as an administrative expense to appropriately reflect the nature of the amount under U.S. GAAP.

 
·
The Company mistakenly booked certain prepaid expenses and accounts receivable balances to the short term deposits and advances line item.

 
·
Certain assets were inappropriately recorded in the long-term available-for-sale investments accounts.  These amounts have been presented in the appropriate other assets account.

 
·
Certain provisions and other operating expenses were mistakenly classified as non-operating expenses in the 2009 income statement.   These amounts have been re-classed to operating expenses.

Non-Controlling Interest Errors - The non-controlling interest balance was adjusted to reflect the non-controlling interest effect of the above discussed errors.

 
F-53
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Supplemental consolidated U.S. GAAP restated balance sheet as of December 31, 2009:

   
2009
 
   
Previously 
reported
   
Adjustments
   
Restated
 
Assets
                 
Current assets:
                 
Cash and cash equivalents
  $ 3,861,532     $ (23,862 )   $ 3,837,670 (1)
Investments
                       
Available for sale
    178,832       -       178,832  
Held to maturity
    7,876       -       7,876  
Accounts and notes receivable, net
    2,530,379       317,322       2,847,701 (2)
Inventories
    1,929,977       15,679       1,945,656 (1)
Advances and deposits
    1,200,682       (856,740 )     343,942 (2)
Prepaid expenses and other assets
    62,759       532,515       595,274 (2)
Deferred income taxes
    1,015,488       (205,570 )     809,918 (1)
Total current assets
    10,787,525       (220,656 )     10,566,869  
Investments
                       
Available for sale
    4,118,555       (931,477 )     3,187,078 (3)
Held to maturity
    130,740       (312 )     130,428  (1)
Equity Method
    -       1,154,193       1,154,193 (4)
Accounts and notes receivable, net
    226,781       379,994       606,775 (3)
Restricted assets
    380,463       469       380,932 (1)
Property, plant and equipment, net
    13,098,446       (499,883 )     12,598,563 (5)(6)(11)
Natural and environmental resources, net
    9,431,458       (11,096 )     9,420,362 (1)
Goodwill
    2,385,113       (953,939 )     1,431,174 (4) (11)
Deferred charges and other assets
    1,280,359       117,831       1,398,190 (3)
Deferred income taxes
    1,475,559       254,975       1,730,534 (8)
Direct finance lease long-term
    19,254       -       19,254  
Total Assets
  $ 43,334,253     $ (709,902 )   $ 42,624,352  
Liabilities and shareholders’ equity
                       
Current liabilities:
                       
Financial obligations
  $ 437,111     $ (30 )   $ 437,081 (1)
Accounts payable and related parties
    3,571,680       (13,100 )     3,558,580 (1)
Capital lease liability
    82,356       -       82,356 (1)
Taxes payable
    567,271       632       567,903 (1)
Labor and pension plan obligations
    165,472       (9 )     165,463 (1)
Estimated liabilities and provisions
    1,122,409       (12,864 )     1,109,545 (1)
Total current liabilities
    5,946,299       (25,371 )     5,920,928  
Financial obligations, long-term
    5,725,099       -       5,725,099  
Accounts payable, long-term
    248,571       -       248,571  
Capital lease liability
    278,594       -       278,594  
Pension plan obligation and other labor obligations, long-term
    4,359,751       (6,827 )     4,352,924 (1)
Estimated liabilities and provisions
    2,841,371       (570,558 )     2,270,813 (6)
Other long-term liabilities
    809,334       (341 )     808,993 (1)
Total non-current liabilities
    14,262,720       (577,726 )     13,684,994  
Total liabilities
    20,209,019       (603,097 )     19,605,922  
Shareholders’ equity of Ecopetrol
                       
Share par value
    10,117,791       -       10,117,791  
Additional paid-in-capital
    4,044,669       -       4,044,669  
Retained Earnings
    8,107,416       1,138,788       9,246,204  
Accumulated Other Comprehensive income (loss)
    272,045       (1,296,998 )     (1,024,953 ) (4)(7)(8)(10)
Total Shareholders’ equity of Ecopetrol
    22,541,921       (158,210 )     22,383,711  
Non-controlling interest
    583,313       51,405       634,718 (9)
Total equity
    23,125,234       (106,805 )     23,018,429  
Total liabilities and shareholders’ equity
  $ 43,334,253     $ (709,901 )   $ 42,624,351  

(1)
Represents the correction of immaterial errors identified in the preparation of U.S. GAAP reconciliation.
 
(2)
Primarily represents re-classification of amounts incorrectly booked to the advances and deposits line item.  See above discussion on classification errors.
 
 
F-54
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
(3)
Primarily represents re-classification of amounts incorrectly booked to available-for-sale investments.  See above discussion on classification errors.
 
(4)
This adjustment primarily consists of the OIG re-class of goodwill to the Investment in equity method investee, $726,764, as well as the adjustment of OIG contingent consideration, $165,332, increasing the investment balance and non-operating income.  The equity method investment account was also decreased $128,985 by the cumulative translation adjustment.  See above discussion on purchase price allocation errors.
 
(5)
This adjustment includes the duplicate U.S. GAAP fixed asset adjustments.  This caused fixed assets to increase by $221,194 and a decrease in depreciation expense by the same amount.  See discussion on fixed assets errors above.
 
(6)
This adjustment primarily relates to the Asset Retirement Obligation error. This adjustment caused a decrease in fixed assets of $674,551, a decrease of Estimated liabilities and provisions of $570,558 and a decrease in cost of sales of $103,993.  See discussion on asset retirement obligations.
 
(7)
A portion of this adjustment represents the employee benefit plan error.  This resulted in a decrease in operating expenses of $1,759,049 and a decrease in OCI of the same amount.   See discussion on employee benefit plans above.
 
(8)
This represents the adjustment to deferred taxes as a result of the above discussed errors.  In addition, it includes the adjustment to deferred taxes of $211,444 relating to the error in calculating the deferred tax effect of available-for-sale securities.  A portion of the total deferred tax adjustment was recorded in the income statement and a portion in OCI.  See discussion on deferred tax errors above.
 
(9)
Represents the non-controlling interest effect of the above discussed adjustments.
 
(10)
This adjustment relates to foreign currency translation error.  Assets and liabilities have been adjusted by not material amounts as a result of this error, with a corresponding adjustment to cumulative translation gain/loss included within OCI.  See discussion on foreign currency translation adjustment errors above.
 
(11)
This adjustment includes some minor increases to fixed asset and decreases to goodwill due to the recording of the purchase price step up of those assets.  See discussion on purchase price allocation errors above.
 
 
F-55
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Supplemental consolidated U.S. GAAP restated statement of income for the year ended December 31, 2009:
 
   
2009
  
   
Previously reported
    
Adjustments
    
Restated
  
Revenue:
                  
Local sales
   $ 13,808,720     $ -     $ 13,808,720  
Foreign sales
     15,742,854       -       15,742,854  
Total revenue
     29,551,574       -       29,551,574  
                         
Cost of sales
     19,136,478       (485,291 )     18,651,187 (5) (6)
      10,415,096       485,291       10,900,387  
                         
Operating expenses:
                        
Administration
     1,990,603       (963,572 )     1,027,031 (7) (12)
Selling and projects
     1,967,139       (148,996 )     1,818,143 (1)
Operating income
     6,457,354       1,597,859       8,055,213  
                         
Non-operating income, net
     549,981       163,189       713,170 (4)(12)
Income before income tax
     7,007,335       1,761,048       8,768,383  
                         
Income tax:
                        
Current income tax
     1,948,819       -       1,948,819  
Deferred income tax
     375,329       569,815       945,144 (8)
      2,324,148       569,815       2,893,963  
Net income
     4,683,187       1,191,233       5,874,420  
Less: Net (income) attributable to Non-controlling interest
     (104,719 )     (51,397 )     (156,116 )       (9)
Net Income attributable to Ecopetrol S.A.
   $ 4,578,468     $ 1,139,836     $ 5,718,304  
Earnings per share (Basic and diluted) attributable to Ecopetrol common shareholders
   $ 113.13     $ 28.16     $ 141.29  
Weighted-average shares outstanding (Basic and diluted)
     40,472,512,588       -       40,472,512,588  

(1)
Represents the correction of immaterial errors identified in the preparation of U.S. GAAP reconciliation.
 
(4)
This adjustment primarily consists of the OIG adjustment of the contingent consideration, $165,332, increasing the investment balance and non-operating income.  See the discussion on purchase price allocation errors for more detail.
 
(5)
This adjustment includes the duplicate U.S. GAAP fixed asset adjustments.  This caused fixed assets to increase by $221,195 and a decrease in depreciation expense by the same amount.  See fixed assets errors discussion above for details.

(6)
This adjustment primarily relates to the Asset Retirement Obligation error. This adjustment caused a decrease in cost of sales of $103,993.  See the asset retirement obligation discussion above for detail.

(7)
A portion of this adjustment represents the employee benefit plan error.  This resulted in a decrease in operating expenses of $1,173,990 and a decrease in OCI of the same amount.   See the employee benefit plan discussion for details.

(8)
This represents the adjustment to deferred taxes as a result of the above discussed errors.  In addition, it includes the adjustment to deferred taxes of $211,444 relating to the error in calculating the deferred tax effect of available-for-sale securities.  A portion of the total deferred tax adjustment was recorded in the income statement and a portion in OCI.  See deferred tax errors discussion above for detail.

(9)
Represents the non-controlling interest effect of the above discussed adjustments.

(12)
Included in this adjustment is the re-classification of employee benefit expense and other operating expenses, $595,000, from non-operating to operating expenses.  In addition, it was offset by the incorrect calculation of the bargain purchase gain on the purchase of Hocol, resulting in a decrease in the gain and a decrease in deferred taxes of $285,000.

(13)
Represents re-classification of certain operating expenses that were incorrectly classified as non-operating expenses.
 
Supplemental consolidated U.S. GAAP restated statement of cash flows for the year ended December 31, 2009:

 
F-56
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The adjustment related to employee benefit plans did not have an impact on the 2009 U.S. GAAP statement of cash flows. The net effect of the other not material adjustments resulted in a decrease in U.S. GAAP operating cash flow of Ps$ 47,723. There was no adjustment to the investing and financing sections of the U.S. GAAP cash flow statement.

A) Reconciliation of net income attributable to Ecopetrol S.A.:
 
The following table presents the reconciliation of net income under Colombian Government Entity GAAP to net income under U.S. GAAP attributable to Ecopetrol S.A. for the years ended December 31, 2010, 2009 and 2008:
 
     
2010
    
2009
    
2008
  
           
Restated
        
 
Consolidated net income under Colombian Government Entity GAAP
   $ 8,146,471     $ 5,132,054 (*)   $ 11,629,677  
i.
Investment securities:
                        
 
a.  Unrealized gain (loss)
     63,545       702,876       (924,715 )
 
b.  Impairment
     (36,818 )     28,083       163,902  
ii.
Investments in non-marketable securities:
                        
 
a.  Equity method
     (25,063 )     (181,991 )     164,734  
 
b.  Variable Interest Entity (VIE)
     (13 )     320,600       (367,743 )
 
c.  Impairment
     (61,371 )     (4,810 )     -  
iii.
Derivatives
     (24,736 )     20,521       -  
iv.
Exchange of non-monetary assets
     23,640       23,640       55,623  
v.
Deferred charges
     (7,167 )     (35,702 )     (228 )
vi.
Employee benefit plans
     336,276       342,451       (1,451,179 )
vii.
Provisions, allowances and contingencies
     67,629       12,779       1,082,434  
viii.
Deferred income taxes
     (1,159,147 )     (779,934 )     (159,891 )
ix.
Revenue recognition:
                        
 
a.  Cost of sales – over and under
     158,609       (110,087 )     (8,887 )
 
b.  Other income
     (11,685 )     8,906       -  
x.
Inflation adjustment
     320,374       177,300       128,837  
xi.
Inventories
     (87,797 )     16,853       10,274  
xii.
Lease accounting
     (36,298 )     (43,163 )     39,744  
xiii.
Property, plant and equipment:
                        
 
a.  Interest
     (168,527 )     (63,779 )     -  
 
b.  Impairment
     (157,446 )     (248,765 )     (121,296 )
 
c.  Capitalized expenses
     38,751       (118,376 )     76,167  
 
d.  Exchange difference
     -       (16,028 )     -  
xiv.
Depreciation, Depletion and Amortization
     702,527       563,145       (1,478,851 )
xv.
Asset retirement obligations
     140,959       297,702       (70,014 )
xvi.
Equity contributions:
                        
 
a.  Incorporated institutional equity
     20,281       20,692       21,217  
 
b.  Reversal of concession rights contributed as capital
     81,058       18,199       24,117  
xvii.
Indebtedness cost
     (1,670 )     8,800       -  
xviii.
Business combinations:
                        
 
a.  Goodwill
     172,660       139,909       27,512  
 
b.  Fair value adjustments to assets and liabilities acquired
     (176,590 )     (362,216 )     449  
xix.
Non-controlling interest
     (124,394 )     (151,355 )     -  
xx.
Cumulative Translation Adjustment
     16,977       -       -  
 
Consolidated net income under U.S. GAAP attributable to Ecopetrol S.A.
   $ 8,211,035     $ 5,718,304     $ 8,841,883  
(*)This restatement does not affect the financial information under Colombian Government Entity GAAP.
 
 
F-57
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
B) Reconciliation of Shareholders’ equity attributable to Ecopetrol S.A.:
 
The following table presents the reconciliation of Ecopetrol shareholders’ equity under Colombian Government Entity GAAP to Ecopetrol shareholders’ equity under U.S. GAAP attributable to Ecopetrol S.A for the years ended December 31, 2010 and 2009:
 
     
2010
    
2009
  
           
Restated
  
 
Consolidated shareholders’ equity under Colombian Government Entity GAAP
   $ 41,328,181     $ 32,569,957 (*)
i.
Investment securities:
                
 
a.  Unrealized gain
     1,660,975       645,644  
ii.
Investments in non-marketable securities:
                
 
a.  Equity method
     (1,496,057 )     (1,507,097 )
 
b.  Valuation surplus
     (1,693,553 )     (1,029,443 )
 
c.  Variable Interest Entity (VIE)
     320,587       320,600  
 
d.  Impairment
     (66,182 )     (4,810 )
iii.
Derivatives
     769       25,505  
iv.
Exchange of non-monetary assets
     709,654       686,014  
v.
Deferred charges
     17,026       24,193  
vi.
Employee benefit plans
     (1,795,081 )     (1,504,997 )
vii.
Provisions – allowance and contingencies
     121,718       54,089  
viii.
Deferred income taxes
     (2,039,099 )     (1,086,406 )
ix.
Revenue recognition:
                
 
a.  Cost of sales – over and under
     (63,690 )     (98,121 )
 
b.  Other income
     (1,128 )     2,599  
x.
Inflation adjustment
     (3,515,570 )     (3,835,943 )
xi.
Inventories
     (114,868 )     (27,103 )
xii.
Lease accounting
     363,315       399,734  
xiii.
Property, plant and equipment:
                
 
a.  Interest
     (192,538 )     (24,011 )
 
b.  Revaluation of property, plant and equipment and public accounting effect
     (9,375,123 )     (5,361,974 )
 
c.  Impairment
     (1,870 )     (248,095 )
 
d.  Capitalized expenses
     (577,976 )     (613,984 )
 
e.  Exchange difference
     (233,563 )     (233,563 )
xiv.
Depreciation, Depletion and Amortization
     4,342,688       3,616,158  
xv.
Asset retirement obligations
     460,668       321,358  
xvi.
Equity contributions:
                
 
a.  Incorporated institutional equity
     (64,412 )     (82,870 )
 
b.  Reversal of concession rights contributed as capital
     (22,202 )     (103,260 )
xvii.
Indebtedness cost
     7,130       8,800  
xviii.
Business combinations:
                
 
a.  Goodwill
     142,611       19,020  
 
b.  Fair value adjustments to assets and liabilities acquired
     (772,416 )     (595,826 )
xix.
Non-controlling interest
     206,626       336,619  
xx.
Cumulative Translation Adjustment
     (481,336 )     (289,075 )
 
Consolidated Ecopetrol shareholders’ equity under U.S. GAAP
   $ 27,175,285     $ 22,383,712  
 
(*)This restatement does not affect the financial information under Colombian Government Entity GAAP.
 
 
F-58
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
C) Supplemental condensed financial statements under U.S. GAAP
 
C) 1.  Supplemental consolidated balance sheets The condensed balance sheets of the Company as of December 31, 2010 and 2009 under U.S. GAAP are presented below:
 
   
2010
    
2009
  
         
Restated
  
Assets
            
Current assets:
            
Cash and cash equivalents
   $ 3,910,745     $ 3,837,670  
Investments
                
Available for sale
     58,935       178,832  
Held to maturity
     17,369       7,876  
Accounts and notes receivable, net
     2,971,109       2,847,701  
Inventories
     2,055,736       1,945,656  
Advances and deposits
     277,937       343,942  
Prepaid expenses and other assets
     491,762       595,274  
Deferred income taxes, net
     1,438,988       809,918  
Total current assets
     11,222,581       10,566,869  
Investments
                
Available for sale
     5,807,075       3,187,078  
Held to maturity
     110,755       130,428  
Equity Method
     932,721       1,154,193  
Accounts and notes receivable, net
     1,538,450       606,775  
Restricted assets
     391,021       380,932  
Property, plant and equipment, net
     17,744,665       12,598,563  
Natural and environmental resources, net
     10,191,727       9,420,362  
Goodwill
     1,380,632       1,431,174  
Deferred charges and other assets
     1,590,565       1,398,190  
Deferred income taxes, net
     1,405,987       1,730,534  
Direct finance lease long-term
     15,969       19,254  
Total Assets
   $ 52,332,148     $ 42,624,352  
Liabilities and shareholders’ equity
                
Current liabilities:
                
Financial obligations
   $ 1,091,079     $ 437,081  
Accounts payable and related parties
     4,344,528       3,558,580  
Capital lease liability
     74,681       82,356  
Taxes payable
     2,222,073       567,903  
Labor and pension plan obligations
     160,248       165,463  
Estimated liabilities and provisions
     1,173,401       1,109,545  
Total current liabilities
     9,066,010       5,920,928  
Financial obligations, long-term
     7,830,812       5,725,099  
Accounts payable, long-term
     651,692       248,571  
Capital lease liability
     242,592       278,594  
Pension plan obligation and other labor obligations, long-term
     4,787,698       4,352,924  
Estimated liabilities and provisions
     1,783,282       2,270,813  
Other long-term liabilities
     485,426       808,993  
Total non-current liabilities
     15,781,502       13,684,994  
Total liabilities
     24,847,512       19,605,922  
Shareholders’ equity of Ecopetrol
     27,175,285       22,383,712  
Non-controlling interest
     309,351       634,718  
Total equity
     27,484,636       23,018,430  
Total liabilities and shareholders’ equity
   $ 52,332,148     $ 42,624,352  

 
F-59
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
C)  2.  Supplemental consolidated statements of income
 
The statements of income of the Company for the years ended December 31, 2010, 2009 and 2008 under U.S. GAAP are presented below:
 
   
2010
    
2009
    
2008
  
         
Restated
        
Revenue:
                  
Local sales
   $ 18,291,606     $ 13,808,720     $ 21,550,543  
Foreign sales
     22,587,718       15,742,854       12,298,670  
Total revenue
     40,879,324       29,551,574       33,849,213  
                         
Cost of sales
     24,059,620       18,651,187       17,927,991  
      16,819,704       10,900,387       15,921,222  
                         
Operating expenses:
                        
Administration
     856,880       1,027,031       4,246,426  
Selling and projects
     2,084,310       1,818,143       1,834,485  
Operating income
     13,878,514       8,055,213       9,840,311  
                         
Non-operating income, net
     1,037,793       713,170       3,587,132  
Income before income tax
     12,840,721       8,768,383       13,427,443  
                         
Income tax:
                        
Current income tax
     3,201,040       1,948,819       3,648,451  
Deferred income tax
     1,196,757       945,144       930,853  
      4,397,797       2,893,963       4,579,304  
Net income
     8,442,924       5,874,420       8,848,139  
Less: Net (income) attributable to Non-controlling interest
     (231,889 )     (156,116 )     (6,256 )
Net Income attributable to Ecopetrol S.A.
   $ 8,211,035     $ 5,718,304     $ 8,841,883  
Earnings per share (Basic and diluted) attributable to Ecopetrol common shareholders
   $ 202.88     $ 141.29     $ 218.47  
Weighted-average shares outstanding (Basic and diluted)
     40,472,512,588       40,472,512,588       40,472,512,588  

 
F-60
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
C) 3.  Supplemental consolidated statements of cash flows
 
The statements of cash flows of the Company for the years ended December 31, 2010, 2009 and 2008 under U.S. GAAP are presented below:

   
2010
   
2009
   
2008
 
         
Restated
       
Cash flows provided by operating activities:
                 
Net income
  $ 8,442,924     $ 5,874,420     $ 8,848,139  
Adjustments to reconcile net income to cash provided by operating activities:
                       
Equity method in non-marketable securities
    25,063       40,635       (106,845 )
Depreciation, depletion and amortization
    3,608,292       4,106,221       3,177,935  
Impairment
    157,446       248,765       113,087  
Provisions
    (141,038 )     362,424       (569,969 )
Deferred income tax
    1,196,757       945,144       930,853  
Exchange (loss) gain
    (137,054 )     (544,622 )     (1,390,953 )
Loss (gain) on retirement of property, plant and equipment
    42,340       -       -  
Losses in retirement of investment in natural and environmental resources
    39,668       -       -  
Other asset write-offs
    359,981       4,810       -  
Net changes in operating assets and liabilities:
                       
Accounts and notes receivable
    7,910       3,730,221       (2,383,061 )
Inventories
    (90,512 )     (45,289 )     (255,090 )
Deferred charges and other assets
    (520,175 )     171,413       (245,528 )
Accounts payable and related parties
    1,294,450       1,398,162       326,967  
Taxes payable
    553,613       (4,384,524 )     1,374,621  
Labor obligations
    (369,839 )     304,686       401,445  
Estimated liabilities and provisions
    (639,758 )     121,387       668,220  
Bargain purchase gain
    -       (264,085 )     -  
Fair value of pre-existing participation of business combination
    -       107,545       -  
Net cash provided by operating activities
    13,830,068       12,177,313       10,889,822  
Cash flows from investing activities:
                       
Payments in advance in acquisition of companies
    (1,163,131 )     -       -  
Payment for purchase of companies, net of cash acquired
    -       (4,061,289 )     (1,274,751 )
Purchase of investment securities
    (11,808,784 )     (7,921,615 )     (27,814,744 )
Redemption of investment securities
    9,952,542       12,250,387       25,975,418  
Proceeds from sales of property, plant and equipment
    4,751       1,927       -  
Investment in natural and environmental resources
    (3,759,410 )     (2,934,666 )     (3,574,418 )
Additions to property, plant and equipment
    (5,946,298 )     (6,419,793 )     (3,869,577 )
Net cash used in investing activities
    (12,720,330 )     (9,085,049 )     (10,558,072 )
Cash flows from financing activities:
                       
Non-controlling interest obligations
    (325,367 )     (340,178 )     240,918  
Repayment of financial obligations
    (43,677 )     (310,420 )     (99,888 )
Proceeds from financial obligations
    2,959,345       6,152,400       235,720  
Proceeds from issuance of shares
    525       41,044       832,919  
Cash paid to acquire a non-controlling interest
    -       (998,903 )     -  
Dividends paid
    (3,782,966 )     (8,902,602 )     (4,652,182 )
Net cash used in financing activities
    (1,192,140 )     (4,358,659 )     (3,442,513 )
                         
Effect of exchange rate changes on cash
    (155,476 )     (291,470 )     83,923  
Net increase (decrease) in cash and cash equivalents
    73,075       (974,925 )     (3,194,687 )
Cash and cash equivalents at beginning of year
    3,837,670       4,812,595       8,007,282  
Cash and cash equivalents at end of year
  $ 3,910,745     $ 3,837,670     $ 4,812,595  

 
F-61
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

   
2010
    
2009
    
2008
  
Supplemental cash flows information
                  
Cash paid during the year
                  
Interest
   $ 404,708     $ 107,343     $ 9,874  
Income taxes
   $ 982,783     $ 3,934,441     $ 1,869,475  
                         
Non-cash transactions
                        
Liabilities assumed in business combinations
   $ -     $ 891,239     $ 184,807  
Assets acquired through leasing contracts
   $ -     $ -     $ 12,659  
Increase of natural and environmental resources through asset retirement obligations
   $ 779,913     $ 96,766     $ 137,903  

Under Colombian Government Entity GAAP as in effect for 2007, some deposits with banks were considered as short-term investments since they produce yields and the Company has defined them to be used for specific purposes. Under U.S. GAAP, these deposits are considered cash and cash equivalents.  The amounts reclassified as of December 31, 2010, 2009 and 2008 were $183,967, $275,552 and $2,404,159. These deposits are valued at fair value.
 
 
F-62
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
C) 4.  Supplemental consolidated statements of shareholders’ equity
 
The statements of shareholders’ equity of the Company for the years ended December 31, 2010, 2009 and 2008 under U.S. GAAP follows:
   
Common Stock
                                           
   
Millions
of
shares
   
Value
   
Additional
paid-
in-capital
   
Comprehensive
Income
   
Retained
earnings
   
Accumulated
Other
Comprehensive
income (loss)
   
Ecopetrol’s
Equity
   
Non-
Controlling
Interest
   
Total Equity
 
Balance at January 1, 2008
    40,473       10,113,334       3,607,929       -       8,269,100       (999,332 )     20,991,031       571,597       21,562,628  
Business combination
                                                            8,718       8,718  
Issuance of company shares
    -       4,457       828,462       -       -       -       832,919       217,378       1,050,297  
Distribution of dividends
    -       -       -       -       (4,654,340 )     -       (4,654,340 )     (141,634 )     (4,795,974 )
Other contributions
    -       -       -       -       (23,742 )     -       (23,742 )     139,566       115,824  
Comprehensive income:
    -       -       -       -       -       -       -       -       -  
Net income
    -       -       -     $ 8,848,139       8,841,883       -       8,841,883       6,256       8,848,139  
Other Comprehensive income, net of tax:
                                                                       
Unrealized earnings on investment securities, net of tax effect of $(236,974)
    -       -       -       524,729       -       -       524,729       -       524,729  
Actuarial gain (loss), net of tax effect of $(302,050)
    -       -       -       613,251       -       -       613,251       -       613,251  
Translation adjustment
    -       -       -       316,895       -       -       300,004       16,891       316,895  
Total other comprehensive income
    -       -       -       1,454,875       -       1,437,984       -       -       -  
Comprehensive income
    -       -       -     $ 10,303,014       -       -       -       -       -  
Balance at December 31, 2008
    40,473       10,117,791       4,436,391               12,432,901       438,652       27,425,735       818,772       28,244,507  
Business combination
    -       -       -       -       -       -       -       21,530       21,530  
Acquired non-controlling interest
    -       -       (432,766 )     -       -       -       (432,766 )     (281,692 )     (714,458 )
Other non-controlling interest
    -       -       -       -       -       -       -       22,775       22,775  
Issuance of company shares
    -       -       41,044       -       -       -       41,044       -       41,044  
Distribution of dividends
    -       -       -       -       (8,903,953 )     -       (8,903,953 )     (89,736 )     (8,993,689 )
Comprehensive income:
    -       -       -       -       -       -       -       -       -  
Net income
    -       -       -     $ 5,874,420       5,718,304       -       5,718,304       156,116       5,874,420  
Other Comprehensive income, net of tax:
                                                                       
Unrealized earnings on investment securities, net of tax effect of $226,832
    -       -       -       136,600       -       -       136,600       -       136,600  
Actuarial gain (loss), net of tax effect of $482,535
    -       -       -       (979,694 )     -       -       (979,694 )     -       (979,694 )
Translation adjustment
    -       -       -       (634,606 )     -       -       (621,559 )     (13,047 )     (634,606 )
Total other comprehensive income
    -       -       -       (1,477,700 )     -       (1,464,653 )     -       -       -  
Comprehensive income
    -       -       -     $ 4,396,720       -       -       -       -       -  
Balance at December 31, 2009
    40,473       10,117,791       4,044,669               9,247,252       (1,026,001 )     22,383,712       634,718       23,018,430  
Acquired non-controlling interest
    -       -       (804 )     -       -       -       (804 )     804       -  
Other non-controlling interest
    -       -       -       -       -       -       -       4,444       4,444  
Issuance of company shares
    -       337       188       -       -       -       525       -       525  
Distribution of dividends
    -       -       -       -       (3,682,998 )     -       (3,682,998 )     (418,558 )     (4,101,556 )
Return of Capital due to a Spin-Off
    -       -       -       -       -       -       -       (144,251 )     (144,251 )
Comprehensive income:
    -       -       -       -       -       -       -       -       -  
Net income
    -       -       -     $ 8,442,925       8,211,035       -       8,211,035       231,889       8,442,925  
Other Comprehensive income, net of tax:
                                                                       
Unrealized earnings on investment securities, net of tax effect of $ 8,819
    -       -       -       997,425       -       -       997,425       -       997,425  
Actuarial gain (loss), net of tax effect of $ 206,699
    -       -       -       (419,661 )     -       -       (419,661 )     -       (419,661 )
Translation adjustment
    -       -       -       (313,642 )     -       -       (313,947 )     305       (313,642 )
Total other comprehensive income
    -       -       -       264,122       -       263,817       -       -       -  
Comprehensive income
    -       -       -     $ 8,707,047       -       -       -       -       -  
Balance at December 31, 2010
    40,473     $ 10,118,128     $ 4,044,053             $ 13,775,291     $ (762,184 )   $ 27,175,285     $ 309,351     $ 27,484,636  

 
F-63
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

C) 5.  Supplemental consolidated Comprehensive Income
 
   
2010
    
2009
    
2008
  
                   
Net Income
   $ 8,442,925     $ 5,874,420     $ 8,848,139  
Other Comprehensive income, net of tax:
                        
Unrealized earnings on investment securities, net of tax:
     997,425       136,600       524,729  
Unrealized actuarial gain (loss), net of tax
     (419,661 )     (979,694 )     613,251  
Translation adjustment
     (313,642 )     (634,606 )     316,895  
Total other comprehensive income
     264,122       (1,477,700 )     1,454,875  
Comprehensive income
     8,707,047       4,396,720       10,303,014  
Comprehensive (income) loss  attributable to the non-controlling interest
     (232,194 )     (143,069 )     (23,147 )
Comprehensive income  attributable to Ecopetrol
   $ 8,474,853     $ 4,253,651     $ 10,279,867  
 
A detail of accumulated other comprehensive income attributable to Ecopetrol, including the related income tax effects, is presented below:
 
   
2010
  
   
Before-Income Tax
    
(Income Tax Expense)
    
Net of Income Tax
  
   
Amount
    
or Benefit
    
Amount
  
                   
Unrealized gain (loss) on securities available for sale
   $ 1,734,255     $ (25,802 )   $ 1,708,453  
Pension liability - net unamortized actuarial gain  (loss)
     (2,639,033 )     870,881       (1,768,152 )
Cumulative translation adjustment
     (702,485 )     -       (702,485 )
Other comprehensive income (loss)
   $ (1,607,263 )   $ 845,079     $ (762,184 )

   
2009
  
   
Before-Income Tax
    
(Income Tax Expense)
    
Net of Income Tax
  
   
Amount
    
or Benefit
    
Amount
  
                   
Unrealized gain (loss) on securities available for sale
   $ 745,649     $ (34,621 )   $ 711,028  
Pension liability - net unamortized actuarial gain (loss)
     (2,012,673 )     664,182       (1,348,491 )
Cumulative translation adjustment
     (388,538 )     -       (388,538 )
Other comprehensive income (loss)
   $ (1,655,562 )   $ 629,561     $ (1,026,001 )

   
2008
  
   
Before-Income Tax
    
(Income Tax Expense)
    
Net of Income Tax
  
   
Amount
    
or Benefit
    
Amount
  
Unrealized gain (loss) on securities available for sale
   $ 835,882     $ (261,454 )   $ 574,428  
Pension liability - net unamortized actuarial gain (loss)
     (550,443 )     181,646       (368,797 )
Cumulative translation adjustment
     233,021       -       233,021  
Other comprehensive income (loss)
   $ 518,460     $ (79,808 )   $ 438,652  

 
F-64
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
D) Summary of significant differences between Colombian Government Entity GAAP and U.S. GAAP and required U.S. GAAP disclosures
 
i.
INVESTMENT SECURITIES

The Company’s investments include both marketable securities and non-marketable securities.  Under RCP, the Company classifies investment securities based on the form of their investment return, either as fixed-yield investment or as variable-yield investments.  Fixed-yield investments generally represent debt securities and are initially recorded at cost with subsequent adjustments to fair value recorded in the income statement.  Variable-yield investments generally represent equity securities or interests in other entities and are initially recorded at cost.  Subsequent adjustments to fair value are made with increases in fair value resulting in an increase to equity, while decreases in fair value are charged to the income statement.  Fair values are determined using quoted market prices, if and when available.  In the absence of quoted market prices, these investments are recorded at Management’s estimate of fair value using discounted cash flow techniques.

Under U.S. GAAP, the Company has classified its investment securities as held to maturity or available for sale, as defined in ASC Sub-topic 320-10-25, Accounting for Certain Investments in Debt and Equity Securities. Debt security investments for which the Company has demonstrated its positive ability and intent to hold until maturity are classified as held-to-maturity.  Such investments are reported at amortized cost.  Investments classified as available-for-sale are reported at fair value, with unrealized gains and losses reported, net of taxes, as a component of other comprehensive income.

In the event any other than temporary impairment of the values of the investments occurs, the impairment loss is recorded in income.

 
F-65
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The Company’s short-term and long-term investments at December 31, 2010, December 31, 2009, and 2008 consist of  the following:

As of December 31, 2010
  
Aggregated
Fair
Value
    
Gross
Unrealized
Holding
Gains
    
Gross
Unrealized
Holding
Losses
    
Gross
Recognized
Losses
    
Cost
Basis
  
Short-term Investments - Available for Sale Securities:
                              
Securities issued or secured by Colombian government
   $ 19,527     $ 255     $ -     $ -     $ 19,272  
Securities issued or secured by financial entities
     39,408       -       (1,338 )     (156 )     40,902  
Total Short-term Investments Classified as Available for Sale
     58,935       255       (1,338 )     (156 )     60,174  
Long-term Investments - Available for Sale Securities:
                                        
Securities issued or secured by Colombian government
     1,622,809       35,723       (5,546 )     (19,654 )     1,612,286  
Securities issued or secured by government sponsored enterprise  (GSEs)
     1,498,957       33,141       (1,021 )     (21,382 )     1,488,219  
Securities issued or secured by financial entities
     80,636       201       (458 )     (1,430 )     82,323  
Securities issued or secured by government USA
     642,974       9,061       (1,924 )     -       635,837  
Other debt securities
     29,585       459       -       (136 )     29,262  
Securities issued by mixed- economy governmental entities
     1,932,115       1,656,071       -       -       276,044  
Total Long-term Investments Classified as Available for Sale
     5,807,075       1,734,656       (8,949 )     (42,602 )     4,123,971  
Total  Available for Sale
   $ 5,866,011     $ 1,734,911     $ (10,287 )   $ (42,758 )   $ 4,184,145  
                                         
   
Aggregated Fair
Value
    
Gross Unrealized
 Holding Gains
    
Gross
Unrealized
Holding
Losses
    
Net Carrying
Amount
          
Short-term Investments - Held to Maturity Securities:
                                        
Other debt securities
   $ 7,700     $ -     $ -     $ 7,700          
Securities issued or secured by government USA
     9,867       199       -       9,669          
Total Short-term Investments Classified as Held to Maturity
     17,567       199       -       17,369          
                                         
Long-term Investments- Held to Maturity Securities:
                                        
Securities issued or secured by Colombian government
     120,322       9,567       -       110,755          
Total Long-term Investments Classified as Held to Maturity
     120,322       9,567       -       110,755          
Total Held to Maturity
   $ 137,889     $ 9,766     $ -     $ 128,124          

 
F-66
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

As of December 31, 2009
  
Aggregated
Fair
Value
    
Gross
Unrealized
Holding
Gains
    
Gross
Unrealized
Holding
Losses
    
Gross
Recognized
Losses
    
Cost
Basis
  
Short-term Investments - Available for Sale Securities:
                              
Securities issued or secured by Colombian government
   $ 126,376     $ 5,472     $ (965 )   $ (6,813 )   $ 128,682  
Securities issued or secured by government sponsored enterprise  (GSEs)
     41,863       4,472       -       -       37,391  
Securities issued or secured by financial entities
     10,593       1,093       -       -       9,500  
Total Short-term Investments Classified as Available for Sale
     178,832       11,037       (965 )     (6,813 )     175,573  
Long-term Investments - Available for Sale Securities:
                                        
Securities issued or secured by Colombian government
     597,761       51,997       (375 )     (5,001 )     551,140  
Securities issued or secured by government sponsored enterprise  (GSEs)
     1,670,687       48,476       -       -       1,622,211  
Securities issued or secured by financial entities
     592       -       (412 )     -       1,004  
Securities issued or secured by government USA
     153,186       -       (20,667 )     -       173,852  
Securities issued by mixed- economy governmental entities
     764,853       640,740       -       -       124,113  
Total Long-term Investments Classified as Available for Sale
     3,187,078       741,213       (21,454 )     (5,001 )     2,472,320  
Total  Available for Sale
   $ 3,365,910     $ 752,250     $ (22,419 )   $ (11,814 )   $ 2,647,893  
                                         
   
Aggregated Fair
Value
    
Gross Unrealized
 Holding Gains
    
Gross
Unrealized
Holding
Losses
    
Net Carrying
Amount
          
Short-term Investments - Held to Maturity Securities:
                                        
Other debt securities
   $ 8,280     $ 404     $ -     $ 7,876          
Total Short-term Investments Classified as Held to Maturity
     8,280       404       -       7,876          
                                         
Long-term Investments- Held to Maturity Securities:
                                        
Securities issued or secured by Colombian government
     129,769       9,655       -       120,114          
Securities issued or secured by government USA
     10,950       636       -       10,314          
Total Long-term Investments Classified as Held to Maturity
     140,719       10,291       -       130,428          
Total Held to Maturity
   $ 148,999     $ 10,695     $ -     $ 138,304          

 
F-67
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

   
Aggregated
Fair
Value
    
Gross
Unrealized
Holding
Gains
    
Gross
Unrealized
Holding
Losses
    
Gross
Recognized
Losses
    
Cost
Basis
  
As of December 31, 2008
                              
                               
Short-term Investments - Available for Sale Securities:
                              
Securities issued or secured by Colombian government
   $ 239,819     $ 17,825     $ (5,559 )   $ -     $ 227,553  
Securities issued or secured by government sponsored enterprise
     989,949       148,808       (4,158 )     -       845,299  
Securities issued or secured by financial entities
     92,535       13,026       -       -       79,509  
Other debt securities
     23,457       3,175       -       -       20,282  
Total Short-term Investments classified as Available for Sale
     1,345,760       182,834       (9,717 )     -       1,172,643  
                                         
Long-term Investments - Available for Sale Securities:
                                        
Securities issued or secured by Colombian government
     821,342       123,957       (6,259 )     -       724,733  
Securities issued or secured by government sponsored enterprise
     2,515,761       427,156       (215 )     (390 )     2,110,413  
Securities issued or secured by financial entities
     596,792       110,263       (64 )     -       487,898  
Securities issued or secured by government USA
     2,169,197       35,436       (27,653 )     -       2,161,414  
Other debt securities
     1,452       144       -       (95 )     1,403  
Total Long-term Investments classified as Available for Sale
     6,104,544       696,956       (34,191 )     (485 )     5,485,861  
Total Available for Sale
   $ 7,450,304     $ 879,790     $ (43,908 )   $ (485 )   $ 6,658,504  
                                         
   
Aggregated
Fair
Value
    
Gross
Unrecognized
Holding
Gains
    
Gross
Unrecognized
Holding
Losses
    
Net
Carrying
Amount
          
Long-term Investments- Held to Maturity Securities
                                        
Securities issued or secured by Colombian government
   $ 132,133     $ 993     $ (2,533 )   $ 133,693          
Securities issued or secured by government USA
     12,436       1,129       -       11,307          
Other debt securities
     35,829       1,733       -       34,096          
Total Long-term Investments Classified as Held to Maturity
   $ 180,398     $ 3,855     $ (2,533 )   $ 179,096          

 
F-68
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The maturities of fixed-income investments at December 31, 2010, and December 31, 2009 are as follows:

As of December 31, 2010
  
   
Available for Sale
    
Held to Maturity
  
   
Cost Basis
    
Fair Value
    
Cost Basis
    
Fair Value
  
                         
Due in one year or less
   $ 60,174     $ 58,935     $ 17,369     $ 17,567  
Due in one year to five years
     3,719,718       5,396,547       110,755       120,322  
Due in five years to ten years
     404,253       410,529       -       -  
Total
   $ 4,184,145     $ 5,866,011     $ 128,124     $ 137,889  
                                 
As of December 31, 2009
  
   
Available for Sale
    
Held to Maturity
  
   
Cost Basis
    
Fair Value
    
Cost Basis
    
Fair Value
  
                                 
Due in one year or less
   $ 175,573     $ 178,832     $ 7,876     $ 8,280  
Due in one year to five years
     2,397,956       3,123,537       130,428       140,719  
Due in five years to ten years
     74,364       63,541       -       -  
Total
   $ 2,647,893     $ 3,365,910     $ 138,304     $ 148,999  
 
Amounts recorded in OCI in prior years realized on securities available for sale sold at December 31, 2010, 2009 and 2008 were:

   
2010
    
2009
    
2008
  
                   
Losses
   $ 67,225     $ 727,697     $ 188,060  
Gains
   $ 24,322     $ 38,539     $ 48,108  

Foreign Exchange Gains and Losses on Securities Available for Sale

Under RCP, changes in account balances resulting from variations in foreign currency exchange rates are reflected in the company’s net income.  Under U.S. GAAP, any change in value of available-for-sale debt securities as a result of changes in foreign currency exchange rates is reflected in equity as required under the guidance in ASC subtopic 320-10-35.  The amount reclassified from earnings under RCP purposes to other comprehensive income for U.S. GAAP purposes includes $18,931, $88,278 and $635,430 in 2010, 2009 and 2008, respectively that correspond to exchange rate differences.

 
F-69
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Unrealized loss
 
Available-for-sale securities in an unrealized loss position as of December 31, 2010 and 2009 are as follows:

2010
  
   
Less Than 12 months
    
12 Months of Greater
    
Total
  
Descriptions of Securities
  
Fair Value
    
Unrealized
Losses
    
Fair Value
    
Unrealized
Losses
    
Fair Value
    
Unrealized
Losses
  
Securities issued or secured by Colombian government
     346,690       5,432       6,483       115       353,173       5,547  
Securities issued or secured by financial entities
     69,756       912       121       883       69,877       1,795  
Securities issued or secured by government sponsored enterprise  (GSEs)
     149,485       1,021       0       0       149,485       1,021  
Securities issued or secured by government USA
     186,224       1,924       0       0       186,224       1,924  
Total
     752,155       9,289       6,604       998       758,759       10,287  

2009
  
   
Less Than 12 months
    
12 Months of Greater
    
Total
  
Descriptions of Securities
  
Fair Value
    
Unrealized
Losses
    
Fair Value
    
Unrealized
Losses
    
Fair Value
    
Unrealized
Losses
  
Securities issued or secured by Colombian government
     18,608       375       27,013       965       45,620       1,341  
Securities issued or secured by financial entities
     0       0       592       412       592       412  
Securities issued or secured by government USA
     153,186       20,667       0       0       153,186       20,667  
Total
     171,793       21,042       27,605       1,377       199,398       22,419  

The unrealized losses on Ecopetrol investments in debt securities were caused by interest rate increases. Because Ecopetrol does not intend to sell the investments and it is not more likely than not that Ecopetrol will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Ecopetrol does not consider those investments to be other-than-temporarily impaired at December 31, 2010 and 2009.

Restricted Assets

Under US GAAP the Company classifies Santiago de las Atalayas securities as restricted assets because its availability depends on a court decision.

These securities are represented in the chart below:

2010
  
Concept
  
Amount
  
Investments available for sale
     361,607  
Investment fund *
     1,251  
Cash
     28,164  
Total
     391,022  

2009
  
Concept
  
Amount
  
Investments available for sale
     380,463  
Investment fund *
     469  
Total
     380,932  

*This fund receives the coupons and principal payments of the Santiago de las Atalayas investments in US dollars.

 
F-70
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The investments related to Santiago de las Atalayas at December 31, 2010 consist of the following:

As of December 31, 2010
  
Aggregated
Fair
Value
    
Gross
Unrealized
Holding
Gains
    
Gross
Unrealized
Holding
Losses
    
Gross
Recognized
Losses
    
Cost
Basis
  
Long-term Investments - Available for Sale Securities:
                              
Securities issued or secured by Colombian government
   $ 201,172     $ 7,835     $ (2,126 )   $ (10,062 )   $ 205,525  
Securities issued or secured by government USA
     160,435       3,920       -       -       156,515  
Total Long-term Investments Classified as Available for Sale
   $ 361,607     $ 11,755     $ (2,126 )   $ (10,062 )   $ 362,040  

As of December 31, 2009
 
Aggregated
Fair
Value
   
Gross
Unrealized
Holding
Gains
   
Gross
Unrealized
Holding
Losses
   
Gross
Recognized
Losses
   
Cost
Basis
 
Long-term Investments - Available for Sale Securities:
                             
Securities issued or secured by Colombian government
  $ 281,723     $ 18,481     $ (88 )   $ (4,188 )   $ 267,518  
Securities issued or secured by government USA
    98,740       -       (2,574 )      -       101,314  
Total Long-term Investments Classified as Available for Sale
  $ 380,463     $ 18,481     $ (2,662 )   $ (4,188 )   $ 368,832  

The unrealized gains and losses of the restricted assets are recognized in Other Comprehensive Income

a.
Impairment
 
Impairment of investment securities are reported differently under RCP and U.S. GAAP.  Under RCP, impairment is also charged to earnings in the current period, but recoveries in value can be recorded up to the amount that was originally impaired.  Under U.S. GAAP, other-than-temporary impairment should be charged to earnings in the current period and a new cost basis for the security is established.  Subsequent increases in the cost basis of an impaired investment as a result of a recovery in fair value are included in Other Comprehensive Income.
 
The Company has a policy under which they conduct periodic reviews of marketable securities to assess whether other-than-temporary impairment exists.  A number of factors are considered in performing an impairment analysis of securities.  Those factors include:
 
a)
the length of time and the extent to which the market value of the security has been less than cost;
 
b)
the financial condition and near-term prospects of the issuer, including any specific events which influence the operations of the issuer (such as changes in technology that may impair the earnings potential of the investment, or the discontinuance of a segment of a business that may affect the future earnings potential); and
 
c)
carry out the analysis as instructed in ASC paragraph 320-10-65-1 which includes the comparison of the fair value and the amortized cost, evaluates the intention to sell the security and if it is more-likely-than-not that the company will be required to sell the security prior to recovery, including the existence of a credit loss.
 
The Company also takes into account changes in global and regional economic conditions and changes related to specific issuers or industries that could adversely affect these values.
 
Ecopetrol’s marketable security portfolio consists only of debt securities, such as treasury investments, bonds, and commercial papers. For this reason, the Company has an internal policy to limit the ratings of their investments and issuers to the following ratings:
 
Credit Rating Agency
  
Short-term Credit Rating
  
Long-Term Credit Rating
  
Standard & Poor’s
  
A-1
  
A
  
Moody’s Investors Services
  
P-1
  
A2
  
Fitch Ratings
  
F-1
  
A
  

 
F-71
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The Company recognized impairment on its investment securities amounting to $44,851, $5,724 and $485 in 2010, 2009 and 2008, respectively.

ii.
INVESTMENTS IN NON-MARKETABLE SECURITIES

a.
Equity Method and Valuation Surplus

Under RCP, equity securities for which prices are unquoted, or for which trading volume is minimal, and the Company does not control the investee, are accounted for under the cost method and subsequently are valued by the shareholders' equity comparison method. Under the equity comparison method, the Company accounts for the difference between its proportionate share of shareholders' equity of the investee and its acquisition cost, adjusted for inflation through 2001, in a separate valuation account in the assets and equity (valuation surplus), if the proportionate share of shareholders’ equity of the investee is higher than its cost or as an allowance for losses, affecting net income, if the cost is higher than the proportionate share of shareholders’ equity of the investee. The proportionate share of shareholder’s equity is considered as the market value for this purpose and is known as book value. Under this method, the Company only records dividends as income when received. From 2008 the RCP incorporated the concept of significant influence for the recognition of investments in associated entities and established the equity method to update these investments.
 
Under U.S. GAAP, an investment in a non-marketable equity security is recorded using the equity method when the investor can exercise significant influence over the investee, or the cost method when significant influence cannot be exercised. Under the equity method of accounting for U.S. GAAP the carrying value of such an investment is adjusted to reflect (1) the Company’s proportionate share of earnings or losses from the investee and (2) additional investments and distributions of dividends.  The Company’s proportionate share of income or loss is reported in earnings but any dividends or additional investments are reported only as an adjustment of the carrying amount of the investment.
 
The differences between the application of the cost and the equity method under U.S. GAAP were:Reversal of valuations and allowances for losses recorded under RCP
 
·
Reversal of inflation adjustments recorded under RCP
·
Reversal of Goodwill amortization and impairment
·
Inclusion of share of earnings or losses under U.S. GAAP, net of intercompany eliminations.
·
Inclusion of share in Other Comprehensive Income under U.S. GAAP.

The summary of the investments valued by the equity method for U.S. GAAP purposes is shown in the following table:

For the Year Ended December 31, 2010

Company
  
Percentage Of
Voting
Interest
    
Equity
Calculated
under
U.S. GAAP
    
Equity
Under
Colombian
GAAP
    
Assets
Under
Colombian
GAAP
    
Liabilities
Under
Colombian
GAAP
    
Net Income
(Loss) Under
Colombian
GAAP
    
Investment
Under U.S.
GAAP
Equity
Method
    
Equity
Method
Accounting
Adj (*)
    
Total
Equity
Method
Investment
  
                                                       
Invercolsa S.A.
     32 %   $ 312,711     $ 536,744     $ 537,319     $ 575     $ 87,755     $ 99,348     $ -     $ 99,348  
Serviport S.A.
     49 %     3,111       14,656       17,312       2,656       (1,637 )     1,524       -       1,524  
Offshore International Group
     50 %     712,375       780,957       1,187,267       406,310       109,283       356,188       469,851       826,039  
Ecodiesel S.A.
     50 %     11,191       23,411       132,028       108,617       2,073       5,596       -       5,596  
Sociedad Portuaria de Olefinas
     50 %     427       780       1,022       242       33       213       -       213  
                                                    $ 462,869     $ 469,851     $ 932,720  

 
F-72
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

For the Year Ended December 31, 2009
Company
  
Percentage
Of Voting
Interest
    
Equity
Calculated
under
U.S. GAAP
    
Equity
Under
Colombian
GAAP
    
Assets
Under
Colombian
GAAP
    
Liabilities
Under
Colombian
GAAP
    
Net Income
(Loss)
Under
Colombian
GAAP
    
Investment
Under U.S.
GAAP
Equity
Method
    
Equity
Method
Accounting
Adj (*)
    
Total
Equity
Method
Investment
  
                                                       
Invercolsa S.A.
     32 %   $ 230,058     $ 468,507     $ 479,104     $ 10,597     $ 71,903     $ 73,078     $ -     $ 73,078  
Serviport S.A.
     49 %     4,742       15,170       17,557       2,387       941       2,324       -       2,324  
Offshore International Group
     50 %     640,866       726,398       860,151       133,753       69,845       320,433       754,875       1,075,307  
Ecodiesel S.A.
     50 %     5,985       15,842       91,641       75,799       336       2,992       -       2,992  
Sociedad Portuaria de Olefinas
     50 %     982       834       1,106       272       (134 )     491       -       491  
                                                    $ 399,318     $ 754,875     $ 1,154,193  

(*) Represents the purchase price allocation adjustments to Offshore International Group assets and liabilities as a result of the 2009 acquistion.
 
 
Concept
  
2010
    
2009
  
 
Fair Value of Property, Plant and Equipment
   $ 3,665     $ 4,236  
 
Goodwill net of Taxes
     466,186       750,638  
 
Total
   $ 469,851     $ 754,875  

The number of shares which the Company owns with respect to its investment in Invercolsa S.A. has been subject to a legal dispute with another Invercolsa shareholder.  Lower court decisions had ruled in favor of both the Company and the other shareholder and a final court decision in January 2011 determined that 324 million shares, equivalent to 11.58% of the capital stock of Invercolsa should be returned to Ecopetrol.  As a result Ecopetrol controls 43.35%. The dividends paid in respect of the shares returned to Ecopetrol are still in dispute, as well as the ownership of shares constituting 8.53% of Invercolsa. The resolution of these matters is still pending.
 
Because the court decision was issued in January 2011, and the registration of the shares on behalf of Ecopetrol was completed in February 2011, Ecopetrol recognized the investment under the equity method, applying the percentage owned as of December 31, 2010 (31.76%) as the transaction represents a contingency gain. As such, the amount of the Company’s investment is adjusted only for its proportionate share of Invercolsa’s net income or loss and any dividends received or additional investments made, and no adjustment is made for changes in Invercolsa’s participation.
 
b.
Variable Interest Entity (VIE)

Under U.S. GAAP, ASC paragraph 810-10-15-13 requires that consolidated financial statements include subsidiaries in which the Company has a controlling financial interest, i.e., a majority voting interest.  However, application of the majority voting interest requirement to certain types of entities may not identify the party with a controlling financial interest because that interest may be achieved through other arrangements.  Thus, the U.S. GAAP rules also require a Company to consolidate a variable interest entity if that company has a primary beneficiary that has the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.  In determining whether it is a primary beneficiary of a variable interest entity, a company shall treat variable interests in that same entity held by the Company’s related parties as its own interest.  Under RCP, consolidated financial statements only include subsidiaries in which the Company has the majority voting interest.
 
Ecopetrol owned 35.29% of Oleoducto Central S.A. (hereinafter “Ocensa”) and was consolidated considering that it was considered the primary beneficiary based on its variable interests in Ocensa. In addition, in March 2009, through a direct transaction with Enbridge Inc., Ecopetrol acquired an additional 24.71% ownership interest for $998,903 in cash.  As of such date, Ecopetrol’s participation in Ocensa became 60%. Until March 2009, Ocensa was valued at cost under RCP.
 
According to Colombian Government Entity GAAP, the acquisition of the 24.71% of the non-controlling interest is accounted for as an increase in investment and goodwill; under U.S. GAAP, the ownership interest increase in a subsidiary is an equity transaction , Non-controlling Interests in Consolidated Financial Statements (ASC Subtopic 810-10, Consolidation - Overall) is accounted for as an equity transaction which decreases additional paid-in-capital in by the difference between the non-controlling interest carrying amount and the consideration paid. Under U.S. GAAP, the additional paid-in capital effect of the transaction was $610,007.  A corresponding deferred income tax effect of $177,241 was recorded, resulting in a net effect of $432,766.

 
F-73
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
The summary of Ocensa’s financial information under U.S. GAAP as of and for the years ended December 31, 2009, and 2008, are as follows:
 
   
2009
    
2008
  
             
Assets
   $ 1,268,681     $ 1,000,110  
Liabilities
     (61,566 )     (106,447 )
Equity
     1,207,115       893,663  
Net income
   $ 497,471     $ 10,284  

In October 2009, the subsidiary Oleducto de los Llanos Orientales (hereinafter “ODL”) assigned its rights under a "Ship or Pay” contract for the completion of a securitization for the purpose of obtaining the funds required to finish the second phase of the project, the refund of capital to the associates, and maintain the capital structure initially agreed. The structure of this issuance was made through an assets of a trust fund (hereinafter “Fideicomiso P.A. ODL - ECOPETROL”) administered by Corficolombiana S.A., who have to pay the security holder on the due dates. Additionally, each month, the trust company must report to ODL income and expenses that are generated in this process and that are paid, if applicable, to ODL as advances.

Based on the ASC 810 definition, ODL determined that since they are responsible for the entire operation of the Fideicomiso P. A. ODL - ECOPETROL, it qualified as a Variable Interest Entity and therefore consolidated its financial statements for  U.S. GAAP purposes.

The summary of Fideicomiso P. A. ODL - ECOPETROL financial information under USGAAP as of and for the years ended December 31, 2010 and 2009, are as follows:
 
   
2010
    
2009
  
             
Assets
   $ 522,342     $ 514,484  
Liabilities
     (509,288 )     (512,271 )
Equity
   $ 13,054     $ 2,213  
Net income
   $ 13,052     $ 2,212  

c.
Impairment
 
Under Colombian Government Entity GAAP it is not mandatory to perform impairment tests of the Equity Method Investments unless positive evidence is identified. For the year 2010, the investment in Offshore International Group was evaluated for impairment resulting in a loss of $287,662.

The impairment under U.S. GAAP ASC paragraph 325-20-35 1A and 2, assets held at cost, including non-marketable equity investments, should be evaluated for impairment if the Company is aware of any events or changes in circumstances that may have significant adverse effects on the fair value of the investment.  If the Company believes such circumstances exist, the Company would estimate the asset’s fair value and compare that to cost to determine if any impairment is necessary. During 2010 the Company evaluated its investments and concluded there was an impairment in Offshore International Group “OIG” under both Colombian Government Entity GAAP and U.S. GAAP. This 2010 impairment loss under U.S.GAAP equaled $349,033. For the year 2009 the Company experienced a U.S. GAAP impairment loss of $4,810.
 
 
F-74
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
iii.
DERIVATIVES

Ecopetrol is exposed to market risk from changes in foreign currency exchange rates, interest rate risk of its financial obligations and to commodity price risk, resulting from the fluctuations of international crude oil prices which affect its earnings, cash flows and financial condition. Ecopetrol manages its exposure to these market risks through its regular operating and financial activities and, when appropriate, through the use of derivative financial instruments. Ecopetrol has established a control to assess, approve and monitor derivative financial instrument activities. Ecopetrol does not buy, hold or sell derivative financial instruments for trading purposes. Ecopetrol's primary foreign currency exposures relate to the U.S. dollar; however, Ecopetrol manages its foreign currency risk position internally, using non-deliverable forwards, according to the size of the mismatches between its asset-liability position in U.S. Dollars and its asset-liability position in Colombian pesos. If no mismatches occur Ecopetrol has a perfect natural hedge. Ecopetrol also utilizes other derivative agreements to mitigate changes in the fair value of commodities. None of the derivatives were designated or documented for hedge accounting.
 
The Company periodically enters into call and put option contracts to cover the price risk associated with fluctuations in market prices of asphalt. The option contracts limit the unfavorable effect that the price increase will have on asphalt. The maximum term over which the Company is managing its exposures to the variability for commodity price risk is 12 months.
 
As of December 31, 2009, the Company had entered into four (4) commodity call options with an effective date of January 1, 2010 and a termination date of December 31, 2010.  Under these call options, Ecopetrol had the right to purchase 2.040.000 bls. equivalent of asphalt.
 
As of December 31, 2010, the Company had entered into a commodity put option with an effective date of January 1, 2011 and a termination date of December 31, 2011. Under these put options, Ecopetrol has the right to sell 2.000.004 bls. equivalent of crude oil.
 
The subsidiary Refineria de Cartagena has 41 foreign currency delivery forward transactions outstanding to cover the exchange rate exposure created by the purchase of property plant and equipment in Euros. The purchased equipment is part of the new refinery under construction.
 
Total results recognized related to derivative activities during the periods are as follows:
 
   
2010
    
2009
    
2008
  
   
Realized
    
Unrealized
    
Realized
    
Unrealized
    
Realized
    
Unrealized
  
Options (1)
   $ (13,175 )   $ (1,474 )   $ 66,889     $ 25,943     $ -     $ -  
Swaps
     (7,031 )     2,242       (23,757 )     (438 )     (45,024 )     -  
Forwards
     245       107       5,862       -       (24,879 )     -  
Total
   $ (19,962 )   $ 875     $ 48,994     $ 25,505     $ (69,903 )   $ -  
(1)
Amounts include premiums paid

Under RCP, each derivative has its own accounting treatment depending on the type of derivative. Option premiums paid are recorded as deferred charges and amortized to the income statement as financial expense in a straight line basis over the life of the contract, the option contract is recognized in memo accounts unless it is likely to be exercised, the gain is recognized as an investment.  Swap and forward contracts net result is recorded as an investment. In all cases, gains and losses are recognized in earnings as financial income or expense. Amounts receivable or payable upon maturity resulting from net payments are recorded using current rates for the period.

U.S. GAAP requires that all derivative instruments be recorded on the balance sheet at fair value.  Changes in the fair value of derivatives are recorded each period in current earnings. See note xxvii for amounts recorded on the balance sheet relating to derivative instruments. The fair value of derivatives instruments is recorded other assets and other liabilities.
 
 
F-75
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Under U.S. GAAP, embedded derivative instruments shall be separated from the host contract, and accounted for using different measurement attributes, if certain conditions are met.  In the case of the Company, some contracts to which the Company is counterparty include embedded foreign exchange derivatives. According to ASC paragraph 815-15-15-10 through 13 these contracts do not require separate accounting for the embedded derivative and the host contract because contract payments are made in the functional currency of a party to the contract or contract payments are made in a currency in which the price of the good or service delivered is routinely denominated in international commerce.

Gas imbalance agreements were evaluated to identify if they were derivatives. Management concluded these agreements are not derivatives since they do not contain fixed notional amounts.
 
iv.
EXCHANGE OF NON-MONETARY ASSETS

During 2007, the Company exchanged a refinery business with a book value of $234,371 for a 49% interest in Refinería de Cartagena S.A.  The Company estimated the fair value of the 49% investment as $1,369,546.  Under RCP, this difference between the cost of the assets given and the fair value of the assets received was recorded as an increase to asset revaluation and equity.  However, under ASC Subtopic 845-10-30, 51% of the difference between the book value of the Refinery and the fair value of the assets received, which the Company determined to be a more reliable indicator of the value of the exchange since the fair value of the investment was greater, was recorded in the results of operations as a gain in the amount of $578,939.  The remaining 49% of the difference, equivalent to $556,236 is to be amortized over the useful life of the equipment. The reconciliation includes $23,640 in 2010 and 2009 and $55,623 in 2008 corresponding to the amortization of the deferred gain.

v.
DEFERRED CHARGES

Under RCP, the Company deferred certain pre-operating expenses and other deferred charges, which are expensed as incurred under U.S. GAAP.  These charges include research studies and projects in the research and development phase.  Normal recurring maintenance is also included in this category. Under U.S. GAAP, the mentioned deferred charges are not applicable and must be reclassified or reversed.
 
vi.
EMPLOYEE BENEFIT PLANS

Under Colombian Government Entity GAAP, the Company estimates the net present value of its actuarial liability for all pension and other post-retirement obligations. Annually, the Company estimates the net present value of the actuarial liability and adjusts the recorded liability accordingly. The amount of the adjustment is reflected in the Company’s net income.

For other post-retirement benefits, the payments are made according to seniority and the salary at the time of retirement, as stipulated in the Collective Labor Agreement and the Agreement No. 01.

Under the post-retirement benefits plan for Ecopetrol personnel, the Company covers 90% of educational expenses for children of employees, including enrollment fees, tuition and other associated costs. A fixed annual sum, depending on grade level, is also provided for the acquisition of textbooks. Educational coverage includes kindergarten, elementary school, high school and college. Ecopetrol´s financial statements must also show the cost of post-retirement educational benefits for children of retired employees, since benefits continue irrespective of retirement or death.

According to the Collective Labor Agreement and Agreement No. 01, the Company will pay for health services for employees and enrolled family members. Health services include: office visits and required laboratory services, drugs, diagnostic examinations, ambulatory treatment, hospitalization due to illness or accident, surgery due to illness or accident, maternity and rehabilitation treatments and orthopedic parts. Therefore, such post-retirement health benefit costs are recorded in the RCP Ecopetrol financial statements, since retired workers and enrolled family members continue to receive full medical coverage. The same is true for deceased non-retired employees.

 
F-76
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

U.S. GAAP requires the recognition of pension, health care and education plans costs based on actuarial computations under a prescribed methodology which differs from that used under RCP. For purposes of U.S. GAAP reconciliation, the transition obligation is calculated at the date the Company adopted the ASC Topic 420, 715, 805, 835, 958 and 980 Employers Accounting for Pensions and is being amortized from January 1, 1989. The transition obligation for the education and medical plan is being amortized from January 1, 1995.

Under Colombian law, employees are entitled to one month salary for each year of service. This benefit is known as the “severance obligation” or “cesantias”. This benefit accumulates during the time of employment and is paid to employees upon their termination or retirement from Ecopetrol. However, employees may request advanced benefit payments at any time. In 1990, the Colombian government revised its labor regulations to permit companies, subject to employee approval, to pay the severance obligation to their employees on a current basis. Law 50 of 1990 also enabled each employee to freely choose yearly which trust fund would manage the amount accrued during each year in which they are eligible for severance payments. This amount must be transferred by the company to the trust fund no later than the next subsequent year.

In addition, the Company under Colombian law must pay pension bonds for certain employees when they leave Ecopetrol. And those bonds payable accrue interest at the DTF rate, which rate averaged 5.6% for 2009, and 6.27% for 2010.
 
The economic assumptions used in the determination of pension obligations under U.S. GAAP differ from those used under RCP because the latter are established annually by the Colombian regulations.
 
The combined costs for the above mentioned benefit plans, determined using U.S. GAAP, for the years ended December 31, 2010, 2009 and 2008 are summarized below: (all obligations were measured at the year-end)

   
2010
   
2009
   
2008
 
Components of net periodic benefit
costs:
 
Pension
   
Other
Benefits (*)
   
Total
   
Pension
   
Other
Benefits (*)
   
Total
   
Pension
   
Other
Benefits (*)
   
Total
 
Service cost
  $ 46,686     $ 32,840     $ 79,526     $ 21,126     $ 40,279     $ 61,405     $ 57,957     $ 20,549     $ 78,506  
Interest cost
    845,144       386,159       1,231,303       1,037,577       446,502       1,484,079       861,042       787,838       1,648,880  
Expected Return on plan assets
    (1,303,018 )     (290,075 )     (1,593,093 )     (1,013,399 )     (238,744 )     (1,252,143 )     (366,541 )     (78,806 )     (445,347 )
Amortization of net (gain) or loss
    22,977       41,293       64,270               10,009       10,009       270,231       143,337       413,568  
Net periodic pension cost under U.S. GAAP - (gain) or loss
    (388,211 )     170,217       (217,994 )     45,304       258,046       303,350       822,689       872,918       1,695,607  
Net periodic pension cost under Colombian GAAP (gain) or loss
    264,693       (146,411 )      118,282       118,677       527,124       645,801       (608,473 )      852,901       244,428  
Difference to be recognized under U.S. GAAP (income) loss
  $ (652,904 )   $ 316,628     $ (336,276 )   $ (73,373 )   $ (269,078 )   $ (342,451 )   $ 1,431,162     $ 20,017     $ 1,451,179  

(*) Other benefits include education, health, pension bonds and accrued severance.

 
F-77
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
The changes in the benefit obligations and  in plan assets for the above mentioned benefit plans, determined using U.S. GAAP, for the years ended December 31, 2010 and 2009, are summarized below:
 
   
Pension Plans
   
Other Benefits
 
   
2010
   
2009
   
2010
   
2009
 
Reconciliation of project benefit obligation:
                       
Project benefit obligation as of January 1
  $ (10,338,890 )   $ (8,910,139 )   $ (4,844,216 )   $ (3,838,042 )
Cost of service
    (46,686 )     (21,126 )     (32,840 )     (40,279 )
Cost of interest
    (845,144 )     (1,037,577 )     (386,159 )     (446,502 )
Actuarial (gain) loss
    (58,216 )     (920,726 )     120,377       (729,243 )
Benefit payments
    602,693       550,678       254,017       209,850  
Projected benefit obligation as of December 31
    (10,686,243 )     (10,338,890 )     (4,888,821 )     (4,844,216 )
Reconciliation of plan assets:
                               
Fair value of plan assets as of January 1
    8,973,955       8,501,667       1,997,767       1,671,124  
Fund Contribution
    -       -       -       (80,264 ) 
Expected return on plan assets
    1,303,018       1,013,399       290,075       238,744  
Benefits paid
    (602,693 )     (550,678 )     (6,776 )     -  
Actuarial (gain) loss on plan assets
    (569,101 )     9,567       (183,690 )     168,163  
Fair value of plan assets as of December 31
    9,105,179       8,973,955       2,097,376       1,997,767  
                                 
Projected benefit obligation, as of December 31
    80,142       (308,069 )     (1,813,618 )     (1,890,642 )
Amounts recognized in other comprehensive (income) loss
    (1,661,206 )     (1,056,866 )     (977,827 )     (955,807 )
                                 
Net liability
    (1,581,064 )     (1,364,935 )     (2,791,445 )     (2,846,449 )
Net liability under RCP
    383,380       118,676       2,194,048       2,587,711  
Net effect under pension plan and other benefits
  $ (1,197,684 )   $ (1,246,259 )   $ (597,397 )   $ (258,738 )

Net liability of employee benefit plans is classified as follows:
 
   
Pension Plans
    
Other Benefits
    
TOTAL
  
   
2010
    
2009
    
2010
    
2009
    
2010
    
2009
  
Current portion
   -     -       (468,350 )     (246,881 )     (468,350 )     (246,881 )
Long-term portion
     (1,581,064 )     (1,364,935 )     (2,323,095 )     (2,599,568 )     (3,904,159 )     (3,964,503 )
Net liability
     (1,581,064 )     (1,364,935 )     (2,791,445 )     (2,846,449 )     (4,372,509 )     (4,211,384 )

The decrease in the asset related to the health fund in 2009 amounting to 80,264, treated as a contribution, was originated in the remaining asset once the partial transfer “conmutación” was completed in 2008.
 
Under U.S. GAAP, the Company applies the provisions of Statement on ASC Topic 420, 715, 805, 835, 958 and 980, as amended by Statement on ASC Topic No. 450 and 715, Employers Disclosure about Pension and Other Post-retirement Benefits, an amendment to ASC Topic  No. 420, 715, 805, 835, 980, 712 and 710.  The Company adopted Statement on ASC Topic No. 715 and 958 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans effective January 1, 2006, in respect of its defined benefits pension, health and education plans.  Accordingly, the Company recognizes the overfunded and underfunded status of each of its defined benefit pension and other postretirement benefit plans as an asset or liability and to reflect changes in the funded status through Accumulated Other Comprehensive Income, as a separate component of shareholders’ equity.  The actuarial calculations are estimated at year-end dates.

 
F-78
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
As of December 31, 2010 and 2009, net obligation amounts recognized in the balance sheet related to pension, health, education, bonds and severance obligations consist of:
 
   
2010
    
2009
  
Long-term liability
            
Pension
   $ (1,581,064 )   $ (1,364,935 )
Health
     (2,799,628 )     (2,343,212 )
Education
     (413,241 )     (437,424 )
Bonds
     899,400       191,319  
Severance
     (9,626 )     (10,251 )
Total long-term liability
   $ (3,904,159 )   $ (3,964,503 )

As of December 31, 2010 and 2009, the amounts recognized in accumulated other comprehensive loss, related to pension, health and education obligations consist of:
 
   
2010
    
2009
    
2008
  
Other comprehensive income
                  
                   
Pension
   $ (1,661,206 )   $ (1,056,866 )   $ (145,707 )
Health
     (1,373,096 )     (951,590 )     (343,811 )
Education
     (139,445 )     (144,247 )     (60,925 )
Bonds
     534,714       140,030          
Total other comprehensive income
     (2,639,033 )     (2,012,673 )     (550,443 )
Deferred income tax effect
     870,881       664,182       181,646  
Total
   $ (1,768,152 )   $ (1,348,491 )   $ (368,797 )
 
The significant variation in the other comprehensive income 2009 compared to the year 2008, of pension plans and health are due to the impact they had retained product actuarial losses of the applicability of the mortality table, for pension plan was $920,726 and for pension medical was $616,837.
 
The Company expects the following amounts in other comprehensive income to be recognized as components of net periodic pension cost during 2011:

   
Years for Amortization
    
Amortization
  
Pension
     0.67     $ 592,582  
Bonds
     13.03     $ 24,941  
Health
     19.24     $ 49,898  
Education
     19.24     $ 4,100  
 
As of December 31, 2010 and 2009, the amounts of liability for gains and losses related with pension, health, education and bonds consist of:

   
2010
    
2009
  
                         
   
Gain (loss)
    
Cumulative Gain
(loss)
    
Gain (loss)
    
Cumulative Gain (loss)
  
                         
Pension
     (58,216 )     (1,661,206 )     (920,726 )     (1,056,866 )
Health
     (457,941 )     (1,373,096 )     (616,837 )     (951,590 )
Education
     (56 )     (139,445 )     (84,273 )     (144,247 )
Bonds
     578,374       534,714       (28,133 )     140,030  

 
F-79
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The economic assumptions adopted are shown below in nominal terms. Those assumptions used in determining the actuarial present value of the pension obligation and the projected pension obligations for the plan years were as follows:
 
   
2010
    
2009
  
   
Pension
    
Health
    
Education
    
Bonds
    
Severance
    
Pension
    
Health
    
Education
    
Bonds
    
Severance
  
Discount rate
     8.00 %     8.50 %     8.00 %     8.00 %     8.00 %     8.50 %     8.50 %     8.50 %     -       -  
Rate of compensation and pension increases
     3.48 %     3.48 %     3.48 %     3.48 %     3.48 %     5.06 %     4.00 %     4.00 %     -       -  
Expected rate of return
     4.37 %     -       -       4,37 %     -       4.33 %     -       -       4,33 %     -  
Mortality table
     *       *       *       *       *       *       *       *       *       *  
* Colombian Mortality Table ISS, male and female, 2005-2008.

The Superintendency of Finance concluded a mortality study based on the experience of the affiliated workers to the pension funds and to the Social Security Institute ISS, during the years 2005-2008. The resulting mortality table from such study reflects the current mortality of the Colombian workers. As it was expected, the new table shows a lower mortality rate compared with those of the actual mortality table, ISS, experience 1981-1989. For such reason, the new table was applied for purposes of executing the different actuarial calculations included in this valuation in 2009.
 
The rate of return of the plan assets during 2010 was 7.85%. We have considered the rate corresponding to the government bonds, TES, at December 31 2010 of 8.0%, and an expected inflation rate equal to 3.48% with a real discount rate of 4.37%.
 
Estimated future benefit payments
 
The benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
 
Period
  
Pension
Benefits
    
Health Care
Benefits
    
Education
Benefits
    
Bonds
Pension Plan
    
Severance
Plan
  
2011
   $ 612,222     $ 204,843     $ 80,018     $ 177,190     $ 6,299  
2012
     614,638       196,196       66,353       22,906       53  
2013
     604,529       191,731       62,690       25,203       74  
2014
     594,230       186,675       57,059       29,963       97  
2015
     583,766       181,609       52,138       26,707       125  
Years 2016 – 2021
   $ 4,376,510     $ 1,299,362     $ 205,643     $ 683,030     $ 13,816  

All of the benefits estimated in the table above are to be paid from plan assets.  The Company does not have any insurance policies that are intended to cover benefits that plan participants are to receive in the future.
 
Furthermore, currently the Company does not intend to contribute to the fund in the upcoming fiscal year.  Management believes that the plan assets will provide for a sufficient return to cover any payments that are necessary to be made in the upcoming year.
 
Assumed health care cost trend rates have an effect on the amounts reported for the health care plans.  A one percentage point change in assumed health care cost trend rates would have the following effects:
 
   
1% Percentage Point
  
   
Increase
    
Decrease
  
Effect on total of service and interest cost
   $ 264,539     $ 207,387  
Effect on postretirement benefit obligation
   $ 3,409,159     $ 2,694,759  

 
F-80
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Plan assets
 
Pension and pension bonds are covered by assets in a single fund with the following investment allocation:
 
   
2010
    
2009
  
Government securities
     50 %     51 %
Private bonds
     29 %     24 %
Foreign currency
     2 %     3 %
Other
     18 %     22 %
      100 %     100 %

The plan assets do not contain any shares of stock of Ecopetrol or any of its related parties.
 
In 2007, the Company outsourced administration of its pension plan to a third party (known as a partial transfer).  As a result, on October 28, 2008, the Ministry of Finance and Public Credit approved the partial transfer (“commutation”) of the pension obligation of the Company, which was then approved by the Ministry of Social Security, according to the actuarial calculation at December 31, 2008 of $10,092,528.  Since Ecopetrol continues to be financially responsible for the transferred pension liability, this amount continues being considered in the calculations for U.S. GAAP purposes.
 
vii.
PROVISIONS, ALLOWANCES AND CONTINGENCES
 
The amount at which the provision is valued under RCP is the estimated amount of the loss at year end.  In 2008, the modification of the methodology generated a net decrease (recoveries and new provisions) of $425,376, recorded in December 2008.  In addition, in 2009, the modification of the methodology generated a net decrease (recoveries and new provisions) of $142,452, recorded in December 2009. In 2010, the Company used the same methodology of 2009 and recorded a net decrease (Recoveries and new provision) of $127,706.
 
For U.S. GAAP, Accounting for Contingencies (ASC 450), provides the guidance for recording contingencies.  Under ASC 450, there are three levels of assessment of contingent events – probable, reasonably possible and remote.  The term probable in ASC 450 is defined as “the future event or events that are likely to occur”.  The term reasonably possible is defined as “the chance of the future event or events occurring is more than remote but less than likely”. While the term remote is defined as “the chance of the future event or events occurring is slight”.
 
Under ASC 450, an estimated loss related to a contingent event is to be accrued by a charge to income if both of the following conditions are met:
 
•
Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements.
 
•
The amount of loss can be reasonably estimated.
 
The amount recorded is an estimate of the amount of loss at the date of the financial statements.  If the contingent event is evaluated to be reasonably possible, no provision for the contingent event may be made, but disclosure of the event is required.

As a result of the difference in the definition of “probable” between RCP and U.S. GAAP, and the general interpretation of the definition in practice in Colombia, there is a difference in the amount of the provision for legal proceedings.  In 2010, 2009 and 2008, there was a difference in the amount at which the provision for loss is recorded, as described above.

 
F-81
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
viii.
DEFERRED INCOME TAXES
 
Under RCP (Colombian Government Entity GAAP), deferred income taxes are recognized only for temporary differences using the liability method.  Under U.S. GAAP, deferred tax must be recorded for all temporary differences between the financial and tax basis of assets and liabilities.
 
Under RCP, deferred income tax asset is recorded to the extent the Company expects to generate taxable income tax to recover that amount. Under U.S. GAAP, a valuation allowance is provided for deferred tax assets to the extent that it is more likely than not that they will not be realized.
 
Under RCP, deferred income taxes are calculated using the current statutory tax rate. Under U.S. GAAP, deferred income taxes are calculated based on rates and tax laws enacted at the reporting date considering the future tax rate that will apply when the deferred income tax difference will be realized.

Under RCP, since 2009, goodwill is deductable and does not generate differences between tax laws and the RCP, except by the difference in the time of amortization. Under U.S. GAAP, the goodwill is not amortizable and generates a temporary difference, as a result it is necessary to compute and recognize deferred income taxes for differences originated by deductions since the acquisition date.
 
Under RCP, the fair value of the assets is not recorded, the difference between this value (zero) and the value recorded under U.S. GAAP generates deferred tax calculated under ASC 740.
The Company and its subsidiaries file separate income tax returns since tax regulations do not allow consolidated income tax returns.  There are no requirements to file tax returns by segments.  Tax returns are required for each legal entity.
 
The following information regarding income taxes has been prepared under U.S. GAAP:
 
Income Taxes
 
Total income taxes for the years ended December 31, 2010, 2009 and 2008 were comprised as follows:
 
   
2010
    
2009
    
2008
  
Income tax expense
   $ 4,397,797     $ 2,893,963     $ 4,579,304  
Income tax effects based on items of Other Comprehensive Income:
                        
Pension Plan Liability
     206,699       482,535       (302,050 )
Available-for-sale securities
     8,819       226,833       (236,974 )
Additional paid in capital
     -       177,241       -  
    $ 4,613,315     $ 3,780,572     $ 4,040,280  

Income tax expense attributable to income from continuing operations consists of:
   
2010
    
2009
    
2008
  
Current provision
   $ 3,201,040     $ 1,948,819     $ 3,648,451  
Deferred tax
     1,196,757       945,144       930,853  
    $ 4,397,797     $ 2,893,963     $ 4,579,304  

In 2010, 2009 and 2008, subsidiaries in foreign countries have not generated taxable income and, consequently, they have not incurred income tax expense.  In the countries that are accepted the carry forward under fiscal losses they recorded differed tax asset less a valuation allowance in the case that applies.  In other countries the current tax rate is 0% or they considered exempt income, also, the companies were not recorded current tax provision.

 
F-82
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Tax Rate Reconciliation
 
Income tax expense attributable to income from continuing operations was $4,397,797 , $2,893,963, and $4,579,304 for the years ended December 31, 2010, 2009 and 2008, respectively, and differed from the amounts computed by applying the statutory income tax rate for Colombian entities that is 33% in 2010, 2009 and 2008 to pretax income from continuing operations as follows:
 
   
2010
    
2009
    
2008
  
Statutory income tax
     33.00 %     33.00 %     33.00 %
Non – taxable income
     (2.37 )%     1.39 %     (1.09 )%
Non – deductible expenses
     4.64 %     (1.91 )%     3.56 %
Others
     (0.45 )%     0.26 %     1.94 %
Exempt revenue
     (0.52 )%     (0.11 )%     (3.29 )%
Effect of foreign profit taxed at other rate
     (0.05 )%     0.02 %     (0.02 )%
Business combination
     -       0.35 %     -  
Effective income tax under U.S. GAAP
     34.25 %     33.00 %     34.10 %
 
Deferred Taxes
 
The significant components of deferred income tax expense attributable to income from continuing operations for the years ended December 31, 2010, 2009 and 2008 are as follows:
 
   
2010
    
2009
    
2008
  
Deferred income tax expense (exclusive of the effects of other components below):
                  
Accounts payable
   $ (6,586 )   $ (21,075 )   $ 8,192  
Inventories
     (6,949 )     52,705       (14,554 )
Property, plant and equipment, principally due to DD&A
     (1,223,111 )     (666,473 )     521,649  
Deferred charges
     92,747       (845 )     (70,630 )
Prepaid expenses
     (52,613 )     55,679       -  
Capital lease asset
     11,597       43,120       10,488  
Monetary correction and other
     212,482       (103,012 )     (39,573 )
DD&A and inflation adjustments
     890,348       295,638       -  
Investment
     (111,530 )     125,899       655,164  
Estimated liabilities and provisions
     87,423       (178,468 )     (106,139 )
Accounts and notes receivable
     (3,734 )     13,375       (19,110 )
Carry forward loss
     16,652       (42,681 )     -  
Labor obligations
     (98,280 )     (360,488 )     51,299  
Deferred income
     7,811       8,052       (156,470 )
Natural and environmental resources capitalized expenses
     23,841       241,725       (11,979 )
Valuation allowance
     91,712       (11,475 )     4,126  
Additional tax discount on the acquisition of productive assets according to ASC 740 (1)
     1,276,705       1,107,934       637,418  
Excess in presumptive income tax
     (217,577 )     (106,437 )     -  
Other
     5,654       369       (4 )
Amortization of actuarial loss recorded in OCI
     206,699       482,535       (302,050 )
Unrealized loss in available for sale securities
     8,819       226,835       (236,974 )
Amortization of fiscal goodwill according to (ASC 830)
     (15,353 )     (217,768 )     -  
    $ 1,196,757     $ 945,144     $ 930,853  

(1)
This value corresponds to the deferred tax generated by the calculation of ASC 740, due to the implementation of the special deduction for investment in real productive assets.

 
F-83
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2010 and 2009 are presented below:

   
2010
   
2009
 
Deferred income tax assets and liabilities
           
Deferred income tax assets:
           
Inventories
  $ 69,145     $ 62,196  
Investments
    1,048,981       333,719  
Accounts and notes receivable
    3,039       (695 )
Deferred income
    140,422       148,233  
Property, plant and equipment, principally due to DD&A
    3,032,395       1,809,284  
Deferred charges
    16,583       109,330  
Prepaid expenses
    63,024       10,411  
Financial obligation, principally due to capitalized leasing
    107,517       119,114  
Pension obligations
    657,008       558,728  
Accounts payable
    141,253       134,667  
Carry forward loss (1)
    130,280       146,932  
Excess in presumptive income tax (2)
    332,320       114,743  
Other
    1,585       5,672  
Amortization of fiscal goodwill according to ASC 830
    472,536       457,183  
Estimated liabilities and provisions (3)
    786,153       873,576  
Total gross deferred income tax assets
    7,002,241       4,883,093  
Less valuation allowance
    (195,139 )     (103,427 )
Deferred income tax assets
    6,807,102       4,779,666  
Deferred income tax liabilities
               
Natural and environmental properties due to the difference between the methods of amortization
    464,335       440,494  
Monetary correction and other
    630,480       425,488  
DD&A and inflation adjustments
    1,185,986       295,638  
Investments
    1,681,325       1,077,594  
Deferred income tax liabilities
    3,962,126       2,239,214  
Net deferred income tax assets (4)
  $ 2,844,976     $ 2,540,452  

 
(1)
Carry forward looses are generated by subsidiaries and according to local tax laws, these losses do not expire.
 
(2)
The excess in presumptive income tax are generated by subsidiaries and will expire in 5 years.
 
(3)
Includes in 2009, $14,364 from Ecopetrol del Perú that are calculated an 29% income tax rate that is the income tax rate in this company.
 
(4)
The Company does not intend to withdraw the dividends originated from subsidiaries in a foreign country in the short-term, for that reason the deferred income taxes just include the deferred income taxes recognized by the subsidiaries.

ASC 740 “Income Taxes” (formerly FIN No. 48) prescribes a comprehensive model for the recognition, measurement, financial statement presentation and disclosure of uncertain tax positions taken or expected to be taken in a tax return. This standard does not have any effect on the financial position or result of operations of the Company.

The Company classifies income tax related interest and penalties as income taxes in the consolidated financial statements. See note 15 for the years remain open to examination.
 
ix.            REVENUE RECOGNITION
 
a.1           Natural Gas Imbalance
 
For U.S. GAAP purposes, the Company utilizes the entitlement method of accounting for natural gas balancing arrangements by which the amount of natural gas sold is based on its shared interests in the properties.  The Company’s natural gas imbalance positions at December 31, 2010 and 2009 were $ 13,187 and $539 in favor, equivalent to 1.733.334 MBTU and 147.903 MBTU, respectively.  Under RCP, natural gas imbalances are settled with a purchase or sale to the partner that are accounted for at the end of each period.
 
a.2           Over and Under
 
Under RCP, the Company recognizes receivables from or payables to partners based on the cost of the inventory.

 
F-84
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
For U.S. GAAP purposes, the Company utilizes the entitlement method of accounting for over and under positions by which the amount of crude oil sold is based on its shared interest in the properties, and revenue is recognized based on market prices. The Company’s crude oil over and under balance position at December 31, 2010 was $28,836 and at December 31, 2009 was $227,900 equivalent to 193,411 and 1,674,479 barrels, respectively.
 
a.3         Cost of Sales
 
Under U.S. GAAP, the related cost of sale for over and under transactions described at a.2 above amounted to $158,609 $(110,087) and $(8,887) during 2010, 2009 and 2008, respectively, in comparison with the amount recognized under RCP.
 
x.           INFLATION ADJUSTMENTS
 
The RCP consolidated financial statements were adjusted for inflation based on the variation in the IPC (Colombia’s equivalent to the consumer price index in the United States) for middle income-earners from January 1, 1992 to December 31, 2001 for Ecopetrol S.A. and from January 1, 1992 to December 31, 2006 for Oleoducto de Colombia S.A. (“ODC”), Hocol S.A., Oleoducto Central S.A. (“Ocensa”) and Reficar S.A.  The adjustment was applied monthly to non-monetary assets, equity (except for the valuation surplus) and memorandum accounts.
 
Under U.S. GAAP, the aforementioned adjustments under RCP are not applicable and must be reversed.
 
xi.          INVENTORIES
 
Under RCP, inventories are valued at the lower of average cost or sale price.  Under U.S. GAAP, inventories are valued at the lower of average cost or market value, the determination of which can be made using several different methods acceptable under U.S. GAAP.  An adjustment has been recorded to reflect the difference in the method used to determine the valuation of inventories that arises from using sale price instead of market value, as defined by U.S. GAAP. The effects of this adjustment (loss)/gain in the reconciliation of income were $(87,797) $16,853, $10,274, in December 2010, December 2009 and 2008, respectively.
 
Inventories are also affected by the effect of adjustments to cost of sales included in this reconciliation. These adjustments relate to depreciation, expenses capitalized in property, plant and equipment, asset retirement cost and impairment of long lived assets. The effects of these adjustments in the reconciliation of equity and the corresponding effect in inventory were $(114,868) and $(27,103) in December 2010 and 2009, respectively.
 
xii.         LEASE ACCOUNTING
 
Under both RCP and U.S. GAAP, lessee accounting for capital leases and operating leases is identical.  However, the tests used to determine if a lease is a capital or an operating lease differs between RCP and U.S. GAAP.  In applying the tests in accordance with RCP, the Company has determined that all leases are operating leases.  Under U.S. GAAP some of these leases should be accounted for as capital leases in accordance with ASC 840-10.  As a result, adjustments were recorded to reflect the related assets and liabilities, and to recognize interest expense and de-recognize operating expenses associated with the lease payments.
 
Embedded Leasing
 
Under RCP, there is no requirement to identify whether the arrangements or contracts contain leases.
 
Under U.S. GAAP, an arrangement contains a lease if both of the following two criteria are met:
 
1.
The arrangement depends on a specific fixed asset, either identified contractually or implicitly identified as no alternative item could feasibly be used.

 
F-85
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

2.
The purchaser has the right to control the use of the underlying fixed asset, such control demonstrated by the existence of any of the following qualitative conditions:

 
a)
The purchaser can operate the asset or direct others to operate the asset while obtaining or controlling more than a minor amount of the asset’s output;
 
b)
The purchaser can control physical access to asset while obtaining or controlling more than a minor amount of the asset’s output; or
 
c)
Probability is remote that another party will get more than minor amount of the asset’s output and the price is not fixed per unit.

Under U.S. GAAP, if the arrangement contains a lease, ASC 840 is applied by both purchaser and supplier for recognition, measurement, classification and disclosure purposes.
 
Build, Operate, Maintain and Transfer (BOMT)
 
   
BOMT
        
   
Ecogas (1)
    
Hocol (2)
    
Dina – Tello (3)
    
Transmetano (4)
  
Year
  
USD
(million)
    
Pesos
    
USD
(million)
    
Pesos
    
USD
(million)
    
Pesos
    
USD
(million)
    
Pesos
  
2011
     20     $ 38,420     $ 1,083     $ 2,072       2,5     $ 4,840     $ 9,220     $ 17,647  
2012
     18       35,098     $ 1,181       2,261       2,9       5,549       10,709       20,498  
2013
     17       33,098     $ 1,289       2,467       3,3       6,332       -       -  
2014
     17       32,513     $ 1,345       2,575       3,8       7,199       -       -  
2015
     17       32,513       -       -       4,3       8,155       -       -  
Payments after 2015
     27       50,920        -       -        10,2       19,586       -       -  
      116     $ 222,561     $ 4,899     $ 9,376       27,0     $ 51,660       19, 929     $ 38,145  
 
The outstanding amount of rentals, excluding operation and maintenance, payable under the BOMT obligations that were not relieved during future years are as follows for these leases:
 
At December 31, 2010 and 2009, the capitalized amount and the related liability are as follows:
 
   
BOMT – Hocol (2)
    
Transmetano (4)
  
   
2010
    
2009
    
2010
    
2009
  
Assets
                        
Property, plant and equipment (Building offices)
   $ 8,733     $ 9,326     $ 83,245     $ 83,245  
Land
     503       538       -       -  
Equipment F&F
     1,051       1,122       -       -  
Accumulated depreciation
     (1,783 )     (1,481 )     (72,147 )     (66,596 )
Net book value
     8,504       9,506       11,098     $ 16,649  
Liabilities:
                                
Financial obligations
   $ 9,376     $ 11,258     $ 38,145     $ 56,903  
 
 
(1)
Three original leases that were accounted for as capital leases under U.S. GAAP are BOMT contracts, the use of which are specifically required under Colombian law for projects that involve the building, operating, maintaining and transferring of natural gas pipelines for the transportation of natural gas.  These contracts had original terms of 20 years, no renewal provisions, and a purchase option.  The rights to the leased assets were subsequently transferred to a related Company (ECOGAS) that was sold, but Ecopetrol was not relieved of the primary obligation under the original lease.  This transfer was considered a sublease accounted for as a direct finance lease.  In 2007, Ecopetrol received a prepayment of all amounts to be received during the term of the sublease contract.

 
F-86
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
 
(2)
The subsidiary Hocol has another BOMT contract, which is accounted like an operating lease under Colombian Government Entity GAAP.  Under U.S. GAAP, this BOMT is accounted for as capital leases in accordance with ASC 840-10.  As a result, adjustments were recorded to reflect the related assets and liabilities.

 
(3)
In 2010, we entered in a new BOMT, corresponding to the gas treatment plant located in the Dina-tello field with an estimated value of construction US$28 million. This BOMT is accounted as capital lease in accordance with ASC 840 such as the contracts described previously, this contract had original term of 8 years, ending in 2017.

 
(4)
 In the case of the Company, it was determined that there were leases included in various contracts.  The most significant embedded lease was determined to exist in Contract DIJ 970 (Transmetano), Natural gas transportation - Sebastopol – Medellín pipeline.

The contractor is entitled to receive natural gas at the designated point, and it is also obligated along with the Company to transport the product throughout the pipeline and bring it to the delivery point (conducting up to 67 million cubic feet per day).  The contract has a duration of 15 years, and could be extended for periods of one year, for a period no longer than 10 years. Lease payments include the costs of transportation, administration, operation and pipeline maintenance.
 
This contract meets the criteria of Emerging Issues Task Force 01-08, Determining Whether an Arrangement Contains a Lease ASC 840 in order to be considered a lease agreement. Similarly, according to ASC 840, the contract meets the criteria to be recognized as a capital lease.

xiii.          PROPERTY, PLANT AND EQUIPMENT

Under RCP, property, plant and equipment are recorded at cost and were adjusted for inflation until 2001.  Costs include administrative expenses until 2004, financial expenses, asset retirement costs and exchange differences from foreign currency financing until the asset is placed in service.  Normal disbursements for maintenance and repairs are charged to expense and those significant costs that improve efficiency or extend the useful life are capitalized.  Under U.S. GAAP, cost includes expenditures until the asset is placed in service such as installation cost, freight, interest, retirement cost; construction cost and other direct expenses are capitalized, with exception of adjustment for inflation and foreign currency loss that generate a reconciling item since assets do include adjustments for these concepts under RCP. For U.S. GAAP purposes, administrative expenses capitalized, inflation adjustments and exchange difference were eliminated from property, plant and equipment.  In addition, a deferred income tax asset resulted from the application of the provisions of ASC 740 SEC Staff Guidance Accounting for Acquired Temporary Differences in Certain Purchase Transactions that are not Accounted for as Business Combinations, since the investment in productive assets creates an additional tax deduction of 30% in 2010 and 40% in 2009 and 2008.
 
The following table reflects the net changes in capitalized exploratory wells during 2010, 2009 and 2008 and does not include amounts that were capitalized and subsequently expensed during the same period.
 
   
2010
    
2009
    
2008
  
Beginning balance at January 1
   $ 363,922     $ 218,413     $ 206,300  
Additions from business combination
     -       143,541       -  
Additions to capitalized exploratory well costs
     1,029,203       349,162       268,041  
Reclassifications to wells, facilities and equipment based on the determination of proved reserves
     (132,672 )     (149,130 )     (163,817 )
Capitalized exploratory well costs charged to expense*
     (841,713 )     (198,064 )     (92,111 )
Ending balance at December 31
   $ 418,740     $ 363,922     $ 218,413  

* Includes $7,514 and $32,351 of capitalized exploratory well costs at December 31, 2010 and 2009, respectively, which were declared as dry wells during 2011 and 2010 (see subsequent events note), respectively.

 
F-87
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
The balances at December 31, 2010, 2009 and 2008 correspond to well costs capitalized during the years ended at those dates. The increase along time is explained by the growing of exploratory activities in recent years.
 
a.           Interest
 
Under RCP, all interest paid net of interest income is subject to capitalization regardless of the utilization of the funds. Exchange rate differential is also capitalized as part of the asset.

The Company´s assessment of the methodology followed to determine the capitalization amount under US GAAP considered more detailed information available to estimate the interest to be capitalized.  Previously, the calculations were made based on the average monthly disbursements, as an improvement, the Company obtained a detail of  the assets associated to the debt and was able to apply the analysis and calculations based on each project, providing further detail of interest capitalized.  The impact was recognized during the period as it was considered a change in an accounting estimate per ASC 250-10-45-17 and 18, Change in Accounting Estimates.

The total interest capitalized during 2010 under RCP was $319,326 and the total interest capitalized under U.S. GAAP was $150,800. The effect of this adjustment in the reconciliation of income was $168,527.  The total interest capitalized during 2009 under RCP was $127,026 and the total interest capitalized under U.S. GAAP was $63,247. The effect of this adjustment in the reconciliation of income was $63,779. There is not interest capitalized during 2008.

b.           Revaluation of property, plant and equipment and public accounting effect
 
Valuation surplus of property, plant and equipment and the public accounting effect correspond to the difference between net book value and the market value for real estate or the current value in use for plant and equipment, determined by specialists.  These accounts are reflected as Valuations and as Valuation Surplus from reappraisals of assets and the public accounting effect (components of equity) in the Company’s consolidated balances sheets.  The last valuation was in December 2009.  The effects of the valuation were recorded in 2010.  Technical appraisals are valid for three years.
 
Under U.S. GAAP valuation, valuation surplus of assets and the public accounting effect are not permitted.
 
c.           Impairment
 
Under RCP, technical appraisals for property, plant and equipment are performed at least every three years.  If the technical study is lower than the carrying value, the difference is recorded in equity as a reduction of the property, plant and equipment carrying value even if it reduces the valuation surplus below zero.  Under U.S. GAAP, in accordance with ASC 360-10, Property, Plant, and Equipment - Impairment or Disposal of Long-Lived Assets (ASC 360-10), property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  If circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by the asset to the carrying value of the asset.  If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value.  Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.  For U.S. GAAP purposes, the Company reviewed property, plant and equipment for impairment as of December 31, 2010, 2009, 2008,  and recorded impairment losses when required.  For U.S. GAAP purposes, the Company recorded in 2010, 2009 and 2008, $135,469,  $395,044, and $121,765, respectively, as additional impairment charges to reduce the net book value of certain wells and pipelines to their estimated values.
 
xiv.        DEPRECIATION, DEPLETION AND AMORTIZATION
 
Under RCP, all tangible equipments, including those used in the production of crude oil and natural gas, are depreciated on a straight-line basis over the related estimated useful lives.  Intangible crude oil and natural gas assets reflected on the Company’s consolidated balance sheets as natural and environmental resources are depleted on a units-of-production basis. Under U.S. GAAP, all assets, including tangible equipment, used in crude oil and natural gas producing activities are required to be depreciated or depleted using a units-of-production method, using proved reserves calculated in accordance with U.S. GAAP requirements.  Therefore, an adjustment to net income per U.S. GAAP has been recorded to account for the difference in depreciation, depletion and amortization expense based on the above-described differences in the methods used.

 
F-88
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
xv.         ASSET RETIREMENT OBLIGATIONS
 
Under RCP, the Company annually updates an analysis of the estimated liability for future asset retirement obligations as of each balance sheet date.  The liability is adjusted to the current value and an offsetting amount is recorded as an adjustment to the asset cost.  Until 2009  the  elements of the liability originated in U.S. dollars, changes in the foreign currency rates are included in the adjustment to the liability and the related asset, the component of the asset cost resulting from this liability is included in the depreciable base of the related asset. In addition, as explained in the Principal Accounting Policies and Practices, we eliminated the exchange rate effect during 2010 that represents an amount close to ($170,590).
 
For purposes of U.S. GAAP reporting, the Company follows the provisions of Accounting Standards Codification (ASC) 410-20 Asset Retirement Obligations.  ASC 410-20 requires the Company to recognize a liability for the present value of all legal obligations associated with the retirement of tangible, long-lived assets as of the date the related asset was placed into service, and capitalize an equal amount as an asset retirement cost (asset).  Each period the liability is accreted using an effective interest rate method.  The accretion is included as an operating expense.  The cost associated with the abandonment obligation, is included in the computation of depreciation, depletion and amortization. 
 
An adjustment has been recorded in the consolidated financial statements to reflect accretion expense, and the related obligation and assets in accordance with ASC 410-20. 
 
It is not possible at this time to reasonably estimate the amount of any obligation for Asset Retirement Obligation related to refineries because the company undergoes major renovations. In addition, the Company believes that there is not sufficient information available to estimate the fair value of the asset retirement obligation because the settlement date or the range of potential settlement dates has not been specified by others and information is not available to apply an expected present value technique.
 
The following table presents the changes in abandonment obligations for December 2010 and 2009 as is required by ASC 410-20.
 
   
2010
    
2009
  
Balance at beginning of period
   $ 1,904,096     $ 1,320,058  
Liabilities incurred in the current period
     30,748       6,857  
Abandonment Cost from Business combination
     -       58,143  
Revisions in estimated cash flows
     (237,906 )     562,453  
Liabilities settled in the current period
     (30,663 )     (17,435 )
Accretion expense
     151,516       (25,980 )
Balance at end of period
   $ 1,817,791     $ 1,904,096  

xvi.        EQUITY CONTRIBUTIONS
 
a.
Incorporated Institutional Equity
 
At the end of association contracts that were signed prior to January 1, 2004, private companies are required to transfer, without cost, to Ecopetrol, all producing wells, facilities and other real estate and assets acquired in executing the contracts. Under RCP, the Company accounts for the receipt, using the relinquishing company’s reported historical cost, by recording an increase to assets and equity.  The assets are then depreciated in accordance with the Company’s previously disclosed accounting policies.  For U.S. GAAP reporting purposes, these balances and their related impacts on accumulated depreciation, depletion and amortization, and cost of production have been removed from the financial statements, based on the fact that the cost of these assets is zero.  The adjustment to conform to U.S. GAAP in 2010 was a reduction in equity of $64,412 (original value of $137,010 net of $74,418 of accumulated depreciation of the assets received) and hold materials of $1,881. The adjustment to conform to U.S. GAAP in 2009 was a reduction in equity of $82,870 (original value of $137,068 net of $54,198 of accumulated depreciation of the assets received).

 
F-89
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
b.
Reversal of Concession Rights Contributed as Capital

Under RCP, prior to the effectiveness of Decree 1760 of 2003, the Company recorded the total amount of all crude oil and natural gas reserves that were returned to the nation as a result of expire concessions that were previously issued to third parties. Reserves were valued by means of the technical-economic model where the value per barrel resulted from the relation of the net present value obtained at a discount rate and the total proved reserves on the contribution date.
 
For U.S. GAAP purposes, these reversals were considered a transfer of assets between entities under common control. Ecopetrol, the entity that received the net assets, recognized the assets transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer which was zero value.  The unamortized value of the reverted reserves at December 31, 2010 and 2009 was $89,280 and $103,260, respectively.
 
xvii.       INDEBTEDNESS COST
 
Under RCP, the borrowing costs correspond to interest paid, lender commissions and other costs related to the debt transactions, the exchange difference for the interest rate to be paid, the amortization of premiums and discounts in the placement of bonds and securities, and any income results earned on the temporary investment of such loans.

Under U.S. GAAP, the borrowing costs correspond to interest payable, lender commissions and other costs related to the debt transactions, the amortization of premiums and discounts in the placement of bonds and securities, should not offset interest expense with interest income, unless the financing transaction involves restricted, tax-exempt borrowings. Unlike RCP, the cost of borrowing does not include the exchange difference for the interest rate to be paid, unless such difference forms part of the negotiation of the interest rate for the transaction.

The total indebtedness cost incurred during 2010 under RCP was $519,697 and the total indebtedness cost incurred under U.S. GAAP was $521,367. The effects of this adjustment in the reconciliation of income were $1,670. The total indebtedness cost incurred during 2009 under RCP was $ 210,362 and the total indebtedness cost incurred under U.S. GAAP was $201,562.The effects of this adjustment in the reconciliation of income were $8,800. There were no indebtedness costs incurred during 2008.
 
xviii. BUSINESS COMBINATIONS                                                                

a.
Goodwill

Under Colombian Government Entity GAAP, goodwill corresponds to the difference between the acquisition price and the book value of the acquired company recognized as an intangible asset, separate intangibles are not identified under RCP nor are assets stepped up to fair values as a result of acquisitions; if the book value is higher than the acquisition price, the resulting difference is recorded as a gain. The amount recognized as goodwill is amortized during the period in which the Company expects to receive future benefits; in addition, it is subject to annual impairment test
 
Under U.S. GAAP, goodwill is not amortized, but it is subject to an annual impairment test.

 
F-90
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The following table shows, by company, the goodwill balance at the end of 2010, 2009 and 2008, net of the amount of deferred income tax on goodwill and assets recognized at the purchase date, (indicating the impact of paragraphs 262 and 263 of ASC 805), and the translation adjustment:
 
Company
  
Balance 2008
    
Goodwill
acquired during
2009
    
Exchange
Rate Effect
    
Balance
before tax
2009
    
Deferred
income tax
    
Balance 2009
  
Propilco - Andean Chemicals
   $ 652,948     $ -     $ -     $ 652,948     $ (899 )   $ 652,049  
Refineria de Cartagena S.A.
     -       834,048       (63,916 )     770,132       -       770,132  
Bioenergy
     8,993       -       -       8,993       -       8,993  
Hocol
     -       185,624       -       185,624       (185,624 )     -  
Total
   $ 661,941     $ 1,019,672     $ (63,916 )   $ 1,617,697     $ (186,523 )   $ 1,431,174  

Company
  
Balance 2009
    
Goodwill
acquired during
2010
    
Exchange
Rate Effect
    
Balance
before tax
2010
    
Deferred
income tax
    
Balance 2010
  
Propilco - Andean Chemicals
   $ 652,049     $ -     $ -     $ 652,049     $ (1,472 )   $ 650,577  
Refineria de Cartagena S.A.
     770,132       -       (49,070 )     721,062       -       721,062  
Bioenergy
     8,993       -       -       8,993       -       8,993  
Total
   $ 1,431,174     $ -     $ (49,070 )   $ 1,383,004     $ (1,472 )   $ 1,380,632  
 
Under RCP, the following table shows the amounts deductible for income tax purposes for 2009 and 2010.
 
   
2010
  
Company
  
Goodwill
    
Accumulated
Amortization
    
Balance
    
Net Effect
    
Remaining
time-years
  
Andean Chemicals Ltd
   $ 357,629     $ (53,903 )   $ 303,726     $ 100,230       16.8  
Offshore International Group – “OIG”
     788,043       (76,376 )     711,667       234,850       13.0  
Hocol
     805,045       (62,039 )     743,007       245,192       15.0  
Total
   $ 1,950,718     $ (192,318 )   $ 1,758,400     $ 580,272          

   
2009
  
Company
  
Goodwill
    
Accumulated
Amortization
    
Balance
    
Net Effect
    
Remaining
time-years
  
Andean Chemicals Ltd
   $ 357,629     $ (33,655 )   $ 323,974     $ 106,911       17.8  
Offshore International Group – “OIG”
     821,994       (48,502 )     773,492       255,252       14.0  
Hocol
     628,456       (22,750 )     605,706       199,883       16.0  
Total
   $ 1,808,079     $ (104,907 )   $ 1,703,172     $ 562,046          

Under RCP in 2010 and 2009, $172,660 and $139,909 were amortized in regard to goodwill acquired from OIG, Ecopetrol Transportation Company, Hocol, and Andean Chemicals.  The amortization in the table above represents the accumulated amortization of the companies that could be deductible for income tax purposes. Under U.S. GAAP, goodwill acquired from OIG, which is recognized by the equity method, is included in the investment.

Under U.S. GAAP, Ecopetrol tests goodwill for impairment at least annually using a two step process that begins with an estimation of the fair value of a reporting unit.  The first step is a screen for potential impairment and the second step measures the amount of impairment.
 
Fair value is determined by reference to market value, if available, or by a qualified evaluator or pricing model. Determination of a fair value by a qualified evaluator or pricing model requires management to make assumptions and use estimates.  Management believes that the assumptions and estimates used are reasonable and supportable in the existing market environment and commensurate with the risk profile of the assets valued.  However, different assumptions and estimates could be used which would lead to different results.  The valuation models used to determine the fair value of these companies are sensitive to changes in the underlying assumptions.  For example, the prices and volumes of product sales to be achieved and the prices which will be paid for the purchase of raw materials are assumptions which may vary in the future.  Adverse changes in any of these assumptions could lead the Company to record a goodwill impairment charge.  During 2010, Ecopetrol conducted an impairment test of goodwill which showed that no goodwill had been impaired.

 
F-91
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
b.
Business Acquisition Subsequent to year-end

In August 2010, we entered in into a memorandum of understanding with Talisman Colombia Holdco Limited, or Talisman, a Canadian oil and gas company, to acquire BP Exploration Company (Colombia) Limited, a subsidiary of British Petroleum operating in Colombia. After obtaining the necessary governmental authorizations, we completed the acquisition, in January 2011, which includes assets in gas and oil exploration and production as well as oil transportation and gas marketing, for US$1,642 billion net, plus an additional US$145 million return of equity to Ocensa’s shareholders, resulting in a 51% ownership by Ecopetrol and 49% by Talisman. The company’s new name is Equion Energia Limited. As a result of this acquisition, we increased our participation in Ocensa from 60.00% to 72.65%, in ODC from 66% to 73% and in Oleoducto del Alto Magdalena, or OAM assets, from 83.00% to 85.12%.  We also acquired a 10.20% interest in Transgas de Occidente.
 
With this acquisition, Ecopetrol aims towards the fulfillment of its strategic objectives with an immediate increase in the reserves and current production representing 5% of Ecopetrol’s consolidated production; the exploratory opportunities contribute to the achievement of the 1,000,000 gross barrels of clean crude equivalent per day production expected for the year 2015.
 
The total purchase price was US$1,750 million with a negative price adjustment of US$108 million to bring the transaction to a net purchase price of US$1,642 million, of which US$837 represents the 51% share paid by Ecopetrol. The following table details the purchase price calculation (USD in millions) as well as the Colombian peso equivalent (in billions) of the transaction using the effective exchange rate on the dates of the payments.
 
   
Amount USD
  
Purchase Price
     1,750,000  
Less: Purchase Price Adjustment
     (108,389 )
Adjusted Purchase Price
     1,641,611  
Participation (%)
     51 %
Ecopetrol Purchase Price
     837,222  

The proceeds were paid in cash by Ecopetrol on two separate dates, as follows:
 
   
Date
  
Amount USD
    
Amount COP
  
Earnest Money Deposit
  
August 5, 2010
     637,500     $ 1,163,132  
Closing of Transaction
  
January 24, 2011
     199,722       367,276  
Total Purchase Price
         837,222     $ 1,530,408  

The Share Sale Agreement established that after the closing date, the seller has a 120-day period to review the price adjustments, including working capital adjustments, based on the financial statements at the closing date. The buyers then have an additional 60 days to complete the review of the price adjustments in order to consider the final purchase price. Adjustments to the price can result from the review, therefore, the final purchase price and information required to prepare the initial accounting for the business combination will be available during the second half of 2011. Therefore, disclosures related to fair value measurements, goodwill/intangible recognition, assets and liabilities recognized and effects of the business combination in the financial statement will be available in the 2011 year-end filing.
 
xix.         NON-CONTROLLING INTEREST
 
To determine the attributable non-controlling interest at December 31, 2010, 2009 and 2008, Ecopetrol used the net equity from all subsidiaries at the beginning of the period and considered all activity (net income, retained earnings, non-controlling interest, distribution of dividends, purchase price allocation, translation adjustments, and others) for purposes of calculating the carrying amount of total equity (net assets) attributable to the non-controlling interest at the end of 2010, 2009 and 2008.
 
In August 2010 Ecopetrol incorporated with a participation of 54.80% of the company Oleoducto Bicentenario de Colombia S.A. (hereinafter “OBC”), in which we have a total participation of 55.97% interest.

 
F-92
 
Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The following table sets the information for Ecopetrol’s non-controlling interests in 2010, 2009 and 2008, respectively.
 
    
OCENSA
   
BRAZIL
   
PERU
   
ODC
   
ODL
   
BIOENERGY
   
OBC
   
TOTAL
 
Balance 2007
  $ 571,074     $ 49     $ 474     $ -     $ -     $ -     $ -     $ 571,597  
Issuance of company shares
    -       -       -       -       217,378       -       -       217,378  
Other Non-Controlling Interest
    -       (45 )     (484 )     -       -       -       -       (529 )
Net income (loss)
    8,716       -       -       -       -       (2,460 )     -       6,256  
Distribution of dividends
    (141,634 )     -       -       -       -       -       -       (141,634 )
Retained Earnings
    140,095       -       -       -       -       -       -       140,095  
Purchase Price Allocation
    -       -       -       -       -       8,718       -       8,718  
Translation Adjustments
    -       (4 )     10       -       16,885       -       -       16,891  
Balance 2008
    578,251       -       -       -       234,263       6,258       -       818,772  
Acquired Non Controlling Interest
    (300,377 )*     -       -       21,495       -       (2,810 )     -       (281,692 )
Other Non Controlling Interest
    -       -       -       -       (78,405 )     -       -       (78,405 )
Net income (loss), restated
    198,968       -       -       (26,691 )     (15,325 )     (836 )     -       156,116  
Distribution of dividends
    (89,736 )     -       -       -       -       -       -       (89,736 )
Retained Earnings
    95,790       -       -       (2,142 )     991       6,541       -       101,180  
Purchase Price Allocation
    -       -       -       21,530       -       -       -       21,530  
Translation Adjustments
    -               -       -       (13,047 )     -       -       (13,047 )
Balance 2009, restated
    482,896       -       -       14,192       128,477       9,153       -       634,718  
Other Non Controlling Interest
    -       -       -       3,902       -       1,346       -       5,248  
Net income (loss)
    223,403       -       -       (7,173 )     21,676       (975 )     (5,042 )     231,889  
Distribution of dividends
    (99,888 )     -       -       -       -       -       -       (99,888 )
Return of capital through and due to Spin-Off
    (144,251 )     -       -       -       -       -       -       (144,251 )
Dividends for Spin-Off
    (318,670 )     -       -       -       -       -       -       (318,670 )
Translation Adjustments
    -               -       -       305       -       -       305  
Balance 2010
  $ 143,490     $ -     $ -     $ 10,921     $ 150,458     $ 9,524     $ ( 5,042 )   $ 309,351  

* Corresponds to acquisition of an additional 24.71% ownership interest in Ocensa for $998,903 in cash. The difference of  $610,007 was registered as an additional paid in capital net of income tax in an amount of $171,241 as a result of the difference between local deductible goodwill.

xx.
CUMULATIVE TRANSLATION ADJUSTMENT
 
Under RCP, the companies domiciled outside of the country, regardless of its functional currency, must report in USD and then translated to Colombian pesos with the impact recorded as cumulative translation adjustment.
 
For U.S. GAAP, the company must prepared its financial information in the functional currency and then translate it to the reporting currency. This difference in methodology results in a difference in the translated amounts recorded in the financial statements.
 
As such an adjustment is made to appropriately reflect amounts under translated U.S.GAAP.
 
xxi.           EARNINGS PER SHARE
 
Under RCP, earnings per share ("EPS") are calculated by dividing net income by the weighted average of both common and preferred shares outstanding for each period presented.  However, although the Company has presented EPS under RCP for informational purposes, the presentation of EPS is not required for financial statements issued under RCP. The Company does not have any issued or outstanding preferred shares.
 
U.S. GAAP requires dual presentation of basic and diluted EPS for entities with complex capital structures, as well as a reconciliation of the basic EPS calculation with the diluted EPS calculation.  Basic EPS is calculated by dividing net income available to common shareholders by the weighted average of common shares outstanding for the corresponding period.
 
Diluted EPS assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period.  For the years ended December 31, 2010, 2009 and 2008, the Company had a simple capital structure.  There are no stock compensation plans or any other compensation plan involving shares.  Therefore, the Company is not required to present diluted EPS for these years.

 
F-93
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
xxii.           CONCENTRATIONS
 
At December 31 2010, 2009 and 2008, 31%, 32% and 33%, respectively, of the Company’s employees belong to unions.  Management believes that the Company’s relationships with labor unions are good.  The current labor agreement with the union was renewed on September 10, 2009 that will expire in 2014.
 
In 2010, one customer of the refining segment accounted for 11.4% of total sales. No other customers accounted for more than 10% of total sales in 2010.  In 2009, one customer of the refining segment accounted for 13.1% of total sales. No other customers accounted for more than 10% of total sales in 2009.  In 2008, one customer of the production segment accounted for 14.2% and one customer of the refinery segment accounted for 11.7% of the total sales.  No other customers accounted for more than 10% of total sales in 2008.  There is no exposure that affects the financial position of Ecopetrol if the Company were to lose a client.
 
The significant majority of the Company’s assets and activities are located in Colombia.  The financial position and results of operations of those subsidiaries located outside of Colombia are not material to the Company.
 
xxiii.      RECENT U.S. ADOPTED ACCOUNTING STANDARDS AND U.S. GAAP PRONOUNCEMENTS
 
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASU”) 2010-03, Oil and Gas Reserve Estimation and Disclosures. This ASU aligns the oil and gas reserve estimation and disclosure requirements of FASB ASC Topic 932, Extractive Activities—Oil and Gas, with the requirements in the SEC Rule, Modernization of the Oil and Gas Reporting Requirements, which was issued on December 31, 2008 (SAB-113). The amendments to Topic 932 are effective for annual reporting periods ending on or after December 31, 2009 and should be accounted for as a change in accounting principle inseparable from a change in estimate; this accounting standard update was applied since December 31, 2009 at Ecopetrol. The adoption of this guidance had an impact on the disclosures of the company. Refer to Note xxviii for more information regarding such impact.   
 
In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics—Technical Corrections to SEC Paragraphs (SEC Update), this accounting standard update represents technical corrections to SEC paragraphs, this accounting standard update had been applied by Ecopetrol as of December 2010. The adoption of this guidance did not have a significant impact on our consolidated financial statements and related disclosures.    
 
In January 2010, the FASB issued ASU No. 2010-06 - Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires new and revised disclosures for recurring or non-recurring fair value measurements, specifically related to significant transfers into and out of Levels 1 and 2, and for purchases, sales, issuances, and settlements in the rollforward of activity for Level 3 fair value measurements. ASU 2010-06 also clarifies existing disclosures related to the level of disaggregation and the inputs and valuation techniques used for fair value measurements. The new disclosures and clarifications of existing disclosures about fair value measurements were effective on January 1, 2010, except for the disclosures about activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. This accounting standard update was applied by Ecopetrol at December 2010. Refer to Note xxvii for more information regarding such impact.   
 
Also in February 2010, the FASB issued ASU 2010-09 Subsequent Event (Topic 855) in order to clarify questions about the requirements to disclose the date that the financial statements are issued potentially conflict with some of the Securities and Exchange Commission’s (SEC) guidance. All of the amendments in this update are effective upon issuance of the final update, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. Ecopetrol adopted this standard at December 2010. Refer to Note 31 for more information regarding such impact.   
 
In April 2010, the FASB issued ASU 2010-14 Accounting for Extractive Activities—Oil & Gas—Amendments to Paragraph 932-10-S99-1 (SEC Update), modernization of Oil & Gas Reporting, the amendments was adopted by Ecopetrol at December 2010. The adoption of this guidance had an impact on the disclosures of the Company. Refer to Note xxviii for more information regarding such impact.   

 
F-94
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

In February 2010, the FASB issued ASU 2010-08, Technical corrections to various topics, by eliminating the inconsistencies and outdated provisions and providing the needed clarifications to make ASC easier to understand and apply, the amendments in this update are effective for the first reporting period beginning after issuance, in August 2010, the FASB issued ASU 2010-21 Accounting for Technical Amendments to Various SEC Rules and Schedules Amendments to SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies (SEC Update), and ASU 2010-22 Accounting for various topics, Technical corrections to SEC paragraphs, an announcement made by the staff of the US Securities and Exchange Commission. The amendments were adopted by Ecopetrol at December 2010.   
 
xxiv.           RECENTLY ISSUED ACCOUNTING STANDARDS AND U.S. GAAP PRONOUNCEMENTS
 
In December 2010, the FASB issued ASU No. 2010-29 Business Combination (Topic 805) - Disclosure of Suplementary pro-forma information for Business Combination, to address diversity in practice about the interpretation of the pro-forma revenue and earnings disclosure requirements for business combinations. This amendment is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Ecopetrol will be adopting this standard at December 2011, The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements and related disclosures.
 
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs in order to ensure that fair value has the same meaning in U.S. GAAP and in IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The Boards concluded that the amendments in this Update will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. Ecopetrol will be adopting this standard beginning in January 2012. Ecopetrol is evaluating the impact of the adoption of this guidance on the disclosures of the Company.
 
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, in order to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of ítems reported in other comprehensive income. The FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this Update. Ecopetrol is evaluating the impact of the adoption of this guidance on the disclosures of the company.
 
xxv.           SEGMENT INFORMATION
 
The following segment information has been prepared in accordance with ASC 280, Disclosure about Segments of an Enterprise and Related Information.  Financial information by business segment is reported in accordance with the internal reporting system under RCP and shows internal segment information that is used by the chief operating decision maker to manage and measure the performance of Ecopetrol.
 
In 2010, the Company’s management modified the methodology used to analyze financial information by business segment in order to obtain a better measure of the Company's operations. Specifically, since the year 2010 the Exploration and Production segment sells to customers at market price, while, until the year 2009 revenues were valued at a transfer price at the field of production. This change did not result in a material adjustment in the income from the field to the point of sale to final customers was recorded in the Market & Supply segment along with all associated marketing costs.

 
F-95
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

In 2010, the Company reports its information in four segments: Exploration & Production, Refining, Transportation and Market and Supply. Until 2009 a Corporate segment was reported. The Corporate segment in the new methodology is assigned to the four segments.
 
The financial information between segments is reported considering each business as a separate entity. Prices between segments are established by referencing those that can be earned in transactions with third parties or unrelated parties. Each segment should bear the costs and expenses required to put the product in terms of use or marketing. Each segment assumes its administrative expense and all non-operational transactions related to their activity.
 
The structure of the Company’s internal organizations was not modified. The segment information for 2009 and 2008 included herein has been updated for comparison purposes.
 
The Company operates under the following segments, which are described as follows:
 
Exploration and Production — this segment includes the Company’s oil & gas exploration and production activities. Revenue is derived from the sale of crude oil and natural gas to inter-company segments and to third parties, at market prices. Revenue is derived from local sales of crude oil, regulated fuels, non-regulated fuels and natural gas. Sales are made to local and foreign distributors. Costs include those costs incurred in production. Expenses include all exploration costs that are not capitalized.
 
Refining – this segment includes the Company’s refining activities. Goods sold, both internally and to third parties, include refined products such as motor fuels, fuel oils and petrochemicals at market prices. This segment also includes sales of industrial services to third parties.
 
Transportation – this segment includes the Company’s sales and costs associated with the Company’s pipelines and other transportation activities.
 
Market and Supply – this segment includes the Company’s revenues, costs and expenses associated with sales of crude and gas purchased from third parties and the ANH (Agencia Nacional de Hidrocarburos), and with sales of imported products to broader areas. It also includes revenues generated for products trading operations.
 
These functions have been defined as the operating segments of the Company since these are the segments (a) that engage in business activities from which revenues are earned and expenses are incurred; (b) whose operating results are regularly reviewed by the Company's chief operating decision maker to allocate resources to the segments and assess their performance; and (c) for which discrete financial information is available.  Internal transfers represent sales to intercompany segments and are recorded and presented at market prices.
 
The following presents the Company’s balance sheet by segment in accordance with RCP:

 
F-96
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
   
As of December 31, 2010
  
    
Exploration &
Production
    
Refining
Activities
    
Transporting
    
Market and
Supply
    
Eliminations
    
Total
  
Current assets
                                    
Cash and cash equivalents
   $ 2,319,046     $ 150,236     $ 1,239,258     $ 18,238     $ -     $ 3,726,778  
Accounts and notes receivable
     1,485,854       1,126,737       559,147       565,442       (1,000,588 )     2,736,592  
Inventories
     1,083,572       1,105,022       4,669       173,906       (175,081 )     2,192,088  
Investments
     243,000       57,419       24,086       3,277       -       327,782  
Other current assets
     2,588,375       807,608       208,294       42,121       -       3,646,398  
      7,719,847       3,247,022       2,035,454       802,984       (1,175,669 )     12,629,638  
Investments in non-consolidated companies
     773,821       11,309       29,167       15,873       -       830,170  
Property, plant and equipment, net
     20,104,180       7,511,806       6,322,588       120,843       (18,620 )     34,040,797  
Other non-current assets
     12,350,678       5,773,967       3,564,576       272,258       (692,728 )     21,268,751  
Non Current assets
     33,228,679       13,297,082       9,916,331       408,974       (711,348 )     56,139,718  
Total assets
   $ 40,948,526     $ 16,544,104     $ 11,951,785     $ 1,211,958     $ (1,887,017 )   $ 68,769,356  
                                                 
Accounts payable
   $ (2,663,441 )   $ (920,862 )   $ (513,038 )   $ (855,040 )   $ 889,779     $ (4,062,602 )
Financial obligations (short-term)
     (555,665 )     (709,968 )     (195,578 )     (2,958 )     385,000       (1,079,169 )
Other Current Liabilities
     (2,938,090 )     (1,367,859 )     (538,577 )     (64,437 )     8,156       (4,900,807 )
Current Liabilities
     (6,157,196 )     (2,998,689 )     (1,247,193 )     (922,435 )     1,282,935       (10,042,578 )
Financial obligations (long-term)
     (3,638,479 )     (1,912,991 )     (2,667,276 )     (40 )     385,071       (7,833,715 )
Other non Current Liabilities
     (6,539,180 )     (1,299,702 )     (1,002,119 )     (260,467 )     22,537       (9,078,931 )
Non-current liabilities
     (10,177,659 )     (3,212,693 )     (3,669,395 )     (260,507 )     407,608       (16,912,646 )
Total Liabilities
     (16,334,855 )     (6,211,382 )     (4,916,588 )     (1,182,942 )     1,690,543       (26,955,224 )
Non-controlling interest
     -       (11,550 )     (474,401 )     -       -       (485,951 )
Shareholders’ equity of Ecopetrol
     (24,613,671 )     (10,321,172 )     (6,560,796 )     (29,016 )     196,474       (41,328,181 )
Total Equity
     (24,613,671 )     (10,332,722 )     (7,035,197 )     (29,016 )     196,474       (41,814,132 )
Total liabilities and equity
   $ (40,948,526 )   $ (16,544,104 )   $ (11,951,785 )   $ (1,211,958 )   $ 1,887,017     $ (68,769,356 )
Capital expenditures
   $ 5,878,246     $ 2,084,554     $ 2,351,662     $ 5,513     $ -     $ 10,319,975  
Goodwill
   $ 1,423,801     $ 613,152     $ 471,449     $ -     $ -     $ 2,508,402  

   
As of December 31, 2009
  
    
Exploration &
Production
    
Refining
Activities
    
Transporting
    
Market and
Supply
    
Eliminations
    
Total
  
Current assets
                                    
Cash and cash equivalents
   $ 2,621,304     $ 476,518     $ 441,505     $ 22,791     $ -     $ 3,562,119  
Accounts and notes receivable
     1,878,701       752,130       185,046       157,580       (4,337 )     2,969,120  
Inventories
     761,501       1,133,913       38,168       229,608       (120,492 )     2,042,697  
Investments
     352,997       -       104,787       4,473       -       462,258  
Other current assets
     1,959,128       884,055       206,585       31,827       -       3,081,595  
      7,573,631       3,246,617       976,090       446,278       (124,829 )     12,117,788  
Investments in non-consolidated companies
     734,748       11,135       27,667       3,952       -       777,503  
Property, plant and equipment, net
     17,077,895       5,792,130       5,050,438       17,421       -       27,937,884  
Other non-current assets
     8,153,792       3,778,164       2,560,488       254,696       (20,799 )     14,726,341  
Non-Current assets
     25,966,435       9,581,430       7,638,593       276,069       (20,799 )     43,441,729  
Total assets
   $ 33,540,067     $ 12,828,047     $ 8,614,683     $ 722,348     $ (145,627 )   $ 55,559,517  
                                                 
Accounts payable
   $ (1,852,745 )   $ (386,400 )   $ (259,115 )   $ (791,505 )   $ 9,533     $ (3,280,232 )
Financial obligations (short-term)
     (83,316 )     (246,093 )     (107,671 )     -       -       (437,081 )
Other Current Liabilities
     (1,730,724 )     (1,543,690 )     (434,626 )     (43,861 )     -       (3,752,901 )
Current Liabilities
     (3,666,785 )     (2,176,183 )     (801,412 )     (835,366 )     9,533       (7,470,213 )
Financial obligations (long-term)
     (3,220,265 )     (1,452,892 )     (1,041,198 )     -       -       (5,714,354 )
Other non-Current Liabilities
     (6,218,381 )     (1,307,492 )     (1,130,167 )     (223,244 )     15,602       (8,863,682 )
Non-current liabilities
     (9,438,646 )     (2,760,384 )     (2,171,365 )     (223,244 )     15,602       (14,578,036 )
Total Liabilities
     (13,105,431 )     (4,936,567 )     (2,972,777 )     (1,058,610 )     25,136       (22,048,249 )
Non-controlling interest
     -       (11,696 )     (929,615 )     -       -       (941,311 )
Shareholders’ equity of Ecopetrol
     (20,434,636 )     (7,879,784 )     (4,712,291 )     336,262       120,492       (32,569,957 )
Total Equity
     (20,434,636 )     (7,891,480 )     (5,641,906 )     336,262       120,492       (33,511,268 )
Total liabilities and equity
   $ (33,540,067 )   $ (12,828,047 )   $ (8,614,683 )   $ (722,348 )   $ 145,627     $ (55,559,517 )
Capital expenditures
   $ 5,652,330     $ 3,634,939     $ 3,556,733     $ 8,587     $ -     $ 12,852,589  
Goodwill
   $ 1,393,705     $ 603,193     $ 510,654     $ -     $ -     $ 2,507,552  
 
 
F-97
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The Company’s statement of net income by segment is as follows in accordance with RCP:

   
Year ended December 31, 2010
  
    
Exploration &
Production
    
Refining
Activities
    
Transportation
    
Market and
Supply
    
Eliminations
    
Total
  
                                     
Revenues:
                                    
Local sales
   $ 1,302,275     $ 14,166,202     $ 1,819,125     $ 955,576     $ (158,753 )   $ 18,084,425  
Foreign sales, net
     13,629,198       5,641,545       717       8,163,371       (3,550,945 )     23,883,886  
Inter-segment net operating revenues
     9,032,898       1,024,563       1,876,594       47,061       (11,981,116 )     -  
Total Revenue
     23,964,371       20,832,310       3,696,436       9,166,008       (15,690,814 )     41,968,311  
Cost of sales
     6,990,223       20,421,756       1,538,713       8,542,971       (15,510,409 )     21,983,254  
Depreciation, depletion and amortization
     2,759,835       487,911       727,970       31       -       3,975,747  
Selling and projects
     2,014,600       338,349       91,512       82,484       -       2,526,945  
Administration expenses
     242,717       184,420       164,985       11,401       -       603,523  
Costs and expenses
     12,007,375       21,432,436       2,523,180       8,636,887       (15,510,409 )     29,089,469  
Operating income
     11,956,996       (600,126 )     1,173,256       529,121       (180,405 )     12,878,842  
Financial income (expenses), net
     115,361       (55,244 )     983       (7,242 )     (16,069 )     37,789  
Pension expenses
     (157,035 )     (171,547 )     (48,706 )     (338 )     -       (377,626 )
Other non-operating income (expenses)
     (443,165 )     (230,956 )     (178,391 )     (193,876 )     -       (1,046,388 )
Other expenses, net
     (484,839 )     (457,747 )     (226,114 )     (201,456 )     (16,069 )     (1,386,225 )
Income before income taxes and non-controlling
     11,472,157       (1,057,873 )     947,142       327,665       (196,474 )     11,492,617  
Income tax benefit (expense)
     (3,127,944 )     266,997       (294,616 )     (83,087 )     -       (3,238,650 )
Non-Controlling interest
     -       403       (107,899 )     -       -       (107,496 )
Net income for the year attributable to Ecopetrol
   $ 8,344,213     $ (790,473 )   $ 544,627     $ 244,578     $ (196,474 )   $ 8,146,471  

   
Year ended December 31, 2009
  
    
Exploration &
Production
    
Refining
Activities
    
Transportation
    
Market and
Supply
    
Eliminations
    
Total
  
                                     
Revenues:
                                    
Local sales
   $ 2,865,478     $ 11,838,570     $ 964,194     $ 2,083,460     $ (3,693,168 )   $ 14,058,534  
Foreign sales, net
     6,838,783       4,196,143       836       5,310,094       -       16,345,856  
Inter-segment net operating revenues
     7,801,225       958,026       1,703,915       67,607       (10,530,773 )     -  
Total Revenue
     17,505,486       16,992,739       2,668,945       7,461,161       (14,223,941 )     30,404,390  
Cost of sales
     5,490,208       16,512,052       1,340,638       7,725,926       (14,103,449 )     16,965,375  
Depreciation, depletion and amortization
     1,893,936       411,512       635,186       64       -       2,940,698  
Selling and projects
     1,569,576       250,862       69,927       72,277       -       1,962,642  
Administration expenses
     260,901       231,497       161,344       10,122       (1,528 )     662,336  
Costs and expenses
     9,214,621       17,405,923       2,207,095       7,808,389       (14,104,977 )     22,531,051  
Operating income
     8,290,865       (413,184 )     461,850       (347,228 )     (118,964 )     7,873,339  
Financial income (expenses), net
     530,074       (79,891 )     (2,802 )     48,452       -       495,833  
Pension expenses
     (249,252 )     (272,284 )     (73,085 )     (536 )     -       (595,157 )
Other non-operating income (expenses)
     (256,842 )     (8,364 )     (159,406 )     (97,031 )     (1,528 )     (523,171 )
Other expenses, net
     23,980       (360,539 )     (235,293 )     (49,115 )     (1,528 )     (622,495 )
Income before income taxes and non-controlling interest
     8,314,845       (773,723 )     226,557       (396,343 )     (120,492 )     7,250,844  
Income tax benefit (expense)
     (2,330,443 )     183,019       (77,441 )     110,836       -       (2,114,029 )
Non-controlling interest
     (39,270 )     31,272       3,237       -       -       (4,761 )
Net income for the year attributable to Ecopetrol
   $ 5,945,132     $ (559,432 )   $ 152,353     $ (285,507 )   $ (120,492 )   $ 5,132,054  
 
 
F-98
 
 
Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
   
Year ended December 31, 2008
  
    
Exploration &
Production
    
Refining
Activities
    
Transportation
    
Market and
Supply
    
Eliminations
    
Total
  
                                     
Revenues:
                                    
Local sales
   $ 3,221,054     $ 14,500,342     $ 716,284     $ 3,160,319     $ -     $ 21,597,999  
Foreign sales, net
     4,888,275       3,273,018       1,139       4,136,238       -       12,298,670  
Inter-segment net operating revenues
     11,644,466       828,629       1,436,763       62,938       (13,972,796 )     -  
Total Revenue
     19,753,795       18,601,989       2,154,186       7,359,495       (13,972,796 )     33,896,669  
Cost of sales
     4,649,150       17,898,231       1,101,136       7,370,147       (13,972,796 )     17,045,868  
Depreciation, depletion and amortization
     1,538,320       302,534       197,345       369       -       2,038,568  
Selling and projects
     991,203       300,188       431,576       49,807       -       1,772,774  
Administration expenses
     131,546       161,223       85,093       4,239       -       382,101  
Costs and expenses
     7,310,219       18,662,176       1,815,150       7,424,562       (13,972,796 )     21,239,311  
Operating income
     12,443,576       (60,187 )     339,036       (65,067 )     -       12,657,358  
Financial income (expenses), net
     3,717,490       87,440       104,502       191,820       -       4,101,252  
Pension expenses
     (479,495 )     (523,803 )     (140,597 )     (1,030 )     -       (1,144,925 )
Other non-operating income (expenses)
     162,097       143,400       151,486       (59,464 )     -       397,519  
Other expenses, net
     3,400,092       (292,963 )     115,391       131,326       -       3,353,846  
Income before income taxes and non-controlling
     15,843,668       (353,150 )     454,427       66,259       -       16,011,204  
Income tax benefit (expense)
     (4,330,126 )     90,574       (124,321 )     (18,109 )     -       (4,381,982 )
Net income
     11,513,542       (262,576 )     330,106       48,150       -       11,629,222  
Less: Net loss (income) attributable to Non-controlling interest
     -       -       455       -       -       455  
Net income for the year attributable to Ecopetrol S.A.
   $ 11,513,542     $ (262,576 )   $ 330,561     $ 48,150     $ -     $ 11,629,677  

The following tables illustrate sales by geographic zones:
 
Sales by Geographic Zones for the year ended December 31, 2010
 
Zone
  
Products
  
Value
    
Participation
  
Colombia*
  
Crude oil, Refined, Petrochemicals and natural gas
   $ 18,229,158       43.4 %
United States of America
  
Crude oil, Refined and Petrochemicals
     14,965,911       35.7 %
Asia
  
Crude oil, Refined and Petrochemicals
     3,952,186       9.4 %
South America (excluding Colombia)
  
Crude oil, Refined, Petrochemicals and natural gas
     1,031,808       2.5 %
Central America and Caribbean
  
Crude oil, Refined and Petrochemicals
     2,311,529       5.5 %
Europe
  
Crude oil, Refined and Petrochemicals
     1,431,301       3.4 %
Other
  
Petrochemicals
     46,418       0.1 %
        $ 41,968,311       100.0 %
 
*Includes sales to free trade zone sales of $144,734 (The sales of Natural gas $34,904 and $109 of petrochemicals as a part of sales to free trade zone)
 
Sales by Geographic Zones for the year ended December 31, 2009
 
Zone
  
Products
  
Value
    
Participation
  
Colombia*
  
Crude oil, Refined, Petrochemicals and natural gas
   $ 14,134,884       46.5 %
United States of America
  
Crude oil, Refined and Petrochemicals
     10,875,221       35.8 %
Asia
  
Crude oil, Refined and Petrochemicals
     2,151,854       7,1 %
South America
  
Crude oil, Refined, Petrochemicals and natural gas
     561,221       1.8 %
Central America and Caribbean
  
Crude oil, Refined and Petrochemicals
     1,473,225       4.8 %
Europe
  
Crude oil, Refined and Petrochemicals
     1,207,367       4.0 %
Other
  
Petrochemicals
     618       0.0 %
        $ 30,404,390       100.0 %
 
*Includes sales to free trade zone of $76,350

 
F-99
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Sales by Geographic Zones for the year ended December 31, 2008
 
Zone
  
Products
  
Value
    
Participation
  
Colombia
  
Crude oil, Refined, Petrochemicals and natural gas
   $ 21,597,999       63.7 %
United States of America
  
Crude oil, Refined and Petrochemicals
     7,847,375       23.2 %
Asia
  
Crude oil, Refined and Petrochemicals
     1,516,946       4.5 %
South America
  
Crude oil, Refined, Petrochemicals and natural gas
     1,024,709       3.0 %
Central America and Caribbean
  
Crude oil, Refined and Petrochemicals
     1,188,904       3.5 %
Europe
  
Crude oil, Refined and Petrochemicals
     605,655       1.8 %
Other
  
Petrochemicals
     115,081       0.3 %
        $ 33,896,669       100.0 %

Sales of products by Segment for the year ended December 31, 2010

Local Sales
  
Exploration &
Production
    
Refining
Activities
    
Transportation
    
Market and
Supply
    
Eliminations
    
Total
  
Medium distillates
   $ 5,058     $ 6,588,097     $ -     $ 506,021     $ -     $ 7,099,176  
Gasolines
     -       4,324,551       -       -       (22,269 )     4,302,282  
Crude Oil
     123,797       -       -       -       (6,611 )     117,186  
Other products
     189,833       1,214,831       -       16,124       (68 )     1,420,720  
Services
     97,350       32,546       1,819,125       54,492       (55,684 )     1,947,829  
Natural Gas
     854,427       -       -       378,939       (74,121 )     1,159,245  
L.P.G.
     31,810       595,551       -       -       -       627,361  
Diesel and gasoline price differentials
     -       740,682       -       -       -       740,682  
Plastic and rubber
     -       669,944       -       -       -       669,944  
Total local sales
   $ 1,302,275     $ 14,166,202     $ 1,819,125     $ 955,576     $ (158,753 )   $ 18,084,425  

The following tables illustrate sales of products by Segment:

Sales of products by Segment for the year ended December 31, 2010

Foreign Sales
 
Exploration &
Production
   
Refining
   
Transportation
   
Market and
Supply
   
Eliminations
   
Total
 
                                     
Crude oil
  $ 13,515,877     $ -     $ -     $ 8,108,425     $ (3,550,945 )   $ 18,073,357  
Fuel oil
    -       2,377,266       -       -       -       2,377,266  
Gasoline
    -       687,984       -       10,084       -       698,068  
Diesel
    -       1,638,044       -       -       -       1,638,044  
Natural Gas
    101,363       -       -       44,700       -       146,063  
Plastic and rubber
    -       673,574       -       -       -       673,574  
Other products
    11,958       264,677       717       162       -       277,514  
Total foreign sales
  $ 13,629,198     $ 5,641,545     $ 717     $ 8,163,371     $ (3,550,945 )   $ 23,883,886  

Sales of products by Segment for the year ended December 31, 2009

Local Sales
  
Exploration &
Production
    
Refining
    
Transportation
    
Market and
Supply
    
Eliminations
    
Total
  
Medium distillates
   $ 9,808     $ 5,087,659     $ -     $ -     $ -     $ 5,097,467  
Gasolines
     -       5,001,527       -       14,373       -       5,015,900  
Crude Oil
     1,943,410       -       -       1,692,832       (3,618,048 )     18,194  
Other products
     128,038       446,647       -       1,605       -       576,290  
Services
     75,322       82,616       964,194       38,284       (47,341 )     1,113,075  
Natural Gas
     691,930       -       -       336,366       (27,779 )     1,000,517  
L.P.G.
     16,970       452,581       -       -       -       469,551  
Diesel and gasoline price differentials
     -       196,533       -       -       -       196,533  
Plastic and rubber
     -       571,007       -       -       -       571,007  
Total local sales
   $ 2,865,478     $ 11,838,570     $ 964,194     $ 2,083,460     $ (3,693,168 )   $ 14,058,534  
 
 
F-100
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Sales of products by Segment for the year ended December 31, 2009

Foreign Sales
  
Exploration &
Production
    
Refining
    
Transportation
    
Market and
Supply
    
Eliminations
    
Total
  
Crude oil
   $ 6,613,961     $ -     $ -     $ 5,201,551     $ -     $ 11,815,512  
Fuel oil
     -       1,660,911       -       -       -       1,660,911  
Gasoline
     -       1,713,823       -       10,712       -       1,724,535  
Natural Gas
     214,091       -       -       97,643       -       311,734  
Plastic and rubber
     -       544,912       -       -       -       544,912  
Other products
     10,731       276,497       836       188       -       288,252  
Total foreign sales
   $ 6,838,783     $ 4,196,143     $ 836     $ 5,310,094     $ -     $ 16,345,856  

Sales of products by Segment for the year ended December 31, 2008

Local Sales
  
Exploration &
Production
    
Refining
Activities
    
Transportation
    
Market and
Supply
    
Eliminations
    
Total
  
Medium distillates
   $ 11,312     $ 5,587,435     $ -     $ 315,880     $ -     $ 5,914,627  
Gasolines
     41       3,635,254       -       9,050               3,644,345  
Crude Oil
     2,312,950       -       -       2,461,451       -       4,774,401  
Other products
     178,233       1,160,873       -       36,685       -       1,375,791  
Services
     94,644       70,912       716,284       39,812       -       921,652  
Natural Gas
     603,973       -       -       297,441       -       901,414  
L.P.G.
     19,901       592,870       -       -       -       612,771  
Diesel and gasoline price differentials
     -       3,070,479       -       -       -       3,070,479  
Plastic and rubber
     -       382,519       -       -       -       382,519  
Total local sales
   $ 3,221,054     $ 14,500,342     $ 716,284     $ 3,160,319     $ -     $ 21,597,999  
 
Sales of products by Segment for the year ended December 31, 2008
 
Foreign Sales
  
Exploration &
Production
    
Refining
    
Transportation
    
Market and
Supply
    
Eliminations
    
Total
  
                                     
Crude oil
   $ 4,658,337     $ -     $ -     $ 4,037,945     $ -     $ 8,696,282  
Fuel oil
     -       2,093,012       -       -       -       2,093,012  
Gasoline
     -       186,197       -       -       -       186,197  
Natural Gas
     215,312       -       -       98,036       -       313,348  
Plastic and rubber
     -       704,034       -       -       -       704,034  
Other products
     14,626       289,775       1,139       257       -       305,797  
Total foreign sales
   $ 4,888,275     $ 3,273,018     $ 1,139     $ 4,136,238     $ -     $ 12,298,670  

xxvi.           RELATED PARTIES
 
In addition to the transactions disclosed in Note 14, Ecopetrol is controlled by the Colombian Government which owns a majority stake in the Company. Therefore Ecopetrol has numerous transactions with other government entities as well as state-owned companies in the ordinary course of its business. The most significant of these transactions are disclosed below:
 
Price differentials: Ecopetrol sell prices are regulated and the National Government pays to Ecopetrol the amount of the benefit price for the refined products generated between the income of the regulated producer and the equivalent price quoted in the international market . The amount of price differential included in revenue in 2010, 2009 and 2008 were $740,682, $196,533 and $3,070,479, respectively. Additionally, in 2010, 2009 and 2008, the Company recognized interests amounting to $929, $235,704 and $93,218, respectively, which corresponds to the price differentials recorded.
 
Purchases of hydrocarbons from ANH – The Company purchases the physical product that the ANH receives from all producers in Colombia at prices set forth in the Law 756 of 2002 and Resolution 18 1709 of 2003, which reference international prices. For more information on this transaction, please see Notes 1 and 24. (Consolidated Financial Statements).

 
F-101
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The following table presents accounts receivable and payable with related parties as of December 31, 2010 and 2009:
 
   
2010
    
2009
  
   
Assets
    
Liabilities
    
Assets
    
Liabilities
  
Ministerio de Hacienda y Crédito Público
   $ 1,930,947     $ 332     $ 1,015,691     $ 130,668  
Ministerio de Minas y Energía
     -       -       37,228       -  
U.A.E. Agencia Nacional de Hidrocarburos
     66,913       -       134,108       9,093  
E.S.P. Empresa de Energía de Bogotá S.A.
     1,101,455       -       503,217       -  
E.S.P. Generadora de Energía del Caribe S.A.
     37,219       -       54,337       23,735  
Interconexión Eléctrica S.A. – ESP
     833,206       74       766,969       -  
Entidades Territoriales (Departamentos, Municipios)
     37,232       24,099       17,438       7,399  
Empresas Públicas de Medellín S.A. – ESP
     8,568       113       33,038       62  
Isagen S.A.
     199       23       8,306       45  
E.S.P. Transportadora de Gas del Interior S.A.
     3,982       434       4,666       -  
Empresa Colombiana de Gas
     -       -       -       -  
E.S.P. Termoemcali S.A.
     -       -       34,001       -  
E.S.P. Gestión Energética S.A.
     -       -       600       -  
Central Hidroeléctrica de Caldas S.A. E.S.P
     -       937       529       -  
Universidad Industrial de Santander U.I.S.
     11       -       18       -  
Dirección de Impuestos y Aduanas Nacionales DIAN
     1,341,223       3,288,780       11,961       2,023,516  
Others
     1,498       5,124       484       3,855  
    $ 5,362,455     $ 3,319,915     $ 2,622,591     $ 2,198,373  

Other transactions with related parties during 2010, 2009 and 2008 are:
 
   
2010
   
2009
   
2008
 
   
Income
   
Expenses
   
Income
   
Expenses
   
Income
   
Expenses
 
Ministerio de Minas y Energía
  $ -     $ -     $ -     $ -     $ 3,870,348     $ -  
Dirección de Impuestos y Aduanas Nacionales DIAN
    1       3,523,700       19       4,295,093       -       4,855,718  
Entidades Territoriales (Departamentos, Municipios)
    1,328       30,986       15       121,396       -       133,346  
Contraloría General de la República
    -       52,876       -       33,106       -       25,811  
Ministerio de Defensa Nacional
    124       -       -       12,128       -       15,774  
Ministerio de Transporte
    -       -       -       -       -       13,922  
Inversiones de Gases de Colombia S.A. - Invercolsa
    -       -       -       -       9,231       -  
Unidad de Planeación Minero Energética
    -       2,557       -       2,308       -       2,206  
Others
    376,712       49,347       745       19,526       1,653       7,311  
    $ 378,165     $ 3,659,466     $ 779     $ 4,483,557     $ 3,881,232     $ 5,054,088  

Material Related Party Agreements
 
Set forth below is a description of the Company's material related party agreements:
 
We entered into a supply agreement with Ecodiesel Colombia S.A., or Ecodiesel, a company in which we have a 50% equity interest. This agreement has been operative since August 1, 2010. Pursuant to the terms of this agreement, Ecodiesel must deliver to us and we must purchase from Ecodiesel at least the guaranteed amount of 48.100 bls of Ecodiesel's biodiesel production each month. Payments vary depending on the purchased volumes of biodiesel. This agreement expires on December 31, 2017.
 
In 2010, we renewed the service agreement with Sociedad Colombiana de Servicios Portuarios S.A. or Serviport S.A., a company in which we have 49% equity interest. Pursuant to the terms of the agreement, Serviport assists the Company in its maritime operations in the Coveñas port. This agreement expires on May 27, 2019.
 
The Technical Service Agreement signed between SAVIA and us consists of management, administration, technical and business advice in order to implement all the necessary operations of several offshore oil and gas concessions in Peru, the Technical Services shall be implemented in Peru and will mainly concentrate on the following matters: Technical, Geological, Drilling, Operation, HSE, Administration, Legal, Human Resources, and Information Technology. Ecopetrol has a 50% equity interest in Offshore International Group which owns SAVIA Peru S.A. The Technical Service Agreement is worth US$ 1,000,000 per year.

 
F-102
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

xxvii.           FAIR VALUE
 
Accounting standards for fair value measurement (ASC 820) establish a framework for measuring fair value and stipulate disclosures about fair value measurements. The standards apply to recurring and nonrecurring financial and nonfinancial assets and liabilities that require or permit fair-value measurements. Among the required disclosures is the fair-value hierarchy of inputs the company uses to value an asset or a liability. The three levels of the fair-value hierarchy are described as follows:

Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. For the Company, Level 1 inputs include marketable securities that are actively traded.
Level 2: Inputs other than Level 1 that is observable, either directly or indirectly. For the Company, Level 2 inputs include quoted prices for similar assets, prices obtained through third-party broker quotes, and prices that can be corroborated with other observable inputs for substantially the complete term of a contract.

Level 3: Unobservable inputs. The Company does not use Level 3 inputs for any of its recurring fair-value measurements. Level 3 inputs may be required for the determination of fair value associated with certain nonrecurring measurements of nonfinancial assets and liabilities. In 2010, the Company used Level 3 inputs to determine the fair value of certain nonrecurring nonfinancial assets.
The fair value hierarchy for recurring assets measured at fair value at December 31, 2010, and December 31, 2009, is as follows:
 
        
Fair Value at Reporting Date Using
      
Fair Value at Reporting Date Using
  
        
Quoted
Price in
Active
Markets for
Identical
Assets
  
Significant
Other
Observable
Inputs
  
Significant
Unobservable
Inputs
      
Quoted Price
in Active
Markets for
Identical
Assets
  
Significant
Other
Observable
Inputs
  
Significant
Unobservable
Inputs
  
Description
  
2010
  
(Level 1)
  
(Level 2)
  
(Level 3)
  
2009
  
(Level 1)
  
(Level 2)
  
(Level 3)
  
ASSETS
                                  
Available for sale debt securities
                                  
Securities issued by mixed – economy governmental entities
   $ 1,932,115   $ 1,932,115   $ -   $ -   $ 764,853   $ 764,853     -     -  
Securities issued or secured by Colombian government
     1,642,336     1,642,336     -     -     724,137     724,137     -     -  
Securities issued or secured by government sponsored enterprise (GSEs)
     1,498,957     1,498,957     -     -     1,712,550     1,712,550     -     -  
Securities issued or secured by financial entities
     120,044     120,044     -     -     11,185     11,185     -     -  
Other debt securities
     29,585     29,585     -     -     -     -     -     -  
Securities issued or secured by USA government
     642,974     642,974     -     -     153,186     153,186     -     -  
Total available for sale debt securities
     5,866,011     5,866,011     -     -     3,365,910     3,365,910     -     -  
Derivatives
                                                  
Option
     12,651     -     12,651     -     66,099     -     66,099     -  
Swap
     21,191     -     21,191     -     184     -     184     -  
FX Forward
     107     -     107     -     -     -           -  
Total derivatives
     33,949     -     33,949     -     66,283     -     66,283     -  
Total Recurring Assets at fair value
   $ 5,899,960   $ 5,866,010   $ 33,949   $ -   $ 3,432,193   $ 3,365,910   $ 66,283   $ -  
 
 
F-103
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

Marketable Securities:  The Company calculates fair value for its marketable securities based on quoted market prices for identical assets and liabilities. The fair values reflect the cash that would have been received if the instruments were sold at December 31, 2010.
 
Derivatives: The Company records its derivative instruments on the Consolidated Balance Sheet at fair value, with the offsetting amount to the Consolidated Statement of Income. For derivatives with identical or similar provisions as contracts that are publicly traded on a regular basis, the company uses the market values of the publicly traded instruments as an input for fair-value calculations.
 
The company’s derivative instruments principally include foreign exchange and refined-product (asphalt) swaps, options and forward contracts, principally with financial institutions and other oil and gas companies, the fair values for which are obtained from third-party broker quotes, industry pricing services and exchanges.

The company obtains multiple sources of pricing information for the Level 2 instruments. Since this pricing information is generated from observable market data, it has historically been very consistent. The company does not materially adjust this information.

The fair value hierarchy for non-recurring assets measured at fair value at December 31, 2010 is as follows:

         
Fair Value Measurements Using
        
Description
  
2010
    
Quoted Price
in Active
Markets for
Identical
Assets Level 1
    
Significant
Other
Observable
Inputs
Level 2
    
Significant
Unobservable
Inputs Level 3
    
Total Gains
(Losses)
    
2009
  
Equity Method Investment
   $ 826,039     $ -     $ -     $ 826,039     $ 349,033     $ 1,075,308  
Production fixed assets with impairment
     93,069       -       -       93,069       134,604       338,158  
Transportation fixed assets with impairment (*)
     -       -       -       -       865       19,888  
Other fixed assets
     11,609,275       -       -       11,609,275       -       8,382,912  
Total Fixed Assets
   $ 11,702,344     $ -     $ -     $ 11,702,344     $ 135,469     $ 8,740,959  
Total Non-Recurring Assets
   $ 12,528,383     $ -     $ -     $ 12,528,383     $ 484,502     $ 9,816,267  

* Transportation fixed assets were written down to their fair value of $0, resulting in an impairment charge of ($865). Under U.S. GAAP in 2010 two transport systems were measured at fair value, in 2009 four transportation systems were measured at fair value.
 
Impairment of “Equity Method Investment”- During 2010 and in accordance with the accounting standard for Investments – Equity Method and Joint Ventures (ASC 323), the acquired participation in Offshore International Group with a carrying amount of $1,175,073 was written down to a fair value of $826,039, resulting in a before-tax loss of $359,981. The fair value was determined from internal cash-flow models, using discount rates consistent with those used by the company to evaluate cash flows of other assets of a similar nature.

Impairment of “Properties, plant and equipment”- During 2010 and in accordance with the accounting standard for the impairment or disposal of long-lived assets (ASC 360), long-lived assets “held and used” with a carrying amount of $12,232,611 were written down to a fair value of $11,702,344, resulting in a before-tax loss of $134,469. The fair values were determined from internal cash-flow models, using discount rates consistent with those used by the Company to evaluate cash flows of other assets of a similar nature. The respective long-lived assets were reviewed for impairment on a well-by-well basis.

Assets and Liabilities Not Required to Be Measured at Fair Value

 
F-104
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The Company holds cash and cash equivalents. The instruments held are primarily time deposits and money market funds. The fair values reflect the cash that would have been received or paid if the instruments were settled at year-end. Cash equivalents had carrying/fair values of $3,910,745 and $3,837,670 at December 31, 2010 and 2009, respectively. Fair values of other financial instruments at the end of 2010 and 2009 were not material.

xxviii. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

In accordance with the requirements of the United States Securities and Exchange Commission (SEC), Accounting Standards Codification 932 and the ASU- 2010-03 “Oil and Gas reserve Estimation and Disclosures” Rule, this section provides supplemental information on oil and gas exploration and producing activities of the Company. The information included in items (i) through (iii) provides historical cost information pertaining to costs incurred in exploration, property acquisitions and development, capitalized costs and results of operations. The information included in items (iv) and (v) presents information on Ecopetrol’s estimated net proved reserve quantities, standardized measure of estimated discounted future net cash flows related to proved reserves, and changes in estimated discounted future net cash flows.
 
The following information prepared under U.S. GAAP corresponds to Ecopetrol’s oil and gas producing activities at December 31 of 2010, 2009 and 2008 in direct and joint operations.
 
Under the new SEC final rule optional disclosure of possible and probable reserves is allowed, but the Company opted not to do so. Ecopetrol estimated its reserves without considering non-traditional resources.
 
Table i – Capitalized costs relating to oil and gas producing activities

   
Year ended December 31
  
Consolidated Companies
  
2010
    
2009
    
2008
  
Natural and environmental properties – proved properties
   $ 16,977,248     $ 12,188,806     $ 8,657,429  
Wells, equipment and facilities – property, plant and equipment
     6,564,590       5,359,419       4,112,318  
Construction in progress
     2,490,365       2,321,427       1,828,945  
Accumulated depreciation, depletion and amortization
     (11,864,137 )     (9,883,704 )     (7,637,750 )
Net capitalized costs
   $ 14,168,065     $ 9,985,947     $ 6,960,942  

It includes information of the subsidiary companies of the sector of E & P.

There are no capitalized costs associated with unproved oil and gas properties for the periods reported.

In accordance with ASC 410-20, Asset Retirement Obligations, during 2010, 2009 and 2008 were added $30,748, $6,857 and $25,902, respectively, to the cost basis of oil and gas wells for wells drilled.
 
Table ii – Costs incurred in oil and gas exploration and development activities
 
Costs incurred are summarized below and include both amounts expensed and capitalized in the corresponding period.

 
   
Year ended December 31
 
   
2010
   
2009
   
2008
 
Acquisition of Proved Properties
  $ -     $ 2,879,233     $ 1,049,402  
Exploration costs
    1,307,379       1,258,827       941,369  
Development costs
    5,835,141       4,717,550       3,109,011  
Total costs incurred
  $ 7,142,520     $ 8,855,610     $ 5,099,782  

It includes information of the subsidiary companies of the sector of E & P.

 
F-105
 
 
Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
 
Table iii - Results of operations for oil and gas producing activities

   
2010
    
2009
    
2008
  
Net revenues
                  
Sales
   $ 15,245,110     $ 9,957,793     $ 8,109,328  
Transfers
     9,032,898       7,801,224       11,644,467  
Total
   $ 24,278,008     $ 17,759,017     $ 19,753,795  
                         
Production cost (1)
     3,577,780       3,117,872       3,990,929  
Depreciation, depletion and amortization (2)
     1,856,118       1,184,584       884,372  
Other costs (3)
     3,554,315       2,533,031       691,002  
Exploration expenses (4)
     1,696,383       1,357,147       871,619  
Other expenses (5)
     593,257       535,494       368,231  
Total
     11,277,854       8,728,129       6,806,154  
Income before income tax
     13,000,155       9,030,889       12,947,641  
Income Tax expenses
     (4,290,051 )     (2,980,193 )     (4,272,722 )
Results of operations for producing activities
   $ 8,710,104     $ 6,050,695     $ 8,674,919  

Note: Effects of naphtha addition are included into results of operations in the table above. During 2010, 2009 and 2008 the additional total barrels (million boe) were 12.2; 8.5 and 5.4.
 
(1)
Production costs are lifting costs incurred to operate and maintain productive wells and related equipment and facilities, including such costs as operating labor, materials, supplies, and fuel consumed in operations and the costs of operating natural gas liquids plants. In addition it also include accretion expense related to asset retirement obligations that were recognized during 2010, 2009 and 2008 in production costs which were approximately $ 151,516, $(25,980) and $195,191, respectively. The Company’s results of operations from oil and gas producing activities for the years ending December 31, 2010, 2009 and 2008 are shown above
 
(2)
In accordance with ASC 410-20, the expenses related to asset retirement obligations that were recognized during 2010, 2009 and 2008 in depreciation, depletion and amortization were approximately $180,484, 69,371 and $16,352 respectively.
 
(3)
Relate to transportation costs and naphtha that do not form part of the company´s lifting cost.
 
(4)
Exploration expenses include the costs of geological and geophysical activities and non-productive exploratory wells.
 
(5)
Correspond to administration expenses and marketing expenses.
 
The Company transferred approximately 37%, 44% and 59% of its crude oil and gas production; (percentages are based on the sales value in Colombian pesos) to inter-company business units in 2010, 2009 and 2008, respectively. Using volumes, those transfers were 47%, 57%, and 69% respectively (included Reficar), in 2010, 2009 and 2008. The inter-company transfers were recorded at values equal to the Company’s market prices.
 
In 2010 the Company reports its information in four segments: Exploration & Production, Refining Activities, Transportation and Market and Supply. Until 2009 a Corporate segment was reported. The Corporate segment in the new methodology is assigned to the four segments as detailed in note xxv.
 
The information for 2009 and 2008 included herein has been updated for comparison purposes in accordance with the methodology used during 2010.
 
Table iv – Reserve information

The reserve information presented in this section is based on the definitions and rules used for U.S. GAAP purposes. The estimates for proved oil and gas reserves used in the preparation of the consolidated financial statements were prepared by Ecopetrol’s engineers, audited in a 99% by the “external engineers” and approved by the Company’s reserves committee, consisting of the Chief Financial Officer, the Exploration and Production Executive Vice-President and the Vice-President of Strategy. Decisions of the Reserves Committee have to be unanimous. Finally, results are presented to the Audit Committee of the Board of Directors and the Board of Directors.

 
F-106
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

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 2010 net proved reserves is based on the 2010 audited reserve reports for 99% of our total reserves prepared by experts under the SEC definitions and rules. The remaining 1% corresponds to calculations made by us internally using SEC definitions and rules set forth in Rule 4-10(a) of Regulation S-X and the disclosure guidelines contained in the SEC’s “Modernization of Oil and Gas Reporting” final rule dated December 31, 2008 and effective as of January 1, 2010.

Reserves were audited by Ryder Scott, DeGolyer and MacNaughton and Gaffney, Cline & Associates (collectively, the “External Engineers”). By corporate definition, Ecopetrol reports the reserves values obtained from the External Engineers. Our 2010 crude oil and natural gas net proved reserves include reserves from production assets located in the United States, Perú and Hocol’s assets in Colombia.

The Company’s proved reserves as of December 31, 2010 and 2009 are based on the SEC average price methodology for U.S. GAAP purposes, which mirrors the average price methodology used by the Company in Colombia during this period. The Company’s proved reserves as of December 31, 2008 are based on the SEC year end price methodology for purposes of U.S. GAAP which mirrors the year-end price methodology used by the Company in Colombia during this period.

Future development, abandonment and production costs were computed by estimating the expenditures to be incurred in developing, producing, and abandoning proved oil and gas reserves at the end of the year, based on year-end costs. Future income taxes were computed by applying statutory tax rates to the estimated net pre-tax cash flows after consideration of tax basis and tax credits and carry forwards. Discounted future net cash flows are calculated using 10% mid period discount factors. This discounting requires a year-by-year estimate of when the future expenditures will be incurred and when the reserves will be produced.

The arbitrary valuation methodology prescribed under ASU 2010-03 and ASU-2010-14 requires assumptions as to the timing and amount of future development and production costs. The calculations are made as of December 31 each year and should not be relied upon as an indication of the Company’s future cash flows or the value of its oil and gas reserves.

Ecopetrol used deterministic methods that are commonly used internationally to estimate reserves. These methods have some uncertainty in degradation, and thus, the estimates should not be interpreted as being exact amounts. However, the technology used to estimate reserves is considered reliable.

Estimates of reserves were prepared by geological and engineering methods commonly used in the oil industry. The method or combination of methods used in the analysis of each reserve was adopted from experience with similar reserves, stage of development, quality and completeness of basic data and production history.

The majority of the producing proved reserves were estimated by applying appropriate decline curves or other performance relationships. In analyzing decline curves, reserves were estimated by calculating economic limits that are based on current economic conditions. In certain cases, where the methods previously employed could not be used, reserves were estimated by analogy with similar reserves where more complete data was available.

Most of the Company’s activities and reserves are located in Colombia. The Colombian Nation is the owner of all mineral interests located in Colombia. The Company and, by extension of joint association contracts, its partners, are given the right to explore, develop, produce and sell those reserves, but do not own them. The reserve quantities and their standardized measure, presented in the following tables, represent those reserves and their estimated value that the Company has the right to extract and sell.

The table below sets forth the Company’s total proved oil and gas reserves together with their changes therein as of and for the years ended December 31, 2010, 2009 and 2008. The estimates (oil in million barrels, gas in billion cf, gas converted to million barrels at 5.7 billion cf per million barrels) using the SEC rules in effect for each respective year. In 2010 Hocol and Savia increased the Company’s total reserves of oil and gas by 9.5 million boe, 3 million boe, respectively. The Company did not consider these additional reserves as significant to be disclosed separately.

 
F-107
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

     2010   2009   2008  
    
Oil
  
Gas
  
Total
  
Oil
  
Gas
  
Total
  
Oil
  
Gas
  
Total
  
    
million
barrels
  
billion
cf
  
million
boe
  
million
barrels
  
billion
cf
  
million
boe
  
million
barrels
  
billion
cf
  
million
boe
  
Proved Reserves:
                                      
Beginning of year
     1,123.3     2,329.4     1,538.2     798.9     1,898.9     1,137.0     857.4     1,979.6     1,209.9  
Revisions of previous estimates (1)
     99.1     558.7     190.9     246.0     537.2     341.6     44.2     54.5     53.9  
Improved recovery
     47.4     -     47.4     -     -     -     -     -     -  
Purchases of minerals in place
     -     -     -     84.2     33.2     90.1     0.8     0.5     0.9  
Extensions and discoveries
     126.3     0.3     126.5     126.1     16.8     129.1     7.5     0.4     7.6  
Production
     (159.8 )   (165.9 )   (188.9 )   (131.9 )   (156.6 )   (159.7 )   (111.0 )   (136.0 )   (135.2 )
End of year
     1,236.4     2,722.6     1,714.0     1,123.3     2,329.4     1,538.2     798.9     1,898.9     1,137.0  
                                                         
Proved developed reserves:
                                                        
Beginning of year
     630.5     1,732.6     939.0     518.4     720.6     646.7     651.3     1,210.5     866.9  
End of year
     800.7     2,261.7     1,197.5     630.5     1,732.6     939.0     518.4     720.6     646.7  
Proved undeveloped reserves:
                                                        
Beginning of year
     492.8     596.9     599.2     280.5     1,178.3     490.3     206.1     769.1     343.0  
End of year
     435.7     460.9     516.5     492.8     596.9     599.2     280.5     1,178.3     490.3  

(1) Includes enhanced oil recovery component for years 2009 and 2008
 
The Company’s revisions during 2010 amounted to 191 million boe, corresponding primarily to the following activities:
 
·
Rubiales Field:  the reservoir has demonstrated a better production performance (lower decline rates) and a more favorable economic limit (35 million boe); Chuchupa Field:  the reservoir has demonstrated a better performance resulting from the compression project (27 million boe).
·
Cusiana Field: New gas sales agreements (38 million boe);
·
Cupiagua Field: The Company signed an internal gas sales agreement to Barrancabermeja Refinery (20 million boe);
·
Pauto Field: The Company has updated the field development plan (additional wells and optimization for gas injection strategy) (10 million boe).

The activities described above represented 68% of the additions to reserves revisions in 2010; the remaining 61 million boe resulted from varying increases and decreases from a variety of fields.
 
The Company’s improved recovery during 2010 amounted to 47 million boe, which corresponded mainly to better production results amounting to in the secondary performance of the Casabe field, which at the same time allowed for updating of the development plan, (35 million boe), which represented 74% of the Company’s additions by improved recovery.  The remaining 12 million boe are distributed in Yariguí-Cantagallo, San Francisco, La Cira, Infantas, Cusiana and Cupiagua fields.

 
F-108
 

Ecopetrol S.A. and Subsidiaries

Notes to the Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008

The Company’s extensions and discoveries during 2010 amounted to 126 million boe, which corresponded to 21 million boe of newly discovered fields and 106 million boe of extensions of proved acreage.  The newly discovered fields corresponded mainly to Quifa Suroeste and Casabe Sur fields, representing 90% of the additions.  In terms of extensions of proved acreage, 80% of the 106 million boe was associated with Rubiales Field (85 million boe), where the Company has created an improved development plan, covering existing and new proved areas, which supports additional future drilling activities. The remaining 20% is distributed in smaller changes in several fields like, Chichimene, Castilla, Provincia, Sardinata and others.

Table v –
Standardized measure of discounted future net cash flows relating to proved oil and gas quantities and changes therein
 
The standardized measure of discounted future net cash flows, related to the above proved crude oil and natural gas reserves, is calculated in accordance with the requirements of ASU 2010-03. Estimated future cash inflows from production under U.S. GAAP are computed by applying unweighted arithmetic average of the first-day-of-the-month for oil and gas price to year-end quantities of estimated net proved reserves.
 
   
2010
    
2009
    
2008
  
Future cash inflows
   $ 186,295,426     $ 137,518,875     $ 91,719,056  
Future production and development costs
     (57,267,518 )     (52,670,688 )     (40,753,567 )
Future income tax expenses
     (36,783,230 )     (27,574,537 )     (18,409,888 )
Future net cash flow
     92,244,678       57,273,650       32,555,601  
10% annual discount for estimated timing of cash flows
     (36,690,043 )     (21,813,763 )     (13,897,290 )
Standardized measure of discounted future net cash flows
   $ 55,554,635     $ 35,459,887     $ 18,658,311  

The following are the principal sources of change in the standardized measure of discounted net cash flows:
 
   
2010
    
2009
    
2008
  
                   
Net change in sales and transfer prices and in production (lifting) cost related to future production
   $ 23,136,538     $ 11,522,615     $ (20,440,064 )
Changes in estimated future development costs
     (2,936,160 )     (4,585,987 )     (3,920,730 )
Sales and transfer of oil and gas produced during the period
     (24,278,008 )     (17,759,017 )     (19,753,794 )
Net change due to extension discoveries
     4,102,951       1,129,590       137,845  
Net change due to purchase and sales of minerals in place
     -       2,387,443       53,468  
Net change due to revisions in quantity estimates
     10,577,037       13,532,916       1,758,941  
Previously estimated development costs incurred during the period
     4,352,080       3,369,970       2,934,497  
Accretion of discount
     3,545,989       1,865,831       4,251,867  
Other – unspecified
     6,674,884       11,859,363       3,059,763  
Net change in income taxes
     (5,080,563 )     (6,521,148 )     8,057,853  
Aggregate change in the Standardized measure of discounted future net cash flows for the year
   $ 20,094,747     $ 16,801,576     $ (23,860,354 )
 
 
F-109
 
 
SIGNATURES
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
 
ECOPETROL S.A.
   
 
By:
 /s/ Adriana M. Echeverri
  
   
Name:  Adriana M. Echeverri
  
   
Title:   Chief Financial Officer
  
       
 
By:
 /s/ Javier G. Gutiérrez
  
   
Name:    Javier G. Gutiérrez
  
   
Title:      Chief Executive Officer
  
 
Date:  August 8, 2011

 
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