Q3 2012 OMV AG Earnings Conference Call
Nov 07, 2012 AM CET
OMV.VA - OMV AG
Q3 2012 OMV AG Earnings Conference Call
Nov 07, 2012 / 10:30AM GMT
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Corporate Participants
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* David Davies
OMV AG - CFO
* Hans-Peter Floren
OMV AG - Executive Board Member Responsible for Gas & Power
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Conference Call Participants
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* Brendan Warn
Jefferies - Analyst
* Dan Ekstein
UBS - Analyst
* Nitin Sharma
JPMorgan - Analyst
* Thomas Adolff
Credit Suisse - Analyst
* Lydia Rainforth
Barclays Capital - Analyst
* Paul Spedding
HSBC - Analyst
* Alastair Syme
Citigroup - Analyst
* Laura Webster
BofA Merrill Lynch - Analyst
* Matt Lofting
Nomura - Analyst
* Gerard Wakalek
Asset Group - Analyst
* Marc Kofler
Macquarie Securities - Analyst
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Presentation
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Operator [1]
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Welcome to the OMV's Group conference call for the Q3, 2012 results. There will be a presentation of the results and a G&P strategy implementation update, followed by a question and answer session. (Operator Instructions).
You should have received a presentation by email. However, if you do not have a copy of the presentation, the presentation slides can be downloaded at www.omv.com. Additionally, simultaneous to this conference call, a live audio webcast is available on OMV's website.
I would now like to hand the conference over to Mr. David Davies, Deputy Chairman of the Executive Board, and CFO of OMV. Please go ahead, Mr. Davies.
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David Davies, OMV AG - CFO [2]
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Thank you very much, and good morning, ladies and gentlemen. It's a pleasure to have the opportunity to, as ever, go through our quarterly results with you. I'm also very happy to have my colleague here, Mr. Hans-Peter Floren, who's responsible for Gas & Power since earlier in the year, who will be speaking to you, after my presentation, about the Gas & Power business.
Let me turn to the first slide and outline the quarterly performance. As you can see, the quarterly Clean CCS EBIT increased by 34% to EUR786 million during the quarter, helped by higher production; the 309,000 barrels a day represents a 9% increase and, clearly, signifies a normalization of our production, almost, in Libya. And Yemen, also coming back onstream, provided 5,000 barrels a day to that additional production.
Higher exploration expenses, however, impacted the results. They were higher by the same quarter last year by an amount of EUR112 million, of which the vast majority, some EUR100 million, relates to a write off of our activities in Mala Omar, and in Shorish in the Kurdish region of Iraq.
The US dollar was 12% stronger versus the euro over the same period last year. And despite the somewhat lower oil price, $109.50 per barrel, 3% below the same quarter last year, this meant that our net realizations were, as a consequence, also higher than the same quarter of last year.
Also very positive, our OMV indicator refining margin increased very substantially. Since quarter 2 we've been enjoying enhanced refining margins; this continued during quarter 3. And our refining margins during the quarter were $5.28 against $1.74 from the same time last year. So that was a substantial improvement, as you will see when we get to the Refining and Marketing section.
The gearing ratio decreased still further to 28%; a year ago it was 33%; a quarter ago it was 31%. So we're delighted that our cash flow has remained strong, and we're also starting to see the first benefit of [some] working capital work that we talked about in quarter 2.
During the quarter, we announced the acquisition of a 15% stake in the Aasta Hansteen gas field development in Norway. This is expected to add something of the order of 18,000 barrels of oil equivalent per day to our production by 2017 when it will come on stream.
We also completed the quarter with the raising of EUR1.5 billion of Eurobonds; the cheapest funding we've been able to raise so far and also the longest maturity, actually tapping the 15 year market for the first time, and strengthening both the liquidity profile and also the maturity profile of the Group as a consequence.
Over on the next chart, you can see the main factors which have constituted the environment during the quarter and during the last 15 months, in fact, for that matter. The oil prices you can see here slightly down from $113 to $110, down by the 3% I mentioned previously. What you see with the green line on the left-hand side is the substantial strengthening of the dollar, down from $1.41 to the EUR1 to $1.25 during quarter 3.
The middle chart shows you the challenge that we particularly have in the Gas trading business, Gas supply business, where the long-term contracts are shown as a proxy there with the top line, compared to the yellow line which represents the price of gas available at spot markets. And this widening gap between those two lines, of course, is a major challenge for the Gas business, particularly given the long-term supply contracts that we have on oil-based prices as reflected by the top line. And that's due to losses in our EconGas subsidiary, as we foretold at the second quarter.
The lower line on this central chart is the gas price in Romania appears to have gone down slightly, but this is purely a foreign exchange effect impact. The price has now remained unchanged for several years now.
The OMV indicator refining margin is shown on the right-hand side. Here you see particularly the step up in quarter 2 and quarter 3. And, as I mentioned earlier, we are now more than 3 times higher than we were a year ago at $5.28 compared to $1.74 in quarter 3, 2011.
I turn now to the next chart which shows you the step up in net income that we achieved by 34%; CCS net income rising to EUR317 million during the quarter. Looking on the right-hand side and going briefly through the charts here; EBIT we've already talked about. The financial result was higher in terms of expenses, EUR106 million against EUR71 million. The biggest reason for this increase were the penalties that we paid for early redemption of certain financings and bonds of the order of about EUR900 million of early redemption, and this cost us something of the order of EUR40 million in penalties. And of course, we found that it was more effective to use the new bonds rather than continue with the old bonds, and hence that. So this is something which will be a one-off effect and shouldn't repeat itself, going forward.
The effective tax rate has increased substantially, compared to the same quarter last year. This is driven predominantly by Libya; you'll be aware that tax rate in Libya, which of course, was not contributing to our production a year ago, is substantially higher than the Group average. And the inclusion now of four quarters' production from Libya in quarter 3, 2012 has obviously driven the tax rate up substantially.
Minorities are lower than last year. The predominant reason for this is the lower contribution of Petrom. Petrom's net profit, which is eliminated here to the extent that it relates to the minorities, is obviously substantially lower, and that obviously helps us.
And when we come, therefore, to net income attributable to stockholders, EUR311 million against EUR225 million is a 38% increase, which reflects itself, clearly, in the EPS at EUR0.95 against EUR0.69. And adjusted for clean CCS EBIT you see right at the bottom, EUR0.97 plays EUR0.73, against an increase of 33%.
The next chart shows our cash flow, and what's been moving the cash flow. It's quite clearly explained here. Our depreciation at EUR1.549 billion during the nine months year to date is some EUR340 million higher than the same period last year. The predominant reason for this are the higher impairments and exploration expense write-offs that you have here, the Kurdish region I mentioned, in quarter 3, 2012.
We also made earlier in the year write-offs, as you'll be aware, against Strasshof in Austria, and Peking Duck in Norway, and that's obviously increased the depreciation as a consequence.
Other items, EUR288 million, are substantially higher than last year. The principal reason for this is the tax refund due as a consequence of the Peking Duck write-off in Norway, which was executed in the early part of the year. And that, of course, in cash terms will only be realized in next year and, as a consequence, one has to eliminate that from the net income in the cash flow statement.
Sources of funds then, EUR2.6 billion against EUR2.2 billion same period last year. Change in working capital you've seen has been positive, despite the very strong oil price, EUR121 million against minus EUR144 million last year. And we're starting to see the benefits of the working capital reductions which we spoke of in quarter 2. We've committed to reduce our working capital by EUR500 million by the end of the year, and within this current number that you see we've already got more than EUR300 million reflected in that already achieved. So we're obviously making good progress there.
Cash flow from operating activities, as a consequence, at EUR2.7 billion is 30% higher than the same period last year. Our investments were substantially lower, EUR1.5 billion against EUR2.4 billion; clearly a year ago, we'd completed the Pioneer acquisition in Tunisia at a cost of approximately EUR800 million, and that's the biggest reason for the difference here.
So with a substantially lower CapEx, and a stronger cash flow from operating activities, we've moved our free cash flow from minus EUR287 million into positive territory at EUR1.256. And even after paying the dividends in quarter 2, we've still got a free cash flow after dividends of EUR630 million.
CapEx and EBITDA shows clearly, as ever, where we've been investing most of our capital is in E&P, EUR732 million during the first nine months of the year against EUR3 billion of EBITDA generated by the division. We've had substantial investments in the form of exploration activities in Neptun in the Black Sea, in Zidane in the Norway in the North Sea, and Bina Bawi in the Kurdish region of Iraq.
Petrom drilling and work-overs, as ever, was always a substantial part of our CapEx in E&P. Gas & Power, the green area, EUR284 million will come down substantially next year. Here you see the ongoing expenditure in the Brazi plant in Romania, which is now onstream, and the Samsun plant which will come onstream shortly.
We also have the storage facility in Germany of Etzel, where we've capitalized the lease fees from the caverns there within the Gas & Power division.
In Refining and Marketing, the EUR321 million relates predominantly to the continuation of the Petrobrazi modernization, which will be completed in 2014.
Special items, on the next chart, were not really significant during the quarter. The only item was the minus EUR15 million which relates to a write-down on the book value of the exploration activities -- E&P activities rather, that we have in Petrol Ofisi in Turkey; we're very small exposure there. And as we prepare that asset for sale, we've written its book value down considerably, as you can see.
The other item of minus EUR26 million relates to a legal case relating to an uncollected receivable in Kazakhstan. We go, therefore, from a reported EBIT of EUR779 million, adjusting for CCS changes and special items, and arrive at a Clean CCS EBIT which is only slightly higher, at EUR786 million.
Turning now to the business divisions, starting with Exploration and Production. The first chart shows, quite clearly, the reconciliation between the EBIT of this quarter versus the last quarter, and this quarter versus the same quarter last year.
What's changed this quarter versus last quarter is, predominantly, the additional exploration expense of EUR122 million. Looking to the same period last year, the change is more complex. We've had higher realizations of EUR69 million; this is all due to foreign exchange. In fact, the oil price was, as I mentioned earlier, 3% lower. We've also had the volume impact, which is positive EUR257 million, coming in particular from the higher sales volumes in Libya.
Exploration expenses are higher by EUR112 million, which we've already talked about. And the other position of EUR79 million predominantly relates to the depreciation which is ascribable to the higher volume that's now being produced. The volume effect on the left is just after OpEx, and the depreciation clearly has to be booked as well. So that reconciles the EUR482 million to the EUR617 million.
If you go to the next chart, you can see the summary of what's been happening in E&P in terms of production. We've now increased our production for five quarters consecutively, and clearly, Libya and Yemen have been the major driver of this, producing now 309,000 barrels per day. This is unlikely to continue into quarter 4; quarter 4 is likely to be far more stable.
In fact, you may be aware that there was a strike at the refinery in Libya, which takes the production from Murzuq, [but not rather a strike]. There was a political occupation of the facility, which actually led to us having to shut in production for a few days this week. But that's now back onstream, so we only lost production from Sunday 'til Tuesday in Murzuq. But that 28,000 barrels per day will clearly also not help us in terms of trying to get higher than the 309,000 in quarter 4. So production is likely to be around about the same level in the final quarter of the year.
OpEx has continued its decline, from $14.88 a year ago to $12.10 per barrel. The most significant part of this has come from foreign exchange, clearly, the stronger dollar. Given that a large part of our operating expenses is not in US dollars, has helped us reduce our OpEx in dollars per barrel of oil equivalent.
You see that also on the next chart. In Romania down from $16.61 to $14.67. In fact, the apparent spike in quarter 2, 2012 was really due to a higher than expected salary award for our staff in Romania, and that was backdated and led, as a consequence, to something of a spike during quarter 2. But if you eliminate that, you can see we are still on a trend downwards, and again, the larger part of this is due to foreign exchange, although our operating expenses in total, both in Romania and outside for that matter, remain under strong control.
Positive also is that our production continues at more or less the same level. Clearly, a primary target that we have is to maintain the level of production in Romania, and also Austria for that matter. But clearly, Romania is the lion's share, and keeping it high is clearly a major priority for us.
I come now to the next chart, which shows you where our major exploration activities are ongoing. News today is that we will be starting, very shortly, the 3D seismic in the Black Sea following the Neptun discovery, and are very excited about identifying further structures comparable to Neptun in the nearby area, given the huge discovery that we made in January this year.
We also now have committed a vessel to come into the Black Sea again during 2013 -- towards the end of 2013, and hope to restart the drilling campaign as a consequence of that. So that is also a very positive development in this area, about which we are all very excited.
You see surrounding Romania there in the Black Sea, both Bulgaria to the south and the Ukraine to the north, and you'll be aware that we've secured acreage not only in the Romanian part of the Black Sea, but also to the north and south in the Ukraine and Bulgaria respectively.
Norway, the drilling of the Bonna plant is expected now to be in the first half of 2013. There was some hope, originally, of perhaps being able to do this in 2012; that's proving not to be the case. In Austria, we've done some further 3D seismic around Mistelbach, and made a small gas discovery in Rabensburg, and Rabensburg-4 has now been also spudded to try and extend this. And this continuing work in Austria, and infield drilling, is going to be able to contribute some stabilizing of our production there. So major targets in Romania and Austria, as I mentioned, keeping our production round about the same.
I'll move on, if I may, from there to our project activities and give you an update there. In Norway, we clearly announced the third acquisition in 12 months with the Edvard Grieg oil deal we announced recently; we hope to close that during this year. Aasta Hansteen, an acquisition we also announced earlier in the year, is a discovery where our final investment decision on the discovery is expected there by the end of 2012.
And as a consequence of these activities, as well as the developments in the Schiehallion and, hopefully, the FID being taken in Rosebank during the next few months, we believe that the North Sea, Norway and the UK is going to become really quite a substantial part of our production portfolio over the next 5 to 10 years, which we're quite excited about.
Tunisia, the Nawara development, the south Tunisian gas pipeline proceeds on schedule; the United Arab Emirates, we clearly entered the country this year and are looking for our first appraisal well in the Shuwaihat gas field, and this is planned to spud next year with first gas planned, hopefully, for 2018.
In Yemen, given the security situation, although we're very happy that production has been continued, the major field activities on the Habban development remain suspended until we have more clarity there.
In Pakistan, the Mehar development, the construction activities, are in progress, and a fourth well is planned to be spudded next year. And a development agreement for the Latif gas field has also been signed which will help us to increase our production there.
In the Kurdish region of Iraq, we continue with our activities in Bina Bawi, with Bina Bawi-4 drilling at more than 3,000 meters now, and Bina Bawi-5 also spudded during the last quarter. So we're very excited there about that very substantial oil discovery we made.
Romania, onshore Totea deep development, the first appraisal well has been perforated and is currently in testing, and the second appraisal well, which spudded in August, is continuing to drill. And again, these infield discoveries are also part of the picture to keep our Romanian onshore production stable.
Turning to a chart now with which you will be familiar; the pipeline in E&P continues to grow more healthy and we're very pleased with this development. You see on the top right-hand corner where we are now and where we were in quarter 2 a year ago. In terms of appraisals -- in terms of barrels under appraisal, we now have something of the order of 450 million barrel of oil equivalents. If you look at cumulative field life production, a year ago we didn't even really feel comfortable disclosing that number, quite frankly, so we've made some tremendous progress there. We've also added substantially to the barrels that we currently have under development, a year ago it was round about 280,000 -- 280 million boe, and now it's something of the order of 450 million.
As these developments and new production come onstream, we believe that these will be contributing something like 70,000 to 80,000 boe per day to our 2016 production, compared to our expectation of some 20,000 boe per day lower a year ago. And we look forward to 2021 as some of the activities currently under appraisal hopefully go through development and start producing. Then 10 years from now, these will all be adding something like 150,000 to 200,000. So compared to where we were a year ago, nothing of that dimension, so we're very excited that we've been able to add so many barrels to our resource base.
Turning now to Gas & Power, before Hans-Peter goes in more detail at the end of my presentation into the division, just looking at the results, quarter versus quarter. A rather stable picture from EUR6 million to EUR7 million, but you can see within that there's been quite a lot going on. The Gas logistics business added to our performance, as did the onstream bringing of the power station in Brazi. The Gas logistics, in particular, has benefited from the startup of the gas storage in Etzel, on an overall lower cost level.
What has not helped the results, of course, is the Supply, Marketing and Trading business with a loss of EUR10 million, the background to which you will be familiar with, and this is basically the long-term supply contracts.
Key performance indicators in Gas & Power are, sales continue to move ahead as the overall volume of trading increases, up by 87%, although the vast majority of this is due to short-term trading. We've seen a deterioration in the quarter, in fact, between oil and gas prices and spot prices. Petrom has performed relatively well during the year, although gas volumes in the quarter just slightly decreased by 2%.
We also first did the first filling of the gas storage in Etzel during the quarter, and of course, brought Brazi onstream with a total net output of 0.8 terawatt hours.
We also started the hot commissioning phase of the power plant in Samsun, in Turkey, and expect to bring that onto stream -- onto production during the first half of next year.
Then to Refining and Marketing, a big step up in our performance here, clearly driven by the improved fuel margins which contributed a EUR152 million increase to our last year profit. Less positive was petrochemicals where a higher naptha price and significantly lower propylene margins were negative -- had a negative impact on the performance.
Likewise, in Marketing minus EUR15 million, really due to ongoing pressure in both our margins and our volumes in the Marketing business, although this has not been the case in Turkey. Within that minus EUR15 million you see a further improvement in terms of our operating profit by about EUR4 million Petrol Ofisi. So Petrol Ofisi has continued the very positive trend, compared to last year.
So overall, a big step up in EBIT in Refining and Marketing, from EUR129 million up to EUR243 million.
Just turning briefly to the next chart, you can see what's been happening to our refining output in Petrom. The blue block, within the blue and green block, it's obviously down substantially on previous quarters, and this, of course, is due to the major stop which was executed in Q2 and, to a certain degree, impacted quarter 3 as well. But volumes have now started to come back.
In Marketing, you see the typical seasonal movement of our Marketing sales volumes rising as we got into the driving season in quarter 3 but unfortunately, not reaching the same level as last year, 5.99 against 6.27. Although, in that, we did see actually a reduced number of gas stations down by about 150. And that is predominantly due to the sales of the gas stations in Cyprus which belong to Petrol Ofisi.
Borealis, within the overall Refining and Marketing division, performed slightly better. And Petrol Ofisi, as I mentioned already, continued to improve its performance.
And then just summarizing the key financial indicators; the gearing I've already mentioned. I'm obviously very encouraged that it's now substantially lower, down to 28%, compared to the end of last year when we actually had 34%. And that's something we're very encouraged by; the strong cash flow obviously helping us there.
The payout ratio, you'll be aware of our long-term target of 30%, and we're broadly in line with that over the last couple of years. And our ROACE, somewhat below our long-term target of 13%, 11% at the moment, although clearly the performance improvement program is working hard to address that.
And then just finally from my side, turning to the outlook for 2012. The market environment; we expect Brent price to remain high, for the balance of the year. We certainly don't see any improvement coming in terms of gas margins. And the strong start from the Refining business indicates -- gives us a confidence as we look into quarter 4. But as we look beyond that, clearly the outlook remains uncertain because Europe still wrestles with its fundamental challenge of having too much capacity in refining. And we're enjoying the situation as it is right now, but certainly do not believe that the industry in Europe has got into a new paradigm, as it were.
CapEx for 2012 is expected to be slightly below prior guidance, which was EUR2.4 billion, so down to EUR2.1 billion. This is really just due to a number of projects drifting into next year. I mentioned Bonna, for example, the spudding of the well in the Norwegian North Sea. And there are a number of projects similar to that which are likely to lead to our CapEx being around about the EUR2.1 billion level for the year.
The working capital reduction of EUR500 million by the end of the year is something we remain committed to; as I said we've already achieved more than EUR300 million of that by the end of quarter 3. Production is going to be broadly similar, we believe, to quarter 3. And the large 3D seismic survey is going to be starting imminently around the Neptun block, so that's obviously a positive development, as is the fact that a vessel is now committed to restart the drilling program at the end of next year.
A positive EBIT contribution is expected to continue from Brazi, the power plant is now onstream, and we expect to further progress the R&M divestment program. And we'll have, hopefully, more to say about that before the end of the year.
At that what I'd like to do now is hand over to my colleague, Hans-Peter Floren, who's going to give you a brief overview of what's been happening in the Gas & Power business, and then we'll be available to take your questions. So thank you for your attention. Hans-Peter.
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Hans-Peter Floren, OMV AG - Executive Board Member Responsible for Gas & Power [3]
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Thank you very much, David. I have taken over responsibility in the Executive Board for Gas & Power by March this year, and I would like to start at the strategy presented to you in September '11 where OMV was given to you with its ambition to develop its business as an integrated gas and power player along the Nabucco project.
Our key priorities were raising performance short term, delivering midterm growth, and positioning for long-term growth. And I would like to describe what we actually have achieved so far.
Asset-backed trading has been built up, and the CCPP Brazi is onstream now, in a way that we managed to achieve equity gas integration. We have contributed to delivering midterm growth, by starting sales activities quite successful, from 0 bcm to 1 bcm, and we continue our ambition to increase our marketing position in the Turkish market.
As regards Nabucco itself, we had to take account of reality. Reality is that (inaudible) has been promoted as a project for transiting Turkey by SOCAR and Botash. We have adopted our project concept to that, and the Nabucco West concept has been presented and welcomed, by the Shah Deniz consortium, as well by political leaders, and EU administration. And we continue our investments in infrastructure, around Baumgarten, example given by expanding the WAG pipeline system.
Of course, we are changing rapidly. We are acting in a changing gas market environment, and we have to take account of the new equity gas options triggered, and that drove us to reassessing our Gas & Power strategy. And I would like to focus a little bit on that, from A to E, gas oversupply and strong pressure on profitability on the one hand. And then to the benefit of OMV, its equity gas position, its focus on growth markets, and building its business on several areas of specific OMV strengths.
Let me start by pointing out that the EU gas market has changed fundamentally, and will continue to be oversupplied for the next years. You can see from the graph, the widening gap, which became too large to be managed by take or pay flexibilities given under the long-term contract.
The question is how long is that going to last? There is a wide spread of expectations there. We have narrowed that down, and according to our expectation, in the second half of this decade, it's going to be balanced again. Which is very important then, also, for our equity gas development and starting marketing of that.
When it comes to gas pricing, that oversupply and structural changes in the market, driven by political and regulatory actions, have led to a decoupling of hub markets from long-term oil-indexed supply.
The drop, end of 2009, 2010, was regarded by market players as a one-time experience. Prices recovered again, but the decoupling starting at the beginning of 2011 is really regarded now as a structural decoupling which is going to persist, and we have to take account of it. It's actually focusing -- it's actually based on the fact that natural gas in the market area is no longer into fuel competition versus oil products, but there is liquid transparent, natural gas market, driven by up quotations, all over Europe.
On the other hand, OMV has the potential to strengthen and grow this gas position, based on equity gas. You have heard about Black Sea development, Domino discovery, and that we have been awarded additional blocks in the Bulgarian and Ukrainian sector.
In addition to that, we are also active and successful in the North Sea and Norwegian Sea region. Zidane, Aasta Hansteen, and several fields west of Shetland, have been mentioned already.
Based on that, Gas & Power has a clear role in an integrated OMV strategy by generating additional value, compared to E&P direct sales. And we do that by creating access to market, especially in those markets which are restricted, or oversupplied.
So our task is to identify the most attractive markets for our business, build and manage sales and supply position. And when it comes to that, the pre-marketing, the ramp up in the market position is very important to phase in then equity gas production, when it's ready to be marketed.
We have to manage the supporting logistics infrastructure, and we have to optimize the overall portfolio. In that picture, we foresee still having long term contracts, under the preconditions that they continue to be commercially and strategically attractive. Of course, that requires for a solution under the price [regulators], to get them back to a market [reflecting] price.
When it comes to the various market areas, we look at the markets west of Baumgarten, which are more stagnating markets, well developed markets, but we don't expect growth there; more challenging developments; not meeting expectations raised in the past, in terms of gas to power development.
On the other hand, the markets east of Baumgarten, where we have a good positioning, will be growing market, especially then, also Turkey, where we have started gas marketing, and we expect Turkey to be the fastest growing market. And in the Turkish market also, as a gas to power segment, continuing being an attractive business area.
To the benefit of OMV, as we see it, is that we are holding a position of strength in our core countries. Of course, in Romania, based on our current equity gas position, adding up to 5 bcm. And the additional growth potential, Domino, and also then, in the long term future, potentially also, shale gas production.
We have generated captive demands through our CCPP Brazi, which has started successfully operations, and contributes to our overall positioning in the country.
Austria, 55% market share; very strong, based on equity gas production in Austria itself, and long-term contracts. Backbone of our Gas business in Austria is our strong logistics position, based on our leading pipeline operations, and we are the biggest storage operator in the Austrian market.
In Turkey, good positioning of OMV. As a Company, when it comes to gas we are a newcomer, a successful newcomer in the sales market, as already mentioned. We have managed to build up sales business. We have an ambition to drive that further.
We continue to work on the Samsun power plant, which will start operations in the first half of 2013 and, thus, generate additional captive gas demand, and we will benefit from marketing power in the Turkish market. And we have a potential for equity gas supply from neighboring countries.
David has described our activities surrounding also the Turkish market, and we can expect, sooner or later, equity supplies from there. And we will build up the market positioning, the ramp up, by pre-marketing activities, based on third party supplies.
So OMV is building its gas positions, currently, in two very different market areas west of Baumgarten. Highly liquid markets, very regulated markets, driven by EU regulation.
Infrastructure, logistics, are well developed, sufficient. We are building our business there on an interconnected, international gas transportation grid, and well developed storage capacities.
East of Baumgarten, different. No liquid hubs; up to now a limited market absorption capacity; and a heterogeneous regulatory environment. And further development of the Gas business requires also a development of infrastructure which is insufficient so far to support that.
Nabucco continuous core project in that picture of integration along the value chain and regional integration. As already mentioned, the Nabucco West concept based on TANAP being a reality for the transit in the Turkish market, has been welcomed by the Shah Deniz II consortium, and by political leaders.
10 bcm from Shah Deniz will be available for transportation. We are in a competition race there for the route to Baumgarten. We have won the semi-final, and there is still competition between two different routes and thus, two different projects between Nabucco West and TAP.
We have submitted a binding conditional Nabucco best tariff offer to the Shah Deniz consortium, and we will continue to promote Nabucco West because it has potential value drivers for OMV. It will support our potential access to equity gas and its integration in Azerbaijan. We have an ambition to develop business there.
It will support evacuation of gas from Black Sea production, and enable central optimization of our assets across the countries. Our business is focusing at new markets; entries will be supported by Nabucco. And last but not least, also the Nabucco contract -- the Nabucco concept foresees attractive returns for the infrastructure investors.
So what are the next steps now? In the fourth quarter, we want to conclude a cooperation agreement, equity and funding agreement, and make progress on gas supply agreements with the Shah Deniz consortium. That should form the basis then also for gas transport agreements, open season procedures, in the next year to markets with transportation capacity.
The Shah Deniz timeline foresees taking a final decision on Nabucco West; currently, that is foreseen for mid of next year. And potential final investment decision on Nabucco will be depending on the Shah Deniz timetable and the Shah Deniz decision-making process.
When it comes to the Gas & Power business model in a comprehensive view, we are acting in three regions, as described. We are acting in supply, building our business on equity gas from various countries; Austria, Romania, the North Sea, and other potential sources.
We have long-term contracts on board for deliveries from Russia and also, to a limited extent, from Norway. We have an ambition to get L&G into our portfolio as a third pillar. However, in today's world gas market environment that's quite ambitious and not easy to achieve.
In addition to that, we have short-term purchases in our portfolio. Logistics as a backbone built on our Austrian activities, Nabucco as a development project. We have a long-term position for regas capacity at the Gate, Rotterdam L&G regas terminal.
We have storage capacities in Austria and, more recently, also opened activities at the Etzel storage joint venture in northwest Germany, which adds additional capacities to our northwest European portfolio.
And all that has to be optimized, sales, marketing and especially trading has got a job to optimize all these -- position all these assets to make the best of the overall value chain, and to steer the business between the various regions.
That's, in a nutshell, how we want to proceed in our business, so it's a continuous story of integration along the value chain, and a continuous story of integration between the various regions. We are working in and Nabucco continues to be an important project supporting achieving these goals.
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David Davies, OMV AG - CFO [4]
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Thank you, Hans-Peter. Thank you also for your attention, ladies and gentlemen. At that point, I'd like to hand back to the moderator and take any questions that you may have. Thank you.
==============================
Questions and Answers
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Operator [1]
------------------------------
(Operator Instructions). Brendan Warn, Jefferies, London.
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Brendan Warn, Jefferies - Analyst [2]
------------------------------
Just first question, if I can have just three short ones please? The first question relates to your base production business, or E&P division, and I appreciate that you've given guidance into the fourth quarter, and you certainly paint a positive picture for 2013. But I guess, in light of a couple of your bigger peers last week, just if you can give us an idea of any expected declines, or our outlook for your E&P production in 2013, please, and just any anticipation of any major turnarounds.
Secondly, just in terms of exploration spend and expense, again, just any guidance you give us going into 2013; obviously, in light of your drilling that you've announced in the Black Sea at the end of the year.
And thirdly, just on the G&P business, and also related to your gas component of your E&P business, if you can just talk to us around your expected average cost of supply for future equity gas, and where you see relative to, on the cost curve, and that you highlight obviously pressures on profitability, going forward, and decoupling with the oil link, but where do you see your future equity supply being placed in terms of the cost curve, please?
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David Davies, OMV AG - CFO [3]
------------------------------
Okay, Brendan. Guidance for 2013; I think I'd really rather defer until the end of 2012 before I got too specific, but I would point out a couple of things which are not going to help overly positively during 2013, when you look at production. And that is that we have disposed of a number of smaller activities in the central North Sea in the UK, which clearly will no longer contribute to production.
And also the fact that it is expected that the Schiehallion redevelopment by BP will start early in 2013. So that's likely to have a slightly minor negative impact on oil production, but I don't want to get too specific on guidance until we get closer to the end of this year.
And that would be likewise the case for exploration expenditure, although I would say that they are likely to remain quite high. I think we have a very clear focus now on putting more of our capital and spend generally into the E&P business.
We've seen also that we've had more success in growing by acquiring discoveries in acreage where there's further exploration potential, and that's obviously going to need to challenge our exploration commitments. And we're very happy to face up to that challenge, so I don't want to get into too many specifics.
But I think we'll continue to invest heavily in exploration, of course. If we're going to restart the drilling program in the Black Sea, then that also is clearly going to be significant, although it is likely to kick in right at the end of the year.
Then the gas cost of supply, if you'll allow me to take that question; I think if you look at where most of our gas is produced, it's produced fairly close to the market in which it's consumed. I think that would start to become a bit different when we actually get into bringing the Norwegian gas onstream. And also, in particular, when it comes to evaluating the commercial development of the Black Sea discovery.
Now, the Black Sea discovery is in deep water, and whatever is ultimately decided, and when it's decided, it's not going to be an insignificant investment to bring it in onstream. And there'll be a whole range of questions that we need to answer, not only in terms of the fiscal regime, but also in terms of what the market price expectations are.
But I would point out to you that the Black Sea is a lot closer to the marketplace than the Caspian Sea and, as a consequence, we believe we'll be able to compete quite effectively with largely competing gas sources that are coming into the European market.
When you look at the Norwegian gas developments, we clearly looked at current prices when we evaluated that investment, and we believe that that is a profitable investment. The prices around about this level, so I don't want to get into specifics in terms of what the actual cost will be, but we believe the gas that we bring into the European market from Norway will be a profitable investment, as Statoil is already proving to be able to demonstrate.
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Brendan Warn, Jefferies - Analyst [4]
------------------------------
Okay, thanks for that. Thanks, David.
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Operator [5]
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Dan Ekstein, UBS, London.
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Dan Ekstein, UBS - Analyst [6]
------------------------------
A few questions, please. Firstly, on CapEx, I think last September we were talking about EUR2.7 billion per annum of CapEx through the forecast period. And this year, it's come down progressively to just over EUR2 billion, bucking the industry trend.
But does it mean that certain projects are dropping out, or being pushed further out? I know you mentioned Bonna exploration on the call, but that can't account for all of it, I guess. So if projects are being pushed further out, if so, what?
Then on Norway, following on from the discussion on the acquisitions you've made there over the past few months. Both of these add to production, but in the second half of the decade and are, potentially, going to be quite expensive developments. So should we be expecting changes to existing CapEx guidance as a result of these acquisitions? Or was it already baked into your prior guidance?
And then finally, have these acquisitions you've made this year got you to the point at which you think your asset base can deliver the 4% production growth by 2016 you talked at the last strategy presentation? Or do you think you'll need further deals beyond what's already been done in order to get to that point? Thank you.
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David Davies, OMV AG - CFO [7]
------------------------------
Thank you for those questions. In terms of CapEx, our guidance in Istanbul was that our gross CapEx over the next three years, so that was '11, '12 and '13, would be around the order of EUR2.7 billion. But that we believed, in fact, that with the EUR1 billion disposal program in Refining and Marketing, if you take that into account, then net-wise, we were going to spend about EUR2.4 billion. And that was before any acquisition investments, clearly, that we did.
'11 and '12, if you take out acquisitions, we will have spent below that. I wouldn't say we were bucking an industry trend and we've found some sort of magic solution. I think it largely is that it takes quite a lot of resource to actually spend CapEx like that, particularly when you're focusing it in one business division, in E&P.
And we've been strengthening our internal resources to enable us to successfully pursue projects. But I don't believe there's any sort of industry trend being bucked.
And when it comes to guidance for next year, I think it's a little bit early but I would probably suggest, at this point, we probably will be tweaking our guidance upwards. Because if only for the very reason that you mentioned, the acquisitions that we have done have been more at the lower end in terms of the entry price, but bring with them substantial capital commitments. And Edvard Grieg and Aasta Hansteen are both examples of that.
We've had more success doing that, and we believe that's a better way to be able to create value also if you're growing your business, rather than buying already producing and developed reserves. But, clearly, it's going to require CapEx, and we need to carefully consider that within our plans before we issue formal guidance. But I would suspect it's likely to be moving upwards from the EUR2.4 billion which we've previously given.
And then in terms of our production growth target of 4%, which we also gave at Istanbul, if you remember what we said, was we would grow by 2% organically by 2016, which would take us to about 350,000 barrels of oil equivalent per day. And then we would look to acquire potentially up to another further 2%, which would get us up to around about 400,000 barrels of oil equivalent by then.
Now, there are a number of the acquisitions that we've done, if the developments are completed on time, which could actually bring production in at the tail end of 2016. But it's more likely to drift slightly beyond that.
So I think we're very happy with the acquisitions that we've done, but whether or not they actually add to our 2016 production I think is a bit difficult to say, at this point. It's rather unlikely, I would think.
But they clearly are acquisitions that were part of our overall expectation of investment; if they deliver a year later, we'd be very happy with that. But our target, really, predominantly, remains that we want to get this 2% growth in organically. And we'll continue to look at acquisitions with the primary target really being that they create value rather than they [land us with] a specific production number.
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Dan Ekstein, UBS - Analyst [8]
------------------------------
Okay, thank you.
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Operator [9]
------------------------------
Nitin Sharma, JPMorgan, London.
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Nitin Sharma, JPMorgan - Analyst [10]
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Two questions, if I may? The first one on Gas & Power; you've guided to losses in EconGas in Q4, and you're also guiding that European gas markets, in your view, will remain oversupplied for some years. Therefore, is it fair to conclude that this business will generate losses even in 2013, based on what you see today?
And a related one, how much of your gas supply contract portfolio will come up for term renegotiations in 2013?
Second question on Yemen; given the security situation in the country and the current suspension of field activities, what sort of timeline should we factor in for the start of the Habban project? Thank you.
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David Davies, OMV AG - CFO [11]
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I'll let Hans-Peter answer the questions on Gas & Power in a moment, but if I can perhaps jump to the last question, Yemen.
That really is a difficult one to answer. We clearly know that we sit on an oil discovery in Habban and, in fact, the development was ongoing before the troubles really kicked on last year. But until we have a far higher degree of clarity on the security situation there, then it's difficult to talk about precise timing.
We'll clearly continue to evaluate the situation. We have people in the country, in the field, and we're obviously evaluating daily what our opportunities might be and considering the various options. But it's a little bit too early to be too specific.
I think it presents a challenge for you in terms of when you model it in. It also presents a challenge for us in terms of when we model it in. And I think we're tending towards the cautious end rather than the optimistic end, I think it would be fair to say, Nitin.
On the Gas & Power business, let me, if I can, hand over Hans-Peter.
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Hans-Peter Floren, OMV AG - Executive Board Member Responsible for Gas & Power [12]
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Yes. We enjoy a right under the contracts to renegotiate the prices and get them back to a market price level. And you know that this is not a unique experience what I just have described. It's happened all over Europe; actually, Austria managed to slow this coming to Austria a bit down, to a limited extent. So this is to the good side.
There is no need for us now to argue towards producers, long-term suppliers about markets reality. That is given; that is accepted as a new reality and will support us in our negotiations.
You know us having the contractual price review date April 1 with Gazprom export. Gazprom export, by far, is our biggest supply under long-term agreements with by far the biggest volumes. Of course, we can't say now about the actual outcome of the negotiations. What I can give to you is that we, very early in the course of this year, have already started talking about this to prepare for this, to achieve results by April 1.
And our contracts really give us a right to go for a further price adjustment, which is challenging against the background that the last price adjustment was done end of the year, and we are coming now 15 months later with a new one.
But, yes, if you ask me about it, I assume that we continue making losses in EconGas for a limited time, and it's really hard now to judge on the extent.
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David Davies, OMV AG - CFO [13]
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I think also, Nitin, we actually started this year relatively strongly in comparison, in EconGas, And that's not going to be the case at the start of next year. So we're really seeing this different situation being particularly a second-half issue in EconGas, and that's certainly going to continue into the early part of next year, at the very least. So I would certainly say that it's quite likely that we'll be booking losses still next year in EconGas.
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Nitin Sharma, JPMorgan - Analyst [14]
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Thanks, just one follow-up, a short one. What sort of EBIT contribution should we expecting from Brazi in Q4?
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David Davies, OMV AG - CFO [15]
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That's a difficult one to say. We've only just starting operating in Q3. Q3 clearly was very strong prices for electricity. The market was really quite favorable, given the very low level of water and the current corresponding increase on the electricity prices.
Before we start sticking our head out, Nitin, I'd really rather feel more comfortable to have a few quarters of our own experience. It's the first power plant we've ever operated [of any size], so I'd like to get a little bit more experience under our belt before we start saying this is how much we should be guiding you towards.
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Nitin Sharma, JPMorgan - Analyst [16]
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Thank you.
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Operator [17]
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Thomas Adolff, Credit Suisse, London.
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Thomas Adolff, Credit Suisse - Analyst [18]
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Three questions for me as well, please. Just going back to production in 2013, can you, at least without giving any specifics, say that production next year is growing year on year?
Secondly, just on the effective tax rate, is 40% a good number, going forward, assuming that obviously Libya stays at current levels?
And my final question is just on the underlift during the quarter, whether it was significant, and whether we should expect this to be booked in 4Q? And if so, how many barrels are we talking about? Thank you.
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David Davies, OMV AG - CFO [19]
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Production 2013, clearly the growth that we've seen in the five or six quarters, as we've wrestled with the minor decline that we've seen in Austria and, to a lesser degree, also in Romania, has almost entirely comes from Yemen and Libya stabilizing, to some degree, in terms of production.
Clearly, a major assumption is that continues to be the case next year. We've had the slight hiccup this week in Libya, which is the first we've had, in fairness, this year really; that's now resolved itself. And clearly, our working assumption has to be that they stay more or less where they are.
We'll lose production from the UK, clearly. We've sold assets in Schiehallion and if things go according to plan, it's likely to go off the chart for a year or two, probably starting in the early part of 2013.
So the primary sources of growth this year are not going to be there next year, and I have existing production which is likely to be down. So I think I'd be tempted to say, if anything, I'm going to find it a bit challenging next year to grow. But I don't really want to get more specific than that. But we certainly will not be coming out in quarter 4 saying this is going to be a year of growth. I think it's fair to say that.
We have a number of developments, which we'll continue to pursue during next year and the year after, which we'll start to add because we've got a 350,000 barrel organic target by 2016. And 2016 is going to be just around the corner at the end of 2013.
So we would expect some of those developments coming onstream. But I think next year could be a little bit more of a challenge when it comes to actual growth.
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Thomas Adolff, Credit Suisse - Analyst [20]
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Okay, so flat production basically?
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David Davies, OMV AG - CFO [21]
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I don't want to give anything more specific than that.
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Thomas Adolff, Credit Suisse - Analyst [22]
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All right, cheers. (Laughter)
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David Davies, OMV AG - CFO [23]
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[I've been as clear as] I can; you can make your own interpretation.
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Thomas Adolff, Credit Suisse - Analyst [24]
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Yes.
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David Davies, OMV AG - CFO [25]
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Our underlift, the one thing that's quite clear, all of our production in Yemen did not sell, and it now has sold in quarter 4. So that was 5,000 barrels a day straight off the bat.
We had a little bit also in Tunisia, which should come back. So we're probably talking about 6,000 or 7,000 barrels, which hopefully should reverse themselves, all things being equal, into quarter 4.
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Thomas Adolff, Credit Suisse - Analyst [26]
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Okay and then --
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David Davies, OMV AG - CFO [27]
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And then the tax rate -- I beg your pardon?
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Thomas Adolff, Credit Suisse - Analyst [28]
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Yes, just the tax rates, thanks.
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David Davies, OMV AG - CFO [29]
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Okay, and then the tax rate, I would think the tax rate that we've just had, given the one or two expense items that we took in the quarter was probably a little bit higher than we would have expected to be running at normally. But it's going to be somewhat above the mid 30%s, I would have thought, round about the 36%/37% level that kind of area, going forward.
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Thomas Adolff, Credit Suisse - Analyst [30]
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Perfect. Thank you very much.
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Operator [31]
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Lydia Rainforth, Barclays, London.
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Lydia Rainforth, Barclays Capital - Analyst [32]
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A couple of questions, if I could? Firstly, David, can you just remind us around the liberalization schedule for the gas price in Romania?
And then, just while we're on the regulation in Romania, any progress that you're making on the tax rate negotiations there?
And then secondly, maybe for Hans-Peter, on the Gas & Power side, can I ask you just to talk a little bit more about the Power side and what you see OMV's role within the power generation side being, and particularly without Samsun? And I think you were looking at power plants in Germany at one stage. Thank you.
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David Davies, OMV AG - CFO [33]
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Okay, let me take the first two on that. The liberalization program, which has been quite formally announced in Romania, which actually sets out a quite clear schedule of periodic price increases to the industrial sector, to achieve full liberalization by 2014 and by 2016 -- '18, I'm sorry, in the consumer sector.
So there's a fairly detailed program of events to come forward, which would then see full market liberalization by 2018, but in the industrial sector, which is the biggest part of the market, clearly, four years ahead of that.
Now, the first scheduled increase is actually for December 1. And I think it's on December 9, if I'm not mistaken, or the 6th, but it's certainly early in December, there's a general election. So whether or not that actually goes ahead, we will see. That would be a fairly brave move, but that's obviously for somebody else to decide. But there is a scheduled increase for the early part of December.
It's also been widely reported that they're also looking to engage in dialog with the sector to talk about the taxation regime surrounding this liberalization. And we're looking forward greatly to participate in that. But, of course, in the middle of an election period, there are other focuses at the moment, and we're clearly happy to keep out of that and be available for dialog, as and when we go forward.
As regards the broader tax discussions, they're clearly [irrelevant] because, at the end of 2014, the tax liberalization, or rather than the tax stabilization part of the privatization contract and the privatization law expires. So this clearly is a matter of significance for us.
And what we'd rather expect is if we get a clear government set up following the general election, then we would look forward to opening an dialog with them, both in terms of the impact of this gas price liberalization on the tax regime, but also generally what the world looks like in Romania beyond the end of 2014.
Our argument has been quite consistent. We're a major investor in Romania. We've stabilized local production; we've modernized the Company dramatically. And since we've bought Petrom, we've reinvested more than 90% of the EBITDA that we've generated back into the Company.
So we've been a good owner. And if that level of investments, which actually could increase considerably, of course, if Neptun proves as successful as we expect, and if that's going to be continuing, then the profit needs to -- the Company needs remain a profitable Company.
But the precise outcome is something which is going to have to await negotiations, which are probably, hopefully, going to start when a government is established following the upcoming election.
Let me hand over to Hans-Peter about the power generation side.
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Hans-Peter Floren, OMV AG - Executive Board Member Responsible for Gas & Power [34]
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Okay, power generation, we are currently focusing very much on our two existing projects.
To start with, Brazi, we started successfully. There was a delay, but now we're successfully commercial operations by August 1 with the power plant. We're gaining experience. We want to lead that project also to economic success. One step, an important step, has been the right to integrate equity gas for consumption in that power plant.
The second project is Samsun. We haven't started operations there. We foresee entering into commercial operation in the course of the first half of 2013.
Both markets are challenging markets, but looking better than western European markets for power generation. We want to deliver on these projects first, and then start evaluating potential other investments.
When it comes to Turkey, there's no decision for the power plant. We are carefully watching the markets, sorting out opportunities, and further development will be very much driven, also, by the availability of equity gas volumes. That's what we want to achieve.
You have asked about Germany. We have got one project there, the Haiminger Burghausen project next to our refinery site. In today's market environment, very open, an investment into that kind of power plant is not simple. You are well aware of that.
Nevertheless, we continue that project in terms of getting the necessary permits for the site. The site itself is very promising. We have the full support by regional and local politicians there, in contrast to many, many other sites in Germany.
We can -- or there are some expansion expectations in the German market that the German Government will start an initiative to change the law to support these kind of investments. We wait for the outcome. There are some parties interested also joining us in the partnership, joint venture type of solutions. So we're carefully sorting out that and continuing on the permitting side. And then, in the light of all these developments, presumably by end of next year we will take further decisions.
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Lydia Rainforth, Barclays Capital - Analyst [35]
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Wonderful, thank you.
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Operator [36]
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Paul Spedding, HSBC, London.
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Paul Spedding, HSBC - Analyst [37]
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Lydia asked most of my questions. If I can follow up, though, just a quick query on the Romanian salary backdating. Why was it backdated, and are we now settled with all the union problems there?
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David Davies, OMV AG - CFO [38]
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There is nothing problematic about it at all; it's simply a salary award that I think was due to kick in on January 1. And the process of negotiation, it took a little bit longer; they tried to resolve it and when it was resolved it was backdated to January 1.
So there's no -- I presume you're referring to these legal cases about holidays and suchlike which were, clearly, a major issue about four or five years ago. Those cases continue to be worked off, and we've booked no further provisions since the last provision, which must be at least three or four years ago now. So whatever provisions we built for that matter continue to be worked off.
We, every now and again, get new cases arising, but we're clearly far more stringent on the thing. And once a minor fire breaks out we leap on it with great energy to extinguish it. But this accrual here, this issue in the quarter I mentioned, quarter 2, that was simply that the award was finalized a few months later. And in quarter 2, you basically had two quarters of the increase rather than one; nothing more unusual than that, Paul.
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Paul Spedding, HSBC - Analyst [39]
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Okay. Thanks very much.
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Operator [40]
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Alastair Syme, Citigroup, London.
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Alastair Syme, Citigroup - Analyst [41]
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Can I ask about downstream, two parts? One on Petrom; by my reckoning the first profit out of the refining since third quarter '05, and yet the indicator margin still reading as negative, so just wanted to try and reconcile that.
And then secondly, Petrol Ofisi. Looks like it's doing better than it did in 2011, but I would probably still hazard a guess below what you anticipated when you bought it. I just wondered what you think is going on there?
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David Davies, OMV AG - CFO [42]
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On Petrol Ofisi, I think it was significantly below what we thought it would do when we first bought it now. It had a really tough first year, there's no question at all about that, and it's recovered quite strongly during the course of 2012. We await to see how quarter 4 now pans out, because there was recently a very substantial further tax hike in Turkey on gasoline, and the revenue from gasoline production is quite an important part of the Turkish state budget.
And as a consequence, when they look for further revenue for the State budget, the petrol pump is one of the first places they get hold of, and they've increased taxes there by about EUR0.13 per liter, which is very significant, and we'll see what impact that has. We haven't really noticed a major impact just yet, but clearly, that is going to be a significant factor for the market to actually absorb.
As regards Petrom and the refinery situation, clearly we had a stop during quarter 2. During quarter 3, we've seen of the benefits of that in terms of yield improvement coming through from the refinery. And we're delighted that it's turned in quite a nice performance, which is not something we do often report from the Petrobrazi structure.
As we move towards the full implementation of the restructuring project, which will be towards the end of next year and into 2014. Then as I said, the refinery's never going to be a world class refinery, but with a good margin environment it should be able to produce a respectable result once it's fully [reconfigured]. We're not far away from that now.
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Alastair Syme, Citigroup - Analyst [43]
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On Petrol Ofisi, how far below par do you think the business might be? I'm trying to [hint at] where can we get to on earnings out of it?
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David Davies, OMV AG - CFO [44]
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It's going to have a good year, there's no question at all about it. As you may remember, one of the major sources of its profit was the fact that the refinery profits of Tupras were typically much higher than the rest of the industry in Europe, and that's a consequence of it charging higher prices, basically.
And given the import capabilities of Petrol Ofisi, they were able to import product from the Med and from the Black Sea and sell it into this higher price Turkish market. And this so called import advantage was that it was always a major source of its profit. That was very low last year; has returned to some degree this year. And if that continues to be the case, then I think we'll be able to say that Petrol Ofisi will be able to wash its face and have met its organic objectives, if you will.
As we also said, Petrol Ofisi however, as a standalone investment, was never intended to be the acquisition of 2,500 gas stations and a leading market share in Turkey. We saw Petrol Ofisi as an entry into a market with 80 million people. It's the fastest growing energy consumption market in Europe, but it's also surrounded by hydrocarbon rich countries producing both oil and gas. And we consider the assets that we had in both the oil and gas industry to be very attractive in terms of engaging in partnership dialog with those countries, which we have been doing since we bought Petrol Ofisi.
So I think the real value in terms of that investment is going to be seen in the other business divisions rather than simply the profit from the gas stations, although we're happy with the profit the gas stations are making at the moment.
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Alastair Syme, Citigroup - Analyst [45]
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Okay. Thanks, David.
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Operator [46]
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Laura Webster, BofA Merrill Lynch.
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Laura Webster, BofA Merrill Lynch - Analyst [47]
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I just had two quick questions. One was to get an update on the disposal process, just how much proceeds you've managed raised to date, and what you're targeting in terms of selling? I know that you mentioned something about Serbian and Croatian service stations, but what else you're thinking to get to that EUR1 billion by 2014?
And secondly, you mentioned you had the right to integrate equity gas in the Brazi power plant. What does the gas basket look like now for that power plant?
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David Davies, OMV AG - CFO [48]
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In terms of the disposal program, we've probably raised, overall, about EUR100 million I would have thought, mostly assets in Germany and Austria, gas station assets in Germany and Austria. The next up are going to be -- Bosnia and Croatia it was, rather than Serbia and Croatia, which are well advanced in terms of the disposal process. We've had a very competitive process around those assets, and we may even have something to say on that before the end of the year in terms of who the winner will have been.
The big asset within the disposal program remains, as ever, the stake in the Bayernoil refinery in Northern Bavaria. And as part of the overall program, I can point out that the working capital part of that disposal is well in excess of EUR200 million. So simply selling the inventory for a dollar on the dollar will be a big part of the overall proceeds. But that is something we've set ourselves a deadline by the end of 2014, so we're quite some way off.
The asset is very profitable right now in this margin environment, and we're enjoying that, but we are pursuing a very specific disposal program. We appointed Deutsche Bank some while back to advise us on the process, and that process will continue. But we'll sell it for what we consider to be the appropriate value rather than try to do something more quickly on that.
Then as regards the gas basket for the power station, if I can just steal that off Hans-Peter for a second, because I know we were involved in that dialog a long time before he came on the scene, as it were. What we were claiming there was that, to require that power plant to import gas at round about 30%, 35% of the overall basket from Russia would render the plant completely uneconomic, quite frankly, and we pointed out the consequences that that would have.
Because this is an important plant for the country; this is something close to 10% of the electricity demand in the market. And certainly, the availability of this plant during this very difficult quarter 3 for them was very helpful, because they lost so much power producing capacity with the low water levels in the hydro facility. So this is a very important plant for them, and it needed to be able to be profitable as a consequence, and that was able.
And I think that shows, actually, that the government listens to well-founded commercial arguments, and as a consequence, issued this ordinance allowing us, instead of importing gas into that basket, that we can use all of our gas from our own production. And that is what is currently happening; the gas is being fed with captive E&P production, something of the order of just under 1 billion cubic meters per year, [900 million] cubic meters per year, of our total production of round about 5 billion cubic meters per year. So it's almost 20% of our production's going into the plant now.
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Laura Webster, BofA Merrill Lynch - Analyst [49]
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Great, thanks very much.
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Operator [50]
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Matt Lofting, Nomura.
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Matt Lofting, Nomura - Analyst [51]
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Two quick questions left. Firstly on near term production, I was just wondering if you could clarify, in the Q4 guidance, what you incorporate into that for Yemen?
And secondly, on Gas & Power, I just wondered what your CapEx expectations are around the scaled-down Nabucco West proposal, assuming you do get a positive final decision there middle of next year, and what the phasing of your share of that spend could be through the coming years? Thanks.
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David Davies, OMV AG - CFO [52]
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The near-term production with regard to Yemen, our expectation would be for quarter 4 that it's probably about the same as quarter 3, about 5,000 barrels per day. Clearly, we've had the lifting already from the previous quarter's production, and we'll see -- clearly, the security situation can change that, we in quarter 3 already had a week or so of interruption when we lost the pipeline again, but that was able to be quickly repaired, so that's encouraging. But if we have a completely normal quarter it should be broadly the same as the quarter just ended.
I'll let Hans-Peter talk about the overall cost of what Nabucco West would be, and then he can hand that back to me and I'll talk about how we would expect to finance that and the phasing. So if you just want to talk about what the expectations are for the cost of producing of building the Nabucco West pipeline?
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Hans-Peter Floren, OMV AG - Executive Board Member Responsible for Gas & Power [53]
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Yes, of course, and then the specific question was on our share, which is highly dependent on how we sort this out in the cooperation agreement with the Shah Deniz consortium. But there are several investment cases, given the basis of that firm conditional tariff offered to the Shah Deniz consortium, for several stages of expansion of the project. And the base case is the [10 bcm] and around some EUR3.5 billion investment for Nabucco West. And you can have some expectation of what our future shareholding is going to be starting from today, 16% and then getting Shah Deniz into it on a 50% basis. What is currently under discussion, and thus diluting our share from [16.-something% to 8.-something%] would lead to something in the order of magnitude of EUR300 million. But this is very preliminary; it's just an indication of the order of magnitude.
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David Davies, OMV AG - CFO [54]
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I think also we've always said that this project is likely to be project finance funded. Clearly, the current structure of the ownership gives us a one-sixth share, so even if that didn't change, which is a very unlikely scenario, but even if that didn't change, then we'd have one-sixth of the EUR3.5 billion, which is about EUR600 million. Given that we expect something of the order of 20% to 30% to be equity, the balance to be provided by project financing off balance sheet, you're only talking about an exposure on that basis of 20% to 30% of EUR600 million, which is, what, EUR120 million to EUR180 million. It's not going to be significant in the context of that, particularly when you consider that the overall shareholding is likely to change and our interest is going to come down, as a consequence.
So it's never really going to be a significant factor in terms of our overall CapEx, particularly when you consider it will take several years to construct. So on a yearly basis, it's really going to be a relatively small amount.
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Matt Lofting, Nomura - Analyst [55]
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Okay, very clear. Thanks guys.
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Operator [56]
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[Gerard Wakalek, Asset Group, Vienna].
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Gerard Wakalek, Asset Group - Analyst [57]
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Two quick questions; one, I would like to come back to the divestment program. If I'm not mistaken, you mentioned that with regards to the investment of retail assets in Croatia and Bosnia, the progress is already quite advanced and you expect some news flow by the end of the year, was this correct or --?
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David Davies, OMV AG - CFO [58]
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Yes, the process is the more advanced in terms of the process that we're pursuing, and news flow by the end of the year is not something I would exclude. I'm not committing to it, by any means. It's a fairly well developed process with a number of interested parties.
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Gerard Wakalek, Asset Group - Analyst [59]
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Okay. And then I would like to have a question regarding the production contribution from the new fields; it has slightly increased from 50,000 to 60,000 barrels per day by 2016, to 70,000 to 80,000. This mainly due to acquired assets, or where's this coming from?
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David Davies, OMV AG - CFO [60]
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[It's indeed] acquired assets, in particular compared to the present -- that slide from quarter 2. It's of course, the acquisition of Edvard Grieg in Norway, which was only announced a few (multiple speakers) added to that.
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Gerard Wakalek, Asset Group - Analyst [61]
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Okay. And then on the Gas & Power strategy update, so if I understand it correctly, you anticipate that, overall, the market dynamics will remain unfavorable until 2015. And in the short term you can only try to renegotiate the long-term contracts you're in to reduce your potential for losses. Is this correct or --?
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Hans-Peter Floren, OMV AG - Executive Board Member Responsible for Gas & Power [62]
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It's correct that we expect this over-supply situation, as described by me, to maintain for a couple of years, and then supply and demand getting into a kind of balance, based on today's long-term contracted volumes, and indigenous production going down in Europe in the midst of the second half of this decade. Yes, that's correct.
Long-term contracts are a slice of our portfolio. I would like to point out that we have additional short-term volumes, and then our overall portfolio, of course, we blend those volumes; partly under the long-term contracts already some [half] pricing was achieved in the past. And the ambition is now to reflect, to the maximum extent, market reality under the LTCs as soon as possible. Yes, that's it.
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Gerard Wakalek, Asset Group - Analyst [63]
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Okay, thank you.
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Operator [64]
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Brendan Warn, Jefferies, London.
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Brendan Warn, Jefferies - Analyst [65]
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Just two follow-up questions. Just firstly on your chart that's on slide 23, if I may, and I haven't seen that you've presented that chart in the past. Just what your broad underlying assumptions for, let's say, GDP growth, oil price or gas price and competition coming in from say [Shells] and the like, and just the risk of call it pushing the cross section out past 2020?
And then just a second question, it might be my failing memory, if you can make some comments on your shale gas pilot test work, and I can't remember if you'd spoke about it at second quarter? I can remember who won part of the Olympics, but can't remember comments about the shale work that you've been doing.
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Hans-Peter Floren, OMV AG - Executive Board Member Responsible for Gas & Power [66]
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I'm not quite sure what the first part of the question is really aiming at.
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David Davies, OMV AG - CFO [67]
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The primary assumptions underneath the --
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Hans-Peter Floren, OMV AG - Executive Board Member Responsible for Gas & Power [68]
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The primary assumption of the view graph, of course it shows a range, and the range is given by many, many scenarios you can find from various sources like Eurogas, McKinsey, the International Energy Agency, [Zera], and that kind of stuff. And we try to narrow that down, given our own market experience, our own -- our inside view into the business, running our own models, because that wide range really doesn't give us an answer on what we can really expect in our core markets. And that is reflected by this more narrow band, which really suggests it's getting into a balance prior to the end of the decade. So that's what we talk about.
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David Davies, OMV AG - CFO [69]
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And as regards shale gas, we had been in discussions about a pilot project, at some point next year, in Austria in this particular area. But I'm afraid that was -- clearly, met a substantial amount of political resistance locally and, as a consequence of that, we've decided to terminate that project in the Austrian market at least.
There's clearly uncertainty at the European Union level in terms of what is allowed, what is not allowed. It's also quite clear that not only in Austria, but also in Romania, and indeed outside of the European Union when you look at some of our activities in North Africa, we clearly sit on resources of shale gas in substantial volumes. But what we're certainly waiting to do at the European level is to wait for some sort of clarity at the European Union level, what is allowable, what is not allowable and, hopefully, governments will then start to fall into line with that.
What is clear is that the huge impact that shale gas has had on the industrial landscape in North America is not something that Europe is going to be able to turn its back to in the long term. And whilst one is fully cognizant of the environmental concerns are quite justifiable environmental concerns, we hope that with some sort of standardized legal approach in terms of what's possible at the European Union level then we'll look at it again at some point in the future. But at this point in time, the project is on ice, clearly.
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Brendan Warn, Jefferies - Analyst [70]
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Okay. Thanks for those comments.
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Operator [71]
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Marc Kofler; Macquarie, London.
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Marc Kofler, Macquarie Securities - Analyst [72]
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Just a very quick one, coming back to production. I was wondering if you could give an update on volumes out of the Totea deep first appraisal well in the third quarter?
And then if you had an indication of when you might be able to give an update on that second appraisal well, which you said was spudded in August? That would be great, thanks.
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David Davies, OMV AG - CFO [73]
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What I'll do, rather than have my colleagues here go through their library books looking for an answer on that one is, can I get somebody to call you back on that one?
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Marc Kofler, Macquarie Securities - Analyst [74]
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Yes, that would be great. Okay, thanks.
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Operator [75]
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That was the last question, as we are running out of time. I will now hand back to David Davies for his closing comments, please go ahead.
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David Davies, OMV AG - CFO [76]
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Okay, thank you, ladies and gentlemen, for your attention and also your very interesting questions this quarter, and we look forward to speaking to you again in three months' time. And of course, in the meantime, should you have any questions, you know where our Investor Relations team are. Thank you.
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Operator [77]
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That concludes today's telephone conference call. A replay of the call will be available for one week. The numbers are printed on the telephone conference invitation or, alternatively, please contact OMV's Investor Relations department directly to obtain the replay numbers.
Thank you for joining today's conference call, you may now replace the handsets.
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