Q4 2012 OMV AG Earnings Conference Call
Feb 21, 2013 AM CET
OMV.VA - OMV AG
Q4 2012 OMV AG Earnings Conference Call
Feb 21, 2013 / 10:30AM GMT
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Corporate Participants
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* Lacramioara Diaconu
OMV AG - Head of IR
* Gerhard Roiss
OMV AG - CEO
* David Davies
OMV AG - CFO
* Jaap Huijskes
OMV AG - Executive Board Member, Exploration & Production
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Conference Call Participants
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* Haythem Rashed
Morgan Stanley - Analyst
* Alistair Syme
Citi - Analyst
* Mehdi Ennebati
Societe Generale - Analyst
* Nitin Sharma
JPMorgan - Analyst
* Dan Ekstein
UBS - Analyst
* Lydia Rainforth
Barclays Capital - Analyst
* Thomas Neuhold
Kepler Capital Markets - Analyst
* Matt Lofting
Nomura International plc - Analyst
* Oleg Galbur
Raiffeisen Centrobank - Analyst
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Presentation
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Operator [1]
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Welcome to the OMV Group's conference call for the Q4 2012 results. There will be a presentation of the results, followed by a question and answer session. (Operator Instructions).
You should have received a presentation by e-mail. However, if you do not have a copy of the presentation, the presentation slides can be downloaded at ww.omv.com. Additionally, simultaneous to this conference call a live audio webcast is available on the OMV's website.
I would now like to hand over the conference to Miss Diaconu, Head of Investor Relations. Please go ahead, [Lacramioara].
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Lacramioara Diaconu, OMV AG - Head of IR [2]
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Good morning, ladies and gentlemen, and welcome to the presentation of the full-year and fourth quarter for 2012 results. Today we have a live audience in Vienna, I would like to welcome all of you; and also people connected via telephone lines and Internet.
We have the pleasure to host the presentation with Mr. Gerhard Roiss, the CEO of the Company; Mr. David Davies, the CFO of the Company; and Mr. Jaap Huijskes, Member of Executive Board, and responsible for exploration and production. We will have a one-hour presentation, roughly; followed by a half an hour question and answer session.
And now, I would like to hand over to Mr. Roiss.
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Gerhard Roiss, OMV AG - CEO [3]
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Thank you, Miss [Lacramioara]. I'm pleased to present a strong 2012 result today. But before doing this I would like to talk about the market environment as it has been in the year 2012. The oil price, as you are aware, was on quite constant high level. It started with $111 and it is $109.
Production; here the big impact on our result is the recovery in North Africa, meaning mainly Libya. Libya we are back to -- nearly back to, pre-crisis production, with about 30,000 barrels a day. The year before, during crisis, it was about 7,000 barrels. Similar Yemen but smaller size; we are ahead of production in the year 2012 with 3,000 barrels a day. This is key that we stayed in these countries. We see a future there, and they have recovered.
Gas prices, you know the significant spread in some other European markets as well between the long-term gas/oil-linked prices, and the spot prices. This was in Austria last year a spread of about 20% oil-linked long term above spot.
Refining margin is quite volatile, but at high levels, we had in 2012 a margin of $3.85 per barrel.
Now let's come to our results. We could increase our clean CCS EBIT by 35% to EUR3.4 billion. And one should be aware that 90% of this recycle achieved outside Austria. This means also a growth in sales of 25% to EUR42.6 billion. The key figure is this growth for E&P project pipeline by 100% means doubling our project pipeline, which is key for our strategy, key for our future, and Jaap Huijskes will give you more details on this impressive figure.
In terms of upstream growth we did four major transactions. First of all, we divested, went out to Central North Sea fields, small fields, small participation in fields, which were fields we have sold. Same time we did acquisitions in field developments, like Aasta Hansteen, where we took a share from Exxon, and Edvard Grieg where we took the share from RWE. These are developments, and what is key for us, we managed to get into Abu Dhabi upstream, this three app development where we could come in.
But historic event was this biggest gas discovery in the history of OMV in Romania. We announced, if you remember, on the occasion of our last year's presentation of the full-year results, we got information of this discovery, so this is now under evaluation and we do some seismic in the [up field] area when we start drilling.
We also started our first gas-fired oil plant in Romania, part of our integrated gas strategy, use our own gas, convert it into power and sell it to the market. This went on stream last year, has a capacity of serving Romania power market up to 8%.
And, also according to our strategy, we left two markets, this was Bosnia, we exited, and we also exited Croatia.
Let me summarize again our results, the EUR3.4 billion this composition of this result, if you come to divisions, in Exploration and Production we could manage to stabilize our production in Romania and Austria. At the same time, we had this increase in Libya, which all together led to an increase in result to 31% compared to the year before.
Gas and Power, we have an impact on this spread between oil price and spot gas, which has caused some negative effects, and also the issue that we have a gate terminal where LNG is now going to Japan, Asia, not going to Europe. So this is affecting our business, but nevertheless they managed to get an EBIT of EUR184 million coming out of Austrian transportation business, Romanian gas business, Turkish gas business.
Refining and Marketing is having a strong margin, which helped us, refinery margin. But in connection with a high utilization rate of [80%] percent, it helped us to increase the refinery result. At the same time, we managed to increase the result in Petrol Ofisi quite significantly. Increasing this all together created quite an impressive result in Refining and Marketing of EUR488 million, and a plus 101%.
Going to the financials, just roughly, with a cash flow of EUR3.8 billion, it's quite a substantial cash flow to source our further expansion. Our CapEx was grown to EUR2.4 billion; key is that two-thirds went into E&P. And in terms of reducing our working capital, we could reduce it by EUR690 million coming from the downstream area.
The gearing ratio accordingly went down from 34% to 26%. And we could keep our rate in Fitch A minus, Moody's A3.
In terms of upstream, as you know we said we will focus our activities and focus our growth regionally. Core countries you see, Austria and Romania, stable as production, but then you see Black Sea where we managed to get further acreages in Bulgaria, in Ukraine, also in Romania to grow where we did some seismic there. And this is to get gas to integrate into our gas markets in Europe. This is gas, European gas, for Europe, that's important.
And the other thing is that the North Sea, this other acquisition development, our exploration exposure, whatever, we see here in the range of 2020/2021, the capacity, daily production, of 80,000 barrels to 100,000 barrels a day compared to nowadays a few thousand barrels. Again, this strong area of growth concentrated, balanced in terms of risk when you get to North Africa area, so we have the stable area here in the North Sea and also, this European Black Sea. That's very important, this balance and this integration into our market.
To grow upstream, we have mentioned our strategy, the target of 2016 to achieve 350,000 barrels a day. Jaap will give you more details how we can achieve it; we are sure that we can achieve it. What we do that you can see how to achieve it, we invest two-thirds of our CapEx in E&P. This is our plan, it can be more but not less. We doubled our project pipeline in one year, as I've mentioned.
But on top of it, we also doubled our exploration and appraisal expenditures within three years, from EUR250 million we went up to EUR500 million expenditures in exploration. And if you spend more, it also should be successful. The average success rate in this area, in exploration, is about 40%. We had in 2011 a success rate of above 60%. We also had in 2012 a success rate again of 60%, but this is quite important invest more and know what you're doing to be successful.
That was a short overview. May I hand over now to David Davies?
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David Davies, OMV AG - CFO [4]
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Thank you, Gerhard. Good morning, ladies and gentlemen, also from my side. Gerhard, given the record year that we've just had, has, obviously, focused on the full year. I as ever will spend more time on the fourth quarter itself. And what I'd actually like to do is do this relatively quickly to leave more time for Jaap's presentation and for the questions thereafter.
Gerhard's mentioned it already, this target of 350,000 barrels a day for 2016 is quite key to us. And particularly as we've guided for relatively stable production for the current year, by the end of the current year, of course, 2016 is not going to be far away. So I think Jaap's presentation outlining exactly the projects and timing when they are expected to come on stream is going to be more interesting than the numbers for Quarter 4. But let me just go through them quickly in any case.
The highlights of the quarter, clearly production was higher than last year, we were just starting to come back on stream in Libya in 2011, so that's obviously been helpful. We were 4% higher, 301,000 against 289,000. Higher exploration expenses, as Gerhard has already mentioned for the full year, was also the case in the fourth quarter.
The spread between long-term oil and gas supply and hub prices has been a factor for the whole year, in fact even going back the year before, and it continues to be the case.
And I should also point out that the Gas and Power business in quarter four last year benefited from the booking of the credit that we negotiated with Gazprom. And clearly, quarter 4 this year has not seen that. In fact, April 1 this year 2013, is the first opportunity we're going to have for the prices to be adjusted. So we will hopefully be able to see something coming out of the negotiations, which are currently going on.
The oil price in dollars was slightly ahead of the same quarter last year, by 1%, $110 per barrel versus just over $109 per barrel. The refining margin was considerably higher, and this, of course, helped the Refining and Marketing result come out quite positive, not just for the quarter, but of course for the year as a whole.
Very important was our gearing ratio, decreased from 34% a year ago to 26% at the end of December 2012. And this is a tendency which we expect to see developed particularly in the first quarter of this year when, of course, we hope to be booking the EUR600 million cash proceeds of the sale of the strategic inventory, which we announced a couple of weeks ago, which, of course, is not yet reflected in our gearing. We will also have a very significant and positive impact as we start 2013.
Cash outflows, of course, were executed given the acquisitions of Aasta Hansteen and Edvard Grieg in Norway, which were both closed in the fourth quarter.
And on the strength of the financial position of the Group and also the performance the Executive Board has proposed to increase the dividend by 9% to EUR1.20 per share.
On the next slide you see the economic environment. The oil price, as we've said, has been relatively stable apart from the blip upwards in quarter 1. The foreign currency rate, dollar to the euro, has been anything but stable and, in fact, the whole year was characterized by a weakening euro against the dollar, which of course as a euro-reporting company was helpful, although that turned somewhat in quarter 4 and, in fact, the euro has continued to strengthen since the year has now started.
The middle chart shows you the differences between -- the difference between the gas price, this is a CERA published proxy for the oil and gas prices. The orange line on the top of that chart, the yellow line immediately below it is what the Central European gas hub is reporting, as spot market price.
And clearly, the challenge of being committed to buy some of your gas at the orange line and sell it in a market where you can buy gas in substantial volumes at the yellow line, I think characterizes the difficulty that our Gas Supply and Trading business has been having now for quite some time, and this shake up of the market is continuing.
The lower line, the brown line shows a relative stability, this is the gas -- regulated gas price in Romania for the domestic producers, that's continued, and local currency is stable in euros per megawatt hour. It seems to have gone down slightly, but that's all due to the foreign exchange effect.
Of more relevance here is the fact that now with the new governments having been formed in the New Year 2013, they have actually now shown their signed commitment to progressively increase the prices; the first increase already happening now on February 1 by a 5%. And if you actually go onto the website of the Romanian Energy Regulator you can see a detailed schedule of the expected increases in the prices quarter-by-quarter going out over the next two years or three years. So there's quite a detailed program in place and we'll hopefully see that being progressively rolled out.
The indicator refining margin is shown on the right-hand side of this chart. Clearly we started last year and finished the year before at a relatively low level, round about the $1.70//$1.80 level and then in quarter 2 and then further in quarter 3 we saw it increase to quite substantial levels, declined slightly in quarter 4 to $4.03.
And I can report that as far as quarter 1 is concerned we are roughly at a similar level to quarter 4, a difficult start in January, but in February it seems to have recovered somewhat. So, margins have continued at similar levels to quarter 4 so far this year.
On the next page you see the summary of the results, going through the profit and loss accounts. One point I'd like to point out is our effective tax rate at 41% in the quarter, was actually higher than we expected at the time of the trading statement.
And this relates to an event that arose subsequent to the trading statement, and that was the receipt in Romania of a tax penalty. And, in particular, late payment penalties in relation to this tax amounting to something in excess of EUR50 million, which we have booked in financial results and, of course, that's impacted the tax rate adversely. This is relating to a VAT case going back several years, where we actually treated the VAT in a way, which had been agreed with the Finance Ministry. The Finance Ministry now appears to have changed their mind and is imposing late payment penalties on us. So of course we will pursue our legal opportunities as well with this particular case.
That reflect itself also in minorities, which you see in quarter 4, the deduction from minorities was quite a bit lower than the previous year, EUR86 million against the EUR154 million. This is, of course, because Petrom's result was impacted by this tax claim in quarter 4.
But, more particularly, the reason that the minorities were lower, of course, is that we took in quarter 4 a special charge of EUR128 million at EconGas. And the minority shareholders in EconGas, of course, had to suffer their part of that loss and that's the reason the proportion of our profit that goes to minorities is correspondingly lower than last year.
So net income attributable to stockholders EUR317 million is 50% higher than a year before. That produces an EPS for the quarter of EUR0.97 and a clean CCS EPS of EUR1.20 for quarter 4, which is, in fact, equivalent to the dividend that we're proposing for the full year.
Cash flow is the next chart, I think here in particular of interest is the very high depreciation of EUR2 billion during the year, much higher than we've historically had. And this, of course, relates -- is higher, in particular, because of a number of impairments of one-offs that we booked.
You may remember earlier in the year the write-offs of over EUR100 million relating to Strasshof in Austria; the write-off of our Kurdish -- some of our Kurdish investment in Mala Omar and Shorish; and also the write-off of an exploration investment in Peking Duck in Norway.
All of these add up to quite a substantial increase in depreciation, which is added back to our net income, produces however something like EUR2.8 billion of -- EUR3.8 billion rather of operating cash flow, which is very strong of course. EUR2.3 billion was invested in -- back into the business, of which about EUR400 million relates to two Norwegian acquisitions.
Dividend of EUR626 million produces a very substantial free cash flow out of the dividends of EUR907 million, with which we're very pleased.
You see what contributed also to this free cash flow was a reduction in our working capital, total reduction of minus EUR237 million. In fact, within that coming out of the energize initiatives there's something like EUR690 million of working capital reductions, which have been executed during the year. We expect during the coming year another EUR350 million. And we also have the EUR600 million plus revenue coming in from the sale of the strategic stock reserves in Refining and Marketing here in Austria.
So a lot of good work going on to generate cash flow out of working capital, some of which you've seen already and some of which will be coming in the first half of 2013 as well.
CapEx and EBITDA, our CapEx number here is slightly different to that shown in the cash flow statement, cash flow CapEx is basically what's flown out of the bank accounts into CapEx; here's what's been booked into the fixed assets register. So there's always a minor difference between the two, EUR2.4 billion in total.
Something like EUR400 million as I mentioned related to the Aasta Hansteen and Edvard Grieg acquisitions. The major projects of course were the Petrom drilling and workovers in E&P; the two acquisitions we've mentioned. The Schiehallion redevelopment has started and will continue now going forward in the next couple of years. And gas and power, the two power plants more or less completed now, Brazi on stream and Samsun in testing now, so effectively completed.
A big investment also in the Storage business in gas and power in Etzel, the German storage asset, which we're developing, the caverns lease fees have been capitalized during the year just ended. So that's obviously added to the CapEx in that business and in Refining and Marketing, the single biggest project remains, the investments in the Petrobrazi modernization, which again expects to be completed in 2014.
We're guiding for the current year for CapEx of about EUR2.8 billion, that's higher than we've said over the last couple of years. And that's due to the two Norwegian acquisitions, which we executed in 2012, both of which are in development. So clearly, the development CapEx to those two acquisitions we need to add to our guidance.
Special items on the next page, the major items here of interest are EUR45 million booked relating to unscheduled depreciation of gas stations in Moldova and, particularly, in Hungary. The extra tax is being imposed in Hungary at the moment have had quite a detrimental effect on our profitability. We've taken the corresponding relevant action in terms of the valuation in the balance sheet of those assets.
We made an EUR85 million gain from asset disposals, almost all of which is due to the profit we made on selling certain Central North Sea assets in the E&P portfolio.
And then we booked this very substantial provision of EUR128 million against the LNG commitment of EconGas in the gate terminal, where we're unable to fully utilize our booked capacity in that terminal, given the economic situation with LNG, where the prices in Asia are far higher than those in Europe. And, as a consequence, it's difficult to get volumes in this terminal economically.
So, total special items therefore amounting to EUR128 million in the quarter as a whole against EUR166 million in the same period last year.
Then coming to the -- briefly to the operating performance of the business, E&P, you see here the reconciliation against the same quarter last year and against the previous quarter in 2012. So on the left, why was quarter 4 higher than quarter 3? The reason is that we had a EUR28 million volume impact, which is really liftings in excess of production. Our production was actually down on the quarter, which I'll show in a moment. But we had extra liftings in Tunisia in particular in Yemen where we had the first lifting of the year booked in 2012. So that compensated the lower level of production.
Exploration expenses in the quarter were also slightly lower and that, obviously, helped the profit also rise by EUR57 million. So, in total EUR617 million goes up to EUR698 million.
The reconciliation then to quarter 4 last year is shown on the right. Clearly, we had higher realizations, not due to the oil price particularly, but due to the foreign exchange rate; EUR77 million more due to realizations. Substantially higher volumes; of course, this reflects the fact that our production was higher, particularly out of Libya and Yemen.
Exploration expenses relating to the full year were higher by EUR70 million and, of course, we had other expenses of EUR117 million, a large part of which relates to the fixed costs associated with the extra volumes that were booked. We also had one or two one-off charges and provisions in Romania. As we moved our storage of replacement mechanical parts over to a third party, management decided that certain of our assets were probably overvalued and taking appropriate action by writing them down.
The next slide shows our KPIs for the E&P business as a whole. Clearly, our production had been growing each quarter, but that was largely a reflection of the fact that we were getting more production out of Libya and Yemen. And, of course, in quarter 4 things more or less had reached their peak.
Production actually came down, unfortunately, because not only did we have planned maintenance and workovers in New Zealand, which hurt our production, but we had minor incidents in Libya. And, unfortunately, the perennial story of the pipeline attack in Yemen, which also collectively took about 4,000 barrels out of our production for the quarter.
OpEx for the quarter reversed the positive trend and stepped back up; you had two factors driving this. Clearly, our production was lower and one of the reasons our OpEx was coming down each quarter was that our production was rising. Clearly, when that reverses, then you see the trend in OpEx do the same.
We also saw the FX benefit turn around with the dollar weakening in quarter 4. And, given the high proportion of our costs, which are not in dollars, this is always going to drive -- be a challenge here because, of course, this is a dollar KPI, this US dollars per barrel number. And then the higher one-off costs I mentioned, the service and material costs in Romania had also a negative impact here.
You see that on the next chart as well, which talks about Petrom where, again, you saw in quarter 4 the OpEx step-up. And that's due to the foreign exchange again, the weakening dollar here and also these material costs, which were written off in Romania.
Production, on the other hand, has remained relatively stable which, of course, is the primary goal here, ignoring the offshore clearly. But onshore production has remained relatively stable and, clearly, our investments in the onshore area are primarily aimed at achieving that.
On the next chart you see what is anything but a stable picture in Gas and Power where we had a massive reduction in the profits generated by our Supply, Marketing and Trading business. It's a bit misrepresentative, in fairness, because quarter 4 last year we had a special gain.
As we finalize the negotiations with Gazprom, we haven't quantified it precisely for commercial purposes, but we did confirm that it was a significant double figure billion number which contributed to last year's quarter 4 -- 2011's quarter 4 of EUR134 million. We didn't get that in quarter 4 2012. Clearly, as I mentioned already, the next point at which our contract prices can be readjusted is the April 1, 2013 and we're, clearly, making all efforts to ensure that that is achieved.
What it's actually meant, though, is that the absence of that special factor plus the difficult marketing situation in any case has really quite badly impacted the results of the Supply, Marketing and Trading business, which are now almost EUR80 million down on where they were a year ago.
The rest of the business remains, as ever, relatively stable. Gas logistics is slightly down by EUR3 million. We had a minor contribution from Power for the first time, now that the Brazi power station is operating and other items just by EUR5 million to give us in the quarter a clean CCS EBIT from Gas and Power of EUR59 million.
On the next page in Gas and Power you see a few KPIs. Volumes have been increasing, but this is really due to the trading volumes; very thin margin trading volumes, of course, so comparing physical volumes with the traded volumes is a bit of an apple and orange comparison. But, nevertheless, our trading volumes continue to rise and have done so by 40%.
The high spread between the oil-linked prices and spot prices has clearly been the primary marketing factor, as we mentioned several times in Gas and Power. Petrom sales volumes declined, which has also been a concern, of course, and this is mainly due to the demand in Romania for natural gas reflecting the economic challenges in the country, also being down quite considerably.
Gas Logistics, you see the average storage capacity sold has increased quite substantially. This, of course, is due to our asset in Etzel in Germany now coming on-stream. Our total net electrical output in the quarter was 0.78 terawatt hours. Of course, this is predominantly Brazi now being on-stream in Romania.
The West Austria Gas pipeline expansion was finalized, which enables us to sell more gas transportation capacity. And, of course, the construction of the power plant in Samsun in Turkey is now also complete and is currently going through testing.
Refining and Marketing on the next page, you see here really only one factor of great significance, and this is the step-up in the fuels margin, driven by the higher refining margins. Quite a substantial contribution compared to where we were a year ago, EUR65 million more coming out of the Fuels side.
Petrochemicals has declined slightly, although indicator margins were higher. Our realized margins were actually slightly lower than last year.
And Marketing is broadly flat, but within the Marketing situation you see a couple of conflicting stories. Our volumes were down, reflecting continuing high oil prices and the impact that's had on demand. But within that you see quite an upturn in performance from Petrol Ofisi in Turkey which, despite the highest fuel prices in the world, in fact, has seen volumes increase in the retail side and seen an increased contribution as well from profits, which has been quite pleasing.
So, overall a good turnout from Refining and Marketing, up from EUR85 million EUR145 million.
You see on the next page a couple of the key indicators, which broadly reflect what I was just talking about. Refinery output is slightly down, while utilization increased, in particular, because of the high utilization in the eastern refinery in Romania. Marketing sales volumes are down. Borealis came in with a better result and Petrol Ofisi has certainly increased its contribution versus last year.
Then on the next page just a couple of key financing indicators; very encouraging is the trend in the gearing ratio, down to 26%. You will recall also in quarter 4, that's usually a difficult quarter for our gearing, because we have to make certain advance payments in -- for taxes in Bavaria. So, we've reflected that also in quarter 4, so that should turn round in quarter 1. And we'll also get this sale of the strategic stock reserves hopefully booked in in quarter 1. So we should certainly see this trend continuing into the start of the year.
Our long-term gearing ratio target remains at the 30% level. Our net debt now, following a very strong cash flow in the year, has come down from EUR4.6 million at the end of quarter 4 2011 to now EUR3.7 million and that reduces the gearing from 34% to 26.8% (sic - see press release "25.8%").
So, we're very happy with that and that, as I've said, led us to increase the dividend proposal from EUR1.10 to EUR1.20, an increase of 9%, a payout ratio of 29%, which is broadly in line with the long-term payout ratio target of 30%.
The profitability of the business has also improved. Reported return on capital employed remains at 11%, but clean for the special effects, our clean CCS return on average capital employed has increased to [12.4%] in 2012, so we're very pleased about that as we move now back towards our target of 13%.
Which brings me quite elegantly on to the final part of my presentation which is energize; you'll recall in August last year I told you about the contents of this program; a critical program, which engages something like 180 of our employees directly working on initiatives to improve the profitability of the existing assets of the business as we build new assets to drive the growth for the future.
Where we are right now is that -- you see on the page here the initiatives that we've identified, the year of delivery that we're expecting. Where are we broadly? By and large across the board, we're either ahead of plan or on plan. The one question mark is our production growth in Tunisia and Pakistan where our initial drillings have been a little bit disappointing than what we'd previously expected. But with that exception we're actually on schedule to deliver this 2% step-up.
In fact, if you look at the next page, you can see that we've already increased our return on capital employed by about 50 basis points. Following the exercises implemented this year and are looking to add another 70 basis points during 2013. So, we're actually making good progress towards achieving that 13% target by 2014.
What are some of the things that we've done in 2012? Comingling in the E&P side, we think we've generated something like an additional 600 BOE per day. Through that we've reduced working capital dramatically, EUR690 million, with more to come through that.
Refining margins, particularly driven by cost improvements, improved by EUR25 million. In Marketing the Avanti unmanned business is being rolled out. We've also identified the loss-making gas stations and are developing a strategy to either turn them around or exit them. And our Gas and Power costs are also being focused upon.
A lot of these initiatives are relatively small. Clearly, if we had improvements lying around that could generate in one fell swoop 2 percentage points of ROCE improvement, we'd do them. It's not like that, of course. It really is focusing like a laser beam, on operational improvement, and really putting the resources behind achieving them, and putting the resources also behind monitoring the programs to make sure we deliver.
We take this enormously seriously. I know the industry and we've certainly been victims of -- we've certainly been perpetrators of that in the past. It's very good to actually talk about cost reduction targets, which then prove more and more difficult to actually identify afterwards, when they were achieved and whether they were achieved. And we're working very hard to make sure that we can deliver on these programs, and can actually demonstrate that we've delivered and improved the profitability as a consequence. And we believe this year's performance has demonstrated part of that.
You look at the next slide you see some of the initiatives we're working on in upstream; I won't bother you by going through all of them. But you can rest assured that we have an extensive list of projects like this, which are being very finely tracked, in terms of execution timetables, deliverable, and the results being visible in the P&L account. And I've just listed a few of them here, in Austria, Tunisia, and Pakistan, and some of the other broader measures just to make sure that our operational excellence is really at the peak of its capabilities.
Gas and power, and refining and marketing, and indeed, the corporate side, when it comes to helping reduce the working capital is shown on the next page. Working capital in particular, is a major benefit to try and help the profitability of the downstream business, as it shrinks in size.
It's optimizing its dimensions, it's reducing its costs, and we're looking at ways to reduce the asset base, not simply by the asset disposal program, which we continue to pursue, but also, in particular, looking at some of these working capital measures. Most of which that we've booked so far have landed in R&M. And indeed, as I said, in quarter 1 we'll see some more coming through with some of the things that we've already announced.
So that would conclude my side of the presentation. What I'd like to do now is hand over to Jaap, who'll give you a more detailed picture of what's going on in E&P. Thanks very much.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [5]
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Thanks, David. My story line for E&P is going to focus more on what's going on in the portfolio and what that means for the future of E&P. And really what I want to confirm to you very loud and clearly, is that our promise of 350,000 barrels a day in 2016 stands.
What's more, with our exploration delivery, our acquisition delivery, and the way our opportunity pipeline, our development pipeline now looks, we're confident we can continue to grow beyond 2016. And I'll show you some first indication of where that might come from.
The starting point for us though, remains still our core countries, Austria and Romania. Stabilizing the production in our core countries has been key; the starting point of our strategy, right from the start. You saw that when we rolled it out in Turkey in 2011, and that continues to be the case.
You see our performance there, last year we ended the year for Austria and Romania combined at 208,000 barrels a day. Austria was flat year-on-year, from [383,000] barrels a day in 2011, to 38,000, which I would argue is the same in 2012.
Romania did drop a little bit, though anything less than 2%, I would argue, is roughly flat. From 173.7 to 170.5, and a lot of that goes back to the start of last year, where I don't know if you remember, but this is not a winter. Last year, February was a winter, it was minus 20 and 4 meters of snow. In some area of Romania, big snow drifts and that did affect the start of our year. Had that not happened, a decline would have been even less than this.
Going forward, we do project to stay in that range that we promised in 2011, of [200 to 210]. In fact, we project to stay at the upper end of that range. In fact, Austria and Romanian production we're very cautiously predicting small increases in the next couple of years. That's driven by application of technology, field redevelopments and high activity levels across the board.
In Austria the illustration -- or the best illustration of that, is our average investment rate over the next three years, which is double the average investment rate over the last three years. So we're increasing our activity levels, chasing every barrel.
And also in Romania, you see our water injection projects increasing. You see the wells that we're drilling increasing in contribution. And you're also seeing exploration in Romania, contributing some 7,500 barrels a day, in -- sorry, 5,000 barrels a day in Romania, coming from early production out of our Totea development, or our Totea discovery, that we found in 2011.
My apologies, the 7,500 relates to the total. There's a few thousand barrels a day, coming from early exploration success in Tunisia as well.
The key news for us in 2012 though, is how we changed the future of our E&P Division in OMV. Our project pipeline, the volumes that we got under appraisal and development in E&P have doubled in 2012.
You see there two colors; in dark blue, projects that are actually defined and under development, both pre and post FID. And the light blue color you see projects that we've got under appraisal. Acquisitions are part of that, but the large majority of that increase comes from our own exploration success and our own exploration success turning into appraisal and projects. So the large majority of that increase is actually organic.
If you look at what that does to production, we stick to our promise of 350,000 barrels in 2016. And I will show you some of the projects that will happen and come on stream in the next couple of years, contributing to the increase from where we are today.
But what's more, most of the volumes that we're adding to the development portfolio will not come on stream in 2016. That's not how fast things work in E&P. Typical project duration is anywhere between four and 12 years, or even longer in some isolated cases.
What we're doing is we're building up a portfolio that allows us to continue growing beyond the 350,000 barrels a day, in '16, to a higher number in 2021.
If you look at the next slide, the colorful one, yes, we're on it. Some of the details on the project pipeline, what you see now is names across the board. We don't just have new ventures that we're trying to get into.
You see exploration ventures that we're actively chasing. The names there reflect the key exploration wells that we're targeting -- were targeting in '12, but also in '13/'14. You'll see key wells turning up there. Again, I'll provide you with a bit more detail around those in one or two slides.
You see a long list of projects under appraisal. Key ones there, Domino in the Black Sea, of course, where we're at the moment, finalizing quite a large seismic acquisition. We do anticipate to recommence drilling towards the end of 2013.
You see, just highlighting another one or two, Bina Bawi, in the Kurdish region of Iraq, where we expect early production to start this year. And you see towards the bottom Shuwaihat in the United Arab Emirates, where we are, together with partners Wintershall and ADNOC, starting the appraisal of a sour gas development. Appraisal first, and then trying to turn that into project.
All that together close to 500,000 million barrels of oil equivalent, none of which will contribute, really, to production, in 2016; all of that is for the second half of the decade.
If you then look at the projects that we got under development and execution, the distinction between the light blue and dark blue, really, is pre-FID and post-FID. So the key projects pre-FID, they are Rosebank and Nawara. We are trying to take FID this year.
And then in execution you see the projects post-FID. Again, together those projects constitute 450 million barrels oil equivalent, in total.
You see field redevelopments in Romania. In all of these, you see field redevelopments in Austria. Soon in all of these, a key one will take FID in the next few months.
But key projects in addition to that, Mehar and Latif in Pakistan, that we expect to start contributing this year. So now we are in the list of projects that we expect to contribute in 2016. Habban in Yemen, where we are today, producing. We do have experts in the fields. We have got workovers being executed. And we are in the process of starting to drill our first new development well.
Schiehallion in the UK, which is negative for our production in 2013, the old vessel is being removed. That will happen in summer, but the shutdown of production has already commenced. New vessel will turn up in 2015. And then you see the two acquisitions done last year, in Norway Edvard Grieg and Aasta Hansteen.
Just the North Sea part of that blue column contributing between 80,000 to 100,000 barrels a day, by 2021; clearly again, the large majority of that turning up after 2016.
You see the approximate production contributions that we expect from this portfolio, in 2016 and '21. You can't simply add those up to today's performance of course. You all realize that we have decline in our existing productions as well. And indeed, we've done a divestment, we divested a couple of thousand barrels a day production, in the Central North Sea, during the course of 2012, and also took that out of our reserves replacement.
All in all, a healthy -- a very healthy project portfolio, and a completely different project portfolio, compared to a year ago.
We'll come to reserve replacement later, but let me point out already today that you are starting to see some of this turn up in our reserves replacement rate; not proven reserves, that tends to come a bit later and in smaller quantities. But our 2P reserves, our probable reserves replacement rate, in 2012 added up to 160%. And we haven't been there for a long time.
If you look at a little bit more detail on the key projects that we got under the development, again I don't propose to go through these slides in detail; they're more for Q&As, I think. But I -- we wanted to give you a bit more color on which precise projects we've got coming on stream when, and what sort of quantities you should expect from them..
Be careful adding them up; they don't all come on stream with the same peak production in the same year. But these are the projects that we are executing in that development portfolio. You also see some other detail that we haven't really provided that often before, which of these projects we operate; what sort of participations we have in these projects; etc.
You see a wide spread. Let me just name one or two of the field redevelopments in Romania, because that's a big number, both CapEx-wise and production-wise. The key projects, for example, that we're executing there are in offshore redevelopment where the gas production in the shallow water offshore of Romania, we often talk about the deep water, but, of course, we already produce some 30,000 boe per day offshore Romania today.
We are implementing a compression project to extend the reserves life of our gas production there. [The Black] redevelopment is in there, our heavy oil development in the Northwest of Romania, where we're redeveloping both the infrastructure and drilling quite a few infill wells to extend the recovery rate there. And water injection projects in [Ville] are part of that larger portfolio.
So you see one description, but there's actually a whole project portfolio sitting underneath these field redevelopment headers in Romania, both in the under-appraisal category and in the under-development category.
On the next slide you see some of the projects we've got under appraisal, key one of course there, Domino. Already mentioned, the volume there is not new. We said last year this time, actually, when the discovery well was drilled, that we estimated the volume in there at 1.5 to 3 TCF, the number you see here is the 50% share that's would be OMV Petrom's share. We're working, or the operator Exxon together with ourselves, is working on the next steps. Key step today is finishing quite a large 3D seismic survey.
That's the projects end of the portfolio. It's very important, of course, that we fill the portfolio with our own exploration, that's where the large majority of our value generation's going to come from in the next year.
What you see here is some of the highlights of 2012. We haven't got all our competitors' numbers for 2012 yet, so what we illustrated here is how our exploration spend in 2012 compares to what our competitors spend in '11. We'll update this picture as all the '12 results come out.
And what you see there is that our exploration spend has doubled from 2009 and 2012; not to a silly level. We're middle of the pack; I don't think you want to see us to the top of the pack. But we're going to try and push a little bit further up this ranking. We spent last year some EUR500 million compared to about EUR250 million in 2009.
If you look at some of the other activities -- or if you look at what that's delivering, clearly some of the highlights are the Domino discovery that you saw us report on last year. We've also shot some 17,000 square kilometers of 3D seismic for this money in 2012. And just to compare that to where we've come from, that's about twice what we shot in 2011, and it's 7 times the amount of seismic that we shot in 2009.
We also added some licenses, 48,000 square kilometers. Again, to give you some benchmark for what that means that is twice the amount of acreage that we added in 2011. It's 7 times the amount of acreage that we added to the portfolio in 2009. So clearly, the spend is going somewhere.
What's more, our success rate in exploration stayed at 61% last year; just about 60% this year, again above 60%. That compares to an industry average that's in the high 30%s. So clearly, we're not just spending the money; we're delivering.
Next slide, please. And this illustrates that. If you compare from 2009 to 2012, the technical resources, these are clearly not reserves, but these will eventually turn into reserves when we've got the projects to develop these. We've gone from finding about 100 million barrels to 400 million barrels in 2012; barrels oil equivalent, of course, a mixture of oil and gas. As a result, despite the fact that we spent 3 -- 2 times as much money, our unit finding cost has actually almost halved from $4 per boe to $2.5 per boe, clearly driven by the volumes that we're finding.
I already mentioned the acreage that we added, close to 50,000 square kilometers. But equally important, we've relinquished almost the same amount. So we're not just building a large collection of acreage; we're also able to make our mind over what acreage we no longer want, and relinquishing that without drilling the sort of activities that would drop our success rate from where we currently find ourselves.
So we're delighted with our exploration performance in 2012, and we're delighted with the fact that our reserve -- our exploration strategy is clearly on its way to delivering.
A bit of detail on what the key wells are that we are planning to drill in 2013/'14, on this slide. We're planning some 70 wells in the next couple of years. The gray bar, which is our near field and existing basins, is still relatively large; but of course this is the well numbers graph. If you look at it expenditure-wise, that is dropping off rapidly. These are the cheap wells in our portfolio.
The more interesting wells in our portfolio are where we're drilling in emerging basins, and where we're drilling our higher risk, frontier-type wells. This is where the Black Sea fits in. This is where the Great South Basin in New Zealand fits in. This is where the Barents Sea fits in. And you see us drilling in the next two years some 14 higher impact wells. Wells of high impact are wells where we see net to OMV some 25 million boe; so 14 wells.
In the table you see where we expect them to be; and you see four of them there in Norway. You see the two Bina Bawi wells in KRI that we're drilling today. We're, in fact, in the latter stages of both of these. You see us -- you see that we expect to resume drilling in the Black Sea. Not in Bulgaria yet; Bulgaria's seismic first, then drilling. That'll be starting probably in '15, depending on what, of course, we see in the seismic. But we do expect to recommence drilling in the Romanian acreage.
You see us drilling two wells in Australia. We are still in Australia, and these are big wells. We have actually closed our office; for us New Zealand and Australia are now a single operation. And you see a key well also in New Zealand itself, in the Taranaki Basin. In fact, the rig for that has just been contracted, and is on the way.
And finally, one key appraisal well in Cambo, west of Shetlands.
So what is that delivering to us? I already mentioned the number of (inaudible) 2P reserves replacement related to 2012 160%. Clearly, it's coming. If you look at where we are with reserve life in OMV, you see us at about 10 to 11 years, which puts us roughly in the middle of the pack. So we've got today proven reserves to last, at our current production, for another 11 years. That's what that key number indicates.
Our reserves replacement rate in 2012 improved. Our three-year running average is not at 79%, 1P. It's not at 100% yet. We committed in Turkey last year that by 2016 we aim to be at 100%. These things take a bit of time, but our one-year 1P reserves replacement rate in 2012 was, in fact, 86%. That includes acquisitions. It also includes divestments. And so the UK Central North Sea divestments, clearly, subtract from that from what it otherwise would have been.
And already indicated, clearly, our 2P reserves an indication that this development funnel that's doubled in size is starting to feed reserves, but you see that first in the 2P the probable reserves later you will see that coming through in the 1P proven reserves.
Of course, curving's nice, but it needs to go together with good cost control and good financial performance. I've got two graphs for you here; again, the gray graph our peers and in green ourselves. And clearly, we'll update this to include all 2012 numbers when we can.
The first one illustrates our production costs, which have been coming down for OMV over the last couple of years. Clearly, when you compare to our peers you see the green and the gray lines coming together, and you see us dropping off from '11 to '12,driven by volume recovery, but also by good cost control, in particular in our Austrian and Romanian operations.
That's one. Very important to our high recovery rates. The high recovery rates that you see us achieve in Austria and that we're aiming for in Romania are not only a technology gain; they're also clearly a cost gain, if you can't keep the cost in control you can't keep the wells going with relatively low production rates, you can't achieve the high recovery rates that we're known for.
And then on NOPAT per barrel, clearly again you see us compare well to our peers on the net profit that we make per barrel produced.
Where will all this take us if we look further into the future? Clearly, we're confident that we will hit the 350,000 barrels a day in 2016. We're also confident that we're building the portfolio to continue growing beyond 2016.
If you look at what that does to our portfolio makeup, our portfolio will change quite dramatically over the next eight years to 2021. You see in 2016 a small yellow sliver turning up and you see a big yellow sliver turning up in 2021. And what's happening to our portfolio is that from two-thirds in our core countries, Austria and Romania we see our portfolio shifting to only about a third of our production coming from these very mature provinces.
We see a portfolio that will deliver about a third out of the International portfolio that we currently operate and another third out of places that we're currently not present. Deep water, Black Sea we do expect to be contributing in 2021. Norway already referred to the North Sea total, 80,000 to 100,000 barrels a day in 2021; material new positions contributing to our portfolio in 2021.
We also see a greater share of that production being gas, we're not afraid of that. Integrated gas in Europe we like; gas in the Black Sea; gas in North Sea we like, we got the organization with our Gas and Power division to be able to monetize that gas. Further afield we're very specifically looking for oil, that's clear. And we see a greater share of that production coming from OECD countries; a lesser share from non-OECD countries in the long run as well. That's where we expect this change in our development funnel to take us towards 2021.
Thank you very much, back to Gerhard for the outlook.
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David Davies, OMV AG - CFO [6]
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Let me just take up on the last slide. Thank you, Jaap. The outlook for 2013 what our expectations are and how we built our planning.
We expect the oil prices to stay high. How high is obviously hard to say, but certainly above the $100 level.
The gas market is clearly a hub price market now and increasingly so. And the extent with which we remain committed to buying gas at non-hub prices is clearly going to be a challenge and we're working feverishly to address that, as indeed is much of the industry.
The remaining gas price is in liberalization. As we know, this implementation is going ahead and, as I say, there's a very detailed timetable of quarterly increases already set out and approved.
And we will obviously benefit from that in that the proposal that's been made by the Romanian Government is that something like 55% of that will be taken either royalties, through special taxes, or through the corporation tax that, in any case, we would earn on our profits, which leaves of course net/net something like 45% to the benefit of OMV Petrom enabling it to continue its investment program in gas. So we're happy to have seen this deadlock hopefully now broken and we can start to see the market move towards a position of being liberalized.
Our expectations for refining margins was that they would be more modest than 2012. We, actually, had a couple of very strong quarters in 2012, quarters 2 and 3. Quarter 4 came down and quarter 1 when it started this year showed every indication that the margins were actually softening quite significantly and that concerned us a little.
But I can say that since the end of January and right through February we've seen margins actually return to quite attractive levels. So they may be more modest than in 2012, but we're feeling more comfortable with that projection, as it were, based on what we've seen so far.
CapEx our guidance increases slightly, that's driven by the two acquisitions, which were obviously not included in our previous acquisition -- in our previous guidance. We hadn't acquired them at that point in time.
I know a number of people have raised a concern that we would be moving our guidance up. Clearly, our guidance is going to move up to the extent that you've bought assets with a big development commitment that could not possibly be included in previous guidance.
But as we look out to the future, clearly we've got some big projects coming our way, which aren't fully analyzed and appraised at this point in time, and certainly a long way away from FID. And we'll continue to keep the market updated in terms of what capital that will require.
But don't lose track also of the fact that historically OMV had invested fairly heavily across three business divisions. And as we look going forward now the vast majority of our spend is going into one, and that's E&P. R&M has obviously reduced its CapEx quite substantially in gas and power. The major CapEx investments have by and large been completed now. By that, obviously, I'm referring to the two gas-fired power stations. So when you look at the overall number for CapEx for the Group bear that in mind.
The energize program is critical, that will be continued further and we will update you every six months, the next time being in August, on precisely where we were in that. And I look forward to being able to show you further progress in that regard.
As regards next year's production or rather 2013's production, we expect it to be broadly the same as 2012. Our average for 2012 was 303,000 boe per day. Clearly, we've got the UK divestments contributing here and, of course, the fact that the Schiehallion field has now been taken out of commission and is currently going through its redevelopment. So the UK is the biggest reason for that production not being higher than the current year.
Gas supply contract renegotiations are ongoing, April 2013 is the first trigger point with Gazprom. Clearly, we're in dialog with them already and hopefully we'll have more to say about that as the months unfold.
The Samsun power plant is ready for startup in the first half. There are some legal issues, and have been for some while, surrounding the licensing of this power plant. They're not legal cases which involve OMV in Turkey at all; they're rather parties who were around the decision, but we do have to pick our way rather carefully through this legal process before we can start full production. But the plant will physically service -- be ready for startup in the first half of this year.
The Petrobras refinery modernization will continue, that should be complete by 2014.
And our divestment program targeting this EUR1 billion by 2014 will also be continued. And clearly be the biggest asset now left for disposal following the deals that we've already done is the stake in Bayernoil, which we hope to close as I said by the end of 2014.
So that's the outlook for the next year; concludes the presentations and we hand over to the moderator now, [Lacramioara], who will moderate your questions.
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Questions and Answers
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Lacramioara Diaconu, OMV AG - Head of IR [1]
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Thank you David, we will now take questions from the audience, live audience here in Vienna, please go ahead.
If there are no questions here, then we go for the conference call questions.
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Operator [2]
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(Operator Instructions). Haythem Rashed, Morgan Stanley London.
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Haythem Rashed, Morgan Stanley - Analyst [3]
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Two quick questions if I may, firstly I just wondered if -- just more of a clarification perhaps as well on your 2016 production target. How much you assume is coming from Kurdistan, I note in your presentation you talk about Bina Bawi starting to produce this year? And just in terms of understanding also how much comfort you have around production growth in Kurdistan going forward given the remaining uncertainties around the payment mechanism there?
The second question was just I wondered if you could perhaps talk a little bit about your strategy for inorganic growth in the upstream going forward. Clearly, with a solid balance sheet that you highlight, I just wanted to understand your appetite for additions to the upstream portfolio in terms of, are you focused on the regions that you outlined on page 7 of the presentation? Or do you intend to establish new core areas and just a few thoughts around there would be very helpful? Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [4]
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Thanks for those questions, so on the [KOI] I just want to clear where we are in the development phase of Bina Bawi. We drilled the discovery well Bina Bawi 3, Bina Bawi 1 & 2 were drilled by somebody else, they missed the reservoir. Bina Bawi 4 & 5 are still in drilling as we speak.
What we expect to do this year is put an early production system on stream. It's actually close to being finished, so it should be on stream shortly. And that has a capacity on a 100% basis of up to some 5,000 boe a day.
Now being able to produce that is not really an issue, 5,000 boe a day we can sell locally, and that's, in fact, the working assumption that we have for that early production test.
Now really this is a well test and what this will do is provide us with information together with the two appraisal wells that we're drilling Bina Bawi 4 & 5 that will lead to development decisions for Bina Bawi. And therefore, full board development and production of Bina Bawi is some time off.
The wells politically, we're not overly concerned at the moment on whether or not it's possible to produce 5,000 barrels a day. It clearly is. 50 is more difficult, but we are a long way away from that.
In 2016 I can't actually give you the precise production contribution that we expect from Bina Bawi , but I can tell you it will not be that much, because even though the extended well test will produce some 5,000 barrels a day on a 100% gross basis, our net entitlement of this, it being a production-sharing contract, will attribute a small fraction of that number. So in the headline number of 350,000 barrels a day in 2016, the Iraq contribution, will be relatively small.
On inorganic growth, clearly we are continuously looking at further acquisition opportunities. You have seen in the last year the kind of opportunities that we've exercised. We are sticking to our strategy. So the first one is that whatever we buy we need to see a clear way of how it adds value beyond the purchase price, otherwise we don't do it. It's simple as that.
Geographically we are looking within our existing footprint. The one exception and we said this right up front as well, is that we are trying to get an exploration foothold in sub-Saharan Africa. We're working that quite hard. We've been close to one or two deals in 2012, and I would hope that you will see us execute deals in 2013.
Whether you would classify that as inorganic growth, of course, is debatable. We'll have to find a way into exploration acreage. There's a million different ways of doing it. Most of them will involve some kind of farming deal, but you couldn't -- you don't necessarily exclude buying a small exploration firm. There are quite a few exploration firms active in sub-Saharan Africa, with only one or two blocks in their name, so instead of farming in, you could see yourself buying a firm like that as well.
Having said that, clearly in sub-Saharan Africa we are looking at entries for exploration activities, not so much producing or development-type activities.
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Haythem Rashed, Morgan Stanley - Analyst [5]
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Great. Thank you.
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Operator [6]
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Alistair Syme, Citi, London.
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Alistair Syme, Citi - Analyst [7]
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I've got three questions. Firstly, I wonder if you'd elaborate a little bit on the guidance for Gas & Power that you're giving for 2013; maybe not in absolute terms, but maybe some sort of reference versus 2012, and how you would think about the Gazprom renegotiation within that context.
Secondly, can I just ask about Petrol Ofisi? Granted that, as you make note in the presentation that the performance has improved a lot in 2012, it looks to be still well below where it was pre acquisition. And I wonder just what are your thoughts on the outlook, and particularly how you view the carrying value of that acquisition versus the current level of profitability?
And thirdly, just to clarify on the exploration side. You noted the good exploration success in 2012, but expenses are still running higher than expenditure. And I guess that is just writing off stuff that has been in the hopper and is now deemed uneconomic. How much more of that sort of clean out of the cupboard is left to come through on the exploration side? Should we expect a better run rate on expenses in 2013? Thank you.
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David Davies, OMV AG - CFO [8]
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Let me take the first part -- two parts of that. Alistair, it's David here. And I'll hand over to Jaap for the third part.
G&P guidance, clearly the biggest single loss booked this year in Gas & Power has been the write-off that we have made against the gate terminal. That is by no means fully resolved. Clearly, as we look forward three to five years from now, a lot of pundits are talking about more liquid being available on the global market, and that would hopefully bring the European prices and the Asian prices closer to equilibrium and could, perhaps, then open the door for that asset being activated again, shall we say. So we are certainly looking forward into 2013 expecting that position to get worse. But, of course, who knows what can come.
The biggest issue, really, within Gas & Power, as has been for quite some time, is the upside down nature of the long-term supply contracts. We are, as we have mentioned, in negotiations with Gazprom. I think there is a very high level of realization and understanding that the market that we saw a few years ago is not the market that simply exists today.
There is a very liquid market for natural gas in Europe and I think that's gradually being accepted. It's quite a bloody process occasionally to get everybody there. But I think, by and large, that's being broadly accepted now and I think we'll see some mitigation of the situation as we get into 2013. But until we have actually finalized the negotiations, I can express hopes and aspirations, but I'd really rather reserve judgment until we actually get our position finalized, as it were.
This isn't the first time we have conducted negotiations with Gazprom on this subject matter. We've already talked about what we booked in Q4 last year. And the year before that we also made a similar step in this right direction, and we hope a step will be made similarly for 2014 -- 2013.
The position remains challenging nevertheless and, as I say, until that situation is clear around the Gazprom situation, I wouldn't like to be overly specific with my guidance as to where we are actually going to land in profit terms.
Petrol Ofisi there were two questions. I can say quite clearly as regards the carrying value of the asset, there is no borderline issue whatsoever. Clearly, we concluded our Audit Committee yesterday and this obviously, amongst many other items, clearly, of a material value in our balance sheet, is an item that gets discussed by the Audit Committee. And there is a significant headroom based on current performance and projections to justify the carrying value of the investment. So we don't see that particularly as the concern.
The situation vis-a-vis pre-acquisition profits; of course, the pre-acquisition period was also one where refining margins in Turkey had historically been quite higher. And that enabled Petrol Ofisi, given the import capacity that they have, to import product from the European market and sell it into the Turkish market under the umbrella of the Tupras refining margins. That's been more pressure for the last two years, although this year we did actually see this import differential starting to open again. But that's the principal reason for the profits being lower than the pre-acquisition period.
And, of course, to a degree also the margins have been under pressure because, of course, we do have in Turkey, by some considerable margin now, the highest fuel prices after tax in the world. So the Turkish consumer is paying a very high price, when the oil price is in the $115 area, where we currently find ourselves.
We bought, however, Petrol Ofisi to really place a strategic foothold in Turkey. Turkey remains a very interesting market for us. It's not simply the gas stations that we have. But across Turkey we're obviously involved, effectively, in the gas distribution pipeline, which hopefully will connect into Nabucco. We have a power station now which is being constructed. We are building a gas distribution business into Turkey itself.
So we see Turkey as an area of major strategic focus in our market place, given its size and given the assets that we've got in and around Turkey. But it is fair to say that Petrol Ofisi's profit remains somewhere below its pre-acquisition level for factors which, by and large, are out of our control.
I'll hand over to Jaap for the third part, thanks.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [9]
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Thanks. We had two items that drove the disconnect between expenses and expenditures that you referred to. First of all, of course, 61% success rate means 39% failure rate, so there are exploration write-offs to be taken during the course of the year. The two specials in 2012 were Peking Duck and Shorish; Peking Duck in Norway and Shorish in the Kurdish region of Iraq.
Peking Duck was completely routine. It was a well that was finished in 2011. It was a non-commercial discovery. But, of course, when you discover that, you first of all put it on the books, then you look at whether or not you can make it commercial; if you don't then you write-off the exploration well, and that's what happened.
We drilled the well in 2011. It was a relatively expensive well, that's why you've seen the effect of it. And then early 2012 we decided it couldn't be made to work and wrote the well off, together with the operator, ConocoPhillips in that case.
Shorish was a well that we drilled in 2010. The reason that was still sitting around is that what we were to do next with Shorish, really depended on the Mala Omar results, and that's the well that we drilled in 2012. When Mala Omar did not encounter hydrocarbons in the layers we were drilling through, we wrote off both the Mala Omar well and the Shorish well at the same time. That's what happened there.
And if the other question is have we got any skeletons sitting around the exploration cupboard, the answer to my best knowledge is no.
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Alistair Syme, Citi - Analyst [10]
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Okay, thank you very much.
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Operator [11]
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Mehdi Ennebati; Societe Generale, Paris.
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Mehdi Ennebati, Societe Generale - Analyst [12]
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Two questions please. The first one is regarding your 2P reserve replacement rate. So you said -- you highlighted it was 160%. I just wanted to know when do you think you will be able to post a 1P reserve replacement rate at 100%? Can we expect it from 2013?
Second question is regarding your working capital efficiency. You talked about the possibility for you to increase -- to decrease, sorry, your working capital by EUR350 million, excluding the sale of mandatory stock. What can you achieve in 2013?
And finally, I have a question regarding your Yemen production. What -- given that you provided a prediction flat in 2013 compared to 2012, just wanted to know what is your hypothesis regarding 2013 Yemenite hydrocarbon prediction? Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [13]
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Thanks. I'll take the first and the last questions first, if I may. So what we've committed to previously is that we aim to be at 100% reserves replacement rate in 2016. I'll stick to that. Clearly, if we can do it earlier we will. But I still want to continue to be very cautious with forward-looking statements on reserve replacement rate. These are complex things.
Clearly, doing 160% 2P reserves replacement rate in 2012 is encouraging, and we'll push the 1P reserves replacement rate up as fast as we can, given the portfolio that we have. That's all that I can really commit to. Clearly, though, 2016, 100%, we're increasingly confident. That clearly is one that you can take to the bank.
Production flat, there's pluses and minuses already referred to. So UK is down during the year -- or year on year, because of divestments and the Schiehallion redevelopment. The old vessel is shutdown, it will disappear soon.
Up is in particular Pakistan in 2013, where we expect both the Latif and Mehar gas developments to come on stream during the course of the year. Combined, that leads to a flat performance year-on-year average, but the exit rate by the end of 2013 should be up compared to the average for the year. So we will end the year with an exit rate above the guidance leading to then continuing growth '14 onwards to 350,000 barrels a day in 2016.
The actual uptime assumption in Yemen, clearly, we have one. I'd prefer not to divulge it. It's not 100% clearly in that forecast.
David?
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David Davies, OMV AG - CFO [14]
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The working capital improvements of EUR350 million, I mentioned, in fact, we expect to achieve the EUR350 million during 2013. It's interesting really, and I don't think we're alone in this as companies will look to improve their profitability, that working capital, I think, in an area for an oil company where the oil price is over $100 has not always had the highest focus, quite frankly.
And as we look at many of the initiatives that we're implementing, I certainly ask myself whether we should have done these things earlier. So there's no magic in it. But I think what we're doing is just putting a laser focus on some of these areas and driving out improvement.
Some of them are relatively straightforward, quite frankly. We've looked at factoring. We've looked at securitization of our receivables. It's almost financial instruments, which enable you to move your positions off the balance sheet. We've looked at far more complex things, like the sale of the national stock obligation, which we had to do a lot of legal and tax work to actually get it structured the way that we were able to do.
But I'm really encouraged that every aspect of the business is asking itself the question now; do we really need to have that cash tied up in working capital? And I'm delighted with what we've achieved so far, and as I say, the EUR350 million target is a target that we expect for the current year.
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Mehdi Ennebati, Societe Generale - Analyst [15]
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All right, thank you very much.
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Operator [16]
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Nitin Sharma, JPMorgan, London.
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Nitin Sharma, JPMorgan - Analyst [17]
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Three questions, if I may; first one on Gas and Power. What percentage of your total gas purchase under these long-term supply contracts is coming up for renegotiation this year; conscious that you've already flagged the Gazprom contract.
Second one on Romania. Could you please give us some guidance on the 2013 earnings impact of the phased gas price liberalization in the country?
And final one, again, please clarify what was the organic reserve replacement ratio in 2012. Thanks.
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David Davies, OMV AG - CFO [18]
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Let me take the first two. The proportion of our contracts -- contracted volumes in terms of gas in Europe with Gazprom is of the order of 60%, which isn't to say that 60% is all burdened by the kind of gap between the long-term contract price and the spot price, because we have progressively been reducing the percentage within that 60%. And that's why we got the credit last year; it's why we got the credit the year before.
What we're trying to do now is get it lower and lower and lower, of course, so that effectively the pricing is as near as possible equivalent to what the hub price would dictate. That's what our challenge is. So it's the vast majority of our current volumes, but not all of the current volumes have the full scale of the disadvantage, shall we say?
Then the Petrom contribution from the increase in tax is likely to be relatively marginal, to be perfectly honest. 2013, because although we're getting these increases phased through, as is currently planned, the Romanian Government has also increased -- introduced a special one-off tax on all natural resource producers, which is not a contradiction to the taxed ability clause, because it's not just on the oil and gas industry, it covers forestry and things of this nature.
So it's all usage of natural resources, and that's going to be based on revenue. In and of itself it's not a significant impact, but it compensates broadly what we would have benefited from the gas price increase this year.
It's only expected to be, at least at this stage, a one-year tax, but we will see. But, certainly, as we have these relatively low level of contributions coming in from the gas price liberalization, whatever there was will be mostly washed away with this special natural resource tax, which is being imposed in Romania; so 2013, not significant.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [19]
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I'm afraid I'm not going to answer your question on reserves replacement rate. We don't provide that sort of granularity in your reporting, but I do want to give you a little bit more confidence that our reserves are coming through.
We already referred to the 2P reserves replacement rate last year of 160%. The average 2P reserves replacement rate for the five years preceding last year was 15%. So it's coming.
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Nitin Sharma, JPMorgan - Analyst [20]
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Thanks.
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Operator [21]
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Dan Ekstein, UBS, London.
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Dan Ekstein, UBS - Analyst [22]
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I've got two questions, please. The first one is on your 350,000 barrels a day production target. You've reiterated that today in 2016. Does that include or exclude the impact of the Edvard Grieg acquisition, because it seems that if it includes that, then something must have dropped out compared to the guidance you were giving in Istanbul. Could you clarify that, please?
And then secondly, on the upstream, you presented a chart which was quite interesting highlighting the high margins that your upstream generates vis-a-vis your peer group. All else equal in terms of commodity prices, how would you see the progression of your upstream margins to the period out to 2016?
I think one of the reasons I ask is that you highlighted the changes that are ongoing in your portfolio, and gas is becoming a bigger part there. So I just wonder how I should be thinking about the direction of margins. Thanks.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [23]
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Thanks for forcing me through that honesty check. So, this 350,000 barrels a day in 2016, indeed, would be excluding Edvard Grieg.
Now Edvard Grieg, of course, is a fairly major project. It will come on stream in -- the plan is in 2016, so it could contribute. But major projects have got a knack of going up and down by quite a few months as well. So it's early days, but, really, we should be able to get 350,000 barrels a day, and our portfolio shows we will get 350,000 barrels a day, excluding a contribution of Edvard Grieg in 2016 as well, which, depending when it comes in during the course of the year, could push us significantly or a little bit above the 350,000 barrels.
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Dan Ekstein, UBS - Analyst [24]
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Okay.
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David Davies, OMV AG - CFO [25]
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As regards the net contribution for the new barrels, there's a few critical assumptions that you have to make, of course, and we internally have made them and we haven't disclosed them, nor will we. But clearly, one significant one is what will the Romanian royalty environment be on the end of 2014 look like? And that, of course, given that so much of our production is in Romania, is obviously something which is critical within that analysis.
As we plan our expectations for 2016 and beyond, and look at the contribution that will increasingly come from the new barrels that we're producing, we certainly do not see a material deterioration in the post-tax profit per barrel. And I'd really like to leave it that rather than get into being too specific about it.
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Dan Ekstein, UBS - Analyst [26]
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All right. Thanks.
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Operator [27]
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Lydia Rainforth, Barclays, London.
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Lydia Rainforth, Barclays Capital - Analyst [28]
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A couple of questions please. Firstly, if I could come back to the 2016 target of 350,000 barrels a day, I'm just wondering how much contingency you've actually included within that target, particularly in the light of what probably looks like a fairly challenging operating environment in North Africa.
The second question I had was around New Zealand. And, geographically, do you still feel that that fits within your portfolio as well as it did two/three years ago? Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [29]
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So one bit of contingency has just disappeared which could have been the Edvard Grieg production if you hadn't spotted that.
No, the reality is that as production forecasts go there isn't, of course, a lot of contingency in that. You do these production targets bottom up. You challenge your operations to do as much as you can, and you keep a little bit up your sleeve and it leaves you with a production target.
So the reality is that 350,000 barrels a day is not going to be easy for us, nor should it be of course. An easy target is not something that would stretch the organization. 350,000 barrels a day we're going to have to run as fast as we can.
And we're going to have to be producing in Libya and Yemen; clearly, if Libya and Yemen drop out in 2016 that will detract from hitting 350,000. They are part of our portfolio. They will still be part of our portfolio in 2016 and, therefore, their production will have to contribute to those 350,000 barrels a day.
New Zealand is a great part of our portfolio. Let me start by that. Does it fit geographically? Clearly not. If I could move New Zealand to the Black Sea I would do it tomorrow, but that's not how life is.
If you look at where New Zealand fits in our portfolio, technically and financially it's a key part of our portfolio. We produce some 20,000 boe a day. We've got some long-term gas production. We've got our own operated offshore oil development. We're mobilizing two rigs; one to drill exploration wells; one to drill infill wells in Maari, with Maari production forecast to increase over the next couple of years, as a result of that infill drilling campaign.
It's a great asset with further exploration upside, so we like it very much as an asset. I have to admit, though, my trip there once a year I do hate.
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Lydia Rainforth, Barclays Capital - Analyst [30]
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Perfect. Thank you very much.
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Operator [31]
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Thomas Neuhold, Kepler, Vienna.
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Thomas Neuhold, Kepler Capital Markets - Analyst [32]
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Three questions if I may. Firstly, can you please give us an update on your hedging policy? If I remember right your last hedges expired by the end of last year?
Secondly, can you maybe also please give us an update on the sensitivity of the EBIT towards changes in the oil price and the exchange rate?
And thirdly, in the outlook you mentioned a significant increase in exploration expenditures in 2013. Could you maybe quantify this a little bit more?
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David Davies, OMV AG - CFO [33]
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I'll take the first two on that. The hedging policy is that we have hedged when we have felt our cash flow may potentially be threatened, particularly with reference to the credit rating that we have and we are quite a long way away from that position. Our hedges, as you rightly said, expired in December 31 both the oil and the FX hedges. And as far as strategic hedges are concerned, we have no further hedges in place at this point.
Our sensitivity as regards the oil price is that a dollar movement in the oil price, all things being equal, would add about EUR42 million operating profit to the E&P business. You could say, of course, yes, but it puts further pressure on your gas margins; it perhaps increases your refining losses because of the extra cost of own energy and such like. That is, of course, true. The EUR42 million just refers to the E&P side.
And on the currency, a $0.10 movement against the euro is approximately around EUR200 million of operating profit.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [34]
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On the exploration expenses, what we aim to do is increase from the roughly [EUR500 million] that we spent in 2012, another 30% to 40%.
There's a bit of uncertainty in that range and it's very much driven by rig availability. In fact, one or two of these Norwegian wells we would have liked to have drilled in 2012, rig availability pushed those into 2013. And it's not unlikely that one or two wells would again go from '13 into '14, simply driven by rig availability. So there is some uncertainty around that range, in the order of, with an increase of 30% to 40% is what we're looking at with the current planned activities.
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Thomas Neuhold, Kepler Capital Markets - Analyst [35]
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Thank you.
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Operator [36]
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Matt Lofting, Nomura, London.
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Matt Lofting, Nomura International plc - Analyst [37]
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Two quick questions remaining please. First, Jaap, just coming back to the point you just made around rig availability, I was just wondering if you could give us a sense, in terms of the 14 high-impact wells for 2013/'14 that you talked through during your presentation, as to how many of those prospects have rigs confirmed and contracted? And how many are still looking for rig availability on, and what therefore the risk is of slippage in terms of '13 into '14 and '14 into '15?
Secondly, I think earlier on David you talked indirectly around -- or referred to the fiscal framework in Romania post-2014 in the context of stability costs and so on. I just wondered if you could give us a broader update in terms of whether negotiations with the government in the context of that clause, post-elections, have picked up again in the New Year.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [38]
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Thanks for the question on rig availability. It's interesting, because we do have some issues with rig availability. When I look at the list of wells on slide number 38 where we explained the 14 high-impact wells, most of those actually have the rigs confirmed. So the four Norwegian wells have all got their rig slots available. But, clearly, well spudding Apollo in Q4 '13 could well end up being drilled in '14, or certainly finished in '14.
Bina Bawi 4 and 5 are actually drilling and due to be finished. Domino-2 and Neptun Deep, as I said we expect to -- or we anticipate to recommence drilling in the Neptun acreage towards the end of '13. So certainly in '14 we will be drilling there.
Bianchi-1's got the well -- it's got a rig. Palmerston-1's got a rig. So, most of those have got rigs. Matuku-1's got a rig and Cambo-5 is actually waiting for the rig to be released on the well just preceding it. So most of these high-impact wells have got rigs lined up.
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Gerhard Roiss, OMV AG - CEO [39]
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Concerning the fiscal regime in Romania, starting 2014, we are in discussion with the Romanian Government. We presented to them a strategy what it means to Romania if they attract investment, Black Sea or onshore. And I think they are quite constructive discussions.
And you should know, have in mind, that meanwhile there's some international companies already in Romania who are prepared to invest. It was, I think last week announced, [scrap sellers] are going into Romania via [Vix] and we have a lot of other companies farmed into Romania. And this is important to have here a competitive and negotiated taxes, and then you have such prospect that we're having.
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Matt Lofting, Nomura International plc - Analyst [40]
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Okay, thanks very much.
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Operator [41]
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Oleg Galbur, Raiffeisen, Vienna.
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Oleg Galbur, Raiffeisen Centrobank - Analyst [42]
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Only one question from my side. For 2013 you're guiding for rather flat marketing sales volumes and assuming that, or seeing the motor fuel consumption in the region, and especially on the Mediterranean region, remains quite weak in 2013, I was wondering what are the assumption behind your guidance. Thank you.
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David Davies, OMV AG - CFO [43]
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I think it's really a reflection of exactly what you said. I think we clearly don't see a significant uptick in the broader level of economic activity in our marketplace; that reflects itself in the level of fuel demand and we feel that forecast is consistent with that. We're not expecting any big things up or down in terms of overall demand for refined product in our marketplace.
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Oleg Galbur, Raiffeisen Centrobank - Analyst [44]
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Okay, thank you.
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Operator [45]
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This was the last question. I will now hand back to David Davies for his closing comments. Please go ahead, sir.
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David Davies, OMV AG - CFO [46]
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Well, thanks both to the audience here in Vienna and those who dialed in or followed us on the web. It's been a pleasure, as ever, to go through our results with you and we look forward to speaking with you over the next two weeks as we now go on the road.
If there are any questions in the meantime, you know where our Investor Relations department is, thank you.
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Operator [47]
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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. You may now replace your handset.
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