Q2 2013 OMV AG Earnings Conference Call
Aug 13, 2013 AM CEST
OMV.VA - OMV AG
Q2 2013 OMV AG Earnings Conference Call
Aug 13, 2013 / 09:30AM GMT
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Corporate Participants
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* Gerhard Roiss
OMV AG - Chairman of Executive Board and CEO
* David Davies
OMV AG - Deputy Chairman of Executive Board and CFO
* Jaap Huijskes
OMV AG - Executive Board Member, Exploration and Production
* Hans-Peter Floren
OMV AG - Executive Board Member, Gas and Power
* Manfred Leitner
OMV AG - Executive Board Member, Refining and Marketing
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Conference Call Participants
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* Mehdi Ennebati
Societe Generale - Analyst
* Brendan Warn
Jefferies & Co. - Analyst
* Thomas Adolff
Credit Suisse - Analyst
* Haythem Rashed
Morgan Stanley - Analyst
* Marc Kofler
Macquarie Research - Analyst
* Tamas Pletser
Erste Bank - Analyst
* Alastair Syme
Citi - Analyst
* Dan Ekstein
UBS - Analyst
* Lydia Rainforth
Barclays - 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 Q2 2013 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 email. However, if you do not have a copy of the presentation, slides can be downloaded at www.omv.com. Additionally, simultaneous to this conference call, a live audio webcast is available on OMV's website.
I would now like to hand the conference over to Mr. Roiss. Please go ahead, Mr. Roiss.
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Gerhard Roiss, OMV AG - Chairman of Executive Board and CEO [2]
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Thank you. Good morning from Vienna. I am pleased to go through the half-year result for OMV. Let me start with the market environment for the half year. I think you are aware of it, we had a decreasing average oil price; we had a quite difficult operating environment, have instability in Middle East and North Africa; the gas price in our region are still this ongoing spread between spot and long term; and refining margins have been volatile at the lower level.
Let's now move to OMV. The key figure of OMV result is the cash flow, the cash flow of [2.1], and, in specific, the free cash flow of EUR1.6 billion after dividend. And this is a free cash flow. This was compared to the period before of EUR194 million. So this is very important for us to have this high number of free cash flow, to finance our growth.
On top of it, when we talk on [gross], we have about 1 billion boe in our project pipeline, which will lead to a production of 70,000 to 80,000 barrels a day 2016/'17, onwards.
Again, what you know already, we have this Neptun discovery, which leads to a production of up to 6 bcm; our share is 50%, together with Petrom.
We have, the last weeks, we have been awarded six new exploration licenses in Norway.
And in terms of gas and power, we have started put our Turkish power plant, gas fired power plant, in Samsun onstream middle of the year.
The financial performance for the first half year, the clean CCS EBIT went down by about 5%, from EUR1,665 million to EUR1,584 million.
Where does the decline come from? The decline comes from E&P, where we have, on the one hand, the Brent price which is down, but we also have a slight production decrease, and we have some effects from lower liftings.
Gas and Power, again here, the main issue is the negative margins.
And in Refining and Marketing, we see a very positive trend coming out of good performance of the business, running our refineries 91%, which is far ahead of the market; and also coming out of a strong performance of our marketing business.
How does this solid financial [passage] look like? If you see the source, we have EUR2.6 billion cash flow, and EUR0.9 billion net working capital reduction.
And in terms of use, we used out of it EUR1.2 billion for investments, mainly in E&P, 75%; dividends, EUR0.6 billion; and we reduced our debt by EUR1.8 billion, which leads to a gearing which is down from 26% to 15%.
Coming to upstream, you see here our growth position. We still stick to our 350,000 barrels a day in 2016; this is our target. And to reach this target, it first has to start with stabilizing our production in the core countries where we have two-thirds of our production. And you will hear much more from Jaap Huijskes how we do in Romania in terms of stabilizing our production. This is key.
Then it comes to growth. First of all, invest two-thirds of Capex in E&P. This is ongoing, and will not change in the future.
We have a 1 billion project pipeline. And on top of it, we have increased exploration activities. We invested about 23% this period more in exploration than we did the period before.
Black Sea, we finished our 3D seismic. This was an area of 6,000 square kilometers; the biggest ever where we did seismic. This is completed. Ship now moved into the Black Sea, on the Bulgarian side, to start with seismic.
North Sea, here we did the FID on Aasta Hansteen. Aasta Hansteen is a [for us] EUR800 million investment; start of production 2017; peak production about 18,000 barrels a day.
And on top, as I've mentioned, we have been awarded six new licenses in the Norwegian North Sea.
When we talk about upstream, we have to see where are our focused area, as we always say that we want to have an integrated growth. This means European gas for Europe. Therefore, we have to be focused with our investment on the two close areas in Europe. The two close areas are the one that's west of Shetland, the region north North Sea; and on the other hand is the Black Sea, the offshore, the deep sea part.
So this is -- these are the two focus areas for our growth, as of today. And the outcome is that gas will be integrated, sold into our markets, oil sold [part] in our refineries, otherwise globally.
Optimize downstream. First, Refining and Marketing, we have succeeded with our divestment on the Bosnia-Herzegovina market and Croatia market; this is closed. And we also have divested our lubricants business second quarter.
Key is that we have here in this R&M EUR1.3 billion -- EUR1.4 billion cash generation in the first six months of this year, strong operating cash flow, and several working capital reductions on top of it.
Gas and Power, the renegotiations with Gazprom and Statoil are ongoing. We will hope to come to a solution in the second half of this year. As I've mentioned before, the gas-fed power plant is on stream.
May I now like to hand over to David. David?
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [3]
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Thank you, Gerhard, and good morning, ladies and gentlemen, from my side as well. I'll turn to the second quarter and highlight that, if I may.
On the slide highlighting the results, page 10, you see that our clean CCS EBIT for the quarter, at EUR733 million, is down by about 15% on the same period last year.
What has hurt the results is the lower average Brent oil price; $6 below last year's number at $102, a 5% reduction.
We also would have seen more reduction had it not been for the hedges that we still had last year. That was also impacting last year's result for about 60,000 barrels, which were hedged round about $100, so clearly we've not had that burden this year.
Production was lower as well, unfortunately, at 297,000 barrels; about 8,000 barrels below the quarter 2 number last year.
Liftings were lower. You will also recall, I hope, that in the first and second quarter of last year we were benefiting from over liftings in Libya, in particular, because the 2011 tail end production that we had we didn't lift anything, and we caught that up in quarter 1 and quarter 2 last year. We clearly haven't seen that situation this year, that was a one-off, to the extent that Libya was actually 12,000 barrels of oil equivalent per day under lifted in the quarter.
We also sold the UK during last year, and that 5,000 barrels a day is also missing from both our production and our liftings.
Gas and Power, as Gerhard has already touched upon, and we've mentioned repeatedly, has been burdened by the negative performance of our marketing subsidiary, EconGas, which is particularly burdened by the Russian and Norwegian contracts.
Hans-Peter is here today, he'll explain a little more about where we are with those negotiations to revise those prices; they continue, but of course we've had no benefit from any resulting outcome in the results so far.
The refining results at Petrom increased. This was driven by higher volumes and lower costs, both of which were, by and large, a consequence of the fact that the Petrobrazi refinery was closed for six weeks during the second quarter last year.
The marketing results were also strong; this helped, in combination with the improved refining performance, the Refining and Marketing business turning quite a strong quarter.
And the gearing ratio was decreased compared to where we were last year by 15%; the same level as we were at the end of quarter 1, despite of course having paid out a dividend during quarter 2. So that's a very pleased result.
The next page shows the economic environment. The oil price has declined, as we've already discussed, compared to the same quarter last year; $108 last year compares to $102.
If you look at Brent, the dollar is also weaker; slightly up from $1.28 to $1.31 to EUR1.
The middle chart shows the gas price developments in euro per megawatt hour. The top two lines are in relation to the Western European prices. The top line is a measure published by CERA, which is an indicator for the cross-border prices.
Coming into Western Europe, you see the gap between that price and the Hub price, which is shown by the yellow line. Back in 2012 was a gap of EUR4 per megawatt hour. That gap has now narrowed, which would indicate that the prices are coming closer. This is because, of course, many utilities, particularly in German, have now increasingly resolved their disputes as regards these prices, so the two things are getting nearer. We, of course, hope to duplicate that trend with the successful outcome of our negotiations as well.
The lower line, the brown line, shows the gas price in Romania as it's been liberalized. We've seen already this year three price increases. The Government also recently committed to continue with the program. Of course, the larger of the increases are expected for next year if the Government is to assume its target of having fully liberalized the price for the industrial users at that point. So there's clearly still some way to go.
What is also of significance is we've seen now, in July 1, a price increase which actually affected the domestic households as well, so they've also started to see the price decouple from the regulated regime.
The right-hand side shows the indicator refining margin for OMV, which has been declining consistently now since the third quarter last year, which was obviously the very strong quarter.
Our prediction that refining margins will decline during 2013 has unfortunately come about. At $2.48, we are less than half of where we were at the third quarter level, which, as I say, was the best quarter that we had last year.
So the next page, you see clean CCS net income; down from EUR455 million to EUR321 million.
On the right-hand side, you can see the quarter's P&L account in more detail. I'll just go through a few highlights here. The financial results minus, EUR109 million against EUR26 million. Within the EUR109 million you have the write-off of the Nabucco investment of EUR55 million. You also have a slight reversal in terms of one or two exchange losses that we had compared to last year, exchange gains. But the biggest reason for the variance is this Nabucco provision.
The effective tax rate stays broadly in line with the same position as last year, last year's second quarter.
Minorities are substantially higher, EUR117 million against EUR76 million. This is of course due to Petrom having quite excellent results; they produced a quarter 2 profit this year of EUR118 million, against EUR73 million last year. Clearly, last year's second quarter was burdened by the Petrobrazi refinery shutdown, and a number of costs associated with the refineries there.
EPS, in total EUR0.69, against EUR0.87. But if we clean everything for CCS and for special items, the clean CCS EPS down at the bottom there, EUR0.99; 29% down on last year's number of EUR1.39.
The next page shows the cash flow. I apologize, a rather complex reconciliation between the net income we generated in the first half this year, and the free cash flow that was produced.
I think if I can pull out one or two highlights from it, you see the change in net working capital, EUR851 million; a major contributor to our improved cash position.
We will continue to improve working capital but, clearly, the vast majority of the significant steps are behind us now, so much lying around. Clearly, we're not going [to find] them, and we've done most of the big things now. In fact, in the second half we can see the situation deteriorate slightly because, of course, particularly as regards EconGas, the gas storage season is now upon us, and clearly we'll be building inventory into that business to some extent.
You see also the cash outflow from investments; just under EUR1.2 billion. Set against that, a cash inflow from divestment proceeds, which includes the first quarter's sale of the strategic inventory reserves here in Austria; and also includes now the proceeds from disposing of the gas station business in Croatia and Bosnia.
We paid in quarter 2 a dividend in total at the OMB level, and for the Petrom minorities, in excess of EUR600 million.
That produces a net free cash flow after the six-month stage of almost EUR1.6 billion, which compares to the same position last year of only EUR194 million. So some tremendous progress there; and that of course is why we've been able to reduce our debt so significantly, and got our gearing down to 15%.
The next page CapEx and EBITDA. You can see where we've been investing in the first half of the year. Clearly, as we've said consistently, it's got to be focused extensively into E&P, and that is the case here. EUR842 million invested in the first half, almost half of which has been in Petrom, covering work overs, drilling programs, field redevelopments; in total, just under EUR400 million invested in Petrom in the first half.
We also invested EUR103 million in Norway, in particular with Edvard Grieg and Aasta Hansteen.
And in the UK, EUR46 million was invested as the Schiehallion redevelopment is now kicking in; and also some investments in the Rosebank project, preparing hopefully for FID in next year.
The green area is Gas and Power; EUR138 million of investments, an unusually high quarter. This is due to two reasons. You'll recall that we purchased the stake of Nabucco that belonged to RWE during this quarter; and we also were obliged to purchase an increased stake in EconGas through a put option that one of the other smaller shareholders had in the Company.
Those two combined cost us about EUR70 million, which is the biggest part of the EUR138 million; much of the balance being represented by the final investments in the Samsun project, which is now coming up close to commercial operation. They've been technically operating it now for a few weeks.
In Refining and Marketing, we invested EUR130 million. That stands over a EUR886 million EBITD, so comfortably funding its own investments. Here, the biggest investment focus was in the Schwechat and Burghausen refineries; and also EUR46 million was invested in marketing, the majority of which was in Petrol Ofisi in relation to contract extensions.
The next page shows the CCS effects and the special items in the quarter. The CCS losses were minus EUR67 million.
As regards special items, there was really nothing of significance at the EBIT line. The only significant special item we booked in the quarter was the write-off of the Nabucco result, which of course went into financial results given that we only own one-third of that company.
Then we come to the business divisions. Exploration and Production, the first slide here shows you a reconciliation of the clean CCS EBIT going from quarter 2 this year to quarter 1 this year; that's on the left-hand side. You see the biggest reason for the decline is the value of the realizations; this is a lower oil price compared to the first quarter. The other things are far less significant. It's really principally the oil price.
Whereas the reconciliation on the right-hand side, quarter 2 this year versus quarter 2 last year, the biggest reason for the decline was the volume; minus EUR119 million. This of course, for this calculation, is liftings, which is of relevance here. And of course the biggest part of that was in the Libyan market. As I said, we were overlifting last year quite considerably, and because that's now reversed that obviously is the biggest single reason for this decline; although also, of course, the sale of the UK is also a not insignificant part.
Next page shows our E&P key KPIs. Our production declined versus the first quarter last year, slightly, from 302,000 barrels of oil equivalent per day to 297,000 barrels of oil equivalent per day, versus the same quarter last year, from 305,000 barrels of oil equivalent per day down to 297,000 barrels of oil equivalent per day. We did sell 5,000 barrels of UK production during the year, so that's the biggest reason for the year-on-year decline.
If we look at why we're actually as low as 297,000 barrels of oil equivalent per day, clearly, we had security problems, strikes in Libya, although their impact on the quarter was relatively low. It only kicked in really towards the end of the quarter. We will see some residual impact also in Q1 -- sorry, in Q3 this year.
We also had one or two technical issues in Austria and Kazakhstan, which impacted production marginally. But nevertheless, we only had a small decrease in those numbers obviously count into that.
Our operating expenses came down from last year's second quarter $12.59 per barrel, but still about the same at $12.64 per barrel, but have been coming down consistently since the fourth quarter last year; now stand, as I say, at $12.64 per barrel.
Despite the slightly lower production, we've seen an improvement in the Petrom situation because of, the good news to report, as you see on the next slide, is that our production in Romania actually increased by 2%. It's the first time we've achieved such an increase since we owned that majority stake in Petrom. So we're very encouraged by that. And that's been a big driver of why our operating expenses are continuing a downward trend, from $15.96 per barrel last year it's now $14.42 per barrel.
On the top, you see the total production of the Petrom Group. I remind you that this includes not only Romania, but of course the small production from Kazakhstan, which also contributes to that. And even at the Group level, despite one or two difficulties in Kazakhstan, we also showed here an increase in our overall production level in Petrom. So a very encouraging result from our Romanian subsidiary.
Turning now to Gas and Power, this is the first quarter, to my knowledge, that we've actually booked a loss at the operating profit level. I think this chart shows you quite graphically precisely where the issues are. There's no surprise there; they're in the supply, marketing and trading side, particularly the EconGas subsidiary.
You see a true reflection here of the gravity of the situation as regards the upside-down nature of the long-term gas supply contracts with Gazprom, and with Statoil. We are in detailed negotiations with both parties, and in particular as regards the Gazprom discussions. If we're able to reach a successful outcome, that outcome will be back-dated until April 1, this year.
So, hopefully, we see a somewhat distorted result here because, clearly, we're not booking any benefits from where we are in the negotiations until they're finally resolved. But the fact of the matter is that we've seen a dramatic turnaround compared to where we were last year from the supply, marketing and trading business.
Gas logistics, relatively stable, as ever, actually, improved our position there with a better result from the Austrian storage business.
Power was slightly down. We will obviously be expecting power to be coming in and benefiting more significantly here, but the Brazi plant in Romania was actually out of action for a month during second quarter as a planned maintenance stop.
It would also be fair to say, clearly, that, particularly driven by a high level of hydropower in the Romanian market, the gas spark spread is really quite depressed at the moment. So no small amount of challenges at the moment in the power business, but the biggest challenge remains the supply, marketing and trading positions, as clearly shown here on the graph.
And just turning to some of the KPIs, in the Gas and Power business, clearly, the challenged state of the market has lead to our sales volume through EconGas actually declining by 5%.
The gas logistics, which you see in the bottom chart, which had been improving the average storage capacity sold, is really a consequence of the Etzel facility, which is in Germany, coming increasingly onstream so that the capacity available for storage is now higher.
Key to the performance of the Gas and Power business going forward is going to be resolving the prices with Gazprom, and with Statoil.
Coming to Refining and Marketing, last year's result, EUR129 million, plays against EUR160 million. Quarter on quarter, the refining margins, although not higher, our refining performance was clearly substantially improved. This is in large part due to the improvement in the Eastern refinery's performance, given the shutdown that we had last year, and some of the extra costs that we were carrying partly as a consequence of that.
Petrochemical margins were softer. This lead to a decline quarter on quarter on the results. This was more than compensated by a very positive result from our marketing business, which has really come from both improved margins, as well as a reduced level of costs in the business. So, a very credible performance in R&M in total.
Again, KPIs, one of the most noticeable things here on this chart is the step-up in utilization. Particularly in the East, clearly, with the refinery having been turned around this time last year was only utilized at 43% in Q2, and that's improved now up to 92%.
And indeed, in the West our refining margins have improved -- sorry, our utilization of our refineries also increased at 95% in Q2 this year, plays 89% last year.
You see, in the bottom left-hand side, the number of gas stations that we have; starting to come down, of course, with the disposals of Croatia and Bosnia-Herzegovina. The lubricants business has also been sold in the meantime. And the disposal program continues, with clearly the big target still being the disposal process around the iron ore stake.
And just finally, key financial indicators. The gearing ratio speaks for itself. A very strongly improved performance, driven by the operating performance of the Group, and, in particular, the improved working capital situation, gives us a gearing ratio substantially below our long-term target of 30%; very consistent with our goal of maintaining the strong investment grade rating that we have.
The payout ratio round about the target level of 30%; and the dividend, which has been consistently now increased over the last three years, and that's something we look forward to continuing.
And the return on capital employed target of 13% remains the same. On an unreported basis, in Q2 we're more or less there. That, of course, is helped by the big step-up in the contribution from the sale of the strategic inventory reserves in Q1.
Then just the final slide, the outlook for this year. No major surprises here. Brent, above $100.
The gas [pump] market is clearly driven by the Hub prices now, and that's something we need to resolve in terms of our purchase contracts.
Gas price liberalization is clearly in full implementation in Romania, although there is a long way to go.
And refining margins, as we predicted at the beginning of the year, will be lower than last year, and that obviously is coming about.
CapEx around EUR2.8 billion before acquisitions, the vast majority of which will be into E&P.
The energize program, in terms of improving our return on capital employed, will continue.
Production will be broadly similar to last year's number. We stay with that guidance, despite the more difficult first half than we expected.
We have four high impact exploration wells planned in the second half of this year.
The gas supply contract negotiations, as we've said repeatedly, are absolutely critical.
And progressing the Petrobrazi refinery modernization to completion next year.
And, of course, continuing the R&M divestment program.
These are the major challenges that we face for the balance of the year.
Thank you very much for that. At that point, I think I hand over to -- no, I've got two more slides, I do apologize.
Yes, an update on the energize program. You see here a slide which we repeat every six months; the major elements of the energize project at a broad level.
Both Jaap and Manfred Leitner will go into more detail in terms of what we're doing in the upstream and the downstream parts of the business towards this. But in broad measure, you can see the key critical ones are stabilizing production in Austria and Romania, which we're very strongly on track for.
Reducing working capital where we've over delivered, that's been very encouraging.
Optimize marketing; you can see that in the results so far this year.
And improving refining, which has been also driving our results this year, and should deliver further benefits into 2014 when the turnaround in Petrobrazi is completed.
Unfortunately, we have one chart, one area here, where we haven't been as successful, and that's been the accelerated production growth in Tunisia as regards the South Tunisian oil development, which Jaap will talk a little bit of in a moment, where unfortunately we don't believe we're going to be able to hit the targets that we expected from that program, and we're actually showing as a consequence a red curve.
If you look at the next slide, where are we? Compared to the 2011 base, which was the foundation of the energize program, we've added, we believe, 1 percentage point to that; realized half of it last year, and half of it so far this year.
Between now and the balance of the year, the target is to add those 2% to move us towards the 13% target. Clearly, that's before any acquisitions that we have done in the meantime, or may do in the coming period. And it also seeks to compensate negative headwinds that you occasionally bump into, such as the issues that we're having with Libya, and suchlike.
But a huge success so far, and we look forward to delivering more success as we go forward. You can clearly see that in the results of the business, and particularly in the cash flow, which has really been a dramatic improvement compared to where we were a couple of years ago.
Thanks very much for your attention then, ladies and gentlemen. I think I hand over to Jaap at this point. Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [4]
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Thanks, David. Good afternoon from myself. You've heard from David the financial results. Let me concentrate on some of the project highlights and exploration highlights for the first half of this year; and a few statements about what we're intending to do for the rest of this year.
On the first slide you see a summary of some of the key things that have happened. We've now got about 1 billion barrels on our development pipeline, split roughly halfway into under appraisal volumes and under development volumes, both pre and post-FRD projects.
The first thing that you notice is that both in the under appraisal volumes and in the project volumes we've added additional Romanian projects. We are continuing with what we think is quite a successful strategy of redevelopments of fields in Romania. It's, in fact, spilling over into Austria as well. The first impact of that you clearly see in the production performance in Romania, where compared to the previous year our first half-year production is 172,000 barrels per day, up 1% from 170,500 barrels a day last year.
Clearly, that's quite an encouraging shift; from stopping the decline, you're actually seeing a marginal increase in production, supporting that strategy of continued field redevelopment.
The other thing, Bina Bawi, you see the highlight there, that we have finished testing in Bina Bawi 4 and 5. The conclusion is, in principle, quite simple; we found a lot less oil than we expected, but a very significant additional gas volume. And we're currently working out what to do with that.
It's sour gas, so producing it is not without its challenges. The volumes are very significant. As soon as we've done the studies that demonstrate how we could commercially produce this gas we will come back to you and provide you some estimates of both volumes, CapEx, onstream dates, production rates, etc. At this point in time, we're studying that.
If you then look at the 0.5 billion barrels we've got under development, you see a couple of new projects turning up there; Zidane.
South Tunisia Oil, you see two projects in Tunisia. We tend to talk about the gas project a lot, Nawara; that we expect to take FID before the end of this year. In fact, we've just ordered the line pipe, the export pipe, and the main construction contracts are out for tender at the moment.
South Tunisia Oil is the project where we're somewhat disappointed; we expected more. We drilled quite a few exploration wells. We found quite a bit of oil, but nowhere near what we expected, and nowhere near the reservoir performance that we expected. We do have a project, we will develop this oil in the south of Tunisia, but it's a bit smaller than we originally set out to do.
Other projects, one project we've added to the funnel. We've been working this for a while. It wasn't explicitly mentioned previously, but we are now mobilizing a jack-up rig to do in-fill drilling, site tracking, etc., in New Zealand. That's one of two rigs that we're mobilizing in Tunisia; and the second one is floating, and we'll drill exploration wells. And that's a project that will add some 10 million barrel recoverable volumes to the Maari project, in particular.
So they're some of the project highlights.
If you then look at the next slide, you see the now familiar detail. That will continue to provide some of the key changes in the last quarter is that South Tunisia Oil is now mentioned. That volume is of course very preliminary. We are continuing to drill additional exploration wells and, as and when we find these,' we are putting the infrastructure in place to be able to produce those.
The volumes, for those of you that track this very closely, the volumes in the FRD Romania have come up. That's, as I said, a clear signal that we continue to push additional field redevelopments in the funnel.
Also, in Austria the volumes have gone up, so additional field redevelopments that we're executing.
You see the Nawara project in Tunisia, where we do expect to take FID before the end of this year.
And then finally, at the bottom you see the Rosebank oil development in the West of Shetlands, where we've actually moved the FID date back. We previously projected to do that towards the end of this year; we're now expecting to take that early next year. Simple fact is that we want to spend, and the operator wants to spend, and we support that, additional time in the front-end engineering to make sure that when we take an FID decision the project we execute is robust.
On the next slide you see the projects under appraisal. Key changes there, obviously, Bina Bawi. You would like to see numbers there, I would like to see numbers there. It's going to take us a little bit more study time to get to grips with the type of gas development we're going to have there.
And then in Romania, again, you see a very significant increase in volumes under appraisal. It's roughly a doubling of the volume we carried there previously. Why is that? It's because the more we learn about the field redevelopments that we're executing at the moment, the more we see potential for additional field redevelopments going further into the future. So that volume is increasing, and will lead to further projects in the future.
If we then shift to exploration, some activity in the first quarter; but, in particular, the second half of this year quite a bit of activity coming up.
First quarter, we have drilled the Bianchi-1 well in Austria -- Australia, excuse me, I wish it was in Austria, which was the first appraisal well following on the Zola-1 discovery of last year. So it's really it's called Bianchi-1, but you could also call it Zola-2. That found quite a bit of gas, and we're currently with the [part 2D] operator, looking at further appraisal targets around Zola.
Cambo-5 was an exploration well, actually, not an appraisal well, in the UK, looking for targets below the Cambo discovery. That came up dry.
At the moment, we're drilling in effect three wells in Norway. Eni is operator of Bonna, is well on its way in the Bonna-1 exploration well.
And we've literally in the last few days spudded the first of two Wisting wells, which will be drilled back to back in the Barents Sea.
Looking further forward, we've mobilized a rig to New Zealand, a semi-sub called Kan Tan, which will spud in the third quarter a significant well, Matuku, in New Zealand.
Also looking forward, further forward now, we are making progress in the Black Sea. We've finished the shooting of the Neptun Deep seismic acquisition. That same vessel is now shooting seismic in the Bulgarian Han-Asparuh block.
We've also, and you've seen the announcement of that, now committed to a rig for the recommencement of drilling in the Black Sea, the Neptun block in the Black Sea. And that rig will turn up, it will come before the end of this year, with a likely spud of the first well into the first part of next year.
Longer term, we've added to our exploration portfolio by signing an Abu Dhabi exploration agreement, where, together with National Oil Company, ADNOC, we will start shooting seismic, and then have a commitment to drill two shallow and one deeper exploration well in the next couple of years; very encouraged by that.
And then, we'll come back to the exploration licenses that we've added in Norway.
Again on the slide, the next slide, the detail that you're now used to. Some of the dates have slightly shifted, I've mentioned them already. Bonna was expected to spud in the second quarter, it actually spudded in July. Wisting spudded. It was previously again expected to spud in the second quarter, but that's now spudded also. So you're seeing one or two of these wells slip a little bit, based on rig availability.
Further down, we've already mentioned the fact that we've now confirmed a rig for the Black Sea.
And then towards the bottom you see the Matuku well in Taranaki Basin in New Zealand, where a rig is now actually in New Zealand and preparing for operations.
One last slide, if I may. When we talk about our portfolio, we talk a lot about stabilizing our production in Austria and Romania; a lot of progress there. We tend to talk a lot about Libya, Yemen, and Tunisia because of the issues that we've had there. But increasingly in our growth portfolio going forward you see Norway playing a key role.
If you look at our activities in Norway at the moment, we've got three key projects on the go; Aasta Hansteen and Edvard Grieg, post-FID, and Zidane working its way through front-end engineering, heading for FID.
We're currently drilling three high impact exploration wells, already mentioned; Bonna and the two Wisting wells. And we've got an exploration portfolio of 23 licenses.
In the 22nd round, we added to that portfolio six licenses. In fact, we were the first-ranked non-Norwegian Company. We were just behind Statoil, who obtained eight licenses, so very successful participation in that exploration round.
And what you're seeing now in Norway is really a portfolio of both development projects and exploration targets that will deliver longer-term organic growth opportunities.
One last slide. Sorry, I thought, like David, I forgot briefly there about the energize slide. Three key themes; and none of those would surprise you, you've seen then before.
Stabilized production in Romania, Austria, a very successful part of our strategy. What energize has done is really unleashed quite a high level of activity, individually quite small, but in aggregate quite significant in both Austria and Romania; and again, in particular, in Romania you are seeing the effect of that.
In Tunisia and Pakistan, we were mainly looking at accelerating projects. In Pakistan, we will have two projects coming onstream this year; Latif in the third quarter, and Mehar in the fourth quarter.
And then in Tunisia, we are going to bring the South Tunisia Oil Development onstream, but, already mentioned, it's going to be a bit smaller than we originally expected. That is the red traffic light in our portfolio beneath this.
There are others, too. Acceleration of production can even be done in an area as mature as Austria, where we take an FID in the last quarter on the [air press] redevelopment project, and that's going to come onstream about half-a-year earlier than we originally planned. Again, these efforts to accelerate things are spilling over.
Finally, you see us chasing operational excellence. I think the best evidence of what's happening there is that in the first half of 2013 our production cost has dropped 1%, despite a slightly lower production volume, in comparison to the first half of 2012.
Thank you. With that, I'll hand over to Hans-Peter.
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Hans-Peter Floren, OMV AG - Executive Board Member, Gas and Power [5]
------------------------------
Thank you very much. Gas and Power, it's about integrated gas. First of all, I would spend a couple of words on the issue you have heard several times today; the problems, the challenges we are facing under the long-term contracts. They are, to a high extent, still oil-linked and leading to prices significantly above market prices, which are defined by Hub prices. That's market reality.
Fortunately, we enjoy a price review right under the two big contracts with our main suppliers there, Statoil and Gazprom. The dates for Gazprom are April 1, this year; and for Statoil, October 1, this year.
We are bound to confidentiality to negotiations on that, but what I can assure you is that we execute our rights. We enjoy a general right to a price, which enable us to run an economic business in marketing the gas, thus, we enjoy a right to significantly reduce prices. We are executing that right, and we are in well progressed negotiations on that.
Of course, the main task of Gas and Power and integrated gas is to bring gas into the markets, and optimize the value of that gas. By doing so, we can build on our sales position, as well as on our strong logistics position, transport and storage, especially in Austria. David has already mentioned the stable contributions from there.
Mid and long term, we will have an increased focus on integration of equity gas. We will intensify our cooperation with our colleagues and E&P.
We have a clear ambition to market, in addition to today's positions in the core markets of OMV, to successfully market equity gas from the Black Sea region, as well as from the North Sea and Norwegian Sea regions, following progress in our E&P division. That's the main focus more and more focus on equity gas, integration into our portfolio optimization activities.
When it comes to the gas-fired power plants, I would like to start with Brazi. It's also about integration of equity gas. We started operation of that EUR530 million investment plant last year, August last year; it's equity fired; 860 megawatt net capacity; 9% market share at full capacity. It's the most modern and most flexible power plant in Romania with high efficiency; two times higher than the sector average in Romania, so it's really an asset in the Romanian power market.
In addition to that, end of June this year we started operations at Samsun; 870 megawatt net capacity; a little bit different design of that power plant, direct seawater cooling; EUR600 million investment.
Also, in Turkey we have a target to integrate equity gas in the future. That is, unfortunately, not yet available. This power plant there has a very good efficiency rate; it's significantly above Turkish power generations there. We are now in the final stage of doing testing with our contractors, but we are running the plant already at full load, thus we have 1.7 gigawatt gas-fired power plants onstream.
Manfred?
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Manfred Leitner, OMV AG - Executive Board Member, Refining and Marketing [6]
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Thank you, Hans-Peter. Good afternoon. Refining and marketing, just on the results, David has given you guidance already. I think it's easy to be seen that the efforts are already reflected in the results because we had lower refining margins, lower petrochemical margins than compared to second quarter last year, but a significantly better result. That's based mainly on a very high utilization of our refining business; on increased total product sales; and a cost reduction in the amount of, or in the magnitude of, some 5%.
If you look at the first graph here, what we reflect here is that we compare the OMV market, where R&M is working, to the overall European community market of the 28 countries. This is clearly showing that we are comparatively better located in those markets because the 28 are going down over the next years by 10%, whereas in our markets we still see some growth, this is some 5%, supported and mainly driven by Turkey.
On the next slide, this is showing the areas where we are focusing on in order to improve operational excellence. We believe, I believe, that in Europe you have in the R&M industry a shakeout competition, so it is extremely important to develop, to foster, to increase competitive advantages. We do see a lot of that integrated or actually reflected in integration of our operations, and of our product streams.
The first integration KPI here is showing local E&P production processed in our refineries. We are, as you can see, at 18%, whereas the competition is only at 12%. We have as a target for 2015 still to increase that significantly over 25%.
The next one is refining to retail sales. Why is that so important? Because the retail sales channel is the most reliable sales channel, so I mean the more stable sales channel, of our refining production. As well here you see that we're at 42%, whereas competition in Europe is approximately at 24% only.
The last one is refining to petrochemical capacities. The importance behind that is because the product that has the highest reduction in demand in the future is gasoline. And gasoline is based on naphtha production. If you are integrated into petrochemicals, you can take a portion of that naphtha production and direct it into the petrochemical plans, thereby producing high-value products, and reducing at the same time your gasoline production, so very much in accordance with the market development.
Our integration is here approximately 10%. Again, we are much better than competition, than the European competition, which stands at 6%.
Next slide is showing the development in our divestment programs, we have announced that in November 2011, with up to EUR1 billion in terms of sales proceeds. This is going from 2011, from the sale of our stake in the Cyprus retail business of K-PET.
We have sold, in the meantime, the Petrom LPG bottling business; we have stepped out of Bosnia; we have stepped out of Croatia as well. And now we have, just a few weeks ago, signed the sale of our OMV European lubricants business; and are still working on the sale of the 45% stake in Bayernoil, which we have planned and announced always for 2014, and this is still the plan.
On the next page, an update what is going on in Petrobrazi. As you know, we have defined there a modernization investment program in the amount of some EUR600 million. The target is to improve the refining margin there by some $5 per barrel.
As you have seen in 2012, you can see that here we have revamped the crude distillation unit already.
We have upgraded the coker in the first quarter 2013; and just in July now we have commissioned the desulphurization unit.
So now the focus is on vacuum gas-oil conversion project, which will give us a significant increase in margin. We still plan to be finalizing by the end -- by mid of 2014 next year, so that the full impact of the whole modernization program will be reflected in our results from 2015 onwards.
Next slide is showing the energize achievements in R&M. You see that we are working on three different areas here; one is, and this has been already mentioned, reducing the working capital. We have been pretty successful on that, not only on the operational side, but together with the finance department here as well, on securitization and factoring program implementation.
We have in the meantime reduced on an overall level by EUR1.2 billion our net working capital position; and out of that, EUR0.5 billion in 2013, in the first half. The main part here is that we have sold the Austrian national stock business, has brought a reduction of EUR190 million; more importantly, however, I believe, a cash in of over EUR600 million.
In marketing, there are several areas. The most important ones maybe are we have been working on a reorganization of the retail organization, of the retail business; more focusing on the local markets, much closer to a profit and loss responsibility again.
We have defined a lot of turnaround sites, or of low performing sites, which we are working on. Clearly, the activities here are to either turn around them; if this is not possible, then to sell or even close them.
And we have been focusing a lot on pricing excellence in the business, which is, to a certain extent, reflected already in our second quarter results, as you can see.
In refining, the main areas here are integration and flexibility measures; more flexible production, for instance, in our [bitumen] business; higher efficiency and lifetime of our catalysts, that's variable cost; strengthen the yield from the Austrian crude processing, there are possibilities, we have actually implemented them already, to maximizing the value out of our Austrian crude production; and to increase synergies between refining sites, which means to transport a few of the intermediate products between the sites in order to increase overall result and effectiveness.
On the next page you see Borealis again contributing strongly to the R&M result. What we have reflected here is for the first six month 2013 our share in the Borealis result, which is at EUR52 million. That's lower, or could be lower, than if you take 50% of that compared to last year. The main reason for that is that in the first half of -- in the first quarter of 2013 there was a six-weeks turnaround in the Borouge 1 and 2 operations, and so this has a negative impact obviously on the result, especially in the first quarter.
On the other hand, the Borouge 3 investment, this is an investment into an increase of the polymer production capacity in Abu Dhabi. This is on track and will be implemented in 2014, mainly starting in the middle of the year, and finalization in the second half of the year. This will bring the Borouge production capacity from 2 million tonnes of polymers to 4.4 million tonnes, so a significant step upward.
On the next page you see the main areas where we have improved in the meantime, and that is especially then reflected in the cash generation of the Group.
You see that we are working on EBITDA. We have here mostly the operational improvements included. Investment is a tighter investment control, so minimizing running business investments and just go for very high return projects, if any.
And the networking capital has been mentioned already.
We have in the meantime reduced by EUR1.2 billion; EUR0.5 billion of that in 2013 only. That's more or less two-thirds of the Group cash generation and so that's actually the main topic where we are concentrating on in order to provide funds for our upstream growth. Thank you.
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Gerhard Roiss, OMV AG - Chairman of Executive Board and CEO [7]
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Thank you, Manfred, for your insight in the downstream business. May I now conclude with an outlook into second half 2013?
Let me start with E&P. As you have heard from Jaap Huijskes, Black Sea, we will start drilling end of this year, beginning next year.
We will have our FID Nawara, in Tunisia, in the fourth quarter of this year.
Production in Pakistan, Mehar and Latif, will start second half.
And on top, we have started drilling; the four impact exploration wells are on the way to start drilling.
On top of it, we will continue our investments in E&P to expand our position in E&P.
In Gas and Power, we have to improve our competitiveness, mainly -- the main leverage here is the negotiating of the two contracts; one is Gazprom, the other one is Statoil.
In Refining and Marketing, we have to finalize our Petrobrazi modernization, which is due in 2014. The investment here is about EUR600 million, finalized 2014. And we have to continue our R&M divestment program.
Altogether, E&P, to deliver 350,000 barrels a day 'til 2016; downstream optimization, which we see on-track; and the excellent cash flow, which we see now, it is a basis to secure our E&P growth in the future.
Thank you so much.
==============================
Questions and Answers
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Operator [1]
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(Operator Instructions). Mehdi Ennebati, Societe Generale.
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Mehdi Ennebati, Societe Generale - Analyst [2]
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I would like to ask two questions, please; the first one regarding your working capital improvement. Just to be sure I understood, you are saying that you already achieved EUR1.2 billion of working capital improvement, and your target is EUR1.4 billion and you expected to achieve it in 2014. So, if this is the case, can we expect that there will be no reversion, working capital reversion, in H2 2013, meaning that you will not have a huge significant increase in the working capital in H2 2013?
The second question is regarding your hydrocarbon production. You say that Libya is coming back to normalized level, however, the news flow I see on Bloomberg and Reuters highlight that there is still severe disruptions at Libyan oil terminals and fields. So could you tell us why you are not impacted currently by the continuing descriptions in Libya? Thank you.
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [3]
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Let me take the first question on working capital. In fact, we have achieved improvement in working capital already of EUR1.4 billion, if you go back to the beginning of last year. And what we're saying is in terms of structural changes to working capital there will be some improvements on that, but they're going to be at the margin, quite frankly. The biggest things are behind us.
What you will need to take into account of in the second half is that within the cyclical nature of parts of our business we do tend to see second half working capital build, in particular, in EconGas with gas storage; and also in Refining and Marketing to some extent, because, you may recall, in Germany we had this issue in quarter 4 where we have to pay our taxes in advance, which has the consequence of taking cash out, and that then reverses in quarter 1. It happens every year. That actually is a burden on our cash flow in the fourth quarter, but it all comes back in first quarter.
Also, of course, you don't know what's going to happen with the oil price. If the oil price goes up, clearly our working capital goes up, and that's something you need to understand.
But the EUR1.4 billion that we're talking about, they are structural changes. So whatever happens, as you see through the cycles of working capital investments and divestments with the oil price, or whatever, we have changed the basis of the working capital investment that we have so that we've taken it down by EUR1.4 billion.
In fact, if you look at the net working capital that we had at the end of quarter 2, it was just over EUR150 million, which compares to something well in excess of EUR1.5 billion more than a year ago. So I think that speaks for itself, quite frankly.
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Mehdi Ennebati, Societe Generale - Analyst [4]
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Okay. Mr. Davies, please, regarding [the gas that you are] building and taxation payment in Germany, is it possible for you just to quantify those two elements?
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [5]
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The inventory building will be a couple of hundred million, I would suspect. It won't be as high as we had last year. The summer/winter spread that we currently enjoy, if that's the right word, is certainly not as high as it has been in the past. That affects, obviously, the profitability of the storage business.
And the working capital adjustments in Germany, I think it's of the order of about EUR100 million, very roughly, something of that order, which goes out in quarter 4, and then comes back in quarter 1.
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Mehdi Ennebati, Societe Generale - Analyst [6]
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All right, thank you very much.
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [7]
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Okay, I'll hand over to Jaap now.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [8]
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On Libya, you've seen us having a pretty good run in the first half of the year with a major interruption at the end of the second quarter spilling into the third quarter, which you've seen us announce as well because it lasted at some point longer than a 1.5 weeks, with no foreseeable outcome. That then came back onstream relatively quickly after the announcement, and has been onstream ever since.
If you look at the total news flow around Libya, about 90% of our production comes from the Murzuq Basin and, therefore, when Ra's Lanuf, or one or two of the other terminals, get interrupted it doesn't necessarily affect us in the Murzuq production, which comes out through a place called the Sarir refinery and terminal.
So as and when we get interrupted, clearly we'll deal with that as we can. But right now, we're not affected by the current news flow that's around in particular Ra's Lanuf.
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Mehdi Ennebati, Societe Generale - Analyst [9]
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All right, perfect. Thank you very much.
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Operator [10]
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Brendan Warn, Jefferies.
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Brendan Warn, Jefferies & Co. - Analyst [11]
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Just two questions. Firstly, in terms of your success in selling R&M assets, and if I refer to slide 43, can you just talk around your latest plan, or plan b, if you're unable to find a buyer for your remaining R&M assets? And just, can you remind me the cumulative cash that you've received towards that EUR1 billion target?
And then secondly, more focused on the E&P, or upstream, your expansion in Norway, how material are we going to see this region? Is it about right-size for your business, or do we expect any further acquisitions into growth projects?
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [12]
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As regards the cash amount, let me just answer on that part. The EUR1 billion that we set in 2011 for delivery by 2014, we're probably a bit less than halfway there, I would have thought, at this point, and clearly we've got a number of assets that we're still working on.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [13]
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And then on the materiality of the E&P portfolio in Norway, if you look at the current projects we've got under development, Edvard Grieg and Aasta Hansteen will get you to some 40,000. If you get [Suilven] on top of that you'll get in the region, or in the vicinity, of 50,000 boe a day; about half gas, half oil. So how material is that? That's clearly quite material to us.
Would I like to grow further in an area that's politically clearly more stable than some of the other areas we talk about? The answer's yes. As with anywhere else in the portfolio, we don't exclude the possibility of further acquisitions.
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Brendan Warn, Jefferies & Co. - Analyst [14]
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Okay, thanks. And just in terms of any sort of guidance next year in terms of CapEx increase, obviously with step-up of developments to achieve your production growth?
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [15]
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I think it's a bit early to say at this point in time. We changed our guidance at the beginning of this year to actually take account of the fact that we made those two acquisitions in the meantime in Norway, so they obviously came into the portfolio. But I'd rather wait until we see our plans coming together for next year, and see where we go from there. But certainly, on the basis of the portfolio that we're currently working on, I certainly wouldn't expect any dramatic changes.
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Brendan Warn, Jefferies & Co. - Analyst [16]
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Okay, thanks, David.
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Operator [17]
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Thomas Adolff, Credit Suisse.
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Thomas Adolff, Credit Suisse - Analyst [18]
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Just a few -- three questions, please. Firstly, just on the tax rate, please, if you can give a guidance on a clean basis for 2014, and potentially the evolution of the tax rate, obviously, as Norwegian production comes onstream.
Then secondly, for Jaap, on the Romanian field redevelopment upside. Is it fair to assume now that you can stabilize production for slightly longer than previously guided to?
And then finally is just something that you've invested in some time ago, which is Pearl Petroleum. I was just wondering how one should think of Pearl Petroleum. Should one treat it as a wasted investment, or how does it now fit into OMV's portfolio? Thank you.
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [19]
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The first and the last, and I have to re-answer -- restate the question as regards the last. Did you say [Toll] Petroleum? That's not a company --
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Thomas Adolff, Credit Suisse - Analyst [20]
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Pearl.
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [21]
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Pearl Petroleum? I'm sorry, I thought you said Toll. Okay, I'll do that one. I thought you said Toll, I was going to say I don't know that one.
Okay, let me come to the tax rate then. Clearly, this year is going to be somewhat distorted by the sale of the strategic inventory reserves in quarter 1, which was obviously very lowly taxed. If you take that out, our tax rate would be in the high 30 percentage, I would say, so somewhere below 40%, but in the high 30s.
We don't see anything going forward which would make 2014 significantly different from that, although clearly as we move towards our 2016 production target we expect to see our production increasing to reflect that, to some extent. And E&P of course brings typically a higher tax rate because that's where we pay the largest part of our tax in most of our E&P ventures.
Clearly, one of the things the tax rate does benefit from at the moment is the strength of our presence in Austria, which has a corporate tax rate of 25%; and in Romania with a tax rate of 16%. As far as we understand, neither of those are under review in either of those countries, although that's clearly a matter for the domestic politics of those countries.
But to the extent that we grow our business, as we're projecting to do in E&P, I think it's likely that you'll see tax rates coming in which are different from 25% and 16%, in which case overall you'd expect to see our tax rate start to move up slightly. But it's far too early to be giving guidance on that. I don't think for 2014 we'll see any significant change, that's for sure.
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Thomas Adolff, Credit Suisse - Analyst [22]
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Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [23]
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On the potential to keep Romanian production stable for longer, clearly, we see the reserve base and the potential for field redevelopments that would allow us to push that out a lot further. But clearly, also a commitment for a new date, or a new range, or a new longer period also depends on what happens to royalty in Romania, which is a discussion that's ongoing at the moment.
Clearly, we've made some assumption around that, and at those assumptions we can see the potential to keep production stable for longer than the 2014 commitment that we made when we rolled out the strategy in '11.
The investment you referred to in Pearl Petroleum in the Kurdish region of Iraq is anything but stranded. In fact, that has been producing gas, has been producing condensate and LPG. The LPG production has been interrupted for a while due to an incident, but it's also back onstream, and that has been producing income from the liquid side of the business, which has been paying then shareholder loans over the last two years. So, that is ongoing.
Clearly, we'd like to do more with that asset, and that's a topic of debate, as is the development of the gas that we've discovered in Bina Bawi.
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Thomas Adolff, Credit Suisse - Analyst [24]
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You went into Pearl Petroleum initially to secure equity gas ultimately to fill the Nabucco pipeline as it stood back then, and obviously the Khormor-Chemchemal supplies the domestic market with gas for free and you get paid for condensate. But now that things have changed since the acquisition, does it still make sense to hold on to it, and just focus instead on Bina Bawi and the other stuff you have in the Kurdish region?
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Gerhard Roiss, OMV AG - Chairman of Executive Board and CEO [25]
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On gas, you have to see how the situation develops in terms of export of gas into Turkey.
I think the Bina Bawi asset, as you have heard, we have gas as well. And what we learnt from our talk with authorities, there are talks between Turkey and Kurdish region how to export gas and then to start exporting gas. There are plans, and I think there could be a mid-term solution, and as soon as this is clarified then one can talk about which pipeline connections.
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Thomas Adolff, Credit Suisse - Analyst [26]
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Yes, but just on the Pearl Petroleum, you don't really get paid for the gas sales, right? You get paid for the associated condensate etc., so it doesn't really fit your strategy any more does it, the Pearl Petroleum potential?
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [27]
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You're absolutely right on the commercial structure; we get paid not just the condensate, also the LPG. But the asset base hasn't changed, so there's a lot of gas in place there and clearly we'd like to do something else additionally.
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Thomas Adolff, Credit Suisse - Analyst [28]
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Okay. All right, perfect. Thank you.
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Operator [29]
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Haythem Rashed, Morgan Stanley.
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Haythem Rashed, Morgan Stanley - Analyst [30]
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Thank you for the presentation. Three questions, if I may; two of them on the upstream. Firstly, on the Barents Sea, you mentioned you are drilling three wells this year and targeting volumes there. I just wondered if you could give us an update on your view on developing oil and gas in the Barents Sea; given the recent fiscal term changes we've seen in Norway, whether you feel differently about that, whether you need to see greater thresholds to sanction developments there.
Secondly, I wanted to ask a follow-up question to Libya. The question is really more about your production guidance for 2013. As you reiterated flat production year on year, flat production growth, I just wanted to understand how much of a contingency or buffer you have in that guidance. Is the recent developments that we've had in Libya eroded a lot of that buffer, or comfort that you have in there? Or is there quite a lot there to see further disruption is not necessarily impacting your full-year guidance?
And the final question I had was just an update on the discussions around the new fiscal framework in Romania; how that's going, and whether there's been any progress made?
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [31]
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So let me start with the Barents Sea. I think any development discussion is very premature; we've just spudded our first operated wells.
But clearly, when you're drilling out in the Barents Sea you're not drilling 10 million barrel targets; you're drilling out there because you're chasing big targets. And clearly also, there's a lot of other people doing that and eventually collectively, or individually, individually would be nice, we'll find enough to warrant the installation of infrastructure. Statoil got close, but I'm sure with continued exploration we'll get there. Anything else, quite frankly, at the moment is speculation.
If you look at Libya going forward, and also going backwards, if you actually look at Libya's performance last year and so far this year, including the longer interruption that we had at the end of the second quarter and the start of the third quarter, all in, the performance has actually been very, very good, including recovery; including being onstream as fast as we can; including managing to keep any interruptions as short as we possibly can.
Clearly, going forward, we've got a big chunk of our Libyan production in our forecast. If it disappears, have we got contingency volumes elsewhere to cover for that? Clearly, we don't. Our Libyan production is 30,000 barrels a day for us, and clearly that's of a size that if it drops away we can't compensate for that anywhere else. If I had those volumes, I would have them onstream.
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Gerhard Roiss, OMV AG - Chairman of Executive Board and CEO [32]
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Coming to what you have seen in Romania, we are in discussion with the Government. The Government has support from IMF. The Government is aware that they have to attract a huge amount of investment in terms of Black Sea, or even if, what Jaap has said, you want to maintain production on the mainland, and, therefore, we see quite reasonable discussions with this Government to develop the country's resources.
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Haythem Rashed, Morgan Stanley - Analyst [33]
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Okay, thank you very much.
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Operator [34]
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Marc Kofler, Macquarie.
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Marc Kofler, Macquarie Research - Analyst [35]
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Two please in the upstream. Firstly, I was just wondering if you could give me an update on the status of your operations in the Yemen, particularly thinking about existing projects; then also how you now feel about the Habban development, and the subsequent phases, which were due onstream next year?
And then -- yes, and that's all thanks.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [36]
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On Yemen, I can give you an update on performance so far this year. In the first half of this year, we've produced some 6,000 barrels per day on average. It can do a bit more than that, so it hasn't been up permanently, but it's been up a very good proportion of the time.
In the fields, we've put a lot of effort into our security measures. I could go into lengthy detail, but suffice to say we put a lot of time and effort into that. And what that's allowed us to do is recommence some of the project work as well.
So we are actually in the process of constructing a central processing facilities. We are in the process of drilling development wells. We've got two rigs up and running including a working -- and a work-over rig running ESPs and completions. So we're active in the Yemeni desert, but we're taking it very slowly.
Our risk management going forward, and I think I said this in previous quarters, is crystal clear; we'll invest what we produce. So if we manage to keep our production up, we manage to lift our cargoes that generates the cash that allows us to continue our investment program. If we're not producing, clearly there's something wrong with the security of our operations in the field, then in which case we'll also slow down our expenditure. That's how we manage our risk exposure going forward.
We do, therefore, expect Yemen production to increase into the future. We are drilling wells. We are building a central processing facility. But it'll be less and it'll be slower than what we had planned when we wrote originally our strategy originally two years ago, simply because we want to manage our exposure.
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Marc Kofler, Macquarie Research - Analyst [37]
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Great, thanks. Just another upstream question as well. Just in terms of Pakistan and the new growth projects there, I was wondering if you could just give a rough outline for expectations for volumes for next year, on average.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [38]
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Yes, so what I'd like to do is give you the volumes for next year later on in this year when we've actually managed to bring them onstream. In particular, in the case of the Mehar project, we want to see our well performances before we tighten in our forecast.
There's two projects coming onstream; Latif in the third quarter, which is a field that we're partially producing today but will divert it to a plant with further capacity. So that really is an export pipeline and drilling project that should be coming onstream in the next two months.
The second project, Mehar, is a new project, where we're building a gas plant and we've drilled a couple of wells.
And really, before we tighten in on production volumes for 2014 I would like to see the initial production from those wells, so allow me another quarter before I come back to you on that one.
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Marc Kofler, Macquarie Research - Analyst [39]
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Great, thanks very much.
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Operator [40]
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Tamas Pletser, Erste Bank.
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Tamas Pletser, Erste Bank - Analyst [41]
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I've got two questions. First of all on Petrol Ofisi, can you tell us what was the performance of your Turkish subsidiary in the second quarter, and how do you see the future?
The second question is regarding your divestment policy in Refining and Marketing. Do you plan to sell any other assets than Bayernoil? I just ask it because, as I see now, the marketing performance of your Company was quite good. Basically, the consumption levels in Central and Eastern Europe is now it doesn't decline any further, so I suppose it might be a reverse later on, so I don't really see the rationale to sell marketing, as such, in the region. What is your view over here?
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Hans-Peter Floren, OMV AG - Executive Board Member, Gas and Power [42]
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Petrol Ofisi, I would comment, as being comparable to the second quarter of 2012. We are in so far a bit lower in euro terms mainly because of the different exchange rate there.
And on the divestment, you should not underestimate that we are selling a lot of plots and in the stations, which is just improving our network efficiency and effectiveness.
It's not that we are planning currently to leave a few other countries, as we have done in Bosnia and Croatia, but I wouldn't exclude that we're in the future our addressing certain areas of the marketing assets just to again improve the return of the remaining [half].
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Tamas Pletser, Erste Bank - Analyst [43]
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Okay, I think that's clear. Thank you very much.
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Operator [44]
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Alastair Syme, Citi.
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Alastair Syme, Citi - Analyst [45]
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Can I ask Jaap, just on the Romanian fuel redevelopments, because it looks like one of the big success stories of the last couple of years?
You're talking about adding 75 million barrels of reserves at $8 per barrel and a low tax regime, so on the face of it the economics look really good. What's the limiting factor in terms of trying to scale that out? Is it geology, or is it something else? And I've got a second question as well.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [46]
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On the FRDs, the reality is that these volumes are very real because they're based on what you know is in the [ground stored] volumes, to use a technical term. And there's enough production history to be able to predict what we get out of this fuel redevelopments.
But the way you see the reserves turn up is over a long period of time. So you see 75 million barrels of ultimate recovery added to the portfolio there in the projects that we currently got under execution, but they don't all turn up as a reserve booking at the end of this year because we've got the projects now under development. What you see in 1P reserves is you see these things coming out over time, long time.
We can't forget what you're doing is you're redeveloping fields that have been in production in some cases over 100 years. Therefore, what you're doing is you're getting the last couple of percents that you can squeeze out of these fields out, and you can't get those out overnight. What you're doing is you do field redevelopments; for example, you're upping gross rates, you're going to pump a lot more water, but you're only going to get a little bit of oil out of that.
Now the total oil you get out over the next 10 years may be a very significant volume, but the individual volumes that you see overnight can be quite small. So it's the recovery mechanisms that we're chasing. And the fact that we're doing it in fields that in some cases have been producing for a very long time dictate that these things come over slow incremental volumes, over a long period of time and not overnight.
The things that come overnight are a Rosebank that you bring onstream with 100,000 barrels a day and, bang, there's 20.000, if your equity stake is 20%. These things come in very small bits, over a long period of time. It makes them very sustainable as well, of course. That's the upside of that.
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Alastair Syme, Citi - Analyst [47]
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So, sorry, you're implying that the time value impacts on the return? Is that what we're taking away on that?
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [48]
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Well, there's lots of takeaways that you can take from that. First of all, what we're doing is kind of long-term future, because clearly if these volumes come in small increments over a long period of time then we can keep this up for a long period of time.
And clearly, the investments follow the same profile, yes? So if I am going to drill another 100 wells, infill wells, in a field I don't drill 100 in one year, I drill 10 this year; 10 next year; 10 the year after, etc. So also the project durations, and, therefore, the CapEx profiles, run out over a long period of time. So you can't necessarily immediately translate what I just said into return numbers because, like I said, the spend also stretches out over a long period of time.
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Alastair Syme, Citi - Analyst [49]
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Okay. And a quick question for yourself, or for David. Just on the Southern Tunisia Oil change, can you remind us what you've done with the carrying value of the Pioneer acquisition? Is it still at the same value it was bought at? Does it impact?
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [50]
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Clearly, part of the Pioneer acquisition also had producing assets in there. So we have been producing oil and gas, a bit of associated, with some particular oil in the Pioneer assets since its acquisition, so clearly there we've been writing off costs.
And also, on the exploration side we've returned one small -- I'm trying to remember which license it is now. Anyway, one small package of the license acreage that we obtained we've given back, and we've written off a little bit of value on that. But there is clearly still quite a chunk sitting there.
There's also still quite a bit of exploration left. We shot a significant size, I forget the precise dimension, 3-D seismic survey that we haven't even addressed yet. So we're not done yet, and there is clearly still significant of book value sitting. But we're also producing oil from the Pioneer assets in the south of Tunisia, already.
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Alastair Syme, Citi - Analyst [51]
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Okay, thank you very much.
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Operator [52]
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Dan Ekstein, UBS.
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Dan Ekstein, UBS - Analyst [53]
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Thank you. The first question is on the Gas and Power business. Clearly, very tough conditions; I think, David, you said it's the worst result you've recorded there. Could you talk about the extent to which the negative underlying trends have continued through into the first six weeks of this quarter? So I guess in the absence of a windfall receipt from the gas sales renegotiations, are we looking at another loss-making quarter here?
And then the second question was on Bina Bawi, specifically. Your partner in the field has said they expect a formal gas sales agreement for 10 bcm to be signed by year end between the KRG and Turkey, and has said that Bina Bawi gas is earmarked to fulfill those volumes. Your commentary sounded like things may be a bit less immediate than that, though. Could you just talk a little bit more about how quickly you think Bina Bawi gas can be brought to market? Thanks.
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [54]
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Let me take the question on the Gas and Power performance environment, and particularly as regards to what's continued so far this year.
There is no way that the supply, marketing, and trading business in a quarter such as quarter 2 and 3 can move into a profitable position with the current contract environment. And to the extent that we haven't resolved the negotiations so far, clearly we would have informed the market had we done that, then clearly at this point in time it's likely that we will produce a negative position also in Q3 at that level. I wouldn't want to go into the precise level, but I think it's also going to be a difficult year until we resolve this situation.
Just to give you an indication, the turnaround of about EUR46 million compared to last year from the supply, marketing, and trading business, if all the gas sold within the supply, marketing, and trading business had been acquired at prices more focused around the hub price then our performance would have been EUR50 million better. So I think that gives you a clear indication of where the problem lies, and clearly all our efforts are devoted towards resolving that.
Hopefully, I can say more about that later in the year.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [55]
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On Bina Bawi, clearly, we're aware of the discussions; we know about the 10 bcm number, we know about the KRG Turkey discussions. Clearly, given the size of the discovery that we think we have, we would expect Bina Bawi to feature at least in the debate.
Any statements on how quickly, I would want to hold back until we've done the appropriate work. That's been our style all along, and I want to continue in that trend. So we know what we found, or we think we know what we found, and we're currently looking at engineering studies, commercial studies to see how, if, and when that could be brought on stream; and as soon as we got that, we'll give you further news.
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Dan Ekstein, UBS - Analyst [56]
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That's fair enough. Thanks, Jaap.
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Operator [57]
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Lydia Rainforth, Barclays.
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Lydia Rainforth, Barclays - Analyst [58]
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Two questions, if I could, please. First, if I can go back to the Gas and Power business, there has been stories circulating that you may have to inject capital into the EconGas business. Can you just talk about whether that is true or not, and what sort of magnitude that would be if it is?
And then secondly, you talked about the beginning around very strong free cash flow generation and I'm just wondering what are your expectations as to how that develops? But primarily, what are your capital allocation priorities within that? Is the idea that it will go to debt repayment, dividends, or is it going back all into the business in terms of the growth profile? Thank you.
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [59]
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Lydia, just to give you a bit of background on EconGas, EconGas is a fully consolidated subsidiary, I think of which we own about 65%/66%.
We have two other core shareholders in that relationship, those being two local utilities; one called Wien Energie, the Vienna energy utility. And the surrounding area, lower Austria, there's a company called EVN, which is a listed company as well, they also own a stake in EconGas. And we jointly control the company, and that's the nature of the shareholder agreement, albeit we own the controlling shareholding.
Its primary business, EconGas, is to sell gas to optimize its performance on the basis of that in Austria and the surround markets. To the extent that it's selling gas which it's buying at Russian or Norwegian current prices and selling in a highly liquid market which is pricing off the hub, the local hubs, then clearly it's trading at a loss. And if it's trading at a loss, it's consuming its equity base.
As it was a trading company, it doesn't have a substantial equity base. And to the extent that the losses continue then clearly the possibility is that the shareholders will have to protect the company by reestablishing its equity base. Clearly, the primary target is to reduce those losses so that it stops consuming its equity, and that's what we're working on.
So it's not as though it's a sort of hidden entity within the Group, or whatever, which has got sort of huge capital needs in excess of what its trading performance generates. Its fundamental problem is its trading performance, and whether it's a subsidiary, or whether it's a branch of the parent company. Clearly, if the company's trading at a loss then it's going to be consuming capital.
Then to your point about capital priorities, we clearly have growth targets for our E&P business. Certainly, on an organic basis they can be comfortably achieved from the cash flows that we're generating, we believe.
We've also stated that as well as having targets to grow beyond those organic numbers, to improve our reserve replacement ratio and profitability of the business, we also want to maintain a progressive dividend policy, growing our dividend as our earnings increase, as well as maintaining a strong investment grade.
I think they are the three points of the triangle with which we -- through which we seek to navigate, as it were. We want to maintain the credit of the Company; we want to provide the shareholders with a growing dividend; and we want to continue to invest in the E&P business, in particular, and grow and develop it. But the idea that it's all rooted in one direction is not something we consider. It's -- that's the sort of matrix to which we work, and which we regularly update the market on where we are with all of those things.
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Lydia Rainforth, Barclays - Analyst [60]
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Great. Thank you.
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Operator [61]
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Brendan Warn, Jefferies.
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Brendan Warn, Jefferies & Co. - Analyst [62]
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I'm sorry about the follow-up question. Just in terms of your field redevelopment activities in Romania and Austria, obviously, at current oil prices you see this as attractive to invest in, but can you give us some sort of indication of breakeven price levels to achieve your cost of capital for this type of development?
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [63]
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Clearly, we've got further criteria, and all of these projects meet the (inaudible); in fact, most of them meet them quite well. But, of course, it's a huge portfolio as well, so they're wildly different individually. What you tend to see in this field redevelopments in particular is that to manage risk what you do is you slice them.
So you try the redevelopment in a small corner of the field; if that works, you take the next three corners, etc. So that's how the manage you the risk on your return. But the actual return is widely different for the different projects, it's a huge portfolio by now.
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Brendan Warn, Jefferies & Co. - Analyst [64]
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Okay. No indication of breakeven [procs] required?
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration and Production [65]
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Not today, no.
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Brendan Warn, Jefferies & Co. - Analyst [66]
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Okay. Thanks, guys.
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Operator [67]
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That was the last question. I will now hand back to David Davies for his concluding comments.
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David Davies, OMV AG - Deputy Chairman of Executive Board and CFO [68]
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Okay. Thank you for your attention, ladies and gentlemen, and your very interesting questions. As ever, are there any further questions you should contact our Investor Relations department here in Vienna; and of course the Petrom Investor Relations team in Bucharest, who can help you with more specific questions as regards Petrom.
Thanks for your time. Bye-bye.
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Operator [69]
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That concludes today's tele-conference call. A replay of the call will be available for one week. The numbers are printed on the tele-conference invitation; or alternatively, please contact OMV's Investor Relations department directly to obtain the replay numbers. Thank you.
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