Q3 2013 OMV AG Earnings Conference Call
Nov 07, 2013 AM CET
OMV.VA - OMV AG
Q3 2013 OMV AG Earnings Conference Call
Nov 07, 2013 / 10:30AM GMT
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Corporate Participants
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* David Davies
OMV AG - CFO
* Jaap Huijskes
OMV AG - Executive Board Member, Exploration & Production
* Hans-Peter Floren
OMV AG - Executive Board Member, Gas & Power
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Conference Call Participants
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* Haythem Rashed
Morgan Stanley - Analyst
* Mehdi Ennebati
Societe Generale - Analyst
* Thomas Adolff
Credit Suisse - Analyst
* Lydia Rainforth
Barclays - Analyst
* Matthew Yates
BofA Merrill Lynch - Analyst
* Matt Lofting
Nomura - Analyst
* Oleg Galbur
Raiffeisen Centrobank - Analyst
* Tamas Pletser
Erste Bank - Analyst
* Mukhtar Garadaghi
Citi - 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 Q3 2013 results. (Operator Instructions).
You should have received the presentation by email; however, if you do not have a copy of the presentation, the 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 call over to Mr. Davies. Please go ahead, Mr. Davies.
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David Davies, OMV AG - CFO [2]
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Thank you very much, and good morning, ladies and gentlemen. I'm joined today by my colleague, Jaap Huijskes from the exploration and production business, Executive Board Director; and likewise, Hans-Peter Floren, who's the Executive Board Director responsible for the gas business. And they will both give you an update on their respective businesses later in this presentation.
Let me start with the financial side of the third quarter and summarize the highlights of the quarter. Clearly, the biggest event most recently was the closing of the transaction with Statoil, which although it didn't close in the quarter, it did close shortly thereafter. We're now actually operating a big part of these assets. That transaction was closed at the end of October, although it was announced clearly during the quarter.
During the quarter, our clean CCS EBIT was EUR619 million against the previous year's EUR786 million, a decline of 21%. You can see on the bar that both E&P and refining and marketing in particular deteriorated. The background to this was the average Brent oil price being $110 per barrel, more or less the same as where we were last year.
What worked against that was that the United States dollar was weaker against the euro. What worked in particular against it, of course, was the fact that our production was quite a bit lower at 275,000 BOE per day. We were down by 34,000 barrels per day compared to the same quarter last year, but more about that in a moment.
We had lower sales volumes, mainly in Libya and the UK, in Libya, following the security difficulties; and in the UK, more particular because of the assets that we sold during the period.
Gas and power was burdened once more by negative gas margins and a lower power result. What particularly hurt the result, however, was the indicator refining margin for OMV being considerably lower than a year ago. And you can see that in particular reflected in the clean CCS EBIT of the refining and marketing business, which is down from EUR243 million to EUR98 million.
Compensating somewhat was the marketing business performance, which performed quite strongly, but clearly not enough to offset the decline in the bulk refining margins.
Positive news was in the cash flow, which remained strong during the third quarter and enabled us to reduce our gearing further from 28% last year down to 12%.
And, in fact, the measures that we've taken to improve our cash flow over the last two years was such that they've broadly allowed us to finance the acquisition that we've just made with Statoil from our own cash flow. And we will not see our debt-to-equity ratio go above the target level of 30% that we have as a Group.
On the next page, you see the economic environment graphically represented in terms of what we encountered during the last quarter. As I mentioned earlier, the oil price has been relatively stable; in fact, it's exactly the same quarter 3 this year as it was last year.
In euro terms, however, it has deteriorated; you can see the dollar's been weakening right through this period from $1.25 a year ago to where we are now at $1.32.
The chart in the middle shows two quite interesting developments. The first is the coming together, as it were, of the border contract gas prices with the market price, as referenced here by the price quoted on the Central European Gas Hub here in Austria.
The gap has almost disappeared now. And that's obviously good news and reflects the fact that the big gas importers have more or less resolved their differences with Gazprom. And we remain in discussion with them and are quite confident of an acceptable outcome. But unfortunately, we haven't been able to consummate it just yet.
Also of interest on this middle bar is the change in the Romanian gas price. You can see that there's been a number of small increases implemented during the course of the year, but those small increases have added up in total now to a position where the realized price for the domestic producers is now 40% higher than it was a year earlier.
There's a schedule of further increases proposed for next year which would, if they were all implemented, actually bring the price in Romania at the -- up to the level that you see on the two lines above. But you can understand that that represents quite a significant pace of increases for the Romanian market during the next 12 months. So clearly, that's not without its risks. But we've seen, as I say, a 40% increase in the price over the last 12 months for the industrial users.
On the right-hand side, unfortunately, quite a graphic representation of what's been happening to refining margins now for the fifth quarter in a row.
They're now actually lower than they were a year earlier. We're at $1.20 per barrel in terms of our reference indicator margin, compared to $5.30 last year. And that clearly has had quite a significant impact on the performance of the refining and marketing business as you would expect.
Coming to the next page, clean CCS net income of EUR263 million compares to EUR317 million a year earlier; on the right-hand side, some of the things that have been impacting that.
Our financial result, at minus EUR66 million improved compared to the same quarter last year. This is predominantly due to foreign exchange, expenses and, in particular, interest expenses being lower than last year as we've been paying off debt which has been more expensive having been taken up some years ago, as that matured or was expired. Then clearly, our interest burden has come down and clearly, our strong cash flow has enabled us to do that.
The effective tax rate in the quarter was quite somewhat lower than last year. This unfortunately, however, is due to the Libyan production not being as strong as it was a year ago and the very high tax rates in Libya obviously heightened last year's tax charge, but the lack of production meant that this year's tax charge was lower.
What also helped this relatively low tax charge was a very strong performance from Petrom within our overall business. In fact, if you look at the impact from minorities and hybrid capital owners, the biggest position in here, in fact, is the removal of the 49% stake of Petrom that we do not own.
And you can see how much higher it is than last year. Last year it was minus EUR90 million, this year minus EUR147 million. That is a reflection of the fact that Petrom put in a much stronger performance this year as production has been relatively stable, the oil prices in dollar terms have been relatively stable as well.
What also helped is the fact that last year, of course, we had a pretty substantial refinery stop, which complicated also the results of the E&P business, because there was quite a substantial amount of crude inventory on which we hadn't booked the profits last year. So all of that has turned around and Petrom, in fact, closed in with a very big quarter in the quarter just ended.
Clean CCS EBIT, as we've already discussed, was down by 21% and the clean CCS net income that we reported, minus 17% compared to last year.
What affects the clean result, of course, is shown on the next chart; page 5, special items and the current cost of supply effect. The current cost of supply gains were EUR53 million. You need to add that back to the clean CCS EBIT to get you up towards the reported EBIT of EUR576 million. But unfortunately, what you also need to do is reduce it by EUR95 million relating to the unscheduled clean expenses.
They predominantly relate to two items of unscheduled depreciation. The biggest one is the write-off of the oil part of the investments that we've made in Bina Bawi, that was approximately EUR48 million. And an amount of about EUR38 million relates to certain provisions we've taken in Austria for losses we've been making on a number of highway stations where clearly the rent is very high. And as such, it's not been possible to hit the targets that we expected to and, in consequence, we've taken a provision against it.
Coming to the cash flow, we've had this quite complicated chart for two quarters now, and this is because the inclusion and then removal of the one-off gain that we made on selling the strategic inventory reserves in quarter 1 is rather difficult to clearly present when you follow the IFRS cash flow format. But let me just take you through it once again.
The net income year to date of EUR1,669 million includes the gain of over EUR400 million from the sale of the strategic reserves. We then have to remove that again under the other column, there's minus EUR571 million, so that we can then reintroduce it when it comes to cash inflow from divestment proceeds and it's included in the EUR802 million there.
The total cash flow from that transaction being over EUR600 million, which coupled with a number of R&M asset disposals that we've done, takes the total cash inflow from divestment proceeds up to over EUR800 million.
The most important messages here I guess are that the EUR1.9 billion of investments that we've made as well as the EUR625 million dividend that we've been paid, have been absorbed within the cash flow that we've generated. And, in fact, have still allowed us to generate a free cash flow after dividends of EUR1.9 billion in the first nine months. A lot of which has come clearly from the change in net working capital, which is down by over EUR1 billion compared to the same time last year.
CapEx and EBITDA is on the next page. The CapEx, so far this year, was EUR1.9 million, EUR1,949 million; our guidance for the full year was EUR2.8 billion, and we remain on track with that guidance broadly. This, of course, excludes the investment that we've made recently in buying the assets from Statoil. But on an organic basis, before that deal, the EUR2.8 billion broadly remains intact.
The key investments we've been making during the year will continue, the Petrom drilling, the workovers and field redevelopments. Clearly now in Norway, we're already active in Aasta Hansteen and Edvard Grieg, that will now roll out given the other assets that we've acquired in Norway. Field redevelopment in Austria is also a part, as well as the Schiehallion and Rosebank field redevelopments in the United Kingdom.
Our total EBITDA against the CapEx of EUR1.9 billion is EUR3.9 billion, which is further reflective of the fact that our cash flow was so strong. You see a particularly strong EBITDA from the refining and marketing business compared to its CapEx, this [EUR1,142 million], however, does contain the EUR440 million one-time result from the sale of the Austrian stockholding business which was closed in quarter 1.
On the next chart, what we attempt to do is give you some indication of where we think we're headed as a Group following the acquisition of the assets from Statoil. That clearly has changed the profile of the Group quite substantially.
It's given us a portfolio now which is adequate to actually meet our medium term targets, both in terms of overall production growth, up to 400,000 boe per day in 2016, as well as to achieve the 100% reserve replacement ratio. These are targets which you will recall we actually gave back in 2011.
This year's production is now unlikely to meet the same level as last year, and that was the previous guidance that we gave. Clearly, the events of the third quarter have proven particularly difficult to compensate, and by this I obviously mean the stop of production in Libya, and to a lesser degree in Yemen.
Libya is still out of production, although it did come back in the meantime. It's gone out again in the last week or so, so it clearly is a very difficult situation to predict.
We have reflected that to a certain extent in our guidance of 2014. Given the uncertainty in Libya in particular, our guidance for next year's production, which obviously includes the acquired production now in Norway, is to produce next year something between 320,000 and 340,000 [barrels of oil equivalent per day].
We've clearly taken here an estimate of production interruptions in Libya within this number. Clearly, if there are not any productions in Libya, we would be able to produce more than this, hope to be able to produce more than this. Clearly, if we have an even greater difficulty in Libya, then the challenge on this is on the down side.
That's the only reason that we probably are producing less next year than you perhaps otherwise would have been expecting, because the security situation in Libya is just so difficult to predict. Of course, in terms of our production, when it's fully on stream our production in Libya would actually represent something like 10% of our production today, so it is very significant.
You will recall, however, when we gave this first guidance for 2016 back in 2011, the status then prevailing in Libya was that we were having no production at all either in Libya, or in Yemen for that matter.
It started to come on stream back towards the end of that year and into the year thereafter. But when we gave this guidance, our assumption was that we would have Libya and Yemen back on stream. That was the case for several quarters, now, unfortunately, the situation has become a bit more complex.
So for 2014, we're being a little bit more cautious. Our guidance for 2016, however, at 400,000 [barrels of oil equivalent per day], the assumption is once again that things will have stabilized and then we'll be back on stream.
As our production grows up to the 400,000 [barrels of oil equivalent per day] by 2016, we would expect similarly our net income to also show the benefits of this additional production, and our dividend payout ratio of 30% will be something that we will continue with, which should enable us to increase our dividend in line with that going forward.
Going forward, also clearly we now have a much bigger project development funnel, and that clearly is going to take more CapEx to actually bring it on stream. So our guidance now has increased such that we expect on average over the next three years to be spending something like EUR3.9 billion on a gross basis, so there's no disposal proceeds included in this.
But we do expect, however, through the continuation of the R&M program, as well as a number of portfolio realignments in the E&P business, to generate proceeds from asset disposals and portfolio optimization, which together with the cash flow we expect to generate over the next three years, would mean we'd be able to execute this program and stay comfortably within our gearing ratio target, as well as increasing the dividend in line with an increasing net income.
The Group tax rate on the other hand is expected to increase. This is perfectly logical when you think that we've gone now more heavily into Norway, and the tax rate in Norway clearly is above the Group average.
We would expect on that basis that the Group tax rate would start to move up towards a 40% level, although this again is contingent on exactly what happens in Libya given the impact that that can have on our tax rate.
I'm sure you'll have questions about that when the call concludes, but we felt it important having just changed quite significantly the portfolio and profile of the business that we gave you some more clarity in terms of what that now means for our medium-term goals.
Coming to E&P and looking at the recently published results. You look at the reconciliation compared to the same quarter last year and the previous quarter this year.
Compared to the previous quarter, this year what happened was that the realized oil price was higher. The oil price did, in fact, in dollar terms, increase quarter on quarter, Q2 to Q3. It was compensated somewhat by the weakening dollar.
What compensated it more significantly, however, was the loss of production that we had compared to quarter 2 and that's wiped out the benefit of the higher realization. And with a small EUR40 million other adjustment that brings us to a profit which is broadly in line with the previous quarter.
Looking now to last year, however, the movements are more significant. We had improved realizations. The dollar price was the same for crude. The euro price was worse because of the stronger euro against the dollar.
What's really reflected here in this realization column is this increasing natural gas price in Romania, which I talked about earlier, which has obviously come through and has been helpful here.
What have been anything other than helpful, of course, has been the loss in production compared to the same period last year, which has cost us something like EUR187 million.
Positive compared to the same quarter last year is a lower level of exploration expenses. And this is in particular due to provisions which we booked last year in the Kurdish Republic of Iraq. In particular the write-off of our Mala Omar and Shorish investments, which together amounted to the EUR100 million improvement that you see here. That produces a clean CCS EBIT for the quarter of EUR578 million.
If you come to the next page, you see what's been happening to our production in E&P as a whole. It had been declining. Quarter 1 started relatively strongly and even after quarter 2, we still felt that our guidance for a similar production to last year's 303,000 [barrels of oil equivalent per day] was going to be achievable.
Clearly, the events of quarter 3, however, have put paid to that hope and in particular, the issues in Libya and Yemen and their impact on our overall production, which is down by 7%.
We've also had one or two other issues in New Zealand. In Maari, we actually started a major maintenance program somewhat earlier than we'd expected. That should come back on stream in the beginning of 2014, but it's obviously also contributed to the slightly lower production that we've seen so far this year.
That lower production has also fed through into OpEx, as you would expect, which on a per-barrel basis has increased slightly, up from $12.64 the previous quarter to $13.88. And that compares to $12.10 per barrel a year ago.
Looking at Petrom, a more sanguine position actually. Our production has remained really quite stable over this period. Our production in quarter 3 was the same as last year, 182,000 barrels a day. Year-to-date it's actually slightly higher. This, of course, is very encouraging and in particular, this overall target of maintaining our production level in the mature areas of Austria and Romania is critical to achieving our strategic goals. And clearly this is very encouraging that we've been able to achieve this in Petrom.
OpEx is, however, up very slightly. This is mostly due to a number of higher service costs, in particular in the Kazak activities that they have. This being Petrom's only overseas operation.
I come now to gas and power. Gas and power unfortunately had a difficult second quarter and reported a loss following also a loss in the second quarter.
You can see we've had, in particular, difficulties in the supply, marketing and trading business and that's been the subject of the negotiations with Gazprom, which unfortunately are not yet concluded. When they are concluded we hope the benefits of those, if successfully concluded, to be backdated to April 1 this year. So that should turn around much of the losses that we've had from the supply, marketing and trading side in particular.
Gas logistics has also suffered from very low summer/winter spread, which has impacted the performance, in particular of the storage business.
Of course, the spark spreads in both Romania and Turkey are at disappointing levels, which has further impacted the performance of the business, such as we were EUR10 million worse on the power side than we had been in the same period. Overall, that produces a loss for the business division of EUR15 million.
Some KPIs in the gas and power business. The level of gas sale volumes has come down quite significantly. The very tight margin situation in Europe has meant that some of the trading business that we were active in is now not as attractive as it was previously. As a consequence, that's been reduced and that in particular is the reason for the lower level of gas sales volumes.
Net electrical output now that Samsun in Turkey is fully on stream, both plants are fully operating, is higher than the previous year and much higher than the previous quarter, which is obviously particularly badly impacted by the Brazi plant going through a one-month shutdown in Romania.
That brings me then to refining and marketing. Our clean CCS EBIT is down from EUR243 million to EUR98 million. You can see it's almost entirely explained by the lower level of fuel margins. EUR156 million of the decline is due to this position.
What's been happening in refining margins, I think I explained quite clearly when I showed you the graph of the trend of refining margins over the last five quarters.
Petrochemicals and marketing, on the other hand, have performed relatively strongly, but clearly they were nowhere near able to compensate what's been happening on the bulk fuel refining margin situation.
The next slide shows our refining and marketing -- rather, our refining utilization rate, which at 90% is actually higher -- sorry, at 90% in the East is a lot higher than where we were last year. Last year, we did have a plant outage in the Petrobrazi refinery in Romania. Our Western refineries at 94% are higher than the industry average, but down somewhat on where we were a year ago.
The number of gas stations we have, you can see on the left-hand scale, the bottom left-hand scale, has been declining. That's not only due to the disposals of countries such as Croatia and Bosnia during this period, but also due to some portfolio rationalization, both in Austria and in Turkey, which has reduced the number of our outlets such that we're down by about 260 compared to where we were a year ago.
Marketing sales volumes increased in quarter 3 compared to the previous two quarters, as one would expect as the driving season kicks in. At 5.92 million tonnes of marketed volumes were actually slightly lower than where we were last year, which is an indication that efficiency of our reduced number of gas stations is actually improving.
Borealis pulled in a relatively good quarter, helped as ever of course, from the very strong performance of the Borouge joint venture with ADNOC in Abu Dhabi.
And the next bit just shows you a couple of key financial indicators. Our gearing ratio, which we're very proud, has been declining consistently over this period. We're now 16 percentage points lower than we were a year ago. That is clearly going to change in quarter 4 following the investment with Statoil. It's also fair to say that our working capital situation is typically more negative in quarter 4 as we prepay customs duties in Germany.
And of course in the gas and power business, we're increasing stored volumes and we have a lot of receivables given the uptick in sales that one always has in the winter quarter in the gas business. So this will turn around somewhat in quarter 4, but we still expect to finish the year below our long-term gearing ratio target of 30% despite this very strong investment that we've just made.
And then finally to the outlook, what we expect for the balance of the year. Our oil price, we can say with some confidence given where we are now, that we will stay above $100 on average.
The European gas market is clearly increasingly determined by the Hub market prices rather than the contract prices. We hope very shortly that our contracts will now largely reflect that reality as well.
The refining margins will certainly be lower than they were during 2012.
Business outlook, the CapEx will be around the EUR2.8 billion excluding clearly the Statoil asset acquisition and round about three-quarters of that is going to be in E&P.
The energize OMV program, which had done so much to help us improve our performance, in particular on the cash flow side, will be continued.
Our production on the other hand is expected to come now somewhat below the level of 2012, and this depends very much on just how much production we end up losing now from Libya given the current situation there.
Our E&P, exploration and appraisal expenditure is going to be around about the EUR700 million level. The Gazprom discussions I've already mentioned. The Petrobrazi refinery modernization will continue and should be completed next year.
And the R&M divestment program, of which the biggest outstanding step remains the disposal of the stake in the Bayernoil Refinery, is a program that will be continued and where we expect to hit the targets of completing that program by 2014 on time.
At that, I'll hand over to Jaap, who can give you an update on what's been happening in exploration and production. Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [3]
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Thanks, David. Production has already been mentioned a couple of times, of course, a disappointing third quarter. Yemen, Libya mentioned. Really have to wait to see what happens for the rest of the year.
On the repair and maintenance work that we're doing in New Zealand, we do expect that work to complete before the end of the year, but reconnection and startup of the vessel is, of course, weather dependent. So weather permitting, they'll be on stream right about at the end of the year or it may slip into early next year, again, depending on what conditions we've got out there.
And, of course, contribution to our production shortfall in the third quarter, there's a key gas well in Austria which, unfortunately, is watering out and we need to find replacement things to do for that particular lost production and that's going to take some time. Altogether, clearly disappointing production.
The fourth quarter, Yemen and Libya are the big certainties. As I mentioned, New Zealand's coming back. And we've got a couple of projects coming on stream in the fourth quarter. I'll mention those when we come through the project highlights.
We then look at the highlights for E&P in the quarter. Clearly, the big one for Q3 is the signing of the acquisition and then the closing of the acquisition which happened just after the quarter, of course, happened at the end of October.
As of November 1, we are now the owner of the four assets or the four shares of assets that we acquired from Statoil. That includes, therefore, producing equity oil in Norway and it includes producing equity gas in Norway, which we're exporting from Norway into Germany, where our integrated gas and power division picks it up and sells that gas in the German market. Early days, but it has started on November 1.
Closing happened, as I said, on October 31. That's earlier than we projected when we announced the acquisition 2.5 months ago. And therefore also, the balancing payment that we made over and above the acquisition price of $2.65 billion is a lot smaller than what we projected at the time of the announcement. We had then projected about $0.5 billion and right now, that's effectively nothing.
Production, as I said, has started in our books on November 1 and the contribution is Gullfaks. So it is the 19% of Gullfaks that we acquired that's now contributing to production. In barrel oil equivalent terms, that's about 25,000 barrels a day, which if you average it out over the year, will help us to the tune of about 4,000 barrels a day for the year average.
Going forwards, the key highlights, and again, I'll come back to this when we talk about the actual projects. The next bit of pro-action is going to come from Gudrun. The picture on slide 19 is actually a little bit out of date. Gudrun is now sitting on its jacket and is going through the final hook-up phase and will start up early in 2014 and then ramp up during the course of the year.
That will then contribute to our production in 2014, culminating in about 40,000 barrels a day towards the end of 2014 from Gudrun and Gullfaks combined.
In the UK, of course, production will take somewhat longer. We've doubled up in Schiehallion. That's going through its redevelopment phase. Again, that picture is slightly out of date. The current picture of Schiehallion actually looks like a recognizable vessel and come the end of November, it will even be floating off the yard in Korea and that will be starting up production somewhere in 2016; that then is the next step. Rosebank, clearly slightly later than that again.
If you look at some of the projects in the wider portfolio, again you've seen this slide before. The detail is also available, I think, on the web. So the pipeline, our project pipeline now has got 1.1 billion barrels of oil under appraisal and development in it, a still growing volume.
The biggest step, of course, coming from the [Titan] acquisition. Bigger share on Rosebank, bigger share in Schiehallion and Gudrun as the new projects, all adding up to that total 1.1 billion barrels.
Other changes during the quarter is that we took FRD on another three field redevelopments in Romania. They turn up twice. We got second phases of those projects already on the map. You see those on the little picture on slide 30. It's phase 1 of those three projects we've taken FRD on and that's generally how these field redevelopments go.
If you look at redeveloping the entire fields, we do have commit to redeveloping the entire fields. You do a phase 1 and if that works then you take -- you pull the trigger on phase 2.
Looking forward, key events coming up, one more towards the end of this year. We're still aiming to take FRD on the South Tunisian gas development -- it says oil development here that should be gas -- by the end of 2013. And then somewhere in the first half of 2014, we expect to take FRD on Zidane, the second gas development in Norway and Rosebank probably in 2014 sometime as well.
So a busy project funnel on slide 21; you see the usual detailed update of each of the projects. We promised to keep you up to date on that and that's exactly what we're doing.
So in here, you see the Romania FRD number changed; that reflects the fact we've taken FRD on three more projects. Phoenix Istria which is offshore in Romania. We will do infill drilling and a little bit of exploration near field as well. Shallow water, not completely unrelated to the deep water exploration we do and the third project there is phase 1 of the Tazlau redevelopment.
The other changes in this table already mentioned, is the fact that we've doubled up in Schiehallion and in the Rosebank, we now reflect 50%. Our guidance there hasn't changed. We're now at 50%. We do aim to sell on between 10% and 20% of that equity around about the time that Rosebank takes its FRD decision.
Those are the key changes in the projects under development. If you then go to slide 22, I think I just gave you the wrong number. I'm on slide 22 now.
The key change on the projects we've got under appraisal is related to Bina Bawi. You already heard David Davies mention that this quarter we'd taken an unscheduled depreciation or with other words a write-off on the liquids part of the investment in Bina Bawi.
When we originally explored Bina Bawi, we made a fairly significant, we thought at the time, oil discovery. We've then been appraising that oil discovery and, effectively, what's happened with the appraisal wells is that the amount of volume that we thought we had has been reducing. But in the deeper layers, we've found a very significant amount of gas.
So right now where we're at is that we got a very small oil development which is no longer as economic as we thought it would be and therefore we've taken -- we've depreciated the investment we've done on the liquid part of Bina Bawi development.
On the gas part, we're still finishing the last well called Bina Bawi 6, the last of the currently planned appraisal and we're looking together with our partners at ways of commercializing the Bina Bawi gas.
As soon as we are convinced that we've got a commercial case, then we'll also, obviously, come out and give you some projections on the volumes we got there and the development costs that we might incur and when something like that might come on stream. But for now, we'll hold off until we're convinced we've got a commercial case.
If I then go to the next slide, the exploration update. Key activities there in the third quarter, starting with seismic in the Black Sea. You may remember that in the first half this year, we finished shooting seismic in the Neptune acreage, the Romanian deep water acreage.
We've taken that same vessel and we're now shooting seismic in the Bulgarian deep water acreage and at the end of Q3, so this is out of date obviously, we were 60% finished. We're aiming to finish this before the end of the year and are making good progress, given the good weather conditions.
On the acreage side, you've seen the announcement that we've entered Madagascar. We've long expressed the wish to enter oil-prone exportation acreage in sub-Saharan Africa and this is a first step. Long-term gain; earliest we would drill there at 2015. We may actually choose to shoot some additional seismic and push that slightly further out. So clearly, part of a long-term gain, but nevertheless, a first step into sub-Saharan Africa. Clearly into oil-proven acreage, so an encouraging first step.
Also announced at the time of the acquisition from Statoil was that there was a site agreement to farm into up to 11 blocks of exploration acreage held by Statoil. That has finished, so together with the closing of the acquisition, we've also signed up for exploration acreage. Some of which is still subject to government approvals, particularly in the Faroe Isles, but we expect that will be forthcoming.
We have in total not farmed into 11 blocks. We've farmed into 7 blocks and that was a matter of choice; 4 of the blocks we didn't particularly like. What we did like is 5 exploration licenses in the Faroe Isles, the details of which have been released in a press release earlier this week.
And on the Norwegian continental shelf, we farmed into two licenses just to the south of the Edvard Grieg development. And in there is the Lunar 2 discovery, which will require further appraisal, but if successful that's clearly a candidate for tieback to the Edvard Grieg development. So obviously, we did like that acreage a lot.
On the drilling side, you've seen the announcement of the Wisting exploration discovery in the Barents Sea. More recently, we drilled -- we declared the results of the second well, called Wisting Main, which was unfortunately dry.
Now, the results of that well are completely unrelated to the discovery made in the first of the two Wisting wells. The first of the two Wisting wells started at quite a shallow horizon and the success we declared there gave you some volumes. The drilled segment, 6,260 million barrels and in the block, the license together, we estimate some 200 million to 500 million barrels oil recovery. Nice light oil.
None of that's changed with the drilling of the second well, that second well was drilled off structure for the shallow horizon, and with targeting a deeper exploration target. We have found some oil shows there but, unfortunately, no filled reservoir and, therefore, that is effectively a dry well.
As I said, it does not change our view on the success of the first Wisting exploration well at all. Rather, the contrary. We are busy planning appraisal of that discovery, hopefully next year, but that's really depending on access to rigs for that particular part of the world.
Two further successes during the quarter, both of them you've seen in releases. Sofiya in Pakistan is a gas condensate discovery to the north of our Mehar project and the Mehar project is one of the two Pakistan projects that we expect to bring on stream before the end of the year.
This is, clearly, a tie back candidate to that, so not a massive volume, not one of the high-impact wells we were drilling, but a nice upside to the Mehar project that we're bringing on stream.
Then in Libya, you saw the announcement of an exploration discovery as well. Clearly, given the current security issues in Libya, that does a lot for our relationship with the NSE. We're out there, we're doing work and we're finding hydrocarbons, but it doesn't change the fact that the security situation has an impact on our production performance there.
On the table on this slide, you see the actual high-impact wells that we drilled. Since we started giving you this table with high-impact wells, so this is the first time we give you a summary table with the actual results. Flipping through them very quickly, because we have in the quarters talked about each of these wells.
Cambo-5 was an appraisal well but also targeting a deeper horizon. That's why it's listed as an exploration well/appraisal well. That was dry, no hydrocarbons in deeper horizon.
Bianchi-1 was a major extension to the Zola gas discovery in Australia and was successful.
Bina Bawi 4&5, as I mentioned, confirmed very significant amount of gas, albeit sour gas in Bina Bawi. And we're looking at ways of commercializing that.
Bonna E&I operated in the Barents Sea was dry. Wisting Central, as mentioned, a significant success for us, followed up with Wisting Main, which was then dry.
On the next slide, you see the look ahead high-impact wells and again, the high-impact well, we define as more than 25 million barrels oil equivalent net to OMV; net, not gross.
A couple of new wells on there. Clearly, the wells that we've finished have been taken off this graph now and we'll continue to do this in future quarters, but four new wells on there as well.
So just running through those; Atlantis is a new well in the Barents Sea. Atlantis and Apollo are, effectively, similar wells to the Wisting success wells, which will be operated by Statoil. We are participants in these blocks, and they're a little bit to the north of our Wisting discovery well.
Jupiter is a completely separate exploration target in, again, the Barents Sea, operated by ourselves.
So Atlantis and Jupiter are new on this list and, towards the bottom, two new wells turning up, Sula-Stelkur, a well in the Faroe Islands. We were already part of this acreage. We were expecting it would be drilled in 2015, that's why it's now the first time you see this well. We now expect this to be drilled in 2014. And our equity in this acreage has increased to 30%; part of the farm-in to the Statoil exploration acreage.
And finally, Stripfing T is a well that we will be drilling here in the Vienna Basin; conventional, albeit deep gas exploration target here in the Vienna Basin.
Let me wrap up with a part of the slide that David already showed you. So he showed you this slide, completed wells with the capital guidance in the midterm.
Production guidance, nothing new here, and David already talked about why we've got a range on our 2014 targets, really keeping a little bit of a wraparound the arm for the security situation in Yemen and Libya, particularly.
Our organic portfolio, we still project to contribute to a total 350,000 barrels a day in 2016. But clearly, Libya and Yemen are part of that and will have to be producing to hit that.
A new target on here is that we project to keep Romania and Austria production combined; flat in that 200,000 barrel oil equivalent to 210,000 barrel oil equivalent a day range.
Previous commitment was out to 2014, so clearly, what you're seeing here is confidence coming in on the success of our strategy of doing these field redevelopments, eking out additional recovery rates, which in particular in Romania is now -- is successful.
You'll see that in the production numbers for the year to date, but also I'm confident at the end of the year, and that's led to us being confident enough to push that stable production out for another two years.
Exploration and appraisal expenditures, we project keep flat at EUR700 million, already mentioned.
And reserves replacement rate, we're now confident we've got the portfolio to be over 100% reserves replacement rate three-year average by the time we get to 2016.
With that, I'll hand over to Hans-Peter. Thank you.
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Hans-Peter Floren, OMV AG - Executive Board Member, Gas & Power [4]
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Hello to everybody. Good afternoon.
Gas and power is operating in a very challenging European gas market environment and that is due to contractual oversupply, and we can expect that oversupply to remain.
What you can see from page 27 is that demand went down from 2010 to 2012. The forecasted gas demand for 2013 is slightly higher than 2012 due to lower than average temperature in the first half of the year. But, unfortunately, gas to power demand is down and expected to remain very, very weak.
When it comes to the midterm gas demand, it's stagnating. Will increase only insignificantly to 2020. The only growth area of significance is Turkey.
Page 28, the consequences of oversupply to market are threefold. One consequence is, in combination with structural changes, new market models, more transparency in the market, the decoupling of gas prices from oil indexation in long-term contracts. And this leads to negative margins on long-term oil-linked contracts.
A second aspect is the Hub prices in Europe converge. That is because the markets are open, the markets are transparent and they are connected via powerful bidirectional cross-border capacities. And you can see from the slide that the European market is now practically acting like one big hub with different locations with converging prices. And thus, it causes substantially lower regional arbitrage potential.
The third aspect, as markets are sufficiently supplied, the value of flexibility decreased. This is reflected by the drop in summer-winter spreads by approximately 65% compared to 2010.
This situation affects when we're into areas of the gas phase business where especially EconGas can only partially recover storage costs in the logistics -- partially recover storage costs. And the second area is logistics, because they see weak demand for storage capacities at lower prices.
Page 29. A strong supply position in such a competitive market environment is essential. And our supply is built on two pillars. One pillar is long-term supply contracts. We have successfully renegotiated, as already mentioned by David, our long-term gas supply contract with Statoil.
The agreement now reflects the Northwestern European market changes by being priced towards a relevant gas market indices. And the renegotiations with Gazprom are ongoing. I would like to call them well progressed but we haven't managed to finalize them formally.
The second pillar, equity gas gets more and more important, gets more and more into the focus. As we expect, a significant increase based on the two growth regions in Europe, the North and Norwegian Seas on the one hand, and the Black Sea area on the other hand.
I think I would like to flip to page 30 to explain that a little bit more in detail. The recent Statoil asset acquisition, which was closed on October 31, as already mentioned by Jaap, contributes to our increasing integrated gas position.
The first volumes have already been marketed since November 1 and significant volumes will be produced and marketed in the course of 2014.
In future, we can expect additional volumes from Aasta Hansteen and Zidane. We further expect approximately 3 bcm from the Black Sea to add to our supply portfolio in an integrated way at the end of this decade.
Gas power, slide 31. This -- the power segment is burdened very much by low spark spreads. Looking to Turkey, the low spark spreads are driven by weaker power demand. The short-term outlook remains very challenging. Growth is moderate and meets with substantial capacity additions, approximately 4 gigawatts in 2013. And thus, reducing market tightness and also reducing the spark spreads.
In the midterm, the Turkish market is expected to grow and the competitive advantage of Samsun, the high efficiency CCCP is clearly an upside. We are well positioned to meet requirements of the balancing market due to the flexibility, which is at the leading levels for the Turkish market.
So, all in all, gas and power is operating in a very challenging market environment and will focus on two strategic priorities. As you know, a lot of our past investment decisions were taken at a time when gas market forecasts were much more optimistic. And to increase our profitability now, we are therefore evaluating options to optimize our asset portfolio; to make our capacity commitments more fit to what we actually need in today's and tomorrow's market.
When it comes to future growth potential that is, of course, then to best monetize our gas portfolio, especially our equity gas from the North Sea and the Black Sea and for this aim, we are in the course of identifying the best markets and the assets needed to successfully act in this market. We will optimize the value of our integrated supply portfolio including our existing long-term contracts.
So, in this market environment, we have a strong belief that integrated gas, pushing more and more for further integration, is the right answer to the challenges we are facing.
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David Davies, OMV AG - CFO [5]
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Thank you Jaap and Hans-Peter. That concludes the presentation from our side and as ever, we'll hand you now back to the moderator to handle your questions.
Thank you very much.
==============================
Questions and Answers
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Operator [1]
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(Operator Instructions). Haythem Rashed, Morgan Stanley, London.
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Haythem Rashed, Morgan Stanley - Analyst [2]
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I'd like to ask two questions please. Firstly just on your CapEx guidance for the medium term, if you could -- it would be great if you'd tell us a little bit about the headroom that you feel you've got built into the framework that you have in place now for any potential additional spend if you decide to pursue any other reinvestment opportunities either in the upstream or elsewhere?
What sort of headroom do you have in place and also what would you ultimately prioritize? If you found that you did need to spend more, would it be dividends over gearing or disposals, what sort of -- how does that sit in the pecking order?
Second question I had is just on your -- just an update on the divestment plans, specifically around Bayernoil, but also with the medium-term guidance that you have in place, do you now have a different disposal strategy in place? Is it additional to the EUR1 billion that you've talked about previously or is it just including the downstream divestments you've talked about? Thank you.
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David Davies, OMV AG - CFO [3]
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Let me take that, firstly on the headroom, we're not actually looking for headroom for any further major investments. We actually now have a portfolio where we can work and achieve our long-term strategic aims or medium-term strategic aims out to 2016, which was the only target that we'd set ourselves when we published the strategy first in 2011.
So I think our balance sheet is strong. Our portfolio is substantially richer than it was three years ago -- two years ago, rather, when we made -- when we announced that strategy. And I think quite frankly now, our primary aim now is to work it through and actually get the development.
I think you may see some portfolio optimization as you would always do in any business, but our portfolio now is much richer than it was going back two years and our primary target now is to work it through and deliver.
Our gearing you talked about if we needed more headroom, which would come first as it were. As I say, we're not looking for further headroom. Our gearing -- assuming of course, that the oil price remains at broadly similar levels to where we are is -- we'll remain in good shape as we execute this program and we're certainly not expecting to -- need to see our balance sheet stretch for us to be able to accommodate it.
So we're really not expecting either gearing or dividends to be something that we'd even put on the agenda, let alone how to get into discussions about prioritizing them.
With our midterm guidance, we also announced that as we expect our net income to rise, our cash flow and our gearing, strength of our balance sheet will allow our dividend to rise with that as well and that will also be something which we see as a reasonable priority, which our shareholders would expect from us.
The only thing that's changed on the disposal program, of course, is as Jaap mentioned, that we would be looking to dispose of part of our Rosebank share now. With 50%, it probably is a bit rich for us. And when we believe the time is right in terms of value optimization, we would certainly look at that, so that's the only real change on the program.
Other than that, the program is really around the execution of the downstream disposal program and as I said the biggest asset still to be closed in that is the Bayernoil stake transaction where we are in negotiation.
Back in 2011, we gave ourselves a timescale of 2014 to achieve that and we'd stick with that.
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Haythem Rashed, Morgan Stanley - Analyst [4]
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Thank you. That's very clear.
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Operator [5]
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Mehdi Ennebati, Societe Generale, Paris.
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Mehdi Ennebati, Societe Generale - Analyst [6]
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Two questions as well, the first one regarding the cash generation per barrel in Norway. In 2014, you will be able to deduct from your Norwegian taxes part of your CapEx for Edvard Grieg and Aasta Hansteen, plus as well your exploration expenditures in this country.
So it seems this might have a material impact on your Norwegian effective tax rate. So could you please guide us on that and then maybe guide us on the operating cash generation per barrel you expect from Norway in 2014 please?
And the second question is regarding Libya. Could you just please remind us your average year-to-date production from this country? And which hypothesis did you take in your 2014 guidance from -- regarding Libyan production? Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [7]
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On the tax position in Norway, I don't think we've given any specific guidance on cash per barrel and I don't think we're going to do it now. Suffice to say that clearly, the tax benefit of having this production in parallel to the investment profile is something that we're keenly aware of and was part of our evaluation of the value of the deal in the first place.
If you then look at Libya, our Libya production to date, this is at the end of Q3, it's actually dropping since that because in October, it's been a particularly bad month in Libya again, but was at about 27,000 barrels a day. But the big drop-off has been in Q3 and is continuing in Q4, the first half of that product of the year has actually been relatively stable and good in both Libya and Yemen; the trouble has started in the second half of the year.
So that average year-to-date is over-complementary one could say. It reflects a good first half of the year and then absolutely rubbish second half of the year. Just to illustrate that, this third quarter production was 20,000 barrels a day. So that basically illustrates a good first half, rubbish second half of the year and it's not improving right now.
What we've taken in the guidance for -- or the midterm guidance and the 2014 number, clearly the range that we've put in there reflects continued uncertainty around our Libya and Yemen production contribution. Suffice to say, if they're completely out, we'll probably be dropping at the bottom of that range and if they're completely in, we'll pop above the top of that range. We've taken a relatively conservative assumption, thinking that we'll end up somewhere in that 320,000 barrels of oil equivalent per day to 340,000 barrels of oil equivalent per day range.
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David Davies, OMV AG - CFO [8]
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I think all we tried to say there is what we clearly don't want to get into is a debate around OMV things; country X is only X% reliable and whatever, that isn't what it's about at all.
We've clearly experienced some difficulties this year, and in trying to guide people in terms of what our expectations are for the next couple of years, I think it's incumbent upon us to try and have a degree of conservatism.
And then hopefully, we have been conservative, if we haven't been, as Jaap said, we could drop out of the bottom of that range if things really become very difficult indeed.
But if things come back to normal, which is where we were not that many months ago, quite frankly, then hopefully, we could come out of the top of that range, but we need to be a little bit prudent, given the circumstances we have today.
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Mehdi Ennebati, Societe Generale - Analyst [9]
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Okay. Okay, if I can just add another question please. Repsol is saying that they are losing very, very profitable production in Libya. Is it the same case for you, given that you are on the same fields, or no?
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [10]
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Yes, by and large, our production is from the same fields with Murzuq. We've got a little bit of production in the east, but in the greater scheme of things, that's insignificant. The main production is in the west, with Repsol and Total from the Murzuq basin.
They're great barrels in EBIT terms, big tax loads, but even in net cash terms, they're good barrels, so they're not the ones you want to lose. Having said that, you don't want to lose any barrels of course.
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Mehdi Ennebati, Societe Generale - Analyst [11]
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All right. Thank you very much.
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Operator [12]
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Thomas Adolff, Credit Suisse, London.
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Thomas Adolff, Credit Suisse - Analyst [13]
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A few questions as well please. Just a few on the financials I guess, on the -- just trying to get a better understanding for working capital and the continued reduction there.
On your tax guidance of 40% next year, if Libya was operating normally, where would that 40% be, or would it be higher, I'm guessing?
Another question is on Romania. Obviously, the gas price increases are encouraging, but I was wondering if you can talk around the potential royalty increase in 2014, and whether that potential could wipe out all the benefits from the higher gas price. Thank you.
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David Davies, OMV AG - CFO [14]
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The working capital, clearly, there are still a number of things that we're working on, but the big things are most definitely behind us.
We've generated almost EUR2 billion of working capital improvements, and with that, we've been able to invest that into attractive E&P assets. So we've put the funds to good use, and we'll continue to look at opportunities, but the big things very much are behind us.
So I wouldn't expect any more dramatic changes going forward and, as I said, in the fourth quarter, we could actually see a bit of a deterioration driven by the normal seasonality of the business.
The tax rate for 2014, if Libya actually came on 100% of what it can produce, our tax rate would indeed by somewhat higher than the 40%. So yes, we have taken, to some degree, an expectation in there, consistent with what we've given in terms of production guidance.
And then as regards the gas prices and the overall royalty discussion, they're a little bit decoupled. The royalty discussion, as you'll be aware, is really around the expiry of the tax stability clause in Petrom, which ends at the end of next year.
Clearly, we've been involved in the dialog that's been going on. It's possibly a little bit complicated next year, by the fact that there are EU elections.
But more particularly the president -- there are presidential elections next year in Romania, and there's a risk that it becomes a -- we get sucked into the whole political process, so that might actually lead to a delay in a decision being taken. On some points, we've heard them say they'd like to take the decision earlier.
At the end of the day, it's for the politicians to decide. The message that we have always clearly communicated and we believe that that's been accepted, is that Petrom is the biggest investor in Romania.
We've invested more than 90% of the cash we've generated in the Group, back into Petrom, and that needs to continue because Petrom can really be a powerhouse for the Romanian economy, particularly on the back of the offshore discovery that we announced last year.
The government has indicated that they want to allow Petrom to continue to invest because the strategic goals of a stronger energy business in the Romanian economy is something that the Romanian Government shares. So that leads us to hope that a balanced outcome can be the result of these deliberations.
But at the end of the day, after the end of 2014, then there is no contractual restriction on what could be charged. There are clearly economic consequences if too much is charged, but no contractual limitation.
The gas prices, I think this is quite interesting, and I think hopefully indicative of the constructive relationship we have there by and large.
We agreed at the beginning of last year -- beginning of this year rather -- no actually it was last year, that as the prices did increase in line with the agreement that they had with the IMF and the European Union then, a certain share would be retained by Petrom to enable it to continue to fund investments in its domestic gas production, which otherwise would be the far more marginal end of its investment, clearly.
They've honored that, and as the prices have increased, they've increased exactly in line with the schedule, and you've seen that clearly in the chart I showed earlier in the presentation. And we benefited from that accordingly.
The question really, I think, for next year, is going to be will these prices go through in accordance with the timetable that's established. Because that could represent quite some substantial increases for the Romanian industry to bear and that's not without its risks, in terms of what could happen to demand, of course.
But we will see. As I say, the government has been very clear about its commitment to that timetable and it's delivered on it so far.
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Thomas Adolff, Credit Suisse - Analyst [15]
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Thanks. Just a quick one for Jaap if I may. Just on the Matuku prospect. Just wondering if you've reached the primary target then, whether you can say anything on maybe preliminary results or -- thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [16]
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No, it's too early, so we're completing at the moment. So there's two wells we're drilling back to back, and the first one we're completing at the moment, and that's Manaia appraisal well.
Manaia is the field that we produced from the Maari development, and it's currently produced through an extended reach well, from the existing platform. To allow us to drill another well in there, it really needed a vertical appraisal well. So that's the one we're just wrapping up.
In the next week, we expect to spud the Matuku well, so clearly, it's going to take some time before we get a result on that.
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Thomas Adolff, Credit Suisse - Analyst [17]
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All right. Thank you.
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Operator [18]
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Lydia Rainforth, Barclays, London.
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Lydia Rainforth, Barclays - Analyst [19]
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I have three questions if I could. Hopefully, some of them are relatively short. Firstly, on the Statoil renegotiation, could you just remind us how much of -- or what percentage of contracted volumes that actually covers, please?
And then secondly, if I come to the CapEx numbers, just to help me understand some of the moving parts, can you just walk me through what is actually the cumulative CapEx 2014 to 2016, how much of that relates to the acquisitions that have just been made?
And then finally, one for David please. Just around the dividend, and this idea of the 30% payout ratio, and I can understand earnings going up over the time of the acquisitions, but is there any point at which you suddenly turn round and go, actually no, we're generating cash flow, maybe we shouldn't be at 30% payout ratio, maybe we should be at 50%? And just what would actually trigger that sort of thinking? Thank you.
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David Davies, OMV AG - CFO [20]
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The Statoil renegotiation, I'll let Hans-Peter answer. But let me try to answer the other questions.
The cumulative CapEx over that period of time is, broadly speaking, the 3.9 times 3, to be perfectly honest, Lydia. It's a simple average over that 3-year period.
Our guidance for the current year had been EUR2.8 billion for the -- had we not done the Statoil acquisition that probably would have increased to something round about the EUR3 billion level, and the vast majority of the remaining increase is down to the Statoil deal.
So that's an average over that three-year period. And as, in fact, we said when we announced the Statoil transaction, the CapEx associated with the assets, the development program still to execute with the Statoil investment, is self-funding.
So we haven't added to the cash flow burden, by acquiring those assets, because what we invest we'll be generating ourselves. And clearly, once all the developments are on stream, then the free cash flow will be quite substantial.
I think it's really, really rather too early to talk about changing the dividend payout ratio, but the Group has got no intention of simply reducing its leverage to zero.
And clearly, if we'd felt that we had achieved a certain size which was consistent with value optimization and were generating cash, to the extent that a dividend in excess of 30% could be absorbed, then we would look at that, at that point in time. But I think we're a little bit away from that just now.
It's not the -- we're not going to invest ad infinitum and grow ad infinitum. I think we are close to achieving an optimal scale with the portfolio that we've got now. As I said, there'll be always some optimization around that and there will be -- we will continue to look at new exploration acreage opportunities. But you certainly shouldn't be preparing yourself for another Statoil-type transaction in the near future.
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Hans-Peter Floren, OMV AG - Executive Board Member, Gas & Power [21]
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Okay. To Statoil, it's about 8 terawatt hours out of a portfolio of more than 50 terawatt hours contracted on a long-term basis. So you may derive from that it's a minor impact.
Actually, it's not, because for historic reasons, Austria paid quite significant diversification premium in the past, without any more details on that. And we have successfully renegotiated that and reached a structural solution which now reflects the market reality and the market pricing.
So the effect is more significant; significantly more significant than the volume ratio may suggest to you.
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Lydia Rainforth, Barclays - Analyst [22]
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Okay. That's hugely helpful, gentlemen. Thank you.
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Operator [23]
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Matthew Yates, Bank of America, London.
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Matthew Yates, BofA Merrill Lynch - Analyst [24]
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A couple if I may. Just to follow-up on the last question from Lydia about the Statoil gas contract. I appreciate a lot of these terms are confidential, but is there any more indication you can give us about what this means for your profitability in Q4, of course, which is always a big seasonal quarter as well?
And then, related to that, you're yet to agree a deal with Gazprom, but just in terms of relative importance, was it more important to you to get Statoil under your belt first?
Secondly, again, a question related to Statoil. But the announcement you had the other day on the exploration side, about the farm-ins, in particularly, I wanted to ask about the Faroe Islands. What attracted you to those blocks? Is it the logistical closeness of what you're doing in the Shetlands, or is this more of a geological bet? Thanks very much.
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Hans-Peter Floren, OMV AG - Executive Board Member, Gas & Power [25]
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So Statoil, as you rightly said, a lot of this is governed by confidentiality. I can only tell you that we are now right at the structural solution which really reflects the dynamics and the reality in the market, and it's directly linked to price development. And thus, we are out of lossmaking situation, as it was in the past.
So at -- came out to be possible, and it's now achieved. And from October 1 ongoing, we are out of this problem. So it's a good basis now for our integrated supply portfolio and sales business.
When it comes to Gazprom, a complete re-engineering of the contract, of course, is more and more challenging. You know that also from other reports.
So there are three elements in the focus. Of course, the most important one is the price level, as such. But then, also the price pegging and the price review mechanism.
Our focus, at this point in time, is on the price level as such to get that down to a level which is reflecting market reality, at least on an interim basis. And we feel we have made progress on that, but we haven't yet managed to formally conclude something on that. And, of course, after that, we will continue to negotiate on a more structural solution for the future.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [26]
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On the exploration acreage in the Faroes, that really is clearly geologically driven. We've stated before that in the UK, we're concentrating on the West of Shetlands. We've got a few legacy assets left in the central North Sea, but we've been selling those off.
And the West of Shetlands doesn't stop at the UK Faroe border, of course. That same exploration arena extends into the Faroes. So what this has done is extended, effectively, our exploration position in the West of Shetlands. And what we're drilling in the Faroes is the same sort of stuff that we're looking for towards the northern end of the West of Shetlands.
So it's not a logistic game; it's really a single exploration arena. It just happens to be across the border.
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Matthew Yates, BofA Merrill Lynch - Analyst [27]
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Okay. Thanks very much.
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Operator [28]
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Matt Lofting, Nomura, London.
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Matt Lofting, Nomura - Analyst [29]
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Two questions please. The first, just coming back to CapEx, EUR3.9 billion average for the next three years. Could you just clarify, David, how much of the EUR700 million per annum exploration budget is included in that EUR3.9 billion? Do you include it all, or do you just include the proportion that you assume will be expensed of that EUR700 million over that timeframe?
I wondered if you -- I noticed also you'd commented earlier on the assumption that oil prices largely stay where they are for the immediate future. I just wondered if you could comment on how much flexibility there is in that revised CapEx budget, under the scenario that, medium term, oil prices moved lower.
Secondly, just on the Black Sea. It looks slightly disappointing now, in terms of timing, to going back there mid-2014. I think it's perhaps a little bit later than you'd previously pointed to. I wonder if you could give us an update there. Thanks.
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David Davies, OMV AG - CFO [30]
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Yes. Matt, on the CapEx exploration side, clearly, it all gets capitalized and hopefully, would all stay capitalized until, unfortunately, some of it proves itself to be dry.
As a percentage, it's probably something around the area of about 40% that we would be expecting to capitalize. And that's within that CapEx number of EUR3.9 billion.
The oil price, clearly, that is a significant sensitivity that we have. And clearly, as our oil production increases, our sensitivity, both in terms of profits and cash flow, is going to be something that we're going to need to look at.
Clearly, you can never withstand everything, and to the extent that the oil price went through a major structural change, then we would need to look internally at the pace and the amount of our investment program. But we've got a balance sheet which is strong enough and robust enough to contain what would hopefully be the normal kind of fluctuation that you're expecting -- that we're expecting to see in the oil price.
We bought -- as we've said, I think, when we made the Statoil investment, our long-term assumption for the Statoil investment was $100 Brent. We've obviously had a period above that. We could sustain a period below that as well, to a certain degree.
By and large, with the strength of the balance sheet, I think we're in good shape to meet our targets. But clearly, if we see a major structural change, then things would have to change somewhat.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [31]
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On further drilling in the Black Sea here, yes, our latest indication is that we will commence drilling towards the middle of next year.
I could get terribly excited about that, but the reality is it takes time to get a deep water rig into the Black Sea. Any rig worth hiring is obviously drilling for somebody else. And then, the timing at which you can get your hands on the rig depends on when that somebody else finishes.
Clearly, you don't get the rig on a certain date; wells don't finish on a certain date; you get the rig when an agreed drilling sequence is (technical difficulty).
We've got a lot to do in the next couple of years. And quite frankly, drilling an appraisal well three months or four months later than what we'd originally anticipated is not really a cause for great concern. Having said that, clearly, we'd like to do it as soon as possible.
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Matt Lofting, Nomura - Analyst [32]
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Great. Very clear. Thanks, guys.
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Operator [33]
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Oleg Galbur, Raiffeisen, Vienna.
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Oleg Galbur, Raiffeisen Centrobank - Analyst [34]
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I have two questions. The first one is a follow-up on your CapEx guidance for 2014, 2016. I was wondering whether the EUR3.9 billion that you mentioned assume a decrease of your participation in Rosebank; and if yes, to which level; as well as if it includes the CapEx that you need to commit under the recently acquired licenses from Statoil?
And my second question is regarding Romania, where the Romanian Government is considering introducing a new tax of 1.5% on so-called special constructions, that could also hurt Petrom's bottom line. I was wondering whether you've done some analysis and you could tell us, let's say, under the best case and worst case scenario, to which extent the Company's bottom line could be affected? Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [35]
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So the capital guidance assumes we divest 15%. So we said, right at the announcement of the deal, we'd look at divesting between 10% and 20%. So the CapEx guidance reflects a divestment of 15%.
The exploration licenses that we farmed in, into -- in the -- confirmed the announcement on Monday this week, will be covered by the exploration budget. And as said, that's flat at about EUR700 million a year. And this would have to be done as part of that EUR700 million a year budget.
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David Davies, OMV AG - CFO [36]
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On the Romanian taxes side, clearly, there's a lot of rumors flying around as regards the overall intention generally on taxation in Romania.
Frankly, it's just far too early to comment. There's a lot of rumor, nothing specific. And we'd rather wait for specifics, before we started quantifying it. Thanks.
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Oleg Galbur, Raiffeisen Centrobank - Analyst [37]
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Thank you.
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Operator [38]
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Tamas Pletser, Erste Bank, Budapest.
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Tamas Pletser, Erste Bank - Analyst [39]
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Two questions if I may. First of all, can you give us some update what is going on with Petrol Ofisi? What was the profit contribution and what are the key stories, the key happenings in Turkey?
And the second question is about your operating expenses for your upstream. Can you give us some guidance, where do you expect this operating expense per barrel to increase for next year, when the Statoil assets will be operating, with assumptions whether Libya and Yemen will be operating or not? Thank you.
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David Davies, OMV AG - CFO [40]
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Do you want to do the OpEx?
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [41]
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Yes, so I'll do the OpEx first. We do expect the OpEx to be roughly flat at our historic level.
The big swing isn't actually what happens in Norway. The big swing is what happens in Libya. Libya operating costs are particularly low, so if those volumes drop out, you tend to see the average operating cost per barrel shoot up quite rapidly. The Libyan barrels come in at about $2 per barrel. That's why they've got a disproportionate impact.
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David Davies, OMV AG - CFO [42]
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As regards Petrol Ofisi, its year-to-date clean operating profit is -- cleaning the CCS EBIT, is just under EUR100 million after nine months. And the quarter contribution to that was just over EUR34 million.
Turkey remains an economy generally which has got some difficulties at the moment, although our business, in terms of both volumes and margins has remained relatively robust.
There have been a number of statements made by the energy market regulator in Romania about seeking to regulate prices again, because with the weaker Turkish lira and despite the dollar weakening, the Turkish lira's been even weaker. So at the pump price in Turkey, prices have been rising again and there have been some mutterings about perhaps the regulator, once again, trying to put pressure on the industry to reduce prices.
But that's not manifested itself in any great degree just yet, although we are cautious about how things might pan out in the medium term there. But the quarter generally was a relatively good quarter.
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Tamas Pletser, Erste Bank - Analyst [43]
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Okay, understood. Thank you very much.
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Operator [44]
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Mukhtar Garadaghi, Citi, London.
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Mukhtar Garadaghi, Citi - Analyst [45]
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I have two questions if I may. One, in light of the headwinds that you're seeing both on production side and weak downstream and gas and power in Europe, could you just please comment an update on your ROCE target and how do you see that affecting in terms of the schedule you had outlined previously?
And the second question on Kurdistan, we're seeing some progress on the gas negotiations with Turkey. Could you please comment if you're a part of that negotiation and whether Bina Bawi is being targeted for that first match, whatever 10 bcm has agreed or whether you see that being commercialized later? Thank you very much.
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David Davies, OMV AG - CFO [46]
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As regards the ROCE target, our long-term target remains 13% and we reiterated that back in 2011, as well as a number of measures, which we're implementing which sought to achieve that by 2014.
However, the clear statement was made that this ignores any further acquisitions we might do in the meantime and, clearly, we just made the biggest acquisition we've ever done in our history. And that's going to have a negative impact in the short term on our delivery of that ROCE target.
Our ROCE target, however, in a more stable environment, which is probably going to take us now a couple of years to establish once we bring some more of these developments back on stream, most certainly remains 13% and all of our investments are benchmarked against that.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [47]
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On the KRI, we're not involved, but clearly, very aware of the negotiation that's taking place between the KRI and Turkey. So it is, indeed, a 10 bcm gas sales agreement that's being negotiated.
That could come from a variety of players, but currently the most obvious candidates to feed gas into that are clearly Bina Bawi and Miran. Having said that, as when I went through the project update, our key focus right now is to make sure that we've actually got a commercial case around development at Bina Bawi. And if there is one, then indeed, that gas could feed into those 10 bcms.
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Mukhtar Garadaghi, Citi - Analyst [48]
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Thank you very much.
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Operator [49]
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Mehdi Ennebati, Societe Generale, Paris.
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Mehdi Ennebati, Societe Generale - Analyst [50]
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Two follow-up questions, the first one regarding the acquisition of Statoil's assets. You say that it will be self-funded between 2014 and 2016. But just would like to understand will it be self-funded from the first year, meaning 2014? Or on average for the period, meaning that you will have a negative contribution in 2014 and probably a positive one in 2016 with the production ramp up?
Second question is regarding EconGas. You've told us, if I remember well, that in 2012, EconGas' operating profit were EUR42 million. Just wanted to know for the first nine months of 2013, what are EconGas' operating losses please?
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David Davies, OMV AG - CFO [51]
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The time range of the break-even statement is relatively even throughout that period, Mehdi. You're not going to see a significant swing one way or the other.
One of the assumptions, however, is that the stake in Rosebank is disposed of during that period, not really because of the sale proceeds that it would generate, but also, of course, because it's a very expensive project and over the long term then clearly, the reduced capital commitment would also need to come into that equation. That was always consistent with what we said back in the summer when we announced the transaction.
So, it's not about two years of massive negatives and then a third year of bonanza. It's relatively smooth over that period of time.
We've never officially disclosed the operating profit of EconGas, but I don't think it's any big secret that last year it was more profitable than this year. This year, of course, it suffered, in particular, from the difficult market situation and the situation with the contracts.
And, hopefully, when we do reach a successful outcome with Gazprom, that, of course, will be booked in EconGas, because EconGas is the investment that we have which carries the relationship with Gazprom. And that at least, as far as concerns the sales, the trading of gas, should put the business on a more sustainable footing.
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Mehdi Ennebati, Societe Generale - Analyst [52]
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Okay, okay. Just a follow-up question regarding Statoil asset acquisition. You are telling me that Rosebank will be the main contributor to the increase in CapEx. Does that mean given that you didn't take yet the FID on that field, that 2014, let's say, free cash flow from those investments should not be that negative?
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David Davies, OMV AG - CFO [53]
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No, I didn't actually say that to you, Mehdi. What I said to you was that the overall statement that our broad investment would be past neutral over that period in time did make the assumption that our commitment to Rosebank wasn't 50%. Rather, it would be somewhat lower than that. And being somewhat lower, that would reduce our capital commitment as well.
I was simply saying that that was part of that assumption, part of that statement that we made rather than that this was really where the issue was.
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Mehdi Ennebati, Societe Generale - Analyst [54]
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All right. Thank you very much.
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Operator [55]
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That was the last question. I will now hand back to David Davies for his closing comments. Please go ahead.
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David Davies, OMV AG - CFO [56]
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Thank you very much as ever for your attention and clearly, some interesting questions. If you do have any follow-up questions, then as always, our investor relations team are available for you. Thanks again.
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Operator [57]
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This concludes today's telephone conference call. A replay of the call will be available for one week. The numbers are printed on the telephone conference invitation or alternatively, please contact OMV's investor relations department directly to obtain the replay numbers.
Thank you for joining today's conference call. You may now replace your handsets.
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