OMV AG Exploration and Production Update Presentation
Feb 20, 2014 AM CET
OMV.VA - OMV AG
OMV AG Exploration and Production Update Presentation
Feb 20, 2014 / 08:30AM GMT
==============================
Corporate Participants
==============================
* Felix Rusch
OMV Group - Head of Investor Relations
* David Davies
OMV - Vice Chairman and Chief Financial Officer
* Jaap Huijskes
OMV Group - Executive Board Member for Exploration and Production
* Johann Pleininger
OMV Group - Senior Vice President
* David Latin
OMV Group - Senior Vice President North West
* Walter Hamilton
OMV Group - Senior Vice President
==============================
Conference Call Participants
==============================
* Marina Postnikova
UBS - Analyst
* Dan Eckstein
UBS - Analyst
* Nathan Rush
Morgan Stanley - Analyst
* David Mers
Soc Gen - Analyst
* Makti Gardagi
Citi - Analyst
* Mark Bloomfield
Deutsche Bank - Analyst
* Henry Morris
Goldman Sachs - Analyst
* Thomas Adel
Credit Suisse - Analyst
* Matt Lofting
Nomura - Analyst
* [Thomas Adel]
* [Matt Lofting]
* [Makti Gardagi]
* [David Mers]
* [Nathan Rush]
* [Dan Eckstein]
* [Marina Postnikova]
==============================
Presentation
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [1]
------------------------------
Welcome, ladies and gentlemen, at the OMV Exploration and Production Update here at the London Stock Exchange. My name is Felix Rusch. I am the Head of Investor Relations at OMV.
I am happy to see that so many of you have managed to be here in person today, but at this stage I would also like to welcome all our viewers who follow us via the live stream on the Internet. OMV has transformed from an integrated downstream-focused company to an integrated, but more upstream-focused company. And so underlying this, we felt it is appropriate to dedicate this special event to our exploration upstream business.
So this is why we're here today, and therefore, let's have a quick look at the agenda of today. David Davies, the Vice Chairman and CFO of OMV Group, will start off with giving you an overview of the group's perspective on our upstream-focused business, and especially on the profitability that is expected going forward. Jaap Huijskes, Executive Board Member for Exploration and Production at OMV, will give you insights on how E&P is delivering on its promises and how it will be focused on project execution and on exploration to deliver growth and value for the future.
Afterwards, you will hear from senior E&P management about their respective areas of responsibility and how they feed into the overall E&P and group strategy. Johann Pleininger will talk about our successful and our business in CE and the Black Sea. After the break, David Latin will talk about Northwest Europe, Africa, and Australasia, and about the capabilities we are developing there. Then Walter Hamilton will talk about our successful exploration activities and how we'll put further emphasis on exploration for the future. [Daniel Prostkis] will wrap up with some closing remarks. There will be the opportunity for Q&A at the end of each presentation and then again at the very end of the event.
So let me now wish you an interesting and insightful morning, and I will give the floor to David Davies to kick off. Thank you.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [2]
------------------------------
Thanks, Felix, and good morning, also, from my side. I'll kick off with just a couple of slides on the quarter four and full-year results. I won't spend too much time on them. For obvious reasons, I think we went through much of the detail yesterday. And then I'll talk about why we're actually having this meeting and what we're hopefully going to achieve with it.
Clearly, the year ended somewhat disappointingly, particularly driven by the Libyan situation -- I'm sure you'll have questions on that later on -- but also in our gas and power business, the challenges there remain really quite strong, despite having largely resolved the contract discussions with Gazprom and with Statoil. There are other issues in gas and power, clearly, which are continuing to bedevil the industry, and that's obviously had its impact on our level of profitability.
[Refining and] marketing in profit terms was quite an outstanding result, when you consider the environment was so unbenign in terms of refining margins, in particular, but with a high level of utilization profit from our petrochemicals business and a very strong performance from our marketing business, we actually achieved the respectable result, clearly lower than the year before, but nevertheless quite outstanding when you consider how challenging the environment was. The cash flow that division has generated has really been a driver of what's enable us to fund what has been a very substantial investment program over the last couple of years.
The investments that we made in total last year amounted to -- or, rather, the cash flow that we produced was something like $5.8 billion. That includes, obviously, a small amount of debt, which we have to take on to fund the very high level of investments that we made, but you can see on the left the downstream has been really the driver of a lot of our cash flow generation. Net working capital reductions has also been a part of that. That's this energize program of which you're aware has been a major part of that improvement as been coming from working capital, and that's enabled us to fund a level of investment, which has been necessary to address what fundamentally was an unsustainably E&P portfolio of two or three years ago, because basically we were so reliant on Austria and Romania, which, of course, in the long term are very much ex-growth territories for reasons you'll all understand.
We've done all of this and maintained the balance sheet in a strong state and kept our gearing in line with our long-term target of approximately 30%. We remain and will remain an integrated company, clearly far more focused on our upstream division. That was part of the strategy that we laid out three years ago in Istanbul, when we had the capital markets day down there. Our downstream business has been reduced in size through disposals and through a very much curtailed investment program. And the cash has been devoted towards growing our upstream business.
But we will remain an integrated company. We have a very high degree of physical integration, probably much more than other integrated players, and I'm thinking here particularly of Romania, clearly, where all our crude is processed in our refineries, and to a lesser degree in Libya, where we clearly have refining capacity in [southern Bavaria] and [Burkasa] devoted to our Libyan production.
Gas and power will become increasingly important in terms of that integration, as well. It already sells the gas that we produce in Austria and Romania, as more and more gas is going to be sold into our market when we look at the Black Sea developments. Of course, it's also selling the gas that we produce in the North Sea now with the Gullfaks development, so being able to market gas and the whole sort of complexities around the infrastructure is going to remain an important part of our portfolio, as it were.
But what we're trying to do is grow our upstream and optimize the downstream. This is a very clear message from 2011. In fact, I would say that back in 2011, well, we clearly are ahead of the schedule that we set ourselves, in terms of achieving that step change, and that's because we've been so successful in the oil downstream disposal program, sell in both markets where we had gas stations, reducing our working capital. Of course, more recently, we announced the sale of the stake in the [Bina Oil refinery], and that is a deal that we expect to close in the first half of this year, hopefully.
What we said -- what we expected back in 2011 was by 2021, we would have achieved the position where rather than 35 of our -- 35% of our asset base being in upstream, we would have something like 55%, and, in fact, we're already ahead of that. And by the end of this year, we expect to achieve a situation where more than half of our asset base is in E&P. And, of course, with the investments we'll be making over the next few years, that percentage [towards 2021] is going to rise still further, so we'd be very much more focused on our E&P activity, so we're happily ahead of schedule there.
And if you look at what we said we'd do back in 2011, where are we precisely? What we said -- and this is straight off the presentation that we gave in Istanbul, that we aim to stabilize our production in Romania up to 2014, in the range of 200,000 to 210,000 barrels a day. Last year, we achieved 206,000 barrels a day, so clearly on track within that range, and, in fact, what we've now done is extended that target out to 2016, so a further two years of relatively stable production we expect. This, of course, ignores anything that will come in the longer term in the Black Sea.
We wanted to grow our production to 400,000 barrels a day by 2016. We didn't have that in our portfolio. We now do. We had to think approximately 350,000 barrels a day. Now we have the portfolio which will get us to 400,000, and Jaap will go on in more detail to explain how the various developments as they come onstream will help us achieve that target.
[We had surface] since we bought Petrom, which really transformed the scale and profitability of the OMV Group from the challenge of replacing the reserves that we were producing, but had set ourselves a target to get the business into a position by 2016, where the portfolio was more sustainable and we could replace our reserves going forward.
Big target, a target, again, which the portfolio that we had wasn't able to achieve, but since the acquisitions that we've done and the investments that we've made during that period, we can now look forward to achieving that target from the portfolio that we now own. In fact, in 2013, the single year reserve replacement rate was 113%, and we now have the portfolio in place, as I said, to achieve that target.
Nabucco didn't happen. Clearly, had Nabucco happened, the striving to achieve an upstream exposure to actually bring part of our gas through Nabucco was a major part of that. It didn't happen. It's gone; it's off the agenda.
Gas-fired power generation, the two power stations are onstream. They're not without their challenges right now, for reasons I'm sure you'll understand. In Western Europe in particular, the situation is quite dire for gas-fired power stations. In the east, it's more benign, but still anything but hugely positive, that's for sure.
Romania has the particular advantage, however, that of course our gas that we produce, a fifth of that production represents the capacity of the Brazi power plant, so as demand comes under pressure, as the price in Romania for natural gas is rising, we at least have that outlet to monetize our gas for a fifth of our production, and that's obviously a strategic advantage.
The divestment program in R&M targeted EUR1 billion by 2014. We're well on track. In fact, if you include the disposal proceeds of the strategic inventory reserves, which were EUR600 million, last year, we've achieved that and more besides. We have a couple of other things to complete this year. Of course, the [Binoil sale] closure is obviously critical to this, but that program is largely implemented.
And, of course, the final point, that performance improvement program to improve our return on capital employed by 2% by the end of this year is also on track. In fact, without that program, we wouldn't have been able to fund the investments that we've made and keep our balance sheet as strong as it is.
So growing the upstream, and also the reason for this meeting today, we have clearly invested very heavily since 2011 in our upstream assets and clearly are projecting further investments going forward as the business is more and more focused on upstream. And that's the reason that we had this meeting. Clearly, the portfolio that we now have is radically different from which we had in 2011. Jaap will go in more detail to explain both the exploration acreage that we have and also, critically, the development programs that we're working on to actually bring these reserves and production into the books, as it were.
But we felt that we really needed to get together here to explain now the asset that we have and also to deliver a few key messages. Clearly, the commitments that we made in 2011 we've delivered on. We've demonstrated that. What's important to also understand, that the targets that we're communicating here, the targets that we've set, we have the portfolio to achieve them, so we're not looking for any further significant acquisitions to actually bolster what we currently have. That is done. We have the portfolio. And the challenge now is to execute on the developments, to invest in the acreage that we've acquired for exploration, and to bring it into reserves and into production. We're not looking to acquire on top.
Clearly, there will always be portfolio adaptations in a business our size, but any significant acquisitions of the scale that you've seen over the last two or three years are done, as it were, in terms of the targets that we currently have.
The project pipeline has both medium-term growth potential -- clearly, the target of 400,000 by 2016 is in the medium term -- but if you look beyond that, we also have the potential to grow still further from this portfolio. There's a number of developments clearly [which won't] hit the road by 2016, which are already being executed, and beyond that, of course, we still have the very exciting acreage in the Black Sea, where there will be two further exploration wells drilled this year to really confirm exactly what it is that we found there. That exploration will continue to be a driver, as well, as we go forward.
So we can fund our growth. We have the portfolio to achieve our growth. We can do that from the cash flow that we generate. We actually believe that we can do that and maintain the balance sheet in good order. And, of course, as our production grows, as it will do when these developments come onstream, that will enable our profits to rise and, of course, the dividend payout ratio at 30% will lead to a growing dividend, all of which is reflected in the cash flow expectations that we have, of course, always assuming that the oil price stays around about the EUR100 level.
The project pipeline, I think I've talked about. The growth to 400,000 by 2016, beyond that, as well, and the CAPEX that we have to achieve that, as I said, is reflected in our expectations of what the cash flow is going to produce, and the cash flow from operations is in place as our business grows to actually [fund that conservatively].
And one of the key questions we have, of course, is, okay, as this production comes onstream, what's that actually going to mean to your profitability? And we recognize that's a perfectly valid question, and what we've tried to do is perhaps give you sort of two indicators of where we think this is going to take us.
We finished last year with a NOPAT per BRE, excluding Romania. And I'll come on and explain why we're excluding Romania from this calculation in a second, but excluding Romania, our NOPAT per BRE was EUR9 exactly.
Going forward, from the production that's coming onstream, it's going to be broadly stable as that production of 400,000 comes onstream, and beyond that, as more and more of the activities are going into profit generation, rather than loss causing, and bringing the production onstream, that number is going to rise somewhat.
So we believe that the production that we have scheduled to come onstream by 2016 is not going to be diluted to our profitability and, in fact, beyond that, particularly as increasing exploration starts to play a role there, and we will be spending something like EUR700 million per year on exploration, then the prospect is that that can actually rise somewhat.
Why have we excluded Romania? Clearly, the big missing ingredient here is Romania, is clearly a major part of our production right now. Why haven't we put it in? The very simple reason is, of course, at the end of this year, the fiscal stability that we've enjoyed over the last 10 years expires. Things will change. And until we know precisely what that's going to be, it's rather misleading to actually base any expectations for Romanian profitability, because we simply don't know.
Our expectation remains clearly that the cost base will rise, be it in royalties, or increasingly what's being talked up now is a profit tax, so our after-tax profit is clearly going to be affected. On the other hand, of course, the gas price continues to liberalize, and that is also of benefit. So the messages that we're getting from the Romanian government is that it's still going to continue to allow us to fund our very substantial investment program, but we simply don't know what the outcome will be, so it's probably inappropriate to actually issue targets on that.
So that's NOPAT. What happens to pro forma cash flow? Now, pro forma cash flow, what does that mean? What we've done here is calculated the NOPAT per BOciation, but assuming the tax rate is at the statutory rate, so accounting tax rather than cash tax -- and I'll come on to explain that difference in a second -- clearly, depreciation, is going to play a big role in these new developments coming onstream, and as you strip that out to actually calculate your cash flow, we believe that by 2016 our cash flow pro forma per BOE, again excluding Romania, is going to be about 5% higher, and with the prospect to rise still higher beyond that period.
That's accounting tax. In fact, in cash tax terms in the medium term, it will be even better, because, of course, both in the U.K., and particularly in Norway, we're actually building tax losses, which means that when it comes to actually pay tax during the medium term, when these -- rather, these barrels start to become more -- come onstream and generate profits, we have a tax law situation which will enable our cash post-tax profit per barrel to actually increase above these levels for the medium term.
Clearly, it will come back into equilibrium when these losses are fully consumed, but in the medium term, we should actually be able to achieve a higher level of post-tax cash flow per BOE that is actually suggested here. So at least no dilution of the cash profit per BOE. Cash flow positive on a pro forma basis, on an actual basis, even more positive.
So that sets the framework for where we're going here. You see that captured in sort of four key points. The gearing will stay stable around the 30% level, so our balance sheet will remain -- will remain strong. Our payout ratio in the long term remains the 30%. The slight dividend increase that we made for the 2013 results actually represents 35%, but our long-term target remains 30%. Our investments very much focused on delivering this E&P portfolio, EUR3.9 billion per year approximately, and our cash performance enabling us to actually fund that without stretching the balance sheet or putting the dividend at risk.
So that sets the framework, gives you the key message, I think, of what it is that we're trying to achieve. Profitability-wise and production-wise, clearly we're going to go into far more detail now when Jaap and his team present that, but that just sort of sets the financial parameters for what it is that we're trying to do, if you will.
Before I hand over to Jaap, we can take a few minutes of questions here, should you have any questions, and then I'll give over to Jaap. Please?
------------------------------
Matt Lofting, Nomura - Analyst [3]
------------------------------
David, thanks. Matt Lofting at Nomura. A couple of quick questions. You talked about the self-funded nature of the growth. Can you talk about how you think about oil pricing and potential variability in future oil pricing around that, in particular if we have a scenario of a lower [oil deck] longer -- or medium term? How do you -- or do you think there's a need to adjust the pace of investment around that in that scenario?
And, secondly, could you talk a little -- in a little bit more detail around depreciation? And as you roll through the next two to three years, how you think DD&A moves in -- per BOE and in absolute terms, as some of these assets come through. Thanks.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [4]
------------------------------
Well, clearly, our fundamental basis for this planning has been a long-term oil price assumption of $100 Brent. If it isn't $100, particularly if it's substantially lower, then clearly we're going to have to revisit this -- this schedule of investments. We're not going to overly stretch the balance sheet to do this, and we clearly need to look at the schedule of investments that we had planned.
In that rather challenging period back five, six years ago in the financial crisis, 2008, I think we were one of the first to take that action. We cut our investments very, very severely, because our dividend, as well, of course. And I think we've shown that, you know, when you need to stand on the break, you can do that, and we would do that, clearly, if there was a substantial and structural change in our oil price expectations. It's not the basis of our current planning, however. We're planning for $100. Clearly, we're enjoying something slightly more than that, and that's to our benefit and to the benefit of this program.
I don't want to get into sort of detailed numbers in terms of depreciation per BOE, but clearly with the schedule of investments that we've got, $3.9 billion and another 100,000 or more barrels of oil of today -- oil per today to cover -- oil and gas per day to come onstream by 2016, the absolute quantum of our depreciation clearly is going to rise substantially as that production comes through, and that's the reason, of course, I was saying that pro forma cash flow is going to look so encouraging, we believe, as these barrels come onstream. Clearly, depreciation is going to rise.
Two-thirds of our production right now is coming from Romania and Austria. The depreciation base in Romania clearly has been increasing since we bought the company, as we've needed to invest very substantially to actually maintain this level of production, and that, of course, has meant that the depreciation charge on our Romanian barrels has been increasing progressively, but such was the price that we paid for those barrels. And, of course, the Austrian assets are -- although we continue to invest there in large part -- are highly depreciated, then the depreciation per barrel on that production is relatively low, that appreciation per barrel on the new barrels is going to be much higher, certainly.
Gentlemen at the back? And then we -- somebody over here, I think.
------------------------------
Unidentified Speaker [5]
------------------------------
Hi, morning (inaudible) from Exane BNP Paribas. A couple of questions. The first one is on your cash flow projections, the ones that go to 2017-2021. How much of an improvement in the situation in Turkey in your gas and power business you have baked into these numbers? Or is it just kind of continuation of what we're seeing now?
And then the second question is, in terms of the production target for 2021, or that kind of, you know, chart that you are showing there, how much of that is depending on new exploration being successful as opposed to what you have today in the portfolio?
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [6]
------------------------------
Firstly, on the very first question, that's quite easy to answer. None of the divisions outside of E&P are reflected in that cash flow. That was purely per barrel improvements of the E&P cash flow, so anything that's going to happen in gas and power or refining and marketing is not reflected in those per barrel numbers.
In the overall cash flow, that clearly -- it is of some relevance, and we expect the market to improve in gas and power in Turkey and the power generation in Turkey, but we want power plants. I mean, whether it's one thing or the other, quite frankly, it's not going to have a material impact on this, although it clearly continues to trouble us strategically exactly how to optimize our position in that market for power generation. Whether it's one thing or the other, it's not going to have a material impact on this. It's just one plant at the end of the day. And the Romanian plant, as I say, it's an essential backstop asset, given the challenges for gas demand in Romania. And when the price has just increased by 50% last year and is scheduled to increase by a similar amount this year, it's already started to come under pressure as one would expect.
The second question was what? Sorry, remind me.
------------------------------
Unidentified Speaker [7]
------------------------------
-- (microphone inaccessible)
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [8]
------------------------------
Beyond 2021, clearly, there are specific assets which are currently under development. I'm thinking particularly of [Astor Hanstein] in Norway. That's not scheduled to come onstream in this timescale and clearly is part of our production target. There are things coming onstream -- and I'll leave this more to Jaap and David Latin, perhaps, to talk about, but you will clearly have some hopes on the Rosebank development ultimately taking FID. And clearly during that period, they're coming onstream with production.
And, of course, towards the end of that period, we have the discovery in the Black Sea that we've already done, which will clearly be the subject of further exploration, but we're quite confident that the discovery we've made will also bring substantial gas into that overall production number.
There is clearly, then, a model of what we're going to get from our exploration budget, as well, which is expected to generate production during that period, but by the end of 2021, we'll have spent the best part of EUR5 billion on exploration, seven years times EUR700 million, and as I've said to Walter, if that doesn't bring us something, then we've got a bit of a problem, quite frankly. So -- okay, please.
------------------------------
Unidentified Speaker [9]
------------------------------
... from Morgan Stanley. Thanks for the presentation. Two questions, please. Firstly, just to come back to cash generation, but in the '14 to '16 timeframe, could you perhaps provide a bit of color on the split between just, you know, cash flow from operations, but also some of these other elements that contribute to that, i.e., the divestments in the net working capital reductions? I'm thinking specifically how much is Rosebank potentially -- and further net working capital reductions begin to contribute over the next three years.
And the second question, just on the gearing target and how you think about that sort of ceiling, how hard that ceiling is ultimately, is it something where you would be comfortable with that sort of creeping over 30% in the near term, if you felt that medium term you would still be below 30%? Or is it really sort of a hard and fast ceiling for you? Thanks.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [10]
------------------------------
God, my memory's going as I get older. I'll go to the gearing one first, because I remember that question. I was just prepared to answer on the first question, then you asked me the second one.
The gearing target, we have had gearing clearly as high as the high 40s. And I've said consistently at that point you start to flirt into that level, it's time to do something, and it's either on your cash outgoings or your equity. We're not looking at equity increases during this plan period. We don't need them.
But clearly, we've said in the past -- and we've demonstrated in the past -- there's some flexibility around that. And particularly if we were looking at what we considered to be a medium-term blip, and it's really rather hard to define the criteria by which we would say that a medium-term blip, rather than a structural blip, but certainly if -- if we felt that it was appropriate to continue an investment program in the short term and let our gearing take the slack, we would do that. However, as we look forward, particularly with $100, it's not necessary. Our gearing can accommodate that and stay within the 30% range.
And I just remembered your first question was on the working capital or the disposals program. There is more to come on working capital, but the lion's share is most definitely behind us. There's a few hundred million we're still working on, and we will continue to look at creative things. It's actually -- we actually finished last year with a net working capital positive, more like a retailer, quite frankly, and it's really encouraging. I noticed yesterday coming down the office that -- as the elevator stopped on the refining and marketing floor, there's posters everywhere in terms of, you know, how they can do things on inventory management and credit and management such like.
So it's really encouraging how much this has been taken up in the organization. And I noticed with interest a lot of the remainder of the industry is actually starting to look at that, because, you know, as I always said, with $100 a barrel, you can get fat, dumb and happy fairly quickly, to be perfectly honest, and not really put the energy into looking at these things, which I'm glad to say we've done very well. There's not much more to come.
On the disposal side, clearly, there's the cash proceeds from [Bayin Oil]. I'm not going to go into too much detail telling you precisely what that is. The deal is signed, but it's not closed yet. But as we always said, there's a big working capital element in that, of course, because there's a lot of inventory associated with that refinery and that marketing business.
So there's part of that. Part of that actually if things go according to plan will lead to our gearing by the end of this financial year being actually lower than we currently have, so that's the current internal projections, but, of course, we will see. So it's not as though we need a huge contribution from that to actually take the fat out of the fire, as it were, but it's still in there at the margin, yes.
I think I've got time for one final question, [Lydia].
------------------------------
Unidentified Speaker [11]
------------------------------
Thanks, David. It's [Lydia] from Barclays. Two questions, if I could. Firstly, on the downstream, and you said you'd implemented a lot of what you set out to do two, three years ago. Are you happy now with where the downstream portfolio is? Or is there more that you would want to restructure within that part of the portfolio? And I'm thinking particularly Petrol Ofisi within that.
And then, secondly, on the chart you showed in terms of cash flow per barrel was quite a range in terms of the per barrel possibility from, I think, $7 up to sort of $43. Is there any way that you would at any point consider saying, actually, we don't want to do 400,000 barrels a day, we'd rather do less volume, and get rid of some of -- or try and sell some of the lower margin portfolio?
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [12]
------------------------------
Petrol Ofisi first. I think that's a very valid question. When we bought Petrol Ofisi, our objective clearly was to build a much more integrated business in Turkey, and we haven't been able to fully execute on our plan, and that's still something we continue to look at. And to that extent, I think it's -- to a large degree -- still a work in progress, and clearly it's a very material part of our downstream activity.
And I think the other question on the lower range of profitability, I think it's a perfectly valid point. We have a lower range of level of profitability from assets, which in large part are still producing not an attractive return, because they're older, mature assets. But certainly, if we actually felt it was better for value creation to actually tweak that target down slightly and dispose of an asset which was of more value to the shareholders, doing it that way rather than continuing to operate it, yes, we would certainly look at that.
The primary objective of what we're trying to achieve going forward is develop the portfolio that we have, create value for the shareholders from that portfolio, and how we actually do that, we would certainly be flexible, but that's the primary target, no question at all about that.
It's interesting, when you particularly look at the strong share price performance we had last year and some of the things which have been going on in the industry in this very strong focus on value management and focus on capital discipline, I think this is all well and good, and I think we certainly take that very much to heart.
The fact, however, you have to accept with OMV is that when you go back to 2011, we had an E&P business which in the longer term was completely unsustainable. We had two-thirds of our production in very, very mature fields, Austria and Romania, where we couldn't fully replace our reserves. We were more than replacing the reserves that we had in the balance of the portfolio, but the balance of the portfolio simply wasn't substantial enough, quite frankly.
And what we've been trying to do is reduce the size of our downstream footprint to put that capital into the upstream business, so the portfolio is far more sustainable, so there's been more capital as a consequence spend, but I think the business that -- we've now generated the portfolio of assets that we now have, and that as they develop going forward, the business that we will have in 2016 and beyond will be a far more sustainable and value creating animal.
Thanks very much for that. I think that's my time allowance, and I'll hand over to Jaap. But thank you.
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [13]
------------------------------
Thanks, David.
Ladies and gentlemen, good morning from me, as well. It's a pleasure to be here. We've done E&P presentations before, but it's the first time we've gone to the lengths of bringing three of the SVPs looking after a very big chunk of our business together. I mean, Hans looks after two-thirds of our production and a very significant chunk of our investments. David looks after the international part of the portfolio. And in '16, he'll be producing as much as Hans does. And then the big spender at the end, Walter. We will actually show you that that $5 billion that we'll spend in this decade is already delivering projects that will be onstream by the end of the decade, as well.
This is not one of them. The pictures of Gudrun, one of the two assets that we bought into with the Statoil acquisition, and currently that jackup, the drilling rig that's standing behind that platform, is drilling the first well, and we expect Gudrun to come onstream towards the end of March.
But let me just start very briefly by setting the scene, and then really what I want to do is hopefully lend the message that the last three years and the next three years for E&P and OMV are very fundamentally different. This is where we are. We're a top 30 company when you look at production level in the rest of the world. If you look at market cap for these companies, you get similar results. We're somewhere towards the tail of the top 30.
And our aspiration is to stay well and firmly within that top 30, and we'll do that partly by growing to 400,000 barrels a day. And if that goes well, by 2016, we've got the portfolio to allow us to grow beyond that and move a little bit further towards the big end of that top 30.
You can see the numbers. I'm not going to go for those. The slide I want to spend a little bit of time on is this. We often get asked, what makes you different from others? What are your unique features? And here is three.
If you locked us in a room long enough, we could probably come up with another couple, but these three are very important. First of all, we are very good at exploiting mature assets. We can manage recovery rates in onshore assets that are at the best -- with the best in the world. And that drives a lot of things. It drives technology, it drives ways of working. It also drives cost.
We often forget that the biggest influence over these high recovery factors has got nothing to do with technology, this activity cost management. You can keep your costs down. You can keep your wells on longer. You can keep a five barrel-a-day well going instead of stopping at 10 dollars a -- barrel a day. Cost is actually the biggest driver to help us drive these very high recovery rates. That's one of our key U.S. piece.
And the next one is exploration, and Walter, our exploration SVP, will say a lot more about this, but if you look at our exploration success rates over the last three years, 61%, 62%, 46%, 46% a bit down, average over those three years, 55%, 56%. In the street, 20 to 30. We're good explorers.
Our success rate is probably going to go down a little bit in the years to come, because we're going to drill more frontier basins. Again, Walter will talk about some of the places we're moving into.
And the third one is that we've got a very interesting portfolio ahead of us, and that's the result of what we've been up to for the last couple of years. We got the portfolio in place to deliver 400,000 barrels a day in 2016. And, in fact, we got the portfolio in place to do a bit more than that beyond '16, and I'll actually show you some of the projects that we've got lined up to also start delivering post-2016, including our own exploration projects.
If we start by looking back, so the last three years, what have we been up to? These are some of the key things that we've managed to change over the last three years. You'll see a theme developing. It's all around what we've done in exploration. It's all around what we've done in the project portfolio.
In exploration, we've now got -- this is all unrisked, of course, but we got an unrisked prospect and leads portfolio, the things that we're working on to get drill ready and maybe discover -- 10 billion barrels, roughly double what it was three years ago.
And if you look at the project pipeline, again that's roughly double what it was three years ago. Three years ago, we had about 250 million barrels, 280 million barrels of projects under development, and we had another 150 million barrels worth of projects under appraisal. That was actually the number that we showed when we rolled out the E&P strategy in Turkey in September 2011.
If you look at a portfolio now, we've got more than a billion barrels of projects under development. And what we started doing last year is actually give you on a quarterly basis, in a table-type format, the key projects, the phase they're in, what sort of volume we expect to come out of these projects. We tend to call them reserves. They're not often, of course. They are the reserves when these projects kick off.
But we talk about volumes. We talk about what equity we've got, what sort of CAPEX we expect to spend, when we expect to get things onstream. All of that detail is available for that 1.1 billion barrels, and we'll keep you updated on that on a quarterly basis, not just a number on the slide. There's a real portfolio of projects on the line now.
That's been a big shift. And, of course, you then start seeing that coming through in our reserves replacement rate. The last year 1P reserve replacement rate to 113 and 2P reserves replacement rate last year -- I forget the precise number, but it was around 250%.
Three-year average, therefore, 93% to 1P. On 2P, a lot higher, of course, but that tends to come earlier. If you look at the rules for reserve bookings, you can book 2P a lot earlier than you can book 1P, so you'd expect 2P reserve booking rate to pick up a lot earlier than your 1P, so that's exactly what happened. 2P started picking up last year. We replaced around about 150% of our reserves, 2P this year almost 250, and 1P this year started picking up to over 100%, three-year running average now up to 93%.
And what we're going to do with that, nothing new there. We're going to deliver the 400,000 barrels a day in 2016, and I'll show you some detail, and then in particular Hans and David will go through the detailed sort of projects in there, as well. We're going to do it with a portfolio that will increase in value, not dilute. That's the pro forma cash flow that David just showed you. And there are -- [Lydia], you're right. There are some little dots on there. One or two are at the bottom. And there is in-house debate as to what we might do with one or two of those.
And if we decide that selling one of these dots is the right thing to do, clearly it wouldn't be one at the top. It would be one near the bottom. And, clearly, if that's got an impact on our production target for -- for 2016, we'd expect to get credit for the fact that we've decided it was a better thing to sell something, and clearly that could then have an impact on production target, but we look at it that way around, not the other way around.
And then, finally, the point David clearly made is we really are shifting our portfolio from one that had two-thirds of its production in very mature assets, which we're good at, but assets where you cannot expect to have 100% -- rate on an annual base, to a far more balanced portfolio, where in 2021 you see an expectation of about a third of our production still from these very immature assets, about a bit less than a third from our current international portfolio, and a yellow other -- let's call it roughly a third coming from the portfolio that we've been building in the last two years, two, three years.
So a very different make-up of portfolio. You can do this in different ways, as well. You can look at an oil-gas split, and our projection is actually that in 21 we're going to be a little bit oilier than we are today, not gassier. You can look at it versus offshore, onshore, and clearly we expect our portfolio to be a little bit more offshore-focused than it is today in 2021. Today, about 20% of our production offshore, we expect that to increase towards 2021, as well.
So there's different ways of looking at this portfolio, but clearly the key message is we expect the make-up of the portfolio in the second half of this decade to be far more sustainable. It's going to be a better mix, and we're going to have the exploration portfolio to keep the portfolio at that sort of level, that sort of production level with 100% reduce exploration rate out of our own projects, instead of having to buy them.
So let me talk about how we then execute our work. I do want to start with this. It's important -- internally, we talk about the fact that we got three priorities, and for E&P, we put them as safety first, production second, cost third. Safety first, because it's the ultimate expression of how well you manage your business. Active managing safety in our industry is a prerequisite. It's your license to operate in a lot of areas. And actually getting that right, if you look historically, that means your operating costs are under control, the quality of what you do is under control, because all of that leads to having a safe operation, as well. So there's an ethical, a moral obligation to run a safe operation, but a safe operation in our industry equals a good, solid, well-run operation, as well.
So we've improved a lot. We're not as far along as we want to. Clearly, we want no incident whatsoever. We've put a lot of effort into this, and a lot of our management attention goes into this, as well. But we're on our way. It's getting a lot better than where we used to be.
The second thing I want to do is just briefly touch on our footprint before I go to our portfolio. In a lot of ways, when we say the management meetings -- and I've had this question from a lot of yourselves over the time, as well. Aren't you too widely spread? In a lot of ways, we are narrowing down.
We've still got New Zealand at the other end of the world. It's true, it's a long trip, but it's an excellent piece of business. New Zealand also looks after Australia for us, so other than the fact that it's at the other end of the world, it is not one of the dots at the bottom of that cash flow per barrel range, so it's probably going to stay.
But then the rest of our portfolio is really starting to narrow down to -- somebody jokingly called it a time zone operator the other day. So it's Europe, key growth areas, Black Sea and the North Sea, Middle East, where we're very actively trying to grow our position in particular in the UAE, and then for exploration, we're very actively pushing into sub-Saharan Africa. And, again, you've seen the evidence of that, and you'll see more of that today.
What's that got us? This is a slide you're all familiar with. I like it, and I'm going to keep showing you or boring you with it, because to me it's important. It's -- what this is, the 1.1 billion barrels that we got in the development funnel, and this is the summary evidence -- actually, we give you one level more detail -- that it's not just a big number on a slide. These are the projects, and these are the different phases that they're in.
In dark blue, the projects that are in execution, cutting steel, being built, in light blue, projects that are in what we call feet, so they're in the last phase getting ready for final investment decisions, and then in green, the more uncertain projects that are under appraisal. Clearly, a bigger range of uncertainty, but we split them out separately. Half our volume are in the light and dark blue. Half our volume in the light -- light green. Anything in the orange or the yellow at the start is important, but we don't count in volumes. That's where the next round of volumes is going to have to come from.
And if we then look at how we execute the portfolio, our story really drops into three bits. It starts with keeping the core stable, Austria and Romania. Then I'll talk about the international part of our portfolio, which is where most of our growth is going to come from. And then, finally, exploration. That's also the sequence in which you'll see the three SVPs talk through the business.
Keeping the core stable is absolutely crucial to us. This generates the cash and is a stable platform upon which we build growth. If this declines by 10% or 15% a year, and we build growth together, nothing happens. So our strategy really starts with keeping the core stable. And in that sense, it's extremely encouraging, of course, that last year, despite all the good and the bad news, the mixture of news that we had last year, one of the key bits of news is that for the first time ever since privatization Romania increased its production by 1,000 barrels a day.
A thousand barrels a day, not that significant in the greater scheme of things, but, of course, the fact that it's gone up instead of down, very significant and a real morale booster for the guys in Romania pushing that stability thing.
We've also, of course, extended the stability thing, and we run the strategy out in Turkey in 2014. We said we'd keep production in Austria and Romania together stable out to 2014. And last year, we actually extended that to 2016. And clearly, delivery last year is evidence that we are confident we can do that.
Hans will say a lot more about this, and he'll say a lot more about this, as well. Hans spent most of his last eight years in Romania, was responsible for a lot of this turnaround, so he'll talk about this far more eloquently like than me, but the net result is that we took a business that already had some 14,000 people in it to a business that's now got some 15,000 people in it. That's just the E&P bit. It's growing instead of declining. They had a loss that's now turning more than a billion barrel -- a billion dollar -- euro, sorry, I'm always in dollars, I'm afraid -- for a while, it looked like it was going to be about the same, but that's no longer the case.
So EUR1 billion EBIT in the last three years. You see a huge capital investment program, but what you're also seeing is clearly the -- a contribution to the -- for a simple reason that we're making profit instead of losses that used to be made in Romania. Again, a lot more to come when Hans gets up and takes you through the detail of how we've achieved some of that and how we can extend that performance out to 2016 and perhaps beyond.
Then let's talk about the 400,000 barrels a day. I'm just going to get a sip of water. Thank you.
Again, a lot more detail on this coming, but this slide is important. You see the production performance in 2013? Not where we wanted it, 288,000 barrels a day, in particular Libya, Yemen, but also New Zealand, where our floater needed to be repaired, affecting our production. And then you see the list of projects -- actual developments that are going to help us get this 400,000 barrels a day -- these are deep projects.
I'm going to start in the middle, Austria and Romania zero. It's back to that message just now. Growth is nice, but it's important to keep the base stable, and we are projecting a zero contribution from Austria and Romania in 2016, relative to what they did last year, and that's saying we will keep production in Austria and Romania flat between now and 2016. That's the starting point again.
Then you see a significant increase in Norway. Where's that coming from? It's going to come from Gullfaks, which we had for two months last year, but, of course, in '16, we will have for the full year. It's going to come from Gudrun, the picture that you saw at the start of my presentation, and it's going to come from [Edward Greek], which planned to come onstream by 2016, as well.
Other key increases, Tunisia, that's the one project on this list that hasn't taken final investment decision yet. And details coming in David's presentation. We expect that FID there in the next few months, in fact, matter of weeks now, more than months.
So that's last in this list that still has to take FID. All the other contributors to the 400,000 barrels a day are in execution. And, of course, with the lead times that you have in E&P projects, that's exactly where you need to be. These things take a couple years to come on.
Other big increases, the U.K., we expect Schiehallion back on production sometime in 2016, as well. In fact, that contribution reflects it's starting up about midyear, so that's half the total contribution we expect. And then you see growth in Yemen and Libya. That's not because we're going into Yemen and Libya with a massive investment project, but that's, of course, because they weren't onstream full-time in 2013. So we then compare what we expect to do in '16 to '13, we expect an increase, given 2016 we expect a Yemen and Libya to contribute 100% of the time, and that is what is in this -- in this 400,000 barrels a day.
We were asked yesterday how much of a contingency or how much of a buffer have you got in the 400,000 barrels a day. We're working very hard to building one, because we've been in the industry long enough to know that things will happen in two or three years, so we're making sure that some of those are going to be positive things. Not all of them are going to take away from the 400,000 barrels a day. But, of course, Libya, we can't compensate for this. If Libya drops out in 2016, then clearly that will affect our ability to hit the 400,000 barrels a day target.
Some key achievements. I'm going to pass over this relatively quickly, because, again, it's going to come back in the presentation in particular of David's. We've had some key changes at the end of last year. I showed that slide yesterday where new production has come onstream. Two of them are at the top there. Latif came onstream in Q4, beginning of Q4, but Mayar impact some came onstream right at the end of the year, and really, the production impact of that we now start to see in January. That's important.
[Mary], New Zealand, that vessel on that blurry picture was broken. Very proud of how the team managed to do the repair job on that vessel. And that came onstream towards the end of last year, as well. Gudrun, you've seen that. That's coming onstream in the next couple of weeks. And [Navar] in Tunisia is the last of the projects we need to take FID on.
If we look beyond 2016, this is the portfolio of projects that we expect to deliver in the second half of this decade, and it's a mix, and clearly the uncertainty increases where you go towards the bottom of this list, but it starts with a project that's already taken FID. [Astor Hanstein] has taken FID, will come onstream in 2017. And then you get three sets of projects, [Rosebank, Zadan], and a portfolio of fuel redevelopments . There's more than one in there, and, again, you'll see some further detail on what is the typical field redevelopment.
But there's a portfolio of projects there that we expect to take FID on in the next period. And then there's projects under appraisal. Now, under appraisal, that's where you see our exploration contribution turning up. Domino was around exploration. [Pinabawe] is our own exploration. Western Shetland, Combo, Tornado, et cetera, is our own exploration. [Zola] in Australia, our own exploration. And Wisting is the Barents Sea discovery well that we drilled last year. So we're working very hard to make sure that investment flows into projects, but you're going to see those projects coming through in the second half of the decade. Clearly you don't do that in one or two years. You do that in 5 to 10 years.
So that's what we've got coming through. All in all, some three-quarters of a billion barrels, because this is where you see most of that development funnel coming through. The bigger volumes come -- take a longer time to come through, so the bigger chunk of the 1 billion barrels, 1.1 billion barrels we've got in the development funnel you see coming through in this sort of time period.
Exploration, where we'll be focusing, Walter will say a lot more about this, but we're focusing in effectively three areas. You've seen us very active in Norway last year, Black Sea position. You've seen us build up over the last couple of years, as well. We'll show you what we're planning to do there. And then in sub-Saharan Africa, you saw us make a few steps last year. Already, when we rolled the strategy out in September '11 in Turkey, we said we would need to go into further areas for exploration to make sure we could support that 400,000 barrels a day and bigger production portfolio. And we already then said we would target getting into sub-Saharan Africa, and towards the end of last year, you saw us make quite a big stop into Gabon. And earlier last year, we moved into Madagascar, and there's one or two other things that we're trying to do there.
All in all, we significantly worked the portfolio in those three areas, again, more detail coming when Walter presents. And in fact, this slide is out of date, because the last set sub-Saharan Africa, we actually forgot to put the Gabon volumes -- the Gaboni acreage in. If you put that in, that's actually 30,000 square kilometers. So we -- again, very busy building that portfolio.
Resource replacement rates, so what does that all end up doing then? We've been in the sort of 10 to 11 years reserves life. This is 1P, proven reserves life for a long time. And I would argue we're in good company there. That's nothing to be embarrassed about. I would love to have 16 years, but there's a lot of companies around us that have got a similar 11-year reserves life.
Nothing to be concerned about, as long as, of course, you're replacing 100% of your reserves annually, and historically for the last couple of years we've struggled to do that, which is evidence of what David said, that portfolio that was not sustainable. We had a very mature part of the portfolio that replaced on a very good year 60%. The international portfolio consistently did more than 100%, but if you added it all together, we were shrinking as a business. That's now turning around with reserve replacement rate last year of 113, and in the next two years, we expect to lift the three-year average one period replacement rate over 100, hit that target that we also put out there in 2016, not just to produce 400,000 barrels a day, but it'll also be replacing 100% of our reserves.
It deserves a mention -- it needs a mention. It's not just about portfolio. We've been very busy building our organizations, our skills, the technologies that we can exercise to -- that we know how to work with over the last couple of years, as well. In particular, David's going to talk about this, because, of course, what we're doing and plan to be doing in the next 5, 10 years in the offshore arena is something that we need to learn, and we're very actively learning that. We've very actively bringing the people in.
Last year, we came out with publicity around the program that in E&P we're going to recruit 1,600 staff in four years. And, in fact, last year, we brought in 500 of those 1,600 staff, so we're very busy recruiting, making sure we built both the capacity and the capability to execute the program that we now have the portfolio for.
I'm going to wrap up, ladies and gentlemen. I hope that looking back, looking forward changes -- it's clear looking back it was all about building the portfolio, building an exploration portfolio, building a project pipeline, getting that reserve replacement rate up. Going forward, it's all about delivery, 400,000 barrels a day 2016 with more valuable barrels actually than we have today, not dilutive, and to make sure that that portfolio that we then have in 2016 is something that's sustainable going forward. In fact, you will have got the message. We actually expect it to grow a bit more going forward from that 2016 position.
Thank you very much. I'm bang on time. We've got 10 minutes for questions.
------------------------------
[Thomas Adel], [14]
------------------------------
Thomas Adel from Credit Suisse. Got three questions, please. Firstly, on your mature asset, you said it's going to stay stable until 2016. What's the profile for the period beyond? And can you also talk about the portfolio in the deeper play in Romania?
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [15]
------------------------------
I'm probably going to do that with a few of your questions, so I'm going to park that a little bit, because Hans is going to talk about that when he gets up.
How much further we can push this out, of course, depends on what happens to fiscal conditions during the course of this year, early next year, as well, so that's one of the variables. Oil price is a variable. But there are in-house scenarios where we can push that out quite a bit further, but what you'll probably see us do is push that out by two years at a time to make sure we're sufficiently confident when we put new targets out.
The deep exploration targets, both Hans and Walter are going to show you some pictures of.
------------------------------
Thomas Adel, Credit Suisse - Analyst [16]
------------------------------
Okay. The second question is, on the contingent resources, you talked about 1.1 billion BOE, and one of your strengths is also to improve recovery effect. So I was wondering what recovery effect that you assume on average for the year, contingent resources?
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [17]
------------------------------
So when you first look at the contingent resources, you tend to be quite conservative. And so I can't give you the individual projects there, and even if I could, I probably wouldn't do that.
But on oil and on the gas side, you tend to be quite conservative by the time you put them in that portfolio. And that, of course, is where a lot of your organic reserve bookings then come in following years from, and that's exactly what you see happening in Austria and Romania, but also in some of the international portfolio that we've already got onstream. You know, and so you see the performance of your reservoirs, and the classic rule, big ones get bigger. You see that coming through in some of these organic reserve bookings that you do year and year.
So the only I will tell you is that the recovery factors we got in those -- that portfolio project tend to be quite conservative.
------------------------------
Thomas Adel, Credit Suisse - Analyst [18]
------------------------------
And the final question is, you said you're a good explorer. Your track record ranges 45% to 60% over the past three years. How much of that was operated and how much of that was offshore, if you can remind us?
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [19]
------------------------------
Walter will tell you -- Walter will show you some of the detail of what we've done over the last couple of years. A lot of that was operated. And if you look at our big offshore wells, [Zola] was not operated in Australia, but Wisting was operated, and, of course, the Black Sea was not operated, the Domino discovery well, but it was actually our prospect that was drilled there. We show the size mix. We build up -- we build up the prospect. Exxon then did the drilling, full price. I mean, clearly a very capable operator we got there.
But it's not as easy as saying that was not our operated prospect, therefore, it was Exxon that had the discovery. That was very much our discovery.
------------------------------
Thomas Adel, Credit Suisse - Analyst [20]
------------------------------
So going forward, from a risk management perspective, you're quite happy to be operated in deepwater projects?
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [21]
------------------------------
Selectively, yes, we're certainly moving in that direction, and that's the skill set that we're building.
------------------------------
Thomas Adel, Credit Suisse - Analyst [22]
------------------------------
Okay, thank you.
------------------------------
Henry Morris, Goldman Sachs - Analyst [23]
------------------------------
It's Henry Morris from Goldman Sachs. Jaap, you mentioned that the future potential for the exploration of the company comes from the Black Sea, North Sea, sub-Saharan Africa. One asset I noticed you haven't spoken as much about recently is Bina Bawi. I just wondered what your latest views are on it and, you know, is there any appraisal drilling plan for this year? What are the sort of...
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [24]
------------------------------
No. So we've drilled two appraisal wells, Bina Bawi-5 and -6. And it's no great secret -- and I'll also tell you why we don't talk about it a lot, but we found a lot of gas, a lot. In fact, Domino is not our biggest gas discovery. This thing is way bigger.
But it's not off the coast of Europe. This is in northern Iraq. It's got about 20% [nastis] in it minimum. It could be more. H2S, nitrogen, CO-2, a lot of H2S in particular. So we're working on how we can commercialize that gas, and that's got some very significant technical and clearly political and commercial challenges.
Clearly, the intent is to make that work. And as soon as we got a commercial project, then we will talk to you about timing, volumes, what that could mean, both reserve-wise, investment-wise, but before that time, I think it's appropriate to be just a little bit cautious, because it's not that easy.
------------------------------
Henry Morris, Goldman Sachs - Analyst [25]
------------------------------
Thank you.
------------------------------
Unidentified Speaker [26]
------------------------------
Hi (inaudible) from Exane BNP Paribas. You showed very clearly the depth of your portfolio, what you're doing and so on. Maybe the question is why you're trying to beat for some of the -- developments there, I mean, especially when you -- when you seem to have a focus on value and not so much on volume, as you have been saying. So what's ...
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [27]
------------------------------
Sorry, could you come again? Sorry, I understood the context, but not the actual question.
------------------------------
Unidentified Speaker [28]
------------------------------
Yes, so -- so the question is, what is -- rationale for trying to beat for some of the UAE onshore developments, when they seem to have a much lower profitability than what you have in the portfolio?
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [29]
------------------------------
So what we're aiming for in a Gabon or in a Norway, compared to what we're aiming for in the UAE, is fundamentally different, of course. The UAE is really a play that we're looking at getting into because of the skills, technologies, and cost management, as I mentioned, that we have in these mature fields, so we think we got something significant to offer.
And, of course, the barrels you may end up chasing there could be low-margin barrels, but there could be a lot of them, and there is a point where skill gets important, too, of course. And that's really why we're there. There's a very different play than some of the Norwegian stuff, for example, you see -- it really plays on our core strength of running mature fields really well with high recovery rates.
------------------------------
Unidentified Speaker [30]
------------------------------
Okay, thank you.
------------------------------
[Matt Lofting], [31]
------------------------------
Thanks. Matt Lofting at Nomura. Just one question on exploration and increasing exposure to the offshore, I guess. You can sort of look at the industry, we're seeing one or two of your competitors, like [Tello] more recently indicating that for cost reasons they're effectively pulling away from the onshore and moving back to have a greater bias onshore. Just wondered if you could make any comments in terms of what you guys think and see in terms of that trend and, you know, costs on the offshore side. Thanks.
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [32]
------------------------------
Thanks. No, sure. We've seen costs offshore from very up close with Rosebank, of course, and David will talk a little bit about what we're doing to get that fixed. So cost offshore is clearly a challenge, and the other thing you see is this has been hidden, of course, by the oil price going up year on year for a long time. It's not going up year on year, so it bites.
What we do think is that if you've got the portfolio that gives you a little bit of optionality to choose when you do projects, rather than rush into all projects as fast as you possibly can, that gives you quite a few options to manage your costs a lot better than I think people have done historically, and it's, in fact, one of the things that we're addressing with Rosebank.
So we think there are options to manage that better. But it is certainly cause for concern. But if you then look at our total portfolio, of course, even in 2021, far more than half of my portfolio will still come from onshore assets, so I would argue I've got a slightly different portfolio mix than [Tello] when you talk about shifting back to the onshore. I've got practically all of my production onshore at the moment. We're shifting to offshore, not so much because we like getting wet feet, but that's where the bigger opportunities are left. Simple as that.
------------------------------
Mark Bloomfield, Deutsche Bank - Analyst [33]
------------------------------
Thank you. It's Mark Bloomfield from Deutsche Bank. I think you're very clearly showing the barrel growth potential of the business through to 2016. Maybe you can talk a little bit about the kind of average returns you expect on the capital going in to deliver that growth over the next three years. Thanks.
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [34]
------------------------------
Yeah, so returns come and go, of course. And they tend to go during investment programs and then come back when things come onstream. And what you are going to see in the next couple of years -- and I'm going to hand over to you in a moment -- I see David getting nervous already -- but I'll hand over to David in a second.
But what you're going to see in the next couple of years is returns not going up, of course. We're going to struggle to push them up, because we got two things. We got a major acquisition that we're only partially bringing onstream. Only Gullfaks is onstream to come next few months, and the U.K. assets, first one is Schiehallion and won't come onstream until '16. So you see that on the books as a burden, and then you see a very significant investment program over the next couple of years, building that production growth from 288,000 last year to 400,000 barrels a day in 2016.
Now, clearly the project -- life cycle project returns that we expect on these projects, we got hurdles for that, and they're very significantly into double-digits. I think that's about as -- do we give more guidance to that?
------------------------------
Unidentified Company Representative [35]
------------------------------
--
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [36]
------------------------------
You can give the numbers in a second. But, of course, you only see that turning up over the life cycle of a project, and we're going to be investing a lot in the next couple of years. We're actually going to build up a chunk of not yet contributing CAPEX over the next couple of years. Yeah? We're going to be investing in Schiehallion already. We're investing in [Astor Hanstein] already. We're going to be investing in a Domino development. We're going to be investing in a Rosebank development, if we manage to take FID next year. And the first out of that short list that I've just given you comes onstream in '16, and the last out of that list that I've just given you we expect to come onstream in 2019. So clearly, that's going to have a medium-term impact on returns.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [37]
------------------------------
Can I just add...
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [38]
------------------------------
Project returns are good. Otherwise, we don't take FID.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [39]
------------------------------
Can you put this mike on? Okay. Again, I'd just add -- I mean, nothing I'd disagree clearly with Jaap. The next three years clearly are going to be challenging, as we invest in, as we actually start to digest the acquisition that we just did in Norway. And clearly, there's an understandable and valid trend in the industry, in the market generally that's a focus on returns, to improve returns.
The best way for us to have improved returns -- we clearly have had intensive debates on this internally -- would not have been pursue this program, would have been to actually continue with this unsustainable portfolio of E&P assets until it was no longer sustainable, quite frankly, because our production would have declined, but our returns would have been excellent in the medium-term period.
What we're doing here is building a business which is a sustainable business and is capable of achieving those returns that we strive. So the 13% return on capital employed target that we've always had remain intact, but clearly as we invest over these next few years, that's going to be particularly challenging to achieve, and we -- our internal forecast, clearly, depending on, of course, what happens with the oil price, but on internal forecasts, to see those returns being diluted in the medium term, but in the long term, and as these assets come onstream, then that remains the target and we'll be achieving it.
------------------------------
Unidentified Company Representative [40]
------------------------------
One more, and then...
------------------------------
[Makti Gardagi], [41]
------------------------------
Hello. Makti Gardagi from Citi. In terms of your reserve replacement, I mean, 2013 was clearly a distorted year, was a giant acquisition. Could you please talk about '14 and '15 and '16 outlook in terms of, you know, what you could book? You probably have a pretty decent visibility on it already in terms of projects. How do you see that evolving? Thank you.
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [42]
------------------------------
Yeah, so I won't give you the individual targets, but the very clear target is that in 2016, our three-year running average is then at 100%, very clear. That's one of the table stakes. It's no good hitting 400,000 barrels a day but not having that reserve replacement rate up at 100%, either. We want it to be a sustainable piece of business at that stage.
If you look at 2013, clearly, it is, indeed, a distorted year, and there's quite a bit of speculation going on about organic and inorganic reserves bookings. I'm not going to help you too much with that. Suffice to say that within the rules that we got, and clearly we have got all of the books as you see rules. We don't mess with that. But clearly within those rules there is optionality or a bit of optionality on when exactly you book reserves. And clearly, where you do an acquisition, like we did last year, and you book all that, you push as much of the other bookings as you can into the next year. So clearly, there's a bit of management in there, as well.
And if you look at some of our competitors -- let's not name them -- but I know one that I used to work for, and it does this. And then they're a rather large American company, and it does that, yeah? And that's about managing within the flexibility that the SEC rules allow you. And clearly we are trying to do that, too.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [43]
------------------------------
Okay, thanks. Let's move on for now to Johann Pleininger for our next session.
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [44]
------------------------------
So I've mentioned -- but let me just a few words of introduction. So Hans spent the last eight years of his life -- well, you've actually been back half a year now, but for the last seven-and-a-half out of eight years of his life in Romania, and for the largest part of that, he's been running our E&P operations in Romania. So, Hans, your floor.
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [45]
------------------------------
Thank you very much, Jaap.
Thank you. Once again, good morning, and welcome, everybody, also from my side, so the introduction was already done by Jaap, but just want to add, I am seen 77 already riso NV, so around 37 years, and last eight years in Romania, and there of six years responsible for the executive board in E&P in Petrom.
Once we are talking about the core, the core, as Jaap mentioned already, we talk about Romania, Austria, and Black Sea development in the future, but the core countries are Romania, Austria. Just to give you a flavor what we are talking about, what is the size of the business in Romania and Austria, so what we're talking about is 16,000 people, they are off around 700 people in Austria and 15,300 people in Romania operating our assets there.
Our asset, 11,500 wells operated in Romania and in Austria, around 1,000 in Austria, and 10,500 in Romania, around or more than 600 gathering station and metering points, just a couple or just a handful thereof in Austria, around more -- more than 50 tank farms, only one in Austria. The rest is in Romania. And more than 1,000 compressors, that's what we are operating, so that you get -- that you get the flavor what am I talking about.
What does the core stand for? By the way, what you see here is a picture of Deepwater Champion, which discovered Domino on the 22nd of February in 2012. We announced the discovery.
What does OMV's core stand for? Core stands for safe operations. We haven't had any political unrest, and we haven't had any strike, even during the heavy restructuring phase in Romania. And I can't remember any strike in Austria since I'm working for OMV.
Strong financial performance, which is the basis for future growth, as Jaap mentioned already, and I will come to it. Stabilized production in Romania and Austria. State-of-the-art application. Strong position for growth in the Black Sea. And last but not least, also the core serves as a basis for training and development of our people and of our talents.
Safety is our highest priority. As you can see, the left-hand side, then very nice development of the LTI rate in Romania over the last years. We've achieved already an international benchmark, OGB oil and gas producers 2012 stood also at 0.48, 0.49. We've achieved this already in 2013, as well.
Regarding fatalities in Romania and Austria, in Austria, we haven't had any fatalities since more than 10 years. In Romania, we substantially reduced the number of fatalities by more than 80% since 2008. And we had no oil spill since privatization in the Black Sea.
Financial performance. The core contributed or delivered 80% of E&P's EBIT in 2013. And this is the basis for future growth in the Black Sea, but also in our international business. The production cost, as you can see, have been reduced by more than 20% in Romania since 2008, and we're achieving top gas return on net capitalized cost in the core countries, so we are clearly above 25%. If you compare this with the European integrated they stood at around 13%.
Strict privatization of key projects, that's what we are doing, value-driven, so value over volume. So we are ranking quite strict our field redevelopments, our drilling program. In both countries, in Romania and Austria, we have developed a drilling program for the next two years at least, so that we can select only the best wells which will be drilled.
We realized sustainable cost savings around EUR75 million in the last two or three years by our energized project, around EUR70 million in Romania and EUR5 million in Austria, which is equalizing -- or which is equal to 10% of our production costs in Romania and 5% of our production costs in Austria.
To stabilize the production that will be promised in our strategy 2010, we delivered so far and we will further deliver, so we extended this target until 2016, so we'll keep the production stable in the core at the range of 200,000, 210,000 BRE per day for the next two years. 2013 was a very successful year for Petrom. E&P, the first year where we increased the production since privatization slightly, around 1,000 BOE per day, but still in Austria we keep the production stable already over more than 30 years, I have to say. In the '80s, in Austria will be produced between 29,000 and 30,000 BOE. And last year, 35,000.
You see a slight decline continued with the years before. This was because we had -- we've had one of our key wells in [Evendar] voted out, but we will come back and we are at the level already right now, and we try to increase the production coming slightly above 35,000 until end of the year.
What we see, as well, is a long-term potential to stabilize the production. More than 20 field redevelopments are already in our pipeline to unlock more than 250 million BOE recovery reserves until the end of the decade, 15 field redevelopments will contribute with incremental production already until 2016, and we do MARs, as we call them, multidisciplinary asset reviews, which will lead to additional field redevelopments, and here we have identified already 200 million BOE recovery with resources, so in total we are talking about potential of additional 400 million BOE, recoverable resources until end of the field life.
As I mentioned already, increased production in 2013, how could we do that? What are the main reasons for it? Number one, successful deep onshore drilling and new field exploration. Two examples for it, [Field Totaya], four wells have been drilled. One have been abandoned, but three are successfully producing already, and they are producing quite nicely around 10,000 BOE per day, and also [Totaya] shows excellent project execution capability we brought today onstream only four months after discovery in 2011. [Mamo], also one of the near field exploration drilling activities, is producing already at 5,000 BOE per day.
Second contributor, work over. We have an excellent work over track record. As you can see, we increased by 50% of work over activities since 2010. This is delivering or delivered in 2013 around 10,000 BOE incremental production via these work over activities. And the efficiency in work over increased by 30% since 2008, meaning each dollar which we spend on work over, it gets 30% more return on it.
But even more on that, well interventions, which is the activities where we repair our wells after a break of the saka roads or -- saka road bump, when we took over Petrom, we had at around 150,000 well interventions per year. And now last year, we were below 11,000, 10,900 well interventions were performed in 2013. And applying new technology, just one example, I will come to it. I will show you more examples what we're doing in Romania and in Austria.
Using the [desolvine] technology, we got 5,000 barrels of incremental production only from four wells. This was developed offshore. We will transfer this technology also to our onshore wells.
Talking about how do we want to achieve the 2016 targets? I explained how we did it so far, to stabilize the production until 2013. 2016, more and more of our field redevelopments will kick in. In the past, we've concentrated more on work over and on drilling. We will do this, we will continue this in the future, as well, but now more and more of our field redevelopments will kick in, so 35,000 BOE we expect incremental production until 2016 from 15 field redevelopments.
Twenty I told you we have in our funnel, in our pipeline. They are off are 10 already in the execution phase, seven in Romania, and three in Austria. You see on the map there also we are targeting more oil than gas, three field redevelopments in Austria targeting oil production, and from the 12 which would contribute until 2016. In Romania, four are targeting gas, and eight oil.
Now I want to show you some examples for field redevelopments, field redevelopments in Romania, in Austria, and offshore. Two of them field redevelopments, [Pustohin], [Pulvochin], these addressing our biggest gas fields or two of our biggest gas fields in Romania in the western part, so what we tried to achieve is 30,000 BOE incremental production. How do we want to do it? Drilling of new wells, implementation of wellhead compressors, modernization of facilities, and first production we will deliver already end of 2014 and beginning of 2015.
Now the example, field redevelopment in the up race. Eight million BOE incremental production is expected, peak production of around 3,000 BOE in start of operations, start of production area right now, because we started drilling already in January, so nine wells will be drilled this year, seven production wells and two injection wells.
Next one, showing an example of an offshore field redevelopment, target is 10 million BOE additional and incremental production, peak production of around 6,000 BOE. Scope of work to new wells, eight side tracks, four work over. And first production, which would get already beginning of the year, so the go back campaign has been started already.
Coming to partnerships, partnerships is another part or a cornerstone of our strategy in Romania. Why? Why we are doing partnerships? On the one hand, we want to concentrate with our field redevelopments on our major fields, on our big fields to develop them, to get more out of them. On the other hand, our small fields, we don't want to invest too much, because we want to focus with our investments on the big fields.
So that's what we did already. We started in 2010. We concluded two PECs, production enhancement contracts, with [Petros Zidanda] and [Secline] and [Petrofac] in [Segin], so a nice development, which -- what we can see there already right now. So compared with the time of handover, we increased the production by 10%. And on the baseline, that's what we agreed the forecasted decline, the already between 30% and 50% above this baseline.
The third one was concluded as a last year, with expert petroleum. In addition to that, we finalized last year two exploration trend] vendors, one with [Serapsoil] and one with Hunt Oil. With [Serapsoil], we want to drill in the second half of this year two wells deeper than 4,500 meter. With Hunt, we are peer reviewing three prospects right now, maybe drilling the first one maybe already this year, if not this, then next year.
The next slide should show you and give you a flavor of our technical capabilities, so what we achieve as Jaap mentioned already world-class recovery rates in mature fields, up to 60% on the oil side, and here are some examples. In [Suplac], in parts of the field, up to 65% oil recovery rate, also in Austria in [the sixteen third zone] in the western part, 60% in the [Shikertenty field], 59%.
Also on the gas side, good examples in Romania, up to 88% recovery rate and 92% in Wilderbak in Austria. And all of those fields are still producing, so we will achieve even more at the end of the field life.
With our IOR UR technologies, we are focusing mainly on water flooding and steam injection, but also two pilot projects are ongoing, one in Austria and one in Romania in Videla in asset four to use polymer flooding. Polymer flooding, you achieve a recovery rate about 10% higher than with water flooding. And the IOR UR share in Romania and Austria, 25% of the production is supported by IOR UR methods in Romania and 50% in Austria, which shows still potential in Romania.
State-of-the-art technology application, what we have achieved so far multiple world records we are holding, and that's where we are very proud of, especially in Romania, so we have achieved the world record. We are still holding this world record in shale or horizontal drilling, in [Suplac], for example. In depths of 175 meters only, we drill the horizontal section of 500 meter.
Casing drilling, we are not quite sure whether we still have the world record, because some guys in Indonesia, I think, so they have beaten our world record, but we are working on it to get it back, and I told my people already in Romania, and we will do so. We will get it back. And we hold the European record in multi-stage stimulation.
Offshore, other examples for technology application, well automation, more than 2,500 wells already fully automated, another 1,500 will come in the next one, two years. Linear road pumps, they are one -- around one-third or 40% cheaper than conventional bean pumps. Wellhead compression, 30 units will be up and running until end of the year. We are using them in our gas wells to almost suck out the gas from the reservoir. In cost compressors this all I mentioned already and continuous road, which will increase run life of the -- of the wells by up to 10%, up compared with normal bean bumps.
The core is very well positioned not only keeping the production at the level where we are right now, but we are also very well positioned for long-term growth. Why? Redevelopment of our fields will further stabilize our production. Right now, we are promising until 2016. We are working already, and we have -- for it that we extend this even for some further years.
Exploration of deeper and front-year hydrocarbons will on the one hand support the stabilization of production, on the other hand, will give also some potential for slight growth, even in our mature assets. It depends also whether we can keep this exploration success rate at around 60% in our core countries, yes or no.
And our offshore acreage, what you can see on the map there, will deliver the growth at the end of the decade. At around 40,000 square kilometers of acreage we have got already. Only one is still under discussion. This is [Kivska], which is currently under negotiations with the government of Ukraine, and Walter, my colleague, will tell you a little bit more about it.
Fiscal stability is key for us in Romania, as well as in Austria. Jaap talked already about it.
Growth in the Black Sea, we strongly believe in the growth opportunity in the Black Sea. We have -- we had already a nice discovery in 2012, Domino, preliminary estimates ranging from 250 million up to 500 million BOE. What we are doing right now, we have finalized the seismic activities already, so the interpretation of this seismic activities is ongoing. We plan for the drilling campaign to start June, July -- or, rather, June, middle of the year, and we expect the production at the end first guess, end of the decade.
But not only stable production that's what we're promising. What we're doing, as well, is reinvesting in our workforce. The core is also a stable home base for effective training and development of our engineers, project managers, and managers. What we did so far is we concluded a strong cooperation with the universities in Austria and Romania, mainly with the oil and gas university in [Plestk] and [Leovin]. We established an international petroleum master. The start-up should be in 2014.
The Petrom training center, where we will train around 3,600 people per year, started very successfully already end of the year in 2013, and we are taking in around 100 fresh graduates from the universities every year in Austria and Romania, which we will send then to our internal field academies, seven of them we have already up and running.
Coming to my last slide, and let me summarize why CE and Black Sea region stands for growth and strong performance. First, excellent performance in the core countries, world-class recovery rates, stabilized production, even prolonged until 2016, and costs under control. As you have seen, we have stabilized also the cost. Strong managerial and technological capabilities, still, and still long-term potential in our core assets.
1% increase of our recovery rate in Romania equals around 200 million BOE incremental production. This should give you a flavor what we are talking about that we still have potential in the core countries and our potential for growth end of the decade in the Black Sea. And as I mentioned, Walter Hamilton will talk a little bit more of it.
So let me conclude my presentation with the following sentence. A sustainable core is key and is the basis for growth in OMV's E&P business in many dimensions. Thank you very much.
So I hope...
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [46]
------------------------------
--
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [47]
------------------------------
Yes, please, [Lydia]?
------------------------------
Unidentified Speaker [48]
------------------------------
Thank you. And thank you for the presentation. Two questions, if I could, the first one being on the cost side. How are you seeing the cost of fighting that decline evolving in terms of how we should think about the capital expenditure over the next three to four years? Is it getting more expensive? Is it stabilizing, coming through?
And then the second question was...
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [49]
------------------------------
Cost to mean investments, sorry.
------------------------------
Unidentified Speaker [50]
------------------------------
Yes, yeah, or we can do OPEX, as well.
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [51]
------------------------------
Yeah.
------------------------------
Unidentified Speaker [52]
------------------------------
And then, secondly, on the partnership agreements, how much more do you want to expand that program? Or is it where you want it to be? And within that, are you using different techniques to you in the field redevelopment side?
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [53]
------------------------------
Yeah. Coming to your first question regarding investments in the upcoming years, we have -- we will invest mainly in the field redevelopments between 250 million and 300 million per year in drilling of around 150 wells per year, 160 million, 170 million, because we drill also many shale wells quite cheap in Romania, and for work overs around 140 million. So in total, between 800 million and 900 million for the running business, excluding deep offshore development, excluding our net development, so this will come on top.
Second question regarding these partnerships, why we are doing it, two reasons for it. So there are two different partnerships. The first one are these production enhancement contracts. Why we are doing it, because we will not -- as I mentioned, we will not focus so much on those fields anymore. We will bring in international know-how, international management capability, and those companies what we have experienced and what we have also contracted, they will invest five to eight times more in those small fields than what we would have done, yeah? And these are the major or main reasons why we are doing it.
Thank you. And the second one, second one -- sorry, these twin ventures on exploration, acreage, why we are doing it, because we are drilling more front year areas. There is still potential there in Romania. In Romania, in total, all over the years, yeah, from [Roncas] and from Petrom have been drilled around 65,000 wells, but only around 600 wells deeper than 3,500 meter, so we still see some potential there, and that's what we have seen already. [Totaya], [Mamo] are perfect examples for this strategy.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [54]
------------------------------
-- and then [Makti].
------------------------------
Thomas Adel, Credit Suisse - Analyst [55]
------------------------------
Hi. Thomas Adel, Credit Suisse. Two questions, please. On slide 39, you showed the potential from field redevelopment and mass combined 450 million BOE. If my method's right, then you don't really need the deeper place to keep production flat, so in essence, if we take into account the deeper prospective resources, whatever that may be, maybe you can talk about that, could you see production actually grow in Romania? And can you also perhaps talk about the relative economics of the deeper plays? That's the first question, and then I've got a follow-up.
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [56]
------------------------------
Yeah. What we're doing is, we push these field redevelopments further, because we think this perfectly fits to our strategy to keep the production flat, so what we promise is for the next two years to do it.
Yes, if you put everything together, the 450 million BOE, but don't forget some of them are identified by MARs, yeah, so multidisciplinary asset reviews, not each of those MARs studies will make it to a field redevelopment, yeah? This is still a potential. You cannot count on it that we will produce the 450 million BOE.
Second...
------------------------------
Unidentified Company Representative [57]
------------------------------
The other thing you tend to see with these volumes out of these field redevelopments is that they don't come as a single booking. They come because you change your technologies, you change your ways of working, you change how you develop the field, and you see a very small booking that year, and then you drill a few more, and you see -- so you don't see a booking of -- it comes over -- these volumes come over a very long period of time, and you can't really accelerate that. No matter how much you want to invest, it takes a long time. Sorry, Hans.
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [58]
------------------------------
Yeah, yeah. No, it comes over time, yeah? Reserves booking will come over time, yeah.
------------------------------
Thomas Adel, Credit Suisse - Analyst [59]
------------------------------
And the potential from the deeper play?
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [60]
------------------------------
The potential from the deeper play, this is a game of near-field exploration opportunities, where we drill per year between 10 and 15 of these near-field exploration wells in Romania. As I mentioned, 30 of these deep wells, deeper than 3,000 meters, will be drilled until 2016. They are off around eight in Austria and 22 in Romania. Yeah, so -- but here we have much higher risks than ones from development drilling, so the risk is between 20% and 30%, yeah?
------------------------------
Thomas Adel, Credit Suisse - Analyst [61]
------------------------------
And the second question I had is on the Neptune Deep. You said your target is to produce by the end of the decade, quite a punchy target. Assuming you're not going to FID without some changes to the fiscal terms, is that a fair assumption? Or do you feel that the development can be economics based on what we see today?
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [62]
------------------------------
Can I answer that?
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [63]
------------------------------
Yeah.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [64]
------------------------------
What we always said on Neptune is it's beyond the current fiscal terms or whatever else will come on top of that, to be perfectly honest. The investment will be so substantial that until we've got a concrete schedule and understanding of precisely what the regime will be, I'm sure neither ourselves or Exxon would be prepared to make the investment decision, quite frankly. So it will stand alone on its economics. It will have to stand alone on its economics for us both to actually take the decision.
So what the physical regime will be for that, we don't know yet, and that will obviously be coming out in the course of the appraisal, the discovery, and so on and so forth, but if it's not economic, we won't go ahead with it.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [65]
------------------------------
[Makti], please?
------------------------------
Makti Gardagi, Citi - Analyst [66]
------------------------------
In terms of the FIDs, when you take the decision on these projects, A, I wanted to understand the evolution of the returns that you've seen maybe three years ago and now out to '16. Are they becoming less profitable, in terms of the upfront CAPEX required? And what is the returns threshold to take field redevelopment, you know, without many precise numbers?
And my other question is, is -- you know, it's a bit of a follow-up on the deep exploration, so the JV you have with Repsol, for example. Is this a game-changer? Or is this just a part of the process to keep this flat? Or is there a -- if you can quantify maybe that upside potential from that?
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [67]
------------------------------
Yep, yep. First one, we have a clear internal hurdle rate. If we don't pass this hurdle rate, which is mainly a rate of return for those MP we over CAPEX payout rate, then we would not get the final investment decision and would not be approved by the board in Petrom and neither by the board in OMV, so we have a certain -- I don't know whether we disclosed this figure...
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [68]
------------------------------
-- 10% as a cash return as an absolute minimum IRI.
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [69]
------------------------------
Yeah. And second one, potential of the deep. As I tried to mention it, on the one hand, it will help to stabilize the production. This was the case in the past with [Totaya] and [Mamo]. Of course, if we are more successful, than in the past or I keep the 60% success rate, then it would drive maybe a slight increase, but I cannot commit to that right now. But this is our strategy, that we keep the production flat as long as possible. What's key for us are the field redevelopment, is drilling of 150 wells, drilling more frontier and deeper targets also onshore, and the high level of work over activities, yeah? So these three pillars will drive the future production in the core countries.
------------------------------
Makti Gardagi, Citi - Analyst [70]
------------------------------
Thank you.
------------------------------
Unidentified Speaker [71]
------------------------------
Yes, just to follow up on some of these things, how many of these things that you are talking about, the -- that you are and so on, make sense only in the current fiscal environment, i.e., if we're seeing a change in the fiscal environment, some of these things you may not do? And then the second question is, maybe you can share with us, what is the underlying declining rate, if you're not doing these things?
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [72]
------------------------------
Yep, so we have -- coming to the second question first -- we have -- as well as in Austria as in Romania, in the do nothing case, we have a decline rate at around plus/minus 10%, because both very mature fields. Some of the fields we have even higher decline rates, up to 20%, but average is 10%.
And what was the second question?
------------------------------
Unidentified Speaker [73]
------------------------------
The first one was in terms of how much you need the current fiscal terms to stay as they are --
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [74]
------------------------------
Yeah. So we -- we checked it, and we checked also, yeah, some scenarios. Our project, especially those field redevelopments, we are targeting oil, are quite robust against increase of royalties. Yeah, so...
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [75]
------------------------------
What we -- we've said this also -- what we internally clearly for quite some time now, the investment decisions we've made in Petrom deliver in a period when the fiscal stability clause will have expired, so clearly one has to make assumptions, and we have made them. We clearly don't disclose them, either. But we don't expect the situation to improve. Clearly, there will be a higher cost burden to actually be born by the company, and we make an assumption on what that will be. Whether that's right or not, of course, time will tell, but a consistent message to and fro with the remaining government has been look how much we're investing, look what benefit that has actually provided.
Petrom in total, if you take all the direct and indirect taxes, is 10% of the Romanian state budget, so that's important that it's able to maintain that level of significance, and clearly investments are going to have to be a key part of that, so they have to be profitable.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [76]
------------------------------
--
------------------------------
Henry Morris, Goldman Sachs - Analyst [77]
------------------------------
Henry Morris from Goldman Sachs. I just had a question on your target of recovering another -- potentially another 450 million barrels of reserve from field redevelopments and so on. And as I understand it, that would assume maybe another 2% increase in the recovery rates. I'm wondering how far you've already pushed the envelope and how much you can recovery from the oil in place and how much further in the longer term you think you can go, and is this contingent on new technologies being developed? Or could you do this with existing technologies and this is what's helping you recover more reserves?
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [78]
------------------------------
So part of it we can definitely do with existing technology already. Technology will go further -- or will further develop, so polymer flooding and technologies lag head will help to continue this way.
------------------------------
Henry Morris, Goldman Sachs - Analyst [79]
------------------------------
And what do you think, I mean, the ultimate recovery factors from these fields could eventually be, if you're at, say, 60% today?
------------------------------
Johann Pleininger, OMV Group - Senior Vice President [80]
------------------------------
These -- the current recovery rate average on the oilfields in Romania is at around 25%, in Austria, at 35%, yeah? So if you would compare those two, you would say there's a 10% difference. Will you achieve it? The answer is clearly no. Why? Because we started much earlier with water flooding in Austria, so the later you start, the less you get out at the end, so it will be somewhere in between, but still big potential there, because the original oil in place were at around 20 billion BOE in Romania. And as I mentioned before, only 1% increase of the recovery rate would equal around 200 million.
------------------------------
Unidentified Company Representative [81]
------------------------------
And a lot of this -- a lot of this is the peak oil debate at a smaller scale. And, of course, peak oil hasn't changed, the debate hasn't changed. The oil price has changed. We had the peak oil debate when the old price was $10 a barrel. We were about to come off the abyss. But, of course, then the old price moved to $100 a barrel, and all this oil that previously was undevelopable became developable. And this exactly -- the same is happening here.
------------------------------
Unidentified Speaker [82]
------------------------------
-- from -- I had a follow-up question on the oil drilling in Romania, because I guess there is a bit of confusion when it comes to the potential impact of the new royalty regime in Romania, at least in the short to medium term. My question is, would it be fair to assume that the new royalty regime will be valued only for the new licenses that Petrom would obtain in Romania and should not affect the existing licenses, which means that the effective royalty tax to be paid by Petrom should increase only gradually and there should be not -- no immediate increase on the -- on the effective tax rate, at least, as I said, not in the short to medium term. Thank you.
------------------------------
Unidentified Company Representative [83]
------------------------------
I think I should...
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [84]
------------------------------
There is some discussion going on in Romania at the moment based on the realization that the royalty rate is not a centrally statuted number. Rather, it's actually embedded in individual licenses, most of which have got many years to run and represent in and of themselves sacrosanct contract, as it were.
And simply going in to change that royalty would require each one to be individually renegotiated. It's actually quite separate from the fiscal stability clause and undoubtedly constitutes a complication to what would otherwise be -- I imagine a quite simple solution to actually simply increase the royalties. It's not as easy as that.
It's not going to make a big difference cash flow-wise, because what's likely to happen instead is if that's the way it ultimately proves out, they'll raise a tax on the profits, which, in fact, it would actually be better, to be perfectly honest, because, of course, profit taxes are only paid when you make profits, whereas royalties -- imposed even when you're not at the profitable level.
So we will see. The bottom line, however, is that we simply don't know. There's been a lot of speculation, a lot of rumor, a lot of discussion, and, of course, we're now in a particularly complicated phase, because there's a major election later in the year when the presidential -- when the president position is up for re-election. So I can't imagine any government actually making a decision one way or the other ahead of them, because it will inevitably become a political discussion that it was wrong, it was too light, and all kinds of nonsense.
So we rather suspect it will be deferred towards the end of the year or into perhaps even early next year. We don't know. We can't influence it, clearly. We would like certainty, but there's no doubt at all about that, and we clearly expect the overall fiscal burden to increase that. That's clearly understood, but I repeat, consistent message and always part of the dialogue is that they -- that they -- there isn't a company even remotely like Petrom in Romania in terms of its profitability, the cash it generated, importance to the state budget, and actually maintaining that. And keeping it as a viable company, a viable employer and a viable investor is in the interests of everyone, and that's been recognized. What the outcome will be, we simply don't know yet.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [85]
------------------------------
-- ladies and gentlemen, we now take a 20-minute coffee break, and then we come back at 10^40 with David Latin and his presentation. Thank you.
[Break]
------------------------------
David Latin, OMV Group - Senior Vice President North West [86]
------------------------------
Okay, welcome back. Good morning. I'm David Latin. I've had the pleasure of working with OMV for the last two-and-a-half years. I was with BP before that.
The picture you've got here on the screen is actually -- is actually Gudrun last summer being lifted out. It's the top sides of the Gudrun platform being lifted out by a [Sipem] heavy lift vessel.
So over the last 12 months, I've met some of you. I've read some of your reports. And I've been talking to a few of you during coffee. And, of course, you have some recurring questions. Of course, you're concerned about cash flow and the capital profile, but there are three other questions which I also hear you ask.
First of all, you ask, can we really meet our 2016 targets? The second question I heard you ask are, can we manage the risks associated with these big, big projects and deliver them without major cost overruns and delays? And, thirdly, you ask, can we actually develop our offshore exploration successes ourselves?
And from where I stand, of course, the answer to these questions is yes. And in the next few minutes, I want to give you examples which show you why I believe we can deliver. As you know, our business is pretty simple. First, we discover; then, we develop; and then, we operate. It's simple, but it's not easy, and it demands real capability. So I want to start by giving you some examples of OMV's capability and then move on to examples of delivery from my area.
We've already got a highly capable E&P organization. We operate across a great geographical and technological spectrum, and as you just heard from Hans, we're doing some things really impressively well in our older assets, in Romania and Austria. Examples are listed on this slide.
Much of our future, however, comes from offshore projects. And these future projects are not things that we've done a huge amount of to date, so I want to focus quite a lot on our capability offshore. We have -- we have, however, delivered big onshore projects, and you'll hear a bit about Pakistan later. We're also delivering in Tunisia and in Yemen. Those are onshore developments.
But since so much of our future comes from the offshore, I'm going to focus on our ability to operate there. Offshore operations aren't new to us. We produce offshore today in Romania. We produce offshore today in New Zealand and in Tunisia. And we've been acquiring seismic data and drilling wells in offshore locations for many, many years. So before I talk about the offshore, I want to spend a moment on the rocks, because I'm a geologist, and actually this is where the E&P business starts.
You'll hear a lot more about the subsurface when Walter speaks. It's something that I think we're good at. And to my mind, the quality of our subsurface work is shown in three ways. First, it's demonstrated by the confidence that other companies have to farm into what we're doing, to actually buy into what we're doing. Exxon in the Black Sea, who you heard about, Shell in the Great Southern Basin of New Zealand.
Second, quality is demonstrated by the confidence that governments have in us, and they award us acreage. The Norwegian government have got a really significant stake in their acreage awards, because they pay 78% of the cost of every exploration well, whether it's dry or whether it finds something. So the Norwegians really care about finding the right partners. In 2013, the Norwegian government awarded OMV six licenses in Norway. That was only one less than Statoil, who got the most awards out of the industry.
And then the third way of looking at this in terms of quality of exploration in our subsurface is the results. And in the last two years, we've had play opening discoveries in the Barents Sea with Wisting and in the Black Sea with Domino.
Of course, to discover things means you've got to be up to drill in these places, and I wanted to talk a little bit about our drilling capability. It's not easy to drill for oil and gas offshore Norway. Prior to drilling there, the Norwegian Petroleum Safety Authority can elect to audit it any new entrant, any new operator, and check that they're ready to run a drilling operation. And the audit is almost always performed on new entrants, and sure enough, in 2011, before we drilled our first operated well, we were audited.
The audit is far-reaching and very rigorous. The scope covers not only the engineering and the design and the planning of a well, but also emergency response plans, contractor management plans, the competence of the people working on the rig, the quality of the rig, and environmental impact assessments.
The results are very serious. The authorities can and do stop people from drilling. They do halt operations, and they make requirements to cause people to improve before they'll let them operate. In any case, it's very rare that an audit will happen without there being many findings. It's even rarer for this to happen with a new operator.
Excuse me. In the event -- we passed the audit with flying colors. We got one minor recommendation, and this was possibly the best audit result of any new entrant either before or since. And since then, we've gone on to drill several exploration wells in Norway, including last year, the Wisting discovery, which has already been mentioned up in the Barents Sea. All of these were done safely, they were done on schedule and to budget.
We're now recognized as a major player in Norway. But we're not only drilling in Norway. Our drilling operations span the globe, and you can see them on the slide. And at one point last year, we were simultaneously drilling the most northerly well in the world in the Barents Sea and the most southerly well in the world in New Zealand.
We've been a good onshore operator for decades. And we're already a relatively experienced offshore operator. We have hundreds of staff working offshore in Romania, Tunisia and New Zealand. And we do offshore project work. For example, in Tunisia, we're just about finished the revamp project on our Ashtart field there.
But I want to take you to an example from New Zealand, because something really remarkable happened in New Zealand last year in the second half of last year. So when my country manager phoned me late at night, I knew it was going to be bad news, and Peter was caught up in a serious situation. There was a bad earthquake happening in Wellington. But he wasn't just calling about the earthquake.
We had a problem with our operated FPSO. Something called the swivel had jammed. And the swivel is supposed to be able to rotate. It lets the vessel weathervane with the weather, so the vessel can spin around in the weather. It gets worse, though, because we were already planning some critical work to replace mooring lines. Three of eight mooring lines had been damaged by severe weather that we'd had down in New Zealand over the last few years, and one of the lines had just failed. And these were also critical.
So perhaps you can imagine how I felt about the situation. It was winter in New Zealand. We had a failed swivel, failing mooring lines, and an earthquake impacting the response team. So we had to shut down production. We had to fly in a new 50-ton swivel from Germany on a giant chartered Antonov plane. Thank goodness we'd seen that the swivel had a failure risk and we'd already got a replacement. Otherwise, we might have been shut down for 18 months. Thank goodness we'd already done the detailed planning to work out how to do the replacement. Thank goodness we already had the appropriate offshore vessels in the field and on order ready to help repair the mooring lines.
So we took the FPSO to port. It had never seen an FPSO before, this port. We replaced the swivel. We completed 60,000 man hours of work without a sticking plaster. No injuries at all. We repaired the mooring lines, and we redeployed the FPSO, which, by the way, was not designed to be able to take off and put back very easily. And it was producing oil again by the end of the year.
The work was commended by the Norwegian -- by the New Zealand government. I hope the Norwegian government would commend it, as well. It was completed ahead of schedule, ahead of budget, without any incident, and it utilized more boats than the entire New Zealand navy.
So it shows that we can identify key risks and plan ahead to mitigate their impact. It shows we can manage highly complex offshore projects under very stressful conditions in hostile offshore environments. And it shows that we can muster very capable resources from across the globe and our industry.
And with that, I have a good lead into talking to you about the team that we've been building. You see, our success really is built on people and relationships. Before the people, I want to give you a couple of examples starting with relationships. Relationships really matter to us. I want to take you to Tunisia and show you how and why.
We're about to sanction a very significant gas development in Tunisia in the south of Tunisia. Imagine how things are in Tunisia right now. There's a lot of political uncertainty. There's been a lot of social instability, severe unemployment, and it can be difficult to get things done. In response to significant local pressures about 18 months ago, the government announced there would be a new route for our pipeline and our project, a route which would have added -- it would have added hundreds of millions of dollars of extra cost, but was going to satisfy local stakeholders to see a pipeline in their area and perhaps create some jobs for them.
At this point, our partner company, which had been leading the project, decided to walk away. We did not walk away. We engaged to try and make something happen and to protect the value. We took over as the project operator. We engaged the stakeholders at all levels in the country, some of whom weren't able to put any kind of face to our industry before. We invested in a vocational training center, building skills and creating people who then actually walked into jobs afterwards, and we engineered the new pipeline route, and we demonstrated the huge additional cost it was going to create for the government, as well as for us, because they have to pay some of it.
So where does that story end? The government now supports the original route. They've provided guarantees to buy our gas. The local community now knows who we are, and they support us. So we now have a robust and economic project which is almost ready for FID. I'll talk a bit more about it later.
But I want to now move onto our people, and we've got a very strong E&P leadership team. In the room today, actually, you see a team which brings together long-term OMV experience, represented by Hans and by Walter, with long-term experience from Shell, in the case of Jaap, and in my own case from BP.
The wider team also reflects this same mix of professionals from diverse industry backgrounds, and we're actively recruiting more, as Jaap said, some 500 just last year. We're finding that we can attract really talented people, because they want to come to an E&P business that's growing. The team we've built is starting to have a very significant influence on major projects that we have which are operated by others, and I think it would be fair to say that Chevron, the operator of our Rosebank project -- I saw a few of you perk up then -- were somewhat astonished, actually, when OMV showed up at partner meetings and started to have very direct, very detailed, very credible recommendations for how the project could be significantly improved, recommendations which come from the people we have deployed on the project, who have more than 300 years of deeply relevant industry experience. For example, our procurement expert has more than 30 years of experience. He was a senior adviser to BP and then to Shell, and he's learnt on other big projects, and he went in to advise us and Chevron, our partner.
Recommendations which come from benchmark data that we've got and the insights that we can bring as a partner investing in very similar projects, like the BP-operated Schiehallion project, recommendations which are based on very searching questions, questions like, why does the tank of the FPSO on Rosebank need to be so much bigger than the Schiehallion next door? Why does the Rosebank FPSO need to be so much heavier? Why does the subsea system require so many more valves? I could go on.
So we're working with our partners with Rosebank, and we've brought a lot of expertise and insights to the table, and we formulated a way forward for the joint venture. I'll describe it later. So we manage our relationships, and we've built a strong team.
I've talked to you about organizational capability that we're building. I've been focusing on areas where we're demonstrably good. Of course, it's a journey, and we're certainly not uniformly good. We're still learning, and we're building strength. Why should we care?
Capable organizations manage risks. Less capable organizations let the risks manage them. This capability is really important to deliver in our current operations and in our portfolio of projects that Jaap was showing you. Such projects are places where we need to protect our interests, influence the outcomes, and where we're able to learn from others. And today, we're standing at a really exciting point in the history of OMV, actually. It's a very important point in time, because we've got a ringside seat on a whole host of major partner-operated projects, and as a result, we've got a historic opportunity to learn from among the very best in our industry. We're actively learning from Exxon, from Statoil, from BP, from Chevron, and from others. And we're seconding OMV employees into those project teams.
For example, we've had two OMV staff performing key roles in the BP Schiehallion project during construction of the FPSO at the Hyundai yard in Korea. The same yard is going to be used to build [Astor Hanstein]. The same yard is going to be used for Rosebank.
We're absorbing knowledge, and we're active in transferring lessons between these different projects. And this learning is setting us up for a future portfolio, a portfolio in the future that will involve OMV-operated projects, developing resources that we have discovered, resources like Wisting, future exploration discoveries, as well, in the North Sea, the Black Sea, Africa, and elsewhere.
Our research and development activities is something else I wanted to mention, because this was key to our deal with Statoil last year. And they're going to play a very significant role in the design of our future developments. You may remember one element of the deal last year with Statoil was that we agreed to work closely on research and development. Future developments that we do will see an increasing utilization of technology on the seabed, which will involve ideas tested with Statoil on Gullfaks. We'll see future developments planning from day one for enhanced oil recovery involving injection of polymers or specific water chemistries into onshore oil reservoirs where they can be piloted in low-cost environments before being taken offshore.
So a little earlier, I posed three questions, and I answered yes. Yes, we can deliver. Yes, we can maintain project value. And, yes, we can develop our own discoveries. Capability is the reason that I answer yes, and it provides us with insights and allows us to understand risks. And through capability, we'll intervene and manage those risks. And through capability, we'll deliver.
So now I want to take you into the portfolio and demonstrate some of our delivery. We've got a really exciting portfolio of projects which will deliver new production for us in 2016 and beyond, and I want to step through a selection of these and update you on the progress. I'd begin with some projects which start up in 2016.
I've already mentioned the gas project in Tunisia. [Navarro] will develop our gas discoveries in the south of the country. It involves constructing a 360-kilometer-long pipeline from a processing plant in the desert to a treatment plant on the Mediterranean coast at Gabes. And Tunisia really needs the gas.
Most of the power in Tunisia is generated from gas, and much of it is currently imported from Algeria. Gas market guarantees and gas sales agreements are in place. Line pipe is ordered and being manufactured. The wells are already drilled and awaiting completion. Bids for three major EPC contracts have been received from interested companies, and these are currently being evaluated. And we expect contract awards to be made after FID in the next couple of months. We will expect first gas from [Navarro] in 2016, and the peak production will be around 10,000 barrels a day. It may not get to that in 2016, of course, 10,000 barrels a day net to us, that is.
Now, Schiehallion I've talked about a bit already, and it's got a very special meaning for me, because in my last company, I was directly involved in the sanction case for this project, the original development just over 20 years ago, the sanctions. And Schiehallion is being redeveloped because it's got a great resource base. The original development was designed to recover 300 million barrels. This amount has already been produced, and we think now that there's another 300 million barrels to be recovered. And I think this is an example of a field getting bigger through improved recovery factor Jaap was talking about earlier.
So to do this, we need a new FPSO. We also need a new subsea architecture designed to last another 20 years. And the FPSO in the picture -- and you've seen it outside, as well, some of you, I guess -- is now 54% complete, and sail away from South Korea is planned for the end of this year. It will be moored and connected in the field in the middle of 2015 and will start up through 2016.
And the subsea part of the project is also a very major undertaking. The old FPSO and the old subsea systems have to be removed and new subsea flow lines and systems -- manifold, risers -- have all got to be put in place, and there's quite tight weather windows in the -- that part of the Atlantic, so it's a major undertaking. Currently, the project is on plan. And we expect, as I said, first oil in 2016. It'll add around 12,000 barrels a day net to OMV's production.
Edvard Grieg, Edvard Grieg in Norway. It's in southern Norway. The project's requiring 15 new wells to develop gross reserves of more than 200 million barrels. As you can see, we have a 20% stake in this. The jacket, which is the yellow bit underneath the platform there in the picture, is already finished and is ready for two out in the next few months.
Top sides construction is going on in several sites, in Poland and in Norway, and the associated pipeline projects are progressing according to plan, as well. All the main commercial agreements have been signed. So the project is currently very much on track. We expect in our plans first production from Edvard Grieg during 2016. The project's actually on a schedule to deliver even earlier than that, if everything goes according to plan. It could come in late part of 2015, but our plans are for 2016. And production will ramp up to around 19,000 barrels a day net to OMV.
So far, I've been talking about projects which start up in 2016, but the projects on this slide are current and near-term start-ups, and they're delivering production now or within the next few months. So Pakistan achieved two key milestones last year. In October, the Latif field development was completed, and that work involved drilling and completing four wells and constructing a 50-kilometer pipeline to connect those wells to the [Sadan] processing plant. And then in November, we commissioned a gas condensate processing facilities at [Mahar], and that started to fully come onstream at the end of the year, and that development required several new wells and construction of the central gas and condensate processing plant. These two projects are already adding around 6,000 barrels a day to current production levels and will continue to ramp up.
In Yemen, continued political instability has resulted in repeated shutdowns of production over the last year or two, these, of course, by attacks on the pipeline there. However, the average production last year was double that the previous year, and we took a very important step for the [Haban] field in successfully restarting the project work, which included -- includes constructing a central processing plant, as well as drilling and work over operations.
And the security, as you might imagine, is a very serious undertaking in a place like Yemen. We've been continuously increasing security measures. We have several defense barriers that we've built around our operations there, and you actually -- there's an air strip within our defended area, and that defended area is of the order of 400 square kilometers. So it's about the same size as the city of Vienna. So it has a huge berm that goes around it several meters high and is very well protected.
And in order to reduce our financial exposure in Yemen, what we're doing is we're really only financing investments to the degree that they can be financed by current operations. So it's a kind of pay-as-you-go. But we expect to add around 10,000 barrels a day net by 2016 there.
Gudrun we mentioned a few times already. It's a new Norwegian gas condensate field development. We acquired our share last year as part of the deal we did with Statoil, and we expect first production to occur towards the end of March. That'll bring on around 14,000 or 15,000 barrels a day as it ramps up, so it gets to around 15,000 barrels a days net to OMV towards the end of the year or early in 2015. It starts with one well, and then there's a further six that will follow over the following year.
It will also bring OMV Norway to a total production of around 40,000 barrels a day. Gullfaks is producing 27,000 at the moment.
We're also adding production in New Zealand. What have I done here? I apologize. I didn't realize I'd flicked the side on. But, anyway, we're also -- we're also adding production in New Zealand. We're drilling a series of new wells in the [Mary] field over the next 12 to 18 months. And the rig that's going to drill those wells is arriving in the field in the two or three months, start drilling, and it will add around 7,000 barrels a day net production in the next two years.
Now we can go to [Astor Hanstein]. I don't know how long you were looking at that for, but apologies. It's a project that's slightly further out in time. It's a gas condensate development right up in the northern part of the Norwegian Sea. It will require the world's largest floating spar development, developed for harsh conditions and deepwater, and the facilities are designed to allow [Astor Hanstein] to operate as a hub for further tiebacks in the future.
The spar is being constructed by Hyundai in Korea, as I already mentioned, the same yard that's being used for Schiehallion today and that will be used for Rosebank. And we expect peak production from [Astor Hanstein] to be around 18,000 barrels a day. The current target date for the project team is 2017.
In a project of this size and this kind of complexity, it requires certain weather conditions for installation. So the different components are docked in a fjord in Norway and then moved out to the field. And if you miss the weather window, you can have a really significant delay. So in our planning, we allow for quite a bit of delay, in terms of our internal forecasts versus the 2017 target that the project has.
Rosebank. So it was mentioned already, and as part of the deal last year with Statoil, we required another 30%. That makes us the majority shareholder with 50%. Our intention is still to reduce to around 35% in due course.
The project FID was delayed this year because the costs had simply grown too large. As I explained earlier, we're paying a great deal of attention to Rosebank. The Chevron-led team now has a series of workstreams aimed to improve the economics. We're looking to drive down capital costs by between $1 billion and $2 billion, and we're going to change the phasing to improve the economies, just change the phasing of the capital over time.
The FPSO design got too large, too complicated, and so it's being simplified. I think an example of that, we were speaking to Chevron recently, and as they started to look at some of our benchmark data from the Schiehallion project next door and re-evaluate the design, they found something like 850 valves on the top sides that they could now take out.
We knew it could be simplified because of this benchmark data that we're getting from Schiehallion, but also from other FPSO projects that we've looked at. We also think it's possible to simplify and reduce the subsea system. That's probably got too many valves in it, as well. The number and type of wells is being optimized. And we're reviewing the contracts, because we think a very aggressive schedule to try and start up in 2017 has resulted in some inflated prices, so by relaxing that schedule and going at more natural pace for the project, we think we'll get a better deal.
And the result of all of this work is that we're actually quite confident that we'll find an economic way forward for the project and we'll have that defined towards the end of the year. We haven't agreed dates with the JV yet, but in our view, taking FID sometime during 2015 with first production towards the very end of 2019 or into 2020 is quite possible and it will be an attractive project. If we retain our current equity, which I've already said we won't, but if we were, it would add 50,000 barrels a day of production when it comes online.
So as I said earlier, capable organizations manage risks, and less capable organizations let risks manage them. We're very much focused on our performance and on our projects and on our promises, and I've shown you the status of a number of the big projects, by no means all of them. These projects I've shown you add 100,000 barrels a day of extra production to OMV between now and 2016, the end of 2016, and the current pipeline that Jaap showed you of all of the projects brings between 180,000 and 240,000 barrels a day of additional production by 2021.
Future organic growth is increasingly going to be through OMV-operated developments, developments like Wisting, and our portfolio will extend from big projects in the North Sea to increasingly include discoveries in the Black Sea and in Africa. I started by saying that I believe that we can deliver our targets and manage our project risks, I believe we're on track to do that. And we're also building the team that we need to develop our own discoveries, discoveries that'll be found by our explorers, which is where we're going to go next, after a little bit of time for questions. Thank you.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [87]
------------------------------
Thank you very much, Dave. So if there are questions right now, please go on.
------------------------------
Unidentified Speaker [88]
------------------------------
Thank you very much. In terms of your 400,000 target for 2016, clearly you have quite a few projects starting in 2016 or right at the end of 2015.
------------------------------
David Latin, OMV Group - Senior Vice President North West [89]
------------------------------
Yes.
------------------------------
Unidentified Speaker [90]
------------------------------
Libya aside, which is a bit of a political wildcard, but what do you see as the riskiest part of that 400,000 target?
------------------------------
David Latin, OMV Group - Senior Vice President North West [91]
------------------------------
Yeah, that's a good question. As Jaap said, we're trying to build a buffer so that we've got more capacity than 400 in 2016, but it is currently quite tight. As I look at the projects in the portfolio, I'd say probably that the riskiest one in [Navarro] in Tunisia, not from the point of view of getting the project sanctioned, because I think we will and I think it's a great project, but Tunisia is still a country where a lot can happen. It's seemingly politically more stable now. We've got a technocrat government in place that's just had a constitution ratified, which is very, very good news.
So everything's headed in the right direction, but the potential for social unrest to bog us down in some way, shape or form during the construction is still there, and we've still got to agree the final contracts awards with the government. And there's obviously issues to do with local content and local contractors that we need to work through with the government.
So I think of all of the ones I've talked about, the one with the most potential to slip is probably that one. I mean, the big ones for 2016 are Schiehallion and Edvard Grieg. I think those projects are well on track. You want to add anything, Jaap? And I know -- of course, Libya -- Libya is -- you know, Libya is Libya, as you said.
------------------------------
Unidentified Speaker [92]
------------------------------
Just as follow-up on Libya, could you please talk about the kind of -- Libya wasn't in the transition, and I realize that, but in terms of the vital pieces of infrastructure for OMV there, should we -- as analysts should be looking out for to be back at work, basically, that would matter, basically?
------------------------------
David Latin, OMV Group - Senior Vice President North West [93]
------------------------------
So, I mean, last week, Libya was producing two-thirds of OMV's production -- the normal production level, so it was at two-thirds of its full production level last week. We produce in two areas in Libya, so we produce in the Murzuk area, which is southwest of Tripoli, and we produce in the Sirte area, which is between Tripoli and Benghazi in the east of the country.
Eighty percent of our production comes from Murzuk, so if you ask, you know, which is critical area? It's Murzuk. And Murzuk, since the beginning of the year, has been more or less fully producing. Murzuk was what really hurt us last year when it got shut down. It was shut down for a very long time. It was shut down by Tuareg tribesmen who decided that they would invade the field and sit there until they got some agreements from the government to do with the Tuareg identity within the constitution and to do with their language and a whole bunch of complicated issues.
So -- but the one to watch is that one, Murzuk, and that's operated by Repsol, in terms of the foreign companies. It has a local company running it, but Repsol most heavily influence it.
In the east of the country, everything's been shut down since -- I can't remember when it first shut down. I guess it was probably the middle of last year. It's been shut down fully. And you read in the news about rebels in the east trying to export cargoes and the government threatening to attack and bomb any ships coming in to take that crude away. Thankfully for us, that's a relatively small percentage of our production.
Did that answer your question?
------------------------------
Unidentified Speaker [94]
------------------------------
Yes, thank you.
------------------------------
[David Mers], [95]
------------------------------
Hi, David Mers at Soc Gen. Just two questions. Firstly, internally you've been trying to reduce the costs on these developments. Externally, have you gone out to your service providers and asked them to have another look at their figures? And how do you think -- and they themselves will be able to reduce their costs?
------------------------------
David Latin, OMV Group - Senior Vice President North West [96]
------------------------------
So that's a conversation -- that's a conversation we're in right now as a Rosebank partnership with the service providers on that project. I think a lot of it -- I mentioned that the costs of timing, because, you know, when -- when a yard is available can influence the cost, when a vessel is available to do work can influence the cost, so availability of key components, if you'd like, for building these projects can be a real driver on cost, as well as the complexity of the project which we're trying to simplify.
So we're very much in the conversation. I can't go into the details of the specific conversations with Hyundai or with others, but we are very much having those conversations.
------------------------------
David Mers, Soc Gen - Analyst [97]
------------------------------
And just secondly, on your U.K. and development base, in Norway, you will have 40,000 barrels a day by the end of this quarter with which to offset your development spend.
------------------------------
David Latin, OMV Group - Senior Vice President North West [98]
------------------------------
By the end of the year.
------------------------------
David Mers, Soc Gen - Analyst [99]
------------------------------
Sorry, by the end of the year, but -- which to offset your development spend. Given the number of asset packages that there are in the U.K. and the relatively high tax rate in the U.K., would it not make more sense to be a bit more tax-efficient by taking producing assets?
------------------------------
David Latin, OMV Group - Senior Vice President North West [100]
------------------------------
It would be good to have a bit more production in the U.K. from a tax point of view. But as we said earlier, you know, we're not in the process of going out and making major acquisitions right now. We think we've done enough for now, but it would be more tax-efficient to have a bit more production in the U.K.
------------------------------
Unidentified Company Representative [101]
------------------------------
-- deals in the U.K., and that clearly has been a factor in our valuation, and to a certain degree, also, in the valuation expectations of the people that were looking at doing the deals with us, as well, so we haven't really been able to make any of them work. But as David also said, you know, we believe we've got the portfolio that we want and that's the real thing that we're really focusing upon now.
------------------------------
David Mers, Soc Gen - Analyst [102]
------------------------------
But by expanding the projects (inaudible) projects -- in terms of not --
------------------------------
David Latin, OMV Group - Senior Vice President North West [103]
------------------------------
There's a conversation with the government at the moment about the length of time, because there's a window for the tax that I think is currently six years, and we're talking with them about extending it. Not just us, others are, as well. So you're right. When you spread things out over time rather than clump them together, potentially that becomes less tax-efficient, too.
I mean, we've looked at a number of possibilities, as David says, to get more production in the U.K., but we don't want to just buy any old thing. And there's lots of people trying to sell any old thing, and we really don't want any old thing. So if the right thing comes along and we can do it at the right kinds of price, we will obviously look at it, but we won't be doing a really big deal. And we might swap out of some of the stuff that we've already got to.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [104]
------------------------------
-- maybe just one more question, please, and then in the end there will be, anyway, some further opportunities for questions.
------------------------------
Unidentified Speaker [105]
------------------------------
-- from Only Credit. One question. What about your sub-Saharan footprint? Are you focusing on Madagascar or Gabon? Are countries like Angola and South Africa, also, on the agenda?
------------------------------
David Latin, OMV Group - Senior Vice President North West [106]
------------------------------
So I'm going to let Walter deal with that in detail, because that's really his talk, and I think he'll answer those questions, if that's okay.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [107]
------------------------------
Great, thanks. Dave, thank you.
------------------------------
David Latin, OMV Group - Senior Vice President North West [108]
------------------------------
Okay, thank you very much.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [109]
------------------------------
So -- switch to exploration.
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [110]
------------------------------
Ladies and gentlemen, my name is Walter Hamilton. Despite the name, I'm Austrian. There's a bit of Scottish blood pulsing through my veins. I'm the one you -- I'm the one between you and lunchtime, obviously, so I'll try to make it precise.
I have more 30 years' industry experience with OMV. I've been working and living in different countries, in various countries like Canada, Pakistan, and also Romania for several years. And I've been in business and technical management functions over those years.
You saw, we saw over the last couple of hours bits and pieces of exploration, and I would like to stitch these together now for you in order to bring it into a full shape.
Two years ago, when -- three years ago now when the OMV strategy was reformulated, obviously exploration was an important part of it, and also exploration reformulated the goals.
Here you see some of them. HSC comes first. Sometimes people forget that exploration has a pretty big operations out there, just talk about seismic onshore, 200 people in the field every day, and sometimes these areas are very remote, so HSC is a very important topic to us.
Deliveries also is for growing production and sustainable reserve base. Before 2011, exploration was charged with halting the decline. I think we need to think differently. We need to charge exploration with growing the company, actually.
How can we do that shift towards larger share of high-impact euro area? What does mean high-impact? High-impact for us means a net volume of discovered resources of in excess of 25 million barrels, or BOE, for that matter. This is very important. This is the base. Obviously, we aim higher in many cases.
So we drilled at that time -- we drilled a lot of small near-field stuff very successfully, but it did not -- it was not enough to try to change the face of the company eventually. What we also thought we might -- we keep -- we stay where we are, where we believe we can find substantial resources, but in order to be sustainable, we have to venture out into new areas.
We also are sitting on an exploration portfolio and an acreage portfolio which was more or less stable. The turnover of this portfolio to get even better things into the portfolio is key for our exploration.
Just a few numbers. Turnover of our exploration licenses, portfolio, about 60% of the licenses were touched, either acquired or relinquished. And about 42% of the acreage area which is around about 132,000 square kilometers net to OMV, which equals to about 245,000 square kilometers gross, which I prefer, actually, because with our partners, we are exploring in these 245,000 square kilometers, not in the 132,000, which is our net share.
Growing inventory, we have -- and Jaap alluded to it already -- we have grown our pre-drill resources significantly. The green bar at lower left-hand corner of this slide shows you the prospect. Those are the drilling opportunities which are basically in the drawer ready to drill. And the blue stuff is the pipeline of opportunities that gets into prospect stage eventually.
Higher quality leads and prospects, how -- how do we define higher quality? First of all, rigorous exploration governance. So we don't just take anything that comes along. We have very, very strict rules, guidelines, and KPIs in order to pick something up or leave it alone.
We do have the luxury now for the first year to actually rank, to pick. Not everything that comes in needs to be drilled. We can choose, which is another very important factor of it.
And, thirdly, wherever possible, we plan for success in exploration. I'll give you a few examples during this presentation.
We talked about -- Jaap talked about the success rate already on a three-years average is in the range of 50%. He also said something very important I have to underline and emphasize, that it will go down, for good reasons. You saw in the first slide, they're going to go for the high-impact stuff, high-risk, but high-reward at the end of the day. So if we go down, this is not the sign we're bad explorers, but we venture out in order to do the company touching, sometimes hopefully changing discoveries.
Increasing resource delivery, you see on the graph in 2009, we discovered on a three-years average 100 and a bit, 108 million barrels. In 2013, it was 273. Of course, big discoveries over three years will be shown here. The long-term target is about this range.
The unit finding cost decrease accordingly 40%. We started out with $4 per barrel, found technical resources. We are now at about $2.50 per barrel. Again, high-impact frontier and emerging material exploration successes. You've heard [Zola] in Australia has been appraised by one well, which fully -- which fully -- which provided another discovery basically, fully substantiating what we believed from the [Zola] discovery.
Domino, everybody has talked about Domino, the Black Sea exploration discovery together with Exxon. There's more to come. I'll come to it. And the Wisting discovery. The Wisting could be a game-changer. Between 200 million and 500 million barrels in the block, we have drilled only one well so far. That's the size of the well down there. But we're going to drill more.
Since it is operated, we have our faith in our own hand. We can -- we can determine when and how fast. It looks like -- Wisting is an old story Never forget it's been found -- it was found only six -- no, four months ago. And in another three months, we will have our first exploration well -- I'm sorry, our first appraisal well. So this is the pace -- the new pace of OMV's discoveries when it comes to our own operations.
We can sometimes not change things when we're not operating and have discoveries, but when we discover things -- and I allude to that a bit further with other discoveries -- we are fast.
Recent exploration highlights North Sea, 15 licenses, U.K. and Norway. That is part of this turnaround, this fast turnaround of exploration licenses. We farmed into seven exploration licenses as part of the Statoil deal. Wisting discovery -- I said it already -- 200 million to 500 million barrels, 100%. Just to give you an idea, OMV as a company was founded on one discovery 70 -- no, 60 years ago, and that was [Matsen] in the Vienna basin. This proved to have around 550 million to 600 million barrels. That's the significance of this discovery.
Not only that -- and, again, plan for success -- it opened a new fairway of opportunities up in the Barents, and we're there. It's not only this one license we've got. We've got several other licenses crossing this fairway. That's what I call plan for success in exploration. We did not wait until we had success. We secured some of the most interesting acreage.
And I can tell you that Statoil, as in this case, the operator of this additional acreage is planning to drill together with us another two exploration wells in these two licenses this year. So, again, the pace also makes the value.
Gabon, we farmed into Ophir Energy's four blocks offshore Gabon, around 12,500 square kilometers altogether. Again, we have not drilled yet. We're in the process. We have now a week drilling first well, very exciting, subsalt stuff, come to it later, plan for success. Don't pick up only one block. Pick up a fairway. Pick up four blocks. And we plan 3-D.
Offshore Bulgaria, again, plan for success, discovery in Romania offshore waters. Adjacent to it, it took us only a few months to sign up this huge block in Bulgaria, together with Total and Repsol, and we are the operators in the exploration phase.
That's a bit of a generic slide. We are going to use a lot of money in exploration. David has said it, and he's always looking at me when he talks about the 5 billion in seven years, but that's true. We have a responsibility here. We have to transform those 700 million per year into value. How are we going to do that? Drill 30, 40 exploration wells out of this -- should be in this bigger category of frontier and emerging.
We are testing about a billion barrels of oil equivalent per anno. That means we drill out exploration opportunities in the pre-drill value of about a billion barrels, or BOEs. OF that, as said, we want to find between 200 and 300 BOEs per year on average -- per years average. Here you see 250 to 300 million by 2021. We have achieved it now. We have to make sure that it is sustainable.
Out of this discoveries in 2011, we defined the goal that exploration will provide 100,000 barrels production in 2021. With the discoveries we've made already, with the future discoveries, I do feel this is an achievable goal, tough, but achievable.
As David said, people is the key. I have about -- in the G&G, the geology and geophysics skill pool, I have about 500 people which work exploration development, up to 170 new hires until 2016. That will enlarge the G&G workforce significantly. We have the means and ways how to integrate them into the country, and we have a pretty balanced age portfolio and gender distribution. The under 30 part of this skill pool is actually balanced 50/50 males, females.
We do have -- and, again, David said it -- we do have geoscience data interpretation. We do have an edge on some of this regional stuff, Great South Basin, Shell got in here not for nothing. Shell doesn't get into an area which they don't believe is valuable, and they bought into our concept.
Technical subsurface expertise, just give you the idea of Yemen, which is a basement play, a very, very difficult play. We produce from granite there, but we understand how we do that. Obviously, also, we try out alternative exploration technology, sometimes Gravmenka microsize monitoring and many other things.
Regional expertise, that comes really to the core of it. We need to understand how the Black Sea geology works. We need to understand how the Barents Sea geology works. We need to understand how Pakistan, Austria and Romania work subsurface.
This regional expertise is also expressed, for instance, in the Black Sea by us as OMV being the second-biggest acreage holder in the Black Sea already. There's only one company, TPO. They obviously -- as sort of the old kid on the block, they have more than us.
Three key regions, North Sea -- and the geologists amongst you, please apologize. Of course, it's not the North Sea in geological terms. It's the North Sea in geographical terms that spans from the Barents to the British North Sea, basically. The Black Sea and sub-Saharan Africa, I'll come to it in a second.
How many wells are we going to drill over the next, say, two years, which may impact -- will impact, in case of discovery, 17 wells? I'll show you in a minute. And we will keep on showing you these numbers and these wells in order you to track them continuously every quarter.
We extended our position significantly in the North Sea and the Black Sea and sub-Saharan African countries. As you know, as you've heard, it's Madagascar on the one hand and it is Gabon on the other hand. I would like to answer the question, is this it? No, it's not.
We are at the moment talking about one or two more deals, which may come in a relatively short while. And we also -- this is very important -- we also need to understand, this is not the end, if we enter into Gabon, if we enter into Madagascar. That's actually the beginning, because we have to expand our activities. Like in any other existing country, we have to expand our exploration activities in these countries in a meaningful way.
These are the 17 what we call high-impact wells. You see three Gabon wells already, and these Gabon wells are really exciting. I'll say it now, then I can flip over the next pages faster. Subsalt, a petroleum geologist, if an exploration is tier subsalt, then he gets excited. And even more so in Gabon, because the subsalt there, about 120 million years ago, was connected to the subsalt in Brazil, and you all know the giant discoveries in Brazil. So a very, very interesting time for us now, drilling the first well there.
You see a number of Norway wells, as discussed. We do concentrate on the Barents. There's lots and lots of opportunities there. You see the Domino-2, which is an appraisal well to the Domino-1 discovery in Romania deepwater offshore. And another Neptune Deep, another exploration well which we are going to drill. I'll show the acreage in a second.
Even in Austria, we do have opportunities. I don't want to bore you with a name, because it's unpronounceable, anyway.
Then we still have our Palmerston opportunity in Australia and, obviously, the Great South Basin, where Shell and us -- we took the decision, it was a drill or drop decision -- we took the decision earlier this year to actually drill a well in 2015.
In the North Sea region, up to eight of those high-impact wells are going to be drilled, including two wells in the Farrows, Wisting, as I said, appraisal activities, very fast, very diligently, will commence already in the first half of this month -- of this year, rather, and this Apollo and Atlantis opportunities are exactly what I was talking about. They're in the structure of the opportunities of the discovery of the -- of the Wisting discovery.
United Kingdom and the Farrows west of Shetland, five exploration acreage opportunities acquired in the Statoil deal, and two wells are going to be drilled already this year.
Wisting discovery, a few -- a few details on this one. We talked about the plan for success idea. We talked about the additional acreage, which is going to be drilled this year. What we did not talk about yet was its peculiarities. It's only 300 meters below the mud line, only 300 -- it's about 400 meters water depth, only 300 meters below the mud, basically. Below the sea floor, there's oil there. It's excellent quality oil. It's high-permeability oil. It is something that we all aspire to and see more about.
The appraisal well will actually test this reservoir. At the moment, we'd have the logs, we have cores, we have all sorts of things, but static stuff. Now we see the pressures and how the flow behavior will be very exciting times ahead of us.
And, again, as you can see, I always say, if you look at this blue gray picture here, now we know the real color of oil is blue. We believe we can actually see on seismic, we can see where the oil is -- it was proved by two wells already, and we're going to drill another one soon.
Black Sea regions -- region, Romania, deepwater, you know it takes on operating as, for instance, operating the seismic, the offshore seismic on Exxon's behalf. Media Deep is an add-on acreage piece of acreage which gives us access to another opportunity, which we acquired recently. [Hanas Baruk] in Bulgaria, OMV is the operator in the exploration phase. We are going to hand over and we're in the process to hand over to Total for the drilling phase, but I can tell you -- and, again, that makes me very proud -- I can tell you that Total offered us that we keep on doing the G&G work, the exploration work, and they will pay us for that.
[Skifsky] exploration block was awarded in the Ukraine and adds to this plan for success idea. We had a success in Domino. We have to line up all the acreage in the vicinity.
This is how it looks like. Excellent seismic, that's what we did over the last eight months or so, and now it's getting into processing and into interpretation. We do believe it's gas, if there's anything, and we also believe there's a chance for oil. If there's nothing in there, we won't find any oil and gas. If there's something there, I promise we'll find it.
Sub-Saharan Africa, I really like this left-hand expression of the size of this continent. You can cram in almost all the other continents and you're still within the boundaries of Africa. That's how large it is. But that also means -- that also means you know how many opportunities are there.
Madagascar, 16,000 square kilometers, a bit more opportunities together -- we are together here with micro resources. If I say 16,000 square kilometers, London is about 1,600 square kilometers, so you may imagine the size of this block. You also may imagine the work that has to get in, in order to identify and hone in on opportunities.
What we're looking for -- and that goes as a rule in sub-Saharan Africa -- we're looking for oil. Gas is rather a risk than a value. I'm frequently asked, ah, why don't you go into Mozambique or -- et cetera, Tanzania, with all those big gas finds? They talk about 100, 150 Tcf discoveries already. I don't want to be the one who is lining up with another five Tcf and wait forever until it is being developed. I'd rather go for the -- sort of the alternative route, which is a bit neglected in the area at the moment, and that's the oil ideas.
Gabon for licenses pre-salt, very, very exciting stuff. The [Paduk Deep] is drilling as we speak, and we will see results in the months to come. Not only we are going to drill three wells this year, there's a multiple of other opportunities, again, plan for success in exploration.
Last but not least, when we found something, this is not the end. This is the beginning for the company to deal with, of course including our expertise, but for us, we need to get more opportunities to think differently. The discovery for us almost is the end of thinking. Of course it's not, but for exploration, we have to go the next step.
Last year's discovery is so far away this year's discovery. Next year's discovery, that's what counts. So our exploration strategy formulated in 2011 is delivering. We have developed and further developed our in-house expertise and our connections with our partners. Our existing acreage portfolio provides us with a solid base for future success, and significant opportunities will be executed in 2014 and beyond. We concentrate on key areas, again, plan for success. Don't do the B. Don't do one-shot deals. That is not what is in our portfolio.
So sustainable exploration success delivers highest long-term value for shareholders. What does that mean? Drilling in always cheaper than buying. We all know that. We progressing our opportunities fast, if we operate them. Wisting is a very good example. Hans mentioned [Totaya] in Romania. That was above the 25 million barrels net to OMV Petrom threshold, was onstream in a couple of months' time, delivering value, and around a little less than 10,000 barrels production today come already from discoveries from '11, '12, and '13.
So not only the long-term view, but also the short-term value view has to be on it. And that is the art of balancing the two out. The short-term thing will not change the face of OMV, but it makes a lot of money. The long-term view I'm convinced -- Domino, Wisting are very good examples already -- I'm convinced will change the face of OMV eventually.
Thank you very much.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [111]
------------------------------
Thanks a lot, Walter, for those insights. Let's continue right over with the questions. [Haban], please start.
------------------------------
[Nathan Rush], [112]
------------------------------
Thank you. Nathan Rush from Morgan Stanley. Thanks for the presentation. I just wanted to pick up on Gabon, just -- I just wanted to ask you -- you sounded quite excited about the prospectively there. Would you say your Gabon program is the most exciting part of the exploration program this year? Is that -- would that be fair to say?
My second question really relates to chance of success there, if you could give us a sense of how you're thinking about the riskings on each of the wells, but also the follow-on potential. So if there was a disappointment in [Paduk Deep], what does the impact have for the subsequent two wells, just to get a sense? Thank you.
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [113]
------------------------------
Sure. Let me follow up on the second one, and then please ask the first one once again. Risks -- especially in Gabon we're talking about high risks. It is frontier. It is new. It has never been done before in the range of 20%-ish, so every well obviously has its commas and all the rest of it, so it's one out of five. That's normal, industry standard emerging play risk, basically, or chance of success, I should say.
------------------------------
Nathan Rush, Morgan Stanley - Analyst [114]
------------------------------
And also in terms of the interdependency, are the other wells -- the success on one dependent on the others?
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [115]
------------------------------
There's two completely unrelated -- two of those three is completely unrelated because it's -- one is sub-salt and the other one is post-salt. The third one is -- and there's two sub-salt plays. But if the first one does not pan out, we know the reason already now, because there is this one risk that will -- that really is the make of break of this opportunity. This risk is not present in the other well. So -- and that's why we drill this first. So it's -- all the three are independent in terms of finding or not finding oil or not.
------------------------------
Nathan Rush, Morgan Stanley - Analyst [116]
------------------------------
And just on my first question, in terms of you rank Gabon and the Gabon program...
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [117]
------------------------------
Oh, yes.
------------------------------
Nathan Rush, Morgan Stanley - Analyst [118]
------------------------------
... versus the rest this year?
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [119]
------------------------------
For the 2014 campaign, drilling campaign, exploration campaign, it's very clear, very exciting follow-up in the Black Sea, extremely exciting. It will lead -- the results will lead the way into the next years in the Black Sea.
The third -- the second one is parency with these really exciting two follow-up exploration opportunities operated by Statoil after the Wisting discovery. And a third exciting thing -- and they're all at the same level of excitement, if you want -- the third exciting piece is Gabon, yes.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [120]
------------------------------
--
------------------------------
Unidentified Speaker [121]
------------------------------
Yes, thank you. You mentioned at the end there that drilling is always a better option than buying barrels, but we've certainly seen -- particularly from your peers -- quite significant cost inflation in finding costs over the last couple of years, coupled with arguably values of discovered barrels going down, given longer time to develop them, and so on.
Is there a sort of peak finding cost per barrel that you would want to not exceed? Or is the priority more -- you know, we absolutely want to hit this 100% reserve replacement ratio and we'll spend through cyclical peaks in finding costs?
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [122]
------------------------------
Yeah, if I end up -- and we are always talking about longer periods than one year. I mean, please, that -- exploration is a long-term game. If we end up with six, seven, eight dollars per barrel finding costs, then I will have -- or David will have a discussion with me, I guess.
What we're doing now, $2.50 is very, very nicely located in our peers' -- in our peers' achievement. Having said that, there are exploration companies out there, exploration companies that sometimes have half a dollar and over the next year's period or two years' period, they have $10. That's how volatile, is you find a big animal and you don't find it every year, so you have to stretch it out. So a range between $2 and $4 is pretty healthy, I guess.
------------------------------
Unidentified Speaker [123]
------------------------------
And just one quick follow-up, as well. On the -- your guidance of spending up to EUR700 million on exploration, is that a gross number? Or is that net of any rebate from Norwegian...
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [124]
------------------------------
That's a gross number.
------------------------------
Unidentified Speaker [125]
------------------------------
--
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [126]
------------------------------
And exploration plus appraisal, according to the international standard.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [127]
------------------------------
--
------------------------------
[Dan Eckstein], [128]
------------------------------
Thanks. That's Dan Eckstein from UBS. On Wisting and on the Barents more generally, whereabouts are you thinking at the moment in terms of reaching a commercial threshold for development? I mean, clearly there's very limited infrastructure there, and costs are going to be reasonably high.
And then as a follow-on, I guess the very shallow nature of the reservoir means that there should be some cost savings in terms of -- in terms of drilling. But are there any concerns about what a reservoir at such a shallow level will deliver in terms of flows? Thanks.
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [129]
------------------------------
It's early days. After a discovery, you don't have the cornerstones yet, really, to determine, and that's why I don't have FID after discovery to understand how you -- how the value will be delivered.
What we clearly can say -- it's a lot more challenges to create -- it's a lot more challenging to create value from a gas discovery in the Barents than it is from an oil discovery. At the end of the day, if there's an oil discovery and it's good enough to pass all the economic thresholds, you put the vessel on top of it and you produce it, very simply said. So cannot really comment on it yet, only that oil is obviously the better thing than sort of a mediocre gas discovery.
When it comes to the flow, to the flow expectations, again, I beg, give me a few months' time until we have the first appraisal well, which will do all those things. We'll flow it -- we'll look at the composition of the oil, et cetera, et cetera. So it will take a little while until I really can answer this appropriately, yeah?
And to your cost savings, in terms of drilling, obviously we will be looking at all sorts of options, including horizontal drilling. You've heard a world record of shallow horizontal drilling, et cetera, et cetera, so we will look very wide at the beginning to narrowing on the best opportunity, how to develop it.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [130]
------------------------------
--
------------------------------
Unidentified Speaker [131]
------------------------------
Yeah, thanks. Can I ask a question on Domino, on the Neptune Deep prospect? Having spent a lot of time and money shooting the seismic and processing that, can you talk a little bit more about what you've seen in terms of prospectivity and an upside from the appraisal program?
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [132]
------------------------------
The appraisal program for the Domino discovery is very clear. We're going to drill starting in June or early July. We're going to drill an appraisal well which also will target some new horizons which we have not looked at yet. So that's very clear.
When it comes to the overall prospectivity of the Neptune block, yes, we believe in it. We have the seismic on our workstations now for a couple of months. That's way too early to really -- to really come to a conclusion, but from the regional geological picture, we do have very high hopes in this block, and not only in this block. As you have seen, we picked up other acreage around this block in Bulgaria and in the Ukraine, because we believe in it.
Again, there is the prospectivity there. And we are working very hard on it. Our Romanian colleagues are working very hard on it. Yeah. So in a nutshell, yes, there is additional prospectivity.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [133]
------------------------------
Thank you. Thomas?
------------------------------
Thomas Adel, Credit Suisse - Analyst [134]
------------------------------
Hi, Thomas Adel from Credit Suisse. Three questions, please.
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [135]
------------------------------
Three?
------------------------------
Thomas Adel, Credit Suisse - Analyst [136]
------------------------------
First -- sorry, first, on New Zealand, I believe you had -- you drilled a well last year there in the Taranaki Basin, I believe.
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [137]
------------------------------
Yes.
------------------------------
Thomas Adel, Credit Suisse - Analyst [138]
------------------------------
What exactly happened to that well?
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [139]
------------------------------
Yes.
------------------------------
Thomas Adel, Credit Suisse - Analyst [140]
------------------------------
If you can give a bit more color. And a second, a very simple question is, you've got new acreage in Romania in the Black Sea media deep. It says deep, so it is fair to assume it's in the deepwater? If it's in the shallow water, why are you going to shallow water? Because there hasn't been much success there.
And the last question is on Madagascar. There's obviously a proven petroleum system there, heavy oil. Exxon and BG have a block there, and they've been sitting on it for many years.
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [141]
------------------------------
Yes.
------------------------------
Thomas Adel, Credit Suisse - Analyst [142]
------------------------------
What is going on? What are the key risks? Thank you.
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [143]
------------------------------
All right. Now I wrote it down, so I don't forget your questions. [Matuko], first one, this is the well in New Zealand. It was a dry well. It had traces of oil. It is part of this exploration game. Not every well is a hit. We are now re-evaluating the entire area, including some of the exploration wells we wanted to drill. It's very important that very fast you get -- you get your new ideas and your new data integrated into the wider area. So it was a dry well.
Second, media shallow deep, it's on the shallow side, but shallow or deepwater, not necessarily tells you something about the underlying geology. One is bathymetry, if you want, and the other one is geology underneath. We do believe that this little sliver of media adds to the prospectivity of our remaining acreage.
And, thirdly, Madagascar, yes, Exxon has three blocks to the north -- to the northwest of the island and has been sitting on it force majeure. I can obviously not comment on Exxon's ideas of these blocks. Madagascar onshore houses probably the biggest heavy oil accumulation in the world, billions and billions of heavy, heavy, heavy oil barrels. A production of a couple hundred barrels artifice at the moment.
If you go from this very heavy oil deposit to the west direction block, if you wish, or in the area of our block, if you wish, you hit on the surface proved through other wells light oil and different horizons. And if you look at the bigger picture of the geological basin, that you come -- then you come -- you come to the conclusion. There is a chance of light oil offshore. Do we know it? Not yet. But there's a chance.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [144]
------------------------------
-- one more question -- chance to wrap up (inaudible) further opportunity of questions afterwards.
------------------------------
[Marina Postnikova], [145]
------------------------------
Marina Postnikova, UBS. Just one question, really. You said that you will look to expand your frontier exploration in the coming years. How would this be primarily implemented? Will you go through farming to kind of shorten your time to drilling? Or will you go through official government rounds? What would be the professed strategy and why? And also, is there any acreage that you find particularly interesting at the moment?
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [146]
------------------------------
I probably wouldn't tell anybody because I would want it. Anyway, let's concentrate on sub-Saharan Africa for a second. The first phase, as I call it internally, was get very prospective exploration rather quickly. How do you do that? You farm into something. Yes, you pay a bit of a premium. You pay a bit of a promote. But you have a foothold in an area.
Now we are approaching the second phase, and if I tell you Madagascar is thinking about the licensing round, Gabon has been -- let's see how it pans out. Yes, now we have a lot more -- we look at these ground floor deals, if you wish, not only because we have our foot in the door in the country, so people know us, the government know us, the regulators know us, but also we can expand our activities on these ground floor deals.
I would not, on the other hand, exclude very lucrative and interesting farming. It is a mix how you -- how you tackle these opportunities.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [147]
------------------------------
Okay, thank you, Walter.
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [148]
------------------------------
Thank you very much.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [149]
------------------------------
So let's now give the floor to Jaap again for his closing remarks.
------------------------------
Jaap Huijskes, OMV Group - Executive Board Member for Exploration and Production [150]
------------------------------
So, ladies and gentlemen, what we tried to do this time is give you a different level of detail than what we've done before, and that's why we've brought Hans, David and Walter along, so I hope you enjoyed that. I'm not going to bore you with an awful lot of summary slides, so I just want to re-land or make sure I have landed the question that the next three years are different from the last three years.
If you look back at the last three years, and you've seen this slide earlier when I presented, that was really all about building our portfolio, on the expiration side, on the project side, and making sure that those reserves turn up in our book. That's what we've done for the last three years.
By and large, that's finished. It's never finished, of course. We'll continue with further exploration entries. We'll continue to look at our portfolio, both ins and outs, but not to the skill -- certainly not on the inside -- that you've seen us do in the last couple of years. We've got the portfolio to do what we want to do.
Now, what we want to do is this. We've shown you the substance of the projects that go into the 400,000 barrels a day. And actually most of the slides you've seen today weren't related to what we'll deliver in 2016 or related to what's going to happen post-2016. So not only are we going to hit the 400,000 barrels a day in 2016, but we're going to do it with a portfolio that by that time looking forward is going to look as healthy as our portfolio does today, with good reserves replacement rate, with an active exploration portfolio, and with a funnel worth of development projects which will provide further growth from then on.
We'll do it in a way that adds value. Clearly, that's where it starts -- talk about barrels, but we don't forget that at the end of the day our barrels per day is really a proxy for value generation. And therefore, we're very conscious of the fact that the growth we so often talk about is all about adding value, and we've shown you today a couple of new bits of evidence that we haven't shown you before on the fact that the new barrels that were added are not diluting, but, in fact, increasing our -- in this case, the one I've picked up here is that one that shows the pro forma cash flow per barrel.
And what it does is it changes our portfolio dramatically from where we've come from. We've come from a very mature onshore operator with also an offshore element in that, but even that offshore element was largely mature, to a portfolio, if you look towards the end of the decade, that's far more balanced.
We're still that core. We're proud of that core. There's nothing wrong with that core. But we want to be bigger than only that core, and we're going to use our knowledge there to work on the international part of the portfolio, and you're seeing a step increasingly into a deepwater portfolio, as well, around the world, from as far north as the Barents Sea to as far south as New Zealand and sub-Saharan Africa in the longer term, as well. You saw that in Walter's presentation just now.
Let me leave you with this. So we've got the people. We've got the team that was also something we were keen to demonstrate to you here by bringing a few more of the E&P leadership team here to deliver this 400,000 barrels a day in 2016, including an exploration portfolio that goes with that, and including a portfolio that when we get to 2016 will show a bright future and not another round of we need to buy stuff to make sure we get to a sustainable portfolio. It will be sustainable when we get to 2016.
Thank you very much. I'm going to join my colleagues, and I will take any further questions you got.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [151]
------------------------------
So thank you very much for these five very detailed presentations. It's now again an opportunity for you to raise some more questions. We have nearly 25 minutes, so please, [Nathan], you want to start? Yes.
------------------------------
Nathan Rush, Morgan Stanley - Analyst [152]
------------------------------
Two questions, if I may. First one on payout ratio, David. A key factor of OMV's equity story, which in my view differs from some of your peers, is the low payout ratio, payout of 30% with a promise of growth. Is there -- is there any thinking in the company now that you should revisit that? And if not, why?
And, second, one to Walter. You intend to spend EUR750 million a year, look to find 300 million to 375 million BOE a year. But all barrels discovered do not have the same value, so is there an underlying value accretion target, as well? Thanks.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [153]
------------------------------
On the payout ratio, we've had the payout ratio target of 30% for as long as I've been in the company and I think before, as well. At this point in time, when we've only recently announced an organic investment plan of just under EUR4 billion a year, I think it would be a little premature to actually start to talk about perhaps changing that -- obviously, changing it and increasing it until we've got a bit more comfort that we can manage that and that we're achieving the targets that we've set.
But, clearly, we've got no interest in driving the gearing ratio down to a very low level and ultimately wallowing around in the cash. If our gearing ratio allows it and the projects come onstream as we project them to, then we would certainly revisit that at some point in the future with the prospect of increasing it.
And I think to a certain degree, as we look forward to the future, and coming back again to this message that we've got the portfolio that we needed, that's one of the reasons that we actually decided to increase the dividend this year. In fact, we paid out 35% in the year just end -- or will pay out 35% based on the dividend we're proposing.
So no thoughts at this point to actively increase it, but clearly it would be one of the things that we would most certainly look at, as the cash flow comes in from these developments.
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [154]
------------------------------
Yeah, from my end -- is it on? Yep. Value -- value discoveries, if you wish, there's a couple of elements, obviously. We don't have now sort of a strict policy, if you wish, but what is very clear -- and I tried to point it out already -- oil over gas, except of some areas, like the Romanian deepwater areas or the adjacent areas, why? Because we have a customer nearby. It's not like in the middle of nowhere. It is something which we can -- Exxon and us -- can hopefully market in the future, if -- if everything is right, as pointed out by David before.
That's one element of it. Another element of it -- when we are preparing for getting into a new country, before we do that, actually, we're looking at all the fiscal elements of the country, the ultimate government take, et cetera, et cetera, et cetera, and only if our, if you wish, [damli] economics [pan out], then we go into there.
I also said on the Barents, we tried to go for oil or for real big gas, but not for the one, two Tcf discoveries, which are nice, but they will not get us anywhere. So here is an underlying theme, if you want, how we do -- how we do exploration.
Of course, we are also -- and we have a significant portfolio of exploration opportunities. We also rank them in terms of economic criteria.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [155]
------------------------------
Okay. [Jonas], please?
------------------------------
Unidentified Speaker [156]
------------------------------
Just one question, please. Question on your cash cycle. If at $100 Brent, and let's say refining margins remain pretty tough, if you take out any working capital moves that you may still have, you talked about a couple of hundred million euros, and no disposals, at what point do you think you will turn free cash flow positive?
------------------------------
Unidentified Company Representative [157]
------------------------------
Well, free cash flow positive, we were the year before last. Clearly, we had a huge benefit from the working capital within that. This year, again, with one or two benefits from the disposal of the strategic inventory, for example, we were only about -- about 490 million negative, despite the size of the acquisition that we did in Norway.
Next year, we're going to be spending about $3.9 billion, little bits and pieces in working capital still to do, and disposal proceeds. I would expect certainly with the -- with the disposal proceeds and the working capital, that we would be free cash flow positive in the coming -- in the coming year. That's certainly what our internal projections or suggesting.
I think your question is, once you've stripped out all of that, when does the business start to deliver that? Once you get into 2016, or '15, rather, we're going to have some of these developments onstream. We'll hope to have a more stable Libya and Yemen situation. So I would start to feel a bit more bullish about things going on from there, because between now and 2016, we're going to be adding compared to last year 112,000 barrels a day production, and that's going to be quite some benefit to our cash flow and our profit.
So I have a relatively sanguine look at $100 -- clearly, that's one of the major assumptions there -- relatively sanguine look as we look at our cash flow going forward, but I'd like to see it in the bank before we started looking at the payout ratio. That's the reason, in answer to the first question.
------------------------------
Unidentified Speaker [158]
------------------------------
So '16, you'll be free cash flow positive organically?
------------------------------
Unidentified Company Representative [159]
------------------------------
I think there's a prospect earlier than that, as well, actually, I think.
------------------------------
Unidentified Speaker [160]
------------------------------
Thank you.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [161]
------------------------------
--
------------------------------
Unidentified Speaker [162]
------------------------------
Thanks -- David, so I guess a follow-up question from the previous one. Could you just talk a little bit more explicitly about how you guys think about disposals and how disposals sort of fit into the view on -- in terms of strategy and the cash cycle? I guess you've talked explicitly around being less focused on M&A going forward. You've talked about working capital and some of the elements there. Could you then just sort of talk more explicitly about disposals and how assets like Borealis, for example, fit into the longer-term thinking and strategy? Thanks.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [163]
------------------------------
Well, next year, and more likely the year after, is going to be quite an interesting year in the development of Borealis. When I say next year, I actually mean -- I mean the current year, 2014. At the end of the current year, unfortunately, a few months later than scheduled, but nevertheless, [Barouge] -- the latest developments of the [Barouge] partnership between Borealis and -- and ADNOC comes onstream.
And the [Barouge] investment generally has been a huge success, but the cash that it's generated, based on very high oil prices driving very high polyethylene prices and, of course, with a favorable tax regime and a frozen feedstock price at a very favorable rate, the huge cash flow that is generated has been used to reinvest, basically.
There's -- we're now completing the third phase of [Barouge], and they've all been paid for out of cash that they've generated and a level of debt that's been funded on the balance sheet of the JV. Once this latest phase comes onstream and we're operating one of the most profitable and certainly the biggest polyethylene plant in the world, [Barouge] starts to throw off a huge amount of cash, 40% of which when it's paid out as a dividend would come to Borealis.
And I think that changes the value perspective of Borealis quite considerably. So we look forward to seeing that, and certainly as regards any of the long-term intentions we may have with Borealis, we'd certainly like to see that reflected in its numbers before we got too excited about it.
On the other side, one always has to bear in mind why we've gone into Borealis in the first place. And the reason we've gone into Borealis in the first place is that it has two facilities on two of our critical refineries, the one in Vienna and the one in [Burkhausen]. You've seen the bulk refining margins and what's been happening to them over the last few years in the particularly challenging environment they continue to face without the petrochemicals facilities at both the [Burkhausen] refinery and the [Svekart] refinery. Both of those assets would have a very difficult situation, no two ways about that.
So that partnership with Borealis has been a critical part of maintaining those plans as viable and value-creating assets. And that's not something we choose to jeopardize. But as we look at Borealis, as I say, the thing we're focusing on right now is looking forward to the delivery of the [Barouge-3] developments and the cash flow that that would generate. We'll start to see some of it this year, but next year will be the first full year.
As we look at other assets, I think Jaap has touched on -- and the question has been asked already a couple of times already -- some of the lower value or lower margin, lower return elements of our E&P portfolio. We would certainly look at that. We're not wedded to anything, if we think we can create more value from disposing it in that context.
The refining and marketing disposal program is subject to -- as we look at a more structural approach to Turkey and this integrated story I was mentioning earlier on -- we're largely through that. I think there will be continuing pruning of the estate, maybe one or two packages we're looking at in terms of gas stations and such like, so getting that really down to a tight business, which is extremely cash generative, even with the difficult -- difficult environment.
And, of course, what we need to look at is the structure of our gas business, as well, because the gas and power business has gone through some quite substantial and structural changes over the last four years, which were inverse to everything we were expecting, I must be honest, the way we looked at it five years ago, so that's a business we need to restructure, but I don't think massive disposals are going to be part of that solution. It's just it needs restructuring.
Okay.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [164]
------------------------------
Okay. Are there any further questions? [Peter], please?
------------------------------
Unidentified Speaker [165]
------------------------------
Hi, Peter (inaudible) probably two for David. What's the share of unproductive capital sitting at your balance sheet currently? And given the size of your company, what we expect at say sustainable level going forward?
And the second one. How much flexibility have you got in your investment program? How much is fixed? How much is variable? I mean, it depends on the project -- on the project facing, obviously, but if you could give us some color on that one. Thanks.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [166]
------------------------------
I mean, we clearly now have -- the book value of our E&P assets, we have quite a high proportion not currently adding barrels and adding any profits, not yet adding barrels and profit, clearly. And that is -- I wouldn't say we look for a sort of target level of that. Clearly, you're always going to have projects in the development, and that's perfectly healthy, but where we are right now in terms of transforming the portfolio, it's higher now than it should be in the longer term.
And from here on out, it will actually rise, of course, because a lot of that CAPEX is going to be going into projects in the discovery -- just go through the cycle of the Neptune -- the Domino discovery, and everyone's very excited about that, but before cash starts coming back in, it's going to be the end of the -- the end of the decade. And between now and the end of the decade, it's going to be cash going in the other direction, so we're going to -- and there's a number of others like that, perhaps not -- perhaps as far out as that, but nevertheless, the big spend on Rosebank hasn't started yet. For all the discussion and excitement about trying to get that back on track, clearly, once it starts, then cash will start to flow out.
So the percentage is going to be -- be increasing, which is one of the reasons I mentioned earlier on about the challenge to achieving our return numbers. I see it's going to be extremely difficult clearly in this intervening period.
It's high now. It will get higher because of these developments, but the target is clearly that it needs to be a lot lower than where it is today, quite frankly.
The other question was about -- sorry?
------------------------------
Unidentified Speaker [167]
------------------------------
Like flexibility in your investment program.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [168]
------------------------------
Frankly, I mean, we had this discussion in the teeth of the financial crisis. You'll be surprised when things look fixed how variable it can be when you've got no money. And I'm not suggesting clearly with major projects clearly capital commitments are made, and, you know, that starts to complicate the picture, to say the least, but with a major structural change in the oil price, which none of us are expecting, then you can move things fairly quickly. I think not only ourselves, but the whole of the industry demonstrated that in the crisis. Best thing that happened to this industry, frankly.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [169]
------------------------------
Are there any further questions? No further questions? All right. Okay.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [170]
------------------------------
And [Lydia] had a question.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [171]
------------------------------
[Lydia], fine, please.
------------------------------
David Davies, OMV - Vice Chairman and Chief Financial Officer [172]
------------------------------
[Lydia] has the final word, as ever.
------------------------------
Unidentified Speaker [173]
------------------------------
Thanks. Just ask two questions. Firstly, on the exploration program, why is 250 million to 300 million barrels the right number to target? Is it just what you can afford to spend or is that just what you think you need to be able to sustain the portfolio longer term?
And then, secondly, going out to David's presentation around -- you talked about the [Mary] field was fixed quicker because you had a swivel in sort of Germany that you could transport up, within the context of looking after -- are you -- in the new projects, are you still building in that same level of contingency and to working capital almost to what you've had in the past?
------------------------------
Walter Hamilton, OMV Group - Senior Vice President [174]
------------------------------
On your question -- and 250 million to 300 million barrels on average in a couple years' time, it's all about statistics, actually. What you do is you look at what you can spend. You look at your desired finding cost, and you do some statistics. We do have an expiration model, as we call it, which is fed with a number of data, part of it that's financial data, part of it is -- I don't know -- probability of success, et cetera, et cetera, and how much money actually from those 700 have to be used for appraisal activities.
So all this together brings us to a range between 250 million and 300 million. Forgive me if it's 249 million at the end of the day.
------------------------------
Unidentified Company Representative [175]
------------------------------
I think for your second question, I was just trying to think -- I don't think we've got a policy to lock up more working capital now than we've ever had in the past. In fact, the opposite. The specifics of the example I gave you, in some ways, we were somewhat fortunate, because we saw some warning signs a while ago that there might be a problem with the swivel, and so we'd already ordered one in anticipation that we might need it, and now we have it -- now we're refurbishing the old one, so we've got a spare.
So I think, you know, we were somewhat fortunate that we'd been able to kind of expedite that situation because of having seen the warning signs, but I don't think we have a policy to kind of over spare or anything like that. But if we see big single failure points, then we will have risk mitigation measures, and if they include locking up some working capital, we'll do it, if they're critical for a project.
------------------------------
Felix Rusch, OMV Group - Head of Investor Relations [176]
------------------------------
Okay. Any further questions? So if that is not the case, then thank you very much for your interest and your active participation. We've now a well-deserved good lunch. If there are any further questions, then we are still around for a while, and clearly myself and the investor relations department is always at your disposal. So thank you very much, and have a nice lunch and afternoon. Bye.
END
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------