Q1 2014 Novatek OAO Earnings Conference Call (IFRS)
Apr 30, 2014 AM CEST
NVTK.MZ - Novatek PAO
Q1 2014 Novatek OAO Earnings Conference Call (IFRS)
Apr 30, 2014 / 01:30PM GMT
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Corporate Participants
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* Mark Gyetvay
NOVATEK - Deputy Chairman of the Management Committee & CFO
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Conference Call Participants
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* Oleg Maximov
Sberbank CIB - Analyst
* Andrey Gromadin
JPMorgan - Analyst
* Alexander Kornilov
Alfa Bank - Analyst
* Maxim Moshkov
UBS - Analyst
* Geydar Mamedov
Goldman Sachs - Analyst
* Sergey Pigarev
RMG - Analyst
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Presentation
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Operator [1]
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Good day, and welcome to the NOVATEK first quarter 2014 results conference call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Oleg Maximov from Sberbank CIB. Please go ahead, sir.
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Oleg Maximov, Sberbank CIB - Analyst [2]
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Good afternoon and welcome. I'm Oleg Maximov from Sberbank CIB, and this is NOVATEK first quarter 2014 IFRS conference call.
With us today as usual are Mark Gyetvay, Chief Financial Officer of NOVATEK; and Alexander Palivoda, Head of Investor Relations. Mark, please start with your presentation.
Thank you.
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Mark Gyetvay, NOVATEK - Deputy Chairman of the Management Committee & CFO [3]
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Thank you very much, Oleg. Ladies and gentlemen, shareholders and colleagues, good evening, and welcome to our first quarter 2014 earnings conference call. I would like to thank everyone for joining this evening, and again extend our sincere gratitude to Sberbank CIB for organizing and hosting our earnings conference call.
Before we begin with specific details, I would like to refer you to our disclaimer statement, as is normal practice.
During this conference call, we may make reference to forward-looking statements by using words such as plans, objectives, goals, strategies, and other similar words, which are other than statements of historical facts.
Actual results may differ materially from those implied by such forward-looking statements due to known and unknown risk and uncertainties, and reflect our views at the date of this presentation.
We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events.
Please refer to our regulatory filings, including our annual review for the year ended December 31, 2013, as well as any of our press releases and documents throughout the past year for more descriptions of the risks that may influence our results.
Despite the warmer than normal winter, we delivered another set of solid financial and operational results for the first quarter 2014 relative to the year-on-year and quarter-on-quarter comparatives. Despite this fact, we continued to experience significant volatility in our equity share price, even though we increased our natural gas and liquid production consistent with our annual guidance, reported double-digit earnings growth, and generated strong operating cash flows to fully fund our capital expenditure program and remain free cash flow positive.
Our first quarter 2014 financial and operational results were clearly overshadowed by the geopolitical events in Ukraine and the ensuing rounds of economic sanctions imposed by the United States, the European Union and Canada, as well as the escalating tensions in Eastern Ukraine.
The capital market reaction to these events has been swift and negative, and our share price drop subsequent to the imposition of the second round of economic sanctions has clearly reflected this negative market sentiment.
The announcement of the second round of US sanctions against Russian citizens included one of our shareholders, Mr. Gennady Timchenko, which exasperated an already negative market situation.
Immediately following the US sanction announcements, we sought external legal advice from international law firms to assess the US Treasury Department's Office of Foreign Controls' Specifically Designated Nationals requirement to understand how the OFAC sanctions are applied, and to determine without question that NOVATEK was not considered a sanctioned entity under these regulations.
The legal opinions we received were quite straightforward. The sanctions issued against Mr. Timchenko are not applicable against NOVATEK, and that NOVATEK should not be regarded as a Specifically Designated National, or SDN. Based on a longstanding OFAC precedent, an entity should be considered an SDN if it is 50% or more owned by an SDN.
Therefore, the rule does not apply to NOVATEK, as Mr. Timchenko's non-controlling shareholder in NOVATEK via Volga Resources is under 24%. The ownership test, rather than the ownership or control test, was confirmed in subsequent announcements made by OFAC officials.
I would like to confirm that we are conducting normal business and financial operations, and that NOVATEK is not a sanctioned entity. We continue to conduct normal trading operations in Europe via our wholly-owned trading arm NOVATEK Gas and Power, as well as continuing to load tankers of our petroleum products destined to international markets via our Ust-Luga gas fractionation and transshipment terminal.
We continue to transact financial flows concerning payments and receipts through the international financial community, and subsequent to the announcement of the second round of sanctions, we withdrew the remaining balance of approximately $430 million from a syndicate of international banks, again confirming our active participation in an international financial arena.
Our work activities relating to our Yamal LNG project are proceeding as planned and we continue to hold constructive discussions with the international banking community, including export credit agencies and commercial banks, despite the recent announcement by US Ex-Im to suspend further discussion on financing all Russian projects, including the Yamal LNG projects, while the current US sanctions are in effect.
We believe that there is adequate financial support for the Yamal LNG project from the remaining International Export Credit Agencies, as well as positive comments from Chinese financial institutions regarding their commitment to provide a substantial portion of the total financing package as agreed with NOVATEK upon the recent conclusion of our equity transaction, and confirmed again in February with the execution of the inter-governmental agreement between the respective governments of Russia and China.
I mentioned in one of my prior earnings conference calls that the NOVATEK investment [place] has clearly moved away from our sound operational and financial fundamentals and is now squarely focused on external events; in this particular case, the escalating geo-political tensions around the Ukrainian situation.
We expect that the market will remain volatile for the foreseeable future, or at least until such time as this geopolitical situation de-escalates, which in both cases is obviously difficult to predict.
We will continue to address this market situation as best as possible in a manner consistent with our historical practice, and we encourage you to raise your concerns, risk and/or issues with us in our question and answer segment, or during upcoming investor meetings or conferences.
I do not want to monopolize tonight's call on the present geopolitical situation in the Ukraine other than to reiterate the statement that NOVATEK is not a sanctioned company under the OFAC rules, and that we are presently conducting normal business and financial operations.
We remain an open and transparent company with a strong track record of sound corporate governance, and as such, we will continue discussing these matters with all interested parties.
We remained active in meeting with investors, financial institutions and credit rating agencies over the past several weeks, as we did throughout the 2008/2009 economic crisis; and it is our strong belief that we should share with you any negative and/or positive news in a constructive manner, rather than cancel meetings or participation at conferences in the hopes these issues will dissipate.
We understand that the Russian investment climate has changed for investors with the continued escalation of events in Eastern Ukraine, the risk associated with the upcoming presidential elections on May 25, and the negative effects of the sanctions opposed so far; but it's equally important that we take a pragmatic view of the situation and remain focused on our business activities.
I would like to focus the initial portion of tonight's conference call on providing an update on our current operations.
The Yamal LNG project continues to play a key role in our main financial and operational activities as we press forward with construction activities. As of the end of 2013, the shareholders had invested approximately $2.5 billion into the project, and we presently have over 5,000 people working on various activities.
The budget for 2014 has been approved by all shareholders, and we anticipate that this year's expenditures will be approximately 2 times more than the previous years of 2012 and 2013.
Conservatively, the plan is to currently fund the 2014 budget via shareholder loans, and it is subject to the completion of all of our work related to project financing, which I will discuss separately in a moment.
In terms of field development activities, we have executed contracts for the drilling of 124 wells, which ensures a timely startup of the three LNG trains, and these contracts support the present drilling program for the years 2013 through 2017.
We anticipate that a contract for the drilling of an additional 84-plus wells will be concluded during 2015, based on the results of the wells test and an update on our overall well development program.
Currently, we have two drilling rigs actively drilling; the Arctika numbers 1 and 2. And the third drilling rig, Arctika number 3, is on site and being erected. We anticipate that all three of the drilling rigs will be actively drilling by the fall of 2014.
We have already drilled 14 production wells, and have prepared four of the estimated 19 drilling pads. The test results on the production wells confirmed the geology of the South Tambeyskoye field, and will serve to determine the future update on the well development program.
The full EPC contract was signed in April 2014, and presently includes Technip, JGC, and the addition of Chiyoda to the contractor group. The contract's effective date was April 1, 2013, which is the date the contractor and Yamal LNG commenced site preparation activities, engineering and procurement, all under the original letter of award.
The delay in executing the final EPC contract was influenced by the joining of CNPC into the project consortium, as well as Chiyoda joining the EPC contractor group. The delay in executing the final EPC contract did not have any negative impact on the overall project cost, or the project schedule.
As of today, we estimate that Chiyoda's main EPC contract progress is approximately 5.7%.
To date, several office complexes and a 1,000 person pilot camp have been built for the EPC contractors at the Sabetta site. An additional camp for roughly 5,000 people is presently being constructed, and I mentioned in my previous conference call that we have already completed approximately 50% of the projected housing complex.
The LPG plant site preparation is approximately 75% completed, including the full completion of the land, backfilling for LNG train number 1. The contractor has commenced piling work for the LPG plant foundations, purchase orders have been placed for main equipment such as turbines, compressors and heat exchangers, and the module construction yards have been selected.
We have also placed purchase orders for various types of equipment in bulk materials, as well as subcontracting construction packages. We have concluded an EPC contract for the construction of four 160 cubic meters full containment LPG tanks, with the consortium of Entrepose and Vinci. The detailed design stage has been finalized, and we recently completed the pile foundation for the first out of four LNG tanks. Approximately 948 piles were installed.
The foundation for the second LNG tank is presently being constructed, and on-site workshops and concrete batch plants have been built. In May 2014, the EPC contractors will commence concrete activities to complete the foundations and walls for the first two LNG tanks during the warmer season.
The EPC contract for the power plant has been signed with a total capacity of 376 megawatts, and the 400-person contractor camp is completed. The detailed engineering phase is in the final stages of completion, and purchase orders have been placed to Siemens for the manufacturing of gas turbine generators. The power plant site has already been prepared, and a contractor is currently mobilizing its resources to begin piling works in May 2014.
The seaport's front wall, measuring 1,000 meters, is already completed; and the early phase facilities will be fully operational during the third quarter 2014, including port area, warehouses and administrative buildings.
The seaport harbor and approach channel was officially designated for winter operations in November 2013, and since that time, 19 vessels have arrived and offloaded 135,000 cargos of materials and equipment.
From inception, approximately 840,000 tons of construction cargos have been delivered to the Sabetta location, and the present navigation plan calls for the delivery of approximately 1.5 million tons of cargo per year.
In addition, the contractor has recently started the construction of the LNG loading jetty trestle foundation. There are currently over 5,400 people and 866 construction vehicles at the Sabetta construction site and the South Tambeyskoye field.
The new international airport designed to accompany aircrafts such as a Boeing 737 is 60% completed and is expected to become operational in the fourth quarter 2014.
In terms of marketing, 77% of the expected L&G volumes have been contracted on long-term bases at internationally referenced L&G market prices based on the region of delivery, and the project marketing team is in active negotiations with potential buyers for the remaining unplaced volumes.
We believe this process will be wrapped up in the near term, again confirming the market's appetite for L&G volumes sold from this project specifically, and Russia in general.
With the recent signing of the EPC contract, the ECAs, or Credit -- Export Credit Agencies consultants can finalize their technical due diligence and report back to their clients. We believe this process will take a few months to complete and we are scheduled to have the next set of meetings in early June.
Last week, I led a delegation of NOVATEK's finance team to Beijing to continue our discussions with CNPC, as well as Chinese financial institutions, and we had a very positive and constructive working group meetings relating to Chinese participation and project financing.
We will continue to hold various working group meetings with international, Russian and Chinese financial institutions, and we believe the term sheet is in advanced stages of negotiation at this particular point in time.
As for potential partner discussions, we are presently satisfied with the current shareholder structure of NOVATEK at 60%, and both Total and CNPC each holding a 20% equity stake.
We will continue to entertain talks about the remaining sale of 9% if the transaction value is acceptable to us, but it is not cardinal to our present work activities or financing activities.
There were no major updates to report in terms of exploration activities during the first quarter 2014. We relinquished two exploration licenses during the reporting period, but we were also able to expand the Yurkharovskoye license area by identifying additional hydrocarbon layers in this important field. We completed 33 production wells during the quarter as compared to 28 production wells in the first quarter of 2013.
As reported in the Russian press yesterday, we encountered technical problems at the Urengoyskoye field as the result of a fire at the de-ethanization unit, or condensate treatment facility, which separates the gas condensate stream from natural gas.
We estimate that it will take several weeks to assess the situation, conduct an investigation, and determine the extent of damage and its impact on production output for the joint ventures, and correspondingly, our forecast for the year. There were no fatalities or injuries to report as a result of this fire.
At the Urengoyskoye field, we managed to launch the field's first production on April 9/10 as planned. However, the fire has shut down production at the field. We realize that this news is disappointing to both you as investors and to us in Gazprom Neft as joint venture partners.
The Urengoyskoye field was considered a major driver of our expected growth and liquid outputs in 2014, and our production guidance will need to be revised to reflect this event. We will provide an update on the situation once we have additional information to report, as well as the potential effect on our production guidance for 2014. Despite the fire, we are currently working on the second production train at the field, and this scope of activity was not affected.
At the Yevo-Yakhinskoye field, we have completed the drilling of 33 cumulative production wells, or roughly 75% of the field's drilling program, as well as other work activities such as backfilling of drilling pads, roads, and other infrastructure related activities.
We are currently testing the completed condensate pipeline, and we are approximately 90% complete on a 20 kilometer gas pipeline. A power plant was launched in the field, and the first stage of the oil treatment facility was completed. We anticipate that the field will be launched during the latter part of 2014.
At the Samburgskoye field, we have completed the drilling of 42 cumulative production wells, or roughly 53% of the field's drilling program, as well as practically completing the piling work for the gas treatment facility. We are scheduled to complete and launch the third production train in September 2014.
In terms of capital spent during the quarter, we significantly ramped up the infrastructure and field development activities at the Yarudeyskoye field, our main crude oil program. During the quarter, three drilling rigs were on site. and we completed our first production well. The 350 kilometer oil pipeline from the field to Pur-Pe is approximately 70% completed, and the 150 kilometer gas pipeline is roughly 35% complete. The backfilling for the oil treatment facility is 70% complete, and piling works have begun. We plan to launch this crude oil field in 2015.
At Termokarstovoye, we have completed 11 of the planned 22 wells, and the wells which have been tested indicated higher than expected initial flow rates. We are approximately 75% completed on the 179 kilometer gas pipeline, approximately 95% complete on the 236 kilometer gas condensate pipeline, and have begun piling and construction work at the field's living camp. This field is expected to be launched in 2015, one year ahead of its original timetable.
From an operational perspective, our natural gas production volumes were negatively impacted during the quarter on a comparative basis due largely to the swap of Sibneftegas to Rosneft in December 2013.
Overall, our organic production volumes were down 2%, while our combined production figures, including a proportion of share in the production of our joint ventures, decreased by 8%.
If we exclude the natural gas production of Sibneftegas during the first quarter 2013, making the analysis more comparable, our overall natural gas production increased by approximately 5.2%, which is slightly lower than our production guidance for 2014, but largely takes into consideration the warmer winter weather.
The largest growth contribution came from the successful launch of the Eastern dome at the North gas field in October 2013. Our total natural gas volumes sold declined by 967 cubic meters or roughly 5.2%, largely driven by the divestiture of Sibneftegas in December 2013, and a reduction in purchases from SIBUR.
We also had a substantial reduction in volumes stored in the underground storage facilities of roughly 2.5 billion cubic meters to fulfill our contractual obligations, which also correlated to the reduction of purchases from SIBUR, and to a lesser extent Nortgas.
The share of end consumers in our total sales mix increased from 89% in the first quarter 2013 to 94% in the current reporting period. The 5% change in the composition of our sales mix also contributed additional revenues to the Company, since the average netback we received for end customers was approximately 12% greater than the average ex-field or wholesale traders' sales per 1,000 cubic meters.
During the quarter, we reported total gas sales to end consumers of 16.7 billion cubic meters, which was consistent with the volume sold year on year, and greater than 15.4% quarter on quarter.
Within our end customer sales, power companies and large industrial consumers represented roughly 89% of the sales volume delivered, or approximately 84% of our total gas sales for the quarter.
Total natural gas sales for the reporting period aggregated 17.8 bcm, representing a year-on-year decline of 5.2% and a quarter-on-quarter growth of 15.4% respectively.
We had a change in the regional mix of our gas deliveries as a result of new contracts. We increased our sales volumes year on year to the Khanty-Mansiysk region by roughly 1.8 billion cubic meters, and had a corresponding decrease in volumes sold to the City of Moscow by 1.5 billion cubic meters.
Geographical regions representing greater than 10% of our sales volumes included the Perm, Khanty-Mansiysk and Chelyabinsk regions. As a result of the change of our regional sales mix, our average distance to market was approximately 1,460 kilometers, representing a significant decrease in our transported distance of 875 kilometers year on year, and 610 kilometers quarter on quarter.
This reduction in our average transport distance resulted in a roughly RUB1 billion reduction in our natural gas transport costs despite a 6.4% increase in the average transport tariffs effective August 1, 2013.
Our average netback for natural gas sold to end customers increased by RUB345 per 1,000 cubic meters, or by roughly 20.2% as compared to the first quarter 2013 where it was down by RUB88 per 1,000 cubic meters quarter on quarter; whereas our ex-field sales price increased by 7.4% year on year, but decreased by 11% quarter on quarter.
The quarter-on-quarter decrease was largely due to a 1.9% reduction in the average gas transfer -- average tariff, effective January 1, 2014, and a shift in the composition of our volumes sold to certain clients and regions. Otherwise, we were generally pleased with the stronger gas prices we received for both end consumers and ex-field sales in the current reporting period.
In terms of liquid production, we maintained relative output of liquids from our core fields, mainly due to the contribution of crude oil production at the East Tarkosalinskoye field. However, the majority of the first quarter's positive year-on-year contribution was attributable to the growth in the output of liquids from our joint ventures, particularly the contribution made by Nortgas after the launch of the Eastern dome of the North-Urengoyskoye field in October. Overall, our liquid production growth was 15.3% year on year.
During the reporting period, we sold 1.5 million tons of liquid hydrocarbons, representing a slight decrease over the comparable reporting period. The decrease was mainly driven by a significant reduction of stable gas condensate volumes in transit of 295,000 tons in the first quarter 2013, which was offset by a slight increase in naphtha and other refined products volumes in storage of 20,000 tons in the current reporting period.
Our refined products recorded as inventory aggregated 555,000 tons as at March 31, 2014, as compared to 268,000 tons of stable gas condensate year on year, and 535,000 tons of refined products at year end.
The current reporting period presents the first full quarter that we operated the Ust-Luga gas fractionation unit since it was commissioned in two stages in 2013, the first stage representing 3 million tons capacity in June, and another 3 million tons launched in October.
As we discussed previously, the successful launch of Ust-Luga dramatically changes the composition of our liquid sales from selling raw materials to the market in the form of stable gas condensate, to refined petroleum products such as light and heavy naphtha, jet fuel, diesel fuel, heating oil, and bunker fuel.
The new range of higher-value finished products changes our marketing and logistic operations, as well as enhanced the average netback we received for our products sold in the international market.
It is difficult to make a like-kind comparison between the first quarters 2013 and 2014 due to the significant change in the composition of liquid products sold. Therefore, I will not provide a detailed analysis of these differences, but will focus mainly on the results achieved in the current reporting period.
If we combined or lumped together all of the products sold from Ust-Luga relative to a single products sold last year of stable gas condensate, we can see that the average netback that we received this quarter increased by approximately $102 per ton, which demonstrates the value-added netback we received post the implementation of Ust-Luga.
On an individual product basis, we achieved higher relative netbacks on each product stream than achieved by solely selling stable gas condensate.
In terms of geographical regions, we dispatched 941,000 tons of refined petroleum products from the Ust-Luga complex in the first quarter 2014, of which 526,000 tons were shipped to the Asia Pacific region, 318,000 tons were shipped to Europe, and 97,000 tons were shipped to the United States.
At the quarter end, we had 153,000 tons of naphtha in transit to both the US and Japanese markets versus zero goods in transit in the comparative period.
We also managed to achieve relatively strong LNG prices on our international sales during the first quarter 2014, with Poland and Finland representing the largest geographical areas in terms of volumes sold.
Natural gas represented 66% of our total oil and gas revenues, whereas our combined liquids represented the remaining 34%.
On a total barrels of oil equivalent basis, our first quarter 2014 production slightly declined 1.2% to approximately 112 million barrels of oil equivalent versus 114 million barrels of oil equivalent in the prior reporting period, representing an average total hydrocarbon production per day of approximately 1,247 million barrels per day.
In the first quarter, the share of our liquids represented approximately 10.1% on a combined BOE basis versus 8.7% in the previous year.
We effectively managed our overall operating expenses through the quarter, and the increase period on period of RUB2.8 billion, or 6%, was primarily due to an increase in our 'taxes other than income' expense category as a result of a significant increase in our natural gas mineral extraction tax, which was offset by a reduction in transport costs for both natural gas and liquids.
As part of the migration to the new tax formula calculation effective July 1, 2014, the Russian Government has effectively increased our natural gas mineral extraction tax by 51.7% in July, and another 17.2% on January 1, 2014. This change essentially increased the tax rate charged to the independent gas producers from RUB265 per 1,000 cubic meters to RUB471 per 1,000 cubic meters in the reporting period.
And this rate will be in effect until July 1, 2014, when the new amendments to the Russian tax code regarding the new methodology for calculating the MET rate becomes effective.
There are no material surprises in our G&A and other expense categories to highlight, except for the increase in employee headcount post the launch of the Ust-Luga complex and the expansion of the Purovsky processing plant.
Our balance sheet and liquidity position remains strong throughout the reporting period as we decreased our overall net position this quarter relative to the year-end net debt position balance by 21% as a result of very strong cash flow position.
As a result of the economic sanctions, slowing domestic economy, and high capital flight in the first quarter of 2014, all three of the credit rating agencies held discussions with the Company and undertook event driven credit meetings. The credit agencies have reiterated our investment grade credit rating, demonstrating the strong fundamentals of our business and our present liquidity position.
As of today, NOVATEK has over $2 billion in cash on the balance sheet, and continues to closely monitor our credit policy relating to domestic and international sales. Yesterday, however, S&P issued a general statement on placing a series of Russian companies, including NOVATEK, on negative outlook, following the downgrade of the Russian sovereign debt rating this past week, but reaffirmed again our investment grade rating.
We remained free cash positive during the first quarter 2014, and ended the quarter with a free cash flow position for the Company of RUB13.4 billion, which is lower than the prior year, but takes in account a higher capital expenditure program in the current year.
We will continue to fund our capital expenditure program through internally generated cash flows, and have the ability to meet all of our debt obligations and liabilities when they mature or come due for payment.
In conclusion, NOVATEK ended the first quarter of 2014 with another set of strong financial and operational results, as well as delivering robust production growth consistent with our corporate strategy. Notwithstanding the recent geopolitical events in Ukraine and the US/EU sanctions, we remain keenly focused on our core business operations and the various work streams relating to the Yamal LNG project.
The recent fire at the de-ethanization plant at SeverEnergia's Urengoyskoye field is clearly a major disappointment to us and our joint-venture partners, Gazprom Neft, as we successfully launched a new field in accordance with our project time schedule.
We are mindful of the implications this shutdown in production will have on our production guidance for 2014, but it is still too early to make overall comments until the investigation is completed, the extent of damages assessed, and corrective measures are implemented.
We were thankful that no fatalities or injuries occurred from the fire, which was the first point of concern for us when we were informed of this event.
I would like to end this portion of the conference call and now open the session to questions and answers.
Thank you very much.
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Questions and Answers
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Operator [1]
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Thank you. (Operator Instructions). Oleg Maximov, Sberbank CIB.
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Oleg Maximov, Sberbank CIB - Analyst [2]
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A couple of questions from me. The Russian companies in any economic sectors, as far as I know, have not raised any funds on the Eurobond market since the Ukrainian crisis. Do you feel the market is shut now? Do you see any impact on NOVATEK? Do you see any need for NOVATEK to tap the external financing this year? If yes, how much, and how do you go around this?
The second question is on the flexibility of your CapEx budget this year. If you can provide any color of how much CapEx can you theoretically cut before it impacts the operations.
And the third question on Termokarstovoye field, which you are supposed to launch early next year. How should we think and model about this field's marketing arrangement on both natural gas and condensate sides?
Thank you very much.
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Mark Gyetvay, NOVATEK - Deputy Chairman of the Management Committee & CFO [3]
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Thank you, Oleg. On the first point, at this particular moment in time, I don't believe we have any plans to enter the capital markets other than complete the project financing for Yamal LNG. As I mentioned just a minute ago, we presently have over $2 billion of cash on the balance sheet today in US dollars, and that provides us with a sufficient buffer in the near term if we need to access that particular cash.
I think in terms of what other Russian companies are planning to do, I really haven't heard of anyone actively in the market today looking to place Eurobonds. There might be a selective debt arrangement based on relationships with commercial banks. As I also mentioned, post the issuance of the sanctions, we were able to withdraw the remaining of our syndicated loan. But that was already an existing facility and not a new one.
I think what we should expect to see, there will be increased costs of financing as a result of the economic crisis. So any company that needs to go to the market right now would have to face that situation.
In terms of the project finance, as I mentioned, I think that's going to be our biggest objective, and we hope to conclude that towards the latter part of this year. And I believe from the meetings that we had recently in London, as well as my recent meeting this past week in Beijing, I think we're moving further and further along on completing this important financing package for Yamal LNG.
We have to wait for the completion of the consultants to provide their feedback and report, the due diligence report, back to the ECAs, and that will only be done now that the final EPC, the final main EPC contract, is completed.
So I think it's a difficult question in terms of how long the sentiment is, but I believe if you have some form of relationship with commercial banks, funds will be available to you.
Your second question in relation to flexibility in the CapEx budget, as we mentioned previously on a conference call, the budget for 2014 is estimated at RUB60 billion. I think we're assessing the situation now in light of the events at the Urengoyskoye field to see if we can possibly either rearrange some of the CapEx and divert it to other projects to expedite some of the development activities, but I don't believe we'll have any really significant opportunity to reduce this CapEx program for this year.
We already have a pretty robust program to try to launch these new fields to meet our strategy as outlined in 2011, which we'll update later this year, but I don't believe we'll have much scope to change that. But it doesn't mean that we can't look at some of the particular fields, and there may be some flexibility, but I don't anticipate that it will be significant.
In terms of Termokarstovoye, if I understand your question correctly, you're more or less interested in who's going to be responsible for the marketing arrangements, both for the liquids and the natural gas. And according to the shareholder agreement, NOVATEK will be responsible for that. So we'll be the person that will be buying the gas and liquids from the field.
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Oleg Maximov, Sberbank CIB - Analyst [4]
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Okay. Great. Thank you very much.
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Operator [5]
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Andrey Gromadin, JPMorgan.
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Andrey Gromadin, JPMorgan - Analyst [6]
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I have a few questions, first on SeverEnergia. I understand your explanation on Urengoyskoye field and this unfortunate event, but could you please clarify if this [piece of] production guidance only related to possible downside on Urengoyskoye field or some other developments could be also -- I mean some other fields' potential could be also decreased because of this fire?
And second question on Yamal LNG. Is my understanding correct that you haven't finalized any project financing for this project? Because you said that [cumulative] investments about $2.5 billion, and I see from the accounting that end of the year -- end of the quarter, a loan from NOVATEK is about $1 billion.
So most of the financing going from loans from key participants, NOVATEK, Total and CNPC, so when should we expect any progress on this project finance?
And I heard you saying about these negotiations with Chinese financial institutions, but just maybe a bit more clarity on timing, because you mentioned CapEx for this year for this project could be about $5 billion.
Thank you.
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Mark Gyetvay, NOVATEK - Deputy Chairman of the Management Committee & CFO [7]
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Okay. On the first question, right now, as I said, it's early to assess the overall impact on SeverEnergia's production guidance, but the fire relates only to the Urengoyskoye field and does not affect any of the other operations at SeverEnergia.
But keep in mind is that SeverEnergia is the bigger -- or Urengoyskoye; excuse me, [not] SeverEnergia -- is the biggest producer, and was expected to be the biggest producing field out of the four fields in that joint venture.
But none of the other fields in my understanding right now are not affected. Samburgskoye is not affected. And I believe also the expected launch of the Yaro-Yakhinskiy at this particular point is also not affected.
It's just a question of assessing the damages as a result of the fire, determining a corrective course of action, completing the investigation, by not only specialists from NOVATEK and Gazprombank, but clearly, there will be specialists from the Russian Federation also looking at this and making their assessment.
And once we complete those steps, then it's easier for us to come back with an assessment on the impact on production from that particular field, the Urengoyskoye field.
In terms of your second question, again, it's -- there is a series of activities going on. This is not -- they're not linear. There's a bunch of parallel work routes working through the process and finalizing the project financing.
We had again very constructive meetings about three weeks ago in London, narrowing down any open items in terms of the term sheet. We also needed to go out to Beijing, because the Chinese financial institutions will play a major role in the overall financing package as agreed in our sales/purchase agreement with CNPC, and as confirmed by the inter-governmental agreement.
So I believe that that first step of actually going out there for my level, and sitting down and understanding what were some of the requirements that needed to be put in place to move this process forward, is easily reconcilable between all parties.
And so I believe that the way we're targeting right now with an upcoming meeting probably back into Beijing after the Russian holiday, so early/mid-May, as well as the next group of ECA meetings in June in London, I think we're moving fastly along this track of finalizing the term sheet.
But please keep in mind, as I alluded before, the ECAs have hired a series of consultants to do all these reviews of the operations, the marketing arrangements, the shipping operations, environmental operations, and so they also have to wait to get their final reports back from these particular consultants.
Now we know some of them are already done, and we know that one of the processes that needed to be completed was the signing of the final EPC, domain EPC contract, which was just completed. So that, as I mentioned in my prepared text, will be about the next several months for them to finish that review and report back to the ECAs. So there's a bunch of parallel tracks going on here.
Now from the Chinese financial institutions, we have -- we're expecting, and the indications that we're getting from the banks, as well as indications from CNPC, are very, very positive to be able to complete this round of financing by the end of the year.
So I can't give you a definitive date on when project finance will be complete. All I can is that we're moving closer and closer to that particular target. However, in the interim period, the shareholders will have to contribute to the capital program; that was to the budget that's been approved for 2014. And you already see part of that being done in the first quarter via the use of shareholder loans to Yamal LNG.
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Andrey Gromadin, JPMorgan - Analyst [8]
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Just a quick follow-up. Is my understanding correct that you said project financing by the end of the year but still CapEx will be financed via shareholder loans? So potentially your CapEx requirement for this year, including this launch, could be much higher than RUB60 billion you indicated. Is it correct?
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Mark Gyetvay, NOVATEK - Deputy Chairman of the Management Committee & CFO [9]
------------------------------
Yes. And the RUB60 billion was without -- where we've already reported that before, is without the financing related to Yamal LNG. So what needs to be considered in terms of the timing, the quicker we get the project financing in place, the lower amount of shareholder loans will be financed.
But right now, we have a budget. We have a work stream. We just signed EPC contractors. That contract, we're procuring equipment, etc. Those need to be funded in the [meantime]. So, yes, we'll have to provide a portion of shareholder loans in part of the financing package for this particular year.
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Andrey Gromadin, JPMorgan - Analyst [10]
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And just -- again, a quick, even quicker follow-up. EPC contract already finished and irreversible, so the number for total CapEx already fixed. Right? It's not going to change?
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Mark Gyetvay, NOVATEK - Deputy Chairman of the Management Committee & CFO [11]
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The number that we provided has not changed. It's $27 billion. That was the decision on the FID. As we said before, that represented about 70% of fixed contracts already to the project.
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Andrey Gromadin, JPMorgan - Analyst [12]
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Okay. Thank you.
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Operator [13]
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Alexander Kornilov, Alfa Bank.
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Alexander Kornilov, Alfa Bank - Analyst [14]
------------------------------
I have actually three minor questions related to your ongoing buyback program. First of all, could you please remind us what is the percentage already utilized to date from your $600 million buyback program? That's first.
Secondly, do you already have any certain plans how to deal with those shares which have already been bought back? Are you going to cancel them? You are going to sell them back to the market? Any color would be much appreciated.
And thirdly, do you have any plans to extend the buyback program? As far as I understand, it's going to expire at some point in June this year. Do you have any plans to extend that program going forward?
Thank you.
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Mark Gyetvay, NOVATEK - Deputy Chairman of the Management Committee & CFO [15]
------------------------------
Okay. Well, the first point is we roughly have spent -- the buyback program that was approved was for $600 million, and today, we have spent approximately $130 million, or roughly 21% of the total amount. So that gives you the scale of what we're doing.
We report back -- for everybody who has not seen it, we report every Monday via the press release of that prior week's activities. So we're pretty open in terms of disclosing to the market what the buyback program is on a week-by-week basis.
Second one, the plan is that -- we don't plan to retire these shares. We plan, just as we did on a prior buyback, eventually we'll put them back in the market, but the timing of that we'll need to determine based on where the respective share price is at any particular moment in time.
Your third question is whether we can expand the program or extend the program. We've already extended it a couple of times already since the original program was implemented in, I believe, 2012. And so the likelihood is that by June, we will probably issue another press release or go to the Board of Directors and at least get approval to either continue with the program or extend it in terms of its [tenure].
I'm not sure at this particular point, we haven't had any really long discussions on whether or not we'll raise the amount of the buyback at this particular point in time -- I mean beyond the $600 million that's already approved.
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Alexander Kornilov, Alfa Bank - Analyst [16]
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Okay. Thanks.
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Operator [17]
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Constantine Cheropanov, UBS.
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Maxim Moshkov, UBS - Analyst [18]
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It's actually Max Moshkov. I have two questions, if I may. First, what are the maintenance CapEx for Purovsky plant and the Ust-Luga complex per year?
And the second question is regarding the Total ownership. So the company -- Total just said that they still have plans to increase ownership to 19.4%. Do you have already signed an option? Is there an option already in place with Total regarding its ownership in NOVATEK? And what is the timeframe for it?
Thanks.
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Mark Gyetvay, NOVATEK - Deputy Chairman of the Management Committee & CFO [19]
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On the first question, I think it's a little premature right now. If you look at our -- in terms of what the overall maintenance capital [vision] is we just effectively launched the third stage of Purovsky in January of 2014 and we're just now getting up to a point of seeing the first full quarter. But we're nowhere near the capacities at both of these plants right now, and the anticipation that we would be reaching processing capacity around 2016.
If you look at our year-on-year change in our CapEx program. you see that in the first quarter, we spent about RUB161 million for the Purovsky processing plant, and this was down from RUB1.3 billion in the first quarter and RUB2.1 billion in the first quarter. Again, this is reflecting that the finalization of the process, it doesn't give us any indication that this will be ongoing maintenance capital, but you can see the actual scale of capital has dramatically started to -- dramatically dropped as a result of these launches.
We can also see roughly the same level of decreasing capital. We were essentially about RUB1.9 billion spent in the first quarter 2013, and in the first quarter of 2014 it was RUB83 million; and that was also a drop from RUB745 million in the fourth quarter.
So again, it's just reflecting the drop in the actual construction phase but hasn't really given us any indication at this particular point in time what the overall maintenance capital will be; as well as also the overall operating capital, the operating expenses, as we just hired an additional 475 employees at both of these plants, combined employees for both these plants, which was a reason why the operating expenses increased year on year.
So I think it's a little too premature to provide what our maintenance capital will be on this particular project, but I'll be glad -- Maxim, we'll be glad to provide that to you at a later date. I just don't have that right now. Okay?
In terms of your second question, Total shareholding, there was an agreement, shareholder agreement with Total where they had the right to increase their shareholding up to 19.4%. At the last time I've seen it, it's roughly about 17% right now.
I believe that the option, or the right that they had with the shareholders, expired in April 2013, if my memory serves me correctly, but I believe it's their intent to continue buying up to the 19.4%. But I don't know, since it's not a direct NOVATEK event, I'm not involved with the shareholder discussions, if it's directly related to Mr. [Nicholson] at all to Total.
So at this point, all I can report is that they do have roughly about 17% shareholding in the Company.
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Operator [20]
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Geydar Mamedov, Goldman Sachs.
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Geydar Mamedov, Goldman Sachs - Analyst [21]
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I have one question regarding Yamal LNG. The plan to dispose of a further minor stake in the project, mainly if I recall it correctly, 9%, is I would suppose probably not in the focus at the moment. Or am I wrong in this and you're still in discussions with potential buyers of this stake and this is something that is also being on the agenda? And if, yes, are Russian companies considered at all as potential partners in there?
Thank you.
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Mark Gyetvay, NOVATEK - Deputy Chairman of the Management Committee & CFO [22]
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As I said in the prepared text is that we're satisfied today with our 60% shareholding, but that means that we will not entertain -- excuse me, we will entertain additional offers for the 9% if the price is right. And I believe two weeks ago, we received a proposal for a portion of the volumes.
When I talk about 9%, just so that we have a clear understanding, there is a possibility that that 9% will broken down into smaller percentages. Okay? And so the sale is up to 9%. So we may only sell 5% of it at the end of the day.
But we did receive a proposal from a group in the Asia Pacific region for that, and I believe it's being evaluated. I don't know what the ultimate decision will be in terms of whether or not we'll proceed forward. But we are looking at it and we're still open for discussions, but I think our primary concern right now is that it would have to be economically justifiable for us to sell that stake.
Your second alluding question to it was would we consider a Russian participant in the project, and I believe that, as you may already know, we had discussions, which I believe are still ongoing, with a combination of the Russian Investment Fund, as well as their counterpart in China for a small stake in the project. But those are ongoing discussions at this particular point and nothing has been concluded.
I can't mention if there will be an equity shareholder from a producing company. It's probably highly unlikely at this particular point that it will be that such of investment made. It's probably more like, as I said, a pension fund or the Russian Investment Fund, which will be quasi-sovereign wealth funds.
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Geydar Mamedov, Goldman Sachs - Analyst [23]
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Thank you.
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Operator [24]
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(Operator Instructions). [Sergey Pigarev], RMG.
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Sergey Pigarev, RMG - Analyst [25]
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Can you say some words, please, about timing and volume of dividends from joint ventures of NOVATEK?
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Mark Gyetvay, NOVATEK - Deputy Chairman of the Management Committee & CFO [26]
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Well, obviously, this will change somewhat with the fire, if it means a reduction in production coming from the Urengoyskoye field. But the anticipation of issuing dividends via our joint ventures, timing was roughly 2015/2016 period of time that we anticipated starting to receive significant dividend distributions from the particular joint ventures.
Just a word. I didn't mention it in my text, but we made some additional reporting in our financial statements, or MD&A, that now includes a line item that shows the EBITDA contributions from the joint ventures. So we've added that additional layer of disclosure so that investors and analysts, etc., who can start looking at what is the EBITDA contribution from these joint ventures. But I think the timing is probably 2015, more like 2016 now.
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Sergey Pigarev, RMG - Analyst [27]
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Thanks, sir.
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Operator [28]
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(Operator Instructions). There are no further questions over the telephone. Therefore, I'd like to turn the call back to the speaker for any additional or closing remarks.
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Mark Gyetvay, NOVATEK - Deputy Chairman of the Management Committee & CFO [29]
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First of all, thank you very much again for attending tonight's call. I think the economic situation and the political situation was one item that I thought would be a large discussion today. But, clearly, the events over the last couple of days at SeverEnergia changes a little bit our discussions; in particular, upcoming discussions.
I would just ask everybody to be patient as we assess the situation and come back with some more credible updates on what's going on from the actual field level. And as has been our practice, we will continue to advise the market of any changes in any of our plans.
We know that the situation currently in the political, geopolitical situation is quite difficult at this moment. Again, we have to wait and see a little bit and be a little more patient and pragmatic, as I mentioned. But there will be some trigger dates there obviously coming up in the near term that could escalate or de-escalate the situation, but none of us really have any clear-cut views on what the outcome.
All I can say is that you have our complete assurances from management of NOVATEK that we will continue focusing squarely on our core projects and delivering them as we said we would deliver, as well as our efforts from all the collective parties working on it to ensure that Yamal LNG moves forward as currently planned, as well as I know a lot of the questions today centered around the project finance, which squarely falls on my shoulders to ensure that we get this project completed and the financing to the project done on a timely basis.
So we will keep you up to date on future conference calls on the progress of the financing package.
And again, l'd like to thank everybody for coming, and again, I'd like to thank Oleg and Sberbank CIB for hosting this conference. And thank you, and we look forward to addressing you on future conference calls.
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Operator [30]
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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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