Q2 2014 OMV AG Earnings Conference Call
Aug 12, 2014 AM CEST
OMV.VA - OMV AG
Q2 2014 OMV AG Earnings Conference Call
Aug 12, 2014 / 09:30AM GMT
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Corporate Participants
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* Gerhard Roiss
OMV AG - CEO
* David Davies
OMV AG - CFO
* Jaap Huijskes
OMV AG - Executive Board Member, Exploration & Production
* Manfred Leitner
OMV AG - Executive Board Member, R&M
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Conference Call Participants
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* Haythem Rashed
Morgan Stanley - Analyst
* Thomas Adolff
Credit Suisse - Analyst
* Joshua Stone
Barclays - Analyst
* Matt Lofting
Nomura - Analyst
* Tamas Pletser
Erste Bank - Analyst
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Presentation
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Operator [1]
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Welcome to the OMV Group's conference call for the Q2, 2014 results. (Operator Instructions).
You should have received a presentation by email; however, if you do not have a copy of the presentation, the slides can be downloaded at www.omv.com. Additionally, simultaneous to this conference call, a live audio webcast is available on OMV's website.
I would now like to hand the conference over to Mr. Roiss. Please go ahead, Mr. Roiss.
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Gerhard Roiss, OMV AG - CEO [2]
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Thank you. Good morning from a rainy Vienna. I am pleased to guide you through our presentation. The market environment from the first half of this year, I think you're aware of it, about the oil price which was quite stable.
The political environment, which impacted the results of OMV quite heavily, we have seen this instability in Libya, and we also had some impact from the Yemen political situation.
The gas price, the significant drop of spot price at 20% at the half-year. And the gap to border contract tracker has reopened again.
The refining margin has been very poor the year 2013, but this year there was a further decrease, by 35%.
And the exchange rate, we had the negative impact, like the whole industry had, from a weaker US dollar.
Then we move to the highlights of OMV's first half-year. I start with the [highlights] that happened in July, but we are happy to announce that we have spudded our second well in Domino, our Black Sea discovery in the deep part of Black Sea. It's a kind of appraisal well which, hopefully, fourth quarter, will show us that what we expect will become reality.
North Sea: Gudrun production started a little bit delayed, in April, and Jaap Huijskes will give you the latest information about Gudrun. In terms of our portfolio West of Shetland, we have strengthened it by taking over some assets from Hess.
Wisting: we have done an appraisal well and we could confirm the potential that we have assumed out of the exploration were last year in the range of 200 million to 500 million boe.
Tunisia: we have taken our final investment decision on Nawara field; it's about [EUR550 million] net to OMV.
Bayernoil: we are happy and lucky that we could close the divestment, and finish this divestment, that we have announced 2011. Nowadays, and that's the reason why I say I'm lucky or happy, nowadays I think we could not do this again into this refining environment in Europe.
Petrobrazi refinery: we have started couple years ago our modernization project. We invested about EUR500 million, and Manfred Leitner will give you the impact of this investment.
And on South Stream, we have signed the joint venture agreement with Gazprom.
In terms of result, we see a drop in the clean CCS EBIT by 34% to EUR1,037 million. This comes out of E&P, a drop of 24%, and this is, of course, affected by our Libyan situation and the weaker US dollar.
Gas and power: we have lower spark spreads in Romania impacting our power plant, and on the other hand, we have improved gas supply contract terms. But the margins in this gas and power business remain under heavy pressure.
Refining and marketing: again a drop of 59% depressed refining margin, you're aware, in Europe. And on top of this, we had a temporary price regulation in Turkey because of the election which happened last weekend.
Overall, we have to say that our refining impact, which is a positive one of EUR111 million, is, of course, heavily impacted by our petrochemical result, which is key to our remaining refineries.
When you have this huge political impact in your production, it's important to see what is the stability in the portfolio. We had the last half-year about 85% in stable OECD countries and our target is, long term, to have a higher share, more than 80% in these stable OECD countries, or EU countries, even if Libya or Yemen is back on full production.
As you see, we have announced in 2011 our strategy in terms of E&P. We have announced to grow our portfolio to a production of 400,000 barrels a day in 2016, and I would like to guide you through this growth.
We had production of 288,000 barrels 2013; the guidance for 2014 is 310,000 barrels. Then you see this slight line which is stable core countries. This is, of course, two-thirds of our production, with some mature productions and here, therefore, this to keep a stable production which we could achieve and we could deliver over the last years. This is Romania and Austria.
Then we have key projects. Jaap will tell you more about it and give you more details, but one dimension is, the biggest dimension, is North Sea, with the production of 65,000 barrels in 2016 as a target. And of course, we plan to have [what we had at 2011] and the plan is today to have full production in Libya and Yemen in 2016. That's, of course, our plans.
But we have to develop our existing portfolio also beyond 2016 and, as we have this clearly a big focus, we also have to track and retain people in the long term. And, therefore, we have launched a strategic incentive plan to support this growth.
And just to talk about the growth that we have planned 2013 to 2016, is a growth of [12%] per annum. That's quite a strong growth that we see a company. And then if you see the long-term growth you see here figures that have a range from 440,000 to 520,000 [boe/d] for the year 2021.
So again, you see growth is an issue, but there's such a wide range it's very important that we will show a profitable growth, which means that we have a combined ranking with relative ROACE, relative production growth versus peer groups. And that it's sustainability of the growth, which means the 1P reserve life target of minimum eight years, despite production growth.
So this is how our owners, our Board, how we are seeing it to support it. Growth is important, but much more important is the profitability and the sustainability of our growth.
How does it work? The grant period is 2014 to 2018; the performance period is again 2014 to 2021; and the payout period is 2022 to 2024. There are further details on this you can see on our web page, and I'm sure we can discuss it when we are on the roadshow [meeting].
So then we come to downstream. Here's still room for optimization of business and in terms of cash flow to support to our upstream growth. First of all, we have executed our divestment, which was Bayernoil, and it was a 45% stake in Marmara terminal in Turkey, and we have finalized the Petrobrazi refinery modernization.
We also strengthened the petrochemical business, which is important for our refinery integration, by a capacity expansion of butadiene production in our petrochemical refineries.
Gas and power: we have extended our interim agreement with Gazprom until March 2015 and further negotiations are ongoing. And we also have consolidated our infrastructure business.
I now hand over to David Davies.
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David Davies, OMV AG - CFO [3]
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Thank you, Gerhard. Good morning, ladies and gentlemen, from my side. My first slide is headlined Q2/14 highlights, just to make sure we're all on the same page.
This shows the clean CCS EBIT in quarter 2 this year and quarter 2 last year. At EUR369 million we are 50% down on the same period last year, the biggest decline clearly coming from the biggest division, E&P. The production of 297,000 barrels per day, [practically the same as the same] quarter last year. Of course, (technical difficulty) 30,000 barrels last year and clearly, the loss of that 30,000 barrels is quite a significant impact at EBIT level; less so at net income with a very high tax rate, but at the operating profit level really quite high.
The loss of the oil production in Libya has also contributed to a relatively lower oil share in our total sales. Oil share of sales was 52% in this quarter versus 55% last year and, clearly, the profit on the gas sales has not been as high as it would have been on that missing 3% of oil.
A further reason for the E&P decline is the extended exploration and appraisal expenditure that we were conducting. And, unfortunately, we've made write-offs against our activities in Gabon, while there was drilling in Faroe area and also in Norway, which amounted to a EUR61 million increase compared to the same period last year.
Gas and power made a small profit in the quarter of EUR10 million against the loss of EUR30 million in the previous year. The loss last year was, in particular, burdened by the as yet unresolved price negotiations with Gazprom and, indeed, with Statoil at that point in time.
Since then, Statoil negotiations have been concluded; we're now priced at the hub level for our deliveries from Statoil. And as regards Gazprom, negotiations were, of course, resolved at the end of last year as regards the first interim agreement, and negotiations are ongoing about further improvements in that regard.
That led to the churn turnaround in profit because the conclusion of those first wave of negotiations last year clearly hadn't happened by the first quarter in 2013 and now it has.
Refining and marketing: as Gerhard already indicated, the indicator margin was down by 23% at $1.92, compared to last year's number. The marketing business was also hurt in particular by a margin cap that was introduced in Turkey, which had a negative impact after what had been a relatively promising start in Petrol Ofisi.
The profit was also burdened, to some extent, by the stops in the second quarter of the year, in particular the Petrobrazi stop of 30 days to complete the modernization program.
You see here also on this chart the EUR38 million expense in the second quarter this year relating to consolidation adjustments. This is, in fact, as a consequence of the Petrobrazi stop, because of deliberately overproduced crude from Petrom into the refinery could not be -- the profit on that could not be fully booked, given that is was sitting in inventory as part of the planning for the refinery shutdown.
The next page shows the economic environment. Three charts as usual. On the left hand side the oil price: clearly, the oil price is higher than it was in the same quarter last year, $110 against $102, approximately 8% higher. However, if you convert that into euro, which is, of course, relevant to our financial performance, it was not quite as high, only about 3% higher, given the relative weakness of the US dollar as shown on the green line on the left-hand chart.
Chart in the middle is really quite interesting; it actually shows quite a number of events which have been developing over the last few quarters. I'll start, as ever, with the bottom line: the brown line shows the regulated price in Romania, which you can see has been increasing throughout the year and a very substantial increase took place in quarter 2, 2014. The target here all along, of course, was to liberate the market, which would have meant some degree of compliance and conformity with the price elsewhere in Europe.
And you can see, in fact, that the Central European gas hub price, given the collapse of Western European, Central European gas prices since January, has unfortunately come half way to meet the Romanian price on the way up, as it were. And in fact, at the end of quarter 2, 2014, or rather the average for that quarter, we had a price which is exactly the same as the Romanian price.
So that opens up, obviously, some considerations now for the Romanian regulator, because continuing to push to price up above a price which might be seen as the European level, is clearly not on his agenda. And now the market is going through the changes one would expect, the one always wanted as one moves towards a clear market regime as it were. However, the low gas price in the west of our market is of great concern to us.
The top line shows another byproduct of that. The orange line on this middle chart is the cross border -- sorry, the border tracker, so it basically is a proxy for what's being paid for imported gas into Germany, and it basically is a proxy for the Russian gas price. And you can see at the end of last year the prices had met the Central European gas.
And liquid hub price was more or less the same as what the gas cross border tracker was stating, which basically was an indication of successive renegotiations of Gazprom contracts by German utilities; rather a lot longer story that OMV had been pursuing as well.
Unfortunately, what you now see, since the collapse of the Western European price is, although the tracker price has come down a little, a further deviation has now been created and would be currently -- the Central European gas hub price and, indeed, the price of the rest of the European hubs is quite below the border tracker price and indicates a reemergence of the issues with Gazprom. Of course, feverish renegotiations now are ongoing in that regard to try to address this issue.
The right-hand side shows refining margins having improved consistently throughout the year, although remaining at a very low level and below, clearly, the level that we had a year ago. In fact, if you go back into a period before that, our refining margins were higher again. So clearly a reflection here of quite a depressed situation overall in the European refining market situation.
Turning to the next page: the clean CCS net income for the quarter just ended at EUR202 million was 37% down against EUR321 million last year. I'll just run through the P&L here quite quickly. The financial result you see a dramatic improvement versus last year, EUR14 million expense versus EUR109 million. Two primary reasons for this.
Last year, we had a EUR55 million provision for the write-off of the residual investment in the Nabucco pipeline which, of course, was terminated last year. That, of course, didn't repeat this year, and what we also had this year was substantially improved performance, approximately EUR20 million our share from Borealis and that's also reflected here.
That leads us also to the tax rate, which was very low, 20% against 39%. The reason it's so low is partly due to the Borealis contribution which, of course, is already taxed. We take our share of net income into the financial result line, not our share of pretax income so the tax rate has already been absorbed. Correspondingly, the tax rate goes down if the profits there are high.
What predominantly, however, is contributing to the very low tax rate is the missing Libyan production which otherwise would [make] our tax rate on a full capacity basis something closer to 40%, which has been our guidance consistently following the Statoil acquisition. And if all of our assets are operating to capacity, then our tax rate is going to be in that area.
The Libya production alone, the difference between 0% Libyan production and 100% Libyan production, depending on the oil price of course, but is broadly equivalent to 15 percentage points on our tax rate. So it really is quite a dramatic impact there, and that's obviously played through in the quarter just ended.
Minorities were lower than last year, only EUR43 million against EUR117 million. This is reflective of the fact that Petrom, despite the rising gas price, has produced a result which was lower than last year. This is due to the fact that, of that gas price increase, something like 60% is taken in taxes in one form or another. And of course, we had the introduction of the construction tax in the beginning of this year, which is going to cost us EUR60 million in a full year and, clearly, Petrom has to absorb that also.
However, the biggest reason for the low level of profit is the fact that, in quarter 2 this year, Petrom took a provision of EUR110 million against part of its investment in Kazakhstan. And Kazakhstan being a Petrom subsidiary, clearly it's reflected here and reduces the amount of the profits of Petrom that are due to the minorities.
So clean CCS net income attributable to the shareholders, as a consequence of all of that I've shown in the bars, is down by 37%, and that clearly is also reflected in the clean CCS EPS number.
Coming to the next page, special items, I've mentioned the biggest one, the EUR110 million write-off against the Kazak investment is the biggest part of the EUR132 million. The balance is taken up by a writedown of license in Tunisia where our exploration proved unsuccessful and we decided to take a hit against the cost of that license.
The asset disposals produced a loss of EUR27 million; here you can see [it was] predominantly relating to the Bayernoil disposal. And that gives us a net special items of approximately EUR153 million against last year's number which was actually slightly positive.
The next page shows the cash flow. Clearly, cash flow in the quarter has to bear the dividend of EUR633 million. That's the OMV dividend as well as the Petrom dividend attributable to the minorities. And despite that, clearly quarter 2 is always a weak cash flow quarter as a consequence of that. We were only down by EUR440 million despite the dividend, and that's consistent with our expectation that, by the end of the year, we'll be broadly cash neutral.
It depends, of course, what happens in Libya on that. Libya cash flow is equivalent, on a full year, to something like EUR250 million to EUR350 million. And clearly, to the extent that we don't have that then we're going to lose a proportion of that which could affect this projection in terms of where our cash flow will end.
As we've said all along, our cash flow, if it's going to be neutral this year, it's going to be helped by the disposal proceeds. And you can see indeed it was in quarter 2, sorry, in the first half this year, EUR392 million booked as disposal proceeds, a lion's share of which relates to the Bayernoil disposal, which is also shown in a number of other positions in this statement and in particular in the net working capital line.
Biggest position, however, on the cash flow statement remains investments, EUR1.8 billion, EUR1.787 billion. And that's consistent with our guidance for the full year of approximately EUR3.9 billion.
The next page shows where we did invest. The EUR1.8 billion is a slightly different number to that which you see in the cash flow statement. That purely reflects the movement in unpaid [which is] around CapEx. You see here that the lion's share, as expected, has gone into E&P, EUR1.3 billion.
Refining and marketing was EUR288 million, the biggest chunk of which is the continuation of the butadiene investment in Schwechat and Burghausen. And, of course, the final investment in the turnaround in the Petrobrazi refinery which has now been completed. What you see as a consequence the investment in refining and marketing declined now from this level.
The gas and power investments were EUR164 million. This is also a bit misleading and relates really to the fact that we've taken over, according to our contract, the further capacity in the Etzel storage asset. And although it doesn't affect cash immediately, we have the capital release commitment for the cabins that we've taken over, and that's reflected in [the green line].
Investments in E&P: as one would expect, the biggest investment area is in Norway; something like EUR240 million has been invested there. EUR219 million has been invested in Petrom. Austria itself also has received an amount of investment, EUR64 million. The UK, continuing investment in the Schiehallion turnaround was [over] EUR50 million and in New Zealand, something close to EUR40 million was invested in Maari.
Total investments of EUR1.8 billion, compared to an EBITDA for the first half of the year of just under EUR2.2 billion, and this despite difficulties that we've had [recently with] Petrom. So our EBITDA is covering our investment, going forward.
And turning to the divisions, we have on the next chart a reconciliation of second quarter this year with the same period last year, as well as second quarter this year with the first quarter this year, and what caused the business to produce a lower level of profit.
Quarter 1 this year, 2014, had EUR603 million EBIT and this moved down to EUR349 million in quarter 2. The biggest reason, of course, is in volume, EUR146 million. This relates to the changes in Libya. We also had exploration expenses in quarter 2 this year which were EUR83 million higher than in the same period [last year]. This by and large explains why we're lower.
If you look at the reconciliation to last year it's a slightly different story. Realizations were higher than in the same quarter last year. This is predominantly due to gas price realizations in Romania; the oil price is a relatively low contributor here. Exploration expenses this year versus last were EUR61 million higher.
What you now see, however, is a big change versus the period last year, there's a much higher depreciation level and, of course, this is relating to the acquisition of the Statoil assets, EUR129 million higher. You don't see that in the reconciliation quarter 2 this year versus quarter 1 this year, of course, because Statoil's assets were already in, in quarter 1 this year whereas last year they were not.
And what we've lost, of course, is the production from Libya where, correspondingly, the depreciation per barrel is significantly lower.
The other position relates to higher production costs. I'll talk about that in a moment. Of course, you also see here the extra taxes that have been imposed on us in Romania, this so-called construction tax which particularly [affects] the E&P where most of these investments are taking place which are, unfortunately, being taxed.
Coming to the performance of the divisions and looking in terms of production and also OpEx per US dollar, you see that our production compared to the same quarter last year is the same. Clearly, you see also the higher proportion of gas within that, given that we lost the oil production in Libya. That's also affected the profitability and clearly, we would have been higher had we had the contribution from Libya. We had 30,000 barrels in quarter 2 last year from Libya; in this quarter 2 we've had zero, so that's obviously had a very significant impact on our production.
It's also contributed to this trend in operating expenses which you see an increase of over $5 per barrel compared to the same period last year. Clearly, we've lost lower OpEx barrels going out in terms of Libya being interrupted periodically during this period, and actually being zero in quarter 2, 2014. And of course, the fact that they've been replaced in terms of barrels by the Norwegian production which obviously, on an OpEx per barrel, is quite higher.
If you look at the Romanian performance you see this trend also, and the contribution that Romania makes to this increasing trend, also reflected here, where we're above $4 ahead per barrel.
Personnel costs have affected this in quarter 2, 2014. We actually booked a settlement with the unions in terms of the latest collective bargaining agreement. The 7% increase alone is only about $0.30 within this increase, but there were one or two one-off bonuses paid, which had a more significant increase, so that's caused this rise here.
Of course, you also see the EUR30 million tax that we're paying in terms of construction tax reflected here, as well as the fact that the dollar has been weaker throughout this period, or been getting weaker throughout this period. And given that this is a dollar measure, that obviously plays through into this statistic as well.
I come now to gas and power. The most significant thing which springs out at you here is the extra benefit of the supply, marketing and trading business; EUR65 million better than last year.
Why was that? It's quite straightforward: last year, we were still totally burdened by the Gazprom and Statoil contracts, which only came to show their benefits of the renegotiations later on in the year.
The Statoil contract kicked in, was it January 1, I think? Or was it October 1? It was one of the two.
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Gerhard Roiss, OMV AG - CEO [4]
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October.
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David Davies, OMV AG - CFO [5]
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October. So in October last year it first kicked in, so it wasn't showing the benefit in quarter 2 last year yet. And the Statoil benefit was only in quarter for it was -- sorry, the Gazprom benefit was only in quarter 4 as well. So both of those kicked in and have fully been reflected in quarter 2's results, and weren't reflected last year, hence the step-up.
I mentioned in an earlier chart, however, that this problem is recurring now as the gas price since January has come down quite dramatically. And clearly, we've been in detailed and feverish negotiations, particularly with Gazprom and Statoil. The situation is resolved, and moves down with the hub price. That's not so for all of our purchases from Gazprom, and clearly we're working hard to resolve that.
Gas logistics and power unfortunately detracted from this. Gas logistics was down by EUR15 million, and this reflects tariff reductions to our Austrian customers, as well as the fact that we've had slightly higher expenses in this area, for maintenance in particular. We also saw less short-term capacity booking, which also impacted the profitability.
Power, unfortunately, particularly in Romania, has had a very difficult quarter. The Romanian spark spread has in fact been negative, so burning gas would have actually increased our losses. So that's clearly led, at times, to the utilization of the plant in Brazi being substantially lower than it was last year.
You can see that on the next chart. The key KPIs in gas and power where Brazi's lack of utilization has severely impacted the net electrical output compared to where we were last year and, as I say, has been substantially reduced in terms of its output.
Gas sales volumes overall were down by 1%. Lower gas demand from power plants has been the particular driver of that.
Our trading volumes, on the other hand, were up by 8%, driven really by the fact that we're bringing our Norwegian equity gas onshore, and our gas and power division is handling that effectively in the Northern European market.
Then to the next chart, refining and marketing, a chart which also speaks for itself, by and large. The fuels margin down because of the lower indicated refining margin. It's cost us about EUR55 million, compared to where we were last year. Petrochemicals broadly the same, slightly lower.
Of course, the price ceiling in Turkey has had quite an impact on the marketing business. And of that EUR37 million decline versus last year, almost EUR30 million of it is due to the lower performance of Petrol Ofisi, driven by the introduction of the price ceiling.
KPIs in terms of R&M: in particular, you see the lower level of utilization in quarter 2 in the east. And this, of course, is due to the fact that 30 days of this quarter the Petrobras refinery was out of circulation. Our overall refining utilization is down by 11% at 84%; it's a combination of west and east, of course.
The filling station network has been further optimized with a number of smaller disposals. What has also helped the overall business, although not reflected in its EBIT, is the strong contribution from Borealis, particularly helped by an improved Borouge contribution.
Key financial indicators: after the payment of the dividend in the second quarter, as is quite normal for the Group, our gearing ratio increased slightly at 33%. However, we remain consistent with our long-term goal of approximately 30%. That dividend represented 35% of our previous year's net income attributable to shareholders, so we are slightly higher than our long-term payout target of 30%.
And if you look at the return on capital employed, it's actually down considerably in quarter 2 on a reported basis, but [cleaned for] special items it's at 9%, which is reflecting heavy investments that we are making in E&P, and of course, the purchase price of the acquisition that we closed with Statoil last year.
That concludes the presentation on the results, but as every half-year, and we will do one final one when the program is concluded, I just want to talk briefly about the project energize which we've started, or announced rather, back in 2011.
The target of this project was to increase our return on capital employed by 2 percentage points higher [than it normally would have been]; clearly our long-term target remains 13%. In the short term we will be lower than that, as we go through this very strong investment phase in developing the E&P portfolio we've now acquired.
And we have an E&P portfolio on our books now consistent with achieving our 2016 goal, and indeed the goals beyond that. Gerhard mentioned the strategic investment incentive program in his presentation. I want to emphasize that the assets needed to achieve those growth exist within the portfolio of OMV today. We're not looking at any further acquisitions to actually achieve that.
So a major transformation of the business' E&P division would be consistent with a payout of that target. And clearly, the reasons we've introduced that program is to help retain and attract the people into E&P that we needed to help us achieve that.
Coming back to energize: the 2 percentage point return on capital employed improvement is shown on the slide here. We actually had a contribution which basically hit target in all but one area, and we're delighted with that.
The only area we weren't successful was production growth in Tunisia and Pakistan, but across the board we've been able to achieve substantial benefits. And particularly in downstream, when you look at the cash flow that was generated by these improvements, it's really been that cash flow which enabled us to fund the Statoil acquisitions that we did last year. So getting cash out of the business to really put it into assets, to help us enhance the portfolio of our E&P business.
However, factors have worked against this 2%. Clearly, part of our market did not perform in line with what we would have expected back in 2011. Refining margins have been lower; clearly, the gas and power business has gone through tremendous difficulties, and that has detracted from our overall performance.
But the contribution of the energize initiatives itself, we'll hit the 2%, and in fact on a gross basis we'll actually exceed 3%. Of course, we needed to do that, because there have been certain factors that we clearly had to address. Not [all we've] been able to do so; clearly, the gas and power impact and the lower refining margins there's not really a great deal we can do about that in the short term.
And of course, the fact that we've brought in the investment in the Statoil assets that has also impacted our return on capital employed [that we'd] actually report. But one thing is actually clear, by the end of this year we would have been 200 basis points worse off, had we not done this energize program.
That shows you on the next chart as well, the various years as it's built, where we are right now. We've achieved 1.7% of the 2%. You can see the divisions that we've achieve it in, and the years that the progress was made.
A great initiative, really, which we're immensely proud of. And as we go into the end of this year, of course, what we really need to be looking at is how can we continue the initiatives and the momentum behind this to make sure that we maximize our return on capital employed.
That, ladies and gentlemen, concludes our presentation.
What I'd like to do now is hand over to Jaap, who will take you through the E&P division. Thank you very much.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [6]
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Thanks, David. So David ran through the results; what I'm going to do is give you some project highlights, and let's start with the first picture. It's actually a picture of the Transocean Barents drilling our Wisting appraisal well, otherwise known as Hanssen.
On slide 30, a couple of other highlights, starting with Gudrun. Gudrun, of course, important to our production growth this year. Came on stream in April; has so far been producing from a single well. And over the weekend, the second well has been brought on stream by Statoil, the operator, and it is currently ramping up.
And before the end of Q3 we also expect the third well, in which we've had some issues with the completion, we expect that to be sorted, and that well also to come on stream in the third quarter.
So quite a significant increase in Gudrun in this month and next month. And in fact, the fourth well on Gudrun is also being drilled as we speak. So important, and making good progress. It started a bit later than what was originally planned, but having started in April, the ramp-up is now going quite well.
Two other highlights, but I'll come to those in a bit more detail. In Nawara, where we took the final investment decision for that gas project in the south of Tunisia in the second quarter, more on a later slide.
And also Wisting, as mentioned, the Hanssen appraisal well, or Wisting appraisal well, was drilled in the second quarter. Again, I will come back to that on the next slide.
Two more that I won't come back to, but nevertheless very important to us, and both of them illustrate, I think, the capital discipline that we're trying to instill in our program.
Rosebank in the UK, that project has had a setback last year, where we delayed FID based on escalating costs. You hear the industry talking about the cost being out of control, but you've also heard me talk about Rosebank, saying cost is not out of control, engineering is out of control.
Bringing costs back under control is difficult. Bringing engineering back under control means you go back to the drawing board to start again, and that's exactly what we're doing with Rosebank.
We're making good progress. Our relationship with Chevron is improved dramatically, by good work from our side, and good work from Chevron's side, it has to be said. And we do expect to be able to give you some positive news on Rosebank towards the end of the year.
Right now, that reengineering of the Rosebank development is in full swing, and a lot of our ideas are being implemented to reduce the scope, and, therefore, the cost of Rosebank. It's going well, but real news will have to wait.
Zidane is another example of capital discipline. There, we've got a project, quite a small project. Rosebank, of course, is a very significant one; Zidane is relatively small.
In Norway, gas and a combination of gas price cost related to the development, but also the commercial cost of tying this development back to a host platform in Norway. All of that put together made this, in our view, quite a marginal development.
Operator RWE was keen to go along, but us and other minority partners elected to put this project, for lack of a better word, on ice. It doesn't mean it's gone; it means, again, we need to look at other options to produce maybe of other host platforms and, again, reduce the costs, both commercially and engineering wise, of developing this project. For now, we're not going to go ahead with Zidane as it currently stands.
If we go the next slide, 31, no changes there, but we committed to keep showing you this table so that's what we're doing. And also on the detailed table supporting our 1 billion barrel project pipeline there are one or two minor changes. I'll run you through those in the next slides.
On 32, if I can come back to Nawara and Wisting, the two key highlights in the second quarter. In Nawara we took FID. As you can imagine, taking FID on what is more than EUR1 billion development, 50% of which is for our cost, in a country that's recovering from Arab spring is not without challenges.
Clearly, Tunisia is doing materially better than some of the other countries that we're struggling with. But it's still a country that's going through very significant change, and it's bordering on Libya and Algeria, which comes with its own security issues that we're having to address as part of this development.
Nevertheless, us and our national oil company ETAP, partner, have taken the FID decision, and we're currently in the process of signing the major contracts.
That is basically three chunks to this project. There is the upstream development in Nawara itself, the production license in Nawara, which consists of a number of gas discoveries that have to be tied into a little network, and will then feed into a gas plant that we build in the desert.
Then would dehydrate the gas, separate the condensate, stabilize it, export the condensate a short distance to an existing oil pipeline coming from Algeria. And then the gas goes in Gabes; that's a 200 kilometer gas pipeline that we'll be building. And then in Gabes on the coast we will be building an LPG extraction plant.
All that together is about EUR1.1 billion, 50% of that to us, EUR550 million, so quite a significant project and currently in the ramp-up phase, with first bulldozers starting to move. Picture there is of the line pipe in the fabrication yard in Greece. That line pipe is starting to move to Tunisia as well.
Second highlight in the quarter was the drilling of the Wisting appraisal well. You'll see the name Hanssen there as well. It's an annoying Norwegian habit, that the names of fuels and wells seem to change at random. Really the Hanssen well is the first of the Wisting appraisal wells, and there will be other appraisal wells to follow.
I'm proud of the fact we've been so quick. This is in the Barents Sea, so there are rigs available to drill there, but our sequence and our availability of rig slots in Norway allowed us to reshuffle our drilling sequence. In fact, we dropped an exploration well in favor of drilling this appraisal well; portfolio management in action.
So we've managed to drill this well within a half-year of the discovery. It was successful, so it confirmed another full block, another in the order of 50 million barrels of recoverable resources. And it's confirmed our resource estimates for the entire license of 200 million to 500 million barrels oil equivalent.
We also production tested this well, so we've now got some valuable data on productivity with the reservoir and also fluid properties have been confirmed. Current expectation is that we will drill a further appraisal well before this really starts hitting the [road, drilling] wise, as a project.
Then the detail, as I said earlier, we promised to update you on a quarterly basis, so on slide 33, you see the major projects under development. The only change there is the number for Nawara, where the CapEx has changed from EUR500 million to EUR550 million, and this is basically the latest numbers that were coming in as tenders.
And the number that we've taken FID on is now that EUR1.1 billion, and 50% of that is EUR550 million. That's the FID amount that we finalized or we took final investment decision for the project on.
The other small changes, the Maari Growth, we now project spending EUR160 million on the drilling, instead of EUR150 million. And that's an increase in the number of days we expect to spend out there drilling.
Including Zidane and Rosebank, both to be determined, with Rosebank, as I said earlier, making good progress.
Slide 34, it's the second table; they always go hand in hand. These are the projects that are clearly less mature. These are projects under appraisal, about half the volume sitting there, half the volume was in the previous table.
The key change there is the Cambo Hub, where we've taken over Hess' share of the Cambo resources. And there's one or two other bits of equity clean up that we're doing in that region. Too early to turn this into a project, on the previous table, so a project what we are projecting to do next year, is to bring a rig in and do a drill stem test, or a production test, of a previously drilled Cambo well.
This is an activity that was planned originally, and I think it was Cambo 4. But then the original drilling of that well ran out of weather window, and that activity was never done. We now project to go back and do that production test, which is crucial for the further design of a hub development.
Cambo really is a hub, so that's why we call it the Cambo Hub. It consists of Cambo itself, plus satellites around that, including Tornado, Suilven. And we've got one or two other exploration prospects around it as well that will be part of that same development, if they are successful.
Going to successful exploration wells, 35, a mixed picture, and not as good as some of the previous updates I've been able to give you on exploration. We've had some very good years, but this is -- surely, the first half of the year this year is not one of them.
I'm going to start with the two successes, and then just summarize some of the other things that have happened.
In the Black Sea, we have drilled a successful exploration well. It's not in the table, because it doesn't constitute more than 25 million boe equivalent to OMV. We just list the high impact wells normally in this table.
Nevertheless, it's significant, the Marina-1 exploration well, you'll see it in the text above the table. This is nothing to do with Neptun; this is actually in shallow water of the Black Sea where we operate as 100% Petrom.
We've got a jack up drilling infill wells, recompletions, sidetracks in shallow water there, where we produce both oil and gas. In fact, it's our second biggest producing asset in Romania; it's offshore there, a mixture of oil and gas.
We now also drilled a near field oil exploration well there, called Marina-1, and we're currently addressing how we can bring that exploration discovery on stream; probably by an extended reach well from one of the existing platforms. So smaller than some of the bigger wells in this target list, but nevertheless significant.
Domino-2 is the other highlight. That spudded in July; clearly no news yet, other than the fact that we've started. News towards the end of the year.
Then if you look at the progress on the high impact wells in that table, you see quite a few dry wells there, both in Gabon, in the Barents Sea, West of Shetlands, a number of dry wells. But I'm proud to say that the one operated well in the list of wells that's been completed, Hanssen Wisting appraisal, already mentioned, was successful.
The Gabon wells have not been successful; unfortunately [ENI] managed to find quite a significant wet gas discovery just next to our blocks. We haven't give up on our blocks, they're very sizeable, but clearly we're back to the drawing board on what it is we're going to drill next.
Finally, production in two slides: first of all this year, and then looking ahead to 2016. Most of this has been mentioned by David, but a little bit more color on what's going on.
Clearly, Libya continues to be a key theme. We saw a reasonably good Libya performance in 2013; 2014 it's been not very good at all. In fact, year to date, we've seen an outage to Libya of about 80%, or an outage of 80% in the first half of 2014. If we look at third quarter, third quarter, of course, we're only halfway through, and looking ahead for Libya is a difficult thing, but I can tell you what's happened in the last six weeks.
It's still up and down. In fact, today, we produce about 8,000 barrels a day in Libya, but we've been higher. Average Q3 to date, we've produced 12,000 barrels a day in Libya. So Libya continues to be a major swing.
In Kazakhstan, we've seen some technical issues; in particular, a pipeline in the TOC fields had some severe corrosion issues, which we're in the process of fixing, both the pipeline, but also the actual source of the corrosion we're in the process of fixing. We've had an unfortunate ingress of corrosion which led to that pipeline failing only 1.5 years after it being renewed.
Yemen, we continue to see interruption; nothing like the percentages you see in Libya, but nevertheless, some 25% outage in the first half of this year.
And then finally, Norway, key to our production ramp-up over the course of this year. It started a bit later than we had originally planned in April, but the ramp-up has been going well. In fact [proved] wells have performed spectacularly well, and Statoil is now in the process of bringing on the second well, with a third well to follow closely thereafter.
So looking ahead, what's going to happen through the rest of this year, what's getting boring; Gudrun I've mentioned. The first of the Maari Growth well we expect on stream towards the end of the third quarter; that's the redevelopment drilling, infill drilling that we're doing off the coast of New Zealand. But then the big swing, going forward, as always will be Libya.
If I then look ahead on the final slide to 2016, we're on track for the 400,000 barrels a day. You've seen this slide before; the only thing that's changed is that Nawara now carries a green tick. But otherwise, all the projects that we need to produce the 400,000 barrels of day in 2016 we've got. In fact, all of them have now taken FID; all of them are in execution.
The key of certainty we're going to have to manage is, of course, the performance of the projects, but also the timing of the on-stream dates of Edvard Grieg, Schiehallion, Nawara. You will see all of these come on stream in 2016 and, therefore, the startup and ramp up of these projects in 2016, key to our achievement of the 400,000 barrels a day.
But again, and I'm sounding like a stuck record, of course, Libya performance is key to this 2016 performance as well. The 400,000 barrels a day does assume that Libya is fully on stream with about 31,000 barrels a day.
Thank you very much. With that, I will hand over to Manfred.
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Manfred Leitner, OMV AG - Executive Board Member, R&M [7]
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Thank you, Jaap. Hello from OMV refining and marketing. I would like to give you an update on the structural progress made in our refining and marketing division.
The result on the one hand, you have been already informed about, have been pretty disappointing in the first half-year. There are several reasons for that, not the least the depressed refining margin environment, some turnarounds in the country and, as well, as some turnarounds in our refineries, and as well the certain regulatory impact by the Turkish authorities into our marketing business there.
I'm going to page 39 where I would like to start to show you the market that we are working in, compared to the European community, because we are actually located in Europe. But what you clearly can see here is that, whereas the European-28 market is expected to decline steadily over the next 10 years and the magnitude would be by 10%, we do see the OMV market, apart from Turkey, being pretty stable.
If you take the market inclusive of Turkey, we do have a slight increase here, and this is actually already allocating our activities into the better part of the European landscape.
On the next page, we have been depicting the potential consequences, or the expected consequences, for refineries in the European industry, due to the fact that there is structural oversupply in the market.
On the left side, you can see those refineries that are in red points, they have already been closed. The blue ones are refineries that we believe are very much under pressure because are coastal refineries and they're in direct competition to increasing flows of products into the European market feed from the US, because there is a higher refining profitability based on the tight oil that is produced there coming more from Russia.
Russian companies have invested a lot into the configuration of the refineries' upgrading and, therefore, middle distillate exports to Europe are growing. And, obviously, there are some marginal volumes coming even from the Middle East and India.
On the right side of that slide, you see that in case, and this is what we expect, demand is going down further, this will automatically force refineries to go out because, obviously, there will be such a low capacity utilization possible that these refineries cannot be run economically any more.
I would like to give you some of the strategic steps we have undertaken in order to differentiate us from competition. On the next page, you see the modernization of the upstream integrated refinery, Petrobrazi, leads to significant yield improvements. We have finalized that investment project that had been started in 2011, now mid of the year.
We have been staying within the budget of the EUR600 million and we have achieved as well the yield improvement that we have been aiming for.
The main target there was to process the whole domestic crude oil production of Petrom in the Petrobrazi-only refinery; boost conversion and upgrade the bottom of the barrel to push the middle distillate high value yield; to reduce especially fuel and losses and energy consumption, which is extremely important before the background of the high oil prices.
We have already, as well, upgraded the infrastructure and the timeline was coming from 2010. We have finalized it, I mentioned, midyear 2014 now.
The impacts on OMV indicate the refining margin will be over $1 per barrel. On the refining margin [yield] the impact will be approximately $5 per barrel. A lot of that will come in addition to what we are having achieved already in 2014 -- in 2015, when we will have the first year of the full operation in the new setup. But it will not be $5 clearly, because some of the advantages have already been in the results until 2014.
On the next page, you see the update on the announced divestment program. We have announced the divestment proceeds of up to EUR1 billion by the end of 2014 and, obviously, we have made now the biggest step in closing the sale of the 45% share in the Bayernoil refinery by June 30, 2014. So we have already approached the EUR1 billion pretty closely.
There are two or three other projects in the pipeline that we will implement in the rest of the year, so that the EUR1 billion will be delivered as planned.
On the next page, and this has already been mentioned by David as well, you see the strong contribution of Borealis into the R&M results. This is not shown in the EBIT of our division, but it's shown under the financial result.
You see that the first six months' OMV share, the 36% in the net income, has been close to EUR90 million, which is a significant increase compared to 2013.
That's mainly true because the polyethylene margins have been improved and, as well already, a very positive impact by the Borouge 3 project where the crackers are already starting now. And the target is to run on the full new capacity by the end of the year, so 2015 will then unfold the whole potential.
On the next page, this is key for R&M insofar as we need to define, and we have defined, and we need to increase as much as possible the competitive advantages in the European refining industry, which gives us clearly an advantage to competition. And, to a certain extent, you could even say to give us the time to wait for the restructuring of the industry.
I do see that in terms of integration in three levels: that is exactly the strategic targets we are aiming for and we are very much concentrating on.
The first is the integration of our domestic E&P production into our refining capacity because, if you produce the crude very closely to your refinery, clearly, this is less complex than go to the oil market, and less costly as well to optimize the crudes and to bring them through pipeline and ships to the refinery. And clearly, because mainly of Romania, you do see that we have an integration level here of over 20%, whereas competition is just at 11%.
The second level is refining into retail. Retail is so important for refining companies because this is the stablest, most reliable sales channel that is available. At the same time, in retail there is always a mix between diesel and gasoline. As you might know, gasoline is the product that is going down in demand, so it's very important to have a steady gasoline outlet. This is provided by retail. We are having an integration of over 40% here; competition is only at 22%.
And the third one, very important competitive advantage in terms of integration value, is coming from refining and petrochemical integration. Again, going for the gasoline production, if a refinery is processing crude obviously there is a lot of naphtha produced and you have two choices. If you don't have an integration with petrochemical you've just the one choice; you have to produce gasoline.
If you're integrated into petrochemical, you have the choice to route the naphtha into the petrochemical part of refining, and thereby, actually having feedstock for a high value product in the petrochemical part. As has been mentioned, you see clearly that the petrochemical result in OMV R&M has been stable over the years, so this is a very, very, important factor in order to differentiate us from competition as well. Our integration is here approximately 10%, and competition is approximately 6% only.
Those three levers [don't] go for the most decisive KPI in refining; that is the utilization rate. And actually OMV, in the past, has been, and will be in the future as well, leading in capacity utilization in Europe. We are pretty close to 90% all the time. Even in times when we had, in the first half of the year, three turnarounds which had been planned, we're still at 87% and, therefore, very much ahead of the average of the other European refineries.
And to the last page you see the clearly defined strategic target of R&M in OMV; that is cash generation in order to support the upstream growth. What you see on the right-hand side here is -- these are real figures behind. So what you clearly see that we have, in the last three years, we have already, together with the first half of 2014, we have released approximately EUR2.8 billion, which has been invested into our upstream in order to shape, in order to change, the portfolio of our capital employed.
Clearly, 2013 will not be repeatable because there has been some sales and which will not be coming in the future as well. But, as I mentioned already, through the step out of the Bayernoil refinery, as well as the finalization of the Petrobrazi refinery, the second half will be much better in terms of cash than the first half. Thank you.
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Gerhard Roiss, OMV AG - CEO [8]
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Thank you, Manfred. Coming back to the outlook for 2014, the oil price we see to stay above $100. The gas and power markets we see quite challenging in the second half. Refining margins, I think, in general we see them staying under pressure. But in our case, we have this upside that you've heard from Manfred of about $1 out of our Petrobrazi investments.
Marketing volumes same we see come under pressure. Production: on the production on the one hand as you see, as of today, you see this guidance of 310,000 barrels per day. In terms of Libya in top of it, they will see [Insha'Allah].
CapEx, our guideline is EUR3.9 billion; 80% goes into E&P. And exploration and appraisal expenditure in the range of EUR700 million.
If we come then to our strategy: again, you have seen from Jaap our key project has been from our portfolio we will deliver, it's Gudrun and Maari this year, the others following 2015 and 2016 years. Then we have this continued emphasis on exploration. There are still, second half, some high impact wells. And if you go back a couple of years we've invested about EUR300 million; now it's about EUR700 million.
In terms of downstream, key for us is to review our gas and power asset portfolio. You can see the results out of this business. You have to look into the assets and see which assets will you delivering over the upcoming years. In terms of R&M, we have to finalize our divestment program as you heard from Manfred, and to finalize our cost optimization in terms of energize and in terms of the [relationship]. Thank you.
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David Davies, OMV AG - CFO [9]
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So ladies and gentlemen, that concludes the presentation. I think we now hand back to the operator who is going to officiate the Q&A session.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Haythem Rashed, Morgan Stanley.
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Haythem Rashed, Morgan Stanley - Analyst [2]
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A couple of questions from my side. Firstly, I just wanted to come back to a comment you made, David, on the free cash flow neutrality for 2014, and perhaps if you could just talk a little about 2015. So assuming no further significant disposals, do you expect to see similar free cash flow neutrality in 2015? And just a bit of color on that would be great.
My second question comes back to the upstream, and Petrom specifically. If you could perhaps just talk us through a little bit about how you see that OpEx number evolving over the coming quarters. You talked about some renegotiations with the unions and some one-off, perhaps, bonuses in that number. So should we, therefore, expect OpEx to roll over in Petrom, going forward from here?
And then the final question really is on Romania and just a bit of an update in terms of the negotiations around the fiscal terms, anything you can say around whether you still feel confident in some kind of an update by the end of the year. Or is this something that we should expect continuing to move into 2015? Thank you.
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David Davies, OMV AG - CFO [3]
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Okay. Let me take the free cash flow one before handing over to Jaap and Gerhard. We've said, I think it was at the time of the Q4 results when we did the E&P day in London, that we expected this year we'd be broadly cash flow neutral, but needed the disposal proceeds for us to get there. I think I'd broadly remain by that statement, although clearly the events in Libya are not helpful in that regard, and may hurt us somewhat.
But all other things being equal, with the disposal proceeds we've booked and the small ones still to come through, I would stick by that statement, so the free cash flow in the second half should be better. And consistent with that, what we said for 2015 was that we should be able to achieve free cash flow neutrality without any extraordinary disposal proceeds. And I think, at this stage, I'd also stick to that.
But it's always, of course, subject to political uncertainties in Libya, and [when we reported] at the beginning of the year we were not counting on any interruptions. Of course, we've had to revise that expectation during the course of the first half of the year, unfortunately.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [4]
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On OpEx, you should see a reduction in Romania over the rest of the year, because the increase that you see is made up of a couple of things. Some will stay; some are one-offs. The Petrom infrastructure tax that we rolled into the OpEx number is clearly, for now, it's there to stay. So we are projecting that to continue through the rest of the year.
If you look at the personnel costs, there's two elements making that up. There's a relatively -- it's still significant, but in the greater scheme of things, minor increase in salary which clearly will project through the rest of the year. There is also a one-off set of bonuses and settlements that we've all taken in the second quarter and they will not repeat in the third quarter and the fourth quarter. So there will be a reduction in the Petrom operating costs over the rest of this year.
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Gerhard Roiss, OMV AG - CEO [5]
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In terms of royalties in Romania, the question's when could be the time for a new scheme. What we see now is that, on the one hand there's elections, and we don't expect anything before the end of this year. In terms of how will it affect our [Tupras] license, what we hear is here from politicians saying that they will not affect existing licenses that we hold.
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Haythem Rashed, Morgan Stanley - Analyst [6]
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Okay. Thank you very much.
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Operator [7]
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Thomas Adolff, Credit Suisse.
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Thomas Adolff, Credit Suisse - Analyst [8]
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I have three, please. Just on Rosebank, you said potentially good news by the end of the year. Do you mean in terms of FID? And I guess you also reviewed the concept; I just wanted to have a bit more color on what you are doing differently to before, and whether also Rosebank will allow for some tieback opportunities from other discoveries nearby. That's question one.
Question two, on your target to 2021 of 440 to 520 kbd, just wondered whether you can give me a bit more color on this 80 kbd delta. Does the low end of the range include stuff like Zidane, the stuff in Abu Dhabi or Bina Bawi? Does the upper end include Wisting?
The final question I had is the Petrobrazi refinery upgrade that's now completed. You talk about $5 per barrel improvement. I wondered whether you can give us some form of a guidance on EBIT per boe uplift, based on a 2013 macro environment. Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [9]
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Thanks for your question. Let me try Rosebank first. As I said earlier when FID for the project was deferred, the claim was that cost was out of control. My claim has been, and will continue to be, that engineering was out of control. So what we're doing is Rosebank is being reengineered.
And this goes all the way to reservoir. So the type of wells that we're projecting to drill in the reservoir have changed. The number of wells and when we drill them has changed. The subsea architecture has changed. The number of trains from the vessel that is going to be installed has changed. The gas export route for Rosebank has changed. There's a lot of reengineering happening in Rosebank.
You have to, because simply hoping that you do another cost estimate and you cut a significant amount of the cost is wishful thinking. You really need to go back to the drawing board and reengineer the development. And that's exactly what's been going on and what will continue to go on over the rest of this year.
FID on this project I don't expect this year. I expect FID -- or expect by the end of the year to be clear on whether or not we'll take FID next year. Taking FID on a project like this will not take you by surprise. It won't be a public notice that goes out on Wednesday, we've taken FID yesterday.
You will see something like this coming because we'll have to go back -- or the operator, Chevron, will have to go back to the market with tenders and re-tenders for engineering, for equipment, etc. As and when that starts to happen, you will see the temperature go up and that will give you an indication that FID is, indeed, something that we expect to happen next year.
Will Rosebank allow for tiebacks in the near future? The answer is yes, of course. Any of these developments, but in particular in the West of Shetlands where there's so little infrastructure available, will allow for further development in the area.
Having said that, the development that we're projecting to put in at the moment, the one that we're engineering at the moment, really concentrates on Rosebank because, again, where things go off the rails is when you're trying to build something that does everything for everybody. You can do that, but it costs a lot too. So we're trying to really make sure that what we build there is fit for purpose for Rosebank. But of course, there's something like Rosebank South, which we do expect to be included in that development.
If I look at 2021 production, the 440 to 520 kbd, now clearly it's a long way out and, therefore, there's a big range. Some of the projects that you mentioned won't be on stream by the end of this decade. The key projects that make up the range between 440 to 520 kbd we've actually talked about in the presentation already.
Rosebank is going to be a big chunk of that. The other big chunk, of course, is Domino, which you've heard us talk about previously. We're projecting to get Domino on stream by the end of this decade. As you also know, Exxon let the cat out of the bag in one of their investor presentations earlier, and therefore, it's clear that what we're projecting to do is build a 6 bcm development. 50% of that would be to us, 3 bcm; that's roughly equal to 55,000 boe a day. So that clearly is a big step in that production projection for the end of the decade.
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David Davies, OMV AG - CFO [10]
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Can I just add on that also, Thomas, you used the expression, target 2021. We have not issued a new production target. I think what we've communicated here is that, given the transformation really, which enhanced the E&P portfolio which we have now created over the last three years, gives the Company such an opportunity that what we really needed to do is actually strengthen the bench strength, as it were, within our E&P business. A lot of this program is really being dedicated to be able to track and retain those people as we go through this journey.
The criteria clearly for payout is going to be value creation, predominantly, but it's also about achieving the growth targets consistent with that. But these are not targets; we have only one production target at the moment and that is the 400,000 by the end of 2016.
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Thomas Adolff, Credit Suisse - Analyst [11]
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Thank you. Don't worry, I won't be writing target. (laughter)
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Manfred Leitner, OMV AG - Executive Board Member, R&M [12]
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To your question on Petrobrazi, it's a tricky question to a certain extent but I will still try to give you communication. The question, as far as I understand, is the potential on the basis of 2013 that you would expect out of the finalization of the investment program.
The refinery is having a capacity of 4.2 million tonnes per year. That relates to 30 million barrels per year. And I would expect, on the basis of 2013 still $1.5 to $2 a barrel, approximately, to come into our EBIT results, which clearly means that, on the basis of 2013 environment, we would be significantly positive in the refinery for the first time, so to say.
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Thomas Adolff, Credit Suisse - Analyst [13]
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Perfect. Thank you very much.
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Operator [14]
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Joshua Stone, Barclays.
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Joshua Stone, Barclays - Analyst [15]
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A couple of questions on the upstream, please. Just coming back to OpEx and unit OpEx, given there's quite a lot of volatility with Libya, Petrom, North Sea, can you give us any indication of what a normalized unit OpEx would be, and perhaps how you would expect that to evolve over the next few years?
Then, Jaap, coming back to the Rosebank project, you talked about bringing down engineering -- or reengineering the whole project. I was wondering is there anything you've learnt there that you see applicable for the rest of the portfolio. Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [16]
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Thanks for those. The OpEx, to be honest, is almost impossible to answer because there's just so many things moving. We talked about Libya a lot. But the other thing that doesn't get highlighted a lot is that our OpEx, this quarter in particular, in the first half, is way up because in Norway you get the full production cost of Gudrun, but you get very little production of course. Over the rest of the year, you get the same cost but you get a lot more production. So their costs will be coming down to about the average of our total portfolio.
If I look at full-year estimates, I would expect our operating costs at the end of the year, all things being equal, to end up roughly about $17 per barrel. But there's a lot of dependencies in there. There's a ramp-up [project] in Norway, which will contribute to costs coming down. There's also, of course, the productivity in Libya. Libya being on or off makes about $1.20 difference to our total operating cost. So if Libya is on, we'll end up $1.20 lower in our total dollar per barrel operating costs than if it's not on.
The other one is the Petrom personnel cost, which will decline a little bit in the second and the third quarter -- sorry, the third and the fourth quarter, because there are some one-offs in the operating cost in the second quarter.
David will probably hit me by the end of this call, but if I want to give you a prediction for the end of the year, I would expect it to slightly decline and go back to the area of $17 per barrel, depending a little bit on what happens to Libya over the rest of the year.
Your other question, Rosebank, and what we learn and what's applicable elsewhere; there's actually some learning that's already being implemented in Rosebank. One of the key contributions that we are making to the Rosebank joint venture is our experience in the Schiehallion joint venture. And it's not like we can take Schiehallion and build a copy of that at Rosebank.
But of course, being in the final stages of building Schiehallion, we know approximately what it should cost to put a vessel off the coast of the West of Shetlands. Therefore, it was quite clear that the cost of what Chevron was projecting to put there was excessive. And we could also, very clearly, point out where it was excessive and what was contributing to that escalation of costs. So a lot of experience from one project actually feeding into the Rosebank project.
[Coming to] capital of course, OMV telling Chevron how they got it wrong can get a bit sensitive at times. Nevertheless, that experience we are transferring very, very actively, and that is, in our mind, clearly paying off.
The next step that we want to do, of course, is we're now the operator of the Cambo Hub, which sits roughly halfway between Rosebank and Schiehallion, geographically, and physically, will be similar to either one of those two. Now if it's up to us, it will look more like Schiehallion than Rosebank, because that's a cheaper option.
But it's going to have its own complexity because this will have quite a few satellite developments, to make sure there's enough resources there to warranty infrastructure investment. So yes, we will take a learning of both Schiehallion and Rosebank to that Cambo Hub.
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Joshua Stone, Barclays - Analyst [17]
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Great. Thank you.
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Operator [18]
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Matt Lofting, Nomura.
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Matt Lofting, Nomura - Analyst [19]
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Two questions, if I could, please? Firstly, just coming back to gas and power; I think the press release this morning and the front pages have alluded to your reviewing of gas and power asset base in order to increase future profitability.
If you could perhaps talk in a little bit more detail around the nature and depth of that review and some of the asset and fundamental changes that you think are perhaps necessary medium term, outside of some of the other moving parts in terms of the macro. And then also linking in on gas and power, I think you highlighted earlier the negative spark spread in Romania recently and the extent to which you expect that to persist, going forward.
Second question just on the energizer OMV program; clearly, the majority of that 2% ROACE target now realized. If you could perhaps elaborate on how much more you think there is to do, going forward, and whether we could, or should, expect fresh additional targets going into 2015 and beyond. Thanks.
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Gerhard Roiss, OMV AG - CEO [20]
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In terms of gas and power, we have to review and see what is our position in gas and power as such, because I think strategic-wise the issue is to integrate it into equity gas. But if you see this strategic orientation, this equity gas integration, you see some assets. You have to think do you need them or not. If you have a gas-fired power plant in Turkey, the question is does it make sense to keep it. If you have storage facilities or terminal facilities in the area of Netherlands, the question is what is the [real] contribution to the equity gas. You're saying and what is it and what will it be?
So this is much more going to the core of our strategic orientation to see what do we need to expand our upstream business. Is there any integration, maybe yes or no. This we give you and it will come out with conclusions beginning of next year.
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David Davies, OMV AG - CFO [21]
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And then as regards energize, it has been a tremendously successful program and I would say, I wouldn't call any of the initiatives low hanging fruit or easy wins, as it were, there's a lot of work went into all of them, which makes, of course, any next phase that we look at more and more difficult. But I think the kind of initiative that energize represented, you really need to ensure as an organization that it's not a project with an end, but it's a process that continues. And we are starting to look now at what we need to embrace next year and going forward to continue the pressure.
Gerhard's touched on what we're looking at in gas and power, which clearly needs to go through a restructuring to reflect the new market realities that we face, which are clearly dramatically different to those which we expected a few years back. But across the whole Group, we clearly need to continue, but we're not giving any targets in regards timing or initiatives, or scale thereof at this point in time. But I think it's safe to say that it is something we're clearly looking at.
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Matt Lofting, Nomura - Analyst [22]
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Great. Thanks very much.
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Operator [23]
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Tamas Pletser, Erste Bank.
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Tamas Pletser, Erste Bank - Analyst [24]
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I got three questions. First of all on Libya; I remember you mentioned in the presentation 8,000 and 12,000 barrels per day is the current production. Can you just a little bit remind us what is the situation exactly there? I didn't really catch you.
And the second question I have is about the Brazi power plant. Can you tell us what is the current book value of this power plant and, given the low profitability of this unit, do you see any chance to have an impairment in Brazi?
And finally, about your production target; as I see from the presentation and the schedule of your development, you will not have a significant increase in production in 2015, only in 2016 from the new projects. Can you tell us what is your target for production level for 2015?
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [25]
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So let me do the Libya and I apologize, there's an awful lot of numbers sailing around on Libya, of course. So the bad news is that we had 80% outage in the first half of the year. The good news is that in the third quarter production has recommenced.
The reason you got two numbers there is, the 8,000 barrels a day is what it was doing yesterday; what it is doing today I can tell you tomorrow, but it will be different. And if you look at the average for the third quarter, so six weeks in, average over the third quarter it's produced about 12,000 barrels a day. That's why you get those two different numbers.
Let me grab the production target before I hand to David for the Brazi power plant. You're right, most of our new production comes on stream in 2016 and that's where our production target of 400,000 barrels a day sits. Our target for next year will be somewhere between our current production and the 400,000 barrels a day. There'll be some progress, but we haven't got a specific target out there; it will be in between.
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Tamas Pletser, Erste Bank - Analyst [26]
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But I suppose it will be closer to the end 2014, because you don't have anything to come on stream next year if I understand that correct?
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Jaap Huijskes, OMV AG - Executive Board Member, Exploration & Production [27]
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There's a few bit and bobs, but the big projects come in 2016, you're absolutely right, yes. Gudrun continues to ramp up over the course of this year, but also next year there's some Gullfaks production that we expect to increase. But then the big ones, Schiehallion, Edvard Grieg and Nawara, all come in 2016, you're absolutely right.
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Tamas Pletser, Erste Bank - Analyst [28]
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And where do you see the production by the end of this year, ex Libya?
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David Davies, OMV AG - CFO [29]
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Well, we're not going to get into day-by-day forecasts. We've said that we expect our production to end the year round about 310,000. Three months ago we were saying between 310,000 and 330,000 because we gave you the range. [Nawara] Libya was 310,000 if Libya sprang fully back into life; back then it would have been about 330,000.
Now what we're saying is, look, take Libya out of the equation, we certainly can't predict it and at the moment it's a lot less than its capacity and even then it only recently came back on stream at all. And what we expect is, without any further contribution from Libya, we'd be round about the 310,000 level this year. So that's what our expectation is.
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Tamas Pletser, Erste Bank - Analyst [30]
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Sorry, is it the end of the year targets, not the average?
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David Davies, OMV AG - CFO [31]
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That's the average that we would expect to achieve for the year.
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Tamas Pletser, Erste Bank - Analyst [32]
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Okay.
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David Davies, OMV AG - CFO [33]
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And if I can come to Petrobrazi, the power plant in Brazi, I think the book value is something in excess of EUR500 million. Our total investment was about EUR600 million, a bit less. There's no doubt were we to expect, ad infinitum, the current level of profitability, then we would have to take a provision against that asset value. Clearly, what's important in this is, as you look forward 20 years, because this is a long life asset, how do you expect the market to develop? And we don't expect it to be as seriously low as it is now, although clearly it's not a comfortable position we're in.
If you want its valuation, however, one of the things you do need to consider as regards the Brazi plant, which is quite unique, is that it actually enables us to underwrite our level of production in gas in Romania, because unfortunately, as you would expect with the rising prices of the gas in Romania, the demand has fallen. And Romania is somewhat of an island; there's no real viable high volume export opportunity to take the domestic production outside of Romania and sell it elsewhere.
And to that extent, having an asset in your portfolio that can actually take one-fifth of your natural gas and convert it into electricity will, at least, enable you to avoid the very damaging prospect of actually shutting in part of your production. So as we look at the valuation of that plant, that clearly is a factor we consider also.
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Tamas Pletser, Erste Bank - Analyst [34]
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Okay. Thank you very much.
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Operator [35]
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That was the last question. I will now hand back to David Davies for his closing comments.
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David Davies, OMV AG - CFO [36]
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Thank you, ladies and gentlemen, for your interest and your questions. As ever, should you have any questions you'd like further clarification on, then don't hesitate to contact the investor relations team here. Thank you very much.
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Operator [37]
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That concludes today's conference call. A replay of the call will be available for one week. The numbers are printed on the teleconference invitation, or alternatively please contact OMV's investor relations department directly to obtain the replay numbers. Thank you for joining today's conference call, you may now replace your handsets.
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