Q3 & 9M 2014 Novatek OAO Earnings Call (IFRS)
Oct 30, 2014 AM CET
NVTK.MZ - Novatek PAO
Q3 & 9M 2014 Novatek OAO Earnings Call (IFRS)
Oct 30, 2014 / 02:00PM GMT
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Corporate Participants
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* Alex Fak
Sberbank CIB
* Mark Gyetvay
OAO NOVATEK - CFO
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Conference Call Participants
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* Maxim Moshkov
UBS - Analyst
* Artem Konchin
Otkritie - Analyst
* Alexander Kornilov
Alfa Bank - Analyst
* Alexander Nazarov
Gazprombank - Analyst
* Alexander Rozhetskin
Unicredit - Analyst
* Andrey Gromadin
JPMorgan - Analyst
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Presentation
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Operator [1]
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Good day and welcome to the NOVATEK third quarter and nine months 2014 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alex Fak from Sberbank CIB. Please go ahead, sir.
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Alex Fak, Sberbank CIB [2]
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Good day, everyone. I'm Alex Fakh with the Sberbank CIB, and we are proud to host this conference call. With us today is Mark Gyetvay, the CFO of NOVATEK, and Alexander Palivoda, the Head of Investor Relations. I now hand over to Mark.
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Mark Gyetvay, OAO NOVATEK - CFO [3]
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Thank you, Alex. Ladies and gentlemen, shareholders and colleagues, good evening and welcome to our third 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 for hosting our earnings conference call.
Before we begin with the specific conference call details, I would like to refer you to our disclaimer statement, as is our 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 as 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 other earnings press releases and documents throughout the past year for more descriptions of the risks that may influence our results.
Before we begin tonight's conference call, the senior management of NOVATEK wishes to extend its deepest sympathy to the family of Christophe de Margerie, who tragically died last week in a plane crash at the Vnukovo Airport here in Moscow. Mr. de Margerie was a good friend of the Company and his untimely passing will certainly be missed by each of us here at NOVATEK.
He was a large supporter of Total's initiative here in Russia and was instrumental in moving forward the direct equity investment in NOVATEK, as well as Total's participation in our Terneftegaz gas joint venture and Yamal LNG. We will miss Christophe's participation in the eventual launching of Yamal LNG, but his legacy within the global oil and gas industry, his contribution to Russia and his friendship and support of NOVATEK will endure.
Our third quarter financial and operational results were once again overshadowed by a series of external events, a weakening commodity environment and a depreciating Russian ruble versus the US dollar in the currency market. We continued to operate in a normal and sustained manner despite these externalities, but it is clear from the financial results that we, as well as other Russian companies and energy producers, were negatively affected.
During the reporting period, the Russian ruble depreciated against the US dollar by 17.1% year on year and by 20.3% since December 31, 2013. And this impact is quite notable as we continue to report volatile non-cash foreign exchange movements period to period against the backdrop of a higher weighted debt portfolio denominated in US dollars.
At period end, our US dollar denominated debt portfolio represented approximately 76% of our debt borrowings, as well as the majority of our loans provided to our joint ventures. For the three months ended September 30, we reported a non-cash net foreign exchange loss of RUB6.1b, mainly on our US-denominated debt portfolio, and a corresponding loss on the share of profit from our joint ventures, which mainly comprised a non-cash net effect of providing loans in US dollars.
In the energy commodity markets, we experienced a quarter of weakening benchmark prices for crude oil and the derivative petroleum products, which was further exasperated by the weakening of the Russian ruble relative to the US dollar. This essentially meant that we are not only receiving less physical cash for our products sold, but also the translation into the functional reported in currency was partially impacted by the depreciating Russian ruble.
We continued to demonstrate sustained volume growth with the successful launching of the new fields, the partial restoration of the production at the North-Urengoyskoye field and the continued growth of crude oil output from our development program to exploit these hydrocarbon layers, but were offset by the external events outside of our control.
We maintained our commitment towards cost control throughout our operations and achieved positive results in our core expense categories, but nonetheless, had to contend with the weakening external market that looked to persist through the remainder of the year.
Overall, we were pleased with the results we have achieved, both financially and operationally, during the current reported period, in a tough macro environment.
The geopolitical backdrop continues to take front and center stage, but we believe the events in Ukraine appear to have at least settled down from the heightened uncertainty that categorized the first and second quarters and the present ceasefire initiative remains in force.
The Ukrainian election results were conducted without any major disruption, which is another positive development in this crisis. And three party talks remain on the table for settling the ongoing gas price and debt issues.
With that background, I would like to provide a brief update on some of the operational activities before discussing some of the specifics relating to the financial results.
During the third quarter we worked diligently to move the Yamal project forward and have achieved positive results despite the distractions and various ancillary discussions consuming management time regarding the sanctions. It is imperative that we as a management team remain focused on our core business activities and deliver results according to our development strategy. And hopefully, over a reasonable timeframe, we begin to see the lifting of the sanctions as the geopolitical situation de-escalates.
We hosted our first analyst field trip to the Yamal LNG field site, amongst other operations. And I believe this trip provided the analyst community with a first-hand experience on understanding the magnitude and scale of the project undertaken and the various work stages that are currently underway. Hopefully, everyone had a chance to read some of the comments and reports that were published post trip, but overall, I believe the general consensus was quite positive and a favorable experience for those who made this trip. We will periodically hold similar trips in the future for both investors and analysts.
I believe the main question on everybody's mind regarding this project is the current state of project financing post-NOVATEK being included on the US sectoral sanctions list issued on July 16, 2014.
Without question, a project of this size and scale is important for NOVATEK and its project shareholders, Total and CNPC. And ongoing efforts and discussions continue, both with the financial community, as well as their respective governments.
The Russian government has unequivocally stated that the Yamal LNG project is strategically important for Russia and, as such, we will qualify for financial support from the Russian government. Subsequently, we have applied to the Ministry of Finance, Economics, and Energy for access to the National Wealth Fund and will continue to explore this option for partial state financing.
The Company continues to have active discussions with relevant export credit agencies, as well as its Russian and Chinese financial institutions, and we believe that these discussions will continue for the remainder of 2014 and early 2015.
As a result of the sanctions, there has been some changes to the composition of the team and consultants. But it is my understanding that everyone is presently working on the financing arrangement and we will provide more information at a later date when the financing arrangements have been finalized.
It is clear at this stage that the financing discussions have moved away from US dollar financing and that a combination of other currencies will be considered. For example, the most recent financing provided by the shareholders was denominated in euros.
At the project level, we continue to invest capital according to our planned work schedules for 2014. And as of today, the shareholders have increased their investment in the project from $5.8b, as of our last conference call, to approximately $6.9b.
We have completed another five production wells during the quarter and have completed a total of 23 production wells, representing 11% of the planned drilling program, which essentially means that we have completed 100% of the planned drilling program for 2014 and are presently ahead of our overall drilling program. We are currently preparing and backfilling the fifth well pad for the upcoming 2015 drilling season.
In terms of LNG plant construction, we are approximately 13% complete on the cumulative EPC contract at the end of September and we have completed roughly 87% of the plant site preparation, including completing 100% of the land backfilling for the first LNG train. The EPC contractor has begun piling work with -- for the first LNG train and the power plant. All six Frame 7 gas turbines produced in the United States by General Electric have been shipped to Italy for full load test and further delivery to the project site, in packages with compressors and helper motors.
All module yards have been selected and all fabrication contracts have been awarded. This essentially means that the work activities at these facilities have begun. And as of today, the first steel cut took place for four module packages, including fast-track modules scheduled for delivery in early 2015.
We continue to place purchase orders for non-critical equipment and bulk materials, as well as subcontracting -- sub-construction packages. The pylons, thermal stabilization, foundations and concrete walls for the first two cryogenic LNG storage tanks supporting the first LNG train have been completed and work has already begun on the roof insulation for the first tank. We have also begun prefabrication work for the site pylons for the third LNG tank. And as of today, we estimate that overall LNG tank progress at approximately 21% complete versus the 5% reported in July.
The work activity on the 376-megawatt power plant is progressing as planned. The first stage of pylon works for the main building foundation was completed at the end of September and we are presently awaiting delivery of metal structures to the site, which will allow the contractor to begin main construction activities in November.
During the first nine months of 2014, 64 ships were unloaded at the marine berthing facilities, as well as 350 barges. Over 20m cubic meters of soil has been excavated during the 2014 navigable season, and construction works has commenced on the building of the ice barriers.
We continue to make progress on other infrastructure works like roads, power lines and water supply systems. And presently, there are approximately 7,000 contractors and 1,700 construction vehicles onsite.
The airport certification process has begun and the first dry runs were made in September. The first certification flight, including landings and takeoffs, will be arranged in the coming weeks, weather permitting.
A lot of construction activities are presently underway at the Yamal LNG site and much has been completed since we started providing project updates during our conference calls. I believe the work activities highlighted tonight correspond to the significant level of project activities noted by the analysts at their recent site visit and should demonstrate to everyone tonight that despite the sanctions, work and construction activities are proceeding as planned.
Moving forward to our other projects, I would like to highlight some of the notable changes made since our last conference call. Specifically, I believe it is important to note the progress made at the Urengoyskoye field to mitigate the damages of the fire in April. Most of the damaged equipment has been replaced and testing at the facility has commenced. We expect restoration of the de-ethanization facility will be finished and re-launched by the end of November. The second stage production line will be launched right after the facility is put back into operations by year end. Therefore, we should see full production capacity in 2015.
Within the SeverEnergia joint venture, we launched the third stage of the Samburgskoye field in September, as planned. And we are now working on the formal launch of the Yaro-Yakhinskoye field in early 2015.
At Yaro-Yakhinskoye, we have now completed 40 production wells, the gas gathering lines and the installation of equipment at the gas treatment facility. Equipment is currently being installed at the de-ethanization facility.
At Termokarstovoye drilling of production wells is currently underway and we have now completed 19 of the planned 22 wells for the field. We anticipate launching this field in early 2015 rather than later that year.
We have continued to make good progress at our Yarudeyskoye field, our crude oil project, and we are anticipating a launch of this new field with a production capacity of 3.5m tons of crude oil to be launched in the second half of 2015.
We have made great strides in meeting our long -- mid-term production strategy as outlined in our last Strategy Day presentation, and accordingly, we will begin a period of notable ramp-up in the Company's liquid production and the generation of foreign currency earnings.
The next evolution in our longer-term strategy is the eventual launch of Yamal LNG and the beginning of design and engineering activities for the expansion of the LNG output on the Yamal and Gydan Peninsulas. We are confident that we have the financial and technical resources to undertake these large-scale projects, as well as the participatory interest of international energy partners and the support of the Russian government.
Our organic production volume for natural gas for the first nine months of 2014 increased year on year by 5.8%, while our combined production figures, including our proportionate share in the production of our joint ventures, increased over the corresponding period by 3.9%, representing an offset between the volumes disposed at Sibneftegas in December 2013 and a corresponding increase in gas production at Nortgas and SeverEnergia.
The main growth drivers came from the successful launch of the eastern dome at the Nortgas field in October 2013 as we increased our purchases from this joint venture from 2.1b cubic meters to 4.6b cubic meters and from other third parties, including purchases from SIBUR.
Total natural gas sales for the current reporting period aggregated 14.9b cubic meters as compared to 14.4b cubic meters year on year and 15.5bcm quarter on quarter.
Natural gas sales are generally impacted by seasonal factors in the second and third quarter, so the drop in volume sold sequentially is not an unusual trend in our seasonal flows. And accordingly, we have increased our injection rates into the underground storage by approximately 1bcm, which will be used to support our sales efforts during the peak seasons in the fourth and first quarters.
Overall, our total natural gas sold increased year on year by 541m cubic meters, or roughly 3.8%, largely driven by organic growth at our core fields, an increase in purchases from SIBUR, and the contributions from Nortgas, which were slightly offset by the divesture of Sibneftegas, as well as an increase in our natural gas injection into underground storage.
The share of end consumers in our total sales mix increased from 90% in the third quarter 2013 to 94% in the current reporting period, which impacts both margins and transport costs. This change in the additional revenues to the Company, since the average netback we received from our end customers was higher by RUB43 per 1,000 cubic meters and reversed the negative trend from the prior year. The sequential quarter-on-quarter differential was lower by RUB27 per 1,000 cubic meters, but remained positive and reflected the seasonal softening in sales between the respective quarters.
Our average netback for natural gas sold to end customers was consistent with the netbacks received as compared to the third quarter 2013, reflecting no changes in gas tariffs, but was slightly lower by less than 1% as compared to the netbacks we received for this category of sales in the second quarter of 2014.
We continued to optimize our natural gas sales in specific regions based on contractual obligations, and, accordingly, increased our sales volume to the Khanty-Mansiysk region by roughly 1b cubic meters during the current reporting period, as compared to the prior year, but more or less remained relatively consistent with deliveries to our other core consuming regions.
The geographical regions representing greater than 10% of our sales volumes included the Perm, Khanty-Mansiysk and Chelyabinsk regions, as well as the city of Moscow.
Our average distance to market was approximately 2,200 kilometers, which was relatively consistent with the year-on-year and quarter-on-quarter, but was slightly lower by 97 kilometers if we consider the full nine months of the year.
In terms of liquid production, we maintained our relative output of liquids from core fields mainly due to the contribution of crude oil production at the East-Tarkosalinskoye field, as well as other smaller fields. However, the majority of the third quarter's positive year-on-year growth was largely attributable to the increase in the output of liquids from our joint ventures, particularly the contribution made by Nortgas and contributions from SeverEnergia.
Overall, our combined liquid production growth rate was 49.8% year-on-year and 19.5% quarter-on-quarter.
During the reporting period we sold roughly 1.7m tons of liquid hydrocarbons, representing a year-on-year and quarter-on-quarter increase of 344,000 tons and 10,000 tons respectively.
The increase in our liquid volumes sold was attributable to a combination of factors including, as I mentioned, the crude oil output from our East-Tarkosalinskoye field, increase in purchases from our joint ventures, which were offset by a swing in inventory movements from increasing goods in transit in the current reported period to a reduction in goods in transit year-on-year and quarter-on-quarter.
We increased our goods in transit by 196,000 tons in the current reporting period as compared to a decrease in the reporting periods of 65,000 tons and 85,000 tons in prior periods respectively.
Geographically, we dispatched approximately 1.1m tons of liquids in the third quarter 2014, of which 471,000 tons were shipped to the Asia Pacific region, 391,000 tons were shipped to Europe and 203,000 tons were shipped to the United States.
At quarter end, we had 65,000 tons of naphtha in transit to Taiwan and Japan versus 151,000 tons recorded as goods in transit in the prior reporting period. The remaining 242,000 tons were in storage at the Ust-Luga complex.
Natural gas represented 62% of our total oil and gas revenues and our combined liquids represented the remaining 38% versus 34% in the prior year. We continue to report a growing proportion of our revenue stream from liquids as our production continues to increase with the launch of new wet gas fields.
On a total barrel of oil equivalent basis, our third quarter 2014 production increased by 8.7% to approximately 112m barrels of oil equivalent versus 103m barrels of oil equivalent in the prior reporting period, representing an average daily hydrocarbons of approximately 1.2m barrels of oil equivalent per day.
We remain focused on our overall cost structures and we're pleased that we have done a good job managing our expenses, both operational costs and capital programs, during the reporting quarter. Our overall operating expenses increased during the quarter consistent with the growth of our business. Specifically, our non-controllable expenses comprising transportation and taxes increased by RUB2.8b, of which our transportation expense increased in line with our growth in end customer sales and our extraction tax increased in line with volumetric growth in our production.
The new formula-based tax calculation became effective July 1, 2014, as previously reported and the change in our tax per unit for both natural gas and gas condensate production were in line with our expectations.
I would like to have a few more quarters of financial results to determine a base or trend in the movement of our per unit taxes for mineral extraction. But, generally speaking, we had a slight increase in our gas MET and a slight decrease on our gas condensate MET rate for the periods relative to the rates paid in the second quarter of 2014.
There were no material surprises in our G&A expenses as well as other expense categories to highlight, except for the increase in consultant services relating to ongoing works on the Yamal and Gydan Peninsulas, and a general reduction in employee compensation due to a reduction in bonuses paid to management for the period.
Purchases of oil, gas and gas condensate continues to increase in line with the growth of production output from our joint ventures and represents one of our most important cost categories. We reported higher purchases of gas condensate from our joint ventures, mainly due to the launching of new fields as well as the third stage of Samburgskoye, both operated by SeverEnergia.
Our balance sheet liquidity position remained strong throughout the reporting period as we decreased our overall net debt portfolio this quarter relative to the year-end balance by approximately 6.5% as a result of a very strong cash position.
We remained free cash flow positive during the third quarter 2014 and ended the quarter with a free cash flow position for the Company of RUB6.6b which was lower than our free cash flow position in the prior year. But, during the current reporting period we made a large income tax payment relative to the prior period thus reducing our cash flows from operations.
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 become mature or become due for payment.
I want to highlight another important trend as we have discussed in the past what is becoming more obvious as we move towards maintenance capital in our core fields. Our Yurkharovskoye field was predominantly the major capital program of the past several years, as well as the funding towards construction our Ust-Luga complex and expanding our Purovsky plant. We have significantly reduced the amount of capital to the Yurkharovskoye field and shifted more capital to new growth projects such as the crude oil development at the Yargeo joint venture and the North Khancheyskiy license areas.
We will continue to see a gradual shift in our capital expenditure program over the next several years to new growth areas like the Yamal and Gydan Peninsulas. But I believe it is safe to say that our core fields are now primarily in maintenance capital mode.
Another important point I wanted to mention is the increasing EBITDA contribution from our joint ventures. Recently we began disclosing separately the EBITDA from our joint ventures and our proportionate share of this amount. We expect this trend to continue and our joint ventures will represent a larger proportion of our future cash flows, earnings and dividend contributions. And the inclusion of this information provides additional disclosure as well as improves the overall financial transparency.
To conclude tonight's call I would like to reiterate that the OFAC Sectoral Sanctions have not delayed the work activities at the Yamal LNG project, but has obviously affected the financing element. We will continue to provide periodic updates on this situation but we believe we will have a credible financing structure in place sometime during the latter part of the first half of 2015. And in the meantime all of the core partners are committed to funding the capital program based on the approved budget plans. We see no major delays as the majority of the equipment is being delivered to the site at an expedited pace and everyone is still working towards a committed timetable for launching the first train in 2017.
We are cognizant of the difficult and evolving geopolitical situation. But, as I already mentioned, we have not seen any escalation of tensions in the Ukrainian situation and we are hopeful for more fruitful dialogue amongst all the parties involved in this discussion.
We will continue to maintain our course on all capital projects and deliver the sustainable growth as outlined in our mid-term strategy of which the results are already obvious.
The financial and operational results we achieved in the current financial reporting period demonstrate our commitment to sound corporate governance and financial transparency, despite the unwelcome noise in the capital markets. We are confident in our ability to generate sufficient cash flows from our existing asset base, although the weakening of the commodity markets will have to be factored into future expectations if we are operating in a sustained period of a lower band of benchmark crude oil prices.
Thank you very much for your continued support of NOVATEK's investment case and your confidence in our senior management's ability to navigate this turbulent period we presently face. Thank you.
Now we are ready for questions and answers.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Maxim Moshkov, UBS.
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Maxim Moshkov, UBS - Analyst [2]
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Hello Mark. Thank you very much for the presentation. I have three questions if I may. The first on SeverEnergia production plans for next year and CapEx spend if I may.
The second question about the CapEx outlook for 2015 for Yamal LNG and NOVATEK's share in the approved CapEx plan for this project.
And the third question is about mineral extraction tax. What were the effective rates for gas condensate and gas in the third quarter? Thank you.
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Mark Gyetvay, OAO NOVATEK - CFO [3]
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Maxim, unfortunately, on the first two questions, you know, I appreciate you asking but it's a little early to provide that data as we're in the process starting in November for the upcoming planning season and approval of budgets. So I think on that particular point we'll ask you to wait a little bit towards the latter part of December when we generally give this information to the market.
But right now they're being formed. Budgets are being prepared for the upcoming season, both for NOVATEK, the joint ventures, as well as Yamal LNG, so I appreciate if you would hold off on that for a little bit more time.
As for the MET rate, as I mentioned, it was slightly lower on a weighted average base for the -- oh sorry, the natural gas was slightly higher on a weighted average base for the Group. It averaged about RUB471 per MCM and on the condensate side it was slightly lower, in the low to mid RUB500 range. But, like I said, I prefer to wait a couple of quarters and make sure that trend stabilizes and we'll get back to you with that at a later date.
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Maxim Moshkov, UBS - Analyst [4]
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Thank you very much.
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Mark Gyetvay, OAO NOVATEK - CFO [5]
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You're welcome.
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Operator [6]
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Artem Konchin, Otkritie.
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Artem Konchin, Otkritie - Analyst [7]
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Yes, hello. Good evening. Thank you for the presentation and the disclosure of EBITDA for equity subsidiaries. It's a welcome addition of course.
My question relates to your purchases of gas from third parties. I'm trying to use your disclosure on relationships with SIBUR to estimate the price you're paying there. And for the last quarter it looked to me like there was some increase, if I'm calculating this right, in terms of the prices that they are charging you. So I was wondering if you could comment on that to help us project this cost line a bit more precisely. Thank you.
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Mark Gyetvay, OAO NOVATEK - CFO [8]
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Let me see, how should I answer that? I don't think it -- it doesn't appear to change dramatically. What we end up doing, we purchase from a set amount of companies. It's basically -- it was Sibneftegas. That's no longer there. Nortgas, SIBUR and other parties. Our average price we paid relative to last year, year-on-year, is up about 10% which I think reflects some of the changes in the contributions of the fact that we're no longer purchasing from Sibneftegas. So the combination of gas purchased from the other joint ventures are slightly higher.
The quarter-on-quarter differential is just about 1%. So I'm not sure what the major concern is in terms of on a combined basis and I believe if you look at SIBUR specifically, it's about the same. It's roughly about 1% difference quarter-on-quarter in the purchase price. So I don't think it's a question of being alarmed. We don't provide that level of granularity in the details of our purchases. We do it only on a weighted average base and, like I said, quarter-on-quarter it's just about 1% increase so I don't think it's too alarming.
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Artem Konchin, Otkritie - Analyst [9]
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Yes, I guess it's my numbers. I'm just simply using the line you have on our related parties disclosure in terms of what your purchases were there and the volume that you provide in the MD&A disclosure. So it's either a timing issue or perhaps I'm not seeing the right -- I'm not correlating the right numbers basically. Maybe something that you disclosed.
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Mark Gyetvay, OAO NOVATEK - CFO [10]
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Well if you just send a question offline we'll see where you're making a mistake or something, or missing. But I can see from the numbers that I have on my support schedules there isn't really any major difference between quarter-on-quarter the purchase that we do with SIBUR.
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Artem Konchin, Otkritie - Analyst [11]
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Okay. Then it must be the timing of the disclosure. And I also wanted to ask you about your plans for participating in the gas trading on the St. Petersburg Exchange. Whether you see this is as an opportunity or a liability, or do you have any kind of volumes allocated to that, perhaps for next year and so on, if you could comment on that? Thank you. That's last my question.
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Mark Gyetvay, OAO NOVATEK - CFO [12]
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No problem. We welcome the launch of the independent trading venue as we see it as an important step in the further liberalization of the Russian gas market. In the long-term we expect the gas exchange to provide a fair spot price for natural gas. As everybody can appreciate, we're at the very, very early stages of establishing this mechanism, so it's kind of premature to make any conclusions and/or expect what influence it will have on the domestic market and the prices.
It's also difficult to make any predictions at this particular point what the level of volumes will be traded. But one thing I'm certain, we will be a market participant and we will make all efforts as we can do to help support this new market mechanism.
As it stands right now, the government has basically set some indicative volumes for the trading platform at roughly about 17b cubic meters for Gazprom. But overall no more than the volume sold by independents. So we kind of have an order of magnitude of what we believe will be trading on this exchange. We don't believe, given a new start-up, we don't believe that such volumes can be achieved as early as 2015.
But, of course, we will be an active participant in this exchange. And, as I mentioned at the outset, we fully welcome the government's approach to a more liberalized market and the creation of a spot market trading mechanism in Russia, but that's really about all I can tell you at this juncture.
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Artem Konchin, Otkritie - Analyst [13]
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Thank you.
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Mark Gyetvay, OAO NOVATEK - CFO [14]
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You're welcome.
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Operator [15]
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Alexander Kornilov, Alfa Bank.
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Alexander Kornilov, Alfa Bank - Analyst [16]
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Good evening gentlemen. Thank you very much for the presentation. I have only one question. I'm just looking at your capital expenditures breakdown and I have seen, I have noticed, that the CapEx for Yurkharovskoye field dropped dramatically up to RUB240m. You have mentioned that this is just a reflection of the fact that you are readily moving towards the maintenance mode to the existing fields. So should we consider that quarterly spending, the amount of RUB240m as a kind of sustainable level for Yurkharovskoye field or are you expecting a little bit higher numbers? Could you please comment on that? Thank you.
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Mark Gyetvay, OAO NOVATEK - CFO [17]
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I think it's safe to say that we are moving closer and closer to the maintenance mode on all these fields. To say that Yurkharovskoye is stabilized at this point and juncture I think, again, is a little premature. But you should see, again, a notable decrease in the level of capital being applied to that.
We are doing some test wells up there on some of the crude oil zones. So if we're successful in monetizing that, which I believe the early indications look like the test results were positive but the extent of the program is being formulated, I think it's safe to say that you will see a precipitous drop in the amount of capital spent at Yurkharovskoye field. But to use these numbers at this juncture as the maintenance capital I think it's a little too premature.
I think it's better to look at, when we see how we ferry out the oil development program etc. at that field to look at what's being spent at the Yurkharovskoye field.
Secondly, I just want to add a point too, is that when we talk about Yurkharovskoye field we might also have questions about expenditures in the Greater Yurkharovskoye license area. And if that starts picking up to a large extent, we will separate that out from the fields in the license area so that you get some clarity on what the maintenance capital mode will be for the field. But I think it would be a little premature to use the numbers that you see in the nine months as an indication yet of what the maintenance capital. I believe the nine months' number so far will be actually higher than the maintenance capital mode that we expect at this particular field. But let's give it a little more time.
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Alexander Kornilov, Alfa Bank - Analyst [18]
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Okay. Fair enough. Thank you.
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Operator [19]
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Alexander Nazarov, Gazprombank.
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Alexander Nazarov, Gazprombank - Analyst [20]
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Thank you. Good evening and thank you for the opportunity to ask questions. I have two questions please. First of all it's about Total. We all also regret that Christophe de Margerie passed away, too early of course and he was good friend, not only for NOVATEK but also for the whole Russian oil and gas industry and to Russia as well. Nevertheless, we already saw a conference call without him and the new management at Total. I want to ask, did you have contacted them before? Did you contact them just, for example this week? Have you discussed the strategy about Total being in NOVATEK and being a shareholder in Yamal LNG? Do you expect any changes or they reconfirmed Total's strategy regarding Russia as a whole and NOVATEK and Yamal LNG?
And the second question is regarding the article in the Kommersant newspaper this week about the Sabetta seaport, possible problems with taking the state audit of the project. As well as other analysts I was there back in September and I saw that [Karga] Seaport in Sabetta operated fully and I do not really understand the concerns the newspaper writes about these projects. Could you please give your view on this situation, if this issue is a real issue or is it just, let's say, overestimating by journalists of this fact? Thank you.
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Mark Gyetvay, OAO NOVATEK - CFO [21]
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Okay. On the first question, let me just remind everybody that the discussions going back with Total actually began in 2003, pre-IPO, and at that time Christophe was part of the management structure within Total but the CEO was Desmarest.
So we've had a lot of ongoing dialogue over the years with different sections of Total management in terms of their participation, whether it was Termokarstovoye which is the Terneftegaz joint venture, and actually most of the new management that's in place today, including the CEO, actually participated in the discussions on the Terneftegaz joint venture. Because as you recall when we did not receive formal approval on the initial investment and NOVATEK management and shareholders decided to do the IPO we kept in contact with Total and their first foray into a project with NOVATEK was the Terneftegaz joint venture.
So we're very well aware of the new management structure. They have confirmed to us already and I believe there are other meetings coming up over the next couple of weeks. Not only with us, I think there's an ongoing roadshow that Total plans to do to discuss the change in management structure. But we're very well aware of the management, they're very well aware of the company and the investment and the importance of NOVATEK as an investment for Total. So I think things will be relatively status quo continuing on with all the investments.
Mr. Mikhelson attended the funeral services for Christophe de Margerie on Monday and he also had a chance to meet up with some of the senior Total management. And although it wasn't really the time and place for that particular discussion they did have a chance to have a brief discussion on basically, again, reiterating their complete support following along the path that de Margerie outlined with the investment in NOVATEK. So I think things will remain as it is and we welcome the continual working with the present Total management.
Your second point on the seaport, I mean God knows where that came out of and where that information has come from. Our position on that is that the Kommersant article as written is basically not fully correct as the government order on amendments to the federal special purpose program has already been issued and all necessary agreements have been currently signed.
The schedule, the commission has been approved by Rosmorport which is actually, as you saw personally all the work activity such as dredging etc. has already been underway. So as I alluded in my prepared text, 64 ships and 350 barges have already landed on the site. So I think it's -- unfortunately, I think everybody is jumping on the Russian-bashing mode these days in the press and I wouldn't put much credence or credibility to that article.
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Alexander Nazarov, Gazprombank - Analyst [22]
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Okay. Thank you very much. I appreciate the answers.
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Mark Gyetvay, OAO NOVATEK - CFO [23]
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You're welcome.
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Operator [24]
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Alexander Rozhetskin, Unicredit.
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Alexander Rozhetskin, Unicredit - Analyst [25]
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Good evening and thank you very much for your presentation. Just two questions from my side. First a follow-up on the CapEx. If you could provide a guidance for this year, what do you expect the CapEx of NOVATEK to be?
And the second question is regarding the application for the government support that you've made. If you could shed some light as to when do you expect to receive the support, the amount of the potential support and, if possible, any light on the structure? Thank you.
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Mark Gyetvay, OAO NOVATEK - CFO [26]
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In terms of your first question in terms of CapEx, as I mentioned before we're about -- I think so far for the first nine months we've spent about RUB46b in CapEx. I think the overall plan was consistent with 2013 at about RUB60b. So we're kind of probably trending slightly less. But I think at this juncture right now I think it's basically safe to say that we will stick with that number but a lot of the activity goes on in the fourth quarter during the big drilling season. So roughly the same as last year. We estimated in the order of magnitude of about RUB60b.
On the second question in terms of the National Wealth Fund, as you can appreciate we applied for about RUB150b, roughly about $3.8b loan and we currently have passed all the so-called strategic approval process, and now are just basically undergoing some the technical feasibility approval.
We're not -- I think the way the structure will work, I think we'll expect that the funds will be bought against bonds, Yamal bonds, and we're relatively optimistic that this structure will be finalized in the near future as the government essentially, as I mentioned in the text portion, supports the position as a strategic project. As well as we've had various ongoing discussions with the three ministers that are basically responsible for overseeing this particular project and this fund.
So it's roughly about RUB150b and I think we're just waiting for some of the more mechanisms to get done. But I think in the near future, when this thing is completed, we'll issue a press release etc. accordingly, showing the structure, the amount etc. and everything else okay. But right now it's still being reviewed and discussed.
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Alexander Rozhetskin, Unicredit - Analyst [27]
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Okay. Thank you. Just as a follow-up, if you can shed some light into it as well. The support, will it be provided for specific projects or you will be able to use the proceeds for what you decide?
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Mark Gyetvay, OAO NOVATEK - CFO [28]
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First of all, let me make it clear to everybody as we speak, we have enough cash flow generation to fund all of our current operations as well as service our debt and pay our obligations. So from the core perspective we do not need any cash and we will not be going to the capital markets for the next 12 months or so considering the current situation.
This specific request is specifically earmarked for the Yamal LNG project. That's why the government has classified or considered this project to be a strategic project and the funds that will be utilized via the welfare national fund will be coming specifically for the Yamal LNG project. Okay?
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Alexander Rozhetskin, Unicredit - Analyst [29]
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Thank you.
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Operator [30]
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Maxim Moshkov, UBS.
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Maxim Moshkov, UBS - Analyst [31]
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Thank you. So I have one question on the strategy update. As we have seen the strategy been changed since 2010 and the Company is currently focusing on the liquids which is indeed quite a profitable business compared to the natural gas sales and also given the depreciating ruble relative to the US dollar. So Mark, in your view, when we should be expecting the strategy update at the earliest? Thanks.
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Mark Gyetvay, OAO NOVATEK - CFO [32]
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Maxim, I think it's important to first state that the Company has not deviated dramatically from the strategy presentation that we did in December 2011 in London. That strategy more-or-less outlined all the mid-term, mid-range projects that we are executing as we speak, including the building of the Ust-Luga complex and the eventual expansion of Purovsky from 5m tons to 11m. So we are pretty much operating according to those sort of principles and following the strategy that we outlined in 2011.
We have been in the process of updating the strategy to take us forward to the next series of development activities, more-or-less like the next mid-term and longer term, which obviously the next mid-term will encompass the launch of Yamal LNG as well as the longer term we'll look at the development of the new Arctic 1, 2 and 3 LNG projects that are currently being discussed as we speak. So that needs to be formalized and put into a comprehensive strategy presentation.
Unfortunately, as you can appreciate, the sanctions have sort of taken an inordinate amount of management time away from focusing on updating our strategy. And the idea was to try to get it done before the end of this year, but it's unlikely to be. So I think it's safe to say that it will be some time in 2015 which will complete the mid-term range as well provide you with more updates on Yamal LNG and where we plan to do with that.
But I think it's more important that we start looking and moving forward to what are the other potential LNG expansion projects that we're looking at and utilizing the resource basis of the Utranneye, Geofizicheskoye and other fields in that general vicinity to support the growth of NOVATEK's business as well as the growth of LNG coming out of Russia. So I think that will be really the next evolution of our corporate strategy and hopefully we'll get you that sometime in 2015.
I know from your perspective the earlier the better. But I think it's important right now that we provide strategic updates on a regular basis of the Yamal LNG. But it's also important to understand and to demonstrate to the market that we have achieved the strategy that we outlined in 2015 -- up to 2015, with the launches of all this new liquid business. That was the heart of the mid-term strategy, as I said, outlined in 2011. So hopefully sometime in 2015 we will be able to give you an update.
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Maxim Moshkov, UBS - Analyst [33]
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All right. Thanks.
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Operator [34]
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(Operator Instructions). Andrey Gromadin, JPMorgan.
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Andrey Gromadin, JPMorgan - Analyst [35]
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Yes, good afternoon. I have a small follow-up on the Yamal LNG financing. You mentioned that the partners committed to finance the project with loans until the -- I think I understood correctly, until the middle of next year, and you expect finalizing some kind of project financing in the later part of first half 2015. So this RUB150b from the Russian government, is it a kind of backup plan? Or maybe you expect to agree on project financing later maybe, in the end of 2015, because this RUB150b looks like six, nine months financing for the project. Thank you.
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Mark Gyetvay, OAO NOVATEK - CFO [36]
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I don't know if I would look at it from that perspective. I think right now it's probably better to categorize the financing structure as external financing as opposed to just project financing. So, and the reason why I say that is because obviously we're still considering what the impact of the drop-offs from the export credit agencies will be and whether or not we'll receive any funds from some of the ones that remain in the dialog. So I think it's better to categorize it more as just external financing which will encompass a wider range of financing structure, including the National Wealth Fund.
I think I want to just say is what is important is that as we speak today, the shareholders are committed to continue with this project and that is pretty evident by the financing already put to date. The shareholders have all confirmed in this period of uncertainty we will continue to finance the remainder of this project to the point of the budgets that are approved.
And then subsequently we look at hopefully finalizing the remainder of this external financing package, whether it's a combination of Russian government, Chinese government, Chinese financial banks, National Wealth Fund as well as maybe some participation from some of the ECAs and Russian banks. And that whole package we will hopefully have done by the latter part of the first half of 2015.
I mean that's where the discussions are going right now it is my understanding. Unfortunately, as you can appreciate, I am no longer directly involved in any of the discussions so what's being reported back to me from these meetings is essentially that that's the direction we're headed and that's more-or-less the timeframe.
Now does it mean, we looked at an optimistic, we looked at a base case and we looked at a pessimistic case in terms of financing? And what I think is important also to take away from this call tonight is that, as you can appreciate when we went out and looked at the financing structure of this pre the July 16 sanctions, the goal of the Group was to look at a 70% project financing and a 30% equity financing. It's probably safe to say today that the external financing package will be somewhere between the 60% to 70% range, in that early range, which then implies that the shareholders will move from 30% to 40% range potentially in their contribution of equity financing. That's what we're working on.
The term sheets and all that are well in advanced stages. We had to change out the legal groups because the original consultants, basically as I've mentioned in the text. We had to change some of the parties involved in the process and so there is some catching up to do. But I think we're pretty much at that point where there's full discussions going on as we speak and that is the target which we plan to seek in terms of closing the financing package.
Until it's done I won't be able to give you any definitive answer into what the whole composition of the financing structure looks like. But right now those are the specific component parts and those discussions are going on on a regular basis.
My team is basically flying back and forth between Europe and Asia on a regular basis. Mr. Mikhelson has had to step in for my place to start talking to some of these senior people at the banks etc. because of the sanctions. But this is what I'm getting fed back in my discussions, that things are proceeding as planned, although the package will look different than we originally estimated.
So that's pretty much all I can say at this particular juncture.
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Andrey Gromadin, JPMorgan - Analyst [37]
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Thanks a lot. Just again, small question. What kind of CapEx already invested? What kind of money already invested in the project? What's already in it year-to-date?
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Mark Gyetvay, OAO NOVATEK - CFO [38]
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Yes, the shareholders I mentioned invested up to, so far it's about $6.9b.
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Andrey Gromadin, JPMorgan - Analyst [39]
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Thank you.
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Mark Gyetvay, OAO NOVATEK - CFO [40]
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Okay.
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Operator [41]
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Thank you. There are no further questions at this time so I will hand the call back to the speakers for any additional or closing remarks.
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Mark Gyetvay, OAO NOVATEK - CFO [42]
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Okay, well again, thank you very much for attending tonight's call and we look forward to engaging you on a regular basis as is customary practice at NOVATEK. So, again, thank you for support and we look forward to hearing your comments in the near future.
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Operator [43]
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Thank you. That will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.
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