Good afternoon, ladies and gentlemen, and welcome to Eni's 2013 interim update and the second quarter results conference call hosted by Paolo Scaroni, Chief Executive Officer, and Massimo Mondazzi, Chief Financial Officer. For the duration of the call, you will be in listen-only mode. However, at the end of the call, you have the opportunity to ask questions. I am now handing you over to your host to begin today's conference. Thank you.
Good afternoon, ladies and gentlemen, and welcome to our interim update and second quarter results. In the first half of 2013, our Italian and European operations performed poorly, affected by a weak market context across the board. Meanwhile, our upstream activities performed well but suffered from non-technical production shutdowns in Libya and Nigeria. While these issues have impacted first half results, our underlying business has made strong strategic progress. Key startups for 2013, including Kashagan, are on track. We have closed major gas renegotiations, and we are continuing with the restructuring of our downstream businesses. On the corporate front, this has been an excellent first half. Our disposal program has unlocked a further EUR 5.9 billion of value, including the recently completed transaction with CNPC. Let's take a closer look at the first half, starting from upstream. The two key issues are Libya and Nigeria.
In Libya, the security issues in Q1 and other disruptions in Q2 cost us around 20,000 Boe per day in the first six months of the year. The situation in the country remains volatile, and we cannot exclude further disruptions in the second half. Meanwhile, in the rest of North Africa, operations are only marginally affected by continuing unrest. The ramp-up of our Algerian projects has been slower than expected. The major concern is, however, Nigeria, where in the first half we lost around 30,000 Boe per day from a combination of flooding, bunkering and sabotage. Production losses were even higher in July as a result of the LNG blockade, this issue has now been resolved. Turning now to the economic crisis, which is impacting European and Italian operations, this continued to worsen.
Gas consumption in Italy fell by 11% in Q2, driven by a near 30% decline in gas demand for power generation. Declining electricity consumption and competition from coal, renewables, and hydro mean that gas demand for power generation is now 49% lower than in Q2 2008. With regard to refined products, in the first quarter of 2013, we saw a further 7% contraction in Italian demand, bringing the total decline since 2008 to 26%, adding further pressure to structural refining overcapacity in the Mediterranean. In chemicals, demand continued to be depressed, in particular in the elastomer segment, which was hit by lower sales to the tire industry. In this tough market context, we made robust progress on our long-term objectives of growth and profitability. In E&P, we have already achieved six out of the eight key startups we announced in our strategy in March.
Kashagan is on track, and we can confirm production of at least 75,000 Boe per day by the end of September. Altogether, new projects are performing well. Startups and ramp-ups contributed an additional 90,000 Boe per day to Q2 production, offsetting the impact of the Karachaganak and Galp disposals, the disruptions in Libya and Nigeria, and the heavier maintenance activities. We expect their contribution to grow in the second half, bringing the overall additional equity production to 120,000 Boe per day for the full year. With regard to our longer-term prospects, exploration continues to deliver strong results. To date, in 2013, we have made discoveries for almost one billion Boe of new resources, with major oil finds in Ghana, Pakistan, Egypt, continuing success in Mozambique, and, as you have seen today, Congo.
With regard to Mozambique, we are studying the results of our tenth well, which looks to be a play opener for the south of the block. In the rest of the year, we will drill promising prospects in Norway, Australia, Vietnam, and the Gulf of Mexico. At the same time, to fight the strong headwinds in Europe and in Italy, we are taking more incisive actions in our mid- and downstream activities. In gas and power, we have closed good renegotiations with two major suppliers, Gazprom and Sonatrach. We are determined to secure further significant cuts to supply prices through outstanding price reviews with GasTerra and Statoil. With regards to GasTerra, we have made some progress, we cannot exclude arbitration proceedings. With regard to Statoil, we believe that we have no alternative to arbitration, we have accordingly opened the proceeding.
In refining and chemicals, we are structuring our footprint. On top of the announced closure and reconversions, such as the Priolo cracker scheduled for this summer, and the Venice refinery, which we will shut down in September, we have announced the additional closure of gasoline and polyethylene lines at our Gela plant. This brings the total cut in Eni's refining capacity to five million tons and the total reduction in Eni's polyethylene capacity to 23%. Turning now to capital allocation. We continue to make excellent progress in streamlining our asset base, unlocking value, and strengthening our balance sheet. The EUR 5.9 billion of asset sales so far this year brings total disposal benefits secured since June 2012 to over EUR 24 billion. This has driven a substantial improvement in our financial position.
Adjusting Q2 net debt for the proceed from the Mozambique disposal, it is EUR 13 billion, less than half the EUR 27 billion we had in June 2012. In what remains a volatile context, the strengthened balance sheet is a key pillar of our strategy to create value, invest in high returns, growth opportunities generated by our exploration success. I will now hand you over to Massimo for a review of our financial results.
Thank you, Paolo. Good afternoon. In the second quarter of 2013, the market environment was negative for all relevant parameters. The average dated Brent price was $102.4 a barrel, down 9% versus last quarter and down 5% year-on-year. The Brent-Ural refining margin weakened $3.8 per barrel, representing a fall of 13% versus last quarter and a fall of 40% year-on-year. In second quarter, the EUR averaged $1.31. This represented a depreciation of 1% against U.S. dollar versus the previous quarter versus an appreciation year-on-year of 2%. In the second quarter of 2013, adjusted operating profit was EUR 1.95 billion, down 51% when excluding NAM's contribution to continuing operation in the second quarter of 2012. The decline reflected the significant losses incurred by engineering construction due to a revision of profitability estimates on some large contracts.
Excluding the engineering construction impact, Eni's operating profit would have declined by 27.2%. Adjusted net profit was EUR 0.58 billion, down 55% when excluding NAM's contribution to continuing operation in the second quarter of 2012. The decline was due to a lower operating performance and higher group tax rate, which rose to 91.2% or almost 30 percentage points higher than a year ago. The increase was almost exclusively due to the absence of tax shield for the Saipem losses, with residual effect due to higher contribution of profit before income taxes from E&P, which is subject to a larger fiscal take than the other businesses. We now expect our full-year tax rate to be around 66%, excluding the effect of Saipem guidance revision. It is current with our previous expectation of a range of 63%-64%.
Turning to E&P, in the second quarter of 2013, Eni's liquids and gas production of 1,648,000 Boe per day was broadly in line with the second quarter of 2012 for the reason outlined by Paolo. Exploration and production reported an adjusted operating profit of EUR 3,409 million, down by 19.6% year-on-year. This was driven in roughly equal parts by the worsening scenario on one end, and by lower oil production, increased opex and D&D on the other. Now, gas and power. In the second quarter of 2013, gas sales declined by 6% to 18.4 billion cubic meter from the second quarter of 2012, or 3.4% excluding the impact of gas divestment. Against the backdrop of the ongoing downturn in demand and intensified competitive pressure, Eni's sales in Italy were broadly stable at 6.5 billion cubic meter.
While international gas sales were down by 9% to 11.9 billion cubic meter. In the second quarter of 2013, the gas and power division reported an adjusted operating loss of EUR 436 million, a deterioration of EUR 35 million compared to second quarter 2012. The marketing business reported an adjusted operating losses of EUR 457 million, an improvement from the EUR 494 million loss in Q2 of 2012. The effect of the worsening competitive environment were offset by the renegotiation of gas supply contracts with retroactive effects to the beginning of the year. As you may recall, a number of our gas and power activities are not consolidated in EBITDA. Income from this associate in the second quarter amounted to EUR 56 million, compared to EUR 81 million in the second quarter of 2012. This reflects the impact of the Galp disposal and reduced Unión Fenosa Gas's profitability from the shutdown in Damietta. Now R&M.
In the second quarter of 2013, Refining and Marketing reported an adjusted operating loss of EUR 174 million, increasing by EUR 32 million or 22.5% from the second quarter of 2012. This performance reflected lower refining margins impacted by the narrowing price differential between light and heavy crudes, and weak demand for refined products. The negative trading environment was partially counteracted by efficiency gain of EUR 32 million compared to second quarter of 2012. This related to reduced energy costs, plant optimizations, and lower throughputs at less competitive refineries. Marketing results declined, driven by lower sales related to declining demand for fuels and mounting competitive pressures. Passing to the other businesses, Versalis losses amounted to EUR 82 million, EUR 57 million worse than in the second quarter last year.
You should take into consideration that in the second quarter of 2012, Versalis benefited from a relatively favorable environment, thanks owing to the rapid and temporary decline in feedstock costs. Overall, in the first half of this year, Versalis results show an improvement of EUR 49 million or 25% as a result of a stronger scenario from steam crackers, efficiency gain of EUR 14 million, and higher revenues from licensing activities. The engineering and construction segment has been commented on previously, and the combined other activities and corporate results improved by EUR 28 million. Commenting now on the overall debt evolution, net cash generated this quarter by operating activities and disposal amounted to EUR 4.4 billion. This was made up of EUR 2 billion from operating activities and EUR 2.4 billion from divestment, mainly the disposals of Snam and Galp.
Capital expenditure amounting to EUR 2.8 billion, mainly related to continuing development of oil and gas reserves and exploration projects. Overall, investment in the first half of the year, including both technical and financial, were EUR 6.3 billion, and we confirm for the full year 2013 CapEx broadly in line with 2012. Dividends were paid in the second quarter for EUR 2.2 billion. As a result, net financial debt remained broadly stable as compared to first quarter. Following the close of the quarter, we have received EUR 3.5 billion of cash from the sale of 20% of Mozambique Area Four. This will support an improvement in leverage at year-end 2013 compared to year-end 2012 at our scenario of $104 barrel Brent for the full year. Now I lend you over to Paolo for the final remarks.
Thank you, Massimo. Looking forward to the rest of the year. In E&P, technical performance in terms of startups and ramp-ups is in line with our previous guidance of 3% growth and $90 a barrel. However, Libya and Nigeria remain key uncertainties. On the assumption that Nigerian and Libyan production remains at the low levels experienced in the first half, production at current oil prices will be broadly in line with last year. For Gas and Power, we confirm our expectation of a further significant cut in gas supply prices, although where revisions are not closed before year-end, the benefits relating to 2013 will be deferred to future periods. In any case, as a result of the renegotiation we have already closed, we expect no further take-or-pay prepayment this year. In R&M, we expect weak market conditions to continue, largely offset by the benefits of cost cuts and capacity closures.
In Versalis, results will improve, supported by the shutdown of unprofitable capacity. We are determined to bring these two businesses to profit, and should the scenario prove more negative, we'll launch additional measures. Looking ahead, we expect the second half to be significantly better than the first, driven by production growth from startups and ramp-ups and more incisive actions to face the deteriorating market environment in Europe. We will continue to reward shareholders with a sustainable progressive dividend and will evaluate the activation of a buyback in Q3. Thank you for your attention. Massimo and I, plus the heads of our main business units, will now be pleased to take your questions.
Ladies and gentlemen, the Q&A session is now open. I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. Thank you. The question comes from Mr. Theepan Jothilingam from Nomura International. Mr. Jothilingam, please.
Yes. Good afternoon, gentlemen. Thank you for taking my few questions. Three, please. Firstly, just on the balance sheet, I just want to talk about your discussions with credit rating agencies. Is there perhaps a target gearing level that you want to reach? Does that sort of impact how and when you activate a buyback? Secondly, just in the upstream, two questions just on Kashagan. Could you again sort of remind us where we are in the commissioning process, what you've budgeted, and when exactly you plan for the second train to come on stream, perhaps next year? Thirdly, I thought a very important discovery in the Congo. Again, could you talk perhaps about the P10 upside case and also any follow-up prospectivity? Thank you.
Very good. Massimo will answer your first question, and Claudio, the second two.
As far as the credit agencies, as you know, the only change that happened recently has been the change in the Italian ratings made by Standard & Poor's that didn't affect the rating of Eni. For the first time Eni is retaining three notches up the Italian government. The discussion comes together with Standard & Poor's about the qualification of Eni as a government-related entity. What we like to explain to Standard & Poor's that Eni now is running on its own legs and is betting on its balance sheet without any strong, I would say, effect from the government.
As you made a reference to the buyback, sincerely speaking, our balance sheet now is very strong, but we didn't enter into any specific discussion with Standard & Poor's about this specific issue that I guess will not be under the spotlight for this time.
Kashagan first. Kashagan is on track with the recent guidance. The project is progressing well to reach KCP, I mean 75,000 barrel per day by the end of September, and around 180,000 barrel per day by the first part of 2014. By the beginning of 2015 to reach 370,000 barrel per day. Just in summary, the technical situation of the project. Onshore facilities have been completed. The two trains onshore have been handed over to production. We finalized all the dynamical tests, we are ready to receive the first oil. The A island, which will provide initial production, has already been handed over to operation and is ready for production. On B island, the train one is completed, has been pressurized with sweet gas since thirteenth of July.
We are finalizing the dynamic commission for the rest of the facility process and utilities. We think that by the end of August, we can start the production and reach by the end of September, the KCP. For the train two, I think that you asked about when the train two can start production, will be in the first quarter 2014, but that is following our schedule and program. For Congo is a very important discovery in the pre-salt. I think that the most important pre-salt discovery in the offshore of Congo in the Block 12. We have at the moment drilled two wells, and at this stage, as we said, we have found about 600 million barrels of oil. Very good oil, 33 degree and very good viscosity. Also from a production point of view, it will be a good well.
We have to continue the appraisal for these blocks. The name is Mbinga. Also on another block where we are drilling other wells, oil wells in a block called Litchendjili. I think that the potentiality of this area will increase, and I think by September, we will be ready also to issue the results of the Litchendjili well.
Great. Thank you, Claudio.
Next question comes from Mr. Clint Oswald from Sanford C. Bernstein. Mr. Oswald, please.
Yes. Thank you very much. Maybe a question on Nigeria. Given the issues and actually given what Royal Dutch Shell have activated this morning with a portfolio review, is there something there? Is Eni considering something similar, or is something you might think about going forward? Secondly, just on gas and power, with your comments there about supply prices being deferred but no take-or-pay payments, can you talk about your confidence about this business potentially turning positive in terms of earnings contribution in 2014? Thank you.
Let me say a few words about our Nigerian position, then I would hand it over to Marco about the prospects of gas and power.
We have been in Nigeria for the last 50 years. We've been living through the Biafra War. For us, Nigeria is really a legacy country. Of course, we are quite worried of what happens in Nigeria, and we expect, frankly, that the situation will not improve dramatically in the next few months. We are reviewing our position. For the time being, our decision is certainly to try to be more offshore and less onshore in Nigeria. With the acquisition of Block 245, you should read this intention of ours to decrease the impact of our onshore activities as compared to our total activities on Nigeria. In terms of disposals, well, to dispose of onshore activities today in Nigeria is not exactly the easiest thing to do. That's our impression. Marco?
Okay. Thank you. On the gas business, as Paolo said, we are satisfied with the Gazprom and Sonatrach agreements, which we consider complementary, because the Gazprom agreement addresses prices and the Sonatrach agreement addresses volumes. The Sonatrach agreement is the one that allows us to, essentially for this year, stop incurring take-or-pay prepayments. That's on the volume front. Through these negotiations, we've been able to offset the very weak trading environment we're in this year. It's particularly weak on the gas-fired power generation. There could be some one-off impacts due to the very high hydro power generation this year, but overall, coal and renewables are squeezing gas demand. In 2014, though we are not giving any guidance for 2014, we expect there should be more positive impacts from further supply discussions ongoing with GasTerra.
The prices are continuing to align themselves to Northern European and to hub prices across Europe. Also on the regulated tariff, there will be an alignment to hubs in Italy. There should be pricing pressure in 2014 compared to 2013, although on the supply side, we expect the benefits to continue to come. As we've said at the beginning of the year, we expect there to be a new round of pricing discussions as these discussions have a retroactive observation period to fully capture the deterioration we've really seen since last summer. We need to do a new round of negotiations, which will probably involve a part of 2014 and 2015. As regards to the arbitration, we expect that to last, with Statoil, around 18 months.
Even if during the arbitration, it is possible to continue negotiation.
Absolutely.
That's great. Thank you.
Next question comes from Ms. Lydia Rainforth from Barclays. Ms. Rainforth, please.
Thank you. Good afternoon. If I could just ask around Saipem and has the scenario that we've seen in the last six months changed your view on that investment there? Then secondly, if I could just come back to North Africa and both Libya and Egypt. Is there anything that you can do within Libya to try and limit or anything more that you can do that you can limit the downtime there? Just any comments on what you're seeing in Egypt at the moment. Thank you.
Okay. Let me answer something about Saipem, just to update you on our strategic thinking. Then I will try to give you some answer about North Africa. Maybe Claudio will help me on that. On Saipem, essentially, we have two objectives. The first is to support the company in whatever way is needed until it recovers profitability, financial solidity, and reputation. The second is to try to unwind the contradiction in our relationship with Saipem, a company that we consolidate, but we do not control and we don't want to control. Of course, these objectives do not necessarily go together at all times. However, while we are keen to protect Eni shareholders from risks that are not under our control, you should bear in mind that the Saipem relationship is a contradiction that we have been living with for almost 30 years. It's nothing really new.
We prefer to create value for Eni and for Saipem shareholders than to rush into a quick fix of this problem. Therefore, we continue to evaluate our strategic options with regard to our Saipem holding, and we'll, of course, inform the market as a whole in the proper way as and when any decision is taken. Moving to North Africa. You should bear in mind that we are the major player in North Africa. In North Africa, we produce almost 30% of our hydrocarbons, and therefore, for us, it's certainly a very important part of our business. So far, we have not had any major production problems, neither in Egypt nor in Algeria.
The only country which we have been suffering in terms of production in Libya, we continue to keep a certain optimism about the outcome of the situation, both in Egypt and in Libya, while we regard Algeria as a solid country from which we should not expect, in the short term, any major trouble. I don't know if you want to add something, Claudio, on this.
For Libya, as you know, in the first half, we lost an average of 18,000 barrel per day, 20,000 barrel per day. What we experience in Libya, we don't have any problem with the terminals. I mean that our two terminals, one is offshore, that is Bouri, and the other is Mellitah. They are in good shape. We have just some interruption of our production in our fields. The situation is recovering also, if in July, I have to highlight that we are suffering some big losses. We are following the situation. We are traveling to Libya every week. We are going to visit our fields. What we remark that all the institution, all the state company, the institution, are really focused to recover the situation as soon as possible. We are, as Paolo said, we are confident about the future.
That's very helpful. Thank you very much.
Next question comes from Mr. Iain Reid from Jefferies. Mr. Reid, please.
Yeah. Hi, gentlemen. Just a question on Mozambique, whether you can update us on the status of the development in terms of unitization with Area 1, what you're thinking at the moment about the LNG developments. Maybe you can also say something about this play opener well you were talking about. I think that's in the liquids-focused region of the block towards the south. Thanks very much.
Okay. Claudio will update you, Iain.
In terms of exploration, starting from exploration, I think we are very happy about the new result because it's a new play, Cretaceous play, so completely segregated and far from Mamba complex. We are going to announce the result, I hope, in a couple of weeks. I don't want to anticipate anything, but there are further development. Exploration is continuing. We already drilled 10 wells. After this well, we are going to drill an additional appraiser in the Mamba complex, and we finish the exploration. We take a break for some months. On the development side, collaboration and working with Anadarko are going very well in terms of LNG, in terms of development, in terms of unitization. We don't see any problem or big hurdle in front of us.
We are together in all the discussion also with the state company and with the government, that give us a big push and big help in progressing on the development. We have the target to have the FID, as we said, in 2014, in the second half of 2014 for the LNG and as well for the planned development of many unitized areas. Everything is on track, and the things are moving in a positive way.
Okay. Just to follow up, is it too early to give us a rough idea of what the total CapEx could be?
I think we can confirm the level of CapEx we said a few months ago that we'll be fine-tuning next year during the sanction of the project. We talked about EUR 35 billion-EUR 40 billion for the first two plus two trains, so four trains to develop 24 TCF of gas.
Okay. Thanks very much, Claudio.
Next question come from Mr. Jon Rigby from UBS. Mr. Rigby, please.
Thank you. Two questions, actually. The first is, you mentioned, Paolo, you were going to look at the potential for share buybacks in the second half of the year. Can I just ask whether an active consideration was made of whether you would start right away? Just simply because, you have a unique insight into the sort of strategic progress that you're making, and clearly you can see where the share price is right now. There was an opportunity, or still is an opportunity, I guess, to arbitrage those two and use capital appropriately, and it's a great signaling device, clearly. The second question is just on the downstream. As I understand it, I think there are three main events in the second half of the year that are important. I think you mentioned two, which is Gela and Venice closures.
I think isn't the EST conversion unit starting up in the second half? I wondered, is it possible to estimate or give some indication of what those three effects would have had on your earnings in the first half of the year if they had been in effect in the first half of the year, just to get some idea about sort of momentum through the second half in the downstream? Thanks.
Okay. The second question requires a little calculation that I'm not sure I'll be able to give you right away. Certainly, with the very weak demand, the closure of Venice will have had a positive effect, and also Gela, both for the refining and for Versalis, would have been a positive. If you want some number, I might ask Camilla to give you more detailed information, which I don't have right now. In terms of share buyback. Of course, this has to be an orderly process because it is not me taking the decision. I have to bring it to my board, I planned with my board to go there in September to make a proposal.
I have to tell you, from my point of view, I'm very keen to start a buyback, as I think of it as a very useful tool to contain the overall dividend payment while maintaining a progressive dividend policy. This is the purpose of the share buyback. We have not yet been aligning the different elements of this decision, which we will do in the next few weeks, because I'm going to present it in September to my board. I maintain the fact that I'm certainly keen to have, in the future years, a plan of share buyback active to contain the total dividend payment.
Right. That sounds great. Just to come back on that. Presumably, will any kind of affirmation from the rest of the board that you can start it leave you with some flexibility over that following 12 months to decide how, when, and what you do?
Yes, I'm planning to ask for a flexible decision, which will include timing, amount, price at which I would be making the share buyback. This will be left to me and to Massimo to decide. We have also to propose, which we have not done so far, an algorithm which we'll be using to buy back those shares. We are still a little behind in this process, in September, we will conclude the whole process.
Okay, great. Thank you.
Thank you.
Next question comes from Mr. Jason Kenney from Santander. Mr. Kenney, please.
Hi there, sorry if you've already discussed some of this. I joined the call a bit late, unfortunately. Just following up on the Congo. Is it too early to think of a development scenario there or a startup timing for that particular find? Then secondly, on effective tax guidance, could you just maybe talk around the moving parts of the impact of a very high effective tax rate in the second quarter, of course, where you think that might play out for the rest of the year?
Well, we have already said something about Congo, but not exactly your question. Maybe Claudio can add something.
Yeah. I think that is quite early to talk about the future development, because practically, we discovered two structures. One, the structure that we announced today, and there is other appraisal wells in progress in the area. We prefer to have a clear idea about the full potentiality of this area before starting the appraisal. For sure, it will be a project that will go behind this four-year plan. We have to say also that we are in a very shallow water, where these blocks are 15 km from the coast in a very good area with natural grid. I think that when we will have all the data, we can think about a very fast-track development.
Yes. I think we can rate Congo as a near field discovery in some way.
It's a hub. It's a good hub that is so big that we have a unique hub that we have to rethink in terms of development.
Okay, Massimo.
Okay. You're right. As already said, we experienced a very high tax rate in the second quarter, amounting to 91.2%. The great majority of this increase is due to the Saipem review of its results. If you strip out this fact, the tax rate will be in the range we already announced during our strategy in March. I can confirm that the overall tax rate we expect for the full year would be in the range of 66%. Again, on the full year, if you strip the Saipem effect out, we will come back to the range we gave at that time. It was between 63% and 64%.
Okay, thanks so much.
Next question comes from Mr. Nitin Sharma from JP Morgan. Mr. Sharma, please.
Afternoon, gentlemen. Two quick questions, please. First one, you've discovered close to a billion barrels of resources in H1. Could you maybe give us some more color on this? I.e., how much of this is Mozambique and how much is ex-Mozambique coming from other areas? Sorry, one more on buyback. Guidance of Q3, potential startup of buyback in Q3. Does the weakness in Saipem's share price have any implications on your decision whether to start a buyback or not? Thank you.
Let me start. Let me answer the second question, then I will ask Claudio to answer the first one. The second question, the quick answer is no. Whatever is the share price of Saipem does not really have a major impact on our balance sheet. Besides, the share price of Saipem has been recovering quite a lot recently. Just as a reminder, just for you as a reminder, in 2009, the share price of Saipem was as low as EUR 9. The EUR 16 of today, well, is some progress as compared to 2009, at least. Claudio, maybe the second one.
On the exploration for the first half up to now, in July, we have 60% of the resources discovered in Mozambique and the rest in other discovery like Congo or Ghana or Egypt or Pakistan. We can also say that 40% is oil and 60% is gas. That is more or less the data about this first half exploration result.
Thank you. Very clear.
Next question comes from Mr. Michele Della Vigna from Goldman Sachs. Mr. Della Vigna, please.
Good afternoon. I would like to ask two questions. The first one is about demand for oil and gas in Italy. The first half was clearly very weak. I was wondering what signs you are getting from the July data point in terms of whether there is any recovery or stabilization in demand. The second one is about your gas and power business. I was wondering if you could give us a guidance for EBIT for this year in view of the possibility that the Statoil and GasTerra renegotiations do not happen this year.
Let me answer the first question, I will hand it over to Marco. No, unfortunately not. The market in Italy continues to be extremely weak, while in the rest of Europe, it is just weak. We do not see any sign of improvement, neither in gas nor in petroleum products. In particular, petroleum products in July have been minus 7% as compared to July 2012, which was not exactly a very good month. As you can see, the situation continues to be extremely difficult.
I would say, Michele, picking up on what Paolo said on oil, on gas, July is also weak. We are now forecasting about 70 BCM for the whole of Italy for 2013. Regarding the guidance, as we said, it is early to predict the outcome of the GasTerra discussion, which is ongoing, that will determine very much what parts of the 2013 EBIT we can actually put into the 2013 year-end results. I would say the same applies to Statoil. Of course, the arbitration decision on Statoil comes with that uncertainty. As Paolo mentioned, we cannot close sooner than the 18 months, certainly a deferral of the closures of those two negotiations will mean that we will have to wait to recover those profits as they close.
Overall, I think with excluding these deferrals, we confirm the guidance we gave at the beginning of the year, which, as you remember, was to close in line with last year, excluding one-offs, which would bring last year's result to somewhere around minus EUR 200. I don't know if that's clear.
Sorry, going back to that. The minus EUR 200 would be if Statoil and GasTerra were successfully closed this year, right?
Yes, which is what we said at the beginning of the year. That was the same guidance we're sticking to.
Okay, you couldn't quantify how much those two renegotiations could be worth on the
No.
Understood.
Thank you.
Thank you.
Next question comes from Ms. Irene Himona from Société Générale. Ms. Himona, please.
Thank you. Good afternoon. I had firstly a question on production guidance, if I may. You reduced today the guidance for this year to flat effectively because of Libya and Nigeria. Thinking about the strategy presentation guidance, I was under the impression that the four-year plan already included a contingency, and I thought a contingency is meant to capture events such as Libya and Nigeria. I wonder how we can sort of reconcile the two. My second question concerns cash flow in Saipem. I see in the second quarter you had a EUR 448 million cash release from working capital. I think Saipem had a EUR 1 billion cash inflow in working capital. Just thinking about Saipem, would you look at their Q2 working capital move as perhaps an indication of That all the kitchen sinking has happened, and EBIT margins for them should improve going forwards? Thank you.
Let me try to answer precisely to your first question, then Claudio might help me on that. The guidance was 1,740,000 barrels a day on an oil price of $90. This was the previous guidance. Today, we say roughly in line with last year, which means around 1.7 million barrels, at today's scenario of $104, more or less. This is the difference. This assumption assumes that Libya and Nigeria will perform in the second half at the same level than the first half, which was a level not particularly satisfactory. We do not foresee a worsening of the situation, neither in Libya nor in Nigeria. This is where we stand today. Part of this difference between 1,740 and, let's say 1.7, which is the guidance we give today, is scenario. Part of this is Libya and Nigeria continue to perform worse than expected.
Part of this has been eating some of the reserves of the provisions of the contingencies that we were having at the beginning of the year. I don't know if you want to add something, Claudio.
I think that you said everything. Only can add that the contingency that we put at the beginning of the year has been burned by the slowdown of the MED. Especially Algerian project and Angola LNG, that have a very slow ramp up. Angola LNG for technical reason, and in Algeria because of the security issue that we experienced at the very beginning of the year. That is the reasons. It's clear that Libya and Nigeria are something that we didn't consider in the contingency, something that is really force majeure, and treated as a force majeure, and as extraordinary event.
Okay, Irene, you are perfectly right. We had an advantage from the working capital movement Saipem in the second quarter, amounting to around EUR 1 billion, that are EUR 700 million if referred to the first half. Our expectation is that this advantage will be partially absorbed by the end of the year. In line with the guidance of Saipem we received at the beginning of the year. Working capital neutral as far as 2013, with a recovery beginning of 2014. Exactly the same guideline can be applied to Eni. Eni benefited from this advantage from Saipem in the second quarter, and the advantage has been amplified some way by the seasonal reduction of inventories from gas and power. At the same time, we suffered an increase in the commercial credits.
All in all, we had a small advantage around EUR 0.5 billion as far as the second quarter. Again, the expectation for the full year will be cash neutral as far as the working capital.
Thank you. Would you look at Saipem as pretty much being at the bottom? Are you also looking for a recovery in their margins going forward?
We have the same information you have.
Okay. Thank you very much.
Thank you.
Next question comes from Mr. Mark Bloomfield from Deutsche Bank. Mr. Bloomfield, please.
Good afternoon. Thanks for taking my question. Two questions, please. First, going back to gas profitability in Italy and the pricing pressure on your sales. Can you perhaps indicate roughly what proportion of your Italian volumes are being sold on spot or spot-linked terms today, ideally split between industry power and residential, and maybe give some sort of sense of how you expect that percentage to evolve over the next 12 months? Second question, could you perhaps update on the Goliat project, particularly when you expect that to start up, and what the key critical path items are over the next 12 months? Thanks.
On the first point, in Italy, I would say we still have in our current sales price some of the older contracts that had some oil indexation. Basically, 100% of the contracts we are signing are hub indexed, both for industry and for power. Regarding residential, it's a regulated tariff that will move to 100% hub indexation as of the last quarter of this year. In 2014, excluding some of the older contracts that are going to expire, we don't have a lot of long-term sales in the Italian market. The Italian market tends to have a one-year time horizon as opposed to two or three that we see in Northern Europe in terms of length of industrial contracts. I would say it's fair to assume that we have, in 2013, some oil indexation that will disappear and is disappearing as we're moving to 2014.
Goliat, we started the drilling completion activities in October 2012, that is in progress and progressing well. The flowline and riser have been already installed. FPSO construction in Hyundai yard in Korea is in progress. We foresee a sail away in Q2 2014, schedule the construction and the production in the Q3 2014.
Thank you.
Next question comes from Mr. Alastair Syme from Citi. Mr. Syme, please.
Yeah, good afternoon. Another question on gas, actually. Given that you've seen over the last couple of years the sort of gradual convergence between spot and contract again in Europe, I just wonder how that changes the dynamics of the renegotiation talks, does the seller say, "It doesn't really matter now, contract versus spot, we'll sell you either," have we not got to that point yet?
I would answer that it is helping. As the Italian market becomes more liquid and the PSV becomes more liquid, it will over time become a reference for sales and for the long-term purchases, as is happening in other European countries. As these renegotiations look backward, they still include periods of time when our sales mix had oil indexation in it. That's why it will take more than one round to get to a full hub-based pricing system. Yes, indeed, it is helping, but we're not able to fully reflect what's going on because of the time lag in the contract and the backward-looking nature of the observation period.
Just to follow on from what you said, Marco, do you therefore get much benefit if you-
Yes
manage to renegotiate?
Yes, I think the discounts we've achieved with Gazprom is a result of that convergence and that alignment.
Okay, thank you.
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