Good afternoon and W elcome to Eni's 2020 update and Q1 results. We are going through an unprecedented times with the recent collapse in commodity prices caused by the twin factors of COVID-19 pandemic and supply glut. In facing this scenario, Eni is stronger than it was in the last downturn in 2014. In the past six years, we have transformed the company into a leaner, more efficient organization with a robust upstream, a structured mid downstream, and a solid balance sheet. Overall, these actions, coupled with the cost and CapEx reductions, have more than halved our all-in cash neutrality while reducing our net debt. Today, in facing this new challenge, we are taking a number of initiatives that will further strengthen Eni, both operationally and financially. We are assuming the lockdown until the end of May, and then a gradual demand recovery toward normality by the start of 2021.
In the coming slide, I will detail our action plan for 2020. In these particular circumstances, all our action are being based on the following priorities. People are always at the center of our strategy, and even more so now. Every decision we make is for the health and safety of all our employees and of all those that work with and around us. On top of this, we are taking strong action to reduce our costs across the business and deferring project without impacting long-term value. In our operations, we will focus on preserving the integrity and continuity of our assets safely. To date, we have had no interruptions as a result of COVID-19.
We consider that our low-cost resources and flexibilities across all businesses are distinctive competitive advantages, which we will leverage to keep our balance sheet strong while we maintain significant liquidity to pass through the weak scenario. This year, we will fully leverage the flexibility in our portfolio to reduce our CapEx by EUR 2.3 billion, equal to around 30% of the total annual CapEx originally planned, or 40% over the last three quarters of the year. Also, over 80% of the CapEx reduction is from upstream, where CapEx rephasing affect mainly new development projects by 35%, and production optimization by 20%. In the other businesses, we have optimized maintenance and logistics CapEx. Our portfolio is both resilient and flexible.
The production optimization we have postponed can be restarted quickly as soon as appropriate market conditions appear, and related production will be recovered accordingly with limited loss of value. In addition to the investment cut, we are carrying out a strong cost efficiency program in all our businesses and corporate functions. We expect an overall benefit of around EUR 600 million in 2020, with around 40% of the savings coming from the upstream with reduction mainly in OpEx and G&G costs, and the remainder across all the other businesses and the corporate.
Our production cost, notwithstanding the lower production this year, is being optimized further. We expect to keep it just below $6 per bbl, confirming our competitive position in the sector. Production in 2020 is expected to be around 1.75- 1.8 million bbl of oil equivalent per day before the OpEx cuts that are still unknown at field level.
The lower production versus budget is 2/3 as a result of CapEx cuts and COVID-19, and 1/3 for lower gas demand, mainly in Egypt and force majeure in Libya. A contingency of 40,000 bpd is still retained in our projects. With CapEx at around EUR 4.3 billion, we expect to generate free cash flow for EUR 1.5 billion in a $45 bbl scenario. The 2020 organic free cash flow of EUR 1.5 billion shows a reduction of EUR 2 billion versus the original budget of EUR 3.5 billion at $6 Brent. The weaker scenario accounts for EUR -3 billion.
The action we are taking to contract the turmoil will result, even considering the lower production, in a positive effect of around EUR 1 billion. To evaluate the different scenarios, our free cash flow sensitivity, based on our current outlook, is EUR 180 million-EUR 190 million for each dollar move in Brent.
Now let me focus on the mid downstream businesses. R&M has been the most affected by the virus containment measures, with a contraction in transport fuel consumption of up to 80% in the worst week of the pandemic. Oil product demand is expected to gradually recover with the easing of restrictions and the restart of industrial activities. We have optimized maintenance of our refineries, and we are continuing to run them at reduced operating level. Overall, we expect a yearly utilization rate of around 80%. In marketing, despite falling oil products demand, we expect EBIT in 2020 in the range of EUR 300 million. In Gas & Power, we expect to record around EUR 400 million of EBIT, with almost 2/3 coming from the resilient retail business.
In Versalis, we expect to reduce losses by around 2/3 versus the last years, thanks to a supportive scenario for steam cracking, more than offsetting COVID-related demand weakness, in particular for elastomers. Overall, the mid downstream is expected to contribute for over EUR 600 million of EBIT, slightly better than last year, notwithstanding the significant impact of COVID. These expected results, when excluding COVID effect, will also exceed the original 2020 budget that was around EUR 1.3 billion. Moving now to the group's cash position. Cash flow from operation before working capital is expected to be EUR 7.3 billion in our revised $45 Brent scenario.
The reduction versus the original budget of EUR 11.5 billion at $6 Brent is due to EUR 5 billion of reduction made up of scenario effect, COVID-19 impact, and remodulated production, partially mitigated by EUR 800 million coming from the combination of cost saving for EUR 600 million and better performance for EUR 200 million. The expected cash flow from operation will more than cover the revised capital budget of around EUR 5.5 billion. Turning now to our Q1 results. In response to the COVID-19 pandemic, we immediately put in place safety measures worldwide to protect our people and all those around us. In addition, Eni has launched a series of initiatives to help local stakeholders in areas in which it operates, and also made its supercomputers, HPC5, available for coronavirus research. Turning to business. Exploration continued to have success.
In Angola, Block 15/06, the Agogo discovery oil in place was upgraded to 1 billion bbl as a result of the second successful appraisal well. In Mexico, the first well drilled in Block 10 resulted in an oil discovery containing up to 300 million bbl of oil in place. Several prospects have been identified nearby. In case of success, they can be clusterized in a common development project. In Sharjah, Area B, we drilled the first well, discovering gas and condensate in just one year from the signing the block. The well has been tested with excellent flow rates that already proved the commercial viability of the discovery. Upstream production was 1.77 MM bpd , -4% year-on-year, impacted by lower gas demand, together with the effect of contractual triggers and force majeure in Libya. These effects more than offset the increased production in Norway.
Gas & Power performance proved to be robust, notwithstanding the weakness of the energy market. In R&M, the improvement was due to both marketing and refining, which, in particular, benefited from an enhanced industrial configuration and a higher contribution of the bio business. In the renewable business, in March, we started 50 MW wind farm in Kazakhstan, and we have completed the acquisition of 49% of the Falck portfolio in the U.S. with an equity production of 57 MW. In the first three months of 2020, we generate EUR 2 billion cash flow from operation before working capital. A reduction versus last year, mainly due to the lower oil and gas scenario, but matching our CapEx requirements. Our balance sheet is strong. We can rely on EUR 16 billion of liquidity to face the drawdown of activities related to the pandemic.
In terms of economic results, upstream EBIT in Q1 was EUR 1 billion, impacted for EUR 1.1 billion by the lower oil and gas prices. On a comparable scenario basis, upstream EBIT was resilient, notwithstanding the lower production volumes. Moving to mid downstream, the overall result improved by 40% or 85% excluding the COVID impact. Gas & Power EBIT was robust at EUR 430 million, up almost 30% year-on-year. This result was driven by the G&P business unit with EUR 270 million of contribution, thanks to contract optimization and volatile market scenario. This positive performance was only partially offset by the lower contribution of the LNG business related to the weakness in the Asian markets.
In retail, Eni Gas e Luce delivered a result of almost EUR 116 million, driven by the addition of almost 250,000 customers and the higher contribution from non-commodity activities, which offset the sales reduction linked to the virus, milder weather conditions, and increased expected default by clients. Refining and marketing was at EUR 80 million, despite the challenging scenario. In particular, the refining business benefited from the optimization of industrial assets, lower operating costs, and from the positive contribution of the bio business, thanks to the Gela plant ramp-up. The marketing result helped counterbalance the demand reduction related to the lockdown measures. Finally, the Versalis result was impacted by depressed demand, in particular in the automotive, building, and construction sectors, and by competition from U.S. producers. Turning now to the cash position. In Q1, adjusted cash flow from operation before working capital was EUR 2 billion, matching our CapEx requirement.
Excluding the scenario COVID and non-cash derivative effects, cash flow would have improved year-on-year by EUR 200 million. The balance sheet remained robust with leverage at 28%. To sum up, we have taken action in terms of CapEx, cost savings, and remuneration through the suspension of the buyback to recover EUR 3.3 billion versus our original plans this year. In this new environment affected by the pandemic with the consequent revised plan, we expect to produce between 1.75 and 1.8 million bpd with the flexibility to reactivate production as the scenario improves. Our midstream will continue to improve year-on-year despite the COVID pandemic. We will maintain sizable reserves of liquidity, which are currently around EUR 16 billion, three and a half times our short-term debt. Together, this action will allow us to navigate the challenging scenario while we maintain the highest standards of safety at work.
Thank you very much. We are now ready to answer your questions.
Ladies and gentlemen, we will now begin the question and answer session. The first question comes from Oswald Clint of Bernstein. Please go ahead, sir.
Oh, thank you very much. Claudio, thank you for getting onto the call in this tough time. My first question, please. Thank you for the updated guidance here on 2020 cash flow. You're obviously using $45 for the year. It looks like the market's really gone to 35 for the year. You've given the sensitivities quite clearly today, and obviously, your cash flow would just cover CapEx there for 2020. Obvious question, but could you just talk about how you think about sustaining other distributions, like the dividend at such a price level if it was to happen? Secondly, just on the downstream, pretty impressive Q1 with the operational improvements coming through, offsetting some of the COVID-19 demand impacts.
Could you just talk about 2Q so far in terms of gasoline, diesel, jet fuel, and just whether you think some of those operational improvements might also come through to offset some of that demand weakness once again in the second quarter, please. Thank you.
Thank you. About the first questions. I think that to talk about dividend and what we are going to do with the dividend is not time now, because the pandemic and the glut started just one half months ago. I think that we have to continue working, first of all, on the optimization of our CapEx, OpEx, G&A, all the possible optimization that we can do in our structure. We act very rapidly. We start immediately the first week of March. We have a first revision in the March 19, and then less than 10 days ago, we finalized the revision that we presented today, and we are continue to fine-tuning and also execute this revision in our subsidiaries. We will see the next couple of months how the COVID-19 will evolve.
In our assumptions, also in terms of price and in terms of COVID-19, we think that by the end of May, the critical phase is finished. We start gradually to recover the consumption and go through a possible new normal situation by the end of the year. We will see what is going to happen in May, and June, and July. In July, we can update on the dividend. We run different scenarios clearly. We didn't just run $45, we ran a $40, we ran a $35. We still have flexibility, clearly. Flexibility in the cost reductions. It's something that we can apply if the scenario remains less attractive than what we thought at the beginning, $45. We will can think about the dividend, but not now because it just happened.
We don't want to react immediately, before having a clear idea of what we can do in terms of efficiency inside our company. For the question about refinery, still refinery working very well. We can say that the bio refineries were very positive, both in Venice and in Gela. From a R&M point of view, they work a lot of cost efficiency on the logistics, on the stocks. We can have some additional improvement on that also if now the situation in March was, I think, the most critical in terms of transportation and consumption, because during the week, we had an average of 70% reduction and about 80% during the weekend. Now is improving. The good news that is improving. Some percentage point, is improving. We are following up, and we will see what is going to happen in May.
We think that in terms of transportation and consumption will be better, especially for gasoline. Diesel consumption was, I can say, good also during this period because the heavy truck continued to work for transport materials and food. That was less impacted. I think that we can recover also on gasoline.
That's very helpful. Thank you.
The next question is from Michele Della Vigna of Goldman Sachs. Please go ahead.
Thank you very much for taking my question. Claudio, congratulations, and best of luck for your new mandate. I had two questions, if I may. The first one is around the CapEx and OpEx cuts. I was wondering how much in your mind is cyclical and just belongs to this really difficult time in the market, and how much you think could be sticky even at the time of the recovery. We've seen before how the industry in difficult times manages to put through cost cuts, which actually then can become quite sticky even after the price recovers. My second question is about price dislocations. We are seeing a lot of dislocation in the physical crude markets, and I was wondering through your business where perhaps you see realizations really starting to diverge versus Brent. Thank you.
I answer about maybe with the help of Sandro, about what you asked about the cyclicality, if this kind of situation is cyclical or how we can manage this kind of up and down in our upstream business in term of prices. Then maybe about prices diverging between Brent. I don't know if Massimo or Pino can answer. I give them time to think about and I answer to the first question. Michele, in the last six years, we had a very low price. We have up and down. For that reason, we start already before, but we change also our way of developing fields and all of our way how to select the field that we want to develop, and try to explain better what I mean.
First of all, as you know very well, we put a lot of focus on the exploration to be very resilient in terms of cost, because our exploration cost is less than $1 per bbl. We start from a very strong basis. We start working on short cycle. What I mean by short cycle, also for big projects, we start working on phase one, phase two, phase three to be able to capture with a very good time to market, the cash flow return, the return on the project. We don't do any more super giant projects, where we put all the investment up front and then we start recovering. Because of that reason, because today we can have $60, tomorrow $80, and then we can jump down to $30. You must be very fast in your development. Clearly, the world needs energy.
Until December, the consumption was at 1.2 MMbpd on yearly average. We need oil, we need gas, we need energy. We have to adapt ourselves, and we must have the flexibility to be able to be inside this short cycle. For that, you must have the right asset and also the right strategy in term of development and the geography where you are to exploit at the maximum level, your position and the position of your consumers. Your customers, we can say. That is my answer to your question. Now, I give the floor to Pino to talk about the diverging price between Brent and other crudes.
To the differential volatility of the crudes, of course, we are in a period where in only one week, we change completely the spread between Brent, Urals, or Brent or Middle East crudes. The question is to try to take the maximum advantage of this volatility. Of course, in the last month, we took advantage to buy crude for our refining system with a very good discount on OSP, on the official pricing. About the equity production, we tried also to maximize the use of our equity production in our refining system in order to avoid to be damaged from the sale of our crude on the market.
If I may add something on this, Michele. Talking about the average price we got in the first quarter, the average has been versus Brent minus five versus minus 2.6 that was the first quarter of 2019. I would say that the minus five is more normal than the minus 2.6 we had last year. Do you remember last year, the heavy oil had, I would say, a very high quotation on the market because of the first OPEC cuts, Venezuela, and so on and so forth. The minus five is more in line with what we have seen in the past, giving some advantage to our refinery system that you remember is quite complex. In terms of sales, I would like to add that all the forward sales in May has been already placed as far as our equity production. Everything has been sold.
Thank you.
The next question comes from Alessandro Pozzi of Mediobanca. Please go ahead, sir.
Good morning, all. I wanted to go back to the comment about the flexibility in costs, and I was wondering where are the areas where you think you can take a bit more decisive actions in the event the oil price remain depressed? I'm asking that because compared to the last downturn, I think oil majors are much leaner. Potentially the room for cutting costs, maybe on the OpEx side, may not be that great, and therefore you have to lean on the CapEx side. Maybe a follow-on from that, can you give us a bit more color on what projects you put brakes on? I think you reduced the CapEx by 30%. Which other projects are still going ahead? Thank you.
Thank you. I give the floor to Alessandro Puliti to answer your question.
Okay. Good morning. The reduction in CapEx was basically allocated for EUR 400 million to production optimization activity. That means on the short cycle. EUR 1.2 billion that is allocated on the long cycle, the main projects. The main projects that have been postponed are the Rovuma LNG in Angola, our activities in the Cabaça North, Agogo, the Merakes in Indonesia, expenditure in Iraq, in Zubair, some reduction in Egypt, and in the U.A.E. Those are the main areas where we postpone projects to achieve cost reduction this year. On top of that, there are EUR 300 million of reduction on the exploration activity. In definitely how we can do more, clearly doing more, we can do it in further rationalization in our operation, especially on the operating cost side.
Okay. Thank you. Just a second.
Sorry, just to complete.
Yeah.
Just to give you more color on this, how we can be resilient if the price is lower or what we can do more. You have to think that this exercise of revision of our CapEx, OpEx, and cost, generally, has been performed practically in one month. We reacted immediately. I said we start the first week of March, we can do much more working on with each single subsidiary inside the inner costs. We are a big company, so it's something that we can perform further, and we can optimize, and the exercise is not finished. We run fast to give immediately, to be immediately in the right side, and clearly to impact positively the year. This optimization is going to continue. For that reason, we run a sensitivity at $35 or $40, and we continue to understand how to optimize it.
It's something that the budget, we prepare, we presented the strategy. I've been working for five, six, seven months, and now in practically one and a half months, working with all the people, starting from top down and then bottom up. We revise, we make an aggression. We have been very aggressive and determined to do that, and now we continue to finalize. Not just in the upstream. We have several other component, where we are looking inside corporate cost and G&A. A broad range of costs that we can optimize, and we have optimized, also changing organization and structure to be even more flexible and resilient in the future.
Okay. Thank you very much. Just maybe a second one on the tax rate. It's been fairly high in Q1 in the upstream, but I guess that's mainly a reflection of the lower oil price. Can you give us a guidance for the tax rate for the rest of the year? Thank you.
Thank you.
The tax rate, targeting a $45 per bbl for average this year means a lower oil price for the remaining nine months. It means that we expect an increase in the E&P tax rate that is correlated to the oil price. We expect, for this reason, a tax rate adjusted for the full year that will be more or less same level, around 100%, as you have seen in the first quarter. A different story as far as the cash tax rate. Because of the different composition in this environment between deferred taxes and cash taxes, we will project a reduction in cash taxes to be paid. That's the reason why we expect a decrease in the cash tax rate from the 33% we had in 2019 to around 25% in 2020.
Thank you. Very clear. Thanks.
The next question is from Thomas Adolff of Credit Suisse. Please go ahead, sir.
Good morning, good afternoon. Got a few questions, please. Just firstly on cash flow. Obviously, cash flow is one thing and working capital is another thing. If you can't sell what you produce and you don't get paid what you sell, obviously the cash flow would look worse than your base case. I wondered if you can give some guidance for working capital and how that evolves over the balance of the year. Secondly, I wondered if you can also give a comment on the supply chain. Obviously, we're seeing major disruptions there. Are you seeing any major issues there that could impact your operations? Finally, if I may, just on global gas, you've announced, obviously, force majeure on Libya. What does that mean in terms of production? You probably have some issues in Indonesia, and you've highlighted issues in Egypt. What is Zohr producing there?
What generally is happening to your LNG portfolio? Is your share of spot LNG higher than in 2019? Thank you.
I think for the cash flow, working capital Massimo, and then supply chain, Sandro Puliti, and then for the LNG and the gas issue and the force majeure between Cristian and Sandro Puliti, they can answer.
As far as the working capital, you have seen that we absorbed, in the first quarter, EUR 640 million, because of the seasonality. Much better than in the first quarter 2019, that contained some, you probably remember, some special item. We paid around EUR 300 million for an arbitration. Definitely, we are taking advantage from the decrease in the prices environment that is giving us an advantage. We are cashing in bills that we issue in 2019 when the oil price and the gas prices were higher, and we are releasing new bills with lower scenario. Projecting what we expect for the full year is a bit complex because all the reason that you mentioned. The market is really volatile.
Can I say that taking into consideration what we expect in terms of, I would say, a higher probability of default from our clients, mainly in Gas & Power, retail, specifically, we can project a cash absorption for the full year that will be, I would say, in the range of EUR 100 million-EUR 300 million. Let's say an average of EUR 200 million cash absorption for the full 2020.
Can I just quickly just follow up on the working capital? Obviously, the comment you made just now, the release, that's the LIFO, FIFO effect, right? Inventory losses and inventory gains, or the offset in the cash flow. I was just wondering about the underlying working capital effect, not the LIFO, FIFO.
Well, the underlying is more or less stable, so we do not expect a significant change in respect to what we have seen last year, remaining more or less flat. For the full year, out of the EUR 100, EUR 300, EUR 200 million, I would say the most important deterioration is linked to the reduced level of cash-in from our clients. If you take this out, we'll be in the range of between EUR 0 and EUR -100.
Okay. Thank you.
The next question is from Lydia.
It is not finished.
Excuse me.
We have other two questions to answer.
Sorry.
Sandro and then Cristian.
Okay. Regarding supply chain and disruption due to the pandemic. The pandemic is mostly affecting those activities that requires international support and mobilization. Therefore, we are suspending or rephasing most of our drilling and especially deep water drilling activities. While on production operation, always with the aim to protect our people while granting production continuity, we have been able to maintain production level, thanks to the fact that we have a prevalence of local workforce in our producing countries, so we are not affected by the blockage of traveling between countries. We also reinforced our headquarter support where possible, and we have identified critical manpower and optimized HR management. We have also improved our supply chain monitoring regarding spare parts to ensure their availability and advance booking and delivery. Now I leave the floor to Cristian.
Yeah. Hello, everybody. When it comes to, let's say, the global gas environment. We enter in 2020, which already the fundamentals were very weak in terms of supply balance and demand. Just to remind, in the first quarter of 2020, there has been 15 million tons of more LNG floating around due to the start-up of U.S. LNG trains vis-a-vis last year quarter. The lockdown linked to the pandemic has increased, let's say, the weakness of the market due to the demand disruption.
We have seen it firstly in China in February. I have to say that now we see China picking up in terms of demand and actually recovering from that slump. Clearly Europe has been affected. Let's say, all in all, this weak market environment has affected also our results. As you can see from the result of the first quarter, our exposure to LNG spot prices are fairly limited.
In fact, we are growing our portfolio of LNG, and we try to balance and to manage the exposure to that balance. Our, let's say, exposure to spot prices are not that high. That's why you don't see a huge impact on the results.
Thank you.
The next question is from Lydia Rainforth of Barclays. Please go ahead, madam.
Thank you. Good afternoon. Two questions, if I could. The first one was on the strategy presentation, and I appreciate it was only a month ago and that a lot has changed since then. Does the current crisis that we're going through, and depending on the duration, change how you think that might evolve? Does it mean that you accelerate some of your energy transition ambitions, or is it really sort of too early to think about that? The second one was more of a social question as to, can you talk about some of the initiatives that Eni has been deploying in terms of response to the pandemic? Clearly there's been a lot of brilliant examples of the help that Eni has been giving to the wider society. What initiatives are you seeing making the most difference? For example, the supercomputer being used for the virus modeling. Thanks.
I take the first question, and I know Massimo for the second question. First of all, the long term doesn't change at all because I think looking at what is happening, I think more to accelerate the long term. It means that the action to go through a different kind of retail products, so green or blue or bio, that are working well now, and they are really resilient and give a good balance with the traditional business. I think that to counterbalance, then, this possible volatility that we'll see in the future, what we presented in the long term has to be improved and may be accelerated. Clearly, we have to understand how, and also find the means, the money, to accelerate it.
We have also, as I said, during the strategy, we are working through a different organization that will be useful to accelerate and also to reduce our overall structural cost. For sure, that remain our main target to continue and to go to really to work on Scope 1, Scope 2, and also the Scope 3. That is our plan, and we go ahead with determination. The second question? Massimo?
Second question about what we are doing. We are doing something in Italy and abroad. In Italy, mainly, we are helping hospital to cope with this critical moment. We provide them breathing systems. We help them to set up additional beds to assist the more critical people. We did it everywhere in Italy, from south to north. Maybe I leave the floor to Alessandro to give you some detail about what we are doing abroad.
Okay. Abroad, basically, we are adopting same strategy. In each of our subsidiaries, we are in contact with the local health authorities. According to their needs, we are helping in the response to the COVID by providing either beds, ventilators, or personal protective equipment when required, and always in accordance with the local health authorities.
Jessica, would you like the next question? The next question is from Jason Kenney of Santander. Please go ahead.
Good morning, wishing everyone at Eni and on this call good health and sanity at this time, crazy as it is. I've got a couple of questions, if I may. The first on going back to CapEx. Out of the EUR 5.5 billion, how much of that is absolute minimum maintenance CapEx, do you think, in 2020? The second question, I think you commented that the 1.75 million-1.8 million bpd volume guidance for this year is pre-OPEC cuts. I'm just wondering if any of the OPEC nations, or indeed any country that is going to support production cuts later in the year, has contacted you about field restrictions. I know you've mentioned a 40,000 bpd contingency. Is that purely for possible OPEC cuts, or is it contingency on operational procedures?
Just a bit more color around where volumes might be impacted if OPEC were to contact you. Thanks.
Okay. Sandro, you can start talking about, I think both, because the first question is about the minimum CapEx for maintenance, and the second, if somebody's already contacted us and if there is a contingency in the contingency for OPEC cuts.
Okay. We always divide our CapEx in CapEx that are related to development project, production optimization, and also what we call it as mandatory CapEx, that are the one that are related to basically our asset integrity. The level of that CapEx is around EUR 2 billion per year. This is our minimum CapEx level that we have to maintain to ensure full asset integrity of our operation. The other question?
OPEC. First, if countries start contacting us, and we have a contingency in our plan.
Okay. In our plan, we have a contingency of 40,000 bbl of oil equivalent per day. That is covering also possibility of some OPEC cut. To date, we don't have any request recorded to date of OPEC cuts from our producing countries.
Okay, many thanks.
The next question is from Irene Himona of Societe Generale. Please go ahead.
Thank you very much. I had two questions, please. Firstly, thinking about the two affiliates now, ADNOC and Vår Energi, can you tell us what they contributed to the first quarter results, either in terms of profit or dividend? Then what you expect from them for the full year, please. My second question, Claudio, as you mentioned, you worked hard over the last few years to strengthen the balance sheet, and all your actions, in response to this crisis, is indeed to protect the integrity of the balance sheet. What would be the maximum, the ceiling, level of leverage that, in this environment, you would be prepared to tolerate? Thank you.
Okay, thank you. I think that for the first question, also the second question, Massimo can answer, please.
Okay. As far as ADNOC and Vår, in terms of cash, talking about Vår, we already cashed in our share of EUR 150 million of dividend. That is the first quarter dividend. Because of the situation, definitely we distributed what was available to be distributed in the first quarter. Then we are waiting for more clear information ahead in order to decide what to do in the remaining 3 quarters. Last year, we distributed something in the range of EUR 850 million, 100%. I would say more clear decision on this respect will be taken probably in June, July, talking about the second quarter and the remaining quarters. Maybe Pino could give you some additional detail, as far as ADNOC, and then I'll be back talking about the leverage.
ADNOC in the first quarter of this year, had the general turnaround of Ruwais East and West. The general turnaround is already finished and happened at just in the same time of the development of crisis in China for COVID. This is a good news. Now the units are already in operation, and the refinery is quite empty because the turnaround. It's ready to supply the Far East, where the crisis is finishing, and the consumption is increasing. We consider to be in a good situation to cover the market after the crisis from Ruwais. Notwithstanding this, we consider it in the second quarter, a conservative throughput of the refinery around 60%, considering the queue in April of the turnaround and the ramp up slowly, in parallel with the growth of the consumption and the full utilization in the second half of the year.
Irene, in term of leverage. It's a bit difficult to make such a projection this year due to the very high volatility. For sure, we will be a bit more precise, in July presenting the first semester. The first attempt should be this year, notwithstanding all this volatility, to try to stay below 0.4 in term of maximum leverage.
Thank you very much.
The next question comes from Mr. Martijn Rats of Morgan Stanley. Please go ahead, sir.
Hi. Hello. Thanks for taking my questions. Frankly, a lot of them have already been asked, so I only had one. Clearly, 1Q saw a significant sort of decline in earnings, but it doesn't look like 2Q is going to look any better. It's a little difficult to gauge what the incremental impact is from here on 2Q results. Now, the closer we get to second quarter results, the more difficult it is, I would imagine, for you to brief the market on it. This might be an opportune time. Could you talk us through generally what your observations are when it comes to the second quarter and the factors that could impact earnings from here on?
Sorry, if I understand, you want to understand some color about the second Q and how it can be for us? Didn't catch your question.
Yeah. Exactly.
Okay. As I told you, we can analyze from different point of view, because in the COVID-19, it's really propagating in different parts of the world with different timing. What I can say that from a downstream point of view, from a retail or marketing point of view, we see that we have some recoveries and is recovering. Also, you see that refining in the first quarter, in any case, in marketing, worked quite well in a very quite difficult condition. I hope that we can see some recovery in the second quarter in terms of consumption. That means consumption means also that will be easier also for our productions. I cannot give you from a quantitative point of view, because I will be able just to give you at the end of the quarter.
I think I see the progression positively respect to the last one half month. From a production point of view, that means that our production in Middle East or Far East, is, as Massimo or Pino said before, for May and June, we already sell our production. That is a good point. We see a recovery in China and generally in East Asia. If that happen completely, and we can have a recovery as expected, about 70%-80% on the consumption, that means that give space for our production in the area. We have Africa. Africa is linked in term of our production to the European market, and the European market is, as I said before, for Italy, is improving also in other country, in Germany is already improving, is better than in Italy.
It is improving also for other country, could be good also for our production in Africa. We have another point that is not just COVID-19. Is how the OPEC+ program will be implemented. That is clearly going to impact on the price. As soon they start implementing, I think that we can have an improvement in the price. Should be positive from that point of view in terms of recovery. For the reason I said, clearly we have to analyze and understand the impact of COVID, and so the impact in terms of time of COVID, and the implementation of the OPEC+ resolutions. If the two things are working in the positive way, I think that we can have some recovery in the second quarter.
As we said this morning, the situation is very volatile, and we have to understand now for end of April and May, what is really going to happen for these two points.
Okay, thank you.
The next question is from Jon Rigby of UBS. Please go ahead.
Thank you. Yeah. Can you just, given we're on the call, just give a bit more color detail around the two areas where you're producing below capacity. Libya with the force majeure, Egypt, I think you referenced demand. If you can give me a little bit more detail around that, and also perhaps some indication of how far below theoretical capacity that you're running in both those countries. Thanks.
Can you answer, please?
Okay. Situation of force majeure in Libya is detected now by two main events. One is the block of all the ports in the east side of the country that is blocking, basically, the oil production of Libya. Recently, we registered also an illegal closure of a valve on the coastal line for gas distribution. Currently, we have these two events that are reducing production for Libya. Our expectation are that by end of June, situation should be back to normal, and this will allow us to recover around 30,000, 40,000 bbl of oil equivalent of production from equity production from Libya. Regarding Egypt, situation is still recording a low gas demand, low internal gas demand due to the COVID situation, especially nowadays. We do expect a recovery of the demand with the summer increase of temperature, and so more consumption for power generation.
We expect a recovery of the demand in Egypt in the second half of the year.
Thanks. That's great.
The next question comes from Christyan Malek of JPMorgan. Please go ahead.
Hi. Thanks for taking my questions, and I do hope you're keeping healthy and safe in the same as some of my esteemed counterparts. Sorry to come back on the dividend. It seems to me that on a critical path with the dividend decision is whether we see an end to lockdowns next month. I appreciate it's certainly not binary, and there are many variables, but would it be fair to say that if nothing has changed three months from now, you would actively cut the dividend to protect the gearing and your future CapEx? The way it currently stands, the capital frame does appear already constrained. It seems you're working very hard to protect it with gearing moving higher, and I just want to understand what the industrial logic is to keep the dividend at these levels through cycle and not just in 2020.
Secondly, and I guess linked to the gearing, is there a threshold for yourselves and the board, like a red line you wouldn't cross before prices remain low and gearing continues to rise? Thank you.
Massimo, please.
On both questions, Claudio.
Understood the first one there. I didn't understand the second one.
No, the first one is about the dividend.
Yeah. I understood.
The rationale to judge about the future decision on dividend. May I try to answer, and you can definitely complement, Claudio. Christyan, what you said is not completely right. We are not going to take the decision about the dividend, looking at the lockdown only. We are not taking the decision looking at what's going on in 2020 only. What we are going to evaluate mid-year is a more complex environment, including, by definition, what we expect in 2021. Definitely, if we see a recovery in the overall situation, including prices during 2020, in order not to, we say c ompromise our balance sheet equilibrium.
We see a price in 2021 that is close to our cash neutrality, I would say that the decision would be in some direction. If the situation will be different, I just figure out the decision would be probably the opposite. Now, as I answered to Irene, we try to fix the maximum level of leverage, not the gearing. I would say you can calculate the difference easily. That is the maximum 0.4, we would like not to cross in 2020. Even on this, we will be more precise when we elaborate a bit more in July, based on additional information that we have, as far as what's going on in 2020 and what we can, more grounded, we can judge about what's going on in 2021.
If I can complement what Massimo said. First of all, we are working a quarter. It is just one half month, clearly. As a company, as an energy company and an oil and gas company, we work on long cycle. May make a projection and talking about details with a statistic of one half month is absolutely incorrect. It is not only possible, but it is not reasonable. Clearly, when you talk about gearing, Massimo said, and I agree, the gearing is based on the gearing that I can have, is based on the medium term. What I can do this year and next year, in the three years, how we can recover my debt. It's something that is made by different variables. At the moment, we have really few elements.
Clearly, we showed from the beginnings in the last six years that the debt, so the gearing and the leverage is very important for us, is a priority, is one of also of the basis of our remuneration policies. In this case, we have to understand if what happened in 2020 can be recovered in 2021. I cannot, and it's wrong to react after one half month, and change everything drastically, also for my shareholders. I cannot be schizophrenic without having the right parameters to take a decision, share with my shareholder, and explaining why. The range of hypotheses and the guess are too many now to take this kind of decision. We said very clearly, and we demonstrated that is a priority, the capital allocation, the gearing, the dividend. I cannot be acting like if I run a small motorcycle. I'm running a big truck.
I'm running the life of a lot of people, my shareholders. I have to be reasonable in each step I take. That is my answer.
Thank you.
The next question is from Biraj Borkhataria of Royal Bank of Canada. Please go ahead.
Hi, thanks for taking my questions. Just a couple of quick ones. The first one's on your R&M guidance. This year is EUR 300 million. That would suggest earnings up year-on-year, and given the current environment, at least heading into Q2, looks quite challenging. Could you just run through the assumptions behind that? The second question, another easy one, is for Egypt, that's one of the countries you've highlighted, for the year-on-year declines in volume. Could you just highlight what the contribution you expect to your 2020 production budget is for that? Thank you.
I understand the second question. That is for Sandro. I didn't understand anything about the first question, honestly. If you, Massimo, from there, because I didn't catch what he said. Sorry.
The question is about the assumption underlying our guidance in R&M full year result, about EUR 300 million. I guess that Pino would be in the position to answer.
No, about this is very simple. Our crash program to improve the efficiency, again, to the good result of the ramp-up of Gela Biorefinery and some optimization in the marketing cover in part the effect of scenario and COVID-19, and that we have evaluated in more than EUR 800 million. With this improvement in this area, together with the strong cost cutting and re-optimization of the maintenance in the refineries, allow us to confirm a guidance of EUR 300 million for the year.
Sandro?
Okay. Regarding Egypt production and the contribution to the overall Eni production in 2020, it is around 300,000 bbl of oil equivalent as an average of the year.
Great. Thank you.
The next question comes from Mr. Peter Low of Redburn. Please go ahead.
Thanks for taking my question. Just one last. In your scenario, you see a recovery to $55 oil in 2021, but you still intend to cut CapEx even further in that year. Can you perhaps just explain what's the driver of that? As a follow-up, would investment at that level be enough to maintain your production flat, or should we then assume it's kind of declining at that level of spending? Thank you.
Massimo.
The answer right now would be yes. Even if the scenario will be $55, we will intend to reduce CapEx as we said. Nothing new versus what we said one month ago, when we revised our scenario, $45 this year and $55 next year. It means that we are giving some priority to recover what we are losing in 2020, thanks to the cuts, reducing a little bit our production expectation, but giving priority to the cash in order to increase the cash to be generated that year. We said that thanks to this action, we expect that all in all, our cash neutrality will drop to around $50, $52 per bbl, giving us the possibility to live with some comfort in a world of $55.
The decision will be to keep the CapEx cuts in order to increase the cash generation, keeping production same level as expected in 2020.
Thank you.
For any further questions, please press star and one on your touch-tone telephone.
If there are no questions, please let's close the call here. Thank you.
There are no questions registered, sir.
Okay. Thank you very much, everyone.
Thank you very much. Thank you. Bye-bye.