Good afternoon, ladies and gentlemen, and welcome to Eni's 2018 Third Quarter Results Conference Call hosted by Massimo Mondazzi, Chief Financial Officer. I will now hand you over to your host to begin today's conference. Thank you.
Good afternoon, and welcome to the 9 months result presentation. During 2018, we have continued to grow and strengthen our business model, accelerating cash generation. But let's see more in detail. In Upstream, production was 1,844,000 bureaus per day, up 3% compared to the same period of 17 or 4% if we take into account the PSA price effects. We expect further growing volumes in the last quarter.
Moreover, we will continue to proceed towards the FIDs that we have planned, in particular for Mexico Area 1, where we already obtained approval of the development plan, while we'll progress also with Mene Phase 2 in Congo, Cacio Pea in Italy and Maracas in Indonesia. In exploration, we continue to expand our portfolio of acreage, in particular with the deals we announced during October in Libya and Mozambique. Another important driver of our growth is Gas and Power, which in this quarter has maintained a positive result, bringing operating profit from the beginning of the year over EUR 500,000,000. In this business, we are going to further improve our yearly guidance. Finally, our refining and chemical results, while lower than last year, confirm that the new industrial structure allows greater resilience to fluctuations in oil prices.
Cash flow from operation before working capital in the 9 months amounted to EUR 9,400,000,000, recalling the strong acceleration in the last quarter in which we achieved EUR 3,400,000,000. In the 1st 9 months, free cash generation before net disposal of the period amounted to EUR 4,300,000,000 well in excess of the full year dividend. Our net debt is declining as well our leverage that is now at 15% and is expected to contract further by the end of this year. Upstream is speeding up in terms of economic results and cash generation. In the 1st 9 months of 2018, we recorded a 4% production growth compared to 2017.
This result was achieved notwithstanding the conclusion of the Intisar Gas contract at the end of June. The effect of the expiry was about 40,000 bureaus per day over the 9 months and was more than offset by the new start ups and ramp ups in Angola, Congo, Ghana, Indonesia and Egypt, including the acceleration of Zor that since early September reached the level of 2,000,000,000 cubic feet a day in advance versus our original schedule. Our growth could have been even more sustained if it had not been impacted by lower gas demand in 3 countries, in Venezuela and Libya because of lower domestic consumption and in Glana because of lower gas nominations from the buyer. Assuming that these three effects will continue also in the 4th quarter, which is our most likely case, yearly growth will be around 3% versus the original guidance of 4% at the price level of $60 per barrel. However, it should be noted that this lost production, as long as we envisage it will persist, has only a marginal effect in term of cash generation.
The new production contributed to increase our operating result up to EUR 8,000,000,000 EUR 4,600,000,000 more than last year. This growth was boosted by higher scenario for EUR 3,700,000,000 €900,000,000 by endogenous contributors. Also in term of cash generation, our Upstream confirms its strength. With an operating cash flow of €8,900,000,000 60% higher than last year and the CapEx amount of 4,700,000,000 8 percent lower, we generated an underlying free cash flow of about €4,200,000,000 excluding portfolio actions. E and P is covering its CapEx at around $40 per barrel.
It is worldwide to highlight that E and P free cash flow in 9 months is also higher than our full year dividend. Upstream cash flow per barrel grew to $21 in the 1st 9 months versus $16.7 on average last year. This was based upon an improved scenario and the increased quality of portfolio that benefits from accretive new production in Ghana, Egypt, Angola, Congo as well as Indonesia. This improvement is driving our cash flow per barrel faster than planned towards our total 2021 target of $22 per barrel. In Gas and Power, we continue to achieve important results by beating for the 2nd time the guidance we had previously set.
With an operating profit of BRL 500,000,000 in the 9 months, of which BRL 110,000,000 related to retail, we can now further upgrade our full year guidance to around EUR 550,000,000 This strong result comes from the growth of the LNG business where we envisage 9,000,000 tons of contracted LNG at year end versus 5,200,000 tons last year. These 2018 volumes are 56 percent equity, almost twice the level of last year. The second contributor is power. And 3rd, the greatest competitiveness of midstream, which is combined by a stable contribution of retail business. The downstream has been penalized by margin that are 25% lower than last year.
Refining was affected by the appreciation of sour crudes due to U. S. Sanction on Iran and the euro exchange rate that worsened our breakeven by $1.4 per barrel. At budget scenario, the breakeven margin is $3.4 per barrel in the 1st 9 months, but is expected to fall to $3 $3.2 on average in 2018 and further down to $3 per barrel with the restart of East project during the first half of twenty nineteen. The robust contribution of marketing, however, ensured an R and M result of over €200,000,000 in the 9 months period.
In our Chemical business, we delivered a positive contribution, notwithstanding the rapid increase in the euro price of virgin naphtha and the growing supply of ethylene from U. S. Plants. In terms of cash generation, we reached a level of €9,800,000,000 For 2018, assuming an average Brent price of 72, dollars we estimate an operating cash of €13,500,000,000 Our operating cash flow will cover CapEx estimated at €7,700,000,000 and generate an organic free cash flow of almost €6,000,000,000 twice our dividend. A further benefit derived from portfolio activity that contributes €300,000,000 Leverage at 18% and gearing 15% at the end of September will be further reduced in the 4th quarter.
And now, together with Anytop management, I'm ready to respond to any question you may have.
The first question comes from Adolphe Thobas with Credit Suisse. Please go ahead.
Good afternoon. I have three questions, if I may, and congratulations on the strong 3Q results. A lot of good things are happening in Egypt at the moment, so I want to focus my questions on Egypt. Firstly, you mentioned you've obtained a 10 year extension of the Great Norils area, which is great. But perhaps since production there has often surprised positively on the upside, can you perhaps talk about the profile we should expect for Nora's and the remaining prospectivity of the license area?
Secondly, on ZO, the ramp up is performing better than expected. I wonder whether you can comment on how the reservoir is behaving so far and whether the previous or the current plateau target could be raised? And then finally on Egypt as well, I wanted to know if you've spud at the Knorr prospect and if you are happy to share with us the pre drill P50 estimate for this well. Thank you.
I leave the floor to Antonio and Alessandro to answer your question about Egypt.
Okay. Concerning the Nourous, I think we are as you know, that we are producing a stable SEK 1,200,000,000 cap per day within synergy with the Abu Madi facilities. We have already launched a pipeline connecting the Abu Madi facilities with El Gamil in the cost because we have spare capacity. This will allow us to continue exploring Neuruz for the future, possibly expanding the production. But in addition, the pipeline we're going to connect Saltim West, which left already a lot of exploration to be done.
And this is the large prospectivity, which imply an extension of 10 years for that part of the development area in Nain Delta. On Zohr, we are progressing our plan in anticipation with Train 5, which is going to be on stream in March. Then we'll continue 6 and 7 between June September to reach the POD value with an upside of additional S1 1,000,000,000 cap, which is going to give us the opportunity to produce 3,200,000,000 scarp per day within next. Concerning the reservoir, I leave the floor to Alessandro to tell you exactly how it's producing the reservoir of Zohr. Thank you.
Okay. Good morning. Reservoir of Zohr is currently delivering extremely good performance. Pressure depletion is hardly detectable. And certainly, receivable performance, they will sustain the increase of plateau just mentioned by Antonio.
So we will target to achieve by end of 2019 a target of 3.2 Bcf per day of production.
Okay. Maybe Luca could answer the Nour question.
On Nour, we start drilling the well at the end of September, so we are in a very early stage. What I can share is that nor is a sizable prospect and this is our expectation for the wild.
The wild. The
next question comes from Alastair Syme with Citi. Please go ahead.
Yes. Hi. Just a couple of outlook questions. I think you previously talked about the LNG market as you look to market Mozambique. I think you said earlier in this year that you might look at taking 50% equity and that the LNG markets will probably not support more than a 12% slope.
I just wonder if you can sort of update us on the current state of the LNG market as you market that gas. And secondly, could you just talk a little bit about the MOU you signed with Gotomina? What's your intention and what sort of returns criteria will you use on investment?
I'll leave Massimo Montalani answering your question about the LNG market outlook.
It was a great year for LNG, and it was an unbelievable very great quarter. If we consider that the JKM reference price in August was $10.5 and which is even higher than actually what we expect in November. And on the other hand, for the LNG market, we also have to consider that most of the contracts are all based. And in terms of what we buy, which is good for our upstream side And of course, for us, it's a little bit less good. But on the other hand, what is key and important for us is that E and I makes a profit.
In terms of Mozambique, the discussion which has been taken with our partners is in respect of actually going ahead and taking marketing out of the critical path for taking a final investment decision, and this is still the status. And we are still all targeting for a final investment decision to be taken in 2019. And we do believe that, that gas would be important to be added to our portfolio of LNG. I have to mention that this year, we will sell about 7,500,000 tons as compared to 5,000,000 tons of last year. And what is more importantly and was also mentioned by Massimo before is that we had an increase on the quarter, which is coming from our own equity, which is more than 50% this year as compared to about 30% last year.
And that has we also said in the 4 year plan is going to grow. We are targeting a portfolio which is sizable enough to take all the opportunity. And the contract at the end of this year will be already 9,000,000 tons. And so we are more than in line than what we envisage in the plan, which was about 12,000,000 tons by 2021. So we are increasing more than that.
Okay. So about Petalina, if you are referring to the MoU that has been signed about the chemical business, this is an MoU aiming at expanding the relationship between the two companies. So the main target for the time being is to explore the wide array of potential new opportunity across the entire energy value chain, but targeting mainly, as I said, green refinery initiative. We are transforming JLR and Venice, and we are, the moment, the first in doing such a transformation. Perpamina is very well interested in exploring alternatives such as the one that we are doing in Italy.
So that is the main scope of what we signed.
And can you just remind us what sort of returns criteria you're using in downstream investment?
So this is really, this is a period of studies in this respect. But if I give a look to the expected return from the green refinery right now what we are doing in Italy, in Gela. And then it's definitely the internal return we expect today is higher than 10%.
Okay. So higher than 10%. Yes. And so can I just circle back on the Mozambique? As you market Mozambique, is it still the intention to put roughly 50% on equity?
Is that still the time?
Yes, it is. I mean I think the key issue, as I told you, is that the offtake will be taken by the patent's pro rata to their respective participation in the project. And so that's equity for us.
The next question comes from Thomas Klein with RBC. Please go ahead. The next question is from Jason Gammel, Jefferies.
Any updated thoughts on the potential for the restart of the Damietta facility in Egypt, any progress that's been made there? And second question on the chemical business, can you talk a little bit about how you think about the medium term competitiveness of the polyethylene business, just given that one of the factors that you cited for the weakness in the quarter was the surge in volumes from the U. S. Because that looks to only be increasing over the course of the next several quarters.
Okay. Massimo, to answer the Dermotja question.
And preferably, Dometa has not been working in terms of taking out LNG since a few years. And now the condition of the market is completely different. And now with all the production that is coming out in Egypt and not only in Egypt, actually in the future, South African also be aggregated from bordering areas to have it look pretty good in respect of the start of the meter. There are ongoing discussion, which are quite advanced, and I think it's the interest of all parties that the meter could start as soon as possible. It takes about once an overall agreement is reached, something like 3, 4 months to start.
But I wouldn't be surprised if we don't have the meter on work next year. Nevertheless, this is the object of the discussion which are taking place.
So Alberto, the Chemical Business CFO, will answer your question about the Chemical Business.
Thank you, Jafrit, for your question. Yes, indeed, in the Q3, Versalis recorded a negative effect on the scenario, driven by the polyethylene business. But you have to address these negative effects on as the comprehensive combination of events, the rapid increase in the price of NAFTA, a strength in dollar and a relatively lower demand for polyethylene in Europe. It is quite difficult to project this volatile market of the quarter in the coming months. For sure, as a general trend, we can say that in Europe, there is a growing trend in substituting naphtha with ethane and there are growing fluxes of ethylene from the USA.
But at the same time, Europe is still enjoying a very strong demand growth, definitely healthier than in the last 2, 3 years. And so these growth in demand could rebalance the pressure from rising oil based feedstocks.
Thanks very much.
The next question comes from Harry Tarr with Berenberg. Please go ahead.
Hi, thanks. I just had a couple of questions. One was on higher gas realizations, which were clearly a driver for the quarter. Were they higher across the board? Or were there sort of specific regions where you benefited particularly?
And then secondly, on the Gas and Power business, you've obviously increased the profit target for the year. Is the bulk of that being driven by LNG? Or are power generation, midstream, retail also adding to that change in guidance?
Thanks. So as far as the gas sterilization price, I mean, the gas sterilization in the NPEs, essentially, the growth that we recorded in this quarter was driven mainly by the new production, new ramp ups in EP production such as definitely Zohr. Zohr, you remember, we never disclosed exactly the formula, but what we said that the formula is partially linked to the oil price. So today, with the oil price at $70, dollars 80 per barrel, definitely, we are benefiting from the higher range of the price formula. The same for the new gas production that is coming from John Creek.
So this is another good example of high price gas that we are increasingly producing worldwide. But let me complete you correctly, you've noticed the increase in the gas refrigeration price. Let me also add that the at the same time, the cost that we incurred to produce this additional quantity of gas is really competitive because definitely the most important example is ore that has been developed in a very low scenario in term of cost, but even John Creek benefiting from a very positive scenario. So what we are harvesting right now is the best margin that is the result of high prices and the low cost sustained to develop this gas feed. As far as the composition of the Gas and Power result, maybe I leave the floor to Marcio Montovali.
The key strategy for this year was based on 2 pillars, which was the turnaround of the legacy contract and assets and the integration that helps in respect of LNG. And I think that both worked pretty well this year. And all line of business, which is in Gas and Power, work as well. I mean, starting from retail business and also I have to mention specifically LNG. LNG was one of the top performer.
As I said before, we increased the amount of volumes quite significantly, mostly upstream. Jank Creek was a pretty good source for that, also for extra volumes. And considering the pricing that we had in the market, which were quite exceptional, I mentioned before referring to JKM, but not only also in the European gas market, it was a pretty good moment, in particular in this quarter.
Okay, thanks.
The next question comes from Rafa Gutai with Bank of America Merrill Lynch. Please go
ahead. Good afternoon. Thank you for taking my questions. Just the first one, turning back to European Gas. Can you just remind us on your exposure on to spots versus longer term structure in Europe?
And then secondly, your production guidance on entitlement is 3% at $60 Just given that we're running at about $72 year to date, can you just remind us on the sensitivities of that if you were to run that at year to date numbers?
Okay. I'll give you right now the answer to your second question. So the sensitivity is more or less 10,000 BOE. So dropping from 72,000,000 that is the number at which we are running the Q4 to $60 per barrel that is the level of Brent at which we are giving the guidance. So $12 per barrel means more or less 10,000 bureaus per day.
And maybe I'll leave the floor to Massimo to answer the question about
you. We have a quite complex aggregated portfolio from the European Gas base, of course, on the contracts long term with different source. And in terms of sales, something like about between 25% 30% in general terms is actually sold on the spot market. It's also an issue of optimization, which is done constantly. And we also have to consider that in all this, of course, has a way to also the logistic that we acquired in the past in respect of the gas business.
The next question comes from Jason Kenney with Santander. Please go ahead.
Hi there. Welcome on results today. Going back to theme from an earlier question, if I might, on oil and liquids realizations. I'm just trying to take down to see where there were perhaps some regional supports in oil and liquids realizations, particularly looking for Kazakhstan and Italy to see if they were above normal? And then maybe also the general trend.
Think in 2016, the discount versus Brent for E and I was 10%. In 2017, it was 8%. On a year to date basis, you're 7% discount versus Brent. So I'm just wondering what I should be thinking about that trend going into 2019, please?
The most important reason why we reduce the discount versus Brent is the quality of our production. If you think about the most important contributor of new production such as Goliath and Cascagun, for example, so high quality of oil, definitely they are contributing significantly to the net price we're going to get from the market. We do not expect significant changes in this discount overall as far as 2019.
The next question comes from Alessandro Posit, Mediobanca. Please go ahead.
Thank you. I have a couple of questions. The first one on Venezuela. You mentioned a bit lower production there. I was wondering if you can maybe give us an update on the situation in Venezuela also in terms of receivables.
And going back to the Ezzor previous questions, you mentioned your target is to increase production to 3 0.2 Bcf by the end of next year. I was wondering if that is subject to the restart of Dermietta or not? Thank you.
Okay, Alessandro. So as far as Venezuela, the situation remain a critical one. So the reduction in gas taken by PDVSA, as I said before, is expected to remain in place at least by the end of this year. And we will see the reduction. We guess it's caused by the reduction in domestic market consumption together with, I would say, some technical problem that PDVSA is having in these power plants that now are suffering because maybe they are short of the part to have that plant back in production after maintenance.
In term of financial exposure, the news are not so bad because the level of exposure we are succeeding to take is quite stable. We are talking about something less than $700,000,000 We are receiving some payments anyway notwithstanding the situation. So on this respect, we are in line with the projection we made at the end at the beginning of this year when we definitely took into consideration the quite difficult situation in country. And maybe I can answer also because it's quite easy the question about Zohr. No, definitely, the target of 3.2% definitely is not related to the restart of Daimlera.
Thank you.
The next question comes from Jon Rigby with UBS. Please go
ahead. Yes. Hello. I think both of these questions are for Massimo. The first is, when we met in March, you had a slide that talked about the leverage target and share buybacks for excess cash distribution.
So I guess given where your performance has been, where the macro has been, that scenario is now starting to come into view. I think it feels to me that the industry is thinking hard about where it should exit a high cycle conditions in terms of gearing and so sort of balancing gearing versus buybacks. I wondered whether you could just share with us some initial thoughts about that, obviously early days, but I guess you'll talk about it in 2019. But some sort of thought process around where you want to be with respect to your leverage targets and what you would then leave over for buybacks? The second question is just on tax rates.
We seem to now be leveling out in the Upstream at about 55 percent or so tax rate. Is that a good number to use going forward at these kind of oil price conditions? And then also secondly, your Downstream businesses actually seem to take quite a high tax charge, I think, about where corporate tax charges are globally. So I just wondered whether maybe you can shine a little bit of a light on that.
So in terms of leverage and cash distribution and buyback, John, as you said, maybe the good timing to talk about any decision is would be March February, March 2019, where we are going to present our new strategy. But definitely, what I could say that term of aspiration to maintain progressive dividend together with the buyback while we perceive a leverage below 20% steadily remain in place. And on this respect, I would say that what is going on, what we are doing in term of performance, in term of implementation of our strategy is running very well. So the cash we are producing is significant. You have seen that the leverage dropped below 20% for the first time in the Q3.
As I said, we expect the leverage to be even lower benefiting from the cash we're going to generate in the 4th quarter. So March would be the right time to tell you when and how much, but we are really on the right way to implement what we said on this respect. In term of tax rate, yes, assuming a $70, dollars 75 Brent scenario that you know is impacting significantly our tax rate on the upstream business, that definitely is the most is the most important tax contributor in our group. Something in the range of less than 60%, something in the range of 55%, 58%, that would be the right guidance for this year, the full year and as well as in 2019, while the cash tax rate is expected to remain in the range of 30% as it is in for the 1st 9 months. And in term of tax rate on downstream, let me see the detail.
I see a 40% tax rate that is a bit higher than the Italian tax rate. I don't have a specific answer in detail. So maybe I'll let you know, John. So the tax rate is 40%. Why is higher than 30%, 27%, I'll let you know.
Okay. Thank you, Marcel.
The next question comes from Rob West with Redburn.
First one I'd like to ask you is about your long run guidance for the Gas and Power business. I think back in March, that was targeting €800,000,000 by 2021. And this year, you're effectively coming in at double what you're targeting. You spoke a little bit earlier about having more volumes in through the gas business, particularly on LNG. And so my question is, would it be right to assume that, that long run target is moving upwards as well or should be when you come to revisit it in March?
The second question I have is about the evolution of upstream OpEx. It's not a number that we see in closures. And so I was wondering if you could comment on whether you're managing to keep costs where you want them to be or seeing anything in there that requires a bit of focus to address inflation coming back? Thank you.
Okay. In terms of Gas and Power long run, so as Massimo said, definitely, mainly in mid gas, the result we are achieving in 2019 has been definitely positively affected by the scenario, scenario that has been really positive on all the sub businesses included in midstream. So the clean spurs spread in power, the gas price, the LNG price in Far East and elsewhere. So we have been surprised. That's the reason why we adjusted twice the guidance because the scenario that we are justifying is definitely higher.
So on this respect, we believe that the adjustment, the scenario we are assuming, we are going to assume to reproject our full year plans will be lower than this based on normal condition. But at the same time, the result we are achieving to testify that the industrial activities, the progress in term of lower cost, higher margin in term of clients talking about retail is progressing even a bit faster than expected. So no reason to change the guide today. And as far as 2019, definitely, we will touch base more precisely in March. But definitely, what we could say right now that we are going to project something that will be global in the range of €400,000,000 €500,000,000 in term of EBIT, expected EBIT.
In term of upstream OpEx, now we are the actual numbers in the range of $7 per barrel and $7 is something that is that we are confident and we believe we can take. Also because we are not testifying any significant inflation increase in the market right now. So no sign that the 7% could be higher, for example, in 2019.
The next question comes from Irene Himona with SG and A. Please go ahead.
Thank you. Good afternoon, Massimo. I had three questions, please. Firstly, you mentioned how robust marketing was. I wonder if you can split for us for the Q3 9 months the refining versus marketing EBIT, please?
Secondly, working capital. You've been releasing cash for the last couple of quarters. I wonder if you can give us any sort of guidance, any indication for the Q4 expected working capital. And then finally, back to Gas and Power, which obviously surprised positively with the profit. I think I'm right in saying that you say the results the adjusted result includes EUR 40,000,000 from derivatives.
I just wonder if that is correct, if you can share with us the rationale for not stripping out the EUR 40,000,000 from adjusted profit. Thank you.
Okay. So in terms of split between refining and marketing, So as far as the 4th quarter, we are talking about a full result of SEK140. So marketing is 143, while refining is more or less at breakeven, considering that we had a slight recovery in the refining margin in the 3rd quarter. Talking about the 9 months, marketing EUR 372,000,000 while refining was negative EUR 154,000,000 percent, so for a total result of more or less year as far as marketing. While looking at the margin we are experiencing as far as refining in October, we expect a slight loss in refinery in the 4th quarter.
In terms of working capital, so we are doing what we promised. So as far as now, the 9 months actual, we I'd say we fully recovered the EUR 900,000,000 that has been absorbed in the Q1. And we expect a positive contribution from working capital in the 4th quarter in the range of very few 100 of €1,000,000 of euros. In term of derivatives, I can't give you an answer because I maybe it requires a bit of time. So Irina, I will back to you, explain the rationale of what you are asking for.
Thank you very much. Thank you, Neisse.
The next question comes from Massimo Bonisori with Equita. Please go ahead.
Good afternoon. Two quick questions left. Could you give us some color on the start of exploration and production activities in Libya from the asset recently acquired from BP? And the second, do you have any progress in the farm out process of the Area 1 in Mexico?
Well, Antonio will give you the answer about the BP exploration activity in Libya.
As you know, the for me, including 3 blocks, A, B and C, which A and B are in close to WAFA. So that is the main synergy we have seen jointly with BP and NOC. And this is the objective since we have enough spare capacity in the area of Wafaa, and this is can be one of the area which will kick off quite quickly. And the rest will be offshore. Definitely, we should work a little bit more on that.
Okay. Marcimo, it's Fares. The farm out in Narayual in Mexico, we are proceeding. We are in negotiation phase. We do not expect to cash in any dollar by year end.
I guess, we'll let you know why we are completing the deal.
Thank you very
much. The next question comes from Lucas Hermann with Deutsche Bank. Please go ahead.
Yes, thanks very much. Good afternoon, gentlemen. Couple if I may. But first, just a point of clarification, Massimo. Your statement or the slide on strong cash generation, which shows you've delivered CFFO of €9,800,000,000 in the 1st 9 months, Does that include the sum that you've received to Zohr?
I presume it does, but just to make sure. Secondly, I just wanted to ask if you could expand a little bit on the litigation in the U. S. Around regas. What the actual cash outflow on that litigation might be to you?
And what the benefit to P and L and cash flow longer term maybe as the regas obligation isn't there any longer? And thirdly, if I could, just on Jan Creek and LNG volumes, to what extent are you overproducing, if I can use that phrase at the present time in Indonesia and driving more gas through Bontang than perhaps had been planned?
As far as the cash flow, yes. As we wrote in the chart we presented a few minutes ago, chart number 8, the 9.8 as well as the 13 point $5,000,000 does include the more or less $450,000,000 we cashed in as a later payment relating to the disposal to Rotmester and to BP of shares in Zohr. And as far as the Bontang and Indonesia, I'll let Antonio maybe answering your question.
Yes. So as been mentioned in the previous call, the spare capacity of our FPU in Yang Creek allow us to produce more because also the reservoir is performing much, much better. Initially, the plateau expected from the reservoir was 450. But since the start up, the higher performance allow us to utilize the additional capacity of the FPU. And today, we are ranging production between the 697,000,000 SCAF a day.
Antonio, what does that do to the reserve space? It obviously draws it down more rapidly. But are you upping reserves effectively at the same time? Or are we just seeing the more rapid producing now?
We have recently made all this buildup on the reservoir, and we have seen we have much more reserves. But the expectation is also that Meracas has been designed also to come in on a decline of Jan Creek, which up to now is not coming up. We are making additional development on Garcreeq and the workover, which will keep the plateau longer than the expectation.
Thank you. And then on U. S. Regas, Massimo?
Okay. And as far as the Pascagoula regas arbitration outcome, what we'd like to pay is written even in our financial statement is the amount is EUR 286,000,000 The amount that we have to pay as a result of the arbitration, we believe is a good as a result, taking consideration the obligation we signed a few years ago when the prospecting in term of the worldwide LNG market, mainly the U. S, was completely different. And this amount has to be paid, I would say, shortly.
And what's the future saving and benefit to Gas and Power that we should expect to see?
No. And
you don't have to
pay that?
For the group or then Gas and Power, I would say significant savings.
Sorry, what does significant mean?
I cannot release exactly the number that is based on our internal valuation, but significant means definitely not some tens of 1,000,000 but 100 of 1,000,000.
Right. But that's not I'm sorry to go on. And that benefit will be seen in which division?
So the installment up to the arbitration outcome in term of cost, where the installment was written in the NPE profit and loss.
The next question comes from Thomas Klein with RBC. Please go ahead.
Hi, Paul, this is for earlier. Thank you for taking my question. Just following up on the one about your MoU at PerTamina at Sheila. Can you talk a bit more about the pilot waste, the fuel plant that's being built by Sundial, I believe? Any more detail on what you're trying to do there would be helpful.
For instance, how big a scale it could potentially become? Thank you.
Yes. On the waste of fuel technology, we have to say that EMEA has protected this technology with 6 registered patents. And that the bio oil obtained with this technology can be used to produce an ultra low sulfur bulkhead oil, which is
compliant with the new IMO regulation.
By the end of 2019, the new Gela pilot will be started up, and we are engineering so far a Simindasco scale plant in Ravenna. We are also studying other plants at the larger scale, which we expect to have a significant return.
And those larger plants, they would presumably be at existing E and I refinery sites? Or would you be considering new ones elsewhere?
It's something that we have to decide. So we can't give you an answer right now about this.
Okay. Well, thank
you. The next question comes from Lydia Rainforest with Barclays. Please go ahead.
Hello there and thank you for taking the questions. I have 2, please. The first one was on Union and Finosa Gas and just particularly in the context of the Daniele plant restock. Are you happy with the current Union Gas Finosa Gas shareholding? Or would you look at taking that to the full 100 percent?
And then secondly, on cash flow per barrel in the upstream, is that better at this oil price than you thought it would be? Thank you.
So in terms of relationship with Natuzzi, maybe I'll leave the floor to Marcio and I give you the answer about the
Yes, we are happy. We are happy with the current situation, and we are not looking to change it at the moment. And of course, every project is always alive. But for the time being, we are with them. We are working well.
We are trying to have the clients restarted. We are talking with the Egyptian side, who are actually also somehow in the demeter because 20% is owned by Aegis. And we just have to conclude these discussions with all the partners involved to have the plan to restart as soon as possible. This is what is going on.
And about the unit cash flow in E and P, yes, Lydia. What we are getting is something slightly better than expected on top of the advantage we are taking from the oil price, so the scenario. So that's the reason why I said that we are progressing ahead of schedule in getting the $22 per barrel result that we projected in 2021. And to give you more color on this, what I can do is to give you maybe the breakdown of what we are getting after this 1st 9 months in term of cash flow from operation in E and P. So you have seen that the cash flow from operation grew by €3,400,000,000 in the 1st 9 months versus 2017.
And the overall growth is related as far as 70% to the scenario, which is definitely being positive as far as the price is slightly negative in term of exchange rate. And as far as 30%, it means EUR 1,000,000,000 is due to endogenous factors. So an increasing value of our production, increasing volumes, reduced costs that are performing slightly better than what we expected when we performed the budget.
Lovely. Thank you very much.
The next question comes from Alwyn Thomas with Exane.
Just a couple of quick ones for me. Firstly, can I get an update on the list of FIDs that you're looking to achieve by year end? And the second one is just on Libya. Can you just give us an update on the current operations and liftings you're able to achieve there? And maybe what your outlook is into year end.
Maybe I'll leave the floor to Alessandro as far as the FIDs are concerned and Libya, I'll leave the floor to Antonio.
Okay. The planned FID from now to the end of the year are Casiopea in Italy, Mexico Era 1 and MA Phase 2B in Congo. And then we are working to bring also FID of Merakes in Indonesia across the end of the year.
Okay. Concerning the operation, all plants are running quite well. Unfortunately, we've been suffering some reduction on local market requirements due to power plant failure in country. There is a little improvement in those days. But definitely, the production of gas is available from our side.
Anyway, we're monitoring the situation of the power plant. And hopefully, we're going to garner up again as previously. Thank you.
Can I ask what volume you're at currently?
The volume for local markets is moving between 19,000,000 to 21,000,000 cubic meter per day. This is the range normally they are receiving from the gas producer between WAFA and Melita with Sabrata platform. Okay. Thank you.
The next question?
In respect, it's worth mentioning that definitely we believe that the domestic consumption is going to recover because we are talking about a few 1,000 BOE equivalent per day in terms of lack of demand. But it's worth taking into consideration that we always have the possibility to export gas, to apply for the export of gas in the UK, the situation would be worse or last longer than expected today. So that's the reason why we are not particularly worry about potential economic impact in the longer term.
The next question comes from Christian Malek with JPMorgan, please go sorry, with Martin Ratz with Morgan Stanley. Please go ahead.
Yes, thanks. All right. There was some introduction. I had 2 that I wanted to ask you. On the last conference call, you made some comments about buybacks depending on the trajectory of the balance sheet.
I think this sort of builds a little bit on the question that Jon asked earlier as well. Given that the balance sheet is de geared to fair a bit during the quarter, can you update us on your thoughts on buybacks? And secondly, I wanted to briefly ask you about the credit rating downgrade.
My suspicion is that this
does not have a big impact. I mean, it largely reflects Sovereign. But I was wondering if you could make some comments about it in terms of if there's anything you can do to address this, how important this is, etcetera?
Well, in terms of buyback and leverage, I already said that the trajectory, as you said, is positive. So 18% expected to drop further by year end, projecting a pipe to be in the range of 70%, 75% in 2019, we used to have a longer good trajectory on this respect. So the execution in our strategy is going ahead very well. But as I said, final decision and announcement about even quantities in cash and buyback is postponed to March 2019, Martin. And in terms of downgrade, I really believe that we did not deserve this downgrade that is due to the strict rule applied by Moody's of the 2 notches of maximum difference between government related entities and the sovereign rating.
Even Moody's recognized in this report that we are performing even better than expected. So really, this decision is going to penalize at least in term of info that has been circulated more than we deserve. Anyway, I do not believe that this decision will negatively impact on our financial capability, Our balance sheet is stronger and stronger. So definitely, I'm not worried about this. But anyway, I believe that definitely has been a wrong decision and we didn't deserve it.
Great. I'm going to talk with them explaining maybe better and better our financial situation, how strong is our portfolio, how good our perspectives and see if there is a possibility to apply the exception that I believe could be applied in term of this 2 notches strange move.
Okay, wonderful. I appreciate that. Thank you very much.
The last question comes from Christian Malek with JPMorgan. Please go ahead.
Yes. Thank you for taking my questions. And just as a follow on from, I guess, my colleague from the house of Morgan. The question around buyback, I think to sort of break it up into a follow-up. To what extent are you getting sort of more involved discussions from the Italian government in terms of how you think about your capital frame.
Are you seeing sort of a change in how they interact and sort of special micromanage? Or is that just my imagination? And in terms of the philosophy around buyback, just to be clear around your priorities, can
I is it fair
to assume that this the
trigger is the trigger, but
in terms of M and A or areas of sort of opportunities you'd like to sort of take advantage of, would that take priority over any potential buyback as you start to de gear or continue to de gear into Q1 next year? And then just a second question on in Egypt. With the new gas law and easing up in terms of their fiscal regime, as they sort of talk about looking to allow you to basically secure full production or full share of production and now you basically companies would bear the entire cost of exploration and production. And with that being able to sell in terms of not being able to sell it at a preset price in the Ministry of Electricity. Does that new laws of regime shift apply to all new contracts?
And how does that influence how you think about allocating CapEx to Egypt going forward? I presume it's retroactive, so it's going to be forward looking on new projects. So I'd like to see how that sort of evolves and how you would think about that in terms of allocating more or perhaps less CapEx into Egypt?
No, no effect to this law about our prices and our contracts. Yes. As far as buyback, so buyback is a priority. So we said that our remuneration policy is based on the 2 legs, the progressive dividend and the buyback. Buyback is linked to the condition linked to the leverage.
As far as this condition will be respected, we'll go ahead in performing in the strategy, in the eventual policy that we announced. We also said sometimes Claudio also mentioned that any M and A activity that could happen, talking about asset and so on, will not jeopardize the performance on this respect. So in case both of them would be accommodated. And definitely, no relationship with what's going on in Italy together with the buyback. Buyback is a decision we are taking.
We will take looking at our numbers, our business perspective scenario and so on.
Okay. And on Egypt?
Okay. Egypt, I said that we don't have any impact on this new rule. So the gas price is fixed. And so I do not see any direct effect on our decision on our current asset or any future decision about the capital allocation. The situation remain as it is, and the parameters we take into consideration to evaluate the project will remain the same.
So no impact from this new legislation, Christian.
Okay. Thank you very much.