Good afternoon, ladies and gentlemen, and welcome to Eni's 2018 third quarter results conference call hosted by 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 will have the opportunity to ask questions by pressing star and one on your touch-tone telephone. I will now hand you over to your host to begin today's conference. Thank you.
Good afternoon, and welcome to the nine-month result presentation. During 2018, we have continued to grow and strengthen our business model, accelerating cash generation. Let's see more in detail. In upstream, production was 1,844,000 barrels per day, up 3% compared to the same period of 2017, or 4% if we take into account PSA price effects. We expect further growth in volumes in the last quarter. Moreover, we will continue to proceed towards the FID that we have planned, in particular for Mexico Area 1, where we already obtained approval of the development plan, while we will progress also with Nenè Phase 2 in Congo, Cassiopeia in Italy, and Merakes 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 million. 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 fluctuation in oil prices. Cash flow from operations before working capital in the nine months amounted to EUR 9.4 billion, recording a strong acceleration in the last quarter in which we achieved EUR 3.4 billion. In the first nine months, free cash generation before net disposal of the period amounted to EUR 4.3 billion, well in excess of the full-year dividend. Our net debt is declining, as well as 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 first nine 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 barrels per day over the nine months and was more than offset by the new startups and ramp-ups in Angola, Congo, Ghana, Indonesia, and Egypt, including the acceleration of Zohr, that since early September reached the level of 2 billion 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 three countries. In Venezuela and Libya because of lower domestic consumption, and in Ghana because of lower gas nominations from the buyer.
Assuming that these three effects will continue also in the fourth 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 terms of cash generation. The new production contributed to increase our operating result up to EUR 8 billion, EUR 4.6 billion more than last year. This growth was boosted by a higher scenario for EUR 3.7 billion and EUR 900 million by endogenous contributors. Also, in terms of cash generation, our upstream confirms its strength. With an operating cash flow of EUR 8.9 billion, 60% higher than last year, and a CapEx amount of EUR 4.7 billion, 8% lower, we generated an underlying free cash flow of about EUR 4.2 billion, excluding portfolio actions.
E&P is covering its CapEx at around $40 per barrel. It is worthwhile to highlight that E&P free cash flow in nine months is also higher than our full-year dividend. Upstream cash flow per barrel grew to $21 in the first nine months versus $16.7 on average last year. This was based upon an improved scenario and 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 second time the guidance we had previously set.
With an operating profit of EUR 500 million in the nine months, of which EUR 110 million related to retail, we can now further upgrade our full-year guidance to around EUR 550 million. This strong result comes from the growth of the LNG business, where we envisage 9 million tons of contracted LNG at the year-end, versus 5.2 million tons last year. These 2018 volumes are 56% equity, almost twice the level of last year. The second contributor is power, and third, 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 EUR exchange rate that worsened our breakeven by $1.4 per barrel.
At budget scenario, the breakeven margin is $3.4 per barrel in the first nine months, and is expected to fall to $3.2 on average in 2018, and further down to $3 per barrel with the restart of EST project during the first half of 2019. The robust contribution of marketing, however, ensure an R&M result of over EUR 200 million in the nine-month period. In our chemical business, we delivered a positive contribution, notwithstanding the rapid increase in the EUR price of virgin Naphtha, and the growing supply of ethylene from U.S. plants. In term of cash generation, we reach a level of EUR 9.8 billion. For 2018, assuming an average price of $72, we estimate an operating cash of EUR 13.5 billion. Our operating cash flow will cover CapEx estimated at EUR 7.7 billion, and generate an organic free cash flow of almost EUR 6 billion, twice our dividend.
A further benefit derives from portfolio activity that contributes EUR 300 million. Leverage at 18% and gearing 15% at the end of September, will be further reduced in the fourth quarter. Now, together with Eni top management, I am ready to respond to any question you may have.
Ladies and gentlemen, let's begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. The first question comes from Thomas Adolff with Credit Suisse. Please go ahead.
Good afternoon. I have three questions, if I may. Congratulations on the strong Q3 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 have obtained a 10-year extension of the Great Nooros 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 Nooros and the remaining prospectivity of the license area? Secondly, on Zohr, 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.
Then finally, on Egypt as well, I wanted to know if you have spotted the Noor prospect, and if you are happy to share with us the pre-drill P50 estimate for it as well. Thank you.
I leave the floor to Antonio and Alessandro to answer your question about Egypt.
Concerning the Nooros, I think as you know that we are producing a stable 1.2 billion scf 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 Nooros for the future, possibly expanding the production. In addition, the pipeline we're going to connect Baltim West, which left already a lot of exploration to be done. This is the large prospectivity which imply an extension of 10 years for that part of the development area in Nile Delta. On Zohr, we are progressing our plan in anticipation with the train five, which is going to be on stream in March.
We'll continue six and seven between June and September to reach the POD value with an upside of additional one billion scf, which is going to give us the opportunity to produce 3.2 billion scf 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.
Good morning. Reservoir of Zohr is currently delivering extremely good performance. Pressure depletion is hardly detectable, and certainly reservoir performance, they will sustain the increase or plateau, just mentioned by Antonio. 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 Noor question.
On Noor, we start drilling the well at the end of September. We are in a very early stage. What I can share is that Noor is a sizable prospect. This is our expectation for a while.
Perfect. Thank you very much.
The next question comes from Alastair Syme with Citi. Please go ahead.
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. Secondly, could you just talk a little bit about the MOU you signed with Pertamina? What's the intention and what sort of returns criteria will you use on investment? Thank you.
I leave Massimo Mantovani answering your question about the LNG market outlook.
Well, 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 $10.50, which is even higher than actually what we expect in November. On the other hand, for the LNG market, we also have to consider that most of the contracts are oil based, and in terms of what we buy, which is good for our upstream side. Of course, for us is a little bit less good, but on the other hand, what is key and important for us is that Eni 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, this is still the status, and we are still all targeting for a final investment decision to be taken in 2019. We do believe that gas would be important to be added to our portfolio of LNG. I have to mention that this year, we will sell about 7.5 million tons as compared to 5 million tons of last year. What is more importantly, and was also mentioned by Massimo before, is that we had an increase on the quota which is coming from our own equity, which is more than 50% this year as compared to about 30% last year.
That, as we also said, in the four-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 million tons. We are more getting in line than what we envisaged in the plan, which was about a 12 million tons by 2021. We are increasing more than that.
About Pertamina, 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. The main target for the time being is to explore the wide array of potential new opportunity across the entire engine value chain, but targeting mainly, as I said, Green Refinery Initiative. We are transforming Gela and Venice. We are, at the moment, the first in doing such a transformation. Pertamina is very well interested in exploring alternatives, such as the one that we are doing in Italy. That is the main scope of what we signed.
Can you just remind us what sort of returns criteria you are using in downstream investment?
This is really a period of studies on this respect. If I give a look to the expected return from the green refinery right now, what we are doing in Italy, in Gela and Venice, definitely the internal rate of return we expect today is higher than 10%.
Okay. Higher than 10, then?
Yeah.
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 plan?
Yes, it is. I think that the key issue, as I told you, is that the offtake will be taken by the partners pro rata to their respective participation in the project, that's equity for us.
Okay. Thank you.
The next question comes from Thomas Klein with RBC. Please go ahead. Excuse me, the question has been withdrawn. The next question is from Jason Gammel, Jefferies. Please go ahead.
Do you have any updated thoughts on the potential for the restart of the Damietta facility in Egypt? Any progress that's been made there? 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 Damietta question.
Partly Damietta has not been working in terms of taking out LNG since a few years. Now the condition of the market is completely different. Now with all the production that is coming out in Egypt, not only in Egypt, actually, in the future, some can also be aggregated from bordering areas, too, have a look pretty good in respect of a restart of Damietta. There are ongoing discussions which are quite advanced, and I think it's the interest of all parties that Damietta could start as soon as possible. Takes about, once an overall agreement is reached, something like three, four months to start. I would be surprised if we don't have Damietta on work next year. At the rest, this is the object of the discussions which are taking place.
Alberto, the chemical business CFO, will answer your question about the chemical business.
Thank you, Jason, for your question. Yes, indeed, in the third quarter, Versalis recorded a negative effect on the scenario, driven by the polyethylene business. You have to address this negative effect as the comprehensive combination of events, the rapid increase in the price of Naphtha, a strengthening 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. 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. At the same time, Europe is still enjoying a very strong demand growth, definitely healthier than in the last two, three years. This growth in demand could rebalance the pressure from rising oil-based feedstocks.
Thanks very much.
The next question comes from Harry Tyrwhitt, 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? 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.
As far as the gas realization price, the gas realization in the E&P business, definitely the growth that we recorded in this quarter was driven mainly by the new production, new ramp-ups in E&P production, such as definitely Zohr. Zohr, you remember, we never disclosed exactly the formula, but we always said that the formula is partially linked to the oil price. Today, with the oil price at $70, $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 Jangkrik. This is another good example of high-price gas that we are increasingly producing worldwide. Let me complete. You correctly, you've noticed the increase in the gas realization price.
Let me also add that 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 Zohr, that has been developed in a very low scenario in term of cost, but even Jangkrik, benefiting from a very positive scenario. What we are harvesting right now is the best margin that is the result of high prices and very 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 Massimo Mantovani.
The key strategy for this year was based on two pillars, which was the turnaround of the legacy contract and assets and the integration with upstream in respect of LNG. I think that both worked pretty well this year, and all line of business, which is in gas and power work as well. Starting from retail business, and also I have to mention specifically LNG. LNG was one of the top performers. As I said before, I increased the amount of volumes quite significantly, mostly upstream. Jangkrik was a pretty good source for that, also for extra volumes. Considering the pricing that we had in the market, which were quite exceptional, as 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 Rafael Gutierrez-Meza 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 spot versus longer-term structure in Europe? Secondly, your production guidance on entitlement is 3% at $60. 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? Thanks.
Okay. I give you right now the answer to your second question. The sensitivity is more or less 10,000 BOE. Dropping from $72, that is the number at which we are running the full quarter to $60 per barrel. That is the level of Brent of which we are giving the guidance. $12 per barrel means more or less 10,000 BOE per day. Maybe I 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. In terms of sales, something like about between 25% and 30% in general terms is actually sold on the spot market. It's also an issue of optimization, which is done constantly.
We also have to consider that in all this, of course, has a weight also the logistics that we acquired in the past in respect of the gas business.
Thank you.
The next question comes from Jason Kenney with Santander. Please go ahead.
Hi there. Well done on the results today. Going back to a theme from an earlier question, if I might, on oil and liquids realizations. I'm just trying to dig 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. Then maybe also the general trend. I think in 2016, the discount versus Brent for Eni was 10%. In 2017, it was 8%. On a year-to-date basis, you're 7% discount versus Brent. I'm just wondering what I should be thinking about that trend going into 2019, please.
The most important reason why we reduced the discount versus Brent is the quality of our production. If you think about the most important contribute of new production such as Goliat and Kashagan, 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 for 2019.
Thank you.
The next question comes from Alessandro Pozzi, 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. Going back to the previous questions, you mentioned your target is to increase production to 3.2 Bcf by the end of next year. I was wondering if that is subject to the restart of Damietta or not. Thank you.
Alessandro. As far as Venezuela, the situation remains a critical one. 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. We will see. The reduction with gas is 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 spare parts to have the plant back in production after maintenance. In terms of financial exposure, the news is not so bad because the level of exposure we are succeeding to take is quite stable. We are talking about something less than EUR 700 million.
We are receiving some payment anyway, notwithstanding the situation. On this respect, we are in line with the projection we made at the beginning of this year, when we definitely took into consideration the 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 Damietta.
Thank you.
The next question comes from Jon Rigby with UBS. Please go ahead.
Yeah. Hello. I think both these questions are for Massimo. The first is, when we met in March, you had a slide that talked about a leverage target and share buybacks, breakevens, cash distribution. I guess, given where your performance has been and 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 of conditions in terms of gearing sort of balancing gearing versus buybacks. I wondered whether you could just share with us some initial thoughts about that. Obviously early days, and 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% or so tax rate. Is that a good number to use going forward at these kind of oil price conditions? Also sort of secondly, your downstream businesses actually seem to take quite a high tax charge, I think, about where corporate tax charges are globally. I just wondered whether maybe you can shine a little bit of a light on that. Thank you.
In terms of leverage and cash distribution and buyback, Jon, as you said, maybe the good timing to talk about any decision would be February, March 2019, where we are going to present our new strategy. Definitely what I could say is that up to now, nothing changed in terms of aspiration and strategy. What we said in terms of aspiration to maintain progressive dividend together with the buyback while we perceive a leverage below 20% steadily remain in place. On this respect, I would say that what is going on, what we are doing in terms of performance, in terms of implementation of our strategy, is running very well. The cash we are producing is significant. You have seen that the leverage dropped below 20% for the first time in the third quarter.
As I said, we expect the leverage be even lower, benefiting from the cash we are going to generate in the fourth quarter. March will 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 terms of tax rate, yes, assuming a $70, $75 Brent scenario that you know is impacting significantly our tax rate on downstream business, that definitely is the most important tax contributor in our group. Something in the range of less than 60, something in the range of 55, 58, 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 for the first nine months.
In terms 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, maybe I'll let you know, Jon. The tax rate is 40%. Why it is higher than 30, 27, I'll let you know.
Okay. Thank you, Massimo.
The next question comes from Rob West with Redburn. Please go ahead.
Hi. Thank you very much. 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 EUR 800 million by 2021. This year, you're effectively coming in at double what you were targeting. You spoke a little bit earlier about having more volumes coming through the gas business, particularly on LNG. My question is, would it be right to assume 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. 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, 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, the clean power spread in power, the gas price, the LNG price in Far East and elsewhere. We have been surprised. That's the reason why we adjusted twice the guidance because the scenario that we are testifying is definitely higher. In this respect, we believe that the adjustment, the scenario we are going to assume to re-project our full-year plan, will be lower than this, based on normal condition.
At the same time, the result we are achieving testify that the industrial activities, the progress in terms of lower cost, I imagine in terms of clients, talking about retail, is progressing even a bit faster than expected. No reason to change the guide today. 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 EUR 400 million-EUR 500 million in terms of EBIT, respective EBIT. In terms of upstream OpEx, now we are the actual numbers in the range of $7 per barrel, $7 is something that we are confident and we believe we can take. Because we are not testifying any significant inflation increase in the market right now.
No sign that the 7 could be higher, for example, in 2019.
Very clear. Thank you very much.
The next question comes from Irene Himona with SG. 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 third quarter and the nine 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 fourth quarter expected working capital. Finally, back to Gas and Power, which obviously surprised positively with a profit. I think I'm right in saying that you say the results, the adjusted results, includes EUR 40 million from derivatives. I just wonder if that is correct, if you can share with us the rationale for not stripping out the EUR 40 million from adjusted profit. Thank you.
Okay, Irene. In term of split between refining and marketing. As far as the fourth quarter, we are talking about a full result of EUR 140. Marketing is EUR 143, while refining is more or less at breakeven, considering that we had a slight recovery in the refining margin in the third quarter. Talking about the nine months, marketing recorded EUR 372, while refining was negative EUR 154. For a total result of more or less EUR 220. We expect marketing performing well in the fourth quarter, even if the fourth quarter is not the strongest all along the 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 fourth quarter. In term of working capital, we are doing what we promised.
As far as now, the nine months actual, I would say we fully recovered the EUR 900 million that has been absorbed in the first quarter. We expect a positive contribution from working capital in the fourth quarter in the range of very few hundreds of million of EUR. In terms of derivatives, I cannot give you an answer because maybe it requires a bit of time. Irene, I will back to you explaining the rationale of what you are asking for.
Thank you very much. Thank you, Massimo.
The next question comes from Massimo Bonisoli 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? The second, do you have any progress in the farm-out process of the Area 1 in Mexico?
Antonio will give you the answer about the BP exploration activity in Libya.
Okay. As you know, the farm-in including three blocks, A, B, and C, which A and B are close to Wafa. That is the main synergy we have seen jointly with BP and NOC. This is the objective, since we have enough spare capacity in the area of Wafa, and this can be one of the areas which we'd kick off quite quickly. The rest, with the offshore, definitely we should work a little bit more on that.
Okay, Massimo, as far as the farm-out in Area 1 in Mexico, we are proceeding. We are in the negotiation phase. We do not expect to cash in any EUR by year-end. I guess we'll let you know while we are completing the deal.
Thank you very much.
The next question comes from Lucas Herrmann with Deutsche Bank. Please go ahead.
Yeah. Thanks very much. Good afternoon, gentlemen. A couple if I may. First, just a point of clarification, Massimo, your statement or the slide on strong cash generation, which shows you've delivered CFFO of EUR 9.8 billion in the first nine months, does that include the sum that you've received for 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&L and cash flow longer term, maybe as the regas obligation isn't there any longer.
Thirdly, if I could, just on Jangkrik 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? Thank you.
As far as the cash flow, yes, as we wrote in the chart we presented a few minutes ago, chart number eight, the EUR 9.8, as well as the EUR 13.5, does include the more or less $450 million we cashed in as a later payment relating to the disposal to Rosneft and to BP of shares in Zohr. As far as the Bontang and Indonesia, I'll let Antonio maybe answer your question.
Yes. As has been mentioned in the previous call, the spare capacity of our FPU in Jangkrik 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 of the higher performance allow us to utilize the additional capacity of the FPU. Today we are ranging production between 697, 700 million scf 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 build-up on the reservoir, and we have seen we have much more reserves. The expectation is also that Merakes has been designed also to come in on a decline of Jangkrik, which up to now is not coming up. We are making additional development on Jangkrik and work over, which will keep the plateau longer than the expectation.
Thank you. Then on the U.S. regas, Massimo?
Okay. As far as the Pascagoula regas arbitration outcome, what we have to pay is written even in our flash statement is the amount is EUR 286 million. The amount that we have to pay as a result of the arbitration, we believe is a good result, taking consideration the obligation we signed a few years ago when the perspective in term of the worldwide LNG market, mainly the U.S., was completely different. This amount has to be paid, I will say, shortly.
What's the future saving and benefit to gas and power that we should expect to see? Since you don't have to pay.
For the group or then gas and power, I would say significant savings.
Sorry, what does significant mean?
Significant. I cannot release exactly the number that is based on our internal evaluation, but significant means definitely not some tens of millions, but hundreds of millions.
Right. Sorry to go on. That benefit will be seen in which division?
The installment up to the arbitration outcome in terms of cost, where the installment was written in the E&P-
Right
profit and loss.
Okay. Thank you very much.
The next question comes from Thomas Klein with RBC. Please go ahead.
Hi. Apologies for earlier. Thank you for taking my question. Just following up on the one about your MOU with Pertamina. At Gela, can you talk a bit more about the pilot waste, the fuel plant that's being built, by Syndial, 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 to fuel technology, we have to say that Eni has protected this technology with six registered patents, and that the bio oil obtained with this technology can be used to produce an ultra-low sulfur bunker 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 semi-industrial scale plant in Ravenna. We are also studying other plants at a larger scale, which we expect to have a significant return.
Those larger plants, they would presumably be at existing Eni refinery sites, or would you be considering new ones elsewhere?
It's something that we have to decide. We can't give you an answer right now about this.
Okay. Well, thank you.
The next question comes from Lydia Rainforth with Barclays. Please go ahead.
Hello there, and thank you for taking the questions. I have two, please. The first one was on Unión Fenosa Gas, and just particularly in the context of the Damietta plant restart. Are you happy with the current Unión Fenosa Gas shareholding, or would you look at taking that to the full 100%? Secondly, on cash flow per barrel in the upstream, is that better at this oil price than you thought it would be? Thank you.
In terms of relationship with Naturgy, maybe I'll leave the floor to Massimo, and I'll give you the answer about the cash.
Yes, we are happy. We are happy with the current situation, and we are not looking to change it at the moment. Of course, every project is always live. But for the time being, we are with them. We are working well. We are trying to have the plant restarted. We are talking with the Egyptian side, who are actually also somehow in the Damietta, because 20% is owned by EGAS. We just have to conclude these discussions with all the parties involved to have the plant restarted as soon as possible. This is what is going on.
About the unit cash flow in E&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. The scenario. That's the reason why I said that we are progressing ahead of schedule in getting the EUR 22 per barrel result that we projected in 2021. To give you more color on this, what I can do is to give you maybe the breakdown of what we are getting after these first nine months in terms of cash flow from operation in E&P. You have seen that the cash flow from operation grew by EUR 3.4 billion in the first nine months versus 2017. The overall growth is related as far as 70% to the scenario, is definitely being positive as far as the prices, is slightly negative in terms of exchange rate.
As far as 30%, it means EUR 1 billion, is due to endogenous factors. An increasing value of our production, increasing volumes, reduced cost. That perform is slightly better than what we expected when we performed the budget.
Lovely. Thank you very much.
The next question comes from Alvin Thomas with Exane. Please go ahead.
Good afternoon, gentlemen. Just a couple of quick ones from me. Firstly, can I get an update on the list of FID that you're looking to achieve by year-end? 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? Thank you. Maybe what your outlook is into year-end. Thanks.
Maybe I leave the floor to Alessandro as far as the FIDs are concerned, and Libya, I leave the floor to Antonio.
Okay. The planned FID from now to the end of the year are Cassiopea in Italy, Mexico Area 1, and Nené Phase 2B in Congo. 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 gather up again as previously. Thank you.
Can I ask what volume you're at currently?
The volume for local market is moving between 19 to 21 million cubic meter per day. This is the range. Normally, they are receiving from the gas producer between Wafa and Mellitah with Sabratha platform.
Okay. Thank you.
The next question.
In this respect, it's worth to mention that definitely we believe that the domestic consumption is going to recover, because we are talking about a few thousand BOE equivalent per day in term of lack of demand. It's worth taking into consideration that we always have the possibility to export gas, to apply for the export of gas in case the situation would be worse or last longer than expected today. That's the reason why we are not particularly worried about potential economic impact in the longer term.
The next question comes from Christyan Malek with J.P. Morgan. Please go with Martijn Rats with Morgan Stanley. Please go ahead.
Yeah, thanks. All right. That was some introduction. I had two 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 has degeared a fair bit during the quarter, can you update us on your thoughts on buybacks? Secondly, I wanted to briefly ask you about the credit rating downgrade. My suspicion is this does not have a big impact. I mean, it largely reflects sovereign. 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, et cetera.
Well, in terms of buyback and leverage, I already said that the trajectory, as you said, is positive. 18% expected to drop further by year-end, projecting a buyback could be in the range of EUR 70-EUR 75 in 2019. We hope to have a longer, good trajectory on this respect. The execution of our strategy is going ahead very well. As I said, final decision and announcement about even quantities in case of buyback is postponed to March 2019, Martijn. In terms of downgrade, I really believe that we did not deserve this downgrade, that you know is due to the strict rule applied by Moody's of the two notches of maximum difference between government-related entities and the sovereign rating. Even Moody's recognizing this report that we are performing even better than expected.
Really, this decision is going to penalize, at least in terms 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. Definitely, I'm not worried about this. Anyway, I believe that definitely has been a wrong decision, and we didn't deserve it.
Great.
We are 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 terms of this two notches strange rule.
Okay, wonderful. I appreciate that. Thank you very much.
The last question comes from Christyan Malek with J.P. Morgan. Please go ahead.
Yeah, thank you for taking my questions. Just to sort of follow on from, I guess my colleague from the House of J.P. Morgan. The question around buyback, I think just to 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 try to micromanage, or is that just my imagination? In terms of the philosophy around buyback, just to be clear around your priorities, is it safe to assume that the trigger is the trigger, but in terms of M&A or areas of opportunities you'd like to 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?
Just a second question in Egypt. With the new gas law and easing up in terms of their fiscal regime, as they talk about looking to allow you to basically secure full production or full share of production, companies would bear the entire cost of exploration and production. With that, being able to sell, in terms of not being able to sell it at a preset price into the Ministry of Electricity. Does that new law or sort of a regime shift apply to all new contracts? How does that influence how you think about allocating CapEx to Egypt going forward? I presume it's not retroactive, so it's going to be forward-looking on new projects.
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. Thank you.
No effect of this law about our prices and our contracts.
Yeah.
As far as buyback is a priority. We said that our remuneration policy is based on the two 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 remuneration policy that we announced. We also said sometimes, Claudio also mentioned that any M&A activity that could happen, talking about asset and so on, will not jeopardize the performance on this respect. 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 will take looking at our numbers, our business perspective, scenario, and so on.
Okay. On Egypt?
Okay. Egypt, I said that we don't have any impact on this new rule. The gas price is fixed, 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, the parameters we take into consideration to evaluate the project will remain the same. No impact from this new legislation, Christyan.
Okay. Thank you very much.