Afternoon, ladies and gentlemen, and welcome to the Eni's Second Quarter Results Conference Call hosted by Mr. Claudio Descalci, Chief Executive Officer. For the duration of the call, you will be on listen only mode. However, at the end of the call, you'll have an opportunity to ask questions by pressing star and 1 on your I will now hand you over to your host to begin today's conference. Thank you.
Good morning, and welcome to Annie's first half results. The first half results confirm the strength of our industrial performance. Upstream production was more than 5% higher versus 2017 considering the PSA effect. Wealth was sustained by the contribution of major ramp ups such as Zor and Kashagan and the start up of Ochifugu in Angola and Barisalam Phase 2 in media. Inspiration continued to deliver great results.
During first half, we drilled 7 successful wells for a total resources of 280,000,000 barrels at an exploration cost of $1.4 per barrel. Finally, we announced a strategic step in Norway with the creation of Var Energi. Moving to Gas and Power, the structural change we have implemented in the first in the past 4 years allow us to achieve a strong performance, increasing EBIT to €430,000,000 more than doubling 2017 results. Downstream businesses impacted by a weak scenario confirmed their resilience with an overall EBIT of almost €150,000,000 Moving to financials. Operating and free cash flow growth are the most remarkable achievements.
In summary, the first half, we generated €6,000,000,000 of operating cash flow, a 22% growth versus 2017. CapEx was reduced by 14% to €3,700,000,000 So we generate an underwriting free cash flow before disposal of €2,300,000,000 largely exceeding the 1 point €5,000,000,000 of interim dividend paid in this period. Thanks to this strong cash performance, we reduced our net debt to below €10,000,000,000 the lowest level reached since 2006. This corresponds to a leverage of 20% at the end of June and the gearing of 16.4%. Before detailing the result of each business, I would like to give a more color on Norway.
We agreed with the Private Equity High-tech Vision to merge Point Resources into any Norge, creating a new company called Var Energy. We are expecting the completion of the deal by the end of 2018. The new entity will be a leading Norwegian energy player with a widely diversified portfolio spreading from the Barents Sea to the North Sea and producing around 180,000 barrels per day this year. VAR Energy has 17 producing oil and gas fields and more than 500,000,000 barrels proven reserves. Building on the existing organization and leveraging complementary strength, we will grow production through a pipeline of 10 already existing project to 250,000 barrels per day by 2023.
In total, the company will focus over the next 5 years on bringing projects on stream, revitalizing older fields and exploring for new resources. This is fundamental step in our strategy to reinforce A and E's presence in OECD countries with strong upstream potential, such as Norway, delivering an immediate impact on financial indicators with a reduction of around $2 per barrel in our cash neutrality by
2019.
Also this year, we have achieved major inspirational successes, both in near field discoveries and in new basins. In Block 15 of 6 in Angola, we discovered Kalimba bearing around 300,000,000 barrels in place of high quality light oil with an estimated production rate per well exceeding 5,000 barrels per day. This discovery will open new opportunities for oil exploration in the center part of the block, which has so far been considered mainly a gas area. We plan to apply the discovery and then to take the FID within the end of this year. Our expectation is to put on stream the field by the beginning of 2022.
This will be a fast track project, maximizing synergies with the East Hub, which is only about 55 kilometer away. In Egypt, we made 2 oil discoveries in Southwest Melia in the Western Desert. These discoveries tested the deep geological sequences of the Fagour Basin, a new exploration play. During the production test, the wells delivered more than 5,000 barrels per day. These Egyptians discoveries, together with other prospects that will be drilled in this basin this year, we rely on fast drilling phases, low cost and synergies with existing facilities.
This will accelerate our growth in this new production area, where we are already producing about $53,000 per day. Finally, we achieved important results also in new areas, in Area 1 in Mexico with the quarry 2 and Amorca Deep and in Cyprus with the offshore discovery of Calypso, Calypso, a wind gas discovery, which proved the extension of the Dror like play within the Cyprus exclusive economic tone, where the joint venture is now working to prepare the appraisal plan. And now a quick look at production results. Production in the first half reached $1,865,000 per day, 5% higher than last year. We had positive performance from wrap ups and startups mainly in Egypt, Indonesia, Angola, Ghana, Congo and Kazakhstan, contributing $263,000 per day.
And on the other side, we had some production reduction due to a major maintenance program in Algeria and in Libya, where the downtime was higher due to the tie in of Barisalam Phase 2 wells and the natural depletion in stone fields in the U. S. And U. K. We confirm a production growth of 4% in 2018 at budget scenario.
We achieved an EBIT of €4,830,000,000 more than doubling last year result due to scenario effect for €2,100,000,000 better production performance for around €500,000,000 Let's now have a look at Zohr, where our ramping up is proceeding faster than planned. After the start up of the first train in December 2017, we added 4 new treatment units. Each production unit has an average production capacity of 400,000,000 scarp per day. We will increase production from the current 1.2 Bcf per day to 2 Bcf per day by September this year. The final plateau will be reached in 2019 with the start up of the last 3 production units.
The valuable contribution of our production translated into a strong operating cash flow growth. Upstream cash generation was €5,500,000,000 38% higher than last year, thanks to volume growth and the scenario effect. With upstream CapEx at €3,200,000,000 in the semester, E and P generating an underlying free cash flow for €2,300,000,000 including disposals, more than covering our interim dividend needs. The cash flow per barrel grew to $20 in line with our plan and while ago the level of 13 I'm sorry, yes, dollars 2,300,000,000 excluding disposal, not including, yes, excluding. Gas and Power's EBIT has doubled versus last year, with a steady return contribution of around €100 and €30,000,000 The strongest improvement is related to midstream where EBIT increased by nearly €250,000,000 Looking detail into mid in midstream growth, €70,000,000 was related to higher LNG volume, 60% more than 2017 and stronger margins capturing the good condition of the Asian market where we sold roughly half of the volumes.
€70,000,000 was linked to the better power result and the remaining amount to logistics, efficiency and contract renegotiations. Taking into account the result achieved until now and the seasonality of Gas and Power performance during the second half, we improved our yearly EBIT guidance from €300,000,000 to around €400,000,000 Downstream was impacted by the challenging scenario of the first half of this year. In R and M, we achieved a positive EBIT result of €80,000,000 notwithstanding the lower scenario that impacted the refining activities. We will continue to strengthen our R and M businesses to make it more competitive, targeting a reduction of our breakeven margin to our $3 per barrel level. In particular, we will further optimize logistic and operational costs to integration and efficiency, complete our biofuel plant in Jela by the end of this year and restart the S plant at Sanitaro and consolidate our marketing position in Italy.
In the chemical sector, the scenario has been characterized by some negative factors. High cost of virgin naphtha occurred in the Q2, not yet entirely reflected in the product prices and an excess of supply in the European quality land market due to higher export from U. S. Notwithstanding these very difficult conditions, our result was positive with an EBITDA of €65,000,000 in the first half, showing the resilience of Versalis. In the second half of the year, we expect a further improvement mainly due to the continuous focus on operational performance and higher product prices.
Considering this rebalance of the market and thanks to the positive contribution of the industrial and the market in action, we now forecast for the downstream and the overall EBIT of more than €500,000,000 of which €330,000,000 is from R&M and €180,000,000 from Versalis. Looking at our consolidated results, thanks to the strong cash generation achieved in the first half and taking into account the disposal, cash in and the dividend payment, the net debt for the first time since 2006 is below €10,000,000,000 and our leverage is 20% is at 20%. In terms of full year guidance, we will generate a cash flow from operation of more than €13,000,000,000 which includes a minor contribution from working capital and the cash in related to 2017 Thor Disposals. With CapEx around $7,600,000,000 and the value free cash flow before disposal is expected to be $6,000,000,000 dollars a 40% growth versus our original plan. This confirms our capability to more than capture the upside related to the improvement in the scenario.
And we confirm a cash neutrality of $55 per barrel. And now with Massimo and the team management, we are ready to answer your questions. Thank you.
The first question is from Oswald Clint of Bernstein. Please go ahead, sir.
Yes. Thank you. Good afternoon. I want two questions, please. The first one just on your last few comments on leverage, just almost reaching the 20% level at the end of June.
I think at the strategy there you spoke about balancing strength in excess of that or below the 20%, you would talk about buybacks and the potential for those. So maybe you can just update us on that number, where it might progress and ultimately what that means for that possibility of buyback streams. And secondly, I was just curious about your recent dealings in Algeria with SomaTrac. And at the press release, Erin, you spoke about significant cost savings and operational efficiencies, but also seems to be some upside potential with the gas supply agreements, mainly upstream and gas and power benefits here from that deal. I just wonder if you could talk about that set of negotiations, please.
So I for the first point, so the buyback, once we reach or we are below the 20% leverage, I can just confirm what we said during our strategy presentation. So we said that we once we are below the 20% and considering the scenario, we are steady below the 20%, we can consider and propose to our Board a buyback and that is inside our policy. So our remuneration policy and that is confirmed. For Algeria, yes, we signed 2 different agreements. And the agreement is a general agreement that aim to reduce cost because we have several activities in Algeria.
So we agree with Sanatra to put all this activity and merge out this activity under just one umbrella and create strong synergy and reduce cost, operating cost. And that has been done, is in progress and with good result. Then we final agreement on the gas because we have gas in Nigeria that produce as the associated gas and we have gas in the underneath level where we produce oil. So we signed an agreement to export these gas that we produce in the south to our facility where we treat gas in Emily and Cask from the BRN field where we produce this gas, and that is will be an additional improvement in term of efficiency, in term of the sales, in term of quantity of gas that we can deliver. And another form of efficiency in Algeria is that we are replacing in our activities and also in the future in Sonatruk.
The gas that we use for internal consumption with renewables, in this case with solar or photovoltaic, and that is make an additional gas free for export or for domestic consumption.
The next question is from Thomas Azolff of Credit Suisse. Please go ahead.
Good morning. Two questions for me, please, as well. Firstly, congrats on the deal in Norway. Hopefully, life gets a bit easier and better now. You've mentioned that near term cash flow breakeven will improve by $2 in 2019.
And I wondered whether you can provide a bit more color how this breakeven or the contribution will look like in maybe 2021. I understand that your portfolio ex Point Resources contributes a bit more growth a bit later than Point Resources. Second question is more to do with the IMO, but a bit less to do with what upside you may see on refining. But I'm just more interested in the type of crude that you have that you produce in the upstream. So the overall crude gravity and sulfur level.
So in an IMO world, would ENI's price realization improve or worsen versus what you see today? Thank you.
Thank you. So the first question will be answered by Mosk and the other from
So Thomas, the effect is due to the different timing in term of cash flow from operation versus CapEx. So that's the reason why we will record an improvement in our cash neutrality by 2019 of around $2 And then we expect, thanks to the
investment production growing to $2.50 that would be the final result. All this based on existing project already here, very well identified in our portfolio.
Thank you, Thomas, for your question. As we already mentioned in several other occasions, we and I will be able to satisfy the requirements of the IMO to resolve production capable of achieving a 0 production of fuel oil. And this is due to the fact that we are a highly conversion system. We exploit the EST that, as you know, is on the phase of rebuilding in San Azaro. There are actually that is a residue of the treating unit in Taranto and the Mirazs and the C funding plus system integration.
On this aspect, let me also emphasize that we just restarted the Parento refinery. It was offset our plan to allow the work to make the plant able to refine also the temporary crude that is 10 to 22 degree gravity. In general, we don't expect hours late to live in
in the
coming years. And on average, we have as late that he is about 30 degrees happy in density.
Yes. I was just more interested in your actual upstream production, not the what crude due to process in the refineries. Because the other side of the equation is clearly, if I'm producing medium gravity, very low sulfur volumes in upstream, let's say, Lula in Brazil, I'm going to see an improvement in price realization. So I wondered what dynamics we should see in ENI's upstream price realization?
One second, we are checking the few data, but I can start giving a qualitative figures. So our average crude production in the upstream is light. So it's light oil with a very low sulfur content. So I think that from generally speaking, not just talking about our refineries, but all the different refineries that we use, we are going to have an improvement from this point of view considering our kind of crude. Honestly, I cannot give you now, but we can give you we can let you have the differential and of how much that can be lifted.
This is great. I just wanted to know that you will benefit from it.
Yes, yes, sure.
Thank you.
The next question is from Irene Himona of Societe Generale.
I had two questions, please. First of all, on Gas and Power, obviously, a very strong result and you're increasing your guidance for this year. Back in March in the start of your presentation, you presented the retail gas business as, let's say, the growth engine in that division's full year plan. I wonder if you can talk
a little bit about the
performance of retail in the first half and second quarter results. My second question, again, you mentioned, Claudio, the continuing strong exploration results in the first half of the year. Oil prices, obviously, are above plan, above expectations. And my question is at what point would E and I or should E and I, given your track record as a top class exploration company, at what point should you treat $75 oil as a market signal that actually the industry has underinvested? The market needs more supplies.
And therefore, given how good you are at it that you should actually contemplate increasing your capital expenditure above the €32,000,000,000 your budget for the next 4 years?
So Alberto can give you some color about retail gas or any gas in Lucha and the trend and the result in the future?
Yes. Thank you. In terms of results of the first half of Aiminga Solucia, the results were quite stronger. We reached $140,000,000 of EBIT overall. And in terms of clients, we increased our customer base from 8 point $5,000,000 to $8,800,000 This is making us confident that we should be reaching our target in terms of forecast of 9,100,000 customers and around €200,000,000 of EBIT.
So that's
So considering the second question that is related to, can things to increase our CapEx because we have so many resources and within that price now is stable or we can grow and we need additional production. So if you look what we have done in the last 4 years, we never reduced our growth on our investment. We try to have a different kind of attitude approach to be able to increase our production, reducing our CapEx and without leaving behind us any kind of project of opportunity. So we develop everything. Zara has been developed with a very so in a price scenario, we were an average of $40 per barrel.
We took a meeting with $12,000,000,000 but at the end, what happened that through our exploration due to our exploration, we are able to reduce our inactive capital. We reduced our exposure and we can continue to develop. So from one side, we have an organic growth starting from exploration low cost. So I'm seeing that at a very low cost where we don't need a lot of investment. We don't have complex, super complex and made project that guide us to put a lot of money.
We learned, we know everything about that. So in the last 4 years, we changed low CapEx because our cost our opportunity is low. Secondly, we use another tool that they do an exploration to reduce our exposure without really without leaving on the ground with our the opportunity and the other. So I don't think that also with higher we can say higher price with the kind of asset we have, we are obliged to invest more. I tell you that this $55,000,000 cash neutrality, dollars 50,000,000 cash neutrality, so this area of cash neutrality for us is a must.
It's a must because the only way to be able to face any kind of environment, but it's a must also because we use a model, we use a philosophy and approach that allow us to invest because our costs are low. And we have the dual aspiration to spread and reduce our investment risk. So the answer is, we are going to continue to grow. We have 3 point 5% this year. It's 4%, will be 3.5%, maybe will be more in the future.
But we want to be really strict and disciplined and use a strong discipline in term of cost and capital allocation.
The next question is from Alessandro Pozzi of Mediobanca.
So the first one is on Mexico. I was wondering if you can give us an update on the development plans there. The second question I have is on the exploration opportunities. I was wondering if you can perhaps highlight key exploration wells for the second half of the year. And finally, gas realizations on Zohr.
I believe the Egyptian government is looking to raise domestic prices, gas prices. Just wondering if that has an impact on Zou as well. Thank you.
Sorry. For Mexico, Antonio can say something about the future development in Inspiration looking, then you can say something about the growing gas pricing.
Okay. So as you know that we've been working with the authority in the last couple of months to finalize the POD. So everything has been completed. And in a week's time, we expect to get the approval. And then immediately on the Q3, we will have FID.
This is all in Mexico.
On exploration, second half, we will add wells in one well in Indonesia, targeting additional resources nearby our Jan Greek harbor. We will also continue drilling in Egypt and Fagor basing additional wells to exploit the potential of this new plague. And also we will start the drilling of an offshore well in Egypt, a deep well that is named Nur. Finally, we will have a couple of wells in Norway and we will start our exploration campaign in Angola with the appraisal of Perimba and some new cross vessels.
So for gas, you heard correctly that we are going to move some subsidies on the end customer. For us, it's completely different. We have a contract, a long term contract for our gas sales and we have prices there are contractual prices on which we are covering our cost. And as you know, as our oiling, but with the floor and the ceiling, So we cannot go down more than some prices, but we cannot go following the oil price. We have an area where we expect that is also represented the securitization for us for the future.
So this kind of increase of Pfizer are not touching the upstream side.
Thank you very much.
The next question is for Bertrand Audi of Kepler Cheuvreux. Please go ahead,
sir. Yes.
Hello. Thank you for taking my question. I have 2, if I may. The first one on your new discovery on Block 1506. You mentioned that it was close to existing infrastructure, but it's like 55 Kilometer away and you intend to make a fast track.
So imagine it's going to be a tieback. It's probably one of the longest tieback. It feasible? That's my first question. And the second question is about the other FID contemplated this year.
So you we've already talked about Mexico Area 1. And but can you give us an update on Congo, in the Marine Phase IIb, where do we stand? And also on Egypt, that seems elsewhere.
Antonio Vale is going to answer the two questions.
Okay. Concerning the Kalimba tieback, we will call it a tieback because we are patented already our technology concerning the long extension tieback underwater and will be implemented in Kalimba, which will allow us to go above 65 kilometers for the time being. So this is going to be a development of between 5 to 7 wells. Concerning the so the delivery of the oil, so large distance, we have a multi phase pump underwater, which will allow to produce all the volume directly to 1 of the 2 FPSO actually in production. In reference to the other question of the FID of Calimba, we'll have an FID by the end of the year.
And the next the other question was the FID of an A2B. It's planned for this year, and we are completing all the marketing bids and is expected to make it by the Q4 of 2018.
So the
other the other issue is of Baltin Southwest buyback. So Baltin Southwest is already the FID has been made and is under construction and will be in production next years. The production increase in between Great News and Ima, we rise up the actual 2,000,000,000 or 200 scrap per day to 1,900,000,000 scrap per day. I think concerning the other development and the FID, the of Maracas in Indonesia, we are going to finalize the FID within the Q4 of 2018. It's going to be a tieback also in junk rig FPSO.
Many thanks.
The next question is from Massimo Bonizboli of Equita. Please go ahead, sir.
Thank you for taking my two questions. The first on Gas and Power. Considering the strong result in the first half, the new outlook for the division implies some decline of operating profit in second half compared to second half last year. Could you give us some color on the evolution of EBIT in second half? And do you have some contingencies in the outlook?
And the second question, if you can give us some indication on the working capital evolution expected in second half just for our models?
Okay. Massimo,
The first half benefits in respect of LNG are very high price in the Asian market. And thanks to the integration with Upstream, we managed also to increase and to sell more of the production of January. It was a next step production, which is expected this year of EUR 1,000,000 more than what actually were in this year. And most of the LNG activity, of course, have been locked in already in the 1st semester in respect of the second one to be sure that we were taking the benefit of the market scenario. In respect and there is one thing which may be of interest that is also considered, which is not a reasonable question, but we had an increase of the equity marketed by Aaso.
54% of the marketing was actually equity LNG. That's compared to only 25% of last year. In respect of power, we also benefited the 1st semester of a very good outlook in respect of the expected a little bit lower in the second half. In the first half, we also benefit of the CIBEX, which as you know has been solved at the end of June and will not be in the second half. For the time being, we are setting Okay, Massimo.
And the working capital is
Okay, Massimo. And then the working capital tender in the Q2, we released more or less 2 $50,000,000 out of the $900,000,000 absorbed, do you remember, in the Q1? The expectation would be to release the So to recover the remaining $700,000,000 plus we still expect a positive contribution working capital by the end of this year.
The next question is from Mr. Sifan Jafalinga of Exane BNP Paribas. Please go ahead.
Yes. Hi. Good afternoon, gentlemen. I had a few questions actually. Firstly, could you talk a little bit about how much contingency you have left in sort of upstream volume forecast for 2018?
I'm trying to understand how derisk sort of underlying cash flows are for the second half of this year. The second question I wanted to ask was just how do you put the leverage ratio and the appetite for buybacks vis a vis aspirations to broaden a downstream footprint? Thank you.
Tanja, can you talk about contingency and that you have up to the end of the year?
So we have a $20,000 BOE of contingency for the next 6 months. And as you have seen, our 1,865, at this moment, we will have just few shutdown during the next 6 months and hopefully we can recover part of this contingency.
Okay. Thank you. So for the question, if I understood, you are putting against the buyback, against a possible downstream acquisition or organic growth in the downstream. So the answer is very clear. There is no there are nothing competition.
So we have space for both and there is no competition between a possible buyback if we have the right condition and a possible increase in our refinery capacity under our conditions, at the right place, with the right margin, so the two things can stay together.
The next question is from Mr. Jason Gammel of Jefferies. Please go ahead.
Thanks very much, gentlemen. I just want to come back to the Barr Energy transaction, which looks very interesting. I was hoping to ask more about corporate governance. And will the entity act essentially fairly autonomously with you having Board members? Or will you have a little more direct oversight into their operations?
And then also, will this be essentially a self funding entity? Or it will require ongoing capital injections from the parent? And then I guess the flip side of that is when would you expect to be able to receive dividends from BAR? VAR?
So definitely we'll be I'll try to answer all your questions. So no capital contribution expected there. So the company is so strong that they definitely they can go ahead funding the capital plan without any kind of contribution. Anyway, the company should definitely should fund us by itself the future CapEx. In terms of governance, the currency global balance taking consideration of the 30% to 70% in terms of shareholding.
So definitely we'll have the majority in the board, but the exceptional decision definitely that required the unanimous decision because definitely the 30%, 70% participation in interest. Definitely, definitely about the dividend, yes, I already said that the capital structure is really strong
and
there is already production. So the cash flow could be distributed to the shareholders since the beginning of this new venture.
Very helpful. Thank you.
The next question is from Mr. Biraj Borkhatria of Royal Bank of Canada. Please go ahead.
Thanks for taking my questions. Just two quick follow ups, please. The FID in Mex I believe that was originally expected in the first half of 'eighteen. Could you just confirm that first production is still on track for early 2019? And then the second question is on the Knorr prospect.
Earlier this in Q2, there were some conflicting reports on whether you've completed the well or not, and it sounds like it's still ongoing. But could you talk about just give a bit more color on the prospect side
and the potential there? Thank you.
Okay. As you know that our prediction on the POD approval, I was a little bit optimistic. But unfortunately today, the POD approval of Mexico is going to be in a weeks from now. So the first production is confirmed within first half of twenty nineteen.
Regarding Nour, as you see, we didn't comment on all the noise that come out on the press. Nour prospect is still a prospect. We didn't start drilling. We will start drilling
Next question is from Rob West of Redburn. Please go ahead, sir.
Sir. I've got a couple. First, I'd like to go back to Gas and Power. So you've raised the guidance for 2018. I was wondering how the change there impacts the guidance towards the end of the plan, so the ramp to €800,000,000 Does it just does what you're seeing just give me more confidence?
Or what has to happen to translate through some upside to that number as well? The second question I wanted to ask you is about restarting the LNG assets in Egypt for Damietta. And can we have an update on what's the the holdup there in terms of what do you still need to agree? I think last quarter you
said it was something
that could happen quite soon. So I was wondering if there was any update as Zohr continues ramping quite nicely. Thank you.
In respect of the plan, I think that we will have had this when we have the strategy at the beginning of the year. However, of course, the situation of the gas and power is something which puts us more confident in respect of what we are doing. In respect of the meter and you know that in respect of the meter and Neo4josagas, there are ongoing arbitration between the Egyptian side and Neo4josagas. However, I've been going on commercial discussions and I do believe that not only is in the interest of all parties involved to reach an agreement, but from my perception, all parties are working hard
on the possibility to reach
an agreement on this. Of course, the discussion are ongoing.
Next question is from Jon Rigby of UBS. Please go ahead.
Thank you. Yes. So a few actually. The first is, obviously, cash flow benefited from some deferred consideration now starting to come through, which actually came in about a quarter ahead of where I've been modeling. But I guess that comes the question, is there any more deferred consideration still to flow through on announced transactions, please, just so get that right?
The second is a question just on Kazakhstan. I'm just looking at the liquids production on Kazakhstan, it seems to be flat year over year and sequentially. And I thought with Kashagan ramping up, I'm a little puzzled about it. So can you just explain the moving parts on that? I guess there may be something to do with Karachaginak.
And the third is I'm still left
a little puzzled on the
gas and power number. I know you sort of talked to this, but can you just go through 1H to 1H, the moving parts sort of decomposed by the various contributors to Gas and Bags? They are very sort of differentiated, just so I can understand how we've got to where we've got to in 1H18 over 1H17, if that's possible, please. Thank you.
So John, in terms of cash in from disposal already done, the answer is yes. There will be the last one, first half of 'nineteen, that
will be, I would say, minor value.
Right. Kazakhstan? Yes. Okay. So
as again, we have reached the production of 4.24, which is 380, 3 38 oil in last June. So the APC, as you know, has been commissioned in the beginning of the year and now is contributing with additional 7 wells. The average equity in 2018 will be 61 barrel oil equivalent with a clear contribution on the ramp up, which you expect by the end of the year, the 350,000 barrels oil.
Right. So Karachaganak is running below or is there some No,
no Karachaganak is running very well. We keep stable the 250,000 barrel liquids. And we are progressing We got the record last year, as you remember. We got the record last year as you remember.
So sorry, John, but your impression is that the well, whatever that is now a grow in spite of the growing production in cash again, you see a steady production in Kazakhstan, that is your question? Yes. Yes. So we have a cut and carried out an ax steady, but we have also maintained. So during the year, you saw sometimes that the current one production was down.
And the increase in cash again rebalanced this. And at the end it seems it looks that steady, but how do I not get steady and cash again is ramping up, Then there is the game of the maintenance that can be confused if you look at the period. But in the long term, the situation is that.
Okay. For Gazanpaou, if I look at the first half of last year and half of this year, where are the areas where we are more pleased about how things went. The first one is actually LNG also if you take into account that if we do not consider retroactive effect on LNG that we had last year, the improvement this year was quite significant. As I said, there was also a significant increase on the volume and the integration in particular with our equity production in Jan Creek was extremely important in this respect. A second area of key difference is also power.
That is mostly because the clean spot spread view of this year the scenario was better significantly better than the other year. And the 3rd area, while we can look at the difference between the two half is actually they are of logistic of gas and gas supply cost overall, which had a significant improvement. And so those are the three elements which probably made the difference in respect of this year.
Right. Are you able to decompose that number
Not really, but the weight of the 3 elements were quite significant. Please consider that substantially also the retail business was in line during the 2 half. So the increase is mostly on this area of LNG and Power and Gas Logistics.
The next question is from Martin Ratz of Morgan Stanley.
Taking my questions.
I had 2, they are slightly more generic in nature. First of all, I wanted to ask if you are seeing any signs of cost inflation throughout your upstream businesses. It's one
that on the whole we'd be
sort of quite interested in. And secondly, given your position in Venezuela, I was wondering if you had any sort of thoughts on the country, any observations from the ground, so to say?
In terms of cost inflation, what we can say is that we see some increase of steel raw material. It is mainly affecting the cost of line pipes. Regarding the rest of the activity for upstream, we don't see particularly change in the offshore drilling unit market with very most significant increase in rates. What we can see instead is the increase of the utilization of the brailling units that offshore has reached 65% as we can see in the last quarter without a direct increase in terms of delivery.
For the rest
of the equipment, especially for subsea development, the global demand is still lower than the capacity of supply. So we don't see in the short term change in terms of cost for development.
So then it's where we can just stay from our position and from an operating point of view, we have some we got some very some good positive size because we after a discussion, we started getting some money back. So they are paying the gas that we are producing for the first time in the last month. So for the 1st 6 months has been, we can say, positive because they paid. So our securitization agreement that we are in place are starting and are working again. So that is what I can say.
The next question is from Lucas Herman of Deutsche Bank. Please go ahead.
Thanks very much. Claudio, I wonder if I could push you a little bit more on the comments you've made on downstream assets and certainly seems to have made to institutional clients around the desire to expand or potentially expand your downstream presence, not least in the Middle East. I mean, just to push into sort of the strategic rationale of a move in that position and how much capital perhaps you're willing to put at risk, I mean, the strategy and the thrust has very much been upstream. I appreciate observations around balance, but if you could just give us a better sense of what you're trying to achieve and how much you're willing to put at risk to achieve it? Thank
you. So thank you for all the questions. Clearly, what we to achieve is to have a to be along the value chain. So when we are downstream, we'd like to have some downstream to really to cover the value chain and also to be able to counterbalance the price situation has happened sometimes in the last couple of 3, 3, 4 years. So we talk about growing, growing at switch conditions.
First of all, want to be able also going in the downstream to be able to reduce as a target our cash neutrality because as you saw, as we experienced during the low price, one of the downstream that is a good one. So with a good margin that can increase can really increase your profitability and can reduce your cash in totality and that is my target. That on the contrary, it's going to give me the freedom to invest more in the upstream. And that is what I want to achieve. Clearly, I want I'd like to have integrated projects.
So I don't we are not looking for downstream for the sake of more downstream, but where we have production, we'd like to have some stake in the downstream. And with AIM and that is one of the tool that we want to use to reduce our cash neutrality. As I said before, in terms of investment, the investment will be really in line with our capability to have a strong balance sheet, a low leverage, the possibility to have as a we have as a priority a capital allocation to pay our dividend and in the future the buyback, but we also be able to invest to increase a good downstream to reduce our cash neutrality.
If I think of scale, given I guess we're talking about the UAE or Abu Dhabi where you'll be producing from recollection 80 odd 1,000 barrels a day, is integration you want?
The level of integration is related to the value. So it's not just a volume that we don't have a targeting volume, but we have the targeting volume and in term of cash strategy. So it's a balance, it's a material balance that we have to do every time. So it's linked to the economics and to the value that we are going to create. Based on the last studies and feasibility we made, we were discussing to we are discussing our target was to have about $200,000 $400,000 per day additional in the full year plan.
So that is something that we are working on and some things organically and other ways not organic.
Sorry, just to be clear, that's 200 to 400 incremental barrels of refining capacity, both inorganic and inorganic?
Yes. In the full year plan, that's what we said during our strategy. And that's what is but it's clearly linked to the value that we are going to create and the impact on our cash neutrality.
The final question is from Kim Fusier of HSBC. Please go ahead, ma'am. Hi, everyone. I had a couple of
questions, please. First, I wondered if you could offer any color on that Deepwater Black Sea dry well as part of your Rosneft JV. I think you own 1 third of that JV and the write down for that dry well was €200,000,000 So could you perhaps confirm what was the growth cost of that well? And also what your intentions for that Rosneft JVR going forward? Secondly, I think you and your partner, Ericsson, made some comments recently at a gas conference in the U.
S. About progress on marketing of the Namba LNG volume. So I wondered if you could share some of that color with us and also if you're still aiming for FID in late 2019 or early 2020.
So on the first question about Russia and the joint venture, you know that these activities, the arbitrage activities, Bear Bar and Sea and Brex Sea are under secondary sanction. You have secondary sanctions. So clearly, there is no space for us to go ahead with this joint venture. And for the Kesempower, yes. For Kesempower
in respect of our Mozambique LNG future production, you're right, there was actually a marketing meeting, which we had in Washington, D. C. With all the partners involved in the project and upon the Axon, but also the others. And we all agreed that basically marketing will not be a critical element, so that everybody is ready to offtake the production and to ensure that the final investment decision is taken irrespective of the fact that all the LNG has been sold to 3rd parties. Some of these LNG will go in the portfolio, some will be solved, but nevertheless, pro rata all the partners are ready to take
it
Excuse me, I'm sorry. There's another question from Ian Mitchell of JPMorgan. Please go ahead.
Hi, guys. Yes, it's Ian from JPMorgan. Just two quick ones hopefully. You've talked quite a lot on shafts and power. And we've heard about the improvements that had in equity volumes of LNG and then spark spreads in power.
Are either of those sustainable structural changes? Would we expect better spark spreads next year versus what you were expecting earlier on this year? And if so, why? And then the same in terms of the LNG volumes, should we be considering that there's some longevity to this improvement? And the second one is on Mexico.
You've given us some details on the POD. Has there been any change at all in terms of tone or your discussions since the election? And given that you're on the ground, have you got any additional information as to how the new government might look at the oil and gas sector relative to what you were dealing with prior to the election?
Yes. On the gas and power, just a few elements in respect of what you asked. The first one is that, of course, on the power, it does depends a lot on how we see and where it will build a clean spark spread in respect for future. And but please do consider also that one key element is the flexibility element for the power production where we think that there will be some value to gain at. In respect of LNG, of LNG, also here the market scenario was extremely significant in the first half, which allow us to lock in the volumes we had.
But as you underline, it was interesting the increase of production, which we our upstream part managed to have on the junket field. And we do believe that the volumes which we are allowed to put in our portfolio, as I said, is extremely important to increase that volume, which is working very well this year. And we are working on that in conjunction with our upstream colleagues. And this is something which we will be looking at in particular when we present a new strategy.
Okay. Concerning Mexico, we've been working, as I told you, that very, very well with the authority. And we identified the plan of development jointly. And as far as election, we didn't notice any changes and the cooperation is still going. And as I mentioned, in a week's time, we expect to have the approval of the