Good afternoon, ladies and gentlemen, welcome to Eni 2017 first quarter results conference call, hosted by Massimo Mondazzi, Chief Financial Officer. For the duration of the call, you will be listening only mode. However, at the end of the call, you will have the opportunity to ask questions. I'm now handing you over to host to begin today's conference. Thank you.
Good afternoon, welcome to the presentation of our first quarter 2017 results. In the first quarter, we continued to execute our long-term strategy focused on upstream profitable growth and the strengthening of mid downstream businesses. The main achievement this quarter were the following. In upstream, production was 1,795,000 barrel per day, 6% higher than last year, adjusted for PSA effects and OPEC cuts. All key developments are on track, and we are close to start up production from Jangkrik in Indonesia, and immediately after, OCTP in Ghana. While Zohr is progressing ahead of schedule towards first gas by year-end. Kashagan ramp-up continues with 32,000 barrel per day net to Eni in this quarter, and more than 65,000 barrel per day expected in the fourth quarter.
In the mid downstream, we recorded over half a billion EUR of adjusted EBIT due to a strong performance in gas and power, thanks to the successful execution of the turnaround, and positive result in the downstream sector, both in R&M and chemical. Finally, our disposal plan is well advanced. On the basis of the two deals already announced, Area 4 in Mozambique and Retail in Belgium, we expect to cash in this year pre-tax proceed of around EUR 3 billion, over half of the lower end of the four-year plan disposal target. In addition, this year, we expect to cash in around EUR 1 billion related to the closing of the Zohr farm downs to BP, which has already been completed, and Rosneft, which is expected to complete in the second half of the year.
Now, before detailing the quarterly result, I would like to give you some color on the market environment affecting our results. Trends were positive, with slightly stronger oil and constant European gas prices and refining margins. In more detail, the average oil price was $54 per barrel, around 58% higher than the minimum of last year, following the OPEC cuts and the start of market rebalancing. Gas prices in Italy increased by 43% versus first quarter 2016, thanks to a 9% increase in overall gas demand that was driven mainly by the power and retail sectors. Refining margins remained stable, whilst chemical margins, although up on the previous quarter due to shortages in U.S. and China, were lower than a year ago. Having said that, now the review by business.
Upstream production in the first quarter of 2017 consolidates the exit rate of last year of 1,856,000 barrel per day. We recorded an output of 1,795,000 barrel per day. That is in line with the last quarter production, if we take into account the impact of Goliat 40-day shutdown, the OPEC cuts that affected our production in Algeria and Venezuela, and PSA effects. Versus the first quarter of 2016, our adjusted growth is close to 6%. For 2017, we confirm a production rate of 1,840,000 barrel per day, thanks to the contribution of startups and ramp-ups in Egypt, Angola, Kazakhstan and Norway, and assuming that Val d'Agri shutdown lasts for no longer than 90 days. The good result in term of EBIT of EUR 1.4 billion was affected compared with first quarter 2016 by higher write-off in exploration for around EUR 100 million.
Upstream operating cash flow of around EUR 2.3 billion is in line with the full year guidance that we gave in the strategic plan. Now a brief outlook on the key startups for 2017. In February, we started our Block 15/06 East Hub five months ahead of schedule, and the overall block is now producing gross 100,000 barrel per day, 34,000 barrel per day net to Eni. All other main developments are also well advanced and close to reach first production. The Jangkrik floating unit is on site, hookup has been completed, commissioning is ongoing, targeting an imminent startup. The ramp-up will be very short and will deliver a plateau around 45,000 barrel per day net to Eni. The OCTP FPSO arrived on site last month. Hookup is ongoing to allow first oil within few weeks.
This first phase of the OCTP project will deliver, net to Eni, 20,000 barrel per day of oil at plateau, and a further 20,000 barrel per day from gas phase will start in the first half of next year. Both developments anticipate delivery of production versus the original plan. Also, Zohr is progressing fast, and we expect to start up within December. These three fields are expecting to deliver, net to Eni, volumes of 30,000 barrel per day this year. In 2018, 150,000 barrel per day with a cash contribution of EUR 1.5 billion. As 2016 numbers are now filed for the oil industry, I would like to give you a brief comparative look on some of the upstream performance metrics. We continue to deliver amongst the lowest unit operating cost in the industry. In fact, we have delivered first quartile OpEx per boe for five years running.
In the first quarter 2016, 2017, sorry, OpEx per barrel was just above $6 per barrel, continuing to be at the bottom of the sector. Equally important is capital efficiency, as measured through the finding and development cost. Through a combination of our continued leadership in conventional exploration and focus on development efficiency and procurement at the bottom of the cycle, we have consistently added reserves cheaper than any other company. Rolling three-year finding and development cost average has been lowered down to $13 per barrel, while the industry moved up to an average of $33 per barrel. We believe that given the near FID project inventory and exploration prospect we have currently identified, we will be able to continue delivering organic finding and development cost at the bottom of our peers' range. Eni's portfolio is competitive not only in term of cost, but also in term of reserves value.
Eni's proved reserves are worth EUR 31 billion according to the PV 10 analysis. This continues to be an outstanding result, considering that our barrels have the same absolute value of portfolios much larger than ours. In terms of unitary value, we rank third in the peer group. This is notwithstanding the larger presence of undeveloped reserves in our portfolio, Eni, 43% of undeveloped reserves versus an average of 34% for the competitors, generated by the recent additions, and the long production plateau of these reserves that affect their discounted value. This is the result of our strategy to continue to invest throughout the cycle, growing the reserves base, as confirmed by our life index. Since 2014, we kept Eni life index above 11 years, notwithstanding the growth production by 10%, whilst peers fell by two years.
These figures prove that our reserves are really valuable and resilient in the long term. Now let's move to mid downstream. In this quarter, we delivered positive results in all our midstream segments. Gas and Power business confirmed the progress of the ongoing turnaround, with an EBIT of EUR 338 million, plus EUR 53 million versus last year. This increase, even more remarkable if you consider the impact of lower retroactive effect for EUR 56 million compared to 2016, is mainly driven by recent negotiations, cost savings, and trading performance. This result consolidates the prospect for a structural breakeven of Gas and Power business in 2017. Refining and Marketing performance was in line versus last year, despite the upsets in Sannazzaro. The improvement is related to optimization in crude supply and good performance in wholesale market.
In refining, Venice and Gela plants turnaround is proceeding, while the plants in operation succeeded to reduce their breakeven margin below $4 per barrel. Finally, Versalis, our chemical unit, had a strong quarter thanks to the lower downtime and production mix highly exposed to those products which benefited from good margins. This proves the capability Versalis had developed from its new portfolio configuration to capture market opportunities. Overall, in the quarter, the company generated EUR 1.83 billion of EBIT, an improvement of EUR 1.25 billion versus last year. This result is driven by the improved scenario that accounted for EUR 1.35 billion and growing efficiency action for EUR 0.1 billion, net of negative impact of the unplanned Goliat shutdown, and the negative effect of one-off and OPEC cuts for around EUR 0.2 billion. We generated net profit of EUR 744 million, the highest level in the last two and a half years.
The average tax rate in the quarter was 57%, a level that should increase to a full year average of around 70%, reflecting the growing weight of upstream contribution to the overall results. Moving to cash. Our cash generation highlights the effectiveness of our strategic plan. Before changes in working capital and valuing stock at replacement cost, cash generation amounted to EUR 2.6 billion, an increase of over EUR 1.1 billion compared to last year when oil and gas prices were lower. If we compare cash generation in the first quarter 2015, which had a similar oil price but higher gas prices in Europe, higher LNG prices worldwide, and higher refining margins, we can see that the increase is about EUR 400 million, proving the effect of mid downstream turnaround and E&P valuable growth.
Cash flow from operation, including working capital changes, was around EUR 2 billion this quarter, or EUR 2.2 billion if adjusted to neutralize the sale of mandatory oil stock accumulated in this quarter and sold early April. 2017 will be a year of strong cash recovery. In the last strategy presentation, we announced to reach an organic coverage of dividends at around $60 per barrel. We continue to pursue that goal. In the first quarter, stock-adjusted cash flow from operation substantially covered CapEx, assuming our post-disposal working interest in Mozambique and Zohr. The quarter's CapEx level reflected the effort to put into production two giant field by mid-year and the strong effort on Zohr. In the coming quarters, we expect to generate higher cash flow from operation, thanks to the production growth coming from the planned startup and ongoing ramp-ups, and the seasonal contribution from mid downstream.
Investment will reduce the pace as major development are completed. We confirm that 2017 CapEx will be below EUR 8 billion, representing an 18% reduction versus 2016. Finally, we will cash in proceed from disposal of Zohr, Mozambique Area 4, and Belgium Retail Gas. Our 2017 dividend cash neutrality, including disposal, is around $45 per barrel. Now, together with the company stock management, we are ready to answer any question you may have.
Ladies and gentlemen, the Q&A session is now open. I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. Thank you. First question comes from Mr. Oswald Clint from Bernstein. Mr. Clint, please.
Hello?
Mr. Oswald?
Thank you. Massimo, hi. Thank you. Can I ask about Kashagan, please? The 32,000 barrels of oil production this quarter, is there any way you can give us any indication of the cash flow contribution this quarter from that kind of chunk of oil production? Or at least the cost recovery percentage that you might be getting against that cash flow, please. Secondly, I just wanted a little bit of an update on Cyprus. You're building quite a substantial acreage position there. I think there's some wells being drilled in the second half of the year. Can you just talk about the well program and also potentially, maybe the prospect size that you're actually targeting there? Thank you.
Oswald, as far as the cash flow contribution from Kashagan, we don't release such detail in our information. You remember, we gave a guideline in term of cash contribution when we presented the overall plan. We are still on this forecast. Nothing can change in this respect. Even the ramp-up is growing as planned, and we are projecting the full production as far as the first phase by the end of this year. As far as Cyprus, I would say Luca Bertelli could give you the answer.
Hello. Regarding Cyprus, we plan to start drilling campaign in the last quarter 2017. Drilling one well inside the 2017, another well back-to-back. We are shooting the seismic, we have more clear idea about the size of a prospect in the second half of the year.
Okay. Very good. Thank you.
Next question comes from Mr. Thomas Adolff from Credit Suisse, U.K. Mr. Adolff, please.
Good morning. Thanks. A few questions, please. Firstly, you tend to go into any given year with a good contingency buffer, as far as upstream production is concerned. Then, you quickly eat into it. In recent years, this year and last year, these outages actually happened in regions where you think if you have maybe proper standards acceptable to the regulator, it wouldn't and shouldn't happen. Last year, you had a field called Zohr in Egypt, that surprised on the upside to offset these unexpected losses in production but not in cash flow. I wonder whether there's anything like Zohr that we're not aware of in your portfolio this year that can surprise on the upside. Then I have two smaller questions. One on the LNG contract you signed with Pakistan, which looks to have a progressive step up in the slope.
I wondered whether you can talk about this progressive step up, and why this offering. Then another very small question around, a little random, but around the press report earlier today that talked about Eni looking to build a refinery in Nigeria. I just wanted to double check with you whether that's accurate or whether that's just factually wrong. Thank you.
Okay. I give you the answer about the production, then I'll let Massimo Mantovani to give you the answer about the LNG, and maybe Antonio Vella to give you some color about Nigeria. As far as production, I understand what you said, but first of all, let me say that what we accounted for, as far as the first quarter in term of production, not very far from the guidance we gave in term of the plan, because the plan already, as far as 2017, projected a growth. Just to give you an idea, the first quarter in our budget was 1,815,000 boe per day. The 1,795,000 is not so far from that. By definition, we had some accident, including Goliat, but we have already some contingencies included in our projection. We had enough room to compensate significantly the accident that we have.
Having said that, the new startup, including Jangkri k and the ramp up of the major project up to now is definitely confirmed. We are still retaining some contingency, and definitely we have some potential upside in term of production, that I would say are not completely represented in the number that we are disclosing. All in all, Thomas, we are confident to confirm the 1,840,000 boe per day that we gave as indication. Maybe certainly included in the positive contingency, we say Jangkri k and the OCTP up to now are forecasted to start up some days in advance versus the expectation we have when we performed the budget. Maybe Roberto Casula could, at the end of this, I would say, the answer could elaborate, giving you some more detail about the two projects. This is the sense of what I'm saying.
I give the floor to Massimo Mantovani to give you the answer about LNG.
This is Massimo. The offer we made for Pakistan is obviously, first of all, consistent with our portfolio for LNG, which we have. That includes also J angkri k . You are quite correct, we do have a sort of progressive offer, which we made in respect of pricing for the first years. That's consistent with the analysis we made always on the portfolio. Overall, obviously, the offer we made as an average is well below the five-year tender that they awarded recently.
Concerning Nigeria, I would like to recall that Eni have signed in January 2017, an MoU with the Minister of Oil in Nigeria, where several item has been tackled on the relationship between Eni and the Ministry and NNPC. Within the items, we agree to support NNPC and the Ministry to study an upgrading of Port Harcourt refinery, and the study are ongoing. Meanwhile, we are being requested to add additional studies to identify new locations eventually between Brass and Port Harcourt to evaluate an additional expansion while the upgrading of the existing refinery is going to be implemented. This is what I can clarify to you on the discussion that happened yesterday.
Okay, that's great. Eni would take a stake in this expansion?
First of all, we have to conclude our feasibility, then the issue of stake, I think, is going to come later for sure.
Okay, great. Thank you very much.
Thanks.
Maybe Roberto Casula could give you some additional color about the three major project ongoing this year.
Thank you, Massimo. Well, I'll start from Jangkrik in Indonesia, which is now very close to start up. The floating production unit is on location. We are just completing the cap of the subsea wells. We already drilled and complete all wells envisaged in the project. As a good news, we were able to save some money in terms of overall CapEx in addition to increased reserves. I remember that the production is 450 million standard cubic feet per day. Similar case for OCTP project in Ghana. All wells have been drilled. We continue the completion of the first wells to start up production. Again, expected really shortly. FPSO is already on location. Everything is progressing in advance compared to the plans we had. In both cases, we can talk about one to two months of anticipation for these two projects. Zohr.
Zohr, all the offshore activities are ongoing. We almost completed the laying activities for the pipes. The platform, the control platform, as you probably remember, will be installed by June and will be ready in September. Onshore, all activities are progressing both for the startup and the ramp up. We confirm, as Massimo already said, the startup of Zohr by December.
Great. Thank you.
Next question comes from Mr. Biraj Borkhataria from RBC. Mr. Borkhataria, please.
Hi, thanks for taking my question. I had a few. The first one was on the divestments you've agreed. Your release today states that 50% of the proceeds from the BP deal will be paid in installments. I was wondering if you could just talk us through when the rest of the proceeds are to be received, and also whether this is the same structure as for the Rosneft portion and with Mozambique. The second question is on the production guidance. Obviously, with production a little bit low, you've eaten into the contingency. Also in the release, you state that there's some initiatives of production optimization which were not included in the initial plans. I was wondering if you could talk about those initiatives and why they weren't necessarily included in the plans at the start of the year.
Just finally going back to the final slide on slide 11, you've got the cash flow plus disposals figure, and I just wanted to clarify, was I right in hearing you said you're expecting EUR 3 billion in proceeds to be cashed in this year? If I take the half, is that a fair reflection of your underlying cash flow generation for this year? Thank you.
I'll give you the answer about the investment, and I leave the floor to Antonio Vella to give you additional detail on the production and production guidance. In term of divestment, with reference to the Zohr divestment, yes, payment will be through installment. Expected cash in 2017 is EUR 1 billion, that represent more or less 65% of the overall price. The bulk of the remaining 35%, the largest part of the remaining 35%, will be cashed in in 2018. The remaining few money to be cashed in will be in 2019. In term of overall cash in, making reference to the latest slide, we said that we expect to cash in a net of EUR 2.7 out of Mozambique, net of tax.
Probably you know, because it has been reported by the press, that we got the agreement about the tax treatment of the gain in Mozambique, that is in the range of EUR 300 million. The net will be EUR 2.7 plus the overall EUR 1 billion that we'll cash in from Zohr. The overall amount is EUR 3.7 expected to be cashed in in 2017. I leave the floor to Antonio to answer your question about production.
Thank you, Massimo. The production optimization, it's an allocation of CapEx within our budget. The contribution expected in 2017 budget was 50,000. Definitely, this allocation of wells is moving in a different circumstances. For example, Nidoco, as it was mentioned, some of you mentioned Nooros. Nooros has performed much, much better than any expectation, and we are continuing drilling wells of more or less 5 million cube meter a day. While we are improving our expenses in wells, which are not complying with the breakeven that we request. The 50,000 barrel plus will be confirmed. Meanwhile, we have all the anticipation of Jangkrik, East Hub, and OCTP that will contribute additional production to make robust our 1,840,000. Thank you.
Great. Thanks.
Next question comes from Mr. Joshua Stone from Barclays. Mr. Stone, please.
Hi, good afternoon. I've got two questions, please. Firstly, on gas and power, a very strong performance in 1 Q. It appears to be running ahead of the 2017, 2018 guidance. I wonder if you could talk a little bit about more detail on the drivers of that performance, perhaps giving some contribution, how much from trading, how much from costs, and then how sustainable you think that is for the rest of the next 18 months or so. Secondly, on Mexico, the recent discovery there. Can you just update us how discussion's going with the government and how soon you think you'll be able to start up production? Thank you.
Okay. Massimo Mantovani give you the answer about gas and power. Antonio about Mexico.
Okay, for gas and power, the guidance we gave in respect, in particular, is in relation of the gas negotiation, which are ongoing. They're on a positive track. We already managed to close some of them and are still discussing on others. The positive result of this negotiation, I think, are underlined from, as Massimo said, the operating profit results of quarter one as compared to quarter one 2016, EUR 50 million more. In particular, if you take away the retroactive effect in both quarters, you do have in this quarter, in 2017, an increase of the operating profit of EUR 100 million. That is mostly coming from gas renegotiation and also some trading activity. There is a portion of trading. In particular, of course, we optimize some trading activities in general in respect of the high price for the weather.
Okay. Just to clarify, the advantage from gas renegotiation that Massimo mentioned relate to previous negotiation that happened in 2016. This is the normalized benefit of this negotiation that we are benefiting from now on. This is a stable contribution. We are not talking about benefit that are retroactive effect of renegotiation happened this year. This is a quite positive result that Massimo remember amount to EUR 100 million, if we take this retroactive effect out of the calculation. Antonio.
Okay. Mexico, the result are very positive. We are discussing with the authority, recently a visit with our CEO for an early production implementation. However, we are going to drill additional three wells in 2017. Immediately after, we will proceed with a plan of development, at least for Amoca early production. Thank you.
Great. Thank you.
Next question comes from Mr. Iain Reid from Macquarie. Mr. Reid, please.
Hi. Two questions, please. One on the gas business again, Then one on asset sales. On the gas, now you're at a more normalized level of profitability. Is it possible to give us a sensitivity of the overall earnings in the business to European and Italian gas prices? Presumably when those prices rise a bit, your profits will fall somewhat given the fact you're a net price taker in that business. A question on asset sales. You obviously completed some of the big ones now. I just wonder if you could give us some indications, generally, obviously not talking about specific assets, about where the next wave of your asset disposal program is coming from to meet your longer term target. Thanks a lot.
Okay. In terms of gas, I confirm that now the results are much more stable, It's difficult to identify, we say, sensitivity, because the nature of different businesses inside is so different, We say the fact that we are not related directly to a specific, we say, price, but we work taking account the differential between different hub or whatever. It really is difficult. I'm not able now, and probably even in the future, to give you, as we do talking about the E&P production sensitivity. As far as the disposals, certainly, as I said, we are quite ahead, if compared to the targets we gave performing the four-year plan. We are working on additional divestment on the same wave of disposal that we already achieved. Mainly targeting from one side, the so-called dual exploration model.
We still retain significant discovery already achieved, retain with a very high interest that could be subject to a dilution. Maybe I would like to mention West Africa among these. Other assets are retained from 80%-100%. For example, Mexico is retained today 100%, Cyprus, very high stake, and even new prospect that are going to be drilled in 2017 are retained with a very high percentages. Definitely this would be a source of additional disposition looking forward, as well as some other minor asset, even in business other than E&P, mainly targeting logistic and other asset that are no more focused on our strategy.
Okay, thanks.
Next question comes from Mr. Hamish Clegg from Bank of America. Mr. Clegg, please.
Good afternoon. Thanks for taking my questions. Just a couple. Just wondered if you could clarify that slide on where you talk about dividend cash neutrality at $45. That looks very much like it's a sort of including your disposals for this year. Is that very much for just this year? Because it's not quite the same as the $60 neutrality you talked about. My second question is regarding gas volumes as part of the mix. One of the things I noticed in your results is a big uptick in gas volumes has basically offset some of the down movement in oil. Is this something that we're going to see reverse in the mix, in terms of percentage of your volumes coming from gas in the coming quarters?
Okay. I give you the answer to your first question. The aim of the last slide was just to say that as far as 2017, we are saying two major things. First of all, that we are confirming the guidance to cover CapEx and dividend at $60 per barrel organically. Second, that definitely we will leverage on a significant amount of cash in from disposal. I mentioned EUR 3.7 billion, that will allow us to drop from 60 to around 45 at year-end. No more than that. This is the message we would like to pass to you through this slide. Gas volume production mix. Okay. Certainly, targeting the overall production of 1,840,000 at average 2017, we will have some reduction in oil, and we will have some increase in gas.
We are talking about more or less two percentage points in term of growth gas versus decline in oil. This percentage has been a little bit higher in the fourth quarter because of the stop of Goliat. The difference in the first quarter has been higher, but with the recovery of Goliat, notwithstanding the shutdown of Val d'Agri, we expect that this different will be much less. It will be reduced, as I said, as a yearly average.
Okay, that's great. I just had one follow-on question, actually, because I don't know about everyone else, but I was very pleased to see you guided or reporting cash flow on a pre-working capital replacement cost basis. It makes our lives a lot easier. Could you confirm that your full-year cash flow guidance that you gave earlier in the year, whether or not that's also on a pre-working capital replacement cost basis as well, to be in line with what you told us this quarter?
The guidance that we are giving now probably would be, I would say, repeated from now on. The guidance we gave performing the four-year plan was the guidance, the cash flow from operation, including working capital. What I could say that we do not expect significant changes in working capital all along this year. At the end of the story, at year-end, as an average, the two number will be very close.
That's clear. Thanks so much.
Next question comes from Mr. Jon Rigby from UBS. Mr. Rigby, please.
Hi. Thank you. Just two quick ones. The first, can you just update on the EST plant, and where you are on bringing that back into service and maybe some kind of estimate of if it had any economic effect on your earnings in the first quarter? The second, just to come back to a piece of guidance, I think I heard Massimo refer to in the opening remarks about tax rates. I think you said that you expected the tax rate to move towards 70% for the full year or for the remainder of the year. That would be significantly ahead of both the corporate and the upstream tax rate in the last couple of quarters.
I just wondered whether you could maybe sort of articulate further what the moving parts are to move us back towards what is a significantly higher tax rate than we've seen in the last six months, if that's possible. Thank you.
Okay. I'll try to do my best to answer your question about the EST plant. The refurbishing is ongoing. The overall amount of CapEx to be injected is in the range of EUR 200 million, I would say covered by the insurance, except for the retention that is quite limited. We expect to have EST plant back in production by the end of 2018. Yes, definitely, we are suffering a loss of EBIT because of the stop that is in the range of, for example, this quarter, EUR 15 million. From one side, definitely it's a pity. On the other side, we say, show how strong is the recovery in terms of efficiency in our refinery plan, our refinery system that, as I said, reached a break-even below $4 per barrel. That is including the negative effect of the EST plant stop.
This just to give you the major values. As far as tax rates, yes, definitely, I confirm the 70%. Why 70% as an average? Because as far as the Italian contribution to EBIT, that is exposed to the lower tax rate in our portfolio, it reached the maximum in the first quarter and then declined, mainly in reference to the gas and power business, while the upstream is expected to increase. You know that upstream is carrying a much higher tax rate. Why 70% versus a tax rate that has been much higher in the past? Because as we tried to explain even in the past, at this level, 70% is, I would say, the average of tax rate.
It was much higher before because when we are exposed to much lower oil prices. The amount of undeductible costs, I would say exploration, the structural cost, are so significant that the tax rate resulting from this equation is much higher, in some cases even more than 100%. Tax rate with $55 per barrel would be in the range of 70%. We said that targeting the four-year plan, while we expect, I would say, Brent price growing up to $70 per barrel, we expect a slight decrease in tax rate in the range of 60%.
Massimo, can I just follow up on that? I mean, the oil price for 4Q and 1Q was low to mid 50s, and the upstream tax rate, not even the corporate tax rate, the upstream tax rate was less than 60% in both those quarters. Why would the upstream move so significantly upwards over the balance of this year?
No, I didn't comment on this because I would say it's a minor issue, but the normalized E&P tax rate has been, in both quarters, in the range of 60%. It's been reported a bit less than 60% because we had some, I would say, unrepeatable income in both quarters that caused this slight decrease below 60%. But we are talking about, for a quarter, three, four percentage points in the tax rate of E&P.
Okay. Thank you.
Next question comes from Mr. Michele Della Vigna from Goldman Sachs. Mr. Della Vigna, please.
Massimo, thank you for taking my questions. Two, if I may. The first one, could you give us a bit more visibility on what drove the operating working capital outflow in the quarter, and whether you expect it to fully reverse by the end of the year? Secondly, given the cost deflation we're seeing broader in the industry, could you tell us which projects you are ready to FID in the next 12 months? Thank you.
Okay, Michele, I give you the answer about the working capital. I leave the floor to Roberto to answer your question about the market cost and inflation. About the working capital. You have seen that we absorbed, as far as the working capital cash, amounting EUR 0.9 billion. The explanation, talking about the major issue, is the following. EUR 0.2 is a difference in factoring. We discounted less receivable than we did in fourth quarter 2016, but I would say is a movement that definitely will be recovered in full year. We do not expect any difference on this respect. As far as EUR 0.2, as I mentioned during my speech, the Refining & Marketing business bought some stock of oil in the first three months to be sold to the Italian organization that take care of the mandatory stock at the system level.
This disposal happened formally at the beginning of April. We incurred the cost in the first quarter, and we cashed in the disposal, if I remember well, the 5th of April. As far as an additional EUR 200 million, it's something that has already been recovered. As far as EUR 300 million, is just the stock revaluation driven by the scenario that the effect, the replacement cost that neutralize the price effect from EUR 2.9 to EUR 2.6 cash flow in the quarter. As far as EUR 0.2, it's just a seasonal dynamic of our working capital, mainly related to the Gas & Power business, and partially to the Refining & Marketing. The majority is very specific for this quarter, and we definitely expect that every negative effect accounted in the first quarter will be fully recovered by year-end.
As far as the inflation, I leave the floor to Roberto.
Okay. Thanks, Massimo. Well, as you certainly remember, we had an intense activity of contract renegotiation during the past couple of years. From what we see today, well, for instance, drilling units, we think that they reach level just sufficient now to cover operating and depreciation cost, difficult to see further signs of cost deflation. About equipment, umbilicus, and line pipe, all these items are mainly driven by raw material cost, which have increased, in particular the steel. The decrease compared to the prices we had three years ago now has been partially offset. About installation vessels, EPC contract, well, in this case, the price is mainly driven by the workload of the service companies. There are not much project around the world. For a certain period of time, the prices will continue to be low, then we will see when the activities will restart.
About FID, we have this year. First of all, by the end of 2017, the FID of Argo Cassiopea, which is a gas development offshore Sicily. We have a couple of FID in Egypt, in the area of Nidoco and Baltim. I have to mention also that in a couple of weeks, there will be the launching ceremony for Coral South floating LNG. Next year, we do see Johan Sverdrup in Norway. Between 2017 and 2018, we have also a number of projects under maturation, and I'm referring to deep water Nigeria, I'm referring to Indonesia, Merakes, which tie in to Jangkrik, Congo, and as already Antonio said, Mexico.
Thank you.
Next question comes from Mr. Massimo Bonisoli from Equita. Mr. Bonisoli, please.
Thank you. Good afternoon, gentlemen. A couple of questions left. One on asset sales again. Earlier, you mentioned EUR 3.7 billion proceeds from disposal in upstream for month over 2017. Will you have any contribution from the disposal of the retail gas and power in Belgium over this year? One question on Val d'Agri. Could you give us an update on Val d'Agri, and when do you expect to restart production there? Earlier you mentioned 90 days off assumption in your guidance, if I got correct.
Okay. Massimo, sorry, I have to correct. The 3.7 I just mentioned does not include the price we are going to collect anyway in 2017, from the disposal of the retail Belgium business. Because of the agreement with the counterparty, we didn't disclose the number, so I cannot give you the value. The number that are around is, I would say, very close to the reality, but I can't give you the right number now. I leave the floor to Antonio about Val d'Agri.
Okay. In Val d'Agri, we are currently refurbishing the tank, which has been already completed, and we are currently sandblasting and painting. The availability for us to start up is between end of May, early June, providing all the necessary authorization by the competent authority is going to come. This is the situation as now.
Very clear. Thank you.
Next question comes from Mr. Thomas Adolff from Jefferies. Mr. Adolff, please.
Sure. Hello, everyone. Thanks for taking my question. I just wanted to come back to the capital spending guidance for this year, in the context of the run rate in Q1, Massimo. Even if you adjust for asset sales, it still looks a little bit high versus that annual guidance. Could you talk about how the capital spending trajectory is expected to evolve over the course of 2017? Secondly, just moving on to Venezuela and the upstream. Could you talk about operationally how you're finding the situation there, any comments around receiving payments and sort of taking cash out of the country and the measures that you've taken to aid that process? Thanks very much.
Sorry, I didn't got clearly your first question. Could you repeat, please?
I was just asking about the run rate on the capital spending, Q1 versus the full year guidance.
Okay. As far as the capital spending, as I said, we confirm the guidance that we give. Slightly less than EUR 8 billion as overall. Again, what we spent in the first quarter. The EUR 2.47 billion adjusted for the quote that will be reimbursed mainly in Zohr and in Mozambique too, as we get the closure of the deal, is something I would say higher than the average that is more or less in the range of EUR 2 billion per quarter. As far as payment, as I well understood, payment from critical countries around the world, probably Venezuela is in your mind. Situation in Venezuela is the following. We are still definitely producing in normal status from Perla. Activity in Junín-5 are stopped because of two reasons.
First of all, because the environmental situation in terms of prices, second, because of the OPEC cuts. We intend to resume production only if there will be the condition to do so. As far as the cash-in from the gas sales from Perla.
The cash in, I would say, is quite normal. The issue, if I could say, is related to the outstanding that we have since the beginning of this year, that you remember is in the range of EUR 300 million. This outstanding is growing a little bit but is, I would say, under control, and we are not deeply worried about this. This is the situation. Any production from phase 1 in Perla is going ahead. Any kind of additional investment in Venezuela will be incurred only if there will be all the conditions necessary to do so, including the recovery of the existing outstanding. Situation in other countries, in Iran, we are going to recover any outstanding that we have, and it will happen in 2017. We don't have outstanding in Iraq at this moment. This is the situation.
There are no significant outstanding that I'm worried about. Definitely, the level of activity in Egypt is so high that the money that we expect from Egypt is ongoing. Looking forward, this is an element of attention.
Great. Thank you.
The last question comes from Miss Irene Himona from SG. Miss Himona, please.
Thank you. Good afternoon. I have three questions, please. Firstly, going back to tax, Massimo, and that is the cash tax rate. In Q1, it was around 10.7 and a half. Should we expect that to increase over the rest of the year, this year? In line, in other words, with the P&L. Secondly, if I can go back to Mexico, you're drilling the second well, you're talking about early production startup. Can you talk about your current estimate of the resource size that you're looking at? My third question is just a quick one on DD&A. It was EUR 1.8 billion in Q1, flat year-on-year. For the full year 2017, Massimo, should we expect a higher level of DD&A versus last year? Thank you.
Okay. Irene Himona, as far as the cash tax rate in a full year, we expect something in the range of 25%-27%. In terms of DD&A, yes, DD&A is being a little bit depressed in the first quarter because of the stop of Goliat. We expect a full year DD&A slightly higher than the DD&A we record in the first quarter. As far as the resources in Mexico, I'll give the floor to Luca.
Hello. As you understand, we are drilling. What I can say is that results for the first well were pretty positive, also we have encouraging results from the well we are drilling now. We foresee an upside to the original reserve estimate. Of course, we are working for a proper assessment.
Thank you very much.