Morning, ladies and gentlemen, and welcome to Eni's 3rd Quarter Results Conference Call hosted by Massimo Mondati, 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. I am now handing you over to your host to begin today's conference. Thank you.
Good morning, and welcome to our Q3 2016 results presentation. In the 1st 9 months of this year, in a difficult price environment, we continue to deliver on our strategy, intravicular on 3 pillars: the start ups on high cash margin large fields, the reduction of cost and efficiency of our operations and the announcement of new downstream performance. In E and P, we are now at full production in some of our main cash contributors, mainly Balgagri and Goya fields. Moreover, 2 weeks ago, we reached the start up of Cascagam field that is now producing around 100,000 barrels per day of oil and ramping up. Start ups and ramp ups of recent discoveries will sustain our performance from the 4th quarter on, giving us confidence on our production and cash targets.
Exploration, the engine of our portfolio flexibility continues to beat new records. Thanks to the appraisal wells in Zohr that confirm our expectation and in great Rus area, we have now discovered EUR 1,000,000,000 of BOE of resources, lowering our unit dispersion cost to $0.5 per barrel. CapEx was reduced by 17% at the end of September, while OpEx at $6.6 per barrel at 70% 7% lower, sorry. Both are in line with our 2016 guidance of a 20% CapEx reduction and a level of $6.4 per barrel for OpEx. Let me add that we are continuing to invest in the development of a giant Zohr field that is expected to start at the end of next year.
Excluding the impact of this project, we will cut our CapEx by almost 30%. And finally, our mid downstream businesses are consolidating their turnaround. The funding breakeven even sorry, the funding breakeven already at $4.2 per barrel, below the original 2016 guidance of $4.5 per barrel. Esalis keeps delivering good results with an EBIT of EUR 300,000,000 in the 1st 9 months. And in Russian Power, the 9 months pro form a turned negative at minus EUR320,000,000 mainly due to lower attractive benefits from contract negotiation as well as challenging scenario in the LNG market.
The turnaround plan is proceeding with a reduction in logistic cost of around BRL100 1,000,000 this year. Gas and Power contributes a positive free cash flow of around BRL400 1,000,000. Our mid downstream contributed overall with a €1,500,000,000 to the 9 months of each sector and each sector indeed the downstream is also free cash flow positive. Overall, the company generated more than BRL4.4 billion of operating cash flow in the 1st 9 months. For the full year, thanks to the 4th quarter expected of full operating speed, we are in line with the planned operating coverage of CapEx at $50 per barrel.
Before entering the details of our business performance, I would like to give you some color on market environment. Prices were weak in all our markets. The average Brent price in the 9 months was $42 per barrel, 25% lower than last year. European gas prices were even weaker. Gas demand in Europe staged a mild recovery, plus 4%, tends to grow in the power sector due to lower hydro production in Italy, low nuclear availability in Germany and France and substitution of coal mainly in UK.
However, this trend was not enough to offset the growth of imports via pipelines. As a result, the Italian hub price was lower by 34% in the 4th quarter in the 3rd quarter and by 36% in the 1st 9 months. Similarly, all the other European hubs recorded a declining trend. European gas weakness impacted the value of our APT production in Italy, UK, Norway and Libyan exported gas. The timing difference between the value of LNG market also reduced the scope for worldwide cargo arbitrage.
Also, our refining margin was significantly lower. Year to date, taking into account of the hedging that was put in place in 2015, the margin of our refineries was 40% year over, with diesel prices still suffering from market oversupply and gasoline leaving steam due to a high level of stocks and falling European export towards the United States. As far as the chemical, the reference cracker margin of the 1st 9 months was substantially in line with the last year as the reduction in cost of raw material, mainly virginata, was offset by the reduction of prices of ethylene and propylene. However, the Q3 'sixteen was 23% weaker than last year. Turning now to the operating activities.
In the Q3, we achieved fundamental operating milestones. The 2 major fields that were temporary offline, Balzagre and Joliet, will start the production respectively in August September, and they ramped up to Filcra Tor with high quality equity contribution now back in excess of 135,000 buelos per day. Arshagan started up few weeks ago and is now producing around 100,000 barrels per day of oil. Production is expected to gradually increase towards the target level of 370,000 bb per day of oil to be achieved by the end of next year. Other ongoing projects are ramping up smoothly, such as in Rus, now gross production 130,000 barrels per day and targeting further growth in the next year.
The West hub reaching more than 90,000 barrels per day of gross production and Marine 12 and Congo now is producing more than 20,000 barrels per day. These are just some examples of our continuous improvement on time to market. Overall, in 'sixteen, we will produce 190,000 barrels per day from start ups and ramp ups of food started last year. Year to date, production was 1,726,000 barrels per day, 0.5% ahead of last year. The unplanned shutdown of Al Bagri that impacted 42,000 bureaus per day was mainly offset through the rapid ramp up of news.
In the Q4, we will benefit of the full contribution of Goyak and Balbaghri and we will start to record Cascagran production allowing us to confirm the full year guidance of almost BRL1.76 million per day. In terms of EBIT, in the 1st 9 months, we have generated 1,100,000,000. Compared with last year, the lower oil and gas scenario in Balbari shutdown impacted for EUR 3,600,000,000 compensated by an operational improvement of EUR 1,000,000,000. E and P operating cash was about EUR 3,600,000,000 during the 9 months, BRL 1,700,000,000 lower than last year. On cash, the overall negative impact of the scenario in Balbari accounted for almost EUR 2,000,000,000.
In the 3rd quarter, EBIT was almost EUR 650,000,000 while operating cash, notwithstanding the stock of cash generative asset in Italy and Norway, was EUR 1,900,000,000 more than 20% higher than last year, although in a bad price environment, it was 10% lower. In Gas and Power, European scenario remains weak as I described. Furthermore, the energy trading is now meet by the narrow differential among the different regions, limiting the scope of international trading. In this scenario, Casten Power is now progressing in the turnaround, having achieved an extra saving of around EUR 100,000,000 in the operating and logistic cost. The gross saving accumulated in 'fifteen and '16 amounts to around EUR 200,000,000 in line with the target of EUR 350,000,000 per year from 2019 compared to 2014 levels.
During the 9 months, we recorded an operating loss of around €320,000,000 that is EUR170,000,000 lower than last year. This result is substantially driven by the different impact of attractive effect among the two periods. The lower result in LNG was fully offset by higher performance in trading and the above mentioned saving in logistic cost. Despite this weak result, the business is cash generative with an operating cash flow contribution of more than EUR 450,000,000 in the first 9 months. In R and M, we continue to increase the efficiency of our refineries.
We ramped up the S plant and we benefited, thanks to the flexibility of our refineries from favorable crude differentials. For 2016, we have already reached a breakeven margin of $4.2 per barrel, $0.3 lower than the original guidance. This relentless effort has allowed us to contract the scenario slump recorded to date. Over the 9 months, EBIT adjusted fell by 28% because of the negative scenario in refining, while marketing posted a good performance in line with last year. Operating cash flow remains robust with €800,000,000 of free cash flow and free cash flow positive.
As regards to Versa Vista, Q3 is the 7th quarter in a row with a positive performance. Our chemicals recorded EBIT grew by more than 10% year on year in the 1st 9 months. In spite of a slightly weaker margin scenario, our results improved mostly thanks to stronger sales of intermediates and the high unit margin of Toyota Lien. The business has an operating cash flow of more than EUR 250,000,000 largely enough to sustain its investments. On a full year basis, Vosalis will generate a positive free cash flow, the first time in many years.
Coming up our performance at group level. In the 1st 9 months, EBIT was EUR 1,000,000,000. Year on year, results were heavily impacted by the lower commodity prices and margins, which affected our operating results by BRL 3,300,000,000. In addition, the Valdavi shutdown and other non recurring items in the Santander accounted for another BRL 500,000,000 or lesser results. This negative effect were offset in real stable production by the action we described in terms of efficiency and cost saving that together accounted for BRL 1,000,000,000 of better performance.
In the 3 quarters, adjusted net income was negative for about BRL 800,000,000 penalized by higher tax rate paid on positive results in PSA. However, cash tax rate was much lower at 37%. On a full year basis, our cash tax rate is expected just above 30%. In terms of cash, we confirm the cash neutrality at $50 per barrel. Thanks to the improvements in all businesses, in the Q3, we recorded an operating cash before working capital of BRL 1,400,000,000, almost in line with last year when we were operating with a better scenario and we're fueled by the other contribution.
In the 9 months, we generated EUR 4,400,000,000 of operating cash flow. In the 4th quarter, the cash grow will accelerate with an expected contribution of current market conditions of around half of the amount of cash flow generated in the 1st 9 months. Without the scenario impact and the effect of the valdagu shutdown, we would have generated EUR 2,000,000,000 more of cash, reaching approximately the EUR 9,000,000,000 level required to cover CapEx. Leverage at the end of September was 32% after the interim dividend that we paid in the quarter. Thanks to the cash contribution from some disposal at an advanced stage of execution, we plan to reduce this level in the coming quarters.
And now let's open the floor for a Q and A session.
Thank you. First question comes from Mr. Clint Oswald from Bernstein. Mr. Bernstein, please.
Thank you. Yes. Massimo, I wanted to ask about the Kashagan barrels, just given the field has started up. Maybe if you can try and help us think about the maybe the unit profitability or the cash flow per barrel that we should come to expect from those barrels? Obviously, there's a lot of depreciation.
There's a lot of transportation cost realization differentials. But it's maybe if you could talk about the kind of unit margins from those barrels as we look into 2017, please? And then secondly, I think you mentioned, Jan, your comments about confidence on growth in cash, at least in the upstream. Could you talk about your confidence on executing on the kind of the main divestments that you've spoken about over the last year or so? Certainly, as we think about Mozambique, Egypt, maybe even the chemical business and gas retail, please.
Okay. So Clint, in terms of, I would say, economics of Cascagane, I cannot elaborate in detail on this. Definitely, Pashagan is a high quality oil that will be evaporated without any significant discount. And the underlying PSA contract is an old one with a very high cost of oil percentage that will allow us to recover very quickly the investments we made. So do you remember the projection we shared with you previously about the time required to recover the CapEx.
And we said that more or less 40% of CapEx would be required based on our scenario in the next 3, 4 years. So it will be on top of this, the tax rate applied to this contract that is one of the lowest in the industry is around 25%. So all these elements should give you the confidence that the cash flow expected from Cashagan is a very high quality cash flow. In term of ramp up, I don't know if Antonio that is together with me could give you some additional element in term of ramp up and production ongoing. Okay, Massimo.
So the ramp up at the actual phase is coming up very slow. But as we have discussed, we will reach 200,000 by, let's say, by the end of December with the process system will allow as of today. Okay. So in terms of future cash flow, so the 4th quarter cash flow and cash flow coming from expected from divestment. So again, in terms of divestment, you understand I cannot tell you exactly what's going on.
What is important that we are confirming the target of the overall divestment we gave to the market in March. We feel that we are pretty ahead of this plan in more than one negotiation regarding different assets. So I would say maybe some news or I'll be in a position to update you more precisely in the next month. But let me say, if I well understood, you asked also something about our confidence in the future cash flow before disposals. So by definition, adding Valdegri, Goliath and Cachan in production, the oil, very high quality oil in good fiscal even in good fiscal regimes will give us the push towards a higher cash contribution.
And if you take a look at the last slide I show this morning, you will see that we expect in the 4th quarter, just to give you an example, half of the cash flow we got in the 1st 9 months. So in the range of EUR 3,200,000,000 €1,000,000,000 Why? First of all, because the expected production in this last quarter would be in the range of EUR 3,000,000 mentioned. We are keeping on as I mentioned. We are keeping on targeting the reduction in our outstanding in some countries.
We already got some results in the 3rd quarter. That's the reason why we have been able to show BRL 1,800,000,000 of cash flow in E and P in the 3rd quarter, higher than last year. We kept on recovering some outstanding in Egypt. In Iraq. We succeeded to keep at least steady our spending in Venezuela.
So all these contributed to the cash contribution and will contribute to the cash contribution in the coming weeks. Cash and power would be as a seasonal phenomenon, a good contributor of cash in the Q4. And if you maybe leverage in the current scenario that would be in the range of $50 trend and a margin refining margin of around $5 that is the current margin, the amount we are announcing that would be definitely achievable. On top of this, we'd like to remember that also on a tax basis, in the future, we will benefit from the same phenomenon that now is affecting our actual tax rate that is very high because we are suffering some losses without the possibility to record deferred tax asset. It means that additional cash that will be produced in the future will be produced without any cash burden.
That's very detailed. Thank you, Massimo.
Next question comes from Mr. Adam Thomas from Credit Suisse. Mr. Thomas, please.
I've got a few questions, slightly more specific. I guess just on the disposal in Mozambique, and I guess we're kind of getting all tired about reading about Mozambique and the deal was done, etcetera. Is the idea to monetize a stake in the entire block or only really part of it through the creation of a separate ring fenced area? So should I be thinking about Coral FMNG also being partly monetized as part of the deal? The second question, I guess, kind of on your confidence on cash flow.
Egypt, obviously, is an important part to your cash flow story. And financially, Egypt often is relying on Saudi generosity. And unless I've misread, Saudi appears to be cutting back on some freebies. So how should I think about the evolution of receivables? What do you reflect in your budget?
And how do you think about the cash flow certainty that comes from Egypt? And maybe finally, just on Iraq. Can you perhaps give some color on Zubair and the outlook there based on the investment level today? And what progress you're making on changing fiscal terms, etcetera? Okay.
So first of all, Coral and the overall disposal program in Mozambique, definitely, I'd say, without disclosing any specific info to you, I would say that the only solution in term of disposal in that effort is, I would say, a unit disposal without any carve out. So no sense to carve out core, allowing other piece out of the full development picture. We can't buy up. Cash flow in Egypt and our confidence. First of all, we are testifying a very good answer from Egypt in term of financial response.
We you remember, we had more or less BRL 800,000,000 of outstanding at the beginning of this year. The number is more or less half today, and we expect that to be, I would say, to reach even additional payment from now to the end of this year. So the response is quite good. As far as the Zohr project, You remember, when we presented the project, we said that we put in place some of protection layers in term of cash payment in dollars while the project and we expect to receive significant payment in U. S.
Dollar. As far as the political, I would say, environment, I cannot definitely, we are taking great care of this. We are looking at what's going on, but I cannot comment and we are ready to deal as we did in the past through maybe an evolution of the current situation. As far as Zubaira, I will ask Antonio to elaborate a bit more on the status of this project. Okay.
Jibera at the moment is producing lower than 400,000 barrels per day. And concerning the negotiation of the new fiscal term, there are discussion ongoing with the authority and all the oil companies. And definitely, we will see what's going to be the end of the negotiation. Thank you. Okay.
As I mentioned before, in the meantime, we've got some better payment terms in this process. That's the reason why we are taking some advantage in term of working capital in this respect. Great. Thank you very much.
Next question comes from Mr. John Rigby from UBS. Mr. Rigby, please.
Yes. Thank you. I've got three questions, please. The first just on CapEx. If I just look at the run rate on CapEx, the drop 3Q against the run rate in the first half of the year And thinking about your guidance for the full year, should we be expecting and are you expecting a similar sort of drop down in the Q4, I guess, as Ashagan and Golliott now have rolled off?
That's the first question. The second is just you didn't you did seem to indicate that you expected the cash tax rate to fall meaningfully into the Q4. And you also referenced the fact that there was a fair amount of shield going forward, which I guess begs the question and commenting on the statement I think you make on Page 2 today, is you don't seem to be recognizing full deferred tax benefits for some of the losses that you're making. Can you perhaps sort of square that circle and maybe indicate to us what kind of scenario and outlook you would need to start to recognize some of the deferred tax credits that you appear not to have taken in the Q3 and in fact, actually quarters before because your accounting tax rate is so high. And the last is just on Gas and Power.
I recognize I sort of asked this question every quarter, but it's sort of reflective of the opaqueness of the opacity of the guidance and the performance in that business. What should we be thinking about the 4th quarter outlook given the moving parts that you've acknowledged? And can you confirm that you do expect to be essentially breakeven in 2017?
Okay. Thank you, John. So in terms of CapEx, so we as I said, we are confirming our guidelines as far as the full year, minus 20%, becoming minus 30%, excluding Zohr. That is quite unique. In term of rapidity, we are executing the project and the time compression because we are projecting to put the project in production substantially in 2 years' time.
So two comments on this. First of all, the 20% is a confirmation on what we said on March because today, we see more or less the same market we have seen in March with significant opportunity in term of CapEx decrease, in term of unit cost. And that was quite high. You remember, we said we announced EUR 3,500,000,000 of CapEx reduction in the 4 years Manubra related to the better scenario, so better condition in the market. And we are glad to say that notwithstanding the fact that we are, I would say, reducing our potential reduction from 30% to 20%.
And we are glad to say that investments we are doing in your are fully benefiting from the current scenario. That's probably the best one in term of new project because thanks to the FID we have taken and the same for Coral, we are fully leveraging on this scenario. And probably, if the expectation is the one that everyone has in term of future brand trend. We will in these two projects, we will take the full benefit of this trend. So this is in terms of CapEx.
So more or less, we are going to spend €9,000,000,000 as we expect to spend more or less EUR 2,000,000,000 in the 4th quarter. In terms of cash tax rate, so first of all, let me comment about the 37% that is slightly higher than the guidance we gave as Storer 2016 that was in the range of 30%. I said that at the end of the year, we'll be more or less in line. It would be in the range of 32%. Why?
Today, we are higher because of 2 reasons mainly. First of all, just talking about Valsagre because Valsagre is benefiting from, I would say, the tax losses we incurred in the past. So any cash produced would be tax free. And that's the reason why thanks to the production, a full regime in Balagu in 4th quarter, the cash tax rate is expected to decrease. As well as for Golar, because the 1st year in Norway, you benefit a 50% reduction in tax rate.
So also Goliath will give a contribution to this tax rate, cash tax rate reduction. As I said, definitely, we are partially posting the deferred tax asset today with the current scenario because tax assets are checked every period versus the projection we have in term of income generation in the coming years based on our scenario. Due to the fact that our scenario is the one that you know very well, it represents today a cap to the full records of deferred tax asset in our balance sheet. Definitely, a level of $60 per barrel would be growing forward in the following year would be the level at which this amount of non recorded deferred tax assets will decrease and the current tax rate we record in our profit and loss would turn down 100%. In term of customer power, so you asked for guidance in term of result by year end and looking forward.
So let me give you some color more color on the expected results by year end. So first of all, I'm just checking the numbers. So we have lost BRL320 1,000,000 after 9 months. The expectation is to increase this loss by year end in the range of EUR 80,000,000. So the expected loss by year end would be in the range of EUR 400,000,000.
We do not expect any significant gas contract negotiation from now to the year end. But at the same time, comparing this result with the result we had in the previous year. In the previous year, we recorded more or less EUR 20,000,000, so more or less 0 result in the 4th quarter, while today we are forecasting something in the range of EUR 80,000,000 of loss. I would like to remember that as happened in the 1st 9 months, in 2015, we recorded some significant one off positive items that in the Q4 2015 amounted in the range of EUR140,000,000. It means that like for like on the underlying result, the 20 16 result is expected to be slightly better than the 2015 result due to the advantages we already got in the 1st 9 months, mainly a better result in trading in oil in the gas and power and the cost reduction, you remember we showed the slide in which we are showing the EUR 100,000,000 of cost reduction, logistics and the credit cost reduction, part of this technically will keep on the 4th quarter generating this underlying better result.
Now I'll leave the floor to Maximo Antovani to describe view about the negotiation going forward. Good morning. Well, let me say that we are building on the structural breakeven for 2017. As Marcin has said, firstly, in respect of the optimization and the reduction of the operating cost and in particular in respect of the negotiation of the gas supply, long term gas supplies. These negotiations are on track and the objective of breakeven is actually still there and is actually what we are aiming at.
Now just to confirm, that would effectively mean about a €400,000,000 turnaround 2017 over 2016,
right? Sorry, can you repeat, please?
You're effectively saying that implies a €400,000,000 EBIT turnaround 2017 over 2016? Yes. Thank you.
Next questions come from Mr. Massimo Bonisoli from Equita. Mr. Bonisoli, please.
Thank you and good morning, gentlemen. Just two quick questions left. The first one, the results below the EBIT for the associates line. Could you shed some light on the negative figure? And the second question is on the Central Group cost and the elimination effect.
Could you also shed some light on the higher cost than we expected? Thank you.
So about the equity investment, you said that the reduction is driven by the same drivers we highlighted as far as the EBIT result because having sold NAM and Galt today, the most important equity investment we are still retaining in our balance sheet are upstream related, mainly Nigeria NGL. Nigeria NGL, by definition, suffering for the current environment. That's the reason why we are recording a significantly lower result. On top of this, we are suffering also some losses from equity investment in Venezuela because of the exchange rate that is more or less a one off. So that's the reason why this drop in this profit and loss line.
As far as the corporate cost, I would say, I don't know exactly which kind of problem we are looking at on this respect. But I would say that in term of corporate cost year on year, today we are consolidating something in the range of BRL 40,000,000 lower cost. The rest would be part of the consolidation, the consolidation effect in term of internal profit, which is, I would say, quite complicated to be explained now. But substantially, the underlying cost, the corporate level are decreasing.
Okay. Thank you very much.
Next question comes from Mr. Alessandro Pozzi from Mediobanca. Mr. Pozzi, please.
Hi. Thanks for taking my question. It's about gas prices. You mentioned the weaker macro scenario, but your gas coalitions have been held up quite well in the quarter. I was wondering if there is an impact of the oil into contracts.
And also I was wondering whether you can maybe give us a little bit of value inside of how you think gas regulations are going to go in the next couple of quarters? Sorry. Probably I didn't get fully your question. Could you repeat, please? Yes.
Okay. So it's about gas realization. And I was wondering the outlook for gas realizations for the next couple of quarters, given that they've been quite different this quarter in Q3? Yes, I'm Francesco. Actually, the quarterly performance on gas pricing, you know that it's impacting differently clearly the our business absolutely.
There is a lot of different kind of price mechanisms. There is only a mechanism in certain equity production. And most of our production, as mentioned, as you mentioned during the presentation, is that is substantially included on spot basis. So it's impacted by the current price of gas. As you could expect in the future, clearly, the rebound of oil price will generate a rebound also in the oil linked reference, but it will take time.
We know that most of our oil linked are generally working with a line item of, let's say, average. So it depends how long will the bulk will emerge and how strong it will be. While on the spot pricing dynamics is mainly clearly from the the seasonal oversupply, but also from the general structural trend in European gas market that is expected to be relatively longer in terms of gas volumes. So I would say there could be some recovery, but I wouldn't expect a large gas recovery in terms of pricing. Some recovery in Q4?
I'm referring refer to the next quarter, Q4 and Q3 next year. So the rebound of pricing is expected mainly in the oil reference and more than in the last one. By part, the current price we see today in the Italian market, the prices are slightly better than the average growth over the first 9 months.
Okay. Thank you. Next question comes from Mr. Biraj Borkhataria from RBC. Mr.
Borkhataria, please.
Hi, thanks for taking my questions. The first one was on Kashagan. I think last quarter you mentioned that you were expecting it to get to 230,000 barrels a day by year end and then be at full plateau by the middle of 2017. And then as of today, your guidance is a little more cautious. So I was wondering if you could just talk about if there's any change in view there or whether you're just being conservative.
And second question, just going back to the cash flow framework, I was wondering if you could just highlight or quantify the maintenance volumes in Q3 that were offline that are going to come back in Q4? That would be really helpful. Thank you.
Okay. Antonio will give you the answer about cash again. Okay. I think the production sometime has been mentioned in the barrel and BOE. There is a little confusion among all the communications and press are coming out.
The 230 are Bayer oil equivalent. Okay. So this is part of the answer. Today, as I said, we are producing 100,000 term of oil. That means 100,000,000 or less in terms of BOE, including gas.
The ramp up is going ahead. The fleet is quite complex. No issue at all up to now in terms of progressing towards the full production. We cannot be engaged together with the joint venture targeting some intermediates step towards 200 to 370 that is expected by the end of next year. So we are a bit cautious in projecting, but I will say changed versus last time when we disclosed our numbers.
In term of production offline, in the Q3, more or less, we are talking about 40,000 bureaus per day shutdown because of maintenance that would be again production in the 4th quarter.
Comes from Mr. Hamish Clegg of Bank of America. Mr. Hamish, please.
Hi there. Two questions for me, please. First of all, do you think you'd give us a little bit of reassurance on Goliath after seeing it switch on and off multiple times this year that we can start to see consistent production from Goliad, maybe talk about the remedies that you've put in place? And second, do you mind explaining probably once again just in very simple terms the tax impact on the net income in this quarter? Because it seems that not only you, but other companies too are not really benefiting from a tax yield in loss making times.
I appreciate the nontax deductible cost. Do you mind explaining it very simply? And is this just a function of oil price? Or is there something else?
Okay. So Antonio will give you the reassurance about Golub and I'll answer the question about the tax rate. After the startup that we made in September, all the action and the remedial action has been made, minor remedial action has been made. And since that, we never shut down again. And I think the performance is quite well at the moment on Goliad.
We don't expect any shutdown. The production is over 100,000 barrels per day, 100 percent. And all the rest of the plant is working very well. So could you just add just
before you do the text, if it's okay, do you mind just telling us what the minor remedial action was and why we should be confident that the problem is solved?
It was just a training process that we made to our people. As you know, this is a platform of very sophisticated technology. And this is that was the main issue that will be resolved already. Okay. Thank you.
Okay. As far as the tax rate, I'll try to do my best to explain very simply more in detail what's going on. So let me break down the overall tax rate in 2 pieces, the NPE part and the other businesses. So E and P reported in the Q4, a tax rate in the range of 100%. Why 100%?
Because the majority of profit before taxes we recorded in the 3rd quarter is coming from PSK with, I would say, and higher than the average tax rate, while the other activities, mainly concession, at the level of price that we had in the Q3 as well as the 9 months are, I would say, slightly positive or even negative. In this case, by definition, the algebraic sum of this element will result in a tax rate that is even higher than the maximum tax rate we paid. On top of this, if you consider that in some cases, for example, in Italy, where we overall recorded a loss, we currently measure how bookable are these losses in term of deferred tax asset versus the future recovery, so the future generation of recordable income. So due to the fact that this future flow is not enough at the current scenario to cover all the future the current losses, the current losses are not fully booked in our balance sheet. That's the reason why, for example, if you look at the final year marketing of Gas and Power, so the remaining business, mainly in Italy, the relevant tax rate in the 3rd quarter is in the range of 18%, high 18% or non 27% is the current tax rate because the remaining part is not being booked at deferred tax asset because of the phenomenon I just mentioned.
I hope I contributed to a better explanation.
Thank you very much.
Next question comes from Mr. Alastair Syme from Citi. Mr. Syme, please.
Hello. I just had one question. I just want to come back to Gas and Power because I must have been sort of confused. Is the turnaround in EBIT performance, operating profit performance in 2017 of the €400,000,000 simply a function of stopping the losses on gas supply contracts? And if so, is that entirely down to renegotiation?
Or is there some assumption around recovery and hub pricing being built in? Yes. As you said, it would be a function of renegotiation that we expect will take place all along 2017 together with the current action we already put in place in term of, I would say, reduction in cost. I mentioned that we already got EUR 200,000,000 out of EUR 350,000,000 that is our projection. That is a process that is going on together with maybe the, I would say, management of our trading activity.
So all these together will imply by year end 2017 the significant reduction of this EUR 400,000,000 losses we are suffering in 2016. So if the renegotiations take place for us Not the bike, but definitely the bike of the activities looking forward to reduce this overall loss. So is the implication therefore that this year you've lost more than €400,000,000 on those gas supply contracts? So I would say in principle, no, it will depend on the market condition, difference between oil price and the up price and whatever. But in principle, I would say no.
And on the hub price, is there an assumption around the hub price of 'seventeen? Because I mean, the hub price has moved a lot even in the last month. So a bit difficult to get a sense of where that guidance is based on. Definitely. If we remain with some oil linked supply contract, while the oil price will go up and the up price will go down by definition because of the phenomenon we will see our losses increase, just to give you an example, considering the same contract in place.
So that's the reason why our scope, as Massimo said, is to renegotiate even the latest contract that remain to be negotiated renegotiated in 2017.
Okay. Thank you very much.
Next question comes from Mr. Martin Ratz of Morgan Stanley. Mr. Ants, please.
You've gone through a lot already, so I'll keep it with 1. I wanted to ask you what the status is of the
EUR 1,000,000,000
sort of claim from Gastera and the bank guarantee that you've sort of given up. Where are we now in that process? And
can we expect some sort
of provision on that at some point? Can you give us an update?
So Marcin will give you the answer. The guarantee is going to stay there until there is the end of the arbitration process. And the arbitration process from our side is in respect of the revision of the price. And that when you consider overall what the situation can be an outcome, we do expect that the prices should be adjusted in respect of the Italian market condition. Okay.
Thank you.
Next question comes from Mr. Irene Himona, Societe Generale. Ms. Himona, please.
Thank you. Good morning, gentlemen. Just one question, please, on cash flows, if I may. You mentioned, Massimo, that year to date, the cost of the nonrecurring interruptions at Valdaga, etcetera, was about EUR 2,000,000,000. So effectively, if we add back that plus 9 months, plus a stronger Q4 effectively, the underlying is on track with strategy.
In practice, of course, the actual differs and the actual will be closer to €6,500,000,000 And in practice, equity on the balance sheet has declined about 13% since year end, so gearing is up a little bit. And my question really is about next year, 2017, in a scenario where there is no OPEC response, oil slips back down to $4, $5 How would the Board's response differ to the current plan? How can we think about the 3 internal levers available to the Board to react at $45 oil to protect the balance sheet? And I'm thinking about OpEx, CapEx, dividends. What is the relative flexibility for you on these 3 in an environment of $45 as you look to protect the balance sheet?
Thank you.
Thank you, Eirim. So probably your question, we received a full answer why we present next strategy next full year plan, so approximately February, March 2017. Now let me say that up to now, as far as we can see the development of our business, including disposals, including the overall external environment, I mean, the commodity prices. There are no reason to think about the change in our strategy. On top of this, do you remember we said that to protect what we said, we retain some additional lever that maybe others already spent in their action that we are still keeping on our pocket in order to cope with worsening looking forward of our scenario.
First of all, in terms of disposals, you remember that we said that we confirmed that the retail gas and power business is not more considered core in our portfolio. But any proceed is not included in the BRL7 billion disposition that we declared. And let me say that this divestment will not be related to the overall, I would say, environment in term of oil environment. So it will not follow in case of an overall price difficulties in dispositions. On top of this, we didn't use any other tools such as hybrid or whatever in order to reduce the weight of the EBITDA on our equity.
So on top of this, as you say, ZO will be spent in 2017 to complete the first phase of investment. So to respect the year end production start up, but we are still retaining some leverage in our CapEx maneuver that can be readjusted in case performing next strategy presentation, we will realize that there are some negative effect not considered in the previous plan. So this kind of additional levers together with what has been already performed arena that will give benefit looking forward. And our expectation in term of divestment are keeping us quite comfortable about what we committed. Thank you, Martin.
Next question comes from Mr. Tipam Jotirlingam of Exane. Mr. Jotirlingam, please.
Yes. Hi, gentlemen. Three quick questions actually, please. Could you just update on Zuora and the development progress there? And just provide a little bit of color in terms of is the CapEx spend in 2017 for Zor likely to be similar to a level of 2016?
And then my second question is just if you could just update on what you see as exploration spend for 2016? And my third and final question is, could you give us a progress in terms of when you see the timing for Coral LNG FLNG and the final investment decision? Do you think that will be before year end or not? Thank you.
Okay. And I'll ask Antonio to answer about Zohr and Luca to answer about the exploration targets. And then I'll answer about Correa. Concerning the XO development, we are scheduled as we anticipated December 2017 and spending is matching our budget. It's going to be including exploration cost in 2016 is going to be 1,400,000,000.
I'll leave a look to give you much more color on exploration of that. I think you asked about the capital expenditure in 2016. Our projection is about $800,000,000 this year, including already said. Okay. In terms of Coral progress, GfID, you remember we got the government approval for the development plan.
We got the environmental license. We completed the tender procedure. We selected the winner. By the way, taking, as I've said, full advantage of the current service environment, We signed the gas agreement that has been announced a few weeks ago. The last step towards the final investment decision is the final commitment of the project financing.
The process is very mature. We are quite ahead. We are collecting the commitment from all the involved banks. So the process will keep some weeks to be completed. And at that time, we'll be ready to take the final FIT.
Okay. Thank you. Could you just clarify, do you think spend on Zuora will be the same in 'seventeen and 'sixteen? Or will it be less or more?
The expectation, I guess, would be a bit higher. The expansion will be a bit higher in 'seventeen than 'sixteen.
Okay. Thank you.
The last question comes from Ms. Lydia Rainforth of Barclays. Ms. Rainforth, please.
Thanks. And I'll try and keep it short. If I could just come back to the Gas and Power guidance again for next year. Of that €400,000,000 swing,
can you give it did
I understand the right thing? You said about €200,000,000 of that swing will be down to reduce costs. And does that then imply that the other €200,000,000 is down to the contract renegotiations? And I just want to check-in terms of the cash flow from new projects coming on stream. I understand you can't give it to anyone specific project like Kashkin.
But are you able to give us what that average cash flow the new projects coming on stream over the next couple of years is compared to the current average for the portfolio? Thank you.
I don't think it's correct to split the issue as you said. And also, it's difficult and also for commercial sensitive information, I'm not going to tell you how much is the discount or the reduction in respect of the gas supply. The key issue for us is the structural breakeven in bringing the price in line with the market price. And that really remains what we look at for 2017.
Okay. Thank you.
I'll start with your second question, Lydia. It's difficult to give you an answer in terms of the flow. What I can say that we are targeting the fleet production from Balagro and Goya in 2017 and the ramp up of Cachagana, the amount of cash expected by 2017 so it would be a significant amount. But again, we are talking about oil, we are talking about oil that as far as Casa Grande suffered in the tax rate. Bad value, we suffered no tax rate at all.
So I cannot enter giving you some precise number, but I'd say together with other major fields we have in our portfolio, just to mention Carajaganak and others, this contribution would be very important one.