Good morning, ladies and gentlemen, and welcome to Eni third quarter results conference call, hosted by Massimo Mondazzi, Chief Financial Officer. For the duration of the call, you'll be in listen only mode. However, at the end of the call, you'll 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 third quarter 2016 results presentation. In the first nine months of this year, in a difficult price environment, we continue to deliver on our strategy, in particular on three pillars. The startups on high cash margin large fields, the reduction of cost and efficiency of our operations, and the announcement of mid downstream performance. In Eni, we are now at full production in some of our main cash contributors, namely Val d'Agri and Goliat fields. Moreover, two weeks ago, we reached the startup of Kashagan field, that is now producing around 100,000 barrels per day of oil and ramping up. Startups and ramp-ups of recent discoveries will sustain our performance from the fourth quarter on, giving us confidence on our production and cash targets. Exploration, the engine on our portfolio flexibility, continues to beat new records.
Thanks to the appraisal wells in Zohr that confirm our expectation and in Great Nooros area, we have now discovered one billion of BOE resources, lowering our unit exploration cost to EUR 0.5 per barrel. CapEx was reduced by 17% at the end of September, while OpEx at EUR 6.6 per barrel, are 67% lower, sorry. Both are in line with our 2016 guidance of a 20% CapEx reduction and a level of EUR 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%. Finally, our mid downstream businesses are consolidating their turnaround. Refining breakeven already at $4.2 per barrel, below the original 2016 guidance of EUR 4.5 per barrel.
Versalis keeps delivering good results, with an EBITDA of EUR 300 million in the first nine months. In Gas & Power, the nine-month performance turned negative at minus EUR 320 million, mainly due to lower retroactive benefits from contracting negotiation, as well as challenging scenario in the LNG market. The turnaround plan is proceeding with a reduction in logistic cost of around EUR 100 million this year. Gas & Power contributes a positive free cash flow of around EUR 400 million. Our mid downstream contributed overall with a EUR 1.5 billion to the nine months. Of each sector and each sector in mid downstream is also free cash flow positive. Overall, the company generated more than EUR 4.4 billion of operating cash flow in the first nine months.
For the full year, thanks to the full quarter expected at full operating speed, we are in line with the planned operating coverage of CapEx at $50 per barrel. Before entering in the page 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 nine months was $42 per barrel, 25% lower than last year. European gas prices were even weaker. Gas demand in Europe staged a mild recovery, +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 U.K. This trend was not enough to offset the growth of imports via pipelines.
The Italian hub price was lower by 34% in the third quarter and by 36% in the first nine months. Similarly, all the other European hubs recorded a declining trend. European gas weakness impacted the value of our equity production in Italy, U.K., Norway, and Libyan exported gas. The time difference between the various LNG markets also reduced the scope for worldwide cargo arbitrage. Our refining margin was significantly lower. Year-to-date, take into account of the hedging that was put in place in 2015, the margin of our refineries was 40% lower, with diesel prices still suffering from market oversupply and gasoline losing steam due to a high level of stocks and falling European export towards the U.S.
As far as the chemical, the reference cracker margin of the first nine months was substantially in line with last year, as the reduction in cost of raw material, mainly virgin naphtha, was offset by the reduction of prices of ethylene and propylene. The third quarter 2016 was 23% weaker than last year. Turning now to the operating activities. In the third quarter, we achieved fundamental operating milestones. The two major fields that were temporarily offline, Val d'Agri and Goliat, restarted production respectively in August and September, and they ramped up to full plateau with high-quality equity contribution now back in excess of 135,000 BOE per day. Kashagan started up a few weeks ago. It is now producing around 100,000 barrels per day of oil.
Production is expected to gradually increase towards the target level of 370,000 BOE per day of oil, to be achieved by the end of next year. Other ongoing projects are ramping up smoothly, such as Nooros, now gross production 130,000 BOE per day and targeting further growth in the next year. The West Hub, reaching more than 90,000 BOE per day of gross production, and Marine XII in Congo that now is producing more than 20,000 BOE per day. These are just some examples of our continuous improvement on time to market. In 2016, we will produce 190,000 BOE per day from startups and ramp-ups of fields started last year. Year-to-date production was 1,736,000 BOE per day, 0.5% higher than last year. The unplanned shutdown of Val d'Agri, that impacted for 32,000 BOE per day, was mainly offset through the rapid ramp-up of Nooros.
In the fourth quarter, we will benefit of the full contribution of Goliat and Val d'Agri. We will start to record Kashagan production, allowing us to confirm the full-year guidance of almost 1.76 million BOE per day. In terms of EBIT, in the first nine months, we have generated EUR 1.1 billion. Compared with last year, the lower oil and gas scenario and Val d'Agri shutdown impacted for EUR 3.6 billion, partially compensated by an operational improvement of EUR 1 billion. E&P operating cash was about EUR 3.6 billion during the nine months, EUR 1.7 billion lower than last year. On cash, the overall negative impact of the scenario in Val d'Agri accounted for almost EUR 2 billion.
In the third quarter, EBIT was almost EUR 650 million, while operating cash, notwithstanding the stock of cash generated asset in Italy and Norway, was EUR 1.9 billion, more than 20% higher than last year, although in a Brent price environment that was 10% lower. In Gas & Power, the European scenario remains weak, as described. The LNG trading is now hit by the narrow differential among the different regions, limiting the scope of international trading. In this scenario, Gas & Power is anyhow progressing in the turnaround, having achieved an extra saving of around EUR 100 million in the operating and logistic cost. The overall saving accumulated in 2015 and 2016 amount to around EUR 100 million, in line with the target of EUR 350 million per year from 2019 compared to 2014 levels.
During the nine months, we recorded an operating loss of around EUR 320 million, that is EUR 170 million lower than last year. This result is substantially driven by the different impact of attractive effects 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 million in the first nine months. In R&M, we continue to increase the efficiency of our refineries. We ramped up the EST plant. We benefited, thanks to the flexibility of our refineries, from favorable crude differentials. From 2016, we have already reached a break-even margin of $4.2 per barrel, $0.3 lower than the original guidance. This relentless effort has allowed us to contrast the scenario slump recorded to date.
Over the nine 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 EUR 800 million of free cash flow positive. As regard Versalis, Q3 is the seventh quarter in a row with a positive performance. Our chemicals recorded an EBIT growth by more than 10% year-on-year in the first nine 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 polyethylene. The business has an operating cash flow of more than EUR 250 million, largely enough to sustain its investments. On a full-year basis, Versalis will generate a positive free cash flow the first time in many years. Summing up our performance at group level. In the first nine months, EBIT was EUR 1 billion.
Year-on-year, results were heavily impacted by the lower commodity prices and margins, which affected our operating results by EUR 3.3 billion. In addition, the Val d'Agri shutdown and other non-recurrent items in Gas & Power accounted for another EUR 0.5 billion of lesser results. These negative effects were offset in an area of stable production by the action we described in terms of efficiency and cost saving. That together accounted for EUR 1 billion of better performance. In the three quarters, adjusted net income was negative for about EUR 800 million, 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 third quarter, we recorded an operating cash before working capital of EUR 1.4 billion, almost in line with last year when we were operating with a better scenario and with full Val d'Agri contribution. In the nine months, we generated EUR 4.4 billion of operating cash flow. In the fourth quarter, the cash growth will accelerate with an expected contribution of current market conditions of around half of the amount of cash flow generated in the first nine months. Without the scenario impact and the effect of Val d'Agri shutdown, we would have generated EUR 2 billion more of cash, reaching approximately the EUR 9 billion 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&A session. Hello? Hello?
Si.
Si.
The Q&A session is now open. You can register for your question by dialing star followed by one. To cancel your reservation, dial star followed by two.
Si.
Thank you. First question comes from Mr. Oswald Clint from Bernstein. Mr. Clint, 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 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 maybe if you could talk about the kind of unit margins from those barrels as we look into 2017, please. Secondly, I think you mentioned in your comments about confidence on growth and cash, at least in the upstream. Could you talk about your confidence on executing all 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. Thank you.
Clint, in terms of economics of Kashagan, I cannot elaborate in detail on this. Definitely, Kashagan is a high-quality oil that will be valorized without any significant discount. The underlying PSA contract is an old one with a very high cost oil percentage that will allow us to recover very quickly the investment we made. If you remember the projection we shared with you previously about the time required to recover the CapEx, when we said that more or less 40% of CapEx will be required based on our scenario in the next three, four years. It will give, on top of this, the tax rate applied to this contract, it is one of the lowest in the industry. It's around 35%.
All these elements should give you the confidence that the cash flow expected from Kashagan is a very high-quality cash flow. In terms of ramp up, I don't know if Antonio, that is together with me, could give you some additional element in terms of ramp up and production ongoing.
Massimo. The ramp up at the actual phase is coming up very slow. As we have discussed, we will reach 200,000, let's say by the end of December, if the process system will allow as of today. In terms of future cash flow, the fourth quarter cash flow and cash flow coming from expected from divestment.
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. How do you say? Maybe some news about being in a position to update you more precisely in the next months. Let me say, if I well understood, you asked also something about our confidence in the future cash flow before disposals. By definition, having Val d'Agri, Goliat, and Kashagan in production, the very high-quality oil, even in good fiscal regimes, will give us the push towards a higher cash contribution.
If you take a look at the last slide I showed this morning, you will see that we expect in the fourth quarter, just to give you an example, half of the cash flow we got in the first nine months, in the range of EUR 3.2 billion. Why? First of all, because the expected production in this last quarter will be in the range of 1.84 thousand barrels per day, high-quality production, as I mentioned. We are keeping on targeting a reduction in our outstanding in some countries. We already got some results in the third quarter. That's the reason why we have been able to show EUR 1.8 billion of cash flow in E&P in the third quarter, higher than last year. We kept on recovering some outstanding in Egypt, in Iraq. We succeeded to keep at least steady our outstanding in Venezuela.
All this contributed to the cash contribution and will contribute to the cash contribution in the coming weeks. Gas & Power will be, as a seasonal phenomenon, a good contributor of cash in the fourth quarter. If you maybe leverage on the current scenario, that will be in the range of $50 Brent and a refining margin of around $5, that is the current margin, the amount we are announcing there will be definitely achievable. On top of this, I would like to remember that also on 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. Alan 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 is done, et cetera. 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? Should I be thinking about Coral FLNG 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. Financially, Egypt often is reliant on Saudi generosity. Unless I've misread, Saudi appears to be cutting back on some freebies. 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? 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, et cetera? Thank you.
Okay. First of all, Coral and the overall disposal program in Mozambique, definitely, how do you say? Without disclosing any specific info to you, I would say that the only solution in terms of disposal in Area 4 is, I would say, a unit disposal without any carve-out. No sense to carve out Coral or any other piece out of the full development picture.
Okay.
Second, cash flow in Egypt and our confidence. First of all, we are testifying a very good answer from Egypt in terms of financial response. You remember we had more or less EUR 800 million of outstanding at the beginning of this year. The number is more or less half today, and we expect to be, I would say, to reach even additional payment from now to the end of this year. 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 protection layers in terms of cash payment in EUR while the project was in production. We expect to receive significant payment in US dollars. As far as the political, I would say, environment, 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 the evolution of the current situation. As far as Zubair, I will ask Antonio to elaborate a bit more on the status of this project.
Zubair at the moment is producing lower than 400,000 barrels per day. Concerning the negotiation of the new fiscal term, there are discussions ongoing with the authority and all the oil companies. 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 got some better payment terms in this project. That's the reason why we are taking some advantage in terms of working capital in this respect.
Great. Thank you very much.
Next question comes from Mr. Jon Rigby from UBS. Mr. Rigby, please.
Yeah. Thank you. I've got three questions, please. The first is 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, thinking about your guidance for the full year, should we be expecting, and are you expecting, a similar sort of drop-down in the fourth quarter, I guess, as Kashagan and Goliat now have rolled off? That's the first question. The second is just, you did seem to indicate that you expected the cash tax rate to fall meaningfully into the fourth quarter.
You also referenced the fact that there was a fair amount of shield going forward, which I guess begs the question, commenting on the statement I think you make on page two today, is that 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 third quarter, and in fact, actually quarters before, because your accounting tax rate is so high.
The last is just on Gas & Power, and I recognize I sort of ask this question every quarter, but it's sort of reflective of the opaqueness or opacity of the guidance and the performance in that business. What should we be thinking about the fourth quarter outlook, given the moving parts that you've acknowledged, and can you confirm that you do expect to be essentially breakeven in 2017? Thank you.
Okay. Thank you, Jon. In terms of CapEx, as I said, we are confirming our guidelines as far as the full year, -20%, becoming -30% excluding Zohr. That is quite unique in terms of rapidity we are executing the project, and the time compression, because we are projecting to put the project in production substantially in two years' time. To comment on this, first of all, the 20% is the confirmation of what we said in March, because today we see more or less the same market we have seen in March, with significant opportunity in terms of CapEx decrease, in terms of unit cost. That was quite high. You remember, we announced EUR 3.5 billion of CapEx reduction in the four years maneuver related to the better scenario. Better condition in the market.
We are glad to say that notwithstanding the fact that we are, I would say, reducing our potential reduction from 30% to 20%. We are glad to say that the investments we are doing in Zohr are fully benefiting from the current scenario. That probably is the best one in terms of new project, because thanks to the FID we have taken, and the same for Coral, we are fully leveraging on this scenario. Probably, if the expectation is the one that everyone has in terms of future Brent trend, in this project, we will take the full benefit of this trend. This is in terms of CapEx. More or less, we are going to spend EUR 9 billion, and we expect to spend more or less EUR 2 billion in the fourth quarter.
In terms of cash tax rate, first of all, let me comment about the 37%, that is slightly higher than the guidance we gave as target 2016, that was in the range of 30%. I said that at the end of the year, we will be more or less in line. It will be in the range of 32%. Why today we are higher? Because of two reasons mainly. First of all, the stock in Val d'Agri, because Val d'Agri is benefiting from, I would say, the tax losses we incurred in the past. Any cash produced would be tax-free.
That's the reason why, thanks to the production, a full regime in Val d'Agri in fourth quarter, the cash tax rate is expected to decrease. As well as for Goliat, because the first year, you know well, you benefit a 50% reduction in tax rate. Also Goliat will give a contribution to this cash tax rate reduction. As I said, definitely, we are partially posting deferred tax asset today with the current scenario. Because tax assets are checked every period versus the projection we have in terms 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 represent today a cap to the full records of deferred tax asset in our balance sheet.
Definitely, a level of EUR 60 per barrel going forward in the following year, would be the level at which this amount of non-recorded deferred tax asset will decrease, and the current tax rate we record in our profit and loss would turn down 100%. In terms of Gas & Power. You ask for a guidance in terms of result by year-end and looking forward. Let me give you more color on the expected result by year-end. First of all, I'm just checking the numbers. We have lost EUR 320 million after nine months. The expectation is to increase this loss by year-end in the range of EUR 80 million. The expected loss by year-end will be in the range of EUR 400 million.
This is due to the, I would say, current environment in which we do not expect any significant gas contract renegotiation from now to the year-end.
Right.
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 million, so more or less zero result in the fourth quarter, while today we are forecasting something in the range of EUR 80 million of loss. I would like to remember that as happened in the first nine months, in the 2015, we recorded some significant one-off positive items that in the fourth quarter 2015 amounted in the range of EUR 140 million. It means that like for like on the underlying result, the 2016 result is expected to be slightly better than the 2015 result due to the advantages we already got in the first nine months, mainly a better result in trading in the Gas & Power, and the cost reduction.
Do you remember we showed a slide in which we are showing EUR 100 million of cost reduction, logistic and operating cost reduction? Part of this definitely will keep on the fourth quarter, generating this underlying better result. I will leave the floor to Massimo Mantovani to describe his view about the negotiation going forward. Good morning. Well, let me say that we are building on the structural breakeven for 2017, as Massimo said, firstly in respect of the optimization and the reduction of the operating cost, and in particular in respect of the negotiation of the long-term gas supplies. These negotiations are on track, and the objective of the breakeven is actually still there, and is actually what we are aiming at.
Just to confirm, that would effectively mean about a €400 million turnaround, 2017 over 2016, right?
I'm sorry, can you repeat, please?
You're effectively saying that implies a EUR 400 million EBIT turnaround 2017 over 2016?
Yes.
Yeah. Thank you.
Next questions come from Mr. Massimo Bonisoli from Equita. Mr. Bonisoli, please.
Thank you, good morning, gentlemen. Just two quick questions left. The first on the results below the EBIT for the associates line. Could you shed some light on the negative figure? 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.
About the equity investment, I would say that the reduction is driven by the same drivers we highlighted as far as the EBIT result, because having sold NAM and Galp, today the most important equity investment we are still retaining in our balance sheet are upstream related, mainly Nigeria LNG. Nigeria LNG, 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. That's the reason why this drop in this profit and loss line. As far as the corporate cost, I don't know exactly which table you are looking at in this respect.
I would say that in term of corporate cost year-on-year, today we are consolidating something in the range of EUR 40 million lower cost. The rest would be a part of the consolidation effect in term of internal profit. That is, I would say, quite complicated to be explained now. Substantially, the underlying cost at the corporate level are decreasing.
Okay, thank you very much.
Next question come 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 that your gas realizations have been held up quite well in the quarter. I was wondering if that is the impact of the oil-linked contracts ended. I was wondering whether you can maybe give us a little bit of insight on how you think gas realizations are going to go in the next couple of quarters.
Sorry. Probably I didn't get fully your question. Could you repeat, please?
Yeah. Okay. 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 our business upstream. There is a lot of different kind of price mechanism. There is oil linkage mechanism in certain equity production, and most of our production, as mentioned also during the presentation, we said is essentially linked with the spot basis. 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. You know that most of our oil-linked are generally working with a nine-and-a-half months, let's say, average.
It depends how long the rebound will emerge and how strong it will be, while on the spot pricing, the dynamics is mainly linked clearly from the seasonal oversupply, also from the general structural trend in European gas market that is expected to be relatively long in term of gas volumes. I would say there could be some recovery, but I wouldn't expect a large gas recovery in term of pricing.
Some recovery even in Q4?
I am referring to the next quarter, fourth quarter and probably first quarter next year. The rebound of pricing is expected mainly in the oil reference more than in the gas one. By quarter, the current price we see today in the Italian market, the gas prices are slightly better than the average we recorded in the first nine 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. I was wondering if you could just talk about if there's any change in view there or whether you're just being conservative. The 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'd be really helpful. Thank you.
Okay. Antonio will give you the answer about Kashagan.
Okay. I think the production sometime has been mentioned in barrel and BOE. There is a little confusion among all the communications and the press are coming out. The 230 are barrel oil equivalent.
Okay. This is part of the answer. Today, as I said, we are producing 100,000 ton of oil. That means 130, more or less, in term of BOE including gas. The ramp-up is going ahead. The field is quite complex. No issue at all up to now in term of progressing towards the full production. We cannot be engaged together with the joint venture at targeting some intermediate step towards the 200 to 370 that is expected by the end of next year. We are a bit cautious in projecting, but I would say nothing changed versus last time when we disclosed some numbers. In term of production offline, in the third quarter, more or less, we are talking about 40,000 barrel per day shut down because of maintenance, that would be again production in the fourth quarter.
Thanks. That's very helpful.
Next question comes from Mr. Hamish Clegg of Bank of America. Mr. Hamish, please.
Hi there. Two questions from me, please. First of all, do you think you'd give us a little bit of reassurance on Goliat after seeing it switch on then off multiple times this year, that we can start to see consistent production from Goliat? Maybe talk about the remedies that you've put in place. Second, do you mind explaining, probably once again, just in very simple terms, the tax impact on the net income in this quarter? It seems that not only you, but other companies too are not really benefiting from a tax shield in loss-making times. I appreciate the non-tax deductible cost. Do you mind explaining it very simply? Is this just a function of oil price or is there something else?
Okay. Antonio will give you the reassurance about Goliat, and I'll answer the question about the tax rate.
After the startup that we made in September, all the remedial action has been made, minor remedial action has been made. Since that, we never shut down again. I think the performance is quite well at the moment on Goliat. We don't expect any shutdown. The production is over 100,000 barrels per day, 100%. All the rest of the plant is working very well.
Could you just add one? Just before you do the tax, 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?
No, it was just a training process that we made to our people. As you know, this is a platform of very sophisticated technology, and that was the main issue that will be resolved already.
Okay. Thank you.
Okay.
As far as the tax rate, I try to do my best to explain very simply more in detail what's going on. Let me break down the overall tax rate into pieces, the Eni part and the other businesses. Eni recorded in the third quarter a tax rate in the range of 100%. Why 100%? Because the majority of profits before taxes we recorded in the third quarter is coming from PSA with, I would say, an higher than the average tax rate. While the other activities, mainly concession, at the level of price that we had in the third quarter, as well as the nine 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, the future generation of recordable income. Due to the fact that this future flow is not enough at the current scenario to cover all 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 refining and marketing of Gas & Power, the remaining business, mainly in Italy, the relevant tax rate in the third quarter is in the range of 18%. Why 18% and not 27% is the current tax rate? Because the remaining part is not being booked as 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 & Power. I must admit, I'm still a little confused. Is the turnaround in EBIT performance, operating profit performance in 2017, the EUR 400 million, simply a function of stopping the losses on gas supply contracts? If so, is that entirely down to renegotiation, or is there some assumption around recovery and hub pricing being built in?
Yes, as we said, that it will be 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 million out of EUR 350 million, that is our projection. That is a process that is going on, together with maybe the, I would say, enlargement of our trading activity. All this together will imply, by year end 2017, the significant reduction of this EUR 400 million losses we are suffering in 2016.
If the renegotiations take place.
That's definitely the bulk of the activities looking forward to reduce this overall loss.
Is the implication, therefore, that this year you've lost more than EUR 400 million on those gas supply contracts?
No, I would say in principle, no. It will depend on the market condition, difference between oil price and the hub price, and whatever. In principle, I would say no.
On the hub price, is there an assumption around the hub price in 2017? The hub price has moved a lot even in the last month, quite 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 hub 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. That is why our scope, as Massimo said, is to renegotiate even the latest contract that remains to be negotiated, renegotiated in 2017.
Okay. Thank you very much.
Next question comes from Mr. Martijn Rats of Morgan Stanley. Mr. Rats, please.
You've gone through a lot already, I'll keep it with one. I wanted to ask you what the status is of the EUR 1 billion claim from Gazprom, and the bank guarantee that you've 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?
Massimo will give you the answer.
The guarantee is going to stay there until there is the end of the arbitration process. The arbitration process from our side is in respect of the revision of the price. When you consider overall what the situation can be at the outcome, we do expect that the price should be adjusted in respect of the Italian market condition.
Okay. Thank you.
Next question comes from Ms. Irene Himona of 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 non-recurring interruptions of Val d'Agri, et cetera, was about EUR 2 billion. Effectively, if we add back that, plus nine 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 EUR 6.5 billion. In practice, equity on the balance sheet has declined about 13% since year-end, so gearing is up a little bit. My question really is about next year, 2017. In a scenario where there is no OPEC response, oil slips back down to USD 45, how would the board's response differ to the current plan?
How can we think about the three internal levers available to the board to react at USD 45 oil to protect the balance sheet? I'm thinking about OpEx, CapEx, dividends. What is the relative flexibility for you on these three in an environment of USD 45 as you look to protect the balance sheet? Thank you.
Thank you, Irene. Probably, your question will receive a full answer while we present next strategy, next four-year plan, approximately February, March 2017. 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 a 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, but we are still keeping in our pocket in order to cope with a worsening, looking forward, of our scenario.
First of all, in term of disposals, you remember that we said that we confirmed that the retail Gas & Power business is not more considered core in our portfolio, but any proceed is not included in the EUR 7 billion disposition we declared. Let me say that this divestment will not be related to the overall, I would say, environment in term of oil environment. 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 debt on our equity.
On top of this, I would say, Zohr would 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 lever 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. This kind of additional levers, together with what has been already performed, Irene, that will give benefit looking forward, and our expectation in term of divestment, are keeping us quite comfortable about what we committed.
Thank you, Massimo.
Next question comes from Mr. Theepan JothilingamJeyasingam of Exane. Mr. Jeyasingam, please.
Yeah. Hi, gentlemen. Three quick questions, actually, please. Could you just update on Zohr and the development progress there, and just provide a little bit of color in terms of, is the CapEx spend in 2017 for Zohr likely to be similar to a level of 2016? My second question is just if you could just update on what you see as exploration spend for 2016. My third and final question is, could you give us a progress in terms of when you see the timing for Coral FLNG and the final investment decision? Do you think that will be before year-end or not? Thank you.
Okay. I'll ask Antonio to answer about Zohr, and Luca to answer about the exploration targets. I'll answer about Coral.
Concerning the Zohr development, we are on schedule as we anticipated, December 2017. The spending, it's matching our budget. It's going to be, including exploration cost in 2016, is going to be EUR 1 billion 400. I leave Luca to give you much more color on exploration of that.
I think you ask about the CapEx exploration 2016. Our projection is about EUR 800 million this year, including all the appraisal campaign that we are receiving.
Okay, in terms of Coral progress, FID, do 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 said, full advantage of the current service environment. We signed the gas sales agreement that has been announced a few weeks ago. The last steps 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. The process will keep some weeks to be completed, and at that time, we'll be ready to take the final FID.
Okay, thank you. Could you just clarify, do you think spend on Zohr will be the same in 2017 as 2016, or will it be less or more?
The expectation, I guess, will be a bit higher. Expenditure will be a bit higher in 2017 than 2016.
Okay. Thank you.
The last question comes from Miss Lydia Rainforth of Barclays. Miss Rainforth, please.
Thanks, I'll try and keep this short. If I could just come back to the Gas & Power guidance again for next year. Of that EUR 400 million swing, did I understand it right that you said about EUR 200 million of that swing will be down to reduced costs? Does that imply that the other EUR 200 million is down to the contract renegotiations? I just want to check in terms of the cash flow from new projects coming on stream. I understand you can't give it for any one specific project like Kashagan, but are you able to give us what that average cash flow per barrel for 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, 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.
As for your second question, Lydia, it's difficult to give you an answer in term of cash flow. What I can say that we are targeting the full production from Val d'Agri and Goliat in 2017, and the ramp up of Kashagan, the amount of cash expected by 2017, say, will be a significant amount. Again, we are talking about oil. We are talking about oil that, as far as Kashagan, we suffer in the tax rate. Val d'Agri, we suffered no tax rate at all. I cannot enter giving you some precise number, but I would say together with the other major field we have in our portfolio, just to mention Karachaganak and others, this contribution will be a very important one.
Understood. Thank you very much.