Good afternoon, ladies and gentlemen, and welcome to Eni 2015 Third Quarter Results Conference Call, hosted by Claudio Descalci, Chief Executive Officer and by Massimo Mondazzi, Chief Financial and Risk Management Officer. For the duration of the call, you will be in listen only mode. However, at the end of the call, you have the opportunity to ask questions. I'm now handing you over to Joost to begin today's conference. Thank you.
Thank you. Good afternoon, Before describing the financial results, I would like to give you a brief update on our strategy progress and tell you the opportunity to give you more details on the transaction we announced yesterday concerning the sale of the stake in Kraken, a major milestone in our strategic plan. The strategic plan was based on 3 pillars: focus on value growth in upstream, turnaround in mid downstream and value enhancement through portfolio transformation. We have made a rapid progress with each of them, delivering significant change to aim to the benefit of our shareholders. On our first pillar is upstream growth, where we improved our 2015 guidance, planning a 9% production increase, almost doubling the original target.
In exploration in the 1st 9 months, we have more than double our resources target, discovering 1,200,000,000 barrels at the record level of $0.60 per barrel. On CapEx, we forecast a reduction of 17% versus the 14% originally planned. And also for OpEx per barrel, we improved our target with a reduction of 12% instead of the 10% 7% cash. The second pillar, our strategy is restructuring of the mid downstream. This segment generated robust cash contribution of more than €3,500,000,000 in the 1st 9 months.
Gas and power notwithstanding the weak economic performance in the last quarter is continuing its recovery and will be close to breakeven in 2015 regardless of any delay in the conclusion of the ongoing arbitration. This is a further improvement to the original guidance. R and M and chemicals are recovering their best performance for many years. For refinance, we are reducing our breakeven to around $5.5 per barrel, taking advantage of operating efficiency and improved market conditions. We expect the highest performance in R and M since 2,008.
The result of chemical sector is expected to be the strongest in the 20 years, thanks to the ongoing turnaround plan and the focus on specialized products, which maximize the upside related to a lower feedstock price. Our Downstream segment is expected to be overall free cash flow positive in 2015, 2 years in advance of our plan. All these actions will contribute to any achieving coverage of CapEx from organic cash flow in 2015 at $55 per barrel, excluding the ongoing contribution of tariffs. The last pillar is our transformation plan. Yesterday, we announced the most important part of this process, the Saipem stake disposal and the consolidation.
With this operation, we are enforcing both E and I and Saipem. EMI through the disposal of 12.5 percent and the intercompany debt repayment would improve the balance sheet and free up resources to support its investment plan. While excitement with a new strong shareholder base, will enhance its financial solidity and strengthen the execution of the business plan. Now we will leave the floor to Massimo for further details on the Saipem transaction and the presentation of Q3 and year to date results.
Thank you, Claudio. Some more detail on Saipem deal. The overall transaction is structured as follows. The sale of 12.5 percent of Saipem to the Italian strategic fund implies a value of around €400,000,000 The sale is coupled with the shareholder agreement with FSI, representing 25% of total shareholdings with initial duration of 3 years. The parties have agreed on 3 main aspects.
1st, representing a single list for board members at the Annual General Meeting 2nd, standstill and lockup restrictions on the share registered in the shareholder agreement and third, having a prior consultation on major strategic board issues as allowed for by law. We have also agreed to participate pro quarter to the subscription of Sartem Capital Increase for a value that we estimate as slightly more than €1,000,000,000 And finally, we agreed the full repayment of Saipem Intercompany net debt of EUR 6,100,000,000. As a result of the new governance, Saipem, at the completion, will be equity accounted for by Uni and deconsolidated from our balance sheet. The pro form a net debt reduction for Uniti at the end of September, including all above assumptions, is estimated at EUR 5,100,000,000 And now let's move to the Q3 and year to date results. E and P production in 3rd quarters was 1,703,000 BOE per day, an 8% increase compared to last year.
This growth is thanks to the startup and ramp ups in Venezuela, when the Giant Perla field started up in July, Angola, United States and UK. The price decrease, the so called PSA effect and the contribution of Egypt near field discoveries in Libya. In the 1st 9 months of the year, production grew by 9%. And considering this strong performance, we upgrade our full year production guidance to 9%. In exploration, we continue to record exceptional results despite lower spending versus 2014, minus 30% CapEx in euro, notwithstanding the dollar appreciation.
We made the largest ever gas discovery in the Mediterranean with Zohr. This 30 Tcf discovery will be developed in Phase Fast Track approach and benefit from a competitive cost structure. Overall, in the 1st 9 months, we have discovered more than $1,200,000,000 BOE of resources at the unit exploration cost of $0.6 per barrel. This represents a substantial progress against our full year trend target of 2,000,000,000 BOE of resources, more than doubling the target for 2015. In the 3rd quarter, E and P EBIT adjusted was EUR 757,000,000, down by 76% from last year as a result of lower oil and gas prices, only partially offset by a favorable exchange rate, higher production and lower costs.
In the 9 months, EBIT adjusted of EUR 3,200,000,000 is 66% lower than 2014 due to the same drivers of the quarter as D and P performance improvement by 6 EUR 6.30 million was more than offset by lower sentiment. Turning to Gas and Power. Adjusted EBIT in 3rd quarter was a loss of EUR 469,000,000 mainly driven by the recovery of makeup gas that, while benefiting cash generation, determine an increase of supply cost due to higher price prepaid volumes. 2nd, weaker margin in 1 B2B contract currently under negotiation, still oil linked And third, the scenario impact on Power and LNG. On a 9 month basis, Gas and Power recorded an operating loss of €144,000,000 representing an improvement of €280,000,000 versus last year when retroactive elements are excluded.
Turning to cash. Gas and Power generated almost EUR 2,000,000,000 in the 1st 9 months of 2015, with a significant recovery of PECO pay of around EUR 600,000,000 and of last year overdue. Thanks to this performance that confirm the robustness of our turnaround plan, we expect to be close to the equivalent notwithstanding the slight delay of the ongoing arbitration as a buyer with Asterra beyond 20 2Q. In Refining and Marketing and Chemicals, it is a record year. The 2 segments recorded an overall adjusted EBIT of €335,000,000 in 3rd quarter, the highest quarter since 2,006.
On a 9 month basis, these factors have recorded a EUR 1,100,000,000 improvement compared to last year, thanks to the restructuring plan, the optimization efforts and better scenario. In terms of cash generation, on a 9 month basis, the sector has generated EUR 1,700,000,000, an additional EUR 1,200,000,000 of cash flow versus the same period of last year. For the full year, we confirm a positive adjusted operating result on R and M and upgrade our expectation for chemicals to be positive this year, the best results since Ayni's IPO. We now expect ahead of our full year plan assumptions, the downstream sector to cover organically its CapEx this year, even after the cyclical excise peak payments that happened in December. And now a short review of our consolidated result net of Saipem.
EBIT adjusted for the group was down EUR 5,300,000,000 in the 1st 9 months. This reduction was driven by EUR 6,100,000,000 related to the weaker scenario, partially recovered by EUR 800,000,000 of performance improvements. This is the result of an improvement of EUR 700,000,000 in E and P due to lower exploration, cost efficiency and higher production And of EUR 400,000,000 in Downstream segment, partially reduced by the effect of the hedging on refining margin we put in place last up to last August with a negative fair value of
EUR 300,000,000.
The 2015 performance is well ahead of the plan we set out in March. In the 9 months, net profit amounted to EUR 800,000,000, down by 76% year on year. The reduction was driven by lower operating profit and higher consolidated tax rate, which increased to 79.1%, excluding Saipem. This increase is driven by E and P segment that in the current weak oil price scenario registered an higher tax rate mainly due to significant weight of exploration and other charges not fiscally deductible. Let's move to the cash balance, excluding Saipem contribution.
In the 1st 9 months, operating cash flow at €8,400,000,000 fully matched our CapEx. Same result is expected on a full year basis, assuming a Brent price of $55 per barrel average. This represents an improvement of the original guidance that was targeting cash neutrality before dividend at $60 as averaged between 2015, 2016. And now let's start the Q and A session.
Ladies and gentlemen, the Q and 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 1. To answer the reservation, press star followed by 2. Thank you. This question comes from Mr.
Oswald Clint from Stanford Bernstein. Mr. Clint, please.
Yes, thank you. Maybe a question, I'm sorry, excuse me, on the production growth, the 5% initial guidance becoming 9% today, and obviously, that contingency that was in there. Could you just talk about what that means for your 3.5% CAGR growth over your 5 year plan? Obviously, if everything keeps going as well as it has this year, it kind of points to that number being potentially quite stronger. Maybe some comments around that, please.
And then secondly, obviously, we're seeing plenty of evidence, I guess, of the accelerated start ups. But could you talk about the other side, which was the early monetization of the exploration assets, which you've discovered? We haven't seen as much evidence there yet. Could you talk about that, please? Thank you.
Okay. Thank you. We will talk about production moving forward and Nelson will talk about M and A and acceleration. First of all, I think that is quite we are in an early stage still about the future and growth about the future. It's clear that this year, we add some additional potential in the near field, in the near field production and also from installation near field.
So I think that, that's again the most important contribution like in Egypt and Libya or Congo or also Angola. So I think that that is a very positive factor. I think for the future, I think it is quite it's too early to talk about guidance. It's clear that in production, we are doing better. So our hope is really to be able to in 20 16 to be better than the 3.5% we announced.
So, Oswald,
as far as the early monetization of exploration, what I can say that some well advanced discussion on this respect are ongoing. So it's something we are fully committed to. And our hope is to, I would say, announce something in
the short term.
But having said that, let me take the opportunity, thanks to your question, to give you an overview about the full disposal plan that we announced in March. So you remember that we announced EUR 8,000,000,000 in 4 years, out of which EUR 3,000,000,000 expect in 2015. Out of this $3,000,000,000 now we already achieved $1,500,000,000 including the remaining disposal of gas share that will happen very, very soon. So on this regard, we are halfway. But you remember that launching the €8,000,000,000 plan, we said that Saipem was a contingent plan on top of this.
Now what we have done, we made Saipem. So Saipem will allow us early 2016 to cash back something in the range of EUR 5,500,000,000. So adding up this EUR 5,500,000,000 to the EUR 1 point 5 already achieved, we already got 7 out of 8. On top of this, as I said at the very beginning, we are in advanced negotiation on the early monetization of exploration assets.
That's super. Thank you very much both of you.
Next question comes from Mr. Thomas Adolff from Credit Suisse. Mr. Adolff, please.
Hi, thanks for taking my questions. Two questions, please. 1 on the balance sheet. Now congrats on progress on Saipem. Let's say on a 3 year view, you also reduce further your equity stake in Saipem and you're successful in monetizing the resource base, the discovered resource base and obviously you've over discovered, which also then reduces your exposure to sub Saharan Africa.
How should I think about the gearing range after you succeeded on all of these potential monetizations? And how should I then think about is the balance sheet becoming inefficient and we need to do something about it and how we should think about capital allocation then? The second question, I guess, is going back to Egypt and the Zohr discovery. You've met with Mr. Nathan Yao, and I wondered what sort of discussions you're having around the East Met gas development and whether there are actually any maritime boundary issues around Zou?
Thank you.
Yes. Thanks. And I'll start talking about the hazmat gas pipeline, nothing real answer about balance sheet in capital allocation. For Egypt, our discussion mainly concerned the synergies that we have and the possibility to put together the Lutzibanco resources that we have found in the area. I'm talking about the 3 countries, so Egypt, Israel and also Cyprus.
You know that we are in Cyprus and Egypt. And if we are that the opportunity to have a huge amount of resources in the facility structure and the exporting facilities immediately can accelerate and improve the time to market to all the regions. And the other point is that we think that we have additional resources, 1st of all. And I think that, putting together, discoveries, we will be also stronger from a commercial point of view in terms of finding markets, in terms of increase the value of the resources. So that was mainly the subject of the discussion.
And I think that all the 3 countries are looking at this possibility to use Egyptian additional facilities in a very positive way.
Okay, Tomas. To give you a full answer on the new balance sheet structuring, I guess, we should wait for the new business plan that is going to be elaborated and would be announced in February, March. But as far as I can today, I would say that our target remain exactly the one that we announced in March, presenting our last strategy plan. As an anticipation, I would say that the cash coming from Saipem should be, 1st of all, to make our balance sheet stronger. 2nd, definitely to support the development of the additional resources that in the meantime has been discovered.
But we need to elaborate the full plan in order to reassess the rank of our project, having very well in mind that we don't want to exceed the amount of CapEx that we projected year by year in the last strategic plan.
Perfect. Thank you very much.
Next question comes from Mr. John Rigby from UBS. Mr. Rigby, please.
Hi. Yes, thank you. It's clearly striking the progress you've made in the Chemicals business. And looking at the plan that you set out at the start of the year, it was also evident that there was an expectation that there will be significant progress. And it looked a bit back end loaded, and it was a lot to do with really quite a significant transformation of the business.
So the change is certainly the sequential change 2Q to 3Q in that performance is not obviously explained by the change in the macro conditions, although they've been helpful. But I just wondered whether you were able to talk a little more about what's going on underneath the surface in the Chemicals business that has generated this significant improvement. And then I guess lastly, just as a comment, I think there were some wire stories a couple of weeks ago talking about the potential for a spin out of that business. I just wondered, a, is there anything in that? And is it related to this very significant improvement in performance that you're seeing?
Okay. Thank you. Yes, you're right. We put a lot of effort in our Chemical business, and we transform also the process and also in terms of the quality of the process, the efficiency and the products. So we work more in the specialties and we brought our specialty in term of specialties or in term of like percentage and more than 55% of our production.
And that's improved. And it's also true that we passed through also in the past in some good scenario situation, but we always lost money. So that is the first time that after this transformation that is not finished, we were able to took advantage of the investment that we made. That is a good period to talk about the future because we need additional investments. And as you know, we want to focus our investment in the core business in the upstream.
For that reason, we are as we did in the past, we look for partners, financial partners that can help us and can reduce the driving of the investment in the future. About what happened and what so the rumors in the past, we don't like to make any comments on these rumors, but it's clear that there is a process where we are looking for opportunity to reduce the ABLO investment. And clearly, if we are able to find some good investors that can dilute our position and enter a joint venture with Aza, we'll do that. So, maybe Daniel, you want to add anything?
I would Claudio, you covered most of
the aspects. John, I would only remind you, in April 2013, we did a seminar on the chemical business. You were among the attenders of many other people. And I would say that everything that was presented there has been achieved almost with a year in advance. And as Claudio said, partially is due to It was
2 years in advance.
Nearly 2 years, yes. I would say that the scenario certainly has, but we weren't able to capture the scenario if we're going to have done the international repositioning, the portfolio transformation and the restructuring. It was due to this business for many years to come. So that's all I will try to add.
So sorry, just a comment because we talk about cycling, we talk about chemicals and other other systems that are not linked to our core business. So I think that ENI is a strong opportunity because normally what the R and D company are doing is reducing the CapEx or cutting the cutting. What we are doing as well, but I think that the opportunity that ENI has is that can get value, strong value from all these businesses that were that are in the NII that we think that extracting them, pulling out, I think that we can we had an additional research of potentiality to add value and also to be resilient at a lower price. So that is a big opportunity for us. We are following.
We are focusing on that. And I think that in the next future, I think that we can express additional energy from these transformational actions that we are doing. Okay.
That's clear. Thank you.
Next question comes from Ms. Irene Himona from SG. Ms. Himona, please.
Thank you. Good afternoon. My first question is on Gas and Power. If you can perhaps remind us and apologies if you've addressed the issue, if you can remind us of how much you expect to receive in cash this year? How much is then outstanding?
And in terms of the P and L, can you quantify what the hit was in Q3 from the negative margin on that? And my second very quick question, thank you for updating us on disposals. Just if you can remind us of where we are with the remaining stakes in Snam and Galp, please? Thank you.
Well, for what relates to the result of the Q3, as Massimo said before, this has been related to 2 main factors. And the first factor was the recovery of the takeout pay. So the prepaid gas that's determined an increase of supply cost due to the fact that this gas has higher was higher price prepaid. This is on one side a significant result in terms of cash flow, but also significant result in terms of stabilizing our midstream business because basically, we have completed the recovery of the take or pay on the most important of our Russian contract. And this is an activity that was carried out during the last 2 years.
And this has significantly reduced our exposure in this aspect of the business. The other aspect was the fact that we still have some contracts on sales side that are indexed to oil for which, of course, compared to last year quarter, we have been impacted by the change in the brand price and with the delay that typically is impacting on our contract. There is also a number of other minor factors that when put all together had some impact. These are related to scenario regulatory factors. In general, all impacting the power business.
For example, we had a different last year changes in the tariff for gas transportation that now are hitting the final user as our power business. And we had to absorb increased cost for getting certificates of previous years. So all of this made the reason of this substantial change with previous year. What we are expecting now from our ongoing negotiation and arbitration, of course, is not something that we can disclose today also because commercially is pretty sensible. I think that we are talking about price review of contracts for the previous years that are some of our main contracts, so for which we have quite high expectation of positive results.
Okay, Irina. As far as Galp is now, today, we own less than 5% in Galp. And you may remember that 4% is linked to the exchangeable that is expiring this November. And our intention is to sell off the remaining stake, I'd say, as soon as possible. And as far as NAM, again, we're talking about an 8% stake in NAM linked to the exchangeable that expires in January 2016, and the shares are very well in money in the money.
Okay. Thank you very much.
Next question comes from Mr. Martin Ratz from Morgan Stanley. Mr. Ratz, please.
Hi, good afternoon. I wanted to
ask you 2 things.
First of all, with regards to the Zohr discovery, I was wondering what the impact of that would be on the trajectory for capital expenditure because on the one hand, it's an attractive discovery after Saipem transactions. There is additional cash available. I can see how this opportunity could provide upwards pressure on the trajectory for CapEx. At the same time, this is this seems to be a below average cost discovery. So I can also see how you would invest in this opportunity at the expense of some other projects.
And as the average cost of future capital projects goes down, I can also see how this would actually reduce the trajectory of CapEx basically through the process of high grading. So I was wondering how you see this project impacting CapEx going forward. And secondly, as we're sort of on the topic of guidance, I was wondering is there any sort of piece of guidance that you've previously given that might change as a result of the Saipem transaction?
Okay. Thank you. I think that you explained very well what is happening. So you delivered the question, you gave the answer because there is absolutely what is happening. We have a strong flexibility because we found resources and our reserves that are very, very low cost, still over hidden because following our strategy, we run exploration in a place where we have fixed synergies and where we are working operations.
So we have flexibility. And what you said is right, we try to move very easily, cut us from more complex and more costly project to cheaper or lower cost project. And that is what we have done. Our target is, as Marcin said before, because we have to cope with a 50% or 55% scenario, is really to stay in our guidance and of CapEx already if it's possible to improve. In any case, the new mix of project and the new mix of CapEx is made by faster and better time to market in higher return.
So at also it's considering the same amount of CapEx. I think the internalized return and the time to market will be much better. And also the cash from operation will be better.
Okay. And guidances that might change after the Saipem transaction? I guess there's not much, but I just wanted to cover it anyway.
No, I think that the first question is also the second question because our target is to remain in this range, what we said last year, dollars 12,000,000,000 per year, that was our threshold. And as Nelson learned, we said that we want to have a very strong balance sheet. We want to have a very low debt because we want to be resilient at this time point with the loss scenario. And work and other efficiency and on our company to be rating when the price will be better to have a very strong lead ahead.
Okay. Thank you.
Next question comes from Mr. Massimo Bonizoli from Equita. Mr. Bonizoli, please.
Thank you and good afternoon, gentlemen. Congratulations for the Saipem deal. Two questions. Once the deal the capital increase of Saipem would be completed, could you give us some color on the 18% stake in Saipem, which is not part of the shareholders agreement with FSI? Could it be considered at the same way of Snam and Galp stake?
And would you consider some monetization options such as the exchangeable bond on those shares? 2nd question on financial cost per site and the consolidation. What would be the financial cost savings on the 5.1 percent lower net debt?
Well, thank you. Thank you for the congratulations first. And I answered to the first question and not to answer to the second. Talking about the 18% remaining after the transaction, we don't we don't we are not to think about that yet. It's clear that is a strong upside potential, But it will be stronger in the future because of the better scenario and also because of the execution of the site plan that they presented yesterday.
So I think that we have in our hands some potential, additional potential. As you know, we have 18% and 12.5% in the shareholder agreement for 3 years. So I think that is a for that, it's a good operation. But at the moment, we don't move because we are still because the scenario is dead and also because Shai Poonstar credit using the new plan. So we have this resolved.
We are very happy about that. We think that there is a strong upside potential,
and we see in
the future what we can do with this money.
And Massimo, as far as the financial our financial cost after the cycle and the consolidation, I would say, too early to make a full assessment because we are collaborating with the new plan and decide exactly how to use this money if we want to retrace some bonds and how we would like to utilize this fund. So it's something that we can display on when new business trends will be being elaborated.
Okay. Thank you very much. Very clear.
Next question comes from Mr. Henrich Clegg from Bank of America. Mr. Clegg, please.
Afternoon, gents. I'm delighted about your deleveraging event this week. I just had two questions. First was on the Saipem uncoupling. And I wanted to ask Mr.
Mondad, see if you could give us any light on where we could see interest costs going next year, tax rates and potentially new CapEx. Maybe this is a day to store up, but it might it will help us model in the short term. And the second question was just on Kazakhstan. We also the Kazakh government trying to fine you this week over Karashaginak. Could you give
us a little bit of
an update on relations there? While we're talking Kazakhstan, I assume things are still going ahead nicely at Kashagan as well.
Sorry, Anish. Just to check if I correctly understood, are you asking some clarification about the tax rate? Is it right?
Yes. In a post Saipem world, what's your interest cost, your tax rate and your CapEx?
I would say, again, this kind of guidance as far as the 2016 onwards, I'd say it's
a bit early
to assess, including the financial aspect because what we need is to elaborate the full new plan in order to see, which is the overall composition of debt, the full utilization of the additional cash we will receive from Saipem. So be back on this question, I would say, on February 2016.
I totally understand. I was going
to say, could you maybe elaborate
a little bit on whether you potentially look to restructure your balance sheet as you have quite a high cost of interest or at least cost of net interest implied?
So again, what we have to decide, depending on the market situation where we'll have this money in our pocket is to see which has the best opportunity. If you would like to buy back some bonds outstanding or whatever. So
it's fair to say. Okay. Antonio Vela will answer about Kazakhstan, talk a bit before Carojak and Mac and secondly about an update on cash again.
Okay. Let's talk about the Carajacamac. The ongoing discussion with the Republic of Kazakhstan and the venture and partners has still normal discussion within our production sharing contract. There are some negotiation ongoing in terms of the audit cost recovery, which is a normal
activities.
The relationship are okay. And if some discussion is coming out on the audit and cost recovery, we'll be resolved as usually amicable with our partner as we have done on the past experience. Concerning Casa Grande, the installation work is progressing quite well, and we are confirming that the installation work will be completed by mid-twenty 16. And production restart in the Q4 of 2016.
Next question comes from Mr. Henry Tarr from Goldman Sachs. Mr. Tarr, please.
Thanks and thanks for taking my questions. My first question was just on LNG. How has progress been in attracting buyers to the first phase of the project? Has there been any change to the timeline of development there? And then just secondly, you've revised upwards the OpEx savings that you expect
to see this year.
Is this being driven by internal cost savings or more by falling third party costs? Thanks.
Thank you. Rene, talking about the Area 4 offshore Mutluvandevik, he and I, together with this partner, is in the final stage of negotiation for entering into a binding sales and purchase agreement with BP as a buyer of the production coming from the Coral field. This negotiation is based on key terms that we have previously agreed. Under these key terms, BP is the sole offtaker of the total LNG volume produced by the floating LNG unit that we will install on the Coral field. This negotiation, as I said, is expected to be completed soon, and this will be in line with the schedule for the currency of the FID.
Roberto Cazula will answer about OpEx reduction.
Good afternoon. Well, we are continuing our efforts to maximize the efficiency in our operations. At the moment, we do see unit operating cost of $7.3 per barrel. Actually, this is a combination of operated and non operated activities. Our operated activities are even much lower in the range of 6.6 dollars per barrel.
And this is due to many efforts. Firstly, from the contractual point of view, we'll be renegotiation of all the maintenance contract, logistic contract, chemicals. And also from the asset point of view, we did a lot of efforts to reduce the downtime of our
installations. Thank you, Roberto.
Thank you.
Next question comes from Mr. Tipan Jotlingan from Nomura International. Mr. Jotlingan, please.
Yes. Hi. Good afternoon, gentlemen. Just two questions. Just coming back to E and P, I just wanted to understand what you're seeing in terms of your underlying decline trends in the base?
And also, if you could just recap what your sort of projected spend is to underpin that decline? The second question just comes back to the progress you will make deleveraging balance sheet. I just wanted to know whether you would consider restarting a buyback program post the completion of the Saipem transaction. Thank you.
Antonio will answer his first question about fighting the decline.
So as you know, our strategy is keeping 5% our decline. So we are fighting all these numbers through our continued reservoir modeling and petroleum engineering. Definitely, since the objective was also to reduce cost OpEx, we directed most of our activity in rigorous instead of large and heavy workover. And this is still responding on 5%.
And Deepan, any decision about potential modification on NAVAR showed the return policy will be taken, I would say, in February presenting the new strategic plan.
Okay. That's fine. And could you just remind me how much it costs to maintain that 5% decline rate on the base?
We have a part of that cost, R and D production optimization, which are CapEx. As you know, normally, we are moving in our budget between EUR 2,930,000,000. Dollars And this number is going to be reduced with since the strategy went through a rigorous activity instead of heavy workover and drilling and sidetrack.
May I go ahead with the next question, sir?
Yes. Thank you.
Next question comes from Mr. Biraj Borkhataria from RBC. Mr. Borkhataria, please.
Hi, thanks for taking my question. Just a quick follow-up on Mozambique. Could you give any color around what level of cost deflation you're seeing in your through the why as you go through the EPC tender process? Thank you.
Okay. Roberto will answer this question.
Well, at the moment, we are running several tenders, in particular, the ones for the coral development, which consists, as you certainly know, of a floating LNG and the subsea wells. Well, I can tell you that we are really very close to select the lowest bid there, and we have reached very good results in terms of unit cost per 1,000,000 TPA. In combination, we've also very good results in signs I mean signs of cost deflation for all the subsea production systems. So we are very confident that we will have very soon a robust cost estimate for our development. At the same time, about the onshore development, the tender is ongoing.
And so the commercial results will come in the near future.
Thank you very much. Okay, next.
Next question comes from Mr. Anik Aak from Exane. Mr. Aak, please.
Thank you. Hi, guys. Just a question for downstream profitability and cash flows. If my numbers are correct, I think almost 40% of your free cash flow this year is coming from downstream. If we start to see a weaker, let's say, refining and chemicals environment next year, What starts to happen when you think about your planning for $16 to that $55 breakeven, which obviously you've done very well to get down to this year?
So as far as the refining, Annik, maybe you remember that we are working hardly to significantly reduce our breakeven cost breakeven margin in refining. Today, we are in the range of 5.5 dollars per barrel. So definitely, the cash contribution we had in 2015 benefiting from a higher scenario has been the one that you have seen in the 1st 9 months of this year. But what we are going to do is to prepare ourselves to cope with, I would say, harder time ahead of us. And we believe that definitely the highest margin we have seen are gone.
And what we are doing is to we're trying to reduce even more the $5.5 versus the you remember the $3 per barrel that has been our target we announced when we launched the 4 year plan. And I'll say that as well as we are well ahead on this plan in 20 15, we still remain absolutely confident that we can get there.
Can you maybe give me a sense of what we should think about as a more normalized level of cash flow next year than from downstream?
Let me maybe I can give you some maybe more specific idea. So if we see the downstream cash flow we got in the 9 months of 2015, I would say that more or less I'm mentioning and referring to the EUR 1,700,000,000 we got in the 9 months of 2015. I would say that 60% more or less 60% of the increase is related to the scenario, but 40% is related to the, I would say, efficiency, the utilization rate, the, I would say, the full production of the heavy oil treatment plant in San Azzaro. So a significant part of this increase is not simply related to the scenario.
Okay, perfect. That's brilliant. Thank you.
Next question comes from Mr. Neil Morton from Investec. Mr. Morton, please.
Thank you. Good afternoon. Two questions, please. Firstly, on the Downstream, you've been making losses in Refining and Chemicals for so long. I wondered whether you built up significant tax loss carry forward.
So basically, as we go forward, what sort of tax rate should we model in Refining Marketing Chemicals as a unit? And then secondly, a macro question on Libya. You probably know more about the country than most. So I just wondered what you think its prospects are to perhaps increase oil production over the next, say, 12 to 18 months? And also what ENI's plans would be if the security situation normalizes?
Thank you.
So as far as the tax rate, due to the fact that the majority of the refining and chemical businesses are in Italy, The tax rate to project the net income for the future will be the Italian tax rate because we accrued deferred tax asset using debt tax rate. By definition, this is the economic effect because as far as the cash effect, we will not pay any tax because of the previous losses.
Okay. Lydia, so what we are experiencing there is that for gas and condensate, especially for gas, the situation is so far is good. And we think that gas that now is going about 60% for the domestic market is tropical at the maximum rate and our forecast is that it's going to continue at this rate. So the and that is also a positive signal because they increased, legally increased the gas utilization disposal. So that is positive because it means that they are working and the situation is not so bad in all different cities.
So for gas, we are optimistic. For oil, the projection is not so optimistic because we need the treatment facilities. We need more maintenance in spare parts and we need also the extra facility working operationally at the best. So the projection that we made in our calculation is a steady state now that is not at the maximum, that's just as more percentage in the full potential.
Thanks. Just as a quick follow-up, can I perhaps ask perhaps the quantum of those historical tax losses in Italy in the Downstream?
We're talking countries in the Middle East?
I don't know.
I don't have the figure with me. I'll let you know.
That's fine. Thank you.
Next question comes from Ms. Lydia Rainforth from Barclays. Ms. Rainforth, please.
Thanks. Good evening and thank you for taking the question. I will keep it short, if I could. Just while we're on tax rate, can you talk about what the outlook is for the upstream tax rate? Clearly, there have been a number of moving parts over the quarters.
And then actually, secondly, just a quick one on the upstream cost savings number. Apologies if I didn't quite get this copy. When you're looking at both the non the operated cost reductions and the non operated cost reductions, are they the sort of similar sort of scale of reductions that you're seeing? Thank you.
Okay, Lydia. I'll give you the first question about the E and P tax rate. So the E and P tax rate as far as the quarter, is 110. But at the overall tax rate, please do not refer to the quarter tax rate as a reference point to project the full year tax rate. Very quick explanation about the E and P tax rate.
E and P tax rate is significantly affected by the full expenditure of the exploration cost at this level. Because you remember, we from an accounting point of view, we expense 100% of the subscription cost, while I would say the other use the successful reform method. It means that we are fully impacting the taxable income without any deferred tax effect because when we drill the well, we don't know exactly the outcome of the exploration activity. So we don't know if at the end of the story, we'll get the FID or no. So no the first tax asset.
Just to give you the sense of this effect, if we apply the successful reform method to the quarter number, the 180% become 80%. Having said that, we have another significant effect because of the significant and quick drop in the oil price that happened in the 3rd quarter. The significant and quick drop in prices above $60 in July, below $50 afterwards in this quarter. What is causing? It's causing, I would say, definitely a full effect in revenues, but a delay effect in our production chain agreement, the effect of which in term of rebalancing in cost oil and profit oil is delayed later on.
So when you have this quick effect, you must wait some months in order to have the full rebalancing. That's the reason why to make the long story short, we expect for the full year a guidance that will be very much in line with the guidance we gave in July. You remember, we said 70%. I'm referring to the full group. 70% having in mind a brand price average above $60 at that time.
Now targeting the $55 I would say $80 as a tax rate average for the full 80%, sorry, 80% for the full year. And looking forward, as the mechanical adjustment in PSA and the better result in non upstream assets in Italy, this 80% definitely should drop.
So second question, Roberto will answer. Yes.
About this
further efficiency in the capital expenditures, well, first of all, you know that in 2015, the majority of our CapEx were related to already committed projects, the majority of which were operated. On this project, we were able to achieve significant cost savings, thanks to the renegotiation of the contract or retainedering of the contract. And thanks also to some reconfiguration of the project. So the majority of the cost saving is related to the operated project.
That's really helpful. Thank you, both.
From Fidentis Equities. Mr. Rebuttini, please.
Good afternoon, gentlemen. Thanks for taking my question. Coming back to the disposal of the share of Saipem to FSI and the shareholder spec, I wonder whether the joint control of Saipem, which is embedded into this structure, might involve a change of control formally under the Italian law, which might in turn trigger the need for a tender offer over Saipem shares. Could you please comment on this, please?
Definitely, we don't think so because what we are following is the same path we follow when we dispose off NAM. But by the way, you have seen probably that the final answer from Consob is one of the condition precedent to complete the deal.
Okay. Thanks.
Next question comes from Mr. Dario Micki from Bancaagros. Mr. Miki, please.
Hi, good afternoon, gentlemen. Thank you for taking my questions. I'll try
to read very, very brief.
The first one is on Saipem as well. Have you taken any specific commitment with FSI on Saipem's dividend policy? The second one is on DASTERRA. When do you expect the final outcome of the arbitration? And the third one is a very brief update on the main start ups expected for 2016.
I'm referring to Wafaa and Nenen, Cachiran, you did it a few minutes ago. But just to understand correctly, Sato Miyafobe stated that the delivery of the project is expected for the end of 2016, while you said that the production is expected for the last quarter of 2016. So I'm a bit confused. Could you please help me understand when do you expect the production from Cascagao? Thank you.
Yes. So, Nacional
Okay. So definitely no agreement with Versailles about the dividend policy of Saipem? Vocera?
Vocera will be, we believe, within the Q1 of next year.
So cash again, don't be confused. We said that Antonio said that we finalized the installation of the energy of the second half, the first half and then production will start in the Q4. That is confirmed.
The last question comes from Mr. Rob West from Redburn. Mr. West, please.
Hi there. Thanks for taking my question. It's been a relatively long day, I'm sure. I just wanted to go back and follow-up on Martin and Thomas' questions from earlier. You said that with the store as a discovery, you're trying to keep your the OpEx around €12,000,000,000 a year.
And so Zohr is going to compete with something else in the portfolio for capital. My question is, are there any other candidates beyond Mozambique for what it could realistically compete with? Is this just totally rash and jump into a conclusion to think that that's a logical thing? Are there other options beyond probably selling down your stake there with another party? And then secondly, Italy is an area that doesn't get much discussion in your upstream portfolio on these calls.
I imagine this year is probably one of the more pretty cash generative of all the different regions, these 1,000 and report annually. Is there any change in the way you're running that core upstream Italian business this year versus a typical year, and particularly to maximize the free cash generation from it and maybe spend a little less and work the assets a bit harder? Thank you.
So for Zol and Coral and Italy, First of all, the trial is not something that we are going to spend in a couple of years. It's something that we are going to spend in a longer period because that confirmed the full development is also the sufficient phase of development, say, is the long term. So it's not what we're going to spend to put in production upfront. That will be much less than that. And on Mozambique, surely we don't find this flexibility in Cora because Cora is good.
We fund that for the Gaza, we finish the tender procedure and the process and we will be ready to FADECOR of the year end of the year beginning 2016. And my draw will be sanctioned in December this year. We have other projects. We have other projects where we already discussed and decided that we are going to shift and move out the CapEx. And we talked about Iraq.
We talked about IDD in Indonesia and we are talking about Venezuela that's what really CapEx is intensive especially in the second place. So we have room in our budget to find feasibility and go for smaller and faster and cheaper projects. So it's not a big issue. I really didn't understand very well your question in Italy because Italy, what we are doing, so we're not changing anything. Nothing is changing.
Unfortunately, we are continuing working intentionally and we finalized the project in Valdawi, the first the 5th train, and we are looking at the positive impact there. And we're working on, as Antonio said before, on well prioritization or production optimization project in the gas in the Adriatic Sea. That is at the moment. We have other projects in Sicily that can give a good improvement in the Italian production. That is in the agreement we signed last year with the region when we finalized the Gela transformation to a green refinery and in the packages there is also the development of the gas field in Italy, and that is another project that we are going to develop.
So in Italy, we tried to find accretion and we tried to improve the new project, Meringasa and some marine gas offshore and some project in Malvargy for the to increase production all onshore. And that is our problem. That is confirmed.
Great. Thank you.