Good afternoon, ladies and gentlemen, welcome to Eni 2015 third quarter results conference call, hosted by Claudio Descalzi, 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. At the end of the call, you have the opportunity to ask questions. I am now handing you over to Jost to begin today's conference. Thank you.
Thank you. Good afternoon, all. Before describing the financial results, I would like to give you a brief update on our strategic progress and take the opportunity to give you more details on the transaction we announced yesterday concerning the sale of a stake in Saipem, a major milestone in our strategic plan. The strategic plan was based on three pillars: Focus on value growth in upstream, turnaround in mid downstream, value enhancement through portfolio transformation. We have made a rapid progress with each of them, delivering significant change to Eni 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 first nine months, we have more than double our resources target, discovering 1.2 billion barrel at the referral level of $0.60 per barrel.
On CapEx, we forecast a reduction of 17% versus the 14% originally planned. Also for OPEX per barrel, we improved our target with a reduction of 12% instead of the planned 7% cut. The second pillar of our strategy is restructuring of the mid downstream. This segment generate a robust cash contribution of more than EUR 3.5 billion in the first nine months. Gas and power, notwithstanding the weak economic performance in the last quarters, 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&M and chemicals are recording their best performance for many years. On refining, 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&M since 2008.
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, two years in advance of our plan. All these action will contribute to Eni achieving coverage of CapEx from organic cash flow in 2015 at $55 per barrel, excluding the ongoing contribution of Saipem. 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 Eni and Saipem. Eni, through the disposal of 12.5% and the intercompany debt repayment, will improve the balance sheet and free up resources to support its investment plan.
While Saipem, 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% of Saipem to the Italian Strategic Fund implies a value of around EUR 400 million. 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 three main aspects. First, representing a single list for board members at the annual general meeting. Second, standstill and lockup restrictions on the share registered in the shareholder agreement. Third, having a prior consultation on major strategic board issues as allowed for by law. We have also agreed to participate pro quota to the subscription of Saipem capital increase for a value that we estimate as slightly more than EUR 1 billion. Finally, we agreed the full repayment of Saipem intercompany net debt of €6.1 billion.
As a result of the new governance, Saipem, at the completion, will be equity accounted for by Eni and deconsolidated from our balance sheet. The pro forma net debt reduction for Eni at the end of September, including all above assumptions, is estimated at €5.1 billion. Now let's move to the third quarter and year-to-date results. Eni E&P production in third quarter 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, U.S., and U.K. The price decrease, the so-called PSA effect, and the contribution of Egypt near field discoveries in Libya. In the first 9 months of the year, production grew by 9%. Considering this strong performance, we upgrade our full-year production growth guidance to 9%.
In exploration, we continue to record exceptional results despite lower spending versus 2014, -30% CapEx in EUR, notwithstanding the USD appreciation. We made the largest ever gas discovery in the Mediterranean with Zohr. This 13 TCF discovery will be developed in phase fast-track approach and benefit from a competitive cost structure. Overall, in the first 9 months, we have discovered more than 1.2 billion BOE of resources at the unit exploration cost of $0.6 per barrel. This represent a substantial progress against our full-year plan target of 2 billion BOE of resources, more than doubling the target for 2015. In the third quarter, Eni E&P EBIT adjusted was EUR 757 million, 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 nine months, EBIT adjusted of EUR 3.2 billion is 66% lower than 2014 due to the same drivers of the quarter as the Eni E&P performance improvement by EUR 730 million was more than offset by lower scenarios. Turning to gas and power, adjusted EBIT in third quarter was a loss of EUR 469 million, mainly driven by the recovery of make-up gas that, whilst benefiting cash generation, determine an increase of supply cost due to higher price prepaid volumes. Second, weaker margin in one B2B contract currently under negotiation, still oil linked. Third, the scenario impact on power and LNG. On a nine-month basis, gas and power recorded an operating loss of EUR 144 million, representing an improvement of EUR 280 million versus last year, when retroactive elements are excluded.
Turning to cash, gas and power generated almost EUR 2 billion in the first nine months of 2015, with a significant recovery of take-or-pay of around EUR 600 million and of last year overdue. Thanks to this performance that confirmed the robustness of our turnaround plan, we expect to be close to the dividend, notwithstanding a slight delay of the ongoing arbitration as a buyer with GasTerra beyond 2015. In refining and marketing and chemicals, it is a record year. The two segments recorded an overall adjusted EBIT of EUR 335 million in third quarter, the highest quarter since 2006. On a nine-month basis, these sectors have recorded a EUR 1.1 billion improvement compared to last year, thanks to the restructuring plan, the optimization efforts, and better scenario.
In terms of cash generation, on a nine-month basis, the sector has generated EUR 1.7 billion, an additional EUR 1.2 billion of cash flow versus the same period of last year. For the full year, we confirm a positive adjusted operating result on R&M and upgrade our expectation for chemicals to be positive this year, the best results since Eni'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 payment that happened in December. Now a short review of our consolidated result, net of Saipem. EBIT adjusted for the group was down EUR 5.3 billion in the first nine months. This reduction was driven by EUR 6.1 billion related to the weaker scenario, partially recovered by EUR 800 million of performance improvements.
This is the result of an improvement of EUR 700 million in Eni E&P due to lower exploration, cost efficiency, and higher production. Of EUR 400 million in downstream segments, partially reduced by the effect of the hedging on refining margin we put in place up to last August, with a negative fair value of EUR 300 million. The 2015 performance is well ahead of the plan we set out in March. In the nine months, net profit amounted to EUR 0.8 billion, 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&P segment that in the current weak oil price scenario, registered a higher tax rate mainly due to the significant weight of exploration and other charges not fiscally deductible. Let's move to the cash balance, excluding Saipem contribution.
In the first nine months, operating cash flow at EUR 8.4 billion fully matched our CapEx. Same result is expected on a full year basis, assuming a Brent price of $55 per barrel average. This represent an improvement of the original guidance that was targeting cash neutrality before dividend at $60 as average between 2015-2016. Let's start the Q&A session.
Ladies and gentlemen, the Q&A session is now open. I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. Thank you. This question comes from Mr. Oswald Clint from Sanford C. Bernstein. Mr. Clint, please.
Thank you. Maybe a question on the production growth, the 5% initial guidance becoming 9% today. Obviously, that contingency that was in there. Could you just talk about what that means for your 3.5% CAGR growth over your five-year plan? Obviously, if everything keeps going as well as it has this year, it points to that number being potentially quite stronger. Maybe some comments around that, please. Secondly, obviously, we're seeing plenty of evidence, I guess, of the accelerated startups, 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'll talk about production looking forward, and Massimo will talk about M&A and exploration. First of all, I think that we are in early stage to talk 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 field production, and also from exploration near fields. I think that has been the most important contribution, like in Egypt, in Libya, or in Congo, or also in Angola. I think that is a very positive factor. I think for the future, I think that it's too early to talk about guidance. It's clear that in production, we are doing better. Our hope is really to be able in 2016 to do better than the 3.5% we announced. Massimo?
As far as the early monetization of exploration, what I could say that some well advanced discussion on this respect are ongoing. It's something we are fully committed to, and our hope is to announce something in the short term. 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. You remember that we announced EUR 8 billion in 4 years, out of which EUR 3 billion expect in 2015. Out of these EUR 3 billion, now we already achieved EUR 1.5 billion, including the remaining disposal of Galp share that will happen very soon. On this regard, we are halfway. You remember that launching the EUR 8 billion plan, we said that Saipem was a contingent plan on top of this. What we have done, we made Saipem.
Saipem will allow us early 2016 to cash back something in range of EUR 5.5 billion. Adding up this EUR 5.5 billion to the EUR 1.5 billion 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 come from Mr. Thomas Adolff from Credit Suisse. Mr. Adolff, please.
Hi, thanks for taking my questions. Two questions, please. One on the balance sheet. Now, congrats on progress on Saipem. On a 3-year view, you also reduce further your equity stake in Saipem, and you are successful in monetizing the resource base, the discovered resource base. Obviously, you have 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? How should I then think about, is the balance sheet becoming inefficient, and we need to do something about it? How would you think about capital allocation then?
The second question, I guess, is going back to Egypt and the Zohr discovery. You have met with Mr. Netanyahu, and I wondered what sort of discussions you are having around the EastMed gas development and whether there are actually any maritime boundary issues around Zohr. Thank you.
Well, thank you. I might start talking about the EastMed gas hub, and then Massimo will answer about balance sheet and the capital allocation. For Egypt, our discussion mainly concerned the synergies that we have and the possibility to put together the huge amount of resources that we have found in the area. I am talking about the three countries, so Egypt, Israel, and also Cyprus, that we are in Cyprus and Egypt. It is clear that the opportunity to have a huge amount of resources and the facility and structure and the export facilities in Egypt can accelerate and improve the time to market all the regions.
The other point is that we think that we have additional resources, first of all, and I think that putting together these 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. That was mainly the subject of the discussion. I think that all the three countries are looking at this possibility to use Egyptian facilities in a very positive way. Massimo?
Okay, Thomas, 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 will be announced in February, March. 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, first of all, to make our balance sheet stronger. Second, definitely to support the development of the additional resources that in the meantime has been discovered. 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. Jon Rigby from UBS. Mr. Rigby, please.
Hi. Yes, thank you. It's clearly striking the progress you've made in the chemicals business. 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 would 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. The change, 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. 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.
I guess lastly, just as a comment, I think there were some wire stories 2 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? Thanks.
Okay. Thank you. You actually are right. We put a lot of effort in our chemical business, we transform also the processing, also in terms of the quality of the process, the efficiency, and the products. We work more in the specialties, we brought our specialties in terms of representing more than 55% of our production. That improved. It's also true that we passed through, also in the past, some good scenario situation, but we always lost money. That is the first time that after this transformation, that is not finished, we are able to take advantage of the investment that we made. That is a good period to talk about the future because we need additional investment. As you know, we want to focus our investment in the core business, the upstream.
For that reason, as we did in the past, we look for partners, financial partners that can help us, can reduce the burden of the investment in the future. About what happened and the rumors in the press, we don't like to make any comment on these rumors, it's clear that there is a process where we are looking for opportunity to reduce the aim of the investment. Clearly, if we are able to find some good investors that can
Reduce our position and enter in a joint venture with others. We will do that. Massimo, you want to add anything? Something else on the-
I would say, Claudio, you covered most of the aspects. Jon, I would only remind you, in April 2013, we did a seminar on the chemical business. You were among the attendees, so many other people, and I would say that everything that was presented there has been achieved almost with a year in advance. As Claudio said, partially is due to-
Two years in advance now.
Nearly two years. Yeah. I would say that the scenario certainly has, we weren't able to capture the scenario if we wouldn't have done the international repositioning, the portfolio transformation, and the destruction that was due to this business for many years to come. That's all I would like to add to the answer.
If I Sorry, just a comment because we talk about Saipem, we talk about now chemicals and other business that are not linked to our core business. I think that Eni has a strong opportunity because normally what the other companies are doing is reducing the CapEx, are cutting. What we are doing as well, but I think that the opportunity that Eni has is that it can get value, strong value, from all these businesses that are in Eni, that we think that extracting them, pulling out, I think that we add an additional research of potentiality to add value and also to be resilient at a lower price. That is a big opportunity for us.
We are following, we are focusing on that, I think that in the near future, I think that we can express additional energy from this transformational action 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, 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? In terms of the P&L, can you quantify what the hit was in Q3 from the negative margin on that? My second very quick question, thank you for updating us on disposals. Just so 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 third quarter, as Massimo said before, this has been related to two main factors. The first factor was the recovery of the take-or-pay, so the prepaid gas that determined an increase of supply cost due to the fact that this gas was higher price prepaid. This is, on one side, a significant result in terms of cash flow, but also a 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 contracts. This is an activity that was carried out during the last two 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 Brent 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 different, than last year, changes in the tariff for gas transportation that now are hitting the final user as our power business. However, we had to absorb increased cost for green certificates of previous years. 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 it 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, Irene. As far as Galp, Snam, today, we own less than 5% in Galp. You may remember that 4% is linked to the exchangeable that is expiring this November. Our intention is to sell off the remaining stake, I would say, as soon as possible. As far as Snam, again, we are talking about an 8% stake in Snam, linked to the exchangeable that expires in January 2016, and the shares are very well in the money.
Okay. Thank you very much.
Next question comes from Mr. Martijn Rats from Morgan Stanley. Mr. Rats, please.
Hi, good afternoon. I wanted to ask you two things. First of all, with regards to Zohr discovery. I was wondering what the impact of that would be on the trajectory for capital expenditure. On the one hand, it's an attractive discovery. After the 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 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. 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. I was wondering how you see this project impacting CapEx going forward.
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. You delivered the question, you get the answer, because this is absolutely what is happening. We have a strong flexibility because we found resources and reserves that are very low cost, still overheating, because following our strategy, we run exploration in a place where we have big synergies and where we have a lot of operations. We have flexibility, and what you said is right. We can move very easily CapEx from more complex and more costly project to a cheaper or lower cost project. That is what we have done. Our target is, as Massimo said before, because we have to cope with a $50 or $55 scenario, is really to stay in our guidance in terms of CapEx or maybe 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. Also it's considering the same amount of CapEx, I think the internal rate of return and the time to market will be much better, and also the cash from operation will be better.
Okay. 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 covered, and also the second question, because our target is to remain in this range of what we said last year, EUR 12 billion per year. That was our threshold. As Massimo and 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 and point with the low scenario. Work on our efficiency and on our company to be ready when the price will be better to have a very strong leap ahead.
Okay. Thank you.
Next question comes from Mr. Massimo Bonisoli from Equita. Mr. Bonisoli, please.
Thank you, and good afternoon, gentlemen. Congratulations for the Saipem deal. Two questions. Once 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? Second question on financial cost post Saipem deconsolidation. What would be the financial cost savings on the EUR 5.1 lower net debt?
Thank you for the congratulations first, and I answered to the first question, and Massimo answered to the second. Talking about the 18% remaining after the transaction, we are not thinking about that yet. It's clear that it's 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 Saipem plan that they presented yesterday. I think that we have in our hand some potential, additional potential. As you know, we have 18%, 3% and 12.5% in the shareholders agreement for 3 years. I think that for that is a good operation. At the moment, we don't move because we are still, because the scenario is that, and also because Saipem start executing the new plan. We have these reserves. We are very happy about that.
We think that there is a strong upside potential. We'll see in the future what we can do with this money.
Massimo, as far as our financial cost after the Saipem deconsolidation, I would say too early to make a full assessment because we have to elaborate the new plan and decide exactly how to use this money. If we want to replace some bonds and how we would like to utilize this fund. It's something that we can discuss later on when the new business plan will be fully elaborated. Okay, thank you very much. Very clear.
Next question come from Mr. Hamish Clegg from Bank of America. Mr. Clegg, please.
Afternoon, gents. I'm delighted about your de-leveraging event this week. I just had two questions. First was on the Saipem uncoupling. I wanted to ask Mr. Mondazzi if he could give us any light on where we could see interest costs going next year, tax rates, and potentially new CapEx. Maybe this is data you store up, but it will help us model in the short term. The second question was just on Kazakhstan. We all saw the Kazakh government trying to fine you this week over Karachaganak. 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, Hamish. Just to check if I correctly understood, are you asking some clarification about tax rate? Is this 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 a full plan in order to see which is the overall composition of debt, the full utilization of the additional cash we will receive from Saipem. 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'd potentially look to restructure your balance sheet as you have quite a high cost of interest, or at least cost of net interest implied?
Again, what we have to decide, depending on the market situation, when we'll have this money in our pocket, is to see which are the best opportunity. If you would like to buy back some bonds outstanding or whatever. It's early to say.
Okay.
Antonio Vella will answer about Kazakhstan, talking before about Karachaganak, and secondly, about an update on Kashagan.
Okay. Let's talk about the Karachaganak. The ongoing discussion with the Republic of Kazakhstan and the venture and partners are still normal discussion within our production sharing contract. There are some negotiation ongoing in term of the audit cost recovery, which is a normal activity within our accounting and adjustment on the activities. The relationship are okay, and if some discussion is coming out on the audit and cost recovery, will be resolved as usually amicable with our partner, as we have done on the past experience. Concerning Kashagan, the installation work is progressing quite well, and we are confirming that the installation work will be completed by mid-2016. Production restart in the fourth quarter of 2016.
Thank you. Back Antonio.
Thank you. Thanks very much.
Next question comes from Mr. Henry Tarr from Goldman Sachs. Mr. Tarr, please.
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? 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. Really talking about the Area 4 offshore Mozambique, Eni together with this partner, is in the final stage of negotiation for entering into a binding sale and purchase agreement with BP as a buyer of the production coming from the Coral field. This negotiation is based on key terms that were previously agreed. Under these key terms, BP is the sole off taker 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. This will be in line with the schedule for the Coral field FID.
Roberto Casula will answer about OpEx reduction.
Good afternoon. Well, we are continuing our effort to maximize the efficiency in our operations. At the moment, we do see a 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 per barrel, and this is due to many efforts. Firstly, from the contractual point of view, with the 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. Theepan Jothilingam from Nomura International. Mr. Jothilingam, please.
Yeah. Hi. Good afternoon, gentlemen. Just two questions. Just coming back to E&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 projected spend is to underpin that decline. The second question just comes back to the progress you will make deleveraging the 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 to the first question about fighting the decline.
As you know, our strategy is keeping 5% our decline. 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 rigless instead of large and heavy workover, and this is still responding on 5%.
Theepan, any decision about potential modification on our share return policy will be taken, I would say February, presenting the new strategic plan.
Okay. No, that's fine. 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 are on the production optimization, which are CapEx. As you know, normally we are moving in our budget between EUR 2.9 billion, EUR 3 billion. This number is going to be reduced since the strategy went to a rigless activity instead of heavy workover and drilling and sidetrack.
Thank you, Tony.
May I go ahead with the next question, sir?
Yes. Thank you.
Okay. 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 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 consist, as you certainly know, of a floating LNG and subsea wells. Well, I can tell you that we are really very close to select the lowest bidder, and we have reached very good results in terms of unit cost per million MTPA. In combination with also very good results in signs of cost deflation for all the subsea production system. 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, the commercial results will come in the near future.
Thank you, Roberto. Okay, next.
Next question comes from Mr. Aneek Haq from Exane. Mr. Haq, please.
Thank you. Hi. It's just a question for you 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 2016 to that $55 breakeven, which obviously, you've done very well to get down to this year?
As far as the refining
Aneek, maybe you remember that we are working hardly to significantly reduce the given cost, the given margin in refining. Today, we are in the range of $5.5 per barrel. Definitely, the cash contribution we had in 2015, benefiting from a higher scenario, has been the one that you have seen in the first nine months of this year. What we are going to do is to prepare ourselves to cope with, I would say, harder times ahead of us, and we believe that definitely the highest margin we have seen are gone. What we are doing is we try to reduce even more the 5.5 versus, you remember, the $3 per barrel that has been our target we announced when we launched the four-year plan.
I will say that, as well as we are well ahead on this plan in 2015, 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, then, from downstream?
Maybe I can give you some maybe more specific idea. If we see the downstream cash flow we got in the nine months of 2015, I would say that more or less, I'm referring to the EUR 1.7 billion we got in the nine months of 2015. I would say that more or less 60% of the increase is related to the scenario, 40% is related to the, I would say, efficiency, the utilization rate, I would say, the full production of the heavy oil treatment plant in Sannazzaro. 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. Neill Morton from Investec. Mr. Morton, please.
Thank you. Good afternoon. I have two questions, please. Firstly, on the downstream, you've been making losses in refining and chemicals for so long, I wondered whether you'd built up significant tax loss carry forward. Basically, as we go forward, what sort of tax rate should we model in refining, marketing, chemicals as a unit? Secondly, a macro question on Libya. You probably know more about the country than most. I just wondered what you think its prospects are to perhaps increase oil production over the next, say, 12 to 18 months? Also what Eni's plans would be if the security situation normalizes. Thank you.
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 the deferred tax asset using that 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, Libya. What we are experiencing there is that for gas in Mellitah , especially for gas, the situation so far is good. We think that gas that now is going about 60% for the domestic market, is practically at the maximum rate, and our forecast is that it's going to continue at this rate. That is also a positive signal because Libya increased the gas utilization disposal. That is positive because it means that they are working and the situation is not so bad in all the different cities. For gas, we are optimistic. For oil, the projection is not so optimistic because we need the treatment facilities. We need more maintenance. We need spare parts, and we need also the actual facility working operationally at the best.
The projection that we made in our calculation is a steady state like now, that it's not at the maximum, that just is no percentage of the full potential.
Thanks. Just as a quick follow-up, could I perhaps ask the quantum of those historical tax losses in Italy, in the downstream? We're talking hundreds of millions?
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, thank you for taking the question. I will keep it short if I could. Just while we're on tax rates, can you talk about what the outlook is for the upstream tax rates? Clearly there have been a number of moving parts over the quarters. Actually, just secondly, just a quick one on the upstream cost savings number. Apologies if I didn't quite get this completely. When you're looking at both the operated cost reductions and the non-operating cost reductions, are they the similar sort of scale of reductions that you're seeing? Thank you.
Okay, Lydia, I'll give you the first answer about the E&P tax rate. The E&P tax rate as far as the quarter is 110. As the overall tax rate, please do not refer to the quarter tax rate as a reference point to project the full year tax rate. A very quick explanation about the E&P tax rate. E&P tax rate is significantly affected by the full expenditure or exploration cost at this level. You remember, from an accounting point of view, we expense 100% of exploration cost while I would say the other use the successful efforts 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 . We don't know if at the end of the story, we'll get the FID or no.
No deferred tax asset. Just to give you the sense of this effect, if we apply the successful efforts 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 third quarter. The significant and quick drop in price is 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 sharing agreement. The effect of which, in term of rebalancing in cost oil, profit oil, is delayed later on. 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 Brent price average above $60 at the time. Now targeting the $55, I would say 80% as a tax rate average, 80% for the full year. Looking forward, as the mechanical adjustment PSA and the better result in non-upstream assets in Italy, this 80% definitely should drop.
Second question, Roberto Casula.
About this further efficiency in the capital expenditures. First of all, you know that in 2015, the majority of our CapEx were related to already committed project, 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 retendering of the contract, and thanks also to some reconfiguration of the project. The majority of the cost saving is related to the operated project.
That's really helpful. Thank you both.
Next question comes from Mr. Giuseppe Rebutini from Fidentiis Equities. Mr. Rebutini, please.
Good afternoon, gentlemen. Thanks for taking my question. Well, coming back to the disposal of the share of Saipem to FSI and the shareholder's pact, I wonder whether the joint control over 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 followed when we disposed of Snam. 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 Michi from Banca Akros. Mr. Michi, please.
Hi, good afternoon, gentlemen. Thank you for taking my questions. I try to be 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 GasTerra. When do you expect the final outcome of the arbitration? The third one is a very brief update on the main startups expected for 2016. I am referring to Wafa and Nenè and Kashagan. You did it few minutes ago, but just to understand correctly, Satom yesterday 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. I am a bit confused. Could you please help me in understanding when do you expect the production from Kashagan? Thank you.
Yeah. Massimo-
Okay, definitely no agreement with FSI about the dividend policy of Saipem?
Nostera?
GasTerra, we believe within the first quarter of next year.
Kashagan. Don't be confused. Antonio said that we finalize the installation at the end of the first half, and then production will start in the fourth quarter. That is confirmed.
Thank you.
The last question comes from Mr. Rob West, from Redburn. Mr. West, please.
Hi there. Thanks for taking my question. 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 replied that with Zohr as a discovery, you're going to try and keep your CapEx at around EUR 12 billion a year, Zohr is going to have 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 it just totally rash and jumping to a conclusion to think that's the logical thing, or are there other options beyond probably selling down your stake there with another party? Secondly, Italy is an area that doesn't get much discussion in your upstream portfolio on these calls.
I imagine this year it's probably one of the more free cash generative of all the different regions you spit out and report annually. Is there any change in the way you're running that core upstream Italian business this year versus typical years, 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.
For Zohr and Coral and Italy. First of all, the EUR 3.5 billion is not something that we are going to spend in a 2 years. It's something that we are going to spend in a longer period, because that concern, the full development is also the subsequent stage of development. It is a long term. It's not what we are going to spend to put in production upfront. That will be much less than that. On Mozambique, surely we don't find this flexibility on Coral, because Coral is good. We signed there for the gas. We finished the tender procedure and process, we will be ready to FLNG Coral at the end of the year, beginning 2016. While Zohr will be functioning in December this year. We have other big projects.
We have other big projects where we already discussed and decided that we are going to shift and move out the capitals, we talk about Iraq, we talk about Indonesia, we are talking about Venezuela, that was very capital intensive, especially in the second phase. We have room in our budget to find flexibility and go for smaller, faster, and cheaper projects. It's not a big issue. I really didn't understand very well your question on Italy, because Italy, what we are doing, we are not changing anything. Nothing is changing. Unfortunately, we are continuing working intensively, and we finalize the project in Val d'Agri, the fifth train, and we are looking now the positive impact. We are working on, as Antonio said before, on well optimization or production optimization for other projects 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 view we signed last year with the region, when we finalized the Gela transformation to a green refinery, in the package, there is also the development of the gas field in Italy, that is another project that we are going to develop. In Italy, we try to fight depletion, we try to improve the new project, Mare gas offshore, and some project in Val d'Agri for increased production, all onshore. That is our program. That is confirmed.
Right. Thank you.