Good morning, ladies and gentlemen. Thank you for standing by and welcome to Repsol's second quarter 2013 preliminary results. This conference call will be led by Mr. Miguel Martínez, CFO of the company. A brief introduction will be conducted by Mr. Ángel Bautista, Director of Investor Relations. Mr. Ángel, please go ahead.
Thank you. Good day, ladies and gentlemen. This is Ángel Bautista, Director of Investor Relations in Repsol. On behalf of our company, I would like to thank you for taking the time to attend this conference on Repsol's second quarter results. This presentation will be conducted by Mr. Miguel Martínez, CFO. Other members of the executive committee will be joining us as well. Before we start, I invite you to read our disclaimer note. We may make forward-looking statements which are identified by the use of words such as will, expect, and similar phrases. Present results may differ materially depending on a number of factors as indicated on the slide. I now hand the conference over to Miguel.
Thanks, Ángel, thank you for attending this conference on our second quarter results. First of all, we would like to express our deepest condolences to the families and friends of the victims of yesterday's tragic train accident in Greece. Our thoughts and prayers are with them today. Today's conference call will cover two topics. First, the operational activity and the main events of the quarter, including an update of the situation concerning the YPF confiscation. Second, the quarterly results. Starting with the operational activity, I would like to highlight the following. In the upstream business during this quarter, production of hydrocarbons reached 359,000 barrels of oil equivalent per day, which represents a 12% increase year-on-year.
The additional volumes arise mainly from the ramp-up of the projects that came on stream during the second half of 2012 and the beginning of 2013 in Russia, the U.S., Spain, and Brazil. The improved performance of our operations in Trinidad and Tobago, partially offset by the reduction in volumes from Ecuador, where we sold a 20% stake in Block 16 last September, and Libya due to recent disruptions. In Libya, we resumed operations on July the 12th, we are currently producing at normal levels. From an operational standpoint, Kinteroni is ready to start production. However, we are working on some commercial arrangements. The Peruvian government decision is that gas reserves from Block 57 replace the ones related to Block 88 as the guarantee to the Peru LNG export facility.
In consequence, some contract modification between Camisea and Peru LNG need to be made, since gas from Block 57 will be sold to Peru LNG. We are making progress and expect to start production shortly. In relation to the JV with SandRidge in the Mississippian Lime, we are reducing the production forecasts. This reduction is due to the new plans released by SandRidge after the changes in the board, with a stronger focus on value creation rather than production volumes. For this year, we expect to produce on average 7,000 barrels of oil equivalent per day. We are in permanent contact with the new management with the aim of approving in the following months 2014 activity.
Moving to Brazil and Bolivia, before the year end, we expect to connect two more wells to the FPSO in Sapinhoá as is scheduled, to put into production Margarita Huacaya Phase Two in Bolivia, thereby consolidating the successful delivery of two of the key projects of our strategic plan. Let me emphasize that the 10% production growth target for the year is achievable. Regarding our 2013 exploratory activity, we have already achieved the 300 million barrels of oil equivalent annual target of contingent resources addition. During the first part of the year, 12 exploration wells and one appraisal were completed. Nine of these wells, located in the U.S., Brazil, Colombia, Algeria, and Russia, had positive results. We are currently in operations in Brazil, Canada, and the United States and Indonesia.
In the second half of the year, we will continue drilling the ongoing wells and will continue with the exploratory campaign in Libya. We will start new wells in Norway, Kurdistan, and the Gulf of Mexico, by the year-end, we will start with new winter campaigns in Alaska and Russia, expecting to achieve the target of drilling 32 wells this year. Turning now to our seismic activity, we finished a campaign in BM-C-33 in Brazil and started campaigns in Australia, Bulgaria, and Venezuela. In relation to the exploratory acreage, we acquired four new licenses in Norway, in the Norwegian and Barents Sea, where we will be the operator in two of them. We have also acquired additional acreage in Guyana and Indonesia. On the LNG sale, we continue working on the closing of the transaction along with Shell.
We have received all the antitrust approvals, we will be continuing with the initial plan to close the deal before the year end. To finish with the operating aspects in the refining business, the utilization rate has improved. On the one hand, the distillation capacity moved up to 80% from 68% during the same period in 2012. On the other hand, the conversion units increased up to full capacity, 100%, compared with 82% during the same period a year ago. Before going to the results analysis, let me provide you with an update concerning the YPF confiscation. Last month, Repsol board of directors unanimously rejected the compensation offer it had indirectly received for the expropriation of YPF, as it did not satisfy the losses suffered by Repsol.
The offer was based on overvalue assets far from market values seen in recent transactions in Argentina and in the U.S., and had a structure which was far from the declared interest of Repsol for an agreement, since its lack of liquidity did not include the minimum necessary legal nor financial warranties and required significant and compulsory investments. It's also worth mentioning the recently announced Chevron YPF agreement. Repsol regrets that a company like Chevron, that seeks the endorsement from the international community in its conflicts with foreign states, is willing to take advantage from an illegal act, entering into an agreement over the expropriated assets prior to the payment of a fair compensation to Repsol. In the meantime, we would like to acknowledge the support received from the best companies in the industry.
Repsol trusts in the justice of the legal proceedings already brought in different forums in response to Chevron's actions, including the request made yesterday before ICSID in Washington for an injunction in order to protect the assets of YPF. At the same time, Repsol maintains its confidence in the recognition of its legitimate claims through the legal actions taken against the government of Argentina, reiterating notwithstanding, as it always has, its open attitude to reach an agreement negotiated through the appropriate corporate channels with the necessary balance and which provides for a fair compensation, bringing to an end the claims surrounding the expropriation. Let me start now with the results. This quarter, we released a CCS adjusted net income of EUR 509 million, 6% higher year-on-year, and a CCS adjusted operating income of EUR 979 million, 5% higher than in the same quarter last year.
In the first half of the year, we released a CCS adjusted net income of EUR 1.2 billion, 26% higher year-on-year, and a CCS adjusted operating income of EUR 2.3 billion, 14% higher than during the first half of 2012. In upstream, the adjusted operating income during the second quarter 2013 was EUR 514 million, in line with the same quarter of last year, mainly due to the increase in production, but lower realization prices. The explained 12% production increase had a positive effect of EUR 51 million, while the related increase in the depreciation charges had a negative impact of EUR 33 million. Exploration cost decreased this quarter by EUR 86 million if compared to the same period last year due to the success in the exploratory wells during the period.
Repsol crude realization prices had a better performance than Brent due to higher volumes in Brazil and in the U.S., while gas realization prices decreased year-on-year due to the sales volume mix. These two price effects have a negative impact of EUR 71 million. Other minor items explain the remaining differences. Moving on to the LNG, adjusted operating income in the second quarter was EUR 117 million versus EUR 78 million posted during the same quarter last year. We achieved higher volumes and stronger marketing margins, along with a better performance in our North American operations. In the downstream business, adjusted CCS operating income in the second quarter 2013 was EUR 147 million, 28% down year-on-year. The results of our resilient marketing business could not offset the lower result in these industrial businesses.
By business segment, in the refining area, we suffer weak margins in Europe, mainly during April and May, recovered slightly during June. This decrease in margins was due mainly to narrower spreads of middle distillate and gasoline versus Brent, and the spread between light and heavy crude oils. The margin indicator and the premium margin Thanks to the upgrades for the second quarter were $2.6 per barrel and $1.2 per barrel respectively. The higher volumes could not offset the lower margins and caused a total negative impact of EUR 11 million. In the chemicals division, lower naphtha prices and better volumes could not offset lower product prices, having a negative impact of EUR 23 million. The chemical division results were close to breakeven. The marketing businesses had a performance in Q2 2012, despite 7% volume decrease in our service stations located in the Iberian Peninsula.
In Gas Natural Fenosa, EUR 239 million adjusted operating income during Q2 of 2013 was in line with the same period last year, due to better wholesale marketing margins, partially offset by a lower contribution from Union Fenosa Gas. The government of Spain recently announced a change in the law that regulates the electricity sector in Spain, putting pressure on the regulated business. We estimate that this change will produce a negative impact, pre-tax, net to us of EUR 2,754 million in 2013 and 2014 respectively. The effective corporate tax rate in Q2 of 2013 was 48%, and we forecast a 44% tax rate for the whole year, including accrued inventories effects under current circumstances. As a conclusion or in summary, I'll say that despite the tough macro and regional environment, we were able to release a resilient set of results.
Moreover, we have maintained our focus on the execution of our strategic plan, delivering production growth and resources additions. Now I will be pleased to answer any question you may wish to put forward.
Good morning, ladies and gentlemen. The Q&A session starts now. If you wish to ask a question, please press 01 on your telephone keypad. Thank you.
Hello again. Let's begin with our Q&A session. We have enabled a chat in the webcast in order to post questions in the event there are connection problems on the call. You may identify it by a tab called Ask a Question. If any, we will address these questions at the end. Let's begin. Please, Thomas Adolff from Credit Suisse. Hello, Thomas, go ahead with the question.
Hi, thanks for taking my questions. I've got three, please. Firstly, on your production, maybe in 3Q, can you give some form of guidance and perhaps go into some details on the moving parts? Secondly, on your solid liquidity position, which will improve further post the LNG disposals completed. I was wondering whether you intend to bid for the Libra field as part of the JV with Sinopec, and I'm assuming you have seen the data already, and perhaps you can comment on the oil and gas ratio and say something on the CO2 content. Just sticking around with liquidity, I was wondering whether you also consider potential share buyback just to keep the share count the same. Finally, just on the U.S. unconventional play or the onshore play, I was just wondering whether you feel you have the capability to be ultimately an operator.
Thank you.
Thanks for your question, Thomas. Regarding some light for the 3Q, I would say that it's going to depend much on the entrance of Kinteroni, because the rest of the additions will come more in the fourth quarter. By that, I refer to the second well that will be tying into Sapinhoá and Margarita. It's going to depend much on the entrance in production of Kinteroni. I would say flat with this quarter if Kinteroni doesn't start. In relation with Libra, there's time at least to analyze, but it doesn't have much to be with liquidity. In the relation with Libra, we analyze for sure everything that moves. In that case, we will have to analyze that in conjunction with our partners Sinopec.
Having said so, probably I would say that there are other companies that would be more aggressive initially because our position in Brazil is quite long, and we already have a capital employed which it fits with our portfolio. Turning back to liquidity and share buybacks, I would say no. We are not analyzing any share buybacks. You have to think that the liquidity that it's shown, which is the EUR 10 billion, from which EUR 4.5 billion more or less are credit lines, will shrink because cash proceedings, we are not renewing the EUR 1 billion bond that matures in July. We also have the conversion of half of the preference shares. Basically, no buybacks and the position we have at the month-end is somehow exceptional. Finally, as an operator.
Well, right now, I would say that we'll keep in touch with them to analyze which are the proceedings. They are more oriented to value than to production figures, which for us is fair. We keep working with them. Being an operator, well, could be, but is not in the table at the present time. Okay?
Okay. Thank you.
You're welcome.
Thank you, Thomas. Let's move on. Please, Oswald Clint from Bernstein, please go ahead with your questions.
Yes, thank you. Just two questions. First one, maybe just talking about the weak downstream result there. Can you talk about how your crude diet has changed for the refineries in the second quarter? Is there anything you can do here with the low light, heavy spreads to try and improve that capture or improve that positioning in terms of light, heavy spreads or any other crude that you could actually start to import? Secondly, I wonder if you could just give or talk about your OpEx per barrel just in the upstream and how that's trending through 2013 relative to last year. Thank you.
Thanks, Oswald. Starting with the second one, I would say that the OpEx is moving but is slightly up. It has to be more with the type of activity we are entering in, more deepwater, more than with cost inflation that we are not perceiving. With transportation costs from Sapinhoá, which is just one well. Costs there are impacting more per barrel produced because we are in several of our projects in the startup phase, they normally assume more costs per barrel. In relation with the crude diet, I think that we have keep attached to the crude diet more or less the same we had last year, except for the change in the Iranian crude, but this affected more in the first quarter than the second one. Second one, I would say it's the same diet.
We basically operate with 45%, 48% of our diet is heavy crude. I don't see any other thing we can do. It's the market, the one that really marked the spread between heavy and light. In relation with weak results, I agree with you. They have been weak. I think that probably this quarter, at least is the trend in the last year, the second quarter has always been the weakest in refining. We will see how we end the year, but in relation with your question, I cannot see any way to really modify the spread.
Okay. No, that's great. Thank you.
Thank you, Oswald.
Okay. Thank you very much, Oswald. Let's move to Jason Gammel from Macquarie. Hello, Jason. Please go ahead with your questions.
Thank you, gentlemen. I just had a couple. First, on Brazil, you mentioned that there's only one well producing now and that you expect to tie in two during the fourth quarter, I believe is what you said. Can you comment on the production that you're seeing from the well that's in operation? Just clarify that the reason for the delay in the other wells being tied in is simply the unavailability of the subsea buoy. Second of all, if I could turn to Kurdistan. Can you talk about any progress that you may have had in farming down your interest in Kurdistan? I believe you mentioned that you were intending to drill a well there later this year.
In relation with the first one, the producing well is producing 25,000 barrels per day gross. Okay? In relation with the second one, we are in talks with two companies at the present time to allow them to farm in Kurdistan. Still, probably within one month or so, we'll have news in that sense. Yes, our idea is to dilute our 100% that we already own today.
Okay.
Did I answer you, Jason?
Yeah, you did. If I could just ask, though, the delay in tying in more than one well at Sapinhoá, obviously it's been producing for a while now. Is this due to the unavailability of the subsea buoy, or are there other issues on the FPSO?
What you mentioned. Exactly what you mentioned.
Okay. Thank you.
Okay. Thank you very much, Jason. Please, Flora Trindade from BPI, go ahead with your questions.
Yes. Hello. Good morning. First question, basically is a follow-up on the last one, the delays on subsea equipment. Are you also seeing any cost inflation? What's your view here on the impact it could have going forward? In line with this, considering the information you have as production advances in Sapinhoá, can you share with us any updated expectations for the typical OPEX per barrel and CapEx per barrel you have implicit in your models? The last one, just trying to look forward to the second half of the year. Can you update any expectations for Canaport and also for the marketing within the downstream division? Thank you.
In relation with cost inflation, I would say that 5% is the figure of cap inflation that we are seeing. No more than that. What is possible is that in Brazil, due to the extra works, there are not many companies or suppliers available. If you remember, the operator is negotiating that now with SBM and MODEC, we will have to wait and see which would be the final cost of this process of negotiation. I would say on average 5%, with the factor I mentioned you in relation with Brazil. The second one, in relation with the second one, I would say that altogether it would be around $35, $37 per barrel, combining CapEx and OPEX.
I prefer to give you the combined figure because depending on the property of the FPSO, figures can change from one company or the other, depending if you own the FPSO or if you simply rented it. Around EUR 35, EUR 37 per barrel. Second, in relation with Canaport. Well, I would say that Canaport figures will vary our North American LNG business, the part that we didn't sell to Shell. The results will vary once the transaction is closed, because at that moment, we will not have the availability of our own gas. As mentioned in the press release after the announcement of the sale to Shell, we will accrue the necessary quantity so that at the end, in the figures and for your models, the operational result would be zero. The negative part that we expect in the future would be absorbed by the amount accrued.
Did I answer you, Flora?
Yes. Perfect. Thank you.
You're welcome.
Thank you very much, Flora. Let's move to Filipe Rosa. Hola, Filipe. Please go ahead with your questions.
Okay. Hi, good morning, everyone. Three questions, if I may. The first one on CapEx. Apparently it's running slightly below your full year run rate. Mainly in downstream, could you update us on your guidance for full year CapEx? My second question would go for Peru on the asset sale, if you could update us on that. The third one would be for the marketing division. Again, a follow-up on that one. Have you seen any recent signs of recovery in terms of volumes stabilization? Could you update us on your view for the second half on that one? Thank you very much.
Always the first part of the year, you are a little below what you ended up. Our figure or the indication we gave in the first quarter presentation results, were between EUR 3.3 and EUR 3.5 ex Gas Nat.
I think that we are going to be in line. In the first six months, we have a CapEx of EUR 1.5, and normally, especially the fourth quarter, is a little higher. I think that we are in line with our budget and with the indications or color we gave you. In relation with your second question in Peru, we keep the process, and I'm under confidentiality clauses, so I cannot tell you more that the process continues, and let's see how it evolves. I cannot tell you more about this. Sorry. In relation with the volumes, we have seen somehow soften the fall in the retail network, because at the end, the retail network is the one that provides you the best data. In wholesaling, through a small discount, you can move volumes easily.
If you look at the figures, the fall in the, was it 7.3% in the quarter? Which was smaller than what we have seen before. In this month, we're a little above what we saw in July 2012. The situation, it looks like somehow recovering, though. If someone would have told me six years ago, if I could think that the consumption in our network will fall 30%, I would say that the guy would have been crazy. This is really a tough recession, we will see, it looks as if the news are a little better.
On the margin front, if there is a stabilization of the volumes or if the drops are relatively smaller in the second half, do you think that it will be possible to have some margin improvements, or do you think that it will be something similar to the first half?
I would say that margins will be a little better in the second part of the year. You have to think that when we started the year, the Spanish government changed the tax in relation with the biofuels. Initially, the biofuels were not taxed with the hydrocarbon taxation, we have been slightly recovering that tax. I expect there's a little recovery in the second part of the year in comparison with the first one.
Thank you very much.
Thanks, Filipe. Now let's move on to Haythem Rashed from Morgan Stanley. Hello, Haythem. Please go ahead with your questions.
Thanks, Ángel. Good afternoon, everyone. Just two quick questions from my side. One is a very quick clarification and a follow-on from the previous question on the downstream. Just to understand, given comments that there is cautiously optimistic outlook potentially for the marketing side, do you feel guidance for the full year could be exceeded, or have you got any updated view on where you see full-year EBITDA for the downstream ending up? Second question I had is slightly bigger picture. You've made good progress on all the financing parts of this strategy. It sounds like with the LNG sale, effectively with all the approvals in place now, it's a matter of time now to have that completed. Are you thinking about a potential next stage in the sense of where you see Gas Natural in the portfolio, and have you had any update on your thoughts there?
I know that previously that was something that you wanted to see the LNG sale done before thinking about, is that something that you're now looking at in a bit more detail? Thank you.
In relation with the first one, I think that my comments in the first quarter presentation results were that probably we will reach EUR 1.5 billion as EBITDA for the whole downstream division. If you look at our figures today, we closed the first part of the year with EUR 430 million, I think. My comment was based on non-impact from the inventory effects, and we have suffered EUR 230 million impact on the inventory valuation. If we add up both figures, considering for the whole year that the inventory impact would be zero, the figure of the first half of the year would be around EUR 670 million. Expecting a slightly better second part of the year, I think that if we don't reach it, we are going to be pretty close with no inventory effect. Okay. In relation with the second one. You are right in your comments.
Part of the rationale of our stake in Gas Natural was the ability to make money throughout the LNG division. The rationale disappeared once we sell the LNG business to Shell. Having said so, we are not in a hurry. Only the financial advantage we get. Gas Natural yield is 6.5% after tax, our last bond issue was 1.8% after tax. We have a positive carry of almost 500 basis points . We are not in a hurry, but it is true that it is something we seriously have to think of it. Okay?
Thank you.
Thank you very much, Haythem. Now let's move to Alejandro De Michele. Hello, Alejandro, please go ahead with your questions.
Good afternoon, gentlemen. Thank you very much for taking the questions. The first one is a follow-up on your last answer on Gas Natural. If you are thinking about where your next steps are, do you need to agree with La Caixa to do something jointly? That is the first question. Second question is on Argentina, and you mentioned the situation with Chevron. Does that change your willingness to take part of the asset as part of the transaction, given that Chevron has taken probably the jewel in the crown of the asset?
Well, for sure, any transaction we possibly foresee in the future, it would be much fairer and much simpler if we do it in agreement with Caixa and with the Gas Natural management. That's clear. As mentioned, it's way too early. We have to think of it and look for the future. I would say yes. I would prefer to have any future transaction in agreement with Caixa and with Gas Natural. In relation with Chevron and Argentina. Over here, I want to explain that basically we are not against any expropriation. I think it's a right that all the governments have, but the point here is that we need a fair compensation, which is something that after 15 months, we haven't seen. We haven't seen a single dollar. One way is to receive the liquidity now or value now for the assets that were expropriated.
The other possibility, if we don't reach an agreement for value, is to obtain the assets back. In that sense, Chevron is interfering in our process. The jewel of the crown, yes, it's true that it's probably the best part of Vaca Muerta, but I think that Vaca Muerta is huge. On top of that, we are looking more for liquid assets, more than for future investments in Argentina.
That's clear. Are the negotiations with the government continuing, or have they stopped now?
As mentioned, really there were no negotiations with the government. I mentioned that it was indirectly. Basically, what we had was a meeting in Mexico with YPF people and Pemex people, and our team. That was it. I cannot say that we are in conversation because the contact has been totally indirect.
That's very clear. Thank you.
Thank you very much, Alejandro. Please, Theepan Jothilingam from Nomura, please go ahead with your questions.
Yes, thank you. Good afternoon, gentlemen. Actually, two questions. Just coming back to exploration, please, could you perhaps give us any sort of indications of, on a volumetric basis, what you're targeting for H2 after having a successful H1? Just on Alaska again, could you just talk about what the next steps there are, how much you think you've discovered to date, and when you may think about first oil. Thank you.
Theepan. I'm sorry, but to the first question, I have to say no. We do not disclose volumes we are aiming at, though I have to say that still in front of us, we have Kurdistan, Norway, Canada, Brazil, U.S., Libya, and in front of us, and Romania. It's still a really weighted second part of the year, but we not disclose the volumes we are aiming at. In relation with Alaska, if you remember, we still have one campaign to go, an exploratory campaign. We do prefer to really end up all our homework before disclosing any figure. Sorry about that, Theepan.
Okay. Just two follow-up questions, I guess. What do you think of economic threshold is there, therefore? I might spin it a different way on that question. Secondly, just coming back to the previous Q&A. Subsequent to the Chevron announcement, has there been any further contact with the Argentine government? There's not been any change in stance. Is that what you're trying to tell us today?
In general terms, we always aim for a return, which depends on the risk of the country and also the fit with our strategic plan. I would say that for sure it was, or what I can tell you, it was two figures before we started, and after the tax modification, it's going to be a little higher in Alaska. For sure, it's going to depend also on what we find during this winter. Depending on the size, the development project would vary. Still way too early to say. What I can tell you is that based on our initial analysis, we are in better shape today than when we approved the first exploration campaign. The other one, the answer is no. There has been no contact.
Okay. All right. Thank you very much, Miguel.
Thanks, Theepan.
Thank you, Theepan.
Sorry.
Hello, now, thank you, Theepan. Let's move to Hootan Yazhari. Hello, Hootan. Please, from Merrill Lynch, go ahead with your questions.
Good afternoon, gentlemen. Two questions, if I may. Starting with YPF, you indicated that you will be pursuing some activity in the U.S. court system. Can you just give us some clarity on what exactly you are pursuing there? If a successful judgment is given in your favor, what would that entail, and how could this play out for you? Secondly, moving to the exploration portfolio, I just wanted to get an update in terms of whether you have the rigs lined up for your re-entry into BM-C-33 and what we could expect in terms of timings there. Thank you.
I'd like to pass the first question to Miguel Klingenberg, who is our lawyer and the one that is suing everyone that moves around. Miguel?
Thank you. Thank you, Miguel. Very quickly, as you probably know, we have filed an arbitration procedure at the World Bank Arbitration Tribunal, ICSID. The claim is related to the fact that the expropriation has been approaching. In our views also, let's say, illegal itself. Therefore, our claim at ICSID is twofold. On the one side, we are requesting the tribunal to grant us the restitution of the assets expropriated, the shares. In fact, we are still the legal owners of those shares, although economic and voting rights were seized by the government. Secondly, as an alternative, an economic financial compensation. Far, therefore, it is our obligation to protect the assets of YPF, and this is what we are trying to achieve.
We have advised third parties that we are going to fight against those who are willing to take advantage of this illegal expropriation. Therefore, that's what we are doing. What we have by now done apart of other proceedings in the U.S. courts is basically to request the tribunal to grant an injunction to the government of Argentina, imposing on them the protection on the assets, and in particular, those who are the subject of the Chevron YPF agreement.
Thanks, Miguel. Hootan, your second question was referred to BM-C-33 or in general terms?
BM-C-33.
The rig would be in place by the end of 2013, probably the end of October, November. Okay?
We won't get any results on BM-C-33 until early next year?
Yeah, at the best.
Okay. Understood.
Thank you.
Okay. Thank you very much. Now we move to Anish Kapadia from TPH. Hello, Anish.
Hi. Good afternoon. I have three questions. First one was on Brazil, on a couple of developments over there. On Carioca, it seems like the size of the FPSO has come down in size, and also that I think there was only one company that tendered for the FPSO. Just wondering if there's any risk of delays over there and impact on CapEx. On the gas condensate developments, it seems like the Panoramix well was unsuccessful. Just wondering how that impacts development of Panoramix and the other discoveries around there. Second question is on the refining division. Given the very weak performance you've seen, would you consider closing down one of your underperforming refineries? Will you not be allowed to do so by the Spanish government? The final one is just a little bit of guidance for 2014.
I was just wondering, with the LNG business coming out of the portfolio, can you give guidance on what the increase in tax rate will be and, following the preference share conversion, what the decrease in the financial expense will be that you expect in 2014? Thank you.
Well, in relation with Carioca, we do not expect any delay. It's true that the FPSO is a little smaller, and this is due to the results of Carioca Sela. We are going to develop the north part of Carioca with the one FPSO, but we do not expect any delay. As mentioned before, the operator is negotiating right now with MODEC and SBM the tariffs for it. No delay expected there. Your second question refers to Panoramix. Yes, Panoramix, we have abandoned this project. The dry was well, and it was not commercially interesting to go ahead. There was a four-meter pay. We have abandoned this project. Your third question. Well, first, it's true that the refining or the downstream division has been weak this quarter, but we are still better than we were last year. This as a first comment.
Second, we do not expect to close any facility. Our system works as a unit, and we took advantage of it. Not any closing expected so far. Finally, in relation with 2014 for the tax rates and the financials, it is way too early to being able to give you any color or any hint. But I would be happy once we have all our budget for the next year to comment that with all of you. I would say it's still way too early to provide you any flavor. Think that also in relation with financials, it's going to depend much on how the closing of the LNG is. There are many factors, I would rather prefer to wait for the budget to give you those data. Okay?
Okay. Just one clarification in terms of Panoramix, abandoning that project. Are you still going ahead with Piracucá though, and what's the timing on that?
Piracucá, Petrobras is the operator, and we're still going ahead. In Panoramix, we are the operators, and we just decided to stop the project.
Thank you.
Okay. Thank you. Thank you very much. Let's move to Lydia Rainforth from Barclays. Hello, Lydia. How are you?
Hello there. Yes, thank you very much. I just have a couple of questions, if I could. Firstly, Miguel, just to clarify on the LNG sales closing. You've got the antitrust approval, is there any risk at all that the deal doesn't happen, or is it just a case of going through each of the individual contracts and sorting those out? Secondly, I'm sorry to ask you to do this again, but could you just go through the outlook for the profitability of the North American LNG business again for me, and just what would it take for that business to be breakeven? Actually, if I could just do a third one. It is now pretty much over a year since you signed the strategic alliance with Pemex around the Mexico side.
I was wondering, have you actually seen much progress in that, or sort of what more you might expect from that to come through? Thank you.
Well, to the first question, I would say no. I'm totally positive that the deal will be closed. We already have the antitrust permits. The point there is that exactly we have 152 contracts to be transferred to Shell, and in all these contracts, we have other parties, so it takes time. It takes time. Things are going well. My comment three months ago was that probably by September, October, there would be possibilities. Would fall more in the fourth quarter. The answer is that we think that for sure we'll go ahead with it. In relation with North America and the LNG, what we mentioned when we announced the deal with Shell is that we will accrue the quantity necessary for those assets. At the end, the losses could be between EUR 50 million and EUR 100 million per annum.
This will go against the accrual. Basically at the operating level, the result would be zero. In relation with Pemex, we are in talks with them, especially in the petrochemical area with some possible projects. Going slow. We keep talking with them. No major advances, to say something. Okay, Lydia?
Perfect. Thank you very much.
Thank you, Lydia. Thanks for your questions. Let's move on to Alastair Syme from Citi. Hello, Alastair. Please go ahead with your questions.
Hello, Ángel and Miguel. One point of clarification on the change in electricity tariffs in Spain. Just to clarify, is that EBIT impact coming through the Gas Natural line, or is it coming through the E&P in the form of lower natural gas prices to the extent that those are linked to Spanish electricity prices? My second question, you mentioned the big fall in marketing volumes over recent years. Is there anything or are there things you are doing on the fixed cost side to adjust for that lower capacity?
Thanks, Alastair. The change in the regulation of the electrical system in Spain affects us in two ways. The first one is through our participation in Gas Natural for the figures I mentioned. Then we have an extra minor impact on our cogeneration. That's it. All combined will not represent EUR 100 million for us for a whole year. That's it. Through Gas Natural one part, and through our cogeneration system in the other. In relation with fixed cost, you can imagine that, yes. We are really somehow squeezing every single cent that we have cost-wise.
Especially if you remember, we had in 2009, we really did extraordinary effort cost-cutting, and we have reviewed almost everything, starting from timetables in the service station, all the costs have been analyzed, reanalyzed, and we are trying to reduce all of them in order to somehow save the impact on the volumes. Okay, Alastair?
Is there a thought to closing capacity at all?
You mean in the retail network?
Yes.
Well, service station normally die alone. By that mean that independently of the moment in which you are, there is a limit, probably around 2 million liters per annum, in which those sites cannot be operated by companies. Between 1 million and 2 million liters per annum can be operated by families, and below 1 million liters, they die alone. Okay? There's not any idea or global concept of closing service stations. As mentioned, they die alone.
Okay. Thank you very much.
Thank you, Alastair. Now let's move on to Irene Himona from SocGen. Hello, Irene. How are you? Please go ahead with the questions.
Good afternoon. Thank you very much. Most of mine were answered. I just had one question, if I may, Miguel. On the financial side, you've now obviously sold LNG. You've exchanged the pref's for a bond. You've got the scrip dividend going. What is it that the credit agencies want you to do from here on, in order to, at some point, have a chance for a credit rating upgrade? Thank you.
Thanks, Irene. I agree with you. Basically, they want us to close the deal with Shell. Once this deal is closed, all the ratios would be, I would say, in the upper part of the triple B. Then, we'll have to wait. The agencies always take their time to move you up. They're a little faster moving you down, downgrading you. But in our case, I have to say that they have been quite conscious of the problem we face after the confiscation of YPF. We presented the plan with the message you mentioned, and some other ones, and we have delivered everything. I think it's only pending on the closing of the LNG deal.
Thank you very much. Thank you, Miguel.
Okay. Thank you, Irene. Hello, Neill Morton, please, from Investec, go ahead with your questions.
Good afternoon. Two exploration questions, please. The first one on Namibia. I think results to date have been fairly mixed. I appreciate you don't get full access to other operators' data, but has that given you any pause for thought against ahead of your own drilling in 2014? Secondly, in Ireland, again, you're not the operator there, but I just wondered what the next steps are on Dunquin, and for example, if you're planning to drill Dunquin South. Thank you.
In relation with Namibia, I'll have to say that we are aiming for it, a totally different play. I would say that nothing to do or to be with it. Your second question in Dunquin. In Dunquin, I'll have to say that it was a great wealth for the geologist, but a horrible one under an economic point of view. The reservoir was there, the quality of it was great, all the conditions were great, but it was water instead of oil. I don't know which conclusions the geologist will end up, but one thing is clear. The idea was correct. Probably they will keep moving around. To say something, Neill. Okay?
That's great. Thank you very much.
You're welcome.
Hello. Now we move on to the questions that we received in our chat. First one comes from Brendan Warn from Jefferies. He is asking about an update on the result of the Sagitario discovery in Brazil, if there are other analogous prospects in the block.
Well, the appraisal plan would be presented this month. If he was talking with me, to not give some heat, but we are talking about a really big one over here. Petrobras always, they don't like us to comment on that, but it's a big one. I cannot tell you more. The second question. Well, to see if there are some other prospects similar in the area, I'll have to first list appraise Sagitario, then we'll see in the future how the other prospects look.
Moving on to a question that has been made by Jason Kenney from Santander. Comment on gas realization prices as compared to Henry Hub.
Yeah. It looks a little curious that the Henry Hub went up, but our realization prices went down. Two reasons for that. The first one refers to the gas we provide to the government of Trinidad and Tobago , which was higher this month, it affects the mix. The second one is that we have a 20% of our gas sales indexed to the Brent price. Especially important is Bolivia due to its volumes. Brent went down, so the total mix at the end didn't follow the Henry Hub. To give you a data, I think that only approximately 30% of our gas production is linked to Henry Hub, that's the reason, the mix.
That has been everything for today. Thank you very much for attending this conference call about our Q2 results. Thanks, everyone, for the questions, and I hope we have answered everything. If you have any further doubts or queries, please contact us in the IR department, and we'll be available for you at any time that you need. Thanks a lot, and bye.