Good day, ladies and gentlemen. On behalf of our company, I would like to thank you for taking the time to attend this Conference Call on Repsol's First-Quarter Results. The presentation will be conducted by Miguel Martínez , the CEO of the company. Other members of the Executive Committee are joining us as well today. Before we start, please, 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. Actual results may differ materially depending on the number of factors as indicated on the slides. I now hand the conference over to Miguel.
Thanks, Mavi. And thank you all for attending this conference on our first-quarter results. This quarter, we released a CCS adjusted net income of EUR 654 million, 29% higher year -on -year, and a CCS adjusted operating income of EUR 1.4 billion, 11% higher than in the same quarter last year. Our recurrent P&L has improved in relation to both the previous quarter and Q1 2010. Higher oil and gas prices, the strong performance of our LNG division, along with the recovery of the chemical business, despite a lower production figure, have been the drivers of these solid results. Let me say a word on a couple of relevant aspects in the quarter. In upstream, as we anticipated at the beginning of the year, production was expected to be lower than in 2010 since no major projects started to come on stream in 2011.
Non-manageable events have put additional pressure on the production figures. First, the conflict in Libya. Although it has not resulted in any damage to our facilities so far, it has cast a shadow of uncertainty over the country's short-term scenario. In the quarter, we produced a daily average of 27,000 bpd in comparison with the 43,000 bpd of Q1 2010. Since the fifth of March , our production in the country has been completely interrupted. When it comes to shipments, we were able to sell three cargos in comparison to four to five cargos sold in a regular quarter. Second, the negative impact of the moratorium in our production in the Gulf of Mexico.
Although the moratorium has been lifted and the activities in the area have been reactivated, which is very good news for us and our peers, it has still affected production during this quarter with a drop of 8,000 bpd versus Q1 2010. Drilling operations of our B-20/1 development will resume in March 2011 and will reach target depth on April 3rd. The results have been positive, and production from this well is expected in July. Accordingly, production in the region should start then being in line with our budget. Third, Martinez turnarounds in Trinidad and Tobago meant that production was 11,000 bpd lower than last year. The above factors were partially offset by higher output and throughput driven by demand and the LNG plant and by the new contract that came into force in Ecuador.
For the rest of the year, excluding the PCE effects and Libya, production is expected to be similar or even slightly higher than in this quarter. Despite this, it's important to mention that we maintain our long-term production growth targets since the effects, as we mentioned above, are due to special circumstances. Only Libya has an uncertain scenario, but we are ready to resume operations as soon as the conflict is over. In fact, the first growth projects contemplated in the strategic plan set to come on stream over the next year and a half are proceeding on time and on budget. Cartagena and Bilbao are progressing according to the timetable and are scheduled to start full operations in four quarters this year, freeing up EUR 1 billion CapEx per year.
Kinteroni, where the appraisal campaign is currently underway, will enable the first gas production to come on stream in 2012 as planned. Margarita, where the first gas output of phase one is set to come on stream in 2012. Guará, the contract for its development was awarded to Subsea 7 in this quarter. It includes engineering, procurement, installation, and commissioning of the riser systems between the underwater wellheads and the FPSO. Contracts for FPSO hulls were already awarded in 2010. The project remains on schedule and will come on stream in early 2013. Lastly, we cannot fail to mention the corporate transaction relating to the partial sale of Repsol's stake in YPF. Repsol sold a total 11.6% stake in YPF in the market, 3.8% through a direct sale and 7.7% through an IPO, including the green shoe, making great progress towards achieving Repsol's objective of diversifying its portfolio.
Due to current accounting rules, we are booking after the previously described operations EUR 355 million as reserves. Taking into account that the Petersen Group announced last week that it will exercise its 10% call option, Repsol's stake in YPF will be 58.2%. We are now ready to initiate the last stage of the plan, the placement of a stake of YPF among retail Argentinian investors. Thanks to this transaction, Repsol is now in a very solid cash position. We have started using that cash in the redemption of one of the most expensive instruments in our balance sheet, the American preference shares. Our next step will be to find a replacement for the cash coming from YPF. Producing assets mainly in OECD countries or areas with relevant exploration upside are the kind of assets that fit into our strategic vision.
Now going into further detail on the operational highlights of the quarter and starting with the upstream business. In the upstream business and as part of our exploratory drilling campaign, we are currently drilling five exploratory wells, two in the Brazilian Santos 44 block, Itaborai Antinguá, one in Campos 33 block, Gávea, one in Bolivia, Sararenda, and one in the U.S. onshore, Garden Island Bay 1. We are also forging ahead with the appraisal well drilling campaign in Peru, with Kinteroni III, and in Venezuela with Perla V. Both Kinteroni II and Perla IV already deliver promising results that reinforce the positive outlook for the development of the above-mentioned fields. Another well that proved positive during Q1 was Carioca Northeast, as we already mentioned in our previous conference call.
In the Gulf of Mexico, the bargaining permit application was submitted on April 18th by the operator, and its approval is expected in the following weeks. The operator currently has a deepwater drilling ship in the Gulf that is awaiting the permit for this well. Regarding new exploratory acreage, we want to highlight the farming into 164 blocks at Alaska Prolific North Slope that we announced in March. The blocks are close to existing producing fields and cover an area of 2,000 sq km. The opportunity is twofold: a very low-risk portfolio and extensions of fields within the Colville High and a group of high-potential exploration prospects in a basin that together sum up a potential of almost 1 billion bbl on a risked basis. The project represents an excellent opportunity for accessing the onshore exploration blocks adjacent to Alaska Giant North Slope fields.
These blocks, governed by the laws of the state of Alaska, are close to open infrastructures with surplus capacity. In LNG, the improvement of marketing conditions, mainly in our North America operation, is particularly worth mentioning. Marketing activities in North America benefited from low winter temperatures, thereby increasing the volume sold. Sales growth was not merely due to harsh weather, but also to the increase in our capacity for supplying the plant thanks to the agreement with Qatarga s. Seven Q-Max from Qatar were delivered during the quarter. This agreement made it possible to match supply in the area. Meanwhile, the marketing activities of Peru LNG benefited from the agreement executed with KOGAS, supplying eight vessels to Korea during the quarter. Lastly, on 12th March, ENARSA announced the outcome of the tender process for supplying LNG to the Argentinian Bahía Blanca terminal between May and October 2011.
Repsol has been awarded nine out of the 25 shipments put out to tender, with Gas Natural Fenosa to deliver another seven shipments. Moving into downstream, our business obtained this quarter an integrated margin of $5 per barrel, still ranking solid among the peer group and confirming once again the resilience of the business. In refining, better diesel and heavy light oil spreads increased margin, although this impact was offset by higher oil prices, placing margins at the same level as in the first quarter 2010. The volumes were affected by the program maintenance turnover at the Tarragona plant that reduced the capacity utilization rate compared to the last quarter of 2010, 67% this quarter versus 76% in the last quarter of 2010, although it was better than in the same quarter last year.
In YPF, the strikes in December 2010 affect the drilling schedule and consequently production output in the quarter that was below the volumes required by Petrolera Cruz in order to be entitled to earn tax incentives. We will do our best to regain the required volumes by the second half of the year. Unfortunately, strikes have occurred also during April and remain these days in some areas of the country. Prices at the pump station increased on a year-on-year basis, 11% in dollar terms, both for gasoline and diesel. The government of Argentina, however, enacted Resolution 46/2011 that allowed new price increases, which were already implemented at the beginning of April. Let me elaborate on the progress achieved in relation to unconventional resources.
In tight gas, following the agreement with the mining company Vale in 2011, plans are underway for repair work and drilling operation at the Lajas Formation to ensure that the 1.6 million cu m per day production will be available as of 2013. Regarding shale oil and gas, I would like to remind you that the exploration work conducted in 2010 confirmed the great potential of the Vaca Muerta Basin, very similar to the Bakken and Eagle Ford formations. As part of these exploration activities, YPF announced last Tuesday a new shale oil discovery in the Vaca Muerta formation. The preliminary results of the first six vertical wells indicated initial flows of 200 bbl up to 560 bbl of oil equivalent per day. That along the geological and seismic studies done allows estimated 150 million bbl of technically recoverable oil equivalent in this area.
In light of these results, YPF will begin a pilot development in an area of 25 sq km and the appraisal of another 200 sq km . 17 new wells will be drilled over the remaining part of the year, and 14 existing wells will be fractured, thereby launching the first massive development of oil from a non-conventional reservoir in the world outside North America. Lastly, negotiations with the province of Mendoza made it possible to extend the concessions of all of YPF's 16 blocks in this region. We are also pursuing negotiations with other provinces to extend the terms of the permanent concessions. After the quarter main highlights, I will now focus on our earning performance. Adjusted operating income in the quarter on the basis of current cost of supply was 11% higher than in the same quarter a year earlier.
On a business-by-business basis, starting with upstream, adjusted operating income in the first quarter 2011 was EUR 490 million, increasing 13% in comparison with the first quarter 2010. The variation in these quarters is mainly the result of the following factors. The 13% increase in oil realization prices and 15% in gas net of royalties on a year-on-year basis had a positive impact of EUR 153 million. The decrease in production volumes of 7%, mainly in oil, had a negative impact of EUR 171 million. Lower exploration expenses in the quarter versus the same quarter last year when the depreciation of CEAT was accrued had a positive impact of EUR 25 million. Lastly, lower depreciation charges as a result of lower production volumes had a positive impact of EUR 16 million. Other minor items explain the remaining differences.
Moving to LNG, adjusted operating income in the first quarter 2011 was EUR 115 million versus EUR 34 million posted in the same quarter last year. The increase between the periods is due to higher volumes, mainly because of the startup of the Peru LNG in June 2010, higher LNG marketing margins, and the improved performance of the Canaport project. In the downstream business, adjusted CCS operating income was EUR 216 million, 16% up year -on -year. Year-on-year earnings growth is mainly due to the recovery of the chemical business. By business segment, in the refining business, the slight increase in distillate volumes in Spain, as well as greater production optimization, had a positive impact of EUR 11 million on this division operating income. The ongoing positive performance of the marketing business was achieved thanks to the strong margins that were able to offset lower sales volumes.
Chemical activities with higher volumes and margins had a positive impact of EUR 38 million. Lastly, the variations in other activities such as LPG trading and transport, as well as other minor items, explain the remaining difference. Moving on to YPF, adjusted operating income was EUR 392 million in the first quarter 2011, 7% lower than the EUR 420 million recorded in the first quarter 2010. Higher dollar-denominated fuel prices in the domestic market had a positive impact of EUR 151 million. The increase in the revenues from exports from products sold domestically but linked to international prices had a positive impact of EUR 104 million. The drop in the oil production and in the refinery process led to an increase in oil and oil product purchases to meet growing demand. On top of this, the mandatory use of biofuels as of March 2010 made it necessary to increase the purchases of these products.
The net impact of all the above-mentioned was a EUR 95 million decrease in operating income. In gas, better prices in the industrial sector, as well as the slight increase in sales to the domestic market, had a positive impact of EUR 15 million. Higher operating costs had a negative impact of EUR 122 million. Other factors, mainly not having been entitled to the Petroleum Plus incentive, explain the other variations. The production in this quarter was 4.7% lower than in the same quarter last year, mainly because of the impact of December strikes and the natural fuel decline. Gas production fell 5.9% compared to the 3.7% drop in oil output. In Gas Natural Fenosa, at EUR 249 million, adjusted operating income in the first quarter 2011 was 2.7% lower than the EUR 256 million reported in the same year ago.
In the same quarter a year ago, operating income in the first quarter 2011 was slightly below the figure in the first quarter 2010, mainly because of lower income from electricity marketing activities in Spain and the affecting results of the investments made during 2010: distribution assets in Madrid and power generation in Mexico. Those factors were partially offset by the improvement in power distribution in Spain and the enhanced earnings performance of Union Fenosa Gas. The effective corporate tax rate in the first quarter 2011 was 40%. We forecast a 38.5% tax rate, including accrued inventory effects, for the full year under current circumstances. After this brief analysis of our performance, let me focus now on our financial situation. We are maintaining a robust financial position. Debit direct cash not generated in the period was 24% higher than last quarter.
Operating cash flow generated in the quarter made it possible to absorb the cash outflows relating to current activities: investments, taxes, interest, and the Repsol interim dividend paid in January 2011. In addition, the divestment of an 11.6% stake in YPF enabled us to cover the early redemption of the U.S. preference shares, $725 million, and nearly all of the considerable increase in the working capital that was driven by a sharp increase in crude oil prices. Our liquidity position has remained close to EUR 7 billion, in line with the prudent approach we have been sustaining throughout the financial economic crisis period. The group's net financial debt at the end of the first quarter 2011, excluding Gas Natural Fenosa, amounted to EUR 2,18 0 million, EUR 483 million more than at year end. Taking preference shares, EUR 5,192 million, into account and given that the U.S.
shares were redeemed, the figure is slightly lower than at the end of 2010. The net debt to capital employed ratio, excluding Gas Natural Fenosa, was 6.9% or 16% if we take preference shares into account. Summing up, our P&L performance this quarter was quite positive. Our numbers improved despite the difficulties in the operational magnitudes, namely in production, where the negative impacts that we mentioned before were aggravated by the unforeseen circumstances beyond our control, such as the case of Libya. During the rest of the year, we will devote our efforts to continuing the development of the growth projects foreseen in our strategic plan. We put in mind that 2011 will be the year to lay the groundwork for the next stage of the growth processes to which we are committed in the medium and long term.
Thank you for attending, and now I'm ready for all the questions you may want to put.
Okay. Thank you, Miguel. We will start with questions from Morgan Stanley. We have Steven first. Steven, good afternoon. Go ahead with your question.
Yeah. Hi. Good afternoon. A couple of questions, actually. Could you firstly just clarify when you think you'll get the cash in from the retail sale and also the second tranche from the Petersen Group? A follow-up, I was hoping, could you make some observations on what you think the asset market is like in terms of to buy producing assets in the OECD? Do you think that's likely in 2011? Moving on to the downstream, if you could perhaps provide a little bit of color on how you think the downstream environment progresses through the rest of this year and in the current environment, what you think the profitability will be from the two upgrade projects.
Hi, Steven.
Hi.
Regarding the first one, we wish to get the money from the Petersen next week. Okay. Regarding what you mentioned, if we would be able to cover this part of the P&L we are losing due to the minority interest we are selling in YPF, yes, we expect to do some transactions, a small one. I'm not thinking in a huge one, but we are trying to look for new assets in OECD short terms just to cover the part of the P&L that we are losing with the sale of the shares in YPF. Regarding my view on downstream in Europe, my perception is that it will remain weak. The figures we have and the models we work with show us that Cartagena and Bilbao, even in this scenario, will provide us between $2 and $3 extra for the whole system.
I think that since 2007, when we reached the demand peak in Europe, we have been falling. Approximately, I think that there are about, I would say, almost 3 million bbl of distillation in Europe that either become logistic terminals or even they would be losing money. The name of the game to me is to get a system as the one we are going to have by the year-end, which is certainly first quartile. We will see. I don't see it very positively, to be clear. Did I answer your question, Steven?
Yeah, you did. Just on the retail tranche, when do you think that would be complete?
You mean the retail in Argentina?
Yes.
We expect that before August, we'll have to be in the market and sell this small portion to the Argentine investors.
Okay. Perfect. Thank you.
Bruno, are you in there? Okay. Let's move to the next question from Bank of America Merrill Lynch with Hootan Yazhari . Hootan, good afternoon.
Good afternoon. Just a very quick question. With the balance sheet now looking very relaxed, and obviously, you're having a lot more flexibility, how is the board looking at the dividend policy and returning cash to shareholders? Has that moved up the ladder of importance, or are you still looking to maintain cash in order to fund your very aggressive CapEx program? Thank you.
Hootan, second option is the one. We attach to what we have been saying in the past. Due to the financial situation and due to, as you mentioned, the CapEx program we have in front of us, we'll keep that money for us, for the company. Our announce that we did, I think it was in Antonio Brufau's presentation in the fourth quarter, is that we expect to increase the dividends at a minimum of 10%. This is what we are thinking right now to do. Dividends will be increased, and we can guarantee for the next two years that dividends will be increased by 10% in the existing market conditions. The money that we are raising through the share sales of the shares in YPF will be dedicated to new assets in upstream.
Thank you very much.
Thank you, Hootan. We have a next question from UniCredit, with Stefano Vitali. Stefano, good afternoon.
Good afternoon, everyone. A couple of questions, please. The first one is on Venezuela taxation. How do you think that will impact your two big projects there? The second one is, if you could give us some details about your exploration activity, continued exploration activity in Sierra Leone and Cuba, please.
Okay. Thanks, Stefano. Regarding the impact of the nuclear and solar taxation rule for our two projects that you mentioned, I suspect you refer to Cardón and to Carabobo. First, it has to be said that we have the law, but we don't have yet the development of the law. Our perception today is that, first, regarding Perla, it will not affect it. I mean, the law was referred to crude oil, and Perla is a gas. We don't expect an impact there. In relation to Carabobo, actually, we expect that our rate of return to be increased by this decree by 2%. The reason for that is that the approach of the Venezuelan government is to help new developments. In both cases, in one, it doesn't affect, and in the other, it's going to help us.
I think that the new law includes that this taxation rule will apply only after the CapEx of the companies have been recovered. It helps a little. On top of that, it has also clarified that it's not the Brent index to which it relates, but the basket of Venezuelan oil. For us, I think it's a help, okay?
Yeah. Thanks.
Okay. Regarding the second one, in the exploration of Sierra Leone and Cuba, I would say that starting with Cuba, we'll be drilling in the fourth quarter. The Scarabeo 9 platform is being built and almost finished in Singapore, and we will help to move it to the area by September. Fourth quarter this year, we are going to be drilling in Cuba. Regarding West Africa, three wells there. The first one in Liberia. The three of them will be in the second part of the year. The first one in Liberia, then the same platform will move into Sierra Leone for the appraisal of Mercury. After that, they will be drilling Jupiter. We kept with the initial plan. As you can see, we are heavy loaded in exploration in the second part of the year. Did I answer?
It does. Thank you very much.
Thank you, Stefano.
Thank you, Stefano. We have a next question from Tudor Pickering Holt, with Anish Kapadia. Anish.
Hi. Good afternoon. A couple of questions. Firstly, just thank you. Your upstream, the Alaska deal appeared to fit perfectly with your strategy. I was just wondering if you're looking at further deals in the U.S., either on conventional U.S. assets or Gulf of Mexico, given where valuations are at the moment. The second question on YPF. The company seems to be getting more opportunity rich with the tight gas, the shale oil, but it seems like it might be constrained by the agreement to pay a 90% dividend payout ratio. I was just wondering, how would you look to fund an increase in CapEx if you do go ahead with full-scale development on the unconventional side in Argentina?
Anish, in relation with the first one, I think that Alaska fits for us perfectly well. I mean, I think we will cover with Alaska part of what we have sold in Brazil to say something. It's a big project. It's OECD. It's the U.S. It's an area that we think really that we are balancing our portfolio with this transaction. Regarding the new one, I cannot tell you right now whether we will land. One thing is clear, at least to me, I don't see right now in the projects that I have analyzed any value on the shale gas. My bet will be always against that type of business because I think that the money has already been made by the developers. Not shale gas, but there are areas we are looking, basically, OECD and basically areas in which we think that some extra exploratory potential is there.
I cannot be more precise on that. In relation with YPF, you are right in one sense. The shale gas acreage in the Vaca Muerta South Rock is enormous. Our net there is 3 million acres, which is huge. I think that the news that appeared on Tuesday from Argentina referred to 81,000 acres, and the whole acreage is 3 million acres. I don't have problems when I have such a big quantity of oil. There are always farmers to come. The problem is not to have it. First, I will say we are starting, and we will see once we finish this year. We are going to invest almost $200 million, and we will see once we finish these 17 wells where we will be drilling this year, we'll have a better picture on how the whole shale of Vaca Muerta looks like.
Second, the 90% payout ratio, I wouldn't get that as something fixed in mind. We are more looking at the figure that is $1.2 billion in dividend. If YPF evolves in the way we think, this payout ratio will be decreasing because actually, we think that the results in YPF will be growing. What we need is $1.2 billion in dividend, not the 90%. Anyhow, if at the end it shows us that it's a very, very big project, we'll look to farm in someone. No problem on that. Okay?
Okay, thank you.
Thanks, Anish. We have a next question from Espírito Santo . We cannot identify the name. It is not identified. Is there anyone in there who would like to ask a question? No? Okay. Let's move to the next question.
Hello? Are you hearing me?
Yes.
Hi. It's Philip.
Hi.
Hello, everyone. [Philip Rogers from Street Santa]. A couple of questions, if I may. Are you hearing me?
Yes, perfectly well.
Okay.
The first question goes for you. You mentioned that you are currently drilling in Brazil, and you also mentioned that you have drilled the Carioca well in the beginning of the year. Could you update us on when you expect to have the results from this important well that you are drilling now? Regarding the drill stem test of Carioca, you were very positive on being able to revise that for your expectation of recoverable oil. The second question regards still the follow-up question on unconventional resources on YPF. Do you already have, I don't know if you're already providing any guidance on the sort of oil break-even or price break-even that you would need to develop these shale oil resources that you found now? Thank you.
Regarding our existing exploration right now in Brazil, we have finished the Gávea well, which is positive, but we'll have to reevaluate the results of it. In Itaborai and in Tinguá, we're still drilling, so we haven't yet arrived to the horizon we expected. Guará North was positive, and it confirmed the resources we were thinking of. Carioca North is a positive one, and initially, for us, it represents an increase in our reserves estimation. Though in Carioca, a second well will be performed throughout the year. We call it Sela. It's in the middle of the formation, and it's the one that will give us somehow the final picture about Carioca. On top of that, we also are drilling as well Guará Sul, which is drilling right now, and Guará RDI as well in the drilling process.
Fibbnally, we have an appraisal well in Piracucá III, which we are analyzing the final works. Okay?
Okay.
Regarding Brazil. Regarding shale and break-even point of shale gas, our analysis today, and I want, before getting to figures, to give a first comment, which is that we just had six wells being drilled there. We have to be prudent in all our estimates, okay? Our figure shows that we need each well to produce 300,000 bbl of oil to make a good return there. Right now, the figures, as I mentioned, I mean, there have been only five, six months of production in the wells that initially we drilled. It's way too early to say, but we are quite optimistic. I think that in the area we analyze, we are estimating, I mean, the figure we reached is 150 million bbl of resources based on 26 million bbl per sq km , 5% as a recovery factor. We believe that all figures are quite conservative.
We are quite optimistic, but as I mentioned before, it's way too early to give you more data. We are in the very early stage of analyzing Vaca Muerta.
Thank you very much.
You're welcome.
Thank you, Philip. We have a next question from Lydia Rainforth from Barclays Capital . Lydia, good afternoon. Please go ahead with your question.
Thanks. Good afternoon. A couple of questions, if I could, please. Firstly, on the YPF stake, do you think he's suggesting the final stake will be 55%? That's sort of different from the 51% you talked about in the strategy presentation. Is it just that you will want to do another 4% next year? Secondly, can you just talk about what you're seeing in terms of natural gas pricing in Argentina at the moment and whether there's been any progress in terms of putting up prices on the natural gas side? Thanks.
In relation with the first one, when we mentioned 51%, it was simply as an indication to the markets that we are going to get the majority, okay? Whether it's 51%, 53%, or 55%, I don't know exactly the figure. We even can allocate some or put some direct sale to reach this 51%. The idea behind the 51% and the message was that we are going to get the majority in YPF, okay? Regarding the gas price in Argentina, basically, there has been no move. On average, the small variance we have, which was little, it was positive, but little, was based on the industries. We were able to increase the industry price from $3.9 last year, first quarter last year, up to $4.4 this year. Is that good enough? I wouldn't say no, it's not.
Though Gas Plus keeps working, it's way too slow to really catalyze the prices into, I would say, a regular situation. Okay?
Perfect. Thanks, Miguel.
Is there anyone else who would like to ask any question? I think that the system is not working properly, and we are receiving some emails to ask questions. We have emails from Irene Himona, from SocGén, Jon from UBS. Are any of you in there that could hear us and could answer? Could ask the question, sorry?
Why don't you write us an email with the questions, and we will answer them, please.
If you wish to ask a question, please press zero one on your telephone keypad.
Okay, we have the lead now. Irene, please go ahead with your question.
Good afternoon. Can I ask apologies if any of this has been asked before? First of all, on LNG guidance, your full-year guidance is EUR 250 million. You delivered about 46% of that in Q1. Are you raising the guidance or still sticking with it? My second question is on cash flow. If we exclude working capital, you delivered EUR 2.1 billion of cash from operations in the quarter annualized. It's in line with your plan for EUR 8 billion. Your CapEx in the quarter was only EUR 1.1 billion out of the budgeted EUR 6 billion. Do you expect still to spend the EUR 6 billion in the year, or are you likely to fill the gap with asset acquisitions? Thank you.
Thanks for the questions, Irene. In relation with the first one, my people keep telling me that the EUR 250 million, because I think that in the last conference call, Antonio mentioned dollars, but it's EUR 250 million, will remain. As a company opinion, yes, we kept with the EUR 250 million. If you want my personal opinion, I will expect a little more than that. Okay? Regarding investments, I will say that we are, at the present time, only short in, and we will be short first in Argentina due to the strikes we have been delaying investments. I think that the whole month of April and these first days of May, basically, all the strikes have blocked the Santa Cruz province and also part of the Chubut province. Investments there will be a little lower.
You have to decrease if you consider that the situation in Libya will remain as it is today for the whole year. We had, in that EUR 6 billion investment, EUR 110 million were expected to be invested in Libya. Apart from that, yes, we kept with the EUR 6 billion. I think that in downstream and partially in upstream, the year is more loaded in the second part. We kept with the EUR 6 billion.
Thank you.
Thanks, Irene. We have a next question from Daniel Exane from Jefferies. Daniel, good afternoon.
Good afternoon. Thanks. A couple of questions from me. Firstly, on the upstream and your oil realization, they moved up by only about $2 per barrel from the fourth quarter, and international prices were moved up by about $19 or $20. Could you explain why your discount widened and what the outlook is there going forward? Secondly, on YPF, I think you mentioned that you'd missed out on the petroleum plus bonus during the first quarter. Do you think you'll be able to achieve this bonus at any point in 2011? It seems like it might be a challenge with the strikes, etc., ongoing. Thanks.
In relation with the first question, you have to take into account two factors. The first one is Libya. Libya is important. This quarter, we produced 27,000 bpd , while, for example, in the first quarter 2010, we were producing 43,000 bbl of oil per day. Libya weighs in that equation. The second reason is Ecuador. In Ecuador, last year, we were accounting at market value the barrels we produced, and those barrels were reduced by 38%, almost 40%, because the royalty was paid in kind. This year, with the new contract, we are valuing those barrels at $36.9. If you put on the table both factors, it's a pure mathematical problem in Ecuador. The value is the same as we had last year, even growing. In Libya, it's the impact of Libya.
Those two factors are the ones that make the average only increase by $2 per barrel in comparison with last quarter. In relation with Petroleum Plus, as you mentioned, I don't think we are going to be able to obtain the Petroleum Plus in the second quarter. Right now, we are working to see how we handle it for the third quarter. Our initial estimate at the beginning of the year, and due to the strikes in December, was that the first quarter was totally lost and that we have to battle for the second. Right now, the second quarter, we will not be able to reach it, in my opinion. Did I answer you then?
Yes, you did. Thank you.
Thank you, Daniel. We have now Jon Rigby from UBS. Jon, please go ahead with your question.
Thank you. Two questions, actually, just sort of going back on questions that have been asked. The first is on LNG. Can you just go through where your cargoes contracted are likely to be going in the second and third quarters, sort of summer period, and confirm that the Argentine deliveries will be oil price related rather than Henry Hub related? Give some idea of sort of structure of profitability, say, vis-à-vis the first quarter. The second is just to circle back on Argentina again. I'm sorry about this. I noticed that although you mentioned you got a price increase at the pump in April, I also noticed that year-over-year inflation is running significantly high. Is it going to get to a point if you don't achieve more price increases this year that you start cutting CapEx and operation merely because some of the marginal activity started to become unprofitable?
Are you willing to sort of go through this process to get to 2012 in the hope that prices then start to move up?
In relation with the LNG, first, in Argentina, the prices of the LNG do not relate to liquids. They relate to Henry Hub, and we have signed contracts between Henry Hub +$ 5 and Henry Hub +$ 7. It is Henry Hub, but with this margin. Where are the cargoes going to go? We have several contracts, but basically, it is going to be through those areas in which we obtain a better price. We will commit with the contracts we have with KOGAS, and the rest is going to be the place in which we maximize our reserves. In relation with Argentina, it is true that the only moving prices we had this year was in April.
It was a 5% or 6% in pesos term, which represents 2% for gasoline and 3% for diesel in dollar terms. It is true that it is quite modest, especially if you compare it with the cost increase. We also have to mention that we have a very good increase in prices in December. My perception is that we will be able to keep increasing those prices. Our goal is to reach a 15% in dollar terms for the whole year, and let's see if we can do it. I know it is a difficult year. It is an election one, but also, all the strikes are putting more pressure because there is a scarcity of products. That means imports, and that at the end means that price increases to reach the pump.
Right. Can I just follow up on the LNG again? Since March, have you seen, I mean, I'm conscious that your Peruvian supply is actually quite well located. Have you seen greater interest in pulling those cargoes into Asia over and above your existing Korean contract?
Yes. Yes, we are selling cargoes in Japan.
Thank you, Jon. We have a next question from Credit Suisse with Thomas A dolff. Thomas, please go ahead.
Good afternoon, gentlemen. I guess three questions. First on Brazil, Guará and Carioca. Given the operational issues you have had with the Guará extended well test, are you considering shortening the test period there to avoid delays to the Carioca extended well test in view of the deadline for declaring Carioca commercial? On Carioca as well, how important is the third well you're drilling there? Is this why first oil is uncertain for now for phase one until this one is drilled? Secondly, on Creal B in Albacora Leste , is there anything you can say on the prospect size now? I'm hearing this could be a huge prospect. Finally, Angola pre-salt, I know it's 30 days, but my question here is, have you agreed so far on the work commitment? If so, what is your current thinking in terms of activity there, timeline? Thank you.
I mean, in relation with Guará extended well, once we finish the repairs, it will turn back. We expect it shortly, and we will be producing some extra three months in Guará. We expect, on average, a production of 16,000 bbl of oil per day. This will imply a small delay for sure in the Carioca extended well. As you mentioned, the important part of Carioca is the Sela well. Right now, we have very good news in the northern part of Carioca and in the southern part. The hypothesis is that in between those, we would like to see how the reservoir behaves. This is the goal of Carioca Sela. The results will come once we drill. Okay? In relation with Creal B, we will be drilling an appraisal in Creal B in the second part of the year, mostly, I would say, in the fourth quarter.
Quite difficult to announce now any expectation. We were positively surprised last year when we made the finding, and it's still way too early. To make any extra comments, we would be drilling in the fourth quarter this year. Okay, Thomas?
Thank you. On Angola, pre-salt?
Okay. In relation with Angola, the commitments are okay, and we would be drilling in 2013.
Okay, thank you.
Thank you, Thomas. We have now Barry McCarthy from RBS. Barry, good afternoon.
Good afternoon, and thanks for taking the question and for the presentation. Going back to the shale oil project in Argentina, can you say of those wells that you plan to drill over the rest of this year if you would begin horizontal drilling, which might give a different perception of the magnitude of the flow rates that we might get from this field? Thanks.
Thanks, Barry. As you know, the six wells we have drilled up to now were all vertical. The reason for that is that the thickness of the South Rock is, I would say, enormous, between 100 m and 400 m thick. We were obtaining these results with the vertical wells. The cost of these vertical wells has been $7 million per well. I mean, $3.5 million for the well and $3.5 million for the frack. We will be drilling horizontal. I mean, we are in the learning curve, and throughout the year, we will be drilling horizontal wells. We expect the cost almost to double in these wells, and we will see which the results are. Yes, the answer is yes, we will be drilling horizontal wells throughout the year. Not all of the 17, but some of those. Okay?
Thank you very much.
Thank you, Barry. We have a next question from Luis de Toledo from BBVA. Luis, good afternoon.
Good afternoon. I just would like to know if you can provide any kind of guidance regarding depreciation. It seems that the first quarter figures came a little below our expectations. I was wondering if it's all related with the fact that your volumes in upstream have been lower. Do you plan any significant pickup in depreciations along the year?
Sorry, Luis, are you asking about production?
No, sorry. Depreciation figures.
Depreciation. Okay.
Okay. Depreciation figures, which I'm talking just by memory, were about EUR 800 million and something million euros, are a little below our expectations for the whole year. For the whole year, in your model, you can put EUR 4 billion. You have to think there in two factors. First, in this first quarter, we didn't have any depreciation in exploration. Along the year, I expect some charges in exploration. I mean, for the whole year, I expect something as $500 million, including GNG and GNA. You also have to consider that in the third quarter, sorry, in the fourth quarter this year, we'll have Cartagena and Bilbao, which will represent also an increase on the depreciation. On top of that, it's true that our estimate of EUR 4 billion was based in our production that is shrinking, basically, to Libya. You have to adjust that.
To me, the final figure would be something around EUR 3.8 billion or something like that.
Okay, thank you.
Thank you.
Thank you, Luis. We have next [Carmelo Fuente from N Plus].
Good afternoon to everybody. Just Miguel, a quick question on the production for this year. Could you please repeat the guidance that you expect for 2011, please?
Sorry. I would say, Fernando, that taking out Libya from the equation, which in this first quarter represents 27,000 bpd , our figures for the rest of the countries would be in line with this first quarter. Put in Libya the figure you may.
Okay. Great. Thank you so much.
It's the last question that we have. Any additional questions? Okay. Let me apologize for the problems in the communication that we have today, and thank you to all of you for attending the conference call.