Hello, welcome to the Repsol second quarter 2015 results conference call. This conference is being recorded. Today's conference will be conducted by Miguel Martínez, Chief Financial Officer. A brief introduction will be given by Mr. Ángel Bautista, Head of Investor Relations. I will now hand the call over to Mr. Bautista. Please go ahead.
Thank you. Good day, ladies and gentlemen. This is Ángel Bautista, Director of Investor Relations at Repsol. On behalf of our company, I would like to thank you for taking the time to attend this conference call on Repsol's second quarter 2015 results. This presentation will be conducted by Miguel Martínez, our Chief Financial Officer. Other members of the executive committee will be joining us as well. 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. Before we start, I would like to make an invitation.
In order to help analysts to understand and model the new Repsol, the investor relations team will be organizing workshops to be held in London and in Madrid during the month of September. Please send us your requests in order to organize them. I now hand the conference over to Mr. Miguel Martínez.
Thank you, Ángel, thank you all for attending this conference on the second quarter 2015 results. This quarter, we are integrating the results of Talisman Assets from May 8th, 2015. CCS adjusted net income was EUR 312 million and EUR 1.2 billion for the quarter and the first half of the year, respectively. Today, we will address four topics. First, some words about the integration of Talisman. Second, the market environment for the quarter and the main operational highlights. Third, an outlook of 2015 and efficiency measures we are undertaking. Finally, the quarterly results. Starting with the integration of Talisman, as you may know, the 8th of May, we closed the transaction. Following the closing, a new organizational structure has been implemented to include the integrated assets in our upstream division. This new organization comprises four regional areas: Europe, Africa, and Brazil, North America, South America, and Asia and Russia.
Reporting of results and operating figures in the upstream business will be shown from now onwards according to this new structure. We have already completed the purchase price allocation, and the goodwill value has been established in EUR 2.6 billion. Out of which, EUR 2.1 billion are deferred tax liabilities. This value is firmly supported by the identified synergies we will speak about in a few minutes. We will have one year to adjust and refine the allocation as accepted by IFRS. Turning now to the market environment and main operational highlights. During the second quarter of the year, the weakness in the oil prices continued, counterweighted by a strong U.S. dollar. Brent crude prices recorded a maximum of $66.7 per barrel in May and averaged $61.9 per barrel in the quarter, an $8 per barrel increase compared to the previous quarter.
During the beginning of this third quarter, we have observed that the weakness of the oil price continues. In relation with gas prices, they were also weak during the quarter. We have averaged $2.6 per million BTU, a figure that compares with the $3 per million BTU of the previous quarter and with the $4.7 of second quarter 2014. In relation with the operational activity of the quarter, let me start with the upstream business. In exploration, during this second quarter, 14 wells, nine exploratory and five appraisals were concluded. Six with a positive result. Two exploration wells in Algeria, the U.S., Alaska. Four appraisals wells in Bolivia, Russia, and the U.S. Four wells had a negative outcome. Four of them are under evaluation.
As of today, seven exploratory and appraisal wells are ongoing, out of which three are exploratory in Romania and in Brazil, and four are appraisals in Brazil, Bolivia, and Algeria. In the second half of the year, the drilling schedule is composed of a less risky exploration program and will entail lower investment than in the first half. Talking about our development projects, this quarter it is worth highlighting the progress in Brazil, Venezuela, Colombia, Canada, Vietnam, and Malaysia. In Brazil, we continue with the ramp-up of Sapinhoá Norte. The third well was connected to our second FPSO in place, Cidade de Ilhabela, in May. Gas injection commenced in June, allowing gross production to increase to 90,000 barrels per day in this second platform. At the end of 2015, peak production is expected to be reached in this second FPSO, which has a gross capacity of 150,000 barrels per day.
Together with the first FPSO, the field will reach the planned plateau of 270,000 barrels per day. In Venezuela, some days after the end of the quarter, Repsol has start up the first producing well at the Perla field, the largest offshore gas field in Latin America, holding 17 TCFs of gas in place. This first phase of the development will produce 150 million of standard cubic feet per day, rising to 450 million cubic feet per day by the end of 2015. With the start-up of this field, the eighth key growth project of our 2012-2016 strategic plan has been delivered. In Colombia, the average gross production for CPO-9 block reached 10,000 barrels of oil equivalent per day. The block is operated by Ecopetrol 55%, and Repsol owns a 45%.
We continue working on the definition of the field development plan for the Akacias project in this block, with a final investment decision expected before year-end. Exploration activities in other areas of the block are moving forward also. In Canada, in the Duvernay play, appraisal dealing of the company's land in the South Duvernay continue. Drilling operation at a two-well pad in Ferrier has now finished, with completion scheduled in the following weeks. In Vietnam, once the outline development plan of Red Emperor in Block 73 was approved by partners and PetroVietnam back in January, the commercial declaration was completed in early July. A formal approval of the development plan and associated final investment decision is expected to be taken by the year-end. The net investment that will be devoted to this project in the period 2015-19 is EUR 630 million.
In Malaysia, a final investment decision has been taken by the end of June for the redevelopment of the Kinabalu field with a EUR 200 million net investment in the 2015-18 period. Negotiations for a 10-year extension of the license of PM3 field expiring in 2017 and intended to consolidate our presence in the country are well advanced. To finalize with the development projects, let me say that the remaining key growth projects of our 2012-2016 strategic plan, Lapa in Brazil and Reggane in Algeria, progress as planned to deliver production in fourth quarter 2016 for Lapa and in first quarter 2017 in Reggane. In Lapa, development will commence in the northeast area, but the test performed in Lapa-9 well with an initial productivity of 2,000 barrels per day encourage a faster development of Lapa South, also as a second project stage.
Turning to production, the average production for the quarter stood at 525,000 barrels of oil equivalent per day. This figure is 55% higher year-on-year. Production from Talisman assets has been included since May the 8th. Out of the overall figure, 182,000 barrels of oil equivalent per day come from the recently acquired assets. Excluding Talisman assets, production increased 1% year-on-year, thanks to the ramp-up of Sapinhoá in Brazil, partially offset by the maintenance work carried out in Trinidad and Tobago. For the full year, we expect a 6% production increase on average on a homogeneous basis. That is to say, stripping out Libya from both periods. This increase is in line with the goal established in our strategic plan. Average production in June stood at 660,000 barrels of oil equivalent per day.
The contribution of former Talisman assets in June has been on average 307,000 barrels of oil equivalent per day. Our 660,000 barrels of current production is split as follows: 190,000 barrels of oil equivalent per day produced in North America region. Marcellus has averaged 73,000 and the Eagle Ford 25,000 barrels, with Canada delivering 54,000 barrels. 108,000 barrels of oil equivalent produced in Asia and Russia, most of it in the new Southeast Asia core region. 93,000 of oil equivalent per day produced in Europe, Africa, and Brazil, out of which 40,000 come from former Talisman positions in Norway and in the U.K. Unfortunately, we still cannot produce in Libya. 269,000 barrels of oil equivalent per day produced in South America region, out of which 21,000 come from former Talisman production in Colombia.
Out of these productive areas, let me go into more detail in Marcellus and Eagle Ford, where in June, as mentioned, we produced 73 and 25,000 barrels of oil equivalent per day. Regarding the Marcellus, our acreage is held by production, allowing us great flexibility in our CapEx decision. This year began with 2 drilling rigs, but has been reduced to only one for the remainder of the year, which will allow us to maintain a production plateau of above 400 million cubic feet per day net of royalties, with self-sustained cash flow at the given current price scenario. Gas price will direct the pace of growth of this asset. During the first half of the year, 17 development wells were drilled in our play, and production from the French Field area continued to ramp up following completion of gas compression facilities.
In Eagle Ford, our acreage in the play is mainly held by production, which will allow us to drill in the most prolific areas of the assets. We are lowering costs and improving efficiencies in the play. Our drilling is focused on liquids-rich acreage where economics are superior. This year activity is based on a 3 gross rig program, one operated by Repsol and two by Statoil. In addition, Repsol participates in a third-party non-operated program focused on the liquids-rich part of the play. During the first half of the year, 63 new development wells were drilled in our acreage, equivalent to 19 net wells for Repsol. Let me also give you a brief update about our U.K. operations. In the U.K., the production of Tartan, which had been shut down since the third quarter 2012, has been restarted following intensive upgrades and maintenance activities.
MonArb and Claymore have performed well also in the quarter, and works on platform abroad have been finalized, which has allowed production to restart. Overall, we have been able to significantly increase production in the U.K. quarter-on-quarter. In relation with the U.K.-wide turnaround plan, we can confirm that today is being implemented in a satisfactory manner with a new organization in place, staff optimization, and production efficiency measures deployed, and more to come. Moving now to the operational highlights in the downstream divisions. With regard to the refining environment, we achieved an average margin of EUR 9.1 per barrel, slightly above that of the previous quarter, in comparison with the second quarter of last year. The margin improves in EUR 6 per barrel, thanks to the generalized strengthening of the spreads of products, together with lower energy cost.
The high complexity of our refining system and the sales consumption efficiency program helped to capture the benefits of the existing scenario. The distillation utilization rate was 89% during the quarter, while conversion ran at full capacity. In petrochemicals, we continue seeing an improving environment with higher sales and better margins. This, together with the competitiveness plan we put in place a year ago, allow us to achieve very positive results during the quarter, continuing the previous trend. In the commercial business, marketing and LPG operating income was lower year-on-year, mainly due to the regularization of prices that took place during the second quarter of 2014 in the LPG business. Notably, sales of gasoline and diesel in service station in the second quarter grew by 1% year-on-year and wholesale sales by 17% year-on-year.
In gas and power, sales volume decreased and the price environment in North America was tougher. The Algonquin gas price reference averaged EUR 2.2 per million BTU in the second quarter, well below the value registered in the second quarter of 2014, which was EUR 4.2. Regarding the outlook for the rest of the year, with a Brent oil price assumption of EUR 59 per barrel in 2015, and Henry Hub of EUR 3, we expect to achieve an EBITDA between EUR 5 billion and EUR 5.5 billion for the full year. Talisman assets will contribute with an EBITDA of EUR 800 million. The outlook for 2015 EBITDA, excluding the contribution from Talisman assets, is a figure in the same range as to that obtained in 2014, even in an oil price scenario almost EUR 40 lower than that of the previous year and having no contribution from Libya.
I would like to stop now to explain what we are doing in order to reduce and optimize costs and CapEx. Repsol, as always, but especially in the current situation, applied strict cost efficiency culture and is fully committed with the optimization of the OpEx and CapEx program. In downstream, efforts in the last years have been focused on an ongoing energy efficiency saving program, on optimizing all purchases and on the maintenance and reliability programs, all of which have led to a refining margin increase of EUR 1.20 per barrel as compared with 2011. Efforts continue in this area. In relation with the upstream CapEx, a full review of every single project is underway, stopping or delaying investments in those which value is at risk in the current scenario. Repsol invested slightly below EUR 4.5 billion in upstream CapEx, including G&G and G&A in 2014.
Would like to underline that in 2015, with Talisman assets on board since May, Repsol will maintain an upstream CapEx at the same level as 2014. More importantly, Repsol has the objective of maintaining this investment flat in 2016 in a company with an upstream twice as big. Going into detail with the upstream CapEx, in exploration CapEx in 2015 for Repsol ex-Talisman will be reduced by 27%, from EUR 1.8 billion in 2014 to EUR 1.3 billion in 2015. Adding the exploration CapEx budget for the former Talisman assets, we can conclude that even managing a much bigger company, our exploration investment is being materially reduced. In relation with the development CapEx, it's also being reduced for Repsol ex-Talisman. It goes down 15% from EUR 2.5 billion to EUR 2.1 billion. All in all, upstream CapEx of Repsol ex-Talisman will be reduced by 21% in 2015.
Furthermore, former Talisman assets, exploration and development CapEx, for the period May-December 2015 will be EUR 1.2 billion, expecting to end with a figure below their guidance before the acquisition. Together with the efforts to optimize CapEx, we launched the Go program this year in order to identify improvement measures to increase our income through efficiency and innovation. This measure comprise, among others, the renegotiation of contracts. Within the Go program, in our negotiations with contractors and existing contracts in the upstream business, we expect to finalize 2015 with reductions of up to a 6% on average. As these contracts are expiring and we are opening a new bidding processes and our expectation is to obtain additional cuts of between 10% and 20%, we will endure in our efforts.
In relation with our recurrence synergies coming from Talisman acquisition, we have increased our target from EUR 220 million previously established to an annual amount of EUR 350 million, now that we have been able to analyze the joint company hands-on and in depth. Of this amount, EUR 70 million are already executed. We have identified more than 80 initiatives from various scopes and areas such organization, IT, purchases, financials, G&A, together with business opportunities in trading and commercialization. We are working on further identify possible one-off effects of the integration that could add additional amounts to these synergies. Adding up the application of the Go program and the recurrence synergies, we plan on improving our operating income by EUR 500 million in 2016. Repsol will present a new strategic plan in November after our third quarter result release, with a very special focus on value creation.
Let's move to the second quarter 2015 earning performance. CCS adjusted net income was EUR 312 million, 20% lower compared with the same period of last year. CCS adjusted net income of the first half of the year was EUR 1.2 billion, 35% higher compared with the same period last year. Starting with the upstream business, adjusted net income for the second quarter was minus EUR 48 million. This result has been mainly affected by the drop in crude oil and gas realization prices, partially compensated by the growth in production and the decrease in exploration costs. Excluding the impact of exploration cost, operating income of the upstream division would have been positive in both the second quarter and the first half of 2015. The year-on-year performance, excluding the effect of the consolidation of Talisman, is explained as follow.
Lower crude and gas realization prices had a negative impact at the operating level of EUR 359 million. Higher production, thanks mainly to the ramp-up of Sapinhoá, partially offset by the maintenance works carried out in Trinidad and Tobago, resulted in a positive impact of EUR 37 million. Lower exploration costs lead to an increase in the operating income of EUR 128 million, the decreased costs were mainly due to lower amortization of dry wells. Higher depreciation charges due to higher production had a negative impact of EUR 37 million. Taxes had a positive impact of EUR 89 million. At current price, Talisman assets have been at breakeven on a net adjusted basis. Positive results in Southeast Asia, Canada, Algeria, and Colombia were partially offset by exploration cost and the negative results in Norway and in the non-conventional business in North America.
Turning to our downstream division, CCS adjusted net income in the quarter was EUR 439 million, which compares with the EUR 162 million of the second quarter 2014. Drilling down into the quarterly results, in refining, we saw a year-on-year increase in margins from EUR 3.1 to EUR 9.1 per barrel due to a generalized strengthening of the product spreads and lower energy costs derived from the efforts in efficiency undertaking in the last years. These higher margins, and also a higher utilization rate, had a positive impact at the operating level of EUR 275 million. The improvement in operating income of the refining activity in Spain comes together with better results in Peru. In the petrochemical business, wider margins and higher volumes allow us to improve the operating income by EUR 133 million. This improvement is due to the competitiveness programs implemented together with a better market environment.
In the commercial businesses, the weaker result in the LPG business was the main driver of the EUR 55 million decrease in the operating income. Moving to gas power and trading, this business increased their joint operating income in EUR 24 million. The exchange rate effect was positive by EUR 116 million when compared year-on-year. In Gas Natural Fenosa, the EUR 105 million adjustment income in the second quarter of 2015 was lower year-on-year, mainly due to the fact that in the second quarter of 2014, a capital gain on the sale of the telecom business was registered. The financial result in the second quarter of 2015 has been EUR 199 million of net expense as compared to a financial expense of EUR 46 million in the same period last year. Two effects there.
The first one is the exchange rate positions which increased the net expense year-on-year by EUR 192 million because of the positive results achieved in the second quarter of 2014. The second one is the EUR 36 million increase in interest on debt as consequence of the payment of Talisman and the consolidation of its debt. These figures have been partially compensated by the amortization of the bond offer in the cancellation of the preferred shares in the second quarter last year, which had a positive effect of EUR 71 million. Turning now to our financial situation. The group's net financial debt at the end of the second quarter of 2015 amounted EUR 13.3 billion, an increase of EUR 31.1 billion compared to the end of the first quarter 2015 due to the payment of the acquisition of Talisman and the consolidation of its debt.
Besides these effects, the business cash generation in the second quarter of 2015 was positive, but negatively impacted by the increase in working capital. The increase in working capital has been generated largely because the business has to stockpile inventories in order to take a benefit from the contango structure in the forward curve. We expect this effect to be reverted in the following quarters. Our liquidity position is EUR 8.7 billion, including cash and outstanding credit lines. As conclusions, after achieving the integration of Talisman, this is the first quarter in which we consolidate its results. We have delivered a solid set of results under a challenging macroeconomic scenario in which the performance of our downstream business offsets the lower results of the upstream division.
Regarding the outlook for the full year 2015, our estimated EBITDA is a figure in the same range that that obtained in 2014, even in a $40 per barrel low oil price scenario and having no contribution from Libya. The macroeconomic scenario is weaker in the short term than we expected in our projections when we went ahead with the acquisition of Talisman. We have purchased these assets with a long-term view. We are aware that we must weather the current situation for some time. Nevertheless, we now have a much deeper knowledge of the acquired assets and we are fully not only committed, but convinced that we will extract value from them, even under challenging circumstances like the current ones.
From the combination of both companies, a series of value addition initiatives are rising and the broader project portfolio is allowing us to prioritize capital allocation to the highest cash flow and net income contributors as planned. The combined entity has a high degree of flexibility regarding the timing and allocation of CapEx. As we have underlined, we have the objective of maintaining our upstream CapEx at current levels, not only in 2015, but also in 2016, in a much larger company. Therefore, the optimization of our joint CapEx with our cost reduction program and the identification and fulfillment of synergies is underway, working to systematically bring down the break-even price of every asset. Coupled with a strong vertical integration, Repsol moves forward on full trust on the generation of value for our shareholders.
We'll also remain engaged to financial discipline, maintaining a strong balance sheet and competitive shareholder remuneration. Thank you so much, and we'll be pleased to answer any question you may wish to ask.
Thank you very much. Let's move into the Q&A session. We have enabled a chat in the webcast in order to post questions only in the event there are connection problems in the call. You may identify it by a tab called Ask a Question. We will address these questions, if any, at the end. Please only use it in case we have any connection problems. Now let's move to the first questions. We have first, Flora Trindade from BPI. Hola, Flora, please go ahead with your questions.
[Foreign language] Hola, buenos dias. First question is regarding EBITDA guidance that you mentioned. I assume this includes the guidance you had given for downstream of EUR 2.8 billion-EUR 3 billion, but just to confirm it, and also ask you if it's possible to give us a guidance for the operating income as well for 2015. A detail also on the 2016 CapEx guidance. Can you just give us an indication of how much are you considering for Talisman in this year? Just a broad question, there were some news around divestments, and they specifically mentioned Venezuela as one of the options up for sale. Are you able, at this point, to comment anything on divestments? Can you just give us a sense of when can we expect news flow on this front?
Just finally, just a detail, I think you mentioned strategic plan in the third quarter results, just to confirm. Thank you.
Thanks, Flora, for your question. In relation with the EBITDA, I think that in the last quarter results presentation, I gave a figure between EUR 2.8 billion and EUR 3 billion as EBITDA. My perception is that we will be a little higher than my prior estimates. We will be around between EUR 3.2 billion and EUR 3.4 billion. Take it EUR 3.3 billion in a flat situation with the one we have seen in this quarter. In relation with the EBIT for the whole group, with the estimates we have, we expect to be around EUR 2 billion, and Talisman will contribute with approximately minus $200 million in that figure. Finally, in relation with divestments, not only about a single country, but we refer to the commitment we had with the agencies, which is to divest EUR 1 billion in the next 14 months.
The agreement with the agencies was that we have to divest EUR 1 billion, and we had 18 months since the closing date of Talisman. We have approximately now 15, 16 months to deliver in that sense, and we will deliver. I'm not going to disclose which are going to be the assets. Sorry about that, Flora.
[Foreign language] Gracias, Flora. Thank you. [Foreign language] Obrigado. Thank you very much. Let's move to Brendan Warn from Bank of Montreal. Hi, Brendan. Go ahead with your questions.
Hi, guys, thanks for the opportunity to ask a couple of questions. Just two questions, if I may. Just first question, I guess more broadly on the acquisition, referring back to your presentation at the time of the acquisition, slide 24, where you talked about creating value and this still being the IRR being above WACC. Can you give us a sense now, having seen the assets and the assets being in your control, just sort of what oil price you expect IRR would need to be for IRR to be above WACC and considering your higher synergy ability of the $350 million?
Then just second question, could you just zero in on the U.K. North Sea assets, just in terms of how much of a drag they are, obviously on the performance of the assets that you've bought, and what sort of plans you expect to take forward to create values from those assets, please?
Relation with the first one, I don't have a clue. One thing is clear. We have bought 2B reserves at $10.5 per barrel. We know that right now the price situation, the price scenario is not in our favor, but we are going to be seated in those assets for 20 years. All in, I can tell you that at the moment we did the transaction with the price deck that we commented last December, we were above our WACC. You can have the data if you look at the point that at this level, Talisman EBIT is basically zero. I'll say I don't have the data over here.
The second question refers to the U.K., on there, basically we are following the turnaround plan, which implies the split of the asset, taking out those that really cannot deliver much. In the other hand, looking to increase activity in those that still have some life. There's no news other than the ones we have commented before. Things are moving in the right direction with the turnaround plan. On the other hand, our valuation includes a negative value for the assets. We knew that it was not an asset in which we pretend to really create value other than in front of the value we assign to this asset. Sorry, I cannot be more specific, Brendan.
Well, just in terms of the U.K. assets, do you sort of expect the 8% of development CapEx going forward into 2016? Is that a sort of a demand that we expect in terms of CapEx commitment to the asset?
You mean in the U.K.?
U.K., yes.
We're still in the way to work with this strategic plan and with the budget, so I don't have any data for 2016 of any individual assets. What we have is an objective, and the objective is to keep the CapEx flat for the upstream division, even including all the Talisman assets. I don't have data for specific assets.
Okay, thanks, Miguel.
Sorry, Brendan, I cannot be more specific. I don't have those data.
Okay, thank you.
Thank you, Brendan. Thank you very much for your questions. Let's move to Morgan Stanley, Haythem Rashed. Good to speak with you again today. Go ahead, Haythem.
Thank you, Ángel. Thank you, Miguel, for the presentation. A few questions from my side, please, if possible. Firstly, just on coming back to the CapEx, but actually looking ex-upstream, because you've given obviously detail around your thoughts around upstream. Could you say anything about how you see CapEx for the group evolving as we move into 2016? Do you think that that can also remain sort of flat, or is the downstream investments likely to sort of move higher with Peru? Secondly, just a question on the Go program. Could you perhaps talk a little bit more about the renegotiation of the contracts, just in terms of what is included in the numbers that you were talking about there?
When we think about some of the drilling day rates that we've seen, the movements in some of the different parts, the sort of numbers that are being talked about in the industry in the last couple of months are higher than these sort of numbers and higher than the 10%-20% that you're targeting towards. Would you say that this is somewhat conservative, or if you could just give it a bit of color around that would be helpful. The final question I have is in relation to the upstream OpEx efficiency that you highlighted in the previous call. I think you talked about a EUR 5 per barrel reduction in upstream costs that you were targeting.
I wonder if you could just give us a sense of whether that's still the case, whether you could maybe do more, or any update there would be very helpful. Thank you.
Thanks, Haythem. In relation with CapEx in the downstream division, you know that in the past, I mean 2014 and prior, we have been around EUR 700 million, EUR 750. This year it's going to be a little higher, as you point out, due to the investments we are doing in Peru, which will end up this year, the whole downstream division in EUR 1 billion. This would be flat by 2016. Okay? That in relation with the CapEx for the downstream division. Turning into the Go program and the synergies, we would be able to deliver the following impact in our P&L. EUR 280 million in this year, EUR 550 million in 2016, EUR 700 million in 2017, and EUR 750 million by 2018. How is this working? Well, first, the Go program has 217 different initiatives as of today. They are increasing permanently. We have initiatives there of all types.
I can mention some. In Russia, we are going to optimize the operational structure of our development assets. In Bolivia, we are going to optimize the whole marketing of our production. In Brazil, we are going to adapt the operating structure to current and projected level of activity and restructuring trade agreements. In the U.S., with cost reduction to improve rates of drilling and well services. In Trinidad and Tobago, we are going to really improve the complex logistics we have there of transportation and storage. In Algeria, new optimization of the structures and sites. In Downstream, our refineries have launched a new CO2 reduction program, which implies better results thanks to the energy consumption, energy cost reduction that goes along with it. In chemicals, we have between many other projects to reduce the cracker capacity in Puertollano, which will give us extra margins.
The Go program is a long one. In the renegotiation process, I will say, I think I mentioned that. What we have obtained in existing contracts was a 5% in Repsol suppliers and a 7% in Talisman ones. This is on, depending on the region more than in any other area, our reduction between 10%-20%. Perhaps we may sound conservative, it is what we are seeing. Finally, as it may be a question may arise at a given moment because it's totally linked to the Go program. In the synergies, we are also. I would like to mention some of the initiatives of the synergies. Some of them as mentioned, are already implemented.
We can start with the removal of Talisman board and listing cost, Talisman top management restructuring, integrate and optimize the spacing categorization of discretionary G&A, IT system optimization, scale effects, action plan for smaller offices already ongoing, Singapore, Amsterdam, Erbil, Algeria, Jakarta, Luxembourg, Lima, and Oslo. Optimization of the intergroup financing mechanism for the Talisman entities, integration of Talisman services and activity within Repsol, current agreements, reinsurance programs. We have more than 90 different activities going on. The whole company is moving in the same direction. Remember that our origin has always been Downstream. In Downstream, we are quite efficient, and costs it's a must to be assessed. In the past years, our goal in the Upstream division was growth. This is a turning point.
In the existing scenario, I think that the Downstream culture is going to help us also to reduce CapEx and OpEx in the Upstream division. Finally, in relation with the EUR 5 I mentioned, if you remember, EUR 1 was cost reduction, EUR 2 were due to exploration reduction, and the other two were due to the mix of our production, because we have several projects that are ramping up. The extra cost of the new barrel is much lower than the ones we had in the past. The combination of those is EUR 5 per barrel, which is what I mentioned in the last quarter results. How much it will be? Our goal, our objective, it would be to reach the EUR 9 per barrel of reduction, in which I include the EUR 5 I mentioned before. EUR 4 extra is the objective.
Whether we reach it or not, it would be on our hands.
Thank you, Miguel. That's very helpful. Just a quick follow-up. On the 10%-20% that you expect to reduce new contracts by, over what time frame are we talking here? Is it over a 12-month period or something less so?
Once we renew it. It's not the term that affect us, but the maturity of the contracts. When a contract is mature, we have been capable of really reduce up to this 20% that I mentioned. It's not a matter of when it will happen, it's a matter of each contract is being renegotiated when it's finished. Okay?
Okay. Very clear. Thank you very much.
You're welcome.
Thank you very much, Haythem, as always. Now let's move to Anish Kapadia from Tudor, Pickering, Holt, TPH. Hi, Anish. Go ahead with your question.
Hi. Good afternoon. I have three questions, please. The first one was, could you just give us some idea of, you're gonna have a CapEx reduction in 2016. What was the impact on production of the CapEx reduction in 2016, and would it lead to a reduction in proof reserves in North America in a low oil price environment? The second one's related to the hybrid bonds. I think you've still got €4 billion remaining. It seems like the hybrid bond market's got a little bit worse, relative to your expectations, it was getting better. Just wondering if you're still confident of getting the €4 billion of hybrid away, and if you can't, what's the alternative to improve the balance sheet position? Then the final one was on Talisman's abandonment liabilities.
If I've got it right, I think Talisman had about EUR 7 billion of abandonment liabilities on its balance sheet. Just wondering, are you carrying that same amount? Has it changed? Should we expect some of the spending on that to be brought forward in places like the U.K. where I think you've got EUR 100 per barrel operating cost? Thank you.
Well, thanks, Anish, for the questions. In relation with the first one, you have to think that we don't expect any impact in production due to this CapEx shortage. First, because the projects we have in front of us are ramping up. Cardón will be ramping up, Sapinhoá will be ramping up next year, and by the end, Lapa would be there as well. On top of that thing, that in this year we have been the whole day without Libya, the whole year without Libya. If you combine only these four areas, short term, for sure, there would be no impact at all. Talking about the hybrids, first comment is that it's not EUR 4 billion that we had left. We issue EUR 2 billion this quarter. One of them was a non-call six, the other was a non-call 10. We still have EUR 3 billion to be issued.
I'm positive. I think that the suffering that the fixed rate has been in the last month and a half, if you want, is totally related to, I'll say, Greece in one hand, the doubts about the Fed position in the other, and finally, some news about China. The market is so volatile that we will see what happens. I think, and I am positive, and I still confident in Mr. Draghi and his EUR 60 billion per month, which I hope that at the end will move the yields in the direction I expect. In the final one, in relation with the Talisman abandonment liabilities, as of today, we don't have any material increase. After our purchase price allocation analysis, we have somehow confirmed what they have in the group. Basically, as of today, no changes there.
Just going back to the first question. What was just trying to get any sense is more in terms of North America, given you're reducing CapEx over there, would you expect production to fall in North America next year? Given the reduction in CapEx and low oil prices, would you expect reserves to have to be de-booked?
First, I would say that a possible reduction in production in North America, which is possible, because as we mentioned in the speech, we are going to drill for cash. Free cash could be a reduction, but it's not our main concern. Globally, production will grow. In North America, we will drive for those as much as the scenario allowed us to. In the existing scenario, probably would be CapEx reduction and reduction of the main production. I don't see it as a major concern. Okay, Anish? Anish?
Yeah. Sorry, on reserves?
On reserves, you have to think that the whole company mindset has changed. With the acquisition of Talisman, we are by far larger in reserves that we never expected. We'll have to wait for the budget to really provide you better answers to that question. On average, in the last four years, we have been above 200% on reserve replacement ratio as Repsol. With the addition of Talisman, really, the reserve figure is something that will appear once we end our budget work. Our concern today is totally focused on free cash generation and not in size. As mentioned, with the organic capabilities of Talisman assets and Repsol assets, we'll be reaching more than 900,000 barrels of oil equivalent as production per day. This is not the objective.
This is also one advantage we have right now because we don't have any need, as others may have, to maintain our production. It's not our goal anymore. We are looking for value, not for size. Okay?
Okay. Thanks, Miguel.
Thank you, Anish. Okay, let's move on. [Foreign language], Felipe, Banco Espírito Santo Investment. Hello. Go ahead with the question.
Hi. Good afternoon, everyone. Two questions from me. The first one, just to follow up on the synergies that you are now targeting. Two questions associated to that. The first one is, basically, if you have included in those EUR 350 million any OpEx savings associated with exploration expenses? That would be my first question related to exploration, to the synergies. Also associated with that, you have raised your target to EUR 350 million. Has that implied higher restructuring charges? Could you update us a little bit on that front? What would be the currently, what is your best estimate for restructuring charges, and what will be the split between 2015 and 2016? My second question relates to downstream and the strength in refining and in the chemicals business. You have done a significant restructuring the chemicals division.
Refining margins are, I don't know, I think that everyone is surprised by their resilience. Going into 2016, are you assuming a reduction of your profitability in the downstream in a scenario of a stabilization of oil price, or do you think that, in a scenario of stable oil price at the current level, your industrial businesses in downstream could maintain their profitability? Thank you.
Thanks, Felipe. In relation with the first one, the synergies did not include any exploration cost reduction. Are pure synergies. In relation with the best estimates of restructuring charges, as of today, Talisman did some before the closing, something like 250 people were laid off there. We expect in Repsol, and we have included a cost EUR 50 million in Repsol, I repeat. Finally, you have to think that we are under the agreements with Investment Canada, which are a confidential agreement. Basically, we will fulfill the agreement, but I cannot disclose more than what I told you. Already 250 people were laid off restructuring.
In relation with the second one, whether or not I am expecting a reduction of profitability in the downstream business, I would say that probably in the chemical business, once the crackers that are now under maintenance will come back to work. Probably there would be a slight reduction there in the chemical business. Other than that, I do not see or I do not have any reason to expect a reduction on the profitability of the downstream business.
Okay. Thank you very much.
Felipe. Let's move on to Thomas Adolff from Credit Suisse. Hi, Thomas. How are you? Go ahead with your question.
Hey, Ángel. Hi, Miguel. Quick questions, please. Firstly, on Perla or Perla, whatever you want to call it. Do you still expect PDVSA to exercise the back-end rights or should we just assume 50/50 going forward between Repsol and Eni? Just a quick one on your production growth, ex Libya of 6% this year. I believe you used to say 60 days. Where is the shortfall? Then just finally going back quickly to what Anish was discussing on the upstream CapEx in 2016. Perhaps, can you split it out between where is the reduction coming from? Is it deferral and rephasing of certain projects? I am more interested outside of the U.S. and how much is related to cost deflation, re-engineering, et cetera. Thank you.
Thanks, Thomas. In relation with the first one, it's on PDVSA. It's their decision, and I don't have any hint or any idea of which would be their final decision. In the production, if you remember, we gave a 7% growth for the 5 years of the strategic plan. The 6% ex Libya, I wouldn't say it's a shortfall. We are totally aligned with the figures we provide in 2011 when we launched the strategic plan. We are totally aligned. In relation with the upstream CapEx for 2016, we still have not finished the budget nor the strategic plan. The figure I mentioned to keep that CapEx flat for the whole division, it's an objective. It still is on the business to decide how to fulfill or to reach this objective and how to split their CapEx. I don't have the split.
It's the business, the one that have to work out how to reach this EUR 4.6 billion of CapEx for the next year. I don't have the data.
Thank you, as always. Thank you.
You are welcome, Thomas.
Thank you, Thomas. We're moving to Jon Rigby from UBS. How are you, Jon? Go ahead.
Hi, guys. Hi, Ángel. Hi, Miguel. Two questions, please. Can you just, now we've got the numbers, just talk around the refining business. I think your refining margin was up, throughputs were up, it looks like the contribution from refining was down. Maybe the context on sequential basis, maybe in the context of 1Q to 2Q, some of the moving parts, and I know you're optimizing crude supply and so on. Maybe some color around that, if you could. The second question is, I think you referenced in the presentation that you were planning on FID-ing Red Emperor and Acacías before the end of the year. I'm interested in the context of you talking about the budget not yet being fixed for 2016 and the plan not being ready until the end of November.
I just wondered whether you feel comfortable in sanctioning those projects when you've really only got them onto your roster in the last few months and, in the context of the industry slowing down on FIDs to make sure that they're being done optimally, whether careering straight into sanctioning them within a few months of completing Talisman is an appropriate timeframe. Thanks.
Thanks, Jon. I don't know if I have the answer for the first one. Sometimes, the refining business beats the index, sometimes it doesn't. I don't have the slightest idea why last quarter they improved by, I think it was something like EUR 0.60 or something like that, the index, while in this quarter they have been almost at the same level. I think they're something like EUR 0.10 below. I don't have the slightest answer other than that in Bilbao, in Petronor, there was a maintenance for something like 15 days that may have affected the CCS margin that we have reached this quarter. It's the only reason that I can think of right now. In relation with the second one, the answer is yes. We are quite comfortable because both projects are quite strong.
We stress under the acid scenario we are using, which is EUR 55, EUR 65, EUR 75, and they work out perfectly well. There are two good projects. The answer is yes, we were comfortable while sanctioning both Emperor and Akacias. Okay, Jon?
Thank you, Miguel.
Thanks, Jon. Now, let's move to Matt Lofting from Nomura. Hi, Matt. Go ahead with your question.
Perfect. Thanks, Ángel. Thanks for your comments, Miguel. Just two things if I could. Firstly, just on cash flow and the cash cycle, if you could just add any sort of comments in terms of how you see the sort of the cash cycle on an underlying basis this year and then perhaps next year at sort of current forward curve oil prices, given the sort of additional comments you've made around CapEx plans, assuming, I guess, in the background that you continue to sort of look to utilize the scrip on the dividend side. Secondly, if you had any guidance on depreciation going forward on either a quarterly or an annualized basis, including Talisman. Thanks.
Thanks, Matt. In relation with the cash flow, I can provide you my estimates for 2015. I don't have data for 2016, as you may imagine. For 2015, the total cash generation would be minus EUR 8.35 billion. From those, you have to take out the EUR 8 billion we paid for Talisman, so it would be negative by EUR 350 million. This is my estimate for the end of the year. Basically, without the acquisition of Talisman and not considering any divestment, would be around EUR 350 million negative. Okay? In relation with the scrip, the idea is to keep it. For sure, it's a decision that it's on the board and in the general assembly. If we take out the three largest shareholders that all of them have gone for the cash, we have obtained a 63% acceptance ratio over a 75 or 74 number of shares.
It's almost a 90 or a high 80% of acceptance, and the idea is to keep it. In the projections I gave you about the cash flow, about the free cash flow or total cash generation for 2015, I include dividends for EUR 488 million. It's basically a percentage similar in the scrip as the one we have had in July, in the last dividend we paid. In relation with the guidance for depreciation for the combined entity, I would say that the figure may be around EUR 3.1, EUR 3.2 billion. Okay, Matt?
That's great. Many thanks, Miguel.
You're welcome, Matt.
Thank you very much, Matt. Let's move to Hamish Clegg from Bank of America Merrill Lynch. Hi, Hamish. Go ahead with your question.
Morning, guys. Thanks for taking my questions. I wondered if you could give us just a little bit of an update on Mississippi Lime. You mentioned some of the other assets in North America, but it's one of the region's basins that's been coming under a bit of pressure recently. I just wanted to check everything was going well there. Also, I wondered if you could maybe clear up just a question I had on the CapEx side. I just wanted to be very clear about this. You said that 2016 CapEx would be the same as 2014. Can you just confirm that that 2014 CapEx will be with or without the legacy Talisman CapEx in it? Is that a Repsol standalone CapEx number that's being compared to a Repsol Talisman CapEx number in 2016?
I was going to say the final question is, can we expect you to also review the dividend in the Q3 strategic update, or will it just be an operations update? Those are my questions. Thanks.
Thank you, Hamish. In the update that I can provide you in relation with the Mississippi Lime is that we have Include an impairment during the quarter of EUR 110 million. The book value we have at the present time in the whole asset is $900 million. The activity has slowed down, and we are aiming there always also for cash. I think that there's a total agreement with our partner in that sense. I don't expect much activity or increase of activity there as long as the price scenario remains the same. In relation with the CapEx guidance, the figures I mentioned, EUR 4.5 billion last year, EUR 4.5 billion this year, and EUR 4.5 billion next year, includes Talisman legacy assets. One thing, 2015, it's a projection of what we expect to end at. 2016, it's an objective. Okay?
Still pending, but yes, it does include all the Talisman assets. The last one with the dividend in relation with the strategic plan, we have to end the strategic plan. The idea is to keep the EUR per share with the scrip. Initially, at least as far as I know, we'll continue with this policy. EUR 1 and the scrip. Okay, Hamish?
Very good. I really appreciate it.
Thank you for your questions.
Thank you, Hamish. Now let's move to Irene Himona from Société Générale. Hi, Irene. How are you? Go ahead, please.
Thank you. Good afternoon. I had two questions, please. Firstly, Miguel, you closed the deal on May the 8th, I think you mentioned. Between then and now, as you went through finally taking hold of all the details and the numbers and consolidating, was there something that particularly surprised the Repsol management, either positive or negative in the deal? My second question, I was looking at page 25 of your statement. New group capital employed nearly EUR 45 billion, and current return on capital is about 4%, which is clearly below your work. You outlined today cost-cutting plans to, I reckon, add another 1% to that return. When you say you look to turn Talisman into a value-creating deal, what do you think that ratio should be?
In a world of EUR 60, EUR 70 oil for a while, is it achievable unless you shrink very materially the denominator of that ratio? Thank you.
Thanks, Irene. In relation with surprises, I would say that with the existing price scenario, there has not been any surprise. Positives and negatives have been balanced, and none of them has been big to surprise us, not in the positive nor in the negative side. That's clear. In relation with the ROACE, I think that a 4.3%, which I think is the figure that appears in the notes, you have to think that we have put, and that we have right now EUR 25 billion, more or less, of capital employed in the upstream division, which is not delivering any EBIT at the present time. Should I be concerned? Well, I'm concerned about the price situation, but not about the acquisition. The 80/50 world scenario, it's something that is going to be here forever. Our perception is that it's not. It could be one year, two years.
Also, we were a company that had the chance to play that game, first, because we have the cash, second, because of the resiliency of the company. Look at the EBITDA. We have been able to generate the same EBITDA as we did last year in this first half of the year, simply because of our downstream, our Gas Natural, the dollar-euro, which always help us when the barrel goes down. I'm concerned about the price deck, but not about the acquisition. At the given moment, the price will fluctuate, and we are going to be in these assets for, as I mentioned before, 20 years. Those are reserves that were bought at EUR 10. Thinking in a longer term, I think that we have done a good move.
If we look at it in a EUR 50 scenario and EUR 2.4 per million BTU, as Henry Hub, for sure, ROACE will not be there and returns will not be there, but it's not our estimate. Okay, Irene?
Thank you, Miguel. Thank you.
You're always welcome, Irene.
Thank you very much, Irene. Let's move to Marc Kofler from Jefferies. Hi, Marc. How are you? Go ahead with your questions.
Hi. Afternoon, all. Miguel, thanks very much for the presentation. Just two questions for me, please. I suppose the first one is sort of building on the previous question. Acknowledging your comments around the current scenario and weathering the storm, so to speak. Are you able to put a time out there as to when you think the Talisman asset can be free cash flow generative? Secondly, this one's probably more mechanical. Given the strategic update plans for early November, should we expect some potential divestments before that update? Thanks.
I would say that if you tell me when the price will go up, I'll tell you when the company will generate free cash. We have the data there. You have the knowledge that the company, at EBIT level, it's neutral with the existing prices, with the $60 we have had this quarter. You also have the depreciation figure for Talisman for the year. It's a matter of calculation. I think that everyone knows the price today, and everyone expects the price at a given moment to reach the $80, $90. The question, I think that your question in that sense is totally right, is when will this happen? There we have forces that are playing against each other within the business and other factors that are external to the business but are also affecting the price.
Difficult to say, but one thing is sure, it will not last forever at this level of prices. I cannot answer the first one, saying when will it be free cash flow positive. We have Talisman depreciation. It's around $1.1 billion per annum. You have all the data, it's on you to put the price you may think, and then you will realize. One thing is clear. At $60, we are EBIT breakeven. Sorry, divestments before the strategic presentation. I can tell you that we are working already in the divestments, but it takes time. Could happen, and probably some of them will happen. We will see. These processes, you know, the day you started, but not so easy the day you close. I would say that for sure, with a high probability, we will announce some transaction before to assess.
Okay, Marc?
Yeah, that's great. Thanks so much. Just on the first question, could you maybe, if we took the macro environment flat from today, is this sufficient capacity, excuse me, flexibility on the capital spending program for 2016 to achieve a cash flow neutral level, do you think?
This year, we have been almost cash neutral, including dividends and including interest. This year, EUR 350 million negative. It's going to depend much on the price for next year. If the figures remain and the price deck remains exactly the same as this year, we basically will have the same figure with the difference of four extra months of Talisman. It's a matter of EUR 700. In this, from EUR 300, which is our deficit, 2015 up to EUR 700, 2016, if everything remains the same. In this figure, we don't have any divestment. For sure, I think that yes, the answer is yes. I expect, considering divestments, to be cash neutral next year.
Great. Thanks very much.
Okay. Thank you very much for your question. Luis, [Foreign language]. Go ahead with your questions, Luis de Toledo from BBVA.
Thanks, everyone. I have only one question. It's relating to geographical reporting, the breakdown you have provided, the new breakdown, including Brazil in the EMEA region. I was wondering if there's some specific rationale for that move. If it could change the way you manage the Brazilian operation in any sense. Whether you have chosen that for some equilibrium in your upstream portfolio or if there is any specific division. Thanks.
Thanks, Luis. Gracias, Luis. There's one clear reason. We want to align the manager, who is Tomás García Blanco, who has been leading the Brazilian operation in the past, to have all the relation with Sinopec. To have the U.K. business and the Brazilian business, we thought it was a good idea to have the same manager who will have the relation with Sinopec in both areas. That's the main reason for it, Luis.
Thank you very much.
Muchas gracias, Luis. Now let's move to Nitin Sharma from JP Morgan. Hi, Nitin. How are you? Go ahead with the question.
Hi. Afternoon, gentlemen. Two questions from my side. First one on divestments again or kind of divestments. With pressure increasing on your balance sheet, how comfortable are you with your holding in Gas Natural? I ask this question because in the past, you flagged this stake as an option. The second one is regarding your comments on the commitment made with agencies to divest assets of EUR 1 billion in the next 18 months. Maybe just clarify, have you also committed to a net debt EBITDA multiple? Thank you.
Well, I was starting to get concerned because nobody was asking anything about Gas Natural. Thank you, Nitin, for your call. I was starting to become nervous. Our idea is to keep Gas Natural. Gas Natural is a great asset. It gives us a very good carry, only if it's totally necessary to maintain the investment grade, we'll think of divesting Gas Natural. Okay? It would be somehow the silver bullet, if you want to call it that way.
Understood.
The second one, you mentioned that if I am committed to EBITDA, to net debt multiples. The truth is that we are not. To me, my concern is to have multiples that fit with the agencies in order to keep our investment grade. Those are the ones that are really our goal, our objective, and our commitment, which is to keep the investment grade. That's it. If it's needed to have a net debt to EBITDA, we'll look for it. Right now, I think that I used to put this ratio the other way around, so net debt to EBITDA. We are right now, our estimate is to end up the year at 2.4, but it's not the ratio that normally the rating agencies work with. They are more in the flow from operation into net debt. This is adjusted net debt.
This is where we will do our efforts to really cover all the multiples they ask us. As an answer, I would say EBITDA to net debt is now committed flow from operations to adjusted net debt. The way the agencies analyze both is what we are committed with.
Thanks, Miguel.
Well, with this last question from Nitin, we've finished with our Q&A session and our second quarter 2015 conference call. You know that any further queries or clarifications you may need or want to put on Repsol, the IR area is at your entire service. Obviously, we're also waiting for your request for the workshops in order to help you to model the new Repsol on September, whether in London, Madrid, or in any other place if you may need it. Thank you very much, and have a nice day. Cheers.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now all disconnect.