Good day, ladies and gentlemen. Welcome to the Galp's second quarter 2022 results presentation. I will now pass the floor to Mr. Otelo Ruivo, Head of Investor Relations. Please go ahead.
Hello, everyone, and welcome to the analyst Q&A session related to Galp's second quarter and first half 2022 results. Thank you for joining us today. Early this morning, we released all the results materials and included a video presentation from Andy and Filipe, highlighted the key achievements during the quarter and covering the financial results. As such, this session should be shorter as we will go straight to Q&A. Together with Andy, we have Filipe, Teresa, Georgios, and Thore. So the full executive team here available to take your questions. As usual, I would like to remind you all that we are making forward-looking statements that refer to our estimates. Actual results may differ due to factors included in the cautionary statement presented at the beginning of the presentation we released this morning, which we advise you to read.
Andy, do you want to say a few words before we start the Q&A?
Thank you, Otelo. I just want to reiterate some of our messages. We were pleased with the results we presented earlier today. Cash generation, close to EUR 500 million of free cash flow, despite a working capital build. This is supported by strong performance on all business segments. As a result, today, Galp is in even more robust position with our leverage now down well below 1 net debt to EBITDA, giving us additional financial strength to execute our strategy. With our distribution framework, we should be able to offer 2022 dividends, a third of our operating cash flow. Operating cash flow is now expected to be close to 3 billion EUR. As I also alluded to in my video presentation, we made really good progress on the execution of our key projects that underpin our portfolio reshape.
Exciting times for Galp, and we're all here ready to take your questions. Thank you very much.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for a name to be announced. To ensure everyone has the opportunity to ask a question today, please limit yourself to just two questions. Please stand by while we compile the Q&A roster. Now we're taking our first question. The first question.
Yes, please.
Comes from the line of Biraj Borkhataria from RBC Capital Markets. Please ask your question.
Hi. Thanks for taking my questions. Thanks for the new format. Much appreciated. Two questions. The first one's on the low carbon portfolio. Following the Titan deal, if we think about 2023, how much CapEx is moving from sort of deconsolidated to being consolidated? I'm just trying to understand the moving parts versus the prior plan. The second question is on shareholder returns. You guide to the one-third payout, EUR 500 million in buybacks for fiscal year 2022. How are you thinking about, you know, second half of this year, given where the share price is, and the visibility you have on volumes and I guess commodity prices to some extent, you may want to look to accelerate that.
How should we think about the balance of the first, second half of this year and then into next year? Thank you.
Thanks, Biraj. Look, firstly, I think we've given some guidance on where we see the commodity prices for the remainder of this year, around $90, $15 a barrel refinery margin that gives us close to EUR 3 billion of OCF. We have no additional guidance at this moment on how we will distribute the 2022 dividends, but I think we're pretty clear there will be a third of OCF. Now on the Titan deal, clearly this was an opportunity to take control of this portfolio. The reason we take control isn't per se to consolidate it, but was to create some more flexibility going forward to unlock more value. Perhaps I can hand over to Filipe to give some guidance on how this may affect CapEx going forward.
Early days for us to actually announce anything particularly, but Filipe, how do we see the numbers?
Hi, Biraj. In the real world, the assets are generating and producing as before. Galp now has increased exposure from 75% to 100%. That's really what has happened. From an accounting point of view, before when it was deconsolidated, we would put in our equity into the project. Our partner would put in its 25% share. We have project finance and some of the underlying assets. The plan is that we keep 100% of the Topco that we now fully controlled. The underlying assets have project finance, and what you had in our cash flow statement before was whatever money would come to Galp after the assets would service their debt. It was a relatively small amount. You will now see the full cash flow coming to us.
You'll also see more CapEx going out and also the project finance debt that we have now brought on board to help. Net-net, you know, we keep bringing a lot of visibility of this business into our consolidated statements, and so the market will have a much better view of the true cash flow generation without the project finance associates movements. Thank you.
Are you able to quantify?
Thank you.
Sorry. Are you able to quantify the CapEx that is being consolidated for 2023?
If you look at our long-term plan assumption, what we've disclosed early this year, we're growing the portfolio 300-400 MW per year. If you put in, assume a round number, EUR 700,000- EUR 800,000 per megawatt, it's giving you EUR 300- EUR 400 million of gross CapEx before asset rotations. That would also, you know, you'll see that as a CapEx number.
Understood. Thank you.
I think, Biraj, I mean, obviously this is a great portfolio. It's exposed to the merchant market, generated EUR 200 million in the last 12 months in Titan. You may ask, "Well, why do we do this?" I might ask Georgios to just say a few words about, you know, what this flexibility that we'll bring by taking full control of this asset base. Jørgen?
Thanks, Andy. I think that will perhaps also preempt other questions. Biraj, that was the opportunity to do a deal, a comprehensive deal to get control of the assets and be able to have execution of the portfolio in our own, let's say, hands. We had the opportunity to get this deal in a comprehensive way, exchanging also certain other things that we had to sort out with Cobra. Cobra is not a natural, let's say, owner of this 25%. Cobra wanted to focus more on the development and on the execution of the portfolio. We had agreed EPC prices at different times, so that was an opportunity also to update the EPC prices to more, let's say, current context.
We also had the opportunity to change the engineering of those projects to change the scope of the EPC agreement so that we have higher yields. That, all in all, with getting the 25% on our hands gives us the opportunity to be able to market the energy ourselves to consider other value pools in the future from energy management, but also eventual asset rotation. All in all, it's a deal that gives us more control and more optionality for the future.
Thank you, Biraj. Now we're taking our next question. Please stand by. The next question comes from the line of Oswald Clint from Bernstein. Please ask your question.
Oh, yes. Sorry. Thank you very much, everyone. Could I ask about Bacalhau North, please? Good to see the rig secured. So that's still a 2023 drilling, I think, to appraise Bacalhau North, if you could confirm that. But I just wanted to get your broader thoughts around Bacalhau North. At this point, do you think it could feed into a second FPSO or still very much a resource addition for the first FPSO? And perhaps more broadly, just what's the latest on the Tupi redevelopment plan, please? That's the first question. I mean the second question, just a little bit further on renewables, please.
I mean, this comment around continual licensing and permitting delays, I thought in the context of Russian gas that Europe was going to, and Portugal speed up some of these approvals. If that's the case, does it make you lean more towards the acquisition side of the renewable portfolio? Especially given your financial strength, would you look to do more such acquisitions here? Thank you.
Can I ask Thore to talk about Bacalhau North and an update on the POD for Tupi?
Yes, Andy. Thank you, Oswald. When it comes to the latest rig that we're taking in for Bacalhau, it actually has two purposes. One is exactly as you're alluding to, that we are going to use that rig to drill the ADR well in the north in order to better understand what is really the potential for Bacalhau North. Of course, the outcome of this well will very much determine what will then be the way forward. Is it going to be a tieback or is it going to be a standalone? That has not been decided at this stage. The Bacalhau.
The latest rig we took in has also a second purpose, namely having additional drilling capacity to make sure that Bacalhau phase one have all the available production capacity when it comes on stream so that we get the swift wrap-up. When it comes to Tupi and the second phase and the new POD, it is moving ahead according to plan. We are just now starting to drill the first infill wells for the project. Then we are in active dialogue with ANP with respect to approvals of the new POD that has been handed in, and that is a dialogue that goes back and forth between the partnership and ANP.
On renewables, on the licensing delays. Look, I think, you know, clearly the European Union has set out an ambition to accelerate these permitting. What happens now is the different countries are putting in legislation to kind of underpin that and to create the environment where they can accelerate those approvals. Portugal has recently put a package through. I think for us, the jury's out a little bit about how effective these are. Does that change our strategy from going from a kind of organic growth to one that's inorganic? No, I don't think you can draw that conclusion. I think we will continue to make the point that there is more money pointed towards renewables growth in Europe than there is the capacity for the governments to give the permits to actually pursue them.
If, you know, REPowerEU is gonna become a reality, we are gonna have to accelerate permitting, not only just for electricity, but also for value streams like hydrogen. This is a really important point that we wanna work very closely with government to make sure that all the money we want to spend in renewables can actually find a home.
Next question, please.
Hello, can you hear me?
Yes.
Mehdi, your line is open. You can ask your question.
Okay, sorry. Thank you. Hi, this is Mehdi Ennebati, Bank of America. Two questions, please, on my side. First question, you know, on the maintenance schedule in Brazil. Can you please remind us how many maintenances you've realized on FPSOs in Brazil in the first half of this year? And how many maintenances are scheduled during the second half of this year? Because it seems that this year, you know, it was the first half was pretty heavy in terms of maintenance. Should we expect, let's say, a little bit less maintenance in the second half? And maybe can you also tell us more about the current production level of the FPSOs which were on maintenance in the first half?
Would you say that production is back to 2019 levels? Or would you say that the depletion started having an impact and it is almost impossible for you or too challenging for you to come back to 2019 production on those FPSOs, which were on maintenance in the first half of 2022. The second question is about your gas business. This quarter again, you've highlighted that you've met some gas sourcing issues. From what I understood last year, or let's say in February, you were highlighting that you took some measures to significantly limit those gas sourcing issues. But we can still see this quarter quite a significant impact.
Would you say that you have been surprised by, or you were thinking that it will be much easier for you know, to find some natural gas or to, let's say, lower the purchase on the spot market? Negative surprise, or would you say that it is in line with what you've scheduled, but unfortunately you have been surprised by the price of the natural gas? In fact, the real question behind that is there a very significant risk for you this winter in case, you know, there is some difficulties of gas supply in Europe? Should we expect, you know, that division, that business of yours to be under pressure? Thank you.
Thanks, Mehdi. I will hand over in a second on both actually subjects to Thore. Firstly on the maintenance schedule, I think we can roughly see the planned shutdowns to be evenly distributed between the first half and the second half of the year. In the first half, they were really concentrated in the second quarter, not the first quarter, and I think that's something we see. Now, do we have to fight against, you know, declining production as the pressure comes out of the reservoir? Yeah, I think this is a normal oil business. We do. Thore might be able to add some color on the maintenance planning. I'll just address the gas topic as well now. We had a schedule of deliveries for our gas business that is being maintained.
It is below what we had originally contracted, and we have taken whatever measure we can to reduce our own gas consumption. Part of that was to fire a hydrocracker on naphtha instead of gas. You know, that is a new operation and it's one where it creates some additional fouling, and Thore can talk a bit about how we will be looking forward to see how we can balance the gas versus naphtha in using the hydrocracker. What I can tell you, it will all rely on whether the deliveries can keep up with the schedule that we're being promised now, probably nine months ago. If it does, then we will be in a reasonable position to cover the obligations of gas we've sold for our own use, but also for the use of our customers.
I hope, we hope, Mehdi, that we aren't going to have to go to the market again, but it will all rely on receiving the cargoes as per the schedule we've given before. Thore, perhaps a little bit more color on maintenance and then anything more on the naphtha or gas use in the refinery.
Sure, Andy. Thank you, Mehdi. It is very correct what Andy said. You know, the heaviest part of our maintenance this year as we see it today actually took place in the second quarter of this year. All the FPSOs are planned to go down for maintenance during the course of the year, but it was a heavy bunch in the second quarter. We expect there will be maintenance also in the third quarter, and then it'll be the lightest quarter will be the fourth quarter. That is what you can expect in the ramp up. I will not go into the details on each one of the units, but that is what you can expect. Production impacted by the maintenance also in the third quarter and even less in the fourth quarter.
That is what the planning says today. When it comes to production, the production potential remains very good. Tupi is astounding when it comes to sort of the level of production capacity, but it is depletion business and there is a decline in Tupi, which is not very high, but it's still there. We have to really run fast in order to stand still. That's why the infill drilling program that I just spoke of is so important. We have fantastic economics on these infill wells that is now being contemplated. When it comes to gas sourcing, the refinery has shown an astounding level of flexibility to adjust to market.
We work really as one team within the company, between the refinery and the energy management team to see what it is that creates the most value for the company. Successful switching into naphtha during the second quarter, and very high operational availability of the facility. What I perhaps was most impressed with and satisfied with was that we had such a high availability of the refinery during the second quarter, which of course was very nicely timed versus also fantastic refinery margins. That's one of the key reasons why the refinery contributed in such a good way in the second quarter and continue to do so as we speak. Thank you.
Now we're going to take our next question.
Can you hear me?
Yes.
Now we're taking our next question, please.
This is Sasikanth Chilukuri from Morgan Stanley.
The next question comes from the line of Sasikanth Chilukuri from Morgan Stanley. Please ask your question.
Hi, can you hear me? This is Sasikanth from Morgan Stanley.
We can hear you perfectly.
Yes. Great. Thanks for taking my questions. I had two, please, both on the refining side. The first was on throughput. Last quarter, during last quarter's earnings call, it was highlighted that securing VGO supplies remained a risk to refinery throughput. But today it appears that this risk is largely minimized. I was just wondering what were the actions taken? And also if you could comment on the impact of securing these new sources of VGO, what the impact was on refining margins. And also if you could comment on the sustainability on securing these VGO supplies from these new sources. Is that sustainable over the period as well? The second question was also kind of related to this, mostly on the refining margins.
You have laid out a reference conditions of $15 per BOE, Galp refining margin for the second half. Lately we've been seeing benchmark refining margins decrease quite materially, although they're from record high levels. Just wondering if you could possibly give some details on how you're currently, or how you see the refining market evolve in the second half, and what level of refining margins you're currently witnessing.
Thank you very much, Sasikanth. Yeah, VGO sourcing, we have managed to secure all the cargos of VGO that we needed to keep the refinery at full throughput. I have to say that some of those are secured, you know, just weeks before you need them. It's an active work of our energy management. We're sourcing them from Europe, we're sourcing some from the Middle East. Now, those cargos have been sold at quite a high margin themselves. We always have to check whether there's actually positive economics in buying them. Over time, you know, that looks attractive and sometimes it looks marginal. All of these have been positive in terms of our overall financial delivery. We will continue to do that.
Now, refinery margins are much lower, I think around $10 per barrel today. Clearly they were much higher the earlier parts of July, but we are seeing some softness. So July kind of to date, I think we're looking about $17. Now, going forward, clearly, we haven't got a crystal ball. I don't know if you have, Tor, or you want to say a few words, but at the moment it's hard to tell how the market is responding. We're in the driving season now. We'll see how the volumes are affected and how stocks are affected vis-a-vis an economic downturn. But clearly the situation is with weaker refinery margins than we had previously. I don't know. Do you wanna add anything, Tor? No, I think your basic capture.
It is just volatile. Actually, the cracks this morning was expanding again, actually. You know, the market is just volatile. What we do is really just make sure that we are really optimizing the runs on a daily basis, making sure that the refinery runs with the highest possible availability so that we can maximize what the market has. For sure, we don't have a crystal ball and let's see where the margins are going to pencil by the end of this year. Right now, still, quite good margins, at least when you see it in a hisThorec perspective.
Great. Thank you.
Thank you. Now we're taking our next question. Please stand by. The next question comes from the line of Joshua Stone from Barclays. Please ask your question.
Thanks, good afternoon. Two questions, please. First, if I could just come back to the Titan acquisition and the decision to fully consolidate. Is this a change in the approach of Galp in renewables? In particular, how should we think about the ownership structure going forward in renewables? Is the intention for you to still reduce your stake over time? If so, over what timeframe do you think is likely? Then a second question on Brazil. There was a EUR 85 million write-off on exploration assets. Maybe if you could just provide a little bit more detail about what those were and what else is left in that portfolio that could be impaired. Thank you.
Joshua, I think the first thing to say is that our strategy haven't changed. We have taken 100% control of this asset. It is delivering significant cash flows at the moment. It is a position clearly that we're enjoying. There's some additional debt that appears on our balance sheet, EUR 220 million. Now going forward, I think as Jorge outlined, we have a lot of flexibility, and that may include asset rotations, may in turn, you know, include deconsolidation again, but at this stage, I think we are not giving any clear guidance on that. I think when we come back to the market, we'll create some clarity. What I can say is that we, in control of this asset, have a lot more flexibility to actually unlock value for the shareholders.
You know, in due course, we'll see which levers, whether they're rotation, energy management, hybridization of those we will pull to extract even more value from those assets. I'm gonna hand over to Filipe to talk about the Uirapuru, or impairment. You can do it, Filipe. Oh, no, Thore's gonna do it. Thore, talk about the Uirapuru impairment.
Okay. You know, we have not made a commercial discovery in Uirapuru. That is the reason why we decided to make the impairment in this quarter. There are still prospects in that license that we would like to explore. We have not aligned in the partnership when the next step will be. We do see structures that could potentially be interesting. The current plan is therefore to do that ADR in Bacalhau North first. That will enrich our understanding of the northern part of Bacalhau, and the next door neighbor to the northern part of Bacalhau is actually the Uirapuru license.
That is why we take it in sort of a step-by-step approach, first figuring out Bacalhau North, and then the partnership will decide what would be the next step for Uirapuru and its license. Thank you.
Thank you.
Thank you, Joshua. Now we're going to take our next question. Please stand by. The next question comes from the line of Henri Patricot from UBS. Please ask your question.
Yes, everyone. Thank you for taking my questions. One on the downstream and one on CapEx. On the downstream, following up on Chris' question around refining margins, can you perhaps comment on what you're seeing on demand in your own retail network? Are you seeing much of an impact from some higher prices or not so much from competing? And secondly, just on CapEx, the guidance for the full year, no change to EUR 1 billion despite the acquisition. Can you talk about some of the moving parts of setting the acquisition there? Thank you.
I'm gonna first ask Teresa to talk a bit about what we see in the oil demand side.
I think one thing to say is that with year-on-year, I think we're 22% up, but we're still a bit shy of 2019. Teresa, give a bit of color on what we see in the demand side of the business.
We definitely see an increase, an overall increase in demand versus last year. Thanks for the question. We definitely see that coming mostly from the B2B segment, aviation with very high volumes and marine bunkering also with very high volumes. On the retail side, we do observe a slightly different picture, so volumes are not picking up as much as in the B2B segment. Still, we see improvements coming, and it depends geography by geography that we see improvements coming.
I'm gonna ask Philippe to talk a bit about the CapEx. I think we spent EUR 365 million in the first half, but EUR 1 billion for the year, we think. Philippe?
Yeah. No change in guidance despite bringing the whole of Titan on board. The reason is, we were not planning on having project finance on our CapEx in Titan this year anyway, so the only difference is the 25% share goes up. We have other areas of Galp where we're having timing, phasing.
Of payments will likely move to the right. This gives us cushion to absorb the original guidance of EUR 1 billion. Thank you.
Okay. Thank you. Thank you, Henri. Now we are going to take our next question. Please stand by. Our next question comes from the line of Giacomo Romeo from Jefferies. Your line is open. Please ask your question.
Yes, thank you and good afternoon. Two questions for me. The first one is there have been some headlines regarding a potential for windfall tax in Brazil. Just wanted to get sort of your view on the likelihood of something happening before elections. How do you think this could take shape? Second question is about Coral LNG. You said you expected first cargo in Q4. Just wanted to have a view of your latest view on the timeline to get to capacity level of liquefaction there and when do you expect this to happen?
Finally, if I may add, squeeze in a third one is just wondering if you can quantify the impact from your discount offering on retail customers and whether until when you expect this to continue. Thank you.
Thanks. On the windfall tax, you know, I think clearly it's something that's talked a lot and there have been various discussions actually earlier this year in Brazil, and those draft legislations were never put through. We at this stage can never say never, but it's now only a few months to the elections. We're not expecting that to pass through Congress. Clearly, we're gonna keep an eye on that going forward. But obviously as we make more money in Brazil, taxes go up. Our taxes have doubled as well as our revenue to the upstream business. It's probably good for Thore. Obviously, we're not the operator. I have to say Eni is doing a fabulous job on Coral.
Some of Galp employees are also working hand in hand with Eni. Thore, do you wanna give a little bit about where we are and what we can say about the progress? It has been impressive.
Correct, really, you know, remember this, we FID this in 2017. First gas came into the facility on the 18th of June, virtually exactly 60 months after the FID. Now the final commissioning is going on for the LNG factory. Actually, as we speak, the defrosting has started, which is a very exciting part of the commissioning. It looks still good. That's why we expect first cargos in latest by the fourth quarter. We expect to be at plateau during the course of next year. If this ramp up goes according to plan. Still very healthy and a very robust product in this market environment. Very robust.
Teresa, do you want to say something about discounts? I think I have to stress this is for our loyalty customers. This isn't a general discount across all our forecourts, but, Teresa.
Yeah, sure. Given the highly pressured current price environment, it is important that we support our clients and alleviate some of the strain that has been put upon them by a very volatile context. As such, we have indeed launched some campaigns within our loyalty programs, namely with our key retail partners, Sonae in Portugal. This offers a top-up of discounts of EUR 0.04. It goes into the EUR 0.14 per liter, which is a very good value proposition for our customers. In Spain, we're also launching summer discount promotions aiming at acquiring new customers or and also activate and retain existing clients during the summer. These discounts can add up to EUR 0.25 per liter.
Just one final note that the B2B recovery more than compensates in terms of the margin that we're generating in the business.
Thank you, Giacomo. Now we're going to take our next question. Please stand by. The next question comes to line of Raphaël Dubois from Société Générale. Please ask your question.
Good afternoon. Thank you for taking my questions. The first one is about São Tomé and Príncipe. I understand you're still analyzing the results of the drilling, but is there any chance you could already share with us some of what you already know? I guess if you encountered hydrocarbons, you should at least already know that. That would be my first question. Then, on the dividends to non-controlling interests, I note that it dropped from EUR 110 million to just EUR 1 million in Q2. Can you also maybe give us some idea of what it will look like for the next few quarters. Is this the drop in Q2 something that was planned?
Is this due to a special schedule of payment to Sinopec, or is this because of the Bacalhau spending?
Okay. Can I ask Thore to talk about São Tomé?
Yes, Andy. Thank you, Raphaël. The rig is still on location in São Tomé. We are finishing now a very comprehensive data acquisition program that we've had there. What I can tell you is that, yes, we are analyzing the data. I will not conclude anything or communicate anything before we have done a really proper and thorough job there and aligned in the partnership. This is, of course, very exciting. It is completely frontier area. We need also to be very careful to make sure that we spend enough time, we really also understand what we have acquired.
I can tell you, we have had a big acquisition of data that has been acquired and which we know will use some time to analyze. Thank you.
Thank you, Thore. Perhaps ask Filipe to give a bit of a color to the dividends on minorities, particularly Sinopec's through the year.
Yeah, Raphaël, I would not read much into the timings. We usually pay in Q1, and then late in the year, we see how the year is going in Brazil, and we adjust the dividends. We had budgeted some EUR 200 million for 2022 of payments to Sinopec. Given the macro, this could go up, but it was never meant to be done in Q2. It could be Q3, Q4, to be decided. Thank you.
Thank you.
Thank you, Raphaël. Now we're going to take our next question. Please stand by. The next question comes from the line of Pedro António Alves from CaixaBank. Please ask your question.
Hi, good afternoon. Thank you for taking my questions. The first one, on upstream. We have seen some players closing or at least analyzing disposals in their upstream businesses. Would you consider crystallizing value at this point of the cycle? Because portfolio management in upstream was something that you have flagged in our Capital Markets Day one year ago, and the price or the valuation context is perhaps more appealing now. Your thoughts on this topic would be helpful. The second question regards the working capital evolution for the full year. Given your commodity price scenario, what is your base case for working capital? Thank you.
Thank you, Pedro. I'll you'll excuse me not to say too much about upstream disposals. Clearly, you know, we have, you know, guided that it's something that we will continue to look at. I think that's all we wanna say at this stage about that. When it comes to working capital, I think as you've seen in our numbers, there was a working capital build of EUR 1.1 billion just really from our stock and inventory position this year. Clearly, if you take that away from our net debt, then you're getting the even better numbers. Filipe, what do we assume in terms of the end of the year of any working capital release? This is in addition to the EUR 630 million we have on margin accounts.
We can expect quite a lot of working capital to come back, but certainly versus the end of Q2.
We do, Pedro. We have two components. You have the margin account related to the hedges, EUR 630, June 30. This should tend to zero by year-end. You have the fundamental working capital that is client receivables and inventories. This is highly dependent on Brent prices. If Brent prices correct downwards, we should see a meaningful adjustment downwards of our working capital balances on top of the margin account releases. Thank you.
Thank you.
Thank you, Pedro. Now we're going to take our next question. Please stand by. The next question comes from the line of Alejandro Demichelis from Nau Securities. Your line is open. Please ask your question.
Yeah, good afternoon. Just one very quick question. Could you please update us on how you're seeing the development of the Bacalhau FPSO in terms of timing and also in terms of the costs?
Thank you, Alejandro. Thore, this is on you, I think.
Thank you, Andy, and thank you, Alejandro. You know, the project is going quite well. The major construction is taking place in China. We have had some issues. You know, the project is going quite well.
The major construction is taking place in China. We have had some issues in China with respect to COVID and the very strict lockdowns that has been put in place from time to time. There is a slight delay. Still, the latest forecast is that we will still see first oil in 2024. Overall, quite good. On the cost side, there is good control. The major cost positions is a lump sum contract. At least for the time being, there is a good control on the cost side in the project. Thank you.
Thank you. Just as a quick follow-up from there, from what you're saying then we should expect kind of late 2024, is that what you're saying?
What we have said is the second half of 2024, and that's what you should continue to expect. Thank you.
Thank you.
Thank you, Alejandro. Now we're going to take our next question. Please stand by. The next question comes to the line of Matthew Lofting from JP Morgan. Your line is open. Please ask your question.
Thanks, all. Thanks for taking the questions. Two quick ones if I could, please. First on hedging, business is effectively giving up some of its strong leverage to higher oil and refining at the moment through the hedging positions that are on, particularly given the clear potential to deleverage the business under prevailing macro conditions. Could you just talk a bit about the philosophy around hedging here and triggers and whether investors should expect further opportunistic hedging mechanisms to be entered into 2023 and beyond?
Second, if I could just sort of come back on the distribution policy and just clarify there, I think you were in the context of talking about the working cap and margin releases earlier, the potential for in the region of sort of EUR 500 million of buybacks for calendar year 2023 that I think Filipe mentioned earlier. That sort of derived primarily from the underlying OCF generation rather than headline CFFO inclusive of those effects, if I understand correctly. Thank you.
Hey, thank you, Matt. Look, I'm gonna ask Filipe to say a little bit about hedging strategy and what to expect for 2023 on the distributions and working capital. I just thought that he might talk about that, but just wanna stress, we did move from a working capital, a third of CFFO to a third of OCF, basically, because we wanted to take the big swings of working capital out of that distribution framework. But Filipe, a bit on hedging and what to expect going forward.
Given the extraordinary volatility that we've seen in 2022, really unprecedented, yes, we did have a lot of hedging noise in our numbers. The one thing that we will do differently going forward is that we'll be using options and not swaps, so that we would be, if we take a decision. You ask about the philosophy behind this. If we take a decision sometime in the future to protect some of the downside on Brent, which is really what moves the needle at Galp, then it would be done through options. We would invest in premiums, and we protect the downside without giving up any of the upside. Thank you.
Thank you, Matt. Now we're going to take our next question. Please stand by. The question comes to the line of Ignacio Domínguez from JB Capital. Please ask your question.
Yes, good afternoon, and thank you for taking my questions. My first question is on the refining cash costs during the second quarter. We saw refining cash costs going down on the insurance receivable, but at the same time for FY 2022, you are guiding towards $2 per barrel, which would imply a significant increase during the second half. If you could provide us some light here. Then on my second question is on Namibia. It's exciting to see Galp going forward with the exploration campaign there. It would be interesting if you could let us or give us an idea of what should we expect.
We should expect Galp to lead the exploration from an operatorship perspective, or is Galp looking to farm down a stake in the two licenses or in two blocks in Namibia? Thank you.
Thank you, Ignacio. I'm gonna ask Filipe actually to tell us a little bit about the refinery cash costs and what this insurance receivable was. Then I'll ask Thore to talk a bit about Namibia and the exploration prospect there.
Yeah, Ignacio, you recall we did have an incident in the refinery late last year. The OpEx this quarter looks artificially low because there is EUR 10-15 million of insurance collection. We continue to guide to $2 per barrel as recurring fundamental OpEx. Thank you.
Well, Ignacio, what I can tell you regarding Namibia is that we really like our ZIP code in Namibia. I think we have a good address, a good location. Actually, the Galp team has been quite persistent in Namibia. We have been there since 2014, and we have drilled three dry wells in Namibia. But I think we, through those three dry wells, learned something about, you know, where there could be an additional potential. Quite excited. Next step for us now is to de-risk this further, and that would be by drilling a well. Our target is to drill an exploration well there during 2023 or 2024. That's really where we're going to focus right now.
Thank you, Ignacio. Now we're going to take our next question. Please stand by. Our next question comes from the line of Jason Kenney from Santander. Please ask your question. Your line is open.
Jason, please go ahead.
Jason, your line is open.
Operator, I think we need to move to the next one, if you don't mind.
Yes, of course. Thank you very much. We're going to take the next question. Please stand by. The next question comes to line of Mehdi Ennebati from Bank of America. Please ask your question.
Yes. Hi again. Thanks for taking my additional question. Just, you know, yesterday I was reading that there was some issues regarding the pipeline connecting Algeria to Spain. I wanted to know if you observed, you know, some gas sourcing issue today because of that, and what are the measures, you know, that you could take, you know, if this lasts for quite some time? Thank you.
No. At the moment, there's nothing to report there, Mehdi, from our side in terms of gas sourcing through from Algeria. Of course, the line from Morocco into Spain is actually has not been flowing at all since earlier this year. We haven't got any notification of an issue with gas supplies from Algeria.
All right. Okay. I think it was an operational issue, you know, at some compressor units in Spain. All right. No, no worries. Maybe it's not that important. Thank you very much.
Thank you. Now we're taking our last question. Please stand by. The last question comes from the line of Raphaël Dubois from Société Générale. Your line is open. Please ask your question.
Thank you very much. Two quick follow-ups. I noticed that you've received EUR 9 million of dividends from associates in Q2. Could you please confirm that it's coming from the solar JV, maybe? Also on the buyback, what sort of visibility do you have on who participates? When could we know whether Amorim Energia is participating? Thank you.
Raphaël, I'm going to ask Filipe to answer both of these questions.
Yes, Raphaël. We have the Titan dividend payments. We also have a bit of our Brazilian JV related to biofuels that is also paying dividends. On the buyback, we have no visibility, nor do we seek to have any visibility. We have contracted a bank to do this for us. They intervene in the market without you know actively seeking specific sources of shares or price influence. We have no visibility from any shareholder on who is selling and what their intentions are. Thank you.
I think this was the last question. Thank you all for participating on the Q&A session. We hope it was a useful one for you, all of you. Do reach out to our IR team if there are some additional clarification needed from our side. To conclude, I would just like to wish you all the best for the rest of the earnings season and hope it is followed by a great summer holiday. Hope to see you all in person after the break.
That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day. DS speakers, please stand by.