Good day, ladies and gentlemen. Welcome to the Galp's Fourth Quarter 2021 and Full year 2021 and 2022 outlook question and answer conference call. To ask a question, you will need to press star one on your telephone. 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 with Galp's Fourth Quarter and Full year 2021 results. I would like to thank you for joining us today. Early this morning, we released all relevant materials, and this time also included video presentations from all Galp's executive members, highlighting the key achievements during the year and covering the financial results. As such, this session is expected to be shorter as we will go straight to Q&A, where Andy and the remaining executive team will be available to take your questions. As usual, I would like to remind you that we will be making forward-looking statements that refer to estimates, and actual results may differ due to factors included on 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 taking questions?
Thank you, Otelo. Well, it's been one year since I started as CEO of Galp, and it's an exciting year. It's a year in which we have a new purpose. Let's regenerate the future together. As we look back on the year, we have a robust set of results. Despite some operational difficulties in those supplying us gas and LNG, some operational difficulties in our own refinery in Sines, and some operational difficulties battling with COVID in our non-operated position in upstream. We also have a very large working capital build, which masks, I think, the quality of our financial framework and position today. We have a distinctive investment opportunity. One that is grounded on growth. Growth of our core upstream business, which is extraordinarily cash generative, but also growth in our other renewable and new energy businesses.
This gives us an overall decarbonization pace, which I think is distinctive. Given the cash generation, we have a distribution framework, which I think is attractive. We have a new distribution policy, one that now features buybacks for the discretionary or the supplementary element of our distributions. A growing of the base from EUR 0.50 per share at 4% a year, so EUR 0.52 for this year. With the discretionary or the supplementary element up to a third of adjusted operational cash flow. I think this is an investment opportunity that shows growth, shows decarbonization, and it shows a good yield. I'm looking forward to taking your questions. We've got Filipe, Thore, Teresa, Georgios, and Otelo here to receive them. Thank you.
Dear participants, we will now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone. As a courtesy to everyone on the call, we ask that you limit yourself to a maximum of two questions. The first question comes from the line of Biraj Borkhataria from RBC Capital Markets. Please ask the question.
Hi. Thanks for taking my question. First one on some of the gas sourcing issues you had in 2021. Could you talk about the current position right now for 2022? If anything, the incremental costs are baked into your EBITDA guidance. The second question is on Brazil. Andy, you've mentioned previously about some maintenance catch up once you can post pandemic. Just wondering where you are now and how much of that catch up is left. Secondly, sort of related to that, for some of the early FPSOs in Brazil, should we be thinking about structurally lower utilization or some underlying declines coming through? Or are we not there yet? Thank you.
Thanks, Biraj. I'll start with talking a bit about the gas sourcing, and I'll mention a few things on Brazil and pass over to Thore. On the gas sourcing issues, yes, we have suffered, particularly in Q4. We've compensated by our own use, particularly in Sines. This has offset some of those issues. We are having cargos rescheduled going forward. But I think we're getting more adept at managing the overall balance of the supplies we get and the demands we have in our own use, but across Iberia. This is still an ongoing challenge for us, but I think we're much better equipped to manage it going forward.
When it comes to Brazil, clearly it's been a difficult couple of years, particularly with COVID and activities not going as fast as they normally would. I think we've got to remember these are declining fields. These are fields that now are more or less all fully drilled up. We've got some infill still. This is a matter of can you keep pace with, you know, additional hookups, higher availabilities to compensate for, you know, some of the declining production rates. Thore, you know, I think this is a situation that's not unusual. I have to remind everyone on the call, we have Bacalhau that's going well and being built and will give us 25% production increase by 2025. Thore.
Thank you, Andy. Yes. No, just confirming what you just said, the Tupi, we have to realize there is now 12 years since first production, so this field has now reached its peak. There is a slight decline on Tupi now. All the work that is now taking place there is to try to reduce the decline rates. The decline rates are not big. Actually, we're speaking in Tupi below 3% per year. Which is quite astounding for a field that has already been in production for 12 years. But that is the fact. As Andy said, only when we get Bacalhau towards the end of 2024, we could expect a significant uptick in production.
We will have a positive contribution in 2023 from Coral, but that's a lot about the compensating for the decline that we see in the other fields. Maintenance is being carried out according to plan. We basically have more or less all the units now planned for maintenance this year. You have to expect that there is a utilization factor of around about 85% when you're factoring in the usage of the FPSO. That's for your guidance when it comes to the availability of the units. Thank you.
If I can just supplement. Yeah, in I mean Q4 you saw around 125,000 bbl a day, but I think there were four units that went into planned shutdowns through the quarter. You know, I think you've got to realize it was quite a high maintenance activity quarter. Just to reflect back on the energy management, we can see EUR 100 million EBITDA swing from 2021 to 2022, because of regas costs, but also the sourcing issue. Biraj, it's you know, I think we are gonna get a much better year, a much better set of results from our energy management team, this year than we had in 2021.
Okay. Understood. Thank you.
Thank you. The next question comes from the line of Oswald Clint from Bernstein. Please ask the question.
Yes, good afternoon. Thank you very much, everyone. Yeah, thank you. It's great to see the new competitive distribution framework. I think that's gonna help a lot going forward. In that, I see you've stuck to the one-third of cash flow in terms of total cash return. It's interesting because some of your peers are also talking about in today's higher macro environment that the, you know, a third or 30% might be suboptimal. I just wanted to get a sense of if a third of adjusted CFFO is a hard ceiling or could be a soft ceiling, could be raised if the environment turns out to be higher than you're expecting or the deleveraging comes in faster.
Second, as it relates to, you know, some future developments here, I'd like to get a bit more flavor color here on Northvolt deal. I think Georgios was saying he was very impressed by this deal, when he saw it at the end of last year. He also spoke about it being the first step in a much larger battery chain for you. I just wanted to get a sense of what is this total expected capital outlay for you, for net to Galp, and what are the return expectations that you're currently contemplating here? I see Northvolt takes 50% of the offtake, but how do we secure the offtake for the rest, please? Thank you.
Hi, Oswald. How are you? All right?
Good, thank you.
Look on the distributions. Yeah, look, I think I'm not gonna guide anything, but it's a third of adjusted operating cash flow. Now I think the exciting thing about Galp is we see our operating cash flows grow. That's, I think, how we're gonna reward our shareholders by growing our cash flows and in the, you know, attractive macro like today, we're fully expecting that a third of adjusted OCF is going to be distributed. Northvolt, I'm gonna ask Georgios to say a few words in a second, but yeah, I mean, I think we're very excited. It's Northvolt, a very dynamic company, in combination with our industrial experience. This is, I think, a very good joint venture. You know, we talked about EUR 700 million. We're 50%. We'll project finance it.
You can, you know, work out some of the numbers. You know, we've just come off a call with Northvolt. I think the teams are working really well together. We've got good momentum behind the creation of that joint venture. Georgios, you want to say a few words for your first impressions?
Sure. Thanks, Andy. Oswald, thank you for the question. Yeah, as Andy said, it's on a high end of EUR 700 million investment, 50% project finance. In terms of, we're now at pre-feasibility study, so it's early to talk about returns. In terms of offtake, one thing I can tell you is that as soon as we announced it in December, the phone started ringing. It's not gonna be, and there's reputable companies interested in our offtake. We don't see an issue in securing offtake for this facility, particularly with what's happening around the globe with lithium hydroxide prices and demand.
Excellent. Thank you.
Oswald, you probably don't track the lithium hydroxide prices like you do the oil prices and gas prices. But the raw material spodumene's gone from about $400 a ton to $2,400 a ton, and the lithium hydroxide product from around, I think $8,000 a ton to $40,000 a ton now. This is extraordinary what's happened in the commodity market around lithium hydroxide. A market where European demand is going to grow 10-fold, so in 2030. This is a business that really excites us, and I think we're entering it exactly the right moment.
That's great. Thank you for your answers.
Thank you. The next question comes from the line of Mehdi Ennebati from Bank of America. Please ask your question.
Hi, good afternoon all. Thanks for taking my question. Maybe three small questions, please. First, you know, the discount to Brent, your oil and gas realized price, you know, saying $10 below the discount to Brent. I was wondering myself, now that you can increase your gas price, gas realization price in Brazil, what kind of discount, you know, should we expect? Should we expect it to remain around $10 per barrel in the coming, let's say, quarter, year? Or do you expect it, you know, to go back, you know, to the range that you were previously providing us, which was -$6 to -$8 per barrel?
Second question on the refining, so clearly, you know, you are benefiting from the relatively high refining margin environment. From what I understand, and please confirm if I am not right, you clearly take advantage of the fact that your gas supply contract is oil linked in your refining business. So this is kind of helping you against the relatively high gas price. But I also would like to understand, you know, CO2 costs are increasing quite a lot. How or where can I see that, you know, in the division? Is it impacting the cash costs or no? And finally, just on the shareholder remuneration distribution. So you've announced EUR 150 million share buyback.
Should we consider that you will buy roughly 59% of those EUR 150 million in the market, given that Parpública and Amorim Energia, you probably will directly buy them some shares? Or should we expect Parpública and Amorim Energia to grow their shareholding interest in Galp Energia, and then you realizing EUR 150 million share buyback that you put for the market? Thank you.
Thank you, Medi. On the first point around the discount to Brent, you asked the question, will we revise our guidance on the discount to Brent because we're now managing to market the gas in Brazil at a higher price than the regulated market with Petrobras? The answer to that is yes, we are. We're going to go from an $8-$10 discount in 2021 to $6-$8 going forward because we're actually realizing higher gas prices as we market the gas ourselves in Brazil. That's really good news, of course. I will hand over to Thore on refining, perhaps also to reflect that actually one of the measures I talked about how we're gonna reduce our own use of gas because of our sourcing restrictions.
One of the things we've done is we've been firing our hydrocracker off naphtha, which reduces our own gas consumption. Thore, I don't know if you want to explain any more on that.
Mehdi, thank you for your question. What you can expect is that our refining margin is actually including the impact of the CO2 cost. It is actually already baked in. We expect that to be in the order of $2-$3 per barrel. Now, with the high prices closer to $3. As Andy has said, we have had a cushion or have a cushion in the refinery with respect to gas prices. Actually, in order to further optimize that, we have found that we can actually run very successfully now our hydrocracker really on naphtha, which is sort of helping us with the utilization of it. We're actually seeing that we can even lift production to somewhat more than 100% of capacity. That's how we are hedged on that.
I'm handing back to you on buybacks.
I think, Mehdi, I understood the question. I mean, we have no specific arrangements with Amorim Energia or Parpública on the buyback arrangement. We're going to buy back EUR 150 million in the market on the open market. We're gonna do it in a very measured way, and I think less than, say, 20% or 25% every day of the market. Very slow over the year, starting after the AGM. We have to get approval from the AGM to cancel the shares. We're only gonna start the buyback after the AGM.
All right. Thank you very much. Maybe just one follow-up, please. Can you tell us, year to date, what's your refining margin, please?
We have started the year well on refining, Medi, and we actually are year to date somewhat above $5. It's early days, as you know, and it's too early to elaborate more. Our guidance remains $4-$5. If I just may add one little thing. On the differential side, Medi, actually our performance on oil last year was actually better than the year before. The qualities that we are delivering from Brazil is continuously being more appreciated in the market. Our energy management team is actually doing a very good job also now to optimize on the buying side. We see now a new buyer universe that is also opening up.
The big drag and the reason why it looks so tough on a realized basis is because gas prices had a big impact. On our 2021 result. As of the first of January, we are handling these volumes ourselves and expect, therefore, better realization also on the gas side. Thanks.
Thanks.
Just to answer.
Yeah.
On the CO2, the CO2 prices are baked into that refinery margin, and operating costs are at $2 a barrel. We have a good margin in today's operating environment.
Thank you very much. [audio distorted]
Thank you. The next question comes from the line of Joshua Stone from Barclays. Please ask your question.
Hi, good afternoon, and thanks for the question and also the new format, much appreciated. So yeah, two questions, please. Firstly, just on the buybacks, what was it that convinced you to go down this route rather than the variable dividend? I mean, I know there was a long decision on that, but what was it that sort of clinched it for you? Just some clarity on the practicalities of the program. Is the idea that every year at the full year results, you announce the share buyback and then to the AGM and other. In other words, we're going to get regular updates every quarter. It'll be sort of always announced at the full year results. My second question on the renewables capacity targets you put in.
They look to be a bit lower than you put in at the CMD over the sort of 2023, 2024 time period. Maybe you could talk about what's driving that reduction, and also why your confidence are still hitting your medium-term targets there. Thank you.
Yeah. Thanks, Josh. In terms of the why we moved to buybacks from cash, that was a result of actually very extensive consultation with shareholders. Since I came in, as you know, we had Capital Markets Day in June, and then, you know, I've been on the road talking to all the shareholders and, you know, the majority were keen on buybacks. I think we spent our time, we consulted and came back with that as a decision. We will calculate this, you know, on an annual basis. We won't have to wait necessarily for the AGM to agree to cancel. I think we'll get an authorization to cancel a certain proportion of the shares over a period of time.
It will be based on year-end results to understand how much we'll buy back in the subsequent years or year. Renewables, I'm gonna ask Georgios to talk a little bit about what's happening in the Iberian market in renewables and particularly in solar.
Thanks, Andy. Thanks, Josh, for the question. Yeah, we have seen some slowdown in capacity deployment. Absolutely. In 2022, we see 400 MW coming online, but we also see about 800 MW to reach ready to build. That will be, let's say, our. That will fill our appetite for 2023. We have confidence in the portfolio that we have, and its executability for the interim target of 2025. We're also going to look for other opportunities for early-stage projects in order to develop more optionality for the execution.
If I can just add. I think it's Iberian wide how long it's taking to get the permits from the authorities, and that's because they've got an enormous backlog. I think something like 330 GW of proposals, and that actually is leading to a delay to get these projects going. I think that's why we've seen this slowdown.
Understood. Thank you.
Thank you. The next question comes to the line of Sasikanth Chilukuru from Morgan Stanley. Please ask your question.
Hi. Thanks for taking my questions. Two , please. Just coming back to the policy, the shareholder distribution policy. Just wanted a quick clarification. Does the adjusted operational cash flow on which the distributions are tied to include the cash flow of the renewables on a pro forma basis? Could you talk about the CapEx and the financing costs, interest payments, of the renewables business on a pro forma basis as well? And, given that this business is equity accounted, could you provide some guidance on the dividends from the business in the near and the medium term? The second question was on the production outlook.
Just wanted to check whether the production outlook that you have laid out includes the new plan of development for Tupi and Iracema within the numbers as well?
Thank you, Sasi. I'm gonna ask Philippe to answer the first one and then Thore to answer the second one on production.
Hi, Sasi. The OCF that guides total distributions up to one-third is the consolidated OCF. It will not catch the cash flows from renewables. It will catch the dividend stream that you'll see under the associates lines in the cash flow. It is not the pro forma number that you have. For 2020, the guidance we have for 2022 is EUR 2 billion, and that is a consolidated number. We have a lot more cash that is unconsolidated within that number. On the P&L, what you see, and P&L does not drive the guidance for dividends. On the P&L, what you see is the pro rata share of the net income of the solar companies. Thank you.
Thank you, Sasi. With respect to the POD, yes, our outlook is including the expected input from the or effects of the POD. Remember, this is- You know, the POD has actually a short term, a medium term, and a long-term element. The short term is very much infill wells. They will be drilled in the next few years, two years, actually. Then we have more sort of medium term that is then looking into what other sort of development opportunities are there of this field. That is, of course, very much, you know, depending on the negotiations, discussions that we will have with the authorities in Brazil. We see really exciting opportunity for harvesting much more out of this fantastic asset. That is what we are going to continue to do with Tupi and Iracema.
Great. Thank you.
Thank you.
Thank you. The next question comes from line of Alessandro Pozzi from Mediobanca. Please ask your question.
Hi. Good afternoon, and thank you for taking my questions. The first one is a bit more broader. I think if you look at the share price over the last year, probably Galp has not benefited from the re-rating of the sector as some of your peers. I was wondering, what do you think the market is missing, and would you be prepared to do something different?
Yeah. Look, I would agree with you that, you know, we have our share price has gone sideways, and that's with the macro that is and our cash generation that we're delivering at the moment. You know, I think that's why actually buybacks are quite a good thing because we think the share price is undervalued. Look, I think the market, you know, I think we clearly were a company that was growing, had a very aggressive upstream production growth outlook. Clearly with the LNG in Mozambique being delayed, you know, we've had to moderate some of those production targets. Still, for any upstream business, as you all know, a 25% increase in three years' time is an enormous growth for an upstream business.
You know, I think that will come as we get closer to that moment of startup. I think the market will really appreciate that. But what they, I don't think have fully appreciated is the scale of our investment, the relative scale of our investment in the new energies businesses, and also the transformation of our commercial business. You know, these are gonna deliver, you know, real significant cash flows, certainly in the second half of the decade. I think the market will appreciate that. We're not gonna change track. We have a very clear plan. You know, we clearly are enjoying the macro at the moment. We have a great upstream position.
Our energy management business, as I alluded to, is I think still gonna come into its own, particularly when we start receiving the LNG volumes from Venture LNG. You know, I think there are a number of catalysts that we have going forward. I think once you do the numbers and you look out to 2025, you'll see that, you know, this is a growing business that is able to yield and decarbonize at the same time. I don't think there's anything else that you really want from a business like ours than to have those three things captured.
I was thinking maybe whether it's time to make more radical choices. As you mentioned, you have a great green energy business. Whether is it time to take opportunity of the oil price and start monetizing the upstream to accelerate the development of the green energy business?
You know, I think, you know, you'll be surprised if we weren't continuing to look at options, you know, where the value of our assets were, but you know, this is not a point to give any guidance on that. We have a very experienced gentleman around the table here that can point us to all sorts of opportunities in that renewable energy space. You know, we will look forward to continuing to yeah to deliver a good growth business that decarbonizes and yields. We have quite an organic strategy today, but we continue to look at what inorganic opportunities there may be.
Okay. Thank you. Maybe a second one on-
Now joining.
Maybe a second one on the dividend. Your progressive dividend, I believe you indicated 4% growth. How do you manage to come up with that number? What are the inputs that went into the calculation of the guidance for 4% growth in dividend? Thank you.
You know, I think this was. We reflected on, you know, wanting to show that we've got progressive dividend policy that shows that our base will grow in whatever macro environment. Recognizing if you pay back shares, we'll have more capacity in order to reward or increase the base. This is a balance between understanding how many shares we were gonna take out of circulation, how much we could grow the base, and what overall dividend kind of contribution that we can afford from our financial framework.
Got it. Thank you.
Thank you. The next question comes from the line of Alejandro Demichelis from Nau Securities. Please ask your question.
Yes, good afternoon. Thank you for taking my question. It's only one. On one of your slides of sources of uses of cash, you're showing a deleveraging for 2022 of somewhere in between EUR 700 million-EUR 800 million, roughly. The question is, with all those opportunities that you were mentioning, organic, inorganic, project financing on the Northvolt deal and so on, what is the kind of optimal leverage for a company like Galp going forward?
Thank you, Alejandro. I'm gonna ask Filipe to answer that one.
Alejandro, the target is one times net debt to EBITDA. That's where we would like to be, and distributions will be sized in such a way that we're always at close to one times net debt to EBITDA. Now, the leverage that you see for 2022, in great part is also to make up for the increase in indebtedness that we have in 2021 with the cash margins related to derivatives. You would expect us to compensate the miss in net debt in 2021. That should be covered in 2022. Now, the business plan is based on 75 Brent. There could be, you know, OCF would go up with a higher Brent, so distributions would go up to one third of OCF. That's quite mechanical. Thank you.
Okay. Just as a follow-up, yeah. When you get to the end of 2022 with those numbers that you're providing, you're going to be well below that 1x net debt EBITDA, because also your EBITDA is going up, yeah?
Correct. That is the expectations in which case, you know, it will be 1/3 of CFFO that will drive distributions, of OCF that will drive distributions.
Okay. That's great. Thank you.
Thank you. The next question comes from the line of Raphaël DuBois from Société Générale. Please ask your question.
Hello. Yes, thank you very much for taking my questions. Two, please. The first one is a follow-up on the FPSO utilization rate. You mentioned earlier that we should aim for 85% utilization rate this year. What will you guide us for beyond 2022, assuming, let's hope so, that the COVID situation does not impact us too much anymore and that you have caught up on your backlog of maintenance? That will be my first question. A second one on renewable power. Assuming the EUR 150 per MWh that you use in your short-term outlook and the deployment plan that you have, can we expect Galp to receive a dividend from this business?
If you could maybe tell us a bit more about the amount that we should be considering. Thank you very much.
Okay. On utilization. We talked about 85%. As you know, these are aging FPSOs in this environment. We're not the operator, so I have to say that one of the things we're working very closely with Petrobras on how to improve it. But Thore, we don't give any guidance on this, but you know, I think these are clearly. There are a number of things going on in these FPSOs. One is, you know, we're having to maintain them and make sure that we keep the asset in good conditions. We have talked about issues with the risers, and that's an ongoing inspection and replacement program as seen fit. All these things are multi-year things that go forward.
We're not in a position, I think, to give any guidance. What we are doing is working very closely. Actually, we're bringing technology into Petrobras to help them with some of the inspection regimes. I don't think we wanna give any further guidance. I don't know if Thore can-
No, correct, Andy, then that will not be. 85% utilization rate, what we have guided you for 2022, I think it's also fair going forward, that you use that as the key assumption base. We see, we work, as Andy said, a lot with the operator in order to find continuous opportunities to debottleneck and improve the efficiency of the unit. We continue to see interesting infill opportunities, which is also then being pursued in order to maximize the recovery of the field. Thanks.
Filipe, are you going to talk a little bit about the, perhaps the pro forma OCF we might see this year? Or EBITDA, and then do we get any dividends?
Mechanics are the following. Our projects are project financed. If cash flows are very strong, then we have cash sweep, so we can accelerate deleveraging of those projects, and there is a dividend being upstreamed to the shareholders. Yes, on the associates lines in the cash flow statement, there will be a dividend income. What you don't see here is how quickly we're delivering the asset base. We also, as we do project finance, at the time when the projects are mostly de-risked, so we actually fund 100% of the equity upfront. When project finance arrives, a lot of that money comes back to the shareholders, so a reimbursement of shareholder loans into the project companies. That funding is used not for dividends, but to fund the next projects. Thank you.
I see, can I ask a very quick other one?
Please.
Yes. Thank you. Just maybe in the commercial business, we've seen your oil products volumes. They are not yet at 2019 level. Can you maybe give us some idea of how things are evolving year to date in this business? Could we eventually see oil product volumes back to 2019 level?
Teresa, do you want to answer this one?
Yes. Thanks for the question. We do still expect 2022 to have volumes that are not at the levels of 2019.
Mm-hmm
... in the last weeks, so end of year and January do show encouraging growth in volumes in key B2B sectors, namely aviation, marine, and ground transportation, but not yet at the levels of 2019 and 2022 will still be a year of recovery in volumes.
Great. Thank you.
Thank you. The next question comes from the line of Michele Della Vigna from Goldman Sachs. Please ask your question.
Thank you very much. Two questions if I may. The first one relates to the most recent auction in Brazil, where other companies bid for a stake in Sépia and Atapu, and you decided effectively not to increase your stake there. I was just wondering if you could perhaps comment on how you thought the auction went and some of your reasons behind it. Secondly, if you could give us some ideas of how the progress is going with the Bacalhau development. I believe the operator, Equinor, was talking about it being 50% complete. What are the key milestones from here? Thank you.
Thank you, Michele. I'll answer on the Brazil bid round. You know, it was very tempting. It was a very attractive asset, and we know Sépia very well. As we're the only other partner in that with Petrobras. We understood the potential of this resource. It was a very competitive tender in the end. You know, I think well above the minimum bid rate. But I think our assessment was, you know, we have a very clear strategy. We have a strategy where half our capital over a period of time is going towards these zero and low carbon sources of energies and products.
Therefore, although attractive, in our balance of our strategy, you know, we really felt that this was not a moment to deepen our position in that asset, but obviously to put the cash towards basically a very future-looking portfolio. You know, clearly it was not an easy decision for us to make, but I think one that reflects that we are very serious about our strategy going forward. If I can ask, because actually we have a strategy that actually has upstream growth. Already in the funnel, we have 50 years of 2P and 2C resources at the current production rate. We have plenty in the hopper, and one of the big tests of that hopper is Bacalhau. Thore, talk about how the progress is going.
Yes. Thank you, Andy. Bacalhau is actually progressing well. The next big milestone for this project is now to start the drilling and completion campaign in the second half of this year. That's going to be an important milestone for us in order to make sure that we have sufficient production and injection capacity available at the start of the field. As you know, or you might know, on Bacalhau, there will be full gas injection, and from day one, that is not the field where we're exporting the gas, but actually injecting it straight back into the field. To have the necessary injection capacity will also be important therefore. So far, the project is developing well. Thanks.
Thank you.
If I could give a supplementary on the TOR plus. Sépia clearly has an FPSO that's now online and performing really well. The next step there is another FPSO to be built. Actually, when you look at those cash flows going forward, you know, you don't get your money back until well into the next decade. You know, this is a real decision. Where is Galp gonna be in the 2030s and 2040s? Was this strategically a good move for us to make, or is this the moment for us to be, you know, putting our capital elsewhere?
Thank you, Michele. The next question comes from the line of Ignacio Domenech from JB Capital. Please ask your question.
Yes, good afternoon. Thank you for taking my questions. My first question is on Namibia. Following the recent discoveries of Graff-1, is there any resources that you can do for block, the latest in Namibia? And maybe if you could give us some color on any potential drilling campaign, and if it proves to be successful, do you plan to develop this block or would you be looking to partner that business here? My second question, and apologies to come back on gas realization prices. You mentioned before the opportunity to improve the differentials in Brazil, following the gas market liberalization.
Perhaps if you could elaborate on what levels of gas price, Net Zero gas, you are achieving, and what would be the tenor of these contracts, and what is the benchmark and maybe what is the percentage of the gas you produce, which is being impacted? Thank you.
Ignacio, I think I got the second question, but let's go to Namibia first, and yeah, we're very excited about what's going on around our PEL 83 block. Thore, perhaps can give it a bit of color to that.
Thank you, Andy, and thank you Ignacio for the question. Yes, we are really, of course excited. This has been a position that we've been holding for a while. We have had big faith in Namibia and actually see some very interesting structures. The Graff well and the Venus well is next door neighbors. For us, this is taking away one of the key risks that was actually a working petroleum system. This fact that these discoveries are made makes it's a very good proof for that the petroleum system is working. It's actually leading us as we speak to upgrade our probability of success quite significantly on these two fields. Yes, I can tell you that there's a lot of happy faces in our exploration department these days.
As you perhaps noticed from my presentation, we have also two other very interesting shots in the exploration magazine this year. We are drilling as we speak in the Campos Basin in Brazil, the so-called Bob prospect. Later this year, we'll also be drilling in São Tomé and Príncipe on something that we actually think is quite interesting. Both of them with quite significant Galp positions. In São Tomé and Príncipe we actually hold 45%, and in Namibia we actually have 80% of PEL 83. It's an interesting position to have right now. Thanks.
Actually, I think you were talking about the gas contracts we have in Brazil. Actually, we've done six different deals already, and we're only seven weeks into the year. We're marketing our own gas. We're not committing at all. We're only committing between a third and two thirds of our gas production into those markets. But we're also marketing on behalf of others. We're getting, you know, as you might imagine, really attractive, well, much more attractive than the past gas prices. There are seven companies marketing gas in Brazil, and we're one of them, and we're, you know, I think, very proud that we've set up that capability.
I think, you know, you will see those numbers coming to the bottom line, so through the upstream results. I don't wanna reveal really the length of those contracts or the price lines. What I can say is, you know, that this is a reasonable amount of cash that we're generating from these new contracts. Thank you.
Right. Thank you.
Thank you. The next question comes from the line of Pedro Alves from CaixaBank. Please ask your question.
Hi, good afternoon. My question is on renewables. Just a quick refresh on what should we expect from Galp in terms of inorganic movements. We have seen last week the news that ACS is allegedly seeking a buyer for Zero-E, the renewable subsidiary where you hold a 75% stake. Could you please comment on this, on your intentions to this company? And also in terms of on the acquisition side, what I mean, should we assume that your inorganic moves will be mostly early stage portfolios, like you mentioned, or perhaps more aggressively to scale up your portfolio, would you perhaps consider merging, for instance, this JV with ACS with other Spanish-listed player? Could this be a possibility for M&A, or would you rather do a corporate move outside Iberia? Thank you.
Thank you, Pedro. Let me start that, and then I'll hand over to Georgios. I think the first thing to say, we have 4.7 GW now in our funnel. You know, we've got a line of sight to build out that capacity. As you know, we've added Brazil this year to that portfolio, but also deepened in Iberia. We get into these projects early, so we can get the biggest return from those projects. You know, clearly we will continue to look at inorganic, but we're not giving any kind of guidance on that today. I have to say, I think we've got a strong portfolio, and we've got one that gives us certain visibility to our 2025 target.
I don't know, Georgios, do you want to add to that? I mean, we do continue to look, and we will look to rotate our own assets, as we've said, in order to maximize the equity value. Also perhaps mention a little bit about ACS and Zero-E and what we understand from that announcement.
Thanks, Andy. On the organic versus inorganic, we are growing and, you know, buying early stage portfolios. I mean, I consider that mostly organic. This is something that we will selectively continue to do, as I was saying before, because it adds optionality to our deployment through the years. On ACS, we don't wanna comment on announcements of others, but we don't see any, let's say, impact on our portfolio and our relationship with them.
Thank you.
Thank you. The next question comes from the line of Matthew Lofting from J.P. Morgan. Please ask the question.
Great. Thanks for taking the questions. Two follow-ups if I could please. First, just on capital allocation. It sort of felt to me, based on sort of the earlier answers around how Galp looked at the Brazil bid round in recent months, that there was perhaps sort of some degree of constraint in terms of how that was assessed from a capital allocation perspective, given the degree of allocation that you're putting towards the low carbon piece over the medium term. I wonder if you could talk a bit about how you think about the company's ability to be agile or nimble around capital allocation over the medium term, and particularly if
Oil and gas prices and the upcycle around that sustains over the medium term, the extent to which you can respond to that. Secondly, we're obviously seeing sort of signs in some segments of cost inflation reemerging in the industry in recent months. Bacalhau is obviously a very important project for the medium term for Galp. Can you just talk about sort of post the FID, not just sort of the drilling and completion side, but the extent to which the contracting is locked in around that project for the next couple of years? Thanks.
Yeah. Thank you. You know, to the point of agility, I think what we wanna do is keep our powder dry. Let's say we've got 50 years of 2P and 2C resources. At current production rates, we're growing our upstream production. We're committing quite a lot of capital towards that. We didn't see any reason to spend quite a bit of money on getting more resources in that funnel that, you know, will not even deliver cash flows or get our money back until well into the 2030s. Okay, the price is high today, but we can't predict what the prices are gonna be at the end of this decade. I think that was really us signaling that, yeah, Galp is a company that is determined to decarbonize its portfolio over time.
We have to make some hard choices, and we made a hard choice, so that we could actually, you know, reserve, I say, the firepower for things that are lower carbon, in due course. Now, cost inflation on Bacalhau, I think, Thore, perhaps an update on how we see costs in the Bacalhau project.
Thank you, Andy. If I may just add to the first, Andy, it's also that, you know, we have a very competitive upstream portfolio. You know, remember our breakeven is actually below $25 per bbl. Anything that wants to get in has to be really damn good. There's also a lot of competition to get into the Galp portfolio. When it comes to Bacalhau, we believe that Bacalhau is actually in a very good position. We have the EPCs locked in, and therefore we have very limited exposure versus cost inflation on Bacalhau, which, of course, is a very important field for us. The same goes both for the FPSO and also for the SURF contract.
as we see it as of today, we are in a quite good and robust situation when it comes to Bacalhau. Thank you.
Super. Thanks, gents.
Thank you. The next question comes from the line of Pablo Cuadrado from Credit Suisse. Please ask your question.
Yes. Good afternoon, everyone. Just two quick questions on my side. The first one is related to the production cost on upstream. It has declined by roughly $0.2 year-on-year. I was wondering whether you can tell us how you are expecting that to move in the next, for this year particularly, but also probably if you are able to give a little bit, a vision going forward and even when Bacalhau starts, that would be great. The second question, I'm sorry for coming back to this, is on operational cash flow.
I want to understand the guidance for this year, the EUR 2 billion, is that a reported figure, i.e., that's a figure that excludes any kind of working capital inflow to be recovered from the losses that you have had in 2021? Because I might recall that you have been highlighting that part of the working capital impact should be recovered as soon as the cash contracts are finally delivered on physical terms. I wanted to understand if that EUR 2 billion basically assumes any working capital inflow or not.
Thank you, Pablo. Can I ask Thore to talk a bit about the production cost guidance and Filipe on the OCF guidance?
Thank you, Andy. Thank you, Pablo. When it comes to production cost, actually our production cost in the fourth quarter was unusually good. There's a one-off effect in the fourth quarter that is related to the fact that we're transferring assets from our Dutch BV to Brazil. That helped it. Going forward, where we are guiding you is that we continue to say that you should expect it to be below $3 per bbl. That is the guidance we have. When Bacalhau comes, that will sort of clearly also sustain this level. Continued very competitive OpEx from the side of our Brazilian business. Thanks.
Pablo, the best way is to go to our slide 29 on sources and uses of cash. You'll see the EUR 2 billion is the clean OCF, and we're guiding now for OCF because it is clean. We're taking out every variation in one-offs, working capital, inventory effects. Two billion is a clean number. Then yes, on top of that, there will be a significant cash inflow from the FY 2021 , but that will not drive. Only OCF will drive the distribution policy. Thank you.
Thank you, Pablo. Our final question comes from the line of Mehdi Ennebati from Bank of America. Please ask your question.
Hi. Thanks. Thanks for taking my question again. A few follow-up questions. First, Andy, can you please make sure I understood well. You said earlier regarding the share buyback that you will do it slowly, but you also said that it will be 20%-25% of the daily traded volume. Did I understand well or no? First question. Second question, you have been impacted by the EUR 605 million working capital outflow due to gas derivative in 2021. And how much are you confident? How are you confident that you will get back the EUR 605 million in 2022?
Have you been approached by some of your customer telling you we can't pay it because we can't pay for the gas? We want to renegotiate the gas deal, et cetera, because it's too expensive. Or do you consider that the demand is pretty nice and you will get back, you know, your EUR 605 million? You commented quite a lot regarding your utilization rate of 85% for 2022, but I probably missed it. What was the average utilization rate in 2021? Thank you.
Mehdi, let me start with the first. I don't think we caught the last question, but firstly on the buyback. We are actually looking at about EUR 1 million a day, which will be about 3%-4%, you know, well below what I mentioned before. Only 3%-4% of share acquisitions in the market on a daily basis. Filipe, can you talk a bit about the working capital outflows?
Yes, Mehdi. We're highly confident that we're getting the money from the clients throughout the year. If I understood your question, putting in an extreme scenario, if clients were to stop buying the gas from us, then we could place the gas in the spot market. Financially, this is not going to be a risk for Galp in 2022.
Perfect. Thank you very much.
Can you ask-
And I just-
Can you ask-
Yes, I just.
Can you ask your third question?
Yeah. Just you said that, you know, your upstream or your FPSO utilization rate in Brazil should be around 85% in 2022. Can you please remind me what was your FPSO utilization rate in Brazil in 2021? Thank you.
Thore, can you help us with that?
Yeah. The effective rate for last year was in that order. It was actually around 83%, Mehdi. That's where we expect it to come up somewhat. 85% is what we are guiding you for next year. Thanks.
Excellent.
Thank you. We have some extra questions to take. The next question comes from line of Ignacio Domenech from JB Capital. Please ask your question.
Hi. Thank you for taking my last question. Regarding 2P oil reserves, you mentioned these were up 11%. However, 2P plus 2C reserves are down 8% year-on-year. I was just wondering why these reserves have dropped. Maybe if you could tell us what would be the recovery factor assumed Tupi Iracema. Thank you.
Ignacio, can you please repeat your question?
Yes, you mentioned 2P oil reserves were up 11%. However, 2P plus 2C have dropped 8% year-on-year. I was wondering why reserves have dropped. Then my second question would be on the current recovery factor assumed at Tupi Iracema.
Okay. I think, Thore, the question is about the reserves and the adjustment of the reserves and the recovery factor we're expecting from Tupi Iracema.
We are not publishing in detail the reserves and resources and what have been the changes with the individual, the different fields. We do that on a portfolio basis. As you correctly pointed out, the oil reserves, 2P, has increased in Galp with 16% last year. There was a decline on the natural gas reserves. That is really due to the fact that. You know, we have DeGolyer and MacNaughton that is doing the auditing of our reserves. The fact that we now have a gas contract in place in Brazil requires us then to book the reserves according to what the gas sales contracts are stipulating, and that led to a reduction in on the reserve side.
Overall, the 2P increased in Galp last year with 2% versus when you looked on gas and oil in totality. When it comes to the recovery factor on 2P, I'm not 100% sure whether I got your question. We continue to work on improving the recovery factor on 2P, and that is a very important reason for this new plan of operation and the development that was delivered by the end of last year, which actually sort of really targets to continue to improve it short term by more infill wells, longer term by looking into further development on the field, and even more than that, also looking potentially field life extension. That is now discussions that we have with the authorities in Brazil. Thank you.
Thank you. The next question comes from the line of Henri Patricot from UBS. Please ask your question.
Yes, everyone. Thank you for the update. Just a couple of quick ones from me on the Sines HVO project. Targeting FID in 2023. You're still looking at startup in 2025. Can you comment on the progress you're making under the waste feedstock sourcing strategy? Thank you.
Thore, can you help us with that one?
Thank you, Henri, for your question. Yes, we are very excited about this HVO advanced biofuels product that we are now currently doing the feasibility studies for as we speak. This is going to be one of the elements in our portfolio to turn Sines from a gray refinery into a green energy park. Waste feedstock sourcing is going to be a key element, and we are actually, as we speak, in direct negotiations with partners that we are looking to join into this product to make sure that we do the sourcing in the most optimal way. I cannot disclose more of this at this stage, but take it for granted that feedstock sourcing is an important part of this project. Thanks.
Thank you.
Thank you. The final questions come from the line of Michael Schwartz from Jefferies. Please ask your question. Michael, your line is open.
Thank you. I was wondering, what are the main fields or FPSOs in Brazil that are in decline, and which ones are still at plateau? Following on that, what is the average decline rate across your business in Brazil? I had a second question. In terms of your refining margin, what is included in terms of energy costs? You have your guidance for $2 per BOE for refining cash costs in 2022. Could you break down the components of that? Do you still have a long-term target of $1.7 per BOE for refining cash costs? Thank you.
If I can first, firstly, as you might imagine, our Brazil assets are essentially showing, you know, roughly flat production going forward, because we're ramping up a few fields like Sépia and the Ara fields. And clearly with Tupi and Iracema, we're seeing some declines. You know, overall, this is a mixture of various ramp-ups, some infill drilling, and some decline, keeping overall flat. You know, I don't really want to get into the details of each individual field, but you know, we see our Brazil assets delivering, as I say, flat until Bacalhau comes online, when we see the 25% increase. I think anything to add on refinery margin, Thore?
No, I think we have said what we want. We are not wanting to discuss the details and how our OpEx is really composed, Michael Schwartz. That's not the sort of level that we are disclosing at this level. However, what you can expect is that the $2 per bbl is a robust target. We are working, of course, to continue to optimize it, but as Andy said in his opening remarks, we did have operational challenges at the refinery last year. A very important part of our recovery is to make sure that we are now doing the maintenance that it was long overdue in the refinery. That's why we are looking for $2 to be a very robust guidance for you going forward as well. Thank you.
Thank you.
Thank you. There are no further questions. I would like to hand the conference over to Mr. Otelo Ruivo for closing remarks.
Because some may be confused on what I said about the buybacks. The 20%-25%, you have to be below that for the safe harbor regulations. That's why I mentioned that number. The actual number is between 3% or 4%, so well below where the regulations would stipulate. I just wanted to make sure you all were clear about that. Otelo?
Thank you for clarifying, Andy. I think this ends the session for today. Thank you for participating. Hope to see you all soon. Bye-bye.
That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.