Good morning, ladies and gentlemen. Welcome to the Galp second quarter 2021 results call. At this time, all participants are in listen-only mode. After the speakers' presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I will now pass the floor to Mr. Otelo Ruivo, Head of Investor Relations.
Good morning to you all, welcome to Galp's second quarter and first half 2020- 2021 results presentation. I would like to thank you for joining us today and wish that you are all in good health. Today, Andy will provide an overview of our operations as well as cover the recent developments and the short-term outlook. Filipe will take us through the quarterly and half-year results. At the end, we will be happy to take your questions during the Q&A session when Thore will join us as well. If you want to participate, please follow the operator's instructions at the end of the call. As usual, I would like to remind you that we will be making forward-looking statements that refer to estimates, actual results may differ due to factors included in the cautionary statement at the beginning of the presentation, which we advise you to read.
I now hand over to Andy.
Thank you, Otelo, and good morning, everyone. It's a pleasure to be able to present the Q2 results in the first half for Galp. These are solid results with robust cash flows, and now with a refreshed leadership team. Our first half operating cash flows were EUR 0.9 billion. We've seen a recovery in the second quarter in our Brent prices, but also the Iberian market demand. This business is not yet at its full potential. COVID is still constraining us, both in our Brazilian operations with other maintenance issues, but also in Iberia, with liquids demand still 25% below the equivalent quarter two in 2019. We have still delivered robust cash. We have been disciplined in our investment, and with the proceeds that we've received from GGND, we've delivered EUR 0.7 billion of free cash flow in the first half.
This has allowed us to decrease our net debt in the first half of the year. At the same time, improving our EBITDA, meaning our net debt to EBITDA is now around one. This unlocks an opportunity with the sustained macro, which should be able to deliver a variable component of dividend at the end of the year. Our upstream business has an implicit free cash flow around EUR 0.5 billion, EUR 736 million of operating cash flow and EUR 248 million of CapEx. This is a business with a high cash margin, and now relatively low CapEx, which yields these strong free cash flows. We also see, even with this modest CapEx, a business that will grow 25% to 2025. Operational performance could have been better. We've seen lower availabilities. We've seen a slower execution pace, and also an increase in the backlog of some of our maintenance activities.
Although we've seen a 3% increase quarter-on-quarter, we still have ongoing maintenance, but also inspection activities. As a result, we expect 2021 to be at the lower half of our range between 125,000 and 135,000 barrels a day. We are working hard with our partners to continue to optimize production, we still maintain safe operations as the top priority. That said, the growth funnel continues with Sepia not far off its startup, with Coral making great progress to start up next year, and Bacalhau starting well after its FID in June. In summary, this is a business with a strong free cash flow. Despite the increased maintenance, we see these cash flows continuing for the coming years with further significant growth in 2025. Moving to our commercial business, as I said, we've seen recovery in the quarter, 20% up quarter-on-quarter.
Actually, we expect H2 to be about 20% higher than H1. In the second quarter, our volumes are still 25% below what they were in Q2 2019, 10% below in our B2C business and 30% below in our B2B business, with aviation being 65% below the run rate in 2019. This is not all just disappointments. We've been able to reposition this business and are starting to improve our non-fuel contributions, which H1 to H1 versus last year are now 18% higher in absolute terms. We do see the return of aviation. We do see the return of bunkers. We do see growth in our G, Gas & P ower clients. Also, we see new opportunities in the EV charging space. We have about 700 charging units today, and we'll increase this to 10,000 by 2025.
Despite the headwinds in this business, it has delivered EUR 136 million of operating cash flows, with only about EUR 26 million of capital expenditure year- to- date. Moving to our industrial and energy management business. We have seen for the first half of the year, a positive EBITDA contribution from refining. The margins in the first half are around $2.1 per barrel. In the second quarter, $2.4 per barrel. Demand has been low, and diesel cracks have suffered as a consequence. We've also had outages in our FCC that makes gasoline. This is now back up at full capacity, taking full benefit from somewhat higher margins already in July versus Q2. We maintain our $2-$3 a barrel guidance. We have included CO2 price in our margin, and not anymore in our OpEx.
Our energy management business has had headwinds because of the liquefaction costs, our LNG liquefaction costs. From Q4, we see an improving situation here as we've renegotiated our access without the premium that we've suffered this year- to- date. Given the GGND sale, this business is showing very strong free cash flow. Going forward with Fit for 55, we do see increasing CO2 costs in this business. At the same time, we see a very favorable environment for our biofuels investment, particularly HVO, but also in green hydrogen. Today we're co-leading a consortium of 100 MW electrolyzer, which has recently received a EUR 30 million grant. In our renewables business, in Q2, we saw higher radiation and very strong solar capture prices of around EUR 70 per megawatt hour. This has allowed us on a pro forma operating cash flow basis to deliver about EUR 19 million.
We also see strong growth with 200 MW still to be connected up this year and another 100 MW in our funnel, so that we have 4 GW of firm projects under development today. This is ahead of potential expansions that we now have outside Iberia, and we've already put together a strong team for Latin America. This business grows from strength to strength with a very strong outlook. In summary, Galp is delivering against its guidance. Its free cash flow in the first half of EUR 0.7 billion is 75% of the guidance for the year, and it's actually 10% of our current market capitalization. We are maintaining our discipline. We spent around EUR 0.4 billion this year on CapEx, which is almost completely compensated by the proceeds from the GGND sale. Going forward, we are going to maintain our guidance.
This remains a volatile market, our net debt to EBITDA is now at one. With the current macro, we see it coming below one through the rest of the year. Given our remuneration framework we laid out in our Capital Markets Day, we should see this coming below one, which will allow us to pay a variable component. We can't promise this. We still have six months to go. Assuming a favorable macro, we should be able to deliver that variable component up to a maximum of base and variable of a third of our CFFO. In the first instance, we pay half of the base of EUR 0.25 in September. Then depending on the macro, we'll evaluate how much of that third of CFFO we would be able to contribute towards a variable component. In summary, this is a distinctive investment opportunity.
It has growth, and yield. Growth from existing businesses, and Upstream that will grow 25% to 2025. Growing our commercial sales in electricity and EVs, but also growing exciting new renewable businesses. Our renewable capacity will increase four-fold to 2025. At the same time building hydrogen and biofuels businesses. Through the agility of Galp, able to offer 40% decarbonization by 2030. This is also a business with a competitive yield. Our base dividend is now 6% of our market capitalization. On top of that would be any variable component that we'll be able to pay depending on macro and performance. To finalize. On Friday, we announced some management changes. I've now assembled a team that I believe has the capacity, the teamwork, and agility to take Galp forward. This is a smaller team, tight-knit. Galp aims to regenerate its future and to thrive through the energy transition.
We have in Torre, who will be now running our production operations unit, someone with a broad base of upstream and downstream experience that will be able to take that business into the future. We are discussing with some exciting candidates with global experience the opportunity to take our renewables and new business into the future. We have in Teresa a candidate that has both consulting but deep marketing and commercial experience that is joining the executive committee. We have assembled a team that I am convinced can take us into the future. I have an energy management reporting to me now, a reinforced team that touches all of our business, oil products, gas, LNG, renewable electricity, taking full value from that business. We have a new strategy. We have a refreshed team. We have a distinctive investment opportunity. It is now about delivery.
I'm going to hand over to Filipe.
Thank you, Andy. Good morning, guys. I will start on slide 14. You see our EBITDA of EUR 571 million. This is coming predominantly from upstream, as you would expect, given the current macro. More so as the mobility restrictions were still impacting our Iberian businesses during Q2. The downstream segments are gradually recovering on a quarter-on-quarter basis, but of course, not as quickly as upstream. Upstream production of 128,000 barrels per day reflects the lower restrictions. The EBITDA growth to EUR 467 million was really driven by rising Brent prices. Do bear in mind that what we produced but have not yet sold is booked at cost of production, not at market prices. In a fast-rising price environment, you only capture the EBITDA, the full benefit of the higher Brents during the following period. Commercial EBITDA was EUR 73 million in the quarter.
This reflects the higher demand in Iberia, even if we're still way below 2019 volumes. It's picking up. Industrial and energy management EBITDA was EUR 50 million. Now with energy management helped by derivative gains in EBITDA. Some of our gas derivative hedges expired during Q2, so we needed to book the gains in EBITDA, even if some are related to H2 deliveries to clients. This gain was about EUR 30 million and should partially revert during the second half of this year. Having said this, the fundamentals of the gas trading business are improving. Even if we are still paying until Q3 this year, the premium prices for access to the Sines Regasification Terminal. On refining, the Sines refining margin was $2.4 per barrel, and this was impacted by the operational constraints in the FCC, which are now fully behind us. As you know, renewables is not consolidated.
The JV results are presented under associates. The EBITDA that you see of - EUR 6 million refers mostly to overheads and development costs related with our renewables and new businesses areas. Renewables pro forma EBITDA, if our assets were consolidated in proportion to our equity stakes, was EUR 17 million in Q2. This is a very strong number, and it has benefited from the good capture prices during the quarter. You also see that still in EBITDA under the others line with -EUR 13 million . This includes EUR 18 million in Brent price hedging costs, which before we used to book under financial costs. It's now in EBITDA.
EBIT was EUR 305 million, supported by the stronger operational performance, and this already includes EUR 50 million in impairments from exploration assets, mostly in the Potiguar Basin. Associates are in line year-on-year, considering the contribution from the international pipelines and the solar ventures. GGND, of course, is no longer a relevant contributor to the associates line. Financial results, negative by EUR 4 million only. This includes a positive FX effect, as well as the reclassification to EBITDA of the Brent price hedging cost I just mentioned.
RCA net income was EUR 140 million, and IFRS net income was EUR 71 million. Now, IFRS net income was positively impacted by EUR 68 million of inventory effects. This comes from the rising commodity prices, of course, and was impacted by negative EUR 137 million of special items. Here we include the discontinued Matosinhos operations and the mark-to-market swings on the gas derivatives to hedge client exposures.
On slide 15, just a reminder that we started last quarter to provide an adjusted operating cash flow, the OCF indicator, as a proxy of our clean CFFO performance. That is excluding volatile inventory effects, working capital variations, and special items. OCF was EUR 470 million in the quarter. A strong number, considering that downstream is still picking up. You can see upstream continues to be a strong cash contributor, with over EUR 200 million in cash generated after covering all CapEx in the period. All the non-E&P units have delivered positive contribution despite the macro. In total, EUR 125 million from downstream and renewables. Renewables pro forma. During the quarter, CapEx was EUR 186 million, with most of the investments directed to growth in upstream projects such as Tupi, Iracema, and Bacalhau, and to our solar projects pipeline.
The quarter also collected the final EUR 25 million from the GGND stake sale, and it's captured here under the industrial line. Slide 16 shows our cash generation during the first half. This removes a bit the quarter-on-quarter differences. For the first half, EUR 900 million of OCF, EUR 800 million of CFFO, and this considers a working capital build with the higher commodity prices. Net CapEx close to zero, given the proceeds from GGND, and EUR 35 million related to the ongoing sale of FPSO P-71 to Petrobras.
With this, free cash flow was very strong at EUR 746 million during the first half, which after distributions, leads to net debt reduction of EUR 354 million. Net debt to EBITDA at around one time, which effectively has reached our target leverage ratio and will support our capital allocation framework. That's all from me. I will now pass on to Q&A. Thank you.
Thank you. To ask a question, you will need to press star one on your telephone. Please limit yourself to two questions only. To withdraw your question, press the pound hash key.
Your first question comes from the line of Mehdi Ennebati from Bank of America. Please go ahead. Your line is open.
Hello, can you hear me?
[Otelo]?
Yes, we can. Mehdi, go ahead.
Hi. Hi, Otel o. Hi, everyone. Sorry, the line was pretty bad on my side. Excuse me if I ask questions which have already been answered during the call. Please, just one question regarding the production. Your production averaged roughly 127 kboe in the first half. It seems that in the second half, there might be some maintenance impact, a little bit higher than the first half. However, we can see that the COVID-19 situation is improving in Brazil. In that kind of context, should we expect that the operator, Petrobras, might decide to ease a little bit the constraints on the FPSOs? Do you think we are still at the very early stage of the COVID-19 situation improvement, and it will take much more time for the situation to improve on the FPSOs? Thank you.
Mehdi, I'll answer that. Thank you for the question. In our plans and the way we are guiding you, we do not dare, at this stage, to factor in.
Positive upside at this stage. I would like to see that that could happen. In our guiding, we still try to continue with prudence. What we like is that we see that we're actually having more maintenance on the plan of what was originally expected. That's good for the longer term. It will hurt us a little bit in the shorter term. For the longevity of the assets, this is good. Our encouragement to Petrobras is that we now are catching up with the backlog, doing the maintenance that is planned for, and that will have some impact on production this second half. Going forward, this will be good for the life of the assets. Thank you.
Thanks very much, Thore. I have a question now on the refining side, please. With the closure of Matosinhos, you are lowering your jet fuel production. Also your middle distillate production. It seems, according to me, that the Portuguese market will be much more balanced thanks to that. Should we expect, or did you notice that you are now benefiting from an increasing premium on your petroleum products in Portugal due to a better balanced market, or no, because imports remain high from Iberia or from somewhere else?
Filipe, you want to? Filipe.
Hi, Mehdi. Can you hear me well?
Yes, I can.
We exported close to 50% of what we were refining. The premium is captured within the Sines refinery only. Also, a reminder that Matosinhos' main product was VGO, which is now trading at, I think, 37-40 discount, so negative crack. In a way, Sines was the prime off-taker of the Matosinhos VGO. It is now buying from the outside market at a hefty discount. Yes, it's a much more balanced market, and the mix is a lot more tuned to what the domestic market requires.
All right. Thank you. That you don't expect with the demand on petroleum products, which is now picking up, you don't expect any kind of positive impact on the local petroleum product market now it is more balanced? Or do you think that most of it has already been taken into account?
No, every time we can place the molecules in the hinterland, we capture the imports parity difference. Yes, we will benefit from growing demand in Iberia and in Portugal in particular. Where we are capturing a big premium is on RBOB, which you did not see much in Q2 because of the FCC constraints. Now this is now operating fully, and we are sending cargoes to the U.S. at a good premium. Thank you.
Thank you very much. Filipe.
Thank you. Your next question comes from the line of Alessandro Pozzi from Mediobanca. Please go ahead. Your line is open.
Oh, hi there. Good morning. I have two questions. The first one is on the discount on the realized price versus Brent. I think this quarter was slightly wider. Can you give us maybe a bit more color about what's going on and also, what would you expect that to evolve in the next few quarters? That's the first question. The second one, in order to better understand the potential variable payment, can you give us any sense of the potential difference between the adjusted cash flow and the operating cash flow for 2021, I guess? Probably the working capital is one element of that. Thank you.
Thank you, Alessandro. I'll take the first part regarding the discount to Brent. Yes, you are correct. We had somewhat higher discount to Brent for the second quarter, 8.9 in totality when you combining both what we realized on oil and on gas. This has two main factors. One, we have seen some softness in the Chinese market. That has been one of the primary destinations for our crude cargo. The differential have therefore increased. Secondly, we have also an impact on the fact that, since this is a combined realized price, that the gas prices, we are not able to fully to capture the upside because we have a cap on our gas price at $55. That gives us a cap, and that means that there is an, in totality, a somewhat weaker price. Thank you. Filipe?
Thank you, Thore. Alessandro, if you look at the first half, OCF EUR 914, CFFO EUR 817. Given the magnitudes of the increase in prices over the last few months, we would expect going forward, if the current macro.
stays that we want to see more consumption of working capital. The inventories are fully valued, and we have more money outstanding with our clients because the molecules are more expensive now. At current levels, this should be as high as it gets, the gap between OCF and CFFO. Thank you.
Okay. Thank you. Just going back on the discount, should we expect a similar discount in the coming quarters?
Alessandro, the way we see the market now, yes. I think you have to expect that it would be in that ballpark, somewhere above $8 per barrel as a discount.
All right. Thank you very much.
Thank you. Your next question comes from the line of Joshua Stone from Barclays. Please go ahead. Your line is open.
Thank you. Hi, good afternoon. Two questions, please. First is, I hope you could be just a bit more specific on the maintenance in Brazil. You mentioned the backlog. Maybe how large is the backlog, or how much production will be offline this year because of that? When do you think you'll be able to get through this backlog and sort of be back to more normal conditions? The second question on refining, you mentioned the impact of rising CO2 costs, or at least you're including that in the margin now. Maybe just talk about what is that impact today, and where could it get to if carbon prices continue to increase? Thank you.
Thank you, Joshua. There is more maintenance in Brazil now, and that is needed because we actually, as we are speaking, have 14 wells out of production, 11 of which are producers. The three others are injectors. This is important for us in order to keep up the issues. The 50% of the wells that are out, are out due to the fact that we have an issue that is called stress corrosion due to CO2. This is preventive maintenance. We are taking them out just in order to inspect them to make sure that they are full, well integrity still is being preserved. These inspections take some time. They are so far going quite well, but the wells are out of production. It will be speculating on me to say then what would be the production impact.
As you know, there's a balance there, depending on also what sort of injection capacity you have versus what is the capacity also for gas injection. I think it's safe to say that we are at least in the area of around 10,000 barrels that is out of production due to this. Thanks.
If I can address the CO2 cost, Joshua. Yeah, at the moment, we have high CO2 prices, so in the second quarter it affected about $0.30, so $0.30 a barrel. I think this has potential to go up to more like $0.50. At the moment we've got 65%-70% of our CO2 are covered by free allowances. With the Fit for 55, those allowances will decrease over time. Our challenge is obviously to put in the efficiency projects and the hydrogen projects in order to reduce our CO2 footprint. We can see those allowances, the decrease of the allowances, moving towards from 2026 to 2.5% a year decrease from the 1.6% we've seen. This is already with our margin guidance. Thank you.
Great. Thank you.
Thank you. Your next question comes from the line of Sasikanth Chilukuru from Morgan Stanley. Please go ahead. Your line is open.
Hi. Thanks for taking my questions. I had two, please. The first was related to the dividend and the variable component for 2021. Can you provide more color on how we should be thinking about the level of the variable component? Assuming second half CFFOs are similar to that of the first half, the base level of EUR 0.5 per share would go on to represent around 25% of the overall CFFO. There is room for the variable component to be up to 8% of the CFFO. If this were to play out, what additional criteria would you be looking at before declaring the variable component? What would it take for this variable component to reach this 8% of CFFO? The second question was related to the production cost in the upstream segment.
It seems like there's another dip in the cost to $1.2 per BOE, down from $1.8 in 1Q and $2.8 in 2Q last year. Lower personnel on the FPSOs had been highlighted as one of the key reasons for the decrease in 1Q. I was just wondering what are the reasons for this further increase in production costs? What's the guidance for the remainder of 2021, and what would you highlight as the normalized cost of production for these FPSOs now?
Thank you for your questions, Sasikanth. I'll take the first one, and I'm sorry to save the second. Essentially, the variable component, the considerations is just going to be a calculation. As I say, with net debt to dividend of 1 now, we will see the rest of the year. We can expect the current macro. Obviously, we will be generating operational cash flows similar to the ones that we had in the first half with the same macro. This should allow us to deleverage further. Then at the end of the year, we will see what our net debt to EBITDA is, and we'll make up with a variable component up to a third of CFFO, as long as there's space up to the 1 net debt to EBITDA level.
In order to, obviously, serve the space, if we deleverage a lot and there's space, we pay the full one-third of CFFO, being the variable plus the base. Obviously, that's contingent on what that CFFO is. At the current CFFO rate, that then obviously delivers a substantial amount of variable component. I think this is not contingent on our expectations of future macro or anything. This will just be a calculation at the end of the year that we will then approve through the AGM to distribute to the shareholders.
Sassi, to your question regarding our OpEx. The two key factors driving it down is, one, less POB on board on the installations than was expected due to restrictions that COVID has put. Secondly, less number of well intervention that we had in our plans. When it comes to guidance, we will still remaining that you should expect it to be normalizing between $2 and $3 per barrel. That is the sort of guidance on OpEx that you should expect. Thanks.
Very clear. Thank you very much.
Thank you. Your next query comes from the line of Jon Rigby, UBS. Please go ahead. Your line is open.
Thank you. Two questions if I can. The first is, Andy, can you just sort of revisit what took place on Friday with the changes in the executive committee and the drivers behind those changes? I'm struck by the fact that people have left their roles without you identifying replacements. What was the driver behind the timing and the reasons? Obviously, you're sort of six or eight weeks from a big strategy event, which they all attended. I'm just sort of struck by that. In fact, actually, in overall terms, the sort of context or lack of context that we've seen with any of the changes at the executive level since your predecessor left in January. I wonder whether you could just talk a little bit more about that.
The second question is, I'm struck by the share price performance this year, which has been weak, for any number of reasons. You've just talked about variable dividend component. Have you thought more about whether actually using that variable element as a share buyback as opposed to a bonus dividend would make some sense at this point? Thanks.
Thank you, Jon. Thanks for your question. Yeah, what's behind the leadership changes? Well, if I go through this almost six months now. I inherited a team. They had their own strengths, their own weaknesses. I thought if I looked at my task list, I had first clarify the strategy, clarify the capital allocation, make sure we understand where we're going, what we're doing. We leveraged a whole top 50 people in order to come up with that strategy, which we then presented at the Capital Markets Day. Over this period of time, I've obviously observed the performance of the team as well as the individuals. For me, clearly, this is a challenging agenda we have with the energy transition. I need absolutely the best team to go forward.
I talk about a team that has the right capacity, so strategic capacity, very much for us to work into that future. Teamwork, our ability to work together as a team across all our businesses, which integrate quite a lot in a number of areas. Also that agility, that ability to make decisions quickly and to make sure we take the opportunities that we need to take. That has then driven, for me, what is a much tighter, much more aligned team. The third thing on my task list is just execute, is then to get after this business with a team that I have absolute confidence in their ability to do it. Now, you say, "Well, you haven't got a full team yet. You've got a blank box here."
Well, I have to say, what I wanted to do is be clear about that team, the ones that I have already in the company I want to take forward. I'm not going to wait for a long, long time as we recruit the very best person to run our renewables business to wait for that moment before I announce the changes. This does come with it not only a change of strategy, but a change in the way we lead in Galp. This is a big change for the company. I now have the leadership team, I believe, or the executive committee, I believe, that can take that forward.
I have to say, the people that we discussed today will also, the CEO that I'm going to put in that sixth slot, I think will have a real capability to build a global world-scale, profitable, renewable business. It's exciting for me. I now actually look around the table, and I have absolute confidence in the people around me will be able to deliver this challenging strategy.
Okay. Thank you.
On your second point, Jon, we've had a lot of discussions with a lot of shareholders since Capital Markets Day, and this issue of buybacks versus cash dividends has come up. I have to say that the jury is split on this. Some liking cash, some preferring us to use the buybacks. We will continue to study this. We will continue to consider whether a buyback versus cash dividend is the best way to reward shareholders on the variable components. We will continue to talk to all of our shareholders about that. At the moment, it's cash dividends.
We will continue to review the option of using buybacks. You are right, the share price has gone down more than I would hoped, but that's where we are today. I think and I hope that people recognize we have got a really differentiated investment case here. I think we've got to make sure that we get our message out clearly, and we now have the team that can execute and deliver what we say we're going to do. Thanks, Jon.
Thanks a lot.
Thank you. Your next question comes from the line of Biraj Borkhataria from RBC. Please go ahead.
Hi there. Thanks for taking the question. I've got a couple of quick ones. The first one is just on taxes. As I'm thinking about the second half of the year, do you expect any meaningful differences between cash taxes and P&L? The second question is something you mentioned about underlift. Are you able to quantify the underlift position as of the second quarter? Thank you.
Hi, Biraj. If you look at H1, and not Q1 and Q2 this year, H1 gives you a good view of what the P&L tax looks like in an environment where it's really all about upstream. We have some bit over 60% taxation. We do expect as downstream and refining and commercial starts to contribute much more meaningfully as we get into Q3- Q4. We should expect to see the P&L tax rate to close to 50%. On a cash basis, and if you look at the cash flow statement, you'll see the numbers are below that. On the underlift positions, hence my comment on you don't see in the upstream EBITDA all the benefit of the rising Brent prices. So far, I think we had one full cargo priced at about cost of production was $40 when Brent was in the 70s.
If you take, say, one million barrels times 30, say EUR 30 difference, you have about EUR 30 million that will be recognized during Q3. Thank you.
Thanks for the color.
Thank you. Your next question comes from the line of Matt Lofting from JP Morgan. Please go ahead. Your line is open.
Great. Thanks, gents for taking the questions. Two quick ones, please. First, Andy, I sort of noticed during the call that you referenced several times the focus and the importance around execution from here. When we sort of take stock sort of post the CMD and maybe taking a time horizon to year-end, could you be a bit more specific around what you see as the key issues and key deliverables for the rest of the year? Secondly, just following up on the sort of the previous comments and questions around the renewed exec management structure. One of the things that struck me was the consolidation of the industrial units alongside upstream under Thore. Could you expand on how that signals an intent or a shift around the day-to-day running of Galp's businesses?
Mindful that the upstream's largely non-operated today to what extent that could generate synergistic benefits? Thanks.
Thanks, Matt. Thanks for those questions. Firstly, about execution. I largely talk about execution around a strategy, but I also want to talk about execution on a day-to-day basis. Look, in the Q2, yeah, I know it's a non-operated position, but we're still seeing some softness in our production numbers. I think we need to stay on top of our partners to make sure that we are getting the production that we need. We've had problems with the FCC. We need to make sure that all our units are firing and going forward. There's something in my mind still about delivery that we need to get deep in the organization. For me, it's also about performance management. It's also about understanding where we are today as a business. What is the best business in our industry or even outside our industry, and what's our gap?
What is our gap that we can close if we get the right culture through the organization? This comes with everything from how we performance manage, how do we reward people, how do we motivate people? This is a very kind of deep delivery and execution strategy that we're going to go into today. It's an absolutely crucial part of this, is that we get a team around us that have that focus, and we create that context going forward. It's about operational delivery, but it's also about performance management. When I touch then on why do you bring upstream industrial together? If I think about the business, if I think about what do I have as a business challenge in Galp? I think very clearly of three things we've got to be really good at.
We've got to be good at managing oil and gas operations, investments in big projects. Project management, operational excellence. What you get in a refinery in terms of the equipment and the pumps and the compressors and the bad actors and the cost per barrel operating performance is not so dissimilar from managing an FPSO with the units you have on top of it. That's our first, and we'll come back to that. That's the first most important thing to do, manage operations, manage our projects, getting the most for the capital we put into those things. Secondly is how do we manage our sales to our businesses, to our customers? How do we give that whole ability to sell at a premium our products into the market?
How do we think about how we cross-sell, how we digitalize, how we exercise that interface and delight our customers? A completely different mindset from the oil and gas operations. Thirdly, how do I build a new zero CO2 business, a renewable business, a business that is global, growing, focused on renewable energy, looking also things at battery value chain, but a completely entirely new business with different ways of thinking about how you maximize value. That's the third big area of our business. Those are the three big businesses.
I have in Thore someone who has actually some downstream experience before and some marketing trading experience, able, in my mind, to look at that whole base of upstream and that industrial business and optimizing that, getting the lowest cost delivery, but also strategically placing that industrial business and the green energy part going forward. This is very much in my mind about, what are the key skill sets that will unlock superior performance? Also, I know Thore, he's a great safety leader. Making sure in the way we manage our assets, we're keeping people safe day in, day out. That's the fundamental thinking behind the new structure, and between why we've given this additional challenge to take on.
Great. Thanks, Andy.
Thank you. Your next question comes from Raphaël Dubois from Societe Generale. Please go ahead. Your line is open.
Hello. Thank you very much for taking my question. I have only one left. It's about the renewables business, and the solar generation sell price that you could obtain in Q2. As much as it must be enjoyable to see such an increase in your earnings generation, I'm a bit surprised that you could obtain such a nice increase. I would have expected that you will transact in this division in a way that you will be immune from such volatility. Could you please remind us of the weight of your PPA contracts and how much volatility should we expect from this division going forward? For the moment, it does not matter too much because it's still quite a small division. As you deploy further gigawatts, it will obviously have an impact on your overall earnings.
It would be great if you could give us more visibility on how variable this sell price could get with your contract. Thank you.
Thank you, Raphaël. Indeed. If I just talk about the portfolio we have today, this is a legacy portfolio that actually enjoys a floor in the Spanish market that gives us a base return on the downside, but is completely exposed to the upside. This is as you would really like it. Protected on the downside, but exposed to the merchant market on the upside. That clearly is the position we're in today, so that's why we can enjoy the increase. Going forward, we're not going to enjoy that. Going forward, we're going to have to consider how we are managing the balance between merchant market and PPAs, because obviously in time, as we grow that portfolio, we're going to have to consider how much we risk cover and what's our view on that market.
Clearly, as we go overseas, we're probably going to be, because we expose some other risks, we'll probably be more wanting to go to more PPAs. This is a balance of securing a base return, but also enjoying some of the upside. I don't know, Filipe, you want to add anything more to that?
Raphaël, what you see in Iberia, as we speak, is quite a number of, I would say, almost distressed situation. People that have projects, they're trying to build, trying to get financed, trying to get PPAs at very distressed price. It's not at levels that we would want to lock in our margins for 100% of our production for the next 10 or 15 years. At Galp and in Iberia, we have an integrated model, so we can manage some of those risks. Outside Iberia, yes, we would want to protect at inception or very close to inception, a lot of the volatility. Thank you.
Great. Thank you very much.
Thank you. The final question comes from Jorge Guimarães from JB Capital. Please go ahead. Your line is open.
Hi. Good morning. I have two questions. The first one is related to renewables. I have a feeling that the installation of the portfolio is running behind schedule. If I'm not mistaken, it should be close to 1.9 GW by the end of 2021, and we'll be at 1.1 GW. In your view, what was the main reason behind this delay in installations, which given the current environment, is costing some loss of opportunity or opportunity cost? Anyway, what is the main reason for the delay? Can that be should be tackled? This would be the first one. The second one is it possible to provide us with an estimate for the full closure cost of the Matosinhos refinery? If so, how much of that is already provisioned and how much is not?
What do you plan to do with the terrains where the refinery was located? Thank you very much.
Thank you, Jorge. Yeah. Look, on the renewables. We are seeing some delays. Those delays are actually quite predictable. They're COVID related. They're supply chain related. There are also licensing issues that we have some delays. This is really just a timing issue. We don't believe this leads to any reduction in the volume going forward. In our deal with ACS, because we're actually only paying at milestones as things come online, it doesn't mean we've sort of paid money up front and are not enjoying the benefits. The cash flows go backwards as well as, or the capital injections go backwards as well as when the projects go backwards with those sort of supply chain and licensing delays. It's obviously a little bit disappointing that we're seeing some delay, but it doesn't actually affect the economics of what we've been doing.
I think perhaps I'll ask Filipe to talk about Matosinhos. Matosinhos obviously is a difficult closure for us. We've completely closed down operations apart from cogen. We're engaging with the local authorities there and talking about what we can do with the future of that great bit of real estate in the heart of a really vibrant city. Clearly, we're going to have our logistics park, and we have a lubricants blending plant there as well. We have a number of activities, but we're working quite closely with the authorities on what we can do there. I think Filipe has some of the numbers on provisioning that he can give you an update on.
Hi, Jorge. The provisioning was, when we announced, was close to EUR 200 million. This includes decontamination. It includes the decommissioning per se. We have, of course, gone through the difficult discussions with people and the redundancy packages. That is part of that. We have not considered any value of the land because that is open for discussion. What will be used and for what purpose. This may still take a while to figure out. We have no changes. The activity is going well. It is a delicate exercise to decommission a refinery. Safety is paramount, and it's all going according to plan. Thank you.
Thank you. We will move to the CaixaBank question from Pedro Alves. Please go ahead. Your line is open.
Hi, everyone. Just a final one. I'm not sure, probably, and it's not easy for you to understand right now. Whether or not, if you could comment or at least give any additional color on your side on the news that the Portuguese government is proposing to introduce a cap on fuel retail margin. Thank you.
Thank you, Pedro. Yeah, it's an interesting moment to be in Portugal. Clearly for us, we don't know what this legislation is going to look like. We're waiting to see the proposal. They talk about potential for short-term interventions and extreme margin cases. We're going to have to see if that actually impacts us. I guess, if we look at the AdC report, what I think we've been disappointed is that there were actually a lot of errors in how they calculate their margin. We would actually argue about 80% of that margin increase they talk about is actually errors in their calculation. To be honest, we haven't been very vocal on this, but that's really disappointing. Just to give you a sense. If you look at the price at the pump today in Portugal, 12% goes on that whole distribution cost.
That's 700 fuel stations to manage, 900 direct staff, 2,500 individual indirect, also working with our partners. An enormous number of people that hasn't been addressed anywhere. If I look at that business, so I look at that commercial business, it's only generating about 7% of our total EBITDA in Q2. If I look at refining, 1% of EBITDA in Q2, so 8% in total and 40% of our employees in Galp. This idea that somehow this is where we make all our money is we have to get this news into the public in Portugal, because it's really sad. We have 60% tax, one of the top five highest tax bases in Europe.
I think we're barking up the wrong tree here, and I just want to make sure that everyone on the call knows that we will make sure that our position is made very clear to the Portuguese government. Any type of regulation is very negative for any kind of country. We're really keen to get the truth out there so people can make up their own minds. Thank you for your question, Pedro.
Thank you.
Thank you. That concludes the Q&A. I will hand the floor back to Mr. Otelo Ruivo. Please go ahead.
Yes, thank you. This ends our Q&A session. We hope it was a helpful one for you. In case you may have some follow-ups, the investor relations teams will be here for you as always. Reach out if that's the case. Thank you for participating. I wish you can enjoy some good break during the summer. [Foreign language]