Good morning, ladies and gentlemen, and welcome to Galp's second quarter 2020 results. There will be a presentation followed by a question-and-answer session, at which time, if you need to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I will now pass the floor to Mr. Pedro Dias, Head of Strategy and Investor Relations. Please go ahead, sir.
This is actually Otelo here. Good morning to you all. Welcome to Galp's Q2 2020 results conference call. Today, Carlos will provide us with an overview of the recent developments and only a short-term outlook, given the current volatility. Filipe will take us through the quarterly results. At the end, we will be available to take your questions when Thore will join us as well. As always, I would like to remind you that we may be making several forward-looking statements. Actual results may differ due to factors included in the cautionary statements available at the beginning of our presentation, which we advise you to read. Thank you. Carlos, the floor is yours.
Thank you, Otelo, and good morning to you all. I hope that in these challenging times, you and your families remain safe and healthy. As we all knew that the second quarter was going to be a challenging one for everybody, and facing such unprecedented challenges, the priority quickly became adapting our operations to increase the resilience and also the flexibility of our businesses. Still our lighthouse is unchanged, and that is to deliver Galp's transformational and growth strategy. Looking at the quarter and looking at our upstream activities, we are seeing that they were only marginally impacted, having quickly reinforced preventive measures to ensure the safety of our people and, of course, the safeguard of the continuity of our operations. In the downstream operations, however, we had tough times, especially during April and May.
The resilience of our overall portfolio and the immediate actions put in place have allowed us to mitigate the effects of the pandemic and the crude oil price war. Free cash flow remained positive year to date. We have reinforced our liquidity and remain with a solid financial position. First, let's look to the market environment evolution so far, and I'm on slide five. The worldwide lockdown led to unforeseeable demand reduction and a massive inventory buildup. We have observed Brent prices hit $13 per barrel in April and gradually recovering to just above $40 as we advised. On the product side, refining margins were at first supported by cheap crudes and cracks were helped by opportunistic trading demand. This quickly faded, and the low consumption resulted for the inventory buildup as pressures, the cracks of all the products.
In April and also in May, we saw gasoline and diesel demand declining over 50% year-on-year. As lockdown measures in Iberia were gradually lifted, demand picked up better than expected. Uncertainty remains high. Given the recent developments, we are now adjusting our macro assumptions. We are now using Brent at $40 in 2020 and increasing by $5 per barrel over each of the following years. Long-term Brent price has been lowered to $60 per barrel in real terms 2019. Of course, that we naturally test our balance sheet according to these revised assumptions, and no impairments were registered given the quality, and I would say also the resilience of our assets. Let's now looking into our operations in the quarter, and I'm in slide six. As mentioned, our Upstream operations so far were only marginally impacted by this pandemic.
In May, two FPSO stoppages in Brazil resulted from the identification of COVID-19 cases. All in all, just around 3,000 equivalent barrels per day impact in the second quarter. We have also the new unit that will develop South of Atapu, that has started in June, ahead of plan. After the unitization agreements, I would like to recall you that Galp has only 1.7% stake here, so not that material. On Refining, tough times. The significant demand decline and the high level of inventories led us to stop Sines Refinery and several units in our Matosinhos system. The Midstream operations were also impacted by harsh environment with the demand destruction and strong supply levels into Iberia, putting high pressure on also natural gas prices. With the lockdowns, April and May were very difficult months for our Commercial business, which shows in oil and natural gas volume sold this last quarter.
June was already a more supportive month and keeps improving in July to date. On the Renewables front, we have set up a joint venture under which Galp acquires 75.01% of the Spanish solar portfolio of 2.9 GW and the ACS Group remains as our partner with just under 25% with a joint control structure. I'll say that this agreement follows the strategy we had set for our Renewable business, which is to develop a competitive portfolio through partnerships while maintaining a relevant role and integration with Galp's activities. The transaction value remains unchanged, which means that on an enterprise value of around EUR 2.2 billion, which includes all acquisition, development, and construction costs associated with the existing and future portfolios. On a 100% basis, pre-project financing.
Galp is to pay an amount that should range between EUR 300 million and EUR 350 million at the closing for the stake acquisition and previous development costs, with the final value dependent on the development status of some of the projects at the deal completion date. This includes already one or around 1 GW already under operation, fully project financed. This agreement maintains the development and construction of the portfolio with Cobra, which is an affiliate of ACS Group. We are happy to have partnered with ACS Group, as this JV combines Galp's integrated energy position in Iberian market with ACS renewables engineering and development expertise. This is a good combination. The transaction is expected to be completed before year-end, and likely still during the third Q, after the EU competition approval. Moving now to slide number seven. Let's look at the short-term call to action programs.
In this front, Galp responded quickly to the challenging environment resulting from the COVID-19 lockdown and also the oil prices fall. Words like resilience, flexibility, and adaptation capacity were and will continue to be critical. Zooming in on what we are doing actively and with visible results already in the quarter. On the Upstream, operations continue to be optimized, allowing us to keep production costs consistently below $3 per barrel. The cost-saving initiatives halved our Upstream CapEx plan with almost all those initiatives being implemented. The team is successfully reducing services and other overhead costs. On Refining and Midstream, we adjusted the level of our operations to deal with a very low demand, and as I mentioned before, high level of inventories. This allowed us to increase our gross margin, mitigating the effect of the more depressed environment and reduce our operational costs.
Additionally, this slowdown time was used to bring forward some scheduled maintenance works. On the Commercial side, several key initiatives were promptly put in place to enhance the robustness of the business and also to adapt to a unique market condition environment. The company also took this opportunity to reinvent the business and to reach clients in a more digital and contactless way, innovating especially the non-fuel offer. We established agreements with several partners like Uber and Glovo, for example, which allowed us to reinforce and explore different sales channels that are linked with last mile logistics. We kept also a very special focus on optimizing our operations and of course our cost structure, that will remain. On the Renewables and New Businesses, we are adjusting our short-term plan, keeping strategic development on these new divisions.
Our efforts go beyond improving efficiency of our operations and also includes the adjustment of Galp's corporate and business units, organizational structure. The efforts are paying off. Galp remains very much on track to deliver its over half billion CapEx and OpEx reduction targets, having over 90% of the identified initiatives behind, and that ambition already being implemented. Looking ahead. I'm now in slide eight. Starting by short-term outlook, which although limited considering the still reduced visibility and also high level of uncertainty, Galp and its partners expect to resume the connection of wells, and therefore the ramp up in production. In fact, by the end of June, we connect the third producer well in Berbigão through FPSO. Of course, we remain cautious on how COVID-19 may impact our operations in the future.
We should be able to grow our production at about 10% year-on-year basis, which is slightly below our initial guidance that was ranged between 13% and 17%. As mentioned before, refining environment remains depressed and under pressure, economic incentive to push our system seems not to be there. Utilization of our refineries, as well as supply and trading volumes, will depend on how the market evolves from this point onwards. On Commercial, although we are seeing positive, supportive signs, we prefer to maintain a cautious approach as the full economic fallout from this crisis has yet to be understood. We should see an improvement of this segment contribution, especially during the summer, uncertainty remains.
On the right side of this slide, we want to flag that despite the challenging 2020, and the attention we need to put on the short term, we are continuing to position Galp for the future of energy. It focus on value protection and enhancement of our key strategic projects, as you already know well. That will play a major role for our future. Of course, we are well-aligned with our partners conducting relevant value improvement programs around these key assets. At the same time, we continue to evaluate opportunities to adapt to market trends and also to regulation, increasing our competitiveness and reduce our carbon footprint as part of our strategy to address the energy transition challenges. We are analyzing the production of lower products, carbon content, in our industrial facilities, anticipating market trends and reducing the carbon intensity of our portfolio.
Namely, through co-processing or reconfiguration of some existing units. These are potential options to increase Galp's competitiveness on refining and midstream with marginal investments over our existing industrial base, and that may also benefit from the alignments with EU guidelines. Longer term, we are also analyzing new energy sources and technologies such as hydrogen. In this case, Galp sponsors with other companies a feasibility study for a pan-European project leveraging on a cluster that could be implemented in Sines to develop a green hydrogen supply chain project. These kind of projects may have a natural integration given the current circumstances, while actively preparing future alternatives that may fit our strategy and also our investment criteria. To finish, on slide nine, just a couple of words. Clearly we were significantly impacted by the commodities price crash, and this obviously impacts cash generation.
Still, at the cash spending reduction initiatives are being implemented. We are increasing the resilience of the company, leading to a going-forward free cash flow neutrality at $20 per barrel. This assumes a net CapEx that's a range between EUR 0.5 billion and EUR 0.7 billion that should support our free cash flows on average during this year and next year. We need to be prepared to navigate through the uncertainty and volatility expected over the next few quarters, ensuring Galp's financial position to be as strong as possible to protect and support our transformational and growth strategy. With this in mind, and as part of the mitigation measures undertaken to preserve the strength of Galp's financial position under unprecedented market circumstances, no interim distribution will be made during the second half of this year in relation with the 2020 fiscal year dividend.
This considers the prudence and the short-term flexibility we want to maintain, as mentioned to you back in April. The proposal for the 2020 dividend shall be made considering the full-year results expected to be announced in the first Q of 2021. Our commitment for the rest of this year is to keep our financial discipline, employing efforts to control the net debt, and therefore to protect company's balance sheet. Three key message that I want to leave with you from today. We have a highly resilient portfolio, and we are successfully implementing value-protecting measures that are increasing this resilience even further. Our free cash flow line already tells everyone that. The second point is that we have a unique transformational and growth investment case, well supported on clearly identified projects. On top of that, several potential options to explore.
We are keeping the same discipline that brought us today. I will now hand over to Filipe to go through the financials. Filipe?
Thanks, Carlos. Good morning, guys. I am on slide 11. Group EBITDA of EUR 281 million in the quarter. This is down more than 50% year-on-year, and this is from the very harsh environment on most of the businesses we are operating in. Upstream, EBITDA was EUR 204 million. That's 50% down year-on-year. This with an average Brent of under $30 in the quarter, and more than offsetting production growth. Bear in mind here we have about EUR 50 million in positive underlifting effects during Q2. Refining and Midstream EBITDA was impacted by the significant slowdown of the refining activity and a lower contribution from supply and trading. Commercial EBITDA of EUR 59 million. That's down over 40% from last year, impacted by very weak demand in Iberia. Group EBIT of minus EUR 57 million already includes the impairments of EUR 92 million related to small exploration assets.
This is a reflection of a conservative assessment of the discovery's potential. This is not from our lower Brent price assumptions going forward. We have no impairments coming from the revised long-term price assumptions. Financial results of -EUR 10 million in the quarter with a negative FX exchange variations on our Brazil currency cash positions and losses on CO2 derivatives compensated by positive mark-to-market valuation of derivatives to cover natural gas price risk. Net income was a - EUR 52 million, whilst under IFRS, net income was a -EUR 154 million, with a negative inventory effect of EUR 84 million. On slide 12, and cash flow. We start with IFRS EBITDA, which includes the negative inventory effect. Working capital release was only EUR 11 million in the quarter with lower capital tied up in inventories, but with elevated payments to suppliers for some cargoes priced during Q1.
Taxes paid were EUR 83 million. This is significantly higher than what you see on the P&L taxes, this mainly reflects the timing mismatch of SPT payments, so the Special Participation Tax in Brazil, which was affected by the more elevated Q1 Brent prices. All this leads to a CFFO of only EUR 160 million during Q2. CapEx payments were EUR 149 million in the quarter, we also have the net cash in of EUR 83 million from the equalizations related with the Lula, Sepia, and Atapu unitizations. Please note that our net CapEx guidances always consider these equalization proceeds. We are expecting further equalization proceeds from the Berbigão/Sururu unitization likely next year. The derivative outflow number of EUR 43 million you see here is basically driven by the CO2 licenses impact as per our announcement recently, this is partially offset by the unwind of the outstanding 2020 refining margin hedges.
Now, given the current market circumstances and the volatility, we opted to crystallize this value. Free cash flow was -EUR 10 million in the quarter and positive EUR 52 million during a most challenging first semester. Some payment phasing impacts on these numbers. Also bear in mind that we include within free cash flow, all operating lease payments under IFRS 16, and that is the interest component and the principal amortization component that is within our free cash flow numbers. During the quarter, we have also paid to the Galp shareholders EUR 318 million in dividends related to 2019, as well as EUR 86 million to Sinopec, our partner in Brazil. With this net debt increased EUR 436 million in the quarter. Moving to the balance sheet on my final slide 13.
The net fixed assets decline results from the accounting effects of the unitization and the exploration impairments of EUR 93 million. Net debt to EBITDA was up to 1.1 x, with the combined effect of both higher net debt and lower EBITDA. To conclude, during the quarter, we have increased our liquidity to EUR 3 billion with cash of EUR 1.7 billion and undrawn credit lines of EUR 1.3 billion. We're now happy to take your questions. Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. As a reminder, that's star one on your telephone keypad to ask a question and wait for your name to be announced. Thank you, sir. Your first question comes from the line of Biraj Borkhataria from Royal Bank of Canada. Your line is open.
Hi. Thanks. It's Biraj, RBC. Couple of questions, if that's okay. The first one is on your new production guidance. I know Galp typically puts some contingency in there. Could you just outline how much contingency you've put in for either slower well connections or any other potential delays due to COVID-19-related incidents? The second one is on the dividend. With the big CapEx cut this year and then obviously the new structure of the renewable deal, at 1x the net debt to EBITDA, your balance sheet looks actually quite healthy. I was wondering, can you just comment on your intention for the dividend going into 2021? Is it just a pause and then the intention is to get back up to the prior run rate, or is there anything else within that? Thank you.
Hi. Good morning, Biraj. Thank you. I will address the dividend question, and Thore will address the production guidance. In relation to the dividend, we are living in uncertain times and therefore, decision that we are taking now, is to guarantee that we are protecting and preserving our balance sheet. Further decisions should be based on full-year cash availability. Our financial position, the outlook that we will have at that moment in time. I think we have to wait for the second half of the year to see how the things will evolve based on this principle we will take.
Thank you, Carlos, and thank you, Biraj, for your question, which is actually a difficult question because the big challenge for us here is actually to estimate the COVID-19 impact. I think you pointed to it very correctly. As Carlos said in his opening remarks, we have had direct impact on production on two units during the first half
We have also had somewhat slower well ramp-up due to COVID and actually the restrictions that we're putting on operation in order to preserve the health and well-being to the people. We have made a guesstimate for the second half what that will be. I believe that what we have given you as guidance, namely that we are able to increase year-on-year with 10%, should, under normal circumstances, be conservative. The big unknown, and which we really don't, is what will happen with COVID during the second half of this year. That is the big unknown, and we have put in some cushion for that. Thank you.
Would you like to take the next question, sir?
Can we move on to the next question, please?
Thank you, sir. Your next question comes from the line of Oswald Clint from Bernstein. Your line is open. Oswald Clint, your line is open. There's no response from that line, sir. I'll move on to the next question. Oswald Clint, your line is open. Moving on to the next question, sir. Your next question comes from the line of Mehdi Ennebati of Bank of America. Your line is open.
Hi. Good afternoon all, and thanks for taking my question. Two questions please. The first one regarding with the working capital. During the first quarter compliance call, I think it was Filipe who guided on the working capital release during the second quarter, and this obviously did not happen. Can you explain us why? Is it related to the maintenance that you have made? Should we still consider working capital release will happen in the second half of this year or no? Maybe one question as well regarding the refining costs, which were pretty low in the second quarter.
I wanted to know if this is all related to the savings made from the maintenance, or if this is also partly due to a cost reduction program that you recently announced, meaning that we should take lower refining cash costs in the near term. Thank you.
Hi, Mehdi. Bonjour. Thank you for your questions. Filipe will address the working capital. In relation to refining, clearly the decisions that we have taken has allowed us to reduce relevant cost structure and therefore based on environment that we have lived during the Q, it was the ones that has protect cash and cost for the company. Clearly, I think it was the right decision we have taken. Filipe, working capital.
Good morning, Mehdi. In Q1, under IFRS balance sheet, we have a release of working capital just because we marked down the inventories, mostly accounting. In Q2, what you see on a cash basis is that we're still paying suppliers, so significant cash outs, more than the run rate cash out that you would expect for cargoes you would be acquiring during Q2. Going forward, the three moving pieces within working capital, clients, suppliers, and inventories, of course, it depends to a very significant extent on your views on what the commodity prices are going to be. From this month onwards, we would not expect working capital to change massively if the commodity prices stay within what we're observing today.
All right. Thank you very much.
Thank you. Your next question comes from the line of Joshua Stone from Barclays. Your line is open.
Hi. Good afternoon. Thanks for the presentation. I've got two questions, please. First, going back on the cash flows. It was particularly weak during the first half of the year. You've highlighted a number of factors, timing effects and working capital. Is there a number we should be adding back to get to an underlying cash flow? If I look at that EUR 404 million on the slide 12 of CFFO, are you thinking about adding something back to help us with those moving parts? Secondly, on the commercial business, it does look like margins have been pretty resilient there despite the lockdown. The fall in earnings has pretty much matched the fall in volumes. Can you talk about what's driving this and how you managed to perform so well? Thanks.
Morning, Josh. On working capital, EUR 404 million in H1. Clearly, as I've alluded to, this has a number of phasing impacts. If the commodity prices stay where they are, we would expect, for example, to have lower SPT payments going forward than what we've seen. We would expect to be paying for CapEx at much more lower levels. Same with suppliers. Without giving you any hints on what the year-end will look like on a CFFO basis, it's hard to imagine that it will be below what we've seen in H1.
Hi, Josh. Good morning. On commercial front, and the resilience of our business, so you have seen that we have been hit by 11 months demand decrease. Even in those circumstances, we have been able to adapt our cost structure first, and secondly, the sales that we have made, they were mostly in higher margin segments. That contributed for sustain even in a specific and a complex environment. These are the two key effects that I would say that mostly contributed for that. Thank you.
Okay, thanks.
Thank you. I take your next question. Your next question comes from the line of Thomas Adolff from Credit Suisse. Your line is open.
Good afternoon. I couldn't hear you very well, Filipe. I wanted to ask you a question on the SPT as well. You said it's elect payments, so there's a difference between P&L and cash flow. Can you perhaps say how big of a difference it was in the second quarter? Was it something like EUR 50 million or EUR 100 million? That's the first question. The second question just on the ACS, the solar deal, essentially. I was a bit surprised that you ended up partnering with the seller. I was wondering whether it was at all competitive, the process. Were there other interested parties you were talking to? Thank you.
Thank you, Thomas. Good to listen you. Filipe will address the SPT. Let me just handle the solar process. Clearly, this was an evolution during the negotiation process that we realized that we will be able to combine Galp's integrated energy position in Iberian market with actually what ACS renewables engineering and the portfolio development experience expertise will combine with Galp. Clearly this is a kind of an industrial partner that will fasten, that will speed up our development and clearly achieve the targets that we have established for this process. We are happy with that, and I think this will contribute significantly for accelerating our renewable project. Filipe.
There were no interested party that were willing to pay a better valuation than you did? That was my question, essentially.
If you ask me if you have a competitive open tender towards this, the answer is no. If you ask if you have had signs of interest to partnering with Galp, the answer is yes. For the time being, that has been the decision that we have taken, Thomas, and we are happy.
Okay.
Thank you.
Thanks.
Thomas, on the SPT. We pay SPT the month after the end of each quarter. We pay in January related to Q4 2019. Brent in Q4 2019 was $63 on average. Come January, we're paying SPT based on Brent at $63. In Q1, Brent was $50, come April of this year, we paid SPT related to Brent of $50. The drag on the cash outs of SPT based on the quarter before is very significant. The flip side of that is when Brent goes back up, we're still paying low Brent and we're paying low taxation when we're cashing in higher crude sales.
Perfect. Thank you very much.
Thank you. Your next question comes from the line of Jon Rigby from UBS. Your line is open.
Yes. Hi. Thank you for allowing me to question. The first question, just going back to the dividend a moment. Just so I sort of understand what the thought process is going to be. You seem to be indicating some sort of hybrid between a progressive dividend and a payout. I just wondered what thought process you have about what the relationship should be between dividend and earnings, or dividend and cash flow, and at what point do you consider the balance sheet to intervene into that point? Put another way is, can we expect dividend policy, which seems to have now been changed, to be addressed come February? Where do you think that might be headed? The second question, just a small one, is just intrigued on you cashing out your hedging structures around the refining.
I think you've indicated two or three times through the speech about the absence of visibility going into 2H, et cetera. Just wondered what the thought process was behind removing an element of protection against exactly that volatility? Thanks.
Hi, Jon. Thank you for your questions. How the process is going to be in terms of dividends. Let's recall a little again. First, we have to look at our free cash flow position for the year-end, I think is the first point, and there's still some uncertainty in the market. The second one has to do with cash position and our debt position. Our net debt to EBITDA is relevant. We know that we are looking at our net debt to EBITDA in a rolling year. We know that we are considering the first half of this year with the second half of 2019. Let's see how the second half of 2020 will evolve and how that will impact the net debt to EBITDA.
Thirdly, it is also important to have not only the outlook in the cash evolution, but also to analyze how the global factor remuneration will evolve. That is also something that is important for us. There's one point that I would like to emphasize. This time, we are not considering non-dilutive cash distribution whatsoever. I think that is also important for your considerations. Filipe, the second point.
Hi, Jon. The way we think through our risk modeling on hedges, whilst a few years back Galp was very exposed to refining margins, now we are a lot more exposed to Brent price valuations. What we have seen this quarter, and something we have never seen, is that at the same time, simultaneously, we have our three key businesses going south. The risk model went reverse, effectively. We know inverse in inverted correlation on each of these. When we saw our refining margin hedges very deeply in the money, we just took the money and left, effectively. There was no other explanation for it. It was a financial call. Again, the biggest risk we need to protect long term, given the upstream increase going forward is Brent prices, not so much refining margins.
I understand. Could I just come back to Carlos for a second on the dividend? When you come to consider the dividend in February, will you be thinking about the full year 2020 dividend? Are you going to be just effectively saying 1H 2020, to write off, we're thinking only about what the final dividend is going to be? Will you be thinking about the full year in the round or just the second half?
Jon, it will have to be the full year, for sure.
Right. Okay. Thank you.
Thank you. Your next question comes from the line of Jason Gammel from Jefferies. Your line is open.
Yes. Thanks very much. I'm trying to understand how to think about organic capital spending this year, given the guidance on net investment, but also the payment for the solar JV and the inflow from the unitization. I guess the other piece that's out there is unitization at Berbigão and Sururu. Can you perhaps discuss whether you expect to be in a net receivable position there and maybe give an idea of the order of magnitude? The second question relates to the comments you made about April and May being particularly bad for the downstream business. Can you talk about how maybe utilization rates on the refineries currently and how refined product demand has recovered in your markets?
Good morning, Jason. Thank you for your questions. I will address the second one, and Filipe will take the first. Utilization rates. This is highly correlated with the demand evolution. Clearly, in the second quarter we were, I would say, at about 50% of utilization rate because we take the decision to shut down or slow down some units because the margins were not there. That was the right decision from the economic point of view. That was additionally affected by the high level of inventory. Looking into the second half, the inventories are still high. We are also looking at the cracks that are still depressed, and the decision of utilization rates, which includes not only atmospheric distillation, as always is indexed, but the conversion units will much depend on what it will be, the economics and the environment.
It always will be an economic decision, not a physical one. We will keep going forward as we do always. We will keep that decision based on pure economics. Filipe?
Good morning, Jason. On your question on CapEx, the guidance, EUR 0.5 billion to EUR 700 million this year. This is all inclusive, this does include the solar acquisition. The equity piece of the solar acquisition. We're still considering asset rotation to meet that guideline. More importantly, if you look structurally longer term for Galp, we are a low CapEx company on a runway basis. A lot of what you see in our guidance for the future, these are incremental new projects like Mozambique, Bacalhau, et cetera. If you take that out from the equation, we have a host of very long-life assets with very limited CapEx to sustain production for many, many years.
Understood. Would you expect to be in a receivable position on the unitization in Berbigão /Sururu ?
Yes, we do. Double digit number, but this is going to be received most likely only next year.
Okay, great. Thanks very much.
Thank you. Your next question comes from the line of Alwyn Thomas from Exane BNP Paribas. Your line is open.
Hi. Thanks for taking my questions. A couple from me. Could I just ask for an update on the potential asset sale processes you're considering and whether you would expect any of them to potentially close this year, or is it now more likely that 2021 is a more likely and realistic impact? Secondly, on the two big projects, Mozambique and Bacalhau, could you just give us an update firstly on COVID-19 impact to the projects and whether they're likely to be pushed further? In Mozambique in particular, what the security situation is there and the likelihood of achieving any material progress in the next 12 months on the project. Thank you.
Hi. Good morning, Alwyn. I will handle the first question, and Thore will go through Mamba and Bacalhau, the two projects that we have under development. Actually we are considering several assets for potential rotation, and you know that out of them, we have said in the past that there are some candidates that are quite well-known. We will consider all the options open and we will continue with that and execute on any of those optionalities only if we will consider that they are adequate for the company from one side and they are at the right and fair value from the other side. In what respects to Mamba and Bacalhau, Thore.
Yep. Thank you, Carlos. Thank you, Alwyn, for the question. As it is known in the market, the partnership on Rovuma LNG has decided to delay FID. We have not given an update to the market yet with respect to for how long. What is been happening right now is that there is intensive value engineering that is being done in order to then utilize the opportunities in the market. The same actually happens now with Bacalhau. Bacalhau, we see that there is an opportunity in the market to fine-tune, to optimize, to lower cost, and that is what is happening also on Bacalhau. None of these projects are at this stage i mpacted by COVID.
Actually, as a matter of fact, the same also goes for Coral. Coral South is the floating LNG project that we have developing in Mozambique. It is developing very much according to schedule, and we are still on track for first gas in 2022, and no impact of COVID so far on that project either.
Okay, thanks. Any estimate on how much cost saving you might be able to see in percentage terms, or are you trying to achieve?
We have internal targets and goals for that, Alwyn, it would be incorrect of me to communicate that to the market at this stage. Yes, we do see there is opportunity now to further improve the projects. Thank you.
Okay, thanks. Worth a try.
Thank you. Your next question comes from the line of Alessandro Pozzi from Mediobanca. Your line is open.
Good morning. Thank you for taking my questions. I just wanted to go back to the ACS assets. I was wondering whether the target of the 2.9 GW still holds for 2023, and if you can maybe give us a bit more color on how you're planning to go there, whether you're already planning to add capacity starting from 2021, and whether we should see a quick ramp-up in terms of power capacity. Also, given now that we have probably a bit better visibility on what the structure is going to be, can you give us a sense of the earnings potential of the current assets from ACS? I believe we're not going to see any EBITDA, but probably income from associates. Any color on that would be great. Thank you.
Good morning, Alessandro. Thank you. I would say that at the completion of this deal, we will have to reschedule and to review the projects that were in the pipeline, the ones that are for developing, based on also the existing environment, because it is useless to say that some of the COVID-19 impacts also will have to be taken in consideration for the setting up the scheduling for the projects 2020 onwards. What I've mentioned to you before is that they are already under production about 1 GW , and the plan for 2020 onwards is being reviewed in a way that we will be able to address this. Clearly, the structure that is being set up is an independent JV that will be self-financed and that will impact Galp throughout the non-recourse project financing.
Clearly, it's equity investment from Galp's side, and where you see that is coming from dividends from associates. Thank you.
Thank you. Any guidance on what the earnings could be based on the existing assets that are producing at the moment?
I would say it's too soon to release that to the market. We intend to do that later on in this process, once we have the rescheduling and completing the projects that are in a way that I have mentioned to you.
Okay, perfect. I have a second one on Brazil. You had a bit of an issue with the COVID-19 in the FPSOs, but not much in terms of volume. I believe you mentioned just 3,000 barrels a day. I was wondering, can you give us a bit more color on what your protocol or precautions measure you are taking to avoid any repeat of that in the second half of this year?
Thank you, Alessandro. The measures that have really been taken, there's two key measures. One, a mandatory quarantine period for the offshore personnel before they are now boarding the ship. Typically, that is between one and two weeks. Secondly, of course, temperature is being measured on a frequent basis, both before entering the ship and while on the ship. Thirdly, the number of weeks that the people stay on the FPSO before they are changed. It used to be two weeks, now the typical rotation scheme is three weeks, so that you have fewer rotations for the ship. That's the key measures that have been implemented. As we all know, COVID is no small issue in Brazil, I think we need all to be cautious on it. So far, it has been rather limited impact on our production. Thank you.
All right. Thank you very much.
Thank you, sir. Your next question comes from the line of Sasikanth Chilukuru from Morgan Stanley. Your line is open.
Hi, good afternoon. Thanks for taking my question. Quite a few answered already, but I had one for the upstream. It appears that the oil and gas price realizations in 2Q came in at a significant higher discount to Brent prices, more than 25% in Q2 compared to around 12% in Q1. Can you talk about the reasons behind this, whether this was purely to do with the timing of the cargos? Can you let us know what kind of differentials are you seeing right now, after the recovery in the Brent prices? If we should expect the differentials to revert from the Q2 lows to a more normalized level in the future?
Let me try to address this. The key effect that we saw during the second quarter is really mainly relating to increased shipping costs that have had a direct impact on the realized prices. We have seen in June that is starting to recover already. We do see that there is a bigger discount this year than what we initially had expected. Year to date, we are running around $4 per barrel and discount versus Brent. Thank you.
Thank you.
Thank you. Your next question, sir, comes from the line of Michael Alsford from Citi. Your line is open.
Thanks. Good afternoon. A question on refining. You've updated your medium-term outlook on oil prices, and I just wondered if you could maybe talk a little bit about how you're seeing the medium-term outlook for refining margins. I think from the previous plan in February, you were thinking of $4-$5, and I know clearly we're in an uncertain environment, but I just wondered if you can give a sense as to where you think refining margins might recover towards over the next couple of years. Just secondly, on the exploration write-off, I just wanted to confirm whether the write-off included or didn't include any value for the Uirapuru well that was recently drilled. Thank you.
Hi, Michael. Good morning. Thank you. Actually, comparing with the world that we have been observing back in February, we are in a completely the opposite side. Nowadays, if you look at where they are, the refining margins, we are barely covering our refining costs. Which means that if the demand will not go up and the inventories will not be reducing, it could stand in the market for a couple of months ahead with some refining pressure. I would say that for the full year, refining might have a marginal contribution for Galp.
When it comes to your second question, what I can say to you is that the majority of our impairments in an exploration asset is related to our assets in Portugal, where we have done a review of the portfolio and decided that there are a few of the licenses where we wanted to step up, and then it's natural that we did also the impairment. What is related to Uirapuru is very marginal in what we have impaired this quarter. Thank you.
Okay, thanks. Just following up on Carlos' point, do you think that the refining margins or refining business has a meaningful contribution in 2021? Do you think that still refining margins are under pressure as we see the oversupply in the markets maintaining?
Michael, that will depend very much on how the market will evolve and how this uncertainty will evolve. I think it's highly difficult to have a view on that. We can only play with scenarios. If the more recent times will continue to evolve as positive as they were, we might see a more positive world. If we will have ups and downs, even with partial lockdowns, this could take more time. Clearly, I think we have hit the floor and step after step, we will recover, but the speed of recovery, it will depend highly on how the demand will grow.
Okay. Thank you.
Thank you, sir. Your next question comes from the line of Matt Lofting from JP Morgan. Your line is open.
Hi, gents. Thanks for taking the questions. Two if I could please. First, just coming back on dividends and Galp's dividend policy. Clearly 2020 is an exceptional year in a number of different ways. When we look forward, can you characterize a bit more specifically the nature of the dividend policy that you're looking to structure Galp around? Is this ultimately a through cycle, absolute focus dividend policy where you're looking to grow the distributions commensurate with earnings and cash flow? While Galp remains in growth mode, does this need to be more of a backward-looking process on an annual basis where you're pivoting the annual payouts primarily around the macro environment and cash distribution combined with net debt on an annual basis?
Secondly, could I just ask on the long-term oil price assumptions and carrying values of Galp's assets, we saw you reduce from long-term $70 to $60 per barrel. Understand clearly that the Galp's assets are differentiated by being low on the cost curve. Equally, taking $10 off the long-term price must have a negative connotation for long-term value and cash flow potential. I am surprised that there's no relevant asset impairments, if you could just elaborate on that. Thank you.
Thank you, Matt. Good morning. I will take the dividends, and I will coordinate with Thore the second answer or the answer to the second question. Clearly this is an exceptional year and not only for dividend purpose, but also for the global business and environment. Once we will be able to back to certain normal, we intend to recover our dividend policy as it was pre-COVID-19, let's say. That said, we have, of course, certain caveats or restrictions or elements that should be taken in consideration, which is our cash position, which is our net debt to EBITDA that we will continue to follow as a kind of a self-covenant below 2x Of course, and I have said that before, we have also to look at what is the competitiveness of the remaining markets.
Clearly, setting back or back to the normality, hopefully we will continue to evolve as it was reviewed in a pre-COVID-19 context. In what relates to the long-term oil prices that we have now reduced not only in the case of oil, but also in the remaining variables that are also impacting our different business units. Clearly, we are benefiting, and has been said already, from the fact that we have very low-cost producing assets. Which means that we can live a couple of years without or with a minimum CapEx in this context. What we can see is that for the assets that are under development, and as Thore already mentioned, it has no impairment impact whatsoever, which reviews the competitiveness of those projects also. That's from my side. If you'd like, Filipe will complement this.
Matt, if you look at our balance sheet, you see that we have virtually no goodwill. The assets that we have on the balance sheet, most of the big ones are all discoveries. We do have a history of accelerated depreciation in most of the assets that we have. The carrying value of our assets is very, very low. If you look at our share price, our market cap as a multiple of book value, that kind of gives you a hint. The market is giving us two times book value, which is almost double the sector. That gives you an indication of how low the carrying value in the balance sheet we have. Thank you.
Very good. Thank you both.
Thank you, sir. Your next question comes from the line of Jorge Guimarães from JB Capital Markets. Your line is open.
Good morning. Thank you very much for taking my questions. I have three. Firstly, is it possible to give us some visibility about how volumes are evolving in July in Portugal and in Spain? Namely, in the context of concerns about tourism. The second one would be related to your CapEx comment, CapEx and OpEx reduction. Should I assume that the over 90% reduction in CapEx and OpEx is already included the reduction in CapEx from this change in the structure of the ACS deal? This would be the second one. The third one, it's also related to this change in renewables. I thought to understand that you mentioned in a question that you expect the JV to be self-funded after the initial acquisition. Is this so, and if not, what are the equity CapEx needs of the JV with the new capital structure? Thank you very much.
Thank you, Jorge. Straight forward to your questions. First, volumes. I would say that July today, we are observing year-over-year mid-10s reductions in Iberia. In CapEx, yes, you should consider that we have already included the deal. In renewables acquisition, I let Filipe to go through on that. Yes.
The ACS transaction on our guidance was already only the equity piece component of that. Going forward, Galp funded means that it's going to be, say, 70% project financed and the Galp equity piece, 70% of the equity piece will be our contributions for each of the next years as we develop the portfolio.
Okay. Thank you very much.
Thank you, sir. Your next question comes from the line of Alejandro Demichelis from Nau Securities. Your line is open.
Good afternoon, gentlemen. Thank you very much for taking my question. Coming back to the renewables deal, obviously, you changed your planning assumptions on the oil price. You were talking about downstream also being challenging. We have also seen electricity prices in Iberia coming down a lot. The question is, have you changed your planning assumptions on electricity prices? If so, how is this impacting the value of the deal? Just trying to make sure that we are unlikely to see an impairment of this deal that you just kind of renegotiated.
Alejandro, good morning. Thank you for your question. Clearly, we have also been reviewing our solar prices, or power prices and solar capture prices going forward. There was no relevant impact in the transaction that we have designed with ACS. If we look at the returns, they are pretty aligned with what it was our initial decision. Nothing to allude on this front. Thank you.
Okay. Thank you very much for that. Just as a follow-up, is this because you're compensating part of that lower electricity price with better financing conditions on this renewal project?
It's all in all. When looking at the project in a global perspective, it's all in all. It's completely, let's say, a single package analysis. With combination with the two elements that you have mentioned, with also what I have already referred that we have related with the scheduling of the development of this project. Thank you.
Fantastic. Thank you very much.
Thank you, sir. There are no further questions on the phone line, sir. I'll hand the call back to yourself. Thank you.
I think we conclude the call. Thank you so much. Bye-bye.
Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect.