Ladies and gentlemen, welcome to Statoil's Fourth Quarter E arnings Presentations and Capital Markets Updates, both to the audience here in London and to our audience and webcast audiences. My name is Hilde Nafstad, and I'm the Head of Investor Relations in Statoil. Before we start, let me say that there are no scheduled fire alarm tests today, so if the fire alarms do go off, please listen to the announcements and follow the instructions. The fire assembly point is over by St. Paul's Cathedral, opposite the Black's camping store. The venue management team will be on hand to assist. The nearest fire exits to these locations are out of the entrance doors behind me and turn to your left or right. The fire exits are indicated by the green running man sign.
In the event of a medical emergency, please inform the event management team, who are trained first aiders, or where required, can contact the relevant services. This morning at 7:30 A.M. Central European Time, Statoil announced the results for the fourth quarter and full year of 2012. The press release and presentations for today's event were distributed through the wires and through Oslo Stock Exchange. The quarterly reports and the presentations can, as usual, be downloaded from our website, statoil.com. I would ask you to kindly make special note of the information regarding forward-looking statements, which can be found on the last page. Our CEO, Helge Lund, will not be present today. He is attending a reception in Bergen to receive the casket of our esteemed colleague and country manager for Statoil in Algeria, Mr. Victor Sneberg, who was killed in the terror attack in Algeria.
Today's program will start out with Statoil's CFO, Torgrim Reitan, who will go through the earnings, the strategy update, and the outlook for the company. After the break at 2:00 P.M., EVP Øystein Michelsen will give an update on the Norwegian Continental Shelf, followed by EVP Eldar Sætre, who will give a presentation about natural gas. After the presentations, Q&A sessions will follow. Please note that questions can be posted by means of the telephone but not directly from the web. Dial-in numbers for posting questions can be found on the website. The operator of the conference call will explain the procedure for posting questions over the phone immediately before the Q&A session starts. The event will close around 3:30 P.M. U.K. time. It is now my privilege to introduce our CFO, Torgrim Reitan. Please, Torgrim.
Thank you, Hilde. At In Amenas, in Algeria, we are part of two international corporation, three companies from three countries and two continents, and suppliers from across the globe. Colleagues from Algeria, the U.K., Japan, U.S., Canada, Ireland, Norway, and others, and this is what the terrorists so cold-heartedly attacked. More than 40 people from 10 countries were killed. Innocent people with rich lives, and in Statoil, we lost five of our best. We share the pain, and we share the sorrow of all the families who have lost their loved ones. It is difficult to understand, and it is impossible to accept that our colleagues are the victims of deliberate and gruesome violence. Our response to this evil has been to respond with determination and to reach out with care and support to the victims and the families.
In these dark hours, we have also experienced the character of our people. On behalf of Helge and the rest of the company, I would like to thank you for the support and the sympathy we have received from partners, from authorities, and from the financial community from all over, and that means a lot to us. Terrorism is a global challenge, and it needs an international response. Statoil cannot respond alone, but we will work together with authorities and our partners, and we will do our part. We have the responsibility to learn and to improve and to protect our people and our assets, and we will not be deterred from doing business around the world. We are going to share our experience. We are going to share our know-how and bringing energy to those who need it.
Today, we will show you that the state of Statoil is strong. I will start by going through the results and give you an update on our strategy and our outlook. Then Øystein and Eldar will cover our activities on the Norwegian Continental Shelf and in the gas markets. We look forward to taking your questions and discuss these issues with you. We have started our fifth decade of growth. Last year, we marked the 30 years anniversary, and in the last few years, we have accelerated that development. From a Norwegian national oil company to a globally competitive oil and gas company, we have achieved necessary scale, and now we have operatorships in several of the most attractive basins around the world.
From an integrated oil and gas company to a focused upstream company with a clear strategy. Selling non-core assets and putting our money where our strategy is. From resource-constrained to opportunity-rich, we are delivering industry-leading exploration results and production growth. We have moved from financially restrained to having significant financial flexibility. We have brought down our net debt to 12% currently. We enter 2013 from a robust position, and then we do look forward to the next 40 years as well. 2012 was a year of records for Statoil. We delivered strong results across the business. We broke new barriers. We produced more than 2 million bbl per day in 2012.
Two years back, I'm sure you recall that we said we will grow with 3% on average from 2010 to 2012. I am very glad to be here today and tell you that we have delivered on what we have said. That meant a production growth of 8% from 2011 to 2012. We deliver strong earnings, and the earnings are growing. Our cash flow from underlying operations is the best ever, more than NOK 250 billion last year. Reserves. Reserve replacement rate is 110% in 2012. When we take into account the divestments that we did, it is 100%. Exploration was another great year, adding 1.5 billion bbl from the drill bit.
That is the best exploration year since 1997. Our dividend policy remains firm, and we propose to continue the growth in the dividend, NOK 6.75 per share, this year, and that translates into a direct yield of around 4.5 percentage points. For 2012, we delivered strong adjusted earnings. It increased 7%, and we report an earnings per share of NOK 22. In the fourth quarter, earnings increased by 5% when we make the adjustments to reflect the underlying operations. This growth of 5% comes even without the results from Statoil Fuel & Retail and Gassled that has been part of earlier years' results. I know that tax on adjusted earnings is a bit lower than what you expected.
Simple reason behind that, the low tax rate is mainly due to deferred tax assets in the international business. You will find that the tax rate for the year 71.5% is within the guided range of 70%-72%. We can report strong performance across the business, across the segments. Our Norwegian business continues to deliver strong earnings and earnings growth for the year. There's particularly one thing I would like you to see, that even if we have more fields into production now, costs are stable. We have kept operating costs stable for five quarters in a row. Our cost focus is paying up, paying off, and Øystein, he will come back to the NCS later today. From our operations outside Norway, we see increased earnings.
Earnings grew by 20%, and production grew by 25%. We are ramping up production from Peregrino in Brazil, from Pazflor in Angola, and Pazflor in -- Bakken in the U.S., and Pazflor in Angola. Currently, around one-third of our production comes from outside Norway, and this is profitable production. The cash flow per barrel is on par between the Norwegian production now and the international production. We are growing internationally, and it is a profitable growth. Marketing, processing, and renewables contributes with close to NOK 18 billion last year. That is a 60% growth. We have record gas sales, and we have record gas prices in Europe. In addition, our traders are doing well, and they achieve better margins, and we achieve better margins from our refineries.
Eldar, he will tell you more about this later today. In 2012, we produced the barrels we promised you at the Capital Markets Day in New York two years ago. Average annual growth from 2010 to 2012 was 3%, and the last year it increased by 8%. In the quarter, it was up 3%. We responded to strong gas markets and increased gas production on the NCS, and we are ramping up production as I have told you. We have also reduced the maintenance compared to the same period in 2011. We are on course to profitably grow our production to above 2.5 million bbl per day in 2020.
This means that 3% growth on average throughout this decade and our current resource base has a potential well beyond that. I will come back to the details of that later in my presentation. I'm following the cash flows very carefully. Cash flow from underlying operations was record strong, more than NOK 250 billion last year. It was up NOK 20 billion from 2011. You know, we sold oil and gas, more oil and gas to higher prices. Of course, we had to pay more taxes as well. Our organic CapEx was $18 billion, and that was in line with what we told you in advance. After dividends, we are left with around NOK 26 billion for the year.
Net debt has been reduced from 21% at the start of the year to 12% at the end of the year. Let me now move over to give you an update on our strategy. 2012 was a year of strong strategic progress. In Norway, we are growing, and we are growing on the back of a rich and highly profitable portfolio. We are on track to grow our production to more than 1.4 million bbl per day in 2020. We are positioning ourselves for the future gas markets in Europe. In 2012, we realized highest gas prices ever in Europe. Negotiations have been concluded for the majority of the volumes, and we have agreed on sustainable solutions for all parties. We are actively shaping this market, and we are seizing new opportunities.
We are deepening our positions in the offshore basins, and we had another strong year within exploration with five high-impact discoveries. It was Havis in the Barents. It was King Lear in the North Sea. It was Zafarani and Lavani in Tanzania and Pão de Açúcar in Brazil. Within unconventionals, we will now operate production from all the three U.S. plays that we are part of. We have doubled the production from Bakken since we acquired it a year ago. We are making money on our unconventionals in today's prices and with the current differentials. Finally, we will continue with portfolio management as a key part of our strategy. You have seen the successful divestments we have done from our retail business, and we have also realized substantial value from non-core assets in the transactions with Wintershall.
In total, we have delivered gains of more than $6 billion over a short period of time. We will continue to add and subtract to our portfolio, and you will recognize the pattern. We are sharpening the growth, putting our money where our strategy is, securing influence and control to Statoil, and giving us added financial flexibility. We are in a robust position to finance our growth. First of all, in the past four years, Statoil has generated strong cash flows. This has provided strength and flexibility to invest in our projects, reducing our net debt from 27% to 12% and, at the same time, maintaining a firm dividend policy. We have maintained a solid credit rating, AA-. Over the next four years, we aim to follow a similar pattern.
We are going to generate significant free cash flow from operations, and we will actively manage our portfolio going forward. We will continue with our dividend policy, which is to grow the dividend in line with underlying earnings. Let me turn to how we are investing the capital. In 2012, our producing assets generated around $10 billion in free cash flow. That is after investments. The producing assets will continue to deliver a solid free cash flow over the next years. That means that if we had selected not to invest in new assets, we would have paid back the entire company value by 2020. We are reinvesting, and we are reinvesting to deliver even greater value to our shareholders.
With a return on capital employed above 15% last year, we are in the top quartile compared to our peers. We will invest in a controlled way. This year, we expect to invest some $19 billion on organic investments. Over the coming four years, we see an average yearly CapEx of around $21 billion. This is consistent with delivering on the 2.5 million bbl per day ambition in 2020. We have more than a hundred projects that has a potential production capacity of 1.9 million bbl per day ahead of us. Highly attractive and profitable projects that are competing well within the industry.
The average break-even price for our sanctioned projects is $50 per barrel, and the average payback time from production start is actually three years for the new projects. This money will come back quickly. As a last point, let me remind you that we operate most of our investments ourselves. 40% of our total new project has not yet been sanctioned, so we have the flexibility to adjust and optimize as we choose. Over to Norwegian tax system. 40% of our projects are located in Norway with a tax system that gives a very efficient cash recovery of CapEx. You know, I get questions about the Norwegian fiscal regime, and yes, 78% is a high tax rate. What makes this work is that the system is balanced.
Due to depreciations and uplift, we get back 93% of our investments as reduced taxes, and that is just over the first six years. This means that after-tax CapEx cost is only 7% of the pre-tax CapEx. It's of course the after-tax investments that will impact our cash flow. Projects are put into production as planned. Since the strategic reset in 2011, we have delivered the first growth wave. 400,000 bbl per day in new production capacity for Statoil. To put that in context, that is 4 x the contribution from Gullfaks to Statoil. The projects that are operated by Statoil have been delivered on schedule and at cost.
Towards 2020, we will add an additional 1.9 million bbl per day of new capacity, and 900,000 of those will come over the next three years. Our fast-track portfolio, they will produce 100,000 bbl per day for us in 2014. That is stronger, and it is faster than expected. This is substantial value creation and projects with low break-even prices. As you understand, we are on track to deliver on 2.5 million bbl per day in 2020. As you know, we will grow with 2-3 percentage points from 2012 to 2016. Excuse me.
Our investments results in many big projects coming on stream, and growth will accelerate 3-4 percentage points growth per year from 2016 to 2020. As we have told you, growth will not be linear. In 2013, production will be lower than in 2012. This comes from decisions we have made ourselves and decisions we have made to create value. The Wintershall transaction will reduce our production by 40,000 bbl per day from closing. We have reduced the rig count in Marcellus to adjust to the price environment there, and so we can produce the gas at a later point in time at higher prices. That will reduce the growth in Marcellus with some 25,000 bbl per day.
We have sold more gas in Europe in 2012, meaning that there will be a lower gas production in 2013, around 15,000 bbl per day. The situation at In Amenas will also impact output in 2013. In Amenas produced 23,000 bbl per day for Statoil in 2012. Work needs to be done on the plant, and work needs to be done before it can be started up safely. It is too early to say when that can happen, so it puts uncertainty into the production for 2013. We are on track, and we are moving ahead as we have discussed earlier. We have a portfolio with a capacity to produce more than 3.5 million bbl per day in 2020.
Our current portfolio of producing assets is performing well. Decline is 5% as it has been over the last years, and it is as expected. New projects will add significant growth on top of that. We are also increasing the oil share in our production towards 2020, and we expect the NCS gas volumes to stay around the same level throughout the decade. We are growing both internationally and in Norway. All clusters are growing, and we are growing on all our continents. Based on the resources, we could continue our production for more than 30 years. You know, our ambition doesn't end there. Our ambition is to consistently deliver an organic RR R above one. In 2012, it was 110%.
We have increased the oil ratio as well, and the three-year average, RR R is one. This result come from a strong effort by the organization. We have sanctioned four new developments, giving more than 200 million bbl of new reserves, Dagny and Ivar Aasen on the Norwegian Continental Shelf, Hebron in Canada, and Mariner off the coast here in the U.K. Increased recovery also provide important reserve additions. Our large project portfolio will ensure an average RR R above one throughout this decade. Over to exploration. Our new exploration strategy is showing results. 2012 was the best exploration year since 1997. 46 wells completed, 23 discoveries, adding more than 1.5 billion bbl from the drill bit. You know, high impact discoveries in Norway, in Brazil, in Tanzania.
You know, the result is even better than in 2011 when we discovered Johan Sverdrup, the world's largest oil discovery that year. You have seen the Tanzania announcement today. Seven-nine TCF of recoverable resources from our Block 2. A great reservoir, probably 60%-80% recovery rate, and that forms a good basis for an LNG project. We are moving our discoveries from the Americas to East Africa, and we will work together with Exxon to mature other prospects there. There is more to come. 20 high- impact wells is going to be drilled from 2013 to 2015. This year we have four exciting campaigns with a number of wells to watch. First, the Barents Sea. We will drill four wells in the Skrugard-Havis.
The first one is Nunatak, so that is we should pay attention to. We have the Hoop area further north. There we have the first well called Apollo. That is a potential play opener. Moving to East Africa in Tanzania and Mozambique. You know, Zafarani- 2 was announced today. We have Tangawizi. That's a new prospect looking promising that should be watched. Moving over to Canada. There we will have three wells. The one to look out for there is called Harpoon West. In Gulf of Mexico, a program of five wells and a prospect called Sake is worth mentioning. In Indonesia, we have a potential play opener called Sikar West. Back home in the North Sea, the Lupin prospect should be watched. It's a long list, and that is the whole point.
Next year we will also start drilling in the Kwanza Basin in Angola. As you have seen today, we are in an investment cycle. We are building two legacy assets for the future and the growth will be strictly governed. Our projects will give a strong cash flow and a cash flow growth, and we have the luxury to pick our best projects. Balancing all of this will ensure that we deliver a competitive growth on top of a robust balance sheet and while we are providing a competitive dividend yield. In conclusion, we are delivering strong results across the business. We are executing our strategy, and we are on track to meet our targets. Thank you very much for your attention.
We will turn to the Q&A session. For this session, Torgrim will be joined by the Senior Vice President for Performance Management and Analysis, Svein Skeie. We will take questions from the audience here at London Stock Exchange and also over the telephone. I will first ask the operator to explain the procedure for asking questions over the telephone.
Thank you. Ladies and gentlemen, if you wish to ask a question over the audio, please press star one on your telephone keypad at this time. That's star one if you wish to ask a question over the audio.
Thank you, operator. We will start with questions from the audience here at the London Stock Exchange. I ask you to please state the name, your name, and the name of your company. Also, please limit yourselves to one question. The Q&A will end at 1:35 P.M. We will pass microphones here in the audience in London. We'll start out with Brendan here, please.
Thank you. It's Brendan Warn from Jefferies. Just my one question. In terms of value over volume, you've given us the impact of 2013 by producing the gas in 2012. What was the EBIT or can you give us an idea of the value you got from the reduction of volume in 2013, please?
It's a good question, and I think we should save it for Mr. Gas, which is here, Eldar Sætre. You know, record sales, record prices, yes, large earnings impact.
All right. Yes. Next, please.
Hi. Alejandro de Micheli from Exane BNP Paribas. Yeah, my one question is you talked about stabilizing costs across the portfolio. Maybe you can give us some indication of how you see that evolving both in international business but also in Norway.
Excuse me. Could you repeat the start of the question?
You talk about stabilizing cost.
Yeah. Mm.
In your upstream business. Maybe you can give us some indication of how you see that going forward.
Yeah. Thank you. I'm very glad to see the development on the cost side in 2012. Stable operational cost. I do expect, you know, cost control to be strict going forward as well. You know, the way we work with these elements is, first of all, on simplifications. I think the fast-track concept is a very good example of addressing cost. Standardizing the way that we, you know, build these projects so one project team can take care of more than one project, and the project have to use these type of equipments. It has reduced the time from discovery to production by 50% and reduced cost by 30%. That is, you know, getting more out of scarce resources.
It's about, you know, working with suppliers, long-term framework agreements. It is a scale effect, working with costs, take advantage of them. The last point is about culture and the people and the attention that, you know, our leaders put on costs. It is under control, but you know, it is a tight market in many places, so we need to have full focus on this, going forward as well.
I have another question.
Paul Spedding from HSBC. Your production profile that you show on slide 15 shows a relatively flat gas profile. I'm curious as to whether you include anything in there for gas from East Africa or whether that could be providing some upside to that profile.
Okay, thank you. You are right. The gas profile is rather flat on that profile. When it comes to East Africa, still large uncertainty when that will be put into production. We are very encouraged with what we see and the potential. The block is large, and there are further things that we want to mature and drill. That is what we focus on now. Then we have to come back to any potential, you know, startup and decisions in East Africa. You're right, it is not part of you know, the gas profile in that chart.
Yes, Haythem.
Thanks. Hi, good afternoon, Haythem Rashed from Morgan Stanley. Thanks for the presentation. One question with two parts, if possible. Just around your financial framework. I just wanted to ask firstly on the sort of CapEx guidance that you have over the coming years, sort of how comfortable you feel with that and whether you think it's enough given, you know, some of these projects that you are considering sanctioning, like Tanzania, for example, sort of coming over the next couple of years. I'm sort of particularly interested given the
When you look at the operating cash flow that you're guiding for and the CapEx, sort of how much flexibility you have there. Obviously assuming you actively continue to manage your portfolio in that regard. The second part to it is just on your reference oil price. I just wanted to get your thoughts around that. The $110 looks relatively high compared to some of your peers in terms of reference conditions. I just wondered, given some of the agencies we've seen around the world talk about spare capacity increasing quite substantially over the coming years, what your thoughts are around sort of that oil price going forward? Thank you.
Okay. Thank you even for a long and complex question, and I counted three or four questions, so thank you. On the CapEx and how comfortable, I mean, a key point on the CapEx guiding is that it is consistent with a 2.5 million bbl per day production in 2020. You know, the project portfolio can produce more than that. If we bring on all the projects that we are working on as soon as we can, we can produce, you know, more than that, and that would also lead to a higher CapEx than we have guided on.
It takes a strict prioritization, picking the best projects, picking the most profitable projects, and that is what we are doing, and that is what we have done over the last years as well. It is a consistent in that respect. You touched upon Tanzania and sanctioning and upsides. If there are sort of an increase in the growth outlook, it will need more CapEx in a way. It sort of hangs together. This is a consistent data set that sort of builds into 2.5%. Then above the operating cash flow and flexibility and divestments and so on. Over the last few years, we have, you know, brought in proceeds of around $13 billion, you know, creating capital gains of $6 billion on those transactions.
We haven't stated anything going forward on what will happen with the portfolio, and that is deliberate. I see that some of the peers are more explicit on numbers and what, but we are not doing that. What I can say is that there will be changes in the portfolio going forward as well. You know, we will sharpen the growth. There are assets that will be sold. There are assets that will be acquired. That will, of course, distort you know the picture and you know the guidance in a way. You know, we'll have to come back to any adjustment in that respect. Your last point, and that was on the oil price.
I think $110 per barrel, the reason why we use that is that that is the current prices. We said, "Okay, just on the same price, prices as today, this is the development." This is not what we do for planning purposes. We use different prices as such. You sort of fed that into the development of the oil price outlook. Hard to tell. I think the world is off to a good start this year. Macroeconomics showing strength. I do think it's very vulnerable, but let's hope that Europe can come back in growth mode. That will sort of strengthen the picture. Political risk.
There is a political risk premium into the current price environment, maybe $10-$15 per barrel. An escalation or an extension of the Syrian issue, Strait of Hormuz issues and so on could add to the price. You have the general macro issues. I think it's important to remind ourselves that, you know, if we see, you know, more than $100 per barrel, while the world is at the state it is, and, you know, it's a strong oil price. There are some strong fundamentals here that sort of supports strong oil price in the long term. We need to be prepared for significant volatilities in the short term. This is sort of, to me, more of a short-term concern than a long-term concern. Okay. Long question, long answer.
Sorry. Yeah.
Rahim Karim from Barclays Capital. Just wanted to touch back on this issue around financial framework and perhaps around the growth of the international business. You seem to be suggesting that you're putting a constraint in terms of capital that you want to deploy as a group as a whole, and that's why you're not going to perhaps deliver more than 2.5 million bbl per day by 2020. If I've understood that correctly, we should be getting towards the point in the middle of the decade where the international business becomes free cash flow positive. Am I thinking about that correctly? If not, what am I missing? At what point should we start to see that international upstream business start to generate free cash flow rather than being an absorber of CapEx?
Okay. First of all, international business is contributing strongly, you know, to fund the investments. You know, the cash flow per barrel, on par with our Norwegian production, and one-third of the total production. It is contributing well. Sort of, the way we look at the investments going forward, it is not allocating X billion to international and Y billion to Norway, when these projects have to compete side by side with equal measures, and then we prioritize the best ones. It's a strong competition for investment funds in Statoil today. All the projects knows that, and they know that they have to deliver. That is the way it works.
I can't give you a specific guidance on, you know, how this totality on the international will sort of be as one unit. Yeah.
I think it was Michael first over here.
Good afternoon. It's Michael, also from Citigroup. Just a quick question on the financials while we wait for the later presentations. Just on tax, obviously a few one-offs in the fourth quarter, but could you give us some guidance on 2013 tax-
Okay.
Rate for the group and perhaps by division would be helpful.
Okay. Thank you.
Thank you.
I'll leave that to you, Svein. Please.
Thank you, Torgrim . Yes, as you said, the fourth quarter tax rate was a bit lower than expected. If you look at the international segment, it's especially related to that one. We announced earlier on that there is a new law in Norway saying something about the availability then for getting tax deductions for international activities. That is an effect that we will have now in fourth quarter, which we have accounted for. In addition to that, we have also then done some restructuring in the group, which have the opposite effect from the cost that we had related to the future international dispositions.
We have an offsetting in the group related, and mainly to restructuring to our U.S. business. If you look at DPN Norway in itself with high prices, the effect of the uplift related to the investment is a bit lower. But we are in the similar segments at similar level as we have guided on earlier on, also for that one. In MPR, we have said that there will be volatility in that, especially now when we don't have Gassled anymore here. Looking forward, it's about the DPN similar level as we have said earlier on. DPI also at a similar level as we have said earlier on.
When we get more and more, then from the U.S. and lower tax regime, then it will be a bit lower as we have guided on earlier on as well.
Yes. Next question. Lars, can you please pass the mic?
Thank you. It's Irene Himona from Societe Generale. You renegotiated about half your portfolio of gas contracts last year. Can you please update us on the current balance of oil versus spot gas link? What do you expect to happen to your margin as you lose the benefit of the oil link but gain volume flexibility? Thank you.
Okay, thank you. Eldar is coming on the stage later today, you know, addressing especially this issue and already to take that question. I think it's better that Eldar answers it than I do. Thank you.
Yes. Last one over there.
Hi there. It's Mark Kofler from Macquarie. I just had a quick question on the reserve additions for 2012. I noticed you talked about, I think it was four distinct geographies, within that 110% replacement ratio. I was just wondering how much of that was U.S.
Okay. A reserve addition in the U.S., Svein.
I will not give a specific number, but what we see is that we have the onshore part in the U.S. is having a higher contribution than before and being more important than before for the booking of the reserves, which adds significantly to our reserve replacement ratio. It's still a large contribution as it also was in 2011.
Next question, please.
Hi, Peter Hutton from RBC. Just wondering if you can give any kind of guidance on what you see as the optimal gearing level for a company like Statoil. You've gone to 12%, your guidance is for 15% at the end of 2013. If we look at the slides in terms of operating cash, dividends, CapEx, your free cash flow negative of about $1.5 billion, so creeping up. You're between 15% and 20% over the medium term. Is that the right level or is that a bit conservative or what do you think?
Okay. Very good question. From a purely financial perspective, it's probably low. I mean, we are on the low side. I mean, debt is very low, you know. Price currently. I guess there are good arguments to increasing the gearing from that perspective. When that is said, to us, it is extremely important and strategically important to run with a strong balance sheet and a lot of liquidity. Because we must be able to take long-term decisions even if there is, you know, short-term volatility and trouble in the short term. We need to be able to live safely through strong volatility in oil and gas prices. That it is in those periods you can actually create much additional value. Running with a solid balance sheet is very important to us.
Strong rating and a lot of liquidity. You will see that going forward as well. I'm not prepared to give a specific range and so on, but you know, the current net debt level is of course very comfortable. A very solid balance sheet going forward will be the case. Thank you.
Next question, please.
Thank you. It's Neill Morton at Investec. Could I just follow on from that comment and just go back to portfolio management with regards to gearing?
Mm-hmm.
As you sharpen the portfolio further in the future, can we assume that in dollar amounts acquisitions are offset by disposals? Also just in terms of acquisitions, perhaps just give us a clue as to what the criteria are. Are you looking at conventional, unconventional, existing areas with synergies or new areas, et cetera? Thank you.
Okay. I mean, some years there will be more divestments than acquisitions, and then some years the other way around. It's based on, you know, opportunities that arise and the market conditions, and so on. To better understand the future, I think we need to look back on what has happened. Over the last 10 years, divesting out of, you know, shipping, petrochemicals, Statoil Fuel & Retail, a lot of other assets as well, and then acquiring into things that can be something big going forward. That will be sort of the things for the future as well. I'm not prepared to give any specifics on what will happen with the portfolio.
You just have to be prepared that there will be changes to the portfolio going forward as well. Thank you.
Hi. Oswald Clint from Sanford C. Bernstein. Just a maybe a question on the Gulf of Mexico. Some of your projects there, Jack, St. Malo, Julia, near FID are close to it, but you haven't quite given the volumes yet, the capacity of those projects. Could you say what's happening there in terms of what you expect volumes to be? Maybe also just an update on what's happening in terms of your Gulf of Mexico portfolio. Thank you.
Okay. Thank you. On St. Malo, we have said that we assume production start in 2014. From you know, Jack, St. Malo and Julia, the capacity combined, we expect to be around 170,000 bbl per day to as such. We haven't split it. There are you know, quite a few interesting developments in the Gulf of Mexico coming on stream now. We are going to continue our exploration efforts. There are several wells this year. You know, we took quite a bit of acreage in the licensing round last time, and we have quite a few interesting prospects that we really would like to try out.
You know, we are positive with outlook on it, and looking forward to, you know, get going with more production.
Do we have any further questions here in London? I can't see any hands. I think we'll turn to the audio audience. Operator, would you please be so kind as to introduce the first question over the telephone?
Certainly. We'll take our first question from Teodor Nilsen from Swedbank First Securities. Please go ahead.
Good afternoon. Just a question on CapEx in relation to the recent attacks in Amenas and the Arab Spring in general. Has the recent terror attacks changed the way you think on which areas you will allocate CapEx to, like in the long term from, let's say, 2015 and onwards? Will you allocate more CapEx to less or areas with low political risk?
Okay. Thank you, Teodor. First of all, safety for our people is the absolute most important one. You know, we will not bring back our people into Algeria until we know it is safe. That is the way going forward as well. It's important to remind ourselves that, you know, risk management and security assessments is a key judgment with any investment decision and it's constantly evaluated. Because we need to be very comfortable with where we send our people. We are committed to our assets in Algeria. They are important to us. They contribute well to production. There is work that needs to be done on the asset before it can be started safely.
We have started an investigation or agreed with the board that we will start an investigation that will establish the fact and chain of events. It will see to that we take out learning from what has happened and that we improve our business. We need to wait for that investigation report to evaluate the consequences of what we are going to do.
Okay. Is it likely that you will change the way you think around the gas discoveries in Eastern Africa following the recent events?
It's too early to conclude, Teodor.
Okay, thank you.
Next question, please, operator.
We'll take our next question from Brandon Mei from Tudor, Pickering, Holt & Co. Please go ahead.
Hi. I just noticed in the Marcellus, it looks like you've had a pretty significant ramp up there, despite a lower rig count. Looks like about +12,000 bbl a day in the quarter versus +5,000 bbl in 3Q. I was just wondering if you could talk about what's going on there, as far as rig count, wells drilled in the quarter, and then wells drilled but not turned on.
Okay, thank you. You're right, production from Marcellus has increased, and that comes from a large inventory of drilled wells that has not yet been produced or put into production. That inventory is, you know, being capitalized on currently, stepping up production in Marcellus. You're right, it is increasing even if we have reduced the rig count. Interestingly, this Marcellus gas will not be sold in the Marcellus area. It will go to Toronto. We have taken on capacity, as you know there, the full capacity in that pipeline. Our gas is now realizing a much higher prices in that area than the alternative was. We are earning money in Marcellus currently.
Can you put some numbers around, how many wells are drilled but not turned on now?
Svein, do you have it?
That I think I need to come back to.
It's all right.
Because it's developing day by day.
I suggest we take that with the Investor Relations officers.
Thank you.
Next question, please, operator.
We'll take our next question from Jason Kenney from Santander. Please go ahead.
Hi there. Just a point of clarification, please. I know you answered Paul earlier on the volumes from East Africa and whether they were in that volume profile or not. I think one other question revolved around will you need more CapEx if you decide to FID Tanzania? I was just really wanting you to clarify, is CapEx in the 2013-2016 plan for East Africa or not?
It is the same answer that earlier. We have more wells to be drilled. There are more interesting prospects that will be matured in that block. There are no firm plans for, you know, an investment decision related to this.
Okay.
Do we have another question, operator?
Yes, we have a question from Anne Gjøen from Handelsbanken. Please go ahead.
Thank you. I wonder, when it comes to the 2020 production, guiding of 2.5 million bbl a day, how much of that is related to projects yet to start? When it comes to project yet to start, how much of that remains to be sanctioned? Thank you.
Okay. I think there is one slide in my package which elaborate the various fields, and then when they are starting. There it is on page 13. There you can see which one are sanctioned, when we expect them to start up, and the capacity they provide. Hope that can be useful to answer your question on that.
Okay, thank you.
Do we have any further questions?
We have a question from John Olaisen from ABG. Please go ahead.
Yeah, good afternoon in London. I wonder if you could give the split of the E&P spending, the CapEx spending and the exploration spending versus in the liquids and split into Norway and international it is.
Okay. Thank you, John. Svein?
There I will refer to the supplementary information that we have provided in the details that we have provided. If you look at the investment going forward, we have said that around 40% will be at the Norwegian Continental Shelf. Then the split of what is then going into the North American and the rest of the international portfolio is split out. Also, we have said that 10% of the CapEx in the future is then expected to be in the MPR segments. There we have also then, it's on slide 16, by the way, on the supplementary information.
Here we have also then giving the split into how much is going into the liquids and then how much is not sanctioned. Also, in the supplementary information at slide 13, we have then also provided the exploration activity in 2012. The split between the Norwegian part of it and the international part of it.
Mm-hmm.
That's very useful. Thank you. To follow up on that
Given the, when your guidance is based on a dollar amount, could you tell us a little bit about the cost inflation in this? With flat exploration spending, does that mean lower volume?
In, uh-
I guess, 'cause I guess, you know, rig rates are going up and seismic data and day rates are going up and everything.
Yep.
Could you give us an indication what's the volume, how much is volume going down in exploration and in CapEx?
I think what we have experienced now in 2012 is a very good exploration results. We have spent $3.6 billion in exploration, drilling 46 wells in 2012, and then adding on $1.5 billion. What we have said then for 2013 is that we expect around 50 wells, and then being at a similar level. What we will then also see then now in 2013 is that we will drill quite a lot of appraisal wells to secure that we are maturing our resources into reserves so that we have the ability then to develop them into profitable projects.
Appraisal will be more important than in 2013.
Given the exploration success you had lately and all the interesting exploration acreage you have available, why don't you boost exploration more?
Yeah. Okay. Thank you. Thank you, John. It is a tempting question, and there's a lot of opportunities, exploration opportunities out there. This is an optimization exercise based on, you know, all the rigs that we have available, and all the prospects and all the discoveries that we have made. You know, the more discoveries you have, the more appraisal you need to do. So that's why there is quite a bit of appraisal this year. I'll bring back home your advice, John, so thank you.
Shall we have one more?
Follow this question. Will we see a well in Angola for you guys in 2013?
Excuse me. I think we need to move on to the next question now, John. We'll take one more before the break, and that is Lars-Henrik Røren from SEB. Please go ahead, Lars.
Good-
Good afternoon, London. You hear me?
Yes, we do. Just one question, please.
Thank you. Just a clarification on your operating cash flow guidance, from 2013 to 2016. As far as I understand, this is based on $110, but you also said that you have another budget price or internal planning price. Can you confirm that? And can you also tell us what kind of price that is?
Mm-hmm. Thank you. Yes, we have another planning price, if I can tell it. No. I'm sorry about that, but we use different prices. We use a very low price where we sort of test all our projects and the profitability and the sustainability of the company.
We have a bit higher prices, and then we use one price that is even higher than what we see today because there is an upside as well.
Okay-
Very important for us to see to that we can sail safely through any scenario.
Yeah. If you have an internal
Thank you,
Can I ask the question?
Well, I think we actually have to round off for the break now, Lars.
Yeah, this was just beginning of the question. Okay?
Okay, go ahead. One. Finish it.
Okay. Just to understand, because if you use your sensitivities and say that the dollar or oil price will be 10 dollar lower, and with the current NOK to U.S. dollar price, then you will add on for the next four years approximately $6 million-$8 million in financing deficit, that will increase your net debt ratio by 10-12 percentage points. Is that what you also include in your internal planning, that you plan for a higher debt ratio than your sensitivities or that you show us?
Yeah. On this issue, you know, we expect net debt to grow slightly during 2013. You know, we are investing. If prices, you know, drop significantly, we have, of course, to borrow money. I have no problems with borrowing money. It's actually a very tempting market out there. Everything need to be balanced. You know, to add some debt when you are growing, I think that is, you know, at all set perfectly fine. The point is that, you know, we will run this company based on a very solid balance sheet. You know, I think you need to take a bit of comfort from the history here.
You know, over the last 10 years, we have seen oil prices between $17 and $147. We have paid a dividend, you know, 50% in that period. We run with a AA- rating, and we have had a production growth of more than 100%. Things are changing, and that is the art of running an oil and gas company. You need to take into all of these uncertainty and just see to that you sail safely, and you are able to grow, and you are able to create value. We are in an investment cycle. We intend to do it, and then we have a lot of tools, and we have also a lot of flexibility in the investment program to address the situation.
Thank you very much. That will have to conclude this Q&A session. We'll have a short break. There will be refreshment outside at the gallery, and we will reconvene again at 2:00 P.M. I'll ask everybody to please be on time, in respect of the audio and webcast audiences. Thank you.
Welcome back, everybody. We will now have the Executive Vice President for Development and Production Norway, Øystein Michelsen, present the development of the Norwegian Continental Shelf for us. Please welcome Øystein.
In June 2011, I shared my perspective on the NCS with the investment community in New York. My main message then was the NCS is not the sunset region. In 2011, I said that we plan to develop more than 500,000 bbl per day of new high-value production towards 2020, and we plan to produce more than 1.4 million bbl per day in total in 2020. We even see exploration potential in addition to this. Now, today, my key messages are the following. Our operational performance has improved. Our portfolio has been high-graded through asset transactions. New projects are maturing on schedule and at cost. The exploration success to date provides additional volumes and optionality. In short, Statoil on the NCS delivers according to plan.
Most importantly, we are on track to meet the 2020 ambition. Our company has worked systematically on safety and efficiency over a number of years. The serious incident frequency has been consistently reduced. Production efficiency has improved due to more efficient maintenance, and we have reduced unplanned losses, regained shut-in wells, and increased our drilling and completion capacity. According to the North Sea Benchmark Study, our unit lifting cost has improved relative to the industry average. I'm convinced that safety, efficient operations, and a minimized CO2 footprint are all prerequisites to maximize value creation. This is why we have a continuous focus on improvement in these areas. As you may know, we have undertaken several portfolio transactions since June 2011. The two largest were the U.K. company Centrica, and secondly, with the German company Wintershall.
I am pleased to see that we have managed to reach an agreement on transfer operatorship to Wintershall, a highly competent, I would say, newcomer on the NCS. We see this as a win-win outcome for the two parties. The rationale behind these transactions was to enhance value creation and growth. We want to high-grade our portfolio by exiting non-core assets, to strengthen our position in defined growth areas, and to recycle capital into new growth opportunities. As shown in this graph, these transactions represent a net divestment of approximately 60,000 bbl-70,000 bbl per day of production over the coming years. Let me underline that these transactions are not driven by lack of belief in the NCS. It must be seen within the context of an increasing number of business opportunities there and our strategy to concentrate our efforts on the NCS.
We are reallocating our resources from the opportunities of the past to business opportunities of the future. Our policy of active portfolio high-grading will continue. In addition to exploration and production, the core task of an oil and gas company, as I see it, is project maturation. This graph shows the progress since June 2011. The top left graph is the new project portfolio that I presented then. Since 2011, we have made progress in three respects, and that is, one, we have completed five projects. This represents approximately 90,000 bbl per day of new production in 2014. During the coming three months, we will add another 60,000 bbl per day from projects now close to production start. Two, we have sanctioned 11 new projects.
In total, this will add 240,000 bbl per day in 2017. Three, we have added six new projects to the new project portfolio, among them Skrugard and Johan Sverdrup. According to our current plan, these will produce 200,000 bbl per day in 2020. I would like to underline that this is the result of a consistent field development strategy over a number of years. In 2011, I said that we plan to develop more than 500,000 bbl per day of high-value new production towards 2020. Today, I believe we will develop more than 650,000 bbl per day of new production. Due to this positive development in our new project portfolio, we are on track to fulfill our 2020 ambition.
We are fully aware that the challenge going forward is project planning and execution. We have already taken steps to prepare ourselves. On the external side, we have modified our supplier strategy. We have gradually increased our use of global supply market and thus expanded the supply capacity and the competition for our projects. On the internal side, we have taken active steps to improve the planning and monitoring process. We have increased the focus upfront planning, we have strengthened the monitoring of project cost and project progress, and we have simplified and thus increased efficiency in the monitoring of our contractors. The project execution on Gudrun and Valemon has been excellent, that is on schedule and within cost. We are well-positioned to tackle the project execution challenge going forward.
In addition to our portfolio of large projects, we have a number of smaller projects ongoing, typically subsea tie-in projects. As you may remember, we introduced the fast-track initiative in 2010. The objective is to expedite project execution and reduce investment costs through simplification and standardization. At present, we have 12 fast-track projects ongoing. Each project may be small. However, in total, they contribute significantly to our portfolio of new production, more than 100,000 bbl per day towards 2014. Even more importantly, the value creation is high. As shown in this graph, the average break-even price for our fast-track portfolio is below $50 per barrel. The net present value of the current fast-track portfolio is slightly larger than the Skrugard project, a highly profitable project in itself.
As I see it, this clearly demonstrates that our fast-track initiative is a success. A systematic exploration program in the vicinity of existing platforms will create additional business opportunities going forward. The fast-track initiative is an important part of our strategy, and it will be continued. Now to value creation. Let me highlight three different value creation aspects of our portfolio. First, the cash flow characteristics of 2012. We are currently, as I've shown earlier, investing in new production capacity. Our present cash flow from operations, despite substantial tax payments, allows us to self-finance all investments in new NCS business opportunities. In addition, we provide NOK 40 billion in net cash to Statoil Corporate. Secondly, let us look at the value of our new project portfolio.
The average break-even price of our total new project portfolio is $50 per barrel. In other words, our project profitability criteria are met even at a $50 price level. To me, this illustrates that our new projects are profitable and robust. Third, the external market assessment of NCS assets. The two major deals we made recently employ an average transaction multiple of $15 per barrel. I'm certainly aware of the fact that for a number of reasons that you all know very well, this multiple cannot be used as a kind of firm yardstick to assess the value of the total NCS reserves. If I were to apply this multiple to the Woodmac estimate of our NCS commercial reserves, it would imply a value of approximately $130 billion.
My observations from these three variables are, one, the strength of our value machine, our currently producing assets, is impressive. Two, our new project portfolio is robust. Three, the transaction market recognizes the underlying value of the NCS. In 2012, we launched an increased oil recovery, IOR, initiative. Our ambition is to increase the average oil recovery of our NCS-operated fields from the present level of 50% to 60%. In order to avoid any misunderstanding, I would like to be clear on three basic issues connected to this ambition. First, the ambition is value-driven, not volume-driven. We will not engage in IOR projects that do not add value. Our IOR projects are highly profitable. Second, this is a long-term goal. We expect gradual increases via incremental steps.
Please note our 2020 ambition of 1.4 million bbl per day is not dependent on reaching a 60% average recovery rate. Third, the major part of this ambition will be realized after 2020, and 60% recovery will require continued technology development. As part of this ambition, we are currently building an IOR research and test center in Trondheim. The center is due for completion towards the end of this year. Statoil is a technology-based upstream company. We do believe that technological progress creates value, and this is why we see value in increased oil recovery. Let me now turn to the larger picture, the main industrial steps going forward, that is the further industrialization of the NCS. Due to our history on the NCS, the industrial architect capability is one of our core competencies.
This is a continuous process in which we pursue a number of different industrial tasks in parallel. We actively explore for new reserves close to existing installations. We tie in smaller discoveries to existing platforms, typical fast-tracked projects. We identify the best area development solution for larger new discoveries, and we find the optimal joint export solution from a new area. We secure best practice project execution. I'm convinced that this is a process in which we can create high- value both for shareholders and the larger public. Now we'll start in the North Sea, the most mature part of the NCS. The recent discoveries in the Utsira area, Edvard Grieg, Ivar Aasen, and Johan Sverdrup, and the ongoing development of Gudrun and Dagny, have definitely revitalized this part of the North Sea.
We now see the emergence of a Sleipner Utsira area in which our production will increase from the current level of 160,000 bbl per day to more than 200,000 bbl per day in 2020. Beyond this, we see interesting exploration potential in Sleipner Utsira. Due to this positive development in the Sleipner Utsira area and the significant remaining reserves identified further north, we believe that the present production from the North Sea of 880,000 bbl per day will be maintained at a similar level in 2020. Therefore, as I underlined in 2011, we do not see a sunset future even in the most mature part of the NCS, the North Sea, towards 2020. Turning now to the Norwegian Sea.
As you may know, in January, we submitted the plan for development and operation of the Aasta Hansteen project. Aasta Hansteen is a 47 billion cubic meter gas field located in the deep sea part of the Norwegian Sea. The planned production start date is 2017. It will add 100,000 bbl per day to our production. Polarled, the 480 kilometer gas pipeline to the Ormen Lange facilities at Nyhamna, will link this new gas discovery to the European gas markets and add gas export capacity from the Norwegian Sea. Our Norwegian Sea production will consequently be maintained at the present level, around 400,000 bbl per day, also in 2020. I would like to underline that these two projects represent the opening of a new gas province in the Norwegian Sea.
I will not speculate on the result of future explorations in the Norwegian Sea, but it is a fact that the Aasta Hansteen development and the construction of a new gas pipeline opens new industrial opportunities. Further discoveries in the vicinity of Aasta Hansteen field and along the new pipeline will become more attractive. The Barents Sea has for a number of years been part of our exploration frontier, and I would say it still is, even though there remains uncertainty as to the resource potential in the Barents Sea. The oil discoveries, Skrugard and Havis in 2011 and 2012 are promising. These are located 240 km northwest of Hammerfest, and the water depth is in the range of 360 m-400 m. We are studying two main development alternatives.
That is one with offshore load-loading of oil and one with oil transportation to an offshore-onshore terminal. We will make a decision on the development concept this month. According to our current plan, we foresee a production start in late 2018, and it will add up to 90,000 bbl per day to our production at plateau. I would like to underline that the area has further prospectivity. We are in the middle of the planning process with regards to industrializing a new oil province in the Barents Sea. So far, we have drilled three exploration and appraisal wells on Skrugard and Havis. We plan to drill eight new prospects this year in the Barents Sea, four of them on Skrugard.
Based on our present reserves, our production in the Barents Sea is expected to increase from 40,000 bbl per day up to 140,000 bbl per day in 2020. Beyond 2020, the ongoing exploration and future license awards may add to this. In the future, we expect the Arctic will be of increasing importance for our industry. The Norwegian Barents Sea is the most ice-free part of the Arctic. It is closer to existing markets than other parts of the Arctic, and there is no other area in the Arctic that offers more attractive framework conditions for exploration. Further large oil and gas discoveries in the Barents Sea would provide a new energy region for Europe. Statoil has more experience in the Barents Sea than any other company.
This means that we are strongly positioned to move further north into the Arctic. To conclude, the NCS, the backbone of Statoil, is on track to meet the 2020 ambition. Our efforts to improve safety and efficiency do work, and we have made two major steps in high-grading our portfolio. This will continue. We are maturing new projects according to schedule and cost, and we have taken action to continue this success going forward. We have a robust portfolio that create high- value. We consider IOR to be an important value-creation competence, especially in the longer term, and we see the emergence of three new oil and gas industrial regions on the NCS. The NCS is a strong base for Statoil and will continue to be for decades to come. Thank you for your attention.
I have the pleasure of introducing my good colleague, Eldar Sætre, responsible for marketing, processing, and renewable energy in Statoil. There you are.
Thank you, Øystein. Good afternoon, ladies and, gentlemen. It is really good to see you all, and also good to see quite a lot of familiar faces here, actually. As some of you might know, I was the CFO of this company for quite a few years before handing over the position to Torgrim two years ago, more or less exactly now. I know, and I could see today, Torgrim, that you are enjoying yourself in this new role. That's very good. I think you have had really good reasons to do so. It has been actually a tremendous achievement and tremendous results that has been delivered, from the company since then.
I have a confession to make, and that is, that I have also enjoyed myself, a lot actually, being responsible for the quite sizable, but also extremely dynamic mid and downstream part of this business. It has been, as I said, truly exciting. The gas part of the business, which is my subject today, represents actually a big part of this, excitement. On this background, again, my key messages today are the following. First of all, that, Statoil has, and it has been said before today, delivered record, gas sales and earnings in 2012. Secondly, that we actually believe in a strong, robust outlook for the European gas market.
Thirdly, going forward, that Statoil is well-positioned, well-equipped to capture value from the ongoing changes that is taking place in some of our gas markets. My main focus today will be on Europe, but I will also touch upon our U.S. gas business towards the end. 2012 was a very good year for Statoil's gas business. Record gas sales, very strong gas prices, and actually the highest earnings ever in relation to the gas marketing and trading activities as such. Our total gas sales increased by approximately 10% compared to the volumes that we sold in 2011. This was achieved in a market that was actually declining compared to the year before, implying as you can understand, an increased market share for Statoil.
In addition, the global realized gas price we achieved last year was the second highest ever. In Europe, if you look at Europe alone, we saw actually the highest gas price that we have ever seen in Norwegian krone, that is. I believe this demonstrates the sustainability of our business model, while at the same time we are also adapting to the changes and the structural changes that is actually happening in our markets. Most of the value is passed on from my business to the upstream business areas through the transfer pricing mechanism. I know Øystein is very happy about that.
As Torgrim mentioned earlier, our adjusted earnings for gas marketing and trading, the money that is left in my P&L, was the highest ever at NOK 14.7 billion compared to NOK 13.2 billion the year before. You should note that this happens despite the fact that we have divested a significant part of the Gassled infrastructure from 29% to 5%, which typically represents NOK 4 billion-NOK 5 billion in income loss from that divestment annually.
Then you might ask, so I will ask the question so you don't have to ask it later if this is a sustainable level of earnings. My response to that would be that we do have, I think we have proven, and I know we have a solid competence base, skilled and a professional team, and also a very solid and flexible asset base, and that combination is very strong. Then you should obviously be prepared to see variations in the results as the volatility and opportunities, you know, varies. Last year was, in many ways, a reasonably good year for my P&L in that respect.
I should say to this question that, I'm also confident that we will be able to deliver solid contributions from our, gas marketing and trading over time, and the justification for such a statement is actually the word backbone of what I'm going to talk about in this presentation. First, I will say a few words about the, European gas markets and our perspectives on the gas market. We believe in a robust, use that word, outlook for the European gas market as Europe needs new gas supplies actually in competition with other regional markets. The outlook for the overall European gas demand is somewhat uncertain, at least in the short term. Growth is expected to resume as we move towards 2020. That's our views.
Energy policies currently provide limited support for gas demand growth, and you know also economic growth in general is stagnating. However, we expect demand to rebound and increase by almost 100 BCM from now until 2030. The key feature on the supply side is that indigenous gas production in Europe, excluding Norway, is in decline, and that this trend is actually set to continue, as you can see here. Between 2008 and 2012, indigenous gas production came down by some 50 BCM. This leaves Europe with a large supply gap that needs to be filled from new and more costly supply sources. This gap can be as high as 250, big number, BCM by 2030 according to our estimates.
This supply gap can be filled with new pipe and gas from Russia and from Norway, as mentioned by Øystein, and also from the Caspian region, which I will revert to. In addition, Europe will need continued and increasing supplies of LNG. Generally speaking, new LNG projects will not be dedicated for Europe. This implies that gas buyers in Europe will have to compete with buyers in other import regions. The cost of developing new gas value chains into Europe, in particular LNG value chains, underpins a strong price outlook. This also goes for potential future LNG exports from the United States, as the delivered cost from U.S. LNG to European hubs would not be particularly low.
In conclusion, the price level for gas in Europe will over time have to allow for new and profitable development of the required supply, both piped gas and LNG. Potential downsides to or risks to the demand level are driven by, as you can see here, unfavorable energy and climate policies, and obviously also lower economic activity. On the other hand, the price risk for natural gas is balanced due to the potential tightness in supply that I just talked about. Within this framework of a robust market outlook, let me reflect a little bit on the structural changes that is taking place in our markets. We do see that the regulatory efforts to stimulate the development of gas commodity markets on the continent have worked in some markets.
Ensuring access to traded hubs for all players has increased the level of trading activity. For instance, the volumes being traded at the NCG and the Gaspool hubs in Germany have both increased by over 300% during the last three to four years. However, today we see what we call here and illustrate to you a three-speed Europe. In Northern Europe, as I touched upon, we see some real changes taking place. While Southern Europe has adopted liberalization legislation as such, but are in reality lagging behind in this development. Eastern Europe countries are the least liberalized markets. For us, this means that also our adaptation to these more market-based terms and conditions will materialize at different speeds, implying that the old market structures are still most relevant for markets that is in an early phase of this process of maturation.
These different regional and market dynamics will also create trading opportunities all along the value chain for a company like Statoil. Market players that have a diversity of assets, including a lot of flexibility, will be able to capitalize on this. The liberalization process provides Statoil with new opportunities to enter into new growth markets, to diversify the composition of our sales channels, and also getting direct access to new customers. I'll come back to this. Finally, these changes also have some quite obvious implications for gas price formation and product bundling in the most mature markets, and that is actually my next subject.
We all know that restructuring and adaptation to more market-based gas pricing requires both the existence of transparent price quotations at sufficiently liquid hubs and open access to infrastructure to attract market participants sufficiently to create the liquidity that is needed and sufficient competition. When these conditions are fulfilled and we are facing a fully liberalized market, the historical oil indexation is likely to be less used. The graph shown here compares the import prices to Germany, the so-called BAFA price, which typically was a proxy for oil indexation, represents the contract to Germany, versus a gas market price contract, which is illustrated here by the NBP in the U.K. These two prices, price formation mechanisms for exactly the same product is not likely to coexist in the long run in a fully liberalized market environment.
When it comes to new sales in such a market environment, I'm talking about new sales, both oil indexation and other non-gas indices may still be an option for certain customers for various risk management purposes. This kind of pricing could, however, entail hedging as such, and there would typically be a cost associated to that kind of risk management services for the customer. Bear in mind that the pricing in a traditional oil index contract and a market-based sales contract is not comparable, as these two actually represents very different products. Hub-based sales equals flat volume sales, whereas the traditional oil indexed contract were a bundled product in with an all inclusive price for the commodity as such, and also for the including a significant offtake flexibility.
With the flat and hub-based sales, the seller, Statoil in this case, regains control of this flexibility and can sell it as a separate product or use it as a trading tool in our trading activities, and we are doing both. Now let me elaborate on Statoil's approach to these market developments. We seek to address these changes in an opportunity-driven manner. The liberalization process, which breaks up old and often inefficient monopolistic value chains, creates a new dynamic where both old and new players have access to the same markets and on equal terms. Germany represents a very good example actually of a market that is going through this process.
Suppliers get access to new customers, such as trading companies, regional and local distribution companies, industrial end users, big and small, and also power companies. Statoil is very much an active participant in these market developments, and we have expanded our commercial relationship over the last few years quite considerably. From 2009 until last year, the volume sold through the traded markets and through direct sales activities to end users almost tripled from around 10 BCM to more than 25 BCM last year. Going forward, this part of our business is going to grow even further, as indicated also on this graph. This means that we are developing new commercial relationships with large end users, utilities, and local distribution companies, like in this case, the German Stadtwerke.
In addition, we expect to continue to grow our short-term gas trading activities via liquid hubs, which today, as you can see, represents around 25% of our total volume-equity volumes. Long-term contracts will continue to be an important part of our business, but they will most likely take different shapes and forms, reflecting the various underlying market characteristics. In this context, we will continue, obviously, to develop our relationships with our legacy customers, strong and important relationships. At the same time, we will develop new relationships, and our recent sale to Wintershall in Germany is a good example of our ability to do that, a new type of relationship and a strong long-term partnership.
Our strategy is to mature the total capacity of our sales channels, which will be more diverse than they have been before, but to expand the total capacity to be beyond the physical production capacity that we have. That enables us to shape the portfolio structure and the sales channels mix in a way that maximize value creation over time. Let me then say a few words about our price risk profile. We have actively managed our gas business and modernized our contract portfolio over the last few years. Through commercial negotiations with our existing long-term customers, we have gradually adapted to these new market realities to the extent this has been justified.
The upper chart on this slide illustrates the development of our price exposure in the global gas sales portfolio, showing approximately 55% at hub price, hub-related price last year, 45% oil indexed. The increasing share of hub, gas hub pricing is a result of several factors. It includes increasing sales and production in the U.S. and also growing sales to the U.K. market, both markets which have been fully liberalized for many years, and gradual adaptation to gas hub pricing in continental markets whenever this has been considered relevant. In the contract negotiations, we have also been seeking what we call structural solutions, which typically could be outside of the formal price review process.
Examples of such structural solutions is access to markets and access to hubs, access to flexibility that I just talked about, and in some cases, also volume reductions that we have agreed upon. In addition, we have reduced the level of price review exposure in our long-term contract portfolio, as shown on the lower chart here. Negotiations have now been concluded for the majority of the volumes, which has been up for negotiations in gas year 2011 and 2012, and we have agreed on sustainable solutions with all parties. Let me remind you briefly of our unique NCS position. Our competitive features includes the following elements, huge gas reserves, flexible production assets, quite unique, and access to an integrated and very cost-efficient transportation system, which is directly tied into attractive markets, short distance.
To monetize these positions, we capitalize on commercial competence and operational skills that have been developed for over 30 years. An important part of this strategy is to build on our huge upstream flexibility and the beneficial cost position. The Troll and the Oseberg fields give us access to physical upstream production flexibility based on both day-to-day and seasonal demand variations. We will also continue to use the integrated transportation system to access different markets to optimize and maximize value creation. Our LNG business will continue to create arbitrage value by diverting LNG cargos to premium markets around the world, I'm talking really around the world, whenever we see opportunities to do that. Before leaving Europe, you can see on this slide on the right-hand corner of the map, there is an arrow coming in there.
I would like to give you the latest status on our growing gas position in Azerbaijan. The Shah Deniz 2 project is one of the biggest of its kind, and we have a 25.5% stake in that material stake. It's really key to opening up the southern gas corridor from the Caspian to Europe. The project is now progressing towards final investment decision late this year, and first gas in mid-2018. In addition to the upstream investments in relation to this project, the project also requires significant investments in midstream infrastructure. We are talking about more than 4,000 km of new pipelines that needs to be sort of put in place. This includes the expansion of existing pipeline capacity in Azerbaijan and Georgia.
It includes a new pipeline through Turkey, and Turkey is a long country, and also onward capacity from the border of Turkey into Europe, which would be either the Trans-Adriatic Pipeline or the Nabucco West. Statoil has an option to become shareholder in actually the entire value chain from source to market. The gas sales negotiations are very important. With the EU buyers were resumed last month, and the Shah Deniz consortium targets final selections of buyers, and that will also have to be combined with the selection of pipeline route into Europe ahead of the final investment decision to be made this year. Let me spend some time on our growing gas position in the U.S. The United States is the largest growth market for Statoil outside of Europe.
We currently market 4 BCM-5 BCM of equity volumes in the U.S., which is mainly production from the Marcellus region. As we are all aware of, the gas prices in the U.S. remain at a low level. We were hoping for a development, but it didn't materialize. In the short term, prices will continue to be driven by weather, obviously temperatures, coal prices, and short-term drilling economics as such. However, we believe that as demand growth continues, mainly from structural shifts to more use of natural gas in the power generation sector, that prices should slowly trend upward. For our Marcellus volumes, we have secured access to growth and premium markets in both the Greater Toronto Area and in New York City. This has enabled us to achieve materially higher prices for our gas compared to the local markets in the production area.
The price graph that you can see here illustrates the price difference between Dominion South Point, which is the best proxy for the local markets, Toronto and New York, and it's all relative to Henry Hub. As you can see, there is a significant value uplift for sales to Greater Toronto and also to New York markets. One additional point, we also add value to our Marcellus production by means of ethane extraction and sales, realizing a significant premium compared to the alternative of actually blending this ethane into the sales gas. We do all we can to extract and maximize value. Going forward, we will use our competence and resources to develop similar type of thinking, value chain thinking. Premium markets is important to cater for growing production also in the liquid-rich southern Marcellus.
I think our latest acquisition in this region will give us even more leverage in that respect. Finally, Hilde, to conclude my presentation, I always like to repeat, and I will leave you with these three main messages of today. During 2012, we have seen record gas sales, record gas prices into Europe, and also record earnings. I think this demonstrates the sustainable business model. We do see a continued strong outlook for the European gas market, and we are convinced that Statoil is fundamentally well-positioned, well-equipped to continue to capture value, also in a more liberalized market environment as it emerges. Thank you very much for the attention, and I leave the word to you, Hilde.
Thank you, Eldar. We will now run another Q&A session, and this time we will have both Eldar and Øystein available for answering questions regarding their presentations. Once more, we will start out with taking questions from the audience here in London. Again, please state your name and the name of your company before your question. I'll also, again, ask you to please limit yourself to one question at a time. We can start off with Jon. Please, Jon.
One question per principal on the stage. Maybe I'll come back with my second one. If I can ask my first question to Øystein. I'm trying to relate the production targets that you have to the CapEx targets you've also announced in Norway. I'm conscious that over the next two-three years, you're probably building up developed reserves in advance, so actually a tick-up in production from things like Johan Sverdrup, et cetera.
Are you able to give some guidance on capital intensity, a development cost, either blended or by region, the Norwegian Sea, North Sea, Barents Sea, that we can use as a guide as to the development cost, unit development cost for Norwegian oil and gas over the next decade or half a decade?
We don't give all those details for all our separate projects, but we have we are guiding on sort of CapEx numbers over the next years in total. I'm not sure if I can give you all the details, but as I said, we have an average break-even price of $50 per barrel. That is some indication of what it costs to develop the NCS.
Sorry, I don't need it per project. I'm just trying to get an idea of the build-up of capital intensity and then almost the release of capital intensity as you come off the back of what looks like quite an active development process over the next few years. I'm just trying to get an understanding of the unit CapEx intensity so that we can kind of.
Okay.
Plot that out over the decade.
Maybe we could come back to some.
Okay.
Just to make sure we.
All right.
can give you what you're actually asking for.
All right.
Mm-hmm.
Yes, Theepan.
Hi. Afternoon. I'm Theepan from Nomura. Sort of a derivative of that question, I guess. I guess the backbone of your growth in Norway has grown over the last couple of years. The question I have is: Do you think there's enough capacity in the local contractor market in Norway to meet your aspirations? Or are you increasingly going to use Asian contractors to deliver on your projects?
Well, as I said, we are increasingly using the international supply market. We have been working on that for some time, actually, to qualify more contractors and to qualify more suppliers in the market, and also how to team them up with the right competencies that we need on the NCS. We have been preparing for that. We have seen that this activity level is more than can be absorbed by sort of the local markets. Still, for example, the Norwegian suppliers are very sort of heavily involved in our project, and they're contributing a lot. We have prepared for that, and we see that there is an international supply industry that can provide us with the capacity we need.
Is there a very deliberate strategy therefore to keep the market in Norway, let's say, as subdued as it could be?
To keep the market as
Is there a strategy therefore to keep that market in Norway, let's say, not to overinflate that market?
Well-
Because you are clearly prepared to buy elsewhere.
Yeah. Yeah. It's important to keep a kind of competition in the market. That is important for us. We would like to see the supply market being able to compete with this so that we are not stuck with sort of a limited capacity, because then the prices and the cost level will rise to yeah more than we can live with. Hilde?
Oh, yes. Haythem, please.
Thanks. Thank you. Afternoon. It's Haythem Rashad from Morgan Stanley. My question is for Eldar, actually, on your presentation on gas. Just to really, if you could perhaps give some more color and sort of substance around the comments you made about the expanding of the commercial relationships and sort of increasing that share to sales directly to end users and trade markets. I just wondered if you could sort of talk a little about what Statoil is doing to sort of prepare for that in terms of resourcing, staffing. Do you feel you're ready, sort of, as an organization to sort of grow that, or is that something to come? Thank you.
Okay. I appreciate that question because that gives you an opportunity just to repeat that this is a you know, we are looking for opportunities in this new reality. That means that we are not sort of reactive, we are proactive. We seek to, you know, prepare ourselves before the event, to put it that way, and build the organization, build the capabilities on top of the competence base that we already have to be able to sort of deal with a much bigger number of customers, which is one of the you know, features of the future. By selling directly through the hubs, increasing volumes, and also by selling directly, increasing volumes, we will have to deal with a lot of many more customers and smaller customers.
We need to build the competence to deal with this and with that. We are doing that quite aggressively. We have a direct sales organization in Brussels that has been doing a tremendous job and has developed, you know, very good relations and expanding their market presence and has grown, as I indicated, that part of the business quite significantly. We have high ambitions for further growth in that area. Our trading activities, which is carried out from London, first of all, is making good money. I think we demonstrate on the way that, you know, we are up to the task.
We are also preparing ourselves to do more volumes and utilize sort of the whole set of opportunities that Europe, you know, gives us and the flexibility that we have. We are expanding that both geographically and also in terms of building our capacity to run that business.
Yes, Rahim first.
Thank you. It's Rahim Karim from Barclays. Eldar, you talked about the fact that your long-term contracts are taking different shapes and different forms, and you're also looking to sell more of your gas to end users directly. I was just wondering if you could perhaps talk a little bit about the different commodity prices or different price risks you might be willing to take on or that you are having to take on as a result of these shifts. I guess we all assume or mainly assume that, you know, those contracts are going to be spot gas price linked or some derivative of that. Perhaps you could give us a sense if you're linking contracts to, you know, other commodities or other pricing references.
You know, the legacy contracts have a huge component of oil in it, the gas or fuel oil. Obviously, we are willing and will continue to be willing to take on that kind of risk. It's a core risk for Statoil, oil as such. No problem. We will increasingly take on gas market risk into this, and we like that. It's also part of our core risk. We see that, you know, there is developing a diversity of desires and needs from various customers.
In particular, when we go down to the more short-term and more sort of smaller customers with more specific needs, we see a variety of things that we need to relate to. One of the basic principle is the product unbundling here, that you start, you know, with the hub price on these new sales and if there is something which has a price tag attached to it, you know, that is, you know, basically has to be priced into this. That could also have a hedging type of nature. You know, we are into some kind of commodity that we might not want to prefer as a core risk for us.
We might sort of look at for what is the cost of taking that back to crude oil or gas or something. I think we have very conscious, you know, strategy as to sort of what is the kind of risk that we like and so on. What I should say is that, when it comes to the power segment, it is an issue because they are facing basically, power electricity risk at the end and gas risk, you know, on the other end. There is a risk component that to the extent that there is spark spread positive at all, which is a problem currently.
Where we have discussions and have developed sort of concepts are involving ourselves in discussions which is about sort of how to look upon that risk. We had a couple of contracts where, which has been signed, which has sort of more complex risk and which also has component of power risk and electricity into our risk profile. That's not a big chunk, but you know, there are those kind of components as well.
I think there's Neill for the next question, please.
Thank you. It's Neill Morton at Investec. Back to the NCS. Øystein, you mentioned that back in New York two years ago, you gave a 1.4 million bbl a day target for 2020. Your projections today now include new volumes from the Utsira High and from the Barents, but yet the target's still the same. I just wondered what the offsetting factor was.
We can see we have had a development. We are also divesting from the NCS that is affecting our production. Also the target or the ambition that we stated in New York one and a half years ago also included exploration success. That was part of it. This is what we actually have. We have confirmed that the potential in the exploration prospects that we were looking at, that actually is true, and that is adding on to our production in 2020. Yeah.
Of course, we are much firmer on our guidance now than we two years ago.
Michael, please.
Hi there. It's Michael Wilson again from Citi. Could I maybe just refer back to the sort of European supply and demand chart that you talked about on the gas market? Clearly, we can all model maybe the supply declines in the existing production base. Could you maybe talk a little bit more about your thoughts around the demand, you know, I guess, targets you lay out? I think you talk about 20% increase in European gas demand till 2030. Maybe could you talk a little bit about where you think gas is as a percentage of share into the utilities market, for example? Are you saying that it's gonna increase, or is it simply just a recovery in GDP that's driving that kind of assumption? That'd be great. Thanks.
Yeah. Also, there are several factors that goes into that belief as such when it comes to the overall demand. Then I discuss the price as a separate thing because that's the you know strongly related to the supply side as well. When it comes to demand, what we do see is that honestly we believed a few years back that the power sector would be the main engine and the driver for growth as such. That has not materialized, and that's also why we have seen a contraction in the European gas demand in combination with the economic situation in Europe, which hasn't sort of rebound. We are still optimistic about the power sector as such.
Let me remind you that there are other sectors also where gas plays an important role. When it comes to the power sector, we think it is. It would be rather astonishing if Europe, at some point, doesn't recognize the fundamental nature of gas in terms of climate policies and the effectiveness of gas in terms of coexisting with renewables and so on. We think that, you know, it might take some time, but, you know, eventually there will be policies established, like we see in the U.K. actually, which is favoring gas slightly more than we typically see in Germany, for instance. We think also that the E.U., in terms of the ETS system, will have to come together at one point.
They are struggling, but they will have to come together to establish a system that makes this come into the money in a way and have an impact, and which was the starting point for the whole ETS system. This more sort of fundamental, you know, we. There are sort of variances from year -to- year here, but, you know, we have to take the fundamental view, and we think that is going to drive also this sector longer term. Then it's going to be, you know, differences depending on what part of Europe you're looking at. We're talking about 100 BCM of additional demand, which would be part of the 250 BCM glut that I was talking about.
We don't think that the material part of that is going to come in Northern Europe. It is probably going to come in Southern and Eastern Europe. That is also an aspect of this which is important in our analysis. Another component is that obviously renewables has played an important role in particular in countries like Germany so far, and displacing gas. You know, the price of coal has sort of you know made it superior to gas in this environment. We also think that you know fundamentally the cost of renewable subsidy is increasingly, and also looking at the economic situation in Europe, coming up among politicians as an issue.
We see those debates emerging also in Germany now. We think that sort of the politician's view on how much, you know, financial willingness there is to invest massively in further development of renewables is also going into this equation. All in all, renewables, subsidies, finances, climate policies, fundamental attractiveness of gas, it all points together into a longer term development that we are quite convinced about. The main driver of what I said about the price is actually, in any case, there will be a significant supply glut from the indigenous production side, from the supply side.
Yes, I can see one more from John.
Yes. Jon Rigby from UBS again. If I can ask my gas question now. If I look at the chart that you showed of your projections on prices, which you don't show a European contract price in, but you show Japanese LNG prices dipping down, which I guess is a reflection of your oil price view. You also show NBP spot European prices climbing. It strikes me that if you were to put a European contract price on there, you'd end up showing that spot prices in Europe and contract prices in Europe pretty much converge in your scenario. Therefore, we get back to the answer we first thought of. Is that a correct interpretation?
You know, I consciously didn't show. I would have to pick a contract to do that. We don't do that. What you see, what you have seen is actually quite strong evidence that we are able to sort of deliver strong results, despite the fact, you know, last year that we have 55% on an RRR basis. Going forward, obviously, what kind of assumptions are you putting into place here is also important. That's sort of how the forward curve for gas and oil is developing. We see that oil is backward and gas is the opposite. You know, even today, this is strong evidence that we are dealing with this situation in a good way.
Going forward, they're looking at the market and how it prices those commodities. You know, it's. I think we might be back to the situation that we had, you know, earlier that, you know, before the economic crisis, we took up most of the gas demand. That you know it's a pricing that you know is pretty much equal. It could go up and down, but as you know, over time it equals. So I honestly think that longer term hub-based pricing and the liquid market for gas is a good thing longer term. We are preparing ourselves to do that, and we are making good money on that already now.
Yes. I see another hand.
Hi. Peter Hutton from RBC. You've got a strong position on, in European gas pipeline deliveries. Is there a question mark over the sustainability of that? Or are there any handicaps to the long-term position of that given that as a company you're relatively underweight in global LNG, and are there any issues to address that?
You know, it's the fundamental nature of a pipeline. You cannot turn, you know, there's not much you can do about it. There is an infrastructure. I think the main point is that it's a flexible infrastructure. It gives us access to various markets, and that gives us a very strong starting point. If you look at Europe, you know, I think it is there could. I mentioned there is demand uncertainty. We have a view on that. We think the pricing in Europe is quite robust, and that we will have a situation where Europe will need LNG to balance the whole thing. I pointed out some risk factors, obviously. Things could happen, which we don't give a lot of probability to, you know.
That sort of takes away the whole European gas market. I think we would have to see a quite serious situation before sort of we were really concerned with the pipelines of gas to Europe. The cost efficiency of utilizing that system is so huge that my starting point gives me a very strong hand and is a benefit to us. Ideally, if looking at sort of how to expand our growth business, our gas business, you know, we have said that LNG is a nice thing. The flexibility of LNG in a global context is something that we would like to see, and we have tried for many years. In that context, the Tanzanian position is a very good asset for us.
That will make it a difference in that respect.
I think we'll turn to the audio audience now. Our first question comes from Teodor Nilsen with Swedbank First Securities. Please go ahead, Teodor.
Hello again. A question related to the NCS. You have said that you want to concentrate your portfolio in Norway. I guess you want to divest some assets in some areas and maybe want to increase exposure in some other areas. Is it possible to give some color on which areas you will pay attention to and which areas you will seek to make some divestments in?
Well, as you know, we have already done two major transactions. That is telling us something about what our thinking about this is. We are building up in, for example, Utsira and selling down in the Njord/Vega area. That's a reflection on where we intend to be and where we do not intend to be. The same was with the Centrica deal, where we also divested many, say, very early phase projects because we couldn't, we were not, or we didn't want to prioritize these, and therefore we also divested them. We have a plan, we have a strategy to where we want to be, and then it is the opportunities and the price and to find the right partner to do these transactions with.
This will be a continuous effort on the NCS, and we would very much like to see more of this happen. Of course, this depends on many parties. We do work systematically on this issue.
Do you have any thoughts around owner shares? There's some fields on the Utsira High you already have a pretty substantial owner share in. Could you own 100% of a field, or do you have any thoughts around that in terms of risk management?
Well, we do not want to own 100% of the fields. It's also a matter of sharing the risk with other partners, and that will also be part of our strategy going forward.
Okay, thank you. A final question just on recovery rate, if I may. You're aiming for a 60% recovery rate on NCS, which is nice. Could you say something about the CapEx requirements per barrel, and also something about the internal rate of return you expect on the CapEx related to increased recovery?
Well, as I said, this is a very long-term ambition. This is only
A natural going forward from the 35% we started out with. We had 49% last year, we have 50% this year. We have said that this is the right ambition for us to give direction to our IOR efforts. What we say also is that this will require technological development. We are not there today to say that it's. We do not know exactly what it takes to make a 60% recovery from our NCS portfolio. We will. The most important thing, we will have a strong effort on doing research, doing technological improvements or developments to get there in the future. As I said also, this will happen in the long term and most of it after 2020.
I can't give you any figures or directly sort of the price for this 66%. We don't know.
Okay. That, that's fair. Thank you.
Our next question comes from Brandon Mei with Tudor, Pickering, Holt & Co. Please go ahead, Brandon.
Hi. I may have missed it, but I was wondering if you can give some color on what you're seeing on the coal competition, and maybe if you could put some numbers around it and what you expect going forward.
What you see on-
Coal. Was it coal?
Coal competition. Okay.
That was me.
He's a coal man as well.
I'm not a coal man.
Definitely not. Obviously, you know, there are some paradoxes here, but what we see is that the United States is basically growing their gas consumption at the expense of coal and improving their climate accounts as such, without the climate policy, to put it that way. While Europe, which has a climate policy, goes the other way. It's a paradox. I think the solution to that equation is the coal that increasingly comes in at a low cost from the United States into Europe, into Germany, at quite low cost. It's hard to compete when that happens.
Europe is willing to accept that stuff into their power generations and for other purposes with CO2 emissions, which is 3x at least, you know, as much with the old power plants as you know, you would see on gas. That's what happens, at least we have seen that in Germany. I don't think that paradox or that situation can prevail for a long time. I think the U.K. is seeing it, and their electricity market reform is pointing at sort of, you know, acceptable levels of carbon emissions for power generation. That clearly creates a problem, at least for new coal investments.
I think it also incentivizes gas, at least to a large extent. I think the other X factor in this is Europe. I think the fundamental thing is that Europe, if they want to reduce CO2, they have to put a cost on it. If they want to achieve something, not only put a cost on it, but a cost that has an impact. So far, there is a cost that doesn't have an impact, and it's far away from that. European policies have to sort of address that in a way which displaces coal. Otherwise they will not see impacts in their climate ambitions. That's my general view on this.
As I said, longer term, we think these, you know, elements will emerge, and that coal will really struggle in the European energy mix, and it should.
Thanks. I guess my second question is on the Marcellus again. Can you give some color on what new opportunities you're exploring in the midstream in the Southern Marcellus? Also your thoughts on LNG exports from the U.S. and also petrochemical projects?
Yeah. Petrochemicals, to take the easy one, that is something we have been into a few years ago, and we are not going back there. Obviously petrochemicals is a potential customer. I talked about ethane extraction as such, and that is part of the thinking, you know, to supply into petrochemical industry. When it comes to Southern Marcellus, we are looking into that. The key thing here is to attract key markets, premium markets that has sort of a demand and would like to develop a demand and where there are infrastructure projects that is, you know, addressing these markets.
I think, you know, basically we are heading slightly south and not north as we have seen into Toronto and New York and into southern markets like the Atlanta region and so on. We are exploring those kind of opportunities and pipeline opportunities in that respect. It's based on the same competence that we have from the Norwegian side and the same principles that you have seen us develop in the Marcellus so far. To take out the wet components and maximize values from that is also a key part of the strategy in the South.
All right.
Hilde, there was a question from that I might try to answer on Torgrim's on the volumes that we have you know, moved forward, to put it that way, and how much money we have made on that. I have to disappoint, not surprisingly a little bit on that question. Because, you know, I think we have you have indicated the volumes, Torgrim, that we have moved forward around 15,000 bbl per day. If I were to give a number on that, I would pretty much expose every sort of, you know, strategies for decision-making and how we think about this, and I don't think that is a wise thing for me to do.
All I can say is that it's, you know, we obviously make good money on that, and that's part of sort of what you see also in our accounts.
Okay. Next on the list, we have Jason Kenney from Santander.
Hi there. Thanks for another question opportunity. Just going back to the earlier questions on capital intensity, but also thinking of unit costs. I wonder if you could share your thoughts on the unit cost profile going forward, versus today, at least, particularly over the period of 2016. Then, maybe if you could just expand a bit on the $50 per barrel cash breakeven of new projects and relay that to or relate it to the current cash breakeven of your business and maybe the whole portfolio, and the profile going forward.
When it comes to unit cost, we see the cost is developing. We try to keep it in a kind of constant, but it will have a slow increase in the years to come. We have full control of that. It's not kind of getting out of control. As we said, because we are working on, we have our ambition is to keep the field cost level at a constant level. When it comes to the capital or the cash or the break even on the project, there is a variety. We have a $50 per barrel as an average, about that.
Some of our projects are much better than that, and some of them are not as good. When it comes to Aasta Hansteen, for example, where I mentioned that we have a somewhat higher breakeven, and that is also because this is an area solution. It's opening up a new infrastructure and so on. But on average, we have a very robust portfolio. Our best projects within sort of fast-track is better than $30 per barrel breakeven.
Okay, thanks.
We'll take the last question today from Christine Tiscareno from S&P Capital IQ. Please go ahead, Christine.
Thank you. I don't know if you're the right person to ask this, but I wonder if you could give us an update on the Troll field, which is one of your most flexible ones. If you have any comments on that and maybe also the Alvheim field. Thank you.
The Troll?
The Troll field and what was the second field?
Yes, the Troll field and Alvheim.
Alvheim.
Alvheim.
Correct.
Yeah. Okay. That was. Yeah. What do you mean about the Troll field? The update about the projects or?
Well, yes, there was a significant decline in production in the fourth quarter versus the third quarter. I don't know if most of your so-called held back volumes are coming from there.
Yeah. That is one kind of older question. I mean, Troll is a swing field. We have a very large flexibility of production capacity. The gas sales is very much controlled by-
You know, the fourth.
Gas-
Yeah, the fourth quarter is full speed. That is, with the gas prices that we have seen and Torgrim mentioned, we also moved forward volumes. Basically on the Troll field, it has been, you know, full speed. Any kind of decline in the fourth quarter, you know, there have been some minor operational interruptions, but those are minor. They shouldn't have any impact on the production volumes as such in the fourth quarter. I can't relate to sort of a material, you know, reduction from the Troll field. You know, that should basically be as much as possible, at least in November and December.
When it comes to the-
Or-
To Alvheim, I'm not quite sure what you mean about that.
Well, there's also very significant reduction in volumes.
Yeah. We have had some problems with the riser at the owner, and that has affected the production from Alvheim, that is correct.
Um, and you-
That is a very minor.
See-
Very minor effect on our total production.
Going forward in the first half of the year, the Troll production could increase again, or it could stay where it is, which is basically half of what it did in the third quarter.
You know, I'm not familiar with the numbers that you're referring to.
No.
They don't fit with my sort of market intelligence. We'll check it, I think. Yeah.
Okay. That's fine. Thank you very much.
We'll get back to that. Yeah. Okay. We'll have to conclude the Q&A session. Should there be any further questions, please feel free to contact us in Investor Relations. The presentation and the Q&A session will be available for replay from the website in a few days, and transcripts will also be available. Now, before we end, I would once again like to introduce our CFO, Torgrim Reitan, who will close today's event.
Please, Torgrim.
Okay. Thank you, Hilde. It has been very good to be together today, and I hope it has been a useful few hours for you. We have given you a comprehensive comprehensive level of details and information. I'll let you digest the information, and I'm not going to to repeat it now. What I want you to remember is two things. Firstly, we have delivered a very strong set of numbers for 2012, and we have enhanced the value for our shareholders. Secondly, we are on track to deliver on our longer-term ambitions, and our strategy remains firm, and there's quite a big momentum in the strategy work. It has to be said that the strong set of results raises expectations for future deliveries. That is a challenge that we live well with.
We have been clear on the development in 2013, and I do think it has come across that, as a CFO, I'm looking forward to 2013. I'm proud to be part of an organization that is able to deliver, you know, strong growth, the transactions we have done, the exploration results that we have seen in 2012. Let 2012 be a teaser for what we would like to achieve in the years ahead. Thank you very much for your attention, here today. Then I'm looking forward to enter into discussions with you over the next few days. Thank you very much.