Equinor 2Q19 results conference call. I'm delighted to be joined by Lars Christian Bacher, CFO, who will run through the results and highlights presentation. We'll open up for Q&A over the phone, and we'll expect to finish the call inside the hour, as I know this is a busy day for everybody. Also on the call, we have Svein Skeie, Head of Performance Management, and Ørjan Kvelvane, Head Accounting . With that, I pass over to Lars Christian to get us underway.
Thank you, Peter. Good morning, everybody, and thank you for joining us. In the second quarter of 2019, Equinor delivered good overall operational performance in a quarter characterized by record-high project activity and many planned turnarounds. In addition, our financial results were mainly impacted by lower realized oil and gas prices and their production mix in the quarter. We have said that we expect price volatility and therefore it is important to sustain and build upon the structural improvements achieved during the past years. I'm pleased to see that we continue to demonstrate strong cost focus and capital discipline. Equinor is a stronger company than we were just a few years ago. We have a stronger balance sheet and more competitive projects, and we are more resilient to lower prices as well as carbon impact.
With a net debt ratio below 20%, Equinor continues to be in a strong financial position and the board has decided on a dividend of $0.26 per share for the second quarter, up 13% compared to last year. Based on our strong capital discipline, continuous improvements, and project execution, we are today lowering our CapEx guiding for 2019 from $11 billion to between $10 billion and $11 billion. Strong project execution is also why we are lowering the CapEx estimate for Johan Sverdrup phase I by a further NOK 3 billion from NOK 86 billion to NOK 83 billion. Since the PDO for Johan Sverdrup phase I was approved back in 2015, recoverable resources have been increased from a range of 1.7 billion- 3.0 billion to a range of 2.2 billion- 3.2 billion barrels. In addition, we have reduced operating costs by around 30% and CapEx by NOK 40 billion.
These are unprecedented deliveries from a dedicated project team together with our partners and suppliers. During the first half of 2019, the successful topside lifts at Johan Sverdrup reduced key schedule risks, and we are on track to start production in November as planned. We expect to reach phase I production plateau of 440,000 barrels per day during the summer of 2020, which is earlier than previously communicated. Just before the summer, the Norwegian Parliament approved the phase II field development plan, which will bring the plateau capacity to 660,000 barrels per day with a unit production cost of around $2 per barrel, a break-even oil price below $20 per barrel, and a CO2 emissions well below 1 kg per barrel. Johan Sverdrup is, in my view, the best development project in the world today.
As announced earlier this month, we have agreed to sell 16% of our Lundin shares and increase our direct equity position in Johan Sverdrup from 40% to 42.6%. Our Lundin investment has been very profitable. Since 2016, we have more than doubled the value of our investment. We expect to receive around $1.5 billion in cash during the third quarter, retain a 4.9% stake, and book a gain of around $1 billion. We expect to finalize the acquisition of the 2.6% equity in Johan Sverdrup following governmental approvals in the fourth quarter of this year. Let me also remind you of a few other key developments achieved by Equinor so far this year. We have made commercial discoveries on the NCS and secured new prospective acreage, including offshore Argentina. We have agreed with OMV that Equinor will take over as operator of the Wisting field in the development phase.
We doubled our equity interest in the Caesar Tonga field, deepwater Gulf of Mexico, to 46%. Last week we started production from the Trestakk field on the Norwegian Continental Shelf. Finally, we were awarded the right to develop the largest offshore wind project to date for Equinor. The Empire Wind project offshore New York is a breakthrough achievement for the development of our global renewables business. The project is twice the size of our developed offshore wind projects to date. We expect to start the Empire Wind development in 2021 with 60-80 bottom-fixed turbines, and the output will generate sufficient power to serve more than half a million New York households with renewable energy. The safety of our people and the integrity of our operations are top priorities for Equinor.
We work very hard to maintain a strong safety culture and to deliver good safety results. Over the last 12 months, our Serious Incident Frequency continued to be stable at 0.5 incidents per million hours worked. This is the best safety performance level achieved in Equinor's history. Our strong safety focus and drive to further improve continues with undiminished strength. Management visibility and setting clear expectations are top priorities to deliver on our always safe ambition. Now to the financial results. We delivered net operating income of $3.5 billion in the quarter. Adjusted earnings before tax in the quarter were $3.2 billion, down from $4.3 billion in the same period last year. We delivered overall good operational performance and maintained a high production level. This quarter, we delivered a production mix on the NCS with 60% gas, a lower liquid share than usual.
Lower oil production was mainly due to unplanned production losses on Snorre Bravo and reduced production from partner-operated fields. Higher gas production is mainly due to the start of Aasta Hansteen, contributing with around 60,000 barrels per day. As I mentioned, our financial results were negatively impacted by lower commodity prices. Our realized liquid prices in the quarter was down 10% to $59.3 per barrel. Within liquids, we had a relatively high NGL share of 24%, impacting realized prices. We expect the liquid share to increase as a result of higher production, especially with the start-up of Johan Sverdrup. Our invoice gas prices were down 16% in Europe and 4% in U.S.. The demand for gas in the EU increased by 15% from the same quarter last year. New and increased LNG capacity, combined with lower demand in Asia, has resulted in temporarily lower gas prices.
Still, the fall in our realized prices was less than half of the reduction in NBP prices. Market volatility shows the importance of our continued strong focus on costs. In accordance with our expectations and previously communicated, our costs were somewhat up compared to last year due to new fields on stream and preparation for start-ups. As in the first quarter, increased reserves on several fields reduced our overall depreciation costs. The group tax rate on adjusted earnings was 64% in the quarter. IFRS net operating income after tax in the second quarter was $1.5 billion, up from $1.2 billion in the same period last year. Our quarterly adjusted earnings after tax of $1.1 billion was down from $1.7 billion. Now, some comments on each of the segments.
E&P Norway delivered adjusted earnings before tax of $2.4 billion in the quarter, down from $3.1 billion in the same period last year. This is mainly due to lower realized prices. In addition, we had 2% lower production with a mix more skewed to gas than usual. As normal in the second quarter, we had several turnarounds which reduced production. These turnarounds mostly impacted our liquid volumes. In addition, we experienced some specific production challenges on Snorre Bravo and Aasta Hansteen. Good cost control was maintained on the NCS in the quarter. Underlying OpEx and SG&A cost were lower this quarter than in the same period last year. E&P International delivered adjusted earnings before tax of $649 million, down from around $1 billion in the same period last year. Adjusted earnings after tax were $442 million, down from $752 million.
The after-tax cash flow per barrel for E&P International in the quarter was strong at around $25. Including turnaround effects, we delivered a production rate of 820,000 barrels per day, the highest second quarter production ever achieved internationally. A strong cost focus in our international operations delivered stable cost quarter-on-quarter. Let me also mention, in Nigeria, due to lifting schedules, we sold less volume than produced in the quarter. Income of around $70 million will thus be booked in later quarters. Our MMP segment delivered adjusted earnings of $210 million, compared to $300 million in the same period last year. Weak refining results affected MMP negatively this quarter. In addition, we also had a negative timing effect related to the valuation of gas in storage. According to accounting principles, we had a write-down of the gas inventories due to the drop in the gas prices in the quarter.
The gas inventory is sold forward at higher prices, and expected delivery is during winter. Without this timing effect, MMP would have delivered adjusted earnings within the guided range. We maintained a high production rate. Equinor's production in the second quarter was 2,012,000 barrels per day, on par with the same period last year. Expected natural decline on fields in production was offset by new fields and new wells brought on stream, especially on the NCS and in U.S. onshore. During the first six months of 2019, we report a solid cash flow from operations and a net free cash flow of $1 billion. We maintained a net debt ratio below 20%, and our organic CapEx for the year to date is $4.8 billion. In addition, we have closed several value-generating transactions, and we paid $1.6 billion in dividend and $4.2 billion in tax.
Let me conclude with our updated guidance. Last year, we had a record high production. We expect to be around the same level this year. From 2019 to 2025, we expect 3% average annual production growth. Excellent project execution and cost control make it possible for us to lower our organic CapEx guidance from $ 11 billion to $ 10 billion-$11 billion. We maintain our 2019 exploration activity guidance of around $ 1.7 billion. With that, I'm pleased to open up for questions. I hand it back to you, Peter. Thank you.
Thank you, Lars Christian. I'll pass this through to one of the operators who can remind people of the process for polling questions, and then we'll start to take the first one. Thank you.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad now. The first question is from Oswald Clint from Bernstein. Please go ahead. Your line is now open.
Thank you very much. Good morning. I wanted to ask about the gas. I guess I wanted to ask why your gas production was up so much in Norway in the second quarter. You mentioned demand was up 15%. Could you perhaps break down that demand and tell us where it's coming from in terms of power, residential industry, please? Primarily on the topic, I wanted to know that you talked about 2020 moving to spot gas prices primarily. If prices were to remain weak, could you delay that intention and continue to be selling forward in terms of natural gas sales? That's the first question. Secondly, I was just curious about sustaining Norwegian volumes longer term.
I know you had that plan for extending 20-odd platforms through time, and I see this year you've had eight of those approved by the government. Is that number in line with the plan so far? When would you expect the other ones to get approval? Thank you.
Thank you for a very good set of questions. On the latter, we feel that the eight approvals so far is in line with our plan and the others are progressing nicely. We don't expect any sort of surprises when it comes to that. It is just a lot of work that needs to be done and documents that needs to be provided. On the gas production in Norway. Yes, it is up compared to previous year's quarter, mainly due to starting up Aasta Hansteen, bringing some 60,000 barrels of oil equivalents per day to Equinor. We have had some temporarily operational restrictions on Oseberg during the quarter related to gas re-injection. That means that we have exported more gas from Oseberg than would have been normal during second quarter, given the seasonal variances in the prices.
Troll gas production were down, in line with what we usually do for a second quarter. The turnarounds for this quarter, the majority of them are hitting the oil production, the liquid production. Third quarter this year, the turnarounds that are coming up will, to a larger degree, affect our or impact our gas production compared to what was the case for second quarter. To the last piece of your question related to sort of the 15% increase in European gas demand. It's partly weather, colder April and May. The residential demand was up some 5.5 BCM, there is sort of quite an extensive switch from coal to gas of around 4 BCM adding to it. That explains those trends, to put it like that.
The good thing about, in many ways, the production mix is that this is temporary, and we expect the liquid share of the production mix to come up again over the next couple of quarters, and even more so when Johan Sverdrup comes on stream during November.
That's really helpful. Sorry, there's just that tiny bit at the end about 2020 onwards in terms of moving your natural gas to spot prices.
Yeah.
Is that something that could be pushed back in time?
Well, the shifts that we're doing is that we want to expose more to the spot market. We see that the benefit from having entered into contract more on a season ahead and year ahead, both for this quarter, and we expect the same to happen for third quarter, and then gradually that will fade out. If the forward prices for gas are to stay low, then they'll be able to achieve the same effect running the business the old way of doing it. The shift more to the spot market does not limit us. On the contrary, we would like to take a more active role in placing our gas volumes in the market.
If we see that the gas prices medium long-term comes up, we will go more for seasonal ahead than a year ahead, of course, if we believe that that is favorable.
Super, thank you.
Next question is from Biraj Borkhataria from Royal Bank of Canada. Please go ahead. Your line's open.
Thanks for taking my questions. I have a couple, please. The first one on production. You mentioned a couple of things on unplanned downtime. Could you just talk about whether those issues are now behind you, and also how much contingency is built into the flat production target for 2019 at the group level? The second question is on CapEx and the reduction. I remember asking this question at the CMU, whether the target was challenging enough. I'm wondering, on the one hand, are you setting the bar challenging enough for your businesses because you have a wave of improvement processes and digitization, all these things coming through? On the other hand, when you look at volume numbers, particularly from the NCS, which are declining year-on-year, and your spending levels are coming down, I guess investors might get a bit nervous about replenishment, particularly in Norway.
Sorry, that's a bit general. Could you just talk about the balance of those two factors? Just interested to get your thoughts. Thanks.
First on the operational issues. Oseberg reinjection is up and running again, that is behind us. We expect Snorre Bravo to come on stream during second half. That issue with the flexible risers to be solved. On CapEx guidance. We started out the year with a CapEx guiding of around $ 11 billion. Now we are saying between $ 10 billion and $11 billion. This is due to capital discipline and very good project executions in addition to improvements in the business. We are very happy to see that improvement because this is definitely a positive result, which brings us a lot of learnings, definitely. We have seen over the last couple of years, and you have seen, too, in our numbers, how we've been able to bring down the development cost and now having a portfolio that is extremely profitable and resilient in a global perspective.
What we're doing in moving forward for every new project is that all our learnings, we're trying to factor into the new developments. This way of running a project is in many ways setting a new standard for ourselves and some might even argue for the industry, but that's for others to judge. This is then for us to draw the maximum learnings on going forward. There were some other questions that I really sort of. Well, a lot of them. Svein?
No. Maybe also on the NCS, a reminder of the IOR that we are doing. We said that we are going then to drill around 100 production wells per year with a break even then below 20. A short payback period. We will continue to do that. We are on our plans also with that one, which is also something that will benefit the production going forward.
Great. Thanks.
Next question is from Thomas Adolff from Credit Suisse. Please go ahead, your line's open.
The Johan Sverdrup ramp up. Previously, you've guided to within 12 months. Now you're saying plateau will be reached during the summer. What's driving that confidence of really a faster ramp up? I guess secondly, if you look at M&A and compare that to buybacks, where do you see more value today? Thank you.
First of all, on Johan Sverdrup. The faster or earlier ramp up, targeting plateau coming summer, whereas we said within 12 months some months ago. The reason is the progress of the drilling of the wells. There's a lot of work still remaining offshore. I've worked offshore for seven years. I've been starting up several platforms, and this is the first time I'm going to start up Johan Sverdrup. Lot of nitty-gritty details and pieces and valves and documents and startup procedures and all that kind of stuff that needs to be in place and verified and people go through it and train and all that. It's a lot work still remaining, which makes us keep the startup to say during November. I see others are saying that they might be starting up earlier. I hope we can start up earlier. I'm a positive guy.
I always been, I'm also realistic and I know how much work and hard work that still remains for us to deliver on that startup during November. I'm also very happy to see that we can guide on a faster ramp up. We have never really produced this asset. I get questions from time to time about can you increase the reserves and all that kind of stuff. I fully respect that those are valid questions and important questions, and we will ask them too internally. Now it's more about getting the job done, prepare for startup, getting it to start up, and deliver on the plateau.
We will start getting production experience and see how this reservoir is developing and responding to the different levers that we have to pull, that we have in our toolbox when it comes to reaching and delivering on a high recovery factor. In many ways, you could say that I'm giving you a bigger, longer reply than your question merits. I think it is important. I understand fully the big attention related to this asset, and it deserves so, but that's how the timing of different aspects related to the development will pan out. On the M&A side, we see that there are some pockets around the world.
If you were to use, just around the capital framework, sorry to stop you there.
Yeah.
If you had to compare M&A versus buyback.
Yeah.
Where do you see more value?
That's where I'm-
Given your, yeah.
That's where I'm coming to. On M&A versus buybacks. We have said that we would like to strengthen our balance sheet. I think the last quarter is too very, we have volatility in the commodity prices merits to keep a very strong balance sheet. We have said that cash dividend is the preferred means of returning cash to our shareholders. Then at each point of time going forward, we will look at the world and the outlook and that good opportunity set. If we can make good business deals like the Lundin recent transaction announced and the doubling of our equity in Caesar Tonga, that is for us very, very important to do.
Don't forget that we have an extremely profitable sanctioned portfolio of our projects, but also a very attractive unsanctioned portfolio project that we would like to pursue, which we believe overall will represent the best value proposition for our shareholders. Buyback is still a part of the toolbox.
Okay. Thank you.
Next question is from Lydia Rainforth from Barclays. Please go ahead, your line is open.
Thanks and good morning. Two questions for me. Coming back to that performance issues question from Biraj. What can you actually do in terms of, because a lot of that seems to be from non-operated assets. What you can do about addressing that performance issues that you've had within the NCS. The second one, just in terms of cash flow, clearly we do have weaker gas prices, I think than were in the plan. As we go through into the second half of the year, how concerned are you that that puts at risk the cash flow forecast of the group?
Well, on the performance issues related to our non-operated assets on the NCS, as in every partnership where we are not the operator, we are supporting the operator and pushing the operator. That is what we're doing in this case, too, to see if we can help out to the best of our ability for having good results also delivered from non-operated assets. On the cash flow for the quarter, as you say yourself, it's highly impacted by the commodity prices and gas being one of them. It's also impacted by the fact that we have two tax installments on the NCS for this quarter compared to just one the previous quarter. I think we, at the CMU, guided you something about $1.50 in reduction in the gas prices. It represents sort of $ 1.1 billion in lower cash flow or NOI per year.
That is kind of the range that we're talking about. You can do the calculations as good as I can about the different scenarios going forward. We believe that we will be cash flow positive at $ 50 for the full year 2019. When it comes to sort of CapEx guiding for the period of time going forward, the first opportunity for us to revert you on that will be in the Capital Markets Day coming up early next year.
That's helpful. Thank you.
Next question is from Teodor Sveen-Nilsen from SB1 Markets. Please go ahead. Your line is open.
Good morning, thanks for taking my questions. Two questions. First one, a quick one on Sverdrup and the ramp up of your new profile. Should we assume a linear ramp up from first order until summer 2020, or will it be a back-end loaded production growth? My second question is related to NOAKA. In Norwegian media, we are seeing a lot of discussions regarding NOAKA and the development solutions. My question is, how does the recent Liatårnet discovery change your view on the NOAKA situation and your preferred development solution? Thank you.
When we start up wells, every well we ramp up gradually and define what we call a sand-free rate. We don't want to produce sand. For that to happen, you have to use a test separator and some equipment to determine that flow rate, which is then the maximum flow rate for that well. Starting up a totally new field like this, you will need to do that well by well, and just add it on and stack it on top of it. It's in many ways, neither nor of the two. It's more like walking a staircase because you gradually ramp up one and then you will have determined what that plateau should be like flow rate-wise. Then you add the next one, then the next one.
You see already in our guidance for this year how we believe that that ramp-up will be reflected in our numbers, where we are saying it is going to be around the same level as we had last year, which was a record high. We will come back to how this is going to be factored into the 2020 production numbers in more detail, because then we have at least two months of production history, hopefully, close to when we get to that stage. On the NOAKA and the Liatårnet discovery. NOAKA is a huge area on the Norwegian continental shelf, and it stretches from Oslo, the capital of Norway, to beyond Porsgrunn, which is a small town to the far west of Oslo. For those interested, you can look it up in Google Maps, I guess.
We believe that this area will be best developed if you look at it as one area solution to the north, where Equinor is the operator, and one to the south where Aker BP is the operator. This will bring best value to the companies involved, to the Norwegian government, which has a interest in how this is being developed, and also from a resource development point of view. To the discovery that Aker BP just recently did on Liatårnet, we believe that that is just going to support their area solution to the south and bringing that into being better economics. I think it is important to look at the improvements that we have done in our proposed solution to the north.
We have worked it like we did with Johan Sverdrup, like we did with Johan Castberg, Bay du Nord and others, really been able to bring down the development cost. That is what makes this a very good proposition, seen from our point of view. We would expect that the same way of thinking would add the same way of economics and maximizing the revenue for all parties involved if they did the same to the south.
Thank you.
Next question is from Christyan Malek from JPMorgan. Please go ahead. Your line is open.
Hi, gentlemen. Thanks for taking my questions. Two, if I may. First, on the international strategy. Clearly, that's been sort of a source of underperformance and sort of for reasons which are sort of less conspicuous. I want to understand more in terms of strategic perspective, what are you looking at internationally that you're effectively using your sort of capital allocation towards? Is it Brazil? Is it shale? If not, I'm struggling to understand why we're not seeing more cash return on the horizon, particularly given your gearing range has started to sort of continue to outperform you. You're moving a balance sheet in the right direction. The second question is on Lundin. Why sell now, the logic behind it. You clearly got a remaining stake of 4.9%. What are you planning to do with that?
Ultimately, how do you think about that transaction in the context of your capital allocation and cash return?
We have developed over decades as a company. We have been competing on the NCS with some of the biggest international companies for decades and learned to survive and thrive and compete at very good terms and results. We have seen when we moved internationally that we have nothing to be shy of. We have an excellent organization, excellent track record, and people want to work with us. People invite us into partnerships, and governments are inviting us to bid for opportunities because they see a company that has a lot to show for.
Not only sort of return-wise, it's our toolbox, it's our way of thinking when it comes to taking care of the environment, being a prudent operator, how we treat our employees, all that kind of stuff adds up to a basket of being an attractive employer, but also an attractive partner and operator to have in your neck of the woods, depending on where you look around the world. You see that we are taking on more and more opportunities and also as an operator, because that's when you really can make a difference and have an impact on the development solutions being brought forward. We strongly believe that a lot of the deals that we have done over the last couple of years, the Carcará deal, the Bay du Nord discovery, BM-C-33, the Pão de Açúcar, taking on that operatorship based on stellar drilling performance.
All this makes sense for us because it's the best way of returning cash and value to our shareholders over time. We could choose to ride down the depreciation curve, as an accountant once said, by stop investing and return the cash to you guys. That is not a sustainable business for a company like ours. That's why we need to and want to gradually build our company. Yeah. I'm buying shares in Equinor every month, and I recommend everybody else to do the same. On the gearing range, we have said that 15%-30%. This is before IFRS. You can add another 5%, 6% based on IFRS 16 effect, but 15%-30%. We are comfortable by being below in periods of time and comfortable by being above. Now we are at 19.9%.
Everything else being equal, as far as what we see now, of course, the cash that we're getting from the Lundin transaction in the third quarter most likely will improve that net debt ratio somewhat. Then we are going to buy the 2.6% of equity in Johan Sverdrup in the fourth quarter, then it's somewhat back up again. That I think is the most granularity I can give you on the gearing. Why sell now? Well, this was the opportunity we got. When we entered into this, we wanted to be exposed to Johan Sverdrup production.
This opportunity came along where we could have an industrial solution, where we take direct equity into this asset and could also monetize on a very good investment where we double the value, and then we are left with some shares in that company, and we are very happy to see that that is part of the deal too.
Could I just quickly on that, you sort of said your preference to build over cash return, if I'm clear on that response? Would you consider a wholesale M&A in the context of your build strategy? Or is this more going to be through strategic asset sales transactions and so on? Just want to understand if there is a priority within that build strategy.
There is only one priority, and that is to maximize the shareholders' value.
Right. Okay. Thank you very much.
Next question is from Jon Rigby from UBS. Please go ahead, your line is open.
Hi, Lars. Yes, hi, thanks. Just on the NCS operating costs, they appear to be unit costs are rising again. They clearly came down very significantly post 2014. I just wonder whether you're able to unpick the various elements of that. Sort of mix effects. I guess there is a sort of dollar-kroner effect in there, although I think guidance has been to think about these in kroner. Also whether there is any sort of underlying operational inflation starting to come back into it. The second question, just on your gas trading business.
Is it likely that even with the Danske acquisition, that while prices in absolute terms remain as low as they are, which I guess could be for a couple of years, is that it just will be very difficult to generate margin from that business much higher than the lower end of the guided range until we see some sort of recovery and stabilization in gas markets? Thanks.
When it comes to NCS and adjusted OpEx and ACNA per barrel, it is up 7% year-on-year in absolute cost. It's up 6% year-on-year. This is the total picture for the company, the group. If you adjust then for Roncador coming in and also Aasta Hansteen and some changes related to divestments of Alba, gas lead removal costs, asset removal obligations adjustments, the absolute cost is flat year-on-year. To your point on that we see some cost inflation coming back into our business. I'm almost schizophrenic on this one because we're looking every day and in every corner and in every part of the business to see if we can see any cost inflation. We see a kind of a push for costs coming up. We've seen more from the external market side of it.
Globally, there are still good capacity, there are some pockets, rigs in Norway, for example, even though it's part of a global market, It takes time to bring in another rig if you want to do something about the capacity of the supply side. We see some trends in some areas that might reflect or represent higher supplier costs. We have secured procurement contracts for $100 billion, as I told you around the Capital Markets Day. We are quite comfortable in the short-term picture on this one. The medium long-term, beyond two or three years, it's for later contracts to determine what the contract terms will be. 80% of the improvements is still by our design in combination with the improvements that the supplier industry have delivered.
That is what we're focusing on primarily to keep it and churn it to become even more competitive going forward. To the Danske Commodities, we expected when we bought it, and that is reflected in the numbers too, that there are usually during, third and fourth quarter that they are making most money because that's when you have really the spikes and the volatility to thrive on. That we hope will be the case regardless of whether the gas prices are low, medium, or high. Anything else to add to this, Ørj an or Svein?
Just to comment on the absolute level on the gas price. Remember that it's a flow-through of the price going into the DPN segment of that one, and the MMP is more picking up the margin on it. The price level will be more reflected in the DPN and the in segment rather than in the MMP in itself. We have the trading advantage that you can do on top of it, and as we are doing in the MMP.
Super. Thanks, guys.
Next question is from Michele Della Vigna from Goldman Sachs. Please go ahead. Your line is now open.
Thank you for the presentation and congratulations on winning the offshore wind project in New York State. I was wondering if you could give us a bit more detail on the economics there in terms of what IRR you expect on an unlevered basis, and then what you expect on a levered basis, and also if you plan some farm down of that large investment. Secondly, I was wondering on your gas realizations, they are quite difficult to model as you can expect. I was wondering if you could guide us for the second half of the year on how much of the volumes have effectively been pre-sold in the previous three to six months versus how much we should expect to be broadly linked to spot prices. Thank you.
Empire Wind, we are very happy that we won that auction. This segment of the business, you see from our Capital Markets Update that the current project that we are having in our portfolio up and running, producing, have a returns around 10%. That is on a project basis, it's not on an equity leverage basis. Then we have seen that there is a huge competition in this segment pushing down sort of the returns. We have not been willing to compromise on returns. We have looked at a lot of opportunities and chose not to bid. We have looked at some opportunities and chose to bid, and we lost because we didn't want to compromise on the returns.
We see a few opportunities that we really would like to pursue because those projects can create good value, and we believe Empire Wind is one such project. It is too early in the stage of that development to say something about the returns and the terms and all that kind of stuff. We need to move forward and start construction in 2021 and start delivering power to the grid during 2024. We have ample time to discuss this going forward. On the gas side, Svein.
Yes. We have sold and are benefiting then from the long-term gas sales. As we said, this quarter, in second quarter, we had an invoice gas price of $ 5.49. We have $ 4.9 in the NBP price. We will also see benefits from the gas sales now in third quarter, as Lars Christian said earlier. Based on what we see in the current prices, it will be somewhat on, but still way above what we see in the current NBP market. Also of commercial reason, I'm not disclosing exactly what kind of volumes where we have done it. It will be above.
Thank you.
Both NBP prices.
Thank you.
Next question is from Christopher Kuplent from Bank of America. Please go ahead. Your line is now open.
Thank you very much. I just have two questions remaining. The first one, I suppose you tried to answer in reverse earlier on Johan Sverdrup and Lundin and the transaction. I wonder whether you in fact are signaling that you are very excited about Johan Sverdrup with the price you're willing to pay. My question is, do you see more opportunities for increasing your equity exposure to Johan Sverdrup? Have you had other discussions with shareholders within Johan Sverdrup? Are you keen on doing so? The second question is, again, on wind. Just wonder whether you can tell us within 2019, 2020, whether there are contingencies in your CapEx plans. It looks like, to me, there isn't much actually going to be spent on wind in the near term. Just wondering whether you can confirm how much, if any, has been budgeted. Thank you.
On Johan Sverdrup, if you have met a single Equinor employee that is not very excited about Johan Sverdrup, please give me his or her name, because I would like to know who he or she is. This is definitely a project that everybody is very excited about. This opportunity arose to take more of an industrial solution and get direct equity into this asset. We are very happy that this turned out the way it turned out. The way we read the comments in the market was that it looked like Lundin was making a good deal, and it looked like Equinor was making a good deal. In this case, I think we struck a price then, or a package then, that looked like something of a win-win situation.
Whether we have discussions with others in Johan Sverdrup or discussions with others in other assets or not have had them, or we are going to have them or not, we are a company that do not give comments about that. You will read about it in the papers. On wind and capital spending going forward, currently around 5% of our CapEx is related to the wind or the renewables segment. We have guided on 15%-20% of our CapEx in 2030 should be within an ambition to be within the renewable segment, but back-end loaded and not a linear curve. The Empire Wind is a very big building block in that to happen. We have in our capital plans for 2019 to 2021, the around $ 11 billion year-on-year that we have guided on average. We have also renewables projects as part of that.
We have oil and gas projects to part of it. We are running a business today, like we did during the downturn, with a contingency plan. If the oil price were to drop or the commodity price is ready to drop really rock bottom and stay for a long time and we need to free up some flexibility, we do have so the opportunity to do. At the same time, we believe that this level is something that, given the pricing and the balance sheet strength and so on, we would like to progress along these numbers, and that gives room for both growth within oil and gas as well as renewables.
Thank you.
Next question is from Martijn Rats from Morgan Stanley. Please go ahead, your line is open.
Yeah, I hand it back. My questions have been answered. Thank you.
Next question is from Peter Low from Redburn. Please go ahead, your line is now open.
Hi. Thanks. Just a clarification on CapEx in 2020 onwards. Do you see that $ 11 billion number as being adequate to deliver the production growth targets you've outlined to 2025? Or is the expectation that that will be supplemented by further opportunistic resource acquisitions going forward? Thanks.
One detail sort of comment to the CapEx spending organic so far this year. When we guide on $11 billion, that's based on an exchange rate of NOK 8.25. If you use NOK 8.25, you get $ 4.9 billion CapEx spending so far this year compared to what you see in the numbers of $4.8 billion. That is just a detail, something to be aware of. When we announced the production sort of numbers and the CapEx guiding at the CMU, the $ 11 billion on average for 2019, 2020 and 2021, the projects then being sanctioned is sufficient to bring us and give us the production growth that we told you about. Of course, beyond 2021, we will also sanction new projects. That is also turning in to be a very attractive portfolio.
Thank you.
Next question is from Yoann Charenton from Société Générale. Please go ahead, your line's open.
Thank you for taking my questions. First set of question will be on Empire Wind. You referred to a $ 3 billion CapEx budget for developing that project. How much of this will show through organic CapEx, roughly speaking? Second question that will be on your cash flow statement. You reported a very significant increase in financial investment in the first half of the year versus 2018. Could you please describe some of the underlying factors leading to such an increase?
First of all, on Empire Wind, the $3 billion, we are going to work this project and start up construction then in 2021 for that project to be on stream in 2024. The majority, this is the organic spending that we expect to have on this project in that ballpark. On the financial investments, Ørjan, do you want to give some meat to the bone on this one?
This is important to look together with the cash element. This is part of our liquidity management, and it's about whether our instruments are above or shorter than 90 days. This is only a kind of classification and then hits the cash flow based on that.
Okay, thank you.
Next question is from Anders Holte from Kepler Cheuvreux. Please go ahead, your line's now open.
Yeah, thank you guys for taking my questions. Just one follow-up on the wind project, if I may. I know you say it's early days, if you look at Ørsted's material, they state that they target an unlevered IRR of 7.5%-8.5% on new wind farms. Is that a level that you would be happy with in the recent wind projects, or are you looking for inherently higher IRRs on your offshore wind? Thank you.
We are currently having a couple of assets up and running on a project-based return. We are talking about around 10%. It's a huge sort of mixed basket of numbers out there. Some are leveraged and on equity basis and all that. On this project, a lot of work needs to be done and some contracts that needs to be negotiated to find out what the terms will be for Empire Wind, and we will revert when we have more details on that one.
Okay, thanks.
That was our final question for today, so I'll hand the call back to the speakers. Please go ahead.
Okay. Well, thank you, everybody. I'm pleased that we've covered everybody's questions, and we're absolutely bang on time for the hour. Thanks to all for your participation and thanks to the speakers here today. With that, good luck, and thanks very much indeed. Bye-bye.
Bye-bye.