Ladies and gentlemen, welcome to the Equinor conference call for the first quarter results 2019. I know it's been a busy week for reporting, we'll get straight to business on the call today. We've got Lars Christian Bacher, CFO, who will run through the quarter's results, and then we'll open up for Q&A. Also with us are Svein Skeie, head of performance management, and Ørjan Kvelvane, head of accounting. With that, I pass straight away to Lars Christian. Thank you.
Thank you, Peter. Good morning, everybody, and thank you for joining us on this first quarter's earnings call. Today, Equinor presents solid results across all segments. Adjusted earnings after tax were up year-over-year, despite lower commodity prices in the quarter. The oil price increased gradually through the quarter from below $55 per barrel at the end of 2018 to around $70 at the end of first quarter, resulting in an average Brent oil price of $63. For the first three months of 2019, we report a strong cash flow from operating activities before tax of $6.5 billion, and we reduced the net debt ratio to 19.4%. We continue to deliver strong results because we are realizing on the improvements we have made. Volatility in commodity prices is a clear confirmation of the need for continued cost and capital discipline for operators as well as suppliers.
In Equinor, we continue to strive for efficiency in everything we do and use lean principles as our way of working. This is what we mean by an improvement culture. Given our improvements and solid results, the Equinor board has decided a first quarter dividend of $0.26 per share, an increase of 13% from the same quarter of last year. Before I move on to the quarterly results in more detail, allow me to point out some of the good industrial progress we have achieved in the first quarter. One, we closed the transaction for Rosebank, Danske Commodities, and a new wind license offshore East Coast U.S. Two, we secured new prospective exploration acreage in Norway, Gulf of Mexico, and Argentina. Three, we formally opened Arkona, the German offshore wind park.
Four, we are steadily progressing the development on new projects on the NCS and internationally, which we expect to deliver around 3% average annual production growth from 2019 to 2025. Johan Sverdrup Phase One is well on track to start up in November this year and expecting to reach a plateau of 440,000 barrels a day within 12 months from starting up. The full field Johan Sverdrup can produce 660,000 barrels per day at plateau with a very low unit production cost of around $2, carbon emissions below one kilogram per barrel, and a break-even oil price below $20 per barrel. Equinor currently has 24 projects in execution, we are pleased with our overall progress. The safety of our people and the integrity of operations are and will always be our top priority.
The group maintained its serious incident frequency level over the last 12 months at 0.5 per million hours worked. Our strong safety focus continues with undiminished strength to further improve our safety performance. Management visibility and setting clear expectations are key success factors. Now to the financial results. As a reminder, this is the first quarter reporting on IFRS 16 leases. We have chosen to include these changes in the segment Other to provide clarity. That means that reporting of operating segments is not impacted and therefore fully comparable to previous quarters. Now let me walk you through the main effects of this change. A reported lease liability of $4.2 billion is now reflected in the balance sheet with increased net debt. In addition, we continue to report on adjusted net debt ratio comparable to previous reporting. The impact on equity and net income is insignificant.
Operating cost has decreased by $100 million. Depreciation increased by $150 million. Free cash flow improved by $250 million. Moving on. We delivered adjusted earnings before tax of $4.2 billion this quarter, down from $4.4 billion in the same period last year. The IFRS net operating income in the first quarter was $4.7 billion. Our financial results were impacted by the low average prices. At the same time, we delivered solid operational performance across all segments and maintained high production. Realized liquid price in the first quarter was $55.80 per barrel, a reduction of 7% from the first quarter of last year. Realized European gas prices were at the same level as in the first quarter last year, while U.S. gas prices were down around 10%. In addition, refinery margins were down more than 20%.
After-tax-adjusted earnings were $1.54 billion in the quarter, slightly up from $1.47 billion in the same quarter last year. For the group, tax on adjusted earnings in the quarter was 63%. This is due to strong earnings in regimes with low taxes. Our International segment had a 25% tax rate, including solid results from our U.S. activities. As expected, new fields brought on stream increased operating costs in the quarter, while increased reserves on several fields led to reduced depreciation rates. Now to a short review of each reporting segment. E&P Norway delivered adjusted earnings before tax of $3.2 billion, down from $3.4 billion in the same period last year. The small reduction is mainly due to lower realized liquid prices and lower production.
Production in the quarter was 3% lower than in the same period last year, largely due to expected natural decline and operational challenges on Aasta Hansteen, Snorre, and some partner-operated fields, partly offset by new production from new wells and new fields. Underlying OpEx and SDA costs increased somewhat in the quarter, mainly due to start-up costs for new fields. Depreciation per barrel was down 11% in underlying currency due to increases in reserves and production with no depreciation effect. E&P International delivered strong adjusted earnings before tax of $0.7 billion, an increase of 4% from $0.6 billion in the same period last year. International equity production came in at 841,000 barrels per day, near a record high. This corresponds to 5% growth when compared to the same quarter of last year.
OpEx and SDA were somewhat up, mainly due to new fields and increased costs related to preparation for operations. The achieved cash flow per barrel after tax was around $25, which is higher than on the NCS. In the quarter, E&P International delivered $0.5 billion in adjusted earnings after tax. This is up 17%. Our MMP segment delivered adjusted earnings of $359 million, compared to $454 million in the same period last year. In the quarter, MMP took a one-off provision linked to historical pricing for third-party volumes. Strong liquids trading and European gas sales contribute to an MMP result well within our guiding of $250 million-$500 million per quarter. Equinor's production in the first quarter was 2,178,000 barrels per day, on par with the same period last year.
Expected natural decline of 5% was offset by new fields, among them Roncador in Brazil and fields offshore North America, and new wells brought on stream on the NCS and in U.S. onshore. For the first three months of 2019, we report a strong cash flow from operating activities before tax of $6.5 billion and the net free cash flow of $1.8 billion without any proceeds from divestments. The net debt ratio was reduced by 2.8 percentage points in the quarter to 19.4%. The results and the cash flow was a main driver for the reduced net debt ratio. Organic CapEx in the quarter was $2.2 billion, and we expect higher activity level and spending for the next quarters. The net debt ratio was also positively impacted by not declaring dividend and thereby reducing equity as we do in fourth quarter. Including lease liabilities, the net debt ratio was 25.8%.
In addition, we closed value-generating transactions such as the Rosebank acquisition in the U.K., Danske Commodities, and a new offshore wind license in the U.S. During the first quarter, we paid around $0.8 billion in dividends and around $1.4 billion in tax, including the first of six NCS tax payments. To conclude. We are on track, and we have no changes to our guiding for 2019. We maintain our organic CapEx of around $11 billion and our exploration activity of around $1.7 billion. We expect 2019 production around the same level as in 2018, and an annual average production growth of around 3% from 2019 to 2025. With that, I'm pleased to open up for questions and hand it right back to you, Peter.
Thank you, Lars Christian. With that, I'll ask the operator to remind people of the procedure for polling, and then we'll go ahead. We have around 45 minutes for questions. Thank you.
Thank you. Ladies and gentlemen, if you would like to ask question, please press star one on your telephone keypad at this time. We'll take our first question from the line of Oswald Clint from Bernstein. Your line is open. Please go ahead.
Thank you very much, Peter. Hello, can you hear me?
Yes, we can.
Peter, thank you. Good morning, Lars Christian. Two questions, please. The first one just on international volumes up strongly. Obviously, Roncador is quite a bit of that, but I was zooming in on your unconventional business, which I think has just hit a kind of volume peak, whether I look at gas or liquids. I guess with price realizations and pipeline capacity issues and some of the parent-child issues you've said you've had yourself within Eagle Ford, what's happening to really drive that part of the volume pie up to these record highs? Is that tracking your plan or is it coming in a bit better than your production plan? That's the first question, please. Secondly, I was curious, looking at Ørsted's numbers in Q1, seeing around NOK 400 million of EBIT for offshore wind.
I know they're four or five times bigger than you with wind, but I was wondering, is there any positive contribution yet from your wind portfolio coming up in the corporate segment yet? Thank you.
Well, thank you for your questions. First, on the volumes and the international volumes. You are right, Roncador contributes this quarter. That was closed midway last year. When it comes to onshore activities and production in U.S., it is mainly related to gas. What we see is in all these cases, it's more or less according to plan. On the renewable side, there are contributions, positive for the quarter, but not big numbers given the size of our business.
Okay, very good.
Next question, please.
We'll take our next question from the line of Jason Gammel from Jefferies. Please go ahead.
Thanks very much, gentlemen. I appreciate the commentary around Johan Sverdrup. I was hoping you could maybe just address, what are the critical path items in front of you to be able to meet that November 1st production start? Then maybe also, just as a second one, have you seen any changes to the budget yet? Is everything going according to schedule, or have you even possibly achieved any further cost savings? Thank you.
Well, on Johan Sverdrup, I think perhaps the best way of answering your question is to rewind, go back in time a couple of months and say what is on critical path as a sort of what we need definitely to be able to achieve, to create really comfort around that start-up date, beginning of November. Those activities were some of the heavy lifts operations that we have finalized. That was on the critical path. What is remaining then of work related to Johan Sverdrup is a lot of work still to be done, but not sort of really big activities that if not being sort of delivered according to schedule, that could threat that start of date. Still, beginning of November is our best estimate.
On the budget for Johan Sverdrup and the other projects, 24 projects in our project portfolio in execution, and we are happy with how that portfolio is progressing. As we said at the Capital Markets Day, we have placed contracts for NOK 100 billion that we are securing more or less a lot of what we need to do, both on the project side and the maintenance side over the next three years. We are guiding on $ 11 billion for this full year. That is because despite some NOK 2.2 billion in CapEx first quarter, we see and expect a higher activity level over the next couple of quarters, including some onshore wells in the U.S. that will come in. This is the best sort of bottom-up estimate that we are having.
Just also to remind you that when we're saying around 11, it is around 11, and it has always been around 11. Yes.
Thanks very much.
Thank you. We'll take our next question from the line of Thomas Adolff, Credit Suisse. Your line is open. Please go ahead.
Good morning. Two questions from me, please. I think you mentioned Tanzania LNG earlier today. I was just wondering what is going on there and whether this project has become a live project. Then you also secondly mentioned that you are also looking at other LNG opportunities aside from Tanzania LNG. Would you say LNG is a gap in your portfolio that you want to fill? If so, aside from Qatar, anything else you're looking for? Thank you.
On Tanzania LNG, it is a very low burn rate related to that project. We matured it sufficiently so that we have a good understanding and overview of what that project will look like and some early cost estimates, even though that there is a high case and a low case, since this is very early in the project design phase. The reason for that is that we needed that to have a solid basis for engaging and having the discussion around establishing the host government agreement. What we are seeing now is that there is progress and they are ready, our counterpart, meaning the Tanzanian government, to engage and start the negotiations. We expect those to take time. What I mean by time is that I do not have any better estimates, and that is partly based on the learning so far operating in that country.
On other LNG opportunities. First, we have a stellar quality project portfolio under execution. We have a very good non-sanctioned project portfolio with very good economics, whether you look at it from a break-even point of view or a returns point of view. We have a resource base of 20 billion barrels and are not distressed. We do not have to buy stuff. Of course, as a company operating in oil and gas, you need to discover or add volumes to sustain that production and the production growth. We have time to be selective and work the different alternatives. LNG is one sort of alley that we are pursuing and looking at whether we can get more LNG operated volumes into our portfolio, whether that is operated by us or non-operated. It has to make sense from an economical returns point of view.
Yes, we have looked at different alternatives and screened several projects that so far have not been able to make it work from a returns point of view. Thereby we are picky and saying then we wait and look for more alternatives and whether that is an LNG or other projects, that remains to be seen. I think the key takeaway is that whatever we do of acquisitions, it has to make sense. By that I mean it has to fit nicely into our projects from a returns point of view, create value for the shareholders.
That is great. Thank you.
We'll take our next question from the line of Lydia Rainforth from Barclays. Your line is open. Please go ahead.
Thank you. Good morning. Two questions from me as well. The first one on the gas market and the Equinor approach to contracting. At the gas seminar in February, we talked about the idea that over time, Equinor would want to transition to shorter term contracts rather than the mix of long-term and short-term contracts that you currently have. Can you talk us through whether that is still the case, given where the gas pricing is at the moment and just any reflections on the gas pricing as a whole would be helpful. The second question was just to come back to Oswald's point on the renewables side. To the amount that you are investing in renewables and whether it's from Scatec Solar to the organic offshore wind side, there is a value to those, but it's actually very difficult for us to assess externally.
At what point do you think it becomes scalable enough to give us more disclosure on that? Thank you.
On the gas market, as you correctly point to, we have announced that the day ahead, month ahead, the season ahead and the year ahead, we are moving away from. It will take time to get more of the volumes being short-term pricing. Currently we see this quarter then that the volumes that were sold last year on season ahead, the year ahead prices, and these prices have been higher than present. They are in the money and that contributes nicely. That's why we are saying that realized gas prices this quarter for European gas is at par with what we saw last year. We are still transitioning into the new principle as we announced earlier this year. On the renewable side, in many ways it's the same for oil and gas.
It has to bring value. Some of our projects that are in operations, we have internal rate of return 9%-10% on asset-based. That is not on a leverage-based, but on an asset-based return. We have also said that we expect the CapEx spending to increase going forward. As it looks, it is going to be heavily back-end loaded given the limited opportunities of good enough projects from a return basis. When this will be scalable is highly dependent on us succeeding in finding projects that make sense from a returns point of view.
Lars, thank you.
Thank you. We will take our next question from the line of Teodor Sveen-Nilsen from SB1 Markets. Your line is open. Please go ahead.
Hi, good morning, and thanks for taking my questions. First a question on the net debt and capital employed ratio, which now has come significantly down over the past few quarters. I guess your guidance from previously is still valid, that you are looking for keeping net debt to capital employed ratio above 15%. My question is, when you reach that level, what would be the pecking order of use of cash flow? Will it be increased dividend or increased investments? My second question is actually related to another question that has been today on Sleipner and the ramp-up profile. How should we expect the ramp-up of 2-4-40 in production to happen? Would that be on the first month of production, or do you expect it to take a year or so? Thank you.
Well, the ramp-up for phase 1, Johan Sverdrup, we are saying it will take 12 months from production startup to reach plateau. On net debt ratio, we are very happy to see that it's been reduced from 22.2% to 19.4% during the quarter. We have guided on we want the net debt ratio to be between 15% and 30%. We can live with a net debt ratio above 30% for a period of time, as well as below 15% for a period of time. Having that said, we are also very mindful of a very low net debt ratio. There's the question of how efficient your balance sheet is. Looking at the numbers, before I go into how to prioritize free cash flow or the cash flow. Yes, we have seen a 2.8% reduction in the net debt ratio during the quarter.
Be mindful that we did not declare dividend this quarter, as well as we had NOK 2.2 billion in organic CapEx booked for the quarter. We expect in both cases, those will kick in with a higher spending over the next couple of quarters. By that, trying to say that it's not automatic that you can take another 2.8% of the 19.4% and so on going forward. We are trying to say that be a little bit cautious when it comes to how you look at the development on net debt ratio going forward. Can it go down? Yes, with good commodity pricing, definitely. There are elements that will mean that it's going to be around this level going forward. On how to prioritize your capital distribution. One, we still want to strengthen our balance sheet.
We also are saying that we have a very healthy, profitable, strong project portfolio that we would like to invest in and with an internal rate of return of more than 25%, which is very, very good. Cash dividend is our preferred means of distributing cash to our shareholders and be mindful of the 13% increase in dividend that has now been decided by the board yesterday for first quarter this year compared to first quarter last year. Going forward, we have options like share buyback that is in the toolbox. We have options like doing M&A deals, but be mindful that as I said, that it has to make sense from a returns point of view. Thirdly, it is very dependent on the commodity prices at each point of time going forward.
You have seen, and we have seen, and everybody has seen that there are still very volatile commodity prices. That is important to factor in when it comes to how you maneuver to ensure flexibility and robustness. That I think is the way I would like to put it. On net debt ratio, anything else to add, Ørjan or Svein, or?
No, I can just add that we are also exposed to currency movements that can hit the equity. That can also impact either positive or negative going forward.
Correct.
Okay, thank you.
We'll take our next question from the line of Biraj Borkhataria from RBC. Your line is open. Please go ahead.
Hi, thanks for taking my questions. Just one follow-up on European gas. With prices being pretty weak recently, I was a bit surprised to see Troll running at full capacity. I was wondering if you could talk about whether you're considering lowering your production or taking your flex gas down a bit, especially into the summer months. Second question is on Danske Commodities, which you consolidated in Q1 into the midstream MMP division. I'm assuming that has a positive EBIT contribution, but you didn't move your range in guidance. Could you just talk a bit about how you see that contribution going forward? Thank you.
Yes, on European gas prices. It's been weak, compared to strong prices for a period of time. I think in a historical perspective, what MMP is telling me is that the current price level is, in a historical perspective, perhaps a normal price level. I think that is just important to bear in mind. What we have seen is some odd trends in many ways. That there has been a strong demand for gas and driving up LNG prices during the summertime from China, when they wanted to fill their storage to avoid ending up in a situation like they did the previous winter, where they were kind of short.
We have seen that during this time, it's been both a mild winter but also a lower demand, meaning that more of the LNG is targeting Europe and putting some downward pressure on the gas prices in Europe. To counter this, you could say that there has been also quite steep decline in indigenous production in Europe. Troll was down in 3Q due to plant maintenance. I think, yeah, Svein, anything to add on this?
Yeah. On Troll, as you alluded to it there, we have the production parameter. It's 36 giga, which has increased significantly over the years. That means that we are then also optimizing within the production permit. We have the flex on Oseberg as well, and at all times we are evaluating how then to run it most efficiently based on what we see in the market. Normally when we go into the summer months in May and onwards, we often take down production somewhat, and we have some turnarounds, as Lars Christian said, in the third quarter this year. It's about then optimizing within the production permit of 36 giga for the year.
We had a question on Danske Commodities, which came in and were completed. We have two months in the quarter in our numbers. 1st January was Danske Commodities is still not part of the company in many ways. We see a positive contribution from Danske Commodities and are very hopeful that by this company coming in, that we can strengthen the results for MMP. It's too early to say anything about the guiding range that it should influence or impact the guiding range. Svein?
Maybe we could also remind of what we said at the CMD, NOK 80 million for the full year of 2018 was the contribution and then spread over the four quarters.
Great. Thank you.
We'll take our next question from the line of Jon Rigby from UBS. Your line is open. Please go ahead.
Thank you. Yeah. Not wanting to labor a point, but first question just is on gas again, is that in the quarter, it looks to me that you probably traded a record level of volume. Looks also to me that, it goes up and down a bit, but the gas trading result contribution to MMP was towards the lower end of the range you would expect for a first quarter, which is generally a good quarter. I just wanted to ask whether, this is for Europe, I just wanted to ask whether if we assume TTF and NBP are lower or continue at these kind of levels up and down for the next 18 months, 24 months, does that influence the profitability of MMP? Or is the flat price, the absolute price, largely irrelevant to what you can make in trading and margin around gas optimization?
The second question or request is, can you just do a quick review of highlights, et cetera, on your exploration activities in the first quarter?
Yes, on the exploration activity, we completed 11 wells, eight on the NCS and three internationally. We had in total four discoveries, Carcará Northwest in Brazil, Telesto, Ragnfrid North, and Jasper South. After closing all the quarter, we also as a partner have a discovery in the Blacktip Discovery in Gulf of Mexico. Spending, NOK 1.7, still our best estimate for the full year. We are still hopeful for our exploration campaign that we have planned for the Barents Sea and some other exploration activities or wells around. On the gas volume trading side, it was 19.6.
16.4.
16.4, Svein?
Yeah. As you said, Jon, it's high volumes in the gas sales from NCS than including the LNG at Snøhvit, just about 11 BCM that has been traded. What I also would like to remind you of is that normally what you see in the prices that we achieve is that the main results of that goes into the DPN segment. Of course, we will also take positions in the MMP, which impact the MMP results. The gas prices and the invoiced gas prices is then mainly impacting the DPN segment. You see the impact there and to a lesser extent on the absolute level in MMP, but trading then into the MMP segment.
Right. Is MMP a standalone, is where it sits within your guided range of results somewhat independent of what the external absolute flat gas price is? Is the level of gas price, is that going to somewhat determine where results are going to sit while global gas markets remain well-supplied?
I think it's fair to say that, of course, you normally take advantage of the fluctuations in the gas trading. Realizing prices there into the MMP segment, but in a flat price environment, then most of it will be then going into the DPN segment.
Yeah, through the cycle as well.
Yeah.
Thank you.
Ladies and gentlemen, if you find that your question has been answered, you may remove yourself from the queue by pressing star 2. We'll take our next question from the line of John Olaisen from ABG. Your line is open. Please go ahead.
Thank you. First I could say, Lars, of all the 72 quarters that I've followed Statoil and Equinor, this was the shortest and most precise, so thanks for that. I'll try to do the same in my question. One question only. You recently participated in an exploration success in the Gulf of Mexico. Could you tell us about the upcoming wells in Gulf of Mexico? Just update us on Gulf of Mexico exploration, please. What's next?
Well, thank you for the compliment. Then I will be very precise on Blacktip. It's a Paleogene well in the Western Gulf of Mexico. We are working closely with the operator on this and the assessment of what this might end up being when it comes to the volumes. The drilling is still ongoing, or was still ongoing late April. Yeah.
Maybe another one coming up in the Gulf of Mexico.
Monument
is the Monument well. That will come up, expected then to be spudded towards the year-end this year.
Yeah.
Second half.
We also have one well in Canada-
The Harp
the Harp well in Canada. That our wells to watch in the North America segment.
Thank you very much.
We'll take our next question from the line of Robert Pulleyn from Morgan Stanley. Your line is open. Please go ahead.
Thank you, gentlemen. Two quick follow-ups on gas since it's in vogue. Firstly, to what extent will the weak gas prices year-to-date impact 2Q results given the lag, or is there still enough of these longer-term contracts from last year sort of smoothing the way? The second question is, staying with gas prices given the recent volatility, what does Equinor consider the medium to long-term marginal gas price in Europe to be given the increasing globalized nature of gas markets and of course, volumes of LNG exports from the U.S.? Thank you.
On the first one, we expect a smoothing as you say, when it comes to the effect of the contracts that are still in the money, the one we sold on long-term last year. On the marginal cost of gas for Europe. Svein?
Yes. What we believe, as I said, is that some of the volumes now coming into in the short term, seeing that in the longer term that more demand for gas is then coming. What we have said in our economic planning assumption is that when we get into the 2020s, in 2024, around $8-ish on the NBP price is what we disclosed at around the CMD.
Okay. Obviously that thinking hasn't changed given trends so far?
No.
Right. Thank you.
Our next question comes from the line of Alwyn Thomas from Exane BNP. Your line is open. Please go ahead.
Hi, guys. Can I just ask on production guidance for this year. I know there's a lot of moving parts, but maybe you could tell us what you assume for net volumes from Sleipner in your 2019 production guidance of flat year-on-year. Sort of in that context as well, can you give a little bit more detail on current operations at Aasta Hansteen, Mariner, and Martin Linge into next year would be helpful. Then just on DPI, pretty solid performance this quarter. Can you maybe just give a little bit more color on the moving parts regarding the influence of Brazil and Roncador volumes in terms of cash margin and the U.S. onshore as well for the quarter, maybe help us try and explain the numbers. Thanks.
Well, first of all, we delivered 2,111,000 barrels a day production last year. The decline on the existing portfolio is still around 5%. That is equal to just north of 100,000 barrels that you have to replace for 2019 to stay flattish. The startup of this quarter was as planned, Ormen Lange started up just before the year and has been ramping up and reached production plateau mid-February and are currently producing at plateau and nicely with a good regularity. Mariner, we are guiding them that that will start up second half and hopefully in the beginning of second half. Martin Linge, we see a lot of comments from time to time at least that there is a delay in Martin Linge. When we looked at Martin Linge to take over the operatorship and increase our equity, it was assessed thoroughly.
We expected that the production start-up from Martin Linge should be Q1 2020. For us, that remains the same and there is no cost changes either to that project. Production guiding is on Johan Sverdrup then coming on stream. It will ramp up to full plateau in 12 months' time from starting up. Yes, it's a good asset, and it will contribute towards the end of the year. Based on all these moving parts, as you allude to yourself, we expect that the production for this year will be flattish compared to production last year, and the 2.1 million barrels per day last year was a record-high production for us. Flattish is still on a record high level, yeah.
And-
We'll take our next question from the line of Peter Low from Redburn. Your line is open. Please go ahead.
Hi. Thanks for taking my question. Just one on your non-sanctioned project portfolio. Do you consider that that is currently adequate to organically deliver the 2025 production guidance you've laid out? Then as a follow-up, can you provide any update on the progress towards FID of some of the larger projects in there, as I'm thinking of things such as Bay du Nord, Carcará, and North Platte? Thanks.
Well, when it comes to the production guiding towards 2025, the sanctioned portfolio will come on stream by 2022, and then we have some other projects, unsanctioned, as you say, that are progressing according to plan. We are confident that the guiding of 3% compound annual growth rates from 2019 to 2025 still holds. We have sufficient projects in the pipeline to deliver on that production growth and then also production beyond 2025. On Carcará, a final concept select, we expect for that to happen for the first FPSO during this quarter with a decision gate in the third quarter for this year. Bay du Nord, we reached an agreement with the provincial government when it comes to the framework, the fiscal terms for that development.
We reached that July last year, and the work is ongoing with the development application and benefit plan that we need to provide as part of that application. The benefit plan is there are some requirements in the agreement with the provincial government when it comes to local content. Concept studies are being conducted for the floating production storage and offloading units, as well as the sub-sea templates, risers, umbilicals and flow lines and the sort. Those projects are progressing nicely. Also bear in mind that one of our key learnings from the drop in oil price was don't rush these projects. Take the time you need to deliver good projects. If you rush, you might start up a couple of months earlier, but it will come at a very high cost. Take time to do it right, and then plan and stick to the plan.
I think that is why you see that we are able to sustain a guiding when it comes to capital spending at around NOK 11 billion for our total portfolio.
Thanks.
We'll take our next question from the line of Christopher Kuplent from Bank of America. Your line is open. Please go ahead.
Thank you very much. I hope I'm going to be quick too. Can you let us know whether you're actually downgrading your full-year CapEx guidance or is the IFRS 16 impact so small on that NOK 11 billion? Quickly, I wanted to also ask whether the recent M&A activity pickup we've seen in the U.S. you think is making it easier or more difficult to potentially sell assets out of your portfolio? Lastly, sorry again on European gas. If I'm assuming that spot prices in the second quarter stay at current levels of around NOK 450, are you saying that your pricing means you could actually see a premium in the second quarter? Any more color for an idiot like myself would be welcome. Thanks.
On the IFRS 16 and the effect on the CapEx, Ørjan.
Yeah. The organic CapEx is not impacted by IFRS 16, so no impact on that. Yeah, short answer.
Yeah.
Thank you
the question of buying or selling assets in the U.S. In many ways, you could say that the current commodity prices is among the worst we can have from the point of view that it's high enough for everybody to muddle through, and it is not high enough for the M&A market to really kick off big time like it was before the drop in oil price back in time. Having that said, we see that there are pockets around the globe that the market is hot from the point of view that it is pricey. Part of the U.S. onshore, the Permian, to be more specific, is such a one. We have looked at the stuff in the Permian. Subsurface-wise, it looks nice and it looks to work, but it still needs to make sense from a returns point of view. It's too pricey.
You had a question on the 4.5 for european for second quarter, whether there is an opportunity for us, given where we sit when it comes to the contracts we entered into to last year, whether that can represent a premium like we saw in the first quarter. That is what we expect if the prices is around what we have seen. Bear in mind that we are smoothing out this change in how we are going to trade volumes going forward to more short-term pricing.
Understood. Thank you very much.
Yes. Thank you.
We will take our next question from the line of Anders Holte from Kepler Cheuvreux. Your line is open. Please go ahead.
Thank you, guys. Congrats on a strong quarter. Just two questions if I may. One of them is on CapEx. Now due to the strong cash flow in Q1, you covered 47% of your CapEx is already covered for 2019 from your operations. My question on the CapEx front is how much of the remaining CapEx is contingencies of Johan Sverdrup? The second question, you talk about returns in the renewables segment as one of the key hurdles for you guys to launch your investments into the sector. What I'd like to know is to pick your brain on what exactly do you mean has to change in the renewable side for you to see more upside on the returns? If you could just elaborate a bit more on the details behind your reasoning for holding back on the renewables investments.
When we see companies like Enel, they're just saying that they can't simply sanction enough, and returns are fantastic. This is the opportunity set I've been waiting for a generation. This kind of completes a bit the picture you're painting with the low returns and the pull back on investments. What has to change in that sector for you guys to pick up the pace? That would be great. Thanks.
First on Johan Sverdrup, now phase 1 and phase 2 being sanctioned at a total cost below what Johan Sverdrup phase 1 alone was supposed to cost. A stellar project development execution and good collaboration and work by the supplier industry is helping out in making that happen. On the remaining contingency on Johan Sverdrup phase 1, it's not much left. You have more in the beginning, and as the time go by, and you get more and more clarity, that contingency level is being taken down, and that is also partly why you have seen a reduction in estimates historically. It's not much left. In the renewable space, we have seen a lot of cheap capital-seeking infrastructure-like returns, and accepting the low returns. That has been, the way we look at it, pushing down the returns in this segment.
Now that we see that the subsidies more or less is fading away, and we are, as an industry, being met with more emerging risk, we expect the returns to come somewhat up. Also people that think that low risk is a low return, a high risk then should be also wanting high returns. For this to be sustainable, the renewable space, when it comes to offshore wind, has to improve.
Okay. Well, when you say it has to improve, what does that actually mean? It'd be a little bit difficult.
It just means that either you go into this and have very low returns or no returns at all, and whether that is sustainable, it's up for you. Or, in our case, we need to see better returns and work the projects to create better returns for us to be willing to invest.
Okay, thanks.
We'll take our last question from the line of Stephane Foucaud from GMP. Your line is open. Please go ahead.
Yes, morning. Thanks for taking my question. Equinor has a quite busy CapEx program exploration in 2019. A specific question on what Equinor is doing in Turkey in the Thrace Basin. Looking at the Equinor website, you talk about massive amount of gas, something like 20 Tcf of resources with ongoing drilling and testing. I was wondering whether you see that as being as mature as that, because that could move the needle even for Equinor. When you think you would know whether the volumes are there or not, whether it works or not, and how that would fit with the overall European gas strategy? Thank you.
Well, the work program for the Banarli and West Thrace license in Turkey consists of several phases. Phase 1 is drilling and testing of the Yamalik-1 exploration well in the Banarli license. The drilling has been completed, and testing is ongoing, and it is way too early to conclude on the production potential of this license. We have also completed some 3D seismic for other areas. Drilling and testing one more exploration well will be on, or that was budgeted in fourth quarter, actually, 2018. All in all, it is way too early to conclude on the production potential, the volume in this structure, and both have to be in place for this to be of value. For us, it is still value over volume, but we still know that without volume, there will be no value.
For this to fly, it has to make sense from a returns point of view, as for everything else. It will compete with whatever we have else in the portfolio.
Thank you.
Thank you. Last question, and that's the last question. Thank you very much, everybody, for participating. We always like to deliver our projects on time, and indeed, it is exactly 12:30 Norwegian time, so that keeps that tradition. Thank you, everybody, for the interest. Of course, any further questions that you have during the course of today or beyond, please feel free to contact investor relations and we will follow up immediately. Thank you very much indeed. Thank you. Bye-bye.
Thank you.