Ladies and gentlemen, welcome to our conference call this morning to discuss the acquisition of license interest announced in Brazil. With me, I'm delighted to have Tim Dodson, EVP of Exploration, Lars Christian Bacher, EVP of DPI International, and Hans Jakob Hegge, Chief Financial Officer. The presentation is available on the website, and Tim will run through this for around 10 minutes, and then we'll ask for questions for around 20 minutes, we expect. We'll at that point poll for questions, but you can do so beforehand. With that, there's a lot to discuss, so I'll ask Tim to get us on the road. Thank you.
Thank you, Peter, and good morning, everyone. I'm very pleased to have this opportunity to present to you today a few more details around the agreement between ourselves and Petrobras to acquire a world-class asset in one of the most prolific oil basins in the world. As you've seen, we'll be acquiring a 66% operated interest in the BMS-8 license in the Santos Basin. That license includes a substantial part of the Carcará discovery, up to 1,300 million barrels of oil equivalents proven there, and with a significant resource potential from exploration. The normal acquisition cost is $2.5 billion, but it's a staged payment, with the NPV after tax of that staged payment below $2 billion.
The closing of the transaction is subject to customary conditions, including partners and government approval. In addition to this deal, there are ongoing discussions on a long-term strategic partnership covering the cooperation in offshore basins and on gas and technology projects. That was something we will revert to at a later date. As I say, we're accessing a high impact asset here, very high quality, in one of the most prolific oil basins in the world. The Santos Basin, as you all know, is where the pre-salt started, more than 50 billion barrels already discovered, but we believe there's still more to be had and have a yet to find estimate of more than 30 billion barrels.
The Carcará discovery has excellent reservoir properties. More than 300-meter hydrocarbon column, a high net gross, high porosity, high permeability, therefore a high resource density. What does that all mean? It means that you can produce more per well and can develop this field with fewer wells. You know, I would put it this way, it's everything you could hope for from a subsurface perspective. The BMS-8 license has considerable exploration upside, as I say. There is one remaining commitment, and if all goes according to plan, then we plan to drill that well next year.
Moving on to the next slide, should be obvious to most of you that this fits very well, you know, so with our international strategy and our strategy for Brazil, where we already have the Peregrino field in producing and operation. We've made the decision to move forward on the Peregrino Phase Two. We will soon assume the operatorship of the Pão de Açúcar discovery in the Campos Basin, and now we add the Carcará to that. What do we get here? We get access to a world-class reservoir in a prolific region. We get further scale and materiality, and through the strategic intent, then, or the discussions we have with partner, with Petrobras, a strategic partnership with them.
I think what we can bring to Brazil is a proven track record as an operator in Brazil and in the pre-salt through our experience in the Campos Basin with Pão. Of course, also our expertise when it comes to subsea developments across the various geographies. This in many ways, you know, sort of is another natural stepping stone. It provides a diverse and balanced portfolio for profitable growth in Brazil. We become a major player with strategic presence in Brazil's main offshore basins, the Santos and the Campos Basin. I think, not least, you know, it creates a strong foundation to secure production beyond towards 2025 and beyond, and to take out the synergies of an already robust and mature organization with proven experience in Brazil.
To sum up, high value resources on what we regard to be competitive terms in a prolific basin in the Brazil pre-salt. If you look at the acquisition cost here and the volume range, you can do the numbers, but you know, this is indicatively you know, this is somewhere between $2 and $3 a barrel, which compares favorably you know, with exploration metrics and other acquisition metrics. Strong strategic fit, as I said, with the existing positions in Brazil, and well-positioned, I would say, for future operatorship of a unitized Carcará field. We feel that we can add further value to this license by our subsurface and project management, you know, through the application of technology and value chain optimization.
As I said, this will also further strengthen the relationship with an important long-term partner, Petrobras in Brazil. It is also consistent with our financial framework. It is countercyclical approach, but an approach is taken to improve the long-term outlook. In fact, we think the timing of this deal is very good. Staged payments, as I say, half upfront, $1.2 billion dollars at closing. That will add around about 1.5 percentage points to the net debt to capital employed ratio. When it comes to the final investment decision, we don't envision taking that until 2020 at least with production start at some time in the mid-twenties.
With that, I think I will hand the word back to you, Peter.
Thanks, Tim. Operator, if you could now poll for additional questions. Thank you.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Once again, that's star one to ask a question. We will now take our first question from Thomas Adolff of Credit Suisse.
Hi, thanks for taking my question. Just got a few. You bid for it, many others stayed away from it, in fact. I guess perhaps you can comment on why this indicative FID of only 2020 or later, what are the hurdles? Is that unitization, gas evacuation, the open acreage, et cetera, et cetera. The second question, I guess, for me is, Petrobras obviously is looking to monetize more, and is Statoil willing to participate, increase exposure further, if there are other attractive opportunity in the market? The final question, if I may, on the exploration upside, beyond Guanxuma, is there, are there any other prospects that could potentially add to the resource base? Thank you.
Okay. I'll take a stab at this. When it comes to the final investment decision and the process going forward, the Carcará discovery clearly extends out into open acreage to the north. All the indications are that that acreage will be part of a limited concession round in 2017. That acreage needs to be awarded, needs to be drilled, and hopefully, one will confirm the discovery there. That potentially needs to be appraised in that northern acreage, all that before you can move to unitization. That's the main reasoning for the investment decision not being taken before 2020 at earliest.
Just the open acreage licensing round next year you said concession, but as I understand it, Petrobras for new licenses in the pre-salt Santos Basin tends to do everything in a PSC. You're saying this will be a tax or royalty regime again?
We don't know the terms and conditions for that yet, nor do we have sort of final confirmation that the round, but all the indications from the Brazilian authorities are that this acreage will be made available at whatever terms and conditions are agreed next year. I don't have any more details. No one has any more details on that at the moment.
Thank you.
When it comes to other opportunities, we have been looking, you know, sort of continually at both exploration and business development opportunities in Brazil for many years. We've bided our time and, as I said, we feel that first now are we able to access an asset of such high quality at such a good price. When it comes to other opportunities, of course, we will continue to evaluate other opportunities, but I would remind you that this one is significant in itself. It's material with up to 1,300 million barrels on a 100% basis for BMS-8 .
When it comes to exploration, there are other possibilities over and beyond Guanxuma. Guanxuma is the main prospect and is likely to be the target of the remaining exploration commitment well next year, hopefully.
Thank you.
Could I just intervene before we go to the next question to remind people to keep it to one as a maximum or of two questions? Like, you got a first mover advantage there with the three, so we will keep it down to one, max two from now on. Thanks very much.
We will now take our next question from Jon Rigby of UBS.
Thank you. It's been evident over the last five or six years that Petrobras has made some very significant steps forward in the learnings around the sort of exploration appraisal and particularly development in the Santos. With the title obviously moving completely to us with Petrobras stepping out of the license, what measures are you putting in place to ensure that the very significant learnings that Petrobras has taken from the developments are retained in the block and that you don't start from sort of step one in reinventing the wheel in terms of the appraisal and particularly the development of the block? Thanks.
Lars Christian, could I ask you to pick that one up?
Yes. Thank you. That's a very good question from Jon, as always. On this topic, we have over many years have a very good relationship with Petrobras, and cooperation.
As you point to, they will exit if this deals get the final stamps from all parties involved. The MOU we are talking about is also trying to cater for this exchange of relevant information between the two parties. Of course, we will get all the relevant information from the drilling of the three wells that has been delivered so far, one exploration well, and two appraisal wells. We also feel that the good development that we have shown and also told about at the Capital Markets Update in February last time related to bringing down development costs but also improving in the drilling of wells.
I think also, other companies can learn from what, you know, the journey we've been through over the last two years. We see that that is something that attracts questions from peers and gives us a good opportunity to actually then exchange information. I think in this development of this asset going forward, yes, we can learn from Petrobras, but I also think that others can learn from us. For us, it's all about trying to pick the best from all companies in this to make this a really good development.
Okay. Makes sense. Thank you.
We will now take our next question from Biraj Borkhataria of Royal Bank of Canada.
Hi. Thanks for taking my questions. I had a couple. The first one would be if you could just talk us through the cash flow outlay. I know you have a $1.25 billion upon closing, but can you talk about the other installments that you're to pay and when they are to be paid, and on what conditions? As part of that, have you assumed in that $2.5 billion any costs associated with the new upcoming license round? That'd be my first question. The second one is, as part of this transaction, were there any conversations? I know there have been recent conversations in Brazil about improving the fiscal terms.
I was wondering if that played a part in your willingness to double down in Brazil. Thanks.
Can I suggest that Hans Jakob Hegge answers the first question and then Lars Christian Bacher on the second? Hans Jakob Hegge? I think we have Hans Jakob Hegge dialing in remotely. It may be that he's not able to reply directly. Let me do that on his behalf.
Sure.
The question related to the stage payments. As I said, 50% on the signing, which we would expect to be towards the end of this year, and then two contingent payments, which relate to particular benchmarks. One is around the licensing and when that goes, and the second would be around the unitization of the block. two- stage payments. That's one of the reasons why the NPV of the payments is lower than the headline $2.5. That $2.5 does not include anything for the upcoming licensing round. That was, I think, your first question. Lars Christian, can you take the second about the fiscal terms? Yes.
This license was awarded very early, so when it comes to the fiscal terms on this one, government take, local content, it is among the more favorable ones. So that has been kind of one of the elements that is being factored into the accretion and the totality of this, of course. I mean, this is proved volumes, three wells, with acquisition cost between $2-$3 per barrel, which is very, very low for something that is working. This is a very good deal that stands on its own merits. It's not dependent on exploration success. Definitely it's going to be very welcome if that happens. It's not dependent on any fiscal improvements, but if that comes, then that will also be welcome.
Thank you very much.
We will now take our next question from Haythem Rachid of Morgan Stanley.
Thank you. Good morning, gentlemen. Thanks, Tim Dodson, for the presentation. This is probably a question for Hans Jakob Hegge, if he's available. Just wanting to come back to the balance sheet actually. As I appreciate very much, you highlight this as a sort of countercyclical and investing sort of in an opportune moment like it is at the moment. Having said that, with sort of Statoil's gearing rising quite a bit in the last quarter or so, up to just under 30% net debt to capital, and obviously adding on a little bit now for the initial payment at least, by closing.
I just wanted to, I wondered if you could give us a sense of the conversation you or the guidance you've given before about that you would be comfortable going beyond sort of 30% if you could see a path to get back below 30%. Now I just wanted to get a sense of how long do you think that path is?
Whether you're comfortable with, sort of staying kind of at elevated levels of gearing, you know, well into 2017, or whether you would be looking to take other actions to sort of start to bring gearing down as well? If you could give us a sense around that would be very helpful. Thank you.
Okay, thank you for that question. First of all, I think it's clear to say that the transaction does not impact our dividend policy. It is in line with the guidance given in February. Having said that was based on the portfolio that we had then. On the call on Wednesday, we just updated on the gearing. As you said, we're taking down the CapEx for this year, from $13 billion to $12 billion. We continue with the strict prioritization. At the same time, we see some signs of recovery, a more balanced market, hopefully going forward based on the adjustments that we see. During 2017, we think we will have some recovery in the prices.
The plan includes several measures, but not affecting the dividend policy.
Okay, thank you.
We will now take our next question from Mehdi Ennebati of Société Générale.
Hi. Good morning, all, and thanks for taking my questions. Two quick questions. You highlighted that the resources are between 700 million-1.3 billion BOE. I just wanted to know what is the recovery factor that you used, you know, to get that range? Regarding, you know, the quality of the reservoir, which has been highlighted by Petrobras, Galp, and now Statoil, I wanted to know if we could expect, you know, a material increase in this recovery factor, not now, but you know, after some appraisal wells, et cetera. The second question relates to your exploration expenditures budget for 2016, 2017, and 2018. Now you are adding material amount of resources to your portfolio.
Should we expect an adjustment of your exploration expenditures? Thank you.
Christian, can I ask you to cover those for the exploration?
Certainly. I can take both of those. So the 700 million-1.3 billion recoverable resource estimate for BMS-8 , that's on a 100% basis, that reflects, you know, sort of, P10 to P90 spread. There's no sort of real midpoint on that. In the evaluations which we've performed here, the basis for those is a 30% recovery factor, but with considerable potential for upside. When it comes to the exploration question, the exploration spend going forward, and particularly from 2017 and beyond, depends very much on the portfolio at hand.
Of course, this is a very good and high quality add to that portfolio. As to activity level and spend level in 2017, we haven't got that far in internally yet. As I say, I'm very happy to add this asset to that portfolio, allowing us to sort of high grade even further.
Thanks very much.
We will now take our next question from Anish Kapadia of TPH&Co.
Hi. I had some questions around the economics and your assumptions. Just kind of thinking about the $2.5 billion that you're gonna pay, if you include that in the thinking. What kind of oil price do you see this breaking even at if you use the midpoint of the resource, and you're kind of in that, what discount rate are you using for Brazil? And then in terms of how you again appraising the value of this field, what assumptions have you used in terms of developing the field? Is it similar to what you've seen in Brazil so far, so kind of 150,000 barrels a day, FPSOs with associated gas outtake?
Do you think there's potential for, you know, significantly higher plateaus than that? Thank you.
Hans Jakob Hegge, could I ask you to do the first, and Lars Christian Bacher the second?
Thank you for the question. I think that it's a bit early to talk about breakevens and the profitability as such. Having said that, this is favorable in our terms, the way we look at it. Acquisition cost of $2-$3 per barrel. And there is additional exploration upside in the license. We think this is comparable. Having said that, it's a high resource potential, and it's a world-class discovery. We are also excited about the opportunities going forward.
Lars Christian?
Yes, on the second question, this will definitely be an FPSO. How many, how big remains to be seen. There is also this factor of.
The remaining sort of part of Carcará, which is then outside this block. I think, you know, from my point of view when it comes to being on the receiving end of this asset when the deal is finalized, this is going to be a process internally where we're trying to mature this in such a way that we position ourselves to be in the best possible position to be the operator of the totality, if and when that happens. At the same time, have as low as possible burn rate, since this is going to be somewhat decided or influenced by sort of factors outside our own influence for the time being.
That's why this question is somewhat premature. I understand why you ask it. What we have learned over the last two years, at least when it comes to bringing down the breakevens for development cost, is that it's all about, you know, taking necessary time and doing the right thing in the right sequence. As with the effect of having as low as possible CapEx to be put on the table as an upfront investment, but at the same time having a good plan to operate. It's a little bit too early to ask that question.
Can you say what the discount rate is that you used? Sorry, can we move to the next question?
We will now take our next question from Lydia Rainforth of Barclays.
Thanks, good morning. It's Lydia from Barclays here. Just coming back to sort of one of the earlier questions around the exploration outlook from here. Can you just talk about how you're seeing the balance of exploration that obviously you're looking at buying up barrels that you can actually add at probably a cheaper level than you might be able to add them through your own exploration program. How does it then affect what you're looking at going forward? Is it should we think about this being the first step in a number of things, or is it just a unique option that you have? Thank you.
Okay. Thanks, Lydia. I think we've always said that, you know, sort of, going forward and in order to replace our current resource and production base, we will require a combination of exploration and business development. In many ways, I think the acquisition of this asset, it's kind of, you know, hitting both of those at the same time, which is particularly good. You know, the remaining prospectivity has high impact potential and a high chance of success. No guarantees of course. And as you've already seen, you know, the acquisition of this asset is very competitive compared to our exploration finding cost, you know, sort of ambitions.
You know, it will always be sort of a balancing game between how much we invest in exploration, which carries more risk of course, than acquiring proven resources. You know, I think you should expect the sum of both going forward. I think it's important, at least from my perspective, from Equinor's perspective, that we are mindful that as we invest in exploration, that there can be other alternatives, there are at least that are as competitive, if you like, when it comes to acquisition slash finding cost.
Can I add to this, Lars Christian?
Please.
Yeah. I mean, historically we've said that if you want to achieve sort of super profit then it is through exploration. As Tim was saying, this is a case actually where the acquisition cost $2-$3 is behind sort of, somewhat at par or below what we have of our target, as finding cost through exploration. This is a sort of odd case out in that regard. If we get across more of those, I think you will see that we do more through the acquisition, and not through exploration. As Tim was saying, we need both, and the industry, every company in the industry needs both to play both levers to make it work.
On this cost of development of this, if you look at Wood Mackenzie's sort of analysis of this basin and their description of this asset, they're pointing to one important factor that I think is key for you to also factor in into your thinking. That is that this field has no CO2 content, whereas others in this basin do have quite high CO2 content, which is somewhat more demanding when it comes to construction and operation, when it comes to kind of materials, and maintenance load that you have to put in place to make it work.
That's really helpful. Thank you.
We'll now take our next question from Mark Sherlock of Jefferies.
Oh, hi there everyone. Thanks. Take my question. I was just wondering if you could talk a bit more about the anticipated closing of the transaction. I think you mentioned the end of this year. What sort of hurdles, if any, do you anticipate between now and that timing? And then maybe, if it was relevant at this stage, just talk about any potential preemption options from some of the other partners. I'd appreciate your views there.
Thanks, Mark. Tim, do you wanna pick this one?
Yeah, sure. Thanks, Peter. Thanks. No sort of significant hurdles as we see it. There are the normal, you know, sort of preconditions on this. There is a first right of refusal with the partners in the license. We don't sort of envisage any issue there. Then, you know, sort of the approvals with the authorities have to go their course. At the same time, we've had, you know, sort of an active dialogue, you know, sort of with the authorities, not specifically about this deal, of course, but, you know, sort of in case something like this come up. We have good relationships there, and they're already informed about this and initially sort of received this deal very, very positively.
You know, these things take some time. We would like to think that we could close this, you know, before year end, but that's just a sort of kind of general guiding sort of rule of thumb here. Around about year end is when we foresee closing on this.
Great. Thanks very much.
Well, ladies and gentlemen, I think that's it for the questions, and also for the timing. As ever, if there are any further follow-up questions, please don't hesitate to contact us in Investor Relations, and we'll be delighted to provide what details we can on what we think is an excellent deal announced today. Thank you very much for your time. I know it's a busy day. We'll let you get off, and thanks again for calling in. Thank you.
Thank you for your participation. You may now disconnect.