Thank you for joining us today on the Statoil conference call for the second quarter of 2015, either by phone or following us on the web. My name is Peter Hutton, Head of Investor Relations at Statoil, and I'm joined today by Torgrim Reitan, CFO, Svein Skeie, Head of Performance and Risk, and Ørjan Kvelvane, Head of Accounting. I'm conscious that today is a very busy day for everyone on results, so we will keep this call tight on timing and should be finished by 1:30 P.M. UK time. Torgrim Reitan will present the results and drivers for the quarter over 15 or 20 minutes, and then we'll open up for quick questions and answers for around 30 minutes. With that, I'll pass the word through to Torgrim Reitan for his presentation.
Thank you very much, Peter, and good afternoon and welcome. We have three messages for you today. First, we deliver an encouraging set of adjusted numbers, solid operational performance, generating strong cash flow, and we reduce our net debt compared with the first quarter. Second, cost improvements are coming through, giving visible impact on the bottom line. Third, we also see good progress on capital efficiency. This enables us to lower our organic CapEx guidance. When also taking into account changes in the dollar-kroner rate, we expect organic investments in 2015 of around $17.5 billion. In addition, we announce that we are converting to US dollar as our presentation currency from the first quarter 2016. This will better reflect the exposure to dollars in the underlying business and also facilitate comparisons with peers.
We will also declare our dividends in dollars. This starts now with a second quarter dividend of $0.2201 per share, which is consistent with the previously guided level of NOK 1.80 per share. Our reported net income for the second quarter was NOK 10 billion, positively impacted by the divestment of Shah Deniz. Adjusted earnings after tax were NOK 7.2 billion and NOK 22 billion before tax. This is impacted by lower commodity prices compared to a year ago. However, cost improvements are coming through to the bottom line, and we delivered solid operational performance with good production growth and continued high regularity. We also saw another strong result from our downstream business. Please note that the weakening of the Norwegian kroner to dollar continues to impact our financial results as it is measured in Norwegian kroner.
It increases revenue, operating expenses, particularly outside Norway, and capital employed. Finally, our tax charge was NOK 15 billion. Tax on adjusted earnings was 68%. Strong results from the midstream and downstream business with lower tax rates contributed well to the after-tax earnings on the corporate level. In a low-price environment, our tax rate in the upstream is expected to be higher than normal, so please be aware of this in the coming quarters. Our upstream operations in Norway are performing well. The lower earnings compared with the same period last year are due to lower prices. This is offset by reduced operating expenses. So far, we have taken down operating expenses by 11% year-on-year, and an even higher percentage reduction on a per-barrel basis. We see lower field costs driven by improvements, reduced activity levels, and lower turnarounds.
Production on NCS was up 7% and around 9% adjusted for divestment. Good production efficiency. We are ramping up new fields like Gudrun, Svalin, and Valemon. We have produced flexible gas from Troll and Oseberg in accordance with our value over volume strategy. We had lower maintenance than the same period last year. At the same time, we continue to invest for the future. In June, we submitted the plan for phase one of the Shetland/Lista development at Gullfaks to the ministry. We also installed the world's first subsea wet gas compressor at the Gullfaks South. Also in June, the plan for development and operation for the Johan Sverdrup project was approved by the Norwegian parliament. Over the past week, we have awarded important contracts on Johan Sverdrup and recently started construction at Verdalsøra. This is one of the largest industrial projects ongoing in Europe.
The results from our upstream business outside Norway are also impacted by lower prices. We continue to deliver high production, adjusted for divestment, close to 4% growth despite higher impact from plant turnaround. Our entitlement production is up 9% due to lower PSA effect. We report an increased depreciation charge in Norwegian kroner. This is due to currency effects and ramp-ups on new field. Measured in dollars, DD&A is down 16%. Operating momentum is good and production cost in dollars is down 10%. Finally, MMP again delivered a strong result across the board. More than double earnings compared to the same quarter last year. We are realizing high margins at our refineries, delivering solid trading results across all commodities, and solid performance in European pipeline gas and in LNG. As you know, the results from MMP will fluctuate.
I have earlier said that around $3 billion is a normal quarter. This is still valid. However, if the business environment remains supportive with contango in the energy market and strong refinery margins, you should expect results above this level. I'm pleased to report another quarter with strong operational performance. We produced 1,873,000 barrels per day, up 4% compared with the same period in 2014. Adjusted for divestments, the growth is at 7% with a solid 9% on MPS. Stable operations and high production efficiency. Regularity improvements continue. Decline remains stable at around 5%. We continued to ramp up production at Gudrun, Svalin, and Valemon in Norway, CLOV in Angola, and Jack/St. Malo in the US. This gave an improved production mix with liquids up 8% and gas flat.
We have maintained strong cash flow from operations during the first half of the year at NOK 88 billion. We have realized NOK 24 billion in proceeds from divestments. We have paid three tax installments on the MMP, and please note that these are based on 2014 earnings. The second half of this year, tax payments will be based on 2015 earnings and thus be lower than in the first half of the year. We saw higher after-tax earnings from the MMP segment. Year-to-date, we have paid NOK 11 billion quarterly dividends, and then we have invested NOK 464 billion. We have a strong financial position. As you have seen, we have maintained a strong credit rating with stable outlook. Our net debt ratio is now 22.4%, which is down from 24% in the previous quarter.
As we guided in February, we expect to see increasing gearing at current prices, but we are prepared to use the flexibility in our investments to safeguard a solid financial position. We are currently running with more than $20 billion in cash. Our efficiency programs are progressing well. We outlined the key initiatives at our capital markets update. These are now coming through to the bottom line, and we remain on track for the 2016 target. I want to highlight some of the deliveries in the first half of this year. We continue to improve the offshore drilling and well performance. The target is 35% time savings, and we are on track. In the US onshore, we also see strong performance at almost 30% cost reduction. I will, of course, follow this very closely from Houston.
We are making good progress on facility CapEx. This is CapEx that will come in the future. I am particularly pleased with our efforts to increase robustness and further optimize these projects, reducing the break-even prices. We will come back with more on this at our next capital markets update. In February, we increased our ambition on modification CapEx savings. Strict prioritization and good planning has been key for this progress. On the cost side, we continue to see field costs on the NCS moving down, and we continue to see high production efficiency. As you can see from the chart on the right-hand side, our adjusted operating expenses and net DD&A are coming down. Upstream operating expenses and DD&A are down by around 15% quarter-on-quarter. We are improving both in our international business and in Norway.
The numbers confirm that we are working smarter and delivering. I am particularly proud of the strong engagement I see from our team across the company. You also know that this is just the start. Major efforts lie ahead of us. Let me close by turning to the outlook. We reduced our CapEx guidance for 2015 from around $18 billion to around $17.5 billion. This is based on gains from our efficiency programs coming in even stronger and faster than expected, and also from gains from currency. If the current kroner to dollar rate is maintained through the year, there is an additional potential to reduce the investment level. As we said at our capital markets day, we will continue to prioritize high-value growth and use our flexibility to increase returns and to balance cash in and cash out.
We maintain significant CapEx flexibility in 2017 and 2018, and we have financial robustness to continue to invest in the best projects. Ongoing development will grow organic production by around 2 percentage points per year towards 2016, and we have many startups this year. Valemon, as you have seen, Edvard Grieg, Goliat, as well as fast-track number 11 in Norway. We have also experienced delays on some development projects, such as in the Gulf of Mexico. We are following our projects closely to ensure that the deliveries remain according to cost and plan. We will continue to ramp up Gudrun, CLOV in Angola, and Jack/St. Malo.
Production growth is expected to be around 3 percentage points a year from 2016 to 2018, and Johan Sverdrup will come in late 2019. For 2015, we have a somewhat lower turnaround activity than previously. Full-year maintenance is expected at 45,000 barrels per day. 45,000 barrels per day should be expected as the impact in the third quarter as well. Finally, on the exploration side, we have shared with you some more detail on our program at the last presentation. In the second quarter, we made 2 discoveries on the NCS, and we announced the Julius discovery earlier this month. Internationally, Thorvald in Gulf of Mexico was a technical discovery, and Valemon in the UK was a surprise.
We still expect to spend around $3.2 billion in exploration this year, and this is positioning for the long term. Let me round up. An encouraging set of numbers, solid operational performance, and efficiency improvements coming through. We deliver a strong cash flow and lower our gearing. We reduce our CapEx guidance for the year, and our financial position remains robust. We are dealing forcefully with the current market environment and at the same time continue to position for the long term. Our next results presentation will be held by the incoming CFO, Hans Jakob Hegge. He's a very experienced leader, and the CFO area will be in a safe pair of hands.
As you know, I am taking over as head of our U.S. business starting in August, and it has been a real privilege to work with you all over the past five years, and I look very much forward to continue our discussions in my new role. Thank you very much for your attention. Then I will leave the word to Peter to guide us through the Q&A.
Thank you, Torgrim. We're now ready to move to Q&A, and in the interest of time and efficiency, can I please ask you to keep yourself to one question? There may be time for a follow-up question during the course of this call before it finishes, after around 30 minutes of this Q&A. With that, Arne, could I please ask you to open the lines to poll for questions?
Certainly. If you would like to ask a question at this time, please press star one on your telephone keypad. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, that's star one to ask a question. We will now take our first question from Haythem Rashed from Morgan Stanley. Please go ahead.
Thank you. Good afternoon, gentlemen. I wanted to ask one question, particularly around the operational efficiency improvements, the chart that you show in the presentation. It looks in particular like the field costs on the NCS have seen a big improvement in this year in particular. Just wanted to get your thoughts on how that sits versus your expectations. Was this something that you've been pleasantly surprised with? Do you think that there's potentially scope for more to be done there? It looks like you're sort of well into delivering on your target for 2016. If you could provide a few thoughts around that.
Apologies, I know I'm gonna sort of break the rule here, but just one very quick follow-up question. Your Marcellus production gas, on the gas side, was particularly strong this quarter relative to the previous quarter. If you could just give us a bit of color on what's driving that'd be very helpful. Thank you.
Okay. All right. Thank you very much. On the field cost on the NCS, I am , particularly impressed by the momentum in the operating organization, and the ability to take out costs quickly from the field costs. T his is part of the target, but I think I will say it is, it has come with higher momentum and quicker than we had predicted into the plans. I think this comes from a very engaged organization that really sees opportunities to improve the business currently. On the Marcellus production, we are now running 6 rigs in Marcellus. One is operated by us, others are operated by EQT and Anadarko.
The growth in Marcellus production is mainly coming from wells that are hooked up to the gathering systems and coming into production as such. We are able to evacuate all our gas into the Toronto markets and the New York markets. In the second quarter, we have quite a nice uplift on the value of Marcellus gas.
Thank you very much. Very helpful.
We will now take our next question from Oswald Clint from Sanford C. Bernstein. Please go ahead.
Yes. Thank you very much. Maybe could I ask a question on divestments please? Obviously this year they look a little bit over double what you'd done this time last year, but and obviously that's helping to balance the cash side of things. Could you tell us, Torgrim, what we should expect? I mean, I know you don't have divestment targets, but do you have a list of identified or credible assets that could be sold through the rest of the year and even into 2016? That's the question. If I could break Peter's rule as well please, just ask a question again on the U.S. but on the liquids shale side. I think I saw a sequential decline in terms of oil volumes.
Could you just talk about what you might expect for 3Q and 4Q? Thank you.
Okay. Thank you, Oswald. On divestments, you said it yourself, we are not having specific targets on it. The reason for that is that we don't consider ourselves to be in a position where we have to sell, and we do not want to be a forced seller. Second point, very glad that we have been able to do some very good transaction in a high price environment, and we benefit from that in the current environment. On the third point, on your question whether there's more to come, well, there are still assets in the.
There are still work to be done to high-grade our portfolio even further, both on assets that we have and also potential, you know, add-ons to the portfolio. All of that is purely driven by opportunity and timing. This is an integral part of the strategy that we drive. I think I'll have to leave the comments to that general level, Oswald. On liquids production, onshore we have production growth in Bakken compared to same quarter last year of 17%. We are currently running with five rigs there. So there has been growth since last year, same.
Just a comment, if the comment was then also related on from first quarter to second quarter, we had some downtime in April, which we now have fixed and for this quarter. It's turnaround and the downtime in April that affected the liquid rate in Bakken in the second quarter.
Okay. Thank you very much.
We will now take our next question from Biraj Borkhataria from RBC. Please go ahead.
Hi. Thanks for taking my question, and best of luck in the new role, Torgrim. It was on CapEx. I know you lowered your guidance for the full year, but your H1 CapEx, if you annualize it, is running well below that. Do you see further downside beyond the NOK 17.5 billion for 2015? Second, very quickly, could you comment on the level of committed CapEx for 2016? Thanks.
Thank you very much. Extrapolating the current spending for the full year of course gives a lower number than NOK 17.5. If we assume the same dollar-kroner rate as is in the market currently, you should expect a somewhat lower than NOK 17.5. I think that's fair to say. On committed CapEx next year, we haven't given any explicit number on that. It is a lower number than the current spending.
Thanks.
We will now take our next question from Teodor Sveen-Nilsen from Swedbank. Please go ahead.
Good afternoon, and thanks for taking my question. One question on dividend. Based on consensus expectations, it looks like you will pay out 80%-100% of your 2015 earnings. What should we expect for the future in terms of dividend payout ratio?
Thank you, Teodor. Dividend policy is meant to work through cycles. Our intention is to grow our dividend in line with long-term growth in underlying earnings. That policy remains firm. We have today, changed to declare our dividend in dollars, and you should expect that to be the level going forward. While oil prices are now down compared to earlier, we also see that costs are coming down and capital intensity is coming down. All else equal, we will also see over time that returns will improve even in the current price environment.
Just one follow-up. What you're saying is that on the current oil price, you expect to be able to keep the current dividend while payout ratio will decline?
I know you will listen very carefully to what I'll answer this question, and I will refer to the dividend policy, which is what we have, and also to what we said on the Capital Markets Day in February, where we demonstrated that we will be able to navigate in the $60, $80, and $100 environment within, with a very solid balance sheet and also honoring the dividend policy. Since January, things have developed, we have seen, significant progress on our programs and projects in January.
Thank you.
We will now take our next question from Jon Rigby from UBS. Please go ahead.
Yes, thank you. I'm just looking back at your presentation from February. You kind of highlighted some very considerable flexibility that you did have in CapEx, $5 billion-$7 billion, I think you talked about. That was largely dependent upon whether you sanction or not a number of currently non-sanctioned projects. Excuse me. What I'm wondering is, with us now six months later, where would you characterize yourselves in terms of maturing those sanctioned project or non-sanctioned projects? Do you think those are now further away as you start to think about when the right time is to FID them? Or do you think right now that the shape of the project sanction list is broadly the same as you would have thought about it six months ago?
Just on that, can you confirm or not whether that 5-7 was based upon the cost that you saw in the market as of February this year, and whether you're starting to see some downsides to those costs in the projects that you are planning to sanction? Thanks.
Thank you. Thank you, Jon. What has happened since the February presentation is the following. We have not sanctioned investments that are sort of jeopardizing the various portfolios. So we have, you know, kept the flexibility, which is very important in these times. The second observation is that the projects that we have decided to delay are becoming significantly better and significantly more profitable. We see break-even prices for those projects really moving quickly downwards, and it's very encouraging. It actually, from my seat, I would say that there has been significant value created from delaying projects and giving them the opportunity to make slimmer concepts, streamline the development and capitalize on lower supplier costs.
When that is said, there are still more work to be done on these projects, so we will keep the flexibility, and we will have the opportunity to sanction them when the timing is right.
Right. Just to confirm, would you agree that versus what you saw six months ago, you see downside both in terms of timing and also in terms of the actual physical cost of those projects that you were looking at six months ago? Is that fair to conclude?
I would not call it downside. I will call it improvements. We see, a stronger set of projects, and we have maintained the flexibility in the investment program.
Great. Thank you.
Thanks.
We will now take our next question from Lydia Rainforth from Barclays. Please go ahead.
Thanks, good afternoon. Just one question if I go back to the efficiency program, you did announce in June further plans or plan to further standardize and simplify the business in response to the lower oil price environment, and particularly around simplification of work processes and changes to the organizational setup. Are those incremental to what you saw back in February? Is that as part of the existing program?
Yeah. Thank you, Lydia. A ll the simplification efforts and the standardization and all that is an integral part of the program that we communicated. It is very much in line. I think that is when we really crack that code. I think that is an area that has a significant upside over years to come.
Okay. Thank you.
We will now take our next question from Michael Alsford from Citi. Please go ahead.
Thanks for taking my question. O ne question from me too, just maybe looking at the current portfolio, do you see it having, I guess, sufficient optionality at the lower oil price environment to sustain and arguably grow production over the medium term? Or perhaps do you see the need to use the downturn and your balance sheet to add new assets to the portfolio? I guess what I'm trying to understand is whether you feel comfortable that you've got the portfolio depth today to carry on and sustain the business or do you feel that there is holes to fill? Thank you.
Okay. Thank you, Michael. We have some, you know, more than 100 projects in the portfolio that we can invest in. It is fair to say that that project portfolio has been, you know, the break-even prices in that portfolio has been sort of impacted by the environment we have seen over the last three to four years. These projects need to be improved significantly to be, to justify to be invested into in the current price environment. We see that many of these are now coming into profitability levels that that sort of make sense. T hose projects make sense absolutely in the current price environment, and are probably more to come.
I see a portfolio with optionality also in the current price environment, but there are more work to be done on these projects before we are ready to move forward with them. When that is said, and the second part of your question, we are of course looking also on everything else that's moving in the world. There's a lot of sales processes going on globally, and we are monitoring that closely. I think it is fair to say that it is not necessarily the high quality assets that hit the markets in these days.
Understood. Thanks, Tor. Just to follow up, when you mentioned the point around the kind of existing backlog and how things are looking to be more able to be sanctioned in this lower oil price environment, are you simply looking at the spot price or are you really thinking about where the forward curve is? It works at the forward curve prices, but not necessarily just at the spot price.
It's in these days, there is a positive net present value is not enough to be allocated the investments into. There is good business in delaying projects and making them even better and improve the project. Even if project have positive net present value, it is not sufficient to be invested in these times. We have taken a more cautious view, as we discussed last quarter, and have reduced our long-term outlook for oil and gas prices.
Okay. Thank you very much.
We will now take our next question from John Olaisen from ABG. Please go ahead.
Thank you for taking my question. At the CapEx update in February, you said that you will have free cash flow to cover dividend in 2016 with an oil price of $100. Given all that you're saying now with costs coming down, capital intensity coming down, and break-even levels coming down, et cetera, will you be willing to give us some indication how much the $100 free cash flow needed to cover dividend 2016 has come down? What is that number now?
I cannot give any specific details on that. The guidance we gave in January still remains firm. If anything, things have progressed, you know, quicker than what we assumed in February. The guidance still remains firm.
Okay. On the CapEx guidance for 2016, at the same March update, you seem to indicate flat CapEx in 2016 compared to 2015. Now you said, if I got it correctly on one of the previous questions, you said that so far you have committed less in CapEx for 2016 than what you're guiding on for 2015. Does that give an indication that CapEx in 2016 is likely to be lower than in 2015? Is that correctly understood?
We have not issued any specific guidance for 2016 and the dividend, but we have a growing flexibility.
Not dividend, but the CapEx. Sorry.
Yeah.
CapEx, sorry.
Yeah. I understood in the CapEx. We have a growing flexibility in the CapEx. The good thing with our investment portfolio is that we have the flexibility, and in these times, flexibility is gold. Any further guidance on CapEx 2016 is likely to come at the Capital Markets Day next year.
Okay, thank you.
We will now take our next question from Thomas Adolff from Credit Suisse. Please go ahead.
Hi. Just one question, please. Wanted to dig into the details of your production targets, the moving parts and contingency you have, you might have eaten into. If we look at 15, you say 2% growth unchanged from your prior guidance. If I go into the detail, Goliat is a bit delayed again. Bigfoot won't contribute, possibly not even next year. I wondered, and you might see slippages here and there in other projects, you know, Corrib or, you know, Heidelberg or whatever. I just wanted to get a sense for whether some of these delays are being offset by an improvement in platform uptime in the NCS or whether you're using your contingency or, you know, just some details, please. Thank you.
Okay. Thank you, Thomas. Production growth so far this year is good. The guidance for the year remains firm. When we put forward production guidance, we also always have some sort of contingency in there. What has happened is that we have continued to deliver high regularity from our operated business, which contributes positively. We have also decided to produce from Troll and Oseberg in this quarter, also adding production, and that is, you know, value over volume strategy. The guidance remains firm.
Can I just follow up and just get a sense for whether well whether you can quantify in KBD terms the improvement in platform uptime year on year? Last year.
In general, I would say that one percentage point in improved uptime is around 10,000 barrels per day on the Norwegian Continental Shelf. This year we have, I mean, both last year and so far this year, we have seen an improvement of several percentage points compared to earlier years. It's absolutely a meaningful contribution.
Perfect. Thank you very much.
We will now take our next question from Anish Kapadia from Tudor, Pickering, Holt & Co. Please go ahead.
Hi. Yeah, I had a question on exploration. Sounds like you've significantly lowered drilling time as you were seeing drilling rig rates coming down. You also seem to be getting through your prospects quicker, so bringing some forward from last year. Then, you know, in, I suppose the most high cost area, Angola, though, it doesn't seem like there's a lot of follow-on potential over there. Just wondering if that means that the $3.2 billion of exploration CapEx is sharply lower for next year and not just down kind of 10-20% or so. Just wanted to get a bit of an update in terms of your progress so far in your Gulf of Mexico and your Canada drilling campaigns this year. Thank you.
We think, and we are of the strong opinion that it's possible to create value through exploration through the cycle, both in a high price and low price environment. We think it is important to be consistent on the exploration strategy also in the low price environment. We work you know consistently with building an inventory of high impact opportunities, so we can you know maintain an attractive drilling program, and that's the case for 2015. We are well on the way you know building the portfolio for the future as well. When it comes to the actual spending level for next year, we have to revert to that later.
The general tone is that we intend to continue to explore through the cycle. In the Gulf of Mexico, we had Torvald as a technical discovery this quarter. We have an interesting prospect called Pony that is spudded actually in the third quarter in July from Mærsk Developer, and that is to test the potential extension from the Shell block. We're probably looking at a November date for completion of that. On the Canadian business, Bay du Nord, as you know, we are running a big program up there. Now we are doing follow-up drilling, but we have no plans for announcements of this year. That's a short update on the US drilling program.
Okay. Just to clarify, so by technical discovery on Torvald, you, I mean, that's discovery but non-commercial?
Yeah. That's what we call it when it's not commercial. We call it technical.
We will now take our next question from Hamish Clegg from Bank of America Merrill Lynch. Please go ahead.
Hi. Thanks for taking my questions. Just a few little things to clear up. First of all, why you decided to convert into dollars right now? You mentioned the easier comps. Should this mean that it makes life easier looking for potential acquisitions in the market? On that point, with your dividend, which is now rebased in dollars, perhaps you could just confirm that's the $0.22 per quarter base that you wanna stick with. It's effectively 30% down year-on-year. You've managed to sort of work in a 30% dividend cut. Am I right in understanding that, so your Norwegian shareholder base will effectively be vulnerable to the krona dollar swing in currency? The second question I just had was really looking at CapEx.
You have used 7.76 NOK to give us the updated guidance. Based on the current run rate we've already seen, I'm looking at more like $16 billion of CapEx, or can we expect that to really increase in Q3 and Q4 as payments on Johan Sverdrup start to kick in? Thirdly, just Torgrim, I wondered why you're moving from the role of CFO to the U.S., maybe just a little bit of personal color you could shed on that. It seems like a step down, or are you gonna get paid any more or less? Is there a tax advantage to that? What's your sort of career outlook? On tax, you mentioned the cash taxes are being charged on 2014 oil price levels.
When you sort of look at the effective run rate, it appears that you're running at sort of nearly half the cash tax levels that you were at last year. I mean, correct me if I'm wrong, but it looks like the cash taxes that we're already seeing sort of for the first half this year are implying a 70% tax rate that we would normally expect.
Okay, thank you. On the dividends, we want to change our presentation currency to dollars, and we'll do that from the first quarter next year. The reason for that is that we are a dollar business. We want to take away, you know, currency noise in our reporting. It's sort of a much better match to the business. At the same time, we also find it natural to declare the dividend in dollars as well because we want the dividend commitment to match the sort of business which is a dollar business.
We are doing that now, and we are changing the presentation currency from the second quarter. It is to take away, uncertainty and speculation from this, just you know, firm it up, right away. Looking forward.
It's cheaper for you in dollars, am I right in thinking, than it was a year ago?
We are a dollar company, and we measure everything in dollar. That's the way we look upon all our commitments as such. This just makes sense business-wise. On your CapEx guidance, I answered that earlier on, I don't have to repeat that. It is of course currency related. On personal note on moving to the U.S., I'm very encouraged by, having the opportunity to take a broad leadership task, and heading up an area that will be very important for Statoil in the future. Really looking forward to do that.
Of course, it's hard to leave the CFO role because I like it so much, but it's very easy when I know what I'm going to do over the next period. The last question, I didn't figure out what was, so I.
It was just on the tax side. You mentioned the taxes you've been paying in the Norwegian Continental Shelf this year were based on 2014 oil prices, implying that we could expect the tax to come down in the second half of 2015. I'm just looking at your numbers. It appears they're already nearly half of where they were in 2014. I kind of was just wondering analytically if that made sense to expect taxes to come down in the second half of the year.
You have to look at, paid taxes, and that is going to be lower in the second half than in the first half of the year.
Okay. Okay.
Thanks, Hamish. Before we move into the next question, can I just repeat, we do ask to keep it to one or two questions for a reason. We are time-constrained. So if we move to the next question, if you could maintain the discipline, that would be helpful for everybody. Thank you very much. We will now take our next question from Anne Gjøen from Handelsbanken. Please go ahead.
Thank you. Good afternoon. Two small questions. Are you willing to give an indication of, by the end of this year, net debt to capital employed, for example, with the oil price, gas price as today or at $60? The second one, the maintenance activity is rather low that you're guiding for third quarter and the full year guiding. My understanding is that it will be considerably higher next year. Have you got any comments, more specific on that? Thank you.
Yes. Thank you. Thank you, Anne. We haven't given any specifics on the net debt for the year-end. You should expect it to increase in the current price environment towards the end of the year. It will also be impacted by the dollar-krona rate as well. It's very hard to give a specific number on this as that currency cross is very volatile. This is also partly the reasons why we are actually shifting to report in dollars to take away that type of noise. When it comes to maintenance next year, you are right. The maintenance level next year will be higher than in 2015, and we will have to revert later on the specific numbers on that.
Thank you.
We will now take our next question from Rob West, Redburn. Please go ahead.
Hi there, Torgrim. Thanks very much for taking my question. I've got one on Johan Sverdrup, which is sort of interesting because the first big project in the majors portfolios is really going through contracting during this downturn. If I add up all the contracts that you've announced, I think that includes almost all of the kit except the large awards, except one jacket and some of the SURF. You're about NOK 40 billion, so a third of the way towards your 117 billion krona target for phase one. That leaves quite a lot of headspace to contract a jacket, some SURF, and all the small missing pieces that aren't in that NOK 40 billion number.
Given that, I was wondering is there anything you can say about how the cost so far is coming in relative to what you expected or anything around the contingency in those numbers or what you need to see to really be sure of hitting that phase one budget? I have one more on the dividend, but I'll pause there and sort of honor Peter's request of one question.
Thanks, Rob. All right. Johan Sverdrup, I mean, there's an excellent progress in the project, and there's no loss of momentum. That's very good. We have awarded five major contracts and then in addition, a lot of smaller contracts as well. You are right, summing up all of the awards is close to NOK 40 billion. I will not comment specifically on how this is compared to the total number. We see that we are able to take, you know, to have the current environment reflected into the contracts that are awarded.
Okay. That's an enigmatic comment but makes sense. Could I ask one more on the dividend there? I sort of sympathize a little bit with Hamish's point that we're effectively moving the entire P&L from krone to dollars at the weakest krone for about 10 years. I guess the tangible impact of that is we're converting the dividend at the weakest krone level in about 10 years as well. I just wonder if we were in a world where the oil price went back up and the krone began strengthening against the dollar again, would that mean you could increase the dollar dividend as a result because you're gonna pay it all in krone and the FX now works in your favor?
I mean, there's no sort of cap being at $0.22 per share forever, is there?
Okay, thank you, Rob. Yeah, I mean, it makes business sense to make this shift, and we want to take away the uncertainty for the investors. We are a dollar company, and we are dollar exposed. The investors in our stock get a dollar exposure when they invest in Statoil. The dividend stream will from now on be a dollar stream and so on. Of course, the currency cross between.
I'm not quite sure.
The currency cross between dollar and krona can go both ways, from here as it always can, and it's the forward curve is what it is.
If the US dollar was to begin weakening rapidly against the krone, is there any I mean, would you wouldn't rule out increasing the US dollar dividend because US dollars are now cheaper relative to krone?
Yeah. Okay. Thank you for the question, Rob, but this is not the right place to announce an increased dividend.
That's a fair point.
We'll now take.
So, um-
You might want to just comment on it. It moves up. It's gonna be set in US dollars.
Yeah.
It's automatically translated into krone.
I mean, it's very important that we don't create any unclarity here. The second quarter dividend is $0.2201 per share. The intention is that that is the same for the third quarter and the fourth quarter. When you come to the first quarter 2016, the AGM will discuss the dividend level, and it will take its basis in the dividend declared in dollars.
Thank you.
We will now take our next question from Torbjørn Tungesvik from Fearnley Securities. Please go ahead.
Hey, good afternoon. Thanks for taking my question. A question on the realized oil price. It seems you realized a lower discount to Brent for the international division. Could you give some color to sort of the background for that and also some color on what you expect going forward? Secondly, also on the return on average capital employed, on your outlook section, you say that you expect to maintain the 2013 level, adjusted for price and sort of foreign exchange effects. Could you give some comments to what you mean by that? Thank you.
All right. Svein Skeie will respond to the return on capital employed and how we will make adjustments to that. When it comes to the realized oil prices internationally, we see the same, you know, reduction in realized oil prices internationally as we do in Norway since last year, 44% and 45% respectively. The international oil realized oil price is impacted by the Peregrino quality in Brazil, which is a lower realized price than Brent. In addition, there will be, you know, the other qualities, but also in particular, realized prices in the Bakken field as well. Then on the return on capital employed, Svein.
On the return on capital employed, as we said in the guidance, we said that having a similar level as the 2013 level, which we communicated at the capital market update in 2014. We showed that based on actual prices and for what it was last year. We are also showing sensitivity in the 20F regarding the impact of oil prices and gas prices pre and after taxes and how that impacts it.
Before we move to the next question, can I just say we want to keep this call short to let people get away for other things that I know starting shortly in the sector. We still have three questions, which we will take. We'll extend the call very slightly so that we can do that one. Please, can I ask if we can keep the questions pretty short so that we can use people's time fully and effectively? Thank you.
We will now take our next question from Christian Malek from J.P. Morgan. Please go ahead.
Afternoon, Torgrim. My question is on the 2016 operational efficiency target of $1.7 billion. You've given an update on the good progress that you're making, so I thought probably get some clarifications on that. I think that number of $1.7 billion includes OpEx and CapEx savings, probably over $1 billion coming from CapEx, remainder from OpEx and SG&A. Could you maybe confirm that breakdown and then give me what net of tax cash impact is from SG&A efficiency savings if you were to achieve that 2016 target, please?
Okay, thank you. $1.7 billion, you are right. There is $1.3 billion in related to CapEx and $0.4 billion in OpEx of the target.
Roughly.
The improvements will come across the board, both in Norway and internationally. The Norwegian savings will have a sort of smaller impact on after-tax earnings due to the tax rate than the international improvement.
Should I be using a 70% tax rate, average tax rate of the company for coming up with a post-tax number for OpEx savings, please?
Well, I think that's pretty fair. I think it's also fair to say that any improvements done on CapEx, you will probably, there's a lag on you know, depreciation and all of that. You get you know, more immediate impact on cash flow on CapEx than OpEx.
Thank you.
All right.
Thank you.
We will now take our next question from Theepan Jothilingam from Nomura. Please go ahead.
Yeah, afternoon. I've got one question, just one point of clarity. Just on Statoil's CapEx, Torgrim, can you just clarify how much of the CapEx is non-dollar? Because you talked about the FX move, so I'm just trying to understand what's non-dollar in there. Secondly, my question is more on, could you discuss perhaps what you're seeing in terms of underlying gas demand in Europe, both for the first half, but then how you see the outlook in the second half? Thank you.
Okay. Thank you, Theepan. On CapEx, the investment in the Norwegian business is, I mean, CapEx is mainly dollar-driven, you know, across the board. Within the Norwegian spending, there are some Norwegian kroner exposure, but it is quite limited. When it comes to the European gas markets, you have probably seen from our numbers that the realized prices in the gas market has remained very solid over the last year, and we are very glad to see that. We see that it's a robust market, and we are able to generate a significant value from our gas business in Europe.
There are an underlying gas demand in place, and we see an increasing demand for Norwegian supplies too, in particular both the western part of Europe, but also into the eastern part of Europe. We see, you know, gas as, you know being solidly on the energy roadmap for the future in Europe.
Just coming back to, I mean, is that NOK number in CapEx, is it less than 10%? Is it 5%? I'm just trying to get some sort of feel given that you talked about CapEx being somewhat lower if you go mark to market.
I think I won't go into specifics, but it's a limited impact.
Okay. Thanks very much.
We will now take our next question from Neil Morton from Investec. Please go ahead.
Oh, good afternoon. My last question was on CapEx, so I have no questions. Thank you.
As there are no further questions, I would like to hand the call back to the speakers for any additional remarks.
Thank you. Well, thanks, Anne, and thanks to everybody. I'd like to take the opportunity to thank everyone for participating in the call today and to thank Torgrim, and to take the opportunity to wish him the best of luck when he starts in the U.S. Next quarter, I look forward to doing the call with Hans Jakob for the third quarter. With that, I will close the call, let people move on. If, as ever, if any further questions or follow-up, please don't hesitate to contact investor relations. Thanks very much indeed. Good afternoon.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.