Gentlemen, welcome to Statoil's third quarter 2014 earnings presentation, both to the audience here in Oslo and to our audio and video webcast participants. My name is Morten Johannessen. I'm Vice President Investor Relations here at Statoil. This morning at 7 CET, Statoil announced the results for the third quarter of 2014. The press release and presentations for today's event were distributed through the wires and through Oslo Stock Exchange. The quarterly report and the presentations can be downloaded from our website, statoil.com. I would ask you to pay attention to the information regarding forward-looking statements, which can be found on the last page. Today's program will start with Statoil CFO Torgrim Reitan going through the earnings and the outlook for the company. As usual, the presentation will be followed by a Q&A session.
We will aim to end the conference around 2:30 P.M. Central European Time. Please note that questions can be posted by means of telephone, but not directly from the web. The dial-in numbers for posting questions can be found on the website. It is now my privilege to introduce Statoil's CFO, Torgrim Reitan.
Thank you very much, Morten, and good afternoon and welcome. I have three messages today. First, our adjusted earnings are in line with my expectations and cash generation is strong. However, reported income is impacted by quarter-specific items, and I will come back to that in more detail. Second, we deliver strong operational performance and our improvement program is on track. Third, we continue to progress according to our strategy with value-creating transactions and with new discoveries. We maintain our guiding for 2014. We will revert with an update on our guiding post 2014 in February at the Capital Markets Day. In the third quarter, we delivered adjusted earnings of NOK 30.9 billion, impacted by lower oil and gas prices and the effect of divestments.
We also used our flexibility in the quarter, deferring gas production to create more value. This impacts earnings, production, and unit DD&A. Our reported net income is NOK -4.8 billion. This is due to quarter specific items of, in total, close to NOK 14 billion. We have taken an impairment in the oil sands in Canada, triggered by the postponement of the Corner field development. We have also taken impairment of exploration assets in the Gulf of Mexico and Angola, Martin and Dilolo. Negative price developments impact the value of our operational storages. This leads to an effective reported tax rate above 100% for the quarter. I'm pleased to report another quarter with strong operations.
We produced more than 1.8 MMbpd, around the same level as the third quarter last year, despite decline, divestments, and moving of gas. Divestment and deferrals impact production by more than 100,000 bpd in the quarter, so the growth is as such above 4 percentage points. We continue to produce with high regularity, starting and ramping up production and executing our projects on cost and schedule. We are progressing well on our improvement program, particularly within production efficiency and within drilling and well. Our strategic progress is strong. We have divested assets for $3.5 billion in the quarter on the NCS and Shah Deniz in Azerbaijan. The gain from these transactions will be booked in future periods.
Since 2010, we have divested for more than $23 billion, resulting in $12 billion in gains. We continue our exploration progress. Our new discovery offshore Tanzania brings estimated gas in place in block two to 21 TCF. We also recently reported 30 million-80 million additional barrels at Grane in the North Sea, an attractive candidate for our fast-track program. We add significant high-value barrels on the NCS. The new compressor at Kvitebjørn increases the recovery by 220 MMbpd , and Kristin low-pressure production will yield an additional 160 MMbbl . Our third quarter dividend will be 1.8 NOK per share, and this will be paid in February next year. As you know, the second quarter dividend, that will be paid in November.
Finally, as you all have seen, on the fifteenth of October, the board appointed Eldar Sætre as acting president and CEO. Many of you know Eldar well from before, from his time as CFO in the period 2003 to 2010. The board's and Eldar's message is very clear. Our strategy remains firm. The business will be developed according to plan and our efficiency improvement program will progress with full force. We will provide an update at our Capital Markets Day in February. Our IFRS result was NOK -4.8 billion. This is due to quarter-specific items already mentioned. Net operating income was NOK 17 billion. As always, we make adjustments to reflect the underlying business.
This quarter, we adjust for impairments of NOK 13.5 billion and a gain on sale on assets of NOK 0.9 billion related to Dudgeon Offshore Wind and over 5% interest in Angola Block 15/06. After adjusting for these effects, earnings were NOK 30.9 billion. The results was impacted by lower oil and gas prices, divestments, and deferral of gas, partly offset by higher liquids production. Realized prices have declined more than Brent in this quarter. This is due to lighter crudes trading at a larger discount than earlier, both in the US and also related to light qualities on the NCS. Costs are impacted by activity-driven elements such as US gas transportation costs, and there is also increased pension liabilities and costs related to increased gas injections. These are similar to the effects seen in the second quarter.
OpEx and SG&A grows more than production in the quarter. Some of this is transportation costs related to increased activity. Some is related to diluent purchases, and we have some non-recurring costs in the U.S. onshore. We have previously guided increased DD&A over time, and this quarter we see, as expected, a higher unit DD&A cost. In line with practice, we book only a share of the oil reserves early in a field's life, resulting in a high DD&A per barrel in the first years. This quarter, particularly CLOV and PSVM in Angola and Gudrun on the NCS have high initial unit DD&A. These effects will be offset as we book more of the proved reserves. The DD&A unit cost is also impacted by the composition of production. The high production efficiency leads to higher liquids production with higher associated DD&A rate compared to gas.
Our flexible gas fields have a very low DD&A per barrel, so reducing gas production increases the average DD&A per barrel. For the year as a whole, we expect the DD&A to be somewhat higher than in 2013, and this is in line with what we have said earlier. After tax, we delivered adjusted earnings of NOK 9.1 billion. The tax rate was 70.6%. The higher tax rate for the international segment is due to higher income from higher tax regimes like Angola, together with expensive exploration without tax shield. We still expect a tax rate for the year of around 70%. The tax rate is expected to stabilize below 70% in the coming years. Let's look at the segments. Our Norwegian business, upstream business, delivered earnings of NOK 23.2 billion.
Results are impacted by lower prices, divestments, and reduced gas production, which is partly offset by higher liquids production as mentioned. Costs were impacted by new field startups. However, we continue to maintain a stable underlying field cost. From our operations outside Norway, adjusted earnings were NOK three and a half billion. Earnings were negatively impacted by lower oil and gas prices, and we also saw increased diluent costs and some non-recurring items as discussed. This is partly offset by lower exploration expense. As mentioned, the discount to Brent in realized prices has increased this quarter. Finally, the results from MPR were NOK 4.4 billion. It is up 11% year-on-year. This is a strong number, mainly driven by European gas, where we achieved good margins in the quarter. Some higher transportation costs in the U.S., impacts OpEx onshore.
Our LNG business is running well and we also saw improved refinery margins in the quarter together with increased margins on our U.S. gas sales. In the third quarter, we produced above 1.8 MMbpd . This is around the same level as the third quarter last year, despite the decline, divestment, and deferring of gas. We are deferring equivalent to around 30,000 bpd in 2014 from Troll and Oseberg flexible fields. Turnaround also impact production with six successful turnarounds completed in the quarter. In total, turnarounds are expected to impact the 2014 production by around 50,000 bpd . In Norway, we continue to produce with high regularity, and the performance this year is actually the best since the merger with Hydro seven years ago.
My colleagues at the Norwegian Continental Shelf are doing a great job, and they are running the improvement agenda with large momentum. The reduced production in the period is mainly due to the divestment and gas optimization. If we adjust for these factors, we have a production growth in Norway of 4% this quarter. In the third quarter, we have put two more fast-track projects on stream. It's the Smørbukk and Svalin, and these are our fast-track number eight and number nine. Our projects continue on plan, and we expect to see Valemon come into production by end of the year. We also continue to see increased production in our international portfolio. We are ramping up in Angola, including CLOV, which reached start-up in September, and we continue to ramp up in the U.S.
Going forward, we will also start a new production with Jack/St. Malo , and in Canada, Hibernia South extension. This will be towards the end of the year. For the quarter as a whole, we set a new record for Statoil's equity production internationally with 743,000 bpd . Cash generation continues to be strong. Year to date, cash flow from operations after tax is NOK 102 billion. As you know, we have paid the full year dividend for 2013, as well as the quarterly dividend for the first quarter this year. Cash flow to investment was NOK 89 billion year to date, and the organic investment was around $15 billion, and this is as expected and as planned for. Our net debt to capital was 19%.
This was negatively impacted by a weakened Norwegian krone, as our debt is mainly held in dollars. The second quarter dividend will be paid end of November with around NOK 5.7 billion, and we expect net debt at year-end to be around 20% in line with earlier guidance. It will, of course, be affected if there is large currency change at year-end. We have a firm financial framework and a solid balance sheet. Let me change pace and share some reflections on the market environment and our response. The last few weeks have been a reminder on the volatility and the cyclical nature of our industry. Short-term oil prices have dropped by $30 from its peak in June. Interestingly, prices in the futures markets for oil three to four years down the road are actually higher today than one year ago.
Volatility is nothing new in our industry. The recent developments are well within the outcomes we prepare for when we do our business planning. For us, this is all about resilience and being ahead of the game. We have secured a strong position and taken measures well before the most recent volatility started. We are taking action when we can and not waiting until we have to. We are well-positioned to handle different scenarios. First of all, running with a solid balance sheet is an absolute. We have a AA- rating, a net debt of 19%, and $18 billion in cash. Second, investing in the most robust and profitable project is key. Portfolio management is an integrated part of this, where we have a strong track record.
We also maintain flexibility in our projects, as on the NCS, where we operate most of our investments and exploration ourselves. Third, our improvement program is making us even more resilient. We have already reduced our staff costs after reducing by more than 1,000 positions within HR, finance, communications, IT, and facility management. We see improved production efficiency and drilling performance. Going forward, this will lead to even lower break-even cost in our projects. In short, we are taking the steps necessary to steer through short-term volatility. At the same time, we maintain focus on the long term by maintaining our exploration activity and maturing our strong resource base. Let me return to the outlook. Even though we reduced our gas production in the last quarters, we maintained our 2014 guidance.
This is due to strong operational performance and regularity so far this year. New fields will also contribute to the growth, like Gudrun, CLOV, and the fast tracks. Our guidance of around $20 billion in investments for the years remains. Year-to-date, our organic CapEx is around $15 billion. Finally, exploration activity will come in around $3.5 billion as guided, and we expect to complete around 50 wells, and I would like to highlight some of the wells to watch going forward. We have Bay du Nord in Canada, which are spreading as we speak. Romeo and Saturn here in Norway. Kaxare in Angola. Perseus in Gulf of Mexico, as well as Kungamanga offshore Tanzania. Let me summarize. Our earnings are impacted by the lower prices, and our reported income is impacted by quarterly specific items.
Our underlying operations are strong, including our improvement program, which is on track, and we continue to deliver strategic progress. Thank you very much for your attention, and we look forward to give a status at our capital markets update and fourth quarter presentation in London in February, and I hope to see all of you there. From first of January, Peter Hutton will join Statoil from RBC Capital Markets to head the IR, and I look forward to his contribution. I also want to thank Morten here very much for heading up IR over the last period, and looking forward to having you to continue as head of IR in the U.S. I leave the work to you, Morten, to lead us through the Q&A session. Thank you.
Thank you very much, Torgrim . We will now turn to the Q&A session. Torgrim will, as usual, be joined by Senior Vice President for Performance Management and Risk, Svein Skeie, and Senior Vice President for Accounting and Financial Compliance, Ørjan Kvelvane. We will take questions both from the audience here in Oslo and over the telephone. I will first ask the operator to explain the procedure for asking questions over the telephone. Please, operator.
Thank you. If you would like to ask a question at this time, please press star two, followed by the digit one on your telephone. Please ensure that the mute function on your phone set is toggled to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for just a moment to allow everyone to stay.
Thank you. We will start with questions from the audience here in Oslo. Please state your name and the name of your company. Remember to push the button on the microphone in front of you asking the question, and then release the button when you're finished. Please try to state one question. Thank you. We will now take the first question from here in Oslo. We'll start with Trond Omdal.
Trond Omdal. At the Capital Markets Day in February, you targeted $100 that you were cash flow neutral after the CapEx and dividends in 2016 at $100 Brent. Of course, afterwards, you made some divestments increasing your capital flexibility. The current oil price being below that target, how does that influence your thinking or the initiatives going forward?
Okay. Thank you, Torgrim. Oil price volatility is the nature of this business. What has surprised me more is actually the stability in the oil price over the last three to four years. As I said, you know, we are well prepared for dealing with this. I think key for us is to be consistent and drive our strategy through volatile oil prices. The guidance we put forward at the Capital Markets Day earlier this year still remains firm. Free cash flow positive after dividend 2016 on a $100 real basis. That is the basis for the guidance. You know, changes has happened to the business in between, and then we will give an update in due time in February in London.
Yes. Another question from Jesper.
Yes, this is Kjetil Bakken from Carnegie. You mentioned that the realized oil prices were impacted by quality differentials which have widened this quarter. Do you see this as a quarter-specific issue, or does this reflect more long-term underlying trends here?
Thank you, Kjetil . It's a very good question. We have seen that the spread widening this quarter, and it is mainly related to oil production in the U.S. that has sort of follow-on effect to the rest of the world. I think it's fair to say that this will probably be a bit volatile, that discount as such, and we follow it closely. It's the nature of the oil production mix in the U.S. I just encourage you to follow that closely in the coming quarters.
Morten?
Morten Evjenth . Eldar said that you had a comment earlier today on share buyback, and you're increasingly looking at that. Could you explain a little bit what you mean by that?
At last winter's Capital Markets Day, we said that share buyback is a natural tool for us to have available going forward. We have the necessary mandates from the AGM. What we also said was that the use of share buybacks will be dependent on the financial situation, the balance sheet of the company, our free cash flow generation, and proceeds from transactions. That still remains valid.
Any further questions here in Oslo? One more from Trond Omdal.
Trond Omdal, Pareto. You've guided the trading result in marketing and processing and renewable between $2.5 billion and $3.5 billion. You had a good result in Q3. Is that still the guidance you would go going forward, or do you have any new answers there in Q4?
Earlier guidance in this segment is still valid. What you should expect is actually quite a bit of volatility in this result. It's been on a quarterly basis. You know, we expect it to be both above and below that guidance. If you see it over a year's perspective, it should typically be within that range.
No call, no color on Q4?
No color on news on Q4 .
I think then we'll take the first question from the telephone operator.
We will now take our first question from the phone. Please press star to un-mute your line if you'd like.
Yeah. Hi, good afternoon.
Sorry. Yeah, there seems to be a bit of an echo.
Torgrim, my question was really on the U.S. onshore business, 300,000 bpd or so, with the unconventional business. Could you speak about the kind of rough break even WTI price for that business and how you think about that side of the portfolio, given what's happened to the oil prices in the third quarter? Secondly, just curious about your comments and obviously a focus on the return on average capital employed. But in particular to the non-operated kind of development queue and projects like Stampede, which were sanctioned yesterday in terms of the Gulf of Mexico.
Are you still, you know, still comfortable that the non-operated developments are still hitting the attractive return hurdles that Statoil is looking for? Maybe you could just talk about that, please. Thank you.
Okay. Thank you, Oswald. Good to hear from you. So, within the onshore complex in the US, we are generating, you know, positive cash flow in totality. So, we earn money in the current environment. Of course, we would have liked to earn even more, but that's the situation there. On the return on capital employed is a metric that is very important to us. As you know, we have put forward specific guidance on that, turning the trend in a falling return on capital employed in this industry. It's a real background behind, you know, all the improvement efforts that we are doing and the participation in the portfolio. When it comes to Stampede, that is recently sanctioned.
It is an attractive assets with a competitive breakeven. More generally, your question on how we deal with it, this on non-operated assets. Of course, less flexibility, but, you know, we have also flexibility to divest out of assets that doesn't stand the profitability test or the prioritization internally. I think if you look back on quite a few of the transactions done over the last years, you'll see a clear pattern in that.
That's great, Torgrim. Thank you.
Next question on the telephone, please.
We'll now take our next question from Haythem Rashed from Morgan Stanley. Please go ahead. Your line is open.
Thank you. Good afternoon, gentlemen. A couple of questions from my side. First, just wanted to clarify one quick clarification, first of all. You mentioned on Jack/St. Malo that you were talking about sort of a startup by end of year. Were you referring to sort of end of 2014? Were we talking about 2015 for that project? Second question, perhaps relating a little bit to some comments that hit headlines this morning from, I think it was an interview with Eldar just regarding spending going forward and the sort of the idea that you may reconsider spending sort of in light of sort of recent recent developments.
I mean, perhaps you could just sort of talk a little bit about, if you were to sort of see some of these asset sales come through, are we talking about with the sort of lower oil price environment, you may consider, lowering spending just by sort of, doing less or delaying projects? Or is this actually, a view that you have perhaps on, a sort of softening in the service cost environment? But if you could provide some of the comments around that. Related to that question, obviously in the quarter, you've impaired the Corner development, and that follows on obviously from the postponement of that project.
Should we expect to see, with you know, delay on decisions, for example, with projects like Bressay, further impairments coming through? I mean, is that something that you know, you may consider given the developments in the oil price? Thank you.
Thank you very much. I hope I have noted down all your questions, Haythem. Jack/St. Malo is the end of this year, 2014. Spending going forward, our guiding is $20 billion on average from 2014 - 2016. That, you know, for the time being remains firm. Then we will, you know, at the Capital Markets Day in February, you know, revisit all our guiding and of course, taking into account, you know, changes in our business. You had also a question whether, you know, the current price environment is an opportunity to do less. You know, the current price environment is, you know, well within what we have planned for and are robust for.
I think it's fair to say that, you know, we are opportunity rich. We have many investment opportunities, and there are a lot of projects that are not coming, you know, as we planned for a few years back. I think they're saying there are some 30 projects that we have, you know, put on the waiting list that we like, but we would like to take them later on, capitalizing on further improvements, standardizations, and also potentially another cost level. That then Corner is to give a comment on that. Corner is still, you know, positive economics, but Corner did not, you know, stand up in the competition internally, among all the investment opportunities. We have put it on wait for later.
Okay. Thank you very much.
We will now take our next question from Brendan Warn from BMO Capital Markets. Please go ahead. Your line is open.
Yeah. Thanks, gentlemen. Thanks for the opportunity to ask a question. Just, I guess we got a former CFO and a current CFO on the platform. I guess my question relates to both in the current price environment and maybe if we thought about a scenario for the price environment with $70 a barrel. Can you just talk through your funding and debt strategy and any refinancing opportunities or finance refinancing we need to think about going into 2015, please?
Brendan, thank you very much. First of all, even if Eldar is a former CFO, I think he truly acts like a, excuse me, as a CEO currently. Of course, he has a very good understanding of the CFO business. I think that works well. You know, we are constantly optimizing our, you know, funding and debt structure. You know, the market is there and provides good and open opportunities and attractive conditions. You know, we are regularly operating in that market. I think last year we used the market, I think it was $10 billion if I'm not wrong.
Generally what we are doing, we have a pretty long duration on our debt. The average duration is 10 years. That is, you know, from a strategic perspective, sufficiently long duration. With the current interest rates, it makes sense with longer durations.
In terms of net debt, you're comfortable around the 20%, and you've been as high as sort of 27%-28% in the past. What can we think about for 2015?
What we said at the Capital Markets Day in February was that a net debt in the range of 10%-30% is the natural range for us to operate in. You know, we still, you know, want to run with a very solid balance sheet.
Okay. Thanks, Torgrim.
We will now take our next question from Theepan Jothilingam from Nomura. Please go ahead. Your line is open.
Yeah. Hi, good afternoon, gentlemen. Another point of clarification, just coming back to thinking about capital spend for next year. I mean, could you just clarify whether CapEx for Shah Deniz and Aasta Hansteen was included in your plans for 2015 and 2016? Alongside that, just whether you can give any sort of percentage on what is committed CapEx or not. Aside from that, just quickly, on projects in Johan Sverdrup, clearly with the volatility in oil price, but also in terms of thinking about offshore services, contractors, rig rates, could there be a potential delay on the sanction of the first phase of Johan Sverdrup? Thank you.
Okay, thank you, Theepan. On your first question, Shah Deniz and Aasta Hansteen were projects that you know were sanctioned. They were naturally you know part of the fuller portfolio that we had you know at that point in time. Of course in our planning we also assume that there might be changes in the portfolio. When it comes to Johan Sverdrup you know it's just such a lovely field I must say. Very strong profitability and big returns. There's no doubt that it will be a very prioritized project going forward, and we plan to sanction it in the beginning of 2015. There are no changes to that plan.
Okay. Just coming back to committed CapEx for next year.
Yes, Svein.
For the CapEx this year, of course, more or less all is committed for this year. Also then for next year, when we have our plans, we have quite a bit of firm commitments in the development projects that we are now maturing and progressing. Most of the CapEx in 2015 is then committed. We start in 2016 and onwards to get more and more flexibility.
Okay, great. Is that the same, by the way, on exploration spend compared to development?
I think there's, you know, more flexibility. We are a strong believer in exploration, and I think it's important to continue to explore through the cycle. It's very important to us.
Next question, please.
We will now take our next question from Nitin Sharma from JP Morgan. Please go ahead. Your line is open.
Afternoon, gentlemen. Two questions if I may. First one on exploration. Obviously very successful campaign 2011, 2013. I remember earlier this year you mentioned P90, P10 estimate of 400 billion-1. 5 billion BOE of targeted resources. Maybe you could clarify where does the year-to-date performance stand in terms of discovered resources? And a second one, classification cash taxes, maybe some explanation for relatively low cash taxes in first nine months of this year. Thanks.
Okay. Svein, you can prepare for the cash taxes. Exploration so far this year, of course there have been a couple of disappointments in this quarter. Overall, you know, significant volumes added. We are, you know, still in line with expected resource additions compared to what we have said earlier.
Well, when you look at the cash taxes last year, we paid around NOK 80 billion the first nine months. This year we have paid around NOK 65 billion. One of the main part of explanation is related to the Norwegian Continental Shelf, where we then pay taxes, half of it the year it happened and half of it the year after. We have done some transactions regarding that that has effect now this year as well as the redetermination that we have done. That will affect the taxes for this year. You can see in first quarter we paid around NOK 15 billion in taxes versus around 18 in last year.
We will make two installments for the taxes at the Norwegian Continental Shelf in fourth quarter.
Thank you.
We will now take our next question from Michael Alsford from Citi. Please go ahead. Your line is open.
Thank you. I've got two questions, please. Firstly, can you talk about what you've achieved today in terms of your percentage, maybe in terms of percentage, sorry, of your 2016 targets of annual savings of $1.3 billion from your cost and capital efficiency program? And then secondly, just on the write-offs in 3Q You talked about some of the write-offs relating to signature bonuses on Block 39 in Angola following Dilolo. Could you maybe talk about how much of the signature bonus has been written off and whether there is still a degree of signature bonus that's still on the balance sheet? Thank you.
Okay. I'll take the first, and then, Ørjan, you can take the next. We will give, you know, a detailed update on the improvement programs in February in London. I can give you some highlights on where we are. There are quite a few things that are now delivering very significant results. Production regularity on the Norwegian continental shelves is a very important contributor to the whole step project. It is, you know, generating significant value. I think it's fair to say that production regularity is still not part of the NOK 1.3 billion that we have guided on, but it's part of the bigger improvement agenda. On drilling and wells, we see significant impact of the standardization, the simplification of well and coordination.
So far this year, we see that we use 15% less time on each well. On the modification portfolio, which actually quite a bit of the same approach, we see a similar impact so far this year. Within U.S. onshore, take Bakken as an example, last year, we had improved, you know, drilling efficiency or time per well by 25%. That was by end of 2013. Now we see 10% additional improvements. Also in Eagle Ford, that had been reduced by 50%, 50, last year, and now we see a 20% further improvement and reduction. All of this, you know, brings your meaningful result and effect into it. Then there is, you know, all these more fundamental things that will be very important part of the new project developments, around.
That will naturally take longer time before it turns into to cash saved, as this will be more relevant for new projects being sanctioned. They are well underway, and we will give a fuller update in February. Then Ørjan.
Signature bonus, we said, NOK 3.4 billion related to Angola and Gulf of Mexico. When it comes to remaining in Angola, it will be between NOK 2 billion and NOK 3 billion left on our balance sheet related to Angola.
Great. Thanks to you both.
We will now take our next question from Rob West from Redburn. Please go ahead. Your line is open.
Oh, hi. Hi there. Thanks very much for taking my question. Maybe you've just answered this on the exploration expenses. Just looking at the IFRS exploration expense, that was NOK 8.5 billion in the quarter. On an adjusted basis, it was 3.6, so kind of almost NOK 5 billion difference there, which you treated as kind of items impacting or an adjustment. I've never seen those two numbers kind of diverge so much before, the IFRS exploration expense and the adjusted. I was wondering, can you offer a bit more detail around, you know, what that comprises and why you've classified it as a kind of adjustment?
Second, some interesting news out last week about kind of exploration plans next year in Norway and potentially scaling that back to as few as five wells. I was just interested if you could comment on that. Is that something that's, you know, really, you know, something you're thinking about? Or, you know, would that be enough to keep the resource hopper full? Thanks very much.
Okay, I'll take the last one, and Ørjan, you take the first one. On the last one, I have no idea where that information, you know, started and what it's about. Our plan is to continue with full force on the NCS, and we have an, you know, a very attractive drilling program on the NCS, also next year. We don't see any significant change. Ørjan?
The 5 billion is then NOK 3.4 billion related to signature bonuses, as just commented on Angola and Gulf of Mexico. Of course, there is no drilling expense into that figure. The remaining 1.6 billion is part of the 8.1 billion impairment related to oil sand. We take a share of the intangible asset as well, of the oil sand. In total, NOK 8.1 billion kroner, and 1.6 is hitting the exploration line.
Okay. Very clear. Thanks very much.
We will now take our next question from Jon Rigby from UBS. Please go ahead. Your line is open.
Thank you. Yes, just one question. Yesterday, BP commented that in this current part of the cycle, they actually saw more opportunity than threats to their business. I just wondered, firstly d o you agree with that proposition? The second is giving your comments around the balance sheet and protecting your cash and debt position. Do you feel that you are in a position to take advantage of opportunities? Thirdly, even if you were financially in that position, would the board feel comfortable in doing something like that around portfolio before a permanent CEO is appointed? Thanks.
Okay, Jon. Thank you. You know, portfolio management is an integral part of, you know, our strategy, both divesting and acquiring. That is something that we monitor, you know, very closely, all the time. You know, our radar screen is always very large. It will be very important for us to run with a balance sheet. Of course it will. On the third point is that Statoil is fully operational and fully capable of doing everything that an oil company is expected from an oil and gas company. Eldar is taking the full role as a CEO, so you can rest assured with that.
My last point will be that, looking at the portfolio, it's actually a very full portfolio of investment opportunities. There is visible growth based on the assets that we have currently for more than 10 years, which is a very comfortable place to be, as executives in the company. There's no urgent need to fix the portfolio if that is a necessary or useful background, Jon.
Right. Still, if opportunity to high grade presents itself, it would be something you'd still look at. Would that be fair?
You know, I will of course never go into any specifics in this direction, but you know, it's an obligation to both the board and executives to constantly look at everything.
Right. That, that's very clear. Thank you.
Thank you.
We will now take our next question from Lydia Rainforth from Barclays. Please go ahead. Your line is open.
Thank you and good afternoon. I have two questions, if I could. This first one, just going back to something that you said on DD&A during the call that it would be high initially because of the relatively low proportion of reserves that you've actually booked. Can you just talk us through what proportion of reserves, I guess from the TP side, you would typically have booked as proved at this stage, for something like CLOV or PSVM? Then the second question is just coming back to the impairment charges. We had impairment charges this quarter, we had impairment charges last quarter. Within the process at Statoil, do you think that there is a robust process around testing what might be adverse scenarios? Or is it just really this is a normal cost of doing business? Thank you.
All right. Svein, you can take the DD&A. When it comes to the accounts and processes, I'll leave the work to Ørjan, but just give one statement up front. When it comes to these processes, they are very robust and very rigid, and I'm very comfortable with the judgment that they do. I think it's fair to say it's a natural part of running a company that you will have, you know, impairments from time to time, and you will have gains from time to time. If you look and you know what we do, we do these adjusting items in our accounts. If you look back for, you know, quite a few years, we have actually more positive results than we have taken away than negative results we have adjusted for. This is a natural part of running a big corporation. Svein first on DD&A.
Yes. On the DD&A, as Ørjan said in his presentation, there will be on the oil fields, typically, there will be lower proportion of the reserves booked initially due to the fact that depending on number of wells that you have in place and when you start the production. For example, for one of the fields that has been starting up this year, we have seen around 30% of the total reserves have been booked. As we are then moving ahead and getting the real wells in line for the project, we are then increasing as we are moving along.
If you look at for some of the projects that we had last year with, for example, Skarv and Fram H-Nord , which then initially had lower reserves when it started, they have booked additional reserves this year. Taking then the reserves up and impact of the depreciation on those things. For one of the fields started up now typically have around 30%.
Ørjan, anything that we should add on processes around, you know, adjustments and impairments?
I think, we follow the same procedures every quarter, either in good times or bad times. We look for triggers and, if there are triggers for impairment or reversal, we do additional work and sometimes it end with reversal or impairment. Yeah, we follow the same processes every quarter.
Thank you, Ørjan.
That's very helpful. Thank you.
We will now take our next question from Teodor Nilsen from Swedbank. Please go ahead. Your line is open.
Hello, good afternoon. There's no doubt about that you're really doing effort to reduce the costs on NCS. Have you changed the plans for any of your fast-track projects? Secondly, what's the book value of the oil sand assets in Canada?
Okay. Thank you, Teodor . The fast tracks are, you know, generally very competitive. They are, you know, working well in the internal competition within Statoil. We have one recent development this quarter, Grane Sør , that is typically, you know, it is high-value barrels, and it's a great candidate for a fast-track project. It is likely that that will be developed under that umbrella. Oil sands, Ørjan.
Normally we do not comment on the book value of single assets. Yeah.
Thank you, Ørjan. Just a follow-up on the fast-track project. Is it yes or no if you have changed the plans for any of the fast-track project coming up over the next few years?
There has not been any changes. We expect Oseberg Delta will be the next one coming up. As Torgrim said, the Grane Sør discovery that we recently announced, that could be a candidate. We have also other candidates for fast-track projects coming up going forward also.
Okay. Thank you very much.
Bye-bye.
We will now take our next question from Anish Kapadia from TPH. Please go ahead. Your line is open.
Hey, good afternoon. A couple of questions from me as well. I was just wondering, given the better drilling efficiency that you're seeing combined with rig rates coming down pretty substantially, seismic costs coming down, and also looking through your the wells you drilled this year, it seems like there'll be a lack of appraisals that you'll need for next year. Is it fair to assume that we'll see a significant reduction in exploration and appraisal CapEx in 2015? And then secondly, looking at the U.S., onshore CapEx in the US is clearly a lot more sensitive to oil price.
So I was just looking at, in a sustained, say, $80 Brent scenario where you're gonna see $70 in the U.S. and probably sub-$4 gas prices, what impact does that have on your drilling plans? How many rigs would you look to be running in that kind of sustained scenario? Thank you.
Thank you. You know, drilling efficiency is very good. It will of course be something that we take with us into next year. When that is said, you know, we will continue to use exploration as a very important growth tool. It will be too early to comment on exploration spending next year. We are, as we speak, working on the drilling plans and the prioritizations in also within the exploration portfolio. I have to revert to that later.
On onshore, you know, we run currently with 6 rigs in Bakken, with five rigs in Eagle Ford, and nine rigs in Marcellus, which we find a robust and good run rate where we can actually take learning as we go across the drilling crews. But you're right, this is an area where there is, you know, typically more flexibility in adjusting as we go, but we have not made any adjustments to our plans.
Can I just follow up on that? Is there any pressure from your partners and their, you know, given their balance sheets may not be as strong as yours, any pressure to reduce rig count, in any of those plays?
I can't go into detail, but we still consider, you know, both partners and other operators to be, you know, very interested in continuing to build this business. I think it's, you know, an example of that is Southwestern Energy's acquisitions in Southern Marcellus recently.
Okay, great. Thank you.
We will now take our next question from Hamish Clegg from Bank of America. Please go ahead. Your line is open.
Hi there. Thanks for taking my questions, and thanks, Jon and Oswald for asking two of mine. I still have one left, which is just on the CEO plans and timings. I wondered if you could give us a little bit more color in terms of whether we can expect internal candidates from your very strong lower layers of management in the business, or are we more likely to see an external candidate? In line with that, will there be a potential pay review to prevent the risk of other instances of CEO departures and also to attract the top talent to the business? Finally, within the CEO question, can we expect the government to have an influence over potential hires?
Okay. Thank you. Very, very interesting question. I think it's the board has started a process to find a permanent CEO. Eldar Sætre is acting, but he has also stated clearly that he doesn't consider himself as the permanent candidate. The board will do an external search, but also evaluate internal candidates for the job. I'm sure that in the end, the board will make a good choice when it comes to the next CEO. For me, it will be, you know, wrong to, you know, elaborate too much on this issue. It more belongs with the chairman.
Can you even comment on whether the government will have an influence over the position or?
You know, this is a board responsibility.
Okay.
To find a new CEO. That is run from that part of the organization.
No problem. I had just one follow-up, if I might ask a second, which is just on reserve bookings, year on year, following the material divestments booked this year and some of the, I guess, impairments that you've kindly talked about. Can we expect reserve bookings to be down year on year? I guess, can you confirm that Johan Sverdrup will, when it's sanctioned next year, actually contribute to the full year of 2015, which will, I guess, get released in 2016?
Yeah. Okay. Reserve booking. The reserve booking is very much driven by sanctions of new developments and it's driven by revisions of existing developments. Acquisition and divestitures. It's too early to comment on it, but I think it's important to note that we have done a few divestments too during the year that will have an impact on the reported reserve replacement. Of course then there's also this organic reserve replacement which is another number that is not impacted by portfolio changes. It's too early to comment.
Can you just remind us if there were any major sanctions, what the major sanctions were this year?
Yeah, I'll leave that to Svein. You asked about Johan Sverdrup. That is planned to being sanctioned next year.
Yeah. On other sanction this year, as you might have seen, Stampede was sanctioned yesterday. That has been sanctioned. We also then have some sanction of looking into some of the fast tracks. We are then also then preparing for an eventual sanction of the Peregrino field in Brazil.
Thanks so much.
Of course.
We will now take our next question from Andrey Aleev, from Credit Suisse. Please go ahead. Your line is open.
Thank you very much for taking my question this late. Just one on MPR. You note that the results were impacted by impairment losses related to midstream assets and reduced expectation of future trading activities. I wonder if you could give any color on the size of this reduced activity going forward. Thank you.
Okay. Thank you, Andre. Yeah, you're right. There's an impairment also in this segment. We won't go into the specific assets, but it is an asset that relates to bringing oil and gas to the market that we don't see that we need that much anymore.
Thank you very much.
Thank you.
We will now take our next question from Neill Morton from Investec. Please go ahead. Your line is open.
Thank you. Good afternoon. Two questions, please. Firstly, in light of the lower oil price in the third quarter, I was surprised at the working capital build on the cash flow statement. Could you perhaps explain that? Secondly, I'm noting that your U.S. Gas realizations have been sort of widening versus Henry Hub. I think you had spoken before about evacuation bottlenecks in the Southern Marcellus, and you took a write down in that regard in Q2. But maybe talk about when you expect some of those bottlenecks to clear. Thank you.
Okay. Thank you very much. Svein, if you take the working capital. When it comes to U.S. gas realization, you know, the way we book or realize price in, you know, the international upstream segment is related to local gas prices in Marcellus area, while the price that we realize as a company is linked to our end price. We know we sell our gas into Toronto and Manhattan currently. In the Southern Marcellus, there is, you know, bottlenecks to deal with. This is progressing, but it is not keeping up the speed with the upstream development. Then working capital, Svein?
If you look at the year as a totality, we see pretty stable in the working capital environment. I guess what you refer to is then the changes from the second quarter into this quarter. There we have then built up some working capital that could be affected by if you have vessel in transit and those things. Also there is an underlying change where we then have contango in the market. When you have contango in the market, typically evaluate if you should have more into storage, which then could typically build up the working capital.
Okay, that's fine. Were there any gas storage effects in Q3? That affected working capital.
I will not go into the specifics there, but in general, you see that the volumes in storage has then been filled up because that goes to natural gas prior to the winter. When the winter season is coming. Both in Europe, but also then, as a general rule, also you see that, in U.S.
Okay, great. Thank you.
Thank you.
We will now take our next question from Irene Himona from Société Générale. Please go ahead, your line is open.
Yes, thank you. Good afternoon. If I can go back to fast tracking, please. You had a target to reach, I believe, 100,000 bpd of production from fast track projects by the end of this year. Obviously, these are very low cost, low CapEx barrels. They seem ideally suited to a low oil price environment. My question is the plan for 100,000 on track? And in the event of a prolonged period of price weakness, let us say if there is no OPEC response next month, how much flexibility is there to divert either more capital or more technological expertise to accelerate those projects being developed? Thank you.
Okay, thank you. Yeah. When it comes to fast-track, you know, there are 9 of them on stream now. They are contributing with very valuable barrels. We have had some issue with one of them on the reservoir side. It will not be fully delivered on the 100 Mbbl . The flexibility, I mean, we of course you know we prioritize you know the resources where we can get best use for it wherever they are. As such, absolutely we have flexibility.
Okay, thank you.
Thank you.
Thank you very much. That will conclude our Q&A session today. Today's presentation and Q&A session can be replayed from our website in a few days and transcripts will be available. Any further questions can be made to the investor relations team, and you'll find the details in the back of the presentation or on statoil.com. Thank you for participating and have a good afternoon.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.