Ladies and gentlemen, welcome to Statoil's second quarter earnings presentation, both to the audience here in Oslo and to the webcast audiences. My name is Hilde Nafstad. I'm the Head of Investor Relations in Statoil. Before we start, let me say that there are no fire drills planned for today. In case the fire alarm goes off, you will need to exit through the two doors in the back of the room or the one to my left and continue downstairs. This morning at 7:30 A.M. Central European Time, Statoil announced the results for the second quarter of 2012. The press release and presentations for today's events were distributed through the wires and through Oslo Stock Exchange. The quarterly report and the presentations can, as usual, be downloaded from our website, statoil.com.
I would ask you to kindly make special note of the information regarding forward-looking statements, which can be found on the last page of the presentation. Today's program will start with Statoil CEO Torgrim Reitan going through the earnings and outlook for the company. As usual, the presentation will be followed by a Q&A session. 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 Chief Financial Officer, Torgrim Reitan.
Okay. Thank you, Hilde. Good afternoon to you here in Oslo, and good morning and good afternoon to all of you on the webcast. Particular greetings to our good friends in London who are gearing up for a big day tomorrow, the opening ceremony. It is a pleasure to present Statoil's results for the second quarter of 2012. Strong financial results, 17% production growth in line with our expectations, yet another quarter with significant discoveries, and we keep on streamlining our portfolio. Another good quarter. Before I get started with production and financials, I want to talk about the strategic progress. We have made two new high-impact discoveries in Norway and Tanzania. King Lear in the North Sea, this discovery is between 70 and 200 million barrels.
It is in the mature areas of the shelf, just 20 kilometers from the Ekofisk field. The Lavani gas discoveries offshore Tanzania supports our ambition for East Africa. We now have access to nine TCF in this block. Both are operated by Statoil. This means eight high-impact discoveries over the last 15 months. We have added new acreage, including 26 new licenses in the Gulf of Mexico and shale opportunities in Australia. So far, 2012 has been a very good exploration year. We have discovered more than 1 billion barrels of resources. This is actually similar to the full year result of 2011, a year where we discovered Johan Sverdrup, Skrugard, and others.
We have taken steps to implement the strategic cooperation with Rosneft, signed agreement on joint bidding for exploration in the Norwegian Barents Sea, and a joint technical evaluation covering two Russian offshore, onshore assets. The speed ahead reflects our joint commitment and determination, and it marks an important milestone in our Arctic exploration program. We continue to streamline our portfolio. In June, we completed the divestment of Statoil Fuel & Retail to Couche-Tard, a strong industrial buyer. We received NOK 8.3 billion for our 54% share. This quarter, we book a net gain of NOK 5.8 billion. All in all, we have realized around NOK 20 billion from SFR, including the IPO proceeds, dividends, and deconsolidation of debt.
We also closed the sale of NCS assets to Centrica at a net gain of NOK 7.5 billion. Through these deals, we have realized substantial value and will redeploy our capital into core assets. Finally, we are maturing our project portfolio. Key milestones have been set for Johan Sverdrup with a PDO to be submitted in late 2014. We submitted the PDO for the Svalin fast-track project in the North Sea. The government has approved the PDO of partner-operated Martin Linge. That is the field formerly known as Hild. We are enhancing recovery further through subsea compression at Gullfaks.
Valemon has seen its steel jacket installed, and we have taken the first steps towards development on Aasta Hansteen in the Norwegian Sea. In Angola, the Kizomba satellites phase I started production on the 18th of May, and we continued ramping up new production. We are progressing, and we are moving ahead as planned. Let's turn to production. In the second quarter, we grew our production as expected. 2012 is a year where we will see significant growth. Well, now we are halfway through the year, and we produced 1,980,000 barrels in the second quarter. This is consistent with our guidance. It is a 17% increase from the second quarter last year, and that means that we are on track.
We see growth across the board, increasing both our oil and gas production and our production in Norway and internationally. We increased our gas production by 33%, and we also grew our liquid productions by 8%, mainly through startup and ramping up production. Remember that we had higher maintenance effects in the same period last year, and I'll get back to this later. On the NCS, we saw an 11% total production increase, mainly through high gas sales, and international production grew by a solid 32%, including more than doubling North American production from the second quarter last year. When it comes to growth, let me particularly mention the Troll field in the North Sea. Troll is the very cornerstone of Norwegian gas production. As you know, this is a great and flexible machine.
Troll gas increased production by 100,000 barrels per day for us this quarter, amounting to a total of 176,000 barrels. Pazflor in Angola continues to perform well, with production now reaching 44,000 bpd for us. This is operated by our partner Total. Also, the Bakken area in the U.S. is growing, and it produced 35,000 bpd in the quarter. We have increased the number of rigs from 10- 16 since the acquisition. Marcellus also grows with an increase of 32,000 barrels. On Eagle Ford, we will take operatorship from the start of 2013. I need to remind you of the uncertainties. Now we said last quarter that upcoming turnarounds will impact the yearly production by around 50,000 barrels.
I expect a significantly higher impact in third quarter than last year. In the third quarter, I expect it to be around 110,000 bpd . Around 2/3 are planned at the NCS, and most of the effect is on liquids. I will remind you once again about Skarv and the delay there. Startup will be in the fourth quarter according to the operator, BP. Please remember that the Centrica deal closed on the 30th of April, leading to lower production of some 30,000 bpd from these assets for the rest of the year. We will continue our gas optimization. We have again used our flexibility on gas. That also means that we have taken out quite a bit of the potential.
Furthermore, gas offtake has been strong in the second quarter, so we expect gas production to be significantly lower in the third quarter. To repeat from last quarter, there will be significant growth from 2011- 2012. The production in the first half of the year is in line with our expectations, nothing more than that. Our production guidance remains unchanged. As we have repeatedly said, the risk is more on the downside than to the upside. I will come back to our guidance on investment and exploration later. Over to the results. Net income in the quarter was NOK 27 billion. This is a 2% decrease. It is worth mentioning that we had significant gains in the second quarter last year related to the sale of 40% of Peregrino.
In the second quarter of 2012, our net operating income was NOK 62 billion, and that is up NOK 1 billion from last year. As usual, we make adjustments to better reflect our underlying operations. This quarter, it is at NOK 16 billion, mainly related to gain on sales of business and assets of NOK 14 billion and a reversal of provisions related to the discontinued part of the early retirement pension. The adjusted earnings before tax was NOK 46 billion, and that's a 5% increase over last year. Increased volumes of liquids and gas account for an increase of NOK 10 billion, and we see better trading results, especially in the gas area, and higher prices for gas.
The increase was partly offset by lower prices for liquids and higher costs, mainly reflecting high exploration activity with expensing of wells and increased DD&A due to new fields coming on stream and ramping up. Please note that the operating expenses and SG&A is stable at around NOK 21 billion for the past three quarters, and that is even with a growing portfolio of assets. After tax, we made NOK 12 billion this quarter in adjusted terms. That is down from NOK 13 billion in the same period last year, mainly due to higher taxes, and I will come back to that in a moment. Let's move to the segments. Development and Production Norway delivered NOK 39 billion in adjusted earnings. That's an increase of 5%. This is mainly due to increased gas production with increased deliveries from Troll in particular.
Increased production positively impacted the results by NOK 2.5 billion. It is also worth mentioning that there has been limited maintenance this quarter, while it was extensive in the second quarter last year. Please remember the Heidrun redetermination, where our new share is 13%. The makeup for this correction started in July with our share at 0%. This means no Statoil production on this field for the rest of 2012. International Development and Production delivered adjusted earnings of NOK 3 billion, down from NOK 6 billion in the second quarter last year. The increase in revenues and other income was strong, from NOK 14 billion-NOK 20 billion, and that is more than a 45% increase, and that is driven by higher entitlement production, which alone added NOK 8 billion. However, this was offset by two elements.
First, higher exploration expenses. We see a NOK 3.6 billion increase due to higher activity and from expensing. Secondly, higher production leads to higher costs. DD&A increased by NOK 3.6 billion, and this is related to ramp up of Pazflor, Peregrino and unconventionals. Bakken was not in our portfolio last year. Other costs increased by NOK 1.7 billion in this segment, and this is related to increased royalty payments and also other costs related to higher production. Marketing, Processing and Renewables delivered earnings of NOK 3.9 billion, a significant increase from NOK 500 million last year. For natural gas, earnings were NOK 3.6 billion compared to NOK 1 billion in the second quarter in 2011.
The increase was due to higher gas sales, in addition to a positive contribution from trading activities, but partly offset by lower income due to the lower Gassled ownership share. For crude oil processing, marketing and trading, earnings were NOK 500 m illion in the second quarter compared to an adjusted loss of NOK 0.4 billion last year. The increase was due to better trading results and higher refinery margins. There is still a demanding outlook for the refinery business, so we will continue our improvement programs with full force. Please notice that the results of MPR will fluctuate from quarter to quarter, and a certain part of the result will be volume driven. The reported tax rate was 55% in the quarter and was influenced by capital gains.
Based on adjusted earnings, the tax rate was 75%, and that is somewhat above our guided range, which is 70%-72%. I have earlier said that, you should expect our tax rate for 2012 to be in the upper part of the range or slightly above it, and this is still valid. The higher tax rate this quarter is explained by a higher share of earnings from the NCS with a marginal tax rate of 78%. It was also caused by a higher international tax rate due to a higher share coming from high tax regimes. We also see some exploration costs with low tax deduction. Over to the cash flow. This quarter, the cash flow from underlying operations was NOK 66 billion. That is up from NOK 57 billion in the second quarter last year.
So far this year, cash flow from underlying operation is NOK 137 billion. In the quarter, we paid NOK 35 billion in tax, and we paid NOK 21 billion in dividends. We received the proceeds from Statoil Fuel & Retail transactions and the Centrica transaction. The proceeds from sales provided NOK 15 billion in the quarter. SFR is from this quarter on deconsolidated from our balance sheet. As you know, we pay tax in Norway six times per year. In the third quarter, we will pay one installment of around NOK 20 billion, and then two more in the fourth quarter. We will continue to run with a strong balance sheet and with significant liquidity. Adjusted net debt decreased from 15% in the first quarter to 13% in the second quarter.
We are progressing as planned, and we now expect to invest around $18 billion in 2012. We will drill more wells this year, and as we build on our exploration success, more exploration cost is capitalized. The successful outcome of the GoM lease sale also contributes to higher investments. This will increase CapEx, but I can live with that. We have also increased the number of rigs in Bakken from 10 at acquisition to 16. Some of the increase is related to faster progress than expected with the fast-track portfolio. They are meant to go fast, but they have actually gone even faster. On other projects on the NCS. This is due to higher exploration activity, exploration success, and a deliberately higher activity than earlier expected.
We will also increase our exploration spending to around $3.5 billion as we increase the number of well drills from 40 to around 45 in 2012. We have an inventory of drill-ready wells that is larger than this, which can be further optimized. We expect to drill 20-25 high-impact wells from 2012- 2014. I see no reason to change our production outlook, but I have reminded you of the uncertainties. High turnaround effect in the third quarter. We expect significant lower gas production next quarter. Skarv is delayed until the fourth quarter this year. Finally, the closing of the Centrica deal will lead to lower production from these assets going forward. We still see more risk to the downside than to the upside to our guiding.
In summary, it has been a good quarter with significant progress for Statoil. Strong, financial results, production growth in line with expectations, continued exploration success, and streamlining our portfolio, putting our money where our strategy is. Thank you very much for your attention. I will leave the word to you, Hilde, to lead us through the Q&A session. Thank you.
Thank you very much, Torgrim. For the Q&A session, Torgrim will be joined by Senior Vice President for Accounting and Financial Compliance, Kåre Thomsen, and Senior Vice President for Performance Management, Svein Skeie. We will take questions from the audience and over the telephone. I will first ask the operator to please explain the procedure for asking questions over the telephone.
Thank you. If you would like to ask a question over the telephone, please press star one on your telephone keypad. Again, please press star one.
Thank you. We'll start with questions from the audience here in Oslo. Are there any questions? If so, microphones will be passed. Please state your name and your company. Yes, I see one question.
Trond Omdal, Arctic Securities. Could you comment a little bit on the bigger spread from Brent to realized prices? How much is related to Peregrino and Bakken oil and how much is related to NGL? On the second, also, exploration expense in international was quite high at almost $5 billion. Could you talk a little bit about a couple of wells that is linked to?
Okay, Trond, thank you. Thank you very much for two very relevant questions. First, on prices. You mentioned Peregrino, and you mentioned Bakken, which is currently at a discount, compared to Brent. However, the volumes is fairly limited, so it doesn't have a large impact, on the average realized price. The real thing that makes an impact this quarter is the NGL prices. We have had high gas production in the quarter. Gas production leads to higher NGL production, and also the NGL prices have developed weaker than the Brent price in the quarter. The NGL price and the NGL content is the main explanation for that. When it comes to exploration expense, that is especially valid in the international segment. This is driven by wells that has been expensed.
Two wells that I can mention here today, it is the Kakuna well in the Gulf of Mexico, Nexen operated. The other one is Jagüey in Cuba, operated by Repsol. Those have been expensed. Then there are other ones that I can't comment on from due to it is mainly partner-operated wells. That has an impact in the quarter. Furthermore, we have stepped up our seismic activity as well compared to last year. Especially, I would like to mention what we are doing currently in the Kwanza Basin outside Angola. We are shooting a significant amount of seismic to prepare for exploration in the five blocks that we have there, and we will come back to later on. That is the main explanations.
I think I would like to say that you should expect that exploration expenses are sort of volatile from quarter to quarter. First quarter was a quarter with very little exploration expenses, while this is high. So far this year, the average capitalization of exploration is 35%, which is, you know, a bit higher than the normal assumption that we use. So far this year, it's sort of in line with what we expect, but there are swings between the quarters.
A very simple, while I have the chance. You talked about our Troll production being very strong, and I assume part of it is, of course, that strong offtake from customers, but also that the production permit from NPD was higher this year. Of course, I assume you haven't got it confirmed, but is there any reason that it should not be the same production, you know, permit for the next gas year?
you know, the production permits are very important to us. They are granted on an annual basis. I see no reason why there should be any change to the current permits.
Do we have any further questions in Oslo? Yes, Helge André.
Helge André Martinsen, Nordea. Just a question on the Peregrino ramp-up. Volumes are dropping a bit this quarter. Can you comment on when you expect to be on full capacity? And also, if you can comment on development of the water cut and oil water separation. Is there any issues there, or is it running smoothly?
Okay, thank you. Peregrino is ramping up. We have had a few issues with some wells coming on stream, so that is being worked, but that has sort of impacted somewhat the production this quarter on Peregrino. Ramping up towards full capacity, it is within the year, what we say, that we expect Peregrino to be on full capacity.
Okay. Well, if there is no further questions in Oslo, we'll turn to the audio audience. Our first question comes from Jon Rigby with UBS. Please go ahead, Jon.
Thank you, Hilde. Two questions. The first is I appreciate that you like to give a health warning around your production outlook each quarter. We're now halfway through the year. Given your more risk to the downside than the upside, how would you contrast that with your more risk to the downside than the upside in the first quarter? Do you have greater comfort on your 2012 outlook now than you did three months ago? Absolutely impressive performance in the quarter. The second is just on gas realizations. I think there's been some concern that as Europe renegotiates gas pricing, that your realizations will come under pressure, but it's not obvious from looking at the evolution of oil prices and gas prices.
When you renegotiated, you've talked about taking back flexibility to you from the buyer. I think analysts and investors have found that difficult to sort of incorporate into their view. Are you benefiting from that? If you are, can you sort of go through how that might be helping you in terms of your effective realizations as you trade and sell gas? Thanks.
Okay. Thank you, Jon. Production outlook, halfway through the year. Yes, production so far this year has been strong. For me, it's important to, you know, give some granularity to the drivers of the production. It's also important for me to get across that, in the next quarter, production will be lower than what we have seen in the second quarter. You know, there is no new signals, no new messages in what I've said today. It should be the exact same wordings that has been used over the last quarters. Things are progressing as planned. Then there are, you know, still, uncertainties in place, especially related to customer offtake on the gas side.
If they end up taking more than they have to, it will certainly have a positive impact on the production. Maintenance, if that runs smoothly, is also everything risk-related to that. We have startups over the year. We have Skarv in the fourth quarter, BP operated, which is sort of the main one to watch in that respect. There are it is sort of the same risk elements that has been in place, but we are half through the year. I still consider there to be more risk to the downside than to the upside of our production guiding. On gas realizations.
You are right, we have been through a period of renegotiations of our gas contract portfolio in Europe. In those renegotiations, it has been very important for us to say, one, yes, we are willing to put more spot indexations into the contract, but it needs to come together with that flexibility comes back to where it belongs and also access to the hubs. The market is developing towards a more liquid market. It will mean that the seller sits on the flexibility on the gas volumes instead of the customers going forward. It provides us with significant flexibility to decide which market the gas should end in and also which period the gas should end in the market.
This has, from time to time, significant value to us, and it has created good values for us over the last year. I can particularly mention in 2009 when the gas markets more or less collapsed. I mean, prices dropped from GBP 0.70-GBP 0.20 per therm. We elected to turn down production in the summer and sell it into the next summer at GBP 0.40 per therm. We realized a 100% gain on those volumes, and that was based on the flexibility that we had and the customer didn't. It's just an example on how we use this tool, and we have some really fantastic big assets that are flexible. Troll, you can look upon as a seasonal storage.
Oseberg, you can look upon as the world's largest short-cycled gas storage.
Effectively, you can see. Would it be fair to conclude that you're seeing that the flexibility is compensating or at least compensating for what would ostensibly be at current prices, a lower realized price in the new contract structures? Net-net, you're at least coming out neutral?
I cannot.
Which would appear to be the case.
No, I cannot give specific guidance in that respect, but it creates value out of the flexibility that we carve back.
Thank you.
Thank you. The next question comes from Brendan Warn from Jefferies. Please go ahead, Brendan.
Thanks, Hilde. It's Brendan Warn from Jefferies. Just actually it's probably on the same topic in terms of production. I was just wondering if, obviously, 'cause of the rate of growth from the international division, if you can give us some sort of exit rate indication and maybe if you split it out sort of international from North America. Just secondly to obviously in light of BG making some non-cash sort of impairments of their U.S. gas shale business, Torgrim Reitan, just see if you could make any comments on what you're sort of carrying for your gas assets in the U.S.-
Mm.
Do you see anything similar that Statoil may be doing? Just lastly, just while we're on North America in terms of gas price and rig count, if you could just sort of step through, and it ties back to the production rate, rig count in your various regions Bakken, Marcellus, Eagle Ford. Thank you.
All right, Brendan. Thank you very much. When it comes to production growth from the various assets, there is in the supplementary package, which is on the web, you see the breakdown on an asset-by-asset level. It is all there. I think it's fair to say that the U.S. production, the North American production has doubled. International in total has grown by 32%, so it's a significant contribution to production. Over to the U.S. and gas prices and shale, I can of course not comment on BG's accounts, but I can comment on how we look upon that asset.
I reviewed the production profile from Marcellus a few weeks back, and I certainly recognized that when I'm 100 years old, this asset is actually still producing on plateau. This is here for the long term for Statoil. Current gas prices in the US is low. In a situation with low prices, it is extremely important to take care of your gas. I'll give you a couple of examples on what we are doing in Marcellus. From 1st of October, we will start selling Marcellus gas into the Toronto area. Toronto has, you know, over the last quarters been priced $1 per MBtu higher than around the Marcellus area. It's a significant premium market to the area around Marcellus.
In 2009, I think it was, we took all the capacity at National Fuel to get to Canada. At I think it was $0.11 per MBtu to get to the border. For the first of October, we will realize a higher price on our gas in Marcellus than the alternative was. I would also like to mention that we are working on a pipeline solution to Manhattan. We will cross the Hudson River, first crossing with a gas pipeline for 40 years, come up at Penn Station and connect to Consolidated Edison's grid, realizing significantly higher prices. This is very much about taking care of your gas, and we are that.
We test you know our Marcellus asset regularly for impairments, and it sits solidly in our balance sheet as it does. When it comes to gas price outlook, I think we must be you know prepared for low prices for a couple of years more, and we are. We are not into the Marcellus for 2012 and 2013. We are in Marcellus for the next decades. I think there are some significant forces in place that will bring this back to more sensible levels. Brent, you asked about you know rig counts and so on. As I said, you know, we have increased the rig count in Bakken from 10- 16, progressing well there.
In Eagle Ford, we have 11 rigs going, or Talisman has 11 rigs going. On Marcellus, we have taken down the rig counts down to 15. It was 27 at first quarter. When it comes to wells, you know, we have a lot of wells producing, more than 180 in Bakken, more than 100 in Eagle Ford, and more than 400 in Marcellus. The inventory is also significant, so there's a lot of wells, for instance, in Marcellus, more than 400 waiting for gathering systems and hooking up, and that can be done extremely cheap. There is more to come, and we are looking forward to that.
Okay. Thanks, Torgrim Reitan.
We'll take the next question from Michele Della Vigna of Goldman Sachs. Please go ahead, Michele.
Thank you for the presentation. I had two quick questions. The first one is, after your successful disposal to Centrica, would you consider more disposal of mature NCS assets? The second one is regarding Tanzania. You clearly had a lot of exploration success there. I was wondering how quickly you can proceed with a FEED for an LNG plant and whether you've got ongoing dialogue to other players there to join forces?
Okay. Thank you, Michele. Centrica transaction, significant value created out of that. Further portfolio optimization is a natural part of what we do. We do it all the time. I think in 2011, we had eight transactions on the NCS and several internationally as well. You should expect, you know, further streamlining of the total portfolio and also our NCS portfolio, going forward. We would like to center our money into where we can make the most impact with the money, into the core assets and where we want to be. That is just a natural ongoing business and nothing special to it than a continuous portfolio optimization.
When it comes to Tanzania, I think it's too early to conclude on what will happen when. We have made two significant discoveries in the block. This is a huge block, and there's several other structures that we would like to test. This is something we would like to work further before we conclude on how to proceed. As you pointed out, it is natural to discuss with other companies in the areas on how to optimize the area.
Thank you.
We'll take the next question from Kim Fustier of Credit Suisse. Please go ahead, Kim.
Yeah. Hi, good afternoon. I had two questions, please. Firstly, just on CapEx. You've got it to a $1 billion increase to $18 billion versus your previous plan. Half of that is coming from exploration and presumably the other half from development. I was wondering if you were able to say on which project you're spending more development CapEx, or is this related to higher CapEx on maintenance? Secondly, on international D&P, you've talked about higher operating costs coming from field ramp-ups for quite a few quarters in a row now. I was wondering how much of this OpEx increase is structural and how much you expect to see falling off going forward. Thank you.
Okay. Svein, maybe you can prepare on the CapEx question. When it comes to the operating cost internationally, it is related to increased production. Couple of examples. Royalty has increased due to higher production. Royalty is normally a function of production and price, and sort of the higher the royalty, the more you earn. That is sort of cost that we think is okay, that increases. Within international, there are some increased transportation costs, and it is also related to more wells producing, especially within the unconventional area. It is sort of structural in a way that it is directly linked to higher production and better earnings.
On the increase in CapEx, we increased the capital expenditure from around $17 billion to around $18 billion, and it's coming partly from the exploration, as you mentioned, due to the fact that we also then increased the guiding for the exploration activities from $3 billion- $3.5 billion. In addition, it's high activities on the Norwegian Continental Shelf, as Torgrim mentioned in his presentations on projects, the fast-track projects, but also on other projects where we see that we have better progress than we planned for. In addition, the success for the lease round where we have acquired 26 leases in the Gulf of Mexico, which also contribute to the capital expenditures for 2012, and that are the main reason why we increased.
Around 50% of the CapEx increase will be from Norway and the rest from the international part of it.
That's great. Thank you.
The next question comes from Michael Alsford from Citi. Please go ahead, Michael.
Thanks, Hilde Nafstad. Good afternoon. Two questions if I can. Firstly, just actually follow on from that CapEx question. Could you maybe more specifically give us an indication on what the cost inflation you're seeing on the NCS, you know, going forward for the service industry? And then secondly, maybe could you give an update on Shtokman? A lot of press reports, obviously, you know, over the last few weeks, and I know obviously the frame agreement, you know, expired at the end of, I think, end of June. Could you maybe give an update as to Statoil's position on that project? Thanks.
Okay. I'll take the Shtokman, and Svein, you can continue with the CapEx issue or CapEx question. On Shtokman, you are right. The framework agreement with you know SDAG expired. That is true. We are continuing the negotiations related to Shtokman. Those negotiations are progressing. For us, it is very important that investment levels come down to a level where we see you know significant profit from the project. It is also important that fiscal framework are put in place. It becomes you know a sound project, and there are some other commercial terms.
Negotiations are ongoing, more or less on the same parameters that we have discussed among ourselves, over the last period. We are still negotiating.
Thank you, Torgrim. On the NCS, the main increase is related to a higher activity level. If you look at the pressure in the industry, yes, there is pressure, but we are responding to that. I will, for example, mention what we have done within the drilling segments, where we have gone into long contracts for Category B rigs, dedicated well rigs that could drill wells on the Norwegian Continental Shelf, so that we are able to take down the expected cost for that going forward. We're also seeking in other segments where we see pressure, trying to find good solutions between us and the supplier.
Going for contracts where we see that we cannot benefit both for us and for the supplier.
Okay, thank you.
The next question we'll take from Teodor Nilsen of Swedbank. Please go ahead, Teodor.
Good Afternoon, Just a question on the increased exploration guidance. Where will the increase or the incremental increase in exploration spending come from? Will be in Norway or internationally? Also a question on the tax rate. You have said that the 2012 tax rate will be in the upper end or end of the guided range. What can you say about the 2013 tax rate?
Okay. On the exploration guidance, more wells will be completed, and more wells will be started during 2012. It is pretty well distributed across the portfolio. It is both in Norway and internationally. If there is, you know, something to mention, I mean, we will start a new campaign around, you know, the Skrugard and Havis discoveries, and that campaign will be started off in the back end of this year. Further appraisal programs around Johan Sverdrup as well. Then there are, you know, other exploration wells as well. It is fairly spread around. Tax, Kåre?
Yes. Year-to-date, we have 73% tax on adjusted earnings, and we have guided 70%-72% in the upper end of it for 2012. We still maintain that guidance, and you should also foresee similar guidance for the year of 2013.
You do not expect that the tax rate will decline as the international production builds up?
Not in 2013, but as we progress, we expect the tax rate from the international part to come down to the previous level, which we guided on between 40% and 50%. Now we guide on 50%-55%, and it has to do with the composition from where we get the taxable profit, whether what's the tax structure in those countries. As we see it, at least in 2013, it will be with more or less the same composition. Later on, we expect it to come down more to the level we indicated or had before.
Okay, thank you.
The next question will come from Oswald Clint of Sanford Bernstein. Please go ahead, Oswald.
Yes, thank you. My first question is just on the ACG field in Azerbaijan. It's showing a sort of steady decline over the last year and a half. It's, you know, it's a good 10% of your international portfolio. I just wonder, is that decline in line with your expectations? Again, I think you're pointing to well problems, operational problems there this quarter. Again, I just wondered if you could talk about that particular asset. Secondly, on the Bakken, you've talked about the number of rigs you have and the number of wells you drilled. I'm just curious to know, with all the new wells you're drilling, are you still seeing the same healthy flow rates or the initial production rates?
Is there nothing there or at least everything's consistent with, again, with what you saw at the very beginning of the acquisition? Finally then, just on your oil sort of onshore assets you're participating with Rosneft in Russia, could you give us a sense of activity levels or what the next couple of steps are in terms of appraising that onshore asset? Thank you.
All right. Thank you, Oswald. On ACG, producing well, there has been some issues with wells. It seems to improve and be working well, but BP is the right one to answer on that progress as the operator. On Bakken, initial production rates are good and as expected. It varies like it is expected, but it is progressing as it should. Maybe when I have the opportunity to talk about Bakken, that evacuation or marketing of the oil is an important part of, you know, creating value out of that asset. We are taking on train capacity that will be available to us from October.
We will narrow the discount that we have seen from that asset in this quarter. When it comes to the onshore part of the Rosneft deal, it is actually very interesting if you look at the potential on the conventionals in U.S. We have two areas we have access to. We will first study and work on a technical program related to it, and then we will progress from there. It is pretty obvious that this is hydrocarbons with a high potential. We're looking forward to further exploring those opportunities.
Okay, that's great. Thank you.
Our next question comes from Haythem Rashed of Morgan Stanley. Please go ahead, Haythem.
Hi, good afternoon all, and thank you for taking my questions. Just very quickly wanted to touch base on three things. Firstly, on CapEx for 2013, just wanted to ask if you had any comments you could make there, in particular with regards to the fact that obviously 2012 has been increased. In the past, you'd indicated that 2013 was likely to be similar to 2012. Should we expect a similar increase for 2013 CapEx levels? Secondly, on production guidance, you've clearly highlighted the downside risks on production into the second half.
I just wondered if you could give us a sense of which are the most significant of those three that you talk about, perhaps even if you could rank them in terms of the gas evaluable volume, the startups and ramp-ups and obviously the maintenance. Then thirdly, just wanted to quickly ask on the five extra wells to be drilled this year. Could you indicate if any of those are high impact? Or in other words, have you shifted any of the high impact wells to be drilled over the next two years into this year? Thank you.
Thank you, Haytham. On the CapEx for 2013, we will revert to that later. What is important for me to talk about when I talk about CapEx is the project portfolio. More than 150 projects, average break-even price of $50 per barrel. We are all set to deliver 2.5 million bpd in production in 2020 from this set of projects. I'm always becoming very enthusiastic when I talk about, you know, our project portfolio, but you have heard it before, and I'm sure you will hear about that later on as well. When it comes to the CapEx development going forward, I can give you some color to it.
That is what we have seen over the last years is a CapEx increase related to increased activity, more projects being developed and not related to cost inflation or cost overruns. When that is said, I mean, we will always have some projects which are doing better and some projects that are doing worse, but on an overall level, not a part of the explanations as such. We have a large project portfolio that we would like to realize. Of course, the set of projects will cost money to develop, and that will be reflected in the investments going forward.
For me, it's extremely important to have a firm financial framework around our investment program, meaning a solid balance sheet, meaning a predictable dividend policy, and strict decision criteria around this. This will be managed in a very diligent way. We will come back to that very interesting issue at another point in time. When it comes to production guidance and, you know, main uncertainties, I think it's fair to say that on top of the list, it is sort of gas production that is the main uncertainty. So that is sort of the one that is the main uncertainty.
When it comes to high-impact wells going forward, there are two wells that I would like to draw your attention to in the 2012 drilling program. It is the Brugdan II well in the Faroe Islands that has already been spudded, and it is the Buckskin well in the Gulf of Mexico that has also been spudded. Those two are the most imminent wells to watch. Furthermore, in the Gulf of Mexico, we are working to acquire or to get a permit on the Candy Bar, which will, when that is in place, we are ready to move along with that one as well. Those are maybe the few that I would like to highlight. Thank you, Haythem.
Thank you.
We'll take the next question from Rahim Karim , with Barclays. Please go ahead, Rahim.
Hi. Good afternoon, Torgrim. Just a couple of questions. The first was just around potential progress in Angola in the pre-salt there, and if you could perhaps give us an update on how seismic is progressing there. The second question is on the finances. Perhaps if you could give us some guidance in terms of where we should expect gearing at year-end to be, given the divestment processes that we've seen complete so far? Thank you.
Okay. Thank you. Seismic in the Kwanza Basin in Angola is progressing well. We are significant. I mean, it's a big area, so it takes its time to sort of get it shot. When that is done, we will of course work the seismic extensively and prepare ourselves for starting exploration, which we expect to be late next year or early 2014. Progressing as planned in Angola in the Kwanza Basin. When it comes to financing and gearing. Our net debt rate is at 13% currently. It came down from 15% in the second quarter, and it at year-end, I think it was 21%, if I recall right. It is moving down towards the end of the year.
It will of course be very dependent on the oil price development for the rest of the year. If sort of oil prices you know are at the $110-$115 level that we saw in the end of first quarter, this will sort of come down to you know around 10-ish that we talked about at that point in time. That is sort of the framework around that one. That said you know and as I said earlier, it is extremely important for us to in the current market uncertainty to run with a solid balance sheet and also run with a significant amount of liquidity and prepare ourselves well.
We work with, you know, several scenarios that we have talked about for the world to be as prepared as we can.
Perfect. Thank you.
We have one more question, from Nick Coleman of Argus Media. Please go ahead.
Thank you. Just a question about the industrial action that we've seen this year in Norway. Presume the impact on production would be extending into the current quarter. Can you say whether the Oseberg output is now back to normal after the industrial action? Give any assessment of what the impact has been in terms of production and any views on any possible recurrence of industrial action later in the year? Thank you.
First of all, it is very important to us that we are able to solve differences between, you know, the company and the employees on an ongoing level. This time it ended up in an industrial action. The impact of that, we will have to sort of get back to you in the next quarterly result, but it has been limited in production terms. Not, you know, impacting the overall picture significantly. What was said earlier that the total impact of the strike was some NOK 3 billion for the NCS at totality, as a totality pre-tax. That was statements from the OLF, which is sort of one of the, you know, the organization that that faced the negotiations.
Whether this is a further risk going forward is hard for me to comment on. To me, it's important that we are able to solve the differences that we from time to time have and do that in the best possible way.
Thank you. Could you just clarify if Oseberg?
Yeah. Sure.
Is back to normal?
Oseberg is back and available, as it should be.
Thank you.
We have another question from Christine Bies from RBC. Please go ahead, Christine.
Yes. Hi, good afternoon. I was wondering if you could give some color around the NOK 2.5 billion financial item charge? Thanks.
Yeah. Thank you. On that, it is higher than normal this quarter, and it is related to the accounting treatment of the Shtokman investment in the SDAG. You know, as we said, the framework agreement expired. We handed back our shares. From an accounting perspective, we have to take the value down of those shares as such. That is explaining the financial charges. That is impacting the quarter as well. That is from, you know, the way we deal with it from IFRS point of view, and then we have taken the necessary steps to protect our positions as we should.
We are continuing the negotiations for the future of the Shtokman together with Gazprom.
That was the final question on my list. This will conclude our Q&A session for today. The presentation and the Q&A session can be replayed from our website in a few days, and transcripts will also be available. If you have any further questions, please don't hesitate to contact investor relations in Statoil. Thank you all very much for participating, and have a good afternoon.