Good afternoon, ladies and gentlemen, and welcome to Statoil's third quarter earnings presentation and conference call. My name is Hilde Nafstad. I'm the Head of Investor Relations in Statoil. Before we start, let me say that there will be 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 each side of the room and continue on towards the same side. This morning, at 7:30 Central European Time, we announced the results for the third quarter of 2011. The press release regarding the results was distributed through the wires and through Oslo Stock Exchange. The quarterly report and today's presentation can, as usual, be downloaded from our website, statoil.com. There is a link directly to the presentation on the front page of statoil.com.
I will ask you to kindly make special note of the information regarding forward-looking statements, which can be found on the last page on the presentation set. Please note that questions can be posed by means of telephone. Questions cannot be composed directly from the web. The dial-in numbers for posing questions can be found on the website. The operator of the conference call will explain the procedure for posing questions over the phone immediately before the Q&A session starts. It is now my privilege to introduce our Chief Financial Officer, Torgrim Reitan.
Thank you, Hilde, and welcome everyone. It's a pleasure for me to present Statoil's results for the third quarter of 2011. A quarter where we delivered strong financial results. We produced as expected, and we have made significant steps towards long-term growth. Let us turn to some of the highlights since we last met. In the past months, we have taken large steps in line with the strategy we announced at our Capital Markets Day in June. First of all, we have achieved strong financial results with a significant increase in earnings. In addition to stable production, this has been a quarter with successful exploration. Of course, the most important one is the Aldous and Avaldsnes discovery, and I can tell you, in Statoil, we have not stopped smiling yet, and we have problems with stopping to smile.
This is one large oil discovery. There is communication between the two licenses, and we hold 40% in both of those. On Friday last week, we announced a doubling of the volumes in the Aldous part. We increased our estimate to between 900 million and 1.5 billion barrels on the Aldous part alone. The combined Aldous and Avaldsnes is a giant, and it is growing. This is probably one of the five largest discoveries on the Norwegian continental shelf ever. We will work with the partners to ensure the necessary clarifications and a rapid and optimal development of the field. We are making discoveries elsewhere also. Worldwide, we have completed 13 wells in the period, and we have made nine discoveries.
Furthermore, you know, we actively manage our portfolio to create value, and we will put our money where our strategy is. We are expanding into unconventionals, and last week, we announced an offer to acquire Brigham Exploration. Let me quickly run through the highlights once more, since this is actually one of the largest single transactions Statoil has ever done. This deal fits well. It builds on our stepwise approach into U.S. unconventionals. First, through the Marcellus deal and last year in the Eagle Ford, with the Eagle Ford deal. This one now establishes Statoil as an operator in unconventional plays. We will be one of the first majors in this area. Brigham has some of the highest initial production rates in the Williston Basin, and they have been in the forefront of investing in value-adding equipment and infrastructure.
We have a strong record in applying technology. We believe there is additional potential to unlock upside through our technology and R&D capability. We look very much forward to creating more value together with our new colleagues. Let me also mention that we are maturing our project portfolio. We have submitted plans for development and operations for the Skuld field in the Norwegian Sea and for the sub-sea compression project at Åsgard, and also in the quarter, the PDO for Stjerne and Vigdis Northeast was approved by the ministry. Skuld, Stjerne, and Vigdis are examples of fast-track projects. So far, four fast-track projects have been approved, a fifth one has been submitted, and two more PDOs will be delivered before year-end. We are taking significant steps, and we move ahead as planned. Over to production. In the third quarter, production was as expected.
Our equity production was 1,764,000 bbl per day, and this is a 14% increase over the third quarter last year. As you may recall, that quarter had a lot of maintenance. We have started up new fields and are ramping up existing fields. I would like to mention the Peregrino startup in Brazil, which took place in April. We are proud to see such a safe and efficient startup of Statoil's largest international operatorship. We expect to produce at full capacity from Peregrino within one year from startup. Actually, Peregrino makes Statoil the second-largest operator in Brazil, and it offers us opportunities for growth in a key offshore cluster. I would like to congratulate our team at the Leismer demonstration plant in Canada, where we find the world's largest known reserves of oil-bearing sands.
We have achieved many milestones at Leismer in the past year, including regulatory approvals, a safe startup, and operation and production ramp-up. I would like to mention the startup of the Pazflor development in Angola on the twenty-fourth of August. This startup was actually ahead of schedule, and I would like to give Total credit for very good work. We hold 23.3%, and this asset will contribute with approximately 45,000 bbl per day when we reach plateau over the coming months. We also saw a natural decline on mature fields, as expected, and some operational challenges. We saw suspended production in Libya, as you know. Extensive maintenance has been carried out as we had planned for, and you all know the seasonal lower gas offtake that happens every year, and it happens also in 2011.
An important point. We are continuing our strategy of gas optimization or value over volume, as we call it. So far this year, we have reduced our gas production and instead sold it into future years where we see prices are better. We have continued to move gas out of the fourth quarter as well. Production is, of course, extremely important to this company, but if we can create even more value out of the production, that is even more important to us. Looking ahead, I should also mention the further delay on the Skarv project. BP, as the operator of the field, they have confirmed that the production startup will be delayed until the end of first quarter in 2012.
This startup was expected earlier in 2011, and this will of course have negative effect on our production in the fourth quarter. This will impact the 2011 production with approximately 15,000 bbl per day. As you understand, Skarv will produce less than initially planned in 2012 as well. Looking a bit closer on the Norwegian Continental Shelf, a total production of 1,245,000 bbl per day. That's an increase of 17% compared to last year. We see good production performance on most assets, but production is impacted by known elements like the reduced water injection at Gullfaks, the riser challenges on some of our installations and the reduced production permit on Troll for the gas year that ended first of October.
Internationally, production increased by 6% compared to the third quarter in 2010 to 519,000 bbl per day in the third quarter. In 2011, we have started at Pazflor and Peregrino, as well as ramping up Leismer in Canada and increased production from Eagle Ford and Marcellus. The increase was partly offset by Azeri-Chirag and Shah Deniz in Azerbaijan due to operational issues and planned turnaround. We had decline in Angola as expected, and we had suspended production in Libya. In the third quarter of 2011, our net operating income was NOK 39.3 billion. This is an increase of more than NOK 11 billion over the same quarter last year or actually 39%. This increase was largely driven by high commodity prices and increased production.
The net income in the quarter is NOK 9.9 billion. We have made adjustments to better reflect the underlying operations in the quarter like we do every quarter, and this quarter it is at NOK 3.9 billion. Those adjustments are impairment losses of NOK 4.8 billion. 3.8 of those is related to impairment of our refinery business, and the majority of that is related to the Mongstad refinery in western Norway. The impairment is made mainly because we see a more challenging outlook for refinery margins in Norwegian kroner. The change is a result of a strengthening of the kroner to U.S. dollar exchange rate, increased expected CO2 prices, and an increase in the crude differentials, which are positive to Statoil overall, but negative for our refineries.
We are working hard to improve the underlying operations, and we have, since 2009, carried out a comprehensive program to improve margins. However, the situation is still challenging, and we will review further measures in order to resolve the situation. Other adjustments are higher fair value of derivatives of NOK 3.3 billion, with a positive impact on the net operating income. The adjusted earnings before tax was NOK 43.1 billion, and this is a 62% increase over last year, or more than NOK 16 billion kroner. Higher commodity prices contributed with NOK 13.8 billion and increased volumes contributed with NOK 5.5 billion kroner. The reported tax rate was 76.6% in the quarter, but based on adjusted earnings, it was 73.5%, and I will revert to that later in my presentation.
Over to the segments. A few comments to the adjusted earnings. Exploration & Production Norway delivered 35.8 billion NOK in adjusted earnings, and this is an increase of nearly 65%. The increase was mainly due to higher prices impacting with NOK 10.9 billion and increased production of oil and gas with a positive impact of NOK 5.5 billion. I would particularly want to mention that the production cost on the NCS is stable despite new fields on stream and extensive maintenance. The focus on cost-efficient operations will continue. Exploration & Production International delivered earnings of NOK 4.1 billion, and this is an increase of 64%. Increased prices in Norwegian kroner impacted positively by NOK 2.9 billion and exploration cost actually decreased by NOK 1.1 billion. That is despite that exploration activity has increased.
This is due to higher capitalization this quarter. This was partly offset by higher operating expenses. The start-up of Leismer and Peregrino and ramp-up of Marcellus and Eagle Ford contributes to cost increases. The high activity level will impact our costs going forward as well. There is one additional point that is worth mentioning as well, and that is related to royalties in the fields. Those are accounting-wise handled as part of the revenue, as equity and in the cost line as well. This is a part of the cost picture, and that is expected to continue going forward as well. Marketing, Processing and Renewables delivered NOK 2.5 billion in earnings. That's NOK 400 million higher than last year.
For natural gas, the increase was mainly due to higher margin on gas sales and higher entitlement volumes, which was partly offset by decreased income from Gassled, caused by a decreased ownership share and a lower tariff income. For crude oil processing, marketing and trading, we saw a small loss compared to a small earnings last year. We realized lower margins from products and gas liquids trading in a backwardated and challenging market. The traditionally strong gasoline market during this part of the year has been very weak. Refinery margins are low this quarter, but they were on a similar level last year. Finally, I would like to remind you of the sale of our Gassled asset. This will significantly impact the MPR results from the first quarter next year. Tax on adjusted earnings is 73.4% this quarter.
This quarter, we have a relatively higher income tax with a marginal tax rate of 78% from the Norwegian Continental Shelf. I have told you earlier, this year that we expect to come in the higher end of our guided tax rate of 70%-72% in the full year. Our expectations is now that we will be slightly above that range, and that is, mainly due to strong earnings from the Norwegian Continental Shelf with a higher than average tax rate. We will get richer and the state will also get richer. Over to the cash flow. Far this year, the cash flows from underlying operations is strong, NOK 177 billion. This is mainly due to high prices of liquids and gas. We paid approximately NOK 23 billion in taxes during the quarter and NOK 67 billion so far this year.
We pay taxes in Norway six times per year, and in the fourth quarter we will pay two installments. Proceeds from sales are significant. We have received the proceeds from the Peregrino transaction in Brazil and the KKD transaction in Canada. All in all, this has brought NOK 29 billion this year. Finally, we expect to close the Gassled transaction by year-end, and this will provide us with around NOK 17 billion more. We have a quite comfortable position with a strong balance sheet and a lot of cash at hand. The net debt was 13.6% at the end of the quarter, and I expect, as earlier stated, that the net debt by year-end will end around 10% excluding the Brigham acquisition. That acquisition is expected to increase our net debt by approximately 6-7 percentage points.
Investments are progressing as planned, and we expect to spend around $16 billion in 2011. We will address the 2012 investments during our fourth quarter and strategy update in February 2012, where we will take into account the Brigham acquisition. Exploration is also expected to come in around what we have guided, around $3 billion. As we have previously guided, we expect equity production for 2011 to be slightly below the 2010 level. Equity production for 2012 is expected to grow with around 3%, average rate based on the actual 2010 equity production. As I said in the start of my presentation, our third quarter production was in line with our expectations.
As you know, BP has delayed the start-up of the Skarv field until the end of the first quarter next year. As I said, this will impact our 2011 production by 15,000 bbl per day. We continue to work the riser issues. It is under control and we are waiting for new risers to be installed. This will have an impact for 2011 and also some impact in 2012 as well. Far this year, we have moved gas out of 2011 and into later years. This is due to opportunities in the market and enables us to get better prices for our gas. We have continued to move gas out of the fourth quarter as well. This will also impact the fourth quarter production.
Planned turnarounds will impact the international production by around 30,000 bbl per day next quarter. In total, the estimated impact from turnarounds on equity production is around 50,000 bbl per day for the full year 2011, and that is mostly liquids. In summary, we believe this has been a quarter with significant progress for Statoil, strong financial results and production in line with expectation and exploration success and business development for the long term. We presented our strategy at our Capital Markets Day in June, and we have taken significant steps towards delivering on a long-term outlook towards 2020. This concludes my presentation. Thank you very much for your attention. Then I'll leave the word to Hilde to lead us through the Q&A session. Please.
Thank you very much, Torgrim. We will now turn to the Q&A session. For this session, Torgrim will be joined by the Senior Vice President for Accounting and Financial Compliance, Kåre Thomsen, and Senior Vice President for Performance Management and Analysis, Svein Skeie. The session will last for approximately 15 minutes. We will take questions from the audience and over the telephone. I will first ask the operator to explain the procedure for asking questions over the telephone.
Thank you. Ladies and gentlemen, if you would like to ask a question over the phone, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has been answered, then you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. Thank you.
We'll start with questions from the audience. I will ask you to please state your name and who you represent. We will pass microphones around. We have a question from John.
Yes, good afternoon. This is John Olaisen from Carnegie. Could you tell us a little bit about when you expect to be able to book the Aldous Avaldsnes reserves into your official reserves, please?
All right. Thank you, everyone. First of all, the resources and the reserves are going to be large, as we all understand. We are working as hard as we can to you know mature this and develop concepts. We aim for this asset to come into production before 2020. You know, we have an ambition for 2017 for production. You know, the booking of reserves is you know a large chunk done at the point of sanction, and then a second chunk at the start of production. The sanctioning will be between now and 2017. As you understand, I cannot give more exact than that, but this will of course be positively impact the reserve booking.
My second question is regarding the Brigham acquisition. It's currently producing about 21,000 bbl, and you said it could produce 60,000 bbl-100,000 bbl within five years, i.e., being 2016. You also have a quite explicit guidance on production for 2016. Does the Brigham acquisition mean anything to your production guidance for 2016?
When it comes to production guiding, we have said that, you know, we will stick to that. I mean, this will have an impact all the way to 2020, as well. This will, you know, make us even more comfortable in the way we have guided the markets. This will be a positive contribution, you know, to what we have guided to. We were comfortable with the guiding that we gave at the Capital Markets Day, so this will make us even more comfortable on that.
Just to be clear on that, should we add 60-100 thousand bbl on top of your previous guidance? Or how should we interpret, if not, how should we then interpret your guidance? Is it an organic plus potential acquisitions that are included in your guidance, or how do you see this?
I see this as the guiding going forward, as such. In the 2016 perspective, we are not ready to make any adjustments to that. In 2012, we said this is within the uncertainty of, you know, the range we are guiding on. When it comes to 2016, we are not, you know, prepared to make any changes. This will be a positive contribution compared to the portfolio today. If it is relevant to changes, that will be done at a later point in time.
Okay, thank you.
Any more questions from the audience? Yes, we have one.
Helge André Martinsen, Nordea Markets. I was wondering if you could please explain the development of the gas prices from the second quarter into third quarter why it's dropping. The second question on the tax rate on the MPR. The third question would be could you be more precise on what you mean by you got a more flexible production permit at Ormen Lange?
Okay, thank you. On the tax rate on the MPR, I can take that myself. Svein, if you can prepare on the development of the gas prices, that would be good. In the MPR, there are several tax regimes involved. Mainly it's offshore NCS, like, you know, the process and transport business, which is in the 78% regime. Then we have activities in the 28% regime. We have, you know, of course profit in the 78% regime, and then we have losses in the 28% regime. When you combine that together, you get strange tax rates on the segment as such. That is the main explanation on that one.
On the gas prices, a large part of our gas sales are linked to contracts with references to oil prices. It's then dependent on the development in the oil prices, especially for fuel oil and gas oil relating to the prices. You typically see a six-month lag on it. In addition, we're also selling gas on spot, and that will also affect the gas prices as we report in quarter by quarter. That will be an average blend of those two.
Are there any further questions from the audience? We will turn to the questions over the phone. Operator, can you please introduce the first question?
We will take our first question here from Brendan Warn with Jefferies. Please go ahead.
Thanks guys. It's Brendan Warn from Jefferies. Just first question, just two questions, please. Just can you give us an update on Shah Deniz Phase 2 and timing and milestones that we'll be looking for in terms of FID, and I guess just your commitment to the Nabucco project. Just secondly, can you just remind us of the upcoming high-impact wells for the coming three months, both in Norway and international, and just timing of your well in Block 2 Tanzania. Just thirdly, just the status of the ratification of your new acreage in Angola, please.
Okay, thank you. Shah Deniz Phase 2 is you know an important development to Statoil. The Shah Deniz Phase 2 is expected to produce in total around 16 billion cubic meter per year when at plateau. As you know, there is a lot of things to be clarified before that can be sanctioned, and it is especially related to transportation and transit of the gas. There are progress in those discussions, so we are progressing ahead with the work in the partnership as such. First of all, this needs to you know be bid on a concept selection on you know the especially on the transport route, and then it will move forward toward final sanctions.
We are following that very closely, and things are progressing. On Angola and the pre-salt licenses there, those are not finally concluded yet, but they are expected to be closed in not too distant future. On the high-impact well in Tanzania, Svein, can you give an update on that one?
In Tanzania, the well there, we expect them to spud that around a year in, probably in December in this year. That's when we expect to spud it.
Yeah. That is not expected to be concluded in 2011 but in 2012.
Can you just remind us of some of your other high-impact wells, please, that are near term?
On the Norwegian continental shelf, I think, yeah, you should look out for the King Lear well that we are now planning to spud in the near future. The Faroes, that will also then probably be concluded in 2012. That will probably be spudded prior but concluded after year-end.
Okay. Thank you, guys.
Next question, please.
We will now take a question from Michael Alsford with Citigroup. Please go ahead.
Good afternoon. A couple of questions if I can. Firstly, just on following the Brigham deal, are you looking to or should we see Statoil potentially looking to add further acreage in either the Bakken or other parts of your own conventional gas portfolio in the U.S.? Secondly, just a bit further on East Africa, you've got a couple of blocks in Mozambique. Could you potentially talk a little bit around the plans that you might be you know undertaking into next year following I guess recent sort of successes for ENI and Galp and Anadarko? Thank you.
Yeah. All right. Thank you. I'll talk to Brigham, and Svein, you can talk on Mozambique and Tanzania. Brigham is a significant step forward for us. You know, it's the third large acquisition into unconventional for us. We see unconventional as a very important part of the energy mix going forward, and the next wave is going to be much more technology intense than it has been so far. That is where you know, we really see the Statoil footprint within this business. Brigham is you know, giving us an operator role in a key area in the Bakken. When it comes to further acreage, we are you know, looking to optimize the areas we have.
We, in the quarter, we concluded a transaction together with Talisman with SM Energy. Small transaction, but it sort of will be an active approach to the acreage we have there and we will continue to do that. We will move forward on that basis in the U.S. West, East Africa, Svein.
Yes. We'll start with Mozambique, where we are now planning for doing the seismic there. So we are planning to have a large 3D seismic survey, which we are planning for in second quarter. Our intention is following the seismic activity that we will drill a well in the 2013 to 2014 perspective. On Tanzania, it's about the well that we plan to spud but will be concluded next year as we discussed earlier.
That's great. Thank you very much.
Next question, please.
We will now move to Mark Bloomfield with Deutsche Bank. Please go ahead.
Good afternoon. Yes, two questions, please. Firstly, a question on your international business and costs. Adjusted OpEx and depreciation both stepped up quite sharply this quarter, which was presumably due to Peregrino and Pazflor. Just wondering if you can give us a sense of the run rate going forward, particularly over the next 12 months, as those projects continue to ramp up.
Mm-hmm.
Second question, just turning to the Aldous and Avaldsnes discovery, perhaps you can give us some insight into your appraisal plans over the next 12 months. Yeah. Thanks.
Yeah. All right. Thank you. On the international costs, if you look at the operating expenses and SG&A, on an adjusted basis, it increased to NOK 3.6 billion in the quarter from NOK 2.6 billion. That was a sort of significant increase. That can be explained by mainly two things. One element is, you know, growing production and growing activity. You know, we have a startup of Leismer and Peregrino and Pazflor this quarter compared to last quarter. We are ramping up the Eagle Ford and Leismer activity. That counts for around half of that increase. The other explanation is related to royalties and production bonuses in various fields across the portfolio. The production from those fields is growing.
The way we deal with royalties and production bonuses is that we book the revenue based on an equity basis, and then in the cost, we subtract the royalty and production bonuses as cost in this cost line. That, you know, in general terms, explains the other half of that increase. To your very important question about what to expect going forward. I mean, the royalties and production bonuses, that will certainly continue as these fields have the intention to continue to produce. Also we expect, you know, significant activity and growth internationally going forward as well. I think that must be, you know, the guiding I can give on the international cost level going forward. On the plans for Aldous and Avaldsnes.
We expect, you know, an appraisal well, at least budding of that on the Avaldsnes part this year, and then there will be further activities on the Aldous part next year as such. To firm up the volumes and, you know, prepare for selecting development solutions and so on. These are, of course, assets that will be prioritized to be worked and they are.
All right, we'll move on to the next question.
We will now move to Oswald Clint with Sanford Bernstein. Please go ahead.
All right. Good afternoon. Thank you. Just going back to Azerbaijan, actually. Could you just give us some insights into what's happening when you say operational issues at the ACG field and the shutdowns at Shah Deniz? Is there anything there more problematic we should be aware of? The second question was back on the Brigham acquisition. You talked about it having the highest production rates in the Bakken. Does seem to be that they also have the highest number of fracs per well in the Bakken. Is that, you know, something you think you will have to sustain, the high level of fracs per well, or is that something you think you might be able to decrease?
All right, thank you. On Azerbaijan first. BP operates these fields. Let's touch upon Azeri-Chirag first. There have been some sand issues in the wells there. There will be maintenance done on this one later this year. On Shah Deniz, it is more related to well integrity issues and a cautious approach by the operator. I think, you know, to get more details on this, I think it's prudent to discuss that with BP as the operator. These are, you know, significant contributors to Statoil's production. On Brigham and fracking. Yes, they are one of the companies that, you know, frack the most. They have, you know, strong experience in that.
The way, when we now work together with them, we will of course, we very much appreciate their skills and their technology and skill sets related to fracking. I think there is more to be learned and more to be developed about, you know, fracking in the right way and fracking efficiently and so on. We will certainly contribute to that, into that asset going forward.
That's good. Thank you very much, Torgrim.
Next question, please.
We will now move to Hootan Yazhari with Bank of America Merrill Lynch. Please go ahead.
Hi there. Two questions, please. First and foremost, the very big discoveries that you've made in Norway. Obviously, there's a consideration here to be made with the sort of resources available to you. Are you now looking to reconfigure your portfolio and optimize it such that you dedicate more resource to Aldous and Avaldsnes? In that context, would you now look, or would you be more amenable to divesting assets in Norway? The second question really revolves around if you'd give us some more color on the Logan discovery and any sort of further guidance you can give on your drilling program in the Gulf of Mexico for the next few months. Thank you.
All right. Thank you. Aldous, Avaldsnes, it's large. It's going to take a lot of resources, of course, to develop. It will, you know, it will have priority. With that he said, we have quite large capacity. We have actually more than 100 projects in the pipeline currently and have a lot of capacity in hand. I mean, we will need to prioritize even without Aldous and Avaldsnes. I mean, bringing both that one and Skrugard alive will mean that, you know, some other assets needs to wait a little bit more. On the net, it is of course, very, very positive. On your point on divesting assets in Norway, let me just put it into perspective.
If you look at Statoil over the last years, we have had a quite active approach to our portfolio. You know, we have sold a lot of our shipping activities, our petrochemical activities. We have IPO-ed our fuel and retail business. We are recently selling our transportation system on the Norwegian Continental Shelf, and we have done adjustments to some of the big international assets as well. Going forward, we will continue with an active portfolio management. I think that has you know proved quite well. Looking at Statoil as a very upstream-tilted company, we are actually currently what many other companies would like to be as I see it.
We will continue with portfolio management, and nothing in our portfolio is sort of more sacred than anything else. That's a general comment on that. I would not, of course, speculate on you know, neither this nor that. In general, you know, we have an active portfolio approach to all of the assets in the company. When it comes to the Logan discovery, I think it's important not to take that out of proportion in any way. We have encountered hydrocarbons, which is, you know, good. More work needs to be done on this well to see, you know, how much is in place, recovery rates, and whether it is commercial or not. Let's not overstate that currently.
I can say this is not Aldous and Avaldsnes all over again. I can tell you that.
That's on the Logan.
Next question.
Comments on further exploration activity in the Gulf of Mexico.
Yeah.
in the near term.
Yeah. We have, let me see here. We have Bioko and Kilchurn. The first up is Bioko as far as I recall.
Mm.
Yeah. That, when is that going to be spudded, Svein?
It will probably be spudded over next year. I believe.
Okay. Yeah.
Okay. Wonderful. Thank you very much.
Next question, please.
We will now move to Nitin Sharma with JPMorgan. Please go ahead.
Good afternoon. Two questions, please. The first one, more an extension of earlier questions on the subject. You explained briefly the buildup in U.S. conventional space, unconventional space, three transactions. My question is, what are the next steps? Are acquisitions on near-term agenda? And if so, could you please give it a little bit more of color in terms of size? You know, what sort of comfort range in terms of where your balance sheet would be if you were to go in for a deal? I'm fully aware that post-Brigham, you know, you're still very comfortable at 17%-18% gearing. Just a little bit more color on that front. Second, could you please explain the very high tax rate in MPR, please?
That's one bit that I could not grasp looking at your release this morning. Thank you.
All right. Okay. I tried one explanation earlier, so I'll give the chance to Kåre to explain it better this time on the tax rate on MPR. On unconventional and acquisitions going forward. You know, it's you know, we have an active look on a lot of things around the globe, also within unconventional, and Brigham is an example of that. Going forward, and I cannot neither confirm or exclude whether that is part of the route going forward.
You know, it is important for us to be well-placed in an early stage, in new plays within unconventional, to put the Statoil footprint in place early and see to that we are able to create value on anything that we do. On, you know, comfort range and balance sheet, and all of that, we are running now with a net debt of 13.6% and expect that to come down to 10%. When the Brigham transaction is closed, it will increase by 6, 7 percentage points. We have significant cash at hand, and so on. I'll just share some thoughts about how we're thinking. To us, it is very important to run with a solid balance sheet and with significant liquidity.
I've touched upon that several times during the year. First of all, running a company like Statoil, a big oil and gas company, you need to do that with a big balance sheet. You also need to have significant liquidity, especially in uncertain times. I mean, the current market and outlook is unresolved, so we will continue with that. We have a very cautious approach to the gearing of the company going forward. That said, a good oil and gas company needs to be able to take long-term decision also in troubled time and not be impacted by short-term fluctuations. That is the characteristic of a good oil and gas company. I think the Brigham acquisition is a good example of that.
We were able to make a strategic move in a time with a lot of uncertainty, and we are able to do that due to that we have solid financials and a strong balance sheet and liquidity at hand. We will continue with running with a solid balance sheet. Tax rate MPR. Kåre?
Yeah. As the tax rate for MPR is close to 100%, I fully understand your question. If you look at the income composition of MPR this quarter, it's exemplified in our highlight presentation in the supplementary on the 16th page there. You will see that the majority or more than the total earnings is coming from the natural gas marketing and the natural gas processing and transportation. That part of the business has a marginal tax rate of 78%, average tax rate to expect around 75%. Then we have a loss in the part which is taxed around 30%. When you add this profit taxed on average, probably around 75%, and you only get deduction with 30% of the losses approximately, then we get this strange tax rate, which in this period is 99%.
We have said that probably it will be on the average around 70%, but it will very much vary with the composition of the income of the MPR segment.
Very clear. Thanks.
I think it's just to add on that. I mean, when Gassled is going out of the portfolio, I mean, there will be even more fluctuations in both the earnings and the tax rate on this asset, on this segment.
Thank you.
Next question, please.
We will now move to Teodor Nilsen with First Securities. Please go ahead.
Good afternoon. My first question is related to the average realized liquid prices. It seems like the discount to the average spot during quarter was slightly higher than normal. My question is that only related to weak NGL prices? My second question is related to Brigham deal. What thoughts do we have around your ownership in Brigham and Bakken assets going forward? Thank you.
All right. Could you please repeat the last question? I didn't get that.
It's related to Brigham and your thoughts around the owner share in Brigham going forward.
Okay. All right. On the realized liquid prices, you are right. It's very much to do with the NGL prices. On Brigham and ownership, not sure I really understood the question, we will issue a tender offer to the Brigham investors during October. There will be a 20 working day time period for them to accept it. If more than 90% of investors accept it, then it sort of automatically we issue, you know, that we have the right to buy the rest of the shares. If it is between 50% and 90%, then there are other mechanisms that comes into play. That is the process going forward.
When the transaction is closed, this will be integrated into the Statoil organization. There will be an internal Statoil ownership structure. This asset will be run very much by the existing Brigham management. We will see to that we are able to continue, you know, with the capturing the, you know, the way they run the business and the way they are operating, and then combining it with, you know, the strong thing that Statoil can contribute, you know, technology. There will be some system and processes going forward.
Can we have the next question, please?
We will now move to Dominique Patry with Cheuvreux. Please go ahead.
Yes, good afternoon. I have a question regarding your gas price optimization strategy. Just in order to better quantify the impact it could have on your production, could you maybe help us assess the impact it has on your nine-month production compared to what you were maybe originally expecting?
The gas optimization is as I told you that we reduce production and then sell it into later periods with higher prices. So far this year we have done that over the you know in the summer months where we have that opportunity. You ask about you know the typical impact related to that. It is you know in the range you know $10,000-$15,000 per day typically. That is what we're talking about in that respect. However, we are continuing with that into the fourth quarter as I said.
Okay. Thank you very much. With regard to the negotiation that you have with some of your customers with regard to a long-term contract, could you maybe elaborate a bit more about sometimes the flexibilities they are asking in terms of spot price indexation versus-
Mm-hmm.
Oil indexation?
Yeah. Okay. Thank you. On the long-term gas contracts, there are of course discussions with the customers. In general terms, our customers, you know, create noises every time when the spot price is below the long-term gas price. That is as expected. The gap between the spot price and the long-term gas price has narrowed over the last couple of years. The issue is less than it used to be. In general terms, in the long-term contracts, there are renegotiation mechanisms that occur on regular intervals. In 2012, around 50% of the volumes in the long-term contracts are sort of up for renegotiations. We have dialogues with our customers in that respect.
There is some spot indexation into those contracts already, and that is sort of working well. When discussing, you know, the long-term contracts, we typically discuss a lot of things at the same time, you know, indexation, flexibility, and security of delivery and all of that. It's quite a complex picture. We consider ourselves to be, you know, well-positioned in the European gas markets. We are close to the market. You know, our gas have to travel 1/5 of Algerian gas, 1/8 of Russian gas, and 1/10 of Qatari gas. We have all pre-invested in infrastructure and so on. We are ready to act in the market.
We are building up our own, you know, end user business in parallel to the long-term contracts and acting directly with, you know, the power producers and Stadtwerke and so on. We see a healthy development in the gas markets in Europe actually, and we see that especially into the power segments. The long-term contracts, we see them as, you know, an important part of our portfolio, and they're here to stay. But there are, so they will be part of our gas sales portfolio going forward.
Okay, thank you very much. If I may, one final question from my side. On the Marcellus ramp-up, if I recall correctly, you were a little bit constrained by pipeline permitting issues. Has it been cleared with regard to your former production guidance for 2012 out of the Marcellus?
Excuse me, do you have a chance to repeat that question, please?
Yes, sorry. As far as I understood, you had some restriction in terms of pipeline permitting for the ramp-up of the production-
Okay.
from the Marcellus. Just wanted to-
Right.
be updated on this front.
Thank you. Yes, that's a very insightful question, like all the others earlier today. Let me say that. On the Marcellus, we have a lot of wells waiting for transportation capacity that are, you know, prepared. There have been some delays in the permitting, especially to the gathering systems in that area. There has been bottlenecks in the organization that makes those approval. Those are now moving better, and they are, you know, the time from an application to an approval has been reduced quite a bit. That is progressing. You're right, we have a lot of wells ready for gathering systems.
This is moving forward and that is good.
Thank you very much.
Okay, we will move on to the next question, which will have to be the last in the interest of time. Next question, please.
We will now move to Matt Lofting with Nomura. Please go ahead.
Thanks. Good afternoon. I just had two quick questions, please. Firstly, could you just elaborate a little bit on the unchanged production guidance for 2012? Does that guidance now implicitly include or exclude any volumes for next year from the Brigham acquisition? And within that, how has the sort of delays around Skarv impacted your confidence on hitting those targets? Secondly, I think on the refining side, there was an impairment on Mongstad. Could you elaborate a little bit around sort of the comment in the presentation earlier that further review would be carried out of that business? What are the potential options there going forward? Thanks.
All right. Thank you. Yeah. In 2012, we expect to, you know, increase production by an average of 3% per year from 2010 to 2012. We deliberately say around 3 percentage point growth, and that is to give you a range, implicitly a range. You know, a positive element into that is the Brigham acquisition. It is sort of within the uncertainty that we have in our production in a year. Skarv is contributing negatively to the same picture in 2012. This is sort of within the accuracy that we want to give guidance on. On the refining on Mongstad.
First of all, Mongstad is a very important refinery to Statoil. It is very much interlinked with the upstream business. It creates, you know, significant value for the value chain. It is an important asset to Statoil. With that being said, running onshore industry in Norway is not the easiest thing. You can talk to, you know, aluminum producers or other producers. They are actually hard to get good profitability. When it comes to this asset, I mean, the reason we have written it down is due to the outlook that we see for the refining industry in Europe, and there's a lot of other companies that are struggling with their refinery business as well. We have put in place a significant improvement program that we are, you know, on our way to deliver.
We need to have a closer look at that and then continue to look for improvements to improve that business. You know, this is an asset with Norwegian cost structure onshore in Norway, and you know we want to be as competitive, we want to be competitive onshore as we are very competitive offshore, as well. There are, of course, things that we don't control, like the framework conditions for onshore industry. There have been made changes to the tax depreciation rules on these assets. That is nothing that we have control over, but you know, we will encourage the politicians to look into that, to see to that onshore industry can live profitably and well also in Norway.
We continue to work with improvements on Mongstad going forward, but it is a very important asset to us.
All right. As I see that we now only have one last question in queue, we will make time for that as well. Last question, please.
We will take a question from Uli Gerhard with Insight Investment. Thank you.
Hi there. This is Uli Gerhard. What I wanted to ask is in regards to your unconventional tight oil and tight gas purchases you've done in the past and development, where does your preference lie going forward? Do you rather want to grow more in tight oil, more in tight gas? Secondly, so far, you've pretty much financed those acquisitions through divestments. I think the rating agency quite clearly said, you know, if you continue on a growth path on acquisitions, they actually might go after your credit rating. Could you please comment on that?
Okay, thank you. On unconventional, you know, we are placed in three areas, which we find very attractive. We will grow all of those three areas. There are no sort of specific preference. I mean, the Bakken Play is, of course, a very interesting new addition, and it's tight oil. That is, of course, an area of importance going forward. Divestments have taken place and then, you know, portfolio management will be a natural part of what we do going forward, as well. Only on the balance sheet that we have and the liquidity we have at hand, there is, of course, significant, I mean, comfort in that going forward, as well.
Further acquisitions, you know, it's, I will not comment on whether or not we are looking into that, but in general, you know, we look at a lot of things. Credit rating agencies, we have a close cooperation with them as well. We have currently an AA- rating with S&P, and that's where we are. We are, of course, looking carefully after, you know, how this develops going forward. It's a comfortable rating as such. You know, in these times, it's good to have a rating like that.
Okay. Thank you.
Thank you. That will have to conclude our Q&A session and also our program for today. Today's presentation and Q&A session can be replayed from our website in a few days, and transcripts will also be available. Any further questions can be directed to the Investor Relations department. Thank you all very much for participating, and have a good day.