Ladies and gentlemen, thank you for standing by, and welcome to the Vermilion 2021 budget announcement call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Curtis Hicks, President of Vermilion. Thank you. Please go ahead.
Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining us. I'm Curtis Hicks, President of Vermilion Energy. With me today are Lars Glemser, Vice President and CFO, Dion Hatcher, Vice President, North America, Darcy Kerwin, Vice President, International and HSE, and Kyle Preston, Vice President of Investor Relations. We will be referring to a PowerPoint presentation to discuss the 2021 budget we announced yesterday afternoon. The presentation can be found on our website under Invest With Us and Events and Presentations. Slide two in the presentation refers to our advisory on forward-looking statements. These advisories describe the forward-looking information, non-GAAP measures, and oil and gas terms referred to today and outline the risk factors and assumptions relevant to this discussion. Let me start off with a summary of our 2021 budget.
Yesterday, we announced a CAD 300 million E&D capital budget for 2021. I want to emphasize that this is a very disciplined and balanced budget. Given the uncertain and volatile commodity and economic environment we are in, we spent a great deal of time reviewing our project inventory and selecting the highest return projects for inclusion. As we have stated in the past, our number one priority for 2021 is debt reduction and preserving financial liquidity. With this being the primary focus, we wanted to ensure we found the right balance between capital investment and production preservation in order to maximize free cash flow. This CAD 300 million capital program is expected to deliver annual production between 83,000 and 85,000 BOEs a day, which at midpoint is about 1%-2% below our December production rate.
One of the other objectives for 2021 is to transition to a more manageable, level-loaded capital program. In recent years, we had a very front-end-weighted capital program, and while this has contributed to higher annual average production, we found that it is not always the most efficient capital program, and it makes it more difficult to manage our production base year after year. So we wanted to reset our approach to the business, and we will start this in 2021. It does result in a lower annual average production level in 2021, but we believe this production base will be more manageable over the long term. For comparison, our planned Q1 2021 capital investment level represents approximately 31% of the full-year budget, compared to 65% in 2020.
As a result of this transition to a more level-loaded capital program, we also expect our annualized decline rate to moderate from about 25% in the second half of 2020 to approximately 22% for full year 2021. Despite the lower production level, this budget is expected to deliver free cash flow in excess of $200 million in 2021, based on the January 13th commodity strip. On an unhedged basis, we estimate a WTI break-even price of approximately $37 per barrel to cover the $300 million capital program. Approximately 55%, or $165 million, of our budget will be allocated to our North American assets, and approximately 45%, or $135 million, will be allocated to our international assets.
You will notice that we have reorganized the business and reporting structure into two core regions, North America and International. We did this following a review of our global asset base and to align with our new management structure that we announced in November. We have Dion, we have Dion Hatcher managing North American operations and Darcy Kerwin managing the international operations and HSE. As you can see on the chart on the right, our international CapEx has increased 35% year-over-year, while North American CapEx has decreased 37% year-over-year. This is largely a function of the stronger natural gas prices in North America and Europe that we witnessed during the second half of 2020 and into 2021.
During our initial project review in the fall of 2020, our condensate-rich natural gas wells in Alberta and conventional natural gas wells in the Netherlands provided the strongest return profiles across our asset base. As a result, our first half 2021 capital program will be largely focused on drilling in Alberta and the Netherlands. Our light oil projects in Southeast Saskatchewan, Wyoming, and France also screened well under strip pricing at the time of evaluation and will be the focus of our second half 2021 drilling and well optimization program. With the continuing strengthening of global oil prices, the economics of these oil projects has further improved, and we will consider adding more capital projects during the second half of the year if market conditions remain supportive.
This slide is a key slide as it helps illustrate the transition to a more level-loaded capital program and the impact it will have on our decline rate and production levels. The blue bars represent quarterly capital spend, and the red line represents quarterly production in 2020. The gray shaded boxes are the annual production guidance ranges for 2020 and 2021. As you can see, last year, we spent the majority of our capital in Q1, CAD 234 million out of a CAD 360 million dollar budget. This contributed to a strong production level in Q1 and Q2 of 2020, but given the minimal capital investment during the second half of 2020, the production base was essentially on a PDP decline curve.
This is an extremely difficult program to execute year after year and does not deliver the best capital efficiencies. As I mentioned, we wanted to reset our approach to the business, and we are doing that in 2021. We plan to invest just under CAD 100 million in Q1, slightly less than that in each of Q2 and Q3. Our current budget has minimal capital allocated in Q4, essentially just maintenance capital, and this was by design as we wanted to generate maximum free cash flow in 2021 to facilitate debt reduction. With a truly level-loaded program, any capital invested in Q4 would have minimal contribution to annual production levels and current year FFO, and is really designed to set us up for the following year. We have many other projects to invest in, and we will consider adding more capital later in the year if market conditions are supportive.
The blue dashed bar on the chart shows what an incremental $50 million of capital would look like and would essentially represent a fully level-loaded program. I want to be clear, we have not committed any incremental capital to Q4, but it is something we will consider as the year progresses. This slide shows our unhedged 2021 FFO and free cash flow sensitivity under various oil price assumptions, holding all other commodities at the January 13th strip. At the current commodity strip, we expect to generate in excess of $200 million of free cash flow. As you can see, we have significant leverage to oil prices. We estimate that for every $1 per barrel increase in the oil price, our FFO and free cash flow increases by approximately $17 million.
Given our global commodity exposure, we also have significant leverage to North American and European natural gas. For every, you know, CAD 1 per MMBtu increase in European natural gas prices, we estimate our FFO and free cash flow increases by approximately CAD 28 million. What, what are we planning to do with this free cash flow? Well, our plan is to allocate all of our free cash flow after funding ARO to debt reduction, as we remain committed to reducing our net debt to an FFO leverage ratio of less than 1.5 x over time. As we begin to make progress towards our debt reduction target, we will continue to review our long-term shareholder return policy to determine the appropriate time to reinstate a dividend and/or share buyback program. Returning capital to shareholders remains a fundamental part of our long-term capital markets model.
We do not necessarily need to achieve the targeted leverage ratio to reinstate a dividend or share buyback program, but we will want to see a more stable commodity price environment and make meaningful progress on debt reduction before doing so. This slide provides a summary of our debt position and maturity schedule. We exited 2020 with net debt of approximately $2.1 billion, comprised of $1.6 billion drawn on our $2.1 billion credit facility and $300 million of senior notes. We have no near-term maturities, as our credit facility is termed out until May 2024, and our U.S.-denominated bonds mature in March 2025. Under the January 13th commodity strip, we would expect to reduce our net debt by in excess of $200 million and end 2021 with approximately $600 million of liquidity.
Now, I will spend a bit of time providing you an update on our corporate strategy. Following the leadership changes in mid-2020 and the reestablishment of an executive committee, the committee set out to review our global asset base and identify areas to improve or realign the portfolio to enhance the overall profitability of the business. While this review is still ongoing, we have made several changes to date, including the reorganization of the business and reporting lines into two core regions, as I mentioned earlier, along with a 10% reduction to our workforce. In addition, the 2021 budget and capital program we outlined this morning will serve to reset the corporate production base, improve overall sustainability going forward.
As part of the review of our global asset base, we have decided to explore certain farmout opportunities to reduce exposure to higher-risk assets in Europe as part of managing the corporate risk and to refocus the organization. To this end, we recently exited our Ukraine joint venture and will no longer be pursuing opportunities in this country. We have no further details on the status of farmouts to provide at this time, as this is an ongoing process, but we will provide updates on material developments if and when they occur. We remain bullish on European natural gas and are optimistic about our opportunities in the region. In the Netherlands, we have two natural gas wells in the 2021 budget and continue to advance future permits.
In Croatia, we continue to build out the required infrastructure to bring on production the two Croatian gas wells that tested over 30 million a day combined in late 2019, and to prepare for future drilling. These wells are expected to come on production in 2022. We continue to review our five-year strategic plan to maximize profitability and free cash flow generation over the long term. This process will also include an updated sustainability strategy, which we are targeting to complete by mid-year. ESG remains a key focus for Vermilion, and we continue to receive positive ratings and recognition from various third-party ESG rating agencies, as listed on this slide. Vermilion remains a top ESG performer amongst our peer group, and we will continue to work to further improve our performance over time.
We spoke a lot about our leverage to commodity prices and our ability to generate strong free cash flow. We believe this is largely due to our global diversification and exposure to global commodity prices. As a reminder, approximately 70% of our production base is comprised of high-value light oil, condensate, and European natural gas.... As everyone is aware, oil prices have strengthened recently, and the outlook appears constructive for 2021 and beyond. Our France and Australia production is price-referenced to Brent, which continues to trade at an approximate $3 a barrel premium to WTI, while our Wandoo crude in Australia continues to sell for a $10 per barrel premium to Brent. European natural gas prices have also rallied significantly in recent months due to strong fundamentals.
Cold weather in Europe and Asia have created fierce competition for LNG, along with high carbon pricing in Europe, which are the primary drivers of the recent price rally. The current forward price for European gas is close to CAD 8 per MMBtu in 2021, and approximately CAD 7.50 per MMBtu in 2022. In summary, our 2021 budget is a disciplined budget that will maximize returns and free cash flow to facilitate debt reduction and move us closer towards our leverage target of less than 1.5 x. The 2021 budget is a much more balanced and level-loaded capital program compared to prior years, and we believe this will establish a more manageable and sustainable production base over the long term. Furthermore, our reorganized business structure will increase operational focus on lower-risk opportunities and increase overall organizational efficiency.
We believe this focus on debt reduction will lead to long-term value creation for shareholders and pave the way to an eventual return to a dividend-paying capital markets model. We believe Vermilion provides a compelling investment opportunity at this time, as our stock continues to trade at a significant discount to historical valuation metrics and a significant discount to the blowdown NAV estimate, as based on independent research. Vermilion continues to be an industry leader in ESG, and we believe this will provide us with a competitive advantage as we execute our business strategy through the global energy transition. That concludes my prepared remarks, and with that, I would like to open it up for questions.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from Greg Pardy with RBC Capital Markets. Your line is open. Your first question comes from Greg Pardy with RBC Capital Markets. Your line is open. Greg Pardy, your line is open. Your next question comes from Patrick O'Rourke with ATB Capital Markets. Your line is open.
Hey, guys. Good morning. I just had a couple of questions to ask here, and I'm curious in terms of the CEE assets or the higher-risk European assets, you talk about a potential for a farm-out. What would your objectives with that farm-out be? Are you looking for, say, a promoted capital position, or would you be trying to achieve sort of a cash payment to help, whittle down at debt or some sort of combination of both?
Well, Patrick, you know, it's a good question. I you know I think we're open to to anything and everything. I think the reality is knowing the market and the potential players in that market, it would likely be a promoted capital investment situation. And you know it remains to be seen. I I think the industry is is cash-strapped. We have we have some good opportunities that carry a little higher risk than you know we see sort of absorbing in the portfolio. So you know we think potentially finding you know farm-in partners is a is a better way to go for some of the opportunities that we've identified.
Okay, and then, you know, with this budget, there's a bit of a reset on the production base, but also, you know, kind of a refocus on those European assets that have really, you know, been one of your core strengths over the years. You do have, you know, a fairly deep North American inventory. Maybe this goes to sort of the last question a little bit, but we've seen, and, you know, recent asset sales in the Powder River Basin, for example, that look, you know, to be a fairly attractive metrics or that would read through, well to Vermilion.
I know that you've, you know, you've shied away from potentially talking about dispositions, but is something like that, now that you've moved to this new business plan, something that could come back onto the radar that, that helps accelerate that deleveraging of the balance sheet and get back to a return on capital model?
Yeah. Yeah, Patrick, good question. I mean, we saw that, deal that you referenced in the Powder River Basin. I mean, to be honest, if somebody approached us with, you know, something in that order, we would give it serious consideration. Would we do it? I don't know. I mean, we haven't had to make that decision, so it's too easy to speculate. But, right now, we're not looking to put any of our, assets, on the market, for disposition. I mean, we like the portfolio that we've got. We like the diversification that it provides us. We've kind of gone through some of the benefits of that, today, and I know that, you know, you've heard us, speak to them over time.
So we don't see a lot of value creation, you know, in terms of disposing of any assets. Having said that, you know, like we've always said, anything's for sale at the right price, but, you know, we just haven't seen anything like that, you know, come across our desk at this stage.
Okay, perfect. Thank you very much.
Your next question comes from Greg Pardy with RBC Capital Markets. Your line is open.
Greg Pardy, your line is open. There are no further questions at this time. I will now turn the call back over to the presenters.
Well, thank you all again for participating in our 2021 budget conference call. With that, we'll say goodbye and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.