Hello, and welcome to OMV Group's conference call. If you would like to ask a question after the presentation, you may register your request by pressing star one on your telephone at any time during the actual presentation or during the question and answer session itself. You should have received a presentation by email. However, if you do not have a copy of the presentation, the slides and the speech can be downloaded at www.omv.com. Simultaneously to this conference call, a live audio webcast is available on OMV's website. At this time, I would like to refer you to the disclaimer, which includes our position on forward-looking statements. These forward-looking statements are based on beliefs, estimates, and assumptions currently held by and information currently available to OMV.
By their nature, forward-looking statements are subject to risks and uncertainties that will or may occur in the future and are outside the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward-looking statements. OMV disclaims any obligation and does not intend to update these forward-looking statements to reflect actual results, revised assumptions and expectations on future developments and events. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV. I would now like to hand the conference over to Mr. Florian Greger, Head of Investor Relations. Please go ahead, Mr. Greger.
Yes, thank you very much. Good morning, ladies and gentlemen. Welcome to OMV's earnings call for the third quarter, 2021. With me on the call are Alfred Stern, our new CEO, and Reinhard Florey, our CFO. Alfred Stern will walk you through the highlights of the quarter and discuss OMV's financial performance. Following his presentation, both gentlemen are available to answer your questions. With that, I'll hand it over to Alfred.
Thank you, Florian. Ladies and gentlemen, good morning, and thank you for joining us. This is my first earnings call as CEO of OMV, and I have the pleasure of presenting some fantastic financial results. Oil prices continued to rise. Natural gas prices surged to a record high. Refining margins saw a market recovery. European olefin and polyolefin margins started to normalize but remained at healthy levels. Underpinned by the strong macro environment and our expansion into the chemicals business, we were able to achieve a new record in our quarterly earnings and cash flows. We now have a very strong foundation to shape the significant transformation that our industry is experiencing. We see change as an opportunity. We are excellently positioned not only through our financial strength, but also through our innovation capabilities and technological expertise.
We want to continue to grow value and provide better solutions for society. We are working intensively on a strategy update with a particular focus on circular economy and sustainability. Ladies and gentlemen, let me say this again, we are committed to the Paris Climate Agreement. We are planning to announce our new strategy in the first quarter of 2022. In the meantime, I look forward to talking to many of you over the coming weeks and months. Let's come back to the third quarter of 2021. Let me start with a brief review of the market environment. The third quarter of 2021 was the fifth consecutive quarter of sequential Brent price improvement. At $74 per barrel, Brent was up 7% quarter on quarter and 71% year on year.
Prices breached $80 per barrel, the highest level since the fourth quarter of 2018. This upward momentum was driven by demand recovery, a strong OPEC+ quota compliance, and supply outages. In September, Hurricane Ida caused oil supply losses of approximately 30 million barrels, resulting in a sharp drawdown of global oil stocks. European gas prices continued their upward climb in the third quarter, driven by low European storage levels in a physically tight market. Storages were not able to sufficiently fill due to limited imports over the summer, a heavy maintenance season in Norway and the U.K., and limited LNG arrivals in Europe due to the strong demand in Asia. At 47 EUR per megawatt hour, Central European gas prices were up 90% quarter-on-quarter and more than four times higher year-on-year.
At $4.4 per barrel, the European refining indicator margin doubled compared with the previous quarter and was five times higher than in the same quarter of the previous year. The increase was driven by higher naphtha, gasoline, and diesel cracks. Outages of refineries on the U.S. Gulf Coast, a demand uptick in transportation, diesel, and jet fuel. Continued high petrochemical demand and lower naphtha exports from the U.S. contributed to the increases. European demand for olefins and polyolefins was strong, especially in the packaging, hygiene, and medical sectors. The ongoing global logistics limitations and reduced supply from the United States due to the recent hurricane season put constraints on additional imports into Europe. Ethylene and propylene indicator margins were slightly above the previous quarter and significantly above the prior year quarter, despite the increase in naphtha cost.
Demand for propylene was very strong, with propylene prices reaching and even exceeding ethylene prices in September. European prices for polypropylene were quite stable, while polyethylene prices declined by roughly 10% from the historical peak recorded in the second quarter of this year, driven by seasonally lower demand and capacity returning to production. Due to rising feedstock costs, the polyolefin margins decreased at a faster rate, though remaining well above historic averages in the third quarter of 2020. At EUR 1.8 billion, our Clean CCS operating result reached a new all-time high for the second consecutive quarter. The results further increased by almost EUR 0.5 billion compared with the previous quarter, and was roughly six times higher than in the third quarter of 2020.
For the first time ever in a quarter, we were able to deliver a cash flow from operating activities, excluding net working capital effects of EU 2 billion. Our Clean CCS earnings per share surged to EUR 2.39, up tenfold year-on-year. Looking at operations, our E&P production was 6% higher than in the third quarter of last year, primarily due to the return to full operations in Libya, a lower OPEC quota in the United Arab Emirates, and higher gas production in Norway. We have also seen an improvement in operations in R&M and in C&M. The utilization rate of our refineries in Europe was 91%, and the steam cracker utilization rate was 88%. Borealis once again delivered an excellent performance, driven by a very strong margin environment.
Polyolefin sales volumes were stable in Europe, while those of the joint ventures recorded a slight decrease due to limited shipping container availability. We also made further progress with our divestment program. Yesterday, we announced the sale of our 25% share in the Wisting oil field in Norway to Lundin. The divestment is part of our E&P strategy to increase the share of natural gas over oil to reduce the carbon intensity of our product portfolio. We are focusing increasingly on low carbon projects, shifting away from the substantial capital expenditures required for developing this project over the next years. Let's now turn to our financial performance in the third quarter of 2021. Our Clean CCS operating result rose sharply by almost EUR 1.5 billion compared with the third quarter of 2020, which was heavily impacted by the pandemic.
All three segments contributed to the positive development. We saw a sharp increase in the exploration and production results, an improvement in refining and marketing, and a continued strong contribution from the chemicals and materials business. The Clean CCS tax rate increased to 41%, which was three percentage points higher than in the same quarter last year. This was due to a significantly larger contribution from high tax regime countries in exploration and production. Clean CCS net income attributable to shareholders surged almost tenfold to EUR 781 million. Clean CCS earnings per share amounted to EUR 2.39. Let me now discuss the performance of our business segments. The Clean operating result of exploration and production rose considerably to EUR 816 million from -EUR 24 million in the third quarter of 2020.
The driving factors were higher realized oil and gas prices, higher production, and improved sales volumes due to a lifting catch-up effect in Libya. The increase in production was attributable to the return to full operations in Libya, a lower OPEC quota in the United Arab Emirates, and higher gas production in Norway. Compared with the third quarter of 2020, OMV's realized oil price increased by 86%. Our overall realized gas price more than doubled compared with the prior-year quarter. It increased less than the European gas prices, as only 20% of our gas production is directly linked to European spot pricing. Half of these volumes, about 10% of our total gas production, benefited from the surging prices, while the other 10% was hedged at EUR 20 per megawatt hour.
The remaining 80% of our gas portfolio is linked to domestic markets, where we have also seen increases, albeit more modest ones. The tougher benchmark based on which half of our production volumes in Russia are priced trended upwards as well. Our production rose by 26 to 470,000 BOE per day due to a higher contribution from Libya, the UAE, Norway, and Tunisia. This was partially offset by a natural decline in Romania, maintenance activities in various countries, as well as divestments in Malaysia and Kazakhstan. In Russia, booster compressors were installed during the annual maintenance activities, and we expect production to increase again to above 100,000 BOE per day. Total sales volumes increased by 43,000 BOE per day due to higher production volumes and a significant catch-up effect of liftings in Libya.
The Clean CCS operating result in refining and marketing grew by 53% year-on-year to EUR 361 million due to stronger refining margins, higher sales volumes, and a positive contribution from Upstream Refining and Trading. The increase was partially offset by the divestment of Gas Connect Austria in May. Margin hedges contributed positively to the result, however, to a much lesser extent than in the prior-year quarter. We have seen a robust demand recovery. Total sales volumes were 14% above the third quarter of 2020, with a significant uptick in jet fuel sales. Both the commercial and the retail businesses delivered an improved contribution driven by higher unit margins and sales. Retail volumes were slightly above the pre-pandemic level.
Jet fuel volumes recorded a strong increase compared with the third quarter of last year, but were on average still 40% below pre-pandemic volumes. The contribution from Upstream, Refining and Trading improved significantly from EUR -49 million to EUR 6 million due to increased refining margins and higher utilization rates. Upstream Global Trading, which started its activities at the end of 2020, contributed to this result. The results from the gas business declined from the outstanding high level of the prior year quarter to EUR 41 million. The result was impacted by the divestment of Gas Connect Austria, higher storage expenses, and a lower contribution from the power business in Romania. However, we benefited from the high market volatility through supply and sales contracts.
Gas sales volumes rose by 20% on account of higher sales in Germany and the Netherlands, and were slightly offset by lower sales in Austria, Hungary, and Romania. The clean operating result of chemicals and materials increased from EUR 99 million to EUR 623 million. This outstanding development was driven by strong margins, positive inventory valuation effects, and the full consolidation of Borealis. The contribution of OMV-based chemicals more than doubled due to higher ethylene and propylene indicator margins. Butadiene and benzene margins were also significantly higher than prior year quarter. Borealis again delivered an excellent performance. Excluding the joint ventures, earnings grew from EUR 59 million to EUR 400 million. The Borealis-based chemicals business improved due to higher margins and steam cracker utilization, as well as positive inventory valuation effects. In the third quarter of 2020, contrary to 2021, it included positive light feedstock advantage.
Polyolefin earnings rose sharply, driven by substantially higher margins and positive inventory valuation effects. Polyolefin sales volumes in Europe were stable overall, but the share of specialty products grew primarily driven by the energy segment, where we can see an increase in investments in renewable energy and the related power grid. The contribution from the fertilizer business was higher as it benefited from positive inventory valuation effects and the reclassification as an asset held for sale. This was partially offset by reduced ammonia production and higher variable costs following record high natural gas prices. The contribution from Borealis joint ventures, Borouge, and Baystar came in at EUR 137 million and benefited from an increase in polyolefin prices in Asia and the United States. Polyolefin sales volumes of the joint ventures declined slightly by 3% due to lower volumes at Borouge.
The decrease was caused by logistics constraints due to limited shipping container availability in Asia. Turning to cash flows, our third quarter operating cash flow, excluding net working capitals, capital effects, reached a historical record of EUR 2 billion and thus almost tripled compared with the previous year's quarter. Net working capital effects generated a substantial cash outflow of about EUR 400 million in the quarter, mainly attributable to substantially higher oil and gas prices. Despite the considerably negative effects, we recorded an excellent cash flow from operating activities for the quarter of above EUR 1.6 billion. Looking at the nine-month picture, cash flow from operating activities, excluding net working capital effects, amounted to EUR 5.4 billion. A huge increase of almost EUR 3.5 billion compared with the first nine months of last year.
This is a remarkable achievement as we generated, for the first time, more than EUR 5 billion cash flow from operating activities, excluding net working capital effects, and this after only three quarters. Despite the big swing in net working capital effects, cash flow from operating activities increased by 72% to EUR 4.2 billion. While in the first nine months of 2020, we recorded an inflow of EUR 502 million, in the same period of this year, we had an outflow of EUR 1.2 billion. The organic cash outflow from investing activities amounted to around EUR 1.7 billion, which is 31% higher than in the same period last year. This is primarily attributable to the new segment, chemicals and materials.
The organic free cash flow before dividends for the first nine months came in at around EUR 2.5 billion, and thus contributed significantly to the deleveraging of the company. Thanks to the outstanding cash generation and the progress with the disposal program, net debt excluding leases decreased by EUR 934 million to EUR 6.2 billion compared to the second quarter of this year. Consequently, our gearing ratio, excluding leases, defined as net debt excluding leases to equity, decreased by another 6 percentage points to 28%. Ladies and gentlemen, as promised, we delivered deleveraged fast, and we have already exceeded our end of year target of a gearing ratio, excluding leases of around 30%.
If we consider the divestment projects already signed, which will lead to a further net debt reduction of around EUR 1.1 billion, our gearing ratio, excluding leases, would be at 23%, down by another five percentage points. At the end of September 2021, OMV had a cash position of EUR 4.1 billion and EUR 4.3 billion in undrawn committed credit facilities. Given our strong balance sheet, in October, we decided to repay one tranche of hybrid bonds in the amount of EUR 750 million with a coupon of 5.25%. In addition, we repaid a EUR 500 million euro bond with a coupon of 4.25%, as it had reached maturity. While this significantly improves our financing cost, it has an impact on the gearing ratio, which is expected to increase by around five percentage points.
Despite this effect, we will be below the envisaged gearing ratio of maximum 30% by the end of the year. Let me now give you an update on our divestment program. Since the announcement of the program last year in March, we have signed agreements resulting in a deleveraging effect of around EUR 1.8 billion. After the successful closing of three projects this year, we realized around EUR 700 million. In the fourth quarter, we expect additional closings with a deleveraging effect of around EUR 800 million. This includes the sale agreement for the retail stations in Germany and the aforementioned divestment of our 25% share in the Wisting Oil Field. The sales price for our stake in Wisting amounts to $320 million.
In addition, there's a contingent payment of up to $20 million depending on the final project CapEx. Closing of the transaction is expected by end of this year. The closing of the divestment of our Slovenian retail and commercial business is expected next year. The sales process for Borealis Nitrogen business is progressing well. We consider the high gas price environment only a temporary challenge, and we still expect to sign the transaction by the end of the year. Let me conclude with an update on our outlook for this year. Based on the developments we have seen so far, we now expect an average Brent price of around $70 per barrel for 2021, and an average realized gas price of more than EUR 15 per MWh.
We have no oil hedges in place, but we have hedged around 10% of our gas production at around EUR 27 per MWh in the fourth quarter of this year, and at EUR 29 per MWh in the first quarter of 2022. We have slightly raised the full year production guidance to more than 480,000 BOE per day in 2021. In the fourth quarter, we expect production to be above that of the third quarter. Volumes in Russia are expected to exceed 100,000 BOE per day following the installation of booster compressors. On the other hand, sales volumes will not benefit any more from the liftings catch-up effect in Libya.
In refining and marketing, we have increased our estimate for the refining indicator margin by more than $1 to around $3.5 per barrel, given the improvement we have seen in recent months. The utilization rate of our European refineries is now anticipated to be above the prior year level. In chemicals and materials, we now expect the European ethylene margin to be above, and the propylene margin to be substantially above the respective prior year level. The utilization rate of our steam crackers is forecast to stay above 90%. In polyolefins, we expect a balanced market in the fourth quarter, supported by good demand and ongoing constraints on deep sea container availability, limiting imports into Europe. However, given the rising energy prices and an increase in European production, polyolefin margins are expected to decline but stay substantially above the level of 2020.
We are reconfirming the outlook for the polyolefin volumes of Borealis, excluding JVs, which are expected to be higher than in 2020. The clean tax rate for the full year is expected to be in the high 30s%. Thank you for your attention, and now Reinhard and I will be happy to take your questions.
Thank you, Alfred. Let's now come to your questions. I'd ask you to limit your questions to only two at a time, that we can take as many questions as possible. You can obviously always re-queue for follow-up questions. The first question come from Mehdi Ennabati, Bank of America Merrill Lynch.
Hi, good afternoon, all, and thanks for taking my question. I will ask two questions, please. The first one, on the gas hedging that you just explained. I would like please a little bit more of color here, because if I look at the difference between your IFRS net income and your clean net income in the third quarter, there is roughly EUR 600 million difference. Of course, you know, the IFRS net income takes into account hedging derivatives. Should I then consider that your hedging losses, yet to be realized, are currently around EUR 600 million, net of tax, essentially because of the gas hedging?
Is there anything else here which could explain the difference between the clean net income and the IFRS net income? Just for me to try to, let's say, have an idea about the potential hedging loss in the next two quarters. Second question is about your chemicals margin. So your polyethylene and polypropylene indicator was quite strong in the third quarter of 2021. Can you tell us a little bit more about the current level, please? Is it coming down smoothly or is it crashing? I am not asking for the October average level, huh? I have a pretty good view on that.
More about the current level, you know, if you can tell us if it keeps coming down, if it kept coming down during the month of October or if it is stabilizing. Thank you very much.
Yeah, thank you, Mehdi, for your questions. This is Alfred. I will maybe start with the chemicals margins and then ask Reinhard to give you more insight on the gas hedging piece. For the chemical margins, I think we have to differentiate a little bit between the if you look at the total integrated polyolefin margin between the ethylene propylene piece and the polyethylene polypropylene piece. On the ethylene and propylene side, what we actually see is that the margin situation is on a very high level pretty stable. In the third quarter, we have actually seen a slight increase in this, a little bit stronger in the propylene indicator margins.
For the full year, as a result, we are now also saying that here we will be in ethylene above the last year and in propylene significantly above. This is quite healthy. On the other side, if you look at the polyethylene situation and the polypropylene situation, a little bit stronger a decline we have seen in polyethylene than in polypropylene as a result of some demand reduction and some production coming back. However, still limited capacity of deep sea container shipments coming to Europe and is somehow constraining then imports into Europe.
that we see that we are coming down to a more normalized level, but still significantly above last year's performance where we are here.
Okay. Yeah. Just to follow up on deep sea container shipment, when do you think that this issue, you know, will be solved? Do you think it's a matter of weeks, months, or do you think it could remain, stay as it is for quite a long time?
Yeah. I will answer it this way. In the beginning of the year, we thought this was a temporary issue that was somehow an issue coming out of the corona pandemic. But this hasn't happened. It's still an issue. In addition, we have actually seen that now in Asia, we see for the exports with Borouge, we also see some limitations on those containers. It's a little bit more systematic issue that I believe will take a bit longer than we may wish for or that we have anticipated.
Sorry, Alfred, because this is very important. Regarding Borouge, this is negatively impacting you because you need to export. No?
It has slightly constrained the sales volumes in Borouge. At this point, it's limited. We of course have mitigating actions in place to minimize the effect.
Thank you very much, Alfred.
Yep. I will hand to Reinhard for the hedging.
Yeah. Good afternoon, Medy. Happy to give you a little bit more color on the effects from hedging. I would like to take it from the overall special items position that we have in our P&L. We have a total special items position of EUR 710 million. That includes EUR 38 million of CCS effect. That makes EUR 750 million negative then from special items as such. Out of those, around 440 are the effect of the gas hedges that we have in place for unrealized mark-to-market evaluation. Please keep in mind, it's always a mark-to-market evaluation that we have to take into account in our special items.
This comprises both the Q4 as well as the Q1 of next year, hedges, and this is about the level of this commodity hedge position. The other areas are gas storage hedges as well as energy hedges that we have in place that need to be evaluated at exactly the level of current markets, but that is only more or less the liability leg that we are evaluating here. You can count on that coming back to a neutral position in Q4, respectively Q1. Therefore, this does not resemble any kind of hedge loss. This is just a hedge evaluation. I hope that gave you a little bit of color on this special item.
Only a little bit more than half of that is what we could see from today's point of view as a hedge loss regarding the gas hedges we have in place.
Okay. Thank you. Thank you, Reinhard. You said 440. Can you just remind me this is net of tax?
Well, this is on a operating.
Okay.
Level.
All right.
If you take the net of tax, of course you have to deduct that kind of tax if you come then of a net.
Yeah.
Net result level. Yeah?
That's correct. That's super clear. Thank you very much, both of you.
Later.
We now come to Joshua Stone, Barclays.
Yes. Thanks, Florian, and hi, Alfred. Yeah, two questions. Firstly, looking at ADNOC Refining, you spent an awful lot of money on this deal a couple of years ago now. It's been mostly loss-making since you bought those assets, albeit a very small contribution this quarter. Just thinking, as you get to the end of the year and you have to review your books.
Is there a risk of a write-down here, and could that impact your gearing ratio? And then the second question, a remarkable level of free cash flow in this business that you're generating. A decent amount appears to be sustainable. You've got disposals coming, potentially more disposals that you sort of put up in headlines in the press. So what do you expect to do with all this free cash flow? And more generally, how do you think about the level of shareholder returns in your business? Do you think this is an appropriate level, or could you look to increase that? Thank you.
Josh, regarding the question of any kind of revaluation of ADNOC Refining. We have traditionally in Q4 our business planning around this asset with the main shareholder, ADNOC, and this will be showing then the way forward. Yes, you are absolutely right that it is disappointing year to date how the performance of ADNOC Refining has developed. However, we are seeing a little bit of a light at the end of the tunnel. We have seen refining margins also in the Middle East going up quite significantly. That will also be something where ADNOC Refining will benefit from. Therefore, I cannot today give you any anticipation of a write-down risk or anything like that, because at the moment, we still stick to the business plans as we have them.
If there are any changes, that will only be able to be assessed in quarter four.
Yeah. I will try and give you some insight on the cash flow utilization, Josh. Here we had a pretty clear priority and a commitment that we wanted to make sure that we deliver our divestment program, and that we have a very high CapEx discipline in order to get back to the 30% gearing level, excluding leases, by the end of the year. As you rightly point out, we achieved this now in the third quarter, that we are at 28% gearing level, excluding leases, and that was helped, of course, through a very healthy cash flow out of operations.
As we go forward, we want to make sure that we then manage our gearing level, continue to manage our gearing level well, and we also have a commitment to our progressive dividend policy where we are saying that at least we want to keep our dividend at the same level as prior year or increase it above that level. That commitment was quite visible last year also, we were under quite difficult economic framework. We were one of the few companies that kept their dividend level at the prior year level. Then this year we increased it. This is a commitment that we will also take to the future.
Okay. Thank you.
Thanks, Josh. We now come to Michele Della Vigna, Goldman Sachs.
Thank you very much, and congratulations on the really strong results. Alfred, I wanted to ask you a long-term question, if I may. The strategy, I believe, is very clear. It's an acceleration of the energy transition with the shift to materials and the circular economy. What I was wondering about is, what do you think is the right pace? Because although you probably want to reduce the exposure to oil and gas in the long term, it may actually be a very free cash flow generative and profitable business for quite a few years to come. I'm just wondering, what do you think is the right pace of starting to wind down that business but maximize its free cash flow potential?
On the other side, in terms of the businesses where you probably want to increase exposure like petrochemicals, I'm sure there's still a lot of opportunity for consolidation, but probably that would be better done in a down cycle, which still seems pretty far away. I just wanted to get your sense of what do you think is the right pace of transformation for the company here. Thank you.
Thank you, Michele. That's great. It's of course the billion-dollar question, isn't it? I completely agree with you. I think we are all aware that energy transition to lower CO2 emissions is required to combat climate change. Of course that needs contribution from all of us to make that happen. The big question, as you point out, is how fast will this go? We can learn this year, actually, if there's a significant economic rebound and energy need, oil and gas prices can spike very significantly.
I believe it will require a careful evaluation that provides both the agility but also the optionality to adjust some of the speed going forward. We are currently going through quite a strategy exercise here in OMV and trying to also take these things into consideration. Our plan currently is that in the first quarter of next year, we would like to come and explain how we want to do that on our chemical market day. Your second question, the chemical consolidation, as you point out, I think the last couple of months are very strong months in the chemical industry.
With this, of course also, the expectations of valuations are pretty high. We are also observing that trend and seeing how this is working. From this perspective, we are of course quite happy that we made our 39% Borealis acquisition or additional share acquisition when we did, because we are benefiting at this moment, as you can see in our results quite considerably. This will be a consideration from project to project, what the right moment and values are that can be achieved.
Thank you.
We now move to Sasikanth Chilukuru, Morgan Stanley.
Hi. Thanks for taking my questions. Two please. The first was related to the E&P business and also to the announcement of the sale of the Wisting stake. Interesting to see your preference of gas over oil and your comment on saving from material development CapEx in oil projects. Given that the expectations for this, the break-even price for this project was around less than $35 or around $30 per barrel. I was just wondering, does this mean that you're not likely to embark on any major oil development in the future? What does this mean for existing oil projects? Are we likely to see more disposals in this space given the high oil price environment right now?
The second question was related to the impact of higher natural gas and hydrogen prices on realized refining margins. Of course, we're seeing a material improvement in the reference margins. Just wanted to say, think how we should be thinking about the realized refining margins in the future. Thanks.
Okay. Sasi, the first question on Wisting and oil. We continuously look at our portfolio, not just the exploration and production, but our entire portfolio and see how we can optimize that to make our business go forward and be aligned with our strategic moves. Maybe if you look a little bit at the divestments that we have done over the last couple of months, we had Kazakhstan, we had some oil assets in Malaysia, and we are now doing Wisting, and that is helping us to improve our portfolio. We also have clearly said in the past that we want to enrich our portfolio with more gas.
Today we are already over 60% in gas, and we want to continue and push this forward. There are multiple reasons for that, but one of course also that gas is a lower CO2 intensity energy carrier than oil. I think this is maybe the context that you could see this in. On the higher natural gas and hydrogen things, I will ask Reinhard to make some comments on this.
Yeah. Sasi, I think your observation is correct to see that of course, if we look at our customers, in general, there is some pressure regarding the overall energy prices. However, in our case, we see that the indicator margins are already giving us a very good indication where the base profitability of our refining business is. If you are talking realized refining margins, they may be compressing a little bit, but still come as a premium on top. That is why you can also see that we are differentiating positively in our results in the refining business. Yes, you might see premiums at a slightly smaller level in the future, but the realized refining margins are mainly dominated by what is the indicator margin.
The indicator margin is currently going up and showing a quite strong development in our case with good margins currently clearly above $5 in Austria and Germany, even above $8 in Romania. We are also seeing good margin development in the Middle East.
Thank you.
Next is Peter Low, Redburn.
Hi. Thanks for taking my questions. The first was, I was wondering if there was any comment you could make on recent press reports about your stake in Petrom. I know you probably can't talk on specifics, but how core is Petrom seen to the business under the new strategy? The second was just on CapEx. You reiterated the EUR 2.7 billion for this year. Can you give any guidance or steer on where you expect that to go next year? Thanks.
Thank you for your question, Peter. Maybe let me comment on Petrom. To be honest, we have never made any announcement or any kind of statement that we want to around Petrom. There has been over the last couple of years continuous rumors about this despite OMV never making any kind of statements. In such a sense, there's really nothing I can say about those rumors and don't want to comment on them either. Secondly, on the CapEx, for this year, as you say, we said EUR 2.7 billion, EUR 1.1 billion for exploration and production.
700 for refining and marketing, and 900 for chemicals and materials. We have said that our aim is to be between EUR 2.5 billion and EUR 3 billion. Also, that's our CapEx range that we are aiming for.
Thank you.
Thanks, Peter. We now come to Michael Alsford, Citi.
Hi there. Good morning. Thanks for taking my questions. I've got one on the Upstream. If you could talk a little bit more, clearly the focus on gas has been shown by the Wisting divestment. Could you talk a little bit more about Neptune? There's been a change in partner there. Where are we in that project? A little bit about how core is potentially the Achimov deal in your future plans for the Upstream. And then also, you've obviously got the potential to grow the Malaysian business. Maybe if you could perhaps elaborate a little bit more on your gas strategy in the Upstream. What is the priority? Is it development? Is it buying production? Could you maybe elaborate more broadly on that? Thank you.
Yeah, thank you for the question, Michael. Let me talk a little bit. Let me start maybe with Neptune. As this has been a project that has been on the radar screen for quite some time. Of course, most recently, ExxonMobil announced that they wanted to exit from the Neptune gas field. Now, a few days ago, finally, Romgaz made an announcement that they have agreed with ExxonMobil on taking over their share of the gas field, subject to their AGM approval. That was an important step.
There's one more important step they are missing for us, and that's the approval of the offshore law in Romania that still needs to happen before we can make any final investment decision for that Neptune. However, all this time, we have continued to make progress and work on progressing the development of the Neptune field. The second one is in Malaysia, the Chereng field, where we are also actively working to drive progress and develop the field there for the future.
The final one, the Achimov. A few years ago, we actually delayed the decision where in combination with other M&A activities, there was actually a repositioning where we said there will be a delay until the middle of next year in how we want to proceed with Achimov. Also, there we have a non-exclusive kind of agreement in place with Gazprom that we need to then decide by the middle of the next year. No decision has been taken at this point.
Thanks, Alfred. Just to follow up on the Nord Stream 2. Just to remind me, when are we starting to see the inflow from the financing agreement under that project? Thank you.
Yeah, as you rightly point out, as OMV, we are a financing partner to this. We have provided a loan of EUR 729 million to Nord Stream 2 AG. Actually in the last quarter, we already saw a low double-digit payment coming against this loan. We are of course hoping that this will continue on the way forward.
Great. Thank you.
Thanks, Michael. Next question comes from Henri Patricot, UBS.
Yes. Hello, everyone. Thank you for that presentation. Two questions please. First one on gas, one on retail. So on gas, because you've been hedging about 10% of your production for the second half of the year and the first quarter. So I was wondering if we should expect to see this on a kind of a rolling basis, that you'll continue to hedge 10% of your production for the rest of 2022, or if there's some sort of price level that you have in mind at which point you can stop hedging? And then secondly, you mentioned a strong retail performance in the third quarter. I was wondering if that's something you continue to see in the fourth quarter with the much higher oil price that we're seeing at the moment.
Thank you.
Yeah, I will start with the refining piece and maybe Reinhard can give you some more on the hedging. On the refining, you are absolutely correct. The third quarter was a positive development for the refining margins, finally, because the first half of the year was not so good. Driving season in the third quarter, we saw actually the refining margins recovering significantly, and that's also why we have now increased our new outlook to around $3.5 per barrel. For what we can see now in October, it has started quite positively here in Europe, but also in Abu Dhabi in the Middle East, we saw...
We see a strengthening of the refining margins that are helping us to see some more profits coming out of that business.
Okay.
Regarding the gas hedging, you're absolutely correct. It's about 10% of our total volume, about half of the European volumes that we have here. We have hedged Q4 and Q1 at an average level of around 30 EUR per megawatt hour, and there's currently no intention to increase or continue with a hedging strategy because this was very much a defensive hedge, not a kind of speculative hedge that we took into consideration, considering that there was a quite high overleverage of the company. That allows us, looking at the very low gas prices of last year, that allowed us to make sure that the deleveraging could go in a very orderly manner. Now, of course, looking at the very high prices, that could have been also done differently.
On the other hand, we managed even better in this economic situation to deleverage the company, and very happy to say we are way below 30% at the moment. Therefore, no need to take any considerations in that respect at the moment.
Okay. Very clear. Thank you. Can I just follow up? You commented on the refining performance, but can you comment on the retail business performance in the fourth quarter?
Yeah, sure. Also, the retail business and the retail margins we have seen quite strong in the third quarter. Now, going forward, I think, because third quarter is of course always a heavy driving season here in Europe in particular, so I think some expectation of some softening can be there. It looks like it's still at a quite good level.
Understood. Thank you.
You're welcome. Thanks, Henri. We now come to Giacomo Romeo, Jefferies. Giacomo, are you there? If this is not the case, we come to Raphaël Dubois, Société Générale.
Hello, can you hear me?
Yes, we can hear you, Raphaël.
Hello, hello. Yes. Excellent. Congratulations on your results. Two questions, please. The first one is about chemicals and materials. I was wondering if you could maybe help us understand what you mean by normalization of margins. Should we have in mind maybe a return to 2020 average? What would you deem as a normal level of petchem margins for your polyolefins? I'm mostly interested. Just to confirm, you said that the weight of specialty within polyolefins had gone up. I sort of remember it used to be 40% of the total. Any indication what the new level is? Then I will have another question please.
Thank you, Raphaël, for the interesting questions. Let me start with your normalization question here. I think we normally talk about indicator margins. Those are not necessarily then the margins that we are making in our businesses then. What we are expecting for polyethylene indicator margins is that there will be a certain or what we have observed is that from a peak in the second quarter there was a softening in the third quarter in that we will see some further softening but that will be slower but above the 2020 levels.
That's why we expect that we will be significantly above the 2020 polyethylene indicator margins in Europe, and in 2020 they were EUR 350 per ton. For polypropylene, the prices are keeping up higher and but also let's say a softening of the prices here also, so that in the end we are also saying that we will be significantly above the 2020 levels. In 2020 the indicator margins for polypropylene were about EUR 413 per ton. We see it coming down from second quarter peak levels, but both polyethylene and polypropylene significantly above 2020 levels.
On your second question, around the specialty mix, I think this is the interesting question to ask, because as you correctly remember, about 40% of our volume is specialty products, but this 40% make about 60% of our sales margins. What we typically see is that the prices on the specialties they hold up better than the commodity. The commodity moves more with the indicator margins. As we sold some more specialty products, we will benefit from that effect now, with a decline in the indicator margin environment.
The growth was mainly in the energy segment, year to date. We have also seen some growth in automotive and in healthcare.
Excellent. Thank you very much for that. I have one remaining question. Is it possible to have an update on Borouge fourth expansion as well as Ghasha? How close are you getting from FID time? Thank you.
Maybe let me comment on Borouge. Of course we are in active discussions and have made significant progress in the project so that we are making significant progress and getting quite close to a FID decision that hopefully the decision should get made hopefully still this year. On Ghasha, we are also actively working on that project to drive it forward. I cannot tell you at this point when an FID for this would be.
Thank you, Alfred.
Maybe my colleagues can tell me. No, we would have to give you this information afterwards, yeah.
Okay. Thank you very much, Alfred.
Thank you, Raphaël. We now come to Bertrand Hodée, Kepler Cheuvreux.
Yes. Hello everyone. Thank you for taking my question. Yes, it's a follow-up on your United Arab Emirates strategy and especially I would say the opportunity in natural gas. You're part of Ghasha, you're part of Dalma, and United Arab Emirates has a major natural gas planned expansion, and they even now consider a giant LNG project of close to 10 million tons. Is it something you could be looking at taking a piece in the LNG business, especially in United Arab Emirates? Also can you update, even if I understood that you cannot give us a date on FID for Ghasha on the other natural gas development you are involved in the United Arab Emirates? Thank you.
Okay, thank you, Bertrand. Our participation in the UAE is in two producing assets. One is SARB Umm Lulu, where today we are operating already and producing oil out of these assets. As you rightly point out, the development project that we are also part of is the Ghasha project, where we are actively participating in the development of this. Unfortunately, I can't tell you when the FID decision there should happen. What I can tell you is that beyond this, we currently have no additional projects going on in the UAE concerning oil and gas assets.
Would you consider taking more if you, especially if you want to develop a natural gas more going forward given your natural relationship with Abu Dhabi?
Look, we are of course always looking into optimizing our portfolio. I do believe that today we actually have two pretty big development projects for gas in our portfolio with Neptune and with Charon. I think what we need to do now is to go through our strategy development to have clarity how to take that further beyond this so that at this moment we don't have any other active projects in the UAE in the oil and gas area.
May I ask another quick, very quick follow-up. What's your thinking about LNG? Do you intend to go into liquefaction at some stage in the future?
Yeah, I think as OMV, we always quite clearly said that we will not go into LNG. At this point, this direction has not changed for us.
Okay, perfect. Thank you.
You're welcome.
Thanks, Bertrand Hodée. The next question come from Tamas Pletser, Erste Bank.
Yes, good morning. I got just one follow-up question on the gas and the realized gas prices. Can you just remind us how is the Russian gas priced? I mean, the gas which they sell, you know, towards Europe, as well as how is the domestic gas prices are developing? Thank you.
Sure, Tamas. Thank you for the question. The gas from Yuzhno Russkoye is priced, half of it with the local Russian price. The other half is connected to the BAFA price, the German import pricing that is indexed there.
Isn't this price somehow crude oil price linked or is it rather spot based?
Tamas, the European price, the BAFA price has certain characteristics that it is on the one hand side calibrated on European gas hub prices. There is a small element also of oil price calibration in there. The main characteristic that is relevant for us is that it comes with a two-month delay in gas price development in realizing the price. This is also why BAFA has a little bit of a less amplitude in volatility than European gas prices, and comes with a delay of what we see with European gas hub prices.
I see it quite clear. Just one follow-up over here. How is the Russian gas prices developed? Do you see an increase there?
Very flat. It's a regulated gas price that is very much driven by the political will to provide affordable gas to the population in Russia.
Basically the upside can rather happen only from the export side, if I see correctly.
Correctly.
Great. Thank you very much.
Thanks, Tamas. There's a follow-up question from Mehdi.
Thank you. Thanks very much. Two questions please. One, on Petrom. There has been, you know, on Bloomberg, some comments that the Romanian parliament voted an energy price cap. I was wondering if this is impacting in any way Petrom. Can you please comment on that? The second question is about the fertilizer units. I mean, the profitability, you know, the EBIT from the nitro unit has always been very weak? With the increase in the gas price, can you tell us if in Q3 you have been able to generate a positive profit, a positive EBIT from the nitrogen business or no?
Also, can you tell us if you have been surprised positively or not by the interest on that fertilizer business, you know, from potential acquirers? Thank you.
Thank you for the two questions, Mehdi. Let me maybe start with the fertilizer. They are indeed. We see the high gas prices creating some challenges for fertilizer businesses. I'm sure you're aware that across Europe, some of the ammonia plants have been curtailed because of the high gas prices. Which is just reflecting the significant pressure. We of course also see that in our fertilizer business, however, we also see this as a temporary effect. The interest for a divestment program was there. We are currently in active discussions with the potential interested parties. I'm sure you will understand that I cannot comment then on how this is progressing further.
In any case, we are still planning and hoping to come to a signing before the end of the year with that divestment project.
Okay. Just on Q3 profitability on the third quarter of the business, do you want to comment or you don't want?
On the fertilizer business profitability, what we have seen in that business is that with the gas prices, the margins are under pressure. We have seen some reduced profitability. At the same time, there's also some other parts in that nitro business that have performed rather well. Like for example, the melamine business that's in there. Finally, you know, the depreciation stop has also improved some of the results on the positive side.
Thank you, Alfred. Petrom?
On your question to Petrom.
Mm-hmm.
The energy price cap that has been discussed in Romania is only relevant for household gas prices. Petrom, in its delivery, has a relatively small share of deliveries to households. Rather, we are delivering on industrials as well as on export, so therefore impact on Petrom should be, whenever that is enacted, relatively small.
Okay. Thank you. Thanks, Reinhard. Just a follow-up on that. Will Petrom have to lower its natural gas price to households? Can you just confirm if I remember well, one-third of Petrom gas sales go to household. Is it fair enough?
Well, as I said, it's a smaller amount, and it therefore has not such a major impact on Petrom profitability. Currently Romania is again in a political crisis, and the conclusions on all these kind of relevant topics in the parliament have not yet reached realization. We have to wait until there is a concrete impact visible. At the moment we are not considering that this would have a major negative impact on Petrom.
That's it. Thank you very much, both of you.
Thanks, Mehdi. We have now two more questions. First is Henry Tarr, Berenberg, and after that we have Matt Lofting, JP Morgan. Please go ahead, Henry.
Just on the production outlook for 2022, I know it will depend a little bit around Libya. Anything on that would be helpful. Just secondly, on Borealis, obviously, it's been a great acquisition. Would you be interested in increasing your stake further? Would Mubadala be open to that, or have there been any discussions on that side? Thank you.
Thank you, Henry, for the questions here. Let me maybe start with Borealis and increasing the shareholding. As you know, right, we just increased to 39%. We are now committed to deleveraging and for sure in our strategy review, we will consider all kind of different possibilities. I would ask that maybe we will answer your questions then at the capital market day. What I can tell you is that at this point we don't have any active project actually to do something like this. On the second question, that was around the production in E&P. In exploration and production.
Of course, what we will see going forward, right, we have for this year, we have actually, last time we said we will produce around 480,000 barrels per day. We have now increased that to over 480,000 barrels per day. That is the biggest improvement that we see is really coming from the installation of the booster compressors that we did during the maintenance stop in Yuzhno. With this, the production level can go up again to 100,000 BOEs per day. We are hoping that this level will also be sustainable going forward, and that we can then keep good production levels.
Okay, great. Thanks.
You're welcome.
Thanks, Henry. I just heard that Matt is no longer in the queue, but there is a follow-up from Raphaël.
Yes. Sorry. Just one extra question, and it's also on Petrom gas. I think they were due to renegotiate bilateral contracts sometimes around September, and that's a big part of their gas production. I guess it's part of your outlook for average selling price in Q4, but can you maybe tell us a bit more about the increase that they should have obtained in the current context? Thank you.
Raphaël, as this is a period where all these negotiations are currently going on, I cannot preempt any of the outcomes at the moment. This is the market dynamics that I need to leave at the moment to the Petrom management. Therefore, we'll update you as soon as contracts are concluded.
Okay. Thank you.
Thank you, Raphaël. We come now to the end of our conference call. Thanks a lot for joining us today. Should you have any further questions, please contact the investor relations team. We're happy to help. Thank you, and have a great day.
Thank you. Have a good day and a good weekend.
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