Welcome to the OMB Group's Conference Call. 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 and 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 over the conference to Mr.
Florian Greger, Head of Investor Relations. Please go ahead, Mr. Greger.
Thank you, Kevin. Good morning, ladies and gentlemen. Welcome to OMV's earnings call for the Q3 2019. With me on the call are Rainer Selle, OMV's Chairman and CEO and Reinhard Florey, our CFO. As always, Rainer Seele will walk you through the highlights of the quarter and will discuss OMV's financial performance.
Following his presentation, both gentlemen are available to answer your questions. And with that, I'll hand it over to Rainer.
Yes. Thanks, Florian. Good morning, ladies and gentlemen, and thank you for joining us today. The market environment in the Q3 was the weakest since the end of 2017, characterized by lower oil and gas prices impacting earnings across the sector. Based on the strong operational performance with significant higher production and increased sales, OMV achieved solid earnings.
Let me start by briefly reviewing the economic environment. In the Q3 of 2019, the Brent oil price averaged $62 a barrel, 10% down quarter on quarter and percent down year on year. The oil price was impacted by the oil disruption in Saudi Arabia, the largest in recent history, ongoing uncertainty about U. S.-China trade conflict and increasing geopolitical tensions. Prices were relatively stable at $64 in July before dropping to $59 in August.
The drone attacks on Saudi Arabian oil infrastructure in September led to a sharp price increase to $69 However, this was only short lived as production was restored faster than Driven by oversupply, European gas prices further declined in the 3rd quarter with SEK spot prices 28% lower quarter on quarter and 56% below the previous year's level. Gas storage levels in Europe rose to almost 100% and made the market highly sensitive to any supply increase. While global LNG oversupply continued to push surplus volumes into Europe, the inflows have slowed down due to declining European margins. Saw a rebound quarter on quarter, increasing by 72%, mainly driven by strong cracks of middle distillates, reaching a similar level to the previous year's quarter. Naphtha remained unusually weak, pressured by seasonal cracker maintenance and low LPG prices.
The fuel oil market experienced some volatility upcoming IMO 2020 with cracks heavily fluctuating, but showing an overall uptick quarter on quarter. The ethylene and propylene margin was still healthy 7% below the 2nd quarter and almost at the same level of last year supported by low naphtha feedstock costs. Delay in the restart of several crackers kept supply limited, while demand was robust throughout the period. Impacted by a weaker market environment, OMV delivered a clean CCS operating result of €949,000,000 10% lower versus the same period a year ago. Our cash flow from operating activities, excluding net working capital effects, amounted to €1,100,000,000 We continue to show a strong operational performance.
In Upstream, we increased our production to 480,000 barrels per day and reduced the average production cost to $6.3 per barrel. In downstream, our refineries run above 95% for the 5th consecutive quarter and we managed to increase our sales volumes. We also made further progress in delivering on our strategy. At the end of July, we closed the acquisition of 15% share in ADNOC Refining and the Global Trading Joint Venture. Our experts are now at the site in Ruwais and started the exchange of operational excellence as well as the setup of trading joint venture, which will begin operations next year.
We expect to receive dividends from ADNOC Refining starting with the financial year 2020. In the midterm, we are anticipating a dividend yield in excess of 10% per year based on the purchase price. In line with our strategy to expand our petrochemical business to growth markets, together with Mubadala, we signed a memorandum of understanding with Chandra Ashri to explore opportunities for correlation in the petrochemical sector in Indonesia. September, we signed a multiyear agreement with the Austrian company Ostracell Haline to supply OMV with advanced bioethanol based on a really innovative technology. Wood sugar, a waste material in the cellulose production process will be used as a feedstock for the production of bioethanol.
Instead of burning, this waste material will be fermented by yeast and then distilled to bioethanol, the product will be added to OMV's gasoline and will contribute therefore to reducing the carbon intensity of our product portfolio. The first supplies of bioethanol are expected to start in early 2021. Last but not least, we are very proud that our commitment to best ESG practices was recognized again and OMV was included in the Downshone Sustainability Index for the 2nd consecutive year. The index comprises The index comprises the top 10% of the 2,500 largest companies in the S and P Global Index in terms of their sustainability performance. So let's turn now to more details of our financial performance in the Q3 of 2019.
Our clean CCS operating result decreased by €101,000,000 to €949,000,000 versus the strong prior year quarter, which had benefited from a favorable market environment. And up stream earnings were 19% lower year on year, impacted by lower oil and gas prices. The significant increase in production volumes could not compensate for the negative impact of the market environment and higher depreciation. Downstream showed again a strong performance with earnings at the prior year's level. The clean tax rate amounted to 36%, 2 percentage points below the previous year's quarter due to a proportionally lower upstream contribution.
At €457,000,000 Clean CCS net income attributable to stockholders was basically flat. Clean CCS earnings per share came in at €1.40 Let me now come to the performance of our 2 business segments. Compared to the Q3 of 2018, the Upstream Clean operating result decreased by €104,000,000 to €449,000,000 due to lower oil and gas prices and higher depreciation. Market effects had a negative impact of €176,000,000 a result of lower realized oil and gas prices, partially compensated by a stronger U. S.
Dollar. OMV realized oil price decreased by 13%, While the SEK gas price dropped sharply by 56%, the OMV realized gas price decreased by only 17%. The gas price declined to a lesser extent than the European spot prices as only approximately 40% of our gas sales portfolio is directly linked to the European hub prices. Production went up by 70 4,000 to 480,000 barrels per day, driven by the acquisitions in New Zealand, Abu Dhabi and Malaysia as well as the production ramp up of Aasta Hansteen in Norway. Production in New Zealand recovered from a shutdown of the Puroharkura platform in May and amounted to 47,000 barrels per day in the Q3.
The fields, SARB and Umhlulu and Abu Dhabi contributed 22,000 barrels per day. Production in Malaysia was 14,000 barrels per day. Despite some interruptions in the Al Sharara field in Libya in July August, we were able to produce 34,000 barrels per day in the Q3, more than in the same period last year. Due to the annual maintenance shutdown in the Q3, Yuzhno Russkoye contributed 90,000 barrels per day, similar to the previous year's quarter. Our total sales volumes increased in line with production.
We reduced our production cost by 7% to now $6.3 per barrel on the back of higher production and a favorable currency development. Depreciation increased by €103,000,000 due to our acquisitions and higher production in Norway. In Downstream, the clean CCS operating result increased marginally to €490,000,000 as compared to the Q3 of 2018. The Downstream oil results came in at €465,000,000 supported by a healthy refining margin. OMVs above average middle distillate yield of roughly 50% and very low heavy fuel oil yield allowed us to benefit from the strength in diesel cracks, while not being exposed to the downside of heavy fuel oil cracks.
Our operational performance was once again very strong, reflected by a refining utilization rate of 96% and higher sales volumes. Retail volumes and margins increased as compared to the previous year's quarter and the commercial business still benefited from the regional supply situation. At €59,000,000 the petrochemicals results declined by 20%, mainly due to an unplanned outage of the steam cracker in Brukhausen. The contribution from Borealis declined by 26% to €75,000,000 following negative inventory valuation effects and a lower contribution from Borouge. The integrated polyolefin margin was at a healthy level and the performance of the fertilizer business improved due to lower gas prices.
Following the closing at the end of July, the ADNOC Refining Business is consolidated at equity and reflected in our books for 2 months. The FCC, a key unit of the refinery to upgrade low value fuel residue into higher value products has been ramped up in the Q3 and is now running stable. The clean CCS operating result in downstream gas was almost flat at €25,000,000 Similar to Q2, we have seen valuation effects from the gas storage negatively impacting the result in the Q3. We anticipate a reversal of the negative storage effects starting with the Q4 when the gas will be withdrawn from the storage. The weaker storage result was mainly compensated by higher results from gas trading.
Let's now continue with our cash flow. In the 1st 9 months of 2019, the cash flow from operating activities, excluding net working capital effects, amounted to €3,300,000,000 an increase of €106,000,000 compared to the 1st 9 months of last year. The prior year's period included the payment of the interim Borealis dividends in the 3rd quarter amounting to €108,000,000 This year, the interim dividends will be paid in the 4th quarter. Taking into account this change on a like for like basis, cash flow increased by €214,000,000 year over year. Year to date, we recorded negative working capital effects to the amount of €227,000,000 with a small positive net working capital release in the 3rd quarter.
At €1,300,000,000 our organic cash flow from investing activities was slightly below the same period of 9 months in 2018. The organic free cash flow before dividends amounted to €1,700,000,000 The decrease of 9% versus last year stemmed mainly from the negative net working capital effects. The cash outflow for inorganic investments came in at €2,700,000,000 primarily liquidity with a cash position of €3,200,000,000 at the end of the 3rd quarter. Net debt rose from 3 €300,000,000 to €4,900,000,000 due to the acquisition of the 15% share in ADNOC Refining and the 2 B established Trading Leop joint venture. Consequently, our gearing ratio increased to 29%.
This includes the impact of IFRS 16 of around 5 percentage points. Let me conclude with the outlook for the full year 2019. Throughout the 1st 9 months of this year, we saw the oil price averaging at $65 per barrel. Based on this, we reconfirm our Brent assumption of $65 per barrel for the full year. Makes sense as we have been 9 months correct, isn't it?
So coming into the cold months of the year, we expect an increase in gas prices in the Q4 compared to the Q3. However, for the full year, gas prices will remain on average below the level of 2018. We reconfirmed the full year production guidance of slightly below 500,000 barrels per day. In the Q4, we expect production to be above 500,000 barrels per day, depending on the security situation in Libya, of course. The increase is driven by higher volumes in Russia and Norway.
In Downstream, we saw a very volatile refining margin in the 1st 9 months of this year, averaging $4.3 per barrel. We estimate an increase in the Q4 compared to the 1st 9 months, primarily driven by the IMO regulation, which will come into effect in January 2020. However, the full year, we estimate the refining margin to be to average below $5 per barrel. For petrochemicals, we project the full year margin to be at a similar level of 2018, following a strong performance in the 1st 9 months of 2019. As already guided, organic CapEx is projected come in at around €2,300,000,000 thereof €1,500,000,000 in upstream exploration and appraisal expenditures are expected to be €350,000,000 Thank you for your attention.
And now Reinhard and I are more than happy to take your questions.
Yes. Thanks, Rainer. Let's now come to your questions. I'd ask you to limit your questions to only 2 at a time so that we can take as many questions as possible. You can of course always rejoin the queue for a follow-up question.
The first question comes from Jason Gammel, Jefferies.
Thanks very much, gentlemen. A couple of questions on IMO, if I could, please. Reiner, you made mention to middle distillate cracks beginning to appreciate and heavy fuel oil cracks beginning to drop. I guess one effect we haven't necessarily seen yet is wider differentials for heavy and sour crude. So I was hoping you could address the crude flexibility of your system and how you might gain advantage if we do start to see the spreads widen?
Then the second question that I had was related to, I believe back about a year ago, we had the presentation at your refinery and you mentioned that you would be marketing essentially a low sulfur fuel oil that was that met the regulations of IMO. Can you talk about whether you started to now market that product? And if so, what type of margin is that attracting relative to diesel?
Well, Jason, your first question on heavy and sour crudes, I think the spread will widen. The market is getting less and less interested to buy that stuff. But it's an opportunity for us as we speak about the optimization of our refinery in Ruwais. As you know, we have a run for sweet and for sweet and light crudes. This is the 100% of the crude we are running now in the Abu Dhabi refinery, and we are investing now into the crude flexibility.
And I think we should hurry up with that project because 2020 onwards, and I think that this effect will last for 2 or 3 year max, we will see that market attractive, especially for heavy and sour crude as a feedstock, as I said, honestly speaking, our honestly speaking, our share of heavy fuel oil, I'm so happy that I don't have to deal in that market so much. Yes, so we have only very small volumes to be market as heavy fuel oil. We have started with some low sulfur heavy fuel oil transactions. What I can say is the market is developing right now. What is more interesting for me is the price decrease of the high sulfur HFO.
This product you have really problems to sell, But we see it more or less indirectly. The diesel fuel oil the diesel cracks are benefiting because diesel, we sell more now in the maritime to maritime industry as a blending component. We see the volumes not shifting from heavy not purely from heavy to low sulfur HFO, we see more move into diesel. So diesel will benefit more. The low sulfur HFO prices we have seen so far in the market is still below diesel.
Diesel is benefiting more.
Thank you very much for the comments.
The next question is from Josh Stone, Barclays.
Hi, good morning. Thanks, Florian. I've got two questions, please. One just on the downstream. It seems this year you've seen a number of benefits from a shortage of products around you related to pipelines and the Rhine River and Bion Oil being down.
I was maybe to quantify what sort of impact you've seen this year in your retail and commercial business from that? And then also your expectations going into 4Q and next year, whether that where that could go? And then secondly, on a different topic, on Romania, I was hoping you could update us on the fiscal regime there and what you're seeing in the country. Thank you.
Josh, how should I answer your first question? Well, we do have a shortage. I don't want to call it a shortage of products in the market. I would say that the market is very well balanced. Let me call it that way.
Because talking about a shortage, I think you might calculate it a little bit with 2 drastic numbers. Let's say the now I have to come back with shortage. Shortage is better to explain. Well, the shortage you think is in the market is not resulting from the Rhine River level. It is a reduction of imports into the European markets.
And it has to do with the freight rates. The freight rates for crude transport increased enormously because of sanctions. And the freight rates are so high that more products from the Middle East will move has been sent into the Asian market and therefore the European market was benefiting from them. And because of such a situation in the market, we are benefiting with a very attractive refining margin in the Q4. The refining margin, I have said, is above the average.
I would say, I am right now looking into the forward curve of the refining markets in Europe, I see a refining margin, which is well above the 3rd quarter. So and the refining margin is benefiting from the reduced imports into the European market. Your second question on Romania, well, we are still in the same situation, yes? It's not as bad as the Brexit story, but we do have no government in place. There is no energy minister.
Therefore, we can't see any progress, especially getting the parliamentary approval of the changes of the offshore law for the development of the Neptune project. So we have to sit and wait. I think it will not last an eternity. But if the new government is in place and if they are going for a fast track approval process and if this draft legislation will be not changed dramatically, then I think we do have a very attractive framework in place.
That's very clear.
Thank you. Next question is from Ori Patricot, UBS.
Yes, everyone. Thank you for the update. I have two questions for me. The first one, I was wondering if you can give us some sense of the contribution from ANNOCC refining in the quarter and how the macro environment performance is evolving for that asset in the Q4? And secondly, just to come back on to the topic of IMO 2020, but for the upstream side of the business this time, because I remember that you've highlighted previously that 85% around 85% of your crude production is sweet crude.
So should we expect to see a lower discount to print for your realized oil price in the coming quarters? Any guidance would be helpful on that. Thank you.
All right. I'd take your first question and the second is so difficult that Reinhard will answer. So your first question on ADNOC refining, well, Henri, we have seen 2 months in the Q3, where we have seen so many ups and downs in the refinery, especially as we talk about the key plant, the FCC plant, which was not up and running on a continuous in a continuous operation. And also the coker unit was impacted by the FCC plant with reduced Q3 we have decided is by far not representative. So we don't release any numbers on the Q3, but we prepare ourselves to release with a continuous reporting on the ADNOC Refining business starting with the 4th quarter results.
So on the next conference call, we will talk about the quarterly contribution of ADNOC Refining to our overall performance in OMV. Talking about the Q4 and ADNOC refining, we can say that the plant, the FCC plant has been ramped up. It's now running on full capacity. We have also increased because there is a connectivity. We have now increased also the coker capacities.
And therefore, we should see a representative for Q4. If you look into the refining margins, it is a good combination that you come up with the capacities when margins are looking more attractive. It hasn't been planned already, but I always say the luck is with the heavy workers. And that's why I think the Q4, we should see with ADNOC refining, where we have a higher utilization rate and a better macro environment in the region will help us also to come up with good numbers.
Yes, I'll read to your second question about AMR 2020 Upstream impact. In principle, it is absolutely true. The market for sweet crude will get tighter, which will also make the product more valuable, which means that specifically in the regions in Romania and the East, the discount to Brent will decrease. We have even seen adverse developments in for a certain period of time. However, please take into account that we are fully integrated operation in Romania, which means even if on the upstream side, there is this positive effect to deliver more or less all of our crude into our downstream operations there.
So part of that also will be a wash, but in principle, of course, on the upstream side, a positive development.
The next question is from Morgan Stanley.
Hi. I had two questions, please. The first one regarding 4Q cash generation. I was just wondering what the contribution or the dividend contribution from Borealis in 4Q was, whether you expected a reversal of the €227,000,000 working capital build in 4Q? As a consequence, where do you see the gearing levels going to by the end of this year?
You had previously highlighted it will be somewhat slightly below 30% gaining level. So if you can comment on that. The second question, I just wanted to check what the progress was on the Achimov deal. Are you still expecting to sign the financial the final transaction documents by the end of this year and closing at the beginning of next year? Thanks.
So your question was, what's the impact in general of 4Q on the gearing level? So of course, we do have some networking capital developments. And normally in Q4, there is an uplift of net working capital. The second effect that we also have is that in the 4th quarter, traditionally we have somewhat higher CapEx levels. So therefore, in general, the free cash flow expectation that we have for the Q4 is a little bit lower.
However, we see still a positive development also on the gearing level and will stay below the 30%.
On Achimov 45, I reconfirm our timing that we would like to sign the final documents until year end and that closing will be in 2020, depending on the approvals by the local Russian authorities. Honestly speaking, I'm not too much in a hurry as we speak about closing the deal, because the production will start up. It will start then at the end of next year, beginning of 2021. So I have all the remaining time. The value of the product will change and we have to renegotiate if we cannot close the deal until the start of production.
So therefore, make a long story short, yes, the same story as last call.
Thank you.
We now come to Irene Himona, Societe Generale.
Thank you. Good morning. Two questions from me. Firstly, following the increase of depreciation, especially in the Upstream in the Q3, I wonder if you can give us some guidance for group depreciation for the full year, please. And secondly, back to IMO and the positive impact on margins.
Do you have any planned maintenance in your refineries next year? Any planned shutdowns? Or are you able to fully benefit from the uptick in margins? Thank you.
I take your second question. No, no maintenance is planned for 2020 as well as 2021.
And regarding depreciation, I think it's fair to guide in the same way as we did now see for the quarter 3. So year on year for the quarter, we have been around €100,000,000 higher in depreciation due to the acquisitions and also the investment projects that we have done. And this is fair to assume as to be continued.
Thank you very much.
Next question is from Thomas Adolff, Credit Suisse.
Good morning. Two questions for me, please, as well. Firstly on ADNOC and specifically to the dividend. I wonder if you can perhaps tell us whether it is a quarterly dividend, semi annual dividend, annual dividend, just for the purpose of modeling kind of 2020, 2021 cash flow? And perhaps if you can also comment on the tax rate on ADNOC Refining Venture that you're likely to pay?
And then secondly, if I may, I'm just looking after looking for some numbers and perhaps you can comment more specifically than you have already. What was the refining margin in October on average? Where are we on upstream production? And then maybe what's your view on European gas prices in 2020? Thank you.
Regarding the dividend expectation that you have addressed from the ADNOC refining. In principle, the agreement so far is that we would have a biannual dividend payment. Of course, we are not seeing a dividend payment in 19, and we will see the dividend payments for as of 2020 gradually increasing then over the years to the level that we have guided for as a 10% dividend yield. So therefore, today hard to assume whether they will be equally set in the two halves of the year. We'll have to anticipate that when we are coming closer to anticipating how well the refinery and also the trading will then work in 2020.
Thomas, I take your questions about numbers, although I can't give you numbers, but I can help you to calculate some numbers. First of all, when we talk about the refining margins in October, I would like to ask you to look into the trading markets. There you find the average margin refining margin realized and the forward margin for the Q4. And then you will see that this margin is well above the average margin we have seen in Q3. Then your second question on upstream production.
Our upstream production right now is, as I have said, above the 500,000 barrels per day. The gas prices for 2020, again, I would like to ask you to look into the forward curve. The published forward curve here to help you a bit more with some numbers. The forward curve is telling you that gas prices in average 2020 will be well above the average gas price we have seen in 2019. So higher gas prices in the forward curves awaiting us in 2020, especially you see in the forward curves that the very low summer gas prices we have seen in 2019 are not in the forward market of 2020.
And there is a substantial delta. I would say the forward summer gas prices for next year are something around 50% above the summer gas prices we have seen in 2019. And the 2 winter quarters, Q1 and Q4 2014, are very much also depending on two events, on further frost, whether or not he will send us minus 20 tomorrow. So the winter weather and the weather conditions and therefore the consumption and therefore, I think the market will very, very much look on the storage levels in the winter season. And it's very important that I say storage levels because the market has over committed into storage capacities as we all together don't know whether when the permits from Denmark or Nord Stream 2 will be applied, whether or not there will be permit, I have to say, and whether or not the capacities of Nord Stream 2 will be available, especially in Q1 next year.
That's why the market is waiting a little bit on the progress on discussion on the prolongation of the Ukraine transit and the market is watching on the permit and waiting for the permit in Denmark.
Yes. Thank you. I mean, I thought the futures curve in the summer next year is a little bit too optimistic. So wanted to see where you stand in that regard. But quickly, can we come back to the ADNOC question on tax?
Can you say what the tax rate should be for ADNOC? Thank you.
The tax rate for ADNOC has not been published and we are not in a situation to directly comment on the downstream tax.
Thank you.
Thanks, Thomas. We now come to Peter Low, Redburn.
Hi, thanks. The first was just on distributions. Free cash flow continues to be strong and even following the ADNOC acquisition, your gearing is below your 30% ceiling. Kind of given that, how do you think about distribution growth from here? Is it some kind payout ratio versus earnings or cash flow?
Or really any color on how the board thinks that setting the dividend would be appreciated? And then the second was just a follow-up on the fiscal situation in Romania. Is that impacting your current level of investment there? And does that mean that the climate rates at Petrom are going to continue to accelerate in the coming years? Thanks.
Peter, on your first question regarding dividend, we are absolutely committed to our dividend policy that we have given out. And we are seeing that the way how we are dealing with our proceeds keeps us below the 30% gearing level. So this means that we stay to say this will be a progressive dividend and this will be increased bit by bit every year.
Well, Peter, talking about Romania, of course, the level of CapEx is strongly depending on the Neptun development. If Neptun development if we will not take an FID on Neptune development, our CapEx spending in Romania will be substantially lower. We will not shift any CapEx spending to lower quality onshore projects in Petrom and then increasing our CapEx budget. That's not in our even discussion, yes, on a board level. The decline rate, I would guide you now a little bit to the decline rate, something between 3% 5%.
Why do I say 3% 5%? First of all, it's not depending on Neptun. Neptun would be compensating for the decline rate. The 3% to 5% is just on the basic portfolio of OMV Patron, excluding Neptun. The 3 why do I give you a range?
The 3% to 5%, I have to say it's depending on the framework we get from the Romanian government, yes? The day they decided that they are not believing in the liberal free market, gas market anymore and they were regulating the gas prices, we had to reduce our CapEx spending on gas projects substantially, and therefore, the decline rate was in more in the 5% region. Now we have seen that the government has changed this environment. And now we can go for gas projects also next year again. And therefore, maybe the decline rate will be more towards the 3% than to the 5%.
Thank you. That's very clear.
Next question is from Michele Della Vigna, Goldman Sachs.
Thank you and congratulations on another strong set of results. Two questions from my side, if I may. The first one is, could you update us on progress towards new developments in Norway, particularly in light of the MoU with Equinor in June? And then secondly, could you give us some examples of where your push for digitalization is reducing costs in the upstream, again, particularly in light with your recent collaboration with the Aker Group and with Aker BP? Thank you.
Michele, all right. I was writing your first question when you were talking about your second question. Therefore, I needed some time to get the second question in my book. It's about digit. First, the new development with the Equinor.
I'm expecting you are asking about the development. Is that right?
Yes. Thank you.
Yes. So, development, what we have seen, we have handed over everything. Now Equinor is developing the field development plan. We are within the same timing like before as before when OMV was the operator in the exploration phases. I think that Equinor more has an interest for fast track development, but it's too early, Michele, to give you a real number today.
All I can see is that the commitment is now on a much, much higher level. And therefore, it was the right move, signing that MOU with Equinor. And I would say, we need at least half a year, maybe 1 year to give you a more precise number, how much they could accelerate. The second question on digitalization, we definitely don't release any numbers on the budget we do have on digit projects. But what I can tell you is we are more talking about spending in the double digit and not in the 3 digit €1,000,000 area.
Thank you.
We now come to Alwyn Thomas, Exane BNP Paribas.
Hi, good
morning. I guess just on the sort of strategy level as things are going well and earnings have been pretty good this year. Are you guys planning to do a CMD or strategic update with the full year results now that some of the key deals have now been completed? And I guess whether you see any scope, given you're ahead of schedule, on for any small scale acquisitions next year? My second question is just on petrochemicals.
I'm quite interested to get your take through the various parts of the value chain as to what you're seeing on margins and the outlook for the Q4 and into next year? Thank you.
Well, your first question, The only remaining M and A project is, as I have mentioned earlier, Achimov 45. This is a project we would like to focus on in 2020. This is of major importance, especially if we would like to meet our target of the 600,000 barrels per day production, which we have guided as a midterm target to the market. On top of that, additional acquisitions, I would say we don't have any acquisitions now in the pipeline, which I do see where we will address to the market in 2020. It might change that the summer sale opportunities arrive in the market, then we will look into that.
But we have a priority as Reinhard has always said, we would like to take that break. We would like to harvest the acquired assets. We would like to further strengthen our balance sheet. And if you look into our priorities of capital allocation, you will find out that acquisitions are lowest ranked. And that's explaining my statement why I'm not so hungry to look into acquisitions in 2020.
Talking about the petchem outlook and Patchem margin, it's interesting. We do see a little bit of the weakening of the Patchem margin in the Q4 if we look into the forward pricing, but it's only a slightly weakening. Don't overdo it in your calculations that my first view, we still have healthy level of Patchem margins in Europe. The Patchem margins in other continental region, I have a totally different outlook for you. We do see a pressure on polymer margins and petchem margins in Asia.
I would say that's the most difficult continental market at the moment. It's reflected by the trade conflict between U. S. And China, determining the mind by the overinvestments on additional capacities. We do see right now in the market a little bit of a slowdown of appetite to further invest.
It's triggered also and we don't learn as an industry. We always invest when the margins are high and we always stop when the margins are low. That's the principle I do see now also happening in Asia. OMV is a little bit different. We are antithetically, as you know, we have signed a memorandum of understanding for a potential investment in Indonesia, as we think in the mid to long term that this over capacities will disappear.
Just our market outlook globally for the growth in polyethylene, polypropylene demand, we are talking about an increase market growth about roughly 2% to 3%, which translates that every year we have the industry has to build a new Borouge complex to supply the market. And that's helping, of course, that the over capacities are also being then rebalanced into a market growth we do see. When we talk about North Africa, I don't want to specify too much. I think the especially the investment activities on ethane cracker based petrochemicals has turned the market a little bit into a recession. And I'm happy that we are not selling a single cubic meter into that market.
Okay. Can I just one follow-up on Barouche? Are you able to give any guidance on what you expect the 4Q dividend to be and what you would expect for next year?
Well, we can't make any comment on Borouge. As you know, we are in a second tier shareholder in Borussia. So it's a minority shareholding of Borealis and therefore we're not I meant Borealis, apologies. No. As Borealis as you know, Borealis, we are minority shareholder and it's fully consolidated by Mubarala.
So therefore, I would like to ask you if there will be some release on information, just talk to Mubalala.
Okay. Thank you.
And we now come to Matt Lofting, JPMorgan.
Yes. Thanks for taking the questions, gents, and congrats on another strong execution quarter. Two things, if I could please. 1st, can I have another go at the retail and commercial businesses, which appear to be performing very well and leveraging the strong market share positions OMV has in some of contribution of retail and commercial to 9 month to date downstream operating income, please? And then secondly, you referenced current production moving up to 500,000 barrels a day plus.
It would appear on my math that the primary driver of that is the reversal of the maintenance cycles in Russia and Norway. But when we think about the growth projects behind that, what are your expectations, in particular, on the start and ramp up of Nuara into 2020? Thanks.
All right. Well, Matt, your first question, I would like to work a little bit through the math with you. Yes. I can't I don't want to release the numbers on retail and commercial for the 1st 9 months of 2019. But what I would like to do with you is looking into the numbers we have published for 2018 and explaining a little bit the principle how you can calculate the number for 2019.
So when we look into the downstream operating result of 2018, the clean CCS operating result of 2018, downstream in total was €1,600,000,000 Out of €1,600,000,000 €200,000,000 came from were contributed by downstream gas and 0.6 €1,000,000,000 was a contribution from petrochemicals. So 50% of the downstream operating results was coming from downstream gas and downstream chemicals. The remaining 50% is attributable to the fuels business. And the fuels business, the €800,000,000 I can tell you, you can calculate the retail share And we have released it that we have 2,100 stations, and we have said that OMV is making €185,000 per station. And now I can tell you I help you also with the calculation, it's €400,000,000 So 50% out of the fuels business is coming from retail.
And the commercial part, I'll leave as a secret for me so that you have a reason to ask me next time again. The second question on the 500,000 barrels per day. You're absolutely right, Matt. The reverse of Russia and Norway is the main reason. But we think that we can start Navara gas field already in the Q4, but it will be a late start in Q4.
That's why I think the Navara impact, you should calculate from maybe the 1st day in 2020, then you are getting the production numbers precisely good. In the Q4, as I said, late Q4, Navara could come on stream. We also think that maybe we can increase a little bit the production in Malaysia. Malaysia is developing much above our expectations as we speak about the development of the projects. As you may remember, when we signed the joint venture with Sapura in Malaysia, I explained that Sapura Upstream was a great exploration company, but had no experience in a SapuraOMV, And we might come up with a good additional or an earlier additional contribution from Malaysia.
We now come to Michael Alsford, Citi.
I've just got a couple
of follow ups, if I could. So just following on, Rainer, from what you're saying on Sapura Energy and the JV. I was just wondering whether you can remind us where you think medium term sort of production guidance would be. I think it was 14,000 contribution in 3Q. Where do we see that in the next few years as you move through the development pipeline?
And then just secondly, I wanted to just clarify from the MAU that you're signing in Indonesia and pet chems, could you talk a little bit about how you think about deploying capital there? Is it going to be sort of a joint venture structure? How material an investment are you thinking about for that potential expansion? And then just finally, just on CapEx, you're obviously EUR 2,300,000,000 reiterated for EUR 1,000,000,000 for the full year 20 19. I guess with all the acquisitions, should we think about it directionally going higher in 2020?
Thank you.
Michael, long list. Let's start with Sapura. Well, right now, we have the production of 14,000 barrels per day. Midterm, I would like to guide you that we are running into the 30,000 barrels per day region, yes? But this might be a continuous step up.
As we have planned, as you remember, we have started with 8,000 to 10,000 barrels per day. Then we have said we have increased now to 14,000 barrels per day. In the midterm, I would say, it's 30,000 barrels per day as a stone. And we have said in 2023, just to define mid and a bit longer mid term, in 2023, it should be already 60,000 barrels per day. So I leave it with your fantasy, which years are between 2020 2023, to be honest.
So then working a little bit on Indonesia Pet Chem. We have visited the petchem site in Indonesia. And I have to say, the quality and the performance of the installations is impressive. It's a real worldscape plan yes, world scale technically reliable capacity, which is on the site already there. The investment is more or less in the same order of magnitude.
What I would like to advise you is just look into the business report of our partner in Indonesia and there you get an idea about what size of existing complex. And I think when we talk about an activity over there, it should be more or less in the same size if you would like to build and would benefit from economies of scale, then you should be more or less in such kind order of magnitude. Giving you a CapEx number, which will be attributable to OMV, I first have to say, we have to define the precise CapEx number and we have to discuss it and we have to find ourselves as real partners. And secondly, we have to then see how the partnership structure will look like.
The
CapEx number 20 29 2020 onwards, well, we have guided that this will be in the range of €2,000,000,000 between €2,500,000,000 What I also would like to mention now is that within our CapEx numbers, we do have now an IFRS 16 effect of roughly €100,000,000 which we show on a comparable basis higher CapEx numbers because of IFRS 16. So if I put that on top for next year, we will discuss that later on. And of course, we will release our CapEx precise number for 2020 beginning of next year.
Next question is from Chris Kuplent, Bank of America Merrill Lynch.
Yes, thanks very much. I just have a few questions remaining to clean up. Firstly, on production costs, this has been a great quarter, it looks. Can you tell us whether there is more scope to be even further below 7% in terms of your outlook on unit production costs upstream? And then secondly, considering your share price outperforming your hybrid bonds by quite a bit, Just wanted to maybe ask Einhard how he feels about the usage of capital and the relative cost of that capital in terms of your dividend plans versus the coupons on the hybrid bonds.
I know we could talk for hours about this, but just wanted to see whether you can give us anything that you might consider topical. Thank you.
Well, Chris, well, more scope to reduce the production costs. Well, our guidance was $7 per barrel. Now we have reached a level of $6.3 per barrel. And I have to tell you, given our existing portfolio, the air is getting thinner and thinner, yes? There is a little bit of scope because it is in our philosophy that we never stop optimizing costs.
But now I would say, if you look back in 2015, when we had something about 16.6 dollars We have now reduced more than $10 per barrel in average. And I would say, we have seen now an impressive number. We take it very sporty and we try to bring it further down, but big steps are not waiting you.
Okay. Thanks.
Yes. Chris, brilliant question on the share price development. As we see today, we are, of course, total shareholder value driven. And the use of capital, we have said that on the one hand side, the priorities have been shifted. We still stick to what is organic investments and mandatory and maintenance investments as the number one priority, have then moved up dividends as second priority even before deleveraging and as Rainer said, on 4th place only acquisitions.
Now you mentioned also that the development of the hybrid coupons compared to our share price maybe a little bit in a different way. However, if you point to the question of whether there are any buybacks planned, this is not the case, neither on shares nor on hybrid bonds, simply because of economics at the moment. This doesn't make too much sense for us. And the level of hybrid bonds with currently €2,000,000,000 is a level on which we feel quite comfortable. So this is not something that we intend to change for the group at the moment.
Understood. Thank you.
The next question is from Bertrand O'Dea, Kepler Cheuvreux.
Yes. Hello. All of my questions have been answered, but maybe one follow-up on Romania fiscal terms. Can you elaborate a bit what is the latest, I would say, direction in terms of fiscal terms for the offshore Romania? And what kind of export gas price would you need to deliver an appropriate rate of return on that project?
Thank you.
Well, Bertrand, it's very difficult to talk about prices in general. And I take that question first. All I can say is that the share of gas we have to export given the general fast decline of domestic production in Romania is not of that major importance as we speak about the volatility of the project. So if I look into the different netback calculations, because for the export of the gas, you also need to book export capacities in the pipeline and you do have additional costs to digest in your calculation, I have to say, we are very happy to sell the majority of the gas into the Romania market, especially given the fact that we are one of the bigger players and do know our customer space, especially over there. That's our priority.
The fiscal terms we got so far are really taking away the overtaxation what we have seen in the first draft. And it's really also deleting the export restrictions we have seen in the last offshore law. So given that framework and if we are going to calculate now our economics with Neptune And now I take the domestic gas price and the export gas price we could get in some markets and the export gas price, you really have to ask me which kind of country I should supply in the export. It makes a difference whether I supply the gas to Bulgaria or whether I supply the gas to Austria, for example. That's if we take all the prices in our calculation, I have to say with the new fiscal framework from which is drafted by the government, OMV has a high probability that the economics are satisfying and a positive FID next year, which means that the promised overall ROCE target, which we would like to deliver to you as to the financial markets, should be met in our calculation.
And can I ask thank you for the very elaborate answer? And could you explain to us or quantify what is the hurdle rate in terms of economics on that particular project you would consider?
Well, I don't we don't release the hurdle rates for specific countries. Our hurdle rates are different depending on which country. I made I was giving you a hint, Bertrand, because we have promised to the financial markets that OMV will deliver a ROCE of 12%.
Thank you. Thank you very much. It was very helpful comments. Thank you.
Good. So there are no further questions. So this brings us to the end of the conference call. Thank you all for joining. If you have further questions, please reach out to the IR team.
We are happy to help. Goodbye
and have a good day. Bye. Thanks.
That concludes today's conference call. A replay of the call will be available for 1 week. The number is printed on the teleconference invitation or alternatively, please contact OMV's Investor Relations department directly to obtain the replay numbers. Thank you.