Welcome to the OMV Group's Conference Call for the Q4 and Full Year twenty sixteen Results. Itself. You should have received the presentation by e mail. 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 Web site.
At this time, I would like to refer you to the disclaimer, which includes our position on forward looking statements. Such forward looking statements are based on numerous assumptions regarding the company's present and future business, strategies and the environment in which the company will operate in the future and speak only as of the date of this document. None of the future projections, expectations, estimates or prospects in this document should in particular be taken as forecast or promises nor should they be taken as implying any indication, assurance or guarantee that the assumptions on which such future projections, assumptions, estimates or prospects have been prepared or the information and statements contained herein are accurate or complete. As a result of these risks, uncertainties and assumptions, you should, in particular, not place reliance on these forward looking statements as a prediction of actual results or otherwise. I would now like to hand the conference over to Ms.
Magdalena Moll. Please go ahead, Ms. Moll.
Yes. Thank you very much, Simone. Good morning, ladies and gentlemen, and welcome to OMV's Q4 and full year 2016 conference call. ORMB's performance in the Q4 was strong, and we continued to deliver on our strategic targets. ORMB again generated a positive free cash flow after dividends, including non controlling interest changes of €803,000,000 in the 4th quarter and €1,100,000,000 for the full year 2016.
And this morning, ladies and gentlemen, the Executive Board proposed to the EnoGeno meeting a dividend in the amount of €1.20 per share. With me on the call today to explain the results are Rainer Seele, our Chairman of the Executive Board and Chief Executive Officer and Reinhard Florey, our Chief Financial Officer. Reinhard will update you on OMV's achievement in 2016 and comment on the company's future strategic direction. Afterwards, Reinhard will talk about the segment results in much more detail and discuss key aspects of the financial statements with you. Rainer will conclude with the outlook for the full year 2017 and R and D's vision for 2020.
So with this, I would like to hand over the presentation to Heine.
Thank you, Maggie. Ladies and gentlemen, good morning, and thank you for joining us. Let me start with a review of the economic environment in 2016. Well, in 2016, oil markets were characterized by significant oversupply. On January 20, we saw a US26 dollars per barrel on an 8 year low Brent price, followed by a strong recovery throughout the year.
Of course, the OPEC agreement in November 2016 to cap production at 32,500,000 barrels per day had a supportive effect on the price level. OMV's assumption for 2017 is that the oil price will reach average of US55 dollars per barrel. Within the last few years, European gas markets have turned into a state of constant oversupply, which is expected to stay. European gas prices were marked by extremely strong volatility in the course of 2016, caused by weather influences, unscheduled maintenances in the North Sea as well as storage interruptions in the U. K.
However, at the beginning of Q4 2016, a clear upward trend started. This was due to the early start of the winter season with below average temperatures combined with supply shortages. OMV sees an upward trend in average gas prices on European spot markets in 2017. In the European Refined Business, market fundamentals have not changed in 2016. We experienced persistent overcapacity, and we faced with the supply of competitive middle distillates from Russia and the Middle East.
In the second half of twenty sixteen, higher crude prices could only be partly passed on. Strong competition is expected to continue in Europe, and therefore, OMV expects its indicator refining margins to trend downwards. Petrochemical margins in 2016 were somewhat lower than in 2015. Supply considerably improved as cracker outages In such a volatile market environment, OMV stayed on track delivering on its strategy. OMV countered these challenges by successfully achieving important milestones in 2016.
1st, we reshaped the portfolio and successfully completed several transactions, which I will discuss in more detail on the next slides. 2nd, OMV has made excellent progress implementing the cost cutting and efficiency program. Strict cost management measures throughout the entire organization led to savings of around €200,000,000 100,000,000 more than we have targeted. Compared to 2015, we also reduced CapEx and exploration and appraisal expenditures by 32% and close to 50%, respectively. This was a basis to achieve our 3rd milestone, a positive free cash flow after dividends of €1,100,000,000 including the sale proceeds of the minority stake of Gasconic Austria.
This represents an impressive of EUR 1,700,000,000 compared to 2015. 4th, the executive board decided on a new dividend policy for the company. OMV intends to grow the dividend progressively from 2016 onwards. For 2016, we propose a dividend per share of €1.20 to the Annual General Meeting. So let's talk about the important strategic steps we have taken last year.
We made significant progress in focusing OMV's upstream activities and created a more sustainable portfolio. Our actions comprised divestments, acquisitions and building on strategic partnerships. In upstream, profitability took priority over production growth. O and B pushed the portfolio redesign forward and successfully divested 30% of Rosebank as well as 100 percent of the U. K.
Upstream subsidiary. We have received a total of US920 $1,000,000 in cash for these assets until February 2017. We also agreed on a contingent payment in the amount of up to US290 $1,000,000 for both transactions depending on the Rosebank final investment decision. Through these divestments, OMV reduced its planned CapEx in the North Sea by €3,700,000,000 freeing up funds for investments in low cost countries. With respect to our position in Sub Saharan Africa, we seized activities in Namibia, Gabon and the onshore areas of Madagascar.
Following our strategic goal to build a new core area in Russia, we signed the binding basic agreement with Gazprom for the asset swap. OMV will receive a 24.98% stake in the Blocks 4 or 5 of the Achimov reservoir in the Uringoy field located in Western Siberia, while Gazprom will get a 38.5 percent participation in OMV Norge. Moreover, we achieved our goal of 100% reserve replacement rate in 2016 by adding 118,000,000 barrels of oil equivalent in our 1P reserves. 1 third of this increase was attributable to Pearl Petroleum Company and 1 third to the expansion in Libya. OMV holds a 10% share in Pearl, an operator of gas fields in the Kurdistan region of Iraq.
Arbitration proceedings confirmed entitlements to existing production reserves. In Libya, we expanded our position in the Surte basin, and I will explain this transaction in more detail in a minute. In addition, we are intensifying our cooperation with the Libyan and the Abu Dhabi National Oil Companies. In Iran, OMV signed a memorandum of signed a memorandum of understanding with the National Iranian Oil Company. Let me now come to Libya in more detail.
In 2016, OMV restarted production in both the Mursuk and the Surte basin in Libya. As announced on February 2, 2017, during my visit in Tripoli, OMV acquired 75% of the 2nd party share in 4 exploration production sharing agreements in the Surte Basin from Occidental Petroleum Company. OMV and Occidental agreed not to disclose the value of the transaction. The state owned Libyan Oil Company holds the 1st party share and will remain the majority shareholder with a working interest of 90% in Nafora Gila and 88% in the Block C 103, NC2974, NC102. Consequently, OMV now holds 10% in Nafora Aguilar and 12% in the remaining blocks.
As a result of this transaction, OMV expanded its production capacity from 30,000 to 40,000 barrels per day and increased its 2P reserves by 52,000,000 barrels of oil. Considering our increased stake in these fields, OMV now expects to reach a production of 10,000 barrels per day on average in 2017. This transaction also offers OMV field redevelopment opportunities in the Nafora field. The redevelopment would increase OMV's production in Libya to a maximum of 50,000 barrels of oil per day. The project for seas improved oil recovery and infill drilling programs as well as upgrading and expansion of surface facilities.
The execution of the Nafoda redevelopment is highly dependent on the ongoing improvements of the political and security situation in Libya. Libya is a very important country in OMV's upstream portfolio. This acquisition is in line with our strategy to further invest in low cost areas. Now let me give you some more color on the asset swap with Gazprom. In December 2016, we signed the binding basic agreement with Gazprom to swap participation in assets of equivalent value.
The agreement states economics of the swap transaction with a fixed shareholding of 24.98 percent in Blocks 4.5 of the Achimov reservoir and the 38 0.5% in OMV Norge. Signing off final transaction documents is expected by mid-twenty 17. The negotiations will now focus only on detailed corporate governance and other customer legal contract terms. Closing is envisaged by year end 2018 at the latest and is conditional upon governmental and corporate approvals. Start of production of Achimov 45 is planned for 2019.
The project will substantially increase OMV's production and provide a long term stable production base for the next 20 years. Investment required to bring the field on stream will amount to €900,000,000 net for OMV. Thereof, we expect 40% to be spent for the years 2017 2018 and will be paid after closing. We anticipate that from 2020 onwards, Achimov 45 will generate sufficient cash flow to finance its future investment needs. Production from Achimov 45 will be transferred to Gazprom at wellhead subject to a take or pay agreement.
The gas production will be partly sold at Russian domestic prices, while the remainder will be exported at European netback prices. 30% of total production represents condensate, which is to generate better margins than gas. After closing of the transaction, OMV's interest in the Achimov 45 blocks will be shown in the income statement as equity accounted investment. Let's turn to downstream business now. The most important impact on the optimization of downstream will come from the divestment of OMV.
We have received binding offers and we expect the divestment process to be concluded in 2017. In Q4 2016, OMV reclassified OMV petrol thesis net asset as held for sale. The Downstream Gas business has been significantly restructured to become a lean, low cost organization. OMV took over econgas and completed the integration of the sales and trading business, now called OMV Gas Marketing and Trading. Furthermore, the gas sales offensive in Northwest Europe is gaining momentum.
We opened a sales office in Germany in Dusseldorf and already contracted 17 terawatt hours of gas volumes in the German market in 2016. The increasing marketing volumes in Northwest Europe will also allow for better utilization of long term infrastructure capacity bookings at the Gate Terminal in Rotterdam. In the gas transportation business, OMV focus on non regulated activities resulted in the sale of a 49% stake in Gasconnex Austria to a consortium of Snam and Allianz in 2016. OMV received a total cash consideration of €601,000,000 There are EUR454,000,000 for the 49% stake and EUR 147,000,000 long term financing. The decline in interest rates over the past 4 years led to an adjustment in the regulated gas transportation tariff from 2017 onwards.
The regulator reduced the weighted average cost of capital by around 20% to 5.2% before tax. This change will result in a significant lower profit contribution from Gasconc Austria in the coming years. In the non regulated gas transportation business, OMV intended to participate in the Nord Stream 2 project. Due to a statement of objections received from the Polish merger control authorities, the consortium had to withdraw the merger control notification and terminated the shareholder and share purchase agreements in August 2016. Currently, alternative options to support the project are under evaluation.
Nord Stream 2 remains strategically very important to OMV because it will improve Europe's energy security. Now I would like to discuss some more highlights of our operational performance in 2016. OMV realized solid operating results in the full year 2016, despite the decrease in oil and gas prices as well as in the refining margin. Brent oil and the spot prices decreased by 17% 28%, respectively. The OMV indicator refining margin declined even by 34%.
Our claims CCS EBIT decreased by 20% from €1,400,000,000 in 2015 to €1,100,000,000 in 2016. This was mainly attributable to Upstream, which showed an earnings decline of 81%. The clean CCS net income attributable to stockholders decreased by 13% to €995,000,000 Clean CCS earnings per share decreased in line with Clean CCS net income to €3.05 in 2016 from €3.52 in 2015. The highlight of our operational performance in 2016 is clearly the cash flow development. Free cash flow after dividends, including non controlling interest charges improved from negative €581,000,000 and I like to read that to a positive €1,100,000,000 in 2016.
This number includes €451,000,000 of proceeds from the sale of our 49% stake in GasKonec Austria, as well as a €36,000,000 contribution from former minority shareholders in e commerce. Given this excellent development of OMV's free cash flow, the OMV Executive Board proposes a dividend payment of 1 €200 per share to the Annual General Meeting. While the business environment did not support our cash flow in 2016, OMV's good operational performance was the result of strict cost discipline. Upstream production costs decreased by 12% to US11.6 dollars per barrel, driven by the successful implementation of the cost reduction program coupled with higher production volumes. Our cost reduction measures mainly resulted in lower service, maintenance and personnel costs.
During the course of 2016, we reduced capital expenditures by 32% to €1,900,000,000 This was €100,000,000 lower than we have planned. Despite this reduction, production increased in 2016 to the highest level in the course of the last 5 years. With respect to exploration, we focused on low cost regions and near field opportunities in 2016. As a result, we reduced our exploration and appraisal expenditures from €607,000,000 to €307,000,000 For the years 2017 2018, we expect the exploration and appraisal expenditures to remain at the level of €300,000,000 We also continue to make excellent progress with the implementation of our cost reduction and efficiency program. By the end of 2016, we achieved cost savings of €200,000,000 100,000,000 more than we had promised.
This was the result of favorable contract renegotiations, process optimizations and efficiency initiatives. As we have seen the successful impact of our cost program, we will continue on the path in 2017. Now let's come to an essential question. What oil price does OMV need to be free cash flow neutral after dividends? In 2015, the actual oil price averaged $52 per barrel.
The price that OMV would have needed to be able to fund the dividend without increasing its debt amounted to approximately US70 dollars per barrel. Now, ladies and gentlemen, at an average oil price of US44 dollars per barrel in 2016, OMV generated a substantial free cash flow even excluding divestments. This was driven by major efforts to reduce CapEx and costs as well as a strengthened focus on cash generation by our operations. As a result, we managed to decrease our free cash flow breakeven to an impressively low level of US35 dollars per barrel in 2016. This shows that OMV has laid a much more solid business foundation for the future.
Now I would like to turn the presentation over to my colleague, Reinhard Florian.
Thanks, Rainer. Good morning, ladies and gentlemen, from my side as well. Let me present the financial highlights of the year 2016 to you. In 2016, OMV managed a significant turnaround with respect to its portfolio and at the same time improved financial stability. Free cash flow after dividends, including non controlling interest changes, which may be related to the proceeds from divestments of our minority stake in Gasconic Austria, increased from minus €581,000,000 to positive €1,100,000,000 Net debt decreased by 26 percent to €3,000,000,000 Consequently, the gearing ratio improved from 28% to 21% in 20 16.
Our portfolio optimization measures resulted in net special items of close to €1,400,000,000 which were mainly related to impairments booked in connection with the divestment of OMV UK Upstream, including Rosebank. As a consequence of its divestment activities, OMV generated until February 2017 substantial financial firepower with directly related cash inflows of €1,700,000,000 including proceeds from the U. K. Transaction. These cash inflows will be used according to our strategic capital allocation priorities, capital expenditure, strategic acquisitions, dividend payments and the reduction of debt.
We also improved on reported return on average capital employed, one of our main KPIs in our financial steering framework. In 2016, reported ROICI returned positive to +1%, while in 2015 it was still negative at minus 6%. On a clean basis, we realized ROCE of 7% in 2016. Now let's have a closer look at the details of our cash flow development in Q4 2016. At €611,000,000 cash flow from operating activities, it was well above Q4 2015.
Changes in net working capital resulted in a cash outflow of €266,000,000 mainly related to a value increase in crude inventories in downstream oil and higher excise tax payable. Cash flow used for investments decreased by €227,000,000 to €401,000,000 as a result of significantly lower capital expenditure, especially in Norwegian Romanian upstream operations. We recorded a net cash inflow from divestments of €226,000,000 Two examples of divestments were the closing of our sale of the Aljager terminal in Turkey as well as 30% stake in Rosebank. Free cash flow before dividends was €436,000,000 up by €579,000,000 compared to prior year. Free cash flow after dividends, including non controlling interest charges amounted to €803,000,000 This was an improvement of €946,000,000 and marked the highest free cash flow of any quarter in 2016.
2016 reported net income was positive at €3,000,000 Non cash items of €3,600,000,000 included net special items mainly related to impairments. Lower investments, coupled with divestment proceeds, led to a cash flow from investing activities of €1,800,000,000 which was €1,000,000,000 below the level of last year. Free cash flow before dividends amounted to €1,100,000,000 The dividend payment of €46 6,000,000 was offset by the divestment proceeds, mainly from Gasconnex Austria. Thus, free cash flow after dividends, including non controlling interest changes, was €1,100,000,000 Let me now turn to the performance of our operative segment. Clean CCS GIBIT overall increased by 68% to $350,000,000 in Q4 20 16.
The increase was mainly driven by upstream, which rose from minus €62,000,000 to €65,000,000 positive as a result of lower exploration of production costs, lower depreciation and higher sales volumes. Production rose by 2% to 315,000 barrels of oil equivalent per day in Q4 2016. We successfully started up production in Libya and reached 3,000 barrels of oil per day on average in Q4 2016. Sales volumes increased by 3% due to higher listings in Norway, Tunisia and one lifting in Libya. Downstream gas, clean EBIT also increased to positive €24,000,000 from minus €40,000,000 in Q4 2015.
The performance of Gas Connect Austria remained stable at €29,000,000 This was partially offset by the gas sales result, which was negative due to mark to market valuation effect. Downstream oil, clean CCS, EDID decreased from €288,000,000 to 2 €46,000,000 due to a different product mix and lower jet fuel margin. The refineries utilization rates remained on a very high level of 96%. OMV's indicator refining margin decreased from US5.9 dollars per barrel in Q4 $2,020.06 per barrel in Q4 2016, largely driven by lower naphtha spreads. On the full year comparison, the decrease in oil and gas prices in 2016 also affected clean CCSEBIT, which decreased by 20% to €1,100,000,000 This was mainly attributable to clean EBIT of Upstream, which was down at €26,000,000 The impact from lower oil and gas prices was only partly offset by higher sales volumes, lower acceleration in expense, depreciation and production costs.
Despite 34% lower refining margins, the downstream result remains strong at €1,100,000,000 supported by the €182,000,000 contribution from downstream gas. On the next slide, you can see the income statement summary of Q4 and the full year 2016. In Q4, the $396,000,000 deviation between clean CCS EVIT and reported EVIT was mainly attributable to net special items of €450,000,000 incurred by both Upstream and Downstream. Upstream's net special items amounted to minus €120,000,000 and were related to an impairment in Pakistan and other restructuring measures. Down impaired €293,000,000 for OMB Petrolophisi, Samsung power plant and the ethyl gas storage.
The net financial result more than doubled to €39,000,000 a strong contribution from Borealis in the amount of €86,000,000 and an improved net interest income drove this positive development. OMV recorded tax expenses of €103,000,000 driven by the stronger performance of the international upstream businesses and deferred tax asset valuation allowances. Non controlling interest were positive at €21,000,000 driven by a substantially higher contribution from OMV Petron. On a reported basis, net income attributable to stockholders was minus €192,000,000 which is equivalent to minus €0.59 per share. Adjusting for special items, clean CCS net income attributable to stockholders amounted to plus €153,000,000 resulting in clean CCS earnings per share of €0.47 Clean CCS EBIT in full year 2016 was €1,100,000,000 down versus last year by 20%, driven by a similar reduction of the oil price.
Total net special items close to €1,400,000,000 were recorded. I will explain them to you in more detail on the next slide. The net financial result of €227,000,000 reflected higher income from Borealis and an improved net interest result. OMV recorded tax expenses of €47,000,000 The clean tax rate was 7% in 2016. Non controlling interests were positive at €118,000,000 driven by a substantially higher contribution from OMV Petal.
On a reported basis, net income attributable to stockholders was €217,000,000 equivalent to €0.67 per share. Adjusted for special items, clean CCS net income attributable to stockholders amounted to €995,000,000 resulting in clean CCS earnings per share of €3,050,000 Regarding special items, in 2016, we booked negative net special items of €1,400,000,000 mainly attributable to impairments in both upstream and downstream assets. Upstream accounted for €1,100,000,000 of impairment, mainly driven by the sale of OMV UK upstream subsidiary, including Rosebank. In downstream, we booked net special items of minus €296,000,000 The divestment process of OMV Petrolofici, which was initiated in 2016, is progressing according to plan. In Q4 2016, OMV reclassified OMV Federal Fees' net assets as held for sale.
Following the reclassification, OMV recognized an impairment of €148,000,000 The divestment is expected to be still concluded in 2017. A decrease in spark spreads in Turkey adversely affected the value of the Samsung power plant and led to an impairment of €101,000,000 Finally, the gas storage business was impacted by the decrease in summer winter spreads, which led to a €73,000,000 impairment of the Edel Gas Storage in Germany. In 2016, OMV made excellent progress implementing the cost cutting and efficiency program. Strict cost management measures throughout the entire organization led to savings of around €200,000,000 100,000,000 more than targeted originally. This strong showing materialized especially in Q4 when we were able to close very favorable contract renegotiations.
For example, we renegotiated the maintenance for our power plant turbine, material sourcing and shuttle services. In our shared service center, we managed to further reduce costs through process optimizations and to numerous other efficiency initiatives, including the streamlining of software licensing. In our operations, we launched a series of cross divisional initiatives, including the benchmarking of operating costs and best practice sharing. For 2017, we commit to cost savings of €250,000,000 as compared to our 2015 cost basis. Now let's have a look at CapEx.
While we projected CapEx to come in at €2,400,000,000 at the beginning of the year, we only spent €1,900,000,000 in 2016. For the next 2 years, we are planning CapEx of €2,000,000,000 annually, which is below our earlier guidance of €2,200,000,000 In 2016, we reduced exploration and appraisal expenditure by 49% to €307,000,000 as a result of reduced exploration activities in Romania and the seizing of our activities in Sub Saharan Africa. Our new strategic target for 2017 'eighteen is to maintain exploration and appraisal expenditure at a €300,000,000 level. Now I would like to introduce our new dividend policy to you. ORV is moving away from targeting a payout ratio of 30% to a progressive dividend payment.
We are committed to delivering an attractive and predictable shareholder return through the business cycle. OMV projects a slower dividend of €0.01 per share, provided that this will not be to the detriment of the company's long term financial health or stability. OMV intends to grow the cash dividend progressively from 2016 onwards, in line with the group's free cash flow and net income development. The rate of progression will take into account the group's investment needs and strategic capital allocation priorities. And as Rainer has already announced, management's proposal for a dividend of 1.2 euros per share for 2016.
The overriding goal of OMV's financial steering framework is to ensure an attractive shareholder return and to have a stable rating. The 2 pillars to achieve this goal are value and cash. Value represented by ROCE, which is one of our main KPIs in steering OMV. The implication of ROCE on economic value added is accompanied by a special focus on a strong balance sheet demonstrating an optimal mix between leverage and liquidity for investment undertakings as well as dividend payments. In addition, OME strives for the generation of substantial free cash flow, which forms the basis for the future value added growth of the company.
The supporting principles for implementing our strategy with respect to value and cash are efficiency in operations, efficiency in capital management and efficiency in financing and cash management as well as a sound and stable future oriented portfolio management. ORB's financial steering framework stands for risk monitored, future oriented value added growth for the company and its stakeholders. With that and for the outlook, back to you,
Reinhard. Thanks, Reinhard. Ladies and gentlemen, let me now summarize OMV's outlook of 2017 for you. For the year 2017, OMV expects the average Brent oil price to be at US55 dollars per barrel of oil. The gas market environment in Europe continues to be characterized by oversupply.
However, average gas prices on European spot markets are expected to show an increase in 2017. Our production guidance for 2017 is 320,000 barrels of oil equivalent per day. Libyan production partially restarted and is expected to continue on average of 10,000 barrels of oil equivalent per day in 2017. In addition, the 2017 production guidance includes close 8,000 barrels of oil equivalent per day from per petroleum company. OMV's indicator refining margin is projected to trend downwards due to crude price recovery and persistent overcapacity in the market.
Capacity utilization in 2017 is expected to be above 90%. A planned full site turnaround at the Schwechat refinery is scheduled for the Q2 2017 and will last approximately 1 month. We reduced our CapEx guidance from €2,200,000,000 to €2,000,000,000 in 2017. We remain the exploration and appraisal expenditure guidance at €300,000,000 and we aim now to achieve cost reductions of €250,000,000 in 20.17 as compared to 2015. Let me finalize with OMV's vision for 2020.
In February 2016, we presented our new corporate strategy to all of you. The main theme was where do you want to go and what are the short and the midterm activities we need to to pursue to improve the competitiveness and profitability of our company. While 2016 was a transformation year with significant changes in our portfolio, restructuring and cost reduction reducing cost were also important topics. But it is now the time to lean back and say we have done a good job in 2016. If we want to shape the future of our company, we have to continue to change.
I have already a clear picture where OMV will go from here. OMV now has to enter a phase of value added growth. Our priority in the short to midterm is replenishing of our reserve base. We will focus on building a sustainable upstream portfolio by undertaking projects in low cost areas with rich hydrocarbon reserves such as Russia and the Middle East. Of course, we will aim to maintain a balanced risk portfolio.
In addition, in the current portfolio, we strive to actively manage our existing fields in order to optimize the production performance. We will apply best in class technologies in our operations. In the coming years, we will also focus on growth in our gas business. Natural gas remains a key fuel in the electric power sector and in the industrial sector. According to the International Energy Agency outlook in 2016, consumption of natural gas worldwide and Europe is projected to increase by 69% 42% from 2012 to 2,040, respectively.
OMV will create a European gas sales business to market OMV's increasing supply position and and better commercialize legacy regas and transportation capacities. OMB's future engagement in the gas transportation business is focused on non regulated activities. In particular, Nord Stream 2 remains an important strategic project for OMV's future, and we are working on finding a way to support it. OMV's downstream oil strategy centers on securing and further strengthening the competitive position of the refinery complexes in Schwechat, Burkhausen as well as Petrobrasie. While gasoline and middle distillates demand is anticipated to decline, oil demand for petrochemicals is expected to increase by an annual growth rate of almost 3% according to the International Energy Agency.
Considering the pivotal role of OMV's pathochemical integration with Borealis, we see significant long term growth potential in this area. We believe in mutually benefiting from the attractive and long term opportunities, and hence, we will seek to strengthen our relationship with important partners in Russia and the Middle East. At the same time, OMV will be financially and operationally steered to ensure financial discipline. OMV is on the right pathway for an ambitious transformation. By 2020, we will continue to produce and market oil and gas, and at the same time, we will be on our way to become an innovative energy and petrochemical supplier.
Thank you very much.
Yes. Thank you, Rainer and Reinhard. And now ladies and gentlemen, I would like to open the call for questions. I ask you to please limit your questions to 1 at a time and then so that we can take as many questions possible. But of course, I would like to encourage you to rejoin the queue for a follow-up question.
Now I would like to start the first question with Mehdi, but please ask Mehdi to limit it to one question.
Hi, good afternoon all. Yes, I will limit to one question and then come back on the queue. So question on the dividend, the new dividend policy. So you say that you intend to increase the cash dividend progressively from 2016 onwards in line with the group's free cash flow and net income development. Now if I see what you have done in 2016, you've got you've increased your dividend by 20%, whereas the net income, the clean net income went down.
So should I consider that the free cash flow is a better, let's say, tracker for you for the future dividend trend? And second, are you talking about the group's free cash flow or the group's organic free cash flow? Because in 2017, probably your group's free cash flow will be extremely high given all the asset disposal that you are going to realize. So just wanted to have a better view here. Thank you.
Thanks, Macy, for this question. First of all, I think the new dividend policy should just give a very clear indication that we are going away from some of this unpredictability of a direct relation to net profit number. So therefore, the overall situation of proximity to cash flow as well as the overall strategic path that the company is taking should be an indication. Now, if you take 120, please see that in the context of €1 dividend in 2015 €1.25 in 2014. So what does this mean?
This means, 1st of all, that in spite of more difficult environment, we still have been living up to our target to deliver positive free cash flow after dividend. And we even made a quite big contribution to our firepower of the future, of which we said that there are different means of using that money and dividend is one of them. Therefore, this 20% increase is a tribute to also show that we are coming back to normality rather than the increment of 20% is a yearly increment that you should count on for the future. In terms of the general group's free cash flow, the group's free cash flow is certainly there also to support what Rainer has indicated also the growth ambitions of OMV in value growth that certainly has to be tracked during the year 2017 2018. And this is certainly not something that we restrict just to 1 year.
Thank you very much.
Thank you, Mehdi. And now I move on to the next question from Haysom Rashid. Hello, Haysom.
Hello. Thank you, Maggie. Good afternoon, gentlemen. Thanks for the presentation. One question from my side.
Really just to come back a little bit on this financial firepower and the discussions you've and some of the sort of the comments you've made already outlining sort of use of this additional headroom now that you have in the balance sheet and the free cash that you're generating. Rene, you talked about entering a phase of value added growth. Given that CapEx is not really rising from here, at least sort of excluding the Achimov sort of asset swap, can you just talk a little bit more about sort of how we should think about this? I mean, should we be thinking about sort of a number of acquisitions of producing assets over the next kind of 12, 18 months to sort of to support that? Or is it something else that you have in mind here?
But just a bit more color around that would be very helpful.
Well, Hafen, first of all, the CapEx level from of 20 17 of €2,000,000,000 is more or less the level we are playing for the next years, which is sufficient to keep our production level and to go for an increase of production, especially in 2018 when 2 projects are planned to come on stream, Aasta Hansteen and the Navara project, you might see an effect next year on our production level. On the other hand, there is an upside potential. As we have said, we have restarted the production in Libya, but we are 10,000 barrels per day out of a capacity, which we could go now up to 40, given the recent acquisition in the four blocks. So there is an upside potential of 30,000 barrels per day, and we don't need any additional investment to go for 30,000 barrels per day upside. If we go for further investment in Libya, which will be then up to 50,000 barrels per day, then we are going for the Nafara field.
On the other hand, I think if we want to go for further additional growth, you're absolutely right, OMV prepares itself for acquisitions.
Okay. Thank you.
Thank you very much. And the next one is now Michael Alford from Citi.
Yes. Thank you very much. So I have a quick sort of follow-up on the same theme, if I can, but maybe asking it in a different way. So the gearing levels for OMV at the end of the year was 21% based on your definition. That will fall based on my estimates in 1Q to less than 15% given the proceeds that are coming in from the Siccar Point transaction.
So I just wanted to confirm whether you still hold that view that you want to be less than 30% gearing. And with that, should we think that OMV will run a more conservative level of gearing going forward? So should we think about the capacity on the balance sheet to be up to that sort of 30% threshold? And then just a sort of second question I had, which was more around the tax rate. Could you just give us some guidance on what you would expect a clean tax rate would be for 2017 based on your macro assumptions?
Thank you.
Regarding the gearing levels, what we have said is that we target to stay below 30% over the cycle. So we are well in that range. But of course, with cash flows improving, balance sheet improving, in general, that keeps up some headroom where you can also think about strategic moves. And that is exactly the targeted strategy that we have in mind. Regarding the tax rate, we came out at a clean tax rate of about 7% in 2016.
Due to the situation that unfolds here, we cannot expect that this level will stay. We are rather anticipating a clean tax rate around, say, 25 percent for 2017, of course, very much depending on specifically the high tax countries where we are exposed with production. So if we surpass in Libya or in Yemen, Yemen would come back or something like that, that could drive it up. On the other hand, it could also be driven down if we are increasing in other countries where we are paid less. But take that as a first ballpark number for 20
17. So we're coming now to Henri Patricot from UBS.
One question for me on downstream oil. In your slide on the U. N. Division to 2020, you mentioned extending the value chain in refining towards higher value products. I was wondering if you can share some details with us on the projects that you have for this part of the business.
Thank you.
Well, if you look on OREAL's performance of 2016, yes, they showed up one record year after the other. 50 was a record, 16 is a record where we cannot continue. But what we can say is that we do see a growth dynamic in pathochemicals, which is interesting for OMV. So we are going to support we are going to support Borealis on their strategy to further grow in their markets. So Borealis has a very nice set of good ideas, but we do have strict rules and I follow the rules that Borealis will talk about their business, yes, as they should not talk about OMV's business.
So Borealis will explain it also to the public what their ideas are, but in our strategy, there is a strong support of Borealis to go for further growth. On the other hand, petrochemicals in OMV, especially ethylene and propylene, but also butadiene has developed not too badly. So we have a clear view that we would like to support the business unit in petrochemicals to look for opportunities along the value chain. So you know that I'm a chemist. You can do a lot of with these
Now after Henri, we move on to Mark Koffler from Jefferies. Hello, Mark.
Hi, everyone, and thanks for taking my question. I just wanted to focus in on the cash flow and particularly looking forward over 2017 2018. I appreciate the upstream, downstream split that you provided for 20 16. Could you give some guidance how you think that sixty-forty downstream, upstream split moves over the next couple of years? And at the risk of asking 2 questions, it looks as if your oil price sensitivity is reducing in 2017.
Can you just add any color on that? Thank you.
Okay. Regarding the cash flow of upstream and downstream split sixty-forty that we have seen in 2016. We anticipate that cash flow in downstream will stay strong on a comparable level with the gas business maybe increasing a little bit. But this is a major cash provider that will stay also for the next years provided that, of course, the margins are there. Upstream, of course, with volumes increasing slightly and our production going up also participating in opportunities in Middle East and North Africa.
We would expect that also the cash flow basis of upstream would increase. So that in the end, there will be a sound contribution from both sides, maybe upstream increasing and downstream staying on very strong levels.
Your second question again, could you repeat? On sensitivities for the
Sensitivities for 2017. Well, what we more or less say is that if we have the Brent oil price down by US1 dollars per barrel. This has an impact on profitability on EBIT side of about 35,000,000 dollars And if we take it on the cash flow side, this will be about 30,000,000 in average. And if we take or we indicate the refining margin, if that increases by 1 U. S.
Dollar, which is, of course, a comparatively high change, this would have slightly above $100,000,000 EBIT effect and from the cash flow, a little bit above €18,000,000
Actually, for your information, we have attached a chart with all the sensitivities at the very end of the backup section of the presentation, so you can look at it after the call. So we are now coming to the next question from Lydia Rainforth from Barclays.
Barclays. Can I just come back to the use of cash flow? I'm sorry to come back to this, but can you just talk about your thoughts about the hybrid bond? So given the cash flow that you're generating, whether that was something that you would consider buying back or whether that is just actually a permanent feature within that? And I'm sorry to do a second one, but related to that.
In terms of the breakeven that you're looking at, you talked about $35 for 2016 as the breakeven, which is an incredibly impressive number. And yet you're talking about being free cash flow positive for 2017 at 55. Can you just talk through where you actually see breakeven for 2017? Thank you.
To your question on the hybrid, first of all, this is not a headache for 2017 actually. The first tranche of our hybrids that we have out there, 3 of them we have out there, would have a first call date in 2018. Until then, we, of course, will look very closely on how our cash flows, how our net debt position will develop, and then we make up our minds there. The no ideas of calling that early or changing our strategy in that way. But of course, we have interest to optimize our financing costs overall for the group in one or the other way.
Well, Lydia, I know Reinhard now quite a while. He has one thing is for clear, he wants to keep the money in his pocket. He's going to give you an answer only in 2018.
Thank you.
The second question was on the breakeven, cash breakeven.
For 2018?
For 2017. We had the 35
Okay, yes. Oh, yes. Well, Lydia, it's a little bit too early to give you an indication about 2017, whether it's $35 per barrel or not, yes. We have to wait a little bit. But as OMV is very sporty, I assume that we don't want to see too much upraise in the breakeven oil price, but it's too early to give you an indication.
That's perfect. Thank you very much.
The next question comes from Hamish Clegg, Bank of America.
I just wanted to go into a bit more detail on reserves and resources. You talk about the 100% reserve replacement ratio. Am I right in thinking, if I take the number you gave us on the call, 118,000,000 for the contribution of new assets, that the organic reserve replacement would be 90%. You mentioned and just on the same theme, you mentioned this target of 100% RRR. Is that an organic target you aim to achieve?
And could you sort of elaborate on how much of your new assets from Achimov particularly have found their way into your 2P resource? Sort of one resource question,
if that's right. All right. Well, first of all, we want to we would just want to concentrate on the 1P reserves as a statement because this is when I say I would like to replenish my production, it's important that I fill up the 1P reserves. Yes? So that's the reason why we would that we are targeting 100% reserve replenishment, which means that we are replenishing the production, which means 100% 1P reserves.
The second question is on new assets in Achimov. We have not booked any reserves of Achimov because we first have to close the deal and we have not finalized our deal with Gazprom. Therefore, we have not taken into account Achimov into you don't find in our 2P, neither in our 3P reserves.
Okay. Thanks very much.
So the next question comes from Thomas Schleitzer from Deutsche Bank.
Yes. Hi, everyone. Hello. Just one question on Libya. Can you elaborate a little bit about the situation in Libya?
What is the major obstacle for you to boost the production and the activities over there? So can you just tell us what's going on there? Yes. I'm delighted. I was 2.5 weeks ago in Tripoli, yes.
And I was looking at all the media reports, and I was surprised to see that this city really looks pretty peaceful. So during my visit, I discussed with NLC what can we do together to improve production. They are doing quite a good job. Our major obstacle in Libya as we speak about OMV's production is availability of transport capacities. The ports are more or less free to load our crude oil and to send it to the international markets.
That's the availability of transportation capacity Surte basin as we speak about C-three. So if other neighboring fields would come back on stream, yes, producing more associated gas, which we can inject into our fields, we can further upgrade our production. But we do see some progress, especially with NOC, freeing up transportation capacity, so that I really see an upside potential for OMV. But right now, it's too early to say what the upside is going to be because we have to see whether or not the agreements the National Oil Company has closed with the tribes with these bandits blocking the transportation routes, whether this is a sustainable agreement or not. Okay.
Can you say any guess what can be the production end of the year? Or is it too early to say anything? Come on. It's early January early February. Yes, it's a bit too early.
Okay. I think
if you calculate with the 10,000 birds per day, we have mentioned you are on the safe side. Okay. Thanks very much.
So now we come to the follow-up questions. The first one comes from
And
Mehdi, you may even ask 2 now. Yes,
next 3 weeks. You had already 2 Mehdi.
No. In fact, I had 4, but I will only add 4. So first question about the realized gas price, which has been pretty low in 4Q. In fact, since beginning 2016 and the collapse of the European spot gas price, you the spot gas price started increasing in Europe. And now, the spot gas price started increasing in Europe, your realized gas price is collapsing.
So I wanted to know if this is essentially due to Romania and if you can provide us some information there or if there is also some time lag effect that means that you will not benefit in the following quarters from the spike in European spot gas price? The second question is regarding, in fact, just an alert that I have read on Bloomberg saying that Rainer Hilleux announced that production might reach 350 kilobytes OED by the end of 2018. So I just wanted to have some precision here because this is not what I have in my model. And what is the contribution of Libya and Yemen that you put on this 3 50 kilobytes OET number that apparently you've announced which is in Bouygues.
Mehdi, thanks for the question. Let me answer the first question on the realized gas prices. The impact on the realized gas prices in Q4 2016 actually was Romanian gas prices and differences there, rather than that in fact, have been time lag effects, hedging effects that have been calculated into this in order to reflect also the expectation would ease result wise to come in Q4. So that was also one intention when giving you the trading update before that there is an indication how this also from this time lag effect in Q4 would be impacted.
Well, your second question, Mehdi, when we are talking about the 350,000 barrels per day production, this is the potential we can see nowadays for 2018, if, if, if we are both very, very positive. For example, I have said we are 320 with 10,000 barrels per day production in Libya. So if Libya would come theoretically next year, and the full capacity, you are up to 350. So this is the capacity in this is a capacity in that. But there is a second upside potential, yes, with the 2 projects I have mentioned already with Astra Hansen and with Nevada, yes, they also have substantial impact on our production.
So that's why we are talking about a potential we can see as a production daily production next year.
Okay. So just to make it clear, by end 2018, because we are talking about end 2018. If I remove Libya, okay, so 350,000,000 minus 40,000,000 from Libya, that means you expect to remain in 2017 2018 at 310 kilobytes OED including the positive impact from Astan Steen and Nawa?
Well, first of all, what we have said also last year. First of all, my colleague, Hans Bleininger, made the statement of the 350. He was very optimistic, but he said following his development timetable for the 2 projects I have mentioned, Aasta Hansteen and Navara, yes, we have to look at the end of 2018 and not beginning of 2018. That's the first point. The second point, up to your math, yes, I only can help you what we have said also in our previous conference call, yes?
Given our current portfolio with the current CapEx plant, we can keep the level of 310,000 barrels per day. Point.
Okay. Good. So now, we are totally satisfied, and we move to
the next question.
Good afternoon again and thanks for taking my follow-up. It's actually a very quick follow-up. You gave some very helpful color on Libya. I just wanted to know if you would be able to tell us where production is today. Because you talked about 3,000 barrels a day as being an average for Q4, although I know that this only started at the back end of the quarter.
And you're averaging you expect to average around 10,000 to 2017. But just in terms of getting an idea of where we are today, could you just tell us where production is as of sort of last week or 2? Thanks.
Well, all we can say is we have seen the 10,000 barrels per day in average. We are well on track with the 10,000 barrels per day.
Okay.
Good. And then final question comes from Lydia Rainforth.
Thanks. Hello there. I've got lots of questions today. So if I stick to Timo. On the Libya side, sorry to come back to this, but have you actually given what the kind of earnings and cash flow sensitivity is, to Libyan production coming back?
From what I remember, I can I'll go back to 2012 when we had very different oil prices. And the second one was on the cost savings plan, where clearly you have said that and achieved some impressive results there. Can you just talk through sort of whether this is now a stretch target for you and where you're seeing those benefits come from? Thank you.
All right. I take the first difficult question. It's a really good one, but you don't get an answer. I leave the second question for my board, Karl. Okay.
For the cost savings. The target of $250,000,000 I think it's important to be understood as compared to the cost basis of 20.15. So that's more or less an additional $50,000,000 on the level that we have reached by the end of 2016. However, take into account that, of course, in every year where you have cost savings, there are some one time cost savings in there as well. So the threshold that we have set ourselves is, of course, much higher than €50,000,000 But we are more than confident that this is a target reachable for us.
We have shown in 2016 a very good performance of our teams in order to deliver on the target. So, we are confident that also the real bottom line 250 improvement target in 2017 with Halt.
So the very final final question comes from Michael Otsford, but then we really have to stop. Michael, last question.
Yes. Thanks, Scott. Sorry for prolonging the call, but just one follow-up. Just wanted to get a sense, I know activity in exploration has come down quite a lot or it's expected to come down quite a lot into 'seventeen. But I just wondered if you could give some sense as to where the money is going.
Is it focused mainly on Romania and replacing reserves there? Or are you planning other wells within your portfolio? Thank you. Exploration
wells?
Well, first of all, we will have some E and A focus on Abu Dhabi. This tower gas fields we have mentioned, it's Shuai Hat as well as the Ghassar field. So we will go for an appraisal program in Abu Dhabi. That's where we are going to focus on. Then we do have participates also in licensing rounds in Norway.
So in Norway, we are going to continue in exploration, especially in the Barents Sea in the neighborhood of our Wisting field, we would like to further explore it. And of course, Romania is going to be a major focus continues with about onethree of our exploration spending.
Great. Thank you very much.
So with this, ladies and gentlemen, we have come now to the end of our conference call. For your information, OMV will next report on the Q1 2017 results. This will be in May 11, 2017, but I hope that many of you will see beforehand on the one or the other roadshow and the meeting. I would like to thank you all for joining us. And should you have any further questions, please contact the Investor Relations team, and we will be happy to help you.
With this, we would like to wish you a nice afternoon and hope to speak to you soon. Bye bye.
Bye bye. Thank you.
That concludes today's conference call. A replay of the call will be available for 1 week. The number is printed on the telephone conference invitation. Or alternatively, please contact OMV's Investor Relations department directly to obtain the replay numbers.