Welcome to the OMV Group's conference call. If you would like to ask a question after the presentation, you may register your request by pressing the star one button on your telephone at any time during the actual presentation or during the question and answer session itself. Additionally, simultaneous to this conference call, a live audio webcast is available on OMV's website. I would now like to hand the conference over to Ms. Magdalena Moll. Please go ahead, Ms. Moll.
Yeah, thank you, Andrea. Ladies and gentlemen, thank you for joining us on such short notice to this conference call. Today we have a special occasion. We welcome you to OMV's conference call on the asset swap with Gazprom. We are pleased to inform you that OMV and Gazprom have signed today a binding basic agreement for the asset swap. This is really a major milestone for OMV in reaching one of its most important strategic targets, namely to exceed the 100% reserve replacement rate. With me on the call today to give you more details on the transaction are Rainer Seele, our Chairman of the Executive Board and Chief Executive Officer, Reinhard Florey, our Chief Financial Officer, and Johann Pleininger, the Executive Board Member responsible for Upstream. Following their short presentation, all three Executive Board members are happy to take your questions.
Please also note that we have published the charts and the speech on our website at www.omv.com. With this, I would like to hand the presentation over to Rainer.
Yeah. Good afternoon, ladies and gentlemen, a warm welcome to today's conference call on the asset swap with Gazprom, and thank you for joining us. I'm delighted to announce that OMV and Gazprom today signed the binding basic agreement to swap the assets of equivalent value. As we announced in February 2016, OMV considers Russia to be one of its most important growth regions in Upstream. The establishment of a strong partnership with Gazprom along the value chain offers a unique chance for OMV to create value by entering low-cost production and adding substantial reserves. In the anticipated swap, OMV will receive a 24.98% stake in the blocks 4 and 5 of the Achimov Reservoir in the Urengoy natural gas condensate field, which is located in Western Siberia.
The project will substantially increase OMV's production by the beginning of the next decade and will provide a long-term stable production base for the next 20 years. Start of production is planned for 2019. In addition, OMV will add around 560 million BOE in cumulative production. This is about five times our annual production, our current annual production. In return, Gazprom will receive a 38.5% participation in OMV's wholly owned subsidiary, OMV Norge. OMV has grown its presence on the Norwegian continental shelf quite substantially in the recent years. The current portfolio consists of a total of 32 licenses, out of which five are operated by us. The economic effective date of the transaction will be January 1, 2017. Signing of final transaction documents, which include detailed corporate governance and other customary legal contract terms, is expected by mid-2017.
The closing is envisaged by year-end 2018 at the latest and is conditional upon governmental and corporate approvals. We firmly believe that this is an important strategic step to reshape OMV's upstream portfolio. The transaction will balance our upstream portfolio, improve our competitiveness, and provide a strong growth platform. My board colleague, Hans, will give you more insights on the assets in Russia and Norway.
Thank you, Rainer. Welcome also from my side. Let me start with Achimov 4 and 5. The Achimov 4 and 5 project encompasses the development and operation of Block 4 and 5 of the Achimov Reservoir in the Ust-Balyksky field in Western Siberia. The Ust-Balyksky field is Russia's largest gas field and extends over 12,000 sq km. This field was discovered in 1966, has been producing gas for over 35 years from shallow reservoirs. The Achimov Reservoir is a deep and condensate-rich reservoir. Currently, Block 1 and 2 are producing. OMV will receive a 24.98% stake in the Achimov 4 and 5 joint venture with Gazprom and Wintershall. The Achimov 4 and 5 project has already been sanctioned in March 2016 and is currently in the development phase.
The project will add approximately 560 million BOE in cumulative production, representing OMV's share of production until the end of the contract in 2039. The split is about 70% gas and 30% condensate. According to the current assumptions, we expect the reserves to be booked mostly over the first five years of the project. This will increase the reserve replacement rate to more than 100% for OMV for a period of five years. It is anticipated that 14-20 wells will be drilled annually in the timeframe 2018-2024. We expect the production startup in 2019. Plateau production of more than 80,000 BOE per day will be reached in 2025. We assume that the plateau production level will last for at least 12 years, with only a slight decline thereafter, providing a long-term stable production base for OMV.
At the end of the contract period in 2039, the production level still will amount to 70,000 barrels of oil equivalent per day. This should lead to a strong and stable free cash flow contribution. OMV's share of total investment is expected to amount to approximately EUR 0.9 billion from 2017 to 2039. In the first two years, around 40% of CapEx will be spent. Let's turn to our Norwegian Upstream subsidiary. OMV Norge, headquartered in Stavanger, is a wholly owned subsidiary of OMV. OMV has identified the North Sea as a core region. Norway has become the second highest production country after Romania. Total 2P reserves of OMV Norge amount to 200 million barrels of oil equivalent. Thereof, liquids and natural gas having a share of 50% each.
The first nine months 2016, average production of 67,000 barrels of oil equivalent per day came from OMV interests in Gullfaks, Gudrun and Edvard Grieg. Additional production is expected from the field development of Aasta Hansteen in 2018 and the redevelopment of Gullfaks. The Wisting project, which is currently in the appraisal phase, provides further upside potential. In summary, OMV's Norwegian subsidiary holds a favorable position in a politically very stable region for oil and gas production. Now I would like to turn the presentation back to Rainer.
Thanks, Hans. Ladies and gentlemen, let me now talk about the strategic rationale of this transaction. The following aspects have been considered for a strategic decision to pursue the asset swap. First, the ability to continuously replenish reserves is crucial for OMV to renew its production base. Russia offers significant opportunities for reserve replenishment. With the remaining reserves of around 420 billion barrels of oil equivalent, Russia offers potential to become a major source of reserve replenishment in OMV's portfolio. The realization of the Achimov deal is expected to make a significant contribution to OMV's current 1P reserves level. Thus, the transaction enables OMV to exceed its strategic target of 100% reserve replenishment. For a period of over five years, we can manage.
Second, production from Achimov 4 and 5 is estimated to amount to approximately 25,000 barrels of oil equivalent per day in 2020 and reach plateau of more than 80,000 barrels of oil equivalent per day in 2025. The project will therefore substantially increase OMV's production. Third, the access to production in Russia will improve OMV's cost position. In Russia, costs along the entire upstream value chain, from finding to development and production costs, are among the lowest in the world. The high volume, low cost operations in Achimov 4, 5 will have a substantial impact on OMV's upstream unit cost by 2025. Unit production costs in Achimov 4, 5 are expected to be below $2 per BOE on an average for the contracted period.
With this major new hydrocarbon reserves coming into our portfolio, OMV will not need to spend as heavily on exploration and appraisal in an effort to achieve 100% reserve replacement ratio. Consequently, OMV reduces its exploration and appraisal expenditure from EUR 700 million in the past years to EUR 300 million annually over the medium term. Finally, the asset swap strengthens the partnership between OMV and Gazprom. OMV has had a long and successful cooperation with Gazprom for almost half a century. As a result of the asset swap, OMV will benefit from Gazprom's strong position in Russia and its technological knowhow. Gazprom, in turn, will be able to diversify its asset base outside Russia. Additionally, OMV will identify and jointly develop further projects and opportunities with Gazprom. That will strengthen OMV in the long term. Let me now turn to the financial impact on OMV.
Following this transaction, OMV will continue to fully consolidate the OMV Norge subsidiary and its reserves. OMV Norge's financial performance has been driven by development activities, turning fields into production since 2014. While revenues and operating cash flow increased since 2014, constant investments in further exploration development activities burdens free cash flows. For 2016, free cash flow is forecasted to turn positive, ramping up in the following years, reflecting successful project developments coming into production. OMV Norge will distribute to Gazprom its respective share dividends. In turn, OMV will be entitled to dividend income from the Achimov 4-5 joint venture. The dividend is expected to be distributed from 2020 onwards. OMV's share of net income will be shown in the income statement in Clean CCS operating results as a net income from equity accounted investments. Thank you, ladies and gentlemen. I'm now more than happy to take your questions.
Now, ladies and gentlemen, I would like to open the call for questions. I would like to ask you to please limit your questions to one at a time so that we can take as many questions as possible. Of course, you're always welcome to rejoin the queue for a follow-up question. Our first question comes from Mehdi Ennebati from Societe Generale.
Hi. Good afternoon, all. Thanks for the update. I will ask very quick, small questions. There will be three. Just, Rainer, can you please confirm that you will keep your EUR 300 million exploration expenditures until 2020? I'm not sure I heard the 2020 figure. Second, do you see a risk, even if it's a low risk, that the deal won't be approved by the Norwegian authorities, or did you deal with them before finalizing the deal with Gazprom? Regarding your CapEx guidance for 2017, 2018, if the deal is not fully concluded before year-end 2018, will you have to revise down your CapEx guidance for 2017, 2018, removing the CapEx which were allocated to Achimov project? Maybe just a small one. Can you just-
Well, no. My dear Mehdi.
Okay.
We have agreed on one question.
Fine. Okay.
Three questions. This is fine.
Mehdi, you will get quick and straightforward answers. Yeah? I can confirm EUR 300 million E&A budgeting until 2020. Yes. Your second question, risk in Norway. We are going to have a joint approach to the Norwegian ministries, as we have to approach the Russian ministry in the next months to come, asking for and starting the approval process. We needed to have, first, the basic agreement in line that we do understand what kind of asset swap structure are we going to have and are we going to discuss with the authorities. What is even more important, Mehdi, is that we have to agree on the corporate governance, which is very important in the approval process, and we have scheduled that we have an agreement on all these corporate governance issues, et cetera, until summer next year.
I don't expect that we will have a clear picture in Q1 next year. We will start this process in January, February next year. CapEx guidance. Well, I confirm the EUR 2.2 billion CapEx budget as an orientation for 2017. Let's wait and see. We have in our budget that we will go for the project. Let's wait and see when we do have to transfer the money, whether it's going to be 2017 or 2018.
After closing.
After closing, of course.
Thank you.
It's depending when are we going to close the deal, definitely this will be in 2018.
Good. Thank you very much. Now we move on to Haitham Rashid from Morgan Stanley. Please have the discipline because there are so many questions coming that we are limited to two questions per person if you can.
Thank you, Maggie. I will keep it to one main question, one very short clarification. The clarification is just around the EUR 0.9 billion of your share of CapEx. I just wanted to understand, is that actually share of full field development spend for the field as a whole or the development as a whole? Is there some other element of spend, in terms of either project finance or some other way in which you are funding the development of the field? It just seemed that that number is quite low relative to the amount of production you expect over the time period. Just if you could clarify that. The second question I had, the main question actually, was just coming back to this idea of the timing.
From your previous experience, Rainer, in Wintershall, with the closing of the transaction when you entered into the same development previously, it took quite a while, and I just wanted to understand what are the major hurdles or challenges to closing this transaction? It sounds like you've put in a time limit of end 2018, but it could be something that could come a lot sooner. Just if you could give us a sense of what could make this perhaps potentially close a lot quicker than that or what could delay it, that would be very helpful. Thank you.
Haitham, Hans speaking. I would like to answer the first question regarding the CapEx. The EUR 0.9 billion, the total CapEx over until end of the contract, where we will spend around 40% in the first two years, which is around EUR 200 million-EUR 250 million in the first two years.
And this is important, we will not spend it or really paid out in cash in the first two years, but it will only be paid after closing, and this is 2018.
Can I just clarify that that means that the full development of Achimov-4, 5 you're saying is EUR 3.6 billion to develop that particular formation. Is that what you're saying? There is no other additional CapEx that is going to be spent or going to be funded in some other way. I just wanted to understand that. That's all.
That's true. Why is it so low? If I can say, it's because the infrastructure is already built with Achimov-1 and 2, because this is already producing. We are using the same infrastructure and pipeline system. We just need to drill the wells and need to build the gas treatment facilities for Achimov-4 and 5. Everything else is already existing.
Okay, very clear. Thanks.
All right, the second question is on my experience with the Wintershall closing the deal. Well, the major challenge is just to get the necessary approvals from the authorities in time. My experience in Wintershall was not so much challenging issues in Western Europe. It was more getting all the approvals from the state authorities in Siberia. I hope that we might get an accelerated approval for Achimov-4, 5 as one Western company is already in the project, so that we don't have to invent the wheel, and we might can fly in the tailwind of the already closed deal and approval process of Wintershall. That's the major challenge.
Okay. Thank you. That's very helpful.
We are now moving on to the next question of Josh Stone from Barclays. Good afternoon.
Hi, good afternoon. Just one question, please. Given that it could be quite a long time between the deal being signed and closed, are there any provisions for movement in oil or gas price over that period in terms of how the deal is structured? Thank you.
In terms of the structuring, as we are not talking about a signed transaction, but an announcement of basic agreement, there have, of course, not been any kind of provisions of that kind for that time being. This is a matter of what we expect until end of the first half 2017 to finalize the signing for this transaction.
Okay. Thank you.
Now we're moving on to the next question from Marc Kofler from Jefferies.
Oh, hi there, everyone. Two questions from me, please. Rainer, in your comments, you alluded to the integrated approach across the value chain with Gazprom. Could you expand on that, please, particularly thinking about some of the other possibilities you see out in the future? Also, I think in the past you talked about Nord Stream 2 as well. Just really piecing that all together, please. Secondly, I think today you're talking about first gas from 2019. Earlier on this year, I think it was 2018. Is there any sort of obvious reason for that slippage on the project? I'm just trying to get a feel for some of the execution risk around the development. Thank you.
All right. Well, I take the first question, Hans will answer on the first gas topic. What we do have in mind working along the value chain is, first of all, as we have started working the market, we would like to increase our trading activities together with Gazprom, that we are going to contract additional gas volumes. You might have seen the comments from Gazprom that we have increased the gas imports from Russia towards Austria. We would like to increase the trading activities, which means that we are ready to import more gas, which also makes sense in the context that we are going to expand also our cooperation with Gazprom towards midstream. Yes, you're right, we do have an ongoing interest, we haven't cooled down to cooperate with Gazprom also in the Nord Stream 2 project.
As this project has a strategic importance for us as OMV, because the final destination of the vast majority of the gas running through Nord Stream 2 is going to be the Baumgarten hub, which will be improved in its importance as the Southern European trading hub
It's just within our system. It makes much sense that we also continue to work in midstream, this is going to be also the first investment project we will have as a joint project with Gazprom. So far, we never had a joint investment project as OMV together with Gazprom. Of course, it's a good start with Achimov-4, 5. Of course, other opportunities are waiting in Russia. Honestly speaking, we have to concentrate 120% finalizing the deal and closing the deal so that this is our priority.
On the second question.
Coming to first gas. First gas, you are right, originally was estimated at the end of 2018. It's now slightly delayed for beginning of the second half in 2019, there's nothing to worry about it. It's just that the drilling will start a little bit later. As I said, it's just half a year delay roughly.
Okay. Thank you.
Very good. Now we are coming already to the sequence of follow-up questions. I'm happy to announce that Mehdi is first in line.
Mehdi, welcome back.
Thank you very much. Just a very quick additional questions. Regarding the resources, 2.6 billion BOE for the full project. I wanted to know if you are using the same recovery factor than Achimov-1, 2, and if there is some upside here, meaning that we say big fields get bigger. Is there any possibility that this recovery factor will go up in the years to come? Second question, just a follow-up. One, can you please, Rainer, just remind me in 2017 and 2018, what is the CapEx that you are using for Achimov-4, 5 in your CapEx guidance, in your group CapEx guidance? Yes, there was some discussion about a tax increase for gas producers in Russia, particularly Gazprom.
I wanted to know if you can just make us a very quick update on that and if Achimov-4, 5 projects is impacted by that potential tax increase. Thank you.
Tax increase.
Tax increase. I will take the first question. The recovery factor is similar to Achimov-1 and 2. Indeed, as you said, usually big fields are getting bigger. Let's say right now we are just at the beginning. We have done the due diligence, the technical due diligence, but remains to be seen. I support what you have been saying that big fields becoming usually bigger. Right now we can't confirm it.
What recovery factor are you currently using?
The recovery factor is, I can't tell you the exact one because we don't disclose those figures. First of all, I can't disclose a figure from Achimov-1 and 2, and from 4 and 5, we'll see once we have been starting up production.
Okay. Thank you.
All right, Mehdi. The CapEx guidance. Well, what we have said, and now we are going both together in the math. Yeah? You have some information already. We have said it is EUR 0.9 billion from 2017 until 2039, and we have said 40%.
Yes
EUR 0.9 will be spent in the first two years. How you split the number now into 2017 and 2018, I will leave to you. This is a part of the math you have to do yourself.
No, because there is another question.
You said that the CapEx started by March 2016. Given the deal is effective January, I don't know if the 40% relates from the 1st of January or from March 2016.
That's the case. Effective date is 1st of January.
Okay.
I'm taking the bill from January 1st, 2017. What is the past? I don't care. I hope they will spend a lot in 2016.
Correct.
I have no influence to my biggest regret. Your last question, Mehdi, the tax increases. It's my understanding that this is in discussion in Russia. Yeah? There is no tax change being approved so far. By the way, we also have tax increases being discussed here in Austria, as well in other countries. We have to wait and see whether or not this will really become true, and then I will let you know whether or not it's going to be impacted our project.
Thank you.
Good.
There's a final question coming from Bertrand Hodee from Kepler Cheuvreux. Hello, Bertrand?
Hello, can you hear me?
Yes, we hear you. Yeah.
Yes. Okay. Sorry. Yeah, just one question on the structure of the OMV Norge. What kind of free cash flow do you expect, let's say if we are at $60 at OMV Norge? And what kind of, I would say, dividend payment can Gazprom expect to receive from OMV Norge in a, let's say, $60 oil price environment or whatever oil price environment you may choose to give a guidance on that?
Bertrand, I'm very sorry that I cannot release specific numbers on your questions. What I have said in my remark is that in 2016, this year, we will have the first year where the free cash flow is forecast to turn, I would say, slightly positive. I add one word, yeah, to give you an idea, slightly positive. It's ramping up positive in the following years. That's all what we can say as we speak about OMV Norge. The dividend policy is part of our contractual agreements, which we haven't fixed so far, but it's depending on the performance of the company, of course. Gazprom as a new partner in the company, of course, will ask for a dividend which is reflecting the current business performance year by year.
Can I ask one follow-up?
Sure.
What kind of CapEx should we assume for OMV Norge on 100% basis, let's say in the next two to three years?
Everybody sitting around my table is now shaking his head. Behind me, "Rainer, Rainer, Rainer, be careful, be careful, be careful, be careful, be careful." That's what's going on here in my room. Bertrand, very clever question, but I will have a problem because today we are in the mood to drink champagne. If I disappoint my team here because I release some information they don't want, we will get only mineral water. It's also sparkling, but it's not tasting like champagne. That's the reason why I would like to ask you to understand that we don't want to release the information CapEx on OMV Norge.
Okay, fair enough.
Thank you very much.
Thank you very much.
Good questions. Here we have to refer a little bit to your analytical skills that you make a good assumption, okay? We come to the final question of Haitham Rashid, one final one.
Thanks very much for allowing me to ask another question. I just wanted to follow up a little bit on just on pricing, just to understand how we should think about the gas that comes out of this field, whether you will just get effectively a European gas price as this is exported to Europe, or is there some sort of agreement where some of this will go to the domestic market at different prices? Just if you can give us a sense of how we should be thinking about pricing these molecules. The second question, which is sort of related to that, is clearly once this is up and running and plateau, you are going to become a much gassier company than you are today, given the size of this relative to your existing production.
I just wondered whether that's something that you've thought about strategically as well, for some of the future perhaps optionalities you're looking at. Are you thinking of becoming more gassy generally, or actually, would you be then looking to add oil? You want to keep yourself fairly balanced just to get a sense of where you're thinking on that. Thanks.
Well, in terms of pricing, I have to say, we do have, as Hans said, a 70/30 split of gas to condensate. The condensate, you can go for international pricing. I would recommend use your blend as an orientation. Why? Because we are injecting the condensate as a blending component into the Transneft system to make this heavy crude from the Ural regions a little bit more transportable. As we speak about the natural gas pricing, what you have said is correct, and it's both, but I don't tell you the share.
Okay.
We do both pricing structure. Part of the gas will be priced netback to the European gas prices, and part of the gas will be on the domestic pricing. If you look into statistics published by some consultants who make analyses of European gas prices towards domestic Russian gas prices, you will find out that the Russian gas market will come closer to a netback pricing of European gas prices. The gas prices in Europe went down substantially, and on the other hand, the ruble effect is reflected. What we have, and that's very important, what we have agreed, in principle, is a wellhead type business, as we speak about selling and marketing of our production in Siberia. When the gas and the condensate sees the daylight, we are selling it to Gazprom under take or pay conditions. The portfolio effect.
We do have right now a 50/50 split oil and gas. You are right, with the 70/30, we are swapping 50/50 in Norway, we will become a bit more gassier. Our strategy is that we are targeting more or less the 50/50 structure, which is a more or less balanced portfolio. We would not be against having a little bit more a gassier portfolio in OMV as we think that the dynamics in the market, especially that the gas demand, has a better outlook long-term compared to the oil demand. If I look into IEA figures, I can see that oil demand long term will go down, whereas gas demand will go up. That's the reason why we think we are well advised to become a bit more gassier. This wouldn't mean that we will turn from 50/50 to 90/10.
We are not so drastic in our thinking, a little bit more gas is, from my point of view, not too bad.
Okay. Thank you.
Yes. Hans says condensate is a liquid.
Yes. Condensate is counted as liquid, and therefore it's counted on the oil side. Therefore, this has not such a big impact as it seems to be. Because 70% is gas and 30% is condensate.
No, fair enough. That's very helpful. Thank you.
I think after this wonderful statement, we have now come to the end of the conference call, ladies and gentlemen. I would like to thank you for joining us, and would invite you, if you have any further questions, please contact the investor relations team and we will be happy to help you. We all wish you still a very nice day and say goodbye to all of you. Thank you.
Bye.
Bye.
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