Welcome to the OMV Group's Conference Call. 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.
Yes. Thank you, Andrea. And ladies and gentlemen, thank you for joining us on such short notice to this conference call. Yes, today, we have a special occasion. We welcome you to ONV'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 MV 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 Flore, our Chief Financial Officer and Johan Pleininger, the Executive Board Member responsible for Upstream. Following their short presentation, all 3 executive board members are happy to take your questions. Please also note that we have published the charts and the speech on our website atwww.omv.com.
So with this, I would like to hand the presentation over to Raitt.
Yes. Good afternoon, ladies and gentlemen, and 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's client are binding basic agreements 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, OMB will receive a 24.98% stake the Blocks 4.5 of the Achimov reservoir in the Uringoy natural gas and condense field, which is located in Western Australia. 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. This is about 5 times our annual production, our current annual production. In return, Gazprom will receive a 38.5 percent 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 licensees, out of which 5 are operated by us. The economic effective date of the transaction will be January 1, 2017. Signing of final transaction documents, which includes detailed corporate governance and customary legal contract terms is expected by mid-twenty 17. 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. Now my Board colleague, Hans, will give you more insights on the assets in Russia and Norway.
Thank you, Rainer, and welcome also from my side. Let me start with Achimov 45. The Achimov 45 project encompasses the development and operation of Block 45 of the Achimov reservoir in the Urine Goi field in Western Siberia. The Urine Goi field is Russia's largest gas field and extends over 12,000 square kilometers. 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 12 are producing. When we will receive a 24.98 stack in the Achimov IV and V joint venture, Gazprom and Wintershall. The Achimov 45 project has already been sanctioned in March 2016 and is currently in the development phase. The project will add approximately 560,000,000 barrels of oil equivalent in cumulative production, representing OMV's share of production until the end of the contract in 2,030 9.
The split is about 70% gas and 30% condensate. According to the current assumptions, we expect the reserves to be booked mostly over the 1st 5 years of the project. This will increase the recent replacement ratio to more than 100% for OMD for a period of 5 years. It is anticipated that 14 to 20 wells will be drilled annually in the time frame 2018 to 2024. We expect a production start up in 2019.
Plateau production of more than 80,000 barrels of equivalent 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 2,039, 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 €900,000,000 from 2017 to 2,039.
In the 1st 2 years, around 40% of CapEx will be spent. Now let's turn to our Norwegian upstream subsidiary. OMV Norge, headquartered in Stavanger, is a wholly owned subsidiary of OMB. OMB has identified the North Sea as a core region. Norway has become the 2nd highest production country after Romania.
Total 2P reserves of OMV Norge amount to 200,000,000 barrels of oil equivalent. Thereof, liquids and natural gas having a share of 50% each. The 1st 9 months 2016, average production of 67,000 barrels of oil equivalent per day came from OMV interest in Gullfax, Gutrun and Edvard Grieg. Additional production is expected from the field development of Astra Hansen in 2018 and the redevelopment of Goldfax. The Vistim project, which is currently in the appraisal phase, provides further upside potential.
In summary, WV's Norwegian subsidiary holds a favorable position in a politically very stable region for oil and gas production. And now I would like to turn the presentation back to Harald.
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 4 1,000,000,000 barrels of oil equivalent, Russia offers potential to become a major source of reserve replenishment in OMV's portfolio. The realization of the Erchimov 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 5 years, we can manage. 2nd, production from Achimov 45 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. 3rd, the access to production in Russia will improve OMV's cost position. In Russia, cost along the entire upstream value chain from finding to development and production cost are among the lowest in the world. The high volume, low cost operations in Achimov 45 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 appraisals in an effort to achieve 100% reserve replacement ratio. Consequently, OMV reduces its exploration and appraisal expenditure from €700,000,000 in the past years to €300,000,000 annually over the mid 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 know how.
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. So 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's Norge's financial performance has 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 burdened 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 Nagel will distribute to Gazprom its respective share dividends. In turn, OMV will be entitled to dividend income from the Achimov 45 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 accountant Investments. Thank you, ladies and gentlemen, and I'm now more than happy to take your questions.
Yes. 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 1 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. So our first question comes from Mehdi Ennibati from Societe Generale.
Hi, good afternoon all. Thanks for the update. I will ask very quick small questions. There will be 3. Just Rainer, can you please confirm that you will keep your €300,000,000 exploration expenditures until 2020?
I'm not sure I heard the 2020 figure. 2nd, 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? And regarding the CapEx, 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 we are allocated to active off project? And maybe just a small one, can
you No, no, no, no. My dear Mehti, we agreed on one question. So three questions, this is fine. So
Migdi, I heard you will get quick and straightforward answers, yes? I can't confirm €300,000,000 E and A budgeting until 2020. Yes. Your second question risk in Norway. We are going to have a joint approach to the Novicha 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, Mecky, 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 government issues, etcetera, etcetera, until summer next year. So I don't expect that we will have a clear picture in Q1 next year, But we will start this process in January, February next year. CapEx guidance, well, I confirm the €2,200,000,000 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 send or transfer the money, whether it's going to be 2017 or 2018. After closing, of course. It's depending when are we going to close the deal.
And definitely, this will be in 2018.
Good. So thank you very much. So now we move on to Haysom Rashid from Morgan Stanley. Yes, and please have the discipline because there are so many questions coming that we are limited to 2 questions per person if you can.
Thank you, Maggie. And I will keep it to one main question, one very short clarification. The clarification is just around the €900,000,000 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? Or is there some other element of spend in terms of kind of either project finance or some other way in which you're kind of funding the development of the field?
It just seems that that number is quite low relative to the amount of production you expect over the time period. So just if you could clarify that. And the second question, I had the main question actually, was just coming back to this idea of the timing now from your previous experience, Rainer, with 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 sort of major kind of hurdles or challenges to kind of closing this transaction because it sounds like you've sort of put in a kind of a time limit of end 2018, but it could be something that could come a lot sooner.
So 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.
Hesham, Hans speaking. I would like to answer the first question regarding the CapEx. So the €900,000,000 the total CapEx over until end of the contract, where we will spend around 40% in the 1st 2 years, which is around €200,000,000 to €250,000,000 in the 1st 2 years.
But maybe and this is important, We will not spend it. We are really paid out in cash in the 1st 2 years, but it will only be paid after closing and this is 2018.
But can I just clarify that, that means that the full development of ACIMO 4.5, you're saying is €3,600,000,000 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 be funded in some other way. I just wanted to understand that. That's all.
That's true. And 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. So we are using the same infrastructure and pipeline system. So we just need to drill the wells and need to build the gas treatment facilities for Achimov 45.
Everything else is already existing.
Okay. Very clear. Thanks.
All right. The second question is on my experience with Wintershall closing the deal. Well, the major challenge is just to get the necessary approvals from the authorities in time. And my experience in winter high 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 45 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 backwind of the already closed deal and approval process of Wintershall. So that's the major challenge.
Okay. Thank you. That's very helpful.
So we're 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. So this is a matter of what we expect until end of the first half twenty seventeen to finalize the signing for this transaction.
Okay. Thank you.
So now we're moving on to the next question from Mark Kovler from Jefferies.
Hi there, everyone. Two questions for me, please. Can you 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? And then also, I think in the past, you talked about Nord Stream 2 as well.
So just really piecing that all together, please. And then secondly, I think today, you're talking about 1st gas from 2019 earlier on this year. I think it was 2018. Is there any sort of obvious reason for that slippage in the projects? I'm just trying to sort of get a feel for some of the execution risk around the development.
All right. Well, I'll take the first question. Hansel will answer on the gas 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 so 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.
So we would like to increase the trading activities, which means that we are ready to import our 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 interest an ongoing interest. We haven't cooled down to cooperate with Gazprom also in the Nord Stream 2 project. Because as this project has a strategic importance for us as OMB because the final improved in his importance as the Southern European Trading Hub, and it's just within our system.
So it makes much sense that we also continue to work in midstream, and 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. And of course, it's a good start with Achimov 45. Of course, other 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 1st guess, 1st guess, you are right. Originally, it was estimated at the end of 2018. It's now slightly delayed for beginning of the second half in twenty nineteen, but there's nothing to worry about it. It's just that the drilling will start a little bit later. But as I said, it's just half a year delay, Hafid.
Okay. Thank you.
So very good. Now we are coming already to the sequence of follow-up questions. And here I have, I'm happy to announce that Meci is 1st in line.
Meci, welcome back.
Thank you very much. So just very quick additional questions. Regarding the resources, so EUR 2,600,000,000 BOE for the full project. I wanted to know if you are using the same recovery factor than AKIMOV-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 2018, what is the CapEx that you are using for Achimov for 5 in your CapEx guidance in your group CapEx guidance? And yes, there was some discussion about the 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 Akimov 45 project is impacted by that potential tax increase? Thank you.
Tax increase.
Tax increase. So I will take the first question. So the recovery factor is similar to Achimov 12. And indeed, as you said, usually big fields are getting bigger. But let's say it right now, we are just at the beginning.
We have done the due diligence, taking due diligence, but remains to be seen. But I support what you have been saying that big fields becoming usually bigger. But right now, we can't confirm it.
So 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. And I don't want first of all, I can't disclose a figure from Achimov 1 and 2. And from 45, we'll see once we have been starting up production.
Okay. Thank you.
All right, Mehdi. The CapEx guidance, what we have said and now we are going both together in the math. You have some information already. We have said it's €900,000,000 from 2017 until 2,039. And we have said 40% of the €900,000,000 will be spent in the 1st 2 years.
So how you split the number now into 2017 2018, I will leave open I will leave to you. This is a part of the math you have to do yourself.
No, no, because there is another question. You said that the CapEx started by March 2016. And given the deal is January, I don't know if the 40% relates from the 1st January or from March 2016.
That's the case. Effective date is 1st January. I'm taking the bill from January 1, 2017. What is the past? I don't care.
I hope they will spend a lot in 2016, but I have no influence to my biggest regret. So your last question, the tax increases, it's my understanding that this is in discussion in Russia, yes? But 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. So we have to wait and see whether or not this will really will become true.
And then I will let you know whether or not this is going to be impacted our project.
Thank you. Good.
So and then the final question coming from Bertrand Ode from Kepler Cheuvreux. Hello, Petrone?
Hello. Can you hear me?
Yes. I hear you, yes. Yes.
Okay. Sorry. Yes, just one question on the structure of the OMV in Norge. What kind of free cash flow do you expect, let's say, if we are at $60 at OMV Neorgeau? And what kind of, I would say, dividend payment or can we can Gazprom expect to receive from OMVenergo
in a, let's say, dollars 60 oil price environment or whatever oil price environment you may choose to give a guidance on that?
Well, all we can well, Desjardins, I'm very sorry that I cannot release specific numbers on your question. What I have said in my remarks is that in 2016 this year, we will have the 1st year where the free cash flow is forecast to be to turn, I would say, slightly positive. I add one word, yes, to give you an idea, slightly positive. But then it's ramping up positive in the following years. That's all what we can say as we speak about OMV Norge.
And 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. And 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.
And can I ask one follow-up? What kind of CapEx should we assume
for OMVNorge on a 100% basis, let's say, in the next 2 to 3 years?
No. Everybody sitting around my table is now shaking his hands behind me, Reiner, Reiner, Reiner, Reiner, Reiner, Reiner, Reiner, Be careful, be careful, be careful, be careful. That's what's going on here in my room. That's all very clever questions, yes, but I will have a problem because today we are in the mood to drink champagne, yes. And if I disappoint my team here because I release some information they don't want, yes, we will get only mineral water.
It's also sparkling, yes, it's not tasting like champagne. So that's the reason why I would like to ask you to understand that we don't want to release the information CapEx on OMB in Oregon.
Okay. Fair enough.
Thank you very much. Good questions, but here we have to refer a little bit to your analytical skills that you make a good assumption, okay? So and then we come to the final question of Haysen 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 sort of European gas price as this is exported to Europe? Or is there some sort of kind of agreement where some of this will go to the domestic market at different prices? Or 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, when 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. And I just wondered whether that's something that you've thought about strategically as well for kind of some of the future perhaps options optionalities you're looking at. Are you thinking of becoming more gassy generally? Or actually, would you be then looking to add oil? And 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 handset is seventy-thirty 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 condensate as a blending component into the Transnaf system, yes, to make this heavy crude from the Yura regions a little bit more transportable.
So 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. Yes? Okay. We do both pricing structure. Part of the gas will be priced net back to the European gas prices and part of the gas will be on the domestic pricing.
But if you look into today's into statistics published by some consultants, yes, who made analysis of European gas prices towards domestic Russian gas prices, you will find out that the Russian gas market will come closer to a net back pricing of European gas prices because the gas prices in Europe went down substantially. And on the other hand, the ruble effect is going to be 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. So 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 fifty-fifty split oil and gas.
You're right with the seventy-thirty, we are swapping fifty-fifty in Norway. So we will become a bit more gazier. Our strategy is that we are targeting more or less the fifty-fifty structure, which is more or less balanced portfolio. But we would not be against having a little bit more a gazier 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.
So that's the reason why we think we are well advised to become a bit more gazier. But this wouldn't mean that we will turn from fifty-fifty to 90 to 10, yes? We are not so drastic in our thinking, but a little bit more gas is from my point of view not too bad at condensate.
Okay. Thank you.
Yes. Unsaid 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, yes, because 70% is gas and 30% is condensate.
Fair enough. That's very helpful. Thank you.
So 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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