Welcome to the OMV Group's Conference Call for the Q2 2015 Results. There will be a presentation of the results followed by the question and answer and answer You should have received the presentation by e mail. However, if you do not have a copy of the presentation, the slides can be downloaded at www.omb.com. Additionally, simultaneous to this conference call, a live audio webcast is available on OMB's website. I would now like to hand the conference over to Mr.
David Davis. Please go ahead, Mr. Davis.
Thank you, and good morning, ladies and gentlemen. Just a brief word of introduction from my side as a courtesy from a familiar voice to somebody who is not so familiar. Starting our presentation today will be our new Chief Executive Mr. Einar Sehler. And without many more to do, I'd like to hand over to him to kick off the Yes.
Good morning, ladies and gentlemen. I'm delighted to be here with my Board colleagues and we are ready to present our quarterly and half year results. Before I'm going to start, let me introduce myself with a few words. By profession, I'm a fully trained chemist and that's the reason why I also started my business career with BASF, the leading chemical company in the world. I look back to a 20 year business career with BASF and I was in my position in charge of the oil and gas division of BASF Group, which was or is the Wintershall AG.
Wintershall is the largest oil and gas company in Germany. And I managed in my time as CEO of the company to grow the company from 280,000 barrels per day to 380,000 barrels per day and in parallel we doubled the net profit. So I think I'm well prepared to show up the same kind of development also with OMV. But before I'm going to start talking about numbers, I would like to start with our HSSE track record because first things comes first. And HSSE stands for license to operate.
That's why it's so important and has the highest priority in our company. As you can see on the chart, we have improved our safety track record quite substantially. The LTI rate went down from 0.7 to 0.3. But that statistics, I think we have to continue to work further to bring that LTI rate down. Our target is of course is 0, which is a challenging target.
But in some regions, we can show up that this is possible and we have to think how much we can do also in OMV Group. On the next chart, you can see the business environment, which is explaining a little bit what is really the major challenge and what is also in the press. It's the decline of the oil price. You can see in that upper chart that the oil price nearly halved within a year. The reasons are all familiar to you.
We are now below the $50 per barrel and that's the reason why our Fit for 50 program, which stands for an EBIT enhancement in the cost reduction program should be realized as planned. It's very, very important that we are going to increase the competitiveness of OMV Group and this is nothing else than reducing our cost basis. I'm really making that a key point because I think that our industry will change a little bit that we are not competing on growth that we are competing environment to strengthen especially our cost competitiveness. And from my point of view, if I look in all the key KPIs for our cost development, there is some room left for improvement. Well, if we look on the oil price development, of course, the main question is how does that develop in the second half?
Well, honestly, I cannot see any fundamental data convincing me to give you a positive outlook. I think the times of the high oil prices of $100 plus are over. We have to deal with the situation that we have a misbalance in the market. Supply demand are really not fitting each other. There is too much oil in the OPEC target.
So although OPEC is not the only reason why we do see the oversupply, you know the story about the shale oil production in the U. S. Looking into the gas markets, I think they are going to they will remain difficult for us. We do see very low trading margins in natural gas. The same story, I can repeat that we do have an oversupply of natural gas in the markets and that's why I think the trading margins will stay low.
As you can see on this chart, the price is something around €0.21 to €0.22 per megawatt hour, which is for a summer not a bad price level. And that's the reason why we have because we have to refill the storage capacities. We have seen a pretty normal winter in the first half. That's the reason why we had seen a high withdrawal rates on the storages and now the storage capacities are being refilled. We do see a very stable good contribution from our transportation and storage business.
So what we see in the natural gas trading is really an urgent need to think about our trading business, what kind of strategy we would like to follow and I would come back to that. The red line is the line of help, yes. And what you can see, it's the development of the refining margins, pretty nice development. Well, was that man made? I don't know.
It was of course in our first instance also a cost cutting program we have every year in our refineries. So we think that the refineries are well positioned refining margin because we are really enjoying the lower feedstock prices for our refineries. Does this stay forever? Definitely not in our outlook. I think we are going to stay on we won't stay on the current level.
It will go in second half down to a normal level. On the next chart, there is summarize the that summarizing that OMV improved the financial performance in Q2, 2015. Well, David will next talk a bit more in detail and will specify all the numbers. I only give you a broad overview. Well, the EBIT before special items increased in 2nd quarter from 333 in Q1 to 375 and downstream oil contributed more or less at the same level.
You see 260 and 2 whereas upstream in 2nd quarter could contribute a bit more something around 25% of the EBIT generated in Q2. Q2 and of course we have seen a higher production. As we speak about half year, the production level more or less is the same like previous half year something around 304,000 barrels per day. But we have also very, very impressive development of Borealis is shown in the Clean CCS earnings per share. Can see that the earnings per share from Q1 to Q2 went up by 50%.
In Q2, it's €1.11 per share. So that's a very, very strong improvement. Also if we compare Q2, 2014 to our Q2, 2015, you see that the earnings per share went up by 80%. So the bottom line performance in the which is reflected in the EPS in Q2 is much, much better than what is what you can read in the EBIT structure. My major headache, if we look on the chart is the free cash flow, because Q1 was a real challenge for us with 517,000,000 dollars minus.
For Q2, I show you the free cash flow before dividend because the before dividend is more reflecting the positive business development we have seen in the 2nd quarter. And as you can see, we have turned back to a positive free cash flow of €97,000,000 And we expect that the free cash flow will remain positive also in the second half year second half of the year, if we see a similar business environment like in the first half. We keep our targets to be broadly cash flow neutral after dividends midterm. All in all, the market environment with low oil price is still a challenge, but we see an improvement of all three KPIs. I will concentrate together with my team cash flow management and bottom line delivery.
What is making us busy in the second half of the year is really the definition of the new strategic framework of OMV as a company. As we have improved our quarterly performance, we are now reviewing the business unit strategies, all three of them. At this early stage, I really would like to ask your patience. We think that we have that we will finish our review on the strategies until year end, so that we are going to present it to you at latest early next year. But some indications I would like to give you.
Short term, we will go for an EBIT enhancement program to also to improve the cash flow. The cash flow management and profitability will be the key and it's nothing else than flow. Mid term and long term, we will continue to have an integrated business model, especially what you can see in the quarterly results we are presenting to you is that the natural hedge works nicely in today's low oil price world. But I have to say that only oil downstream is hedging our lower EBIT results in the upstream. We have to concentrate on the gas downstream business.
That's the strategy we are working on first. And we will also try to execute as early as possible the new natural gas strategy because it's not satisfying us. The downstream, especially in trading as I have mentioned earlier. But you should not respect the revolution coming up with the review of our strategies. It will be an evolution of the strategy.
We will update and upgrade the strategy. We will come up with new targets, that's for sure. But we have to work on that to have the total picture until, as I said, the year end. We will keep a focus on upstream growth. That's the growth story also coming with the new strategy.
So upstream will be in the focus, but it doesn't mean that downstream is only the cash producing machine, which we will use to reinvest in upstream? Majority, yes, but we will also keep our refining and marketing and gas downspend business competitive. One development you have seen in the recent past is already reflecting a change in our strategy and that's the cooperation with Gazprom and along the entire value chain. So we have an interest work importing natural gas from Russia to Austria, which looks back to nearly 50 years of a relationship business relationship we have built up. So we want to cooperate also investing together into export pipelines.
You have seen in the press, it's going to be a pipeline running through the Baltic Sea. So doubling the capacity of Nord Stream 1 will have the name Nord Stream 2. It's the same capacity of 55 Bcm. BCM. The main strategic interest of OMV is that the gas landing at the German coast will find its way to our central hub in Baumka, because the gas flow via the Ukraine is being diminished in such a concept that Gazprom might not go for the same volume to prolong their contracts, the transportation contracts in the Ukraine.
We have to make sure that the new routing of gas from Russia will find its way to Austria. So the remaining component is the cooperation between Gazprom and OMV in Siberia. It is an interesting field, which we are discussing to get access with Gazprom. It's the 3rd largest gas reservoir or gas field you can find in the Russian Federation. The field has a name or in voice goya.
They have different layers. Right now they are producing from the cinnamon layer. We have an interest to work together in the Achimov formation in the layer there. It will be it will be a very interesting area for us for three reasons. 1, the acquisition costs in Russia also given the current framework are relatively low.
2nd, the producing cost, the development cost given the fact that we also have a very low weak ruble and the investment will be done on a ruble basis. It's also compared to other reasons relatively low. And the operating cost, again, there is a currency effect, but it's also an effect of operating of scale because it's a very large field also the operating costs are pretty low. So that's the economic attractiveness coming with that and this will be part of our strategy. So we have signed a memorandum of understanding giving us the framework and we will speed up to have binding agreements with Gazprom as early as possible.
So now I will hand over to David. Thank you very
much. Thank you, Rainer. And I'll start with the overview of the quarter's results, if I may. If you look on the slide, which I now have numbered 8, hopefully it's the same for you, the Q2 2015 highlight. You see, as Ryan has mentioned a number of times, the balance between the upstream and the downstream.
Clearly, our upstream performance benefited sorry has been punished by the lower oil price 44% down with Brent being on average during the quarter $62 per barrel partly compensated by the stronger dollar compared to last year as you will remember and also cut the back of our production is higher by 3% and indeed our sales were higher particularly in Norway. That nevertheless has not been able to fully compensate being compensated by the strong downstream performance 198,000,000 improvement compared to last year, so very close to improvement in that. And clearly, the strong refining margins in particular have been the major driver of that, although not alone our marketing business has performed well as has our petrochemical business. You see here also a contribution of $41,000,000 from corporate and other. Our corporate costs are lower following our cost reduction program.
But the biggest part of the change here is that in this block, we eliminate the intercompany profit between upstream and downstream predominantly in Romania. And of course at current oil prices the amount of profit what needs to eliminate is clearly a lot lower hence the improvement quarter on quarter. So for the quarter as a whole, we achieved a clean CCS EBIT of $375,000,000 against $369,000,000 last time. Our gearing at the end of quarter 2 finished at just under 40%, so clearly somewhere above our long term target of 30 percent. And you'll be aware that last night we also announced our intention to issue a hybrid bond of at least benchmark size.
And the reason we're doing this is clearly to just ensure that we maintain flexibility during this particularly difficult period as regards to the oil price. Now you can see clearly on the next chart, a chart you'll be familiar with. The oil price declined to $62 in quarter 2 from $110 last year. It's clearly reflected improved versus quarter 1, but clearly we're still a long way down where we were a year ago. The oil price is down by 44% quarter on quarter, but the foreign exchange rate has improved in our favor by 19%.
So that helps compensate decline partly, but clearly the full compensation has not been reflected here. Then the next chart in the middle shows you the gas price. The yellow line is the price that we realized for our hub here in Austria. So very much reflective of the Western European market price, €21 per megawatt hour in quarter 2 coming down as one would expect from the winter quarter. The orange line is the price of gas that we realized down overall in the upstream.
And the largest part of this of course is the gas price in Romania, hence the line being considerably lower than the yellow line. Clearly the market has liberalized quite substantially over the last few years, but there's still some way to go. The reason we saw an increase in quarter 2 against quarter 1 is that the private household price is still heavily regulated and quite a way below the industrial price. And included within that categorization is the district heating, which clearly was much higher in quarter 1 than it has been in quarter 2. So their volumes going down has helped the average price improve somewhat.
The chart on the right hand side shows the very strong increase that we've seen over the last five quarters in the refining margins from $1.90 back in quarter 2 last year to now just under $8 A dollar of this increase in quarter 3 in particular was due to the recalculation of the yield following the improved position of the refinery in Romania Petrobras. But clearly the market has been driving the biggest part of the increase as we've moved up to 7 point $1 for the quarter just ended. And we see that of course reflected in the refining and marketing results. Coming to the next chart, Clean CCS net income attributable to the OV stockholders has improved quite substantially up from €202,000,000 to €364,000,000 an 80% increase. And this clearly is also reflected in the Clean CCS EPS per share, which at €1.11 almost fully covers the dividend that was actually paid out in the quarter of €1.25 so an 80% increase there.
Going further up the charts on the right hand side, the financial result has been the biggest reason for the improvements that you see in profit from ordinary activities. On a reported basis $92,000,000 profit against the $14,000,000 loss and of this $75,000,000 was due to a much stronger performance from Borealis. So a very strong $1,000,000 was due to a much stronger performance from Borealis, so a very strong performance contributing there. That's also helped the effective tax rate, which is 7% was quite a way down on the 20% that we had last year. Clearly the fact that we only bring in Borealis' net income into the profit from ordinary activity, so it's already been taxed as it were.
So it doesn't need to be reflected in our tax rate that drives the tax rate down. And of course the environment that we're currently experiencing where our downstream is relatively low taxed in Austria at 25% and in remainder at 16% for example, whereas upstream clearly typically carries a higher tax rate and the upstream profits are clearly lower. Also losses we're incurring given this low oil price in our Romanian in our Norwegian production are also being relieved at a very high tax rate. So that further drives the tax rate down. At this point in time, we would certainly expect our year to date tax rate at the end of the year to be in single digits.
Minorities are higher than last year. This is due to an improved performance from Petron, €83,000,000 deducted as opposed to 43,000,000 euros in the period last year. Coming to the next page, special items, there's only really one of any significance. The clean CCS gains are are clearly part of this reconciliation. But as regards special items, we booked €205,000,000 this year as a provision against the profitability of the Samsung power plant following 5 or 6 successive quarters of very low margins, which have actually led us to put us in a position in Turkey of not actually operating the plant for long periods of time.
On the next chart, you see the cash flow. I think Baader has talked quite a length about this being a very important focus for us, clearly bringing the cash flow into a neutral position. The Q1 was very difficult. Clearly, we were standing the brakes very hard as the oil price declined as we were cutting our costs and our CapEx. But the effect of that we couldn't really get to kick in really in quarter 1.
What you also saw in quarter one was cash flow in investment activities reflecting the fact that we were paying the charges that were incurred in the previous year as well. But now we've been really able to get a strong break on the spending as it were. And you can see in the second half of this chart on the left the graph that our free cash flow before dividends was actually positive in the quarter. So our operations are now generated cash in quarter 2, dollars 97,000,000 against over 500,000,000 negative in the same in the Q1 of the year. Clearly in quarter 2, we paid the dividend €530,000,000 €29,000,000 went out in the quarter.
So quarter to the overall the quarter produced a negative free cash flow after dividends and year to date we're at €950,000,000 but with a more stable position now for the second half depending, of course, on what ultimately happens with the oil price. As I said in quarter 1, we should be able to see a much stronger position in the second half and I would hope that we'd be able to deliver a positive cash flow for the second half of the year. On the next page, you see where we've been spending our money. Clearly at €1,400,000,000 the lion's share continues to go into the upstream €1,200,000,000 We continue to execute the developments in Norway, Aasta Hansteen, Gullfax and Edvard Grieg. That's just over a quarter of the total amount that we spent in E and P.
Similar amount was spent in drilling workovers and field redevelopments in Romania. Capitalized exploration during the first half of the year was just under €170,000,000 We've also invested in completing the Murray Growth project in New Zealand which cost a further €60,000,000 and a similar amount was spent in Schehelion on the ongoing developments redevelopment there rather in the U. K. So they are the key items that we've been spending the CapEx on in quarter 1 sorry in the first half. The green block shows you the amount that we spent in the downstream $184,000,000 and the majority of that relates to contract renewals in Petro Lofisi in Turkey.
Our investments of €1,400,000,000 stays against a total EBITDA generated year to date of €1,800,000,000 dollars Coming now to the results of the upstream business. On the left hand side, you see a reconciliation between what our profit was in quarter 1 this year versus quarter 2, why have we improved. Clearly, realizations have been stronger, we've generated €157,000,000 and this clearly is due to the oil price in quarter 2 averaging $62 against 54 dollars We also saw a minor strengthening of the dollar against the euro which further helped, but the biggest chunk of the improvement has come from realizations. Volumes were also higher. This in particular due to Norway, which compensated the decline in Yemen, Our production ceased in quarter 2.
We still did have some production in quarter 1. We also saw an improved volume from New Zealand as the Murray Growth project came on stream. Exploration expenses were higher in quarter 2 versus quarter 1. We wrote off an appraisal well in the Wisting block in Norway and also had a write off of $22,000,000 in the Black Sea in Petron. So that was worse than quarter 1 by $47,000,000 And clearly with more production coming in from Norway and New Zealand and correspondingly we had the depreciation associated with that.
So hence we were down by €55,000,000 So that takes you from Q1 to Q2 doing a similar reconciliation from Q2 last year to Q2 this year. The picture looks quite different. The real reason for the decline is obviously principally driven by the lower realizations. And no need to talk anymore about the much lower oil price clearly. Volumes are slightly higher.
Exploration expenses Q2 this year versus Q2 last year were much lower. We had a number of exploration expenses written off last year. DD and A coming on stream for the same reasons that I explained a few moments ago. So clearly, realizations have been very positive reconciling Q2 to Q1, but negative reconciling Q2 this year to the same to last year. The next chart shows you what's been happening to our production.
Our production has increased slightly from 2.97 up to 307. Norway, the Gudrun field is ramped up following the technical issues that we had in the Q1 of this year. And as I mentioned already bringing on wells from the Maori field in New Zealand. The shut in in Yemen has impacted negatively by about 6,000 BOE per day. But despite all of those difficulties, it's reassuring to be able to actually increase our production slightly.
What's also very reassuring is the trend in operating expenses were down from just under $18 to around $13.60 by quarter 2 of 2015. A large part of this is undoubtedly being due to favorable foreign exchange effect if you look over the year. Volumes have also helped strict cost management has also been a major part of this improvement. You see that in particular on the next chart, which shows the same position in Petron, where our operating expenses per barrel have gone down from $18.70 to $13.16 Again, here you've seen about $3 of that due to foreign exchange, but a huge chunk of it is also due to very strict cost management, which has helped us bring our costs down quite substantially. Reassuring also is that with 1 or 2 variations up down, our production has remained relatively stable compared to last year.
In fact, we're slightly ahead as of the previous quarter slightly down, but nevertheless more or less balanced. Now turning to the Downstream briefly. Last year, we generated a CCS clean EBIT of $71,000,000 this quarter $269,000,000 so a big step up of lion's share which has clearly been due to the much stronger refining situation which we've talked about a number of times. I'll now say a little bit more about that in a moment. The marketing business has also performed well.
Marketing volumes down by 3% due to the missing performance. Gas on the other hand had a slightly weaker quarter than the same period last year, driven predominantly to a number of provisions that we booked for doubtful receivables in Romania and in Austria in our gas business. Key performance indicators in the gas sorry in the Downstream business. Overall, our refining utilization rate is at 92%, up by 8% compared to the same quarter last year. The big increase here however is due predominantly to the fact that in the same quarter last year we were undergoing the turn around in Petrobrasie hence the utilization in the East at 59%.
That then in the East increased quite substantially in Q3 and Q4 as we processed the inventory of upstream production that we built up during that period. And now it's more normalized into the 80s. But overall particularly in the West, the improved utilization means that at 92% we certainly feel we're above the European average and clearly able to profit from the very strong refining margin environment. The sales volumes in marketing slightly down. I've mentioned that already.
Borealis contribution similarly, we talked about 127 $1,000,000 in the Q2 much stronger than last year's $51,000,000 So benefiting there from the strong petrochemical margins, which I've already talked about. Natural gas sales volumes, the decline here continues unfortunately. Comparable volumes of the same quarter last year are down by 14% with weak market demand and overall lower sales to the industrial customers in Austria, Turkey and in Romania. Our CapEx and reduction program is progressing well. We've a target of spending this year approximately €2,700,000,000 That's a 30% reduction on last year's spend.
We still maintain that guidance. I believe we'll be close to that number. We also are targeting to reduce our exploration and appraisal expenditure by up to $200,000,000 during the current year. That will be somewhat more of a challenge. But nevertheless that remains a target and that will be something which we repeat over the next 2 years as well as we look to focus on managing that cost down.
Our annual operating cost and overhead cost is targeted to come down by about €150,000,000 and we're making good progress towards that across the business divisions as well as in the Corporate Center. Headcount reduction program is already in place. We've taken more than 500 employees out of the headcount since the end of last year. And as we've also mentioned, the review of our non core assets is a process which is continuing and that we believe would also lead to some disposals. Now as we look at the outlook for the current year, our full year expectation for the average oil price is between $50 $60 per barrel.
We expect refining margins although they've been strong in the first half of the year to decline somewhat. Marketing volumes are expected to be supported by the overall lower product prices. The gas markets will remain challenging. There's very little doubt there. Unfortunately, our production is on target to hit our guidance at the beginning of the year of approximately 300,000 BOE per day assuming no further and E and A expenditure, we've actually tweaked this up slightly.
I mentioned this was a challenge. We actually previously had guided to $500,000,000 We're now expecting this to be closer to €600,000,000 Then just finally before I hand over to Jaap to talk about the upstream, the financial priorities 20 15 to 2017 cash flow. For over these 3 years, our target is clearly to bring the business into a position where after dividends, we can maintain a broadly neutral free cash flow. So we're no longer increasing our debt as we have done so far in the first half of the year. The dividend, our long term goal is to maintain a payout ratio of 30%.
The dividend that we paid out during the rather during quarter 2 based on last year's profit was €1.25 Rating is very important to us. We're maintaining strong investment grade credit rating. One of the reasons we're issuing the hybrid bond is to actually give us more flexibility around this as well. A strong balance sheet in the medium term reducing our gearing ratio by closer to the 30% long term target and keeping the group's liquidity position in its current comfortable state. These are the major financial priorities.
At that point, let me hand over to Jaap, who will give you an update on our upstream business. Thank you very much.
Thanks, David. Good morning for myself as well. Let me quickly run through some of the key highlights. Numbers have been mentioned by both Rainer and David. I'll try not to repeat the same messages.
Nevertheless though, I start with the OpEx and you've seen the reduction. You've seen some of the underlying push months quarter to quarter. Very strict cost management across the board, but in particular in our managed operations in Austria and Romania where we've got full influence over what happens, you see that really starting to pay off. We're confident we can keep at the same sort of level over 2015. I'm also confident further out given that a lot of the cost measures that we're implementing this year, of course, you're only seeing part of the impact this year.
You should see full impact of those activities next year. And therefore, these measures that we're implementing are clearly sustainable and will protect our OpEx going forward. Production, again, you've seen this in the previous slides with David and Rainer as well. You see the Q2 performance 307, slightly up on the quarter. Our guidance for the year remains at about 300.
That's because in the second in the third quarter, we have got some planned shutdown and turnaround activities. We're coming to the end as we speak on a major workover program of 2 very big gas producers in Romania, where we've had to do some integrity work over work. And we're also starting the offshore shutdown season in Norway, again planned. All of that will see us dip production in the Q3 slightly for it to pick back up in the Q4. And for the year, we continue to guide about €300,000,000 That's not assuming any return of Libya or Yemen for the rest of this year.
Positive contributions also mentioned earlier on New Zealand. The Marigrowth project is now finished. The rig has departed very early on in the Q3. And it's one example of many where activities during the year are coming to a halt and also illustrates why in the second half of this year we expect the CapEx to be less than in the first half of the year. Many activities are stopping.
But of course, it takes time to hold activities. It takes time to demobilize drilling rigs, etcetera. It takes time to complete projects. As we do that CapEx burn rate will reduce during the course of this year. With that to the next slide on project update, it's satisfying to see that by now we only got one artist impression left on this picture.
That's Aasta Hansteen at the top. Edward Creek has seen a major progress during the quarter. The platform is effectively now installed offshore and the hookup program is continuing. Operator is doing a good job. London, they continue to be quite bullish on starting up at the end of this year.
We've always assumed 16 and we continue to predict platform to start up early next year, late this year, early next year, it doesn't matter, projects on schedule and about to come on stream. Scheherylian, good progress in the yard, good progress offshore this summer season as well. Operator, again, targeting to have Shialion onstream in 2016. We're a bit more conservative on Project 2017, but good progress on project. Kudrun, we had an outage.
We talked about that in Q1, where we had a process pipe failure in the Q1, leading to an outage that's been rectified. Drilling of production wells is complete is progressing, but effectively the platform is running at capacity. Goufax, lots of infill type programs, but also satellite developments coming on stream. GULFAX South is now on stream as of the end of July, not yet a plateau for the wells we brought on stream. And Rimpaksdalen, another satellite program is progressing projected beyond stream in 2 years' time.
The final picture you see there is Namara, the gas project in the south of Tunisia, which is progressing, albeit Tunisia and you've seen this in the news, of course, is rapidly becoming also quite a difficult place to operate. So far so good. We've not been touched by any of the unrest in Tunisia. But clearly, it's not as easy as it looks from first inspection to operate in the south of Tunisia. On exploration, Slide 26, David already mentioned that we have adjusted our estimate for the year to €600,000,000 That's not because we want to spend €600,000,000 We're clearly targeting to spend €500,000,000 which would have been a significant reduction from the previous year.
What we're seeing here is similar to CapEx. We see it takes time to ramp down activities. It takes time to work rig commitments out of the program. And in many cases, of course, partners have got similar rig commitments where at the occasion we get voted into activities by partners where you have no choice but to go along. The other key activity, of course, that's ongoing is drilling in the Black Sea where together with Exxon and Petron we're committed to have a drilling campaign that will last to roughly the end of the year.
And in that drilling campaign, we so far completed 4 wells and we aim to continue drilling for the rest of this year. But then of course, expenditure will run down rapidly into next year here too. The increase this year is not something we aim for and you will see later on in the year a further reduction in exploration reflected in our projected spend in 2016 2017. That's also partially to make up for the overrun in 2015. On success rate, it's actually a very good year.
So far in the first half of the year, we're running at close to 60% success rate. In particular, in Romania, we've seen both offshore and onshore further discoveries. In Norway, we've seen satellite discoveries to Edwed Creek. Austria, small gas discovery that we're projecting to bring on stream early next year. And also in Tunisia, we've had some smaller ore discoveries.
If you look at our priorities, safety wasn't one of my slides. Rainer started with that. And clearly, that's where our priority starts. But then rather than production, it's really cost that's now our key second priority. Operational efficiency as reflected in both uptimes, but then also clearly our operating cost is key to our cost performance this year, but also going forward.
And as you see reflected in the numbers, we're managing that very tightly at the moment. CapEx, you see us you will see us ramping down capital spend in the second half this year reflected by activity programs projects that are ramping down or coming to completion. And on production, you'll see us focusing on clearly sweating our assets, but also delivering our post FID projects, in particular, the key 6 that I described in the previous slide. With that, hand over to Manfred.
Thanks Jaap, and hello to all of you from OMID downstream. Let's go to Page 29, where you see that Downstream delivers reliable results and substantial free cash flow. On the left hand side of this graph, we have reflected a downstream clean CCS EBIT development over the last three and a half years. And you see here that the first quarter the first 2 quarters in 2015 have been significantly high almost close to a yearly result. This is clearly not only a function of the refining and petrochemical margins, which have been extraordinarily high, but as well that we have been in a position to increase our sales volumes in terms of quality and volume closely to compensating for a loss of the production in Bayer and Oil in the first half of twenty fourteen.
At the right hand side, you see the investments into the division. These are managed very carefully and obviously that converts into a very strong free cash flow generation. 40% of the CapEx over the last couple of years have been of the group's free cash flow have been operating cash flow have been coming from downstream and only 20% share in the CapEx that results in the same period of time of a free cash flow in the amount of some 3.8 €1,000,000,000 On the next page, you can see the progress made in downstream oil. During the past couple of years, the net assets have been reduced by 28% since 2011. Clean cash cost per unit of refined product sales have come down by 13% and the new steering model that has been developed over some time has been transferred into a new organizational setup effective from 1 July of this year.
This will ensure a reinforced market focus on the basis of an integrated margin management from crude supply to finished product sales. On the right side of the graph, I have included a ROCE comparison that had been recently published by Barclays. The dotted gray line shows the ROCE of major average downstream oil. The solid gray line shows the ROCE of European downstream average oil and the green line shows downstream oil of OMV. I believe that the OMV rose is somewhat overstated, but the overall structure is correct and is a clear evidence of the substantial improvement in the profitability of OMV downstream oil since 2011, especially compared to our European peers.
On the next page, I would like to show you some KPIs showing the overall operational performance compared to our peers. The This is to go for the maximum economic utilization of our assets clearly. The middle graph shows the utilization rate of our refineries, which lies reliably over 90%, thereby clearly ahead of the competition. The current high refinery utilization of our peers is a function of the very high refining margins clearly. We however keep this high level even in times of low margins as you can see the first half especially of 2014 where the other refineries are potentially already in the red.
A utilization rate of below 90% in our refineries only comes as a result of planned turnaround activities, so far not above low margins. The right hand graph shows the average throughput per retail station per country in our market. And again, you can see that we are far ahead of the industry in more or less all of them. Again, this is demonstrating the superior utilization level of our assets, this time in the retail business. This resides then into the graph that shows on the very much left hand side of the page, which is the clean CTS EBITDA over refinery throughput.
And I think this is showing a very clear message as well. Coming to Borealis, I've mentioned that we have had a record result on the clean CCS EBIT in the first half of 2015. Borealis as you know is accounted for at equity and therefore shown in the financial result of the OMV Group. The increase compared to last year for the first half was from €88,000,000 to €176,000,000 mainly driven by improved polyolefin and olefin margins as well as a stronger contribution from Buruj impacted positively from higher volumes from Buruj as the ramp up is actually in plan. The polyolefin margins in Europe have been supported by a significant number of planned and unplanned outages, some of them are still remaining.
On the next page, we're coming to downstream gas. Here you see on the graph the European gas markets remain oversupplied. As you can see, the demand is continuously going down over the years. That is mainly due to the low gas to power demand, renewables and predominantly coal are replacing the gas based power production, thereby deteriorating the CO2 balance in Europe. Our power business in Romania and Turkey are suffering as well as the spark spread leverage most of the time is not allowing an economic power production.
This is the reason why we have impaired the power plant in Turkey by some €200,000,000 as already mentioned by David. The weak demand paired with the long term offtake agreements lead to oversupply of markets and very strong competition and finally reside in pretty much lower margin levels. The demand in 2015, we would expect to be a bit higher because 2014 was extraordinarily warm winter. And so this should give us a certain support for the next winter in at the end of the year. And last I wanted to mention that the logistics business, it is the transportation and storage business is coming in with a very reliable result at the same level of last year.
On the next page is just the key actions going forward that I would like to focus here. This is obviously improve the core business to restructure the non core assets and to further streamline the organization. We have already streamlined the organization to a certain extent reducing the layers and more focusing on the market by that starting from the 1st July onwards. And the main focus in the second half now will be to decide the way forward in the current asset setup that we are having, which is too high, which we have to restructure clearly. But I can already confirm that the asset restructuring in downstream gas will be a bigger challenge even than in downstream oil, because the difficult market environment and the bleak outlook of this area of our business are very well known.
On the next page, you see the downstream priorities for 2015 plus that's just a wrap up. Obviously, strong free cash flow from safe operations, 1 downstream organization and strong value chain integration as under the headline of integration and performance restructured in non core gas and power assets and a strong focus on efficiency and operational performance. And with that, I would like to hand over to the moderator to start the Q and A session. Thank you.
The first question comes from the line of Mehdi Enabati from Societe Generale. Please go ahead.
Hi, good afternoon all and thanks for the presentation. I will ask 2 questions please. The first one regarding the working capital, which continues to go up in Q2, 2015 as in Q1. You already highlighted during the Q1 call that the vehicles put in place to lower your working capital requirement a few years ago don't work in the lower oil price environment. Should we then consider that if oil price remains unchanged for the rest of the year, you will paradoxically have a continuous increase in working capital?
And on the contrary, if oil price goes up, you could see a decrease in your working capital. So if you could just explain us the mechanism please. And the second question regards with CapEx. So if we look at your cash flow statements, you've spent nearly €1,700,000,000 in CapEx during H1, 2015. Whereas if we look at the CapEx details in your data supplement file, H1 2015 CapEx were around €1,400,000,000 So I understand that in Q1, 2015, you've paid part of the last year CapEx.
But just to make it clear, should we base your €2,700,000,000 CapEx guidance for 2016 on €1,700,000,000 highlighted in your cash flow statement or no? Thank you very much.
Thank you, Mehdi. David here. In regards to working capital, it's not actually strictly true to say that the measures don't work in a lower oil oil price environment. They don't know that the problem is they don't work as well. If you're able to move barrels off your balance sheet, it makes more impact on your working capital if those barrels are $100 rather than $60 or $50 and that's the issue that we've had in the first half of the year.
They still work. What's likely to happen is if the oil price recovers, they will start to work better clearly. But if it stays around about the same, then you should not see any further deterioration. In fact, as we look to our cash flow in the second half, we'd actually look to improve our working capital situation somewhat or not dramatically. So no further deterioration.
The instruments still do work. The instruments still do work. The observation that you made on CapEx is quite correct. We've actually spent cash 1.7 on CapEx, but booked only 1.4. And the reason for that is the 300,000,000 we booked last year, but wasn't paid last year.
And of course that was part and parcel of the process of spending nearly $4,000,000,000 last year. We went into this year with a number of payables, which we still had to settle. The $2,700,000,000 guidance in fact reflects is closer to the 1.4%. So what we will actually book, which means it's likely to be slightly higher in terms of the cash out, but it won't be materially different. The big net the gap that you see now 1.7 and 1.4 should get closer towards the end of the year.
And we did have a particularly unusual and difficult Q1, but this was really coming out of the tail end of the large investment program, which we completed last year and which of course we've now started to quite significant reduce. Thanks.
Thank you very much.
The next question comes from the line of Hayton Rashid from Morgan Stanley. Please go ahead.
Thank you. Good afternoon, gentlemen. Thanks for the presentation. Two questions from my side, please. Firstly, on Borealis, that was clearly a strong result in 2Q and probably one of the surprises for the market.
Could you give us a sense of where that could go in the second half of the year in terms of any guidance you could provide? Does the Baruj three ramp up mean on that would be very helpful. And my second question is just sort of on the financial framework on a sort of 6 to 12 month time horizon. And perhaps if I could come back to some comments made by David in 4Q, but also some of the comments made on the call today. But David, in the full year results, you mentioned that at a sort of $50 oil price, where we were at that point in time, the maintaining a dividend or the current dividend for an extended period of time would be something that may be a challenge.
I wondered if just now that we're sort of 6 months on with some of the cost reduction programs that have been implemented with where you are in the business so far this year, how you feel about if the oil prices stay where we were today, close to that sort of $50 whether that is something that means that your concern around the dividend remains or whether the Fit for 50 program allow you to sort of address that? And then secondly, again, Rainer, you mentioned that the you expect to be free cash flow positive in the second half, assuming similar conditions to the first half. So with an oil price averaging $58 in the first half and if we again sort of similar question if we come to sort of the $50 if we say it's $50 where we are at the moment, do you think that that sort of Fit for 50 program is actually enough? Or do you think more will need to be done in order to achieve that? Thank you.
Hi. This is Madsbert. Coming back to the question on Borealis. What you have to see in Borealis in the first half of the year is that there has been a very, very strong European business especially in terms of the polyolefin area of the business. And this is primarily true.
1st of all, there is a certain increase in demand. That's true. At the same time, there was a restriction in the production capacity and the production utilization because some of the plants a number of the plants have been in unplanned turnaround And in And in parallel to that, Peru 3 has increased the result because obviously the production and the sales volumes have been gone up by putting the plant into operation. Currently, we are having all polyolefin plants in operation So there might be a certain increase in production and sales as well in the Q2, but not I would not multiply the first half of the year by 2.
Okay. Thanks.
Let me talk about the dividend and the cash flow. Firstly, we've made no decision on the dividend. We've not that's a decision for later in this year, beginning of next year. It's exactly the same position as where we were a few months ago. I understand clearly there's a lot of interest and focus on it not just on us but for the rest of the industry.
Let me just however just say a few facts. Current plans in terms of the financial forecast that we've made internally, none of them suggest we're actually going to cut the dividend. Remaining the dividend, we understand its importance and it's important not just for the shareholders, but also important for the message that it sends out in terms of our confidence and the prospect for the business. We clearly have a profit improvement program, which is starting to see some benefits. We do expect even with the oil price roundabout levels where we are now to produce a broader neutral free cash flow in the second half of the year as the benefits of that program are starting to kick in.
But as we get to the end of this year, what's really going to be important for the dividend is what are you looking forward to for the next 2 or 3 years? And the statement that we made quarter 1 was if we reach the view and we haven't reached that view, but who knows what will happen given where we are with oil prices right now that the $50 environment may be one that sustains itself for several years right now. And frankly, the level of dividend at €1.25 is more than a bit rich to be perfectly honest given the level of profit that going to be able to produce at that level. But the decision hasn't been taken at all. We will look forward to the end of this year and making an assessment as to what the next 2 years are likely to bring for us.
I would say in fairness to that that the recent developments in terms of the oil price going below $50 was not something we had been reckoning with. Clearly, our target for this year or rather average goal this year was $55 We believe that looks fairly safe. But beyond that, of course, we were expecting to see the oil price improve next year and the year thereafter. And clearly, what's happened since July is not overly conducive to that view. We'll wait till the end of the year and take a view then to be perfectly honest, but it's nothing's been decided.
And as I say, none of our internal projections are doing anything other than maintain the dividend at this point.
That's very clear. Thank you very much.
The next question comes from the line of Nitin Sharma from JPMorgan. Please go ahead.
Good morning, gentlemen. Thanks for taking my questions. 3 from me please. First one David just following up on the previous question. Could you maybe share with us the oil price deck that you've used for the impairment reviews on your upstream assets?
I think last time you mentioned the recovery to $90 in 20 16, 2017. That still the case? So just a clarification there. 2nd one on Romania. Maybe an update on your ongoing discussions.
Possibly when do you expect the revised terms to be finalized? Is it possible that the revised terms are applied from 1st Jan when the previous agreement expired? So that's all on Romania. And finally on Libya, ongoing instability in the country, when do you start to have concern on the carrying value of these assets? One of your peers has already impaired some of their assets in Libya.
So the question I'm trying to ask is, is the CAD book value of these assets at risk if you do not see a restart within a reasonable period of time? Thank you.
Let me try and answer all of those and my colleagues may want to chip in particularly on the Libyan position. The oil price deck, we very clearly stated that we had assumed the following for the next 3 years. For 2015, an average of $55 for Brent for $2,091 and for $2,107 We also included in our financial statements a sensitivity which was basically saying if we assumed our long term oil price was going to be around about $75 the further impairment need would be approximately 7 €50,000,000 and that was before doing any sort of steps against things and cutting costs, cutting CapEx on one thing or the other, which is very broad, rough calculation. If we were to assume the long term oil price of $75 then that would be the impact. Although clearly to the extent that our assumptions when we make them toward the end of this year are likely to be south of those assumptions which we've currently taken.
Clearly the risk needed to make further impairments is clearly given. But it's there's been nothing decided at this point, although clearly the environment is not particularly easy at the moment. Then on the Romanian tax situation, I mean, this really is in the hands of politics. In Romania, there's been statements made which had actually at one point expected new regime to be valid from August or at least be passed its ruling during August. That's most unlikely to be the case right now.
And until we get some clarity from the political process, it's really hard to make any really clear statements on when we're going to get an answer. But clearly, there are discussions ongoing not just with us but also with various advisers that the Romanian state has engaged. One thing they have also said quite clearly is that it will not be backdated until January. To compensate that, you may remember there was a construction asset tax put in place a couple of years ago which should have expired at the end of last year. They kept that in place.
So that sort of compensates for the fact that they didn't change the royalty regime. But they have made that statement that the new regime will apply from the data which it comes into force. Then as regards to Libya, perhaps you may like to contribute in terms of what the situation on the ground there is. But if those assets never go back into operation then clearly at some point in time a trigger will actually occur which will make us need which will require us to reflect that in the carrying value. Remember our assets in Libya are relatively mature.
We've been in Libya since the mid-80s and as a consequence the per barrel book value that we carry is a lot lower than many of the relatively newer entrants. And in particular when you look at our biggest exposure where we're surrounded where we're the to various activities by E and I who we understand have also made no provisions against the assets. And we're also very close to various activities by ENI who we understand have also made no provisions against the asset. We're not alone in the stance that we're taking. But clearly if those assets don't come back into production or if we reach the view that they're unlikely to come back into production anytime in the foreseeable future, then clearly a provision will need to be made.
We're not assuming they spring back into action next week and therefore the value is justified. We can wait several years in fact until they come back on stream before we'd really start to have issues. But that's the position that we have at the moment.
Thank you, David. Very clear.
The next question comes from the line of Henri Patricot from UBS. Please go ahead.
Yes, Hello, everyone. Thank you for the presentation. A couple of questions. The first one on Borealis. You've seen very strong results in the second quarter.
And you've also mentioned during the presentation that you're looking at potential disposal. So I was wondering if you could update us on the thinking about Boraleis and how it fits within your portfolio. Wouldn't now be a good time to monetize that stake in the positive environment? Or would you rather wait for at least to reduce the leverage before you decide to monetize? And the second question just on your objective.
I've noticed you've dropped the reference to that previous target of 400 per day and you seem much more focused on cost rather than growth. So is the objective for the next few years to keep that production stable? Thank you.
All right. A short answer on Borealis. We are not thinking about selling our stake in Borealis right now. As we speak, we don't have the need to cash it in. I agree with you that we do have a very good business environment with Borealis.
But from our point of view, we concentrate on optimizing the other business units, which is of major importance. We enjoy very much the contribution of Borealis stabilizing our integrated structure and that's the reason why I quite feel happy with Borealis being in our portfolio. Do I exclude it forever? Definitely not. If there is a chance to strengthen our business with other components with a swap for example, we might think about it, but we will not cash in
Borealis. And then let me talk about the 400,000 target. If you remember when that target was first issued for 2016, it was back in 2011. Back in 2011, Libya at that point in time was not producing. It came back on stream fairly soon thereafter, but was not producing.
And we made it clear that both Libya and of course Yemen at that point in time wasn't as big an issue. We're part of that 400,000 target. Their absence is probably between 4,050,000 barrels of that target. So just put that to one side. What is the case is that the the assets which were supposed to come on stream during that period are broadly on track.
They move back a little bit clearly as some CapEx has been trimmed from them. But the 4 major projects which going forward we're going to contribute to that target and that in particular the 2 Norwegian assets Edvard Grieg and Aasta Hansteen, Schehellion coming back on stream in the U. K. And the gas development that we're operating in Chinesio called Navara. They're still being executed.
What is fair to say, however, that within the group, the primary target is clearly not hitting the $400,000 The primary target is protecting the cash flow and putting the business in a position where it's sustainable in a very much lower oil price environment which unfortunately is the one we think we're going to be confronted with.
Okay. Thank you.
The next question comes from the line of Hamish Cleck from Bank of America. Please go ahead.
Good morning, gents. I've just got 2 questions for me this morning really directed at Doctor. Sila. The first of which is one other thing he mentioned in his introductory speech, the focus on upstream growth. Could you maybe outline if that's likely to be organic or inorganic?
And the second question, again to Doctor. Seeler, you mentioned a downward revision or a kind of a move down back in refining margins. Do you think you could tell us why you see this happening in the second half of this year? And what the catalysts would be to see that realized? And finally, in your business review and David touched on this, what oil price outlook are you looking to take and acid test your business down to?
All right. Thanks for your question. I will concentrate on the question on the focus on upstream and that we are going to grow the business. I don't want to repeat what David said that we do have some projects running under development, which will kick in. Jaap already told you that Edvard Grieg might come in earlier at the end of the year, maybe starting next year.
That will be a contribution from the asset portfolio we do have right now. So that's going to be the organic growth we do see in our swap agreement with Gazprom that would be a kind of a mixture of organic and inorganic growth, because we are swapping some assets we do have in our portfolio, but we are gaining more reserves in a low cost country, where we will produce substantial amount of gas and condensate. And if you look into WoodMac numbers, you will see that this will be a major step in production growth if we can manage to bring that swap agreement successfully to an end and that we are then investing together with Gazprom into that production profile. And
On that, sorry, could you maybe elaborate a little bit on what you expect to invest in terms of confining the size?
Well, that's a bit too early to give you an answer. We are now preparing ourselves to enter the data room. Gazprom will open a data room for us so that we can check what is really behind the project because we don't have right now the CapEx profile and the production profile for the development of Area 4, 5. So when we have visited the data room, we are really in a situation that we precisely and professionally can answer your question.
Okay.
Let me answer your question on the refining margins in the second half of twenty fifteen. I would give you an answer twofold, 2 different areas. Currently, the refining margins are mainly that high because of the gasoline cracks. What you clearly see currently that there is a potential some 5% increase for the product in the U. S.
And in other parts of the world. So this is something where the refineries obviously are currently not in a position to cope with. But at the same time, the driving season in the U. S. Will come to an end very soon now.
So the demand for the product will go down. So this will most probably in the refining margins. On the other side, as long as the oil price is where it is, then you will see that the residual products, so those products that have a sales price below the value of crude will obviously support the refining margins and this is true as well for the own consumption of course.
And on the Hamish on the oil price assumptions, there's not one set quite frankly and if there were, it would suggest we had some insights into what life would be in the future, we clearly don't. So we work on scenarios and some of those of course will be very challenging scenarios, but the overall backdrop to all of them will be what do we need to do to the group to put it in a position where we can defend its cash flow and be sustainable under even quite challenging conditions. So we're working on that now.
I was just wondering if you're taking a BP type approach of lower for longer or you had sort of a hope of a sort of former recovery?
Well, we have a hope for a former for a fuller recovery, but I think it's prudent to actually look at lower for longer as frankly.
Okay. Thank you.
The next question comes from the line of Marc Koffler from Jefferies. Please go ahead.
Hi, everyone. Thanks for taking my questions. 2 please and they're mainly in the Upstream, so I guess targeted towards Yap. I think in the Q1 results, you talked about a 2% to 4% decline in Romania this year. Given the output so far through 2015, I was wondering if you had any updates on that 2% to 4% decline guidance?
And then secondly, I think you've also mentioned in the past that you would be looking to divest some of your equity in Rosebank. Given more recently we have seen some signs of the A and D market in the upstream starting to fall a little. I was wondering if there's any updates there. Thanks.
Thanks, Mark. On the ammonia decline rate, I think what I'd like to do is leave that for the full year results and then we also need to give you an updated view going forward. But clearly what you see us do in Romania is exactly what you see the shale operators do in the U. S. Halving the drilling budget doesn't mean you drill half the number of wells, if your costs are coming down and reducing your number of wells doesn't mean your incremental production reduces by the same amount either because you drill the most effective wells you can find.
So we're doing that same we're in that same efficiency drive that you see there. And the impact of that of course is work in progress. So yes, there will be an update on that, but I think we should leave that for the full year result and then we'll also give you a look forward. On the Rosebank divestment, indeed, when we acquired the incremental 30% from Statoil, we immediately then said we would at a future point divest part of that and that process is currently running. So given commercial sensitivity, obviously, you can't comment on the progress of that, but it's running.
Okay. Thanks very much.
The next question comes from the line of Joshua Stone from Barclays. Please go ahead.
Hi, good afternoon and thanks for the presentation. I've got two questions please. First one on the strategic review, I appreciate it's still a little early, but on disposals outside of Gas and Power, is there anything treated as sacred within the portfolio? And then when you're looking at these assets, what are the key metrics you're looking at in terms of comparing performance? Is it returns?
Is it free cash flow? Or some sort of combination? Anything you can say about that? And then my second question on the production costs upstream. I noticed the unit costs are coming out at the group level.
But if I look at the core OMV business, costs are up quarter on quarter on both an absolute and a unit basis. I understand you perhaps don't have full control of those costs, but are you able to say what the increase relates to sequentially? Thank you.
Let me take the last point first perhaps and then I'll hand over to Ryan on the strategic review question. I would actually ask you Joshua if you were to speak to our Investor Relations team so you can sort of refer them to the numbers that you're coming to. And we'll try to get an answer for you because the costs have gone up quarter on quarter. It's not something that immediately sort of springs as something reflective of what my understanding is. So speak to them and maybe they can take you through and get an answer to you.
I'll give you to Ryan an answer.
Well, first of all, as to speak about disposals, outside gas and power is very limited. We will concentrate on the downstream business. And as I have said, we would like to strengthen the upstream portfolio by swapping downstream assets into upstream assets, especially when we are talking about an asset swap with Gazprom, this would be our preference. If we can do so and that's open, then I would be more than delighted because then we are swapping low margin business for hopefully higher much higher margin business. And that's our main focus as we speak about that strategic review.
This will be reflected the swap agreement in our strategy. And what we are doing is, of course, we are looking into the assets on an NPV basis. And on an NPV basis, we are evaluating the assets. It will be disposal of assets outside gas and power only in case we are going to speak about the asset swap. We will focus on the asset swap and then one of the other upstream asset might run into that transaction, but we will not focus with our priority on disposing assets in the upstream.
Do I exclude that? Definitely not. You will hear more about it at the end of the
year. Very clear. Thank you.
That was the last question. I will now hand back to David Davis for his closing comments. Please go ahead.
Thanks as ever, ladies and gentlemen, for attending the conference and also the questions that you asked. And we look forward to speaking to you again in the near future. And once again, as ever, any questions you have in the meantime, don't hesitate to contact the Investor
Relations team.
Thank you.
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