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Statoil ASA (NYSE:STO)

Q3 2013 Earnings Call

October 30, 2013 8:30 am ET

Executives

Hilde Merete Nafstad - Senior Vice President of Investor Relations

Torgrim Reitan - Chief Financial Officer, Executive Vice President and Chairman of Corporate Risk Committee

Svein Skeie - Senior Vice President for Performance Management and Analysis

Ørjan Kvelvane

Svein Rennemo - Chairman and Member of Compensation & Leadership Development Committee

Analysts

Trond Frode Omdal - Arctic Securities ASA, Research Division

Morten Evjenth Lindbäck - Fondsfinans ASA, Research Division

Alejandro Demichelis - Exane BNP Paribas, Research Division

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

Haythem Rashed - Morgan Stanley, Research Division

Jon Rigby - UBS Investment Bank, Research Division

John A. Schj. Olaisen - ABG Sundal Collier Holding ASA, Research Division

Peter Hutton - RBC Capital Markets, LLC, Research Division

Michael J. Alsford - Citigroup Inc, Research Division

Rahim Karim - Barclays Capital, Research Division

Oddvar Bjørgan

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Iain Pyle

Blake Fernandez - Howard Weil Incorporated, Research Division

Hilde Merete Nafstad

Ladies and gentlemen, welcome to Statoil's Third Quarter Earnings Presentation. My name is Hilde Nafstad, and I'm the Head of Investor Relations in Statoil.

This morning at 7 a.m. CET, Statoil announced the results for the third quarter of 2013. The press release and presentations for today's event were distributed through the wires and through also stock exchange. The quarterly report and the presentations can, as usual, be downloaded from our website, statoil.com. Please make special note of the information regarding forward-looking statements, which can be found on the last page of the presentation.

Today, Statoil's CFO, Torgrim Reitan, will go through the earnings and outlook for the company. The presentations will be followed by a Q&A session. We will aim to end the conference, at the latest, at 2:30 p.m. CET. Please note that questions can be posted by means of telephone but not directly from the Web. The dial-in numbers for posing questions can be found on our websites.

It is now my privilege to introduce Statoil's Chief Financial Officer, Torgrim Reitan. Please go ahead, Torgrim.

Torgrim Reitan

So thank you, Hilde, and good afternoon and good morning to all of you in the U.S.

In the third quarter, Statoil delivered adjusted earnings of NOK 40.4 billion. This is in line with the same period last year. Our net operating income was positively impacted by gains from the Wintershall transaction. However, impairments on the refineries and commercial provisions impact the financial results negatively.

We delivered good operational performance in the third quarter, producing as expected. In fact, underlying growth was around 6% if we adjust for the divestments we have made and the redetermination at the Ormen Lange. The transactions created significant value, and I have, of course, no regrets in seeing the production being impacted as a consequence.

We're ramping up new production on the NCS, as planned, and carrying out high maintenance activity, and we maintain good cost control and capital discipline. And then we produced record volumes from our portfolio outside Norway.

We continue to deliver on our exploration strategy. We announced a new high-impact discovery offshore Canada. This is the world's largest oil discovery this year, and it is our 10th high-impact discovery in 30 months and it's our third oil discovery in the Flemish Pass Basin. Our chief explorer, Tim Dodson, and his people are doing very well.

We continued to shape our portfolio, announcing divestment of assets in Norway and in the U.K. to OMV. $2.65 billion in proceeds and an expected gain of $1.4 billion. This transaction will also reduce our future CapEx exposure by $7 billion, and most of this is before 2020. This demonstrates the value of our portfolio. Recent asset divestments in the North Sea price our assets at around 50% premium to Wood Mackenzie estimates. And we expect to close the OMV transaction shortly. And finally, we have further strengthened our financial position in the quarter, generating strong cash flow and reducing our net debt.

Our reported results. Our reported net operating income is down slightly compared to the third quarter last year. We booked a gain of NOK 6.4 billion on the sale of assets to Wintershall. However, we also booked NOK 5.6 billion in impairment losses mainly related to our refineries, and then we made commercial provisions that negatively impacted the results by NOK 4.3 billion. But, as always, we make adjustments to reflect the underlying business. Our adjusted earnings increased slightly. Liquid prices are up 4%, and we produced 4% more. This was partly offset by lower average gas price and increased royalties and depreciations.

We continue with stable underlying operating costs. This is as expected and something that I watch very closely. I will come back to our costs in further detail later.

The tax rate is 70% and within our guided range. We delivered adjusted earnings after tax of NOK 12.1 billion, and this is slightly up from the third quarter last year.

In the third quarter, we produced as expected. We carried out a high maintenance activity, and that went just as planned. Production in Norway was slightly down compared to the same period last year, but this was impacted, as you know, by the divestments we had carried out to create more value. The Wintershall transaction at -- closed at the end of July, and impact production by 40,000 barrels per day from closing. In total, the transactions -- the transaction with Wintershall and the redetermination at Ormen Lange reduced production by around 60,000 barrels per day in the quarter. So we see adjust for that, we see an underlying solid production growth for Statoil.

Also Norway, we continued to ramp up new production, producing at a record level. As we have earlier said, we expect to produce less in 2013 for the year as a whole compared to last year. This is due to the divestments, gas optimization and the redetermination at Ormen Lange. I will come back to this when we talk about the outlook later on.

So then, let's take a look at the various segments. From our Norwegian business, we delivered adjusted earnings of NOK 30.6 billion. This is similar as the same quarter last year. We largely offset the natural decline on mature fields and divestments by ramping up production such as Skuld in the Norwegian Sea. And this increases the DD&A, as expected, in DPN on a year-on-year basis.

From our operations, also Norway, adjusted earnings were NOK 6.2 billion. This is more than 40% up from the same period last year. The cash flow per barrel from our international portfolio is at least as good as from our Norwegian production. We increased our equity production by 13% and the entitlement production by 23%. This was done by successfully ramping up U.S. onshore production, production in Angola and in Brazil. The increase was partly offset by natural decline at several fields, particularly in Angola, and decreased production at In Amenas, as you are aware of. In all, we -- now we produce 4 out of 10 barrels outside Norway this quarter.

The result from Marketing, Processing and Renewables were at NOK 3.9 billion. This is a strong result and is a significant improvement from last quarter. As you know, results for MPR will be volatile. 2012 was a very strong year. The first half of 2013 was weak. And going forward, I expect to see results to be somewhere in between.

We see strong trading results within the natural gas business. Our overall realized gas price is down, but that is due to a higher share of U.S. gas in the global mix. Our European price realization is good and is on par with last year, and last year was a year where we had the record price realization in Europe. And finally, the results are impacted by lower refining margins.

So let me spend some time on the refineries. First of all, we have a low exposure to refining and the midstream than our peers. That said, we booked impairments on Mongstad and Kalundborg this quarter, more than NOK 4 billion in total. There are 2 clear drivers for this. First, we are realizing lower margins in the markets. And secondly, we also see a weak outlook going forward. But let me be very clear. Our ambition is to see profitability within our refining business. We are doing what we can to bring down the costs that we can control. And our improvements programs have brought down costs significantly. Our own NOK 1 billion on a yearly basis is the improvements done at Mongstad, for instance.

We have no plans to close the refineries, but we will work very hard on further improvements. And we must ensure that we have the right structure in place for this business to develop successfully.

Our cash flow from underlying operations is NOK 156 billion year-to-date. The change from last year is mainly due to lower prices and a lower production. We continue to generate a strong cash flow. We have invested NOK 84 billion so far this year, and this is in line with our guiding on investments.

Since the financial crisis, we have reduced our net debt from 27% in 2009 to 12% last year. At the end of this quarter, we had reduced net debt from 21% in the second quarter to 17% by end of this quarter. And we expect net debt to come further down during the fourth quarter. And this is despite 2 tax payments, 2 installments in Norway in the fourth quarter. And then we currently hold around NOK 100 billion in cash and cash equivalents. So we continue with a firm financial framework and with a solid balance sheet.

We are working constantly to improve our cost position further. In DPN, we have maintained a stable underlying total cost for 7 quarters in a row. This is despite having more fields in production and despite industry cost inflation. And I'm very glad to see that all the efforts are really showing up in the bottom line. In MPR, the improvement program we have put in place is really paying off with concrete improvements and clear impacts.

In the international segment, we continue to deliver profitable growth. The increase in costs comes from royalty payments and transportation costs. These are a function of increased production and prices. And then compared to last year, diluent cost in Canada is now being included in the operating cost. So the underlying costs, underlying operating costs, is stable.

Then let's move to depreciations. Compared to the same period last year, we see an increase as new fields are put onstream with higher depreciation at the start of the life cycle, as we have discussed earlier. We do expect to see an increase for DD&A on the NCS also for the next year as we continue to add on new fields and they come onstream. But the increase will not be as large as the increase seen this year.

Outside Norway, I expect the DD&A to be relatively stable. In general, DD&A will vary between quarters also in the future, but you should expect this to be impacted by new fields being phased in. As we move forward, we will continue to improve our cost base and further strengthen our competitiveness.

So then, let me touch upon the strategic progress we have seen in the quarter. First, the high-impact oil discovery, called Bay du Nord, offshore Canada is between 300 and 600 million barrels of oil recoverable. This is light crude and a high-quality reservoir. And this adds further resources to the Flemish Pass in addition to the 100 to 200 million from Nexen and also Harpoon, which is under evaluation. So we are the operator, and we have a 65% ownership share. And needless to say, this field will be highly profitable, a large potential oil development at the core of what Statoil does best, giving us a potential for a new offshore cluster. And it also takes Statoil to the top of the list of oil and gas companies in terms of conventional discovered volumes so far in 2013. Actually, we now have 4 out of the 12 largest conventional oil discoveries over the past 3 years in the world.

We have, as discussed earlier, a large inventory of prospects. Therefore, we have decided to drill some more wells this year than earlier planned for. And this will slightly increase oil exploration spending in 2013.

Then we'll continue to actively manage our portfolio. In July, we closed the $1.45 billion transaction with Wintershall. And in August, we announced the $2.65 billion transaction with OMV. And over the past few years, we have realized some $17 billion in proceeds and more than $8 billion in gains from strategic divestments. So that means around $4 billion on average per year in proceeds, making the net investments significantly lower than the gross investments, which is what we guide on. These transactions have shaped our portfolio further to fit our strategy, reallocating capital and realizing significant value.

So let's talk about the outlook. As we have discussed earlier, our growth will not be linear. 2013 production will be lower than 2012. The Ormen Lange redetermination will reduce production by 20,000 barrels per day on an annual basis this year, and this means around 40,000 barrels in the second half of the year. The divestment to Wintershall will also impact our production 40,000 barrels per day from the closing, which was 31st of July. And then, the OMV transaction will impact production by some 30,000 barrels per day from closing.

We will invest $19 billion in 2013. This is as expected. Projects, they are on schedule, and they are at cost. And we will continue to mature our large portfolio of exploration assets. We now expect to complete around 60 wells this year. Total exploration activity level will be around $3.75 billion, excluding signature bonus. And we will drill our own 20 high-impact wells from 2013 to 2015.

So turning to next year. For 2014 production, there are effects that you need to be aware of. We have divested producing assets to OMV. We will also see full year production impact from the Wintershall transaction. And on Ormen Lange, we will also have full year impact of the redetermination. These 3 elements will impact production by around 110,000 to 120,000 barrels per day in 2014. And this is around 80,000 barrels per day more than the impact in 2013.

2014 will be a year where a number of new fields come onstream. The Statoil-operated fields are progressing as planned. But remember that the majority of these will come onstream, and they will start to ramp up during the second half of the year. And despite the underlying growth, it is, of course, difficult to compensate for the impact from divestments and redetermination.

We are also using the flexibility in our onshore U.S. assets. We have reduced the activity to optimize for the market condition, and this implies limited growth in 2014 from all our U.S. onshore assets compared to their current level. As you will remember, we increased our production by 8% from 2011 to 2012 by ramping up new fields. Going forward, we have the capacity to deliver beyond 2.5 million barrels per day. However, we have been clear that we are not driven by volume ambitions but by value creation. We are in a privileged situation with a lot of great investment opportunities. This enables us to prioritize our investments. And we will come back to more details on our long-term outlook at our capital market update in February.

And finally, I know you like to watch our wells. So let me give you some wells to watch. At this time, I will talk about some key regions to look out for. The Barents Sea campaign in Johan Castberg area continues. We believe in further oil potential in this area. Iskrystall is next out, and we expect that to be completed during the fourth quarter. We also continue drilling in Tanzania where Marungga [ph] is in progress. And we will come -- and that will be finalized in the quarter. Also in 2014, we have drilling campaigns coming up in the Hoop area in the Norwegian Barents Sea. The Kwanza basin in Angola and in the Gulf of Mexico.

So to round off. Strong underlying earnings in the quarter somewhat impacted by impairments. Operational performance was good with production as expected. A 6% underlying growth and record international production. A high project activity level progressing according to plan. A great new, high-impact discovery. And then we realized significant gains through continued portfolio optimization. We are on track and maintain our guiding for 2013.

So looking ahead, Statoil is well positioned. We continue to efficiently develop our projects. We have a strong resource base, and we are prioritizing hard. And we will maintain a firm financial framework, and we will continue to pay a predictable and a growing dividend to our shareholders. And we will do all of this while we are keeping our balance sheet solid.

So thank you very much for your attention. And then I will leave the floor to you, Hilde, to lead us through the Q&A session. So thank you.

Question-and-Answer Session

Hilde Merete Nafstad

Thank you, Torgrim. And for the Q&A session, Torgrim will be joined by our Senior Vice President for Performance Management and Risk, Svein Skeie; and our Senior Vice President for Accounting and Financial Compliance, Ørjan Kvelvane. We'll start out by taking questions from the audience here in Oslo, and then we'll turn to the audio audience. So I'll first ask the operator to explain the procedure for posing questions over the telephone. Please, operator?

Operator

[Operator Instructions]

Hilde Merete Nafstad

Okay, we'll start out here in Oslo then. Please remember to push the button and hold it on your microphone as you speak in order to broadcast your question. We have Trond.

Trond Frode Omdal - Arctic Securities ASA, Research Division

Trond Omdal, Arctic Securities.

Hilde Merete Nafstad

Please hold the button while you speak.

Trond Frode Omdal - Arctic Securities ASA, Research Division

Trond Omdal, Arctic Securities. On the Troll field, you're going to install a new compressor, and I think you're guiding was second half of 2014. Is that still the case? And how will that impact your plateau or peak production in Q4 and Q1? And the second question, you've now taken over ownership on Eagle Ford, and you've been drilling for 3 years. Has the -- your -- the company's view of the liquids component versus the dry gas component changed since you did the acquisition?

Torgrim Reitan

Okay. Thank you, Trond. So first, on the Troll field. You're right. One compressor is for repair, or a new compressor will be installed. The plans are as they have been. While we are -- while we have reduced capacity at Troll, the maximum capacity is to -- between 95 million standard cubic meter per day while the full capacity is 120 million. So this means, first of all, a reduced flexibility around the Troll production. On Eagle Ford, drilling is progressing well since we have taken over the operatorship. We see that there is a significant potential to improve efficiency and reduce costs. And so far, that asset delivers pretty well and in accordance with our expectations.

Hilde Merete Nafstad

Any -- yes, Morten.

Morten Evjenth Lindbäck - Fondsfinans ASA, Research Division

Morten Lindbäck, Fondsfinans. Could you please elaborate on Snøhvit, on the processes that you have been through? And also, on all the -- last tax changes has affected the economics on the project.

Torgrim Reitan

Okay. Thank you, Morten. So Snøhvit, 2014 is an IOR, potential IOR investments. We have not made any decisions. What we have agreed is to work on a concept and plan for an investment decision in 2016, which is actually later than was planned for earlier. We will work very hard to improve that project as much as possible, but no decisions have been made. In 2016, this project has to compete with other investment opportunities as such. When it comes to specifically on the tax changes made in the spring, that deteriorated the profitability of that asset, and adjustments to that will improve the economics and make it easier to make a positive investment decisions when that is relevant.

Hilde Merete Nafstad

Do we have any further questions here in Oslo? I can't see any. So then, we will turn to the audio audience. And our first question comes from Alejandro Demichelis from Exane.

Alejandro Demichelis - Exane BNP Paribas, Research Division

Torgrim, just one question here. You have been talking about your cost being under control here. Maybe you can give us some kind of indication, at least directionally, in terms of how we should be thinking about CapEx going into next year?

Torgrim Reitan

Okay. Thank you, Alejandro. So the guiding that we gave is $21 billion, in average, in investments 2013 to 2016. This is consistent with our production in 2020 of 2.5 million barrels per day. So that is still valid. But we also are saying that this production ambition in 2020 is what it is, and we -- our target is to create value and not necessarily steer on a 1 single number at 1 point in time. So we are doing portfolio adjustments, as you know. We will revert at the Capital Markets Day in February with a fuller update on the totality.

Alejandro Demichelis - Exane BNP Paribas, Research Division

Okay. But just in terms of you're doing the divestments here, can we see some kind of reduction in CapEx because you have less assets to spend your money on?

Torgrim Reitan

So I won't go into details. We will have to revert to that in February. But generally speaking, yes, these transactions reduce our investments or free up investment capacity going forward.

Hilde Merete Nafstad

And then our next question comes from Theepan Jothilingam from Nomura.

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

A couple of questions actually. I was just coming back to the disposal strategy particularly after the OMV transaction. Is management thinking that there could be a greater emphasis to sell some of the growth assets particularly in Norway? Then in that context as well, I was wondering whether there had been any progress in terms of development plans on Johan Castberg. I think the Energy Minister made some comments recently there. And I'd just follow up, I understand that you'd like to give more details on the CapEx for the longer-term and the 2020 target but just, I think pulling up on the first question directionally, do you see investment, organic investment up year-on-year or not, given that you've given us a production profile?

Torgrim Reitan

Okay, thank you, Theepan. When it comes to disposal strategy, portfolio management is a key part of our strategy. And I think that is very well demonstrated by the transactions over the last 3 years. We will continue to high-grade the portfolio to sharpen our growth further, seeing to that we reinvest into the most profitable projects. So going forward, you should expect this to be a part of the strategy and what you should expect to happen. When it comes to Johan Castberg, we have a drilling campaign in that area. We will await that and then, it has been said that physical framework will be looked upon in this area. So we also await physical clarification for that assets. When it comes to investments, I do can understand your question and your curiosity but I must ask you to show up at the Capital Markets Day in February instead.

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

Okay, can I just follow-up back on disposals. Just in terms of thinking though. Is there more emphasis in terms of being more active on early cycle assets trading some of the exploration success that you've clearly had over the last 18 months, 2 years. Is that now more in your thinking or you're still thinking more around the mature producing assets in the portfolio?

Torgrim Reitan

If you look back on the transaction that has been done over the last year. You will see actually quite a broad spectrum of assets from mature assets to more exploration and early phase assets. So we take a rather broad perspective on this and I think that must be part of forming your expectation. I will not give more clear guidance on specific type of assets but we have regularly review of the portfolio to decide on what do we want to continue with and what do we want to do something else with.

Hilde Merete Nafstad

The next in line is Haythem Rashed from Morgan Stanley.

Haythem Rashed - Morgan Stanley, Research Division

I may be sort of repeating answered earlier questions, but if I could ask you slightly different way, I'd like to come back to sort of portfolio management again. But I just wanted to understand because I know in the past you chose not to sort of give any explicit guidance on disposals and you clearly have a very strong track record in actively managing your portfolio. But is there any sort of scope to provide any sort of guidance or color on sort of the amounts of, should we say spending saved through an active portfolio strategy so...

Hilde Merete Nafstad

Excuse me.

Haythem Rashed - Morgan Stanley, Research Division

Would you, would it be fair to say that your focus or you're priority when you're looking at sort of assets in the sort of disposal phase, you would be looking at those with sort of perhaps disproportionately high levels of spend associated with them. And is that something that is an increasing focus for management? And second question is on U.S. onshore gas production, it was quite a bit stronger Q-on-Q. I know you sort of made some comments about 2014 sort of level, activity levels in the U.S. continue to remain relatively subdued. I just wanted to, so if you could give a better color as to how we should think about the trajectory for that going forward over the next 12 months, is sort of 3Q more of anomaly, should we be seeing sort of those productions normalizing back down again?

Torgrim Reitan

Okay. It was a bit on and off with the sound, so the first question, I think I got it. So looking at further portfolio adjustments, I think I just have to repeat my answer. It's all of a pretty broad approach to how we look at our portfolio. We keep on making big discoveries that are very profitable and that will be prioritized. So we currently run a very hard prioritization what to invest in and what not to invest in. So certainly there will be assets and that are in the investment phase that are part of that discussion. And then there are other assets that are less strategic than others. That we want to capitalize on. On the U.S. onshore production, to give some more color on that. Currently, we run with 5 in Bakken. We run with 5 rigs in Eagle Ford, and a total of 14 wells in Marcellus. So this is down since the start of the year and significantly down from what it was before that. So when it comes to Marcellus, in the start of the year, we had 400 wells drilled, waiting for completion and hook up to gathering systems. A lot of them have not been hooked up and are in production. The current in entry is down to 100. And 100 wells is a normal in entry when you're in a steady state. So have been in sort of what should we call it, a backlog of wells waiting for transportation. So that is a part of the explanation why the growth in this segment has been so high so far this year. So as you understand, a stable situation with fewer rigs means lighter growth from the Marcellus area. When it comes to Bakken, we at 1 point in time, we had 16 rigs. We are currently at 5. Now to give some color on why that is. For us, it's very important to take a long-term perspective on that assets. So what we do see is that when we run with such a number of rigs, we're able to take learnings across the rig portfolio and apply it. And that is makes very much sense. So that is, explains while this will be slower ramp up than it has been this year.

Hilde Merete Nafstad

The next question comes from Jon Rigby with UBS.

Jon Rigby - UBS Investment Bank, Research Division

Two questions, first just going back to your Bakken comments, and you talked about value not volume, but surely everybody is driven by value. And if you look at your competition which is mainly independents, they're clearly growing production significantly faster than you in the basin. So I just wondered what it is more specifically that you are concerned with about not growing production but that they clearly are not and maybe what it is we're missing in the comparison between the two. And then the second question is, I'm fully behind your strategy of realizing value, I think it's a good one and particularly with your exploration success it make sense to continue to high-grade. But has any thought been -- has there been any thought at broad level of allowing shareholders to participate in that, in that the final link between realizing capital value within the portfolio and delivery to shareholders could be something exceptional in terms of payback shareholders. I'm thinking primarily of share buybacks?

Torgrim Reitan

It will be the easiest thing to boost short-term production in Bakken. It is just to frac very hard and then you'll see the initial production go very, very high and then decline very rapidly. The key here is to track as subtle as you can, reduce the distances between the fracs and get the maximum out of your reservoir. Then you get the higher recovery rate but a much flatter production profile and much less initial production. Without naming anyone, companies that want to dress up for being acquired really have the incentives to boost initial productions. We have not that driver. So I think that is a short and brittle comment. When it comes to your second question on share buybacks, yes, we have a mandate from the annual general meeting like we have every year. It is part of the toolbox that we have and if that is judged as being prudent, we will use it.

Hilde Merete Nafstad

The next question comes from John Olaisen with ABG.

John A. Schj. Olaisen - ABG Sundal Collier Holding ASA, Research Division

Two questions. First, do you intend to give a lot of warnings about production for 2014. And how strong this is to take this in the case. Do you expect another year with production down year-on-year or do you expect production growth in 2014?

Torgrim Reitan

My main purpose is to get across very clearly the impact of the changes that has happened over the year. So you all have that with you when you make your forecast into the future. I will not give any directions in to it next year, but we have our guiding from 2% to 3% of growth towards 2016. That is still valid but you should remember that impact from the OMV transaction is 60,000 barrels in 2016.

John A. Schj. Olaisen - ABG Sundal Collier Holding ASA, Research Division

Oh yes, but also organic investments are going from $16 billion to $19 billion to $21 billion, should we really not expect any production growth from all this increased CapEx?

Torgrim Reitan

So I think it is -- we're currently investing $19 billion and yes, it is investing into growth and there will be growth. But I think it's relevant to also take into account what is the net investments in this perspective all of the proceeds that has been brought in, and then of course, reduces the production.

John A. Schj. Olaisen - ABG Sundal Collier Holding ASA, Research Division

Okay. My final question here is regarding the NOK 4.3 billion in provision for a change in ownership interest in an international field. Can you specify which field that is and what's the dispute?

Torgrim Reitan

This is related to an offshore field internationally. And due to commercial reasons unfortunately, I can't be more specific than that.

John A. Schj. Olaisen - ABG Sundal Collier Holding ASA, Research Division

Could you tell us a little bit how much it would impact your production if you lose on that dispute?

Torgrim Reitan

That is too early to say. But the expectation is that it is not too large impact on production.

Hilde Merete Nafstad

Your next question comes from Peter Hutton with RBC.

Peter Hutton - RBC Capital Markets, LLC, Research Division

And just 2 questions, again coming back to the guidance or marginal guidance that we've got for 2014 production. You said that the impacts of the Ormen Lange and the disposals, that would be 110, 120 in 2014. Can I just check because looking through this, which is the logic that you gave in getting to those numbers, that would imply that 2014 compared to 2012 is that correct, because you also said that's bigger than the 80,000 barrels a day that we saw in -- so that's 80 bigger than the impact we saw in 2013. So that the base is actually 2012. Can I confirm that one? And the second area is, thank you for the update on Castberg. When do you think we might be able to get to a stage whether there's more information on that one given that you're awaiting the campaign and also the fiscal framework, and also on dates, are we still on track to get an update on share drop by the end of this year?

Torgrim Reitan

Okay, thank you Peter. So Svein, if you can give the more granularity into the 110 to 120, that would be appreciated. On Johan Castberg, Skarv is being drilled. When that is done, the next one is going to be drilled and as far as I recall, it's called Kwanza [ph], yes. And then, we have done with the campaign around Johan Castberg. Then we know more whether there is additional volumes. When it comes to fiscal framework and clarification, we are awaiting that and that will of course, be an important factor in deciding on the way forward. It is a great reservoir. It is large and we'll see. When it comes to Johan Sverdrup, the plan is to make a concept selection by end of this year where an updated resource estimate, total resource estimate from us will be given. So that is the plan and we will see to that information is presented in a prudent way.

Svein Skeie

Regarding the 110,000 to 120,000 barrels impact next year. That comes from the Ormen Lange, which is then estimated to be around 40,000 barrels per day, out for the year. The OMV transaction, which is done also and estimated to be around 40,000 and as we have said also for the Wintershall transaction, that the impact then, after closing, is around 40,000. So those are the 3 elements, adding up to the full impact of 110,000 to 140,000 -- 110,000 to 120,000.

Peter Hutton - RBC Capital Markets, LLC, Research Division

But that's not against sort of full year average '13 because some of those elements have been included already, Wintershall from the end of July, Ormen Lange date is 20,000 on an annual basis.

Svein Skeie

Yes, this is the impact in 2014, and also as Torgrim mentioned in the speech, is that the increase will be around 80,000 from this year.

Torgrim Reitan

Peter, the Ormen Lange the annual effect is 20 but the second half effect is 40.

Hilde Merete Nafstad

We'll turn to the next question then. It's Mike Alsford from Citi.

Michael J. Alsford - Citigroup Inc, Research Division

I've got 2 questions actually, please. Firstly, just on cash taxes. So despite, obviously, lower possibility in '13 versus '12, cash taxes are running high year-to-date. Can you just tell us what's driving this, does this I guess, unwind in fourth quarter and how should we think about I guess, cash taxes relative to P&L taxes into 2014. That was my first question. And then secondly, maybe more go on CapEx, you've obviously given us the guidance on production impact for the asset transactions that you've made. You mentioned, I think when you did the OMV deal, that you were sort of freeing up around $7 billion of CapEx of which I think $5.5 billion was before 2020. So could you maybe provide us with what the I guess, saving is from that asset divestment for the period 2013 to 2016 so we can reconcile with your current group guidance on CapEx, please?

Torgrim Reitan

Okay, the first question on cash taxes this year and I'll make a comment to the Norwegian taxes because that is paid with a 6 months delay. So the first, the Norwegian taxes paid in the first half of the year was based on the 2012 earnings. And they were high. So the tax payments in the second half of the year is lower than in the first half of the year. When it comes to the OMV transaction, you were absolutely right. It takes them, the investment levels, from these assets from some $7 billion, $5.5 billion within the period up to 2020. And if you look at the profiling, it is more in the early years than in the later years, related to those.

Michael J. Alsford - Citigroup Inc, Research Division

Okay, so just to confirm that $5.5 billion is going to be in the 2013 to 2016.

Torgrim Reitan

No, no, not all of it. But $5.5 billion will be in the period of 2020 and if you profile it, it is more in the earlier years than in the later years of that period.

Hilde Merete Nafstad

Next question comes from Rahim Karim from Barclays.

Rahim Karim - Barclays Capital, Research Division

I have 2 questions, if I may, the first was just around Tanzania. We've seen a few comments on the headlines in the last week or so around the fact that those concerns about there not being enough resources to develop LNG facilities there. A bit surprised by those and also by others suggesting that Statoil and Exxon might be looking to sell down stakes there. So I was just wondering if you could perhaps provide an update and your current thinking around Tanzania. And then the second question, was just about the impairment seen in the upstream. You talked a bit about the provision but I was wondering if you could provide any color on the impairments especially in the International business. What those relate to, whether any of it relates to the U.S. onshore and what whether they were there any associated reserve impacts?

Torgrim Reitan

Okay, all right so on the impairments Ørjan, if you can take that afterwards. On Tanzania, there is enough resources for a development, 15 to 17 Tcf. We are working closely with BG in the neighboring block as you know. We have one well being drilled correctly, Marungga [ph], which is the first in that campaign. And so of course, more volumes are better when you talk about LNG developments. To us, the priority is to do this right. This will be -- this will have no impact on 2020 production. So this is for the next decade. So on the impairment, Orjan.

Ørjan Kvelvane

Yes, on the impairment, we, of course, test the triggers every quarter and this quarter it's mainly impacted by the refineries, over 4.3 billion and then in addition, we have parts in DPI 0.9 billion and also in DPN Norway 0.4 billion. But I don't think we should go into details further.

Torgrim Reitan

And the question was, did this have reserve impacts, these impairments?

Ørjan Kvelvane

No, they will not.

Rahim Karim - Barclays Capital, Research Division

Okay, but can you confirm that they're not associated with the U.S. onshore?

Ørjan Kvelvane

They're not associated with the U.S. onshore. You are right. They are not associated with that.

Hilde Merete Nafstad

Next question comes from Oddvar Bjorgan from SpareBank Markets.

Oddvar Bjørgan

I'm afraid it's the CapEx question again, but as you know, this is the main investor worry in the stock. But I'm just trying to rephrase the question a bit. You're last CapEx guidance for 2014 to 2016 was given in February this year. Today, what has changed? Do you see more CapEx or do you see less CapEx in that period now? Can you answer that?

Torgrim Reitan

Okay, thank you, Oddvar. 2.5 million barrels per day is consistent with the 21 billion in the period 2013 to 2016. If we elected to grow harder, which all the assets and discoveries and everything gives the potential to, then investments can be significantly higher than that. On the other hand, if we decide to do something else than producing 2.5 million in 2020, lower, then the investments will be lower. So it's a pretty consistent picture and we see that still is the case. What has changed since February? I think first of all, it's a series of great discoveries and explorations, results that has brought into prioritization work that we are currently doing.

Hilde Merete Nafstad

Then our next question comes from Robert Kessler with Tudor, Pickering, Holt.

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I wanted to come back to refining if I could, I recognize it's not the largest portion of your portfolio but I wanted to see if I could get some color nonetheless. You said no plans to close the refineries but any thoughts about temporary reduction in runs and also any possibility of divestment for those assets?

Torgrim Reitan

Okay. So the related production out of those assets are optimized and the runs are reduced to optimize it. When it comes to any plans for divestments, I won't comment on that but on general notice, that selling refineries in Europe is not an easy task these days.

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Understood. Have you been below cash costs on the margin in recent histories in the last couple of months at those refineries?

Torgrim Reitan

At both refineries, so far this year, is balancing neutral, both in the quarter and so far this year.

Hilde Merete Nafstad

Our next question comes from Iain Pyle from Bernstein.

Iain Pyle

I have just 2 questions on the Flemish Pass. Firstly, when might you expect to have more information on Harpoon. And then secondly, given a fast-track development of what looks to be pretty attractive assets there, is there any potential for these to contribute to the 2020 production targets?

Torgrim Reitan

Okay. thank you, Iain. So the Harpoon, the finishing of that evaluation, that is ongoing. Am not sure if you have the dates, Svein.

Svein Rennemo

We are in the phase of them doing the final evaluation so and then taking the totality and then when we have the full flow [ph] we -- you need to come back for our plans.

Torgrim Reitan

Yes, exactly, there are, there's such a huge acreage that we hold around this and we do see other very interesting drilling targets in this area. So we will work on bringing a rig back and do more work. You should not expect this to be part of the production in 2020.

Hilde Merete Nafstad

We have time for just 1 more question. And that will come from Blake Fernandez with Howard Weil.

Blake Fernandez - Howard Weil Incorporated, Research Division

I had a couple of questions on back to North America. I'm just curious, it sounds like you're activity levels as you say will be modest as you kind of develop your drilling and completion techniques. Is it fair to say at this point you really focused on optimizing costs and not so focused on testing other formations and down spacing in some of the places like the Eagle Ford?

Torgrim Reitan

I think you are absolutely right. We see a big potential in improving the operations and making it optimal. We are satisfied with acreage that we have and the positions that we have. And optimizing on that is a natural part of running that business of course, but quite comfortable with what we have.

Blake Fernandez - Howard Weil Incorporated, Research Division

If I could just follow-up, do you have a first right of refusal on your Eagle Ford acreage with Talisman?

Torgrim Reitan

I think those commercial considerations, I'm not prepared to share.

Hilde Merete Nafstad

Thank you. And that will have to conclude our Q&A session for today. And our presentation and the Q&A session can be replayed from our website, as usual, in a few days and there will also be transcripts available. If you have any further questions, please don't hesitate to contact us with Investor Relations department. And thank you, all, very much for participating today. Have a good day.

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