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Executives

Phil Corbett – Head, IR

Tony Hayward – CEO

Julian Metherell – CFO

Analysts

Rafal Gutaj – Bank of America/Merrill Lynch

Tom Robinson – Deutsche Bank

Andrew Whittock – Liberum Capital

Michael Alsford – Citi

Al Stanton – RBC Capital Markets

Jamie Maddock – Morgan Stanley

Daniel Ekstein – UBS

Brendan Warn – BMO Capital Markets

Peter Hitchins – HSBC

Robin Haworth – Oriel Securities

David Gamboa – Tudor, Pickering, Holt

Yuriy Kukhtanych – WOOD & Company

Will Forbes – Edison

Sanjeev Bahl – Numis

Genel Energy PLC (OTCPK:GEGYF) Q2 2014 Earnings Conference Call August 5, 2014 3:30 AM ET

Operator

Good morning and welcome to the Genel Energy Half Year Results 2014 Conference Call. I will now hand you over to your host Phil Corbett, Head of Investor Relations. Please go ahead

Phil Corbett

Good morning everyone. I’m joined on the call this morning by our Chief Executive, Tony Hayward and Chief Financial Officer, Julian Metherell. Tony and Julian will take you through the presentation slide, which if you haven’t received already are available at our website genelenergy.com. We will then open up the call for Q&A. Tony over to you.

Tony Hayward

Thanks Phil, good morning everyone. I’ll take you through the highlights for the first-half and then touch on recent developments in the Kurdistan Region. I’ll then pass over to Julian to walk you through the financial performance before I return to give you an operational update with a key focus on the key catalysts over the balance of 2014.

On slide two of the presentation we have the usual disclaimer.

Moving to slide three, the main feature of the first-half was of course a very strong production performance with volumes increasing around 50% year-on-year to 63,000 barrels of oil equivalent today. This was driven by the first exports by the Kurdistan Regional Government through the Kurdistan Region Turkey pipeline, a full period of trucked Taq Taq exports to International markets by Turkey and robust domestic norms.

Overall around two-thirds of production from Taq Taq and Tawke were sold into the domestic market with the remainder exported via the Kurdistan Region to Turkey pipeline and by truck. Both Taq Taq and Tawke continued to perform strongly with both sales averaging in excess of 100,000 barrels of oil per day in May and June.

During the period the Kurdistan Region Turkey pipeline system became fully operational and the Kurdistan Regional Government achieved a landmark event; the loading of the first cargo exported by the pipeline. To-date, five cargos have been lifted with letters of credit in place for all of them. Two sales are competed so far with cash proceeds being received into a Turkish bank account controlled by the Kurdistan Region Government. It is taking time for buyers and refiners to grow comfortable with the quality and sustainability of Kurdistan oil exports. However we remain confident that through the remainder of this year we will see increasing clarity and predictability around the pipeline export process from well head to contractor [and taking] proceeds.

In our gas business first gas from Summail field was delivered into Dohuk Power Plants in May. However our main focus continues to be on advancing our major gas fields at Miran and Bina Bawi towards commerciality. In recent months we’ve had constructive negotiations with the KRG around the shape and scale of our involvement in the development of this resource and we remain confident that the negations will be completed before year-end.

Despite a couple of disappointing exploration well results in the first half we continue to build a portfolio that we believe can deliver material value to shareholders. In April, we announced the acquisition of presalt interest in Blocks 38 and 39 offshore Angola with Dilolo wells spudding in June. Our balance sheet remains strong, bolstered during the period by our first bond issuance. We are encouraged by the strength and institutional demand which resulted in both total funds raised and the coupon coming in ahead of our initial expectation.

Turning to slide four, let me now focus on recent political events. It is clear that the territorial gains made by ISIS have created a new paradigm on the ground in Iraq. Whilst the story is still evolving it is also clear that the Kurdistan Region Government has increased the territory under its control. This has the potential to deliver budgetary independence on the KRG sooner than previously anticipated. Against this backdrop Turkey remains resolute and in support of the full developments of the Kurdistan Region resources.

Our operations in the Kurdistan Region remain safe and secure and are unaffected by recent events. This is demonstrated by the strength at our production figures for June when at the height of the instability, Taq Taq and Tawke produced a combined gross average of 230,000 barrels a day and as we speak we are continuing to produce at full capacity.

On pipeline infrastructure, we remain confident that our production growth ambitions will be matched by the build-outs of pipeline infrastructure in the region. The KRG’s plans to install additional compression on the Kurdistan Region pipeline at the Khurmala Dome are well advanced and we see 300,000 to 400,000 barrels a day of capacity available by year end. This will give Taq Taq crude clear line of sight to the border. In addition truck export remains a proven way to commercialize Taq Taq barrels with volumes varying between 25,000 and 55,000 barrels a day in the first-half.

Before I hand over to Julian, I just want to take a step back and remind everyone that the extraordinary progress that the Kurdistan Region has made in developing its own business. It is just eight months since the singing of the landmark bi-lateral energy agreement with Turkey. In that time the KRG has successfully completed and commissioned a major oil pipeline, initiated oil exports and receives proceeds into its own bank account in Turkey.

It is perhaps understandable that the market is focused on day-to-day tanker movement and payment routing but the fact is that the evolution of the Kurdistan Region’s oil industry is groundbreaking in terms of its price and fundamentally positive for the Genel investment price.

With that let me hand over to Julian.

Julian Metherell

Thank you Tony and good morning everyone. The slide six details the income statement for the first-half. Revenue came in at$192 million, a 20% increase from prior period. This was comprised mainly of domestic sales proceeds with some trucked export revenues. Historically, we have recognized exports sales on a cash receipt basis. Consequently is the first-half sales from piped exports on a proportion of trucked exports were owed but not recognized.

Along with piped operations to the KRI pipeline this results in around $40 million of revenue, which has not yet been recognized. If this had been received in the period it would have delivered the revenue number of around $230 million, representative of the 63,0000 barrels a day production in the period. Sales realizations for Taq Taq and Turkey domestic deliveries have remained stable at $60 to $70 per barrels while trucked exports via Turkey averaged around $80 per barrel.

Cost of sales came in at $98 million, a year-on-year increase commensurate with the uplift in production volumes. Within this production cost of $35 million more than doubled year-on-year. This was down to a combination of higher production volumes, additional maintenance programs and increased transportation and handling cost at Taq Taq and additional conceivables at Tawke. Of the year-on-year increases around $5 million were one-off costs.

Depreciation on a unit basis was lower year-on-year primarily due to a higher proportion of production from Tawke which has a low depreciation charge per barrel. EBITDAX or EBITDA excluding the impact of non-cash exploration charges or credits came in at $138 million, up 6% on first-half 2013 and higher revenue was only partially offset by the increase in production cost. If the unrecognized revenue of around $40 million were to be included EBITDAX would have increased by 37%.

Factory and other operating cost and the initial impact of the financing cost associated with the high yield bond, net profit for the period of $71 million compared to a $109 million in the first-half of 2013.

The next slide illustrates the production trends from the first-half of the year. In line with the commentary provided at the beginning of 2014 production started to increase in the second quarter as pipeline exports commenced. Our production guidance for 2014 of 60,000 to 70,000 barrels a day is unchanged which at the midpoint would represent an uplift of 50% on 2013. Once planned upgrades to Taq Taq and Tawke are completed our net production capacity will increase to 145,000 barrels of oil equivalent per day.

Our revenue guidance for 2014 of $500 to $600 million on accruals basis is unchanged. Although I would flag that the revenue outcome for any production number in the second-half is dependent upon the sales mix amongst other factors.

Turning to slide eight, on CapEx, in the first-half we spend $311 million of which roughly one-third was on development activities in our Kurdistan portfolio as we continue to expand facilities at Taq Taq and Tawke and deliver on the 2014 development drilling program. 80 million was spend on KRI exploration appraisal comprising the ongoing drilling of Miran West 5 and seismic acquisition of Chia Surkh and Ber Bahr.

Around 130 million was spend on African drilling program in the first-half due to a significant period of drilling activity offshore Morocco, Malta and preparing for the start of Dilolo well offshore Angola. For the full year we still expect capital expenditure to come in at the $550 million to $600 million range with a broadly equal split between KRI and Africa. In addition we expect the acquisition cost element of the Angola farm-in to be around $75 million.

On the next slide, you can see the bridge from opening cash at the beginning of 2014 and cash at the end of the first-half. Operating cash flow of $115 million has been negatively impacted by working capital build relating to proceeds for domestic sales owed at the half year. CapEx is as previously discussed with a $500 million inflow from the high yield bond issuance. Combined with M&A and outflows relationship focuses for employee scheme and bond financing cash balances were $974 million at NGU.

I’ll now hand you back to Tony to give you update on the assets.

Tony Hayward

Thanks Julian. Moving to slide 10, in the first-half we continued to make progress with our plans to increase production capacity of both Taq Taq and Tawke to 200,000 barrels a day whilst delivering on the development drilling to support that increased capacity. At Taq Taq, we expect completion and commissioning of the second central processing facility by the end of the third quarter of 2015 which will increase capacity to 200,000 barrels a day. The project management of the CPF-2 by the Turkey contractor has falling short of our expectation which is the reason behind the slippage in timing. We are recently taking steps to ensure that the revised time table is deliverable which includes restructuring the contract in order to incentivize the contractor for the new schedule.

In the second quarter, we spudded the first well in the 2014 development program which comprises four wells. We will also be side tracking the Taq Taq Deep well into the cretaceous as a producer. At Tawke, the Tawke 21 and Tawke 23 wells were brought on stream at a combined rate of 37,000 barrels a day in March. Testing operations on the Tawke 24 and Tawke 26 appraisal and development wells were recently completed with a Tawke 26 well coming on stream at an initial rate of 200,000 barrels a day. The Tawke 24 well results were inclusive and this well has been suspended awaiting further evaluation. The Tawke 25 horizontal development well is currently drilling.

Surface processing capacity is planned to increase from 100,000 barrels a day to around 200,000 barrels a day by year-end 2014 through the utilization of early production facilities. At Chia Surkh and Ber Bahr we will complete 3D seismic programs this year and we plan to drill appraisal wells in the first-half of 2015 in order to revise the results potential for both discoveries.

Moving to slide 11, we have been encouraged by the progress made in the first-half of 2014 on our Kurdistan Region Gas business. The Gas Sales Agreement signed between the Kurdistan Region and Turkey creates the end user demand for Miran and Bina Bawi. We have an agreement in principal with the Kurdistan Region Government on the scale and scope of the development of the significant of gas results. Our primary aim is to make sure that the chosen development concept generates an attractive rate of return while mitigating nature and capital exposure. I look forward to updating you on all of this in the coming months. On the Dohuk license, the Summail field started delivering gas in Dohuk power plant in May with a Summail-2 development well expected to complete this quarter.

Slide 12 summarizes our 2014 exploration activity. As previously reported the wells on Taq Taq Deep and Hagar Qim were unsuccessful while we continue to review results of the Juby Maritime-1 well which confirmed an Upper Jurassic heavy oil discovery. The important Dilolo well spudded on Block 39 Offshore Angola in June. Drilling operations have gone well so far and we estimate having results from the well in the fourth quarter. The Stena Carron drillship will then move to drilling exploration well on Block-38.

Last week we spudded an exploration well on the Nour prospects on the Sidi Moussa block Offshore Morocco. This is targeting oil in both upper and middle Jurassic carbonates in a structure geologically independent from Juby Maritime. The well should take between 60 and 90 days to drill.

Before I open it up for Q&A, on slide 13 let recap the progress that Genel continues to make. In our view the recent changes in our Iraq’s political landscape strengthen the Kurdistan Region hand in the development and acceptance of its upstream ambitions. The changes also have the potential to create further E&P opportunities which we believe we will well positioned to take advantage of.

Our strong production performance in the first-half of the year unpins our 2014 production guidance. We expect predictable and sustainable Kurdistan Region pipeline exports as we progress through the second-half of the year, which in turn will transform the cash flow generation of that business. In tandem we are on the cusp unlocking the commerciality of our Kurdistan region gas assets which will be the next driver of significant growth to Genel.

The third major catalyst over the balance of 2014 is of course the potentially transformational exploration wells offshore Angola and Morocco. All of this activity is underpinned by a strong balance sheet and I would like to take this opportunity to reiterate that the potential for returning capital remains a core element of our strategy. We have consistently stated that there are three objectives which we need to achieve in order to deliver cash returns.

These are, one, sustainable pipeline exports and visibility on cash flows. Two, successful debt issuances, and three, the commercialization of our gas business. With debt issuance already achieved and sustainable pipeline exports and a gas sales agreement on the near horizon I believe that significant progress has been towards our aim of returning cash to shareholders.

With that ladies and gentlemen, let me hand the call back to the operator for the questions and answers. Thank you very much.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will now take our first quarter from Rafal Gutaj of Bank of America. Please go ahead.

Rafal Gutaj – Bank of America/Merrill Lynch

Good morning. Just two questions from me please. The first one, could you provide any more detail around why the latest horizontal wells in Tawke were weaker than they have been historically? And do you think this is limited to the Eastern section of the reservoir? And then following on that could you help us understand where the upcoming T-28 and T-27 wells will be drilled?

Secondly, just moving on to domestic pricing into the second-half in Kurdistan, could you comment on what impact the flow of crude is having, if any, on domestic pricing, or is it being offset by exports out of the region? And finally with what certainty do you think you will be moving to recognizing revenues on an accrual basis in the second-half so that these tally up with your full year ‘14 revenue guidance which is currently given on accruals basis. Thank you.

Tony Hayward

Right. Thanks Rafal I think I am going to do a little research actually, if that’s okay. I think on the two Tawke wells were drilled as you said on the extreme eastern flank of the field which as an area is still under appraisal. So they were in essence appraisal/slash development wells. It’s clear in that particular field, the structure is coming a little deeper then we’d had anticipated. We have ended up with a section of the completion quite close to the oil water contact and when we turned them on we pulled in some water.

So I don’t think it says anything very significant about the reserve base or any other issues but it’s clear that in this broader localized area which we are in essence, we are appraising the top structure is coming a bit deeper and the wells were completed the slower sections of the wells were completed close to the water. I think it’s fair to say that we and all the Sidi operator are still evaluating the results and I am sure I’ll be in position to give you a further update when they report their major results in a few weeks of time.

On domestic pricing, the process of selling crude into Kurdistan domestic market is ongoing, it’s not going at full bore yet. As I think people understand the plan would be to satisfy domestic demands through Kirkuk oil allowing the Kurdish sales to be used for exports. I don’t think it will change the pricing but it clearly means that as we go through the second-half of the year we would expect to have more and more of our oil exported and less and less consumed in the domestic market. That’s clearly a good thing because it will uplift the revenue.

And that leads me on to your third question which is around revenue recognition. I think what we want to say is a consistent and steady exports cargos lifted, money received, transferred, contractors paid before we start recognizing it. We expect that will happen through the second-half of the year. We are taking steps ourselves to become involved in the process of lifting oil at Ceyhan.

Rafal Gutaj – Bank of America/Merrill Lynch

Great, thanks.

Operator

We will now take our next question from Tom Robinson of Deutsche Bank. Please go ahead.

Tom Robinson – Deutsche Bank

Good morning gents, three brief questions for me please. Firstly, on the sales proceeds for pipe exports can you just talk around the timing and process of revenue receipt, and what needs to happen for the KRG to release these funds to contractors? Secondly, following on from that, on the domestic market and trucking, how much headroom do you see to increase production into these markets in the interim period? And then lastly just on exploration, could you talk about the rig contract renegotiation and how the new terms compare to the old there?

Tony Hayward

Okay, thanks Tom. I think your first question is that’s the sixty-four dollar question which we await to see how it’s going to happen. As I just alluded to we are in discussions about how we get involved in the process of putting the oil into the international market which would clearly short circuit the process. So the idea that we would lift our entitlement volume at Ceyhan and sell it into the international market which would be the way things would operate in a normal situation. I think that’s where we will end up in the second-half of the year but it’s going to take a few months probably to get there.

In terms of domestic trucking or domestic sales and trucking volume I think we need to be clear we are producing at full capacity currently. We has every – when everything is running we are full out and anything that is not going into the domestic market or down the pipeline is being trucked to Turkey. So for reasons that are entirely understandable the Kurdistan Region is producing every barrel it can today to maximize revenues at what’s clearly a pretty challenging time.

And then the final question on the rig contracts we have renegotiated and shortened dramatically our commitment. So when we have completed this next well in Morocco we have no more, no further contractual obligations. I am not at liberty or I am not choosing to disclose the commercial terms at which we did that but we think it’s a very favorable outcome.

Tom Robinson – Deutsche Bank

Excellent, thanks.

Operator

We will now take our next question from Andrew Whittock of Liberum. Please go ahead.

Andrew Whittock – Liberum Capital

Yes, good morning, gentlemen. I’d just like to follow-up on the concept. So if I guess listing entitlement at all Ceyhan rather than waiting for the escrow accounts to flow through. Could I mean does this reflects some sort of dissatisfaction on your part on accounts arrangements or I don’t know if it’s a reflection of how you are expecting to change if Kurdistan gains independence. So just wondered if could you talk a little bit more about your preferred mechanism.

Tony Hayward

Yeah. Thanks Andrew for that; a couple of points of clarification. Firstly, this has got absolutely nothing to do with Kurdish independence. And secondly it is not an escrow account. It is in the account in the Turkish bank controlled by the KRG. And then what I would say with respect to your questions it not an expression of dissatisfaction, it’s an expression of how we expect the situation to evolve going forwards as we get to a more normalized process for exporting into the international markets.

Andrew Whittock – Liberum Capital

Do you have any – I am sorry, if I follow-up on that, do you have any sort of timeframe in your mind there?

Tony Hayward

Through the second-half of the year.

Andrew Whittock – Liberum Capital

Fine, okay, good. Thanks so much.

Operator

We will now take our next question from Michael Alsford of Citi. Please go ahead.

Michael Alsford – Citi

Thanks for taking my question, I have got three please. Just firstly, on the gas commercialization plant, maybe you could give a little more color, Tony as to how advanced perhaps you are on the gas off take agreements about bringing in partners to help fund the forward, the development CapEx of Miran. And more specifically, I guess what are you sort of budgeting currently for that development CapEx for that field. That’s my first question.

Secondly, just on the delay to the upgrade on Taq Taq for the second processing facility, have you got any recourse to the service provider for the delay? It seems like it’s something that they maybe have done wrong from the project management perspective rather than I guess a major change to scope. Could you maybe talk around that?

And then just thirdly on the sort of exploration portfolio clearly a very active second-half with obviously looking at [Peshkabirin] that’s a key well but as you head into 2015, could you maybe talk a bit more broadly about how you see the hot opportunities within the portfolio, do you feel that you want to be doing more farm-in opportunities here in the second-half to maybe build out that exploration portfolio in ‘15? Thanks.

Tony Hayward

Right, thanks Michael. Let’s start with the gas. We are in parallel negotiating both the contract and the basis on which third parties would enter the development. So it’s all being done together. We remain confident that we will have it complete by the end of the year and then frankly until it is complete I am reluctant to put a number on the CapEx. One of things that I think you should be bearing in mind is we will be endeavoring to accelerate the oil development at Miran which will provide a potential quite significant source of revenue for subsequent investment into the gas development. So we have been trying to structure the whole development to minimize our overall capital requirements but also to minimize the capital exposure in the near term. And when we complete it we will tell you all about it but until its complete it’s clearly commercially very sensitive.

Michael Alsford – Citi

Okay, thank you sir.

Tony Hayward

On CPF-2 clearly we are pretty disappointed with the performance. This is not a particularly difficult expansion without naming names the contract has not performed terribly very well. We have, all I can say is we are satisfied with the commercial terms that we have negotiated to ensure that it’s complete on time. As always the issues is about time, particularly in this sort of development rather than any potential overspend. So it’s not a good story frankly, but we have taken action and got it back on track.

I think in terms of exploration we’re going to continue to be quite selective with how we expand exploration. It’s clear that the industry is not having a great period in the world of exploration and we need to be I think quite robust and quite diligent in terms of how we expand it. We have the existing hopper to complete the drill out and further expansion beyond that we will be very rigorous in how we got about it. I think is all I would say at this point.

Michael Alsford – Citi

Okay, thanks so much Tony.

Operator

We will now take our next question from Al Stanton of RBC. Please go ahead.

Al Stanton – RBC Capital Markets

Yes, good morning folks. I was surprised to hear you mention that you haven’t been paid for some volumes trucked and so – for export and that kind of undermines the whole purpose of trucking. So a question about…

Tony Hayward

Al, sorry, can I correct you? It’s simply a timing issue.

Al Stanton – RBC Capital Markets

Right.

Tony Hayward

Right. It’s not about we haven’t been paid. The dollars that we were owed when we close the books we now been paid for.

Al Stanton – RBC Capital Markets

Fine, okay that was…

Tony Hayward

It’s going back between when the oil leaves Taq Taq and when we receive the proceeds having trucked to halfway across Turkey that is all we’ve referred to.

Al Stanton – RBC Capital Markets

Okay.

Tony Hayward

And we have not – we have always been clear about this. We do it on a cash basis not on accrued basis. Therefore it doesn’t show up but it’s nothing to do with not being paid it’s simply the time lag.

Al Stanton – RBC Capital Markets

Fair enough. No, you sounded distinct from that. Okay. Just to keep the tension up, I was just wondering if Glencore would be interested in trading improve or would you not address a question on that.

Tony Hayward

We are on the Genel call and [inaudible]. Glencore will be reporting their results in about three weeks’ time. Why don’t you ask them, when they report?

Al Stanton – RBC Capital Markets

Fair comment. And then finally, just with what you said about measuring how you would grow exploration and you also reiterated quite strongly your commentary about returning capital. Are we seeing like an end of the first size of the story here at Genel where perhaps you are retrenching as a Kurdistan play and very much focused on that or is this just a pause for breath as some might say?

Tony Hayward

I’d like to think you are seeing a disciplined management team that understands the concepts of creating value for shareholders rather than [pouring] it down to drill exploration wells.

Al Stanton – RBC Capital Markets

Cool, I’ll leave it there.

Operator

We will now take our next question from Jamie Maddock of Morgan Stanley. Please go ahead.

Jamie Maddock – Morgan Stanley

Hi, thank you. It’s not a pointed question. I’m just wondering if you could enlighten to the extent that you can, is with regards to the cargo ships which have been loaded, and I appreciate you don’t [inaudible] by any side. But I’m wonder if you could just sort of help me try and understand perhaps some of the issues that the buyers are seeing. It seems that buyers have been identified and like you say letter of credit et cetera are in place. But have they have being able to complete – I am just wondering how that, what it is that these buyer could get more comfortable with to actually take receipt of these cargos or at least the content of the cargo ships anyway. Any sense you can give to that will be very helpful. Thank you.

Tony Hayward

Yeah, okay, Jamie thanks. I think this is I think this has been quite well documented. There’s clearly been – I think there are three things, one is buyers have been identified and the buyers, they are a bit cautious because they don’t know quite what the quality of the crude is, they don’t know what the products slate is going to be and they don’t know whether they are going to get three cargo over the next three months or ten. So the whole marketing of the crude onto the market has not been, it’s not been terribly well done frankly and it’s not been very easy, some of that’s not surprising.

In addition to that of course we had a couple of other specific issues, in the case of Morocco, as has been widely documented now I think, there was an intervention, political intervention, that prevented – has prevented for the time being that cargo being off loaded. We will see over the coming weeks whether that situation changes. And then of course, as you have all seen there was a legal intervention in the case of the U.S. which, it looks very much to us will be overturned and thrown out of the Texan Courts in the course of the next three or four weeks.

So I would say in addition to the normal challenges of getting new crude with no track record and uncertainly of exactly how much and when volumes will be made going forward there’s clearly been because of the very unusual circumstances in here both political efforts and in the case of the U.S. the legal efforts to prevent the cargos being offloaded. Now our view of this is that what is now a trickle is going to become a torrent in the second-half of the year.

Jamie Maddock – Morgan Stanley

Okay, super. That’s great, thank you.

Operator

We will now take our next question from Dan Ekstein of UBS. Please go ahead.

Daniel Ekstein – UBS

Thank you. A couple of questions from me. Firstly we have got the Taq Taq horizontal wells coming in the second-half, but could you just remind what the recovery factor on that field assumed is at the moment? And then what would define our success with those wells, either from a qualitative or quantitative perspective?

And then secondly, just on the accruals process, again I mean the KLG is operating under quite several budgetary constraints at the moment and I guess it may have to prioritize how it allocates oil revenues as a result for a time. If you do go through accrual counting should we prepare ourselves for a period of time where receivables and working capital would be higher than normal under a ratable business as normal type environment? Thanks.

Tony Hayward

Thanks for the questions Dan. Let me do the second one first. I think we need to see how this whole system beds down, but what I can tell you very sort at the macro level, the Kurdistan government understands fully well that’s it is absolutely critical to keep its contractor on board during this period, because it is their source of revenue. And as you are well aware we have a very strong relationship with the MNR and we are in regular dialog about the need to ensure that we are continued to be paid to allow us to put our best foot forward and deliver the growing production volumes that they so badly need.

So I don’t expect there will a big mismatch between what we would want to see by way of revenues coming back to us and what we would be entitled to under a sort of business as normal environment. It is clearly going to take some months to settle down. I don’t really expect this to settle down towards the end of the year. But I think when it does there will be a tremendous effort on all parties to make the whole system work to be transparent and to demonstrate that this really is business as normal. It is in everyone’s interest to demonstrate that, not at least the government of Kurdistan.

In terms of the Taq Taq horizontal wells we’ve got recovery factors depending on the reservoir between sort of mid-30s and high 30’s in the Taq Taq field. As you know there are three reservoirs in the – three upper cretaceous, there cretaceous reservoirs in the field. I think we see the opportunity primarily as a rate enhancing opportunity, the horizontal wells and ultimately an opportunity to ensure that we don’t leave any upswept oil behind.

Though I am not certain we see there is an opportunity to significantly increase recovery rates. I don’t think people should be thinking like that about this field. We are seeing good recovery rates, we are seeing good sweep of the metrics in the areas that are being swept, obviously not very much so far. But it’s – so I don’t think we would anticipate a significant increase in the recovery factor as a consequence of horizontal wells. But it will ensure clearly higher rates, assuming it works which there’s no reason to think it won’t and it will ensure that we don’t leave any upswept oil behind. I think that’s the biggest opportunity.

Daniel Ekstein – UBS

All right, that’s really helpful, thank you.

Operator

We will now take our next question from Brendan Warn of BMO Capital Markets. Please go ahead.

Brendan Warn – BMO Capital Markets

Yeah, good morning gentlemen, this is Brendan Warn from BMO. Just two questions, I am going to labor on one of them, just under two scenarios as you move from, call it your, trickle to a torrent. Just how do you envisage control of the payment process if you lift your own entailment barrels? And then just on that second point just so I’m clear, I might not be catching it, but with the account controlled by the KRG, just as you move tomorrow to a normalized process just what needs to change or improve the release of funds to the contractor?

And then just secondly, Tony just in terms of yourself, obviously Glencore was mentioned earlier, the balancing of your duties, how do you farm between your two what are pretty full roles and obviously ongoing commitment to Genel.

Tony Hayward

Right, thanks, Brendan. Well, let me do the second one first. I mean I think with the greatest of respect to these two roles they together don’t come anywhere close to the sort of time commitment that I used to spend looking after BP. So I think I have been doing it now for about 15 months, I suppose I became the Chairman albeit on an interim basis of Glencore in May of last year. I think it’s fair to say I found it pretty comfortable frankly to take care of things in the way I need to. Just remember that being the non-Executive Chairman of Glencore is definitely not a full time job, particularly with the caliber of the management team that we have at Glencore.

Back to your question about revenues, revenue recognition how it’s all going to work but I think the answer is we don’t quite know at the moment. That’s exactly the discussion we are having. But you could imagine that in the event where we are lifting and selling on the international market at [Ceyhan] our entitlement crude and perhaps even not pushing on the half of the KRG some of their crude it remains to be seen whether we end up doing that. Then the money will parse from the trader to us and into our bank account, which is clearly one of the things that would make life a lot easier and simpler.

But like I say these are all of the things that we are now discussing in a very constructive way with the KNR as we get this new export system that they have created up and running. And back to what I’ve said in the presentation this will happen very quickly. And if you like the paper work is catching up with the reality on the ground at the moment and I expect that will be a process that continues through the second-half of the year. I think it will at year end before we got this all bedded down and sort of working to everyone’s satisfaction, including all of yours. But I feel very confident that that’s where we are going and I don’t see anything reverse again.

Brendan Warn – BMO Capital Markets

Okay, thank you, very clear.

Operator

We will now take our next question from Peter Hitchins of HSBC. Please go ahead.

Peter Hitchins – HSBC

Good morning gentlemen. It was quick question about the case, the Kurdistan pipeline. Just your understanding of the current capacity of that pipeline. I understand there might be some problems on pumping station still and also the ability to use it for Taq Taq exporting by pipeline, why are you tending to truck export than pipe. And whether this could be a potential bottleneck for your expansion plans, sorry it’s a little convoluted but perhaps you can help me.

Tony Hayward

It is very clear. Let me see if I can help you. Firstly, we are choosing to truck rather than export by pipe because we know we can get paid by trucking. So whilst we are surrendering a bit of revenue, a bit of margin we are guaranteeing payments and as I think we said consistently we will not be committing big volumes to pipe until such time as we are confident that we can understand how the payment system, all the way back to the contractors is going to work. So at the moment we are choosing to put Taq Taq crude into trucks and take our entitlement that way. I mean if you like we are over lifting into the truck export and domestic market and under lifting into the pipe export market whilst the pipe export market sort of gets settled down.

In terms of the KRA pipeline, it’s 36 inch pipeline with a hydraulic capacity of around 400,000 barrels a day, 350 to 400, we won’t know until we test but that’s the hydraulic capacity of that order. The KRG are currently installing new pumps at the southern end of it where the line from Taq Taq joins that system, a place called [inaudible]. Those will be ready, let’s say, in early September and at that point the line will have in excess of 300,000 and as much as 400,000 barrels a day capacity which will enable the KRG to clearly export to Turkey all of the Taq Taq production and a reasonable concern, let’s call it a 120,000 barrel a day of oil from the Khurmala Dome which is, as you know, is the Northern end of the Kirkuk structure that has been under Kurdish control, going all the way back to 2003. And it has been operated by the KAR Group which is the Kurdish contractor group. I hope that was clear Peter?

Peter Hitchins – HSBC

Yeah, just one follow-up question, given that the KRG control the whole of the Kirkuk field and there is only a limited domestic market, do you that they could substitute out Taq Taq for Kirkuk crude on to the export market?

Tony Hayward

I think that is most unlikely. I do not believe that we will see Kirkuk crude produced from the so called disputed territories exported in either the near or medium term. It will be used domestically.

Peter Hitchins – HSBC

Okay, brilliant, thank you.

Tony Hayward

It is all politics, clearly.

Operator

We will now take our next question from Robin Haworth of Oriel Securities. Please go ahead.

Robin Haworth – Oriel Securities

Good morning and just a question on Tawke, you’re reverting to Tawke, just wondering if you could discuss at all what proportion of the field you think is outside the area of good debt control either given the potential for a positive or a negative surprise on the reserve there? Thank you.

Tony Hayward

Well, I think what we can say is that the area that was, where there was uncertainty there is now much less uncertainty. We just drilled two recent wells in it. I think beyond that the area of uncertainty is along the northern flank adjacent to the major bonding fault. And we are in the process of reprocessing the 3D seismic there to get better definition. I think that’s probably more upside then downside actually because we haven’t included anything in the two key numbers for that area of the field.

Robin Haworth – Oriel Securities

Thank you. And I guess just a follow-up, would that seismic reprocessing will be complete in advance of the next results update?

Tony Hayward

I think you need to ask the operator for that, because we won’t. We will be following them, as I think is quite reasonable in this particular case in terms of when they do the next reserves update et cetera. So I think you could save that question for [DNA].

Robin Haworth – Oriel Securities

Perfect, okay, thanks very much.

Tony Hayward

[multiple speakers] questions to come.

Operator

We will now take our next question from David Gamboa of Tudor, Pickering, Holt. Please go ahead.

David Gamboa – Tudor, Pickering, Holt

Good morning gentlemen. I think most of my questions have already been answered but just a follow-up on PF 2. So you mentioned that you did some restructuring of the contract over there just to ensure you will be finishing the work in Q1 next year. I was just wondering if this covers also the works being done at Tawke and if we can expect these upgrades to be done by Q4 this year?

Tony Hayward

No, it doesn’t because it’s a different contractor.

David Gamboa – Tudor, Pickering, Holt

Okay.

Tony Hayward

PF2 at Taq Taq a permanent expansion of the central processing facility. At Tawke we are putting on some early production skip-mounted services

David Gamboa – Tudor, Pickering, Holt

So no risk of that being delayed further from Q4?

Tony Hayward

It’s completely different.

David Gamboa – Tudor, Pickering, Holt

Okay, okay, thanks.

Operator

We will now take our next question from Yuriy Kukhtanych of WOOD & Co. Please go ahead.

Yuriy Kukhtanych – WOOD & Company

Yes, good morning, gentlemen thank you for your presentation. Two questions from my side on a slightly different topic. Given the recent tensions between the KRG and Iran resulting in the closure of the border, could you please comment on the current relationship between the two governments and whether it impacts your business? And on the same topic, did you experience any noticeable decline in the domestic sales in the past months, when the mentioned border was closed? Thank you.

Tony Hayward

Thank you very much, Yuriy. Well first, there has been no impacts on our business and no decline on the – in the domestic sales. Clearly the relation with Iran is a very important relationship that the Kurds have done, I think a very job of managing over the years, they are very good keeping both Iran and Turkey in their different ways also, and that’s particularly true of the two UK section of the Kurdistan Regional Government which have very strong ties to Iran. I believe that the borders are now open again so it was temporary phenomena but as I said it had no impact on our business.

Yuriy Kukhtanych – WOOD & Company

Okay, thank you.

Operator

We will now take our next question from Will Forbes of Edison. Please go ahead.

Will Forbes – Edison

Yes, good morning. A couple of questions, if I may. Just on the curtailments of the rig contract, is this is a recognition of the lack of potential from opportunities that you folks saw on your first rig contract, or is it a more recognition that perhaps the exploration campaign so far has been less successful, than you’d hoped and the [interpretation] you had for your existing exploration hope is not therefore anywhere near strong as it was before.

And secondly with regards to [inaudible] the postponement until 2015 rather than just a straight movement from the now one well on site completed? Thank you.

Tony Hayward

Thanks Will. No, I think the rig contract is a reflection of the rig market, which, as you know, is [treacherous]. So we had the opportunity through a lack of performance on the part of the contractor to renegotiate the rig, the contracts and you know the contractor failed to perform on the contract, it will become in essence null and void. We renegotiate it as the same undisclosed commercial terms, that are attractive both in terms of pricing and in terms of commitment.

I think the question on – is a very straight forward one. We want to the results of Nour in Sidi Moussa and have the opportunity to digest them and understand them before we go off and drill the next well in Morocco which is, I think, a sensible way of proceeding.

Will Forbes – Edison

Okay, thank you. And then one follow-up, if I can on Kurdistan, obviously the Kurds control most of Kurdistan very completely but the situation is much in flux. I was just wondering how much conversation and discussions you had with the KRG with regards to protection of your assets and if you thought about any private protection and what kind of contingency plans you may have or are discussing in terms of any progress that ISIS makes.

Tony Hayward

Well of course we have all of the contingency plans you would expect us to have in a situation like this and we remain very confident in the capability of the Kurdish Peshmerga to ensure that ISIS get nowhere near our facilities or if I can use the expression, Mainland Kurdistan, clearly there has been some conflict between the two groups over the last few days. That was a very long way from the core Kurdistan. It was over a 100 kilometers to the west of Mosul. So a long way into, not even the disputed territories actually it was sort of in the middle of Nineveh province and I think really has no bearing on the Kurdish ability to defend their homeland, which we believe remains absolutely robust and rock solid.

Will Forbes – Edison

Okay, thank you very much.

Operator

We will now take our final question from Sanjeev Bahl of Numis. Please go ahead.

Sanjeev Bahl – Numis

Good morning, just two questions for me, please. Firstly, you have mentioned in the past that contractors may receive an enhanced share of domestic production to compensate them for piped export. So I was just wondering that is still a possibility or still being talked about. And secondly, as the market adapts to the quantity and quality of Kurdish crude available on the market, also some of the legal issues, should we be expecting quite a deep discount in the early months or years as that crude is sold?

Tony Hayward

Well, I have done a lot of talking this morning, so, I am going to let Julian answer the final question.

Julian Metherell

Sorry, so your first question was on over lifting in the domestic market and yes, certainly in the first-half, we have over lifted in the domestic market. And I think going forward in the second-half we don’t expect that to be the case. So we enjoyed some benefits of over lifting in the first-half. In the second-half I don’t think we can rely upon that as a way of compensating ourselves for piped exports going forward.

Sanjeev Bahl – Numis

Is it possible to quantify that over lift?

Julian Metherell

No, I mean we even – you can talk to Phil off line but I mean I don’t have the numbers in front of me. It was not that meaningful and I think it’s reflected in our accounts which we adjust on a cash basis.

Sanjeev Bahl – Numis

Okay.

Julian Metherell

So your second question was on the discount. Can you just repeat your second question?

Sanjeev Bahl – Numis

Sure. It was just really to do with market adapting to the quantity and quality of Kurdish crude.

Julian Metherell

There’s absolutely no discount.

Sanjeev Bahl – Numis

I was wondering if there’s a discount?

Julian Metherell

No, and the Kurds will not accept a discount, they can’t accept a discount and there won’t be a discount.

Sanjeev Bahl – Numis

Okay, great, thanks.

Tony Hayward

Ladies and gentlemen, I think that brings us to the ends of the questions, if I the signals I am receiving from my colleagues here is correct. Thank you for joining us. It is probably in the middle of the holiday season for at least some of you, one or two of you may have even dialed in from the beach. Let me wish you all a good summer. Thank you for your support and interest.

I think our view is that the events of the last couple of months have simply accelerated an outcome that was already predestined. Kurdistan is on the road to independent exports, increasing volumes. It looks at the moment like it will be independent of Baghdad. If we get the right political results in over the month, next month or two it maybe in collaboration with Baghdad but whatever, whichever way it’s goes there is no doubt they will retain authority over the development and monetization of their oil and gas resources. And I think when we next talk to you I hope I’d be able to tell you a lot about the deal we have done on gas and hopefully I’ve got my fingers crossed now, a little bit about some exploration success which we might have delivered in the second-half of the year.

Thank you for joining and we will see you all again soon.

Operator

Thank you. That will conclude today’s conference call. If you have any further questions please call Phil Corbett, Head of Investor Relations. You may now disconnect.

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