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OMV AG (OTCPK:OMVKY)

Q2 2007 Earnings Call

August 16, 2007, 5:30 AM ET

Executives

Wolfgang Ruttenstorfer - CEO, Chairman and Head of Head Office

David C. Davies - CFO and Head of Finance, OMV Solutions GmbH

Gerhard Roiss - Deputy Chairman, and Head of Refining and Marketing

Analysts

Alastair Syme - Merrill Lynch

Mark Hume - Credit Suisse

Anish Kapadia - UBS Warburg

Lucas Herrmann - Deutsche Bank

Theepan Jothilingam - Morgan Stanley

Presentation

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Thank you. Good morningladies and gentlemen. It's a pleasure for me to welcome you at our telephone conference regarding the First Half 2007. And I would like to start with slide, page 4. The result in the first half of this year shows, on the operational level, the impact of a weak dollar and also strong Romanian leu and this is the main reason why Clean EBIT was down by 12% in the second quarter. Whereas the Clean net income has increased actually by 5% of the minorities and this is mainly due to the good results of Borealis.

Strategically we have done steps forward by our new exploration licenses in Ireland, Norway and New Zealand. We had successfully executed three major refinery shutdowns and we'll have two more in the course of this year that will improve the position of our refineries in Central Europe significantly. We had, of course, the gas price increase and last but not the least we also increased our strategic stake in MOL.

The outlook for 2007, well, will concentrate on the restructuring of Petrom and I would say quite successfully, and of course we continue to implement our growth strategy, the macro environment, as we know, especially today is going to be difficult.

Next slide shows our unchanged vision for 2010. We are determined to be the strongest oil and gas company in the growth belt of Europe that has been established in the East of European Union by the excision countries. We want to be leading in terms of market cap of oil and gas production, refining capacity, number of filling stations, gas sales as well as petrochemical exposure, and our targets for 2010 are unchanged, half a million barrels of oil equivalent per day production, which would allow us also to further increase our refining capacity and marketing exposure and also gas as for us a substantial and important business.

On slide number 6, you see that our expectation regarding the way how to achieve this increase in production is unchanged. We think that based on the optimization in Romania but also on the development projects that are ongoing in Ireland, in Norway, New Zealand... sorry in Austria, New Zealand, Kazakhstan and Yemen that based on this project it will be possible to reach 400,000 barrels a day production until 2010 which would of course request and require from us that we deliver another 100,000 barrels a day of production via acquisitions.

While we stay committed to the 400,000, we will do our best to achieve the 500,000 but only at, of course, reasonable prices. What is also very important to mention here is that it is our objective to stabilize our production in Romania and on the oil side we have actually achieved that in the second quarter. On the gas side we still depend on seasonal demand and pressure in the major transmission pipelines but we do our best to turnaround the overall production in Romania.

In refining and marketing and this is now slide... now on page 7, we stay committed to the gross market in Central and Southeastern Europe. We have entered Turkey last year and Petrol Ofisi has been granted refinery license now on a provisional basis, the restructure Petrom on the marketing side towards the end of the year, the 90% or 100% of restructuring will have been done and the modernization of the Petrobrazi refinery until 2011 is on track. And in our western cluster, we have expanded significantly our cracker capacity both in Schwechat and we'll do so on until yearend in Burghausen.

In gas it is our unchanged objective to reach 20 billion of sales and to increase our transit capacity to 56 billion cubic meters in Austria and we think that we are very well positioned to take advantage of the growth in that market by EconGas in Austria and neighboring countries and by Petrom gas in Romania and neighboring countries.

The gas price has gone up since we have entered into Petrom from $50 per thousand cubic meter to now in the third quarter 2007 almost $200, but there is still some way to go because import prices are at $300 per thousand cubic meter.

May I now hand over to David.

David C. Davies - Chief Financial Officer and Head of Finance, OMV Solutions GmbH

Well, thank you, Wolfgang. Good morning ladies and gentlemen, I will take you quickly through the numbers for the half year before then handing over to Gerhard Roiss who then give you a more thorough presentation on the downstream performance and strategy.

Turning to the first slide, the key themes for the second quarter are EBIT at €584 million was 12% down on the same quarter last year. The environment was such that, although oil prices were only slightly lower, our realizations were clearly adversely impacted by the continuing challenges of foreign currency. The Romanian leu, for your information, clearly is the biggest challenge with 2007 our upstream production coming in Romania and that was 13% down against the dollar on the... or rather up against the dollar on the same period last year which means that all the realizations in dollars were broadly similar, of course, the local currency equivalent that we are realizing was substantially lower.

R&M had strong refining margins for the quarter but clearly the full year... the half year has already been dislocated somewhat by three major refinery shutdowns and the strong refining margins situation was not able to fully compensate that situation. In gas business the most notable news, of course, was the further increase in Romanian gas prices to which Wolfgang has just alluded, Clean net income up 5% at the minorities, a very strong performance at equity line in particular from Borealis, continuing strong performance from our 36% participation there, and also Petrol Ofisi, which of course is running against the same last year when it hadn't yet been purchased, so clearly anything it contributes represents an increase.

Gearing is up to 18% at the half year from the first quarter and the biggest driver of this has clearly been not only the dividends which were distributed by the group in the second quarter but clearly the substantial increase in the stake that we have in MOL up to 18.9% by the end of June.

To the next slide, our reported EBIT was 9% down against the quarter year-to-date at 8% down on the six months of last year, financial results as I've already mentioned very strong 66 million in the quarter against 22 million last year. Of this 66 million we had a positive contribution from Borealis of 48 million and from Petrol Ofisi of 30 million. Although, I must point out that a significant part of this 30 million was due to the strength of the Turkish lira against the US dollar and these, those FX gains contributed therefore quite a significant part of this contribution from Petrol Ofisi.

The tax rate for the quarter in question was 23%, down on the same quarter as throughout on the first quarter of this year which was 27% impacted to some degree by favorable liftings in the second quarter, which are expected to reverse in the quarter three, such that we should see the second half tax rate being somewhat higher than what we just closed in quarter two, and our guidance for the year by and large remains approximately 27%.

The minority items are down on last year; this is in particular due to the lower profit contribution of Petrom. Petrom clearly very much affected by the strong Romanian leu against the dollar to which I've already made comment. Our EPS when you clean out the minorities was up by 3%; and on a clean basis we are actually 5% ahead of the same quarter last year and year-to-date 6% up.

Turning to the next page our cash flow, cash flow from operations was €455 million, 1.126 year-to-date. Working capital shown some increase as EconGas plays some role here. This is the first time we've had a full consolidated of it in a second quarter are clearly the fact that they are building inventory in storage ahead of the next winter impact the working capital adversely here.

Cash flow used in investment activities of 1.5 million in the quarter, 1.977 billion year-to-date, clearly the big position within this is more than 1 billion having been invested in the extra stake in MOL. Free cash flow after dividends, as I mentioned, the group pays its dividends in the second quarter. So, we have not only the OMV full year dividend reflected in this quarter but also the dividend pertaining to the 49% holding in Petrom, which belongs to the minority shareholders, that dividend contribution is also reflected in our group cash flow such that free cash flow after dividends was year-to-date minus $1.3 billion.

This clearly had its impact on Gearing and one sees here that the increase in Gearing is being quite substantial in the quarter going up from 3% debt-to-equity at the end of March, to 18% at the end of June and clearly the reasons, that I've made quite clear a moment ago, but despite this step up we clearly are substantially below our long-term target of 30%.

CapEx and EBITDA, our first half investments were 2.88 billion, pure on a capital expenditure basis and the cash flow, they're slightly lower because, of course, we have some asset disposals showed on that line in the cash flow but the broad additions to CapEx in the year which is under 2.1 billion against an EBITDA of 1.490 billion. As you can see on the right hand side, the biggest step up is in the corporate and other area where we've reflected the increased investments in the MOL position and all but about 30 million or 40 million of that increases representative of that transaction.

E&P invested €523 million, predominant spending being in the refinery turnarounds which are being sole factor of this current year and the associated plant investments with those turnarounds. In... that was in R&M... sorry, in E&P the big projects are the investments in developing the Strasshof field in Austria further investment in the Maari oil field in New Zealand expected to come on stream next year and of course a substantial amounts invested, something over €270 million in the upstream activities of Petrom also being reflected in this position.

On the next page you see special items. In the second quarter we had €22 million of expense but year-to-date we still have 10 million net increase... net income as it were on this line, the biggest driver for that clearly being reversals of schedule... our unscheduled depreciation in quarter one and on top of that certain asset disposals in E&P which contributed also to the first half position.

This in the second half if likely to reverse, we will, as we've always said continue to have restructuring provisions in Petrom to continue the restructuring program... our restructuring program, which by the way in the two and half years since we've owned Petrom, has taken our employees down in Romania by approximately 40%.

At the end of the second quarter 2007 our employee headcounts was just over 32,500 and I might remind you that when we bought the business at the end of 2004 we had somewhat over 50,000 employees on the payroll of Petrom.

Looking therefore at the next slide, where have we been making our profit, clearly the blue line is Q2 '06 whereas the green is Q2 '07. E&P is down from 507 million EBIT in the quarter to 448 million. Almost all of this is in Petrom: you see at the bottom-half of this chart the relative contributions from Petrom to these over all numbers. And the reduction there is predominantly driven by the foreign exchange rate position of which I'll say more in a moment but also, of course, that compared to the same quarter last year our production is also somewhat down in Romania.

In R&M in the quarter, as again, I think we mentioned the reduction was despite the more favorable refining environment. And is very much more relating to the lower level of utilization as a consequence of the refining turnarounds. The gas business is up from 28 million last year to 42 million. The biggest single driver, this is the fact that EconGas is now fully consolidated in our EBIT whereas previously it was shown only in our 50% share only in financial income.

Turning to the next slide. The economic environment on here you see three key drivers of our financial performance. The green line is the refining margins. You see the improvement in the second quarter from the first and also the turnaround, hopefully, in the trend that we saw negative tendency in refining margins up to the fourth quarter last year. You see also with the yellow line the fact that crude prices have now come back to broadly the level where they were in the second quarter of last year following declines in quarter four and quarter one of this year. The most dramatic index here is the grey line. And this shows you the impact of the regulated gas price in Romania which is substantially ahead of the same period last year. In fact the dollars per thousand cubic meters that we are now realizing in quarter two is a $187 compared to last year's position of a $118.02. So an increase of about 59%.

What you don't see on these charts, however, you see on the next chart and this is very much the point that we've been talking about here and that's the impact of foreign exchange. You can see across the board we've been particularly challenged by the continuing decline of the dollar against the Romanian leu. And that is reflected here with the light blue line on this curve. Our Romanian leu compared to where we were in quarter two last year is 13%. So although the gas price may have increased, for example, in dollars by 59%, the underlying increase in Romanian leu is only 38%, still a substantial increase, but you are looking at the dollar headline numbers, be it for gas realizations or oil realizations, for that matter, doesn't give you the full picture.

That's not only the impact on realizations but again as I'll come to explain in a moment it also has an impact to the extent that we report our cost on a dollar per barrel basis as we clearly do in E&P. Because in this environment where the majority of your costs are clearly in Romania leu, local currency, having them translated into a per barrel basis in dollars clearly is a challenge.

Coming now to the businesses starting, firstly, with group exploration and production, our production level Q2 versus Q1 was stable, as you can see, we produced in quarter two, this year, 322 that's exactly the same as what we did in the first quarter. The production increases from... sorry, from New Zeeland and from Yemen compensated the decline that we continue to experience overall in Romania.

We are still year-to-date on the same position last year 322 plays 330 for the first six months of last year.

Our realizations, $62.20 versus $61.09 in the same quarter last year. So broadly similar, slightly up; whereas for the first half of the year we're at $57.02 against $58.16 last year. You can also see here that our exploration expenditure has increased quite substantially 52 million in the quarter just ended against 37 million in the year before.

Coming then to Petrom's contribution with in this E&P position, a 198 million EBIT whereas last year we had 239 million on a Clean basis. Production down 196,000 barrels a day against 202,000. Although we do have some positive news to report on our stabilization, we believe, in the oil production which I'll come to in a second. The gas business is very much seasonally driven, not totally within our control and what has been a running challenge for us since bought the businesses managing our production from our gas wells given the pipeline pressure in the high pressure distribution infrastructure. And certainly while we get into the summer period where the storages are very full and demand seasonally clearly as not as high as it is in winter. We do find difficulty to maintain our gas wells at full production because they simply don't have enough natural pressure to get the gas molecules into the distribution network. Clearly something we are working on in the longer term but in this shorter term it remains a challenge for us.

Gas prices, I've already talked about, was up 59% in dollars versus 38% in Romanian leu since the same quarter last year. And our crude realizations were up slightly 59.29 against 58.49 in quarter two. Once again, however, do take cognizance of the impact of FX on this locally, although our prices in dollars were more or less the same, our realization all things equal, approximately 13% lower, that also reflect itself in the OpEx number at the bottom. You see our $16.66 compares to $14.97 last year, an 11% increase all things being equal, but if you take into the 13% adverse moment in the foreign exchange rate, you could understand exactly why that's happened and in fact I do have a chart in a moment which throws more light on that.

To the next slide, I think you saw this for the first time last quarter, it is rather lot of information but what we're trying to demonstrate here is our performance in bringing the decline in the oil production very much under control. We said in terms of our expectations for this year that we would hope by the end of this year to be able to demonstrate that the large number of steps that we've been taking to address the decline in upstream... in oil production would start to bear fruits and we are happy to report that what appear to be a positive indication in quarter one has continued, you see the dots along this graph represent the monthly average production from our oil wells and where is it a year ago and rather 15 months ago in quarter one '06. The monthly level of production was such that had it continued that trend line, we would have been seeing a decline of 14% a year that improved in terms of quarter two, where we got it down to 6% a year and in quarter one '07 if you lay the line to best face along our monthly production the decline was down to 3% and clearly we're happy now to report that if you took the production in the last quarter, quarter two, '07 and add July to that in fact than our production seems to have stabilized.

Now clearly, one swallow doesn't make a summer and frankly neither does two, and although we are clearly happy with this tendency we're certainly not popping the champagne corks just yet, but I think you can see from the trend on this graph that we started to have the impact on our oil production that we were hoping we would be able to demonstrate, and clearly we look forward with interest to being able to continue this trend.

The next chart, I think, is also quite illustrative. This is an attempt to sort of give you a clear understanding of what's been happening with our operation... operating costs in Romania in the upstream business. The blue blocks represents, on a quarterly basis, the amounts in RON which we're actually spending in terms of operating costs. If you actually take that RON and convert them into US dollars what we reported in terms of OpEx in quarter two last year was $14.97 and what we are reporting this quarter just ended is $16.66, an increase of 11%.

However, if we were to take quarter two '06's RON costs and use the same exchange rate that we had then and ignore what you can see here with this yellow line, has been a very strong appreciation of the RON against the US dollar. Rather than 16.66 that we did just report, in fact our operating costs would have been 14.53, so instead of 11% increase, we would have been reporting a 3% decrease clearly which would have been more favorable.

The decline in production also has its impact because one has a smaller denominator here to actually divide the operating expenses into, had we been able to maintain our level of production and clearly addressing the decline and starting to bring that back up to our long-term target of 210,000 barrels a day by 2010, will clearly impact this measure positively but had we been able to do it from quarter two '06 instead of the $14.53 operating expenses I just mentioned, we would have in fact had $14.09, what would have been a 6% decline. So, had we maintained production and had constant exchange rates, we would have been reporting a 6% decline in units operating expenses, and I hope that puts into context the challenge we are particularly having with FX against... about which we can do very little. And also the benefit that we will be able to demonstrate when we can fix this arresting... this decline in oil production and start to move our volumes back up to the long-term target.

Turning now finally, briefly, to our gas business, our EBIT of $42 million in the quarter compares to 28 last year, clearly the single biggest driver of this has been the full time consolidation, the first time consolidation of EconGas, which clearly wasn't included in the last year's EBIT number of 28. The decline from the first quarter of this year of 79 down to 42 is also due... is rather has nothing to do with EconGas consolidation, it's rather got to do with the seasonality of the business particularly now that we are consolidating the marketing business of EconGas because quarter one however warm it was is clearly the more substantial gas demand quarter than quarter two, hence the decline in EBIT.

What is positive to report in our gas business underlying is very much the average storage capacity sold. We are quite someway ahead of last year and very much building up to a full capacity situation as the demand for our storage capacity is really substantially high right now.

Petrom gas, similar story in terms of the season-on-season decline. Quarter one was not strong as it was the year before, only 90 million of EBIT because it was a very warm winter but even said that quarter two clearly lower because of the seasonality, 12 billion in quarter two. Year-to-date EBIT 31 million plays 27 million in the same period last year. Clearly the most significant change in the gas business is, I've already commented upon in the E&P side and that's been the increase in the regulated price for our oil production up by 51% over the same period last year in dollars.

Just turning then finally to the outlook for 2007 for the second half of the year, and the year as a whole, the macro environment as ever in this industry will remain highly volatile and in all likelihood going to be more challenging than last year. I think for us in particular as euro business, many of our peers in the euro side will have similar challenges to those which we are facing. We have the particular challenge, in particular, of the substantial business base in the Romanian leu market and that will prove a challenge. So, while the crude prices will be similar to those of 2006 in dollars, the impact on how realizations of the FX movements will clearly be adverse.

We will this year have a full year contribution from Pohokura and are increasing steadily our production in Yemen. And this is expected largely to compensate for the lower production that we'll experience in Romania such that our production will probably be by the end of the year similar to the same level that we had last year.

In R&M we have plant shutdowns which have already impacted the results and clearly those plant now for the balance of the year Burghausen and Petrobrazi, which will close in quarter four '07, briefly, as closed which will bring you forward from quarter one '08. They will also impact clearly the results adversely and similarly we expect refining margins to be weaker than those which we see in the first half of 2007.

Gas, will clearly will have the full impact of the EconGas full consolidation and we'll also have additional pipeline capacities coming into the business from the Trans Austria Gas pipeline and the West Austria Gas pipeline, both of which are being expanded as we speak.

Total storage capacity, as I've already mentioned, is likely to be fully sold for the year which overall would clearly impact the gas business positively.

At that I will hand over to Gerhard Roiss who can take you through not only the R&M results for the quarter just ended but also even more broader view of the strategy of the downstream business. Thanks.

Gerhard Roiss - Deputy Chairman, and Head of Refining and Marketing

Thank you, David. Welcome to Refining and Marketing. Despite of good margin situation in our Refining business, we had a negative impact from three major shutdowns, six-week shutdown in Arpechim in Romania, three weeks in Schwechat and 11 days in Burghausen refinery. Therefore you will see our depreciation rate went down from 90% last year to 76% this year. In the Petrochemical side we had a good situation despite of low volumes coming out of Burghausen impacted by the shutdown.

Retail environment has improved in May in most of our countries, the retail margin increased, commercial business was suffering by [indiscernible] by mainly by heating oil which was down on German market by 39%, on Austrian market by 35%.

Coming to Petrom again here better margins but here is a shutdown of Arpechim refinery and which brought our utilization rate is down to about 60% from 85% the year before. Which also impacted, as you see, our volumes from 1.5 to 1. Retail has improved, we have here nearly finished our restructuring. If you take... we have changed 400 filling stations into full agency system and this showed us an improvement in throughput, if you compare, of 5 to 7 the first half year improvement of about 50%, 50% same size just different system and better management.

We move now next page Borealis. Borealis as you know is an all time high even in cycle but at the same time we concentrate on restructuring the company. We have closed... sold our site in Portugal two years ago; in this year few months ago we have sold those site, a small site, Norway to another company. This means we are concentrating on fewer sites but investing on this site which means investing in the growth stream of the new PP plant in Burghausen, we have to work in Sweden, and we do some of the bottlenecks in Finland.

And our huge investment site in Middle East, in Abu Dhabi, we are moving forward into a project investing about $5 billion US, and building the world's biggest ethylene cracker with 1.5 million ton; the project is on track. Again, in terms of result, we have of course a strong contribution from our existing unit in Abu Dhabi and... but again mentioning this net profit increase from 92 to 137 also shows the huge cycle... effect.

Next slide, the position in... of our marketing business, refining business you see in CEE, we are here in a market of about 100 million people 85,000 tons of product but this is the growth area in Europe. The issue is here to get a market share of 20% which we have achieved already. The issue is now to realize the Petrom opportunity in marketing, as I mentioned, we are nearly finished our turnaround this was to catch up to three at a time; and in refinery it's related to our investment project which would be everything on-stream in '11.

The issue is here to increase our leader profitability out of the existing leadership and the issue is to strength the competitive of Petrochemical, this means also that we will strengthen it by bringing our investment in Burghausen on-stream. The bottleneck of our crack in the new PP plant, and the other issue is to engage in the areas outside Eastern Europe which means Turkey where we entered our last year and we also now analyzing opportunities in Ukraine in the area of retail business.

Next slide, again you see here the steps of expansion this market, if you also add Turkey than you see we are on market of about 180 million people and oil demand of 130 million tons all in the growing market yield curves. You see we are clear leader in terms of refining capacity with 26 million tons, a clear leader in market share of marketing, we are clear leader in retail side with 2.5 thousand filling stations and if you add also Turkey this results in 500 Petrol Ofisi.

Next slide, what if we now compare, take West and East. West means the area West of Romania and Bulgaria, here the issue is, that from the market we are faced with the issue of heating oil to the mild winter the other market show a strong decline in terms of refining assets as I will show you afterwards we streamline oils to close one of the three burning oil refineries but improve the yield. Petrochemical's expansion, for instance, Burghausen pipeline, ethylene pipeline we connect the Bavarian region into Rotterdam and to market 20% market share, here the issues is of our non-oil business we increased and we have not the constitution margin of 23%.

Seeing on the next slide what is decided, what was the actions [ph] in terms of bulk, we see a decrease because we close down one refinery but if you see the product yield, we increased our diesel output by 25% despite of the closure of one site. We reduced our heavy fuel output by 40% and we also increased the possibility of using of Russian export plans from Northeast 2.5 to 4 million tons. Beside of that we have a lot of cost issues, where we move into a better quarter in terms of Solomon.

Petrochemical as mentioned already, the expansion in Burghausen and the pipeline. Petrochemical important of us as you see in our results, the strong contribution, the next slide you see what is Borealis going to do. First of all, as I mentioned, we expand our Middle East capacity, we build in Europe new plants. We have just finished last year, the plants in Schwechat. We will go on stream in Burghausen this year. We will also start a new pilot plant in Burghausen. And in '08 the new LD plant in Stenungsund.

The restructuring, Portugal/Norway, as mentioned. Great expansion mentioned the issue of the pipeline of importance [ph]. Next issue is Petrom restructuring being on track.

Let's move to next chart to see it in detail. First of all, the target is to increase its turnaround intervals from one to five year. We have nowadays achieved the four years interval. If you take our utilization rate adjusted for turnarounds we have moved in the right direction but we are not there where we have to be. The issue of own crude reduction here; there is a peak effect that you see in our results that we have 14% instead of shrinking at 4%... 7% sorry 7%, 14%. The target is to go down till '11 to about 9%, which would bring us to two to third quartile in Solomon. We have achieved already a reduction of 1% but lot of measurement.

The next issues on the yield. The important thing is that we have already 100% now fuel specification according to European law which means 100% of 50 PPMP in gasoline quality. We also started with 10 PPMP.

If you see the change in leads, our target is in middle we estimate from 30 to 41. We now have achieved 34 on heavy fuel oils and 15 to 6, we are now, 15 to 13. So there are some achievements already. In terms of fixed costs that were in from the people side we have started with 9,000 people, we are now middle of this year with 4,000. On the petrochemical, heavy loss make, we have improved this shutdown 12 inefficient petrochemical units. We are just running, now, three of them. And we started the spin-off of the whole petrochemical part of Arpechim, Borouge and the polar Olefin plants which is on track and will be tendered second half.

In terms of marketing, you see here fixed cost reduction has happened already from 14,000 people to about 4.6. We have changed all our filling stations into full agency systems, 400 out of 460. And this you see in the throughput efficiency, our target till 2010 was a throughput from 1.9 to 2.9 million liter, we now have achieved 2.9 million liter already. This was done by... on the same side by closure of stations, by training of people and by changing into this full agency situation.

On storage facilities, we have closed out of 146; we have closed 109 old facilities. We have one new storage begun under construction. Second development is, I think we had all our 2,000 trucks that's all out now and this is finalized.

Let's move into Turkey. Turkey is a big growth market nowadays. In Europe the figure of 8% means gas oil, by product the growth is about 6%, anyhow it is a grow market and it is good to be there. The issue we are facing now is integration, integration in refining which you know we have this Ceyhan project, we have been granted a preliminary license and we are also thinking about going into upstream in neighboring countries.

Last slide, you see our competitive position in this eastern region of Europe, that's the region where still consolidation is taking place. Consolidation of first and second generation, first generation means niche, of instance, still process. Look what is moving in from the East, Eni is also in Czech Republic, Burghausen [ph] and Bavaria, then you see the Slovakia Onvi [ph] and MOL. Thank you.

Unidentified Company Representative

Ladies and gentlemen may I know conclude with some remarks. From the presentation, I think you can clearly conclude that we are on track to deliver the implementation of our strategy. In E&P, we are committed to the organic growth rate of more than 5% to reach to $400,000 a day. In Refining and Marketing, we are in the mid of a major investment program to substantially improve the quality of our refineries by expanding petrochemicals or by really turning around the Petrobrazi refinery. And in gas, we are have embarked on a growth strategy and are pushing forward this major project.

The restructuring of Petrom is a special focus of us, I may assure, and will continue to be a focus. And on the next page, you see what we have achieved so far. We have made progress in stabilizing the oil production which is very important for exploration and production, we have stepped up our exploration program and we are seeing first results.

In refining, our investment program to improve substantially Petrobrazi is on track to expand there the... not only the group distillation by the specially the output of diesel which is very important for us. In Marketing Gerhard Roiss has just described to you that we have almost achieved the target that we have set ourselves for 2010. So, this is on track, and in gas while we have achieved an improvement of the gas price from $50 when we entered Petrom to now round about 200 import price is still 300 there is still a way to go but we are quite confident that also this will happen because of the market rules in the European Union.

But we have to look beyond our core strategy, beyond our target 2010 and the Petrom restructuring. And the next slide clearly shows how the overall picture is on the oil side. As you see the grayish area which depend on Russian pipeline oil supply and you see clearly a couple of trends. The first trend is that the Russian producers want to diversify their export routes. They are pushing forward with the Burghausen [ph] pipeline that should be available in two to three years down the road. They are promoting some possibilities to supply in China and they are also tackling the issue of the phosphorus [ph] by supporting the pipeline from Bourgas to Alexandroupolis. This will reduce their pressure to sell to the former Eastern European refineries and might also have some effects on the differentials that those refineries enjoy today.

At the same time competitors from Russia but also Gerhard Roiss has mentioned from the West are increasingly entering this area, this very attractive growth area formed by the excision countries to the European Union. We conclude from that that the competition will go up and it consolidation will continue to happen. And we have to act proactively. We cannot just wait. We have to define how to do the next steps and that's the reason why we have stepped up our shareholding in MOL from 10% to now a little bit less than 19% at the end of first half year.

And on the gas side you... we will be confronted with a market initiative of Gazprom going directly in themselves to the market, so we have to strengthen ourselves and we are doing it at the time we have also to develop other supply streams which we do via in Pohokura [ph] project but also via our L&T initiative. And those supply issues on the oil... on to the gas side we will have very severe implications for deferrals or consolidation of the oil and gas sector in Central Europe.

And on page 45 you see that our proposal how to respond to these coming challenges clearly is to join forces with our Hungarian neighbors with MOL [ph] and we think that from such a merger substantial value for the shareholders of both companies can be created.

In Refining and Marketing we both clearly have very solid downstream basis in Central and South-Eastern Europe. There are significant synergies in the petrochemical sector as well to be expected. And this will also give us the strength to further expand in exploration and production and to compete on a global basis for the oil and gas reserves and this is the real decision that will be taken over the next decade.

In gas, definitely such a merger will facilitate the realization of major infrastructure projects as they are required by the market growth in the area. We expect significant synergies, we don't want to give right now the bottom-up numbers but from comparable transactions we have seen that an increase of value of round about 50%, 40% of the smaller partner in such a merger transaction can be expected which would lead to a sum of €3 billion to €4 billion and would be substantial. And we think that by gaining the size we can more effectively compete with the oil companies from West and East in the very attractive market of Central and Southeastern Europe.

The response, and that leads me to the next slide, of the MOL management was not positive so far and the reactions are facing now with some questions. The questions raised by the capital market as well as by us are of course that this stock lending to friendly partners is not really inline with EU corporate governance.

We think that it's very difficult to have more than 10% treasury shares and how does this fit with the voting right limitation, how does this fit with the takeover rules in Hungary, so these are questions that have to be answered.

Moreover, these shares we have bought at quite a high price and the question is whether this has really add to the value of the company as well as have some recent acquisitions have to really added value to the company or what is the strategic logic of those acquisitions.

We also are quite concerned about the keeping up the golden share that has been introduced in the company in '95 as well as the 10% voting right limitations both are connected and we are quite sure that not only the capital markets but also Brazils we look at those structures.

Therefore we think that it would be of the unchanged opinion that it would make sense to sit down and discuss an alliance or combination of those two companies in the interest of the shareholders of those companies.

Let me conclude, with a final slide of page 47, in the last five or six years we had many transactions that have led to a substantial consolidation of the oil and gas industry in Central and Southeastern Europe.

ORLEN has bought the participation, Unipetrol have bought the Mazeikiu [ph] refinery, MOL has bought Solvenia's minority [ph] stake in Eni, Hellenic has initiatives in Montenegro, in Cyprus and in other areas. And OMV has of course bought Bayernoil, Schwechat [ph], 51% in Petrom, and 34% Petro. Ofisi. We think that now the first rate of consolidation with exception of this is over but this does not mean that consolidation will stop but the increasing pressure on the market will lead to further consolidation and we want to be the best positioned company for that coming consolidation and we want to take advantage of this consolidation and this is the basis for our actions.

This ladies and gentlemen has now concluded our presentation and we would be very happy to answer your questions.

Question And Answer

Operator

We will take the first question from Barry McCarty [ph] for ABN Amro. Please go ahead, sir.

Unidentified Analyst

Good morning gentlemen. Question on the MOL management response, when that response has been on competition ground?

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Well, certainly we have looked into this question and we think that definitely there will some conditions on the transaction put by Brazils especially in Refining Marketing whereas we see no issues in Exploration and Production. We see no issues in the gas business, in petrochemicals but in Refining and Marketing there might some conditions on merger but we have also concluded that the overall attractiveness of this transaction will not be diminished substantially by such conditions. So, I think what we should do is sit together with the MOL management and try to work out what could be reasonable remedy issues which can be offered to the commission and we think that this issue can be resolved in a reasonable way.

Unidentified Analyst

Okay. So when you say no material impact. Should we take that the 30% to 40% indication on synergies would be after your expected impact from Brazils on competition?

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Well, we have no formal opinion of Brazil so far and so far it's quite difficult to give a final answer to your question but definitely that's the order of magnitude of value increase via synergies that we would expect from the overall transaction. Just answer that Barry, also whatever conditions may or may not be applied, they wouldn't simply be a case of giving the assets away, there have been similar transaction of this nature most recently of course the BP Bayernoil deal in Germany, when of course there was a competitive process where the assets were disposed off and clearly there would still be value to be created from that whatever they were.

Unidentified Analyst

Thank you.

Operator

We will now take our next question from Alastair Syme Merrill Lynch from Merrill Lynch. Please go ahead sir.

Alastair Syme - Merrill Lynch

Good morning. I wondered if I could ask you a couple of questions on production, one on just to clarify there is a bit of industry press on the Maari field in New Zealand, if you could just clarify, you know what your expectations on the startup and contribution of that is and then just more broadly on the issue of Petrom and Romania production because you seem to be having a remarkable success in standing the decline and yet you still retain a forecast on overall Petrom production, it looks pretty conservative over the next four years, can you just help reconcile those.

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Well, on Maari the expectation is that the startup of this field will take place say in 2008 with an overall contribution for us and we have almost 70% of 16,000 barrels a day. So, this is the expectation that we have, of course, not in the first year 2008 but in 2009, when the full year will be available. On the Petrom side well our forecast and our objective is unchanged since the beginning of the acquisition, we always said that we want to return to an overall production of 210,000 barrels a day until 2010. I think that's a very reasonable objective even now two and a half years after we got into Petrom. And we as you know, we are doing a lot of measures in order to achieve that. One is to run the rehabilitation program and reservoir engineering approaches but the other is exploration which has only recently started up. We have certain exploration successes but it's too early to be more optimistic, so we think that 210,000 for 2010 are a reasonable target and for the time being we want... for prudence... we want to stick to that targets.

Gerhard Roiss - Deputy Chairman, and Head of Refining and Marketing

Can I just elaborate. We would, because you've invested on the well rehabilitation side, you've done 10% of investment program in effect and you've managed on the oil side to take the decline rate from 6% to 0%. And yet you know the target is still very near an overall 10% improvement in volumes over the next four years. And it seems really prudent.

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Well there are others who might say, Alistair, frankly that progressing... projecting any increase from situation where quarter-on-quarter what we have done since we've owned the company is report declines is somewhat optimistic, so it's a question really of choosing a fine balancing line. You are actually right, clearly we've apparently not rested the decline in oil production but as I have also said two swallows don't make a summer and we need to be able to demonstrate that we have got a few good quarters of this behind and then maybe we will start to feel a little more confident to talk about more ambitious goals but that's certainly not where we are right now, we clearly still have issues in the gas and although those aren't totally within our control they're still clearly affecting production when there is high pressure in the distribution system, we have major issues getting all of our production out of the wells because of the low, relatively low natural pressure.

We clearly, although, we have done a lot of the well rehabilitation and we've really started to accelerate that program now have over 600 of the 2,000 full year target and 5,000 for next year target, as you rightly say, completed in that program, that are going well, but there is still a long way for it to go. And when we believe we've got a few more actuals behind us then I think is the time for us to start feeling a bit more bullish and we obviously hope we can get to the situation but I don't think it would be really appropriate to stop blowing off expectations from where we are right now.

Alastair Syme - Merrill Lynch

Okay. Fair enough. Thank you.

Operator

Thank you very much. We will now take our next question from Mark Hume from Credit Suisse. Please go ahead sir.

Mark Hume - Credit Suisse

Good afternoon. I just wondered, not to de-lever the point too much on the discussions which you have been having with MOL but and length of the currency you meet today on the behaviors of MOL and the lead up to your initial approach, what do you think needs to change in the coming months before you might be able to meet progress on possible merger talks and when do you anticipate that those negotiations might start taking place.

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Well that's really difficult to say, we have to accept there is a quite emotional discussion going on right now in Hungary, and what we try to do is to contribute more facts, bring more facts into the discussion and bring them down to an approach which is more realistic and objective form. It's very difficult to say when this will succeed, so we don't want to commit ourselves that we will deliver on this issue, I don't know in September or October. We have said from the beginning when we increased our shareholding in MOL that, yes we believe in consolidation, yes we expect coming pressures on MOL that will bring them to the table but we have always said also that this can take quite some time.

So, we do whatever we can, to bring the right objective information to the capital market to the authorities in Hungary, to MOL management, of course, and we hope that at some point of time but I can't really specify when exactly this will happen, that they will be prepared to discuss those kind of facts and try to find solutions, definitely we are committed to a friendly approach as it is right now because we think that would make more sense.

Mark Hume - Credit Suisse

And if I may just follow-up on that, if you were to place the potential discussions that you might or might not have, for example, with PKN, alongside those discussions that you are attempting to have with MOL, how advanced or otherwise do you think those discussions might be with PKN and would you in fact undertake some sort of merger discussions in the coming months with PKN.

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

We are committed to the MOL process, we don't look at other options right now and I think that makes sense. We don't think that for at least as we see it, a combination of MOL and PKN would make sense because both depend to a very high extent almost 100% on Russian crude oil supplies so from all kinds of perspectives, this does not sound very convincing to us, and in the past this has failed several times, so we concentrate on the MOL issue and that's it.

Mark Hume - Credit Suisse

Thank you.

Operator

[Operator Instructions]. We will now take our next question from Anish Kapadia from UBS. Please go ahead.

Anish Kapadia - UBS Warburg

Hi, it's Anish Kapadia here from UBS. I've got three questions, firstly on Petrom you said few months ago that you're looking to build a power plant in Romania, I was just wondering if you could expand on your thoughts on that. Secondly, in your E&P division, I was wondering if you could give a production target for 2008. And the final question is if you can give Romanian leu production cost target in absolute terms for 2010 relatively to the dollar that you are getting, it might be a bit more useful in that format and how that has changed if at all from your original forecast?

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Regarding the power plant, yes, we are in a tender process for a 800 megawatt, some bit more than 800 megawatt power plant, gas fire power plant in Romania. Roundabout 20% to 25% of the production of such a plant would be used for captive demand and we think that given the overall supply situation in Romania, it will be a quite attractive project. So, this is in the course of the tender for the plant. We hope that we can decide that finally when the offer is on the table, early 2008 but with today's delivery times this will take more than 36 months or something like that until it's really reliable. Unfortunately, the delivery times have gone up substantially recently. On E&P, well we have always said for 2007 that we want to end up with a similar number like the year before on average and this will be a quite ambitious target. And since until 2010, we want to go to up to 400,000 barrels a day that means that from 2008 onwards we have to increase our production. We have not mentioned so far. We have not committed us to a specific number of 2008 but for 2010, for 2010 the organic growth... the number that can be achieved by organic growth is 400,000 barrels a day and the major projects will come on-stream in the course of 2008. This is Maari in New Zealand; this is Kazakhstan, the field; this is in Austria, the additional gas production. So a very important part of our development project will come on-stream in the course of 2008 but we have not yet specified exactly in which months and which will be the production increase that we envisage for 2008. Regarding now the production cost in leu, may I hand over to David.

David C. Davies - Chief Financial Officer and Head of Finance, OMV Solutions GmbH

Yes. Hi, Anish. Clearly since we issued the targets in 2005, the single biggest change that we've had has been the dollar against the Romanian leu and whatever we needed to do in terms of revisiting that would certainly be the single biggest factor. I would rather not have a piecemeal sale for one will go back to Romanian leu, what would it will be then because of course three years is a long time, two and a half years is a long time since we gave those target and of course many things have happened at least of which an overall level of high inflation in the industry.

The fact of the matter is what we really need to do to get to our target is to address the decline in production which we have started doing clearly and with the first side of those positive results gives us more confidence to believe that we can get back to 2010 by the year after next and a rather 2.5 years from now and then of course what we still need to continue to tackle is the absolute level of leu cost. As I mentioned we've already taken a substantial amount of cost out of our payroll in terms of headcounts across the business being now 40% less than when we acquired the business.

What we still need to see any increase of cost also the full benefits of this well modernization program because that's very much not only a lost production factor but also a cost factor because one of the biggest drivers for doing that program was the extremely high level of maintenance and to mention that was previously necessary we have only got 10% done, the previous question mentioned but when we have got that program completed by the end of next year that would be in much clearer picture to really start showing progress on our cost because we'll have a field that we are producing as such which will start to have a substantial lower level of maintenance expansion more particularly maintenance interventions.

So, I don't really think it's now I would like to start talking about that but clearly that's going to be something you would be legitimately asking for an update into next year I would expect. Thanks.

Anish Kapadia - UBS Warburg

Just as a follow-up. Are you looking at all and I know you have quite substantial movement from the effects of that, are you looking or have you seen hedging at all, the impact of currency?

David C. Davies - Chief Financial Officer and Head of Finance, OMV Solutions GmbH

No, we have not been hedging impact of currency and unfortunately the exposure to the currency comes from a rather unavoidable physical fact, our revenue is although it actually takes place in Romanian leu, we are actually selling hydrocarbon commodities which the market worldwide is in dollars. So clearly, we could hedge I think the liquidity in the market, would allow a certain degree of hedging but not a full degree of cover but you are going to ask yourself the period to which... for which you could hedge yourself because we are physically present and selling actively in the Romanian market and that's always going to be a leu market, albeit obviously with a progress towards during the European Union when the euro within the next four or five years. Similarly our cost base is largely in leu, our operating cost base particularly, that again is a physical fact, we're producing hydrocarbons in a Romanian leu cost base and selling it Romanian leu. The challenge we got in particular is that the revenue price references are all in dollar and that's going to remain a challenge, frankly, for the longer term as long as the leu stays as strong as it is.

Anish Kapadia - UBS Warburg

Okay. Thanks David.

David C. Davies - Chief Financial Officer and Head of Finance, OMV Solutions GmbH

Thanks.

Operator

We will now take our next question from Lucas Herrmann from Deutsche Bank. Please go ahead sir.

Lucas Herrmann - Deutsche Bank

Thanks very much and good morning gentlemen. I am sorry I have got four, if you don't mind, two are brief and two are general. The brief points of detail; Libya, my assumption is there is some degree of under-lift so if you can give some idea of what the value of that might have been? Secondly, the spinout of petrochemicals, I am not sure I understand exactly what you mean, can you just go through that in slightly more detail and also comment on the potential benefit given my understanding is the petrochemical activities loose quite a lot? And then two general, David, one for you, there is obviously a fair amount of turmoil in financial market at the moment and maybe it's slightly abstract but I just wonder whether as a Company, that's having any impact on you at all, whether you see any repercussions? And finally MOL, the restrictions... the voting rights restrictions in particular, the limit to 10%, Wolfgang; firstly what you understanding at the legality of that in EU law, and secondly to the extent that you can change it what are you doing to actually alter things? Sorry, for the long list.

David C. Davies - Chief Financial Officer and Head of Finance, OMV Solutions GmbH

Let me hit maybe two of the easy ones, Lucas, it's David. The under-liftings, I will get Barbara to call you back because I don't want to get ourselves into a nausea of what did you mean by that, what did you mean by this. I would say, however, as regard to maybe one of the things that did affect us adversely was the OpEx quota, which probably costs us about 1,600 barrels a day out of Libya. And that's clearly... fully reflected. Then as regards to financial turmoil, I think the things which sort of caused me to focus is that we clearly have a number of businesses with emerging market currency exposures, Romania is one of them, of which I've talked at length and to the extent that that could provoke any sort of risk to safety as it were that one may actually see a reversal of perhaps some of the foreign currency things. So that's something I sort of follow an interest, although we haven't seen major impact just yet, and another aspect of that is that I mentioned earlier on, one of the positive contributors to Petrol Ofisi strong results in the first half have been foreign exchange gains because it has quiet a dollar sure balance sheet, both from the working capital and the debt side, which is not on typical of Turkish companies, which of course as we seen the dollar weaken over the last 12 months, has been universally beneficial for us in Petrol Ofisi, that can change. And of course where it to change than clearly we would see some exposure there. So that causes me some degree of attention as it were.

The other factor as regards to turmoil is what clearly seems to be happening is that for institutions with low credit ratings or implied credit ratings than clearly the capital market, the debt markets in particular are proving more of challenge, we don't believe that effects us and certainly any conversations we've had with banks and raising agencies would indicated that because although we haven't a published rating, we are very confident that if and when we were to publish a rating, we clearly would be on the strong investment grade side of the fence. I'll hand over to Gerhard, who will talk to about the petrochemical side before you pick up with Wolfgang later on, on the MOL question. Thanks.

Gerhard Roiss - Deputy Chairman, and Head of Refining and Marketing

Thank you, David. These of law picking, law pickings consist of two parts, one is bulk refineries 3.5 million pounds, the other part is a petrochemical part which is greater. Small one is 2,000 pound capacity and two remaining plants olefin plants HT and LT plants, very small. On the other hand this petrochemical side is connected by a pipeline to Alkim, Alkim is dependent on the feed too that they get from this site, this is corrected by pipeline and they also get C3 by rail car from this pipeline so for us it's an issue to restructure Petrom refinery business to spin-off, despite we have started this petrochemical spin off last year, and already we have opened our charter room and we are talking to interested part as to take over this spud.

Unidentified Analyst

And financially what is does it mean, anything should we be conscious of any numbers?

Gerhard Roiss - Deputy Chairman, and Head of Refining and Marketing

We have not... there is overall refinery resides and we have to think in the audit we will see it next year and nowadays as we are not running the crack to full capacity it's difficult to answer, what it would be if you would run it fully. Thank you.

Unidentified Analyst

Thank you.

Gerhard Roiss - Deputy Chairman, and Head of Refining and Marketing

Most welcome.

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Well as far as your question on the 10% is concerned, the 10% voting rights limitation as well the golden share both introduced back in '95; at the point of time when a very high percentage, if I remember correctly, 85% of MOL was held by the Hungarian government. So it was clearly input the status at the point of time when the public, the government had a very high percentage of the shares. In the meantime the government has slowed down and basically that they have only one share today, which is this golden share or as they call it now, priority share. The government has abolished all golden share rights this year in the first half of this year via a law but then a General Assembly took place in MOL and this General Assembly has not fully abolished the golden share but has only abolished certain aspects of the golden share.

The golden share comprised two different kind of things. First of all, it was necessary that the government gives approval if the refineries are sold, if the gas net... pipeline network is sold and other such things which are very relevant from any energy policy perspective, and which might have been legitimate under European Union legislation because they are relevant for the energy policy but those have been all abolished. What has been left, based on a motion put by MOL management, was the golden share in so far as the approval of the Hungarian government is necessary to abolish the 10% voting right limitation. So, this is now the case, there is a kind of golden share called priority share for the government that gives them the right to approve or not to approve if the 10% voting right limitation is abolished. We understand that the Directorate for Internal Market in Brazils is looking at this issue at the golden share and the 10% voting right limitation and well we look forward to hear some results of those analysis and investigation.

Unidentified Analyst

And have you got any idea what the timelines around that view from Brazils might be?

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Well I am sorry I can't tell you that, but this will be a very important issue and we understand that the commission is looking into it but I, of course, cannot give you any information when we can expect any results from that investigation.

Unidentified Analyst

Wolfgang, thank you.

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Okay, you are welcome.

Operator

We will now take our next question from Theepan Jothilingam. Please go ahead.

Theepan Jothilingam - Morgan Stanley

Yes, hi, good morning gentlemen. Three questions actually. Just firstly, you've been... you were fairly cautious in Q1 about the evolution of gas prices in Romania. Clearly there is some scope for upward risk to that process. Just wondering if you could give some thoughts on timing there. Secondly, I just wanted to ask whether you could give us an update on the Nabucco project and where we are there. And finally I just wanted to ask, coming back to the issue of MOL; you've essentially stated that you weren't excludifying [ph] any further shares in MOL. I believe you did buyback a small percentage after the 8.6%. I was just wondering whether we would see... whether what sort of limit you would want to move up to, in terms of a level for MOL? Thank you.

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

On the gas prices, when we entered Petrom, we had $50 per 1,000 cubic meters, now in the third quarter 2007 we have almost 200 import price is going up to 300 right now. The Romanian government has originally committed themselves in their relation to Brazils to reach European prices, import prices, by the end of 2008. So, in one and a half years with the increase of the gas price this now seems to be less likely and what I understand is that Romanian government has now applied to Brazils that it would be possible to extent this transition period to 2010 instead of end of 2008, whether they have not got any response, I understand, therefore I really don't know what will now happen.

What we have seen so far is that it's probably very difficult to expect the specific schedule for the first liberalization of the gas price over the next 2 or 3 years. This is politically very sensitive in Romania and can not really be expected but in reality, it happens. You see it almost each quarter it will now become a bit more difficult for the rest of this year because of the increase of the import prices but we expect that within next two years to roundabout we should reach international prices but it's... we cannot guarantee this because we don't have a schedule on the table but we think that it's kept between $200 and $300, will take roundabout two years to bridge.

On Nabucco, what we do right now are three things; first of all, we are discussing with the commission but also with the national regulators. The exception decisions which we need in order to finance this project long-term. But that will be successful because we are making good progress. The second thing is that the new Turkish government will have to decide under which conditions they allow the transit through Turkey, whereas in the European Union this is regulated and this is quite clear, this is not yet regulated according to EU directives in Turkey because they are not yet member and they have also not yet started to discuss and negotiate the energy chapter. But we need to get a decision now from the new Turkish government for this in order to finally proceed with the pipeline.

And the study shows of course gas supply contract and there we are in touch with countries in the Caspian region and in the Mid East in order to find solutions for that. So these are the three issues which are tackled right now. On the MOL shares, well what we have said is that we don't exclude further purchases of smaller amounts of MOL shares but we will only announce this if this is material, if this is making any change to our position which clearly is not the case right now and of course we will announce it with our quarterly results. So that's what we have communicated that we will do as soon as we do anything which is meaningful and not just small quantities, we will of course inform the public.

Theepan Jothilingam - Morgan Stanley

Thank you.

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

You are welcome.

Operator

Thank you very much. We will now take our next question from Thomas Spencer from ING Bank. Please go ahead.

Unidentified Analyst

Yes, good morning gentlemen. I have three questions, two on your operations and one on your strategy. On your operations, I wonder whether in the second quarter the shutdowns which cost did it have and what are going to be the costs of the shutdowns in the fourth quarter? The second question of my side would be about your inventory evaluation gain, I suppose in the second quarter there was a significant increase in product and crude oil price, I suppose it should have some impact on the valuation of your inventories. So my question is that how much... or how many percentage of your profit was coming from this side? And finally I would like to hear your thoughts about your project in Turkey, what kind of chances do you see there and what are your plans for the Turkish refinery investment?

David C. Davies - Chief Financial Officer and Head of Finance, OMV Solutions GmbH

Hi, it's David Davies and let me answer the first two and I'll hand over to Gerhard Roiss for the Turkish issue. The cost in the, rather the... yes the cost in second quarter of the shutdowns we estimate at approximately €45 million in terms of lost margin contributions. It's rather difficult to access what the cost of the balance of the year will be, of course, because it rather depends on what the refining margin situation is at that particular time, but certainly from the refinery margin that we are currently seeing and it would not be anything like as high as that. But that really is something we would be able to better guide you towards in the third quarter. So, I'll take a range on that, well, if you don't mind. As regard to inventory gains in the second quarter, no, they were not material as it happens. I think I may have explained a number of times our inventory valuation is somewhat unique in the oil industry and that certainly all of our Austrian production has a evaluation method very similar to LIFO because of the fact that we need to hold substantial inventories out of statutory reasons, and the impact of that is that inventory impacts come very quickly right through into the same quarter, so that we don't get them building up as the crude price might be moving. In fact, we would have expected in the second quarter to have seen some inventory benefits particularly in Petrom because we built inventory in quarter one, ahead of the Arpechim plan stop, but because the stop was somewhat longer. And in fact the structure demand in the second quarter was such that we tended to reduce our imported crude inventories rather than our domestically produced inventory more in quarter two, our position would really rather be that we would expect at this point to see some inventory gains in quarter three as the situation unwinds. But in quarter two the impact of inventory gains in fact was not really that significant for the group as a whole.

Let me give you Gerhard and he can talk to you about the Turkish projects? Thanks.

Gerhard Roiss - Deputy Chairman, and Head of Refining and Marketing

Thank you, David. The Turkish refinery project first of all we have got... granted a preliminary license that we are working on now this has been granted to three companies in the area of Sheehan. We have the concept now that we are having thoughts that this refinery will be in the range of about 10 million tones which will be crude-wise on euros as well as a Caspian group and in terms of yield we try to get a high metal facilities of more than 60%, small gasoline and small residues. Thank you.

Unidentified Analyst

And will these three refineries in Turkey would be to many for accomplishment?

Gerhard Roiss - Deputy Chairman, and Head of Refining and Marketing

We think there will be... at the end that there will be one refinery that we build.

Unidentified Analyst

And how do you see your chances that 20 refinery will be yours?

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Yes it depends on what we see either also to get in the consortium, it's still early to say.

Unidentified Analyst

Okay. Thank you very much.

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Thank you.

Operator

[Operator Instructions]. We will now take a question from Shailesh Shah [ph] from JP Morgan. Please go ahead.

Unidentified Analyst

Hi, good morning gentlemen. I have got two questions and the first one is on buyback. We saw that you didn't make any buybacks in the second quarter. But as part of our program you made some in the first quarter. What's the plan for the second half of this year. And my second question is on the CapEx guidance which for 2007, I think you said is going to run at slightly higher than €2 billion as on an organic basis just wondered why that was is that increased activity or was it FX and inflation? Thanks.

David C. Davies - Chief Financial Officer and Head of Finance, OMV Solutions GmbH

I will answer to both of those questions, the buyback... the OMV share buyback program which we were executing at the end of last year and in quarter one this year was very much focused on the convertible bond that we had issued at that place in time because as if sowing in the money what we wanted to do was to avoid dilution we were buying shares from the market and as the bond is being converted we were using those shares into that program. We've now subsequently completely extinguished the buyback program it's either the convertible program is had to been converted with shares report from the market or we've actually bought the bond back and now as of today there are no further bonds outstanding. And as such, we have no active running buyback program because the focus of that program was as a same focus very much on the convertible bond requirements.

As regards to the CapEx, in fact we have said fairly consistently since we guided on about 2 billion year-over-year to 2010 that this early period would more likely see spending above that and it... what we said today is clearly it is just completely consistent with that there is nothing new into the equation, clearly the MOL purchase was never included in that numbers. So, that is a rather new to it, but even on the organic CapEx we were saying from the beginning that the nature of the projects that we are running particularly with the refinery turnarounds, a very accelerated program in E&P that those... that CapEx was more likely to be front-end weighted and that's simply all there is there, there is nothing new in that information.

Unidentified Analyst

That's great. Thanks.

David C. Davies - Chief Financial Officer and Head of Finance, OMV Solutions GmbH

Thanks.

Operator

That was the last question. I will now hand back the call to Wolfgang Ruttenstorfer for his closing comments.

Wolfgang Ruttenstorfer - Chief Executive Officer, Chairman and Head of Head Office

Thank you very much for taking part in the OMV conference call for the second quarter results. If anyone has any further questions please do not hesitate to contact either myself or our Investor Relation team. Thank you and bye, bye.

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Source: OMV Q2 2007 Earnings Call Transcript
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