Novatek PAO

LSE:NVTK

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the NOVATEK First Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mark Gyetvay. Please go ahead, sir.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Thank you, Christina. Ladies and gentlemen, shareholders and colleagues, good evening, and welcome to our first quarter 2020 earnings conference call. We'd like to apologize for the slight delay, but we had issues with the operators connecting all the calls. Anyway, we would like to thank everyone for taking your valuable time to join us this evening. Before we begin with the specific conference call details, I would like refer you to our disclaimer statement, as is our normal practice. During this conference call, we may refer to forward-looking statements by using words such as plans, objectives, goals, strategies and other similar words, which are other than statements of historical facts. Actual results may differ materially from those implied by such forward-looking statements due to known and unknown risks and uncertainties and reflect our views at the date of this presentation. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Please refer to our regulatory filings, including our annual review for the year ended the 31st of December 2019 as well as any of our earnings press releases and documents throughout the past year for more descriptions of the risks that may influence our results. We are living in an unprecedented time in history. The health impact of COVID-19 has placed enormous economic and financial stress on many countries around the world. On our annual conference call, we briefly discussed the coronavirus as a black swan event, unpredictable to forecast and difficult to gauge the extent and duration of this pandemic. More than 2 months have passed since our last call and we now see the economic and societal damage caused by COVID-19. More than 93 countries are in some state of economic and/or solid lockdown, impacting more than 3 billion people. Trillions of equivalent US dollars in economic stimulus have already been announced and these amounts will surely rise. It has touched all aspects of our lives in unimaginable ways and will continue to do so for the foreseeable future.Many of our gas import regions are negatively impacted by these lockdowns. And the question many people are pondering is a reopening of economic activities and how markets will recover. Answering these questions will determine the impact on energy demand and the eventual recovery of hydrocarbon prices. We also discussed the primary issues leading to weaker natural gas prices, mainly warmer than normal winter and high storage volumes. These factors dramatically impact the gas price at key gas hubs and the situation has not notably improved, despite colder spring temperatures.Inventory levels are still tracking above 5-year averages in key markets. This supply glut will need to subside to increase industrial demand and a reversion back to normal seasonal weather patterns before we can realistically expect stronger prices. Nevertheless, we are beginning to see early signs of renewed LNG import activities. China has begun to reopen its economy and thus increase in energy consumption. This represents a positive development, as China is a major importing market for natural gas and crude oil. Over the reporting period, a positive recovery of LNG imports into China was reported in March, and it will be important over the next several months to track this development on a week-to-week basis as this fact reversed negative import trends in January and February. We also saw very strong LNG imports in Europe and India during the first quarter, but these numbers began to decrease in the latter part of the quarter with the announced lockdowns and subsequent shutdowns in economic activities from COVID-19. We need a few more months or even quarters to see how this economic slowdown impacts energy consumption, especially as we shift seasonal consumption patterns and see how production shut-ins reduce excess supplies. To size this pandemic, the OPEC+ Production Agreement came at a bad time, as supplies drastically exceeded demand, due to the global economic slowdown. Subsequent to the balance sheet date, OPEC+ agreed to a series of production cuts aggregating approximately 10 million barrels per day. But unfortunately, this action has not stopped the downward spiraling of benchmark crude oil prices. Most likely more supply cuts will be needed in the short term, as storage availability is being stretched to the maximum.Similarly to the natural gas markets, this present oversupply situation will need time to work through the excess supplies before we see a more sustainable price recovery. We may have already hit the floor on both global natural has and benchmark crude oil prices, but recent events like the negative WTI May contracts and now cancellations of U.S. LNG cargos is a sign of how severe the economic slowdown is today from the negative consequences of the pandemic. Fortunately, the situation is not all bleak. We have faced various economic crisis in the past, although nothing compares to the extent of this pandemic. NOVATEK has historically operated on the low end of cost spectrum, and our ability to remain solvent and generate positive free cash flows has been discussed many times in the past. This resiliency is extremely important in these extreme stressed market conditions, as we are able to sell our hydrocarbons production profitably, sustain production output and generate above-industry returns, while comparatively many of our global peers are substantially reducing capital expenditures, generating negative cash flows and slashing dividend payments. Our financial position is very strong and it's a direct result of our conservative financial policies and our strict focus on cost control and project execution. We manage what we can control and focus our efforts where we can make a positive impact to our business and society. 2020 will be a difficult year for many companies in all sectors, not just the oil and gas industry. We are confronted with many unforeseen challenges, as economies eventually emerge from these lockdowns, but we are resolved to maintain our strategic focus and invest capital to become one of the largest LNG producers globally. In our opinion, the present market imbalances does not represent a structural shift in our future gas demand forecast. As we mentioned on our annual conference call, we remain very optimistic that the strategy we have adopted to become the leader in delivering low-cost LNG to key consuming global markets is the right strategic decision, despite these present challenges. We have a balanced portfolio of projects that allow us to make short cycle investment, like the North-Russkoye Cluster that will sustain our production profile domestically, and we have long cycle investments like Arctic LNG 2, Arctic LNG 1, Obsky LNG and our other LNG projects, which will meet future global gas needs. We remain committed to our vision and our strategy. The first quarter 2020 was challenging, but we achieved reasonably good financial and operational results, despite the precipitous declines in crude oil and natural gas prices globally, a reduction in spot LNG volumes sold as Yamal LNG sold more volumes under long-term contracts, and a tremendous financial and economic stress on global economics caused by the pandemic. Global LNG imports were approximately 101 million tons or roughly 13% higher than the first quarter 2019. China imported approximate 15 million tons, representing a decline of 5% as compared to the prior year. But more importantly, we have seen a recent increase in Chinese LNG imports, with the country's economic activities slowly reopening. The EU imported 28 million tons of LNG, representing a solid 57% year-on-year increase. The lockdowns in key import markets are beginning to slow down economic activities as well as high inventory levels which limits this important region's flexibility to import more volumes. This situation has led to recent announcements of U.S. LNG cancellations for cargo deliveries in the June time frame, but many more may follow in the upcoming months. Overall, COVID-19 will impact natural gas demand globally in 2020, but to varying degrees. Chinese gas demand is forecasted to remain relatively flat year-on-year with the industrial and transport sectors most affected. We believe the floor in LNG imports was achieved in February and March and we do not believe LNG demand to decrease further. For Japan and South Korea, the LNG import situation is relatively the same, although these 2 key markets have seen relative declines over the past several years. Nonetheless, these 3 markets remain key LNG import nations and it's important that economic activities resume pre-COVID-19 levels. It is probably sensible to discard all forecasts in 2020, as the market is too volatile and too uncertain at this moment. We need to see more tangible signs of global economic recovery and more consistent data on energy consumption to get a realistic sense of the demand destruction and its impact on energy prices. Currently, natural gas prices in key gas hubs are weak and are trading at less than $2 per mmbtu with the forward curves for the upcoming months not very encouraging. We see LNG prices completely decoupled from crude oil prices as a result of increased lot trading and short-term contracts where the oil price linkage is minimal or nonexistent. In Europe, we believe the title transfer or TTF price will remain low throughout the summer months, but possibly reach price stability with gas injections and air conditioning usage. We also expect that the JKM price to remain low this summer, based on recent tenders from China and India. LNG prices in key Asian import countries should stabilize however, with massive air condition usage and as economic activities slowly recover from shutdowns, with a slight lead-down in prices during the upcoming winter season. Although there is a present oversupply of LNG, the underlying market fundamentals impacting consumption are quite different from oil products. We had 2 abnormally warm winter seasons which significantly curtailed gas demand from the traditional peak heating season. This fact, combined with new LNG supplies of approximately 41 million tons in 2019 exasperated the oversupply situation. For instance, EU gas storage in April was approximately 55% full at roughly 53 billion cubic meters, while the region's 5-year average from 2013 to 2018 levels were 31%. The situation in the U.S. is no different. U.S. gas storage in spring 2020 was approximately 47 billion cubic meters, while the 5-year average was 33 bcm. The market can temporarily use LNG tankers as storage, but this situation is not ideal due to boiloff gas. Another major factor was the huge new supplies of LNG that came to market in 2019. Approximately 43 million tons of new liquefaction capacity was commissioned last year, and more capacity will be launched from the United States in 2020, albeit at a lower growth rate. We should see some curtailments of LNG output over the next several quarters, especially the marginal projects. But we see the most profound impact of lower prices and oversupply on final investment decisions that were planned for 2020. Most of the major LNG FIDs have been postponed to 2021 or after. In our opinion, these delays will rebalance the market around the time we expect to commission Arctic LNG 2 in 2023, which is very positive for our projects, market and efforts. Our Yamal LNG project loaded and dispatched 67 cargos or approximately 5 million tons of LNG in the first quarter 2020, of which 48 cargos or 72% were long-term contracts and the remaining 19 cargos or 28% were spot sales. This represents an increase in long-term contract sales from 58% in the fourth quarter of 2019 to 72% during the current period. And we expect spot sales will not exceed 25% of total deliverable [indiscernible] in 2020. Yamal LNG also dispatched 7 cargos of gas condensate totaling 290,000 tons. Yamal LNG is currently working at full capacity and all cargos were offloaded and delivered to consumers, including those in Asia, without delays or disruptions in accordance with contractual agreements. The facility's liquefaction trains continue to operate above its nameplate capacity at 122%, which is extraordinary. Equally important, all counterparties fulfilled their respective obligations within the agreed contractual framework. At the balance sheet date, there were no force majeure notifications with our customers. All cargos are offloaded and delivered to our customers, including full commitments to China without delays or disruptions. So far in April 2020, we have dispatched 23 cargos of LNG. Another important milestone was reached recently, as we have successfully completed our final shipping test to release the DSU imposed by international banks financing the Yamal LNG project. We have received positive confirmation from the lenders and can now reconsider our dividend payments as promised, although we have some remaining procedural paperwork that needs to be completed. Obviously our profitability will depend on the macro environment, but nonetheless, we finalized the completion test and will increase the dividend payout based on the financial results of the first half 2020. Our financial position is strong and we reiterate that the increase in our dividend payment is one of our key priorities. We have received many questions recently on LNG pricing and the impact on our prices due to the significant drop in crude oil and spot gas prices on many gas hubs. We stated previously that LNG contractual terms are commercial secrets respected by all industry players and our counterparties. We also respect this industry practice and do not disclose our price formula, including the mechanisms of the S-curves. However, thanks to the S-curves embedded in our contracts, our LNG prices are not as volatile as crude oil prices. The S-curves effectively decreases price volatility, protecting both the buyers and sellers, or price ceilings and floors, respectively. More significantly, we believe the era of high gas prices linked to crude oil indices is over, and we welcome a relative period of lower gas prices to stimulate gas demand in price-sensitive markets. We know the statement on relatively lower gas prices is probably at odds with most of our competitors, largely due to the differences in our operating cash costs, where we have a distinct competitive advantage. But this price competitiveness makes our LNG platform attractive to buyers. We have received strong interest from perspective customers on future Arctic LNG 2 volumes. Buyers are reasonably comfortable in our ability to deliver some of the lowest-cost LNG in the market. As previously reported, we signed Heads of Agreements with all our project shareholders with terms FOB Murmansk and FOB Kamchatka, including agreed pricing formula. We expect first LNG produced from train #1 in 2023. We expect a more balanced LNG market after the cancellations and delays in FIDs as well as completing the recent wave of project commissioning. It's very important that Arctic LNG 2 is being realized, despite massive delays and cancellations of global LNG projects, as these other projects are initially scheduled to commence commercial production at roughly the same time as Arctic LNG 2. We see no major delays in our marketing efforts, although the current market environment is more competitive and the inability to have direct meetings complicates these discussions. There are presently 11,000 construction workers from more than 20 different companies working at the LNG construction yard in Murmansk. Unfortunately, a series of recent news stories reported an outbreak of viruses at the construction site. At the request of the contractors, NOVATEK Murmansk organized the general testing of staff from all contractors. As a result of this testing, a number of employees at one of our contractors, Velesstroy, tested positive. The Velesstroy camp, where its employees live and work, is located separately at a significant distance from other contractors living and working camps. Velesstroy's employees do not cross paths with other contractor workers. The requirements and precautions mandated by authorities had been met and implemented. This outbreak, although serious and unfortunate, will not impact the construction progress at the site, nor impact the ongoing construction works for Arctic LNG 2. We remain committed to ensuring the safety of our workers and contractors and endeavor to promote a virus-free environment at our work sites. We have received official permission from applicable authorities on completing dry dock number one. At this site, concrete casting of the bottom slabs of the LNG tanks and GBS platforms are underway. We estimate that approximately 57,000 cubic meters, representing 34% of the work-related activities, have been completed so far. We are proceeding with rock blasting at dry dock number two as well as other work activities for main office construction, topside module workshops and hydrotechnical structural work for berth and bank protection. Berth number one and number two for receiving and offloading materials were completed in the fourth quarter. We presently have almost 5,200 people working at the Utrenneye field. We completed the backfill of the gas treatment unit number one for the first dome, well pads one, two and three for production drilling as well as ongoing backfilling works at the gas power turbine site and other onshore facilities. Work was completed on the construction of the high-voltage power lines, 21 kilometers; utilities pipe racks, 10 kilometers; roads, 27 kilometers; and the installation of steel structures for 4 fuel tanks of 5,000 cubic meters each. Work also proceeded as planned on the Utrenneye terminal. We completed the fillings for the technological dams for pilot aisle insulation of the quay embankment, and we started installing anchor rods through the first GBS platform. We will continue to provide more updates, as activities progress on Arctic LNG 2. Overall progress at Yamal LNG train #4 is 79% complete versus 73% as of the 2nd of February, with more than 2,700 people working at the site. Presently, we see no major schedule impact or delays due to COVID-19. All major purchase orders were placed in items delivered. Each site shaft has been extended to 90 days to reduce rotation rate and keep required mobilization levels. We are forecasting construction completion in the third quarter 2020, with train #4 commissioning by the end of the year. Last week, President Putin signed into law the additional amendments to the export law for LNG. And this finalizes one of the outstanding questions relating to our Obsky LNG project. The other remaining question is receiving a patent on the modified design of Arctic Cascade liquefaction technology, as we expand the liquefaction capacity from 900,000 tons as used on Yamal LNG's train #4, to 2.5 million tons for Obsky LNG, including some additional technical modifications and solution enhancements. We have always maintained a conservative approach to our financial policy and weigh project decisions based on rigorous and prudent economic analysis. We are presently considering a delay in the [indiscernible] on Obsky LNG project, but a final decision has not been made at this time. We will consider this question more thoroughly during the next several months after reviewing various financing options, but may consider delaying the start of the first train by 1 year to 2024. We believe that the project will remain highly competitive in growing LNG markets from 2024 onwards. This delay will not impact our long-term strategic goals to produce between 57 million to 70 million tons per annum of LNG by 2030.At Cryogas-Vysotsk, we produced 120,000 tons of LNG during the reporting period or roughly 64% of capacity utilization. The market for bunkering fuel in the Baltic region has been impacted by COVID-19 and this situation will most likely remain stagnant for several quarters. The impact from the economic shutdowns and lack of tourism impacted regional sales, but we remain confident that this market will expand and we will eventually link our marketing strategy with the construction of the Rostock terminal in Germany and the buildout of retail LNG stations in Poland and Germany. We had 3 retail stations operation in Poland and Germany, and we just successfully commissioned our fourth retail station, Potsdam LNG, in Germany in March. NOVATEK Green Energy manages this business segment and purchased 195 truckloads of LNG or 3,000 tons from Cryogas-Vysotsk in the quarter. [Technical difficulty] LNG platform may postpone exploration works, mainly related to crude oil activities [indiscernible] negative impacts of COVID-19, seismic activities performed and received in 2019-2020 and our drilling program remains unchanged. We increased our 2D and 3D seismic runs at our subsidiaries as well as significantly increase the meters drilled as compared to the prior year. We achieved very good drilling results at Arctic LNG 2's Utrenneye field during the quarter. We drilled 6 production wells, all of them successful with average well flow rates ranging from 1 to 1.5 million cubic meters per day. These well flows were higher than originally expected, which is positive for the field's development plans. We maintained our development drilling program throughout the reporting period. We drilled and completed 27 production wells that were consistent with the number of wells drilled in the prior year, with our focus remaining on developing the North-Russkoye cluster. We have more than 3,100 people working on various activities on the North-Russkoye cluster and good progress is being made to implement the various field commissionings over the next few years. We remain committed to our previously announced production guidance, with natural gas production increasing by 2% to 3% and our liquid production remaining relatively flat. We will plan our liquid production in compliance with the recent OPEC+ production agreement by decreasing our crude oil production starting on May 1. It's important to note that our gas condensate production is not impacted and will increase this year, offsetting some of the declines in the crude oil output. Our primary goal is to ensure adequate liquid volumes are delivered to our processing facilities to run at 100% of the respective operating capacities. We will maintain plateau levels at both our Purovsky Processing Plant and the Ust-Luga Complex. It should be obvious that the first quarter results were negatively impacted by weaker commodity prices. This should be not a surprise to anyone, as it's been well-reported in the press. The first quarter 2020 was a period of weak commodity prices across the whole range of hydrocarbon products as well as a decline in demand from the economic shutdowns beginning in China and then slowly affecting most economies as the quarter progressed. Despite these facts, we still achieved decent financial and operational results during the quarter. We also experienced a period of significant depreciation of the Russian ruble against the U.S. dollar and euro of 26% and 24%, respectively, which resulted in large foreign exchange effects on our results that were normalized at both the EBITDA and the net profit lines. In the first quarter of 2019, we also reported a large gain on the sale of our participation interest in Arctic LNG 2 that impacts the comparability of the year-on-year results. Brent crude oil prices declined by 21% year-on-year from an average of $63 per barrel to $50 per barrel, whereas benchmark natural gas prices like the National Balancing Point or NBP and TTF both declined by 49% respectively during the quarter. On the other hand, the Russian domestic gas tariffs increased year-on-year by approximately 3% and this increase positively impacts our revenues and netbacks achieved for gas sold domestically via the Unified Gas Supply System. We mentioned on our annual conference call that our Russian domestic gas business was still a critical part of our revenues and operating cash flows, and we want to stress again tonight that despite everyone's primary focus on our global LNG business and future LNG prospects, we should not overlook the importance of our Russian domestic business. It is less volatile. It has relatively stable sales volumes and it generates substantial free cash flows on minimum maintenance capital. During the reporting period, sales of natural gas domestically accounted for 74% of our revenue, as compared to 59% in the prior year. The change between reporting periods was primarily attributable to the drop in our spot LNG volumes sold, as Yamal LNG commenced more long-term contracts, and to a lesser extent the corresponding decrease in average global LNG prices. There are strong headwinds impacting LNG demand globally, but we believe a period of relatively lower gas prices will spur opportunities for additional demand growth, as this pandemic will eventually pass. Key importing countries will transition from coal to natural gas, supporting future scenarios showing absolute growth in natural gas consumption. We believe LNG remains a key driver in future global gas demand growth, and our cost competitive LNG platform positions us to play a leading role in this energy transition. Our natural gas revenues declined 21% year-on-year and 3% quarter-on-quarter, which were largely impacted by declines in international gas revenues of 51% and 11%, respectively. We sold 17.1 billion cubic meters of natural gas on the Russian domestic market and 2.5 billion cubic meters in equivalent LNG sales during the reporting period, accounting for a combined net decrease of 1.5 billion cubic meters or by almost 7%. On a quarter-on-quarter basis, our volumes sold on the domestic market decreased by less than 0.5%, but declined by almost 9% internationally. Our LNG revenues declined quarter-on-quarter by RUB 3 billion, which resulted mainly from a reduction in offtakes from Yamal LNG and as the project shifted to more long-term contracts, and accordingly we reduced our offtake of spot volumes from early startup. Domestically, our combined sale volumes from end customers and wholesale traders increased marginally by 131 million cubic meters, while our domestic gas revenues remained relatively flat from the fourth quarter. LNG sales on international markets represented 12% of our total natural gas volumes sold and accounted for 26% of our natural gas revenues in the first quarter 2020. Our average netback remained more than 3.5x higher for LNG volumes sold internationally than netback received on the domestic market. This netback ratio remained relatively consistent between the quarters. Even with weak spot prices, LNG volumes sold internationally contributed positively to our revenues and netbacks for natural gas. It is important again to remind everyone that spot LNG sales, although increasing in importance, still represented about one third of the total global LNG volume sold internationally. We sold 4 million tons of liquids in the reporting period, representing a year-on-year increase of less than 1% and a quarter-on-quarter decrease of 6%. We exported 58% of our total liquid volumes during the quarter, which is consistent over the comparative reporting periods. Our total liquid sales decreased year-on-year and quarter-on-quarter by 21% and 28%, respectively; driven mainly by decreases in essentially all our liquid hydrocarbon prices and a decrease in liquid volumes sold quarter-quarter by approximately 246,000 tons. Underlying benchmark crude oil prices are forecasted to remain somewhat depressed throughout the year, largely resulting from an excess of global oil supplies and lower transport demand from the virus. Our operating expenses during the reporting period declined largely due to a reduction in [indiscernible] purchases, as more volumes are sold via long-term contracts as well as lower prices we pay to our joint ventures for our liquids. This expense trend was no surprise during the quarter. Our overall operating expenses declined 16% year-on-year and 12% quarter-on-quarter. Purchases again were the most significant expense item and decreased by RUB 30 billion and RUB 17 billion, respectively. Most of the remaining operating expenses, including G&A, were consistent with expectations for the reporting period and seasonal adjustments. We spent RUB 41 billion in cash on our capital program, representing a decrease of RUB 1.5 billion, or 4% versus prior year, and a decline of RUB 9 billion or 18% quarter-on-quarter. The majority of our capital program remains focused on our future LNG projects, Murmansk LNG construction yard, Obsky LNG as well as capital spent to prepare future LNG fields. We also allocated investment capital on the North-Russkoye licensed area and to complete our ongoing administrative projects. We allocated the remaining capital spent over a range of development projects across our portfolio. More than 60% of our capital expenditure program based on our prior guidance of RUB 250 billion, will be completed in 2020. Considering the present macro environment, we will revise our capital guidance downward and may reduce this amount by up to 20% or RUB 50 billion of our planned investment program. We will maintain our investment commitment to our LNG program in key domestic-related production projects. Our normalized EBITDA totaled RUB 101 billion for the first quarter 2020, decreasing by 15% over the prior year, despite good contributions from our joint ventures. We had very strong EBITDA contributions from Yamal LNG on the back of relatively strong financial results, as LNG sales moved towards long-term contracts. EBITDA contribution from subsidiaries were lower, mainly on liquid sales impacted by lower commodity prices. Our operating cash flows exceeded our cash used to finance capital expenditures by 1.4x, despite a 5% decrease in operating cash generated that was partially offset by a 4% decrease in cash spend on the capital program. Despite this fact, we generated sufficient operating cash flows to fund our capital program, service any debt or liabilities as they become due and disburse semiannual dividends to shareholders. We remained free cash flow positive for the reporting period. Our balance sheet remained very strong during the first quarter 2020. We again improved all our credit metrics and demonstrated, without question, an exceptionally strong balance sheet to support our international and domestic credit ratings. A sound financial position is important in these tough economic times. In closing, the first quarter 2020 was a difficult period for the oil and gas industry. Unfortunately, the second quarter does not look better with continued low commodity prices and weakness in global demand due to the economic shutdowns. A prolonged period of economic stagnation will further exacerbate the situation, as global markets are currently oversupplied with crude oil and natural gas, and this fact negatively impacts spot commodity prices. Even with the announced historic production cuts by OPEC+ starting in May of 2020, crude oil prices have not stabilized, as storage capacity has essentially reached full capacity levels. NOVATEK has fared much better than our global oil and gas peers in times of economic stress due to our low cost structure, conservative approach to our balance sheet and flawless project execution. Moreover, we have delivered exceptional returns on invested capital as well as raised our absolute dividend payment each period. We have faced various economic crisis in the past, although nothing compares to the extent of this pandemic. NOVATEK is one of the lowest cost producers in the global oil and gas industry, and our ability to remain solvent and generate positive cash flows is our strength. This resiliency is extremely important in these stressful market conditions, as we were able to sell our hydrocarbon production profitably, sustain production output and generate above-industry returns, while many of our global competitors are substantially reducing capital expenditures, canceling or delaying projects, generating negative cash flows and slashing dividend payments. Our financial position is very strong and it's a direct result of our conservative financial policies and our strict focus on cost control. This was again reconfirmed recently by external credit rating agencies. We control what we can and focus our attention where we can make an impact to our business and minimize the external events that are non-controllable by management. We will emerge from this pandemic in a very strong position, both operationally and financially. One of our core pillars is our financial stability, due largely to our domestic natural gas business. We still produce and deliver a significant volume of natural gas on the Russian domestic market that is stable, and gas pricing is not volatile. 88% of our total sales volumes or 18 million cubic meters, were sold on the Russian domestic market that was not negatively impacted by the decrease in global spot prices. This element of our business resiliency should not be underestimated. Although lower underlying benchmark crude oil prices impacts our liquid business, as a low-cost producer, we still generate sufficient free cash flows. Excluding our LNG sales, our domestic gas business provided us with almost half of our income and is stable and less volatile, despite the slight decrease in first quarter sales volumes due to warmer winter weather. Our global LNG business is important and exciting to our future growth and profitability of NOVATEK, but our Russian gas domestic business is equally important, remain highly profitable and generates solid operating cash flows. COVID-19 lockdowns has put short-to-medium-term pressure on all our core markets. But in recent weeks, LNG imports in key consuming countries like China has resumed. Since the last week in March to the last week in April, LNG imports in China has increased by 70% to 1.4 million tons. India also increased imports of LNG in the first quarter by 20% from the fourth quarter, so these are positive indicators. A relative period of lower gas prices is not bad. Lower prices will stimulate gas demand in price-sensitive countries. We look at these recent developments as positive signs and focus on lowering our costs of delivered LNG, such as our ship-to-ship transfers that we recently resumed in Norway and the eventual construction of transshipment complexes in Murmansk and Kamchatka. Resuming economic growth is obviously front and center for most governments. But the energy transition is still a key policy agenda. Addressing the question of climate change is still critical, as COVID-19 is having a positive impact on carbon emissions and most likely will be a rallying call from the green movement. As an affordable, secure and reliable energy source, we must promote the benefits of natural gas and position ourselves as one of the leaders in this energy transition movement. We must not let outside influences dictate our message. The remainder of 2020 will be a tough year for the oil and gas industry, but the negative impact is not consistent across all companies. We have built a robust business model that generates resilient cash flows from our core domestic business and which also provides substantial upside with improving global LNG prices and a reversion back to sustainable crude oil prices. We have a strong pipeline of value creating LNG projects that offer high returns to our partners and we have successfully demonstrated that we can deliver [technical difficulty] to key consumer markets. We [technical difficulty] as a much more determined kind of company, more resilient, more resolved, a strong financial position, a low-cost operating model and strong sustainable cash generative domestic business defines our resiliency. Our unwavering commitment to be one of the lowest cost LNG producers globally and achieve the goals and objective set forth on our corporate strategy defines our resolve. Natural gas will play a vital role towards an environmentally sustainable future and our strategic aim is to be a leader in this energy transition. And finally, we will increase our dividend payout, deliver top-tier total shareholder returns and remain steadfast to our environmental, social and government commitments. These pledges define our proposition to our valued shareholders, stakeholders and sustainable remain important despite the COVID-19 crisis. Our shareholders recently approved our second half dividend recommendation at our virtual AGM. We increased our full year dividend by 24% and by doing so, we sent a positive signal about our financial health and our commitment to shareholders. We now ask you to remain patient in your investment decisions as we navigate through these unprecedented turbulent times. We would like to thank everyone again for attending tonight's conference call and for your continued support of NOVATEK, and most importantly to remain safe and diligent to do your part in stopping the spread of this virus. We are now ready to open tonight's session to questions and answers. Thank you.

[Operator]

[Operator Instructions] We'll go to our first question from Ekaterina Smyk with Bank of America.

[Ekaterina Smyk, Analyst]

I have a couple of question. One of them is on the product, the oil product sales. You mentioned that you plan to keep your processing plants at full capacity utilization. Do you see any risks of potential challenges with placing these products to the market, how your sales have been affected so far; for example, in April, month-to-date? And the second question is on the contract Yamal LNG pricing. I mean I fully understand that the terms are commercial. But how do the Yamal prices look versus spot currently? Is that significantly higher than spot, which have recently collapsed to below $2 per mmbtu? And if I can just ask another question, the third one.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Just wait a second. You're asking too many questions at a time. Let me answer the questions and then --

[Ekaterina Smyk, Analyst]

Oh, okay.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

We have plenty of time to go through your question, okay? I think if we start stacking questions, it's going to be difficult to answer all the stuff. Now your first question was on liquid sales, correct?

[Ekaterina Smyk, Analyst]

Yes.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Okay, so liquid remains relatively strong and obviously they will be impacted by the macro environment. We have no problem selling our liquid volumes. But obviously if we look at some of the market today and we look at the individual component because we don't sell just stable gas condensates. We sell a basket of products. We obviously have concerns about what's going to happen to jet fuel, et cetera, as that market is somewhat weak right now. But I think generally speaking, we don't have really a major problem selling our liquids and prices will obviously be dependent on the underlying benchmark prices. And what was your second question? Now we're on LNG.

[Ekaterina Smyk, Analyst]

Yes, I mean the second question was LNG--

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Can you repeat your second?

[Ekaterina Smyk, Analyst]

Sorry?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Yes, on the LNG pricing, I mean as we talked about before, we have said we're moving away from spot. Obviously you can see that spot prices are somewhat weak right now. And as I mentioned, we're moving away. So in April of this year, we have essentially moved away from most of our spot sales at Yamal LNG and should be at full contractual sales for 96% of the output. Spot sales will still be traded on 4%, which was the normal initial projection as well as anything above the nameplate capacity. We produce 122% nameplate capacity in the first quarter. That obviously is not sustainable throughout the whole year. We generally guide the market at least probably 10% higher than nameplate capacity. That will be sold via spot sales. Obviously those sales will be impacted to a greater extent than what would be the oil linkage prices, which has the S-curves. Unfortunately, we cannot disclose what the S-curves are. But as I mentioned in the text, it's not as volatile as we see the crude oil markets, and the prices we received so far in the first quarter were stronger than what we see generally in the marketplace.

[Ekaterina Smyk, Analyst]

Okay, and understood. And just to get back to the liquid sales volumes, I mean looking at April, your, for example, gas oil jet sales have been placed without any problems and you don't see any decline in sales volumes on that front?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

No, what I said earlier, I said as we speak right now, it's obviously transport fuels, such as jet fuel, has been a problem. We produce about 14% of our output from Ust-Luga is jet fuel. And we have obviously a weaker market with jet fuel. So we just need to see how airlines, et cetera, resume operations. But that is obviously a weak spot in the liquid sales.

[Ekaterina Smyk, Analyst]

Okay, understood. And the last question--

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

And you had a third question.

[Ekaterina Smyk, Analyst]

Yes, yes a small one. You mentioned the potential delay in Obsky until 2024 startup. Is it mainly driven by this delay in FIDs, which has postponed for several months because of this current situation?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

I think it's more of a function of essentially our decision to look at what the market will look at '23 and beyond. And we believe that it's prudent at this particular time to consider delaying that decision. But again, we have not made it. Let me be absolutely clear. We have not made a final decision yet. But most likely, we believe that it will be more prudent, given where the market is evolving and the commissioning of projects that are already happening, that it's probably best to postpone it 1 year. Because we were planning to launch Obsky in the same year as we were going to launch the first train for Arctic LNG 2. And so now we're just thinking that it may be more prudent, given where the potential demand situation will occur, that we should look at '24 and possibly 1 year delay. But again, a decision has not been finalized as of this time. I think we'll address this more -- this question more on the next conference call, as we know whether or not we'll make that decision.

[Operator]

We'll go to our next question from Thomas Adolff with Credit Suisse.

[Thomas Yoichi Adolff]

A few questions from me as well, if we kind of contrast price and volumes, and obviously we can all see the prices and how weak the prices are for spot, and we don't really see the volumes until you report, and the volumes have held up quite well in the first quarter, 5 million tons for Yamal LNG. Can you just remind us on the cash costs of Yamal LNG on a dollar-per-mmbtu basis after shipping and after also taking into account the condensate credit? I just want to get a better sense for the profitability of your spot cargos. And then I guess secondly linked to the volumes, as we go into the summer months when seasonal demand is also lower, are you cutting back utilization rate, also because of what's going on in the world? And then I've got another follow-up.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Wait, let's go to the first one. On the first question, as we mentioned on many calls and many discussions with investors, we basically look at the cash costs at about $0.10 for the feedstock gas. So that's $0.10 from the field to the plant. We add another $0.40 roughly to get the liquefaction. So we're at a cash cost -- so we're at about $0.50, in that neighborhood to an FOB [indiscernible]. Then it depends on where the product goes. If it goes to the European market, depending on transshipments, et cetera, we could add another $1.00-1.50, depending on the shipping side. If we go to the Asian market, we're talking about another $2-plus to get it to the Asian market. We don't look at the condensate credit back to it. So I don't have that number to be able to say that feedstock gas, liquefaction, plus shipping, minus the condensate credit. We don't report it that way. So we're talking about probably in the neighborhood of about $1.50 to $1.75 to the European markets, in that neighborhood, and $2.50-plus to get it to the Chinese market, as an example. That's all I can talk about on that.

[Thomas Yoichi Adolff]

So on a spot basis, it doesn't really make much sense to be producing now, no, with spot prices being where they are?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

I mean how are we going to -- are we going to shut down the plant? Is that what you're recommending?

[Thomas Yoichi Adolff]

Well just reduce utilization rate, no?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

It's operating at -- at that amount of money, we're still making money because Yamal is making money. And Yamal is then contributed back on the contribution back to the profitability EBITDA on the joint venture side. So no, we're able to sell our products profitably in these current pricing markets. And that's what I alluded to in my text. So there's no plan to curtail and stop producing at Yamal LNG.

[Thomas Yoichi Adolff]

And then my final question, just on the contract --

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Wait, now. Let me get you on the other question, Thomas. You talked about the summer months. I assume, are you talking about summer months in terms of LNG output [ cut ] or domestic production cuts? Or what are you specifically referring to on this particular question?

[Thomas Yoichi Adolff]

LNG, LNG.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Yes, I don't believe we have any plans to reduce output from Yamal LNG in 2020. Like I said, we have contractual obligations that we fulfill. We have our off-takers committed to off-taking. As I mentioned, we had no problem selling our LNG so far to date. I just told you today, even in these difficult times, we now have 23 cargos that were delivered already in the month of April. So I don't foresee, given our cost advantage, that we are going to sit there and decide whether or not we're going to curtail production. Now that may be slightly different from Cryogas-Vysotsk, but not Yamal LNG. I mean I think what you're alluding to, Thomas, we're not a marginal producer. What I alluded before, I said, what we're going to start seeing is curtailment from marginal producers. So you're going to start seeing curtailment from higher-cost LNG projects around the world, of which Yamal LNG is not one of them. So we're going to keep producing throughout the year. I see no plan that has been presented to me as of today's conference call that talks about reducing the output at Yamal LNG. And you have a follow-up question?

[Thomas Yoichi Adolff]

Yes.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

You said you had something else you wanted to ask.

[Thomas Yoichi Adolff]

Yes, yes. On the contract volumes and the pricing of that, and obviously you talked about the S-curve and you don't want to discuss where the lower kink point is. But when I speak to other companies, they always talk about this 3-month lag, 6-month lag. Is it fair to assume the same for Yamal LNG? Is there a lag or is it essentially more responsive to where prices are today?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

There is a lag, and it's not a short lag. But it's more on the 6-month lag.

[Operator]

Our next question from Igor Kuzmin from Morgan Stanley

[Igor Kuzmin, Equity Analyst]

I have a couple of questions for you. The first question is in regards to the assessment of how the domestic sales volumes potentially may change in 2020 year-on-year, given the negative effect from the coronavirus on the domestic consumption. That's question number one. And question number two, I'm not quite sure I understood. Apologies if I missed it. Is it possible to provide an absolute number or an estimate for the total investment plan for 2020, including all the commitments on a working interest basis for NOVATEK?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Okay, let me get to the second one first because that's the easier one. Our guidance for 2020 was RUB 250 billion. I said that we could reduce that up to 20%. So if you take that number as being the maximum, you're looking at roughly RUB 50 billion being reduced to the CapEx program. So it could be anywhere from RUB 200 billion to RUB 250 billion. Most likely it will be at the RUB 200 range with a 20% cut. Your first question is more difficult because as I tried to say throughout the text, I mean we're operating in a time that nobody has ever experienced a total shutdown of global activity. And Russia's shutdown is no different. I mean we're in a period of time where it's hard to project a forecast because we don't know exactly what the reopening plans and the economic return will look like. I mean for example, Russia just prolonged its shutdown to after the May holidays. So presumably we might see some reopening up of activity after May 12. Now that doesn't necessarily mean that we're going to have a full reopening. So we really don't know with 100% certainty. That's why I said it's going to take a couple more quarters or months, whatever that's going to be, when we start seeing whether or not we're going to resume and how quickly we can resume back to a pre-COVID-19 economic activity. And so I would just be pulling numbers out of the air to try to give you some kind of assessment of what the impact will be. Now we know certain parts of the economy are not going to be impacted. So if we resume back to a normal winter weather, et cetera, et cetera; we're going to use gas demand. So right now we haven't adjusted. As a matter of fact, we said we're going to increase our gas production by 2% to 3% and we haven't really changed dramatically all assessment of what the domestic market sales will look like. So I think we need -- either we need a couple more quarter or a few more months to come back to you. And maybe this is a better question on the second quarter conference call, when we're in July, we can see whether or not -- how economies, including Russia, are starting to roll out of these lockdowns. But right now it's just -- I don't think anybody can tell you that answer. That's the same thing. Nobody can give us an idea of what prices will be. So let's just wait a few more periods and then we'll see what happens.

[Operator]

We'll go to our next question from Henri Patricot with UBS.

[Henri Jerome Dieudonne Marie Patricot, Associate Director and Equity Research Analyst]

I have a couple of follow-ups on the financial framework. And the first one on the CapEx project for 2020, I was wondering if you can give us a breakdown of that 20% cut to the RUB 250 billion figure, where that would come from. And then secondly, on the shareholder returns and the dividend increase and the payout that you're thinking about for the rest of the year; I'm concerned that there's a lot of uncertainty at the moment. But can you give us some sort of indication as to where that payout could be, if we have to keep in mind the level of free cash flow generation, the level of debt you'd be at? Any indication would be helpful.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

On the CapEx, right now it looks like most of the cuts will relate to future oil-related projects, so things like our [indiscernible] field oil program may be cut slightly. East-Tarkosalinskoye oil program will mostly be cut. Things that we know that we're going to contribute into this sort of OPEC+ agreement, most likely those things that are not crucial to the core part of our business will be cut. Everything related to our LNG platforms will continue. Everything related to sustain the domestic gas business will continue. So it's mostly crude oil related. The payout question is obviously first of all should be good news that we finally got everything done on the completion tests and we can confirm that we will increase. But it's like if you had RUB 100 and I had a normal payout at RUB 30, and you got RUB 30. If my net profit goes down to RUB 50 because of the economic decreases due to lower profitability on a crude oil basis, and I raise the 50 to 25. So I mean it's really going to be function of just like we've done in the past, we looked at our profitability based on macroeconomic events, you can see already we have adjusted. So our first quarter profits obviously have gone down year-on-year, but not to a significant extent, with the adjustments for the forex, et cetera. We need to see what the second quarter is. But the point is, is that we are going to raise the dividend payout. We've already said that. I don't know what the number will be as of right now. We need to speak amongst the respective parties and our group to decide what our debt position looks like, as you rightly said. What's going to be the cash flow for the remainder of the year? How are we going to fund the CapEx program, et cetera? And we'll make that decision. But we're not cutting the dividend, per se. And that's the positive message that I wanted to get out today. The DSU shipment tests have been completed. They have been confirmed. We promised everybody that once we got these completion tests done, we will raise the dividend payout, and that's a key strategic priority for management. But to give you an absolute number in terms of will it go to 50% or not, I don't have that answer right now. But you'll know soon enough, and that's a positive signal. We are not cutting dividends. We understand that the market is looking for more returns in an environment where we have drops in equity prices, et cetera. Fixed income people are looking for more returns, and we'll try to accommodate that. And I think that's the positive message that I wanted to get out today is that we will increase the payout. But I can't tell you right now what that number will be.

[Operator]

We'll take our next question from Ildar Khaziev with HSBC

[Ildar Khaziev, Analyst]

I have a question about North-Russkoye. Is my understanding correct that the delays in -- the oil block related delays could push forward the curve for the oil production ramp-up at North-Russkoye? Are you in a position to comment on how that could look like?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

You broke up a little bit on your question. Could you repeat your question, please?

[Ildar Khaziev, Analyst]

Yes, sorry. So my question is about North-Russkoye project and the oil blocks. Is my understanding correct that these blocks will probably developed with a delay, and so we shouldn't expect ramp-up maybe next year?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

No, no, no. I basically said that North-Russkoye will be launched over the next couple years as we planned. We're moving forward. But a question was asked before about the type of impact that a CapEx program. Obviously we're going to adjust some of the CapEx related to [indiscernible] program. And obviously one of the oil elements in the program is the [indiscernible] field. But no, it should not delay the overall commitment to move this field forward because we are working diligently to launch these particular fields over the next 2 years, as we planned. We just may prolong a little bit on the capital being spent currently in this environment today related solely to the crude oil part of it until we get a better understand how this OPEC+ agreement will impact obviously pricing and supplies, et cetera in the marketplace. But it doesn't mean that we're going to delay the launches of these projects. They may just be spread out a little bit further on the ramp-up, but it should not be an impact on the launch or commissioning these fields.

[Operator]

Your next question from Alex Comer with JP Morgan.

[Alex Robert John Comer, Research Analyst]

I've got a couple of quick questions, just one in terms of the financing on Arctic 2 and [ banks, et cetera ]. Obviously liquidity is going to be a bit of an issue going forward. I just wondered how that was progressing. And then just in terms of your longer-term strategic positioning, if I look at it, it looks like U.S. gas production is going to come under pressure with associated production falling down, so therefore they aren't going to move up the cost curve. There's probably going to be some CapEx cuts across your competitors. I mean it looks to me like your longer-term competitive position and your potential to grow going forward has been increased by the crisis. Would you kind of concur with that?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Alex, I'll start with the second part of your question before I get on the finance end. I mean that was part of the message today, Alex. I mean it basically looks at given our low-cost competitive advantage and now the ability to successfully ship into these key markets and have one of the lowest landed costs in the global LNG. Yes, that's going to help us position ourselves stronger as we roll out of this pandemic. I mean I think the response we've received so far from potential interests in Arctic LNG 1, for example, and stuff as we start moving forward with some of these other projects has been quite strong. And I think that's a recognition of the facts that we have built and we'll continue to build a platform, and LNG platform in the Arctic zone that's unique. I mean I don't know many plants in the world that have been able to say they're operating at 122% of its nameplate capacity, or sustainable nameplate capacity like last year 111-plus percent, and are almost 2 million free tons of LNG, as just as a result of the ambient temperature. So given the dynamics of our fields, given the fact that we can produce low-cost gas, given the fact that we do have liquids to support our revenue stream, it's made it extremely attractive to potential buyers. And that's why I said, [indiscernible] pandemic in a stronger position, and I believe what I really was trying to get across to everybody was in that regard in terms of the LNG world. We'll definitely be able to meet our strategic goal and be able to deliver some of these big projects. Whereas our competitors, as you already have seen, both on the cancellations, delays; I mean we can go through the whole list of delays. But I think you can read about it. I mean it's been well-published in the press. Yes, that's going to give us a distinct competitive advantage. And that's why also I said, when we look at the start the commissioning of Artic LNG 2, it's actually better for us because we were anticipating some of these volumes to come on stream about the same time. Now they're not going to come on the same stream, and that's why we're seeing interest in people talking to us again about the volumes coming out of Arctic LNG 2 because they're looking at their portfolios and they're trying to say to themselves that they have to fulfill their obligations in terms of their customers, et cetera, and their market. And Arctic LNG 2 looks extremely attractive to them. In terms of the financing, you know, good progress has been made throughout the last 12 months on Arctic LNG 2 financing, and we have enough capital from the shareholders' contributions so far to continue with the program. But obviously what makes it a little difficult right now, and I hope to address this a little bit more at the second quarter conference call as we start seeing the reopening; it's difficult to do all this stuff remotely. People want to sit down and go over all these discussions on the finance. But we have enough financing to continue with our capital expenditure program through the partner contributions. And we believe that we'll get the financing package completed or we're planning to get it completed by the end of this year 2020.

[Operator]

[Operator Instructions] We'll go to our next question from Olga Danilenko with Prosperity.

[Olga Danilenko, Director of Oil and Gas]

I have a follow-up question on the dividend on your comments. Do I understand you correctly? And I fully appreciate and understand the uncertainties right now. Do I understand you correctly that the management will try to keep the absolute dividend at the level not less than the previous one if circumstances will allow, or do you have some other meaning, what you are saying?

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

I mean Olga, quite honestly, management's intention is to raise the dividend, to raise the absolute dividend each and every period. We have done that over the years. But we're in a macro environment right now that's extraordinary, unprecedented. We don't know the impact, what's going to happen throughout the year. But the goal has always been in terms of our dividend policy because we always felt that a sign of an excellent company was its ability to raise the dividend each year, and that's what we've done. I mean we've paid dividends since we went public in 2005. Every year we embarked on our goal to increase the dividend each year based on the profitability and growth of the company. And that's the same goal we have in place today. Now we've just got to see what the macro environment is. So I can't commit to you that that's the case. But I can commit to you that that's the goal and objective, and that's a priority of management to keep raising the dividend in its absolute terms.

[Operator]

There are no further questions at this time. Mark, I'll turn it back to you for any additional or closing remarks.

[Mark Anthony Gyetvay, Deputy Chairman of the Management Board & CFO]

Well first of all, thank you very much, and I apologize for the slight delay at the onset of this call. You know, it's been an extremely difficult time I think for everybody working remotely and I think it's a strong tribute to our team for our ability to produce the financial statements in a timely basis when everybody is working remotely, including myself. So I just want to say that these are unprecedented times. We have demonstrated through our annual dividend that we just approved that the company's goal is to continue its focus on delivering top-tier total shareholder returns. We are committed to build an LNG platform that's second-to-none globally. And I just wanted to have the overriding theme today for this call was really the resiliency of our business and our resolve to move forward. And so I'd like just to thank everybody again, and hopefully everybody remains safe and we look to address you of the upcoming second quarter conference call. But if you'd like to have individual one-on-one comments over the next few weeks or whatever, please feel to free to contact us directly at [e-mail] or contact your respective sales broker at the investment firms and they'll arrange for us to have a follow-up session to have a more one-on-one discussion. Again, thank you and we look forward to addressing you again in the future.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.