NK Rosneft' PAO

LSE:ROSN

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon, and welcome to the Rosneft first quarter IFRS results conference call. My name is Adam, and I'll be the operator for this call. [Operator Instructions] I will now hand you over to the management team to begin. So please go ahead when you are ready.

[Didier Casimiro, First VP & Member of Management Board]

Hello, good time of day, dear colleagues, and thank you very much for taking part in the conference call of Rosneft's 1Q 2021 operating and financial results. With me today have Zeljko Runje, Eric Liron, Brian McLeod, Artem Prigoda, Alexei Salin but also many other top managers of Rosneft taking part in this call. Today, we will present a brief overview of operational and financial results for the first quarter of 2021, and we will answer your questions. Please note that the presentation includes information about future events and forecasts. Over the past 12 months, we've been through an unprecedented and very challenging environment. And it remains yet to be seen if the healthy financial performance of 1Q '21 represents a return to a normal operating environment as it was prior to the start of the COVID-19 pandemic. By contributing to the OPEC+ efforts to bring balance to the global crude oil market, the Russian Federation and Rosneft, in particular, may have sacrificed production volumes equally this has resulted in strong recovery of crude oil prices. 1Q 2021 extended the positive momentum of the preceding 2 quarters. Despite the materially lower production volumes year-on-year and thanks to further improvements in our operating and financial efficiency, Rosneft managed to nearly restore the top line, generated a highest EBITDA since the ongoing pandemic and moved very close to the average quarterly free cash flow level that was achieved back in strong 2019. The net income attributable to Rosneft shareholders was greater than in full year 2020, setting the base for the future shareholder distributions.Following completion of the corporate structure in 1Q 2021, our world-scale Vostok Oil project turned to the active development. And as we get the benefit of the Vankor extraction tax breaks, and we reinvest those tax savings into the project infrastructure, we are seeing a healthy ramp-up in the investment activity. Vostok Oil will contribute meaningfully to the future growth and value of our company. And therefore, we are doing our best to ensure that the project is developed and delivered on budget on schedule in the standards that we have [Audio Gap] low carbon emissions and best-in-class environmental standards. During this call, we will provide additional details on the Vostok Oil progress. Now turning to safety and sustainable development, as we always do. We had fewer Tier 1 and Tier 2 process safety events in the first quarter of 2021 compared to the same period of the previous year, down by 18% and 23%, respectively. We're also raising the bar by being more transparent and open with our stakeholders about our commitments in the ESG area. In an important development, the company has published a position paper on the strategic intent to achieve 0 fatalities in its operations, which you can find on our website. More than ever before, the safety of people starts with health care and access to medical services. In February this year, Rosneft Chief Executive Officer informed the President that the company had asked the authorities to reserve enough Sputnik V vaccine injections for vaccinating our employees. And in March, we started vaccination at our largest and remote production sites as well as most populous assets, followed by staff returning to workplaces.We completed it on time and can now say that the Rosneft team has reached HERD immunity against COVID-19. First of March, we presented our 2035 carbon management plan to investors and analysts, and we are very appreciative of the interest shown, with over 90 people taking part in the call. And we will keep you informed on planned implementation. In the first 3 months of the year, we successfully progressed our efforts in associated petroleum gas utilization, which is a key lever of our successful carbon management reduction efforts. Rosneft reached the average rate of APG utilization of 96% due to the completion of the gas infrastructure upgrade This production unit joins Samotlorneftegaz, Vankorneftegaz and Verkhnechonskneftegaz and others with the APG utilization rate above 95%. Sustainable development can be achieved when it concerns everyone and leaves no one behind.In the spirit of sustainable development goal 17 known partnerships for the goals in February 2021, Rosneft and BP concluded a strategic collaboration agreement on carbon management and sustainable development. This includes a broad range of activities in the area of greenhouse gas reporting methodologies, methane emissions detection measurements, assessment of low-carbon technologies for new developments, natural carbon solutions, including reforestation as well as social investment projects and ESG best practices. We're happy that our efforts in these areas continue with recognition.In the first quarter of 2021, Rosneft showed the best positive movement among its Russian peers in improving its Sustainalytics ESG risk rating. The company also stayed well ahead of its international peer group in the Bloomberg ESG rating, which assesses corporate transparency on the ESG information disclosure. On this note, I would like to hand over to Eric Liron, who will tell you more about achievements in the Upstream segment, Eric, over to you.

[Eric Liron]

Didier, thank you. Key factors affecting the company's 1Q hydrocarbon production were the easing of restrictions under the new OPEC+ agreement starting January 2021 and the sale of a number of tail assets at the end of 2020 in order to transform and improve the quality of the company's asset portfolio. Under the influence of those factors, total hydrocarbons output in 1Q '21 was 4.76 million BOE per day, down 5.6% quarter-on-quarter. Our liquids production was 3.75 million barrels per day.If we consider production in a comparable perimeter, i.e., excluding the tail assets, daily production of liquid hydrocarbons in 1Q 2021 increased by more or less 1% quarter-on-quarter on the back of Phase 2 easing of restrictions, starting January 2021. The company quickly restored some of its volumes, growing the average daily production by more or less 3% in early January compared to December. And at the end of March, the average daily production growth exceeded the December level by 4%.Development drilling in 1Q 2021 reached 2.3 million meters, up by 5.8% year-on-year. The number of newly commissioned wells increased by 12% year-on-year, exceeding 620 wells. 65% of those wells were horizontal. Share of new horizontal wells with multistage hydraulic fracturing was 40% -- 41%, remaining at the level of last year. Well flow rates from our horizontal wells is more than 2x higher than well flow rates of directional wells. Despite the production volume restrictions under the OPEC+ agreement, the company continues to develop its key assets, giving priority to high margin projects.Total production of liquid hydrocarbons of the new major projects launched since 2016 in the company's share in 1Q 2021 amounted to 422,000 barrels per day, up by 2.6% year-on-year. The share of these projects in the total production of liquid hydrocarbons reached 11.3%, which is 2.4 percentage points higher year-on-year. The development of projects launched last year, the Erginsky license area and the Severo-Danilovskoye field continues.Preparatory works are underway for the launch of the Lodochnoye and Severo-Komsomolskoye fields in 2022. At the Erginsky license area, following the equipment installation, the first start-up complex of the oil treatment and transfer facility has been launched. As of the end of the reporting period, 31 kilometers of infill collection lines were built. In addition, 17 kilometers of high-pressure water pipelines were constructed as part of the reservoir pressure maintenance system. In 1Q 2021, production at the fields of the Erginsky cluster reached 87,700 barrels per day, i.e., a RUB 1.1 million fund for the 3 months period, which is 42.8% higher year-on-year. Development drilling, construction of infrastructure facilities in Lodochnoye, an active phase at the Severo-Danilovskoye field. Construction continues at the oil treatment and transportation facilities. In 1Q 2021, production at the field amounted to 8,500 barrels per day, is cumulatively 0.1 million tonnes for the in the company's share. Development drilling, engineering preparation of facilities and construction at infrastructures facilities, oil and gas production, treatment facilities are continuing at the Lodochnoye field. At the Severo-Komsomolskoye field, engineering preparation has been completed and construction has begun on key facilities in preparation for the full-scale development of the field. As part of the pilot development, production at the fields in 1Q 2021 amounted to 25,500 barrels per day, which is 1% higher quarter-on-quarter.Speaking on the future development prospects, it's impossible not to mention our world-scale project for the development of a new oil and gas province in the north of the Krasnoyarsk territory, the Vostok Oil project. Let me remind you that at the end of last year, the company closed a comprehensive deal to finalize Vostok Oil corporate structure. We also attracted a global oil and gas industry player and a reliable partner Trafigura Pte Ltd making this project a truly international one. Currently, Vostok Oil perimeter includes 52 license areas that contains certain fields. The confirmed resource base of the project amounts to 6 billion tonnes of liquid hydrocarbons. The exploration program, which led to the Zapadno-Irkinsky discovery last year, continues to be successfully implemented. This year Zapadno-Irkinsky key license area, 3D seismic exploration covered 500 square kilometer. This will lead to new exploration drilling to prepare discovered reserves within the Payakha cluster for further development.As part of the priority exploration program for 2022 to 2026, we aim to conduct more than 6,000 kilometers of 2D seismic, more than 7,000 square kilometers of 3D seismic as well as to drill about 50 exploration wells. In order to select an optimal technical approach, we formed a program of pilot operations that will start to be implemented in 2022. We'll include drilling and development of a number of experimental clusters of the high-tech wells of various designs, including multi laterals and horizontal wells with multistage hydrofracturing.Locations for the placement of priority well pads for development drilling have been identified. The site for crude oil collection, treatment facilities is being prepared. Design and survey for the construction of the pipeline and the port in the Sever Bay has been completed. Preparations continue for the construction of storage facilities in the key locations of the project. We have outlined a number of steps to reduce the carbon and environmental footprint of this development with use of best available technologies to ensure this project meets the best global benchmarks.Regarding Upstream natural gas, we're very pleased to announce that in 1Q 2021, the company launched its flagship gas project Rospan. The project will provide annual gas production of more than 20 billion cubic meters, production of 5 million tonnes of gas condensate and more than 1 million tonnes of technical propane butane. To date, both technological lines of the first start-up complex have been put into operation. The railway terminal for the shipment of propane butane has been launched. All the constructed pipelines have been put into operation. The production potential of the well stock has been confirmed. Active work is underway to complete the construction prepare for the launch of the second start-up complex in 2021. All this will allow the company to increase the EBITDA of the gas business in the near future by several folds. It should be noted that the launch of the project is another significant milestone for Rosneft as we take steps to prepare the company for the energy transition. In addition to our 2035 carbon management goals, this project further increases our gas portfolio and contributes a lower carbon emission footprint.Rospan also provides for monetization, the company's major gas potential. As part of the implementation of projects, maintain gas production in 1Q 2021, a booster compression station was launched at the Beregovoye oilfield of our largest gas-producing subsidiary, Sibneftegaz. This will allow us to maintain and increase the gas production relative to the existing levels. I'll now hand it back to Didier Casimiro for Downstream and marketing achievements.

[Didier Casimiro, First VP & Member of Management Board]

Thank you very much, Eric. So moving to downstream and marketing. So let's start here with Refining. In 1Q 2021, the total volume of crude oil refining at the company's refineries amounted to 26.4 million tonnes. This is 2.1% higher quarter-on-quarter, but still 8.3% lower year-on-year. The reduction in refining throughput compared to the same period of 2020 still being due to an incomplete demand recovery to the levels prior to the introduction of the pandemic-related restrictions. In 1Q, the company continued to execute a program of in-house manufacturing of catalyst, a specialized enterprise has developed the technology for the production of a hydrocracking catalyst, which will increase the production of high-quality Euro 5 motor fuels from vacuum gas oil. The production of a new hydrocracking catalyst will significantly reduce the dependence on similar foreign products, which currently accounts for 90% of the total supply of these products in Russia. The company continued to diversify its crude oil and refined product supply channels. In the reporting period, crude oil supplies to the far abroad markets amounted to 22 million tonnes. And of that volume, 13 million tonnes were supplied to the East, which is 59% of the total volume of crude oil supplied internationally to further growth markets. The company also delivered 24 million tonnes of refined products. And of that volume, 14 million tonnes were supplied to far abroad markets. Enhancing cooperation with the end consumers, Rosneft has signed a new long-term agreement with the Polish company PKN Orlen for the supply of crude through the Druzhba oil pipeline to Poland for the period from March 2021 to January 2023. In the first quarter of 2021, the company's retail business stable performance as well as a recovery from the limitations of the previous year. The volume of retail sales at our retail fueling stations in the first quarter of 2021 exceeded the level of the first quarter of 2020 by 1%. In March, the company signed agreements with the Ministry of Energy that enabled 4 of our refineries to receive an extra investment component of reverse excise stacks on petroleum feedstock, which will provide a strong support to the company's ongoing program to develop and upgrade our refining capacity. Now let's move to financials. In the first quarter of 2021, crude oil and refined product prices continued a healthy recovery, and in the reporting period, climbed to the highest level in ruble terms in 2.5 years. While our sales of crude oil petroleum and petrochemical products trended higher and increased by 14% quarter-on-quarter, they remained just below the level of 1Q 2020. The key reason for the year-on-year contraction is a significant contribution to the new OPEC+ agreement, which kicked in, in May of last year. But despite a gradual increase in the production quotas in the past 12 months, all volumes stayed lower compared to the first quarter of 2020. Overall, the 3% quarter-on-quarter reduction in the realized volumes was more than fully offset by the 17% price recovery. Year-on-year, the effects of lower volumes and higher prices nearly offset each other. Due to the ongoing work to improve operational efficiency, company's 1Q 2021 unit Upstream operating costs in dollar terms stayed at $2.6 per barrel of oil equivalent. This corresponds to the lowest levels in the global oil and gas industry. We also benefited from a swing effect of the damper, finally turning positive for our company as it is meant to be. We managed to grow our EBITDA by 22% quarter-on-quarter and by 44% year-on-year to RUB 445 billion. This is the best reading since 4Q 2019 when the global oil and gas industry had not yet been hit by the pandemic. Including capitalized interest in the reporting period, our interest expenses reduced by 3% or by RUB 2 billion compared to the same period last year. Our total financial costs fell by 28% or by RUB 22 billion year-on-year. We have also seen continued positive changes in the structure of our financial debt. As of the end of 1Q 2021, its short-term component reduced to below 14%, which compares to above 17% at the end of last year. Please note that as recently, as at the end of 2017, the short-term debt was more than half of our total supported by strong underlying profitability and in the absence of any material nonoperating items that have swapped away our P&L in 2020. In the reporting period, net profit attributable to the company's shareholders amounted to RUB 149 billion. It's higher than the net profit for the entire last year. In 1Q 2021, our CapEx amounted to RUB 225 billion, which is 22% higher than in 1Q of the previous year, and this is equally due to the start of our stockholder Vostok Oil active development phase. I would like to remind you that the infrastructure spending of our Vostok Oil project is compensated by the mineral extraction tax relief on the existing Vankor cluster production as provided by the law. It supports our cash generation ability, despite of the significant Vostok Oil project expenses. 1Q 2021 free cash flow was strong, USD 2.5 billion, which implies more than threefold increase quarter-on-quarter. Also, we reduced our gross financial debt and trading obligations by more than 5% or by $4.6 billion in absolute term. Last month, the Board of Directors issued a recommendation to pay RUB 73.55 billion in the form of 2020 dividends. Now this important development given the challenges the global oil and gas industry have been through last year. So in summary, healthy financial results for 1Q 2021 have already signaled a major improvement in our company's underlying profitability. We look forward to restoring our full production potential as the OPEC+ agreement and plans in the next 12 months our greenfield projects gain pace, and in the longer run, the very foreseeable future of our stock oil changes the structure and scale of our operations. Rosneft is a growth company, about to demonstrate the pace of volume expansion that is unmatched by any of our peers, and we expect this to be orderly reflected in the market value of our company. So let me now thank all of you for your attention, and please let us proceed with our Q&A session, as now, we have all the management here ready to answer your questions.

[Operator]

[Operator Instructions] Our first question comes from Karen Kostanian from Bank of America.

[Karen Kostanian]

I have 2 questions. Thank you for the update on Vostok Oil. I have a question, if you can you give us an update on the negotiations ongoing with other strategic partners, if they are ongoing? And you do expect another transaction to occur anytime this year? And my second question is on the gas production. Again, congratulations on launching Rospan. I wanted to enquire what is the progress on the second line available at Kharampur?

[Didier Casimiro, First VP & Member of Management Board]

Karen, thank you very much for your questions. Let me maybe take first one myself on the other strategic matters Vostok Oil. Right, indeed, what you are saying, we have ongoing negotiations with a number of parties. And for sure, there will be until year-end, and I'll think, actually, sooner than that, but I don't want everything away, yes. Again, the communication to the market of other partners joining this project. Then I will now pass for gas production at Kharampur to Oleg Ivanov.

[Oleg Ivanov, Head of Gas Business Planning]

[Interpreted] Thank you very much, Didier. My dear colleagues for quite some time. The biggest gas production unit in Rosneft was the company under the name of Yuganskneftegaz. So currently, with the start of preparation for Rospan launch, we, for the first time, we're able to see that Rospan's production started exceeding Yuganskneftegaz And they came a day where Rospan started producing more than Yuganskneftegaz. At the point in time when the preparation is really complete at Rospan, we will have the Rospan's production much bigger, and it will become the biggest unit and shall remain so in the course of several years. So the Kharampur project that Karen is asking about, according to our plans, in due time, it will be able, in terms of the gas production, takeover Rospan's gas production. So -- and how to improve, we're currently going through the first stage, which is the Cenomanian part of it. And according to our current plans, it is due to be launched in 2022. The construction readiness of the project is quite good. We have 2 pipelines currently being built. The one that will connect the field with the National Truck System, the construction readiness there is already 91% was the second line, which is going to be 54% of its volume in terms of the comprehensive gas treatment preparation, 61%. So overall, I should say that we're running a little bit ahead than the schedule calls for.So we will see that the kick off of the project in the first quarter 2022 is a very feasible thing to happen. And by launching it, we will be able to produce from the Cenomanian about 11 billion cubic meters of gas a year in 2023, that will be happening. However, that is not yet the end of it because, at present, we do have the possibility to expand it through the Peruvian formations where we are making plans for this particular part of production to run up to 14 BCM a year, making the total gas output from the project at the level of 25 BCM a year, making it the biggest gas project in the company. In terms of the Peruvian formations, we have already completed the necessary series of tests and are ready to make the investment decision. Although I would like to note also that it was just yesterday that the government submitted into the Russian parliament the Draft Act, which, amongst other things, sets the lower rates for the Beryozovsky Suite gas, which is, yet an additional upside for the Kharampur project, enabling us longer term to maintain the plateau that we currently enjoy from the Cenomanian. So overall, this is the status. And thank you very much for the question.

[Operator]

Burgansky from Renaissance Capital.

[Alexander Burgansky, MD and Head of Oil & Gas Research]

[Interpreted] I've got 3 questions, if I may. Could you please tell us anything about your plans to what kind of Vostok Oil production there will be in 2021? Because I noted that in Q1, it slightly declined. So what's the reason behind it? Another related question is the second one, whether you were able to get all of the deduction for the construction of Vostok Oil that is due to you under the law, I mean, in Q1 as far as I understand, the amount of such a reduction is not related to actual expenses for the infrastructure? So what was the ultimate amount -- the amount that was made available to you in Q1? And my last question about the added additional profit tax. It really grew substantively in Q1. I understand that may be partially related to the transition of the depleted fields as of January 1 of this year. Could you give us some sort of statistics in terms of the production volumes, which were moved into the regime of the windfall profit tax or any additional factors, which impacted this particular line item of expenditures?

[Didier Casimiro, First VP & Member of Management Board]

[Interpreted] Alexander, thank you very much for the questions. I suppose that we should begin with Artem Prigoda who will give you the first answer, and then we'll -- followed by Vladimir Chernov, who is the Vostok Oil General Director. And then we'll go back to Artem with regard to the windfall profit tax.

[Artem Vladimirovich Prigoda, Head of the Department]

[Interpreted] Yes, it is a very good assumption because considering changes in the tax legislation, we have got quite a few fields that have been recategorized to the windfall profit tax, almost all of the fields that we used to have in the decline stage were put into the windfall profit tax part. And so quite a large amount also fell under this particular tax regime, but it's also important to know that at the end, transition of almost 90% of the depleted ones now into the windfall profit tax. EBITDA remained neutral because windfall profit tax compensated to us, the kind of opportunities that we had lost in the depleted fields against the current tax regime. Vladimir, please?

[Alexander Donskoy, Equities Analyst & Oil Analyst]

[Interpreted] Sorry. And in terms of the millions of tonnes, could you tell us what is the volume of output in question?

[Unknown Executive]

I suggest that we should give you the answer separate because just to give you millions of tonnes are not simply just really too quoted off the cuff.

[Vladimir Nikolaevich Chernov, Member of Management Board]

[Interpreted] Alexander, thank you very much for your question. I do see that you are very well aware, which is something that make us really joyous. Chernov Vladimir speaking. Vostok Oil General Director. You very correctly noted. I mean, the figure that applies to the currently operating assets Vostok Oil and as far as Suzun, Targin, Lodochnoye and the Vankor respectively. So in Q1, there was a very slight lagging behind in terms of the output, which is a typical situation conditioned specifically this year by the lengthiest cycle of extremely low-temperature when for the -- in considerations of safety, we stopped work at the lifting equipment for the maintenance of wells and drilling. It is being done exclusively because of the climate as often is the case in the winter period. This year, at the end of December, and practically the whole January, were demonstrating unusually low temperature down to minus 60 and so. Because of safety considerations, we do stop the service companies operating there. At the same time right now, and as far as Q2 currently is concerned, I'm receiving information on a daily basis, we are ahead of the expectations, which in the course of the remaining year will offset whatever declines had to have in the beginning of the year. So it's very much manageable and clear situation. Now and as far as the tax benefits are concerned that the government offered to us for Vostok Oil and our scheduled CapEx for the projects effectively, everything is, again, all right here. I will shortly describe to you in terms of the start of the project and as far as the normal part of it is concerned, which is the time and Peninsula location. So as of today and since the start of the project, about 1,200 kilometers of winter roads were built, which helped to transport to the locations of the future construction more than 250,000 tonnes of material and cargo. And again, as of today, we expect that towards the end of May, beginning of June, the same amount of material and cargo will start from the Verkhnechonskoye through Erginsky additional 300,000 tonnes of cargo. We have mobilized currently about 20 contractors. We've mobilized, now let me just quickly remember the exact figure, 6,034 construction equipment units. At this time, there are more than 600 people at the location, which do preparatory work and deploy the supporting infrastructure, I mean, the fuel depots, lubricants and they prepare the pads for the future year so that the production drilling could then be done, then 4 cementing fleets, 2 hydrofracking fleets, 2 compressor piping stations, 4 fleets for the drilling mark preparation that is to support the current year and next year's exploration program as the task savings. I mean to say that the money is being spent in this project in a very strict scheduled and timed way, and we submit the offsets to the government 100% that we can get -- we are getting it back. Thank you.

[Operator]

Henri Patricot of UBS.

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

Thank you for the presentation. I have 2 questions on the Upstream. The first one is a quick follow-up on Rospan if you can tell us just how much in gas in condensate production you expect overall for 2021? And secondly, on Upstream OpEx, you dropped to $2.6 per barrel this quarter, and they're quite a few moving parts with the disposals of cost constraints and some seasonal factors. So I was wondering how much of the improvement was restructural. How much temporary and what we can expect in terms of actually more tax for the rest year?

[Didier Casimiro, First VP & Member of Management Board]

Thank you very much, Henri. Last question, which was Rospan and then I might ask you to clarify a little bit of the second question, but let's first listen to Oleg Ivanov on this one 2021.

[Oleg Ivanov, Head of Gas Business Planning]

[Interpreted] Thank you very much. Henri. At Rospan in 2020, we were producing a little bit over 6.5 billion cubic meters of gas a year. So now with the launching into production of the first Rospan phase, the annual -- sorry, daily production will more than double. So with the start of the second stage, it will more than triple actually speaking. Now in terms of the annual volumes, we estimate that in 2021, we'll produce about 14 billion cubic meters of gas from Rospan. Thank you very much, Oleg.

[Didier Casimiro, First VP & Member of Management Board]

One more time, please rephrase your second question because, first of all, I mean, the line is not very good.

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

Okay. Sure. No problem. Yes, I was asking about Upstream OpEx dropped to $2.6 per barrel. I was wondering how much of the improvement here is structural. How much is seasonal in nature? And where you expect this Upstream OpEx figure to be over the rest of the year?

[Didier Casimiro, First VP & Member of Management Board]

Very clear. So your question, Upstream OpEx, structural, seasonal and can we expect this type of levels of OpEx per barrel of oil equivalent for the rest of the period? Okay. We will pass the question to Artem.

[Artem Vladimirovich Prigoda, Head of the Department]

[Interpreted] Thank you very much for the question, Henri. If you take a look, then it's been the second year in a row that we've been maintaining a certain flat level in terms of our barrel cost, which means that this is not any seasonal changes. Really, this is very in-depth work specifically related to the efficiency improvements because irrespective of inflationary pressures that are out there, we do lots of work to select the candidate where to identify the specific mode to reduce consumption. And that enables us to maintain our average cost per barrel in ruble. So depending upon the exchange rate, we are able to attain such $2.6, $2.8. But in terms of the ruble equivalent, we find ourselves in a very flat market. Just a couple of notes because OPEC+ does have a bit of an impact. And our colleague has noted to just finally, but as part of the production curbs and the fact that we're able to maintain the potential for further output increase in investment in the new well. So by launching a new well, we need to really put down a highly -- one which automatically leads to our OpEx is going down.

[Didier Casimiro, First VP & Member of Management Board]

Well, we can then go on to the next question. Thank you, Artem, and thank you.

[Operator]

Our next question is from Ronald Smith from BCS.

[Ronald Paul Smith, Senior Oil and Gas Analyst]

So a couple of things. Could you outline, please, your investment priorities for this year? I'm particularly interested in Vostok Oil versus the rest of your Upstream investment? And in the Downstream, how much will you be spending on those 4 refining upgrade projects that you have covered by the agreement with the government in March? And then also, finally, if you could give me some overall guidance for CapEx in 2021?

[Didier Casimiro, First VP & Member of Management Board]

Thank you very much, Ron. Let's then pass here the answer to Alexei Salin, our Chief Company.

[Alexei Salin]

[Interpreted] Well, so responding to your question in terms of our priorities, generally, in 2021, the company plans to increase the volume of investments in the new projects, and we will do that work with certain transformation in mind by improving the quality of our assets. And in this sense, we do plan to be very focused in new projects. Upon our new project, as you know, on a continuous basis, we analyze the impact from the external factors and consequently do assess what is the best way we can optimize our investment program. You may also know that our investment portfolio is based upon the ranking of projects throughout all the business segments linked to the criteria of economic efficiency, the project scale and the level of readiness. And the key priorities here as always will be the on-time and on-budget. Throughout the first quarter, we do see that the CapEx certainly runs up to about RUB 225 billion, which is at the level of Q4 2020 and approximately by 20% higher than Q1 in 2020, respectively. As you may know, optimization really takes into account the EBITDA per barrel, while the aggregate CapEx, I would say approximately is going to be slightly higher compared to the previous year, taking into account the priority that we have in on our new project today. We're not quoting anything specific about it. So as far as your question for Downstream is concerned, throughout the whole period of the OPEC agreement being in place, I mean, in terms of the investment, it's about RUB 400 billion.

[Operator]

Our next question is from Igor Kuzmin from Morgan Stanley.

[Igor Kuzmin, Equity Analyst]

I have several questions, please. First question is in regards to Vostok Oil. I would like to sort of understand a little bit more the economics of the project in the first quarter. And my first sub-question is, how much CapEx has been attributed to the Vostok Oil implementation in the first quarter this year? Secondly, in terms of the impact of the tail assets, which have been or are being disposed as part of the sort of Vostok Oil restructuring or sort of acquisition of Payakha I suppose. And sort of specific question is, what impact on the production perspective do you estimate it had on the overall health in first quarter? And then perhaps if possible, could you possibly translate this into the EBITDA or free cash flow impact on -- again, within the scope of the first quarter? Another question I have was in terms of the -- to the Rospan and the gas itself and byproducts, whether the output of both have been fully covered by the contracts? In other words, whether there is definitely the end market for it? And finally, sort of the question is in regards to the ongoing decarbonization efforts, sort of where are you in terms of the investment allocations and specific activities, which are allowing you to move forward with sort of the reduction of the carbon footprint?

[Didier Casimiro, First VP & Member of Management Board]

So thank you very much, Igor. Plenty of questions, as I would say. Let's go back. I think your first question was around Vostok Oil, maybe see here. Just one second. So we will pass this here the word again to the General Director of Vostok.

[Artem Vladimirovich Prigoda, Head of the Department]

[Interpreted] Thank you very much for your question. Like I previously said Vostok Oil project is following its scheduled performance. We are fully on top of the regional plans and all of the contractors that we have are already out there as well as the spending that we do see, it's about RUB 50 billion as of now, which enabled us in the fullest possible way to -- and entitled to the tax compensation.

[Didier Casimiro, First VP & Member of Management Board]

Answering here. The second one was around tail assets and the potential impact. So I'll pass here the word to Artem Prigoda.

[Artem Vladimirovich Prigoda, Head of the Department]

[Interpreted] Yes, Igor, this is a very good question about the tail assets. So that all of you understand that in our Q1 reporting, there are under annual production of financial results that we demonstrated from what have already been sold. So commenting on what kind of financial performance could happen and what kind of production could happen, it wouldn't have been fair because there are different proprietors or different owners who have them. And so you should direct your questions to them. Now if there's a need to try and understand how the Q1 2021 compares to Q1 2020 when these tail assets were with Rosneft as well, all the reports, you can see it there.

[Didier Casimiro, First VP & Member of Management Board]

And so then we have the last question, which was much more around the carbon footprint and the government management. We will pass that question to Alexei Salin.

[Alexei Salin]

[Interpreted] All right, again. Very good question. Your question is quite broad. And as you know, this company, particularly throughout the past 12 months, has been dedicating a lot of efforts and time at the higher level of our executive. I mean in terms of the strategic objectives that we've stated back in the demonstration of the Rosneft Strategy 2020 in achieving leadership positions in the labor health and safety and environmental protection. And so the company in a planned way is accomplishing this very high standards, which typically, we've been able to see it through a number of ratings like the Fitch and Bloomberg and our agencies. And so bear in mind, the importance in trying to reduce the climate processes, we have put together and adopted the carbon footprint plan until 2035, and you are familiar with that. And as you can see, a number of ambitious objectives were set to prevent the greenhouse gas emissions at about 20 million tonnes of CO2 equivalent, then reducing the intensity of oil and gas, the exhaust and reducing the mean in emission, intensity of emissions. There is a correlation between the emissions to the commercial gas production. Mean time particularly important because this is the gas, which is mostly has a multiple higher potential for negative impact on the climate compared to CO2. And other very important objectives we also set and implementing our program to utilize the episode on associated gas and a lot of attention is being paid to this. And continuation with that, something that we continue to work on reducing the climate change by improving the energy efficiency because, as you know, this is a very, very comprehensive program that currently demonstrating results, which is reducing the flaring of the associated gas, increasing the share of gas like all -- as environmentally more cleaner and pure energy. So we increased the share of the consumption of this particular field by the company. We also plan to consider a number of innovative methods in storing carbon and various projects to produce new environmentally cleaner fuel as well as to work further over the potential that the forest may have in Russia to reduce the carbon print. The company is not limiting itself to the objective written in the 2035 program, continues to search further to identify how better -- may achieve the carbon neutrality by 2050. This is something that Mr. Casimiro previously mentioned. So in this sense, we plan to develop a very comprehensive cooperation with the leading peers in the market. And as you can see in 2021, we have already signed an agreement with our strategic partner, the BP company, in the area of the carbon management. And so these accounts we're going to be jointly assessing a broad spectrum of opportunities, including the renewables as well as using the carbon capture and storing technology as well as using the natural mechanism of the way the forest may do. And so on an annual basis, we are allocating about RUB 50 million, RUB 60 billion towards this work. And also the fact that we previously highlighted, I do make this something that we described as green investments, and you may recall, in terms of our 2022 strategy, we announced more than RUB 600 billion within next 5 years because that will be a very tangible contribution in terms of doing some real intangible work rather than just making declarations.

[Operator]

Our next question comes from Alex Comer from JPMorgan.

[Alex Robert John Comer, Research Analyst]

Yes. I guess I had one simple question. It looked to me like the discount you're achieving between spot prices in the first quarter was pretty significant in your numbers. I just want to comment on those discounts? And how you think they'll develop going through the year?

[Unknown Executive]

[Interpreted] Alex, yes, thank you for the call and for the question, first of all, if you have a look at what was happening with the prices and price discounts, you see that it depends a lot on what's going on in the market, especially on how the situation with the pandemia evolves. So if you look first quarter and second quarter last year, it means of the pandemia global and people staying at home definitely discounts widen. If you see in the third and fourth quarter, it's -- again, it was much lower. And unfortunately, the first quarter 2021, what we saw in Europe with the lockdowns again coming and third wave coming to the market -- to our major core markets in Europe like Eastern European countries and core European like Germany and U.K. So again, we see this widening of spread. So unfortunately, this is like normal market situation and definitely will evolve in -- hopefully, in a better way in the near-term future.

[Operator]

Our next question is from Andrey Zakharov from Raiffeisen Bank.

[Andrey A. Zakharov, Analyst]

[Interpreted] Two little questions about the first quarter results, my first one. Could you please tell us, why is such a serious reduction almost twofold in your offices, apart from the average production OpEx and refining OpEx? Has there been any optimization of other line items of operational expenses? So anything, could you please explain? My second question about the MET rate in terms of the oil that you produced in Q1? Why is this change in terms of the correlation of the effective rate to the standard rate in between the first and the fourth quarter last year? Is it because of the tax deductions for Vankor and Priobskoye that you're currently having? Or maybe this effect comes from something else?

[Didier Casimiro, First VP & Member of Management Board]

[Foreign Language] Artem Prigoda.

[Artem Vladimirovich Prigoda, Head of the Department]

[Interpreted] Well, with respect to OpEx there is no twofold production need. I mean it's a revaluation of reserves, but in terms of the OpExs we do hold it at the level which in average enables us to maintain and retain flat OpExs. So you need to separate it from the reserve revaluation because OpEx as it used to be RUB 190. So I think that's the way it remains.

[Didier Casimiro, First VP & Member of Management Board]

And with respect to MET, we'll have Alexander shoot in.

[Unknown Executive]

Yes. As far as MET is concerned, the difference in terms of the crude taxes definitely explained by the fact that the company entered into an agreement about Priobskoye field in order to get the deduction and also there's conditional difference comes from the fact that some of the fields with the high depletion rate have been transferred into the windfall profit tax, which is lower than the current regime is calling for.

[Operator]

Our next question is from Evgenia Dyshlyuk from Gazprombank.

[Evgenia Dyshlyuk, Director of Equity Research for Oil and Gas]

[Interpreted] I have 2. First, what will happen to your quota within OPEC+ as far as production is concerned, once your tail assets have gone? Could you tell us how technically -- I mean, is it subject to re-estimation or something? How will that happen technically, right? And my second question, would you once again give us your overall CapEx guideline for 2021?

[Unknown Executive]

Well, we will start with the first question, Artem Prigoda will do that.

[Artem Vladimirovich Prigoda, Head of the Department]

Yes, Artem speaking. You understand that this whole OPEC+ is a voluntary thing. And so respectively, it is all being done through the Minister of Energy Operator and following its directives, the quota is being defined that one should work against and the level of reduction in proportion to the output in respect of the kind of fields and the kind of companies, which fall out of the Rosneft's perimeter or dramatically, they reduced their share in the Russian production. And in the similar token pro rata, the volume within OPEC in the quarter goes down.

[Didier Casimiro, First VP & Member of Management Board]

Thank you very much Artem. And now over to Alexei Salin.

[Alexei Salin]

[Interpreted] While again -- like I previously said, today, we are coating the fact that this level will be above the level of 2020. So bearing in mind the transformation of portfolio and our focus upon new assets.

[Operator]

Our last question today comes from Olga Danilenko from Prosperity Capital Management.

[Olga Danilenko, Director of Oil and Gas]

[Interpreted] I would like to ask you about the schedule on Slide 20 and Slide 18, where you demonstrate the itemization of your taxes in Q4 2020 comparing Q1 2021. So this is the end of the tax maneuver minus RUB 29 billion new tax initiatives, plus RUB 4 billion. So my question is this. Could you please tell us, do I understand correctly that the overall impact from the new tax initiatives, considering the results of it was RUB 4 billion and that this new tax benefits, basically for Vankor cluster and Priobskoye, which are now under Vostok Oil, and that is the positive result that you show. Could you please give us some more -- a few more details in terms of which specific effect comes out from every separate decision here?

[Unknown Executive]

[Interpreted] Yes, Artem also.

[Artem Vladimirovich Prigoda, Head of the Department]

[Interpreted] Yes, thank you very much. The only question is that just going over all of these aspects in detailed I suggest that we issued rather maybe hold a separate meeting because there were so many changes, but you're absolutely correct that the overall effect from all of the changes which occurred throughout 2020 and into 2021 with respect to the tax initiatives in Rosneft, they do a lot of positive things. And so respectively, the initiatives like we previously mentioned, which are related to the transition of the depleted fields into windfall tax is neutral and naturally Priobskoye and Vostok Oil makes a positive contribution. Now in terms of the transition or -- into the windfall profit tax positive effect, so there are quite a list of factors I suggest that we should have a separate and substantive discussion rather than as part of this telephone call.

[Didier Casimiro, First VP & Member of Management Board]

We just heard that this was the last question for today. Therefore, this being set, I understand the last question during this phone call, but you might have other questions and obviously, here, our team of Investor Relations, a top team here in Russia is always available for you to answer any question at any given moment that you would have. So that is the first thing. Also our management is equally always here if you have other requirements or requests. Let's then stop the call here, and I want to wish everybody a very good weekend. Since we are Friday evening here already Moscow, thank you very much, and we will talk to you the next investor phone call. Thank you.