NK Rosneft' PAO

LSE:ROSN

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, welcome to the Fourth Quarter and Full Year IFRS results conference call. And now I would like to hand over to the management team to begin.

[Unknown Executive]

Good afternoon, dear, ladies and gentlemen. Thank you for participating in our today's conference call dedicated to the company's performance in 2019. Today, in attendance of this call are the key executives of the company. This is Eric Liron, who will comment on our performance results in the E&P and the business related to internal services. This is Otabek Karimov who is in charge of refining and midstream. This is Oleg Ivanov. He is the head of our gas business. And a number of other company executives covering various areas of our activity. And then today, we will review the most important financials and operation as well as answer your questions. Please note that this presentation contains, among certain things, the information about the future events and predictions. So that is the limitation of our accounts [ without assuming ]. Now let me begin with a review of main and external events. And the implementation of the company strategy, I suppose, are the first comment that we would like to make is that one adapts the importance of the ESG agenda in the results of our operations last year. Then I would say that as of the point in time that the new strategy was taking place in December 2017. Over the past 2 years, we saw them to become truly transformational for the Rosneft's ESG agenda. As you are aware from public statements in September 2019, Rosneft has ratified the Paris Accords and has confirmed its readiness to make its contribution into reducing the anthropogenic impact upon the climate change as well as to obtain a global warming to finish within the 2 degrees Celsius.The company's strategy and our operations in combating climate change is integrated into the general context of achieving the UN Sustainable Development Goals, which was passed through the UN Resolution in 2015. And based on these goals, we have defined 5 top priority strategic objectives, the fulfillment of which we promote as part of our core operations. First of all, that applies to goal #7 in the UN agenda, which is the affordable and clean energy and goal #13, which is the climate action. As you may know, we possess the top-quality producing assets with a confirmed resource potential and is stable, low cost. Our average cost for the organic restatement of our reserves are the lowest in the global oil and gas industry. The aggregate average CapExes and OpExes in the E&P are the most effective compared to the Russian and taking international competitive peer group. At the same time, the energy in the [ hub ] and carbon intensity of our operations are also the lowest one amongst the peer group of companies. Our goals as part of the Rosneft 2022 strategy to envisage more than RUB 300 billion of CapEx associated with the green agenda. And last year, we had a new cash flow added to our Capex, which is so-called green CapEx, where the green investments are aimed, in the first place, to utilize associated petroleum gas and improving the pipeline integrity as well as a quality measurement of the water, waste management and land rehabilitation. This figure is RUB 300 billion within the period of our strategy, is one of the leading ones compared to other oil and gas companies in the world. And percentage-wise, I believe, is one of the highest ones. Thanks to the implementation of the energy selling programs in 2022 and specifically, we have prevented the greenhouse emissions, which would amount to more than 8 billion tonnes of CO2 equivalent. The task of maintaining a favorable environment [ advise ] the need to cooperate internationally and nationally and [ respectable gross net ] in 2019, which is an improvement to that has joined the leading international companies and signed the guiding principles to reduce emissions of methane in the greenhouse emissions and representing our company is Mr. Eric Liron who is also sitting on the Board of this Guiding Principles committee. And so in case there are any questions, he will be more than happy to give you explanations separately as part of the [ combination emissions ] project, Rosneft and the Minister of Natural Resources of Russia in cooperation find an agreement on cooperation in maintaining the biodiversity and preserving it. Over the past 12 months, we have been working and along with our Board with a strong focus upon our environmental agenda, we have a subcommittee for carbon management and our integrated plan for our carbon management in the respective way has been approved through the corporate governance system and currently is being executed. There is also our operations in the area of ESG and in improving the ESG performance have been reflected over the past year in all number of external rankings, specifically in Rosneft became the best Russian company in the CDP rankings in the category of climate and water resources. In December 2019, the company was included in the FTSE4Good emerging market index with a very high score in the environmental protection, social responsibility and governance. Separately, I would like to note that according to the Bloomberg definitive rating, Rosneft is within the top group of the world companies as far as the transparency of which disclosure is concerned related to ESG activities and environmental protection. We shall continue to fight for reducing the anthropogenic impact upon the environment. And once again, I would like to emphasize that this whole area is of a strategic importance. And one of the most significant ones in what we do with very clear results, which we already see, based on the results of executing our strategy over the past 2.5 years. In as far as our financials are concerned, let me comment on the indicators that we have achieved within the reporting period. In the first place, that applies to our net profit, which is attributable to the shareholders of the company. It has demonstrated growth almost -- by almost 1/3. We continue to generate the free cash flow in the reporting period. It amounted to RUB 884 billion or almost USD 14 billion with -- achieving the profitability at about 18% level. The dividend payment in the course of 2018 were RUB 283 billion, which is more than 25%, is above the volume during the previous years. And amongst other things, that applies during the first half year 2019, when we have paid RUB 163 billion. We start to present above the interim dividend over 2018. Very strong results over the second half year enables the shareholders to count upon strong increase of the final dividends for 2019 because the net profit over the period grew by more than 1.5x. As part of the Rosneft Strategy 2022, we continue to work and improve our financial stability in the whole business. In the reporting period, the company not only was able to perform on all of its commitment to the shareholders in as far as the final dividend payment was concerned for 2018 and the interim dividends in 2019. But considerably reduced its financial debt and franking commitments with the total demand going down by 16% or about RUB 907 billion. One should also note that in 2019, the company worked under the influence of negative internal and external factors with a number of uncertainties. Unfortunately, overall, the macroeconomic environment in 2019 was worse than in 2018. First of all, that applies to delivering oil into the trunk pipeline system of Transneft, where we in the second quarter, encountered serious restrictions, which affected the amount of output by the company. Separately, it is necessary to note the agreement on regulating refined product prices in the domestic market, which continue to be in effect until the end of the first half of last year and produced a considerable negative effect upon the financial performance of the company. Again, separately, one should also mentioned the deterring factor in our production as well as the condition of our new project because of various limitations stemming from OPEC+ agreement. Nevertheless, despite all these restrictions, we continue to adhere to the objective in the Rosneft 2022 Strategy as far as improving the efficiency of the current asset base is concerned and developing our new projects. So after the elevation of restrictions for the intake of volume for the system of trunk pipelines, our biggest oil and gas asset, RN-Yuganskneftegaz, in a very agile manner was able to achieve its potential for increasing its own production and the further growth of Yuganskneftegaz production showed up in -- upon the development of the lower permeable and the high water count reserves. Today, we are finishing the dialogue with the Russian government to formalize the incentives in order to ensure the economic viability for the development of these reserves. An important precedent in the discussion of the stimulus package for the Priobskoye field and Yuganskneftegaz company is the Samotlor field. In the period from 2008 until 2017, the production of oil from the Samotlor was falling quite considerably overall through within the period of 10 years, it declined by more than 10 billion tonnes. We have calculated direct losses in government revenue related to the decline in this particular field, which amounted to more than RUB 150 billion. And as you may be aware in 2017, we have negotiations, and we debated this particular issue with the Russian government. As a result of which, the Russian government granted a comprehensive set of incentives for the Samotlor field, which enabled us to stabilize the production of oil and considerably increase the revenue into the government budget. For example, in 2018, the production of oil at Samotlor was 18.6 million tonnes, while in 2019, 18.4 million tonnes. In this way, the decline rate in 2018 was reduced below 1%, actually having stabilized itself when the amount of investment in the development of the field over the period of 2018 and '19 was more than RUB 113 billion, while 98% of orders were related to the development of the internal settings as well local procurement for equipment and services with a very high multiplier effect for the field economics, about RUB 9 from average ruble investment by -- invested by Rosneft. The introduced incentive commissions for Samotlor already have provided for a positive effect for the government by way of additional revenues stream and taking into account the deductions from MT, the positive cash flow for the government since the incentives were granted was more than RUB 111 billion. And we believe that this particular positive experience is definitely should be scaled out to other strategic projects and specifically the Priobskoye project where we see a very serious potential and the kind of conditions and terms, which would allow us to provide for its -- for the development fully, both in the interest of the government as well as in the interest of Rosneft and its shareholders. We separately continue to execute the project for the development of the Erginsky cluster. In the end of June last year, we've launched the second field, which is Western Erginskoye within this cluster, as part of which that was already in place a Kondinskoe and Zapadno-Erginskoye fields, which are operational in third quarter. Rosneft started production drilling a third field in the Erginsky cluster, which is in Priobskoye. The company went about creating the Danilovsky [ cluster ] in certain regions, we are expecting to achieve the high synergies beckoned by way of using local transportation infrastructure regionally in order to cover all of the Danilovsky cluster fields as well as the capacities of the Verkhnechonskoye field in order to treat and prepare for further transportation. In as far as the downstream is concerned, the company continues to work all of these investment programs for its own refineries in Russia. We currently have invested more than RUB 900 billion since the point in time when we started the upgrading of our capacities in Russia. As the program is being completed, the modernization program in the next few years would enable the company to alleviate the negative effect from the introduction of the new MOU 2020 quality standard by reducing the production of fuel oil and by increasing the production of diesel. In the course of 2019, the oil market several times was affected by the price hikes externally. We certainly have to take into account this fact from such important factors as the new record oil production in North America, the disappearance from the market of Iran and the OPEC+ agreement effect. And as a result, as you know, the Brent price in 2019 was in a very broad range from $50 to $75 per barrel, while the average price went down by 9% in dollars and 6% in rubles, which basically speaking was not helping our financial performance. And so we consequently were very focused at more improving our internal efficiencies and our cost control. The growth of the average cost in the production was just 2.6%, which was below the annual inflation rate. [ Owing to our national ] cost in upstream remained unchanged at the level of $3.10 per barrel, which puts us into the top of the most effective category of oil producers in the world. And as a result, within the reporting period, we managed to increase our EBITDA and operational net income. Having set a new record throughout the whole of the strip company's operations. In 2019, the EBITDA in the reporting period reached a new historic record, which is RUB 2.8 trillion, the net profit attributable to shareholders of the company I previously mentioned, grew by almost 1/3, having reached RUB 708 billion, which is also a record in the history of the company, growing our profit was conditioned not only by the positive dynamics in our operational gain, but also by a considerable reduction in our financial and of our expenditures. And specifically, the net financial expenditures in the reporting period went down by RUB 84 billion, which is conditioned by the rate going down a -- the banks rates going down in the domestic market. As a result of a number of positive financial and accounting factors, we expect financials to improve in 2020. In case our expectations are confirmed and as far as the macroeconomic environment, clearly, the dynamics of the external factors, the coronavirus in the first place and a number of other points, which may vary effect upon the economic growth in the world may be significant, but where the macroeconomic environment as it is in the beginning of this year, if it sustains, we expect that the company shall continue to work on increasing its cash flow, increasing the income to shareholders with respective reduction of a state burden. Next, please allow me to pass the microphone to my colleagues, who will comment on the company's operations and the key business streams, specifically, this is upstream. And after that, downstream, and we will have Mr. Eric Liron telling us about upstream. Thank you.

[Eric Maurice Liron, VP for In]

Thank you. And good afternoon. I would like to highlight the key achievements in upstream over the past year. As noted by [ Peter ] earlier, some external factors such as OPEC+ agreement and the restriction of oil acceptance by the Transneft trunk pipeline system significantly affected the level of hydrocarbon production. Despite all these limitations or disruptions, production of hydrocarbon, including liquid hydrocarbons, remained at the level of 2018, which is about 5.8 millions barrel of equivalent oil per day and 4.7 million barrels per day, respectively. Thanks to the achievement of the planned production,the company was able to make a significant contribution to the establishment of a new post-Soviet record oil for production in Russia. The company's production of liquid hydrocarbons in 2020 is planned to be no lower than last year and will depend on the conditions and possible extension under the OPEC+ agreements. Our key operating indicators over the past year showed a steady positive trend to implement Rosneft 2022 Strategy. The company is focusing on the construction of the high-tech wells, which ensure more efficient development of deposits and enhanced oil recovery. [ Footage ] in development drilling by the end of the year reached 10 million meters. At the same time, the rate of construct of complex horizontal and multilateral wells increased by 10%. Commissioning of new horizontal wells increased to 57%. Horizontal wells with multi-stage hydraulic fracking to 34%. Production per horizontal well increased by 11% compared to the level of 2019 and amounted to about 9,000 tons additional per annum, which is 2.4x higher than the indicator for directional wells. The use of state-of-the-art technologies in the project development remains an important strategic priority for upstream. The following are just a few examples. Our largest assets, RN-Yuganskneftegaz, was the first to construct a horizontal multilateral well with a 2-string design with multiple branches using the Fishbone technologies. The total length of the well is more than 5,200 meters and the length of the horizontal sections is more than 2,100 meters. Start-up rate of the well was several times higher than the performance of nearby horizontal wells. In addition, a new industry record was set during the construction of the 2-string horizontal well. At the Salym field, such well was drilled in just 7.4 days, which is 20% faster than the previous achievement. Taas-Yuryakh drilled a multilateral well, setting the company's record lengths with a total footage of holes in the payover horizon was 10,310 meters, the total length of the well being 12,792 meters. Production in hard-to-recover reserves in 2019 increased by 12% to 20.9 million tons, which is more than 3x higher than in 2014. Successful development of challenged reserves is achieved through both application of the existing company's research and production potential. Thanks to the tax incentive for the Samotlor field, the company continues to increase the efficiency of this development. The production decline trend in Samotlor, which was 5% on average every year before 2018, was reversed and in the past 2 years has kept the trend of a decline of 1% and having reached 136 million barrels cumulative production by year-end. In accordance with the plans, we continue to actively develop new fields and increase the share of the high-margin projects. The total production of the company's fields launched since 2016 amounted to 18.9 million tonnes, which was 384,000 barrels per day, which is 27% higher than in 2018. And the rates on the total production of liquid hydrocarbons in 2019 amounted to 8%. At the same time, total production of the Kondinskoe, YuTM fields and Krasnoyarsk increased by more than 1.5x and other Russkoye field almost 3x compared to 2018. Based on successful pilot projects together with our partner, Equinor, we decided to start the implementation of the first stage of north Kondinskoe full field development. In midterm, the active development of new producing oil and gas projects will increase the company's production. In accordance with the strategy by 2022, the production from new projects in Russia will be 20% of the total liquids production of the company. Rosneft is actively getting prepared for the development of the oil and gas programs in the north of Krasnoyarsk Territory. The Vostok Oil projects includes new promising areas. The resources of the new oil and gas programs amount to about 5 billion tonnes of oil. The location of Vostok Oil project allows us to bring about the infrastructure and logistics synergies of transportation along the Northern Sea Route. The development of oil fields in the north of Krasnoyarsk Territory will allow us to implement the tasks of the President of the Russian Federation to occupy this strategically and economically important area. For many years, the company has been consistently ensuring high levels of current production replacement with reserves. The volume of the ACC proven reserves increased by 1 per BOE at the end of last year. The production replacement with proven reserves reached 129%, and the life index for ACC for proven hydrocarbon reserves is more than 20 years. According to the Russian classification, the production replacement rate has reached 185%. In 2019, record-breaking success and exploration drilling on charted Russian Federation was achieved was about 89% across the company. The exploration and appraisal activity across the company resulted in discovery of 258 new deposits and 23 fields with AV1, C1 plus B2C2 hydrocarbon reserves totaling 252 million tonnes equivalent. To improve the success of exploration drilling, we continue phased implementation of advanced technologies for fuel operations, processing the interpretation of seismic data. Rosneft remains the leader among the largest international oil and gas companies in terms of proven reserves and replacement rate. We strive to maintain a high-quality portfolio of oil and gas assets and improve the Rosneft's global position.Let me now pass the floor to Oleg Ivanov, who is going to talk about the deliverables in the gas business.

[Oleg Ivanov, Head of Gas Business Planning]

Thank you. Thank you, Eric. Good afternoon, ladies and gentlemen. In 2019, the overall production of gas by the company amounted to 67 billion cubic meters, which corresponds to the level of 2018. In Russia, Rosneft accounted for about 8.5% of this oil and gas output. At the same time, against the backdrop of a slight decline of the APG production, we note the growth in our natural gas production by 1.4% compared to last year. This growth primarily was conditioned by the Zohr field development in the Egyptian offshore since the commission of the project in December 2017 though we have additional commissioned operation in 13 producing wells. Eight lines in our local plant and 4 marine lines and the marine control platform. The daily output from Zohr reached its design capacity, which is 76 billion cubic meters with 100% share that the company has in the project. There was net revenue from the sale of gas in 2019 grew by 10.7% compared to the previous year. The company's share in gas supplies in Russia currently accounts for 16%. We are planning to further grow it in excess of 20%. Within the next 2 years, it is important to note that since the main revenue in the gas business is being generated in Russia, it's a safeguard from volatility and any negative environmental changes in the external cash markets, which we were monitoring throughout 2019 and continue to watch out for now. The economics of the gas supplies last year were comparable from the profitability from the potential exports related to the spot prices in the European market. And at this point in time, it is even better than these potential export shipments. Now taking into account us having long-term gas contracts and the indexing of the gas prices, which is done annually in Russia, in the domestic market, the profitability of gas sales is guaranteed and ensures a sufficiently low profile of risk for the gas projects. In 2019, our main efforts have been focused upon 2 projects, which are to bring us the main increase in the production of gas as well as the hydrocarbons, so midterm, the bankers, the first project is Rospan. This project is going to be launched 2020 and will provide for the production of gas of more than 21 billion cubic meters a year. Besides the fact that this is a gas project, this is also one of the biggest projects for the production of the liquid hydrocarbons. We are planning to grow the production of the liquid hydrocarbons from the current level of 1 million tonnes to up to about 6 million tonnes. But at the same time, I would like to draw your attention to the fact that 5 million tonnes out of the 6 million will be gas condensate, which will generate to us an additional margin of about $70 per ton or $9 per barrel of oil equivalent and another 1 million tonnes will come from the production of propane and butane, with also an additional margin compared to oil at about $30 per ton or more than $3 per barrel. Besides, there is another important point, which is the exclusion of the gas condensate from the OPEC+ restrictions as of 2020, which enables us to fully concentrate upon domestics to begin the production increase and launching Rospan into operations. So overall, we expect that our gas business EBITDA within the next few years will more than triple.The second biggest project is the development of the Kharampur field. This project is being worked on by the company in partnership with BP, and this first phase will produce the gas production in the amount of 11 billion cubic meters. We plan to negotiate in 2021. We certainly are preparing for the investment decision with regard to the second phase, which is also the Turon formation in the Kharampur, which will provide us further additional 14 billion cubic meters of gas annually. Also, based on results of 2019, another important decision for us was launching the Far Eastern LNG project and currently, we are actively working to the design and FEED stages of it. In conclusion, I may state that the gas business of the company is developing in full compliance with our 2022 strategy, which will enable us shortly to increase our output up to 100 billion cubic meters of gas a year and increase the share of gas as the most environmentally clean fuel, marks with fossil types of fuels in the production of -- by the company.Thank you very much for your attention. Let me pass the floor to Otabek Karimov.

[Otabek Karimov, Global Head of Trade, Supply & Logistics and VP]

Yes. Good afternoon there, colleagues. Now with respect to the refining midstream, I would like to inform you on the following thing. Based on results of 2019, the amount of refining over the company was almost 110 million tonnes, out of which 100 million tonnes was refined at the Russian refineries. As it has been in the previous year, we note the reduction of the refining that is in Russian refineries by 3%, but that was conditioned by the planned maintenance work as well as optimization of our installation and lastly, client demand for refined products in 2019. We saw the completion of the -- one of the key infrastructure projects in the Far East Federal District where we commissioned operation. The pipeline, [ ESTA ] comes from this refinery with throughput of 8 million tonnes a year, which enabled the company to reduce its cost on logistics and ensure the stability of supplies of the volume of oil to that refinery as well as improve the reliability of supplies, caused one of the strategic -- really important things on the company as part of expanding operations of the company in the Iraqi Kurdistan in 2019. We had a commission contract coming to effect for the operation of the only export pipeline in the [ geographical ] region. The design capacity of this pipeline up to 950,000 barrels a day with the life cycle of this operation 20 years with an option to extend it for an additional 5-year period ensure the company the project is 68%. Entering into this infrastructure project was conducive to achieving the strategic goals of the company and enables us to execute integrated development in and throughout the whole of the value-added chain, taking into account the participation of Rosneft in the production projects in the territory of Kurdistan. Thank you for your attention. Now we can switch to Q&A session.

[Operator]

[Operator Instructions] A question we have is from Ekaterina Smyk from Bank of America.

[Ekaterina Smyk, Analyst]

I have several questions. And the first one is about the prepayment in the sections upon your trading subsidiary, as we know, RUB 2 billion prepayment to Kurdistan is on the books of the sanctioned trading entity. Could you comment on your plans with respect to these prepayments? And can there be any effect upon the operations of the company in that region, specifically in the pipeline operations? Also in Venezuela, in prepayments were repaid in the course of the fourth quarter. We noted that you stopped disclosing this figure in your presentations. My second question is about the Priobskoye field. You mentioned that you are in your dialogue with the government about granting an investment package of stimulus for through this project. Is there any understanding about when the final decision is going to be made about it? And my last question about the export of oil to China. Have you witnessed the reduction of the volumes to this year because of the coronavirus? And do you have any capacities to redirect this oil towards the European market in case the Chinese demand subsides?

[Unknown Executive]

Let me answer the second one, and then I will have my colleagues respond to the first and the third one. And as part of the Priobskoye field is concerned, it is true that we have been working over the past several quarters. In a clear way, the government is very scrupulous in estimating and calculating the stimulus package taking into account all of the feasibility factors on that part. We have made all the information available, which have been required in our mind in a very clear way. The issue of increasing the investment activity and the improvement of the economics of this project is something, which is a priority in the mind of the government, and we respectively do hope that within the next few months, this issue will be resolved. The only open point still in terms of a specific date of the start for this investment agreement, I hope that on the next few months is this is going to be resolved. And as far as the downstream question is concerned, let me have my colleague respond to you.

[Unknown Executive]

Well, in the first place, I would like to note that today's conference call is about our results for 2019. While the information in terms of the sanctions is mentioned in the initial press release by the company, but it is important to note that the company is operating in a stable and effective way and continues to generate additional value to the shareholders. Now in as far as our supplies to China are concerned, I would like to mention that there haven't been any drawbacks and logistical flexibility in terms of redirecting the volumes. It's something that the company has in case itwants to -- would like to use them.

[Ekaterina Smyk, Analyst]

Yes, thank you very much. And then in terms of how many prepayments to the [ New Zealand ] have been repaid in the course of the fourth quarter, please?

[Unknown Executive]

Well, we are working fully according to schedule, and we're not disclosing any details.

[Operator]

Ildar Davletshin from Wood & Co.

[Ildar Davletshin, Equity Analyst]

I congratulate you on such a great progress in your operation and financial performance. I have got quite a few questions. I would like to leave [ some ] as to enable other callers to raise it. So my first question, you are showing on the marginal production volumes on your slides, which has continually grown up to 21% in 2019. Now what is your view over the next maybe 2 to 3 years or throughout 2020? Should we expect any further increase? Maybe you have some kind of a guidance, let's say -- could it be 40% by midterm? This is one question. My second one is about refining. One may say that this is relatively weak link in your business considering a very high share of fuel oil in refining. But at the same time, the EBITDA, as you have shown in your report, grew in 2019 despite the refining volumes going down. So I would like to understand whether there are any caveats here, maybe even ones related to logistics or the procurement terms, maybe some accounting policy has changed in some way.And my third question, if I may, I'd like to ask about -- the OpEx is a very positive surprise. We saw in Q4 when they really grew down, both in quarter-on-quarter and year-on-year as well. To what extent the effect here is one-off or something? Or this is a result of certain structural overall changes? Again, within the midterm outlook, should we expect some kind of an additional decline or a slowdown and these OpExs grow the barrel of your production?

[Unknown Executive]

Yes. Thank you very much for your question. And as far as the first one, which concerned the share of the higher marginal barrels, which have been defined -- I mean, as the ones in the windfall tax and the MT deduction and the energy incentives framework. Without doubt, longer term, we do see the capital intensity of the business growing because it is conditioned by us launching new major projects as well as, overall, the long-term depletion of the resource base in the Western Siberia. Therefore, we expect that this share will grow, I mean, the share of the -- our marginal product, which can be -- explain that the capital intensity is going to be much stronger, which is then -- will bring about the need to maintain a dialogue to incentivize the development of specifically these kinds of metals and, amongst other things, related to the need to be granted additional benefits in the fiscal burden. So this is an ongoing work because switching over to when core tax was also an important milestone, which created an incentive -- stimulus to develop a number of our fields. The Priobskoye field, in our case, is the key strategic asset, around which we see a very indefinite potential to grow production as long as the fiscal stimulus is granted as well as entering new production areas, something that Mr. Liron referred to as [ benefiting for the ] Krasnoyarsk region and the establishment of new producing provinces because that would entail the production growth, amongst other things, by utilizing this fiscal stimulus package. So in terms of formal definitions that we referred to on Page 16 of our presentation, the share of the high-margin barrels is going to grow. And we do believe that, in many ways, that's really the function of us, amongst other things, to be investing more. That is the first thing. In as far as the OpExs are concerned, one of the questions that you raised, without a doubt, we do see some pressure in the domestic market in as far as the OpExs are concerned. And we are undertaking some very complex steps in order to keep them at a leading level in the industry in terms of they've done this because we are growing substantially during inflation. But I personally would say that this year especially is going to be outwardly high. The concept can be explained by a whole number of external factors and, specifically, the external bacteriological factor, like for example, the lack of restrictions in the mobility of the workforce flowing in from the third market. That is something that will be a limiting factor to us. The -- when we look at the nature of our business, the better we understand that the reduction of OpEx is in itself -- is not an end or an end, and that is exactly why we came out with an initiative to switch in communications with the Russian government. And that applies to a system of KPIs. So far, the government comes to measure us by the EBITDA growth because the capital intensity is going to grow, and so focus upon the OpEx is going to be less important than the task to grow EBITDA. Now in as far as refineries are concerned, again, I would ask one of our colleagues to comment. Otabek, please?

[Otabek Karimov, Global Head of Trade, Supply & Logistics and VP]

Yes. As far as our refineries are concerned, [indiscernible] speaking, we expected this particular factor from the dampening factor, which we ended up having as a result of our efforts. But one should note that this is something that happens to us only in the western part of Russia. And as far as the eastern part of the country is concerned, and specifically the Far Eastern federal district, we do work in order to make our retail and refining possible.

[Operator]

We now have Alexander Burgansky from Renaissance Capital.

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

I've got 2 questions, and the first is about CapEx. In your presentation, you mentioned that you are planning about RUB 1.3 trillion of CapEx in 2020. Could you somewhat elaborate on this plan? Which part of it do you want to spend on upstream, downstream? And any other formal disclosures that you prefer?And my second question -- the devaluation in the first quarter 2019, you've written off RUB 80 billion. So this whole devaluation -- and as far as the marketing assets are concerned in your today's reporting, you also mentioned that RUB 48 billion was recovered in Q4. At the same time, if I look at comment #13 in your report sale in as far as 2019 is concerned, you've got a lot of value, worth RUB 74 billion. Could you possibly tell us, how did you arrive at this figure? If one is to deduct RUB 48 billion out of RUB 80 billion, in what way you can end up having RUB 74 billion?

[Unknown Executive]

Yes. Alexander, thank you very much for this question. In as far as the CapEx is concerned and capital investments, I believe that the rule really to build a model will be that 98% of our cap is going to be used to develop our upstream business. This is investing into our business. And I think that the rest could be allocated as 3% to 4% for the rest and about 6% to 7% into downstream. I'd say that, that applies to the refineries' modernization, so perhaps is something that is really no different from what we've been able to see in 2019 in terms of our [ startup ] spending. Now in terms of the writing-off and the dynamics in quarterly basis, let me pass the floor over to [ Mr. Polyakov ], and he will give us a detailed explanation about the figures that you've got.

[Unknown Executive]

Alexander, the loss of value recovery is about the fixed assets in uncompleted capital construction as well as the marketing assets, the sales assets, and commercial and this is extreme. With these factored options, we only comment on the effect in the public reporting. Within the changing environment in the domestic refined product market, that's through the improvement of the expected cash flows within the respective business stream and in compliance with IFRS required to recover part of the assets that lost its value, but as you duly noted, have demonstrated a negative response in Q1. We adhere to the IFRS requirements, and we test our assets in terms of loss of value in compliance with the requirements from such international standards. And not only the fixed asset, but also nonmaterial and financial investments are part of it. So the loss of value test that we conducted led us to see additional effects apart from recurring values in our sales assets, and these effects are deemed within the current reporting and are registered with it. So you can see it in various line items of explanations, but no detailed explanations are required because you find a whole number of limited amounts, which altogether produced this common effect.

[Operator]

[Audio Gap] comes from Ildar Khaziev from HSBC.

[Ildar Khaziev, Analyst]

I've got 2 questions. One, about the pipeline concession in Kurdistan. Because you demonstrated a bit of a profit-making there, could you please tell us, what period does it cover? And do you expect any sort of an income in cash, for example, next year? This is my first question. And my second question, about Slide #9, you've got a very interesting chart on it, on the right side of it, where you are showing the way you use the free cash flow. And there is one big component there [ which is 100% ] .And I just would like to understand, apart from a continuing decline in your debt burden, are there any prerequisites which may lead to this interest payment going down? I mean what is -- I mean, in what way you -- are you planning any decisions which would help you to reduce this burden?

[Unknown Executive]

Yes. So colleagues -- thank you very much. First question, with your permission -- I mean, I will first respond to the second question, which is very simple there, because this dynamics is related to the overall debt burden going down as well as the interest rates. So simply, arithmetically, you go down to a reduction of our financial expenditures. Honestly speaking, there's nothing more to it because continuously -- we're continuously optimizing our debt portfolio and looking for the most effective sort of funding. But principally speaking, nothing has changed here as compared to -- the way we were doing it before. So the amount of debt, which is multiplied by a reduced rate, leads to our financial expenditures going down. Now as far as the first question was concerned, let me have my colleague respond to it.

[Unknown Executive]

Yes. As far as the pipelines in Kurdistan is concerned, all of the annual payments are taking place in accordance with the contract. We're not able to disclose the detail because the contract is a commercial document. But in terms of any change in the schedule, nothing is taking plan -- so everything is according to plan 100%.

[Ildar Khaziev, Analyst]

May I ask you to be more specific about the interest rate? Because over the past several quarters, we've witnessed the reduction of the [ rents ] everywhere in Russia and in America. I mean the market [ there ] also went down. Has it produced any effect of a new effective rate -- immediate -- produce any effect -- this year?

[Unknown Executive]

Clearly it has produced an effect. And we mentioned it in our presentation, specifically more than RUB 84 billion is what we saw as the reduction in our financial expenditures because that came from the rate reduction dynamics in the second half of the year as well as the international rates going down in Russia. That is the kind of effect they produce.

[Operator]

We now have Evgenia Dyshlyuk from Gazprombank.

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

I would like to ask a question about the tax benefits for Priobskoye field. The government discussed the possibility of introducing immediate detection for the associated petroleum gas as a probable source for exemptions, which may negatively affect the company. Could you possibly tell us what is the current status of these discussions and what may serve as the source of reimbursement for these exemptions? And may it negatively affect any other aspects of gross net operations?

[Unknown Executive]

Yes. Thank you very much for this question. I apologize for announcing to you that your question was not correctly stated in 2 places because you mentioned the word tax exemptions. We're not talking about any exemptions at all. We are, together with the government, are creating a set of incentive stimuli, which yes, will enable the company to invest more and definitely generate some respective returns. So nobody is exempting anybody from anything. We are creating an additional source of revenue, both for the Russian government as well as for the company. That is of principal significance, and I thought it important to underscore it. Now the second part where you ask where the source is going to be, whether the energy rate may go for the APG, no, indeed, that was natively -- if you -- because this is something that a lot has been mentioned about and lot has been spoken about, I mean, by the oil industry, we're saying that it really wouldn't make any sense to do this. And it wouldn't be totally correct to levy MET upon an element of OpEx, I mean, operation expenses. And secondly, no kind of losses to the budget, in case such a comprehensive project for the development of the Priobskoye field to its full capacity, doesn't ensue from it, period. So what we're saying is that in the course of more than -- I mean, based on the actual data, more than 10 years of such incentives being in place, the company is investing much more into the development of this field. And through -- in 18 months since these incentives were applied, the budget reaches its current higher efficiency. And in the totality of the investment agreement, which had been run for 10 years, it will demonstrate the most material and most significant positive economics for the government budget. And that is why -- and that's the core about ideas, together with the government, to enter into this project having -- creating -- having set up this stimuli, we certainly do away with -- we are basically creating an additional investment commitment, very considerable one, RUB 46 billion with the recurrent contracts and -- annually.You see -- and around this is where we develop our activities in order to recover additional barrels from the [ other with a carve-in ] pipe to produce reserves. So the economics of these barrels would be, in a very balanced way, distributed and allocated between the government and Rosneft and the Rosneft shareholders in order for this to be the kind of a situation where both parties win considerably. That is the core idea. So there are no exemptions of such.As such, we propose a very balanced project, and we hope that in the next few months this agreement is to be formalized and signed.

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

With your permission, there is another little question that I have, which was about the Arctics and the stock oil. Maybe not as part of this teleconference, but didn't you plan to disclose what kind of assets definitely will be included into this project?And again, what kind of tax incentives are going to be envisaged for this? And [ as you're ] speaking, what is in the rebuild there? How the infrastructure is going to be developed there? Is it -- would it be possible to maybe organize a separate disclosure so that we could find out more about this project?

[Unknown Executive]

Yes. Thank you very much for those questions as well. You see, let me answer it step by step. Well, first of all, I wanted to precisely define the scale of the project, then the scope of it. We need to see an improved investment incentives package for the Novokuibyshevsk region. As you know, this is something that has come underway and the drop act has currently been submitted into the Russian parliament. And within the next few weeks or months, it is going to be reviewed, and we hope that this action stimuli is going to be approved shortly because setting up such stimuli.For extremely harsh climate conditions where today, you basically do not have any sort of an infrastructure. It is all a principle importance both for Rosneft as well as for any other investor who will deem to enter into this project. In this project, we see an unprecedented scale in terms of the potential of the resource base, we see in it new page, a new era of the development of the Russian oil industry. And we certainly believe that it will possess the largest possible scale directly and indirectly multiplier effect for the whole of the Russian economy. Currently, we are in a whole series of negotiations and consultations where the potential interested counter parties. Clearly, we are not commenting this subject matter of the current commercial negotiations. As they come to an end, we will definitely present to the external world and the investment community, but the project itself as well as the results of our discussions with our partners. And so I believe that this will happen in the not so distant future because this is what we are looking for, and we will have all of the necessary data about the [ Rosneft ] project. As I mentioned, this is an extremely important project for us strategically, and we will move forward with its execution.

[Operator]

We now [ have a question ] with Igor Kuzmin from Morgan Stanley.

[Igor Kuzmin, Equity Analyst]

So this is Igor Kuzmin from Morgan Stanley. I've got 2 questions. My first question is about the investment outlook. And as far as the investment expenditures are concerned, and more specifically, about your green investment. I was going back to Slide #3, where you identified the overall investments that Rosneft possibly will undertake within 5 years from 2018 until 2022, in the amount of USD 300 billion. Could you possibly be more specific? Which part out of this amount you've been able so far to expense? And how much are being left? And which part from this amount will follow upon 2020? As well as, could you possibly comment upon the level of capital returns that one should expect from these investments and possibly you could give us an example of a few projects, which are being run according to this plan? And my second question, could you mention the current status of your LNG project development? Let's say, do you have any projects because both those I'm interested about your LNG project construction in the Far East?

[Unknown Executive]

Yes, Igor, thank you very much for your questions. Let me start with the first question, this concerned because it was quite straightforward. We are currently working, if you take a look at the last 2 years, with about RUB 50 billion, RUB 60 billion a year dedicated to the green CapEx and approximately the same kind of pace, one should expect for the next few years to come. Now in terms of the example of the different projects, I would ask [ Mr. Netting ], who's our colleague who is in charge of the agenda and HSE agenda in the company and the climate sustainability and the improvement of the ASG (sic) [APG] components to comment. And as far as these green investments are concerned that we do within the green CapEx project as far as the second project -- concern versus development of the LNG business, I would like Oleg Ivanov to respond?

[Oleg Ivanov, Head of Gas Business Planning]

Thank you for the question. And just to build on Ural's opening remarks, the activities of the last 2 years are already delivering results in terms of the investment in our gas infrastructure, improving APG utilization in 2019. Transneft achieved 95% APG utilization as an example. In addition, the investments in our -- in our pipeline replacement programs, our water treatment programs, are also contributing to continuously improving our results. We continue to move forward on those projects, and we are committed towards the programs and activities between now and 2022, which we believe will be within RUB 300 billion.

[Unknown Executive]

And as far as the Far East LNG is concerned, as I previously stated, in 2019 we made a decision, together with our partners in starting one project. We decided to move over into the feed phase, and we're currently working in it, which is expected that the terminal with the [ outlook ] of 6.2 million tonnes to be commissioned in operation in 2027.So I suppose this is everything I can mention about this project.

[Operator]

We now have Olga Danilenko from Prosperity.

[Olga Danilenko, Director of Oil and Gas]

I wanted to ask my question. If that, if possible, way that the events may unfold in the form of OPEC+? Because we heard that additional consultations account are being held with the old companies about extending this increment, and without the possibility of further reductions. As far as 2020 quotas are concerned, could you possibly comment that -- what is the current point that this discussion is going through? What is its status? And how probable it is that Russia may agree to additionally reduce its production quotas?

[Unknown Executive]

Yes. Olga, thank you for the question. Well, you know it is difficult for me to say anything because this question should rather be directed to the Minister of Energy of Russia, which is a supervisory agency and is in charge of an endowed success of the work that Russia does within the OPEC+ framework. It is difficult for us to offer you a comment, as they say. Human beings expect things to happen, while the Lord makes them happen. So it will be more correct to direct this question to the Ministry of Energy of Russia. Thank you.

[Operator]

We now have Henri Patricot from UBS.

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

Just one question left from me on your plans here in 2020 CapEx. Can you give us a sense of the U.S. flexibility that you have? And if the current OPEC+ limitation was extended until the end of 2020, where would you see your 2020 CapEx?

[Unknown Executive]

Yes. Well, thank you very much. Well, we are talking about the things which are going to be comparable to this year. So our guidance, depending upon the OPEC+ scenario, will be about RUB 700 million, RUB 750 billion - RUB 1 trillion within the next year.

[Operator]

We now have [ Philippe Whilington ] from Barclays.

[Unknown Analyst]

Just 2, quickly, on for a little bit more clarity on what you're seeing with the IMO 2020 implementations? We saw it affect your results in Q4. I imagine that's in December ahead of the deadline. Can you provide any details on what you're seeing so far in 2020 in regard to that?

[Unknown Executive]

Yes. That's a very good question, indeed, because the factor was very material in Q4 last year. But at the same time, it definitely will make sense for you to take a look at the price dynamics for the high sulfur fuel oil because we do know some very serious -- I mean, speaking about the like-for-like changes, we do know it's a very serious change in reverse, in January, beginning of February this year, in a clear way, everything is a bit vague, considering the coronavirus situation. So it is very difficult to distinguish between these 2 factors. But generally speaking, we do note of any positive dynamics in the high sulfur fuel oil market compared to what we expected it to be in Q1 this year. So we do hope that this trend will sustain.

[Operator]

We now have Alex Comer from JPMorgan.

[Alex Robert John Comer, Research Analyst]

Yes. A couple of questions. Just with regard to Venezuela, could you explain to me the benefit to shareholders of your continued involvement in Venezuela? Because it seems to me to be a very significant drag on the share price. Secondly, obviously, the introduction of excess profit tax had a big impact on your numbers. It seems to me that there's some pushback on this in ministry. And I just wonder how you feel with regard to that? And what risks you see from any changes to the system?And maybe perhaps you could also let me know what drove the big increase in high-margin barrels from '18 to '19?

[Unknown Executive]

I'm sorry, could you possibly repeat the second question about the pushback from the government? Because I couldn't -- the connection was not so clear. So what was the question about when you were talking about the pushback from the government?[Technical Difficulty]

[Operator]

Alex, your line is now open.

[Alex Robert John Comer, Research Analyst]

I thought I just asked my question. The question was, I was wondering, what benefit to shareholders are of you continuing to be involved in, in Venezuela? It seems to me it's a distraction from our share price. You've talked about 5 billion tonnes of resources on cost stock. Why do you need Venezuela? That's the first question. Secondly, your profits had a big benefit from the introduction of excess profit tax. There seems to be some pushback from the ministry on this. I was just wondering how you feel that is going and what the risks there is? And then also, maybe if you could just delineate the reason why we saw such a big increase in high-margin barrels from 2018 to '19?

[Unknown Executive]

All right. Thank you very much. Sorry, your second question -- now I understand it. The connection was not very clear. So we were talking about the profit based tax. Well, you see these decisions have been made by the Russian government. And these kind of decisions, I believe, were very well weighted because they truly produced a stimulus for us to go further. And with respect to a whole number of projects, the company switched to before tax and the profit-back tax situation. We believe that this is the kind of a tax regime, which is successfully working and enables us to actively develop a number of projects, which by then have already been in operation. And in order for us to continue doing so, we need a high level of fiscal stability. We need to have an understanding that this particular tax regime is for a long period of time and additional guarantees from Russian government, there's some of that we really find important. We do see the efforts undertaken by the government. And as far as further promoting the economic agenda and the economic growth agenda, rather, I would say, so we believe that, of course, the -- having the oil industry using this profit-based tax to raise/lower the security does correspond to the kind of objectives that the government is setting us to push forward the overall economic growth. And as far as the international markets are concerned, I will have my colleague respond to your question.

[Unknown Executive]

Yes. So all of the company's operation is absolutely transparent and it is aimed at maximizing the shareholder returns. And so with respect to your question, I would like to say that our task is to specifically make sure that the previously made prepayments are repaid.

[Operator]

We'll now have Ildar Khaziev from HSBC.

[Ildar Khaziev, Analyst]

I've got a question about refining. Could you specify about your future plans? Because considering your CapEx dynamics, you haven't yet switched over to the active phase of continuing your modernization as far as I understand. Maybe I'm wrong. You also were speaking in your reporting that the situation has improved. So when do you expect -- well, what should we expect, I think? Any more active investments into upgrading your refining assets?

[Alexander A. Romanov, Vice President for Refining]

Alexander Romanov, Refining Vice President. I would slightly disagree to this interpretation that we have put something on hold, that we slowed down. Our modernization is going full swing. And there isn't a single project at our refineries that have now been stopped. We are keeping up the pace, and we are investing annually. We've achieved this rate and that is the way we shall continue. Our time table for modernization is definite in the first place. There's going to be 400 crackings at 400 refineries. So the time frame is clear. That's what we're working towards.

[Unknown Executive]

Thank you. Thank you very much for your attention, for your very interesting questions in the course of this teleconference. We shall continue to work for the benefit of our shareholders. And of course, please, our IR department is always at your beck and call, ready to respond to any queries that you might have. Thank you very much, and hear you again. [Statements in English on this transcript were spoken by an interpreter present on the live call.]