Eni SpA

MIL:ENI

Earnings Call Transcript 2020-Q3

[Francesco Gattei, executive]

Good afternoon. Welcome to Eni results for the first 9 months of 2020. It is a pleasure for me in my first appointment with investment community as CFO of Eni to introduce our new business segmentation. As you know, we set out our ambitious and detailed carbonization strategy, along with a new operational and financial framework at our announcement in February and July. Today, we are reporting for the first time along the lines of the 2 new business units.

In Natural Resources, we included the upstream oil and gas, CCS and forestry, the global gas and LNG and environmental remediation activities of Eni Rewind. In Energy Evolution, we grouped our downstream renewable CCGT and retail gas and power. We are making good progress against the new strategy. It plays to Eni's legacy strength, which give us immediately scale in the new energy side of the business and environmental reporting record that positions us to attract new ESG investment. And finally, balance sheet strength, further enhanced by strong investor appetite for the perpetual bond.

Coming now to the results. In the first 9 months, we produced 1.74 million barrels per day. The reduction versus last year was mainly driven by the impacts of COVID-19, including OPEC+ cuts; lower gas demand, mainly in Egypt; and the effects of contractual triggers and force majeure in Libya, partially compensated by positive portfolio price effects in PSA and the ramp ups. Exploration results continue to confirm Eni leadership with the main discovery in 5 countries that we will detail later.

Since January, we have discovered 300 million barrels of oil, despite the significant reduction of activity that we have implemented since the second quarter. Global gas and LNG delivered a resilient performance, both in terms of EBIT adjusted and in terms of free cash flow generation. And finally, we are accelerating the CCS with a diversified portfolio of projects in Italy and in Europe.

Energy Evolution is continuing to grow and deliver strong results even in the current volatile environment, with an overall EBIT of around EUR 320 million, 25% of Eni overall results. In detail, retail G&P proved to be robust with an EBIT of more than EUR 200 million, driven by commercial actions on the customer base and the contribution from the sale of additional services.

R&M was good, thanks to the resilient marketing and the strong biorefineries contribution. The power segment posted positive results and benefited from asset optimization, while in renewable, we are reaching the target of 300-megawatt, and we are positioned to grow further. Turning to financial. Eni remained free cash flow positive, with cash flow pre working capital of EUR 5.1 billion. Pro forma leverage was reduced to 29%, including the EUR 3 billion of the hybrid bonds.

Before entering into the industrial performance, I would like to focus on our ESG performance. Over the past 6 years, we built a business model that now integrates the 17 sustainable development goals in all our decisions, and we designed a clear path for the carbonization. This strategy is well rated by the ESG agency as MSCI, CDP, Sustainalytics, Bloomberg ES and the Transition Pathways Initiative that evaluated Eni as a leader in different ratings.

This recognition comes also from specialized research institutes, such as Carbon Tracker, which ranked the Eni first among peers for the competitiveness of its unsanctioned portfolio, emission reduction target and for a medium-, long-term price scenario, among the most conservative in the sector. Moreover, we are confirming the FTSE4Good Developed market and this year in the ESG iTraxx index.

Finally, for the second year in a row, Eni is among the top 10 performer company for sustainability reporting according to the World Business Council for Sustainable Development. This strong ESG performance not only enhance our license to operate, but can open up a new source of sustainability-linked funding, which we will look at in the future.

Let's now move to Natural Resources. Both upstream and global gas and LNG showed a resilient performance in this exceptional 2020. Upstream production guidance is confirmed, and we can narrow the range to around 1.72 million to 1.74 million barrels of oil equivalent per day. Upstream EBIT in first 9 months was EUR 0.75 billion. The reduction versus last year is all entirely explained by the scenario that includes COVID, accounting for EUR 5.1 billion, while EUR 0.8 billion is due to volume and mix effects.

Global gas and LNG EBIT was EUR 0.4 billion, up by EUR 0.2 billion year-on-year. The result was driven by the optimization of our portfolio, which counterbalanced the lower PSV-TTF spread and the weakness in LNG demand related to COVID. In terms of full year 2020, we expect the global gas and LNG to deliver an adjusted EBIT in the range of EUR 0.2 billion and a free cash flow of EUR 0.3 billion due to lower optimization opportunities in the fourth quarter as they were mainly realized in the first 9 months.

CCS is a key pillar of our strategy of decarbonization. It aims to reduce emission in order to abate industrial segments, decarbonize final products and reinforce the role of gas in power generation as the backup partner for renewable energy. We have already identified the 2 main geographic hubs in Southern and Northern Europe.

The first hub is in Italy, in the Ravenna shore. Adriatic Blue is the first CCS project in the Mediterranean, one of the biggest in the world, with a storage capacity between 300 million and 500 million tonnes. We are exploiting a unique opportunity, thanks to the combination of depleted offshore gas fields, operational infrastructure already in place and proximity to our onshore power plants and other industrial sites. This, coupled with the scale of this project, will allow us to keep costs very competitive and have a faster time to market. We plan to have a demo start-up already in '22, followed by a potential industrial start-up in 2026.

The second hub is in the U.K. with 2 main projects, one in Liverpool Bay, where we plan to repurpose our depleted reservoirs and infrastructures to store third-party CO2. This month, we have been granted a 6-year license to conduct feasibility studies, including GHG and feed. We plan to take the FID by 2023 with a start-up planned by 2025.

The other project is Net Zero Teesside in the northeast of England. The initiative was launched in 2017 by the OGCI, of which Eni is a member. In addition, we are continuing to invest in forestry REDD+ projects. The main ongoing activities are in Africa, Latin America and Far East. For 2020, we expect 1.5 million tonnes of CO2 equivalent sequestration, mainly thanks to our conservation activities in Zambia.

Exploration continues to deliver strong results. Even in a difficult year, we have successfully discovered oil and gas in various countries. In particular, in Egypt, we recently announced 2 new gas discovery in the Great Nooros Area in the conventional water of the Nile Delta, about 10 kilometer north of the Nooros field. The recent discovery performed in the area indicates that the gas in place for the overall Great Nooros Area is now in excess of 4 Tcf.

In Mexico, the Saasken well led to an oil discovery, which may contain between 200 million and 300 million barrels of oil in place. It was the sixth consecutive successful well drilled by Eni in the Sureste basin.

In Vietnam, the Ken Bau drilled in Block 114 has confirmed a significant hydrocarbon accumulation. Preliminary estimate of the Ken Bau accumulation provide a range between 7 to 9 Tcf of raw gas in place, with 400 million or 500 million barrels of associated condensates.

In Sharjah Emirates -- United Emirates states, the Mahani-1 was drilled and tested with flow rates up to 50 million standard cubic per day of lean gas and associated condensate, just 1 year after the signature of the Concession Agreement. The size of this discovery will be further assessed with additional appraisal, as better time to market of this discovery is around 1 year, with start-up expected in the coming months.

In Angola, thanks to Agogo 3 wells, #3 wells in Block 15/06, we increased by more than 50% the size of discovery. Now is 1 billion barrels of oil in place, with further upside to be tested in the northern sector of the Agogo structure. Thanks to this track record, we confirm our 2020 guidance to discover 300 million barrels of oil at around $2 per barrel this year.

Let's now turn to Energy Evolution. This new business group had a positive result, showing an EBIT of more than EUR 320 million, representing 25% of the group EBIT results. In Eni gas e luce, power and renewals segment, EBIT in the first 9 months was EUR 333 million, almost 60% increase year-on-year. In more detail, Eni gas e luce delivered an outstanding result of over EUR 200 million, an increase of 37% in the period, driven by the growth of the customer base and the high contribution from non-commodity activities. Customers grew by 120,000 compared to the end of 2019. Power and renewables results doubled year-on-year, thanks to higher dispatching contribution, optimization and strong installed capacity growth, plus 60% versus year-end 2019.

In R&M and Chemicals, EBIT in the first 9 months was substantially at breakeven, thanks to the resilience of marketing activities and bio businesses, where its traditional refining adversaries were strongly impacted by the weak margins and lower demands. We expect Energy Evolution to contribute over EUR 0.3 billion in terms of EBIT in 2020, confirming retail adversaries performance whilst reducing R&M from EUR 350 million to EUR 150 million as a result of the weaker scenario and assuming a SERM of $2.7 per barrel in the fourth quarter.

Let's see one of our energy transition lens. Eni has been the first mover to convert a traditional refinery into a biorefinery using the Ecofining proprietary technology, and the results are now becoming material. Porto Marghera in Venice, the first plant conversion in the world, started up in 2014 and has a capacity of 360,000 tonnes per year. From end of 2023, a further upgrade is set to boost capacity to 560,000 tonne, with increased feedstock diversification from food production waste, animal fats and other advanced byproducts.

The Gela biorefinery in Sicily became operational in August '19 with a capacity up to 750,000 tonnes and is able to process a wide variety of sea stock after pretreatment unit start-up by the beginning of 2021. Our biorefining system will become palm oil-free in 2023, with 80% of second- and third-generation feedstock by the end of 2023 versus 20% today. The refining activity has proved to be profitable with a contribution of EUR 60 million in the first 9 months of 2020 and is expected to have an IRR of 15%.

In addition to the current biorefining activities, we are also advancing another third-generation biofuel technology. After launching in 2019, a waste to fuel demonstration plant in Gela, in July, Eni Rewind finalized the feed for our first industrial-scale plant at Porto Marghera, near our Green Refinery in Venice. The plant will treat up to 150 tonnes per year of organic waste, equivalent to the quantity generated by 1.5 million people and yield bio-oil that can be used directly as low sulfur foil for shipping or refine to create high-performance biofuels.

Cash generation before working capital was robust at EUR 5.1 billion in the period. Excluding scenario in COVID, our cash flow would have improved year-on-year by EUR 1.7 billion. EUR 9 million cash flow more than covered our CapEx of EUR 3.8 billion in the period and generated EUR 1.3 billion of free cash flow. This is a further proof of the capability of our company to react fast to minimize its financial needs in this difficult period. For 2020, we confirm our cash flow from operation before working capital guidance in the range of EUR 6.5 billion at $40 Brent.

Turning now to the successful placement of our first hybrid bond for a total of EUR 3 billion. I would like to highlight that the placements brings us a number of strategic benefits. It added a new layer of investment to support our transition plan, significantly strengthened our balance sheet with a pro forma leverage at the end of September now down to 29%, supports our strong investment-grade rating and further enhanced our liquidity position, which is currently around EUR 20 billion, almost 5x our short-term debt. We have achieved a great result with our first hybrid bond issuance, with demand 7x higher than our original offer. This demonstrates the capital market confidence, Eni financial robustness and our new energy transition strategy.

And finally, the optimization of our portfolio. It represents an ever-present lever to generate growth capital and strengthen the balance sheet. As part of the [ perforation ] we are designing, we will dispose of noncore upstream asset, which no longer fit within our portfolio; pursue optimization of our non-upstream portfolio, including infrastructure and logistic assets; consider replicating the Vår Energi model, where we merged our asset with another company to create a dedicated independent entity able to grow and compete nimbly. Thanks to this activity, we are working on agreeing gross disposal for around EUR 1 billion within the end of the year.

To sum up our 2020 guidance. Notwithstanding the difficult operating scenario and depressed demand, in Natural Resources, we confirm our production guidance at 1.72 million to 1.74 million barrels per day and for exploration to discover more than 300 million BOE. In addition, we expect the global gas and LNG to deliver an adjusted EBIT in the range of EUR 0.2 billion. Our mid-downstream in the first 9 months improved year-on-year despite the COVID pandemic. And for 2020, we see Energy Evolution EBIT at over EUR 0.3 billion.

At company level, we confirm an operating cash flow before working capital at $40 of EUR 6.5 billion versus net CapEx confirmed at EUR 5.2 billion. Furthermore, we expect to complete on the gross disposal plan of around EUR 1 billion in the coming quarters and to keep our leverage pre-IFRS 16 below 30% by year-end.

In summary, we have been resilient in the face of the great challenge of 2020. While we expect a recovery in the energy markets in 2021, we are prepared for continued uncertainty. We have a level -- a high level of efficiency in our operation, flexibility when it comes to CapEx and a strong balance sheet with high levels of liquidity and comfortable level of leverage.

And now together with Eni top management, we are ready to answer to your questions.

[Operator]

[Operator Instructions] The first question is from Michele Della Vigna of Goldman Sachs.

[Michele Della Vigna, analyst]

Congratulations on the very resilient results. I had 2 questions for you. The first one is about buybacks. At the moment, the share price of Eni is very de-priced, as is, to be fair, the rest of the sector. You have strong leverage, especially after the hybrid bonds. I was wondering why not take advantage of these circumstances to start perhaps earlier than expected the buyback program that would be highly accretive at this level of share prices?

And then secondly, going back to your slide on the carbon capture project. You clearly have a wealth of opportunities here. I was wondering, do you think that the existing regulation in carbon pricing is supportive of good returns on those projects? And what kind of dollar per tonne do you expect would be required for good returns as these projects go into full scale?

[Francesco Gattei, executive]

Okay. Thank you, Michele. I will leave the second question about CCS to Alessandro Puliti. On the first one about buyback, you know that we prepare the company for this 5 phases. This phase is an uncertain phase. We adapted our distribution policy to a variable element related to scenario, and we consider the buyback above a certain level of pricing. So what we are working is working within this framework.

We are working substantially to enlarge the optionality within the company to ensure that we are able to pay the fixed component of our dividend at a lower price as much as possible. So to work further in optimizing the company performance, the company perimeter, the company efficiency. We work also in additional optimization related to portfolio. We announced that today this, let's say, advanced stage of disposal plan. And we reinforced the balance sheet, as we mentioned before.

So we were working on creating a company that is stronger to manage the complexity and the flexibility. All this part are a part of what, let's say, are the management judgment in terms of dividend and distribution policy. For the timing, I continue to refer to the original plan and to the original remuneration model that we presented to the investment community last summer. And now I leave the reply to Alessandro Puliti for the CCS.

[Alessandro Puliti, executive]

Clearly, the economics in this area are all about comparing the cost of the emission and the cost of the carbon capture and storage facilities. Regarding the current situation, we can say that with our projects that are leveraging on existing reservoirs, depleted reservoirs and utilizing at least partially existing facilities, the cost of the storage can be considered compared with the current value of the carbon certificate.

To this, we need to add the cost of the capture. And clearly, this is subject to an additional cost that can be covered with the future increase of the cost of the carbon certificates or a cost that can be incentivized by the different governments that are interested in putting in place carbon capture and storage policies.

[Operator]

The next question is from Oswald Clint of Bernstein.

[Oswald Clint, analyst]

First question, Francesco. Just coming back to biorefineries and strong performance in the quarter. And you talked about in the release about satisfying strong demand. Could you quantify the sort of demand growth you're seeing for those biofuels, just math -- or at least numerically? And is that -- that's being sold into transportation or kind of into fuels? Marketing has been blended with transportation fuels. Is that correct?

And then even in your retail marketing, I note your sales were back up to 2019 levels. Is there anything going on there in retail marketing in terms of incentives? Or it's just the lack of lockdown in the summer and then people driving again?

And then my second question is just on Mozambique. It seems like the consortium is going back again for some lower costs on Mamba and ultimately delaying that FID. How much more do you think you can get off the CapEx of this project? And when can we expect an FID? Most likely 2022 at this stage. Is that right?

[Francesco Gattei, executive]

Okay. Thank you. I forward your message or your question, the first one to Ricci and the second one to Puliti.

[Giuseppe Ricci, executive]

Hello. About the increase of the biofuel demand, we say that the strong demand is driven by the ambitious decarbonization mandate over Europe due to the rule of RED II. That foreseen in the year, the increase of the renewable in the transportation. 100% of the bioproduct are -- bioproduce are used in the transportations.

And we expect the [ footer ] growing the demand in the next future because of the recent announcement by the European Commission confirmed by the parliament to increase the GHG saving targets to 2030. That, in part, will be attributed to the transport renewable components. Just to do an example, we see that in the last year, the HVO, the hydrogenated vegetable oil demand in Germany, only in Germany, increased 10x.

[Francesco Gattei, executive]

To Alessandro for the Mozambique.

[Alessandro Puliti, executive]

Okay. Regarding Mozambique, in this new environment, the operators are optimizing the development plan, maximizing synergies with Area 1 and exploiting other opportunity, including the potential cost reduction related to the current lower cost market situation.

Therefore, the FID that originally was expected in 2020 is postponed. And an updated project and the new FID date will be defined based on the results of this cost optimization phase. And probably in the next strategy, we can be more precise when this exercise will be concluded.

[Operator]

The next question comes from Jon Rigby of UBS.

[Jon Rigby, analyst]

A couple of questions, please. The first is on what the old gas and power segment. I realize it's being broken down now. But I think you're retaining the sort of the legacy guidance, but it seems to me is that in the first 3 quarters, you've hit that guidance. So implicitly, you're saying no money to be made in that business in aggregate in the fourth quarter. Just to confirm that's correct.

And just then to sort of follow-on to say, well, if LNG markets, as they look to be doing, are improving, and historically, seasonally, 4Q is typically better, could you just walk me through what changes into the fourth quarter that would generate the worst quarter for EBIT from those businesses for 2020, which would look quite unusual.

The second question. I wonder whether you could sort of pick apart or give a bit more guidance on the EUR 1 billion of disposals that you're now looking at. I think you seemed to say in the presentation that you link that to some sort of green growth agenda partnership, et cetera, if I heard correctly. Is that right?

[Francesco Gattei, executive]

About the gas and power results and LNG, everything is clear. I just would like to understand better your last question. I missed what you were referring to.

[Jon Rigby, analyst]

Yes. I mean if you're able to just go back in a little bit more detail on the EUR 1 billion that you've identified for disposal, just to clarify that in a little bit more detail. You did talk about it, but I just wondered whether you're able to give a -- shine a little bit more light on what's happening there and where that's likely to come from.

[Francesco Gattei, executive]

I answer to the disposal question. Then about the gas and power, I can confirm that we kept the same guidance. And you are correct in saying that we have achieved already in this 9 months the results that we are planning for the year. Then I will leave to Cristian to answer to the last quarter performance we are expecting and also which is potentially the upside eventually that could be linked to the LNG evolution.

Now coming back to the disposal. Clearly, we were referring to a EUR 1 billion, let's say, plan of disposal. It's actually a negotiation activity or a tender activity that is in a very advanced stage. You have already probably seen in the news something related to Australia, but also there are other assets that are under discussion. And therefore, we are deciding to disclose this plan.

Clearly, disposal optimization and focusing of our portfolio will be a material part of future plan of Eni. We have to, let's say, to move our positioning from certain area, noncore areas, to growing opportunities to the transition businesses. And therefore, this is the kind of activity we are targeting, various upstream assets, and that is part of the future plan.

About the LNG and the gas for the fourth quarter, now I'll leave the floor to Cristian.

[Cristian Signoretto, executive]

Thank you for your questions. So on the fourth quarter, I think the most relevant issue that we have to face is the fact that in the first 9 months, we have been able to capture most of the value out of our optionality. So we front-loaded our, let's say, options capturing. And so in the last quarter of this year, we have actually less opportunity to be capturing to the market.

And if you add on top of that the fact that the spread, PSV-TTF, which is an important element in our, let's say, capturing opportunities is fairly depressed and is expected to be depressed in the fourth quarter, this actually adds to my explanation.

On the upside side, it's true that the LNG prices have been increasing the last actually days. And yes, we are capturing part of that upside. But also, you have to understand that most of our, let's say, sales already, let's say, locked into long-term agreements. So we have some spare opportunities, but there are not yet many. And if you sum up, let's say, all these elements, we think that the guidance of around EUR 0.2 billion should be, let's say, confirmed.

[Operator]

The next question is from Irene Himona of SG.

[Irene Himona, analyst]

I had 2 questions, please. So firstly, thinking about working capital movements in the fourth quarter. I wonder if you can give us some guidance on that.

And secondly, in the downstream, your new guidance includes ADNOC pro forma. I wonder if you can let us know what is included in that guidance for ADNOC. So we have the, let's say, EBIT as reported on a like-on-like basis. And also, in the downstream, can you tell us what EBIT your marketing business generated in Q3, please?

[Francesco Gattei, executive]

Okay. About the working capital movement, you remember that last quarter in the second half, we announced a change and expected, let's say, absorbation of working capital in the range of EUR 600 million, EUR 700 million. Actually, we are now assuming a lower performance. The lower result is mainly related to the downstream business. The downstreams mainly are referring to refining and chemicals. Clearly, a suffering of, let's say, lower pricing and therefore, lower value on what you are planning and lower demand. And therefore, your capability to absorb working capital will be lowered.

You made a question about ADNOC. The performance of ADNOC in the third quarter is minus EUR 70 million. This is including both the refining and trading. About the contribution instead of marketing in the -- retail marketing on the ninth month, you can consider something just a bit above EUR 400 million in terms of EBIT.

[Operator]

The next question is from Massimo Bonisoli of Equita.

[Massimo Bonisoli, analyst]

Welcome back, Francesco. I have 2 questions. One regarding Libya. If you can give us an update on that country. What are the operating conditions of the facilities there? And how much of the Libyan production is included in your volume guidance for 2020?

The second question is related to the CCS projects in U.K. If you could elaborate on the CapEx related to those projects? And if they were included in your CapEx plan presented in summer?

[Francesco Gattei, executive]

Thank you. Thank you, Massimo. I leave the answer, both to Alessandro Puliti.

[Alessandro Puliti, executive]

Okay. Situation in Libya. I will first give you the numbers. So Libyan production, it accounts for around 170,000 barrels of oil per day equivalent in our 2020 guidance. And regarding the operational situation, we are operating, I would say, in a normal manner, all our gas fields. And the situation on the oil fields that were subject to the blockade is certainly improving.

On the 22nd of September, NOC announced the lifting of the force majeure. And the production of Bu-Attifel field were started on the 19th of October, and the El Feel field restarted on October 26. So now all the fields in which we have an interest in Libya are in production.

Regarding the CCS in the U.K., we have been recently awarded by the license. And in our -- for the time being, we are carrying basically capital only for studies. As long as the project will be defined, then will be defined the capital amount necessary for the transformation of our Liverpool Bay assets and deplete reservoir into CO2 storage reservoirs.

[Operator]

Our next question is from Martijn Rats of Morgan Stanley.

[Martijn Rats, analyst]

Yes. I only have one left. And I'd recognize this might be a little bit of a tricky one, to be honest. Last quarter, we spoke, of course, a lot about the dividend. And I do remember at the time, the indication was very clear that the floor dividend was sort of contingent on sort of $45 Brent. And I wouldn't expect to see a major revision already sort of so soon after the previous major revision, but we're not at $45, and frankly, we may not be there for another couple of months or a couple of quarters to come.

So I was wondering how you would suggest we sort of think about that comment that the floor dividend is dependent on $45. And over what time would actual oil prices need to sort of divert from that before you would start to think about the dividend again?

[Francesco Gattei, executive]

Martijn, I think this is a very good question. I think that what is important for us, we are now in the center of a crisis that, let's say, various runs. And we cover the first runs. Now we're looking the second runs, et cetera. But what is important for us is to exit each runs faster and stronger.

So what we did in the past months was substantially to equilibrate the company. So the cash needs was rebalanced. To reinforce the balance sheet with the hybrid bonds, we add a dilution layers. So we kept the leverage under control. And we are opening now additional flexibility. We have portfolio opportunities. We have additional CapEx flexibility. We have cost opportunities, reducing and slimming the company in certain segments and certain activity, also taking into account of the new opportunity of working that is related to the smart working. So there are various segments that we are working on that.

So from what we consider is that the $45 reference. This $45 can be lowered. Is in our, let's say, plan in our efforts to lower this level even further. We have an additional capability or flexibility to reduce eventually, if necessary, CapEx postponing FID, and we have a larger flexibility in terms of liquidity. We have EUR 20 billion of liquidity. So I think that in the current situation, even if our crisis is longer, we have a lot of tools in our [ arch ] that could be used to defend the EUR 0.36 and to bring this rate of EUR 0.36 sustainable even at lower price.

[Operator]

The next question is from Alastair Syme of Citi.

[Alastair Syme, analyst]

This is not really a third quarter question, but it's just more of strategy. Eni has been -- Eni has been pretty bold in the last couple of years on the energy transition. And one of the things that's happened in recent months is the markets got very excited by hydrogen. And it's not something you guys have really set a huge amount other than perhaps what you're doing in the refining system.

So I guess, the question to you, do you think the market is getting ahead of themselves? Or how do you think about this business opportunity and how you can compete?

[Francesco Gattei, executive]

I think that I will pass this answer to Massimo, who is clearly in charge of all the activity related to energy transition. And thus, as I say, the information -- the right information about the hydrogen trends and expectation.

[Massimo Mondazzi;Chief Operating Officer of Energy Evolution, executive]

Hydrogen for sure would be a quite important new product in our future, mainly thanks to the CCS opportunity that we have that has been already commented by Alessandro because today, throughout the CCS, definitely, we could generate hydrogen, decarbonized hydrogen, at a very, very competitive price versus the green one. So -- and we see such an application potentially in Italy. We see the application in U.K., and that's where in the world looking forward in which we could replicate the same scheme that we are applying in Italy and the U.K. So maybe production of gas, gas to hydrogen with CCS for sale of totally decarbonized hydrogen.

This is really important also in terms of timing because we see certainly, and we are working on the green hydrogen, thanks to our significant expansion in the renewable. But definitely, we see the blue one coming first opening up the marketing. And so the green hydrogen, when it comes, definitely could benefit from the work that has been done on the regulation, on the demand creation in the different markets.

[Alastair Syme, analyst]

And last, can I ask when you speak to regulators and politicians in Italy and the U.K. and in Europe, do they understand that sort of blue hydrogen has to come first and there's green hydrogen is longer down the road?

[Massimo Mondazzi;Chief Operating Officer of Energy Evolution, executive]

But discussion is -- discussions are taking place because, as you noticed, it's a brand-new item on the table. So we are passing some information to them based on our own experience as the others are doing. So -- but I'm really confident that we can get there because like on like, it would be a quite similar process that took place when the renewables took place.

So the necessity is some way to create a new market, to create a new regulation, in this case, could be a bit more complicated because electricity could be transported throughout the existing grid, while on hydrogen, maybe you would need a specific transportation asset. Unless as it could be the first stage, the first companies taking benefit from the blue hydrogen would be close to the production itself of this hydrogen. So I'm thinking about the act to abate sectors that definitely would be the first beneficial counterparty of this new product.

[Operator]

The next question is from Thomas Adolff of Crédit Suisse.

[Thomas Adolff, analyst]

I have 3 questions, if that's okay. Just firstly, on the refining business. When you presented your strategy at the start of the year, you've mentioned that your refineries in Europe, your plans are to convert them into green sites over time. Now obviously, the refining cycle has turned, and refining margins are in this depressed territory and probably going to stay there for some time to come. Are there any plans for you to perhaps accelerate that process of converting refineries into bio sites? Maybe selectively one may be earlier?

And just kind of linked to refining still. Obviously, you made a very big investment 1.5 years ago in the UAE buying a stake in ADNOC, and you've generated another loss this quarter, a very big one, minus EUR 77 million. I'm not sure if your views have changed on refining more recently. We've seen some of your competitors lower the refining margin estimates and taking a big impairment charge. Is this still an asset where you say you paid a fair value?

And then my final question is just on the disposal plan, the EUR 1 billion that has emerged out of the blue. If you kind of compare what -- compared to what you've said in the past. What do you first mean by gross disposal thing? What is this meaning of growth?

And then secondly, is there anything else in the [ hop ] a bit that you're looking to monetize maybe in 2021, so we can expect additional disposals?

[Francesco Gattei, executive]

Thank you, Thomas. I will leave the question about the refining to Massimo. I will answer to the disposal. In terms of gross, we think before taxes, mainly before taxes. So substantially, that is the value of the asset that we are selling and that each one could have a different fiscal component.

On 2021 disposal and future plan, clearly, we are preparing. We are working on the future plans. And therefore, we are not yet ready to announce to disclose, also because it's part of a more wider strategic, let's say, program and sure there will be many, many opportunity to dispose. You know very well that M&A portfolio, sometimes works with, let's say, a trial and error approach, you are a various assets, various opportunities, some are, let's say, achieving the results within the time frame. So that is the plan for the disposal.

About the refining business, the conversion to biorefining and the ERU investment, I will pass the word to Massimo.

[Massimo Mondazzi;Chief Operating Officer of Energy Evolution, executive]

Talking to the biorefinery, the answer would be yes. So we announced a 5 million tonne of capacity -- target capacity by 2050 without specifying any interim result. But considering the very good results that we are achieving plus the significant market that we see is going to be opened up, including the biojet opportunity that could come in the very next years, certainly the idea of the transformation could be accelerated. On this regard, I would say, next strategy presentation, we definitely will give you an updated vision on this.

Talking about ADNOC, I would say, the negative result this year has been driven by 2 main results. First of all, you may remember that ADNOC suffered an accident at the FCC plant in 2019 that keep on recording effect -- negative effect in 2020. So the first cause of the negative result is this one. And second, that definitely is the deep significant downturn that is touching the worldwide refining system. Having said that, we remain convinced that the other refinery is a very strong, healthy facility with the capability to resist in a normal ongoing condition better than other assets.

So definitely, we are making the difference between the European capacity. And so the conversion to the biorefinery versus such an international, I would say, Far East investment that is benefiting from a more positive situation. So we are convinced and we see the possibility -- the high probability to recover very, very soon and to resist to this negative wave to be in the condition to turn to a positive result as soon as the demand will return to a more normal situation.

[Thomas Adolff, analyst]

Massimo, obviously, 3Q was a quarter where the FCC was operating normally. And it was just industry refining margins being weak in the quarter. In that context, did ADNOC actually lose more money in absolute terms than your European refining business, which is obviously -- has a lot more capacity than your equity stake in ADNOC?

[Massimo Mondazzi;Chief Operating Officer of Energy Evolution, executive]

On this, maybe we can give you additional detail. But the third quarter has been absolutely the worst. So this is the -- this is, I would say -- I wouldn't say that this is a source for changing our mind on this. I confirm what I just said in terms of potential prospectivity forward.

[Operator]

The next question is from Peter Low of Redburn.

[Peter Low, analyst]

Firstly, just on the 2020 CapEx guidance. You seem to be annualizing well below the EUR 5.2 billion guidance, especially looking at the run rate over the last 2 quarters. Is there any reason why CapEx should step up meaningfully in 4Q? Or is there a good prospect to come in below that level?

And then the second was just another follow-up on the biorefineries. You've talked about the strong performance, but utilization is still quite low. It's just 53% in the quarter. Is there any reason why they're not running at higher utilization levels?

[Francesco Gattei, executive]

About the CapEx, I think that it is not -- you could not extrapolate a linear model. I think that it's part of the activity -- FID's postponed an activity here to consider that the second and third quarter were extremely light in terms of activity because of the COVID.

You remember the operation, we stopped the drilling, we stopped exploration in the fourth quarter. You could have a partial, let's say, recovery of activity at the end of the year. So it cannot be considered, let's say, on a quarterly basis. The second question, sorry?

[Peter Low, analyst]

Yes. It was just -- you've talked about the strong financial performance in the biorefineries, but the utilization level has been quite low, just 53% in the quarter. I was wondering why you weren't running them at a higher utilization level if the demand was there.

[Francesco Gattei, executive]

This is -- I will leave to Pino Ricci, mainly related to the ramp-up of Gela and Venice maintenance, but I will give to him to answer the detail -- the detailed answer.

[Giuseppe Ricci, executive]

Many thanks, Francesco. In fact, in the third quarter, we had the maintenance -- the planned maintenance in both the biorefineries. And this is the reason because the service factor has been so low. In the fourth quarter, we expect to increase the service factor up to 80%. We have to consider that general refinery is in the -- is still in ramp-up, and the production done in the 9 months -- the overall production done in the 9 months is, in fact, more than 0.5 million tonnes per year. That is 60% more than last year. And we expect to have a continuous increase in the ramp-up, up to the maximum capacity.

[Operator]

Next question is from Biraj Borkhataria of Royal Bank of Canada.

[Biraj Borkhataria, analyst]

I just had a follow-up on the biorefinery. I recalled the cost of the Gela conversion was about EUR 300 million for, I think, 750,000 tonnes. And as you look forward to the next wave of conversions and the expansion you're talking about, can you say anything about how you're expecting costs to come down relative to the initial conversions? Or are those sensible figures to use for the expansions going forward?

[Francesco Gattei, executive]

Pino, sorry, you have to reply again.

[Giuseppe Ricci, executive]

The cost of conversion of refinery is very low because what we have done in Venice in Gela is in the average of -- in the range of $400, $500 per tonnes of capacity of investment, just because we are -- we have transformed existing refining -- reusing existing assets. In case of a full investment, it depends of the type of investment that we will do. We expect to both -- to follow both solutions, brownfield or greenfield, depending to the condition and the area where we will realize the new biorefineries.

[Operator]

The next question is from Bertrand Hodee of Kepler Cheuvreux.

[Bertrand Hodee, analyst]

I have one left. Can you give us a feel of how your unit OpEx in upstream are trending so far in 2020? If I go to the 2019 level, it was around $6.1 per barrel. And wondering if you can disclose what level you are over 9 months or in Q3. And can you -- could you expect some further decrease? Or on the contrary, because of portfolio mix or COVID events, it is a bit different?

[Francesco Gattei, executive]

Yes. Thank you, Bertrand. In terms of unitary OpEx, you have to consider that the portfolio mix with the acquisition, with the contribution of Norway as a bit improved in terms of increase. In terms of OpEx, the current level of OpEx is in the range of $6.5, $6.6 per barrel.

You have to consider that also the reduction of production has, let's say, a negative impact because it is adding a fixed component that is worse in the unitary element -- the unitary value. The trend was to increase to $6.8 due to the COVID so to the lower production, but we were able to contain in the $6.5 to $6.6 range.

[Operator]

The next question is from Lucas Herrmann of Exane.

[Lucas Herrmann, analyst]

Question on Zohr and Egypt, if you don't mind. Can you just remind us where production is at Zohr now? How it's profiled to date? And what your expectations are as we go into next year, assuming that export markets for LNG look or continue to -- say they continue to appear more robust than might have been the case 9 months ago.

[Francesco Gattei, executive]

Thank you, Lucas. I leave now the answer to Alessandro Puliti.

[Alessandro Puliti, executive]

Okay. So Zohr will average in 2020 at the level of 2 Bcf per day in terms of production, while in the third quarter, the average is 2.2 Bcf per day increasing. We see an increasing demand from the export side in Egypt. Clearly, this is linked to the winter time. So we expect production in the near term for Zohr to further increase.

[Lucas Herrmann, analyst]

And where is capacity at the moment now? Are we up north of 3 or...

[Alessandro Puliti, executive]

The price? The price of -- the gas price for Zohr, you mean?

[Lucas Herrmann, analyst]

No, no, no. I'm sorry. I meant, what's the production capacity?

[Alessandro Puliti, executive]

The production capacity, a full production in Zohr can produce 3.2 Bcf per day.

[Lucas Herrmann, analyst]

Okay. And do you want to make any comment on when you think you might be running at capacity?

[Alessandro Puliti, executive]

Running at capacity, we required a full recovery of the demand in Egypt and also an improvement of the export capacity. So I -- we can see it in a couple of years ahead of us.

[Operator]

[Operator Instructions]

[Francesco Gattei, executive]

Okay. I think that we are finished. I don't know if this is the last question. Otherwise, thank you very much, and let's say -- let's see what's happening in the near future. All the best to all of you.

[Operator]

Thank you. That was the final question. Thank you for participating in the Eni conference call.