Var Energi ASA

OSE:VAR

Earnings Call Transcript 2022-Q2

[Operator]

Hello, everybody, and a warm welcome to today's Var Energi Second Quarter 2022 Results. My name is Melissa, and I'll be your operator. [Operator Instructions]

I now have the pleasure of handing over to our host, Ida Fjellheim, to begin. Ida, over to you.

[Ida Fjellheim, executive]

Thank you, and a warm welcome to Var Energi's Second Quarter and First Half 2022 Results Webcast and Conference Call. Joining us today will be our CEO, Torger Rod; and our CFO, Stefano Pujatti. Torger and Stefano will present the results. And afterwards, we will open up to questions. I will now turn the call over to Torger.

[Torger Rod, executive]

Thank you, Ida, and good morning to all of you and happy summer. I'm glad to be here today to present yet another strong quarter for Var Energi.

Diving into the highlights of the quarter. We continue to see strong cash flow generation on the back of high oil and gas prices. Our operating performance was impacted by seasonal high maintenance activities. And our production came in at 210,000 barrels, which is 13% lower than the previous quarter and 3% higher than the same quarter last year. We had a successful turnaround at Goliat, executed in according to schedule and costs.

The full year guidance of 230,000 to 245,000 barrels is maintained, although given extended turnaround activities on partner-operated fields and some minor operational issues in first half of the year, we expect to come in at the lower end of the guided range. We have strengthened our gas position for Q2 as we have secured new flexible long-term gas sales agreements at Dornum in Germany, with deliveries starting in October this year, which give us further flexibility and access to high-priced market.

We have also kept the gas production stable quarter-on-quarter, representing a 40% gas share of the total production in Q2. We had a continued strong cash flow generation in the quarter with $1.5 billion in operating cash flow after tax, driven by an average realized price of $124 per barrel. The dividend guidance for the year is a minimum $1 billion, and we proposed an increased Q3 dividends of $290 million. This means up 12% from the second quarter and close to 30% compared to the first quarter.

Our financial position is further improved as we have entered into the bond market to a $500 million bond, which was used to partially refinance the existing bridge to bond facility. We have also increased our available liquidity with $700 million compared to the first quarter and further reduced our leverage ratio, net interest-bearing debt on EBITDAX, to 0.4 at the end of the quarter, down from 0.6 at the end of Q1. And this is due to strong cash flow from operations, increased cash and lower debt.

Further, we are on track to deliver on our high-value production target of about 350,000 barrels by end 2025. We had a very good quarter in terms of exploration with 2 discoveries in key hubs. Our portfolio is progressing according to schedule, including our large projects, Balder X, Breidablikk and Johan Castberg. We also introduced a new management team, which will come into effect later this year. This to fully realize our potential related to our value-driven growth ahead of us.

Here, you see the key performance indicators defining a strong Q2. As you know, we have a strong focus on safety being a prerequisite in all we do. Focus is always safe, and our ambition is to be the safest operator. Again, we are very pleased that no one got serious injured when working for Var Energi in Q2. Our clear target is 0 serious incidents and injuries.

We continue to focus on emissions reductions. The total CO2 emission intensity for operated fields in the second quarter is estimated to 8.6 kilo per barrel. The increase compared to the previous quarter is due to reduced production.

The Q2 production of 210,000 barrels reflects partner-operated turnaround activities, which extended beyond plan, in addition to minor operational issues. When it comes to production cost per barrel, this is up from last quarter due to high maintenance and lower production. We generated high cash flow from operations in the quarter, and we continue to deliver on our dividend commitments.

This quarter, we introduced a new organizational structure and management team to really realizing our potential. The strengthened management team is a key enabler to deliver on our targets. Var Energi is the perfect sized company, focusing on our high-performing organization. The organization changes are going to focus on us being leaner, more efficient, driving productivity and build capability for the future.

The simplified structure will enhance collaboration and productivity across the company and with our service providers and stakeholders. As part of the reorganization, Ingrid Solvberg and Atle Reinset will be joining the management team, responsible for technology, drilling and subsurface and project development and supply chain management, respectively. This will both add strength to the executive management team as well as width and depth to the leadership in Var Energi. I'm very, very pleased to have Ingrid and Atle joining the Var Energi team. The current organizational structure and management team will remain in place until the new structure is implemented, which is planned completed within the fourth quarter this year.

Now turning to our operations. Safety is about people. Var Energi's highest priority is to operate without causing harm to people and the environment. The company's strong focus on implementation of our safety initiatives continued through the second quarter of 2022. And in the first half of 2022, an overall positive trend on the serious incident frequency, SIF, has been observed. The actual SIF was 0 throughout 2021 and now at 0.21 after the Balder leakage experienced in Q1.

The CO2 emission intensity for our operated asset is slightly up due to lower production as a result of maintenance activities. The operational performance in the quarter was impacted by high turnaround and maintenance activities. The production of 210,000 barrels in average is down 13% from last quarter, however, more than 3% higher than in the same period last year. We had planned maintenance on Goliat in the quarter, which was executed successfully according to plan, cost and with a high safety standard. Some turnarounds on partner-operated fields extended beyond plan, resulting in a reduced production following maintenance activities of 23,000 barrels in average per day in the quarter.

To enhance value, the company continued to reduce the NGL recovery to increase gas volumes and gas sales due to favorable market conditions. This led to a net production decrease of 4,000 barrels per day in the quarter, but as said, higher value realized for the company. Other operational impacts include the continued compressor failure at Sleipner, which is expected to last until end September. In addition, we have a natural decline in the portfolio.

As you can see from the right part of this chart, the gas share is 40% of produced volumes in the quarter. We are a reliable and secure supplier of gas to Europe and U.K. and have full exposure to the current strong price environment. We have flexible gas sales agreements, and these have contributed to strong realized gas prices in the quarter. In addition, we have entered into new long-term gas sales agreements for Germany, Dornum. And Stefano will come back to this later in the presentation.

Then operational update for our operated assets, and we start with Goliat. We had a successful completion of planned turnaround activity executed safely, and production was impacted as per plan. Following the turnaround, the Q2 production efficiency was down from 96% to 75% in the quarter and production reduced by 7,000 barrels per day to 19,000 barrels in average for the quarter.

Goliat has really performed well in the first half of the year, driven by strong well performance, high uptime and less decline in existing wells. And yesterday, we started up the new D4 well, which was accelerated from September. Well done by the Goliat team and involved suppliers. Bottom line, we are seeing clear and tangible effects from our improvement program addressing production and OpEx improvements.

Then turning to Balder and Ringhorne. We saw increased production and improved uptime in Q2 compared to Q1 due to restoration of production after the subsea leak in Q1. Moving into Q3, a 2-week planned turnaround requiring full production shutdown is expected to reduce production with approximately 5,000 barrels in average for Q3 for the Balder/Ringhorne assets.

Moving to unit production costs. These have naturally also been impacted by the high maintenance activity in the quarter. For the second quarter, we are reporting a production cost per barrel produced of $14.7 per barrel, which is up from $12.1 in the first quarter. For the 6 first months, the average unit cost is $13.3, which is in line with our guiding of between $12.5 and $13.5 per barrel. Hence, we maintain the guiding for the full year.

We also remain committed to our medium cost target -- our medium-term cost target of less than $8 per barrel produced, which will be enabled by new projects coming on stream and improvement program actions being implemented. Var Energi is participating in 15 significant development projects on the NCS, where most of them are already sanctioned and well into execution. These projects support our high-value growth towards the production target of more than 350,000 barrels per day by end 2025.

During the quarter, our portfolio generally progressed according to plan. I will come back to the 3 major projects, Balder X, Johan Castberg and Breidablikk shortly. For the other projects, we see good progress with PDOs submitted for Halten East and Eldfisk Nord in May. Hywind Tampen is also progressing well, and the floating wind farm is expected to start up later this year.

As experienced by the energy sector and the world economy and macro in general, cost inflation, resource constraints and supply chain disturbances also affects Var Energi. For instance, we are now seeing inflation of about 10% to 15% for 2022 drilling services. However, having most of the CapEx for 2022 already committed, our guidance of $2.3 billion to $2.6 billion for this year is maintained.

We also have a strong focus on supplier collaboration throughout the value chain and to be the partner of choice. Therefore, I am very pleased and glad that we just recently entered into a new long-term strategic supplier partnership with Aker Solution, Havfram and Saipem for SPS and SURF deliveries. These agreements will bring capability to Var Energi, enable more efficient planning and development of our projects and added value for all parties. This supports our key priority of time to market for our high-value projects and will enhance our capability to deliver on our growth strategy.

Our cornerstone project also progressed well in the quarter. Balder X is progressing towards targeted first oil in Q4 2023. The refurbishment of the Jotun FPSO is ongoing at the Rosenberg yard. Close to 100% of the procurement scope has been completed and the subsea system and marine work are on track for completion in 2022 with the majority already installed.

As earlier communicated, scope increase, both related to engineering and construction in combination with external factors, such as COVID, waiting on weather and supply chain disturbances continue to affect the project. Having said that, we remain committed to mitigate COVID risk and progress the project towards the target first oil.

On Johan Castberg, the topside heavy lifting campaign started at Aker Stord in the second quarter and has made good progress. The subsea and marine campaign is also progressing per plan and below budget. Phase 1 of the drilling campaign has been safely completed ahead of time and below budget. Summarized, the Johan Castberg project is progressing well and remains on track for first oil in Q4 2024.

Turning then to Breidablikk. The drilling operation started in May according to schedule. In addition, the high activity period at the Grane platform to facilitate Breidablikk tie in started in April and will continue into the third quarter. However, importantly, the scope that requires a stop in Grane production has been completed during the turnaround in May and June. This project is also on track for targeted first oil in Q1 2024.

We continue to deliver strong exploration results with 2 discoveries during the second quarter. Snofonn and Skavl Sto are both located in the Barents Sea and an area we know well and see significant upside in. Being located close to Johan Castberg, the discoveries will be assessed for potential tiebacks and should represent high-value barrels. Going forward, we continue to target high-margin barrels. All planned wells this year are located close to our key hubs, in line with our growth strategy.

By this, I will round off the operational update and hope this provided useful insights to our activities and would like to hand over the word to Stefano, who will dive deeper into the strong financial performance in the quarter. Please Stefano, the word is yours.

[Stefano Pujatti, executive]

Thanks, Torger, and good morning, everybody. I'm very pleased to present another strong quarter for us. This slide shows some of our key financials for the quarter compared to Q1 this year and Q2 2021. Some highlights. We have seen continued high commodity prices, both for Brent and gas in the quarter, but with high volatility. We have achieved strong revenues and cash flow generation with free cash flow close to $1 billion.

In the quarter, profit before taxes is impacted by an unrealized loss of $382 million due to the strengthening of the dollar compared to NOK. We have further reduced leverage ratio compared to both Q1 2022 and Q2 2021 due to debt repayments and strong cash flow. We have also increased available liquidity and financial flexibility in the quarter. With respect to the dividend for the quarter, Board has approved $260 million to be paid in August, and we are giving a guidance of $290 million dividend for the third quarter.

I will now move on to explain in more depth the company's second quarter financial performance. As mentioned, this has been a strong quarter with solid operational performance and continued favorable market conditions. The quarter was impacted by high seasonal turnaround and maintenance activity, as Torger already mentioned.

Total revenues was $2.4 billion, an increase of almost 19% compared to same quarter last year, around -- was around $1.1 billion and almost in line with previous quarter. This is a proof of our strong gas deliveries and gas market. And let me highlight that year-to-date income from our gas sale is already equal to the full year 2021, more than $2.2 billion. The $60 million decrease in petroleum revenues from previous quarter was driven by a combination of higher oil prices, offset by lower production.

During the quarter, we continued to divert gas from injection to sale to capture high price -- high gas prices and generate additional revenues. Average oil price realized in the second quarter was $116 per barrel, up from $100 per barrel in the first quarter. The average realized gas price in the quarter was $151 per barrel, down from $163 per barrel in the previous quarter. That is roughly equivalent to $25.5 MBTU or EUR 81.6 megawatt hour.

The weighted average price per boe was $124 per barrel in the second quarter, up from $120. Sold volumes in the quarter was 19.5 million barrels, down from 20.7 million barrel in the previous quarter. Along with a high stable production of gas, we also have a robust sale portfolio with flexible contracts. These enable us to capture the full benefit of the tight gas market. Var Energi has taken advantage from having approximately 9% of the gas for Q2 with delivery point in the U.K. sold at average fixed price of $160 per barrel. This was $65 above the average U.K. spot price and generated about $42 million in additional revenues.

The average realized gas price in the quarter is taking into account also the lower price achieved on gas a year ahead contracts, and this effect will continue until September 2022. 15% of the gas production for the remainder part of the year has been sold on a fixed price basis at an average price of around $140 per barrel in both U.K. and [indiscernible]. Having a portion of the gas sold at fixed prices gives visible cash flows to secure CapEx and dividend, while we maintain full upside potential in the gas price for a significant part of the gas sold at spot price.

In addition to that, to respond to the market condition in Q2, we have optimized gas sales through exit points in Europe over the weaker U.K. market, which is enabled by our flexible gas sales agreements. These optimizations have generated additional $35 million in revenues for the quarter compared to selling in the U.K. market. And to increase delivery of gas to the German market, Var Energi has secured new flexible long-term gas sales agreement at Dornum in Germany with deliveries starting 1st of October 2022. Contract has a 7-year duration and represents about 9% of the planned gas sales in the next 2 years.

Total production cost on sold volumes amounted to $378 million, an increase quarter-on-quarter. The increase was mainly due to higher cost of operations as the quarter was impacted by turnaround activities. In addition, effective from second quarter 2022, Var Energi has changed calculation of over underlift of NGL lifted at cost to terminal and comparative figures have been restated accordingly. This can be seen in Note 1 in the financial statements. Transportation costs, environmental taxes and insurance costs combined were stable quarter-on-quarter.

Another quarter with strong cash flow from operating activities amounting to $1.5 billion, 30% decrease compared to $2.2 billion in the first quarter, driven mainly by changes in working capital and increased tax payments. Tax payments in the quarter amounted to $329 million, up from $183 million in the previous quarter. Tax payments in the third quarter are estimated to be around $530 million.

CapEx in the quarter was lower compared to the previous quarter, $573 million versus $622 million, mainly a phasing. So we expect CapEx to catch up in the second half of the year. CapEx on Balder and Johan Castberg amounted to more than 50% of the total CapEx in the quarter. The strong operating cash flow covered the company CapEx with good margin. The CFFO to CapEx coverage was 2.7 in the quarter.

2022 guidance of $2.3 billion to $2.6 billion in development CapEx and $200 million in exploration and abandonment CapEx is maintained.

A strong CFFO in the second quarter amounting to $2 billion before changes in working capital and taxes, driven by continued high product prices, but offset by lower production. CFFO was $1.5 billion in the quarter. And after investment activities and debt repayments, the cash position at the end of the quarter was $892 million, an increase of around $350 million compared to previous quarter end.

Combined with undrawn credit facilities, the available liquidity amounted to around $4.5 billion. So definitely a quite strong position to be in. The strong cash flow generated in the quarter, combined with debt reductions, led to a leverage ratio of 0.4 at the end of the quarter, down from 0.6. Important to mention, Var Energi raised $500 million in senior notes in the quarter in the U.S. capital markets maturing in 2027, thus further strengthening and diversifying our financing in place.

We keep being committed to maintaining an investment grade rating, and the strengthening of our balance sheet will continue to support material shareholder distribution going forward. We generated exceptional cash flow in the quarter, driven by very strong commodity prices. The dividend expectation for the full year 2022 is minimum $1 billion. The guidance for Q3 is $290 million, up 12% from the second quarter and close to 30% compared to first quarter.

We confirm $260 million in the second quarter 2022 dividend equal to $0.10 per share to be paid on the 11th of August. Dividend policy from 2023 is to distribute a range of 20% to 30% of the cash flow from operations after tax.

Finally, I'd like to sum up these sections with our forward-looking guidance elements. These are unchanged since the IPO process with the exception of the dividend. I just want to highlight the following. We expect production in 2022 in a range between 230,000, 245,000 barrels a day, but in the lower end of the guiding. An increase towards 350,000 barrels a day in the medium term based on the current strategic plan. We are targeting OpEx in a range between $12.5 and $13.5 per barrel in 2022, which is targeted to decline toward $8 as new projects come on stream and we progress our improvement programs.

Our CapEx is maintained in a range between $2.3 billion, $2.6 billion, excluding exploration and abandonment, which will add approximately $200 million. We confirm leverage through the cycle target of 1.3 net debt on EBITDAX. And as addressed earlier, we provide the dividend guidance for the full year at a minimum $1 billion and a proposed Q3 dividend of $290 million.

With that, I leave the floor back to Torger for some concluding remarks. Thank you.

[Torger Rod, executive]

Thank you, Stefano. Var Energi is delivering another strong quarter, continuing to create value, strengthening our market and financial position and our commitment to capital distribution.

And I want to leave you with the main takeaways for Q2. The operating performance was impacted by the maintenance activities. However, we have strengthened our gas position. We continue strong cash flow generation. The financial position is further improved, and we are delivering on the growth strategy.

And by that, thanks a lot for your attention. And we now open up for questions.

[Operator]

[Operator Instructions] Our first question today comes from Teodor Sveen-Nilsen of Sparebank 1 Markets.

[Teodor Nilsen, analyst]

I have 3 questions. First, just on your 2025 targets of 350,000 barrels per day. You didn't explicitly discuss that in today's subjects. Could you just give a brief update on the status on that? And also then in relation to the maintenance this season, does that impact that target at all?

Second question is on gas hedging. We now see forward prices in Europe -- or TTF forward prices well above $40 per MMBtu for 2023. Would you consider to take on some more hedging for next year?

My final question is just on the working capital movement. This quarter, the $146 million, when do you expect that to be reversed?

[Torger Rod, executive]

Stefano and I, we will -- I think we will share. Yes, Stefano? I will -- I can take the first one, and I feel that #2 and #3 is carrying your name. So I will start on the status when it comes to our target to having a production above 350,000 barrels by end 2025. And as I also said in the presentation, we are on track when it comes to our growth strategy, and that means that we are on track to have our production above 350,000 barrels by end 2025.

And this is, of course, driven by the projects that we have in development. I think that is important to emphasize. This is not carrying any sanctioned risk. It is really related to the portfolio that we have in development, which is sanctioned.

And the maintenance activity that we have explained for Q2 have no impact on that. And of course, I'd say the great beams in this growth is related to our cornerstone projects, Balder X, Johan Castberg and Breidablikk, as explained. So this is within our portfolio, and it is based on organic growth that we have in the company. So I'll stop there and pass on the gas hedging question and the working capital to you, Stefano. Please?

[Stefano Pujatti, executive]

Yes. Let me say in terms of gas hedging, for 2023, we have not made any fixed price or hedging transactions so far. Fixed priced transaction represents a firm delivery obligation. So it is key to have the maintenance program for the summer 2023 related to the portfolio and the transportation network finalized before you do this. And this will actually -- we expect this to be published in week 50.

Let me also add the fact that for Q2, we -- sorry, for the remainder of the year, 14.6% of the gas production has been sold at fixed price. So we have sold actually 17.4% in Q3 and 11.9% in Q4 on a fixed price basis. And this is an average price of $139.5 for Q3 -- sorry, the average is $139.5 and for Q3 is $138 per barrel and for Q4 is $141 per barrel.

Now going to the last questions that you had on the working capital movement. That has been mainly generated by the increase -- by the fact that we used to a lesser extent than the previous quarter the credit discount agreement. We actually were able in Q1 to actually do -- use this instrument for an amount of -- for sales up to an amount of $378 million, while in Q2 it was reduced to $166 million, so far less.

This is, of course, something that will reverse -- we expect reversing in the next quarter. And as you can expect, the use of this instrument is very good to improve the working capital. But of course, the extent you can use it varies very much with the lifting that you have distributed along the month and the timing. So that's why sometimes you can use it more. Sometimes you can use it to a lesser extent.

[Torger Rod, executive]

And just maybe add one thing from my side on -- yes, on the gas, Teodor. I think Stefano explained it well in the presentation. We have very flexible gas contracts both when it comes to indexes and the exit points, which Stefano explained it has added value. So that is, of course, also a benefit that we carry with us, as also said by Stefano, in the, I would say, rest of the year. So this is also very useful for us to achieve the highest possible value creation.

[Teodor Nilsen, analyst]

Okay. Just a bit on gas hedging there. Stefano, you mentioned something around week 50. So if I interpret that, that's -- you won't take on any hedges for 2023 until week 50. Is that correct?

[Stefano Pujatti, executive]

What we want to do is really before we do any decisions on the instruments we have is really to have the maintenance plan defined in order -- then we can plan accordingly in a better way.

[Operator]

Our next question today comes from James Thompson of JPMorgan.

[James Thompson, analyst]

A few questions for me, if I may. Firstly, just on the operational side of things on the growth projects. You flagged once again some of the challenges in terms of -- from a COVID perspective or from an inflation perspective. But on Balder, pretty much all the procurement is done. So should we sort of think about it more as a kind of schedule risk to first oil? Or is it really that it's not schedule? It's more on -- along the cost side of things potentially through 2023 would be my first question.

[Torger Rod, executive]

Yes. Okay. That was your first question. Okay, let's take that question then. Again, to zoom out a little bit. And I think Var Energi, as anybody else in the industry and almost the world, we are assessing closely what happens around us. And that is -- and I think everybody talks about inflation. And I think also -- and of course, what that might lead to both when it comes to supply chain disturbances and increase prices, but also resource constraints. So I think that is, of course, something that we are assessing in general.

When that said -- in general, what is very positive for Var Energi and our project portfolio is, as I said and also mentioned on the question here from Teodor, is that we have -- our growth is based on already sanctioned projects. That means that the projects has also done the majority of – I'd say, the contract awards and then locked in the contract pricing. But still, it might be exposed for inflation somewhat.

When it comes to -- and that is also the case for our cornerstone project as such. And of course, what we have seen on the project side is that COVID have impacted us and in a global scale, it's still a factor when it comes to, I'd say, the predictability in the market.

When it comes to Balder, as we talked about last quarter, we said that some of the key important milestones we have now is that it's really to be able to complete the procurement activities. And that we have done, which is very good. And then for us, it is really to be able to, I would say, execute the work, avoid any further growth and do the work.

Then one thing that we are monitoring there is also, as I said, the availability of resources. We see that it is picking up. And also listening to other companies presenting their quarterly result. I think everybody is talking about the increased activity. So that is something that we are monitoring.

So I will say that what we are focusing on is to maintain and secure the startup date of Q4 2023. But of course, also, we are assessing the cost and the cost development, so to speak. And I think, also, just to reiterate what we said for the CapEx guiding. We are maintaining our guidance there, as Stefano explained. So yes, I round off there.

[James Thompson, analyst]

So it has been pretty competitive. In terms of the other question, just slightly different. I mean in terms of the -- thanks for giving the tax guidance, the cash tax guidance for the second half. I mean the number you put out there is a bit lower than my number, which obviously means -- which is helpful, I think. But perhaps you could give us some sensitivity around cash tax expectations for the second half or at least a guidance on how you kind of set those numbers so we can get a feel for where it might be relative to the continuing strong commodity prices that we're seeing today?

And then secondly, sort of -- well, just on the dividend. I mean, when we had the 1Q results and you moved to sort of $1 billion, you kind of get the impression that was fixed for the rest of the year. Now I don't think anyone's complaining about a higher dividend. I think that's most welcome. But I guess it goes back to the view that we should be anticipating a kind of quarterly update. That feels to me like the sort of methodology that you're more comfortable with? Is that fair?

[Torger Rod, executive]

Yes, I heard 2 main questions here. It was about cash tax and it was about dividend. And I think -- my proposal here is that I will start a bit on the dividend, and then I leave it to Stefano to pull it all together when it comes to -- maybe more details on the dividend and on the cash tax as such.

You are right, James, when it comes to your assessment on dividend. I think from -- I would say, well before the IPO, when we started that process, we have been very clear that -- on our distribution policy and our philosophy. And that is really to do quarterly assessments and then to guide the market accordingly on what we feel is right for the future -- or for the coming quarter. And then also giving, I would say, an annual guidance.

And that is exactly the same we have done this time. Stefano and I, together with the Board, we have done that assessment and we found it prudent that we give our updated guiding for quarter 3 of $290 million, an increase of 12% quarter-on-quarter, and then also restate that -- a minimum $1 billion. We will do the same exercise when we are sitting here and doing the quarter 3 assessment and then assess both our own performance, what we believe the quarter 4 will bring, and of course, also the macro picture and then provide a similar update to you and the market.

And as I said, our clear approach have always to be having a good distribution to our shareholders. So I stop there, Stefano, and you can cover the rest.

[Stefano Pujatti, executive]

Let me just add on the dividend, that Var is really very well positioned to combine the possibility to fund our growth. We have a quite ambitious CapEx program, as you know. But at the same time, really being able to deleverage and also give upside to our shareholders with the attractive dividend policy. So I think this is really a unique strong position to be in.

Let me also add the fact that the minimum $1 billion is under the current market conditions, of course, just to stress this point. And will be, as Torger said, quarterly assessed, so we are sure we make things right when conditions are there.

Going to the tax. You have seen from our presentation, we are paying NOK 5 billion in Q3 and actually NOK 12 billion in Q4. So roughly $1.8 billion in the second semester. This is related to the first 6 months -- let's say, the first part of the 2022 profits and also the last installment related to 2021.

Let me say what are the basis for this calculation. Maybe that can provide you a bit more guidance. The taxes for Q3 and Q4 has been calculated on the -- roughly the prices -- average prices of the first half. So we are assuming an oil price around $100 per barrel and a gas of around $160 per barrel.

Now the effective tax rate is very high. You have seen 95%. But that is due to the fact that we have this unrealized exchange rate loss. So if we go down instead to the guidance of the cash tax rate, then I would say you would expect it to be low, I would say, around 60% in the short term. And then gradually increase over time as the investment program reduces. And this is due to the fact that now the investments are depreciated over 1 year and not to 6 as before.

[Operator]

[Operator Instructions] Our next question comes from Mark Wilson of Jefferies.

[Mark Wilson, analyst]

Most of my questions have been answered now. But I'd just like to check on Slide 12, where you show your existing projects and sanctioned developments, and you mentioned 15 of them. I just want to understand correctly, that it looks like in the second half of '22 and at the start of '23, you've got 3 new projects, smaller projects coming on: Bauge, Fenja and Frosk. And therefore, with that, would we expect production to increase heading into 2023? That's the first question.

And then I'd also like to check on where King and Prince stands in terms of further development priorities and whether that's being pursued for sanction, on what sort of time line?

[Torger Rod, executive]

And on the first one, you are right. We -- as I talked about earlier today as well and what is very exciting in Var is that we have this sort of a big portfolio that is sanctioned. And from 2023 and onwards, these projects will start, I would say, ticking in and be completed. So the Bauge, Fenja and Frosk is projects that will start up during 2023. And of course, we are very excited about that and that will -- as you were saying, that will bring additional production to Var Energi.

Then on the King & Prince, which was the very exciting discovery we had in the Balder area last year and of course, one of the reasons why we are, I would say, having such a big and strong belief in the Balder area being one of our core hubs. That is, as we speak, being matured. We are doing what we call a big Balder area assessment to really understand the potential and how we best develop King and Prince and the area further to create maximum value. So this is being worked.

And of course, also, we are looking into -- and we will come back to that on a later stage how we are going to further both appraise and explore in the Balder area. So absolutely, it is on our list and we are working the project and maturing it going forward.

[Operator]

We'll take our last question today from John Olaisen of ABG Sundal Collier.

[John Olaisen, analyst]

May I talk a little bit about the organizational change. You are combining the exploration and production responsibility to Rune Oldervoll. May I ask, firstly, the former Head of Exploration, Alessandro Barberis, is he continuing in Var? Also the fact that you are combining production and exploration under one position, will that send any signal towards like less exploration? That was my first question about the organizational change.

And secondly, your 2022 exploration program is mostly ILX related, yes? Going forward in '23 -- I know it's early and you haven't published any detailed exploration program for '23. But do you see any frontier opportunities on the exploration program, please?

[Torger Rod, executive]

Talking to the organization changes. No, I would say more the opposite. We are -- you know how Var Energi is focusing. We are focusing value creation in our hub strategies. And by combining exploration and production in one unit, we are emphasizing and enhancing even closer insight in -- and use of both the experience and knowledge to our value chain from the licenses to the exploration, the projects and operations. So this is really more to, what I would say, enhance the collaboration and, I would say, the work on this.

So our broad experience, competence is -- I would say, is going to continue in Var. Also, Alessandro is going to continue in Var Energi and working with exploration. So this is rather the focus on creating even more value going forward in total for Var and also within exploration. So this is really to emphasize the hub strategy and ensure that we have the best possible priorities and activities.

Then when it comes to -- you are right, for 2022, the exploration program is predominantly ILX, high-value barrels. And also, as we have been stating before, that we are focusing to have also some higher risk, higher reward and maybe frontier exploration, as you said. We are a partner in one, most likely coming next year, on [ Rodhette ]. And we are also working in some on our own.

So I think what we have communicated before, that we would like to see between 8 and 12 exploration wells per year going forward and then including 1 to 2, I would say, frontier or what we call high risk, high reward wells is in our plans.

[John Olaisen, analyst]

Okay. May I also ask on the cost side. The rig rates, the seismic rates and the oil service costs are clearly rising significantly. I just wonder how will this impact Var going forward and I think, in particular, maybe the medium-term production cost target of $8 per barrel. Just remember back to previous times when we seen the same pattern in the cycle, we can see in the oil industry industries' costs, both unit cost and absolute terms coming up significantly. How do you think it will impact your costs and maybe CapEx and exploration spending going -- for the next 2, 3 years what we're seeing now in the oil service industry, please? That was my final question. Sorry. Yes.

[Torger Rod, executive]

It is a bit difficult to, I would say, be very concrete and very quantitative on that question. When it comes to the -- I would say, the current, we have committed the rigs that we -- I would say, what we need as of now. So at least that is a thing. When that said, our focus in Var Energi is always, I would say, impact and influence what we really can manage. And that is also -- that's taking me to the less than $8 per barrel in production cost. We -- of course, if we see a significant increase and inflation in prices, that is something that might impact that.

However, we are very strong believers that our improvement program and, of course, our projects that is coming on stream will -- with our very competitive production cost -- we are talking here in the range of $3 per barrel for the major projects -- will bring down the production cost per barrel and then take us towards the $8 or even -- take us towards the $8.

So that is -- as I said, our key focus there is to really work on what we can impact and influence. And that is our performance and delivering on our -- realizing our potential improvement program.

[Operator]

Thank you. As that was our last question today, I'd like to hand back to Ida Fjellheim. Ida, over to you.

[Ida Fjellheim, executive]

Thank you. This concludes the second quarter and first half 2022 webcast call. Thank you for dialing in, and we wish you all a good summer ahead. Thank you.