OMV Petrom S.A. (SNP) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the OMV Petrom's Earnings Call. Today's presentation will last around 30 minutes and will be recorded. By now, you should have received the presentation by e-mail. The slides on the speech are also available online on www.omvpetrom.com in the Investors section. These also include the cautionary statement regarding forward-looking statements. Now let me hand over to Simona Crutu, Manager of the Investor Relations & Stakeholder Engagement Department, who will moderate the event.

Good afternoon, ladies and gentlemen, thank you for joining us. We will have a presentation of the second quarter results followed by a Q&A session. Christina Verchere, Chief Executive Officer, will provide the key highlights about the macroeconomic environment of second quarter operational performance and our progress in terms of strategy. Alina Popa, Chief Financial Officer, who will give you more details on our financial performance and the brief outlook. Afterwards, all the Executive Board members will be available to answer your questions. [Operator Instructions] I'm now handing over to Christina.

Good afternoon, ladies and gentlemen, and a warm welcome from my side. Thank you for joining our call. It is a real pleasure to present to you today OMV Petrom's performance for the second quarter of 2022. Please let me first draw your attention to our legal disclaimer, which you can read in detail on Slide 2. Let me start with some highlights regarding commodity prices and main currencies in the second quarter of 2022. Brent oil price continued its growth to an average of $114 per barrel in the second quarter of 2022, 65% higher year-on-year. The development of the oil price was highly volatile with concerns over demand was notably in China, combined with Russian supply risks. The price range during the quarter went from just under $100 per barrel after a release of strategic reserves in early April to above $120 per barrel at the end of May, when China loosened its cover restrictions and the EU agreed to ban on seaborne Russian oil imports. Other conflicting factors, such as Libyan supply reductions and a strengthening U.S. dollar, further added to oil price volatility. During the quarter, the average Brent price rose by more than 9% from $110 per barrel to $120 per barrel. Urals differentials versus Brent collapsed over the second quarter to a record discount of around $35 per barrel, as European buyers continue to self-sanction Russian oil. The EU also agreed to embargo on most Russian oil imports with around 90% of oil imports from Russia to be cut by the end of this year. In the second quarter of 2022 and on a year-on-year basis, the RON depreciated versus the U.S. dollar by 14%, but was stable against the euro. In the context of extraordinarily high Urals-Brent differential, triggered by the geopolitical context, starting from the second quarter of 2022, the transfer price between exploration and production and refining and marketing was adjusted to Brent instead of Urals, as the Urals is no longer a relevant reference. OMV Petrom indicator refining margin in the second quarter, reflecting the change in reference crude price from Urals to Brent reached $24.44 per barrel, a record high. This was as a result of the higher product spreads, mainly for diesel and gasoline. On the natural gas side, prices eased during the first 2 months of the second quarter as a consequence of mild weather and increased LNG availability for Europe, the latter due to Chinese COVID lockdowns and warm weather in Northeast Asia that lowered local demand. These developments offset the effects stemming from lower Russian delivery that started with a supply cut for Poland and Bulgaria. June saw prices rallying again mainly driven by further reductions of Russian natural gas supplies to Europe. Consequently, the second quarter ended higher than it started from many of the European hub base price benchmarks. Gas prices on the Romanian centralized market also increased, with day-ahead prices more than 4x higher year-on-year to an average of EUR 102 per megawatt hour and in line with CEGH. Base load electricity prices in Romania tripled year-on-year but decreased by 7% quarter-on-quarter. Market spark spreads were negative in the second quarter of 2022 as high electricity prices were offset by historically high gas and CO2 prices, the CO2 price increased by 67% year-on-year in the context of a reduction in the number of CO2 allowances. In the context of the Russia-Ukraine conflict, an energy supply security prices has unfolded, sending commodity prices to new highs with wider implications for the global economy. The EU embargo on imports of Russian crude oil -- crude and oil products is increasing the pressure as market players focus on securing alternative supply ahead of the year-end deadline. Unlike other countries in the region, Romania has a relatively low degree of dependency on energy imports. In 2021, the country ensured domestically approximately 35% of the crude oil, 60% of fuel products, 80% of its natural gas and more than 90% of its electricity needs. Our most important goal remains to provide energy for our customers for the industry and population and to ensure the security of supply. We have not experienced any disruptions in our business, and we are prepared in case of further developments. We fully comply with sanctions and since mid-March, we self-sanctioned to no longer import crude oil and diesel from Russia. Approximately 30% of the crude, we process in Petrobras is imported in the most part of it being supplied from Russia or through Russian -- sorry, and in the past, most of it being supplied from Russia or through Russian ports. For imported crude, we are now using a mix of crude oil grades from within the Black Sea, mainly CPC and Azeri as well as North Africa grade. We are closely monitoring potential risks related to Novorossiysk CPC terminal. Thus, we are also considering alternative supply sources and routes such as Mediterranean, West Africa and North Sea. As for diesel and jet, we have increased imports from non-Russian sources. Worth mentioning is that these alternative sources come with a price premium to Russian products. For 2022, our equity gas production covers the majority of the current needs of our customers. Most third-party acquisitions in Romania are from domestic sources with limited imports being around 5% of total gas sales. We are also looking to diversify our supply sources and supply chain. We're exploring options for future years that include LNG supply and capacity bookings. Overall, so far sanctions have had no significant negative impact on our business performance. We mentioned last quarter the temporary measures decided by the Romanian government to address the high gas and power prices applicable between April 2022 and March 2023. In addition, the government adopted temporary measures for the fuels market applicable between July and September. We voluntarily comply with these measures, and we decrease the fuel prices at Petrom and OMV filling stations by RON 0.50, half of the amount being covered by the state. We expect the impact of our results to be in the mid-double-digit euro range -- mid-double-digit million euro range, apologies. We recognize the need for the government to support consumers in these very unusual times. However, the frequent interventions, particularly in gas and power segments, bring volatility and instability for the market participants and increased risk of market dysfunctions, including increased risk of security supply. Therefore, they should be temporary in nature and with robust impact assessment. Also on the regulatory side, the amended Offshore Law entered into force on the 25th of May. It contains improved fiscal and stability clauses, but certain free market related provisions still need to be clarified. Moving to the macroeconomic environment. In the first quarter of 2022, Romanian GDP increased by 6.4% year-on-year, above the European average of 5.2%. The growth in the first quarter exceeded expectations and triggering June an upward revision of the IMF estimates of Romania's GDP growth for both 2022 and 2023 to 3.5% to 4.5% year-on-year from the previous April estimate of 2.2% for 2022. In this revision, IMF referred to the strong rebound of the COVID wave in autumn 2021, noting also the new pressures and risks posed by the war in Ukraine and rising inflation. The consumer price index in the month of June 2022 versus June 2021 was 15.1%. Wage pressure and increase in energy prices are the main drivers with official forecast from the National Bank of Romania estimating the peak of inflation to be in the second quarter of 2022. Looking at the energy sector, in the second quarter of 2022, the Romanian demand for our products generally decreased. Demand for retail fuel decreased by around 2% year-on-year, while the commercial market demand increased by almost 7% year-on-year. Jet demand continued to recover, increasing by 107% year-on-year from a low base due to continued strong recovery in flights, and exceeded for the first time pre-COVID levels by 1%. Gas demand as per internal estimations decreased by 19% year-on-year as consumption was impacted by high energy prices, moreover last year's unusually high consumption due to cold weather led to a high base effect. Powering demand was lower by 6% year-on-year, while domestic power production decreased by 10% year-on-year. Romania being a net importer of power in the second quarter of 2022 compared to a net exporter position in a similar period of last year. Power production from hydro had a steeply decreasing contribution to the generation mix due to dry weather. In addition, nuclear power was lower due to a planned outage, which was partly compensated by an increase in gas and renewable production. On Slide 5, we present the key highlights for the quarter. At group level, Clean CCS operating result of RON 3.7 billion was the highest quarterly result ever recorded and more than quadrupled year-on-year on good operational performance in an unprecedentedly favorable market context with high, but volatile commodity prices. Our operating cash flow increased by 148% year-on-year to RON 3.7 billion with Clean CCS return on average capital employed, reaching 26.9 percentage points. All our business segments recorded record quarterly clean results. In Exploration production, this was supported by higher realized commodity prices and improved production costs. In Refining & Marketing, by record refining margin and the strong refined product sales. In Gas and Power by the excellent results of international gas transactions, with volumes acquired at lower prices in previous periods and increased power production. We continued our strategic focus OMV Petrom for capturing the energy transition opportunities announced in our Strategy 2030. On the 26th of July, the General Meeting of Shareholders approved the proposal for distribution of special dividends of RON 0.0450 per share. The RON 2.5 billion will be paid starting 2nd of September, translating into a record-high amount to be paid this year as base dividends and special dividends, totaling RON 4.5 billion. Regarding our Neptun Deep strategic project, the closing of the transaction between Romgaz and ExxonMobil is expected in the third quarter. Once finalized, OMV Petrom will become the operator of the Neptun Deep block, as agreed in April last year. We welcome the amended Offshore Law, however clarifications are still needed from the authorities. Assuming key prerequisites will be in place, FID is expected in mid-2023. In June, we announced the production of the first batch of sustainable aviation fuel in Petrobrazi. With this, we are progressing towards our goal to reach an annual combined production of sustainable aviation fuel and hydrotreated vegetable oil of about 450,000 tonnes by the end of the decade. In Retail, the integration of MyAuchan proximity shopping stores into the modernized Petrom branded filling stations continued. In June, we reached 204 stores opened in Petrom filling stations, half of the total number agreed with our partner to be opened by end 2023. This year, about 80 more proximity stores will be inaugurated. In Gas and Power, we are progressing towards our target of reaching 1 GW photovoltaic installed capacity by 2030. Negotiations with our intended partner, Complexul Energetic Oltenia, are in progress and we expect to sign the shareholders' agreement for the special purpose entities in the third quarter. Together, we aim to build 4 photovoltaic parks with a total installed capacity of 455 MW. On HSSE, the Total Recordable Injury Rate for the 12-month rolling period July 2021 to June 2022 was 0.49. The GHG intensity slightly decreased with lower index levels in Exploration and Production and at the Brazi power plant, reflecting our ongoing initiatives to reduce carbon emissions. On Slide 6, I would like to present the operational performance and I will start with Exploration and Production. Hydrocarbon production decreased by 10% due to the divestment of production assets from Kazakhstan in the second quarter of 2021, the divestment of the 40 marginal fields to Dacian Petroleum in the fourth quarter of 2021 and the high natural decline in the main fields in Romania. Excluding portfolio optimization, production in Romania decreased by 7.6% compared to the first quarter, the production decreased by 1%. Production cost per barrel of oil equivalent decreased by 12% year-on-year, to a level of $10.91. This was driven mainly by a one-off effect related to a tax audit and the favorable ForEx evolution, partly offset by lower production available for sale. We continue to focus on containing costs and counteracting the pressure coming from suppliers by intensifying our procurement activities. In Refining and Marketing, the refinery utilization rate was 86%, impacted by the April planned shutdown. Total refined product sales volumes recorded a 6% year-on-year increase. The retail sales volumes only slightly increased, reflecting a slowdown in fuels demand, starting in June. Non-retail sales increased by 14% year-on-year, mainly helped by the improved commercial sales, supported by the partial recovery of the aviation business. In Gas and Power, total gas volumes were slightly down year-on-year, in the context of lower market demand and supported by higher third-party supply, which almost compensated our decreasing equity gas production. This represents very good performance considering the current context with gas supply tightness. In the second quarter, we increased our share in Romanian gas consumption to 51% compared to 44% in the second quarter of last year. Starting this quarter, we delivered to the regulated market, households, as well as heat producers for households consumption, the gas quantities as per received allocation. In the second quarter, the quantities subject to capped prices represented a very small portion of our total gas sales, as when Ordinance 27 was introduced, most of our volumes were already contracted. Brazi net electrical output was 62% higher year-on-year, covering 8% in Romania's generation mix. The power plant was in a planned outage for half of its capacity in April 2022 versus being at full capacity in April 2021. Moving now to slide 7, total organic CapEx amounted to RON 1.4 billion in the first half of 2022, 15% higher year-on-year. The majority, RON 1 billion, was directed to Exploration and Production, where we finalized the drilling of 21 new wells and sidetracks and performed over 320 workover jobs. In Refining and Marketing, most of the investments were for the ongoing major projects at the Petrobrazi refinery. In Gas and Power, the majority of investments were directed to the Brazi power plant planned maintenance shutdown. For 2022, we maintain our estimated CapEx of around RON 4 billion, approximately 40% higher year-on-year. Regarding our E&A activities, in offshore Bulgaria we plan to spud one exploration well in 2023 and continue prospectivity and evaluation. In Georgia Block II, the seismic acquisition tendering is ongoing, with the timing still to be determined. Moving now to Slide 8, I am happy to share with you our progress in terms of sustainability, which is an important topic on our Board's agenda. For us, 2021 was a milestone year, with the launch of our Strategy 2030 and our ambitious target to transform for a lower carbon future. We put forward the largest private investment plan in the Romanian energy sector, totaling EUR 11 billion, of which around 35% will go to low and zero carbon solutions. On our journey to reach net zero operations by 2050, we aim for a 30% reduction in the carbon emissions of our operations by 2030, versus 2019. In 2021, we managed to decrease Scope 1 and 2 to carbon intensity by approximately 10%, a downward trend which continued this year. In Exploration and Production, the gas to power and combined heat and power installed capacity increased to around 70 megawatts. These small power plants mainly exploit the energy of the associated gases that otherwise cannot be used, and ensure around 70% of Exploration and Production annual electricity consumption. Overall, investments in energy efficiency projects amounted to EUR 36 million, 17% higher year-on-year. Last year, we also continued our contribution to the largest privately funded forestation campaign and planted another 600,000 seedlings, paving the way to reaching our goal of 2 million seedlings in total by the end of 2022. Moving now to the social aspects of our business, we keep a relentless focus on safety and health, and genuine respect for diversity. We also want to be a strategic partner for the development of our communities. Last year, we spent EUR 11 million for social projects in our sites, almost double versus the previous year. With regards to governance, in April this year, we published our first remuneration report, which has as key design principles, a high performance orientation and share-based long-term incentives. By including sustainability targets in terms of monitoring of safety metrics as well as CO2 reduction targets, we underline our commitment to sustainability. In the end, I want to highlight that our efforts to increase performance and disclosure in terms of ESG were recognized by important ratings agencies. For example, Sustainalytics placed us among the top 3% performing peer companies and improved our score and rating versus the previous assessment. Please let me now hand over to Alina, who will go into the financials and the outlook in detail.

Thank you, Christina, and good afternoon also from my side. I will continue the presentation with Slide 10, starting with some highlights of the income statement, with focus on the developments of the second quarter of 2022 versus the similar period of 2021. Sales increased by 160% year-on-year, reflecting higher commodity prices and higher sales volumes of petroleum products and electricity, as well as relatively stable gas sales volumes. Exploration and Production Clean Operating Result increased to RON 1.9 billion, from RON 0.5 billion in the second quarter of last year, in the context of higher commodity prices and favorable exchange rate. This effect was partly offset by increased taxation and lower volumes. Refining and Marketing Clean CCS operating result almost tripled year-on-year, reaching RON 1.2 billion, following significantly higher refining margin, partly offset by lower retail margins. Gas and Power Clean operating result increased to RON 816 million, from RON 61 million in the second quarter of last year, reflecting strong performance in both Gas and Power businesses. The clean consolidation line of minus RON 228 million in the second quarter of 2022 reflects mainly the unrealized profits elimination as a result of higher margin for crude oil and petroleum products, due to higher quotation. Consequently, the Group Clean CCS operating result increased year-on-year by 330%, to RON 3.7 billion. For the second quarter of 2022, we recorded inventory holding gains of RON 322 million, compared to RON 83 million in the second quarter of last year. In both periods, they reflect the increase of crude prices over the quarter. Net special charges of RON 450 million were recorded in the second quarter of 2022, compared to RON 403 million in the second quarter of last year. In both periods, they mainly refer to net temporary losses from power forward contracts. The Clean CCS net income attributable to stockholders more than quadrupled year-on-year to almost RON 3 billion. The reported Net income attributable to stockholders was RON 2.9 billion, from RON 406 million in the second quarter of 2021. Let me go on to Slide 11, which shows the major building blocks for the development of the Clean CCS Operating Result. I will start with Exploration and Production, where Clean Operating Result significantly improved to RON 1.9 billion. The positive market effect deviation of almost RON 1.4 billion was triggered by the steep increase in oil and gas prices and favorable evolution of the U.S. dollar versus RON. Nevertheless, gas market price increase was offset to a large extent by the specific Exploration and Production gas tax, driven by high supplementary taxation and further increased by the current methodology of royalties being partly based on CEGH price, which was significantly higher than the realized price. The negative volume deviation of minus RON 28 million is due to the 10% lower hydrocarbon sales. Clean exploration expenses decreased by RON 14 million and other deviations include lower production costs, driven by a one-off effect related to a tax audit overcompensating both cost inflation, and higher depreciation. Looking at the lower chart, Refining and Marketing Clean CCS Operating Result almost tripled compared to the second quarter of 2021. The positive market effect reflects the record high refining margin as a result of higher product spreads. Operational effects in Refining and Marketing were overall positive and mainly reflect higher year-on-year volumes for refined products and improved commercial performance, partly counterbalanced by lower retail margins. In Gas and Power, the Clean Operating Result significantly increased year-on-year reaching a record high for these lines of business. The gas business recorded a very strong result, driven by the positive effect of increasing prices on international gas transactions, with volumes sourced in the previous periods at lower prices. The power business also had a good contribution to the second quarter of 2022 results, built on an environment with increasing prices and higher power production. These positive effects were only partly offset by the negative impact from the power forward sale contracts concluded in previous periods and the newly introduced power over taxation. On Slide 12, I would like to continue with the highlights of our cash flow statement. In the second quarter of 2022, we achieved an operating cash flow of RON 3.7 billion, 148% higher year-on-year, reflecting the positive trend of the operating result and the negative net working capital changes. Regarding the evolution of the net working capital, in the second quarter of 2022, we recorded a cash outflow of RON 762 million, compared to RON 169 million in the second quarter of 2021. The outflow in the second quarter of 2022 was due to the increase in inventories driven by higher unit costs following the increase in quotations, as well as by higher quantities of crude oil, petroleum products and natural gas in stock. Receivables also increased due to the higher price environment. This was partly counterbalanced by the increase in liabilities mainly due to higher acquisitions of imported crude oil, petroleum products and materials in order to cover market needs. Our net payments for investments amounted to RON 0.72 billion in the second quarter of 2022, significantly higher year-on-year, as the second quarter of last year reflected the net proceeds from disposal of Kazakhstan assets amounting to around RON 0.5 billion. Our base dividends for the financial year 2021, amounting to RON 1.9 billion, were paid in June. The net cash position including leases increased to RON 12.3 billion at the end of the second quarter of 2022 versus RON 6.5 billion at the end of the second quarter of 2021. The special dividends approved by the general meeting of shareholders on the 26th of July, in total amount of RON 2.5 billion, will be paid starting 2nd of September. Let me conclude our presentation outlook on Slide 13. We expect Brent oil price in 2022 to be above $100 per barrel, higher than our previous assumption of $95 per barrel and significantly above the range of $65 to $70 per barrel assumed in our strategy. Regarding production, in 2022 we aim to contain the year-on-year hydrocarbon production decline, excluding portfolio optimization, at below 7%, and we expect a lower decline for oil than for gas. We expect inflationary pressure on our costs to persist throughout the year. Therefore, we currently see production cost above $13 per barrel of oil equivalent for the year 2022. In Refining and Marketing, we expect extreme market volatility for both crude and product prices. We currently estimate the 2022 refining margins to higher than $15 per barrel, reflecting the exceptionally high margins in the first half of the year. The refinery utilization rate is estimated to be above 95% in 2022. As Christina mentioned earlier, CapEx is expected to be around RON 4 billion in 2022, of which RON 2.6 billion in Exploration and Production and RON 0.8 billion in Refining and Marketing. In 2022, we expect a positive free cash flow, even after the payment of both base and special dividends. Retail demand is expected to be broadly flat year-on-year, while gas and power are expected to be lower than in 2021. Our total refined product sales are forecasted to be similar with 2021. Total gas sales volumes are estimated to be lower, while net electrical output is expected to be higher, given the high utilization of the power plant in the first half of the year. We currently do not expect new full lockdowns, but, if this is the case, we have a good track record in managing our operations. The outlook figures are also based on the assumptions of no significant supply disruptions. With this, I close our presentation and thank you for your attention. We are now available for your questions.

[Operator Instructions] Thank you. We'll now take our first question, please standby. This is from the line of Tamas Pletser from Erste Investment.

I got 2 questions. First of all, you mentioned in the report that your refinery utilization was down to 86%. What was the reason that it went down? Did you have some maintained shutdowns or any other work as basically the environment is very encouraging and very strong. So I suppose you should have had a higher utilization. That would be my first question. And my second question is, I think you probably mentioned during the presentation, I listened to that one that your operating cost in E&P went down due to a one-off issue, a one-off item. Can you just elaborate what it was and what would have been the operating expense without this one-off?

Tamas, thank you for your questions, and thank you for joining us today. Radu will answer the question on refined utilization, why it was down. And Alina with regards to the one-off in the E&P operating costs.

Tamas, thank you very much for the question. So refining utilization indeed level 86% in the context of the plant shutdown. We are in the cycle of a 5-year shutdown, and therefore, this was a necessary shutdown, maintenance shutdown, mend to help us running high until the big shutdown which we are going to have in 2023. So it was a plant shutdown. This is the reason why we are running on 86%. But right now, we have all the technical requisites in place to run high until next spring.

So just -- can I have just a follow-up here? Will this maintenance shutdown effect also the first quarter period? Or did you finish this during the second quarter?

No, it was just in the second quarter, reflected in the numbers that was second quarter.

Also that means that in the third quarter, you should have basically full capacity utilization?

We are having obviously all the incentives to run on the highest level, yes.

I will continue with the second question related to the one-off in E&P. It is related to a fiscal audit, which covered the previous period between 2014 and 2016, quite old period, in which we managed to recover some money which had a positive impact on the production cost. This had an impact of approximately $2.2 per barrel. So without this, yes, it was close to 11%, so it would be around $13.2 per barrel production cost.

We'll now take our next question. Please stand by. The question is from the line of Irina Railean from BT Capital Partners.

I have several questions. The first one is regarding the Offshore Law. You have mentioned that you still need some clarifications regarding the law, and I'd like to know what you still need to make clear from the authorities. Also, I'd like to ask regarding the Eldrive, you see any chances to reverse some of the impairments you have registered in 2020 given the current market context and favorable energy prices. And the third question relates to the international gas transaction you have mentioned in your report. I'd like you to know, are these imports, exports, how could you -- I would like to hear a little bit? I mean, is the importing or exporting gas -- you have mentioned something like 5% of sales is there from imports, if you could just detail a little bit here?

I will take your first question with regards to Offshore Law. Alina will cover impairments and Franck will talk about the international gas transactions that we mentioned. Let me just a net new moment overall Romgaz and Exxon, we believe, are close to having the deal completed actually in this quarter, and we are ready with our team and international team set up to take over operatorship of the block. The offshore load changes did absolutely bring some improvements, and we welcome them. However, we do see need clarification, particularly on the aspects of the free market provisions. Once we are the operator and we see these clarifications provided from the Romanian state, then it will be 9 to 12 months for FID, which is why we're estimating a mid-2023. So in summary, the main areas that we're looking for is clarification with regards to right freely market. If I just take you back, there were 3 kind of key prerequisites that we needed with regards to the Offshore Law -- changes in the offshore Law; one with improvement in the [sections], the second stability around those fiscal terms and third was the rate-free market. So in the context of the current rate very challenging environment, there are aspects of the Offshore Law that have been put in place that we need to understand further.

And how should this clarifications, I mean, look like should it be like something of a guarantee that the price or the markets will be liberalized and no longer will be regulated again? Or what exactly should you look like to be like to meet your expectations? What format should they have?

Yes. At this point in time, we're just looking for clarification to understand what has been put in the Offshore Law and therefore how they will be implemented in that in type articles about it to understand that. How those clarifications come about will be up to the authorities in that.

All right. And what will happen? Do you estimate I mean, to even postpone the final investment decision, you mentioned something like mid-2023? I'm asking just because the context is this high energy prices, is that the governments all around Europe, I think, are trying compensate or somehow to limit this growth in energy prices is different kind of measures for particular state. And that's why I'm asking how will you approach because it may still take some time for the government to totally liberalize the market. That is because they somehow try to compensate and help consumers, how is your approach here that you wait until the market will be total liberalized? Or how do you see the sensation?

So I think you touched on a few, I think, very important points there. First probably, I think it's definitely fair to say that Neptun Deep is a very strategic project for the company, but also for the country, especially in the current geopolitical context and the strong need for, I would say, non-Russian or indigenous European gas to be produced. I think in that context, we have seen improvements, and therefore, we are looking for clarification of it. We also have seen a change, I think, in phase, which we welcome as well. But I think your points are exactly right. We are seeing lots of interventions into the free market at this point in time. And that's why we're selecting for clarifications because this gas, if we're able to stick to the time line, we'll come on in 5 years' time. And actually, we'll be in production for over 20 years. So just really understanding this and making sure that we understand this despite some of the interventions that are going on in the market right now, and this is why we need some clarifications of that, but our goal remains to get these clarifications and move the project forward as quickly as possible. Everybody is incentivized to do that and we are definitely part of that. Turning to your question on impairments for Alina?

I will continue with impairment. So from today's perspective, we do not see any impairment situation. And the reason for that being that this high crude prices that we see right now, we believe, are temporary. So the long-term assumptions for crude price remain unchanged from our perspective. Of course, we look at this on a quarterly basis, and we'll continue trying to understand and reevaluate if there is any trigger. But from today's perspective, there is no trigger for reversal of impairment.

Could you remind us, what is the long-term assumption of -- for the oil price?

Somewhere between $60 to $70 per barrel.

Franck speaking. So in terms of questions, so maybe to go back a bit to the history 3 years ago, we know we started to develop a trading position and a trading portfolio, mainly looking at Southeast Europe, so not just Romania, from Hungary to Greece, including Moldova. And we have started to build position in these different countries to diversify our position from Romania with our equity gas. So first of all, all electricity gas is sold in Romania. And what the trading -- international trading we are talking about is mainly buy and sell, we are doing a broad so from LNG to Greece in Greece to gas on the NGP in Hungary. So that's the -- where this international trading is coming from.

Okay. Basically trading activity, not necessarily exporting actual production or importing volumes? I understand. Thank you.

Thank you. We'll now take our next question. Please standby. The question is from the line of Oleg Galbur from Raiffeisen Bank.

Yes. I hope you can hear me well.

Very well, Oleg.

Excellent. I have 3 sets of questions, and I'll start with the upstream segment. I was wondering whether the new Offshore Law was already having an impact on your second quarter results? I mean, if yes, maybe you could share with us, what was the magnitude of this impact? And also regarding the new Offshore Law, it is talking about the so-called deep onshore gas, which is also subject to more favorable taxation. Could you tell us what is the percentage of totally produced onshore gas, which would qualify as a deep onshore gas at Petrom? And then on refining, clearly, refining margins have been very supportive during the second quarter. However, you have guided for lower levels in the second half of this year of approximately USD15 per barrel according to my calculation. Could you please explain why do you expect the European refining margins to decline, while the European oil embargo on Russia is still not taking a full effect, which means probably even less export or import of oil products from Russia until the end of the year? And also, maybe you can share with us what level of refining margins do you see or have you seen in July? And how do they compare with the second quarter average? And lastly, it's a bit more challenging on the Gas & Power segment, while I understand that Petrom has strongly benefited from a favorable market environment in both power and gas business, without a proper split, it is -- as I understand, very difficult for us to properly analyze how much of the second quarter result was driven by, let's say, one-off development such as gains on the trading activities that you just were talking about. So could you please provide hopefully some details on the key earnings drivers in the segment? For example, what was the rough at least split of earnings between gas and power and what was the level of earnings contributed by, let's put it, non-repeatable activities?

All right. Thank you very much for your questions. Let Alina is came to touch on the impact of the Offshore Law in the second quarter results. Maybe I'll just do a quick one on the deep onshore. You're absolutely right. It's an Offshore Law, but it touches on the onshore as well on the deep onshore. Right now, we're absolutely still waiting for clarification from the regulator on this. We've submitted a list of fields. But I think what we would say at maximum, it's about 15% of our total gas production in Romania. But I would say still waiting on clarification from that. So Alina, maybe do you want to touch on the offshore impact in the second quarter?

Okay. Basically, in the Offshore Law has been approved and adopted at the end of May. So we had -- we had the June month, which was covered within new Offshore Law. And we had a positive impact, a single-digit million euro for June.

Radu, would you like to address the questions with regard to refining margins?

Yes.

If you have the answers, what was July like?

Yes. Thank you for the question. From -- let me start with the last part of the last question from the ones the refining margin, when we talk about the July indication. So we see in July indication lower under average of Q2. And then in this context, then I will be going to why do we go for an indication level of 15 -- above 15% for the rest of the year. It's because we've been seeing at the very -- in the Q2, record margins in the context of very high quotations for the diesel and gasoline. So we've been seeing a complete decoupling of those quotations versus the crude. And indeed, you are right, even though we are going to see in the next period for the restrictions from -- for the products and crude from Russia, we already recognized that a majority of the players are trying to find solutions, intensive solutions for supplying products from different sources on one hand. And on the other hand, because of the high prices, we recognized in end of Q2, and there is a trend that we see as early in July, some demand destruction. So in this context, we believe that it's reasonable to assume still a very pretty high Q3 -- still a very pretty high Q3, but relatively lower for what we've been seeing so far Q4 and therefore, the indication of about 15% for the year. I hope this answers your questions, Oleg. Thank you.

Oleg, you're right. We don't provide more granularity with regards to gas and power. I think the way Franck had indicated, I think it's roughly that we would say 2/3 gas, 1/3 power at this point in time. We'll come back and have a look at whether we're ready to give more transparency. But at this point in time, that would be the indication that we would give.

We'll now take our next question. Please standby, question is from the line of Iuliana Ciopraga from Wood & Company.

Two questions on my side. First, can you comment on your gas price expectations for the following quarters on the upstream segment? I mean in -- what we've seen in the second quarter, there was a decrease compared with the first quarter, if you could explain that as well. And also related to gas, if you could give us some insight into potential sales to households and heating producers in first quarter 2023? And also regarding retail margins for refining, are you seeing an improvement now after the recent decrease in oil prices? That's all from my side.

Could you repeat the last question, please?

Iuliana, how are you, by the way? Nice to hear from you. The last one, it was a bit faster.

On the retail margins, are you seeing an improvement now in retail margins for refining, I mean on the Refining and Marketing side from the lower crude price? We are seeing the decrease in fuel prices. And I was wondering if you see an improvement in margins coming from that?

Franck would you like to touch on sales to households and heating. I think you were saying 1Q '23. Is that correct, Iuliana? Sorry, it was a bit fast. Okay. Yes. And then gas expectations and then retail margins. Franck, do you…

Yes. I think I don't have the value for Q1 '23 -- 2023, I have to say. But for the full year 2022, it's about 3.4 terawatt hour of total gas for this segment. And it's linked to the fact when the regulation came in place, we have already contracted some of our gas, and therefore, it was -- what was available. I will say, for Q1, it will be certainly in the same ratio at what we had in 2022.

Same ratio, medium-ish percentage?

Yes, percentage.

It was quite low because I think you guided 10% of sales from April to December. So you saw -- you keep that 10% in the first quarter of 2022, right?

Yes. Yes, because we had also some gas sold to the gas release program, the previous program before the new regulation. So we had also about 6 terawatt hour on the gas risk program for 2022. On the gas price, yes. So on Q2, we have an impact with the cap on the gas price, of course, that had a consequence of -- on the sales to upstream. Expectations for Q3, I would say, it's -- we expect a slight increase because regulations have changed again in July. So we had another change in July. But I expect an increase due to the fact the way the new regulation has been drafted in July, so a slight increase.

Can you comment on it in July?

There was -- we put in -- beginning of July, there was a modification of the emergency ordinance where the cap price for producer will apply to any customers, which we have been quite an impact because it means that even for B2B, we will have to sell at the cap price. This has been canceled now. So we will use -- we don't have to sell any more at the cap price but market price through B2B customer.

Radu, do you want the retail margins?

Yes. On retail margin, Iuliana, I would say that I would just mention the fact that our pricing policy is a moderate pricing policy. So in times when we have an increasing pricing environment, our retail margin is under pressure. And that's something that we were feeling strongly in Q2. And that's the reason why the rate margin was under pressure at the time if we are seeing all these days, a different -- a slightly different trend that is definitely helping the retail margin. So that -- but at the end of the day, it's a very high volatility, so very difficult to predict how this will go. But again, if we see -- we will see in next period a decreasing trend on quotations. This will definitely help to improve the retail margin. I just want to check, did you refer as well to the refining margin or only retail margin.

Retail?

Retail. Yes. So that's on the part on that.

Just as a follow-up to the first a question on the gas price. I mean it is a bit surprising for Romgaz will guide, they would sell 80% regulated price in the first quarter of 2023. And that -- so you're confirming that you expect to sell just 10% of first quarter volumes at regulated prices?

I don't have the figure with me for Q1 next year. I mentioned the figure for 2022. But the difference with Petrom -- with Romgaz, sorry, and I cannot really comment on gas figures, of course, as you can imagine. But we have our gas power plant running, is quite a big consumer internally, internal consumer. And we have end-user portfolio, which will be hedged for the gas year. So it's quite significantly already hedged when the regulation came in place.

[Operator Instructions] We now can take the next question. Please standby. The next question is from the line of Laura Simion from BRD GSG.

Good afternoon, everyone, and congratulations on the results. Part of my question are already answered. I will put a follow-up question on regulated gas market. So you mentioned this quarter, the quantities wasn't small and for the second -- for the rest of the year, do you expect it to sell about 3.4 terawatts? Is this correct?

Yes. For full year 2022…

And another short question on windfall tax for power. Did you pay the -- in Q2, windfall tax for power, and if you could give an indication about the amount?

Is there any other questions that you have? I just want to check.

No, no. That's all.

Okay. Thanks, Laura. Alina will address your windfall tax question.

Yes, I can confirm that windfall tax for power was applicable in the second quarter, and we have paid. We do not disclose exactly the amount. We had a disclosure when it comes to the entire implication of the ordinance 77, which was mid-double-digit million euro overall from the impact, and this includes the windfall for power.

For the full year?

No, for the Q2.

It's for the entire year, sorry, starting from the beginning of Q2 to the end of the year.

Okay. Thank you. And we'll now take the next question. It is from the line of Cristian Petre from NN Pensii.

Congratulations for the good results. Just if you can comment on the demand destruction and if you see any slowdown in the -- after this -- due to these high prices?

Demand destruction, Cristian, thank you for your question. Maybe we'll set products, and I also sure if you're interested in one particular product or not, but maybe we talk a little bit on the demand destruction that we're seeing in the second quarter with regards to fuels. And then after that goes to the gas and power markets, if that's okay. Radu, will you just touch on that.

Yes. Thank you for the question, Cristian. So indeed, as I was mentioning, we see demand destruction on products, on finished products, especially at the end of Q2 in the context of the high prices and that's the trend stays as well in July on one hand. And on the other hand, if you look to the commercial business, here, we see still solid demand, so that will stay that we some probably for the rest of the period. And if we look on aviation, aviation stays high, it was worth mentioning a good recovery here still, even though we reached 100% increase in a month versus the prior year on a cumulative picture for 2022, the aviation will be sitting on a 15% level lower than 2019. So that means that most probably early to see a complete recovery to the prior level of pandemic to innovation in 2023.

So Cristian, Franck is speaking. For the gas, we have seen -- I think it was in the presentation, 19% reduction versus last year. So part of it is linked to weather. So when we look at the consumption on the TransGas network and versus the DSO, we can see a different value for this decline. We see, especially in Q1, we have quite a strong decline on the TransGas network, so -- which should be more industrial consumption. But in Q2, it was more stable. So I think it's still maybe too early to judge on the demand destruction. We have seen clearly some reduction. But I think we need to wait some of the customer have been productive with the gas cap on especially the SME sectors and the household. So it's a bit too early. We have seen some chemical plant, of course, stop during these high prices in Q1. But let's see what will impact in the second half. But we expect still a decrease of consumption for the year versus last year. On the power, we see a 6% demand. And I think here also, I mean, it was in the press. So energy-intensive consumers, we have reduced our overall consumption due to the high price. I think this clearly is something which is -- will have an impact on the supply demand.

We will take next our next question. It is from the line of Iuliana Ciopraga from Wood & Co.

Just a follow-up question regarding the new Offshore Law and the gas production, so you're seeing 15% of total gas collection -- you mean onshore. For that part, the new Offshore Law could be applicable, but you don't know yet. And that adds to the offshore production, current production. So basically, it would be around 40% when you also lower the supply if we include the 15%. Is that right?

Yes.

Yes, lot of it has to due respect, but yes, that is right.

Just to maybe reemphasize again that 15% is the maximum. And then we got from the regulator, a lot of requests to come up with a lot of details, and it will be a process that will take several months to identify exactly how much would be the real one, yes? So that's the maximum value.

There are no more questions. I want to thank you again for taking part in our conference call. For further information, please not hesitate to hone our Investor Relations team. Until our next call, we wish you all the best. Goodbye.