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 and 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 and 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 fourth quarter results, followed by a Q&A session. Christina Verchere, Chief Executive Officer, will provide the key highlights about the macro economic and regulatory environment, operational performance in the 2030 strategy execution. Alina Popa, Chief Financial Officer, will give you more details on our financial performance and the brief outlook. Afterwards, all 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 fourth quarter of 2022. Let me first draw your attention to our legal disclaimer, which you can read in detail on Slide 2. Let me start by taking a look at the evolution of commodity prices and the main currencies in the fourth quarter of 2022. Brent price continued its decline in the fourth quarter and averaged $89 per barrel, 12% lower versus the previous quarter. In a year-on-year comparison, the average Brent price was up by 11%. In the fourth quarter of 2022 and on a year-on-year basis, the RON depreciated versus the U.S. dollar by 12%, but maintained broadly stable against the euro, supported by the Central Bank's interventions in the market. OMV Petrom indicator refining margin reached $18.80 per barrel in the fourth quarter, more than $11 higher year-on-year as a result of higher product spreads, mainly for diesel, gasoline and jet. In the natural gas market, the European spot prices fell by around 50% during the quarter due to high storage levels as well as an unusually mild weather. At an average of EUR 99 per megawatt hour CEGH price, more than halved compared to the record high levels in the third quarter and was 4% higher year-on-year. Gas prices on the Romanian centralized market also increased with day-ahead prices 3% higher year-on-year to an average of EUR 93 per megawatt hour. Base load electricity prices in Romania decreased by 45% from the record highs in the third quarter and was 7% higher year-on-year in euro terms. Average market spark spread reached a record high for fourth quarter as the electricity price increase outpaced those in gas and CO2 prices. The CO2 price continued its quarter-on-quarter decrease. This was due to the downward pressure from lower industrial demand triggered by high energy prices. Moving to the macroeconomic environment. The latest available data shows that in the third quarter of 2022, Romanian GDP increased by 4.6% year-on-year, mostly supported by services. In October, the IMF estimated GDP growth for 2023 and 2024 at 3.1% and 3.8% year-on-year, respectively. Romania's economy is set to slow down due to higher inflation, tighter financial conditions and the risks and uncertainties generated by the prolonged war in Ukraine and the related sanctions. The Consumer price index in the month of December 2022 versus December 2021 was 16.4%, driven primarily by energy prices and their impact on associated goods and services. For 2023, the National Bank of Romania estimates a gradual decrease of the inflation rate more significant in the second half with an average 11% for the full year. Looking at the energy sector in the fourth quarter of 2022 and in the context of high energy prices and inflation concerns, the demand for gas and power significantly decreased in Romania. However, the demand for fuels increased year-on-year despite rising cost of living and fuel price pressure, in part helped by the voluntary discount applied in Romania as well as warm weather. Demand for retail fuels in Romania increased by almost 6% year-on-year while the commercial market demand decreased by 4% year-on-year. Jet demand continued to recover, increasing by 35% year-on-year from a low basis due to continued strong recovery in air travel. Gas demand as per internal estimates decreased by 22% year-on-year, reaching the lowest level for fourth quarter in the last 2 decades, following reduced end-user consumption impacted by high prices and warm weather. Power demand was lower by 12% year-on-year, while domestic power production decreased by 4% year-on-year. Romania switching to a net exporter position from a net importer position of power in the third quarter. Power production from wind, gas and coal had a significantly lower contribution to the generation mix while hydro generation increased. In our previous calls, we mentioned the temporary measures implemented by the Romanian government to address the high gas and power prices applicable starting April 2022. In December 2022, the Parliament approved Law 357, Transposing Emergency Ordinance 119 and extending its applicability to March 2025. The main provisions of this ordinance refer to the reduction of the gas price cap for heat producers for households and the introduction of a capped transfer price for the equity gas used in power plants. The windfall tax for electricity producers increased from 80% to 100%. A new tax on gas and power trading profits, taxing all profits above 2% was introduced. As one of the main players in the gas and power markets, we are revisiting our future sales strategies to optimize our business in this highly regulated environment. As mentioned, the gas volumes used in the Brazi power plant are also subject to capped prices starting September 2022. Consequently, the portion of our gas portfolio, subject to the new regulation, increased to almost 80% in the fourth quarter of 2022. And for 2023, we estimate that 75% of our gas portfolio will be regulated. The regulations implemented in 2022 are also impacting our power sales portfolio, leading to an increase in the weight of regulated volumes to above 90% in the fourth quarter. The windfall tax for power production recorded by OMV Petrom in the fourth quarter was around RON 740 million. In November, the government adopted the Emergency Ordinance 153, which introduced the obligation of certain electricity producers, including gas-fired power plants to sell electricity at RON 450 per megawatt hour to OPCOM through the centralized acquisition mechanism from the 1st of January 2023 and until the 31st of March 2025. For 2023, given the regulatory framework, all our power sales in Romania are subject to some form of regulation or taxation. In addition, the temporary measures for the fuels market were applicable voluntarily until the end of 2022. We continue to apply these measures in the fourth quarter of 2022 with a negative impact of our Clean CCS operating result of around RON 210 million. As mentioned in our trading update, the EU Regulation 1854/2022 that introduced a temporary solidarity contribution has been transferred in Romania legislation by the Government Emergency Ordinance 186 published on the 29th of December 2022. Based on our 2022 preliminary financials and the current provision of this Emergency Ordinance OMV Petrom is expected not to be subject to the solidarity contribution for the fiscal year 2022, having less than 75% of its turnover in the defined areas of the extraction of crude, extraction of natural gas, extraction of coal and refining business. The Emergency Ordinance may be subject to changes during the Parliamentary process approval. As a reminder, as a consequence of the newly introduced regulations, taxes and contributions and also of the high commodity price environment, 2022 direct taxes and contributions increased approximately 4x year-on-year, to approximately RON 10 billion for 2022. As mentioned previously, we recognize the need for the government to support consumers in these very unusual times. However, the frequent interventions, particularly in the Gas and Power segments and the lack of consultation brings volatility and instability for the market participants and increased risk of market disruptions, including related to the security of supply. Price caps support demand, but are a disincentive for investments in energy-efficient projects and send distorted signals to the market. Therefore intervention should be temporary in nature, targeted mostly to vulnerable consumers and taken only after a robust impact assessment. In the medium term, free market principles are fundamental for investments. On Slide 6, we present the key highlights for the quarter. At group level, Clean CCS operating result of RON 2.1 billion was 38% higher year-on-year. Our operating cash flow decreased by 13% year-on-year to RON 1.8 billion, while Clean CCS return on average capital employed reached 38 percentage points. The overall good results in exploration production as well as in refining and marketing was supported by high commodity prices and our strong operational performance. The Gas & Power result was only marginally positive on increased regulation and over taxation. In Exploration and Production, we recorded slightly higher quarter-on-quarter production in both oil and gas due to increased contribution from drilling and workovers and lower maintenance works. In Refining and Marketing, Petrobrazi refinery had an excellent utilization rate of 99%. Our refined product sales and retail sales increased year-on-year by 5% and 7%, respectively. In Gas & Power, total gas sales volumes increased by 2% year-on-year triggered by a large number of new customers under supply of last resort mechanism. Based on the preliminary results for 2022, the Executive Board proposes for the 2022 financial year, a base dividend per share of RON 0.0375, 10% higher year-on-year. This is at the top end of the range announced as part of our Strategy 2030. At the same time, the Executive Board is planning to propose a special dividend to be paid in 2023 and the value will be announced in mid-2023. Alina will provide more details on this. We are further focused on delivering on our 3 strategic directions and preparing OMV Petrom for capturing the energy transition opportunities. Regarding regional gas and our Neptun Deep strategic project, in December, we submitted the Declaration of Commerciality. This represents an intermediate step towards the final investment decisions. As operator of block, we are currently collecting offers from contractors and negotiating contracts and assuming all prerequisites are in place, we plan for the FID in 2023 -- in middle of 2023. On HSSE, the total recordable injury rate for the year 2022 was 0.38. Based on our preliminary data, the GHG intensity slightly decreased with lower index levels and exploration production and at the Brazi power plant, reflecting our ongoing initiatives to reduce carbon emissions. On Slide 7, I would like to present the operational performance, and I will start with exploration and production. Hydrocarbon production decreased by 3.4% due to the natural decline in the main fields in Romania and the divestment of the 40 marginal fields to Dacian Petroleum in the fourth quarter of 2021, partly offset by contribution of new wells and workovers. Excluding portfolio optimization, production in Romania decreased by 3%. For the full year, daily average production, excluding portfolio optimization, declined by 5.6%, slightly better than our previous guidance. Production cost per barrel of oil equivalent increased by 5% year-on-year to a level of $13.43. This was mainly due to higher costs related to personnel and services and lower production available for sale. Personnel costs increased due to one-off payments. These were partially offset by the favorable foreign exchange evolution. We continue to focus on containing costs and counteracting the pressure coming from suppliers by intensifying our procurement activities. In Refining and Marketing, the refining utilization rate was 99%, well above the European average. Total refined product sales volumes recorded a 5% year-on-year increase driven by improved demand. Our retail sales volumes were higher by 7% due to increased demand helped by the warm weather and the voluntary discount in Romania. Non-retail sales increased by 4% year-on-year, mainly helped by the partial recovery of the aviation business and increased sales on the local market. In Gas & Power, total gas sales volumes were 2% up year-on-year, while gas volumes sold to third parties increased by 6% year-on-year. The lower equity gas production was compensated by higher third-party acquisitions a very good performance given the existing market supply challenges. During the fourth quarter, we continued to deliver to the regulated market, both households as well as heat producers for household consumption, the gas quantities as per received allocation. At the same time, our portfolio increased with a large number of customers under supply of last resort mechanism. The Brazi power plant generated 1.48 terawatt hour in the fourth quarter, maintaining its 11% share of Romania's electricity generation mix. Moving now to Slide 8. Total organic CapEx amounted to RON 3.6 billion in 2022, 26% higher year-on-year. The majority, RON 2.6 billion was directed to exploration and production, where we finalized the drilling of 55 new wells and sidetracks and performed almost 650 workover jobs. We ramped up drilling activities from 7 drilling rigs in the fourth quarter, up from 4 in the first quarter of 2022. In Refining and Marketing, most of the RON 0.8 billion investments were dedicated to the ongoing major projects at the Petrobrazi refinery. In Gas and Power, the majority of investments were directed to the Brazi power plant maintenance shutdown. For 2023, we plan investments of about RON 6 billion, approximately 70% higher year-on-year with increased investments dedicated mainly to the Neptun Deep project, accelerated low and zero carbon projects as well as the Petrobrazi refinery turnaround and related tie-in projects. RON 2.9 billion will be routed exploration and production, including for the Neptun Deep project. We plan to drill around 55 new wells and sidetracks and to perform around 450 workovers. The RON 2.2 billion refining and marketing investments will be directed mainly to the Petrobrazi refinery, including for the approximately 40-day turnaround in April and May. We are progressing with the new aromatic unit and our projects for producing advanced ethanol and SAF/HVO in the Petrobrazi refinery. Also at approximately 80-day planned shutdown of the Brazi power plant is scheduled between March and May as part of the RON 0.9 billion planned investments in the Gas & Power segment. Ladies and gentlemen, as 2022 was the first year of our new strategic cycle. Let me start -- let me present to you our progress in implementing our strategy last year and what we are planning to deliver this year. I will start with the first pillar of our strategy, Transition to low and zero carbon. In Gas & Power, we made good progress towards reaching our target of more than 1 gigawatt of installed photovoltaic capacity by 2030. In October, we announced our partnership with Complexul Energetic Oltenia with the development of 450 megawatts. In addition, we have developed a strong portfolio of projects, opportunities and initiatives in different phases of implementation, a well-balanced mix of our own developed projects and potential partnerships in renewable power. In the Petrobrazi refinery, the first batch of sustainable aviation fuel was produced by coprocessing locally produced rapeseed oil. In October, we announced the final investment decision of EUR 130 million for a new aromatics unit at the Petrobrazi refinery. This will function at modern operating standards with low environmental impact and will double the production capacity of the aromatics products to around 100,000 tonnes per year starting in 2026. On alternative mobility, 120 fast and ultra-fast charging points were installed at the end of 2022. Our plan for 2023 is to double the number of charging points, both within our own filling station network and in other destinations. Moving to the second pillar of our strategy: Grow regional gas. Our major project Neptun Deep is progressing, and we are only a few months away from a final investment decision in mid-2023, leading to first gas in 2027. As mentioned before, in the context of steep natural decline in our domestic gas production, we see Black Sea gas as a solution for securing Romania's energy independence. Regarding other expansion areas in the Black Sea, we are progressing well in Bulgaria, where we plan to drill 1 offshore well in 2023 or 2024. In the third strategic pillar, Optimize traditional business, we continue to capitalize on our integrated business model across all business segments, maximizing the value from our traditional asset base. Based on the very good results thus far, we accelerated the rollout of our partnership with Auchan, reaching 275 modernized stores at the end of 2022. The rollout in 400 Petrom-branded filling station is expected to be finalized this year, 1 year ahead of the initial plan. The utilization rate for Petrobrazi in 2022 was 95%, significantly above the European refining average proving once more the high-value performance of our refinery. For 2023, we expect the utilization rate of approximately 85%, reflecting the first major turnaround after a running period of 5 years, meeting our target to have 4 or 5 years between turnarounds. The Brazi power plant, which celebrated in 2022, 10 years of commercial operations generated a record high electrical output of 5 terawatt hours, representing 9% in Romania's generation mix, a very good contribution to the security of supply. In Gas & Power, we have intensified our activities in the neighboring markets via both gas and power buy and sell transactions, setting up a good foundation for further expansion of our regional footprint. Moreover, we have achieved diversification of our supply sources and supply chains. As our overarching ambition is to reduce the carbon intensity of our operations by 30% by 2030 compared to 2019, in 2023, we will continue to put our efforts into that. In 2022, we reduced our methane emissions intensity by 35% year-on-year, progressing towards our target of less than 0.2% by 2025. At the same time, we stick to our stronger commitment to increase the base dividend per share by 5% to 10% per annum on average by 2030. In 2022, we paid a record high amount as a base and special dividend, totaling RON 4.5 billion. We are also now proposing a base dividend for 2022 at the top end of our guidance for the yearly increase and are planning to propose the special dividend to paid in 2023, the value to be announced in mid-2023. 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 11, starting with some highlights of the income statement, with focus on the developments of the fourth quarter of 2022 versus the similar period of 2021. Sales increased by 91% year-on-year, reflecting higher commodity prices and higher sales volumes. Exploration and Production, Clean Operating Result increased to RON 1.1 billion from RON 0.6 billion in the fourth quarter of last year. The higher prices and the favorable exchange rate effects were partly offset by lower volumes as well as higher production costs. Refining and Marketing Clean CCS operating results increased by 57% year-on-year, reaching RON 0.9 billion, mainly due to the favorable evolution of the refining margin partly offset by lower retail and commercial margins. Gas and Power Clean Operating Result decreased to RON 132 million from RON 444 million in the fourth quarter last year. The good operational result in both gas and power businesses lines being severely impacted by the legislation in place with capped prices and over-taxation. The clean consolidation line of RON 30 million in the fourth quarter of 2022 reflects mainly the positive impact of decline of quotation. Consequently, the group's Clean CCS Operating Result increased by 38% year-on-year to RON 2.1 billion. For the fourth quarter of 2022, we recorded inventory holding losses of RON 126 million, mainly reflecting the decrease of crude prices over the quarter. For comparison, in the fourth quarter of last year, we recorded inventory holding gains of RON 122 million. Net special charges of RON 0.8 billion were recorded in the fourth quarter of 2022, mainly related to net impairments in Exploration and Production. In the fourth quarter of 2022, following the update of our mid-and long-term planning assumption and impairment test was performed for the Exploration and Production segment, which led to net impairment for tangible assets of RON 1.8 billion before tax. These impairments were driven mainly by revised future production profile for our assets due to steeper than previously expected natural decline and also by higher operating costs. These special charges were partly offset by the net temporary gains from power forward contracts in Gas and Power segment. For competitors, in the fourth quarter of 2021, the net special charges of RON 129 million, mainly related to temporary losses from power forward contracts in the Gas and Power segment. The Clean CCS net income attributable to stockholders increased by 60% year-on-year to RON 1.9 billion. The reported net income attributable to stockholders was RON 1.2 billion, 4% lower year-on-year. Let me go on to Slide 12, 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 1.1 billion. The positive market effect deviation of RON 550 million was triggered by the steep increase in oil and gas prices and favorable evolution of the U.S. dollar versus RON. Nevertheless, the positive effect from the higher gas market prices was partly offset by the increase in royalties paid, which are largely referenced to CEGH price. On a sharp upward trend on a year-on-year basis instead of realized gas price. The gas supplemental taxation recorded a decrease year-on-year, reflecting higher regulated sales quantities which are not subject to this tax. As just mentioned by Christina, the E&P realized gas price in the fourth quarter reflected the increasing sales volume at regulated prices as well as the quantities of gas for the Brazi power plant. The operational effects include a negative volume deviation due to the 4% lower hydrocarbon sales, higher production costs, driven by cost inflation and higher depreciation. These are more than compensated by the lower clean exploration expenses and portfolio effects on taxation. Looking at the lower chart, Refining and Marketing Clean CCS Operating Result increased by 57% compared to the fourth quarter of 2021. The positive market effect reflects the higher refining margin as a result of higher product spreads. Operational effects in Refining and Marketing was overall negative and mainly reflects lower retail and commercial margins as well as the fuel price discount voluntarily applied in Romania during the quarter. In Gas and Power, the Clean Operating Result decreased by 70% year-on-year. The result of a good operational business performance in both gas and power businesses was more than offset by legislation in place with regulated prices and over taxation. On Slide 30, I would like to continue with the highlights of our cash flow statement. In the fourth quarter of 2022, we achieved an operating cash flow of RON 1.8 billion, 13% lower year-on-year, reflecting the negative net working capital changes. Regarding the evolution of the net working capital, in the fourth quarter of 2022, we recorded a cash outflow of RON 0.9 billion compared to a cash inflow of RON 28 million in the fourth quarter of 2021. The outflow in the fourth quarter of 2022 was mainly due to increase in receivables largely related to the compensation to be received from the Romanian state for sales of natural gas as part of our supplier of last resort obligation, but due to higher quantities of natural gas and power delivered. The decrease in liabilities was mainly due to lower supplementary taxation as well as lower royalties driven by CEGH prices. This was partly counterbalanced by the decrease in inventories driven mainly by crude oil due to lower quantities of imported crude oil and lower quotations. Our net payment for investments amounted to RON 0.9 billion in the fourth quarter of 2022, 18% higher year-on-year. The net cash position, including leases increased to RON 13.5 billion at the end of the fourth quarter of 2022 versus RON 9.4 billion at the end of the fourth quarter of 2021. Moving now to Slide 15. Let me remind you that in December 2021, we reinforced our dividend policy with a stronger commitment announcing our target to increase our base dividend per share by 5% to 10% per annum on average over the Strategy 2030 cycle. This shows that we, the Executive Board of OMV Petrom are committed to deliver a competitive shareholder return also by paying attractive dividends. Based on 2022 preliminary results, the Executive Board proposes a dividend of RON 0.0375 per share for the 2022 financial year, 10% higher year-on-year at the high end of the range stated in our guidance. We believe that this proposal is competitive among regional peers from the perspective of a 9% dividend yield. The base dividend proposal is subject to the approval of the Supervisory Board and General Meeting of Shareholders which will take place in April. In addition, in line with our dividend guidance, we are planning to propose a special dividend to be paid in 2023 with the extra value to be announced in mid of 2023. Let me conclude our presentation with the outlook on Slide 15. We expect Brent oil price in 2023 to be above $80 per barrel, significantly above the range of $65 to $70 per barrel assumed in our Strategy 2030. For the years 2024 to 2025, we expect an average oil price of about $75 per barrel. Our hydrocarbon production in 2023 is expected to be around 110,000 barrels of oil equivalent per day, excluding possible divestments. For the year 2024 to 2025, our hydrocarbon production is estimated to be between 95,000 and 100,000 barrels of oil equivalent per day. We expect inflationary pressure on our costs to persist throughout the year. However, being supported by stronger U.S. dollar, we see the production cost at around $15 per barrel of oil equivalent for the year 2023 and at around $16 per barrel on average for 2023, 2024. In Refining and Marketing, we currently estimate an average refining margin higher than $9 per barrel in 2023 and the similar level also for 2024 and 2025 on average. The refinery utilization rate is estimated to be above 85% in 2023, considering the scheduled major refinery turnaround and about 95% in 2024, 2025. As Christina mentioned earlier, CapEx is expected to be around RON 6 billion in 2023, of which RON 2.9 billion dedicated to E&P, including Neptun Deep RON 2.2 billion in R&M and RON 0.9 billion in gas and power. For 2024 and 2025, CapEx is expected to increase to approximately RON 7 billion on average. In 2023, due to higher investments, we expect a marginally positive free cash flow before dividends, significantly lower compared to 2022 value of RON 8.2 billion. We envisage demand for all our products in Romania to be broadly flat year-on-year. When it comes to fuel, we refer here to the retail market only. We expect total refined product sales to decline compared to 2022 due to lower exports year-on-year, while our retail fuel sales are expected to be broadly flat. Our total gas sales volumes are envisaged to be lower, mainly on lower supply, both from equity and third parties. Net electrical output is also expected to be lower year-on-year in the context of a longer outage plan for 2.5 months for the entire capacity. In conclusion, in 2023, we will continue to deliver on our Strategy 2030 with significant increase in investments and competitive shareholder returns. With this, I close our presentation, and thank you for your attention. We are now open up for your questions.

[Operator Instructions]

The question comes from Tamas Pletser from Erste Investment.

I guess I'm interested in 2 topics basically. First is the FID on Neptun. What are the current situation with the negotiations with the Romanian government over those legislative issues that you have talked in the last quarter. What I remember that you talked about some minor problems within the offshore law. How do you proceed with the agreement of the government on these issues? And how do you see to be sure that you can make the FID on Neptun in the mid of this year? That would be my first question. And my second question is, what's your opinion about this current, I would say, excessive regulatory and taxation framework in Romania. Do you see some chances that the current system would ease I just see that the gas prices are now falling so maybe the government may not need to be so harsh on you potentially eliminate the price cap or anything like that. Do you see any chance for that to happen in the near future.

Thank you Tamas for your questions and for joining our call today. I will take the first question. I think we could all debate the second one as well, but maybe between Alina and Franck on that one. So on our Neptun FID, just as a reminder, we took over the operations -- the operator role in August of 2022, we have an international team in place, working very hard on progressing through understanding ultimately the cost base and the contracting side of it, but also we submitted our decorative commerciality from a regulatory side in line with our concession agreement at the end of last year. We are working on getting the key prerequisites in place. You are correct. There are some aspects with regards to the offshore law that need clarification with regards to stability, and we will be continuing the dialogue with the state on that, but we are continuing to progress in parallel to take the project forward.

Excuse me. And that basically means that these issues are still pending. So you don't have an agreement fully on this minor issues in the regulatory framework for offshore.

We're still working on getting the clarifications around that.

On the second question, I think -- the way I understood the question, Tamas, was a bit broader gas and power taxation, but also going into the solidarity contribution, if I got it right or...

Yes, yes. Yes, I'm thinking about the whole regulatory and fiscal framework. So do you see any chance that this very harsh environment from the side of the Romanian government would ease going forward due to the fact that the gas prices are not as high as they were before.

Okay. Okay. So basically, the interventions that were in 2022 in Gas & Power primarily were all of temporary in nature. Indeed, at the beginning, it was expected to be for a year, which was extended later on towards the end of the year until March 2025. So good thing is they have the temporary measures substance but nevertheless, we are seeing, of course, significant amounts coming from here and also we are affected from the capping as well. With regards to solidarity, you have seen we do not qualify on solidarity for OMV Petrom.

And I think on the temporary cycle of this taxes, we will also wait to see the reaction of the European Union because temporary when it's more than 2 years, start to be a bit long. So I think we will see if the European Union consider this as extreme position for the Romanian government. So that I think -- and also European Union is looking at -- to propose some change on the power market design, which could also bring some solution for Romania to be closer to European model than the heavy tax we are facing now. Also, the 98% tax on trading is quite extreme, I would say, compared to any other benchmark that you guys had.

The question comes from Raphaël DuBois from Societe Generale.

I have 3, if I may. The first one is on Neptun. You've provided us with the CapEx budget for 2023. it is still with the initial guidance of less than EUR 2 billion that you would have to spend on Neptun? Or is this already some sort of revised CapEx for June? And if you could remind us of the phasing of the spending, would you FID right in the middle of this year? That's my first question. Second one is on Petrobrazi turnaround and Brazi power plant turnaround, just if you could tell us if it will happen at the very same time. And last question, comparing the level of regulation in 4Q 2022 and 1Q 2023. Would you say that this level of regulation for this coming quarter will be harsher than it was in 4Q 2022 comparing maybe over taxation and the capping of the selling prices.

Okay. I'll take the first question with regards to Neptun Deep. We have actually stated that the CapEx in 2023 from Neptun will be about RON 6 million on of that. And at this point in time, we have not changed that to EUR 1 billion, less than EUR 2 billion, that we stated in our Strategy 2023. But this is the fundamental aspect that we are actually working through with regards to prior to FID to confirm that number when we do actually sanction the project and our goal is to sanction the project in the middle of the year. So yes, the CapEx would be more geared towards the back end of 2023. Radu, do you want to talk about the turnaround?

Yes. So the Petrobrazi turnaround this plan as mentioned by Christina, starting with the second half of April after the Easter actually take 42 days. And we have as well the power plant, CCPP plant as well turnaround in that period, but it's a much longer turnaround. To be mentioned that there are not necessarily synergies of, let's say, contradictory influence is one of the -- if CCPP for example is not overlapping with the Petrobrazi.

Okay. I'll go to the third question. So in 2022, we had 2 important interventions. One which started in April which was in the gas and power area. And then this intervention was further increased in starting 1st of September. So if we compare with 2022 with Q1 2023, if we look at Q4, rather Q4 2022, from the level of taxation intervention will have similar intervention with Q1 next year. And this is primarily to the gas and power area. When it comes to E&P, we did not have much interventions in E&P. And when it comes to R&M, we had the 50 ban intervention for voluntary fuel discount, this was for Q3 and Q4. It is not prolonged until now. There are some rumors in the market and it might come back from formal point of view, that is -- we haven't seen any draft or any clear proposal of prolonging until now.

The question comes from the line of Iuliana Ciopraga from Wood & Company.

I have a number of questions. So first, on the equity gas. Can you tell us how much of the sales will be regulated in 2023. And actually, I would like some color regarding sales to households and heating producers at 150-megawatt. My second question, we understand that the government is looking for some clarification on the solidarity tax from the European Commission. Can these clarifications have an impact on solidarity tax we paid for 2022? And third, maybe if I'm allowed the fourth later on. So on power, the regulations now limit you realize net power price at [ RON 450 ] and at the same time, the transfer price is [ RON 100 ]. This basically locks in around RON 150 per megawatt for each megawatt of power produced. Should we build our assumption for the Power segment in 2023 based on this, we don't really see this in the fourth quarter because result in the fourth quarter of 2022 for gas and power was quite low.

What I suggest actually is that Franck takes question 1 and question 3. And -- but maybe let's start with the question 2 from Alina.

So I'll try to summarize the situation on the solidarity contribution. So according to the Emergence Ordinance [ 119 ] and also according to the EU regulation. In our view, it's clear that OMV Petrom does not meet this 75% threshold with activities in the areas of extraction oil and gas and refine. You know we are an integrated company. We have activities in addition to -- these activities being primarily electricity but also purchases of natural gas, petroleum products from third parties, which are being sold. So we do not meet this threshold. Now what could be is that this ordinance 186 will go through the parliamentary process. We know parliamentary process starts now. So in case there are amendments in the parliamentary process mean in our view, such amendments should apply prospectively. This is in line with constitution principles. However, we cannot exclude a different approach or a different view from authorities. We will follow up this closely. And of course, we will inform the market accordingly. With regards to clarification, we do not come from EU. We do not see how these clarifications could change the assessment that we are not in scope of the 75% threshold.

Hi Iuliana, I will take the question on -- the next 2 questions. On the regulated gas price for 2023. So as you mentioned, we have to sell at [ RON 150 ] to the household and to the district heating. And there's also other type of regulations, not only this, for capped price, we have also price, which is a regulated margin fixed for small customers as well. So you could consider that even if it's not a capped price, you have a regulated margin, and then you have to get to be beyond both the difference between your cost and the capped price. So you have different legislation, which make it complex as such. But one thing also you need to keep in mind is when we sell at a capped price of [ RON 150 ], we don't pay tax on it -- a little tax, we pay some tax, but little tax compared to the free market. So you have -- if you look at free market, you have a supplementary tax what is calculated differently, et cetera, et cetera. So there is quite a difference in terms of netback if you look at it like that. The quantity for next year will be quite high compared to 2022 because we have contracted volume before the regulation came in place. In 2022, we were around 3.9 terawatt hour for the household and the [indiscernible]. But for next year, we expect more from that due to the fact that we didn't have any contracted volume. We don't know yet the volume. So we submitted to the authorities. The deadline was the 1st of February, so it was yesterday. Yes, yesterday. And we will have the results later in the month. So when we get the results, we know exactly how much regulated market is allocated to [indiscernible]

And then on the first quarter -- sorry, sorry if I interrupted. Can you comment on the first quarter because I guess you had the details just for the first quarter? So we have some clarity for the...

We expect it will be quite high around, I would say, 70% of our sales -- between 70%, 75% of our sales. Now on the power side, your question was about -- yes, your calculation is not far from the reality. When you look at 2023, I mean 2024 was a very different context because we have some forward hedging. We have some optimization which were planned and done before the regulation came. So we are impacted by the regulation and especially the tax on the calculation of tax on Brazi. Now for 2023, we don't have very limited forward hedge. So your calculation in terms of spark spread is not far from the -- from what we expect as well. What you need also to take into account the depreciation of this asset, it's not just the margin. And that we will have some unplanned shutdown. It's not 100% availability, of course, as we have some unplanned shutdown and unplanned shutdown can be difficult to forecast how much it will cost. It will really depend how many days. Historically, we have a very good track record, but we have a big shutdown now. So we have to see when we restart the plant. But historically, a good track record, but still it's a cost exercise if you have to buy on the market for -- and to sell at [ RON 450 ]. So we have to make sure during the shutdown we do all the maintenance and that's what we are planning, all the maintenance to guarantee the high availability of the plant and much more than we were planning before.

One more regarding the 70%, 75%, that includes the power plant, the sales to the power plant or not?

Yes, include. Well, everything is considered as a kind of regulation, which we want them now.

Okay. So -- okay. So it's not just household and the power plant, you think it will correct as well?

No. There is a total visibility.

And the question comes from the line of Irina Railean from BT Capital Partners.

I have a question regarding the impairment. If you could detail a little bit what should we expect? We understand you reassessed the future prospects of production decline, what should we expect in the midterm? I mean, can we see higher declines or maybe a larger CapEx needs to maintain this decline rates, also related to this there is replacement ratio. We saw it was quite low this year. Should we see it at the similar levels until a Neptun Deep, or could we see some improvement here until the first gas from Neptun. One more question on special dividends. We understood your intention to distribute and to announce something maybe during the middle of the year. Do you see any risks or any factors that would stop you from distributing special dividends? And here, I like to understand if this potential taxation solidarity tax could impact the special dividends you plan to distribute or not, in an unfortunate scenario, let's say that the legislation is changed and the ordinance is changed, not necessarily in your favor. That would be my question.

Thank you, Irina. Again, thank you for joining us. Chris will talk about the decline rates in E&P and reserve replacement ratio and then -- the question with regards to special dividends for Alina.

Yes. Let's start with E&P. As you know, we are fighting every year a decline between 10% and 20%. And this means to bring this down to a level, that is, of course, continuous investment. And last year, we ended up with a 5.6% decline and finally maybe has also noticed in the last quarter, we had only 3%. So where did this come from? And this came out of -- through I would say, extraordinary wells in the [indiscernible] area gas wells and this brought a decline actually to this low level. However, for the planning, we took -- did not take this extraordinary successes -- into consideration. We took gain the average numbers of all the wells actually in it, and that's why we foresee actually by 2023, about 8% decline. On the combined annual growth rate, it will be actually of the strategy we communicated in the 3%. We want to increase it now to 6%, this is, I think, closer to a [indiscernible] view what we see in the performance of the wells. On the reserve replacement ratio, it's 10% for this -- for last year. You see that the 3 years share of intervention average is about 31%. And we think it will stay between 10% and 20% for the years until Neptun Deep get on stream, of course, and then we go above 100% on the reserve replacement ratio.

I will continue with a special dividend. So mid of the year, we will analyze and evaluate the following 3 dimensions, I would say. I mean, Christina mentioned, we are planning for a dividend in mid of 2023. And then we will have updated cost assumptions for our biggest projects. So this would be really important element for us to consider. Of course, we will follow regulatory and fiscal interventions. And here, you made a reference to the solidarity topic. We will have more clarity until mid of the year on how this will be changed if any changes will come. And definitely, we will assess the overall market environment and our financial performance in the first half of the year. With all these elements being more clear at that moment, we will be able to define the value. Now in our view, we should be in a position to give special dividends. It's just a matter of the amount, which would be influenced by these 3 dimensions. And that's why we decided to announce it now in order to give this perspective to all investors that we are planning to do this mid of the year. [Operator Instructions]

The next question comes from the line of Ioana Andrei from Alpha Bank.

I was wondering if you can disclose your allocated volumes under the centralized mechanism on the power market for 2023. And second of all, I would like to know. You've mentioned the proved and probable reserves increased due to Neptun Deep. Can you please disclose what was the split exactly what have you recorded for Neptun.

Ioana. I'll just do a quick one to answer the second question. Actually, we don't disclose that level of granularity. At the time of when we FID the project, we will provide an update on the resource position than at that point in time. Franck with regards to allocated volume to the centralized power market.

A very good question, Ioana, because I have to say, there is still some clarity we expect from the regulator. But at least 80%, that's what we understood in December from the new legislation that 80% of the output has to be sold to the OPCOM. But on the other 20%, there is -- we had 2 different communications from the regulator. The last one, which arrived last week explained that we should sell the other 20% as well, offer the other 20% as well which was not what was communicated in December. So we are waiting for clarification on the last 20%. At the moment, we will offer 100% to the market -- to OPCOM, sorry to OPCOM and we'll see clarity, we will seek for clarity for the 20%.

Okay. But basically, what you're saying is that you're actually locking the RON 450 per megawatt of fixed as a regulated price for the whole volumes, right? Am I understanding correctly?

' That's a legislation, we can't do it differently.

Basically, you're selling other volumes on this centralized mechanism of...

Yes. And if we sell the 20% to the market, we will pay 100% tax on the difference between the actual price and the [ RON 450 ]. So the net impact would be the same...

There is no possibility for the contract -- I don't know, the contracts you made previously at a higher price to gain anything else. Right?

No. Due to the many changes we saw in the regulation last year, we didn't -- we had very limited hedge for 2023. So that's not going to have a huge impact. And this hedge will be also taxed above RON 450. So that's not really a difference. Just on the RON 450 does not include the cost of CO2. So CO2 is on top of that.

And the question comes from the line of Oleg Galbur from Raiffeisen Bank International.

Yes. I hope you can see me well. I have 2 questions now and 2 follow-up questions. The first question relates to your CapEx guidance, which is about RON 2.5 billion higher for this year. According to your guidance and based on the previous year's experience, I have concluded that the E&P CapEx incremental and the allocation for the turnaround of the Petrobrazi refinery could amount to some RON 0.5 billion which leaves another RON 2 billion for other investments or other projects. So I was wondering whether you could provide more details with respect to those projects. The second question is on your guidance for the free cash flow before dividends in 2024, 2025. I was wondering what is the reason for the improvement of free cash flow generation while the -- at the same time, you expect a less supportive market environment, lower upstream production and higher CapEx. And then I have 2 follow-up. The first one relates to the RON 1.8 billion impairment that you booked in the E&P segment. You've talked a bit about the expectations for the production decline, but I was wondering whether you could provide more details with respect to the production decline separately for oil and gas field. Also just a comment here, when looking at your 2024, 2025 guidance and comparing this guidance with the previous guidances, I don't see much difference in terms of production declines. So I was wondering whether this impairment was triggered mainly by a longer term or long-term decline rate worsening or also by significantly higher production costs, which you are also referring to? And if it's the case for higher OpEx per BOE, maybe you can also say a few words about the cost drivers behind this revision. And lastly, on your special dividend, just shortly, would the last year's level of special dividend be some sort of reference for this year?

I think I'll -- maybe we start with coming back to some of your follow-up questions. So we go on to the conversation with regards to oil and gas with regards to the production forecast in the multiyears out. And then we can come back to CapEx, free cash flow for dividends and then special dividends after that.

Yes. Maybe a little bit on the production on the declines that you are addressing. Yes, of course, there's a difference on the gas wells and gas wells normally decline much faster than the oil wells because in the oil wells, we are on the long tail production and this means the changes there are not as significant as on the gas side. It could be price to triple actually on the gas side, this means 10% plus on wells. But on the other hand, we also have some of course, gas production coming out of the associated gas. And this is a rather similar to the oil declines, and that's the big difference mainly. And so also these wells decline this year, we expect them to decline more or less 10 plus percent every year. Another question on the cost, maybe -- on the cost, of course, you know that the share base is defined several factors. That's the product price, that's the productivity of the reservoirs, it's the cost base, but also the tax side. And this means specifically majority, if the cost base increases, this means the -- your share base is shrinking. And that's actually what we've seen and what we considered in the impairment. And so not all fields and all capture units we have done there. It was primarily on the oil side, actually, what we did. And yes.

I'll touch quickly on the CapEx one. We tried to provide some sort of at least list of the different expenditures that you would see in the Slide 8, because I hope this actually, the CapEx share strategy in action. Because what you can see is that we'll have more CapEx in there for growing regional gas with the Neptun Deep project. But also with regards to turnarounds also in -- for the traditional optimization business, which will be around Brazi and about Petrobrazi but also in the energy transition, we've already FID-ed the spend for the new aromatic unit. And then also looking at potential new renewable power projects as well as biofuels advanced ethanol, HVO and SAF on the project side. So I think it's a combination of -- we've got some turnaround activity going on, but actually a lot about our strategy in action overall. Maybe I'll hand to Alina for free cash flow before dividends as well as special dividends.

Oleg. So on the free cash flow before dividends, we have an integrated business model, which gives us strength, and we are able to adapt depending on how markets evolve and so on. Now that we have quite a clear understanding also on the regulatory situation. We will adapt our business and based on our planning assumptions, we see and we believe we will be on a free cash flow positive before the event certainly. So with regards to special dividend, unfortunately, I cannot give any reference at this moment. We will announce this to the market mid of the year.

And the question comes from the line of Daniela Mandru from Swiss Capital.

I have several questions. So one of them is kind of follow-up regarding the CapEx. Can you detail or can you say to us what is the amount allocated for Neptun Deep explicitly? The other question regards the offshore production. Can you give us an absolute amount of percentage of production? And the third 1 refers to the deep onshore, please let us know if you clarify with the authorities, the number of deals that qualifies as deep onshore and so does for lower taxation. And the fourth question relates to power sales. From my understanding is that you also sell third parties power. Can you tell us what is the amount of power sold forward from third parties.

Maybe I'll start quickly with the CapEx one just as a continuation. The Neptun Deep amount that we have set aside is RON 600 million for Neptun Deep on the basis of an FID in the middle of 2023. Maybe Alina will just do the clarification with regards to the deep onshore, we are in discussions with the government on that.

On the deep onshore, our conclusion so far is that we will not see deep onshore fields, which will qualify for the new offshore law. So that's our conclusion so far based on the analysis done on our -- on all of our fields in Neptun.

Maybe just for a quick answer is on the offshore production. I think Chris was just saying it's about 20% of our production is roughly offshore. Franck, with regards to power sales.

I don't know which period you are mentioning. But what we are -- on top of the sale of price that we are performing as we discussed before, we are also developing like gas, some trading of power, not at the same level in terms of volume, but of course, power price is much higher. And it was less than 1 terawatt hour this year but we expect to double this year. So we're expecting to have better revenue on sales coming from this activity and mainly outside of Romania.

Okay. And regarding, I am not sure if you commented on this, the offshore production. So yes, we have this indication, 25% of the production. But meantime, the production declined a lot. So what is now the offshore production? What was last year, for example?

It was around 30%.

30%, 30% Yes.

20%.

20%?

Yes, but it's 20%, yes.

2-0, okay. And may there another question regarding, can you give us -- because, yes, with this impairment, you announced also some production increases, okay? Can you give us an indication for the OpEx this year and for the next 2 years to 2024, 2025. So it should be above $30 per barrel or more.

The OpEx for 2023, what we have planned is $15. And for this following year $15. For the 2 following years, we will have it hovering around $16.

Okay. And I have another question regarding the...

Last question..

Okay. I will address -- this is the last question. May I address it?

Yes.

Okay. And regarding the production, out of this last year production, how much decline, how much is the decline for -- from divestments? Because I have some data, but I want to be clear on this.

So last year -- no, last year, we didn't do any divestments. The last divestment was done in the end of '21. And its the [ 43 ] Last year, we didn't do anything.

So last year, we didn't have any divestments or anything. So it's the natural decline of last year.

Yes.

We have a follow-up question from the line of Iuliana Ciopraga from Wood & Company.

Regarding production decline 2023. This is faster than what I expect based on the 2021 Strategy. I was wondering, do you still see achievable -- a decrease in the decline rate in the medium term as you were expecting the strategy considering also the impairments that you've made. And if you can clarify a bit on the decline rate for gas and oil in 2023.

I think Chris had mentioned earlier that actually we had originally signaled about a 3% decline rate, and it was actually changing to a 6% decline rate in the early time. So Iuliana, yes, you're correct that he had mentioned that.

And the 6% would be start in 2025. I mean, starting 2025, you basically see a decline around 6% per year.

2022. 2022 to 2025.

Because this strategy included some numbers for 2030. I mean if we deduct Neptun from the 2030 numbers, production would have been around 90%, right? 1,000 barrels per day. Is that still valid or not really?

Iuliana because this is the reason why we book the impairment because we invite our production declining from 3% in average to 6% that's why this trigger in collaboration also with an increase in operating cost, this trigger the impairment, this was the reason. So the production...

The average rate from 2022 to 2030.

We only communicate as of '25, -- yes, '22 to '25 is approximately 6%. We do not give further information. It's a bit more complex in the second part of the decade.

Okay. And if you can comment a bit on the split between gas and oil, what should we expect?

The oil, long term, of course, let's say additional, the gas still be a bit more. Right now, we are around 52% on the gas side, and this will, of course, increase them but when Neptun Deep comes on stream heavily on the gas side.

As there are no more questions, we would like to thank you for taking part in our conference call. For further information, please do not hesitate to contact the Investor Relations team. Until our next call, we wish you all the best. Thank you.

Thank you. Bye.

Thank you. Bye.

That concludes today's conference call. Thank you for participation. Ladies and gentlemen, you may now disconnect.