Jul 26, 2007
TRANSCRIPT SPONSOR
Executives
Paolo Scaroni - CEO Marco Mangiagalli - CFO Domenico Dispenza - COO Stefano Cao - COO
Analysts
Iain Reid - UBS Colin Smith - Dresdner Kleinwort Alastair Syme - Merrill Lynch Michele Della Vigna - Goldman Sachs Barry MacCarthy - ABN Amro Theepan Jothilingam - Morgan Stanley Gordon Gray - JP Morgan James Hubbard - Deutsche Bank Irene Himona - Exane BNP Paribas
Operator
Good afternoon ladies and gentlemen, and welcome to the ENI 2007 Interim Review Conference Call. My name is Steffi and I will be your coordinator for today's conference.
For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions.
[Operator Instructions]. I am now handing you over to your host of today's conference.
Thank you.
Paolo Scaroni - Chief Executive Officer
Good afternoon ladies and gentlemen. Paolo Scaroni speaking.
I am very pleased to report the highlights of our financial results. Adjusted operating profit was €9.4 billion, down 11% from the equivalent period of last year.
The adjusted net profit was €4.9 billion, down 10%. Engineering [ph] was at 0.2 despite the recent cash out for acquisitions of over $6 billion.
The good financial performance compared to the first half of 2006 was negatively impacted by a number of external factors, mainly depreciation of the euro against the dollar, a lower average oil and gas price, and the effect of an unusually mild winter on gas sales. We will report to the Board of Directors that we will need in September an interim dividend of €0.60 per share.
After my update on each division, Marco Mangiagalli will take you through the financial results. At the end of the presentation, together with Stefano Cao, Domenico Dispenza, and Mario Taraborrelli, we will be pleased to answer your questions.
This has been an exciting six months for Eni. The carefully targeted acquisitions that we have made in all three divisions have brought further momentum to the organic growth that we were already achieving.
Our upstream acquisitions in the Congo, the Gulf of Mexico, Angola, and Alaska are fairly in line with Eni's core strategy of strengthening our presence in core producing areas, as well as giving us access to new resources and creating synergies with our existing portfolio, they each represent excellent value, especially in the light of the subsequent strength of oil prices. In both Gas & Power and the Refining & Marketing, we have also moved to maximize value in selected areas where we see strong potential for growth while again meeting any strict financial criteria.
On top of these transactions, we have also made substantial strides in Russia, a region that we view as extremely important to the energy industry as a whole. Looking more closely at Exploration & Production, we have continued to deliver robust performance.
Oil and natural gas production for the second quarter averaged 1.74 million barrels of oil equivalent a day, a decrease of 0.7% compared with last year, due mainly to disruptions in Nigeria. Excluding this issue, production was 1% up against last year.
Growth was achieved in Libya, Kazakhstan, and the Gulf of Mexico. During these first six months and mainly through acquisitions, we have added over 2.5 billion boe of valuable resources at an attractive cost in countries where we can play an important role as operator, and where we can add value by applying our core competencies.
We are convinced that these attributes will continue to drive our growth. Our acquisitions this year, combined with our pipeline of organic growth projects, have allowed us to increase our compound annual growth rate from 2006 to 2010 to 4%, up from 3%.
We expect to replace more than 100% of our reserves from 2007 to 2010 at our oil price scenario. The acquisitions we have made in E&P have increased the diversity of our portfolio and strengthened the leadership position we have built in the world's fastest growing oil and gas producing areas.
In the Congo, we acquired 112 million boe of proved and possible reserves, a figure which we believe could ultimately prove conservative once we applied our expertise to the field. In the Gulf of Mexico, our purchase of Dominion's producing assets will lift our production in the region to 110 barrels per day.
This acquisition also gives us high exploration potential for the future. Our purchase of a stake in Angola LNG has expanded our position in the growing Transatlantic LNG market, while our expansion in Alaska is another example of our leveraging innovatorship in promising areas.
In Russia, we acquired ArcticGaz and Urengoil assets that together give access to around 1.5 billion barrels of resources at a cost of less than $0.5 a barrel. And indeed, given the technical expertise that we can apply to Russia's fields, we hope to retain the stake in Gazprom Neft.
By any standards, this is a phenomenal transaction. And the initiatives Russia has taken in recent months to develop new alliances with IOCs [international oil companies] are a clear positive indication of the country's commitment to play a cooperative role in building new energy infrastructure and developing international trade.
Operationally, we are making some progress with existing projects throughout the portfolio. We look forward to providing you with a detailed update on our progress in the whole of E&P portfolio besides visit Kashagan in September.
In Gas & Power, we have made further progress. In Italy, we launched our dual gas and electricity offer on July 1st, a package which we consolidate our strong position in our home market.
Outside of Italy, our acquisition of a state in Altergaz is a further step in any developing plan for France growing us market, and will strengthen our leadership in European gas supply. Notably, we have signed an MoU with Gazprom for the South Stream pipeline.
This long-term project will ultimately represent both a crucial supply artery into Europe and an opportunity for Eni to enforce its leadership position as Europe's number one gas company. The gas we regained from South Stream will give us a strong market position in all the countries that the pipeline crosses and influences -- Bulgaria, Romania, Hungary, Austria, and Germany.
In R&M, our plans to enhance profitability are on track. This will allow us to capture incremental margin through diverse crude sourcing, improved refining yields, and efficiency.
In this division, we have again followed our strategy of making selected acquisitions where they can enhance the profitability of existing operations. We acquired 102 retail stations in the Czech Republic, Slovakia, and Hungary, and the further 16% and 11% stake in CFC, the Czech Refining Company, thus taking our total stake to 32.4%.
We have enhanced Eni's local refining capacity increasing it to 2.6 million tons per year and strengthening the existing marketing business in the fast growing regions, allowing us to reach a market share for the three countries of around 10%. Now, I would like to hand over to Marco.
Marco Mangiagalli - Chief Financial Officer
Thank you, Paolo. Good afternoon to everybody.
I will now comment on our results focusing on the second quarter and starting with a quick overview on the trading environment. Oil prices strengthened from the first quarter of 2007, averaging $69 per barrel, in line with the second quarter of '06.
Refining margin averaged $6.9 per barrel, 20% higher than in the second quarter of 2006. Finally, the euro appreciated by 7.3% versus the US dollar year-on-year.
As usual, I would like to remind you that Eni's results are affected by several issues, including the seasonal factor affecting the demand for natural gas and petroleum products used for residential heating, the demand for which is higher than in the first quarter of the year, the coldest months, and lowest in the third quarter, the warmest months. Therefore, Eni's operating profit and change in net debt in the first six months cannot be extrapolated for the full year.
Having said this, let us now comment on the results. Adjusted net profit in the second quarter amounted to €2.2 billion, a decrease of around 11% compared to the record levels achieved in the same period of 2006.
This was largely due to a 17% decrease in the adjusted operating profit, partly offset by the lower tax rate, which was mainly the result of the different contribution to the pre-tax profit from the division. Adjusted operating profit in the second quarter totaled €4.2 billion.
This result mainly reflects the performance of E&P and Gas & Power divisions, on which I will talk shortly. Hydrocarbon production in the second quarter decreased by 0.7% compared to the same period of 2006, averaging 1,736,000 boe per day.
The reduction was due mainly to the disruptions in Nigeria, which accounted for around 30,000 boe per day. This negative impact has been partially offset by the increasing production in Libya, Kazakhstan, and the Gulf of Mexico.
The second quarter accounted for the recent [ph] assets acquisition in the Congo for 6,000 boe per day. Excluding the impact of disruptions in Nigeria, production increased by 0.9%.
If we look at the first half of 2007, we reached an average daily productions... hydrocarbon production of 1,735,000 boe per day, down 2.9% versus the first half of 2006.
Net of Nigeria and Venezuela, impact [ph] production was up 0.3%. For the full year 2007, we expect hydrocarbon production level in line with that in 2006, assuming our $55 per barrel oil price scenario.
The continued disruptions in Nigeria, the loss of the Dación field and the decline in production for mature fields will be offset by the contribution from the assets acquired in Congo and the Gulf of Mexico, and the build up of the Libyan gas project. In the second quarter of 2007, the E&P reported an operating profit of €3.4 billion with a 16 % decrease in year-on-year.
The result includes the negative special items of around €70 million, mainly related to asset write-downs. On an adjusted basis, operating profit equal to €3.5 billion with an 18% decrease year-on-year.
This is due to the appreciation on the euro versus the dollar, the lower production sold, the higher operating costs and DD&A, as well as higher exploration expenses. If we turn to the first half, the adjusted operating profit reached €6.6 billion, down 22% compared to the same period of 2006.
The drivers of the weaker performance are substantially the same as those in the second quarter of 2007. Turning to the Gas & Power, volumes sold in the second quarter of 2007 were 19.6 bcm, in line with the same period of a year ago.
The impact of the mild weather condition has been offset by the higher volumes sold in the target markets in the rest of Europe. Reported operating profit decreased by around 34% to €465 million.
The second quarter result includes both the special items for €14 million, as well as inventory losses. The Gas & Power adjusted operating profit amounted to €519 million, down 34% over the same period of 2006.
Our EBITDA pro forma adjusted in the second quarter of 2007 amounted to €786 million, which compares to €1.021 billion in 2006. Let me elaborate on each...
by each business segment. Supply & Marketing decreased by 58%.
This weak performance was primarily due to mild weather condition that negatively affected the heating consumption in April, and this mix is indexation between purchase and sales to prices essentially in the Powergen segment. These negative effects were partially offset by the more favorable treatment received under the improved regulatory framework under Resolution 134.
Our Indonesia business generate €236 million, up 6% versus the second quarter of 2006. The increase is due to the increased ownership in gas resulting from the completed buyback program, and to the incentives provided on the new investment.
This positive effect has been partially offset by the lower volume distributed and transported as consequence of the mind weather condition. Powergen EBITDA accounted for €95 million.
Let me remind that starting from the first quarter, the Powergen segment comprises of the tolling activity only, since marketing activities have been moved to the Supply & Marketing segment in accordance with our objectives of developing a dual-offer strategy. Finally, international transportation showed a flat trend versus 2006.
If we turn to the first half of 2007, the overall EBITDA performance has been increased by 8% versus a corresponding period of 2006. This is the result of the strong performance achieved in the first quarter, thanks for the improved regulatory framework, the strength in the euro versus the US dollar, and despite the lower gas volume sold, transported, and distributed in weaker [indiscernible] due to the milder winter.
Let me now turn to the R&M sector. In the second quarter, the division reported an operating profit of €430 million, up 18% versus the same period of 2006.
The result includes a negative special items for €54 million, mainly related to environmental provisions, and a risk provision related to an ongoing UN trust proceeding. In addition, we also accounted for €299 million for inventory gains.
On an adjusted basis, the operating profit amounted to €185 million, showing a decrease of 3% over the same period of 2006. This performance reflected the euro appreciation versus the dollar, and the weaker performance of marketing activities in Italy.
These negative elements were partially offset by the lower maintenance outages and the higher refining margins in dollar terms. First half operating profit increased by 9% versus the corresponding period of 2006.
Thanks to the favorable refining scenario, and the higher volume processed. These positive effects were partially offset by the weaker performance of the marketing activities.
As far as our other businesses are concerned, in the second quarter of 2007, the petrochemicals division posted an adjusted operating profit of €67 million, the decrease versus the same period of 2006 was mainly due to the higher base chemical margins. The adjusted operating profit of the Oilfield Services & Engineering business totaled €203 million, up 53% versus the same period of last year.
And this achievement is attributable to higher results in onshore construction as well as the higher contribution from offshore drilling and construction activity. Other activities and corporate accounted for an overall operating loss of €132 million, showing a flat trend versus the second quarter of 2006.
In the first half of 2007 operating activities generated a cash flow of €9.7 billion. On top of this, disposals and others contributed for around €0.4 billion, bringing the overall cash generated to €10.1 billion.
The cash flow generated fuelled the significant investments that amounted to around €9.1 billion. On top of this, dividend and buybacks absorbed €3.3 billion, bringing the overall cash used to €12.4 billion.
Net financial debt as of the end of June increased to €9.1 billion and our debt to equity ratio was equal to 0.22. Coming to the end of my presentation, let me focus on the cash returned to shareholders.
In 2007, we will payout at least €4.9 billion as follows: €0.65 per share as 2006 final dividend, which had been paid one month ago roughly; proposed €0.60 per share as 2007 interim dividend; and at least 0.3 billion of share buyback completed year-to-date. The overall gas distribution allows us to generate highly competitive returns to shareholders.
Thank you for listening and now I hand it over to Paolo for his closing remarks.
Paolo Scaroni - Chief Executive Officer
Thanks you, Marco. To sum up, I would like to return to a slide with which you are already very familiar.
Our activities over the last six months have been firmly guided by Eni's distinctive strengths: our strong position in the world's fastest growing energy areas, our enduring relationship with host countries, our access to engineering skills and technology, and our uniquely integrated model all the way down to supply chain. Our commitment to deliver growth and to secure value for our shareholders underpin everything we do at Eni.
These guiding principles and the steps we have taken over recent months have created the momentum for further growth. We will now be pleased to answer your questions.
Question And Answer
Operator
Thank you. [Operator Instructions].
The first question comes through from the line Iain Reid from UBS. Please go ahead with your question.
Iain Reid - UBS
Good afternoon gentlemen. Hello?
Paolo Scaroni - Chief Executive Officer
Hello, yes.
Iain Reid - UBS
Hi, sorry.
Paolo Scaroni - Chief Executive Officer
I hear you, Iain.
Iain Reid - UBS
Sorry, yeah, three questions please. Marco talked about the quite dramatic fall in EBIT and EBITDA in the supply and marketing business this quarter.
I wonder if you could just break out the moving parts and just give us a bit more detail as to exactly how that fell so much and how do you see the forecast for that for full year?
Paolo Scaroni - Chief Executive Officer
Break down is around the Gas & Power.
Iain Reid - UBS
Yes.
Paolo Scaroni - Chief Executive Officer
Good.
Iain Reid - UBS
And I have got couple of questions after that on E&P, if you don't mind.
Paolo Scaroni - Chief Executive Officer
Go ahead.
Iain Reid - UBS
Okay. The second question is, you've obviously made some fairly big acquisitions this year.
But you've talked in the past about oil sands, but yet you haven't yet made any sort of acquisition there. I wonder whether this is off the agenda now with your deals in Russia and the Gulf of Mexico, whether oil sands is still a firm part of your strategy, and maybe you can talk about the potential of that?
And thirdly, on Russia itself, if you possibly can give us some timing and cost on the first gas from your two new fields there?
Paolo Scaroni - Chief Executive Officer
Okay. Let me try to answer your question quickly.
Then I will leave Marco or Domenico to give you more detail about the specific drop in EBITDA around our activity in Gas & Power in the second quarter. Let me reassure you first that we are...
we maintain our confidence in out target for the Gas & Power division for this year and the full plan that we have been giving to the market. So we still confirmed the target for the full year.
And I think Domenico will explain you in detail why the second quarter has shown a specific drop. Now, moving quickly to oil sands, we have not given up on oil sands.
We still are looking for opportunities. We are not in a hurry.
We will only look for opportunities that can really generate value. We are even more confident than before than our now S2 [ph] technology, which has been developing very positively in the last few months, will contribute to create value in areas such as oil sands.
Now, on Russia, as a matter of fact, I will ask Stefano to give you more details, but we are already producing gas in Russia, the fields are already producing marginal quantities of gas and marginal quantities of condensate, but I will ask Stefano to tell you more about an area on which I am not sure we can give already precise dates, but in which certainly we have a much more clear view today than we had a few months ago. Domenico, you start with gas.
Domenico Dispenza - Chief Operating Officer
What happened in the second quarter [indiscernible] at the same time. [indiscernible] miss-match between [indiscernible] Powergen segment should be compensated by the positive effect of the difference in change between euro and the dollar.
There has been a milder climate in April, and of course, the [indiscernible] compensated by the [indiscernible] of the resolution 134. So, overall looking [indiscernible], yes, the miss-match comes from different indexation that happens between the price at which we buy the gas and the price at which we have the gas mainly to Powergen segment.
Further, in the defective [indiscernible] indexation [indiscernible]. This is a miss-match that proves now to be negative.
While this is differentiated, definitely in the first quarter we see that this is relatively a positive effect. So if you look to the first semester, from the start of the year, you see that oil impact was increased [indiscernible] what we had last year.
If I can reconcile on what Paolo said, if you look to the entire year, EBITDA should [indiscernible] in the first quarter.
Stefano Cao - Chief Operating Officer
Talking about Russia, as the management goes at it, since we acquired, of course, we are in the process of starting the full assessment on the potential of the value of sales, as well as Paolo said that we have seen that there is a related production ongoing, which is in the range of about 3000 barrels corresponding to our equity, which is about at the moment is 60%. What we derive that is not too far from what we said at the outset, we derived an early production scheme, which might start providing some production in 2009, while we believe that the first real production will be coming on stream in 2011, and this will be the [indiscernible] field, which we have acquired, and at least a couple of years later, the first half of the second field at the Yaro [ph].
Iain Reid - UBS
If you can offer any details, Stefano, on the overall development costs?
Stefano Cao - Chief Operating Officer
Well, we at this stage reconfirm, obviously we haven't got the exhibition, but we confirm the $3 per barrel is reasonable assumption for the development cost in that part of the world and taking in to account that we are seeing that the already strong development started, which were then abruptly interrupted because of the obviously the bankruptcy.
Iain Reid - UBS
Okay, thanks very much.
Operator
Thank you. The next question comes through from the line of Colin Smith from Dresdner Kleinwort.
Please go ahead with your question.
Colin Smith - Dresdner Kleinwort
Thank you, good afternoon. One question about acquisitions, you've obviously had a very heavy acquisition program through the first half of this year and you've also got a very aggressive CapEx program over the next few years.
Can you just say whether you think of the acquisitions you have done are sort of as much as you wanted to do or whether you think there is still strategic level of acquisitions that you'd want to do? That's one question.
And the second thing was just I wondered if you could comment on the treatment on the Gazprom Neft stake, which putting the changes in value there through the P&L, obviously [ph] it's going to create a bit of volatility and it seems perhaps a little bit odd since I believe you kind of hope that Gazprom won't actually exercise the option to repurchase it from you.
Paolo Scaroni - Chief Executive Officer
Okay. Let me make a comment around acquisition.
Yes, you are right. In the first half of the year, our activity has been particularly strong.
We are quite pleased with all the acquisitions we made, all of them, I would say. As we found a few good surprises including in Russia, in which the situation we found has been probably more positive than what we were assuming.
We could say the same thing about Congo and about Dominion and about Alaska. So in total, we are quite pleased with what we have done.
Now, all these acquisitions, including our CapEx, as you've seen have not changed our significantly our leverage and our financial position and our rating. So we believe we have still room for acquisitions if of course we find good opportunities.
What we are liking are good opportunities of creating value. What we are certainly not worried about is about making some further acquisitions.
The real issue is to find good opportunities more than anything else. On Gazprom Neft, well, somebody will tell you about how we treated from a --
Marco Mangiagalli - Chief Financial Officer
Fortunately it's me Colin because it has been rather tough.
Paolo Scaroni - Chief Executive Officer
We have been discussing this issue for some time. The question is well done.
So maybe Marco will take you through. What I can just add is that we are not sure at all what will be Gazprom...
position around Gazprom yet. What we really think is that our contribution to Gazprom Neft from an operational point of you is certainly significant and we hope that going ahead, the partner, Gazprom, will realize that we can create value for the company and therefore will be reluctant in giving up on our operational support.
But nothing has been decided. It probably will not be decided for a few months more.
So we will be missing clarity on this issue for probably the next, I don't know, 18 months or so.
Marco Mangiagalli - Chief Financial Officer
Colin, the 20% is in Gazprom Neft, is accounted for 139 [ph] since we do not exercise and significantly implementing the financial and operating policy decisions of the company. Accordingly, the Gazprom Neft is evaluated as fair value based on market price, since you know it's listed on the London Stock Exchange.
Also the call option being a derivative is evaluated at fair value. As a result, the book value of Gazprom Neft is a net amount of two fair values, the one relating to the shares and the one relating to the collateral, and equals to the strike price of the option.
The participation in Gazprom Neft has been placed along the current assets, for sure should the conclusion, which Paolo was visiting [ph] will be the one which would be applied. It will be moved to non-current assets.
Colin Smith - Dresdner Kleinwort
So, the treatment would change if you ended up regaining the stake, presumably because it would be an assumption of a different operational control?
Marco Mangiagalli - Chief Financial Officer
That's in the nature of things. Yes.
Colin Smith - Dresdner Kleinwort
Okay. Thank you.
Operator
Thank you. The next question comes through from the line of Alastair Syme from Merrill Lynch.
Please go ahead.
Alastair Syme - Merrill Lynch
Yeah, good afternoon gentlemen. My question relates to Gazprom Neft as well.
Just coming back to Paolo's comments about wanting to retain the stake, I'm not sure that I actually understand the rationale. It would seem to me that from that transaction, the [indiscernible] part of the assets were ArcticGaz and Urengoil.
The return on the investment of Gazprom Neft would look to be reasonably low. Is that right?
Paolo Scaroni - Chief Executive Officer
Well, I think that Stefano will tell you something about Gazprom Neft, about reserve production and potential flow of --
Stefano Cao - Chief Operating Officer
Alastair, quite frankly, are right as far as you say that we are quite busy in development of the other options coming from Yukos. But I do believe that if you look also prospectively, the performance of Gazprom Neft so far and more than that, if you look at the potential of the company, making a stake, maintaining a stake of 20%, which would allow not only to maintain the top [ph] position, still participate through the life of the broad, but would certainly allow booking of production in reserves, plus that additional contribution, which we strongly believe we might be providing as a support enhancing the capacity of the company, which in our view might be seen as really a positive contribution in terms of technology people and [indiscernible].
So, all in all quite frankly, that would be an quite an interesting position to be in.
Alastair Syme - Merrill Lynch
Okay, thank you very much.
Operator
Thank you. The next question comes through from the line of Michele Della Vigna from Goldman Sachs.
Please go ahead with your question
Michele Della Vigna - Goldman Sachs
Hi, it's Michael Della Vigna here. I had three questions, one relating to CapEx, you have got a CapEx guidance for the '07 to 2010 of €44.6 billion.
I just wondered if you could update that in light of the new acquisition, and the consequent CapEx on those fields. Secondly on two specific projects, I have seen that you have delayed the drilling of a new appraisal well on Goliath in order to get some more seismic data.
I was just wondering what is behind that decision, and what has changed in your point of view on the development of Goliath. And then finally on Angola LNG, one of the new stakes acquired this year, what would you expect FID [ph] for that field and when could you expect the first LNG to be shipped from there?
Thanks.
Paolo Scaroni - Chief Executive Officer
Okay. Let me answer the first question, and then I will pass it over to Stefano.
On CapEx, for the time being our guidance of almost €45 billion for the plan remains the same. Now when we know more about the new fields that we have developed, we will change our guidance, but this will be at the next strategy presentation.
We are not expecting major changes in any case. Now on Goliath and Angola.
Stefano Cao - Chief Operating Officer
On Goliath, you know that Norwegian Petroleum Directorate is very, I would say, always very open to provide the latest update on the evolution of things, and I would say that we are progressing with the design of the facilities for the fields based on the amount of results, which have been already effected and communicated to the market and to the world by the Norwegian Petroleum Directorate. And the final investment decision is expected around almost 2008.
Any additional appraisal, which is going on is in the direction of adding to the amount of reserves already effect, having additional upsides. So, that's the only way, the only interpretation you want to give to this appraisal building.
In particular, there is no sign whatsoever of a postponement of the well of few weeks or months on the way forward for the development of Goliath. In terms of Angola LNG, you know that the final investment decision for the Angolan LNG is due in the next few months, any time in the next few months, and that the plan for the first shipment is for 2011.
These are the decisions related to the building of the plant. You are referring to the reserves, the gas reserves, in that respect the building of the plant would allow us to book around 100 million boe of gas reserves, which at the moment are not part of any of our existing PSA contract in the country.
Michele Della Vigna - Goldman Sachs
Thank you.
Operator
Thank you. The next question comes through you from the line of Barry MacCarthy from ABN Amro.
Please go ahead with your question.
Barry MacCarthy - ABN Amro
Hello, it's another one on Gazprom Neft please. Just if you could please clarify what the status is in your negotiations for Gazprom, I didn't quite understand if you have actually made a formal proposal to Gazprom about what you aspire to do with Gazprom Neft, and if that could be resolved by the end of the year and thereby normalizing your position there in time before the closing of the books?
Paolo Scaroni - Chief Executive Officer
Okay. Let me try to be clear about that.
We booked for $3.7 billion, 20% of Gazprom Neft on 1st April. Then the company declared a dividend, which we be for our share or our 20% roughly $300 million.
Gazprom has call for two years, therefore until April 2009 to buy back this stake for an amount corresponded for the price we paid like dividends plus an interest of roughly 9%... 9.4%, more exactly.
So, there the call, which is a... a normal call.
Second point of information, Gazprom has already announced that for this year, for 2007, they are not planning to exercise the call. Certainly, we started to have contacts with the company.
We will be entering the Board very soon. We started to have conversation to see what kind of technical and operational relationship we can establish for the company to improve the performance, to improve the...
our recovery, to improve the operational performance of the company, this is the status. Therefore, Gazprom will can certainly exercise the call, they likely not in 2007, but possibly in 2008, We have declared that if they do not exercise the call, we will be pleased to remain associated with this large-large Russian oil producer.
This is just oil, essentially oil, that we believe that we can add value to the company. We would be pleased to write...
to book the reserves and the production corresponding, and to continue to cooperate. That is the status of the situation.
Barry MacCarthy - ABN Amro
Okay. Thank you.
Operator
Thank you. The next question comes through from the line of Theepan Jothilingam from Morgan Stanley.
Please go ahead with your question.
Theepan Jothilingam - Morgan Stanley
Yeah, hi. Good afternoon gentlemen.
Just two questions actually. One, a follow-up on Russia.
I was just wondering if you could tell us sort of what sort of number you would expect in terms of to be... resources to Phase I?
I know you gave a development costs, but I was trying estimate what sot of resource do you expect. Secondly, I just want to know whether you made any progress in terms of negotiations with Gazprom for potentially other downstream assets in Italy.
I think you have mentioned potentially an asset swap on Eni. So, I was wondering if you made any progress there.
And finally, just from a... in the downstream, you purchased 16% in the Czech Refining Company in the first half.
I was just wondering what your strategy is in terms of expansion into Central or Eastern Europe in the downstream, and whether you expect to do further deals there? Thank you.
Paolo Scaroni - Chief Executive Officer
On Russia, for the time being, I am talking now about ArcticGaz and Urengoil, so the former Yukos assets. We confirm that our share of resources, which would become possibly soon reserves, is 1.5 billion barrels.
This 1.5 billion barrels is based on the hypothesis that Gazprom will exercise its option on the 51% of the venture. For the time being, we have 60% and therefore, if they do not exercise their option, which is very unlikely, this 1.5 billion barrels would be the normal.
Okay? Now, in terms of asset swaps, you are right.
Our agreement that we signed in November 2006 includes a swap of assets for half the value, more or less that we paid in Russia, or assets both upstream and downstream outside of Russia. We have been starting a negotiation, but we have no news about the direction that this swap will take.
We have been discussing about the hypothesis of Gazprom entering into power. We have been discussing about a hypothesis of Gazprom entering some distribution...
gas distribution assets in Italy, but for the time being, we are still on the phase of discussing. No decision has been taken.
I think it will be a discussion that we leave for autumn this year. Well, in terms of 16% of the Czech Refining Company, you should link this purchase to the purchase of the Exxon gas station that we made in the region in Hungary, Czech Republic and Slovakia, because we want to have the supply capacity for the newly acquired marketing capacity.
For sure, this is a part of the world in which sales of petroleum products are growing rather than declining. We had marginal position, only 5% market share and we wanted to have a meaningful marketing position.
Now we have 10%, which starts to be meaningful. We have the refining capacity in order to supply our gas station over there.
We certainly will look at further opportunities all within line with the strategy of growing marketing only where we can supply the petroleum products we need.
Theepan Jothilingam - Morgan Stanley
Thank you.
Operator
Thank you. The next question comes through from the line of Gordon Gray from JP Morgan.
Please go ahead with your question.
Gordon Gray - JP Morgan
Thanks very much. On the subject of marketing again actually and with regard to your comments there --
Paolo Scaroni - Chief Executive Officer
Can you speak a little louder please?
Gordon Gray - JP Morgan
Yes, certainly. With regards to your comments earlier about flexibility for further acquisitions and then regarding the comments some minutes ago about marketing, can you give us maybe your thoughts about maybe further increase in your exposure to refining generally through potential acquisition?
What do you think the opportunities are out there? And secondly, if you could just remind us of the sensitivity of your 4% per annum growth target to the effect of prices on PSAs, given that your long-term outlook is still around about $40 a barrel if I am right?
Paolo Scaroni - Chief Executive Officer
Yes. Well, let me comment about refining and then I would probably leave Stefano to give you about...
to tell you something about the sensitivity of our target on PSA. Now on refining, our priority is to improve our existing refining capacity, particularly in Italy.
So we have a plan, which includes more or less €4 billion of CapEx to improve the complexity of our refining system in Italy. This is a priority, we need to do if we want to be the best in class in refining.
And this a plan that we are pursuing today. In terms of growth, we might look for selective growth opportunities such as the Czech Refining capacity that we have done recently or we might look at opportunities where we have our own crude to be refined.
We are not expecting major moves in this direction, will be minor moves, but always function of our presence in E&P and these would be the opportunities we will look at.
Stefano Cao - Chief Operating Officer
On PSA sensitivity, if you go back to our strategy presentation in March of this year, we've said that the growth would have been 3% and you remember, we have provided a guidance for the sensitivity to... related to PSA to the oil price and the guidance was 2000 barrel of production per dollar change in the price of oil.
Remember, at the time we are consistently saying that this is the result of an assessment of the portfolio, which we project for a year. We don't make projections farther than when we raise the 3% to 4% as a result of the acquisition, which we made in the half of this year.
I would say that we confirm that the sensitivity, the 2000 barrel per dollar of scenario, this is valued for 2007. As far as an update of this sensitivity, this will come with the presentation on next full year plan.
For the time being, we can still use for 2007, 2000 barrel of production per dollar.
Gordon Gray - JP Morgan
That's great, thanks.
Operator
Thank you. The next question comes through from the line of James Hubbard from Deutsche Bank.
Please go ahead with your question.
James Hubbard - Deutsche Bank
Hi good afternoon, two questions. Firstly, on E&P costs, when you look at lifting costs drilling rates, E&C costs, obviously they were up over the last couple of years.
But when you look over the next 12 months, do you see any evidence and contracts you are signing say that that there is a softening of the cost momentum going on there, or is just marching on upward at the same rate you have seen over the last 12 months? And secondly, back to oil sands you mentioned earlier, am I right in thinking that you would only be interested in looking at integrated projects to take advantage of your EST technology, i.e., upstream, and upgrade?
Paolo Scaroni - Chief Executive Officer
Okay. Stefano will answer both questions.
Stefano Cao - Chief Operating Officer
Yes, in terms of operating costs, much delayed here, trying to tell you that we don't see sign of any situation easing up in terms of rates. Probably we reckon that they are getting still on the very high side, but they get...
they [indiscernible] to get more favor in spite of [ph] the impact on operating cost. If we compare the operating cost in 2007, what we have seen so far with 2006, we reckon an increase in operating cost of 16%.
That is the level. In terms of oil sands, yes, you are right.
You have the visibilities on why we started the... we launch this campaign of interest we have approved [ph] in the oil sands was related to the development of the S [ph] technology.
We will continue with taxing [ph] the technology. I have to say that the degree of satisfaction on the outcome of this stress keeps improving, going higher [ph] with the stress.
Of course, we believe that it would be worth entering a situation whereby there is a really sort of ongoing development, but on the other hand, certainly an opportunity which would allow to deploy the technology which we have been developing.
James Hubbard - Deutsche Bank
Okay thank you.
Operator
Thank you. We have got no further questions in queue.
[Operator Instructions]. We have got no further questions in queue.
[Operator Instructions]. We have got one question coming through from the line of Irene Himona from Exane BNP Paribas.
Please go ahead with your question.
Irene Himona - Exane BNP Paribas
It's a question on CapEx. You give guidance for €10.6 billion this year.
Could you perhaps break it up for us in terms of exploration versus development and Gas & Power, in particular with launch of the dual offer in Gas & Power, do you anticipate any increase in Italian Gas & Power CapEx? Thank you.
Paolo Scaroni - Chief Executive Officer
Can you repeat the second question please?
Irene Himona - Exane BNP Paribas
Yes, in Gas & Gower with the launch of the dual fuel offering in Italy, I was wondering if that's what evolved a higher amount of capital spending in that business?
Paolo Scaroni - Chief Executive Officer
Let me answer to the second question just saying no. Our dual fuel offer is targeting essentially our gas clients, we have in Italy more or less 5.5 million or 6 million clients, which are clients of gas.
We target them for electricity as well. This is a marketing activity.
I have to tell you that we have been quite successful so far because we have made some... only a few test areas where we already gained many thousand clients, leveraging on the threat of being already our gas clients and the fact that our reputation as a reliable supplier is of course very high in the country.
You know CapEx is only investments in marketing and this kind of things. On the first question, I think Marko will answer.
Marco Mangiagalli - Chief Financial Officer
Irene, I will give you guidance of about 10.6 CapEx effected for the full year. Let me say that about 6.4 will be spent in the E&P and Stefano will then give you a guidance about the exploration component.
1.5-1.6 and should be in the Gas & Power, 1.2 in the R&M, and another 1.2 in Engineering & Construction. What is missing is a mixed [indiscernible] between petrochemical [indiscernible].
As regards to component of the exploration and the 6.4 of E&P, Stefano would elaborate.
Stefano Cao - Chief Operating Officer
Yes, Irene, basically we are not changing the guidance of the exploration for the... what we are adding is of course the component coming from the acquisition of Dominion asset, which is about in the range of €100 million.
Irene Himona - Exane BNP Paribas
Okay, thank you. And can I just ask a second one if I may?
I don't know if you've already referred to that, but is there any way you can quantify the impact of the appreciation of the euro against the US dollar on the first half results? Thank you.
Paolo Scaroni - Chief Executive Officer
Yes, I think we can.
Marco Mangiagalli - Chief Financial Officer
On the first half, only it is about 0.5 billion.
Irene Himona - Exane BNP Paribas
Euros, I presume.
Paolo Scaroni - Chief Executive Officer
Euros. 0.5 billion.
Irene Himona - Exane BNP Paribas
Thank you very much.
Operator
Thank you. We have got no further questions in queue.
So, I hand over to the host to conclude today's conference.
Paolo Scaroni - Chief Executive Officer
Okay. Thank you very much for your participation.
I hope we would see many of you in Kashagan later in September. Good holiday for the time being.
Operator
Thank you for joining today's conference.