Aug 2, 2007
TRANSCRIPT SPONSOR
Executives
Robert Castaigne - CFO
Analysts
Mark Hume - Credit Suisse Jason Kenney - ING Financial Markets Neil McMahon - Sanford Bernstein Alastair Syme - Merrill Lynch Neil Perry - Morgan Stanley Colin Smith - Dresdner Kleinwort Wasserstein Dan Barcelo - Banc of America Securities Jon Rigby - UBS Jean-Luc Romain - CM-CIC Securities Irene Himona - Exane BNP Paribas Mark Gilman - Benchmark Co. Lydia Rainforth - Lehman Brothers
Operator
Ladies and gentlemen, welcome to Total 2007 Second Quarter and First Half Results Conference Call. I now hand over to Mr.
Robert Castaigne, Chief Financial Officer. Sir, please go ahead.
Robert Castaigne
Good, thank you. Hello and thank you for calling in.
Before we review the results, I would like to start the call today with a few comments on our recent highlights. The past few months have been very exciting to us at Total because of several events that are important both operationally and as milestones in the development of the company.
In fact since the start of the second quarter, Dalia reached its plateau of 240,000 barrels per day; Rosa and Dolphin started up successfully; we were able to clarify the new terms and conditions for our Sincor operations in Venezuela; we launched the development of Ofon II in Nigeria, we began construction of our Lindsey refinery in the U.K.; we signed an agreement with Gazprom to study the development of phase one of the giant Shtokman Field which subject to final investment decision would bring us close to 1 billion barrels of oil equivalent of reserves in Russia. And finally, we entered into an agreement with Sonatrach to build a new world-class petrochemical complex.
That is a lot of important news and I believe that all of this highlights our abilities in terms of project management skill and competitive positioning for the short and the long-term. These actions, particularly the agreement that we have been able to make with national oil companies also add significantly to an already very strong and diversified portfolio.
So now we can go to the second quarter results. The oil market environment was volatile but at very strong levels in the second quarter.
Sequential price was $69 per barrel, which is in line with the same quarter last year and about 20% higher than in the first quarter. Our average oil price validation moved in line with spreads.
Our average natural gas price however, was affected by the sharp fall in U.K. spot prices and declined by 14% compared to the second quarter 2006 and 13% compared to the first quarter 2007.
So our combined liquids and gas price realizations were slightly weaker compared to a year ago and 11% higher compared to the first quarter. Looking at the environment, it is clear that the oil market has moved into a structurally higher price range and we do not see really how prices could weaken significantly any time soon.
Of course the adverse counterpart to this has been an increase in cost. The TRCV opened with a margin indicator rose to $43 per tonne, an increase of 12% compared to last year and 30% compared to the first quarter.
However, mainly due to maintenance activity, we did not capture the full benefit of the higher margins in the downstream segment. Petrochemical margins in Europe were stronger compared to a year ago but weaker compared to the first quarter mainly due to the continued oil price increase.
Looking now at the results. The second quarter adjusted net income was $4.2 billion.
Earnings per share in dollars reached a new record level for Total of $1.83 per share, an increase of 1% compared to the same quarter last year and 7% compared to the first quarter. The effective tax rate was 54% in the quarter, stable compared to the first quarter and lower than the second quarter last year mainly thanks to favorable mix effects.
In the upstream, higher taxes in Venezuela and in the U.K. where mostly offset by a stronger contribution from Angola notably because of Dalia.
And at the group level, mix effect was due to a larger share of the downstream in chemicals in the results. Our business segments were achieved for the 12 months ended June 30 was 28%, which continues to rank us among the best in the industry.
Our cash flow generation was strong. Adjusted for the change in working capital at replacement cost, cash flow was $6.2 billion, an increase of 14% compared to the previous quarter and an increase of 5% compared to the second quarter 2006.
CapEx was $3.6 billion, in line with our 2007 budget of $16 billion. So now I will quickly review the results by segment, starting with the upstream.
Adjusted net operating income expressed in dollars increased by 10% compared to the first quarter of this year with higher realized prices more than offsetting a decrease in production that was largely due to scheduled maintenance. Compared to the same quarter last year, which had comparable loss in maintenance, adjusted net operating income in dollars decreased by 6% mainly due to lower prices and higher costs including exploration.
Still this is clearly amongst the best performance year on year in terms of the change in net operating income and it is the best performance in terms of production growth. This of course reflects the beginning of the rebound in our production growth as well as a high quality of our upstream portfolio.
Looking at production volumes in more detail, the main positive came from the Dalia Field in Angola, which at almost full plateau production for the quarter contributed 74,000 barrels per day. Partially offsetting this growth were OPEC reduction of about 25,000 barrels per day and the loss of 22,000 barrels per day from the shutdown of the Nkossa Field in Angola following a fire on platform in May.
Year-on-year production increased by 1.4%. Excluding OPEC reduction and changes in the portfolio, notably determination of the concession in Dubai, the underlying growth was 3.5% compared to the second quarter 2006.
I think it is important to point out that given the type of projects involved, the OPEC reductions and the change in portfolio had a combined effect of less than $100 million of net operating income which qualitatively speaking is quite low. At this point, looking ahead, we expect no C maintenance in the third quarter to be comparable to last year.
The Nkossa Field restarted yesterday and should build up to about 20,000 barrels of oil equivalent per day in the coming year, in the coming days and then 45,000 barrel of oil equivalent per day in the first quarter. The Rosa field in Angola started up in mid June and the Dolphin project started up in mid July.
This will ramp up progressively and reach plateau in early 2008. Snohvit LNG should start up soon.
So these are the main projects that will contribute to the growth through the end of this year and beyond. So we are confident that we will grow substantially and faster than our peers in 2007.
For the longer-term, most of these projects under development are on track. Ofon II has just been launched and several other important projects are close to decided.
And the Sincor division process is now clear. I would also point out that our LNG business has been growing very successfully.
Looking at the equity affiliates, it is clear that we are benefiting from the ramp up of the Nigeria LNG trains 4 and 5. Train 6 should start up around yearend and Yemen LNG is on track to start up about a year after followed by Qatar gas 2.
By the way, all of these LNG projects will be reported as income from equity affiliates. I would also remind you that Sincor will become an equity affiliate after our interest is reduced.
So the net operating income is more and more the number to focus on. Exploration continued to be a success story for us, as we feel quite confident about our program so far this year.
We announced major discoveries on Moho Bilondo in Congo and on Block 32 in Angola. We also acquired new acreage including blocks in Angola, Nigeria, Alaska and Australia.
So to conclude on the Upstream, our portfolio and our underlying production growth are quite strong and we will update you on gross profile in early September at our next strategy presentation. Downstream now.
The TRCV margin holds to a very strong level of $33 per tonne in the second quarter 2007 from $33 in the first quarter and $38 per tonne in the second quarter 2006. In the recent weeks, primarily as a result of weaker pricing for gasoline, high distillate inventories, and lower maintenance activity, the margins of refining have fallen to weaker than average levels.
We all know from experience that refining margins can be very volatile. Nonetheless, we remained confident about the structural strength of refining margins in the short and medium term particularly for convergence margins that in fact are much less volatile.
Adjusted net operating income from the Downstream was $1 million which does not reflect the full capture of the second strong quarter margins. This was largely due to scheduled maintenance in the quarter.
Turnarounds affected five of our refineries in the second quarter compared to only one in the second quarter of last year. For the rest of this year, we have five refineries that are scheduled for special turnarounds and this will affect us late in the third quarter and in the fourth quarter.
In terms of operating projects, the normal BDHC is performing well. We have started construction of the Lindsey HDS unit, which is a $400 million project and for the Port Arthur coker refinery project, you will see the studies are going well and should be completed early next year.
Marketing remains fairly stable at good levels. So finally despite lower-than-expected results for the quarter, the Downstream remains very strong, with annualized profitability of 27%.
In the Chemicals segment, second quarter adjusted net operating income was $315 million, a decrease of 14% compared to the first quarter and an increase of 31% compared to the same quarter a year ago. The variation in the results is due to volatility in the base chemical margins primarily in Europe.
Base chemical margins were above trends in the first quarter 2007 and below trends in the second quarter 2006; this being due to combination of product demand, inventory levels and volatile raw material costs. Specialties continue to perform well.
As you know we spun off the interminant chemicals last year and are focusing primarily on our base chemicals. Our strategy is to optimize our European asset base to develop new projects leveraged to ethane as a feedstock and to grow in the Asian market.
As part of this strategy, we announced last month that we were selected to participate in the construction of a new world-class petrochemical complex in Algeria that will benefit from a dedicated supply of ethane feedstock. This agreement further strengthens the strategy partnership that we are developing with Sonatrach.
In addition, our projects to expand production volumes in Asia and the Middle East are progressing as planned and we are confident that this part of our portfolio will grow substantially over the next few years. Now corporate.
Our net debt to equity ratio at June 30 was 26% which is well below the 30% that we had a year ago but slightly higher than the 23% at the end of the first quarter. In fact, this increase is mainly due to the payment of the dividend in May.
I think it is important to point out that Total has had a large dividend increase among the majors, more than 20% year-on-year. As we have said before, we believe that our dynamic dividend policy sends the strongest signal about our confidence in the future of the company and is a best way to return value to our shareholders.
Over the first half of the year, we paid dividends of $3 billion and also bought back $1 billion of stock, which represents a return to shareholders of about $4 billion. In July, the buyback was about $250 million but most of this was to convert this year's program of granting restricted shares to key employees.
Our main priority is to grow the company organically over the long-term. This of course depends on our ability to continue to find new strategic opportunities for profitable growth that meets our investment criteria and I think that the recent announcements for new projects demonstrates clearly that we are able to do this.
I believe that our strategy to pursue disciplined long-term growth is working well especially in this type of environment which is to say higher and higher oil prices but clearly with less visibility on costs. Next month when we meet with you and make our presentation to the financial community, we will give more details about a project including Shtokman, the already negotiated position on Sincor and the new projects in the Downstream and Chemicals.
In addition, we will update you on the new feedstock steps that we have planned through 2010 and beyond. So that concludes my comments.
And I'm now ready to take your questions.
Operator
(Operator Instructions) We have a question from Mr. Mark Hume from Credit Suisse.
Sir, please go ahead.
Robert Castaigne
Hello Mark.
Mark Hume - Credit Suisse
Hello.
Robert Castaigne
Hello, can you hear me?
Mark Hume - Credit Suisse
Yes, I can hear you Robert.
Robert Castaigne
Okay. Yes good afternoon Mark.
Mark Hume - Credit Suisse
Good afternoon. Two questions please, Robert.
First of all, I just wondered if you might be kind enough to give us some indication of what you are seeing in terms of industry inflation on operating costs both the cash and non-cash elements? And secondly, I appreciate that there are a number of moving parts as to production thus far this year in terms of unexpected shut-ins and so on.
And I know that you have indicated that you'll provide a more detailed update on the growth trajectory in September in Paris. I just wondered in terms of how you will be communicating that update, will you stick to giving point targets as you have done thus far such as the 5.5% long-term growth, or will you start sort of gating toward more of a range of some of your peers have been doing recently?
Robert Castaigne
Okay, concerning the second question, I will come back after the inflation. Concerning the production, you are right to say that in fact in the second quarter on one side, we were I think lucky with all the new starting ups as the evolution of the new production that started up last year.
But is clear that this growth has been affected by OPEC Qatar, by changes in parameter, by the difficulty we had in Congo with Nkossa, and also by a further reduction of our onshore production in Nigeria especially in SPDC. I think that what is important -- you know that in addition to that, we have had just recently new starting ups, clearly this will have a positive impact in the evolution of the production in the second part of the year.
And the difficulty is in fact to assess what could be the recovery of our production in Nigeria, what will be the evolution of the OPEC Qatar in the rest of the year. And this is why I think that we are cautious to be more specific but I think that we will get into more detail in September.
Concerning the production for the long-term, result that is to say that period 2007, 2010. I think in fact we will have to review our assumption, first assumption whether it will stay to $40 per barrel or to $60 per barrel, probably we will move to 60 as we do not see really how we could come back with $40 per barrel especially for the medium term.
Of course we will have the possibility to take into account the change that has happened in Venezuela as well the change that has taken place in Dubai. And probably also our appreciation of the situation in Nigeria, it's fair to expect that after two or three years.
And I just hope much less than that we should be able to recover the normal situation. But I think said that; the rest of our assumptions has remained unchanged.
So if we were to make some correction it will just be to take into account the points that I have just mentioned. Concerning now your first question, that is to say the inflation globally speaking, we remain now with significant inflation.
I would say in the range of 10% to 15%, in some cases for operating first, it could be higher especially North Sea as we have in fact to accept higher costs in order to increase the reliability of our operation which is I think is very important especially when we can enjoy the type of price that we have now. But globally speaking, keep in mind, technical cost inflation something between 10% to 15%.
If I look now at the development cost, especially is a cost for our drilling platform, we remain with the same levels that we had at the end of last year and beginning of this year. And it seems that we are now at the plateau especially taking into account the new deliveries of grading platform for the deep offshore from the deep offshore that should take place in 2008, 2009 and 2010 especially.
So I think this is what I wanted to say. Just a small point in the second quarter, there has been an increase of DD&A which is partly due to an acceleration of the depreciation of value with Sincor as soon as we have the values complete for our indemnity.
This is related to Josephine.
Mark Hume - Credit Suisse
Sure, sure. And not to labor the point too much on the production growth targets, but as we know I'm sure you'll do a thorough level of due diligence before delivering the new targets.
Should we expect to see the same degree of confidence in your new revised targets that you've had in the past?
Robert Castaigne
For the long-term the answer is yes. Is yes because quite frankly if I refer to the situation as it is now, all the bad news are coming from the parties from Qatar, it's not really bad news because of counterparties good oil price.
The difficulty in Congo but I think its alive unfortunately and I would say a lot of what I will call long recurrent issues but globally on the long-term, I do not see why we shouldn't speak with figures that we have announced with a few corrections that should have finally a limited impact on the figure of 5% that we have announced for the evolution of the production between 2006 and 2010.
Mark Hume - Credit Suisse
Thank you very much, Robert.
Robert Castaigne
Thank you.
Operator
We have a question from Mr. Jason Kenney, ING.
Sir please go ahead.
Jason Kenney - ING Financial Markets
Hi, it's Jason from ING and Robert, congratulations on your return to growth and long may it continue. I have a question on Canadian oil sands.
Some of your competitors in Canada heavy oil are accelerating plans and investment in adding integration to those projects and looking to leverage from self-owned to capacity and upgrading. I wondered if you'd progressed your plans in this arena and also if you felt it necessary to split out the heavy oil operations into a separate reporting division which obviously Venezuela is going to be equity affiliated?
So we could see that but maybe Canada could be separated out from Upstream, I don't know. Is this something that you have considered?
Robert Castaigne
No, it's not something that we consider to separate Canada in our reporting. Concerning the development of operation, yes, we start having now a bit of view especially with regard to the up graders that we have in mind to build at Edmonton.
But we are still studying the process and we start having in mind a sure figure concerning the cost of this project as well as a cost for the development of the upstream part of the project.
Jason Kenney - ING Financial Markets
If I may, what kind of pressures do think there will be?
Robert Castaigne
Excuse me, what kind of?
Jason Kenney - ING Financial Markets
What kind of pressures do you think there will be for construction capability or demands on manpower? I mean obviously a lot of people are getting in there trying to buck up capability in Qatar?
Robert Castaigne
I think we'll have some pressure on logistics like everybody but I think the oil industry has been able by the way to move something like 80,000 people to work on their project in Qatar. So I do not see how we shouldn't manage to serve this logistic issues and the human resources issues in Canada.
The only point is that maybe it will take a little bit more time. It will be a little bit more costly but I think it is something that we shouldn't manage to solve.
Jason Kenney - ING Financial Markets
Okay, many thanks, Robert.
Operator
We have a question from Mr. Neil McMahon, Sanford Bernstein.
Sir please go ahead.
Robert Castaigne
Good afternoon, Neil.
Neil McMahon - Sanford Bernstein
Good afternoon. I have few questions.
First of all, could you give us some guidance on where you are with the Sanofi stake? And how should we think about buybacks through the end of this year and next year presuming that the Sanofi stake moves -- you start selling that?
And I've got a follow-up question as well?
Robert Castaigne
Okay. So concerning Sanofi, I think that our position has not changed.
The non-core asset is that it will divest progressively in opportunity. Up to now we are still with our 13% stake in Sanofi and 20% (inaudible).
We are a bit disappointed with the present level of the share price of Sanofi and I think that we have to make up our mind at the time when we think it should be justified to start this disposing part of our stock in Sanofi. And quite frankly, we will not make of course any announcement before doing that.
Concerning the level of buyback, I think that without any divestment in Sanofi, we should more or less arrange the second part of the year what we have had in the first part of the year. Everyone knows that we bought back something like 14 million shares without the shares that we bought to cover our plan for the employees.
So I think we should be supported. We remain with the type of price that we have now, we should be at that level.
That is to say an additional 14 million shares.
Neil McMahon - Sanford Bernstein
I thought we should be still thinking over the next 18 months that you are going to start divesting your Sanofi stake?
Robert Castaigne
I would say possibly but again, it is something that is very sensitive and at least for this only reason it's difficult for me to say more.
Neil McMahon - Sanford Bernstein
Okay, maybe shifting gears just to Iran and maybe if you could tell us the current status of the Pars LNG scheme and your investments in the oil fields there. Have you -- are you still investing at the pace you originally planned to invest there?
Maybe just an overall philosophy about how you work currently in Iran?
Robert Castaigne
Concerning Iran, as you know clearly we remain with a very -- we have to choose in Iran. It is a political situation, the situation which clearly is not in our hands.
And then the cost of the project. The cost -- the studies concerning the cost of this project were completed in 2006 and clearly we are now with cost which is high and we have to see how we could manage to reduce the cost of this project in order to improve the profitability that we should expect out of this project.
So I think we are reviewing our field studies and I think that it would take a little bit of time and we will come back to you when we think we have more valuable information on these specific issues.
Neil McMahon - Sanford Bernstein
Okay, thank you.
Robert Castaigne
Sorry not to be more specific. Thank you.
Operator
We have a question from Mr. Alastair Syme from Merrill Lynch.
Sir, please go ahead.
Robert Castaigne
Good morning Alastair.
Alastair Syme - Merrill Lynch
Good afternoon, Robert. Can I just come back to the issue of CapEx because you made the point in your prepared speech about development costs being similar to levels a year ago?
But it's not kind of the feedback we get from some levels of the industry in looking at capital inflation in some projects like Usan and some of the LNG projects. Where are you seeing the pressure points on development costs?
Robert Castaigne
Yes, note that I just said that we have a feeling that the situation we have now is not very different from the situation we had at the end of last year, no more. Concerning the CapEx by the way, for 2007, as you may have seen, we are I would say a little light compared to our budget but I think that we should recover more or less, a figure in line with our budget.
For the years to come, let's say clearly we do not see decrease of the level of our CapEx for the years to come. I just said that we have the feeling that especially for a grading platform, we should be now more or less at -- we should more or less remain at the high-level that we have registered over this over the last month.
That is all I wanted to say, no more.
Alastair Syme - Merrill Lynch
Can I ask if you are seeing quite significant inflation in costs between the feed stage and the FID of projects?
Robert Castaigne
Excuse me, for which project?
Alastair Syme - Merrill Lynch
Just in general between when you do your feed study and then you go back to FID at values -- seeing quite significant capital inflation still?
Robert Castaigne
You really, so the feed study, of course, we launched the tenders and it shows that in the last two years, our estimations were lower than the final edits of these tenders. But I have in mind a good example of one development that we have just approved.
Initially, we receive tenders that appear to us too high and finally, we renegotiate the contracts, the contract that was proposed to us. We saw modification and we managed finally to reach an agreement with a price maybe 15% lower than as a result of the first tenders.
Which means that, if we have had some significant increase, we see we still see some possibilities finally to have better management of the contract in order to stabilize the cost of construction, the high-level of cost of construction that we have reached now. And what is important to note or so is that we have been able to launch all the development that we have with us in our plants, while having satisfactory profitability meeting our investment criteria.
We think this is very important. Up to now we never had to postpone any investment because the CapEx were too high to justify a satisfactory profitability.
Alastair Syme - Merrill Lynch
Just as a follow-up, can I just ask where you are seeing the biggest pressure point on CapEx inflation then?
Robert Castaigne
In the past, it was clearly for drilling platforms. Now, I think it is probably for the subsea equipments.
Alastair Syme - Merrill Lynch
Thank you very much. It’s very helpful.
Robert Castaigne
Thank you.
Operator
We have a question from Mr. Neil Perry from Morgan Stanley.
Sir please go ahead.
Neil Perry - Morgan Stanley
Robert, it's Neil Perry. I just wanted to ask about two things.
One is in Russia, historically you've had a lot of trouble in Russia and not -- you've fallen behind your peers. You seem to have a bit of a run of success there.
Can you try and explain what you think it is that has led to this flip around in Russia? And secondly, you started off your comments with a very positive outlook in terms of the activity levels.
And then you gave a very bullish outlook for oil prices. I mean is there any discussion internally about adjusting your strategy to invest more rather than return as much to shareholders?
Because if you've got lots to do and you think the oil price is going to remain high, surely you should be spending it rather than giving it back?
Robert Castaigne
Concerning Russia, I think it is clear that in the past, as you know, we have had several difficulties. First when we wanted to acquire 25% of Novatek.
After that in Vanco (ph). And remember it was a time when clearly as a government of Russia, decided clearly to control the main oil and gas fields in Russia.
Now I think it seems that we have been chosen by Russia to participate to the development of Shtokman especially because total is considered or was considered as one of the best companies from a technical point of view to participate to this development. And we have been able to negotiate a contract that should bring us a satisfactory profitability.
Suppose that by the way the feed studies are positive, and we are able to consume our participation to this project, and quite frankly we remain optimistic with this regard. And we see, I think that we have now to study the project and in the contract that we have negotiated, clearly Russia will keep the control of the reserves.
But I think that there is a possibility to play our role to contribute our technology and to have our share of the profit, which I think, is very important. And we will have of course as a consequence of that the possibility to book the reserves in the production.
Concerning the -- as the second question, oil price. It is clear that for the years to come, we are clearly bullish -- I would prefer to say confident.
We think that we should remain clearly with an oil price certainly not lower than the levels $50, $60 per barrel for many reasons, especially because we do not see how production capacity could increase by more than 1% per year. And in front of that, we have the demand that should continue to increase, even if we are cautious by something like 1.2%, 1.3%.
So this is why I think, we are confident that we should remain with practical level for the oil price. As now, I don't think keeping that in mind, I think that it's clear that this environment should help us to develop all the projects that we have with us.
And you may have seen by the way that, our strategy is clearly to grow the Company organically because I think it's probably is the best way to do it with the best profitability. And I think said that, I think that in the last two years, two or three years, we have found a lot of possibility to develop the Company in Canada, in Australia, in Africa with LNG project.
After that we have Shtokman, project Nigeria, so I think to me it's a lot of good news that should enable us to prepare the future. And if I look now at what we can expect with the evolution of the financial situation, if we assume that we should remain with the type of oil price that we have in mind, I think that should be in a situation both to continue to develop the Company with an increase of the CapEx, and also at the same time to continue to increase a dividend.
As far as buyback, the idea is to continue, but clearly the buyback will remain the way we will address the balance, the financial situation of the Company. And clearly, I would prefer to use the money that we have to develop the Company in a profitable way, rather than to increase the share buyback.
If there is a possibility to do both, but we'll do it, clearly. But our main objective is clearly to find additional projects with a view to accelerate -- not to accelerate -- to pursue the growth of the company.
Neil Perry - Morgan Stanley
Thank you.
Operator
We have a question from Mr. Colin Smith from Dresdner.
Please go ahead.
Colin Smith - Dresdner Kleinwort Wasserstein
Good afternoon. I have slightly more technical one.
I just wonder if you could explain to us how the Sincor compensation is going to be shown in the accounts, in particular whether you are going to carry on showing the volume of oil associated with the piece at that PDVSA now gets equity production or not?
Robert Castaigne
After the move, in fact we will remain with 30% of the mixed company. I think there have been a new name that has been given -- that will be given to this company.
And our share in the profits, in this -- our participation in this company will be treated from an accounting point of view as an equity participation. Concerning the indemnities that we will receive, first, it will be both accounting value, so we will register capital gain.
This indemnity will be paid in kind that is to say, in oil and the value of the 17% that we will have to transfer to PDVSA will be amortized from an accounting point of view at the same pace, as we will be paid in kind through shipments of crude oil. But -- so there will be again, that should be registered at the time of the closing of the operation.
I don't know if it will take place in the third or fourth quarter and that's all.
Colin Smith - Dresdner Kleinwort Wasserstein
So to be clear, you expect to book a profit on the disposal? But also just on the volume of oil that you receive in the indemnity, will that continue to show up as part of your production figures?
Robert Castaigne
The answer is yes, yes. The answer is yes so that in 2008 and 2009 finally, it is clear that on one side we will lose part of our production in Sincor as our interest will be reduced from 47% to 30%.
But on another part, we will receive some production in order to compensate in order to be indemnified, and this production more or less will compensate for 2008 and 2009. So, production that we will have lost as a consequence of the reduction of our stake from 47% to 30%.
Colin Smith - Dresdner Kleinwort Wasserstein
Thanks very much.
Operator
We have a question from Mr. Dan Barcelo from Banc of America.
Sir please go ahead.
Dan Barcelo - Banc of America Securities
Thank you, good afternoon.
Robert Castaigne
Good afternoon Dan.
Dan Barcelo - Banc of America Securities
A question regarding the downstream in the second quarter. When I look at refined product sales, particularly in the Americas, there's a big drop from 1Q and also from the year ago period.
I was under the impression Port Arthur had completed most of its turnarounds at the one quarter stage, so why wouldn't there be more volume? And then also if you could comment on the trading volumes were up very large also in the second quarter.
Was this inventory movements?
Robert Castaigne
No, I think that the reduction of the volume that you mentioned is due fundamentally to the trading of -- excuse me, I must admit that I have to count on my colleagues for that. But clearly, there has been an increase of the trading of gasoline in the U.S.
of volume now of gasoline in the U.S. this quarter I think compared to what it was in the first quarter.
In fact, we were led to increase the trading of gasoline in the U.S. but I think it's just a consequence of the reduction of the European market of gasoline.
So I think that more in more we are led to export the parts of the production of our gasoline to the U.S. and now I think I have in mind one refinery which exports in Europe 70% of its production of gasoline to the U.S.
Dan Barcelo - Banc of America Securities
Okay, thank you very much.
Operator
We have a question from Mr. Jon Rigby from UBS.
Sir, please go ahead.
Robert Castaigne
Good afternoon Jon.
Jon Rigby - UBS
Hi, Robert. Just a couple of questions.
The first is on the Downstream and the two projects you mentioned earlier, Jebel and the Port Arthur for Coker (ph) and I just wonder whether if you could share with us now any views on the downstream market? Clearly it’s a while since you fided very early into the cycle the hydrocracker in Normandy and whether what your impressions are of how the market has changed since then and the last very big investment you did?
The second is just to come back to Sanofi again. I think your answer your stock answer you repeated quarter after quarter that is that you think the shares are undervalued or you are slightly disappointed, whatever, and you'd look for an opportunity to sell.
Well, one could say that there's an opportunity to sell would have been when it was €10 higher a quarter ago. So I wonder whether your revisiting the methodology by which you asset whether you think there is an opportunity to sell or not?
I don't want you to comment specifically because I'm aware that whatever you say goes straight onto the screen.
Robert Castaigne
Clearly Sanofi, we were disappointed with the news on regarding volume in the U.S. Clearly this was not expected and we had no reason to expect that especially if we consider that the commercialization of this product in Europe and in Japan is going fairly well.
I think this is relatively new and we have to take that into account but we remain positive despite the fact, despite this situation that clearly was not expected and we had no reason to expect that, in fact. So, I think it is true what you say but we also must admit that we clearly we are fundamentally we are not in a hurry to move.
And just a question of time to find what could be as the best way to manage from a financial point of view our stake in Sanofi and up to now we have not moved and I will not repeat what I just said before. Now with your first question was, yes, the downstream environment.
I think what is important to have in mind for the two projects that you mentioned, the Coker at Port Arthur and the Jebel refinery. In both cases this investment of economics that in fact are economics of conversion, that is to say linked to the different sort of price between heavy oil and light oil.
And this differential is itself linked to the general level of your price. And this is why fundamentally we remain optimistic for the environment for these two projects in the medium to long term.
If I look now at the situation of the refining margin in Europe, I see that it was very volatile especially in July, by the way, when I think there original level was some single I speak for TRCV $13 per tonne. In fact, in TRCV you have the CNV which is in fact a part of the margin which is due to conversion operations and this part finally is not so much volatile, but what is very volatile is the topping and reforming part.
But for the two projects that you mentioned, in fact for them mostly it’s conversion project with equity mix linked clearly on the general level of the oil price.
Jon Rigby - UBS
Okay, thank you very much.
Operator
Your next question is from Jean-Luc Romain (ph) from CM-CIC Securities. Sir please go ahead.
Robert Castaigne
Good afternoon, Jean
Jean-Luc Romain - CM-CIC Securities
Good afternoon. I would like to know if you could give us a figure of almost why your exploration expenses in the quarter as you announced it had increased?
And also there was in the note here an exploration in the decline of production compared to last year's second quarter. Is that only more maintenance or there are things going on there?
Robert Castaigne
Okay. Concerning the exploration expenses for the second quarter, I think it was about $400 million.
This figure is slightly higher more especially because there has been some adjustments but I wouldn't want to, in fact the precise figure is more $550 million. And I think that we had to make some adjustments because we had to take into account the news that we are bought by some additional wells.
I have in mind one particular case. But I think there is nothing very specific, there is no conclusion to draw out of this figure which I remind you is $450 million and not $560 million.
So this was for your question, concerning the acceleration of North Sea decline. Globally speaking the difficulty in fact is always to make the distinction between the new productions and the former one.
It is not very easy but what I can say is that if we exclude totally the new production in North Sea, I would say that on a average over the period 2007, 2010, the net decline should be in the range of 8% to 9% which is not something new. I think previously I had the opportunity to mention something like around 8%.
It is clear that this may be slightly higher figure is also partly due to some difficulties that we have had from a political point of view. But if I take into account the contribution of the new developments such as Jebel, I think the picture is a bit different and instead of 8% to 9%, we should have for the period 2007, 2009 by memory something like minus 3.5%.
Jean-Luc Romain - CM-CIC Securities
Thank you very much.
Jean-Luc Romain - CM-CIC Securities
Thank you.
Operator
We have a question from Mr. Irene Himona from Exane BNP Paribas.
Please go ahead.
Irene Himona - Exane BNP Paribas
Good afternoon, Robert.
Robert Castaigne
Good afternoon.
Irene Himona - Exane BNP Paribas
I have a question on E&P affiliates. You mentioned in your opening statement that the contribution is going up.
Robert Castaigne
Yes.
Irene Himona - Exane BNP Paribas
Indeed we see that Q2 net income is up about 60% year-on-year. I also note that for the first time you started disclosing this quarter the production from equity affiliates.
That has varied in the past. It's actually been pretty steady, 13% to 14%.
So, I wonder if you can give us some guidance as to how the affiliates' production as a percentage of the group out of oil increase over the next few years?
Robert Castaigne
First, concerning the evolution of the reserves of equity affiliates, in fact, equity affiliates in orders, and there are two things. First, very significant increase of the reserves of our equity affiliates especially due to our share in Nigeria LNG.
We also have share in some of the LNG companies in the Middle East but the bulk is clearly in Nigeria. In addition to that, I think that in the orders we had last year a negative impact that has disappeared in the second quarter 2007.
I think there is nothing less to say. I think the figure that you have now for the second quarter is clearly maybe more representative of the situation that it is now.
Your second question was about our intent to segregate in the coming years the production coming from equity affiliates. I think it’s something that you should be able to find globally speaking it’s true, page 13 of our Communiqué French version.
Well it's true that we don't give the detail of the production for equity affiliates by geographical area but the figures that you having find in the coming years it should be some other things they should increase clearly. And now it is something, which is relatively small.
In the future there will be also in addition to that the contribution of Sincor, of Yemen and of Qatar Gas 2, so clearly the share of the contribution of the equity affiliates in the production should increase very significantly in the future.
Irene Himona - Exane BNP Paribas
Thank you, Robert.
Operator
We have a question from Mr. Mark Gilman from Benchmark.
Sir, please go ahead.
Mark Gilman - Benchmark Co.
Good afternoon, Robert.
Robert Castaigne
Good afternoon, Mark.
Mark Gilman - Benchmark Co.
A couple of specific things if I could? Regarding the equity affiliates earnings and the LNG component in particular, were there sales out of inventory that helped make that figure as large as it was?
Robert Castaigne
No, no, no.
Mark Gilman - Benchmark Co.
No? If not…
Robert Castaigne
The answer is no.
Mark Gilman - Benchmark Co.
Okay. Secondly, at current price levels, can you give us a rough idea when your entitlement in Dalia will drop down either as a result of reduced profit splits or capital cost recovery?
Robert Castaigne
I think we should remain with the production that we have clearly for a certain period of time and it will not decrease before a few years, three to four years something like that significantly.
Mark Gilman - Benchmark Co.
Okay, and that is at current prices, Robert?
Robert Castaigne
Yes, this is at current prices.
Mark Gilman - Benchmark Co.
Okay. Thirdly, you talked about a significant new discovery at Moho Bilondo.
I'm wondering is that a new structure entirely or were you commenting on an appraisal well?
Robert Castaigne
Yes, I think it is a new structure, yes. The answer is yes.
Mark Gilman - Benchmark Co.
My final one relates to the Gulf of Thailand where I believe you recently successfully negotiated the extension of your concession. Will you be booking significant additional reserves at year-end associated with this and do you expect production increases in the Gulf of Thailand from Bonkai (ph)?
Robert Castaigne
On the ground the answer is yes. But will it take place by the end of this year?
Quite frankly it seems yes it will be if we have the possibility to develop that, the answer is yes. But quite frankly may I suggest that I think the answer is yes.
But may I suggest that you come back to the higher division to have a confirmation because I think this is also linked to the decision of development and I don't know it hasn't been taken place. But probably there is a good chance that it is taken before the end of the year.
Mark Gilman - Benchmark Co.
Okay, thank you, Robert.
Robert Castaigne
Thank you.
Operator
We have a question from Mrs. Lydia Rainforth from Lehman Brothers.
Please go ahead.
Lydia Rainforth - Lehman Brothers
Hi, Robert. Good afternoon.
Robert Castaigne
Good afternoon, Lydia.
Lydia Rainforth - Lehman Brothers
Just a couple of things. Are you concerned by the reports that the current government wants to renegotiate some of the terms of the Kashagan contract?
And the secondly, on Nkossa I think you mentioned that that would reach about 45,000 barrels a day in the fourth quarter. I was just wondering when you expected that to be back at the 60,000 barrel a day capacity?
Robert Castaigne
I would say in 2008 surely. And we will see if we can be more specific.
I speak for the 60,000 barrels per day. Let's just hope that we have the ability to be more specific at the beginning of September.
Concerning our Kashagan project, what you have to know is that the new plant has been submitted by the operator to the Kazakh authorities recently I think in June with a new time schedule for the production, higher CapEx. And the idea is that there should be a meeting between the Kazakh authorities and the participants that should take place let's say in probably in the third quarter.
What I would like to add is that this is clearly a difficult development and we clearly also need to have a good framework in order to be able to proceed in satisfactory conditions. I think I cannot say more now and we have to wait a little to be more specific with this project.
Lydia Rainforth - Lehman Brothers
Okay that’s great. Thank you.
Operator
We have no further questions.
Robert Castaigne
Okay. So I would like to thank you very much for being with us today at the beginning of August where many people, especially in France are on holiday.
So thank you for being with us today. Goodbye.
Operator
Ladies and gentlemen, thank you all for attending. You may now disconnect.