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Operator: Good afternoon, and welcome to the Rosneft First Quarter IFRS Results Conference Call. My name is Adam, and I'll be the operator for this call. I will now hand you over to the management team to begin. So please go ahead when you are ready.
Didier Casimiro: Hello, good time of day, dear colleagues, and thank you very much for taking part in the conference call of Rosneft's 1Q 2021 operating and financial results. With me today have Aleksandr Sokolov, but also many of the top managers of Rosneft's taking part in this call.
Eric Liron: Didier, thank you. Key factors affecting the Company's 1Q hydrocarbon production where the easing of restrictions under the new OPEC+ agreement starting January 2021 and the sale of a number of assets at the end of 2020 in order to transform and improve the quality of the Company's asset portfolio. Under the influence of those factors, total hydrocarbons output in 1Q '21 was 4.76 million BOE per day, down 5.6% quarter-on-quarter. Our liquids production was 3.75 million barrels per day.
Didier Casimiro: Thank you very much, Eric. So moving to Downstream and marketing. So let's start here with Refining. In 1Q 2021, and the total volume of crude oil refining at the Company's refineries amounted to 26.4 million tons. This is 2.1% higher quarter-on-quarter, but still 8.3% lower year-on-year. The reduction in refining throughput compared to the same period of 2020 still being due to an incomplete demand recovery to the levels prior to the introduction of the pandemic-related restrictions. In 1Q, the Company continued to execute a program of in-house manufacturing of a specialized enterprise has developed the technology for the production of a hydrocracking catalyst, which will increase the production of high-quality motor fuels from vacuum gas oil. The production of a new hydrocracking catalyst will significantly reduce the dependence on similar for end products, which currently accounts for 90% of the total supply of these products in Russia. The Company continued to diversify its crude oil and refined product supply channels. In the reporting period, crude oil supplies to the far abroad markets amounted to 22 million tons. And of that volume, 13 million tons were supplied to the East, which is 59% of the total volume of crude oil supplied internationally to further growth markets. The Company also delivered 24 million tons of refined products. And of that volume, 14 million tons were supplied to far abroad markets. Enhancing cooperation with the end consumers, Rosneft has signed a new long-term agreement with the Polish company for the supply of crude through the oil pipeline to Poland for the period from March 2021 to January 2023. In the first quarter of 2021, the Company's retail business stable performance as well as a recovery from the limitations of the previous year.
Operator: Our first question comes from Karen Kostanian from Bank of America. Karen, your line is now open. Please go ahead.
Karen Kostanian: I have two questions. Thank you for the update on Vostok Oil. I have a question if you can you give us an update on the negotiations ongoing with other strategic partners, if they are ongoing? And you do expect another transaction to occur anytime this year? And my second question is on the gas production. Again, congratulations on launching Gazprom, I wanted to think what is the progress on the second Kharampur metro stand?
Didier Casimiro: Karen, thank you very much for your questions, let me maybe take first one myself on the other strategic matters. So first of all, right, indeed, what you are saying, we have ongoing negotiations with a number of parties. And for sure, there will be until year-end, and I'll think, actually, sooner than that, but I don't want everything away, yes. Again, the communication to the market of other partners joining this project. Then I will now pass for gas production Kharampur to Andrey Baranov.
Andrey Baranov: Thank you very much, Didier and colleagues for quite some time. The biggest gas production unit in Rosneft was the Company under the name of Yuganskneftegaz. So currently, with the start of preparation for Rospan launch, we, for the first time, we're able to see the Rospan's production started exceeding Yuganskneftegaz And they came a day where Rospan started producing more than Yuganskneftegaz. At the point in time when the preparation is really complete after Rospan, we will have the Rospan production much bigger, and it will become the biggest unit and shall remains so in the course of several years. So the project that Karen is asking about, according to our plans, in due time, it will be able, in terms of the gas production, takeover Rospan's gas production. So how we're currently going through the first stage, which is the part of it. And according to our current plans, it is due to be launched in 2022. The construction readiness of the project is quite good. We have two pipelines currently being built. The one that will connect the field with the National Truck System, the construction readiness there is already 91% was the second line, which is going to be 54% of its volume in terms of the comprehensive gas treatment preparation, 61%. So overall, I should say that we're running a little bit ahead than the schedule calls So we will see that the kick off of the project in the first quarter 2022 is a very feasible thing to happen. And by launching it, we will be able to produce from the about 11 billion cubic meters of gas a year in 2023, that will be happening. However, that is not yet the end of it because, at present, we do have the possibility to expand it through the formations where we are making plans for this particular part of production to run up to 14 BCM a year, making the total gas output from the project at the level of 25 BCM a year, making it the biggest gas project in the Company. In terms of the tubing formations, we have already completed the necessary series of tests and are ready to make the investment decision. Although I would like to note also that it was just yesterday that the government submitted into the Russian parliament the Draft Act, which, amongst other things, sets the lower rates for the Beryozovsky Suite gas, which is, yes, an additional upside for the project, enabling us longer-term to maintain the plateau that we currently enjoy from the . So overall, this is the status and thank you very much for the question.
Operator: Burgansky from Renaissance Capital. Alexander, please go ahead. Your line is open.
Alexander Burgansky: I've got three questions, if I may. Could you please tell us anything about your plans to what kind of production there will be in 2021? Because I noted that in Q1, it slightly declined. So what's the reason behind it? Another related question is the second one, whether you were able to get all of the deduction for the construction of Vostok Oil that is due to you under the law, I mean, in Q1 as far as I understand, the amount of such a reduction is not related to actual expenses for the infrastructure? So what was the ultimate the amount that was made available to you in Q1? And my last question about the added additional profit tax. It really grew substantively in Q1. I understand that may be partially related to the transition of the depleted fields as of January 1 this year. Could you give us some sort of statistics in terms of the production volumes, which were moved into the regime of the windfall profit tax or any additional factors, which impacted this particular line item of expenditures?
Didier Casimiro: Alexander, thank you very much for the questions, I suppose that we should begin with who will give you the first answer, and then we follow-up by Vladimir Chernov who is the Director. And then we'll go back to with regard to the windfall profit tax. Yes, it is a very good assumption because considering changes in the tax legislation, we have got quite a few fields that have been re-categorized to the windfall profit tax, almost all of the fields that we used to have in the decline stage profit tax part. And so quite a large amount also fall under this particular tax regime, but it's also important to know that in transition of almost 90% of the depleted ones now into the windfall profit tax. EBITDA remained neutral because property tax compensated to us, the kind of opportunities that we had lost in the depleted fields against the current tax regime. Vladimir, please? Sorry. And in terms of the millions of tons, could you tell us what is the volume of output in question? I see that we should give you the answer separate because just to give you of tons are not simply just really too quoted off the cuff.
Vladimir Chernov: Alexander, thank you very much for your question, I do see that you are very well aware, which is something that make us really speaking You very correctly noted. I mean, the figure that applies to the currently operating assets Vostok Oil and the So in Q1, there was a very slight lagging behind in terms of the output, which is a typical situation conditioned specifically this year by the lengthiest cycle of extremely low-temperature when for the -- in considerations of safety, we stopped work at the lifting for the maintenance of wells and drilling. It is being done exclusively because of the climate as often is the case in the winter period. This year, at the end of December, and practically the whole January, we're demonstrating unusually low-temperature down to minus 50. And so because of safety considerations, we do stock for these companies operating there. At the same time right now, and as far as Q2 currently is concerned, I'm receiving information on a daily basis, we are ahead of the expectations, which in the course of the remaining year will offset whatever declines had to have in the beginning of the year. So it's very much manageable and clear situation. Now in the tax benefits are concerned that the government offer to us for Vostok Oil and our scheduled CapEx for the projects effectively, everything is, again, all right here. I will shortly describe to you in terms of the start of the project and as far as the part of it is concerned, which is the time location. So as of today and since the start of the project, about 1,200 kilometers of winter roads were built which helped to transport to the locations of the future construction more than 250,000 tons of material and cargo. And again, as of today, we expect that towards the end of May, beginning of June, the same amount of material and cargo will start from the carrying additional 300,000 tons of cargo. We have mobilized currently about 20 contractors. We've mobilized now let me just quickly remember the exact figure, 6,034 construction equipment units. At this time, there are more than 600 people at the location, which do work and deploy the supporting infrastructure, I mean, the fuel depots, lubricants and they prepare the pads for the future year so that the production drilling could then be done, then four cementing fleets, two hydrofracking fleets, two compressor piping stations, four fleets for the drilling mark preparation that is to support the current year and next year's exploration program as the testings. I mean to say that the money is being spent in this project in a very strict scheduled and timed way and we submit the offsets to government 100% that we can get -- we are getting it back. Thank you. Thank you,
Operator: Henri Patricot of UBS. Henri, your line is now open.
Henri Patricot: Thank you for the presentation. I have two questions on the Upstream. The first one is a quick follow-up on Rospan if you can tell us just how much in gas in condensate production you expect overall for 2021? And secondly, on Upstream OpEx, you dropped to $2.6 per barrel this quarter, and they're quite moving parts with the disposals of cost constraints and some seasonal factors. So I was wondering how much of the improvement was restructural, how much temporary and what we can expect in terms of actually more tax for the rest year?
Didier Casimiro: Thank you very much, Henri last question, which was Rospan and then I might ask you to clarify a little bit of the second question, but let's first listen to Oleg Ivanov on Rospan 2021.
Oleg Ivanov: Thank you very much. Henri. At Rospan in 2020, we were producing a little bit over 6.5 billion cubic meters of gas a year. So now with the launching into production of the first Rospan phase, the annual -- sorry, daily production will more than double. So with the start of the second stage, it will more than triple actually speaking. Now in terms of the annual volumes, we estimate that in 2021, we'll produce about 14 billion cubic meters of gas from Rospan.
Didier Casimiro: Thank you very much, Oleg.
Oleg Ivanov: One more time, please rephrase your second question because, first of all, I mean, the line is not very good.
Henri Patricot: Okay. Sure. No problem. Yes, I was asking about Upstream OpEx dropped to $2.6 per barrel. I was wondering how much of the improvement here is structural seasonal in nature? And where you expect this Upstream OpEx figure to be over the rest of the year?
Didier Casimiro: Very clear. So your question, Upstream OpEx, structural, seasonal and can we expect this type of levels of OpEx per barrel of oil equivalent for the rest of the period? Okay. We will pass the question to
Unidentified Company Representative: Thank you very much for the question, Henri. If you take a look, then it's been the second year in a row that we've been maintaining a certain level in terms of our barrel cost, which means that this is not any seasonal changes. Really, this is very in-depth that work specifically related to the efficiency improvements because irrespective of inflationary pressures that are out there, we do lots of work to select the candidate wealth to identify the specific mode about to reduce consumption. And that enables us to maintain our average cost per barrel in ruble. So depending upon the exchange rate, we are able to attain such $2.6, $2.8. But in terms of the ruble, we find ourselves in a very flat market.
Unidentified Company Representative:
Unidentified Company Representative: Just a couple of notes, because OPEC+ does have a bit of an impact, and our colleague has noted to just finally, but as part of the production curves and the fact that we're able to maintain the potential for further output increase in investment in the new well. So by launching a new well, we need to really put down a highly, which automatically leads to our OpEx is going down.
Didier Casimiro: Well, we can then go on to the next question. Thank you, Henri, and thank you
Operator: Our next question is from Ron Smith from BCS. Ron, your line is now open. Please go ahead.
Ronald Smith: So a couple of things. Could you outline, please, your investment priorities for this year? I'm particularly interested in Vostok Oil versus the rest of your Upstream investment? And in the Downstream, how much will you be spending on those four refining upgrade projects that you have covered by the agreement with the government in March? And then also, finally, if you could give me some overall guidance for CapEx in 2021? Thank you.
Didier Casimiro: Thank you very much, Ron. Let's then pass here the answer to our Chief Company.
Unidentified Analyst: Well, so responding to your question in terms of our priorities, generally, in 2021, the Company plans to increase the volume of investments in the new projects, and we will do that work with certain transformation in mind by probably assets. And in this sense, we do plan to be very focused in new projects. Upon our new project, as you know, on a continuous basis, we analyze the impact from the external factors and consequently do assess what is the best way we can optimize our investment program. You may also know that our investment portfolio is based upon the ranking of projects throughout all the business segments linked to the criteria of economic efficiency, the project scale and the level of readiness. And the key priorities here as always will be the on-time and on-budget. Throughout the first quarter, we do see that the CapEx certainly runs up to about RUB225 billion, which is at the level of Q4 2020 and approximately by 20% higher than Q1 in 2020, respectively. As you may know, optimization really takes into account the EBITDA per barrel, while the aggregate CapEx, I would say approximately is going to be slightly higher compared to the previous year, taking into account the priority that we have in on our new project today. We're not quoting anything specific about it. So as far as your question for Downstream is concerned, throughout the whole period of the OPEC being in place, I mean, in terms of the investment, it's about RUB400 billion.
Operator: Our next question is from Igor Kuzmin from Morgan Stanley. Igor, please go ahead. Your line is open.
Igor Kuzmin: I have several questions, please. First question is in regards to Vostok Oil. I would like to sort of understand a little bit more the economics of the project in the first quarter. And my first sub-question is, how much CapEx has been attributed to the Vostok Oil implementation in the first quarter this year? Secondly, in terms of the impact of the tail assets, which have been or are being disposed as part of the sort of Vostok Oil restructuring or sort of acquisition of Payakha And sort of specific question is, what impact on the production perspective do you estimate it had on the overall health in first quarter? And then perhaps if possible, could you possibly translate this into the EBITDA or free cash flow impact on -- again, within the scope of the first quarter? Another question I have was in terms of the -- to the Rospan and the gas itself and by products, whether the output of both have been fully covered by the contracts? In other words, whether there is definitely the end market for it? And finally, sort of the question is in regards to the ongoing decarbonization efforts, sort of where are you in terms of the investment allocations and specific activities, which are allowing you to move forward with sort of the reduction of the carbon footprint? Thanks.
Didier Casimiro: So thank you very much, Igor, plenty of questions, as I would say. Let's go back. I think your first question was around Vostok Oil, maybe see here. Just one second. So, we will pass this here the word again to the General Director, Igor.
Igor Sechin: Thank you very much for your question. Like I previously said, Vostok Oil project is following its scheduled performance. We are fully on top of the regional plans and all of the contractors that we have already out there as well as the spending that we do see, it's about RUB50 billion as of now, which enabled us in the fullest possible way and entitled to entitled to the tax compensation.
Didier Casimiro: People answering here the second one was around scale and assets and the potential impact. So I'll pass here the word to Artem Prigoda.
ArtemPrigoda: Yes, Igor, this is a very good question about the tail assets. So that all of you understand that in our Q1 reporting there are production or financial results that we demonstrated from more have already been sold. So commenting on what kind of financial performance could happen and what kind of production could happen, it wouldn't have been fair because there are different proprietors or different owners who have them. And so you should direct your questions to them. Now if there's a need to try and understand how the Q1 2021 compares to Q1 2020 when these assets were with all the reports, you can see it there.
Didier Casimiro: We have the last question, which was much more around the carbon footprint and the government management. We will pass that question to .
Unidentified Company Representative: All right, good afternoon, again. With your question, your question is quite broad. And as you know, this company, particularly throughout the past 12 months, has been dedicating a lot of efforts and time at the higher level of our executive. I mean in terms of the strategic objectives that we've stated back in the demonstration of the Rosneft Strategy 2020 in achieving leadership positions in the labor health and safety and environmental protection. And so the Company in a planned way is accomplishing this very high standard. And specifically, we've been able to see it through a number of ratings like the Bloomberg and agencies. And so bear in mind, the importance in trying to reduce the climate processes, we have put together and adopted the carbon footprint plan until 2035, and you are familiar with that. And as you can see a number of ambitious -- objectives were set to prevent the greenhouse gas emissions at about 20 million tons of CO2 equivalent, then reducing the intensity of oil and gas then reducing the intense of emissions. There is a correlation between the emissions to the commercial gas production particularly important because this is the gas, which is mostly has a multiple higher potential for negative impact on the climate compared to CO2. And other very important objectives we also set and implementing our program to utilize the gas and a lot of attention is being paid to this. And continuation with that, something that we continue to work on reducing the climate change by improving the energy efficiency because, as you know, this is a very, very comprehensive program that currently demonstrating results, which is reducing the flaring of the associated gas, increasing the share of gas like environmentally more cleaner and pure energy. So we increased the share of the consumption of this particular field by the Company. We also plan to consider a number of innovative methods carbon and various projects to produce new environmentally cleaner fuel as well as to work further over the potential that the forest may have in Russia to reduce the carbon print. The Company is not limiting itself to the objective written in the 2035 program, continues to search further to identify how better may achieve the carbon charge by 2050. This is something that Mr. Casimiro previously mentioned. So in this sense, we plan to develop a very comprehensive cooperation with the leading peers in the market. As you can see in 2021, we have already signed an agreement with our strategic partner, the BP company in the area of the common management. And so these accounts were going to be jointly assessing a broad spectrum of opportunities, including the renewables as well as using the Company capture and storing technology as well as using the natural mechanism of the way the forest may do. And so on an annual basis, we are allocating about RUB50 million, RUB60 billion towards these work and also the fact that we previously highlighted, I do make this something that we described as green investments, and you may recall, in terms of our 2022 strategy, we announced more than RUB600 billion within next five years because that will be a very tangible contribution in terms of doing some real intangible work rather than just making declarations.
Operator: Our next question comes from Alex Comer from JPMorgan. Alex, please go ahead. Your line is open.
Alex Comer: Yes. I guess I had one simple question. It looked to me like the discount you're achieving between spot prices in the first quarter was pretty significant in your numbers. I just want to comment on those discounts? And how you think they'll develop going through the year?
Vladimir Chernov: Alex, thank you for the call and for the question. First of all, if you have a look at what was happening with the prices and price accounts, you see that it depends a lot on what's going on in the market, especially on how the with the pandemia evolves. So if you look first quarter and second quarter last year, it means of the pandemia global and people staying at home definitely discounts widen. If you see in the third and fourth quarter, it's -- again, it was much lower. And unfortunately, the first quarter 2021, what we saw in Europe with the lockdowns again coming and third wave coming to the market to our major core markets in Europe like Eastern European countries and core European like Germany and U.K. So again, we see this widening of spread. So unfortunately, this is like normal market situation and definitely will evolve in -- hopefully, in a better way in the near-term future.
Operator: Our next question is from Andrey Polischuk from Raiffeisen Bank. Andrey, your line is open.
Andrey Polischuk: Two little questions about the first quarter results, my first one. Could you please tell us, why is such a serious reduction almost twofold in your offices, apart from the average production OpEx and refining OpEx? Has there been any optimization of other line items of operational expenses? So anything, could you please explain? My second question about the in terms of the oil that you produce in Q1? Why is this change in terms of the correlation of the effective rate to the standard rate in between the first and the fourth quarter last year? Is it because of the tax deductions for and that you're currently having? Or maybe this effect comes from something else?
Unidentified Company Representative:
Vladimir Chernov: Well, with respect to OpEx there is no twofold production need. I mean it's a revaluation of reserves, but in terms of the OpEx we do hold it at the level which enables us to maintain and retain flat OpEx. So, you need to separate it from the reserve revaluation because OpEx as it used to be RUB190. So I think that's the way it remains. And with respect to Amity, we'll have Alexander Shubin
Unidentified Company Representative: Yes. As far as is the Amity concerned, the difference in terms of the crude taxes definitely explained by the fact that the Company entered into an agreement about Prigoda field in order to get the deduction and also there's conditional difference comes from the fact that some of the fields with the high depletion rate have been transferred into the windfall profit tax, which is lower than the current regime is calling for. Thank you.
Operator: Our next question is from Evgenia Dyshlyuk from Gazprombank. Evgenia, your line is now open.
Evgenia Dyshlyuk: I have two ones. First, what will happen to your quota within OPEC production is concerned, once your tail assets have gone? Could you tell us how technically, I mean, is it subject to re-estimation or something? How will that happen technically, right? And my second question, would you once again give us your overall CapEx guideline for 2021?
Unidentified Company Representative: Well, we will start with the first question are on Prigoda. We'll do that. Yes speaking. You understand it the whole OPEC is a voluntary thing. And so respectively, it is all being done through the Minister of Energy operator and following its directives, the quota is being defined that one should work against as- the level of reduction in proportion to the output in respect of the kind of fields and the kind of companies, which fall out of the Rosneft's or dramatically, they reduced their share in the Russian production. And in the similar token pro rata, the volume within OPEC and the quota goes down.
Didier Casimiro: Thank you very much . And now over to
Unidentified Company Representative: What a game like I previously said, today, we are coating the fact that this level will be above the level of 2020, so bearing in mind the transformation of portfolio and our focus upon new assets.
Operator: Our last question today comes from Olga Danilenko from Prosperity Capital Management. Olga, your line is now open.
Olgy Danilenko: I would like to ask you about the schedule on Slide 20 and Slide 18, where you demonstrate the itemization of your taxes in Q4 2020 comparing Q1 2021. So this is the end of the tax maneuver minus RUB29 billion new tax initiatives, plus RUB4 billion. So my question is this. Could you please tell us, do I understand correctly that the overall impact from the new tax initiatives, considering the results of it was RUB4 billion and that this new tax benefits, basically for Vankor cluster and Prigoda, which are now under a stock oil, and that is the positive result that you show? Could you please give us some more -- a few more details in terms of which specific effect comes out from separate decision here?
Unidentified Company Representative: Yes, thank you very much. The only question is that just going over all of these aspects can detailed assets that two issued rather maybe hold a separate meeting because there were so many changes, but you're absolutely correct that the overall effect from all of the changes which occurred throughout 2020 and into 2021 with respect to the initiatives in Rosneft, they do a lot of positive things. And so respectively, the initiatives like we previously mentioned, which are related to the transition of the depleted fields into windfall tax naturally and Vostok Oil contribution. Now in terms of the transition or into the windfall for profit tax positive effect, so there are quite a list of factors I suggest that we should have a separate and substantive discussion rather than as part of this telephone call.
Didier Casimiro: We just heard that this was the last question for today. Therefore, this being set, I understand the last question during this phone call, but you might have other questions and obviously, here, our team of Investor Relations, a top team here in Russia is always available for you to answer any question at any given moment that you would have. So that is the first thing. Also our management is equally always here if you have other requirements or requests. Let's then stop the call here, and I want to wish everybody a very good weekend. Since we are Friday evening Moscow, thank you very much and we will talk to you the next investor phone call. Thank you.