PJSC LUKOIL (OTCPK:LUKOY) 3Q and Nine Months 2020 Earnings Conference Call November 25, 2020 7:00 AM ET
Alexander Palivoda – Investor Relations
Alexander Matytsyn – Chief Financial Officer
Pavel Zhdanov – Vice President-Finance
Conference Call Participants
Karen Kostanian – Bank of America]
Ron Smith – BCS
Alexander Donskoy – VTB Capital
Igor Kuzmin – Morgan Stanley
Andrey Gromadin – Sberbank CIB
Henri Patricot – UBS
Good afternoon, ladies and gentlemen, and welcome to the LUKOIL’s Third Quarter and Nine Months 2020 Results Conference Call. My name is Courtney and I’ll be your coordinator for today’s conference. For the duration of the call, your lines will be on listen-only. However, at the end of the presentation, you will have the opportunity to ask questions. [Operator Instructions]
And I will now hand you over to Alexander Palivoda to begin today’s conference. Thank you.
Thank you very much. Good afternoon, ladies and gentlemen. Thank you for joining us today for this conference call on LUKOIL’s results for the third quarter and first nine months of 2020. On today’s call we have Mr. Alexander Matytsyn, CFO; Mr. Pavel Zhdanov, Vice President for Finance; as well as our colleagues from the accounting team.
Before we move on to the presentation, I would like to draw your attention to the fact that some of the comments during this call constitute forward-looking statements involving risks, uncertainties and other factors that may cause our actual results to be materially different from what is expressed or implied by these forward-looking statements. More detailed information is presented on the slide.
Now, I’d like to hand over to Mr. Alexander Matytsyn.
Thank you, Alexander. Good afternoon, ladies and gentlemen. In the third quarter, the pandemic continued to have a negative impact on the oil and gas industry. Yet, thanks to partial recovery in demand coupled with the offsetting effect of the OPEC+ agreement oil prices stabilized at the level reached at the end of the second quarter. As a result, our financial results in Upstream significantly improved despite external limitations on production volumes. In downstream, refining margins remained extremely low due to imbalances in the motor fuels market.
On top of that lower price volatility led to a significant reduction in trading margins that hit – that had hit to record highs in the second quarter. With the scheduled maintenance works completed at our refineries, we increased refinery throughput and took further steps to improve our product slate. Furthermore, sales volumes at tariff filling stations mostly recovered.
A better market environment in upstream and the management team’s efficient performance amid diverse market conditions in downstream, helped us achieve outstanding financial results in the third quarter despite the negative impacts of the pandemic. Our ongoing efforts to boost efficiency are focused on cost cutting, a well-thought approach to reduction – to reducing production and the flexibility in throughput optimization were the major drivers behind LUKOIL’S financial performance.
Free cash flow in the third quarter more than quadrupled quarter on quarter and exceeded the quarterly average of 2017 despite lower oil prices and many fold higher limitations on production. This was made possible thanks to improved production mix and product slate as well as cost optimization. In the third quarter, cash flow was also benefited from working capital release resulting from partial destocking. EBITDA increased by 40% quarter-on-quarter, mostly supported by upstream while EBITDA in downstream remained almost flat.
I would like to note that in the nine months of 2020, LUKOIL maintained a strong industrial leadership in terms of per unit financial metrics far out stepping its space on free cash flow per unit. Our robust results testify to our highest resilient sticks general stocks, largely driven by our efficient business model, high quality assets, lower costs and natural hedge instruments in Russia.
Today, we are witnessing mobility restrictions return in a number of countries as the second wave of COVID-19 hits. Even though the jurisdictions are less extensive than in spring, they still affect oil demand resulting in slower destocking that is needed to balance the oil market. Despite that analytical agencies downgrade their forecast for demand recovery dynamics. Demand is still expected to return to pre-crisis levels by early 2022. These expectations are largely fostered by the success of vaccine developments and trials. Oil prices are forecast to continue on an upward trend, which is among other things attributable to significant negative effect that the pandemic has had on global oil production. This is due to dramatic drop in investments across the industry, which means faster production declined for existing projects and suspension for new ones.
Even the analysts are optimistic about future oil price trends, we take a traditionally conservative approach to budgeting and investments decision making based on level prices compared to the market consensus forecast. This enables us to secure additional resilience during periods of high price volatility.
Today LUKOIL is perfectly positioned to get the most benefits from the market recovery and our third quarter performance demonstrates this clearly. The ability to quickly recover production along with the ongoing improvements to the production mix, help us amplify the positive impact of rising hydrocarbon prices on our financials. Low refining margins are a temporary trend and the refining profitability is said to improve as mobility restrictions are lifted. The quality of our refining assets is much higher than in the industry average.
We also expect the launch of new conversion facilities slated for the next year to help our downstream financials get the most from the market recovery tailwinds. Although recent changes in Russia’s tax legislation will have some negative impact on our future performance, this impact is by far smaller than the upside potential we can unlock as the market environment improves. On top of that, we are waiting to minimize the effect of negative developments and maximize the impact of new opportunities. As always, we continue focusing on increasing the business efficiency.
LUKOIL maintains a very strong financial position, despite record high dividends paid in the third quarter of 2020 our financial leverage stands at just 0.2. This is a huge advantage in a volatile environment. In November, Lukoil redeemed US$1 billion of year-end bonds. The cash on the Group’s balance sheet exceeds debt maturing in the next three years. On top of that, we increased the amount of committed credit lines to US$3.5 billion amid high volatility.
We continued optimizing our investment program. Total actual savings for the nine months of 2020 amounted to around RUB55 billion with more than half of that recorded in the third quarter. You may remember from our previous call that the biggest savings come from our projects abroad and are attributable to the shift of expenditures in exploration and early stage upstream and downstream projects to later periods.
To a lesser extent optimization effects our ongoing drilling and construction expenditures. Therefore, CapEx reductions achieved through the optimization efforts do not affect the implementation of the company’s key investment projects.
We expect the investments in the current year, excluding the West Qurna-2 project, to be in the range of RUB460 billion to RUB480 billion. This means that the total savings could amount up to RUB90 billion, compared to the base-сase plan of RUB550 billion. Due to the ruble devaluation, investment savings in the U.S. dollar terms will be much higher, up to 25% of the original target, or about US$2 billion.
While optimizing our investment program, we also continued our efforts to cut all other expenses across the board. At the end of the third quarter, almost all conditionally controllable expenses decreased in absolute terms quarter-on-quarter. At the same time, per unit costs remain above the 2019 level, which is attributable to a certain share of fixed costs amid a forced reduction in production volumes. We expect per unit costs to normalize as production recovers.
Thank you. Now, I would like to hand over to Pavel Zhdanov.
Thank you, Alexander. Good afternoon, ladies and gentlemen. I will now present our results in the Upstream segment. Let me start with the price environment overview. The average Urals crude oil price went up by almost 1.5 times quarter-on-quarter. However, due to the progressive tax scale in Russia, the net oil price added 14% only. Owing to the ruble devaluation, the net price in ruble terms saw a slightly higher increase by 16%. The ruble devaluation also kept the net oil price in October and November roughly at the third quarter levels, despite a decrease in the U.S. dollar price.
I would like to note that the current net ruble price is flat year-on-year, although a year ago the Urals price exceeded US$60 per barrel. For the nine months of 2020, LUKOIL Group’s average daily hydrocarbon production, excluding the West Qurna-2 project, totaled just slightly below 2.1 million barrels per day, down 12% year-on-year. We had to cut crude oil production following the new OPEC+ agreement. As discussed during our previous calls, the cuts were implemented based on production economics and predominantly affected mature fields.
We also had to cut gas production due to lower gas supplies from Uzbekistan to China. That is why the chart on this slide shows a decline in production for the new projects. Despite external restrictions, the production of high margin barrels continued to grow as planned, with their share in total output industry rising by four percentage points year-on-year.
I would like to talk more specifically about oil production developments driven by the OPEC+ agreement. After reducing production since May 1 approximately by 310,000 barrels per day against average daily production in the first quarter, in July and August we recovered some of the lost output bringing back 80,000 barrels per day. In doing so, we focused predominantly on production economics, prioritizing and restarting the most profitable wells.
We continue to maintain our spare production capacity in Russia at about 230,000 barrels per day. So, we are able to promptly recover the production back to normal and secure further sustainable growth. The Upstream financial results improved significantly quarter-on-quarter. In Russia, the segment’s EBITDA more than doubled to RUB136 billion. Apart from the favorable pricing environment, this growth was supported by improved production mix and lower per unit lifting costs.
At the same time, it was held back by production cuts associated with the OPEC+ agreement. The Group’s EBITDA outside Russia increased by 89% to RUB16 billion. One-off revenue adjustment of RUB5.5 billion in the second quarter related to the sales of Uzbek gas gave support to the dynamics. Growth headwinds came from lower production volumes in Uzbekistan.
EBITDA for the nine months of 2020 halved year-on-year mainly due to lower hydrocarbon prices, oil production cuts owing to the OPEC+ agreement, lower production in Uzbekistan, as well as the negative tax lag effect in Russia.
In the third quarter, we continued to proceed with our priority projects strictly in line with our plans. The drilling program helped us keep production at the Vladimir Filanovsky and Yuri Korchagin fields in Caspian Sea at the target level. In the nine months of 2020, their combined oil and condensate production reached 5.6 million tonnes, up 2% year-on-year.
In August, we successfully drilled the first production well with the MultiNode intelligent completion system at the Yuri Korchagin field, which enables the best ways to harness the field’s geological potential while minimizing geological risks. By year-end, we plan to commission another well at this field. As part of the Valery Grayfer field development, shipyards continued building platforms.
As at the end of the third quarter, the fixed ice-resistant platform was 59% complete, and the living platform was 77% complete. Offshore jackets for the living platform and for the fixed ice-resistant platform were installed in the Caspian Sea in May and September respectively. Preparations were also made for the laying of subsea pipelines between the Valery Grayfer and Vladimir Filanovsky fields. Let me remind you that the infrastructure of the Vladimir Filanovsky field will be used for processing production from the Valery Grayfer field, which opens up vast synergy opportunities.
For the nine months of 2020, production of high-viscosity oil projects in Timan Pechora has increased by 5% year-on-year to almost 4 million tonnes. In the nine months of 2020, 19 SAGD production wells and 238 underground wells were commissioned at the Yaregskoye field. The Usinskoye field commissioned 34 production wells. We are continuing to expand our infrastructure and production facilities. By the end of the year, the company plans to commission new steamgenerating facilities and proceed with its drilling program.
I would also like to give mention to our success in scaling up the technology to cut the costs. Since the beginning of the year, the Usinskoye field has commissioned three small-diameter wells. As these wells are drilled with more lightweight rigs, we can cut drilling costs by more than 10%. As a reminder, this technology is now being successfully rolled out in the Urals and the Volga Region. In the nine months of 2020, the company launched 108 small-diameter wells, a more than two-fold increase year-on-year.
Let me talk in more detail about the latest changes in oil taxation that also affect our high-viscosity oil projects. As a result of tax incentives being abolished, the fiscal burden on oil produced from the Yaregskoye and the Usinskoye fields will increase considerably from 1 January 2021. This will lead to lack of return on investments into further production ramp up from these fields. At present, we are in dialogue with the government about various options of ensuring recovery of investment returns for high-viscosity oil projects. Along with that, we are revising the development plans for these fields.
Let me say a few words about the progress of operations in the fields with low permeability deposits in West Siberia. Our three major low permeability fields increased production by 41% year-on-year. Notably, Sredne-Nazymskoye field, doubled its production. With an extensive drilling program underway 141 production wells were commissioned at these fields in the nine months of 2020, almost one-fourth increased year-on-year. Given the intensive drilling operations, our continuing efforts to improve efficiency play pivotal role.
The results were impressive. For instance, they improved well-designed helped increase the horizontal drilling speed at Sredne-Nazymskoye field by 1.5 times year-on-year, translating into a 22% decrease in the cost per meter drilled. The same applies to directional wells at this field where the unit drilling costs were reduced by more than 15%. Drilling speed for horizontal wells at – they’ve might been a grounded field drives by 15% year-on-year. As a result, we managed to cut the per unit drilling cost by 7% drilling speed at the Imilorskoye field added 8% year-on-year.
In conclusion, I want to update you on our projects in Uzbekistan. As you know, starting from the second quarter, we had to cut production across our Uzbek projects as our gas export deliveries declined and then stopped completely. This was mainly attributable to a fall in demand for Uzbek gas from China and made a slump in LNG prices.
As a result, in the third quarter daily production stood at around one-fourth of the design capacity. Yet, we managed to avoid complete suspension of production as we reached an agreement to supply gas to the domestic market in Uzbekistan. Since mid-August LNG spot prices in Asia have been rocketing along with the growing demand for gas. This made China once again take interest in pipeline gas with oil link price, exports supplies from our projects resumed with production being gradually ramped up since September to date daily production has been almost completely recovered back to the design capacity.
Now let me hand over to Mr. Alexander Palivoda who will present our results and downstream.
Thank you, Pavel. In the third quarter, the market environment and downstream remained weak. The average benchmark price in – the average benchmark margin in Europe decreased by 40% quarter-on-quarter and first, this was due to relatively high cost of feedstock as Euros crude traded at a premium to Brent, because of oil cuts and oil exports cuts from Russia.
Second, the margin was affected by a decrease in crack spreads for diesel fuel resulting from oversupply cost among other things by a very low demand for jet fuel. As improvements in crack spreads for gasoline partially offsets the negative effects of the in both factors, it is worth mentioning that despite this increased crack spreads for gasoline still stay significantly below market averages over the past 12 years.
In Russia, the refining margin showed a reversed trend, improving considerably from negative values of the second quarter. This is attributable to an increase in global prices for oil and petroleum products resulting in higher export due to differentials and increased to this excise tax for the feedstock due to among other things lower a negative dampen for motor fuels. In October, the improving cracked spreads for gasoline and fuel oil led to rising benchmark refining margins in Europe.
However they drop in gasoline price in November brought the refining margin back to the third quarter level. In Russia, the benchmark refining margins led to close to zero level in November following faster decline in local prices compared to the export net backs. Following a sharp decline of throughput volumes in the second quarter, due to the optimized capacity utilization and mid increasingly challenging market conditions and scheduled maintenance at refineries, our domestic and overseas refining volumes partially recovered in the third quarter of 2020. The quarter-on-quarter average daily refining throughput went up 10%.
The key contributors to Russia – the key contributors in Russia, where Nizhny Novgorod and Okta refineries, which had seen extensive major repairs in the second quarter of 2020, these repairs take place once every four years. Across Europe, the biggest throughput growth was registered a two refinery in Bulgaria also the previous quarters repairs and in Italy, which had seen a sharp decline in utilization rates in the second quarter, due to optimization amid weak market conditions.
Importantly, thanks to our own trading operations and developed retail channels. We optimize utilization at refineries aiming to maximize their financial performance, but not because of inability to place volumes. This is our major competitive edge. The optimized utilization enables us to improve our product slate. In particular, the third quarter saw an increase in the gasoline yield and the decrease in the diesel fuel yield, which helped improve the refineries financial results in mid-level cracked spreadsheet or mid distillates and the partial recovery of those for gasoline.
On top of that, the fuel oil yield dropped 2 percentage points year-on-year to 7% across our refineries. Hence, for our premium sales channels that can be seen as a kind of indicator of the trend in demand for petroleum products, the situation is as follows. Overall, the third quarter retail sales of motor fuels decreased by mainly 3% year-on-year in Russia, while declining by 9% across our chain abroad.
Yet, the sales volumes recovered year-on-year through to August, but started rapidly weakening again from September amid reintroduced restrictions. In November, the difference from the previous year was as much as around 10%. Jet fuel sales showed a similar trend, but with a much larger year-on-year decline. In particular, aircraft fueling sales recovered to only half of the 2019 level in the third quarter and the situation began worsening as of October. We expect the demand to gradually revive as mobility restrictions are lifted with the jet fuel consumption, taking longer to get back to normal of and that’s over motor fuels.
Following the end of scheduled maintenance works on the back of better domestic refining margins, the third quarter saw us increase all supplies to our Russian refineries by almost 10% quarter-on-quarter, coupled with the forced production cut. These factors caused the exports to further drop, where the quarter-on-quarter and year-on-year decrease amounting to 17% and 23% respectively.
Yet, exports of oil subject to a lower rate export duty continued to rise driven by increased production from our priority projects. Downstream showed mixed financials performance, EBITDA in Russia was up 28% to RUB42 billion, mainly due to an increase in the benchmark margin and refining throughput that’s a product slate and stronger retail sales of motor fuels. The growth was constrained by a weaker positive inventory effect at refineries and lower retail margins. EBITDA outside Russia went down by 23% to RUB35 billion, largely as a result of lower benchmark refining margin and international trading margin, as well as a slight negative inventory effect at overseas refineries compared to a significant positive effect in the second quarter.
Downstream EBITDA outside Russia was supported by a higher refining throughput and better product slate that results in retail segments and the positive accounting effect of hedging in global trading operations. As a result total downstream EBITDA remained almost flat quarter-on-quarter at RUB78 billion. Downstream EBITDA for the nine months of 2020 decreased by 1/3 year-on-year, mainly driven by the performance of Russian assets. The amounted key factors were lowering margins and refining throughputs and negative inventory effect at refineries and weaker retail and petrochemical sales. Outside Russia, the metric benefited from the accounting specifics of hedging operations in our international trading, and a much stronger trading margin in the second quarter, high price volatility.
We keep developing selective projects at our Russian refineries. In the delayed coker construction project in Nizhny Novgorod, main long-lead items have been installed. The work is now underway to install on-site pipelines and complete technological equipment strapping. The project was 79% complete as at the end of the third quarter. Slated for the launch at the end of 2021, the project will dramatically increase the yield at both the refineries and group wide by reducing the oil field. Construction of the isomerization unit is ongoing at the same refinery. All major units of equipment have been delivered and installed and the other equipment will soon delivered and installed. The installation of pipelines, power cables and instrumentation is ongoing.
The project was 85% complete as of the end of the quarter. The construction of deasphaltizing units at Volgograd refinery is ongoing. The equipment has been installed and the construction and installation of process and other pipeline is nearing completion. The hydrostatic testing of pipelines is ongoing and the installation of power grids and instrumentation is underway. We started testing with the gas, and the project was nearly 90% complete.
Now let me briefly outline how our financial performance compared to the second quarter of 2020. Revenue increased by 48% quarter-on-quarter. Along with high hydrocarbon prices and ruble devaluation there were other positive drivers such as increased petroleum product output, higher crude oil and petroleum trading volumes and the stronger retail sales. Our third quarter commercial stocks of crude oil and petroleum products shrank by 800,000 tons, which further supported the revenue. The growth was offset by the productions cut and weaker exports of crude oil and petroleum products.
EBITDA went up 40% to RUB202 billion driven by robust upstream results with the downstream EBITDA flat quarter-on-quarter. We have already spoken in detail on EBITDA drivers for each segment. I would only like to add that lower price volatility, the third quarter was distinct with only marginal impact of one-off accounting and carryover factors such as inventory effect at refineries, inventory write-downs to net realizable value and the tax lag effect in Russia, these effects has had a strong impact on our financials in the first and second quarter.
In the third quarter, the company posted net profit of RUB50 billion against net loss in the second quarter. As a reminder, the net loss in the second quarter was due to the recognized impairment loss of assets for RUB39 billion. By contrast the third quarter, so the reversal of the impairment loss for RUB5 billion due to the repayment of debt on our projects in Egypt, a negative impact on the profit came from a significant FX loss driven by ruble devaluation during the third quarter. Importantly, the sensitivity of the foreign currency translation difference to exchange rates fluctuations increased compared to the second quarter. This is attributed to an increase in the negative FX position resulting from the share of year bonds and decrease in accounts receivables in the third quarter.
Free cash flow in the third quarter more than quadrupled reaching RUB115 billion, in addition to stronger profitability, driven by better market environment in upstream. Free cash flow benefited from a working capital release for RUB26 billion, mainly resulting from partial crude oil and petroleum product destocking. Free cash flow was also supported by a decrease in capital expenditures.
Thank you for your attention to this point. And we’re ready to take your questions now.
[Operator Instructions] And our first question comes in from the Russian line, from the line of Karen Kostanian [Bank of America]. Karen, please go ahead.
Good afternoon. Thank you for your presentation. I have a question on the tax regulations. You’re suggesting that you’re currently talking to the government in relation to your high viscosity oil projects to improve their profitability. So what’s your plan on the low permeability fields? Have you already designed? Have you made plans of what you’re going to do with those fields and then how that is going to affect your plans to ramp-up production of those fields? And what CapEx would be required to carry out this plans? Thank you.
We didn’t have any significant of changes in hard to recover reserves, mostly we have changes in high viscosity and mature fields.
It does appear as though we lost connection TV line of Karen. So, we will move on to the next question coming in from the English line of Ron Smith calling from BCS. Ron, please go ahead.
Yes. Good afternoon. Thank you for the presentation. I have a couple of questions. So first, we would continue on the tax – on the tax angle. Do you have any estimate of how much EBITDA may be effect of next year, due to the changes in the tax code? And in general, have you – are you considering any major plans or changes to your plans in response to those changes? And then – with that, I have other question, one additional question. Thank you.
Mr. Palivoda responding. Thank you. Well, we have Yaregskoye and Usinskoye field, where the Permian deposits incoming. These are the high viscosity oil projects. Indeed, the proposals put forth by the country’s government would have a negative impact on the two projects in question. we are expecting to lose like at $40 per barrel euros price, we would lose about RUB40 billion of EBITDA. With Yaregskoye, the lower exports year-to-date is still in effect up until 2022.
So, the effect would be less RUB30 billion boe with the same macro environment. At the same time, we are optimizing our investments as you are aware. So, the impact on the free cash flow will be less than that. Now, before you ask, as far as mature fields are concerned, we are intending to move those fields, be it income tax, not all of those, but at least some parts we are analyzing other fields to understand where it’s worth to have a similar transition at the same time, we have tax benefits for the hard to recover reserves. So, ready to take your questions now.
Thank you very much for that. Yes. I have a question that has to do with your balance sheet. I see that you have in your presentation that your leverage has fallen down to 0.2 times. I think it’s a little suboptimal to me, does management have any near-term plans to perhaps take on more leverage and use the funds to restart the stock buyback program and what’s mentioned in the past, but I’m curious if it’s being discussed at this point.
Mr. Palivoda responding. Don’t we agree that in normal situation, this is sub-optimal and our target leverage is higher than the current number. So the current situation, however, is far from being normal, as we explained during the previous call, we decided to opt for our financial stability now decision-making and we believe the current situation forces us towards a more conservative financial policy. So, we are not going to have any change in the capital structure anytime soon, unless the situation changes.
Raising more debt does not look feasible to us at this point because it makes sense to bring up some debt when there is an investment projects available. There is nothing in the company’s portfolio because we have enough money and enough resource to finance the current projects. Thank you.
Thank you very much.
We will take the next question from the Russian line. And the question comes in from the line of Alexander Donskoy calling from VTB Capital. Please go ahead.
Good afternoon and thank you for the presentation. Great results. Congratulations. I’d like to ask a question on Uzbekistan. In the course of the presentation, you’ve mentioned that the production is down because China is producing itself. And hence my question, what’s the volume exported from Uzbekistan in nine months 2020? And what’s your target for the full year of 2020 and the full year of 2021? And also what’s the domestic price in the nine months of 2020 in Uzbekistan? Thank you.
Mr. Pavel Zhdanov responding. As for exports, there was pretty nil in the summer months. So that – those volumes were sold domestically and we did disclose the price at RUB60 per thousand cubic meters of gas. Currently, we see a growing demand in China. And we are back to our design capacities. So the majority of that goes abroad, exported. We don’t disclose this specific share of export, however, that’s all I can comment.
We’ve another question coming in from the Russian line from Igor Kuzmin calling from Morgan Stanley. Igor, please go ahead.
Good afternoon. Could you please comment on the company’s plants to diversify towards petrochemical projects? I expect seeing any projects to come up anytime soon with some positive profitability. Or have you pretty much abandoned such plants? Thank you.
Pavel Zhdanov speaking. We’re still analyzing potential projects in petrochemical industry, especially considering the stimuli the government is suggesting. We have two projects for polypropylene production at Nizhny Novgorod Refinery, and that the Burgas Refinery in Bulgarian. As we mentioned in numerous occasions, Lukoil has a number of competitive advantages. We have experienced in implementing major complex projects. And then we have a feedstock and we can benefit from the infrastructure of the refineries to which those projects could be attached. However, we’re still analyzing the risks and opportunities related to those rather long haul projects. So it’s too early to discuss any projects other than the ones mentioned.
Follow-up questions then. When you expecting to complete this kind of feed analysis? When is the investment decision coming for the projects that you have just explained?
[Indiscernible] we are expecting to have that decision next year somewhere.
Staying with the Russian line, the next question comes in from Andrey Gromadin calling from Sberbank CIB. Please go ahead.
Good afternoon. I have a couple of quick questions if I may. I may have missed it somehow. You’re already – you must be already planning your investments CapEx 2021. Could you suggest rough CapEx don’t get may be considering at this point in time for 2021 and the key trends – key ideas like where we’d like, which segments would like to invest in more or less?
And my other question relates to Uzbekistan; could you please explain how should we think about future production? Is that fully subject to the extent of market environments, if only for the year? If the prices are generally high than the volumes are up, if the prices are down then what should be our approach? What should be our thinking? Thank you.
Pavel Zhdanov, responding. You have not missed it. We have not disclosed our CapEx for next year as yet. We’re finalizing our budget for next year and it’s going to be endorsed by the Board of Directors in December. But our understanding is RUB450 billion, excluding West Qurna-2, both as always would like to stay flexible and manage our CapEx size either way, depending on the market environment.
And responding to your second question on our production volumes in Uzbekistan; so quite a difficult to give you very specific answer to your question. No one had expected the events of 2020 to materialize. We could not imagine it, but it did arrive. So the situation that we’re saying like the spread between LNG price and the pipeline gas prices with an oil link has led to the situation we were saying. We are expecting the situation not to be repeated and hope it wouldn’t be repeated, depends of course on the recovery of the global economy. We’re expecting the project to carry on producing after the design capacity and that’s up to 15 bcm that’s our share of production.
Okay. Thank you very much.
We will now move to the English line for the next question. And the question comes in from the line of Henri Patricot calling from UBS. Henri, please go ahead.
Yes. Hello, everyone. Thank you for the update. I have a couple of questions on the downstream one – downstream site. The first one, I’m just trying to get a sense of where you see your refining utilization in Russia and in Europe for the next few quarters as demand recovers? And if we just have any maintenance plans in mind. And then secondly, and it looks like you’re expecting significant improvement in refining margins. I’m wondering, if you are planning to make any adjustments to your portfolio in terms of the capacity that you have or an investment that you think you have to make to improve further this portfolio, given still weaker refining margins on what we’ve been used to? Thank you,
Mr. Palivoda responding. As I mentioned in my part of the presentation, we are flexibly managing our refining volumes, and the key driver here is the market environment. So depending on the actual situation I would say in 2021, we’ll respond accordingly and adjust our refining margins – sorry, our refining volumes accordingly. If the situation gets improved, we may well get back to the normal volumes that we had, let’s say on the average in 2019, considering the – any comments on the marketing – on the market environments per se, but expecting that as the global situation improves in terms of the pandemic and the mobility restrictions removed, the demand is expected to recover.
We did see a similar situation back in Q3 this year. However, in autumn, the situation is slightly worst, given the second wave of the pandemic hitting the countries. And we assume that the situation is improved in 2021, then the demand for refined products is going to improve. So the crack spreads is set to improve as well. Firstly for gasoline, less prominently for diesel because a lot depends on the jet fuel, just like I said, we are currently see its recovery rates falling way behind diesel, way behind gasoline. And diesel and kerosene are linked products because of the production technology, should the crack spreads drought or the margins would be improved and the volumes will be recovering in relation to that. Thank you.
Alexander Palivoda speaking. Well, we see there are no question left. So I would like to thank everyone for taking part in this call. Thank you for joining and see you next time. All the best to you.
Thank you for joining today’s call. You may now disconnect your handsets.