埃尼石油 (E) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Eni 2007 interim review conference call. My name is Steffi, and I will be your coordinator for today's conference.

For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions.

(OPERATOR INSTRUCTIONS)

I am now handing you over to your host of today's conference. Thank you.

Good afternoon, ladies and gentlemen. Paolo Scaroni speaking. I am very pleased to report the highlights of our financial results. Adjusted operating profit was EUR9.4 billion, down 11% from the equivalent period last year. Adjusted net profit was EUR4.9 billion, down 10%. And gearing was at 0.2 despite the recent cashout for acquisitions of over $6 billion.

The group's financial performance compared to the first half of 2006 was negatively impacted by a number of external factors, mainly the position of the euro against the dollar, a low average oil and gas price, and the effect of an unusually mild winter on gas sales. We will propose to the Board of Directors that will meet in September an interim dividend of EUR0.60 per share.

After my update on each division, Marco Mangiagalli will take you through the financial results. At the end of the presentation, together with Stefano Cao, Domenico Dispenza and Mario Taraborrelli, we will be pleased to answer your questions.

This has been an exciting six months for Eni. The carefully targeted acquisitions that we have made in all three divisions have brought further momentum to the organic growth that we were already achieving. Our upstream acquisitions in the Congo, the Gulf of Mexico, Angola and Alaska are firmly in line with Eni's core strategy of strengthening our presence in core producing areas. As well as giving us access to new resources and creating synergies with our existing portfolio, they each represent excellent value, especially in the light of the subsequent strength of oil prices.

In both Gas & Power and Refining & Marketing, we have also moved to maximize value in selected areas where we see strong potential for growth, while again meeting Eni's strict financial criteria. On top of these transactions, we have also made substantial strides in Russia, a region that we view as extremely important to the energy industry as a whole.

Looking more closely at exploration and production, we have continued to deliver robust performance. Oil and natural gas production for the second quarter averaged 1.74 million barrels of oil equivalent a day, a decrease of 0.7% compared with last year, due mainly to disruptions in Nigeria. Excluding this issue, production was 1% up against last year. Growth was achieved in Libya, Kazakhstan, and the Gulf of Mexico.

During these first six months and mainly through acquisitions, we have added over 2.5 billion BOE of valuable resources at an attractive cost in countries where we can play an important role as operator, and where we can add value by applying our core competencies. We are convinced that these attributes will continue to drive our growth.

Our acquisitions this year, combined with our pipeline of organic growth projects, has allowed us to increase our compound annual growth rate from 2006 to 2010 to 4%, up from 3%. We expect to replace more than 100% of our reserves from 2007 to 2010 at our oil price scenario.

The acquisitions we have made in E&P have increased the diversity of our portfolio and strengthened the leadership position we have built in the world's fastest growing oil and gas producing areas. In the Congo, we acquired 112 million BOE of proved and possible reserves, a figure which we believe could ultimately prove conservative once we have applied our expertise to the fields.

In the Gulf of Mexico, our purchase of Dominion's producing assets will lift our production in the region to 110 barrels per day. This acquisition also gives us high exploration potential for the future.

Our purchase of a stake in Angola LNG has expanded our position in the growing transatlantic LNG market, while our expansion in Alaska is another example of our leveraging in operatorship in promising areas.

In Russia, we acquired Arctic Gas and Urengoil assets that together give access to around 1.5 billion barrels of resources at the cost of less than $0.50 a barrel. And indeed, given the technical expertise that we can apply to Russia's fields, we hope to retain the stake in Gazprom Neft.

By any standards, this is a phenomenal transaction. And the initiatives Russia has taken in recent months to develop new alliances with IOCs are a clear positive indication of the country's commitment to play a cooperative role in building new energy infrastructure and developing international trade.

Operationally, we are making sound progress on existing projects throughout the portfolio. We look forward to providing you with a detailed update on our progress in the whole E&P portfolio at the site visit to Kashagan in September.

In Gas & Power, we've made further progress. In Italy, we launched our dual gas and electricity offer on July 1st, a package which will consolidate our strong position in our home market. Outside of Italy, our acquisition of a stake in Altergaz is a further step in any development plan for France's growing gas market, and will strengthen our leadership in European gas supply.

Notably, we've signed an MoU with Gazprom for the South Stream Pipeline. This long-term project will ultimately represent both a crucial supply artery into Europe and an opportunity for Eni to reinforce its leadership position as Europe's number one gas company. The gas we will gain from South Stream will give us a strong market position in all the countries that the pipeline crosses and influences -- Bulgaria, Romania, Hungary, Austria and Germany.

In R&M, our plans to enhance profitability are on track. This will allow us to capture incremental margin through diverse crude sourcing, improved refining yields and efficiency. In this division, we have again followed our strategy for making selected acquisitions where they can enhance the profitability of existing operations. We acquired 102 retail stations in the Czech Republic, Slovakia and Hungary, and a further 16% and 11% stake in CRC, the Czech Refining Company, thus taking our total stake to 32.4%.

We have enhanced Eni's local refining capacity, increasing it to 2.6 million tonnes per year, and strengthened the existing marketing business in the fast growing regions, allowing us to reach a market share for the three countries of around 10%.

Now I would like to hand over to Marco.

Thank you, Paolo. Good afternoon to everybody. I will now comment on our results, focusing on the second quarter, and starting with a quick overview on the trading environment.

Oil prices strengthened from the first quarter of 2007, averaging $69 per barrel, in line with the second quarter of '06. Refining margin averaged $6.90 per barrel, 20% higher than in the second quarter of 2006. Finally, the euro appreciated by 7.3% versus the U.S. dollar year-on-year.

As usual, I would like to remind you that Eni's results are affected by several issues, including the seasonal factor affecting the demand for natural gas and petroleum products used for residential heating, the demand for which is highest in the first quarter of the year, the coldest months, and lowest in the third quarter, the warmest months. Therefore, Eni's operating profit and change in net debt in the first six months cannot be extrapolated for the full year.

Having said this, let us now comment on the results.

Adjusted net profit in the second quarter amounted to EUR2.2 billion, a decrease of around 11% compared to the record levels achieved in the same period of 2006. This was largely due to a 17% decrease in the adjusted operating profit, partly offset by the lower tax rate, which was mainly the result of the different contribution to the pre-tax profit from the division.

Adjusted operating profit in the second quarter totaled EUR4.2 billion. This result mainly reflects the performance of E&P and Gas & Power divisions, on which I will talk with shortly.

Hydrocarbon production in the second quarter decreased by 0.7% compared to the same period of 2006, averaging 1.736 million BOE per day. The reduction was due mainly to the disruptions in Nigeria, which accounted for around 30,000 BOE per day. This negative impact has been partially offset by the increasing production in India, Kazakhstan and the Gulf of Mexico.

Furthermore, the second quarter accounted for the recent assets acquisition in the Congo for 6,000 BOE per day. Excluding the impact of the disruptions in Nigeria, production increased by 0.9%.

If we look at the first half of 2007, Eni reached an average daily hydrocarbon production of 1.735 million BOE per day, down 2.9% versus the first half of 2006. Net of Nigeria and Venezuela, in fact, production was up 0.3%.

For the full year 2007, we expect hydrocarbon production level in line with that in 2006, assuming our $55 per barrel oil price scenario. The continued disruptions in Nigeria, the loss of the Dacion field, and the decline in production from mature fields will be offset by the contribution from the assets acquired in Congo and the Gulf of Mexico and the buildup of the Libyan gas project.

In the second quarter of 2007, the E&P has reported an operating profit of EUR3.4 billion with a 16% decrease year-on-year. The result includes negative special items for around EUR70 million, mainly related to asset write-downs.

On an adjusted basis, operating profit was [EUR3.5 billion] with an 18% decrease year-on-year. This is due to the appreciation of the euro versus the dollar, the lower production sold, the higher operating costs and DD&A, as well as higher exploration expenses.

If we turn to the first half, the adjusted operating profit reached EUR6.6 billion, down 22% compared to the same period of 2006. The drivers of the weaker performance are substantially the same as those in the second quarter of 2007.

Turning to the Gas & Power. Volumes sold in the second quarter of 2007 were 19.6 bcm, in line with the same period of a year ago. The impact of the mild weather condition has been offset by the higher volume sold in the target markets in the rest of Europe.

Reported operating profit decreased by around 34% to EUR465 million. The second quarter result includes posted special items for EUR14 million, as well as inventory losses. The Gas & Power adjusted operating profit amounted to EUR519 million, down 34% over the same period of 2006.

Gas & Power EBITDA pro forma adjusted in the second quarter of 2007 amounted to EUR786 million, which compared to EUR1.021 billion in 2006.

Let me elaborate on it by each business segment. Supply and marketing decreased by 58%. This weak performance was primarily due to mild weather conditions that negatively affected the heating consumption in April, a mismatch in the indexation between purchase and sales to prices essentially in the Powergen segment. These negative effects were partially offset by the more favorable treatment received under the improved regulatory framework under Resolution 134.

The regulated business generated EUR236 million, up 6% versus the second quarter of 2006. The increase is due to the increased ownership in Snam Rete Gas resulting from the completed buyback program and to the incentives provided on the new investment. These positive effects have been partially offset by the lower volume distributed and transported as consequence of the mild weather conditions.

Powergen EBITDA accounted for EUR95 million. Let me remind you that starting from the first quarter, the Powergen segment comprises all (inaudible) activity only since marketing activities have been moved to the supply and marketing segment in accordance with our objective of developing a dual-offer strategy. Finally, international transportation showed a flat trend versus 2006.

If we turn to the first half of 2007, the overall EBITDA pro forma adjusted increased by 8% versus the corresponding period of 2006. This is the result of the strong performance achieved in the first quarter thanks to the improved regulatory framework, the strengthening of the euro versus the U.S. dollar, and despite the lower gas volumes sold, transported, and distributed in Italy and abroad due to the milder winter.

Let me now turn to the R&M sector. In the second quarter, the division reported an operating profit of EUR430 million, up 18% versus the same period of 2006. The result includes negative special items for EUR54 million mainly related to environmental provisions and a risk provision related to an ongoing EU anti-trust proceeding. In addition, we also accounted for EUR299 million for inventory gain.

On an adjusted basis, the operating profit amounted to EUR185 million, showing a decrease of 3% over the same period of 2006. This performance reflected the euro appreciation versus the dollar and the weaker performance of marketing activities in Italy. These negative elements were partially offset by the lower maintenance outages and the higher refining margins in dollar terms.

First-half operating profit increased by 9% versus the corresponding period of 2006, thanks to the favorable refining scenario and the higher volume processed. This positive effect was partially offset by the weaker performance of the marketing activities.

As far as our other businesses are concerned, in the second quarter of 2007, the petrochemicals division posted an adjusted operating profit of EUR67 million. The increase versus the same period of 2006 was mainly due to the higher base chemical margins.

The adjusted operating profit of the oilfield services and engineering business totaled EUR203 million, up 53% versus the same period of last year. And this achievement is attributable to higher results in onshore construction, as well as the higher contribution from offshore drilling and construction activity. Other activities and corporate accounted for an overall operating loss of EUR132 million, showing a flat trend versus the second quarter of 2006.

In the first half of 2007, operating activities generated a cash flow of EUR9.7 billion. On top of this, disposals and others contributed for around EUR0.4 billion, bringing the overall cash generated to EUR10.1 billion. The cash flow generated fueled the significant investment that amounted to around EUR9.1 billion. On top of this, dividends and buybacks absorbed EUR3.3 billion, bringing the overall cash use to EUR12.4 billion.

Net financial debt as of the end of June increased to EUR9.1 billion. And our debt to equity ratio was equal to 0.22.

Coming to the end of my presentation, let me focus on the cash returned to shareholders. In 2007, we will pay out at least EUR4.9 billion as follows -- EUR0.65 per share as 2006 final dividend, which have been paid one month ago roughly; proposed EUR0.60 per share as 2007 interim dividend; and at least EUR0.3 billion of share buyback completed year to date. The overall cash distribution allows us to generate highly competitive return to shareholders.

Thank you for listening. And now I hand you over to Paolo for his closing remarks.

Thank you, Marco. To sum up, I would like to return to a slide with which you are already very familiar. Our activity over the last six months has been firmly guided by Eni's distinctive strengths -- our strong position in the world's fastest growing energy areas, our enduring relationship with host countries, our access to engineering skills and technology, and our uniquely integrated model all the way down the supply chain.

Our commitment to deliver growth and to secure value for our shareholders underpins everything we do at Eni. These guiding principles and the steps we have taken over recent months have created a momentum for further growth. We will now be pleased to answer your questions.

Thank you. (OPERATOR INSTRUCTIONS) The first question comes through from the line of Iain Reid from UBS. Please go ahead with your question.

Good afternoon, gentlemen. Hello?

Hello. Yes.

Hi. Sorry.

I hear you, Iain.

Sorry. Yes, three questions please. Marco talked about the quite dramatic fall in EBIT and EBITDA in the supply and marketing business this quarter. I wonder if you could just break out the moving parts there, and just give us a bit more detail as to exactly how that fell so much and how you see the forecast for that for the full year.

Your question is around the Gas & Power.

Yes.

Good.

And I've got a couple more questions after that in E&P, if you don't mind.

Go ahead.

Okay. The second question is, you've obviously made some fairly big acquisitions this year. But you've talked in the past about oil sands. But as yet, you haven't yet made any sort of acquisition there. I wonder whether this is off the agenda now with your deals in Russia and the Gulf of Mexico, whether oil sands is still a firm part of your strategy. And maybe you can talk about the potential for that.

And thirdly, on Russia itself, is it possible you can give us some timing and cost on first gas from your two new fields there?

Okay. Let me try to answer your question quickly. Then I will leave Marco or Domenico to give you more detail about the specific drop in EBITDA around our activity in Gas & Power in the second quarter.

Let me reassure you first that we maintain our confidence in our targets for the Gas & Power division for this year and for the full plan that we've been giving to the market. So we still confirm the targets for the full year. And I think Domenico will explain to you in detail why the second quarter has shown a specific drop.

Now moving quickly to oil sands, we have not given up on oil sands. We still are looking for opportunities. We are not in a hurry. We will only look for opportunities that can really generate value. We're even more confident than before that our EST technology, which has been developing very positively in the last few months, will contribute to create value in areas such as oil sands.

Now on Russia. As a matter of fact, I will ask then Stefano to give you more detail. But we are already producing gas in Russia. The fields are already producing marginal quantities of gas and marginal quantities of condensate. But I will ask Stefano to tell you more about an area on which I'm not sure we can give already precise dates, but in which certainly we have a much more clear view today than we had a few months ago.

Domenico, you start with gas.

What happened in the second quarter comes from many different actions happening over the same time. When it comes to the quarter, weaker [timing] in (inaudible) mismatch between the purchase and sales prices (inaudible) primarily on [new] sales [of] the Powergen segment that could not be compensated by the positive effect of the decrease in the exchange rate between the euro and the dollar. There has been the mild climate in April, and of course the overall negative effect will be partially compensated by the treatment of the Resolution 134.

So overall, (inaudible) the mismatch comes from different indexation that happens between the price at which we buy the gas and the price for which we sell the gas, mainly to the Powergen segment.

(inaudible) indexation that was a little bit different from the indexation where we now [have a] purchasing contract. This is a mismatch that turns out to be negative. While we consider what happened in the first quarter, we see that it is (inaudible) a very positive effect.

So if you look to the first semester since the start of the year, you'll see that the overall effect was an increase in respect of what we had last year. If I can reconfirm what Paolo said, if you look to the entire year, EBITDA should remain at the same level of last year, (inaudible) the negative impact of the mild climate we had in the first quarter.

Talking about Russia and the management of those assets, since we acquired, of course, we are in the process of starting the full assessment on the potential of the various fields; as well as Paolo said that we have seen that there is already production ongoing, which is in the range of about 3,000 barrels corresponding to our equity, which is about at the moment is 60%.

What we devised but is not too far from what we have said at the outset, we devised an early production scheme, which might start providing some production in 2009, while we believe that the first real production will be coming onstream in 2011. And this will be the [Tambovske] field which we have acquired. And at least a couple of years later, [these on top] of the second field at Yaro.

Could I possibly get any detail, Stefano, on the overall development cost?

Well, at this stage, we confirm -- obviously, we haven't got any sufficient data -- but we confirm the $3 per barrel is a reasonable assumption for the development cost in that part of the world; and taking into account that we are seeing that there were already some developments started, which were then abruptly interrupted because of the -- obviously the bankruptcy.

Okay. Thanks very much.

Colin Smith, Dresdner Kleinwort.

Thank you. Good afternoon. One question about acquisitions -- you've obviously had a very heavy acquisition program through the first half of this year. And you've also got a very aggressive CapEx program over the next few years. Can you just say whether you think the acquisitions you've done are sort of as much as you'd want to do or whether you think there's still a strategic level of acquisitions that you'd want to do? That's one question.

And the second thing was just I wonder if you could comment on the treatment of the Gazprom Neft stake, which putting the changes in value there through the P&L obviously looks like it's going to create a bit of volatility. And it seems perhaps a little bit odd since I believe you kind of hope that Gazprom won't actually exercise the option to repurchase it from you.

Okay. Let me make a comment around acquisition. Yes, you are right. In the first half of the year, our activity has been particularly strong. We are quite pleased with all the acquisitions we made, all of them I would say. We have found a few good surprises, including in Russia in which the situation we found has been probably more positive than what we were assuming. We could say the same thing about Congo and about Dominion and about Alaska. So in total, we are quite pleased with what we have done.

Now all these acquisitions including our CapEx, as you have seen, have not changed significantly our leverage and our financial position and our rating. So we believe we have still room for acquisitions if, of course, we find good opportunities. What we are lacking are good opportunities of creating value. What we are certainly not worried about is about making some further acquisitions. The real issue is to find good opportunities more than anything else.

On Gazprom Neft, we have someone to tell you about how we treat it from a --

Unfortunately, it's me, Colin, because it has been a rather tough exercise.

We've been discussing this issue for some time. And your question is well done. So maybe Marco will tell you.

What I can just add is that we are not sure at all what will be Gazprom position around Gazprom Neft. What we really think is that our contribution to Gazprom Neft from an operational point of view is certainly significant. And we hope that going ahead, the partner, Gazprom, will realize that we can create value for the company and therefore will be reluctant in giving up on our operational support.

But nothing has been decided. It probably will not be decided for a few months more. So we'll be missing clarity on this issue for probably the next 18 months or so.

Colin, the 20% in Gazprom Neft is accounted for under [IFRS] 39 since we do not exercise any significant influence in the financial and operating policy decisions of the company. Accordingly, Gazprom Neft is evaluated at fair value based on market prices since, as you know, it's listed on the London Stock Exchange. Also, the call option being a derivative is evaluated at fair value.

As a result, the book value of Gazprom Neft is the net amount of two fair values, the one relating to the shares and the one relating to the call option, and equals to the strike price of the option. The participation in Gazprom Neft has been placed amongst the current assets. For sure, should the conclusion which Paolo is envisioning be the one which would be applied, it will be moved to non-current assets.

So the treatment would change if you ended up retaining the stake presumably because there'd be an assumption of a bit more operational control.

That's in the nature of things, yes.

Okay. Thank you.

Alastair Syme, Merrill Lynch.

Good afternoon, gentlemen. My question relates to Gazprom Neft as well, just coming back to Paolo's comments about wanting to retain the stake. I'm not sure that I actually understand the rationale. It would seem to me that from that transaction, the lucrative part of the assets were Artic Gas and Urengoil. The return on investment of Gazprom Neft would look to be reasonably low. Is that right?

Well, I think that Stefano will tell you something about Gazprom Neft, about reserves, production and potential for growth.

Alastair, quite frankly, you are right as far as you say that we are quite busy developing the other assets coming from Yukos. But I do believe that if you look also retrospectively at the performance of Gazprom Neft so far and that, more than that, if you look at the potential of the company, getting a stake -- maintaining a stake of 20%, which would allow not only to maintain the two board positions, so participate to the life of the board, but would certainly allow booking of production and reserves.

Plus that additional contribution, which we strongly believe we might be providing as a support, enhancing the capacity of the company, which in our view might be seen as really a positive contribution in terms of technology, people and know-how. So all in all, quite frankly, that would appear quite an interesting position to be in.

Okay. Thank you very much.

Michele Della Vigna, Goldman Sachs.

Hi. It's Michele Della Vigna here. I had three questions, one relating to CapEx. You've got a CapEx guidance for the '07 to 2010 period of EUR44.6 billion. I just wondered if you could update that in light of the new acquisitions and the consequent CapEx on those fields.

Secondly, on two specific projects, I've seen that you have delayed the drilling of a new appraisal well on Goliath in order to get some more seismic data. I was just wondering what is behind that decision and what has changed in your point of view on the development of Goliath.

And then finally, on Angola LNG, one of the new stakes acquired this year, when would you expect FID for that field? And when could you expect the first LNG to be shipped from there? Thanks.

Okay. Let me answer the first question. And then I will pass it over to Stefano. On CapEx for the time being, our guidance of almost EUR45 billion for the plan remains the same. Now when we know more about the new fields that we have developed, we will change our guidance. But this would be at the next strategy presentation. We are not expecting major changes in any case.

Now on Goliath and Angola --

Yes, on Goliath, you know that the Norwegian Petroleum Directorate is very, I would say, always very open to provide the latest update on the evolution of things. And I would say that we are progressing with the design of the facilities for the fields, based on the amount of reserves which have been already assessed and communicated to the market and to the world by the Norwegian Petroleum Directorate. And the final investment decision is expected around August 2008.

Any additional appraisal which is going on is in the direction of adding to the amount of reserves already assessed, adding additional upside. So that's the only way -- the only interpretation you ought to give to this appraisal drilling. In particular, there is no sign whatsoever of a postponement of the well of a few weeks or months on the way forward for the development of Goliath.

In terms of the Angolan LNG, you know that the final investment decision for the Angolan LNG is still in the next few months, anytime in the next few months, and that the plan for the first shipment is for 2011. The decision related to the building of the plant.

You were referring to the reserves, the gas reserves. In that respect, the building of the plant would allow us to book around 100 million BOE of gas reserves, which at the moment are not part of any of our existing PSC contracts in the country.

Thank you.

Barry MacCarthy, ABN Amro.

Hello. It's another one on Gazprom Neft, please. Just if you could please clarify what the status is in your negotiations with Gazprom. I didn't quite understand if you have actually made a formal proposal to Gazprom about what you aspire to do at Gazprom Neft and if that could be resolved by the end of the year and thereby normalizing your position there in time before the closing of the books.

Okay. Let me try to be clear about that. We bought for $3.7 billion 20% of Gazprom Neft on April, 4th of April. Then the company declared a dividend, which will be for our share, for our 20%, roughly $300 million.

Gazprom has a call for two years -- therefore, until April 2009 -- to buy back this stake for an amount corresponding to the price we paid less dividends plus an interest of roughly 9%, 9.4% more exactly. So they have a call which is a, how can I say, a normal call.

Second point of information, Gazprom has already announced that for this year, for 2007, they are not planning to exercise the call.

Thirdly, we started to have contacts with the company. We will be entering the board very soon. We started to have conversations to see what kind of technical and operational relationship we can establish for the company to improve the performance, to improve the oil recovery, to improve the operational performance of the company. This is the status.

Therefore, Gazprom can certainly exercise the call, very likely not in 2007, but possibly in 2008. We have declared that if they do not exercise the call, we will be pleased to remain associated with this large, large Russian oil producer -- this is just oil, essentially oil -- that we believe that we can add value to the company. We would be pleased to write -- to book the reserves and the production corresponding and to continue to cooperate. That's the status of the situation.

Okay. Thank you.

Theepan Jothilingam, Morgan Stanley.

Yes. Hi. Good afternoon, gentlemen. Just two questions actually -- one, a follow up on Russia. I was just wondering if you could tell us sort of what sort of number you'd expect in terms of to be booked for resources for phase one. I know you gave a development cost. But I was trying to estimate what sort of resource do you expect.

Secondly, I just want to know whether you've made any progress in terms of negotiation with Gazprom for potentially other downstream assets in Italy.. I think you've mentioned potentially an asset swap on EniPower. So I was wondering if you've made any progress there.

And finally, just from in the downstream, you purchased 16% in the Czech Refining Company in the first half. I was just wondering what your strategy is in terms of expansion into Central and Eastern Europe in the downstream and whether you expect to do further deals there. Thank you.

Good. Listen, on Russia, for the time being, I'm talking now about Artic Gas and Urengoil, so the former Yukos assets. We confirm that our share of resources, which will become possibly soon reserves, is 1.5 billion barrels. Yes -- no, this 1.5 billion barrels is based on the hypothesis that Gazprom will exercise its option on the 51% of the venture. For the time being, we have 60%. And therefore, we would have more. If they do not exercise their option, which is very unlikely, this 1.5 billion barrels will be the double. Okay.

Now in terms of asset swaps, you are right. Our agreement that we signed in November 2006 includes a swap of assets for half the value more or less that we paid in Russia of assets both upstream and downstream outside of Russia. We have been starting negotiation. But we have no news about the direction that this swap will take.

We have been discussing about the hypothesis of Gazprom entering EniPower. We have been discussing about the hypothesis of Gazprom entering some distribution, gas distribution assets in Italy. But for the time being, we're still on the phase of discussing. No decision has been taken. I think it will be a discussion that we leave for autumn this year.

Well, in terms of the 16% of the Czech Refining Company, you should link this purchase to the purchase of the Exxon gas stations that we made in the region, in Hungary, Czech Republic, and Slovakia, because we want to have the supply capacity for the newly acquired marketing capacity. For sure, this is a part of the world in which sales of petroleum products are growing rather than declining. We had a marginal position, only 5% market share. And we wanted to have a meaningful marketing position. Now we have 10%, which starts to be meaningful.

We have the refining capacity in order to supply our gas station over there. We certainly will look at further opportunities, always in line with the strategy of growing in marketing only where we can supply the petroleum products we need.

Thank you.

Gordon Gray, JP Morgan.

Thanks very much. On the subject of marketing again actually and with regard to your comment earlier --

Can you speak a little louder please?

Yes, certainly. With regard to your comments earlier about flexibility for further acquisitions and then regarding the comments a minute ago about marketing, can you give us maybe your thoughts about maybe further increasing your exposure to refining generally through potential acquisition, what you think the opportunities are out there?

And secondly, if you could just remind us of the sensitivity of your 4% per annum growth target to the effect of prices on the PSCs, given that your long-term outlook is still around about $40 a barrel if I'm right.

Yes. Well, let me comment about refining. Then I will probably leave Stefano to give you about -- to tell you something about the sensitivity of our target on PSA.

Now on refining, our priority is to improve our existing refining capacity, particularly in Italy. So we have a plan, which includes more or less EUR4 billion of CapEx to improve the complexity of our refining system in Italy. This is a priority. We need to do it. We want to be the best in class in refining. And this is the plan that we are pursuing today.

In terms of growth, we might look for selective growth opportunities, such as the Czech refining capacity that we have done recently. Or we might look at opportunities where we have our own crude to be refined. We are not expecting major moves in this direction, it will be minor moves, but always function of our presence in E&P. And this would be the opportunity we will look at.

On PSA?

On the PSC sensitivity, if you go back to the strategy presentation in March of this year, we said that the growth would've been 3%. And you remember we have provided a guidance for the sensitivity related to PSC to the oil price. And the guidance was 2,000 barrels of production per dollar change in the price of oil.

Remember that at the time, we were consistently saying that this is the result of an assessment of the portfolio, which we project for a year. We don't make projections farther.

Then when we raised the 3% to 4% as a result of the acquisitions which we made the first half of this year, I would say that we confirmed the sensitivity, the 2,000 barrel per dollar scenario. This is valid for 2007.

As far as an update on this sensitivity, this will come with the presentation on next full-year plan. For the time being, we can still use for 2007 2,000 barrel of production per dollar.

That's great. Thanks.

James Hubbard, Deutsche Bank.

Hi. Good afternoon. Two questions -- firstly, on E&P costs, when you look at the lifting costs, drilling rates, E&C costs, obviously they're up over the last couple years. But when you look over the next 12 months, do you see any evidence in contracts you're signing today that there's a softening of the cost momentum going on there? Or is it just marching on upwards at the same rate we've seen over the last 12 months?

And secondly, back to oil sands you mentioned earlier, am I right in thinking that you would only be interested in looking at integrated projects to take advantage of your EST technology, i.e. upstream and upgrader?

Okay. Stefano will answer both questions, I think.

Yes. In terms of operating costs, much to my regret, I have to tell you that we don't see still a sign of the situation easing up in terms of rates. Probably, we reckon that they are getting still on the very high side. But they have a tendency to get more stable.

As far as the impact on operating costs, if we compare the operating costs in 2007, what we have seen so far, with the 2006, we reckon an increase in operating costs of, say, 15%, 16%. That is the level.

In terms of oil sands, yes, you're right. The very reason why we started -- we launched this campaign of interest with Total in the oil sands was related to the development of the EST technology.

We continue testing the technology. I have to say that the degree of satisfaction on the outcome of these tests keeps improving, going ahead with the tests. Of course, we believe that it would be worth entering a situation whereby there is already a sort of ongoing development, but on the other hand, certainly an opportunity which would allow us to deploy the technology which we have been developing.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Irene Himona, Exane BNP Paribas.

It's a quick question on CapEx. You give guidance for EUR10.6 billion this year. Could you perhaps break it up for us in terms of exploration versus development and Gas & Power? In particular, with the launch of the dual offer in Gas & Power, do you anticipate any increase in Italian Gas & Power CapEx? Thank you.

Can you repeat the second question, please?

Yes. In Gas & Power, with the launch of the dual fuel offering in Italy, I was wondering if that would involve a higher amount of capital spending in that business?

Let me answer to the second question just saying no. Our dual fuel offer is targeting essentially our gas clients. We have in Italy more or less 5.5 million or 6 million client, which are clients of gas. We target them for electricity as well. This is a marketing activity.

I have to tell you that we have been quite successful so far because we have made some -- only a few test areas. We're already gaining many thousand clients, leveraging on the fact of being already our gas clients and the fact that our reputation as a reliable supplier is, of course, very high in the country.

No CapEx at all. It's only investments in marketing and these kinds of things.

Now on the first question, I think Marco will answer.

Irene, I'll give you a guidance about the EUR10.6 billion CapEx expected for this full year. Let me say that about EUR6.4 billion will be spent in E&P. And Stefano will then give you guidance about the exploration component. EUR1.5 billion, EUR1.6 billion should be in the Gas & Power, EUR1.2 billion in the R&M, and another EUR1.2 billion would be in engineering and construction. What is missing is a mixed, if anything is missing, between petrochemicals, (inaudible), and so on.

As regards the component of exploration on the EUR6.4 billion of E&P, Stefano will elaborate.

Yes. Irene, basically, we are not changing the guidance of the exploration for the year. What we are adding is, of course, the component coming from the acquisition of Dominion assets, which is about in the range of EUR100 million.

Okay. Thank you. Can I just ask a second one if I may? I don't know if you've already referred to that. But is there any way you can quantify the impact of the appreciation of the euro against the U.S. dollar on the first-half results? Thank you.

Yes, I think we can.

On the (multiple speakers) euro -- on the first half, only it is about 0.5 billion.

Euros, I presume.

Euros.

Yes. Sure.

EUR0.5 billion.

Thank you very much.

You're welcome.

Thank you. We've got no further questions in queue. So I'll hand over to the host to conclude today's conference.

Okay. Thank you very much for your participation. I hope we will see many of you in Kashagan later in September. Good holiday for the time being.

Thank you for joining today's call. You may now replace your handset.