埃尼石油 (E) 2008 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to Eni's 2008 interim review conference call hosted by Paolo Scaroni, CEO. My name is [Ena] and I'll be your co-ordinator for today's conference. For the duration of the call we'll be on listen-only. However, at the end of the call you'll have the opportunity to ask questions. (OPERATOR INSTRUCTIONS) I'm now handing you over to your host to begin today's conference.

Thank you. Ladies and gentlemen, welcome to our 2008 interim review. In the first six months of the year, we have made significant progress in implementing our long-term strategy. In E&P, where our strategy's to deliver sustainable industry leading growth, we have achieved a solid production increase of 2.8% in a climate of unprecedented oil price strength. Net of the PSA effect, our production growth would have been 8.1%, with robust growth of 2.3% excluding portfolio acquisitions. We have positioned ourselves well to deliver superior future growth through our successful exploration and by building a position in unconventional oil in Venezuela and Congo.

This excellent result testifies the strength of our E&P division which has prospered under the stewardship of Stefano Cao and of his right-hand man, Claudio Descalzi, who today succeeds him as COO. In the last year and half when almost 100% of Stefano's time was absorbed by the Kashagan negotiations, Claudio's been running the rest of our E&P activities globally, and has been directly responsible for most of our major achievements. Claudio joined Eni in 1981 and has grown through the ranks of the E&P division to become Stefano's natural successor. I'm extremely pleased to introduce him to those of you who have not yet met him. And take this opportunity to thank Stefano for his 30 years' contribution to the Group.

In Gas and Power, where our strategy is to consolidate and extend our European leadership, we have continued to grow our international stage rapidly, reporting a 20% increase in the first six months of the year. We have also strengthened our strategic position through the acquisition of a 57% stake in Distrigas, the Belgian gas operator, which is nearing completion following yesterday's signing of the shareholders' agreement with Publigas and through our investment in Hewett, potentially Europe's largest gas storage project.

All this has been accomplished while maintaining a disciplined approach to investment and a strong financial structure. As you all know, one of the rating agencies has recently downgraded our debt. However, our gearing has remained stable at 38%, below our 40% ceiling.

Our financial results will be presented by Marco Mangiagalli today, accompanied by Alessandro Bernini, who will tomorrow take the helm of our Finance Department. There is no need to say how much we have appreciated Marco's contribution over the years and are pleased that his expertise will stay in the family as Chairman of Saipem.

I will now take you through these points and give you a little more detail.

Turning to E&P, our production growth will continue to be extremely resilient in the face of high oil prices, both in the short term and in the long term. Indeed, even assuming an average oil price of $112 a barrel until year-end, our full-year production would increase by 2%, one of the highest growth rate in the industry. And even assuming average oil prices of $120 a barrel from now until the end of 2011, well above our and industry forecast, we would still grow production by 3% per annum. This is because only 16% of our reserves are governed by returned based PSA which are highly sensitive to oil prices.

Considering the evolution of oil prices industry costs expectations. Since our strategy presentation in February we have revised our long-term price deck to $65 a barrel. This is the new threshold we use to stress test the profitability of future projects.

Moving now to our long-term growth, we have secured our prospects through significant successful exploration activity. In the first half of 2008, we have added 450m barrels to our resources from our exploration program. With a significant contribution coming from the leases we acquired from Dominion last year which had a particularly short time to market. This is also true for our discoveries in Egypt, Australia and Pakistan. Through Galp we have also have an exposure to the giant Tupi field in Brazil. Looking even further ahead, we have added 35,000 square kilometers of new acreage to our exploration portfolio, which will sustain our resource replacement.

In the first half of 2008, Eni has taken a major position in the unconventional oil sector with agreements in Venezuela and Congo. We have been able to gain access to large resources at competitive development costs thanks to our long-standing relationship with these legacy countries. Which means we can capture additional value through operational synergies, especially in Congo, and through our proprietary EST technology, which enables us to convert heavy oil into high quality products. Both projects will start to deliver oil within this planned period, and are expected to be profitable at oil prices well below our long-term scenario. These two projects combined are expected to reach a total production of 500,000 barrels per day in the long term, with over 300,000 barrels in 2015.

Turning now to Kashagan, I am pleased to announce that in June we reached a full settlement of the dispute after a complex 10-month negotiation against a backdrop of rapidly rising oil prices. Satisfaction for the positive outcome has been recently reiterated by the Kazakh Prime Minister, Karim Masimov. The settlement will be finalized in a definitive agreement by October 2008.

Since the signing of this MOU, the Kashagan project regained momentum with KMG approving over 2,000 -- 200 contracts. We have also secured a green light on a further 200 awards. The experimental program did not stop during the negotiation. 70% of the offshore modules are ready to start production, and all the wells needed to reach the planned output of tranches one to three have been commissioned. They have also started working on tranche three of the experimental phase. Finally, we have agreed with KMG the new governors to manage the development and production operations on Kashagan and it's satellites.

Turning to Gas and Power, let me give you some more details on the two significant transactions we have carried out in the first half of the year to consolidate our leadership in the European gas market. With Distrigas we have acquired a strong position in Belgium, a key country in the European gas market due to its high level of interconnectivity with the Central North European transit gas networks. The integrated management of Distrigas with Eni's gas portfolio will give us the opportunity to extract valuable synergies by optimizing gas sourcing infrastructure in sales. Eni with Distrigas will have 21% of the European gas market.

With the shareholders' agreement we signed yesterday with Publigas, we laid the basis for an effective management of the Company and a profitable development of our gas operations in the area. We now expect to close the acquisition of the majority stake by year-end, as soon as authorization from the European Commission is granted.

In line with our strategy of consolidating our gas presence in Europe, we are looking very closely at the developments in Spain regarding Union Fenosa Gas. We look forward to talking to Gas Natural in the framework of our existing joint venture agreement.

Moving to Hewit, storage capacity will provide an increasingly important competitive advantage in the European gas market as domestic production declines and we become more and more reliant on pipeline and LNG imports. In the first half of 2008, we kicked off potentially Europe's largest gas storage project, with a EUR210m acquisition of depleting fields, which are strategically located to serve both the UK, Belgium and Northern Europe, where there is a lack of storage capacity. We are now in the process of assessing how much of the 9b cubic meters of total potential capacity will be converted to storage, following which, we will update you on our expected CapEx.

The new storage capacity will enable us to take advantage of seasonal gas price differentials and general price volatility, leading to enhanced margins. It will also support our strategy of pursuing higher margin clients, while further reducing the risks of entering take or pay territory. The Hewett project leverages on our E&P and gas and power competencies. It is another example of how Eni's integrated approach can create value for our shareholders.

Moving now to our R&M division, I'm pleased to report that we have taken the final investment decision on the construction of a full-sized EST plant in Sannazzaro, which will help -- which will be up and running by 2012. This project, which will cost around EUR1b, will increase our conversion index, giving us double-digit returns, as well as demonstrating the potential of this technology, which is a key pillar in our heavy oil strategy. As for marketing, we've increased our market share in Italy by 1 percentage point to 30%, thanks to our drive to improve quality and service, and our successful loyalty program.

Our achievement in the second quarter of 2008, not least our industry-leading production growth, has enabled us to produce solid financial results, particularly in terms of operating profit. On the basis of these strong results and our confidence in the Group's outlook, we'll propose a distribution of an interim dividend of EUR0.65 per share, an increase of over 8% versus 2007.

Now I will let Marco Mangiagalli to give you the detail of our -- about our first half results.

Thank you, Paolo. Thank you also for your words, and good afternoon to everybody. In fact, it has been a long period, 15 years, and an exciting one. But everything must come to an end. Having been given the opportunity to become President of Saipem, which I consider a great privilege, and consequently, I can say that there have been no regrets in taking the decision to step down. Shall I say that I'll miss you all? It would be probably too much. And you will don't believe me. But in any case, it has been always stimulating, and I must admit a pleasure, to deal with you.

Having said that, I will now comment on our results, focusing on the second quarter and starting with a quick overview on the operating environment. In the second quarter of 2008, the Brent price averaged $121 per barrel, increasing by approximately 77%, compared to the second quarter of 2007. The European refining margin averaged $8 per barrel, increasing by 17% versus the corresponding period of 2007. And finally, the euro showed an appreciation of 16% versus the US dollar, compared to the same period of last 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 and lowest in the third quarter. Therefore, Eni's operating profit and change in net debt in the first six months cannot be extrapolated for the full year.

Going to the results, adjusted net profit in the second quarter amounted to EUR2.3b, an increase of around 4%, compared with the second quarter of 2007. This was largely due to a 34% increase in the adjusted operating profit, partly offset by the higher income taxes, due to the higher contribution of the -- to the pre-tax profit from the E&P division and the impact of 5.5% supplemental corporate tax rate on the 10 subsidiaries operating in the energy sector. This supplemental tax rate is affecting from January 1, 2008 and we cannot rule out possible changes in the final version of the relevant decree. Any change will be accounted for in the third quarter. Adjusted operating profit in the second quarter totaled EUR5.6b. The result mainly reflects the strong performance of the E&P division, on which I will comment shortly.

Hydrocarbon production, as Paolo said, in the second quarter increased by 2.1% compared to the same period of 2007, averaging 1.772m BOE per day. The increase is backed by the contribution from the assets acquired in the Gulf of Mexico, (inaudible) and Turkmenistan. The start-up, build up and better performance in Egypt, Angola, Pakistan and Venezuela. These improvements were partially offset by the impact of PSA that accounted for approximately 100,000 barrels per day. Net of this effect, growth, as has been said, would have been of 8.1%.

Second quarter adjusted operating profit amounted to EUR5b, up 43% compared to the second quarter of 2007, mainly as a consequence of higher production sold and the higher realization prices denominated in dollars. It must be said that the liquid realization prices were reduced by approximately $7 per barrel on average, as a result of the commodity hedging contracts we have entered into. Furthermore, the result was negatively impacted by the appreciation of the Euro versus the dollar, higher operating costs in the G&A, as well as increased exploration CapEx. In dollar terms, second quarter adjusted operating profit increased by 66% (sic - see presentation), versus the corresponding period of 2007.

As for the Gas and Power division, overall gas sold increased by 7.7% in the second quarter of 2008, totaling around 22 bcm, driven by the growth in international sales. The Gas and Power operating profit amounted to EUR587m, up 13% over the same period of 2007. Gas and Power adjusted pro forma EBITDA for the second quarter of 2008 amounted to EUR799m. This compares to the EUR758m in the second quarter of 2007.

Marketing segment result decreased by 7%. This reduction was primarily due to a lower operating result of power generation activities, due to the provisions relating to certain electricity revenues recorded in 2005 and 2006 [back]. According to the authority for electricity and gas, we have not impacted to be subsidized. Marketing activities accounted for a stable result. The favorable scenario mainly related to the euro position versus the dollar. And the higher sales in the target market were offset by the stronger competitive pressure in Italy. The regulated business generated EUR275m, up 26% versus the second quarter of 2007. The increase is due to the higher volume transported and distributed, due to the colder weather condition, as well as to efficiency gains and incentives provided on the new investment on the transportation network. Finally, international transportation showed a substantially flat trend, versus the second quarter of 2007.

Turning now to the R&M, adjusted operating profit of this division decreased by around 19% as a result of the higher maintenance activities and the appreciation of the euro versus the dollar. These reductions were partially offset by higher refining margins in dollar terms. In marketing, the weaker performance of the wholesale segment was partially offset by the stronger contribution from retail marketing.

In the second quarter of 2008, the Petrochemicals business posted an adjusted operating loss of EUR157m, compared to EUR67m profit in '07. This loss is due to the negative base chemical margins resulting from higher feedstock costs. In the oilfield services and engineering sector, second quarter adjusted operating profit amounted to EUR253m versus EUR203m in 2007. The increase is attributable to higher results across all business lines. The other activities segment reported an operating loss of EUR56m, substantially flat year-on-year. And finally, corporate activities posted an adjusted operating loss of EUR37m.

In the first half of 2008, operating activities generated a cash flow of EUR10b. On top of this, disposal and others, primarily exchange difference, contributed for around EUR1.6b, bringing the overall cash generated to EUR11.6b. The cash flow generated supported the significant investment that amounted to around EUR8.7b. On top of this, dividends and buybacks absorbed EUR3.2b, bringing the overall cash used to EUR11.9b. Net financial debt, as of the end of June, slightly increased to EUR16.6b. And our debt-to-equity ratio remained stable at 0.38.

Coming to the end of my presentation, let me focus on the cash returned to shareholders. In 2008 we will pay out at least EUR5.4b as follows. EUR0.7 per share is representing the 2007 final dividend, proposed EUR0.65 per share, representing the 2008 dividend, interim dividend and at least EUR0.4b of share buyback completed year-to-date. The overall cash distribution allows us to generate competitive returns to our shareholders.

Thank you for listening, and we are now pleased to answer to any question you may have.

Thank you. (OPERATOR INSTRUCTIONS) The first question is coming from the line of Alastair Syme from Merrill Lynch. Please go ahead.

Yes, good afternoon, gentlemen. I wonder if you could help us with Distrigas, just in terms of quantifying exactly when you think it will contribute to earnings and how we should be thinking about modeling those earnings into our forecast, both in terms of the current earnings from Distrigas and also the synergy.

Okay. Now, the Company is -- [Marco Dera] will answer this question.

The Company will contribute about EUR200m in EBIT. This is before synergies. We're working with Publigas as a minority shareholder to define the detailed integration plan. And as soon as we have reached final agreement on this plan, we will be presenting in a dedicated document, exactly the ongoing contribution of this business, including the synergies.

Can I also ask, since you mentioned on UF Gas, can you tell us what you are able to about the shareholder agreement that's in place?

Union Fensoa Gas?

Yes.

We certainly have a preemption right in the case of a sale of Union Fenosa Gas, and we have a complex clause which is related to a change of control. So we might -- we certainly can exercise the preemption, and we might trigger the clause related to the change of control. We will enter into discussion with Gas Natural probably in September to define what is the best solution for our shareholders.

Okay. Can I ask, does the price that that stake is carried at, does that reflect historic cost investment or does it relate to the purchase price from [Glosbecker]?

If I will remember, when we bought the first 50% of Union Fenosa Gas, we paid it less than EUR300m -- no, EUR400m, the first 50%. So it was a fairly small amount. Now of course, the value is much higher than that.

You can't give us any sort of indication about -- ballpark?

Well I think that there are analysts which are attributing an evaluation between EUR2.5b and EUR4b. This is what analysts think.

Okay. Thank you very much.

Thank you. Your next question is coming from the line of Barry MacCarthy from ABN Amro. Please go ahead.

Good morning, everyone. A couple of questions, please. Firstly, on the movements from the first quarter to the second quarter in the tax in exploration and production, if you could explain the movements between any effect of the Robin Hood tax, if there's a deferred tax effect in Libya and so on, and how that tax rate might move in future quarters.

And the second question is on the Group tax, how Group tax might evolve.

And then on your CapEx guidance, I saw it move up from EUR13.3b in the first quarter to EUR14b in the second. I wonder if that's a function of activity, new projects, exchange rates or cost pressures, if you could elaborate on that. Thank you very much.

Well, the Italian taxes are among the most complex in the world you can think of. I will ask Marco to give you some details, first on the Robin Hood Tax and then on the total tax framework in which we will be moving this year. And then, more specifically on CapEx. Marco.

Yes Paolo. Barry, it's a kind of a mission impossible. But if you are patient, I'll try to drive you through this Robin Hood tax which, in fact, is the sum of two main pillars. The first one is a 5.5% supplemental income tax, effective from January 1, 2008. As a consequence of this, the statutory income tax rate for energy companies now again back to 33%, as it was in previous years. Essentially, the Robin tax law cancelled the reduction of the company income tax rate to 27.5%, which was introduced very recently with the 2008 budget law.

As a consequence of the 5.5% supplemental tax rate, our additional current taxes have been recorded in the second quarter for an amount of EUR154m, which affected the adjusted net profit. Out of this amount, around EUR100m regard the first quarter because the tax has been decided recently, but it is applied starting from the first of January. And this one is the reason for the increase of the tax rate in the second quarter, versus the first quarter. As a consequence of the increase in the tax rate, the net deferred tax assets has been reassessed, and the special gain of EUR94m has been recognized in the reported net profit.

The second pillar of this core Robin Hood tax refer to the fact that energy companies aren't anymore allowed to state inventories for tax purposes with the [life-of] method. And consequently, the methods provided by international accounting principles, weighted average costs of [fivefold], must be adopted, also to determine the taxable income. On the difference between the book value and the tax basis of the inventories, it went up. 16% tax is due, plus such one-off tax amount at June 30, to EUR434m. But the definitive amount will be determined based on the same difference at year end, and will be paid in three equal installments in 2009, 2010, 2011.

The reported net profit benefited of the difference between the deferred tax liability recorded at the ordinary tax rate and the one-off, 15%, 16% tax due, resulting in a net gain of EUR443m. I wonder if it was clear or not, but believe me, that's the maximum we can do.

That's very clear. Sorry, go on.

Was it sufficiently clear?

Yes it was. Thank you very much.

Fine. I did my best. As regards the Group tax rate, Barry, for year end we are expecting something in the range of 53%. We do not dare project any longer, tax rate. So let's try to survive with this guidance just for 2008.

As regards the CapEx guidance --

Marco, if you want, I can say something on the CapEx. It's easier maybe because simply -- Paolo Scaroni speaking. On the CapEx, we were planning to spend this year, EUR13.3b. We now give a guidance of EUR14b. This EUR700m excess CapEx are almost all attributable to the E&P division, and in particular to a bonus in Libya. Bonuses for us are part of the CapEx, as you know. And this bonus Libya is related to our renegotiation in Libya, which extended all our licenses to 2042, 2047. While I'll use this opportunity to tell you that in terms of tax regime, nothing changes in Libya. So we do not face any additional taxes on our Libyan production.

Okay. That's very, very helpful. Thank you very much. Can I just wish Mr. Mangiagalli the best of luck in the future, and to say thank you very much for all your help in the past years.

Thank you, Barry. Thank you.

Thank you. The next question is coming from the line of Michele Della Vigna from Goldman Sachs. Please go ahead.

Hi. It's Michele Della Vigna here. I just wanted to ask two questions here. The first one is relating to unconventional gas. We've seen a lot of companies in the past year announcing dealings in that area. And I just wanted to see what was, what is your point of view there.

And the second one, on the PSA effect, I just wondered if you could tell us how much you expect the PSA effect to increase from the current level to 2011. Thanks.

Let me answer first to the PSA and then I will ask Claudio to speak about unconventional gas. PSA, nothing will change from now to 2011. The position on the PSA will be remain flat. On unconventional, Claudio, unconventional gas and not oil.

Yes. So Claudio speaking. Good afternoon. Talking about unconventional gas, we are studying this different region in the world, especially in North America, but not yet done at the moment. We have also said (inaudible) as you know, in Italy, so we are not new in this area. But we are just -- we're really in early stage.

Thank you.

Thank you. The next question is coming from the line of Irene Himona from Exane. Please go ahead.

Good afternoon, gentlemen. I had first of all a question of clarification. At your new $65 long-term oil price, could you please tell us what long-term production growth we should assume, versus the February target of 3%?

And my second question concerns the balance sheet. Do you expect gearing to decline below last year's 38% level? And could you just remind us of the timing of Gazprom exercising its core option on the Russian assets, please? Thank you.

Okay. Listen, on the first question, $65, we confirm our target of 4.5% in the next four years and 3% in the following three years. So it will be no change.

On the gearing, yes, of course, what is important is what will be the decision of Gazprom on Gazprom Neft. This will take place in the first quarter of 2009. Since, as you probably know, we paid this 20%, $3.7b and the market value for what it's worth, it's probably $6b or something like that, $5.5b. All this indicates the likelihood of Gazprom to decide the call is quite high. If they were not to exercise the call, this would be very good news because the value is much higher than what we paid. In terms of the total gearing, yes, we expect a small decline, not because we expect our debt level to decline, but because we expect our net worth to go up.

Sure, thank you for that. Do you happen to know where Mr. Cao is heading to next?

In fact, I don't know. My best guess is that he will take a long holiday and then he will, will start looking around, probably at the end of the year. But this is just my best guess.

Okay. Thank you, and all the best wishes to Marco for the new challenge at Saipem.

Thank you, Irene.

Thank you. The next question is coming from the line of James Hubbard from Morgan Stanley. Please go ahead.

Hi. Good afternoon. Just two questions. You mentioned earlier that the Kashagan experimental phase agreement should be finally resolved in October. Can we therefore look forward to a CapEx number for phase one to be announced in October?

And secondly, oil price movements over the first half of the year imply a big increase in wholesale and, hence, retail gas prices in Italy over the course of the remainder of this year. I'm wondering, do you see any problem in pushing through such implied large gas price increases, or is there going to be some kind of pushback from consumers or politicians that would mean you're not fully able to put that through?

Okay. Well first, on Kashagan. Yes, in October we will give you a detailed new number for the experimental. When everything will be finished or the contract will be signed, we will be in condition to give a precise number.

On the gas, on the gas front in Italy, yes, you are right, there will be price increases. In any event, even if the oil price would drop, gas prices are going to go up in the next six months, simply because they are referring to the oil prices of today. I would say I'm fairly optimistic about the reaction, the methodology that is used to increase prices in Italy, because this is defined by the authority, which makes a very straight calculation of the increase in oil prices. And this will reflect in the wholesale and retail prices.

The truth of the matter is that there will be some consumers, particularly the low-income consumers, which will be badly hit by the increase in gas prices. And this is the reason why we thought that it was in the best interest of our shareholders to define a kind of an emergency plan with this contribution of EUR200m that we are ready to give in order to subsidize gas tariffs to the lowest income part of the population.

Okay, thanks very much.

Thank you. Your next question is coming from the line of Jason Kenney from ING. Please go ahead.

Hi there. Could you give us a feel for how the variable transfer mechanism at Kashagan above $85 per barrel will likely work, going forward?

And then secondly, on Russia. I know you've got the first European player in the downstream market with sale of gas in Russia agreed over the last quarter. What relationship or dependency is there on you developing upstream gas in Russia, directly for that?

Okay. Well on the first question, I will ask Claudio to answer. And on the second one, probably [Marco Dera], who will give you a feel about our gas sales in Russia.

So talking about the first question on Kashagan, it's a sliding scale related to the price. We don't give the figures, but it's just related to the price, oil price.

So the higher the price, the lower our take.

So that's at normal this year.

In Russia, we've concluded a small sale of about 300m. This is a single-customer sale -- cubic meters. This is really to get started and get to know the market, in view of our upstream gas coming from the Arctic Gas family of assets. We have set a target of 1b cubic meters by 2009. And this will be mainly selling our own equity gas. So what we're doing now, we're starting a downstream activity to get familiar with the rules, particularly around transport, which is the largest issue in Russia. 2010 will be the initial production of Arctic Gas. And then that will increase significantly beyond 2012 and 2014.

I think we can say that on this stage we are really warming our muscles more than looking for a profit. The margin will be small but we'll learn a lot.

Do you see any issues with transport for Arctic Gas? Obviously you said there that that's the most problematic element, to get your (inaudible).

Yes. Well as you've seen recently, there's a specific push, also from the Kremlin to have even greater transparency on the gas transport. This is to let the independents and the associated gas to flow more freely. We have successfully executed this sale using -- going by the current rules. And having Gasprom as a 51% future partner in Artic gas certainly makes it more reliable as a transport integrated venture. We also have certain rights already agreed vis-a-vis transport with Gazprom.

Thank you very much.

Thank you.

Thank you. Next question is coming from the line of Neil McMahon from Sanford Bernstein. Please go ahead.

Hello. A few questions. The first one is, maybe you could go into why there were so many asset impairments in the E&P division in the second quarter, especially with some very high oil prices. I'm presuming these must relate to some of the acquisitions you've made. Maybe you could discuss that. And I've got two other quick questions as well. Thanks.

Okay. So on asset impairment, Marco --

Yes you are right, Neil, the impairments were made on all unproved mineral interests and assets, which refer to all the acquisitions. You may remember the [Lasmo], the [Portume] and so on. So we looked at this quarter as an opportunity to have a reassessment of what we had in-house.

Were you using the current oil prices as a basis for reserve bookings or were you using some other reference level?

We normally use the forward curve to test, to assess for this purpose.

Okay. Well thanks for that. The second one is around Hewett. And yes, you have been the partner of Tullow in that particular field. How much due diligence have you been able to take on the whole concept of gas storage? It seems that Tullow wanted to get out for cash flow reasons, for their other operations. But in terms of what you have done and looked into on this, how confident are you that this field's reservoir characteristics and infrastructure is fully suitable for what could be a very interesting part of the UK gas infrastructure, especially with all the LNG coming in?

Look, we have been working 18 months on this field and particularly in technical terms. We have been creating a team made up by our E&P people and, in particular, the people who are running [Storgit], our storage company in Italy, together of course with the gas and power team, in order to evaluate the margins of this business. We are very confident that that storage is a very profitable business today. And it will be even more profitable in the future.

And I totally agree with you. But have you got the necessary okay and requirements from a government point of view?

Yes. Not yet. No, not yet. This is a very good answer. Not yet. We think that the UK government is very much keen to have a storage capacity. So let's say the general attitude is very positive. We expect to have all this authorization in the next few months. And particularly, remember that this is offshore and therefore there should not be any [mean] kind of effect. This is offshore, but still very close to Bacton, which for us is a key hub for the gas, both in the UK and in Belgium. Remember that in Belgium, there is no storage capacity, zero. And in fact, this storage you can, although it's located in the UK, you can imagine that through the interconnector, is located in Belgium.

No, sorry. It makes absolutely perfect sense and gives synergies. And just finally, a quick question on Galp. What really is in place that would stop you having a serious look at this company, as a way -- you've just got over 33%. What would stop you going after this company entirely, to increase exposure to Brazil because obviously, it must be screening extremely well in your Exploration department's review of the world's future reserves at the minute.

So, now, your question is correct. No, in fact, I cannot say that our long-term strategy is to stay at 33.34% in Galp. No, this certainly is a position that we can accept, but we want to move to a more normal position that an international company would have on a company such as Galp. Having said that, remember that we paid this company, I think in 2000 or 2001, our stake was paid EUR850m. We got dividends for at least EUR500m or EUR600m. And now our stake is worth something like EUR3b or more. So it has been a success story so far. The partnership with Amorim Energia and has been a success. We are ready to take opportunities in the future.

And of course, the position that Galp took on Tupi, but also on Jupiter are positions that we are looking very carefully. We have been appointing not only the gas division, but also in the E&P division, the number two, in order to help Galp in the future developments and, in particular, in the huge CapEx program that will necessarily take place in order to exploit the reserves. I think that in the next three to five years, this situation might evolve.

Okay, great.

Okay.

Thank you. The next question is coming from the line of Colin Smith from Dresdner. Please go ahead.

Good afternoon. A couple of questions, as well. I wonder, just in view of the relative surprise nature of Mr. Cao's resignation, at least to me, if you could put a little bit more color around why that -- what may have led to all of that.

Secondly, I wonder if you could talk a little bit about how Kashagan operatorship is actually going to work. First, the experimental phase and whether that's fully clarified in the MOU you're saying.

And finally I wonder if you'd comment on where things stand with regard to sanctioning Karachaganak phase three. Thank you.

Karachaganak (inaudible). Now let me answer, if I may answer, about Cao resignation. Stefano has been COO and Head of the E&P division since 2000. So it's already eight years. Probably he could not see much of a future in Eni, and he thought that he might be looking for opportunities somewhere else. This is the best explanation I can give.

On the future of Kashagan I'll ask maybe Claudio to give you some more details and as well on Karachaganak.

Okay, thank you.

So focused about Kashagan, second and third phase, so after the experimental phase, as you know, we hand over the operatorship to Shell. And for the second phase, we are -- we have a company, joint venture company that is built by all the joint venture partners that run jointly the future operations. And each major company will be in charge of a subset of the operation. So we have -- Eni will be in charge for the onshore operation. So we run onshore operation. Exxon will take care of about building. And so that will be the model. So a company is in charge and subset run by one of the two majors.

Just let me add that with the first oil at the end of the experimental program, the learning curve for us will be at the end. We will have learned what we needed to learn about Kashagan. And as probably you have heard me saying before, the amount of energy in terms of, particularly in terms of human resources that we have been devoting to Kashagan in the last two years will be reduced. And we look forward to it because we need human resources and skilled people in other parts of the world. There was no point in using 100% of our people to receive only 16% of the profits of this venture.

On Karachaganak?

Karachaganak phase three. The field will be finished by the end of this year, and we intend to be able to have the FID next year.

Thanks very much. And can I also pass on my best wishes to Marco, as well?

Thank you, Colin.

Bye.

Thank you. The next question is coming from the line Will Forbes from Credit Suisse. Please go ahead.

Yes, good afternoon. I just have a couple of questions about exploration. You said in your comments that there were around 450m barrels of resources added in the first half. I was just wondering if you can give a breakdown as to about how much of that was in acquisitions, how much in exploration, and if any of that was in [risk exploration]?

Zero. Acquisitions zero. All exploration.

Only exploration?

Organic growth, therefore.

Okay. And is that, is there any [risk exploration] within that figure as well?

Is any [risk exploration]? No, that is really a risk barrier.

Okay. And then the second one is your exploration program for the second half of this year. Can you point to any particular key wells that you're looking forward to in the second half?

The second half is -- the main target that's the most important target will be in Angola where already we have two big discoveries. We have some good wells in [Italy] and the Gulf of Mexico. And we think that by the end of the year, we are able to more than double our reserves. So we can reach, more or less, 900m, 1b from exploration risked reserves.

We confirm our target of 1b additional resources in 2008 for the full year.

Without acquisitions.

Organic.

Great, thank you.

Thank you. The next question is coming from the line of Paul Spedding from HSBC. Please go ahead.

Afternoon gentlemen. I have two quick questions. Firstly, you said that you would like a more 'normal' position in Galp. Could you perhaps explain what you view as a normal position?

And then secondly, probably a very stupid question, but obviously you have to pay taxes on the book profit on your rising inventories under the new tax system. If you have a situation in a subsequent year where you lose money on that position --

We get the money back.

You do get the money back. Okay.

I get the money back, of course.

We get the money back and we double the rate.

Yes. We will get the money back at the top of the rate on top, not just at 16%. We get it back at 33% -- 37%, so we are looking forward to lower oil prices.

Now on the position in Galp. Let's say, I consider that for Eni to own the stake of a listed company which is in the same business in which we are is a kind of a transitory position and not a long-term position. Therefore, either we see the possibility of completely integrating the company with us, or we might even consider to divest.

Okay. Thank you very much.

Thank you. Your final question is coming from the line of Neill Morton with MF Global. Please go ahead.

Good afternoon. Just one question and one clarification, please. Mr. Scaroni recently talked about the IOCs having come up with a new business model to help access reserves. And I think clearly you had the Congo deal very much in mind. I wonder if you are looking to apply that model to other countries around the world. If so, which? And would it reflect into those countries where you already have a material upstream presences. And I have a follow-up question on Distrigas, please. Thank you.

Listen, you are right. I had in mind Congo. And let me just tell you that in the next few months, we will try to replicate the Congo model to other African countries. Let not me specify which ones today. But we certainly have strong ideas, particularly in the way in which we will deal with the gas which today is flared, and which can be used for the country and in exchange for a stronger position in upstream.

Then you had a second question, no?

Yes I did. The press release today says that once the Distrigas deal is complete, you are required to make a mandatory bid for the rest of the shares. Once you have control, is it your intention to move to 100% or could, for example, you make an offer at market price to limit your increase -- an increase in your stake?

Listen, we have to offer for 100%, including the stake of Publigas. And so we will offer to everybody. As part of our agreements, we know already that Publigas will not divest completely from its stake. We'll remain with a relevant stake in the company, which are part of the shareholder agreement we signed yesterday. What will happen to the few shares which are in the market, frankly we don't know yet. We will be quite pleased to withdraw the company from the stock exchange. This, we'd consider it positive. But frankly, we don't know what will happen.

Okay. Thanks great. Thank you very much. And again, best wishes to Marco.

Thank you. Bye-bye. Bye everybody. We need someone else now to conclude. I can't say see you next time. I'll leave it up to Claudia.

I wish you all good holidays. (Inaudible). Bye.

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