Eni - Earnings Call - Q2 2011

Transcript

Speaker 4

Good afternoon, ladies and gentlemen, and welcome to Eni's 2011 second quarter results conference call, hosted by Paolo Scaroni, Chief Executive Officer, and Alessandro Bernini, Chief Financial Officer. For the duration of the call, you will be in listen-only mode. However, at the end of the call, you have the opportunity to ask questions. I'm now handing you over to your hosts to begin today's conference call. Thank you.

Speaker 2

Good afternoon, ladies and gentlemen, and welcome to our interim update and second quarter results conference call. During the first half of 2011, our results were hit by two uncertainties, of which the major one is, of course, Libya. In this context, we have made good progress on the strategic drivers which underpin our medium and long-term growth and value creation target. I will now give you a brief overview of the developments in our business for this quarter. Sandro will then take you through our financial performance from Q2. Let's look at the two uncertainties which impacted the first half results in more depth. The disruption in Libya has affected all our businesses.

Turning first to Eni, in the second quarter of the year, our Libyan production averaged about 50,000 BOE per day, with a negative impact of more than 230,000 BOE per day on the average daily production for the quarter. Meanwhile, the suspension of Libyan gas imports into Italy impacted gas and power results in two ways. In terms of volumes, we suffered from reduced sales to shipments. In terms of margins, we suffered because Libyan gas was replaced with gas from other sources, which have not yet been renegotiated. The situation in Libya is also impacting our downstream refining and petrochemicals businesses as both had to replace Libyan feed source with more expensive alternatives. For forecasting purposes, we are assuming that the situation in Libya will continue as is until the end of 2011.

However, we are ready to resume normal operations as soon as the necessary political and security conditions are in place. Our assets have suffered no damage, and we will be able to return to pre-crisis levels of production in a relatively short space of time, especially in our gas field. The second major uncertainty affecting our results this year is the ongoing renegotiation of our main gas supply contracts. Our reported first half EBIT does not include the expected benefits from contract renegotiation, which will be retroactive once agreements have been reached. Discussions with our suppliers are progressing well. Looking now at the broader picture, we have made significant progress on the strategic drivers which underpin our medium and long-term growth. Exploration continues to deliver excellent results. Following the over 900 million BOE discovered last year, we added another 415 million BOE of resources in the first half of 2011.

Amongst those, we are particularly excited by the Skluga discovery in the Barents Sea, which together with the Goliath project starting up in 2013, will give us a significant presence in this new frontier oil-producing area. In Indonesia, we have roughly doubled the gross recovery of the resources in place at Jangkrik to more than 2 TCF through additional exploration, resulting in a material resource base in an area with existing infrastructure and favorable gas market conditions. Over the last few months, we have also made excellent progress on some of the giants which will drive growth to 2014. In Venezuela, we have agreed all the details of the Junín-5 development plan with Ceredesa, including the possibility of bringing forward production startup. We are finalizing the commercial agreement called Perla, for which we expect to sign the USAID and take the FID before year-end.

In Russia, our joint venture with Novatek has defined the gas sales agreement with Gazprom for our fields in the Yamal Peninsula, paving the way for the final investment decision on Tsambuskoje and also Rengosskoje in the second half of this year. In gas and power, we continue to strengthen our leading position in the European gas market. Organically, we have expanded our market share, recovering 6% in Italy and increasing volumes to fight sluggish demand in Germany, France, and Spain. Meanwhile, we have consolidated our presence in the Belgian retail market through the recent acquisition of Newom Belgium. We also continue to work on our objective of maximizing value from our non-core subsidiaries, GALP and SNAM. I will now hand you over to Sandro for the presentation of our results.

Speaker 0

Thank you, Paolo, and good afternoon, ladies and gentlemen. In the second quarter of 2001, the macro environment was mixed. On the positive side, the Brent price averaged $117 a barrel, up 50% compared to the second quarter of 2010. However, the average European refining margin Brent fuel was $2.20 per barrel, a 52% year-on-year decrease that heavily impacted our L&M result. Finally, the euro appreciated 13% versus the U.S. dollar compared to the corresponding period of last year. Moving to our results, adjusted operating profit in the second quarter amounted to €4 billion, down 3% year on year. This result is mainly due to the weak performances of the gas and power, which doesn't reflect any benefits from gas contract renegotiations and downstream businesses, partially offset by the contribution of exploration and production division and finances.

Adjusted net profit for the second quarter was €1.4 billion, down 14% year on year. This result also reflects a higher adjusted tax rate, up by more than 2 percentage points to 59.2%. In the second quarter of 2001, Eni's hydrocarbon production amounted to 1,489,000 barrels of oil equivalent (BOE) per day, a decrease of 15% compared to Q2 2010. This negative operating result was mainly due to the ongoing instability in Libya, which reduced production by approximately 2,000 BOE per day if compared to the second quarter of 2010, and by at least 230,000 BOE per day if compared to our planned production profile in Q2 2001. Furthermore, PSA entitlements were negatively affected by the sharp increase in the oil price of 36,000 BOE per day.

The increase in the oil price, however, boosted the division's adjusted operating profit, which amounted to over €3.8 billion, up 11% compared to the second quarter of last year. This positive result comes in spite of the negative impact of the U.S. dollar depreciation, amounting to around €300 million in the quarter. In gas and power, overall gas volumes sold, including consolidated and associated companies, totaled 20.3 BCM, up around 14% year on year. However, adjusted operating profit decreased by 60% compared to the same period of 2010 due to the sharply lower results delivered by the marketing business. It's worth reminding you that the results do not include any benefits from the renegotiation of our long-term supply contracts, although this will be retroactive once agreements are finalized.

Gas and power adjusted proforma EBITDA for the second quarter of 2011 was €300 million, compared to €800 million in the second quarter of 2010. International transportation results showed a 17% increase, notwithstanding the closure of the GreenStream pipeline. The regulated businesses generated €367 million, up 5% versus the corresponding period of last year. The increase is mainly due to higher returns on new investments and efficiency actions. Adjusted proforma EBITDA in the marketing and power business was negatively impacted by increasing competitive pressure in Italy and Europe, as well as unfavorable climate and scenario effects. Furthermore, the ongoing situation in Libya reduced volumes to shippers and affected margins, owing to the substitution of recently renegotiated Libyan gas with other sources of supply not yet renegotiated.

Turning now to L&M, in the second quarter of 2011, the division reported an adjusted operating loss of €114 million versus a loss of €52 million in the same period of last year due to an unfavorable scenario, as well as the depreciation of the dollar versus the euro. These negatives were partially offset by improved efficiency, the synergic integration of refineries, and optimization of supply. Marketing activities reported a significant improvement of EBIT, benefiting from higher sales margins, positively influenced by commercial initiatives, which more than offset sluggish demand for oil products, both in Italy and abroad. In the second quarter of 2011, the petrochemical business reported an adjusted operating loss of €30 million, compared to a loss of €11 million in the second quarter of 2010.

The result was negatively impacted by lower margins as high costs of oil-based feedstock and the cost of substituting the Libyan virgin nafta were not fully recovered in sale prices on end market and substantial demand decrease. Pipeline delivered an adjusted operating profit of €378 million, up 10% versus Q2 2010, mainly driven by higher results in onshore construction and offshore drilling operations. Other activities in corporate showed an aggregate loss of €129 million, in line with the results reported in the second quarter of 2010. In the second quarter of 2011, cash flow from operations was €4.4 billion. Other sources of cash included proceeds from divestments amounting to around €100 million, mainly related to the sale of upstream marginal assets.

The cash inflows were used to partially fund cash outflows relating to capital expenditure of €3.7 billion and dividend payment of €2.2 billion, which included the payment of the final dividend 2010, as well as dividends paid to SNAM and Typing Minorities. Net financial debt, as at the end of June, amounted to €26 billion, an increase of €1 billion versus Q1, and in line with the net debt at the end of 2010. In the second part of the year, we will benefit from the sale of the international pipelines, one of which has been already finalized, while we are in exclusive negotiations with a preferred bidder for the disposal of temp and transit gas. The cash in is expected by year-end.

In this time of market turbulence, we can rely on a financial debt which is well diversified by source of funding and is characterized by an optimal profile in terms of both composition and duration. In the first half of the year, we further extended the duration of our debt. Over 80% of our gross debt is mid-long term, with an average maturity of more than five years. No bonds are due this year, and long-term debt due by year-end 2011 is just €300 million. In addition, 53% of our long-term debt bears fixed interest rates, further stabilizing our risk exposure. Thank you for your attention, and I will now hand you over to Paolo for his closing remarks. Thank you, Sandro.

In conclusion, in Eni, we are delivering on our strategy of developing giant fields in promising areas and making good progress on our growth targets for the planned period and beyond. For 2011, we forecast that Libya will continue to produce at current reduced level until the end of the year, with an estimated overall impact of at least 200,000 BOE per day on full-year production. In light of this impact, we confirm our previous guidance on growth, excluding PSA effects or flat production at $100 per barrel, as startups, ramp-ups, and better performance from other areas of the world will sustain our production in the second part of the year. In gas and power, giving guidance for 2011 is particularly complex, as our results will depend on both the timing and the terms of ongoing supply renegotiations, which are at present confidential.

That said, assuming renegotiations are closed before the end of the year, we expect gas and power results to be broadly in line with 2010 in light of the impact on Libya. The final impact of substituting Libyan gas with alternatives from our portfolio will also depend on the outcome of negotiations, but we expect it to be around €300 million. In L&M, we previously guided to break even in 2011 at the same refining market conditions as 2010. So far this year, market conditions have continued to decline, leading us to report a €260 million loss for the first half. We expect market conditions to improve slightly in the second half of the year, which, coupled with continuing cost optimization and the favorable seasonality of marketing results, will significantly reduce second-half losses.

In terms of leverage, we confirm our guidance of reducing year-end gearing below that reported at the end of last year. Looking forward, our strategy remains unchanged. We continue to invest for growth in the long-term interest of our shareholders while maintaining a firm financial discipline, a strong balance sheet, and our dividend policy. Our solid long-term prospects and the good overall results expected for this year support our proposal of an interim dividend of €0.52 a share, with a 4% increase on the 2010 interim dividend. We will now be pleased to answer your questions.

Speaker 4

Hello, ladies and gentlemen. The Q&A session is now open. I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel your reservation, press star followed by two. Thank you. First question comes from Mr. Clint Oswald from Samsung Bernstein. Mr. Oswald, please proceed with your question.

Speaker 1

Oh, yes. Hi. Good afternoon. Two questions. First one just on the natural gas. Can I just confirm, are you paying for extra Russian gas in 2011? You're not sourcing deferred volumes on your long-term contracts from, potentially, 2010? You're actually buying extra natural gas from Russia. Secondly, maybe just on GALP, could you talk about what some of your second discoveries this week, and now you have two. Could you talk about the prospectivity you think you have in that block and also the split you may have between natural gas and condensate? Thank you.

Speaker 0

Very good. The first answer would be from Domenico and the second from Claudio. Of course, we are taking more gas just because we place the Libyan gas. We use our own portfolio by the school, so we are taking more Russian gas than from other sources. This is within the contract that, of course, offers some flexibility in uptakes. Ghana. The second discovery we made in Ghana that is close to the first one is 15 kilometers. Practically, with this discovery we double our resource base. The percentage of condensate is a few percent. We talk about 5%. The condensate is not a lot. In this second discovery, we have found also some good oil arrival that at the moment is just under evaluation and can give additional perspectivity on other prospects that we have in the surrounding.

Speaker 1

Okay. Thank you. I just follow up. Could you potentially put some numbers on that resource? You said it doubled. Can you talk about some numbers and values?

Speaker 0

Yes, we are above 2 TCF.

Speaker 1

Thank you.

Speaker 4

Next question, please. Next question comes from Ms. Lucy Hoskins from Barclays Capital. Ms. Hoskins, please.

Speaker 1

Good afternoon. Thank you very much for giving an indication of what capital employed you have in Libya. Could you give us an estimate of what proportion of last year's PV10 was represented by your Libyan assets?

Speaker 0

No, I don't think we want to distort these numbers.

Speaker 1

Can you give us any indication of just the reserve number?

Speaker 0

I think when we speak about production, listen, our production in Libya, in normal conditions, is between 280,000 and 300,000 BOE per day, of which a large proportion is gas, almost 60+%. These assets are, generally speaking, young and therefore with an amount of production expected to continue for a long time. This, I think, is the maximum we can really disclose about Libya.

Speaker 1

Okay, thank you.

Speaker 4

Can we have the next question, please? Next question comes from Mr. Barry McCarthy from Royal Bank of Scotland. Mr. McCarthy, please.

Speaker 1

All right. Thank you. Good afternoon. Thank you for the presentation. Can I just ask about the non-core comment, GALP and SNAM retrogrades? I think that's a stronger indication than you've previously given that SNAM is non-core. Is that correct? Have you moved on in your thinking about SNAM in the portfolio? If you can give any update at all, I understand it's sensitive, but any update at all on when you might conclude a deal on GALP? Thank you.

Speaker 0

Okay. Let me make first a general comment about SNAM. You have heard me say in the past that we were not dogmatic about the presence of SNAM in our portfolio. We were not dogmatic, but of course, what we wanted to avoid at almost any price was to be obliged to sell. Because when you are obliged to sell, you normally sell at very poor conditions. Now, we think we have achieved that through the adoption of the third directive in the form of what we call AITO, which will allow us to keep the ownership of SNAM retrogrades as long as we want. Now, with this behind us, we become even less dogmatic than before. What I mean by that is that if we find ways to create value from this shareholding of ours or our shareholders, we would be happy to do it.

This is easier to say than to do because you should always remember that whatever solution we find for a divestment of SNAM needs the approval of the Italian government and even more needs a decree from the government, which allows us to go below 50% of the capital because it's a kind of process of privatization, so-called. We are in the middle of all of that. Frankly, with no hurry because in the meanwhile, the company is performing well and delivering a return which is well in excess of our luck. Of course, we are working on this project, and we expect in the next few months to come with some ideas. As you said, all this is confidential because we are talking about two listed companies and we don't want to raise expectations of something very soon. Certainly, we are working on this subject.

GALP, do you want me to say something about GALP as well?

Speaker 1

If you could, Mr. Speaker, that would be very helpful.

Speaker 0

Yeah. As far as GALP is concerned, let's say our strategy has not changed. We certainly don't want to be a long-term investor in a listed company which we do not control and which represents a sizable amount of investment because our shareholding in GALP is worth something in excess of €4 billion. We are looking at potential opportunities. Here too, things are easier to say than to do because until 2014, any divestment of our stake in GALP should, in fact, be approved by the two partners we have, the two strategic partners, one being Mr. Amorim, Amorim Energia, and the other one being the government, the Portuguese government through LATAJA, where they are the financial institution. This is a point on which we are working. We are probably more in advance than on SNAM in terms of timing. We cannot really distort much more than that.

We are relaxed in terms of timing for two reasons. First of all, because the company is a good company, share price is performing reasonably well. Second, because GALP is in the process of selling a stake of its Petrogal asset, which includes all the assets that GALP has in Brazil, so roughly 75% to 80% of the value of the company. We expect that at the end of this process, the share price of GALP will move up rather than down. Yes, we are working, but no hurry at all.

Speaker 1

That's very helpful. Thank you very much.

Speaker 4

The next question from Mr. Jon Rigby from UBS. Mr. Rigby, please proceed with your question.

Speaker 1

Oh, yes. Hi. Thanks for taking the question. Let's talk about the gas and power business. I recognize on the gas marketing, you don't want to talk specifically about the negotiations by country. Could you sort of talk in a rather higher level about if the contracts had been renegotiated to your satisfaction prior to the second quarter, where you would have expected the gas marketing earnings to be? Or put it another way, if we get to the fourth quarter and you're able to renegotiate and we sort of spread it back across the year, can you just talk a little more about that? Secondly, I think you then said something about comparing it to last year, but then having to adjust it for Libyan effects. Can you also just elaborate a little further on that if that's possible? Thank you very much.

Speaker 0

Let me try to take you through a kind of process out of which you might deduct what our expectations are, more than giving you elements about the negotiation, which, as you can imagine, is very delicate on one side and then is not concluded. Even more, we try to solve this question of yours, giving you guidance for 2011. The guidance we give on gas and power is that on the basis of what we consider a potential outcome of the renegotiations, our results will be in line with 2010, excluding $300 million of Libya. Okay?

If you elaborate on that, you take our results on the first half, which do not include any result of this negotiation, and you compare with this guidance that we are giving to you, I think you might extract a total number of what we expect to be the benefits we should have by year-end from our negotiations, both with Gazprom and Sonatrak.

Speaker 1

The 300 million that is a Libyan effect, is that loss of market share?

Speaker 0

Now, this is made of two components. One is we sold less gas than we would have sold, yeah, simply because we didn't have the gas. Second, I would say price. Price is made again of two components. The first component is that we had to replace some Libyan gas with our portfolio, which is certainly much more expensive than the Libyan gas for the simple reason that the Libyan gas is the only one we have already renegotiated. We have been unlucky. We renegotiated the wrong one first, I have to say. That's the first. Second, in the contract of the Libyan gas, there is a portion, which is what we call extra gas. Gas released by the Libyan, which do not use it for internal consumption, which is particularly cheap. Therefore, we had to replace even this one.

As a conclusion of that, we attribute roughly €300 million to the Libyan shortfall.

Speaker 1

Okay, now that's very clear. Thank you.

Speaker 4

Next question comes from Mr. Nitin Sharma from JP Morgan. Mr. Sharma, please proceed with your question.

Speaker 1

Hi. Just one question, please. I'm conscious that you've delivered a 4% increase in interim dividend, given the likely divestment of stake in GALP, international pipeline, much stronger oil price versus your planning assumptions. When do you plan to reevaluate your dividend policy in terms of the base of €1?

Speaker 0

Now, we are not planning to reevaluate our dividend policy. We are planning to reevaluate our dividend base. That is, I don't know if you remember, but our dividend policy is based on our scenario. According to our scenario, our plan, which includes the CapEx we plan to make and the need we have to go below 40% of leverage, define the sustainable dividend for the four-year period of the plan. Therefore, in our presentation, our strategy presentation we will make in February, in which we will present the new plan of Eni, we will disclose, as usual, our scenario as far as oil prices are concerned. We will give you the new base or calculation of our dividend.

Of course, the new thing is that all this has to take into account Libya because Libya is such an important position for us that if, frankly, I hope it will not be the case, but if in February next year, the Libyan situation will be at the same point where we are today, this will be also part of our considerations.

Speaker 1

Thanks.

Speaker 0

Thank you.

Speaker 4

Next question comes from Mr. Alejandro Denichelis from Bank of America. Mr. Denichelis, please.

Speaker 1

Yes. Good afternoon, gentlemen. A couple of questions for me. The first one is on the renegotiation of the contract for your gas. Is that number that you're providing us with kind of the minimum number you're expecting on those renegotiations, or is there a kind of range of different alternatives that we should be thinking about? The second question is regarding the Libyan situation and how quickly you said you can restart production. Can you give us some kind of time? You know, if you're saying for the gas quite quickly, but for the oil, how long should we think about that?

Speaker 0

Domenico, we'll answer the first one, and Claudio, the second.

Speaker 1

What has been said by Mr. Scaroni is in line with what our expectation of the results or the final result of the negotiation we are running. Our basis on what we see will be the profitable outcome of them.

Speaker 0

For Libyan production, for gas, because of different reasons, the first one is that gas fields are quite young, and there is no water problem, water tower problem, and all the installations for what we know up to now are in very good shape. I think it's a question of a month, two, three months, we can restart practically full production. For oil fields, it's quite different. We talk about giant fields, but very old fields with old installations. We need some time and not less than one year, 12 months to restart production for oil fields.

Speaker 1

When you're talking about your guidance just for this year and not for next year, we should be thinking that, you know, even if the situation in Libya were to be solved today, your 2012 numbers would be quite satisfactory.

Speaker 0

If it's solved today, I think that for gas, you can consider a full rate gas for 2012. For oil, you know, our share now is very low because there is no big investment. I think that we talk about 40,000 to 50,000 barrels per day, and we can consider half of that production for the guidance on next year.

Speaker 1

Yeah. Very clear. Thank you.

Speaker 0

Thank you.

Speaker 4

Are there any more questions? No more questions at the moment. Ladies and gentlemen, I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. Next question comes from Mr. Mark Blumfield from Deutsche Bank. Mr. Blumfield, please.

Speaker 1

Good afternoon. Yes, two questions, please. First of all, on Iraq, perhaps you could update us on the pace of developments there and how that's progressing since you've taken operatorship of Zubair. The second question, just turning to China, I wondered if you could update us on the state of your negotiations with PetroChina under the MOU that you signed earlier this year. Thanks.

Speaker 0

Okay. Claudio will answer both of those. First, Iraq. From an operation point of view, Iraq is going quite well. We are still producing an average of 280,000 barrels per day. We are still in the first phase, you know, that we have the rehabilitation phase that will last three years, and after that, the full development phase. There is no operational problem. We are experiencing some problems in the awarding of contracts because of bureaucracy. That is the main hurdle we are facing. There is no hurdle that was thought at the very beginning, pipe capacity or other things. The main issue now on the table is the awarding of contracts that will allow us to go ahead with the development.

Speaker 1

Can I follow up on that point? Does that change your expectations for production from Iraq this year and next?

Speaker 0

No, that doesn't impact production because if you remember during the strategy presentation, we put some big contingency on Iraqi production. There is no impact from that point of view. For that reason, we say that our guidance for 2011 is absolutely the same. I don't think that this problem that is not a technical problem, it's just bureaucracy, I think that will be solved.

Speaker 1

Thank you.

Speaker 0

Second question is China.

Speaker 1

China.

Speaker 0

China, we started the first MOU at the beginning of the year with PetroChina. We released recently with China Tech. The aim and the content of the MOU are more or less the same in the sense that our main objective is to have some unconventional blocks in China. The main target and objective of our Chinese partner is to have access in Africa, where we are the first company in terms of access to production and reserves. We are working. We already identified some possible areas. I think that in the next month, we will be ready to start the serious discussion and possible transaction.

Speaker 1

Thank you.

Speaker 4

Next question comes from Mr. Sergio Molisani from UniCredit. Mr. Molisani, please.

Speaker 1

Yes. Good afternoon. I'm Dr. Zebati. Two questions, if I may. The first one, I'd like to ask how the sale and/or the consolidation of SNAM retrogrades could change your strategy, whether more aggressive exploration, acquisition of assets. More generally, what are the main constraints you see in your current gearing? Second question, what's the main takeaway from the recent renegotiation of Edison with Promgas, your joint venture with Gazprom? It looks like quite generous for Edison. I was wondering whether you could give us more flavor on what happened there. Thank you very much.

Speaker 0

Let me say a word about the consolidation of SNAM retrogrades. We do not expect that rating agencies will look at us in a different way if we consolidate SNAM retrogrades for the simple reason that it is true that out of our €26 billion of debt, €12 billion or €11.5 billion or €12 billion are SNAM retrogrades debt. The rating agencies, quite correctly, make the final reasoning that this debt is well hedged with regulated assets. Therefore, we are not expecting major change in the perception of the rating agency or of the financial markets. As far as Edison is concerned, I think Domenico will give you a few.

Speaker 1

As you may have read, Edison found the agreement with Gazprom on the gas they buy. This after a threat, in fact, an arbitration process that was already started. Take on the line that Edison and Raffles operate in a different market. Edison is mainly concentrated in power generation. Our market is a little bit different. Another element that we should consider is that the volumes sold to Edison are around 2 billion cubic meters a year. This means around 10 times less because we buy around or what we buy because we buy around 20 billion cubic meters a year. Anyhow, this result is quite interesting because it shows the ability of Gazprom to find agreements.

Speaker 4

Are there any more questions? Next question comes from Mr. Mark Coughler from McGuire. Mr. Coughler, please.

Speaker 1

Oh, good afternoon, everyone. I just had one very quick question on your exploration program offshore Mozambique this year. If you could provide any color on that, that would be great. Thanks.

Speaker 0

Expiration for the in the second half, we have the well in Mozambique and that's using the block four. We have big expectations, of course, for this well and for the result of this well. Also, based on the result of the well drilled by Anabergo. Within that, we have big structure and with the POH now very, very high, close to 50-60%. We think, thought about the possible appraisal phase where we're in the rig and all the materials, equipment, and people ready to go ahead immediately with a back-to-back drilling to be able to define a very fast way and quick way the dimension of these reserves. We are very, very positive on that.

Speaker 1

Great. Thank you.

Speaker 4

No more questions at the moment. Next question comes from Mr. Jon Rigby from UBS. Mr. Rigby, please.

Speaker 1

Yeah. Hi. I've got a follow-up. Just on thinking about SNAM a little bit, is that, as you said, is that it was sort of legally acknowledged that the structure that you had in place complied with the EU directive, third directive, which I believe essentially says that you don't have direct management control any further over the actions of SNAM management. Does that mean actually, in legal terms, that you could deconsolidate it anyway, even if you continue to own 50%, just on a substance over form?

Speaker 0

Now, wait a second. I would like to be more precise. Today, in what we call SNAM, there is the transportation, gas transportation, which is the network in Italy. Then there is storage. Then we have ItalGas distribution. Then we have the GNL, so the regasification terminal. Out of all these four businesses, the only one which is object of the third directive is the transportation. Therefore, within SNAM retrogrades, they will create a company which will be built around the rules of the AITO, which are very specific rules of governance, which will manage the transportation system. All the rest, nothing will change. It will stay exactly as it is. Now, this transportation business represents roughly 40% of SNAM, a little less than 40% of SNAM. For the other 60% of SNAM, nothing changes.

Speaker 1

Okay. All right. Thank you for the clarification.

Speaker 4

Next question comes from Mr. Andrea Scouri from Mediobanca. Mr. Scouri, please.

Speaker 1

Yes. Good afternoon, gentlemen. My question refers to cash again. It seems that the relationship with the government are more friendly now. Could you provide us an update on the relations with the government and the possibility to see the second phase to start in the midterm? Thank you.

Speaker 0

Thanks for this question. First of all, I want to highlight that the relationship with the government is excellent. There is no problem with the government at all. There is no problem with the field. The things are going quite well. For the first phase, as we said already several times, we confirmed that technically there is no problem to reach the first production by the end of 2012. We are discussing about the cost of the phase two. For that reason, we are slowing down. First of all, we want to see the result of the phase one. We are looking at the concept for all the phase two to optimize cost and increase the internal rate of return of the project. That is the situation we are discussing. I don't think that I would say more about that. Thank you.

Speaker 1

Okay, thank you.

Speaker 4

No more questions at the moment. If there are further questions, please come forward. Next question comes from Mr. Lagoste Charles from Chevron. Mr. Lagoste, please?

Speaker 1

Yes. Given the low profitability of the refining business, would you envisage a spin-off of this kind of activities, like it is probably the case for ConocoPhillips in the U.S.?

Speaker 0

I have looked closely at what ConocoPhillips has been doing. For the time being, we think that it would not be appropriate to dispose of this business in this difficult time. We still consider that our refining and marketing business is an important core business within Eni.

Speaker 4

No more questions at the moment.

Speaker 3

Thank you. If there are no more questions, perhaps we can bring the conference to a close.

Speaker 4

The control will confirm, madam. There are no more questions.

Speaker 3

Thank you. Thank you very much, everybody, for being with us on the call. If there are any questions, you can get hold of us at the IR number later on or next week. Thank you very much.

Speaker 4

Ladies and gentlemen, the conference is over. Thank you for calling Eni. Press one to play a recorded conference. Press nine to exit.