TotalEnergies - Q2 2023

Transcript

Patrick Pouyanné (Chairman and CEO)

Good morning, good afternoon, everybody, wherever you are. Patrick Pouyanné speaking. Before Jean-Pierre will go through the details of what we could characterize as a solid set of numbers, I would like to come back an introduction on the major investments that we have announced in this last quarter, which are a good illustration of our oil and gas and electricity strategy. Which in fact, so are based on these two fundamental growth pillars, on one side, growing our hydrocarbon base, mainly driven by energy, but oil, of course, is our cash engine of today, and secondly, developing a profitable and integrated power business, which is key for the future cash engine of the company. The results, I should characterize them as good cash flows, good ROCE, and good distribution, strong distribution to buybacks.

Continuity and revenue and strong and solid set of numbers. Jean-Pierre will come back on it. First, on the first pillar, I would like to highlight a few important projects. The first one, of course, is our project in Iraq, called GGIP. You know that the company is born in Iraq 100 years ago, but it's not a matter of emotion, it's a matter of creating value, let's be clear. The GGIP, in fact, providing for us access to exactly the type of hydrocarbons we are looking for, low cost, low emission, oil and gas, because both projects is targeting both.

strata gas being, of course, a source of gas for but oil, as a matter we feel, will have to increasing production of water refill the other second objective, who I would say a breakthrough contractual breakthrough innovative contractual conditions compared to previous service contracts, which were signed by others in the past. This contract offers an attractive reward, well balancing, of course, the Iraqi risk. We are fully aware of that. Second, of course, example, a very major example of the strategy in motion is our new LNG project in the U.S., the Rio Grande LNG project, which we have announced in June, and which now is FID. You know that we are very committed to LNG.

We think that is a growing demand, and that, of course, the U.S. position is very important because you have lowest cost, a very low cost source of gas there. I would say this is a project on which is attractive because it's one of the most competitive LNG plants with $850 per ton. Rio Grande project benefits from a very good location outside, I would say, of the Louisiana crowded area, and more importantly, access to skilled forces with no competitions, limited site preparation. Again, it's a CapEx competitive project, and I know it's a matter to deliver it. More importantly, of course, for us, we are decided to integrate that project by different angles. Why do we integrate it by different angles?

Becoming equity owner, shareholder of Mexichem, the company promoter of the project, but also direct investor in the project, with 16%, and also, of course, a stakeholder. We've done that because, in fact, we are leveraging this integration in order to have access to the most competitive pricing for U.S. LNG, and this will give us a clear competitive advantage on the market. It's not only a matter of taking, but the integration gave us the capacity to negotiate better price than others. That, of course, as it's a source of value. We might also enhance further the value of the project by further integrating the upstream in order to protect our gas feedstock cost in the future. Other upsides will come also for expanding the plant from 3 to 5 trains.

That's why we consider that not only being a stakeholder, but more importantly, also to contribute directly to the investment is way to leverage and to create different sources of value from this project. Last project, of course, emblematic from oil and gas, is the final award of the contract for the Amiral project in Saudi Arabia in petrochemicals. In fact, it's really, I would say, leveraging the SATORP platform, an integrated platform, a world-class petrochemical facility, well supported by the Kingdom of Saudi Arabia in order to get advantage feedstocks and a very competitive project. We have also, during the quarter, continued to deploy, I would say, the second growth pillar of the company, which is building a profitable integrated model in electricity, so integrated power.

It's oil, gas on one side, integrated power on the other side, on which we focus, I would say, our transition strategy. Two events, with two deals or two projects, happened during this past quarter, very recently, by the way. One is the full acquisition of Total Eren, which has been announced for quite a long time. You've seen through the figures that it's $400 million EBITDA. It's a company, so, and cash flow for additional cash flow next year for TotalEnergies. The multiple is quite attractive. It was negotiated five years ago. It's 3.5 gigawatts, and mainly, by the way, to further them being in what I call the unregulated country, so feeding our integrated power business model.

It's also a lot of competencies which will join the company in order to be efficient and more efficient. With this integration and all the. The next step, and I think we'll come back to you on that in September, is to, we have all these assets around the world. Now it's a matter of industrializing the way we operate them in order to deliver more value for the integrated power business. We also won some maritime business in Germany, 3 gigawatt offshore. Some people think it's too expensive. It's not, because I think it's exactly, I think, what we are looking for in integrated power. It's fitting. It's a perfect illustration of our business model. Why? Because it's the first. It's on the market, the German market, which will offer the best price for electricity in the future.

Germany has decided not to go to nuclear, you know, in the end, the price of electricity in Germany will be supportive. Secondly, it's like an oil and gas concession. We pay only amounts are important, but in fact, it's an upfront payment, like we pay a bonus on an oil and gas concession. In fact, we fixed off. We fixed exactly our fiscal results by what do we pay upfront, 10%. For all these 3 gigawatts, it's something around EUR 500 million. We will pay a royalty among 20 years. The royalty, by the way, avoids us to pay any connection fee to the grid.

When you look to the math, I can tell you, I'm very happy that we have managed to get access to the 3 gigawatts of offshore wind, because it's exactly the model we want to put in place. The price is not controlled, up to us to decide which part we will sell to EPA, to German manufacturing industries, and which part we keep merchant in order to trade around and to asset integration. My answer to the ones who have criticized us is that, in fact, we are exactly in the model, not an infrastructure model, but an integrated power merchant model, exactly what we do in oil and gas. You will see us continuing to deploy this strategy.

By the way, I'm happy because Jean-Pierre, it's easy for me to explain that because Jean-Pierre will explain you, but these results in integrated power are surprising you quarter after quarter, and they will continue to surprise you in a positive way. That's what we want to build. That's my introduction. I will say my last comment, of course, is that the board is very comfortable with the cash generation of the company. Yesterday, reiterated its trust in the future by increasing the interim dividend by 7.25% year-on-year, and maintaining the $2 billion buyback program for the third quarter. It's the 5th quarter in a row that we stay at $2 billion, despite the softening environment.

The payout for the first half is more than 42%, in line with the commitment of the board to distribute more than 40% for 2023. I can only reiterate that commitment. All the transactions and projects, which of course will be the highlights of our presentation to you on September 27 in New York. I will leave the floor to Jean-Pierre for digging into the results.

Jean-Pierre Sbraire (CFO)

Thank you, Patrick. Let's move to the financials. The commodity environment softened in the second quarter, but still at high levels. Quarter-over-quarter, Brent was down 4% to $78 barrel, and European gas dropped by around 35% to $10.5 per million BTU. In this context, TotalEnergies reported second quarter 2023 adjusted net income of $5 billion, a decrease of only 24% quarter-over-quarter, and was able to generate a strong $8.5 billion of cash flow. Over the first half 2023, adjusted net income was $11.5 billion, and cash flow was $18 billion. We continue to deliver excellent profitability, reporting a 22% ROACE for the 12 months ended June 2023. We continue to share our success with our shareholders, as explained by Patrick.

During the second quarter, we paid $1.8 billion in ordinary interim dividends and executed $2 billion in buybacks, which is consistent with the first quarter distribution, despite the softening commodity environment I described. Payout to shareholders, as mentioned by Patrick, was more than 42% over the first half 2023. Our balance sheet remains strong, with gearing at 11.1% in the second quarter. Moving now on to the segment results. Operationally, our oil and gas production was 2.47 billion barrels of oil equivalent per day, up 2% year-on-year, thanks to new project startups. Johan Sverdrup, phase two in Norway, EKK in Nigeria, Mero 1 in Brazil, and Block 10 in Oman. The production also benefited from the integration of SARB and Umm Lulu fields in the United Arab Emirates.

Note that our oil production was at 12% year-over-year, reaching above 1.4 billion barrels oil per day. Production for the third quarter is expected at around 2.5 billion barrels of oil equivalent per day, notably supported by the startup of the Absheron field in Azerbaijan. Exploration and production reported adjusted net operating income of $2.3 billion, down 11% quarter-over-quarter, primarily due to the lower oil and gas prices. Similarly, cash flow of $4.4 billion was also down 11% quarter-on-quarter. These are quite resilient set of results compared to the lower environment. I already mentioned the -4% for Brent and around 35% drop for European gas prices. As previously announced, we are now reporting integrated energy and integrated power as independent segments.

Let's move on integrated energy. In the second quarter 2023, LNG sales were stable at 11 million tons quarter-on-quarter, benefiting from the restart of Freeport LNG, but decreased year-over-year due to lower demand in Europe because of mild weather and high inventories. Integrated LNG generated adjusted net operating income of $1.3 billion, down 36% quarter-on-quarter, reflecting lower LNG price, averaging $10 per MMBtu in the second quarter, and softer trading results compared to the exceptional ones we benefited in the first quarter in less volatile markets. Operating cash flow was down only 13% quarter-on-quarter, also due to lower energy prices, but partially offset by higher margins secured in 2022 on LNG cargos to be delivered in 2023.

Given the evolution of oil and gas prices in recent months and the lag effect on price formula, TotalEnergies anticipates that its average LNG selling price should be between $9 and $10 per MMBtu in the first quarter 2023. For integrated power, in the second quarter, we met our target of double-digit returns, building a track record as an integrated and profitable player in the electricity business. For the 12 months ending June 2023, we achieved the ROCE at 10.1%. The proof is in the results. Our integrated approach to the business is working, which combines renewable projects, flexible power generation, energy storage, asset optimization, trading, and B2B, B2C supply.

Integrated power second quarter, adjusted net operating income is $450 million, and cash flow is $491 million, up 22% and 12% respectively, quarter-on-quarter, due to the good performance of our integrated electricity portfolio. Integrated power generated $930 million of cash flow in the first half 2023, versus only $340 million in the first half of 2022. The different segments have performed well and contributed to this robust first half 2023 results. Gas-fired power plants, renewable, trading and supply, demonstrating the strength of our integrated power strategy. Net power generation was 8.2 TWh in the second quarter of 2023, up 8% year-on-year, as growing electricity generation from renewables was partly offset by lower generation from flexible capacity in the context of lower European demand.

Growth in store renewable power generation capacity is now at 19 gigawatts at the end of the second quarter, up by more than 1 gigawatt, quarter-on-quarter, including 0.5 gigawatts installed in the U.S. and the connection of 0.3 gigawatts from our offshore wind projects in the U.K. Let's move to downstream. Downstream contributed $1.5 billion of adjusted net operating income, down 23% quarter-over-quarter, reflecting clearly lower refining margins, particularly in Europe, partially compensated by higher marketing and services results, quarter-over-quarter, due to the seasonality of these businesses. The refining margins were impacted at the start of the period by Chinese exports and the quicker than anticipated reorganization of Russian flows following the European embargo.

They were also supported at the end of the quarter by higher gasoline exports to the U.S. and lower diesel imports in Europe from China. Our refinery utilization rates on processed crudes improved to 82% in the second quarter, which is a good performance, compared to 78% in the first quarter. We expect same operational performance above 80% in Q3. Since the beginning of July, the average refining margin is higher, above $70 per ton. On company working capital requirement, last quarter, we had an exceptionally high build of $4.5 billion, mainly related to higher crude and petroleum product inventories on quarter, and to the seasonality of our power and gas marketing business.

I said last quarter that we are expecting $1.4 billion would reverse, and indeed, we have a $1.5 billion working capital release, mainly due to the effect of lower inventories, seasonality of payments of the gas and power marketing business. We continue to monitor closely and take action to minimize the working capital requirements, while expecting in the next quarter some working cap release coming from exploration and production tax payment schedules. On net investment, second quarter amounted to $8.6 billion. Our guidance for 2023 net investments is unchanged in the range $16 billion-$18 billion. The board of directors, as mentioned by Patrick, confirmed for 2023 a shareholder distribution of more than 30% of cash flow, supported by our Canada divestments, as expressed end of April.

Patrick Pouyanné (Chairman and CEO)

... the board decided the distribution of the second interim dividend for the 2023 financial year in the amount of EUR 0.74 per share, up 7.25% year-on-year, and authorized the company to buy back shares for an additional $2 billion in the 3rd quarter of 2023. With that, let's move to the Q&A.

Thank you, Jean-Pierre.

Operator (participant)

Thank you, ladies and gentlemen. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please kindly mute any audio sources while asking a question. If you wish to cancel your request, please press star two. Once again, please press star one if you wish to ask a question. The first question is from Christyan Malek of JPMorgan. Please go ahead.

Christyan Malek (MD and Head of the EMEA Oil and Gas Equity Research)

Hi, good morning, Patrick, Jean-Pierre. Thank you for taking my question, and well done on a very strong quarter. I want to ask you about the two pillars, which you've simplified very well. I know you have framed a compelling case of winning the rewards through optimizing across the value chain. What I'm trying to rationalize is how you generate a return competitive with the oil and gas pillar, when you're looking at overall returns for the portfolio. If you're essentially trying to maximize every dollar you place into your jewels generation, if you will, it just doesn't make sense to me why you don't double down on your oil reserves while oil is getting firmer over the next few years.

My question is basically, can we expect a higher growth, oil target from you over the coming years? If so, will that take CapEx higher? Thank you.

Patrick Pouyanné (Chairman and CEO)

Thank you, Christyan. You know, we'll come back on your this question. Of course, it's at the core of our presentation in September to all of you and to our investors. It's true that we have a quite a large portfolio of oil and gas projects, oil and energy projects, and we'll come back on it. On oil, you know, we have Ghana, Angola, we have Iraq. We should have probably a Suriname project coming. We are just testing the last wells. But to be clear, at the end, the guidance we gave you for $16 billion-$18 billion in an environment that we say like today, it will be maintained, to be clear.

If we have more oil, we'll have to arbitrate the project. We have room to maneuver in our portfolio, to be clear. Don't expect the CapEx increase, but again, we will not arbitrate the gap against oil and gas profitable projects. It's a question of balance. We have two pillars in our strategy. One is our three pillars, the oil. If we have more oil, I'm happy to deliver oil. We have gas. We have a blue board as low carbon growth, like oil and gas growth. You can make the math. I mean, some of you have done it. You will find a 2%-3%, I think. That's good. Happy with that. We are also a company in transition, our integrated power pillar.

As you said, we are, probably simplify, and we are looking to the various energy, new energies, and we are strong, and we consider that our commitment to build this integrated power and the results we are delivering is a core of our transition strategy. We might, we say, simplify the rest of the molecules, which, by the way, we see a demand later than 2030. That might be, that will be, we come back on this topic, of course, in the strategy presentation in September. You should describe TotalEnergies as oil and gas and electricity as a core of our strategy, more than a sort of the energy supermarket, you know? Let's simplify and let's deliver the value.

Christyan Malek (MD and Head of the EMEA Oil and Gas Equity Research)

Very clear. Thank you.

Operator (participant)

The next question is from Oswald Clint of Bernstein. Please go ahead.

Oswald Clint (Senior Research Analyst)

Good afternoon. Thank you. Just on LNG, and specifically United States, TotalEnergies are, I think, is the largest offtaker of U.S. LNG. It's just you've got bigger now with Rio Grande, but I wanted to ask about that exposure to U.S. gas feedstock. You, I think you touched on potentially integrating further upstream. Is there a number here, a percentage, something we should think about in terms of feedstock coverage for these terminals, for these offtakes that you would think about looking forward, is the first question, please. Thank you. Then secondly, I noticed it looks like you may be planning to drill a well in the South African portion of the Orange Basin, perhaps next year.

I was curious if you've completed any further analysis over the last quarter around the Venus discovery that gives you the confidence to really extend the exploration campaign further south. Thank you.

Patrick Pouyanné (Chairman and CEO)

For the second one, I think we will focus on Namibia. My priority is Namibia. We are doing an appraisal well of Venus, which is very positive. Of course, we still are expecting the dynamic data. The first test will start beginning of August. I think when we'll meet, I'm sure in September, we'll have the results of the first test, which of course, is important because positivity per well, of course, if it's 15,000 barrel per day, it's fine. If it's 5, it's not fine. You know, I can tell you, the oil column is very big. My whole focus will be Namibia first. We have a lot of place. We have some license in South Africa....

We work on geologists are working on it, but it's again, I feel comfortable my priority will be to buy, to give value to Namibia if it's confirmed, then we'll see what are the extension in the Orange Basin on the other side. New LNG exposure, yeah, true, we have 10 million tons, we'll move to 15 million tons. It's quite a big exposure. Again, you have noticed that we each project, we try since I am CEO, not only to offstate, but to integrate the project, Cameron LNG, ECA, Mexico, Rio Grande. Why? Because it's, when you contribute to an investment, you have a leverage on the pricing, you know, of course, yes, because I believe in integration. It's not new.

You know, we have already produced a production, the net production, more or less of 500 million tons per day in the U.S., on the Barnett Shale that we maintain. We can extend and double that exposure. No worry, yeah, no worry. There is no specific, just, for me, takes time, so we'll have opportunities one day. It's part, of course, because I think controlling the cost of the pit stop is a, is a smart way in order to control the full integration value. It's part of, I would say, our strategic agenda and, integration in the U.S.

Alastair Syme (MD and Global Head of Oil and Gas Research)

Understood. Thank you.

Operator (participant)

The next question is from Irene Himona of Société Générale. Please go ahead.

Irene Himona (Equity Analyst)

Thank you. Good morning. Congratulations on a very busy quarter in terms of the 4 new projects you launched in different areas. You referred to the competitive advantage of low cost in all of those. Can you perhaps help us with how we should think about the return on capital in these very different projects, please? Then, secondly, you pre-announced the third quarter buyback. Obviously, you are generating based on cash flow. Why would you not pre-announce the fourth quarter buyback at this point? Thank you.

Patrick Pouyanné (Chairman and CEO)

Okay. It was a debate in the board. The board, you know, we have business meeting in September. The board is meeting in September, decided to review the full distribution policy for the last, the end of the year. As I told you, we have the fifth quarter in a row, $2 billion, so it would be a very surprise. Then, and to give perspective to you in New York about all these elements. We decided that it was, we maintain the $2 billion per quarter. Again, you know, the environment is opening, so we want to keep that flexibility. The main commitment board has taken to all investors is more than 40% of distribution this year. We are 42% or...

If we not be 40.1, we've been more than 42. This is best we can make the math, I think. The board is working, and remember that the commitment are also linked to the closing of the Canada sales. We are moving forward on these elements positively. Conoco has created an APA with Conoco has been executed. We think we close by end of the third quarter, and the discussion with Sempra are also progressing also to the board want to have a complete view in order to make the right decision for our investors in terms of distribution. On the projects themselves, I cannot disclose all the figures. You know, there are contracts. In particular, I commented positive.

I try to explain you that on the Iraqi projects, yes, that's true, we created a new category of contracts, purely fitting with our standard way to work, to be honest. I mean, I commented that the reward was commensurate to the risk, you know, so we can imagine that it's positive, it's a good return. The raw costs are good, you know, producing oil off control Iraq is the best way to maintain our record with in terms of CapEx, this will take even like $7 per barrel, you know, so $7 per barrel, plus CapEx, gave you a good base to make competitive returns, you know, rather than other areas of the world. That's first. We commented on which other projects I commented.

Rio Grande, again, we have a good leverage. Again, for us, I'm looking to that as integrated way, because not only we invest in the project, but thanks to the investments, we negotiated, of course, I told you, a very good off take contract. The price is very competitive, and we make money. But we make more money than somebody who do not invest in the project, thanks to our downstream exposure, the off take contract. Also because it's a. In fact, we want to capture the infrastructure margin somewhere, leveraging it through, of course, the off take contract, that's the idea. Globally speaking, the integrated IRR is more than 15% on these LNG projects, you know, so 15, next to 20, in fact.

Just to give you an idea. Globally, it's a strong project for us. Which other I comment? I think, sorry, 2, I think. Germany, to be clear, the Germany projects, I've seen some figures, we are perfectly in line with our global business objective in Germany. And even more, because I'm absolutely convinced that the German electricity project price will be, will be, meeting when we come, and we have flexibility to deliver this TotalEnergies project later. Okay?

Irene Himona (Equity Analyst)

Thank you very much.

Patrick Pouyanné (Chairman and CEO)

Thank you for the question.

Operator (participant)

The next question is from Christopher Kuplent of Bank of America. Please go ahead.

Christopher Kuplent (Head of European Energy Equity Research)

Thank you very much. Just two quick ones, hopefully. Patrick, I wonder, as you are highlighting the more than 40% of CFFO payout ambition, whether you've learned anything from last year's special dividend? Is it a fair assumption to assume that the continuation of the $2 billion buyback run rate into Q3 is by now your preferred way of redistributing these, let's call them, extra proceeds from your expected oil sands closing? Just wanted to see whether you have a view on what the market prefers buybacks over a special dividend. My second question is going back to the LNG portfolio, which is growing nicely.

I wonder whether if you consider all your options that are still pre-FID, I would count Mozambique into that too, whether you think by the end of this decade, all these options will actually be in development and will be operating, or whether, to your point on CapEx, whether you're answering, actually it might be a good thing to have more portfolio options because then you can be tougher on the returns you can squeeze out of them from a project-on-project competition. Talking about PNG, Mozambique, of course, Arctic-2 is no longer in your consolidated numbers, you're very busy in the U.S., too. I'm not even mentioning some of the smaller assets. Sorry, it's a long-winded question, hopefully a relatively short answer. Thank you.

Patrick Pouyanné (Chairman and CEO)

It's always a very relevant question. I'm thinking exactly like you. I'm taking the second 1 first. It's clear that today, with this portfolio, we are in a position to arbitrate if costs are too expensive. To be clear, I think we'll make an arbitration in the U.S. because $850 per ton on the ground is better than the cost we are paying today from the additional train on Cameron. I mean, I have the option, and clearly, I'm very comfortable, and if the CapEx on Cameron do not decrease compared to the first feedback we give, we get to contractors, it will be easy for us to postpone it, and that will come later. We have 3 there, and not just 1. We can keep it in the portfolio.

We are delivering PTA Phase One shortly in Mexico. We have also the possibility to expand, there again, it's a matter of arbitration. We like the specific position, we can arbitrate it. The key for me is really what is the position of the project in terms of quarter and CapEx? It's very important to keep that discipline, because at the end, long-term projects, that's the key. On the recent PNG, we will see what will be the cost. At Mozambique, we know we have a public debate with some contractors, we are keen to deliver them, that's part of the plan. Again, as you said, we have a leverage, large portfolio, we work on all of them.

At the end of the day, if CapEx are not meeting our expectations because there is a heating market, we will arbitrate. Again, it's for me, I mentioned first North American project, because it's where we see many projects coming together, you know? I'm more, I think on the international arena, we'll find a way to make this project going through. Again, we are in that, I would say, comfortable position to be, to select the ones on which we consider we have a better returns. On the cash flow, because we are not exactly the same position last year. Last year, remember, the special dividend came of super revenues. We generated last year $45 billion of cash flows.

This year, we are more, I will not say it's so bad, it's $18 billion for after the 3 year, $33 billion, $35 billion, $36 billion. It's not $45, so we, the growth is making a difference between $45 and $36. Even if we see $4 billion for, from Canada, it will make $40 and not $45, $46. We keep the option, the debate is there. We also know that today the market is in on buyback because we consider that the share of TotalEnergies is undervalued compared to some of our peers. There is a certain logic, I think, from the board, which shows a trust in the share, that the share will be evaluated. That's my, the argument. With all these elements, I think you can make a conclusion yourself, or we'll see.

Let it be, I will clarify that on 27th of September to the investors and to the markets.

Christopher Kuplent (Head of European Energy Equity Research)

Very good. Thank you.

Operator (participant)

The next question is from Lydia Rainforth of Barclays. Please go ahead.

Lydia Rainforth (MD and Equity Analyst)

Thank you. Good afternoon. 2 questions, if I could. On the renewables business, clearly the capacity and development has gone up again this quarter to the 50 gigawatts. Can you talk about what you're seeing in terms of the costs of this? I think this was related a little bit to the German wind farm as well, that effectively, and people are worried about costs going up. I think sometimes the idea of the grid connection costs and the integration with the rest of the business gets missed. Just, are you worried about the cost base in renewables at this point on the CapEx side? Secondly, Patrick, probably, you, and we've seen oil prices rally in recent weeks, and we've seen refining margins rally more.

Can you just talk through what you're seeing in the markets in terms of demand at this point? Thank you.

Patrick Pouyanné (Chairman and CEO)

The first one, let me be clear. It's like exactly at the end, it's like an energy answer. We will invest in projects if we obtain the returns we get. You know, there is no. That's why, by the way, the German auctions were interesting. Because in fact, we have submitted a bonus to get the auction in our portfolio, in 10% of the global, I would say, bid, which is for me, I'm putting my auction, like when I'm buying an exploration license in Brazil, I could pay a bonus of $300 million, although it's very normal. There, in this one, I'm sure there is wind. The cost has to be there. You have the cost. Of course, we see that there is...

Again, but it's a question of, honestly, offshore wind, I've often been told you, I'm not surprised at the end, that the all major companies are coming into that business. It's really exactly the type of project that we are able to manage, project management. We can leverage the skills of the company, relations with contractors. It's exactly what we do in any offshore oil and gas project. For me, that is the right way to look at this, so I'm not worried. I'm just, you know, I'm not worried. I don't like CapEx in speed, neither in energy, nor in oil, offshore, nor in offshore wind, but it's up to us to leverage our purchasing power, and I think this is where we have an advantage.

I think TotalEnergies, in this business, I think in scale, has the value and the purchasing power of TotalEnergies, capacity to come. Recently, we have approved a very large solar module contract to cover part of our future needs, leveraging our purchasing power. That's where we need to work in order to be more efficient than others. I think this is what the state of technology are expecting from us, to be efficient. Again, the other point for us is that we consider that European electricity price, because of all what happened in Europe, no Russian gas, more renewables, nuclear, it becomes more expensive nuclear. Price will go on the right direction, yep, that's 1 machine fundamentally. We've been very visible activity, of course, but price.

We understand the concept, but we have, and it's up to us, you know, exactly same answer than on Romania. We have to manage the CapEx side. Refining margin? Can you hear me? Refining margin. Okay, where do we see the refining margin? I will say, today, on the 2 points. The first margins today, as I said, I think Jean-Pierre said that, no, $70 per ton, which is more the average for a month. They are supported as well on the gasoline by the driving season, I would say, which is quite, we have more consumption during in Europe and in the U.S., on both sides.

In the U.S., the inventories are quite low, which means that today we export gasoline from Europe to the U.S., which is good for my European refineries, and it's good that they work. They have a good performance availability today, of more than 80%. That's what we think on the gasoline, so we are positive on the gasoline. On the diesel, the demand is lower, it's true, because it's more linked to, I would say, the global macroeconomic environment. We can benefit also, you know, there is an effect in Europe when the Rhine is low level, low water, then you have some problem of supplying Germany, and then you create some bottleneck in our downstream business, so it's another part of it.

I would say, I mean, some I'm trying to get and can make me say, but we are more positive on the refining margin for the third quarter. That's what the, I would be surprised to go down to the $40 per ton, which we experienced as an average on the second quarter. I think the third quarter will be higher. That's my view on this market. By the way, when it's hot, you know, refinery and refineries do not like hot weather. Running of a refinery is not so good, in particular in the U.S., when the weather is too hot. It's good for margin as well. Next question, maybe?

Operator (participant)

The next question is from Alastair Syme of Citi. Please go ahead.

Alastair Syme (MD and Global Head of Oil and Gas Research)

Thanks, Patrick Pouyanné, Jean-Pierre. On Iraq, you know, I understand it's confidential, are you able to say maybe what your maximum capital employed exposure would be in the country? I mean, you know, we all see the $27 billion headlines, I just want to get some context. I'm just interested and fascinated in your comments about Germany having the highest power prices in the future, and that's quite a statement about one of the industrial powerhouses in Europe. You know, how do you think about the issue of industrial competitiveness and affordability for consumers? Thank you. Iraq, $3 billion, maximum capital employed, $3 billion. You know, we have 45% of CapEx, which are around $10 billion-$11 billion, we have also oil production coming on stream immediately, you know?

Patrick Pouyanné (Chairman and CEO)

The beauty of the contract is that right now, we feel it's producing, we'll stabilize very quickly the production to 50,000, 60,000 barrels per day, very quickly. Our teams are already, we work just on the air. We have a phase on increment of the improvement of the oil production up to $90, $120 per barrel per day, and then going to $210. We have some cash coming in, so it's a way to generate a lower oil exposure. It's part of the key to win we have in Iraq, so keep that in mind. $3 billion, for me, it's very acceptable with the three R, so that's the clear answer to you. Germany industrial competitiveness. Okay.

I mean, I mean, it's a more global question. The question will be more for the state, which is what will be again, and we see that, what will be the support of states to energy intensive industries? In fact, that's the question now. You know, I think, in, in Europe, thinking that the price of electricity might be around 70, 80 EUR per megawatt hour is not a bad bet, in fact. That might might work. It's a matter, of course, I will tell you, of, we go to some ministries. It's long-term commitment. They're always the same for me, when I'm answering to the government, to the customers. If you are ready to take some long-term commitments, we can lower the price.

In fact, you know, that's just a question of if you want to stay spot, your competitiveness will be tough. I can tell you, I don't recommend to anybody to invest in Europe based on spot prices, you know, because then you could be in trouble. We did, we discovered last year, I would say. I think, the question for me is, yes, we are involved for industrial competitiveness in Europe and Germany, if we are able to put together some long-term contracts. I think this is part of our intent with this offshore wind development, will be to commit some of the capacities to this type of long-term contracts and to be part of it as merchant.

We have this famous, 70/30, but we know that this is the type of price we can obtain today in Europe, in Central Europe, and people are ready to commit on this level of pricing.

Alastair Syme (MD and Global Head of Oil and Gas Research)

Patrick, can I ask you know, when you speak to politicians, are they surprised about EUR 70-80 megawatt hour sort of number? I mean, that's twice what it used to be, right?

Patrick Pouyanné (Chairman and CEO)

Yeah, the people, the world has changed, the world has changed. I mean, we have to be clear, politically, by the way, the energy transition has an impact on the energy prices, and there is no way to make the transition in Europe without having a higher prices. I think they understand, you know, the new nuclear is not under the prices I just gave you know, I can tell you. You can ask to the UK investors or to the French government, you know, I will tell you. I think it's part of the transition, and again, you have to adapt towards this, but including, at the end, the customer will have to accept to pay somewhere the cost of this energy, the cost of the transition.

You know, I observe as well in the U.S., that today, the front oil contracts and even the solar contracts in Texas, begin to increase a little, you know, and to recover. It's, it's part of the... We have to keep that in mind. The energy transition will happen if we are to accept some cost increase. We have a super efficient system, which is human gas system, and we want to move to a system which is not as efficient in terms of energy efficiency. That has a cost, that has a price, and it's a, it's a real question for all of us, is at which phase we make that transition in order the customers to accept it. It's what we call the just transition. We, we have to manage the transition. If it's just a jungle, we will be rejected. That's...

I'm not sure they are so afraid. It's just a matter of accepting the reality, we have to be consistent. It's a question for industrial competitive, for European manufacturers to be competitive and for me to have, like the U.S., by the way, to take actions. You know, as we are accepting this price of CO2 somewhere, we have to protect this industry. Otherwise, if only Europe is integrating price of CO2 in products and not the other countries, we'll have an issue for sure.

Alastair Syme (MD and Global Head of Oil and Gas Research)

Great. Thanks for the call, Patrick.

Operator (participant)

The next question is from Biraj Borkhataria of RBC. Please go ahead.

Biraj Borkhataria (Director, Co-Head of European Energy Research)

Hi. Thanks for taking my questions. first one's on your LNG business again. In, in the past, I think you used project financing to deliver some projects, but obviously your balance sheet is extremely healthy at this point, and you probably have some capacity to take on some more CapEx. Could you just talk about your plans and whether it's Rio Grande, Mozambique or otherwise, and your intentions on financing and how you're thinking about that split between balance sheet and off balance sheet? The second question is just following up on Al's point on competitiveness. Obviously you have a, you know, a refinery in Germany and chemicals operations.

You know, with your view on higher power prices, obviously that will feed into gas prices and then, you know, you've said you won't take, Russian crude. How do you think about what more you can do in your operations to remain competitive in a, in a global context? Thank you.

Patrick Pouyanné (Chairman and CEO)

The project financing in LNG is part, you know, by the way, Rio Grande has been announced with a project financing. I think it's globally speaking, a $15 billion CapEx with. I think it has been announced as a 70%/30% project with a package of loan or blending project financing has been announced as well. We, anyway, we helped them. We contributed to that. GIP has strongly contributed to that by becoming a shareholder. I think it's easy to finance. It's competitive in terms of interest rates. Because we are working hard on it between GIP and TotalEnergies in order to get good commercial terms, and this is the case.

In Mozambique, the package was already there, you know, and has been preserved, I would say, because if you remember, when we stopped the project, we stopped, we maintained all the project financing.

Jean-Pierre Sbraire (CFO)

We closed the project financing, but it will, what I'm guessing with the others, of course, we will start up of when the Mozambique project will restart, of course.

Biraj Borkhataria (Director, Co-Head of European Energy Research)

... to unfreeze the project financing.

Patrick Pouyanné (Chairman and CEO)

The conditions are good. As soon as conditions for project financing are okay, and competitive to our equity, I would say, I think we'll maintain that stance. PNG, I don't know, I'm not yet there, I think, today on these projects, but we are working. Japanese banks are very attendant to finance PNG, you know, and you could have good conditions with Japanese banks in that part of the world. On, from us, it's, I think we are fine with that, and it's part of the way to globally have the returns I mentioned to you on Rio Grande, for example, 15%-20% are taking that into account. On the view, and It's true, that's what you said.

It's perfectly true, you know, yes, I can tell you, when we look to our refining breakeven in Europe today, 2023 compared to 2021, no more Russian gas, no more, plus CO2 pricing, less quota at the end, there is an impact. I think the breakeven went probably up from $25 per ton to $30-$35 per ton. In the end, the question is we have to work in order to find the efficiency way to compensate it. This is why, by the way, you know my position on refining in Europe, huh? It's a good way to transform to biorefineries, you know, the question is the pace of it. I mean, we are managing that for already, we have transformed two refineries.

Next one will come, as I told you before, because we understand that the question of competitiveness, and we take it into account in our industrial decisions. That's obvious, so I cannot hide it, and I think. Again, the question will be then on this type of, it's probably more complex for refineries in Europe because they are fossil fuels, you know, we don't like that too much. At the end, it's a question of security of supply for the government, and this is the debate we have to that. If you want to maintain this activity in Europe because you still need your gasoline and diesel, and you don't give us conditions in order to have an attractive, I would say, returns, we might take decisions which might be detrimental.

Again, there are also positive ways to look at it. We are working today to see how we can leverage all the RED directive in order to get the green hydrogen, and it could create additional revenues, in fact, when you look carefully to the new scheme, which has been published by Europe. You can see the cost, CO2 as a cost, but CO2 might be a source of revenue as well, when you combine green hydrogen with fuel products. We are working on two projects, one in France, one in Germany, which will bring additional revenues, and which might compensate part of the lack of competitiveness. I think it's two ways to look to the energy transition. If I look at the cost of an opportunity, it's a tight framework I put into in place.

It seems to be the case for green hydrogen, there is a strong push. That might become a new source of competitiveness for refineries in Europe, and we are working on it. I think in September, we'll be able to come back to you and to give you two good examples where we created value from, I would say, these energy transition frameworks. That also, I will see in the negative and the positive way to go into that. By the way, I'm convinced that the transition will work only if we create opportunities and not just increasing costs and prices, you know?

Biraj Borkhataria (Director, Co-Head of European Energy Research)

Great. Thanks for the call.

Operator (participant)

The next question is from Kim Fustier of HSBC. Please go ahead.

Kim Fustier (Head of European Oil and Gas Research)

Hi. Good afternoon. Thanks for taking my question. Firstly, just on your existing targets on renewable capacity, I was just wondering, what is the acquisition of the 71% stake in Total Eren, and then other deals as well, that you've announced? What do those do to your targets, particularly the 2025 target of 35 gigawatts? If I recall, you'd already reached a pipeline of over 35 gigawatts more than a year ago. Does that mean there's upside to that 35 gigawatt target, or do you have the opportunity now to pick and choose the best projects, as you'd already talked about with respect to LNG and high-grade your project portfolio?

My second question is around reports a few months ago that TotalEnergies was looking at a major gas development in Saudi Arabia, together with Saudi Aramco. I just wondered what the angle is here. Is this about the domestic market, or more about exports in the form of either LNG or green hydrogen or ammonia? Thank you.

Patrick Pouyanné (Chairman and CEO)

You don't have a good information on the second one. I don't think you should believe all what press agencies are writing in the paper. Second one, because as long as I know, Sir, Eurasia has a monopoly on the trade gas. Second one, first one, now to be clear, it was actually in our mind, the acquisition of Total Eren will be part of our roadmap. When we said the 35 gigawatt, the acquisition of Total Eren was already there. Be careful, there is no financial or element. We knew that Total Eren was working well. We knew what were our conditions to leverage our option, and with the figure I gave you, EUR 400 million, you, it is the EV, you understand that we can easily, it's an attractive multiple, we use that.

For me, there is nothing additional. By the way, now you know, we are also working on value and volumes, and on all these points for me, of course, there are some symbols, the 35 gigawatts, and we are working. There are optionalities, and, by the way, the offshore wind Germany is not there. It will be 2030, not 2025. There is no way to build 3 gigawatts offshore in 3 years. What more I'm thinking to that, again, is more if we have more opportunities, we can arbitrate different projects, right? Because you have in my portfolio more opportunities to reach a target, but we're moving the target up and developing all the volumes. Not volumes over value. We know that when you do that, it's value over volume.

I'm happy that the teams are able to generate opportunity, and then we might select the ones which are the best for us. And more importantly, when the gigawatts, by the way, at the end, for me, what is important is because it's clear, we focus on it, is what, how much terawatt-hour it looks like for oil and gas. In oil and gas, you love my 2.5 million barrel oil per day. You will have to learn that we work, we speak more in kilowatt-hour per year rather than in gigawatts. You know, kilowatt-hour per year, that's what create the revenues, the reserve, and the profit, and the cash flow. I think we should move in that field as well, because for me, it's, it's improving.

You know, we reach quickly 50 terawatt hours per year. 50 terawatt hours per year, we're looking the 50 largest utilities, so it's not small. Let's think in terawatt hour per year rather than just in capacities. At the end, what is important is delivering revenues, cash, and results.

Kim Fustier (Head of European Oil and Gas Research)

Thank you.

Operator (participant)

The next question is from Lucas Herrmann of Exane BNP Paribas. Please go ahead.

Lucas Herrmann (Head of Oil and Gas Research)

Thanks very much, and that's been answered a couple of I might. First, Patrick, Arctic two. Do you have any interest remaining in that project? I'm just conscious of, you know, Novatek's comments around, you know, starting startups, so on and so forth, and, you know, the original position, even though you obviously have not been funding anything. The second question was just around going back to balance sheet and how you think about, you know, gearing debt levels, you know, absolutes at this time. Is the range still 10%-20% something you're comfortable with? Just a reiteration, really. That was it.

Patrick Pouyanné (Chairman and CEO)

It's just a reiteration. We told you before that it was less than 15. We are 11, and I told you already, when you have a positive treasury, I'm happy, you know? I think the best way to protect an oil and gas company is to have the strongest possible balance sheet. It's a question of arbitration, and you remember the scheme we gave you is very clear. Dividends, CapEx, and then strong balance sheet, and even targeting potentially a double rating, if we can. I'm still there. It's a question of, then we have the buyback, so we have the board is looking to all of that. Recently, by the way, Jean-Pierre has bought back EUR 1 billion of hybrid debt.

You know, we have decided to lower the hybrid debt because we thought it was a good way to maneuver. You know, balance sheet is important, no, it's 10, not 10, 20. It's less than 15, and lower, as low as possible. That's my thinking on the subject.

Lucas Herrmann (Head of Oil and Gas Research)

I think my people will agree.

Patrick Pouyanné (Chairman and CEO)

I agree.

Lucas Herrmann (Head of Oil and Gas Research)

I am.

Patrick Pouyanné (Chairman and CEO)

No, it's clear. Arctic 2, as we have said in March 2022, we don't bring any capital from TotalEnergies SE to this project. You know, the project, when we left, was in fact, the equity was already injected, and it was more project financing, in fact. For the project is moving on, we didn't put a single more equity from TotalEnergies SE, from Paris. Today, yes, we still are around, but honestly, I have zero information because, as you know, governance, we decided to leave all the Russian assets. I cannot tell you what is really happening there. I read the newspaper like you.

Lucas Herrmann (Head of Oil and Gas Research)

Okay.

Patrick Pouyanné (Chairman and CEO)

There was no representative of TotalEnergies of this last ceremony.

Lucas Herrmann (Head of Oil and Gas Research)

Remind me, did you have any legal liability to offtake volume? From memory, you were 2 million tons of heads of agreement.

Patrick Pouyanné (Chairman and CEO)

If the plant produce, we have some offtake volume. Yeah. I don't remember exactly how much it is, but the contract, it's like Yamal. You know, Yamal, we have a long-term contract, 25 years. It's a take-or-pay contract. We have one on Yamal. Today, we only offtake the long-term contract on Yamal. There's absolutely nothing else than the long-term contracts, no spot, no additional volumes. We have reduced our Russian activity to the only long-term contract. That's the reality of what we do. If Arctic LNG 2 came on stream, we'd have a commitment. I don't remember exactly. I should read that. To be honest, I didn't spend much time on Arctic LNG 2 for the last year. My team will be able to tell you exactly what is the volume.

We have a lower share in Arctic 1, but 10% and not 20% on Yamal, so I think it's well proportionate. By the way, so we'll see, but we can come back to you. Again, the same policy will apply. If we have a contract, we have a contract. We have to execute and to the contract, as long as sanctions do not prevent to do it. That will be the same policy, but we can come back to you on exactly what is the offtake volume with the 10%. Independently of our shareholding, what happens to our equity, the contract, the offtake contract is that.

Lucas Herrmann (Head of Oil and Gas Research)

Okay. No, thanks very much. Good summer.

Operator (participant)

The next question is from Jason Gabelman of TD Cowen. Please go ahead.

Jason Gabelman (Director and Analyst)

Yeah, hey, thanks for taking my questions. First, just on the Novatek dividend, I believe historically you guys got it in Q2 and 4Q. Wondering if you received the Novatek dividend this quarter, and if, and if not, what the certainty is you will see them moving forward? My second question is on global gas. You know, there's a lot of concerns around European gas storage actually filling over the coming months out of winter draw season. Given your unique position in operating European gas assets, just wondering what your outlook is for the European gas market in the fall?

kind of an extension of that, how these tighter gas oil spreads have impacted your outlook, for trading, given last year, integrated LNG trading was particularly strong, in part because of the wide gas oil spreads. Thank you.

Patrick Pouyanné (Chairman and CEO)

No, we did not receive any dividend this quarter. That's the first answer. Second one, in new gas storage thing, it's clear that the storage will be full by October. Today, that's why you have a soft gas price, $10 per million BTU. We don't anticipate difficulties because we exited the winter high, with high inventory, so it's easy to replenish it, and so it will be down. That's why today, but then, as I always explained, if the winter is cold, if the Ukrainian pipeline, the gas from Russia going through Ukraine is stopped, the situation will be quickly in tension, you know?

Cold weather, if on the top of it, China is recovering their activity and is buying more LNG, which it seems to be the case today, we have another additional factor of tension. The situation in Europe will be what it is, you know. We are relying on the meteorological conditions, plus external events, including the ones I mentioned about the transit through Ukraine. That's the reality. That's why, by the way, the full price of European gas is at $15. The price in the $15 next week, next January, next first quarter, the first half 2023, is higher because markets see more risk than more, obviously, bearish bull factor than bearish one. I think that's the reality. What happens, what will happen? We'll see.

We'll see what will happen. That's an element of tension. By the way, it's also why today you don't see manufacturing industry in Europe shifting from fuel to gas. Last year we've seen a little, because the price was very high in 2022, the manufacturing industries are shifting from gas to fuel. We could have expected that at $10 per million BTU, the price is lower than the fuel price today in Europe, they stay on fuel because they are afraid what could happen next winter. It's an interesting behavior. That's why people say the demand of gas in Europe is lower and stays low, because in fact, they should make that shift on the short-term price.

They don't do it because they are still afraid, but there is no stability, I would say, in the gas price in Europe, the volatility. That's why, by the way, our traders, you know, traders in TotalEnergies, they love volatility. They make more money. This quarter was lower volatile, so lower results. We could expect wintertime generally, the volatility is higher. That's what I can tell you.

Jason Gabelman (Director and Analyst)

Thanks for that color. Just to clarify on the first point on the Novatek dividend, should we assume that you stopped receiving it moving forward?

Patrick Pouyanné (Chairman and CEO)

I don't, I don't know. We are, that does depend on us, you know? It depends on others. I think I just answered you. Honestly, I have decided, the board and the Chairman and CEO of TotalEnergies, has decided that Russia is not, no more in my account, it's not clear. We do not plan any distribution or any shareholder returns linked to any cash flow coming from Russia, to be honest. The way we think, if we think about Russia, the board and the figures I'm showing to the board are without Russia. That's all, because anything could happen, so I prefer to show the case. If something is coming, it's coming, but we are not shading it.

It's more, that's the way we think in TotalEnergies, that the consolidation was a very clear decision by the board in December 2022. This is the way we manage the company.

Jason Gabelman (Director and Analyst)

Thanks.

Operator (participant)

The next question is from Henry Tarr of Berenberg. Please go ahead.

Henry Tarr (Analyst)

Hi, and thanks for taking my questions. I had two. One, just coming back on the hybrid debt. Why did you choose to buy back some of the debt, and would you think about buying back more in the future? Then kind of, you know, what did you have to pay for it? Then the second question is on the downstream. You're talking about changing refineries into biofuels and biofuels platforms. How do you see profitability for the biofuels platforms in Europe? How are you getting on sort of securing feedstock for those platforms? Are you seeing increasing government support for sustainable aviation fuel and, you know, renewable diesel and other biofuels within Europe at the moment? Thank you.

Jean-Pierre Sbraire (CFO)

First question regarding hybrids. At present time, our hybrid portfolio at has very low costs, below 3%. It's 2.4, if I remember well. We have the flexibility offered by SMP to diminish the global level of hybrid, minus 10% on a yearly basis. In May, we have a tranche maturing, we decided to use this flexibility. Otherwise, in the market at present time, the hybrid cost increased compared to the 2.4% I mentioned to you, it's around 5%. Given the cash we are able to generate at present time, with Patrick, with the board, we think we do not need to renew this hybrid tranche. That is the main driver behind the decision not to renew this tranche.

We decided to get rid of this EUR 1 billion. Yes, at present time, it's the cost of the hybrid in euro, it's more than 5%. It makes no sense to.

Patrick Pouyanné (Chairman and CEO)

That means that the decision this year could be renewed the next year?

Jean-Pierre Sbraire (CFO)

Yes.

Patrick Pouyanné (Chairman and CEO)

Just to, because we don't want to incur changes behind us, right? You know, it's just a management of.

Jean-Pierre Sbraire (CFO)

The cash.

Patrick Pouyanné (Chairman and CEO)

The cash and the balance sheet of the company, so I think it's an obvious decision, it makes sense. On the downstream, no, we have changed, and we finally did do biofuels. We've changed La Mède, we are changing Grandpuits. I told you that will be others. In fact, you there is a clear framework in Europe. That's why I'm comfortable in Europe, because you have some mandates in Europe, and in particular, the sustainable aviation fuel in Europe is a mandate. It's not just a target, you know, it's a mandate. When you have a mandate, immediately you create a market and a pricing, which will integrate the CO2 cost. I'm comfortable to invest because I think that really Europe is very serious about the...

We have a 6% mandate by 2030, which is increasing to 15% mandate in 2035. It creates a market, positive market. The big question is, how do you produce it? We like old refineries because we have a CapEx per ton, which is lower when you make it greenfield. You will not see TotalEnergies investing in greenfield refineries to make start, to be clear. I prefer to convert the old refinery. By the way, it's part of the transition. We are realizing the demand for gasoline and diesel will diminish in Europe. We have more EVs in 2035, so you need to prepare the transition. Transforming, we can reuse some units to make a bio refinery. The CapEx per ton is around $500-$600 per ton.

The greenfield one is around $1,000 per ton. Let's convert rather than creating new greenfield refineries. That's fundamentally of you. We need to find a feedstock, yeah, to arrive, and the feedstock in Europe is an issue because they want, they don't want 1G. There is no 1G vegetable oil in south. We need to secure it. We don't want to import used cooking oil from far away and being trapped into I don't know which story about waste imports, you know, think it's not good approach. There are ways, you know, we have secured feedstock from Grandpuits by a JV with a German company. We produce animal fats, so we are looking to that segment.

We are also beginning to look to another technology, which is Alcohol-to-Jet, which might be the next one. When you look to, in fact, the balance of the European market by 2035, to reach a 15% mandate, it will be difficult to be done only with lipid feedstock. I mean, with used cooking oil or animal fat. We could have to be over relied, it opens the room to addition next technology. We try to select the ones which don't need the most expensive. We not need, we don't need issues, we might have technologies in between providing the SAP in, I would say, a little more expensive, but not the most expensive one. This is the way we approach this issue.

Again, for me, it's, for us, the focus will be in Europe again, because we have the assets, we know we have to make the transition. It's an opportunity which is, in fact, given to us by this transition and all these famous European Green Deal frameworks. Let's see the opportunity. It's like I said, green hydrogen is the other way to compensate everything, the cost of CO2 and the cost of energy in a positive way to create new markets and to decarbonize the airlines. That's the way we look at it. We work, and we are working on the third one.

Jean-Pierre Sbraire (CFO)

Great. Thanks.

Operator (participant)

The next question is from Henri Patricot of UBS. Please go ahead.

Henri Patricot (Associate Director and Equity Research Analyst)

Yes, thank you, Jean-Pierre. Thank you for the update. 2 questions, please. The first one, I wanted to come back to integrated core and the strong performance in the 2nd quarter with the earnings at Sakhalin. As a team, can you give us, you know, some details on the driver of the sequential improvement? For instance, I see that net power production is down quarter on quarter, so curiosity here, what was driving the improvement here sequentially? Secondly, on Mozambique LNG, if you have an update to provide on the timeline, next milestone for the project before we can fully restart. Thank you.

Patrick Pouyanné (Chairman and CEO)

Mozambique LNG, we are working on both parts. One is with the contractors, and I expect that to be done in the second half of this year. We'll have the answers, and I hope it will be positive for them. Then we are working also, like Jean-Pierre told you, on the relaunching, defreezing the financing. I think my objective for us is to come to you and to have a before year end, and we say, we should have a clarity on the way forward. Again, we need to not hurry, cost before and I think let's do it, well, step by step properly. That's, I would say, as the objective we have. If we need to wait a little more, we wait.

Integrated power, I think Jean-Pierre in his speech gave you some indications. He told you it's coming from everywhere, you know? I can give you the but you know why. In market, for example, in supply business, the winter is always more tough in terms of business because we have an average cost of supply, more demand, so you have a sort of seasonal effect. I think when you look, you are probably following some utilities, you can see the seasonal effect. It's positive, it's more positive in the season, in first quarter. The second and first quarter are more positive, but we have also a good performance coming from our flexible generation capacities because of the, I would say, the spread between the gas and electricity.

We have some good results from trading as well, and we have positive results from renewables. Everything is increasing, I would say. There is not one, it's everybody contribution. By the way, it's why the more we look at it, the more we think our approach of integrated power, and this is why we report to you these results in this way, and I will report the results of refining and chemicals in an integrated way, and so I think, yeah. No, nothing special, everything was positive, which is a good source of, I would say, confidence for the future on this one.

Christyan Malek (MD and Head of the EMEA Oil and Gas Equity Research)

That's it. Thank you.

Operator (participant)

The next question is from Paul Cheng of Scotiabank. Please go ahead.

Paul Cheng (Analyst)

Thank you. Two questions, please. Patrick, any update you can provide on Suriname? With that, I know that you guys will not be ready yet, but any type of preliminary capacity for the first FPSO, assuming that that's going to go forward, and also the timeline that you would expect for the first order. Secondly, that just want to see if you can share over the past several months, what's your investor feedback given the changing market conditions about your teams are investing in the low carbon, et cetera, and the wind and solar power business as well? The matter, think that the pace is right, or that do they think that the pace should be accelerated or decelerated? Thank you.

Patrick Pouyanné (Chairman and CEO)

Paul, I capture the first question. Sorry, the line is not very good here, but it's on this one. I capture the first question, I think, is about Suriname, I'm sure. The second.

Paul Cheng (Analyst)

Yeah.

Patrick Pouyanné (Chairman and CEO)

is about investor feedback on our integrated or no renewable integrated power business. I understood carefully. Is it right?

Paul Cheng (Analyst)

Yeah.

Patrick Pouyanné (Chairman and CEO)

Did I capture the two questions? Yeah? Okay, good. Suriname, okay, I told you that we have, we are just finalizing the test of the last appraisal well. I will give you a meeting point in September because my teams are working. I gave you a big positive indication that since that, we are moving forward with development, but I want the teams working to take all these results together, to put that together, to have a case. I think we'll have a case for development, for sure. Exactly what will be the sign, I told to my team to take few days, you come back to me end of August, September.

We'll answer to you with a clear, I think we'll have a clear idea by September 27th. Come to New York, and we'll have the answer to your question if not before. Obviously, we worked on it. I can tell you, we have an integrated group of development, so if it's positive, sanctions might be targeted by end of 2024, what I would say, and then it's a question of execution. More or less what I have in mind, but again, I want to. There are still some debates about what could be the sign exactly. The news that I read about the data seems to be quite good. That's on Suriname. Just a little patience, it will come.

I mean, our investors, you know, they are just investors, you know, they want to have the cash, you know, they want to have dividends and cash flow. If we demonstrate that this business is contributing, then that's the question mark for us. I think before I will be trying to publish this result, demonstrate that it is profitable, but we may generate cash flow. The question for us will be when does it become net cash flow positive? Again, we are working hard on that because our objective is that this should be a positive cash positive generator. We invest more or less in these integrated power business, $4 billion per year. When do we have the threshold for $4 billion?

And that, again, we'll come back to you in September on that because it's also part of the question. The question coming from investors is, we understand you are in transition. I think the message is, okay, if you focus on one thing, let's focus on it. That's my message, let's simplify. Again, I think it's a matter for us to. Obviously, I think the last, what we clarified in the last year, which is in fact we want fundamentally to apply to this integrated power business, the same way we think in Oil India, the productivity, capturing, integration. I think it's a right answer to investors, that's where we are today. We'll think about strategy a bit there.

We might simplify it from some molecule part, but we are clear on this one.

Paul Cheng (Analyst)

Thank you.

Operator (participant)

The last question is from Giacomo Romeo of Jefferies. Please go ahead.

Giacomo Romeo (Equity Analyst)

Yes, thank you. I have one last just based on cash flow this quarter, and obviously showing the impact of your hedging position integrated LNG. Just want to check if you can remind us sort of, what sort of the hedging level for the remaining quarters of the year, and whether you are still continuing the into your rolling hedging program, and given where the current gas prices are looking for next year?

Patrick Pouyanné (Chairman and CEO)

Well, you know, it's a strong, it's a clear policy. We are hedging more than 80% of the portfolio. What has been done in 2022 for 2023 is one, and we do the same for 2023 for 2024, and 2024 for 2025, and that's it. You know, we have a merchant exposure on our balance sheet in LNG, and we assume it, but we try to, I would say, to cover part of it and to keep some of it matched. By the way, you know that we have decided that all the Russian LNG should not be hedged, because I'm not sure that that will continue. I mean, so it's part of the answer.

It's continuing, that's why, you should expect the next quarter in terms of cash would be to remain more or less positive, because if I remember well, the 4 for 2023 and 24 2023 were higher than the 1 for Q2. The war began in March, you remember the peak of the prices were in Q3, Q4, not in Q2. We should have good cash flows. There is something I do not understand my business, I think we understand. No, I'm clear. I'm very clear.

Giacomo Romeo (Equity Analyst)

You're joking.

Patrick Pouyanné (Chairman and CEO)

No, I'm joking. Yeah, I don't know. No, it's clear. The core of the hedges will come on the second half of 2023, more than the first half. Okay, Giacomo. Thank you to all of you for your answers and your participation. I know that you have a busy day because we are three company, European companies that deliver results on the same day, right? I will not be longer. Just again, the key, I think, on the reserve of the first second quarter, we demonstrated that we are profitable, 22% for actually. We have a strong cash flow, including from LNG, $8.5 billion, much stronger than, I would say, the decrease of the environment.

Further, of course, we are committed to the distribution to shareholder by maintaining the buyback at $2 billion for 5th quarter in a row, despite the softening environment. With this message, have a good vacation, have a good summer, and I hope we meet all of you on September 27th in New York for our update on strategy. It will, and just to remind you, we took your lesson, that you don't want to listen too much to us, so we'll, it will be only 20 minutes morning, and then we'll have a lunch with you and answering questions. Thank you for your attention, and have, again, a good rest of your summer time. Like we will have. Thank you.