Earnings Call Transcript
Eni Spa (E)
Earnings Call Transcript - E Q4 2020
Claudio Descalzi, CEO
Good afternoon and welcome to Eni's 2020 result and strategy presentation. Due to COVID restrictions, we are live streaming today from our R&D headquarters in Milan. At this time last year, we were presenting our long-term strategy. Today, we are taking another step forward in boosting our transformation. Since 2020, we have further improved and accelerated our strategy and we can now announce our commitment to be fully carbon neutral by 2050. In line with this target, we are also announcing the merger of our retail and renewable businesses. This will allow us to be even more efficient in reaching our Scope 3 target and to extract more value from our unique retail customer base. We remain committed to becoming a leader in producing clean energy and offering our customers a full set of decarbonized products. Strong financial discipline remains the key component of our strategy, with a material reduction of our cash neutrality. We have built a robust balance sheet, with resilient cash generation, to respond to market evolution. All these actions are aimed at maximizing value creation for our stakeholders and enhancing our remuneration policy. Let's now recap both actions and results of 2020. We'll never forget this exceptional year which was marked by the most unexpected and destructive challenge we have ever faced. The pandemic affected everybody's life, every activity, and the energy industry with a magnitude that exceeded all previous crises. In tackling COVID-19, we acted quickly, finding inside our company the energy, resources, and flexibility to overcome the crisis. We immediately worked on three priorities. First, we protected our people and the integrity of our assets. We safeguarded each of the 60,000 women and men that work with us and around us worldwide. In less than 24 hours, 99% of our Eni employees in the main offices and 70% in our operational sites were converted to smart working. At the same time, no operational interruptions due to COVID were recorded. Second, we preserved our balance sheet through three budget revisions. By leveraging our flexibility, we cut CapEx by one-third and implemented material and structural cost savings. Thanks to this action, we succeeded in minimizing the impact of COVID-19 on our balance sheet and keeping our net debt flat compared to last year. Third, we changed our organizational structure to better fit with the new strategy. We set up two business groups to pursue our long-term targets – Natural Resources to integrate and decarbonize our upstream and gas marketing operations, and Energy Evolution to transform and sell zero carbon products to an extended client base. In Natural Resources, we recorded production of 1.73 million barrels per day, in line with our post-COVID guidance. In exploration, we discovered 400 million barrels of resources in Egypt, Angola, Mexico, Vietnam, and the UAE. Global gas and LNG delivered exceptional performance, driven by the flexibility of our portfolio and our trading, which was able to capture the value of the market volatility. We are continuing to reduce our carbon footprint with Natural Sink through our various initiatives. And we are progressing with our project on carbon capture and sequestration. In Energy Evolution, we are accelerating our plan. In Renewable, we have 300 megawatts of installed capacity, with new project data in Italy and Kazakhstan. Additionally, we are developing 700 megawatts through important joint ventures in the US and the UK, where we entered with a material stake in Dogger Bank, our first offshore wind project. In the near future, retail gas and power, which delivered an outstanding EBIT result last year, will be able to sell green power to its clients in an expanded geographical presence. In line with this approach, in January 2021, we entered the Spanish market with the acquisition of a local retailer and the development of three new solar plants. Even in a year of lockdown, marketing and biorefineries achieved record results proving their potential combined value. Our rapid and extraordinary reaction is clearly proven by our financial results. Eni remains organically free cash flow positive with net debt kept stable at €11.6 billion. Now, regarding our strategic plan, Eni will be a zero carbon energy company by 2050 in Scope 1, 2, and 3, and we are all focused on this target, with the ultimate goal of being a world-class investment case. Our strategy is built on three key pillars. First, decarbonizing operations and products. Consistent with what we presented last year, we will deliver our customers an entirely decarbonized mix of products. Second, diversifying and expanding our businesses in retail and renewable by product and circular economy. Third, increasing the resilience and flexibility of the company to absorb price volatility. Selective growth, increased efficiency, and right-sizing will continue to ensure value and high returns in all our activities. The three pillars of the strategy are based on two solid foundations. First, minimizing environmental impact, addressing issues of social inequality, and fostering a strong governance model to achieve UN SDGs and increase value for all our stakeholders. Second, technology and digitalization will de-risk our current operations and accelerate our transformation. Technological innovation is an essential part of Eni's DNA. For decades, the application of our technologies has been a distinctive factor for us. Digitalization, thanks to our proprietary algorithms and top computing capacity, has been and will continue to be a competitive element along the value chain. This starts from our exploration where we have been delivering outstanding performances through our industrial processes to preserve the integrity of our assets while maximizing efficiency and minimizing time to market. Our large customer base will be offered enhanced customized services. Eni's R&D, with more than 7,500 patents and 450 projects, will be a catalyst in accelerating energy transition. Ecofining, Eni's proprietary biofuel technology, is at the heart of the Gela and Venice plants, while our waste-to-fuel technology is moving to an industrial application. In chemicals, we are expanding the use of vegetable biomasses to create high growth and value chains such as second-generation bioethanol and advanced biofuels for several applications including intermediates for bioplastics, electronics, cosmetics, and agrochemicals. We are already commercializing high-quality products from the mechanical recycling of post-consumer plastic waste with recycled content up to 75%. Additionally, we are developing pyrolysis technology to recycle mixed plastic waste. In carbon sequestration usage, we are developing two additional technologies. One relates to CO2 mineralization in the cement formulation process, where we have a pilot project ongoing in Ravenna. The other relates to microalgae biofixation, with a pilot project in Sicily and plans to develop an additional project in our Gela biorefinery. We are strongly focused on developing new technologies and breakthrough solutions, collaborating with more than 70 international research institutes and universities. Overall, during the four-year plan, we will spend around €1 billion on innovation, which will also feed our green and bio-transition. We will additionally invest around €4 billion organically in all our transformation processes. Now, let's get to the heart of one of the major improvements we are announcing today. Eni will be carbon neutral by 2050. In last year's strategy presentation, we announced our target covering our Scope 1, 2, and 3 emissions. Based on our fully comprehensive methodology of GHG assessment, we consider all activities and every product we trade to achieve a reduction of absolute emissions by 80% by 2050. This year, we have improved this target, committing to reach carbon neutrality. This is not just an aspiration – it is a target. We have defined this in consideration of all our activities while combining economic sustainability with industrial implementation. Our commitment is further confirmed by including our decarbonization target in our management remuneration policy. Full decarbonization of our products and operations is achievable through existing and proven technology, including biorefineries whose capacity will increase fivefold, the circular economy through a large use of biogas, and the recycling of organic and inorganic waste material, efficiency and digital solutions in our operations and customer services, renewable capacity fully integrated with our clients, and blue and green hydrogen to lower CO2 emissions in our biorefineries and other hard-to-abate activities. Gas, which in the long term will constitute more than 90% of our upstream production, will support our transition as a backup for intermittent sources in power generation. Furthermore, natural and artificial carbon capture will absorb residual emissions. Looking at the four-year plan of our two business groups, in Natural Resources, we have two main goals: reducing our cash breakeven and our carbon footprint. In upstream, we will further lower the price level needed to generate free cash flow after CapEx. Over the last few years, we have materially reinforced our upstream business, reducing its cash needs while continuing to capture new business opportunities. This will result in a drop of our upstream CapEx coverage by almost $10 per barrel to $28 per barrel during the plan. This reduction will be driven by an even more focused aspiration in synergy with our existing facilities, short-cycle development projects, and structural savings in operational costs and G&A. In the plan, we will invest an average of around €4.5 billion per year, half of which will be required to fight depletion, while the other half will be directed toward growth. We retain enough flexibility to absorb price volatility if necessary. In the last two years of the plan, more than 55% of our CapEx is uncommitted, making our upstream even more resilient to lower scenarios. Upstream resilience starts from exploration. For us, this activity has been a strong cash contributor over the last decade and will be a distinctive and critical success factor for winning the energy transition. This is the main source of our low breakeven portfolio and the starting point of our value creation with an average unit exploration cost below $2. It will be key in enabling our transformation toward a gas-rich portfolio. Our future success in exploration will create opportunities for potential disposal, fueling our dual exploration model. In the plan, we expect to discover 2 billion barrels of oil equivalent of resources, with a large part expected to be gas. Selective growth will support the increase of our free cash flow in the four-year plan. Production will grow at an average rate of around 4% per year compared to 2020 under any scenario, while during the same period, our cash flow from operation will grow by 20% per year. Assuming a flat price of $50 per barrel, our cash flow from operation will grow by 8% per year. For 2021, a transition year before fully recovering from COVID, we confirm a production guidance range of 1.7 million barrels per day, assuming an OPEC reduction of around 40,000 barrels per day throughout the year. However, we have the flexibility to restart some activities as soon as appropriate market conditions emerge. In the plan, we will bring 14 major projects onstream, operating over 70% of the new productions. In terms of future production mix, we expect to increase the share of gas in the coming years. By 2024, approximately 55% of P1 reserves will be gas, compared to 50% today. Upstream free cash flow in the four-year plan will exceed €18 billion in our scenario and €14 billion assuming a flat scenario of $50 per barrel, covering twice our four-year plan distribution needs. Our global gas and LNG portfolio is now incorporated into the Natural Resources business to leverage our integrated presence along the gas value chain. In LNG, we are targeting more than 14 million TPA by 2024, with anticipated growth from our new projects in Indonesia, Nigeria, Angola, Mozambique, and Egypt, where the startup of Damietta has been completed and the first cargo is being loaded these days. In marketing, we will target premium markets in the Middle East and Far East while leveraging our legacy presence in Europe to maximize overall value. LNG growth will be driven by our equity production, which by 2024 will account for more than 70% of our LNG portfolio, contributing an estimated €800 million to free cash flow during the plan period. The second primary goal of Natural Resources is minimizing the carbon footprint and developing initiatives to remove CO2, such as forestry preservation and CCS. Eni is focusing on REDD+ initiatives to maximize value for our stakeholders by preserving primary and secondary forests and biodiversity, mainly in Africa, South Asia, and Latin America. We aim to offset more than 6 million tons of CO2 per year by 2024 and more than 20 million tons per year by 2030. Our CCS projects synergize with upstream activities as we aim to create worldwide storage hubs for decarbonizing our industrial activities, such as power plants, refineries, and third-party plants. The Ravenna CCS hub, with a storage capacity of more than 500 million tons, will benefit from existing infrastructure and its proximity to industrial sites providing attractive cost and time to market. In the UK, our two projects, Liverpool Bay and Teesside, will contribute to decarbonizing third-party industrial sites. We have built a distinctive set of competencies in managing carbon capture and storage technology through our experience in gas injection in mature and producing fields worldwide. We are currently in the feasibility phase of a carbon capture project in the UAE in the Ghasha gas field. Additionally, we are studying a CCS application in Libya for the Bahr Essalam project. By enhancing our CCS project portfolio by 2030, we target a total storage capacity of around 7 million tons per year, with an overall gross capacity of 15 million tons per year. Turning now to Energy Evolution. This business group is expected to sustain its transformation and growth during the plan. In refining and marketing, we expect to see results increase across all our business lines: bio-refining, marketing, and traditional plants. In a constant scenario, R&M EBIT will almost double during the plan period. Growth will come from first increasing bio-refining capacity, which will double to 2 million tons by 2024, targeting also the bio-jet fuel market with a share in excess of 10%. Second, the gradual recovery of demand after the COVID-19 crisis. Third, focus on high-margin segments in marketing to expand our network in Europe. Lastly, the contribution of ADNOC refinery reaching full capacity. Our biorefineries will continue to contribute positively, becoming palm oil-free by 2023, with a growing contribution of feedstock from waste and residues, accounting for around 80% of the total by the end of the plan compared to today's 20%. In terms of site, Porto Marghera in Venice will increase its capacity to 560 kilotons per year, while the Gela biorefinery will complete the ramp up to 750 kilotons per year. Moreover, we are planning new capacity of around 500 kilotons per year, with the location in Italy or abroad still under study. Finally, marketing will deliver a steady and material contribution during the plan while we expand our e-mobility services. The combination of biorefineries and marketing will yield EBIT of around €750 million by the end of the plan, and with traditional oil refineries, we will reach €1.4 billion. Now, I'd like to present another significant step in our transformation to maximize value generation along the renewable power chain and foster our decarbonization Scope 3 target. We have decided to merge our renewable business with our gas and power retail business. On one side, we will leverage a 10 million customer base expected to grow to over 11 million by 2024, accelerating our growth to 15 million by 2030, which will increasingly be supplied with equity renewable energy and biomethane. This business combination positions Eni as one of the major green retail operators in the European market. On the other side, our renewables are expected to reach 4 gigawatts by 2024 and 15 gigawatts by 2030. Our generation by the end of the plan will consist of 60% solar and 40% in onshore and offshore wind. We are rapidly expanding to become a major global green power operator in various OECD countries, where we already have a large retail base and in other areas where we are present, such as North Africa, Australia, and the Middle East. Overall, CapEx for the combined businesses will be €4.3 billion in the four-year plan, primarily related to renewables. This new business combination offers high value and rapid growth. Overall, our retail and renewable business will almost double its EBITDA from €600 million in 2021 to around €1 billion by the end of the plan. In retail, we expect EBITDA to grow to €650 million, also benefitting from an increased share of services, such as distributed generation, energy efficiency solutions, and services for e-mobility, which will represent more than 20% of the EBITDA. Our final goal is to maximize the value of this combined group of activities. Before leaving the floor to Francesco Gattei, our CFO, for the financial section, here is a brief video summarizing the key highlights of the presentation.
Francesco Gattei, CFO
Good afternoon. Now let's detail our financial plan. Eni's financial strategy will be a structural component in executing the plan. It will center around a diversified set of levers, including CapEx flexibility, active and dynamic portfolio management involving new business combinations, and a new set of financial tools linked to strategy execution. While continuing to strengthen our balance sheet and reducing leverage, we are also committed to a progressive and competitive distribution policy. On CapEx, we will focus on new businesses and will remain extremely selective regarding returns and the duration of the cash cycle. Over 20% of the yearly average CapEx will be directed to boosting our renewable capacity and increasing Eni's customer base, circular projects that minimize waste and rejuvenate mature industrial sites, and building incremental biorefinery capacity. Net capital employed in these activities will reach 10% of the total amount, doubling the current level. To maintain high flexibility, we will focus on short-cycle initiatives and will limit inactive capital to 20% of our total investments. All our planned projects must pass a selective screening in terms of profitability and resilience. The internal rate of return on upstream projects is 18% and will remain a robust 16% even with 20% lower prices. Our renewable projects also provide high value, with levered rates of return in the range of 6% to 9%, achieving double digits after financing. Furthermore, the rate of return on biorefineries is 15%, in line with our upstream initiatives. Portfolio management will be core to enhancing our transformation, extracting extra value from our assets and disposing of non-core businesses. During the four-year plan, our disposals will reach a gross value of more than €2 billion, with most of these proceeds reinvested in acquisitions for portfolio reshaping. Moreover, we aim to replicate our Norwegian Vår model in different countries through potential business combinations currently under screening. Both these opportunities are not captured by the current plan and, therefore, represent operational and financial upside. Assuming a progressive increase in oil prices to $60 per barrel, cash flow from operations before working capital is expected to reach around €44 billion throughout the plan period, while it will stand at €39 billion under a flat $50 scenario. With a steady CapEx amount of around €7 billion per year, we anticipate generating free cash flow of €17 billion under our scenario or €12 billion assuming a flat $50 Brent. We will continue improving our resilience along the plan period. Cash neutrality, which is the price level required to cover our CapEx needs and the minimum dividend, will gradually drop below $40 per barrel. Finally, while targeting pre-IFRS leverage in the range of 30% in 2021 and declining thereafter, we will seek full engagement from our lenders to support Eni's transformation. In 2020, we finalized more than €5 billion in sustainable finance instruments, including loans and committed credit lines. In the coming year, we aim to issue our first sustainability-linked bond. Additionally, following the success of last year, we are planning a potential issuance of new hybrid bonds in the near future. Now, I’m pleased to announce an improvement in our shareholder remuneration policy. Last summer, we defined a new distribution policy aimed at providing visibility and certainty during a period of immense volatility. This policy comprises two elements. A fixed component of €0.36 per share anchored at a determined price level, which will be revised with the execution of the plan, and a variable component characterized by a progressive dividend in line with price increases and the resumption of buybacks above a certain price threshold. The preference for dividends and the buyback will be announced next July during the half-year presentation. Our successful reaction to 2020 in executing the four-year plan that will significantly reduce our cash neutrality allows us to announce our distribution scheme today. The new policy approved by Eni's Board will be structured so that the dividend floor is secured at a Brent price of $43 per barrel, which is $2 lower than the previous level. The variable component will grow in the same manner that we presented last summer, calculated as a percentage between 30% and 45% of the incremental free cash flow generated by scenarios between $43 and $65. Additionally, we have decided to restart our share buyback at a Brent price of $56 per barrel, beginning with €300 million annually. This amount will increase to €400 million from $61 of Brent and rise to €800 million from $66 onward as originally planned. For example, if we announce a price reference of $50 per barrel in July, our total dividend will be €0.49 per share, indicating a 9% increase versus the previous formula. At $56, we will pay €0.63 per share and initiate a share buyback of €300 million. In the backup, you can find a summary table of the dividend and buyback levels at various price scenarios. Before concluding, our total dividend will be split 50/50 between the traditional dual tranche payments in September and May. We will also pursue further actions to enhance this distribution model in the future.
Claudio Descalzi, CEO
Thank you, Francesco. To conclude, I would like to highlight the major update of today. Eni is committed to being net zero by 2050 across all our Scope 1, 2, and 3 GHG emissions of all our production and traded products. We have also outlined the specific actions we are taking over the next four years. These actions are fundamental steps to becoming even more innovative and resilient in managing the extraordinary volatility of our time while delivering an enhanced remuneration policy. In this period of exceptional change, we will leverage our considerable strengths: our large customer base, which will continue to grow in synergy with our renewable business, our biorefining and marketing which combined will deliver a strong contribution in providing sustainable products for mobility, and an integrated upstream model that reduces both cash neutrality and carbon footprint. Our plan to be carbon neutral by 2050 is concrete, detailed, economically sustainable, and technologically proven. Additionally, we have disclosed our target for 2030 and 2040, two key milestones for our stakeholders to keep aligned with our progress. Eni, its people, and the Board of Directors express a strong commitment to continuing to play a sustainable and innovative role in supporting social and economic development in all our activities. Our strong ESG model provides the foundation for our aim, which remains to deliver value to all our stakeholders. Now, along with our top managers, we are ready to answer your questions.
Operator, Operator
The first question is from Michele Della Vigna, Goldman Sachs.
Michele Della Vigna, Analyst
I had two questions, if I may. The first one is on your emissions reduction. I can see that the absolute emissions are falling about 60% faster than the carbon intensity both to 2030 and 2040. I was wondering where this comes from? Does this effectively mean that you're likely to sell less energy volumes by 2030? You still clearly have a growth plan to 2024, so I was wondering what is the overall volume assumption there? The second thing I wanted to ask you is about your biofuel business. You're targeting 2 MTPA of biofuel production. I was wondering, where do you see the feedstock in the longer term? Clearly, no palm oil, but what do you see as the right mix between waste and biomass that does not compete with agriculture? And do you think you can expand it further in the longer term? Is the main constraint there the feedstock or rather the processing capacity? Thank you.
Claudio Descalzi, CEO
For the first question, Francesco will answer, and then I'll take over for the second one.
Francesco Gattei, CFO
Yes, you are correct. You have highlighted the differing speeds of the two trends, one in absolute value and the other in intensity. We can state clearly that we start with different assumptions compared to last year. First of all, we have a lower production profile. We will reach 2 million barrels per day by the end of the plan and 2.1 million barrels in 2025, which will be the level that plateaus with the flexible fluctuations we described last year. This is about 10% lower. You are also right that we take a more conservative view on LNG growth. That is the first step to assume at the beginning, in the early part of the transformation phase. Then you start adding additional components. The biorefining was accelerated, and biogas was introduced to enhance our bioproduct sold in the domestic market. In the meantime, we are growing components related to intensity. Once we have continuous growth in renewables and start hydrogens, all these components will reduce the second element of the trend. I think this is the way to look at the trends of intensity and absolute reduction.
Claudio Descalzi, CEO
Michele, it's actually a very critical point and something that we started working on three years ago when we changed our technology to be palm oil-free by 2023. Clearly, there is a mix of the two components. What we mentioned during the presentation is that in the plan, we are going to increase the second-generation feedstock. We are currently at 20%, and we are going to reach 80%. We have already planned and modeled the acquisition of these feedstocks. In the long term, we aim to reduce costs while working on agriculture; for biorefineries, agriculture will be like the reservoir for upstream operations. Therefore, we explore testing technologies, for example, with castor oil in Tunisia and also in Italy over the last couple of years. We are testing our technology in Gela to use different kinds of feedstocks instead of palm oil. After advancing and with agreements in Italy and North Africa, we are working on promoting agriculture for this kind of first generation, which doesn't compete with food. Castor oil is one example. We are going to increase it, ensuring a future feedstock. We believe competition in biofuels is inevitable, so we are not just working on this; we are already modeling and have solutions for the future. When we increase first generation, we will also reduce costs.
Operator, Operator
The next question is from Mehdi Ennebati with Bank of America.
Mehdi Ennebati, Analyst
Two questions for me, please. The first one, regarding the dividend policy that you explained, let me give you an example. So, imagine that in July you consider that this year the oil price will be $60 Brent. You will be paying a €0.75 dividend and adding share buyback. If next year the Brent goes back to $60 or $65, I wanted to know what you intend to do. Will you follow your dividend policy, meaning you will lower the dividend, or will you try to at least keep the dividend at the same level as last year? I am asking because the market tends to reward companies that can provide a stable dividend when hydrocarbon prices drop. The second question is about Versalis. During the presentation, you talked about the circular economy and bioplastics. However, I would like to know if you intend to make Versalis profitable during your 2021-2024 strategy, as that company has been losing money since 2017, if I'm not mistaken. What makes it so difficult to convert Versalis into a greener company that can generate profit as you did with your two loss-making refineries?
Claudio Descalzi, CEO
I will address both questions. First of all, concerning the dividend. I understand the question. Clearly, we developed this structure and improved the policy to provide a clear path linked to a fixed component, variable component, and a fixed floor with a growing component relative to prices. What happens at $60, and then it drops? Clearly, every year, in the first six months, we assess the price. We don't change without reason, and we don’t adjust immediately. In July, we will consider the average price of the years while monitoring various situations closely. We won’t drastically change if there’s a price peak or a slight drop. Everything will be assessed on average, and we will be attentive in making changes if they create difficulties for us and our investors. We want stability, so with the improvement in our policy, we encourage buybacks while maintaining stability. You should consider that our plan’s development means that we are working to reduce our cash neutrality. Hence, if we reduce cash neutrality, at the end of the plan, it would be lower than $40 per barrel. That means our policy is being strengthened overall. Regarding Versalis chemicals, since 2017, Versalis has faced challenges. Our first action was to enhance business lines and increase specializations to distance ourselves from feedstock fluctuations, which tend to be expensive since Versalis is not linked to the downstream. The downstream in Italy is not connected to the upstream, so we have to import. This is why we progressed to increase specialties and be more competitive. In the last two years, we worked hard to transform technologies. One sample is in the next couple of years, where we want to bring Versalis into a different kind of business combination focused on green chemicals and recycling to achieve break-even and eventually make a profit. We are concentrated and are finding synergies between biorefineries and bioproduct from refining, which can serve as feedstock for chemicals. We’re linking the green side with bioproducts, refining, and chemicals, which is the way forward. This isn’t just hope; we have been working hard on this in recent years, and it will be our path to transform Versalis to achieve positive results.
Operator, Operator
The next question is from Alessandro Pozzi with Mediobanca.
Alessandro Pozzi, Analyst
The first question is on production. I think your new target for gas production is over 90% in the long term. I was wondering if you could quantify that for us? Also, I was curious as to whether this was a design choice, as increasing oil volumes no longer aligns with CO2 emission targets. I'm asking this because we are likely to see significant supply deficits in our energy supply by the mid-decade. I suspect that investing in conventional oil development is likely becoming exceedingly difficult for oil companies as we transition to a net-zero world. So I was wondering if you could share your views on this. The second question is regarding the recovery fund approved in Italy. I was curious if that could present any opportunities in terms of consolidating various projects. I know they haven’t been included, but there may be others, and I was hoping you could share more context there. Lastly, I’d like an update on Mozambique and where we are on the investment decision.
Claudio Descalzi, CEO
I will answer the first two questions, and then Alessandro Puliti, our Natural Resources MD, will provide an answer on Mozambique. Regarding production, when I refer to long-term, clearly, you want to know what long-term means. Previously, it included the last decade, specifically 2040 and 2050. Now, I refrain from stating an exact date as I want to maintain some flexibility. To summarize our policy we set last year, it remains largely the same: we will peak production in 2025, which still holds. However, post-COVID, we have revised the projected production for 2025 by around 200,000 barrels, adjusted to about 2.3 million barrels per day. Until 2030, we will maintain a ratio of about 50/50 in production. By 2030, we will have around 55% gas and 45% oil. But be aware that our previous significant discoveries were predominantly gas fields. We've made some oil discoveries, but they offer very different profiles in terms of ramp-up and depletion timelines. Oil will follow a different lifetime curve, with gas being forecasted for longer terms since we're dealing with larger finds. The big switch in ratio from gas to oil will likely occur by 2030 to 2040; that's why I mentioned long-term. For recovery, this could present good opportunities for us, particularly concerning the transformation. We have several projects linked to CCS and developments in retail, marketing, biorefineries, and waste-to-fuel initiatives. We have a set of projects already designed; we haven't included recovery funds in this plan yet. However, the recovery plan expected to commence this year will provide an upside. That means we have the same project set, but the recovery plan will allow us to accelerate our transition, particularly in Italy, enhancing biorefineries, waste-to-fuel, and CCS initiatives. Now, I’ll let Alessandro respond regarding Mozambique.
Alessandro Puliti, MD Natural Resources
Regarding Mozambique, Rovuma LNG's FID was originally planned for 2020 but has been postponed. The operators are currently working to find synergies with Area 1 development while exploring cost-reduction possibilities based on current market conditions after the pandemic. We expect to provide an update on the FID date sometime during 2021 once this cost optimization process concludes.
Operator, Operator
The next question is from Irene Himona with SG.
Irene Himona, Analyst
My first question concerns the fact that you appear to be revisiting the dual exploration model after a pause. Is this specifically budgeted for in this plan? In other words, is there a specific target perhaps for monetizing your assets? My second question concerns the merging of renewable generation with retail. Clearly, retail, especially for green power, is a very competitive marketplace. Is that the reason you're merging the two? Can you talk about the synergies? In a market that is increasingly competitive, how can you ensure growing value from that business?
Claudio Descalzi, CEO
Francesco will handle the first question, and I will address the business combination.
Francesco Gattei, CFO
Regarding disposals, we target €2 billion throughout the four-year plan. In this, there are various kinds of assets: mature assets, logistic assets, project stakes, and clearly some considerations regarding the continuation of the dual exploration model. As you know, we have witnessed exceptional results in certain areas with high stakes, like Mexico and Indonesia. These opportunities could be part of this dilution process. Simultaneously, we continue to explore and discover. Therefore, this model will continue to satisfy our investors and our cash flow.
Claudio Descalzi, CEO
Now, regarding renewables and the business combination, merging renewables with gas and power in conjunction with customers is crucial. The competition in renewables is high, with many players vying for market share. We believe that integrating renewables with our retail market for Eni gas and luce forms an essential element to tackle this competition. Additionally, we have other competitive advantages, such as existing land. As Eni, we can reclaim around 3,000 hectares available to us. We have only used a very small percentage, less than 10%, for the initial phase but can significantly scale that up. This combined entity will allow us to supply energy to our retail company efficiently and capture all the value internally. Our aim is to provide a complete range of decarbonized products. This gives a competitive edge to our Eni gas e luce company, which is poised to attract more customers and maintains our position in the value chain. With roughly 10 million customers now, we expect to organically grow to 11 million while minimizing costs. This business combination will deliver substantial potential in the future and create immense value for Eni.
Operator, Operator
The next question is from Thomas Adolff with Credit Suisse.
Thomas Adolff, Analyst
My first question is on your refinery and biofuels plans. You're looking to grow it to 2 million tons per annum. Is this driven by refinery conversions? Additionally, how should I view the Italian refinery landscape by 2030? You've mentioned before that there may be no oil refineries left in Italy by 2050. My second question concerns slide 19, which shows earnings growth from biorefining and marketing versus oil refining. I’d like to understand the significant earnings growth in biorefining and marketing. Are you expecting some margin expansions in addition to volume growth, particularly based on cheaper feedstock? Any color on this would be appreciated. Lastly, on slide 13, you have your target for installed renewable capacity. What’s your outlook for the power sold to customers? Some of your competitors have much higher figures than your equity-installed capacity.
Claudio Descalzi, CEO
I'll cover most of your questions, and then Pino Ricci, the manager for Energy Evolution, might complement. As for the growth in our biorefineries, we have achieved good experiences in converting plants, particularly in Venice and Gela. All processes and required industrial transformations are known to us. We foresee further conversions of existing refineries in Italy and are also in discussions about establishing new ones in the US. Conversion is likely to happen before 2030, as we will have to decide what to do regarding the future of traditional oil refining. We are working on what to ideally build prior to the end of this decade. Regarding potential optimization in returns moving forward, Pino can elaborate on the cost optimization and expected returns in biorefineries.
Giuseppe Ricci, Manager Energy Evolution
The internal rate of return on biorefineries is remarkably high, approximately 15%. This profitability is largely due to our strategy of converting existing brownfield refineries into biorefineries, significantly reducing CapEx while increasing profitability. Furthermore, we expect growth in profitability from biorefineries, driven by our shift to second and third-generation feedstock, replacing less profitable first-generation sources with more profitable waste and residue feedstock. Currently, our focus is primarily on the European market, but we are also diversifying our marketing efforts across the USA and Northern Europe with high-quality products. Finally, we aim for a significant increase in biofuel decarbonization, particularly with bio-jet fuels, as this represents a huge market opportunity.
Claudio Descalzi, CEO
By 2030, we anticipate that we will deliver green electricity at levels of about 35%-40%. By 2040, we aim to deliver 100% of our electricity to our customers. That’s our goal.
Operator, Operator
The next question is from Jon Rigby with UBS.
Jon Rigby, Analyst
The first question is about CCS. You're moving forward very quickly on that. I assume it will be integral to your E&P strategy. So, two questions: When thinking about costs of CCS, are you incorporating those into your OpEx expectations? Is that something that will appear in the mid-decade? Strategically, will you be seeking to concentrate your activities in areas where you can produce and capture carbon simultaneously or close by? Will that be a guiding principle in your upstream strategy? My second question pertains to financial expectations. Francesco, you mentioned balance sheet gearing—unfortunately, we experienced a break in the call. Could you outline your expectations for the balance sheet? I believe you mentioned hybrids, but will you flex the balance sheet differently going forward, bearing in mind the additional off-balance sheet funding for special vehicles?
Claudio Descalzi, CEO
I will respond to the first question, and then Francesco will tackle the second. Regarding CCS, you mentioned correctly that it is connected to upstream operations as our CCS relies on depleted reservoirs. We have many depleted reservoirs in Italy, along with hard-to-abate industrial facilities or plants nearby. When we talk about capturing 500 million tons in our plans, that is just part of the overall potential we have in the Adriatic and Mediterranean seas. We truly have significant potential in this regard. Costs remain low for us; we possess the platforms, pipes, and lines required. The main expense concerns connecting to the power plant or chemical plant's emissions. We are currently working on significant projects in Norway, the UK, Abu Dhabi, and Libya, where we capture and store sour gas. Hence, our pricing for CCS is likely very competitive. We cannot treat it solely as an operational expense, as this serves to benefit both our operations and other hard-to-abate activities while yielding revenue. We need to consider the future rise of carbon taxation or pricing, which we expect to become more pronounced, akin to what we see in Northern European countries.
Francesco Gattei, CFO
Regarding leverage, we maintain a leverage of around 30%. We expect this to remain relatively unchanged this year, 2021, but decline thereafter. It will fall to approximately 20% or even lower if we follow our scenario assumptions or stay around 22%-23% if we forecast flat $50. This reflects our plan. As you suggested, we are exploring opportunities for potential business combinations like Vår to create financial vehicles that can stand on their own, self-financed, and leverage off their balance sheets. This offers a further lever to reduce leverage as outlined in our plan.
Operator, Operator
The next question is from Massimo Bonisoli with Equita.
Massimo Bonisoli, Analyst
Two questions on M&A: First, any updates on capacity expansion in renewables—how much may derive from M&A in that sector? On slide 24, you provided the IRR ranges for renewable projects, which might reduce M&A opportunities in that cluster. My second question is about Australia. Do you have any updates on the disposal of those assets? Lastly, can you provide an indication of Damietta LNG's contribution for 2021 and 2022?
Claudio Descalzi, CEO
Regarding M&A, clearly, in pursuing the growth rate we presented, especially for the next four years, we have many organic opportunities. However, potential inorganic acquisitions allow us to accelerate growth. But our four-year plan designs revolve primarily around organic growth. Concerning renewables, targeting the 15 gigawatts needed by 2030 will likely involve M&A activity. Additionally, we must approach acquisitions wisely without overpaying. We could acquire opportunities where we have existing operations and possibly use existing fiscal losses to offset acquisition costs or derive additional synergies from the country involved. We have no intention to rush towards M&A opportunities amid the competition for gigawatts. Regarding Australia, the process was completed, but the offers we received did not align with our selective expectations, leading us to decide against selling our Australian assets. We are not compelled to liquidate if the offers don’t meet our expectations.
Alessandro Puliti, MD Natural Resources
The Damietta plant has restarted as of January and has produced enough LNG to load the first cargo shortly. Our objective is to maintain production throughout the year, especially during the winter period of 2021-2022 and into 2022-2023. The Damietta restart will significantly bolster our LNG export capabilities, indirectly boosting production from Zohr, which peaked at a record level of 3.2 Bcf per day at the beginning of February.
Operator, Operator
The next question is from Martijn Rats with Morgan Stanley.
Martijn Rats, Analyst
I have two questions if I may. Firstly, I've noted that year-on-year, fourth quarter over fourth quarter, your production levels are down about 11%, which is in line with the average for your European peers. Given these significant declines, they may have macro implications. Eni alone lost over 100,000 barrels a day in oil production. How quickly can that rebound? If oil demand picks up this year, how easily can you reactivate that production and ramp up as demand returns? My second question is more technical, but I'm still very interested. Regarding dividend payout and the split between interim and final payments—the May and September payment. The previous guidance suggested that the base dividend would be split 50-50 between May and September, with the variable portion paid entirely in September. However, I heard you say that the total dividend will now be split 50-50 across the two payouts. Can you confirm if this is indeed a change in dividend payout structure? If so, why was this decision made?
Francesco Gattei, CFO
Regarding production, remember that various factors attribute to change. One significant factor is an adjustment in the trigger of a Libyan PSA, which explains part of the variation between the quarters. We must also account for COVID's influence—the OPEC cuts affected gas demand, and infilling activities slowed. Thus, these two quarters are uncomparable due to these reasons. Now, back to you, Claudio.
Claudio Descalzi, CEO
To elaborate on production, we switched off some operations, notably infilling and near-field activities, and adjusting operations based on the contractual trigger for our significant contribution in Libya. The production we have halted can indeed restart, but not instantly. We expect that it would take around six to eight months for us to reactivate for 2022. If we can restart in three or four months, we could reactivate approximately 60,000 barrels per day on average for the rest of the year. Regarding the dividend split, you are correct; this constitutes a deviation from last year. We've made several adjustments, e.g., changing the floor level for dividends and introducing buyback arrangements. Our aim is to enhance clarity, also reflecting feedback from our shareholders. This year, we are already distributing two-thirds of the dividend floor announced in September, intending to have an equal split moving forward between the two components in subsequent evaluations. All these attempts aim toward clearer policies and greater generosity toward our investors.
Operator, Operator
The next question is from Bertrand Hodee with Kepler Cheuvreux.
Bertrand Hodee, Analyst
If I may, could you shed light on your 2021 production in terms of underlying assumptions? What do you expect from Libya? Can you quantify the negative impact from OPEC+ quotas? Also, what positive impact do you foresee from the Damietta restart? Regarding Zohr, you indicated that it achieved full capacity at 3.2 Bcf where it had performed below that level in 2020. Will Zohr maintain that capacity of 3.2 Bcf for 2021?
Alessandro Puliti, MD Natural Resources
For 2021 production and the specifics for Libya, we estimate that Libya will contribute around 163,000 barrels of oil per day throughout the year. This accounts for the full recovery from the force majeure linked to landfilled fields that are back to normal production levels. Regarding OPEC cuts, we accounted for approximately 36,000 barrels of oil curtailed by those OPEC restrictions across various countries. As for Zohr, while it peaked at a production record of 3.2 Bcf per day, we assume a lower average throughout the year, anticipating that summer will see a decrease in gas demand. Therefore, we expect an annual average of around 2.7 Bcf per day for Zohr, which is still significantly higher than the 2.1 Bcf average recorded in 2020 when gas demand in Egypt was severely depressed.
Claudio Descalzi, CEO
On Qatar, we have had discussions with QP for at least three to four years, and we are interested in their project. It is a good opportunity that is now unfolding, and since they recently announced that the CapEx or investments were less than we initially forecasted, they managed to secure very attractive contracts. Therefore, we will see how conditions develop. While I can’t specify the stake percentage just yet, it's not solely determined by us; QP’s considerations matter too. We expect more news in the near future, maybe next week or next month with tenders rolling out soon.
Operator, Operator
The next question is from Oswald Clint with Bernstein.
Oswald Clint, Analyst
As we progress through this plan towards 2024, I am interested in your expectations for return on capital employed. You are planning to exceed $60 in your projections. I want to compare this against 2019, where your return on capital employed was around 5.3%. With a significant amount of green CapEx entering this equation, 20% of investment, combined with margins, might upstream returns appear strong. But once aggregated, could you provide clarity on expected ROCE for 2024? Additionally, can we talk about low carbon product demand from your competitors and anticipated sales in the industrial and commercial segments? What companies or airlines are you bargaining with? Could you furnish us some examples? Lastly, could you elaborate on how you plan to deliver enhanced customized services, as you mentioned?
Francesco Gattei, CFO
Specifically regarding return on capital by the end of the plan, the comparison is accurate, as we are both looking at similar price levels; however, we have entirely different CapEx structures. The 5% return on capital employed you referenced at $60 was based on an investment of €8 billion, with €7 billion focused primarily on upstream. Now, we are investing less than €7 billion a year, of which less than €5 billion pertains to upstream initiatives. Thus, we anticipate returns on capital to be higher, likely reaching around 9%-10%. This follows a significant shift in terms of returns. We are focusing on short-cycle and lower capital-intensive projects while maximizing returns from upstream activities, alongside investments in profitable biorefineries and renewables. Notably, we’re only allocating 20% of inactive capital throughout the plan—defined as an investment that won’t yield cash flow until after the plan is completed.
Claudio Descalzi, CEO
In relation to new product demand, it's evident that retail is a major factor. Our massive customer base will ensure that all decarbonized products, encompassing green and blue products, flow through as we have significant engagement with established clients. Eni stands out as the largest producer and consumer of hydrogen. This is crucial, particularly as we have high CO2 emissions given the blue hydrogen we produce, as well as opportunities provided to hard-to-abate industrial plants, particularly in Northern Italy. We anticipate demand for hydrogen to rise, especially blue hydrogen, as it's competitively priced relative to gray hydrogen, supported by effective CCS programs. Additionally, we foresee a burgeoning demand for biosolutions like biofuels. The European decarbonization target mandates reductions of CO2 emissions by 2030 to exceed 55%, presenting an opportunity to build this market further. Regarding bio-jet fuels, regulations are developing continuously through the international CORSIA movement, targeting 2% biofuel within aviation fuel by 2025, as airlines seek to decarbonize. This offers significant market potential. Lastly, when it comes to enhancement in customer services, we are in the process of creating an integrated customer database capturing data and providing services for both Eni gas e luce retail customers and our marketing facilities. We aim to draw synergies across these platforms and will leverage digital strategies and applications — this has proved vital in increasing our customer base organically.
Operator, Operator
The next question is from Peter Low with Redburn.
Peter Low, Analyst
Specifically regarding upstream, you are targeting a 4% production CAGR over the plan period. In the past, you have not always met those production targets. Can you provide insights into the margin for contingency within your plan and highlight areas where you see risks in its delivery? Secondly, as shown on slide 19, you indicated a positive contribution from refining in 2021. To what extent is that reliant on a recovery of margins given that your refining division appeared significantly challenged this year both in Europe and ADNOC? I'm eager to grasp the source of the anticipated positive Delta.
Alessandro Puliti, MD Natural Resources
On the 2021 budget, we are factoring around 27,000 barrels per day as a contingency. This includes an OpEx reduction as stated before, on top of 37,000 barrels we've already deducted due to OPEC cuts. This production range is also influenced by market conditions, and we have positioned contingencies accordingly.
Giuseppe Ricci, Manager Energy Evolution
Regarding refining margin expectations, as you know, 2020 posed unprecedented challenges regarding consumption of transport fuels within the refining sector. We foresee a rebound in refined margin during 2021, saying that it may trend below $4 per barrel this year but could rise in subsequent years. Notably, the initial part of 2021 is still fraught with complications due to winter conditions, lingering impacts of the COVID pandemic, and falls in consumption. However, we anticipate that with vaccination progress and economic recovery, margins could begin to improve starting in spring. Our response mirrors that of last year, concentrating on efficiency, optimizing our assets, and creating synergies alongside refining, trading, and supply chain management linked to our equity crude. We aim to optimize every potential scenario.
Operator, Operator
The last question is from Henry Tarr with Berenberg.
Henry Tarr, Analyst
I'd like to return to biorefinery discussions. You mentioned the potential for 80% of the feedstock to comprise waste and residues by 2023. Have you initiated securing that waste and residue? I presume the main sources will include used cooking oil and animal fats. Considering the current supply pool for these resources in Europe doesn’t seem to be expanding rapidly while demand is surging, it would be beneficial to know more about how advanced your plans are. Additionally, concerning renewable growth, are you aiming for Power Purchase Agreements (PPAs) to facilitate and finance that new capacity, or are you intending to cover your retail positioning with that new capacity? How do you balance between PPA and merchant exposure?
Giuseppe Ricci, Manager Energy Evolution
We aim for 80% waste and residue feedstock by 2024, owing to robust global trading capabilities. Our analysis indicates that the availability of resources like used cooking oil (UCO), tall oil, palm oil mill effluent (POME), and other waste products exceeds 35 million tons annually. Our plan encompasses a collection strategy that includes vertical integration to secure feedstock sourcing long-term.
Francesco Gattei, CFO
Regarding renewable financing and growth, we are presently around 20% exposed to merchant operations, while the balance corresponds to PPAs or contracts that could receive incentives following recent tenders. Moving forward, we aim to reduce market exposure even further, striving toward a target of around 15%. The intention behind merging our retail and renewable operations is to enable, strategize, and better cover any potential exposure encountered due to market constraints. So, we perceive the combination of these entities as an opportunity to expand growth, leveraging their cash generation capabilities and strong financing avenues.
Operator, Operator
I turn the conference back to you, sir, for any additional comments.
Claudio Descalzi, CEO
Thank you very much. I don’t have any additional comments. We spoke for two hours; that should suffice. Thank you very much for listening to us.
Francesco Gattei, CFO
Have a nice day.