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Investment in the 2005 to 2008 period totals E17.4b, including the opportunities as defined before. Development activities will account for approximately 87% of total investments.
Criteria. Our investment decisions are based on strict capital discipline, main references are price scenario, technical materiality and economic criteria. The scenario assumes a value of $22 per barrel for the Brent price for the long term, starting from 2009. This substitutes the previous $16 barrel 2000 equivalent; in comparable terms, the $20 per barrel in 2009.
Each project must produce a rate of return higher than the hurdle rate. During the past year, 2004, we have been working on a more detailed method for the selection of the most appropriate hurdle rate. In particular, specific hurdle rates have been defined for each country we invest in. They are calculated by adding the specific countries risk premium and the business premium to our weighted average cost to capital. Currently, our hurdle rate for development projects varies from a minimal 11% for countries such as the U.S. to a maximum of 17% in high risk countries.
An update on Exploration. The slide summarizes the main operation success in 2004. Kazakhstan, the deep waters of West Africa and Indonesia are among the areas with the highest rate of success. Altogether, we can say that this represents a total of about 710m boe of Exploration reserves.
The rate of Exploration success, according the SEC rules, increased from 39 to 57%. As to the Discovery cost, the reduction from $1.2 per boe 3 year's average to $1 boe in 2004; or $0.8 per barrel pro forma at the Brent price of $30 per barrel confirms our downward trend.
Exploration investment in year 2005-2008 period is, on average, E600m per year, of which 74% is related to activities in the existing acreage. In dollar terms, Exploration investment amounts to about E700m a year, substantially at the same level as the previous plan period.
Kazakhstan. In 2004, the drilling of Kairan 1, the last of the 6 commitment Exploration wells, successfully completed the exploration activities in the contractual area. This well follows the successes obtaining Aktote, Kalamkas and Kashagan South West, all part of the North Caspian Sea PSA. This 100% success rate of the Exploration campaign confirms the high potential of this region in terms of Hydrocarbon reserves. Future activity will be the appraisal of these discoveries.
47,000 square kilometers of net new acreage was acquired in 2004, of which 81% operated. New acreage is located both in new high potential areas like Saudi Arabia and Russia, and in countries such as the U.S., Norway, the U.K., and Egypt.
We provide here an overview of the main start-ups in 2004. Elephant in Libya; the first phase of Bayu Undan in Australia; the completion of the second phase, including the LNG plan, is expected in 2006; Kizomba A in Angola, the largest deep water development offshore West Africa. Onshore, Wafa field, and the Gas export to Italy via the Greenstream pipeline within the Western Libya Gas project, the most important integrated project in the Oil and Gas sector ever carried out in the Mediterranean basin. Rod and Satellites in Algeria, this project represents a farther step forward in a high consolidation and expansion strategy in Algeria. In Iran, phase 4 and 5 of the South Pars field, 1 of the largest natural gas fields in the world.
Looking ahead, and as from 2005, we have the start-up of the following fields - Kizomba B in Angola, a farther step in the largest development deep water on Offshore; West Africa, the Offshore field of Bahr-Essalam and NC41 in Libya, thus completing the Western Libya Gas project which will supply the 8b cubic meters per year of Gas to Italy; Bonga in Nigeria, a world-scale deep water project.
Continuing farther - Belize, Benguela, Lobito, Tomboto and other important development project in the prolific Block 14, which confirms our consolidation and expansion strategy in West Africa. Corocoro in the Offshore of Venezuela; Kashagan in Kazakhstan, this project is on track with a start-up date in 2008. To date, 70% of the first phase investment has been awarded. The early work for Eskene onshore site are nearly completed, and the drilling of the development wells is in progress.
In total, the new start-ups in the plan period will generate more than 400,000 boe per day of new production in 2008.
Let's remain in Kashagan. The slide shows some alternatives of export routes that are being considered. Here are some details. There is a southern route from Atyrau to Aktau, trans-shipment to Baku and then Ceyhan via the BTC. Allow me to remind you that some of the Kashagan partners, Eni, Total and COP affiliates hold an overall 12.5% interest in the pipeline. A western route aligns parallel to the existing CPC. It is worth mentioning that this will require a Bosphoros bypass because of the 4 seasonal limitations to tankers transportation.
Another route to the Baltic Sea at the Primorsk loading terminal. Eastern route from Atyrau to the Chinese border. Some sections of this pipeline has already been completed.
The slide shows also the existing line to Samara, and the line from Baku to Novorossiysk, accessible both from Baki and Makhachkala - unpronounceable. The appropriate transportation system, which may include 1 or more alternatives, we'd like to be selected by early 2006 in order to meet the full field development requirements.
As I mentioned a number of times, our Strategic Plan also includes investment for activities to be considered for the time being as opportunities. Those activities will generate the Reserves necessary to fuel the growth in the longer term. Opportunities refer to access to large Oil reserves in the Middle East, Gas Integrated projects in the Far East, West Africa and the Mediterranean region, the development of existing resources in Central Asia, and activities on Non-Conventional Oil.
Portfolio Rationalization. This is an updating of our portfolio rationalization. The slide shows the already completed operation and their impact in terms of reduction of production, 70,000 boe per day, and of capital employed E700m. At this stage, we consider the process of rationalization nearly completed.
A few remarks on Human Resources and Technology. The step change underway that will bring our Company from a 1m barrels per day Company in 2000 to a 2m barrels per day Company in 2008, required close attention to human resources growth and management. Together with the reorganization of Eni E&P Division, that I have already described in previous meetings with the financial community, we have introduced new human resources policies, focused on selecting, recruiting, motivating high profile national and international staff. 300 graduates have been hired since 2002. Furthermore, projects for process re-engineering and knowledge management are in progress.
A complete re-engineering has been applied to the entire E&P process, from Exploration to Production through Development. Common to all 3 process is the presence of decision points, fully identified in terms of quality of the information available to decision makers, and definition of roles and responsibilities.
Best practice have been put in place for all activities, and projects are routinely reviewed by teams of experts that are not directly involved.
A knowledgeable management project was launched in 2003 and the rollout is proving to be effective in terms of knowledge sharing and dissemination through the Division. By adopting this approach, we are no longer managing projects as isolated entities, but we see them as part of a system, allowing effective benchmarkings both internally and externally.
Technology. Eni pays special attention to the development of technology as a competitive and leadership tool capable of contributing to growth and cost efficiency. The slide shows that some applications and that the location where they have been adopted.
A couple of examples now on technologies we are working on to improve through in-house R&D projects. Gas to Liquid is a process that was validated in 2004 in the Sannazzaro pilot plant. On the right hand side, the EST project, Eni technology, is a process to convert heavy oils and petroleum residues into light oil products in the purge below 2%. A commercial demo plant of industrial dimensions has been build at the Taranto Refinery. Test is planned for 2005. Total investment is over E100m.
Finally Performance. In addition to the reported 3 year's average values, which you can see in blue, the slide shows pro forma performance indexes, with a Brent price of $30 per barrel. Why have we selected this value? Obviously because this is the Brent price recorded at the end of 2002 and 2003, thus representing, in our opinion, an appropriate reference to allow for an industrial analysis net of price effects.
At pro forma conditions, we have achieved an organic Reserves Replacement ration of 137%, in line with the previous years, while a Discovery cost of $1 per barrel confirms a trend of steady improvement. A Finding and Development cost of $6.2 per barrel shows a decrease with respect to the rest -- recent years' trend.
2004 increase in lifting costs - production costs including royalties - is mainly due to the rise in royalties. If Opex - without royalties - only are analyzed, we continued to have a good performance, which places us amongst the best performers in the industry.
In addition to other cost indexes, a monetary reference, such as the cash flow, s also considered. Eni's after the tax cash flow per boe is again 1 of the best among our peers. In red, you can see the cash flow generated by our international activity, which provides a material contribution to the total flow of the E&P Division.
To conclude my presentation, I'd like to summarize the main highlights of 2004, and of the Strategic Plan for the E&P Division. Delivery on strong production growth; organic Reserves Replacement higher than 100%; completion of large-scale projects on schedule; development of Kashagan on schedule; 2m boe per day in 2008, with a compound average growth rate higher than 5%, and pursuit of new opportunities to fuel our growth beyond 2008.
Thank you very much and I'll hand you over to Luciano for the Gas and Power Division.
LUCIANO SGUBINI, COO ENI GAS AND POWER DIVISION, ENI: Thank you, Stefano. Good afternoon, ladies and gentlemen. Before commenting on the 2005/2008 Strategic Guidelines, I would like to illustrate briefly the 2004 results.
Last year, overall Gas sales totaled 84.5 bcm, 7,9% up compared to 2003. In the last 2 years, volume sales grew at the compounded annual rate of 11%. This trend has been achieved mainly thanks to the expansion abroad.
In Italy, last year, Gas demand rose by 3.2%, from 77.4 to 79.9 bcm. And this increase was driven by Power sector due to the start-up of new CCGT plants, while the decline in the Residential sector is mainly due to the climatic effects in heating consumption. In this context, our Italian sales were stable at around 51 bcm, while our Self-Consumption doubled from 1.9 to 3.7 bcm, thanks to the new Eni Power plants.
Abroad, in 2004 we reached more than 30 bcm sales, 19% up if compared to 2003. Our consolidation -- our consolidated sales grew to around 5 bcm, thanks to the development of sale in Spain, Germany, and volumes sold in Turkey and at the Italian border. These results are in line with our strategic targets.
As to Power Generation 2004, Ferrera Erbognone and Ravenna plants started producing Electricity. Thanks to this achievement Eni reaches there an installed capacity of 2.8 gigawatts, with a -- the Gas consumption of 2.6 bcm, and a strong increase in its operating profit, from E20m in 2003, to E69m in 2004.
2 remarkable industrial results achieved in 2004 were the Greenstream and Damietta LNG projects. Both projects leveraged on the strong upstream-downstream integration, maximizing the value along the Gas chain. Last October, the Greenstream pipeline started supplying the Italian Gas market to -- with Eni Equity Gas sold to the Italian border to third parties on a long term basis. The 2004 supply amounted to 0.5 bcm, and the plateau of 8 bcm will be reached in 2006.
Through the Damietta LNG plant and the Union Fenosa portfolio, Eni is strengthening its position in the growing Iberian market -- Gas market. The first LNG shipment left Damietta on January 20. I would like to highlight that both projects have been completed on time and within the budget.
Coming to the economic results, ENI Gas and Power operating profit, before special items, totaled E3.5b, with a 4% decline compared to 2003 results. This outcome is due to the less favorable scenario in 2004, and the competitive pressure in Italy. If we strip out the scenario effect, the competitive pressure has been entirely offset by increasing international Gas sales, transportation abroad and expansion in the Italian Powergen sector.
I think it is useful spending some words on this issue. As you can see in this slide, up to now the industrial levers we have put in place have also -- have offset the competitive pressure we have been facing in the Italian Gas market. More than E330m reduction in G&P EBIT from the average lever -- level of 2000 to 2001 period have been compensated to -- by the expansion of other industry activity.
This result is confirmed in 2004 when the industrial action, with a contribution of E239m, more than offset the competitive pressure on the yearly basis. However, in the fourth quarter 2004, Eni G&P recorded more than 20% decrease in the operating profit. The main reasons of this trend are the following.
Firstly, the scenario. The fourth quarter 2003 was sustained by an exceptional scenario, in particular the revaluation of 20% of euro versus dollars had a very strong impact. While in 2004 the euro appreciation versus dollars was less favorable. On a yearly basis was plus 9%. Thus effecting negatively the quarterly result of E55m on a like-for-like basis.
Secondly, the structural margin decreased related to renewal of contracts, with a negative impact of E100m. As you know, most of our contracts are renegotiated in the last quarter of the year. The higher Gas purchase cost resulted from the trend of energy parameters that was not completely transferred to the sale price due to the time-lag effect, had a negative impact of E75m that will be fully recovered during 2005.
The lower result accounted for the secondary distribution due to the -- both the new criteria set for the second regulatory period in October 2004, and to the lower volumes transported related to the warm weather during the year 2004.
And finally, the extradinry -- extraordinary maintenance we recorded in Powergen plants - the old plants of Livorno and Ferrara - for around E20m.
These negative effects were partially off-set by E42m accounted through the development of our activity abroad - transportation, as well as marketing activity.
For 2005, we expect a competitive pressure in line with the average competition we experienced at the -- in the past years. However, net of scenario, we will offset it by continuing the development of Power generation in Italy, and by strengthening marketing expansion and transportation activity abroad. Furthermore, in 2005 and going forward, the contribution from associates will grow, giving a significant contribution to the Gas and Power economic results.
Associates' contribution in an -- is an important item in the overall Gas and Power Division net profit. In 2004, we accounted E224m pre-goodwill contribution from associates, with an increase of around 80% compared to 2003. Most of the result is represented by the increase from a contribution of our marketing activity abroad, specifically Galp, Union Fenosa, GVS in Germany and Nigeria LNG.
Let me move to the strategy section of my presentation. Our strategic plan is characterized by the commitment to keep attractive returns, and we will achieve our target by these actions. In the Domestic market, we will manage Gas sales leveraging on Gas demand growth. In addition, we'll pursue our growth expansion in Power sectors, and finally, we will reduce Eni presence in low return regulated business.
In the European Gas markets, we will strengthen our market share by ongoing expansion in attractive markets. Furthermore, we will expand in the LNG business, leveraging on upstream and downstream Gas integration.
Thanks to this international growth strategy, Eni will enhance its role as a global player in the Natural Gas business, and maintain a high cash flow generation. By 2008, Eni Gas sales worldwide will reach 120 bcm, combining Gas and Power and E&P sales. Gas and Power sales, including Equity Gas, will represent around 80% of the overall volume.
Gas demand in Italy is expected to reach about 86 bcm in 2008, and 91 bcm 2010, with an annual average growth rate of more than 2%. The growth is mainly due to the increase of Gas consumption in the Power Generation sector, which is expected to show an annual average increase of around 5% in the period 2005 to 2008. That will be the result of the expected growth in the Electricity demand from 311 TWh in 2000 -- 2004, to 382 TWh in 2010. This demand increase will be supplied by the new CCGT plants, which are expected to reach an installed power generation capacity of 24.7 gigawatts by 2010.
Turning to the Supply slide, let me focus on the Eni efforts to increase the supply flexibility to the Italian market by investing in the international infrastructures. The most recent example is the Greenstream project, which that -- was visited during the -- our Field Trip in last October. Moreover, Eni will increase the transportation capacity for the existing networks from Russia, from Algeria, for overall additional capacity of 6.5 bcm in the year 2008. This will improve the overall flexibility of the Italian Gas system.
In the near future, year -- Eni will focus on commercial activity and will progressively reduce its presence in the Gas regulated business, allocating new capital from low return business to high return opportunities in the core business.
Having confirmed our strategy, let me briefly highlight that, in October, the second regulatory period started in the Distribution activity. The Authority set a reduction of the rate of return from 8.8% to 7.5%, against which Eni appealed to the Administrative Court. The Authority now appealed to the Superior Court. It will examine the case during that -- coming months.
In the Distribution activity, we expect by 2005 the final approval of a standard network code, while in the Transportation activity the Authority will soon issue a consultation document regarding the second regulatory period which is due to start next October.
Turning to the Power Generator business, Eni will develop an installed capacity of 5.3 gigawatt in 2007 through the start-up of Brindisi, Mantova and Ferrara power plants. Considering this increase the Power production is expected to grow from 14 TWh to 33 TWh in 2008. And in this year, market share of Eni Power will be around 10%.
As to our marketing activity abroad, by 2010 the fast growing areas in terms of Gas consumption are expected to be the Iberian Peninsula and Turkey that will show an estimated annual growth rate respectively of 9% and 7%. Italy will be the fastest growing country among large markets, with an annual growth rate forecast at 3%.
Leveraging on our expansion in attractive and fast growing markets we target, by 2008, 48b cubic meters of sales, increasing the volume we previously set for 2007 by 4 bcm, with a 9% average growth rate in the period 2005 to 2008.
In the main European Gas target market, Eni will grow at a significant average rate. Let me briefly illustrate some areas. In the Iberian Peninsula, Eni will increase its sales through Union Fenosa Gas, and GALP, reaching around 8 bcm of sales, with an average growth of more than 16% per annum if compared to 2004.
In Germany, Eni targets to supply 6.2 bcm by 2008. It will level on our diversified supply Gas portfolio to maximize margin and sales, strengthening both the GVS growth and Eni position in German market.
In Turkey, the supply will grow from 1.7 to 4.4 bcm through the Blue Stream pipeline.
In France, the new country where we plan to move in, our sales will reach 2.5 bcm by the year 2008.
LNG business is 1 of the pillars of Eni growth strategy. LNG opens up new and diversified opportunity to market Gas and to monetize the reserves located far away from consuming regions. With assets distributed among the main producing regions in the world, Eni is capable of targeting the most important markets and meeting their growth. Our interests are primarily concentrated on the Atlantic Basin where LNG demand is set to grow rapidly over the next few years. In order to meet this demand Eni is developing its position, particularly in North and West Africa. As far as the Far East, it will remain the largest LNG market in the world with demand expected to double for 2015 from current levels. Eni's presence will be based on project opportunities in the Indonesia and Australia.
Eni will develop a portfolio of integrated projects in order to enhance its presence all along the LNG chain and a better control over its operation. 1 of the main points of this strategy is to achieve a balance between liquefaction and re-gasification capacity, which basically means to have a secure market access for LNG. By 2008, the target is to have an efficient capacity of 6.2 bcm mainly in West Africa and North Africa -- West and North Africa, and around 7 bcm re-gasification capacity concentrated in the Mediterranean and Atlantic Basins.
LNG portfolio -- Eni LNG portfolio is based on both Equity and Contracted Gas. By 2008, the target is to sell 12 bcm with an average growth rate of 90% if compared with the volume sold in 2004. A material contribution to reach this volume comes from Union Fenosa Gas portfolio, and from West Africa. 1 of the poorer areas for growth in the coming years. After the year 2008, Eni will continue to grow in the LNG sector to a new integrated project in North and West Africa, as well in Far East with a final goal to reach, by 2012, 12 to 13 -- a total figure of 17, 18 bcm.
In the period - talk about CapEx now - in the period 2005 to 2008, the overall investment will be around E4.2b, with an average annual spending of E1.1b. Demand to investment will be in Transportation activity in Italy and in Development of Power Generation business. After the deconsolidation of Snam Rete Gas, the average annual investment will be lower than E0.7b.
Let me finally highlight that the E4.2b of Eni Gas and Power investments includes also around E450m are related to the new invest -- initiatives in the LNG business, which will be developed mainly through associated companies that are accounted with equity method consolidation.
In conclusion, we confirm our targets to increase Gas sales in Europe, to expand in the LNG business, to reduce presence in regulated business, and complete the