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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Genel Energy Half Year Results Conference Call.I will now pass over to Bill Higgs, CEO of Genel. Thank you.
Good morning, ladies and gentlemen. I'm Bill Higgs, CEO of Genel Energy, and I welcome you all to the review of our 2020 half year results. As is now the norm, I'm joined virtually by Esa, our Chief Financial Officer; Paul, our Chief Operating Officer; and Mike, our Technical Director. We will give a short presentation updating you on the resilience of our business, outlining how our business model helps to shelter us from the tough external conditions. We are, of course, not immune to the challenges the industry faces, but our low-cost base and flexibility in our CapEx allows us both to generate cash and allocate capital to key growth areas, even given the prevailing oil price.This year, the allocation priority is Sarta, and Mike will spend some time giving an update on work in the field, where tremendous progress is being made despite the operational challenges presented by COVID-19.We will now take you through the presentation, after which we'll be happy to take questions from analysts. Please quickly note our usual disclaimer. For those that know us well, there is a bit of repetition in the next couple of slides, but this is due to the simple fact that we have a consistent, resilient strategy and business model designed to deliver through the cycle. It is a strategy fit for the current market environment as we continue to focus on costs, retaining a strong balance sheet and maximizing our flexibility to use our balance sheet, to allocate capital to areas that can create most shareholder value. We have low-cost production that we aim to grow through efficient and rapid development, recycling cash into other growth opportunities with enough left over to fund the dividend. It's a simple strategy and one that we feel protects us from the many of the current headwinds the sector is experiencing. The robust nature of our strategy and business model is shown by the fact that even with the collapse of oil price in the first half of the year and with more than $120 million owed by the Kurdistan Regional Government for past production, we still managed to generate free cash flow while investing in our major growth project at Sarta.Now on to the next slide, that describes our resilient business model. We continue to focus on the downside risk and are never complacent. We aim to deliver in tough times and outperform when times are good. It's about growth and returns even when the external conditions are difficult. Financial discipline has been at the heart of everything we do for a long time, and downside risk mitigation is part of our culture. Focusing on low-cost production through safe and reliable operations has helped our financial position to improve rapidly in recent years and provides a resilience that supports our investment and returns even in the current low oil prices.As we said at the March's full year results, this resilience is helping us deliver new production and also allows us to confirm our interim dividend, which is increasingly a positive differentiator between Genel and many of our less resilient peers.Moving on to the next slide. The business model has certainly been given a real stress test this year. As well as the fall in oil price that faces all of our peers, somewhat of a perfect financial storm hit the Kurdistan Regional Government, with the banking issue at the end of last year, followed rapidly by oil price for reducing revenues and COVID's arrival simultaneously increasing financial needs. This led to deferral of payments of amounts owed to all of Kurdistan IOCs, which meant that $121 million of payments owed to us for production from November 2019 to February 2020 was deferred. As with other operators, we have sought, but are yet to receive clarity on how this will be paid beyond the indication that Brent oil price will need to be at least $50 a barrel.We do commend the Kurdistan Regional Government for quickly putting in place a new point forward next-month payment mechanism, committing to it and delivering on it, which provides us with the confidence needed to commit to our plans for this year. And we will continue discussions with the Kurdistan Regional Government regarding the payment mechanism for monies owed. We do, of course, have experienced here, and our receivable settlement agreement showed that a mutually beneficial arrangement can be found.Even without the circa $120 million of deferred payments and despite the operational challenges of COVID-19, we still continue to generate cash. This was due to us focusing on controlling what we can and materially reducing both CapEx and corporate costs.The business was already lean and our flexibility is illustrated by the fact that there has been no reduction in permanent staff. We have retained our execution capability. We've just flexed the timing of resource needs and the associated capital so that we're ready to go as the environment improves.Work on Sarta and hopefully, Qara Dagh as well as material receivable to recover, we are well positioned to accelerate delivery of growth of returns as the oil price recovers.On to the next slide, and our portfolio offers a lot to look forward to. We are already the only multi-license producer in KRI, a position that will be further strengthened with production from Sarta. At present, the Tawke PSC remains our engine room, and we work closely with the operator, DNO, with whom we remain very much aligned on the development strategy. The rapid results seen from work at the end of the first half shows the production potential still in Tawke and Peshkabir and positions production well for the second half.Taq Taq is a much more mature stage of life, and we continue to focus on cash generation rather than low return investment. We do not expect to do more drilling in Taq Taq in the current climate and it's unlikely that there will be any and less there is an improvement in conditions.I will not dwell on Sarta, as I'll leave Mike to go into the details as the meat of this presentation. But I would like to pay true to our team and the Chevron and all serve teams for being able to continue work on delivering towards exciting new production despite the problems with movement of people and the supply chain issues caused by COVID-19. Still having it on track for first production this year is a testament to their commitment and collaboration and to tremendous performance.On Qara Dagh, we focused hard on continuing our community work to help our nearest neighbors in the COVID crisis and are maintaining our readiness to drill once force majeure can be lifted. We look forward to continuing with the program and successfully appraising this opportunity once conditions allow.Bina Bawi remains a source of frustration where we are now discussing the way to progress at the highest level within the KRG and striving for a breakthrough. The key with gas projects like Bina Bawi is having sufficient information on the costs and revenue along the gas value chain to know if there's an investment project. Until we can do the necessary work to gain this knowledge, we will continue to allocate capital elsewhere and will only invest when there is a clear route to value creation, in line with our business model and financial priorities.And with that, I'll hand over Esa to tell you more.
Thank you, Bill, and good morning to all. As you have already heard from Bill, we've worked for the last 3 years to transform our business model to enable rapid reaction to challenging and unpredictable macro developments. That work is serving us very well right now. We have not faced the need for fundamental change. Our primary reaction to the recent conditions has been about pulling off levers already in place to modify existing plants and make sure they match the external environment. Indeed, we have optimized, rephased and adjusted whilst avoiding major drama and crisis mode, and we have continued to maintain our focus on ensuring that our strategy stays on course, irrespective of these unprecedented times. As a result, we do not have eye-catching costs or manpower cuts to announce because we never -- we have never had surplus spend to take out in the first place. We have been putting our capital to work carefully for quite some time, maintaining flexibility through smart contracting and minimizing firm commitments. What we have done is that we have slowed down the ramping up of our operational capability, but ensuring we can do so without any major regrets. The market will recover, and we plan to be ready to benefit from it.This slide shows the same COGS that Bill showed, explaining the objectives that we have set ourselves and our business model. To make it just a little bit more real and relevant to the present circumstances, the slide gives a little headline for all the assets. But I'm just going to talk about Tawke and Sarta as examples.Starting with Tawke, closely aligned with DNO, we have consistently focused on downside risk mitigation by, for instance, maintaining industry-leading operating costs, carefully managing our contractual commitments to maintain flexibility in spending or not spending CapEx. And by bringing appraisal wells straight onto production for fastest possible payback. Working together with DNO, this means we can either put the foot on the break has happened in the first half, with full year CapEx at the Tawke PSC cut by 60% within less than a month. All put the foot on the accelerator as evidenced by the recent restart of work on the Tawke PSC that increased production by around 15,000 barrels a day nearly immediately.Moving on to Sarta. We set the plan to mitigate downside risk from day 1. We worked hard with Chevron to massively reduce the preproduction CapEx and bring the field on to production as fast as possible so that upfront capital risk is minimized. This has enabled us to continue investing in Sarta against the cycle, even when oil price is low and outlook uncertain, we can then accelerate next stages of the development as we start seeing an increasingly self-funding asset. A more, should I say, conventional approach would have been to build a bigger processing facility upfront with a front end heavy preproduction drilling program. With such an approach and CapEx required by the decision to continue to invest to first oil, given this outlook uncertainty, would have been impossible.Then if you take a step back from the asset level and look at our full portfolio in Kurdistan, it's not hard to see that we expect to scale up. As we expand, we will benefit from the efficiencies of having a larger operating footprint in the country, which will bring further risk mitigation in the downside and increase profitability in the upside.Now on to the next slide, which shows the recent financial results. Revenues significantly hit, of course, impacted by average Brent being down by a full 40%. Nevertheless, the producing asset surplus still remains sufficient to cover G&A and interest costs. The free cash flow is just under $7 million, not at all where we would like it to be, but it's not hard to work out what that would look like if we had received $131 million of proceeds. That was due in the period, but has not been paid. We are, however, confident we will receive the full payment, but it will take some time.As you will have seen, we also reported material noncash impairments to both assets and receivables, as I believe everybody expected. On assets impairment of $286 million on Tawke and Taq Taq, the vast majority of this arises from a significant reduction in oil price outlook. We have used $40 per barrel for the remainder of this year, $43 per barrel for 2021, moving to long-term Brent of $60 per barrel only in 2024 and thereafter. The price deck we expect will turn out conservative.On receivables, delay in payment of a $121 million of receivables has resulted in an impairment of $35 million. Terms and timing, as Bill mentioned, of repayment is not yet agreed. So our impairment is based on the initial indication that the KRG provided, i.e., that repayment would commence once oil price returns to around $50 per barrel.The next slide includes our standard waterfall that shows our run rate business costs relative to revenue. We still make money before investing in growth even without receipt of the deferred payments and even in this period when oil prices average $40 per barrel. This low corporate breakeven obviously protects our balance sheet. And the combination of the resilient business model, a strong balance sheet mean that we can continue to invest in growth even through this period of uncertainty.The near-term outlook is definitely uncertain. That is why we maintain conservative expectations and plan on that basis. We can and will react quickly to new news in odds to maximize our chances of delivering shareholder value. Firstly, by protecting our downside; and secondly, by optimizing our position to benefit from upside. Our portfolio offers a lot of potential for upside.We have retained the interim dividend at $0.05 per share. It was the promise we made last year, albeit in a very different world with a very different oil price outlook, before we lost so far $131 million of cash flow expected this year. If you look 6 months or 1 year or 2 years out, the uncertainty continues. During this next 6 months, there will be a lot to think about in the bull case of further oil price recovery, clarity on payment of amounts owed by the government and the return to operational normality.In the bear case, more COVID, oil price softness and no clarity on when we will be paid the monies owed to us, the range of near-term liquidity outcomes is currently about as wide as it can get. So we need to be watchful as things progress, and we'll react accordingly, one foot on the brake and one on the accelerator.Now forward to the next slide and my final slide. Here is a reminder of our financial priorities that we set at the start of the year. Reminding -- regarding the first bullet, establishing clear terms for the repayment of our outstanding invoices by the government is an important near-term target, and the work is ongoing. It is obvious that allocation of capital to continue investment in Kurdistan depends on our confidence in receiving the fast repayment of invested capital that we had due under our contractual terms. In other words, we expect to be paid in full.Regarding the other priorities, hopefully, you will agree that we are being consistent and predictable and, most importantly, delivering on our promises. Dividend should serve as a perfect example of such delivery. But please do not forget the last bullet, although we are very focused on the downsides you can hear and the risk mitigation, we are continuously developing material upside exposure. None of these opportunities are without risk, but in line with our business model, we can limit the downside and derisk our capital deployment.Each of Sarta, Qara Dagh and Bina Bawi have the potential to deliver significant value relative to our market capitalization. We will approach the monetization of these assets in a very similar manner to what has served us so well with, for instance, at Tawke and Sarta.And I'll pass over to Mike to tell you more about Sarta and what the capital we allocate Sarta is actually delivering. Mike?
Thank you, Esa, and good morning, everyone. So as Esa has just highlighted, the preproduction part of our portfolio is well stopped with assets capable of delivering material value. These are projects ranging from the appraisal and development end of the spectrum in the KRI, at Qara Dagh and Bina Bawi to the exploration end in Somaliland and Morocco. All of which we will look to monetize in due course with the financial discipline reiterated already this morning.Today, though, at a time when smart allocation of capital is perhaps more important than ever, I'm going to focus on the Sarta project. With its imminent cash-generative production, an obvious place for us to be prioritizing investment and diversifying our production. Early field life production to complement and replace mature field barrels elsewhere in the portfolio and phased to reduce downside risk while exposing ourselves to significant upside potential.A year ago, I referred to Sarta as first cab off the rank with respect to our growth strategy. In March year-end results as a train that had left the station. Today, despite all of the speed bumps that the coronavirus pandemic has thrown at us and against the backdrop of oil price slump as global demand softened, that train has stayed broadly on track and is closing in on its first destination.To recap, Phase 1A is a low-cost pilot development of 34 million barrels of 2P reserves from the Mus-Adaiyah reservoir, initially via 2 existing wells, Sarta 2 and Sarta 3, with crude processed in a rental early production facility prior to being trucked to Khurmala on the export pipeline. As this has now become customary, as we update you on this journey to first oil, let's start by checking in on the traffic lights of our action tracker.A contract has now been executed for the rig to reenter and work over the S-2 well early in Q4 to be ready for flow line hookup along with S-3 to the facility. Whilst more holistically, as I'll show you on the coming slides, construction of the 20,000 barrel per day oil serve facility as a whole remains on track for production start-up and first oil later this year, the product of a tremendous effort from all involved in the joint venture, contractors and subcontractors alike, to place the project in this position despite all of the logistical challenges that COVID-19 has posed over the last 5 months.Next slide. Taking a drone's eye view now of the entire Sarta EPS site, the surroundings are not quite as green as a snapshot we gave you in March, but like the project, things have moved on. Overall, project progress is now sitting at around 90%. The tanker loading station, top left is 90% complete. The storage tanks and tanker loading pumps are 100% complete. And the flare stack, large to be location, bottom right, ready to be elevated. The majority of the outstanding work is, as you might expect, through that central separation and processing spine into which the crude enters the facility via flow lines from S-2, the well site a few hundred meters to the left, and S-3. That said, from a construction perspective, this in itself is already 75% complete.The next image is, as you can see, down in the weeds all the nuts and bolts anyway of the pipe rack that forms that central spine. In this case, a view of the crude transfer pumps, which send that processed oil onwards towards those three 15,000 barrel storage tanks.And then a view back the other way to show you progress at the tanker loading station, now 90% completed, as mentioned earlier, the trucks coming in from bottom left, loading with their crude and departing along the road to center and left of the image for the remainder of the on-site process ahead of that onwards journey to Khurmala on the export pipeline. As a company, we obviously have vast experience of trucking operations, notably in earlier years at Taq Taq.Looking in a bit more detail now at the to-do list. In terms of the Phase 1A wells, the S-2 workover will clean out the existing well bore, reperforate the reservoir, run a new completion and acidize and flow back the well to reestablish the previously proven deliverability. The S-3 intervention is a minor slick line, i.e., rigless operation to prepare that well for hookup. Armored with that productive well stock, dynamic commissioning of the EPF will be completed with the introduction of first oil into the facility, ahead of EPF acceptance and start-up of regular daily production with an initial ramp-up of a little less than historical test rates, which you recall were a combined maximum of around 15,000 barrels per day, given the need to manage production performance now over months and years as opposed to hours.Next slide. Whilst much of our focus this half year has been on delivering Phase 1A of the project to first oil, we've not been resting on our laurels with respect to the bigger picture at Sarta. That bigger picture, as we've said previously, could be very material and cash-generative, given the way discovered resources here as the geoseismic section illustrates, are stacked through the entire stratigraphy. To remind you, a year-end ERCE audit of Genel's internal estimates concluded that the gross mid-case resource base at Sarta stands at just under 600 million barrels, half of which is discovered, and the bulk of which 250 million barrels sits in 3 Jurassic reservoir zones: the Mus Adaiyah, the Najmah and the Lower Sargelu.The next step in this journey is the 3-well 2021 appraisal well campaign, aimed at adding to Phase 1A production, first and foremost, but also appraising in place volumes and reservoir deliverability and converting this impressive contingent resources stack to the realms of commerciality and reserves, so providing the catalyst for production expansion in 2022 and beyond.From a well delivery perspective, these 2021 appraisal wells are designed to give us an eclectic mix of information targeting volumetric and deliverability contingencies across multiple reservoir intervals, ranging from up-dip, aerial extent and deliverability at S-5 to the Southeast, to down dip vertical and aerial extent and deliverability at S-6 to the Northwest. So extremely cost-efficient appraisal, which maximizes the information gathered and the optionality for future production versus capital outlay and largely focused on that 250 million barrels of Jurassic contingent resources. Okay. Success at each of these appraisal locations breeds opportunity, opportunity to expedite additional production beyond just Phase 1A pilot aspirations, opportunity for accelerated monetization.From a longer-term planning perspective, we continue to try to stay one step ahead to make sure that we give ourselves the best possible optionality in bringing the hydrocarbons associated with those northern and southern step-outs, S-6 and S-5, on stream and monetize safely, efficiently in shortest possible order and at lowest possible cost. The concepts for accelerated production that have been moved by the joint venture from the select to the defined stage are a combination of flow lines. So that's back to the EPF from the tanker loading station or stand-alone pilot facilities as options available to us, depending on geography and the well results themselves. S-5 on that geographical basis would need to be produced through an additional rental pilot facility, representing the third of a second hub. Whereas S-6 would most likely be produced by tieback to the 1A EPF as clearly would S-1D.From a well delivery perspective, the required environmental baselining has already been carried out ahead of the civils to work on well site and access at S-6 and S-5. Whereas S-1D utilizes an existing well pad and well bore, in fact, to sidetrack into the reservoir section, not reach with the original S-1 well. So another example of the cost savings and increased profitability that can be achieved through the ingenuity that represents a core Genel value. By planning for success, whilst minimizing regret cost, we can likely start to bring on production from the appraisal campaign by end of 2021 and early 2022.So on that positive note, back to you, Bill.
Thank you, Mike. As we continue ramping up activity, even given the external environment, we are not losing our focus on sustainability. And being a socially responsible contributor to the global energy mix. The commissioning of the enhanced oil recovery project at Tawke has greatly reduced flaring at Peshkabir and reduced our producing emissions to 7 kilograms of CO2 per barrel. And we continue to further our local community work. We have a long history of working in Kurdistan with $60 million spent on social investment over the course of our history.As we've mentioned before, we haven't always been as good as we should have been in discussing our work in this area and illustrating the efforts we make. We are now members of Transparency International, U.K. and are signatory to the United Nations Global Compact, an illustration of our commitment to ESG. Our inaugural sustainability report out in September will give further details on all of our activities. We still have a long way to go, but we're making good progress, and we are making sure that our values are embedded in all the decisions made by our employees at all levels.On to the final slide. This summarizes what we have looked forward to. We continue to meet the challenges thrown at us, but with a fair wind, we are well positioned to deliver on our promises, growth and returns. Even given the current oil price, we expect to end the year in a net cash position, a robust base that gives us the ability to continue allocating capital to those areas from which we can create shareholder value and deliver shareholder returns rather than just survive.And with that, I'll pass over to the operator to run the Q&A.
[Operator Instructions] The first question comes from the line of David Round from BMO Capital Markets.
I've got a couple, please. The first one, obviously, good signs from Tawke in July. In terms of potentially increasing the activity there even further, though, how much does that rely on better visibility on receivables recovery? Or are you happy with the mechanism that's now in place with the KRG? So is it really just a price-driven economic decision?And I was also going to ask just for latest thoughts on Bina Bawi, really. Obviously, the oil price fall is changing a lot of perceptions and economics attached to oil developments. So purely thinking about the early oil there. I just wonder if that and the overall financial position of the KRG in a lower oil price environment could help find some common ground.
Thanks, David. Firstly, so on the extra work, I think you're right. It's a good indication of what can be done -- still be done at Tawke and Peshkabir, the increase in production that we had in the last month and sets a good base for the remainder of the year.I think you're also right to point out is that clearly, the new payment schedule, which the Kurdistan Regional Government has set in place is a good indication that they are committed to the industry and committed to paying what they can, when they can. But it's also fair to reflect on the fact that the outstanding receivable, I think, about 60% of that outstanding receivable represents capital investment from a prior campaign. So there is certainly a need to better understand how we're going to get those monies back. At least, I think, as part of that framing of when investment can be taken up again at Tawke and Peshkabir in terms of drilling activity.We're positioning ourselves with DNO to be able to act as quickly as we can to get back to work as the price environment and that certainty improves. And as I said, it's a clear focus for us to get that certainty and that's been a consistent message, not just from us but from other IOCs to the Kurdistan Regional Government to give us clarity on how those receivables can be returned.I think with respect to Bina Bawi, I think, again, it's a good observation, David. The -- in some ways, there's nothing like a good crisis to get people thinking collectively about what's the best solution. And I think that's the way that we've looked at it. We were able to meet with the Prime Minister a couple of weeks ago and focused on Bina Bawi, and we were -- it was clearly the conversation, the center of that conversation was this is what needs to happen for us to know whether we've got a project that's investable or not. And if we can go down these threads of activity of price discovery and understanding what the CapEx of the value chain is, then we'll know. And so hopefully, that discussion will bear fruit as we go through the remainder of the year.
The next question comes from the line of Teodor Nilsen from SB1 Markets.
I have 2 questions, if I may. First, on Sarta. You just see that you're progressing well and not too far away. So first of all, I just wonder how should we model like the production volume. And what kind of ramp up pace to plateau for Phase 1 should we assume?Second question is more like on the general situation in Kurdistan now. Now of course, it's more challenging than it's been before because of the COVID situation. So can you just briefly discuss around how to move people around and in and out of Kurdistan and also equipment? Is that like a major challenge compared to you also seen before?
Thanks, Teodor. I'll let Mike answer the first question on Sarta.
Yes, let me do that. So on Sarta, yes, I think the key thing to remember in this respect is that is a Phase IA is a pilot production project. So as the name suggests, we're testing the reservoir to see how it performs over that period of months and years as opposed to hours of initial well testing. That said, our modeling work suggests that the wells will together be able to achieve deliverability not too far from those historical peaks, albeit as part of a reservoir management program geared towards, let's say, longevity rather than the threat of the instantaneous. S-2 and S-3 both flowed up to around 7,500 barrels per day on DST, for typical DST duration, so hours, not days, months, years. But those rates were stable and without water. So that's obviously a very positive sign.Looking forward to our expectations for the 2021 appraisal wells in a success case and even further beyond to the success case development expansion, if you like, in 2022 onwards, we expect those wells to be comparable to Peshkabir in terms of initial rates and in terms of the EURs per well. It's good to think of the Mus-Adaiyah or Sarta in that way. And think of it as being like Tawke and Peshkabir in reservoir type and like Peshkabir in fluid type. So that's really what drives those inevitable analogies.
Thanks, Mike. Teodor, on the second question, in regards to sort of moving people in and around, maybe, Paul, if you're on, you can maybe pick up on that one and talk a little bit about some of the challenges we face more broadly across the business.
Yes. Thanks, Bill. I will. When COVID first struck, of course, there was a great deal of uncertainty as to the best way to move people and equipment about -- and as the weeks and months progressed, we got better at it. We were able to make use of charter aircraft for people and share facilities with other operators, and the authorities got their act together around the land border crossings, which allowed goods and equipment to travel across country, albeit a bit slower than normal. But we were able to get hold of everything that we needed.More recently, following the holiday surrounding the holy month and Eid-ul-Adha celebration just last week, we are starting to see the resurgence locally around both Erbil and Sulaymaniyah, which has constrained us in the short term. So we're going to be following that closely. There have been new controls put in place at both those areas, and there have been a tightening of controls around the land border crossings with Turkey. But we hope as the situation improves over the next couple of weeks that we'll get back to where we were, say, a month ago. So it's a very dynamic situation, it's one that we follow closely. But as you've already heard from Mike, the fact that we've been able to essentially get very close to completing construction at Sarta and we have a full team there undergoing commissioning work just now, I think, is testament to our ability to move goods and materials and people regardless of the COVID constraints.
I just had a follow-up on Sarta on the production level. Given the fact that Tawke now is performing pretty well and Sarta will come on stream this year, is it fair to assume that you will have higher working interest production in second half than first half this year?
I guess it's difficult to say. What I think is the Tawke PSC production provides a good baseline from which to think about us declining from as we go through the remainder of the year if we don't get back to work as we talked about already. And it's likely that new well work at the Tawke PSC will -- maybe timing of it is likely to improve the exit rate rather than have a material impact on the average for the year. And the timing of Sarta is such that it's probably going to sort of be later in the year and have the same effect. So it's -- that's probably the best way to think about the business is that the exit rate for the year should be in a good position, rather more than the average for the second half being materially outperforming the first.
The next question comes from the line of Robin Haworth from Stifel.
Just 2, if I may. So I was wondering if you could talk about the split of H2 CapEx. You said this morning, it would be in the 40s. I imagine most of that is going to Sarta. I was wondering if you could be a bit more precise. And therefore, if there's anything that's going to Tawke, like to what extent is that contingent on? And if you get back to work at the Tawke field [ like it works ], could H2 CapEx increase, please?And the second one on the payments position and the money that you're owed. I was wondering if you could give a bit of color on like to what extent you are in discussions with the KRG about that. Or is it kind of just popped and you're waiting for higher oil prices? Or is it something that you're talking about on a kind of daily or weekly basis?
Thanks, Robin. Esa, do you want to pick up on the split of the H2 CapEx?
Yes, I can. Robin, H2 CapEx, not much similar to H1. It is going to be a combination of producing asset CapEx, mostly Tawke. So this is going to be some CapEx, obviously, spend on Tawke and the continuing investment in Sarta. A little bit of CapEx in order to ensure our ability to drill the Qara Dagh well as well, very little in Taq Taq and then sort of license -- maintaining CapEx on the remaining licenses, particularly Bina Bawi and Miran. There's nothing fundamentally different to first half in the second half of the year. We haven't provided further granularity than that, but that's kind of the way it's going to work out.
Okay. So if you were to get back to drilling at Tawke due to improving situation, is it fair to say that there's like a bit of -- you can flex that up and down or up as needed?
Yes. So there is an opportunity and this is something that we spoke about in our prepared remarks. So particularly, Tawke provides the opportunity to accelerate if the conditions are supportive. The original thinking was that our expectation was that the situation continues quite challenging towards the very end of the year and, therefore, the acceleration of drilling activity will not have a major CapEx implication on this year. It's possible that, that actually increases and instead of spending $100 million or $105 million of CapEx, we spent $120 million. But it's that sort of an order of magnitude. If we do, it's all going to be justified by the same thinking, which is that we get a very quick payback for that CapEx and the payback is going to be months rather than, than any longer period of time. But it's -- there's that flexibility, but the order of magnitude is that sort of order of magnitude rather than much larger than that. We are already in August this year and, obviously, any acceleration towards the end of the year when we start today is not going to be having a very great impact on our CapEx levels. That's kind of the order of magnitude.
And with respect to the payment discussions, Robin, there's been consistency across the international producer community to seek clarity from the Kurdistan Regional Government. And it's exactly for the reasons that we're talking about on this call is that the more certainty that the Kurdistan Regional Government can give the producers on the terms and how that -- those monies will be received, then obviously, it gives more clarity to the marketplace, and that's a good outcome. So there's been quite a lot of engagement on that basis. But it's fair to say that the Kurdistan Regional Government has been also very keen to sort of say, "Look, we really can't get to this until we know that oil price is above $50 a barrel and then we'll be able to talk with you." Part of the reason for that is that if you do a sort of breakeven analysis on the Kurdistan Regional Government's budget, it sort of looks like it breaks even at around $48 a barrel.I think the second reason is probably the bigger reason as to why there's been an unwillingness in the short term to engage on the terms is that the Kurdistan Regional Government really need to resolve the budget allocation with the federal government in Baghdad as part of that picture. And that's clearly a very active and ongoing conversation as to how to -- how revenues are going to be shared and distributed from the federal government to Kurdistan. And I think without knowing how that will work, it's very difficult for them to know how to return these monies to the producers. The -- so we wait to see that, hopefully, we can reach some resolutions with Baghdad on that, and that will create the opportunity for resolving or coming up with at least for a plan that we can communicate as to how these monies will be recovered.
The next question comes from the line of Daniel Slater from Arden.
Just a couple for me. #1 was on Sarta. It's sort of been talked about already, but obviously, you've got the drilling program next year, and you'll be doing the work programs in sort of annual chunks, I expect. When might we sort of reasonably expect new production volumes from Sarta beyond the ones we're going to get at first oil in Q4? So when might we sort of expect, what you might call, Phase 2 volumes to start?And the other question was just on whether you're sort of focusing down on current assets and work programs or whether you're still looking at potential new assets as well, probably in Kurdistan, but possibly further afield?
Daniel, I'll let Mike again pick up on the Sarta new production. So Mike, maybe you can handle that first.
Sure. Happy to do that. Yes, I think really, as shown in the presentation, as a campaign, we should be looking for -- to be adding production in terms of that 2021 appraisal campaign, adding production late in that year to 2022. So clearly, the potential for earliest at would be from S-6, which is the first on the slate and S-1D, which is closest to the EPF, respectively. So both of those are ones which would likely be flow line tieback solutions. And then the latest would be S-5, given that that's last in the sequence and it's furthest from the EPS. So that's one that -- which will in all likelihood, need a stand-alone facility. So that's more likely to be around the end of 2022. But as a campaign, late 2021 into '22, we should be seeing some ads from those wells in success cases.
Thanks, Mike. Obviously, we continue to spend time -- in the current climate, we're very fortunate to have the balance sheet strength that we do, and as I say, a business model that's built for resilience. And so we do continue to look at -- look at opportunities, but they have to be able to fit. They have to be able to fit the model. We're not pushed to -- with a need to do anything beyond our existing portfolio this time, but obviously, we do see opportunity in the marketplace, and we'll continue to pursue things that we think will fit.
The next question comes from the line of Al Stanton from RBC.
Yes. I think Daniel just asked my question about portfolio enlargement. So I suppose I'll expand the question, if I may. I mean your paper is doing better than most people at the moment. We haven't heard about bond buybacks, which suggest that the bond price has recovered somewhat. So you are in a position to do more. So I mean, how much time does management spend actually thinking about new ventures? Because it looks like Sarta is in the bag, bit of hours, hard to move, Qara Dagh is not at its risk. Should you be looking forward more aggressively than you kind of suggest at the moment?
Al, thanks. Yes, I guess, it's -- as ever with inorganic growth, it's something we do and have continued to look at, and it's something that you can never be quite sure when it's going to happen or when the conditions are going to be right. It's the -- it takes two to tango world, isn't it? But we do continue to focus on growth and returns, and we see inorganic growth as one of the levers that we have, given our relative strength and the opportunity to look at diversifying -- on further diversifying our cash flows. We've talked about it before, Al, which is if you go back and look at the story and that's why Sarta has been so important for the story in itself. We had an awful lot of eggs in 4 years ago -- 3 years ago, we had an awful lot of eggs in single wells in Tawke field, and we've managed to continue to diversify our cash flows, and there's a strong focus on continuing that journey to diversify cash flows, whether we do that organically or inorganically.
It's interesting that you still talk about diversification while still talking about Kurdistan. You gave the impression that you're feeling more comfortable with more in Kurdistan as opposed to looking outside of the region.
Yes, we just -- we often use the expression that if Sarta would come up anywhere else other than KRI, would have done that deal in a heartbeat because it meets our criteria very much in the fact that we didn't -- there's no upfront capital. We've managed to do a lot of work on downside risk mitigation, as Mike talked about in the presentation. So it's much more around the character of the assets and the character of the deal in its location. But obviously, we are comfortable with Kurdistan risk.
There are no further questions in the queue. So I'll hand back over to your hosts for any closing remarks.
Great. Well, thank you very much for making the time to listen to us this morning. And we, as a team, very much appreciate the time you spend with us on these results presentations. And hopefully, you've got a clear message today about the resilience of Genel's business model and our ability to weather the storm and come out much even stronger as the situation recovers. I wish you all well, and we'll talk soon. Thank you.