BP (BP) Q3 2011 Earnings Call Transcript

Transcript

Speaker 1

Welcome to the BP presentation to the financial community webcast and conference call. I now hand over to Fergus MacLeod, Head of Investor Relations.

Speaker 9

Hello everyone, and welcome to our results conference call for the third quarter of 2011. I'm Fergus MacLeod. Before we begin, I'd like to add a personal remark. As many of you may know, I'm moving to a new role as BP's Head of Strategic Planning, and as a result, this will be the last quarterly webcast that I host. Jessica Mitchell will be taking over as Director of Investor Relations. I've really enjoyed my nine years in investor relations, and I'd like to thank you all for that. Today's presentation will be by Bob Dudley, our Group Chief Executive, and Byron Grote, our Chief Financial Officer. Before we start, I'd like to draw your attention to our cautionary statement. During today's presentation, we will make reference to estimates, plans, and expectations that are forward-looking statements.

Actual outcomes could differ materially due to factors we note on this slide and in our regulatory filings. Please refer to our annual report on accounts, 20-F, and third quarter stock exchange announcement for more details. Both of those documents are available on our website. Thank you, and I will now hand over to Bob.

Speaker 5

Thank you, Fergus, and hello everyone. Thank you for joining us. Today is the presentation of our third quarter results. I'm also going to use this opportunity to tell you about our direction going forward and at the speed at which we will move. The last year has been an unprecedented one for BP. First, I want to update you on what has happened during 2011, but this year of consolidation is essentially over. I want to tell you about the company we will be in the future. Back in February, I promised we would focus on value ahead of volume, and today I will tell you what that means and how you can measure it. Byron will then take you through our results for the third quarter. I will then move on to a more detailed look at how our new direction will be delivered through our businesses.

I know we need to rebuild confidence in the company and see its true value reflected in our share price. We have firm plans to make that happen. Our goal is to grow operating cash flows to a substantial degree, a degree that will allow us to both invest for future growth, and we have a great project pipeline, as well as directly increase returns to shareholders. We're going to talk for about an hour, and there will be plenty of time for Byron and I to take your questions. In February, I outlined three priorities: one, to put safety and risk management at the heart of everything we do; two, to rebuild trust in BP's ability to operate; and three, to pursue direct value growth for shareholders. These priorities remain central to our strategy.

Much has been achieved, and to give you the headlines, our new Safety and Operational Risk Organization is changing the way we work across BP. We have announced new voluntary standards for how we will drill in the Gulf of Mexico, and we're introducing other new global standards for our operations, for example, with blowout preventers. We've undertaken an extensive program of 48 major upstream turnarounds scheduled for completion this year, of which the majority are now complete. All of our businesses operate under our Single Operating Management System, or OMS. We have reshaped our upstream into three divisions, each of which report to me. This increases accountability and uses and builds capability more efficiently. We've centralized and standardized the way we work to drive uniformity, capital efficiency, and simplicity. We are meeting our commitments in the Gulf.

We have already paid half of the $20 billion we committed to the trust fund to meet the cost of the Deepwater Horizon incident. We've reached settlements with Mitsui and Weatherford, and just last week, announced settlement with Anadarko. We've made the company more secure financially. We've strengthened the balance sheet, improved our credit ratings, and restored dividend payments to our shareholders. We have agreed asset sales totaling $26 billion against our program of up to $30 billion. We've achieved a record year for new exploration access. Over the last 12 months, BP received awards in 11 countries for 67 new exploration licenses, and there is still more to come this year. We have won new opportunities in the world's fast-growing large economies. In particular, we are now investing at scale in Brazil, and we have a new strategic alliance in India.

We're the first company to reach our initial production target in Iraq. Output at the supergiant Rumaila field has grown significantly. In refining and marketing, we continue to deliver underlying earnings momentum. 2011 looks likely to be the highest year ever of downstream earnings for BP, and it provides valuable cash for the group. We are getting back to work in the Gulf of Mexico. As of today, we have three deepwater rigs permitted in the Gulf of Mexico engaged in plugging and abandonment activities. Just last week, we received approval for the Kaskida exploration plan, and subject to approval, hope to have a fourth rig spudding the appraisal well in the very near future.

By the end of the year, subject to obtaining the necessary approvals, we hope to have five deepwater drilling rigs operating in the Gulf, and as we move through 2012 and operations are fully restored, we hope again, subject to receiving the necessary approvals, to increase this to seven deepwater rigs. This ramp-up in activity will create a significant number of direct jobs within BP in the U.S. It will also provide U.S. jobs for our contractors and suppliers. Along with that, there will also be a significant number of indirect jobs. We will have taken major steps forward on many fronts in a relatively short space of time. Of course, as we said upfront, this has increased some costs and reduced some volumes, but these were short-term effects as we laid stronger foundations for the future. This has brought us to a clear turning point.

Operationally, October 2011 marks a turning point for BP. The low point in production has now been passed. Most of the big turnarounds this year are complete, and production is rising again, mostly in high-margin areas. Of course, future divestments will impact the reported numbers, but we are confident that underlying momentum is returning. There is more to come, as you'll see shortly. Let me talk about our future direction. We have delivered what we said we would do in the last year. We are now in action to become an even stronger company. We are resetting the company to be leaner and fitter, a BP that plays to its strengths. Here is the outline of the 10-point plan to move BP forward. Five are changes you can expect. Some are already underway. The second five are what you can measure us by.

Again, the first five are what you can expect. First and most important, we will continue to have a relentless focus on safety and risk management across all of our operations. I am determined that BP will deliver world-class performance in safety, risk management, and operational discipline. We will be a company that systematically applies our global standards as a single global team. Second, you can expect BP to focus intensively on its proven strengths, those areas where we have deep-seated experience and proven capability. BP has distinctive strengths, and let me identify key ones for you. We're great at exploration. We're very good at finding oil and gas and doing it at scale. We are among the real pioneers of the deepwater and have a long track record of building value there. We manage many giant fields around the world, and we develop valuable gas value chains.

We've learned lessons from the Deepwater Horizon incident, which have made us stronger. We have the opportunity upstream to build the same scale and depth in new basins like Brazil as we have today in Angola, Azerbaijan, the North Sea, and the Gulf of Mexico. Our downstream business is world-class. It has a high-quality set of assets, and it is generating good earnings and cash flow. Underpinning these strengths are deep capabilities in building relationships and developing carefully chosen flagship technologies. We forecast world energy demand growing around 40% by 2030 and foresee a need for many sources of energy to meet this demand. We believe our strengths position us very competitively as we face this future. Third, we will be a stronger and more focused BP with a base of assets which is high-graded and high-performing. Fourth, you will see a simpler BP.

Our organization is already much more standardized. Our footprint is smaller, with fewer assets and operations in fewer countries, and our internal reward and performance processes are more streamlined. This will drive better and more sustainable performance in safety, quality, and efficiency with less variation. Fifth, you can expect greater visibility of the value we are creating. We are going to improve transparency in the reporting of our business segments. Beginning next year, we will break out the numbers of certain parts of our businesses, such as lubricants and petrochemicals in the downstream. Now, points six through ten are what you can measure us by. Point six, active portfolio management to build value will continue. In addition to the current $30 billion divestment program, we intend to divest a further $15 billion of assets over the next two years. Planned divestments will result in a total of $45 billion.

This includes the sale of two U.S. refineries announced earlier this year. We want to focus our portfolio further on our areas of strength and deliver increased financial flexibility. To put it in perspective, the targeted $45 billion compares against the current market capitalization of around $130 billion. Seventh, you can measure a strong list of upstream projects coming on stream over the next three years. By 2014, unit cash margins on production from this new wave of projects are expected to be around double our existing average. Eighth, we will grow our cash flow. Between 2011 and 2014, BP's operating cash flow will grow faster than volumes. You can expect us to generate an increase of around 50% in operating cash flow in 2014 compared to 2011, around half from ending Gulf of Mexico trust fund payments and around half from our operations.

Ninth, BP will use this additional operating cash prudently. We want to use around half for increased investment in our project inventory for growth and around half for other purposes, which would include increased distributions to shareholders through dividends and buybacks as appropriate or repayment of debt. Finally, the strength of our balance sheet will be enhanced. We will move to the lower half of our 10% to 20% gearing range. This is our approach in a simple 10-point plan, five things you can expect and five things you can measure. This is underway to build a stronger and safer BP. I am convinced that this is now the right direction for BP to take and the right path to get us there.

BP will be simpler because we will focus on our strongest assets with our strongest capabilities, and BP will be safer because we are fundamentally changing our approach to managing risk. We will have our more detailed strategy discussion in February. We will amplify on these 10 points then. With that, let me now hand over to Byron, our Chief Financial Officer, to review our third quarter results.

Speaker 9

Thank you, Bob, and good day to those joining us on this call. I will begin my review of the quarter with the trading environment. The table shows the % year-on-year changes in BP's average upstream realizations and the refining market margin for the third quarter, as well as year to date. Compared with the previous quarter, our liquids realization reduced by 3% to $104 per barrel, but was 47% higher than a year ago. Our gas realization increased to $4.95 per thousand cubic feet, up 9% on the prior quarter and 26% higher than a year ago. Taking both oil and gas together, our third quarter average hydrocarbon realization was up 41% versus a year ago and 31% higher on a year-to-date basis. Relative to 2Q, the refining market margin fell by $1.40 per barrel to $12.50, but was 25% higher than the third quarter of 2010.

On a year-to-date basis, the refining market margin is 24% higher than last year. Turning to the financials, our third quarter underlying replacement cost profit was $5.3 billion, a reduction of 4% on the third quarter of 2010, driven by the low tax rate experienced in that quarter. The underlying result reflects higher realizations and a stronger refining environment, offset by lower production, increased turnaround activity, and higher costs. The underlying effective tax rate for the quarter was 31% compared to 25% in the third quarter of 2010, a rate which reflected the impact of asset disposals announced over that period. We continue to expect the full-year effective tax rate to be towards the higher end of the February guidance at around 34%. Third quarter operating cash flow was $6.9 billion, excluding Gulf of Mexico oil spill-related post-tax expenditures of $900 million.

Underlying operating cash flow was $7.8 billion, down 7% compared with the third quarter of 2010. Cash flow is down 20% on the prior quarter, primarily due to the unusually large dividend received from TNK-BP in the second quarter. We now expect our organic capital expenditure in 2011 to be around $19 billion, slightly lower than our original projections, primarily due to the delays in getting back to work in the Gulf of Mexico. In exploration and production, we reported a pre-tax underlying replacement cost profit of $7.1 billion for the quarter. The primary factors impacting the quarter's performance relative to a year ago were higher realizations, partly offset by lower production volumes and higher costs. TNK-BP earnings and the gas marketing and trading contribution both improved compared to the prior year.

Costs in the third quarter were impacted by continued rig standby charges in the Gulf of Mexico and increased turnarounds and maintenance, with this activity peaking in 3Q. Production for the quarter was 3.32 million barrels of oil equivalent per day, 12% lower than a year ago and 8% lower after adjusting for the effect of acquisitions and divestments and entitlement impacts on our production sharing agreements. The lower production primarily reflects the continued impact of suspended Gulf of Mexico drilling and higher turnaround and maintenance activity. Once again, the reduction was weighted towards our higher margin areas, including the Gulf of Mexico, the North Sea, and Azerbaijan. As we explained in February, turnaround activity in 2011 is higher than 2010, and significant progress was made on these turnarounds in 3Q. Most turnarounds are underway or completed, with 80% delivered on schedule.

This will support improved 4Q production and have longer-term benefits on reliability and integrity. Production in the fourth quarter is expected to be higher post the peak turnaround season and the completion of the Reliance Industries transaction. Production will continue to be impacted by divestments and the pace of drilling activity in the Gulf of Mexico. TNK-BP continues to perform well. Our share of TNK-BP net income was over $900 million in 3Q, as we benefited from a stronger environment and higher production volumes compared to the prior year. We received cash dividends of $425 million in the quarter. This brings the total dividends received from TNK-BP this year to $2.1 billion. In refining and marketing, we reported a pre-tax underlying replacement cost profit of $1.7 billion for the third quarter compared to $1.6 billion for the same quarter last year.

The third quarter saw a return to strong operational performance following the outages of the second quarter. Compared with a year ago, our result reflects an improved refining environment and a stronger supply and trading contribution. These improvements were partially offset by increased turnaround activity and adverse foreign exchange effects due to the strengthening of the U.S. dollar against the euro and the Australian dollar and a difficult marketing environment. During the third quarter, we continued to realize significant refining feedstock benefits in the U.S. due to our location advantage in accessing WTI-priced crude grades. In the fuels value chains, Solomon refining availability remained high at 95.3% for the quarter. During August, the last of the units impacted by the second quarter weather-related power outage at the Texas City Refinery was brought back on stream.

In the international businesses, petrochemicals production volumes were down year on year in the third quarter by approximately 10%, the majority of which was driven by plant shutdowns in Asia. Looking ahead, we expect a normal seasonal decline in refining margins in the fourth quarter. Our overall level of planned turnarounds is expected to be lower relative to the third quarter. However, our Whiting Refinery will undergo planned maintenance that will affect approximately half its crude capacity for the expected one-month duration of the activity. In other businesses and corporate, we reported a pre-tax underlying replacement cost charge of $410 million for the third quarter, a reduction of $80 million versus a charge of a year ago, primarily reflecting foreign exchange effects. Current expectations are for a substantially greater charge in the fourth quarter as a consequence of the normal seasonal increase in functional costs retained within OBNC.

The expected underlying charge for the full year remains in line with February guidance. The next slide provides an update on the costs and provisions associated with the Gulf of Mexico oil spill. In the third quarter, we recognized a pre-tax charge of $600 million for the incident, bringing the year-to-date charge to $400 million. The 3Q charge reflects a number of provision adjustments and the ongoing quarterly expenses of the Gulf Coast Restoration Organization. The total charge taken for the incident at the end of the quarter was $41.3 billion, including the $20 billion trust commitment. The charge excludes the Anadarko settlement reached on the 17th of October, which will be recognized in the fourth quarter, reducing the overall pre-tax charge for the incident by $4.1 billion. The settlement from Anadarko, when received, will be applied to the trust fund.

As a result, we expect to complete our payments into the trust fund by the end of 2012. Pre-tax BP cash outflow related to oil spill costs for the nine months was $7.3 billion. As we indicated in previous quarters, we believe that BP was not grossly negligent, and we've taken the charge against income on that basis. Turning now to cash flow, this slide compares our sources and uses of cash in the nine months of 2010 and 2011. Year-to-date operating cash flow was $17.1 billion. Before Gulf of Mexico oil spill-related post-tax expenditures of $5.6 billion, underlying year-to-date operating cash flow was $22.8 billion, 7% lower than a year ago, with higher working capital requirements being a major factor. Operating cash flow in the fourth quarter will be impacted by the normal seasonal working capital build.

We received $6.4 billion of disposal proceeds for divestments completed in the first nine months and additionally held $4.5 billion in deposits for transactions to be completed subsequent to the quarter end. These deposits were reported as short-term debt. Organic capital spending for the first nine months was $12.6 billion. In addition, inorganic capital spending was $7.9 billion and included the purchase of Brazilian assets from Devon Energy, the acquisition of the majority control of Brazilian ethanol and sugar producer CNAA, and stage payments of $4 billion in respect of our transaction with Reliance Industries. The remaining payment of $3 billion was paid to Reliance on the 3rd of October. Total cash held at the end of the third quarter was $18 billion. Our net debt ratio was 19% at the end of 3Q.

As I mentioned earlier, the $4.5 billion of deposits for divestments to be completed subsequent to the quarter end was reported as short-term debt. As these transactions complete, net debt will reduce accordingly. We now expect the sale of our 60% interest in Pan American Energy, which is pending regulatory approvals, to complete in 2012. BP believes that the transaction provides significant value to both parties and will continue to work towards securing the necessary regulatory approvals. BP continues to hold a $3.5 billion deposit with respect to the disposal. Gearing at year-end, which will be impacted by seasonal year-end working capital increases and the final payment for the Reliance transaction, is expected to remain around 20%. Our intention continues to be to reduce our net debt and realize the financial flexibility of a gearing level in the lower half of the 10 to 20% band.

Building on Bob's earlier remarks, I'd like to add a few thoughts on the medium-term financial framework for the group. From the first quarter of 2012, we plan to provide additional information around our segment results. TNK-BP's result will be reported as a segment in its own right. We'll also provide additional disclosure on the performance of the fuels, lubricants, and petrochemicals businesses as part of the refining and marketing result. Since we announced the current disposal program, we've agreed transactions totaling $26 billion. We still expect to have agreements in place for around $30 billion of disposals by year-end, although, as I've indicated, some transactions will not complete until 2012. As Bob described, we now plan to increase divestments by a further $15 billion to a total of $45 billion by the end of 2013.

This increase includes our intention to sell previously announced refining and associated marketing assets in the United States. The increased disposal program allows us to focus our portfolio on areas of strength. It also underpins reduction in gearing and provides flexibility for other purposes. The projected growth in cash from operations supports our plans to increase capital spending as well as to fund other priorities, including higher distributions to shareholders. We will review our 2012 distribution plans in February and adjust them in line with the approving circumstances of the firm. That concludes my remarks. Now back to Bob.

Speaker 5

Thank you, Byron. I want to return now to our three priorities of safety, trust, and value growth. In terms of value growth, I have a fair amount of detail to give you on progress and plans for both upstream and downstream. First, a few points on safety and trust. We have a clear strategy of embedding safety and operational risk management at the heart of BP. We are growing deep capability in our Safety and Operational Risk Organization, or SNOR. It now has nearly 500 staff, with over 160 specialists hired this year and more being recruited. Teams are now embedded in our operations. They have the ability to intervene when necessary and are driving continuous improvement by supporting the ongoing implementation of BP's operating management system. We also continue to implement lessons learned from the Gulf of Mexico oil spill and to share these lessons globally.

A dedicated team is overseeing implementation of the recommendations of the BLI report, and new standards and processes are being embedded. Of note, we now have a new zonal isolation standard and a new rig audit handbook. We're also changing how we work with contractors by focusing on developing fewer, deeper, and longer-term relationships. We will implement a systematic selection process and strengthen our oversight and verification work. This is something we will be implementing throughout 2012. I am pleased with the progress we're making, but we believe in continuous improvement, in safety more than anything else, and will continue to drive change across the company. Turning to rebuilding trust, let me briefly update you on progress related directly to the Gulf of Mexico incident.

While we recognize there is ongoing impact in the region, the summer saw strong signs of improvement in tourism and fishing industries, demonstrating that the region continues to recover. We have now paid out around $7.3 billion in claims and government payments. We've committed up to $1 billion to early natural resource restoration projects, and BP has paid nearly $10 billion into the trust fund. We're also making progress in resolving liabilities. We've reached settlements with Mitsui and Weatherford, and just last week with Anadarko. This latest settlement resolves the issues between the leaseholders, and we continue to encourage others, including TransOcean and Halliburton, to step forward. We continue to cooperate with all the investigations and hearings into the incident. The latest report to be issued was that of the final Marine Board inquiry.

Its core conclusion was consistent with every other official investigation, that the Deepwater Horizon incident was the result of multiple causes involving multiple parties, including TransOcean and Halliburton. The limitation and liabilities trial remains scheduled to commence in February 2012. Uncertainties remain with further reports and proceedings to come, but some significant steps are now behind us. Turning now to value growth. As I outlined to you earlier, you will be able to measure it through growth in operating cash flow across the whole portfolio, but it will be delivered through the distinctive strengths of each of our businesses, through increased investment into focused, high-quality assets, and through the capabilities that underpin value in each business. Let me start by briefly reminding you of the five key drivers of value growth in the upstream.

These include risk reduction, increasing investment with a particular focus on exploration, active portfolio management, growing our operating cash faster than production, and all the while focusing on the major growth engines which play to our strengths in the deepwater and gas value chains and in giant fields. We will talk more about these drivers in February, but let's look at some key progress today. Let me start with exploration. In this business, access to new opportunities is key. 2011 is turning out to be a record year for access to new acreage. Over the past 12 months, we have gained access to 67 new exploration licenses in 11 countries with a total of 335,000 square kilometers of new acreage, including 10 new basins. In the third quarter of the year, we continue to make significant additions to our portfolio.

In July, we were awarded two deepwater exploration and production blocks by the government of Trinidad and Tobago. In August, we completed our acquisition of a 30% interest in 21 oil and gas production sharing contracts in India. This is the beginning of what we expect to be a long and successful working relationship with Reliance Industries. Also in August, we agreed terms to farm into a deepwater exploration block in Namibia. It is this growing portfolio that will allow us to continue to increase our investment in exploration over the next few years. We are on track to double our exploration investment. By 2013, we intend to be investing around $1 billion in exploration drilling alone. We're also increasing our spend on seismic and other geosciences activity, as they are critical for sustaining exploration activity over the long term.

We will continue to access new acreage in established basins as well as entering new basins. We're an industry leader in seismic imaging and are continually pushing the boundaries of what seismic can achieve. We have detailed plans to expand the drill-out of our prospect inventory. We plan to increase the number of wells drilled from six this year to at least double that next year and to as many as 15 to 25 in 2013. We plan to significantly increase the number of wells which test new plays over the next few years. The objective is to drive a higher contribution of reserves replacement from new exploration discoveries. The additional exploration drill-out also provides option value, as we can decide what resources to keep and develop and what we divest.

Recent successes include the Moccasin discovery in the Gulf of Mexico, in which we have a stake, and successful appraisal wells and significant extensions to both the Mad Dog Field in the Gulf of Mexico and the Clare Field in the North Sea. Realizing value means also knowing when to divest assets as well as when to access and invest. We are continuing to actively manage our portfolio. We approach this by looking at assets and asking if they meet certain key criteria. Do they play to our strengths? How much risk do they involve? How much potential do they have for growth? We invest significantly in promising assets where risk can be tightly managed and growth potential is strong. We also acquire new assets as appropriate, for example, our recent Brazil and India additions.

We divest assets which do not meet these criteria and where others can deliver more value. This allows us to focus our leadership, technical resources, and organizational capability on those investments that will really grow value in our portfolio. The best capabilities apply to the best assets. We are planning a further tranche of divestments distributed across the world, which will leave us with a somewhat smaller but stronger portfolio with higher production and operating cash flow growth rates. While exploration will assure our longer-term growth, we're also paying close attention to our cash generation. At the half year, I said we were going to grow operating cash faster than production. I now want to add some detail to that statement. As I've explained, our divestment program continues to high grade our portfolio. This will leave us with a higher growth core of operations.

We expect to see an increase in volume from the higher margin areas of Angola, the Gulf of Mexico, and the North Sea as new projects come on stream. The average unit operating cash margins from these new projects by 2014 are expected to be twice the current unit operating cash margin for the upstream segment. That excludes TNK-BP and assumes a constant $100 per barrel oil price. This will contribute to operating cash growth after adjusting for the environment in any divestments. This growth will be driven both by growth in production volume as new major projects start up and by the improvement in the margin mix. Of course, operating cash flow momentum will also be driven by the return of higher margin production that was absent in 2011. Here is the detail on the program of major project startups over the next three years.

After essentially no major project startups in 2010, we are now expecting to see 15 major project startups by the end of 2014, beyond the two already seen this year. Of these 15, we expect to see six in 2012, including three in Angola and two in the North Sea, and nine others in 2013 and 2014 across our three growth engines. We have made the final investment decisions for all of these projects. As I have said, they are predominantly in our higher unit margin areas of the Gulf of Mexico, the North Sea, and Angola. A major factor in operating cash flow momentum will also be a return to work in the Gulf of Mexico. Preparations for getting back to work are progressing. Clearly, all our restart activity is contingent on approval by the U.S.

regulators, the Bureau of Ocean Energy Management, and the Bureau of Safety and Environmental Enforcement. As I mentioned earlier, to date, we currently have three rigs permitted in the Gulf of Mexico. Just last week, we received approval for the Cascada Exploration Plan, and subject to approval, hope to have a fourth rig sputting this appraisal well in the very near future. By year-end, we hope to have five rigs operational with the return to service of our Thunderhorse PDQ rig. Looking forward to 2012, our plans include drilling, exploration, appraisal, and development wells, and the startup of an additional two rigs. Our criteria for restarting operations include new voluntary standards that meet or exceed regulatory requirements, including extra safeguards on blowout preventers, more third-party inspection, new plans for containment and response based on worst-case discharge scenarios.

By 2013, we expect to return to around the historical level of new well delivery. Clearly, there is some remaining uncertainty in respect to timing, but our intent and readiness to get back to work is clear. Turning now to Russia. TNK-BP is a very strong part of our growth momentum. It represents a significant investment for BP into the third largest oil company in Russia. We remain pleased with its continuing strong performance. A solid track record of growth is being maintained with production noticeably surpassing 1 million barrels per day net to BP for the first time this quarter. TNK-BP has been a major taxpayer in Russia, with over $150 billion of duties, levies, and taxes paid to date. BP has received around $17 billion in dividends since the formation of the joint venture in 2003.

Over the last four years, this has represented roughly $2 billion per annum of cash flow to BP. TNK-BP also has significant future potential. Plans are in place to offset mature field decline while world-scale greenfield projects, including the Yamal and further development of the UVAD area, provide the potential for steady growth. Its gas business also has opportunities. For instance, the ROSPAN development. TNK-BP is expanding internationally with the recent additions of Venezuela and Vietnam assets to the portfolio through purchases from BP. We remain committed to our investment in TNK-BP and to our ongoing presence in Russia. Let's turn now from the upstream to the downstream. The focus of our refining and marketing business since 2007 has been on turning the business around based on a consistent set of priorities executed in a systematic and disciplined way.

This began with safety, combined with a focus on improving the quality and efficiency of the business and restoring its earnings momentum. As a result, we now have the platform to sustain and grow a truly world-class downstream business. We have a clear definition of world-class. For us, it means being the highest quality business measured by delivery of leading returns and cash flow growth. Our business in refining and marketing is that of hydrocarbon value chains, and it incorporates three business models: fuels, lubricants, and petrochemicals. We are today delivering returns in each of these business models at or near the top of the competitive range. Let me expand on what it takes to be world-class and what we focus on. Safety remains the top priority as it does across BP, with our Safety and Operational Risk function at the heart of all of our operations.

We are committed to leadership and process safety and have returned operations to strong competitive performance in reliability and availability. Hydrocarbon markets are highly competitive, and it requires excellent execution, the efficient use of all resources, and the right capabilities to win. BP is achieving leading returns that are attractive and materially differentiated relative to the marginal price setter. We have managed our portfolio actively, investing in businesses where we have strengths in terms of core location, configuration, integration, technology, and brand while divesting assets that do not display these key strategic characteristics. We have developed leading market positions and will continue to invest in these to sustain our base business. These leading positions attract high utilization and drive strong cash flows. We are growing our margin share by investing in expansion of margin capability. The most material example is the major repositioning of our Whiting Refinery.

We also have excellent exposure to growth via our petrochemical and lubricant operations. We plan to extend our footprint within these businesses with a focus on growth markets. All of this will continue to be achieved within a disciplined financial framework. Let's turn now to refining and marketing's financial performance, focusing firstly on earnings and returns and then on operating cash flow. This chart is new and helps illustrate the sources of earnings growth that has been delivered to date relative to a 2007 baseline and all at 2009 refining margins. As you can see, we expect to deliver more than $6 billion of incremental earnings in 2011 versus 2007. This confirms we are on track to deliver over $2 billion of earnings growth by 2012 relative to a 2009 baseline. The red line indicates actual pre-tax returns, which have approximately doubled since the low in 2008.

This momentum has been achieved while yearly average refining margins have fallen from over $15 a barrel in 2008 to between $9 and $12 a barrel over the last three years. Beyond 2012, earnings momentum across the business is projected to continue despite competitive pressures. On top of this, the material additional earnings from the repositioning of the Whiting Refinery towards Heavy Feedstock Advantage are indicated separately on the chart. The Whiting Refinery modernization project is scheduled to come on stream in the second half of 2013. All of this is at 2009 margins for a refining market margin of around $9 per barrel. At higher levels such as today, refining and marketing will clearly earn more. Here we see the drivers of our operating cash flow momentum and a chart illustrating this over the period 2011 to 2014.

Earlier, I talked about the importance of ensuring a strong and sustainable base operation. We will invest in our base at around appreciation levels to maintain our competitive position. We will also invest to further improve efficiency and margin capture capabilities, including a continued focus on working capital and project management effectiveness. Refining and marketing has a set of high-quality growth activities to underpin improvements in cash margin capability. The largest component by far is the Whiting Refinery modernization project. This is indicated separately on the chart. As discussed during our 2Q results, we expect this project to generate in excess of $1 billion of operating cash flow per year, depending on the environment. We also have material options underway to expand cash margin capability in other areas. These range from smaller refining upgrades and logistical optimization within the value chains to new product and process technologies.

A significant part of our downstream business is exposed to growth markets, and we expect this to increase as we invest into these markets. In summary, BP has a world-class refining and marketing business, which is now performing very well relative to its competitors and will contribute materially to BP's operating cash flow growth. Bringing all of the parts together for the group as a whole, we can see how we expect operating cash flow to develop over the next three years. We project an increase of around 50% in operating cash flow by 2014 at $100 a barrel, approximately half from ending Gulf of Mexico trust fund payments and half from operations.

You have seen the many drivers of this improvement, but we can summarize the four primary drivers as: one, growth from new projects coming on stream, mostly in high-margin areas, including Angola; two, the restoration of high-value production, which is offline today due to the pause in activity in the Gulf of Mexico and our increased turnaround activity; three, the Whiting Refinery upgrade coming on stream; and four, completion of contributions to the $20 billion U.S. trust fund. To sum up, the management team and the BP board fully recognize the need to move forward and rebuild confidence in the company. From this month, with most of our turnarounds complete, we have accelerated the engine to deliver a clear and competitive future for everyone who has a stake in BP. Today, we have given you our strategic direction and a solid sense that we can and will deliver that future.

Let me end with a few specific milestones you should look for from BP. By the end of this year, we expect to have completed our extensive 2011 program of 48 major upstream asset turnarounds. We hope to have five big deepwater rigs operating in the Gulf of Mexico. We will have agreements in place for the major part of our planned original $30 billion divestment program, and we will have met three quarters of our commitments to the trust fund. 2012 will be a year of milestones with momentum continuing to build in 2013. The full operational and financial benefits of the 2011 turnaround should be evident. We will complete our payments into the trust fund by the end of 2012. We will extend our divestment program to $45 billion with a further $15 billion of divestments by the end of 2013.

Also in 2013, we expect to bring on stream the major upgrade to the Whiting Refinery. By 2014, you should expect 17 major upstream projects to have been brought on stream since 2011 outside of TNK-BP. The firm's overall operating cash flow to have increased by around 50% in a $100 world. You will see us using around half this projected incremental cash for increased investment and around half for other purposes, including increasing distributions to shareholders. Going forward, we expect to be able to increase distributions in line with the improving circumstances of the firm. As Byron noted, we expect to review our 2012 distribution plans in February. To conclude, moving forward, our priorities of safety, rebuilding trust, and delivering value growth remain unchanged.

We have a well-defined path to grow value, a clear 10-point plan, a plan that shows you what you can expect and what you can measure. It concentrates our distinctive talents on high-value advantage assets, and it is sustainable through our new structures, process, and discipline. The past year has shown me just how much can be achieved when BP aligns and applies itself. In the past year, this company has been steadied, turned around, and now this month, with much of our high-margin assets returning on stream, we can march ahead. I am very confident we're on the right path, and I am determined that it will reward all those with a stake in BP's success. With that, Byron and I are now ready to take your questions.

Speaker 6

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I think, Tepan, this is Bob, a couple of things on the disposal. I think the cash from future disposals will depend on the assets, but there'll be upstream assets. It'll be a variety of assets. Some will be pipelines, gas plants, as well as production. It's probably not right for us to go beyond saying anything around that, but it'll be similar in character. On the provisions in our discussions with the U.S. government, it isn't right for us to talk about that in terms of provisions. We think we have provisioned the right amount, as does the board, for where we are today. I think it's probably worth expanding a bit because the number of questions that come in today around our ability to settle legal proceedings in this assumption by 2014.

We do assume underlying that we will not include, we won't have cash outflows in the year 2014 as a result of the Deepwater Horizon incident. We said a number of times and said it earlier today, we would like to resolve the litigation and any investigations from the event, including fines and penalties, only if we could do so on reasonable terms. Our settlements with Mitsui and Arco and Anadarko are good examples of this. By 2014, we do believe that those expenditures will be gone. If they're not by 2014 and we've not been able to reach any reasonable resolution, whether it's private litigation or government claims, we could be in litigation with those claims over a period of many years, possibly very many years.

We're absolutely ready to settle, prepared to defend the claims in court, and we're preparing for the MDL trial litigation in February in New Orleans right now, although we'd rather reach a settlement if we can do so on some reasonable terms. It probably wouldn't be right to go beyond that, I think, at this point, Tepan. In the mid-cons spread, you, of course, will know and see that production from the Bakken shales and other things continues. There are bottlenecks in Cushing that are creating those spreads. I think that'll continue for a while. We're all watching to see whether those pipelines come through in the U.S. As I said in my earlier remarks, clearly both Whiting and Toledo are benefiting from the disparity between WTI-priced feedstock into a global-based product market, and that looks, as Bob said, likely to continue as we move into 2012.

The Whiting Refinery and the Toledo Refinery both benefit from this for us. We just watch it all very carefully. Okay, Fergus.

Yeah, thanks, Tepan. Next question comes from the United States. Another name, nice to see back on the list, Doug Terreson. Doug, are you there?

Speaker 2

Good morning, guys. First, congratulations on your environmental intermediation efforts on the Gulf Coast because there's really been minimal Macondo oil in the area since the well was contained last fall. On this point, between record tourism on the Gulf Coast, which I think Bob mentioned that happened this summer, plus the negligible effect of Tropical Storm Lee, which pretty much sat right on top of Macondo for three to four days last month, it seems that if there were residual oil from Macondo that were meaningful, we'd probably know about it by now. My question is, how do these two items affect your ability to progress discussions with individuals and the businesses and municipalities, etc., towards final settlement?

Speaker 1

Damage, I think, we've not heard much about that. In that sense, it does remove a big piece of uncertainty from many of the communities, which is good. I can't really comment on the tone with the remaining litigation. We'll just have to see between now and as we head into the trials in February.

Speaker 9

Okay, thank you. It sure seems like it fits into the turning point category that you guys have used today. Thanks a lot, guys.

Speaker 5

Okay, thanks, Doug. Thank you, Doug. Now back to the UK and John Ridby at UBS. John?

Speaker 6

Oh, yeah, hi. I've got two questions, actually. One is on the spill liability. The second is on restarting the Gulf. On the spill liability, can you just go into some of the specific numbers and just confirm for me? As I understand it, if I look at your press release, you've accrued for the full $20 billion that you're going to pay into the fund, less obviously what you've paid to date. You appear to be indicating that as far as you can see, everything that would fall under that would be a shortfall of $6 billion or $6.1 billion, i.e., that it actually is probably an overaccrual of six. Is that correct? Secondly, with Anadarko, you could make a judgment call that would say that you were probably $10 billion of comfort on your provision. Would that be a correct interpretation of where we stand right now?

The second is just on the Gulf of Mexico restart. I like the visibility you give on the rigs and the restarts there. Can you just talk a little about what the pace of drilling you were doing pre-Macondo and the capability of the organization that you see going forward to be able to run X number of wells, i.e., what do you think the capability or how many wells do you think you could be drilling at any one time in the Gulf with the sort of new organization that you put in place? Thanks.

Speaker 1

I'll ask Byron to comment on the provisions. I'll come back to the capability one, which is a vital question for us. John, relative to this $6 billion, yes, in the disclosure, we've indicated that we haven't taken specific provisions against the final $6 billion within the $20 billion trust fund. There's a significant range of uncertainty that continues to exist, and there may be other things that we can't currently estimate at all that would be calls on that $6 billion. The only thing that you should take away from that is that there still is considerable uncertainty relative to what we can see at this moment in time within the $20 billion fund. We wouldn't be expecting to reduce that, because we've taken a provision against the whole amount. We'll continue to hold that until the uncertainties become more certain.

As far as the $4 billion that we're receiving from Anadarko, yes, that will reduce the provision by $4 billion in the fourth quarter results. Back to Bob. John, this question of capability, given that we do have such a big position in the Gulf of Mexico, has been absolutely critical. It's taken a lot of our time. Maintaining the capability we had was critical. We obviously dropped way off in 2010. There was a lot of uncertainty with our staff, a lot of question marks. People were wondering, would we be able to get back to work and be allowed to get back to work in the Gulf? We worked very hard with our staff, and there was a lot of headhunting that was going on of talent within BP. We also have a lot of dedicated people, absolutely dedicated to it.

Let me answer the first one first. The divestment, we're not in a position where we need to divest assets for cash. That's clearly not it. What we want to do and what we've said we would be is a company that plays to its strengths, and we'll focus capability and on a somewhat smaller footprint. There may be some risk aspects, de-risking with certain assets as well. We have a very, still a large portfolio of some pieces of it with very mature parts of the asset set that others may value more than we do, that maybe don't have the growth potential. It's those kinds of divestments that you could see going forward.

In terms of quantifying, I'll just say that taking the time out, doing the integrity maintenance turnarounds on our assets, not only in the Gulf of Mexico, but around the world, I believe is clearly good business. As those assets come back on, as they have been during the month of October, I think we're going to see value from that. It's an investment we made consciously this year. Of course, everyone in the Gulf of Mexico, with BP being the largest producer, had assets down during the drilling moratorium. We, more so than others, sustained the idle rig costs more than others. That period is also behind us now.

Speaker 5

I'll just add that if you wanted to get an idea of the impact, the opportunity cost of that investment for the future, just look at the unit margins over the last 18 months, and you can see the impact quite clearly, I think, and the potential for recovery. Staying in London, Lucas Herrmann at Deutsche Bank. Lucas, are you there?

Speaker 6

Yeah, afternoon, Fergus. Afternoon, gentlemen, to all three, if I may. I'm just, I mean, firstly, the change in tone, Bob. The last several quarters, you've been very cautious in terms of comments, particularly about getting back to business in the Gulf. You've been very sensitive to the authorities. Today, that tone has changed dramatically. I appreciate wholeheartedly that integrity is moving towards an end if integrity ever ends. Just some more commentary on why did you feel that you can be much more aggressive now in your statements about back to business in the Gulf, more rigs coming on stream, higher distributions potentially in the future to shareholders. Secondly, I just wanted to get a better fix, if I could, around production through Q4 and beyond. My impression is that you're still consolidating Pan American. Reliance comes in next quarter. On which basis?

Can I just clarify one thing, Fergus? It's Bob. We do not have an inventory of permits sitting there waiting. The practice right now is that you apply for the permit when you have the rig and you're ready to work, and then you apply for the permits, and then they come through. We have the permits for the three rigs that are running today and doing that work. We do have one permit, which the expiration permit was granted on Friday. There's a drilling permit that should come, I think, in a very reasonably short period of time. I just want to make clear that there is not an inventory of permits sitting there waiting. We'll be ready when we're ready to submit them. That seems to be the practice now with the regulator.

Thank you, Lucy. Now on to Jason Kenny at Santander. Jason?

Speaker 3

Hi, yeah. Thanks for taking my questions. A couple of questions away from the U.S. Gulf of Mexico. The Reliance chairman has said that your joint venture is not restricted to India. I was just wondering if you had already progressed other areas of interest outside of India where you could pursue that combination there. Maybe related, obviously, you're ramping up your exploration commitment over the next few years. India is one of the largest acreage exposures you have with the access slide on page 23, 240,000 kilometers squared. Australia is another sizable chunk. I'm just wondering if you could give us some sort of insight as to where those 15 to 25 exploration wells are going to be focused. Are they in the larger acreage areas, or are they in the higher margin areas, which might be smaller acreage pieces?

On the back of that, I very much appreciated the commitment to the North Sea with the Clare Ridge development activity announced earlier in the month. Obviously, you're looking at 200,000 to 250,000 barrels a day through 2030, I think, from the North Sea. How much exploration spend do you have to commit to the North Sea in order to maintain that kind of level of output on such a long-term basis?

Speaker 1

Jason, thank you. Mukesh Ambani is the Chairman of Reliance. We were just out there in India two weeks, two and a half weeks ago. Spoke with him. This business in India, where we have 30% with Reliance, is essentially the majority of the gas production of India, which is such a growing economy and a need of gas. Our cooperation there is based on further developing the gas. They have a field that we've all known, and we knew it when we went in was under decline, but we were already in action with our exploration teams looking at satellite fields. We spoke to the government about hopefully getting the approval to fast-track the development of satellite fields to bring that gas in. Because this business right now is not only the production of gas, but there's a 50/50 joint marketing joint venture for gas marketing.

Gas value changes the basis right now of our relationship with Reliance. It's a country that is so hungry for gas that I could see working with Reliance outside of India on projects to bring gas into India. Although it's early days on that, our focus is, of course, right now on the production there. Ramping up exploration. We will ramp up exploration, and it's a variety of different kinds of prospects. We're looking at 10 new basins. We've got 15 new fairways that we want to test in our inventory of prospects. India is one of those. Out of those 21 blocks, some are more prospective than others, and we'll focus on that for sure. Australia is a new basin that we very enthusiastically have evaluated and looked at. It's provided some interesting insight, but it's a very new basin.

It's a high-risk, high-reward exploration, which you'll see more of BP doing. Other areas, Brazil. We're now investing and operating at scale in Brazil. There's exploration and appraisal work happening there. We're in the middle of an appraisal well right now in a prospect called Itaipu that we'll know more about by the end of the year. Trinidad acreage is more frontier acreage up in the north, away from the island. That could open up some new prospects up there. In Angola, there is a pre-salt potential in Angola. You'll see more exploration by BP in that pre-salt that mirrors, in many ways, what's happening in Brazil. The analogs are there. In the North Sea, we do have exploration prospects there up west of Shetland. We'll continue to look at that.

The northern and the central, southern North Seas, there's been a lot of exploration there, but the west of Shetlands has got the biggest promise there. Clare Ridge, huge field. We found it in the 1990s. It's taken a lot of technology, and the teams have done a great job unlocking that with the horizontal wells and the imaging and the seismic and an appraisal well, which has found a younger reservoir off the top of it. We're very enthusiastic about that. It's those kind of prospects around the world, both big and new, and some in our existing basins that we'll be ramping up the exploration on, Jason. Excited about it. Got a good team on this.

Speaker 5

Yeah, and just to give you a sense of that, Jason, we're planning to test as many new plays in the next five years as we did in the whole of the last decade. It is a real step up in activity. Coming back to the U.S., Pavel Molchanov, Raymond James. Pavel.

Speaker 2

Thanks very much. Question about Russia, if I may. Glad to hear things are going well with TNK-BP financially, but at the same time, a lot of news flow about lawsuits, whether TNK will join as a corporate entity, the litigation filed by AAR. Just your latest thoughts on that would be helpful.

Speaker 1

It seems like every day you pick up something and there's a Siberian lawsuit on something, but TNK-BP does continue to perform well. There was, I believe, a decision by the TNK-BP holding board not to join the lawsuit, a lawsuit by a minority shareholder. Now there's some talk about the TNK board itself, and I'm not a member of that board, but that board joining the lawsuit against BP. The bottom line here is that if Rosneft had wanted to do exploration in the Arctic before with TNK-BP, that would have been fine with us. They don't have that capability. I'm just trying, I would recommend actually not be too distracted by what will, you know, Pavel, be a constant flurry of activity there. I can't resist. The Wall Street Journal had a great quote about TNK-BP this weekend.

They said it was like a squabbling rock band that keeps rolling down the road delivering hits. That's probably not a bad way to describe TNK-BP.

Speaker 2

Understood. Quick follow-up, if I may, about Argentina. In the worst-case scenario where the existing transaction does not reach a conclusion, would you be looking to find a secondary buyer, or would you prefer in that case to keep the asset?

Speaker 1

Pavel, what I'd say about that is we reached that agreement last year at a time when oil prices were lower. It was a time when we actually needed to make some divestments of properties. We're past that point. We don't actually need to make that divestment. We're committed to doing it if it happens. We think approvals will take some time. We'll wait and see. I do think that deal will eventually get its approvals and agreements will be reached. If it doesn't happen, it's absolutely fine.

Speaker 2

Okay, appreciate it.

Speaker 5

Thank you, Pavel. Now coming back to the UK and Kim Fustier at Credit Suisse. Kim.

Speaker 0

Yeah, hi. Good afternoon. I have two questions, if I may. Firstly, if I could just go back to your asset disposals. I think there's been a marked slowdown in the pace of your asset disposals in the last six months. Are you able to give any color on the current asset markets? For instance, are potential buyers having trouble accessing financing, or are there too many assets for sale at the moment? Secondly, on upstream turnarounds, I think you mentioned 48 upstream turnarounds in 2011. I wonder, could you give an indication on the number of planned turnarounds you expect next year as part of your normal course of business?

Speaker 1

Kim, I'm going to ask Byron, as Head of M&A, to comment on sort of his perceptions of the market on this. Then I'll come back to the turnarounds. Kim, I don't think you should read into what you're seeing, the conclusion you've come to. When we started down the path of $30 billion of disposals back in the summer of last year, we clearly progressed those that we could move more quickly out at the front of the queue. The ones that we're still working on are the deals that are more complex and have required a much longer period of time to get them positioned for sale. As I said in my remarks, we still believe we'll have agreements in place for around $30 billion worth of transactions by the end of the year.

Completions, similar to Pan American, take a longer period of time in today's regulatory environment. You have the deal in place, but it's not closed until the regulators have done a thorough review of it. We're comfortable with where we are. We're comfortable about the realization of the transactions. We don't think the environment is actually in any way particularly impeding it. These are just tough transactions to get finalized, and we're progressing them accordingly. Thanks, Byron. Kim, on turnarounds, I think there's two variables here. One is the number of turnarounds, and one is the size and scale of the turnarounds. I'm guessing that next year, we haven't set out the exact number of turnarounds next year, and there are always seasonal turnarounds, particularly offshore in the North Sea, for example. We'll have seasonal turnarounds second and third quarter. I'm expecting that number to be around 30 next year.

What's different is the size and the scale of them will not be quite the same. We do have some big ones in the Gulf of Mexico, like I mentioned earlier on the Atlantis field, but it will be greatly reduced compared to this year.

Speaker 5

Thanks, Kim. Now moving on to Martijn Rats at Morgan Stanley. Martijn, are you there?

Speaker 6

Good afternoon. I'd only have one question, which regards to the dividend and the balance sheet gearing, because you sound much more optimistic than in the past. Clearly, your fortunes have improved with some good news over the last couple of weeks, and you're saying we'll review the dividend policy in February next year and adjust the dividend in line with the prospects of the firm. You'll assess them at the time. At the same time, you're also targeting the balance sheet gearing to be in the lower half of 10% to 20%. I was wondering what will happen if by February you assess the prospects of the firm to be better, yet you're not there where you would like to be in terms of gearing yet. How will you make that trade-off on what type of considerations go into that argument?

Can we expect the dividend to start trending upwards despite the balance sheet gearing not yet where you would like it to be?

Speaker 1

Martin, as I indicated, we expect the gearing is still going to be around 20% at the end of the year. We've made our comments with the realization that we're not quite there yet. As we look across the course of 2012, we would expect a number of the divestments both from the original program as well as the expanded program to complete and provide proceeds that would reduce the net debt. It remains an uncertain environment in 2012 with respect to potential calls on the group's cash with respect to the Macondo liabilities. Obviously, the general economic environment remains uncertain. On an underlying basis, as Bob has referenced a number of times, the firm has turned the corner. We need to, when the board meets, determine the dividend in February of 2012, consider all of the factors. Net debt and gearing will move down over the course of time.

We're confident of that. We'll take a decision in February based on a full suite of factors.

Speaker 6

All right. Thanks. That's helpful.

Speaker 5

Thank you, Martin. Now on to Irene Himona. Irene from SG.

Speaker 7

Yes, good afternoon. I have three questions. First, in the downstream, is it possible to quantify for us the benefit to R&M EBIT in the nine months from the U.S. location advantage in terms of the WTI spread? The better downstream disclosure is obviously very welcome. I wonder, could that be an indication that the old Burmah-Castrol business might eventually be disposed of? My final question is on the asset disposals. Looking at the $26 billion agreed disposals, is it possible to give us an indication of approximately how many barrels of reserves or indeed resources you have disposed of so far? Thank you.

Speaker 1

Irene, hi. This is Bob. On the benefit of the U.S. dislocation, it's something really for competitive reasons. We don't disclose that because of the asset mix that we have and the competitiveness of that. We've given you some indication that we benefit from the pricing differentials, particularly in the Midwest of the U.S. On lubricants, we're going to provide the visibility on lubricants going forward. We'll do it on a historical basis as well as going forward because, again, we think maybe it's not reflected sufficiently in our share price. I wouldn't read anything into it beyond that. On the amount, I'm going to ask Fergus, who's got the figures right in front of him, on your third question.

Speaker 5

Yeah. I mean, the number is in terms of approved reserves on divestments announced and agreed already, including obviously Pan American, which is material, around 1.9 million barrels. Based on the press releases and various announcements being made, when the various sales have been announced. I would just say to follow up Bob's remarks, that on the terms of the U.S. downstream impact of the location advantage of Whiting, you can look at the geographic mix and see the improvement in U.S. profitability. Clearly, it's an important part of that. I think in terms of why provide the additional disclosure on Castrol, I think it's a great success story. I'm not sure how many people who are out there actually understand just what a huge success Castrol has been under BP's ownership since 2000. Hopefully, that will be very interesting for you when the numbers become available for you.

Going back to the U.S., Mark Gilman from Benchmark. Mark, are you there?

Speaker 8

Yes, Fergus. Thank you. You know, Bob, Byron, good afternoon. Had a couple of things. I want to go back to this balance sheet debt ratio target for a moment. Byron, can you talk about whether or not that 10% to 20%, in particular the low half, is intended to be a permanent long-term target? It's well below that which was in place traditionally. In that regard, can you address the issue of whether or not you believe there are appearance and/or political issues as to the timing of any dividend increases or distributions to shareholders? Second question is very simple. I am assuming that there are no direct Gulf of Mexico spill-related outlays outside of the payments from the escrow fund. Could you confirm that that's accurate? Third one just relates to Cascada.

Hi, thanks, Fergus. Two quick big picture questions for you, Bob, if I may. It seems like share repurchases are kind of popping up in conversation a little bit more. When I hear more divestitures, it almost reminds me of a scenario of one of your smaller U.S. peers that recently embarked on a strategy to aggressively sell assets and buy back stock at a depressed level, capturing that arbitrage. Do you think that's a direction we could be heading in? The second question is on potentially a corporate split. I believe there were some discussions around that several months ago. I see we now have increased reporting in the downstream. I'm just wondering if this is an indication of moving in that direction potentially. Thanks.

Speaker 1

Yeah, Blake, I think both are good questions. I think it's a bit of a leap on both of those in terms of assuming that that's what our direction, our strategy is. Our divestments are really to focus our skills and capabilities down. That's the primary driver of it. We'll have a higher quality, higher margin, smaller footprint to be able to drive what we do very well. We have talked about buybacks, but I wouldn't link the two directly there. I do think that the shares are undervalued, and it would be what we have to be prudent with what we do with our cash right now. We'll consider, as Fergus said, it's part of the toolkit going forward. In terms of a corporate split, we have looked at that in quite a bit of detail. Our downstream business 2011 is on track. It's a forecast projection.

We'll be the best year we've ever had in the downstream, and that provides valuable cash and earnings for BP. The idea of splitting just for splitting wouldn't be a good strategy, wouldn't be in the interest of the shareholders. I would also note that if you look at the business models of our downstream, which is lubricants, petrochemicals, and fuels, and then you look at where those businesses sit against peers, they're performing near the top in all three of those different models. That's valuable for our shareholders. Our asset set is different, quite a bit different than a number of the other companies who have decided to go down that path.

Speaker 3

Perfect. Thank you very much.

Speaker 5

Thank you, Blake. Now, Oswald Flynn at Sanford C. Bernstein. Oswald, are you still there?

Speaker 6

Yes, thanks, Fergus. Thank you very much. Maybe just one question for me on exploration, given you have the ramp-up in exploration wells coming through the next couple of years. I guess some of your peers are also pursuing a similar strategy. Can you or would you be able to say that the vast majority of these 12 or 17 wells next year or 15 to 25 the following year would be classified as high-impact wells? Could you go as far to say how big in terms of net barrels the prospects could be for BP? Maybe just linked to that, I see testing a number of new plays, and I just want to be comfortable. Does BP feel they have all of those skill sets in house in order to go out and actually target some of these new plays that are certainly being targeted today? Thank you.

Speaker 1

BP - Earnings Call - Q3 2011

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