BP - Q4 2011

Transcript

Bob Dudley (Chief Executive)

Good afternoon, everyone, and thank you for joining us today. Welcome to BP's 2011 Results and Strategy Presentation. We are very pleased to have you with us, whether that's in person, over the phone, or on the web. For those here in our new venue at Canada Square in East London, you will have seen behind me our safety evacuation guidelines. There are more details in the safety briefing card handed to you at reception. We are not planning to test the alarms today, so if you hear it, please proceed as advised by the instructions. May I ask you also to turn off your mobile or cell phones now? Thank you. With me on stage, I have Brian Gilvary, who I am very pleased to introduce as BP's new Chief Financial Officer, and Iain Conn, our Chief Executive of Refining and Marketing.

In the audience, we have our Chairman, Carl-Henric Svanberg, and members of our executive team who will host the breakout sessions after this and join us for the question and answer session later. Now, before we start, I draw your careful attention to our cautionary statement. Please read it carefully. During today's presentation, we will reference estimates, plans, and expectations that are forward-looking statements. The actual outcomes could differ materially due to the factors we note on this slide and in our regulatory filings. Please refer to our Annual Report and Accounts 20-F and fourth quarter stock exchange announcement for more details. These documents are also available on our website. Today we are going to return to the plans we laid out to you in October, a 10-point plan to grow value. We aim to leave you with an even clearer idea of the path ahead.

2011 was a successful year of recovery, consolidation, and change, and we reached an operational turning point in October. 2012 will be a year of milestones as we build on those foundations. As we move through 2013 and 2014, we expect to see the financial momentum building as we complete payments into the trust fund, as our operations start to show the benefit of our actions. Our 10-point plan provides the roadmap, how we will play to our strengths and be safer, stronger, simpler, and more standardized. Value will be driven by growth in both underlying volume and margin, from a portfolio of the right size to generate the operating cash flow to both reinvest in our project pipeline as well as reward shareholders, as we have announced today with a 14% increase in the quarterly dividend.

We believe this will help us see the true value of the company recognized. Let me outline today's agenda. I'll start with an overview, and then Brian will take us through the 2011 results in detail. I will then report on progress in the U.S. before outlining our plans for the upstream, including showing you a video of a new initiative in the technology sphere that will be important for our industry. I will then briefly touch on TNK-BP and alternative energy before Iain covers plans for the downstream. After a brief summary, the first part of our webcast will end, and we'll break so that those here at the venue can regroup. We'll have three breakout sessions that will be held in rotation. Those cover specific sources of value group that we want to tell you more about.

Mike Daly and Andy Hopwood will cover our plans for long-term investment in the upstream. Bernard Looney and Bob Fryar will discuss our upstream operating model and major projects. Iain Conn and his team will explain how we are moving our downstream business forward. The presentation materials for these breakouts will be posted on our website during the break for those not with us here today. At 4:45 P.M. London time, or GMT, we will gather back here and restart the webcast for concluding remarks and discussion. We expect to be finished by around 5:30 P.M. London time. I want to start by briefly looking back at 2011 and what we achieved. As you know, we set out three priorities last year: safety, rebuilding trust, and growing value. I believe we've made good progress on all three.

We set up a new safety and operational risk organization and reorganized our upstream into three global divisions of exploration, developments, and production, which allows us to strengthen consistency and capability. We will be showing you more of the activities of the divisions in the breakouts later. I believe trust is built by doing what you say you will do, and we have continued to meet our obligations to the Gulf of Mexico communities. We are back to drilling wells in the Gulf of Mexico, applying our voluntary standards that go beyond regulatory requirements. We're looking forward to value growth. There has been great progress. In 2011, we resumed the dividend payments. Our organic reported reserves replacement was above 100% again. Globally, BP was awarded 55 new exploration licenses in nine countries last year, making it 84 over the last year and a half.

We believe this resulted in more net acreage than accessed by any of our peers in 2011. It is a powerful indicator of how confidence has been restored in BP to work around the world after the events of 2010. In October, we reached an operational turning point, already evidenced in the increase in production volumes that you have seen us report today for the fourth quarter. We have made substantial progress with our divestment program, which we will come back to later in more detail. We have completed transactions that expanded the portfolio in the strategically important geographies of India and Brazil. Our downstream business achieved a record year for earnings. That was the story for 2011. Before we look ahead, let's just remind ourselves of some important context. There are a number of clear trends in the energy world, as we highlighted in our recent Energy 2030 Outlook.

We expect aggregate energy demand to rise by up to 40% by 2030, nearly all of it from emerging markets. By 2030, we expect oil, gas, and coal to have similar shares of global demand. We expect gas to grow at around 2% per year, double the rate of oil growth. We expect oil to continue to dominate transport fuel. Renewables are expected to grow the fastest of all, at around 8% per year. Even so, we estimate only 6% of the 2030 energy mix will be supplied by renewables. We also see that North America has the potential to become energy self-sufficient by 2030. This is driven by the shale gas revolution, but also by a growth in biofuels and domestic production from deep water, shale, and heavy oil. I believe our strategy is aligned to these big trends and positions BP well for the future.

We will continue to invest in deep water, gas, and renewables. We're investing in growing markets, for instance, India and Brazil, as well as in North America and elsewhere. We're using our global reach to leverage technology and learning wherever we see the greatest opportunities. Against such trends, the oil price environment has been uncertain and volatile, and gas prices continue to reflect regional supply-demand dynamics, with spot pricing in the U.S. remaining heavily discounted from oil prices, but more aligned in Europe and Asia. In 2011, refining margins improved for a second consecutive year as demand for oil products continued to drive growth, driven by the non-OECD markets. The outlook remains difficult to predict. It requires us to be very clear about our strategy and only participate where we can compete, no matter what the environment holds in store. I believe BP can do this.

We have the scale, the focus, the distinctive trading capabilities, and the access to growth markets, which brings me back to our 10-point plan. In October, we put forward five points to expect and five to measure. I said we would focus relentlessly on safety, play to our strengths, and be stronger, more focused, simpler, and more standardized. We promised to create more visibility and transparency to value. In terms of measures, you will see continuing activity in portfolio management. In October, we announced an intention to pursue a further $15 billion of divestments, making a four-year total of $38 billion by the end of 2013. Meanwhile, we expect to see new projects coming on stream with operating cash margins around double the 2011 upstream average by 2014. That's at $100 per barrel; it does exclude TNK-BP.

You can expect us to generate an increase of around 50% in additional operating cash flow by 2014 compared to 2011, approximately half from ending the Gulf of Mexico trust fund payments and around half from operations. We plan to use around half of that extra cash for reinvestment and half for other purposes, including shareholder distributions. All of this will be underpinned by a strong balance sheet. You will see evidence of how we're already delivering on those commitments as today's presentation unfolds. Our roadmap for long-term value creation plays to our strengths. In the upstream, I think we have a great track record in exploration, deep expertise in finding oil and gas. We have three distinct engines for growth, where you can expect to see us focus on our long-term investments in deep water, big gas value chains, and giant fields.

We have a world-class set of downstream businesses focused on fuels, lubricants, and petrochemicals. We have several world-leading technologies, from advanced seismic imaging to lubricant formulations and proprietary processes for petrochemical manufacturing, to name just a few. We also have long experience of building and maintaining relationships, some of which are more than 80 years old. We saw the importance of this in the aftermath of the Gulf of Mexico oil spill, as many governments, regulators, customers, and suppliers around the world have stood by us and worked with us through this difficult phase. As we set out in October in our 10-point plan, there are now clear near-term measures of how we will grow value. 2012 will be a year where we see increasing investment in delivery in many key milestones.

The year will be marked out by an increase in exploration wells, from six in 2011 to 12 in 2012. There'll be six new project startups and eight rigs at work on BP-operated fields in the Gulf of Mexico. We expect capital investment to grow to around $22 billion and to progress our program of planned divestments. In refining and marketing, we plan to complete delivery of $2 billion in underlying performance improvement versus 2009. We will complete our payments into the Gulf of Mexico trust fund in the fourth quarter. In 2013 and 2014, as investment continues, we also expect to see greater financial momentum coming through in our operations. A further nine new project startups with average operating cash margins from the new projects in 2014 double relative to the 2011 portfolio.

The upgraded Whiting refinery is planned to come on stream, and divestments are expected to have reached $38 billion. All of such, by 2014, you will see the expected rise in operating cash flow. Looking at it in terms of a simple bridge, we start with the operating cash flow in 2011 of $22 billion. The growth comes from four key drivers. As I mentioned, the completion of the payments into the U.S. trust fund accounts for roughly half of the expected increase. We have the restoration of high-value production and growth from our new projects. This is partially offset by divestments and the environmental assumptions we factored in. Added all together, we get an increase in operating cash flow in 2014 of around 50% and an assumed $100 per barrel. Today's presentation aims to give you more confidence in our ability to deliver on this outcome.

Before we do this, I want to touch on some of the more critical enablers of this 10-point plan, those that are related to safety, to technology, and to people and organizations. First, safety. Here are some figures to show how we are performing. We measure even the smallest release of hydrocarbons and track them carefully. We call each one a loss of primary containment. In terms of process safety, the number of incidents in which there has been a loss of primary containment has fallen once again. That is positive, but of course, even one incident is too many. Also, on this chart, you can see the progress we're making in improving personal safety, which is measured through the recordable injury frequency rate. Aside from the exceptional activities of the Deepwater Horizon response, steady progress has been made over this last decade.

We've also continued to implement the recommendations of the BP investigation into the 2010 incident. It's called the Bly Report. Examples include the strengthening of the technical authority's role in cementing and zonal isolation, and establishing key performance indicators for well integrity, well control, and rig safety critical equipment. We continue to make progress against the other recommendations. Now, beyond these markers of progress, we've also done a lot of work in the way we organize ourselves with respect to safety and risk management. These are the five strategic priorities for our agenda in managing safety and operational risk. All of them are delivered through our operating management system, or OMS, which is the standard system we use to drive systematic management and continuous improvement.

The safety and operational risk function provides independent assurance, audit, and oversight to ensure the system is designed and operating correctly and works in partnership with the line management to ensure we're focusing on the right priorities. I'll give you just two examples. Leadership determines the safety culture of the firm, and our action plan here includes requiring leaders to spend time in the field observing and inspecting. Organization, on the other hand, includes defining the competencies required in safety critical roles and assessing individuals and job candidates against them. There will be more on how we are applying OMS in the breakouts. Technology is another key enabler of the 10-point plan. Critically, it enhances safety and integrity, but it also creates value. We focused approach to technology, the 16 major technology programs selectively targeting points of competition within our industry across the areas shown on this chart.

You will see another new one later in a short video clip. In 2011, we've increased our research and development spending to over $630 million, leveraging this expenditure through collaboration with others. We also spend a similar amount applying this know-how through field trips, field trials, pilots, and other deployment activities. You may have already seen some of the ways in which technology is working for us on display outside. In a short while, we're going to introduce you to a new initiative we hope will help us unlock greater potential in our Deepwater portfolio. Value growth will only be unlocked through the commitment, discipline, and hard work of our people. We have great people at BP, dedicated and focused on supplying energy around the globe. We've also been very active in recruiting skilled employees, for example, with over 3,000 new technical specialists.

As a management team, we have devoted time to describing a set of simple and very personal values that we are embedding in the company: safety, respect, excellence, courage, and working as one team. For those of you here with us in London, you can see more of these outside the room as well. We've also evolved our approach to performance management and reward, requiring our employees to set personal priorities for safety and risk management, focus more on the long term and working as one team. That seems like a good note for me to hand over to Brian. He'll take you through the 2011 numbers.

Brian Gilvary (CFO)

Thank you, Bob. It's a pleasure to join you today for my first set of quarterly results. I'd like to start with an overview of fourth quarter financial performance. Our fourth quarter underlying replacement cost profit was $5 billion, up 14% on the same period a year ago. The result benefited from higher upstream realizations and a lower tax rate, partially offset by weaker refining margins and higher costs. While upstream production volumes fell relative to the fourth quarter of 2010, operational momentum improved relative to the previous quarter with an increase of 170,000 bbl of oil equivalent per day. Fourth quarter operating cash flow was $5 billion, including $1.2 billion of post-tax Gulf of Mexico oil spill expenditures. For the full year 2011, underlying replacement cost profit was $21.7 billion, up 6% on 2010.

Today, we also announced a 14% increase in the dividend to $0.08 per ordinary share payable in the first quarter. Turning to the highlights at a segment level, in exploration production, underlying fourth quarter replacement cost profit before interest and tax was $6.9 billion. Liquid realizations increased 29% year-on-year, in line with market grades. Gas realizations also improved, reflecting the value of our LNG portfolio. Production for the quarter was 3.487 million bbl of oil equivalent per day, 5% lower than the fourth quarter of last year, but 5% higher relative to the third quarter. Turnaround activity reduced from a peak in the third quarter, and we also resumed Gulf of Mexico drilling activity with five rigs operating by year end. Production also benefited from the startup of the PASCAL field in Angola. Costs were higher in the fourth quarter compared to the same quarter a year ago.

We deepened our engineering and technical capabilities, including the independent safety and operational risk function. Integrity-related spending was high, and rig standby costs in the Gulf of Mexico continued into October and November. Higher decommissioning provisions and greater production activity in Iraq drove an increase in DDNA. Relative to the third quarter, underlying earnings were also impacted by a loss in the gas and marketing trading business. For the full year 2011, replacement cost profit before interest and tax was $29.4 billion, an increase of 6% year-on-year. Full-year production was $3.45 million. That's barrels of oil equivalent per day, 10% lower than 2010, or 7% lower after adjusting for the effects of acquisitions and investments and price effects on our production sharing agreements. Looking ahead, production in the first quarter of 2012 is expected to be broadly similar to the fourth quarter of 2011.

Turning to TNK-BP, our share of net income was $1 billion for the quarter, benefiting from high production and realizations year-on-year, partly offset by increases in local transportation tariffs. Cash dividends in the quarter were $1.7 billion, bringing the total for the year to $3.7 billion. In future, we will report TNK-BP separately, providing greater transparency of our upstream business outside of Russia. I view TNK-BP as a long-lived self-funding source of free cash flow with significant future growth potential. Now, turning to refining and marketing, for the fourth quarter, the refining and marketing segment reported underlying replacement cost profit before interest and tax of $760 million, compared to $740 million in the same quarter last year. We are now reporting the three businesses within the segment separately, delivering the increased transparency we signaled to you with the 3Q results.

Firstly, turning to fuels, compared to the same quarter last year, the fuels business saw a 9% fall in refining market margins, balanced by an improved contribution from supply and trading, and benefiting from access to lower-cost WTI price crude grades in the United States, in particular in the Midwest. Compared with the previous quarter, the U.S. fuels environment was particularly challenging. U.S. refining margins reduced by more than 40% in the quarter, and differentials between WTI and Brent crude fell sharply from their third-quarter highs. However, globally, we saw continued strong operations with [some] availability at over 95% in the fourth quarter. Earnings from our lubricants business in the fourth quarter were impacted by an increasingly difficult marketing environment characterized by high base oil prices and weaker demand. This was largely offset by supply chain efficiencies and the strength of our products and brands.

Turning to petrochemicals, compared with the fourth quarter of 2010, our petrochemicals business was also impacted by weakening market conditions as additional Asian capacity came on stream at a time of weaker demand. For the full year, refining and marketing delivered a record underlying replacement cost profit before interest and tax of $6 billion, made up of $3.6 billion in fuels, $1.3 billion in lubricants, and $1.1 billion in petrochemicals. Looking ahead, the level of refinery turnaround activity is expected to be broadly similar in 2012 compared to 2011. Moving to the business and corporate, we reported a pre-tax underlying replacement cost charge of $620 million for the fourth quarter, an increase of $140 million versus the charge of a year ago, primarily reflecting higher functional costs related to strengthening our operations. This was more than offset by an improvement in the foreign exchange effects.

The full-year charge of $1.7 billion was in line with our February guidance. In 2012, we expect the underlying quarterly charge for other business and corporate to average around $500 million, although this will remain volatile between individual quarters. The effective tax rate for the fourth quarter is 30%, bringing the full-year rate to 33%. In 2012, we expect the tax rate to be in the range of 34%-36%. The increase is driven by changes to the geographical mix of income, together with the anticipated impacts of the disposal program. Turning to the costs and provisions associated with the Gulf of Mexico oil spill, in the fourth quarter, we recognized a $4.1 billion credit, reflecting a reduction in the pre-tax charge for the incident, bringing the full-year total to a reduction of $3.7 billion.

The fourth quarter credit reflects the settlement with Anadarko and Cameron, partially offset by an increase in the provision for spill response costs, plus a charge for the ongoing quarterly expenses of the Gulf Coast Restoration Organization. Under these settlement agreements, Anadarko paid BP $4 billion in November, which was subsequently paid into the trust fund, and Cameron paid BP $250 million last month, which will be reflected as paid into the $20 billion trust fund in the first quarter. As a result of these accelerated contributions, the $20 billion commitment to the trust fund will have been paid in full by the end of this year. The total charge taken for the incident at year end was $37.2 billion, reflecting the credits that I just described. Pre-tax BP cash outflow relating to oil spill costs for the year was $8.9 billion.

As we indicated in previous quarters, we continue to believe that BP was not grossly negligent, and we have taken the charge against income on that basis. Turning to our divestment program, in October, we raised our divestment target by $15 billion, which now brings the total to $38 billion, as Bob described. In the fourth quarter, we received $1.6 billion of divestment proceeds from the completed sales of our interests in Lukako, Vietnam, the Wytch Farm field in the U.K., and the Pompano field in the Gulf of Mexico. These brought the cumulative total of divestment proceeds since the start of 2010 to around $20 billion.

At the end of the year, we also had agreements in place covering a further $1.8 billion of divestment proceeds, including the sale of our natural gas liquids business in Canada, bringing the total of completed and announced divestments to date to over $21 billion. Turning to full-year cash flow, this slide compares our sources and uses of cash from 2010-2011. Operating cash flow was $22 billion in 2011, which includes $6.8 billion of Gulf of Mexico oil spill-related expenditures. Divestment proceeds in 2011 were $8.9 billion, and $6.2 billion of disposal deposits brought forward into 2011 as short-term debt had been released or repaid.

We spent $12 billion on inorganic CapEx in 2011, which included the purchase of upstream Brazilian assets from Devon Energy, the joint venture with Reliance Industries in India, our biofuels acquisition in Brazil, and the deepening of our natural gas asset base in the United States. Total cash held on deposit at the end of the year was $14.1 billion. Our year-end net debt increased to $29 billion, and our gearing ratio to just above 20%. In order to retain financial flexibility, we are targeting gearing in the bottom half of our new 10%-20% range, and this will be achieved over time. Organic capital expenditure in 2011 was $19.1 billion, in line with our revised October guidance. In 2012, we expect capital expenditure to increase to around $22 billion as we invest to grow in the upstream.

Our DD&A charge was $11.1 billion in 2011, and in 2012, we expect this to be around $1 billion higher due to new higher margin projects with higher finding and development costs and an increase in decommissioning costs across our portfolio. We expect underlying production in 2012 to be broadly flat, excluding TNK-BP. Reported production is expected to be lower than 2011 due to divestments, which we currently estimate at 120,000 bbl of oil equivalent per day. The actual outcome will depend on the exact timing of divestments, OPEC quotas, and the impact of oil price on production sharing agreements. TNK-BP production is expected to grow by 1%-2% per annum over the medium term. In closing, I would like to provide an update on the medium-term financial framework for the group.

We are increasing capital expenditure to grow the firm by investing in our areas of strength, as Bob described. With the improvements in operating cash flow we have outlined for 2014, we are now confident in committing to a progressive dividend policy going forward, and have today announced an increase in the dividend of 14% to $0.08 per ordinary share payable, as I said earlier, in the first quarter. Future increases will be contingent on improved cash flow delivery, balanced by the need to retain financial flexibility and our continuing obligations to the Gulf Coast. Our commitment to reduce gearing to the lower half of the 10%-20% range over time is supported by the $15 billion of additional strategic divestments we announced in October. In addition, we aim to maintain a strong liquidity buffer given the current uncertainties and economic outlook.

After meeting these objectives, share buybacks still remain an option as a flexible mechanism to return cash over the longer term once uncertainty is reduced and gearing has reached the lower half of our target band. That concludes my remarks. Back to Bob.

Bob Dudley (Chief Executive)

Thanks, Brian. Now let's take a look at the progress since the oil spill and spend a few minutes on the upcoming legal process in the U.S. On the Gulf Coast, beaches and water are open, and the seafood is as good as ever. 2011 was a great year for tourism. In many areas of the Gulf Coast, visitors filled more hotel rooms and spent more money than ever before. These figures are from a number of state and regional tourism organizations. Our main effort is now on recovery. Active shoreline cleanup is essentially complete, while patrolling and maintenance operations continue. To date, we have spent over $14 billion on spill response. We have already committed $1 billion for the early restoration of the natural habitats along the Gulf. In December 2011, state and federal trustees unveiled the first set of early environmental restoration projects.

By year-end 2011, we had paid over $7.8 billion to meet individual and business claims and government payments. By the end of 2011, we had paid over $15.1 billion into the trust fund, which is now over 75% funded. This includes the settlements already mentioned by Brian. Of course, we still have a challenging period ahead of us. The legal processes around the incident are complex and uncertain. Let me explain what we do know. As I've said before, we're ready to settle if we can do so on fair and reasonable terms. We are preparing vigorously for trial. The trial will allocate fault across the parties for the causality and resulting oil spill. The judgment is expected to assign percentages of fault among the participants in the well operation and on the rig.

The United States Department of Justice is a party plaintiff and will represent its case for liability under the Clean Water Act. This slide shows a timeline for the civil trial. It is called MDL 2179. MDL stands for multi-district litigation. The future dates shown here are, of course, subject to change. MDL 2179 will start on February 27th and will be tried in three phases, each addressing a different part of the incident and its consequences. The whole process is likely to last into 2013, with breaks between the phases. Judgments can, of course, be appealed, taking us even further beyond this time frame. Over the coming weeks before the trial, the judge will continue to issue rulings to prepare the case for trial. As we have stated from the outset, we do not believe BP was grossly negligent.

We have confidence in our case, and we look forward to presenting our evidence when the trial begins. We believe the evidence will affirm what every official investigation to date has found, that the incident resulted from many causes involving many parties. We can expect considerable media attention to this case in the months ahead. The early weeks of phase one will be dominated by various plaintiffs, including the Department of Justice, presenting evidence to support their claims, followed by Transocean before BP gets to present its case and its evidence. However, we prefer that this case not be tried in the media. We believe the appropriate place to do that is in the federal court in New Orleans. We will make every effort to keep you, our shareholders, informed of the proceedings as appropriate to the legal position.

Now, let me turn to the upstream and our plans for restoring and growing value in this vital part of our business. As you know, we are going through a period of significant change in the upstream. Today, I want to cover the drivers of long-term growth in this business through four lenses. Firstly, the progress we're making in changing the operating model. Second, how we are reshaping our portfolio, both divesting and acquiring. I want to explain what this change is in service of and what is the endpoint we are striving for. Third, I want to set out the milestones that demonstrate momentum towards expected operating cash flow growth by 2014. Fourth, I want to look at beyond the next three years to the longer-term investments we're making, to the future we see beyond the next three years.

Now, the move from a decentralized asset structure to a fully functional organization has been the biggest organizational change we've taken on in the last 20 years. It's hard work, but it's going well. We now have the functional organization lined up with every dimension of operational delivery and with full-line accountability, from our global approach to exploration and appraisal to a global approach to our major projects. This allows us to optimize activity choices effectively and execute them more reliably and efficiently. For example, we have a single global rig fleet operating to a single set of standards. Bernard and Bob will provide more insights during their breakout session. You will see how we are reinforcing risk management and generating efficiencies from more systematic and standardized design, engineering, and procurement practices. Let's take a look at how we manage the portfolio. I want to be very clear about this.

We have some very simple objectives here. First, we want to own assets where we have a distinctive capability and can therefore achieve advantaged returns. Second, we aim to achieve a size of the upstream that is small enough to generate growth in operating cash flow and large enough to enable us to take on the energy challenges and needs of returns, of governments, and doing it for decades. Third, we intend to deliver the funds to live within our financial framework. We're planning divestments of up to $30 billion in the upstream over four years and have announced $16 billion so far. We've also acquired very promising acreage in the deep water in Angola and Brazil, entering a growing gas market in India, and deepened our unconventional asset base in U.S. gas and the Canadian oil sands.

We have massively strengthened our exploration portfolio for the latter part of the decade. We have traded smaller, mature assets with declining cash flows for those which can grow. We have concentrated geographies and assets to focus management attention. We have increased the group's exposure to the growth markets, where we believe exposure along the value chain maximizes returns. India is a good example, where our Reliance position supports the downstream gas JV and our petrochemicals portfolio overall in Asia. Total resources, excluding TNK-BP, have grown by around 16% in the last four years. That is despite total proved reserves falling by 1 billion bbl of oil equivalent as we divested assets. The prospect inventory has nearly tripled, clear evidence of the portfolio's increasing potential.

We are also consciously creating a portfolio that plays to our strength, with a balance between world-class deepwater assets capability and a portfolio of giant oil and gas fields, which are both conventional and unconventional. This balance diversifies our production, which is now around 50/50 oil and gas, excluding TNK-BP, and also the balance between high-margin, capital-intensive deepwater operations and longer-term, lower-margin, but less capital-intensive investments. This leads me to unconventionals. Although unconventionals have been a part of our portfolio for decades, we have significantly strengthened our position over the past five years. We have been, and we will continue to be, very targeted about how we deepen in U.S. unconventionals, where we have a bias to liquid-rich gas and also where we can export our technology to other regions of the world. Mike and Andy will expand on these points during their breakouts.

Let me emphasize an important point about scale. We will see some further shrinkage as divestments materialize, taking us to around a size of 2.3 million bbl of oil equivalent per day. It's at this level we have a quantum of operating cash that allows four things to happen. First, disciplined investment at scale to support growing demand. Second, a major step up in exploration. Third, a good balance between short and longer-term investments. Fourth, enough critical mass to retain the benefits of scale and standardization. There will be underlying volume growth, but as we've said, it is value growth that we are after, which means growing both volume and margin. Now, let me turn to operating cash growth. We showed this slide last October, showing our plans to increase operating cash flow in the upstream.

The operating cash in 2014 will come from, first, our base operations, secondly, the new wells drilled in existing operations, and then finally, our 15 major projects in the upstream that will start between 2012 and 2014. The unit cash margins are expected to improve significantly with the new projects having around twice a unit operating cash margin of our 2011 portfolio by 2014 at $100 a barrel. Our new projects are progressing well, all now centrally managed in our global projects organization. By the end of 2014, we plan to start up these 15 major projects. That's six startups this year, with nine more in 2013 and 2014. The majority of these projects are in our higher unit margin cash areas of Angola, the North Sea, the Gulf of Mexico, and Azerbaijan, and is how we will deliver a unit operating cash margins I just mentioned.

The project's mix is also diverse, with around 2/3 of the projects being oil developments and 1/3 gas. Roughly half of these projects will be operated by BP. Most of the offshore projects in the North Sea and the Gulf of Mexico are subsea tiebacks to existing facilities, which allows us to build on previous investment made in the existing infrastructure. Bernard will say more about the execution of these projects in the breakout session. As you know, the Gulf of Mexico remains a very important part of our future, and getting safely back to work was a critical milestone for us. We now have rigs working on exploration and appraisal, major projects, and drilling and completion work on our existing fields. We have five deepwater rigs working, with a further three planned to start up this year, subject to regulatory approval.

Exploration and appraisal are important to us and also to the future energy security of the U.S. We are planning to spud the Gila exploration well in 2012 and anticipate ongoing appraisal programs on Kaskida and Tiber. In major projects, we've reached the final investment decision on Mad Dog Phase Two, our first for an operated standalone facility in nearly a decade in the Gulf of Mexico and a giant field in its own right. We also have Galapagos, Na Kika Phase Three, and Mars B major projects starting up over the next three years. In production drilling, we have resumed drilling and completion activities at Thunder Horse and Atlantis, and we plan to restart the Mad Dog rig operations by the end of 2012. Clearly, there will be a lag between completing the activity and the related production showing up. Our focus is on value.

Looking to 2012, we expect to see growth in operating cash driven by the unit cash margin improvements already mentioned. As far as volume is concerned, we expect underlying production to be broadly flat, setting aside TNK-BP. This is the net effect of growth from new projects, reduced outages, and new production from India, offsetting the base decline. We expect production from the Gulf of Mexico to be somewhat lower than 2011, with natural decline progressively offset by new production activity now that we're back to drilling. We expect Gulf of Mexico production to return to growth in 2013. We are also planning another extensive turnaround program in 2012, although we expect overall production outages to be lower. Bob will cover the details of this in his breakout session.

We expect reported production in 2012 to be lower than 2011, and the actual outcomes of that will depend on the exact timing of the divestments, OPEC quotas, and the impact of oil price on production sharing agreements. We expect the divestment impact to be around 120,000 bbl of oil equivalent per day in 2012, with around 70,000 bbl of that coming from divestments which are completed in 2011 and another 50,000 bbl of oil equivalent per day from divestments expected to close in 2012. We will continue to update you on these divestment impacts as the year progresses. As Brian said earlier, we expect TNK-BP production to grow organically at 1%-2% in the midterm. In terms of investment, we're expecting to increase our investment in the upstream to around $16 billion-$17 billion this year, up $2 billion-$3 billion on 2011.

This is driven by doubling of exploration drilling and the increase in the major projects and the ramp-up of activity in the Gulf of Mexico. Now, let me turn to the horizon beyond 2014. We have a strong pipeline of exploration prospects and project opportunities that will generate new resources and projects well into the next decade. Near-term, we have plans in place to ramp up exploration activity over the next two to three years. Our experience in managing the subsurface, combined with advances in seismic imaging, is continuing to redefine and grow the size of our giant fields. This is underpinning major new investments, such as Mad Dog Phase Two and the giant Clair Ridge projects here in the U.K., to name just a few. Gas use as a fuel will continue to grow steadily in the global energy mix.

We have world-class gas projects, and we expect to bring onstream before the end of the decade, linked to price-leveraged markets. All this is enabled by a commitment to technology, a theme which I'll return to shortly. This shows the pipeline projects in detail. You can see that we have some major projects coming through behind the highlighted projects on the right side. These projects will start up in the next three years, and there is a very strong inventory of material exploration projects shown on the far left. There's roughly 40 projects there out beyond. These are aligned with our strengths in deepwater, gas value chains, and giant fields. Deepwater will remain a core building block of our portfolio through the end of the decade. In the gas value chains, we have world-scale projects in Azerbaijan, Tangguh in Indonesia, in Egypt, and in Trinidad.

We are appraising another in Oman. In the area of giant fields, we will have significant cash flow coming over decades from our unconventional Canadian heavy oil projects and big unconventional gas fields around the world. Looking forward, we will be growing our overall capital investment into the upstream, led by doubling our investment in exploration. We will invest for near-term gas generation and create options for longer-term value growth. Around 2/3 of our investment over 2012-2014 will underpin the delivery of the operating cash up to 2014. We will do it in a safe and sustainable way. The other 1/3 will go on creating future projects, including exploration. Investment will be split broadly, equally between the deepwater, the gas value chains, and the giant fields. Finally, there is no doubt in my mind that our new operating model will improve the execution quality and capital efficiency.

Earlier, I mentioned the importance that technology plays in the world of energy. I'd like to make a departure from our usual format and show you something that we are very committed to and will be important for us in the years to come for safety and safely unlocking new deepwater resources. Over the last few years, we have had considerable success in exploring deeper plays in some of the established basins, specifically the Paleogene of the Gulf of Mexico, the Tiber and Kaskida fields, the Oligocene of the Nile Delta, that is the Raven and Satis fields, and the pre-salt reservoirs of Shah Deniz in the Caspian in Azerbaijan. Each of these plays has developable oil and gas today, but each also has a material upside that sits beyond the industry's current capability due to the high-pressure areas of the reservoirs.

To address this undevelopable resource, today we are outlining a project to develop a high-pressure capability to drill, develop, and produce resources beyond 15,000 lbs per square inch, or 15,000 PSI. We call it Project 20K. Let's look at a short video to give you some appreciation of the challenge and the opportunity this project represents.

Speaker 17

At BP, we're playing to our strengths: exploration, deepwater, gas value chains, and giant fields, all of which are grounded in technology. We're going to talk about our next investment in technology at scale to extend our deepwater capability to help meet the world's growing demand for energy. It's a new chapter in the story of technology at BP. First, let's recap some earlier technology chapters where BP set the pace. The research we've conducted over the past decade is making possible a significant breakthrough in water flooding. We're now deploying this technology across our assets, including Alaska and the North Sea. Seismic imaging is another area where our innovations have enabled industry breakthroughs. Our modeling and supercomputing capabilities have helped us achieve a strong exploration record and drive down seismic acquisition costs, for example, in Oman.

BP was also a leader in developing high-pressure, high-temperature production systems up to 15,000 lbs per square inch, enabling the development of giant fields such as Thunder Horse. Exploration success has resulted in a leading reserves and acreage position in the Gulf of Mexico, where the deepwater Paleogene offers substantial new reserves. This is where the next deepwater frontier comes into play, one that's hotter and deeper and higher pressure, a technology frontier where new capability is required to explore for and develop deeper reservoirs beyond 15,000 PSI. Inevitably, we come to this new frontier mindful of the Deepwater Horizon accident in 2010. We've had a very difficult choice to make: exit deepwater due to risks involved or apply the lessons learned to improve the safety and reliability of our current and future operations.

Our decision was to go forward, but with great sensitivity to risk and the new standards we're adopting. What will capability in this new deepwater frontier beyond 15,000 PSI mean for BP? It will allow us to develop deeper, higher-pressure resources in our existing giant fields. It will allow us to explore and produce future discoveries that exceed 15,000 PSI. We anticipate a prize for the industry of many billions of barrels. For BP, we estimate a resource potential of 10 billion bbl-20 billion bbl over the next two decades. That's why today we are announcing Project 20K, something we believe will unlock huge potential for BP and the industry. It's going to take an extraordinary commitment to build technology for subsea developments at these higher pressures.

We intend to develop four new systems: rigs, risers and BOP equipment, well designs and completions, a subsea production system, and an interventions and containment system. We've drawn together a team of our best engineers from across the globe. We will seek our partnerships with the best companies, contractors, academics, and government institutions and exploit the benefits of scale and standardization. We know what technology will be needed for Project 20K, and we know it will demand new standards for safety and risk management. We estimate an investment of several billion dollars in exploration, appraisal, drilling, and well intervention technologies. We're very excited about the strategic investment in technology to support production beyond 2014. You'll hear more about our Project 20K strategy as the program develops.

Bob Dudley (Chief Executive)

You can see the challenge and the valuable opportunity that this will unlock. We have great people working on this, and I believe it will not only open some of BP's existing resources, but perhaps the greater prize will be the new resources it will unlock in exploration and development. We anticipate doing this both as BP and in partnership with NOCs. Much of the technology will apply on and offshore and therefore be of help in the Middle East, Mediterranean, Russia, and the Gulf of Mexico. Like many advances in industry developments of this type, capability will take some time. We'll keep you posted on progress. To sum up, our upstream business is going through significant changes. While we still have some way to go, we can already see tangible benefits.

Our new operating model is in place with Safety and Operational Risk embedding in the divisional organization accountable for operational performance. We are standardizing, choosing our activity carefully, and improving how we work to get this done. We continue to sharpen our portfolio, having already announced divestments of around $16 billion of assets in the upstream, with plans in place for up to $30 billion in total. We've made strategic acquisition in businesses positioned for growth, and we'll continue to do so if good opportunities arise. We have reloaded our exploration prospect inventory through record licensing. Upstream will contribute significantly to the group's expected 50% increase in operating cash by 2014. This will be from higher margin major projects, startups that come from new wells, as well as efficiency in our base business.

Finally, we're increasing investment through the medium term, investing in the areas where we can add the most value by playing to our strengths. Now, let me give you a summary of TNK-BP, which continues with its consistent track record of delivery despite the challenges. TNK-BP offers BP a distinctive position to access Russia's extensive hydrocarbon resources. It is now Russia's second-largest oil producer, with BP net production of almost 1 million bbl of oil per day and nearly 5 billion bbl of oil equivalent in terms of crude reserves. It is Russia's third-largest refiner and now has an established international presence. The ongoing shareholder dispute has had minimal impact on the operational and financial performance of the joint venture. Since its formation in 2003, TNK-BP has delivered 4% organic production growth. In 2011, BP's share of net income was $4.2 billion, and dividends received were $3.7 billion.

Since acquiring 50% of TNK-BP for around $8 billion, BP has received around $19 billion in dividends, so historically around $2 billion a year. At the same time, TNK-BP has been a solid corporate citizen and has paid around $160 billion of taxes, duties, and levies since its formation in 2003. Looking to TNK-BP's future, it has a material opportunity set, and we expect organic growth, as Brian said, of 1%-2% per year in the midterm. The efforts to manage production declines in brown fields will continue through the focused application of new technologies, such as BP's BrightWater technology, with an upscaled treatment program being planned. The ramp-up of the Verkhnechonskoye and Uvat fields will underpin growth to 2015. Longer-term growth will come primarily from the developments on the Yamal Peninsula, Russkoye, Suzun, and Tagul.

In the downstream, TNK-BP will invest and continue to invest for higher fuel quality improvements, refining yield improvements, and marketing expansion over the next three years. 2011 marked expansion into selective advantaged international opportunities with access in Venezuela and Vietnam. We see the growth potential in the portfolio, and we continue to be pleased with TNK-BP's performance. Finally, a few comments about our alternative energy business before handing over to Iain to cover the downstream. BP has been in various segments of renewables over the last 35 years to understand and be positioned for the global trend of long wavelength renewables growth we highlighted earlier. The portfolio is now tightly focused on several specific operating and technology assets. In biofuels, our operating assets are focused in Brazil, where we own and operate three mills in prime [CAM] locations and plan to continue investing in advantaged land, mills, and logistics.

Our biofuels technology assets include our U.S. cellulosic biofuels business and other advanced biofuel developments, notably biobutanol. In renewable power or wind, our operating assets consist of over 1,000 turbines in 13 wholly owned and joint venture U.S. wind farms, which have been developed since 2007. We have an advantaged land position, which underpins our ongoing wind development and construction program. This land position does have analogies to upstream exploration acreage. We plan to continue to grow our alternative energy business with an increasing footprint of operating assets. The business is now positioned for a steadily improving income and operating cash flow contribution. With that, let me turn it over to Iain for the downstream.

Iain Conn (Chief Executive of Refining and Marketing)

Thank you, Bob, and good afternoon. It's a pleasure to be talking to you again about refining and marketing. We had an in-depth look at the segment at our Investor Day on November 30th, and therefore, I'm going to focus today on a few key aspects we covered at that time, talk in more detail about our results for the segment as a whole, and remind you where we are on our journey. In the breakout session, we'll provide more detail about our results and strategic progress by value chain business in line with the increased transparency that we've provided you with today. Bob reminded you of BP's 10-point plan earlier. One of the strengths we're playing to is developing a truly world-class downstream business. R&M has come a long way, and we've a very focused portfolio of value chain businesses designed to deliver a competitively winning performance.

We're in the business of hydrocarbon value chains, and in addition to an intense focus on safe, reliable operations, our definition of world-class is clear. It means being the highest quality business measured by delivery of leading returns and material cash flow growth. We're in three types of value chain businesses: fuels, lubricants, and petrochemicals. We're delivering returns in each of these business models at or near the top of the competitive range. Today, we've provided you with further transparency of each of these businesses, including five years of history. In November, I used this slide to outline what a world-class downstream business involves. It all starts with a platform built on safe and reliable operations and leadership in process safety, combined with excellent execution. Next, the portfolio must be of high quality competitively, with assets of the right scale, location, and configuration, and having leading technology and brands.

In each business, the value chain must be operated and optimized in an integrated way. This all drives competitive cash margin capability, which in turn needs to differentiate its utilization and cash flows. Growth of the business comes from growth in margin share in established markets and exposure to growth market positions. Finally, all of this must be within a disciplined financial framework with active portfolio management to ensure a tight focus on quality positions. How are we doing? This chart's familiar to you, it shows the improvement in underlying pre-tax earnings relative to our history. The dark line shows our historical relationship between refining margins and profits. Having returned the business to historical performance levels in 2009, the yellow band represents our goal of improving underlying pre-tax RC profit by a further $2 billion per annum by the end of this year relative to 2009.

Plotting our profits and refining market margin on this chart, you can see that in the two years of 2010 and 2011, it shows we've delivered $1.3 billion of that improvement. 2011 was a particularly heavy turnaround year, and the underlying performance improvement is actually higher when the approximately $200 million of an increased turnaround burden in 2011 versus 2009 is taken into account. We therefore remain confident that we're on track to deliver the aggregate $2 billion of performance improvement by the end of 2012. As of the end of 2011, in total since 2007, we've now delivered over $6 billion per annum of pre-tax underlying improvement. Let me now turn briefly to competitive performance.

You're also familiar with these charts, they show BP's estimates of our competitive performance versus the R&M segments of the other supermajors adjusted to be on a comparable basis using the same methodology we've used for the last five years. In terms of post-tax ROACE, BP's achieved another goal with returns approaching 10% in 2011, the best since 2006 when refining margins were nearly 40% higher at $16 a barrel. BP's now moved from being the worst-performing company in the sector from 2004 until 2008 to being one of the better performers on this measure. On the right, you can see underlying net income per barrel of refining capacity. This is a measure of relative portfolio quality, and while there, of course, is a mix effect, most of our competitors also do have large lubricants businesses and some petrochemicals.

The fourth quarter was a very challenging time for the fuels business in our sector. Despite lower refining margins, including the collapse of Gulf Coast and Midwest margins in particular, and the narrowing of the WTI, Brent differential, our fuels businesses remain profitable in 4Q. Overall, I'm pleased with our competitive performance, which once again is beginning to demonstrate the relative quality and resilience of our portfolio. Brian outlined our 4Q performance earlier, and let me just provide you with some further commentary on how R&M's individual businesses fared for the full year of 2011. Here you see an updated version of the chart I showed in November. On the left, you see the performance history of the individual businesses updated with 2011's actual results. In 2011, R&M's underlying pre-tax RCP was $6 billion, a record year for the segment, and above 2004 levels despite lower refining margins.

Under the graph, you'll also see for the first time the 2011 pre-tax averaged operating capital employed, including goodwill, that's a mouthful, split out by business model. This shows a total capital employed on this measure of $56 billion, giving pre-tax returns relative to this measure of 11% overall for the year. As you can see, the fuels business carries 80% of this capital employed. This is significantly driven by the oil price effect on working capital. On the right, you see the business environment indexed back to 2004. The fuels business delivered $3.6 billion of underlying pre-tax RCP compared to $2.2 billion in 2010, an increase of 62%. Refining margins were $1.60 per barrel higher. Solomon refining availability was similar to 2010 at 95%. Marketing volumes were down 4% year-on-year due to demand effects, and marketing margins were also lower.

Although we did see improved refining margins and improvement in the WTI, Brent spread, there were many offsetting challenges such as the higher price for sweet crude globally. Our oil trading and supply activities returned to a more typical level of contribution after a poor 2010. Overall, 2011 was a good year for the fuels business with material year-on-year momentum. In terms of strategic progress, the Whiting Refinery Project remains on track for coming on stream in the second half of 2013, and today we announced the intention to sell our LPG marketing businesses, serving the bulk and bottle markets in nine countries. This continues our journey to focus down on a logical core set of positions in which we believe BP to be the natural owner. We'll provide more detail of this in the breakout session.

Turning to lubricants, underlying pre-tax RCP was $1.2 billion, down 11% year-on-year, and in line with 2009 levels. Volumes were also down by 4%. Base oil prices, as you can see on the right, rose by over 30% during the year, contributing material pricing pressure and providing a very challenging environment when combined with the general slowdown in economic activity. Against this backdrop, our brands and the business performed well. In petrochemicals, underlying pre-tax RCP was $1.1 billion, down 9% year-on-year. Margins were up 5% on 2010, although ended the year at very low levels, having started the year benefiting from particular strength in parazylene. Production was down 6% year-on-year as a result of operational issues, including a direct strike by a tornado at our Decatur, Alabama facility. Now let's turn to earnings and operating cash flow momentum.

We showed the picture on the left in October. I've simply updated it for 2011 actuals. It shows our pre-tax earnings growth relative to a 2007 baseline in a constant 2009 refining margin environment. Having materially improved our earnings position since 2007, we continue to have confidence in the pre-tax earnings growth of the portfolio through to the end of this year and out to 2014. This earnings momentum comes from sustaining returns from the base, improving cash margin capability, including the impact of the Whiting Refinery modernization project coming on stream, and through extending our positions in growth markets. This earnings momentum at a constant environment is the major driver of our operating cash flow growth between 2011 and 2014 as we contribute to the group goal.

On top of earnings, which flows through to operating cash flow growth, we are constantly looking for ways to improve the efficiency of working capital use in the business, particularly in fuels. In terms of actual pre-tax returns, as you can see from the red line, we've nearly doubled them from 2008-2011, and we expect them to continue to expand through earnings growth, portfolio simplification, including the ongoing U.S. divestments and the proposed LPG sale announced today, and through active improvement of capital and working capital efficiency. R&M remains a material contributor to the group's cash flows today and to the forward growth in operating cash flow into the future. Let me summarize. BP has a highly competitive downstream portfolio, which is becoming truly world-class. Success is defined by safety performance, excellent execution, intense focus on the quality of the portfolio, and through exposure to growth.

The 2011 underlying pre-tax RCP of $6 billion is an all-time record for BP and has been achieved in far from the best market conditions. R&M remains on track for delivery of $2 billion of improvements in pre-tax underlying performance by the end of 2012 relative to 2009 and represents a material contribution to the growth in operating cash flow for the group by 2014, notably through the Whiting Project coming on stream in the second half of 2013. As Brian outlined earlier, we continue to invest with discipline. 2012 organic capital expenditure is expected to be about $4.5 billion, slightly higher than in 2011 as the activity levels in the field at Whiting ramp up. We continue to be active in the management of our portfolio and will provide more detail on our portfolio activities in the breakout.

Finally, we've provided you with further transparency on the performance of the fuels, lubricants, and petrochemicals businesses so you can get a better feel for our performance and momentum. For each of the businesses, you'll be able to track and measure our progress through our profits, operating returns on either capital or sales, and through key operating metrics. In summary, 2011 represented a good year for R&M, and I'm particularly proud of the team which delivered it. Let me now hand you back to Bob.

Bob Dudley (Chief Executive)

Thank you, Iain. Let me just conclude by summarizing this first part of today's presentation. Looking out to 2014, you could expect to see the delivery of many milestones. These include downstream earnings momentum reaching $2 billion of improvement this year versus 2009, upstream performance improving as we return to work in the Gulf of Mexico and the margin mix of our portfolio improves, the Gulf of Mexico liabilities being clarified, trust fund payments ending this year, the Whiting Refinery upgrade coming on stream in 2013, and the startup of 15 new upstream projects over 2012-2014. The 10-point plan will continue to provide the background, backbone of our program for value creation of what you can expect and what you can measure. As the months go by, we will be able to show you how we are progressing against these expectations and indicators of performance.

BP is moving forward. The year of consolidation is now behind us. Safety and risk management are our continuing priority. 2012 will be a year of milestones with financial momentum building in 2013 and 2014. We expect around 50% improvement in operating cash flow by 2014 compared with 2011. Long run, we'll be increasing investment to grow the firm, but we'll also continue to actively manage the portfolio to add value. Gearing is targeted to reduce to the bottom half of the 10%-20% range over time. Our attention is to grow distributions over time in line with the improving circumstances of the firm. Having reached an operational turning point in October and having confidence in our 10-point plan, we believe circumstances have improved sufficiently to increase the dividend as we announce today.

We will now break and say goodbye to those of you on the webcast before moving on to the next part of today's agenda. Thank you for joining us, and we hope you will rejoin us later. The webcast will restart at 4:45 P.M. London time for the Q&A session. In the meantime, you will find the breakout materials available on the website. For those of you here in the room, I'll now hand over to our Head of Investor Relations, Jess Mitchell, to explain the arrangements for the breakouts. Thank you. Hello and welcome back to the wrap-up on Q&A session. My voice is back a little bit. Here in London, on the stage, we have Brian Gilvary and Iain Conn, who we introduced earlier as part of the earlier plenary session, and the Executive Vice Presidents of our upstream businesses who just presented two of the breakouts.

Mike Daly is at exploration and Bernard Looney developments, and Bob Fryar, production, and Andy Hopwood has overall responsibility for upstream strategy and integration. Also in the front row with us, we have Byron Grote, who is our Executive Vice President of Corporate Business Activities, who you all know, Dev Sanyal, BP's new Group Chief of Staff, Fergus MacLeod, Group Head of Strategic Planning, and Jess Mitchell, who you met earlier, Head of IR. You will now have an opportunity to put your questions to all of us. We are webcasting this final section of the presentation today. For those joining us for the first time on the web and telephones who did not see our previous message, here is our usual cautionary statement. Please read it quickly and thoroughly. Once again, I refer you to the remarks I made earlier, which are now posted on the website.

With that, we'd be very happy to take your questions. You can direct them at any one of us. Let me start, Deepan. I'll move this direction. Deepan first.

Speaker 16

Hi, good afternoon, Bob. Thank you very much for your presentation and your management team's time. I wanted to discuss sort of the financial framework, actually. Big oil investors are increasingly thinking of cash generation, particularly post-CapEx. Three things I'd like to sort of talk about. One, just short-term capital investment for 2012. Can you talk about what type of increasing CapEx there is for sort of integrity, increased safety? Secondly, you know I think from the discussions today, clearly you've got many choices to make, particularly around your portfolio, the balance between Deepwater and I think what was referred to as long-term investments or unconventional. Could you talk about the shape of investments going forward between Deepwater and unconventional? Lastly, I guess on the payout, you're generating more cash. I was wanting to know how one should think of payout going forward.

Should you look at payout ratios relative to earnings, gearing, or cash generation? One could argue today with your gearing levels slightly above the targeted range, the potential for a settlement, perhaps an increase in the dividend could wait. I know lots of questions there, but it'd be great if I could have some answers.

Bob Dudley (Chief Executive)

Right. There's a lot of questions, Deepan. Thank you. First on CapEx and the amounts that we're spending on SNOR. Right now, we are embedding what we do in all our projects normally. We're not separating out, I would say, integrity spending. This year, we had 47 turnarounds. We'll have 37 planned for 2012. Some of those may be turnarounds we wouldn't have done in the past, but they're undoubtedly things that will keep our assets operating longer and more reliably. I am going to, as we go through these questions, throw pieces of this to the management team and Bernard and Bob, if you want to comment quickly on the additional spending specifically related to SNOR and how you'd look at that.

Bob Fryar (Executive VP of Production)

Yep. I would just, so with respect to integrity, we invest in really two areas. We've talked, Bob talked about the turnarounds. Secondly, we invest in maintenance, which helps us in our integrity efforts. Turnarounds, I'd say the spending is going to be pretty much on a pro-rata basis. We were $47 million last year, $37 million. We'll see a bit of a decline there. On maintenance, we'll step it up a bit because one of the things we are working to do is to make sure that our assets are safe and they're reliable. That does mean increased investment in maintenance overall. I think year-to-year between the turnarounds and maintenance programs, I would say from 2011-2012, it'd be flat.

Bob Dudley (Chief Executive)

I would add to Bob, we do roughly have an estimate of $400 million for integrity CapEx in 2012, and that would be across the entire company. The number is, for upstream, $400 million, that's right. In the Deepwater long-term makeup of the investments going forward, I'm going to ask Andy to comment on this because he is working with the upstream strategy and can give you a good summary.

Andy Hopwood (Executive VP of Strategy and Integration)

It's tough, good, and an easy answer. We've said about 1/3 of our medium-term investment is going to be into Deepwater. The other 2/3 is about 1/3 into the gas value chain and 1/3 into Deepwater. The other aspect of the investment is about 60% of it is really focused on delivering 2014 and the remainder beyond. Clearly, the percentage of unconventionals will grow as the resources get developed when we bring on particularly the Canadian resources. Of course, it's less capital intensive, so it's pretty hard to break them.

Bob Dudley (Chief Executive)

On our approach to how we think about dividends going forward and distributions, I'm going to ask Brian to comment on some of the ratios that we'll use going forward.

Brian Gilvary (CFO)

Yeah, the key metric we're using, Deepan, is gearing, which is what we've been clear about putting a target at. The key is to make sure that we strengthen the balance sheet over the next two to three years. The destination point we've given is 2014 to be in the bottom half of the new lower band. Remember, the old band was 20%-30%. Post-Macondo, we moved that from 10% to 20%. It's sitting just above 20% now, and the trajectory down to that lower half will be a bit lumpy quarter-by-quarter. We're confident now in terms of the operating cash flows that are coming through in 2014, in terms of what we've promised around 50% of additional cash. The disposal proceeds packages, we'll see net debt be driven down and get under gearing coming into that range.

Bob Dudley (Chief Executive)

Now, before we take a question, we've had some very, very patient people who have been very silent on the webcast, and we've got a set of people who have asked questions. I'd like to ask Doug Terreson, if you can hear me, and if you can go ahead and ask your question, and then we'll turn to Irene.

Doug Terreson (Company Representative)

Sure. Good afternoon, guys. First of all, congratulations on your progress in 2011 and also on your restoration efforts on the Gulf Coast as economic and environmental damage is really unobservable over the past year. Good job there. On these points, Bob, you highlighted earlier today progress on safety and trust and value growth, which I think represent important areas of emphasis for BP going forward. My question regards the cultural or transformative effects that these efforts may be having on the company and specifically how you envision them translating into greater competitive advantage for BP.

Bob Dudley (Chief Executive)

Thanks, Doug, for your comments. I take it you're located somewhere near the Gulf Coast to make that observation, and if you are, thank you very much. The competitive advantage, I think that safety is good business. What we're doing, and I'll ask Bernard to comment on some of this, safety is good business. What we're doing in terms of putting in place our voluntary standards and the things that we are doing to change how we approach drilling and working with contractors is certainly going to change BP going forward as we work in the offshore around the world. I think it's good business. I think it will move the dial on the industry. It's the right thing to do. Bernard, you can make some comments on some of the things we're doing in this area.

Bernard Looney (Executive VP of Developments)

Yeah, thank you, Bob. We talked earlier, Doug, today in some of the breakouts about this. I think this point about safety being good business is just something that we continually harp on. I think we think about it in two ways. First of all, investment in safety and having that be the priority is about the prevention of a major accident, such as the Deepwater Horizon. That's something that none of our shareholders want, none of us want to ensure ever happens again. That's a good reason to invest. I think, as importantly, it is this issue that a safe business is an efficient business, is a reliable business. An example where we're investing a lot of time today is around the reliability of our blowout preventers and those that operate on our rigs.

We're doing that because we want to make that system safer and to make it more reliable. The upshot of having a safer and more reliable blowout preventer is a more efficient well operation. I think this concept that actually investing in safety, and it is investment either through capability, the systems that we have, or the plant that we have, is not alone is it right in terms of safety, it's right in terms of our business. I think as we do this, we see more and more of this, and this is what Bob is leading and we as a team believe in.

Bob Dudley (Chief Executive)

Thanks, Bernard. Now let me turn to Irene, and then I will go back to the web because there's a fair number of questions. Irene.

Irene Himona (Analyst)

Thank you. It's Irene Himona at Société Générale. I had two questions, please. First of all, Bob, you give us guidance or a target for cash flow growth to 2014, but you only provide an indication of CapEx for 2012. In an environment of $100 flat, what cumulative capital expenditure should we anticipate to deliver the 50% cash flow growth? My second question concerns the new project startups, which you mentioned have doubled the cash margin of the existing portfolio. As you said, this is because of higher finding and development costs and higher depreciation charges. I guess my question is, when we look at profit margins, i.e., earnings in an environment of $100, should we also anticipate an improvement in P&L margins and indeed in return on capital employed? Thank you.

Bob Dudley (Chief Executive)

Okay, thanks, Irene. There's a number of things there. First on the CapEx levels, we haven't given specific guidance, but I would not see CapEx rising between $22 billion today for the year 2012. Somewhere between $24 billion and $25 billion is a likely number for 2014. You can work out the cumulative numbers in there. In terms of the increased margin, half of the increase in operating cash flow, by the way, between now and 2014 would go into the 50% increase in CapEx. Regarding the cash flows, just looking at my notes of your questions here, we do see higher margins coming on from the nine, six projects in 2012, the nine projects additional to that in 2013 and 2014. Half of the increased cash flows, I'm sorry, somebody sent me a note here on the web. We see higher margin projects coming in.

They're primarily oil projects, Angola, Azerbaijan, the Gulf of Mexico, and the North Sea. You want to comment further on the increased margin from those projects.

Bernard Looney (Executive VP of Developments)

I think that some of these projects do carry high DD&A. That's why they do carry higher cash margins. I think earnings may not grow quite as fast as the cash, but I think we will see underlying improvement in both. Our focus today, Irene, is on ensuring that these projects come online, that they operate reliably and efficiently. That's the focus of the organization, the 15 of those. I think, as Bob said, you'll see the 50% in cash, and you'll also see underlying earnings improvement through that.

Bob Dudley (Chief Executive)

In terms of the return on average capital employed or ROACE going forward, of course, it depends on the oil prices. Laid out in this target at $100 in 2014. Part of this will depend on how the downstream evolves. We've had a 10% return in our downstream this year. It will depend partly on the environment going forward. Our upstream projects will continue to increase their returns on the business. I know I said it externally, but this year, our return on average capital employed in the upstream has been roughly at 20%. We would expect to see those kinds of returns in this price environment as well in 2014. Let me turn to the web. Sorry, I've been distracted with a couple of technical messages here. Mark Gilman from Benchmark.

Mark Gilman (Analyst)

Bob, thank you. Can you hear me all right?

Bob Dudley (Chief Executive)

I hear you just fine.

Mark Gilman (Analyst)

That's great. Just two questions, if I could, please. On Iraq, there's been some question as to whether the Baghdad government is current in terms of payments and entitlements to you, vis-à-vis both cost recovery as well as service fees. Could you comment on where things stand for you there and whether Iraq is making positive, negative, or neutral contribution to earnings and cash flow at this point? My second question relates to the Eagle Ford. It appears that over the past, I guess, 24 months, you have amassed a considerably larger position in that trend. I wonder if you could just be a little bit more specific in terms of where and what it cost you to get into that position. Thank you.

Bob Dudley (Chief Executive)

Okay, Mark, thanks. A couple of things on Iraq. You'll know that it was about a year ago, a little over a year ago, we reached the production target, the initial production targets, which began a cost recovery cycle for us. We have been steadily and have recovered our initial investment through recoveries of crude cargoes. We're current, we're up to date. There's always a little bit of a lag as we spend CapEx there, but we've been very pleased at the pace of the developments in Iraq. The field now, and Rumaila Field, is producing about 1.45 million bbl a day. It is positive for us. On the Eagle Ford, I'll ask Bob and Andy to comment, but you are right. We have been shifting our focus very quietly without fanfare to the liquids-rich areas of unconventional gas.

We have a sizable position in the Eagle Ford, some of which is very rich in liquids. Andy.

Andy Hopwood (Executive VP of Strategy and Integration)

Yeah, you're right, Mark. As we've high-graded the portfolio both in the divestment and investment, we've got a position now with about 6 TCF of resources in the Eagle Ford, but over about 450,000 acres. We don't divulge the specific deals that we've done down there, but what we do have is a working relationship with Lewis Energy, whereby they operate the field and we work in terms of identifying the subsurface. As you say, Mark, it's going very well.

Bob Dudley (Chief Executive)

I'll keep over here, John, John [Redbean], and then I'll move over here.

Speaker 16

Bob, you talked earlier on about how you saw it, sort of an optimal level of production of around, I think, 2.5 million bbl of ex the TNK-BP portion of the business.

Bob Dudley (Chief Executive)

2.3 million bbl. I think we're good there.

Speaker 16

Already giving you some growth. Does that seem to imply, or would that imply that over the medium and longer term, so post-2014, as you stabilize the business, that you would expect BP to grow at a slightly underlying and a slightly faster pace than maybe what your aspiration was three or four years ago? Would that mean also that your business model changes a bit in that you recycle cash back through the business and look to be buying back stock structurally, adding value to shareholders by churning your portfolio more aggressively and probably being a structural buyer of stock as well.

Bob Dudley (Chief Executive)

We've been very careful not to set production targets. We want to get off that treadmill. We do want to create value. While we have described a portfolio that gets down to around 2.3 million bbl of oil day XT, TNK-BP, which will give us enough cash to be able to invest in projects to return to shareholders. If we don't continue divesting beyond the target, what you would expect is to see growth, and not to give you a target for that, but you would expect to see growth. It doesn't mean though that we won't, and I believe we will continue to focus divestments of mature assets to be able to replace them into growing assets. I think you'll see the portfolio movements which may or may not lead to the growth.

In terms of recycling cash flow, that is what we want to signal, is that we'll generate sufficient cash, operating cash flow. We'll have choices of what to do with that operating cash flow. It could be dividends. It could be continuing to pay down debt at further levels. It could be some acquisitions, although we're not on the acquisition hunt particularly. It could be buybacks. Right now is not the time for us to be out buying back stock, but we'll continue to debate with our shareholders. Our shareholders have a big mix of opinion on whether it should be dividends or buybacks or X. It's quite extraordinary.

Speaker 16

Does that mean that conceptually the lifecycle of an EMP asset within BP needn't necessarily be from being awarded a license right the way through to plateau production? You could be adding value before you even get to plateau production and moving on in terms of the assets that you're holding.

Bob Dudley (Chief Executive)

That's exactly right. What you will see us do from time to time is if we have a big position in exploration and a project for development, you'll see us sell it down to be able to recycle, you know, reduce selling things down that traditionally we might not have done earlier. It could be all or it could be parts. All of those things are on the table. I think it's a good way to describe it. The mindset that we, the industry may have had for a while, I believe is changing, and we're certainly changing within BP. I think my voice lost me as Lucy [Zias] comes here from [Barclays Bank].

Speaker 16

Thank you. Just to follow on the dividend, what were the kind of changes in the company circumstances that did make you feel comfortable about lifting, and why 14%?

Bob Dudley (Chief Executive)

14% is a very precise calculation of going from $0.07 a share to $0.08 a share for the quarter. We felt like the improving circumstances of the firm would allow us to do that. The operational momentum that turned in October, getting our assets back running, and the cash flow from that allowed the board to make the decision that this was the right thing to do. We've had investors who have stayed with us through really tough times in the past, and it's time to start rewarding them. I think I'll just leave it at that. People have different ways of defining progressive dividend policy. We would define it as a progressive dividend policy that our intention is to, with the improving circumstances, move up a dividend in line with underlying earnings. There are a lot of factors in the future decisions.

Oil price, there are a number of things, and we'll come to that later in the year, next year before we make a decision. Progressive can also mean don't lower the dividend. The pace and trajectory of dividend increases is not something we're saying today, but I think a progressive dividend policy in line with the improving circumstances of the firm is probably the best way we could describe it.

Andy Hopwood (Executive VP of Strategy and Integration)

Yeah, Lucy, I mean, I think it's just premature to be talking beyond this quarter. We saw the operational turning point that Bob described in October. We've seen settlements with some of our partners. The circumstances of the firm have improved, and we've signaled that we now have the confidence around the cash flow targets that we can signal a 1% dividend increase today. Beyond that, I think it'd be premature to talk about what the future may look like.

Speaker 17

Thanks. I wanted to ask about the exploration program, the scenario that it was maybe the key core competency for BP historically. We've clearly been through a period of abnormally low activity. My question would be, with the resized portfolio, what would you view as an optimal exploration program, either in terms of the number of wells or really preferably the amount of resource you're exposing yourself to? Given that we've been through a period of abnormally low activity, would you expect a ramping activity from that optimal level for the next couple of years? Maybe what that would mean for overall spending and exploration.

Mike Daly (Executive VP of Exploration)

Yeah, great. I agree with you. I think we have, through this last decade, been underinvested. Perhaps I would say that. Optimal size, the size we're going to is to try and get to a sort of situation where we have the order of 20 real wildcat exploration tests a year. Last year we managed six, and this year we're heading for 12. Of the 12, only five of them are operated, so there's some uncertainty in that out of our control to a degree. We have a portfolio that will sustain the order of, I think in the notes previously we said 15-25, and clearly the middle number is 20. How do we judge? That's one metric. The other is the scale of BP, even the shrunken BP or the slightly smaller BP that we have today.

Exploration has not been the sole renewal mechanism for a long time, and that will continue. We're not going to be producing or finding 1.3 billion bbl, 1.4 billion bbl of oil equivalent a year. Half that coming from exploration seems to me to be a good sort of aspiration. How long it will take us to get back to that sort of level is going to take some time.

Bob Dudley (Chief Executive)

I'm just going to add to that. I'm not sure people recognize the quality of the set of licenses that have been acquired in the last year. Fifty-five licenses in nine countries, whether it's Angola, Namibia, Australia, Azerbaijan, Trinidad, North Sea, Gulf of Mexico, the list goes on. This has really loaded the exploration pipeline of prospects now. Mike and his team now have an enormous amount to work on in the next few years. I'm very enthusiastic about the potential of it.

Mike Daly (Executive VP of Exploration)

I can't help smiling at my colleague at the end of the table there, Bernard, who's going to be drilling all those wells. We have reloaded the portfolio, and the consequences of that will flow through. Equally, we will continue to access things. I think in the past, we've got to a good portfolio, and then we've stopped. Once you stop, it's very difficult to get back. This is something that I think we've learned the hard way.

Bob Dudley (Chief Executive)

I think it's fair to say we have not lost the expression talent in the company.

Mike Daly (Executive VP of Exploration)

Oh, absolutely not.

Bob Dudley (Chief Executive)

To be able to deal with us.

Mike Daly (Executive VP of Exploration)

The young talent in the company is much better than the old talent, believe me.

Ian Reed (Analyst)

Hi, it's Ian Reed from Jefferies. Bob, can I ask you a question about Macondo and any potential settlement? You said, obviously people have said since the outset they don't think they're grossly negligent. Can we assume that whatever settlement you agree with the Department of Justice, you can't go a dollar over $1,100 per barrel in order to reach that? Is there some way of potentially kind of folding that in with something else, which arises a number which kind of doesn't imply that? Is that too much to ask?

Bob Dudley (Chief Executive)

I understand your question. It really is too much to ask because you said when we settle, I think there's a whole lot of variables here. We don't believe we're grossly negligent. We would like to settle a variety of things if it's fair and reasonable. At the moment, we're really working hard vigorously for the trial ahead. It's really hard to answer your specific question.

Ian Reed (Analyst)

We can't assume that you wouldn't settle if there was any sign of gross negligence in that settlement number.

Bob Dudley (Chief Executive)

We firmly believe we are not grossly negligent. I think there are a lot of variables around what you would determine numbers on in terms of fines and penalties. It's really not appropriate for me to talk about it. It's not the right thing.

Ian Reed (Analyst)

Okay, thanks.

Bob Dudley (Chief Executive)

Let's go to this gentleman right here, then we'll go way over there and then back to Jason.

Martijn Rats (Company Representative)

Yeah, I got two short questions. It's Martijn Rats at Morgan Stanley. First of all, I noticed I might get this wrong, but on a number of occasions, you've talked about production, XT, and TNK-BP. There seems to have been more emphasis on parameters, XT, and TNK-BP. I was just wondering whether underlying there is a slightly different view in how you see your relationship with TNK-BP. Have you just become the receiver of the dividends, or is there still a more operational role to play? The second question that I had still relates to the CapEx question that Irene was talking about. Obviously, there has to be a balance, or there is a long-term relationship between spending on exploration and spending on development. Obviously, all of CapEx is going up, but you're talking about a much more aggressive growth in exploration spending.

Aren't we then, are we talking about eventually a similar level of growth in development spending? Because ultimately, the two have to be linked. If you're spending a lot more on exploration, will we see continuing strong growth into the next decade on development?

Bob Dudley (Chief Executive)

A couple of things on TNK-BP. One of the things that we promised in this 10-point plan was more transparency on value. We have laid that out with lubricants. We have laid that out with petrochemicals. What we have found to our investors is when we talk about the upstream and combine our upstream business with TNK-BP, which has three refineries, and we roll it all up, it is sometimes not helping investors understand the business. You should not read anything into it other than that. We are just separating it out for transparency. That includes reserve replacement, production, all that. We just want to make it very clear to you. I think it will make it easier. There is no hidden message in there that somehow we are going to separate this out or have any intention to do so. CapEx on exploration.

It is our intention. We are not built into our plans as exploration success specifically, but I think we will have some. We will have great choices to make. At that point, we will make choices of do we spend money on these developments? Do we sell down other things? Do we sell down some of the exploration success? It is our intention to maintain a capital discipline that makes sure that we have enough operating cash flow and free cash flow for shareholders for distributions. If we were in the old model that John described, where you explore and you carry and you will develop everything, what you describe is probably true, but that is not our intention. Let us see that there.

Paul Spedding (Company Representative)

Paul Spedding from HSBC. It's a sort of two questions on the Paleogene. I think many of us regarded that as a potential source of the next generation of U.S. deepwater growth. I'm interested to see that you are at last getting back there. I'd be intrigued to see you give a comment on what sort of level of drilling activity you would see in the Paleogene in terms of wells per year. The second thing I'd be interested in is that I think our perception in the city is that it is not a high recovery reservoir in that play. You've talked about how technology can boost recovery in some of your other reservoirs. I wonder if there are any technologies that are on the horizon that could help boost recovery from Paleogene style reservoirs.

Bob Dudley (Chief Executive)

Okay, very good questions, Mike. Yeah, talk about the drilling levels.

Mike Daly (Executive VP of Exploration)

As I think you heard in the breakout, you know, we will be restarting drilling in the Pelton. We've restarted with Kaskida. That's a Kaskida appraisal well. The remainder of the year, we hope to start Gila, or I think we'll start Gila and Tiber. Tiber appraisal, Gila exploration. Once we have the eight rigs that Bernard has got coming up and running, two of those will be dedicated to E&A. We expect to be able to continue to drill out our exploration inventory at one or two wells a year. That will depend partly on expiry dates of the portfolio and partly on the amount of success that we and the pace we put forward into appraisal. I think that whole thing comes back to your point about the amount of capital we wish to expose to. There is a choice ahead of us about exactly that.

As for the low recovery rates, we have got a very large oil in place here. There are two issues, the usual two issues. Some of the oil is a little viscous, and so we have to figure out how we're going to deal with that. At places, some of the rocks are a bit tight, and in other places, it's not. In the long term, fracking that stuff may be an option that we explore. I think the lure of it is the very large oil in place. Even if with the recovery factors in the teens or low 20s, you're still talking of very large resources. Your point about technology is absolutely spot on. You heard the first phase of that today with the Project 20K.

Bob Dudley (Chief Executive)

Seismic imaging always allows us to be more within the field.

Mike Daly (Executive VP of Exploration)

Absolutely. I mean, our ability to see through 4 km of salt is remarkable. It continues to get better, and the frequency of our seismic continues to get better. Those barrels will move over time, absolutely. I'd just recommend you talk to a couple of the guys who are joining us here, Kevin Connelly and his team. They're onto this, and they're very interesting people to talk to.

Bob Dudley (Chief Executive)

Jason.

Jason Kenney (Company Representative)

Thanks. It is Jason Kenney from Santander. Two questions, if I may. On the exploration side, do you think there are any particular holes that you would like to chase, maybe East Africa or exposure in Brazil, perhaps? Secondly, we spoke about this earlier, Mike, briefly in the breakout session. I'm interested if there's any wider views from the management team. It's how BP looks to recapture or capture the NAV gap. It's obviously been lost over the last few years, particularly given the material progress you're making in FIDs, expansion of projects. Sometimes in the city, I don't think it's as clear as a new discovery when you double the reserves in an existing development. I wanted to know how you can really emphasize that to some investors to show the value that has been added through that process.

Mike Daly (Executive VP of Exploration)

Shall I start?

Bob Dudley (Chief Executive)

Yeah, go ahead.

Mike Daly (Executive VP of Exploration)

I mean, we clearly aren't in everything. You know, some of it, it's a bit of the same answer about quality through choice that there are one or two things perhaps that you would look at and think, yes, we should try and respond to that. There are other things that actually we're quite happy not to be in. It's always the very nature of the game of exploration, it's always going to be that someone finds something that you don't, and then people say, oh, well, you're not here, you're not there. We are in a lot of places, and I think we're pretty happy with the portfolio we've got now. We're not totally happy with it, and we will continue to change it. That's a sort of, and not answering your question, but answering your question, Jason.

Recapturing NAV, the response we gave to Jason in the session was that by being more transparent and talking about the giant field appraisal programs that we've got, we've sort of exposed a whole bunch of value that people hadn't really seen before. I appreciated the growth in Mad Dog, the growth in Clair, and the growth in potentially Shah Deniz and other fields that we haven't talked about today. That's the sort of recognition of that is a growth in NAV. That was our answer.

Bob Dudley (Chief Executive)

I think that is the right answer. Some of the things we do in terms of re-imaging along the way with fields allow the size of these fields to grow, fault blocks that we did not see before or could not reach. It has just been the history of our industry. You will see we keep adding reserves. We have had a reserve replacement ratio this past year without a whole lot of additional work that we normally would be doing in the Gulf of Mexico. Traditionally, you are right, we have not been particularly transparent on the increase in reserves as a result of, say, seismic imaging or reservoir modeling. Sometimes we have partners. It is just not been our habit. Maybe, to take your point, we can be a little bit more transparent about it.

I know that this year, Jess, the team will have some upstream and investor day. We have not set a date for it yet, but maybe we can take some of that on and be more transparent about that, both the track record and the things we think are possible. Not to put you on the spot, Jess.

Jason Kenney (Company Representative)

In the interest of transparency, can I talk a little bit about India? It's a year since you announced $7 billion. It's been approved. $7 billion is not much shorter than the $8 billion that was the original investment in TNK-BP, but we saw a lot more out of that. What matrix, what information can you, will you be providing that allows investors to sort of chart the progress and the operating momentum in that side of a key strategic investment?

Bob Dudley (Chief Executive)

We look at India as one of the countries that has one of the fastest growing thirsts for energy. Energy in India will grow at 6% a year, and it is woefully short of natural gas. The current pricing in India is about $4 an MCF. Believe it or not, spot cargoes are being imported into India as of yesterday at $17 an MCF. We see this being a real land of opportunity. The Reliance deal took on 22 large blocks off the east coast of India where there are exploration prospects. We knew we were moving into the D6 field that was on rapid decline. Always knew that was the case, but around it, there are a lot of satellites. We have been working and have made proposals to the government on the development of the satellites.

Just this last week, a proposal, I believe, has been made by the Indian government itself to increase the gas price to $7 an MCF in 2014. We've also set up a 50/50 joint venture for gas marketing, and that would include bringing gas into India as well as marketing gas inside the country. Now, we'll have to think about how we describe all those different pieces going forward. This was never going to be an investment that was going to be for tomorrow right away. This is going to be one that's longer term, and given the growth of energy demand in India, very few people, very few companies are going to be able to have that sort of acreage position with that kind of potential going forward. We'll report on it as best we can. I don't think quarter by quarter is the right thing.

We remain very enthusiastic about both the relationship with Reliance and the prospects there.

Lucas Herrmann (Company Representative)

Bob, thanks. It's Lucas Herrmann at Deutsche. I just wanted to ask you a little bit about the Gulf of Mexico and production. It strikes me that one thing, one area more than any other is going to be key to your achieving your 2014 targets, and it's simply the restoration of production in the Gulf. Three aspects, I guess. The first is the progress that you've made of late. Is that in line with the expectations you have? How much P&A work is there for you to do short term that prevents the development and build of barrels in the near term? What level of production do you actually need to achieve in your $100 environment in 2014 as an annual average to broadly deliver the targets that you're achieving relative to where is production today, Bob, as an average?

Bob Dudley (Chief Executive)

To the Gulf of Mexico?

Lucas Herrmann (Company Representative)

Yeah.

Bob Dudley (Chief Executive)

It's above that. We haven't been, for a lot of reasons, disclosed sort of every place we operate with the individual production, but a couple of things. I think, and I'll ask Bernard to comment on the well work that's going on because we're not just P&Aing wells now. It's important to remember when we met at the third quarter results, it was not clear when or if we were going to get back to work in the Gulf of Mexico. The third quarter, it was very clear that we had been working with voluntary standards and we were going to get permits back. We said we expected by the end of the year to have five permits running. Much of the early activity was catching up with plug-in abandonment activities. Here we are in February, we've got five rigs running.

We've got a lot of that work out of the way. Two of the five rigs are working on P&Aing. We've come a long way. We shouldn't take for granted the progress that's been made with the regulator and our sort of care and diligence here. We are now about a 1/3 of the way down through the appraisal well on Kaskida, which is a deep, deep, important appraisal well for us. A lot of progress. Before Bernard talks about what the rigs are actually doing today and the prospects for 2012, Gulf of Mexico fields generally decline relatively quickly. You have to keep going. We and the entire industry, with the drilling moratorium there, set us back in well work. That decline is there. We're arresting that decline in 2012, getting back to work, and then in 2013, we'll see growth again.

I don't see us going below 200,000 bbl a day in 2012 before we start back on the growth.

Lucas Herrmann (Company Representative)

The question was, what do you need to produce in 2014 to achieve your, you know, that target? Where in your, what does your plan say you need to be at, Bob, to achieve the kind of cash flow you need? That is the single component that makes the difference.

Bob Dudley (Chief Executive)

Let me come back. Let's talk about what the rigs are doing. We'll come back to that.

Bernard Looney (Executive VP of Developments)

Lucas, the opportunity in the Gulf of Mexico is we're opportunity-rich. As you know, we're exploring, we're appraising. We've got rigs doing project work for projects that will come online in a couple of years. We've got wells doing immediate production work, and we've got rigs doing P&A work. As a breakdown today, we have five rigs operating in the Gulf of Mexico. Two of them are operating on P&A activity. One of them, as Bob said, is drilling at Kaskida. One is just completing a production well, which will be brought online in March or April. One is drilling a water injector at Atlantis. Water injection is just the same as oil. It just comes a little bit later. In terms of the eight rigs going forward, we will shift that activity set throughout the year.

As Mike said, by the end of the year, two of those rigs will be working on exploration and appraisal activity, good for the future. We'll have two rigs operating on Thunder Horse. We'll have two rigs operating on Atlantis. We'll have a rig focused on Na Kika, which will be near-term production as well as longer-term project work. We'll be restarting a rig on Mad Dog. You'll see the level of activity on P&As not necessarily disappear, but certainly reduce dramatically over time. You'll see that then being translated into full-year effects in 2013 and 2014 when we get the real benefit of full-year effects of having the rigs doing what we want them to do.

Bob Dudley (Chief Executive)

I think one thing's really important to add to this, Lucas, to say that the Gulf of Mexico is the one thing for us. We're very confident we're going to move the dial and get back on there. It's part of a big portfolio. What we do in Angola and the North Sea, I would say in terms of the generation of operating cash, is just as important to us as the Gulf of Mexico. We've got lots of good prospects in terms of production growth in Angola and the North Sea also. Sorry, I'm losing my voice. Those are 65% of our operating cash flow in the upstream come from four places: Gulf of Mexico, Angola, and North Azerbaijan. We're very confident at this point. All those areas come through for us.

Lucas Herrmann (Company Representative)

Thank you both.

Bob Dudley (Chief Executive)

I think it is okay for us to say we'll be back to pre-Macondo levels by 2014.

Lucas Herrmann (Company Representative)

Pre-Macondo levels by 2014.

Bob Dudley (Chief Executive)

For the Gulf of Mexico.

Bernard Looney (Executive VP of Developments)

When you look at what underpins that operating cash, 50% operating cash growth through 2014, what it assumes, what underpins that is pre-Macondo rates in 2014.

Neil Morton (Analyst)

Thank you. It's Neil Morton at Berenberg. I had two unrelated questions. The first on gas value chains. We're pretty close to FID on the second phase of Shah Deniz. Could you perhaps clarify the likely sort of gas evacuation route? It all seems sort of fairly chaotic as we approach the deadline. Secondly, in the downstream, in light of increased transparency and value creation, would you ever consider seeding partial ownership of your lubricants business? Thank you.

Bob Dudley (Chief Executive)

Shah Deniz pays to the moving of gas from the markets in the Caspian to Europe is a complex process, just like it was in the building of the BTC pipeline out of Azerbaijan and the initial Caspian gas pipeline through there. The routes will come up into Turkey, and then it is which direction does it go across through Turkey to link in with Europe? Right now, there are three competing proposals, and we, working with SOCAR, have even developed a fourth proposal. I think very good progress is being made and has been made in the intergovernmental agreements between Turkey, Georgia, and Azerbaijan. That was a key step here. I'm hopeful, because it is complicated, that we'll be able to announce with SOCAR, Turkey, and European the different projects that are being supported for the gas lines, something in the next six months.

This is a complicated process that, like all big oil and gas pipelines, just takes a lot of time. It really feels like it's coming together now.

Mike Daly (Executive VP of Exploration)

I think, Bob, it's also fair to say, you know, you may see it as chaotic from the Shah Deniz shareholders. They also see it as a lot of options. That's going to be good for value. Also, the ability now, over the great constructive discussion that's been had, to be able to build out from Baku in successive steps within Azerbaijan, across Turkey, and then into Europe has got to be a really pragmatic and sensible way of developing this resource.

Bob Dudley (Chief Executive)

On your question around lubricants, I'm going to say, Iain. Yeah.

Iain Conn (Chief Executive of Refining and Marketing)

Neil, I just think I would turn it around and say, why would you? You know, this is a business that's delivering 15%-20% pre-tax returns and has grown 30% per annum over the last five years. I'm not suggesting it's going to carry on growing at that rate. It is material and it's top of the sector. Technically, we've got a tiny bit of it listed on the Mumbai Stock Exchange, which you can always go and have a look at. Unless we were deeply desperate for cash, I can't imagine why we would.

Bob Dudley (Chief Executive)

I think given that it's 5:30 P.M., I see some people have already had to run out to catch airplanes. Let's see if there's any other last question. We've actually lost some people on the web. We've gone too long. Ladies and gentlemen, first, thank you very much for spending today with us. It's a big investment of your time, and we do appreciate it. I hope you've found it a time well spent. I know I speak for all of the executive team here and the others who have joined us today. We actually enjoy showing you what we do and the plans for the future. Thank you. We do continue as a company to meet our obligation for our many employees working hard everywhere. I think it's fair to say the period of consolidation is over, knowing there's some uncertainty still out there.

Now's the time for us at BP. It's time to deliver. It's time to make good on the investment, the growth plans that we have, grow the value, and we're going to do that by playing to our strengths as a company. That means making many choices: exploration, development, development of new technologies. We are choosing value over volume. We're going to measure it in cash flow rather than barrels. We're going to choose strategic assets over non-strategic assets. You'll see more of that over the years to come. We are investing more in front-end exploration, and we are going to divest more mature assets. We think others can derive more value from that. Our capital allocation probably won't go in that direction. That's why we're going to do it.

We are choosing not to be the biggest, but over time, we do have an aspiration, dare I say it, to be the best. We will be a safer and stronger and simpler BP going forward. As I said at the outset, our vision is to build an ever-stronger portfolio upstream and downstream. We want to generate sufficient cash to invest both in our pipeline of projects and reward those who invest with us. Those of you who do, thank you very much. We will return rewards. I'm not crying. I'm just losing my voice. Why don't I just drop. I'm

Going to just say thank you to those who have stayed with us on the webcast. Thank you very much, and our very best to you here in London. And ladies.