英國石油 (BP) 2002 Q2 法說會逐字稿

Welcome to BP 2nd quarter results webcast conference call. I will now hand the call over to Ferguson Clause, VP of BP Investor Relations. Please go ahead sir.

Thank you. Ladies and gentleman,good afternoon in Europe and good morning to our listeners in the U.S.

My name is Ferguson Clause, VP of Investor Relations.

I'd like to welcome you to our 2nd quarter 2002 conference call and webcast. Before we begin, I must draw attention to this disclaimer.

We may make forward-looking statements, which are identified by the use of the word will, expect, and similar phrases.

Actual results may differ materially, depending on a number of factors as indicated on this slide.

I should also point out that our and your words, will be recorded, and information may be made available on our website, BP.com.

I'd now like to hand it over to John Brown, Group Chief Executive. John.

Thank you, Fergus.

We're all aware that this is a very busy day for many of you, with other companies in our sector reporting, so we'll try not to take up too much of your time.

I hope we'll be able to finish in an hour or so.

I'd like to start by talking about the highlights of the first half of the year.

2002 began with a very difficult trading environment in the downstream business, with combined refining and marketing margins at a 10-year low, in the 1st quarter.

Conditions improved somewhat in the 2nd quarter, especially in marketing, but nonetheless, for the first half of the whole, refining margins were down year on year by over 60%.

Oil and gas prices were above this cycle levels, but down by 16 and over 40% respectively, from the levels seen in the first half of last year.

In aggregate, the trading environment was below last year's.

Despite this difficult environment, the results are encouraging, with improvements in underlying performance, which provides the basis for the dividend increase which we have announced today.

Our earnings in the 2nd quarter were down 36% versus the 2nd quarter of 2001, but up 38% from the 1st quarter of 2002.

Cash flow in particular has proven robust, and in turbulent times we're especially pleased about that.

In a moment, John Buchanan will take you through the results in detail, and Dick Olver and I will give you an update on the performance on each of the business [INAUDIBLE]

And finally, I want to step back, and look at how we're doing against our targets and our strategies.

On both cases, we are light on cost to deliver as planned.

Then we'll be delighted to take questions.

Let me start by reminding you of our 2002 target, and the strategy behind them.

Those targets, including specifically the target of increasing production by an average of 5.5% over the medium term, are unchanged and on track.

Life isn't a smooth and orderly process, and of course some things have gone not as well as we'd hoped for in the first half of the year.

Downstream and chemical margins have been weak, exploration [INAUDIBLE] higher than normal, and our gas realizations depressed by regional issues in the United States, just to name a few factors.

But our plans don't assume that all will run smoothly, and on the other side of the equation, the upstream has had a very successful period.

Production is up as planned.

And in line with our target.

And unit production costs are down, putting us on course to achieve the 6% reduction we are aiming for.

In aggregate, our targets are on track, and so is our strategy.

That strategy, which has been in place over a number of years now, is to invest in the organic growth of the business, continuously high grading the portfolio, and working to improve the capital efficiency, and the efficiency of all our operations.

We continue to high grade our portfolio in the first half of 2002, with the sale of $2.9 billion worth of assets, including most of the upstream assets of Faber.

That process is expected to accelerate in the second half of the year, when asset sales, including our interest in [INAUDIBLE], are expected to deliver twice the level of proceeds seen in the second half.

Capital expenditure has been steady, and is on track , with the upper[INAUDIBLE] of our annual target range of $12 to $13 billion.

One useful measure of capitol efficiency, is the product utility of our drilling, which is improved by 13% over the last two years.

The best measure of operating efficiency is planned up time.

For example, in 2000, our average plant availability across our upstream operations was 85%.

Now it's 88%.

The objective of all these steps is to establish a business model, in which growth and performance comes through a continuous improvement in returns at mid cycle.

Return on capital employed has improved from 11% in the 1st quarter, to 14% in the second, as the aggregate trading environment moved toward, but was not averaging mid-cycle.

As Dick will explain, in the upstream, growing returns means that we are aiming for stable profit margins in the near term, but growing cash returns.

In the medium term, it means that earnings per barrel are expected to grow too, as new projects in the Gulf of Mexico, Angola, and [INAUDIBLE] come on 3.

Growth in volume, growth in returns, growth in cash.

That is the basis for a progressive dividend policy.

Our aim is to achieve that growth in performance and dividends, within a difficult financial framework.

That discipline has been maintained with gearing down from 32% at the end of Q1 to 28% at the end of Q2.

All of that has been achieved against the background of a trading environment, which compared to last year, has given us no help at all.

I realize prices in the first half of '02 fell by 16%, and gas realizations by 44%.

U.S. gas realizations fell by a much sharper 57%, hurt by specific issues in the Rockies and San Juan Basin.

In the downstream, we saw some of the most difficult trading commissions [INAUDIBLE] in the last decade.

Refining margins were down 63%, and marketing margins were under pressure, particularly in the 1st quarter.

Chemical margins were 9% lower than last year.

Overall, the weak downstream in chemical margins, more than offset the back that oil and gas prices were above our mid-cycle assumptions in the first half of the year.

Against that background, the results are encouraging, because they show the resilience of the business.

And there are some signs that the prospects for the environment in the second half of the year, are somewhat better, with overall conditions currently above our aggregate mid-cycle level.

Now, let me hand on to John Buchanan, who will take you to the first half figures in detail. John.

Thank you, John, and greetings.

The first slide shows our key bottom line measure, earnings and cash.

For the 2nd quarter and the first half, that is.

The pattern in both periods is similar.

For the second quarter, our pro forma results of $2.2 billion was down 36% from the same quarter last year.

The reported results of $1.3 billion, including one prime item, the purchase of counting[INAUDIBLE] Arco and Castrol, is off 51%.

For the first half, both pro forma and reported results were down, compared with our record results under particularly favorable market conditions in the first half of last year, while operating cash was down, but by only around half as much as earnings.

These figures indicate continued strong cash delivery through the business cycle.

A return on capital employed, calculated on a pro forma basis was 13% for the first half of 2002, compared to 24% in the same period last year.

This decline reflects the below mid-cycle conditions that we saw for the first half, especially in the downstream.

As you know, we report in dollars, and set our quarterly dividends in dollars.

In the second quarter, we have increased our dividend by 9% to 6 U.S. cents per UK share. Or 36 cents per ADI.

Due to the weakness of the dollar, this translates to a small decline in the sterling dividend since the 2nd quarter of 2001, when the dollar was very strong.

But for the first six months of 2002, the dividend was up by 9% in dollar terms, and by 5% in sterling. All in all, this was a strong financial outcome, in the face of challenging market conditions.

This slide provides further perspective on the change in our first half pro forma results, shown in green, from last year's record to this year's $3.8 billion.

Declining prices and margins, impacted our first half results by $3.7 billion post-tax, around two-thirds of this from the upstream, one-third refining and marketing.

The orange and yellow bars on the chart.

We are not immune to market conditions, and must strive to improve our underlying performance through the cycle, in all trading environments.

And that is what we are doing.

We improved our underlying performance in the first half by around $400 million pretax or $300 million post tax.

We also took advantage of lower market interest rates to help reduce our first half financing costs by around $118 million dollars pretax.

Now sources of performance delivery.

The chart shows actual and targeted performance improvement at half yearly intervals for 2001 and 2002.

The composition and phasing of performance delivery have varied, and will continue to vary.

Let's first look at 2001 for context.

In the first half of last year, our performance improvement was weighted towards volume contributions from portfolio changes, mainly four contributions from Arco and Castrol which we acquired partway into the prior year, the year 2000.

As the year progressed, performance in the[INAUDIBLE] shifted from inorganic, acquisition, to organic, volume growth and associated unit cost reductions.

In the first half of 2002 we delivered $300 million of volume growth.

This was mainly organic.

It includes our upstream production increase, as well as good plant reliability in chemicals compared to last year.

It also reflects the planned front end loading of this years refining turn around. And decisions to curtail refining runs in U.S. and European refiners.

Acquisition and disposal impacts were brought in neutral in the first half.

We also locked in prior gains and achieved $200 million of unit cost savings in the first half.

However, our upstream exploration write-offs, shown here in yellow, were up around $100 million, partially offsetting these savings.

Our net first half delivery was therefore $400 million pretax net.

In the second half, we expect to achieve the remaining $1bill--$1.4 billion targets for the year.

This includes upstream volume growth of 7 to 8%, reflecting a number of second half project start-ups that Dick Olver will discuss.

It also includes a full contribution from Veba, with both volumes and cost synergies, as well as continuing unit cost improvements in all streams. And excludes future contributions from [INAUDIBLE]

As in 2001, we expect a contribution from lower costs to be weighed towards the second half of the year.

Special and exceptional items.

We measure year on year improvement based on sustainable performance, removing the distortion from nonrecurring items, such as restructuring costs and disposal gains or losses.

We disclose these nonreturn items, as either exceptional items as required by UK GAP, or as special ones.

This chart shows our track record of special and exceptional items on a pretax basis, for the three years before and after the BP Amoco merger, as well as an indication of our full year 2002 expectation.

In '96 to '98, our special and exceptional items were broadly neutral.

The Amoco merger at year end '98, as well as the Arco/Castrol acquisition of 2000, allowed us to launch a wave of portfolio optimization in restructuring, which delivered synergies of around $6billion.

The special and exceptional charges related to this activity peaked in 1999, and declined to around $500 million last year.

In February, I indicated that we expected our pretax 2002 specials and exceptions to be broadly neutral, with disposal gains expected to offset restructuring charges for more recent smaller deals, such as [ indiscernible ] as well as the completion of Castrol restructuring.

As of the year, our actual out turn is around $63 million positive. On a post-tax basis, this turns around $325 million negative, due mainly to increased deferred tax provision of $355 million as one result of the change to the UK /North Seas fiscal regime.

The sale of Ruhrgas in early July is expected to move us well into positive territory for the year. With a $1.6 billion Ruhrgas disposal gain, more than offsetting expected[INAUDIBLE] restructuring costs.

As in the past, we will continue to highlight material nonrecurring items in order to provide you with clarity on our underlying results.

Sources and uses of cash.

I'd like to turn now from earnings to cash flow.

We plan and run our business to balance cash sources and uses, in line with our established financial framework.

This slide compares sources and uses of cash in the first half of 2001 and 2002.

Despite the drop in first half earnings, noted previously, our cash flow from operations, shown in green, remain strong at $8.8 billion, down around a quarter from the $11.8 generated in the first half of last year.

Disposal proceeds, shown in yellow, provided an additional $2.9 billion.

This includes most of Veba's upstream assets, as well as other sales.

Total first half cash sources were around 11.7% down 9% from 2001.

We used this cash primarily to fund over $6 billion of organic capital expenditure, in line with our $12 to $13 billion full year target, as well as around $1.6 billion to 51% of Veba.

We also paid out $2.6 billion in dividends in the first half, and $1.4 billion in income taxes.

Our cash tax rate remains well below the prudent level of which we provide in our account.

The financial framework.

At the end of the second quarter, our net debt ratio stood at 28%, just below the middle of our 25 to 35% target [INAUDIBLE] , [INAUDIBLE] and down from 32% at the end of the 1st quarter.

This progression is due to strong operating cash flow and disposals.

We expect gearing to remain at around the midpoint of our target band over the remainder of the year.

Our 2nd quarter dividend of 6 cents per Uk share or 36 cents for U.S. ADR is up 9% on the 2nd quarter of 2001.

This dividend increase is based on our policy of paying out around 60% of mid-cycle earnings.

We did not buy back shares in the first half, because market conditions averaged below mid-cycle.

Consistent with our financial framework, we intend to resume buy-backs in the second half, with a goal of at least offsetting dilution, provided market conditions remain above mid-cycle.

We will now move to a brief overview of each team's result, starting with Dick, taking us through the upstream.

Thank you, John.

I want to spend a few moments updating you on progress at the midterm point.

Production delivery in Q2 is over 5% up on last year's 2nd quarter, setting a new production record for the business at 3.546 million barrels a day.

This achieved in a quarter is normally low, reflecting normal seasonal decline in gas, and high maintenance activity.

We're on track to deliver 5-1/2% annual growth, according to the expected quarterly progression I set out in February, weighted to the second half.

Unit production costs are down 6% first half over first half, and we're on track to deliver a similar result for the full year.

This cost performance is helping us to sustain margins at the same time as we grow the business, and I expect margins and returns to improve in the future.

Now let me turn to the production in detail.

I'm taking this opportunity to report on '02 progress, and give you a sense of where we're heading in the future, hence, the slide shows production today and tomorrow.

The base, shown in green on the left of the slide, is performing well at between 3.1 and 3.2 million barrels a day and I expect the base for the year to be within the 50,000 barrel a day decline I set out in February.

[INAUDIBLE] liquids are a good place to look for verification of this trend.

In Q2, liquid production is flat with 1Q and with the same quarter last year.

If we were to look at Alaska, there would be a similar story.

The growth projects shown in blue on the left, continue to build.

2001 start-ups, Northstar, [INAUDIBLE], Sheerwater, Crosby and so on, are now running in excess of 200,000 barrels a day, up over 150,000 barrels a day from last year.

This year, we started up [ INAUDIBLE ] in April, and we plan to bring on King's Peak, Core Mountain, and Princess in Gulf of Mexico, and the [INAUDIBLE] in Trinidad, in the 2nd half.

All these projects leading to the back ended quarterly progression, that I mentioned for February.

That's 2002.

Now let me turn to the future.

We've shown the new projects growth path in 2006 under the heading tomorrow, on the right-hand side of the slide.

In summary, the picture's entirely consistent with what we showed to you before.

By the end of this year, 85% of the reserves should be producing, under construction, or sanctioned, a little ahead of our expectation in February.

Of course, no new expiration success is necessary to deliver this[INAUDIBLE], and all the gas is either sold or will be sold into [inaudible] markets like the United States.

Looking forward in the first half this year, we sanctioned over $4 billion in new projects, including phase II of the super giant ACG field in [INAUDIBLE] and the b to c pipeline.

In the second half of this year, we planned to sanction [INAUDIBLE] in Angola, [INAUDIBLE] in [INAUDIBLE], and LNG [INAUDIBLE] in Trinidad.

All of these projects will have a period beyond those 6, and I expect we'll be able to book new reserves of at least a 170% reduction at year-end, supporting the 5-1/2% average growth track.

So production today and tomorrow is being delivered.

Now let me turn to the quality issues.

The gain I want to report on '02 and give you a sense of the quality tomorrow.

First, '02 on the left-hand side of the slide, we're driving unit production costs down through restructuring initiatives in the North Sea and North America, and the application of productivity initiatives and technology advances everywhere.

We're driving costs down in the base, and adding new barrels at low production costs, to achieve our 6% cost decline, 1 H on 1 H.

We're also investing in a number of large hub developments.

For example, [ indiscernible ] which are contributing to overall depreciation levels, up slightly 17 cents in the first half.

In the short run, we're balancing off slightly higher depreciation charges with cost savings, sustaining profit margins, and improving cash margins as we go.

Now the future.

'06, shown on the right side of the slide.

We're projecting improvements in after-tax profit margins, in cash margins, and in returns.

This is achieved through continuous costs and productivity actions in the base, new barrels from world sale projects, with lower costs leading to higher margins.

So as we bring on the new, the overall quality improves over time.

Lastly, I just want to exemplify what I mean by productivity improvements and quality improvements.

The left side of the slide shows our progress in operating efficiency.

Last year we achieved 1% improvement, but this year looks like a 2% increase on that.

This is achieved by relentless focus and rigger, applied to eliminating unplanned downtime, and optimizing and minimizing planned downtime.

Our turn around challenge program.

A good example of this, in driving those North Sea liquids, is the improvement in [INAUDIBLE] efficiency, from 86% to 90% after rigorous defect analysis.

Capital efficiency is an area where we have much progress still to make.

However, our beyond the best drilling initiatives is already delivering great results in drilling, where 40% of all our upstream capital expense is incurred.

On the right side of the slide we show the time to drill 10,000 feet of hole.

There are many good examples of where rigorous common process, and advanced technology are proving successful.

In parts of the lower 48 onshore business, we've moved from 14 days to seven days, to drill the same well, and in the deep water Gulf of Mexico, we have many, many wells drilling faster than best in class.

At that point, let me hand you back to John Brown.

Thank you very much.

Now let me take you through the highlights in the other business streams and step back to set it all in context.

First, gas power renewables, a very quick review.

Ralph Alexander is here to answer any questions you may have.

In this area, we've had three strategic objectives, and on each one we're making good progress.

The first objective is to monetize the upstream gas which we produce, the second is to build our downstream gas markets, and the third is to build a renewable business on a material scale.

All three are on track.

Then to refining and marketing.

We experienced the worst refining and marketing margin environments in the decay, and or course, this is our result. However, our operational performance was encouraging, and our strategic objectives are on track.

Downstream volumes are at a record level thanks to the acquisition of Veba in February. Product sales are up by around 6% year on year.

Excluding Veba, the figures are down 4% because of reduced demand for aviation fuel, retail divestments, and the deliberate shedding of less profitable commercial and marine sales.

Cost so far this year are broadly in line with last year, costs, but we remain committed to delivering a 1.5% unit cost reduction over the year as a whole as we accelerate the capture of synergy benefits from Veba, and continue to focus on costs across the business.

Performance in the second half of the year will be helped by the fact that the majority of our refinery turn arounds were completed in the first six months.

We continue to improve the portfolio, strengthening the base in steps such as the Veba acquisition.

We're also making progress in China, where we've added 90 new retail sites over the last six months.

The [INAUDIBLE] for growth which we showed in February is on track.

Here is the picture for retail.

We are progressively rationalizing the network and driving up site efficiency.

Increase in volume[INAUDIBLE] show the graft on the left, reflects both the disposal of underperforming sites, and the value of our improved retail offer in growing sales.

Our reimaging program is proceeding very well, with over 2,200 BP and Amoco sites, converted to the BP helio in just the first six months of 2002.

We expect to complete the reimaging of all our European sites this year.

Worldwide, convenience sales are up 54%, including Veba, and up 10% even if Veba is excluded.

That reflex a strong performance from our network of convenience stores, which now accounts for almost $5 billion of sales every year.

And finally, chemicals.

Chemicals margins in the second quarter of this year were up on 1Q, but they remain weak on a historic basis.

Volumes improved by over 4% over 1Q, and unit costs were lower by 5%.

Improvement we've seen in possibility in the first half, has come exclusively from self help.

We are now seeing the benefits of the restructuring we've undertaken over the last two years coming through in a significant way.

Over the last year, unit costs were lower, and our volumes grew by 26%, including 11% from organic activity.

Unit costs are also lower, because we've run our plants more officially with reliability up by 5%.

Restructuring and high grading our chemicals portfolio continues, and in the second quarter, we completed the disposal of our plastic fabrications business.

Our chemicals business is now highly leveraged to a potential upturn in the industry. Conditioned, whenever that comes.

So in total, a robust performance in a difficult environment, with strategy on course and proving its value.

This slide sums up the position on investments and capital expenditure.

The outlook for organic cap x is at the upper [INAUDIBLE]of our target range of $12 to $13 billion.

As we've already mentioned, we expect disposals in the second half of the year to be higher than the first, helped by the real gas sale.

Overall, therefore, we expect both organic cap x and investment net of disposals to be in line with our targets for the year.

Let's look specifically at the impact of Veba.

At the end of the June we got full ownership.

The integration process following that transaction, is progressing extremely well, and we're on track to deliver synergy benefits at a run rate of $200 million by the end of the year.

We've completed the rural gas sales subject to the outcome of legal proceedings in Germany. There are further disposal proceeds, perhaps synergy benefits, further synergy benefits still to come.

The transaction is expected to be cash positive in 2002 and accrued to returns in '03.

So that's the summary for the first half of 2002.

It's been a turbulent period in terms of the downstream environment, and of course from the stock market.

Despite that, we're on track to deliver our target with costs down, production up, gearing down, and dividends up.

Our strategy is proving its value, and is unchanged.

We're confident that we can continue to deliver a strong performance in the second half of the year.

Our distributions to shareholders will continue to flow through.

Our dividend policy is progressive, and we aim to continue our payouts to increase our pay-out in line with improvements in underlying performance.

We intend to buy back shares in the external environment remains above mid-cycle.

So now it's over to you, and we'd be delighted to take your questions.

To ask a question, please press star 1.

Star 2 to cancel that question.

Thank you. Doug Harrison,Morgan Stanley.

Doug, good morning.

Good morning, Lord Brown and company.

John, over the past few years, you used a term constructive dissatisfaction to describe the tone that you and the team expected to replicate the corporate DNA, and to build a new company in a connected way, so my question regards internal progress in that area, specifically which area that you feel like you got the best growth progress, and where do you feel that more progress is needed.

Secondly in the same vein, this may be a question for Fergus, you suggested in the past that leading companies in the industry would need a combination of 3 to 4% volume growth and a similar rate of productivity gains of sustained leadership in the sector and I agree with that.

While you've clearly doubled the volume side, how has productivity trended across the organization, based on the internal measures that you guys provide periodically, specifically you mentioned asset availability trends today, but you also have an update on the unit cost indexes that you share with us periodically for the major businesses?

Thank you, Doug.

Let me answer the question on dissatisfaction, and confirm to you it still exists, and I doubt frankly it will ever go away.

I'll just pick a few things that we're working on.

We are dissatisfied with our capital efficiency.

We are working on this, and we believe that there is room to go here.

It's about the way in which we get our project managers really trained well.

It's about the processes we use for performance.

It's about contracting, and we continue to work hard on this.

And eliminating problems, Dick also says.

It's about operating efficiencies, seeing the first fruits of this.

It's about making sure the plant operates all the time and every time.

It's about getting the costs down, and attending to all the details.

It's about our costs about the business line.

It's about making sure our functional approach to activities works well at the lowest possible cost.

It's about reviewing again, our technology.

We spend $900 million on technology.

We need to make sure it's focused and pointed in the right direction.

It's about our marketing skills, about how we tune those up again and again and again, and how we make sure we point all our marketing businesses to the highest valley segments, and make sure that much like any assets, we don't damage those.

Those are just a few examples.

I could go on for too long, Doug.

Let me just say it's alive and well, I can assure you that we will keep going on this.

Our test is not what the breadth of the agenda is, but how to focus on priorities, and prioritizing our actions to make sure we get the best bang for the buck.

Very good.

Great question.

I'd just like to answer briefly.

I think leadership is about having a high quality opportunity set, especially in the upstream, it's about having a strong ingrained resource base, and I think you guys can see that quite clearly in reserve replacement trends.

It's about having the ability to make choices between high quality investment, high returning investment opportunities.

I think those are some of the issues, Doug.

But I think that maybe it's something we can discuss off line later on. Dick, would you like to add anything to what I've just said?

Ok. Let me add two things.

First thing, Doug is great question on DNA.

I think the soft answer to this is actually it's a very hard test.

If everybody everywhere actually behaving the same way with the same value, the same ethics and still the same when you go anywhere in the world to be in a BP business unit and I have to say my judgment of that is yes.

It's taken a lot of work for three years, but we're there, but everything that John said is actually what people believe and that's what really matters.

Thank you.

Thank you, Doug.

JJ Trainer, Deutsche Bank please.

Good afternoon.

Can I just ask with respect to the ambition to increase the net income per barrel, in the upstream [INAUDIBLE] of all the equipment in the upstream.

Hello?

Can you hear me?

I can hear you.

You were interrupted.

I'm sorry.

That was quite an interesting interruption.

Ok, so the question was about the ambition to increase the net income per barrel out to 2006.

My question is whether that's achievable on the current mix, or are there bits in the upstream that need to be restructured, or sold, to get to that level of income per barrel attrition.

I want to talk about what's happening to mid-cycle returns in the upstream, what your expectation is there for this year, and then a second question was actually unrelated, but does sound related.

Sedanko, how much did it earn and what are its reserves?

Thank you, JJ. Let me just star this off, I'll handle it, Dick.

I think that everything we do, we go back to the business model.

After we go back to the business model, four points to remember.

The first is it's the selection of what we invest in.

The organic investment selection, making sure we pass the selections both in the base and in the new portfolio to things with returns which improve the average.

Secondly it's not sitting on the assets, but it's disposing, you're absolutely right, our things which are in the bottom drawer in the lower quartial, and that continues because the quartial over quarter change as you dispose, so we may buy, it's all a matter of making sure the portfolio lives.

Thirdly and fourthly, it is focusing on capital efficiency, and operating efficiency, and that's the model that we applied to absolutely everything.

And now Dick.

Just to add to that, JJ, what we're doing is, as I was saying, is to push down our cash costs, so we balance off this slightly higher depreciation charge near term, and as we start to get out in the '05, '06 period, we actually get the big barrels coming through from the Gulf of Mexico, [INAUDIBLE] in Angola.

If you look at all of the growth barrels, or if you look at that subset of those 3 areas, they are accreted to the average of the stream.

And I think this is something which is not well understood or we haven't actually explained well.

So actually what happens is the time you get to '06, there are sufficient of those barrels, not only to be sustaining at income per barrel and improving cash per barrel, but also improving returns.

Now in the short run, we're obviously putting a lot of capital in because we are very opportunicity rich, and so there is obviously pressure on returns in the first couple of years.

But it's pressures that we're work on, that's why we're driving costs.

So I would describe this picture as on returns, pressure early, definitely improving as we go out through the '05, '06 period, and in the mean time, margins sustained early, growing later, cash margins growing all the time.

Portfolio, John's mentioned it, it's absolutely right, get the rubbish out of the bottom and we'll continue to do that the way we are.

We never stop.

Sedanko reserves have had an external review by DNN, and those were reserves, net share of those reserves through that study and our incremental [INAUDIBLE] has gone from roughly 50 million barrels to 500 million bears, we basically got a 10 fold increase in reserves from Sedanko.

I think that puts the acquisition costs at somewhere arounds $1.50 per barrel, according to the external study, and of course our acquisition was about $8,000 dollars per barrel per day of production.

As to earnings, earnings in today's environment are about $7 a barrel.

What we're getting of course is, is the dividend on our investment.

If you just wanted to forget about the valueability in the company and just look at the dividends on the capital investment we're getting about a 7% yield.

Is that OK?

That's great.

Thanks very much.

Thank you.

I'd like to go to the U.S. now.

Fred, Fred Loy from Bear Sterns. Fred, good morning.

Good afternoon, John.

I have two unrelated questions, the first in chemicals.

You say in the press release that restocking played a role in the improved demand for chemicals.

Wonder if you can share with us your feelings for what underlying demand is doing future major chemical products, and what do you see as the pricing outlook in 3Q versus Q2, and I have a separate question on refining.

Give it to me now please.

You're going to be switching to ethenol from MTEB in California.

Wonder if you have an estimate on volume loss in your gasoline production that might result from that?

Thank you.

I'd like Byron to answer the chemicals question, and then John to answer the downstream question.

Fred, with respect to the restocking comment,, we saw that the inventory chain was pretty much depleted at the end of 2001.

Everyone in a very uncertain world would demand decreasing was drawing down their inventory levels, obviously that had an impact all the way back to basic feedstock.

It was our feeling's that during the first half of this year that some of the pickup in demand was a consequence of restocking activity.

As we go into the second half of the year, that will not be a factor that will help carry through underlying demand issues.

That having been said, at the end of the day, the economic driver on the demand side is underlying GDP growths, at least in our case, pretty all of our chemicals are driven as a multiple GDP growth.

And as far as pricing versus 3Q versus q2, at the end of the day, we'll be driven by that.

There is excess capacity in our industry, and, therefore, the only way out of this, ultimately, is to find pickup and demand, although waiting for that, for us to be driving down our unit cost and improving the reliability of our plant which you see as really the big factor between the first half of this year and the first half of last year, where margins have actually deteriorated year on year.

Thank you.

John?

Fred, the answer to the ethenol is of the order of 5% on the basis that ethenol blending than the other blending in volume.

Ok, just a--thank you gentlemen.

Just wonder what you're seeing in chemical pricing right now.

Prices in some commodities are -- it's really a mixed bag.

Some are weakening a bit , some are firming a bit, some are steady.

I'd say the margin picture of the second half of this year looked at right now, would be more of the same of what we saw in the first half of the year

Thank you very much.

Thanks Fred.

Rod McLean in London. CSFB.

Rod, good afternoon.

I'd just ask a question about cap x, please.

You're talking about this year's cap x being at down horrendously, at $12 to $13 billion range.

In February I think you gave us a number of $12.6 group.

Could you just tell us which of the businesses you would expect increases to come through?

Is this mainly an upstream issue for 2002?

First of all let me say it's between $12.6 at the upper end of the range of 12 to 13.

There's not too much in it, and most of it there are small increases in the upstream, which are -- which are not an issue to us.

They're obviously, very welcome and they have really to do with making sure that we continue to invest not only for the medium term, but also for the very long-term.

That's the best summary I can give. Is there a follow up?

Thank you very much.

I'd like to go to Steve Pfeiffer in New York with Merrill Lynch.

Steve, good morning.

Good morning, gentlemen.

Just two different questions on the NP.

Dick, you said that the reserve replacement in [INAUDIBLE] would be 177%.

Could you give some color on how much of that is due to acquisitions, specifically Sedanko?

When I do sort of a back of the envelope given your cap x, it looks like, given that reserve replacement, your S and B could be as low as 440 per barrel.

Maybe there's some thought on that.

Secondly, just any comment on point forward U.S. gas production, you had shown some very nice growth there in the last couple of quarters.

It appears that the growth is slowing.

Thank you, Steve.

Let me first correct, the reserve replacement we estimate to be 170, not 177, and let me get Dick to answer the question.

Thanks, Steve.

The reserve replacement will be 170, or it may be even a fraction higher.

What we've always said is you need 170 to continue to grow at around 5, 5-1/2%, so that's why we mention the 170.

We haven't yet obviously, worked out what the portfolio bookings are going to be, but as I scan what the possibilities are, I would say at the moment, none of it comes from acquisitions at all, none.

And certainly we could book 177 with no acquisitions, we may force the book acquisitions, but ready to go.

So therefore I don't know what the S and B will be.

It will certainly be in the range of 3 to 4, as we said.

Some years it will be lower in that range, some years it will be high in that range, but it looks like it's in that range for several years to come.

On U.S. gas production, you've probably seen that base gas production in the United States in the second quarter on second course areas essentially flat.

This is as you know a combination of the old, which is declining in the lower 48, and the new from the deep water Gulf of Mexico growing, where the balance of those two things are going to be as we go forward, I don't know, but it's a pretty tight range.

My guess, it's going to be plus or minus a few percentage points of the U.S. gas in total.

Very good.

Thank you.

Could I now come to London, and Neil Perry, UBS Warburg.

Good afternoon.

I just want to come back to this margin issue, and then ask a quick question on cap ex.

In Dick's case, you talked about a couple of issues, operating costs and depreciation, one largely offsetting the other.

And those are both pretax, and as you move into[INAUDIBLE] Angola, Algeria Trinidad, and they ramp up as a percentage of your total production, is it not the risk that you're post tax margin goes down as your weighted average tax rate in the upstream, something you can't actually influence by self help, actually increases against you, so perhaps addressing the fiscal point.

And then the question on the cap ex, really to John Brown, is given that you have such rapid growth ambition for the business, how long do you think you can hold the cap ex assets to that $12 to $13 billion level, when do you think we're going to need to start seeing cap ex increases to keep pace with the speed with which you're growing in all the divisions of the business?

Thank you Neil. Let me take the second question first, if I can.

It was sometime ago when we laid out the strategy for the firm which we're following, and that was actually pretty well a-- two years this date I think, mid-2000.

At that time, we actually I think that if I remember right, that we'd be in a cap ex range of 12-1/2 to 13-1/2, and then we took it down to 12 to 13 for the specific year we're dealing with.

I think both sets of numbers are probably still, absolutely on point, whether it's 12 to 13 or 12-1/2 to 13-1/2, remains, I think in the fine detail of the years planning.

What I am confident about, however, is making sure that we balance the books on cash, for we have still quite a lot of portfolio activity to do to keep high grading the quality of the assets that we have.

And so I think you have to take it into context both the gross cap ex, and of course the net investment, because of this come back to the business model, it's not only organic growth, it's also high grading the portfolio continually.

I think we could debate your first question at great length.

All I would say is I think our view of our own data seems to indicate that what you're saying is actually not right.

It goes the other way.

And the taxes per barrel in aggregate for the magical reasons of the portfolio, and I will describe by saying that not to us any--any genius in getting here, it is what it is, it actually seems to go the other way, but we -- I think that will require a very long onset to go into any more detail.

Thank you.

Neil?

Neil is gone.

Sorry.

Okay, thank you.

Can I take Michael Young in New York?

It's regarding the Ruhrgas sale.

The sale price mentioned in the press release seemed to be substantially higher than some prior indications.

I was wondering if you could comment on that, and if there's any particular reasons why that may be.

Well, the number are pretty consistent.

These are the dollar equivalent for the proceeds, and the dollar equivalent for the book value, delta, so hence the $1.6 billion of book profit, which comes from translating the Euro proceeds we've obtained, into dollars at the rate of which we hedge them, the numbers are a little bit bigger than you would have expected, but it's what we did internally.

I see, so the terms of the deal were exactly the same, and you just benefited from exchange rate change, if you will?

We benefited by taking a position in the exchange rate in order to make sure that we got that right.

Right.

Well, excellent.

It's a great sale, and it was a very impressive transaction all the way around.

Thank you, Michael.

Can I come back to London and ask Richard Franklin of Morgan Stanley?

Richard, are you still there?

Good afternoon, gentlemen, yes, we are.

Talking about the $1.4 billion of Arco improvement, particularly focusing on chemicals, we're obviously the $4.6 billion is a very disproportionately large number.

How much of the chemicals contribution were you actually able to produce in the first half, and could you go in a bit more detail about the specific measures, maybe to deliver the $4.6 billion in the second half of the year?

Could you also highlight where you think the business will stand, relative to mid-cycle, return on capital employed, once you've been through that restructuring process?

Oh.

Chemicals contributed a substantial portion to the underlying improvement in the first half of this year, and that came from my earlier remarks.

What we've done is been able to help ourselves quite substantially in a marketplace that didn't give us any fair wind whatsoever.

We had the benefit of the transactions that we completed during the course of 2001, where we had the purchase of the other half of [ indiscernible ] the [INAUDIBLE], and then this year the completion of the Veba transaction. But more than that, it was running our plants reliably, avoiding the problems we had in the first half of last year, where we took down for an extended period of time crackers on the United States and in Europe, and simplifying the organization, taking out costs consistent with the restructuring program that we introduced to shareholders last year, so we're on track to deliver against some targets that were made, and feel competent of delivering that disproportionate amount over the course of a year.

Okay.

Can I just follow up on that one last point. How much impact do you think you've had on sort of your mid-cycle return on capital employed capability within chemicals, how much have you managed to drive it up, do you think?

From the actions that are already in place, a couple percent.

Right. Thank you.

Thank you Richard.

Fargle Fallgate, Foundstock in the U.S.

Good morning.

A few short questions.

The first one, you cannot really draw a pattern on your chemical earnings by looking at the chemical indicator margin and the changes in volume.

Why is that?

That's the question?

The question is, you know, if I look at the second quarter earnings versus 1st quarter this year, and I try to arrive to this conclusion based on the indicator margin and the changing in volume, I don't get that at all.

I don't get 200% increase or 150% increase, and then when you compare to 2nd quarter last year, you can see the differences are so great.

So what is underlying the discrepancy?

Well of course a lot of it is self-help.

It's what we've done for ourselves.

But I'll ask Byron to answer the question.

As John said, a lot of it is what we're doing ourselves.

The other thing, we try to make it clearer in the chemicals indicator margin, that this is -- is an attempt to represent a portion of our portfolio, the chemical systems who provides us this data is providing it only across a portion of our portfolio.

We think it is reasonably representative, but only captures the general direction, and cannot be used as a basis for calculating down to very fine digits, the changes in a quarter to quarter basis.

And then on the downstream, U.S. [INAUDIBLE]a poor margin continue to go lower, do you see any end to that, and why the current weakness?

[INAUDIBLE]In a general sense, we still have an overhang in [INAUDIBLE] stocks across the system.

Our own view in a broad sense, is that will remain the case through the rest of the year.

In addition, the West Coast -- [ INAUDIBLE ] hold back of OPEC heavy crude, which collapses the light/heavy differential and both of those two things, I think, impacts the margins, which of the margins you've been discussing.

As we indicate in our press release, I think those factors are likely to stay in place the rest of the year, which limits the up size of the final margins we see.

And then finally on energy trading, a lot of people are focusing on this issue now.

Does the company has any plan to change the way it--it accounts for or report profits on the energy trading. And what kind of order of magnitude the contribution of energy trading?

Well we certainly have no plans whatsoever to change the way in which we account.

Then we are [INAUDIBLE] just describing generally what we do.

Of course, we are not as it were an energy trader.

What we do is to make sure that we maximize the value of the asset positions that we have, and the market positions that we have.

And so separating out these profits, if they were such -- a way of doing it, would I think be somewhat misleading because it's part and parcel of the business that we're in. Byron, would you like to add anything?

John's covered most of it.

I just would add to that, that in these times when there is great public scrutiny around trading activities in general, that we have very strong control systems in place, and very tight assurance processes that we believe gives us the ability to ensure that these businesses are being operated, managed in--in an appropriate way.

As John said, it's based upon our underlying business activities, and therefore quite appropriately, it cannot be segmented out from the business streams themselves.

Thank you.

Thank you.

Now I'd like to go to Peter Nickel in London.

Peter?

Thanks John,

A couple questions.

One actually again is just related to your energy trading.

Just a couple questions.

One was, what impacts you're seeing of the current situations in the states on your own gas and power activities. How difficult that's making life.

Secondly, if you could sort of expand a little bit on the rationale of taking -- [INAUDIBLE] gas and what you get back from that.

And third was just a point of clarification on the numbers.

There's an item in the analysis in the change of net debt of $1.1 billion partnership interest exchange for BP.

[INAUDIBLE] I wonder if you could explain what that is.

Thank you.

I think the first point I would make generally, and then I'm going to ask Ralph to answer the question on gas trading, on Intergas, we have very, very strict, very, very strict credit policies, and I think the major impact we see at the moment is the credit standing of counter parties, which actually reduces therefore, the number of counter parties that we are prepared to sell gas to.

Quite simply, it is not a good idea to do business, unless we can be sure we can get the money.

So we have always had very strong credit policies.

They are biting the number of people we can do business with.

Ralph, anything else to add on that?

Or go straight to Intergas?

[INAUDIBLE]The only thing I could add on that is, what is happening is customers now are more interested in doing business with BP, both on the supply side and on the customer demand side, so actually we're seeing potentially a direction of positive outlook for BP.

On Intergas, just would start by saying, Spain's quite an important market for us. New market for us.

We've been in it several years.

We now have about a 6% market share, up from 0.

The market itself is expanded--expected to double over the next[INAUDIBLE] term, 5 to 10 years, and we hope to move right along with that.

Intergas will be the infrastructure that needs to develop to support that growth, and it will support our business, both from an equity gas standpoint as well as a marketing standpoint, and by participating in Intergas, we believe and so does the Spanish government, that we can actually help in the orderly development of the Spanish infrastructure.

One last point I would make, is our customers in Spain are actually quite interested in BP being part of Intergas.

They see that as a very valuable part of our offer.

It shows commitment to Spain and it will be around for the long run.

We are seeing a kick up from our customers again, for[INAUDIBLE] with BP.

Thank you Ralph. Fergus, just a--would you clarify the question.

Peter, the [INAUDIBLE] which you refer $1.1 billion, is the completion of our -- [ indiscernible ] we were holding low notes of[INAUDIBLE] $1.1 billion.

That notes been counted for and we passed over the remaining interest.

It's a slightly complex calculation.

It doesn't pass through the cash flow that it shows up in the reduction or debt of $1.1 billion, is a contributor to the falling [INAUDIBLE] in this quarter.

Thank you Peter for the question.

I'm going to clear quite a few questions in the UK and Europe, if you don't mind.

This is long and we'll see how much more time we have.

Andrew Archer of Bank of America?

Actually it's a question for Dick Olver.

It's just that despite the strong production growth that you had in the quarter, the upstream result didn't appear to be market expectations and you've highlighted the negative impack from realizations.

Wondering if there was actually some issue over costs?

You reported a 6% reduction in unit costs in the first half versus last year.

Can you confirm that the trend is similar when you look at it on a quarterly basis?

Yes I can.

There's no issues with the costs.

The costs are coming down as I said at around about 6%.

It may not be exactly 6% every quarter, but in the half year and my expectation in the year is 6%.

So that's not the issue.

What you're seeing is a difference in realizations from what you've assumed and essentially what -- it's slightly lower priced NGL in the liquid stream, and slightly larger deltas in the San Juan and Rockies area of the U.S. gas.

And that's deltas you're seeing.

There is also an amount of money which is being extinguished from profit, because of removing the profit from the downstream inventory for product not sold.

The thing we call [INAUDIBLE], Very complicated, but we basically have to extinguish the profit from the group, and it happens to happen in the upstream segment.

It has nothing to do with cost, there are a few things to do with realizations and accounting that's all.

That's fantastic. Thank a lot.

Thank you very much.

Nick Pope, Lehman Brothers.

Actually it's Jeremy Elders, I'm afraid.

Good afternoon, gentlemen.

Could you just expand on the costs in BP exploration, and give us a sense of how much of a proportion of your non U.S.

Costs are in underlying in dollars, and how much are in local currencies which of course have appreciated against the dollar, and that 6% movement in costs, is that the movement in the dollar unit costs, or is there some currency adjustment?

And secondly, on your ambitious $1 billion improvement target for the second half, could you give us an idea of the split of that between the costs volume and portfolio?

Dick, why don't you take the first one.

Okay.

Jeremy, thanks for that. First of all, the 6% is in dollars.

We are a little bit challenged by sterling and Norwegian [INAUDIBLE]costs, so there's[INAUDIBLE] -- that's a movement against us, but nevertheless, what we've got one-half on one-half is a 6% dollar decline in our production costs, and that's what we plan to deliver for the year.

Great, and how much of the costs do you think are underlying in dollars?

I can't give you a percentage, but I guess Fergus can over time.

We'll get back to you on that.

Thanks.

Complex calculations, Jeremy.

Maybe we better get back to you on that.

No problem.

In dollars, we haven't given a full break down.

I would imagine that there will be as -- my going in assumption, and a good one, is similar to the breakdown of the 1st quarter if you just divide it into cost and volume.

The sources of first half, excuse me.

The sources of the improvement are backend loaded production growth in the upstream, continued cost reduction in the upstream, downstream, and chemical, and the contribution of Veba both from synergies, where I'd hope we would going to be at the run rate of $200 million, by the end of this year, and of course the volume improvement from Veba.

So those are the basic elements of the billion dollars.

Thanks very much.

Thank you.

Can I take Mark Goman in the United States.

Mark, hello.

Good afternoon gentlemen.

A couple questions if I could.

Interest expense seems extraordinarily low, given a year over year increase in debt.

I was wondering whether the interest expense number is being impacted by that Altura transaction which was referred to in a prior question.

Secondly, with respect to trading, I guess I don't quite understand.

It seems I read on a regular basis about the company's activities with respect to the Brent market.

One might euphemistically say that from time to time, you've been dominating the Brent market, which would seem a bit out of line with what might be considered underlying business activities.

I wonder if you could clarify whether these press reports vis-a-vis your activities in the Brant markets are just inaccurate, or how that relates to the prior answer.

Thank you.

Thank you, Mark.

I'll ask John Buchanan to answer the first question, then I'll ask Byron to answer the second part of your question.

Mark, the interest rate reduction has nothing to do with Altura.

What we're seeing is two things. One, interest rates are coming down, but also the management of our deck book, used a lot of the higher priced or fixed rolling off to replace by lone interest costs floating debt, so structurally as you've seen over recent quarters, there's been a reduction, which we're very pleased with.

Nothing to do with Altura.

Great. Thank you.

And a--Byron?

Mark, as far as why are we involved in the Brent market, we are a huge producer of crudes out of Europe in the North Sea, and a very large refiner of European derived crudes in our European system.

We recognize some of the issues associated with the Brent market as a consequence of the ongoing reduction in the number of cargoes that are coming through that particular loading terminal, and it's been BP who has led an industry initiative to try to extend the liquidity of that market by opening up options in -- [ indiscernible ] the so-called BFO market, and if that is achieved, what we'll find is an extension of the European market crude about four fold from the current production base.

Thank you.

Can I take one more question from the UK.

Gordon Gray, JPM.

[ no response ]

He's gone.

And let's see--Frisco Rango from ABN Asset Management.

Are you still there?

I have a question.

If we can spend just a minute on the future of your upstream in Russia and Siberia.

Currently, you have a number of activities there.

How do you view that changing in the future, how do you judge at the moment the ideas of the Russian government and President Putin about the role of oil measures in those reserves and the role of the Russian measures, can you say a little bit about that?

Well, I think--some of it is still really quite unclear.

I think there were speculative comments in the press yesterday and complete with denials and reinterpretations.

The answer is we don't know.

We have always viewed working in Russia as working with Russian partners through Russian companies, and that's what we're doing.

We have interest in Sedanko.

[INAUDIBLE]as Dick Olver has said at this meeting already, they are working extremely well with lower costs and higher production.

We have an interest in the Sacland area. Sacland [INAUDIBLE]

We have East Siberian gas field, which we're working with others to see what we can do with.

We're also looking to see what is a sensible value adding position to add to our position in Russia.

As we've talked previously, there's no changes, no transaction, so action at the moment, but we look to see what we can do sensibly where we can have partners who have mutual advantage with us.

Right. Thank you.

Thank you.

I think ladies and gentlemen, that concludes our meeting.

We've overrun by 12 minutes.

I hope you found this useful.

I'm sure there will be other times where we can talk in more length, and thank you very much for attending, and good afternoon.