英國石油 (BP) 2003 Q2 法說會逐字稿

Welcome to the BP presentation to the financial community conference call.

I will now hand the call over to Mr. Fergus McLeod, Investor Relations.

Please go ahead, sir.

Good afternoon to those of you listening in Europe and Asia.

And good morning to those of you in the Americas.

I'd like to welcome you to BP's second-quarter 2003 conference call.

My name is Fergus McLeod, BP's Head of Investor Relations.

Joining me today are John Browne, BP's Chief Executive;

Byron Grote, our Chief Financial Officer; and Tammy Haywood, Chief Executive of our Austrian business who will join us for the question-and-answer session.

Before we begin the conference call, I would like to draw your attention to two items.

First, today's call refers to slides that we'll be using during the webcast.

If you're listening on the phone, the slides are available to download from the investors center on our web site bp.com.

Those of you who are on our e-mail list should have already received the slides.

If you haven't received the slides and would like to be placed on our list for future web casts, please let us know.

Second, I would like to draw your attention to the words on this slide.

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

Actual results may differ from these plans or forecasts for number of reasons such as those noted here.

I'd now like to introduce John Browne, BP's Chief Executive.

THE LORD BROWNE of MADINGLEY: Ladies and Gentlemen, thank you for joining us for this mid-term review.

I want to begin by giving you an overview of the highlights of the first half of 2003, before I ask Byron to take us through the figures and our operational performance in detail.

Then I'd like to update you on our strategy using the framework of indicators that we set out in February.

Then we would be delighted to take your questions.

The first half of 2003 was a very good period for BP.

On balance, our operations performed well and all our major projects, including the joint venture in Russia, are on track and in some cases ahead of schedule.

Our results are up by 80 percent on the basis of strong prices and margins.

Our capital spending, net of divestments, is down.

Our gearing (ph) is down by more than 6 percentage points, reflecting very strong cash flows.

And we've been able to continue to increase the dividend.

We also now foresee that if our current outlook for the trading environment comes about, we'll be able to close some or all of the deficit identified at the end of 2002 in our funded pension obligations over the balance of the year.

Now, let me give you some of the details behind those headlines.

I will start with the external environment.

Oil and gas prices and margins in refining and chemicals have all been stronger than in the first half of 2002.

Most notably, gas prices in the U.S. more than doubled, compared to last year.

And that is important for BP.

Of course, we are the largest single producer of gas in North America and the owner of the largest volume of gas reserves there.

The strategy we described to you in February is on track.

Our capital spending, excluding the investments in TNK BP, is likely to turn out at the lower end of the range of 14 to $14.5 million that we identified and our divestments at the upper end of our indicated 3 billion to $6 billion range.

So far in 2003, we spent $6.1 million in CapEx and received $4.1 billion in disposable proceeds.

We continue to review our asset base and to improve its quality with projects in the five new profit centers of the Deepwater Gulf of Mexico, Angola, Azerbaijan, Trinidad, and Asia Pacific Gas -- all of which are on schedule.

Our joint venture in Russia is nearing completion and is set to contribute to our earnings cash flow production before the end of this year.

We had approval from the European commission at the end of last week and hope to have all the other legal approvals in-place over the next few weeks.

We then want to take you through the whole story in some detail at a special seminar for investors to be held on the 16th of October.

The promise of our outstanding upstream portfolio is being realized.

Our financial position is strong.

We have generated over $13 billion of pre-tax cash from operations and a further $4.1 billion from disposals that I have already mentioned.

Despite a capital program that is at its peak level, and increased distributions to shareholders, to an 8.5 percent dividend increase and a $2 billion share buyback program, our gearing has fallen from 28 percent to below 22 percent.

BP is in great shape and well-placed to deliver the increasing amounts of free cash flow over the years ahead.

So, a very good half year with a good second half in prospect as well.

I will come back later to talk in more detail about how our plans for the future are unfolding.

But before that, let me hand over to Byron Grote, our Chief Financial Officer, who will discuss our Q2 and half year 2003 results in more detail.

So, Byron?

Thank you John.

I'll begin my remarks with a summary of the trading environment and then review our business results for the second quarter and year to date.

I will conclude with a review of the financial framework.

Trading conditions in the second quarter were stronger than those of the year ago but not as strong as those in the first quarter for most of our businesses.

Our focus on the quarterly of the figures on the left of this slide.

Our average liquids realization, which includes both oil and NGLs, was nearly $25 per barrel up around 2 dollars compared with the second quarter of last year.

And down around 5 dollars compared with the first quarter.

Our average natural gas realization was nearly $1 higher than in the second quarter 2002.

And down around 50 cents compared with the first quarter.

In North America, our most important gas market, we saw a tightening supply-demand balance, as well as the benefit of new pipeline capacity which reduced the price differential between Henry Hub and our Western US producing areas.

Taking oil and gas prices together, our average realized hydrocarbon price was about midway between the lower prices of the year ago and the higher prices of the first quarter.

Similarly, our refining indicator margin of $3.27 per barrel was midway between depressed levels in last year's second-quarter and higher margin environment earlier this year.

Although not shown, our second-quarter retail fuels margin recovered and were more than one-third higher than either comparison period.

Petrochemicals margins improved by nearly $25 per ton from their first quarter levels.

As we were able to pass through some of the recent feedstock cost increases into the price of our products.

Shown on the right of this slide, our first half prices and margins were higher than in the second first half 2002 across all lines of business.

With these price and margin increases, it's no surprise that our financial results are strong compared with those of a year ago.

This slide shows key results for the second quarter and half year.

I will focus on the quarter's results, shown at the top of the slide.

Our pro forma result of $3.1 billion was 42 percent higher than in the second quarter of last year.

Our replacement cost profit which includes special items and acquisition impacts, was $2.5 billion up 87 percent.

Our historic cost profit which also includes disposal and inventory impacts was $1.6 billion down 21 percent.

The historic cost results is, of course, dominated by unrealized inventory gains and losses caused by the the volatility in hydrocarbon prices.

Of all these measures, we continue to believe that the pro forma result is the most valid and consistent indicator of our underlying profitability.

And the measure most comparable to others in our industry.

While there are several definitions of earnings, cash flow is much clearer.

Our improved results continue to flow through to operating cash flow, which at $7.3 billion was up 43 percent on the second quarter 2002.

About the same percentage increase as our pro forma results.

The quarter-cent dividend increase we announced today raises our dollar dividend by more than 8 percent compared to the second quarter of last year.

The dollar weakened over the last year, holding the equivalent sterling dividend increase to 4 percent year-on-year.

Still well above inflation.

You should note that, since the start of 1999, when we first moved to a dollar-based dividend we have increased our dividend by 30 percent in dollar terms and by 32 percent in sterling terms.

The effects of currency volatility on our dividends to UK shareholders has more than evened out over that time.

These are strong results.

Our first half comparison summarized that the bottom of slide is even stronger.

As it incorporates our all-time record results of the first quarter of 2003.

Turning now to return on capital employed, this slide shows BP's pro forma return history, relative to our principal competitors.

All results are calculated using a consistent approach which we believe reflects industry best practice.

Our returns remain competitive with those of our peers.

Within a band driven by the industry price and margin cycle which is evidenced in the charts.

There is also a small foreign exchange impact -- around 20 percent of our capital employed is kept in currencies other than the U.S. dollar.

Mainly in the Euro and sterling.

The strength of those currencies versus the dollar has increased our capital base by around $2.5 billion since mid-2002.

This has reduced our return on capital employed by slightly more than half a point.

Our 17 percent return for the second quarter reflects all these factors, as well as the significant capital we are investing in our distinctive portfolio of new upstream profit centers that will contribute increasingly to the bottom-line over the next several years.

This slide shows the main factors driving the $3.1 billion improvement in our first half pro forma results.

From $3.8 billion in 2002 to nearly $7 billion in 2003.

Higher prices and margins are clearly the dominant factor, with the post tax impact of $3.5 billion.

Compared with last year, our first half results benefited by $1.5 billion from higher oil prices, around $900 million each from higher gas prices and higher refining and marketing margins, and around $200 million from other margins -- a combination of petrochemicals and NGL's.

It's important to note that the refining and marketing improvements shown here combine both changes in overall industry conditions with our own performance in capturing the margins available in the market.

We've shown foreign exchange impacts separately.

Appreciation of other currencies against the dollar increased both our revenues and costs by roughly offsetting amounts.

The net impact of 4X movements was small -- less than hundred million dollars -- which indicates the natural hedge inherent across our businesses.

Portfolio activities reduced our post-cash results by $200 million between the years about half of this from this year's ENP disposals and half from the sale of our rear gas interests in the middle of last year.

As the year proceeds, the impact of ENP disposals will continue.

But we expect these to be more than offset by the contribution from TNK BP after that transaction closes.

Our depreciation depletion and amortization charges this year reduced our first half result by around $400 million compared with 2002.

The increase partly reflects a full six months ADEBA (ph).

But it is mainly in the upstream, as DD&A rose, as expected, in-line with our long-term finding and development costs of around $4 per barrel.

Of course, these higher DD&A charges have no impact on our cash generation.

Other factors netted out to a small improvement -- around $200 million year-on-year.

On the cost side, we saw normal inflationary pressures and the expected to $150 million pretax increase in pension and post-retirement benefit charges in the first half.

Offsetting these negative pressures, we continue to improve underlying volumes in unit costs.

This reflects a large number of actions across all of our operations.

The savings from lower interest income and -- the savings from lower interest expense and lower income tax rates, which I mentioned in the first quarter, continued in the second.

For the half, these two factors benefited our pro forma results by nearly $300 million in roughly equal measure.

In February, we indicated that our -- that we expected our underlying upstream production capacity to grow by between 0 and 3 percent in 2003, excluding the impact of acquisitions and divestments.

We remain on track to achieve this.

This slide shows the pattern of quarterly variances around underlying annualized production volumes since 2001.

The orange bar in Q2, 2003, indicates the impact of our recent divestments on volume.

As shown, disposals this year reduced our second-quarter production by 134,000 barrels of oil equivalent per day.

The slide clearly illustrates the high degree of volatility in each year's quarterly volumes relative to the underlying annual average.

The 2001 pattern is indicative of normal seasonal fluctuations.

However during 2002, we saw an unusual pattern of maintenance and weather effects, including a mild winter and a particularly severe tropical storm season in the Gulf of Mexico in the third quarter.

We return to a more normal seasonal and maintenance pattern in the first half of 2003.

Looking through the portfolio changes and the quarterly noise, our underlying production, allowing for the disposals, increased by 1 percent in the first half.

This is in line with our planned for the year and was despite a number of factors that depressed actual production relative to the growth in capacity.

These factors included the impact of high oil prices on production-sharing contract volumes and high gas prices, which have led us to choose to restrict NGL production in order to capture more value in the gas stream.

Most importantly, both our existing and new profit centers continue to perform as expected.

The 3 percent underlying decline in production from our existing profit centers was in-line with expectations.

And the growth from our new profit centers was also in-line with our plans.

In the first half, new volumes from the Deepwater Gulf of Mexico, Trinidad, and our current holdings in Russia more than offset normal and expected declines in our case operations elsewhere.

Our reported quarterly production volumes will continue to be volatile for the rest of the year.

The impact of divestments will continue, but will ultimately the offset by new volumes from TNK BP.

I will return now to our financial results.

This chart highlights our track record of special and exceptional items since the start of last year.

In the first half, we had disposal gains of nearly $700 million, partly offset by restructuring and impairment charges totaling around $200 million.

We expect the balance of our full year 2003 specials and exceptionals to remain a net positive.

Our long-standing financial framework includes balancing sources and uses of cash over the business cycle.

Our 25 to 35 percent gearing band gives us flexibility to sustain our underlying business strategies and to time our acquisitions and disposals based on opportunities and market conditions.

This chart shows our sources and uses of cash in the first half of 2002 and 2003.

Each pair of bars represents a single year with cash sources on the left and uses on the right.

The improvement in trading conditions between last year and this year is evident in the cash from operations -- shown here in green -- which grew from $8.8 billion in 2002 to $13.3 billion in 2003.

The 2003 figure includes $120 million cash dividends on our interest in Sedanko.

This indicates our success as a 25 percent shareholder in helping Sedanko improve its financial and operating performance, which we intend to continue on a larger scale with our 50 percent interest in TNK BP.

Interest and taxes, shown as the use of cash, increased along with operating cash flow.

In contrast to the more significant increase in operating cash, our organic capital investment, shown in pale blue, was about constant in the first half at just over $6 billion in both years.

In the first half of 2003, our portfolio activities was concentrated on the disposal of a number of non-strategic properties -- mostly in the upstream -- capitalizing on strong buyer interest during the period of high prices.

As the shown in the yellow, our first half disposal proceeds exceeded $4 billion.

The remaining uses of cash are distributions to shareholders via dividends and buybacks.

Our first-half dividend of $2.8 billion is up 8.5 percent, in dollar terms, on the first half of 2002.

In addition to dividends, we bought back $2 billion of BP shares through mid-year, completing the program we announced in February.

Having completed $6 billion of buybacks since the second quarter of 2000, we will continue to you buybacks as a key element of our well-established financial framework.

I would now like to spend a moment talking about the priorities for the use of our strong cash flow in the second half of 2003.

Our first priorities, of course, are our dividends and the completion of our capital spending program.

We also expect to be paying the $2.4 billion previously indicated for our 50 percent interest in TNK BP in May subject to a satisfactory outcome for negotiations now underway and an additional amounts to include the assets of SovNet (ph).

I know many of you are also interested in our plans for future share buybacks.

However, our financial prudence also extends to other areas.

One of which is, the funding of our pension plans.

As shown in our 2002 annual report, our funded pension plans had a net $2.2 billion deficit at the end of last year.

This was due to a number of factors.

Firstly, several years of stock market decline.

Secondly, lower discount rates which impact the present value of our future liabilities.

And thirdly, significant lump sum withdrawals following our extensive post merger restructuring activity.

This deficit, which reflects a shortfall in our U.S. position, is a relatively minor sum compared to the strength of our cash flow.

But we believe it is a part of our prudent financial framework.

And given the strength of our cash flows, we should deal with it now.

The first half operating cash flow, shown on my previous slide, was after paying $300 million in U.S. funds.

We now expect to direct up to $2 billion more towards covering all or part of the year-end 2002 deficit.

What I have described is a matter of cash flow only.

The charge to our profit and loss account for pensions and postretirement benefits is a complex calculation, dependent on a number of actuarial assumptions.

Nonetheless, this accelerated funding will have a beneficial impact on the charge made against our earnings in 2004.

After we dealt with this additional funding of our pension plans our high priority remains to continue our share buyback program.

The actual outcome in 2H, 2003, will be dependent upon the actual cash flows generated -- and so, on the actual operating environment.

This chart summarizes our first-half organic capital expenditures and divestments against the full-year plans figures we set out in February.

We invested $6.1 billion in the first-half including $4.6 billion in the ENP segment, where we are building the five growth areas highlighted in February.

As John said earlier, spending programs remain on track with our 14 to $14.5 billion indicator range for the year.

Our first-half divestments across all businesses totaled $4.1 billion.

We have since closed or have deals agreed for another $2 billion of divestments.

This will bring our full-year disposals to the upper end of 3 to $6 billion range set out in February.

Our strong cash flow has allowed us to continue to reducing our gearing, which was below our 25 to 35 percent target range in the first quarter, has moved even lower to 22 percent in the second quarter.

This is more than six points lower than a year ago, including around three-quarters of the points in Forex (ph) effects.

As shown in this chart, we have generally maintained gearing in the bottom half of the range since the BP-Amoco merger.

This has given us the flexibility to return cash to shareholders through increased dividends and buybacks, as well as to pursue strategic opportunities, such as acquiring Castrol in 2000 and (indiscernible) in 2002.

As in early 2000, we expect the current low level of gearing to be temporary.

Following the initial cash outlay for TNK BP and including the pension contributions to indicated earlier, we expect gearing to return to the target range later this year.

That completes my financial review.

John will now summarize the progress we're making in implementing our core business strategies.

THE LORD BROWNE of MADINGLEY GROUP: Thank you Byron.

I'd now like to return to the subject of strategy.

You will recall that back in February, I stressed the importance of balance and our approach.

It is fundamental to our long-term approach.

The value can't be pegged to any one single indicator, but rather requires a balanced view of all the factors which work together to create value and ultimately free cash flow for the benefit of our shareholders.

Our strategy has been developed with the aim of delivering a balanced outcome across the range of key indicators.

The strategy is about choices, allocating our resources the best assets and projects, and divesting those that don't make the grade.

We been busy in his area and 2003 selling low return assets in the North Sea, USA, and elsewhere and investing heavily in the new profit centers which have the potential to deliver high returns and margins.

At the same time, we have access to what we considered to be one of the most significant petroleum provinces in the world, Russia.

We're doing all this within a disciplined financial framework that manages risk, maintaining a prudent but effective and efficient level of gearing, and balancing cash in and cash out over the longer-term of $16 oil compared to around $28 today.

We're focusing on costs, offsetting inflation -- and often doing even better than that, and on capturing available gross margin.

We believe this strategy gives us a significant edge over our competitors with a set of new upstream projects unrivaled in scale or potential returns.

A unique portfolio of number one or number two positions in our refining, marketing, and chemicals businesses.

And the portfolio is strong enough to support our commitment to continuous asset high-grading.

That is the model.

So how are we doing in the first half of 2003?

In the upstream we're on-track with the strategy we reviewed in February.

First, exploration success.

We have made a number of new discoveries, including two in Angola, one in block 31, and another in block 15.

And then another discovery in Egypt the sub-salt (ph) Sacara (ph) field.

Our exploration program continues, but with the majority of new drilling activity scheduled for the second half of this year.

Then onto development.

All of our major project milestones have been delivered and at least four significant projects will come on-stream each year for the next few years.

In Trinidad, preferred LNG trade came on-stream two months ahead of schedule and under budget and is now operating at close to design capacity.

The government has recently approved the fourth LNG trade.

In Azerbaijan, we have completed the predrilling at the central Azeri wells and began the predrilling of West Azeri and Chak (ph) Deniz (ph).

The construction of the BTC pipeline has begun very successfully.

In the Gulf of Mexico, the Nakika platform, the south and the construction yard and predrilling and has begun on the Mad Dog field.

In Angola, construction work on both Kizomba and Kizomba B is on track.

So, we have a strong portfolio of projects, all on track, to underpin growth in our new profit centers.

We continue to high-grade the portfolio with disposals of Montrose Arbrecht and Forties in the North Sea and further disposals announced of interest in China, Norway, and of our trade of interests in the U.S.

Gulf, mid-continent, and Rockies.

We also have agreed to dilute our interests in Algeria.

These transactions are accretive to returns, adding about half a percent to our upstream return on capital on a full year basis.

They also reduce our capital requirements and improve average unit costs.

Of course, as the year goes on, the impact of divestments on our production will grow.

But in the third quarter and beyond, it will be increasingly offset by significant uplift from our interest in TNK BP.

Assuming the deal is closed by September 1, on the full-year basis, the increase from TNK BP will almost exactly offset the impact on reported production of disposals this year.

In 2004, TNK BP is expected to substantially boost our reported output.

This calculation does not include Slavneft (ph) which, as I said, is still under consideration as part of the transaction.

In terms of costs, we continue to drive deficiencies not restructuring of our existing profit centers.

Those gains will flow through in the second half of this year.

Capital productivity is also a key indicator.

We expect capital spending for the full year to be at the lower end of the range we indicated in February partly as a result of disposals and partly because we've been able to further high-grade our investments.

Our focus remains on total return, not volume.

Turning to the gas pyro-renewable segments.

We continue to make good progress on our main objectives.

First, to maximize good value through an enhanced focus on gas marketing.

In North America, BP is now the leading gas marketer, based on wholesale volumes in the first quarter.

Sales in the second quarter were up over 20 percent from the prior year.

LNG is a glowing output of our equity gas with sales up by around 45 percent year on year.

We're now marketing LNG into the US market at a rate of over 2 million tons per year.

We're also making progress on our growing NGL business.

In North America, we have sustained our year-to-date earnings performance from NGLs in-spite of the significant increase in costs for natural gas.

This has been accomplished by restructuring the business to reduce our exposure to the gas-liquid spread, continued attention to costs, and by utilizing the flexibility within our system.

In refining and marketing, our performance in the first half was driven by continued focus on margin expansion.

Margins increased relative to the same period last year in all of our businesses.

Our refineries performed well in the second quarter with availabilities averaging more than 96 percent, a good recovery following a disappointing first-quarter performance caused by a fire at the Whiting refinery.

Our refining availability in the second quarter was one of our best in recent history and allowed us to capture a greater share of the margins available in the market especially in the US.

In our marketing businesses we captured much of the available margin and focused also on margin expansion.

This has led us to offer new products to our customers.

In the second quarter, we introduced BP ultimate in Greece of premium motor fuel, designed for the customer who wants performance and a cleaner fuel.

In India, we relaunched CRB a superior consumer lubricant for the truck market.

And we're planning further new product launches later this year.

We continue to build our retail offer and have re-imaged over 40 percent of our sites worldwide.

The convenience market continues to grow more rapidly than fuel demand.

Our growth in the second quarter has been strong, with same-store sales growth of 3.5 percent.

We remain focused on efficiency and are on track to deliver programs expected to reduce cash costs by over $300 million this year.

Turning to petrochemicals.

We remain on track to focus 90 percent of our capital employed in our seven core products by 2006 and to improve underlying (indiscernible) by 3 percent over the same period.

We're also on target for a 40 percent reduction in our cash fixed cost per ton, from 1998 to 2003.

During the quarter, we increased our share in two Asian joint ventures to produce PTA.

In Taiwan and Kora.

Including our startup in China in the first quarter, our PTA capacity in Asia has grown by around 45 percent over the last year.

Construction of our new chemicals complex in Shanghai, SECO (ph) is well under way.

And the complex remains on schedule for startup in 2005.

We continue to restructure the business.

We've completed the sale of PT Penny in Indonesia.

And we have announced that we intend to sell our industrial intermediates business.

Turning now to Russia.

I'm pleased to confirm that we're on-track for legal completion of the transaction later this summer.

The transaction was signed on the 26th of June.

And we're now awaiting the relevant regulatory approvals.

We expect to have these by the end of next month.

All the key appointments in the joint venture have been made.

Down the line business performance of TNK has been good. 1Q on 1Q production growth was 11 percent.

Export percentages are rising at around 74 percent of crude production and our underlying cash production from the business is strong.

As I mentioned, the inclusion of Slavneft (ph) in the transaction is under discussion.

We plan to describe in detail the assets we have in TNK BP, the synergy opportunities which we believe exists, and our plans for delivering value at a special seminar planned for October 16th.

Now of course, we have been helped in the first half because we've been able to take full advantage of a positive external environment.

We see much of that positive environment continuing into the third quarter.

Crude oil markets are still tight.

Inventories remain low by historical standards and the pace of output recovery in Iraq has been slower than many expected.

Gas prices in United States remain above parity with fuel oil.

Refining margins are so far similar to those in the second quarter.

Although, marketing and petrochemical margins are softening a bit.

So the outlook is reasonably positive.

But we can't and don't rely on that.

We cannot know what will happen.

And so we continue to plan and run the business on a set of prudent assumptions which support the financial framework.

I'd like to conclude by reminding you of our philosophy on delivering value to shareholders.

Through value growth, including a prudent and disciplined financial framework, through the dividend, and through the repurchase of shares.

Byron has already mentioned that our financial framework indicates that we should devote some of our free cash flow in the second half of 2003 to eliminating some or all of the $2 billion deficit in our funded pension plan which was identified at the end of 2002.

We see that as a disciplined step, and very much part of taking a careful and balanced long-term approach.

The first call on cash is our dividends and the funds needed for reinvestment.

Beyond that, if circumstances permit, we'll use available funds to meet our long-term obligations and to return cash to the shareholder.

It is in that context that we'll use part of any surplus of funds available over the remainder of the year to close some or all of the 2002 end-deficit on funded pension schemes of just over $2 billion, which of course is noted in our annual report.

We believe that this is in interest of both our employees and our shareholders.

While the scale of this requirement is relatively small, compared to our overall cash flows and compared to the deficits of many of our competitors and other major companies, the issue is nonetheless important.

And it will be inappropriate for BP to avoid taking action.

We are in the fortunate position of being able to take that action.

Turning to the dividend, the board sets its level on the balance of a variety of factors.

They consider not only present earnings, but also long-term growth prospects and cash flow.

Of course, this is not the mechanical calculation.

The Board the judges the balance between all the factors in all the options available.

Our track record speaks for itself.

Over the last 20 years, our dividends have increased by an average of 4 percent a year above inflation when mentioned in dollar terms and by an average of 3 percent above inflation in sterling terms.

Our dividend increase of over 8 percent in dollar terms in the first half of 2003 builds on that track record.

As we said before, after paying the dividend and meeting our investment needs and other commitments, our priority over time will be to repurchase shares.

Building on the track record of $6 billion of shares repurchased since the acquisition of Arco of which $2 billion of repurchases took place earlier this year.

The scale of share buybacks in the second half of 2003 depends very much on the external environment.

Because of the payment we expect to make in respect of our investments in TNK BP and because of the action we're taking on pensions, we don't currently expect the repurchase of shares in the second half to be as substantial as it was in the first half.

But this depends very much on how the trading interment develops.

So in summary, the figures for the first half of 2003 begin to show the potential of the strategy.

We have been helped by the external environment.

But, we wouldn't have been able to capture all the benefits if we didn't have the right business model in place -- in each segment and across the group as a whole.

It's been a good half year.

But there's more to come.

It's a matter of maintaining a careful dynamic balance.

So, thank you very much.

Byron, Tony, Fergus, and I would now be delighted to take your questions.

(CALLER INSTRUCTIONS)

Doug Terrison, Morgan Stanley.

On BP TNK, you mentioned export capability -- I think for crude oil -- has increased around 74 percent which is well above the original member of 45.

And so my question is whether or not we're comparing apples-to-apples with these two figures?

And also whether you think that 74 percent is sustainable for crude oil?

And secondly -- this is more of a strategic question.

While I don't believe you guys assigned any value to the natural gas component of the new Russian company, can you relate what effect, if any, the new BSE framework is likely to have on the development of Gvitga (ph)?

And also, any time-frames that may apply to that situation?

Let me just answer this question quickly.

And I'll turn over to Tony for any further comment.

You are absolutely right.

The 74 percent is apples and oranges compared with the 45 percent. 74 percent includes crude oil and products.

We said it would be about 60 percent.

So, it is ahead of that number.

How sustainable this is?

It all depends.

We're not banking on it.

It's good to have.

Let's see how it develops over time.

Secondly, a natural gas component -- there's a lot of natural gas in TNK BP.

None of which has been booked as a results.

Quite a lot of resources, not only in Gavitga, but also in West Siberia.

And I think some of the changes which are taking place in PSA legislation and some of the arrangements which I note that, for example, LookOil (ph) has made with GasPom (ph) all of bode well for the attributing some value later on -- and I do stress later on -- for this enormous gas resource.

And I think this gas resource in total is many tens of trillions of feet.

It's about 40 to 50 trillion cubic feet.

But as I say, no value attributed to that for the moment.

Long-term, I would expect it would come through.

Niel Parry, UBS.

Hi, John.

Thank you.

Can I just ask the question on the buyback and then on CapEx please.

Would it be be fair to summarize your comments on the buyback, given the amount of commitments you're making, that you're now likely to suspend the buyback program, at least for a while and that that buyback program might come back in, subject to the macro environment remaining robust later in the year?

And secondly, on CapEx.

I mean, we have seen it going up across the industry.

Could you talk -- or Tony -- talk about any pressures on your CapEx?

It is obviously key to you returning to generating free-cash in the future -- particularly $16 -- would be to bring down that CapEx figure to the 12 to $13 billion range.

Let me just ask Byron, first of all, on the buyback.

Both John and I mentioned in our remarks the commitment that we have to buybacks, provided that we have the strength of the cash flows in the second half of the year that we have seen over the course of the first half.

This is a balance across a number of different obligations.

One of the things that I want to clarify -- we've talked about $2 billion funding as a possibility on the pension obligations.

That is a pretax number.

And all of the funding we expect to do will be subject to full tax relief.

So the 2 billion is translated into cash out-of-pocket terms more like one billion and a quarter.

So, looking at a continuation of the environment we see, recognizing the second half of the year will have higher capital spending because it's waited towards the back half of the year -- and recognizing that we front-end load at our disposals this year -- and rightly so, capturing the strong environment.

If strong cash flows continue, then it is an issue that will have to be weighed, relative to other alternatives. and we have the track record of buying back shares when the cash is there.

This of course, is something which is we take a very disciplined approach to.

CapEx is very well under control.

And we do expected it to keep coming down, as if -- I believe we may possibly be quite come the cyclical -- to the rest of the industry in this regard.

Secondly, dividends -- we have great policy -- which it won't repeat again.

So, the question is what to do with the excess cash.

And we will be balancing all of these factors.

The after-tax impact of the $2 billion into pension funds, the environment, and the capability to buyback stock.

Our policy in this regard has not changed.

And I think it is something best viewed by everybody over the balance of the whole year.

It won't be quarter-by-quarter.

We'll obviously be reporting to you as we buyback stock.

We haven't ruled it out.

But equally, as always, we haven't ruled it out or ruled it in.

On CapEx, I think I've said something.

But Tony?

A little bit more on upstream CapEx?

We're certainly going to end up this year towards the bottom end of the range that we indicated to you in February, if not a little bit beneath it.

That has come about from the success of the divestment program which has clearly reduced the level of capital and the capital efficiency we have been driving into the existing profit centers -- their mature areas.

I think the third thing I would add is that 2003 will certainly be the peak year for ENT capital spending.

And, looking forward, it will definitely come down.

As John said, I think we'll find that we're somewhat counter cyclical with our major competitors.

I'm just looking for the confidence in that dropping CapEx.

Tyler Dan, Bank of America.

Good afternoon.

Thanks for taking my question.

One editorial comment, if I may.

I would like to commend you on your corporate governance in addressing the pension issue head-on.

And in terms of my question, it relates to the spending requirements and -- really what type of trading environment you're conditioning when you set the forecast for what you may be allocating toward the incremental pension related spending?

And then secondly, if you could give us an update, please, on disposal levels.

By my calculations, it looks like you could be looking and above 6 billion -- which the targeted range that you had talked about has been 3 to 6 billion.

It looks to me like you could be $1 billion above that.

Could you update us on that please?

I'll ask Byron to deal with the disposals.

Let me just talk about the funding policy again.

Tyler, as you know, we look at the long run requirements for CapEx in such terms that we balance cash in, cash out with the requirements for dividend, taxes, and interest at $16 oil, not at these prices.

What we have got is an excess which sometimes is tactical -- the use of which is, to a degree, tactical.

So, we look to the second half of this year and say we think it's going to be above the level that we would expect for normal funding.

Relatively positive second half of the year.

Quite good strength showed in crude oil, some strength in natural gas, some strength in refining, a touch of weakening in some of the market-facing businesses.

But all that comes and goes day-to-day.

So on that basis we have said to ourselves -- provided this actually happens -- and I do stress, provided it actually happens -- we think there's enough room here to fund all part of this pension deficit.

And, as the case may be, also to do some stock buybacks.

This will vary quarter-by-quarter, I may say, because of the speed with which we would prudently wish to put the money into the pension funds.

Byron, disposals?

Yes.

I just put a rider on John's statement -- which is, the action is totally discretionary.

We are doing this at this time because we feel it's the right thing to do at this time.

But obviously, if trading conditions were a lot different, then we could defer this action to a later period.

As far as disposals go, as I said, 4 billion in the bank, 2 billion with -- as either completed -- or we have sales purchase agreements in hand.

So you're right to your question whether or not we will end up above 6 billion for the year.

The issue is always looking at it across the calendar year.

A number of these transactions are pushed into the fourth quarter.

And therefore, there is always the uncertainty as to whether they will close in 2003 or 2004.

I would say that we have a number of other transactions that we are progressing.

We're also starting to look at our portfolio for divestments in 2004.

But this year has shown very clearly the advantage of planning ahead and being in action at the start of the year.

So, specifically to answer your question, I would be surprised if the number was materially above $6 billion.

Certainly not $1 billion above it, as you've suggested.

Rob McCain, CSFB.

Good afternoon, John.

I think, probably, a couple of questions for Byron, actually.

Byron, when you were talking about the pension fund effect.

You were saying it's a pretty complex calculation, in terms of assessing its P&L benefit in 2004.

Could you sort of give us some sort of guidance as to what sort of P&L effect you expect to the looking at?

And just picking up your final comment there, you said you're starting to look at 2004 divestments.

Is it too early to ask you what sort of scale of divestments, in very round terms, you might be looking at for 2004 at the group level?

Let me take the first question.

And then I'll address the second.

As far as our charges for pensions and retiree medical -- in 2002, as you could see from annual accounts, it was $440 million.

As I signaled, when I talked with investors in February, we expected that to grow by about $300 million in 2003.

And it has grown on that basis -- the first-year --- our first half of the year charge has been an incremental 150.

So we're on track for the indicated increase.

As I said, it's a complicated formula.

And in particular, there's the amortization of previous year's pension plan performance, relative to that which was assumed.

And the amortization of previous out performance, which is a credit to our charge on an annual basis, is reducing.

So there is an underlying pressure that will tend to increase the pension charge -- and, again, this is a non-cash charge -- but it will increase the charge as we look out to 2004.

This action that we are talking about today will provide an income benefit of about 8 percent of pretax on the amount that is contributed.

So a $2 billion contribution would provide incremental pretax income of a little bit more than $150 million trade in 2004.

THE LORD BROWNE of MADINGLEY GROUP: Thank you.

Niel McMarne (ph) Sanford Bernstein.

Good afternoon.

I've got two questions.

Just going back to Russia, I wanted to find out -- will you see the cash benefit of the deal for the full year?

And any estimates what that will be?

And also, what have you got in-place -- what facility have you got in-place to return the cash to yourselves?

And then, secondly, on U.S. gas.

I wanted to go into detail on what you had divestment in the Rockies and midcontinent?

And plans for divestments, in-terms of your U.S. gas holdings going forward?

THE LORD BROWNE of MADINGLEY GROUP: Let me just take the first one.

And Byron can add in.

We'll obviously see the cash benefit from TNK BP through the dividend.

The policy for dividends which we outlined when we first talked about this transaction was that they would be at least 40 percent of net income, up to the full cash flow.

We would expect that, given the capacity to fund this company, that it would be about 40 percent of net income.

And that will be on the dividend declaration.

So will see a benefit of that this year, provided that, of course, all the things I said about closing the deal actually take place.

The reason I mentioned the Sydanko (ph) dividend was to underscore the fact that this is not a conceptual issue -- that when you have an interest in a company that is generating significant cash in Russia, it is possible to dividend those funds out.

So, we have done it in the first half of this year.

Our partners are aligned with the 40 percent minimum dividending policy that John described.

And we would expect to see dividends flowing in the second half of 2003.

I think, Niel, on the divestments we've clearly done a bit of tidying up really, of the U.S. gas portfolio.

I know I'm broadly happy with what we got.

I think you should expect to see continued very minor tidying up.

But nothing substantial.

It clearly is a very important piece of the overall EMP portfolio.

THE LORD BROWNE of MADINGLEY GROUP: Jeremy Elden.

I was interested in a couple of things.

I hope you haven't had too much of the pension issue.

Can you clarify the initial accounting -- when -- if for a second example you paid 2 billion across into the pension fund, would we see an immediate reduction of 2 billion in the pension provision on the balance sheet, leaving no day-one P&L impact?

And secondly you mentioned the excellent result of 96.7 percent refinery availability.

Can you tell us what it has been recently and what sort of level you expect that to average at going forward?

THE LORD BROWNE of MADINGLEY GROUP: I'll ask Byron to do the first one.

Let me try to answer it this way.

And hopefully this gets to the question that you're asking Jeremy.

The money would move into prepaid pension charges.

So it would be credited into that account.

How it looks, as far as capital employed for the group as a whole, would be dependent upon whether it's cash moving over there or incremental debt.

I think on the margin, we would all presume it's incremental debt.

That being the case, it would be slightly roachie (ph) dilutive.

Probably if we talk about the full $2 billion contribution, a little bit more than a tenth of a percent, and would increase the gearing, as a consequence, by about 1 percent.

So those are the metrics of what will happen as a consequence of that specific funding.

THE LORD BROWNE of MADINGLEY GROUP: I just would like to add one thing on this pension thing.

I know everyone is very interested in it.

I just want to make sure no one loses the overall context within which is being done.

Obviously, we potentially have the availability -- potentially have the capability of doing this.

And this seems from a both appropriate financial and governance point to cover this deficit.

This deficit, of course, is really very small.

Very small, compared with the overall scale of BP.

And I will repeat again, compared with the vast majority of companies -- large companies in many sectors, this is a very, very small deficit.

And we believe at BP, it's the right thing to do to cover it.

Now, our refining availability, Jeremy, I'm looking at -- the chart shows me that in 2003, in the first quarter it was 94 percent.

It was sort of 94 to 95 percent in 2002.

And in 2001, it varied between 89 percent and 95 percent, depending on which quarter you went into.

So, actually this is pretty good.

It was just the right moment to have high availability.

Thank you very much.

Fred Larfa

Hi John.

Can you hear me John?

THE LORD BROWNE of MADINGLEY GROUP: Very well, thank you.

Two questions.

Do you anticipate any change in the tax rate in the second half?

And give us some guidance on the tax rate, please, for '04?

And the second is, I believe you've used up the full authorization for share repurchases for the full year so far in the first half.

Do you have the authorization at this time?

And if so, how much?

Let me answer the second question.

I'll ask Byron to do the first.

Our authorization as approved by our shareholders in general meeting is much bigger than the amount we have used at the moment.

It's very large indeed.

And so that should not limit our actions.

On the effective tax charge, Fred, we indicated -- started the year 34 percent.

We still think 34 percent.

And I would -- it's a bit early to project into 2004.

But, in all likelihood it would stay at that level.

THE LORD BROWNE of MADINGLEY GROUP: Thank you Byron.

JJ Traina (ph), Deutsche Bank.

A couple of questions, firstly on the cash generation.

I'm looking at clean earnings for the first half that are up -- about $3 billion, net cash flow cleaning up for working capital movements that are up less than that -- of about $2.4 billion.

I'd appreciate a rough and ready analysis with cash generation -- doesn't look that strong.

Do you have any comments on that?

I wonder if also update on where you are with some of your performance measures -- for example, what's your standardized return on capital employed?

Where are you with the $.5 billion worth of pretax health-help that you planned for the year?

And the capacity that you had targeted?

THE LORD BROWNE of MADINGLEY GROUP: Byron, the first one please.

JJ, there are lots of different ways to enter into the analysis that you have gone through.

We have looked through it and feel comfortable that the cash flow and the earnings are well-matched here.

There are lots of tax effects -- cash tax effects taking place during the course of the year.

And certainly that complicates the analysis.

I would point out also that cash from operations excludes the $300 million contribution that we made to pension funds in the first quarter this year.

So, I think there's a number of factors that when we adjust for them, you will see, as we have calculated, that the cash flow and earnings are well in-sync with one another.

I'll be happy to have the IR department walk you through that, JJ.

THE LORD BROWNE of MADINGLEY GROUP: JJ, I'll just add I've been on a very simplistic basis.

The gearing has dropped so significantly and the pretax cash flow is very strong.

Post-tax is 4.5 compared with pretax up 3.1 -- 3.4 in cash terms.

And earnings were up another similar amounts.

Now if I could just talk about performance indicators.

I think it's becoming increasingly clear to everybody that's these measures based on standardize assumptions are not very helpful.

In fact, they are very, very difficult to calculate and even more difficult to reconcile to U.S.

GAAP in a way which would make us feel happy, given the regulations of today.

So, we're not doing that.

We are looking very much more on performance against competitors -- I think that is interesting but not sufficient -- as well as explaining the difference in performance quarter-on-quarter, half-year, and rather more critically year-on-year.

Giving you guidance to -- on where the milestones are and how we're hitting our milestones, which show long-term indications of how the strategy is going showing.

Also where we are focused on, as it were, a project to get something done, like $3 million of cash costs out of the downstream -- how that is going.

How returns are improving, as to divestments in the upstream.

And how, indeed, overall costs are working out in-light of inflation and our work to offset that and all the other effects, both as an expense nature and a cash nature.

I hope that the various analysis will show you that.

Certainly, in terms of capacity growth, we're well on track, between our 0 and 3 percent indicators range.

Capacity, of course, is different than production.

It's designed to make sure that we don't get confused with the day-to-day inevitable problems with production, where one operator or another can't quite make what they said they were going to make.

And that, I think, is part of the way of the business.

But we're well on track for that.

I know that it's very difficult to keep track of production this year because there are so many changes.

It's something we said at the beginning of the year.

It would be very tough this year.

I hope you guidance we have given you -- and certainly Fegus can give you much more -- indicates that we're on track for that self-help.

Put another way, in the actions we're taking, divestments, the way in which we're looking at cash costs, and actually the way we're capturing margins which is really very important indeed, being that we'll be able to take full advantage of what the market is permitting us to do.

These things are contributing to improved performance.

And I hope you can see some of that come through this very short snapshot, which is half years results. (multiple speakers) Anton.

Yes, a couple of questions on the strategic areas that you mentioned.

The (indiscernible) after Angola, you have discoveries in four different blocks.

And most recently on Block 31, where you have two discoveries and you're the operator.

There are stories that the Trinidad government is slowing down the development to keep income at a more even level.

And it does seem like your progress in some of your blocks and some of your competitors' blocks in some blocks is different than on others.

I wonder if you can comment on that?

And give us some idea of developments beyond those that you indicate on the strategic outline that you provided in the exhibit?

THE LORD BROWNE of MADINGLEY GROUP: I'll ask Tony to answer the questions on Angola and Trinidad.

On Angola, I think we're making good progress.

We clearly have made a string of discoveries in the first half of the year on Block 15, 17, and on 31.

And they will all ultimately provide the basis for new block developments in Angola.

Beyond that, we're making very good progress with the projects.

We've sanctioned a greater (indiscernible) on block 18, a BP operated block and expect some (indiscernible) approval in the third quarter.

We're making good progress on Kizomba A and B. Kizomba A about 70 percent complete now, Kizomba B now started.

And certainly making good progress on Dalia (ph).

Angola's looking very encouraging, I think.

In terms of Trinidad -- as you know, we started up Train 3, two months ahead of schedule and under-budget -- and at the same time we've got approval for Train 4.

And indeed have begun very early, but nonetheless very encouraging conversations, with the government about expansions beyond Train 4.

So certainly, we aren't seeing any reluctance on the part of the Trinidadian authorities to continue to develop very significant natural gas resource.

Can you give us and idea

THE LORD BROWNE of MADINGLEY: Thank you Tony.

Looking at a couple questions from the Web.

I'll just read them.

The first from Luko Graphadonia of Monte Depasky (ph).

Which interest are you using to discount pension liabilities?

The answer is, in the U.S. 6.75 percent, the UK and European plants use 5.75 percent.

This is in accordance with long-term corporate bond yields.

Secondly, from Doug Herhertz (ph) of the Mitchell Group (ph ).

Of the variance in reserves, recognized by BP TNK, how much of this is natural gas reserves and how much is crude oil?

All the TNK reserves are for crude oil.

There are no natural gas reserves.

One day, I think we're all very hopeful there will be natural gas reserves.

For the lot of natural gas resources, they simply need to be converted into reserves.

The next question is from Mark Ianoti (ph).

He is not there.

Jonathan Wright of CitiGroup?

: A couple of questions, if I may.

The first, going back to standardized assumptions.

Historically, you have given your standardized assumption for dividend payout ratios.

I wondered if you could provide that?

Secondly, you've indicated that you are happy with the extent of your disposals and mature assets in the US.

Does that also apply to the rest of the world?

Or are there other areas you need to focus on?

Jonathan, I said that I explained how the dividend was set, in discussion with the Board.

It is set, of course, on a variety of factors, including internal measures -- which we don't talk about -- of where we think the underlying earning power of the Company is, as well as the past performance, as well as future prospects.

All these go into the pot, if you will, for consideration.

And then we look at our long-term track record, which is a 20-year, 4 percent real increase in dividends.

Right now, it's running a bit higher than that.

All of that is considered to set the dividend.

So, standardized assumptions are not really the main action here.

We obviously have an eye to the earning power of the Company, when we stimulate it internally, at $16 oil and a variety of other factors.

But that is something we do very much internally.

As to mature assets, I presume you mean upstream assets.

And so, let me turn this to Tony.

We clearly have been pretty active this year, particularly in the US and UK.

I'm really happy now with the portfolio we've got.

So, I think going forward, I wouldn't expect to see the same scale of divestments that is in the upstream as we have had in the first half of this year.

Having said that, of course, oil and gas field, by their very nature get old.

And by their very nature, you would expect them to become uncompetitive in their portfolio at some times.

As we go forward, we will continue to be very active with continuing the review the portfolio for things that are not competitive in the opportunity set that we have.

THE LORD BROWNE of MADINGLEY GROUP: Lets see now Steve Phifer of Merrill Lynch.

: Thank you.

I had two separate questions.

The first relates to U.S. gas.

When we look at least the 2Q to 2Q U.S. gas figures reported down about 12 percent.

And when we at least, made the adjustments for acquisitions and divestments, it looked like the organic quarter to quarter was down about 3.7.

Could you comment on what the organic was for U.S. gas?

And some expectation of what the growth rate might be after the divestments?

And secondly, Byron had mentioned that DD&A was going up.

Approaching a $4 per barrel DD&A rate.

Could you comment a bit -- where you are?

And are you now at that $4 DD&A rate?

Is that the number we should think about going forward?

Thank you.

The underlying decline in the U.S. gas business is on the order of 2 to 3 percent which is what we talked about in February.

And that is unchanged Byron on DD&A?

We have been signaling this for sometime in our discussions with investors. $4 creates a consistency between the DD&A and the target we have on finding and development costs.

We would expect that to be the number used by the those who are modeling our financials moving forward.

Could have a question from Gordon Gray of J.P.

Morgan Gordon?

THE LORD BROWNE of MADINGLEY GROUP: J.P.

Morgan no longer on the line.

We'll go back to the U.S., Fargo Gates (ph), Hand Stop (ph)

A couple of quick questions.

As you started your share buyback program years ago, it really hasn't had any impact on your share price.

Share price continue to go lower.

The question is is share buyback the best use for your excess cash?

This is the first question.

The second question -- do you think under $16 oil, you would be able to achieve your target of double-digit (indiscernible).

Well, we have never actually, Fargo, had a target of double-digit returns at $16 oil.

What would $16 oil given -- (multiple speakers)

THE LORD BROWNE of MADINGLEY GROUP: We have had a variety of factors which included actually, relatively positive upstream -- a relatively downstream environment, as well as $16 oil.

When I say relatively positive, not overly positive.

Again I think the target, it seems to me, in returns is to keep improving it by improving the quality of the assets on a short but more importantly long-term.

That is exactly what we're doing.

We used a variety of things we can do.

Both moving the portfolio around, operating it well on applying.

Great technology, which is improving returns.

We take a tremendous focus on costs.

We take a tremendous focus on capital efficiency.

So, it's all a matter of relative improvement.

That means the returns get more and more robust, as the price of oil goes down.

A share buybacks is a tool that we have used over a period of time as you suggest.

I think it would be interesting if one could create a direct mapping between share buybacks, which in aggregate are still less than 5 percent of our capital employed.

And any significant movement with respect for share price -- I think that other factors clearly dominate the share price activity.

But once we have our obligations to shareholders with respect to dividends -- once we have the right sort of long-term capital program in place.

And once we have addressed our gearing, not only our conventional gearing but looking at other long-term obligations like funded an unfunded pension plans -- any surplus beyond that, we believe is most efficiently and most properly returned to shareholders through share buybacks.

And we will continue to do that.

THE LORD BROWNE of MADINGLEY GROUP: I also think it's a matter of discipline.

Clearly, we don't have very large stock option programs.

But we have some.

We also occasionally use equity, as we will, on a forward basis to buy the second, third, and fourth traunche of TNK BP.

You know about that already.

It's a matter of discipline, to make sure that we don't appear just to be printing money.

And, therefore, being disciplined about keeping the level of (indiscernible) at least constant from the beginning as it were of this new company that was just after the ARCO acquisition -- is a pretty good rule of thumb.

How this is affecting the value of the stock, I have no idea.

But -- because, of course, we have not done the experiments -- which is the experiment of not having done the buybacks.

I don't really know.

I think the discipline point is really very important because there must be disciplined use of cash and disciplined use of equity.

Mark Flannery of CSFB.

I have a question on, I guess it's upstream reliability.

John, you mentioned capacity is not the same as volume.

And could you comment, perhaps, on how that is going on?

How upstream -- uptime if you like, is going?

And the second thing would be, perhaps, (indiscernible) second question there.

Is it too early to comment on 2004 disposables?

Across the vast majority of the portfolio, upstream reliability is running very well Mark -- close to 90 percent -- 89 percent.

In the second quarter, we had some issues with partner operations in the North Sea which reduced the operating efficiency in the North Sea.

Of course -- with that exception, the rest of the portfolio is running well.

The impact there was of the order of 30 to 40,000 hours a day in the second quarter.

THE LORD BROWNE of MADINGLEY GROUP: 2004 divestments.

I think it's really a bit too early to tell, Mark.

I think the best is to look at our strategy and it gives you some clues.

We always look at the upstream portfolio.

But we've done quite a big cleanout over the balance of this year.

But there will always be things to look at and as (indiscernible) as Tony says, perhaps, best (indiscernible) by the people.

We always look at we refining the portfolio -- no stories there at the moment.

But I'm very keen that the portfolio -- which is very strong at the moment -- remain strong and that we don't have excess capacity for ourselves -- we like to be a deficit refiner.

The reason for that is, while the returns, on average, are very high in refining, so too is the volatility. (indiscernible) even becoming like BP.

So, we're looking at that.

We'll continue to look at our petrochemicals.

We've got a program out there in getting to the 7 core products.

So those are the areas we focus on.

Some of this has to do with market timing.

We're not going to take something to market unless we can actually sell it at a price that we find is sensible.

That's the best I think we can offer in guidance the moment.

Let's take a question now if we can from Pascal Mendez of Exang (ph)

Good afternoon gentlemen, I have three questions.

One, regarding the refining and distribution division.

If you can split (indiscernible) between refining and distribution.

And regarding Russia, can you give us the increasing production in Q2 of TNK BP?

And could you tell us if the volume -- found that we have (indiscernible) for the (indiscernible) system?

Or did you use some existing roots that got you much more than (indiscernible) and how much more?

And finally, when you say you look forward for cash in-flows and out-flows to be balanced over the long-term at 16 per barrel -- looking at your CapEx and your dividends, does that mean that you look at the cash flow at around $19 billion at $16 per barrel?

Thank you, let me ask Byron in a moment, just to give you -- discuss the refining and marketing components of downstream results.

And talk about the cash flow.

Just on TNK, I'm getting hydrocarbons out of Russia -- there's a whole mix of ways this happens.

And again, the decisions are really quite tactical.

It depends on the exact pricing of different goods to market, including cars and barging, as well as pipelines and so forth.

So, the decisions are very much operating decisions and the overall envelope -- it must be a marginal contribution in excess of the next best alternative.

And that is the way the decision-making is made.

It's done on an optimization basis in a pretty sophisticated way.

Byron?

With respect to your question about the split between refining and marketing, their refining contribution is about 400 million, that's from marketing about 750 million.

So approximately 70 percent or so in marketing which was truly outstanding performance from that particular area.

Certainly the highest since BP and Amoco came together in 2001.

Your question about cash flows -- there are many elements of cash flow.

And, therefore, to focus on a single dimension.

I'm not sure that we can respond to your question.

If you would like to rephrase it I will give it a go.

Yes, just looking at this sentence in delivering strategy slide -- you say that you were looking at cash inflows and outflows to be balanced over the long-term at $16 per barrel.

And I wondered, then we can look at your CapEx program -- which is at around 30 to 40 per barrel by 2006.

And had what (indiscernible) dividend is expected at that time.

And take the assumption that at $16 per barrel, the structural cash out-flow from your business should be at around $19 billion dollars to balance the in-flow of $19 billion to balance the out-flows.

Quite a lot of this was discussed in the February presentation.

And I would say, given the materials of the February presentation, there's no update you on those materials to do with the likely decline in CapEx which we're very committed to get done.

And the ranges are there -- as indeed are some of the subcomponents to model cash flow.

So, that -- I think there's no real update I can give you on that.

Doubtless we'll be updating that sometime next year.

THE LORD BROWNE of MADINGLEY GROUP: Can I ask for -- we're running a bit close for time.

Let me ask Lisa Sobers -- First Albany.

Question?

John its Mark Gilpin.

I have two questions please.

I wonder if you can give us an idea of how trade how you view the trade-off between the dilution associated with asset sales and the upstream in particular and a value-creating aspects as you see them of share repurchases?

Secondly, just to clarify on the dividend issue.

Our calculations suggest that you are now well in excess of the previously indicated 60 percent normalized payout ratio target.

Do you see it that way?

And have you abandoned that target altogether?

THE LORD BROWNE of MADINGLEY GROUP: Let me answer both these questions.

Mark our first-quarter call obviously in divestments is to look at our strategy and ask ourselves not only whether today's performance of the asset -- the most immediate cash flow and earnings is something we want.

Or whether we want tomorrow's as well.

And therefore, we look at very much on a value driven basis -- not on an instantaneous dilution accretion basis.

So that's the first thing.

Secondly, so it's very heavily driven by strategy long-run approach to value and that trade-off.

It has really, therefore, nothing to do with stock buybacks, which is the sum aggregate.

You can't track the money from one place to the other.

That's a very different philosophy about value return.

And I believe we have discussed this already at the meeting.

Secondly, on dividends, what I did say is that we were clear, I think, from the last time we spoke and today repeating again -- the philosophy with which we use -- the philosophies used to set the dividend.

One of the factors is to look at the dividend payout on our internal analysis of so-called underlying earnings.

And we believe that as far as we are concerned that is in pretty good shape as well.

Can I take the last question from the Web -- Tan Newman of Morgan Stanley.

Although it's actually Irene Simone at Morgan Stanley.

Good afternoon.

THE LORD BROWNE of MADINGLEY GROUP: Go-ahead please Irene.

I have two questions.

Firstly, on refining and marketing.

The other element of your portfolio is of course lubricants.

And Castrol has given you an extremely dominant market position.

We've lost visibility, however, on that.

Could you, perhaps, give us an indication of how lubricant margins have moved so far this year versus last year?

And my second question is going back to cash allocation.

Given the cash outflow you're planning in the second half of the year, the CapEx, the TNK payment -- the pension injection.

If we were to assume $25 oil.

And if you were to decide to buy the Slavneft (ph) stake, could you still do a buyback in the second half and maintain gearing in your targeted 25 to 35 percent range?

Thank you.

THE LORD BROWNE of MADINGLEY GROUP: On the second question.

Of course, it's many, many hypothetical ifs and ifs.

But on the balance of our judgments present, we could do all of that.

It's all a matter of balance.

On the first, Irene, we have not given a detailed breakdown of -- not Castrol actually -- but our lubricants division, which is far more than just Castrol.

It has been doing very well, indeed.

Margins this year are slightly better than last year.

And it is something that, in due course, I would expect when we have more detail time, we can take people through.

But we haven't actually given very much visibility to it.

But our main concern, of course, here is that we don't really want to discuss our margin performance, because this is a very competitively-sensitive piece of information.

Fine.

Ladies and gentlemen, I think it is coming to 4:00.

I hope we have answered all the questions that you have posed on us.

I hope there are none left that can't be referred to Fergus.

And if in doubt, he can of course arrange a meeting with any of our executives.

Thank you very much for joining us.

And we look forward to doing this again.

So, thank you very much indeed.

Goodbye. (CONFERENCE CALL CONCLUDED)