英國石油 (BP) 2004 Q1 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 Fergus Macleod, Head of Investor Relations.

Please go ahead, sir.

Good afternoon to those of you listening in Europe and Asia, and good morning to those in the Americas.

I'd like to welcome you to BP's first-quarter 2004 conference call.

My name is Fergus Macleod;

I'm BP's Head of Investor Relations.

Joining me today is Byron Grote, our Chief Financial Officer.

Before we start, I'd just like to draw your attention to three items.

First of all, 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 investor center on our website, bp.com.

Those of you on e-mail lists should already have received the slides.

If you haven't received the slides and would like to be placed on the list, please do let us know.

Secondly, I'd like you to draw your attention to this slide.

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

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

Lastly, a reminder, as we explained in our webcast on March the 11th and in our strategy presentation on March the 29th, we have made a number of changes to our financial reporting and to the layout of our earnings release.

These changes are intended to be helpful and to increase disclosure and transparency.

However, we, of course, recognize that the required restatement of comparative figures for 2003 leads to a need to update your financial model.

As we explained in March, a variety of resources are available on our website and in our recently published financial operating review to assist you in this process.

In addition, the BP investor relations team stands ready to help you in any way that we can.

I'd now like to hand over to Byron.

Thank you, Fergus, and welcome those joining this conference call.

It's less than a month since our strategy presentation, so I'll keep my comments brief.

This will leave plenty of time for your questions.

The results we announced this morning are strong, in come cases records, and we're pleased with the performance of our businesses.

The results reflect a number of factors; a favorable external environment, the disposal of some very successful investments, and most importantly the continued strong performance delivery of BP.

Before focusing on the figures, it's useful to remind ourselves of the broader context.

On March 29th we laid out three targets shown here.

These targets represent the fundamental purpose of the company, which is to grow the value of the firm and, at the same time, to provide returns to our owners through a steadily growing dividend while returning all excess cash flow not required for reinvestment.

Everything that we do is a means to that end.

To help you assess how we're doing, we also set out a framework of strategic indicators; production growth, improving cash return, growing capital employed and so on.

I will mention a number of indicators today.

It is critical that we clearly distinguish between indicators and targets.

Indicators are important, but they are not and never will be ends in themselves.

If we find a better way to achieve the targets, we'll embrace it and change the indicators.

So turning to the targets, first investing for long-term profitable growth.

Our investment program remains on track.

Spending is in line with our plan, our project portfolio is on schedule, and we've grown our TNK-BP interest by the inclusion of Slavneft.

Our 1-2 dividend per share is up 8 percent in dollar terms versus 1Q03, well above inflation and in line with our longer-term track record.

We intend to distribute 100 percent of all excess free cash flows to shareholders, all other things being appropriate.

Consistent with that intent, we bought back $1.25 billion of shares in 1Q, and we are continuing buybacks in the second quarter.

These targets also provide context for this morning's announcement regarding our olefins and derivatives business.

You may recall this chart from our strategy presentation.

It shows the historic pattern of pre-tax cash returns in the two subsegments of our petrochemicals business;

Advantage products, that is paraxylene, PTA and acetyles, and olefins and derivatives.

Our O&D subsegment is one of the better portfolios in the industry.

It has competitive shares for the markets in which it operates, a good track record on cost reduction and volume growth, leading technology positions, and significant growth opportunities, notably in China.

However, in a BP context, its returns have been much less acceptable than those from the Advantage products, as the chart shows.

In March, we advised you of our desire to improve the returns from our investment in petrochemicals, without relying on a better trading environment.

We indicated that we were reviewing all options for further improvement in this area.

Let me give you a progress update.

BP intends to retain and grow the Advantage product businesses.

For the olefins and derivatives business, we are investigating setting up a separate corporate entity.

One option is to make a public offering of a new entity at an appropriate time.

Based on the estimated lead time required for such a transaction, and depending on market circumstances, we would be aiming for an offering in the second half of 2005.

Now returning to the 1Q results.

As shown on the left, trading conditions for our upstream business strengthened in the first quarter to about the same level as a year earlier.

Oil realizations averaged more than $31 per barrel.

Strong oil demand growth, low inventories, and concern about possible supply disruptions have kept crude prices high.

Gas realizations averaged nearly $4 per 1000 cubic feet.

In North America, where we are the largest producer and marketer, gas remained at a premium to residual fuel oil, due to seasonal weather effects and lingering supply concerns.

Our average gas realizations in both the US and the UK were up by more than 20 percent on the fourth quarter of last year.

As shown on the right, key margins in our customer facing business were also up in the quarter.

Refining margins benefited from declining product inventories, strong demand growth, and seasonally cold U.S. weather.

Margin gains were greatest in the U.S., where low inventories and specification changes raised concerns about supply during the coming driving season.

Although not shown, marketing margins were lower than in both the first and the fourth quarters of last year.

The global petrochemicals industry is showing signs of a gradual recovery.

We saw gains in PTA and olefins margins in 1Q.

However, we also saw continued pressure from dollar-based imported product into Europe, which limited the improvement in that region.

Overall, the business environment was very strong, and contributed to the solid financial results we reported this morning.

Foreign exchange impacts during 1Q were consistent with the exposures I described on March 29th.

As the chart shows, both the pound and the euro have strengthened versus the dollar over the past year.

Comparing average rates in 1Q, both currencies were up around 15 percent year-on-year.

As we saw throughout most of last year, our non-dollar revenues and costs are naturally balanced.

So Forex is normally not an issue at the group level, although it does impact segments differentially.

However, late last year, our customer facing segments began to see increased competition from dollar-based imports into Europe.

This limited our ability to recover Forex related increases in our cost.

The impact was greatest in petrochemicals.

In March, I indicated the potential impact was as much as $100 million per quarter.

Our first-quarter results summarized here confirm that estimate.

Compared with 1Q03, and including the margin pressure in Europe, Forex changes reduced our pretax operating cash flow by around $100 million and our pretax earnings by around $200 million.

We also saw a $100 million Forex related increase in our capital expenditures during the quarter.

If the first-quarter exchange rates hold for the rest of the year, we estimate the full-year CAPEX exposure on the order of $300 million, around 2 percent of our full-year program.

Our financial results now fully reflect the reporting changes that we're adopting for 2004.

These include the new UK pension and benefit accounting standard, FRS 17.

Also, consistent with your feedback and emerging industry practices, we no longer remove the impact of exceptionals or non-operating items that we formerly referred to as specials.

We've restated historical comparators on an equivalent basis and have provided the details of this restatement on our website.

Our first-quarter pro forma result of $4.7 billion was up 17 percent compared with the first quarter of last year.

Our replacement cost profit, which includes acquisition impacts, was $4.2 billion, up 22 percent.

Our historic cost profit, which includes both acquisition impacts and unrealized inventory gains and losses, was $4.8 billion, up 14 percent.

Each of these figures benefited from the strong trading conditions just discussed, as well as a $1.2 billion net gain from nonoperating items and disposals.

Our post-tax adjusted operating cash flow of $7.1 billion after discretionary pension contributions also reflects the strong trading conditions.

Our record quarterly cash delivery is driven by the strength of our operations, as well as the reversal of several timing issues that reduced cash flow in the fourth quarter, such as tax payment phasing and seasonal inventory movements.

Our pretax cash return of 32 percent was down 5 percent, and our return on average capital employed of 24 percent was the same as in the first quarter of last year.

I will discuss both of these measures in a moment.

Our dividend of 6.75 cents per share is up 8 percent on last year.

As noted earlier, we had nearly $1.2 billion of post-tax exceptional and nonoperating items in 1Q04, compared with smaller amounts in recent quarters.

These items fall into two categories.

First, UK GAAP requires us to separately disclose the gain or loss from disposals or termination of operations as exceptional items.

In 1Q, these totaled a gain of $1.3 billion.

The main component of this gain was the sale of our PetroChina and Sinopec shares.

Our SEA describes other, smaller exceptional items associated with portfolio activity in exploration production, refining and marketing, and petrochemicals.

In addition in 1Q, we reported a $123 million post-tax charge for non-operating items and changes in unrealized profit and stock, or UPIS.

This slide shows BP's pro forma return on capital employed relative to our principal competitors.

The results shown include all items that various companies referred to as exceptionals, specials, nonoperating items and the like.

These items make earnings, enhance return on average capital employed more volatile on a quarterly basis.

Financial reporting practices vary amongst companies.

The introduction of international reporting standards next year will cause European reporting practices to converge to create new differences between U.S. and European companies.

For these reasons, we are increasingly finding cash return measures a better indicator of business performance.

This chart shows our pretax cash return over the same period.

We introduced this measure on March 29.

As noted then, we calculate pretax cash return before the impact of exceptional items.

We believe this provides a clearer view of the underlying cash generation from operations.

Although price normalization is useful on an annual basis, we find rules-of-thumb less accurate from quarter-to-quarter.

Thus, the quarterly data shown reflects actual prices and margins.

Turning from the methodology to the data, the chart shows quarterly peaks for operating cash returns in 1Q '03 and 1Q '04.

This reflects the relatively strong trading conditions in those quarters.

As you can see, the 32 percent pretax cash return in 1Q '04 is 5 percent lower than in 1Q '03.

The cash return numerator is basically flat.

The change in return is driven by an increase in operating capital employed from $85 billion in 1Q '03, to $97 billion in 1Q '04, consistent with the data we showed you on March 29.

As we explained that, we believe that the underlying trend of our cash returns is one of improvement, driven primarily by capital entering service in our new upstream profit centers.

In order to help understand our 1Q results, I will provide two comparisons.

The first is against the fourth quarter of 2003.

Our result is up more than 60 percent over that period, from $2.9 billion to $4.7 billion.

As shown here, there are three main drivers.

Exceptional and nonoperating items, a stronger environment, and a number of factors collectively shown as other on this slide.

I have already described the exceptional and nonoperating items, so let me cover the remaining two.

The stronger environment added more than $600 million to our 1Q result.

This reflects the higher oil and gas prices and refining margins I described earlier.

The $400 million gain and other items has many components.

These fall into three broad groups.

The first two are essentially the mirror image of what I described into 4Q.

First, as you may recall we had a number of onetime charges in 4Q for items that we considered operating in nature.

Therefore, separate from the nonoperating items shown in the stock exchange announcement.

The absence of these charges accounts for around $100 million of the improvement shown.

Secondly, about $200 million reflects cost reductions spread across all segments.

We believe that this is a phasing issue and reflects the larger accrual adjustments that often occur in the last quarter of the year.

Finally, the ability of our customer facing businesses to capture additional share of available margins added $100 million to 1Q performance.

This is a promising start to the year.

My second comparisons is against the first quarter of last year.

As noted earlier, our result is up 17 percent over this period, from $4 billion to $4.7 billion.

Exceptional and nonoperating items again were a primary driver, mainly the increase in disposal gains year on year.

The price and margins environment was basically flat year-on-year.

Slightly higher oil prices and refining margins offset slightly lower gas prices.

Foreign exchange effects related to the weak dollar reduced our result by more than $100 million post tax, as I have already discussed.

Portfolio activity was a slight positive.

The contribution from TNK-BP including a partial quarter of Slavneft more than offset the absence of the earnings from last year's disposals.

DD&A charges were up by $100 million post tax.

This increase is mainly in the MP and reflects the change in portfolio composition and the startup of new projects over the past year.

All other items effectively netted out between periods.

This slide summarizes the additional TNK BP disclosures that we provide in our SEA.

You will recall that we report based on estimated results from TNK-BP which we convert to UK GAAP and adjust for additional depreciation reflecting our purchase price as well is the accretion of discount on our deferred share consideration.

Current quarter results also include any changes that are required as TNK-BP closes their books for prior periods.

The resulting first quarter net income contribution is $193 million compared to $253 million in 4Q.

The 1Q result includes a $29 million charge related to prior periods.

Adjusting for this charge, 4Q and 1Q results would have been virtually identical at around $220 million.

Slavneft contributed $31 million to the 1Q result during our 76 days of ownership.

This was offset by higher expert duties and income taxes.

Export duties are linked to oil prices but lag by three months.

So higher 1Q duties reflect the oil price increases of late last year.

As expected, the reduction in regional tax exemptions in 2004 increased TNK-BP's tax rate to near the statutory rate of 24 percent in the first quarter.

Because of the additional depreciation charges and prior period adjustments that I just mentioned, the tax rate on BP's books was higher.

Our share of production increased by more than 15 percent between 4q and 1q.

This reflects volume growth of over 3 percent, plus the inclusion of Slavneft for most of the quarter.

During 1q we received cash distributions of $262 million from TNK-BP.

This reflects our share of the dividend from 3q 2003 earnings of which $119 million relates to our period of ownership and the remainder represents an offset to the acquisition costs.

I will now move from the quarterly financials to our longer-term strategic indicators, starting with Exploration and Production.

During the quarter, we announced two significant exploration discoveries in Egypt, and three further discoveries in Angola.

Major projects in our new profit centers remain on track.

Let me note a few examples.

In the Deepwater Gulf of Mexico, the Holstein and Mad Dog Spars moved from construction to installation.

In Algeria, we are commissioning the in solid gas facilities.

In Azerbaijan, construction of the Azeri project and the BTC pipeline remains on schedule for first loadings in mid-2005.

In Angola, the Kizomba A Floating Production Storage and Offloading vessel sailed away from the construction yard en route to the field location.

First quarter production was on track to achieve full year expected production of more than 4 million barrels of oil equivalent per day.

Portfolio hydrating continued what the disposal of noncore assets in Canada and a reduction our interest in the Kings Peak field in the Deepwater Gulf of Mexico.

Our customer facing businesses also demonstrated good progress against our strategies. ourr refining availability exceeded 95 percent, which allowed us to benefit from the favorable margin environment.

Shop sales grew 4 percent, and lubricant volumes by 8 percent, both on a like-for-like basis.

We also announced agreements to sell our Refining and Marketing interest in Singapore and Malaysia.

In petrochemicals, our production volume rose reflecting higher asset utilization.

In addition to today's announcement regarding will olfens and derivatives, we continue to focus the portfolio towards advantage products.

In 1Q, we signed an agreement to sell our specialty's intermediate business.

In Gas, Power and Renewables, we continue to grow our market share in North America in both natural gas, and natural gas liquids, with gas volumes up more than 20 percent, and NGL volumes up over 30 percent on 1Q '03.

We also increased the volume of our equity gas into LNG plants by 25 percent year-on-year.

All in all, strong progress.

Returning to the financials, this slide compares our strong first quarter cash flow versus 1Q '03.

This year's record quarterly operating cash delivery was up significantly on the previous year.

Although trading conditions were comparable, we saw a continued strengthening of underlying cash delivery. 1Q '04 disposal proceeds were nearly $3 billion, including $2.4 billion from our PetroChina and Sinopec investments.

We reinvest around half of this to fund TNK-BP's purchase of an interest in Slovneft.

Organic CAPEX of $3.2 billion was up by $300 million year-on-year, reflecting project phasing and consistent with our full-year estimate.

Dividends were $1.5 billion, and share buybacks were $1.25 billion.

Pension funding was around $100 million as planned.

The net surplus of $2.7 billion led to reduction in gearing during the quarter.

As shown here, we ended 1Q with 22 percent gearing, down from 26 percent at year end 2003, and back below our target band (ph).

This reflects the strong cash flow from operations and disposals in the quarter noted on my last slide.

As we advised in March, our near-term plans are balanced at price and margin assumptions well below current levels.

We aim to hold gearing in the bottom half of the band when market conditions are favorable and to return 100 percent of all excess free cash flow to investors.

We do not forecast the size and timing of future buybacks for obvious reasons.

However, our announced strategic intent, past track record, current gearing level, and strong trading conditions all support continued material share buybacks.

That concludes my prepared remarks.

We'd now be pleased to take your questions over the phone or the Internet.

(OPERATOR INSTRUCTIONS)

I would like to take the first question from London from Neil Perry at UBS.

Two questions.

One is, can you give us any more details on the chemicals business that you guys have spin off in terms of these late last year's operating income or net income or return on capital employed for that part of the business?

Second question, is TNK-BP's dividends were about 119 million for the second half of last year paid in the first quarter of this year.

That looks like a low number, and I understand some of it may have been used to offset the purchase price.

Could you just explain what is going on there and whether there are any other further offsets or whether the TNK-BP dividends are going to kind of lurch back to 50 percent of its net income?

Fine, Neil.

As far as the chemicals business goes, the O&D business, let me just give you a couple of benchmarks here.

The slide that I showed in my presentation obviously indicates the sort of returns that we have experienced in olefins and derivatives compared to advantage products during the course of the last four years.

But, to sort of break down the petrochemicals business, into that part that is O&D, on a operating capital employed basis its about 60 percent.

On a cash return basis, it's about 40 percent, so those are the numerator and denominator of the slide that you saw relative to the overall petrochemicals industry and our business.

And from an RCOP perspective, it makes about a 25 percent contribution.

So 60 percent of operating capital employed, 40 percent of the cash flow from operations, and 25 percent RCOP.

Thank you.

As far as the TNK-BP dividend goes, as I said in my remarks, the dividend in 1Q relates to third quarter.

So it is not the second half, it is the third-quarter dividend being paid in the first quarter of 2004.

The total dividend was $262 million, 119 million of that shows up as an actual dividend with the residual is an offset to the acquisition price, but as far as the cash that BP received relative to 3Q operations, it is the 262 and I just would remind everyone that the effective date of our transaction was the first of the year.

Therefore, we have received dividends for the first half of 2003, which were also an offset to the acquisition price, and then this piece in the third quarter.

Obviously, there are all of the future dividends will be treated as a normal dividending process.

We also received a dividend from Slavneft that was part of the offset to the acquisition as well.

Thank you very much.

Going over to the U.S., a question from Mark Flannery at CSFB.

Thanks, Doug.

Byron, (technical difficulty) the potential IPO of the chemicals business.

I've got two questions; firstly, you mentioned that an IPO was one option.

I presume that means you're also considering a trade sale?

Perhaps you could just comment on the advantages and disadvantages of both routes?

And the second question related to that is assuming everything goes well, what do you intend to do with the money?

Will it be retained within BP for reinvest upstream?

Will it find its way to shareholders' pockets or what are you thinking about that?

We clearly are going to do whatever is in the best interest of shareholders.

We have defined the process as one of pursuing an IPO.

We have laid ito out in that direction because it is something that we can maintain totally under our control.

It is something that has 100 percent execution certainty behind it.

In order to do that, we need to restructure the business to separate out the O&D components, and that is something that we would have to do no matter which track we went down.

If we receive interest for the assets in this part of our petrochemicals portfolio, that is of greater economic benefit to the firm, then pursuing an IPO obviously we will have to consider it.

Some people have made inquiries since John's comments about this back on March 29, but they have just been inquiries, and we will see what the future brings.

But for the moment, we are moving forward, expecting to pursue an IPO in the second half of 2005.

The money will be used to buy back shares.

The environment that I was describing for the first quarter is an environment that is the basis for the share buyback program that is underway.

We balance sources and uses at $20 oil and the steady-state numbers in for gas prices and refinery margins.

Any cash beyond that, however, it comes in whether it is through disposals or through higher than normal operating environmental conditions is cash that we'd expect to return to our shareholders.

So, watch this space.

The timetable under any scenario of a transaction would have to be in the 2005 and beyond range and if this is an IPO that is pursued, normal convention would be to place a portion of this as a first tranch and then subsequent tranches, so one would be unable to realize the full value of this business until beyond 2005.

Great.

Thank you very much.

I'd like to go to Europe.

We have a question from Pascal at Exane.

Good afternoon everybody.

I have two questions.

The first is regarding R&M.

I understood that you benefited there from a strong positive impact from optimum sourcing of crude.

I wonder if that was a structural change going forward?

That is my first question.

The second one is, regarding the strong increase in taxation in Russia coming up from around $50 million to more than 100.

I wanted to know how that could go going forward?

Let me cover the second question and I will ask Fergus to respond to your Refining and Marketing question.

Answering your question, Pascal,the key thing about the ability to capture these high what we refer to as commercial margins, is good refinery availability which allows us to optimize our feedstock costs by sourcing the optimim mix of crude to minimize the cost of product going into the refining system.

That was -- we had very good refinery reliability again.

Maintaing the track record of that business in the first quarter and that did make a material contribution, in the order of $200 million to the downstream result.

There always a good contribution but that is particularly good in Q1 '04.

The stock exchange announcement, note 10, as you observed, indicates an almost doubling, more than doubling of the taxes that were paid in Russia by TNK-BP.

This is a reflection of the elimination of the tax structures that were in use in 2003 and prior years in order to dramatically reduce the amount of income tax paid below the statutory rate of 24 percent.

Those structures were disallowed starting in 2004.

And the rate that we are paying now is around 24 percent of equivalent with the statutory rate.

If you look through good TNK-BP numbers, you will see that the tax rate appears to be much higher than 24 percent relative to our income, but I would observe that you have to start with statutory rate, and then recognize that there are both additional depreciation, and the prior period adjustment that I referenced of $29 million.

Both of these then will tend to decrease the BP share of TNK-BP income, and therefore, create the parent tax rate of in this case about 33 percent.

The statutory rate is the increase that we had long predicted.

You're seeing it flow- hrough the accounts.

It is something that we had expected at this time that we undertook the transaction.

So, this is not surprising to anybody on the BP team.

Thanks very much, Pascal.

Now coming up to Scotland, JJ Traynor at Deutsche Bank.

Good afternoon Fergus.

Can I ask a couple questions about margins, these upstream margins.

Looking at Q1 last year, and Q1 this year, the oil and gas prices are roughly similar, but the pretax margins of the group seem to be a down about 15 percent.

I wonder if you could talk about some of the drivers behind that?

Secondly, looking at the Russia margins for Q1, again, they are significantly lower than the rest of the world margins.

Is there any potential for those margins to increase?

JJ, you answered part of your first question with your second question.

Which is, that the portfolio has changed quite dramatically between 1Q of 2003 and 1Q of 2004.

We sold 220,000 barrels a day of production, most of it out of the North Sea and the US.

On the other hand, we expanded our position in Russia through the acquisition in TNK-BP in August; and then further extended with the Slavneft acquisition in the first quarter.

So, what you are doing is removing some of the very high margin barrels, which were from very mature provinces and had very little future in fact is a future that we did not want to invest in.

Replace those with a much larger number of barrels of oil and gas from Russia, which although they are characteristics are ones of having much lower unit margins, this investment brings with it huge upside potential over the longer-term and with all of the optionality associated with being in Russia.

So, we never expected that the barrels in Russia would be able to compete on a margin basis, on a unit margins basis with those produced out of the mature heartlands in North America and in the North Sea.

We also see in our existing portfolio some additional, excluding TNK-BP, some additional DD&A increases as we have more of the new production units coming onstream.

And of course, things on a non-cash basis are further impacted by the strengthening of in particular Sterling, relative to the dollar which translates through on a non-cash basis to higher depreciation charges as well.

So, we've got in mix affect, and we have higher depreciation charges, part of it reflecting the change of the non-Russian portfolio, part of it reflecting exchange rates.

I would say that the portfolio we have now is unlikely to be subject to material changes over the course of 2004.

So, if it's going to be easier to do comparisons sequentially, as opposed to year-to-year, as a result of really the very large scale of the portfolio shift that we undertook during the past year.

On your point about TNK-BP margins, I will just encourage you to remember that $29 million by a period of adjustment.

If you take that into account, there is likely -- it looks much more marked than it actually is.

And so you take that into account, but we would be delighted to talk that through with you off-line.

Coming back to London or fresh back from Australia, Jeremy Elden from Lehman Brothers.

Good afternoon, gents, or good day maybe I should say.

A few small questions.

Firstly, on CAPEX for this year.

Did I infer from what Byron was saying about the Forex impact on CAPEX that it is likely to be above plan this year or is it going to above plan but the Forex impact is 300 million?

Upon China -- not China, chemicals, the IPO of chemicals if you go that way, would that be something that BP might end up end up having to pay tax on or should we work out a price presuming to get it tax-free?

Finally, the recently adopted changes to Russian upstream taxation, have you made any estimates of the overall cost of those to your 10-K, BP profitability?

Fine, I will cover all three, but Fergus may have some additional comments that he wants to add to various elements of this.

As far as CAPEX, in 2004, on our strategy presentation, all of the numbers were presented in the context of a steady-state exchange rate of $1.60 to the pound and $1.10 to the euro.

We are obviously in a place that is well above that, and to the extent that we have a weakening dollar on a year-by-year basis, this is something that we will attempt to manage, but we are continuing to pursue the strategic investments that we had in place.

This is a very small amount, it is only one-quarter into the year.

We may find that the dollar begins to strengthen again as in fact it has over the course of the last 90 days.

So, watch this space, but we we were very clear in the guidance that we provided, and to the extent that we have a weaker dollar, and this puts upward pressure on capital.

We would expect in all likelihood some small increase in the capital across the year.

But, my remarks indicated a two percent even if the exchange rates stay where they are today.

As far as the IPO goes, we will clearly look for ways to tax optimize it, but a transaction of this type is likely to bring with it some amount of tax.

We don't know the scale of that at the current time.

And as we get closer to the event itself, remembering we haven't even segmented out that part of the business yet, we will be able to provide additional guidance.

But it is too early for you to ask the question although I would be very surprised if this can be transacted totally tax-free.

As far as upstream taxation in Russia, are you referring to the very recent decisions that were taken last week about the mineral extraction taxes and export tarriffs, Jeremy?

Absolutely, those ones.

Yes.

We have taken a look at this, and you've got to remember that the ink isn't hardly dry yet on the announcements.

It is a revenue-based tax, and what it does is impact returns at high levels of oil prices.

At $20 euro prices, so at the basis upon which we did the TNK-BP deal, it would have no impact at all, but as you go progressively from that level, a rough rule of thumb for you to use, this is based upon our portfolio and the amount of oil that we are currently exporting as either crude itself or as products, it would have about $100 million impact.

And I'm talking about on an annual basis, about $100 million impact at $25 euro prices.

That is equivalent of about $27 Brent, and it would have about a $300 million impact at $30 at euro prices; that is about $32 Brent.

So if we -- coming back full circle, Jeremy, if we had today's environment, today's environment in place over the longer-term, and both of these tax changes were to come in effect, one is not scheduled until the beginning of 2005, one is probably will go into effect in August of this year.

The annual impact against this very high oil price environment would be about $300 million per year.

The indications that the Russian government had made was that they expected to put in place a tax regime that would generate about $3 billion of additional revenues in the sort of environment that we are currently in.

From the numbers that I have just quoted, you can see that they have accomplished just exactly that.

Great.

Byron, that is absolutly great.

Thanks very much.

Going back to the U.S., Mark Gilman at Benchmark.

Good afternoon.

A couple of things again about BP TNK and Slavneft.

The Slavneft figure Byron, that you cited, is that burdened by the additional DD&A on BP's books and what is that amount?

Yes it is, Mark.

We are putting a DD&A charge of $5.00 a barrel on the Slavneft production.

That is by contrast $3.60 a barrel on the production out of the rest of TNK-BP.

That 360 compares to a number just over $2.00 that TNK-BP's is booking themselves on their own U.S.

GAAP accounts.

Okay.

If I understand the current export duty situation, we should be looking for I assume a fairly substantial increase in the export duties, and therefore additional margin pressure 90 days down the road when you report your first quarter results?

Would that be correct?

That is incorrect, Mark.

The changes in the tax regime that I was describing in my previous question or previous response, was related to changes that will not take place until later in this calendar year.

The change in the export tarriff would at the earliest go ito effect in August of 2004.

The change in mineral extraction taxes would take place at the beginning of 2005.

Byron, I was merely referring to the three-month lag.

Just be clear, Mark, I think Byron made reverence earlier that there was a contribution from Slavneft in Q1 of just over $30 million and that just about balanced out against the impact of the rise in prices in the prior quarters.

So that gives you some sense of the other part of your question which is the lagged impact or prior period, crude price, euros price increases feeding through.

So that means it's a problem we're happy to have, Mark, really because it obviously improves our realizations, but yes, there is a approximate quarter's lag there in terms of these feeding through into the TNK-BP result that we report.

Therefore, you are right, Mark.

There will be some additional upward pressure on the export tarriffs that you'll see flowing through into our second quarter results.

One more on the same general vein if I could.

Could you give us a rough idea what the channels of distribution if you would for TNK-BP were in the first quarter?

In terms of crude exports, product exports, domestic sales, etc.?

It was pretty much the same level as we experienced in the second half of 2003.

Crude exports at about 55 percent, product exports at about 15 percent, so the 70 percent rule of thumb of realizing international prices remains a good one to work with, Mark.

And then thirty percent was either sold domestically or refined in the products which were sold domestically.

And the domestic product gives you and net back roughly equivalent to domestic crude and not to international realizations?

The domestic crude prices were slightly up by about a dollar relative to the fourth quarter as you probably know.

So that gives you some sense of what the trend was in terms of the realizations from the domestic market.

Some markets are international, have more or less international prices that are realized even for domestic product.

Others don't, and I cannot speak to the mix of that.

Coming back to London, we have Mark Minoty (ph) from Merrill Lynch.

A couple of questions, if I May.

First of all, in previous presentations you have indicated that there are still a handful of restraining assets that you felt were rather structurally disadvantaged or lacked strategic fit.

As you look to exit the olefin business, should we expect to see some further rationalization of some of your refining businesses?

Secondly, Byron, again you referred in your comments to date to giving back 100 percent of excess cash flow to shareholders.

Can you make any comments on what you think the maximum buyback you could give back in any one quarter without disturbing the share price?

And also just associated with that, is it possible for you to pay cash for your AR partners for there tranch, the next traunch you have to pay September?

Mark, on the downstream, our view of our refining portfolio is in no way linked to the decision that we have taken on olefins and derivatives.

John Manzoni and his team look through and judge them on their refining capability.

We have, as you said, long thought about whether or not we have too much refining capacity in Europe, in particular in Central Europe, and this is something that the downstream team is continuing to grapple with.

But, certainly there is nothing that we are looking to do at the current time.

As buy back's go, 100 percent -- what does that means with respect to the maximum amounts?

It is our intention to distribute the cash through share buybacks.

We believe that we have the capability in the London and the New York market to accomplish our objectives without disturbing the price, and how much that means on a quarter by quarter basis will tell you in arrears as opposed to in advance.

As far as the transaction that we have with our partners in TNK-BP, this is contractually established as a deferred share deal.

We will be delivering to them in the third quarter the $1.25 billion worth of BP shares and there is no scope for that being changed.

Thanks.

Thanks very much.

John Rigby at Commerzbank.

A quick question again about the chemicals IPO potential IPO.

One of your major competitors makes a strong point about the advantage of basic petrochemicals linking with refining activities and I think those with a longer memory we remember going through the Total Elf discussions and the value petrochemical refinery.

Are you in danger of giving away operating efficiency or synergies that are permanently lost by being able to replicate it through contracts replacing common ownership?

We do not believe that the scale of those is such that it should stand in the way of separating out a business that is not providing the appropriate returns on the investment that is in place.

There may be some small loss of efficiencies associated with it, one of the challenges associated with the separation agreements must be that we try to ensure that these two separate entities can operate anyway that there are does not greatly impede the overall access of margin from the two.

Again, that will be part of agreements and structures that need to be sorted out over the course of the next nine to fifteen months.

Do you have the means of being able to assess what value exit integration is?

We do not think it is material, if we thought it was material, then we would not be pursuing the path that is outlined.

Book.

Thanks.

Neil McMahon at Sanford Bernstein.

More questions on chemicals.

I think it is quite interesting just on the last theme there that when you look at what happened at Eastman when they broke apart, commodity business from a specialty company, their management really did struggle in setting up pricing structures between the two companies since the refinery and the plants were very much linked.

Sort of looking at Grangemouth, which was to be honest probably one of the most integrated plants in world.

You've exited out of Forties, and out of the chemicals there as well.

Is there a potential that the Grangemouth refining assets should be on the block given that there really is no linkage now between these three elements?

That is the first part.

And the second part, just looking at the IPO, any idea about listing in the U.S. versus Europe?

What dividend will the speed benchmarked off?

The BP stream or looking at more the Lyondells, the Millenniums of the world?

As far as Grangemouth goes, there is no intention of doing anything at Grangemouth beyond what is already been announced.

I would remind you that although we have sold the Forties field, we still have ownership of the Forties pipeline and a lot of the production that comes through the Forties system.

The questions you asked me about the IPO are representative of the work that needs to be done in over the course of the next 12 months or so.

We would obviously have to consider whether the best home for this is U.S. or UK listing.

That will be part of the work that is undertaken and as far as dividend policy, it needs to be a company that operates appropriately relative to its sector, whatever policy that should entail.

You did mention that the Forties Pipeline System -- that is amazing when you look at the quarterly results of UK refining being not fantastic going by quite some way?

And the Forties Pipeline System pretty much has kept that asset in Grangemouth going for quite some time.

Again it just seems odd that if you've got a plant which is delivering condensate to your refinery and to a chemical plant when you actually break apart some of the linkages there, I think it is surprising that you are not considering a deep look at the Grangemouth refining assets?

We know your observations, but as I said, there is no intention of doing anything beyond what has already been announced.

Irene Himona of Morgan Stanley.

Good afternoon.

A quick question concerning production.

If we look at Q1 output excluding TNK-BP and adjusting for the disposals, it appears the underlying number was down about 3.3 percent.

What is your guidance for the year?

I appreciate the absence of the annual targets, but how do we reconcile that with the indication for 5 percent growth longer-term?

Let's be clear about this, Irene.

We have very specific guidance on an indicator for this year which we gave in February and we repeated again on March 29, which is that production this year will be up by more than 10 percent from around 3.6 million barrels a day last year to over four million barrels a day this year.

We stand 100 percent behind that today.

Nothing has changed.

Secondly, in terms of the guidance indicator over the next five years, the average growth rates that we gave on March 29 were five percent, excluding TNK-BP and 7 percent including TNK-BP and we stressed that those are averages over that period.

Each quarter, each year may very significantly from that average.

So, that is the guidance and absolutely nothing has changed.

Clearly, in terms of this year, the first quarter as you say when you adjust for the divestments, and lets leaving the actual production up over 11 present of course.

BUt leaving TNK-BP off to one side, production excluding TNK-BP was down slightly by about 3 percent after allowing for divestments.

You are well aware of course there's some very major projects coming on towards the end of this year.

Those projects will of course start to boost the non TNK-BP volumes in such a way that we expect the full year outcome to be that non TNK-BP production will be around flat for the year but with an accelerating pace as we move through the end of 2004 and into 2005.

So no change at all basically Irene, is the short answer to the question.

Colin Smith at CSFB.

Good afternoon, gentlemen.

Quick question on the share buybacks.

I appreciate you're not going to tell us in advance what you are going to do.

But in April, share purchases were at a much lower rate then they were in the first quarter which presumably was to do with the structure you had in place for purchase during the fourth period.

But perhaps you could say something more generally about your philosophy and approach to how you are looking at returning excess cash and over what sort of periods you're trying to balance it up and how that fits with your gearing targets?

Thank you for the question.

The small amount of buybacks that have occurred today to in April were a consequence we put in place an irrevocable order with brokers for this period of time.

We were testing out the process.

Since it is irrevocable, it means that if any of the constraints were met, then there was no ability to do anything about it.

And admit some of the constraints and therefore we bought back somewhat less than we had originally anticipated over the closed period.

We've learned from that process for going forward.

It is useful to take a look at the slide that I showed that looked back at the slide that both John and I showed on the 29th of March.

From that, we indicated that we would have the capability of distributing about $35 billion to shareholders in an environment that was $30 oil, $5.30 natural gas prices, Henry Hub basis; $2.70 refining margins.

And if you move through a progressive dividend over this three-year period of '04 to '06, somewhere around $20 billion of that might be appropriately earmarked for dividends, which would leave approximately $15 billion or about $5 billion a year for per-share buybacks.

That was the context in which we bought back $1.25 billion worth of shares in the first quarter of 2004.

I should note that the environment that we are currently instant experiencing, if we look at the first quarter metrics, oil prices, Brent prices were $32 a barrel so a couple bucks above the KC.

Henry Hub gas prices were $5.70 in mcf, 40 cents above the the KC boundary.

And refining margins were actually almost $2.00 higher than the KC metrics.

So we are running at this stage well above the KC indicator that we provided to investors.

It is not our attempt to balance this over the course of a quarter by quarter basis, because cash flows swing in and swing out.

The 4Q versus 1Q experience we have just gone through is a very clear indicator of that.

But, what we will do on an annual basis is to cite what we expect to be the environmental outturn of what we expect to have as cash beyond what we need to fund investments, to fund our dividend, to fund any pension obligations; and yet insure that the gearing ratio is not sitting as it is today substantially below the lower end of our band.

Then, progressive buybacks on that basis.

So, it should -- today's environment continue to be in place, you should expect some substantial buybacks to be in place across the rest of this calendar year.

It is our intention not to maintain a gearing level at the level it is at the end of 2000 -- or the first quarter of 2004.

Neil Morton (ph) with DKW.

I'm here, a follow-up question on buybacks in fact.

And just firstly, could you quantify that slide from last March on the buyback amounts, whether that does include any assumption about the chemicals IPO?

And just secondly, will you be in closed period around the time of the issuance of the new BP stock in late August and September?

The slide that we showed on the 29th of March has no considerations for the IPO or any other mechanism for the disposal of olefins and derivatives.

The financial framework we laid out was premised on a net $1 billion a year of divestments.

So this would be beyond that normal cleanup and therefore, additional cash available for distribution.

As far as -- I'm sorry I forgot the second part of your question.

Yes, we will be in a closed period, a very real closed period at that time.

Contractually with AAR, we cannot be entering the marketplace during the period of time in which the pricing of these shares are set.

So, the months before the distribution of the AAR shares will be a closed period from a BP context.

Just to confirm, that is late August?

That would be the end of July and most of the month of August.

If I remember correctly, on the 29th of August.

Thank you.

Well, that appears to wrap up all the questions.

Thank you very much indeed for all those questions.

Thank you for your patience, those who had to wait longer to ask their question.

We, in the investor relations team, remain ready to answer any further questions you may have, either later today or in the future, and just like to thank everybody for listening.