英國石油 (BP) 2007 Q2 法說會逐字稿

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

I'll now hand 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.

It's my pleasure to welcome you to BP's second quarter 2007 conference call.

My name is Fergus MacLeod and I'm BP's head of investor relations.

Before we start, I'd like to draw your attention to a couple of items.

First, we will refer to slide used during the webcast.

Many of you will already have received them by e-mail.

If you'd like to be placed on the e-mail list for future releases let us know.

Second, I need to draw your attention to this slide.

We may make forward-looking statements, which are identified by the 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 and in our filings.

It's now my pleasure to introduce BP's new Chief Executive, Dr.

Tony Hayward.

Thank you, Fergus.

Ladies and gentlemen, welcome to our second quarter results presentation.

This is, of course, something of a landmark for me, as these are my first set of results as BP's Chief Executive.

In today's world it's become traditional for a new leader to be judged on their first 100 days in office.

This is my 95th day, so I hope you don't mind if, in addition going through the quarterly numbers, I use this opportunity to take stock of the Company from the perspective of a new CEO.

It's been a busy period.

I've been doing what I promised to do at the outset; focus on the Company's operations.

And to that effect I've been urging everybody to concentrate on the same three things; safety, people and performance.

Whilst my travels to Russia have received a lot of press coverage -- and I'll say more about that later -- much more of my time has been spent visiting our facilities around the world, especially our refineries in the U.S., talking to our people.

And I've been impressed by the dedication and teamwork I've seen everywhere in BP.

However, my message today is simple.

BP's current operational performance is not good enough.

This has impacted our financial performance.

I'm determined to fix this.

The solution is clear.

Restoring our operational performance is the best way of restoring our financial performance.

Doing this will put momentum back into the business and BP back at the forefront of the energy industry.

I'd like to start today with some of the good news.

We now have greater clarity over several issues which were creating uncertainty.

In the U.S., following the publication of the Baker Panel report in January, we're implementing its recommendations and the board has appointed an independent expert to review that process.

In Russia, we and our joint venture team, KBP, agreed to examine a strategic alliance with [Gazprom] and found a way forward for the future of the Kovitka gas field, and in the board room management succession has been resolved.

These are important issues where I'm glad we've made good progress.

My executive team is in place and we're enjoying working with each other in our new roles, and I'm particularly happy to confirm that Byron Grote will remain as our Chief Financial Officer until the spring of 2009.

Of course there are remaining outstanding issues, but we're working hard on resolving those, too.

I'm also pleased that as well as making significant progress dealing with the short-term issues facing BP, the team has also kept its eyes on the longer term.

We maintained our strategic momentum in the first half of 2007 and have taken important steps to further strengthen our asset base.

In our Exploration and Production segment we sanctioned a series of major projects, including the expansion of our San Juan coalbed methane operations in the U.S., [Scarving,] Norway, and the expansion of our gas-handling terminal in the southern North Sea.

We signed major deals in [Aman], where we could access between 20 and 30 Tcf of gas resource and in Libya, which is the biggest ever exploration commitment by BP.

We had continuing exploration success in Angola, Egypt and the Gulf of Mexico, and we signed a memorandum of understanding to enter into a strategic alliance with Gazprom.

I'm particularly pleased about the latter, because I do not think enough credit is always given to the success of our Russian operations.

A strategic alliance with Gazprom has the potential to herald the next stage play for BP and the Russian economy in general.

That next stage will likely see the increased importance of reciprocity, where instead of Russia simply receiving inward investment, Russian companies themselves start to invest abroad alongside companies like BP.

Reciprocity with Russia, and indeed with many other countries, could become one of the next major trends in our industry.

In refining and marketing, we upgraded our European portfolio by taking full ownership of Noresco and selling [Carlson].

We expanded our biofuels effort, endowing the Energy Biosciences Institution in the U.S., and signing a deal with DuPont and associated British Foods for the construction of a bioethanol plant.

And we signed a joint venture with D1 Oils to develop a sustainable biodiesel feed stock from jatropha, a drought-resistant plant which does not compete with food crops.

In alternative energy we continued our investment and began construction of mega cell solar plants in Bangalore and Madrid.

In wind power, by year end we will have 450-megawatts of capacity in the United States and India.

We've also signed a joint venture with Riotinto to form Hydrogen Energy which will develop [decalvonized] energy projects around the world.

So there is plenty of good news and we should keep that in mind when I get on in a moment to where BP is not doing so well at current operational performance and the impact it is having on our competitive financial performance.

Byron will go through the results in detail.

The absolute numbers are large, but one most key measures our competitive performance in the first half was disappointing.

Our replacement cost profit declined 8% to $10.4 billion compared to the same period last year, and our post-tax cash flow fell 22% to $14.1 billion.

Frankly, our financial performance is not good enough.

I'm determined that it will improve.

We should and we can do much better.

I recognize that many shareholders will be disappointed by our competitive performance.

Let me reassure you we share their disappointment.

The principal cause of our financial underperformance is missing revenue, either from refinery outages in the U.S.

or delayed upstream projects.

We will improve revenues by restoring refining reliability in the U.S.

and bringing on-line projects, such as Greater Plutonia, Atlantis and Thunderhorse.

Byron said at the time of our first quarter results that 2007 will be a year of consolidation of restoring stability.

That process is underway.

Some of you will want me to give a precise timetable to say exactly when we can expect to see a recovery in BP's performance.

but rather than to make optimistic predictions I'd prefer to concentrate on real delivery.

What I will say is that I am determined that we should see progress by the end of the year and that the momentum will build steadily through 2008.

Our production and CapEx guidance the 2007 issued in February is unchanged, as is our projection of future project startups.

However, in the near term, I expect to see continued pressure on earnings and free cash flow from cost inflation in the industry supply chain and higher depreciation charges.

We also plan to make fewer disposals than last year.

By this time next year the picture should be much clearer.

I'm going to say more about the changes we intend to make in order to restore our performance in a moment, but now over to Byron who will take us through the results in more detail.

Thanks, Tony, and good day to those joining us on this call.

Before discussing our results, I'd like to draw your attention to the additional disclosure in our Stock Exchange announcement related to the effect of IFRS fair value accounting, uncertain of our inventories.

I've made it clear on a number of occasions that these are only timing effects.

That over time they tend to wash out.

and that as a result we consider them part of underlying performance and not as nonoperating items.

All of that remains true, but I also recognize that in individual quarters these effects can be significant, especially in volatile markets, and that many of you have requested additional disclosure.

We've responded by providing details on these effects for refining and marketing and gas power renewables on page 10 of the Stock Exchange announcement.

I hope that you'll find this information helpful.

I'll now begin my review of the quarter with the trading environment.

The table shows the percentage year-on-year changes in BP's average upstream realizations and the industry indicator refining margin for the second quarter, as well as year to date.

Our average 2Q liquids realization of $63 per barrel was significantly higher than the previous quarter, but comparable to a year ago.

Our gas realization of around $4.50 per thousand cubic feet was also similar to that experienced a year ago, but was 8% lower than 1Q.

Taking both oil and gas together, our 2Q hydrocarbon realizations were comparable to last year and 10% higher than the previous quarter.

Refining margins continued to set new records, as the industry entered the driving season with historically low refining utilization and product stocks in the United States.

Our second quarter refining indicator margin of almost $17 per barrel was 32% higher than 2Q, '06.

However, the margins realized by our own refineries did not increase to the same extent because of our product mix and low refining availability in the United States.

Turning to the financials, our replacement cost profit of $6.1 billion was comparable in absolute terms to 2Q, '06.

Our profit, including inventory gains and losses, was $7.4 billion, similar to last year and up on a per share basis, reflecting the benefit of the 5% reduction in our shares outstanding over the past year.

These figures include gains of around $750 million for nonoperating items.

I'll describe these items in more detail when discussing individual segment results.

Operating cash flow of $6.1 billion was significantly lower compared to a year ago, primarily as a result of working capital movement.

The $0.10825 per share dividend announced today, which will be payed in September, is 10% higher than a year ago.

The Sterling dividend is roughly the same year on year, reflecting the sharply weaker dollar.

As Tony's already indicated, the first half results shown at the bottom of the page are down year on year.

Turning now to our segments, in ENP we reported a pretax profit of $6.9 billion for the second quarter, which included approximately $400 million of nonoperating gain in respect to disposals and Embedded derivatives related to certain heritage long-term North Sea gas contracts.

Excluding these nonoperating items, our underlying result was $6.5 billion compared with $7.3 billion last year.

This reflects lower volume, continued sector-specific inflation, greater integrity spend, and higher DDNA charges associated with primarily with a change to SEC reserves reporting guidelines and increased decommissioning provision.

Reported production was 3.8 million barrels of oil equivalent per day, a decline of 5% compared with a year earlier.

After adjusting for the effect of disposal, and the impact of lower entitlement in our production sharing agreement, production for the quarter was down 1%.

Full-year production in 2007 is expected to be in the range of 3.8 to 3.9 million barrels of oil equivalent per day as outlined in the guidance we provided in February.

Our Refining and Marketing result increased 48% to $2.7 billion in 2Q, '07.

This included a gain of around $770 million for nonoperating items, mainly related to [quartz] and disposal gains.

Excluding these nonoperating items, our underlying result was $2 billion compared to $2.3 billion a year ago.

The benefits seen from the stronger margin environment and recommissioning of Texas City were more than offset by the impact of operational issues at a number of our U.S.

refineries; in particular, lower availability at Whiting, which I highlighted in the 1Q webcast.

The operational issues at the Whiting refinery have limited the sites ability to make low sulfur gasoline from sour crude oil.

Repairs are ongoing and we expect to resume sour crude processing in the fourth quarter.

Completion of the work will restore the refinery to its full flexibility and crude capacity in the first half of 2008.

In addition, the quarter's result reflects greater integrity spend, lower supply optimization benefits, and favorable fair value accounting effects.

In Gas, Power and Renewables, we reported a pretax profit of $190 million compared with around $450 million last year.

This included a small charge for nonoperating items related to imbedded derivatives.

Our second quarter underlying results was $226 million, reflecting a lower marketing and trading contribution, growing expansion in alternative energy, and a favorable fair value accounting effect relative to 2Q, '06.

In other business and corporate, or OB&C, our second quarter underlying charge of around $200 million was comparable to last year.

Our expected full-year underlying charge remains consistent with the range that I indicated back in February.

Turning now to cash, this slide compares our sources and uses of cash in the first half of 2006 and 2007.

Operating cash flow decreased to $14.1 billion, primarily as a result of working capital movements due to increasing oil prices.

Disposals provided a further $3.7 billion.

In total, sources of cash were almost $18 billion.

We used this cash to fund $8 billion of organic capital spending, $1.2 billion of acquisitions, plus $8.5 billion of shareholder distributions.

Our net debt ratio remained flat and at the bottom end of our targeted band of 20% to 30%.

In the current environment we expect to remain in the lower portion of this range.

Shareholder distributions for the first half of the year were $8.5 billion, dividend payments that totaled $4 billion, and we bought back $4.5 billion of shares.

The pace of our share buyback program in 2007 is slower than in the last two years.

The level of our share buybacks is determined by our free cash flow, which is currently missing several big revenue generators.

In addition, 2005 and 2006 benefited from high disposal proceeds, including the sale of Innovene.

We don't expect such large disposals in 2007.

Our financial framework is unchanged.

We remain committed to distributing 100% of excess free cash flow to investors, other factors being appropriate.

That concludes my remarks.

Now back to Tony.

Thank you, Byron.

As I've already said, over the last few months I've spent a lot of time visiting our operations.

I've enjoyed talking to our people and hearing what they had to say.

Based on those conversations and what we've seen around the organization, my team and I have developed an agenda based on three very simple priorities; safety, people and performance.

First safety.

We're ensuring that we have consistent, safe, reliable operations across BP.

We're implementing the Baker Panel recommendations.

We're also in the early days of establishing a new way of operating in BP, with the progressive rollout of a common group-wide operating management system.

Both of these actions are aimed at improving the capability and consistency of our operations.

Second, people.

We are focused on increasing our operating capability through investing in training and recruitment.

We're in action, deploying people from the office into the field, expanding our operating work force, ensuring we have the right people in the right place and keeping those people in position longer.

To support all of this, we're also putting in place a new training program; operating essentials for all levels in the organization.

In terms of culture we're focused on increasing openness and transparency throughout BP.

We need to listen to people on the front line to recognize that bad news told early enough to act on is good news.

I want to create a culture where everybody has a voice and where every voice is heard.

And finally, we need to restore pride and confidence in our Company.

In the midst of the difficult events over the last few years, we should not forget that BP, like all companies, is not just a collection of assets but a group of people working hard every day providing energy for the basic necessities of life.

I'm proud of what they do and they should be, too.

In terms of performance, the focus is twofold..

First, we will restore revenues by bringing the refineries in the U.S.

back to capacity and by starting up our major upstream projects.

The second focus is on simplifying our organization, reducing complexity and eliminating unnecessary activity.

We will improve the efficiency of the group.

We can be more efficient, leaner and fitter by ensuring we have a common and consistent way of doing things, by reducing our overheads and doing a better job of managing our third-party spend.

For now, though, the priorities are clear.

The focus is on safety, people and performance.

Through delivering this agenda we firmly believe that BP will rediscover its winning ways.

In summary, BP has great fundamentals.

Our strategy has been hugely successful in building an asset base that is the equal of any in the industry.

When we are good, we're really very good.

Azabaijan and Russia are great examples, but we're not consistent enough.

We will change that.

Our financial framework is robust and we remain committed to distributing all excess free cash flow to shareholders.

What we need to do now is to get the plant running and keep it running everywhere.

We're gaining our momentum by focusing on the three priorities of safety, people and performance.

Thank you for listening.

Vivienne, Byron, Andy, Iain and I will now be very happy to take questions.

(OPERATOR INSTRUCTIONS)

Thank you, operator.

Now we'll go to the first question and that question comes from Neil Perry at Morgan Stanley.

Good afternoon, Neil.

Afternoon.

Tony, you talk a lot about restoring the operational performance, but since you've been Chief Executive and looking not just at the upstream but the downstream as well, what do you think the cause is of BP's operational underperformance?

And why did you get in this situation, because surely to fix it you have to look at the problems and determine whether there has been some sort of systemic issue in the way projects have been executed or plant has been run in the past?

And then just sort of a side line, you've not mentioned Thunderhorse in your comments, and I just wondered whether we can assume from that that everything's still on track for end 2008 on Thunderhorse?

Thanks very much, Neil.

Let's just get the Thunderhorse question out of the way.

Everything is on track.

Nothing has changed with respect to Thunderhorse and we've made good progress hitting the marks of things that we've set out for ourself this year.

It remains on track for startup before the end of 2008.

I think if you look at our operating performance, it is exactly what I said, Neil.

It is not consistent, so our issue is one of ensuring real consistency and that is about capability and confidence in the organization, and that's what the program is about.

So we're tackling it through two [axis], as I described.

First we were making certain that we have common and consistent standards that are adhered to and implemented everywhere, and secondly we're ensuring that we have people with the competence and capability everywhere across the organization.

So I think you're quite right.

You have to look at the root cause of our operational issues, and I think we've done that and understood what they are and have taken action to put it right.

To be fair, I think we've been at this now for at least 18 months, and I would expect the -- that program to begin to pay real dividends for us.

I think if -- just compare it with projects, I think we've made enormous progress on projects in the last three or four years.

Back in 2002 we set up a different way of doing projects in BP, and we seen the benefits of that in Azerbaijan and Trinidad.

It's about standardization, it's about common component parts, it's about repeatability.

We're still living with the legacy of a couple of things that started before that program was put in place, but I think we were clear about what we need to do.

Okay.

Thank you.

Thanks, Neil.

We'll now go on to Jon Rigby at UBS.

Jon, are you there?

First, on the downstream and thanks for (inaudible) the clarity over the accounting issues there, but obviously we can drill out further and I just wonder whether you're able to give some indication of the earnings shortfall in the quarter as it regards Texas City and then also to do with Whiting and whether you can then split that between what you think the opportunity loss was of having problems in those refineries?.

Also, what is the on-going costs have to do with infrastructure and rebuilding the people and site, which will go away once that operation is finished and then the two refineries are restored to full operation?

Then just the second question, if I could, it's really to Tony.

You focused on a lot of internal stuff, is that going to continue to be the main part of your time or do you have time to get your head up and look around strategically?

Clearly in the (inaudible) things are changing rapidly.

Well, okay, Jon, thank you for that.

Let me ask Iain to talk about refining and then we'll try and give you as much clarity as we can about where we are and what it will look like going forward.

Well, Jon, thank you for the question.

I think first of all on the first part the earnings shortfall in the quarter, I think the only indication we have given and are prepared to give is the indication Byron gave at the end of the first quarter about Whiting, which is that the overall impact of the prevailing margins at the time would be about $100 million a month, and we would expect that sort of impact to continue until the sour crude capability starts to come back to Whiting in the fourth quarter.

Now without trying to lead the audience from using public information, Whiting is currently running at about 250,000 barrels a day and is running sweet crude when it should be running a mixture of sweet and sour.

Texas City is running at 240,000 a day and it should be running at -- running a mixture of crude.

So you can probably gain a pretty good idea of the impact from both of those refineries being out in the prevailing environment at the end of 1Q, simply by doubling the Whiting number and I don't believe that's anything other than common sense.

In terms of the opportunity loss in total, therefore, I think that gives you a sense because that's the majority of outages we've had.

As far as looking forward's concerned, we don't give indication of what's going to happen in the second half, but I can help you a little bit with just four qualitative points.

The first one is, in the second quarter our refining availability was 1% up on the first quarter and that was despite Whiting being down, so there's some underlying momentum there.

Secondly, the 100 a month that Byron indicated, which clearly will be falling as the sour capacity comes up, Texas City's impact will also be falling as we get towards the 400,000 barrels a day we reconfirmed we'll hit by the end of the year.

That's due to the second crude train coming up in the fourth quarter.

And finally, our turnaround schedule, which we don't publish the details of, in the second half will be lighter, however, than the first half.

All of that should give you some sense of momentum.

Okay, thanks.

Thank you.

In terms of your second question, Jon, I clearly have been spending a little bit of time internally, but I have also spent -- as you will have noticed if you read the newspapers.

They said that the time in Russia, which has very definitely been about the external agenda.

And I think I'd like everyone to know that, as well as fixing the issues we have operationally we're every bit as focused as you would expect us to be on ensuring that we make the right strategic moves of BP going forward.

Thanks.

[Now] I'd like to Nicki Decker at Bear, Sterns.

Good morning, Nicki.

Yes, good afternoon, everybody.

Just on the downstream theme here, I am trying to translate what you were talking about at Whiting in terms of restoration to utilization and product yields, and it sounds to me like utilization at Whiting will not rise by the end of the year nor will product yields.

Maybe you could talk about how those will rise in the restoration process?

Also at Texas City, the expected processing capability by the end of the year is 400,000 barrels a day.

That is that below rated capacity.

Do you expect Texas City to be fully operational by the end of the year?

Let's go back to Iain and see if he can shed more light from this for everyone.

Okay, I think first the Whiting -- thanks, Nicki.

Whiting's currently running at about -- and I see a question on the web, so I'll just try and answer that at the same time.

Whiting's currently running about 250,000 a day against what is an effective capacity in a clean fuels world of about 360,000 a day.

And it's currently running sweet crude oil where, of course, we'd like to be able to run sour.

So two things are going to happen as we move toward the end of the year.

Firstly we're going to get, as Byron indicated, about 300,000 a day on crude oil, and secondly we're going to progressively introduce sour capability into the mix as we bring on the first sour train.

We don't expect to bring on the second sour train until sometimes in the first half of '08, as we indicated.

So what you will see is an increase in overall production, which will mean you will see higher gasoline and middle [distalit] production, and we will see a higher conversion rate as we take in more sour crude.

So the yields will progressively be restored to more of an upgraded refinery based on sour, but in fact we do have quite a high gasoline yield at the moment because we're running on sweet.

So the up-shot of all that is you probably won't see so much on yield but you will see quite a bit on throughput.

As far as Texas City's concerned, we are currently running at about 240,000 a day.

We are running on only one of the two big distillation units.

In the third quarter we'll be bringing up a product cluster, which will consist of some distolate desulfurization units and we'll also be bringing on hopefully one of the other crackers.

That's going tol increase the yield in advance of bringing on the second crude train in the fourth quarter.

So both refineries will see an increase in yield and an increase in overall volume, which I think gets back to Jon Rigby's question about momentum.

The final part of your question was will we see full restoration to Nameplate at Texas City, which is about 460,000-470,000.

The answer is no.

We indicated before that we would see full beneficial production in Texas City in '08 and the remaining upgrading units that will give us that final 50,000 to 60,000 barrels a day won't happen until the first half or middle of '08 would be my guess right now.

Great.

Thank you, Iain.

If I could just ask one more question on Whiting.

You had talked about a year ago of a $3 billion investment in that plant, and I think that I saw some headlines talking about that investment.

Is that something that is currently in your plans?

It is absolutely.

We're completely committed to upgrading Whiting to a predominant diet of Canadian crude and that investment involves a new distillation column and a very new large new coker and various other other units.

We still plan to go ahead with that in 2008 as indicated.

Where are you on that project?

Sorry?

Where are you on that project?

Are you in a design phase?

Can confirm we're not in the design phase, but we've ordered some of the long-lead items, which is public knowledge.

Very good.

Thank you.

Thank you, Nicki.

Now back to London to Neil McMahon at Bernstein.

Two questions, the first one really for Tony.

How will we -- or what could we see as being milestones going forward in terms of you fixing operations?

What should we be looking for really over the next six to nine months in terms of your making quarterly announcements or indeed press releases that will give us a sense of where you're getting from the operational performance of the Company or do we have to wait for the quarterly numbers to come through?

And secondly, do you think that with this main focus on operational performance you need a COO to help you really get things kicked off for at least, say, the first year of your CEO tenure?

Thank you for the question, Neil.

I'll take the second one first.

As far as I'm concerned I have three COO's, each one of them running the principal business.

And Andy Inglis was running ENP, Iain Conn running R&M, and Vivienne running Gas, Power and renewables, so I don't think we need a COO.

We need to make certain everyone's focused on the operation performance.

I think we won't be issuing press releases or anything such -- anything along those lines.

We'll let the numbers speak for themselves and what you should expect to see is, as we're saying, as we go through the second half of this year and into 2008, momentum progressively building in terms of our underlying operation performance.

Great.

Maybe just one last question, just on Russia.

In terms of the subsoil load getting developed, I don't know if any of your conversations when you've been negotiating with Gazprom have underpinned what is going to happen going forward.

I suppose more specifically, with the current TNK-BP asset base or whether you expect any more changes of the ownership of assets that you currently own through --?

Well, I think all I can say on that score, Neil, is that we're happy with our 50% and we intend to keep it and continue to invest into TNK-BP on that basis.

And, of course, our shareholders -- our fellow investors and shareholders they'll have to talk for themselves.

Great.

Thank you very much.

Thank you, Neil.

Now I'd like to pass to Tim Whittaker at Lehmans.

Tim, are you there?

Yes, good afternoon and welcome to this quarterly update process, Tony.

I'd like to ask you a question about your trading business.

You said in your slide you had the lowest supply optimization contribution.

I think it's pretty well known that quite a number of your traders left in recent months.

Could you say by how much the trading contribution fell, and could you say if your philosophy around trading may have changed in the new leadership era?

And also have a quick question around cats, if you can update us on the operational progress around the cat's outage?

Let's start from trading and then I will go to Byron and then I'll ask Andy Inglis to talk about cat.

I think first and foremost I would say -- and this has been true forever -- this is primarily about supply optimization, and the trading is something that we do over and above satisfying optimizing supply around our asset base, I think in terms of losing people there's no doubt that we've lost a few more people than we would have ideally wanted to this go-round, but anyone who follows this particular market will know it's a -- today it's a very hot market for good traders.

And it's simply a case of we're seeing moving into this area a large number of the investment banks.

So whilst we don't like to lose people, what we're not going to do is pay silly sums of money to retain people.

Byron, anything you'd like to add?

Yes.

Tim, as Tony said, the heart of it, we lose traders, we recruit traders.

This happens all of the time.

We obviously are very experienced in physical markets and therefore some of the attraction of the people whom we've lost over the course of the last quarter or so.

But we've a deep bench strength on the team and there's nothing that is occurring that is in anyway reshaping the way that we manage our business and the activities we're involved in.

Let's just -- Andy can give you an update on cats.

Yes, hi, Tim.

On cats, we've literally got a team of divers now on location who are inspecting the pipe as we speak.

And then clearly, the forward plan in terms of the nature of a repair, whether a repair is required, will depend on that assessment.

I think we'll know more in about a week from that inspection and then we'll update folks then.

I think it would be sort of premature to speculate on any other basis than that.

So inspection going on and probably within about a week we can give you an update, and you should have in your head that any repair will take several weeks.

Okay.

Byron, can you give an indication of by how much the supply optimization contribution fell?

We don't provide that disclosure and we won't on this occasion either.

Okay.

Thank you.

Thanks very much.

We've got one question from the web which I suspect is directed at Andy, which is from [Thomas Hackel] at [Hackel] Asset Management in the United States.

How much production -- what impact will it have on your production profile when Atlantis and Greater Plutonia come on stream by the end of this year?

Yes, by the end of this year -- and I think that's the point -- so I [guess it's] probably too early to look at exactly what the contribution would be in the fourth quarter, because clearly it's going to depend on the -- exactly when the startup is in that time period.

As you all know, the contribution from both of these projects is significant when they're on plateau and each at around 100,000 barrels a day on plateau, and then clearly any fourth quarter impact will depend on when they start up, but clearly nowhere near that sort of rate.

Right.

We'd now like to pass on to Ed Westlake at CSFB.

Ed?

Yes, good afternoon, everyone.

Two questions.

Obviously we've talked about the operational improvement coming back from the assets, but are there any other plans across the business to squeeze more cash flow from the assets?

I'm thinking cost cutting, reliability, improvements, and is there any scale of some kind of a cost cutting target?

And then the second question is just specifically on TNK.

Obviously, at the moment you will spend more to keep the western Siberian fields going, but moving to a greenfield phase.

Where do you think CapEx is going to go at TNK-BP?

Thanks.

Great, Ed, thank you.

I can confirm there is no cost cutting targets at all.

What we are focused on is seeing if we can reduce some of the complexity of the group and make it a bit more streamlined, allowing us really to focus on operations.

So in large part it is, in effect, redeploying resources from overhead to the operations, so we don't have any major cost-cutting initiatives or anything of that sort.

In terms of TNK-BP, this year they're investing around $3.5 billion.

It's limited as we said on a number of occasions, not by opportunity but by the capability of the organization there to execute greenfield projects.

We have to build the capability.

As I said before, these will be the first set of greenfield projects undertaken in Russia for some time, along with some of the greenfield projects that some of our competitors in Russia are now beginning to undertake, so we need to make certain we do it properly.

I would not expect the investment level in TNK-BP to rise much above $3.5 billion to $4 billion over the next year or two.

It will depend somewhat on the rate of Russian ruble inflation.

Much of the costs in Russia are ruble denominated and Russia -- the ruble is appreciating at about 10% a year or bit above that at the moment, so it will depend a bit on that.

But as I said, in terms of the activity we're pretty clear.

Thank you.

Thanks, Ed.

And now on to Mark Iannotti at Merrill Lynch.

Mark?

It's a great question for Tony.

Tony, could you just make some comments on where you see the oil price going, where you -- what you think the outlook is for refining margins over the next couple years and how this will influence your strategic thinking, if at all, as you look to tour around the Company?

I think on the oil price we will believe that prices are robust for the short and medium term.

Don't ask me what the medium term is because I'm not certain any of us could clearly articulate it, but I think it's dri -- I think we all understand it's driven by a very strong demand, and until that demand diminishes it's seems to us that prices will be pretty robust, certainly short run.

I think the longer term, which is, of course, the question when you come to strategy, is much, much trickier to call, and you have to look to history and reflect that the industry has called it wrong.

When the oil price was $10 everyone said it was going to go to $5.

And now it's at $70, everyone's saying it's going to go to $100, so I think we will remain quite thoughtful about what makes sense longer run.

And of course, this is a long-run business.

Very few of the investments that we make remunerate themselves within a ten or 15-year time period, so I think we will remain thoughtful and perhaps a little conservative in terms of the long-run price that we test our [put-its] at and we certainly will continue to test them into the low to mid 30s sort of price range for oil.

I think in terms of refining margins, first thing I'd observe is the extraordinary volatility.

And it's clear that, certainly in the U.S., we seem to be -- because again of strong demand and in this case reliability issues -- set for a period of relatively high margins.

Again, I think it's difficult to call that as being a long-run trend.

People are going to continue to expand capacity, and I would expect that we will see demand pattern shifts in the U.S.

over the next three or four years, as the U.S.

gets very serious about energy efficiency and the whole climate changed [about].

So it would be surprising to me if the demand patterns that we've seen in the U.S., in particular, the last few years are sustained certainly over the next four or five years.

So I haven't been very precise, but (inaudible) just as well, Mark.

Okay, thanks.

Thanks, Mark.

Now Irene Himona of Exane.

Good afternoon.

You highlighted the near term continuing pressure on free cash flow, and I just wanted to ask a couple things on the sources of that pressure.

First of all, what upstream cost inflation are you experiencing, is that accelerating, and are you still able to offset some of that?

And secondly, as you come to implementing the -- the Baker Panel recommendations and undertake the integrity spend, are you perhaps finding that that is taking a little bit longer and costing more than originally expected?

And finally, when you talk about near-term pressure on free cash, I was just wondering how long the timeframe might be?

Thank you.

Let me ask -- and thanks, Irene.

Let me ask Andy to talk about the upstream cost of inflation.

I'll cover integrity spend and what I mean by near term.

Yes.

Hi, Irene.

We think we're still continuing to see pressure in the upstream.

If you look at the -- on the capital side, it's probably sort of over 10%, and I'd say we would see the market probably moving closer to 14% and we're able to mitigate 1% or 2% of it.

Tony's talked about some of those mitigation methods.

It's about standardization of the concepts which we're pulling through now; standardization of the components and actually creating greater longevity of some of the contracts that we have with our suppliers to create greater buying power.

So those things are ongoing and I think we are managing to sustain some improvement versus the market.

On the operating cost side, it's probably sub 10% at the moment, but certainly close to it.

I think the market's probably moving at sort of [ninish] and we're probably mitigating maybe 1% of that, so 7% to 8%.

And again, it's similar of processes to try [integrate] greater buying power through way in which we operate in our big centers in North America and the growing center we have in Azerbaijan,Trinidad, et cetera.

But on the operating side you're clearly seeing in real wage inflation coming through.

which is the major underpinning feature.

So I think it is sustaining and it is a real issue.

I think in high price world today driving cost efficiency is as big an agenda as we have and that's fundamentally about how you execute and using the fundamental strategic approach of having larger fields develop to drive greater competition.

Okay, thanks, Andy.

On integrity, Irene, we're going to be investing around $5 billion across the group on integrity investments this year.

It's about two-thirds OpEx, one-third capital, and that's up from the $4 billion in 2006.

In terms of what do I mean by near term, it's the second half of the year because we're -- what we won't see is the big new sources of cash, either in terms of upstream project startup or the two big refineries coming back until into the fourth quarter, so it's through the second half of this year.

As we go into 2008, of course, we will have significant new sources of revenues, which will significantly strengthen the group cash flow.

Thank you.

Thanks, Irene.

Now I'd like to move on back to the United States and to Robert Kessler at Simmons & Co.

Hi, Robert.

Hi, good afternoon.

A quick question on your taxes.

It looks as though for the second quarter in a row you've a favorable cash tax benefits.

Wondering if you might highlight the reasons why those transpired in the second quarter and then provide an update to your guidance in the long term for the cash tax rate?

Thanks, Robert.

Let me go to Byron to give us that.

There is nothing particularly unusual about the tax payments.

I realize that they're down from the second quarter of last year, but if I could step back from the timing of cash payments, which by its very nature is choppy, to the effective tax rate throughout our operations, I said at the start of the year that they would be in the 35% to 37% range for this year.

That continues to be our view in spite of a small dip of it in the second quarter.

And that sort of range, at least as we look at it today, seems robust for looking out across the end of the year into 2008 as well.

Byron, then you expect by default a working capital detriment on balance for the second half of the year as you catch up on a cash basis?

I think that's a reasonable expectation.

Again, to some extent the cash tax paid is a combination of timing, as well as various considerations that would impact our payments, and that will be always running at a slightly lower rate than the effective tax rate.

What you're suggesting as far as catch up is typical for a calendar year and 2007 should be no different than that.

So you are right on in your general direction.

Thanks very much.

[I'm staying in the] United States with Martin Gilman at The Benchmark Company.

Gentlemen, good afternoon.

I had a couple things if I could, please.

First, Andy, give us an update, if you could, where we stand on the potential sanction of development project block 31 in Angola?

Secondly, reading between the lines a little bit in terms of looking at rest-of-world gas volumes and also the minority interest on the income statement, looks to me as if there might be a shortfall in Trinidad gas production in the second quarter of some substance, and was wondering if you might be able to address that?

Thirdly for Tony, regarding the -- the Kovitka arrangement, I'm curious if you could be specific as to whether there was any quid pro quo in that arrangement relating to the development of other Russian assets and why it is that perhaps you did not walk away from that with a minority interest without the call at market price, similar to what we saw evolve in the situation with [Socklanto] and Shell?

Thank you.

Are you still there, Mark?

You just --

Yes, I am, Tony.

Yes, okay, why don't I go --

Block 31 in Trinidad.

Let's start with Trinidad first.

Certainly no shortfall in gas volumes at the 11 mark.

The upstream performed pretty well.

We probably didn't get it to full operational efficiency on train four in the quarter, so I'd say in a very small amount in volumes were down, but I think in terms of the overall -- the supply position it was pretty solid.

In terms of block 31, the first projects, the appraisal is complete.

We're into the select phase of the project, and that means we were out for bid currently for the major components; the sub-sea equipment and the risers.

The FPSOs we expect those conversations to continue with contractors through the second half of the year and with Senegal.

And the expectation is that we would sanction the first project in the program in the first half of '08, so making good progress in that.

Let me come back to Kovitka, Mark.

The deal on Kovitka is as we've disclosed.

We're not in a position to disclose anything else at this point, and I would say that we are satisfied that this was a deal that was acceptable to all parties.

Great.

Thanks very much, Mark.

We'll now come back to Colin Smith at DKW.

Colin?

Afternoon.

Question for Tony, really.

You've talked about reducing complexity and increase efficiency, and I was wondering if you could explain exactly how that might be achieved?

And what I'm thinking here is whether you're feeling that's a change in the way you structure BP organizationally is required, because these things are obviously often quite easy to say but more difficult to accomplish unless there's something a bit more structural going on in the way the business is being organized and managed?

Right.

Thanks, Colin.

We weren't being -- engaging in any wholesale restructuring, Colin.

What we are doing is looking at where we built capability, particularly in the functional areas, over the last few years and ensuring that we don't have duplication.

We're looking at how we hold functional capability and where it should be deployed, what level in the organization it should be held at.

So there won't be any wholesale restructuring, but there's no doubt that we have got duplication and overlap in a number of areas, which we are going to go and source out.

But what I was thinking was does this mean any change to the business unit concept, because I thought the whole point about that kind of thing was to leave functional capability where it needed to be, so I'm intrigued as to why you now find -- or perhaps found, as you mentioned, you've got duplication and so on going forth in the pla -- in the business as it stands?

Well, the fact remains we do -- we believe we have got duplication as we built capability over the last three or four years.

And you are quite right, we need to decide whereabouts it should most appropriately reside.

In some cases it should reside very close to the front line; engineering would be a good example.

In some places it's better to reside more centrally; finance, control accounting a good example of that.

So I think it's sort of [horses for courses] here of being very clear what -- to ensure that we haven't duplicated.

Okay, thanks.

Thanks, Colin.

Now Jason Kenney at ING.

Good afternoon, gentlemen.

Tony, I was very interesting in your theme of reciprocity, and I was wondering if you could maybe expand on the possible internationalization of Gazprom via the JV to BP.

Does this include a knock-to-knock support in Libya or Aman with your new positions there, or are we looking at other regions for Gazprom to enter into outside of Russia?

Well, I'm sure you would not expect me to go into the details of what we have in mind at this stage,Jason, because it's not yet been agreed.

But I think it's clear from what I said today and what I've said in the last couple of times on -- publicly on visits to Russia that the concept of reciprocity seems to me and the team at BP to be an important element of the future for BP in Russia.

Fair enough.

We're not in a position to divulge exactly what that mean mean at this point.

I'm glad you think of that.

You were speaking in terms of $3 billion assets or larger internationally.

I think we've said we think of the $3 billion is a starter pack.

If we can make that work, then who knows what else we might be able to do.

But think of that as a place to start, not place to finish.

So $3 billion in an international territory outside of Russia?

What we've agreed and what we've said publicly is it's $1.5 billion from each side, so you can figure that, as well.

And across the business divisions upstream, downstream, midstream?

I don't remember us saying there is anything (inaudible).

Okay.

Just for the record, not everybody sees $100, by the way.

We're significantly lower in three to five years time, particularly if the dollar strengthens, but just thought I'd say that.

Thanks, Jason.

Thanks a lot, Jason.

Okay, now on to James Neale at Citigroup.

James?

Hi, good afternoon.

I'd be interested in getting your thoughts on how the translation global center [Faye] merger might put further cost pressure on the drilling market and on [set-drop] stream costs?

Okay, James, let me ask Andy to say a few words about that.

Yes, James, I think it's too early to give you a view on that.

I think we haven't had a chance to evaluate the proposed transaction in any detail and there could be some benefits, there could be some disbenefits to the industry, so I think it's too early to comment.

Thanks.

And can I also ask you what you're doing in your next five days?

What am I going to do in my next five days?

You've got --

[If you're talking] to me, my next five days, well, considering I'm going on holiday on Friday, and between then and now, I've got -- actually -- I actually have I the top [80] people at BP together for a couple of days at the end of the week to review where we are and get very clear on the program forwards.

So that's going to be the bulk of my next five days.

Your first 100, thanks.

Thanks, James.

I'd like to -- coming to the last two callers and (inaudible) thank for their patience in waiting.

And the first of them is Lucas Herrmann at Deutsche Banc.

Fergus, thanks very much.

Tony -- really question for Byron and then one for Andy.

Byron, going back to the financial framework, initially or at the start of 2006, I think it was, you laid down the -- in a $60 environment you felt you'd be capable to returning $65 billion over the '06-'08 period to investors.

When you talked today it sounds a little more qualified.

You talk about other factors being appropriate, and I just wonder whether the delays to projects and whether the issues with refineries are factors which are appropriate to reconsidering the scale of that return?

But that is the first.

Secondly, Andy, just in terms of cost and cost inflation, to what extent is the inflation that you've seen in the industry and continue to see starting to impact on -- if it's not started already -- to impact on the timing of the decision of taking [FID on project sites]?

To what extent are you just backing off now and and saying, no, we're not doing things at these levels, they don't make sense any longer?

And just briefly on Kovitka, following the agreement with Gazprom, is there any impact on gas volumes from TNK as reported through the P&L?

Okay, let's go first to Byron.

First I'd point out that distributions are made up of two components.

One is our dividend.

which we've continued to grow at double-digit rate for some time and it was up more than 10% this quarter relative to a year earlier.

As far as share buybacks go, it's about having excess cash flow.

And, yes, it has been impacted by a number of things.

Certainly we didn't envision the scale of refining outages.

We didn't envision the scale of the delays on Thunderhorse and Atlantis.

We didn't envision the scale of sector-specific inflation.

We didn't envision some of the government -- the increases in government take, which have occur in the interim.

That having been said, we have distributed.

by my count.

$32 billion over the course of the first 18 months of that period, so we remain relatively on track to deliver an amount in that range.

It will ultimately be determined by the ability to get these big revenue generators back on stream, the scale of divestments, and just the general environment in which we operate in.

But I think we're making some pretty good progress toward distribution, and the underlying philosophy we have has not changed at all.

Yes, Lucas.

On the issue of costs, I think there are a couple of things, I think, to think hard about at the moment in the current environment.

One is absolutely the impact of costs on the fundamental economic system of our projects and the other is the tightness in the supply industry, I think, which makes it harder to execute -- [execution risks].

So I think the basic approach is about ensuring we move projects forward in their natural pace.

I think it's a real premium for doing high-quality engineering, a real premium from high-quality planning, and all of which results in high-quality front-end loading.

And that's the kind of approach we're taking on block 31 at the moment to ensure that we've the right concept.

We can sort of design one and build many, and that takes a little longer to do that up front, but it does allow you, I think, to drive fundamentally a more efficient structure.

And then you do get to points where I think you find that the current concept is when you get the engagement of the supply industry in place, the costs are too large.

And that was certainly the case when we looked to the [Harding] gas project, where for a number of factors of which cost, tightness of supply and execution risks, we decided that we have the wrong approach.

So we stopped, we didn't move in to execute and we've gone back now to reexamine the concept and come up with a better way of developing that resource.

So.

I think you can see our behavior now really one about driving efficiency in the current environment.

That's huge importantly competitive edge.

And finally on Kovitka, Lucas, no change to gas volumes in TNK-BP following the Kovitka agreement.

Okay.

So the gas that was being produced for the local markets, where was that being consolidated through of the other international businesses, Tony?

Was it --?

Lucas, it was literally very de minimis.

I mean, it was de minimis.

You won't see it.

Okay.

It's de minimis.

It was about enough to run your barbecue.

Okay.

Tony, thank you.

(inaudible) Gordon Gray at JPMorgan.

Thanks.

I appreciate it's not the time or place to give longer-term guidance, but Tony, I wonder if you could just give us your thoughts on two issues.

Firstly, given the opportunities that you see, do you think the current level of organic CapEx is broadly appropriate for the future, obviously adjusting for the current inflation effects?

And secondly, given the scale of the noncrude resource base, can you reiterate your confidence on the reserve replacement (inaudible)?

Thank you.

I think inflation not withstanding -- and none of us know quite what that will be -- I think we're confident that the activities that we're undertaking is appropriate for the capability of the firm and is appropriate to drive production volume growth over the next four or five years, and I think and going beyond that would be certainly inappropriate at this stage.

So the activity levels are about right.

What that translates into in terms of capital on the annual basis is, of course, the function of two things; inflation and what the total pound exchange rate is doing.

So we'll have to see when we get a bit closer to 2008 exactly what that number would be, but in terms of the activity and the nature of the activity we think it's about right.

I've forgotten what the second question was, Gordon.

I didn't write --

It's about your confidence on reserve replacement.

Yes, sorry.

I think, as you said, we have a tremendous resource base.

We've done a good job, I think, of pulling it through over the last four or five years, and there's nothing that would lead us to believe that we won't continue to be able to do that, so we feel pretty confident about 100% reserve replacement out through the end of the decade.

And again nothing seen beyond is -- [was a middle tricky], but it looks pretty good.

Okay.

Thanks very much.

Thank you, Gordon.

And just one very, very final question from David Kline with ABN AMRO.

Good afternoon.

I wonder if I can just ask for a little bit clarification on something that was mentioned earlier.

On the performance-related measures you said you're targeting now, you mentioned simplification, standardization and elimination of duplication, reducing overheads, but I think in the Q&A at one point you said that there were no major cost cutting initiatives that were targeted.

Wouldn't it be natural to expect cost savings or mitigation of cost inflation to flow from some of those measures?

It may well be, but we aren't targeting it.

What we're targeting is the complexity.

If we get some benefit in terms of reduced costs our of it that's great, but what we're really looking for is increased effectiveness in the organization.

Okay, David?

Thanks.

Thank you very much.

Ladies and gentlemen, thank you very much for the usual comprehensive set of questions.

And, of course, Fergus and his team will be ready, willing and able to deal with any further questions you may like to ask and we'll look forward to seeing you all in the course of the remainder of the year.

Thank you very much.