英國石油 (BP) 2008 Q1 法說會逐字稿

Welcome to BP's first quarter 2008 conference call.

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

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

Before we start I'd like to draw your attention to the next slide.

In our presentation today 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 on this slide and in our SEC filings.

Now over to Byron.

Thank you, Fergus, and good day to those joining us on this call.

In February we outlined our plans to restore competitive performance.

The first quarter results reflect the beginning of the momentum that will build over the next two years with improved operating performance and the benefits of restructuring contributing progressively towards stronger financial delivery.

Before I begin the detailed look at 1Q I'd like to draw your attention to a change related to replacement costs profit.

Responding to feedback from many of you, beginning this quarter replacement costs profit will exclude the tax effects of inventory holding gains and losses.

This change should remove some of the volatility that we've seen in the past during periods of significant change in the oil price as in 4Q 2007 and makes our result more easily comparable to industry peers.

We expect the full year effective tax rate on this new basis to be within the previously indicated range of 36 to 38%.

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

Our average liquids realization exceeded $90 per barrel in the first quarter, 70% higher than last year.

Our 1Q gas realization increased to $5.88 per thousand cubic feet, over 20% higher than both last year and the previous quarter.

Taking both oil and gas together our total hydrocarbon realization was over 50% higher reflecting the stronger trading environment than the first quarter of last year.

By contrast our refining indicator margin of $4.57 per barrel was less than half that of 1Q '07 and 20% lower than 4Q.

Turning to the financials our replacement cost profit was $6.6 billion, 48% higher in absolute terms than 1Q '07.

Our profit including inventory gains and losses was $7.6 billion, up 63% compared to last year.

These figures include nonoperating items and fair value accounting effects which on a net basis were not material to the quarters results.

Operating cash flow of $10.9 billion was also significantly higher compared to a year ago.

The [$0.13525] per share dividends announced today which will be paid in June is 31% higher than a year ago, the sterling dividend is also up over 30% year on year.

As I turn to the individual business results let me remind you that this is the first quarter that we are reporting results on a resegmented basis following the elimination of the gas, power and renewable segment.

In E&P we reported a pretax profit of $10.1 billion for the first quarter.

This included a net charge of $380 million for nonoperating items primarily from embedded derivatives and a $260 million charge related to fair value accounting effects.

Excluding these items our underlying results nearly doubled to $10.7 billion.

This reflects higher realization plus a stronger contribution from our gas marketing and trading activities and LNG business which was partially offset by higher DD&A charges and continued sector specific inflation.

Reported production of 3.9 million barrels of oil equivalent per day was flat compared with the year earlier.

Underlying growth adjusting for the impacts of production sharing agreements was more than 5%.

TNKBP contributed $740 million to our 1Q results significantly higher than 1Q '07 reflecting hire prices and a benefit from lag techs reference prices.

Our refining and marketing result was $1.2 billion for the first quarter.

This includes $610 million for nonoperating items mainly related to disposal gains and a benefit of $100 million from fair value accounting effects.

Excluding these items our underlying result was $540 million compared with $1.6 billion a year ago.

This reflects the improved refining availability which was more than offset by significantly weaker refining margins and greater turnaround in repair activity, in particular at our Carson refinery.

Given the refining margins were at the lowest level for over four years the R&M result represents a good first step towards the performance improvement goals (inaudible) outlined in February.

In other businesses in corporate our first quarter underlying result is flat versus last year.

Quarterly results within the segment tend to be volatile and as such our guidance on the annual underlying charge is unchanged from the range provided in February.

Turning to cash, this slide compares to sources and uses of cash for the first quarters of 2007 and 2008.

Operating cash flow increased almost $11 billion and disposals provided a further $300 million in the quarter.

We use this cash to fund $4.7 billion organic capital expenditure and $3.4 billion of shareholder distributions.

You will note that this quarters cash CapEx number is substantially lower than the CapEx figures shown on page 17 of the Stock Exchange announcement which includes the accrual for our two joint ventures with Husky.

Full details are provided in note three of the announcement.

Our net debt ratio was 19% at the lower end of our targeted range.

Let me draw to your attention that the fair value of our debt related hedges is now included in the calculation of net debt.

With the weakening of the U.S.

dollar and falling interest rates, the fair value of our hedges has increased significantly.

As such we believe that this revised calculation gives a more accurate reflection of the actual value of our debt.

Again, details can be found in note eight of the Stock Exchange announcement.

I will now speak to the strategic progress we've been making.

As I mentioned in my opening comments we are committed to closing the competitive gap, to restoring operating momentum and reducing complexity.

Since our strategy presentation two months ago we made solid progress.

We have delivered strong underlying production growth of more than 5% excluding PSA effects which reflects the ramp up of production following the start up of major projects in 2007.

In Azerbaijan we have completed the third phase of the ACG development with the start up of oil production from deepwater [Ginasholi] and in Angola we achieved first production from the Mondo field in the Kizomba feed development.

In the U.S.

the Whiting refinery was restored to its full clean field capability of 360,000 barrels per day in March.

And at the end of the quarter we restored Texas City to accrued distillation capacity of over 400,000 barrels per day.

With the majority of its economic capability on track to be restored by mid 2008.

We continue to work on reducing complexity within the organization and are on track to deliver a head count reduction of 5,000 by mid 2009.

The associated provisions for restructuring costs in the first quarter totaled $300 million.

We have also delivered on items that will help secure the long-term future of the Company.

We continued our strong exploration track record with Portia, our 15th successful well in block 31 in Angola, the Satus discovery in Egypt, a new oil discovery close to Point Haven in the North Sea, and more recently, Kodiak in the deepwater Gulf of Mexico.

We have also completed the creation of our integrated North American oilsands business via two joint ventures with Husky Energy.

We have announced jointly with Conoco Phillips that we have combined resources to start Denali, the Alaska gas pipeline.

Looking forward to the rest of the year, we expect strong underlying growth in production reflecting the ramp up of volumes from major product start ups.

However, with the continued strengthening of prices the negative PSA effects are likely to offset this growth.

With reported production expected to be flat if oil prices remain around $100 per barrel.

In addition, the second quarter marks the start of our upstream turnaround season with major planned activity in the North Sea and the United States.

This will have an impact on both volumes and costs consistent with the effects seen in 2Q 2007.

In refining and marketing we have seen some recovery in refining margins.

However, overall they remain significantly lower than in 2007.

We also expect that our marketing businesses will experience pressures from the effects of higher product prices and a slowing of the OECD economies.

In closing I want to emphasize again that we are in action to close the competitive gap through a focused effort on our three priorities of safety, people and performance.

We are determined to operate safely and reliably, to develop the capability of our people and to drive performance through restoring operational momentum.

At the same time we are rigorously reducing complexity and cost.

Our first quarter results reflect the early progress that we are making on that journey.

That concludes my presentation of our 1Q results.

Fergus and I would now been pleased to address any questions.

(OPERATOR INSTRUCTIONS)

The first question question comes from Mark Iannotti at Merrill Lynch.

Good afternoon, gentlemen.

A couple of questions, just touching on your last point could you give us any firm numbers on the cost you have taken over the business in the first quarter, certainly in E&P it appears that your underlying cost base looks a little bit more than it was in the fourth quarter.

Can you also maybe just make some comments?

I read at the EGM last week again reiterating Thunder Horse onstream towards the end of the year.

Can you maybe just talk through the key milestones we can look for and the achievement of that target?

Thank you, Mark.

With respect to the first question, there tends to be a seasonality effect on costs where the first quarter tends to run a bit below the trend of the year as a whole.

So, embedded in the first quarter is some progress with respect to underlying costs and the seasonality effect.

And it's really impossible for us to break the two apart.

I think what we need to do is look at the year as it progresses and at that stage we will be better able to decouple it and in the backdrop of all of this is the continued inflationary pressure that's impacting the industry at large.

As you can tell this is a pretty complex thing.

What I would tell you is with respect to restructuring we took the $300 million charge that I referenced in my remarks, we to date have taken a provision for the reduction of about 3400 jobs across the group as a whole.

Many of those people are still in place, will be leaving as the quarter and the second half of the year progresses.

But as that occurs with the continued focus on costs and complexity of the group we've got a nice wind that should be blowing in our favor against the headwinds of inflationary costs and the industry at large.

As far as Thunder Horse goes I can only say alongside the guidance that we've been providing you for more than a year now which is that Thunder Horse is on track for start up before the end of the year, obviously efforts are being progressed to do a little bit better than that.

But at this stage the guidance remains the same, before the end of 2008.

Next question from Neil McMahon at Bernstein.

Hi, I have three questions.

The first is really looking at the TNK BP situation.

With the current comments about the potential for a tax reduction in Russia I just wondered what your comments were on that and if you were hearing any rumors about an offshore licensing round taking place?

Then I have got two other quick ones.

Thanks.

The tax reductions, clearly this would be beneficial to the industry at large that the nature of the current Russian tax regime was fine for a lower cost environment and for Brownfield projects.

It compresses quite substantially the returns in a highly inflationary environment with new greenfield products.

So I think the Russian authorities have properly looked in response to the concerns raised not just by companies like TNK BP but the state companies as well.

And we would look forward to some progress on that.

With respect to the offshore licensing round I can't speak specifically to that and I'm looking at Fergus and neither can he.

You can come back to me on that one, Neil.

Maybe two quick ones, it looks like when you look at your tax rate in the first quarter compared to the fourth quarter which was high for 2007, it looks like you were receiving some benefit in that the taxes from TNK BP are lagged and you were receiving a relatively high margins for those volumes and one would presume that your tax rate would rise not just from TNK BP but for the rest of the Company throughout the rest of the year.

Would that be fair to say that the first quarter is seeing a bit of a seasonality benefit and you'll get a true up through the rest of the year in terms of taxes and other areas?

Well, we are always trying to project through to a tax rate for the group that is consistent with our expectations for the year at large.

So what we are trying not to do is create extreme volatility from one quarter to another.

So the first quarter rate that we've incorporated into our results today is reflective of what we believe is the, a replacement cost rate for the year at large recognizing that we have made some changes as I indicated in my remarks in the way that we do this, to try to take out what otherwise is inherent volatility on an annual basis that oftentimes is compressed into the fourth quarter depending on whether prices are going up and down and I think that this change is likely to be beneficial to the, to being able to calibrate ourselves relative to industry competitors as well.

In 2008 we are experiencing on the margin because the marginal rate is above the a average rate, our profitability is higher, we are experiencing some uplift as a consequence of that.

And in 2007 there were a number of beneficial once off factors from tax settlements and certain disposals that helped to push it down.

So the combination of all that leads to a more stable but higher rate in 2008 and 2007.

With respect to your question about TNK BP there is nothing unusual about our income tax rate in 1Q versus 4Q, it was a little bit lower in 1Q than in 4Q but not material.

And in both 4Q and 1Q, we benefited from the fact that the lag tax reference price was considerably less than the actual realizations from euros blend and should prices stabilize that benefit which we estimate at about $200 million in the first quarter would be eliminated and if prices were to go down then there's a penalty associated with that on a quarterly basis.

So hopefully that covers the Spectrum of tax effects both on TNK BP and the group at large.

And there's no change to the tax rate guidance, $0.36 to $0.38 being the expected rate, it's worth mentioning that the 10Kb portion is a percentage of the total profitability of the group has been going down for reasons that Byron gave of relatively higher margin tax rates.

I have one really quick one.

You mentioned which is great that Texas City is back at full distillation capacity but one presumes it's operating more like a simple refinery since the main upgrading units aren't running.

What utilization would it be at today?

I'm presuming it's not running at 100% capacity because of the economic reasons associated with the current margin?

Well, let me just speak to what, where we are on Texas City.

As you note at the end of the quarter we got back to full distillation capacity at the unit.

What we have ahead of us in the second quarter is to complete the work on two residual hydrotreaters and that should give us most of the residual upgrading capability for the unit.

What then is left in the second half of the year is to complete work on an ultra former which would allow us to access full naphtha operating capacity.

So it's not operating as a simple refinery so there are derivative units in place so that would be inappropriate to say that but there are additional upgrading units that will be coming on over the course of the second quarter and the rest of the year.

Absolutely you will see a rise in Texas to maybe 100,000 barrels a day in the second quarter and measured capacity utilization but as Byron said the full economic contribution would be later in the year.

Next question coming from Irene Himona at [Hexane].

Good afternoon I had a couple of questions please.

First of all I note the Husky deal was completed at the end of the quarter.

Can you say what the EBIT that you would have foregone in Q1 would be had the deal been effective during the quarter?

The same question I don't know if you can answer it for Whiting in Texas, if there were during Q1 at the stage at which they are now, what would the additional profitability be?

And my final question, at the [Savageaux] meeting a couple of months ago you referred to you sort of preannounced 2008 provision relating to potential redundancies.

Could you just update us on the timing of that during 2008, please?

Okay.

Let me answer the first question last because I made reference to it earlier.

We have over the course of the fourth quarter and the first quarter taken provision for 3,400 redundancies as I referenced.

We indicated at least 5,000 at our strategy presentation so you can see we are well on track and there is additional efforts progressing across our business activities to be able to identify personnel to achieve that level of restructuring and we'll be taking charges associated with that.

As I said in the first quarter we took about $310 million worth of charges, in the fourth quarter we took $340 million.

So $650 million across the two quarters since we announced our intentions.

With respect to Toledo what would be the difference in the first quarter had we had the Husky deal in effect, net negligible with the low refining margins that existed in the United States in the first quarter, the contribution would not have been, the change in the contribution would not have been significant with respect to the segment or the group.

As far as, I'm not quite sure I understand your question with respect to the other refineries.

What I can say is that the combination of low refining margins and the continued recommissioning work at Whiting during the first quarter and at Texas City plus the turnaround efforts at Carson meant that the overall fuel value chains within the United States were a significant P&L losses that was offset by a very favorable contribution from our fuel value chains around the rest of the world.

So in aggregate the contribution from the value change was basically break even.

So if you look at our refining and marketing underlying earnings which was a bit more than $0.5 billion when you adjust for the nonoperating items and for value accounting effects the full contribution of that was associated with the international businesses.

Thank you.

A little bit more context for you there, Irene.

Irene, just to sum that up, I mean you are looking at a drag effect from Texas City in particular of several hundred million dollars and that was the magnitude that you might expect at the refinery in terms of the ull economic contribution.

(Inaudible) at Morgan Stanley.

Just three quick question actually.

Firstly, Byron could you just quantify the impact on maintenance and costs for Q2 and Q3 in the upstream?

Secondly, I was wondering if you could give an update in terms of guidance for TNK BP volumes for the year whether you've seen any change there?

And lastly just on PSAs and CG if you could help sort of model a profile at $100- oil for 2008 given sort of the start ups with the final phase but the offset with the PSA I would be very grateful.

Thank you.

Well, we'll start first with the turnaround in the United States and in the United Kingdom.

I can't quantify specifically costs.

They would be in line, the work that we are doing is more or less in line with what we've done in previous turnaround seasons.

What you should look for is the impact on production in the second quarter is more or less in line with what we saw in 2007.

So the one 1Q, 2Q reduction would be a bit more in 2008.

But generally it's in line with what we've seen previously.

And the costs associated with that.

I think I should note that all of these barrels that are not produced as a result of the turnaround are high margin barrels that comes from our highest realization areas.

So as one is trying to model the impact you've got to add costs and you have to take out barrels whose contribution is considerably higher than that of the average.

With respect to TNK BP guidance there's nothing that's changed with respect to the guidance that Andy Ingalls and Bob Dudley provided just 60 days ago.

With respect to the sharing agreement effects, the impact in the first quarter we said underlying production growth was more than 5% and the back math calculation of that is the PSA effect were more than 200,000 barrels a day.

This again is consistent with the guidance that was provided by Andy at the strategy session in February.

His charts at that time were referenced to the difference between $60 and $100.

Underpinning that was already a 50,000 barrel a day reduction year on year as a result of the effects of 2007.

And a $60 environment in 2008.

So you take the 50 there, you add on a bit more than 150,000 barrels a day as a consequence of the rise to $100 a barrel environment and you get the more than 200,000 barrels a day that I just referenced.

If prices stay where they are in the current environment of $100 or $100 plus that's the sort of impact that you should expect not only in the first quarter but across the year at large.

Great.

Thank you.

Next question is from Ed Westlake at CFSB.

Coming back to this very strong E&P number, clearly prices were good at a time of seasonally lower costs but maybe if possible you can give some numbers around the contribution that you are getting from the new projects cashwise in the Gulf and Azerbaijan and secondly the results of that higher cash flow clearly as you are gearing it lower maybe talk through what you are planning to do with the strong cash receipts?

Thanks.

Well, we are not going to provide details on region by region of the realization.

I don't actually think it's particularly helpful to do that.

The aggregate performance is what counts here, Andy and his team are in action everywhere to realize the greatest benefits on the operating side and to manage on the cost side.

And the first quarter is an early reflection of the achievements that have been made to date.

With respect to the gearing question, we are at the bottom end of the range.

We tend to look at this on an annual basis and as you know there are working capital effects that build over the course of the fourth quarter and then there's a release of the inventories and other working capital effects in the first quarter.

So that combined with the fact that there is a low tax payment in the first quarter always leads to a dip in our gearing at this time.

Notionally we are still focused on being within that band.

We are continuing to buyback shares.

We bought back $1 billion in the first quarter.

It is as we had indicated in our strategy presentation the swing factor.

We are investing a lot and we've upped our dividends.

And to the extent that we have additional cash left over beyond that that is appropriate to maintain our gearing within the band then we would step up our share buybacks.

But we don't, at the current time we are just on the cusp of this.

So we are managing the buy back program appropriately.

Next question comes from Jon Rigby at UBS.

Hi, guys.

Two questions, one is on the U.S.

downstream.

One of your closest competitors just reported a number of about $200 million plus post tax.

I think you are down close to about 0.5 billion loss on a recurring basis.

That's a business that you regularly outperformed before the problems with Texas City.

Is that a good guide to the performance gap in the U.S.

downstream that we should be looking for that we are looking to recover in the next couple of years?

The second question I have is about Russia.

We've all seen a lot of headlines on Russia in the last few weeks.

Can you just talk to what you as the shareholder in TNK BP doing in regards to your strategy for that business and the long-term of that business and how you are going about protecting your position in Russia?

Thanks.

With respect to the U.S.

downstream, as I said earlier the underlying profitability in the United States was a $700 million loss.

You adjust for nonoperating items and fair value accounting effects.

There's a huge drag associated with Texas City.

With Whiting in the first quarter there's a drag because it wasn't at its full capability until the end of the quarter.

And you can't dismiss the major turnaround we had at Carson.

So the first quarter of the year is not reflective at all of the potential that we have in our refineries.

And once we get those in appropriate operating condition and we are making good progress on that, you should see a much stronger contribution and I'll leave it to you to do the analysis between our competitors and ourselves.

Would it be fair to say, Byron, that in the conditions that prevailed in the first quarter you would expect that portfolio of refining and marketing assets in the U.S.

to be profitable?

I can't speak to that specific point.

What I would expect is that it would, that we would have done much better in the first quarter if all of our refineries were in operation.

The drags associated with -- the combined losses associated with the three refineries I referenced was greater than our overall loss within the United States.

Perhaps yes.

With respect to Russia, the strategy remains unchanged.

We are very happy with our position in Russia.

We found that we were able to continue to expand our position there.

We've acquired additional licenses.

We've been able to extend our reach.

We've progressed new developments.

We've sold assets.

So we've operated the way in which we think it's necessary to operate to be successful in the country.

We believe that we've continued to, through our presence there meet the obligations that we've felt we've made to the government in bringing a strong producer to properly manage those assets.

So we are very satisfied with the investments that we've made there and the current presence we have.

We remain in discussion with Gas Palm to both its BP and TNK BP to see what we can sort out with respect to the Kovykta field and those conversations remain ongoing today.

I know there's a lot of speculation with respect to what is the longer term status of our partners in TNK BP but you need to ask them that question not us.

Okay.

Thank you.

[Lucy Haskins] at Lehmans.

Byron you mentioned something about Husky, perhaps distorting some of the CapEx numbers, I think you reiterated the guidance of 21 billion to $22 billion for this year.

Was there anything else in the quarter which was unusual?

No, it's Husky which the numbers which are in the note three of the Stock Exchange announcement.

If you look at our CapEx figure it was a bit more than $9 billion as you can see in note three, the combination of the upstream and downstream impacts associated with the Husky deal because of the way we have to account for it was $4.65 billion.

So the underlying capital spending in the first quarter was about $4.5 million.

So recognizing that capital spending tends to ramp up during the course of the year we believe we are appropriately on track for the 21 to 22.

Of course recognizing if you add TNK BP and PAE, our Pan American Energy Associate Companies into it, then the 21 to 22 actually is 24 billion to $25 billion is much more comparable to the numbers that some of our competitors are talking about as far as investment in 2008.

Thanks.

Thank you, Lucy.

Mark Gilman at Benchmark.

Mark.

Good afternoon.

I had a couple of PSE related questions, hopefully you can help out Byron and Fergus.

Of the 200,000 numbers that you recited, can you roughly split that between that which is specifically cost oil oriented and that which is occurring as a result of rate of return or cumulative production thresholds which may have a more permanent impact going forward?

Mark, I'm not going to do that break down for you.

I think that the complications associated with this are such that you, providing the details may be more misleading than illuminating.

I think that the fact that we've been very clear on the impact at $100 a barrel in both the first quarter and across the year, the longer range guidance that Andy provided in the strategy presentation should be sufficient for you to do the forecasting required.

Could I specifically ask did you hit the threshold in ADIOC in the first quarter and if not when during the year in the current price environment would you expect that to kick in?

I would refer you to the information we provided on the Azerbaijan field trip in 2006 which would give you everything you need to know about the way in which that particular PSA works.

Obviously there are other traunch effects and other parts of the portfolio but it is fair to say that this is going to be a big year for the PSA effect once the traunch occurs, that's it, it doesn't give you a sense of what our ongoing sensitivity would be fuel prices to PSA.

I'll try one more and see if I can strike out on three times.

It looked as if there might have been a restatement on the gas volumes, natural gas production volumes in the other rest of world segment to the tune of an increase of about 125 feet per day.

Was that true or am I missing something that might have been associated with resegmentation put into place earlier?

I think three strikes you're out because there's nothing unusual with respect to the volumes in 1Q.

Okay.

I'm out of here.

Thanks, guys.

Thanks a lot.

Colin Smith, DKW.

Good afternoon, gentlemen.

Two questions.

First of all, I note in this presentation of the results you're adjusting for the fair value accounting effects to get to the underlying result which is not something you've done in the past and I think previously Byron you've been sort of fairly resistant even to disclosing those numbers on the basis that they would be a wash through the course of the year.

I wonder if you could just talk through your current thinking on the treatment of fair value accounting effect.

And the second thing was just coming back to PSAs again, I'm a little unclear as to where the 50,000 barrels a day comes from.

Does that mean that we should be taking the numbers, the chart that Andy gave and increasing the deduction by 50,000 barrels a day versus the history that we've had?

And can you also comment as to whether you are actually seeing the kick down that you showed in 2009 coming earlier perhaps than you had otherwise expected?

Thank you.

Let me take the second question first because we've talked around that in various ways.

The 50,000 barrels a day was what was embedded into the forecast that Andy provided in the strategy presentation.

That's the impact that was already, let's say, baked into the numbers as a result of the high prices we experienced in 2007.

Plus the $60 a barrel underlying framework that we were describing at that time.

And then on top of that, he spoke to the effect that it would occur were prices to reach $100 a barrel and showed a range of 150,000 barrels a day stretching up to a bit more than that.

And that's what we are seeing now because prices indeed are 100,000 barrels -- are indeed $100 a barrel and the cutting through the various traunches whether they are cost recovery or profit traunches indeed is accelerating.

Your point about are we seeing then an acceleration, further acceleration than is, than what was shown in the slide itself if prices are to be materially above $100 a barrel, the answer to that is yes but I would caution anybody to progress with working some sort of linear relationship at higher prices because these things are anything but linear in their application.

So we are seeing an acceleration which means that the longer term effects as we get out to the, to 2009, and 2010 are likely to be less because we will have already experienced them in 2008.

With respect to your first question, I listened to the comments of analysts and investors it's become clear over the course of the past year that it would be helpful if as opposed to breaking these two elements apart and treating one as part of underlying earnings and the other as outside of that that we just incorporated them both into our definition of what underlying earnings were and that's the reason we redesigned the page, we've not only provided you data on each of the two separately but then we've shown you what the aggregate amount is and with respect to the annual effect, that's pretty much unchanged.

It shouldn't be material at the segment level -- it shouldn't be material on the segment level on an annual basis but it does have a lot of volatility and will help you see the nature of that volatility by pointing out of the underlying earnings calculation.

Okay.

Thanks.

Jason Kenney at ING.

Hi, there, sorry, I was looking for a bit more of a break down of the downstream division and specifically in your QRA you mentioned that the -- let me find the phrase, sorry, international business made a significant contribution to the segment, I just wondered what significant actually was in kind of percentage terms if not a specific number?

Well, in this case it's 100% of the contribution, it came from the international businesses which are the lubricants business, petrochemicals, LPG and marine and aviation fuels and if I can reference back to my earlier remarks the losses in the United States from the fuel value change which again were driven substantially by low refining margins in the U.S.

in particular in the Midwest and the integrated fuel value chain of margins on the West Coast.

We had very low margins in the United States and that was compounded by the continued recommissioning work at Whiting, the continued work at Texas City and the big turnaround at Carson.

All those ingredients added up to a loss that was basically offset by the strong contribution from our refineries and fuels marketing operations in the rest of the world.

And that doing so--?

I was trying to get--?

All the contribution then wash out and all the contributions from the international business.

I was trying to get a split, you split refining marketing to fuel supply chains and international businesses but in the fuel value chains you have got refining and then marketing and trading activities so it's basically splitting out -- you know you have got your negative results in refineries but what's the marketing element?

Consistent with the way in which Ian Kaan has outlined the way we are thinking about the business, the way we are running the business on a go forward basis we are actually running it in this way and that the guidance that we'll provide you will be along the lines of what's coming from the fuel value chains and what's coming from the international businesses.

Okay.

Thank you, Jason.

[Jason Tovy] of Tovy and Company.

Good afternoon, thank you for taking the call.

I notice that you were cutting the personnel.

I did not know -- I had several questions about that.

Are those cuts a result in part of the transfer of some of your operations to some of the joint ventures?

And if so to what extent are the cuts a consequence of that?

The cuts are directly a consequence of trying to reduce the complexity in our organization, to restructure along the lines of a more focused, a more focused and more cost-effective approach to doing our business.

And it's aimed at pulling out overheads as we said in our strategy presentation, this isn't about taking people off the front line.

This is taking away the support people who were needed in the past because of the complex way in which we have run our business and what we are doing is changing that substantially.

It takes awhile to make the transition and one big element, one very big element of reducing complexity has been the establishment of the fuel value chains that I referenced earlier which has very much simplified the interface between functions and our integrated supply and trading business alongside the refining and marketing operations where everybody now is looking at the whole as opposed to the individual pieces.

So it's a major change in the Company at large.

It has nothing to do with joint ventures or anything of that sort.

So it's not a case that the same people are being switched over to joint ventures or something of that order?

No, they are not.

Second thing and this again may be somewhat off track.

At a time when the oil industry is complaining of the lack of people that are available and the need to get a supply, an adequate supply of personnel in, et cetera, are the cuts coming from the technical side or are they coming from the administrative side?

The research side?

I'm kind of trying to figure out as to with the industry on the one hand saying we can't get enough good people and on the other hand your Company saying, well, these were good people but they don't quite fit us at the moment?

Within your three categories it's from the administrative side.

Thank you very much.

One question from the web which is, in respect of the very strong performance in the first quarter, how much of it would we characterize as factors that are specific to the quarter and how much factors that might prove to be ongoing?

A tough question.

I think that it's best to break it down and there's four big buckets here which, and some of them we've talked about already.

We've already talked about the effect of the tax leg in TNK BP which contribute about $200 million more than if prices had been flat from 4Q to 1Q.

I also talked earlier about the fact that 1Q is typically a lower cost quarter than the second through the fourth quarters and it's hard to calibrate exactly what that would be but relative to the average of the year certainly several hundred million dollars lower cost in 1Q than we'd expect on average across the rest of 2008.

A third factor and we've referenced it in the stock exchange announcement and in my remarks is that the first quarter saw a very strong contribution from our trading operations both on the gas side and on the oil and product side.

Within the gas side our gas marketing and trading business contributed about $300 million more than what we would term a typical quarter.

And within refining and, that shows through on the exploration and production results.

And in refining and marketing the oil trading contribution is in 1Q is about $100 million more than a typical quarter.

So together about $400 million above average but I would want to underscore that this is a very volatile area and the benefits of the good performance in 1Q are further underscored by the fact that the trading performance was very weak in the fourth quarter and was about an equivalent amount under an average trend line.

So it's very unpredictable.

1Q was extremely strong but I wouldn't want people to anticipate that that sort of contribution is likely to persist in subsequent quarters in 2008.

And finally in other business and corporate I provided guidance at the start of the year that one should plan on something around $1.5 billion plus or minus $200 million.

So an average of about $375 million per quarter.

It was only $130 million in 1Q.

So ran about $250 million below what we would think is an average number.

Again, this is a very volatile area and tends to spike and then to valley.

But if you add those four factors together the couple hundred million dollars from the tax lag, several hundred million dollars in relative to seasonality of cost, about $400 million in trading, about $250 million from other business and corporate we would say that 1Q had about $1 billion worth of additional contribution that would not be forecastable for subsequent quarters.

Finally we've got David Klein from ABN Amro.

A very patient David Klein still on the line.

A couple of things if I may, just on your last comments on those unusual items in the quarter, the $400 million on trading, was that a pre or post tax number?

And secondly just on the change in the accounting definition of replacement cost profit, just I wonder if you can help my understanding a little bit and just to give a bit of color as to why a definition which you now presumably regard as suboptimal was adopted at some point in the past or even distant past?

Well, let me answer the second question first.

With the benefit of hindsight we probably should have changed this some time ago.

The fact is that this is -- the impact of this is greatest when we have periods of very large price moves.

And the very large price moves are actually something that was not seen until the last couple of years, so the impact of this was relatively modest in the past.

But it was clearly a mix, a mismatch between looking at replacement cost profit as on a before-tax basis and then applying to that an historical tax amount.

And it's, it is apples and bananas and it's started to become a material difference and we felt that the helpful to investors if we took away the particular bias which could work in either direction depending on whether prices are going up or down.

Could you repeat the trading question again?

I'm not sure I got it in its entirety.

The figure you gave for an unusually strong trading performance in the quarter?

Yes, all of the numbers that were compositions such as $1 billion were on a pretax basis so take the $1 billion pretax, apply the tax rate, something like $600 million on a post tax basis.

That's lovely.

Thank you.

Well, there don't seem to be any further questions.

I would like to hand it back to Byron for some closing remarks.

I want to thank everybody for joining and for your questions.

1Q represents a good first step in restoring our competitive performance.

We recognize that there is much left to do and it will take several years to complete this journey.

We've given you a number of milestones and metrics to track our progress at the strategy review back in February.

We remain fully on track at the current time to do that, to, it's only been 60 days but nothing has happened in the course of that sixty-day period to change anything that we told you at that time.

In 90 days in July we will update you further on our progress and we plan on doing that each and every quarter across the course of the next two years.

Have a good day.

Thank you .