英國石油 (BP) 2008 Q3 法說會逐字稿

Welcome to the BP presentation to the financial community.

Webcast and conference call.

Il now hand over to Fergus McLeod, head of Investor Relations.

Hello and welcome to BP's third quarter 2008 conference call.

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

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

Before we start, I would like to draw your attention to this next slide.

During our presentation today, we will be making forward-looking statements.

Actual results may differ from these plans or forecasts for a number of reasons, such as those noted in this slide and also in our SEC filings.

Thank you, and now over to Byron.

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

The third quarter was another strong performance for the group.

And again exceeded market forecasts as we continue to deliver on our promise to close the competitive gap.

Strong oil and gas realizations, improved operational performance in refining, and continued focus on cost control more than offset the impact of upstream turnarounds in the hurricane season.

Despite inflationary pressures in the sector, our cash costs were essentially flat, compared to the third quarter of last year.

We are on track in delivering the upstream growth, downstream recovery and corporate simplification that we outlined in our February presentation.

We're well-placed to weather the current storm in financial markets and the recession that's expected to follow and to seize the opportunities that it's likely to offer.

Now let me begin my review of the quarter with the trading environment.

Although the quarter only ended 28 days ago, it feels like distant history.

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

Compared to last year, our liquids realization exceeded $111 per barrel.

Nearly 60% higher and our gas realization was $6.50 per thousand cubic feet, up 65%.

Both were broadly flat compared with the previous quarter.

Taking both oil and gas together, 3Q total hydrocarbon realizations were almost 60% higher than last year and similar to the previous quarter.

Our refining indicator margin was $8 per barrel in 3Q.

Similar to both the previous quarter and the third quarter of last year.

On a nine month basis, it's down almost 40% compared with 2007.

We successfully captured the benefits of this strong environment.

Our replacement cost profit of $10 billion was the highest ever achieved by the group.

Our profit including inventory gains and losses, was $8 billion.

Non-operating items and fair value accounting effects had an overall favorable impact of $1.1 billion on the result compared with a charge of $1.8 billion last quarter.

The consolidation adjustment also made an unusually large pretax contribution of over $800 million this quarter, reflecting the significant fall in prices and a substantial reduction in the volumes of equity crude in the refining and marketing system.

We've amended the consolidation adjustment amounts recorded for the first and second quarters as shown in the stock exchange announcement.

Operating cash flow was $14.9 billion, again, the highest ever.

Cash flows benefited from a substantial $4.8 billion release of working capital, associated with lower oil and gas prices and lower inventories that we saw at the end of the quarter.

The $0.14 per share dividend announced today, which will be paid in December, is nearly 30% higher than a year ago.

The dividend in sterling terms is up over 60%.

I will now turn to the segments.

In E&P we had another good quarter, including the delivery of strong underlying production growth.

We reported a record pretax profit of $12.7 billion for 3Q, up $6.4 billion compared with last year.

Non-operating items and fair value accounting effects had a favorable impact of $1.2 billion, primarily reflecting gains from embedded derivatives associated with long-term North Sea gas sales contracts.

Excluding these items, our underlying result was $11.5 billion, compared with $6.3 billion in 3Q '07.

Reported production of 3.66 million barrels of oil equivalent per day was slightly higher than a year ago, despite the impact of hurricanes and other operational events.

Adjusting for the impacts of production sharing agreements, underlying production increased by more than 5%.

In the third quarter, we progressed the commissioning of Thunder Horse, with the startup of the second well, and in Australia the fifth LNG train at the Northwest shelf became fully operational.

We also announced in the quarter exploration success in Algeria with the TZN1 discovery, in the Gulf of Mexico, with the Freedom discovery, and in Angola with the Dione discovery, the 16th in Block 31.

Cost pressures due to continued sector specific inflation were substantially offset by actions taken under our forward agenda cost and efficiency program.

TNK-BP contributed $850 million to our 3Q result, around 25% higher than in 3Q '07, primarily reflecting higher prices, partially offset by a lower benefit from RagTax reference prices.

As previously announced on the 4th of September, BP and Alpha Access Renova signed a memorandum of understanding which sets out agreement to new principles of governance for TNK-BP and an option to sell up to 20% of a subsidiary of TNK-BP through an initial public offering at an appropriate time.

We are making good progress in translating the MOU into a definitive agreement between the two parties.

The recovery of our refining and marketing segment continues.

With improved year on year performance in both fuel value chains and international businesses, against a weaker environment.

Pretax profit was $2 billion this quarter.

Fair value accounting effects and non-operating items had a favorable impact of around $640 million.

Excluding these items, the underlying result was $1.3 billion, nearly 70% higher than both a year ago and the second quarter when refining indicator margins were at similar levels.

Compared to the first nine months of 2007, and correcting for the lower refining margin in 2008, profitability has improved by more than $1.5 billion.

The third quarter result benefited from a stronger commercial refining supply and trading performance, and improved marketing performance, partially offset by negative foreign exchange effects caused by the strengthening of the US dollar.

Year-to-date, improved refinery operations mitigated part of the impact of a considerably lower refining margin environment.

In the international businesses, the track record of strong performance this year continued into the third quarter.

Progress on our efficiency improvements has helped to offset the effects of inflation and higher energy costs.

In the third quarter, we saw continued progress in the restoration of the Texas City refinery.

Including the successful startup of the second residue hydrotreater train.

We expect Texas City to be back to its full economic capability before this year-end, after production restarts on ultra former number three.

In other businesses and corporate, our third quarter underlying performance was a profit of $112 million.

Reflecting lower corporate costs and a higher contribution from our other operating businesses, including alternative energy which continues to meet its milestones.

Non-operating items during the quarter were comprised mainly of restructuring costs and additional provisions stemming from our annual review of environmental and other liabilities.

Underlying performance for other businesses in corporate is volatile and our forecasting track record in this area has not been particularly good.

During the third quarter, essentially all this volatility was positive.

We do not expect this result to be repeatable in the fourth quarter.

Turning now to cash flow, this slide compares our sources and uses of cash in the first nine months of 2007 and 2008.

The strength of our position speaks for itself.

Operating cash flow increased to $32.5 billion and disposals provided another $700 million.

We used this cash to fund $17.9 billion of capital expenditure which included the purchase of the Chesapeake assets.

We've distributed over $10 billion to our shareholders.

Dividends paid in the first nine months of the year were $7.7 billion.

I'll speak more about dividend policy in a moment.

Our net debt ratio was around 17% at the end of 3Q which remains below our targeted range of 20 to 30%.

This gives us significant spare debt capacity within our financial framework.

We are confident in our ability to secure short-term and long-term debt in today's credit market, underpinned by the group's high credit rating and strong asset base.

Dividend payments and the strength of the balance sheet are of course an area of investor focus in current market conditions.

Our objective remains unchanged.

To grow the dividend through time in line with our view of future sustainable performance.

In February, we stepped up our dividend, reflecting our confidence in BP's ability to deliver improved financial performance through increasing revenue and controlling costs.

We talked at that time of an expected oil price in the range of 60 to $90 per barrel.

Improved financial performance is now evident.

As new upstream projects like Thunder Horse come on stream, refining availability is restored in the US and the results of our cost initiatives began to come through.

We're delivering on our promises.

Oil prices on the other hand are currently at the bottom of the 60 to $90 range.

With the world economy entering a probable recession, it's of course possible that oil prices could dip further for a period of time.

Our view is that this would be likely to prove temporary.

If oil prices did remain low for an extended period, then over time past experience shows that both costs and fiscal regimes would adjust, albeit with a lag.

In either case, we're well-positioned to weather the storm.

As I've already mentioned, our balance sheet is strong and we've committed less of our portfolio to high cost options like oil sands and gas conversion than some of our peers.

In fact, we believe that the current turmoil may create opportunities for us and we will look at these closely.

Turning now to the outlook for the rest of the year, in the fourth quarter we expect increased production reflecting normal seasonal patterns, continuing project ramp-ups, and recovery from the hurricanes in the Gulf of Mexico and other third quarter operational events.

Oil and gas prices look likely to be sharply lower and TNK-BP's contribution to our results is likely to be significantly impacted by the lag in tax reference prices.

In R&M, a high level of turnaround activity will occur in the fourth quarter.

This will have an impact of both volumes and costs.

Our marketing and supply businesses are likely to experience pressures from the effects of the global economic downturn.

In other businesses and corporate, there's been an underlying improvement in costs and business performance.

But normal seasonal factors are likely to result in a fourth quarter charge in line with the guidance I gave in February.

The effective tax rate in the fourth quarter is expected to remain around 33 to 34%, similar to 3Q.

Year-end gearing is expected to show the normal fourth quarter rise, reflecting seasonal inventory builds and the timing of excise tax payments.

I'd like to finish by summarizing our strategic progress.

The pace of BP's transformation, both upstream and downstream, is accelerating.

In the upstream, the series of major projects already under way, plus our strong resource base and continuing exploration success, underpin production growth well into the next decade.

In refining and marketing, we are closing the competitive gap in performance against our peers.

The first benefits are evident in these results and there are plans to deliver much more.

Corporate simplification and a continued focus on costs and efficiency are more important than ever in today's weaker and more volatile environment.

We must make every dollar count.

We have considerable early momentum in this area from programs started last year as part of our forward agenda initiative.

And in alternative energy, our milestones continue to be met as we pursue disciplined growth.

Overall, I am confident that the third quarter results reflect the increasing pace of BP's transformation.

We are making good progress in simplifying BP, reducing our cost base, and increasing our efficiency.

We are executing our program with discipline.

Much has already been achieved, and there is much more that we plan to do.

Thank you for listening.

And I would now be delighted to take your questions.

(OPERATOR INSTRUCTIONS)

Thank you operator, the first question comes from Theepan at Morgan Stanley.

Theepan, are you there?

Hi, good afternoon, gentlemen.

Byron, a couple of questions, please.

You talked about potentially adjusting the cost structure to these lower oil prices.

I was just wondering if you could talk about whether you are currently seeing this and in what areas?

And secondly, just a follow-up question.

Could you talk a little bit about typically what sort of discretionary level of CapEx you have in any particular year?

My last question is simply just on Thunder Horse, if you could give an update in terms of production levels and where you see production by the middle of next year?

Thank you.

Fine.

Let me -- I'll take them in that order.

As far as the cost structure, we need to remember that the price of oil was still above $100 a barrel as recently at the 26, of September, so we're only a month into this and you wouldn't expect things to have adjusted materially in such a brief period.

But we shared with you a slide back a couple of years ago, which was attempting to show how inflation in the sector lagged the oil price cycle.

The lag on the up as well as the lag on the down.

What is very clear is that historically looking back over a very long period of time, there has been a cause and effect relationship and Fergus and the Investor Relations team are happy to refer you back to the analysis that was done.

As far as CapEx, we look at this on an annual basis.

We'll be coming forward in the first quarter as we normally do with guidance with respect to 2009.

We are still in the process of evaluating our entire plan for 2009 and you can imagine it's challenging to do so in the volatile environment that we're looking at today.

But I'll defer you to the discussion that we have with you in the first quarter for any 2009 guidance.

As far as 2008, we outlined a plan of 21 billion to $22 billion worth of organic capital and we continue to progress plans to fall within that range.

As far as Thunder Horse goes, commissioning there is continuing to go well, despite all of the disruptions from the hurricanes.

As you know, we have two wells currently online with a third well expected to be brought into production in November and a fourth well somewhere around the end of the year.

Facilities are working well with high up time and those -- and the reservoir's performing extremely well.

We're producing more than 100,000 barrels a day from the first two wells and we would expect the next two wells to have a very high production rates associated with them as well.

Just a follow-up question, Byron.

Just I mean could you give us a sense of perhaps -- I mean, given where oil prices have been this year and I know you've outlined your CapEx budget.

I was just trying to sort of push on how much leeway has there been or increase in activity in 2008 as a result of high oil prices, I was wondering if you could perhaps quantify that rather than sort of pushing you on an '09 budget.

I know it's rather early to be asking you that number.

I was trying to get a feel for activity levels for '08 and the increase as a result of high prices?

Well, can I come back to cost structure again, because not all of the increase in capital spending in 2008 has been activity-driven, a significant amount of it has been inflation-driven and I think it's very hard to talk about activity in the absence of getting the calibration on the underlying inflationary or deflationary environment.

What is certainly true, going back to the point I made about leads and lags between the price of oil and the various costs and government take, as well, within the sector, what is certain is if prices were to stay at low levels, that we will be facing a different type of cost structure as 2009 wears on and just how much that will then contribute in its own right to a reduction in capital spending, still needs to be sorted out.

Currently, we enter each year with an amount of capital spending that we could slow down if we so desired and on occasions in the past we've done so.

But we're also minded that having a steady level of activity is very important for organizations as we continue to pursue growth in our upstream production volumes, looking out into the middle of the next decade.

It's a fine balance, but we certainly have -- when you're spending 21 billion to $22 billion each year in capital spending, you certainly have discretion within that to reduce it by a certain amount.

Thank you very much.

Thanks, Theepan.

Next question comes from John Rigby at UBS.

Hello.

Two questions, one, just on the production for the rest of the year.

Can you just update us as to where you stand on the notable interruptions to production you saw through August and September where those things will come back, trajectory through the fourth quarter?

The second is about balance sheet.

I wondered, especially with you on the call, Byron, whether you could just run through anything we should understand about movements in balance sheet balances and particularly with working capital that's taken place in this quarter that we should understand, sort of carrying through to next quarter.

I guess in the context of the credit crunch and everything else we've seen with investment banks and capital markets, et cetera, whether there's anything that you're doing with the balance sheet is different perhaps than what you've been doing six or nine months ago.

I do know for instance that you're running with significantly more cash than you previously have.

Is that one of the things that you've done?

Thank you, John.

As far as production goes, third quarter was impacted not only by the normal seasonal dip associated with planned turnarounds in the North Sea and Gulf of Mexico, Alaska and other places, mostly impacting high margin barrels, but we also had the impact of the two hurricanes in the Gulf of Mexico, which like every company we presume that there will be some disruptions during the hurricane season.

But we found that the impact in this particular third quarter was about three times larger than we would have normally expected with production impacted by more than 90,000 barrels a day in the quarter.

But we've now got -- we've got all of our operated production back on-stream and it's good operating efficiency, so as we move out of October, everything is fully recovered there.

In Angola, we had some unplanned down time on greater Plutonia, but again, the work is complete.

Facility is now running at its full capacity.

We had in Azerbaijan, one disruption associated with the BTC pipeline and the relatively short-term outage there.

But also, in central Azeri, where there is subsurface gas release below the central Azeri platform, these sorts of things aren't untypical in the Caspian but as a precautionary measure we did shut in the production.

Everything is back in production in Azerbaijan now, except the central Azeri facility itself which is still being evaluated, what's the right way to progress.

And work's continuing obviously then to bring it back online.

So a number of disruptions, but in spite of that, and in spite of the fact that we had production sharing contract effects of more than 5% on third quarter production, we did have a small quarter on quarter increase in production.

As we go into 4Q with hurricanes hopefully fully behind us, don't seem to be any sense of any further ahead, and with these operational issues pretty well resolved and the normal reversal of the turnaround impacts of 3Q, we would expect a substantial increase in production, in line with normal fourth -- third quarter to fourth quarter effects and still, are forecasting overall production for 2008 to be similar to that in 2007.

As far as the balance sheet goes, there was a very large working capital effect as I described in my remarks, order of magnitude of $5 billion.

The majority of that a price effect, although there were some reduced volumes as well.

The reason -- one of the reasons, besides the fact I think it's prudent to be holding more cash than normal at the current time, one of the reasons that we ended the third quarter with such a significant amount of cash was the very strong rundown in working capital that occurred during the month of September.

So you have a bit of cause/effect there.

As far as how we expect to run our balance sheet, our debt book, we believe it's prudent to be conservative at this point in time and to make certain that nothing out there could happen that might disrupt our ability to properly service the cash flows of the Company.

So we're likely to continue to hold quite a bit more cash than one would under normal circumstances.

Thanks very much.

Does that cover everything you were looking for?

Was there any other particular point.

Just as long as you capital where you put your cash, I guess, particularly.

Absolutely right.

Thanks for that prudent advice, John.

Next question comes from the web.

What are the increases -- comes from (inaudible).

What are the reasons for the increase in BP's liquid realization in the third quarter?

Well, maybe First Bank could take that one.

It's a good point.

As you noticed, the indicators, both Brent and Henry Hub fell in the third quarter relative to the second.

The answer is a simple one, it's really due to the timing of listings particularly on the oil side where clearly they're not equal day by day through the third quarter and that timing of listings is the principal reason why liquids realizations were higher in the third quarter.

Can I just add to that.

Especially in the US, since we lost a lot of high valued production towards the end of the quarter as prices were falling off.

Again, as Fergus said, timing of listings biases it towards the higher end of the quarterly price.

Next question, going back to the telephone lines comes from Will Forbes at CSFB.

Two questions.

One of the things that I'm concerned about is just the run through of the cost benefit program over the last few quarters.

Can you give an idea of what kind of percentage of the total cost savings are already running through your numbers and what percentage still needs to come through?

The second thing is on windfall taxes, if we assume that the oil price were to remain at current spot levels for let's say the next year, would you expect any elasticity of governments to either reduce windfall taxes or is there a potential threat for the UK government to increase windfall taxes at a time when you're making quite a lot of profits?

As far as the cost savings, I think we're at the front end of things, as opposed to the back end of things.

We put in place the forward agenda as a program across the group, only about a year ago, and embedded in that was the very clear charge for organizational simplification and getting in the minds of every employee within BP that every dollar counts.

We've, as part of the organizational simplification, over the course of the last four quarters, so that's from 4Q 2007 through the third quarter, taken total restructuring charges associated with the elimination of 4600 positions and plus a significant reduction in the number of longer term contractors and many of those have really only left the BP payroll over the course of the last quarter or so and there are many more to go.

So it's both around a lower number of personnel, especially in overhead positions, because this focus was on corporate overheads as opposed to front line operating costs, and then within the wider spectrum of costs, making certain that we approach third parties more effectively than we have in the past and just generally looking everywhere to figure out better ways to do things.

We've driven this down into our individual strategic performance units and the response has been outstanding and so we're seeing it in other business and corporate, we're seeing it in refining and marketing, we're seeing it in exploration and production.

We're quite frankly seeing it everywhere.

As far as the tax regimes around the world, I guess ultimately one needs to speak to governments on that as opposed to companies since they're decision takers.

As I said, everything is moving very quickly.

When some tax regimes were put in place, they were put in place, anticipating a different sort of cost structure than the one we have today and what sort of pressures exist on the system are likely to be based very much on do prices stay at current levels, do costs stay at current levels, it's really the intersection of the two that's the most important.

And I think that it requires a bit more time for these things to be sorted out and then governments will have to decide whether or not their fiscal regimes are putting undue pressure on activity within their respective regimes.

Thank you.

Thanks.

Next question is from Neil McMahon at Bernstein.

Got three questions.

The first on pensions, then one on Chesapeake and third one of TNK-BP's portfolio.

Just starting on the pension side, Byron, could you go into the pension funding situation as it currently stands and going into next year, obviously with the equity markets having fallen so much, how much could we expect BP to have to pay into the pensions as it's still final salary for 2009?

Well, we still, at the end of September had funding levels in our key UK funded plans as well as our US funded plan of more than 100%.

In fact, in the UK it was above 120%.

So we don't see any deep stress associated with that, in spite of the substantial rundown in equity prices over the course of the last two or three months.

We have in previous years been contributing regularly into our funded plans and we're continuing to do that at a pace of about $500 million per annum.

But that is directed towards those plans where we find the funding level to be the lowest or where we find the benefits fiscally to be the most attractive.

I don't expect a major increase, the fact is I don't expect an increase in our funding requirements for 2009.

Great.

Maybe just on some of the deals with Chesapeake, I'm somewhat surprised that maybe the Chesapeake deals were not renegotiated, given sort of the stress for the Company and the asset market for shale plays is currently under in the US.

Maybe you could just talk through in terms of how you're looking at deals you're currently seeing or negotiating at the minute in terms of how you're approaching them when it was somewhat surprising that you still went through with those deals, despite a very falling market.

Well, we're a big Company and we try to make certain we follow the sorts of behaviors that we would expect other big companies to follow with our transactions.

We completed these deals in the third quarter and I will tell you that we find the deals to remain extremely attractive.

We're happy that we did it.

We believe that both the deals with Chesapeake will be highly value-adding to the BP group.

And all subsequent payments are still in place, for example, the CapEx agreements, I think on the Fayetteville deal, is that still going ahead as planned?

As I said, we have a deal with Chesapeake and we'll honor our side of that transactional agreement.

And just a final one from me, really with regard to the TNK-BP portfolio.

Now that it's sort of pretty clear, given what has happened, that you're not -- to be honest, in control of the Company.

It is an equity investment as you have said.

Why wouldn't TNK-BP openly go into Curtis Stand when there are assets that I believe the TNK host shareholders actually have in that region and why wouldn't you use TNK-BP to do some of the growth opportunities that you may not consider to be suitable for BP as the parent Company?

Well, I'll just speak to the discussions we're having with our partners here.

We've outlined an agreement with them.

We have a memorandum of understanding in place.

We are working actively to turn that memorandum of understanding to a definitive agreement.

Part of that agreement addresses activities outside of the Russian Federation and those associated countries like the Ukraine, in which TNK-BP has previously pursued activity.

And when do you think we might hear a bit more about these plans?

Well, as I said, we're hoping to reach a definitive agreement with our partners before the end of the fourth quarter.

Okay.

Thank you.

Perhaps I could just add to Byron's answer there, a question that's coming from the web, which is what sort of gas price would be needed in the US market to make the Chesapeake acquisitions or indeed the whole North American gas business generate a good commercial return?

I think what we've said previously there is those kind of opportunities such as represented by Chesapeake in our portfolio with our assets and our structures would give us a good return during $6 an MCF.

Now going back to the telephone lines, we have a question here from Michele Della Vigna at Goldman Sachs.

Please go ahead.

Sure, thanks.

I have two questions here.

The first one is in terms of your short-term debt you've got about $14 billion.

I was wondering if you're seeing a change there in the cost of financing for such kind of short-term financing.

And the second thing, on TNK-BP, given the difficult taxes to credit in Russia, I was wondering if the Company is rethinking its dividend policy there?

As far as our short-term debt, we've -- incorporated into the short-term debt are a number of gas prepaid agreements and tax exempts that we tend to think of in reality as being long-term, although clearly they can be called short-term but in reality they tend to stay in place for a longer period of time.

The real swing, short-term element is commercial paper.

We've found that our ability to access commercial paper has been unimpeded throughout the financial crisis and we've been able to fund it at extremely attractive rates, just a little bit above treasuries.

So we find ourselves neither constrained nor the cost that we're paying for short-term debt at the current time to be a burden.

As far as the various financial arrangements around TNK-BP, again, the Board is in discussion on this.

They're in the process of finalizing the 2009 plan, and by Board I mean TNK-BP Board.

They will be finalizing their 2009 plan over the course of the latter part of this quarter and I think it's premature to be speaking of any sort of element until the definitive agreement's in place and the Board has decided what it plans on doing in 2009.

Thank you.

Thank you.

The next question comes from Irene Himona with Exane.

Good afternoon.

I had two questions, please.

First, could you update us on the sale of the US dominion stores, has the credit crunch perhaps affected the progress there?

And secondly, you explicitly told us that you have committed less of the portfolio to high cost options like tar sands and GTL and you also talk about the potential in this environment for acquisition opportunities.

Should we read that to mean that BP is or is not interested in acquisition opportunities in these non-conventional areas?

Thank you.

You're right, Irene, there has been a slowdown in the pace that we had anticipated in disposing of the convenience stores in the United States.

We're still doing it and part of the disposal proceeds in the third quarter in refining and marketing represented the exit of various areas.

But with credit as difficult to secure for these relatively small buyers, it's going to extend out longer than we had originally anticipated.

But we remain confident about the ultimate completion of these sales.

As far as acquisition opportunities, when we talk about opportunities, I'm talking about much more than M&A related possibilities.

A world that is as volatile as it is today may open up just a whole range of things that, commercial arrangements that had not been possible in the past.

I think that as fast as things have gone up and come down, one needs to think widely as opposed to very narrowly about specific acquisitions.

What I would say is that if we were to pursue opportunities that -- if we find things that look attractive, then we would expect them to more likely to be asset than Company transactions and sort of the order of magnitude of a few billion dollars like those that you saw progressed in the third quarter with Chesapeake.

I would say those are the sort of typical transactions which we think make strategic sense in kind of all times, but in particular if there's a disconnect between asset values and the prices associated with them on the favorable side.

Non-conventionals, there's non-conventionals and non-conventionals.

I think that one has to look at each opportunity on its own merits and decide how it fits in with an overall portfolio of assets that BP has built, which is aimed at providing us security when price is low and well-levered to the upside when prices go up.

Thank you very much.

Thanks, Irene.

Next question comes from Colin Smith from DKW.

Two questions as well.

Just coming back to the balance sheet, I note also that you stopped share purchases, at least from the point of view of ones intended to be cancelled and you're gearing at 17% as you noted.

Clearly it is prudent to be careful at the moment.

Are you sort of indicating that you might have a sort of shorter term lower gearing target than this 20 to 30% overall range, perhaps going to 15 or less?

That's one question.

The second thing was just on Central Azeri do you have any idea when that's going to be restarted because I recall that's the largest producing unit in ACG.

As far as share buybacks go, let me just be clearer on this that we didn't buy any shares over the closed period.

We did that in spite of the fact that we believe BP shares are an excellent value at this level.

But in these volatile and uncertain financial markets, we believe it's prudent to manage our cash flow conservatively.

As I said back in February, share buybacks are a swing element in our distribution policy.

Where our main focus is to sustain a growing dividend over time.

I should also remind investors that around 75% of our buybacks over the past eight years were funded not out of normal operating cash flow, but from divestment proceeds where we shrank the equity base of the firm in line with the loss of contribution from those assets.

So we're not buying back shares at the particular moment.

We've never provided any forward-looking guidance on share buybacks and I'm not planning on doing it at this point in time, except to say that we did not buy back any shares during the closed period.

As far as the gearing band goes, we traditionally have drawn it below the 20 to 30% range in the third quarter in anticipation of the large cash outflows that we tend to experience in the fourth quarter, which are driven by the timing of excise tax payments and by the normal year-end build-up of inventories and if you look back to 2006 and 2007, you'll find that our fourth quarter debt grew by about $5 billion in each of those years.

So we have it low in 3Q with an eye to the fact that it's likely to move back into that range over the course of the next three months.

We haven't changed our gearing band.

Clearly, it's something that we need to consider as we -- as we frame the overall approach of the group to the environment that we expect to see in 2009.

And that's something we can talk about when we meet going through our strategy presentation in 1Q.

Colin, just to answer your question about Central Azeri, as Byron already pointed out, four of the five platforms are back online but as you currently point out, Central Azeri is the one that is not and it's the potentially largest producer.

I think the biggest piece of contacts that you need a larger part on is, of course, our net production in Azerbaijan has fallen very significantly during the course of 2008 as we've passed through various tranches under the production sharing agreement so that the net impact on our production is perhaps a lot smaller than those of you who were on the field trip a couple of years ago might think as a result of the high prices over the last two years and the impact that's had on our entitlement barrels under the production sharing agreements.

Next question comes from Lucas Hermann at Deutsche.

Lucas.

Byron, a few brief questions.

First, just going back to Tony's statement this morning on the dividends, I just wondered whether you would care to define some way your view of sustainable, what that means in the context of growth, percentage rate, if possible.

Just beyond that, three simple questions.

OB&C, I'm struggling to understand I guess why the guidance remains at around negative $1.2 billion or so per annum given a performance which seems remarkably better than that this year, just if you can talk a little bit more about some of the moving parts within that?

And then two others, just beyond that.

R&M down time, you alluded to it in Q4, just to give some better indication of which refineries are likely to be out and how long?

Finally, just mineral extraction tax in TNK, what you expect the benefit to be for TNK in 2009 with the reductions that are being suggested?

So I'll take them in that order.

First, sustainable, sustainable is sustainable.

We've got a track record over a long period of time of growing our dividend and we grow it with an eye towards the long-term sustainability of that and the decision that was taken to bump up the dividend in February was done in anticipation of growing production, turnaround in our downstream operations and reduced overhead costs as we progressed the forward agenda and we've delivered on all of these.

Our expectation was a 60 to $90 world, as we outlined at that time, but clearly we set the dividend so that it could be covered at lower levels and so I see nothing that has happened over the course of the ride up and down in prices which has occurred over the course of the last six months that in any way takes away from the sustainable objectives that Tony has outlined in his remarks today and that we covered in depth during our strategy presentation in February.

With respect to other business and corporate, we have a number of businesses within that whose owner earnings tend to be fairly volatile.

We've got the alternative energy business.

We've got an aluminum business that we inherited from Arco.

We've got a shipping business that sits in other business and corporate and we have the contribution from the treasury side of our integrated supply and trading activities.

All of those areas produce results much better than we had anticipated in the third quarter, as indeed did the cost benefits coming through on both functional and corporate related activities.

So we found that everything consistent with my remarks sat on the positive side of things.

We don't believe that all of the business performance is sustainable over the longer term and we don't believe that the costs that we saw in the third quarter will necessarily fall through in the fourth quarter.

There tends to be a peaking and valleying of costs in other business and corporate, if you look back over the course of the last several years.

So in light of that, and perhaps I'm being too conservative, but in light of that, as we've looked at 4Q, we think that the fundamental trend of costs in spite of being below it in 1Q and 2Q and actually being positive in 3Q continues to justify that guidance.

Fergus, you want to cover the R&M one?

Obviously that's specifically about Q4 '08.

Covering the other two issues, refinery turnarounds in the fourth quarter, I'm sure you'll understand and of course our shareholders will fully understand that for good commercial reasons we don't identify specific refinery turnarounds at specific sites.

We disclose a general activity will be somewhat higher in our plans in the fourth quarter and the third, not dramatically so but somewhat higher.

Can you help us on region at least, Fergus.

I don't think my colleagues would like me to do that, Lucas, but I will check back and come back to you if I'm wrong.

Certainly we can't give indications about specific refineries.

On the mineral extraction changes, too soon to say.

I think we'd like to wait for TNK-BP to make any statements they would like to make about the various discussions that are going on at the moment about fiscal regime in Russia and how those impact on TNK-BP.

If I can just go back to your refining and marketing question, the fourth quarter will not be materially out of line with other fourth quarters but it seasonally has more turnaround activity that the third quarter and that's what we're signaling in the guidance in the webcast.

Gentlemen, thanks very much.

Thank you.

Now, I'd like to go to the United States now.

Before I do that I would just like to apologize.

I understand we've had technical problems on the telephone lines in the US.

Apologies if anybody has been experiencing any of those technical difficulties.

But with that I'd like to go to Mark Gilman from Benchmark if Mark is there.

Three quick questions, if I could, please.

First on the TNK-BP results in the quarter, was there any significant change in the export mix from what it had been in the recent past?

Secondly, Byron, I think the tax rate guidance is down a bit from what had been suggested earlier in the year.

Is that attributable to the lower oil price environment and the resulting change in the mix of businesses?

And third and finally, I was wondering, have you been approached by the Trinidad government regarding changes in the fiscal terms relating to the operations of Atlantic LNG?

Starting with TNK-BP results, no, there's been no material change in the amount of volumes that are aimed for export.

It's still about 60% with about two-thirds of that being crude oil and the rest being product.

So nothing different there.

The big difference in the results of TNK-BP between the second quarter and the third quarter was as I had signaled in the previous webcast, which was there was about a $500 million benefit from the lag tax reference prices that we saw in the second quarter.

In the third quarter, the reference price and the realized euros prices were not materially different, so a slight hit but only about $50 million.

I think the important thing about TNK-BP looking forward to the fourth quarter is that in spite of the fact that the Russian Federation has lowered the tax reference price from that that would have been normally calculated, we're still facing a $97 price for the October and November volumes.

That's the tax reference price that's been set.

So given the current level of prices, we're expecting a pretty significant impact from that in the fourth quarter and since the December reference price hasn't been set, there's still lots of uncertainty around that.

But it's clear that we may have a disc benefit more akin to what we saw in the -- as a benefit in the second quarter than anything else.

As far as the tax rate goes, really the 33% that we've seen in the third quarter and the signaling of between 33 and 34% in the fourth quarter is a reflection that we now believe our overall tax rate during 2008 is going to be about 35%.

Some of this is currently impacted by the rundown in prices that has occurred but the majority of it is just a reflection that the various steps that we've taken in -- with respect to our tax exposures over the course of 2008 now leads us to believe that a better indicator of that is around 35% for the year, which means 33% in the fourth quarter, than the prior guidance of 36, 37%.

And finally, on your question about Canadian tax in our discussions with the Canadian government the indication has been that the focus is on companies who have contracts to take volumes from train 3 at low prices and have been achieving very significantly higher prices on the international markets and how the economic rent there is shared and BP's not one of those companies.

Now, coming back to the web, we have a question that's related to Mark's question, actually which is which elements of the third quarter results were unusually strong and might not be expected to recur in future quarters?

Well, in the third quarter, this is pretty much limited to a couple of items.

First, the other business and corporate result, which was about $500 million better than what we have as a longer term projected quarterly charge.

And then the large positive consolidation adjustment effect of $800 million, which was the result of falling prices and the lower volumes of equity crude in our refining and marketing system.

We also had a positive trading and supply optimization contribution, but this was offset by the negative foreign exchange effects, which we outlined in our refining and marketing commentary.

So the various other positive and negative elements have pretty much offset each other, leaving just the OB&C result and the consolidation adjustment as factors that I would suggest that you consider as unusual, with respect to the third quarter.

And the fourth quarter, besides just the normal seasonal effects, the big thing is that that I just out outlined to Mark, which is with an eye toward the impact of lag tax reference prices on the TNK-BP contribution in the quarter.

Returning now to the telephone lines.

Hopefully we've still got Mark Bloomfield from Citigroup.

One question, please.

Just wondered if you could give us some kind of the sense of the current end user demand picture that you're presently seeing in your key regional downstream markets, please?

Well, it's weak, Mark.

It's very weak in the United States where we continue to see significant reductions in demand in the East Coast, West Coast, and the Midwest and in fact, we've now -- the US vehicle miles traveled has turned negative year on year for the first time in many, many, many years.

As far as our own system, we've seen through the fuel value chains this impact in the United States.

We're seeing a reduced demand in Europe and all parts of Europe, as well.

The only place which we were still seeing increased demand was in Australia, which is driven by the high activity in the mining sector there, which as all commodity prices are coming off, may also be about ready to turn down.

So within our own marketing volumes, we're down about 5% year on year.

Not all of this is direct result of decreased demand.

Some of it is a reflection of some divestments and some other once offs, but we're definitely seeing a decreased demand for products in all of our key marketing areas with the one exception that I outlined.

Thank you very much.

I think just as a final point here, I think going forward, the issue is whether or not the now lower prices for oil mean that the changed patterns that people had progressed for their own personal driving are now about to stabilize or perhaps increase again, and how that aspect plays against the probability of further decreases in demand, probably for distillate as economic activity slows down around the globe.

So I think we've got a lot of things that are happening on a go-forward basis and it probably is not as easy sorting it out as it may have been during the early portions of the year.

Thanks.

Thanks, Mark.

Next question from Dominique Patry at Cheuvreux.

Yes, good afternoon.

I have a question on Block 31.

Given the fact that you have signed several framework agreements with a number of suppliers to develop the various strategies of Block 31, I was just wondering to which extent you could benefit from any decline in old services costs, given the framework agreement that you have in place?

Thanks.

Well, I don't know the specifics about the framework agreements that we have in place, so I can't comment on those.

Certainly, the more general comment is that if prices are to sit at low levels for an extended period of time, history has shown that the opportunity will exist to access both commodities and services from those providing them in our sector at lower prices than exist today.

But how long that lag is and how much flexibility sits with the agreements currently in place, I can't speak to that.

Moving to the last few questions, we have one from Jason Kenney at ING.

Jason.

Hi, there, and congratulations on good results today.

I'm going to ask an earlier question in a slightly different way, if I may.

You've said that dividend is sustainable in a long-term 60 to $90 world.

All other things being equal, what long-term oil price would the dividend not be sustainable?

Well, let me -- everything changes as you can't hold all things constant.

But let me just go back to the comment that Tony made, which still rings true today.

He talked at our strategy presentation in February that our cash break-even point for 2008 was a price in the mid-$60 per barrel and that as our upstream business grew and as we progressed the turnaround in our refining and marketing activities and as we worked to reduce our overall cost base, that this would come down over the course of time and nothing has happened to change that.

On the earnings coverage side, so now going to a much more accounting related metric, the dividend's covered down to an oil price in the 40s and so I just would say that we feel very confident in our ability to service our dividend at prices well below the 60 to $90 framework that we described back in February.

There was no indication, I'll say it again, there was no indication at that time that we required prices at that level in order to sustain the dividend.

We've got much flexibility within this Company.

We have strong assets.

And we hold the dividend as a given and we expect to be able to meet our needs to service that dividend, irrespective of what the environment deals us.

Okay.

Many thanks for the clarification.

Thanks, Jason.

Neill Morton, Neill, are you still there?

I'm indeed, Fergus.

Just one question left.

You mentioned Texas City, the plant would reach full economic capability by year end.

Wondering if you could perhaps tell us what EBIT losses were in Q3 at Texas City?

And secondly, perhaps guesstimate for us what it would have made had been it been fully up and running with no hurricane down time.

I'll restrict myself to a single remark if I may which is that it was not in the black yet.

In the third quarter.

But we would hope that that would change in the not too distant future and I'll keep it as simple as that, if I may.

So there's a lot of room still to travel in terms of the economic contribution there and we've signaled that a major way point will be passed later on this year, Neill.

Would $0.5 billion loss be ballpark?

We won't comment on that.

But what I will comment on is the fact that if you looked at our refining and marketing results by geographic area, you would have noted that this is a first quarter since the second quarter of 2007 that our US operations have, after we adjust for fair value accounting effects and non operating items, returned to profitability, made about $150 million in the third quarter, adjusted for those effects, which comes after a long run of negative quarters and it speaks to the momentum that we have in the United States and we managed to do that in spite of the disruptions that occurred at Texas City, consequent on Hurricane Ike.

So the upward potential that exists in our US refining and marketing operations is considerable and as Fergus said, we will see that coming through as we march into 2009 and we will be certain to tell you when Texas City has finally made it into the black.

Neill, it's worth being aware that after Hurricane Ike, Texas City was the first refinery in that area to return to operations.

That really speaks to the transformation of the capability of the team at the refinery that they were the first to get back after Ike and how things -- how that situation at that plant is changing.

The final question comes from Kim Fustier at JPM.

Kim are you still there?

Yes, hi, good afternoon.

Just a couple brief questions.

First, in your February strategy presentations you said you were aiming to reduce costs.

50% of that in functions and 50% in businesses.

Obviously you've already achieved part of those cost savings in various places.

I wonder if you could give us a rough idea of the breakdown of these cost savings that you've already achieved between E&P, R&M and other businesses?

And secondly, should we expect the pace of your disposals to slow down in the next 12 months given that some of the potential buyer, for example independent E&Ps and independent refiners may suffer from the current credit environments and if so what are the I'm implications on your share buyback program?

Okay.

As far as a breakdown of the progress we've made in the various segments as opposed to that that's functional and sits at the corporate level, although I remind you that most of our functional activity actually sits within the business segments themselves.

I can't give you a breakdown on that.

I can only point with clarity that it's occurring across all areas within the firm and this is something that I would like to wait until our next investor update, so we'll go into this in detail when we talk with you next year at the strategy update.

As far as disposals go, we don't have a very large amount of disposals in progress in 2008.

It's at a more modest level than it's been in previous years, consistent with the fact that we have spent a lot of time putting together an asset mix that we think is right for the long haul and the major restructuring that we progressed after the various mergers and acquisitions earlier this decade have pretty much run its course, so it's at a much more modest level.

I spoke to convenience retail and the challenges associated with progressing those sales in the credit environment we have in place, but that's really the only area that we found impeded so far this year.

I also -- I think I've already addressed the question with respect to share buybacks.

So I won't comment on that further unless there's some aspect of it you would like elaborated.

No, that's great.

Thank you.

Well, that concludes the questions.

I would just like to pass over to Byron for any concluding remarks.

Thanks, Fergus.

Just one final comment.

There's much underlying momentum in the operating and financial results of this firm.

We're confident that this momentum and the financial strength of the group positions us well to address successfully whatever environment and we've talked a lot about a range of possible environments, that we will face in the quarters ahead.

Thanks for joining the webcast.

And thanks for your questions.