英國石油 (BP) 2009 Q2 法說會逐字稿

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

I now hand over to Fergus MacLeod, Head of Investor Relations.

Welcome to BP's second quarter 2009 conference call.

I'm Fergus MacLeod, BP's Head of Investor Relations and joining me today are Tony Hayward, our Group Chief Executive, Byron Grote, our Chief Financial Officer, Andy Inglis, Head of Exploration and Production and Iain Conn, Head of Refining and Marketing.

Before we start, I'd like you to take a moment to read this next slide.

Thank you and now over to Tony.

Thank you Fergus, ladies and gentlemen a warm welcome to BP's second quarter results for 2009.

Before I hand to Byron to take you through our 2Q results in more detail, I'd like to spend a few minutes reviewing the year-to-date.

Let me begin with the overall business and trading environment.

As all of you are well aware, it's been a pretty turbulent few months, best characterized by continued uncertainty and volatility.

I am pleased to say that BP continues to steer a steady course through choppy waters.

Two years ago we set out on a journey to re-establish BP's competitiveness and despite the current environment, we're making good progress.

We're delivering growth in our upstream business, the turnaround of our downstream business is on track and we're driving costs efficiencies across the Company.

Back in February we reported our 2008 results against a backdrop of a deepening global recession and predictions of stagnant economic growth in 2009.

Today available economic data and growth forecasts suggest the world economy will shrink in 2009, the largest decline since World War II.

That deterioration is now slowing and the global economy is expected to stop contracting and stabilize this summer.

However, global GDP growth for the year will be negative and any recovery, whenever it comes, is likely to be sluggish.

As the world economy shrinks, so too does the demand for oil.

Over the year to date, it's continued its decline, with demand from the OECD falling by around three million barrels per day on this time last year.

In response, OPEC announced production cuts of over four million barrels per day versus the September 2008 outputs and compliance is good.

Refining margins have also suffered from weak demand and excess capacity.

June saw the weakest seasonal margins for six years and global utilization rates have fallen to 80%.

Gas markets around the world have also declined.

Consumption in the US has fallen more than 3% year-on-year and industrial gas demand has fallen by 11%.

US production has continued to grow, despite a significantly lower rig count, keeping US gas prices under pressure.

European consumption is down more than 4% and falling demand in Asia has led to significant reductions in LNG imports.

The overall picture is of energy demand now stabilizing following the significant falls in the first half of the year.

At this point, we've seen little evidence of any growth in demand and expect the recovery to be long and drawn out.

So what does all that mean for BP?

On the basis we're not counting on a recovery anytime soon, we will continue to balance the demands of today with our ongoing program of investment for the future.

Our focus on self-help will both support short term delivery and establish a strong platform for sustainable performance.

That's a brief outline of the context.

Let me now move on to the numbers.

Our 2009 half year results reflect what we believe has been a good performance from the Group in a difficult environment.

Our replacement cost profit was $5.5 billion.

Post tax operating cash flow was $12.3 billion.

We invested a total of $9.4 billion of organic expenditure and had divestment proceeds of $1 billion.

We paid a dividend of $0.28 per share, equivalent to $5.2 billion.

I'd now like to turn to our operational performance and give you a summary of the continued momentum we're seeing across the Company.

We're continuing our focus on safe and reliable operations.

We currently have 50 of our sites now running on our operating management system, which we established as the foundation for a safe, effective and a high performing BP.

That amounts to about half of them.

We're moving operations to the heart of BP and standardizing how BP operates around the world.

The tragic helicopter accident in the North Sea earlier this year was a stark reminder to us all of the risks that we face in our business and the need to continue to make safety our number one priority.

We're maintaining our focus on improving both personal and operational safety.

We're continuing to build capability across the business, ensuring that we have the right people in the right place with the right skills.

We're also deepening expertise across BP and ensuring that reward is appropriately linked to performance.

In E&P, we're delivering volume growth in the business, with production up by more than 3% compared with the first half of last year.

Unit production costs are down by 11% over the same period.

In Refining and Marketing, refining availability is also up.

For the first half, it was around 93%, up by more than 4% on the first half of last year.

Let me now look in more detail at how our businesses performed in the first half of 2009.

In Exploration & Production, we've seen very strong strategic and operational momentum.

We've continued to make good progress, accessing new resources, including Rumaila in Iraq, one of the world's great oilfields.

We've also been awarded two new blocks in the most recent Egyptian licensing round.

And as part of our asset sale in Indonesia, we've agreed a joint venture with Pertamina to look at options for coal bed methane development.

In Azerbaijan, we recently signed a memorandum of understanding with SOCAR to jointly explore and develop the Shafag and Asiman structures in the Caspian Sea.

Our Exploration success also continued with the 17th and 18th discoveries in Angola and we had further significant appraisal success in the Gulf of Mexico, with the Mad Dog South well.

We've also seen the startup of five major projects in the first half of 2009.

They are Tangguh in Indonesia, King South and Dorado in the Gulf of Mexico and Uvat and Kamennoye in our TNK-BP joint venture.

We're also seeing the very successful ongoing ramp-up of Thunder Horse.

And alongside this we've sanctioned a number of developments from our hopper of major projects, including the Block 15 Clochas Mavacola development in Angola and the Serrette new field development in Trinidad.

Turning now to Refining and Marketing, despite the challenges of a difficult market, we've made significant progress in the turnaround of our downstream business.

During the first half of 2009, a further four refineries and two petrochemicals sites transitioned to our operating management system.

We've refocused the activities of our R&M head office and have successfully implemented a new SAP back office system in Iberia.

This system and associated core processes will be progressively rolled out across all the Fuels Value Chains to deliver improved efficiency and effectiveness.

We've continued to restore revenues; refining availability is over 93% up by more than 4% against this time last year and is at its highest level since the first quarter of 2005.

Texas City is restored to full capability.

In our drive to simplify the business, we've completed the exit of our Company-owned, Company operated retail sites in the US.

And we also announced the sale of our ground fuels marketing business in Greece to Hellenic Petroleum.

Cash costs are down by more than 15% versus the first half of 2008.

Before I hand to Byron, let me finish by talking about Alternative Energy and our corporate efficiency agenda.

In Alternative Energy, we've simplified the business to concentrate on four areas, bio-fuels; wind in the United States; solar, where we're repositioning our manufacturing footprint to lower-cost locations in India and China; and carbon capture and sequestration, where we're focused on two major projects in Abu Dhabi and California.

Turning to corporate efficiency and our drive to reduce complexity in the business and bring down costs, we've met our original objective of reducing the headcount by more than 5,000 people by the middle of 2009.

We continue our focus on deepening expertise.

We've simplified the organizational model in the functions and made it more fit for purpose and we've created greater clarity around accountabilities.

Taken together, all of this has resulted in a significant reduction in cash costs, which are down by more than $2 billion on the same period last year.

I'm pleased to say we've surpassed the target we set at the beginning of the year, but we're by no means complacent.

There's more to be done and we will continue to drive greater efficiencies into the business to ensure that we really do make every dollar count.

Now, over to Byron who'll go through the 2Q results in more detail.

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

I will begin my review of the results with the second quarter trading environment.

The table shows the percentage year-on-year changes in BP's average upstream realizations and refining indicator margin.

Compared with last quarter our liquids realization increased by more than 25% to $52 per barrel, while our gas realization fell around 20% to $2.90 per thousand cubic feet.

The sharp decline in Henry Hub prices continues to materially impact both our realizations and our financial results.

Taking both oil and gas together our 2Q and year-to-date average hydrocarbon realizations are more than 50% lower than a year ago.

The refining indicator margin of $5 per barrel was down 20% compared with the previous quarter and nearly 40% lower than 2Q '08.

This margin weakness has been driven by a high distillate stock and reduced demand for products.

Indicator margins in the US have regained a premium over those in Europe, but upgrading margins remain low globally.

Turning to the financials, adjusting for non-operating items and fair value accounting effects of $200 million, our underlying replacement cost profit for the quarter was $2.9 billion, down 66% versus our underlying profit in the same period last year, reflecting the much weaker environment.

Compared with last quarter, it's up by 14%.

The effective tax rate for the quarter was 35%.

We now expect the full year rate to be towards the bottom of the 36% to 39% guidance provided in February.

Second quarter operating cash flow was $6.8 billion, flat compared with last year and up by 21% compared with last quarter.

Cash flows for the quarter benefited from a reduction in inventories, including oil volumes held in storage to access the steep contango structure of the market at the end of 1Q.

The $0.14 per share dividend announced today, which will be paid in September, is the same as last year.

The sterling dividend is up around 20% year-on-year reflecting the stronger dollar.

In Exploration & Production, after adjusting for non-operating items and fair-value accounting effects of some $600 million, we reported a pre-tax underlying replacement cost profit of $4.4 billion for 2Q, down $8.7 billion compared with last year; again, reflecting the significantly weaker price environment.

The Gas Marketing & Trading contribution was comparable to the prior year, but lower than the strong 1Q performance.

Reported production again exceeded four million barrels of oil equivalent per day, more than 4% higher than a year ago.

Adjusting for the impacts of production sharing agreements and the effects of OPEC quota restrictions, underlying production was also 4% higher than a year ago.

We maintained momentum in reducing costs, with unit production costs down by 12% on 2Q '08.

However, in line with previous guidance, DD&A is higher than a year ago.

BP's share of TNK-BP net income was nearly $550 million and we received a dividend of $470 million during the quarter.

In Refining & Marketing, after adjusting for a charge of nearly $300 million related to non-operating items and fair value accounting effects, we reported a pre-tax underlying replacement cost profit of $970 million for 2Q.

This is an increase of nearly $200 million compared with a year ago, despite a much weaker refining environment and the impact of the very narrow, light/heavy spreads.

Refining demonstrated continued operational momentum, with availability up by more than 5% versus 2Q '08.

The International businesses continue to perform well, with lubricants maintaining strong delivery and with some recovery in petrochemicals.

Across R&M, the focus on simplification and cost efficiency continued to deliver material year-on-year benefit.

Supply optimization and trading, which made an exceptional contribution in 1Q returned to a more typical level.

And the weakening of the US dollar and the increase in crude prices in the second quarter created a gain on in-transit barrels.

In Other Businesses & Corporate, after adjusting for $40 million of non-operating items, the second quarter's result was a charge of $540 million, around $350 million more than a year ago.

The increased charge was primarily due to negative foreign exchange effects and a much weaker business environment for shipping and Alternative Energy, partially offset by the continued reduction in corporate costs.

Our guidance for the second half is unchanged from the $400 million to $500 million underlying quarterly charge I indicated in February.

Turning now to cash flow, this slide compares our sources and uses of cash in the first half of 2008 and 2009.

Cash inflows were over $13 billion, with operating cash flow down 30%, reflecting the weaker environment.

Cash expenditures were over $15 billion, including about $10 billion of organic cash CapEx.

Our net debt ratio of 22% remains at the lower end of our targeted band.

In closing, I'd like to say a few words regarding our progress in 2009 and the outlook for the rest of the year.

We continue to expect growth in production.

The normal E&P turnaround season will impact 3Q, with planned activities across many of our operations, including some of our highest margin areas.

This will impact volumes, margins and costs.

For the first half of 2009, refining availability has been more than 4% higher than the same period last year and we expect availability to continue at higher levels than 2008 for the remainder of the year.

Cash costs in the first half were down by more than $2 billion compared to the same period last year.

We now expect cash costs for the full year to be down by more than $3 billion compared to 2008.

In line with previous guidance, organic capital expenditure is expected to be below $20 billion for the full year.

We continue to anticipate $2 billion to $3 billion in disposal proceeds and have already delivered $1 billion during the first half.

A final comment, the challenges of the difficult environment remain with us, but we're making significant progress.

We continue to fund the dividend and invest to grow the firm.

The balance sheet is taking up the slack for the time being, but we're committed to getting our cash flows in balance under the tough industry conditions that we've faced in recent months.

We're not there yet but with the momentum we have we expect to be there soon.

That concludes my remarks, now back to Tony.

Thanks Byron, before we take your questions, I'd like to reiterate the strategy we've been pursuing for the last two years.

In the upstream, we said that we would deliver profitable growth and we are.

Production is expected to grow again this year.

Costs are coming down and capital efficiency is going up.

In the downstream, we said we would turn around the business and we are.

Operational momentum has been restored and we're driving cost efficiency here too.

In Alternative Energy, we said we would focus and simplify the business, and we are.

And finally, we're continuing to drive efficiency at the corporate center.

I'm also pleased to welcome Carl-Henric Svanberg to BP to replace Peter Sutherland as Chairman.

Carl-Henric, who many of you will know as the Chief Executive of Ericsson, will take up his post on the January 1 next year and I'm very much looking forward to working with him.

In closing, let me say we've made good progress over the last couple of years, but there's no room for complacency.

Today, we have strong operational momentum across all of our businesses.

We have a clear strategy that we're delivering and today's results give you an indication of the progress we're making.

I believe we have the best set of assets in our industry and we now intend to get the most out of them.

Ladies and gentlemen, thank you for listening.

We'd now be delighted to take your questions.

(Operator Instructions).

Okay, if we could start then by going to Theepan at Morgan Stanley; Theepan, good afternoon.

(Inaudible - microphone inaccessible) to ask a couple of questions on the medium-term portfolio and just a quick question on costs.

Firstly just on the Gulf of Mexico and the recent Mad Dog South discovery, it was very much referred to as a giant field.

I was just wondering if you could give a little bit of color on what are the options you're looking at in terms of development and potentially production capacity.

Secondly just on Angola, could you give a update there on the development on PSVM, whether you see any change in terms of the breakeven economics on the deepwater?

Lastly on costs, I'm sure you'll get a number of questions on this, but I was wondering, Tony, do you see a limit on how much cost you can take out of the BP system, particularly sort of in the context of keeping operational performance at a high level and ensuring safety?

What do you think the right balance there is?

Thank you.

Okay, thanks Theepan.

Let me ask Andy to cover the Gulf of Mexico and Angola, and I'll come back to talk about costs.

Yes hi; hi Theepan.

Yes, on Mad Dog, as you're aware, when we sanctioned it, we just sanctioned it on the basis of the reserves at the time that had been appraised, which was in the eastern segment of the field and that supported the initial spar development.

We've now appraised the west side of the field and that's come in.

And we recently appraised the southern segment of the field and that has also come in.

So in terms of scale now, we have something that's of equivalent scale to both Thunder Horse and Atlantis, which we describe as giant fields.

In terms of what next on Mad Dog, it is a question now of figuring out how best to pull that additional resource through.

There's clearly some additional de-bottlenecking we can do on the existing spar.

That's relatively limited.

I think we can go from somewhere about 80,000 barrels a day up to 120,000.

So clearly, an option we're investigating now is whether or not we put an additional facility on that southern segment.

I think it's too early to decide the timing around that or whether or not, in fact, that's what we'd do.

But we believe there is sufficient resource and that is an option that we need to look at very hard.

In terms of a Block 31, the actual first project that we have underway at the moment is PSVM and that's due to come on production in 2011.

The project is proceeding well on schedule and on cost.

And then we have a series of follow-on developments sort of hubs two, three and four.

We are taking a little time just to make sure that we've got the right quality of front-end loading on those projects.

They were the projects we talked about last quarter, about those which would come back and make sure that we could work them hard in the current cost environment to make sure that they are economic.

I believe we will get to that point.

We have a high quality resource in Block 31, but it is the time now to really drive deflation into those capital costs and ensure we've got the high quality of engineering up front and that's what we're doing.

And so nothing's changed in terms of the breakeven of these.

They are economic projects, but we need to ensure the capital that we put on the books is of high quality.

Thanks Andy.

On costs, Theepan, the costs that we're seeing today, the majority is obviously the consequence of the actions we've been taking over the last year to simplify, reduce the complexity of BP, significantly reduce the overhead.

More than 5,000 people have left the Company, many of them at relatively senior levels, so we've seen our overhead shrink by about 20%.

Not all of that has hit the bottom line yet.

It continues through this year.

We'll see it continue through this year.

And beyond that, we will see opportunities to drive efficiency in our organization and our business more broadly.

But I think going forward we will see an increased focus on costs coming from the deflation that we are going to see in the supply chain.

Very little of that, if any, has turned up so far; it will turn up progressively as we go forward.

And I do expect us to continue to see reducing costs over the next few years, because that's what the industry requires and that's what BP is going to ensure we make happen for BP.

If we can go now to Jon Rigby at UBS; Jon?

Hi, I have two questions.

The first is on gas, and it relates to sort of both North Sea and US.

In the North Sea, are you running ex.

maintenance at below capacity, because of the demand effects, I guess principally in the UK, is that affecting production?

And secondly, at these gas prices in the US is there consideration being turned to, I guess, turning down your production levels, which still are at quite impressive levels despite the price?

The second is on the downstream.

I take your point about operating improvement and so on, but it still is clear you're loss-making in the US despite the improvements of Texas City.

What's the next stage in the US ex.

macro changes, or I guess you could talk macro changes as well, to make the US downstream more profitable on a sustained basis?

Thanks.

We'll ask Iain to deal with the downstream and then ask Andy to talk about gas in the UK and US.

Iain, how are we going to make it profitable?

Thanks Jon.

So first of all just to set the US result in context; in the first half of '08 the US lost $1.2 billion and in the first half of this year it made $100 million; that's quite a lot of progress, but still more to do.

There were three factors that turned the profit in 1Q into a slight loss in 2Q; lower oil trading result, because some of it accrued in the States.

Quite a large turnaround burden in the second quarter, we had the largest turnaround in the history of Whiting.

And thirdly, lower refining margins of about $1 a barrel.

So what more do we have to do?

Well first of all, in line with what Tony's just said, cost efficiency in our supply chains, particularly in refining and logistics is a major focus.

The second thing is that we still have further to go on utilization.

Our assets are better on average than the industry.

Our utilization rates are better than the industry today, but there's still more to do.

And the third thing, and quite an important one, is the major project we've got going on at Whiting, which is going to fundamentally reposition the margin capture capability of Whiting and turn the Midwest into a very advantaged integrated position.

Those are three of the things that I think will make a big difference as we go forward.

Thanks Iain.

Andy, gas?

Yes Jon, on gas, in the North Sea -- with regard to your specific question, do we have any gas shut here?

No, we don't, not outside the normal turnaround activities.

Turning to the US, clearly you were there in Houston for the review that we had, and our goal is to get the business to be not only profitable but cash breakeven at $4.

We aren't quite there today.

Now overall, the business made a small profit in 1Q, small loss in 2Q, despite $1.40 off of Henry Hub.

So the second quarter was challenging, but we are making progress on the cost base and on the capital efficiency.

In terms of non-profitable wells, yes, there is a small amount of gas that we've shut in that isn't profitable in the current environment, but in terms of our overall portfolio it's a relatively small amount.

And the big challenge for us really is about ensuring that we can get beyond simply being profitable but to cash breakeven while sustaining the business, which is ultimately about driving capital efficiency into the business.

And you certainly saw the actions that we're taking to do that.

Thanks Andy.

Let's go now to Mark Bloomfield at Citi.

Mark, good afternoon.

Specific questions on cost savings please.

First, I wondered if you could help us to understand the impacts of favorable FX moves, specifically talking about how much of the $2 billion saving you've captured to date is due to FX.

Second, I wondered if you could perhaps try to give us some more granularity on the $3 billion target, specifically if you can suggest any split between R&M and E&P, and also the extent to which it's attributable to industry factors versus obviously the BP specific factors you've alluded to.

Thanks.

All right.

If you look at the $2 billion to date, the majority is our own efforts and the balance is made up of both foreign exchange benefits and lower energy input costs.

Looking at the incremental $1 billion, I think we'd expect it to be made up of broadly the same.

It's across the Company in all areas.

And, as I said, as we go through time, we would expect more to be coming from the supply chain and less to be coming from the internal efforts we've made over the last 18 months as that program comes to a natural end and we've got BP's efficiency back in shape.

We have not really begun the task of getting the supply chain costs back to where they need to be for a $60 world.

Thanks.

Let me move on now to Kim Fustier at JPM.

Good afternoon gentlemen, just two quick questions.

Firstly, you mentioned that 50% of your sites were now running on OMS.

How many more BP sites do you expect to be running under OMS at the end of this year, and at the end of next year?

And then secondly, gearing went down in 2Q versus 1Q.

So it looks like you were more or less free cash neutral in 2Q in a $58 oil price environment with very low gas prices and low refining margins.

So you guided at the start of this year with the free cash breakeven of $60.

So is this better than what you had anticipated at the start of this year?

Thank you.

Let me talk first to the OMS question.

By the end of this year we'll have between 70% and 80% of all of our operating sites on OMS and we expect to complete that task by the end of 2010.

So I think that's good progress.

Of course, that's not the end of the journey.

In some senses, it's the beginning of the journey.

In terms of cash flow breakeven, one quarter doesn't make a year and we need to be careful to interpret quarterly numbers wisely.

So this is a good quarter.

And, as you rightly point out, we're very close to cash flow breakeven, but we had the benefit of some quite significant working capital moves that helped.

What I would refer you to though is the comments that Byron made, which I will just repeat.

We are making good progress at bringing the cash ins and outs into balance in BP.

And we expect to be there at the end of the year and in an environment not dissimilar to the second quarter.

That's to say, oil prices in the high $50s, very significantly depressed refining margins and very low Henry Hub prices.

And it is -- as I remind people often, it's about more than just the oil price.

It is the basket of prices we get for our products.

Anything you'd like to add Dr.

Grote?

Just to point out that although the gearing went down quarter-on-quarter, we did have an increase in net debt in the second quarter.

And that's a consequence of the fact that the denominator in the calculation, excuse me, went up as the equity increased in the second quarter.

But as Tony referenced, we did have a reduction in inventories.

A lot of it was a consequence of the elimination of the substantial volumes that we had lined up in the trading area to take advantage of that very steep contango structure that was in place at the end of March, which hasn't persisted across the course of the second quarter.

So if you adjust for what we would say is about $1 billion worth of working capital release, you can see that we still have a ways to go.

But 90 days is only 90 days and we've got a good solid roadmap ahead of us.

Great, thank you.

Thank you Bryon.

Let's move on.

I'd like to now, if I can, take a question from the web from Aymeric Villaret, which is an interesting question.

As you focus on profitable growth, how can you consider agreements you signed in Iraq?

What kind of profitability do you expect?

This is clearly an opportunity for me to talk about Iraq.

I think there's a couple of things I'd like to say about Iraq.

The first one is to understand the scale of the resource.

Rumaila is either the third or fourth largest oil field in the world with 65 billion barrels of oil in place, of which 12 or so have been recovered to date and with the potential to recover somewhere between a further 15 and 20 billion barrels, so it is an extraordinary large resource.

It was a field that was discovered by BP in the fifties.

For the last five years, we have been working with the Southern Oil Company of Iraq to help them manage the field and to help them with the development activity that they have been undertaking.

So we have a very good, I suspect, differentiated view of the subsurface and what the opportunity really is.

We established a joint venture with CNPC.

And one of the reasons for that was to make available to ourselves the Chinese supply chain, because this will be successful if we're able to combine great subsurface understanding with very good costs and capital inputs as we go about the redevelopment.

And the relationship with CNPC provides us with the opportunity to access in a very unique way the Chinese supply chain.

Based on those two things, we are very confident that the Rumaila opportunity is competitive with other opportunities which we have in the BP portfolio and expect its profitability, by way of returns, to be commensurate with other things that we are developing, both in our existing positions and in new ones.

Let me now move on if I can to Michele please at Goldman Sachs.

Hi.

I'd like to ask two questions.

The first one is in terms of your major new projects.

Which one do you feel confident to be able to mature to a final investment decision over the next 12 months?

And then my second question goes back to Iraq and the Rumaila field.

How are you going to be able to book reserves and production from that field?

Let me deal with the second one now.

I think it's too early for us to say exactly how the reserves and production booking will work out.

When we've sorted that out, which will probably not be before the end of the year, we'll tell you about it then.

If I can ask Andy to say something about projects in the E&P portfolio?

Yes, Michele, as we've discussed in the past I think, there are sort of a couple of things going on at the moment as we drive capital efficiency.

Those developments where we have a very sound supply chain, we've built a standardized approach and we can leverage a high quality front-end loading to the projects.

Those are the ones that we need to be continuing with and we'll be bringing forward to investment decisions in the next 12, 18, 24 months.

Those are things that are the tieback opportunities that continue to be there in the Gulf of Mexico and the series of projects, for instance, that we have in the North Sea, which again tend to be sub-sea tiebacks or things like the next stage of the Clair field development; areas where we have an established project execution approach and we can truly leverage a high quality project.

Things where we genuinely look at today's supply chain and believe that we can work harder to get to a better capital efficiency, those are the projects that we are recycling and those are things which are the big Greenfield hubs, for instance, in the Nile Delta, Satis, West Nile Delta, those are things where we will take the appropriate time to ensure we've got the front-end loading right and the next stage of the developments in Block 31.

But we do have a pretty full hopper of projects and so this is all about phasing and ensure that we do that, do the projects at their natural pace.

So there's no timeouts in terms of delivery, it's simply around ensuring that we get the quality into the capital efficiency.

Thank you very much Andy.

Let's go now to Paul Spedding at HSBC; Paul, good afternoon.

Afternoon.

It's a question on refining.

Clearly at the moment, management focus is on the operational performance in the US, but it seems to me that the external market problem area is probably Europe.

I think some of your competitors describe it as challenging although I'd use something probably slightly stronger.

I'd be intrigued as to what action you are taking with your European assets and also whether you're considering run cuts or extended maintenance.

It sounds like one for Iain; Iain?

Thanks Paul.

Well first of all, I think it depends where your assets are on the ground in each of the regions as we're looking at the changing circumstance of the market.

It is true that in the last two months the European indicator margins have come off significantly.

There are two things running in BP's favor that are pretty fundamental.

I think first of all, it's the quality of our assets.

They're very highly upgraded and they are well located in typically deficit sub regions of the UK, and they're heavily integrated into our value chains.

And as a result of that, the second thing is that our utilization rates are actually significantly higher than the industry.

On average this year, they've been running in Europe at approaching 90%, whereas most of the industry has been seeing about 81% and that gives you a sense of the quality.

So those two things drive our performance relative to others.

And to the second part of your question, are we considering run cuts?

We have seen slight run cuts, particularly at Rotterdam which is probably one of the -- it's the least highly upgraded refinery, which also has an export dimension to it.

But in general, our refineries are running well and, despite very challenging circumstances, generating cash flow towards our cost base.

Thanks.

Thank you.

Thanks Iain.

Let's go now to Mark Iannotti; Mark, Bank of America.

Hi, afternoon gentlemen; a few questions.

Just coming back to gas realizations first of all, $2.47 in the quarter; in percentage terms that's about as low as I've seen it relative to benchmark prices.

Can you just give us a feel for what you think realizations are likely to do over the next couple of quarters in US gas relative to Henry Hub markers?

Second question is really coming back to Rumaila if I can.

I know you've made a point about differentiated access to this particular field [in justifying] the terms you've negotiated.

But if you look at the rest of the bidding round, I think there were many companies that had differentiated access to data on the fields they were bidding for.

Were you surprised to find that you were the only company that could strike a deal here in this first round?

Let me ask Andy to talk about this.

I think the answer will be, we can't provide too much clarity, Mark, but let's see what Andy has to say about that.

Well, yes, no, we're looking very short-term here and [create] two dynamics -- two dynamics going on.

What is happening to Henry Hub and I think in the short time period that you've talked about I don't think that we'll really see the impact of the supply reduction from the Lower 48 coming in.

There's clearly plenty of storage and that's going to be the near-term dynamic.

And I do think longer-term as you look toward the year end there is clearly a startup of new plants on LNG and that gas has to find a market.

And the US will clearly be a target.

But I think we can expect sort of prices persisting at current levels, certainly in the near-term.

And then in terms of this, clearly they vary.

They closed slightly in 2Q versus 1Q.

And I suspect 3Q will be at similar levels to 2Q.

Thanks.

I think going to back to Iraq, there was probably surprise on both sides of the table.

What I would say is that, I think as the dust has settled, we feel very happy and confident in the position in which we find ourselves.

And I should probably leave it there.

Okay, thank you.

Let me now move on if I can, to Irene Himona at BNP; Irene?

Yes, good afternoon.

If I can just go back to the point you made, Tony, on cost deflation.

I think you mentioned that cost deflation in the supply chain has not even started yet.

Is there resistance to the industry's effort to achieve that, because clearly, yourselves and everyone else has been trying to renegotiate with their suppliers?

How do you actually start the process?

And how long does it take for a weak industry environment to feed through that?

Thank you.

I think I should clarify.

It's not to say it hasn't started.

What it hasn't done is dropped to the bottom line.

And that is a consequence of contract negotiations, current contracts rolling off, and new lower price contracts replacing them.

So, if you look at history, and it's probably as good a guide as any, it'll be 12 to 24 months before we see the full impact of the activity that is now taking place with respect to contract negotiation, which we are pursuing quite aggressively where it's appropriate, and we're pursuing vigorously everywhere.

And I suspect most in the industry are pursuing it pretty vigorously, but not much of that has turned up in the bottom line, but it will be progressively.

Okay.

Thank you.

Irene, if I could just add, it's not only about industry-specific costs.

There are a lot of goods and services that we acquire that are more generic that impact firms across all industries.

And we're finding an ability to access substantial savings in those areas as well.

But as Tony said, most of these contracts have just been renegotiated, and you'll start seeing the benefits as we look across the rest of 2009 and into 2010.

Okay.

Let's keep on with the questions.

Jason Kenney, of ING, I presume in Edinburgh, Jason?

Yes, I'm still in Scotland.

I've got two questions, if I may.

[What] finer place to be.

I've got two questions, if I may.

The first is on, bizarrely, bond issuance.

I think you've issued maybe $8.9 billion to $9 billion of bonds so far.

And I just wondered if this was more an opportunistic aim rather than necessarily -- necessary, as such?

And what kind of bond issuance can you see being taken by the market in the second half 2009?

And then secondly on Russia, quite a difficult outlook for Russian energy prospects at the moment, falling or flat productions for at least the next three or five years and GDP pressure this year, at least.

TNK-BP are probably well-positioned being oil-focused.

Could you just maybe update us on the key targets medium-term for that position there?

Yes, very good.

I'll ask Byron to cover the bond issuance.

Can you start with that, Byron?

Yes.

We've done about $9 billion-worth of bond issuances in the course of the first half of the year.

And indeed, we have pursued it on an opportunistic basis.

We found that we were able to access very good rates out there.

We've spread it across a whole wide range of markets, and feel very good about what we've accomplished.

We had substantial refinancing needs for 2009, as well as the fact that debt has increased over the course of the last three quarters.

And against an uncertain environment, we felt it was prudent to front-end load that activity and make sure that whatever the world brought our way, that this wasn't a problem that we were facing.

So the majority of the debt issuances that you would be seeing from us in the course of 2009 has already been completed.

Great, thanks, Byron.

I think on Russia, Jason, I would say that TNK-BP is performing very well.

It's been performing very well for some time.

It's running operationally very well.

The team have got their head down and they're getting on with it.

We would expect that production would grow 1% or 2% over the next three to five years, in line with the broader portfolio, and that's made up of two components.

It's made up of the Brownfield activity being broadly flat, and growth coming from a series of new developments.

And we started up two of them in the course of the last quarter, Uvat and Kamennoye.

And they've both got multiple billion barrels underneath them, so there's an opportunity for continued incremental development of that resource.

And I think what TNK-BP is demonstrating is that it can be very profitable and very compelling and competitive with much of the rest of our portfolio in this sort of price environment.

So we're pretty confident about TNK-BP.

Clearly, Russia has some challenges, but my expectation is that they'll manage their way through them without too many bumps in the road.

Thank you very much.

Thanks, Jason.

And let's move on now to Lucy at Barclays Cap, Lucy Haskins.

If I could have a couple of questions, please.

Byron, could you quantify what the ForEx gain was in the R&M business in the second quarter?

Do you want to give us your questions, Lucy, and then we'll figure out where they're going to go.

What's the next one?

And the next one was I think you, Tony, said at the status review, that you thought probably US gasoline sales for the industry as a whole had peaked in the first half of 2008.

And clearly, you have better utilization rates than most of your competitor group at present in that market.

But I just wondered how you might be thinking about reshaping the portfolio sort of going forward to more growth markets downstream?

Okay, thanks, Lucy.

Let's ask Iain to talk about the downstream, and then we'll get Byron to come back and deal with foreign exchange; so Iain?

Thanks, Lucy.

I think, first of all, just on volumes it's true that our marketing volumes year-on-year, as you saw, have been down about 5% in each of this quarter and the half.

But actually, if you parse that apart, the slightly encouraging thing is that business to consumer retail volumes are starting to come up, even though business to business volumes are still -- have been depressed and have been shrinking slightly.

So we are seeing a little bit more demand coming back for gasoline, and that's playing actually through into the stock levels, in that gasoline stocks are only slightly up on a year ago.

In terms of the portfolio, therefore, if you look at the portfolio in the OECD, we've been deliberately for a number of years refocusing the portfolio with highly upgraded refineries in deficit sub regions, which actually are tied into highly integrated positions.

And the focus, for us, is to continue to drive quality and differential quality and differential integrated margin capture relative to the competition.

And we will then, of course, be looking for access to growth markets, particularly in Asia, as those come available.

Great, thanks, Iain.

Thanks.

Byron?

I'd remind everyone that the effect that Lucy is referring to is one that was quite substantial back in the second half of 2008, in particular in the fourth quarter, where the combination of a very rapidly strengthening dollar and falling crude prices led to a significant loss that showed through in Refining & Marketing, because of this in-transit effect.

What we saw in the course of the second quarter was a weakening dollar and strengthening crude prices, so effects that would tend to create a positive effect in the R&M result.

Having said that, this is a category that normally is very tiny and it sits as part of the normal volatility within the segment results.

It was a bit bigger in the course of the second quarter, which is the reason we decided to point it out, but it is still very modest.

And as a result of that, we're not planning on quantifying it.

But it is very small compared to the sorts of levels that we saw during the incredibly volatile markets of 3Q and 4Q.

Is that because -- I think you quantified that sort of loss at about $500 million.

Is that right, if I remember correctly?

And so we're not talking hundreds of millions as far as the second quarter movement is concerned?

Well, Lucy, we don't normally point out items unless they're at least $100 million, so you can take that factor, along with the point you just made, to calibrate.

Yes.

Thank you.

Thanks, Lucy; Neil McMahon at Sanford Bernstein.

Hi, just going back over a number of questions that have been asked already.

I'm just turning to Rumaila again.

Given that the profitability, from what we understand, is $2 per barrel, and it doesn't seem like it's linked to crude oil prices at all.

Do you not run the risk, sort of similar to TNK-BP, that over the past few years, as oil prices have risen your leverage to your oil prices has been understated quite a bit, compared to pure E&P companies and competitors?

And we are talking obviously large volumes here if you're able to book them, but the leverage effect is going to be pretty small compared to other companies, and it's likely that investors will see that.

The second question is really on cost cutting.

You said the majority of the cost cutting effects were self-help or BP-related.

Majorities can be 51%.

Can you just quantify the FX effects, the lower energy costs, and any lack of repairs or turnarounds that were not in these numbers that were in last year's, to get a rough percentage guide, so we can plug it in to the models?

Thanks.

The answer to the second question is no.

I'm standing by what I said, Neil.

The majority is the majority.

In terms of Rumaila, all I would say is that, of course, you're right, if the only thing we were doing was Rumaila.

But it's part of the portfolio, and we think it's a good fit with the rest of the portfolio.

It's, of course, in some senses, the antithesis of what we're doing in the deepwater Gulf of Mexico, for example.

So it's about, how do you build a global portfolio?

And we're very happy with the way our global portfolio is developing.

And do you -- just a quick follow-up, Tony.

Is there any opportunity outside the Rumaila field remit that you can go for, under this contract?

Or is it purely the redevelopment within the licensing round or the license area as is today?

I think we need to put it in context.

It's purely, or simply, the opportunity to develop 66 billion barrels of oil in place; quite a lot.

I would say that the opportunities for BP in Iraq will continue.

I'm sure they will.

And we'll decide which ones of them that we choose to take up.

But we clearly are intent on building a big position in this country in this industry.

Thanks.

Okay, if we can go now to Colin Smith at Icap; Colin?

Good evening, gentlemen.

I've just got a quick -- well, two questions as usual.

Just on the non-US downstream that actually looked like a remarkably strong number, given the margin environment you were facing.

Iain may feel he's partly answered the question of why it's been so strong in terms of the changes that you've been putting in place there.

But I wondered if you could just comment on anything else you think may have been going in, bearing in mind the guidance you gave about Q2 being particularly strong for trading, and perhaps give us a feel for how resilient you think it might be in the face of further weakness in European and perhaps far Eastern margins?

And the second thing was just coming back to cost cutting.

I wonder if you could just say a little bit more about where the cost cutting is actually coming from.

Is this largely a process of waiting for service providers to cut their costs?

Are you going to a new suite of service providers?

Or is it because you're changing, or looking at changing, the nature of the kind of developments you would do on similar types of projects, looking into the future?

Thanks Colin.

Let me ask Iain to talk about the US downstream.

It's actually European not the US downstream.

Iain, European downstream.

Thanks, Tony.

Thanks, Colin.

Well, first of all, let me just talk to the quarter and then I'll talk a little bit about prospects.

The quarter was a reasonably strong quarter outside of the US.

I just want to clarify, however it was not a particularly strong quarter in trading.

It was actually a typical quarter in trading.

The strong quarter in trading was in the first quarter.

We did see, however, good trading and optimization in line with our plans in the second quarter.

The strength came from, broadly, four things.

The first was very high refining reliability and availability.

The second was good margin capture in our Fuels Value Chain marketing.

The third was some quite strong efforts on cost performance.

And the fourth was continued strong performance in our International businesses.

And our petrochemicals business has seen some recovery in the second quarter, and lubricants also has continued to perform very well.

As far as the prospects are concerned, it is true as you've seen with the global indicator margin, that the quarter has started out at about $3.30 or so.

It is weak.

And we are, therefore, going to see challenging margin conditions, I think, in Europe and Asia continuing.

Our Asian exposure is limited relative to the competition, and our European refining portfolio is highly upgraded relative to the competition.

So in a relative sense, even though this will be a tough environment, I think we'll continue to do reasonably okay.

But it's going to be hard.

Thanks, Iain.

Let me come back to the costs, Colin.

I think to date as I said, most of what we've done is to do with BP, and particularly the overhead cost structure of BP, which is down by more than 20% as we've streamlined and simplified how BP operates.

As we turn to the supply chain and third party costs, I think it's all of the above.

It is about new providers in some places.

It's about new contracts in others.

And in other places it's about different ways of working.

And it's all three; all with the objective of bringing our cost structure in line with the trading environment we're now experiencing, and continuing to drive efficiency into BP on an ongoing basis.

Let's keep going.

Let's now go to Iain Reid at Macquarie.

Iain.

Hi, Macquarie.

Macquarie, sorry.

Never mind.

Yes, firstly a question on Shah Deniz if I could; Phase II is still in abeyance by the looks of things.

I just wonder if you could talk a little bit about what the issues are.

Are these project-related issues in terms of cost, etc.?

I believe there's problems with Turkey in terms of transit.

And I wonder whether you're getting any pressure from the gentlemen in Brussels on whether you should sell gas into a western pipeline consortium (inaudible) rather than sell to the Russians?

And secondly on Tangguh; could you just update us on when you expect to see the first volumes from the second train?

And whether there's any kind of deliberate, perhaps, relaxation of the schedule there, given the softness of the LNG market?

It sounds like these are both questions for Andy; Andy?

All very good questions, Iain.

As you understand, the sale of gas from Shah Deniz is an issue with which the state of Azerbaijan has a huge amount of interest.

So, as we work towards enabling the project, you're right, we have to get a transit agreement in place through Turkey.

The negotiations are ongoing at the moment and I would say we continue to make progress.

So it is moving forward and I think there will be the right outcome on that issue.

And, as you say, from a regional perspective, we're certainly getting a lot of help from interested parties to buy that gas.

So we have a huge resource in Shah Deniz Stage II.

We do have an economic project and it is about getting all of the inter-Government agreements in place that will enable it to occur.

It's not unlike the process we went through on BTC actually to get the oil to flow through Azerbaijan, through Georgia and Turkey.

It wasn't easy.

It took a lot of effort to put in place, but clearly led to a phenomenally successful project.

And we're at that same stage in Shah Deniz.

I'd just -- we'd would say that you should be encouraged by the progress that's been made.

On Tangguh, as you know, we've delivered the first two cargoes.

They were from train one.

Train two is currently in cool down at the moment and we'd expect to be making LNG from it in the third quarter -- back end of the third quarter.

There isn't any deliberate process to slow it down, but we clearly are at the commissioning stages of both of these trains.

We haven't run train one yet at its full performance rate.

That we will go through; the process of commissioning and debugging it, and we'll go through a similar process on train two.

You shouldn't expect us to be getting anywhere near the full output from Tangguh before the end of the year.

Thanks Andy.

Great.

Thanks Andy.

Let's go to the US now.

You've been very patient Mark; Mark Gilman.

Gentlemen, good afternoon.

If I could, let me just stick with the Tangguh question for a second.

Once, Andy, the two trains have been fully commissioned would it be your intent to run them, at a 90% odd utilization rate going forward, notwithstanding market conditions and/or the contractual supply position that the facilities are in?

Well, clearly some of the volume is pre-sold Mark, so we have long-term commitments to buyers in Asia, both in China and Korea.

A lot will depend on the growth in their economies in 2010 and there may be cargoes that they want to re-negotiate or redirect.

So, I think we'll have to come to that decision then.

Clearly, there will be some spot cargoes available and we'll have to decide whether again we avail the market with those.

So, you're right.

On the margin -- and you're probably right on the margin, it's probably the last 10%.

There will be choices to be made as to how we optimize the cash flow from Tangguh.

I guess, Andy, my question relates to whether or not you would adjust the operating rates of a facility like that in line with market conditions?

Or whether process considerations basically say run it at as high a utilization rate as possible virtually all the time?

No, when you're in that last part of the turndown, I'd say the last 10%, it makes -- you're truly into a pure choice about the quantity.

The plan has a turndown.

The marginal operating cost is small and then you can decide whether or not it's economic to produce it then or wait for the future.

Okay, (inaudible).

Okay, thanks Mark.

Let's move on now to Neill Morton at MFG; Neill?

Thank you.

Good afternoon, a question for Byron actually.

You used to have a rule of thumb to try and forecast the Yukos effect in your quarterly results.

It now no longer seems to apply.

Can you give us perhaps any guidance as to relative changes in crude prices and/or volumes from quarter-to-quarter, or does it simply remain unforecast-able?

Well, the rule of thumb worked probably pretty well back in the period of time when the bulk of the equity volumes coming into the BP system were volumes of North Slope crude oil.

But over the course of time we have a lot of new equity sources that are being refined in our own system; new volumes from the Gulf of Mexico, from Azerbaijan, from Angola and various other places.

And what that means is that there tend to be wide volumetric swings from quarter-to-quarter as the refineries optimize their slates.

And the rules of thumb work very well if volumes don't move, but volumes do move.

And what you saw in the course of the second quarter was A) as many of you had forecast, a negative effect from the price movement that was more than offset by a positive effect as we drew down the inventories of those equity source barrels that were in our system.

So I'm afraid that this is always going to be an almost impossible thing to forecast, except in an increasing price environment it will have a tendency to be negative but, as in this quarter, counter balancing effects may swing it the other way.

Okay, great.

Thanks Byron.

I think it's time now to draw this to a close, ladies and gentlemen.

Let me just say a few comments by way of closing.

And firstly, thank you for your questions which, as always, were very insightful.

I think it's safe to say that we've made good progress over the last few years and I hope you can see there is strong operational momentum across the business.

I believe we've got a clear strategy that we're delivering and there is no room for complacency, and we are going to continue to drive costs and capital efficiency into the business.

We believe we've got the best set of assets in our industry and we're determined to get the most out of them at the same time as we add options for the future.

Thank you again for your time.

Let me wish you all a very good summer, hopefully a little quieter than the one we all enjoyed last summer.

And we look forward to seeing you all in the autumn.

Thank you very much.