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Operator
Welcome to BP's presentation for the financial community webcast and conference call.
I now hand over to Fergus McLeod, Head of Investor Relations.
Fergus McLeod - VP IR
Hello, and welcome to BP's second quarter 2010 results conference call.
I'm Fergus McLeod, and today's presentation will be by Tony Hayward, our Group Chief Executive, and Byron Grote, our Chief Financial Officer.
We're also joined today by our Chairman, Carl-Henric Svanberg for the first few minutes, and he'll make some introductory remarks.
Before we start, I'd like to draw your attention to our usual cautionary statements.
During today's presentation, we will make reference to estimates, plans and expectations that are forward-looking statements.
Actual outcomes could differ materially due to factors we note on this slide, and in our regulatory filings.
Please refer to our annual report and accounts and second-quarter stock exchange announcements for more details.
Both of those documents are available on our website.
Thank you.
And I'll now hand over to Carl-Henric.
Carl-Henric Svanberg - Chairman of the Board
Thank you, Fergus and thank you all for joining us.
I'm joined here now by Tony Hayward, Byron Grote, and Bob Dudley, and the others in the management team.
As you can see, we have issued two important announcements this morning.
One is the first-half-year results including the impact of the Gulf of Mexico and the spill.
The other one is about the departure of Tony Hayward as our CEO, and the appointment of Bob Dudley as the new Group Chief Executive, with effect from October 1.
After I have my introductory remarks, Tony will say a few things about the management change, and so will Bob, and then we will take a couple of questions before I hand back to Tony and Byron to go through the main points of the results announcement, with questions focused on that.
I will not sit through the whole presentation as I have other appointments, which means that if you have any questions on the dividend, you should ask it in that first section there.
Let me first say this.
The tragic accident of the 20th of April and the subsequent events, they shocked and they saddened us all.
They have had a profound effect on the families of the victims, on the communities of the region, on this Company, and on the industry in which we operate.
We deeply regret the impact of this incident and we are committed to healing and restoring the communities of the Gulf of Mexico, to finish the immediate cleanup, to mitigate the long-term environmental impacts, and to make whole those whose livelihood has been damaged.
As I speak, the well is now capped and no oil has flowed into the Gulf for nearly two weeks, and we all look forward to sealing the well permanently.
But we also know that even when that happens, we still have much to do to make it right.
I would also like to say that we are determined to restore value to our shareholders.
They have seen enormous loss of capital and all the dividend and the Board is committed to creating value for shareholders and believes that we can deliver a stronger BP for them over time.
Looking ahead, I want to make four points today.
First, BP will change as a result of this accident.
We are taking a hard look at ourselves, what we do, and how we do it.
What we learned will have implications for our strategy and our ways of working and our governance.
Secondly, we're committed to meeting our obligations in the Gulf of Mexico, and this set of results underlines the Company's ability to do so, while providing the first estimate of our costs.
Clearly, the financial impact is very substantial, and as a result, we have recorded a significant headline loss but our businesses around the world are performing well and our cash flow is strong.
We have taken a charge of $32.2 billion for costs that we expect to need to cover.
This charge is based on the belief that we were not gross negligent in this incident.
Third, the Board has been very focused for quite a while on the Company's financial position.
Our liquidity position is strong, and last week we enhanced it further to the sale of assets for $7 billion.
And today we are announcing our intention to extend this divestment program to a total of $25 billion to $30 billion.
We expect to achieve attractive offers for assets that have a higher strategic value to others than to us.
This program will reset our position and create a stronger performing portfolio, while at the same time, remove any worry about our financial strength.
Finally, let me then turn to the change of leadership.
As we announced this morning, by mutual agreement with the Board and Tony Hayward, Tony will step down on October 1.
The Board is deeply saddened to lose Tony as our CEO.
However, the decision is typical of the principled leadership that he has thrown throughout his three years in the job and a lifetime of service to BP.
On behalf of the entire Company, I want to thank him for all that he has achieved in that time, in improving the Company's performance in so many critical ways.
But we have to recognize that the tragedy of the Macondo well explosion and subsequent oil spill has been a watershed for BP.
In future, we will be a different Company and the challenge of rebuilding our reputation requires fresh leadership, supported by robust governance, and a very engaged Board.
We're fortunate to have a successor of the caliber of Bob Dudley.
He has spent his working life in the industry both in the US and overseas, and he has proved himself a great operator in the toughest of circumstances.
I have no doubt that he will provide the strong leadership the Company needs to move forward and rebuild trust with our stakeholders.
BP has strong assets and I have discovered during my short time as the Chairman great people, great motivated people, right across the Company.
They're determined to play a full part in restoring BP's position in the vanguard of this industry.
So let me hand over for a remark from Tony.
Tony Hayward - Group Chief Executive
Thank you, Carl-Henric.
Let me add my welcome to those joining the call.
Today is a very sad day for me.
As many of you know, I spent my entire professional career at BP.
I love the Company and everything it stands for.
I thought long and hard about what is the right course of action.
It is clear that this tragedy will leave BP a changed Company, and that to move forward, particularly in the United States, it should do so under new leadership.
It is for that reason, I have agreed with the Board to stand down as CEO.
In the unstinting way in which BP has met its obligations, I believe the Company has demonstrated what corporate social responsibility really means.
That responsibility applies to individuals as well as companies.
I plan to work with Bob over the coming months to effect a smooth transition and support him in every way possible.
I know that with Bob as my successor, I leave the leadership of BP in safe and able hands.
My final thoughts are with the families and friends of those who died on the 20th of April.
We can and will compensate those financially affected by the spill, and in the long run, we can restore the environmental impact on the Gulf Coast.
But nothing can bring back the 11 people who lost their lives.
We must never forget them, and it is important that everyone remembers them on days like today.
Bob Dudley - President & CEO - Gulf Coast Restoration Organization
Thank you, Tony.
I can only echo Tony's sentiments that our thoughts and deepest sympathies are with the families from that day in April, and those impacted by the spill in the Gulf of Mexico.
As I have said earlier today, I have the greatest admiration for Tony and what he's done as the Chief Executive of BP and how he transformed the Company over the last three years and for his unwavering dedication to ensuring BP will meet its commitments to the people of the American Gulf Coast.
As we announce our results today, you will see that BP's commitments run deep and we will fulfill the promises we have made to the Gulf States and the Federal Government.
I believe strongly that meeting our commitments in the Gulf is critical to BP's long-term success.
I believe that BP has made an unprecedented corporate response to the tragedy, a response that is an indication of the values we hold as a Company.
Certainly, taking up this role over the coming months will not reduce my commitment to the region.
I do not underestimate the nature and the complexity of the work ahead as we restore our financial and reputational circumstances.
Equally, I know that BP has a portfolio of very strong businesses and great professional teams around the globe to ensure that we will be back on the road to recovery.
I'll turn it back to Carl-Henric.
Carl-Henric Svanberg - Chairman of the Board
I'll turn it over to Fergus.
Fergus McLeod - VP IR
We'll now take some questions from the telephone lines and operator I would like to ask you to poll for questions, please.
Operator
(Operator Instructions).
Fergus McLeod - VP IR
All right.
We've got our very first question here from Lucy Haskins at Barclays Capital.
Lucy, could you go ahead, please?
Lucy Haskins - Analyst
Good afternoon, gentlemen.
Could I ask, it does seem with the higher proposed divestment plans, that you're giving yourself a bit more financial flexibility over the next 18 months or so.
Is that financial flexibility prudent, just in case you have, say, higher liabilities or a reflection of the macro risk that still may be around in terms of double dip recessions, or is it an indication that you will have the flexibility to make a return to dividend payments, as we move through into 2011?
Carl-Henric Svanberg - Chairman of the Board
Let me just first say, and I would like to actually encourage you to ask any particular questions around the leadership change, because these questions may start to be of the kind you probably would like to have a bit of a briefing from Tony and Byron and the team first.
Let me say --
Lucy Haskins - Analyst
Sorry.
I mentioned it because you said you wouldn't be here long and any questions about the dividends to be addressed to yourself.
Carl-Henric Svanberg - Chairman of the Board
The reason why we're doing the disposal program of $25 billion to $30 billion is basically to match the potential cost that we are looking at and estimating we will see.
And it's not a reflection of any speculation that they could go higher.
It is also a bit of a moment for the Company in an asset base of some $250 billion, to have a look at that portfolio, and see if there are things that clearly are of higher value to others, and which could put us in a position to be more flexible going forward as well.
Fergus McLeod - VP IR
Thanks, Lucy.
I would just stress that given that Carl-Henric can only be with us for a short period, we perhaps focus this part of the question-and-answer session on managing and governance issues and we'll come back to the financials later on in the normal question-and-answer session.
Next question comes from Jon Rigby, Jon at UBS.
Jon, are you there?
Jon Rigby - Analyst
Yes.
Hi.
Just go back to your first point about the reaction to this.
You said that BP will change and there's implications that there's a focus on something new, post this catastrophe.
I think those people who have been following the Company as opposed to those who have been commenting on it over the three months are very well aware that the current CEO, safety was front and center of the entire agenda for the last three or four years.
So I'm a little puzzled about how that change will be put in place.
Secondly, it's also not clear to me that the extent of BP's fault in all this has yet been established.
Again, I'm a little confused about the comments as they relate to the departure of the CEO.
Carl-Henric Svanberg - Chairman of the Board
The first thing I could say is that you are right, that there are many things that are still left to be understood, things that will lead us to various conclusions.
But it's also clear that this is an accident that, of course, should never have happened.
We need to scrutinize and make sure we understand the implications of that in everything we do, in processes, the way we operate our organization, the governance, the discussion of risks and so on.
It doesn't mean at all that we think we have done something wrong in the way that the Company has been led by Tony.
I think everybody has been impressed, that's to say, in the way that Tony has led it, and safety has absolutely been the number one priority.
But any accident of this magnitude will bring learnings to us and it will bring learnings to other players as well in the industry and that will have impact on strategy and governance and ways of working.
Fergus McLeod - VP IR
Thanks, Jon.
We've just got time for two more questions in this section.
The next one is from Pavel Molchanov at Raymond James, United States.
Pavel Molchanov - Analyst
Thanks for taking my question.
Given the write-down that you took for future costs, is it -- does this affect in any way the creation of the Gulf Coast restoration organization or how it's going to be run, vis-a-vis corporate in the coming years?
Tony Hayward - Group Chief Executive
The answer to that is no, Pavel, we intend to continue to have a stand-alone Gulf Coast organization for the reasons that I described earlier, as a way of separating it off from the rest of the business, allowing it to focus on restoring the Gulf whilst the rest of the business focus is on continuing the development of BP.
Fergus McLeod - VP IR
Thanks, Pavel.
And the final question in the section is from Theepan at Morgan Stanley.
Theepan, please go ahead.
Theepan Jothilingam - Analyst
Good afternoon, gents.
I'm just going to come back to the dividend, actually.
If the Chairman could perhaps comment, has the Board changed its view in terms of the reinstatement of the dividend in terms of timing, given the progress in terms of containing Macondo and the recent disposal?
And then I guess going forward, how does the Board think about the payout for BP, subsequent to Macondo?
Carl-Henric Svanberg - Chairman of the Board
Two comments really.
We haven't stated, and therefore haven't reason to comment on whether we have changed anything.
We have said all along that when we come to the -- as it says in this press release, when we come to the Q4 report, that would be the time when we will come back and comment on the dividend.
All of what we have done throughout this whole tragic accident is, including the escrow account agreement with the White House, which I think was important to get an organized [paying] flow with the cutting of the dividends, with the assets disposals, all these tough and important decisions have been made with one main target, and that is to restore the strength of the Company to be able to return to an attractive shareholder return for shareholders as quickly as we ever can.
Of course, if we can create the position where we have assets disposed that give us the financial strength to meet those obligations that we're facing, then that should give us a chance to come back quick to dividends, but we'll come back and talk about that.
Fergus McLeod - VP IR
And as you know, you'll have seen in the press release, we clearly say, as we said on June the 16th, we remain strongly committed to the payment of future dividends and the Board will reconsider its position on future dividend payments at the time of issuance of the fourth quarter of 2010 results in February 2011.
Nothing of course has changed there.
Thank you very much indeed for your questions in this section.
I'm afraid, as I'm sure you'll realize, today is an extremely busy day, and Carl-Henric has other commitments he must fulfill, so unfortunately he's got to leave us now.
Tony Hayward - Group Chief Executive
Thank you very much, Carl-Henric.
Let's now move into the results presentation as we normally would.
We'll start with Byron covering our second-quarter results announced this morning which as you will have seen demonstrate that our operations continue to run well and that we're a strong Company.
Byron will also explain the new disclosures we've made regarding the Gulf of Mexico oil spill costs.
I'll then provide an update on our response to the spill, including the status of containment, well kill and cleanup operations, as well as the claims and investigation processes.
I will also share our early views of some of the potential implications of the incident, for how our industry operates in the future.
And I'll close by sharing some early insights into what will be a different BP going forward, as a result of these tragic events including changes to our portfolio and financial framework.
Let me now hand over to Byron.
Byron Grote - CFO
Thank you, Tony, and good day to those joining us on this call.
I'll begin with an explanation of the impact of the Gulf of Mexico oil spill response on our financial results.
The costs of the response are identified separately in order to present a more transparent view of the underlying performance of the group.
Our 2Q headline replacement costs result with a loss of $17 billion, which includes a nonoperating pretax charge of $32.2 billion in respect to the Gulf of Mexico oil spill.
Our underlying performance remains strong, and I'll return to talk about this later in the presentation.
The Gulf of Mexico oil spill charge includes $2.9 billion of costs to the end of June for spill response, containment, relief well drilling, grants to the states whose shorelines are affected, claims paid and federal costs including US Coast Guard costs.
The $29.3 billion provided for future costs includes first, further offshore and onshore oil spill response and cleanup costs; second, the commitment to establish an escrow account of $20 billion over the next three-and-a-half years.
This will be available to satisfy legitimate claims payable under the Gulf Coast claims facility, final judgments in litigation and litigation settlements, state and local response costs, and natural resource damages and related costs.
Third, estimates of fines under the Clean Water Act.
Fourth, estimated legal costs expected to be incurred in relation to litigation.
And finally, other announced commitments, including BP's commitment to a ten year environmental research program and the remainder of the funding of the Louisiana Barrier Islands project.
What is not included in the spill provision is any other fines and penalties and any claims on the escrow account that might exceed $20 billion.
These costs are currently not estimable and are treated as contingent liabilities.
While BP believes that the partner's share of the costs incurred are recoverable, no amounts have been recognized in the financial statements.
Instead, it's noted as a contingent asset.
Tax relief has been assumed, in line with the requirements of the US tax code.
Now looking at the quarter's trading environment, the table shows the percentage year on year changes in our average upstream realizations and the refining indicator margin.
Compared with the previous quarter, our liquids realization was up 1%, at $73 per barrel, and 39% higher than a year ago.
Our gas realization fell to $3.76 per 1,000 cubic feet, down 12% on the prior quarter, but over 30% higher than a year ago.
Taking both oil and gas together, our total average hydrocarbon realization was down 4% compared to the first quarter of 2010, but around 34% higher than a year ago.
The refining indicator margin strengthened by over $2 per barrel from the weak levels seen in the first quarter to $5.49 per barrel, and was 10% higher than a year ago.
Turning to the underlying financials, adjusting for nonoperating items and fair value accounting effects, our second quarter underlying replacement cost profit was $5 billion, an increase of 70% on the 2Q 2009 results.
Excluding the impact of the Gulf of Mexico oil spill, the underlying effective tax rate for the second quarter was slightly less than 35%, and for the first half averaged 34%, in line with previous guidance.
Second quarter operating cash flow was $6.3 billion -- it was $6.8 billion.
However, excluding Gulf of Mexico oil spill related payments, underlying operating cash flow was $8.9 billion, up 31% compared with last year, and up 15% on the prior quarter.
Moving now to E&P, I'll remind you that the Gulf of Mexico oil spill costs are reported separately, and thus not included in the E&P segment results.
For the second quarter, exploration and production, after adjusting for nonoperating items and fair value accounting effects, reported a pretax underlying replacement cost profit of $6.3 billion, up $1.9 billion compared with last year.
Relative to a year ago, the result was impacted by lower production volumes, but benefited from the improved price environment and lower depreciation.
In addition, a loss in gas marketing and trading in 2Q resulted in a contribution reduction versus both the prior year and the first quarter of over $500 million.
Production at 3.85 million barrels of oil equivalent per day was 4% lower than a year ago and was 2% lower after adjusting for entitlement effects on our production sharing agreements.
As expected, second quarter production was impacted by seasonal turnaround activities.
Production volumes were also impacted as a consequence of the Gulf of Mexico oil spill.
Turnaround activities will continue in the third quarter, and once again, our plan for some of our highest margin areas, including the Gulf of Mexico and the North Sea.
These activities will impact margins and costs as well as volume.
After the end of the quarter, we announced the sale of $7 billion of assets to Apache, and our intention to divest further upstream assets.
Production and income in 2010 will be impacted by these transactions.
Tony will talk more about the divestment plans later.
BP's share of TNK-BP net income was $490 million for the quarter.
And we received a dividend of $505 million.
In refining and marketing, after adjusting for nonoperating items and fair value accounting effects, we reported a pretax underlying replacement cost profit of $1.7 billion for the second quarter.
This is an increase of over $700 million compared to the same quarter of 2009, principally due to strong performance in the fuel value chains, and continued delivery in the international businesses.
In the fuel value chains, throughputs were up 160,000 barrels per day versus the second quarter of 2009 and Solomon refining availability remains high at almost 95%.
Our petrochemicals business captured the benefit of a recovering market, particularly in China, through high reliability and record sales volumes.
Our lubricants business also continued to perform strongly.
The US returned to profitability during the second quarter due to improved operational performance, margin capture, and further cost efficiencies compared to the same quarter in 2009.
Supply optimization and trading improved significantly from the weak levels seen in the previous quarter.
This is Refining and Marketing's strongest underlying results since the second quarter of 2006, when refining margins were more than double current levels.
This significant performance improvement reflects the progress we've made in our strategy of safety, quality, efficiency, and integration.
Looking ahead, we expect refining margins to decline somewhat in the third quarter, in line with usual seasonal trends.
In other businesses and corporate, after adjusting for nonoperating items, the pretax underlying replacement cost profit was a charge of $140 million, an improvement of $400 million versus a year ago.
The underlying charge was significantly lower than the same period a year ago, as improved business results, lower costs, and foreign exchange effects all impacted the result favorably.
We do not expect the beneficial foreign exchange effects to continue in the second half of the year, and we're maintaining the underlying charge guidance for the rest of the year, at $400 million quarterly.
Turning now to cash flow, this slide compares our sources and uses of cash in the first half of 2009 and 2010.
As I mentioned earlier, our operating cash flow in the second quarter, excluding Gulf of Mexico oil spill payments was $8.9 billion, up $2.1 billion on a year ago, and reflects the benefits of higher oil prices and greater operating efficiencies.
The ongoing momentum and underlying operational and financial performance underpins the group's strong financial position.
At the end of 2Q, we held $7 billion in cash, and we currently have $17 billion of committed undrawn bank facilities.
During June the group was downgraded from AA to A, by the main rating agencies as a consequence of the uncertainty around future liabilities associated with the Gulf of Mexico oil spill.
In response to this, we've taken further steps to increase liquidity.
As described in the Webcast on the 16th of June, we reduced 2010 capital expenditure by approximately $2 billion, and created additional financial flexibility through our actions with respect to 2010 dividend payments.
In addition to this, today we announced an increase in planned disposals to between $25 billion and $30 billion over the next 18 months.
As mentioned earlier, $7 billion of this was announced last week.
All of this gives us great confidence in our ability to meet our future financial obligations.
Despite payments with respect of the Gulf of Mexico oil spill, net debt was reduced by $2 billion during 2Q.
At the end of the quarter, the debt level was $23.2 billion, and gearing was 21%.
This increase in gearing was due to the decrease in equity as a result of the Gulf of Mexico oil spill charge.
As a result of the actions outlined earlier, we are now expecting to bring our net debt level down to a range of $10 billion to $15 billion within the next 18 months.
This reflects a prudent approach to managing the balance sheet and liquidity requirements of the firm, in order to ensure that the Company has the flexibility to meet all of its future financial obligations.
Now, back to Tony.
Tony Hayward - Group Chief Executive
Thanks, Byron.
Let me start by providing an update of our response to the spill.
I'm sure many of you are following closely the briefings by Admiral Thad Allen, the National Incident Commander, and Kent Wells, BP's Vice President, so much of this will be familiar.
I'm pleased to report that the cap remains closed and the integrity test continues.
We are now on day 12 of the test, and our monitoring activities have not revealed any indications of a lack of well integrity.
We are confident the well is now sealed.
As the weather allows, we will move ahead with the static kill operations, and finish the job with the relief well.
In addition, we now have 35,000 barrels a day of containment capacity available, should there be any developments that require us to reopen the cap, and we continue to build containment capacity.
On the first relief well, operations were suspended for Tropical Storm Bonnie.
The rig has now returned to location and opening of the hole has begun ahead of running and cementing of the final casing stream.
We will then begin the final [de-sal] stages of drilling and ranging to ensure we accurately intersect the well.
We expect this operation to conclude around the middle of August.
The second relief well, which is a backup, in the event of problems with the first well remains temporarily suspended to avoid interference with the first well.
To date, our containment systems have captured almost 830,000 barrels of oil.
On the surface we've covered around 825,000 barrels of oil-water mixture, which is typically 80% to 90% water.
We've also removed an estimated 265,000 barrels of oil in 411 controlled burns.
With no new oil leaking into the Gulf, it's encouraging that our aerial surveillance and our fleet of skimmers are finding it increasingly difficult to find oil in sufficient quantities to skim or burn.
On-shore, approximately 836 miles of shoreline in the Gulf Coast has been oiled.
In response, the teams have cleaned over 7,000 miles of beach.
This measure includes repeat cleaning of beaches which have been subsequently reoiled, but it helps to highlight the scale of the response.
These pictures give you some sense of what we mean by the terms light and heavy oiling, and the nature of tar balls.
The success with the cap is an important milestone.
In the words of Churchill, it is not the end, nor even the beginning of the end, but it is the end of the beginning.
We're committed to restoring the Gulf Coast to the state it was in before the spill.
Our progress to date is encouraging.
And we will not rest until we've completed the task.
We're also working very hard with our claims process to get money into the hands of people in the Gulf region.
To date, we've issued over 80,000 checks and paid more than $243 million in claims.
And we're now working through the detail of transitioning the claims process to the Gulf Coast claims facility, to be run by Ken Feinberg.
And finally, as you're aware, there are a number of investigations ongoing, including the independent investigation that BP is carrying out which will issue an interim report before the end of August, as well as the Marine Board investigation and the Presidential Commission.
From what has emerged so far, it is clear that this accident was the result of multiple equipment failures and human error involving many companies.
The agreement with the US administration to set up a $20 billion escrow account, which we reached on June the 16th, was an important step forward.
The details are shown on this slide and I won't go through them line by line.
The key points are that the funding of the $20 billion is phased over the next three-and-a-half years, and that the account covers most costs other than the Federal Government's and our own direct response costs and any possible fines and penalties.
There are many lessons to be learned for the industry from the Gulf of Mexico oil spill.
We're committed to be at the forefront in sharing these lessons and building capability for the future.
For example, in the course of mounting the largest surface spill response in history, we've made significant advances in skimming technology.
We'll share these with the industry.
In the subsea, we've built an extensive tool kit to deal with subsea leaks.
Much is reusable, and can become part of the platform on which a shared subsea response capability is built.
A process which is under way, following the announcement by four other major oil companies last week.
BP intends to make the capability we've already built available on a global basis.
It is also clear that our industry needs to re-evaluate the safety systems for deepwater drilling operations.
An example of this is the fail safe blow-out preventer, which this incident has clearly demonstrated is not fail safe.
Standards need to be taken to a completely new level.
And finally, it is likely that everyone in the industry will carefully re-evaluate their business model to determine how we can work better with our contractors in order to reduce the risks associated with deepwater drilling.
We entered the incident with a strong and valuable asset base, including more than 18 billion barrels of proven reserves and 63 billion barrels of resources at the end of 2009.
As Byron has mentioned, one element of our response will be to high grade our asset base by selling $25 billion to $30 billion of assets, principally in E&P, over the next 18 months.
This will serve to fund our obligations relating to the incident and to strengthen our balance sheet.
This is an increase from the $10 billion in asset sales which we talked about last month.
The first evidence of this response is the $7 billion asset sale to Apache announced last week, where we've entered into several agreements to sell upstream assets in the United States, Canada and Egypt.
The deals comprise BP's Permian Basin assets in Texas and southeast New Mexico, our western Canadian upstream gas assets and the Western desert business concessions and East Badr El-din exploration concession in Egypt.
This transaction demonstrates the significant value, even in the non-core element of BP's asset base.
The market for resource assets is favorable at the present time so this is a good time to be high grading our portfolio.
This follows the already announced divestment of a number of RMS -- R&M assets.
These include the sale of our fuels and convenience retail business in France to the Delek Group, and the sale of crude oil storage and pipelines for around $300 million to Magellan Midstream Partners as part of our intent to divest a number of nonstrategic pipelines and terminals in the United States.
The criteria used for this high grading are to sell assets that in general are below average in our portfolio in terms of quality and materiality.
Many of these assets also have higher decline rates than the portfolio average.
The result of this high grading will be a somewhat smaller, more focused and higher quality portfolio.
At the same time, we've continued to add new opportunities.
In Azerbaijan, a key milestone in gas negotiations for Shah Deniz Phase 2 was reached with a memorandum of understanding agreed between Azerbaijan and Turkey.
These set key terms for the transit of gas from Azerbaijan to Turkey, and ultimately to Europe.
Thus, unlocking access to the European market for Shah Deniz gas.
Also in Azerbaijan, SOCAR and BP signed a Heads of Agreement that defines the commercial terms for a production sharing agreement for the Shafag and Asiman offshore exploration blocks.
In Egypt, we announced the signing of a new agreement with the Egyptian Ministry of Petroleum and the Egyptian General Petroleum Corporation to develop the significant hydrocarbon resources in the deepwater, North Alexandria and West Mediterranean concessions of the Nile delta.
The estimated $9 billion investment in this project will develop an initial five trillion cubic feet of gas.
Production in Phase I is projected to reach one billion cubic feet per day.
In China, we have reached agreement with Devon Energy to acquire an interest in block 4205 in the deepwater of the South China Sea.
The transaction is currently progressing through the Chinese government's approval process.
In Indonesia we were awarded a joint study on the West Sanga-Sanga block to assess coal bed methane options.
Finally during the second quarter, we completed two components of our transaction with Devon Energy.
The acquisition of assets in the Gulf of Mexico, and the sale of a 50% stake in Kirby Oil Sands interest in Alberta, Canada.
The other two components of the deal, Brazil and Azerbaijan, are on track to close during the second half of the year.
So what will BP look like as it emerges from this crisis?
As I've said, we'll have a smaller, higher quality, more focused upstream business.
We have an option of increasing our investment into exploration, which is a distinctive BP strength.
The outlook for the downstream is the same as described by Iain back in March, with an opportunity to improve per annum performance by a total of more than $2 billion over the next two to three years, as recovery and growth continues.
None of that has changed.
We intend to maintain discipline on capital spending as previously indicated, which is expected to be around $18 billion in both 2010 and 2011.
And finally, as Byron indicated, we're now expecting to bring our net debt level down to a range of between $10 billion and $15 billion within the next 18 months, in order to assure ourselves of the financial flexibility to meet any potential obligations.
Over the last three years that I've been Chief Executive, safety, people and performance have been my watch words.
We have made significant progress on this agenda.
Our operating management system, OMS, is now in use across more than 85% of our operating sites.
And this will be complete by the end of the year.
We've been rebuilding our operating capability, a drive that reflected the lessons we learned from the incidents in 2005 and 2006 at Texas City and in Alaska.
I've made that drive my top priority.
Over the last three years, in addition to the extensive recruitment of engineers and technicians, over 2700 supervisors have been through our operations essential program, and over 300 senior leaders have attended the Operations Academy we run in conjunction with MIT.
The Operations Academy and a similar program for projects are part of the series of major safety and operations training programs that have been implemented across the Company.
Performance is also showing considerable momentum versus our peers over this period.
A direct outcome of safer, more reliable and more efficient operations.
There is always more to do and in every crisis there is an opportunity.
As I said at the beginning of this Webcast, the impact of this tragedy will leave BP a changed Company and it's right that it should face the challenges ahead under new leadership.
From the beginning of the crisis, I've sought to do the right thing, do it the right way, and communicate openly and transparently.
In the unstinting way that we've met our obligations, I believe BP has shown what corporate social responsibility really means and as I said earlier, I believe that responsibility applies to individuals as well as companies.
I'll work with Bob Dudley over the coming months to effect a smooth transition and support him in every way possible, and I know that with Bob as my successor, I'll leave the leadership of BP in safe and able hands.
I'd like to thank all of you for the support you've given me over the last three years.
We've made great progress as a Company during this time and I have no doubt that progress, so tragically interrupted by recent events, will soon resume and that BP will emerge as an even stronger Company for the future.
Ladies and gentlemen, thank you very much.
We would now be delighted to take your questions.
Operator
(Operator Instructions).
Tony Hayward - Group Chief Executive
We're going to start with Alejandro at Bank of America.
Alejandro, good afternoon.
Alejandro Demichelis - Analyst
Good afternoon, gentlemen.
Three questions, if I may.
The first one is on the tax credit that you're taking on the provisions of Macondo.
Have these been discussed with the US authorities?
The second question is keeping on the financials.
Your cash regeneration looks very strong but we have also seen quite a contribution coming from capital moves.
Maybe you can give us some indication of what we should be expecting going forward there.
And the third question is you have been talking about a changed BP going forward.
Maybe you can tell us what is the long-term opportunity you see for this new BP.
Tony Hayward - Group Chief Executive
I'm going to take the first one.
I'm going to ask Byron to talk about cash generation.
I think it's right that Bob should talk about BP of the future.
So in terms of the tax credit, we have followed the IRS regulations as they're currently written.
Byron, would you like to cover cash generation?
Byron Grote - CFO
Yes.
I realize that the cash flow statement, especially in a quarter like this, can be easily misinterpreted and you're probably speaking to the movement in inventories and other current and noncurrent assets and liabilities that's on page 18 of the stock exchange announcement, the consolidated group cash flow statement which has a number of over $13 billion.
At the bottom of that page, we pointed out the adjustments you need to make because this cash flow statement is made on a historical cost basis, and, therefore, it needs to be adjusted for inventory holding costs and it needs to be adjusted for the big charge that we've taken with respect to the Gulf of Mexico oil spill.
And trailing that through here, that charge would be $12.4 billion on the cash flow statement.
The adjustment from historical cost to replacement cost is $300 million.
And further, if you adjust for fair value accounting effects on embedded derivatives which are a non-cash as opposed to a cash item, all of that means that the actual working capital release in the quarter was only $300 million.
So there was not a major contribution from that source in 2Q.
Tony Hayward - Group Chief Executive
Thanks, Byron.
Bob?
Bob Dudley - President & CEO - Gulf Coast Restoration Organization
Your question about a changed BP, certainly the announced divestments of $25 billion to $30 billion provides us with a chance and a time to reset our portfolio.
Part of this is to meet our obligations in the US but also develop a higher quality portfolio instead of assets, and have the potential to grow a slightly smaller Company as Tony described earlier.
And secondly, there is no question that there will be an investigation of this event and we and the industry will learn many things about operating at the Deepwater, at the frontiers of technology.
And there's no question the Company, both BP and the industry, will need to change and fully understand the capability of rigs, systems, equipment, to be able to operate in these areas.
I think that's the area you'll see a changed BP and a changed oil and gas industry globally.
Tony Hayward - Group Chief Executive
Thanks, Bob.
Let's go to Jason Kenney in Edinburgh.
Jason Kenney - Analyst
Thanks for taking the question.
Can I just get a bit more detail about the 25% to 30% divestments, maybe an indication of what the production impact could be, say, in 2012 after the 18 months has passed.
And if at this stage you're able to indicate a likely proven reserve number that would be associated with the identified assets that you've obviously got.
And if I could push it, maybe even an EBIT contribution.
I know that you've spoken about that on the Apache deal recently.
Are we looking at similar levels?
Secondly, you noted in comments earlier that the US Gulf of Mexico tragic accident was through multiple equipment failures involving many companies.
I'm wondering what the probability is that the full $20 billion escrow account will be needed in full.
And, it does look like there's a good chance, assuming you can claim back from your partners and the other companies involved here, that they will be making up part of that $20 billion total in claims.
I just wondered if you had any comments on that?
Tony Hayward - Group Chief Executive
Well, let me deal with the disposals first, Jason.
I'm afraid I'm not going to help you fill in your spreadsheet because I don't actually know the answer because it will depend exactly what it is we finally end up doing.
We have a number of things entrained.
Clearly the Apache deal was a good start.
I think it's interesting if you look at that, we sold about 2% of the production for $7 billion so you can -- if you want to get to $30 billion, one way you could do it is take that and times it by four and you would be sort of close to there.
That's an 8% to 10% impact on production.
You could argue that the margin on some of those barrels was quite high, so you might want to aim off a bit.
I would say you should be thinking of a Company that emerges with a level of production around 3.5 million barrels a day or so, but of higher quality, more focused.
As we conclude transactions, we'll clearly announce them.
The only other thing we've announced so far because we wanted to be clear with our staff is that we are looking at both Vietnam and Pakistan actively.
We clearly have other things entrained, but until we announce them they remain confidential.
I'm not going to help you overly with the spreadsheet I'm afraid, Jason.
In terms of the companies, we clearly believe we have a good case to have our partners in the license pay their share of this and we are intent on pursuing them through the legal process.
It will probably take time and I think it's just far too early to make any estimate as to whether $20 billion is a good number, a high number or a low number.
It's just a number, and it's the one that we have provided for on the basis that we made a commitment to a $20 billion fund.
Jason Kenney - Analyst
Okay.
Many thanks.
Tony Hayward - Group Chief Executive
Thank you.
Let's go to Ed Westlake now, please.
Ed.
Ed Westlake - Analyst
Yes.
Good afternoon.
Can you hear me, gentlemen?
Tony Hayward - Group Chief Executive
We can indeed.
Thanks, Ed.
Ed Westlake - Analyst
Just coming back to how you are going to operate in the Gulf of Mexico in terms of your current view on when the moratorium might be over and the type of regulations that you might have to operate on in terms of coming back to the Gulf of Mexico.
Thank you.
Tony Hayward - Group Chief Executive
Well, I think there's clearly a big debate going on in the industry with the regulators on the moratorium and its extent and what should happen thereafter.
I would expect that no decisions will be reached until the Presidential Commission has reported.
I would expect that they will make clear recommendations as to the response capability that's required and probably with respect to new safety standards that they would like to see implemented.
That seems to me to be one of the key focus areas for the Presidential Commission.
What does the industry need to do going forward by way of safety standards and response capability to ensure that we can never have a repeat of what we've experienced over the last 100 days.
Ed Westlake - Analyst
And in terms of your views, obviously there's some political pressures over here in terms of banning BP from future lease sales and talk of operations in the Gulf of Mexico.
Tony Hayward - Group Chief Executive
I think I should let Bob Dudley talk about that.
Bob Dudley - President & CEO - Gulf Coast Restoration Organization
Ed, there is a lot of political rhetoric in the US.
I think there's several things.
I think if BP continues as it has done with this extraordinary corporate response, and responding to both what's happened subsea and on the beaches and the restoration after that, and meets its commitments to the US and cooperates with all of the learnings that we will all learn from the investigation of this accident, I think we have a lot to offer in the United States to the oil and gas industry.
And getting this right and working in the US, meeting those commitments and cooperating with officials is vital to BP's future success in America and that's why we're doing it, and I think we will do it very well.
Tony Hayward - Group Chief Executive
Great.
Thanks, Bob.
Let's go to Lucy Haskins, now at Bar Cap.
Lucy?
Lucy Haskins - Analyst
Thanks.
Could I ask for a bit more granularity in terms of the fines you've provided for because I think you've only taken a provision for the Clean Water Act.
So have you been given advice that you won't be liable for any other fines?
Could I also get a bit more detail, and I think you indicated that you took production at previously disclosed ranges.
So do we assume that's in the 35,000 to 60,000 range?
And as you're not assuming gross negligence but it's being charged at $1,100 a barrel and are you assuming, is that oil as it flows into the sea or actually making [the amount is] the oil that has been captured?
Tony Hayward - Group Chief Executive
Let me ask Byron to give you an overview of how we have come up with the provision.
This could take some time, ladies and gentlemen.
Byron Grote - CFO
No, I think I'll keep it narrow, Tony.
Tony Hayward - Group Chief Executive
The five-minute version.
Byron Grote - CFO
I'll respond just specifically to Lucy's question.
We've done it, as Tony said, on the basis of there's no gross negligence, so we've used the $1,100 number as you surmised.
We've looked at it on the basis of the oil that's flowed into -- the oil that was not contained, perhaps that's the easiest way to say it.
So to the extent that we were able to contain between 25,000 and 30,000 barrels a day of oil in recent times before we put the cap on, that is not presumed to be subject to fines and penalties.
As far as a range goes, there's published range.
We're not going to say what's in that range that we peg things but we've chosen a point within the numbers that have been estimated by the experts doing the calculations here.
I would just say, in summary, that the projection here is driven by accounting standards.
We can't do anything that is not in line with the specific guidelines of IFRS.
So to the extent we can estimate something, we've estimated it.
To the extent we've got no basis for making a reasonable estimate, we haven't.
In the case of the Clean Water Act, because there is a schedule, we feel as though we're able to project a charge.
In the case of other fines and penalties, there is no such framework, and, therefore, we're treating that as a contingent liability at the current time.
Tony Hayward - Group Chief Executive
Thank you very much, Byron.
Let's move on you now to Robert Kessler at Simmons & Co.
Robert.
Robert Kessler - Analyst
Good afternoon, Tony.
Best wishes to you in your future endeavors.
I'd basically like to ask for the 30-minute version of Byron's overview of the liability calculations, but more specifically a couple of points.
One, with regard to the escrow fund mechanics, who will, and when will they determine the statute of limitations on claims made into the fund, and as a consequence, when should we, or could we assume that the reversionary interest reverts to BP, should there be a balance at the end of it all?
And then somewhat of a more theoretical accounting question, but it seems interesting to me that you both said that for accounting purposes you have to have an estimable liability.
You said that the $20 billion is neither a ceiling nor a floor, that components to it don't appear estimable at this point, and yet you've booked the full $20 billion.
Can you help me reconcile that?
Is it because cash is actually going out the door?
Is that why you have to go ahead and book it from an accounting standpoint, even if you might get a recovery of that cash at a future date?
Tony Hayward - Group Chief Executive
Let me ask Bob to talk about the mechanics of the fund, because he has been in large part one of the architects of it.
And I'll ask Byron to talk about the accounting treatment for the fund.
So Bob.
Bob Dudley - President & CEO - Gulf Coast Restoration Organization
Robert, there's a fairly simple and quick answer to your question.
In terms of the size of the fund and the time and when it might revert, you can imagine it was only 12 days ago that we capped the well.
It's not permanently -- we've still got to kill it and then drill the relief well.
So this is still something that's moving.
I think we are at a spot now where we can say that the containment is in place and will be in place but this is fairly new news and then regarding the actual mechanics of the fund, we are now still in the process of negotiating the terms of the $20 billion fund with the White House and the Treasury Department and those negotiations are under way and we expect to have that clear by the end of August.
Byron Grote - CFO
Robert, in response to your more technical accounting-related question, we've taken the charge for the $20 billion on the basis of the nature of the commitment associated with that, so consistent with what I think what you surmised.
And we've done that on the basis of IFRS, in particular, the International Financial Reporting Interpretation Committee Five, interpretation has led us to believe that this is an appropriate way to treat the $20 million escrow fund, even if we couldn't determine a specific set of provisions up to that level at the current time.
Robert Kessler - Analyst
Okay.
Thanks for the clarification.
Tony Hayward - Group Chief Executive
Let's move to Mark Fletcher of Citi.
Mark?
Mark Fletcher - Analyst
Good afternoon, gentlemen.
I'm afraid another question on the provision.
Just in terms of trying to think through the size of the Clean Water Act provision.
Just logically, if there's -- if you're looking at $10 billion of tax reclaim, is it sensible then to assume that working backwards, the amount of the provision that isn't tax reclaimable is in fact the provisions against those penalties and fines, and therefore is something close to $4 billion?
Is that logic sensible?
Is that pretty close to the mark?
Tony Hayward - Group Chief Executive
It's reasonable.
It's not quite that -- I think you've missed a number out somewhere, Mark, but you can, of course, back calculate with some degree of accuracy the number we've used, and the number we've used is based on the midpoint of a range that takes an estimate of the flow rate and times it by a penalty.
And it's a range.
So we've taken the midpoint of that range.
Mark Fletcher - Analyst
Okay.
Thank you.
Tony Hayward - Group Chief Executive
Let's move on to Mark Gilman at Benchmark.
Mark?
Mark Gilman - Analyst
Good afternoon.
I was wondering, are there any mandatory arbitration procedures that are implicit in the operating agreement to resolve disputes amongst the working interest partners on the well or will you have to wind up going straight to court?
Tony Hayward - Group Chief Executive
Let me ask Andy to address that, Mark.
Andy Inglis - CEO - E&P
Yes, Mark.
There are arbitration clauses in the JOA.
Mark Gilman - Analyst
So that will be the first path in terms of the resolution of this dispute?
Andy Inglis - CEO - E&P
That's correct.
Mark Gilman - Analyst
Okay.
Secondly, implicit, buried in the SEA is reference to certain conditions under which your committed lines of credit might be revoked.
I wonder if Byron could be a little bit more specific as to what might trigger that?
Byron Grote - CFO
Those would be the most extreme of conditions and it's written in there in the way that one identifies all risk, however minuscule, that might exist.
We're comfortable that we will be able to draw on these lines if necessary in the future, although we have no intention whatsoever of drawing on those lines at the current time.
Mark Gilman - Analyst
A follow-up, Byron, just one more.
I assume your latter comment essentially means that in conjunction with your prior comments regarding the target level for net debt, that relating to the $8.3 billion in maturities before the end of the year, that will be paid down?
Byron Grote - CFO
I don't think -- we've got $8.3 million in maturities.
I think that's over the next 12 months, as opposed to across the course of the next six months.
Mark Gilman - Analyst
Sorry if I misspoke.
Byron Grote - CFO
But the answer is, we have maturing debt and we will be looking to either generate cash flow to do that, or issue new debt to replace debt that's maturing.
Tony Hayward - Group Chief Executive
I'm going to go to the web now and take a question from Bruce Lanni at Nollenberger Capital Partners.
What is the rational for lowering your net debt below previous target levels?
I think as I said in my remarks, it is to give us the financial flexibility to meet any potential obligations.
It is to ensure that we run the Company with perhaps more financial prudence than we might otherwise do given the unknown nature of some of the obligations that we may face.
Let's move on now to Jon Rigby at UBS.
Jon?
Jon Rigby - Analyst
Yes.
I've got a couple questions.
One is just on the underlying operating performance, actually.
In the downstream, the US numbers have been moving quite quickly to a very positive result, and I just wondered whether you were able to calibrate those to some degree and give us some indication of whether you're outperforming or in line with where you would expect performance to be with the prevailing GIM, and maybe also where you are in the performance improvement cycle there.
And then just on the implications of the new model going forward, and also some accounting questions on it, does the fact that you'd be selling some of these, the more mature cash-flow generating assets mean that you would run lower debt anyway, given your experience with the risks that obviously Deepwater does create for the Company.
Lastly, it looks to me that you've provided, on the basis of an NPV of the provision, so can we expect a higher cost of debt running through the income statement going forward, as you see the accretion of that provision through the next few quarters?
Thanks.
Tony Hayward - Group Chief Executive
Let me ask Iain to talk about the downstream.
I'll just observe that the downstream performance was very strong this quarter, and the performance seems to be coming through a little faster than projected, but Iain may choose to challenge me on that, and then, I'll ask Byron to talk about provisions.
Iain?
Iain Conn - CEO - Refining & Marketing
Thanks, Jon.
Firstly, I won't challenge Tony on those conclusions, but let me just give a little bit of insight.
You mentioned the performance relative to margin, and if you take that chart that I showed you guys in March, which plots margin against profit, it is true that this is probably the best outcome since about 2000, so it is a strong quarter.
Second thing I'd say is that global oil trading has had a normal quarter, so that means that this is coming through from across the whole portfolio, and just to give you a bit of color, before coming into the specifics, I think the very strong operating performance in the fuel value chain and in petrochemicals has really driven our ability to capture margin.
And then slightly higher margins and much higher volumes in chemical, 39% up year on year, has allowed us therefore to see this all flow to the bottom line.
The second thing is that lubricants continues to grow strongly.
The third thing, and something that's actually very encouraging for me is our integrated commercial optimization across the fuel value chain starting to show through.
We're running this in a much more coherent way.
And then fourth and final, the cost efficiency that's coming through is in line with what I indicated in March, so the bottom line is, therefore, we are expecting this to be highly competitive, we are seeing it come through in the US in a strong way, and our refining portfolio is getting close to break-even, below $5 a barrel, well-below now.
So we are seeing the momentum coming through.
And I think the only final point I'd make is that as we look forward, the second quarter tends to be the strongest in the year, and we are seeing refining margins coming off a bit, so I'm not sure we'll be able to repeat, so yes, that's so far been a very acceptable level of momentum this quarter.
Tony Hayward - Group Chief Executive
Byron?
Byron Grote - CFO
Jon, we have discounted some of the charges, in particular, the payments into the escrow fund, but the overall impact of this is modest, and in the range of about $500 million, so that will impact the financial charges, but not materially on an annual basis.
Jon Rigby - Analyst
So with the level of debt compared to the risk you're running, would you change the capital structure going forward, anyway?
Tony Hayward - Group Chief Executive
Let me answer that one, Jon.
Clearly, we view some uncertainty about what the liabilities are going forward.
We believe that it is now prudent to run with a low level of debt.
It doesn't reflect our view that the risks have suddenly changed.
I think, as I said in my remarks, we need to do some things operationally to ensure the risks are better managed, and I think that's a task for the industry as well as it is for BP.
But I don't think this is about the fundamental risk.
It is reflecting the fact that we have uncertainty as to the liabilities that we're going to have to face over the course of the next few years in the United States, and on that basis, it's prudent to have a lot of capacity on our balance sheet.
Let's move on if I can to Alastair Syme at Nomura.
Alastair?
Alastair Syme - Analyst
Good afternoon.
Wonder if I could ask about the internal review that you've done on the Macondo accident and at what stage that review is at and when you or how you intend to disclose the results of that review.
Tony Hayward - Group Chief Executive
The investigation has reached an interim stage, I think it's fair to say because clearly there are things that the investigation team, which comprises some 60 or 70 people, many of them from outside of BP, experts, are unable to access.
We don't have access to the BOP, we haven't had access to Halliburton personnel or Transocean personnel.
Clearly we haven't had access to the drilling rig or records from the drilling rig held by Transocean for example.
There will be an interim report issued by our investigation team toward the end of August and it will be made public.
We've made a commitment to Congress and many other people that we'll make that public and it will be made public, available to everyone at that time.
And I do stress it will be interim because of the nature of the accident and the access we've had with respect to some of the critical evidence.
Let's move on now to Lucas Herrmann at Deutsche Bank.
Lucas.
Lucas Herrmann - Analyst
Tony, thanks very much.
And personally, every success for the future.
Very simple question.
Why did it take an event of this order and the loss or destruction of $70 billion or so dollars worth of market cap for BP to review its business and move towards smaller, higher quality as a stance in the future and a mechanism of realizing value for shareholders and value from the business?
And why should or does the process stop there?
It's probably more a question for Bob and the Board going forward.
Tony Hayward - Group Chief Executive
Well, I do think it's probably right.
I'll answer the first bit.
I think you know this, I think, Lucas, because you and I talked about it, periodically looked at accelerating some of the disposals that we would have probably made over the course of five plus years into a more concentrated period.
We now have a need to do that, and as Bob said, there is an opportunity to take advantage of this.
I guess that's just the way world is really, Lucas.
I don't have a particularly insightful answer to it other than to say that it's something that we discussed periodically but we had never drawn the conclusion to do it.
But now there is an opportunity as well as a requirement.
I should ask Bob to comment on what the future might look like.
Bob Dudley - President & CEO - Gulf Coast Restoration Organization
Well, Lucas, it's early.
We've had some success in selling these assets.
We will step back and create a smaller Company, somewhat smaller Company, that will have a different character to the assets.
We'll meet these commitments.
We think we can generate a lots of shareholder value going forward by re-establishing our position in the US.
This is something that looking ahead we'll certainly be looking at.
It's certainly too early to comment any further than that, though.
Lucas Herrmann - Analyst
Bob, can I follow -- and it a sort of just unrelated question, which I apologize.
It strikes me that the market, over the past however long, has not given you credit for your payout.
I think to some extent I get the impression the Company hasn't relished being one of the highest or the highest income payer on the street.
Why in God's name would you rush back there?
Bob Dudley - President & CEO - Gulf Coast Restoration Organization
Well, I haven't said we would rush back there.
I think no one has.
I think if you look at the performance prior to the incident, the year before, I think the market was beginning to recognize the quality of the portfolio as well as the return that was there, and I think the Company was on the right track and then it's had this very tragic, unfortunate accident and we will reassess this.
But it's not -- no one said we're going to rush right back into the same dividend philosophy or character of the Company.
That's what we'll do over time here, look at it.
Lucas Herrmann - Analyst
Thank you.
Tony Hayward - Group Chief Executive
Can we go to Irene Himona now at Exane.
Irene?
Irene Himona - Analyst
Thank you, good afternoon, I had two questions, please.
Firstly, on the downstream where as you've discussed the performance in Q2 was exceptionally strong.
Does the new BP leadership still believe in the integrated oil model or is everything perhaps under consideration, especially as momentum in that business is coming through?
And then secondly, I realize the investigation in the accident is not complete, but your major peers have repeatedly said and testified that they design and drill their wells differently.
Could you perhaps say something on why BP chooses to differ on that?
Thank you.
Tony Hayward - Group Chief Executive
Let me address the second one.
I think it's only right that Bob should address the first part of your question, Irene.
I think when the results of the investigations emerge, it will become very evident there is nothing unusual about the well design for Macondo.
Many wells drilled in this part of the Gulf of Mexico by all of our major competitors have this well design.
It is simply not right to say that this is somehow some rather unique BP well design.
It is not.
And that will emerge, along with many other things, frankly, which I believe will point to the fact that Macondo is an accident for the deepwater drilling industry, not for BP.
Let me now ask Bob to talk about the future.
Bob Dudley - President & CEO - Gulf Coast Restoration Organization
Thanks, Tony.
Certainly the accident itself has not altered our view on the business model of being an integrated oil Company.
The divestments of $25 billion to $30 billion that we're looking at should be kept in the context of a Company with $250 billion of assets and creating a somewhat smaller Company.
That's very different than a conclusion to change our model.
Certainly, as Tony said, we will look at strategy going forward, but right now there's no indication of that or, for example, any conclusion that we should geographically alter our conclusion, such as exiting the US, which some people have asked about.
Tony Hayward - Group Chief Executive
Can we now go to David Silverstein at Ecofin?
David.
David Silverstein - Analyst
Thank you for taking the question.
I was hoping for some help to clarify the disclosures on your credit facilities and also some of the comments that are made in the notes section as it relates to availability of those credit facilities.
Has the composition since the first quarter of your bank group changed at all?
Have you replaced certain banks?
And then also, what are the provisions right now as it relates to granting a security across your credit facilities and also as it relates to the convertible preferred note or convertible note that you'll be issuing to Apache upon receipt of the $5 billion for their purchase?
Tony Hayward - Group Chief Executive
I think we'll have Byron clarify a few things here, David.
David Silverstein - Analyst
Thank you.
Byron Grote - CFO
Well, as far as the banking facilities, we had around $5 billion in place at the end of the first quarter.
These were our standby facilities that we've had -- that level in place for some time, with quite a few banks as members of that particular set of standby facilities during the course of the second quarter.
We added to that substantially and converted the $5 billion to $17 billion.
So an additional $12 billion worth of banking facilities added, with participation from a significant number of those banks who were part of the standbys.
So that transition occurred in the quarter.
It occurred in the quarter in response to us wanting to build up additional facilities in light of the incident on the 20th of April.
These are committed lines.
There's no security associated with them.
I'm not quite certain I understood your question with respect to that.
And as far as the Apache deal goes, the deposit is merely just that.
It's a deposit prior to the closing of the three individual components of the transaction, but that should occur in relatively short order.
Tony Hayward - Group Chief Executive
Can we go now to Tom Gibney at Credit Suisse Asset Management.
Tom?
Tom Gibney - Analyst
Just quickly.
In your intention to reduce net debt through asset sales, should we read in that that the Company would like to meet all of its liabilities generally through cash generation to disposals rather than an increase in net debt or potentially through rights issues in the future?
And in addition, on those credit facilities, which BP group entities are able to borrow under each of those facilities?
And lastly, also, with the net debt level target of $10 billion to $15 billion, is that in any way informed by some rating target or a rating that the Board feels is appropriate going forward for the Company?
Tony Hayward - Group Chief Executive
I'm going to answer the first part of your question, the answer is yes.
The last part of your question, the answer is no.
And Byron will deal with the middle part of your question.
Byron Grote - CFO
That's available for the group.
It's not for a subcomponent of the group.
It's available for the group to use as it sees fit to support group needs.
Tom Gibney - Analyst
Does that mean -- it's BP plc is the borrower?
Byron Grote - CFO
Yes.
Tony Hayward - Group Chief Executive
Okay.
Ladies and gentlemen, I think we've reached the end of today's Webcast.
Let me just make a few remarks.
Firstly, I would like to thank all of you for your support over the last three years.
I believe that prior to April 20th, we had made great progress over the last three years.
And I am confident that BP will emerge from the last 100 days as a stronger and better Company under the leadership of Bob Dudley.
Thank you very much for your time, and I look forward to seeing you all in the future.
Good-bye.