英國石油 (BP) 2010 Q3 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.

Hello, and welcome to BP's third quarter 2010 results webcast and conference call.

I'm Fergus MacLeod, BP's Head of Investor Relations.

And joining me today is Byron Grote, our Chief Financial Officer.

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

During today's presentation, we will make forward-looking statements that refer to estimates, plans and expectations.

Actual results and outcomes could differ materially due to factors that we note on this slide, and in our UK and SEC filings.

Please refer to our annual report and stock exchange announcements and SEC filings for more details.

These documents are available on our website.

Thank you.

And now over to Byron.

Thank you, Fergus.

Ladies and gentlemen, good afternoon, and welcome to BP's third quarter results for 2010.

This has been a quarter of significant change for BP, and I'm pleased to say also one of great progress.

Bob Dudley took over as Group Chief Executive at the start of October.

He has already announced significant leadership and organizational changes, as we implement lessons learned from the Gulf of Mexico incident, and pursue our efforts to rebuild trust in BP, and value for our shareholders.

We're confident of meeting the challenges ahead.

As today's results show, BP's employees have remained focused on running the business during this period of change.

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

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

Compared with last quarter, our liquids realization reduced by 3% to $70 per barrel, but was 12% higher than a year ago.

Our gas realization increased to $3.92 per 1,000 cubic feet, up 4% on last quarter, and 40% higher than a year ago.

Taking both oil and gas together, our third quarter average hydrocarbon realization was up 10% versus a year ago, and 32% higher on a year-to-date basis.

Relative to 2Q, the refining indicator margin fell by around $1 per barrel to $4.53, but remained over $1 a barrel higher than in the third quarter of 2009.

On a year-to-date basis, the refining indicator margin was slightly down on last year.

Turning to the financials, the Group continues to deliver strong underlying performance.

Our third quarter headline replacement cost result was a profit of $1.8 billion.

Adjusting for nonoperating items, including disposal gains and an additional charge for the Gulf of Mexico spill, as well as fair value accounting effects, our third quarter underlying replacement cost profit was $5.5 billion, an increase of 18% on the 3Q 2009 result.

The underlying effective tax rate for the third quarter fell to 25%, primarily due to the impact of recently announced disposals.

As a result, we have also reduced our current estimate of the full year underlying effective tax rate to around 31%, although as always, the fourth quarter rate can be particularly volatile.

Third quarter saw an operating cash outflow of $650 million.

Excluding the impact of the Gulf of Mexico spill, underlying operating cash flow was $8.4 billion, up 4% compared with last year but down 5% on the previous quarter.

Now I'd like to spend a few minutes providing an update on the operational response to the Gulf of Mexico spill, as well as the associated costs and provisions.

From an operational perspective, we've made good progress, although the relief well took longer than we expected at the time of the 2Q results.

You'll be aware that the Mississippi Canyon 252 well was killed and permanently sealed on the 19th of September.

This followed the successful shut-in of the well on the 15th of July, after which no further hydrocarbons flowed into the Gulf of Mexico.

No significant oily liquid has been recovered from the surface of the Gulf of Mexico since the 21st of July, although small amounts continue to be collected from marshland remediation efforts.

BP continues its efforts to repair the environmental damage, and is ready to respond if any additional clean-up is required.

BP released the MC252 well accident investigation report on the eighth of September.

Based on the key findings of the report, the investigation team has made 26 recommendations designed to prevent a recurrence of such an accident in the future.

We believe that many of the findings and recommendations of the investigation are relevant to the wider oil industry, as well as to BP.

BP also announced its intent to join the Marine Well Containment Company, and make its underwater well containment equipment available to all oil and gas companies operating in the Gulf of Mexico.

And on the first of October, we announced that we will pledge certain Gulf of Mexico assets as collateral to the $20 billion Deepwater Horizon Oil Trust.

These consist of an overriding royalty interest in BP's equity production from seven fields in the Gulf of Mexico.

Turning now to the provisions.

You will recall we recorded a charge of $32.2 billion in the second quarter.

We have now taken an additional pretax charge of $7.7 billion in 3Q.

This is principally due to higher ongoing response costs due to the delay in the completion of the relief well, additional costs related to decontamination and demobilization of vessels involved in the response, claim center administration costs, and additional legal costs.

The remaining provision at the end of 3Q represents our current best estimate of future costs, subject to the exclusions and uncertainties described in the stock exchange announcement, and which I shared with you in detail during the second quarter results presentation.

We continue to believe that BP was not grossly negligent, and we have taken the provision on that basis.

While BP believes it has a contractual right to recover the partner shares of the costs incurred, no amounts have been recognized in the financial statements at this time.

Finally, cash payments of $10.1 billion were made in the quarter.

In addition to direct oil spill response costs, cash payments included the first installment of $3 billion into the escrow fund, as well as claims payments made directly by BP prior to the transition to the Gulf Coast claims facility headed by Ken Feinberg.

Turning now to business performance.

In Exploration & Production, after adjusting for a gain of $1.8 billion for nonoperating items and fair value accounting effects, we reported a pretax underlying replacement cost profit of $6.5 billion.

Relative to a year ago, the result was impacted by lower production volumes, and a small loss from our gas marketing and trading activities, but benefited from higher prices and lower depreciation.

As expected, third quarter production was impacted by normal seasonal turnaround activities, and the Gulf of Mexico spill.

At 3.76 million barrels of oil equivalent per day, production was 4% lower than a year ago, and was 3% lower after adjusting for entitlement effects on our production sharing agreements, and the effects of acquisitions and divestments.

BP's share of TNK-BP net income was $730 million for the quarter, and we received a dividend of $230 million.

In Refining & Marketing, after adjusting for nonoperating items and fair value accounting effects of $160 million, we reported a pretax underlying replacement cost profit of $1.6 billion for the third quarter.

This is an increase of $550 million compared with the third quarter of 2009.

The result reflects strong operational performance in the segment, with Solomon availability at 95%, and our petrochemicals business maintaining high production and utilization levels.

These benefits were partially offset by a weak contribution from our supply and trading activities, which endured generally unfavorable trading conditions characterized by very low market volatility.

In the US, the Refining & Marketing business remained profitable for the second successive quarter despite lower refining margins than in 2Q.

Overall in the downstream, the third quarter results demonstrate improving performance momentum, in line with the expectations laid out in the strategy presentation in March.

In other businesses and corporate, after adjusting for nonoperating items, we reported a pretax underlying replacement cost charge of $480 million for the third quarter, an improvement of $40 million versus a year ago.

Relative to the second quarter, the charge increased by $340 million, primarily reflecting adverse foreign exchange effects and cost phasing.

Looking ahead, the underlying replacement cost charge is expected to remain volatile, as seen over the past year, averaging around $400 million per quarter.

Turning now to cash flow.

This slide compares our sources and uses of cash in the first nine months of 2009 and 2010.

Year-to-date operating cash flow, excluding post-tax Gulf of Mexico oil spill expenditures of $10.6 billion, was $24.4 billion, and was 19% higher than a year ago, mainly reflecting the benefits of higher oil prices.

We received $3.7 billion of disposal proceeds for deals completed in 3Q, and additionally held $5 billion in deposits for deals to be completed subsequent to the end of the quarter.

These deposits were reported as short-term debt at the end of 3Q.

We've now concluded agreements on divestments totaling around $14 billion, and are halfway towards our goal of $25 billion to $30 billion of disposals by the end of 2011.

Total cash at the end of the third quarter was nearly $13 billion, and we continue to hold committed bank facilities of $17 billion.

We're planning on holding substantial levels of cash for the foreseeable future, reflecting our cautious approach to managing the liquidity requirements of the Group.

Since the end of the quarter, we've completed two successful bond offerings in the US and Europe for $3.5 billion and EUR2 billion, respectively.

Investor demand was very strong, which demonstrates the return to more normal debt capital market conditions for BP, and is underlined by recent credit rating agency actions.

Net debt at the end of the third quarter increased to $26.4 billion, with gearing at 23%.

This increase was driven by the costs associated with the Gulf of Mexico spill, partly offset by disposal proceeds.

As I mentioned earlier, the $5 billion of deposits for deals to be completed post quarter-end was reported as short-term debt.

As these deals close, net debt reduces accordingly.

As reported in 2Q, we're expecting to bring net debt down to a range of $10 billion to $15 billion by the end of 2011.

Across the Group, we are continuing to make good strategic progress.

With respect to upstream access, in Azerbaijan we've agreed terms for Shah Deniz Phase II, signed a new production sharing agreement for the joint exploration and development of the Shafag-Asiman structure, and completed the purchase of an additional interest in the BP-operated ACG oil field.

In China, we acquired a 40% interest in block 42/05 in the South China Sea.

And in the UK, BP has received awards for seven blocks in the latest round of offshore licensing.

This constitutes the largest award of licenses to BP in the North Sea for over a decade.

In addition, we've taken final investment decisions on 14 upstream projects so far in 2010, and currently expect to approve a further two in 4Q.

With respect to divestments, our program is going well.

In the upstream, we have closed the sale of the Permian Basin assets in Texas and New Mexico, and the sale of our western Canadian gas assets.

We expect to complete the Egyptian leg of the Apache deal shortly, and the sale of our Colombia business sometime around the end of the year, subject to regulatory approvals.

We have also recently announced the sale of our E&P interest in Venezuela and Vietnam to TNK-BP, and the sale of certain non-core assets in the Gulf of Mexico to Marubeni.

In the downstream, we sold our interests in ethylene and polyethylene production in Malaysia, and completed the sale of a number of nonstrategic pipelines and terminals in the US.

In October, we also completed the sale of our French retail business.

Now, looking ahead to the fourth quarter, in the upstream we expect production and margins to reflect normal seasonal trends.

The impact of turnarounds in the North Sea and Angola, continued impacts as a consequence of the Gulf of Mexico spill, and an impact of around 100,000 barrels per day from divestments we have already announced.

In the downstream, we expect a seasonal decline in refining margins and marketing volumes, which is likely to be exacerbated by high stock levels.

Refinery turnaround activities are expected to be higher in the fourth quarter than in the third.

We expect oil and gas markets to continue to be characterized by overcapacity, with limited volatility and little structural change.

This is expected to continue to impact the contribution from our supply and trading businesses.

Organic capital expenditure for 2010 is expected to be around $18 billion.

Given the strength of our underlying cash flows, and the investment opportunities available to us, our 2011 capital expenditure is currently under review, and is expected to exceed the $18 billion previously indicated.

As usual, we'll provide a further update early next year.

In closing, I'd like to summarize the initial steps we've recently taken to rebuild trust in BP.

The trust of our customers, of governments, of our employees, and of the world at large.

Securing that trust is vital to the restoration of shareholder value.

We're setting up a new safety and operational risk function to oversee and audit the Company's operations around the world.

The new organization is designed to strengthen safety and risk management across the BP Group, and will report directly to Bob Dudley.

The upstream segment is to be restructured from a single business into three functional divisions, Exploration, Development and Production, to further deepen our focus on functional excellence.

We will also be carrying out a detailed and wide-ranging review of how the segment manages third-party contractors.

We have announced a fundamental review of how we incentivize business performance, including reward strategy, with the aim of further encouraging excellence in safety and risk management.

As previously indicated, the Board will review its position on future dividend payments at the time of the issuance of the fourth quarter 2010 results in February, 2011.

No decision will be taken until then.

But the improving financial condition of the Company, and strength of disposal proceeds are encouraging, and balance our commitment to fund the escrow account at $5 billion per year through 2013, and the need to retain a high degree of financial flexibility.

In conclusion, I am encouraged by how well our businesses have continued to perform, despite events in the Gulf of Mexico.

These results demonstrate both the strength of our underlying businesses and assets, and the determination of our employees to move the Company forward.

Across the Group, the focus is on safe and reliable operations, and the management of risk.

This is the foundation necessary to rebuild trust in BP, and restore value for our shareholders.

Thank you for listening.

Fergus and I would now be happy to take your questions.

(Operator Instructions)

Thank you, operator.

And the first question comes from Jason Kenney at ING.

Please go ahead, Jason.

Hi there.

I'm just looking at divestments, and obviously the $25 billion to $30 billion target is still in place.

I'm wondering about the potential for maybe a larger amount of divestments.

Are you seeing a lot of interest in the various asset packages that you're trying to sell, and is there a chance that a larger figure is possible?

Secondly, on the divestments, the TNK-BP involvement seems a very good way of retaining some exposure to the value of the divested assets, you know, maybe even a dividend income in time from having it in the TNK-BP affiliate.

Could you maybe outline the strategy behind the agreements with TNK-BP and the potential to transfer perhaps more assets into that associate?

Thank you, Jason.

As far as overall divestments go, there is great interest in the assets in the BP portfolio.

Those that we've indicated that we plan to market and lots of others that are core to BP and we have no intention of selling, but it is, in the current environment, a seller's market.

That having been said, the $25 billion to $30 billion guidance that we gave you in the second quarter remains the intention at the current time.

We've got no plans at this moment of going beyond an overall divestment amount of somewhere in that vicinity.

As far as TNK-BP goes, we are pleased to be able to reach an agreement with TNK-BP to sell them our upstream interests in Venezuela and Vietnam.

For them, it was an important strategic step-out.

They had been looking to have a greater international presence for some time, and these were good assets that fit nicely into that strategic objective.

If there are other assets that we find that we're disposing of, if TNK-BP finds them interesting and if they're capable of meeting the market price associated with those assets, then there indeed remains the opportunity to pass more of our assets over to them.

But from a BP perspective, we're looking to realize a full value from the assets in our portfolio and are marketing them on that basis.

Hopefully that answers your question, Jason.

Yes, many thanks.

That's good.

Thanks, Jason.

Our next question is from Mark Gilman at The Benchmark Company.

Mark.

Guys, good afternoon.

Had a couple if I could, please.

Byron, have you -- has BP filed any litigation whatsoever up to this point against either service contractors or working interest owners in Macondo?

You said you had several questions.

Can we get them all, Mark?

Yes, sure.

Next one, can you give us an idea what the current spend rate is in terms of spill response activities?

And then the final one relates to DD&A, and I'm wondering whether DD&A has been suspended on assets indicated to be held for sale?

Mark, with respect to litigation, I'm not going to make any comments about that, and I'm sure that you understand why I'm taking that position.

As far as the spend rate, it's ramping down.

It's still in the order of about $40 million a day at the current time, but we're ramping it down and would expect that those costs would be materially less than that as we move in to the latter stages of the fourth quarter.

We've been constrained quite a bit over the course of the last several months from pursuing a more aggressive winddown because of the fact that the relief well took until the 19th of September, and that really was the primary trigger for starting to demobilize the very, very extensive effort that we have ongoing in the Gulf of Mexico.

And as far as your technical question -- I'm sorry.

Fergus, do you want to --

Mark, your question was about DD&A on the assets held for sale which is a -- it's a small number.

We are required to start that.

But you're looking at round about $100 million, so a relatively small number in the third quarter.

So you do suspend it once an asset becomes designated held for sale, Fergus.

That's correct.

That's correct.

Thanks very much.

Great.

Thanks a lot, Mark.

And now the next question comes from Theepan Jothilingam at Morgan Stanley.

Theepan, please go ahead.

Yes, afternoon, gents.

Sort of follow-up questions, actually.

Just on this -- the increase in the provision, you've sort of broken it down and tried to explain that.

But I was just wondering if you could sort of quantify the numbers in terms of the increased cost to the point of killing the well and then what you've assumed in terms of increased costs in terms of demobilization.

And then just on discussions with your partners about a potential sort of settlement -- have you actually entered any negotiations there, or has that been sort of [radia-science] between BP and the partners?

I'll answer the second question first, and it really is in line with my comment earlier to Mark that we are not willing to disclose anything with respect to litigation or the nature of discussions with either partners or of the contractors who serviced us on the drilling of the Macondo well, except to say that obviously we're thrown together as participants in the industry in many different ways, and we're continuing to operate appropriately in those relationships.

As far as the provision and what relates to the past and what relates to the future, the most important factor in the increment was the fact that the costs of the response have been larger on a run rate -- daily run rate basis than we anticipated at the time we took the provision in July.

They've extended longer than we would have anticipated at that stage, and the rampdown is slower than we anticipated at that stage.

So there's some that are behind us.

There's some that are with us right now, and there are some that sit in the future.

That's the most important factor.

There are other things that have been incremented as well.

Our provision for future external legal costs, our assessment of what it's costing to run the claim center -- and those costs sit outside of the escrow fund -- and, therefore, are being incurred directly by BP.

And another factor with the scale of the response costs has been the need to decontaminate all of the vessels as part of the demobilization program, and so that's a bit of a bottleneck and speaks to the pace of the rampdown being slower than we'd originally anticipated.

I'd just point out to you that on the slide where I talked about the spill costs and provisions, the other related payments in the period, these are those outside of the escrow fund, were $9.2 billion through the course of the third quarter.

And if you add the provision that we've taken today to the $20 billion of the escrow fund, you can see that those costs outside of the escrow fund, it was approaching half of that at the end of the third quarter, and we're continuing to expend substantially as we go through this quarter.

So, much of the provision outside of the escrow fund will be behind us as we move into the new year.

Certainly by the time we talk with investors again next year, much of this will be expended, as opposed to expenditures ahead of us.

So Byron, just as a follow-up, I mean, in terms of this number and you've explained how it's moved -- going forward outside the issue of gross negligence, is there a lot of potential volatility around that number, or are you trying to say that you're pretty comfortable where that is and there shouldn't be too many revisions?

Well, I can't know today what I will know in three months' time.

We took the best estimate we had at the time of the 2Q results.

We had much more knowledge as we progressed over the last three months, and that's been the basis for the $7.7 billion increment.

We believe we have much better understanding today than we did at that stage because now we're on the demobilization side of the response cost.

So we have a much better understanding of what's involved in doing that, whereas we had only the estimates we could put together on the basis of no experience back at the time of the July reporting.

So, we certainly looked at it very hard.

This is the best estimate of those costs that we can come up with at the current time, and we'll evaluate it again with the 4Q close and see what we've got.

So that -- I wish I could be more definitive than that, but that obviously is the basis on which we do this according to international accounting standards.

Okay.

Fergus, is there anything you want to add to that?

Anything I would remind you of, Theepan, of course, is all of this is provided for on a 100% BP basis, and clearly there may be potential for recovery from others.

Indeed, it's our view that there is likely to be recovery from others which would clearly move the situation in the opposite direction.

Okay.

Thanks, guys.

Thanks, Theepan.

Now on to Kim Fustier at Credit Suisse.

Kim, are you there?

Yes.

Hi.

Good afternoon, gentlemen.

I have two questions, if I could.

Firstly, do you still expect to capture most of the claims through the escrow accounts, and how confident are you that you can recover any funds left in the escrow once it's expired?

And secondly, it seems like the rate of payments out of the escrow fund has increased materially from mid-September onwards.

So are there any changes in the guidelines used to process claims, any changes to the formulas used to calculate claims?

Thank you.

The first question about the escrow fund, would you just repeat it, please, Kim?

Sure.

I was wondering if you still expect to basically capture most of the claims through the escrow, as opposed to external litigation?

Well, with respect to that, Kim, it's totally dependent upon what the individual claimants want to do.

They will have the option of taking a final settlement through the claims process or litigating, and we won't really know what people are doing until they get to that point.

And they'll have to evaluate what Ken Feinberg offers as a settlement versus the uncertainties associated with litigation.

So we don't have -- we don't even have the experience yet in order to make an assessment on that.

That will come in due course.

As far as recovery back, if there is unused funds in the escrow, then according to the terms that we've set up, there will be a sunset at some stage which would allow recovery of any unused funds.

But that's currently a long ways down the line.

And as far as changes, there are no changes that I'm aware of.

Fergus may have some additional comment there.

But it's no changes that I'm aware of.

I think it's just a reflection of the fact that there are many more claims coming in at this stage because the deadline for the emergency payments, or interim payments, is the 23rd of November, and any claims after that point are for final settlement.

So, one would have expected during this period of time for a lot of claims to be coming in, and to the extent that they are legitimate claims, that there would be an increase in the outflow from the fund.

Fergus, anything to add?

Yes, and the obvious point, Kim, that the process has transferred to Ken Feinberg's operation, and they're doing an extremely good job of paying claims in a very fair and prompt way.

Right.

The next question comes from Jon Rigby at UBS.

Jon, are you there?

I am, yes.

Couple questions.

The first is just on your US liquids production.

I'm very well aware that you had a lot of maintenance both through 2Q and 3Q.

Just wondered whether you were able to separate out the sort of Macondo effects versus maintenance year-on-year effects, which I guess we could expect to come back in the fourth quarter.

The second question goes back, I'm sorry, back to this costs and provisioning for the spill.

Do you or is your experience or your impression that BP is the only party involved down there that is interested in mitigating the costs going forward?

It does seem to me to have extended further than either myself or probably you expected, and the costs seem to have mounted up to a greater degree, and I just wonder whether it's in everybody else's interest to keep milking the cow that's BP.

Thanks.

We are responding -- I'll speak to the second question, then Fergus will come back to the first one.

We're responding according to what we believe are the legal requirements under the Oil Pollution Act of 1990.

Where we believe damage has been done, we've responded to that.

Remember, a significant amount of the effort remains under the joint operating command, under the Coast Guard, so with that in place, we need to follow the way in which that group is choosing to respond to the requirements, both at the source on the surface and on the shoreline.

But I hear the point that you're raising, but we're certainly attempting to be prudent with respect to the costs that are being incurred, recognizing the vastness and unprecedented nature of the spill and of the response.

Fergus?

Yes.

In terms of the production impact of the incident, and in fact more importantly, of the drilling moratorium, Jon, in the third quarter you're looking at something in the order of 50,000 barrels a day.

And in addition, we did have some evacuations due to tropical storm warnings in the third quarter of 2010 which created more of a weather-related impact than was the case in the third quarter of 2009.

So you take those two things together, it's probably about 65,000 barrels a day.

You would expect that effect to get bigger, actually, in the fourth quarter, because of course the drilling moratorium is affecting the whole industry in the Gulf of Mexico.

And there's the normal process of what well declines and indeed some well failures across all operators, I think, and of course that's one reason why the whole entire industry is very keen to get back to work in the Gulf of Mexico.

But obviously that's not happened yet, so we would expect to see that impact increase in the fourth quarter.

Thank you, Jon.

If that answers your question, we'll move on to Lucy Haskins at Bar Cap.

Lucy.

Good afternoon.

Two questions, please.

The first is, do you have any sort of time line yet in terms of the Department of Justice inquiry?

And the second question was whether the $10 billion to $15 billion sort of debt target for end of 2011 is going to reflect some potential accounting changes as offshore leases come on balance sheet in the second half of next year?

Lucy, certainly the $10 billion to $15 billion is along the lines of the current accounting practices, and if leases come onto the balance sheet and impact the debt amount, then that would be incremental to that.

As far as the time line for the inquiry, there are a whole bunch of inquiries that continue to be pursued here.

The Presidential Commission, the National Academy of Engineering, the US Coast Guard Incident Specific Preparedness Review, the Marine Board of Inquiry, the Chemical Safety Board -- all of these are doing investigations and will report back at stages from the end of this year out through and maybe beyond the end of next year.

The Department of Justice will be informed by the outcome of these investigations as well as their own, and so I think it is likely it will extend for a considerable period of time into the future, but what specific time line they're on is something that only they know.

Okay.

So you don't have a feel for there is a certain period when you may have crystallized what the potential fines and ultimate liabilities might be?

We would only be speculating at this stage, but it certainly is going to be further down the road, certainly in 2011 at the earliest and quite potentially beyond that.

Thank you.

Thanks, Lucy.

Next question is from Oswald Clint at Bernstein.

Oswald.

Hi.

Good afternoon.

First question, just really on the CapEx indication for 2011 -- is that directed at the strong list of FIDs that you were targeting earlier in 2010, or is it something else?

And then secondly, just perhaps you could give us an update on our activity in Iraq during the third quarter, specifically -- you know, almost specifically in terms of how many rigs you have down there.

And I think you were looking to drill around 70 wells by the end of 2010.

Just looking for some form of update on that, please.

Thank you.

You're definitely right, Oswald, to point to the final investment decision.

Clearly, that will play a role in some of the capital requirements in 2011.

But the indication is much broader than that, that we have lots of opportunities.

The final investment decisions we've taken are one element of that.

But we have lots of opportunities in developments, in exploration, in the downstream portfolio as well, and what we're looking to do is to ensure that we're investing at a level necessary to continue to grow the businesses within the Group.

We'll come back and provide you better definition of that in about three months' time.

But given the fact that we've got what we believe is now the financial capability with the strength of our underlying operations and the cash that we raised from disposals, that gives us the confidence to be able to invest at an appropriate level, consistent with the quality of the investment opportunities in the Group.

So anyway, more on this when we talk in about three months' time.

Fergus, would you speak about Iraq?

Yes.

On Iraq, Oswald, it's a great question.

I mean, things are going very well.

The initial focus, as we indicated earlier, is on drilling and electrical submersible pump works, that sort of things that we did when we first got involved with TNK-BP on summit law.

Initial survey of all the existing facilities has been completed.

Initial focus of the new Rumaila operating organization, which was established in July, is on health, safety, and reliable operations.

Good progress there, working with the local workforce.

We've awarded seven drilling rig contracts.

Those seven rigs are expected to drill 13 wells in the main play this year and a total of 54 next year on Rumaila.

In terms of other activities, the rehabilitation plan for Rumaila has been formally endorsed by the Ministry of Oil last month.

There's a major program for English language training under way for the workforce, and all in all, we're extremely happy with the way things are going.

And we're making good progress towards the initial production target, which as you know is going to be a key milestone in terms of the project.

So yes, no, it's a very exciting opportunity, and it's going very well.

Thank you, Oswald.

Now, next question is from Michele Della Vigna at Goldman.

If you're there, Michele.

Sorry.

Can you hear me?

We can hear you now.

Sorry.

My phone.

I was wondering if you could give us an update on what you think the impact of the Gulf of Mexico moratorium will be on next year's production?

And also, if you could give us the guidance on the amount of earnings associated with the $14 billion of disposal you've done so far this year.

Well, I'm afraid we're going to be unhelpful to you on the quantitative aspects of the question.

As far as the Gulf of Mexico goes, as Fergus indicated, the moratorium and the inability to do development drilling and well work means that there is considerably less production that is going to be forthcoming out of everyone's operations in the Gulf of Mexico than would have been the case otherwise.

And that that will extend not only through the third quarter and the fourth quarter of 2010, but because of the interval between when work was able to -- when work ceased and when it's able to start up again, that it will have an impact in 2011 as well.

We don't want to speculate it at the current time.

We'll see how things ramp back up and that will be part of the projections that we provide to you in January -- sorry, in February, which is normal information that we provide investors once we have a good line of sight on the production capacity of the Group in the calendar year.

So we'll give you more on that then, but there will be an ongoing impact out through 2011.

And as far as what's the earning capacity associated with the disposals, that's not disclosure that we provided, and we won't be providing it at the current time.

Okay.

Thank you.

Thanks, Michele.

Next question is from Fred Lucas at JPMorgan.

Fred.

Thank you.

Can I take you to slide 14 of your presentation, entitled Rebuilding Trust and Restoring Shareholder Value, where you set out a five-point set of remedies to do that.

I just wonder, has the Board of BP ruled out adding any further, more radical remedies to address the shareholder value gap that we're seeing in the market today?

And the second question is, the fifth bullet point says the review by Board of dividend payments -- I just wanted to clarify with you, that means that the Board will not be reviewing dividend policy?

Thank you.

Well, the Board, as is appropriate for all boards, is looking at a full spectrum of ways in which shareholder value can be unlocked.

So I will leave it at that, that the Board -- and in common with all Boards -- has that as a fundamental tenet, and this Board is no different.

I'm not sure --

Remedies, Byron -- this is work in progress, it's not a complete list.

Is that correct?

Well, this is a list of the things that we wish to highlight at the current time, and this is -- I'm not quite sure what you're working towards here, Fred.

Well, I was just wondering whether or not this is it, as it were, in terms of the actions BP is prepared to take or whether the Board will entertain taking more radical steps next year.

The Board is, as I said, considering and has considered a range of different options.

This is some things that we've written down which are critical, we believe, to rebuilding trust and restoring shareholder value.

And we will -- no list is comprehensive.

This is something that we're attempting to do each and every day as an executive team and is, as I said earlier, foremost in the mind of the BP Board.

As far as dividends, what we indicated to shareholders back in June is that we would not be paying dividends during the course of the remainder of 2010.

We would come back to it and address dividends again with the fourth quarter results, and whether that's a dividend payment or dividend policy, we'll address dividends at the time of the 4Q results.

Oh, I see.

So it's both payments and policy.

Got it, thanks.

Yes.

Great.

Thanks a lot, Fred.

Our next question is from Ed Westlake in New York.

Ed?

Ed Westlake, are you there, Ed?

Right.

Well, while we try and find Ed, let's come back to Europe and to Bertrand Hodee at Kepler.

Bertrand, are you there?

Yes.

Hello, everybody.

One question concerning the final investment decision you've taken so far in 2010.

You mentioned 14, not asking you to mention them all, but you highlighted that March strategy meeting you were targeting 17 FID, so probably you can mention the three projects that you have not yet sanctioned.

And I heard Byron also mentioning that you expected two FID to be taken in Q4, so if you could please name them.

And concerning the Gulf of Mexico, you highlighted the potential of South Mad Dog.

Do you still intend to sanction South Mad Dog or Mad Dog Phase II in 2011?

Well, Fergus will pick up the response to your detailed question.

Fergus, can you help him out?

I'll do my best.

Thank you, Bertrand.

Yes, absolutely right, we did list 17 projects on which we intended to make final investment decisions in 2010.

And the 14 that Byron mentioned in the presentation today are almost -- there's one exception, from that list.

The addition is the Clove project and one in the Gulf of Mexico, Horn Mountain Phase II, has dropped out, so it's almost identical to that list that you looked at back in March, Bertrand, but with those two changes.

There are a couple more scheduled for the end of the year.

I think we'll probably wait until they've actually happened, Bertrand, before we identify them.

I think that will be a sensible thing to do.

So, please do ask that question again in February, and we'll give you a further update, and that will also cover FID plans for 2011.

But leave with the thought that they're very much in line with the plans that we laid out to you in March, despite the events of this year.

Right.

I think we've -- thank you, Bertrand.

We've only got one question left, and it's actually from a second follow-up question from Mark Gilman.

Mark, are you still there?

Yes, Fergus.

Thanks.

Byron, I wonder if you could talk to us a little bit about where the $10 billion to $15 billion debt level target comes from, what it's based on, and then if you could, just clarify the comment you made about the tax rate previously and the low level being tied to disposals.

I thought, frankly, you gave guidance on the tax rate exclusive of special items.

Mark, as far as the first question about the $10 billion to $15 billion debt level, it's an objective in the sense that we believe that's the prudent amount of debt for us to hold under the current uncertain environment.

And, therefore, financial prudence drives us toward reducing our debt level down from what we've seen in recent years down to a level approximately half of that amount.

And we're confident of getting there.

The combination of disposal proceeds, the $25 billion to $30 billion that I referenced several times, plus the underlying cash flow from our operations, which as we've seen in the third quarter, continue to function extremely well.

The combination of those cash flows will allow us to reduce our net debt down to that sort of level by the end of 2011.

As far as the quarterly tax rate goes -- and again, it's a technical question but I think an appropriate one -- under IFRS, we're normally required to accrue for income tax in interim quarters based on our expectation of the tax rate for the full year.

And we do that except when there's a material once-off event.

What we've decided in 2010 is the spill is such a material one-off event that we are taking the effective tax rate impact of this, and we're reflecting it as a discrete item, away from the underlying effective tax rate of the Group.

Now, we have only done this on one previous occasion, and that was in the fourth quarter of last year, when we had the big impairment of goodwill associated with the West Coast assets that we acquired from ARCO back in 2000.

But we believe that it's appropriate to take one tax rate across all items in the Group, both operating and nonoperating, except when there's a material event.

And we believe that this is certainly a material event and should be accounted for accordingly.

So as a consequence, the underlying effective tax rate is 25% this quarter, and we expect it at the current time to be 31% on average across the year, and of course 31% is the accumulated average across 1Q, 2Q, and 3Q on an underlying basis.

I hope that answers your question, Mark.

Byron, I was focusing more on the disposal impact which is what you had mentioned in your discussion.

Well, a part of the reason why -- it's one of the reasons why there's a reduction in the full year rate, because some of the asset disposals have tended to have low effective rates of tax.

But we've got some other things.

We've got an increase in related Company income as a proportion.

We've got some previous adjustments.

We've got the effect of the lower UK statutory rate.

So we've got some other things blowing through that are impacting the tax rate as well.

But one contributor is the fact that there's a relatively low rate on some of the assets we've disposed of.

Thank you, Mark.

Thank you, Byron.

Yes, and there is one very final question, actually, just turned up from Sergio Molisani at UniCredit.

Sergio, are you there?

Yes, good afternoon to everybody.

A couple of questions, actually, if I may.

The first one on fourth quarter 2010 production.

At page eight of your press release, you refer to continued turnaround activity in North Sea and Angola.

Can you give us an idea of the impact of this [mansonis] activity, in particular compared to fourth quarter 2009?

And second, probably a stupid question, but how the gross negligence scenario would affect your spill charge estimates.

In other words, if you're found gross negligent, you will probably be asked to sustain on a 100% basis fines, penalties, and claims.

But what about oil spill response costs?

So you believe you could have, in any case, the possibility to recover 35% of these costs also in a gross negligent scenario?

Thank you.

Sergio, we continue to believe, based on all the facts that are available to us today, that the firm was not grossly negligent.

We've done all of our accounting on that basis, and that's the way we present our results, and that's the way we're thinking about the business.

Yes, Sergio, and your question about fourth quarter production, I think if you look at the stock exchange announcement you'll see that we made reference to an expected impact of about 100,000 barrels a day from divestments.

And of course as the divestment program continues, you would expect that divestment impact to continue to roll up into 2011, and we'll talk about that more in the spring.

The second factor we've already responded to -- in respect, I think it was Jon Rigby's question -- about the impact of the drilling moratorium in the Gulf of Mexico, and that is also a cumulative impact.

And then, as you mentioned, there is the ongoing maintenance in the North Sea and elsewhere.

Take all those things together, I think it would probably mitigate against the normal sort of seasonal increase that we see in fourth quarter, so you would expect to see a sort of flatter outlook with all of those factors as we roll into the fourth quarter.

Anyway, thank you very much indeed.

That's all the questions.

Now to Byron for some concluding remarks.

Sergio, the one thing that I failed to mention, although Fergus had previously, is that with respect to partner recovery, we're not presuming any partner recovery.

So, we're presuming we're not grossly negligent, and we're presuming no partner recovery in the provision that we've taken.

Well, thank you for listening to us today, and the final comment that I'd like to make is that -- is to reinforce what I'd said earlier, that our current focus is on ensuring that we have the solid foundation of safe and reliable operations and the ability to manage risk across all our businesses.

We believe that with that foundation, the quality of the assets, and the depth of capability within the Group will allow us to deliver value to our owners.

At the time of the 4Q results in three months' time, we'll provide you with more detail on the Company's plans to achieve this.

Have a good day.