英國石油 (BP) 2011 Q1 法說會逐字稿

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

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

Hello and welcome to BP first quarter 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 would 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 our estimates, plans and expectations.

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

Please refer to our Annual Report, stock exchange announcement and SEC filings for more details.

These documents are available on our website.

Thank you, and now over to Byron.

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

Before we start, I would like to say a brief word on the status of the deal with Rosneft which we announced back in January.

Gaining access to major new opportunities always carries some risks and uncertainties, and so it has proved in Russia this year.

Our plans to enter into agreements with Rosneft, including a share swap and involvement in Artic exploration have been subject to an interim injunction initiated by our partners in TNK-BP.

The original deadline for completing the agreements with Rosneft was the 14th of April, but we agreed with Rosneft to extend the date to the 16th of May.

We know that these developments have created uncertainty.

But you can be confident in our determination that any outcome we agree will be in the best interests of BP shareholders.

I'm sure that you'll understand that its not appropriate at this time for me to discuss details of any current discussions, nor to speculate on what might, or might not, be the ultimate resolution of these issues.

Let me now turn to our first quarter results.

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

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

Our liquid realization of $94 per barrel was up 19% on Q4 and more than 30% higher than a year ago.

Our gas realization was $4.21 per thousand cubic feet, up 6% on the previous quarter and essentially flat relative to a year ago.

Taking both oil and gas together, our total average hydrocarbon realization was up 17% compared with the fourth quarter and was 20% higher than a year ago.

Our refining marker margin of $11.02 per barrel is up 10% on the previous quarter, and 22% higher than a year ago.

Turning to the financials, adjusting for gains of $110 million for non-performing items and fair value accounting effects, our first quarter underlying replacement costs profit was $5.4 billion, a fall of $300 million on the first quarter of 2010.

This reflects lower production, higher costs, and a higher tax rate largely offset by higher hydrocarbon realizations and improved supply in trading contribution and higher petrochemical margins.

The increase in the first quarter tax rate to 37% was due to the impact of the recently announced change in the UK taxation of North Sea production, which resulted in a one-off deferred tax adjustment of $700 million.

Despite this additional charge, we still expect the annual effective tax rate to be around 32% to 34%, in line with February guidance.

First quarter operating cash flow was $2.4 billion.

Excluding Gulf of Mexico oil spill related post-tax expenditures of $2.8 billion, underlying operating cash flow was $5.2 billion, down 32% compared with the first quarter of 2010.

Higher working capital requirements reflecting the significant increase in oil prices during the quarter were a major factor.

Organic capital expenditure was $4 billion in 1Q, and in line with previous guidance, we expect it to total around $20 billion in 2011.

In Exploration and Production, after adjusting for a gain of $740 million for non-operating items and fair value accounting effects, we reported a pre-tax underlying replacement cost profit of $7.7 billion.

This was $500 million lower than the first quarter of 2010, despite the stronger environment.

Underlying factors were lower production volumes, higher costs, including a higher maintenance spending to improve long-term reliability, and rig stand-by expensed in the gulf due to the moratorium.

Exploration write-offs were higher than the same quarter last year, and we saw a reduced contribution from gas marketing and trading.

Production for the quarter was 3.58 million barrels of oil equivalent per day, 11% lower than the first quarter of 2010.

After adjusting for the effect of acquisitions and divestments, and entitlement impacts in our production-sharing agreements, the decrease was 7%.

The reduction in production was weighted towards our highest margin areas.

This reflected the continued impact of the drilling moratorium in the Gulf of Mexico, maintenance activity in Angola and the North Sea, and the impact of the Trans-Alaska pipeline interruption in January.

First production from Iraq provided a partial offset.

Production in the second quarter is expected to be lower than 1Q depending on the pace at which new drilling permits are granted in the Gulf of Mexico, the further impacted divestments and the seasonal ramp up and turnaround activity across its portfolio.

As we explained in February, our turnaround activity in 2011 is planned to be much higher than in 2010, with around 50 turnarounds in the current year compared with 35 last year.

In 2Q these turnaround activities are planned for some of our highest-margin areas and will impact costs and margins as well as volume.

The turnaround should result in long-term benefits in terms of reliability, and are part of getting the foundation right for the long term.

Cash costs in the second quarter will continue to be impacted by rig stand-by costs in the Gulf of Mexico.

We expect production for the year to be in line with our February guidance of around 3.4 million barrels of oil equivalent per day.

BP's share of TNK-BP net income was $1.2 billion for the quarter, more than twice the level of the first quarter of 2010.

In Refining and Marketing, after adjusting for a charge of $120 million for non-performing items and fair value accounting effects, we report a pre-tax underlying replacement cost profit of $2.2 billion for the first quarter.

This is an increase of $1.4 billion compared with the first quarter of 2010.

In the fuels value chains, this reflects improved refining margins and a very strong supply and trading contribution.

The improved result also reflects the benefit of refining feedstock optimization due to BP's location advantage in accessing WTI-priced crudes for its US midwest refineries.

In the international businesses, aromatics margins and volumes were strong, and the lubricants business continued to deliver earnings growth.

These factors were partially offset by the impact of higher turnaround activities.

Solomon availability was almost 94%, but refining throughput was slightly lower than the first quarter of 2010, primarily due to higher planned turnaround activities at the Texas City refinery.

Looking to the second quarter, we expect the supply and trading contribution to be lower than the very strong first quarter performance, and we anticipate that the wide WTI differentials may narrow somewhat compared with recent levels, reducing the benefit to our midwest refineries.

We expect the usual seasonal improvement in the refining margins in the second quarter but anticipate some softening in petrochemical margins.

Turnaround activities in the second quarter are expected to be in line with 1Q.

In other businesses and corporate, after adjusting for non-performing items, we reported a pre-tax underlying replacement cost charge of $300 million for the first quarter, an increase of $90 million versus the charge a year ago, primarily reflecting the impact of business restructuring within alternative energy, and other one-off effects.

Guidance for 2011 remains unchanged from that given in February, with underlying quarterly charges volatile, and averaging approximately $400 million each period.

Next I would like to provide you with an update on the costs and provisions associated with the Gulf of Mexico oil spill.

In the first quarter we've taken an additional pre-tax charge of $400 million.

This reflects a small increment related to spill response costs as we continue to wind down activity, plus the ongoing quarterly expense of the Gulf Coast Restoration Organization.

This is in addition to the pre-tax charge of $40.9 billion recognized in 2010, which included the $20 billion trust commitment.

As announced last week, BP has entered into a framework agreement with the natural resource trustees and various state and federal agencies in the US to provide $1 billion towards early restoration projects to address damages to natural resources caused by the Deepwater Horizon spill.

This agreement has no impact on the pre-tax charge as it will be covered by the $20 billion trust fund.

The provision carried forward on the balance sheet at the end of 1Q represents our current best estimate of those future costs for which a provision could be made at this time subject to all of the exclusions and uncertainties that we describe in the stock exchange announcement.

As indicated in previous quarters, we believe that BP was not grossly negligent, and we've taken the provision on that basis.

We'll continue to review our provision quarterly and adjust it as new information becomes available.

Total cash payments of $3 billion made in the first quarter, which included a payment of $1.25 billion into the trust fund, as well as direct oil spill response costs.

Turning now to cash flow, this slide compares our sources and uses of cash in the first quarter of 2010 and 2011.

Operating cash flow, excluding post-tax Gulf of Mexico oil spill expenditures, was $5.2 billion, 32% lower than a year ago, with oil price-related movements and working capital a major factor, as I mentioned earlier.

We received $2.6 billion of disposal proceeds, including $1.6 billion held in deposit for deals completed in 1Q.

And additionally held $4.6 billion in deposits for deals to be completed subsequent to the quarter end.

These deposits were reported as short-term debt at the end of 1Q.

First quarter organic capital spending was $4 billion, which is $1 billion less than the expected quarterly run rate for 2011.

In addition, we made an initial stage payment of $2 billion to Reliance Industries with respect to the acquisition of off shore exploration and production interests in India.

Total cash held at the end of the first quarter was $18.7 billion.

Our net debt ratio was 21% at the end of 1Q.

As I mentioned earlier, the $4.6 billion of deposits for deals to be completed subsequent to the quarter end was reported as short-term debt.

As these deals close, net debt will reduce accordingly.

As I explained our strategy presentation in February, we intend to reduce the gearing to a range of 10% to 20% over time.

I will now provide a quick update on our A&D activity.

Looking first at acquisitions, during the quarter, we announced an alliance in India with Reliance Industries.

And the acquisition of majority control of Brazilian ethanol and sugar producer CNAA.

We now expect the purchase of Devon's assets in Brazil to complete during 2Q.

Turning to disposals, we've made further progress in our objective of achieving $30 billion of divestments by the end of 2011.

During the quarter, we completed the sale of both our Colombian assets and the package of producing properties acquired from Devon in the Gulf of Mexico.

We announced the sale of a number of additional non strategic assets during 1Q, a package of fuel storage and pipeline assets in the US, the Wattenberg natural gas processing plant in Colorado, and our aluminum business.

The divestments of our interests in Pan-American energy in Pakistan, in Vietnam, and in Venezuela, which were announced in 2010 are all moving towards completion.

During the quarter, we announced our intention to dispose of a package of UK upstream assets, and we're continuing to progress the sale of our Canadian NGLs business.

Finally, I'll give you an update on our strategic progress.

In February we highlighted that 2011 would be a year of consolidation as we focus our efforts on strengthening safety and risk management, meeting our commitments in the US and reshaping our portfolio with a view to growing long-term value for shareholders.

Fundamental change is taking place in the Company.

Our new centralized Safety and Operational Risk Organization is up and running.

There is more work to do to fully define the scope, resourcing and priorities of the organization, but already we're seeing the effects of the new organization in operation.

The reorganization of our upstream business and of functional divisions has also made rapid progress with the first phases of organizational design complete and key roles appointed.

During the first quarter, we launched our new performance management and reward system.

Every employee's reward is now more directly linked to safety and risk management and more focused on long-term objectives.

In the US, we continue to meet our obligations.

Beyond the direct spill response, $5.6 billion have been paid out in claims and government payments to the end of 1Q.

All of the federal waters of the Gulf are now open for fishing, and the deep cleaning of all amenity beaches is complete.

We continue to share the lessons learned and have engaged with some 20 countries to date.

The dividend for the first quarter is $0.07 per share.

Our intention, as I stated in February, is to grow the dividend in line with the improving circumstances of the Company.

As you've seen, we continue to actively manage our portfolio.

To date we've entered into agreements for divestments with a total value of over $24 billion, against our objective of $30 billion by the end of 2011.

Proceeds from these divestments have significantly exceeded the book value.

In addition to the new access opportunities in Indonesia, China and Australia, that we outlined to you in February, we made progress in a number of other strategic areas during the quarter.

Our acquisition of a 30% stake in 23 off-shore oil and gas blocks in India in alliance with reliance industries will, once completed, give access to extensive exploration acreage linked to one of the fastest growing energy demand centers in the world and represents a new alliance with a strong national partner.

In Indonesia we signed four new coal bed methane production sharing contracts, allowing us to deepen our portfolio in Indonesia and leverage more than 30 years experience in the development of coal bed methane resources.

Refining and marketing continues to make significant progress in delivering earnings growth in line with the goals outlined in 2010.

From a portfolio perspective, as we indicated in February, we intend to sell both the Texas City refinery and the southern part of the west coast fuels value chain, including the Carson Refinery with a view to exiting these positions by the end of 2012.

This is in keeping with our intention to have BP's US refining capacity and significantly improve the financial performance of the US fuels value chain portfolio.

As I hope is clear, BP is in the midst of major change as we work to reset the focus of the Company, and begin the task of rebuilding long-term, sustainable value for our shareholders.

We are keenly aware of the loss of value that has occurred over the past year and how deeply discounted we are today relative to both the value of our assets and our financial performance versus our peers.

We are committed to recovering that lost value, both by sustainable long-term performance and by addressing the uncertainties that we face in the US, Russia, and elsewhere.

Thank you for listening.

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

(Operator Instructions).

Theepan Jothilingam, Morgan Stanley.

Thank you for the update.

Two questions just on the Gulf of Mexico actually.

Firstly just on the result, I was hoping, could you give us a little bit of color in terms of a breakdown of incremental costs BP is incurring in the Gulf on the production side.

I'm trying to reconcile the Q4 US upstream result to Q1.

It does look like a very big delta in EBIT per barrel relative to realized commodity prices.

Second question, again difficult perhaps to gage, but I was wondering if you could give us any color on discussions on drilling permits for BP, when you might submit your own permits for operated wells?

Well Theepan, maybe I'll start off with the point of earnings per barrel in the US.

I think you're comparing the fourth quarter of 2010 to the first quarter of 2011.

One aspect of it is a lot of it is related to the north shore in the Gulf of Mexico of course, but one estimate is rig stand-by costs in the Gulf of Mexico, which were quite material in the first quarter, materially higher than towards the end of last year.

The second thing is in line with 2011 being a year of consolidation and the higher degree of plan turnarounds, additional costs across the US business in terms of safety and work to improve operational reliability, which we would of course expect to have a long-term return in terms of a stable -- more stable and more reliable operation and have a cost benefit long-term.

Clearly there are higher costs in the near term and some other factors.

Mix is clearly very important with the moratorium in the US, the Gulf, the decline in production there.

We talked about it back in February.

It is quite material and those are higher margin barrels particularly in the current environment.

And the final point is really the marketing and trading contribution from the gas business, which is also reported in the exploration and production upstream division, which remains low by historical standards.

Largely due to the lack of volatility in the US gas price.

Theepan, as far as drilling in the Gulf of Mexico, we, like everyone else, are progressing the permitting process.

It's being done in a very orderly fashion with the due process being exhibited by the regulatory authorities as is appropriate in the situation.

Irrespective of the permitting, certainly we've got a number of things that we want to make certain that we have right before we recommence drilling in the Gulf of Mexico.

But the combination of getting the permits and making sure we are in an appropriate position to do all of our activity safely and with an eye towards management of the risk, we expect to be back and actively drilling during the second half of the year.

Okay.

Can I just come back to the comments on cost, would it be right to assume similar sort of cost levels in the Gulf going through for the remaining part of this year, or was Q1 unusually high?

Well I think it really, Theepan, depends on the pace of the restart of activity.

We expect in the second quarter certainly to see those factors continue, if activity starts to pick up, and we hoped it would in line with Byron's remarks.

Second off, we would expect those factors to start to roll back in reverse, but really, it's a question of the pace and timing of the restart activity.

Some things, like the rig stand-by costs would cease to be a factor as we look later on in the course of the year.

But as Fergus was outlining originally, there are a number of things that fit into this pot from an overall E&P perspective on the geographic apportionment of it.

And those can leave the impression that our costs are going up at a more rapid pace than they are.

And certainly the combination of that with the decreased production, which is a consequence of a number of factors, but most particularly the Gulf of Mexico moratorium exacerbates the ratio.

And the final point, Theepan, which I neglected to mention earlier, was off course exploration write-offs, which you'll have seen in the stock exchange announcement which were slightly unusually high in the first quarter of 2011.

And that was notably in the US.

Alejandro Demichelis, Bank of America, Merrill Lynch.

Two questions, if I may.

The first one is coming back to your CapEx indications of $20 billion.

Assuming that the Devon transaction does close in the second quarter and assuming that there is (Inaudible) closes as well, should we see a higher impact on CapEx coming from those two things?

That's the first question.

The second question is on the Russian situation.

I know you're not going to comment on the [Devon-Brazil] but is the deadline potentially -- could you extend that deadline if you come to a new agreement with Rosneft?

As far as the capital goes for 2011, we've made our projection with an eye towards the fact that there is some uncertainty with respect to the pace of acquisitions and disposals during the course of the year.

And the $20 billion stands with the presumption of the completion of the Devon-Brazil transaction in 2Q.

As far as the Russian discussions go, I tried to indicate cruelly in my opening remarks, that I wasn't going to comment on it and I won't.

John Rigby, UBS.

Two questions.

The first is on downstream.

I'm just struggling a little bit with all of the moving parts, probably from about the middle of last year through 4Q, which was clearly very poor into 1Q where you've had a bit of a resurgence.

Perhaps I can come at it this way, to ask whether, given all of the conditions you saw in 1Q where you would place the earnings that you actually generated in terms of a par, above par, below par and perhaps where we should think in terms of what your expectations will be given the macro.

Second question, just to come back on to the costs in the Gulf of Mexico and the US, are you increasing your idle line costs as equipment that was previously being used in the clean-up and the well control is released back to your of main business?

Thanks.

Okay, let me address the downstream, and Fergus will pick up your question -- your follow-up question about spending in the Gulf of Mexico.

I think it's important to begin with the fact that the refining and marketing organization has been on a path now for a series of quarters in driving better performance across all of its activities.

They've stripped out operational inefficiencies.

They've improved the reliability.

They are a much more efficient and effective organization that -- than was the case several years ago.

And it's all been following the outline of the various sources of improved performance that Iain Conn outlined a couple of years ago.

Now within that path, there are a number of volatile elements, some of which are driven by the environment, some of which are inherit in our own activity.

Clearly in the first quarter, we saw a lot of very beneficial environmental elements for BP.

The benefits that I described with respect to the dislocation of differentials with respect to a WTI source crude, has clearly benefited the Toledo and Whiting refineries.

That $10 plus differential is still there, but various people are speculating and different paces of which that would go away.

But it was there for 1Q, it's there for the month of April.

At some stage, when there is adequate quality ability to evacuate crude out of cushing, it will return to the same relationship that it's had with international crudes in the past.

It was a good quarter for refining margins.

It was a great quarter for petrochemical margins.

But much of this is not only about capturing the margin, it's making sure that plants are running well in order to capture the margin and the plants were running well to do that.

And the lubricants is a long-term success story that continues to deliver quarter after quarter.

In the back drop the contribution from oil trading is always going to be volatile, and it will be particularly stark in the fourth quarter of 2010 when we announced we had actually incurred a trading loss, versus first quarter of 2011 when we had some really outstanding contribution from the oil trading team.

It was an unusual quarter of opportunity, and like everything else, the key thing is that the organization is positioned to take advantage when opportunity is there, and our trading organization is so structured.

If I look at the two things that you may be most wanting to focus on, John, as far as the amount of trading contribution outside of the norm, and perhaps the unusual effects that were in 1Q and are ongoing for the moment with respect to WTI differentials, it is more than $0.5 billion contribution to the first quarter, the combination of those two effects.

Yes, John, your question about the so-called idle iron issue, or the rig stand-by costs in the Gulf of Mexico, a substantial portion of those costs were actually capitalized due to the uncertainty of the situation last year.

This year, they're being expensed, so your quite right, there is a swing factor in the fourth quarter they reported profitability of the US upstream.

And if activity picks up in-line with our expectations, those material costs at the moment would be negligible by year end.

But, as I've already said, that does depend on your assumptions about the timing of reassumption of activity.

Fred Lucas, JPMorgan.

I want to ask about Rosneft and then I want to ask by TNK-BP.

First of all, can you clarify the status of dividends coming out of TNK-BP?

Clearly there wasn't one paid to you in the first quarter.

And secondly looking longer term, as you reposition BP for as you say, long-term sustainable performance, can you perhaps comment on the suitability of Alfa Access/Renova as BP's long-term partner in Russia.

And if I could throw in something separate, could you also clarify how much of the $1.2 million-barrel a day of US refinery through-put is actually priced out of west Texas?

Thanks.

Okay.

Let me speak to dividends and Alfa Acess/Renova, and I'll let Fergus talk about refining through-put.

As you say, a dividend wasn't declared in the first quarter, but -- and it is not unusual for a quarter to occur in which a dividend is not paid out, it's -- there are a number of precedents for that.

But we would currently anticipate that a dividend would be paid in 2Q.

As far as comments about our partners in TNK-BP, I put that in the same category as a wider discussion around Russia, and I've got no comments to make on it right now.

Nothing that I could say at this point would likely be helpful, and therefore, I will not comment.

Fergus?

And actually, you only have to go back to the first quarter of 2009 to see another quarter where TNK-BP didn't pay a dividend or the second quarter of 2008.

I think if you listen to the TNK-BP's own conference call an hour ago, you'll see they did give an indication they would be shortly paying a dividend.

In terms of what percentage of our crude runs are priced off WTI, I think the main point here, Fred, is the majority of the feedstock for our Midwest refineries, Whiting and Toledo, are indexed at WTI.

The crude distillation capacity of those two refineries, our share off is about 485,000 barrels a day.

So I think that gives you a pretty big clue as to the level of our exposure to WTI-priced crude, and obviously we have indicated the benefit of that during the first quarter.

Can you clarify the dividend that's likely to be paid in Q2?

Is that a catch-up on one owed from Q4 and Q1 or is it just going to be Q4?

The board of TNK-BP has not yet taken that decision, so let's wait until they've assessed the opportunity and taken their decision.

But I'm sure our colleagues at TNK-BP investor relations could probably help you on that one, Fred.

Mark Gilman, Benchmark in the US.

I had a couple of things.

One specific.

Byron, have you applied for permits to drill in the Deepwater Gulf of Mexico?

The answer to that is yes, Mark.

I don't know all of the details of all of the status of permits, but Fergus is looking to see if he can provide some context.

But why do not you go on in your questions.

Okay.

But you have -- you have made an application for permits to your knowledge?

Mark, maybe I'll just jump in and give you the answer.

Subject to regulatory approvals, we're working toward a phased resumption of activities in the middle of the year.

We have got 4 development rigs operating at Thunder Horse, the mobile offshore drilling unit there, and the platform rig and then 2 at Atlantis, and 1 exploration and appraisal rig.

We're not, obviously, able to comment on the details of the permit filing process, except to make clear that we've got some very distinct criteria for the restart.

And those include meeting or exceeding our new regulatory requirements, including new requirements for BOP equipment and testing, worst-case discharge and (Inaudible) scenarios, and analysis of containment response capabilities.

Of course addressing each of our own recommendations of the organizational investigation (inaudible) blind compliance with our own, in many cases, higher standards, ensuring we have the right capability in place to execute the activity in the standards we'd expect and the appropriate management of contractors to oversee the quality of their delivery.

So that gives you some sense of what we intend to do, Mark.

Absolutely the outcome does depend on the regulatory process.

You'll be aware also that we're a partner in certain permits that have been issued for exploration activity.

So in terms of non-operated activity, that is already under way.

Byron, could you clarify your accounting for Iraq in the quarter and how much production was booked and how that is hitting results, if you would, please.

Iraq is being accounted for in a -- it's a hybrid of production-sharing contract process.

It's very similar, therefore, volumes are related to the price of oil, if prices are higher then the volumes will be lower and vice versa.

And we receive volumes according to a formula for both cost recovery, and therefore -- plus the fee associated with the contract.

The volumes that we booked in the first quarter were slightly less than 50,000 barrels a day.

Final question, it would appear that block 18 in Angola is suffering seemingly chronic operational difficulties.

Could you provide a little color on that, and particularly whether it's subsurface or above-surface type issue that continue to be a problem there?

Mark I think that falls under the heading of the increased turnaround activity that we're conducting in 2011 with the aim of improving long-term reliability as a clear signal that we're going to do everything we believe is correct to do to improve safety and improve re -- reduce operational risk and improve reliability.

Fergus, there are issues throughout 2010 as well, to my understanding.

And that's the work that is underway to address those issues, Mark, so I can't really comment further than that.

But, you're quite right.

It's had a material impact on production in the first quarter of 2011, and those are high value barrels, so it's had a material impact on profitability.

Obviously as that work is complete, we hope to see some of that effect reversed.

Peter Hutton at RCB.

Can I just talk to you about the exploration expense, which over the last 2 quarters, so Q4 and Q1, has averaged over $400 million, which is the highest that you've bought.

You mentioned that specifically for the first quarter, but it seems to be -- is it something systemic or is it a coincidence of factors over the last 2 quarters?

Or should we be moving up our expectations going out?

Peter, it's a coincidence of factors.

Exploration write-offs tend to be lumpy, and you can get to two lumpy outcomes in succession.

It should not be taken as an indication that you should expect higher exploration write-offs in the future, except to the extent that if we increase exploration spend material over the course of time, that would bring with it higher exploration expense.

And Peter there are one or two regulatory points.

The BOEMRE has changed some of its regulatory requirements in terms of de-commissioning provisions for idle infrastructure, and that's had a bit of an impact as well.

And that explains some of the lumpiness that Byron is referring to.

Lucy Haskins, Barclays.

Byron, I wonder if you could say whether there has been any indication of demand destruction in this rising oil price environment, because I think Tony indicated in 2008 that there definitely did seem to be reaction of higher prices ahead of the financial disasters.

Are you seeing any signs of that of yet?

There doesn't seem to be a material impact on demand at this stage.

Clearly, on the margins there is always going to be some impact from a significant increase in prices.

But it's certainly modest at this point in time.

And might I ask why you think that might be different this time around?

Lucy, I just was -- you were asking were things were.

There are so many different things that are moving parts here.

If prices continue to go upwards, then clearly, that will have some sustainable impact.

But we've got a combination of economic recovery, and that's going at different paces in different parts of the world.

At the same time, oil prices and other things are moving around.

I think it's extremely difficult to sort through the various changing elements and to isolate on a particular element.

But certainly, increasing prices are going to have some impact on demand.

How material it will be we'll have to see after the sustaining levels that we have today are higher and in place for a period of time.

Irene Himona, SG.

I had three questions, please.

The first, could you update us on progress made on the disposal of the 2 US refineries, and perhaps give us a time frame that you expect for that?

Secondly, I know it's quite a high take braid for the scrape dividend, which is useful from a cash perspective.

Could you indicate if your targeted gearing range is likely to be achieved in the current price environment within the next year or so?

And finally, just going back to upstream profitability, looking at your EBIT margin per barrel in Q1, we are running about $10 or 30% below first half of 2008 when the pricing environment was very similar.

I understand the issue of maintenance and so on, but could you perhaps give us an indication of whether some of that -- or how much of that we're likely to get back next year as activity starts to pick up, taking account of the disposals you have implemented.

Thank you.

I'll deal with the first couple questions and leave Fergus for the last one.

With respect to the US refineries, it's early days.

We just announced this back in February.

There is a lot of preparation that needs to be progressed before we can be actively marketing a known item.

We said at the time of the strategy presentation that we were looking to pursue these transactions with an aim to close them by the end of 2012, and nothing has changed on that count.

It's going to take a while before we can be progressing the activities, and just I think you can appreciate the challenges of carving out the fuel value change from the rest of the US activity.

You're right on the scrip dividend, we're very pleased there was about a 40% take-up on the scrip dividend in the first quarter.

And we look forward to further active participation in the program.

The aim to get down to a 10% to 20% gearing range, I indicated in my remarks, over time, we would certainly hope that, that was achieved in the course of 2012.

If not before.

Yes, Irene on your question in terms of unit margins, I think I've talked quite a bit about the whole cost side of things.

If you look at the margins, say for example compared to last year, you can see a couple of things.

The first thing is that the issue is mainly in the US, frankly.

And that's for the reasons I've talked about in terms of cost, in terms of the drilling moratorium, in terms of the production trends in the Gulf of Mexico that resulted from the drilling moratorium.

But there are some other things in there.

There is some interruption to the Trans-Alaska Pipeline System, which also adversely affected the mix.

And very importantly, a large part of our US business is an on-shore US gas business, and their prices remain relatively low.

And in terms of the overall leverage of our business, to higher oil prices, that clearly has quite a large effect.

So in terms of how much of that you would expect to reverse, which I think was also part of your question, clearly we've indicated that as activity picks up in the Gulf of Mexico, and indeed as we the increased turnaround activity of 2011 improves, operational reliability in the longer term, a lot of that will reverse.

Some will undoubtedly continue in terms of an organization that's more strongly focused than ever before and more strongly intensified toward safe and reliable operations.

We would like to think in the long-run that would be offset by higher operational reliability.

But I come back to the point that the biggest single leave in probably the next 12 months is the pace of restart of activity in the US Gulf.

Kim Fustier, Credit Suisse.

I had two questions if I could.

The first question was on [Sunding].

It was reported a couple of weeks ago that BP made a bid for the other half of TNK-BP for $27 billion, $28 billion.

I know you do not want to comment precisely on Russia, but there is $18 billion of cash sitting on your balance sheet.

Presumably you would like to conserve some of that cash for future Macondo liabilities.

I'm wondering how much flexibility is there on your balance sheet to go above your target gearing or net debt range, at least temporarily?

And also whether you could remind us of how much disposals -- disposal proceeds you expect to receive until the end of 2011?

That was my first question.

My second question is on tax.

You give guidance on the full year tax rate of 32% to 34% back in February.

Could you just clarify why that guidance is still unchanged after the UK tax hike?

Thank you.

Okay.

I think that was -- I've got three questions that I've sorted out from that.

As far as cash on the balance sheet, as you know, we're carrying the better part of $19 billion of cash at the current time, and that is consistent with a desire to hold a lot of cash to deal with the uncertainties of the environment that we currently face.

We've got not only uncertainties and plus ongoing expenditures associated with Macondo, but we're in the process of completing a number of acquisitions in the course of the year, the deal with reliance as well as the acquisitions in Brazil.

So all of that orients us towards having a lot of cash.

We are aiming to get to the 10 % to 20% gearing range in the course of the next year or so, and therefore, what I'm not indicating is an intention at this time to jump to what would be a maximum gearing for BP in the circumstances we're in.

We think going to 10% to 20% and holding a lot of cash is the right place for BP to position itself for the time being.

As far as the $30 billion worth of disposals, we've done agreements with a total of $24 billion.

Obviously we haven't received all of that cash yet.

We have got $4.6 billion of deposits that we're treating as short-term debt, and if we actually had that cash fully recognized on the balance sheet, we would be below a 20% gearing ratio at the current time.

But we remain confident of deals totaling $30 billion between now and the end of 2011.

And as far as the tax rate goes, we looked at the year with its range of uncertainties as 32% to 34% at the start of the year.

We had not anticipated the increase in the supplementary tax with respect to the North Sea, and that has added a charge that's a couple percent or so over the course of the year.

We've got, we believe, relatively modest rates of taxation charge on some of the disposals that would be closing in 2011.

So that's providing a counter-balance to the supplemental charge.

So net-net, we believe we're right back in a 32% to 34% range for the year.

I hope that explains why we've ended up right where we started from, Kim.

Pavel Molchanov, Raymond James.

Also relating to the cash on hand issue, there was a resolution at the AGM pass of 99% regarding share buyback.

Wanted to get your perspectives on that currently?

There is no intention at the current moment to be buying back shares, Pavel.

And any -- I'm curious what drivers might persuade you to reassess that?

For the time being, Pavel, we've got -- we're sitting above the targeted debt ban that's been communicated, so we're above the 10% to 20%.

We've got a lot of ongoing expenditures ahead of us.

We believe that it's appropriate to hold a lot of cash to address that.

Until the circumstances around Macondo become much clearer, you should not expect us to be initiating a share buyback program.

Jason Gammel, Macquarie.

I wanted to first ask a couple of questions about the Reliance alliance.

Have you taken any steps to identify remedial measures that you could take at KGD6 to get the production decline arrested or perhaps even turned around?

And secondly, in addition to the exploration opportunities, would you expect that the alliance would provide opportunities for increasing your LNG training business?

And then finally, on LNG, has the situation in Japan had any effect on your marketing of LNG cargoes?

I'm thinking specifically the LNG opportunities you have at Tango?

That was a lot of questions.

Fergus is going to start.

Gentleman, Jason, I'll have a go.

If you listened, as I'm sure you did, to the communications around the time of the announcement of the reliance deal, one of the reasons that BP was selected as a partner was our subsurface capability.

And the first thing we did was to succumb some of our best people to work on the subsurface issues and the acreage, including the current producing block D6.

Clearly these things do not get turned around instantly.

And we'd expect a period of time, but we see -- our teams see a way of improving performance.

And they're working with the Reliance people on that.

I can't really say any more detail than that.

Also in that initial presentation at the time of the announcement of the deal, we did talk about the opportunity for increased LNG trading, and that remains one of the objectives of the deal.

As far as specific cargo diversions to specific markets, I don't think -- when we talked -- we would detail that I'm afraid.

Jason, I don't wish to be unhelpful, but that's a level of detail that we do not think is appropriate to go into.

Lucas Herrmann, Deutsche.

Byron, you commented at the start of committed to recovering lost value addressing uncertainties in the US, Russia and elsewhere.

You've obviously made clear that you're not going to comment on the situation in Russia.

But you can talk a little about the dialogue you may or may not be having with US federal authorities, resolution of criminal or civil fines associated with clean water in particular?

There was a point about 9 months ago when you seemed to have some optimism that you may be able to reach some resolution with the authorities through the course of 2011.

That seemed to fade.

Where are we today?

Is there any commentary or insight you can give us on discussions in general with the US authorities?

There is a lot of disclosure in the legal proceedings component of the stock exchange announcement, if you've managed to wade your way through there.

But Lucas, I think the best way to describe this is discussions with the authorities have been ongoing and continue.

So that's all the further I could go at this point.

Is there a willingness in any way between -- well themselves in particular, to reach some earlier agreement, or should one just anticipate that one will have to await the civil trial next year and see the outcome of that?

I won't speculate on that, Lucas.

Bertrand Hodee, Kepler.

Two questions if I may relating to the Gulf of Mexico.

Can you disclose what was your level of pollution in the Gulf of Mexico in Q1?

And you can be a bit more specific on the rig stand-by costs occurred also in Q1, and can you quantify them, please?

Yes, we can do that for you, Bertrand.

In terms of production, in the first quarter of 2011, Gulf of Mexico production was about 100,000 barrels a day, lower than the first quarter of 2010, when I think you could see from our published statements, 2010 it was 433,000 barrels a day.

So about 100,000 barrels a day decline there which is clearly significant and driving the mix that we referred to earlier on.

As far as the rig stand-by costs, it's less than $100 million, Bertrand, in 1Q.

Oswald Clint, Bernstein.

Two quick ones.

The first one, merely back on Russia, but a different one related to the East Siberian tax breaks and how they've been stopped going forward for the rest of the year.

Does that have any impact for your (inaudible) project as part of the TNK-BP growth profile there?

And then secondly just back on Iraq, are you comfortable with the export capacity you have there in order to ramp up the (inaudible) Rumaila through 2011?

As far as your question on TNK-BP, unless Fergus can answer that, that would be a good question to ask TNK-BP right before this webcast.

I don't know the answer to your question.

And as far as Iraq goes, there is suitable export capacity for the moment, but clearly export capacity will become an issue over the course of time.

And we as well as other parties in Iraq are concerned about trying to anticipate the issue and get the right investments in place to make certain that we can evacuate crude as it's being produced.

But for the moment, we are able to export the crudes that being produced out of Rumaila.

Sergio Molisani, Unicredit.

Two questions if I may.

The first on the (Inaudible) acquisition price, if looks like that your gut realization in the US and the rest of the world lags behind the press market movement.

Can you elaborate a bit on the reason of this trend, please?

And the second question is a follow-up on India.

We have read a lot about the fast decline of Indian fails due to investment slowdown in terms of related to the lowering gas price.

Can you tell us what the current gas price -- regulated of gas price of 4.2BMU are deadlocked for the next 5 years, or there are rooms to renegotiate at this price in the near future?

Thank you very much.

Well on the first part of your question, Sergio, which was realizations versus markers, of course as usual, it depends on whether you are comparing the first quarter of this year or the fourth quarter of last year.

But I'll do the comparison against the fourth quarter, and you can come back to us if you wanted to commit comparison against the first quarter of 2010.

In the main feature, I think, as you say, is that in a number of areas, realizations did lag behind markers.

It was most noticeable in US gas.

And there were some one-time factors there, higher transportation charges were part of it, and royalty-related payments were another part.

So some transitory factors going there.

That was the main feature, actually, unless you had something more specific behind your question, Sergio?

No, that's fine, thank you.

Sergio, if I would just add to that, there always are a number of things that are changing.

And Fergus didn't speak about locational differentials which can bounce around from quarter to quarter as well.

So the underlying realization from our gas production has not changed materially as a consequence of the movement from last quarter to this quarter.

As far as India goes, as Fergus mentioned earlier, we've not yet completed the deal with Reliance.

It's still their assets.

We were hoping that, that deal will compete in the second quarter, and we're actively involved in helping to realize the maximum value from those fields.

As far as the regulatory environment around that, I'm not going to speak into that space.

I think that we've seen the last of the questions here So just one final comment.

It's clearly been a challenging period for BP, but we've made considerable progress in resetting the foundations of the firm.

Nonetheless, there is much more to do.

And we look forward to reporting to you further on that progress at the time of the half-year results in July when I'll have all of my colleagues with me to respond to your questions.

Thanks for joining.

And have a good day.