Feb 5, 2013
Operator
Welcome to the BP presentation, to the Financial Community Webcast and Conference Call. I'll now hand over to Jessica Mitchell, Head of Investor Relations.
Jessica Mitchell
Hello and welcome to BP's Fourth Quarter and Full Year 2012 Results Webcast and Conference Call. I'm Jessica Mitchell, BP's Head of Investor Relations and joining me today are Bob Dudley, our Group Chief Executive and Brian Gilvary, our Chief Financial Officer.
Before we start, I'd like to draw your attention to our cautionary statement. 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 that we note on this slide and in our U.K. 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 Bob.
Robert Dudley
Thank you, Jess and good afternoon or good morning everyone, depending on where you are in the world. As you all know, the last few weeks have been a very traumatic time for us following the atrocity of the Amenas joint venture in Algeria.
It is also been a terrible blow for our partners in the joint venture; Statoil and Sonatrach and for the contracting companies involved. Of the people who lost their lives; four BP employees and five Statoil employees lost their lives along with contractors and partners; many of them close colleagues and friends.
BP is a large, but tightly knit company. People were murdered in what should have been an ordinary day of work and we feel the loss deeply.
The shockwaves have been felt not only within the companies involved, but around the industry as a whole. The event was a painful and tragic reminder of the importance of what we do.
Our industry has a high profile. We operate at many different countries and cultures.
We work in challenging physical environments and we deal with multiple hazards. This event has highlighted the risk that we face from time to time and as an industry, we must learn from it.
I would like to thank governments and companies for the close cooperation during the incident. BP is a company that has been tested to the utmost, but we have resilient committed people.
I believe we are equal to the test we face in this event that will simply underscore our determination to run our operations that are safe, secure, enabled to delivery energy for customers and value for shareholders. I think today’s presentation will show some of the drivers of work in our business to achieve this outcome.
So turning to our full-year results, today you will see that 2012 was what we said it would be, a year of milestones, in which a great deal was accomplished at BP. We are entering 2013 as a more focused oil and gas company with a smaller, but stronger portfolio that provides a platform for growth, a set of distinctive capabilities, a disciplined financial framework and a clear strategic direction for the long-term.
Together, these building blocks create a solid foundation from which to grow long-term sustainable free cash flow for shareholders. In 2013, we’ll continue to see the impact of the reshaping work in our reported results from the divestment of non-strategic assets and the repositioning of our Russian interest, as well as some early results from improved underlying performance.
By 2014, I expect underlying financial momentum to be strongly evident. I am confident that we have the right strategy and that BP is well positioned for the world, we are heading into.
Today, we will start with a summary of our full year 2012 financial results, a look at the key milestones we have met over the past 12 months and a brief overview of the macro economic environment. Brian will then take you through our results for the fourth quarter in more detail.
Then I want to update you on the big important areas of our business; our progress on safety and operational risk, the U.S. legal process, our expected investment in Rosneft, and our strategic agenda in the upstream and downstream.
And then we will take your questions. So let’s begin with an overview of our full year 2012 results.
Underlying replacement cost profit was $17.6 billion. Post-tax operating cash flow was $20.4 billion.
Our organic capital expenditure was $23.1 billion. And we divested $11.4 billion of non-core assets during the year.
Total 2012 dividends paid were $0.33 per share, up 18% in dollars and up 20% in sterling compared to 2011. This means, we distributed $5.3 billion in cash to shareholders.
And our gearing at the end of the year is 18.7%, which is within our target band of 10% to 20%. That summarizes the outputs in financial terms, but as I said earlier, 2012 was really about a year of strong progress on the drivers that will show up in future results.
So looking at the key milestones; in Russia, we have an exciting and promising new future, now that we have announced the sale of BP’s 50% share in TNK-BP to Rosneft. We expect the deal to close in the first half of this year.
In the U.S., we continue to work through the legal proceedings. During 2012, we’ve reached landmark settlements with the Plaintiffs’ Steering Committee and we’ve resolved federal criminal charges with the Department of Justice and the SEC.
Also in the fourth quarter, we completed the final payment into the $20 billion trust fund. This is a major milestone for the direction of operating cash flow.
We continue to deliver our ten-point plan. We are playing through our strengths and we now have a much more focused portfolio, having effectively reached our $38 billion divestment target, a year earlier than planned.
This will have a marked impact on reported earnings and operating cash flow in 2013, but it paves the way for future value creation by establishing a high quality platform for growth. During 2012, BP started off five major projects; Galapagos in the U.S.
Gulf of Mexico, Devenick in the UK North Sea, PSVM in Angola, and Skarv in Norwegian Sea, all of which we operate and Clochas Mavacola in Angola in which we have an interest. I will come back to talk about two of these, PSVM and Skarv in more detail in a short while.
Both are projects of considerable scope and scale and are real markers of operational progress. With these projects online, we remain on track to complete our program of 15 major project start-ups between 2011 and the end of 2014.
At our Upstream Investor Day last December, we provided a detailed outline of the upstream platform for growth beyond 2014, and I will summarize that again later. In the downstream, the major upgrade of our Whiting refinery is now 84% complete at year end and is on track to start up in the second half this year.
Looking even further ahead, we have reloaded our exploration portfolio by gaining access to a range of promising new leases. We’ve acquired new acreage in Brazil, Canada, Namibia, Trinidad and Tobago, Uruguay and the U.S.
Since 2010, we have been awarded new license exploration areas that cover a combined area roughly twice the size of the U.K or about the size of the State of California. That’s more than twice as much acreage as we acquired over all of the previous 9 years.
Now before we move on, let’s briefly review the likely course of future energy demand. This slide shows some of the main projections from the BP Energy outlook 2030, which we compile each year.
The headlines are that we expect global energy demand to grow rapidly adding around 36% to global consumption by 2030 and nearly all of that increase in demand over 90% is coming from emerging economies. Oil, gas and coal will supply 80% of these needs with gas showing the fastest growth at around 2% per year.
However, the pattern of supply continues to shift and we expect unconventional oil and gas to play an increasing role in meeting demand. The U.S.
is now expected to become almost self-sufficient in energy by 2030 while China and India becoming increasingly import dependent. We can see from the outlook that BP strategy and portfolio is aligned with the opportunities presented by these trends.
We plan to play a leading role in the supply of oil by applying what I believe are distinctive capabilities in exploration, managing giant fields and enhanced oil recovery. We are investing in unconventional oil and gas from shale operations in the U.S.
to Tight Gas in the Middle East and Heavy Oil in Canada. But we’re also investing in the capacity to process heavy oil, most notably through the major modernization of the Whiting refinery, and our downstream businesses are supporting progress in energy efficiency, for example, with fuels and advanced lubricants for transport that help improve fuel economy and lower emissions, as well as leading petrochemical technologies that minimize energy use, cost, and emissions.
Turning from the long-term to the current environment, the oil price has remained above $100 a barrel for the majority of the past year, albeit with some continued dislocations between crude markers in the U.S. Clearly, this is sensitive to the balance between global demand affected by the recovering global economy and the supply attentions from geopolitical risks.
Henry Hub gas prices have continued to remain at historically low trends with reductions in drilling activity offset by only modest demand growth, which has not been sufficient for recovery in the price. And finally in the downstream, refining margins increased on average for the third consecutive year in 2012 as demand for global oil products mainly in the non-OECD markets continued to grow and supply was reduced by refinery closures and operational issues.
So this is the global environment we’ve been operating in. Let’s now hand you over to Brian to talk you through our financial performance for the fourth quarter.
Brian Gilvary
Thank you, Bob. I will start with an overview of the fourth quarter financial performance.
BP’s fourth quarter underlying replacement cost profit was $4 billion down 20% on the same period a year ago and 23% lower than the third quarter. Compared to the fourth quarter of 2011, the result reflected lower production due to divestments, production sharing agreements impacts, a natural field decline, probably offset by major project delivery.
A lower contribution from TNK-BP as it became an asset held for sale following the agreement with Rosneft, meaning only 21 days of underlying income was recognized. A $430 million negative consolidation adjustment to eliminate unrealized profit in inventory, partly offset by the positive impact of stronger refining margins.
As a reminder, the consolidation adjustment relates to the unrealized profit from upstream equity crude that is held in our refinery inventories with the volumes held in the fourth quarter increasing significantly compared to the third quarter. Fourth quarter operating cash flow was $6.3 billion, which included the final payments of $860 million into the Gulf of Mexico trust fund.
And as Bob mentioned moments ago, full year 2012 underlying replacement cost profit was $17.6 billion, down 19% on 2011. This included a record contribution from the downstream of $6.4 billion pre-tax with another year of underlying profit growth from that business.
The fourth quarter dividend payable in the first quarter of 2013 is $0.09 per ordinary share, an increase of 12.5% year-on-year. Turning to the highlights at the segment level; for the upstream, the underlying fourth quarter replacement cost profit before interest and tax was $4.4 billion compared with $5.9 billion a year ago and $4.4 billion in the third quarter.
The result versus a year ago largely reflects a decrease in production of around 7%, primarily due to divestments and entitlement impacts in our production sharing agreements and natural field declines. This is partly offset by major project delivery, underlying 4Q volumes excluding TNK-BP and after adjusting for divestments, and entitlement effects decreased by around 1% year-on-year.
The price environment was basically flat with small improvements in Brent offset by movements in local oil price differentials and Henry Hub traded slightly lower than a year ago. Costs increased year-on-year including high DD&A and high cash costs.
Compared to the third quarter, the fourth quarter result is flat with the benefits of high gas prices, including Henry Hub being offset by higher cash costs. For the full-year underlying production in 2012 was broadly flat compared to 2011 in line with previous guidance.
Looking ahead, we expect first quarter reported production to be slightly up relative to the fourth quarter with a ramp up of production from our major project startups offset by the ongoing impact of divestments. Turning to Russia, as you are aware, following agreement and principle with Rosneft on the 22 of October, we announced that equity accounting of our share of TNK-BP earnings would cease and that TNK-BP will be treated as an asset held for sale.
So our result for the fourth quarter only reflects 21 days of TNK-BP net income. As a consequence, BP share of TNK-BP underlying net income was $220 million in the fourth quarter compared to $1.3 billion in the previous quarter and $1 billion a year ago.
We also received dividend income from TNK-BP of $700 million in the fourth quarter. As an asset held for sale under IFRS, this is accounted forward in revenue and has been treated as a non-operating gain.
The dividend will also reduce the cash proceeds and the sale of our TNK-BP shareholding and the associated non-operating gain by an equivalent amount. We continue to expect to complete the deal with Rosneft during the first half of this year, so until that point, we will not be booking any earnings, more activities and interest in Russia.
We will however continue to report our share of TNK-BP's production and reserves until the transaction closes. In the downstream the fourth quarter underlying replacement cost profit is $1.4 billion compared with $800 million a year ago and $3 billion in the third quarter.
The fuels business delivered an underlying replacement cost profit of $1 billion in the fourth quarter, compared with $400 million in the same quarter last year. The continued benefit of strong operations enabled the capture of high refining margins partly offset by the impact of the planned outage of the largest crude unit at our Whiting refinery which began in November.
Compared with the third quarter the fuel results was impacted by significantly low refining margins, the absence of gains, deployment and pricing of barrels into our U.S. refining system and the planned crude unit outage at Whiting.
This outage is scheduled to continue until the second quarter enabling the startup of the Whiting refinery modernization project in the second half of the year. In addition, we expect the financial impact of refinery turnarounds in the first quarter will be similar in the fourth quarter of 2012, and lower than the full year 2013 than for 2012.
The lubricants business delivered an underlying replacement cost profit of $330 million in the fourth and $1.3 billion for the full year. This reflects continued robust performance in the quarter contributing to year-on-year growth and underlying profit despite challenging demand levels throughout 2012.
The petrochemicals business delivered an underlying replacement cost profit of $50 million compared with the profit of around $100 million in the same period last year. Despite seeing a slight recovery in margins in the fourth quarter, we expect margins to remain under pressure during 2013.
In other businesses and corporate, we reported a pre-tax underlying replacement cost charge before of $450 million for the fourth quarter, an improvement of $170 million on the same period a year ago. The full year charge of $2 billion was in line with our February 2012 guidance.
And in 2013, we expect the average underlying quarterly charge for other business and corporate to remain around $500 million per quarter, although this remain volatile between individual quarters. The effective tax rate on underlying replacement cost profit for the fourth quarter was 16%.
This was mainly due to deferred tax adjustments relating to divestments and foreign exchange movements and adjustments to provisions. The full year effective tax rate on an underlying replacement cost profit basis was 30%.
In the fourth quarter, we also recognized the $4.1 billion charge, primarily reflecting the settlement with the United States Department of Justice to resolve all federal criminal charges. This brings the full year total charge to $5 billion.
The total cumulative net charge for the incidents to-date is $42.2 billion. The pre-tax cash outflow related to oil spill costs for the year was $6.2 billion.
And during the fourth quarter, we completed funding of the $20 billion trust fund. At the end of the year, the cash balances in the trust and the qualified settlement funds amounts to $10.5 billion with $20 billion contributed in and $9.5 billion pay downs.
As indicated in previous quarters, we continue to strongly believe that BP was not closing admissions and we have taken the charge against income on that basis. Since the end of the third quarter, we have announced over $4 billion of further asset sales including our Texas City refinery in the United States together with some related logistics and marketing assets, a transaction, which closed on the 1st of February.
Interest in the number of North Sea oil and gas fields, and our interest in the Yacheng gas field in the South China Sea. As Bob said, we have now effectively reached our $38 billion divestment target a year earlier than planned.
Of the $38 billion announced divestments since 2010, we have received over $31 billion in proceeds by the end of December 2012 and expect to receive the majority of the remaining proceeds in 2013. The impacts will be increasing the evidence as we move through 2013.
For example, the 2013 reported production relative to 2012 is expected to be around 150,000 barrels of oil equivalent per day lower. For the upstream, the divestment program accounts for almost 500,000 barrels of oil equivalent per day or 16% of our 2010 reported production excluding TNK-BP.
For the Group as a whole, assets divested since 2010 would equate to around $5 billion of pretax earnings and $5 billion of post-tax operating cash flow. Looking our full-year cash flow movements, this slide compares our sources and uses of cash in 2011 and 2012.
Operating cash flow for 2012 is $20.4 billion, which includes $6.2 billion of Gulf of Mexico pre-tax oil spill related expenditures. Excluding these oil spill related outgoings underlying cash flow was $26.6 billion.
We received a $11.4 billion of divestment proceeds during the year with $6.8 billion received in the fourth quarter. Full year organic capital expenditure was $23.1 billion, with $6.6 billion in the fourth quarter.
Our year-end net debt reduced to $27.5 billion and our gearing ratio fell to 18.7% bringing it within our target range. With the completion of payments into the Trust Fund as we received the outstanding proceeds in the divestment program, we expect gearing to reduce further.
We will continue to target gearing in the 10% to 20% range while uncertainties remain. Turning now to guidance for 2013, we expect underlying production in 2013 to grow mainly driven by the ramp up of major projects in high margin areas and reduce maintenance outages.
Full year 2013, reported volumes are expected to be lower than 2012 due to the divestments of around 150,000 barrels of oil equivalent per day. The majority of which relates to high margin areas in the Gulf of Mexico and the North Sea.
The actual reported outcome will depend on the exact timing of divestments, OPEC quotas and the impact of oil price on production sharing agreements. Organic capital expenditure in 2012 was $23.1 billion; in 2013 we expect capital expenditures to be around $24 billion to $25 billion as we invest to grow in the upstream.
Our DD&A charge was $12.5 billion in 2012 and in 2013 we expect this to be around $500 million to $1 billion higher. The increase reflects the expected ramp up of production from high margin upstream assets and the plant commissioning of the Whiting upgrade in the second half of the year.
As already mentioned other business and corporate charges are expected to be around $500 million per quarter. Moving to tax; our effective tax rate is expected to be higher in 2013, within a range of 36% to 38% mainly due to a low level of equity accounted income mostly TNK-BP which reported net of tax.
There were also some accounting changes that will impact the earnings in 2013. With effect from the first of January 2013, we will be adopting new accounting standards including IAS 19 employee benefits and IFRS 11 joint arrangements.
We will provide information around the expected impact of these standards on our 2013 financial statements in due cause, and we will also restate our results accordingly for the last five years. However at this time, we expect the new reporting standard for pensions accounting to have the largest effect, reducing 2013 earnings by approximately $260 million per quarter, in effect we will now be using the rate for the return on plan assets that matches the rates used to discount our pension liabilities.
However this will have no impact on cash flow. And finally results of a major portfolio rationalization we will also be updating our rules from this week as published on our website bp.com.
Looking after 2014, and our operating cash flow objectives, we continue to expect to see operating cash flow of $30 billion to $31 billion. As highlighted at our Upstream Investor Day in December, this represents more than 50% growth in operating cash flow versus 2011 including the impacts of payments in respect of the settlement of All Criminal and Securities Claims with the United States Department of Justice and the SEC.
We are increasingly confident in the drivers to underpin this growth, primarily driven by the start of 15 major projects over the period and the planned commissioning of the Whiting upgrade in the second half of this year. With our current portfolio, we expect to manage gross organic capital expenditure from the Group in the range of $24 billion to $27 billion per annum from 2014 through to the end of the decade and to divest an average of $2 billion to $3 billion per annum on an ongoing basis.
Growth in group operating cash flows to 2014 and beyond creates the platform to increase reinvestments and grow distributions in line with the improving circumstances of the firm and we will continue to maintain of aggressive dividend policy. We will provide details on how the cash proceeds from the proposed TNK-BP transaction will be used at the time the deal completes.
However at a minimum, our intention remains to use part of the cash proceeds to offset an evolution to earnings per share. And let me hand you back to Bob.
Robert Dudley
Thank you, Brian. Turning to safety and risk management, some say we are now too attentive to this, but let me be clear, this is good business, both for the near-term and the years ahead.
Our approach brings together our operating management system or OMS and our BP values; safety, respect, excellence, courage, and one team. The first defines what we do, to set global standards that we expect across all of our operations.
And the second set defines how we do it; together, they are the way we work in every BP operation around the world. We then look to three specific principles to guide us, the first is strong leadership, individuals within our businesses and operations to shape and grow a safe operating culture and who are supported by a highly capable workforce.
The second is to insist upon globally consistent use of our OMS. This involves applying safety and operating procedures and rigorously assessing and managing risks, and it means always seeking to strengthen the safety and reliability of our operations through the improvement of planned people and process.
And finally, we have strong self and independent assurance to confirm that we are compliant with our systems and processes. So that’s the approach, but how does this show up in our safety performance.
These charts show some of our safety statistics, across the trend shown here only one lines of safety performance, and we know there is always more to do however, I do take some encouragement from these metrics. The first is losses of primary containment shown on the right slide.
These records losses down to very small releases, 2012 showed the 19% reduction on 2011 continuing in multi-year improvement. also on the right slide, we track process safety events, the American Petroleum Institute or API recommended industry metric.
Our 2012 outcome was 42% reduction in Tier 1 events versus 2011. The focusing of our portfolio has also had a positive impact in terms of safety and risk management, for example, our divestment program in the upstream will remove around 50% of our installations, 50% of our pipeline life and reduce the number of wells by a third while only reducing our reserves by around 10%.
Alongside process safety, we continue to focus on personal safety, maintaining our recordable injury frequency rate at levels comparable or better than industry benchmarks. This is shown on the left chart, there is always more to do, but I believe what we are seeing is the emergence of the safer and stronger BP that we’re creating and our focus remains resolute, and we also clear this is good business.
I want to just focus for a moment on one of the most important things we are doing to better safety and risk management in BP. Since the Deepwater Horizon accident we have been determined to share the lessons to help prevent an accident of this magnitude happening again, and to help advance global oil spill response capabilities.
Our experience has been build across the key capability areas of prevention and drilling safety, well capping, and containment, relief wells, spill response, and crisis management. This has been a significant journey of learning for BP and we’ve been asked to share our experiences with many others in the industry among regulators and governments world wide.
We conducted more than 200 briefings and presentations with such groups in the past two years in at least 30 countries. As you know we carried out a thorough investigation which made 26 recommendations.
We are now implementing those recommendations through a world wide program with a dedicated team. It involves multiple actions to ensure each recommendation is fully implemented in every operation.
This involves creating a new standardized risk identification and action plans. At the same time we are adopting a more systematic approach.
We’ve introduced enhanced well control and other drilling safety standards, practices, and capabilities. In Houston, we build a state-of-the-art facility that displays live well information about our rigs in the Gulf of Mexico.
Operating 24x7 experts of the facility providing additional level of assurance to their colleagues located at each offshore drilling rig in the Gulf of Mexico. We are also ensuring we are better prepared to respond to an accident should one occur.
That has involved building new equipment such as capping stack which is located in Houston and creating new response plans. So let's move on to the legal landscape in the U.S., where we have made progress in reducing the legal risk facing the Company.
We’ve reached a significant milestone with completion of the $20 billion payments into the Trust Fund; the final payment being made in the fourth quarter. These removes a call on the operating cash flows of the group of some $5 billion per year.
The fairness here and to determine whether to grant final approval of the settlements with the Plaintiffs’ Steering Committee was held in November, and the settlements were subsequently approved by the court in December and January. Payments associated with these settlements are expected to be made from the Trust Fund.
We also announced in November that we have reached an agreement with the U.S. Department of Justice and the Securities and Exchange Commission to resolve all federal criminal charges, and SEC Securities claims against BP stemming from the accident of the oil spill and response.
The settlement resulted in an increase to the overall charge of $3.85 billion in the fourth quarter, with the payment schedules stretching out to early 2018. We believe the cash payments are manageable within our current financial framework.
As this increase relates to fines and penalties it will not be tax-deductible. Last week, the court accepted BP’s plea resolving all federal criminal charges against the Company stemming from the Deepwater Horizon accident oil spill and response and sentenced the Company in accordance with the terms of the plea agreement.
BP continues to work with EPA in preparing an administrative agreement that will resolve suspension and debarment issues. By reaching the settlement with the U.S.
government we have removed another significant legal uncertainty. We can now focus more fully on defending the Company against the remaining civil claims.
We remain prepared to settle the remaining civil claims, but only on reasonable terms. Throughout, we have been preparing for the trial scheduled for later this month, and we will be ready to thoroughly and factually present our case in court.
In Russia, we made significant progress towards the completion of our deal with Rosneft announced in October to sell our share in TNK-BP for cash, and an 18.5% stake in Russia’s leading oil company. As a result of the transaction, you will recall that BP will receive $12.3 billion in cash and hold a total of 19.75% of Rosneft when combined with the existing 1.25% of Rosneft, which we already own.
In November, BP and Rosneft signed final binding agreements for the transaction and the Russian government approved BP’s acquisition of further 5.66% of Rosneft. Also on the 12 of December, Rosneft and Alfa, Access and Renova signed agreements, so that Rosneft will acquire 100% of TNK-BP.
The completion of the transaction is subject to regulatory approvals and this process is well underway. We anticipate the closing of the transaction in the first half of 2013.
The BP and AAR have also reached agreement on the settlement of all outstanding legal disputes between them bringing an end to all ongoing litigation. Let’s now look at the potential for value creation as a result of the investment we are making.
Our proposed holding of nearly 20% gives us a great opportunity to contribute to Rosneft’s strategy and potential for value growth. This slide illustrates the areas of potential value growth of Rosneft following its planned acquisition of TNK-BP.
On the left side of the slide are areas where short-term synergies can be achieved through the process of integrating TNK-BP into Rosneft. The right side of the slide shows the longer-term potential.
BP has very relevant experience here in improving performance in Russia and oil and gas businesses, and in large scale, corporate mergers. This can directly benefit Rosneft in its efforts to define and capture these synergies.
Like Rosneft, we see numerous opportunities for optimization of the upstream and downstream businesses and the gas and gas liquids value chains. We also see opportunities in supply chain management, corporate synergies, and portfolio optimization.
Longer term, we see potential to increase both reserves and production through the application of leading edge technology and the powerful partnership between BP and the Russian oil and gas professionals that brought such impressive results in TNK-BP. We are very much looking forward to the prospect of working together with Rosneft to identify and develop standalone projects, both inside Russia and internationally.
Given all the Rosneft and Russia have to offer to the oil and gas industry, we believe there is enormous potential in the large company that create value for Russia, Rosneft, and its shareholders and by direct consequence for BP shareholders as well. Turning to the progress and outlook for the upstream; we continue to improve on safety and risk management in the upstream last year, the number of Tier 1 process safety advance fell by 55% between 2011 and 2012.
Additionally, we completed implementation of 14 of the 26 recommendations of the Bly report, which is our investigation into the Deepwater Horizon accident and we made continued progress towards closure of the remaining 12. In exploration and access, as I indicated earlier, we have significantly reloaded the portfolio.
In the last year alone, we added Atlantic positions including Uruguay, Brazil, Nova Scotia in Canada and Namibia to complement our leading positions in Angola and the Gulf of Mexico. We also established a significant unconventional position in the emerging Utica shale in Ohio and we’ve now started drilling out that inventory.
We started five major projects PSVM, Skarv, Clochas Mavacola, Devenick, and Galapagos, all as you know are in our high margin areas. We significantly increased our rig fleet increasing mobile offshore drilling units from 15 to 19 and we now have 7 operational rigs in the Gulf of Mexico, working on a combination of production and exploration activities.
Overall plant efficiency has improved by around 1% across the portfolio and by almost 10% in our top 4 high margin regions. In 2012 we also completed 70% of our turnaround on or ahead of schedule which is twice as good as our historical rate of efficiency on these critical activities, both are good examples of how the new operating model is enabling us to work more systematically and consistently across BP with further benefits to come in the future.
Looking to the portfolio, we’ve used a combination of divestment and investment to create a strong platform for future growth. We have reached our $38 billion target of disposal significantly increasing the quality of the up stream portfolio while reducing it’s ago, complexity, and the risk which come with that.
Given the high quality nature of the portfolio, we have decided to direct more of our capital investment towards the upstream up to 80% over the next decade. In general, the features of this portfolio are a more focused footprint of strengthened incumbent positions, a reloaded exploration prospect inventory, a strong pipeline of high margin projects and a focus on our distinctive strengths in deepwater, high quality gas value chains, giant field management and a deep hopper of unconventional resources.
Over the past few years, we have transformed our exploration portfolio and materially increased our unconventional inventory. The map shows the positions we have added since 2007 focused on deepwater unconventionals in North America and the Middle East.
We are now early in the process of exploring the acreage. Right now we are acquiring and interpreting seismic data and ramping up to 15 to 25 new exploration wells per year.
This does not count appraisal wells. By testing at least 10 new material conventional and unconventional opportunities every decade, we aimed to add two new provinces each with multi-billion barrel potential like we have done in Angola, Azerbaijan, and the Gulf of Mexico over the past decade.
Turning to projects, we remain on track to deliver 15 major project start-ups between 2012 and 2014. In 2012, we delivered five projects including PSVM and Skarv, each a significant achievement and key operational milestone in its own right.
PSVM in Angola and Block 31 represents one of the largest subsea developments in the world, and the first in the Angolan ultra deepwater. The field started up in December with production averaging just over 60,000 barrels per day, production will continue to ramp up as we bring on stream further wells, and it is expected to build towards plateau rates of 150,000 barrels per day over the coming year.
In December, we also started up Skarv in the Norwegian Sea; the field development includes our new highly advanced FPSO, purpose build for harsh waters with five subsea drilling templets. Production will continue to ramp up through the year and is expected to reach a maximum rate of 165,000 barrels per day by year-end.
There are two short videos currently on our website which show the scope and scale of these two major projects. I hope you take a moment to see them.
Looking further ahead, we have a very strong pipeline of projects as we showed you in December. We expect a further four upstream major projects to come on stream towards the end of 2013, North Rankin 2, Angola LNG, Na Kika 3, and the Chirag Oil project with the remaining six start-ups in 2014.
In total, we have around 50 major projects progressed in the decade, of these 11 are what we call mega projects, which are greater than $10 billion in gross spend. We made final investment decision through FIDs on three projects in 2012.
Juniper, the Kizomba Satellites 2, and Point Thomson and we expect a FID a further five in 2013. To deliver these projects we are planning a gradual ramp-up of our rig fleet.
It will increasingly be made up of newer high-quality rigs, with higher reliability, and with key suppliers very much aligned to our focus on safety and risk management. The strength of this pipeline lies in quality.
As we look at the projects that we delivered out to 2017 where we have the most definition, the average operating cash margin will be roughly twice that of the 2011 upstream segment average. That provides us with the opportunity to grow cash margins through the decade.
Of course, we may not progress all of these ourselves realizing value earlier in the process, and some make get deferred. But this is a powerful platform for future growth, and it does not include any further exploration success.
So what does all of this mean, we remain on track to deliver the upstream contribution to our 50% increase in operating cash flow out to 2014 supported by restoration of production in our high-margin regions in growth from our 15 new major projects. Looking longer-term with the capital frame Brian outlined earlier, there are three things that give me confidence we can see continuous growth in operating cash flow out to 2020 from the upstream.
70% of our production will come from fields already producing. This shows the youth of our reservoirs and gives me confidence that we can count on them.
Second, about 85% of our production will come from oil fields or gas fields with prices linked to oil. I believe this is distinctive and offers as more oil price leverage in a world where oil is more scarce than natural gas.
And third, you can see that we will continue to generate about half of our operating cash from our existing major profit centers. Angola, Azerbaijan, the Gulf of Mexico and the North Sea.
We have a very high quality set of assets to work with and I am certain that the strength of our new organization together with the focus of our portfolio will enable sustainable value growth for our shareholders, while we continue to explore and create value beyond the current portfolio. Now let's look at BP’s downstream business, and what you can expect in the future.
Turning to the downstream, 2012 has been a success in many areas. It was a year of sustained safety and operational improvements, strategic progress and record levels of underlying earnings, despite a weak environment in both petrochemicals and oil trading.
As we have previously explained, our approach is based on the principle that a world-class downstream business requires focus on the right assets with the right scale, location and configuration complemented by leading technology and brands. But first and foremost to deliver an asset’s full potential we must operate safely and reliably.
As this slide shows during 2012, we delivered sustained process safety and refinery availability improvements through targeted investments and capability building. In terms of safety in particular, losses of primary containment more than half between 2008 and 2012 and improving the safety and reliability of our operations, we are realizing stronger financial performance today.
As we announced on February 1, we have successfully concluded the divestment of the Texas City refinery with the previously announced divestment of our Carson refinery in U.S., southwest value chain remaining on track for completion towards the middle of 2013. The Whiting refinery modernization project is on track for operations to begin in the second half of 2013 with construction 84% complete at year-end.
Once operational, we expect this project to deliver an incremental $1 billion of operating cash flow per year depending on the environment, and we are delivering all of this within a discipline financial framework, with a consistent focus on maintaining quality positions with material and growing cash flow generation capability. Looking to the future, our focus is to keep up this momentum, embedding the sustained progress and safe and reliable operations of recent years, and expanding the cash margin generating capability of our businesses to the emphasis on quality, thereby delivering material and growing free cash flow.
Within the fuels business, we will complete our divestment program bring the Whiting refinery modernization project on stream and focus future investments and efficiency programs on expansion of cash margin capability. Within lubricants, we will use our advantage of exposure to growth markets to drive further business expansion and we’ll continue to invest in brand, technology and customer relationships.
And finally, with in petrochemicals, we will continue to invest through the cycle with the focus on expanding our Asian positions and further developing the commercialization of proprietary technologies. In summary, the downstream is delivering strong and competitive results through a high quality portfolio that is capable of sustaining this level of performance across all of its businesses.
Our downstream is a material contributor to the Group’s cash flows today and remains an essential element in our plans for growing operating cash flow into the future. So to summarize the Group perspective, we have repositioned BP over the last two years with sustainable growth into the future.
We have significantly refocused the portfolio, we have addressed head on safety and reliability through a wide ranging change program. We have reshaped BP’s upstream and focused our refining.
We said 2012 would be a year of milestones, it was and we remain on track to deliver the ten-point plan including our commitment to growth in operating cash flow by 2014. We will be a focused oil and gas company that creates value by growing long-term sustainable free cash flow through safe and reliable operations, a disciplined and prudent financial framework and a portfolio rich in high margin opportunities.
We plan to deliver this through increase upstream reinvestment to drive growth in higher margin areas and to sustain the pace of our increased exploration and access activity. And finally, it is our intention to grow distributions overtime in line with the improved circumstances of the firm and to maintain a progressive dividend policy.
We are making BP safer and stronger and there are no shortcuts. We are doing what needs to be done and are becoming a better company as a result.
That concludes my remarks and now Brian, Jes and I will be happy to take your questions.
Jessica Mitchell
(Operator Instructions)
Operator
Right, good afternoon or good morning everyone. The first question comes from Hootan Yazhari from Bank of America.
Go ahead Hootan. Okay, all right no answer from Hootan, can we try a question from Alejandro Demichelis from Exane.
.
Alejandro A. Demichelis
Good afternoon gentlemen and a couple of questions from me. Well you’ve said that you remain prepared to settle the civil claims and the reasonable terms, that which the discussions are still on going, or if you’re just waiting for the start of the trial at this point.
The second question is on the pension situation maybe to Brian, with $260 million impact on a quarterly basis over the growth higher, would you be able to bridge the gap between the labyrinth of the assets or do you need to think that we need to extend that into 2014 as well?
Robert Dudley
Thanks Alejandro. On your question about the trial which is starting, it’s really 20 days away right now, so our teams are working very hard to prepare for the trial and I think that’s probably all I can say, right now, I think we had numerous settlements over the last two years with our partners, with the Plaintiffs’ Target Steering Committee, and the Department of Justice and the SEC in December.
And I think we’re now heading right down to the trial for the civil proceedings and our team is very, very prepared.
Brian Gilvary
Yes, so Alejandro and the question you are asking, I presume this is around IAS 19 which is a new accounting standard that we’d be adopting through 2013. It won’t impact our funding plans.
We’ll continue to invest in the fund’s around about $1.3 billion per annum, what it does is effectively reduce the discount rates, it is a classic example of what the accounting treatment is come into use of discount rates rather than return on equity is based on our bond rate, and on that basis we will be discounting something like 4.4% to the UK scheme, 3.2% for the U.S. scheme.
It does have an impact in terms of how we report earnings. It has no impact in terms of how we fund the plans.
And I think the key here is it’s a classic accounting rule that has no economic sense or resembling for sense but nevertheless we are introducing that as one of the accounting standards, but it will have no cash impact. And I think given the Company is very much focused on cash; this will have no impact on cash going forward.
Alejandro A. Demichelis
Okay that’s very clear. Thank you.
Operator
Right. The next question is from Doug Terreson from ISI.
Go ahead, Doug.
Doug Terreson
Good afternoon everybody and congratulations on your results.
Robert Dudley
Thank you Doug.
Doug Terreson
Bob, you have extensive experience in the integration process, some major strategic activities in this industry, and obviously the record of value creation at TMK-BP speaks for itself. And so, while you highlighted the fast forward for Rosneft, my question regards to level of involvement that yourself and some of the other senior leaders of BP are likely to have in the areas that will drive the growth in return to profile at the new Russian company.
Robert Dudley
Yes Doug thanks. So we are in the approval processes right now.
We are working our way through a couple of government approval, so but all those seem to be on track right now. I have been asked to be part of an integration steering committee with Rosneft along with Igor Sechin and there will be some others who joining I have no doubt that there will be a number of very well known consulting firms that also have experience in merger integration are beginning to work on pieces of this, there will be this work underway on the downstream, there’s work underway on the upstream, and I think right now, the emphasis on the integration is to get the companies ready for day one, which means being able to merge the books, close the books, control the assets, and then building organizational structure.
So while a lot of that is quietly going on, of course, it’s very much going on, and I think we do have experience in that. We know that TNK-BP company and assets so we’ll have, I would say a small, but very experienced group of people that are working on this now.
And then as we go forward, after the closing and depending on the structures of where the assets are grouped, I have no doubt, with some of that experience of being able to identify where the real talent in TNK-BP is and things like waterflooding, artificial lift work, and sort of a focused exploration program will happen. And I think I would just like to say everyone stay tuned.
Doug Terreson
Okay, good. And then also Brian highlighted of around $5 billion of lost profits related to the upstream divestitures, and on this point, I want to see where do you have the similar figure for the downstream and specifically any inside on the profit reduction from the divestitures in U.S.
downstream last year?
Robert Dudley
Yeah, Doug. And I think it’s the other course is always a function of what the refining margin environment looked like, it was quite attractive at least fourth quarter and the third quarter, and the $5 billion figure that we gave you is really a group figure, it's not specific to the upstream..
Doug Terreson
Okay
Robert Dudley
We talked about volumes but at the end of the day, I think it's good to get these two refineries behind us, we wouldn't have seen them as strategic assets to invest in, and actually in terms of Texas City the cash flow out of those negligible for the year. So I think this is a good thing to have behind us in terms of rather disposables and the proceeds came in last week.
Doug Terreson
So $5 billion did include downstream.
Robert Dudley
It did that's correct.
Doug Terreson
Okay thanks a lot.
Operator
The next question comes from Jason Gammel of Macquarie.
Jason D. Gammel
Yes, thank you Rob. My question comes back to the expectations for the cash flow accretion over the next two years, and how that will actually affect the shareholder Bob, you referenced with the dividend rate that was announced last year, rewarding would have been very patient shareholders, when you look at the cash flow growth, how do you now expect to divide that up between increased capital investment, which you provide us in detail on today, and what cash actually goes back to the shareholders versus strengthening the balance sheet?
Robert Dudley
Brian and I would just going through this, I'm going to ask Brian to tackle that and I will come back at the end with a few points.
Brian Gilvary
Yes thanks Jason, the background to this is when we laid the target in the 10-point plan in October of 2011, we started with a base of $22 billion of operating cash and we said that that would grow by 50%, so it takes you to $33 billion in the original 10-point plan and we said 50% to that would go into capital, and we will held that number around about $24 billion, $25 billion with the base in capital is $19 billion, so that would increase by 50%. And we said the remaining $5 billion to $5.5 billion would be available for other purposes, now since that was out there, the revised figures are now $30 billion to $31 billion, (inaudible) says that there is still cash available for the purposes, which will underpin the dividend in terms of future and the rest of dividend policy.
The difference in the $33 billion to $31 billion and $30 billion to $31 billion is basically the fact that we swapped the dividend out of TNK-BP for dividend in Rosneft, effectively we have accelerated six to seven to eight years worth of dividends out of TNK-BP’s product transaction, which is $12.3 billion of cash we will receive on the close of that transaction, and also this flexibility inside those numbers around and they help natural gas prices, and so the figure now so its actually there is still surplus cash available for growth in other purpose of distribution, and also of course we have had since then the criminal settlement with the DoJ and that has a payment schedule over the next five years that sits inside the $30 billion to $31 billion.
Robert Dudley
And Jason I would just add, we have more projects than we can do over the next 15 years and so what we have signaled with our levels of capital investment, we do need to reinvest in the upstream most certainly, but we want to signal a lot of discipline framework there that paces that capital spending, so that we can be sure that we do have incremental free cash flow for our shareholders. The other thing that will be part of this in terms of shareholders as we have said after the closing of Rosneft transaction that we will ensure that the shareholders have not been diluted by the transaction, and after the closing we will lay out steps that will take, which should be certainly before the middle of the year.
Jason D. Gammel
And if I can just follow very quickly then, outside of the potentially anti-diluted measures related to the TNK transaction, will the dividend be the primary focus for returning cash to the shareholders or would you be considering repurchases at this point?
Robert Dudley
Well, I think we are considering both actually and I think a special dividend is unlikely given the progressive nature we want to manage with the cash, but I think you would see us considering both.
Jason D. Gammel
Very clear thanks.
Robert Dudley
Okay. Jason, good job on CNBC today, I saw you talking about the industry.
Jessica Mitchell
All right. The next question comes from Oswald Clint of Sanford Bernstein.
Oswald C. Clint
Good afternoon thank you. Could I maybe just focus on the reserve replacement number, I know it’s a point in time, but just one thing to know if that’s mostly a low number on the back of low U.S.
gas this year, but also maybe think about this year, if you’re starting to drill at your Utica position in terms drilling inventory, would you expect to be able to book any of that at the end of 2013. And then secondly maybe just a question on – down in Iraq with some of the recent news article et cetera talking about various companies thinking about their projections and targets, is there anything we should be aware of in terms of your project there, thank you.
Robert Dudley
Okay thank you, Oswald. Let me start from the back and move up with Iraq.
We continue to move the production up the Ramayla field; it’s between 1.4 million and 1.5 million barrels a day today. As other companies have, we have been in discussions with the Iraqi Federal authorities about – we’ve given them as many as four different options in terms of plateau rates and enhanced development in the field and those talks are ongoing in a very sensible way.
So I wouldn’t expect any news right away on that, and I think that relates to the export assets in the country and what they are capable of debottlenecking in time and that’s probably what’s happening all across the south here. On reserve replacements this year, we’ve said that we will announce the details of that with our annual report, our 20-F to be published in early March.
We expect our reserve replacement ratio to be in the range of 75% to 85% excluding acquisitions and divestments. We will do that – we're going to look at that on a combined basis of all the subsidiaries and equity accounting entities.
We think the number will be below 100% most likely, main reason for that is in 2012, we FID’ed only three projects and we expect to on average over the last five years, we have FID’ed about eight projects. During 2013, we should be up to the 5 to 6 range.
The three that we did this year were not what we would call megaprojects. So that's been an impact for us in 2012.
We've had a reserve replacement ratio of over 100% for the last 10 years, actually 20 years and so this is a trend, we will expect to get back to our trend here in 2013 and beyond. And on the Utica, we do have about 86,000 square acres in the Utica.
We are appraising it right now and I think it's possible we might be able to book some of the Utica shale gas or shale liquids reserves in 2013, but that will be in time. We will see how the year goes.
Oswald C. Clint
That's great, Bob. Thank you.
Robert Dudley
Okay, thanks Oswald.
Operator
Over to the U.S., Robert Kessler from Tudor, Pickering. Do you want to go ahead Robert?
Robert Kessler
Yeah sure. I just wanted to go back to follow-up on the cash balances for 2014, make sure we’ve got the numbers right.
If I look at your cash flow guidance, okay let’s take the high-end of the range there, 31, and low-end if your CapEx guidance at 24, just to get to the current dividend payment, and I know you’ve got a big slug of cash coming of course, with TMK-BP and some other ongoing asset sale proceeds of $2 billion or $3 billion a year, but are we to assume that you’re going to use that to support the dividend growth and if so where do you see your new target? I mean, I know you’ve got the band of 10% to 20%, but are we likely to see you hover at the higher-end of that gearing range going forward to support this distribution strategy?
Brian Gilvary
Yeah, so I think – Bob, I think I’ll take them. So I think the key is first of all cash break-even, that we’re cash break-even the $80 to $100 a barrel fully loaded with the disposal proceeds going forward over this period of time.
So the dividend is more than covered by the cash flow within the existing financial frame. I think what we have here is flexibility around what we do with cash in 2014 and I think rarely we need to give a clear picture of what happens beyond 2014 in terms of free cash flow generation, but after 2014 existing dividend is underpinned.
We can be progressive with that going forward, but that’s really a matter for the Board and with the context of the environment that we’re in at the time. It’s that something which is considered by the Board around the results.
And so I think the key is as you said, you saw the $2 billion to $3 billion of disposal proceeds. We have a script dividend, which is typically round about 20% take-up, so the cash dividend is about 80% of what we actually declare as a dividend.
And I think there is still flexibility out in 2014 around surplus cash and I think Bob has said already that we’ll have the issue in the first half of this year around the cash proceeds that come into TNK transaction will be an opportunity for us to look at the options as Bob described around progressive dividend and potentially shrinking the share base which thereby of course also impacts the overall cash dividend at the company.
Robert Kessler
And thoughts on whether you might get the high-end of the gearing band in 2014?
Brian Gilvary
Right now based on where the oil price is in terms of our plan assumptions, we will continue to see the gearing drift down probably towards the top end to the lower half range. So it will be in the top end of the 10% to 15% range, would be in these existing plants that we have today.
Robert Kessler
And one last one, what oil price are you using for that?
Brian Gilvary
$100 a barrel.
Robert Kessler
Okay, thank you.
Robert Dudley
In longer term, we will continue to re-assess that gearing range of 10 to 20 up in time when we go through this period of transition, we might move that out.
Operator
I am going to come back and try Hootan again; I think he is back on the line. Hootan, are you there?
Hootan Yazhari
Hello.
Operator
Hello.
Hootan Yazhari
Am I coming through or not?
Operator
Yes, you are coming through. Go ahead.
Hootan Yazhari
Good, all right. Sorry about that, phone issues, but here we go.
Just coming back to disposals, your $2 billion to $3 billion run rate has guided going forward from here. It’s sort of you’re also indicating that you might have too much on your plate in terms of investing.
What sort of scope is there for that $2 billion to $3 billion run rate to increase in the coming years, especially given the very attractive realizations you’ve made on asset disposals? And then going back to the civil case, which is coming up on 25th of February, I just wanted to see in terms of underlying negotiations, whether we should see some sort of a split negotiation going on?
First that you would reach a resolution on the Clean Water Act separately from what’s going on with the natural resources thus, and their respective states that you’re going to port with? Thank you.
Robert Dudley
Okay Hootan, thank you. We were worried about you for a while there.
On the disposal of the $2 billion to $3 billion, I mean that’s not an insignificant set of disposals going forward. We will continue to work through that in time.
Right now, we do have a lot in our play, but we also think we have paced them out and separated them out and there are things out later in the decade that I think we could consider, but we are right now not – I don’t think we have too much on our plate. I think we have balanced it well, with capability and the projects identified, but we may divest projects at different points in their life cycle coming up, but they are not in our plans right now.
On the trial in the 25 of February, obviously it’s nothing we can talk about in terms of settlement discussions at all. I just note that they are 20 days to go and that’s not very long and our efforts are really focused on getting ready for the trial.
So I think anything is possible but I can’t give you any real sufficient light on your questions, as you’d expect right now, but thanks for your time.
Hootan Yazhari
Understood, thank you.
Operator
Right, so turning now to Jon Rigby from UBS.
Jon Rigby
Yes, hi. Two questions please.
The first one just going back to I think on the first questions around TNK-BP and Rosneft. Correct me if I am wrong, but it seems to me that the great sort of distinguishing feature of TNK-BP within Russia was the people and the processes that were taking place there.
I mean you always spoke about how that organization kept motoring on even when the management problems were happening. And I’m just wondering as you step back from it, how you ensure that those good people and good processes continue into the combined Rosneft group, because it would seem, I guess to loose that and also I would – thought that applying those people and processes to the combined base would be where you get the vast proportion of your merger synergies from.
I think that’s in the context of your relationship with ARR, of course leaving completely. The second question just is a confirmation and you talked about the $1 billion of cash flow benefit from the Whiting modernization project.
Can you just remind me what macro functions you’re making around the spreads between crude oil prices to the basis of that $1 billion? Thanks.
Robert Dudley
So John thanks. Both good questions and I'll ask Brian answer the one on the Whiting refinery.
Your spot on TNK-BP, when you benchmark the Russian oil industry and I have lots of discussions with Rosneft about that. TNK-BP benchmark is very well in terms of efficiency.
And what has been able to do in terms of ringing out additional reserve additions to the oilfields in Russia as well as very tight controlled centralized exploration processes and accounting processes that allowed the venture really to keep up and close IFRS books at the same pace as with BP. So being able to retain both the business processes and the people who know how to run them is very important.
And clearly when time of a merger as with any company and probably most of you all know this, in times of merger there is a lot of uncertainty. But there is a lot of discussion about just exactly what you describe, how do we maintain some of the business processes that drive a lot of efficiency and be able to make a merger happen simply.
And then secondly identifying good people, best people to be able to work in new organization, so that the assets certainly are just not left alone. And I am confident that that’s not going to happen and that many of those really world class, as good as any business processes will remain.
But like in any merger there will be less stories and lots of headlines I suspect, but actually it’s been the approach path has been remarkably smooth so far. And Brian you might…
Brian Gilvary
Yeah, on Whiting, John we've never actually put macro data out there in terms of the light heavy spread assumptions. I would simply say that at various points through last year is the heaviest blow out.
We will weigh above the $1 billion dollars on an annual run rate basis. But I would describe what the number is, it’s relatively conservative in terms of what we built into that $1 billion.
So I’ve actually – so anything like the blowouts that we saw in the light heavy spreads last year. In addition to of course the benefits you get from the WTI differentials at Brent, because now that you have a cheap light source to price the heavy oils essentially it discounted again versus Brent.
So I would say the $1 million is very independent of the current process we’ve seen in recent years.
Jon Rigby
If it was just looking back at sort of historical trends at or around the points which you FID’ed the project in the first place that you’re guiding to, is that the kind of background that you're looking at?
Brian Gilvary
Yeah, we've done that because actually the assumption we made is that the pipelines will be built, therefore that light, heavy spread would narrow over time. So we’re confident that the $1 dollars will be there based on the historicals that we've looked out in the name build of that number.
And I will actually also say it's probably worth counting of course with the heavy oil position in Canada, effectively between the two positions, we pretty much know how a hedge or if you like that the value can now move between the two assets as that light heavy moves out and comes back in again.
Jon Rigby
Thanks.
Operator
The next question comes from Theepan Jothilingam from Nomura. Go ahead Theepan.
Theepan Jothilingam
Yeah, thanks, Jess. Good afternoon, couple of questions.
Firstly, sort of come back to that point on gearing, to be clear are you saying that it’s beyond let’s say the cash in for Russia, a potential settlement in the U.S., then you sort of anticipate that gearing low moving back sort of towards the high-end of the 10% to 20% and then if that is the case, is that a mix of a higher organic spend, potential use of M&A to both sort of portfolio or is that cash return back to investors? The second question sort of link to that I guess is the position in the U.S.
and in unconventionals, could you talk about how much investment BP would be willing to pay into that business? What sort of growth we expect both sort of the 2013, and then over the next few years and whether you need to add on the liquid acreage side?
Thank you.
Robert Dudley
Theepan, I’ll just give you a quick introduction on the gearing and then Brian follow it up and then I’ll come back on the unconventionals. But I will say on the gearing my comment was many of our shareholders have said as you move through a period of transition is 10% to 20%, the most efficient range you should be and would you be open to increasing that range from 20% to 30%.
And what we have said is that for now, 10% to 20% is the range, but as we move through this period, which I would say is through 2014, then we will reconsider that range, because I think it’s a question about, is that the most efficient range for us. So, Brian?
Brian Gilvary
Yeah. And I think Theepan, the context here is of course historically the range that varies upright within financial frame for the best part of a decade.
Prior to the first quarter 2010 it was a gearing range of 20% to 30%. We directionally move that to 10% to 20% while we have major uncertainties around cash outflows in the United States, of course, a lot of those uncertainties have now been resolved, not withstanding the coal case which is due to 25 of February.
So I think what Bob is alerting you to is that, once we get all uncertainties resolved, there is a formal useful use of cash, gearing is netted as a way to do that. So I wouldn’t read too much into that, in some of the existing plants we have today post the closure of Rosneft, the gearing will track naturally down like 2014 into 10% to 15% range.
And of course that just means that we have a very strong balance sheet which gives us a huge amount of flexibility going forward. And I think with the economic outlook that we see today that’s actually a very good thing to have in your armory.
Robert Dudley
Theepan on unconventionals in the U.S., it’s interesting to note that in the second quarter of last year, gas prices were $1.90 roughly and now they are up to $3.30, but for BP which has a very large gas position in North America, we have reduced the number of operating rigs that we’ve had from 24 in 2010, down to 12 in 2011 and at the year end of 2012, now, we are only down to five rigs. We have reduced our activity to zero rigs and then drive gas basins and we have changed our portfolio by moving out of the mature basins, [Hugoton], and the Jonah and the Anadarko gas plants for example, and we’ve been moving into the liquid rich areas of the Eagle Ford in Texas and Utica in Ohio and we will further continue to shift our investments to the liquid rich areas.
We will retain the optionality on the dry gas acreage and I think for BP right now, it’s a question mark, what will happen is a lot of gas in the U.S., it’s still a question mark, I think the U.S. were to eliminate, to a degree export it, but we are adjusting both the portfolio in the investment levels to suit what we see there and the gas markets now are very regional around the world.
Theepan, is that….
Theepan Jothilingam
Yeah, that’s helpful. But I was just wondering on the – I mean do you have any sort of poll it numbers in terms of what you are thinking of the production for this year and then beyond that?
Robert Dudley
Well, we’ve been careful not to give specific base introduction. I think you overall – you’re talking about the overall of the unconventionals.
Theepan Jothilingam
Yeah, just unconventionals on the U.S. liquid site in the U.S., just trying to get a sense of what it may contribute to underlying growth this year, and beyond.
Robert Dudley
It’s not significant in the Utica, most certainly in the Eagle Ford we got a healthy production there, but I don’t have the exact figure with me right now, and that may be just candid. We got to be careful about giving out the basin numbers, but in terms of a significant boost in the underlying increase in production for in the U.S., in the unconventional it’s not really material.
Theepan Jothilingam
Okay, thanks helpful. I’ll follow-up with Jess.
Robert Dudley
Yeah.
Jessica Mitchell
Thanks Theepan. Can we turn on to Lydia Rainforth at Barclays.
Lydia R. Rainforth
Thanks Jess, and good afternoon. A couple of questions, if I could please.
Firstly can you just talk about the outlook for the Gulf of Mexico for the next year and what you’re seeing there? And then secondly and probably on the cost side, it does appear that certainly the cost per barrel have risen throughout the last couple of years, but there has been a lot of maintenance going on.
Can you just talk to how much of that increase you think is related to maintenance and how much is actually BP doing things differently? Thank you.
Robert Dudley
Well, on an underlying basis, we are going to be flat in 2012 to 2013 in terms of our Gulf of Mexico production. We have divested roughly $50,000 barrels a day in 2012 in the Gulf of Mexico, and then we expect the production to begin to rise consistently up of to 2013 into 2014, 2015 and 2016.
Our increase in spending is going to driven by what is now, last year, year ago we have five rigs running now, we are going to have seven. We're going to be moving into development drilling wells in Thunder Horse in Atlantis, water injection at Thunder Horse.
We’ve got project start ups on Na Kika Phase 3. In Atlantis, the project called Atlantis 2A.
And then beyond 2015, our spending will really be driven by the Thunder Horse expansion and then we've got projects start up after that Atlantis 2B, and the second phase of Mad Dog. We see oil field inflation, sector inflation running 5% to 10% broadly around the world, but very, very different depending on where you are.
And I think the cost increases in the Gulf of Mexico clearly at the higher end and in some categories even higher than that. We have been doing period of plug and abandon network, it's called Idle Iron projects in the Gulf of Mexico.
We will be moving now into right now where our spending is in development and injection work, injector wells and then appraisal, exploration appraisal work going forward. I think we have passed the high point, point when I look at in terms of our maintenance spending in the U.S., a number of turnarounds are going down next year.
I can give you some maybe to much over the call, but some of the activities on what we are doing in terms of Atlantis, Mad Dog and Na Kika and Thunder Horse going forward, but I think what I would just say is, those are our four big hubs, we've got work to do on all of them that will continue to drive production starting in 2014 over about 2013. But still very optimistic about the Gulf of Mexico what we need to do.
I will say that broadly I know this is not just BP, but the more rigs you have running, the more time and care is being taken in our industry and blow-out preventers around the world, and the downtime, not just for BP, but every operator I talk to is quite significant still in terms of blow-out testing and the time taken to drill wells. And we've got to go through a period here, where the industry goes through that phase and that's obviously affecting us in terms of rig days, but it's not just us.
I could go into specifics, but probably not on the call. Does that get at your question Lydia?
Lydia R. Rainforth
Yes, thank you.
Robert Dudley
Yeah, okay.
Operator
All right thank you, can we go now to Elliston Simon with Citi? Go ahead Elliston.
Elliston Simon
My questions are a lot very similar to the second part of Lydia’s. It was about the production cost, about the trend you’re seeing in cash costs in the upstream side in 2012 in terms of year-on-year inflation, and how you think that play's out in '13 as you have greater efficiency when you’re purchasing asset?
Robert Dudley
Yeah, it's very, very similar, 5% to 10% depending on which basin you are in. It's clearly is driving cost there for all the companies.
In our case as we get back to work and we are moving up to the 15% to 25% range of number of exploration wells that we're drilling. The building of technical and engineering capabilities would work towards these 15 major projects now.
It has been an increasing scope for us. Then everyone in the industry knows that the skill labor continues to be a key driver of industry cost and inflation.
Our turnover of personnel is down. We hired 2000 people last year with experienced upstream people.
I think we’ve passed that period now. So we do expect to remain competitive and performance through the work that we do selecting the right activities, planning it well, having effective procurement and then executing it efficiently and our eyes on that now solidly and has been now for the last year as we moved out of the basically the response on safety and reliability is as detailed priority and now we’re doing both that and the execution of projects.
So I see our cost is being competitive going forward.
Elliston Simon
And can you just clarify the $31 billion target in 2014, it still works with inflation in production costs, it doesn’t imply a reduced cost base as efficiency improves?
Brian Gilvary
Well, we have cost efficiencies built into that target. We base that $30 billion to $31 billion based on $100 oil.
So we think that is very much on track for 2014 at $100 oil and we’re not going to rebase the target. And if the costs are up because of higher oil prices, we still think we will be able to normalize back today, targeted at $100.
Elliston Simon
Okay. Thank you.
Jessica Mitchell
All right. Moving on to Irene Himona at SocGen.
Go ahead, Irene.
Irene Himona
Yes. Good afternoon, thank you.
I have three questions please. So first can you remind us of the asset disposals that you have announced, excluding TNK-BP, how much cash remains to be received in 2013?
Secondly, on the U.S. unconventionals, could you give us a sense of the size of that business either on your balance sheet or production, please?
And then finally on the EPA development, is it possible to discuss some of the conditions that actually need to be fulfilled for that to be lifted? Thank you.
Robert Dudley
Yeah. So Brian, on the first one.
Brian Gilvary
Yeah, Irene on the first question, the disposal proceeds still yet to be received this year and of course Texas City we had proceeds coming last week, but for this year in total, we still have about $5 billion of proceeds to come in from what we announced last year, of which $1.5 billion arrived last Friday from Texas City.
Robert Dudley
Okay. Irene, your second question was on U.S.
unconventionals and it cut out for a minute on the balance sheet.
Irene Himona
It’s just the size of the business I was saying, either on your balance sheet or in terms of current production?
Robert Dudley
Yeah, we will get back to you on U.S. production, I don’t know where….
Irene Himona
Okay.
Robert Dudley
With that out separately, but on the size of the balance sheet, what I would say is it’s under IFRS. We have continually adjusted our and impaired the assets down with the oil price.
And we did that in the second quarter of last year and then I would say, if we were to look at the oil prices today that we would some of that might come back on, but I think our balance sheet is sort of being continually adjusted under the IFRS rules. On the EPA debarment and the conditions, it has to do with sort of technicalities of the plea agreement that was reached that I think has been made public.
I am going to be careful just in case it hasn’t, but certainly the outline of the plea agreement, it has something to – things to do with ensuring safety, monitoring of our operations and beyond that it’s a very, very complicated legal process that we’re involved in, and I can’t tell you exactly what the conditions would be for that. But we are going to meet our obligations, we’re going to work with the EPA which is sort of a focal point for lots of different agencies in the U.S., and I can’t tell you how long it takes, I just know it’s a very complicated process.
And as I mentioned earlier, it doesn’t effect our existing operations, permitting processes in the Gulf of Mexico primarily has to do with future release sales or sales of fuel to the US government.
Irene Himona
Okay. Thank you very much.
Robert Dudley
Yeah.
Jessica Mitchell
Right, the next question comes from Martin Rats of Morgan Stanley.
Martin Rats
Hi, hello. I want to ask you about two things; in the beginning you referenced the BP energy outlook 2030, which goes for quite structural energy demand over the next 20 to 30 years.
But over the short and medium term, it actually goes for rather a rapid build and span capacity and a rather large reduction in the coal in OPEC. And the oil markets over the last couple of weeks, clearly has no sort of concern, feasible in the oil price.
But in the scenario where that happens, and oil comes down, what’s the sort of scope for BP to respond, and I was wondering if the scenario is slowly but surely also making it’s way into your strategic planning around the CapEx and things like that. The second question, I wanted to ask revolves around legal spending, besides the sort of settlements that you’ve announced over the last 12 months, I can imagine it’s also actually the cost of running the process has been rather large and I was hoping if you could sort of give a sort of indication of the order of magnitude over that in case that sort of unwinds over the next year or two?
Robert Dudley
Martin, all good questions. I’ll take the first set and then Brian can comment here.
I would say that, the energy outlook for 2030, I mean there is the fundamentals of what’s in storage today and the possibility of potential production, surplus of demand, I’d note that Saudi Arabia has produced itself production by about a 1 million barrels a day in the last quarter, and I think OPEC does continue to adjust based on these what this outlook what they see as well. We do evaluate our projects on $80 a barrel, I’ll let Brian comment on the strength of the Company should the oil price fall, which we obviously do always brace ourselves for that, and I always have, so once you comment on that, and then I’ll come back to the legal costs.
Brian Gilvary
Yeah Martin in terms of stress testing, we do one stress test, and one of the stress test we run is a prolonged two year period at $80 a barrel, and we have various scenarios in place to how we would manage that around being able to make sure, we could fund the balance sheet, and manage the financial framework. I’d also comment that that’s far more comfortable from where we sit today, with our gearing today the lowest it’s being certainly since pre-Macondo, so actually the balance sheet has strengthened up over the last two or three years even with all the outgoings that we’ve seen so we are in a far more robust position today to withstand $80 a barrel, we do have various scenarios we run and we do have a whole activity plan that we have in place, but we see able to withstand that for a period of up to two years.
Martin Rats
And including the dividend absolutely.
Brian Gilvary
When you say underpinning the dividend at those prices…
Robert Dudley
It’s very hard to quantify, but I think the world continues to see sort of underlying geopolitical tensions and uncertainties and that’s clearly hard to measure in the oil price, but it also seems to be a big chronic. The other thing, I would add to your question around the legal costs, I just say they are very high, it’s a very expensive system to work within to meet the obligations that we had to work through the processes, it’s very complicated, it’s very expensive.
I’m looking here to see if we can say anything about it all. Yeah, so Jess has reminded me, we do have legal cost in the provisions that are there, the settlements that we have done with Plaintiffs’ attorneys have a very large legal administrative fee it goes along with those, and I would hope that in time that we could begin to see those things unwind in time as we move through the process, certainly I think I should stop there.
Brian Gilvary
Well, Martin I would comment that of course, we do have the criminal and SEC settlements behind those and now agreed to of course all of the external counsel we are using in that particular space has clearly been closed down with no run rate associated with those.
Martin Rats
All right, okay. Thanks very much.
Robert Dudley
Okay Martin. We do have a very high quality legal team that are helping us through this process, I will say that for sure.
Okay, Martin, thanks.
Martin Rats
Okay.
Jessica Mitchell
Okay, Lucas Herrmann from Deutsche, are you there Lucas?
Lucas O. Herrmann
Yeah, Jess, thanks very much. Gentlemen, can you hear me?
Robert Dudley
Perfectly Lucas.
Lucas O. Herrmann
Two or three if I might. I just want to start and forgive my ignorance, the operating cash flow guidance, $30 billion to $31 billion, how do you or within that how do you think about the provision that still fizzing on balance sheet, and potentially may flow associated with the Deepwater Horizon trial and in short, if were to reach an agreement and it was within the amount you provided, are those something included in $30 billion to $31 billion or would they be additional?
Secondly, just whether you can give us some ideas of what the contribution from divested activities was in the fourth quarter i.e., what the profit for them in UK and U.S. businesses also will not be ongoing in Q1?
And thirdly, if I might, could you just walk through the Whiting process and the steps associated with actually bringing that facility in the second half, that mean huge detail, I just want how much capacity in essence to that and when would you be in a position to capture full margin?
Robert Dudley
Okay. And Lucas, good questions, I’m going to let Brian on the operating cash flow guidance and contribution of the divestments?
Brian Gilvary
Yes on the first question Lucas, clearly in the $30 billion to $31 billion that’s already net off anything that we’ve laid in place of the payment schedule round of the DoJ and the SEC payments are already inside that number, and of course, that number still has, if you go back to this 50% of additional cash flows at 2011 of which half is the capital half, other purposes. I think we have this on the call that we talked about the 3Q that of course, that’s the purposes can be satisfied for that, and there’s about $3 billion available, that would look to be able to cover any range of uncertainties out there including progressive dividend, and the things where we are today.
So everything, which is inside the number on 2014 include anything which you’ve settled already of course the existing outgoings associated with the trial in place of course is not inside that number today.
Lucas O. Herrmann
Okay. So just to be absolute clear, maybe which I’ll agree something the $3.5 billion provision for example, you got sitting on balance sheet for Clean Water and that would be expensed over three years starting 2014, that would eat into that $30 billion to $31 billion?
Brian Gilvary
That’s a hypothetical question.
Lucas O. Herrmann
Not hypothetical question.
Brian Gilvary
So let me be really absolute clear, inside the $30 billion to $31 billion, there is no cash outflow associated with Clean Water Act fines and penalties.
Lucas O. Herrmann
Lovely thank you.
Robert Dudley
Lucas, your contribution of the divestments in the U.S.
Brian Gilvary
Yeah, sorry Lucas, the biggest piece of course, is TNK-BP that we’re adding up 31 days of earnings, it’s a bit too lumpy to give the exact figures, because of course the assets went down to different points during the fourth quarter, we can come back to you with a sort of broad figure on what that looks like in terms of earnings, but it’s the Gulf of Mexico went out from memory half through the quarter, and then all assets spin out towards the back-end of the quarter, so it’s a bit pretty difficult to actually give you a point in time excellent to fourth quarter.
Lucas O. Herrmann
Okay.
Robert Dudley
But Lucas the fourth production impact so in the fourth quarter over 2011 was 116,000 barrels a day, so significant overall. On the Whiting project so this is a project again just this is a structurally advantage project to process Canadian heavy crudes, with a lot of flexibility there, the site construction as of this week, so it was 84% complete at the end of the year.
It’s now continuous through to move through and well above 85% complete, the commissioning is on scheduled in the second half of the year and the major crude unit outage started on schedule in early November, and that will continue to be out until the middle of 2013, and I think for us the whole commissioning process will take roughly 6 to 9 months with three of the major units starting up in the sequence there. So we do anticipate that 2014 will be the first year that we get the full benefits of it, as these operations continue on in the middle of the year.
I think around the middle of the year, that’s when you will see us start getting very precise about this as these units come up and on.
Lucas O. Herrmann
Okay, gentlemen thanks very much.
Robert Dudley
Okay, thanks Lucas.
Jessica Mitchell
And next question come from (inaudible) of Raymond James.
Unidentified Analyst
Yes, thank you Jessica. Two question if I may, can we expect in 2013, BP to launch of the sanction some major project you only sanctioned three projects now in 2012, you had mentioned a possible five in 2013, and can we expect as the likes of Shah Deniz or your also I’d say big opportunity to be sanctioned in 2013.
And the second question is how critical would it be to BP exploration portfolio in to Gulf of Mexico, BP would not be able to participate in next March round lease in the central part of the Gulf of Mexico. Thank you.
Robert Dudley
Thanks [Batron] you are right we had three sanctions this year none of which were mega projects. We do see five sanctions in our FIDs during 2013.
We normally don't lay out the FID point some sales, and I would note that some of our partners don't necessarily consider an FID as the defined gate, but we've got our eye on five projects of which four of those are very large, I will name the ones that we are clearly have been talking about, externally one is the Tangguh Train 3, and Tangguh expansion is a big one. Shah Deniz we were working through now the economics of those complicated pipelines that are so critical to the economics of that project.
We're looking at Angola, Greater Plutonio Phase 3, we're looking forward to and we'll know more about India here in about a month or so. So we have got a good healthy list that I think will get us back in terms of looking at reserve additions as well as we go forward.
In terms of exploration in the Gulf of Mexico today we are the largest lease holder in the Gulf, somewhere between 700 and 750 leases. It is a lot on our plate so we haven't made a decision and we haven't actually been told we cannot bid on the March lease sales, but if we don’t, it’s okay.
Unidentified Analyst
Okay, thank you.
Brian Gilvary
Okay.
Operator
And next question from Peter Hutton at RBC.
Peter Hutton
Good afternoon and thanks for all the details this afternoon. I was actually following on from the similar question on FID, the three that you took in 2012 to low than ‘10 rate, what (inaudible) doing, was it just sort of a kink in the pipeline of future projects or is it that BP see itself is fully loaded and enough on its plate?
An then second one is, thanks for guidance on the gearing and 10% to 20% moving to 20% to 30%, but with respect to significant shareholders in Rosneft with 20%, where would BP in that division, see an appropriate gearing level for them given their risk and obligations?
Robert Dudley
Peter, first, do you think it was a kink in the pipeline. If you look historically, we have sanctioned five to eight projects a year for a decade.
I think if I look back and we have been looking back very carefully of our exploration record and our exploration spending and 2009-2010 even going back a little bit before that, the amount of acreage that we were adding, and the amount of exploration drilling we do, really did dipped down, and there is always a consequence of that, and I think that’s what we were beginning to see with the kink in the pipeline, which I think is the good way to describe it. It’s not a sustained kink.
I am looking at five plus sanctions in 2013 and even more in 2014 so that’s not, and there is no assumptions in there at all for exploration success as well. Gearing level, I would say it’s not guidance, it’s something we have been talking with shareholders about, and I don’t mean to give guidance, so we will as soon as possible.
Brian Gilvary
The third question, I think around Rosneft and what a suitable gearing is for that business is really a question for the final structure of Rosneft, that’s not available to purchase?
Peter Hutton
With this 20% holders, would you presumably, you would have a view, but you’ve expressed that directly to Rosneft not through to all that on list.
Robert Dudley
Yeah, that’s right. I mean, we haven’t, we don’t have the insight into the Rosneft processes yet and their Board and it wouldn’t be appropriate for us to comment on that, obviously they are taking on, everyone knows they are taking on debt for the TNK-BP transaction, but I also know these oil prices that they are capable of generating cash flow to certainly handle that in a healthy way, and also using other means of raising debts such as crude oil, trade sales, which is another way of doing it.
So it’s way too early for us to comment on that.
Peter Hutton
Okay, thank you.
Operator
Okay. And the final question then from Jason Kenney in Santander.
Jason S. Kenney
Thank you very much. So as it relate to the quarter, I can only apologize if you don’t see that a couple of these points, you’re probably announcing my first one anyway.
So but I’ll give a short...
Robert Dudley
Settlement, right?
Jason S. Kenney
Yeah. So you could have viewed or what a reasonable settlement figure for the U.S.
litigation would probably be, I’m just wondering if you’ve undertaken a thorough poll of what investors in BP might think a reasonable figure is, I know you’re not going to tell me either number, but are you at least able to say those two numbers are in the same ballpark or not? And the second question, a bit more traditional I suppose on North Africa, again, Canadian projects you said to me earlier on this, but what is the impact of Algeria outage and do you see any pressure for your activities in North Africa, particularly Libya near-term?
Robert Dudley
Jason, so that I can satisfy your question, because I won’t start with the settlements and the numbers, I’ll talk about North Africa and then we’ll come back on the settlement. I mean North Africa inter-maintenance was around 70,000 barrels a day for us.
So you think about that with the 2.3 million barrels a day company was a good return project for us, but not significant in terms of volume terms. we do remain committed to Algeria, we’re working in In Salah as well; these are good projects for us.
We are going to be very, very careful. We’re going to work closely with Sonatrach and the government along with Statoil and our contractors to make sure, conditions are right from when we go back to work in Algeria.
In Libya, we have no production, we have no facilities there. We have two exploration acreages, one offshore, where our planning work continues, and then onshore, we’re down to get on the space of near the Algerian border, not too far away from where (inaudible) was.
So certainly for the time being, I would say it’s in hibernation, but we also remain committed to doing business in Libya, and as an oil company, we frequently and often take on projects as does our industry in tough places around the world, and I think it’s cautioning some in the media, just not to overreact too quickly and draw conclusions after an event like that, I think that’s the mode we’re in certainly on high alert and looking at all of our facilities. We have had a healthy number of questions on settlements and numbers earlier in the call, Jason and I think we’d probably going to give you about as most satisfaction as we gave everyone else, which is really something, we can’t talk about, but I would know with the trial coming up in 20 days, we are sort of in the shoot to get ready for the trial.
Jason S. Kenney
Okay, many thanks.
Robert Dudley
Yeah.
Jessica Mitchell
And well, thank you everybody.
Robert Dudley
I think that is the last set of questions. I think as BP began 2013, it began to feel like we were back to a normal corporate rhythm of getting ready for the year, starting up two projects in December, getting the redevelopment of all going in January; these are all important milestones for us, we’re laying on our plans.
We did get a bit of jolt with what’s happened in Algeria, the company itself as I have said is a very tight knit company, it’s big company that’s very tight knit and people knew many of the people impacted on it. But as we move that, we will go on, we will keep going on.
We have got some many exciting things happening this year in terms of new projects, the Rosneft transaction is moving along, I think that’s been a problem turned into an opportunity for BP and of course the legal processes in the U.S. are quite mindboggling and it’s hard for us to say exactly where that heads, but it just feels very different than it is in 2011.
It feels better than it did in 2012, I think if the company continues to move through the transition. And thank you all for your attention and questions.