Feb 4, 2014
Operator
Welcome to the BP Presentation to the Financial Community Webcast and Conference Call. I now hand over to Jessica Mitchell, Head of Investor Relations.
Jessica Mitchell
Hello, and welcome, everyone. This is BP's Fourth Quarter and Full Year 2013 Results Webcast and Conference Call.
I'm Jess Mitchell, BP's Head of Investor Relations, and I'm here with our Group Chief Executive, Bob Dudley; and our Chief Financial Officer, Brian Gilvary. Before we start, I need 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.
Bob Dudley
Thank you, Jess and welcome everyone wherever you are in the world. Thanks for joining us today.
We are here to look back at 2013. It was a busy year and also a successful one.
We accomplished a number of important things. We improved our safety record.
We had a very good year for exploration, in fact, our best in 10 years. We started up a series of major new projects, both in the upstream and the downstream.
In Russia, we created a new future for BP. And at the same time we released some of the considerable value we generated with our former joint venture TNK-BP.
A large part of that is currently used for buybacks, a good outcome all around. We also announced some significant new investments for the future that we believe will create value for BP for decades to come.
In particular, these included a huge Shah Deniz 2 natural gas project in Azerbaijan with the associated pipelines stretching well into Europe and also the giant Khazzan project in Oman. We also increased the dividend by 11% in dollars compared to 2012.
We are not complacent but we are pleased with the progress. These are all important milestones on the way to delivering our 10 point plan.
And these will all contribute to sustainable growth and free cash flow in the years ahead. What you can see now is a company that has a more focused and stronger portfolio, leading positions in exploration, deepwater and giant fields and a quality downstream business.
And we will continue to play to these strengths. We will do this through disciplined capital investment in high quality upstream project pipeline and the downstream that is a strong generator of cash for the group.
And we will do all this while maintaining a relentless focus on safety and reducing operational risk. So turning to today's agenda.
We will start with a summary of our full-year results and then look progress against the 10-point plan. Brian will take you through the details of our results for the fourth quarter.
Then I will update you on our safety performance, Rosneft’s progress, legal proceedings in the U.S. and our ongoing work in the upstream and downstream.
And then we will take your questions. So let's begin with an overview of our full year 2013 results.
Our underlying replacement cost profit was $13.4 million. Post-tax operating cash flow was $21.1 billion.
Our organic capital expenditure was $24.6 million in line with our guidance and we divested $17.1 billion of assets during the year. Our gearing at the end of the year was 16.2%, which is within our target band of 10% to 20%.
We distributed $5.4 billion in cash to shareholder through dividends and we also bought back $5.5 billion of our own shares. These results reflect the number of different factors, among them are the restructuring of our portfolio through divestments, a weaker environment in the downstream, large working capital bills and the increased exploration write-offs which have accompanied our ramp-up in exploration drilling.
That said, it is also been a year of strong results in our underlying operations, which I will come back to you in short while. We are confident that the full financial momentum from this progress will become clearly evident in 2014 and beyond.
To reinforce that point, let me give you another figure. Our reserve replacement ratio for 2013 was 129%, excluding the impact of acquisitions and divestments, if we include the net reserves growth as a result of the repositioning in Russia, the reserves replacement ratio was 199%.
I believe this result is a strong indicator of the growing short-term and long-term momentum in our business as we pull-through the drivers of long-term growth. Let me update you a little more on some important milestones.
As many of you will recall, our 10-point plan consisted of things you could expect and things you could measure and 2013 has set us up well to deliver. The first commitment was to continue to make safety the top priority and we are seeing positive results as you can see in a moment.
We also said we build a stronger portfolio and simplify the company, while playing to our strengths, from exploration to high quality downstream businesses. And we have delivered on that commitment, we have completed the $38 billion divestment program outlined to you in 2011 and we are now a smaller but much more focused company.
The divestments have removed complexity, strengthen the balance sheet and left us with the more distinctive set of assets. And with our third quarter results, we announced our intention to divest a further $10 billion of asset before the end of 2015.
This will further focus the portfolio and provide additional free cash flow from which we plan to increase distributions to shareholders, primarily through buybacks. The successful completion of the transaction associated with TNK-BP and Rosneft demonstrated our ability to turn a major challenge into unique opportunity.
It also makes us a 3.2 million barrel per day oil company, when adding our interest in Rosneft to be BP zone production. While reshaping the portfolio, we also continue to deliver some significant milestones in our businesses.
For example, in the upstream, we had continue to reload the exploration portfolio and also made seven potentially commercial discoveries in 2013, in Angola, Brazil, Egypt, the Gulf of Mexico and India. We also saw a series of high-value upstream projects come online.
During 2013 three more projects started up, following the five we started up in 2012. These included the first phase of the BP-operated Atlantis North Expansion in the Gulf of Mexico and two more partner-operated assets, the Angola LNG plant and North Rankin 2 in Australia.
And I’m pleased to be able to tell you today that the Chirag Oil project in Azerbaijan came online last week and Mars B in the Gulf of Mexico another oil project has come online today. In the downstream, we announced last month that all the major units associated with the Whiting refinery modernization project have been brought on stream.
We continue to expect the reconfigured refinery to deliver an incremental $1 billion of operating cash flow per year depending on the environment. So as we end the year, the track record of delivery continues to build.
We have a much stronger balance sheet and we are confident that delivering our important goal for 2014, to increase operating cash flow by 50% between 2011 and 2014, assuming $100 oil. It is this confidence that enabled us to increase dividend with our third quarter results in line with our progressive dividend policy.
On the 4th of March we will tell you more about our future plans, we will show you how we plan to continue playing through our strengths to drive material growth and operating cash flow, coupled with our focus on capital discipline, we expect this to drive continued growth and free cash enhancing our ability to increase distributions to shareholders. Let me now hand over to Brian to take you through the results for the fourth quarter.
Brian Gilvary
Thanks, Bob. BP’s fourth-quarter underlying replacement cost profit was $2.8 billion, down 27% on the same period a year ago and 24% lower than the third quarter.
Compared to the fourth quarter of 2012, the result reflected higher non-cash costs, including exploration write-offs and DD&A, a significantly weaker refining environment and significant divestment impacts, partly offset by improved underlying upstream production in high-margin regions and stronger earnings from Rosneft compared to TNK-BP in the same period in 2012. Fourth-quarter operating cash flow was $5.4 billion.
The fourth-quarter dividend payable in the first quarter of 2014 is $0.095 per ordinary share, up 5.6% compared to the same period last year. Turning to the highlights at the segment level.
The upstream underlying fourth-quarter replacement cost profit before interest and tax of $3.9 billion compared to $4.4 billion a year ago and $4.4 billion in the third quarter of 2013. Compared to fourth-quarter 2012, the result reflects higher non-cash costs, including exploration write-offs associated with increased exploration activity and high DD&A along with some sector inflation, lower production due to previously announced divestments primarily in the North Sea and the Gulf of Mexico and lower liquid realizations partly offset by improved underlying volumes in high-margin regions, a one-off benefit to production taxes, stronger gas marketing and trading results and higher gas realizations.
Fourth-quarter reported production, excluding Russia, was 1.9% lower than a year ago, primarily due to the impacts of divestments. On an underlying basis, after adjusting for divestments and entitlement effects, production increased by 3.7%, partly reflecting new major project volumes in the North Sea, Angola and the Gulf of Mexico.
Compared to the third quarter, the result reflects higher costs partly due to the exploration write-offs, absence of the one-off benefit in the third quarter related to the Trans Alaska Pipeline System and lower liquids realizations, partly offset by improved underlying volumes in high-margin regions, a one-off benefit to production taxes and higher gas realizations outside of North America. Looking ahead to the outlook for the first quarter, we expect reported first-quarter production to be lower than the fourth quarter last year, reflecting the impact of divestments and the expiry in January of the Abu Dhabi onshore concession.
Turning to Russia. This slide shows our share of earnings from Rosneft and historically from TNK-BP.
BP’s underlying net income related to its Rosneft shareholding was $1.1 billion in the fourth quarter. This compares to BP share of TNK-BP net income in the fourth quarter of last year of $220 million which included only 21 days of earnings.
Compared to the third quarter, underlying net income was up $270 million. The fourth quarter's favorably impacted by the finalization of BP’s equity accounting for the year and include certain adjustments for net income in respect of prior quarters.
These effects were partially offset by adverse foreign-exchange and duty lag effects and by lower realizations. BP share of Rosneft production in the fourth quarter was 985,000 barrels of oil equivalent per day, 20,000 barrels per day higher than the previous quarter.
In the downstream, the fourth quarter underlying replacement cost profit before interest and tax was $70 million compared with $1.4 billion a year ago and $720 million in the third quarter. The result included a loss of $200 million in the fuels business compared with the $1 profit in the same quarter of last year.
This reflected a significantly weaker refining environment, the absence of earnings in the divested Texas City and Carson refineries and the weak results from our supply and trading activity and additional depreciation in start-up costs as a result of the Whiting refinery modernization project. This was partly offset by strong refining availability and lower turnaround activity.
The lubricants business reported an underlying replacement cost profit before interest and tax of $230 million compared with $330 million in the same quarter last year. This reflects restructuring charges as we seek to improve a competitiveness of our mature European businesses.
The petrochemicals business reported an underlying replacement cost profit before interest and tax of $40 million broadly flat compared to the same period last year. Results were impacted by the environment which continues to be challenging with excess supply in Asia and the United States, partly offset by lower turnaround activity.
Looking forward to 2014, we expect refining margins to improve in the levels during the fourth quarter but in general we expect the fuels and petrochemicals environments to remain challenging. We also expect an increased exposure to heavy crude differentials in the United States as we ramp up heavy crude processing at the Whiting refinery.
In other business and corporate, the pre-tax underlying replacement cost charge was $610 million for the fourth quarter, an increase of $170 million on the same period a year ago. The fourth quarter results included certain one-off charges compared to one-off benefits that occurred in the same period a year ago.
The full year charge of $1.9 billion was within guidance levels and $100 million lower than the previous year due to lower corporate and functional costs. The effective tax rate on underlying replacement cost profit for the fourth quarter was 24.3%.
This is lower than the third quarter reflecting higher income from Rosneft, which reported net of tax and a number of one-off favorable fiscal settlements in several jurisdictions related to previous years. The full year effective tax rate on an underlying replacement cost profit was 35.4%, slightly below our guidance range for 2013.
The charge for the Gulf of Mexico oil spill was $119 million in the fourth quarter, primarily reflecting an increase in the provision for legal costs plus the ongoing costs of running the Gulf Coast Restoration Organization. This brings the full year charge to $470 million.
The total cumulative net charge for the incident to date is now $42.7 billion. The charge does not include any provision for business economic loss claims that are yet to be paid.
Bob will provide an update on the legal process shortly but as advised at the third quarter, it is still not possible to reliably estimate the remaining liability to business economic loss claims. We will continue to revisit this each quarter.
The pretax cash outflow on costs related to fuel spill for the full year was $1.4 billion. The cumulative amount estimated to be paid from the trust fund remained at $19.3 billion leaving unallocated headroom available in the trust for further expenditures of around $700 million.
In the event that the headroom is fully utilized, subsequent additional costs will be charged to the income statement. At the end of the year, the aggregate remaining cash balances in the trust and the qualified settlement funds was $6.7 billion, with $20 million paid in and $13.3 billion paid out and is indicated in previous quarters, we continue to believe that BP was not grossly negligent and have taken the charge against income on that basis.
Now turning to divestments, our $38 billion divestment program is now complete and in the first quarter, we also completed the sale of our share of TNK-BP to Rosneft for $27.5 billion. Following the receipt of cash proceeds of around $12 billion from the TNK-BP transaction, we also announced the share buyback program of up to $8 billion.
To date, $6.8 billion of shares have been repurchased for cancellation, of which $5.5 billion were repurchased in 2013. In October, we announced plans to divest an additional $10 billion of assets by the end of 2015 and to use the post-tax proceeds predominantly for shareholder distributions with a bias to share buybacks.
So far we've agreed around $1.7 billion of additional divestments. Now looking at our full-year cash flow movements.
This slide compares our sources and uses of cash in 2012 and 2013. Operating cash flow for 2013 was $21.1 billion, which includes $1.4 billion of pretax expenditure related to the Gulf of Mexico oil spill.
Excluding these costs, underlying cash flows of $22.5 million were also impacted by a net working capital build of around $5 billion. Compared to 2012, a high working capital build and the impacts of divestments offset the benefits of strong underlying volume growth from the ramp-up of major projects and improved operating efficiency in the upstream business.
In the fourth quarter, we received $400 million of divestment proceeds, bringing the total for the year to $17.1 billion, including the net cash received from divestments of our share in TNK-BP. Full-year organic capital expenditure was $24.6 million, of which $7.1 billion was in the fourth quarter.
Net debt at year-end was $25.2 billion with gearing up 16.2% compared to 18.7% a year ago. Our intention remains to keep gearing in a target band of 10% to 20% while uncertainties remain.
Turning to our forward-looking guidance for 2014. The Abu Dhabi onshore concession expiry has an impact on production of around 140,000 barrels of oil equivalent per day.
Adjusting for this and the impacts of divestments, we expect full-year underlying production in 2014 to increase compared with 2013 with reported production being lower due to these effects. The actual reported outcome will depend on the exact timing of project startups, divestments, OPEC quotas and entitlement impacts.
Organic capital expenditure in 2013 was $24.6 billion and as previously indicated, we expect 2014 capital expenditure to be between $24 billion and $25 billion. The DD&A charge was $13.5 billion in 2013 and is expected to be around $1 billion higher in 2014 as production on new projects ramp up.
In other business and corporate, the average underlying quarterly charge is expected to be in the range of $400 million to $500 million although this may fluctuate between individual quarters. The effective tax rate for 2014 is expected to be around 35%.
We will provide updated rules of thumb for 2014 on our website later this month. Before I hand you back to Bob, I’d like to summarize our overall financial framework.
We expect the combination of continued operating cash flow growth and capital discipline to enable us to grow sustainable free cash flow underpinning progressive dividend growth into the future. We expect to deliver operating cash flow of $30 billion to $31 billion in 2014 with continued material growth thereafter.
2014 capital expenditure is expected to remain at a similar level to 2013 between $24 billion and $25 billion. Beyond 2014, we expect annual capital expenditure to be in the range of $24 billion to $27 billion through to the end of the decade.
We will continue to actively manage our portfolio. As previously announced, we plan to divest a further $10 billion of assets before the end of 2015 using post-tax proceeds predominantly for distributions with a bias to share buybacks.
And finally, we intend to keep gearing within the 10% to 20% band with uncertainties remain. Now, let me hand you back to Bob.
Bob Dudley
Thank you, Brian. So now, I want to walk you through some of the important details of our 2013 performance and I will start with safety.
These charts show an encouraging trend what I believe reflects the disciplined approach we are taking to our operations around the globe. Looking first at losses of primary containment, which records even very small releases, 2013 showed a 4% reduction in 2012 when adjusted for divestments, continuing a multiyear improvement.
We also track process safety events. The American Petroleum Institute recommended industry metric.
In 2013, we saw a 47% reduction in the most serious incidents known as Tier 1 events versus 2012, again, adjusted for divestments. We also continued to focus on personal safety and our recordable injury frequency rate remains at levels comparable to or better than industry benchmarks.
Safety is at the heart of BP and it is good business. We're pleased with this progress, but by no means do we take it for granted.
Let's move on to our investment in Russia. Rosneft has now completed the initial integration of TNK-BP and laid out its strategy for the enlarged company, identifying significant synergies and benefits.
Momentum continues to build across Rosneft generally. In 2013, they signed a number of binding agreements for joint ventures and projects with IOC partners.
These included unconventional development projects and also Arctic exploration. JV operating companies were established in significant quantities of 2D and 3D seismic were acquired.
Rosneft also continued its program of modernization in its downstream business, including upgrades at a number of refineries, enabling them to produce premium grade fuels. Rosneft continued to deliver on their gas strategies as Russia's regulatory and fiscal landscape evolves.
This has included the removal of Gazprom’s official monopoly on LNG exports. In this area, Rosneft made a number of acquisitions and also finalized the number of long-term LNG supply agreements.
The changes for the fiscal terms in Russia have also increased the attractiveness of other opportunities within Rosneft’s portfolio. So in summary, it was a significant year for BP in Russia and also for Rosneft.
Our unique position in Russia not only makes BP a 3.2 million barrel a day business, it also adds an additional 840 million barrels of oil equivalent to our proved reserve base and opens the way for us to benefit from all of the achievements and progress that Rosneft delivers. More widely, the relationship we have with Rosneft is growing, and we believe it will have significant long-term benefits for both Rosneft and BP.
Now, let me give you an update on the status of certain Gulf of Mexico related legal proceedings in the United States. The first phase of the MDL 2179 trial in New Orleans focused on the causes of the accident and the allocation of fault among the defendants.
The second phase covered source control, and the quantity of oil spilled. Both phases are now complete with the court yet to rule on either.
While the final decision rests with the court, we continue to believe that the evidence in Phase 1 showed that the accident was a result of multiple causes involving multiple parties and that BP was not grossly negligent. We believe that Phase 2 of the trial demonstrated that BP mounted an extraordinary response, and we believe it showed BP was neither negligent nor grossly negligent in its efforts, and the government's flow rate estimates are substantially overstated.
The penalty phase, in which the court will hear evidence regarding the penalty factors set out in the Clean Water Act, has not yet been scheduled for trial. The U.S.
government, BP and Anadarko will be parties in this phase. Turning to the settlement with the Plaintiffs’ Steering Committee and the issues involving business economic loss or BEL claims.
As you know, we have been contesting the payment of claims which we believe to be unfounded. BP has been successful in challenging the claims administrator's interpretation of the BEL framework with a panel of the U.S.
Fifth Circuit Court. The panel reversed the interpretation.
The District Court subsequently agreed that revenues and expenses must be properly matched, but failed to correct the practice of issuing awards to claimants whose losses are not traceable to this bill. BP has again appealed to the same panel requesting a permanent injunction to prevent such improper awards.
This panel has agreed to consider these causation issues on an expertize basis. In the meantime a temporary injunction remains in place for all BEL claims.
In a related development on the 10 January a different panel of judges from the Fifth Circuit upheld the volatility of the settlement as written. However it left to the BEL panel requesting them how to interpret the agreement including the meaning of the causation requirements I just mentioned.
BP has filed a petition for rehearing on the decisions. Separately, former federal judge, Louis Freeh's independent investigation of the claims facility continues.
And we recently received his second written report that subscribes some of the behavior at the claims program that led to the resignations of senior staff members. We continue to hope that Judge Freeh’s investigation will lead to steps that ensure public confidence in the integrity of the claims process.
And while we continue to pursue litigation challenging the EPA’s suspensions and debarment decisions, we are also continuing to work towards an administrative agreement to resolve these issues. And finally I should mention another case, MDL 2185.
This is a coordinated proceeding pending in federal court in Texas, and includes a purported class action on behalf of American Depositary Shares or ADS purchases under U.S. federal securities law.
Plaintiffs filed a renewed motion following the court’s initial rejection of a motion to certify a class, a jury trial on this action is scheduled to begin in October, 2014. In summary, we remained to pursue fair outcomes in all these proceedings.
Importantly, we continue to compartmentalize these activities to avoid distraction and BP’s operating teams remain clearly focused on delivering our strategy. Moving on, let me update you on what we’ve done in our Upstream.
It was an outstanding year for exploration one which really show the impact of playing to our strengths. In total we participated in seven potentially commercial discoveries across India, Egypt and Goa, Brazil, and the Gulf of Mexico making 2013 the most successful year for exploration drilling for almost a decade.
This reflected the increased investment we have made in finding oil and gas. With 17 exploration wells being completed around the world in 2013, and between 15 and 20 planned for 2014.
The Lontra oil and gas discovery in the pre-salt layer in off shore Angola, announced by our partners Cobalt in October was followed by a successful drill stem in December, demonstrating the excellent quality of the reservoir. The Petrobras-operated Pitu well was confirmed as a discovery in December, this is the successful test of a new play in Brazil’s frontier deepwater.
And also in December, we announced a discovery of the BP-operated Gila well in the deep water, Gulf of Mexico. The Gila discovery was drilled in approximately 4,900 feet of water at a total depth of over 29,000 feet and its BP’s third operated discovery in the Paleogene.
Moving on to new operations, three projects were brought online in 2013. The Angola LNG, the first phase of the Atlantis North Expansion and North Rankin phase two projects and I’ve already mentioned the start of Chirag Oil project in Azerbaijan and the Mars B in the Gulf of Mexico plus the Butch online in the last week.
We’re also on tract to deliver four further major project start offs in 2014. The Na Kika Phase 3 in the Gulf of Mexico Kinnoull in the North Sea, CLOV in Angola, and Sunrise Phase 1 in Canada.
Across the portfolio we continue to maintain our focus on the safe reliable execution of activities. In 2013, we achieved the BP-operate plant efficiency of 88%, which was a significant improvement over 2012 and we expect this improving trend to continue as we move through 2014.
We successfully completed 20 plant turn around including 12 in our key assets. This represents a reduced level of activity compared to 2011 and 2012.
Looking forward we intend to continue to invest in the reliability of our assets with a steady state multi-year program, which we expect to require continued lower level of turnaround activity in recent years. At the start of the year, we identified 15 wells in key locations as the top wells for production delivery.
All of these were successfully drilled by the end of year with two remained to be completed by the end of this month. Delivery of production from new wells in 2013 increased compared to 2012, particularly from some of our key regions such as Azerbaijan and the North Sea.
We expect to continue the strength of improving well delivery with production from new wells in 2014 forecast to be higher than in 2013. Now, let me update you on more detail on our major projects.
Our recent key start-ups continued to ramp up their production. For example, PSVM in Angola which started at the end of 2012, reached plateau production of 150,000 barrels of oil per day.
In delivering this, our Angola team has started up all four fields that make up the asset and achieve the first year plant efficiency of 91%. The Chirag Oil and Mars B projects that started up this year, represents major new infrastructure developments in significant established oil fields in two of our key regions.
Facilities completion on the next four start-ups in 2014 now exceeds 75%. During the fourth quarter, we reached several key milestones towards the delivery of these projects.
On the Kika Phase 3 on the Gulf of Mexico, we completed the sub-sea construction and drilled two wells with completion now underway and expect well start-up in the first quarter. We also began commissioning of Kinnoull in the North Sea, while on Sunrise Phase 1 in Canada, the initial 55 wells pairs were completed ahead of schedule.
Most recently, the CLOV FPSO left the Paenal shipyard in Angola on the 20th of January to start the offshore hookup and commissioning campaign. Our 2012 to 2014 start-ups bring high margin production online and will on average deliver twice the operating cash margin the upstream portfolio that we held in 2011.
Looking to our next wave of developments, we sanctioned two significant projects in the fourth quarter of 2013, which we expect to deliver value for BP for decades to come. Shah Deniz Stage 2 and its associated Southern Corridor pipelines will develop the next phase of this gas field in the Caspian, connecting it directly to European markets.
16 billion cubic meters per year of natural gas will be carried some 3,500 kilometers to Georgia, Turkey, Greece, Bulgaria and Italy, while condensate production will increase from 55,000 to 120,000 barrels per day. Meanwhile, our Khazzan project in Oman will see some 300 wells drilled over 15 years, delivering 10 BCMA of gas, which is equivalent to around of a third of Oman’s total daily gas supply, ensuring continued stable supplies from domestic sources.
So in summary, this has been a significant year of building momentum in the upstream. We continued to deliver results across access and exploration, projects, wells and operations.
We have after adjusting for divestments, delivered underlying production growth in every quarter of 2013 when compared to 2012. This has been driven by improving execution of activity through our functional model and a relentless focus on safe and reliable delivery.
Now, turning to the downstream, in 2013, there were continuing improvements in safety and reliability as well as delivering several significant milestones. The number of Tier 1 safety events decreased and the business achieved a steady decrease in losses of primary contentment and recordable injury frequency.
Solomon refining availability was 95.6 for the fourth quarter to the highest level for BP since 2004. In 2013, we met several important milestones primarily focused on the repositioning of our U.S.
fields business. We completed the commissioning of all major units for the Whiting Refinery monetization projects, finalized the sales of the Texas City and Carson refineries and started up new units at the Toledo and Cherry Point refineries.
We expect these changes to enhance the safety, margin capture and operating efficiency of our U.S. fields business and in turn to provide significant cash generation for the group.
Our lubricants business continues to be an important source of revenue growth and returns for the group as it implements its strategy of investment in technology, exposure the growth markets, distinctive global brands, and targeted marketing programs. We're also beginning to implement a program of transformation to improve competitiveness across our majored European businesses.
In January, we announced our decision to sell our specialist global aviation turbine oils business. After a careful review of our portfolio, we decided that business would offer more opportunities for other companies willing to invest in this particular sector.
In petrochemicals, we continued the construction of the third PTA plan at Zhuhai in Guangdong Province of China, which is on track for completion in late 2014. In addition to Zhuhai, we are also retrofitting our existing facilities with our latest PTA technologies to improve cost efficiency.
We also announced two new breakthrough petrochemical technologies in 2013. SaaBre and Hummingbird, which we expect to radically improve the cost of manufacturing the petrochemical feed stocks of acidic acid and the conversion of ethanol to ethylene respectively.
Looking to the future, our focus in the downstream is to leverage our newly upgraded assets, customer relationships, leading technologies to generate material and growing free cash flow for the group. In 2014, our capital investments are focused on safety, efficiency and growth markets are named and enhancing our advantage portfolio of assets.
So I would like to close by summarizing what we've achieved in look to 2014 and beyond. We have talked today about the milestones past in 2013.
These and other recent achievements formed the foundations for delivering value into the long term. Our aim is to grow sustainable free cash flows, we continue to build and operate a high quality portfolio in which we prioritized value over volume.
And I think that value is very much the goal to focus on in today's environment. It doesn't look like an easy sector right now, but I believe that you can succeed if you do the right things well.
It means continuously reloading our pipeline of opportunities through exploration success, it means making the right investment choices, it means sticking to the capital limits we have set and it means excellent execution of only the best projects. At the same time, we will continue to actively manage our portfolio to ensure we are playing through our strengths and divesting assets which are not core to delivering long term value.
And we will always make safety and reliability the top priority in all we do. We are confident that our hard work this year, keeps us on track to deliver our commitment to growth and operating cash flow in 2014 and beyond.
We are strong and committed to our progressive dividend policy and we look to use surplus cash to enhance distributions to shareholders. We look forward to telling you more about what the journey ahead looks like on the fourth of march.
That's the end of our remarks. And now Brian, Jess and I will be happy to take your questions.
Jessica Mitchell
(Operator Instructions) The first question then comes from Oswald Clint at Sanford Bernstein.
Oswald Clint
First question, Bob, I was looking at the [U.S. arcop] per barrel and how it has stepped up the past two quarters, so into mid-teens per barrel, obviously the businesses had quite a range of [arcop] per barrel, I wanted to get some thoughts on where you think that number might actually get to or whether that's 12 months and obviously the next couple of years please.
And then, secondly, as interested in your comments on the most successful exploration here in a decade, is there anything that you can point to that may have help deliver that success and is it possible to give any sense of materiality or [some volume] around the discover you had last year? Thank you.
Bob Dudley
I'll comment on the -- for barrel numbers and then Brian can add a little bit more to it. And then some comments on exploration.
Clearly, it's getting back to work in the Gulf of Mexico for us with 10 rigs running, we're not getting the exact figures, but we did produce more 200,000 barrels a day during the quarter and an exit rate as well $200,000 in the fourth quarter. So we've got that, we've got improved natural gas prices as well that have affected the industry both being mix.
Do you want to add?
Brian Gilvary
Yeah. No.
I think that's the big positive, Bob, and it's actually around on the balance of Gulf of Mexico barrels coming in, Atlantis major project coming online and turnaround around Thunder Horse and it's actually lower oil realizations versus higher gas realizations. So they are the big drivers.
And as more gun barrels come on with the lower production taxes, hence you will start that numbers to get through.
Bob Dudley
Yeah. We expect that out of these four big hubs, out into the decade.
On exploration success, I think it has been a really good year. The three wells there just at very end of the year, the Lontra well in Angola did drill some tests in December, a lot of these we can't really comment on materiality or size because we have partners and governments and regulators that we need to work through.
But I'm very encouraged about Angola and we are drilling another well in the block, in fact it's going down now. And in India, I think the size of those, India is a country that needs every molecule of gas they can get, one of the discoveries was underneath the D6 field, down deep, that looks sizable, facility is there, so that's good.
And in Brazil, I think the most significant thing in the P2 well in Brazil is it's proved up the equatorial margin, a whole new basin in area, so that's got some really good significance. And Gila discovery in the Gulf of Mexico that's another one in the Paleogene formation looks very, very promising, some 4,900 feet of water and drilled at 29,000 feet one of our deepest wells.
And then Egypt as well is a country who has been exporting gas, needs all the gas they can get and the Salamat well which is 100% BP has won, that looks promising and then we've drilled -- drilling another one now with BG that looks promising. So I can't give you the numbers, I know you'd like the figures, but there's just some color around that.
Oswald Clint
That's helpful. Thank you very much.
Jessica Mitchell
Right. Next question from Alejandro Demichelis with Exane.
Alejandro Demichelis
Yes. Good afternoon, gentlemen, and Jessica.
Couple of questions from my side, in terms of the new startup for 2014, plus the Whiting Refinery how much cash flow do you think you can generate from those new projects, in order to get, you should need $30 billion, $31 billion target on cash flow. That's the first question.
Second question is Bob, you mentioned the Gulf of Mexico having a very good exit rate for this year, what do you think you can get over the next couple of years in the Gulf of Mexico?
Bob Dudley
Okay. Alejandro, I'll start with the last one first, I mean overtime, we expect to get over 300,000 barrels a day in the Gulf of Mexico.
In terms of so where it's going to be this year, next year depends on the state of turnarounds and we do have some turnarounds coming up. We've got three of them in the Gulf.
So but very optimistic about where we're heading in the Gulf with those four big hubs. Roughly 80% of our reserve base that we have in the -- resource base around in the Gulf is around those four big hubs.
So, obviously, a great area of focus for us. On the amount of cash flow contributed by the four startups in 2014, we're not going to give you a number on that but the confidence you come with the fact that we've started out four major projects in 2013.
So we'll get the run rates through into '14 on that and we've got two projects we started up this week, with the Chirag Oil platform and the Mars B oil project in the Gulf of Mexico and oil really is the high-margin commodity here that we have more and more coming on so. Brian, do you have anything?
Brian Gilvary
Yeah. I think, Bob, that's the bulk of it and then Brazil is the mix of barrels as we move more high-margin barrels in the base come through that will also help support the $30 billion to $31 billion this year.
Alejandro Demichelis
And in terms of Whiting?
Brian Gilvary
Yeah. Whiting right now all the units commissioned and we're ramping up, so we'll continue to ramp up.
I mean it's a lot, you think it is peak, it can run up to 380,000 barrels a day of heavy crude, that's going to take some time to ramp up as we bring all of those units on, so we'll give you more updates on that as the year progresses.
Alejandro Demichelis
Perfect. Thank you.
Bob Dudley
Thanks, Alejandro.
Jessica Mitchell
Okay. Over to the U.S., so we'll take a question from Blake Fernandez at Howard Weil.
Blake Fernandez
Hi, folks. Good afternoon.
I have two questions for you, for one on the downstream, the results were a little below what we would have thought. I know you mentioned higher DD&A and you give us guidance of an incremental $1 billion of DD&A into '14?
I was hoping maybe you could give us some color around how much of that is associated with the upstream and the downstream? And then the second question is back on Lontra, I know the fiscal terms do not accommodate for gas sales and from what I understand there is a gas component to that discovery also and can you may give us an update of negotiations with the government to renegotiate the terms there, thanks.
Bob Dudley
Okay, Brian may be you can accompany -- come on the detail there and I’ll come back to it long through.
Brian Gilvary
Yeah, we don’t normally give the sales on DD&A by the segments, waiting will be modest increase in DD&A and as we depreciate that as that every time as being commissioned and I think that the depreciation status of my 30 years of what we recruit so we now have a huge impact, but nonetheless with this impactful cues we commissioned the asset. Some other costs that came through 4Q in the (inaudible) restructuring charges rapids effectively which conceals normal charge and so that we’re looking for businesses on more broadly and also we had a weak supply and trading quarter although we had a good supply and trading year both in our oil and gas for 2013, it was actually weak for 4Q fuel and oil trading and supply business that would probably -- they are the biggest components of the mess .
Bob Dudley
And the Upstream DD&A is also due to the new projects that are happened Upstream, we had a number of the big ones come on in 2013 and on Lontra our partners there are Cobalt so really they are discussing and negotiating with the country. I’ll just note -- I’ll just give you color and then specifics on this, you’re right the gases under the contract in Angola are property of the government however this is a very promising oil, gas condensate field that it's not too far from the shore and Angola needs power, they need electric power and their discussions about for this field of the economically viable, the government I believe once it's done and discussions are related to increasing power with a flood of the power in Angola (inaudible) burned more by fuel oil.
So this is quite significant for the country and but I think it would be best asking Cobalt about it but I’m encouraged.
Blake Fernandez
Thank you very much.
Jessica Mitchell
Next question comes from Thomas Adolf at CSFB, go-ahead Thomas.
Thomas Adolf
Graf known thanks for taking my questions of course two, one on India and one on US downstream. First we have in the other price hike looks to be given now from April but how should we think it now production and the development in the near to medium term if you asked to (inaudible) there and secondly on the US downstream I believe you know still on that long trends, so I was wondering if you can quantify the net benefits from when this do at 2013 and how we should we think about it going to 2014, thank you.
Bob Dudley
Okay, Thomas I’ll comment on India and will describe on wins. So you’re right, the government confirmed that actually the first quarter in April the gas price above and a formula, it’s a positive step, we estimate $8 and MCF, it will be just about depending on benchmark prices, this is very good, this is what we always said that we expected to happen.
It has taken a longer over the past two years to get certain approvals on some of the other things that the R-Series redevelopment plan has been submitted for approval, we think that would be the gross resource base recoverable there is about 1.3 tcf like we just adopted in 2017. The D6 satellites and something called NEC-25 with all the plans for that, that’s about and 1.5 to 2 tcf pieces potential.
Managing declines out of the D1, D4 base their new compression comes online in early 2015 and that you know that will be a challenge and then this discovery we had the MJ-1 which is the jurassic reservoir below the D6 fields, I don’t think it’s been given a name D55, we think that significant and so that’ll take some time to develop but it’s right on the facilities, that’s great news. And then an exploration further out in the Cauvery Basin down towards Sri Lanka, we’ve had another discovery and it’s called D56.
So themselves specifics and production we’re not going to let that out just yet but I think all the pieces are finally coming together after what has been -- there was a delay there I think everybody knows that and kind of getting decisions made not just for us but India and I can sort of feel that logs in and breaking in energy.
Brian Gilvary
On the rinse question, you’re right that we’re long rinse since our marks didn’t get a volumes dynamic see it how refine recruit both with the repositioning in the US (inaudible) refineries. The -- what that means in terms of overall results for last year is pretty modest.
It’s not a huge number in terms of the financials that came through. While it gives an apparent of expansion in our refining market margin, you lose a lot of that around the cost of compliance with the standards.
So it doesn’t have a huge impact on the overall financials and is somewhat modest, but we don’t normally give that number out to the market.
Thomas Adolf
Terrific. Thank you very much.
Jessica Mitchell
Next question from Jon Rigby at UBS.
Jon Rigby
Yeah. Thanks, Jesse.
Three questions actually, very quickly, hopefully, you can deal with this. The first is on Whiting.
Can you just tell me how much if any, heavy crude you were processing fourth quarter? I’m just trying to get an idea about where it was operational versus where the potentially is as its ramp up through the first half of this year?
The second is just on the Macondo. What does the cash within the PSC on pay?
I think you referenced $6 billion or so. What does that relate to?
It’s obviously allocated but not yet paid. Can you just sort of run through what that is?
And then very quickly just lastly, on the gearing, the range I guess is, you see is appropriate given the uncertainties around Macondo. What is your attitude about it?
Is that 10% to 20%, something that is probably suitable for the long-term and you go out of it, but say to extinguish the liabilities or would you as that risk falls way, look to see gearing for the corporate start to rise somewhere higher in that range that you got now? Thanks.
Bob Dudley
On Whiting, Jon, I think, we probably not going to give those figures out there, it’s sort of trading sensitive information. But we were running some heavy crude during the end of the year there.
Minimal amounts as we were commissioning them and now we’re working through that sort of post start-up vessel testing set of activities that are going on now.
Jon Rigby
So would it fair to say that there is a little benefit in the fourth quarter for the work that’s been done up here?
Bob Dudley
Yeah.
Brian Gilvary
If anything, Jon, there is probably a minor disbenefit as we were operationally bringing the units on. So, I think, there was certainly no upside coming through in 4Q.
Bob Dudley
Yeah. And there were some of that really severe cold weather.
Brian Gilvary
Yeah.
Bob Dudley
Yeah. Some of it down as well.
But that ramp-up and vessel testing activities and switching over is occurring now on Macondo.
Brian Gilvary
Yeah, so Jon, the specific Macondo question, of the $20 billion fund, we got $13.3 million in cash have being paid out, balance of $6.7 million. There is 1.2 frozen at the moment around the fisheries fund.
If you recall the fisheries, it was a cap number of $2.3 billion of which from memory $1.1 billion was paid out. There was $1.2 billion sitting in the front but that given the issues that we have now listened.
And the litigation, we’ve initiated on the civil side around the loss claims on the fisheries side, that is now as I understand is suspended in terms of payment on the balance. But right now, there is still $6.7 billion within the fund that can be distributed through various things that natural resource damages, Plaintiffs’ Steering Committee settlements, state economic claims and so.
Bob Dudley
And on the gearing levels, if you recall it was March this year, when we completed the Rosneft transaction, the gearing levels drop from over 20% down to 11% and the Board has discussed, what's the right gearing band. For now, we’re doing the share buyback program, which has lifted it up to 15%, 16% now.
For the moment of time being, we like a gearing band. We think its prudent 10% to 20%.
The board Continues to review it and discuss it but I think for the foreseeable future, we like being right in the middle and around. We’ve got plenty of capacity to go up to 20%, so no real change, Jon.
Jon Rigby
Okay. Great.
Thank you.
Jessica Mitchell
Back to the U.S. and Robert Kessler of Tudor, Pickering.
Robert Kessler
Hi. I’m hoping you can help me help me kind of bridge your cash flows from the actual in the fourth quarter to your outlook for 2014.
Of course, a number of moving parts you’ve talked about in bits and pieces. Whiting is a big one.
Working capital swinging the other ways is a big one. The extra margins from the upstream is another one, but now that you’ve got a bigger asset sale program, I’m wondering if some of that kind of carves out of the cash flow for next year.
Just see if you can just provide some kind of waterfall, some bigger numbers you can think through to go from 4Q to next year?
Brian Gilvary
Yes. And Robert, I think that you've highlighted all the big moving parts.
So you’ve kind of underlying improvements we are seeing coming through in the mix of the upstream barrels. And we saw underlying growth year-on-year of about 3.7% at 4Q to 4Q.
So that’s the first sort of dynamic and you will see that continue to come through and a high-margin barrels coming through. You’ve got the new projects at Whiting that Bob talked about.
You’ve also got a working capital build that we saw through the end of 3Q and we said that we expect two thirds of that to reverse out. We did see a chuck of it reverse out in the last quarter, but you didn't see it came through the numbers, because at the end of each year, we have this around $2 billion of working capital goes out door for the German (inaudible) comes back in.
It started to come back in already through the first six weeks of the year. So if you look at the 5.4, you take count of that $2 billion that goes out, it gets you to something more looking like a run rate that you can start to sort of see it breach through to 30s and maybe that will help a little bit.
With some working capital that we built last year and various across various pieces, there are some operational components. So as always things gets moved out through this year, then I think we are still comfortable that the $30 billion to $31 billion target is achievable.
Robert Kessler
As far as the incremental cash flows from the upstream, you of course give us an outlook for production, you gave us an outlook for Gulf of Mexico margins in U.S. and margins, but what about total upstream unit cash flow?
Can you give us some kind of guidance for a way to improvement relative to say grand prices?
Bob Dudley
Yeah, Robert. We talked about all the new barrels coming on the screen, how we doubled the margin of the average portfolio and we are seeing barrels come through actually on a EBITDA basis, you can see those in 3Q, you start to see those ratios on the portfolio come through.
So, we have never given a specific trajectory, but you certainly know you can build various models into your sort of full projects that would see those big margin barrels taking and you saw that in the fourth quarter as Gulf of Mexico now getting better by $10,000 a day. And you see that those -- the margin of those barrels is significantly impacts the overall portfolio.
So you'll see more of these ramp up with the projects.
Robert Kessler
Excellent. Last one from me, couple of just small items, the one, obviously mentioned in the upstream, the benefit of lower production taxes with the recoveries past cost and then the stronger gas marketing and trading referenced in the results?
Bob Dudley
That's correct, yeah. Both those same to be in 4Q for taxes in the U.S.
and a good quarter for the gas trading and the gas realizations outside the United States and actually inside the United States.
Robert Kessler
Any quantification of those two factors?
Bob Dudley
No, we don't give any of them, so Robert, we don't give specific guidance this specific numbers.
Jessica Mitchell
Thank you. Next, Alastair Syme from Citi.
Alastair Syme
Yeah. Good afternoon.
Three quick questions I think. Just picking up on Robert's point about the cash flow target.
Can I -- sort of the pre-working capital cash flow is also going to be up within that range. It's sort of a little bit confused about the point you are making on working capital moves.
Secondly, it's -- I guess, since we last spoke, you've sanctioned Shah Deniz and Khazzan. I wonder if you could just talk about sort of the relative economics of those projects within the portfolio.
And lastly, you have ramp up for Atlantics north and North ranking two this year. It just seems like just that gives yourself whether you are classed those projects within the base.
In other words, do we still consider there is a 3% base decline if those projects are including those projects? Thank you.
Bob Dudley
Mr. Alastair, maybe I take the first question.
No, no on the operating cash flow, because it picks up from how it's lasting. We'll see through the portfolio makes and through the new projects and so for example PSVM is now for -- you'll start to see the end line operating cash flow effective with the earnings of those assets, but conclude in 2014, so that's obviously all part of bridging for $30 to $31 billion dollars of operating cash, excluding all the working capital.
Brian Gilvary
And the two big projects you mentioned Shah Deniz, the second phase of Shah Deniz, this is the largest gas condensate field that BP is found and it's the highest rate wells in our portfolio today form a second stage expansion, 16 bcma taking into Turkey and then later on up into Europe, over to Italy with 125, 000 barrels a day to compensate with it. We're not going to give out the exact production agreements 16 bcma we sold to Turkey, the economics on this projects are long life and they are attractive.
And we who manage what I think is the largest single off-shore complex in the world with ACG and in the Shah Deniz projects you really do need to look at it as a system for us and the economics are attractive. On Khazzan, we have signed what is one of the longest life projects I have ever seen.
We are going to drill 300 wells over time to produce gas in Oman, which is becoming a gas shore region. The economics on that are attractive for us and we won’t give you the exact numbers on here.
But the gas price, which is also not a public number, may not be as high as what people might look at and draw a conclusion from it. But I will note that in that project the gas gathering facilities and the central processing plants are being built by the government itself.
We have a 60% stake in that and Oman Oil has a 40% stake in that. I am very enthusiastic about that.
We have signed a Memorandum of Understanding to use our SaaBre technology that can use the gas and get to potentially acetic acid and what could be a revolutionary process there as well, which of course we did not include that in the economics of decision on Khazzan. So I think it’s got additional phases for development as well down the road and it’s also got some condensate.
So 300 wells over the first 15 years, many more years after that I believe. So, Alastair, does that answer your question?
Alastair Syme
Yeah. That’s perfect.
It’s especially which is the one remaining on Atlantis and North Rankin sort of about whether this is growth base?
Bob Dudley
Brian and I are looking to -- Brian and I are looking at each other quizzically because it’s a fair question, I am not sure. And let’s see if, Jess, can find something.
Tell you what let’s come back, Alistair, and we will see if we can find the data out of that because it’s fairly detailed question and …
Alastair Syme
I see. So they are both…
Bob Dudley
They are both growth.
Jessica Mitchell
Yeah.
Bob Dudley
Both of them from ’13 into ’14, yeah.
Jessica Mitchell
Yeah. We don’t give the specific numbers by project as you know, Alistair, but they are both, I would say in the growth category.
Bob Dudley
Yeah. Definitely looking at the numbers.
Alastair Syme
Okay. Thank you.
Jessica Mitchell
Good. Thank you.
And we will take the next question from Irene Himona at SocGen.
Irene Himona- SocGen
Thank you. I had two questions please.
So, firstly, you indicated the current $9.2 billion provision for the Plaint, is at least $1 billion too low and probably, more given unsettled claims sort of going to the system? There used to be a deadline and I believe it was April ’14 for filing such claims for economic losses.
Is that deadline still legally valid? And my second question going back to Whiting, if I may ask, when do you actually expect the unit to be fully up and running, so to ramp up to plateau as it were and is it at that point that the 1 billion cash flow contribution becomes relevant and is that likely to happen this year basically?
Thank you.
Bob Dudley
So, Brian, on the claims?
Brian Gilvary
Yeah. On the claims, Irene, basically well we started with the PSC settlement but originate did various calculations what we believed the costs would be and then provision for those costs and that was a $7.8 billion.
You probably recall that that number then went to $9.6 billion around the fourth quarter of last year and then we reversed that out that to $9.2, so lots of moving parts. There isn’t -- I think what we have said is, there were two substantive issues that we raised a year ago around the way in which the agreement was being interpreted by the court and we appealed those decisions.
One of which we have received a favorable ruling on from the Fifth Circuit Court of Appeals on the matching of revenues and expenses. So that won’t resolve and now the court is looking to have that getsapplied around those matching of revenues and expenses.
And there is still a separate issue which is sitting with the Fifth Circuit around causation, that is to say that we put the agreements in place to ensure those people damaged by this bill were compensated. However, it appeared that there being a de-linking of causation in the interpretation of the agreement that one we still have there.
So until that issue gets resolved and we have a framework for matching of revenues and expenses, we can’t determine what the future provision might be around business economic loss claims. So I certainly can’t say at this point that we are underprovided by a $1 billion as you have just suggested.
I think there is a $1 billion of determinations setting inside the fund. They may well, the majority of which weighing well need to be re-determined throughout of the matching process or depending on what happens around course action.
Bob Dudley
And the April deadline?
Brian Gilvary
Oh the April deadline, so the dead line is actually set as the earlier -- later of it would’ve been April 14 which is a sunset floors and it’s actually 12 months after dated which the fairness appeal was ruled on the fairness of the settlement agreement but now it was really -- we had it couple of weeks ago. We still working through what that actually means but typically the 12 months after that through all the final plans to coming.
Bob Dudley
In our rewriting we are ramping it up now and yes we are projecting $1billion of incremental cash flow this year for the year, obviously there is some environmental assumptions around that at the current environmental -- you know the current environment that supports that $1 billion forecast we are going to progressively ramp it up. We can’t be specific on the pace because we are going to fine tune it as we go and of course is a trading sensitive number so we’re not going to comment on the pace of fine tuning the ramp up.
Brian Gilvary
I think that really -- Bob makes really important point figuring the light how these spreads stays out where it is today was $19 that’s clearly upside in those numbers as you get to four ramps. So there will be -- to the degree it ramps up early, delay having spread as low compensates for taking little bit longer but we don’t know and I like having spread which is bigger.
So right now $19, $1 billion is comfortably independent $19 spread.
Irene Himona
Thank you.
Jessica Mitchell
Thank you Irene, next from Doug Terreson at ISI. Doug Terreson - ISI Good morning and congratulations on positive execution everybody.
Bob Dudley
Thanks Doug.
Doug Terreson
Bob returns on capital were under pressure for the super measures during the past three years and on this point thus your environment comments underscored the company’s commitment capital discipline today and the spending profile is supported too. So my question is and I have two questions, first given the more challenging environment for returns but also the desire for growth how did BP ensure that it sustained its discipline if there is corporate planning process given recent replenishment of the portfolio but also the more challenging environment for returns, and then second some of your competitors are increasing emphasis on returns on capital so once if we can get update on the message that you got is the most important, was they are changing and specifically how ROC plays into the banking?
Bob Dudley
Yeah Doug I think this is kind of the horde of the sector which is sort of out of favor to a degree and I think what I’d say as return on capital employed (inaudible) I’m sure you go through history and when it’s suits companies talk about turn on capital employed and then when it doesn’t seems on so don’t. But I’m -- and I’m going to fall back a little bit on BP in the sense that we divested $40 billion of assets which had more than 50% return on their capital employed.
So by definition our overall capital employed is going to take a notch down, we think that’s absolutely the right thing to do but the kinds of things that we will if it is a little patience that we are on March 4 going to go and talk about this quite a bit more but I do believe here it sort of fundamentals. We’ve said $24 billion to $27 billion for the rest of the decade, we are going to have the discipline, we are going to invest in carefully and what we think are good margin projects we will taste those in time so that we can make sure we can generate sufficient operating cash flow to have some distributions back to shareholders, make sure we can have a sustainable dividend policy through the decade and there are differences in the portfolios of different companies and you have heard us say many times we have a biased oil, we like oil its high margin products and then selectively in gas.
So that’s kind of we’ve been in a nutshell but remember that $40 billion out at 50% returns has kind of shape some of the fundamentals of the company.
Doug Terreson
Sure, sure okay thanks a lot.
Jessica Mitchell
Moving now to -- moving now to Theepan Jothilingam at Nomura.
Theepan Jothilingam
Good afternoon and thanks Jeff, few questions please just firstly Bob you mentioned Russia in your remark so just wondering are there any specific mask trends that we should look for over the 12 months (inaudible) how much more can BP to contribute on integrations that, secondly Brian, just come back to modeling in the upstream, I think you’ve talked about the margin mix and then I just want to clarify just on unit OpEx on the base portfolio for this share and you said going out flat or down and so that the latter being that you’re benefiting of more barrels at the fixed cost and then just lastly on the Paleogene Gila. How much further prospectivity do you see there in the Paleogene and sort of what are the next steps in terms of price of oil and drilling?
Thank you.
Bob Dudley
Okay, on Russia. So taking these two large oil companies, Rossneft and TNK-BP merged them together.
And I would say that integration moved pretty fast, about 800 to top 1,100 in TNK-BP people came across into Rosneft and you're really do have a mixture of business processes. And I can see it and I can see it in the pace of which many things are happening there.
Both companies have got a lot of professionals. The milestones I would expect you to see from BP, in addition to the kinds of things that we push at the Board processes in terms of governance and your planning processes in capital allocation.
But I would expect you to see and hear about expertise and experts from BP going and working in with Rosneft on specific issues, problems, projects, water flooding, artificial lifts, seismic interpretation, corrosion expertise, pipelines and environmental work. That would be one thing that we think is important.
So I would look at that. We -- I believe a lot of really good Arctic acreage is taken.
That's fine, because we effectively own nearly 20% of that and carried explorations. So we like that.
So I look at the exploration results coming forward as milestones or success of the company itself, Rosneft. And then for us, I know we have expertise and we're looking for carefully selected opportunities onshore.
It might be unconventionals in oil, it might be some of the heavy or tougher oil developments that we can work on together in joint ventures. There is no rush.
This is going to be a multi-decade relationship. Those are sort of things I would look at in the next year.
And then depend -- on the Paleogene, we're going to continue the appraisals of Tiber, Kaskida, the Chevron operated markets and projects which we're in there together. We know there are further opportunities out there.
We have a large acreage position and so we're going to selectively look at what we -- we want to drill for exploration. It's a large province.
We might do things with other companies as well and then of course in December, the big Gila discovery just further reinforce the importance. And it's a longer term province, Gila.
We'll look for technology that can keep up. So we're not going to rush and get out in front of the technology, the 20-K technology we're working on with Kaskida right now.
It's going to be a big play. And I think, I don't know if the potential is for it to go down in the Mexico as well, but there are other things in the Gulf by the way in Mexico that the industry will certainly be interested in.
This is a play for the next decade that's I think is a fair comment.
Brian Gilvary
Theepan and then on the cost question…
Theepan Jothilingam
Yeah.
Brian Gilvary
The internal performance metric we look at around cash costs in the upstream decreased '13 versus 2012. Now primarily these divestments as we take some assets out.
On a unit production cost basis, it increased by about 5% and that again reflects the volume that we've divested. So it's pretty hard to sort of see through in terms of -- they both are going on an underlying basis.
And if you look at over the last five years, unit production costs for the sector have grown about 6% to 15% over that time period. We're kind of in the pack of that.
And we did see some increase on a unit basis. But going forward, we would expect to remain comparative within the sector.
And of course, we’re also ramping up exploration activity in all the new projects that are coming on stream as well. So you'll start to see this sort of smooth out overtime, but it’s something you have to look at on a long run of course it's not in any specific long quarter or one year.
Theepan Jothilingam
Okay. So there is no particular sort of leverage to let's say the gun barrels is coming back this year against the fixed costs just on a unit basis?
Brian Gilvary
It will hard for you to say, if you'll see all the new gun barrels, new projects come on stream, very clearly you see the Abu Dhabi concession volumes come out. So it's going to be hard for you to sort of see through that, but we're trying to give much as guidance as we can as the year progresses.
Theepan Jothilingam
Great. Thanks Brian.
Jessica Mitchell
We'll take the next question from Lydia Rainforth at Barclays.
Lydia Rainforth
Thanks. And yeah, actually just one question from me.
You've made a considerable efforts in the last couple of years to improve the efficiency and availability of assets in the upstream. I was just wondering if you can give us an indication of where we stand now on reliability and availability index compared to where we were two years ago and how much we’d see that improved going forward and [what an] optimal level would be?
Bob Dudley
Yes, good question and really important point. I mean we’ve got our upstream availability now running 88% reliability which is -- this has continually improved over time, each 1% reliability is worth between 150 million and 200 million a year.
This has been a very good year, the number of turnarounds are down and of course we can keep this reliability up. That’s how the operating cash flow stays up.
And this sort of virtuous circle of safe reliable operations is good business because we have such state running. And having made a considerable investment in turnarounds now this is part of the story of why we see improvements this year and we will see more improvements next year.
We’ve had those increased operating efficiencies and this year in the Gulf of Mexico most certainly, Alaska's new well work, the North Sea still has some improvements that yet need to be but they are coming as well. It is a really important point.
And that’s why we’ve highlighted that 88% operational efficiency this time in our numbers.
Jessica Mitchell
Thank you. Question now from Martijn Rats of Morgan Stanley.
Martijn Rats
I have two, I will try and keep it short. First of all, it’s a matter of detail, in the $30 billion to $31 billion for next year in terms of operating cash flow, what is the assumption embedded in there for Gulf of Mexico, was there a related payments?
And secondly, I wanted to ask you about this point that you just made about the bias towards oil. (Inaudible) rule, and when he presented your energy outlook for 2015, I thought he made a very strong case for the opportunity that consists in gas.
And also looking at some of the biggest project managements you made last year, (inaudible) the project in Southern Asia and, they have a gas bias it looks lately and I was wondering when the underlying perhaps this bias towards oil might be steepening at all. I was wondering if you could…
Bob Dudley
Well, Brian, on the assumption on the Gulf of Mexico.
Brian Gilvary
Martijn, I mean anything we can let you know about is the things which are in the public domain. That will be the recall the criminal settlement that we had last year around back to 2000, late 2012 around the DOJ and the SEC.
So there will be payments going out associated with those this year, that was a schedule that was set up over five years in the case of the DOJ criminal settlement and three years for the SEC settlement. That will go out this year that part of the plan.
And then there is ongoing litigation costs which are built into the plans and the ongoing cost of what is now a much smaller organization associated around the Gulf of Coast restoration organizations. So that may be only the things out there but they have led into the plans, so to figure that we can see what we think those costs are going to look like they’re led in already.
Bob Dudley
Okay, and Martijn, really interesting point of our gas and oil and for those of you haven’t had a chance to look at, I think everybody might find it interesting this energy outlook of 2035 which you can download off of our website. And gas is a growing share of the market going forward, but all of them are growing.
So while the share of the coal may come down, natural gas will go up, we sort of think by 2035 about, I mean I call it the rule of 27, so I can remember it. But 27% of the market share of energy will be oil, 27% natural gas, 27% coal by 2035.
But to get to that, you’re going to need -- if this forecast turns out to be right another 19 million barrels of oil per day to get there by 2035, even though its market share is lower because the demand for energy just keeps growing, which is the equivalent of another United States and another Saudi Arabia all coming out there in terms of being able to supply that. So oil, we think, is going to be continually valuable, 90% of transport fuel in 2035 will be oil based or liquids based.
So gas is different, it’s regional. So you’ve got the price of gas in North America, it’s three times that much in Europe and it’s five times that much in Asia.
So we want to be very selective about where we develop gas. And there is good economics probably all three of those but those two projects you mentioned are very economic, but they are not in North America.
Martijn Rats
All right. Thank you.
Bob Dudley
Thanks Martijn.
Jessica Mitchell
Moving now to Stephen Simko of Morningstar in the U.S.
Stephen Simko
Hi. Good afternoon, everybody.
I have two quick questions and the first one will be highlighting this regional gas comments you just made, Bob. In terms of North American dry gas, is there anything from here that can be done in the portfolio beyond divestments in terms of just getting cost down or improving performance, I know, Q1 obviously, going to be best quarter in some time.
But just some commentary there on what can be done to improve the results? And then I don’t think this has been touched on, but in terms of Gulf of Mexico pricing, any idea of just kind of the light crude glut in the Gulf Coast that might develop in the near-term.
Would -- as far as Gulf of Mexico production, what is BP’s exposure to light versus medium output in the Gulf of Mexico? That’s it for me.
Thanks.
Bob Dudley
Yeah. Okay, Stephen, both good questions.
I mean, we were running our gas business in U.S. try to make it breakeven around $4 in Mcf.
So right now, of course, with cold weather prices are up close to the $5. But dry gas is very challenged in the U.S.
and so we are not running any rigs in dry gas, we, of course, hold our production resources there, so we are focusing on liquids-rich gases as much as possible and that I think is what you find most people’s strategy to be. I think for BP going into things like gas to liquids, if you are thinking that far out, I think that requires a lot of capital, a lot of infrastructure, I think we are focusing on that.
So we want to run a tight efficient gas business in North America. We’ve got a lot of work going on to further improve that efficiency.
In a way the Gulf of Mexico, turning to that for a minute, that crude, extra crude that we do see in the Gulf of Mexico and some way is almost a natural hedge between that and Whiting for us. But in terms of the specifics, Brian, you have worked and run trading for awhile.
Brian Gilvary
Yeah. I mean, they have to hand the extra mix of the light versus the medium in terms of Gulf of Mexico, but you all have seen that grids like Mars have been discounted quite heavily to Brent and actually the de-linked from the Brent price now, actually you’ve seen the domestic crude rebalanced in the United States.
So there is some impact on realizations and you will see that come through in future quarters. But the market ultimately return what those balance price are, I think, the last time I look Mars is discounted round about $14 to Brent which follows the pattern that we’ve seen at WTI given the oversupply of crude oil as the oil shale grow in the United States.
Bob Dudley
And I think with these lower realizations, I think is worth noting for us, the cash impact for us in 2014 is positive. It's not anyway because we increase in production more than off-setting that lower realization.
Is it okay, Stephen?
Stephen Simko
Yeah. Very helpful.
Thank you very much.
Jessica Mitchell
Next question comes from Colin Smith of VTB.
Colin Smith
Yeah. Hi.
Thanks for taking my question. Just a follow-up on the realizations, one, as you noted, Brian, realizations or rather market prices fell quite a low for Gulf of Mexico crude but that wasn’t really visible in your realizations which held up very well for the U.S.
and I just wondered if you comment about? And the second, I think was you noted that the trading performance in downstream have been pretty weak and I just wondered if that was in anyway connected with anything to do with (inaudible) or EMEA what you think those issues might mean for you in terms of the ongoing profit from that business?
Thank you.
Brian Gilvary
So, specifically the question around supply and trading is a 4Q issue in terms of being weak in the fourth quarter. The actually year result for supply and trading both in oil and gas is a good year.
So we do have very good start to the year. So in first half of the year the 4Q was a weak quarter for the supply and trading business for the oil side.
It was actually driven by some positions actually de-linked back to the domestic position in United States, but frankly, I wouldn’t -- we don’t normally typically go into the specific of those. And then in terms of realizations, a lot of our barrels do price of Brent related prices you see come through.
To degree Gulf of Mexico barrel stay disconnected and de-linked from Brent, we may start to have some impact on realizations going forward, as Bob said. We are comfortably seeing production growth in the Gulf of Mexico where it was more offsetting that.
Colin Smith
The U.S. realizations quite a bit of that is actually linked to Brent, is that right?
Brian Gilvary
Well, typically, Gulf of Mexico barrels are priced of Brent, so because ultimately there is international trade forward. What you’ve seen happen in the last quarter and last six months is a de-linking now that link back to Brent.
So actually now there is thousand at pricing off of local prices which were low marked WTI.
Colin Smith
Right. But you didn’t really see that in the 4Q to 3Q change in realizations for your U.S.
barrels, that was really my question?
Bob Dudley
Yeah I think you’ve got a whole -- you have a whole mix of things going on with the gas realization being stronger than the liquids realization going through the fourth quarter as well. So I think you will see some of these things clean out as the year progress this year.
Colin Smith
Okay. And they are MiFID in MENA?
Bob Dudley
No. We’ve done everything we need to have in place around the new MiFID regulations and indeed the Dodd-Frank Regulations.
So we comfortably have structured things as we need them to be able to continue to participate in the market but none of those had any impact on 4Q.
Colin Smith
Thank you very much.
Jessica Mitchell
We’ll take the last question from Fred Lucas at JP Morgan. Go ahead Fred.
Fred Lucas
Hello. Thanks Jess.
Thanks guys. A few questions, firstly which upstream projects that you think is operating to sanction in 2014.
My second question is it was a great year for exploration. It’s also a burdensome year for exploration expenses.
I wonder going forward to the two go hand-in-hand? And my third question is around portfolio positioning in the Middle East North Africa region.
BP clearly had a breakthrough in Oman and that’s why we’ve had some exploration success in Egypt. We also lost the concession in Abu Dhabi.
You’ve excluded Jordan, the unconventional play there hasn’t worked. This got to be a question mark over what happens going forward in Libya.
I just wonder if you could share some comments about BP’s portfolio positioning in the MENA region and perhaps where next and if Iran is on your radar screen? Thanks.
Bob Dudley
Okay. Thanks.
Thanks Fred. First on 2014, right now, we're expecting around five FIDs to occur in the variety of different geographies, in the U.S.
and Africa and South Asia .So we've got a list of five. We’re not going to lay those out just yet.
We’ve got partners that we need to get the approvals with. Your -- you asked a second question, while I was looking up something on MENA.
But what was your second question?
Brian Gilvary
Yes. It’s around (inaudible).
Yeah, you’re right, Fred, to the degree that we ramp up the exploration spend, assuming you have the similar success rates that you had previously. Clearly, the more dry holes leads to more write-downs.
So you have two things who go hand in hand. But as Bob said, it was almost successful year in quite a long time, certainly over a decade, last year in terms of the exploration and the commercial viability of some of the finds.
But yes, last year those -- we did get a lot of exploration write-offs coming through in the 4Q that is linked to the higher exploration spend.
Bob Dudley
Yeah. And I think that exploration write-off is not steady.
It’s lumpy depending on individual wells. 4Q seemed higher than what I would expect going forward.
On MENA, MENA is interesting because it is an important area of the world for us. You're right.
In Jordan, we tried the unconventional gas. It wasn't there.
We gave a good effort at it. It’s unfortunate because Jordan is a country that has no energy really and needs it but that one was step away from Iraq where we managed a 1.4 million barrel a day oil field with -- called Rumaila, one of the second largest field now in the world operating.
It provides probably half money from energy into the treasury of the country of Iraq. I think that's going extremely well.
In Algeria, we continued our work and operate in In Amenas and In Salah concessions and we’re back to work now in Algeria particularly In Salah now with more work on both of those projects for expansions probably in 2015 now. We do have large exploration areas in Libya.
I would describe it as being in hibernation and I am glad we don't have production today. But the prospects still remain there both offshore and onshore Libya and offshore is of course the most perspective for us.
Abu Dhabi, the concession was not renewed for anyone. The big -- we still operate there on the Marine concession which is still a very significant concession but we and I think Total, Shell, and Exxon each step down 140,000 barrels a day on the offshore along with the one Portuguese company.
And they'll make a decision at some point down the road here. We still have offices in the Emirates where were we manage a number of our Middle East activities and of course, Oman is a very, very big action.
So in Egypt, we’ve been operating in Egypt since the 1960s. We’ve had no disruptions from the oil production in the Gulf of Suez of the gas production minimal maybe, but primarily gas production has continued in the North.
We remain committed to working in Egypt and so, I think we have actually a fairly sizeable leaner position with the potential to grow.
Fred Lucas
What do you think of Iran, Bob?
Bob Dudley
Iran, we have not had meetings on Iran with government. Somebody said, I had a meeting with the government of Iran.
Well, the head of -- Iranian President came to Dallas and spoke to a lot of people. So that’s the only meeting we’ve had which is I wouldn’t count as a meeting.
Until laws are clear and sanctions are clear, we are not going to drift out of anything around those laws until we have a clear signal that that’s an appropriate thing to do.
Fred Lucas
Got it. Thank you very much.
Bob Dudley
So if I could ask you -- thank you very much for everyone. Really, really, good questions, everyone of them.
As we head towards 2014 and beyond, we look forward to seeing you on the 4th of March. We will do that through webcast.
It will be Brian, myself, Head of the Upstream, Head of the Downstream, and then we will have some teams at Travel after that. It will be live.
It won’t be a recorded webcast. So you will be able to participate.
And again if I could just say, with the kinds of things you are going to hear is about the capital discipline we put in place. We realize we work for our shareholders.
We want to be shareholder-friendly. We don’t want to fall into the trap of generating lot of cash and then bring it back into projects not returning some of those distributions to shareholders.
We treat our portfolio as it is something to manage. We’ve lost some of the emotional hold on assets through this difficult three years and we look forward to telling you more about it in early March.
So with that, again, Happy Chinese New Year to everyone on the line and we look forward to being in touch. Thank you.