Oct 29, 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. This is BP's Third Quarter 2014 Results webcast and conference call.
I'm Jess Mitchell, BP's Head of Investor Relations, and I'm here with 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 Brian.
Brian Gilvary
Thanks, Jess. And welcome everyone to today’s webcast.
Before we go through today’s call, I would like to say how deeply saddened we all are by tragic loss of Chrystal [ph]. The oil industry has lost one of its most distinguished champions, a charismatic leader and a man for whom I had great personal respect and affection.
We will all miss him greatly. Turning to today’s results it has been an eventful quarter with significant volatility and uncertainty both geopolitically and in the markets.
BP’s third quarter results have shown further progress in our business operations along with strong operating cash flow which supports delivery of the 10-point plan we laid out to you three years ago. I will start with a brief overview of the environment before taking you through the numbers in more detail.
I’ll then provide the usual update on our U.S. legal proceedings, followed by the business highlights for the quarter.
At the end there will of course be time for your questions. Starting with the environment; oil and gas prices have shown significant volatility over the last decade, recently we have seen a prolonged period of Brent crude trading around $110 per barrel.
In the third quarter this fell to an average of just under $102 per barrel and we have seen a significant decline in recent months with Brent averaging around $88 per barrel in the fourth quarter to date. A number of market fundamentals are driving this trend.
Global supply has increased from the return of shift in production in a number of locations, as well as continued production growth in the United States where inventory storage also remains relatively high. At the same time there is weekly demand growth globally.
In China, demand growth has weakened to roughly half the rate of twelve months ago. Henry Hub gas prices also fell in the third quarter, the cold winter in the United States at the start of the year led to some large spikes in the gas price followed by an increase in supply and the significant build in inventories.
These supply and inventory increases saw prices falling through the middle parts of the year with stocks now around average levels ahead of the forthcoming winter in the United States. As you would expect, we have seen some impact from lower oil prices in our results today and the outlook remains uncertain.
In the environment, we benefit from being in integrated business with a strong downstream but we expect weaker oil prices will impact our results while these conditions prevailed. Turning now to the financial results in more detail, BP’s underlying replacement cost profit in the third quarter was $3 billion, down 18% on the same period a year ago, and down 16% on the second quarter of 2014.
Compared to a year ago, the result reflects a much lower contribution from Rosneft following the significant depreciation of the ruble, as well as lower oil prices and the associated tax duty lag effects. Lower oil realizations and the absence of one-off benefit in the third quarter of 2013 related to the Trans Alaska Pipeline System, partly offset by recovery in the downstream environment.
Operating cash flow for the third quarter was $9.4 billion. The third quarter dividend payable in the fourth quarter increases to $0.10 per ordinary share, an increase of 5.3% year-on-year.
This reflects our confidence in delivering our 2014 operating cash flow targets and the robustness of our financial framework in a weaker oil price environment. Turning to the highlights at a segment level, in the upstream, the underlying third quarter replacement cost profit before interest and tax of $3.9 billion compares with $4.4 billion a year ago and $4.7 billion in the second quarter.
Compared to the third quarter of 2013, the result reflects lower oil realizations, the absence of the 2013 one-off tax benefit already mentioned, and higher DD&A, partly offset by increased production in higher margin areas, primarily the Gulf of Mexico and higher gas realizations. Excluding Russia third quarter reported production versus a year ago was 2.7% lower, primarily due to the Abu Dhabi onshore concession expiry in January.
After adjusting for this, and for entitlement and divestments impacts, underlying production increased by 4.1%. Compared to second quarter the result reflects lower oil and gas realizations, slightly higher DD&A and lower gas marketing and trading results, party offset by increased production in higher margin areas.
Third quarter production benefited from the absence of seasonal adverse weather in the Gulf of Mexico. Depending on weather and the closing of the Alaska package sale to Hilcorp, we expect fourth quarter reported production to be slightly lower.
Turning to Rosneft, for the third quarter of 2014 we have recognized $110 million as BP’s share of Rosneft’s estimated underlying net income, compared to $810 million a year ago and $1 billion in the second quarter. BP’s share of Rosneft’s estimated production for the third quarter was just above 1 million barrels of oil equivalent per day, an increase of 4% compared with a year ago.
Geopolitical uncertainty in the region continued in the third quarter but did not have any significant impact upon Rosneft’s day-to-day operations. Financial performance was adversely affected by the significant depreciation of the ruble, as well as by lower Urals prices and the associated tax duty lag effects.
In July we received our share of Rosneft’s dividend in respect of 2013 which amounted to around $700 million, net of taxes. BP will continue to comply with all relevant sanctions.
We remain committed to our strategic investments in Rosneft and hope for diplomatic solutions to the current issues. We have worked in Russia over many decades and continue to believe in the opportunities that reside in this vast hydrocarbon province.
Rosneft’s recent first discovery in the Arctic’s Kara Sea is a clear indication of the long-term potential of the region and its importance in balancing the world’s energy demands. In the downstream, the third quarter underlying replacement cost profit before interest and tax was $1.5 billion compared with $720 million a year ago and $730 million in the second quarter.
The fuels business reported an underlying replacement cost profit before interest and tax of $1.1 billion in the third quarter, compared with $340 million in the same quarter last year. The increase reflects a significantly stronger refining environment; stronger supply and trading, and a higher contribution from our fuel business, underpinned by the Whiting refinery.
The lubricants business continue to deliver consistent performance with an underlying replacement cost profit before interest and tax of $340 million, compared with $330 million in the same quarter last year. The petrochemicals business reported an underlying replacement cost profit of $70 million in the third quarter, compared to $50 million in the same period last year, mainly reflecting improved margins in the acetyls business.
Looking at the fourth quarter, in the fuels business we expect a similar level of turnarounds to the third quarter of this year. Additionally, we anticipate lower seasonal demand versus the third quarter to negatively impact margins in both, the fuels and petrochemicals businesses.
In other businesses and corporate, we reported a pre-tax underlying replacement cost charge of $290 million for the third quarter, compared to $390 million a year ago. This reflects a number of one-off benefits in the quarter.
Our full year guidance of an average charge of $400 million to $500 million per quarter remains unchanged. The underlying effective tax rate for the third quarter was 41% compared to 31% a year ago.
This primarily reflects the impact of the strengthening of the U.S. dollar on deferred tax balances and a significantly lower contribution of equity accounted income from Rosneft, which we reported net of tax.
We continue to expect the full year effective tax rate to be around 35%. The charge for the Gulf of Mexico oil spill was $43 million for the third quarter, primarily reflecting the ongoing costs of running the Gulf Coast Restoration Organization.
The total cumulative pre-tax charge for the incident to date is unchanged at $43 billion. This does not include any provision for business economic loss claims that are yet to be received or processed.
There is a small provision for some claims that have been processed and are not subject to appeal within the claims facility. As we have previously advised, it is still not possible to reliably estimate the remaining liability for business economic loss claims.
We will revisit this each quarter as we continue to contest what we consider to be unreasonable claims, a process which could take some time. Regarding the Clean Water Act, as you know we will be appealing the recent gross negligent ruling.
We continue to believe that our original provision of $3.5 billion represents a reliable estimate of the penalty in the event we are successful in our appeal, and we have maintained the provision at this level. Today’s stock exchange announcement includes further information on the provision and contingent liabilities associated with this matter.
The pre-tax cash outflow on costs related to the oil spill for the third quarter was $290 million. The cumulative amount estimated to be paid from the Trust Fund has now reached $20 billion.
The previously reported headroom in the Trust of approximately $700 million has now been utilized, primarily by higher estimates for claims administration, and also charges in the quarter for business economic loss claims and natural resource damage estimated costs. Going forward, additional costs not provided for, will be charged to the income statement as they arise.
At the end of the quarter, the aggregate remaining cash balances in the Trust and qualified settlement funds totaled $6 billion, including $1.1 billion remaining in the Seafood Compensation Fund, with $20 billion paid-in, and $14 billion paid-out. I will provide a more general update on the legal proceedings later.
Turning to progress on divestments and our objective to divest $10 billion of assets by the end of 2015, agreed deals have now reached $4 billion. These include the sale of a package of assets on the Alaskan North Slope, the farm down of 40% of our interest in the Oman Khazzan project, the sale of our Texas Hugoton and Panhandle West gas assets; and the sale of our Global Aviation Turbine Oils business.
Our intention is to use the post-tax proceeds from this divestment program predominantly for shareholder distributions, with a bias to share buybacks. Moving to cash flow, this slide compares our sources and uses of cash in the first nine months of 2013 and 2014.
Operating cash flow in the first nine months was $25.5 billion, of which $9.4 billion was generated in the third quarter. Excluding oil spill related outgoings, underlying operating cash flow in the first nine months of 2014 was $26.7 billion, $9.8 billion higher than a year ago.
This includes a working capital release of $2.3 billion year-to-date of which $1 billion is in respect of the third quarter, in part reflecting the recent fall in oil prices. Note, as with previous years, we expect working capital in the fourth quarter to include an outflow for German Mineral Oil taxes, which is typically around $2 billion.
Organic capital expenditure was $16.3 billion in the first nine months and $5.3 billion in the third quarter. We now expect capital expenditure for the full year to be around $23 billion, relative to our guidance of $24 billion to $25 billion.
In the first nine months of the year we have brought back $4 billion of shares, including $1.6 billion in the third quarter. The cumulative total since early 2013 is now $10 billion.
Around $8 billion of this reflects the proceeds of the sale of our interest in TNK-BP, with the balance coming from the proceeds of our $10 billion divestment program. Net debt at the end of the third quarter was $22.4 billion with gearing of 15% compared to 13.3% a year ago.
This largely reflects the impact of our share buyback program over the course of the year. Our intention is to keep gearing in a target band of 10% to 20% while uncertainties remain.
Turning to our financial outlook, the strong operating cash delivery in the quarter and the year-to-date total of $25.5 billion leaves us on track to deliver the $30 billion to $31 billion of operating cash flow planned for 2014. This will mark the delivery of our 10-point plan.
Relative to 2013, it reflects the higher expected contribution from major projects in the upstream, the progressive ramp-up of the Whiting refinery, and some reversal of the working capital builds seen in 2012 and 2013. Looking out to 2018, and notwithstanding the impact of a period of lower oil prices, the principles of our strategy remain as we laid out to you in March.
Our intention is to build on this platform to realize growth in underlying operating cash flow and to manage the capital in a very disciplined way in order to grow free cash flow, and in turn, distributions. This is underpinned by our quality upstream project pipeline, our repositioned downstream, and the opportunities we see to drive efficiency across the group.
As already discussed, oil prices have weakened considerably in recent weeks. This is prompting the whole sector to consider the implications of a sustained period of lower oil prices.
As we stand today, our balance sheet is very robust with relatively low gearing of 15% and strong cash balances. In 2014 we expect underlying operating cash flow to cover capital expenditure and dividend payments.
Our financial framework aims to underpin this position over the long term. Overtime free cash flow grows materially at average oil prices of $100 per barrel while we see downside support at average oil prices of around $80 per barrel, the level at which we sanction projects.
In addition, we have the surplus cash from our $10 billion disposal program that is currently being used to fund our buyback program. So we have a lot of flexibility to withstand the period of low oil prices.
Our first priority within the financial framework will always be the dividend. Our aim is to grow dividend per share progressively, in accordance with the growth in underlying operating cash flow from our businesses overtime.
We then judge the use of cash for discretionary reinvestment and other forms of distribution on an ongoing basis, with a bias to distributions. We will look very closely at levels of capital spend.
Where we have room at the margin to pare back or re-phase spend without compromising future growth, we will do so. Relative to current guidance, I expect this could make a difference of $1 billion to $2 billion in 2015, with lower spend in the downstream following the completion of the Whiting Refinery Modernization Project.
As we move further into 2015 you might also expect to see the benefits of a greater focus on streamlining activity, a process we began some 18 months ago in response to resizing the Group. We have a strong drive towards operating efficiency currently underway in our upstream.
In the downstream we have introduced a more streamlined organization structure that we expect to drive more efficiencies across the portfolio, and we have around 60 simplification initiatives at the corporate level. At the same time our industry tends to be self-correcting so one would expect to see some deflation if current oil prices remain low relative to recent history.
We will keep you updated on our plans as we move into the New Year. Now let me give you a brief update on the main Gulf of Mexico related legal proceedings in the United States.
The first and second phases of the MDL 2179 trial have been completed, and on the 4th of September, the Court issued its ruling on Phase 1. As we outlined on our investor call, BP strongly disagrees with the Court’s gross negligence ruling.
The law is clear that proving gross negligence is a very high bar, and BP believes that the Court’s findings were not warranted by the evidence presented at trial. BP will appeal this decision and in the meantime, has filed a post-trial motion with the District Court asking the Court to amend its findings or order a new trial.
We have done this as BP believes the Court’s findings and conclusions are based substantially on expert witness opinions that the Court appropriately and expressly excluded from evidence at the trial. The District Court’s ruling is the first of three steps in the process of determining the amount of penalties under the Clean Water Act.
The Court still needs to rule in the Phase 2 proceedings on the amount of oil that was spilled and the penalty phase is scheduled to begin on the 20th of January 2015. Appeals notwithstanding, by law, the penalty is not automatically assessed at the statutory maximum.
The District Court must consider eight statutory factors in determining an appropriate penalty between zero and the statutory maximum. BP Exploration & Production will submit strong evidence in support of these potentially mitigating factors.
Regarding business economic loss claims, a new policy that provides for the matching of revenues and expenses in calculating lost profits for business claims is now in place, and business economic loss payments have resumed. In the third quarter $120 million was paid-out on business economic loss claims, this compares with over $810 million in the same period a year ago.
BP’s motion to allow it to seek restitution from claimants who were overpaid as a result of the previous policy has been denied, and we have filed a notice of appeal with the 5th Circuit. Separately, BP is seeking Supreme Court review of the issue of causation as it relates to approval of the settlement and certification of the class.
In the MDL 2185 securities litigation, the trial for the class action is set for the 18th of May next year, subject to the ongoing appeals around certification of the class BP believes that all of the plaintiffs’ securities claims are meritless and we will continue to vigorously defend against them. As we have said before, we are determined to pursue fair outcomes in all legal matters while protecting the best interests of our shareholders at all times.
We compartmentalize these legal activities and BP’s operational delivery teams remain fully focused on our core business. Turning to the Upstream, we continue to focus on delivery of this year’s key milestones.
16 exploration wells have already been drilled this year, on track for our stated goal of completing between 15 and 20. We have recently made three discoveries; at Xerelete in Brazil, Vorlich in the North Sea, and Guadalupe in the Gulf of Mexico, bringing the total for the year to five.
We also continue to acquire new acreage. In the third quarter we accessed the outer offshore Canning Basin in Western Australia and were also awarded a number of blocks in the Gulf of Mexico western lease sale.
This is in addition to the 24 blocks we were awarded in the Gulf of Mexico central lease sale in the second quarter of 2014. We have also been awarded the El Matariya and Karawan concessions as part of the recent bidding round in Egypt, subject to final approval.
Turning to major projects, the start-up of Kinnoull is now in progress which will bring the total number of start-ups this year to six. Our year-to-date start-ups continue to ramp-up their production as planned, and are contributing significantly to operating cash flow this year and beyond.
Of the seven planned major project start-ups in 2014, the one remaining project Sunrise Phase 1 in Canada is on track, with construction of the central processing facility over 95% complete. Final commissioning continues and start-up is expected to begin in December.
Turning to operations, in the third quarter we successfully completed five turnarounds; three in Alaska, as well as Bruce in the North Sea, and Mad Dog in the Gulf of Mexico. This takes the total completed for the year to seven, against our planned total of eight.
One final turnaround is scheduled for the fourth quarter. Additionally, operations at the Rhum gas field in the Central North Sea have resumed an accordance with the agreed temporary management scheme.
We have now completed all of our priority wells for 2014, with just one remaining to be brought online. We expect them to contribute two-thirds of total new well production in 2014.
Lastly, in India the government announced a new domestic gas price formula as part of a package of oil and gas sector reforms. This increases the gas price applicable for existing production and is a positive first step towards creating the more competitive economic landscape required to encourage the development of India’s gas resources.
We expect further clarity on the new pricing policy and the premiums for future developments to emerge in due course. In the Downstream, we continue to deliver strong operational performance across our refining system with Whiting now fully operational.
Additionally, we have sustained strong year-to-date Solomon availability at 95% during the year. We continue to focus on the overall quality of our portfolio.
The Lubricants business is delivering consistent results by focusing on growth markets, premium brands, and advantaged technology. In the third quarter our Petrochemicals business completed a strategic review.
This resulted in a decision to halt operations at some of our older and less advantaged facilities while continuing to retrofit several facilities with new technologies. We expect these changes to lower fixed and variable costs, as well as to improve returns.
And as previously announced, Tufan Erginbilgic became the Chief Executive of the Downstream on the 1st of October. Tufan brings a deep knowledge of BP’s downstream operations, having held a variety of roles across the segment.
Tufan is a great addition to the Executive Team. So, in summarizing, it has been an eventful quarter and one where operational momentum is continuing to feed through into results.
This is evident in our progress on major project start-ups, in further exploration successes, in the strong contribution from our Downstream with its modernized Whiting refinery and in our continued drive towards operational efficiency across all of our businesses. As we approach the end of the year, delivery of our 10-point plan is firmly on track.
At the same time we continue to work towards completing our divestment program and on maintaining strong capital discipline, ensuring we have a robust financial frame. The environment has its challenges but we remain clear on the direction and focus of BP.
So, on that note, thank you for listening and now Jess and I will be happy to take your questions.
Operator
(Operator Instructions)
Jessica Mitchell
Thank you, this is Jess back again and thank you all for holding. And we will take the first question from Jason Gammel of Jeffries.
Go ahead Jason.
Jason Gammel
Thanks very much Jess. I just wanted to ask about the reduction in capital spending for 2014.
Is this essentially a slower level of expenditure that you would expect to then slow into 2015 or is this going to natural reduction in spending levels? And if so where would you expect it to have any effect on forward production?
Brian Gilvary
Thanks, Jason. It’s basically just some slippage in the spend in terms of phasing of what we’re doing.
I don't think it will have any impact in terms of 2015, in terms of production. We just looked at where the run rate is sitting at the end of the third quarter and then looked at what we thought the likely spend would be in the fourth quarter but it’s not as a result of any intervention at this point on capital.
What we are looking now, we’re in the lower oil price region that we were sort of anticipating make them about depending on variety of circumstances. We are now looking at what we do next year with capital but in terms of this year it’s just simply some slippage.
Jason Gammel
Understood and if I could just follow-up Brian, that wouldn’t have any effect on the $1 billion to $2 billion potential flow reductions that you referenced in the comments you made earlier?
Brian Gilvary
That’s correct. The guidance we’re giving you out to 2018 was in the range of $24 billion to $26 billion.
Jason Gammel
Great. Thanks very much.
Jessica Mitchell
Thank you, Jason. Next question from Oswald Clint at Sanford Bernstein.
Are you there Oswald?
Oswald Clint
Thank you very much, Jess. Brian two questions please, thank you.
First, just on India, it sounds like you still expect the prices to move in the right direction overtime, could you maybe say what time period that might be and therefore why did you take the impairment in this quarter? And secondly, you also mentioned the successful exploration you’ve been having for 2014 and obviously on the back of 2013 I wonder if you could venture any volume numbers yet at this stage, it just will be helpful to compare to some of your competitors.
Thank you.
Brian Gilvary
Thanks, Oswald. I think on India the first point to note is actually we did get last weekend a positive signal in terms of the new formulas that have been put in place which will see our existing production, the prices we realized increased by just over $2 mmBtu.
So I think we see that as a positive signal. The question mark going forward is more around actually understanding what the various statements meant around premiums associated with new discoveries and how they will actually pan out going forward.
I think what we saw was a positive development, that was good, but as we looked at the D6 existing carry that we had on the books with the uncertainty around what those premiums would look like going forward from an accounting perspective we thought it was prudent to take the impairment that we did. And we continue to work with the new Indian Government going forward in terms of what those premiums may look like and I think the big picture here is there is a terrific resource that sits off the Coast of India, and the development of that resource we believe is crucial to the growth of Indian gas, and we want to basically with our partners, Reliance on the ground, they developed that gas with right incentives, that's what we intend to do.
On the exploration side we haven't quantified the volumes at this point, the five discoveries that we've had this year in Angola, Egypt, Gulf of Mexico, North Sea, most recently in Brazil, we're certainly appraise of those discoveries and what they look like but we have nice and pretty volumes out at this point Oswald.
Oswald Clint
Okay. Thanks for the answers.
Thank you.
Jessica Mitchell
Thanks, Oswald. Turning now to Jason Kenney, go ahead Jason.
Jason Kenney
Hi, there. Thanks for the opportunity to ask the question.
So in 2010 you estimated a number for the Trust Fund, obviously with the U.S. Government $20 billion, I was just wondering how significant is this as you like to reach that total four and half years later $20 billion, and how you see any particular commitment over and above $20 billion just going forward.
It’s obviously quite a big feature of the last four and half years of your commitment in the U.S. Gulf.
Secondly, with respect to the Rosneft dividend and the support for annual cash, I’m just wondering if you could share with us any thoughts on particular sensitivities or risks that you plan for or are aware of in respect of future year dividends from Rosneft.
Brian Gilvary
Great, thanks Jason. On the $20 billion fund, this indeed the 17th quarter now that we’ve been tracking the provision, and the headroom that have built up around $700 million just shy of $700 million, was used up this quarter based on our current estimates and administration costs going forward, the bulk of increase, but also some business economic loss claims under the new schemes being put in place that actually went out on each quarter.
We will now provide for those and they will actually – and charges that come through in terms of payments going forward will now be charged to P&L given the $20 billion is exhausted. That said we still have $6 billion of cash in the $20 billion fund for distribution against the original provisions that we did around ensuring those people that have legitimate claims that are compensated.
So there is still $6 billion in cash that we distributed with $1.2 billion is associated with the Sea Fund that was put in place, but effectively now any new things over and above what's within the overall $43 billion will be taken to the P&L as we've done in previous quarters. So I don’t think there is anything more significant to say about it and the fact that now as business economic loss claims come through, it's probably worth same day under the new scheme is been put in place around the matching supervised by the Court [ph], they have been dressed particular reduce from where they were a year or two years ago when the scheme first got up and running.
On Rosneft dividend it comes through once a year typically, we received $693 million in July of this year which is a very important signal out of Rosneft, and we would expect to receive a dividend at the same time next year, it would be based on 25% of earnings from 2014, our share of that 19.75% and at the moment we don’t see any major risk to that dividend but in terms of the overall financial frame it is nothing like a significant as it would have under the old regime where we own 50% of TNK-BP. So in terms of financial frame it doesn’t really cause us any major concern and certainly we have no signals that it's something we need to worry about, it’s quite a long way off in terms of next year’s financial parameter, that’s nine months away, so it’s not something which we are concerned about the moment.
Jason Kenney
Perfect, I appreciate the view.
Jessica Mitchell
Thank you, next question from Theepan Jothilingam of Nomura.
Theepan Jothilingam
Thanks, Jess and afternoon Brian, few questions please. Could you just come back quick on the business economic losses, could you just clarify what's been awarded but not paid and the level that you are still sort of contesting?
My second question is just on working capital, we’ve seen some unwinding in Q3, I was just wondering sort of relative to the built we saw in 2012, 2013, can you just remind us how much you believe is left? And the last question was just conceptually buyback versus use of pricing acquisitions, clearly BP share prices come back but there are some opportunities I guess in the Upstream, could you just sort of way up the opportunity cost between the buyback and potentially buying resource attractive prices?
Thank you.
Brian Gilvary
Thanks, Theepan, maybe I’ll take the second question first because it’s probably easiest. I think we said at the end of Q3 last year that we expected ran about of the $5 billion working capital build about two-third to unwind, it's probably tracking somewhere around that for this year.
So what we've seen, I think $2.3 billion come out already so far this year. The actual bulk of it in the third quarter actually came from price that was somewhat unexpected but as we see the working capital reduce – that the price reduce so you see some working capital release that we saw at the end of the quarter.
So I wouldn’t say that there is any further guidance we give around that but the fact that were still on track to 30 to 31 [ph]. On business economic losses, I think the actual payments that went out in the quarter were in terms of cash, I think in total we have 130,000 business economic loss offices that was submitted as of the 1st of October but within the quarter ran about $120 million went out as payments and within the provision we provided around $200 million within the quarter.
So there are certain bell claims that go through that we don’t have the right of appeal and I think the cutoff is $25,000 and below we can’t appeal, but we can appeal things above that and we do that where we don’t believe it matches up with the matching policy we put in place. On buybacks versus acquisitions, it’s a great question Theepan.
In some respect I would say given where we are with the portfolio and having brought on-stream the projects that we laid out in 2011, as part of the 10-point plan for 2014, our balance sheet has got progressively stronger as the average cash margin of the portfolio is increased. What that means is that we’re actually in a very good position to certainly withstand a sustained period of low oil prices in the range of $80 to $85 a barrel within the existing frame.
And I think as we’ve said in many investor calls previously on any meetings, I think a period of $80 to $85 a barrel probably offers more opportunities for us than threats and on that basis we will look at how we deploy the cash that we have available to us in terms of investments, in terms of buybacks, in terms of progressive dividend and in around and of course acquisitions will certainly be an option but not of the corporate nature, just to be absolutely clear on that, we've been clear on this in the past. But in terms of being able to deepen strategically in some existing positions we have I think there may be some opportunities for us.
Theepan Jothilingam
Okay. And just come back to the BL [ph], is there sort of dollar amount you would say that BP would be contesting at this point or it is been already paid out, I think you gave an update couple of quarter back on that number.
Brian Gilvary
Let me just – Theepan, we'll come back to you towards the end of the call on that if that's okay. I think we've contested something close to a $1 billion of the old claims but we have the existing issue where we have gone to the call, we have a request on call back which was denied, on claims they were actually gone out but we will be appealing that decision as we laid out in the investor presentation.
Theepan Jothilingam
Okay.
Jessica Mitchell
Thanks, Theepan. Over to the U.S.
and Doug Terreson of ISI, are you there Doug?
Doug Terreson
I am, good afternoon, Brian and Jess.
Brian Gilvary
Hi, Doug.
Doug Terreson
Brian the Downstream results were very good during the period led by the strength in the fuels business although it seems like global oil demand maybe deteriorating somewhat based on the tone of your comments. So my question is if you can elaborate on some of the trends that you guys are seeing in global oil demand, and also any view that you may have for coming periods.
Brian Gilvary
I think what we’ve certainly seen is as we mentioned in the presentation slowdown in the Far East around demand. Actually if we look at this year and particularly in Europe with the issues that we've had post 2008 we're obviously seeing some growth in the fuels markets businesses.
So we are actually seeing some growth around that, and of course but we're also at the same time seeing inventories build globally which is what's creating the softening in the oil price. We’ve also seen some additional production come on in places like Libya, and of course the Shale Oil production.
So I think what you’re actually seeing now is a rebalancing which is leading to the softer oil prices. You are also seeing – as I said Asia demand in growth falling, even though China is still growing relative year-on-year it's not growing at a same sort of rate that we were seeing a year ago.
Doug Terreson
Okay. And then second, given BP’s historical position and the positive performance that you guys have enjoyed in the Deepwater, I want to see how recent marketing changes in that area might affect here and immediate term outlook, maybe you talked about deflation earlier and what the specific implications might be for BP of that immediate term?
Brian Gilvary
That’s a great question, actually it's what we've been looking at Doug for the last twelve months. It's sort of interesting, you look at the ultra deepwater rig, this is something that the Dennis Looney [ph] on the team has brought back to us, we discussed this on a number of occasions but the ultra deepwater rig inventory back in 2007 I think they’re on 33 rigs, and we have seen that grow to 150 at where we are today, we’ve already seen five ultra deepwater rigs being laid ideal.
So I think what you’re getting at this period now as the sectors curtail some of the capital that was being pulled into three years ago, and the general sector message around capital. Softening in the oil price some of these ultra deepwater rigs being laid ideal, I think you will start to see a softening in rig rates going forward, and I think from our perspective that can only help projects like Mad Dog Phase 2 which I know Bob has talked about in previous quarters around the region of Mad Dog Phase 2, that can only possibly get better in terms of where we are given that say, project that will probably require some high one to two rigs to be committed over period of five years.
Doug Terreson
Good for BP. Thanks a lot.
Brian Gilvary
Thanks, Doug.
Jessica Mitchell
Right, back to the U.K., and a question from Thomas Adolff of Credit Suisse.
Thomas Adolff
Hi, Jess, thanks for taking my questions, two please. In March you highlighted some organizational efficiency measures and something you called the 60 simplification initiatives, I wondered whether you can comment on the period [ph] it is, and whether you actually already reflected this in your cash flow guidance from 2015 onwards.
The second question is I guess around projects, you highlighted CapEx flexibility to the tune of $1 billion to $2 billion next year, you also made a comment around we sanctioned projects at $80 a barrel [ph]. I wonder whether in the low oil price environment as today you can sanction projects like Tangguh expansion, browse of LNG, certainly did this projects need a high oil price.
Thank you.
Brian Gilvary
Great, thanks Thomas. So on the 60 simplification projects this is something we sort of initiate and put in place over 18 months ago, it was January of last year and it’s ready precipitated by the $42 billion of disposals of assets.
So a very reposition portfolio and exiting a number countries, places like Colombia, Venezuela and Vietnam and so on, led us to look back at the corporate structure that we have that was supporting the effect of the footprint that we had left. And that has led to a period of 18 months coming after this year.
We have now laid in plans that we’ll see quite a reduction, we haven’t given any guidance around numbers on that but we laid out the 60 individual projects that we’ve looked at, it's things like combining corporate functions that we have. So for example previously we had three different audit teams, they are all combined under one leadership now which means that they go into a business as a single unit rather than three separate units.
So it’s actually how do we get things more streamlined and simplified. I don't think – this isn’t something we should have a stop at something which is continues and you continuously look to try to improve, but we have seen significant benefits coming through already this year in part but they are built into the forward plans as we look out to 2018 in terms of what we showed you in March.
So in some respect it’s part of the risk mitigation around the delivery of the cash flow targets we laid out already. On the major projects in terms of $80 a barrel, everything we’ve sanctioned at $80 a barrel now for the best part of five or six years that I can recall.
With the stress test down to 60 with new cases up to a 100 then we lay out a plan for the short term. We’re in the process right now looking at where we will set the oil and gas prices and the refining margins for next year’s operating plan.
And I think the key with things like Tangguh rig, we already have a number of contracts in place, being put in place, and we already have two consortium being awarded on front end engineering and design feed for the Tangguh project. So I think to degree we get some of those margins locked in ahead of time that still makes the margins and the projects pretty attractive going forward.
On browse we’re still in the process of working on the floating LNG option in terms of its development concepts it’s too early to say.
Thomas Adolff
Okay, thank you.
Jessica Mitchell
Thank you, Thomas. Next question from Irene Himona of SocGen.
Irene Himona
Thank you, Jess, good afternoon, Brian. My first question going back to the issue you highlighted in your prepared remarks that’s in 2015 we should expect the greater focus on the streamline activities you were discussing, is that a new initiative additional to what you presented in March?
So that’s the first question. My second question on Whiting, if you can perhaps give us a bit of disparity on the Q3 contribution and where we are currently given the present price differentials.
And then finally you took $550 million impairment on petrochemicals after strategic review, and I wondered if you can highlight what particular negative that review uncovered that led to that decision? Thank you.
Brian Gilvary
Thanks, Irene. So sorry, the first – I'll just take the last question first as my team let me know what the first question was again.
On the petrochemicals, given the market that we’ve seen particularly in the aromatics business, so it’s in sort of the piece that we have in China, we’re seeing a lot of over capacity come in. We have moved on our own technology internally and we had a strategic review with Bob in the third quarter and we went through where we think that market will be going into the future.
So on that basis we chose to close a number of what we call sort of older plans which historically we made a multiple with the anticipation that the oversupply might actually work its way out in future years, we don’t believe that technology is sustainable going forward and also we thought that the right thing to do is to shut those plants down and take the impairment which we did through the quarter. So I think the first question was around the new initiatives, there is still the 60 initiatives we laid out earlier this year on the corporate side but we’ve also just recently gone through a restructuring of the organization within downstream under two front leadership and I think that will create some efficiency opportunities in terms of how the Downstream is running going forward and Lamar’s also gone through some major changes within the Upstream in terms of that structure.
In some respects ahead of what we’ve seen the deal prices recently getting ready for ensuring that we stay competitive going forward in the lower oil price environment and one tangible example of that would be the low 48 separation. And if you look what we’ve done with North American Gas, it's probably a good example of it but we’ve now appointed the new Chief Executive, David Lawler from Sam Rich but we've now moved the office to separate location in Houston.
We expect at least 400 jobs will go and that’s been announced already. And we already start to see the financial benefits of the restructuring that business is going through.
So I think this is just something it will be a theme that you will see more off, but I think just to make the really important point, this is all activity driven so the greater we can take activity out we can make things simpler, it’s not simply about cutting cost it’s actually about taking activity out of the source while we focus on safer reliable operations.
Irene Himona
Okay. And Whiting?
Brian Gilvary
And on Whiting, we saw an improvement in terms of the third quarter comparison obviously, now we’ve got the 6K [ph] is awfully commissioned. The average light heavy spread for memory for the quarter was just on $20 a barrel through the third quarter.
We’ve seen that come off through October so that would clearly impact the results in the fourth quarter but in terms of third quarter we saw still good margins compared to where we sanction the project out and the production stay pretty confident from where we ramped it up to, so Whiting was operating well through the third quarter.
Irene Himona
Thank you very much.
Jessica Mitchell
Thank you, Irene. Back to the U.S.
and Blake Fernandez of Howard Weil, go ahead Blake.
Blake Fernandez
Hi, thank you for taking the questions, good afternoon. First question is on divestitures, you’ve got about 60% of your target still ahead of you and given the collapse in oil prices when they think that could be a challenge I’m just curious if you have an appetite to sell more assets in order to achieve that or if you perfectly find to maybe coming short on that target?
The second question back to the Lower 48, from what I understand there has been a bit of a progressive shift away from gas towards liquids and now with this new phenomenon, lower prices a year and potentially, I guess going to battle with OpEx [ph] if you will, I’m just curious if the new CEO driving that strategy or is that still being dictated from BP corporate level? Thanks.
Brian Gilvary
Okay, well on divestitures it’s a great point you made it was – I'm sort of sitting here pleased that we did the disposals that we did, when we did some of the $115, $110 a barrel because clearly at these prices it’s pretty tough to go fair sort of prices the way we were getting previously. So I think it’s good that we don’t have that bigger challenge ahead of us.
Equally I think where we said the next tranche of $10 billion compared to the original $38 billion program would be a very different mix of assets, that big first tranche that sold we off the $38 billion were typically late life asset target depreciated and quite cash accretive and we got some very attractive prices given where the oil price was at the time. The next tranche of the 10 which would now go forward is a far more diverse and dispersed group of assets that we’re looking at and things like the aviation oil businesses that we talked about.
So I’m not concerned about being able to deliver on the $6 billion, in fact actually I’ve got line of site on at least half of that as we look into 2015. So I’m comfortable that we’ll be able to deliver on that going forward.
But you are right to point out that with the softening of the oil price I think coming back to one of the earlier questions, I think there is as many buying opportunities as selling opportunities at the moment depending on what part of portfolio you’re looking to deepening. In terms of Lower 48, we’ve gone through quite a transformation of that business over the last four or five years certainly since the come down and having shutdown the size of it were down, we're down, we've gone from 24 rigs in 2010 down to three rigs today, those three rigs we have one in Wamsutta, two in Haynesville.
And if you look at our overall gas position about 21% of it are liquids driven within that mix, so sort of gas liquids NGLs, that sort of come out of the mix. Dave Lawler is working with Lamar, it’s a 100% owned company still at BP.
So Dave is still working with Lamar in terms of the strategy what we do going forward with that business, but I think all the early indications are very positive in terms of what we can do with existing footprint and looking at how we transform that going forward. So I think there will be more to come on that next year as we step into 2015, and we started to give you some more line of sight on the performance of that business.
Blake Fernandez
Okay. Thank you, Brian.
Jessica Mitchell
Thank you. And we’ll take the next question from Jon Rigby at UBS.
Jon Rigby
Thanks, Jess, hi Brian. So three questions if I can, quite quick ones I think.
The first is, in terms of how you think about CapEx, should we be thinking about the way you use your oil price sensitivities and think about you’re trying to balance cash in and cash out through the short term period, the weakness as you might see it so couple of sort of $1 billion through every four or five bucks of oil price or is there something you can take out at the operating side as well. Second question is on Iraq, given what’s going on I guess both the security situation and I’m guessing back Baghdad not being the most efficient place in the world right now is – could you just update on how you’re operating there?
And the last one, just a point of clarification on Lower 48 business, is the own idea to just drive a more efficient business around the sort of permits that you have right now or is it a process of divesting exposed to Lower 48 or indeed is it a vehicle, perhaps expanding your presence in the Lower 48 onshore? Thanks.
Brian Gilvary
Thanks, Jon. So if I just pick up a CapEx question, no, that’s not the way we’re thinking about it.
We’re not going to trying and cut CapEx commensurate with what drops the oil price, I think that would actually put a risk to long-term future cash flow. I think the key here is to not do anything sort of joke in terms of CapEx, I think it’s important that we continue to invest in the future Upstream projects and there will be a natural real collaboration of capital in and capital out in the industry, you’ll start to see the deflation kicking.
If we saw a period of probably typically 18 months of sustained at these sort of levels you start to see the CapEx naturally raise just itself. But at the margin we’ll always have projects where we compare things back or rephrase but not looking at cutting CapEx in line with the oil price, I think that would actually put a parallel future growth that we laid for you in March.
And the key here is the balance sheet can more than comfortably handle a period of $80 a barrel and if we come back to what we talked about in terms of the repositioning the portfolio we have a portfolio that was the backend of the profile that we showed you back in March, naturally balances more towards $80 to $100, and today it’s actually cash breakeven, it is below $100 a barrel. So I think that’s kind of an important backdrop as we think about CapEx, so we are certain there won’t be sort of cutting down in a jerky fashion would make put a paddle on the future growth.
In terms of Iraq, clearly the violence in the northwest of the country so far has not affected any of BP’s operations and we are continuing in a south pretty much unaffected with the same production from oil, and we are confident in delivering the continued operations and production growth into the future. We don’t typically talk about security concerns that occur like this, we think that will be an appropriate at this point but we did conclude the new Rumaila contract terms which Bob did in September.
And that also included reissue of production with 2.85000 barrels a day, that's 2.85 million barrels a day to 2.1 million barrels a day. And so things are still going incredibly well notwithstanding what’s happening actually in the north and west of the country.
On the Lower 48, really this is about the fact that we have this terrific position in what is being the most prolific oil and gas basin in the last five years if you look at the growth of what’s happening with the shale. However, we were applying different models in terms of how we run it, it’s more as Bob has said on previous call, it’s more of a manufacturing business, and it’s really bringing that manufacturing know how to bear.
And then in terms of options going forward, I think Dave Lawler has got a pretty much blank sheet of paper to work with in terms of coming up with options of how we can grow that business. And we have a lot of choices around what we do with it going forward but I think the key was actually to get it operating more efficiently on today’s footprint, and then look at where we can take it going forward.
Jon Rigby
So you would see this potentially a growth vehicle?
Brian Gilvary
It is potentially a growth vehicle going forward but Jon in the short-term this is really about making sure that it was running as profitably and efficiently as some of the other independents, and that’s really Dave Lawler has brought in.
Jon Rigby
Okay, perfect.
Jessica Mitchell
Thanks, John. Gordon Gray of HSBC, are you there Gordon?
Gordon Gray
Yes, I am, thanks. Just one thing left to ask actually, it's about the fact that in the last few years you spend a lot of time and a lot of capital expenditure on assets integrity in the Upstream, I’m wondering if there are any figures around that, that you could give us for the outcomes in terms of how you are seeing better out time across the asset base?
Brian Gilvary
It’s a great question Gordon, it’s one that we have picked up and I think Bob touched on in the last call, actually 2Q results. We went through in – forget these numbers right from memory, we went from a period in 2011 of about 48 turnarounds, 35 a year after 22 to 23 the year after that, I think this year we're running about 8 to 9 turnarounds.
And so what we are starting to see already is a major improvement in reliability that given how much of the Upstream because it's actually being taking on the services over that period of time. We still have areas where we can improve and that’s important going forward but we have seen some major efficiency improvements in all basins globally and that’s really come of the back of that with the focus on maintenance and we continue to do that going forward.
We are now into more even program of turnarounds and back to something which is more normal but not at levels that we are running out over 2011 through to 2013.
Gordon Gray
Great, thanks.
Jessica Mitchell
Thank you. Next, Martin Rats from Morgan Stanley.
Hello Martin, are you there? Not getting a reply from Martin, so we’ll go to Lydia Rainforth of Barclays.
Lydia Rainforth
Thanks, Jess and good afternoon. Couple of questions if I could and just coming back to India, would you able to just confirm what gas price assumption you’re putting in that also within what as you would need to see to stop further write downs within that area.
And then the second one, you did referenced earlier there is very strong project portfolio that you still have within BP, I mean – can you just – what you see as the highest percent BP project hurdle in development or presumption at this stage? Thank you.
Brian Gilvary
Thanks, Lydia. On India, the new formula that was laid down last weekend effectively sets a price now from the 1st of November through to 31st of March, and that price equates for our net production at around $6.17 mcf, so that’s kind of a price that was assumed going forward.
It’s based on a basket of full different market prices, I think it’s an important segment in terms of move towards – moving towards market based pricing and then we’ve taken some pretty conservative assumptions around what we believe the premium would look like but there is so much uncertainty around that it's impossible to say at this point. So that’s really – I mean the key here is the premium, we’ll need to incentivize that the potential for the new developments and the discoveries that we have can come on-stream.
So I think that’s the sort of the backdrop to the impairment, and with the uncertainty around that going forward we felt that it’s prudent not to take the impairment that we did this quarter. But other than that a I really can’t share any more information around or assumptions on prices.
Sorry Lydia, your second question was around the projects?
Lydia Rainforth
Yes, it was just given the [indiscernible] exciting project portfolio that you have, I’m just wondering where you see the highest returns within the portfolio amendments in terms of developments of project that still not functioned yet?
Brian Gilvary
So while we look at returns across the portfolio clearly tied back to an existing facility will have much higher returns than the four Greenfield developments, and we have a whole mix of different projects and I actually have the list that we shared back in March where we still have four projects to come on stream next year. Some of those deepwater, some of those tiebacks, and then 2016 through 2018 I’d see here list a of 15 projects, each one in different phases of development in term of appraise and presanction but its – I think there is quite a portfolio of projects we have and we have the opportunity to optimize which one’s we do and how we phase those within overall focus on returns in cash flow.
So a tieback is clearly going to give you the biggest bank for bulk right now, it's something like it's tieback in the Gulf of Mexico is clearly very attractive opportunity but equally we need to make sure that we also focused on the big Greenfield developments, things well checked in these phase 2 in terms of future growth in production in places like that.
Lydia Rainforth
Okay, thank you very much.
Jessica Mitchell
Thank you, Lydia. And we’ll go now to Alastair Syme of Citi, are you their Alastair?
Alastair Syme
Yes, I am Jess. Thank you and good afternoon Brian.
Two questions, you mentioned the seven projects coming on-stream this year. could you give me a little bit of a sunrise but on average across that portfolio are we sort of on-time and on-budget as the original expectations, and as you look at some of the major capital projects that are working through the system does that statement also hold true?
And then secondly, I think you mentioned on previous calls that you did expect to sanction Mad Dog too before the end of the year, I wonder if that still applies?
Brian Gilvary
Well on the last one I suspects that’s not going to happen now, I think we’re actually in the middle of it and as I said earlier, I think given what we are seeing with the rig rates right now, I think it’s right to just hold a little and I think that will probably get sanctioned in the first quarter of next year but there is no question the current market is providing a big opportunity for Mad Dog Phase 2, so what's already become a far more attractive project I think may well get more attractive but that's held off. So I wouldn’t expect that we would sanction that now in the fourth quarter, probably more likely the first quarter.
In terms of Sunrise, it is on schedule in terms of what was originally laid down with the first team coming through in December and we expect first production in the first quarter but as you think Husky last week did say something about some cost overruns that have seen on that, but I would say generally throughout portfolio from the new central projects team that was put in place back in 2009 we are starting to see now projects come through on-time on-budget the way we set them up to operate and the greatest example I can give you is probably is PSVM which I think now hit plateau from the initial production, and it represents I think something like 9.7% [ph] of the world’s production of oil. So it’s quite a major achievement that coming on and hitting a plateau.
But we never rose rest of in project space and we never take advantage, it's kind of key that we stay focused on the – especially during this period of lower oil prices that we stay focused on costs in terms of those projects in bringing projects
Alastair Syme
And in supplementary, what do you think if using sort of 10-point what’s delivering that improvement as a more contingency and better budgeting, better supply chain?
Brian Gilvary
I think it’s all of the above but Bert tells me [indiscernible] both as far as marketing will be front-end loading and the front-end engineering that goes into the pre-planning and when you sit down with all projects team, and they talk you through things like [indiscernible] Phase 2 x is right now on track with everything that we’ve laid out in terms of that project, and Oman Khazzan, the amount of front-end engineering that goes into that to ensure that we have the right design in place that we don’t try and reinvent where these trends as major step changes for us.
Alastair Syme
Thank you very much Brian.
Jessica Mitchell
And next, Guy Baber in the U.S. of Simmons & Co.
Guy Baber
Thanks very much for taking my question. My apologies for revisiting this but I wanted to competing on the capital spending team a bit and I was just hoping if you could elaborate on the comments you already made about the $1 billion to $2 billion flexibility in CapEx.
But could you talk a little bit more about where specifically in the portfolio you see the most flexibility to potentially adjust lower those plans? And you talked about how internally you may rank some of the primary spending buckets, I mean could you trim in the Downstream, is there opportunity to perhaps slow exploration if that was necessary?
And then in the point of clarification, do we still think about the flow for CapEx over the next couple of years of $24 billion or will that be under review? And then I had a follow-up on production also.
Brian Gilvary
Well on the $24 billion, that’s clearly not a slow because we've just indicated $23 billion for this year, and we will look out what the programs looks like through to next year but other than saying that we will look at the margin, I think we can trim $1 billion to $2 billion. A proportion of that will certainly come through the Downstream because we're obviously having completed the Whiting investment which is a very major investment for us.
And we’ve also shrunk the refining footprint radically over the last 14 years, we've taken 14 refineries out through mostly sales but also one or two closures over that period. We have nothing like the capital footprint that we would have had kind of 15 years ago.
So I think there is a natural – you will see some of capital naturally drift down in that space, there will be some of those projects which as a margin we may choose not to purse but they are really at the margin, it’s not the sort of big projects that we've laid down for you in terms of the future growth. So I think I would just pause and wait till we come around to 4Q results where we'll give you specific guidance for 2015, and whether that outlook looks very different going forward.
But clearly the $24 billion is not a flaw given where we are today, and the oil price stays at $80 a barrel, you will start to see some natural deflation kick in, but it is like it takes a period of 9 to 18 months for that to happen.
Guy Baber
Okay, great. And then I’m trying to better understand the 4Q guidance for the decline in production.
But you’ve been performing very well so far this year, reliability is improving, you have the six new projects that should be up, you've completed your priority wells. Even if the Alaska deal close sooner it would still appear like you should deliver some production growth in 4Q quarter-on-quarter.
So I’m just trying to better understand if there is any substantial down time in 4Q, any unplanned outages or specific areas where you expect lower production or that’s just an element of some conservatives within the guidance? Thanks.
Brian Gilvary
What we do, I mean 3Q benefited from the absence of any really sort of seasonal adverse weather impacts of hurricanes from the Gulf of Mexico which specifically have a quite a major impact for us in the quarter. So we did benefit from that in 3Q.
Equally in 4Q we have the uncertainties that you just flagged around Hilcorp and closing Alaska deal. We still have some weather risk because the hurricane season doesn’t officially close at the end of November or certainly from my time, when I lived in the United States it didn’t close until the end of November, so it can still surprise you.
And we also have some maintenance activity at places like Thunder Horse, a shift down in Australia, and some maintenance working in Lower 48, these are maintenance programs that we wouldn’t typically classify as turnarounds but nevertheless they will have impact on volume. So we’re expecting volumes to be slightly down, we’ll see what happens around weather mostly what happens around the closing of Alaskan piece, but there is the potential that it may be flat or it may be slightly up but right now the balance and probabilities are simply signaling that it will be slightly lower.
Guy Baber
That's helpful. Thank you.
Jessica Mitchell
Thank you, Guy. Fred Lucas from JPMorgan.
Fred Lucas
Thanks, Jess. Good afternoon Brian, couple of question if I may.
We know what the range is for CapEx and you’ve eluded to what the potential cut of the margin to CapEx could be, can you put a number to the operating cost pool even if you can’t put on a figure to how much you might be able to produce out of the efficiency, perhaps I’m just trying to get an idea of how big that is and let’s say 5% or 10% mid do to cash flow. Second question is if this not good environment gets worst for its long period of time and takes your gearing to its upper limit if not through it, what goes first, the buyback or CapEx?
And just further if you could, could you give me a list of the projects for the next 6 to 12 months that you would expect to sanction Upstream? Thank you.
Brian Gilvary
Thanks, Fred. On the operating cost pool we wouldn’t really put a figure out there and we haven’t put that out there but I think it gets back to activities and taking activities out.
And any comments I’d probably make as we look at the third quarter results, we are seeing cost running below deflation, places like the Upstream, so where we start to see a little bit of a trend but I don’t want to sort of signal that as something major this point. So I think there will be some benefits and efficiencies coming through, almost same as come through already but there is more to follow on that, so I can’t really give you guidance on specific numbers in that space but there is no question in some of the efficiencies and reducing activities going to have benefits.
I don’t anticipate certainly in the range we’re now $80 to $85 – the question on the upper end of the gearing, if we did reach that it’s highly unlikely, I think the oil price would need to be down more like $70 to $60 a barrel and then I think you get some major corrections in terms of forward program. So, I don’t think it will be something which will transpire, I think the key here is that we continue to stay focused on the capital that’s really supporting the growth of the business going forward that’s committed.
And then in terms of the projects that we have coming up for 2015, we have – I'm going to come back to you on that Fred.
Fred Lucas
Okay Brian. Could I just slip a quick one there on Angola LNG, hearing some quite disturbing news about when that plant maybe back up and running and also what the plant repair cost might be, any comment on either of those facts?
Brian Gilvary
I think the only information we have is some shift tax will be operated but we’re now expecting the restart in 2015 and I don’t think there is going to be guidance as to when in 2015, but that is a concern. And then in terms of the 5 FIDs for next year we’re looking at around projects that we would be sanctioning, it would be Mad Dog Phase 2, West Nile Delta, Trinidad Onshore Compression, Zinia Phase 2, and Western Flank B.
Fred Lucas
Alright, thanks very much.
Jessica Mitchell
Okay. Thank you, Fred.
Next, Chris Coupland of Bank of America, are you there Chris?
Chris Coupland
Yes, thank you, good afternoon. Just a few last crumbs I think I’ve got left just on gearing Brian, what needs to happen, what are you waiting for to consider moving your target range back to 20% to 30%, is that a long way off considering how long some of the appeals processes that you started might last?
Thank you.
Brian Gilvary
Thanks, Chris. I mean that’s really a matter for the board and the financial frame, we went from the 20% to 30%, to 10% to 20% certainly the front-end of 2011 we had an awful lot of uncertainties in place, a lot of those have been resolved.
We have $38 billion of disposals behind us, we have the reposition Russia position that allowed us to liberate a significant amount of cash that supported the $8 billion buyback program, we have certainty around Macondo vis-à-vis the criminal issues and the SEC issues they are behind us, in terms of settled and behind us. So, we've always said that we’ll maintain this going at 10% to 20% while uncertainties remain, of course there is uncertainties probably more biased towards the environmental outlook right now as they are towards the other typical issues that we might talk about.
So I think given where we are today it’s prudent to stay in a 10% to 20% range it served us incredibly well since 2010, and I think it will certainly serve us very well during the period of low oil prices which we wouldn’t expect certainly to be in that position over the coming months over the next 6 to 9 months. So I don’t think that’s something we would be moving on today but it’s something that we look out in terms of more longer range of where we think the markets are moving, and it’s always an option but right now I think it’s prudent to keep in the 10% to 20% band.
Chris Coupland
And you would say it’s not directly linked to the interest rate environment and your ability to rate that?
Brian Gilvary
No, and actually we have – I mean, if you look at what we’ve been doing over the last two or three years you will see that we’ve been quite active and we found it very straightforward to raise the debt that we needed, and we are carrying quite high cash balances.
Chris Coupland
Great, thanks.
Jessica Mitchell
Next question from Lucas Herrmann of Deutsche Bank.
Lucas Herrmann
Brian, Jess, hello, thank you. Couple of them, Brian, I wondered whether you would care to talk a little bit about some of the discussions on the board around the decision to increase dividend, I won’t say it wasn’t expected but given the nature of the environment and the relatively bearish comments that you have been making on price going forward for the next two years, it’s interesting nonetheless.
Secondly, North Sea, it almost feels as though there is some momentum in the business or beginning to build in the business, I wonder whether you just care to expand particularly with projects coming on. And thirdly, back to Rosneft, if 10% or so of your market capital or at least the value that you carry on, the book fees, and the environment relations with Russia have clearly changed whether that's permanent or not, I guess none of us know but actually it is changing by the feel of things.
Where does that lead the board in terms of thinking about the value that you have tapped in that or locked in that business at the present time, not what I'm suggesting now it’s a sensible time to be accessing but certainly a time to be thinking.
Brian Gilvary
Thanks, Lucas. So we start with board and dividend, I think we have a very lengthy discussion on dividend and where we should go with this but I think all roads lead back to strategy and the strategy that we laid out back in March to you as investors which was a financial frame that can be flexible to comparative low oil prices.
Our portfolio is naturally moving to be more balanced to $80 a barrel over the period that we laid out to you in March as said earlier. And we have down side support of $80 a barrel.
There is surplus cash available to us, both this year and next year, and therefore we felt that actually it was important signal in terms of the strategy that we lay down the continued progress on the dividend. Of course if the old price stays where it is, I mean the board will look at all these things, we've changed last year to have the first quarter and third quarter has been the quarters when we would look at the dividend with the board, and if they would consider the dividend going forward, clearly in the round we’ll look at where we are at the end of 1Q next year as to whether where we go with the dividend next.
But in terms of being able to grow it sustainably overtime is a core principal of the strategy that we laid out and we felt it was well supported by the performance this year and the financial friend that we have going forward and where the balance sheet is.
Lucas Herrmann
Okay. Thank you.
Brian Gilvary
In terms of North Sea, I think with the North Sea team with Bernard earlier in the year and I think they are pretty restless in terms of what they are trying to do around reliability what is a very, very aging asset, it’s a very late life asset. But we have seen the Andrew Field restart as part of the prerequisites for bringing to new lot and the Rhum Field restart.
And of course, we also have [indiscernible] for the Clear Ridge projects proceeding to plan, and so I think there is a lot of opportunities still in the North Sea into the future and I think the biggest thing that they are focused on is reliability business in the infrastructure along with the new projects coming on-stream. In terms of Rosneft, we have – it's a great investment, it’s something that we did strategically in terms of repositioning after TNK-BP, working with the company of oil and gas people from the industry and it’s an investment that we saw it over a 30-year period and right now it’s very difficult from a geopolitical perspective but our day-to-day operations with the business on the ground are very good with the team that we have based in Moscow, Bob was for attending board meetings which is important.
And we still think it has huge potential going forward but of course we also have the backdrop of the geopolitical concerns and the sanctions and we just hope that a diplomatic solution can be found through all of this because we believe the world – it's key that those recourses that are available in Russia can meet some of the demand that we see in terms of demand growth in the world elsewhere.
Lucas Herrmann
Okay, Brian. Thank you.
Brian Gilvary
Thanks, Lucas.
Jessica Mitchell
Moving on we’ll take a question from Rob West at Redburn.
Robin West
Hi there, Brian. My question is on Thunder Horse.
I've seen some pretty strong data coming out of the BOEM, some pretty good flow rates at the wells you’re bringing on there, I was wondering if you should comment on that and kind of expectations for next year. And then secondly, I’m kind of looking at LoSal which is looking really interesting to me, I know it’s just a new story last week but in the UAE they are kind of thinking of using some of that technology but I guess you will be operating with.
And so my question is, what kind of further running room for LoSal do you see throughout your portfolio after bringing Clarion online in due course? Thanks very much.
Brian Gilvary
Okay, thanks. On the first question around Thunder Horse, I mean I think while I would comment more generally in the Gulf of Mexico we have production peak that's just under 300,000 barrels a day during the quarter and I don’t take that as an indication going forward [ph] but nevertheless it gives you a backdrop flavor of how well the Gulf of Mexico is performing at the moment, we’ve got 10 operating rigs, four at Thunder Horse, hence why you are seeing the production volume numbers that you are seeing coming out of Thunder Horse, two at Mad Dog, two at Atlantis, and two from where we're working on expression appraisal.
We also have the three major projects in 2014 around the Atlantis north expansion we keep in mass base. So I think you are right, you will have seen some strong numbers coming through and all I would say the driller machine is working incredibly well.
We’re now running with those 10 deepwater rigs historically pre-2010 where we typically had five. So I think – and that’s a big part of what you’re seeing in terms of performance in the Upstream in the third quarter, even with the drop-off in oil prices, the underlying production growth coming out.
In terms of LoSal, it’s a great technology, it clearly moves towards enhanced oil recovery by deploying that and a place that we are looking to deploy it right now is in Clair Ridge and the Clair Ridge developments in the North Sea, and I think there is an awful lot of potential for LoSal further field outside of that region.
Robin West
Thanks very much. Sorry, my question wasn’t very clear.
I guess what I meant on LoSal, is there anything else coming through the halfway thinking you could deploy that or is it really more a function of how Clair Ridge works out?
Brian Gilvary
I think I will reserve comments on that for our Upstream Investor Day which is scheduled for the 10th of December where we’ll be able to showcase some of the things that we’re doing around all the new projects, and we’ll certainly be touching on technology as part of that.
Robin West
Alright, thanks.
Brian Gilvary
Thanks, Rob.
Jessica Mitchell
Thank you. And over to the U.S.
and Stephen Simko of Morningstar.
Stephen Simko
Hi, good afternoon. Just two quick ones and first would just be when you look at liquids volumes in the rest of the world there was something like 50,000 barrel a day sequential uptick, Q3 versus Q2 this year.
I’m just wondering what caused that. And then in terms of the recent discoveries that you guys have had the exploration in the last 18 months or so, I’m just wondering, I know it’s very early days on these but would there be an ability even now just to give a best estimate of what would be the first projects or discoveries that would be moving towards free engineering and design stages?
And that’s it for me, thanks.
Brian Gilvary
Great, thanks Stephen. In terms of the exploration success it probably is a bit premature at this point.
We have seven significant discoveries last year, five this year, actually last year was probably the best year we've had in over a decade and therefore on that basis it’s probably too soon to say which one’s we'll be pursuing first but it’s a great inventory to have available as we start to think about which projects we’ll pursue. In terms of prediction, I would guess although I don't have it at hand but we can come back to you as we probably saw some increase in the North Sea but certainly also in Angola with the club startup, and of course as I mentioned earlier, PSVM did come up to plateau as there would be some growth in PSVM through the quarter.
Stephen Simko
Great, thanks.
Jessica Mitchell
Next question from Anish Kapadia of Tudor Pickering Holt.
Anish Kapadia
Hi, and good afternoon, couple of questions for me as well. I was just wondering given that you’re seeing in the market extremely low rig rate starting to come through you’re seeing the same on the seismic costs.
And how does that affect your exploration CapEx budget for next year so that's just based from a cost perspective, and also potentially in terms of activity for next year? And then secondly, I was just wondering if you can give a bit of an update of where you are with your plans for the lower tertiary, it stays all the way kind of from exploration to potential development side of that, just kind of to get an update on that and Gulf of Mexico.
Thank you.
Brian Gilvary
Great, thank you. In terms of rigs and rig rates and seismic, I’m just trying to come back to our rig rate, I think we run something over 30 rigs and of course they are all on different contracts, typically in last three or four years we’ve already been trying to work more closely with individual suppliers to try and build longer term relationships and therefore have rate negotiated on more basically 3 to 7 year like contracts.
So depending on where they are sitting on the contract and we’ll start to see some benefits of that coming forward or not, so you will see some deflation start to kick in or as we start to renew some of the rigs but we’re not seeing a major change in the short terms that will take some time for that to flow through. In terms of the lower tertiary what were you thinking specifically?
Anish Kapadia
Just in terms of where you are at in terms of further appraisal on your discoveries that gives…
Brian Gilvary
Right, okay, I understand. So what we’ve had most recently we’ve announced is the Guadalupe discovery where we’ve hit significant oil pay in Paleogene around 30,000 feet down, and I think it’s about 4,000 feets of water.
And that of course builds on the previous three discoveries we’ve had in the Paleogene around Hela, Tiber, and Caskida [ph], and we did drill an appraisal well for Caskida last year. So I think all of that is progressing going forward and there will be more to follow on that on the Upstream Investor Day in December.
But there is probably nothing more to say at this point.
Anish Kapadia
Okay, thank you.
Jessica Mitchell
Thanks, Anish. And we’ll take our last question from Neill Morton of Investec.
Neill Morton
Thank you Jess, good afternoon Brian. I’ve just one question last and it’s a hypothetical one on Macondo.
You talked about importance of their outcomes, let’s say if in 2015 you are busy going down the various appeals routes against the gross negligence finding but meanwhile Judge Barbee pronounces in Phase 2, he holds Phase 3, and announces a penalty applying the various mitigating factors of $3.5 billion in line with your provision, do you then drop the gross negligence appeal, is it money or is it the principal? Thank you.
Brian Gilvary
I think Neill that's a very hypothetical question, that would really be a matter for the board but I think if we come back to principals, we believe the bars set for gross negligence was a high bar and we don’t believe it was met, hence the finding that we made a couple weeks back around the way in which that decision came about we intend to appeal that. I don’t believe at the end of the day this wasn’t industrial accident, it was multi-party, multi-casual, it had process safety failures individual errors and machinery failure, it was industrial accident on a huge scale, and I don’t believe one minute, I don't think anybody in the company believes for one minute that actually that the bar of gross negligence was ever met or anything was ever intended in that basis.
But the specific scenario you've laid out would really be a matter for the board, both consideration.
Jessica Mitchell
All right. Thank you, all.
Brian Gilvary
So with that I think – Neill, I hope that answers your question. So thank you all for taking the time today.
In summary it’s being from BP’s perspective another quarter of momentum, building on the strategy that we laid out for you back in 2011 around the 10-point plan. We continue to remain confident around delivery of that 10-point plan recognizing that we are in a very different environment today than we were then, and I think the robustness of the strategy that we’ve laid out will see us through during this period of uncertainty around oil price and with the very strong financial frame that we have.
And I look forward to speaking to you at the next quarter results along with Bob as we announce the full year results. Thank you very much for taking the time today.