Feb 4, 2015
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 Full Year 2014 Results Webcast and Conference Call.
I am Jess Mitchell, BP's Head of Investor Relations, and I am here with our Group Chief Executive, Bob Dudley, Chief Financial Officer, Brian Gilvary; Upstream Chief Executive, Lamar McKay, our Downstream Chief Executive, Tufan Erginbilgic. 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
Thanks, Jess. Welcome, everyone, to today’s call.
Today is an important day for BP, particularly as it marks the fulfillment of our 10-point plan and the start of a new phase. We are here to look back on a turbulent last quarter, a strong 2014 and a three year period in which we did what we said we would do, and we are here to look ahead to a tough period for the industry, but one that we are prepared for.
I will start with an overview of where we have got to in our future plans and I will hand over to Brian to take us through the detail of fourth quarter results and update you on key elements of guidance for 2015. Then Lamar and Tufan will talk in some more detail about their areas of the business.
At the end, there will be time to take your questions. First thing to say is that with 2014 now complete, we can confirm that we have delivered the 10-point plan, we laid out back in 2011.
As part of that plan, we set a series of goals that we would accomplish over a three-year period. We said, we would focus relentlessly on safety, we undertook to manage our portfolio actively while playing to our strengths and to generate around $30 billion of operating cash flow in $100 per barrel world, and we committed to strengthening our balance sheet to be more capable of weathering uncertainty.
This all had a core purpose of creating a stronger, simpler and more focused BP. As we stand today, I believe, we have achieved all that and more.
Back in 2011, we were just one year into our recovery from a major incident with multiple legal, financial, environmental and strategic implications. Progress we have made says a lot about how BP and our people have worked over the past three years.
To me it says more about BP's prospects over the next few years. We are capable to change and capable of taking on tough challenges.
To briefly summarize the key achievements, we have improved the safety and reliability of our operations. In 2014, we had fewer serious process safety incidents and a fewer leak incidents [ph] than in 2011.
To meet our obligations, the U.S. Gulf states, we completed an initial $38 billion of divestments in 2013 and have since been working towards a further $10 billion of divestments, which are well underpinned.
In the Upstream, we have made 13 significant discoveries and delivered 50 new major project startups over the last three years, while also transforming the business to operate under a new functional model. It has been a similar story in the Downstream, where we have invested in the major upgrade of our Whiting refinery, and at the same time, divested two large U.S.
refineries and some related marketing assets leaving a portfolio of more advantaged assets. In all, the choices we have made around our portfolio provided us with a more focused footprint, a less complex business and a stronger overall set of assets.
At the same time, we have resumed payment of our dividend to 2011, and have since grown shareholder distributions. This includes repurchasing $10.3 billion of our own shares, largely using funds from the sale of our interest in TNK-BP.
We leave 2014 behind with a proven track record of delivery in our underlying business and better place to navigate the new and challenging world we have all entered in 2015. The recent sharp fall in oil price is of course the big story in the industry today.
A lot has been said and written about this, so I am going to concentrate today on how BP is positioned in this environment. How well we navigate the road ahead will be a test of our business model.
We have a diverse portfolio, a rigorous process to allocate capital and an already established focus on efficiency, as well as being an integrated oil company with a strong Downstream, our portfolio has around one-third of Upstream production coming from production sharing agreements and a growing portfolio of high quality gas projects, both of which make us less sensitive to oil price fluctuations. We are a long-range business and we look to generate competitive returns across the full lifecycle of a project.
Over the last three to four years, we have been sanctioning upstream projects at $80 per barrel, while testing projects for resilience at $60 per barrel. Of course, in the current volatile times, we will look closely at each investment decision, taking account of current price levels, our ability to leverage deflation and our long-term outlook for the environment.
As and when prices look to have reset in a structural way, we would moderate these assumptions accordingly. We also drive capital discipline by constraining the total level of capital spend in any one year, taking account of the opportunities available and the flexibility of our balance sheet.
We are currently paring back activity and looking to re-phase spend to reflect the expected deflation. We are resetting our capital expenditure in 2015 to around $20 billion, well below our previous guidance.
Our overall capital budget will be the subject of ongoing review as we rework our medium-term plans. At this moment, we benefit from being an organization that is already very focused on cost discipline.
We began to streamline activity and increase efficiency some-18 months ago in response to becoming a small and more focused company. This timing gives us an advantage of the benefits that are already becoming evident and more on that in a moment.
Going into 2015, our balance sheet reflects gearing of 16.7% and we are working steadily towards divesting a further $10 billion of assets over the 2014 to 2015 period, so we are where we plan to be, but the outlook for the environment is now much weaker. The interventions we are currently making on capital and costs have become critical to ensuring we can rebalance our financial framework to the new environment.
Brian will take you through the specifics for 2015 shortly. Let me now spend a moment how we intend to deepen our focus on cost in the different parts of our business.
The background of this, as you know is that BP invested significantly in certain areas of functional capability following the Deepwater Horizon incident, which was also a period of strong inflation. At the same time, we started divesting non-core assets.
This triggered a need to streamline our supporting functions and structures, so they are the right size to support our new portfolio, without sacrificing safety and risk management in any way. At the corporate and functional level, as part of the outlook we showed you last year, we identified over 60 simplification initiatives, many of which are well underway.
You will recall this included consolidation in our global business services organization and combining a number of our corporate functions among other initiatives. As Lamar highlighted in December simplification of the Upstream, primarily reflects a continued focus on doing the right activity at the right time, active management of our supply chain and aligning business support costs with the reduced size of our operations.
It also includes making choices in our portfolio such as the restructuring of the Lower 48 and the United States. We are now further intensifying our efforts in response to current market conditions and we will be actively looking to take advantage of the deflationary opportunity.
We will do this without compromise to safety. Of course, the outcome of this is as much about the industry as about BP, so we are not going to put a number to what we think is achievable today.
We would say that we expect to at least maintain our competitive position as industry cost re-brace to the new lower oil prices. In the Downstream too, we have developed a track record of delivering cost efficiency, and Tufan has brought renewed focus to this since assuming leadership of the segment with 26 simplification initiatives currently underway.
We aim to deliver around $1.6 billion per year of efficiency savings by 2018 versus 2014, as Tufan will explain. This all works together to right size our total cash cost base.
In 2014, we saw a reduction in total group cash cost of over $1 billion relative to 2013. We expect ongoing activity to deliver further efficiencies in 2015 and to be sustainable over the long-term.
Consistent with this, we announced in December that we expect the group to incur about $1 billion of non-operating restructuring charges before the end of 2015. Given the uncertainty of the outlook, we now also see it as prudent to reset our cost base for a more sustained period of lower oil prices.
We are deepening our efforts and looking even more closely at all forms of activity across the group. This will be an area of intense focus for 2015, and we will keep you updated as we put more detail to these plans.
Turning to the portfolio, today's environment is a good reminder of the logic of being an integrated business with a focused portfolio of high quality assets. The repositioning of our portfolio following our divestments has made us less complex, with a lower risk footprint and positioned to focus resources for the greater discipline demanded by current conditions.
We keep our portfolio constantly under review looking for ways to unlock value, whether by exiting assets that no longer fit our strategy or transforming a business model that could work harder as with the Lower 48. It also includes remaining alert to opportunities for investing in assets that fit our core strategy that could arise in the current market conditions.
In the Upstream, our portfolio reflects a balance of investment in giant fields, deepwater and gas value change with strong incumbent positions in our four key geographic regions of Angola, the Gulf of Mexico, Azerbaijan and the North Sea. The portfolio was sufficiently diverse to balance exposure to fiscal geopolitical risk, but concentrated enough to allow us to focus on our strengths.
It provides a distinctive platform for the future. Our gas positions have the potential to grow operating cash improve returns over the next decade along with our established oil positions.
Our repositioned Downstream business with our newly upgraded Whiting refinery is not only an important cash generated for the group, but still has potential to grow returns as we focus on growth markets and efficiency. With respect to Russia, the current geopolitical context remains challenging.
Nonetheless, Russia remains today the world's largest oil and gas producer and we remain committed to our strategic investment in Rossneft, a position with attractive opportunities for the long-term. BP will continue to comply with all relevant sections.
Overall, we believe, we have reshaped a portfolio over the last few years that will allow us to succeed over the long-term and Lamar and Tufan will both, provide more color around their respective businesses. Turning to our overall proposition to investors, this is a slide we showed you in March last year.
Of course, a lot has changed since then, but the fundamental principles of that proposition remain unchanged over the long-term. We are pursuing value over volume, which means investing in high quality activities, which play to our strengths, divesting non-core assets and finding new ways to create long-term value through portfolio management.
This is central to our strategy, no matter what the environment. In the new environment, our focus has to be on rebalancing our financial framework to manage through a period of low oil prices, while underpinning our dividend and meeting our legal obligations in the United States.
Looking further out our aim remains to grow sustainable free cash flow through a combination of growth and underlying operating cash flow from our business and a strong focus on capital discipline. I believe, we have already demonstrated our ability to maintain an affordable capital frame.
Over time, this aims to support growth and distributions to shareholders. Looking ahead to what we expect to happen over the next few years, we see this year and probably the next several years as an industry reset phase, a period of intense change, the outcomes of which will be defined by oil and gas prices, pace of deflation, the realization of efficiencies across the sector and possible inorganic activity.
At BP, we will be focusing on a clear set of priorities. For simplicity, I would like to think of this under the four headings of delivering, divestments, discipline and the dividend.
By delivery, I mean, consolidating the underlying momentum over the last three years in our businesses through continued, safe, reliable and efficient execution. Divestments, is about completing the $10 billion program on divestments.
Discipline has two parts. Firstly, resetting the capital budget to ensure every dollar of capital spend delivers value for shareholders, paring back activity as necessary and taking advantage of deflation.
Secondly, rightsizing the cost base to match our footprint and withstand a sustained period of lower oil prices, and most importantly, the dividend, which is firmly established as the first priority within our financial framework. Looking beyond this phase and into the medium-term, we expect to be operating of a reset base, we expect this reset base to be underpinned by the next wave of upstream major projects and longer-term opportunities for resource progression.
In the Downstream, we see us moving to the next level of competitiveness and efficiency as we leverage our advantage portfolio and we will be continuing our focus on capital and cost efficiency, so there is a lot that may be unclear, particularly in this current phase but there is one point we are completely clear on. Our focus throughout will be on growing value for shareholders.
Now let me turn specifically to our full year 2014 results. Our underlying replacement cost profit was $12.1 billion.
As you would expect, in the Upstream, this was significantly affected by the weaker environment, particular in the fourth quarter. We also experienced some higher costs, DD&A and exploration write-offs in particular.
The depreciation of the ruble and lower oil prices also had a negative impact on our share of Rossneft's net income for the year. However in the Downstream, despite a weak refining environment, we delivered improved performance from our fuels marketing business and benefited from the ramp up of the modernize Whiting refinery.
This reminds us of the importance of being an integrated oil company. Post-tax operating cash flow in 2014 was $32.8 billion and as indicated has fulfilled a major goal of the 10-point plan.
Our organic capital expenditure in 2014 was $22.9 billion, $1.1 billion below the lower end of the guidance range given at the start of the year. This demonstrates our strong commitment to capital discipline.
Proceeds during the year from divestments totaled $3.5 billion, and as already noted, our gearing at the end of the year was well within our target band of 10% to 20%. We distributed $5.9 billion in cash to shareholders through dividends and we also bought back $4.8 billion of our own shares, last year.
Finally, our reserves replacement ratio for 2014 is estimated at 62%, excluding the impact of acquisitions and divestments. Now I want to walk you through the important area of our safety performance in 2014.
These charts show an encouraging overall trend since 2010, which I believe reflects the disciplined approach we are taking to our operations around the globe. Looking first at losses of primary containment or LOPCs, which reflect even very small releases of any hazardous material, we have seen a small increase in these instances against a strong result in 2013.
Newly available data from enhanced automation in are Lower 48 operations in the United States was the reason for the increase in our LOPCs in 2014 and we continue to focus our efforts in this area. We also track process safety events, the American Petroleum Institute or API industry metric.
Looking at Tier-1 and Tier-2 events combined, the overall downward year-on-year trend has continued. As regards personal safety, our recordable injury frequency rate remains level with 2013.
Safety is good business. It remains the primary focus in our operations and we are always striving to improve our performance.
Lastly, let me briefly touch on the ongoing Gulf of Mexico litigation processes in the United States. The penalty phase of the MDL 2179 trial is now underway.
This is the third of three steps in the process of determining the amount of penalties under the Clean Water Act. Following the first phase, the court issued rulings, which included findings of gross negligence and willful misconduct by BP.
We strongly disagree with these findings and have appealed. Regarding phase two, the court recently ruled that $3.19 million barrels of oil were spilled into the Gulf as a result of the incident and found no gross negligence in our source control efforts.
As we said before, we will pursue fair outcomes in all legal matters while protecting the best interests of you and shareholders at all times. Further to the recent decision of the U.S.
Supreme Court not to hear BP's appeal on the issue of causation in relation to business economic loss claims, we have a responsibility to continue to contest what we believe to be unfounded claims and I should also point out that the deadline for submission of any further economic loss claims has now been set for June 8th of this year. Brian will give the usual update on our financial impacts for the quarter shortly.
As always, we are continuing to compartmentalize these legal activities and BP's operational delivery teams remain fully focused on our core businesses. Let me now hand over to Brian.
Brian Gilvary
Thanks Bob. I will start by touching briefly on the price environment in what continues to be a very weak market.
In the fourth quarter, Brent fell to an average of just under $77 per barrel, the lowest quarterly average since the third quarter of 2010 and is averaged $48 per barrel so far this quarter. As is now well documented oil prices softened in the latter part of 2014 as market fundamentals reflected production growth in the United States, other increases in global supply and weaker global demand.
Prices weakened further following OPEC decision to maintain production in November. Henry Hub prices continued to fall through 2014 as growth of United States shale production outpaced consumption.
European and Asian stock prices fell reflecting modest demand and rising LNG supplies. Henry Hub gas prices for the fourth quarter averaged almost exactly $4 per million British thermal units and now stand around $2.70 per million British thermal units.
The overall refining environment was low in the fourth quarter impacted by the seasonal reduction in refining margins along with falling crew differentials in the United States. As you all have seen the sharp fall in oil on gas prices has had an impact on our Upstream results for the fourth quarter.
However, the full run rate effect of the fall in prices will any be visible as you move through the first quarter and beyond. As Bob mentioned against this backdrop, we are making a number of interventions to rebalance our financial framework that I will come back to shortly.
Turning to the results, BPs fourth quarter underlying replacement cost profit was $2.2 billion, down 20% on the same period a year ago and 26% lower than the third quarter. Compared to the fourth quarter of 2013, the result reflects significantly lower liquid realizations and a lower contribution from our shareholding in Rosneft, offset by improved Downstream earnings and increased Upstream production in high margin areas.
You would have seen from our stock exchange announcement that we have booked a pre-tax non-operating non-cash charge of $6.5 billion or $3 billion post-tax for impairments in the fourth quarter. These are mainly upstream assets, reflecting the impact of the lower near-term price environment revisions to reserves and other factors.
Fourth quarter operating cash flow was $7.2 billion. This did not benefit from any unwinding of working capital, which remained broadly flat between quarters.
The fourth quarter dividend payable in the first quarter of 2015 remains unchanged at $0.10 per ordinary share. Turning to the highlights at a segment level, in Upstream, the underlying fourth quarter replacement cost profit before interest and tax of $2.2 billion compares with $3.9 billion a year ago and $3.9 billion in the third quarter.
Compared to the fourth quarter of 2013, the result reflects significantly lower liquids realizations, the absence of the one-off benefits to production taxes in the fourth quarter of 2013 and higher exploration write-offs. These were partly offset by lower costs, increased production in high module areas and stronger gas marketing and trading.
Excluding Russia, fourth quarter reported production versus a year ago was 2.6% lower, primarily due to the Abu Dhabi onshore concession expiry in January 2014. After adjusting for this and for entitlement and divestments impacts underlying production increased by 2.3%.
Underlying production growth for the full year was 2.2%. Compared to the third quarter, the result reflects significantly lower liquids realizations and higher exploration write-offs, partly offset by significantly stronger gas marketing and trading, higher production and lower costs.
Looking ahead, we expect first quarter 2015 reported production to be higher than the quarter, reflecting higher entitlements in PSA regions based on lower oil prices. For the fourth quarter of 2014, we have recognized $470 million as our estimate of BP's share of Rosneft's underlying net income compared to $1.1 billion a year ago and $110 million in the third quarter.
BP's share of Rosneft production for the fourth quarter is estimated as just over $1 million barrels of oil equivalent per day, 4% higher compared with the year ago. Rosneft's results for the period were affected by an unfavorable duty like lower prices and other items as well as foreign exchange effects, which had a favorable impact on the results.
Further details will be provided by Rosneft when they report their fourth quarter results. In the Downstream, the fourth quarter underlying replacement cost profit before interest and tax was $1.2 billion compared with $70 million a year ago and $1.5 billion in the third quarter.
The fuels business reported an improved underlying replacement cost profit before interest and tax of $930 million dollars in the fourth quarter, compared with a loss of $200 million in the same quarter last year. This was driven by higher fuels marketing performance, increased heavy crude processing in the United States and improved results from supply and trading and lower turnaround activity, partly offset by a weaker refining environment, primarily due to falling crew differentials in the United States.
The lubricants business delivered an underlying replacement cost profit of $310 million compared with $230 million in the same quarter last year. This reflects continued gross margin improvement in growth markets and the absence of restriction charges, partially offset by adverse foreign exchange impacts.
The petrochemicals business reported an underlying replacement cost loss of $30 million in the fourth quarter, compared to a profit of $40 million in the same period last year. The result reflects a continuation of the weak margin environment, particularly Asian aromatic sector and unplanned operation events.
Looking to 2015, we anticipate weaker refining margins, due to narrowing crew differentials in the low crude price environment. We expect the financial impact of refinery turnarounds to be at similar levels as 2014 and the petrochemicals margin environment to gradually improve.
In other business and corporate, the pre-tax underlying replacement cost charge was $120 million for the fourth quarter, a reduction of $419 million on the same period a year ago, mainly due to improved results in all of the businesses, lower corporate and functional costs and a number of one-off credits. As a result of the very low charge in the fourth quarter, the full-year pre-tax underlying charge of $1.3 billion is lower than the guidance range we provided in February.
The effective tax rate on underlying replacement cost profit for the fourth quarter was 38%, taking the full-year effective tax rate to 36%, in line with the guidance for 2014. The charge for the Gulf of Mexico oil spill was $480 million for the fourth quarter, primarily reflecting increased costs related to business, economic loss claims, litigation and the ongoing cost of the Gulf Coast restoration organization.
The total cumulative pre-tax charge for the incident to-date is $43.5 billion. This does not include any provision for business economic loss claims that are yet to be received, processed or paid other than our provision for claims that are being processed and not subject to appeal within the claims facility.
The charge in the fourth quarter relating to business economic loss claims was $235 million. As we had previously advised, it is still not possible to reliably estimate the remaining liability for business economic loss claims.
We continue to review this each quarter. Regarding the Clean Water Act, we have filed notice of appeal of the Phase 1 gross negligence ruling and the penalty phase is underway.
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 a provision at this level. The pre-tax cash outflow on costs related to the oil spill for the full-year 2014 was $1.3 billion, including $740 million relating to fines and penalties.
As previously disclosed, the cumulative amount estimated to be payable from the trust fund has now reached $20 billion. Additional costs not provide 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 $5.1 billion, including $1.1 billion remaining in the Seafood Compensation Fund, with $20 billion paid-in and $14.9 billion paid-out. Now, turn to progress on divestments and our objective to divest $10 billion of assets by the end of 2015.
Agreed deals to-date have reached $4.7 billion. These include the sale of package of assets on the Alaskan North Slope, the farm down of 40% of our interest in the Oman Khazzan project monetization of part of our interest in the Tiber and Gila fields in the Gulf of Mexico, Paleogene and the sale of our global aviation turbine oils business.
We remain on track to reach our $10 billion objective this year. Now looking at our full year cash flow movements, this slide compares our sources and uses of cash in 2013 and 2014.
Operating cash flow for 2014 was $32.8 billion, marking delivery of the 10-point plan operating cash flow target. This includes $7.2 billion generated in the fourth quarter.
Excluding oil spill related outgoings, underlying operating cash flow for the year was $11.6 billion higher than in 2013. This includes the working capital release of $2.2 billion for the year.
Full year organic capital expenditure was $22.9 billion, in line with our revised guidance provided with third quarter results. Organic capital expenditure in the fourth quarter was $6.6 billion.
In 2014, we bought back $4.8 billion of shares, including $800 million in the fourth quarter. The cumulative total since early 2013 is now $10.3 billion.
Around $8 billion of this reflects the proceeds of the sale of our interests in TNK-BP, with the balance coming from the proceeds of our $10 billion divestment program. Turning to our forward-looking guidance for 2015, we expect full year underlying production in 2015 to be broadly flat compared with 2014 with base decline offset by new major project volumes.
The actual reported outcome will depend on divestments OPEC quotas and entitlement impacts. As mentioned, organic capital expenditure in 2014 was $22.9 billion.
We now expect 2015 organic capital expenditure to be around $20 billion, relative to our previously signaled capital frame of $24 billion to $26 billion in 2015. This reflects a rebalancing of our uses of cash in the current price environment.
In the Upstream, the reduction is expected to come from paring back exploration and excess spend, shelving a number of marginal projects, prioritizing activity in our base operations and the reduced spending we anticipate in projects operated by others. This does not rely on supply chain deflation in the near-term.
Depending on where prices settle, we would expect deflation to become evident in the ongoing review of our capital frame as we move into 2016 and beyond. These interventions in the Upstream will be further supported by not advancing selected projects in the Downstream and our other businesses.
The DD&A charge was $15.2 billion in 2014, reflecting a steep rise compared to 2013 as a result of a significant production delivered from new upstream major projects and the commissioning of the refurbished Whiting refinery. In 2015, we see a flatter trend for DD&A relative to 2014.
In other business and corporate, the average underlying quarterly charge is expected to be around $400 million, although this may fluctuate between individual quarters. In the current environment and with our current portfolio of assets, the effective tax rate is expected to be lower during 2015.
Today's fourth quarter results also includes a $433 million non-operating restructuring charge against the $1 billion charge we expect to see before the end of this year. Clearly as Bob outlined, this is the year of transition as we adjust to the reality of current and expected lower oil prices.
As we rebalance the company sources and uses of cash, we will update you on progress quarter-by-quarter. Turning to our financial outlook, our 2014 operating cash delivery of $32.8 billion, reflects the reliable operating performance in all business and the release of working capital that is less than half the bill we saw in 2013.
This exceeds our 10-point plan target of $30 billion to $31 billion in $100 per barrel oil price environment. Net debt at the year ended was $22.6 billion, putting gearing at 16.7%.
We remain committed to keeping gearing in a 10% to 20% range while uncertainties remain. We are now entering a phase of uncertainty, while the industry transitions through a period of weaker prices.
We are very clear on the actions we need to take to complete our current $10 billion divestment program, reset our capital frame to around $20 billion for 2015 and resize our cost base. With the interventions we are making, we believe, we have sufficient flexibility to support our dividend in 2015, in the current price environment, while staying within our gearing band.
Current circumstances aside, our objective over time is to reflect the position where underlying operating cash flow covers capital expenditure and dividends. We will be actively working to reestablish this balance in our financial framework over the medium-term.
Over the course of this year, we expect industry margin structures to start to respond to deflation as we also reset our own controllable costs to be sustainable to a lower price environment. This will put us in a better position to define the longer term financial implications for the group.
To reinforce Bob's earlier words, our first priority within the financial framework is the dividend. As we adjust to the new environment, we will continue to judge the uses of cash for discretionary reinvestments and distributions on an ongoing basis with a bias to distributions.
We will continue to keep you updated as our plans evolve through the year. Let me hand over to Lamar to talk about the Upstream business.
Lamar McKay
Thanks, Brian. In December, I shared with you some significant detail about our strategy and plans for the Upstream, so I do not intend to go into a lot of detail today.
I will start with a look back at 2014, followed by a reminder of the key activities driving value in our business and other recent and near-term developments. I will end with a brief recap of the key pillars of the strategy I outlined in December.
We achieved a number of key milestones in 2014, 18 exploration wells were drilled in the year, we made five new discoveries at Orca in Angola, Notus in Egypt, Xerelete in Brazil, Vorlich in the North Sea and Guadalupe in the Gulf of Mexico. We also continue to achieve new access, including the U.K.
North Sea licensing round in the fourth quarter. In December, we signed a new production sharing agreement with SOCAR in Azerbaijan to jointly explore for and develop potential prospects in the shallow water area around the Absheron Peninsula in the Azerbaijan sector of the Caspian Sea, pending final government approval.
This is in addition to blocks awarded earlier in the year in Morocco, Australia, Greenland, the prior North Sea licensing round and the Gulf of Mexico. Last month, we formally received the licenses for the El Matariya and Karawan concessions in Egypt, following the announcement of the award last year.
Turning to major projects, our 2014 startups continue to ramp up as planned. The start up of both Sunrise Phase 1 in Canada and Kinnoull in the U.K.
North Sea during December, takes the totaled 2014 major project startups to seven. Production from the Andrew platform, which the Kinnoull project ties into is forecast to peak at more than 50,000 barrels per day.
Sunrise Phase 1 operated by our 50% joint venture partner Husky, represents our first in-situ oilsands operation and an asset, which we expect to generate steady production for decades. Turning to operations, we successfully completed our final 2014 turnaround in December on schedule, taking the total completed in 2014 to eight.
Additionally, operations at the Rhum gas field in the Central North Sea resumed in the fourth quarter in accordance with the agreed temporary management scheme. Our well delivery execution has also improved in 2014.
We completed all of our priority wells and had the highest production from new wells and well work since 2009. As I described in December, our core business activities are designed to drive value growth and competitive returns.
In our base operations, we are focused on driving systematic delivery of safe and increasingly reliable operations, with our operated plant reliability increasing by 7% since 2010 and strong levels of plant reliability in our top fields. We are also focused on efficient reservoir management and wells execution in order to optimize recovery and value from our base assets.
Managing existing wells is just as important and we maintain these through timely well interventions to restore or enhance production. We continue to move forward with a set of quality major projects.
We have around 60 projects, with a balance between deepwater giant fields and gas value chains, which are also balanced across different geographies and stages of development. More on this year's project startups in a moment.
We have reloaded our exploration pipeline over recent years through significant access to new opportunities. This has given us many opportunities for resource progression into the next decade.
Finally, but importantly, we have a strong focus on capital and cost discipline. In the current environment, we are intensifying this focus to reset our cost base as Bob and Brian have explained.
With regard to capital expenditure, we expect to pay our back exploration and excess spend to re-phase certain projects and we will continually prioritize all of our activity. We have uncommitted spend and flexibility to manage pace of investments and to take advantage of any deflation in the sector.
On cost discipline, we expect to align our cost base with the reduced size of our operations through actively managing our supply chain, by again, prioritizing activity, focusing our efforts on where we had distinctive capability and making choices in our portfolio. Now I will look more specifically at the four major projects, which we expect to start up in 2015, which are progressing on time and within budgets.
In Angola, the Kizomba Satellites Phase 2 project is progressing well. Subsea installation is going to plan and three production wells are complete.
Also in Angola, the Greater Plutonio Phase 3 subsea development is making good progress with the first well already completed. In Algeria, In Salah, southern fields project is on track.
The pipeline is under construction and commissioning of the plan is ongoing. Finally, in Australia, brownfield activities and subsea installations are moving ahead on the Western Flank A project.
In total, we have 15 projects, which we have passed through the final investment decision and are in the construction stage across the world. The remaining projects in our pipeline are in the design or appraisal stage.
Going forward, we will sanction and progress these projects at the right time. We fully intend to make use of the current environment, to secure reasonable contract rates, to continue negotiation of fair price and fiscal terms in certain regions and to access market deflation by phasing investment for the appropriate projects.
I will now focus a little more on our portfolio and recent developments in the United States, where we have three main upstream businesses, the Lower 48, Alaska and the Gulf of Mexico. We have initiated change to actively pursue more efficient operating models in each of these businesses.
In March 2014, we announced our plan to separate our U.S. Lower 48 oil and gas business into a separate unit.
The rationale was that a new operating model was needed to improve performance in this business against its direct competitors, the U.S. independent.
We expect faster decision-making, more innovation and shorter cycle times through the value chain and expect that significant capital and cost efficiencies will follow. Our plans, which include reporting separate financials, are on track.
We are already seeing positive results from the more streamlined organization. We have had a workforce reduction of 900 employees and contractors and have seen cash cost fall by around 25% between 2012 in 2014.
In Alaska, we sold the Endicott and Northstar assets and farms down in the Liberty and Milne Point fields to Hilcorp in the second quarter of 2014. The intent of this transaction was to put funds towards our obligations to the U.S.
Gulf states and to allow us to focus our footprint to operate only one material assets, the giant Prudhoe Bay field, while divesting those worth more to others. At the same time, we sought to find an experienced partner to operate those assets, where we diluted our interest in order to drive incremental value.
Finally, in the Gulf of Mexico, we focused our efforts on four operated hubs and three non-operated positions, which have the potential to deliver production growth. At the same time, we will also consider how we can most efficiently support the logistics of these BP-operated assets.
We also continue to explore and appraise new positions and we participated in three exploration wells in the Gulf of Mexico during 2014. As these exploration activities provide potential new development opportunities, we will continue to consider where and how much we operate in.
In light of this, last week, we announced a new ownership and operating model with Chevron and ConocoPhillips to advance current and future Paleogene discoveries in the deepwater Gulf of Mexico. We are diluting around half of our current 62% equity interest in the Gila and Tiber fields to Chevron, passing operatorship to them at the same time and we also gained exploration access to the Gibson prospect.
This alliance will enable us to do three things that are at the core of our strategy in the Gulf of Mexico, namely, to support exploration and development in the Paleogene, which we expect to be a key part of our future in the region, to share development costs and maximize synergies which will allow us to manage and improve capital efficiency and to increase our focus on maximizing production at our existing operated hubs. To close, I would like to revisit the key takeaways from our Upstream Day in December, we are building a track record of delivery, we are improving safety and making our operations more reliable, we are focused on value over volume by investing in high quality activities.
We have a more focused footprint and we will continue to actively manage our portfolio. We are delivering value today through the efficient execution of our base activities by progressing a quality set of major projects, and we continue to make discoveries from our exploration portfolio.
In order to deliver long-term growth, we will continue to maintain a disciplined investment approach into three distinctive classes of assets, deepwater, gas value chains and giant field. We will continue to maintain a balanced portfolio of opportunities.
Finally, we drive the efficient execution of our activities through our functional operating model and this is delivering results. These remain the pillars of our upstream strategy regardless of the oil price environment.
Our strategy aims to deliver competitive operating cash growth through focusing on safe and reliable base operations, selecting and executing our capital projects at the right time and ensuring sustainability through cost and capital discipline. I will now hand over to Tufan to talk about the Downstream.
Tufan Erginbilgic
Thanks, Lamar. In the next few slides, I will provide a brief update on progress in 2014, and will set up the opportunity I see for further performance improvement across the downstream and the strategy we will be following to capture this opportunity.
In terms of progress in 2014, we have seen continued improvement in our process safety performance, particularly on loss of primary containment, where we have achieved around 20% reduction in incidents year-on-year during 2014, which represents our best recorded annual performances. In fuels, we continue to deliver strong operational performance across our refining system, with Solomon refining availability sustained at around 95% for the year.
Our recent reposition Whiting refinery near Chicago is now fully on-stream. We also announced our intention to seize refining operations at Bulwer refinery in our Australia during 2015.
In lubricants, our focus on growth markets and premium brands continues to deliver like-for-like profit growth. In petrochemicals, in response to a continued difficult environment, we have undergone a strategic review to create a higher earnings potential business, which is more resilient to bottom of cycle conditions.
I will cover this in more detail later in the presentation. This operational progress across many fronts has resulted in operating cash flow growth.
Our 2014 progress gives us a great base to build on and I believe there is further performance improvement opportunity for us to capture in downstream. Our strategy focuses on improving returns, growing operating on free cash flow and building a quality downstream business, which leads the industry as measured by net income per refining barrel.
Our strategy to deliver this performance opportunity has five main themes. Our first priority remains safe and reliable operations and we will continue to drive for performance improvement, both in personal and process safety.
Advantage manufacturing in refining means, we will continue to build top quartile refining business by having a competitively advantage portfolio, which is underpinned by operations excellence. In petrochemicals, it means creating a business with higher earnings potential, which is significantly more robust to a bottom of cycle environment.
In fuels marketing and lubricants, we have material and reliable profit and cash businesses. We will differentially invest in higher returning businesses, which have operating cash growth potential.
This should improve downstream returns and operating cash flow growth. Our strategy has a constant focus on portfolio quality through the high grading of assets and capital discipline, where businesses do not fit our strategic frame, we will seek to divest.
Finally, as Bob has already mentioned, we have launched a simplification and efficiency program to support our strategy to deliver performance improvement and to make our businesses even more competitive. I will now briefly talk about the key elements of our strategy beginning with advantage manufacturing.
We have improved our refining portfolio quality in terms of both, feedstock advantage and scale, and sustained competitive complexity through portfolio rationalization and selective investment. We have divested or closed 14 refineries since 2000.
This gives us a smaller, more focused, higher quality refining portfolio, which as the top-left chart shows is largely concentrated in Europe and the United States. We believe that having a quality refining portfolio connected to strong marketing positions is core to our integrated field's value chain businesses as this provides optimization opportunities in highly competitive markets.
Turning to each of the regions, in the U.S. the top-right chart illustrates how feedstock advantage has grown materially and has the potential to further improve due to refinery positioning and logistics investments, which are largely complete.
Our three U.S. refineries have access to Canadian crudes and U.S.
shale oil, both of which typically priced at the discount to other crudes. Our U.S.
refineries are also location advantage versus Gulf Coast refineries, due to Canadian crude supply proximity. Feedstock flexibility enables us to fully optimize our crude slate depending on relative crude differentials, an important capability given today's volatile energy markets.
In Europe, the bottom-right chart illustrates, we have a top quartile refining portfolio in terms of scale and a smaller refining exposure than our primary competitors. Our refining portfolio is also competitive and Nelson complexity.
Excluding our Rotterdam refinery, which as you know has significant trading and logistics flexibility, our average European Nelson complexity rises to around 11. Outside the U.S.
and Europe, where we have refineries in Africa and Australia, these are industry-leading in their region in terms of scale and have top quartile profit capability. Across all regions, we expect to operate our portfolio at top-quartile ability and with improved efficiency.
The bottom-left chart illustrates our performance over time, together with our aim for further improvement. To underpin this operational delivery, a program of operations excellence has recently been launch.
This advantage portfolio and our business improvement programs should ensure the portfolio delivers further performance improvement and is more resilient to volatility in the environment. This supports our strategy of creating a refining business with last man standing portfolio quality and performance in the regions in which they operate.
Our petrochemicals portfolio is focused in large on two main end products, purified terephthalic acid or PTA, an acidic acid. We are taking steps to significantly improve the cash breakeven performance of the business.
This will improve our earnings potential and make the business more robust to a bottom of cycle environment. These actions include a significant portfolio restructuring in our aromatics business to shut down all the capacity in the United States or Asia and to sell less advantage assets provided we can get good value for them.
We also expect to commission Zhuhai 3 in China, latest generation of PTA plant in the next couple of months. Secondly, extending the Iplan program to retrofit our best technology into our advantage sites and thus reduce overall operating costs.
Thirdly, creating additional value from our leading petrochemical technologies by growing third-party licensing income, and finally, we plan to deliver operational improvements such as turnaround efficiency and improved reliability. As illustrated in the left-hand charts, taken together, we expect these actions will lead to over 35% improvement in our petrochemicals cash breakeven performance.
The top-right chart confirms that market demand growth for our primary petrochemical products, PTA and acidic acid has been stronger than the overall chemicals market. Industry analysts forecast continued growth in the 5%, 6% per annum range.
We believe the market fundamentals for the acidic acid business are positive and improving, with strong demand growth which presents the opportunity to selectively invest to capture extra earnings potential. The bottom-right chart illustrates the cost advantage enjoyed from our latest technologies, deployment of these leading technologies plus portfolio actions should deliver performance uplift, improve earnings potential of the business and ensure our portfolio is more resilient through bottom of cycle conditions.
Moving now from advantage manufacturing to marketing, fuels marketing and lubricants are both key to our profitable growth study. In the left-hand chart the bubble size illustrates total 2014 business profit generation plotted against business returns and the percentage of profit generated from growth markets.
These businesses, which have good returns and are reliable in terms of profit and cash generation, they deliver these returns and growth through differentiated offers and distinctive partnerships. The retail business is the most material element of fuels marketing operations and is proving to be a significant source of growth opportunity both, today and into the future.
To give you an appreciation of the scale of our retail network, it comprises over 17,000 sites, spanning 16 countries and services over 8 million customers per day, which is comparable to Starbucks. This business has good exposure to growth markets and we intend to increase it further.
To reinforce our differentiated position, we partner with leading retailers globally, creating distinctive offers which deliver good returns and material growth potential. Our partnership with Marks & Spencer, MNS in the U.K.
is a good example of this. As illustrated in the top-right chart, we are able to generate more than 50% incremental gross margin, when we bring in our newer offers compared to traditional BP connect site.
This uplift is primarily through sharp sales. Additionally, this combined quality offer generates incremental customer foothold and positions the sites for further growth.
It also provides a more balanced profit mix, helping reduce reliance on fuel margins. This BP-owned and operated network delivers returns of over 20%.
Including MNS, we have distinctive partnerships underway in six countries, with leading retailers and have ambitions to further extend elsewhere. The bottom-right chart illustrates how our lubricants business has grown profit at 5% per annum at constant foreign exchange rates.
This has been driven by our exposure to growth markets and increasing sales mix of premium lubricants, underpinned by strong brands, technology and customer relationships. With more than 50% of profit sourced from growth markets and with continued growth in premium lubricants, we have an excellent base for further business expansion and sustained profit growth.
In summary, both fuels marketing and lubricants businesses have been platform to generate operating cash growth with good returns and reliable earnings profiles. Turning now to our simplification and efficiency program, we have a good track record of generating cost efficiencies as shown in the top-right chart.
Going forward to improve our performance and competitiveness, simplification and efficiency programs will form key elements of our Downstream strategy. As you can see in this slide, we have four main programs in our efficiency agenda now underway.
We are in the process of simplifying and streamlining the downstream head office and functions. A new fuels organization and restructuring within lubricants will eliminate duplication, reduce interfaces and where appropriate simplify our rout to market.
In manufacturing, our first priority remains safe and reliable operations. As I mentioned before, in refining, we are building plans by refinery to further improve our competitiveness.
In petrochemicals, we are pursuing the same aims by deploying advantage technology across our portfolio. Lastly, we are focused on identifying efficiency opportunities in our third-party costs.
We have 26 simplification initiatives currently underway across these programs. Taking it altogether, we aim to deliver around $1.6 billion per annum of efficiencies by 2018 versus a 2014 baseline.
This delivery will contribute to our operating cash flow growth and improved returns. It will also further enhance our competitiveness as measured by our ratio of cash cost to gross margin as illustrated in the bottom-right chart.
Now, let me summarize the key elements of our strategy to capture further performance improvement. Within refining and petrochemicals, we will focus on building an advantage manufacturing portfolio, improving the earnings potential of the business through increasingly advantage assets, operational excellence and distinctive technology.
In marketing, we will selectively invest in higher return differentiated marketing businesses, which have operating cash flow growth potential. Efficiency and simplification will be central to our strategic and will further enhance our competitiveness and improve our resilience to volatility and bottom of cycle conditions and we will do all of these with safety remaining our first priority.
Taking all these together, there is potential to extend operating cash flow and to improve returns of the downstream from a 2014 base. Capture the performance improvement opportunity should deliver industry-leading earnings quality measured by net income per barrel off refining capacity, a measure we have shown consistently in the past.
Implementation of this strategy is expected to lead to a growing downstream earnings profile and increasingly make the business more robust to external environment impacts. Growing operating cash flows and capital discipline will ensure that the Downstream remains a source of increasing cash flows for BP, now and into the future.
As the new Chief Executive of the Downstream business, I am excited by the opportunity I see and the caliber of our people to deliver it. Let me now hand you back to Bob.
Bob Dudley
Thanks, Tufan. Now to summarize the key points, we want to leave you with today.
We leave 2014 behind having delivered some significant milestones over the last three years, including everything we said, you should expect and to be able to measure as part of our 10-point plan. We now have a track record of delivery, real momentum in our business operations and a proven ability to adapt to tough times.
We are well aware that the industry is going into a very challenging phase as we reset to a lower price environment but our business model is a very focused one and we are already well in action to respond. Our near-term priorities are very clear and about delivery in our business, completion of our $10 billion divestment program, a disciplined reset of both, our capital and cost base and a commitment to the dividend is the first priority within our financial framework.
Looking beyond the near-term, we have a roadmap for the future. It is based on the potential of our Upstream business, the opportunity to leverage advantage portfolio and improved returns in our Downstream business and our resolve to continue our focus on capital and cost efficiency.
All of this works towards our intention over time to grow distributions in line with the approving circumstances of the firm and to maintain a progressive dividend policy. Now, with that, we are ready to take your questions.
Operator
[Operator Instructions].
Jessica Mitchell
Thank you for polling your questions and for your patients. We will try and get round to everybody today.
We will start today in the U.S. with Blake Fernandez from Howard Weil.
Are you there, Blake?
Blake Fernandez
Yes. Thank you, Jess.
Good afternoon everyone. My question is around CapEx.
It sounds like most of the reductions are coming from exploration and access. Bob, it sounds like you are maintaining your internal $80, old deck, so I am just trying to get a sense, does this mean we should expect kind of ongoing FID you are sanctioning this year as you would have otherwise?
Bob Dudley
Blake, thanks, and Lamar is here. It is more than just exploration and access.
We think, we have got some projects that we planned to FID this year actually early in the year. Based on what is happening, we are going to retool them again and there is one that you have heard about before that we have taken a steps back from.
We will certainly do that again as a big Mad Dog project and in the Gulf of Mexico. That is a good example.
Lamar, maybe you want to comment on some others.
Lamar McKay
Maybe just a real quick frame, Blake, we are going to maintain spending and safety reliability integrity and the high return base in fuel type spending, exploration and appraisal we do have some flexibility to move some of that sideways or defer high-grade in re-phase we will be doing that. Projects in execute phase, we will continue to do those projects, especially, facility side and we will look at optimizing so to speak the pre-drill drilling expenses and the tempo by which we get the drilling done over the next several years.
Then in the projects in the pre-execute or the pre-FID phase, we will definitely defer re-scope and re-approach some of those projects. Mad Dog might be a good example where we do think they will benefit from deflation and we will access that to the best of our ability, so there will be some changes in each and every one of those categories, because you can imagine we want to be as efficient as we can be and it requires examination of every single dollar, but it is a holistic approach where we make sure they were safe and reliable and yet we still preserve the future.
Blake Fernandez
Okay. Great.
Thank you. My second question is on the Lower 48.
I am assuming on the separation looks like it is still on track, but I assumed it has it is own balance sheet. Does this macro changes forced to liquidity or for balance sheet structure and are you still expecting to increase rig activity as outlined in the December?
Thanks.
Lamar McKay
Blake, yes, everything is continuing as we hoped and expected in the Lower 48 and the balance sheet is said they will react to the environment just like their competitors are. Although, as you know we have not had really high levels of activity in the Lower 48, so you won't see quite as drastic of capital reductions there, but they will certainly be working just like their competitors in terms of making sure each and every dollar they spend is going to be the right dollars to spent, so we expect that to continue.
We will be reporting separate financials later this year, which will give you some insight into that, but yes everything is on track and cause some capitals coming down, so that is good.
Blake Fernandez
Okay. Thank you.
Jessica Mitchell
In the U.K. now, we will go to Oswald Clint of Bernstein.
Oswald Clint
Yes. Good afternoon and thank you.
Yes, maybe a question on return on capital, return on average capital employed. I guess, one of the things we are also looking for is steadily growing return on capital, which is something, Bob, that you have been targeting.
I do not think it did not step up too much last year, but as I think about this CapEx reduction, the shelving of marginal projects, the returns here in the Downstream business going up, plus also some cost deflation which you might access, do you have more confidences at this point that the return on capital metric might actually step up materially from here. Then, secondly, just a question on the North Sea, on the impairment, I know that part of that was to with increased abandonment provisions.
Maybe some thoughts on the U.K. at this oil price and what sort of abandonment costs and ultimately does not feed into kind of the near-term CapEx, if you choose to start abandoning some of the North Sea?
Thank you.
Lamar McKay
Bob, let me take a stab at that. North Sea first, on then the abandonment costs, those abandonment costs went up mainly due to a change in interest rate we calculate to decommissioning value on in fact.
I think the North Sea is an area that we have stated before and I talked about in December is a challenged area. We need better performance rather North Sea plant reliability is not where it needs to be and of course we got teams working very, very hard to get that up, but we need to see a step change in performance in the North Sea.
The quality of the assets is good and we have a set of new projects coming on Clair Ridge and Quad 204 that effectively repurpose the North Sea for us in the West of Shetlands area. I think everyone is struggling a bit in the North Sea, and we have got all work to get our plant reliability up and this particular impairment is related to an interest rate change in the decommissioning cost.
Bob Dudley
Oswald, on return on capital, I think, we have been saying that we must increase return on capital going forward here. I think, we have said this publicly, but the average return on capital employed of the roughly $35 billion of Upstream assets that were sold had a return on capital of about 50% to 55%.
Now, that is a huge return on very mature highly depreciated assets, so that by definition has brought our return on capital employed of the group down and I would expect it to continue to rise here up and down a little bit with the oil price cycles, but we are definitely high grading the portfolio going forward.
Oswald Clint
Okay. Thank you, both.
Jessica Mitchell
Okay. Thanks, Oswald.
Next question from Jason Kenney at Santander.
Jason Kenney
Hi. Good afternoon and thanks very much for the opportunity.
Do you think there will be a profit or loss from the Upstream America's business in 2015 in a $55 a barrel environment? That is the first question.
The second question, I suppose another quarter another surprise for the Russia contribution. I know there has been accounting changes and there was possibly late in the day you have guided on your thoughts as to where that could have been, but it was a surprise for most people on the divisional result from Russia.
With the changes at Rosneft to be announced in the FX hedging, are you able to give us a kind of a steady quarterly outlook for what Rosneft might contribute on an EBIT basis under again a $55 oil price? Thanks.
Brian Gilvary
Jason, let me take the first one. Then I think Lamar can talk about the profitability in terms of the United States.
To degree the account of $55 a barrel given what we are doing around deflation. Yes, Rosneft, has adopted a standard actually which makes complete the economic sense in terms of locking debt against future revenues and we will see what the effects of that are quarter-by-quarter, so they have adopted IAS 39, which makes complete sense.
I am not sure that could have been signaled to market any sooner. It is something which is considered by their board and they discussed and implemented back in October, but I think it is good that you say your Clair, it is exactly the way we would have approached it ourselves into the same - my fresh reporting.
In terms of giving indication going forward, I think Rosneft have all the same challenges that we have and our whole sector has around trying to drive deflation, the cost base, managing sourcing and uses of cash, so I think Jason if you have to be patient and wait a few courses before you start to see any sort of stable earnings figures going forward. At 60% drop in correction in the oil price and I suspect we are going to be here for a short to medium while that is going to take time before you start to see those results flow through to the earnings numbers.
At these levels have rules of thumb that you may be know where to apply historically that pretty tough to apply when you have this bigger collection in the oil price, so I think it just too premature. I would turn it over to Lamar, if you can give any more indication on the U.S., but I suspect that would just be difficult.
Lamar McKay
No. I think it is exceptionally difficult right now to predict individual asset performance throughout the year at $55.
We got to see how the cost base can adjust where we are going to constraint our efforts. We you will get a better view by way of seeing the Lower 48 separate that will help but right now don't carry my head and probably I would not say anyway the addition of those three sets of assets.
If I could footnote to what Brian said about Rosneft because it is complicated. We came in this morning at 6:30 in the morning.
Here in London Rosneft had issued to fairly detail press release explaining the accounting change in the background on it, so some of you who are trying to model that might want to have a look at that might help.
Jason Kenney
Thanks very much.
Jessica Mitchell
Thank you. We will go next to Theepan Jothilingam of Nomura.
Theepan Jothilingam
Hi, good afternoon. Thanks for taking the questions.
Just a few ones on the cash cycle actually. Firstly, just coming back to the 2014 result.
The group beating that sort of $30 billion, $31 billion of cash flow. Could you just talk about compared to your internal estimates where the bps was?
Secondly Brian I think you mentioned there was a working cap how release how do you see that going forward in to 2015 and then sort of a broader question. It appears you are more vocal on being a bit more bearish on the duration of where oil prices maybe.
What should the aspiration to BP be in terms of sort of balancing the cash cycle going forward? Are you thinking $60, $70, I am just trying to get up a sense compared to your 80 to 100 that you used to talked about?
Thank you.
Brian Gilvary
Thanks, Theepan. On the cash cycle question, I think it is some the bps in order to the performance came through across the whole piece actually both in terms of the strength of the Upstream EBITA that we are still coming through in terms of 4Q I think Q4 operating cash number.
The recovery in the Downstream compared to the same prior year ago and we are starting to see some of these functional costs that we spent the last 18 months to two years talking about in terms of simplification effort, but Bob had highlighted previous quarters. Around the 60 odd initiatives that we had around the corporate center and the overhead, so they were starting to flow through, so I think that they were starting to flow through so I think that underpinned everything towards the back end of the year and that is why you saw such a strong cash number coming through.
In terms of working capital, I think, we had signal we had would expected about two-third of the $5 billion bill. We saw in 2013 to reverse out actually low less than about $2.2 billion reverse down in terms of working capital release.
There is a lot of moving parts around working capital as we are going to 2015 with these oil prices where we are. Payments had a provisions, as you can imagine, Theepan, they way we are looking at everything across the board which comes back to your third question about re-balancing the books, so I think it is a bit too premature to talk about what we expected to be but direction at low prices we tend to get reduce of working capital, but the price was pretty low at the end of last year.
In terms of philosophy on balance in the books I think we see '15 as a transition year. It is about with the capital coming down to around $20 billion as we reset the company, we drive out further activity in the simplification initiatives that we have talked about before and it is around getting back to being able to balance the books at the sort of levels that we see today over the medium-term, so we are not going to give you an explicit date, probably two points to observe.
One, in the progress report we gave you back in March around the future projections of what we expected for the firm, we were sort of breaking even around $80 a barrel by 2017 is what we had talked about. Last year, we were breakeven below $100 a barrels, so we were well on that trajectory.
Now we need to see how fast we can drive deflation that Lamar talked about in December in terms of deflationary cycle, the 18-month cycle, how fast we can drive that in, what it looks like in terms of projects that Bob and Lamar, both talked about. Then you get a better feel for this as we get through this year, but our view is, I do not know Bob, you may want just sweep in terms of oil prices where we think they are, but certainly we see as many bearish factors right now maybe more bearish factors than bullish factors, so we will probably work on the basis that the oil price is going to stay somewhere around where we have seeing so far this year, the average around $48 of barrels and we are going to assume now for the medium-term as we started to rebalance the books.
Lamar McKay
Theepan, in terms of being bearish on the oil price, I think it is more a function. We look at supply and demand, there is an excessive supply, there is a lot of factors of course on this.
Certainly, U.S. oil production is not going to adjust overnight to a change in the price.
I mean, we see oil production continuing to increase in the U.S. at least through the summer.
Even though the rigs counts are dropping very fast, stocks are filling up around the world. You have got probably floating storage before long here.
When you have that much storage out there, it takes a long time to work that off. You look at the, of course, China is growing.
No question it is growing, but the rate of growth is off, which is accounting for quite a bit of demand growth in the past, so we will just have to see, but time reminds me a little bit of 1986 in terms of the potential here for this play extended down term I think anytime the price of oil drop 60%, it is not a correction. It is something different.
Of course geopolitical events could impact things the other way and create some dislocations, but there is a lot of chatter around the world about agreements with Iran and that could be a negative pricing signal, so we have got a plan at our company quickly to be ready for that without sacrificing a couple of things. I mean, we defer projects like Mad Dog.
We actually think there would be more valuable when the costs come through and we think there will be lower. We are not going to compromise on safety, reliability or training for hazardous jobs.
That is none of that. Everything is off-limits there, certainly, all are compliance and ethics commitments, so there are boundaries around what we are going to do, but we are going to continue to drive simplification into what quite frankly had become, we have become a really complicated company after 2010 and it is time for us to right-size it anyway.
Jessica Mitchell
Okay. Thanks, Theepan.
We will take the next question from the web from Fadel Gheit of Oppenheimer. Thank you, Fadel.
The question is, is the reserve right-down a reflection of the assets quality and how does it reconcile with BP's strategy of value of a volume?
Lamar McKay
Let me take that Jess. This is Lamar.
I don't think it is a reflection of asset quality. If you let me go interact for just one second, we have had some reserve revisions.
Once we have those reserve revisions, they can trigger an impairment test and we have done impairment tests on these assets and the unfortunate I guess, if you don't like write-offs, the unfortunate thing is you do the impairment. At least we do.
The impairment test with the five-year strips, so some of these in near-term assets that had summer reserve revisions were tested at the five-year strip, so 48 to whatever the five-year strip is, and that caused some impairment. I think it is a fairly conservative way and a correct way as we understand it under IFRS to look at our assets and the amount we have on the books following our IFRS accounting really.
Jessica Mitchell
Okay. Thanks, Lamar.
We will take a question now from Thomas Adolf from Credit Suisse. Are you there Thomas?
Thomas Adolf
Hi. Thank you.
Two questions please? The first one on your dividend, I guess.
If I look at your revised CapEx guidance, it is a much bigger cut than it appears as you know. Isn't that really an admission that your dividend base right now is just the wrong one, particularly as you say 2015 is a bit of a transition year in oil markets and you have a relatively healthy balance sheet.
Actually one of your competitors did say earlier this week that the industry is over distributing. Second question is, just the point that Brian made on breakeven, I just wanted to get a better sense for how you define it.
How does the breakeven look if you ask out the scrip dividend and any disposal proceeds, so really organic breakeven? Thank you.
Brian Gilvary
On the second point, I am not sure it is actually particularly relevant. We offer a scrip, our shareholders like that scrip and they take it up.
Certainly for last year, we were surplus around $2 billion of cash in terms of balancing the books and we would look to that in terms of going forward within the oil price set. In terms of dividends…
Lamar McKay
I think, we are comfortable with the division level. I think that is why partially, I think it is prudent to do it regardless of the dividend, rebase the company for what could be a new price range.
It is absolutely a priority for us in cutting the CapEx. It has more to do with finding value and making sure we spend the CapEx and the shareholders money carefully in this lower price environment, so it is not really related to the dividend.
Thomas Adolf
Okay. Thank you.
Jessica Mitchell
We will move on to the U.S. again and take a question from Doug Terreson of Evercore.
Doug Terreson
Good morning, everybody. One of the key things at Upstream Day that Brian highlighted today was cost efficiency and working with the service providers to the cost [ph] structure with a more challenging environment that Bob talked about.
My question regards an update on the outlook for cost efficiencies in the Upstream and specifically there is a supply chain that the company is most optimistic about our should we assume that the benefits will be fairly broad-based. Also, is there an order of magnitude amount of savings that the company feels it can attain in the upstream, maybe along the lines of the declining cash costs that Tufan highlighted on his slides on 39?
Lamar McKay
Doug. Hi this is Lamar.
Let me try that.
Doug Terreson
Okay.
Lamar McKay
I think, we will seek, we have seen this before and in past cycles we see cost reductions both on the capital side and really on the operating side of reduction of 20% to 30% in 18 to 24 months. We think we will see the same type of thing.
It generally shows up first in rigs and seismic in terms of where the contracting space, but it happens everywhere. We have got, to give you a sense, I don't know how many total contracts we have.
I wish I did, but we have got 1,250 coming up for renewal in 2015. We will be using those as opportunities to react, to understand what the cost set should be only activity associated with those contracts going forward.
There are a lot of contractors and obviously other operators out there making big changes today, so I think we will see broad-based cost reductions. It will probably happen fastest in the U.S., where some of the capital is being trimmed back quickest, but we will see it broad-based and we will see, I suspect if things stay relatively stable in terms of price and everything, we will see 20% to 30% reductions in the next 18 to 24 months.
Our job will be to access that as best we can.
Doug Terreson
Sure. Lamar, I think one of your slides in December talked about the lag effect, so would you say that this cycle is from an timing perspective about where you thought we would be at this point?
Are we are running pretty close to your expectations with timing?
Lamar McKay
To be honest, it is hard to judge, but I have thought about that and I do not why, but it feels fast right now.
Doug Terreson
Okay. Good.
Thanks a lot.
Bob Dudley
Doug, it is Bob. The other things I think will also happen in previous times when the price drops this fast, this sharply, not only does the supply chain move, but also governments take a look at taxation as well in terms of rebasing the industry.
Doug Terreson
Good point. Thanks a lot, everybody.
Bob Dudley
Thanks, Doug.
Jessica Mitchell
Okay. Thank you.
Question now from Jason Gammel of Jeffries.
Jason Gammel
Hi. Thanks very much, Jess.
I wanted to ask you a couple around divestitures program if I could please. My recollection is that the Upstream was the area, where you intended to generate most the proceeds.
It is that still going to be realistic given the drop in oil price and indeed would you be perhaps better off as an acquirer if you start to distressed assets in the market. Then the second question is, I believe Brian made reference to having a bias towards distributions for discretionary cash.
Would you consider divestitures proceeds to be discretionary cash and with those then be bias toward share repurchases or do you think you are done with share repurchases in the price environment?
Brian Gilvary
Jason, let me just talked about last point first, which is we will retain buybacks as part of our armory, but recognize that we are in a transition right now with 60% of our revenues on the oil price side not there, so therefore as we rebalance the books through this year next it will be discretionary, but we are going to keep it within our armory. We are not going to [ph] spend buyback, so that actually would have not been in the market so far this year.
I think, we purchased back about $800 million last year in the market right up to 2037, so we will keep it within our armory and we will make sure that we start the flexibility to do buybacks, but we are not in the market right now. In terms of divestments, I think when the outlined the original $10 billion, I think we set a lot of it will be more early life assets, not late life assets, so to that degree not quite as dependent on the oil price, and you saw the transaction that Lamar completed just recently in terms of the Paleogene in the Gulf of Mexico, which I think is an example of that in terms of shorter term in terms of not long life type-fields.
The bulk of divestment proceeds left to come, a lot that is going to be across the pace, less of it now Upstream, so the $4.7 billion the remainder will be biased towards Downstream, some of the corporate businesses that we have, less of it coming out of the Upstream and still one or two midstream assets we have around tunnels and pipelines and so on, I think that is fairly well on the pinned for this year and there are less dependence on the absolute oil price.
Jason Gammel
Are you seeing attractive prices on distressed assets in the Upstream is just still too early in the price correction?
Brian Gilvary
Lamar, do you want to just pick up, where we are in terms of potential assets that we might chose to acquire during this period as well.
Lamar McKay
Yes. I mean I think it is a little early to be able to talk about with certainly any specifics, but I think this is all going through a transition for everyone right now, so I think it is a bit early on that.
Jason Gammel
Fair enough. Thanks a lot, guys.
Jessica Mitchell
Okay. Next question from Irene Himona of SocGen.
Go ahead Irene.
Irene Himona
Thank you. Good afternoon, gentlemen.
Just three quick questions pleased. Firstly, in December you flagged the $1 billion pre-tax restructuring charge to be taken over five quarters.
I just want to clarify in Q4, it appears that you took $433 million in restructuring and rationalization costs is the $1 billion unchanged or should we expect an increase of perhaps an acceleration in line of the macro environment. Then secondly, India, I note here [ph] the assets.
Can you remind us perhaps or clarify what view on Indian gas prices as used behind that impairment please? Thank you.
Brian Gilvary
Irene let me just pick up the first piece, the $433 million we took in 4Q, the first tranche as we saw it, the original $1 billion restructuring charge came out of really the simplification efforts that we have been talked about over the last five or six quarters. When we came to roll the plans up in December, we could see $1 billion so thereabouts of restructuring hence why we put the announcements out there around the Upstream Investor Day.
That was ready around how we right-size the company for the smaller footprint off the back of all the disposables. For now it is still our best estimate, but we will keep updated on that as we progress through this year.
I would certainly anticipate that we will use the $4 billion, but in terms of whether there is more than that, we will no more, as we progress through quarter-by-quarter, give around the rebalancing the books of the company?
Bob Dudley
On India, I think if I am right, there is some exploration right offs, so I am not sure there were impairments if we had an impairment it was was very, very small one. Isn't there some exploration write-offs?
Lamar McKay
Yes. There was.
I think, the thing to think about in India is that there has been a good step made on gas prices. One step that effectively applies to the base assets, it requires a different gas price to unlock the discoveries in the developments that we have got and we are hoping in 2015 that we can work with the Indian government I get that done, but it does require higher basically a gas premium in the gas formula for these projects to be unlock.
Irene Himona
Thank you.
Jessica Mitchell
Next question from Martin Rats at Morgan Stanley. Go ahead Martin.
Martin Rats
Hi, good afternoon. I want to ask you two questions.
I want to take up on that 1986 comparison, because it also back then there were some a pretty spectacular cost reductions and CapEx savings, but also if you go back to the annual reports of the day, the company did look particularly well prepared to deal with that crisis back then as in the sense of BP was growing quite fast and the free cash flows are quite comfortably recovering the dividends I was wondering and how you feel your position at this moment, particularly in the context of that 1986 comparison. Secondly, I wanted to ask you about Egypt.
In December, you still that the company's plan to invest $100 billion over the coming sort of 10 years if I remember correctly with gas projects and West Nile Delta was of course a big chunk of that, but I was wondering how you think about that project given current oil and gas price expectation?
Bob Dudley
Okay. Thanks, Martin.
In 1986, if I think back I am not sure the company was positioned particularly well going into '86. I think it had higher oil price assumptions and it was somewhat stressed, but you are right about the amount of capital and cost reductions in the industry that happened, that we think could happen now.
How is the company positioned going into this year, well having completed now well over $40 billion of divestments, I am glad that happened. Timing on that and quality of those are good.
I think going into 2015 with a gearing of 16% is good I think you will see companies smaller companies in particular in the U.S. are highly, highly leverage.
I don't think a 16% gearings particularly highly leveraged, so while it is good to be tough and we needed to do lots of things as well bring our overhead down having sold the $40 billion in our overheads were actually up a bit. I think, we are positioned about as well as anyone going into 2015 and for Egypt.
Lamar?
Lamar McKay
I don't remember saying $100 billion over the next 10 years, but nonetheless Egypt is a place where we do have a lot of investment opportunity and some good projects to do. West Nile Delta, that particular project is not entirely, but it is pretty well insulated from the price and the price change that has happened over the last few months.
Obvious, we will do everything we can to make it as efficient as we can, but I think West Nile Delta will still be a project that will go forward.
Martin Rats
All right. Thank you.
Jessica Mitchell
Okay. Thanks, Martin, back to the U.S and Guy Baber of Simmons.
Guy Baber
Thank you guys for taking my question, I had a question on the balance between the obvious focus on capital discipline and restraint versus the ability to grow the long-term resource base of the company through the cycle over time, so the question is I guess in deciding to rest reset that capital base to a lower level, do you believe that $20 billion of organic spend is an adequate base level that is sufficient to drive the long-term resource base over time. Over the current level of spend need to be supplemented by rising exploration spending over time and be supplemented by acquisition of resource.
Just curious about how you think about that balance. Then moving toward 100% organic with their placement as a goal that you guys believe the up-line of site 2?
Lamar McKay
Bob, this is Lamar, again. I think, it is a great question.
I think obviously the $20 billion and how much activity we can do off that $20 billion is contingent on how we get the cost base for that $20 billion, but beyond that I think root of to your question is about renewal through organic means versus a combination and I quite frankly I think it is going to take a combination of organic and potentially acquisitions and I put unconventional resources in an organic category just not exactly like exploration, so I think those three pieces of the pie are going to play going forward.
Bob Dudley
Guy, I a supplement when we have sat down and went through in great detail of portfolio, we look out to the end of the decade. I mean, we still got 50 to 60 major projects that we are looking at and may pace a little bit different timing, but some of them look good and it we will just keep going with them for sure.
If we were in a position where we were short of major project opportunities, we got more than we can do. We had that before this price drop.
We were always going to have to prioritize. Then secondly over the last three to four years, we have really reloaded the exploration portfolio acreage some discoveries in the appraisal, so a slower pace of exploration and I don't think it is going to change our ability to grow and I just add that to what Lamar said.
Guy Baber
That is very helpful. Then I had one follow-up.
You mentioned prioritizing base spending in 2015 is one reason you are able to reduce the overall capital budget. I was just hoping if you could elaborate a bit on that comment and just perhaps quantify for us how that spending level has declined in year-over-year terms and specifically where you may be able to make cuts.
I am just trying to understand those implications, whether that affects your base decline rate at all and just how you think about that decision-making process?
Bob Dudley
Guy, I cannot give you specifics today, but the base spending that I am talking about that is going to be maintained around, safety reliability and integrity. That is going to be the same as it has been.
It might be a little bit lower in some instances because we have done a bunch of turnarounds over the last several years, so it may attenuate a little bit. The infill programs generally are very, very high return and I don't there is going to be attenuated that much and I think that is important to secure the cash flow in the near-term.
My point was more they were going to examine an every single dollar in every single category, not so much that we were going to find a silver bullet in the base. I think our base decline our aim is to keep that based decline in that 3% to 5% range we talked about in December.
Guy Baber
Okay. Thanks, Lamar.
That is helpful.
Jessica Mitchell
Thanks, Guy. Next question from Anish Kapadia of Tudor Pickering Holt.
Anish Kapadia
Hi just first question is on your 24 paying cash flow from operations I am just wondering if you could split that between Upstream and Downstream, kind of looking at the Upstream number, give some kind of updated sensitivity for full 2015 for the oil price?
Brian Gilvary
No. We don’t normally give that level of granularity in terms of breaking it down.
You could probably do some rule of estimates, but no we don’t actually we won’t break up the operating cash flow to be commercially sensitive in terms of what sits between Downstream and Upstream.
Anish Kapadia
Okay. Second question is on just looking at your taxes to 2015, I was wondering if there was going are going to be any significant difference that you would expect in terms of cash taxes versus P&L taxes this year?
Brian Gilvary
Cash taxes have been running at about 8% lower than tax charge, which has all to do with how we roll out the provisions versus what we have cash [ph] the provisions that we have in placed in terms of defer tax. It is typically running at about an 8% difference between paid and charged I think as we enter this year and we start to see the earnings profiles, there is no question the effective tax rate will be lower than the average that we saw this year, but there are so many factors that influence that it is impossible this point to really give you guidance.
We have got a rough indication of what we think it will be based on the plans that we have rolled up, but I think given the sharp drop in the oil price it is impossible to sort of come up with specific guidance at this point.
Anish Kapadia
Okay. Thank you.
Just one follow-on if you can, in terms of your assets in the U.S., I think you pointed to the Eagle Ford assets being a fairly high quality, I am just wondering how you kind of think about those assets in this whole price scenario, but then as well as some of the relative assets in the U.S. in terms of low-level pro scenario?
Bob Dudley
In terms of the Eagle Ford that is a very high quality set of assets in the Eagle Ford. Obviously, we would be working with our partner Louis on exactly what the activity level is going to be maintained through the year and I suspect to be a little bit of attenuation there.
The other assets that we have are more gassy and we have had very, very little capital activity on those assets and actually ironically some of our activity may go up a little bit in the Lower 48 in certain areas certain areas, certain sweet spot, so I think we are probably a little bit different than the average in the U.S. independent space.
Anish Kapadia
Right. Thank you.
Jessica Mitchell
We will take the next question from Rob West of Redburn.
Rob West
Hi. Thanks very much for taking my question.
I would like to return to the theme of having a lower oil price expectations and quite unanimously seem to expect the rapid bounce back in crude prices. My first question is a specific one.
You know, recently outbid on the Abu Dhabi onshore license renewal by one of your peers. I was wondering is that evidence that with the lower oil price need to be somewhat more disciplined in investing those marginal dollars in that specific case.
Second, more generally if your peers are willing to outbid your on new licenses and a new set of contract even we have project capacity? If we look beyond 2015, does that mean that if that happens you are willing invest less in them so long run growth and I guess return that cash instead rather than targeting longer term growth then you expected the oil price to bounce back?
Bob Dudley
Rob, I think. we are keenly aware of the feedback we have had from major shareholders and I factored it beyond the major shareholders, just people that broadly observed that the oil and gas industry for about half a decade now has generated lots not operating cash flow and puts it back in the projects of which are turned out to be pretty low returns and this is even in high $100 oil, so we have been working hard to make sure that we have a discipline around our capital.
I am perfectly comfortable with the changes that we are making. It is an investor focused strategies we do think in terms of value over volumes and I think that a disciplined reset of both capital and cost is very prudent.
We have actually seen this movie before. This is there are four times when prices come down say over the last 30 years only once was there a rapid jump back and that was probably 2008 and 2009, but other times there is more of a rebasing here and we see the fundamentals could do that and I think we needed to do very carefully but we need to do it quickly and I think that is good for all seasons and I think we are going to keep that commitment to the shareholders we will make sure that we protect the dividend, but I don't have a problem with taking this focused approach now.
I don't think we are going to just cut into that really long-term value. We may defer some, but that growth will come, I believe, with lower capital and operating costs.
Then Abu Dhabi, I have only read in the press, so don't know anything other than that. I think total was awarded a share in that concession, but beyond that I am not sure that process is over either.
I just don’t know, we don’t know.
Rob West
Okay. That is very clear.
Thank you.
Lamar McKay
Okay.
Jessica Mitchell
Next question from Lydia Rainforth of Barclays. Go ahead Lydia.
Lydia Rainforth
Thank, Jess. Good afternoon.
A couple of questions. The first one on the cost base or the prices [ph] trying to reduce the cost base.
What source of proportion of that is actually going to the corporate overhead as opposed to in individual businesses? Just within that, can you give us a couple of examples?
Then secondly just in terms of actually a very quick question on the reserve replacement rates ex- Rossneft if you have that. Thank you.
Brian Gilvary
Lydia, on the first point, as per the simplification issues we are talking about, we already in the process of taking somewhere around 10% to 15% of the corporate and functional overhead costs. As we now look through all of our activity on an activity basis, we will be looking to take out at least as much again if not more and we are going through an activity review of all our activities and functions, human resources ITNS, solid information system, all of the activity but coming back to Bob's earlier point not compromising safety and operational risk or comply, that would actually will not be compromised, but in terms of everywhere else we are looking at where we can take activity out, which should all help us within in terms of rebalancing the books going forward.
On the reserve's piece at this point, we do not normally give that sort of guidance that will come out as part of our annual report and account in 20-F filing.
Lydia Rainforth
Perfect. Thank you.
Jessica Mitchell
Turning now to Fred Lucas of JPMorgan. Are you there, Fred?
Fred Lucas
As I am, Jess. Thank you, guys.
Welcome the intention to rebalance your cash flows under oil price outlook, but I wonder if you could just authenticate simply [ph] how you do that. I guess it sounds like you still intend to grow your capital employed a little bit more slowly with the low rate of CapEx.
I am just using BP's would have some oil price sensitivity, we may have lost around $45 going from a $100 $55, plus or minus. Your EBITDA sensitivity would suggest that is an EBIT loss of over $12 billion.
I think that on a pre-tax basis, that was almost $9 billion of earnings I guess drop straight to the cash flow and given your capital employed base around $140 billion, that's a employed loss of return of 6% on your return on the capital, which in 2014 was not very good is below 10% versus where you are back in 2011. That was 16%, so I hear what you say, but have sold [ph] assets with the your return on capital on capital employed is pretty much hove and it looks like it may hove again, so I am trying to square the circle away where you get to cash flow balance, but in order to do that you got to be clearing your cost of cap expense and see how you get there.
How can you recover that loss of cash flow was $9 billion to initiate that balance.
Brian Gilvary
Yes Fred, there is an awful lot of lot of information. You have just drop into that question, I would be very happy to go through each of the pieces with you.
First of all, you have jumped to $55 revenue year-to-date averages 48, so do not get over enthused by whether oil prices in a last few days.
Fred Lucas
…the numbers were.
Brian Gilvary
No. Absolutely, so that is exactly what I am looking at Fred, and that is exactly where we are in the process of rebalance the books, but I mean I thinks it is a little this disingenuous to think about the business $115 of barrels and the returns as you have just described them it from our perspective were not satisfactory and that is something we were looking to grow.
You can't then assume the oil price goes to old $55 if that is where you want to sit and we have a cost base that was built at 115, so we have got to start to drive deflation into. That that will drive costs out, so we have going to pretty handle on what level of costs we need to drive out over the next short to medium-term to get those returns back where they need to be, but we can't do that overnight as you would expect.
You cannot lose that much revenue over night of a big chunk of your portfolio, so it is one of the things that we are very focused on it is kind of one of the things that are looking at in terms of how we rebalance the books. It is not just about rebalancing the sourcing use of and the rules of thumb you are using kind of interesting and $115 a barrel, but for someone that has follow the market as long as you have Fred you will know there is rule of thumb will not be applying down at $45, $50 a barrel and that's something we will look and reset through this year to help with guidance in terms of future quarter so it is just a bit premature this point, but obviously agree with your points.
Bob Dudley
Yes. Fred, this is Bob.
I think the question, the sort of stock to stock reality that you have painted there is an industry one. It is not just the BP one.
Fred Lucas
I agree. It is not unique to BP, but I would love to have BP's kind of bridge those numbers.
I mean EBITDA versus the last year I appreciate is not linear when you fall by as much as $40, $50, but assuming it is approximately right and assuming that you continue to go capital employed and tell me if I was wrong then it is very difficult to see how you can that loss of capital return. To get back to that point of cash and balance, because I assume cash balance is synonymous with the business that earned a exceeds cost of capital?
Bob Dudley
Well, I think that is why and you say we have a bearish outlook on prices. I think, what we have is a prudent, realistic response to what is happening in the industry and we are going to do it fast.
We are going to do rapidly, we are going to go through the cost and the cost base and that is how you move the dial quickly and that is what we are going to do across all over activities. I think, we are the only ones who have put in pay freezes and other things, significant reductions as we go through, but that is exactly why we are going to move fast.
I mean, I think you create it sounds like a distinguishing us but I will tell you the industry broadly has the same issue in those that sort of delay it is not wise and you need to know we are all over it, and I think we can do it. We have gone through '15 is a reset year, you obviously cannot get there in 15 but we are going to get it down in 16 we see the roadmap to do that.
we know how to do and that is what you should hear from us sense of urgency to rebase the company in 2016 and beyond.
Fred Lucas
Bob, what would you say satisfactory return on capital for BP?
Bob Dudley
Well, again, $35 billion to $40 billion is a 55% return. That is why you have seen those numbers come down over time.
I mean, we just divested in some more those in December and you have to know at what price that is as , well but I think you will see we are taking any price really you will see an increase in our return on capital employed going forward and of course that will vary depending on what price you assume.
Lamar McKay
I mean, Fred, maybe just to sort of help, I mean our long-run assumptions have not changed at this point, so we still assume along run assumption of $80 of barrels for our 20 to 30 investments still stand good and we held that when the price are $148 of barrel and will hold it now while it down at $45 to $50 a barrel, because we think long-term that is where it what will end up we just don't want to join this period of transition back to those several levels aromatic is going to take. I think we are just planning to be very, very prudent about how we do that.
Fred Lucas
When does your long-term start Brian?
Brian Gilvary
What you mean when does just start?
Fred Lucas
When do we get back to that $80?
Brian Gilvary
Fred, if I could answer that question for you, I would be a very rich man.
Bob Dudley
I think, we have to plan it on, minimum a year and it could be several years.
Fred Lucas
Right. Over that time, you think you can recover the loss in return on capital employed you like to experience it this year and get back to prior level.
Bob Dudley
You get different numbers depending on what price to use.
Brian Gilvary
Yes. Fred, we will be able to give that you as we get quarter-by-quarter and you start to see the progress, just like we did with the 10-point plan.
It was over 12 quarters it was delivered and you will see progress under this point last year. I don’t think many people thought we could hit the $30 billion target.
If you looked all the summation of all the various things, and we have exceeded, and I would fully expect that we will be able to do the same thing over the next couple of years assuming the oil price stay where it is. If it is above, where we expect it to be, that is all upside.
Fred Lucas
Okay, guys. I will leave it at that.
Thanks.
Bob Dudley
Okay. Thanks, Fred.
Jessica Mitchell
Okay. We will take the next question from Chris Coupland of Bank of America.
Chris Coupland
Thank you, Jess. Hello, good afternoon.
Just two quick questions, on the CapEx outlook, I just wanted to see that $3 billion cut year-on-year can you put a number on your exploration spend budget for 2015? Where is that going to and can you refer to a few FID deferred?
You have talked about Mad Dog, which other FIDs do you still plan to make during 2015 and if I may Brian I appreciate your will need a bit of time to update, but can you at least confirm in which direction it is going as the oil price drops not just from 100 to 90, but over way down to 40? Thanks.
Bob Dudley
Let me go first, Brian. I think, we are staying on a group numbers today.
We are not breaking all these things down into the intricacies of the plan, but the exploration difference in 2015 versus 2014 will be significant, but I am not going to give a number today. In terms of FID's, Mad Dog I listed as a potential referral, there have there been no decisions made on that.
As far as I think that is a project actually there is more about just of finding the optimum way in time to go to the market to understand what the cost of that project will be, so that is still to be worked with partners. Other examples we are looking along the normal pass.
I think expansions of heavy oil in Canada would be some things that we will be looking at to defer potentially. Our portfolio, the whole thing will be looked, but very similar things to what other people are looking at.
Lamar McKay
We got to be a little careful about saying exactly, which once because we are partners in some of these projects and we have to consult as well as.
Brian Gilvary
On the rules of thumb, I think it is just premature. I mean, if I would have sort of gut feel it is probably going to be slightly high on the oil and slightly lower on the gas, but until we sort go through the portfolio looking all the effects of the PSAs what that means in terms of different prices set just premature at this point, so we will update when we can.
Chris Coupland
Okay. Thank you.
Jessica Mitchell
Okay, Chris. We will take a next question from Lucas Herrmann of Deutsche Bank.
Lucas Herrmann
Yes. Thanks very much, gentlemen, afternoon everyone.
At least two of I might just to bring Tufan into things, I guess, very patiently. Chemicals it's a business that over the last three years, I guess, has struggled would be the right phrase.
If I go back three, four years it was delivering near a $1 billion of profit. I guess what I don’t really understand is, you seems to have advantage assets particularly in the PTA chain advantage technology and yet in the losses remain I guess surprising relative to the strength of your position.
To what extent to or what time period, Tufan, or to what extent and do you think it is still possible to move back towards the kind of numbers that you were delivering in 2010, 2011? That is the less first one.
Secondly, Lamar, I wondered if you would like to talk a little bit more about the transaction you have undertaken with Chevron. It just the same in ways they have disclose what payment you might received, because is classic case in some respects, realizing value from exploration, but what intrigued me was the decision to seed operator ship in a basin, which you have a very strong position and that you have been always been exceptionally proud of.
It is not criticizing what you are doing. It is better understanding the logic for seeding?
Tufan Erginbilgic
Let me start with petrochemicals. First of all I will say I think PTA right now is at the bottom of cycle.
We knew that loss of capacity came in China and how long do we believe this bottom of cycle will last at least I will say couple of years maybe three years or more of until the excess supply clears out, therefore.
Lucas Herrmann
Is that two to three years from now ?
Tufan Erginbilgic
That is my expectation if I look at that, but I would say therefore if you look at the strategy, we actually fundamentally changed the strategy. Strategy is right now to say we have significant restructuring, especially in automatics business to reduce the cash breakeven more than 35% as I mentioned in my presentation.
This is good for all seasons, frankly. If the environment picks up and gets to the levels you are talking about, then we expended earnings potential of the business.
If it stays at low levels, we have a much more robust business, hence why we came up with this strategy, especially in automatics restructuring, but one thing I want to say in acetyls, we actually see a better markets and it has been growing and we expect environment to improve even further in acetyls, so I think we may selectively invest to capture that earnings potential in acetyls business.
Lucas Herrmann
Right. Thank you.
Lamar McKay
Lucas. Hi.
Lamar. I think, this was a very important transaction.
We have not given the compensation side of it yet, but I think it was an exceptionally important transaction one that we have been working on for quite a while. Effectively it creates commercial alignment across the number of blocks in a neighborhood of quality discoveries, probably the largest and highest quality Paleogene discoveries or some of them at least.
The simple logic is that we can do more optimal development and capital efficiency for the whole through deciding together and collaboratively with Chevron and Konica, where our host may be what would it look like, what would tie-in from where. There is massive synergy in that teams, where I think we will have seconded members both ways and the teams.
We may operate some of the drilling. They operate the operatorship.
It is an emotional issue sometime, but as I have talked many, many times we are dedicated to try to find the absolute best way to do something. Chevron has the ability, they put up Paleogene field into operation, they built facility, might look very similar to something we may use in this consortia.
The technology development needs to be done by multiple companies rather than one and don't forget we still own Kaskida 100% and operate Kaskida as well as other exploration prospects that we operate, so it is a balanced way of trying to get the most value out of this play really.
Lucas Herrmann
This is to accelerate delivery over and above the ability of the distributors work together on technology? Do you think Chevron already in the position where it can push this development more aggressively than would be the case that would it just be in your hand?
Lamar McKay
I think there is a pretty good chance that working together will accelerate development and it will be the right development rather than everybody for themselves. That’s what it is fundamentally about.
Lucas Herrmann
Okay. Thank you.
Jessica Mitchell
Moving now to Bertrand Hodée of Raymond James.
Bertrand Hodée
Hi, everyone. Thank you for taking my question.
Two quick ones if I may. The first is on Mad Dog, your latest view on Mad Dog I think in December '14 was that development cost were coming down to around $14 billion how much deflation you still need on Mad Dog for this project fly let's say at lower oil price assumption of $50 or $60.
That is my first question. The second question, you took an impairment of $1 billion in Angola around.
Can you explain the rationale behind this impairment? Is it also linked to decommissioning cross-linking or is it something else?
Thank you.
Lamar McKay
Bertrand, this is Lamar. Let me hit the second one first.
The impairments in Angola, we are not going into detail on individual area impairments too much, but there was a combination of reserve write-downs that triggered the impairment tests that I talked about earlier with a very pretty much lower oil price $48 strip, as well as some decommissioning effects on cost service both, and I forgot your first question. Mad Dog, we think, Mad Dog cost have come down as I talked about in December, partly due to its design in scope and partly due to better prices in effect.
I am not going to give any sort of the target in terms of where we are trying to get to, to make it economic at oil price, but I do think there is very significant savings yet to come in Mad Dog, and we will take the time to understand how and when to go to the market to try to access those better costs. I think we will certainly have to work with partners and make sure we are on the same boat on this and aligned, but I think that is going to be an example that probably goes to the right a little bit.
Bertrand Hodée
Just one follow-up on Mad Dog, do you still intend to go to contractors in March as you said in December are you going to proceed back?
Lamar McKay
Well, I think we need to talk to the partners, but I would think, well I am not going to give guidance on that. We will go when we think it is ready to go.
Bertrand Hodée
Okay. Fair enough.
Thank you.
Jessica Mitchell
Thank you. We will move now to Neill Morton of Investec.
Neill Morton
Thanks, Jess. Good afternoon, everyone.
A couple of hopefully quick questions, just firstly on the gearing, you talked about 10%, 20% ban, while uncertainties remain now going into 2015 your strong balance sheet of 17% it is not a million miles away from the total pinned of range just wondered is that laying in the sand that you could defend at all costs. Secondly on Macondo just wondered whether you are looking to appeal the Phase 2 ruling and of so, would be a time deadline on that?
Thank you.
Brian Gilvary
Thanks, Neill. I would just pick up that first question.
You recall the prima condo are gearing about almost 20% to 30%, so we reset that into latter part of 2010. In the 10% to 20%, band, which where we talk about while uncertainties remain in to degree the environment was one of those uncertainties, so I would not go as far saying it is a strong hard-line the sun, but it has been an incredibly powerful way to manage the company going forward and there is no question at these oil prices It gets back to rebalancing source use of cash, which is one of the reasons why we are taking all the actions that we are taking recognizing that the number of incentives that help us so I wouldn't call it a hard-line of sun, but it is absolutely key part of our financial framework right now and we would anticipated at current price levels of where we see today, we can still managed through this year, cover the dividend, rebalance the books to described you today and still stay within that band of 10% to 20% We are pretty confident about after this year?
Lamar McKay
Some slight flexibility to do some things that we do anticipate inorganically, but that's a small things your second question which was the Phase 2 of the trial for those complicated the Phase 2 was the one that looked at what they called the source control and response to the spill the judge ruled that we were not grossly negligent in that and had a value of the oil and we are just considering options for phase to appeal and really no guidance at this time.
Neill Morton
It there deadline Bob.
Bob Dudley
I don’t think there is a deadline. Actually, although I have been exposed to a lot of legal points, I actually don't know and there's probably no one right now that can answer whether there is a hard deadline or not, but we won't let ourselves be timed out from what we think is right.
Neill Morton
Sure. Thank you very much.
Jessica Mitchell
Thank you, Neill. Question now from Richard Griffith of Canaccord.
Richard Griffith
Good afternoon I have not listened to the entire call, so as a quick point of clarification really. You have talked about CapEx budget going down this year if I have heard you correctly driven by activity reduction with a view to capturing service industry deflation perhaps from 16 Ohm went with times further your CapEx expand from 16 onwards could be low given how cautious you are on the old price outlook?
Brian Gilvary
Sorry. Lower than 15.
Lamar McKay
Well, I think the CapEx guidance is an adjustment to what we see as an environment. We are not making assumptions of deflation in that CapEx number, but we see opportunities to defer secure longer-term growth by deferring and avoiding the issue of putting CapEx in something that might not get the right returns.
I think as we look beyond '15 into '16, I mean, we will have to judge this. It is hard to say.
I mean, it feels like that level is about the right level for us in a lower oil price environment to secure of the growth but I think it is probably a little bit premature to lock it in.
Brian Gilvary
Yes. I think at this point which it is a bit premature and we will have to see what happens in terms of deflation.
Of course that will ultimately drive to lower number, but it is just too soon at this point. We will be able to update you quarter-by-quarter we get through this year and see how time progress.
Richard Griffith
Okay. All right.
Thank you.
Jessica Mitchell
Thank you, all. There are no further questions, so I will just hand back to Bob to say a few last words.
Bob Dudley
Well, thanks, Jess. Time is going fast this year.
First, Happy New Year to everybody, we are already into February, quite extraordinary. I think as you listen to what we have said and what we have been saying now consistently, I would remember that we are an integrated company, so we are responding in the Upstream very, very strongly and of course the Downstream actually offers us some growth in cushion to this.
What you are hearing from us is we need to prudently prepare the company for a different environment. This is more than a price correction.
It's quite significant and we have been through a lot as a company and I think the company, the broad management teams across the company are quite still that responding to challenges and problems. In this case, we are going to have a disciplined reset of both, capital and cost.
We think it is prudent to do that. We got a commitment to the shareholders of maintaining a dividend and over time having to be progressive.
We have some momentum and what we are doing I think, we have been pretty fast off the market in an our view of adjusting here we will do it carefully, but we will do it rapidly and look forward to talking with you next quarter, because think about this the average price in our industry of $77 in the fourth quarter so far as running $48, so these are not going to be dull quarters ahead of us, but we are not going to be complacent. Again, thank you all.
I hope your years are off to a good start and we will be in touch. Thanks.