Feb 5, 2019
Operator
Welcome to the BP presentation to the Financial Community, Webcast and Conference Call. I now hand over to Craig Marshall, Head of Investor Relations.
Craig Marshall
Welcome to BP's Fourth Quarter and Full Year 2018 Results and Strategy Update. I'm Craig Marshall, BP's Head of Investor Relations.
And I'm here today with our Chief Executive, Bob Dudley; and Chief Financial Officer, Brian Gilvary. We are also joined by Upstream Chief Executive, Bernard Looney; and Downstream Chief Executive, Tufan Erginbilgic.
Before we begin, I'll 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 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.
Now, over to Bob.
Bob Dudley
Thank you, Craig. And welcome to everyone joining us today.
Six months ago, we opened our second quarter remarks by commenting on how busy the first half of 2018 had been and the second half was no different. We're now two years into our five-year plan and are making strong and steady progress, despite the continuing volatility in the energy market.
First to the agenda today, I'll begin the presentation with a review of the strategic highlights from 2018 reflecting on some of the key themes we have seen in the broader energy markets and demonstrate how our strategy is consistent with advancing the energy transition. Brian will then take you through the detail the fourth quarter and full year results and provide you with guidance on the outlook for 2019 and our financial frame.
Bernard and Tufan will then have an opportunity to update you on their businesses. Lamar cannot be with us today as he is flying to meet shareholders, so I will provide an update on our low carbon strategy that he shared with you last year.
Will then be ready to take your questions. Now to highlights from the year.
The continuing business momentum has underpinned another strong set of operational and financial results. This is a testament to the resilience of our strategy and supports our commitment to growing free cash flow and distributions to shareholders.
We reported underlying replacement costs profit of $12.7 billion for the full year, more than double that of a year ago. Our underlying operating cash flow increased to $26.1 billion.
This is up 33% on 2017 after adjusting for a working capital build, reflecting real growth from across our businesses. Organic capital expenditure was in line with guidance at 15.1 billion, demonstrating our continued focused on cost and capital discipline.
And return on average capital employed was 11.2% almost double that of 2017. In the Upstream, we remain on track to deliver 900,000 barrels per day of new major project production by 2021, supported by the startup of a further six major projects during 2018.
We also completed the transaction to acquire BHP's Lower 48 assets, creating a significant position in the region that is already contributing to production, earnings and cash flow growth. And with the sanctioning of a further nine projects in 2018, our organic reserves replacement ratio was just over 100% for a year on an organic plus inorganic basis, it was 209% In the Downstream, we delivered our best underlying pretax earnings on record of $7.6 billion.
This was underpinned by the continued growth of our fuels marketing business in new and established markets with 17% year-on-year earnings growth. Across our manufacturing business, we continue to see strong performance with record refining throughput in the year.
We also made a series of announcements of interest that support our advanced mobility agenda, notably our purchase of Chargemaster, the UK's largest electric vehicle charging company. In Russia, our 19.75% shareholding in Rosneft provides us a strong position and one of the largest and lowest cost hydrocarbon resource basins in the world with access to major markets both east and west.
In 2018, BP's share of production Rosneft was around 1.1 million barrels per day, and we also received 620 million in dividends and these are after tax. In addition to our equity position, we also have established technical cooperation arrangements in our building and material business that is generating incremental value through standalone joint ventures, both in Russia and elsewhere.
Bernard will touch on these projects later. Turning to our renewables and low carbon businesses.
In alternative energy, the partnership with Lightsource BP goes from strength to strength, having doubled its footprint around the world since we first combined. In conjunction with our existing biofuels and wind businesses, we firmly believe that this kind of strategic partnership will drive further growth in our alternative energy portfolio.
We have also been in progress on the broader energy transition agenda. We are addressing the dual challenge and setting ambitious targets to reduce our emissions, continuing to improve our products and creating new low carbon businesses and markets.
I'll talk more about this and the announcement last week of the BP board support for a proposed climate reporting resolution later. I want to update you on the safe, reliable and efficient execution across our businesses.
It's a story of real progress, however, we remained focused on moving that agenda forward. Safety remains our number one priority and a core value.
As you'll see from the slide, there was a reduction in the number of process safety events in 2018. This is an important indicator of how we are working to keep our people out of harm's way and our plants running safely.
Our aim remains the same to have no accidents, no harm to people and no damage to the environment. There's always more we can do to drive improving results today and in the future.
As you have heard me say before, safety is good to business. This commitment to safety also leads to improving reliability of our underlying businesses, which in turn leads to improve cash flows and business performance.
In this regard, we have seen a consistent improvement in our upstream plant reliability, a record 96% in 2018. And in the downstream, our refining available remain strong at 95%.
Turning then to the macro environment. We continue to see a number of factors contributing to an increase in volatility in the energy markets.
Over the course of 2018, OECD stocks move back in line with five year average levels. During the second half of the year, inventories began rising, driven by a combination of increasing OPEC production levels, record U.S.
supply growth and the decision by the U.S. government to grant waivers to buyers of Iranian oil.
Together these saw the Brent oil price fall from a four year high in October of $86 per barrel to around $50 by the end of the year. Looking to 2019, the Brent oil prices improved to around $63 as OPEC plus have started to implement their decision to reduce production for the first half of 2019.
On supply, U.S. tight oil is expected to continue to grow strongly, especially in the second half of the year as new pipeline infrastructure is introduced.
On demand, we expect growth to remain above average supported by continuing gains in China and India. The outlook for oil is expected to remain volatile with many uncertainties including how markets respond to evolving sentiment around ongoing trade discussions, and Venezuela is an obvious concerned.
Turning briefly to gas markets. The Henry Hub gas price moves significantly in the fourth quarter, increasing to $3.70 cents per mmBtu with storage levels well below historical averages.
Year-to-date, prices have returned to recent average levels of around $3, due to milder weather. Relatively low levels of storage mean that prices are likely to remain sensitive to weather conditions over the next few months.
So as investors and the wider society are faced with the challenges of near term price volatility, so too are we focusing our collective attention on the dual challenge facing the global energy system. That's meeting society's demand for more energy, while at the same time working to reduce carbon emissions to help the world tackle the threat of climate change.
First, we estimate that the world is likely to need around 30% more energy by 2040 to continue to grow. The majority of this additional demand comes from a growing prosperity in Asia with around 2.5 billion people set to be lifted from low to middle incomes over the next 20 years.
Second, carbon emissions need to fall rapidly to be on a path consistent with meeting the Paris climate goals. There are a range of paths, but even are - even faster transition scenario which I'll mention shortly sees emission reductions in the order of 50% or so by 2040.
We all have a role to play in reducing emissions, governments, consumers, as well as businesses like BP. We're in current trends emissions are likely to continue to edge upwards in the near term.
As a global energy business, we are very committed to playing our part in a lower carbon future. We have introduced a clear framework that will shape our approach and hold us accountable through clear targets.
We call it RIC or R-I-C and more on that shortly. Let me then spend a moment looking at how BP is thinking about the two parts of the dual energy challenge.
Turning to the first part that of a growing demand for energy. A year ago, Spencer Dale, our Chief Economist laid out some scenarios within our Energy Outlook as to how the energy transition might evolve.
And he and his team will release this year's Energy Outlook in just over a week. I want to refer to a couple of scenarios from last year's Energy Outlook that help inform us about the future and position BP to be flexible to a range of outcomes.
First, an evolving transition scenario which sees recent changes in global government policies, technological developments and social preferences continuing at a pace consistent with recent history. By 2040, energy demand increases by a third with oil demand growing from around 100 million barrels per day today to 110 million barrels per day by 2040.
But carbon emissions increased by 10% far higher than the rapid decline thought necessary to be consistent with the Paris climate goals. Second, and even faster transition scenario, which sets a trajectory consistent with meeting Paris climate goals.
Carbon emissions fall by nearly 50% by 2040, while energy demand grows by over 20%. Gas demand is broadly unchanged in 2040 verses today, while oil demand falls to around 80 million barrels per day.
Third, a scenario we have called supply with no investment, which assumes new investment in oil is stopped and existing oil production declines at a conservative rate of 3% sets that oil falls to around 45 million barrels per day. So what does all this mean for BP and our industry?
The world will need all forms of energy to meet demand in any scenario. Renewables will grow 4significantly at a faster pace than any other form of energy in history.
However, oil and gas in particular still have a significant role to play in the dual energy challenge. Successful companies will be those who have the greatest flexibility adapting to the prevailing price environment to produce the energy required in the form demanded.
For oil in particular, under a scenario that is broadly consistent with the Paris goals significant investment is required. Many trillions of dollars to bridge the gap between available levels of supply in the no investment case, and the likely levels of oil demand in 2040 even in scenarios designed to be consistent with meeting the Paris goals.
We believe we are well placed to compete. Our focus on advantage oil and gas is driving down our breakeven so that our barrels are increasingly competitive.
To enable this, we're investing our capital with discipline, improving the efficiency of our spending through standardization, driving deflation and implementing technology leading to improving returns. We believe we can also compete through a strategy of maintaining balance and diversification across our portfolio, be it oil or gas, growing our low carbon and renewables portfolio or investing in different geographies, markets, or pricing regimes.
In summary, it's about progressing our strategy, but doing so in a way that keeps us flexible and adaptable to the pace of change into the changing environment. The second part of the dual challenge relates to the need to reduce emissions.
We have embedded our approach to lower carbon and reducing emissions within our advancing the energy transition report, which we launched in April last year, is clearly articulates our commitment to advance a low carbon future through what we call our reduce, improve, create or RIC framework. Reduce the emissions in our operations, improve our products to help our customers reduce their own emissions from the products they buy, and use, and create low carbon businesses building on our existing alternative energy business.
Within this, we also set out clear targets for the first time for reducing emissions in our operations. So even as our business grows to meet growing demand for energy, our net carbon emissions will not.
Almost a year later, I'm pleased to say that we have made significant progress across our business in support of the targets we laid out. Just a few examples include significantly reducing flaring in our offshore plant in Angola, using waste heat for power and our Whiting refinery in the U.S.
and testing technologies to quantify methane emissions in Azerbaijan and the U.S. as well as setting out a framework for what we can do across our business operations.
We also take action outside the organization contributing to international initiatives like the OGCI, the Oil and Gas Climate Initiative. We plan to publish an update on all of this and our sustainability report in April.
Before I hand over to Brian, let me briefly summarize. As I mentioned at the start, it's been a busy year, but we've created a strong track record of executing against our strategy.
This strategy was laid out two years ago and it's based on four clear priorities. Together, these embrace the energy transition and shape how we continue to create shareholder value in this rapidly changing world.
These four priorities are; first, growing supplies of clean gassed and low cost, high margin advantaged oil. Second, market led growth in the Downstream for our technologically advanced fuels, lubricants and petrochemicals and a growing range of bio products, electric vehicle charging an industry leading carbon neutral offers.
Third, venturing and low carbon across multiple fronts, including testing new, emerging and potentially disruptive technologies and business models. And forth, continuous modernizations of our plants, process of portfolios and ways of working.
The strategy allows us to flex and evolve with the changing environment while staying committed to our proposition growing shareholder value. On that note, let me know hand it over to Brian.
Brian Gilvary
Thanks, Bob. Looking at the environment in the fourth quarter, Brent crude averaged $69 per barrel compared with $75 per barrel in the third quarter, reflecting the significant fall in oil prices following the peak at the start of October.
Strong demand along with low stories levels saw U.S. Henry Hub gas prices increase averaging $3.70 per million British thermal units versus $2.90 in the third quarter.
BP's global refining marker margin averaged $11 per barrel compared with $14.70 per barrel in the third quarter, driven by ongoing product over supply. Moving to our results.
For the year, we saw significant growth in earnings, cash and returns. This was driven by a combination of higher oil prices, continuing strong reliability and availability across the businesses and growing throughput and production.
This in turn provides us with a flexibility to manage our financial framework through a volatile price environment, while also providing the capacity to complete the $10.3 billion transaction to acquire BHP's Lower 48 assets. Underlying replacement cost profit for the year with $12.7 billion compared to $6.2 billion in 2017.
For the fourth quarter, underlying replacement cost profit was $3.5 billion compared to $2.1 billion a year ago, and $3.8 billion in the third quarter of 2018. Compared to the third quarter, the fourth quarter result was impacted by lower upstream liquids realizations, significantly higher turnaround activity in the downstream, and the lower contribution from Rosneft.
This was partly offset by strong capture of the available heavy crude discount by U.S. refining system, a strong fuels marketing contribution and higher upstream production including the edition of the BHP Lower 48 assets.
Compared to a year ago, the result benefits from higher upstream realizations in production, strong fuels marketing growth in the downstream, a higher supply and trading contribution, and an increase contribution from Rosneft. This is partly offset by a higher effective tax rate.
The fourth quarter also had a $1.2 billion non-operating charge, which includes environmental and other legal provisions, as well as around $440 million for restructuring. This is primarily non-cash.
This is the final restructuring charge relating to the program that started in 2014, which has seen significant restructuring and rationalization activity across the Group. The total charge since this was initiated is $3.3 billion.
And finally, the fourth quarter dividend payable in the first quarter remains unchanged at 10.25 cents per ordinary share. Turning to cash flow, and our sources and uses of cash.
Excluding oil spill related outgoings, underlying operating cash flow was $26.1 billion for the year of which $7.1 billion was generated in the fourth quarter. This included a working capital build of $2.6 billion for the year of which $1.5 billion was in the fourth quarter.
The fourth quarter build was primarily driven by price and timing effects, including German mineral oil tax payments. Organic capital expenditure was $4.4 billion in the fourth quarter and $15.1 billion for the year.
After adjusting for the working capital build, our 2018 organic free cash flow surplus was $6.5 billion equivalent to an organic cash breakeven around $50 per barrel on a full dividend basis. Turning to inorganic cash flows.
Full year 2018 divestments under the proceeds totaled $3.5 billion and we made post-tax Gulf of Mexico payments of $3.2 billion. Inorganic capital expenditure was $9.9 billion for the full year including payments in respect of a BHP acquisition of $6.7 billion.
Gearing at the end of the year was 30%. We remained active in our share buyback program and bought back 50 million ordinary shares in 2018 at a cost of $355 million.
Now turning to guidance and our outlook for the first quarter of 2019. In the Upstream, we expect reported production to be flat versus the fourth quarter.
This reflects the volume impact in high margin regions for massive divestments, including Magnus and Bruce in the North Sea and Kuparuk in Alaska, as well as turnaround and maintenance activities at Thunder Horse in the Gulf of Mexico. We expect the volume impact to be offset by major project startups and a full quarter benefit of the BHP Lower 48 assets.
In the Downstream, we expect industry refining margins to be significantly lower with global product oversupply, particularly for gasoline as well as narrower North American heavy crude differentials. Looking at our guidance for the full year, we expect upstream underlying production to be higher than 2018 with continued growth from major project startups.
Actual reported production will depend on divestments, OPEC quotas, entitlement impacts under the factors including the pace of integration of the BHP assets. Organic capital expenditure is expected to remain in the range of $15 billion to $17 billion.
The total DD&A charge is expected to be around the same level as 2018. We expect to continue our share buyback program and to fully offset the impact of script dilution since the third quarter of 2017 by the end of this year.
Gulf of Mexico oil spill payments are expected to step down to around $2 billion in 2019 in line with the historical settlements. These payments along with the final cash installments relating to the BHP transaction will be weighted towards the first half of the year.
With divestment proceeds weighted to the second half of the year and assuming current oil prices, gearing is expected to remain around the top end of the 20% to 30% range through the middle of the year. In other business and corporate, the average underlying quarterly the charge is expected to be around $350 million dollars.
Although this may fluctuate between individual quarters. The underlying effective tax rate is expected to be around 40%.
As usual, we will provide updated rules of thumb for 2019 on price movements impacts for the year and expect to publish these and our website by the end of this month. Finally, with the implementation of the new IFRS 16 standard on leases, we will be including additional disclosures in our annual report and accounts for 2018 to be published later this year.
We also expect to revisit our guidance detailing any associated impacts from IRFS 16 at the time of our first quarter results. To summarize, we continue to maintain a discipline financial framework and are on track to deliver the 2021 targets we laid out two years ago.
Organic capital expenditure is expected to remain in the range of $15 billion to $17 billion per year. Over the next two years, we plan to complete more than $10 billion in divestments.
Our commitments are fully fund the BHP transaction within the financial framework using available cash remains unchanged. Through the end of January, we've paid the initial consideration and three differed installments totaling $7.7 billion, with the remainder to be paid through April.
With a continuing high grading of our portfolio alongside strong financial results, we also saw return an average capital employed improved from 5.8% in 2017 to 11.2% in 2018. We remain confident in our guidance on returns of greater than 10% by 2021 at $55 per barrel.
In addition, our balance sheet and cash cover metrics remained strong. At current oil prices and in line with growing free cash flow and the reseeded divestment proceeds, we expect gearing to move towards the middle of our targeted range of 20% to 30% through 2020.
We maintain our progressive dividend policy and the commitment to the share buyback program and expect to fully offset dilution from the script evident since the third quarter of 2017 by the end of this year. Taken together, all of this supports our commitment to growing sustainable free cash flow and distributions to shareholders over the longer term.
On that note, let me now hand over to Bernard.
Bernard Looney
Thanks, Brian, and good morning, ladies and gentlemen. In December, we hosted many of you at an event in Oman, where I shared a detailed update on our progress and plans for the Upstream.
Today, I will summarize the key messages from this event, provide an update on 2018 delivery and provide some context on future plans. In Oman, we shared the following key messages.
First, our continued strong track record of delivery, doing what we said we would and doing so competitively and safely. Second, we are on plan to deliver the 2021 cash flow growth target.
Third, we have improved both our capacity to grow and the quality of that growth. We have the capability within our current resource base to grow pretax free cash by 40% to 50% from 2021 to 2025 under the current capital frame and with increasing returns.
Forth and finally, we are transforming our business. Our teams wanted, the next generation will demand it, our shareholders deserve it and is now hitting the bottom line.
We have momentum and we see enormous opportunity. I'll touch briefly on some of these themes after, we take a closer look at 2018 performance.
First, we grew reported production 3% versus 2017, ahead of our plan with underlying growth of 8%. We had record plant reliability of 96% and our average base decline over five years was 2.5% better than guidance.
Second, we said we would maintain discipline and invest between $12 billion and $13 billion of organic capital per annum. In 2018, we invested $12 billion of organic capital, underpinned by continued gains in execution performance, great delivery from the team and thereby creating the space for the BHP transaction.
As an example, 70% of our offshore wells are now top curtail, up from 25% just five years ago. A lot of waste remains but we will continue to drive the efficiency of spin through our transformation program to make more capital available for the Group.
Third, we delivered six major project startups which on average were delivered under budget and on schedule. We also made nine finalists investment decisions.
Forth, all this helped us generate $16.5 billion of pretax free cash flow. This is significantly hard in 2017, even after adjusting for higher oil lower prices.
Fifth, we strengthen our portfolio, notably through the acquisition of BHP U.S. onshore assets, which added 4.6 billion barrels to our resource base.
And finally, as Bob mentioned earlier, we are making good progress in the upstream on reducing emissions and have completed more than 50 projects to deliver sustainable emissions reductions. A few examples include reducing flaring in Angola Block 18, electrification of compressors in Alaska and methane reduction in BPX Energy.
This is good progress, but we have more to do. Moving to our projects.
We remain on track to add 900,000 barrels a day of oil equivalent from our new projects in 2021. 20 of these projects have been delivered including the startup in January of the Anadarko operated constellation project in the Gulf of Mexico and we have 15 to go.
With the recent sanction of Atlantis Phase 3 in the Gulf of Mexico and Cassia Compression in Trinidad, all of the projects needed to deliver this plan have passed through the final investment decision gate. We expect to deliver this plan with around $15 billion or 25% less capital than we envisage when we first set out our plans.
As well as 35% higher cash margins, these projects are expected to have at least 20% lower development cost than the base business had in 2015. This is advantaged oil and gas.
Next to an update on BPX Energy. As we said in December at our event in Oman, devaluation looks just as good today as it did when we originally showed it in July and likely better.
In our newly acquired BHP acreage, we're up and running. Our first two BP operated rigs are now operating in the Eagle Ford and we spot our first two wells in early January.
By the end of 1Q, we expect to assume full control of field operations. As we spend more time with these assets, we are confident of delivering the synergies.
We continue to see material upside potential through capital efficiency, and over time, we plan to exploit additional resource potential from zones that were not in our base case. You will increasingly see this performance show up through the separate BPX Energy disclosures, and we will look to update the market on progress through the year.
Our 2018 delivery progression of major projects and our enhanced position in the Lower 48 hopefully demonstrates why we are increasingly confident in our guidance. Our plans for 2019 will continue to keep us on track for delivery in 2021 with another year of discipline growth.
We expect underlying production to be higher than 2018 as we continue to ramp up major projects. Reported production will be relatively flat as we go through our significant divestment program.
We expect our organic capital expenditure to be between $13 billion and $14 billion as we continue to focus on capital discipline and productivity. We expect to start up around five major projects and take a number of final investment decisions on projects in the Gulf of Mexico, in the North Sea, AGT and India, underpinning growth to 2021 and beyond.
This underpins our confidence in the progress we're making to deliver $14 billion to $15 billion in pretax free cash flow by 2021. I now want to turn to the longer term.
While maintaining our focus on delivery to 2021, we believe we can continue to grow through the next decade, while remaining focused on value and quality. The foundation is a high quality resource base.
We have around 50 billion barrels of discovered resource. Around 25 billion barrels of discovered resources proved and non-proved is in our forward plan.
Out of that total resource, around 50% is already booked as proved, another circa 30% around 8 billion barrels is expected to come from base management, new wells in our conventional reservoirs and our BPX Energy acreage. These opportunities leverage existing infrastructure and are very capital efficient, they're flexible and have quick paybacks.
The final circa 20% is from major projects, those that have been sanctioned or have yet to be sanctioned and have or are expected to meet our hurdle rates. To conclude, we don't need more resource to grow in the medium term and will continue to look for opportunities to high grade.
Now I will describe the next wave of around 20 potential major projects that may reach final investment decision over the next few years and they're showing on the map. There are several opportunities around our existing hub in the Gulf of Mexico and we see similar opportunities in our other high margin oil regions of the North Sea, Angola and Azerbaijan.
We continue to strengthen this hopper, for example, at Thunder Horse in the Gulf of Mexico, where we recently unlocked an additional 1 billion barrels of oil in place gross. In Mauritanian, Senegal where we recently sanctioned the Greater Tortue Ahmeyim development, we have the potential to create a major new LNG hub.
This is the first major gas project to reach final investment decision in the basin and was sanctioned at a fast pace around three and a half years from discovery. In Trinidad and Australia, we are focused on keeping the existing LNG infrastructure full, as demonstrated by the sanction of Matapal, formerly known as Savannah in December.
Finally, as Bob mentioned, we continue to progress our joint ventures with Rosneft test, one of our 2018 major project startups is producing and already returning cash to BP. In December, we closed on our acquisition of a 49% stake in Kharampur and are developing an existing oilfield and significant future gas production in West Siberia.
And our Yermak exploration joint venture in Western Siberia where we also hold 49% completed an extensive seismic program in 2018 and drilled an exploration well. With all of this, we have increased confidence in continuing to grow beyond 2021.
We believe we have the capacity to increase pretax free cash flow by a further 40% to 50% by 2025 at constant capital. This is not a promise or a target, but a scenario which demonstrates the depth and quality of our portfolio.
Finally, let me touch on our transformation agenda, which is really starting to bite. We think of it through the lenses of digital, agility and mindset.
We now have around 1,000 projects across the upstream aimed at sustainably improving both performance and how it feels to work in the upstream. Some are still in the idea phase, but the majority are in action with a growing number already executed.
We spoke about these four examples in Oman, which demonstrate the enormous potential that we see in this area. To accelerate digital further, we have now created a new digital function, which stands alongside our operating functions.
Digital is going to be as important a capability in our industry as knowing how to drill a well. I'm keen that we move faster, this new function and hence increased focus will help.
Agility is a potential game changer. Last year, this went viral with over 3,000 staff trained on agile ways of working not because they were forced, but because the organization is energized about how this can transform the business.
Finally, mindset shift remains a must do. Last year, we made our largest investment in leadership training in a decade.
3,000 upstream leaders trained in mindsets and ways of leading, 2,000 additional staff engaged in mindset focused events and more to come in 2019. In summary, 2018 has been a good year for the upstream where we increased confidence in 2021 delivery and underpinned our ability to continue growth well into the next decade.
But we're not stopping there, we will continue to maintain a relentless focus on safety, pushing to improve the underlying efficiency of our business and our building momentum in transforming how we work. Thank you for listening.
And let me now hand over to Tufan.
Tufan Erginbilgic
Thank you, Bernard. Good morning.
Today, I will provide you with an update of progress against our strategy. To begin, let me briefly touch on the key global trends that are shaping our downstream industry.
Driven by rising prosperity, global demand for fuels, lubricants and petrochemicals products is expected to continue to grow. The majority of this growth will come from developing economies.
Demand is also projected to significantly grow across convenience retail markets. As the energy transition evolves, products and services will need to be delivered in new and better ways, creating increased demand and material gross margin pools in the areas of advanced mobility, bio and low carbon products, as well as the circular economy.
Digital transformation will also continue to rapidly progress. With these trends in mind, our downstream strategy was developed to deliver underlying earnings growth and build competitively advantage businesses.
It is fit for now and fit for the features. It focuses on the five key priorities of safety, profitable marketing growth, advantage manufacturing, efficiency, low carbon and digital.
We are making strong progress and are on track to deliver our targets. Let me now take you through 2018 delivery in more detail.
Firstly, our 2018 earnings of $7.6 billion are a record and some 70% higher than 2014, despite 2018 having one of the highest levels of turnaround activity in our history. If you look at the chart on the left, you can see this performance reflects $4 billion of underlying earnings growth since 2014 with 1 billion delivered in the last two years, as strong delivery particularly in a challenging 2018 environment where oil market opportunities negatively impacted our supply and trading business, resulting in a lower contribution, which we do expect to come back.
And in lubricants, increasing base oil prices had an adverse lag impact. Drivers of growth have been across marketing and manufacturing.
If you look at the chart on the right, you can see that in the last two years, they have delivered $1.4 billion of growth, 0.5 billion of which was in 2018, putting us firmly on track to deliver our 3 billion target. We are also making progress on free cash flow growth, improving earnings quality and our competitiveness, while delivering attractive pre tax returns.
As you can see from the chart on the left, we have grown EBITDA at double digit rates since 2016. It now stands at $9.6 billion, reflecting 2 billion of growth in the last two years.
As planned to support the sustainability of this growth, we have increase our capital investment in high returning projects with attractive cash profiles. As a result, free cash flow in 2018 grew to nearly $7 billion on track to deliver our 9 billion to 10 billion target in 2021.
This performance improvement further strengthens the quality of our earnings. As you can see, we reduce the BP refining marker margin to deliver 15% returns to $8.6 per barrel almost at our 2021 target.
And pre tax returns of 21% in 2018, our best on record means we have achieved our 2021 target of around 20% three years ahead of schedule. This delivery further enhances our competitiveness and provides us with an excellent platform for continued growth.
Indeed, this strong delivery means that we now lead to competition in net income per barrel of refining capacity, a key measure of overall competitive performance which adjust for business scale. We have come from the bottom of the peer group in 2014 to the very top.
In addition, on the right, you can see that this competitive advantage and earnings quality has allowed us to grow net income differentially to the competition year-on-year. Now let me share progress across marketing and manufacturing.
Our marketing businesses are material and differentiated. In 2018, earnings grew to $4.1 billion.
As you can see on the chart, a growth of around 50% over four years and pre tax returns remained in excess of 30%. In fuels marketing, earnings in 2018 grew by 17% to $2.8 billion, reflecting 0.5 billion of underlying earnings growth in the year.
In retail, we continue to strengthen our offer. Our convenience partnership model continues to deliver differentiated returns as well as a strong value proposition to our customers.
We now have 1,400 convenience partnerships sites, an increase of 290 in 2018. As I previously shared with you, a main driver of the increase in our convenience partnerships sites is are ready to go offer in Germany, where we now have 460 sites with this offer.
If you look at the chart in the middle, you can see that these sites already delivered significantly higher earnings than an average industry site and at full maturity, we expect that to be even higher. The success of our convenience partnership model is reflected in our non-fuel retail gross margin, which grew to more than $1.2 billion.
In new markets, we continue to expand our footprint. In Mexico, we now have 440 BP sites with volumes already running at a level which makes this the fifth largest market in our portfolio.
And we are also active in other new markets such as China and Indonesia. We anticipate that the earnings growth from our new markets will scale up from 2019 onwards.
We also continue to grow our B2B fuels and Air BP businesses with Air BP's earnings growing by 10% in 2018. Turning to lubricants, which in 2018 delivered earnings of $1.3 billion with highly competitive return on sales of 18% in what was a challenging base oil environment.
Indeed, our brands and differentiated position have enabled us to mitigate a large part of the recent base oil price increases, which over the last two years have impacted our cost of goods by more than $400 million. This business has significant growth potential with good exposure to growth markets and the growing premium segment.
Earnings from growth countries increased to 65% and premium lubricant volumes grew by 2% in 2018. In summary, our marketing businesses are making strong progress.
We have demonstrated we can grow earnings at double digit rates over the last four years, while sustainably delivering attractive returns. We also have good and increasing exposure to growth markets.
All of this underpins our confidence in further earnings growth to 2021 and beyond. Turning to manufacturing.
We have an advantage portfolio that has consistently delivered underlying earnings growth. You can see from the chart, we have delivered $0.9 billion of growth since 2016.
Delivery has been underpinned by our multi-year business improvement programs and strong operational performance. In refining, we continue to progress our key programs of reliability, efficiency, advantage feedstock and commercial optimization.
In 2018, refining availability was 95% and we achieved record levels of throughput, despite 2018 being a year of high turnaround activity. At Whiting, for the second consecutive year, availability was sustained at the highest level in more than 10 years allowing us to capture the benefits of wider North American heavy crude oil differentials.
And through our commercial optimization program, we delivered additional value from margin improvement initiatives, low carbon bio processing and yield optimization. All of this supported a continued improvement equivalent to $1 per barrel in underlying net cash margin since 2016, bringing the total improvement to $2.7 per barrel since 2014.
In petrochemicals, our operational performance industry leading technology and efficiency gains have supported the delivery of continued underlying earnings growth and pre tax returns of more than 20% in 2018. In fact, 2018 earnings of around $630 million was higher than 2017, despite the divestment of the SECCO joint venture.
Our technology remains is significant source of competitive advantage. In 2018, we secured six new licensing agreements out of the 10 PTA and PX licenses enhanced globally.
And we recently signed a heads of agreement with SOCAR to evaluate the creation of a joint venture to build and operate a world class petrochemicals complex in Turkey. This facility would be the largest and most competitive integrated PTA, PX and aromatic complex in the Western Hemisphere.
In summary, across manufacturing, we delivered strong operational performance and continued earnings growth. Looking forward, our business improvement plans support more than $1 billion of additional earnings growth over the next five years that underpins delivery of our 2021 targets.
In addition, our refining portfolio is well positioned for the upcoming IMO 2020 changes with around 47% of our yield being distillates and less than 3% being high sulfur fuel oil. This delivery potential and selective investments in an attractive and growing petrochemicals market gives me confidence in further earnings growth to 2021 and beyond.
Now turning to the transition to a lower carbon and digitally enabled feature. We have a clear strategy with a focus activity set.
We are capturing the emerging material gross margin pools by building capability, strategic partnerships, collaborating with industry leaders and leveraging our venturing investments. We have many projects underway.
The plans we have in this space will transform our business over time and are already beginning to create value for us now. To illustrate let me share a few examples.
In advance mobility, we are developing new customer centric solutions. Our electrification strategy is to provide the fastest and most convenient network of charging solutions.
In 2018, we acquired Chargemaster, the UK's largest electric vehicle charging company. Our ambition is to roll out more than 2,000 additional charging points, bringing the total to around 9,000 by 2021, including more than 400 new ultra-fast chargers at our retail forecourts In the UK.
We have plans to scale up advanced mobility opportunities in focus countries such as UK, Germany and China. In bio and low carbon, advantage bio base feedstock and technologies will be key differentiators.
We have made significant progress in innovative technology deployment, some of which are already generating value. In refining, we have expanded lower carbon bio processing to four of our refineries.
We generated $70 million of margin in 2018. We have plans to expand this threefold by 2025.
In petrochemicals, the circular economy is a major driver in the chemicals and plastic sector. We see chemical recycling is a game changer for the plastic circularity.
We are developing technologies to lead the market in this space and looking to commercialize these technologies by 2025. Turning to digital.
In customer and consumer experiences, BPme is our global customer engagement platform. It will be the portal to a suite of offers and services that will transform our retail offer and deliver and enhance and personalized customer experience.
It is already in six countries with over 1 million downloads and the number is increasing every month. In the UK, one of the first launch markets, users on average by around three times more ultimate fuel than other customers.
Across manufacturing, we are developing digital solutions focusing on three key areas, world class productivity, plant availability and optimize production, which are being implemented at our refineries in Kwinana, Whiting and Cherry Point respectively. We are already using a range of technologies including deployment of sensors, predictive analytics and artificial intelligence.
Through the use of digital technologies, across our manufacturing portfolio, we expect to deliver $0.5 billion of earnings growth by 2025. As you can see, across these new business models and digital, we are already in action and creating value in this space.
In summary, our strategy continues to deliver results. We have grown underlying earnings by $1.4 billion across marketing and manufacturing in the last three years.
In 2018, we delivered nearly $7 billion of free cash flow with returns of 21%. This strong delivery puts us firmly on track to deliver our 2021 targets, primarily underpinned by - in marketing, the continued expansion of our successful convenience partnership model, increasing growth market exposure, and the scale up of new market earnings.
In manufacturing, more than $1 billion of earnings growth in the next five years from our business improvement plans, and across all our businesses continued focus on efficiency and cost competitiveness. Looking beyond 2021, we expect continued earnings growth from these areas, as well as significant growth potential from selective investments in an attractive and growing petrochemicals market and our new business models in advance mobility bio and low carbon as well as digital.
In closing, our strategy is clear. It is fit for now and fit for the future.
Our delivery gives me great confidence and I am excited with the scale and breadth of opportunities I see. We have committed and capable people, do know how innovation and partnerships to deliver this.
Now, let me pass you over to Bob.
Bob Dudley
Thank you, Tufan. I would now like to take a moment to share our work across our low carbon businesses, one of our strategic priorities.
In alternative energy, we already have five significant and growing businesses, renewable fuels, renewable products, wind energy, solar energy and bio power and I want to highlight just a few examples of tangible work. Our renewable fuels business which operates three world scale sugarcane ethanol plants in Brazil has increased production by 40% in five years through the innovative use of digital technologies as well as distinctive partnerships such as our JV with Copersucar.
As I mentioned earlier, we are a year on from forming our strategic partnership with Lightsource BP and have expanded activity from five countries to ten. We found new ways of leveraging Lightsource's solar capability with BP's networks and resources to expand under a capital light framework.
Growth has also been driven by a strong platform of partnerships, including in India where Lightsource BP and Everstone Capital have partnered to manage a fund focusing on new energy and conservation projects. In the U.S.
our wind energy portfolio now has 1.8 gigawatts of gross capacity across 11 sites. We've been restructuring and redeploying capital to optimize the portfolio for long term growth including the power, storage investment we made in partnership with Tesla.
In renewable products, our Butamax joint venture with DuPont is progressing a plant upgrade in the U.S. that will commercialize our proprietary technology converting sugars into an energy rich bio product, bio-isobutanol.
In addition, alternative energy are developing new digital energy and low carbon power and storage opportunities that offer attractive synergies with our existing portfolio. This includes the agreement with the government of Azerbaijan to jointly evaluate opportunities to develop renewable energy projects there.
The dual energy challenge and accelerated adoption of digital technologies also creating new and very interesting business models. We're investing in new products, companies and technologies which leverage our core knowledge and capabilities.
We have a clear financial frame investing around $0.5 billion annually across five focus areas. They are advanced mobility, bio and low carbon products, carbon management, power and storage and digital.
These focus areas were selected for their potential to become material businesses in the future and our capital commitment levels designed to provide the right balance between portfolio optionality, commercial scaling and responsible investment. In addition to what Tufan described, we made big steps in 2018.
For example, in carbon management, we invested in projects that generated more than 25 million tons of CO2 equivalent offsets last year just in forestry projects. We invested in StoreDot, an ultra-fast charging battery developer and Voltaware, residential and commercial energy management system and in fact our overall ventures pipeline grew to more than 40 active investments with more than 200 partners.
In addition, we continue to faster and expand relationships at an industry level to ensure future success. In November, the OGCI's billion dollar investment vehicle, climate investments announced the feasibility study for the UK's clean gas project, a world first in CCUS technology for capturing industrial and gas fired power generation emissions.
I believe we are in great shape to act where we see opportunity to make a positive difference in this transition. It's inspiring our people to look for new and better low carbon ways of doing things, while creating new value for our company.
Well, thank you for listening over the past hour or so. Let me briefly summarize before we move to Q&A.
Two years into our five year plan, we've created a powerful track record of delivering doing what we said, we would do. This delivery is coming from across our growing businesses.
It seeing us invest with discipline into the growing upstream, both organically and through acquisitions where we believe we can create value. In the Downstream, we're expanding our marketing business alongside a strong refining system with high availability.
We're also investing into our existing alternative energy business and creating new low carbon businesses. And all of this is delivering strong financial results.
Many of you may have also seen our announcement last week supporting a proposed resolution from a group of investors called Climate Action 100+. This proposed resolution seeks additional corporate reporting in the context of the Paris goals.
It addresses BP's strategy, our metrics and targets and how we evaluate material new capital investments. We listen carefully to investor sentiment and opinion over the past few months on the role of BP in the energy transition, recognizing the views are wide ranging.
Together with recent engagement between BP and Climate Action 100+, this has enabled us to support the proposed transparency resolution. The board intense to provide more detail in the notice to shareholders ahead of our annual meeting in May.
So in closing, we are building business momentum, delivering our strategic priorities and are growing the business all of which underpins our commitment to growing shareholder value. And I'm very optimistic about the future and the role that BP as a global energy company has to play in advancing the energy transition.
Now Brian, Bernard, Tufan and I are now ready to take your questions.
Operator
[Operator Instructions]
Craig Marshall
Okay, thank you again everybody for listening. We're now going to turn to questions and answers.
As usual, just a reminder please, if you can limit your questions to no more than two per person, so we all get a chance to ask a question. On that note, let's take the first question from John Rigby at UBS.
John, good morning.
John Rigby
Hi. Good morning, Craig.
Yeah two questions. The first is on the results, so the outcome of the results.
So I think you clearly signaled a gearing level at the end of this year of about 30% or so and that was an output from the decision you made not to issue equity for the BHP transaction and I think since then, obviously macro conditions have deteriorated. So I just wanted to get a better idea about where you stand on that.
My sense is that you feel somewhat more relaxed about levels of gearing then perhaps some of your peers who would be keen to drive gearing down lower from levels that are already below 20%. Also so I just wanted to understand a little around the prioritization of debt versus CapEx versus anything else you do or disposals across the next one or two years if indeed, macro conditions are somewhat weaker than they were in 2018?
Second question is on the low carbon strategy. I get and fully support reduce and improve, I'm a little nervous about the create bit.
It seems to me and it's backed up by the press release last week is that the reaction or response to quite a lot of pressure around doing low carbon businesses, but what has never really been properly articulated or I might miss something is the return framework around that. So, is of good intention but an absence of what the financial outcome is likely to be and it's a financial structure that clearly applies to your upstream or downstream business.
So I just wanted to what degree you move forward with that strategy before, we as investors and analysts get to judge what the financial returns on these kind of investments are? Thanks.
Brian Gilvary
So John, let me pick up the first part. And Bob can pick up the pieces around and the low carbon.
I think you've answered a lot of the question in your question itself. The environment did deteriorate through the December but of course it's now back over $60 a barrel and looks pretty constructive around those sort of level.
So it's significantly above our assumptions and what we're assuming around the original BHP transaction. And you'll also know with the various announcements in Lower 48, the Midland differentials come right into WTI.
I think it's trading just about $0.60 below. So the economics of that transaction looks even better than what we described when we announced it.
And I think the use of cash versus shares has been incredibly positively received by our investor base. I think universally, the investors are very happy with that but of course as you've laid out, it means that gearing will be up at the higher end.
We've got about just over $2.5 billion of payments left to go on the BHP transaction which will come out through to the end of April, so the end of February, end March and end of April last three final payments. We have about $2 billion of Deepwater Horizon payments for this year, which is on the schedule that we laid out back after the 2015 settlement.
So we're now back on the first year of that schedule, so they're pretty much pre-scripted in the first half of the years. And the disposal proceeds are going to be sort of again weighted towards the second half of this year.
But we have actually now specified, it's over $10 billion over the next two years. So you're going to see those proceeds come through.
And I think what resonated with the investor basis, those proceeds will clearly be used primarily initially to bring gearing down. And then of course, at these higher oil prices, last year one of the big parts of, you look the balances for last year, we balanced the books of $50 a barrel, we're currently today sitting at 62, and it would appear that it looks pretty constructive in this range.
So I think while we're balanced that 50 constructive at $60 a barrel. I think they'll be more to come this year and I'm sure Bernard will talk about BHP as we integrate those assets into the portfolio.
But there is no question now from the board perspective, deleveraging now of the back of the disposal proceed through the back end of this year and into 2020 is now one of the premises in terms of the balance sheet in financial frame.
Bob Dudley
Thanks, Brian. John, hi, this Bob.
You asked a good question about creating new business models. And essentially, we have a large renewables business today that generates operating cash flows that are healthy and getting healthier.
Our approach to this is, one, we know the direction the world's going to a low carbon future. No one knows exactly how that's going to unfold.
But as a company, we need to be nimble about it and we need to be able to respond to customer preferences that will change. I think a key aspect of our strategy is really flexible, agile, just to be sure we can adapt quickly the changing circumstances.
It is a capital light model. The speed of this transition over the next few decades, highly, highly uncertain, depending on technology, societal preferences, government policies, all those things.
So you're right, uncertainty means long term plans with big commitments and big bets are risky. So we're going to be cautious about this.
For example, capital light, Lightsource BP, so it's a company that's growing. We work with them, provide them access to other places where we work.
And actually there's an integrated set of economics that are probably different than other people see, that we look at. So we think this is all part of the energy transition.
We're going to be part of it. We're going to try to be a leader with other companies who are doing good things in this.
But right now, we believe our strategy that we've laid out two years ago is consistent with Paris. And what this is, the resolution is more transparency about we're doing.
We like transparency. We have inside the company a renewal committee.
That's run in junction with our big capital commitments committee. All the executives are involved in it to learn even though the size of these investments are nothing like other parts of the business.
So we realize we have to be very disciplined about the shareholders' money. And that level of investment to us looks like it's going to position in lots of ways.
Chargemaster, electric charging company here, we know that is going to be important, particularly in cities here in the UK, they're going to be in our four courts. And there is a business model evolving around that which involves convenience store.
So there's - I could go on a lot about this, but I wouldn't get worried that we're not going to steward the capital with a discipline, but we are going to invest in some of these businesses.
John Rigby
Thank you.
Craig Marshall
Okay. Thanks, John.
We'll take the next question from Lydia Rainforth of Barclays. Lydia?
Lydia Rainforth
Thanks, Craig, and good morning. I have two questions again, if I could as well please.
Bob, you quoted this morning and then utilize the same that BP will need to sizable buybacks over time. I'm just wondering if you can clarify those comments as the template five domains and over what timeframe we should be thinking about that.
And then secondly, linked to a little bit to John's question. Bernard talked about the ability to grow upstream free cash on a pretax basis 40% to 50% by 2025.
At what point do you actually have to make the decision to allocate the capital to the upstream business to do that and some of the other choices that you might have to make around since the energy transition work? Thank you.
Bob Dudley
Lydia, can I take - if I just take the first part of the question around buybacks. I think as we've already said for this year, we're going to offset all of the script dilution from the third quarter 2017 announcement with slow down the repurchase of shares when we announced the decision to use cash versus equity on the BHP transaction.
But we've committed today that actually there will be a sizable buyback program in the back end of this year. And then if you go back to the strategy that was laid out two years ago, as you've seen in the dividend increase last year by the board was a signal, as we start to see that free cash flow appear over and above what John talked about early in terms of disposal proceeds initially being used to bring gearing down.
As the strategy plays out over the next three years, there is a significant amount of free cash that will come with it and then the board will be able to decide whether we look in terms of progressive dividend, further buybacks over and above script and other opportunities within the company. Lydia, you asked the question about allocation of capital between I think the upstream and new energies.
Is that - was that the essence of yours…?
Lydia Rainforth
Yeah, it was just the idea that if going to compete the capital framework $13 billion, $14 billion and be able to grow free cash flow by 40% to 50% by 2025. At some stage that has become a commitment that get that capital available.
And if what - at what point do you actually need to commit to doing that or does - is the choice between upstream and either downstream of the renewable side?
Bob Dudley
Well, right now, we're on track to be able to do that. So with the upstream capital and the efficiency of these big projects, bringing them on time, what we're able to do with the dollar, well capital is quite different than it was.
So we're going to keep the overall disciplined framework 15 to 17. We're going to flex within that.
No magic formula is really between the upstream and downstream. And the spending and alternative energies, I think is sort of rounding and all that.
So Bernard, you want to comment on, see the direction of capital you'll need with the growth that we have?
Bernard Looney
Yeah, I think - thank you, Lydia, and good morning, everyone. I think the scenario that we laid out was a scenario with the existing resource base and with constant capital, as Lydia said.
And we feel quite confident in the quality, and ultimately overtime, it becomes a choice for the board and for Bob to decide what level of reinvestment. Our job is to ensure that the quality of the investment opportunities are there.
And as we discussed in Oman, we see the real potential to grow. And as every year moves forward, that cash flow increased potential becomes more and more real.
Lydia Rainforth
Thank you.
Brian Gilvary
I'm just going to add a footnote Lydia to what Bernard said and you think about allocating capital. I mean we do see generally we turn over the entire balance sheet really in eight to nine years.
So as the energy transition moves along, we're going to have flexibility to move down the road between if the new business models become material that will begin to reallocate capital, but we're going to have the flexibility to do that. And I think when I hear people talk about stranded assets and we're investing in things for the very long term and we are very long term company, it's you can turn the balance sheets over of not only us, but the IOCs in under a decade here.
So we're planning flexibility and adaptability sort of longer term in our thinking.
Lydia Rainforth
Okay. Thank you.
Craig Marshall
Thanks Lydia. We'll take the next question from Alastair Syme of Citi.
Alastair?
Alastair Syme
Hi, thanks, Craig. I was wondering if you could talk a little bit about the decision to increase the size of the disposal program.
Is it just that the initial signs or the data rooms are going well or are there some sort of broader strategic ambitions as you want to shop in the business? And secondly, I just want to - I know you give a lot more disclosure in the annual report, but any sort of color you can get around the reserve bookings particularly if you'd like to share an ex-Rosneft number for us?
Thank you.
Brian Gilvary
So, Alastair, on the first part, I don't think there's any new news in what we've said today. I think the any bit of new users, the specificity of the 10 over two years, because previously with set off the back of BHP, we'd like to sell $5 billion to $6 billion of assets to fund that acquisition.
And we have a typical $2 billion to $3 billion churn every year, which historically was set aside in the most recent years for Macondo payments. So if you combine those two things, it gets to figure of around $9 billion to $12 billion.
So we've specified actually a figure of $10 billion for the next two years, and we are well advanced in terms of that portfolio, particularly the pieces around the Lower 48 which are pretty public in terms of the marketing of those assets from the historical legacy position that BP had and a suite of other options we have globally. But I think high grading the portfolio is just good for all season.
And especially if you look at these new margin barrels that Bernard and the team are bringing on, it gives us more opportunities to be able to high grade. So I don't think there's anything specific other than the specificity of there is 10 over two years, rather than maybe the five to six over three years.
Bob Dudley
Alastair, I think on reserve bookings, we're not going to break them out separately, but there's healthy reserve bookings at both parts of the business in there. And it sounds very sort of number out of the year at 100, it's actually 100.4%, if anybody thought we were rounding.
And I think the - if you take into account disposals and acquisitions with BHP, we have including the divestments, 209% for the year. But we're not going to split the two out.
I'm sure we have the permission for Rosneft to do that now.
Bernard Looney
Well we will, however, Alastair give the full detail and the breakdown as usual in our annual report which I believe is published on the third of April.
Alastair Syme
Okay. Brilliant.
Thanks very much.
Craig Marshall
Okay. Next question from Biraj Borkhataria, please, RBC.
Biraj Borkhataria
Hi, thanks for taking my questions, two please. One was so for Bernard.
Earlier in the call, you reference upstream reliability and you record for BP, but I believe that was for operated project. Could you talk a little bit about the non-operated side, performance there and how that compares to the operated?
And the second question, just a very quick clarification on Macondo. So $2 billion guidance for 2019, could you talk about the - if there's any uncertainty to that number.
I think the defined element is about just over a billion dollars. So how much confidence you have on the remaining part?
Thank you.
Bernard Looney
Biraj, thank you for the question. Yes, we have seen our highest reliability on record in 2018 results of a lot of hard work by the team over many, many years.
And that's been improvements right across the board. Reliability in the North Sea, for example, has gone up by 10% points over the last four to five years.
And it's really an investment into the operating mentality and the operating equipment inside the upstream. How it compares to operate it by others, I think we try to benchmark ourselves locally in each of the basins we operate around the world.
I think our track record is good in a relative basis. And to your questions, one of the things that we have underway at the moment is a project that is looking at our governance of non-operated joint ventures and operated by other facilities.
And one of the purposes, Biraj, is to see if we can help in any way, transfer some of our learnings on that reliability improvement program over the last several years into those operated properties. And by the way, we can learn from them as well.
So the learnings will go both ways. But that is a specific project that we have underway to improve how we govern, and how we transfer learnings between ourselves and our partners.
Brian Gilvary
Biraj, in terms of Macondo, the total provision now is it $67 billion pretax or 50.5 post tax, of which about $52.7 billion of pretax has been paid out. Pretty much now we are done with the bell process, which is where the uncertainty was.
Historically, we're left with just less than 100 claims on appeal, so they've all been processed and now going through the appeals process. But this is pretty stable now, back on the original schedules that were negotiated back in 2015 and 2012.
And so therefore, we wouldn't expect any major changes. It's now really around basically the appeals process and any litigation associated with that for which we've already provided in our provision.
But we'd expect this to stay pretty stable. Now with around $2 billion this year, last year was $3.2 billion, which is pretty much what we signal at start of year is where the actual payments came out.
And then we get into the runoff effectively next year of a billion a year out. So I think, it's 2032 was the final year of the settlements that were put in place in 2015.
Biraj Borkhataria
Great, thank you.
Craig Marshall
Okay, thank you. We'll take the next question from Christian Malek of JPMorgan.
Christian?
Christian Malek
Thanks, Craig. Good morning, gentlemen.
Thanks for taking my questions. Two if I may.
First, with the strong cash flow result I guess, you continue holding cash breakeven relative to the prevailing oil price. I wonder, is there a topic gearing or divestment size that you are looking to achieve first before you going to roll out your cash return framework.
And just to be clear, lowering gearing paves the way for cash return as opposed to more M&A. Again, secondly in somewhat highlight that, when you look your growth options, and Solomon scenario to grow free cash flow in 2025, 40% to 50% versus 2021.
A lot of these projects seem to be a risky to where you build longstanding legacy relationships Angola, Omen, Egypt, are you comfortable with the portfolio sufficiently diverse, it strikes me that they remained quiet exposed to conventional oils and legacy assets related to the Deepwater and shale positions. And so it makes you wonder whether you may still be tempted to exercise M&A, as opposed to sanction many of these slide FIDs into the next peak ahead?
Brian Gilvary
Thanks, Christian. So just on the first question first, there's no specific target around gearing other than I think certainly from the board perspective and our investors, they would now expect us to elect gearing come down along the pathway I've already described around the cash flow that goes out and sort of the first half of this year and disposal proceeds that come back in.
I think it's also worth noting that our relative position on net debt in gearing is not that surprising given the $16 billion that was paid out over the last three years around Deepwater Horizon settlements is the reason why our gearing is relatively high compared to maybe the prior set. But right now the primacy will be around gearing coming down initially, certainly move signal down to 2020 that would expect it to get back into the middle part of the range.
But I think the board we want to keep all options open around shareholder distributions which we saw last year with the dividend increase, share buybacks which Bob already alluded to, certainly in terms of the script buyback and maybe beyond that in terms of surplus free cash and will always look at renewing the portfolio and will continue to divest assets. So I think yeah, that the pretty much the framework that seen us through the last eight years and seen us through some pretty turbulent times, if you think about Deepwater Horizon and then the oil price correction will serve as well going forward.
Bob Dudley
And turn it over to Bernard on some of the upstream views of the portfolio. But I actually think it's a great portfolio, it's got a wide diversity across it.
And legacy assets always if you can add on to what you've got, you've got the overheads, you got the infrastructure generally are always really good investments. So I don't think we'll turn away from those things.
But we've got FIDs coming up in Gulf of Mexico. Again, the North Sea, Azerbaijan, more to Senegal, Egypt, Australia, I mean, it's a very wide portfolio.
And I think they have the great potential to continue to provide great returns for shareholders. But Bernard, you've been thinking about the diversity here, and there's all kinds of things to keep going.
Bernard Looney
Yeah. Thanks, Bob and thanks, Christian.
We missed you in Oman. But I think one of the things that we laid out in Oman is just a few points I'd make around, A, the quality of the existing resource base and some of the new options that we have.
So if you look for example today, the top four cash generating regions in the company which you would put classifies existing regions Angola, Azerbaijan, North Sea and Gulf of Mexico, they produced about 40% of the cash flow of the upstream in 2018. By 2025, because of the quality of that resource base with no new expiration, we could see that cash flow grow by 50% from those four regions by 2025, just gives you a sense of the existing resource base that we have.
Specifically Gulf of Mexico, 2013, 200,000 barrels a day, today, 300,000 barrels a day. And in Oman, we said by 2025, it could be doing 400,000 barrels a day.
And existing billion barrels we just discovered that Thunder Horse, oil in place, two new discoveries in the Gulf of Mexico. And then so that's examples from the existing resource base.
And then beyond I mean, Mauritanian, Senegal we just entered at the end of 2016, just sanctioned Phase 1 of Tortue, we've got phases 2, 3, and 4 to go. In Tortue, we have appraisal to do, in Senegal, we have more work to do at Berala in Mauritania.
So I think yes, the existing regions continue to give and give and give, which as Bob said, is a characteristic of great basins. And secondly, we are expanding the diversity of it as well through examples like the entry into Mauritania in Senegal just a couple of years ago.
Bob Dudley
And I'm just going to add another footnote. I mean broadly we really like what we have, it doesn't mean we're going to continue or standstill with shaping the portfolio.
But we work pretty hard after the events of the Gulf of Mexico to significantly change the portfolio and focus down. We look at not only the upstream, downstream and with alterative energies, where we look at geographies, physical regimes, balance of oil and gas and other forms of energy provided provisions here.
So we look at it and we're always open to comments and suggestions and observations. But to us, it feels like a very balanced portfolio.
Christian Malek
Okay. Thank you.
Brian Gilvary
Thanks, Christian.
Craig Marshall
Yeah, thank you. We'll take the next question from Henry Tarr at Berenberg.
Henry?
Henry Tarr
Hi, thanks, Craig. A couple of questions for me.
One is, how you thinking about investment in the Lower 48 this year? And then the second thing would be just on the restructuring and the provision in the quarter.
Could you give maybe just a little bit more color on what restructuring is achieving for you? Thanks.
Bernard Looney
Very good. Henry, in the Lower 48 - it's Bernard.
We basically assumed the business at the end of October, so we had two months in the first quarter in - in the fourth quarter, sorry, in 2018, we'll assume full operation, operation control on March the first of this year. Integration is going well.
We've just budded our first two wells on the new acreage both of those in the Eagle Ford. Synergies are going well.
I think there were - I think there were about 550 people in the existing BHP operations team. I think we've offered jobs to just 120 of those.
So a lot of work going on that. We had about six rigs running in our existing base.
They had about six rigs running in their business. I think we see it about a 15 rig program in 2019.
We were spending close to a billion dollars a year a capital. That'll get up to about $2 billion this year.
The majority of that investment will be and Haynesville and the Eagle Ford with some in the Permian. And then overtime, we'll probably ramp capital up to around $2.5 billion with the majority of the capital overtime as the logistics constraints get lifted shifting towards the Permian.
So very pleased with what we said. I think Brian said it well that the deal looks as good as it did when we first did it today and it likely looks quite a bit better.
So that's what I would say on the Lower 48.
Brian Gilvary
And then in terms of restructuring, since we announced, we started this program back in the fourth quarter 2014, if you recall, that was the sort of time when we were in that space of Lower for longer on oil price. And was concerned about where we thought directly at that point in the fourth quarter 2014 when the price was starting to come off.
We started a rationalization program. This quarter, the charge - the total charge since we started is about $3.3 billion, which has led to very significant, a major restructuring of our company which is actually why one of the biggest drivers of why we can now balance the books of $50 a barrel from where the oil price was in the fourth quarter, the start of the fourth quarter of 2014, $100 a barrel.
So that's been a big part of that. In the fourth quarter, is the final restructuring charge we're going to take around that program in terms of a go forward basis, will just be reaching businesses as usual in terms of restructuring.
And of the $440 million, just less than half of that is in the downstream and the balance is in corporate functions and still part of the upstream. So it's been a major program.
It's a program now that we've run over four years since it was first announced. And it's led to a significant reduction in our cost base and being able to drive those efficiencies within the system.
Henry Tarr
Great, thanks.
Craig Marshall
Thank you, Henry. We'll take the next question from Irene Himona at Société Générale.
Irene?
Irene Himona
Thank you, Craig. Good morning and congratulations on a strong set of numbers.
I have two questions. Firstly, upstream, Bernard, you referred to the creation of a digital organization alongside the business.
I wonder if you can help us conceptualize the potential benefit. You probably reluctant to quantify, but should we be thinking about something truly noticeable spectacular and significant medium term?
Second question on the downstream. Tufan, lubricants reported earnings declining both in Q4 and in the full-year.
You referred in your remarks to the base price effect. I mean I don't know what the time lags are but surely that must have kind of worked its way through the system by now.
And if it has, should we be anticipating an improvement in lubricant earnings this year? Thank you.
Bernard Looney
Irene, I'll do the first on digital spectacular. I would love, I'm not sure that we're yet ready to promise that.
But we've gone about this would real intent. And I feel good about what the team has delivered on digital over the last couple of years.
And the Apex production optimization model that you saw in Oman delivering 30,000 barrels a day, our incremental production in 2018 helping our base decline go down to less than historical averages. That's a great example of what's possible.
Inspection costs down by $200 million and so on. But having said that, we still are dissatisfied actually with the pace because we believe that while we're doing good, we believe we could do much, much more and that's why we've created the function.
As put together a 100 day plan that I will be reviewing here in a couple of weeks' time will then move from there into an annual plan. And our ambition is that we don't have just one Apex story to tell you in six months' time that we have many such material stories of where we have moved products from beyond minimum viable product stage and into real application.
So it is early yet, I think we're reluctant to quantify and issue targets around this because quite frankly, when we get into it, it's only then that we discover what's possible and we'd rather be led by the results than necessarily led by a specific target because to target may simply not be enough. So I think a real intent here to do something quite different too early to start to put some specific targeted numbers to it.
Tufan Erginbilgic
Irene, thanks for the lubricants question. The way to think about lubricants is its highly differentiated business.
65% of our earnings in growth countries. So it is fundamentally growth business.
But last two years, we had this cost of goods sold increased because of base oil –because of crude prices and base oil. And the lack in this business because it is B2B2C business i.e.
with intermediaries, generally, if three, four months. So if you take that into account that is the - with the competitive intense there as well, that's the lag impact in the business.
But because we are highly differentiated, we actually offset most of - large part of that that increase in the cost of goods. Going forward, yes, you should expect that this business will continue to grow.
Irene Himona
Thank you.
Craig Marshall
Okay, thank you, Irene. We'll take the next question from Chris Kuplent, Bank of America.
Chris, good morning.
Chris Kuplent
Thank you very much. Good morning.
Just two questions I've got left here. First one I suppose for Bob.
On your comment regarding the Paris climate goals, with this latest announcement that you endorsed the AGM resolution from a number of your large shareholders, does that mean you are going to add to the disclosure that you've given today and existing targets for example, including Scope 3 in that debate? And the second question is more of a financial one and Brian probably knows it well.
Whether there is or ever will be a guidance for inorganic CapEx? And I'm not talking about BHP, you're not going to tell us about these acquisitions in advance, but you could say, external resource additions that over the years have always been around $1 billion, $2 billion, $3 billion a year.
Is that a reasonable expectation to continue to have to 2019 and beyond?
Bob Dudley
Right, thank you for the question. So on this shareholder resolution, we're just going to continue and transparency is always a basis of what we do.
If you've seen what we've written in our reports, we've always had the view about being transparent. We're going to go further and be transparent about some of our decisions, how we make them on major capital investments.
It will be work for us. It'll be talking further about this reduce improve and create models and as part of our thinking.
It does not - is not a resolution requiring us to spend capital in predetermine boxes or businesses, because no one knows where the transitions is fully going. We support the work and I'm consistent with the goals of Paris and of course, there's many, many ways to get to the goals of Paris.
On Scope 3, and I know I have a different opinion then some on this and by the way, it seems to be there's several definitions out there of Scope 3. But for those of you who are not sort of up on these language, think about in a simple way, Scope 3 seems to be that we take responsibility for the emissions of all our products.
And I'm going to take this personally and the company believes this and of course we always have the debate inside, but we cannot be accountable for how everyone uses our products. And a real simple example of that is if you're driving from London to Edinburgh, you're driving from New York to Chicago, you can have a small economy car with four people in it, and you have a certain carbon footprint with that, or you can be one person in a big SUV driving that and you get a totally different carbon footprint.
So there's a lot of responsibility for the use of energy that has to do with the consumers. And so you know, we were very clear in what our products are and their footprints.
But this Scope 3 thing, which is fine, people want to do that and take responsibility for it, but I think that's why we have a different view about Scope 3 and many of you would probably know what I'm talking about Scope 3 but Chris, you obviously are there up on that.
Brian Gilvary
Chris, in terms of inorganic capital, I don't think anybody gives guidance on inorganic capital, but you're right. I mean, I think it's opportunity lead.
The ones that you will have seen outside of the big major transaction like a BHP, I think you're more talking about sort of portfolio churn. It will be opportunity driven, our basis internally ran in organics is that they have to be a creative generally.
They come back to value of a volume, which Bob has talked about many times before. And they have to be able to be accommodated within the financial frame.
So but beyond that, I wouldn't give any specific guidance around what that might look like. What I would say, though, and what we laid out a couple of years ago, if we recall that there was a series of transactions we did about two to three years ago around Abu Dhabi, Mauritania, Senegal, and so on, was the ultimately we'd have to be able to afford those in the financial frame.
And in terms of the inorganic side of that frame is really around disposals covering both Macondo payments and any acquisitions. Now, of course, Macondo payments $16 billion over the last three years, they start to run down now to $2 billion just over to this year and a billion a year beyond that.
The 2 to 3 billion capital churn that we have in terms of disposals would more than compensate for any other opportunistic inorganics that come along. But we would normally give guidance other than, they need to be accretive and they need to be manageable within the financial frame.
Chris Kuplent
Okay, great, that helps. Thank you.
Craig Marshall
Thanks, Chris. We'll take the next question from James Evans, Exane.
James?
James Evans
Thanks, Craig and thanks for taking my questions. Really wondering Bernard, couple on the short term just wondered if you could talk about whether you expect to see further momentum and OpEx reductions in 2019.
And if you could clarify what the current run rate of the impact of OPEC quotas on your business currently. I know you can't talk about it for the full year already.
I never be a bit more medium term around the LNG portfolio, so obviously now of excitement there's an evergreen queue of projects is a willingness of your peers to push through these projects without off take from long term customers as well. So I just wondered in that context where you do see future phases of Tortue within your portfolio, within this global context, and just show me your appetite and exposure to taking equity volume risk, either from this project or from elsewhere?
Thanks.
Bernard Looney
Very good, James. Thank you.
First of all on operating costs, we saw our costs on a production cost per barrel basis last year, we saw them increased by about, I think less than half a percent. So our costs have flattened out last year.
That slight increase was actually driven primarily by well work at the beginning of the year and increased one work, which you would argue is a good thing. But overall, our production costs are down 45% since 2013 when we read about $13.10 and we were at $7.24 last year.
The guidance that we gave in Oman is that we will continue to aim to drive our unit costs down. We're guiding externally for them to being flattish I think in 2019.
And we do of course have to adjust for the BHP portfolio that we will have a full year of in 2019 and their production costs per barrel are higher by probably 40% to 50% than our existing Lower 48 business. And that's purely because it's a more liquids based portfolio, which is why we wanted it.
Now we'll clearly be applying the same intelligent operations type of activities to that as we have done our existing base. So I think guidance for production costs for the year is flattish.
We might see a little bit of an increased due to BHP portfolio. We're not seeing inflation around the world and in fact even in the Lower 48, we're now beginning to see deflation again as prices have come back down off their peaks.
On OPEC quotas, I won't get into any specifics, James, I'm sure you'll understand that. We will obviously be guided by what we need to do in our host countries.
But so far, no material impact on our business there. And in terms of the LNG portfolio, you know, absolutely delighted on the 21st of December to get the first phase of Tortue across the line.
The team has done an extraordinary job working across two countries to get that project from discovery to sanction in three and a half years and possibly discovery to production in seven years, which is about half the industry average. The real excitement I think, as you said, comes in the next phase is Tortue.
As we build the system out, we will have pre invested in the original infrastructure so to speak, and the subsequent phases will be extremely economics. Our two additional phases building up to about 10 MTPA and something that we're all very excited about and, of course potential beyond.
We said in Oman that we see the potential for 50 to 100 TCF of gas in place across the entire region in Mauritania and Senegal. And as you know, we have a pretty significant footprint there.
So hopefully that helps James with your questions.
James Evans
It's very useful. Thank you.
Craig Marshall
Thanks, James. We'll take the next question from Lucas Herman at Deutsche Bank.
Lucas?
Lucas Herman
Craig, thanks very much, and morning gents. Two if I might.
The first to Bernard or to the team in general and maybe this is too simplistic a way of thinking about things. But I'm looking at your high quality growth capacity slide, obviously conscious, the fact you're focused on advantage oil and gas.
And as you move from 12 billion to the potential 25 billion barrels whatever of resources there to be monetized, what rates of return do you think you're going to be recycling at? And I ask in part because 4 billion of resources new wells where I'd expect the returns to be extremely high, BPX Energy you know similarly I'd expect comfortably into double digits probably north of 20 excluding the acquisition costs, post FID major projects you know same observation, pre-FID I think you've always been very clear that you know 15 or so is the hurdle.
So the first question is just what rate do you think your recycling capital at in the upstream now? And the second if I might to Tufan.
I guess, it's two things, A, if Tufan could just mention where he thinks the PCA you know SECCO is at the present time and consequently you know that the outlook for your chemicals business? And secondly the target for fuels marketing from memory was around 3.7 billion or so of EBIT of cash flow by 2021.
Australia within, it's obviously not any longer the extent to which, you know, Tufan you're just too confident in your delivery and clearly the progress to date has been very, very good? Sorry long questions.
Bernard Looney
No, thank you, Lucas. Maybe I can give a relatively short answer.
But I think you've asked the question clearly and I think my response would be the new wells, the BPX Energy, Lower 48, absolutely 20% plus our hurdle rate $60 set. And I think I would say that we exceed those quite well.
So even in BPX Energy, what the gas in the Haynesville, we're getting 35% to 40% rate of return on those wells at $2.75 Henry Hub. So the info drilling and the Lower 48, the hurdle rate is 20% plus at 60.
And then the post FID and pre-FID are absolutely 15% for Greenfield, 20% for any Brownfield in there. Again, we're comfortably meeting those hurdle rates across the board.
We have seen the return on investment improve between the times. We did a presentation in Baku in 2016 and Oman by 5 percentage points.
So we've gone from the high teens overall average to the low 20s as an overall average of the investment portfolio that we see ahead of us. So a real improvement in the returns average that we see in what is ahead of us in the plan.
And I think the post-acquisition returns on the BHP transaction are going to be above 25%, again at $55. So I think that's how I would answer it.
Tufan?
Tufan Erginbilgic
Thanks, Lucus. Two questions I guess, petrochemicals and fuels marketing.
Let me start with petrochemicals. I think our petrochemicals business and the environment, if you think about 2014, we actually lost money.
And since then underlying performance improvement in this business was actually more than $500 million. And the way - and the environment improved at the same time definitely versus 2016.
What happened effectively, we made 600 million this year in 2018. Effectively environment improvement offset SECCO divestment.
That's what how you should think about it. And underlying earnings effectively improved our number to 600.
Going forward, we expect looking at the refining sort of petrochemicals capacity coming in and demand growth. Demand growth continues to be good actually in China, both of our businesses, PTA aromatics and acetyls.
So we expect 2019 environment to be similar to 2018. And 2020 utilizations may even go up because demand will continue to grow and there is not much capacity coming in.
After 2020, there is capacity coming in which may affect the utilization. That's how you may want to think about petrochemicals.
Lucas Herman
Okay, thank you.
Tufan Erginbilgic
Fuels marketing, I think as you say, actually we are making great progress. I think in IR Day, we said more than 3.5 billion in 2021.
And frankly, since we set this strategy in 2014, we increased earnings in this business by 70%. It is $1.7 billion frankly, since then.
And since 2016, it is $700 million improvement. So it is actually driven by our underlying programs.
What is happening in this business is when our underlying programs like convenience partnerships, they are doing two things, they are actually improving the earnings, but at the same time, they are actually changing the shape of the business model and making it more robust with more non-fuel income. Going forward, you're right Woolworth was in our numbers, but actually our progress in spite of Woolworth not being there, we were able to offset effectively that.
And going forward, I think the growth will continue to come from convenience partnerships, growth markets, but also new markets will start to scale up in terms of earnings. We have been scaling up volumes but actually there wasn't much earnings so far.
So I would say we are on track in fuels marketing to deliver those targets.
Lucas Herman
Thank you.
Craig Marshall
Okay, thanks, Lucas. We'll take the next question from Michele Della Vigna at Goldman Sachs.
Michele?
Michele Della Vigna
Thank you, Craig, and congratulations for the strong results. Two questions if I made.
The first one relates to the dividend policy, clearly you're indicating a progressive dividend increase. In 2018, you increased by 2.5%.
The underlying business is growing faster in terms of production, in terms of cash run earnings, but at the same time, you probably feel a need to reduce with these quite a high payout ratio. How should we think about the dividend increase for 2019 and beyond that as your business continues to progress and grow strongly?
And then secondly more technical question on the quarter. We've seen a counter seasonal buildup in operating working capital in the quarter by $1.5 billion.
I was wondering if you could walk us through the key dynamics there and whether you expect that to partially reversing the first quarter. Thank you.
Brian Gilvary
Thanks, Michele. Actually I'll take the second question first, and I'll come back to dividend policy.
Working capital you'll see actually one is a single quarter is not a great indication in terms of what was happening. This quarter we had the mineral oil tax outflow of around 1.3 billion.
And then we had another series of different timing effects that came through in terms of the overall impact on the court as the tune of about $200 million. So we sort of working capital bill of about $1.5 billion in the quarter and it's about 2.6 billion I think for the year.
If you actually look at it over the last eight quarters, it's dead flat. And what we do inside the company and actually simply we initiated way back when the oil prices down at $28 a barrel was we manage that working capital really tightly quarter-on-quarter.
So you won't see huge fluctuations beyond the $1.5 billion into quarter as we manage that working capital particularly around our trading activities. So it's actually a relatively modest change given what happened with the price but it is basically a function of what was going on this quarter around certain timing effects and the German mineral oil tax which flows out at the end of every year, which is advanced payments of tax into Germany that they can get returned in first quarter, which we talked about historically.
In terms of dividend policy, you're right, we did increase 2.5% last year. It was a progressive step up, it was a number of years, it was actually back in 2014, I think was the previous the move up.
In terms of what we've laid out for shareholders in terms of free cash flow surplus in the five year strategy, there is significant free cash flow out to 2021. And I think it was important the board signaled last year that they were ready to move the dividend up on a progressive basis.
Ultimately, it's a function of how sustainable we think the free cash flow surplus looks on a go forward basis. Clearly now we've had eight quarters of what was a 20 quarter strategy and we're pretty much on track with what we laid out to 2021.
So notwithstanding absorbing the BHP acquisition, getting this $10 billion of disposals away to get the balance sheet back in line in terms of the previous questions we've had on the call today. The board will have an opportunity again to look at the balance of progressive dividend increases over and above other uses for that surplus free cash, including the script purchase repurchase that we've already signaled for the end of this year.
Michele Della Vigna
Thank you.
Craig Marshall
Okay. Michele.
Thanks. We'll take the next question from Oswald Clint to Bernstein.
Oswald, good morning.
Oswald Clint
Oh, hi. Good morning.
Thank you. Perhaps the question for Bernard.
Firstly, just on the Gulf of Mexico. It obviously didn't take long to use your seismic imaging to find some more oil around Atlanta and turn it into sanctioned project last month, but in terms of Thunder Horse and the billion barrels of oil in place, could you talk around next steps from here in terms of kind of proving that up, appraising it and perhaps converting it into some future projects, and perhaps just an indication of some of the development costs per barrel, you're actually getting these projects away out in terms of the Gulf of Mexico, please?
And then secondly, Tufan, just, I think you answered it back with Lucas' question. But terms of Mexico, I think you had a target of 500 retail stations for last year and I think he said today for 440, so a little bit behind.
But again, you talked about scaling up and earnings from this year almost. Is that the case with Mexico?
Is it moving as fast as you expect it should be see some earnings contribution from Mexico retail in in 2019? Thank you.
Bernard Looney
Oswald, thanks very much for your question, I think on the Gulf of Mexico on Thunder Horse specifically, we can see the potential for another expansion project to be sanctioned this year. That's well within our sites.
I think overall across the Gulf, we see six to seven projects that quite frankly we didn't see just 18 months ago. And that is Thunder horse is definitely a predominance of that.
But also, as you point out at Mad Dog at Na Kika and at Atlantis as well. So I would expect two to three expansion projects to come at Thunder Horse.
I'd expect to see the first one being sanctioned this year. And I think I would say from a development cost per barrel perspective, we're continuing to drive it down.
In our overall portfolio, our cost per barrel are down by 20% over the last couple of years. As I think we said in Oman, we've actually delivered the - or we will deliver the 900,000 barrels a day of new production for about 25% less capital than we originally anticipated.
And we're seeing those improvements in the Gulf. We have developed these super-fast tie backs that we've really got in a groove on now delivering some of these tie backs in months, matter of months.
So quite excited about what's possible. Expect to see the first expansion project at the Thunder Horse later this year.
Bob Dudley
And since, Oswald, you brought up Thunder Horse, I think it's probably something in your planning here. As we look at the first quarter, there is a long scheduled turnaround of Thunder Horse that's, I don't know, 35-40 days.
Bernard Looney
Yeah, it's a great point, Bob. And just as people do look out to the first quarter, I think - while I think we've said that production will be relatively flat in the first quarter as we take on BHP and so on.
We will lose probably close to 100,000 barrels a day of high margin production compared to the fourth quarter. And about half of that is because of M&A and that's things like Bruce, Keith and Rhum disposal in the North Sea, the Magnus disposal in the North Sea, swapping out in Alaska.
And about the other half comes from as Bob says, a turnaround, a long planned turn around not unexpected at Thunder Horse which will take Thunder Horse down for between 30 and 40 days. So we'll see it, will lose about 100,000 barrels a day of high margin barrels in the first quarter and thanks for reminding me of that Bob.
Tufan Erginbilgic
On Mexico, you are right. I think we are right now around 450 and a little bit lower than we expected, which was 500.
The reason is frankly we are very selective on the site quality and because we are not effectively market leader in terms of brand and offering Mexico. And that needs to continue and therefore we are highly selective on which sites actually we bring forward.
We still keep the target called 1,500 sites by 2021. And in terms of earnings growth, yes, you should actually expect that earnings will grow from 2019 onwards, including 2019 as well.
So far actually, it has been more, we have been building this scale in terms of volume and Mexico became our fifth largest country in our portfolio in terms of volumes, but not earnings, but earnings will start to scale up from 2019 onwards.
Oswald Clint
Super. Thank you.
Thank you both.
Craig Marshall
Thanks, Oswald. We'll take the next question from colon Colin Smith at Panmure Gordon.
Colin?
Colin Smith
Thanks for taking my question. Good morning.
Congratulations on the results. I have one for Tufan, really just around the guidance.
Given that Alberta is now falling a portion of the WTI-WCS differential is now quite a bit and looks like it may be trading sort of $5 a barrel below the guidance number. I'm just wondering two things; one, what you think the longer term I look for that is and essentially whether or not that sort of maybe marks the high point for earnings and cash generation for fighting, if we are going to be looking at lower margins going forward, perhaps the tune of 400 million a year?
That's the question.
Tufan Erginbilgic
Okay. Well, great question.
Let me actually sort of start with the long term then we can come back to why we are seeing WCS-WTI at the current levels. But as you know, WTI-WCS effect is at two components of it, one is refining value, a relative refining value I should say.
The other one is the transportation cost. And given pipeline restrictions, frankly the Canadian heavy will continue to be in rail economics going forward.
But let me answer sort of future question first. I think if you look at our guidance, we actually said refining RMM will be 14 and the WCS-WTI 15 in our sort of target numbers 2021.
And that is still good I would say both of those numbers, because if you look at going forward, IMO coming in, effectively that will increase the refining demand, distillate demand significantly. And even with the new refining capacity coming in, I think refining margins will actually, this year probably they will be lower than last year.
I'm talking about RMM as well as WCS-WTI. But if you go to 2020 and 2021, actually IMO will support because of the additional demand coming in will support definitely RMM 14.
And actually WCS-WTI this year because of Albert reduction, all the inventories went down. Probably this year, range will be more like 12 to 17.
But if you go to 2020, 2021, I think range of 2025 WCS-WTI are still supported because of IMO additional demand on distillate and also you should expect light and heavy differentials to open up.
Colin Smith
Thank you.
Craig Marshall
Okay, great. Just a couple more questions to go.
We'll take the next one from Pavel Molchanov of the Raymond James. Pavel, good morning.
Pavel Molchanov
Thanks for taking the question guys. First one on Venezuela.
I believe that last November, you made an effort to re-enter Venezuela after eight years. And any thoughts you have on the current political landscape and your plans for potentially re-entering the country would be useful?
And secondly on kind of back to the renewables investments. You made the point that it's still a bit of a rounding error in your total CapEx.
When realistically do you think renewables or low carbon investments can get to even let's say, 10% of your total capital allocation, any timing on that would be helpful? Thanks.
Bob Dudley
Pavel, hi. This is Bob.
So on Venezuela, I think the - I'm not exactly sure when you were saying we're trying to re-enter. We have always thought that there's an industrial logic with gas in Venezuela coming into Trinidad with the LNG fields - LNG plants.
So it's kind of a natural filling of knowledge I think in Trinidad. And we made some exploration discussions really only around that.
I think everyone who looks at that resource based as well in Trinidad would see that, but it was not you know, I wouldn't say it was a serious effort, it was exploratory. Regarding the pace of what is happening in Venezuela, we don't have any real insight.
I think whatever's going to happen is going to be complicated and probably take longer than. Probably if you listen to the news, there's going to be rapid change and things are going to turn around.
I think it's going to be very complicated, so we're just going to sit back, I would say and watch. And then on the pace of renewables, I mean, it's sort of we're going to remain a world class investment company.
And what we want to do is make sure we have the flexibility because nobody knows the pace of the energy transitions, we're doing a lot. But I wouldn't say that we would be able to say how long this is going to take before it's 10% of our capital.
Right now it's spending, some of its capital, some of its other spending that we put in, some of its maintenance capital today and some of our existing operations. So I don't know what the paces and there's just so many different possibilities that this low carbon energy transition will happen in.
We just want to be part of it but not formulaic.
Brian Gilvary
And maybe Pavel just to add to that, you've asked the specific question about low carbon businesses. But of course, we are also spending significant amount of money in reducing emissions in our existing portfolio.
So it may well be that we're at 10% already not that we've looked at the specific capital in those areas, but we are investing in reducing emissions, which is really what the Paris climate change is all about. So you may not see, you take alternative energy business as a proxy for low carbon, but it's actually about reaching emissions and we're doing that across our whole system.
Bob Dudley
Good point Brain. Thanks, Pavel.
Craig Marshall
Okay, we'll take the next question from Martijn Rats at Morgan Stanley.
Martijn Rats
Hi, hello. I wanted to ask Tufan some more about refining margins.
Of course, we're seeing revertively healthy middle distillate market, but the ghastly market isn't quite considerable an oversupply. And one of the things that I find a big conundrum particularly when it comes to also your comments around IMO.
Of course as a result of IMO, we are going to get more middle distillate amount, we're going to - you know higher crude oils globally and all that makes some sense. But in the process, we might rub the over producing gasoline and gasoline already looks very, very weak.
And I was wondering what your thoughts were particularly about the gasoline market and how that impacts the rest of how you run the refining system? What are you seeing in gasoline demand?
And also we're hearing stories about economic run cuts simply because of gasoline overproduction. Is that something that BP is doing, are you looking at lower FCC run rates?
I mean FCC margins are very, very low at the moment. How do you think the balance between the strong middle distillate markets within IMO, but this particular week gasoline markets at the same time.
How do you think that is going to play out over the next year or two?
Tufan Erginbilgic
That's a great point. I think current refining margins Martijn as you know driven, I mean they are low because of the gasoline cracks being very, very weak.
In fact the weakest in the last 10 years actually gasoline cracks - so because of the high gasoline inventory. So going forward, I think that will continue to be issue.
But with IMO, I think there is - gasoline demand is actually growing. So it is not a demand growth issue.
And we actually expect that to grow, continue to grow this year as well as next year and next couple of years. So there is no issue on the demand side.
But refining utilization is historically high right now. So normally we are in a strange situation because high utilization historically refinery utilization normally should derive margins to a better place.
But because of gasoline inventories, it is actually depressed. What happened in in my view frankly after the crude prices went down late 2014, we had a behavioral change on the drivers, '15, '16, '17 gasoline demand growth was significant.
But if you go before that, actually, refining margins have been driven by distillate cracks more than gasoline cracks. We came back to that station in a more polarized way I should say.
And going forward, I think this trend will continue. And - but as a result, most of the refineries in the world already that's happening, they will run at distillate mode.
And that should actually obviously reduce the gasoline production in relative terms. I still believe this year I think we expect refining margins to be lower than last year because of gasoline mainly.
But 2020 and 2021, we are still comfortable with our target numbers as I mentioned before. Second part of your question, sort of do we cut the runs.
I always talk about competitively advantage portfolio and that's what we have been actually driving last couple of years. And therefore - and what competitively advantage portfolio does for you, it's actually while others are cutting their runs, we don't need to.
And that's the situation we are in at this point frankly. In 1Q as you know refining margins are low, we didn't have to have any economic sort of related cuts in our system.
And other point about our system, it is more distillate oriented system, half of our yield is actually distillate. And in the current environment that is obviously an advantage.
Craig Marshall
Okay. Thanks, Martijn.
Martijn Rats
Wonderful. That's very helpful.
Thank you.
Craig Marshall
Thank you for the question. We'll take the penultimate question from Thomas Adolff at Credit Suisse.
Thomas Adolff
Good morning. Two short questions for me, please.
Firstly, on the disposal plan, Brian. Can you please talk about the contingency buffer you have on the 10 billion, for example, have you identified say 15 billion or 20 billion to deliver on the 10 billion, so we can kind of consider this a fairly low risk target?
Secondly for Bernard, perhaps you can give us an update on exploration, perhaps comment on the performance in 2018 and what the key wells are for 2019? I'm particularly interested in the pre-sold Brazil where you got a few licenses?
Thank you.
Brian Gilvary
So, Thomas, thanks for that question. And of course, the 10 billion number is clearly a risked number.
So we have a much bigger suite of options than the 10 to make sure that we live with the 10. The only thing I can point you to is track record.
I think we've done about $80 billion now of transactions over the last eight years since 2010 and pretty much hit the guidance on those. I think maybe at the end of last 2017, we may be at $400 million short in the final figure, but actually, it was mostly the one particular project rolling over.
So we're pretty confident, we wouldn't have put the figure out, certainly the board, we discussed this at the broader length, and we're pretty confident in that figure. And it's a risked figure and clearly has a portfolio suite larger than the 10 billion.
Bernard Looney
And Thomas, on exploration. I think with a relatively modest program in 2018, two discoveries that we've announced both in the Gulf of Mexico, both extremely valuable tie backs, so that was good.
2019, we'll probably see a program about double the size of what we did in 2018. Key wells across the world in places as you say, like the pre salt in Brazil and the Gulf of Mexico and the North Sea in Azerbaijan and Trinidad so - and also in Mauritanian, Senegal.
So a big year for us out ahead and I think we'll take the results as they come and wish us luck.
Thomas Adolff
Okay. Thank you.
Craig Marshall
Okay. Thanks very much.
We are going to take the last question from Peter Low at Redburn. Peter?
Peter Low
Hi. Thanks for taking my question.
Just one quickly. You said you weren't seeing any OpEx cost inflation upstream, but you have seven potential FIDs in 2019.
Are you seeing any signs of cost inflation emerging when you go to contact new projects? I guess I'm particularly interested in LNG where there seems to be a lot set to move forward this year?
Thanks.
Bernard Looney
Peter, thanks for your question. Seven potential FIDs this year, one's already done, which is good.
Atlanta's Phase 3 sanctioned right at the beginning of the year. And no, is the answer to your question.
We're not seeing inflation in either the CapEx or the OpEx end of things. We continue to push for better solutions, industry standard solutions.
We continue to push for standardization within our own company and across the industry. We continue to push for cost to come down.
And even in LNG, as you point out, we are seeing that, we've had some very competitive response to tenders on Phase 1 at Tortue for example. And we continue to drive more collaboration with our suppliers to figure out ways where we can collectively lower the cost base at the industry and hopefully share some of that rent, so that we both maintain a competitive environment.
So I think the answer is no. And we are a firm believer through our transformation agenda that we will continue to drive further and further capital productivity into the business.
And we for one, continue to believe that there is enormous waste still within the sector and we see that as a great opportunity and that's what our transformation agenda is 100% focused on.
Peter Low
Okay. Thanks.
Craig Marshall
Thanks, Bernard, and thank you, Peter. Okay.
That's the end of the questions. IR is of course available to follow-up on any other questions you have over the coming days and weeks.
And we'll of course also be visiting a many of our investors over the coming days. We also look forward to welcoming I think a number of you at the sell side lunch today, which is in about 57 minutes.
So good luck with the travel. On that note, let me hand over to Bob for a few closing comments.
Thank you.
Bob Dudley
Thank you, Craig. I hope you're not coming from the city.
That would be a stretch. But thank you and thank everyone for your questions today.
As usual, they're very good and they're very thoughtful and we really appreciate that. I think just a few comments, I think you're hearing from us, we're confidence about the momentum we've got across the company, a strategy that we believe is serving our shareholders very well.
You've seen the company change over the past several years. The strategy is allowing us to flex and adapt both, not only the portfolio within a capital framework, is quite disciplined.
And I think also not just responding to the energy transition, but helping to advance it along with others. Clearly as demand in the world growth for energy, so does the need to reduce the emissions and we see ourselves again with others as part of the solution to that great dual challenge.
You know, we're going to take a practical and pragmatic approach to both sides of this challenge, the demand side as well as emission reductions. And to do that we know that we must remain a highly attractive investment for you all.
We're going to continue to reach out and talk to you this year. We've got a lot of news to share with you as we go through the year.
Right after this call, we've got five teams heading out around the world and we're going to talk to as many as 40% of our shareholders I hope. But your time is very valuable.
And I think I'll end it there and just say a very big thank you from all of us.