Nov 2, 2021
Craig Marshall
Good morning, everyone, and welcome to bp's Third Quarter 2021 results presentation. I'm here today with Bernard Looney, Chief Executive Officer, and Murray Auchincloss, Chief Financial Officer.
Before we begin today, let me 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 UK 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. I'll now hand over to Bernard.
Bernard Looney
Thanks, Craig and welcome everyone. It is great to have you join us.
I'm going to start with a summary of our results before Murray takes you through the detail. I'll then share some operational and strategic highlights and we will then take your questions.
Today, we are reporting another quarter of strong, strategic delivery and underlying financial progress. Our businesses are running well, maintaining their focus on safe and reliable operations.
Our portfolio is capturing the benefit of the strong commodity environment. And our overall results show how our continued focus on performing while transforming is delivering value for our shareholders today, strengthening our balance sheet, growing distributions, while at the same time investing with discipline in our strategic transformation.
For the quarter, underlying replacement cost profits was $3.3 billion. Operating cash flow was $6 billion, which includes a working capital build of $1.8 billion and net debt fell for the sixth consecutive quarter to reach $32 billion.
Next, to distributions, where we continue to deliver on our commitment to shareholders. A resilient dividend is our first priority within this financial frame.
And for the third quarter, BP has declared a dividend of $0.0546 per ordinary share unchanged following the 4% increase announced with our second quarter results. We have completed the $1.4 billion share buyback from first half 2021 surplus cash flow and have today announced plans to buyback $1.25 billion of shares, which we expect to complete by the time of our fourth quarter results.
We've also seen continued momentum across each of our strategic focus areas. And I'll come back to talk about these and other highlights later in the presentation.
But, for now, let me hand you over to Murray.
Murray Auchincloss
Thanks, Bernard. Let's begin with the macro environment.
Oil prices have continued to increase, with Brent rising 7% to average $74 in the third quarter, moving above $80 in recent weeks. This reflects a strong rebound in oil demand as the impact of COVID eases as well as the measured increases in OPEC+ supply.
As a result, inventories have reduced back towards pre-pandemic levels. As we look ahead to the end of the year, we expect oil prices to be supported by continued inventory drawdown with the potential for additional demand from gas to oil switching.
Gas markets were very strong in the quarter as well. Henry Hub averaged $4.30 up from $2.90 in the second quarter, as capital discipline continued to limit US gas production growth and Hurricane Ida led to production curtailments.
In international markets average NBP and JKM prices rose by around 85% compared to the second quarter. This reflects a tight LNG market, driven by strong Asian demand growth, LNG supply outages, depleted European gas storage and uncertainty of Russian pipeline imports.
We expect gas markets will remain tight during the period of peak winter demand. Looking to refining, the increase in industry refining margins was supported by Hurricane Ida related disruptions in early September.
In the third quarter, bp's average RMM rose by 11% to $15.20. This is mainly due to seasonal demand rebound.
Realized margins also benefited from wider North American heavy crude oil differentials. In the fourth quarter, industry refining margins are expected to be lower compared to the third quarter driven by seasonal demand.
Moving to results. In the third quarter, we reported an IFRS loss of $2.5 billion.
After adjusting items of $6.3 billion, we reported an underlying replacement cost profit of $3.3 billion, compared to $2.8 billion last quarter. Adjusting items included fair value accounting effects of $6.1 billion, primarily due to the exceptional increase in forward gas prices towards the end of the quarter.
Under IFRS, reported earnings include the mark-to-market of hedges used to risk manage LNG contracts, but not the physical LNG contracts themselves. This mismatch at the end of the third quarter is expected to unwind if prices decline and as cargoes are delivered.
The underlying result removes this mismatch consistent with how bp risk manages its LNG portfolio. Turning to business group performance compared to the second quarter.
In gas and low carbon energy, the result benefited from higher gas realizations, and a strong gas marketing and trading result. In oil production and operations, the result reflects higher liquids and gas realizations, but was impacted by the effect of Hurricane Ida on our Gulf of Mexico production in the quarter.
And in customers and products, the products business returned to profit driven by a higher refining availability and throughput, enabling the capture of the stronger refining environment, partly offset by increased energy prices. The result also benefited from a higher contribution from oil trading.
And the customers result was supported by higher retail and aviation volumes, strong convenience and fuel margin management, offset by higher wage costs and increased digital marketing investment. For the third quarter, bp has announced a dividend of $0.0546 per ordinary share payable in the fourth quarter.
Turn into cash flow and the balance sheet. Operating cash flow was $6 billion in the third quarter.
This included a working capital build of $1.8 billion after adjusting for inventory holding gains and fair value accounting effects. Capital expenditure was $2.9 billion, and disposal proceeds were $300 million, bringing year-to-date receipts to $5.4 billion by the end of the third quarter.
We now expect to realize disposal proceeds of around $6 billion to $7 billion by the end of 2021. Reflecting the strong underlying cash flow delivery, and after working capital movements, third quarter surplus cash flow was $900 million.
With second quarter results, bp announced the intention to buy back $1.4 billion of shares from surplus cash flow generated in the first half of 2021. This program has been completed with $900 million executed during the third quarter.
Recognizing these factors, net debt fell for the sixth consecutive quarter to reach $32 billion at the end of the third quarter, and has now been reduced by $7 billion since the start of this year. Our financial frame has established a clear set of principles and priorities for our uses of capital.
These remain unchanged with a resilient dividend our first priority. Our second priority is to maintain a strong investment grade credit rating.
I'm pleased with the progress we've made on debt reduction. And we continue to plan to allocate 40% of 2021 surplus cash flow to further strengthen the balance sheet.
Despite the backdrop of higher commodity prices, we remain focused on capital discipline, and our third and fourth priorities for capital expenditure remained unchanged. We continue to expect to spend around $13 billion in 2021.
Finally, subject to maintaining a strong investment grade credit rating and considering the cumulative level of an outlook for surplus cash flow, the Board remains committed to using 60% of 2021 surplus cash flow for share buybacks. Recognizing third quarter surplus cash flow of $900 million and reflecting our confidence in the outlook, bp intends to execute a further buyback of $1.25 billion prior to fourth quarter results.
And we expect to outline plans for the final tranche of buybacks from 2021 surplus cash flow with our fourth quarter results. Based on bp's current forecasts at around $60 per barrel, Brent and subject to the Board's discretion each quarter, we continue to expect to be able to deliver a buyback of around $1 billion per quarter on average, with upside at higher prices and to have capacity for an annual dividend increase of around 4% through 2025.
Taken together, we remain focused on delivering strong per share growth consistent with our proposition to shareholders. Thanks very much for listening, Bernard, back to you.
Bernard Looney
Thanks, Murray. So turning now to look at operational and strategic highlights, and we continue to make disciplined progress underpinning our confidence in the targets we laid out last year.
Looking first at hydrocarbons, we're building a higher quality and more resilient business, growing EBITDA from a smaller, higher margin and price leveraged portfolio, whilst at the same time reducing emissions. In 2016, we first outlined an ambitious plan to grow production from new high margin major projects.
And with two major projects coming online in the third quarter Thunder Horse South Expansion Phase 2 and Matapal, we have now hit our target of delivering 900,000 barrels of oil equivalent per day by 2021. This, I hope you will agree, is a fantastic achievement and a great example of us doing, as we say.
Executing our strategy and building real momentum, 34 projects in 11 countries over 250 million hours with more than $36 billion of capital expenditure net to bp and all executed on average, on schedule and importantly, around 15% below budget. Why is this so important?
First, these high margin barrels will help drive EBITDA growth as we high grade our portfolio. And there is more to come.
In 2022, we plan to start up the high margin Mad Dog Phase 2 Project in the Gulf of Mexico, further expanding our footprint in one of our core regions with substantial price leverage, and we expect to further drive margin and returns by prioritizing projects around existing infrastructure. Second, as we've discussed before, our single operating model is allowing us to leverage these world class project execution capabilities across our existing business and into new areas.
And it is also helping drive resilience across our operating assets, improving reliability, lowering emissions, and maximizing value. Compared to the second quarter, upstream plant reliability improved by around 1% to reach 95.4% underpinned by strong performance in some newer major projects such as Raven in Egypt.
Refining availability was also higher, up 2%. We continue to expect further improvement towards our 2025 target of 96% for both reliability and availability, and we are in action reducing emissions.
Take BPX as an example. Through focused investments since acquiring the assets, the team has cut Permian methane flaring intensity by over 90% to less than 1% by the end of the third quarter 2021.
These actions are key to our BPX strategy, helping improve the sustainability of our operations, while also yielding attractive returns. In convenience and mobility, we aim to nearly double EBITDA by 2030 from around $5 billion in 2019 and generate returns of 15% to 20%.
And we continue to make strong progress across our three focus areas. First, we are redefining our convenience offer.
Compared to the same quarter last year, we have increased the number of strategic convenience sites by 8%. Our BPme customers, who typically spend twice as much as non-app users, have increased by around 50%.
And since 2019, our basket value is higher in key markets. For example in the UK, and in the US at Thorntons, it has grown by more than 20%.
Together these factors have underpinned our record year-to-date convenience gross margin delivery. Next in next-gen mobility, nearly half of our EV charging points are now either rapid or ultra-fast.
Our utilization rates are increasing with electron sales 45% higher than last quarter. And our Digital Charging Solutions partnership with Daimler and BMW Group completed in October.
This is expected to connect EV drivers across Europe to our network of charging points, drive up utilization rates and increase footfall at our convenience stores. And finally, we continue to expand in growth markets.
In the last few weeks, Jio-bp, our Indian fuels and mobility joint venture with Reliance open their first mobility station providing a fully integrated customer offer including high quality fuels, EV charging points, tailored convenience offers, including our Wild Bean Cafe and Castrol products and services. The Jio-bp Brand builds on a well-established partnership in India, further combining the knowledge, expertise and experience of BP and Reliance Industries to create an unmatched and distinctive customer experience.
The existing network of 1400 Reliance fuel stations will be rebranded to Jio-bp in the coming months. And in China, our record year-to-date underlying earnings were driven by the strength of our Castrol brand, and our convenience and mobility businesses.
Finally, low carbon, where we continue to build capability and scale with capital discipline and a focus on returns. In renewables, we have growing confidence in our ability to develop 20 gigawatts to FID net to bp by 2025.
First, compared to the second quarter, our pipeline has grown by 2 gigawatts to 23 gigawatts driven by continued growth in Lightsource bp's projects portfolio. And second, Lightsource bp has increased its growth target by 25%, now planning 25 gigawatts developed to FID by 2025.
In hydrogen and CCUS, we are taking early steps to create a distinctive position, aiming for a 10% share in core hydrogen markets by 2030. Alongside projects in Australia and Europe, we have made several recent announcements in the UK.
Last week, bp was selected by Aberdeen City Council to develop, build and operate the first scalable green hydrogen production hub in Scotland. And earlier in October, the UK Government selected the East Coast Cluster as one of the first two CCUS projects in the country.
The successful bid was managed by the bp-lead Northern Endurance Partnership, which will also develop the CCUS infrastructure. bp also operates two further projects H2 Teesside and Net Zero Teesside power that are integrated with the East Coast Cluster and key to our hydrogen strategy.
And we were in action elsewhere. In September, we announced a strategic partnership with Masdar and ADNOC in the UAE, where BP has a substantial business and a long standing relationship.
Together, we plan to develop a range of low carbon energy projects for the UK and the UAE, with a particular focus on hydrogen and CCUS. These examples demonstrate how we are leveraging mutually beneficial partnerships, deep project experience, and global reach across the energy sector to build scale and presence in low carbon.
So to briefly summarize, I hope you'll agree that today's results tell a story of continued strong underlying financial performance and strategic progress. We are driving value from a more resilient and focused hydrocarbons portfolio leveraged to the stronger price environment.
We continue to grow our established convenience and mobility businesses and we are investing with discipline and low carbon, laying the foundation for a material business that can generate stable long term returns. It is still early days, of course, but the team is doing a great job.
And we believe the combination of financial delivery and strategic momentum presents a compelling investor proposition. One that is purpose led and performance driven, is resilient to market cycles in the near term, and is expected to grow sustainable value in the long term.
And that delivers returns for shareholders today and transforms bp for tomorrow. This is what we mean by performing while transforming and this is what we are laser focused on.
And with that Murray, Craig and I will be pleased to take any questions that you have.
Operator
Craig Marshall
Well, thanks again, everybody for joining us this quarter. As usual, please, if I can remind you just to restrict your questions to two so we get everybody to ask their questions over the next coming few minutes.
And IR is obviously available after the call to follow up on any more detail. So on that note, let me turn to Jason Kenney of Santander for the first question.
Jason?
Jason Kenney
Thanks very much. Hey, Bernard, Murray.
So I am struck by the number of strategic collaborations the bp developed particularly in the last couple of years. I mean, there are some smaller ones like Blueprint and BluSmart.
You've got the obvious ones like Jio-bp and DiDi and then the big one Lightsource bp. And then there's things like the Mazda and ADNOC, I mean, everything's all coming in.
So I'm just kind of just wondering what the BP of the future will look like and how much of the new energy business is being directly driven by BP and how much is dependent on the correct alignment with the right players and the right technologies, or the best scalable new value chains? So any thoughts on that would be much appreciated.
And then specifically on the hydrocarbon positions like Angola and Iraq, which you're looking to move outside of BP, could you maybe comment on other hydrocarbon positions that may be right for being positioned in an independent supportive operations? Thanks.
Bernard Looney
Very good, Jason. Good morning and good to hear your voice.
Maybe I'll take a little stab at the partnerships and Murray can add if he wishes, and I'll let Murray talk a little bit about the hydrocarbons and what we're doing there. Look, I think it's really a couple of things in terms of partnerships and joint ventures and so on.
The first is that the energy system of the future is more diversified. It's more complex, it's more local.
And it lends itself to the need for different skills to come together to help solve those problems. And it sometimes needs local partners like we have with DiDi in China, like we have with Reliance with Jio-bp in India.
So I think one is the energy system of the future will encourage us to partner. And the second thing I would say is that partnership, and relationships are part of our DNA.
I think we are a company that have long seen partnerships as a strength, as a sign of strength not necessarily a sign of weakness. And the encouraging thing for us, Jason, is that not only do we want to partner and in some cases need to partner but it is that other companies wish to partner with bp.
And you mentioned some of them but I think it's incredible to see our investment in Digital Charging Solutions in this quarter in Europe opens up hundreds of 1000s of customers to bp. And that's the joint venture with Daimler and with BMW, getting us in that software so that customers can be pointed to our charging stations as we build them out here.
In the UK and in Germany, we wouldn't be able to do what we're doing. In China, we opened our 100th site in China, in EV charging in the quarter.
We're up eight-fold year-on-year in terms of the number of charge points in China. And I would just let you know that China took 11 years to go to 5% of EVs in the marketplace, and it took seven months to go from 5% to 10%.
So DiDi is an excellent partner for us there. Reliance in India, what we're doing with Mukesh Ambani and his team, on the natural gas side, we hope to be providing between 15% and 20% of India's natural gas over the next several years.
Something that's massively important to that country's transition, and at the same time opening our first Jio-bp station. So partnerships are something that we love.
We have a great relationship and track record in them. PAE in Argentina, Aker BP in Norway, and I just think it's part of the future.
It's just part of what the energy system is going to need. And it's something that we are leaning into.
And I guess, as I said, not alone do we want a need partners, but it's encouraging to see that people want to partner with us. Murray, anything to add on hydrocarbons?
Murray Auchincloss
Yeah. Thanks, good morning Jason.
I guess the only thing I'd add is, if you look back in the 1970s and 1980s, the historic upstream and downstream, you'd have been seeing a similar type of announcements of bp working together with other companies to develop both the upstream and the downstream. I just think we're back in that phase of building.
And so that is that is the nature of the cycle we're in. As far as transactions, etc., I suppose.
Bernard and I over the past decade, we've done a couple transactions with partners to create value. They're always very value driven.
If I think back to Alaska, what we did was Hilcorp, NorthStar and Endicott and created a partnership. I think it's five years ago, we created the partnership with Aker BP and the share price on Aker BP is up quite substantially over that time period.
Bernard Looney
Fourfold.
Murray Auchincloss
Fourfold, so that's not bad is it? So, you know, I think every 10 years, it looks like we can do two of these things.
And the next, the next one's obviously, Angola. Working with our partner, Eni, we see a great industrial synergy opportunity there that we think can create a lot of value for partnerships.
We're constantly looking for these things, they're just very difficult to do and they're very difficult to align. So I'm not going to forecast any future ones.
But we're always looking for ways to create value here for shareholders. And it looks like our hit rates - hit rate is about two every 10 years.
So let's see, Jason
Jason Kenney
It is all about unlocking value, isn't it?
Murray Auchincloss
It is all about unlocking value and that's what we're trying to do with the portfolio. And you should expect us to continue to be laser focused on it.
And I think we can do a bit better than two every 10 years but let's see. So day-by-day.
Thanks, Jason.
Bernard Looney
I think I just got my performance contract, Jason.
Murray Auchincloss
That was a little bit of feedback.
Jason Kenney
Yeah.
Craig Marshall
That's great, thanks, Jason. We'll take the next question from Christyan Malek at JPMorgan.
Christyan?
Christyan Malek
Hi, good morning. Thanks, Craig and hi, Bernard and Murray, it's good to hear voices too.
Two questions, if I may. First, activism in the space regarding sort of the breakup logic appears to be on the rise, be it in the US or Europe now.
I want to know your thoughts on the case for carve out of the gas, low carbon and renewables business. And so I understand partnership, and JV and industrial logic of that following Jason's question, but I just wonder to what extent can that sit within a separate business and you continue to sort of partner, in the sort of bp in UK?
So love to hear your thoughts on that. The second question is on your TSR guide.
It's interesting, you benchmark the TSR guide on your future outlook of . To what extent is that based on the operational execution outlook, versus your belief in firmer macro prices?
It'd be worth just hearing your thoughts on the latter point as well, in terms of how you see the oil price in the next few years if that is ultimately what's driving your increased confidence? Thank you.
Bernard Looney
Very good. I let Murray, Christyan take the second question around TSR.
And I'll see if I can tackle your first question. And good also to hear your voice, thanks for being on the call.
Look, I think the first thing that I would say in the matter of this question around breakup and so on, is that we're not hearing that call from our investors. So I think that's the first and foremost thing.
We're not hearing that from investors today. Why?
I think, our strategy, I think is clear. I think it's increasingly clear.
As we - as people get more comfortable with it, I think our financial framework is clear. I think our investor proposition is clear.
And I actually think, if I may say, I think it's working. Third quarter in a row of good strong results, the balance sheet strengthening, six quarter in a row of net debt coming down, we're generating cash.
I think, I hope you'll have seen, I think we're a cash machine at these types of prices. And we're investing in the transition with discipline, step-by-step and from what we see, Christyan, shareholders increasingly like what we're doing.
So we're encouraged. We chose the name of our strategy last year before these conversations, for a reason, and it's called an integrated energy company.
And we chose that name, because we believe deeply in the premise of being an integrated energy company being the way to not alone help the world transition, but importantly, to create value from that transition. And the reason we say that, Christyan, is twofold.
Number one, we need cash flow to invest into the transition. And our existing businesses generate enormous cash flow, as you guys have done the math better than I do.
Adjusting for working capital, we're close to $8 billion of operating cash in this quarter. When I look at some renewable companies out there, I see some of them struggling to fund their growth.
That's not a problem that a company that is an integrated energy company will have and it's not a problem that we have. And the second thing that I would say is if I take a country like the United Kingdom, what other company can take natural gas, build a power station, capture the carbon, take it offshore, store it underground.
What other company can take and build offshore wind, build a hydrogen facility on the back of it, take that electricity and put it into the largest charging network in Britain at the same time sign a deal with Daimler to explore the potential for hydrogen trucking infrastructure in the UK, sign a deal in Aberdeen to look at hydrogen for public transport, and at the same time, have a trading business that can help customers hedge and plan and have predictable and reliable sources of energy. So as the energy transition becomes clearly more complex, I think in people's minds, I think the roles for a company like bp becomes clearer and clearer by the day.
So we believe, Christyan, long story short, that we are better together. And I think as we deliver each and every day and as we deliver each and every quarter, and we want to be pretty boring, and predictable and reliable performing while transforming, is what you'll continue to hear from us.
I think that proposition will continue to strengthen. So let me just leave it at that.
Murray?
Murray Auchincloss
Yeah, on the TSR question, Christyan, I think you're asking about our financial frame. So what we've said, dividend first priority, has the capacity to grow by 4% per annum, assuming $60 through 2025.
Second priority is to reduce our net debt. Third priority, invest in the transition and sustaining CapEx on our historic hydrocarbons business.
And then surplus cash, at least 60% through share buybacks. And obviously, for 2021, we've said 60% buybacks, 40% debt reduction to protect the balance sheet.
As we guided on the share buybacks, we just said at $60, that's not a forecast of the future oil price. That's just an assumption of what the oil price was.
And we said that we could do around $1 billion a quarter more to 2025 at $60 oil. So it's not our belief on what the oil price will be.
It's just a helpful guideline for you, the sell-side and for our shareholders, to understand what our capacity is. Of course, if oil prices higher or lower than that, those - that buyback potential can increase, obviously, if oil prices higher.
And that's what you're seeing happen with our third quarter results and the announcement of the $1.25 billion of buybacks. On oil price itself, I think we've got a constructive outlook on oil price.
Demand's up above $100 million a day. Again, we're not back to pre-COVID levels.
We think we'll be there somewhere around - somewhere next year, we think we'll be back to pre-COVID levels. And of course, OPEC+ is doing a good job managing the balance.
So we remain constructive on oil price. And it doesn't really relate to the $60, that's just a useful assumption for you to model our business.
Thank you.
Craig Marshall
Thanks, Christyan. We'll take the next question from Michele Della Vigna at Goldman Sachs.
Michele?
Michele Della Vigna
Thank you very much for your time. Two questions, if I may.
The first one is about cost inflation and delays in offshore wind. The oil and gas industry has tremendous experience on delays, bottlenecks, cost overruns, and you carry it with you into a new business.
I was wondering what can you do there differently from your competitors to be able to manage better this risk, which seems to be rising in offshore wind, effectively for the first time in the last decade? And then my second question is about electric mobility.
And I was wondering if there are some key metrics you're looking at in terms of percentage of EV penetration or utilization of your charging points that really are key to achieve profitability in this rising and growing business? Thank you.
Bernard Looney
Thank you, Michele. Thank you, and good morning.
I might ask Murray to talk a little bit about cost inflation, and he has the supply chain function within his remit, but also capability and things that we have. But Murray will talk about that.
On electric vehicles, I have to say it's one of the areas that, I think both Murray and I are most excited about. I think, Emma and Richard Bartlett and the team, are doing a fantastic job in this space for us.
And what are the things that we look at? I mean, the real driver here is utilization rates.
And utilization rates are going up and up and up. We sold 45% more electrons in the third quarter than we did in the second quarter.
And that's because, yes, we're growing infrastructure. And importantly, we're growing fast, our rapid and ultra-fast infrastructure, which is our focus.
50% of bp pulse now is rapid, are ultra-fast. And that means that we're getting more electrons through the system, more kilowatt hours through the system.
So that's the key, 45% increase in electrons. People talk a lot about the number of charges points.
Quite frankly, we need to talk about the number of electrons sold. And I think we fell - we sold 40 gigawatt hours of electricity, or electrons in the third quarter.
So that's the key. We're seeing this happen right around the world.
I think it's really, really encouraging. In China, as I said, we've opened our 100th site.
That's an eightfold increase now, year-on-year, so that's going very, very well. In Germany, we signed a deal with Burger King to put charging points in their sites that will drive utilization.
In Europe, we signed a deal with Digital Charging Solutions to drive utilization. In India, we've opened our first Jio-bp retail site, which has EV charging on it.
We've bought into BluSmart with which is India's all electric ride hailer. So you can see here a system that is coming together.
And I haven't talked about fleets and our deal with Uber here in London and if you have time to ever visit our Park Lane charging station where we have dedicated Uber charging points. So the key in all of this is utilization.
The key here is electricity sales. And of course, to do that, we got to have the right locations, which we do 90% of people in Germany and the UK, live within 20 minutes of a BP retail site, that's number one.
Number two, we got to have fast charging, because people do want to make sure that they can get a charge quickly. Number three, we got to have a good digital offer, which we have and we will continue to improve.
Number four, we got to have a safe and secure location for people to charge, which we do at our sites. And number five, we got to have a strong convenience offer so that people can grab that cup of coffee, or that sandwich while they're charging up.
And that's what we're doing. Hammersmith is the busiest charging site in Britain.
7400 transactions in the third quarter alone, that shows us the future, that shows us what's possible. Ever drive by to Hammersmith site here in London, and you will see our charging points pretty much full.
So it's a pretty cool business. We're excited about it.
It's the one part of the transition that I think is going faster than predicted. And you can expect us to be all-in on making that a very significant part of the company's future.
Murray?
Murray Auchincloss
Great, and I think on offshore wind and supply chain, yeah, I think the sector is starting to see some inflation inside steel. No surprise, given what happened with COVID.
And about every two months, I sit down with our team on offshore wind to continue to learn and see what's happening. So the last time I did that was a month ago.
And the big choke point actually is offshore installation and offshore logistics. Now, the funny bit is that's the exact same thing that that I talk about other teams with on the oil and gas side.
So the way that we'll manage this, it looks to me like about 60% to 70% of the supply chain overlaps between offshore wind and offshore oil and gas. It's a rough estimate.
And the typical way we've managed these things is big long term frame agreements on steel. So, so far, despite input prices rising, we've been able to use our frame agreements to offset that inflation in the oil and gas.
And I'd expect as we move through offshore wind, we'll bring those two things together and manage that inflation. And the other things we do is, we have big programs of activity.
So in the offshore UK, we have subsea teams, we have subsea programs, we have pipeline programs in the upstream. And we'll be sharing the logistics and lift vessels across both the offshore wind and the historical oil and gas positions.
So there's quite a bit of overlap. We know all the things that we do to manage this inflation.
We're pretty decent at managing capital in this space. I think you heard Bernard talk about our project delivery over the past five years.
We targeted to spend $42 billion and we spent 15% less than that across 35 major projects across a very busy time period. And that exact same team has now moved into offshore wind, will move into onshore CCUS and onshore hydrogen.
And we look forward to taking all those lessons that we built up over time in the upstream into the downstream and into low carbon. So I think yes, we're seeing a little bit of inflation in that space.
But I think we'll be able to use everything we've learned from upstream oil and gas in our leverage with the supply chain to manage this risk.
Bernard Looney
Thanks, Murray. Just one fact on electrification before we let Michele go.
It took China 11 years to go from zero to 5% EV penetration. It took them seven months to go from 5% to 10% EV penetration, it's incredible.
And someone just said that we doubled the electrons sold in Germany, quarter-on-quarter. So this is a fast moving business.
And we're well positioned.
Murray Auchincloss
And if you wanted to measure returns, the general stat we hold is, if we get 10% utilization on a fast charger, you'll make a 10% return, that's just the pure electrons themselves. Of course, this is not just about the electrons, it's about the convenience as well.
And when somebody goes to charge their car, they spend probably eight minutes as opposed to four minutes. And hopefully they come in and they get a nice cup of Wild Bean coffee and a sandwich and that will certainly enhance those returns.
Bernard Looney
And utilization at Hammersmith is definitely above 10%. Now, we don't have Hammersmith's everywhere, but it is a sign of the future, I think.
Great, thanks, Michele.
Craig Marshall
Super, thanks, Michele. We'll take the next question from Oz Clint at Bernstein.
Oz?
Oswald Clint
Hi, good morning. Thank you very much, everyone.
India Jio-bp, the new station, which you mentioned a couple of times this morning. I have to admit, when I read that, I saw a lot of the word free, I saw, free active fuel within the standard fuel, I saw free oil change, etc., etc.
So I just wanted to, tell me please what's the revenue model or what's the - or actually where is the margin? Is it - I'm not sure what retail margins are in India, but is it bulk standard fuel?
Is it the EV charging? You just talked about the refreshments or things like battery charging.
It'd be great to flesh out how this all comes together? Is there any cross subsidization that's taking place?
And secondly, please. I mean, there's still some concern out in the markets about your shrinking upstream.
And it's pretty amazing to see just how low your exploration write-offs are this year, basically zero. But could you just talk about your base decline rate at this point in the year and how it's comparing to your expectations, please?
Thank you.
Bernard Looney
Oz, great and Murray will maybe help me on decline rates, I'll say something on the 40%. And then India, look, I think, we're at the very early days.
This is our first Jio-bp site. The existing 1400 Reliance sites will be rebranded over the coming months.
The margin here is a margin that crosses all the way from margin on fuel to margin on convenience to margin on charging. I mean, it is a complete customer capture strategy, so to speak.
And I think the numbers here in the UK now are climbing and climbing. And we're seeing in the UK, that I think we used to say over 50% of customers that visit a bp retail site in the UK buy fuel only, or don't buy any fuel, sorry.
That number has risen to I think between 60% and 70%, so consumer habits are changing. Basket sizes are increasing here in the UK.
We see basket sizes have risen 20% with pre-pandemic. So it is an integrated offer, if I may use that word.
And in terms of free, think of it as customer capture. People made a lot of Jio issuing free mobile phones.
Today, I think they have 400 million users on their platform. So customers matter, we invest in customers, we want to attract and secure customers.
And we'll do that in India as Jio did incredibly successfully with their mobile network. And it's fantastic, actually, for this venture to be called Jio-bp, given the footprint and reputation that that mobile network has.
In terms of the 40%, I think a couple of things I would say and we'll talk more about this at our 4Q results in February, a 40% reduction in production does not equate, as you know, to a 40% reduction in cash flow or anything. But this is all about a high grading of our portfolio.
This is a value optimization strategy, pure and pure. We intend to grow earnings through the middle of this decade, despite shrinking our volumes by 20%.
We take cost out, we make sure that we're focused on the highest margin barrels, we drive the unit margin per barrel up, and you'll see us continue to do that through the decade. I think this is increasingly understood as a strategy that's focused on optimizing value that's focused on value and I think, is absolutely the thing that we need to be doing.
It allows us to really focus our capital. It allows us to make sure that our exploration strategy, as you pointed out, is focused on infrastructure near existing assets.
It's all of those things that I think is 100% focused on how do we create the maximum value from these hydrocarbon assets that we have. So, Murray, anything to add?
Murray Auchincloss
Just on base decline and that type of stuff, So plant reliability, Gordon and the team had a very good quarter. 95.4%, I think, is the year-to-date reliability, so very good performance on the facilities themselves, which forms a part of the base.
We guide, Oz, as you know, to 3% to 5% decline. We don't have an annual number, yet, we've still got another 60 days to go.
But I suspect, as usual, we'll do better than that, is my guess. The places where we have base decline is gas basins, you can see BPX because of the lack of capital investment last year, create some base decline and then Trinidad, we've had some base decline as well.
The rest of the business is holding up super well. And I suspect at year end, when we report back to you, we'll be at the lower end of that range, if not slightly below it.
So 3% to 5% remains good Oz.
Oswald Clint
Super, thank you.
Craig Marshall
Thank you, Oz. We'll take the next question from Irene Himona at Societe Generale.
Irene Himona
Thank you, very much. Good morning.
My first question, well Bernard, congratulations on delivering the 900K b/d of new projects, new barrels, which you set five years ago. At that time, you had said that at $50 or $55 Brent, these barrels had 1/3 higher margin.
In today's environment, $80, $85 Brent, give us a sense of how superior the margins on those new barrels are compared with legacy, please? And my second question on gas trading, which this quarter you described as strong.
The press had mentioned recently figure of $500 million. Is that realistic or how should we think about it?
Is the 2% enhancement to Group ROCE from trading which you provided before, still valid in this environment? Thank you.
Bernard Looney
Irene, good morning. And I let Murray take the gas trading question and I will take the question on the 900,000.
Thank you for acknowledging that. Thanks, the congratulations don't go to me, it goes to our organization who I hope some of them are listening and they have done an extraordinary job.
And I hope you don't mind me boasting about them for a moment. But this has really been an incredible achievement.
This is 34 major projects across 11 separate countries delivered for $36 billion net to bp that's 15% under budget and on schedule, it is a pretty extraordinary set of outcomes. And of course, it speaks to a couple of things, one, that we like to do what we say.
So when we tell you something, we intend to deliver on it. And secondly, project management.
And project management is a capability that doesn't know oil and gas as a boundary. And what I mean by that is project management is as applicable to building a hydrogen facility or building an offshore wind facility, as it is to building an oil and gas facility.
So thanks for acknowledging it in terms of margins. I think Irene, I would say that the 30% to 35% higher margin than the existing portfolio.
And I think today, we would say that at these prices, that 35% margin delta is about what it would be at these prices as well. So that margin uplift remains intact.
And of course, is one of the reasons why we can grow cash flow, grow EBITDA while reducing production as we focus on those high quality barrels. So that 900,000, much of it is on - much of it is coming on, Mad Dog phase 2 comes on next year in the Gulf of Mexico, quite frankly, coming online into an incredibly strong oil price environment.
And you will see that in the cash flows of the company. Murray, gas trading?
Murray Auchincloss
Yeah. Hi Irene, nice to hear your voice.
And so just thinking back to last year when we guided on trading, we said that trading enhances the returns of bp by around 2% to 3%. No change to that guidance, we'll update you in the New Year with any different thoughts on that perspective, but no change so far.
In the third quarter, yes, there was some press speculation around a number. We don't talk about speculation and we don't disclose those numbers.
It was a strong quarter for gas trading. You can see that in gas and low carbon.
But I must say the realizations were very strong as well in the quarter and production was very strong as well. So I think the team inside gas and low carbon had a great quarter for production, a great quarter for realizations, it was a strong quarter for gas trading as well.
But we don't provide numbers obviously. And the numbers in the press we're not going to comment on.
Irene Himona
Thanks so much.
Bernard Looney
Thanks, Irene.
Craig Marshall
Thanks, Irene. We'll tend to the US for the next couple of questions, I think.
First one from Paul Cheng at Scotia.
Paul Cheng
Thank you. Good morning.
Bernard, you mentioned about in the EV charging business is all about utilization. Can you share with us what is the utilization rate in the major operating region for you at this point?
And what is your target over the next couple of years? And also, do you have a number of what is that business, the EBITDA contribution in the quarter you can share?
The second question, question one, do you have an estimate, what is the either production in Gulf of Mexico and the earning impact related to that? And also that, in your - one of your peers that sold their Permian asset and say that's because lack of economies of scale, or at least one of the reason, so want to see how you guys view your BPX business?
Thank you.
Bernard Looney
Paul, thank you. I think on - and I'll ask Murray to comment on the GoM and BPX, his favorite, probably favorite two subjects amongst many.
And in terms of utilization rates, we're not giving utilization rates per - by region yet. I think the reality is that they're sitting today probably on average below 10%.
And there's - we're concentrating on probably three key markets with two markets today and one to come over time, the three key markets being China, Europe and the US. US will probably be more of a fleet story.
The EU, it is on-the-go charging, which where we think the majority of the gross margin pool exists. And China will be a combination of fleet and on-the-go.
Utilization rates today are below 10% on average, I would say. But they're only going one direction.
There is no doubt about that, in our mind. And some of the numbers that I have just given about the pace of growth of EV penetration in China is just one example.
But you see it all throughout the world. So they're going to go up and as they go up, the business becomes more profitable.
We're not providing EBITDA on a charging basis just yet. I think we're providing a lot of transparency.
Some people would say too many metrics. But no doubt as that material - as that business becomes more material over time, you can expect us to start talking about that but that's not for today.
Murray, the GoM, Hurricanes and BPX?
Murray Auchincloss
Yeah, great. Hey, Paul, bright and early in the morning for you, apologies for that.
On the GoM, the impact in the quarter was about 60 mbd, I'll let you do your calculations on what that is. I think there's about a 15% royalty rates in the in the US offshore and operating costs are pretty low sub-$6 a barrel.
So I'll let you do the calculations on what that gets to, rather than provide a number. And then on the Permian and BPX, we're very happy with our BPX position.
It's doing much better than we hoped when we acquired it. Costs are well ahead of what we expected.
Drilling efficiency is well ahead of what we expected, reservoirs are showing up in the Bone Springs that we hadn't anticipated at that time. So I think operationally, all things we're very, very happy with.
As you can see from our disclosure on the website, they're back to growth now as we invest more capital into them, and we're gradually ramping up from about $1 billion this year. We'll probably ramp up to $1.5 billion next year.
The program inside the Permian will focus on building out the infrastructure to make sure that there's no flaring or methane going into the atmosphere as we go into the next leg of drilling in the Permian. We think that's extremely important for not only the environment but also for profitability.
And obviously, we're drilling in the Haynesville and Eagle Ford as well. We'll take a big dividend out of the business this year and we anticipate continuing to take dividends out of it on a growing basis, probably by the time we get through the ramp up and CapEx, we'll probably take at least $1 billion a year in dividend from that business.
And that's what's super important to us is making sure that we gradually grow this but at the same time we can get a dividend back that pays back the price we paid for the assets. So very happy with it, remains a core bit of the portfolio, both from reducing emissions, reducing flaring, reducing methane, and driving profitability and driving cash flow for shareholders.
Bernard Looney
Thanks Paul.
Paul Cheng
Thank you.
Craig Marshall
Thanks, Paul. We'll take the next question from Jason Gabelman at Cowen.
Jason Gabelman
Hey, good afternoon. Thanks for taking my questions.
I want to ask the first one on the convenience and mobility business. You've highlighted a lot of growth and kind of strategic initiatives within that business that are going as planned.
I can't help but notice that adjusted EBITDA was kind of down quarter-over-quarter and year-over-year, despite all this progress and seemingly moving forward on your EV/convenience store strategy. So can you just help us understand what's going on versus those other periods?
And then my second question, just on CapEx, moving forward, given the rise in oil and gas prices, you mentioned, you're going to ramp up BPX spend a little bit next year. Could you just talk about if there's other opportunities within the portfolio to ramp up short cycle spend?
Is that something you're looking to do and what that does for your CapEx outlook in 2022? Thanks,
Bernard Looney
Jason, thanks very much. Good to hear your voice as well.
And I'll just hit the two of them quickly and Murray jump in and help me. On capital, we'll update our capital guidance to the market for 2022 in February at our fourth quarter results.
You know that we're running around $13 billion for this year. And you'll know that our guidance over this period is $14 billion to $16 billion.
What I can tell you about February is that we will not be changing our capital guidance of $14 billion to $16 billion but quite exactly where will come in within that, we will update you on that in February. We remain disciplined, we won't be overreacting to particular prices on the day.
This will be very, very disciplined capital framework. And as I said, it will be unchanged from the guidance that we have issued.
On convenience and mobility, you're quite right to point that out on the third quarter. I would remind people that that business has had a record year-to-date.
So the nine months year-to-date have been a record. Castrol, obviously has been hit by a couple of things.
Base oil price has being much higher. There's usually a lag there.
And that will flow through over time as we pass some of those prices onto consumers. And there's one thing that covers both Castrol and the convenience business.
So that's Castrol and the convenience business. We're investing a little bit more in advertising, we've seen a few increases in staff costs and the thing that's common across Castrol and convenience is, some of the lockdowns in Asia have clearly had a bit of an impact.
So nothing structural there and just draw people's attention to the record nine months year-to-date and that's what we're focused on. Murray, anything to add on either subject?
Murray Auchincloss
No, perfect. Thanks.
Bernard Looney
Okay. Thank you.
That was feedback for me, from Murray, which I will take. Thanks.
Murray. Thanks, very much, Jason.
Craig Marshall
Okay, thanks, Jason. We'll take the next question from Jon Rigby at UBS, please.
Jon Rigby
Thanks, Craig. Hi, guys.
And so two questions. First is, are you able just to speak a little more about the structure of the gas hedges?
What it is you're doing there and are you hedging just your merchant gas volumes or also your produce of equity production volumes? Because I guess that has an impact on whether you see price leverage or not in the underlying?
The second question, I guess, is just to step back a second, is it conventional wisdom of this sort of transition is that you move from, I don't know if you've talked about this point, the sort of peaks and troughs on returns, but your supposedly higher return oil and gas activity to slightly lower return renewable and power activity but that the renewable and power activity is low risk. But if you sort of measure risk as volatility and is that strictly true or is it likely to be true for the next four or five years as we go through this sort of transition phase?
Because it seems to me, if you look at power markets, energy markets, gas markets, witness that the hedging movements you're seeing in your gas activity, is that it doesn't look to me, like a particularly low risk or stable market at the moment, so just interested in your comments around that? Thanks.
Bernard Looney
Very good, Jon. So let me have a little go at your second question.
And Murray will more intelligently speak to gas hedging and so on and he'll probably also pile in on the transition question that you asked. That's a very good question.
On that one, I mean, I'd just say a couple of things. Number one, and probably most importantly, I see the characterization in some media of bp is moving from oil to renewables.
And that's not actually the case. Yes, we are focusing our oil and gas portfolio over the next decade in a volume sense, we actually believe will create more value, but we're doing that in a volume sense.
Yes, we are building a renewables business but we've always said, we're not building a renewables business just for renewable. We're building a renewables business to be part of an integrated energy value chain that goes all the way from the production of energy into, in some cases, people's cars in terms of electrons, or into hydrogen or into whatever it is that you wish to do with it.
So, the first point is important, which is this is not an oil to renewables story. It's focusing of oil, it's a doubling of convenience, including EV charging $5 billion to $10 billion and it's an investment in renewable but not just renewables for renewables sake, investing into the low carbon energy value chain.
In terms of your characterization of returns, I would think that I would say a couple of things. One is, of course, traditionally, some of our investments in hydrocarbons have been very profitable.
And just like others in industry, not all of them are exactly high return. So I would just say that.
Two, they are volatile and open to the vagaries of the environment, as we saw with negative prices last year. And three, are investors valuing the cash flows from those businesses in the way that they used to.
And of course, that's happening less and less. And therefore, the - as we transition and this will happen over this decade, as we transition from a hydrocarbon only company to a more diversified company, I do think some of those cash flows, while still having some volatility, you're correct, but I think they are in some ways less volatile.
I think that they are in many ways more valued by investors. And therefore I think it creates a better investor proposition.
So two big points. It is not an oil to renewable story.
It is a focusing of hydrocarbons. It's a doubling of convenience and mobility.
And it's a renewables as part of a low carbon energy chain, number one, and we believe we can amplify returns in that latter part. And number two, some of what you characterize is correct.
But I think there are attributes that cash flows from this new business, these new businesses that make for a compelling investor proposition. Murray, anything you'd add on that and gas hedging?
Murray Auchincloss
I think the only thing to add Bernard on the, on the volatility of returns. If you invest in a wind program or hydrogen plant, etc.
and you're underpinned by a PPA or a contract for difference by a nation, that's a fairly stable set of cash flows. If you're merchant, and you're taking merchant risk on power, obviously, that's much more volatile than natural gas.
You know all about the trading windows Jon. I think the companies that win in the future are the people who can manage risk really well inside that system, and that can counterbalance natural gas and electricity.
They generally tend to be priced off the same basis. So as we saw in the first quarter in the United States, as we're seeing in the third quarter here in Europe, companies that can manage gas, electricity interchange can do really well.
And of course, that's what we do really well with our 20 years of history in this particular business. So it is more volatile, but we risk manage well, and you can see that in our results day-by-day this year.
I think on gas hedging, you've got it Jon, we don't hedge our equity gas. That's something that our shareholders on LNG etc., enjoy the upsides and downsides.
We don't hedge that as a principle. On the merchant equity margins, yes, we do hedge those sales contracts.
Remember what we're trying to do is buy a cargo, lock that price in and sell the cargo, lock that price in and make a margin on that. And then we'll make superior margins when disruptions occur and we can redirect cargoes.
That's really the principle of our LNG business, it's very ratable and growing over time, from 15 to 20 to 25 mtpa. So it's a very ratable business and we do risk and hedge those sales contracts which is what you're saying showing up in .
Hope that helps, Jon?
Jon Rigby
Yeah, and just to confirm, you'd expect that to reverse over the next two to three quarters? One to two quarters?
Murray Auchincloss
It's - sorry, Bernard and I were looking who wants to answer it. Yeah, it is the FEA will reverse as cargoes get delivered.
And of course, a lot of those get delivered over the next 3 months, 6 months, 9 months. And it could reverse if gas prices fall as well.
So it's dependent on price and dependent on timing of delivery of cargoes, but nothing on towards - we're happy with direction of travel right now. And we're happy with the direction of business.
Jon Rigby
Thank you.
Bernard Looney
I favored accuracy. So I thought I'd go with Murray on this point.
Thanks Jon.
Jon Rigby
Thanks.
Craig Marshall
Thank you, Jon. We'll take the next question from Chris Kuplent at Bank of America.
Chris?
ChrisKuplent
Yeah, thank you. Murray, one for you.
I just wanted to better understand the “formula” you're applying in terms of paying out buybacks. You've published nine months and 3Q results for your definition of surplus free cash flow.
And I'm not sure I can square the circle here to put the $1.25 billion announcement into context. So it would be helpful, how much of your, let's say, confidence or outlook towards Q4 is embedded here or whether you're thinking about this as a year-to-date call with or without the $500 million that you've bought back during the first half?
So please help me, I'm a little confused. And if I may, a second question to Bernard.
Bernard, you've referred to the Aker BP share price performance earlier on. And I just wanted to understand, obviously dividends there are growing as well but the dividend return you're getting from there is still below your own dividend yield.
At what stage does Aker BP become a purely financial investment rather than a strategic one? Thank you.
Bernard Looney
Very good, Chris. Good morning.
I will let Murray take the former question which you may be confused, but I hope positively surprised. On Aker BP, it's - it is a strategic investment as well as being a financial investment.
I think both Aker and bp would argue that we are a strong partnership, we are very much involved. Murray sits on the Board as does Kate and are very actively involved in helping to make that company better and stronger, bringing capability in from bp as and when we can, that might be helpful.
And quite frankly, learning from what Aker BP is doing as well, because they're doing some fantastic stuff, particularly on the digital front. So it is more than a financial investment.
We like that investment very much. We see strong future in that investment and that's what you should expect from that business going forward.
Chris's question on the buyback formula?
Murray Auchincloss
Yep. Good morning, Chris.
So just a few grounding principles here. We've said that when we set the level of buybacks, we will not only look at surplus we've accumulated to-date, but we will also look at the outlook for the future.
Additionally, we've guided that at $60, we should be able to do around $1 billion a quarter out to 2025. So those are the two principal guiding principles you should think about as we do these things.
It's not just a formula. If you go to the formula inside the third quarter, you saw our surplus cash flow, if you applied 60% to the $900 million of surplus cash flow, that would be a $540 million buyback versus maybe the math that you're thinking about, and we've obviously done $1.25 billion.
The reason that we've done more is confidence, confidence in plants operating efficiently. We're up to 95%, new projects ramping up, we've got a lot more projects coming in, they've accelerated from '22 into '21 and we've got more coming in '22, especially Argos, the Mad Dog 2 facility in the Gulf of Mexico.
We have much higher earnings from Rosneft coming through that has a much higher dividend in the future than it has had in the past. The oil environment and the natural gas pricing environment is very strong.
And of course, we had a big build in working capital that will reverse over time. So overall, we feel a lot of confidence in the underlying performance of the business.
The macro is strong and supportive and we've also signaled additional divestments through the rest of the year. So we think all of those things mean that we should lean in a little bit, do $ 1.25 billion of additional buybacks.
And we'll update you in the fourth quarter results with what we'll do for the final installment for 2021 where we have said that 60% will be for share buybacks and 40% will be for debt reduction. I hope that helps, Chris.
Chris Kuplent
Great, thank you. So, less confused.
Cheers.
Murray Auchincloss
Very good, great. And I think we've always said that we would like it to be within reason, a relatively ratable buyback program.
And that's what we're trying to achieve here. And I think there are also questions, Chris, from some people that said, well, why shouldn't it be a little bit bigger?
And of course, we're also making sure that we continue to focus on our balance sheet which is hugely important to us. And the sixth quarter in a row of driving net debt down.
So, it's a pretty strong place, I think for us to be. But thanks for your question.
Chris Kuplent
Thank you. Cheers.
Craig Marshall
Thanks, Chris. We'll take the next question from Lydia Rainforth at Barclays.
Lydia?
Lydia Rainforth
Thanks, great. And good morning.
And Bernard, I liked what you said about the investment case being clearer, day-by-day. And two questions if I could.
And I am going to come back to this carbon management, energy as a service, strategic partnership side. How do we think about the - how you make returns on those?
And maybe it's just me, but it does seem very different as a way to looking at it as opposed to just being asset based analysis. So the idea of valuing customers, and what sort of returns you might make on that?
I still think isn't particularly clear to me at this stage. And then on the second one on the idea of the CapEx and it normalizes that $14 billion to $16 billion level.
At this point, have you thought about whether that goes into a short cycle upstream or into the renewable, the low carbon business? But it does seem that you've got quite a lot of opportunities there and so it's really effectively how do we judge if it's good CapEx?
Thanks.
Bernard Looney
Lydia. Thanks.
And thanks for the question. I'll let Murray have a go at the sort of value chain question.
And I think he's done a good job in the past of describing how, in many ways we're recreating a value chain here, which is a low carbon, almost electron based value chain, as opposed to a hydrocarbon molecule based value chain and have return shift around. But he'll answer that in his own way.
I think on CapEx, I'm afraid I'll just leave it as a relatively short answer without wanting to be evasive, because I don't want to do that with you. But I think, let's just wait until February, and it's only a few months away.
We just got Christmas to get through in the meantime but we'll give you an update early Feb on that. But we're not short of opportunity both on the hydrocarbon side and on the low carbon and indeed on the convenience and mobility side.
As you have seen, will continue to see in electrification, as you saw with our Thorntons acquisitions, so, it's great to have options, it's great to have choice. And it's great to be disciplined, because it means that we should only be doing the very best stuff.
But rather than speculate right now and mislead you, I'll leave it to February to give you an update, if that's okay. And Murray?
Murray Auchincloss
Yeah. So Lydia, the way that I think about this is we're trying to create these integrated energy chains for the future like we did with natural gas in the past.
So if you just went to the UK, and painted the picture of that, we're saying that in offshore, wind will make an 8% to 10% return levered. That offshore wind electrons will be put into probably a mixture of a contract for difference with the government and then merchant positions that we will take risk on ourselves, those electrons will go into green hydrogen plants, I assume, whether that be the Aberdeen one we've announced now, or hopefully something we announced and Teesside in the future, or they'll go into things like pulse fast charging.
So it's clear, we feel pretty comfortable, we'll get 8% to 10% levered in the offshore wind. Some people may doubt that, fine, but we feel comfortable with that for now.
In hydrogen, I suspect the returns will be higher, the risk is quite a bit higher. So the operational risk is tougher.
So we anticipate higher returns in that space. But it's early, so it's hard to forecast what those will be.
And then on fast charging, I would expect similar returns in fast charging that we get from fuel. And fuel we've always said would be 15% to 20% unlevered returns, that's our long history at it.
And I don't see any reason why fast charging will be at least that. The reason is that you'll probably make the same amount on electrons that you do on fuel, the residence time at the convenience site will be much higher with charging than it was with fuel.
So you'll probably make more money on convenience there. So I think that 15% to 20% return in that space feels good.
And then the magic in between the energy as a service whether that's to fleets, etc., Lydia, I think that the thing that we've tried to paint is that our trading business and history has added two to three percentage points to overall returns of bp, with a $100 billion in capital employed. And I can't see any reason that we won't make that amount of money in the future as we have in the past.
And that those 2% to 3% returns include 20 years of experience of this in North America with our North American gas and power business, where we built up to be the third or fourth largest power trader as well as the largest natural gas trader in the United States. So we have strong history in this place.
And I think as you look at that, and you melt it together, you'll get to a business that returns somewhere in the 12% to 14% range. That's the best I can see right now.
And, I can't see why that won't be the case in the future as it has been in the past. Hope that helps, Lydia.
Craig Marshall
Okay, thanks, Lydia. We'll take the next question from Lucas Herman at Exxon.
Lucas?
Lucas Herrmann
Great, thanks very much. Good morning, gentlemen.
Just two, if I might. The first, Murray, I just wanted to return to the biggest trading business and profitability.
And I wondered whether you'd be kind enough to give us some indication of the volume of LNG that you take into your portfolio, and the volume of LNG that you are committed to deliver to customers? And then effect as a consequence, what the net is, and therefore what your exposure and your opportunity around trading is on a quarterly or well on an annual basis?
And if I could just extend that to you must have very good visibility on how the trading business, as you define it, on the portfolio of businesses is likely to perform the fourth quarter, given where prices have been. Can you give us any indication as some of your peers have, as to the extent to which we'll see this benefit continue at least into the fourth quarter, if not the first quarter of next year?
And secondly, can I just come on to divestment from the $6 billion to $7 billion target, a little bit lost on what you'd actually said in the second quarter? I know that we started the year at, $4 billion to $6 billion, clearly higher now.
What's driven the improvement? And associated with that, can you make any comments on Angola and where that process is at the present time?
Thanks, Murray. Thanks Bernard.
Bernard Looney
Hey, Lucas. Good morning.
Craig is telling us we need to speed up on our answers here, which I think is right. I will just do divestments very quickly.
We've done $5.4 billion year-to-date, we did $300 million of proceeds in the third quarter, we guided at $5 billion to $6 billion. We are working on some stuff that will push that number to between $6 billion to $7 billion.
I can't tell you specifically what they are but obviously we have relatively high degree of confidence that we'll get to that place. So without getting into specifics, that's that.
And on Angola, I think it's going actually well and we will have that closed and up and running next year. Strong support from the government and country, which sees this as a very good thing, a combining of two strong operators, two strong infrastructure positions in the country, getting good support and natural thing to do to improve efficiency in a sector in Angola that needs - we all need to improve and so - so far, so good.
And we'll close that early next year and get that machine up and running. And we're excited about it.
Murray, on trading.
Murray Auchincloss
On trading, the long term portfolio, Lucas, so we're saying 20 mtpa right now. Under long term contract, that's about 8 mtpa of equity and 12 mtpa of merchant.
I think we've disclosed that before and nothing changed there. As far as what the volumes of LNG are on a day, I can't keep up with that.
That's a decision by the trading organization on each and every day. Obviously, we mean, we remain positive on natural gas pricing.
And I just expect an average quarter every quarter and we'll update you on what it actually turns out to be. I would hesitate to guide otherwise but there's nothing undo like losses unwinding or gains unwinding or anything like that, Lucas, I would just assume average.
And that's a safe place to be. And you've seen we've had a strong track record of managing volatility this year.
And I'm sure Carol and the team will continue to manage that well.
Lucas Herrmann
I'm sorry, Bernard there. There are no restrictions when you think about taking cash out of Angola from a transaction this nature beyond obviously the need to finance the JV itself?
Bernard Looney
No, I mean, that's - this business may well raise some debt as joint ventures, and entities like that would do and any debt that is raised is cash that is available to the partners.
Murray Auchincloss
No restrictions, no covenants, Lucas. So you're asking the Eni CFO the same questions, but we've got the same answers as he does.
Lucas Herrmann
Thankfully.
Bernard Looney
Thanks, Lucas.
Lucas Herrmann
Thank you.
Craig Marshall
Thanks, Lucas. We'll take the next question from Martijn Rats at Morgan Stanley.
Martin?
Martijn Rats
Yeah. Hi, good morning.
And I've got two, if I may. The statement mentioned, a short comment about additive supply shortages in Castrol.
And supply chain bottlenecks are a huge topic sort of across the economy. So I thought that was just quite interesting.
And I was wondering if you could elaborate a little bit on like, what is exactly sort of play here? Or the fact that you mentioned it, probably means it has some materiality for the fourth quarter.
And therefore, can you just talk a little bit about sort of what this means and how long this could last? And the second question that I wanted to ask is exactly what you just sort of replied to, in terms of Lucas's question.
In terms of the partnership in Angola, with Eni in the sense that, well, one of the attractions of a structure like that would be that a company like that could raise debt in its own right. And I was wondering if you already have some experience or some read on the appetite is for banks to lend to an entity like that, particularly as it looks to me like, sort of broadly bank lending to pure play well companies is under some degree of strain.
So I was wondering if there is already some indication sort of how that is playing out with an entity like that.
Bernard Looney
Good morning, Martijn. Murray will take the financing question on Castrol.
I think I wouldn't read too much into it as in this is going to be a fourth quarter issue and that's why we're highlighting in the third quarter. I think there are issues around the world in terms of supply chains in general and no surprise that we're seeing a little bit of that in Castrol.
I think the broader thing in Castrol is that we have a very, very strong improvement plan. I think that's what we're focused on.
Yes, we've seen a bit of dislocation of demand and supply, and that's around refinery run cuts, that's around the storm in Texas but the real focus in Castrol is on improving the business. We think that that business can do much better.
We have a plan to do that. And as you watch it over the coming quarters, and particularly over the coming couple of years, you'll see that.
So we think that the effects that we just highlighted in the third quarter will probably be the peak in the third quarter of that specific effect. But let's wait and see until the fourth quarter.
Hopefully that helps. And on raising debt?
Murray Auchincloss
Raising debt in pure plays, you could look at Aker BP if you like. They have absolutely no problem raising debt, both in Europe and the United States.
And their rates are very attractive, their ratings are attractive. So we obviously have experience in that entity, which is a public entity.
So you can go see what that looks like. On Angola, it's early in the process.
We haven't completed the deal yet. So we haven't got to final agreement with Eni.
That will hopefully happen this year and then of course the government has to ratify. In the meantime, we are talking to banks about that.
But it's too early to talk externally about how that's going. But I think the proof in Aker BP is relatively straightforward that they can raise funds.
Martijn Rats
Okay, wonderful. Thank you.
Craig Marshall
Thanks, Martin. We'll take the next question from Biraj Borkhataria at RBC.
Biraj?
Biraj Borkhataria
Thanks for taking my question. One specific one which - and one thematic.
But on the specific question, there in your surplus cash flow definition there's a $560 million charge relating to transactions involving non-controlling interests. I'm just wondering what that was.
And then the second question, taking a step back and thinking about growth in LNG going forward. In the context of absolute emission reduction targets, can you add new LNG liquefaction capacity to your portfolio?
Because obviously, the Scope 1 and 2 metrics are usually quite high and the inference from that, should we expect your LNG portfolio to be moving towards more off-take activity versus the equity production, going forward? Thank you.
Bernard Looney
Biraj, thank you, and good morning. Murray, will take the non-controlling interest question.
On LNG and emissions in general, we should not use emissions reduction as a proxy for no new investments into hydrocarbon projects. So you will continue to see this company invest in hydrocarbon projects, sanction new ones, including LNG projects as we high grade the portfolio in a value sense.
So we will deliver on our targets of reducing production but that does not mean that there won't be new investment including in LNG as we will - as you are seeing in West Africa with us today. So hopefully that helps there.
Murray, non-controlling interests of $560 million?
Murray Auchincloss
Yeah. Good, good catch Biraj.
It's primarily the purchase of Thorntons buying out our partner ArcLight. They're 100% interest, there's some other stuff in there too.
Just for Thorntons, we haven't advertised on that one very much on this call. It established us as the leading convenience marketer in the Midwest.
We take over 208 stores fully now, 3000 employees, blending plants and transport systems. It allows us to integrate the back office with ampm as well as supply, logistics and trading.
And we can streamline all the product offers that we have. For those, we haven't really talked about it much but EBITDA growth has been 20% per year from 2018 to 2020, inside Thorntons.
It is a tremendous business and we're super, super excited to take it over 100% and expand it in the United States.
Bernard Looney
It is a growth machine.
Biraj Borkhataria
Just on that point, is there anything else of a similar vein that's already been agreed that would impact the 4Q number?
Bernard Looney
In terms of acquisitions?
Biraj Borkhataria
Yeah, yeah, the things that pop up. Yeah.
Bernard Looney
No.
Biraj Borkhataria
Okay. Thank you.
Craig Marshall
Thanks, Biraj. We'll take the next question from Bertrand Hodee at Kepler.
Bertrand?
Bertrand Hodee
Yes. Hello, thanks.
Thanks for taking my question. In fact, I've just one left.
We've talked a lot about LNG and but not a lot about the gas pipe. And I'm thinking about Shah Deniz Phase 2.
Can you update on the - how much gas is flowing to Europe and how should we think about the evolution of your natural gas price realization? Because when I look at your disclosure, obviously there is Europe gas price realization, but that does not include Shah Deniz, I guess, because your natural gas price realization are based on the origin and not on the destination.
So how should we think about your exposure to strong European natural gas price going forward especially through Shah Deniz? Thank you.
Bernard Looney
Very good. I'll let Murray top and tail this one or tail this one.
But I think first of all, Shah Deniz is doing very, very well. So we just had what we call third gas, the startup of another cluster of gas in that business.
I think we're doing about 10 bcma of exports into Europe, from what I understand. And I think we had a good quarter, with Shah Deniz gas coming into Europe.
I think 40% of the Shah Deniz gas flows to Europe. So I think it's a strong business.
Of course, we've always said in the past that our gas business is split, about a third of it as a hub business more of a Henry Hub type business. Third of it is domestic business like we have in Oman.
And a third of it is an LNG type business. So it is a more balanced portfolio.
Murray, anything you wish to add on Bertrand's question?
Murray Auchincloss
Yeah, Betrand. So Shah Deniz provides power domestically to through natural gas in Azerbaijan, about 20% from about 40% into Turkey and 40% into Europe.
With Europe, we get the netback straight back to Azerbaijan. And interestingly, the Turkish prices are about netback with Europe as well.
So it's enjoying pretty nice profits in the second third quarter, much higher than we ever would have forecast when we sanction that project. And that's why we like these big infrastructure projects.
They give you tons of upside optionality.
Bernard Looney
While also providing Europe with much needed gas.
Murray Auchincloss
As well, so.
Bernard Looney
Yeah. Good.
Thanks Betrand.
Bertrand Hodee
Thank you very much.
Craig Marshall
Thanks Betrand. We'll take the next question from James Hubbard at Deutsche Bank.
James?
James Hubbard
Yeah. Hi.
Good morning. Thank you.
Two high level questions, I guess and I think all my detailed questions are answered. One is on the superfast charging or ultra-fast charging in the UK, are you able to benefit at all from the government funding announced for that about a year or a year and a half ago?
I think that they earmarked a billion funds to aid the rollout of motorway and A-road ultra-fast charging, so do you get to benefit from that at all? And secondly, all the theme of green energy and the exciting strategy that you're undertaking and where the industry is going, I can see how that would be very attractive to graduates.
But when it comes to oil, how are you finding it in terms of attracting the top talents or the talent that you want to manage what is going to remain a very large oil producing business for years to come? I see there's now a sign-in bonus on your website for graduates.
So I'm wondering, how are you facing that particular challenge? Is it an issue at all or not?
Thank you
Bernard Looney
Thank you very much for the question. And on the charging infrastructure in the UK, I think the majority of the government funding is going for broader infrastructure projects.
And what we mean by that is, there are a lot of things that need to be done to upgrade the grid and the transmission systems and the connections. So if you're a fleet provider, and you want to put in a number of charging points near your factory or near one of your depots, that's where the costs can get quite high.
And that's where I think a lot of the government funding is focused. We tend to be able to do our own investments on our own basis.
And so that's what I would say to that. On graduates, did you get a sign-on bonus, Murray, when you joined as a graduate?
Murray Auchincloss
As a graduate?
Bernard Looney
Yeah.
Murray Auchincloss
Y
Bernard Looney
You did? Okay, all right.
I don't think I did but Murray's was worth it. It's a very good question.
And the reality is that we're not struggling to attract people in and actually, obviously, there are people who still want to join the hydrocarbon business and it's a great business that we have. But I think they also want to join a company that has more than a hydrocarbon strategy.
And that has a broader strategy and that they see that they can (a) work for a company that has a bigger role in the transition and (b) overtime, they think they can think about if they want to evolving their career so that they have more career choices. So today, I certainly don't hear any noise inside the company of us struggling to attract graduates into our hydrocarbon business.
I would say anything but and in terms of recruitment, more generally, one of the things I'm most pleased about in the last 12 months is the number of senior executives that we've managed, over 20 now, to bring into the company. And I can almost guarantee that not one of them would have joined if we had kept a hydrocarbon only strategy.
So great to see us attracting talent in and being a place that people want to come and work as evidenced by Anja Dotzenrath joining us from RWE. She could have probably worked for any renewable company in the world.
And she chose to come and work for bp, which I'm incredibly grateful to her for. And now our job is to live up to that.
So back to you, Craig.
Craig Marshall
Thanks, Bernard. We will take the last two questions.
And thanks for being patient. First of all from Peter Low at Red burn.
Peter?
Peter Low
Oh, hi, thanks. Just one more on corporate structure, sort of a breakup.
There are other transactions some of your peers are looking at to try and unlock value that is listed on minority stake in the renewables businesses. Is that something you would ever look at?
Or are there drawbacks you see to going down that route? Thanks.
Bernard Looney
Peter, thank you and good morning. I think we just keep coming back to the integrated energy company.
That's what we're focused on. We believe in the integration, we believe in bp being better together.
And I think as every quarter passes, I think that story personally gets stronger, as we give you evidence in delivery, and that's delivery in the cash flows of today's business. And that's delivery in terms of investing in the new businesses for tomorrow.
So there are loads and loads of things out there that one could do. Our job is to focus on what we've got, focus on execution of that.
And I hope, Peter that that you're seeing that in today's results, and I hope you'll see it, and we've every plan on showing it in the quarters to come.
Peter Low
Thank you.
Craig Marshall
Thanks, Peter. And the final question from Henry Tarr at Berenberg.
Henry Tarr
Thanks guys for squeezing me in and good to hear your voices. And a very quick question just on the LNG.
I guess on the Trinidad project, there have been some issues there, are they temporary or slightly more structural? And then in terms of the future growth prospects, how are you thinking at the moment about Qatar and then further phases at Tanzania and Tortue?
Thank you.
Bernard Looney
Very good, Peter. Nothing structural in Trinidad.
Murray, future in Qatar and Tanzania and Tortue?
Murray Auchincloss
We don't participate in Tanzania or Qatar. You'll need to - that's not something that we participate in.
And Tortue, we're going well with Phase 1 and we're taking a look at Phase 2 and trying to come to agreement with partners, government and our own engineers on what's the right thing to do. So stay tuned.
Bernard Looney
Thanks, Peter. Thanks for your patience.
Craig, anything else?
Craig Marshall
Over to you, Bernard.
A - Bernard Looney
Very good, very good. Thanks, everybody.
Thanks, Murray. Thanks, Craig.
Thanks to the BP team and thank you all for the questions. And I hope you would agree, it's been another good quarter, we're focused on the day job, what we control.
Executing the strategy and it's a sort of a day-by-day, week-by-week, quarter-by-quarter job. I think the team here at bp, if you don't mind me saying, is doing an awesome job.
And I think there's a bit of track record coming through now. We're confident in the cash generation of the company.
At these prices, it really is a cash machine. And we remain absolutely committed to our buybacks and our guidance for 2021.
So, look, we're just staying the course and as I said, in a boring sort of way we're sticking to our mantra of performing while transforming. We feel that it works for us.
We feel that it works for our investors, and we feel that with each passing day and quarter, as long as we continue to deliver, which is what our job is. And hopefully you're seeing that we do.
We think we're in pretty good shape. So thanks for the time.
And if we don't talk to you, in the meantime, have a great break over the holidays. And we'll be in touch in 2022, even though I'm sure we'll talk in the meantime.
Thanks, everybody. Take care.