Good afternoon, everyone. Thank you for joining us today. Welcome to BP's Upstream Investor Day. We are very pleased to have you with us, whether in person, over the phone, or on the web. For those here in Sunbury, you will have seen behind me our safety evacuation guidelines. There are more details in the safety briefing materials handed to you at reception. We are not planning to test the alarm system today, so if you hear it, please proceed as advised by these instructions. We may also ask you to turn off any mobile phones at this point. The format for the day starts with a webcast presentation providing an overview of the group.
There will be more detailed presentations and breakouts, specifically covering our upstream, which will not be webcast, but for which presentation materials will be posted on our website for those not here with us today. With me on stage, I have Bob Dudley, our Group Chief Executive and current head of our upstream business, and Brian Gilvary, our Chief Financial Officer, who will both be hosting the first part of today's proceedings in the form of this webcast. Before we start, I'd like to draw your attention to our cautionary statement. During today's presentation, we will make forward-looking statements that refer to our estimates, plans, and expectations. Actual results and outcomes could differ materially due to factors that we note on this slide and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement, and SEC filings for more details.
These documents are available on our website. Let me now hand you over to Bob.
Thank you, Jess. Today is about giving you a clearer view of the longer-term direction of BP with a very specific focus on our upstream business. Much has happened in the few weeks since our 3Q results. I'm going to start by updating you on progress in respect of the U.S. legal position and then cover developments in Russia. I'll then take you through our progress against the 10-point plan through 2014 and then return to the conversation we started with you a few weeks ago about our future through the decade, including our plans to grow long-term sustainable cash flow. Brian will then show you how all this fits within a robust financial framework for the group. After that, we will pause, and Brian and I will address any questions you may have on the group agenda.
Before ending our webcast, we'll take questions from the room here as well as from the web. The rest of the afternoon's agenda will focus in detail on our upstream. We aim to show you that we have the producing assets and development portfolio to grow long-term sustainable free cash flow through the decade and the exploration prospects to continue to fill the pipeline in the even longer term. We will show you how we intend to achieve this through a disciplined and focused allocation of capital. We will also highlight how our new functional organizational model is starting to drive improved reliability and performance. For those with us here in Sunbury, we will return after that to the very specific agenda for all of this before we start the next session.
Before we start, I'd like to briefly bring you up to date with changes in our upstream organization and explain who is with us today. Just a little over a week ago, we announced the appointment of Lamar McKay, who's here with us today, as chief executive of our upstream business. You'll get a chance to meet Lamar later. Lamar will report to me as chief executive, and this reflects my belief that 2 years after establishing our more functionally centralized organization, it's now time for me to relinquish my dual role as head of the upstream to fill the role as a fully dedicated CEO. Lamar, who is with us in the audience, is currently chairman and president of BP America. Lamar is already a member of BP's executive team.
He brings deep knowledge of BP's upstream operations to the role, having led the upstream production businesses in the Gulf of Mexico, onshore in the U.S., and the North Sea during various points of his career. He's also served as vice president of Russia, and most recently has played a significant role in steering BP through the enormous challenges it has faced in the U.S. post the Gulf of Mexico spill. Welcome, Lamar. Lamar will lead the four upstream functional divisions effective from the start of the year. The executive vice presidents of the three functional divisions, who many of you already know, are also with us here today and will be hosting today's upstream agenda. Bob Fryar, the head of production, Andy Hopwood, who heads up strategy and integration, and Bernard Looney, who heads up developments.
Mike Daly, who heads up exploration, is unable to be with us today, but his team is with us to update you on our exploration activity. I'm also extremely pleased to welcome Mr. Mikhail Kuzovlev from Rosneft, who's a member of the board of directors of Rosneft, Igor Pavlov , who is the vice president of refining, Anton Kozhinov, who is Rosneft's director of structured finance and debt obligations, together with Andrew Balgarnie , an Advisor directly to the President of Rosneft. Later, Mikhail will join us for a few words from the board of Rosneft. Thank you for joining us today. Turning to the start of our agenda and our U.S. legal position. We have recently taken steps, further steps, I think, to significantly reduce the legal risk facing the company.
We have now reached a significant milestone with completion of $20 billion in payments into the trust fund in the Gulf of Mexico, and the final payment being made just last month. This removes a call on the operating cash flows of the group by some $5 billion a year. The fairness hearing to determine whether to grant final approval of the settlements with the Plaintiffs' Steering Committee was held in November, and we expect the rule on this from the court in due course. All the payments associated with that settlement will be made from the trust fund. Most recently, we announced on the 15th of November that we had reached an agreement with the U.S. government, subject to court approval, to resolve all federal criminal charges and SEC securities claims against BP stemming from the accident, the oil spill, and the response.
The settlement is expected to result in an increase of $3.85 billion to the $38.1 billion charge taken against income at the end of the third quarter. With the payment schedule stretching out to 2017, we believe the cash payments are manageable within our current financial framework. As this increase relates to fines and penalties, it will not be tax deductible. By reaching this settlement, we have removed another significant legal uncertainty and can now focus more fully on defining the company against the remaining civil claims. The $38.1 billion charge against income as of the end of the third quarter includes some $7.8 billion to cover these remaining liabilities, including $3.5 billion for the Clean Water Act and the balance of $4.3 billion related to unallocated headroom and provisions already made within the trust fund for the natural resources damage, early restoration, and state and local claims.
This is over and above the amounts already paid out of the trust fund or earmarked to fund the estimated $7.8 billion settlement with the Plaintiffs' Steering Committee. We can now proceed with addressing these remaining claims without the possibility of any criminal indictment and the potentially onerous consequences and distraction that would have accompanied such a proceeding. Subject and subsequent to BP reaching this agreement on the 28th of November, the Environmental Protection Agency in the U.S. announced that BP is temporarily suspended from entering into new contracts with the U.S. government. BP is cooperating with the EPA towards the development of an agreement that we would expect to result in the lifting of a temporary suspension. We remain prepared to settle the remaining civil claims, but only on reasonable terms.
Throughout, we have been preparing for the trial now scheduled for the 25th of February, and we will be ready thoroughly and factually to present our case in court. As we announced on the 22nd of October, we have taken a major step forward in repositioning our business in Russia. We have reached agreement with Rosneft to sell our share in TNK-BP for cash and an 18.5% stake in Russia's leading oil company. As a result of the transaction, and when combined with the existing 1.25% of Rosneft, which we already own, BP will hold a total of 19.75% of Rosneft and receive $12.3 billion in cash. In a further sign of progress, on the 13th of November, BP and AAR signed an agreement to settle all outstanding disputes and waiving the new opportunities provision of the TNK-BP shareholders' agreement.
This frees BP to pursue new opportunities in Russia with parties other than AAR or TNK-BP, including Rosneft. On the 22nd of November, the Russian Federation approved BP's acquisition of 5.66% of Rosneft from the Russian state. On the same day, we signed binding sales and purchase agreements with Rosneft Gas and Rosneft. We expect this transaction to close in the first half of 2013, with only routine regulatory approvals needed prior to closing. Our investment in TNK-BP has been hugely successful, but it became very clear that the joint venture was unsustainable. Acquiring a near 20% stake in Rosneft leaves us in a position that is in many ways comparable to our position in TNK-BP, and in some ways, significantly, I'm sure, more favorable. Although our reported production will be slightly lower, the reserves we are able to book will increase.
Net income based on 2011 figures will be roughly comparable. While the future dividend stream from Rosneft is unlikely to match that of TNK-BP, we expect to receive the $12.3 billion cash from selling our 50%. It is roughly equal to seven years of the historical average of dividends from TNK-BP. Perhaps most importantly, this transaction will bring BP to work with Rosneft for what I believe are world-scale opportunities in the offshore and non-conventional resources through our work with the new company. To understand the potential of BP's investment in Rosneft, it is helpful to look back on the results BP has achieved in TNK-BP. Between 2003 and 2011, TNK-BP's proved reserve base grew from slightly more than 9 billion barrels to almost 14 billion barrels of oil equivalent, roughly a 50% increase.
Over the same period, the joint venture's production increased more than 40%, from less than 1.4 million barrels a day to more than 2 million barrels a day of oil equivalent. These results were achieved through the introduction of advanced technologies and processes by BP technical specialists working with great Russian technical specialists. Over the history of TNK-BP, the joint venture generated more than $19 billion of net dividends for BP shareholders while paying more than $187 billion in taxes and duties to the Russian Federation. These achievements are a testament to the powerful partnership of BP and experienced Russian oil and gas professionals working together. We move forward, BP's near 20% shareholding in Rosneft provides a new and exciting opportunity to grow the value of a Russian company. The production and reserve potential of Rosneft is about four times as big as TNK-BP was 10 years ago.
This potential, coupled with our local knowledge and the proven best practices we deploy globally, provides, I believe, BP and Rosneft the opportunity to create a truly world-class oil company. We believe that by combining the assets of TNK-BP and Rosneft and applying leading-edge technology and practices, this new greater Rosneft has the potential to deliver production growth and efficiency improvements beyond those currently forecast. We can already see opportunities to enhance efficiencies in exploration, reworking brownfields, new greenfield developments, not to mention the downstream businesses, non-conventionals, and, of course, in the Arctic. The left slide of this slide shows Rosneft's early assessments of the synergy focus areas of its continuation and combination with TNK-BP. On the right are the areas where BP's knowledge of merger integration processes can be applied.
BP has the skills and capabilities, both Russia specific and from our mergers of the last 15 years, that can directly, I think, benefit Rosneft in their efforts to define and capture the synergies from their acquisition of TNK-BP. Like Rosneft, we see numerous opportunities for optimization of both upstream and downstream businesses and the gas and gas liquids value chains. In addition to the technologies BP and Rosneft can bring to both upstream and downstream, given the scale of the new and large Rosneft, there will be further opportunities as well. These include supply chain management, corporate synergies, and portfolio optimization. Working together, the experience in major merger integrations will help turn those opportunities into reality. I'm sure of that.
As this chart illustrates in more detail, the close location of TNK-BP and Rosneft greenfield developments in the Yamal Peninsula and Eastern Siberia provide the opportunity to realize natural industrial synergies. Rosneft estimates the combined proven total reserve base of the two companies together to be 38 billion barrels of oil equivalent. Additionally, Rosneft holds licenses offshore, including the Arctic, with a resource base in excess of 250 billion barrels of oil equivalent for growth beyond 2020. We also see synergies associated with TNK-BP and Rosneft's gas and gas condensate portfolios. We believe that Rosneft's stated target of 100 billion cubic meters of gas production by 2020 is achievable. Given BP's knowledge of the TNK-BP assets, we're confident that Rosneft can achieve efficiencies in the enhanced performance of its brownfield asset base.
As in TNK-BP, we know that stabilizing brownfield declines and raising recovery factors to global standards can underpin the Rosneft value growth narrative. Rosneft is also a company which is busy transforming itself, developing its own asset base with new technologies, including a new Arctic technology center, and improving its management processes and corporate governance. BP brings deep international experience in many of these areas to its partnership with Rosneft, and we believe that the combination of Rosneft and BP working together is a new and exciting future for BP in Russia. How does the BP shareholder benefit? BP's 19.75% ownership in Rosneft can bring value to BP shareholders in at least three ways: growth in the value of BP's shareholding in Rosneft itself, cash returns through Rosneft's dividend payments, and access to new opportunities both in Russia and internationally.
As just seen, the merger of TNK-BP and Rosneft provides ample opportunity for the realization of synergies, both in industrial operations and at the corporate level. Rosneft's early indications suggest efficiencies in the range of $3 billion-$5 billion. There is potential for BP to make a significant contribution to this process. BP's experience in TNK-BP can also be used to support optimization in the existing portfolio of brownfield, and we believe the benefits realized from the application of enhanced oil recovery technologies to TNK-BP's brownfield assets can be achieved on a larger scale with Rosneft. Beyond the currently producing assets, there is huge potential in the Bazhenov Formation, the Yamal, and the Arctic as well. Turning to cash dividends, Rosneft has recently increased its dividend payout ratio to a minimum of 25% of net income.
This is an important step in increasing shareholder returns and demonstrates Rosneft's commitment to returning cash to shareholders. As the company grows and becomes more efficient, there is the potential for further increasing dividends over time. Lastly, BP's partnership with Rosneft creates optionality for future growth that was not previously available to BP in Russia. Whether through the development of Rosneft's existing portfolio, new license acquisitions, or international projects, BP and Rosneft have the ability to apply world-class technology and experience to a significantly broader asset base. In all these ways, the combination of Rosneft and TNK-BP with BP's capability has the potential to open up new horizons for the creation and realization of value for both sets of shareholders.
Now, at this point, I am pleased to welcome Mikhail Kuzovlev to the stage for a message from the Rosneft board that he asked to deliver today, and we're very grateful. Thank you. Mikhail?
Dear Mr. Dudley, dear ladies and gentlemen, let me convey the greetings from the President of Rosneft, Mr. Igor Ivanovich Sechin, for the occasion of this important meeting with BP's investors for discussion for the company's production and exploration strategy. Unfortunately, Mr. Sechin is unable to participate in today's event in person due to the previously scheduled meeting with the President of the Turkish Republic. As Mr. Dudley just mentioned, our company now commands the execution of one of the largest energy transactions in history, acquisition of TNK-BP by Rosneft, which will result in BP becoming the second-largest shareholder of Rosneft and, which is very important to highlight, the first largest public shareholder of the company, holding almost 20% of equities and gaining influence upon the company management through participation in the board of directors.
We welcome this step and the decision of the company and believe it to be the logical extension and continuation of the successful BP operation in Russia for many years, as well as the project-based cooperation of our two companies. Personally, as one of the members of the board of directors of Rosneft, as well as on behalf of my colleagues, we welcome people from BP who will participate in the board meeting of Rosneft. With the acquisition of TNK-BP, Rosneft becomes the largest hydrocarbon producer among the public companies. The company holds a unique portfolio of production and exploration projects and are the largest holder of the Russian continental shelf licenses. All of that suggests a huge potential for cooperation between two companies.
It's very important for us that BP has an available experience of implementation and adoption of international best practices in management and application of technology solution in Russia. We are looking forward to active involvement of managers and experts of the British company in the process of TNK-BP integration, which is very crucial now for development of the company after the acquisition of TNK-BP. We believe these efforts may bring value for both companies. Ladies and gentlemen, today we are creating grounds and foundation for the strategic partnership to help satisfy the major portion of the growing global demand for hydrocarbon for decades to come. This partnership is based upon mutual trust that is of great value to all of us. Thank you very much for your kind attention.
Thank you, Mikhail. Thank you very much. As Mikhail knows, I didn't actually know what he was going to say, so that was not scripted. Thank you very much. We're pleased with the progress we've made in the U.S. and in Russia, resolving significant uncertainties for the group and in creating what I know will be an exciting new future in Russia. We're also focusing hard on the rest of BP, which brings me to our 10-point plan, and a slide we showed you last February, which laid out our roadmap for growing value. This remains our clear agenda to 2014. We have been making consistent progress in doing what we said we would do with our three key results. We touched on the progress we've made in many of these areas, including playing to our strengths and in creating a simpler and more standardized BP.
We're going to return to some of these themes today and show you some very real examples of this in action across our portfolio. All of which is part of our intention to create more transparency for value. It is easy to lose sight of how far we have come. Before going any further, I want to list a few of the more significant milestones in 2012. We've announced divestments of around $15 billion of assets in 2012, with our announced divestments now totaling around $37 billion against the $38 billion promised by the end of next year, or $64 billion so far if you include the proposed transaction with Rosneft. We've sold tail assets that represent less than 10% of our reserves for proceeds equivalent to almost 30% of our market capitalization.
We have continued our strong run of new access with prospects added in the deep water of Brazil. In Namibia, in Uruguay, Trinidad, the Gulf of Mexico, the Utica Shale in Ohio in the U.S., and more recently, four deepwater blocks offshore Nova Scotia in Canada. We have tripled our prospect inventory over the past five years and now have begun to test it. Regarding our major project startups so far this year, we've started up CLOV in Angola, Galapagos in the U.S. Gulf of Mexico, and Devenick in the North Sea. Also, in Angola, we expect to announce the start-up of PSVM, one of the world's largest subsea projects, in a matter of days, and start up Skarv in the North Sea in Norway before year-end.
The Angola LNG project is now expected to start up in 2013, along with a further nine major projects through 2013 and 2014. In the Gulf of Mexico, we've made solid progress. It is not much more than a year ago that you were asking me whether we were confident we would even get a permit to restart drilling in the Gulf. Today, we have seven large rigs operating. Five are engaged in production, one doing appraisal work, and one undertaking a P&A project. The major upgrade of our Whiting Refinery is now more than 80% complete. It is on track to be commissioned in the second half of next year. As mentioned already, we made our last payment into the Gulf of Mexico Trust Fund. All of these milestones are key markers of progress against our 10-point plan and our 2014 commitments to grow operating cash flow.
Brian is going to update you on this shortly, but I'd like to turn first to our longer-term direction and the vision to lay out that we began to lay out at our third-quarter results. This is important context for what we want to show you today, I hope you'll bear with me as I briefly revisit a little of the same ground. The vision for BP is one of a more focused oil and gas company that creates value for shareholders by growing long-term sustainable free cash flow. We'll do this through safe and reliable operations, a disciplined and prudent financial framework, and a portfolio that is biased to high-margin opportunities. To create the right platform to execute this vision, we have embarked on an extensive change program in the company aimed at fundamentally repositioning BP.
This is evident, I think, in the significant progress we have made in safety and reliability, in repositioning our portfolio through our extensive divestment program, and through the renewal of our upstream. Looking first at safety and reliability, we are starting to see signs of improvement, significant improvement. In the downstream, for example, we have seen sustained improvements in refining availability. Over the last five years, this has supported our ability to capture some of the high margins we've seen recently. Notable, our refining throughput hit a seven-year high during the third quarter of this year. It was also a record year of earnings for the downstream business.
In the upstream too, through the foundations of our new functional model, we are focusing on safe and reliable and efficient execution, and we are beginning to see the benefits of the investment we have made into turnarounds over the past two years. We're seeing a greater than 60% decrease in unplanned outages from the facilities we worked on in 2011. We expect to see this trend continue in 2013 and beyond. This is just one very early sign of improvement. We have much further to go before we fully capture the benefits of our new operating model. Andy, Bernard, and Bob are going to be showing you other examples of what we are putting into place later.
We do plan conservatively. We believe that safety, we know that safety is good business, and that this will show up in stronger and more reliable cash flows in the years to come. This is something we expect to come back to illustrate to you as our functional model matures, once we have established clearer baselines and a longer track record of delivery. Turning now to our portfolio. I've already mentioned the $37 billion of announced divestments. This has not only been about unlocking cash and increasing financial flexibility, but it's about focusing the portfolio and greatly reducing operational complexity. In the upstream, we have fundamentally reshaped the portfolio. It will play to our strengths in exploration in the deepwater, managing giant fields and gas value chains.
At the same time, we've divested 50% of our upstream installations, a full one-third of our wells, and half of our pipelines. This, of course, significantly reduces complexity and risk. In the downstream, we are repositioning to improve margin quality through the investment in the U.S. of the Southwest Coast fuels value chain and the Texas City Refinery. The upgrade of our Whiting Refinery near Chicago, again, expected to come on stream in the second half of 2013. This concentration of geography and assets across the company positions us to optimize our capability and resources and grow margins longer term. These changes are part of creating the foundation for what we want BP to be in the future. A company with a very clear direction and distinctive for a more focused and lower-risk footprint with strengthened incumbent positions.
We want to have a leading position in deepwater, a strong pipeline of high-margin upstream projects. A unique position in Russia through our proposed Rosneft investment, a reloaded exploration prospect inventory, and a portfolio of world-class downstream businesses that generate strong free cash flow for the group. We will also be a company with a very clear focus on growth and sustainable free cash flow. Central to this is the intention in the upstream to invest for medium-term cash generation and to create multiple options for longer-term growth. The driver is value growth, with volume growth simply the outcome of how we choose to deploy our capital to extract the greatest value. That is the major theme of the rest of today's agenda. We plan to deliver this primarily through increased upstream reinvestment to drive growth in higher margin areas.
We will sustain the pace of our increased exploration and access activity to feed the pipeline of opportunity over the decade ahead. We expect the increase in upstream reinvestment, in part, to be funded by increased free cash flow from our other activities across the group. In the medium to long term, we will see the increase in operating cash flow driven by the growth in production in our high-margin regions. That you can see on this chart. We expect an overall portfolio to show underlying volume growth through the remainder of the decade. Actual reported production in each year will, of course, depend on a number of factors, including the exact timing of the divestments and their closing dates, new project startups, and renewal of long-term contracts, such as in Abu Dhabi. It will be impacted by OPEC quotas and entitlement impacts and production sharing contracts.
You all will know that. Let me hand over to Brian to explain the impact of some recent changes I described earlier.
Thanks, Bob. I'll begin by outlining the financial impact of the changes Bob has highlighted and also provide the group-level financial context for today's upstream presentations in terms of our overall capital spending plans and the financial framework. Let me start by covering some of the factors affecting our near-term outlook for operating cash flow. We have announced some major corporate changes. First of all, as Bob described, we have announced an agreement to sell our 50% share of TNK-BP to Rosneft in a cash and share deal equivalent to $28 billion at the SPA signing. That will leave us with a 19.75% shareholding in Rosneft. Consequently, from the 22nd of October, we stopped equity accounting for our share of TNK-BP earnings, with our interest being recorded instead as an asset held for sale from that date.
Our fourth quarter earnings will only book 21 days of earnings for TNK-BP and not the remaining 72 days of earnings for the quarter. We expect to complete the deal with Rosneft during the first half of 2013, until that point, we will not be booking any earnings from our activities and interests in Russia. Secondly, we have also announced a criminal settlement agreement with the DOJ and SEC, which will be paid over six years. Payments of $1.1 billion and $800 million are expected in both 2013 and 2014, respectively. These are not included in the original 10-point plan operating cash flow forecast, other than the free cash flow we described as available for other purposes. Thirdly, we are close to completing our $38 billion divestment program, as Bob described, a year earlier than planned, with the phasing of completions impacting reported earnings momentum by quarter.
For example, divestments, including the North Sea and Gulf of Mexico, are likely to impact our reported fourth quarter production volumes by around 50,000 barrels of oil equivalent per day relative to the third quarter. Full year 2013 reported volumes are expected to be impacted by around 150,000 barrels of oil equivalent per day relative to 2012, the majority of which relates to high-margin production areas. Underlying production for 2013 is expected to show some growth. At today's prices, the $37 billion of divestments announced so far would have been contributing pre-tax earnings of around $5 billion per year and operating cash flow of around $4.5 billion per year. Taking all of this into account, we expect to see operating cash flow of $30 billion-$31 billion in 2014, as we outlined at the third quarter call.
On a like-for-like basis, this represents more than 50% growth in operating cash flow versus 2011 and is consistent with the guidance we gave in the third quarter, updated for the United States criminal settlement. We are increasingly confident in the drivers that underpin this growth. The growth in group cash flows also creates the platform to increase both reinvestment and distributions by 2014 and beyond. The purpose of today is to give you more insight on the quality of our upstream opportunity set, underpinning an increase in upstream CapEx of around 40%-50% between 2011 and 2014. This will be funded in part by higher free cash flow from other activities and by continued divestment churn of around $2 billion-$3 billion per annum.
With our current portfolio, we expect to continue to manage gross organic capital expenditure for the group at around $24 billion-$25 billion out to 2014, as set out in the 10-point plan, and on average to between $24 billion and $27 billion beyond 2014 through to the back end of the decade. In broad terms, the proportion of group CapEx invested in the upstream is expected to increase from around 70%-80%. At the same time, we expect to maintain a prudent financial framework. We will continue to target gearing in the 10%-20% range over time while uncertainties remain. At the end of the third quarter, net debt was $31.5 billion with gearing at 20.9%.
As we were to complete our divestment program and the funds from those divestments come in, and with the ending of payments into the trust fund, we expect gearing to reduce. From a financial perspective, there are two key messages I would like to leave you with today. Firstly, our 2014 operating cash flow delivery is underpinned. Beyond 2014, we have a clear plan to grow sustainable free cash flow. Continued reinvestment into high-margin regions is expected to drive further growth in operating cash flow. Our plan is to keep tight control of capital spending with organic CapEx in the range of $24 billion-$27 billion per annum to the end of the decade, and to continue to divest around $2 billion-$3 billion per annum on an ongoing basis.
The financial framework is robust to cash breakeven levels of between $80-$100 per barrel, and supports gearing within the 10%-20% range by then. We expect this framework to drive an expansion of free cash flow over the medium to long term, enabling us to grow distributions to our shareholders through time and supporting our progressive dividend policy. Our confidence in this outlook and the progress we have made in reducing uncertainties provided the basis for our decision to increase the dividend with the third quarter results payable in the fourth quarter. In addition, we have committed to offset any dilution to earnings from the TNK-BP transaction through either a share buyback or share consolidation. On that basis, now let me hand back to Bob.
Thank you, Brian. To summarize the group perspective, we have made significant progress in repositioning BP for sustainable growth into the future through a significant change program that addresses safety and reliability, the significant change in the shape of our portfolio, and the renewal of the upstream. We remain on track to deliver the 10-point plan, including our commitment to growth and operating cash flow by 2014. We aim to be a focused oil and gas company that creates value by growing long-term sustainable free cash flow through safe and reliable operations, a very disciplined and prudent financial framework, and a portfolio biased to high-margin opportunities. We plan to deliver this through increased upstream investment and reinvestment to drive growth in higher margin areas and to sustain the pace of our increased exploration and access activity.
The rest of today is all about showing you exactly how we will do this. Finally, it is our intention to grow distributions over time, in line with improving circumstances of the firm, and to maintain a progressive dividend policy. Brian and I would now like to take your questions. Those here in the room, questions here. We've got some on the web. Doug, first hand up. On your tables, there are microphones, and press down, and there'll be one that will be on.
Okay. In the upstream, there's clear emphasis on higher margins and cash flow, which typically, but not always, lead to higher returns on capital and value creation in this industry. My question is, how specifically do returns and value creation play into the goals and objectives of the company? Either way, with growth likely to recover in coming years, how does BP leadership ensure that the commitment to capital discipline remains elevated within the corporation? It's two questions.
Doug, good questions. Absolutely, when you look at the portfolio through the rest of the decade, we do see underlying growth in both increasing operating cash flows. We actually see underlying growth in production. We have quite simply more projects and opportunities that we will be able to do unless we maintain a disciplined capital spending stream. We're going to pace the opportunities we have in time to make sure that we have a sustainable increasing amount of operating cash flow and free cash flow to shareholders. We could plow back that operating cash flow into projects in the company and absolutely overinvest and not keep pace with this. We have the choice through a very wide portfolio, and I believe through an exploration inventory that's coming through, for us to be able to make choices.
In the year ago, we said that we would not hesitate to divest projects at different points in the life cycle than traditionally we have done, and I think we have all those options open to us in terms of capital discipline, and that's clearly our intention going forward. You want to add anything?
Yeah, no, I think that given we've had to shrink the firm so far, we've had a unique opportunity now to reset the financial frame going forward. I think part of the mantra is actually we're going to keep capital under tight control so we can generate free cash flow.
The projects that we have do see a 50% increase in operating margins going forward. I freely admit we have a bias to oil, which we think there's some really great regional gas projects, but we have a bias to oil, which we think will give superior returns over the decade. Jason. Jason Kenney in the back.
Just short-
Probably for everyone that's on the web, everyone identify themselves and their companies, where they're from.
Okay. It's Jason Kenney from Santander. I just wanted a quick sensitivity around that free cash flow target at different oil prices, if you could. I notice you've got 2014 at $100 and $5 per million BTU Henry Hub.
20% either side, what happens?
Yeah, Jason. I mean, the reason why we've chosen the range of $80-$100, of course, it also depends on the Henry Hub price as well. As the higher margin barrels are coming on stream, what's happened is we've divested off this $4.5 billion operating cash flow stream. As the new projects come on, we double the margin of the existing projects. It basically says, once you get beyond 2014, you balance stuff at below $100 a barrel, and actually towards the back end of the decade, push you back down towards $80 a barrel. That's where the flex is in the range, and we're managing that right now through the disposal program.
In 2014, what would the cash flow be at $120 a barrel?
There'll be around, right now, based on what we said with the 10-point plan, originally, there would be surplus cash of about $5 billion-$6 billion. That's looking more like post DOJ, post lower Henry Hub, post TNK-BP, something like $2 billion-$3 billion of surplus cash.
At $120.
At $100 a barrel.
$100, yes. Well, what at $120?
At $120, then you're talking additional $4 billion of operating cash. The rule of thumb is around $2 billion of operating cash for $10 a barrel.
Excuse me. Jason Gabelman with Macquarie. Given the value that you've been receiving through the divestiture process relative to the enterprise value of the corporation, are you now at a point of having essentially reached the target where you'll be pulling back on divestitures? Or do you see divestitures continue to play a role in adding value to the shareholder? Then just a second one on a separate topic. What's the amount of exploration spend that's included in the capital budget?
People say you've gotten good prices for these. Why don't you just keep going, divesting things? I think, again, think about the simplicity now of the company, with 50% less platforms and gas plants, 50% pipelines, a third of the wells, and we've only divested 10% of the production and roughly 9% of the production and 10% of the reserves. We're a much simpler company now. We think we can develop these new projects coming on at higher margins and not necessarily continue to divest. We're open to it, but we're not on a campaign now to just completely continue to shrink the company. We've brought it down significantly now with a lot of opportunities. If we continue to shrink the company too much, you lose the balance point where you can't generate the operating cash to be able to put them back into very attractive projects.
When we met last year, I mentioned roughly 2.1 million barrels a day with the portfolio we have is about the level that we think can continue to generate the operating cash flow to put in these higher margin projects going forward. Going much below that, there will be some portfolio simplification still, but not I think what you're asking about.
Exploration?
Exploration spend.
Exploration spend. It depends on how you define exploration spend. There's seismic, rank wildcats, and with appraisal wells. We have a figure there today of around $1 billion in 2013 for exploration spending, traditional exploration spending. We've got some very good appraisal wells, which we don't count in that. Here, Maurizio, I think you were asking. Are you asking a question? No. Okay. Everyone thinks they have cords on them. They don't actually, so you can pick them up. It's okay.
It's Hootan Yazhari from Bank of America Merrill Lynch. You were saying that you want to keep your gearing in a 10%-20% range while uncertainties persist. Can you give us a little bit more explanation as to what you think those key uncertainties are? At which point you would think those key uncertainties are gone, and then how you would think about gearing. Are you looking at expanding the scope of your CapEx accelerating projects, or is it more a matter of looking into the M&A markets?
Yes. Historically, the range we had pre-Macondo was 20%-30% gearing. We locked down the 10%-20% gearing when we had a huge amount of uncertainties around us. A lot of those have now gone away. The only really remaining what we describe as uncertainties is around the civil trial that we have that starts on February 25th or 4th in Louisiana next year. We've managed to, I think, resolve Russia with a win-win-win-win solution for all parties. It's good for Russia. It's good for BP, TNK-BP, and Alfa. We've resolved the criminal and SEC outstanding issues. If the fairness hearing goes ahead with the PSC, that will be resolved. The only really remaining left uncertainty will be around the civil case in Louisiana.
To the degree that can get resolved, clearly you get more comfortable towards the top end of the gearing band. Every finance director loves to have the gearing lower because it gives them lots of flexibility around the balance sheet. I think once we get the final piece of uncertainty resolved, that will give us more flexibility within the range, and we can look beyond that range into the future. I think there's also something about having the balance sheet shored up given the current economic climate, given what's happening inside Europe right now. I mean, all finance directors right now are focused on strengthening their balance sheets. The really biggest remaining piece of uncertainty is really around what we believe will happen with that trial. Clearly, we believe that we were non-grossly negligent.
It was multi-causal, multi-party, we've set aside a $3.5 billion fine associated with that.
Those uncertainties are moving behind us. We have gotten a number of the milestones gone. There are certain things out there in front of us. It is also not designed for us to dip into the M&A market. That is not behind our thinking there. Yes, sir.
Hi. It is Iain Reid from Jefferies. Bob, you said on the optionality available for you now, you have got the TNK kind of legal situation out of the way, in terms of third-party deals. Are you actually negotiating with Rosneft right now for Arctic opportunities, for these tight hole things you are talking about? Could we expect to see some agreements announced over the next few months, specifically on those sorts of areas?
Well, now that we have reached the settlement, we are able to talk about those things. I would not call it negotiating things. We are in discussions around various things in Russia that might be interesting for us and for Rosneft to work together on. We need to get the closure of the deal done, even then, we are still now freed up legally for us to be able to explore those things. We will see. They have to compete within our portfolio. There is some very interesting things in Russia in the oil shales. We have had some discussions around it. The tax system in Russia, the clarity for us to be able to make an investment decision is not quite there yet, for example. I am not going to foreshadow any big announcements on this, but certainly now we are free to start working on that.
Sorry, just to follow up. You've got the higher hanging fruit, if you like, after the deals that Rosneft has done with other people, do you think? Or are those kind of specific things where you think BP can do as well or better?
Russia's the largest producing country in the world, and it's got a vast hydrocarbon set of systems and basins across it. We think that many of them are not yet developed or explored. I think over the years to come, we're going to identify many new things together, and we'll have a choice of either doing that through our ownership in Rosneft or maybe separately if we have specific expertise that we can bring early or maybe to accelerate developments as options for us. That's both the opportunities would be onshore and offshore, and I think there's opportunities as well in the gas side of things, associated gas production.
Yeah. Hi, Chris Kettenmann from Phoenix Partners Group. On slide 20 here, you have a nice step-up in 2013 and 2014 in production. Just curious how much of that you expect to come from the Gulf of Mexico, and how many rigs you need to have running in the area to reach those targets. Then a second question. Bob, you mentioned that you preferred black oil in your upstream investment strategy. Just curious, seeing two camps in integrated oils, one going to integrated gas and LNG and the other investing in high-margin black oil. The LNG being on maybe a lower emissions profile over time. If you could comment on why you prefer black oil and maybe address the emissions issue.
Chris, if you I don't know if we can bring up slide 20 or not, because it's a good question, because it's got a lot of data on it. If you look at slide 20, and you have it in the books there, the yellow line there is the Gulf of Mexico. You'll see that with the yellow line in the middle of the green lines there. What you'll see in 2013 is the divestments, the significant divestments, the beginning of a redevelopment in Thunder Horse, and then we'll see an increase in the Gulf of Mexico out in time. I'd also like to stress the size and the scale. Some people think that BP's only future is the Gulf of Mexico. We've got massive scale of investments in Angola, in the North Sea, and Azerbaijan.
65% of the operating cash flow today comes from those four places. The Gulf is one. We have over 700 leases in the Gulf, a big exploration portfolio there to work our way through in years ahead. We like black oils because of the economics today of oil. They've been attractive now, very attractive for some time, and it does look like oil is going to be an increasingly valuable commodity. Doesn't mean we don't invest in gas value chains. We have some very, very significant investments in gas. We have a big North American gas position. LNG out of Trinidad, expansion of LNG in Asia, in Indonesia, and a number of other prospects down the road. It's not either/or, but I think when we look out at value creation in black oil, in terms of emissions from them, you'll see all the way through.
That's the economic answer. Of course, the company, we've had a position about the sustainability of energy for a long time as a company. We still have major energy efficiency programs all through the company. Our role is to get the company back on its feet for our shareholders, and if you simply look at the 40% increase in energy demand that will be required by the world by 2030, the rising prosperity rates that are inevitable in Asia, Asian gas is going to be valuable. Oil is going to be valuable everywhere, and that's why we're focusing on it. There is a difference in the companies. I said there's very different strategies starting to emerge. People say all the big oil companies are the same, there are differentiating strategies now emerging from the majors.
Richard Hulf, Artemis Investments. As shareholders in Rosneft, you're slightly exposed to Russian political will, in a sense. Are there any parts of the world or any places that you've agreed that you can't or won't go? For example, if you wanted to drill wells in Georgia, would you be allowed to do that?
I can't comment on the prospectivity of Georgia as a hydrocarbon base that I don't think there is. We do manage a pipeline through Georgia from Azerbaijan to Georgia to Turkey. That's the Baku-Tbilisi-Ceyhan pipeline. We have good relationships in Georgia and of course, Azerbaijan. I think if you think about the world and our portfolio, it is balanced all the way around the world through areas that have political change constantly. I don't think we're different than any of the other major oil companies, in fact, around that. Part of the reason, although we focus the company down, we still have a very wide geographic spread. There's no place I would say we would not think about investing, and none come to mind as exactly not someplace to go for political reasons.
There's many places we won't go because maybe the prospectivity of it or the economic returns or a changing fiscal regime, which always make you think twice. Anything come to mind you, Brian?
No, I mean, I think, as we look at different—maybe part of the question was different job. We look at many different risks, geopolitical risks, financial risks, fiscal risks, and we look at the full envelope of those things before we actually enter into a specific region. We do have a new country entry policy that we need to sort of tick those things before we even contemplate entry.
Here and then here.
Raheem Prem from Barclays. There's been a lot of focus, I guess, on the high margin growth in the upstream. I was just wondering if you could share your views on the lower margin part of your portfolio and how you see that evolving. I mean, Bob, I think you mentioned the contract renegotiations in Abu Dhabi. Perhaps you could shed some light on that, and perhaps other areas of growth in the low margin portfolio. I might think of Iraq comes to mind. Any views that you have on that would be great. Thank you.
Yeah. For example, today in Abu Dhabi, we have a $1 per barrel fee of working in Abu Dhabi. We've been working there for more than 70 years. The offshore concession is coming up for renewal in 2014. The onshore concession. I think it's a process, for example, where if the terms were to remain the same, we have choices, of course, so it isn't an automatic renewal. If the terms are going to remain the same, it's not something we would likely do. I'm sure we wouldn't do it. I think also in Abu Dhabi, the government there is thinking about the kinds of technologies and things that they'll need in the future, and the terms are likely to readjust for the modern-day reality of over $100 per barrel when those terms were put in place under $20 a barrel.
In Iraq, we have a $2 a barrel fee, a return for us on our project in Iraq is good in the Rumaila field. It doesn't rank in the top quartile of returns, but we've taken the field from a million barrels a day to over 1.4 million barrels a day in a very short period of time. We've got decisions to make about the redevelopment. I'm sure that the options are going to be laid out with the Iraqi government around that. They're pleased with what we do. The BP project in Rumaila provides somewhere between 50% and 70% of all the funds for the treasury of the country to help rebuild the nation. We have a special relationship there in Iraq, and we want to cultivate it. It's enormous reserves in Iraq, and some of the decisions we make are further down the road here. I'm very pleased.
Very, very proud of what the team has done there. Some of you may have even visited Iraq and Rumaila. Other lower margin ends of the portfolio. Well, there's not clarity of where North American gas prices are going. We operate and produce a lot of gas in North America. It remains to be seen whether that will remain a low margin part of the portfolio or not. Some of these incumbent positions are so large you don't want to move positions too quickly based on a couple of years out of decades. We have not significantly invested in gas in North America because we've had such a large position, and I'm happy about that. Other areas that are low margin around the world, other parts of the portfolio, for example.
Refining margins can be good regionally, and I think there will be places where they're very good, as they have been in North America in the last quarter as an example. The returns tend to be lower in the downstream. All of that we'll look at. With great returns from our lubricants business, it's got great returns. Very little capital employed invested in it. We'll take some of the maybe lower returns but generate healthy amounts of cash flow and use them to invest in the higher margin, high return upstream projects.
One last question.
Thank you. Keep on. These two questions. They both gentlemen had their hands up. Yes, we are.
Thanks, Bob. Thanks, Brian. Three questions, actually, please. Could you first talk, looking back now at spend at BP, sort of post-Macondo.
Could you talk about the change perhaps in increased integrity costs within the portfolio and how you see that going forward? Secondly, I was just wondering about the base portfolio itself. How confident are you that the base can deliver to your expectations? Could you just remind us about decline rates and any risks around that, and actual integrity or asset issues that you feel you've dealt with? Thirdly, I think there have been a number of questions just talking about beyond 2014, and I think you yourselves talk about long-term sustainable free cash flow expansion. I think the market can see some of the high-margin barrels coming into the portfolio. Typically, though, it's more difficult to see some of the declines in the portfolio, and you imagine that they themselves are high margin.
My question is really around what sort of rate of free cash flow growth should we see? What's appropriate for a big oil company? I can understand not talking explicitly about volumes, but I think investors would want to know what growth rate you see on free cash flow, particularly given the increased spend.
Okay. Tufan, that's a lot of questions. We're going to get one more in in a short period of time. Let me ask some of those questions you talked about during the upstream session because we'll be able to address those. On increased integrity, there's no question that since really 2011 and 2012, there's an enormous amount of integrity spending went on with increased number of turnarounds in the Gulf, in the North Sea, in Angola, for example, among other places. We're starting to see the up times from that integrity now coming through the portfolio. Those are the right things to do. There will always be integrity spending, but clearly there was a period there where we needed to go back and work on the integrity spending, and Bob and the team can talk about precisely some of the effects for you there.
On the base performance, one of the things over time with oil companies, you begin to get nervous when you start to see the base declining faster than you believe. We've spent quite a bit of time on that as a management team, and actually, the base has performed extremely well for us in 2012. That gives me confidence that our projections of the base are in good shape. Again, talk to the team about the base decline rates that we have. As we have divested the tail of the portfolio, significant amounts of the tail of the portfolio, the state of the maintenance spending, the time and attention of management devoted to this 50% of the platforms, 50% of the pipelines, and a third of the well work, you can imagine how our technical teams now are better able to focus going forward.
That's another subject for you to press. Are there examples of asset integrity that we're concerned about? Certainly, anything that we are concerned about for asset integrity, we've already been all over with turnarounds. Now, the Thunder Horse platform, we are looking at ways of optimizing and redeveloping the Thunder Horse platform to try to be able to get at new systems out there, new hydrocarbon pockets. As a result of that, we may take the opportunity to accelerate some integrity spending there. 2014 and beyond, free cash flow rates. Do you want to comment on rates?
We're going to come back to it next year. I think the key is if you look at the margin projection, and once we get to the decline rates, you can then start to do some pretty basic calculations of how much free cash flow potential there is in terms of what we can spin-off. Provided we keep the capital constrained, the margin barrels continue to grow, so you get the base that flows through to free cash. The only part of the equation, Tufan, is what's the decline rate on the base assumption, which the guys can come back to.
Last question. We are actually over time on the webcast. My apologies for those of you in the webcast, we're not going to get to your questions. This will be the last question. Thanks.
It's just one. Just picking up on your comment there that one of the times that you get nervous as an oil company is when you see the base decline faster than anticipated.
Yes.
Can you give us an update on India-
India
What's going to be happening there? Also, presumably, we're expecting to see growth volumes from India between 2011 and 2014. Can you give us an idea as to where those growth barrels stand in terms of the definition of growth margins having twice the cash margin of the existing portfolio, which was $24 a barrel?
Okay. A couple of things about India. When you're with the exploration group today, press them on India, because they're going to show you some of the exploration potential of India. We are now in the process of drilling a deep well down to the KG-D6 block that we'll see what happens there. India has, in many ways, the decline of the KG-D6 block has really followed exactly what we said it was. There've been adjustments to the reserve pictures of some of the other investors in that, and they have adjusted their reserves broadly down to what we were projecting for the field. There has been a period of disappointment in India in general since about a year and a half ago. It was very difficult to get decisions made.
I think we all know the reasons why it started with the telecom scandal and difficulties for ministries, and ministries stopped making decisions. I think we're moving through that now. We were delayed in some rather simple things of getting seabed surveys done to get ready. Our planning on the satellite developments in India is good. I remain absolutely of the belief that India is not going to be easy for India to supply its energy needs going forward. It's going to need every molecule it can produce of almost any form of energy to be able to meet the prosperity growth that is likely to be desired there. I think BP has a great position in the exploration side of that.
Has not only the KG-D6 block, which the satellites around that are going to come on, and we've got a 50/50 gas marketing joint venture in India that we've yet to talk about some of the things we're doing. As I've said to the minister in India, it just doesn't feel right to me that it is more economic for us to develop and produce gas in Australia and ship it to India than it is to develop it in the country. I think that message is now getting through. Stay tuned. Thank you. Ladies and gentlemen, thank you very much. It's the end of our questions. It's the end of the webcast, and we want to say goodbye to those of you on the webcast.
For all of you who joined us over the web and on telephone lines from all over the world, thank you. Some of you very early in the morning in some places. For those of you that are not here in person, you will find the materials that we are laying out, not only in this session, but for the next three sessions this afternoon on our website later today. Thank you very much for your time.