Welcome to the BP Presentation to the Financial Community Webcast and Conference Call. I now hand over to Craig Marshall, Head of Investor Relations.
Good morning, everyone, and welcome to BP's Q1 results presentation for 2020. Process, it is something we are all getting used to, and our IT team have been doing a fantastic job to provide a resilient system to support these types of events, both for internal and external purposes. Turning then to the presentation. I am joined remotely today by Bernard Looney, Group Chief Executive Brian Gilvari, Chief Financial Officer and Murray Oakenclosse, Upstream Chief Financial Officer and CFO Designate. Let me then draw your attention to our cautionary statement.
During today's presentation, we will make forward looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note on this slide and in our U. K. And SEC filings. Please refer to our Annual Report, Stock Exchange Announcement and SEC filings for more details.
These documents are available on our website. I'll now hand over to Bernard.
Thanks, Greg, and good morning, everyone. I hope you and your families are keeping safe and well, and thank you for joining our call. We are in a very different world today than any one of us would have imagined just a few weeks ago. The coronavirus pandemic has gripped our world. People are losing their loved ones before their time.
Many more are afraid for their families, for their finances, their livelihoods, for their futures. And the question I get asked often, will life ever go back to normal? Alongside the physical and mental health impacts is the economic impact. The pandemic is having a severe impact on global economic activity and that has consequently had a major impact on energy markets. With this backdrop, companies like BP are doing what we can to help, not because it is expected of us and it is, but because we want to, our teams want to, we want to make a difference.
Since the pandemic began, our focus has been on 3 clear priorities. First, protecting the health of our people. 2nd, supporting our communities. And third, strengthening our finances. It is a simple frame that helps us balance complex and competing demands between keeping our people safe and running the business, helping society in a time of real need and safeguarding the company for our shareholders.
And it works well for us. We think of it as performing with purpose and I think you will see this coming through in our results today. In a moment, Brian will look back in our performance over the Q1 and then Murray will take you through the steps we are taking to build resilience to the new environment, including the actions we are taking to adapt our financial framework. But first, I'd like to give you an overview of the 3 priorities and our response to the pandemic. 1st and foremost, I want to say how much I am in awe of what our people are doing.
Our frontline staff are making real sacrifices every day out in the field or running our retail network and they are getting brilliant support from everyone working from home, dealing with extra demands and all the complications that go with that. Thanks to their courage and resilience, we have had minimal disruption to our day to day operations. We are focused on maintaining reliable operations, keeping BP safe and keeping our people safe, safe physically and safe mentally, recognizing this pandemic is as much a mental challenge as a physical challenge. We may not all be infected, but we are all affected by it. Across BP, we are in action.
In our operations, we have new protocols for people going offshore. We are taking a range of measures to keep our work environment like making more space for our people to carry out their activities. And we continue to adapt those measures as needed as the environment changes. At our retail sites, we are installing screens and are providing protective equipment for staff. We are also helping customers to observe social distancing and boosting cleaning and sanitizing regimes.
Worldwide, we are ramping up our use of digital resources and agile ways of working, so that our global workforce stays fully connected. And we have been enhancing psychological support for our employees because they are dealing with stressful demands. This pandemic is causing anxiety and job security is going to be a major concern. With that in mind, we have committed for 3 months to no BP employee being laid off so that we can all remain focused on what's most important during this immediate period. Across BP, there has also been a huge desire to support the communities where our people live and work.
The BP leadership team has been facilitating this, so we can support in every way possible, diverting resources and expertise, freeing up time for our people to volunteer and providing financial support to organizations at the forefront of the fight against the virus. Examples include providing free or discounted fuel sites for emergency services and frontline personnel in many countries, as well as offering discounted or food and beverages, making our supercomputer in Houston available to support the pandemic research being conducted by a White House led coalition, as well as the expertise at our Biosciences Center in San Diego. Committing significant donations to the COVID-nineteen Solidarity Response Fund and Mind, the mental health charity. Helge Lund and I both believe that this is a mental health challenge as much as a physical health threat And we are both donating 20% of our salaries for the rest of this year to mental health charities. We are all in this together.
I am confident that by supporting each other collectively as a society, we will make it through this crisis and rebuild better and stronger. These actions in no way compromise our long term commitment to shareholders. If anything, I believe they strengthen it and we are hugely grateful for the support we have been receiving. At the same time, we are doing everything we can to strengthen our finances. Our underlying business has been performing well, but it has been a tough Q1 due to the challenging macro environment, which included impacts to our results through quarter end as a result of lower prices, lower demand for our products and foreign exchange effects.
And in the near term, things are not getting any easier given the demand destruction we are seeing, which recently even led to negative pricing for WTI oil, something never seen before. It is a so perfect storm, but we are calling on our vast experience of navigating through difficult circumstances. We have a clear plan. We are executing it and we are working from a strong foundation. Our operations are performing well.
We are delivering on the strategy we laid out in 2017 and on track to reduce our cash balance in 2021. To further strengthen this, we announced earlier this month a series of actions to strengthen our finances. These are underpinned by 4 near term objectives: reinforce our liquidity position, drive our cash balance point lower, strengthen our balance sheet and enable the energy transition. On the cash balance point objective, through the actions we are taking, we now expect to drive the cash balance point in 2021 down further to less than $35 per barrel Brent, which is below our previous guidance and also assumes a lower refining margin and gas price. Together, these four objectives support our continued commitment to our investor proposition of sustainably growing free cash flow and distributions to shareholders over the long term.
The Board reviews the dividend every quarter, taking account of current circumstances and the outlook at the time and have been meeting weekly given the current exceptional events. Given the underlying performance of the business in the Q1 and the actions we are taking, we today announced a dividend of $0.105 per ordinary share for the Q1. Murray will update you further on the action we are taking and how we are adapting our financial framework over the near term. Considering everything going on, some have understandably questioned our commitment to our ambition and to reinventing BP. On the 12th February, we talked about our new purpose to reimagine energy for people and our planet.
We shared our new ambition to be net 0 by 2,050 or sooner and to help the world get to net 0. And we set out plans for reinventing BP to be more focused and more integrated. We talked about being leaner, faster moving, lower carbon. Those are all qualities we need in the crisis today, as well as the qualities we need when we come out the other side of it. I would like to think we will be helping society build back to be more resilient and sustainable.
And to do that, we have to be a strong company financially, one that delivers value over the long term for our investors. As a leadership team, we believe it is more important than ever that we keep to our plans. We are still working but if not, we will do it like this virtually if we need to. For now though, let me hand you over to Brian for what is his last time on the results call.
Thanks, Bernard, and good morning, everyone. Turning firstly to the environment where we have seen significant volatility. Oil markets were initially impacted in January as we started to see the coronavirus pandemic impacting commodity demand in Asia, notably in China. This situation was further compounded on the supply side following the fallout from the OPEC plus and Russia discussions in early March and has since dramatically deteriorated with the COVID-nineteen driven collapse in global demand. The impact on the global economy is severe, with the IMF now anticipating a 3% contraction in economic activity this year.
This compares with a contraction of 0.1% in 2,009 following the financial crisis. This economic backdrop coupled with pre existing supply demand factors has resulted in the exceptionally challenged commodity environment we see today. In March, Brent and BP's refining market margin touched levels not seen for well over a decade, while Henry Hub gas hit multiyear lows. The pandemic has sharply reduced product demand, notably in the mobility sector. Flight cancellations and compared with a year ago, traffic congestion has fallen by 60% on average across urban areas.
Together, these factors have contributed to sharp falls in refining margins and utilization. The resulting reduction in demand for crude oil and products has begun to put severe pressure on storage and logistics. The effect on prices has been substantial and has promoted volatility such as the extraordinary negative prices seen in the May WTI contract expiry last week. In April, OPEC and its partners agreed to significant supply cuts, which will help reduce the imbalance, but is unlikely to prevent material supply shut ins by producers in the near term, some of which may be difficult to reverse. Gas markets were challenged before the pandemic following significant growth in supply over the last couple of below operating costs in the United States.
Looking forward, there remains an exceptional level of uncertainty regarding the near term outlook for prices and product demand. There is a risk of more sustained consequences depending on the efforts of governments and the public and private sector to manage the health, economic and financial stability effects of the pandemic. Given so many unknowns, our priority is to remain resilient the the Q1. Towards quarter end, we saw the impact of demand and price declines with our financial results impacted by period end volatility in commodity prices and foreign exchange rates as well as non operating impairments and losses on sale of around $1,100,000,000 BP's 1st quarter underlying replacement cost profit was $800,000,000 compared to $2,400,000,000 a year ago and $2,600,000,000 in the Q4 of 2019. Compared to the Q4, the result reflects lower oil and gas realizations, a higher effective tax rate and a lower estimated Rosneft contribution.
It also includes growing demand destruction in the Downstream. The O B and C result was also impacted by 200,000,000 dollars of non cash underlying foreign exchange effects, including foreign exchange translation impacts of finance debt in the BP BungeBioenergia joint venture. Compared to a year ago, the result reflects lower oil and gas realizations, a lower estimated Rosneft contribution, a lower contribution from oil trading and the demand destruction in the downstream. The underlying effective tax rate in the first quarter increased significantly to 55%, reflecting charges for the reassessment of deferred tax assets. The Q1 dividend payable in the 2nd quarter remains unchanged at $0.105 per ordinary share.
Turning to cash flow and our sources and uses of cash. Excluding Gulf of Mexico oil spill related outgoings, BP's 1st quarter underlying operating cash flow was $1,200,000,000 which reflected a working capital build of $3,700,000,000 The working capital build reflects an increase in unsold product balances in the downstream and net receivable imbalances in our supply and trading businesses, the majority of which we expect to reverse during the course of this year. Organic capital expenditure was $3,500,000,000 in the Q1. Turning to inorganic cash flows, in the Q1 divestment and other proceeds totaled 7 $100,000,000 and we made post tax Gulf of Mexico payments of $300,000,000 Inorganic capital expenditure was $300,000,000 We also completed our share buyback program to offset scrip dividends buying back 120,000,000 ordinary shares in January at a cost of $800,000,000
At
the end of the first quarter, BP's gearing rose to 36%, largely due to the impact of the working capital build on net debt and foreign exchange impacts on equity. Adjusting for these factors, gearing would have been around 33%. Finally, on a personal note, this is my final set of quarterly results before I retire from BP after 34 years as a company and the best part of a decade as CFO. That last decade has seen our company navigate through some extraordinarily challenging events, not more so than the one we are dealing with today, which is unprecedented in our lifetime. That said, the strength of BP through times of adversity and experience of the team under Bernard's leadership gives me huge confidence the organization is well positioned to respond.
Years and he has been leading this work to reposition the company. It's been an absolute privilege for me to serve the company, our people and our shareholders. And with that, I would like to hand over to Murray to outline the actions we are taking to position the company for the future.
Thank you, Brian, and good morning, everyone. BP entered this challenging period with a strong portfolio, a disciplined financial framework and a strong liquidity position. That we have this is testament to Brian Stewardship as CFO over the last decade. And I would like to offer my thanks to Brian for the great support that he is providing me through this transition. This is the 6th downturn that I've seen in my career and as a leadership team, we know how to respond.
We are focused on maintaining liquidity and are taking thoughtful but decisive interventions to work our way step by step through this downturn. With this in mind, I want to talk about 2 things. First, the actions we are taking to adapt our financial frame and second, updated guidance for 2020. As Bernard has already outlined, we are focused on 4 near term objectives to deliver an even more resilient financial framework. Underpinning those are a set of decisive actions, which we laid out in our market update at the start of the month.
We are strengthening our balance sheet. At the end of the Q1, we had liquidity of around $32,000,000,000 This included a new $10,000,000,000 revolving credit facility signed in March and in early April, we raised around $7,000,000,000 of new bonds at competitive rates across the U. S. And European Debt Capital Markets. In addition, S and P and Moody's recently reaffirmed our investment grade credit ratings.
We also continue to evaluate further options available to us to strengthen our balance sheet beyond creating additional liquidity. We are reducing our capital expenditure. For 2020, we have reduced our group CapEx guidance to around $12,000,000,000 a decrease of about 25%. Looking to 2021, we will flex our spend according to the environment and have the ability to flex down an additional $1,000,000,000 to $2,000,000,000 if necessary. Stream, most of the capital interventions are being made in areas where we do not expect a significant impact on 2020 cash generation at lower prices.
This includes delaying exploration and appraisal activities, curtailing development activities in lower margin areas, as well as rephasing or minimizing spend on projects in the early phases of development. Overall, expect these capital interventions to reduce 2020 underlying production by around 70,000 barrels of oil equivalent per day on an annual basis. Looking ahead, as we complete the current phase of major project delivery, our capital plans become increasingly flexible as we expect to transition towards shorter cycle investments such as in our BPX business as well as opportunities around infrastructure led investment in our existing production hubs. In downstream, the CapEx reduction contribution is around $1,000,000,000 in 2020. Interventions are primarily related to growth and are also not expected to have a significant impact on our operating cash in the short term.
Examples include project deferrals in manufacturing and a slowdown in the pace of retail site growth. Meanwhile, our investment in low carbon activities remain unchanged and in 2020, we expect to invest around $500,000,000 We are also implementing measures to structurally lower our cash costs. We expect to achieve cash cost savings of around $2,500,000,000 by the end of 2021 on a base of 2019. Part of this will come from cost saving measures across our business as well as an important contribution from the actions we are taking to reinvent BP. The reorganization Bernard launched on February 12 will remove duplication inherent in our current segment models.
This includes the creation a single global supply chain organization that will provide cost efficiencies through improved purchasing leverage. We have invested massively over the past 5 years in digital and we are moving to the next level of efficiency on this agenda through automation and centralization. And last, we have been piloting Agile for years now and will push to the next level, which allows for improved cycle times and delayering. As you can hear, we're passionate about this and we expect further significant savings from Reinventing BP and we plan to update you further at the Capital Markets Day later in the year. And finally, we continue to remain confident in delivering our planned divestments.
As announced, we have reconfirmed our commitment to completing the sale of our Alaska business to Hillcorp in 2020 subject to regulatory approvals. The total consideration of up to 5 point $6,000,000,000 is unchanged, but the structure of the consideration and phasing of payments have been revised to respond to the current environment. The overall program to $15,000,000,000 of announced transactions by mid-twenty 21 remains on track, although the current market environment remains challenging. We have delivered 10,100,000,000 dollars of announced transactions since the start of 2019. The remaining $5,000,000,000 of divestments yet to be announced are underpinned by a a a substantial response aimed at supporting our near term objective of delivering a more resilient financial frame.
We will continue to review these and any further steps that may be appropriate in response to changes in prevailing market conditions. Turning the challenging macro environment and we expect to see the effect of this in our businesses for the foreseeable future. Starting in the second quarter, in the upstream, we expect 2nd quarter reported production to be lower compared to the Q1. There are significant uncertainties with regard to the implementation of OPEC plus restrictions, price impacts on entitlement volumes, divestments and market restrictions given the lower demand for oil and COVID-nineteen operational impacts. In Downstream, we expect material impacts from COVID-nineteen in the Q2.
In our Fuels Marketing business, we expect product demand to be significantly lower in our key European and North American businesses due to the actions taken by countries to limit the spread of COVID-nineteen. In recent weeks, we have seen our retail fuel volumes in these markets fall by around 50% and demand for aviation fuel fall by around 80%. Despite these fuel volume declines, our store sales have remained more resilient, demonstrating the strength of our convenience retail offer. In lubricants, demand has begun to recover in China in recent weeks, but has continued to fall in Europe, the U. S.
And India, where volumes are currently down 50% to 90% compared to the same period last year. In refining, we have an advantaged portfolio of manufacturing assets strengthened through our multiyear business improvement programs. However, we expect reduced utilization due to the overall product demand declines as a result of COVID-nineteen, as well as significantly lower refining margins. In addition, we expect a lower level of North American heavy crude discounts. The annual payment relating to
the Gulf of Mexico spill
settlement is due in the Q2. Our full year guidance in this area is unchanged. Finally, the working capital position in the Q2 continues to be uncertain due to demand destruction and price volatility. Overall, we expect Q2 to represent a period of reset for our business as we continue to navigate the challenging environment. Moving now to the full year outlook.
In upstream, we previously indicated that we expect underlying production excluding Rosneft to be lower than 2019. Given the impact This remains a rapidly evolving situation and we will continue to provide updates as we move through this year. We expect organic capital expenditure to be around $12,000,000,000 We expect further divestment proceeds throughout the year and we'll update as we progress our program. Our underlying effective tax rate is sensitive to the volatility in the current environment. Updates will be provided throughout the year.
We currently We continue to expect it to trend down over time reflecting receipt of divestment proceeds, reversal of 1st quarter working capital impacts and as the interventions that I have outlined lower our cash balance point. In the meantime, we are focused on a broader suite of credit metrics as we look to protect our balance sheet and our cash flows. Returning to our financial frame. In summary, while the external environment will have an impact on some elements of our prior guidance, specifically our 2021 segment free cash flow and ROCE as well as gearing, we remain focused on creating a more resilient financial frame. Through the actions we are taking to deliver on our near term objectives, we expect to drive our 2021 cash balance point lower than previously guided.
We now expect to rebalance our sources and uses of cash at a Brent price of below $35 per barrel, a Henry Hub price of $2.50 per 1,000,000 British thermal units and a refining marker margin of $11 per barrel in 2021. The price assumptions for Henry Hub and RMM are around 25% below our prior guidance. And as Bernard described, this underpins our continued commitment to sustainably grow free and distributions to shareholders over the long term. We expect to update you on this framework as we move through the year, including at our Capital Markets Day in
in a moment. However, before I do that, I'd like to cover 2 important issues. Our AGM is approaching next month and our strong recommendation is you vote now and appoint the Chairman at a meeting as your proxy to ensure your votes count. In terms of the event itself, we're keeping options open, but it is no surprise that this year is going to be very different to the usual gathering of shareholders. We will find a way to conduct the business set out in the notice of AGM, while complying with lockdown measures that may well still be in place.
We will update you and all our shareholders as soon as we can about how we do that. But for now, we are being as flexible as possible so that we can accommodate further changes should the government enact emergency measures dictating how the meeting takes place. The second of those important issues is to mark an historic moment. This is Bryan's 33rd and final set of quarterly results after 9 years as CFO and 34 years at BP. The strength and resilience of BP today owes a huge debt to his energy, his credibility and his complete command of the finances.
He has been instrumental in our relationships with the investor community and I know we are all going to miss his passion, his commitment, his judgment and his candor. We will give him a proper send off when he leaves in July. But for now, Brian, thank you for everything you have done for BP and for everything I have learned from you over many years. So let me then quickly sum up what you have heard today. 1st, BP is operating well, thanks to good work done in recent years, as well as the outstanding courage and commitment of our team today.
Continuing to operate well and staying safe is our absolute focus every minute of every day. 2nd, we are responding fast to adapt BP to the most brutal market conditions we have seen in a long time. We can do that and we will do that. We know what is required. We are adapting our financial framework through a focus on 4 near term objectives to drive our cash balance point lower and support our ongoing commitment to sustainably growing free cash and distributions to our shareholders over the long term.
And third, we are stepping up to help where our help is needed. We believe that is the right thing to do and helps fulfill our purpose to reimagine energy for people and our planet. And I will remain in awe of how so many of our colleagues are responding to the for people part of our purpose. We are performing with purpose and I am confident we will come through this period stronger and able to deliver on our purpose and the net zero ambition we set out in February. Thank you for listening and let's now turn to your questions.
Okay. Thank you again everybody for listening. We're going to turn to question and answers now. As I said at the start, we're working remotely today. So do please bear with us if there's a bit more of a delay on some of the lines, but I expect everything will be fine.
And can I, as usual, remind everybody, So on that note, we'll take the first question
And Brian, all the best for your forthcoming retirement? So here are my two questions. Firstly, in the Upstream, you had a €1,100,000,000 impairment charge. You said this is partly from the oil price impact on your North Sea assets. As we look to the 2nd quarter with oil '18, how should we think about the risk of impairing assets in other areas of your operations, please?
And if you can remind us of what oil price is reflected in your book values? My second question on net debt, which is up €6,000,000,000 since year end. Your actions will lower the cash breakeven to less than €35 Again, Brent is $18 Can you talk perhaps about the ceiling for net debt, either in absolute terms or as a gearing ratio, the maximum that you think BP's balance sheet can tolerate before having to look at dividends as a source of saving cash? Thank you.
Irene, thank you. It's Bernard, and I'm actually actually going to ask Murray to take on both of those questions. First one on the upstream as he is currently still CFO of the upstream and then the net debt question as well. So Murray, over to you please.
Great. Thanks, Bernard. Can you hear me okay?
Yes, very clearly.
Sure. Thanks. Irene, nice to hear your voice. In the upstream, as you said, we have that degree of impairments. It came from a variety of assets around the world, including a $400 impairment on the Alaska transaction as well.
The testing price inside the quarter, we used $30 this year in 20.20 and then a gradual return to our long term pricing in the out years. It's not particularly sensitive. The rule of thumb aren't particularly sensitive to impairments on price near term. So, I wouldn't anticipate dramatic impairments moving forward as price moves around. It's more about anchoring that long term price.
So that's obviously too early to say anything about that right now. On net debt, as you can imagine, we're in action on net debt. We feel that we're in good shape with our interventions on cost, the $2,500,000,000 that we see coming out by the end of 2021. On the intervention on CapEx of driving it down to $12,000,000,000 with further flexibility, I have another $1,000,000,000 or $2,000,000,000 as I previously mentioned. We think that then takes our breakeven point down to a very competitive level at the $35 that you heard 11 RMM and the Henry Hub level.
Additionally, we have significant divestments underway, which we think will help reduce net debt over time. The phasing of those, of course, is subject to market conditions. But we do expect net debt to increase a bit in 2Q. We'll see how that goes based on the environment. And the Board will then consider in due course what we do with that in is they take decisions in 2Q.
I think that's all I'd say for now, Irene. Thank you.
Murray, do you just want to add what the breakeven plan for year is in absence of the dividend, just to give us some sort of people talk about it in that language, I think?
Yes. Sure, Bernard. That's a good idea. We've introduced the term balance point as opposed to breakeven. Just to make it a bit more clear about how sensitive we are to things other than Brent.
Brent makes up about 50% of our sensitivity, RMM and natural gas make up an equal amount as well. So we think balance point is a much more important point to anchor yourselves on. That balance point that we talked about, the 35,000,000,000 dividend, the full $8,400,000,000 that's on an annualized basis. In the event you were to remove that and quote this on a pre dividend level, which some of the competition are doing, our breakeven on Brent with those other assumptions constant would be around $7 So we feel pretty resilient. We feel pretty resilient from an operating perspective.
We feel we'll get our divestments away. And so we think we're in pretty shape right now. Thanks Bernard.
Thanks Murray and thanks Irene for your question. Hope you're well.
Thank you.
Okay. We'll take the next question from Jason Kenney at Santander. Good morning, Jason.
Well, thanks very much. And Bernard, treat baptism of fire as Chief Executive and probably the most interesting 1st 10 weeks of any Chief Executive in any day
and
what has been your most rewarding day? And what has been your most rewarding day in those 1st 10 weeks so far? And then, Brian, thanks so much for your time and support over the years. I've really enjoyed our conversations on the road. What do you think has been your most challenging time whilst at BP and also your most proudest achievement?
Jason, thank you and good to hear your voice and I'll do what Brian would do for us and let him have a little bit of time to think about his answer and I'll take yours. Yes, it's been an interesting time in the British sense of the word. I'm glad I didn't spend a huge amount of time on a 100 day plan. Surprising and rewarding, I think the most rewarding thing really genuinely has been just watching our people in action on so many levels. We like other companies, we do extraordinary things around the world.
We've got we had 12,000 people in the jungle in Papua building an LNG facility. We have people who go offshore to keep gas and oil running. We have 6,000 retail staff here in the UK who are providing essential services, fuel and delivery services for people and old people. And just watching them do their jobs, they've had to undergo massive sacrifices. We've had to take that 13,000 people down to 6,000 people.
We have people sometimes spending 2 weeks in a hotel before going offshore are going to site so that we can confirm that they are virus free. They're undergoing enormous sacrifice and at the same time that they're doing that, really stepping up to help the community and people want to help inside BP right now. We know it's expected of us, but that's not why we're doing it. We're doing it because we want to and the provision of free fuel to the emergency services in the UK and the Nightingale hospitals and people printing 3 d masks at home and so on. So the most rewarding thing of this is to watch our people in action.
And the most surprising thing, Jason, has probably been the connectivity that I feel with the organization. We have relied on travel so much in the past to see people and I have spent more time with people in the last few weeks than I probably would ever have had in a year inside the company. I'm virtually connecting in what they call coffee chats with China, with a team in Air BP in Paris. I was connected to a bunch of people in Toledo and I even joined a happy hour in Australia, though I think I joined that one a little bit later than I was supposed to. We're doing a webcast every week with over 10,000 people.
I do it from home here. It's real. There's no pizzazz. And I just think the connectivity with the organization would have been something I would never have imagined, but much more interesting to hear from Brian.
Thanks, Bernard. And yes, most challenging time was I mean, there's been so many and the nature of the business that we operate in means that we tend to operate in some of the more difficult parts of the world. It would probably be the 60 days between May 1 June 30, 2015 when we were trying to resolve all of the Deepwater Horizon issues and trying to get a handle on the liability going forward. So that was probably the most difficult 60 days I spent with 2 of my colleagues, Tway Coburn and Eric Nichcha, supported by Keith Westhead, but that was almost certainly the most challenging time for us. Proud, I think actually what's happening right now and the way this company is responding and I've been inundated with messages from friends, family responding to all the things that BP has been doing.
Like I have a sister and sister-in-law, both nurses, I've got cousins in the police force. The things that we did around emergency services right out of the traps in terms of what Bernard laid out in terms of making petrol free for 2s and blues has made me feel immensely proud by the amount of feedback that we've got by that. But I think it reflects on the company. The one that I thought I joined 34 years ago, it's responding exactly the way I would have expected it to respond. And I think coupled with that is also the succession of the team.
I think Murray coming through as the next CFO, I think nobody could have been better prepared for the situation that we're dealing with and the team that I'll leave behind that works alongside Murray in responding to this crisis. And I think it's the difference between this and Deepwater Horizon is this impacts 7,600,000,000 people on the planet. It's impacting all companies. And I think just the way we're responding today is probably actually a good way to step down and move on to other things. Thanks for the direct question, Jason.
All the thanks, Brian. And Jason, thanks to your very thoughtful question.
Okay. Thank you, Jason. We'll take the next question from Oz Clint, Bernstein. Oz, good morning.
Hi. Good morning, everyone. Thank you for your time. And just let me echo my thanks to Brian who will be sorely missed. So for sorry Bernard, I mean you've touched on this a little bit, but I wanted to just get you to talk personally around being on the frontline during Deepwater Horizon and that single shock to BP where obviously dividends and CapEx had to be reduced and assets sold.
So I wanted to get you to characterize how today's twin shocks, this double shock kind of feels to you compared to back then and really how well positioned BPR to get through this. It sounds like you think you are at least, but you've also or maybe Brian was using the word exceptional quite a few times in terms of those opening comments. So if you could just talk around that, it would be interesting, please. And then secondly, just on the major projects, 700,000 barrels a day online running is supposed to have higher cash margins, lower breakevens, no better way to test the profitability of that pipeline. But could you talk about how much of that is above water in this current commodity price environment?
And you made some comments around inevitable material supply shut ins. Do you expect BP to have to make any of those in 2020, please? Thank you.
Well, it's good to hear your voice. And Murray, could I ask you please to take the major projects question first?
Yes, sure. Hey, Oz, nice to hear your voice. Yes, 700 MBD of projects online now, 900 is the eventual target. As you'll have seen just from an operational update perspective, Tangu, we have had the down man in the jungle down from 13,000 to around 6,000 people. So the pace of that might be a little bit slower than we were anticipating at the beginning.
And I expect maybe 1 or 2 other projects may struggle with COVID as we move forward. But so far, we're sticking with guidance. On the margins associated with these, you'll remember that an awful lot of them were gas and an awful lot of them were fixed price gas. So we're really pleased with those right now as you can imagine and what gives us the resilience on the balance sheet is all these fixed price gas contracts. If you look at Mad Dog Phase 2 as an example, on the other side of things, obviously, that depends on what the oil price is as it produces out starting in 2021 and beyond.
So I think, by and large, the gas ones are doing pretty well. The oil ones will be highly sensitive to what the price is when we start producing from them. And so I think in hindsight, probably that choice around the gas and that choice around fixed price was pretty important for us. Bernard, back to you.
Thanks, Murray. Also your question on how we think about it today, I mean, as Brian said, the Deepwater Horizon accident was a real tragedy and we just passed the 10 year anniversary and we've been communicating inside the organization that we must never forget what happened and 11 people lost their lives and the environment was impacted and people's livelihoods were impacted. It was one company. It was one sector. And of course, what we face today is the word is unprecedented.
And of course, it is true because what we face today is affecting every company in our sector. It's affecting every company in the world, every sector. I think there's 187 countries in the world or 4,000,000,000 people in lockdown. And I think what's interesting about it is that, it's I think economists are finding it very hard to predict and model because we haven't really seen something like it before. So it's very hard to model the future response.
So we have been guided by a very simple frame and I laid it out, protect the health of our people, number 1. Number 2, support our communities and number 3, strengthen our finances. And within the finances element, we're focused on the quick $32,000,000,000 at the end of the Q1. We're focused on the balance sheet committed to delivering those $15,000,000,000 with Alaska confirmed on Monday. And as Murray said, driving that balance point down and I would remind people that our balance point was about $56 in 2019 getting down to $35 next year.
So the way I think about it, Oz, is that it is brutal and that's the term that I have used. Equally, I am confident that we will get through this. But I have to say, as I would share with you what I would share, what I have shared with our own organization when I speak with them weekly is that it's not a free pass. There is not an automatic right here. And therefore, we are 100% focused on the actions that Murray took us through.
And for now, that is about driving that capital base down to below $12,000,000,000 with extra flexibility next year if we needed, taking $2,500,000,000 out of cost by the end of next year through digitization, through agility, the things that we have sentiment, Murray and I remain deep believers in the potential of that agenda applied across the group and we will be applying it and I hope we can go further. So it is brutal. The future is unknowable because we've never seen anything like it before. I am confident in the strength of the company and our ability to get through it. The plan is clear.
And if anything, the Deepwater Horizon taught us, it's 2 things I think. 1 is, it gives us some confidence to have some real resolve here. And secondly, it has taught us to have a degree of humility. And therefore, we're very focused on acting and controlling the things that we can control. We don't control the oil price.
We don't control the gas price. We do control our cost base. We do control our investment. And that's where we're very much focused. So confident for sure that we have the levers available to us.
It's not a free pass. It's not an automatic right and therefore we must deliver on what we've set out and I hope from knowing Murray and myself you have confidence that we will. So hopefully that helps. Thanks, Oz.
Okay. Thank you, Oz. We'll take the next question from Lydia Rainforth at Barclays. Lydia?
Thanks, Craig. Good morning, everyone. And certainly just to say thank you very much for all the work that BP has been doing in terms of supporting the community as well. Two questions if I could. The first one probably for Bernard, how do you think about whether the risk reward profile has changed between fossil fuel investment going forward and renewables?
Effectively, does what we see in September now change as a result of what we've seen in terms of the prices now? And then secondly, for you on for Brian here, Where do you think BP is in terms of efficiency relative to where you were when you started as CFO? And what's still the biggest area of improvement that you think there is to see? Thanks.
Thanks, Lydia. Good to hear your voice too and thanks for the feedback. I'll let Brian handle the opportunity set that he's leaving for Murray in a moment. In terms of risk reward on fossil fuels versus renewables and the whole subject of the energy transition, I think I've been on record as saying that what is happening now has only reinforced mine. It's not just me, it's the leadership team's belief in the energy transition and what we laid out on the 12th February.
I think there is the background of the pandemic has reminded us of the sort of frailty of the ecosystem and how lives can change overnight almost and people are looking up at clear skies and so on. And so I think there is that backdrop, which I think means that climate will remain in the agenda going forward. But specifically to your point on risk reward, I think I would add 2 things. Number 1, I think the pandemic, I think only adds to the challenge for oil in the future. I think we're all living and working very differently.
It's working. Who would imagine this call this morning being done this way? No travel. I'm connecting with people. The company is running.
And I think there's a real possibility that some of that will stick, not all of it, but I think there's a real possibility that some will stick. And therefore, the question has to be will consumers consume less. And I think there's a real possibility that that may happen. So I think number 1, the pandemic, I believe, only adds to the challenge for oil. And secondly, we talk a lot about the negative prices for WTI just a few weeks ago.
At the same time as that was happening, LightSource BP is doing 400 megawatts of solar contracts in the United States right at that time. That sector continues to attract investment. It attracts investments because of its risk profile and its resilience. And I think that those two things with the backdrop around climate, I think reinforce to me why we must do what we said on the 12th February, which is to reimagine energy and to reinvent the company. And when we come to update you and others in September, I think we are working through what that means and what that looks like.
And the shape of that will be similar. The conviction will be every bit as strong, if not stronger. So with that, I'll leave it to Brian to tackle the efficiency question.
Thanks, Lydia. And I think on efficiencies, I think I'll 2011, 2012 that we started to introduce digitization automation and more recently robotics in terms of what we do in the background of accounting and finance. And I think what Bernard has laid out with the new team around digitization and agile working, I think will be the next big kick on, I think, for Murray with the team and the next big level of efficiencies we'll be able to drive. In terms of balance sheet, actually, I'd look back and think back on the date 17th June 2010 when we had $2,500,000,000 of liquidity and we were dealing with a problem at that point that was unique to ourselves of Deepwater Horizon. And I look today where Murray is coming to this quarter with $32,000,000,000 of liquidity.
I think all the things we learned back during Deepwater Horizon, we kept liquid and in use within our system that enable us to in some respects as we came into January, we thought we were responding to a demand side problem. That very quickly became a supply side problem and has now reverted back to demand side problem. I think all the things that we learned back in 2010 have been deployed as we deal with this situation, which is more of a macro situation. But I think there's still a huge amount more inside finance that can be done and you'll see those efficiencies coming through, I'm sure, as Murray lays out the plans for the next 12 months, 18 months? Thanks, Lydia.
Thanks, Brian. And Murray, maybe you'd like to comment. You have a particular passion for modernization in general and within the finance function and maybe you just want to add a little bit of color around what Brian was saying on what you feel is possible down the road here?
Yes, I think it's pretty material and it's much bigger than I've hoped for over time. Over the past while, we've done everything we can to digitize our wells in the ground. We've done everything we can to digitize the design of the wells and the projects. We're now starting to embark upon it inside operations, inside the upstream, a single procurement system in place that we can now monitor over top of it and watch how people are procuring and see where inefficient loops exist. And the next big digitization effort will be in the end to end purchasing process from an engineer raising an invoice to acceptance of work to delivery of the goods to implementation of the work to billing.
And we're amazingly inefficient as a sector inside that space. We're no exception here at BP. And if we can get our data in the right shape, which David Eitan will lead us on very capably with a series of different partners like Palantir. I think we've got magnificent strides can make in reducing the waste inside those systems. We can move to just in time delivery like most sectors live on.
We can use things like the airlines use on planning. Instead of doing planning on spreadsheets, we could do planning with AI. So I see the price as enormous. It's not just in the back office places like supply chain and finance, but it's also across the broader business. So, Lydia, as you can tell, my passion for this remains and I think the big prize is still ahead of us.
Brilliant. Thank you all.
Thanks, Lydia.
Thank you, Lydia. Yes. And we'll take the next question from Biraj Borkhataria at RBC. Biraj.
Hi, everyone. Thanks for taking my questions. I have 2, please. The first one is on your breakeven guidance of the $35 a barrel. Could you just help me square the circle versus, for example, Q1 'twenty?
If I start with roughly $5,000,000,000 of underlying cash flow this quarter, can you just bridge the gap and how we get to the 2021 numbers? And then second one, hopefully relatively straightforward, but on Macondo, the latest guidance is less than €1,000,000,000 but obviously you paid €300,000,000 in Q1 and you're going to pay another $200,000 in Q2. So can you just reconcile what happens in the back half of the year? Thank you.
Biraj, thank you. And maybe Brian, if you're able to take the Macondo 1 first and Murray, if you're able to take the balance point. Brian?
Yes, yes, sure. And the difference is simply tax. It's the run rate now we're into $1,000,000,000 or less after tax. And so therefore, when you add back the tax credits, that will get you back below $1,000,000,000 for the year?
Sounds like it was a relatively easy question. So thanks, Brian. And the balance point, Murray, or the breakeven, but you want to use the language of balance point, bridge from the Q1 to 35 is Biraj?
Yes. Biraj, thanks for the question. Always tricky to do this stuff in an individual quarter. It's much easier to do it for a full year. So I'd encourage you to look at it that way.
Probably the way I'd encourage you to think about it is previous guidance that we've given. So previously we said 40 Brent, 14 RMM, 3.25 Henry Hub was the breakeven point paying the dividend. We've now lowered that down to 30 less than 35 Brent 11 RMM and 250 Henry Hub. You can go on the website and find our rules of thumb and you'll find that that's about $6,000,000,000 of loss revenue, so to speak, or $6,000,000,000 that we achieve. And then of course, you've got our cost and CapEx moves that we've talked about reduction in cost of $12,000,000,000 this year and another $1,000,000,000 to $2,000,000,000 next year potential if we decide we need to do that and the $2,500,000,000 of cost.
So that's probably the easiest way to reconcile it and you get within about $1,000,000,000 post tax, which is obviously lost revenue from the decreases of investment we see across the couple of years. Trying to do it from a single quarter pretty difficult, would have a lot of moving parts along the way. And happy Biraj, if that didn't help to have our team follow-up with you afterwards.
We'll take the next question from Christian Malek at JPMorgan. Christian, good morning.
Hi. Good morning and thanks gentlemen. And before I get in, the message to Brian to say thank you for being such a great steward of the financial community and appreciate all your help and advice. I'm sure you've got plenty of exciting things in store, including several more in line triathlons, but also some greatly reserved rest of hope. My questions refer to the future production outlook and the capital frame.
And they're sort of interlinked. I mean, to get to $35 breakeven, I appreciate the math around that and the previous questions, but the CapEx would have to stay in the $12,000,000,000 to $13,000,000,000 range next year. Now given the energy transition focus and what appears is no change in new energy spend, am I right to assume that it's expedite your guide of the lower lines nor related revenues framed in the vision outlined a few months ago? 2nd question is on dividend sustainability. What were the main factors behind the Board decision to keep the Q1 dividend unchanged?
And looking forward, if management is considering a move back to scrip financing, just to understand the logic behind that given this creates a larger share count and dividend burden, which is somewhat contradictory in the face of the portfolio that's becoming less oily? Thank you.
Christian, thank you. I'll have a go at both of those and Murray or Brian can help if I've missed anything. Maybe taking your second question first around the basis of the Q1 decision that was taken by the Board and very, very simple as you might imagine. The Board has been meeting weekly since the pandemic has begun and reviewed the Q1 dividend as it usually does, as it always does and it reviewed it in full and made the decision or took the decision to pay the dividend based on the underlying performance of the business in the Q1 and the actions being taken by the team that we have described. And then the 2nd quarter decision and the subsequent decisions will be taken based on the context at that time.
On the your conversation around the breakeven and what that means for capital and what that means for the energy transition, I would just remind us all that we have it isn't just one dimension, a CapEx only way of getting to $35 breakeven. I think Murray has laid out an ambition to get to $2,500,000,000 of cost savings by the end of next year. I think we will try to do more. That may create more room for investment. We shall see.
But the number one thing is to get the business healthy in an environment that we think looks more like what we should be planning for than anything else. So we are very, very focused on getting that breakeven to that point. And what that means for the energy transition and so on, I think we best leave until September when we will update the marketplace on the strategy and our plan remains to do that in September. So rather than front run that and I'll leave it go until we chat later in the
year. Okay.
Thank you, Christian. We'll take Thanks, Christy. We'll take the next question from Jon Rigby at UBS. Jon?
Thanks, Craig. Hi, guys. Thanks for taking my question. 2, as always. The first is, I'm giving this Brian's last quarter, I thought we'd ask a question on trading.
Is I was intrigued by the absence of a of a contribution in oil trading. I think actually you note this weaker year on year. But if I look at the conditions in the quarter, highly volatile, contango emerging towards the end of the quarter, it would seem to me pretty decent conditions for IST. Just question, is that a misread? Is it from my perspective, is that reflection of risk management from your side?
Or was it just missed opportunities in the quarter? The second question goes to the Alaskan deal or redeal that you announced yesterday. I can see that you've taken another impairment. So I think we're up to about $1,700,000,000 of impairments against the Alaskan assets in preparation for its sale. So my question is, at what point do you think you start losing value by selling, by just pursuing the sale rather than preserving value by keeping the asset and just accepting that the balance sheet to be somewhat high gear for a period of time?
Thanks.
John, thank you. Good to hear your voice as well and 2 fair questions. I think we'll take them in turn, if that's okay. Brian, for trading first and then Murray for the Alaska deal.
Yes. Thanks, John. And I would have expected anything less from you than question on trading. It was a good quarter for trading in terms of the Q1 overall. So across oil and gas, it was a good quarter.
It was a strong quarter for gas and it was a below average quarter for oil. In oil, we took some conscious decisions actually off the back of COVID-nineteen in January. We were concerned about a demand side reaction off the back of coronavirus and that was ahead of the OPEC meeting. And therefore, we took some downside protection once OPEC and Russia kicked in with their supply once OPEC and Russia kicked in with their supply push, which exacerbated and obviously then led to a much stronger demand side. As you said at the end of the quarter though, I think conditions have become more constructive with contango as you said.
So all I would say is it was a strong quarter for trading over oil, oil and gas. Gas was a strong quarter. Oil was below average. And I agree with your point in terms of constructive nature at the end of the quarter with contango now kicking in. But the market still remain volatile.
And I think downside protection is an important thing to have in these markets going forward.
I think it's John who's done the analysis of your various adjectives to describe trading results in the quarter. So it sounds like he's got it right. Murray Alofta?
Yes, yes. And hey, John, maybe you can send me the adjectives you learned from Brian. On Alaska, look, we continue to feel pretty good with the transaction, the original transaction. You'll have seen what everybody thought about that. I thought it was a fairly reasonable price.
The impairment you've seen come through the $400,000,000 a lot of it has to do with the adjustment upfront. Oil prices have dropped this year, so the adjustment in the interim period has to come through. So that's what a lot of it has to do with. And the remainder of the impairment is a fairly mild haircut on NPV. So I continue to feel very good about the transaction.
I think it's good for both Hillcorp and ourselves. They'll do a tremendous job operating that facility on behalf of the State of Alaska. So we're just happy to continue with it. And I think both sides will be happy the end.
Very good. Completely agree, Murray. I think, John, this remains a great deal for our company. It definitely is a good deal for Hillcor and I think it's a great thing for Alaska and the U. S.
So right operator at the right point, strategically coherent and we feel good about where we've gotten to. So it is now about completing the execution
Okay, Okay, we'll take the next question from Thomas Adolff at Credit Suisse. Thomas?
Good afternoon. Two questions for me as well. In terms of disposals, you've mentioned that you've identified more than twice the remaining SEK 5,000,000,000 to hit the SEK 15,000,000,000 target by the middle of 2021. That's a good ratio. But are you worried that whatever deal you're currently negotiating and maybe renegotiating, you will see less cash upfront, whether it's up SEK 1,000,000,000 to SEK 2,000,000,000 in CapEx flexibility, this $1,000,000,000 to $2,000,000,000 in CapEx flexibility you have in 2021, is that enough to sustain your upstream business?
You happy to let it decline for a little while? Thank you. Marie, I'll leave you with both of those questions, please. First on disposals and then on the additional flexibility.
Yes. Hey, Thomas. Thanks for the questions. Nice to hear your voice. On divestments, as you said, another 5 to go for those of you who weren't keeping track.
We announced 15 a few years ago and we've delivered on 10 of those so far, so another 5 to go. The 5 that we're going after now are more in the non upstream, downstream type spaces. So it's more about infrastructure plays. It's about real estate. It's about buildings.
It's about things where yield is hunted. And it's probably a very different set of purchasers than we normally see inside our business. Haven't seen any hints about phasing of payments, etcetera, on that stuff, Thomas. It's more just about what yields acceptable for both counterparties. So, feel pretty confident that we'll be able to get those transactions announced and then timing will just depend on COVID.
It's pretty hard to do due diligence right now remotely on the telephone. So it will take us some time to be able to get back to normal due diligence and then move forward with those transactions. So I feel okay. If we were selling upstream, I'd be giving you a different answer, but that's not what we're doing right now. So I hope that helps answer your divestment question.
On the CapEx flexibility, yes, we've announced 12 of CapEx, a reduction of 12 of CapEx in 2020. And we have further flexibility that we've identified of 1 to 2 next year. We haven't made decisions on that yet. That's to come as we watch the situation unfold. Of course, an awful lot of that has to do with things like infill drilling, etcetera, and retail expansion that you might expect around the world.
So those are decisions we don't need to make today. We can make them later. As far as what shape that does to the upstream, I think Bernard laid out in his ambition that we're happy for the upstream to decline. And I'm very happy for upstream volumes to decline. I'm not really focused on volume.
I'm focused on cash flow and returns. So the volume decline will just be an outcome of decisions we make. And you should know that we'll be very, very focused on our scarce capital dollars, focusing that towards the highest return opportunities that we have, both in the upstream and the downstream, and just very, very focused on that margin and returns. And that's what we want to do to drive our breakeven lower. It will help with that.
And volume outcome will be volume outcome. So thanks, Thomas. Appreciate the questions.
Thank you. Very clear Murray. And Murray is right to reinforce what we said in February that over time we would expect capital to increase into the non hydrocarbon businesses and as a result capital to decrease in the hydrocarbon businesses, which would over time result in volume, which we're not so anxious about. We're concentrating on value and cash flows declining over time. So we are also as we go through this doing what we can to Christian's point to enable the energy transition.
We've left our $500,000,000 of low carbon investment unchanged, untouched this year, where we cut elsewhere, we did not cut that back. So we will over time be working hard to create space to do more in that space. So Thomas, good to hear your voice and thanks for your question. Thank you.
Thank you, Thomas. We'll take the next question from Michele Della Vigna at Goldman Sachs. Michele, good morning.
Good morning and thank you so much for your time in these difficult days. And Brian, thank you for all of your help and insights over the years. I have two questions, if I may. First of all, value versus volume is clearly the right strategy. I was wondering if you could shed a bit more light on the breakdown of the 70,000 barrels per day impact this year and what that impact could be in second question is on operating working capital, a big build in Q1, clear reasons for it.
I was wondering as we look forward to the rest of the year, should we expect perhaps a stabilization in Q2 and then a reversal as demand recovers in H2 or perhaps in 2021?
Michele, great to hear from you. Thanks for joining. I'll let Murray take the outlook for working capital and he can correct me on the volume, the 70,000 barrels a day that we've guided to is predominantly in the Lower forty eight where we've basically gone from about 13 rigs to 1 or 2 rigs. So the majority of it is there. We'll also see some in Iraq, but that's the majority of the where the volume is.
And Murray, you can correct me and take the working capital question.
Yes. I think production volume is probably too early to call what the 2020 impact is going to be. The reason I say that is generally when our businesses have been able to play with, they get out
guys
So, we'll update you on that situation. And on working capital
Murray, I'm sorry to interrupt you on the call. I think we're struggling to hear you a little bit. Is that better, Craig? That's better, sorry. You may want to cover the production point again.
Apologies.
Yes, I'm sorry. Okay. On the production point
Go ahead, Murray.
Yes, okay. On the production point, Bernard's right, 70 this year. It will extend into next year. The principal thing the reason that we can't give a number yet for 2021 is generally our operators when we don't have rigs in a basin do a great job at operating the business better and some of that gets mitigated. So we'll update you on what the impact in 2021 is in September we've worked our way through that decision making process.
On the working capital build, dollars 3,700,000,000 in the Q1, Brian gave clear explanation of what it is. The inventory sitting in tanks, we'd expect to sell through the year. So that should just gradually be worked through the system. And then the IST receivables will just depend on what price structure is. On a flat price structure, you're probably getting the majority of it over the coming three quarters.
On an increasing price, you'll get it very quickly. On a decreasing price, it'll drag a little bit. But I should say working capital is quite volatile right now. There are a lot of moving parts out there. And so it's going to be tricky to forecast what that is right now.
Brian, I don't know if you'd add anything more to that one.
Yes. I mean, just to say in terms of €3,700,000,000 about just over €500,000,000 was inventory that we didn't move at the end of the quarter, which was all off the back of the demand side drop. Just over €2,000,000,000 was the IST movements. And it's just simply a difference between the over the counter positions that we have, which don't settle on cash and futures positions. They will naturally unwind.
And exactly as Murray said, if the price moves up, they'll unwind a lot quicker and we'll see that cash flow back in. But the majority of that cash will flow through this year. Thank
you.
We'll take the next question from Henry Tarr at Berenberg.
2, if I may. 1, you talked in the release about the material supply shut ins by oil producers in the near term. Do you think BP may be involved in some production shut ins somewhere in the portfolio? And then maybe on a broader point, where do you see the risk of production shut ins globally that may not come back as things normalize? And then secondly, it would be helpful perhaps if you could comment on whether you're having discussions with ratings agencies currently.
So is there a timetable for the next review and maybe just again on the importance of retaining that investment grade rating? Thanks.
Henry, thank you. Great questions. I'll let Murray take the ratings agency question. And on supply shut ins, in terms of the OPEC plus agreement, which comes into effect on in a few days in countries in the Middle East, in Angola, in Azerbaijan, in Russia, we are in conversations and in dialogue and obviously working on the instructions of the governments in those countries. So very much in action on that.
In terms of having to shut in our own production because we can't get product to market, I think we're very grateful and very fortunate to have great trading business that we do have. So thus far in our operated businesses, we have not had to shut in any production because we couldn't find a market or we couldn't find storage. And right now, we feel pretty good about that. And then probably the 3rd tranche of shut ins is around things like the capital reductions in capital that we spoke about and production in the Lower forty eight and so on and so forth. So I think it will time will tell on how long the broader picture will recover.
We're seeing at least 1,000,000 barrels a day come out of the tight oil in the U. S. This year, it might be higher than that. Obviously, people are looking at oil sands in other parts of the world. So I think too early to say what the ultimate response will be, but I think many will struggle to find a home and we will see shut ins increase through the Q2.
Murray, ratings agencies?
Yes, great. Thanks, Bernard. And Henry, thanks for the question. We had a series of conversations with Moody's and S and P at the back end of March. I think they've moved their way through our sector and you saw their reports come out.
From our perspective, we were pleased with the ratings, A minus stable and with S and P and A1 negative with Moody's. We feel those are good ratings and investment grade is obviously important to us. The nature of our conversations with them is just very much like yours. All the actions we're taking on cost, CapEx, divestments to make sure that we have a very strong balance point. And we don't have anything specifically scheduled with the ratings agencies, but I'm sure that we'll catch up with them as we move through 2 quarter the Q2 at some moment in time.
Thanks for your question.
Thanks, Murray.
Okay. Thank you. We'll take the next question from Alastair Syme at Citi. Good morning, Alastair.
Good morning. Thanks, Craig. I'd like to extend by the next to Brian as well, I just want to pick up on the volume question that you just talked about there, Bernard, on BPX, including you reset your expectations very heavily this year. I just wanted to get some perspective around how that makes you think around this business going forward. Does it make you more or less inclined to want to put capital towards this business given on the one hand it's highly flexible, but on the other hand the economics are clearly highly sensitive.
And then the second question, I just wanted to come back on the Hillcourt transaction. What exactly are you waiting for in terms of the Alaskan regulators to approve this transaction? And related to that, when the sort of the final dollar payment liabilities after that? Thank you.
Thanks, Alistair. And I'll ask Murray to take the second question around the Hillcor transaction and I'll have a go at the question on the BPX business and our outlook for it. And I think if we think about the business on 3 dimensions, the rocks, the quality of the rocks, the synergies that we're delivering and the volumes or the investment into the volumes. The rocks, as we said before, continue to be as if not better than what we planned for. So I think we're very pleased with the physical assets, so to speak.
I think on the synergies, I think the team has done a fantastic job. And to the best of my knowledge, we had promised to deliver $70,000,000 of savings in year 1. I think we delivered $240,000,000 We had planned to drill to deliver $350,000,000 of synergies by 'twenty one, and I think that number is now up to $400,000,000 or maybe a little bit more. So that's all good. And then the volume of course is down.
The investment levels are down. In many ways Alastair, that is one of the attractive things about the business is that it does provide us that flexibility to shift from 13 rigs to 1 rig in a matter of weeks really and my thanks to the team for doing that. But the economics of the business and the investment proposition remain strong in the right environment and we have the ability to flex it up and down depending on what we see. And Dave and the team and Jack continue to work on making sure that the business is as healthy and as well run as possible. So feel good about it.
It does provide that flexibility and that's what we needed at that time. So Murray, over to you on HealthCore.
Great, Alastair. On approvals, we've received the federal approval and we're now working with Hillcorp on the DNR, the Department of Natural Resources and the RCA, the regulatory commission. Those are the 2 set of approvals that we need to work our way through. We're confident in conversations with them that we'll get there this year and we'll just have to see what pace that unfolds at. And then as far as trailing obligations, BP doesn't retain any obligations on the upstream, but on the downstream, on the taps pipeline itself, we'll retain some of that liability moving forward.
But this of course is all subject to regulatory approval. Hope that helps.
Thanks, Marty. Thanks, Alistair.
Okay. Thanks, Alastair. We'll take the next question from Lucas Herman at Exane BNP. Lucas?
Yes. Thanks very much, Craig. Morning, gentlemen. I'm glad you're all healthy. And Brian, again, as with the others, many thanks for all of your help over the time.
And I hope you don't have the crude under $10 in the weeks before you depart. Two questions, if I might. I really want to sort of go back to dividend and go back to the framework that you're using. Clearly, we're early into this crisis. And clearly, dividend adds discipline in the context of the way that you manage the business.
I think it's probably fair to say that the market questioned or was questioning the sustainability of dividends and structure more importantly before the COVID crisis actually happened. That I'd argue was evident from yield. And given the way that debt is moving and you talk around demand uncertainty, you talk about the need to strengthen your finances, you talk about the seeding of revenues by virtue of the CapEx reductions. It's quite hard not to believe that there must be a better financial frame or structure for returning capital to shareholders. But the question I've really got for you is, can you please explain to me what the logic of borrowing at 4% to pay out at 11% actually is?
That's the first. The second question then is just on projects and timelines and whether you can give any update on Mad Dog. Should we be anticipating delays given the impact of COVID? And similarly, Amman, are we also likely to see some delay in the start up of Phase 2? Thank you.
Thanks, Lucas, and great to hear from you. And let me take the first one on the dividend and let me just do it in 2 turns. Number 1, the decision around the Q1 dividend and number 2, the decision around subsequent dividends. The Q1 dividend decision was taken by the Board, reviewed as usual and in full and was a decision, Lucas taken on the basis of the underlying performance of the business in that quarter and the actions being taken that we've outlined today. The subsequent dividend decisions will be made at that time.
The second quarter will be made in the second quarter obviously. Three factors affecting any of those decisions, the underlying business performance, the outlook for the financial framework and the environment at that time. And I'm really not going to say any more on that at this point in time other than to turn it to Murray to answer the question around the projects.
Great. Hi, Lucas. Oman is feeling pretty good. We went through a big turnaround in the Q1. The plant is back up online now and we're starting commissioning on the plant.
So Oman is feeling good and on track to start up in 2021. Mad Dog Phase 2, we had to down man in Korea as COVID swept through. We had, I think, 50 ex pets in the yard in Korea. They've now returned to the yard and they're assessing the state of it. I don't think we'd announce any delays at this moment in time.
But as you can imagine, COVID is a dynamic situation and we'll have to see how that unfolds over time. I hope that helps, Lucas.
Thank you. Murray? Thanks, Lucas.
Okay. Thank you, Lucas. We'll take the next question from Martin Ratz at Morgan Stanley.
Martin? Yes. Good morning. And also my best wishes for Brian for whatever lies ahead and thanks for all the and support over the years. And a lot has been covered and I don't want to sort of repeat previous questions, but I want to build on Lucas' question that he just asked and take the angle of capital expenditure.
What I find intriguing perspective is this. With the CapEx budget of €12,000,000,000 and a dividend which is €8,400,000,000 effectively, the CapEx budget is SEK 1.40 per $1 of dividend. Now if you track that over the decades, as far as I've been able to reconstruct this, this is at least the lowest level since 1984. So CapEx at least relative to the dividend, is exceedingly low. And in previous downturns, there was quite often scope to reduce CapEx from say $3 per dollar of dividend to $2 but it rarely dropped below that ratio of 2:1.
And I was wondering if in your assessment with $12,000,000,000 of CapEx or 1 point $4 per dollar of dividend, whether that level of CapEx and the returns that are available to you, whether that level of CapEx is sufficient to sustain that $8,400,000,000 dividend over the long run?
Maarten, thank you. I'm not going to go back over the dividend decision. I think we've made our basis for that clear. I haven't looked at the analysis back to 'eighty four, but that's good to see. The one thing I would make on that analysis, Martin, is that even in the last 4 or 5 years, I think the productivity that we get out of a dollar spend is materially different to what it was 4, 5 years ago.
So I do think that sometimes dollar for dollar comparisons can be helpful, but other times I do believe that the productivity has improved dramatically over that time period. But I understand the question and in terms of what the right level of investment is for the company in the longer term, I'm afraid I'm going to have to ask you to wait until September when we'll come back and talk about the strategy for the company and the medium term outlook where we will discuss all of these things in much greater detail.
We'll take the next question from Jason Gammel at Jefferies.
Thanks very much, gentlemen, and I hope all your families are safe. First question I had was just some clarification on the reductions in cash costs, dollars 2,500,000,000 achieved by the end of 2021. Does that mean that the run rate on the $35 balance point is achieved at the end of next year? And would you expect that these costs would be sustainable in these cost savings would be sustainable in a higher oil price environment? Then my second question, I was just hoping you could elaborate a little bit further on guidance for lower levels of North American heavy crude discounts.
We're obviously seeing some pretty weak WCS prices. So is this really more of a reflection of what you see as a weak WTI price over the course of
the Q2? Jason, thank you. Hope you and your family are well as well. Murray, I'll let Brian take the second question, which is around the heavy crude and the WTI. Murray, on the first one, the 2.5% to 35% year end versus run rate versus full year and the sustainability.
And I know the answer to the sustainability, which is very much so, but can you take the first one for Jason, please, around cash costs?
Sure, Jason. As you can guess, you've been dealing with us for a while. We're on the conservative end of things when we put statements publicly. So we've talked about the $2,500,000,000 as a run rate, which you're right is at the end of the year. But as you know, our track record of delivery in this space, we're obviously making good strides right now on cost as we speak.
And I expect, as Bernard said, there'll be more to come when we talk about this in September. So do presume end of year for now and we'll update you in September and we're on it as you could guess. As far
as The 35, Marie, the 35 is a full year number and that takes account of the 2.5 being an end year number. Yes, I think Chase's question.
Absolutely correct. And then sustainability of the cost savings, look, we're not presuming we're going to get any deflation. The supply chain is in a pretty difficult place inside the upstream business. Inside some of the other businesses, the supply chain is very resilient. But we're not presuming very much deflation inside this.
This is more about fundamental changes to the efficiency of the business. So, yes, they are sustainable. Hope that helps. Thanks, Marie. Thanks, Jason.
And then, Jason, on WTI WCS, what we saw in the Q1, if you remember last year, it averaged around about $13 was a discount to Canadian to TI. That blew out about $20 through the Q1 and I think quarter to date it's already $14.50 I think you'll have to wait and see how WTI clears over the next 3 to 4 months. And then you'll get a better handle on ultimately what will happen with heavy crude. But I would expect to see heavy continue to back out as storage fills up pretty much everywhere and we're going to be at top tank tops. And then there'll be a question of what the recovery looks like from a demand perspective.
So it's going to be pretty hard to call WTICS, but it is tracking around about 14 books already year quarter to date 20 bucks in the Q1, which is significantly above what we saw last year.
Thanks, Brian. Murray, I was just wondering before we leave the cost one, whether you wanted to I know you looked recently at some of the wells that we're doing drilling from around the world in London and some of the benefits that you saw there. Anything just to give a little bit of color on what's possible?
Yes. I wanted to come
back to that CapEx question of that Martin had about, is the CapEx ratios of the past the same moving forward? And Martin, it's very much the same question when people say you need an 85 percent reinvestment ratio to grow. I think that's a thing in the past as well. And the reason that I think that is the productivity has increased so much with digitization. That's why you see us as so passionate about this.
A small example of that is in West Africa. The last time we drilled in West Africa, say 2 or 3 years ago, it was $150,000,000 to drill a well. Fast forward 3 years, we've digitized and centralized the operations. It's from it's being run out of Sunbury as opposed to in Africa. It's with a lot fewer expats on the ground.
It's with a co located supply chain. It's with standard well, standard conductor, standard riser, etcetera, etcetera. And instead of $1,000,000 it's down to $50,000,000 for the exact same activity when equalized on rates. So I just think the sector had a shale revolution a decade ago. It's in the midst of a digital revolution right now and it's structurally changing the cost of supply of our business.
So I don't think these historic ratios to compare spend to dividend etcetera make an awful lot of sense just because of the productivity improvements that we have seen and we continue to think we can deliver moving forward. Hope that helps.
I think Murray, we would have had 27 engineers on the ground, expatriates, 3 or 4 years ago and today we've got
2? 40 expats 3 years ago. 40 expats now we're down to 2 on rotation, 1 every 2 weeks. So it's an amazing change.
Yes. And more to come. So great, Murray. Thank you.
Okay. Thank you. Bernard, we'll take a question from the web. Okay. This is a question from Colin Smith at Panmure Gordon.
Will current conditions delay the implementation of the new organizational structure due by the middle of this year?
Colin, thanks for the question. And the simple answer is no. We remain on track. We are as well as doing all the things that we've laid out today and we're also in the midst of selecting the next level in the organization, what we call Tier 2. Those decisions have been broadly made and we expect to announce the next level of the organization, the direct reports to Murray and my leadership team here in the next couple of weeks.
So we remain on track for July 1 standing up as a new organization. And I think everything that we've seen so far says that the model is going to work. It's different, of course, but we do see real opportunity in there both from an efficiency standpoint, but also from a ways of working standpoint and already seen even greater cooperation between the businesses and trading and so on. So pretty excited, I have to say, about what's possible here and looking forward to getting to the next stage and that will be the next level of announcements in the next couple of weeks and then getting to July 1st where we'll plan on standing it up. So we remain on track.
Okay. Thank you, Bernard. We'll move into the last couple of questions. We'll take the next question from Pavel Molchanov at Raymond James.
Hey, guys. This is Mohammad Ghulam on behalf of Pavel Molchanov. Thanks for taking the questions. So you guys are present in a number of countries that were part of the OPEC plus agreement from a couple of weeks ago. Do you guys having do you guys anticipate having to reduce volumes in any of those countries?
Mohammad, thank you for your question. And the answer to that is yes. We're in conversations today in Angola, in Azerbaijan, in Russia and in the Middle East. And Murray talked earlier about some of what those numbers could look like. But yes, the answer to your question, we do expect to see volumes reduce in the second quarter because of the OPEC plus agreement.
And as Murray also said, volume is probably not the best indicator of the strength of the business at this time. So we're working very much on the other things that we laid out around liquidity, balance point and balance sheet. But the answer to your question is yes. Thank you, Mohamad.
Okay. Thank you. And my other one would be, you guys started drilling a prospect at the Shafaqahiman block in Azerbaijan in January. Any update you guys could provide on that well?
Thanks, Mohammad. Murray, any update on Shafa Ghassimhan in the Caspian?
Yes. So this is Shafiq Asaman well. We've been talking about it for a lot of years, maybe 8 or something like that. It commenced drilling back in January, as you stated. Recently, we've taken the decision to pause drilling COVID related.
And once the situation clears, we'll get back on it. Originally, the well was forecast to be taking 9 months to get to TD, to total depth. So there's the update right now. Thanks. That's all
for me. Thank you, guys. Thanks, Mohamad. Thank you, Mohamad.
Below that level, reflecting the extra flexibility you talked about today? And then secondly, on the disposal program outside of Alaska, which I appreciate isn't finalized yet, can you give us any guidance on the actual cash proceeds expected to be seen this year? Thanks.
Very good. Peter, thank you very much. Murray, both questions, please.
You're making me do a heavy load, boss. So CapEx for 2021, we've assumed that we're in a low price environment when we make that forecast. So we've flexed the CapEx down to 11,000,000,000 dollars Now that's still a decision to be made. We have not made that decision yet. That will happen in the coming months.
But it helps you get a sense of what's capable inside the business. And remind me the second question guys.
Disposals, any idea of the cash proceeds from the remaining 5 that has yet to be announced? Any idea of cash proceeds phasing?
Yes. So we've announced just to go back to that route of questions, we've announced $10,000,000,000 of the $15,000,000,000 already. We'd expect the next $5,000,000,000 to come by the middle of 2021. On proceeds, we've received through the Q1 $3,500,000,000 proceeds is tricky to predict right now, if honest, given the state of the markets, given the inability to do things like due diligence and get into data rooms, etcetera. That's a little bit tricky.
I think as so the key judgment will be what how will we come out of COVID and when can people start traveling again to look through these things. My sense is, we'll probably have somewhere around $3,000,000,000 ish of proceeds this year with the remainder to follow. But it's very subject to how we move our way through COVID, which I think is almost impossible to predict right now. I hope that helps.
Thanks. Very helpful.
Thank you very much. Peter?
Okay. Thank you, Peter. That's the end of the questions. Thanks very much for those. Let me then just hand over to Bernard for a couple of closing comments before we close the call.
Thank you.
Thanks, Craig. Thanks to the team for pulling this together. Brian, you got lots of compliments on there. Anything you'd like to say before
you depart? Thanks, Bernard. Yes, no, look, it's been a real privilege to be the CFO of this company. This is, I think, my 34th quarter because I actually sneaked an extra one in by doing Byron's last one over 34 years. So there's a sort of symmetry in terms of timing.
It's been an absolute privilege. It's been great to work with all of you on the sell side. I think we are incredibly fortunate to have such strong quality of analysts on the sell side in this sector. And it's been an absolute pleasure to be able to work with all of you over the best part of a decade through the ups and the downs. But I think the great thing for me is your questions have always been thoughtful, detailed and actually trying to help us with how we describe the results.
It's been a privilege, as I said. It's that first question from Jason about a proud moment. I'll reiterate back. I think what Bernard laid out on February 12 for the company and the path for this company going forward is all the reason why I joined the company 34 years ago. And I wish the team well.
I'll be one of the big cheerleaders on the side, and I'm sure I'll come across all of you in the future. And thank you, Bernard, for allowing me to say a few words at the end.
Brian, thank you. The thanks go to you. You've been a brilliant CFO through a very difficult period for our company, and we wouldn't be here only for you. And I think we can all say that very, very easily. So you've done an amazing job under exceptionally difficult circumstances.
So we're very grateful and we wish you well and Brian is going to be very active. So he's not going anywhere. But with that, thanks everybody for your patience. Some really thoughtful questions and I understand we may not have answered them all in the way that you would have liked, but we are where we are. We're like many companies, we're doing our best to navigate these unprecedented circumstances as best we can.
We probably won't get everything right, but we're doing what we can. No really knows how things are going to unfold here, but we're very much in control of the things that we control. I think you know we've been tested many times over our history and we always respond and we know how to respond. There is a plan. It's a clear plan.
We're in action. We're 100% focused on the three things, protecting our staff, the mental and physical health of our staff, supporting our communities and strengthening the finances of the company. And to that end, we're reinforcing the liquidity, we're lowering the balance point and we're strengthening the balance sheet and we're doing that while we do our best to safely deliver the energy and the products that the world needs while we're striving to get to net 0 and help the world build back better, which is what we need to do. And I'm immensely proud of all of my colleagues here at BP who are coming to work every day really looking out for each other and stepping up where they can to help people and all the time running the business safely and efficiently. And that's coming with a lot of personal sacrifice, but they're really, really rising to the challenge and we're all very proud of them.
So thank you all and let me just say please look after yourselves and your families and I wish you all well and thanks Greg and your team for hosting the call. Thank you everyone.