Welcome to the BP Presentation to the Financial Community Webcast and Conference Call. I now hand over to Jessica Mitchell, Head of Investor Relations.
Hello, and welcome. This is BP's full year 2014 results webcast and conference call. I'm Jess Mitchell, BP's Head of Investor Relations, And I'm here with our Group Chief Executive, Bob Dudley Chief Financial Officer, Brian Gilvari Upstream Chief Executive, Lemar MacKay and our Downstream Chief Executive, Tufan Ergenbilgic. Before we start, I need to draw your attention to our cautionary statement. During today's presentation, we will make forward looking statements that refer to our estimates, plans and expectations.
Actual results and outcomes could differ materially due to factors that we note on this slide and in our U. K. And SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website.
Thank you. And now over to Bob.
Thanks, Jess, and welcome everyone to today's call. Today is an important day for BP, particularly as it marks the fulfillment of our 10 point plan and the start of a new phase. We're here to look back on a turbulent last quarter, a strong 2014 and a 3 year period in which we did what we said we would do. And we're here to look ahead to a tough period for the industry, but one that we're prepared for. I'll start with an overview of where we've got to in our future plans and I'll hand over to Brian to take us through the detail of the Q4 results and update you on key elements of guidance for 2015.
Then Lamar and Tufan will talk in some more detail about their areas of the business. And at the end, there will be time to take your questions. So the first thing to say is that with 2014 now complete, we can confirm that we have delivered the 10 point plan we laid out back in 2011. As part of that plan, we set a series of goals that we would accomplish over a 3 year period. We said we would focus relentlessly on safety.
We undertook to manage our portfolio actively, while playing to our strengths and to generate around $30,000,000,000 of operating cash flow in a $100 per barrel world. And we committed to strengthening our balance sheet to be more capable of weathering uncertainty. This all had a core purpose of creating a stronger, simpler and more focused VP. As we stand today, I believe we've achieved all that and more. Back in 2011, we were just 1 year into a recovery from a major incident with multiple legal, financial, environmental and strategic implications.
Progress we've made says a lot about how BP and our people have worked over the past 3 years. But to me it says more about BP's prospects over the next few years. We are capable to change and capable of taking on tough challenges. To briefly summarize the key achievements, we have improved the safety and reliability of our operations. In 2014, we had fewer serious process safety incidents and fewer leaks and spills than in 2011.
To meet our obligations to the U. S. Gulf States, we completed an initial $38,000,000,000 of divestments in 2013 and have since been working towards a further $10,000,000,000 of divestments, which are well underpinned. In the upstream, we've made 13 significant and delivered 15 new major project startups over the last 3 years, while also transforming the business to operate under a new functional model. It's been a similar story in the Downstream where we've invested in the major upgrade of our Whiting refinery and at the same time divested 2 large U.
S. Refineries and some related marketing assets leaving a portfolio of more advantaged assets. In all, the choices we have made around our portfolio provided us with a more focused footprint, a less complex business and a stronger overall set of assets. At the same time, we have resumed payment of our dividend in 20.11 have since grown shareholder distributions. This includes repurchasing $10,300,000,000 of our own shares, largely using funds from the sale of our interests in TNKBP.
We leave 2014 behind with a proven track record of delivery in our underlying business and better placed to navigate the new and challenging world we have all entered in 2015. The recent sharp fall in oil price is of course the big story in the industry today. A lot has been said and written about this, so I'm going to concentrate today on how BP is positioned in this environment. How well we navigate the road ahead will be a test of our business model. We have a diverse portfolio, a rigorous process to allocate capital and an already established focus on efficiency.
As well as being an integrated oil company with a strong downstream, our portfolio has around 1 third of upstream production coming from production sharing agreements and a growing portfolio of high quality gas We are a long range business and we look to generate competitive returns across the full lifecycle of a project. Over the last 3 to 4 years, we have been sanctioning upstream projects at $80 per per account of current price levels, our ability to leverage deflation and our long term outlook for the environment. As and when prices look to have reset in a structural way, we would moderate these assumptions accordingly. We also drive capital discipline by constraining the total level of capital spend in any 1 year, taking account of the opportunities available and the flexibility of our balance We are currently paring back activity and looking to rephase spend to reflect the expected deflation. We are resetting our capital expenditure in 2015 to around $20,000,000,000 well below our previous guidance.
Our overall capital budget will be the subject of ongoing review as we rework our medium term plans. At this moment, we benefit from being an organization that is already very focused on cost discipline. We began to streamline activity and increase efficiency some 18 months ago in response to becoming a smaller, more focused company. This timing gives us an advantage as the benefits are already becoming evident and more on that in a moment. Going into 2015, our balance sheet reflects gearing of 16.7 percent and we are working steadily towards divesting a further of assets over the 2014 to 2015 period.
So we are where we plan to be, but the outlook for the environment is now much weaker. The interventions we are currently making on capital and costs have become critical to ensuring we can rebalance our financial framework to the new environment. And Brian will take you through the specifics for 2015 shortly. Let me now spend a moment on how we intend to deepen our focus on cost in the different parts of our business. The background of this, as you know, is that BP invested significantly in certain areas of functional capability following the Deepwater Horizon incident, which was also a period of strong inflation.
At the same time, we started divesting non core assets. This triggered a need to streamline our supporting functions and structures, so they are the right size to support our new portfolio without sacrificing safety and risk management in any way. At the corporate and functional level, as part of the outlook we showed you last year, we identified over 60 simplification initiatives, many of which are well underway. You will recall this included consolidation in our global business services organization and combining a number of our corporate functions among other initiatives. As Lamar highlighted in December, simplification in the upstream primarily reflects a continued focus on doing the right activity at the right time, active management of our supply chain and aligning business support costs with the reduced size of our operations.
It also includes making choices in our portfolio such as the restructuring of the Lower forty 8 in the United States. We're now further intensifying our efforts in response to current market conditions and we will be actively looking to take advantage of the deflationary opportunity. We will do this without compromise to safety. Of course, the outcome of this is as much about the industry as about BP. So we are not going to put a number to what we think is achievable today.
We would say that we expect to at least maintain our competitive position as cost efficiency and Tufon has brought renewed focus to this since assuming leadership of the segment with 26 simplification initiatives currently underway. We aim to deliver around $1,600,000,000 per year of efficiency savings by 20 In 2014, we saw a reduction in total group cash costs of over $1,000,000,000 relative to 2013. We expect ongoing activity to deliver further efficiencies in 2015 and to be sustainable over the long term. Consistent with this, we announced in December that we expect the group to incur about $1,000,000,000 of non operating restructuring charges before the end of 2015. Given the uncertainty of the outlook, we now also see it as prudent to reset our cost base for a more sustained period of lower oil prices.
We are deepening our efforts and looking even more closely at all forms of activity across the group. This will be an area of intense focus for 20 15 and we will keep you updated as we put more detail to these plans. Turning to the portfolio. Today's environment is a good reminder of the logic of being an integrated business with a focused portfolio of high quality assets. The repositioning of our portfolio following our divestments has made us less complex with a lower risk footprint and position to focus resources for the greater discipline demanded by current conditions.
We keep our portfolio constantly under review looking for ways to unlock value whether by exiting assets that no longer fit our strategy or transforming a business model that can work harder as with the Lower 48. It also includes remaining alert to opportunities for investing in assets that fit our core strategy that could arise in the current market conditions. In the upstream, our portfolio reflects a balance of investment in Giant Fields, Deepwater and gas value chains with strong incumbent positions in our 4 key geographic regions of Angola, the Gulf of Mexico, Azerbaijan and the North Sea. The portfolio is sufficiently diverse to balance exposure to fiscal and geopolitical risk, but concentrated enough to allow us to focus on our strengths. It provides a distinctive platform for the future.
Our gas positions have the potential to grow operating cash and improve returns the next decade along with our established oil positions. Our repositioned downstream business with our newly upgraded Whiting refinery is not only an important cash generator for the group, but still has potential to grow returns as we focus on growth markets and efficiency. With respect to Russia, the current geopolitical context remains challenging. Nonetheless, Russia remains today the world's largest oil and gas producer and we remain committed to our strategic investment in Rosneft, a position with attractive opportunities for the long term. BP will continue to comply with all relevant sanctions.
So overall, we believe we have reshaped a portfolio over the last few years that will allow us to succeed over the long term and Lamar and Tufan will both provide more color around their respective businesses. Turning to our overall proposition to investors. This is a slide we showed you in March last year. Of course, a lot has changed since then, but the fundamental principles of that proposition remain unchanged over the long term. We are pursuing value over volume, which means investing in high quality activities, which play to our strengths, divesting non core assets and finding new ways to create long term value through portfolio management.
This is central to our strategy, no matter what the environment. In the new environment, our focus has to be on rebalancing our financial framework to manage through a period of low oil prices, while underpinning our dividend and meeting our legal obligations in the United States. Looking further out, our aim remains to grow sustainable free cash flow through a combination of growth and underlying operating cash flow from our business and a strong focus on capital discipline. I believe we have already demonstrated our ability to maintain an affordable capital frame. Over time, this aims to support growth and distributions to shareholders.
Looking ahead to what we expect to happen over the next few years. We see this year and probably the next several years as an industry reset phase, a period of intense change, the outcomes of which will be defined by oil and gas prices, the realization of efficiencies across the sector and possible inorganic activity. At BP, we will be focusing on a clear set of priorities. For simplicity, I'd like to think of this under the four headings of delivery, divestments, discipline and the dividend. By delivery, I mean consolidating the of divestments.
Discipline has 2 parts. Firstly, resetting the capital budget to ensure every dollar of capital spend delivers value for shareholders. Pairing back activity as necessary and taking advantage of deflation. And secondly, rightsizing the cost base to match our footprint withstand a sustained period of lower oil prices. And most importantly, the dividend, which is firmly established as the first priority within our financial framework.
Looking beyond this phase and into the medium term, we expect to be operating off a reset base. We expect this reset base to be underpinned by the next wave of upstream major projects and longer term opportunities for resource progression. In the Downstream, we see us moving to the next level of competitiveness and efficiency as we leverage our advantaged portfolio and we will be continuing our focus on capital and cost efficiency. So there's a lot that may be unclear, particularly in this current phase. But there is one point we are completely clear on.
Our focus throughout will be on growing value for shareholders. Now let me turn specifically to our full year 2014 results. Our underlying replacement cost profit was 12,100,000,000 dollars As you would expect, in the upstream, this was significantly affected by the weaker environment, particularly in the 4th quarter. We also experienced some higher costs, DDA and exploration write offs in particular. The depreciation of the ruble and lower oil prices also had a negative impact on our share of Rosneft's net income for the year.
However, in the Downstream, despite a weaker refining environment, we delivered improved performance from our fuels marketing business and benefited from the ramp up of the modernized Whiting Refinery. This reminds us of the importance of being an integrated oil company. Post tax operating cash flow in 2014 was $32,800,000,000 and as indicated has fulfilled a major goal of the 10 point plan. Our organic capital expenditure in 2014 was $22,900,000,000 $1,100,000,000 below the lower end of the guidance range given at the start of the year. This demonstrates our strong commitment to capital discipline.
Proceeds during the year from divestments totaled $3,500,000,000 As already noted, our gearing at the end of the year was well within our target band of 10% to 20%. We distributed $5,900,000,000 in cash to shareholders through dividends and we also bought back $4,800,000,000 of our own shares last year. And finally, our reserves replacement ratio for 2014 is estimated at 62%, excluding the impact of acquisitions and divestments. So now I want to walk you through the important area of our safety performance in 2014. These charts show an encouraging overall trend since 2010, which I believe reflects the disciplined approach we're taking to our operations around the globe.
Looking first at losses of primary containment or of any hazardous material, we have seen a small increase in these instances against a strong result in 2013. Newly available data from enhanced automation in our Lower forty eight operations in the United States was the reason for the increase in our LOPCs in 2014 and we continue to focus our efforts in this area. We also track process safety events. The American Petroleum Institute or API Industry Metric. Looking at Tier 1 and Tier 2 events combined, the overall downward year on year trend has continued.
As regards personal safety, our recordable injury frequency rate remains level with in 2013. Safety is good business. It remains the primary focus in our operations and we are always striving to improve our performance. Lastly, let me briefly touch on the ongoing Gulf of Mexico litigation processes in the United States. The penalty phase of the MDL-two thousand one hundred and seventy nine trial is now underway.
This is the 3rd of 3 steps in the process of determining the amount of penalties under the Clean Water Act. Following the first phase, the court issued rulings, which included findings of gross negligence and willful misconduct by BP. We strongly disagree with these findings and have appealed. Regarding Phase 2, the court recently ruled that 3,190,000 barrels of oil were spilled into the Gulf as a result of the incident and found no gross negligence in our source control efforts. As we've said before, we will pursue fair outcomes in all legal matters, while protecting the best interests of you as shareholders at all times.
Further to the recent decision of the U. S. Supreme Court not to hear BP's appeal on the issue of causation in relation to business economic loss claims, we have a responsibility to continue to contest what we believe to be unfounded claims. And I should also point out that the deadline for submission of any further economic loss claims has now been set for June 8 this year. Brian will give the usual update on the financial impacts for the quarter shortly.
As always, we are continuing to compartmentalize these illegal activities and BP's operational delivery teams remain fully focused on our core businesses. So let me now hand over to Brian.
Thanks, Bob. I'll start by touching briefly environment in what continues to be a very weak market. In the Q4, Brent fell to an average of just under $77 per barrel, the lowest quarterly average since the Q3 of 2010 and has averaged $48 per barrel so far this quarter. As is now well documented, oil prices softened in the latter part of 2014 as market fundamentals reflected production growth in the United States, other increases in global supply and weaker global demand. Prices weakened further following OPEC's decision to maintain production European and Asian spot prices fell reflecting modest demand and rising LNG supplies.
Henry Hub gas prices for the 4th quarter averaged almost exactly $4 per 1,000,000 British Thermal Units and now stand around 2.70 dollars per million British Thermal Units. The overall refining environment was lower in the 4th quarter impacted by the seasonal reduction in refining margins along with falling crude differentials in the United States. As you'll have seen, the sharp fall in oil and gas prices has had an impact on our upstream results for the Q4. However, the full run rate effect of the fall in prices will only be visible as we move through the Q1 and beyond. As Bob mentioned against this backdrop, we are making a number of interventions to rebalance our financial framework that I will come back to shortly.
Turning to results. BP's 4th quarter underlying replacement cost profit was CAD 2,200,000,000 down 20% on the same period a year ago and 26% lower than the 3rd quarter. Compared to the Q4 of 2013, the result reflects significantly lower liquids realizations and the lower contribution from our shareholding in Rosneft, offset by improved downstream earnings and increased upstream production in high margin areas. You will have seen from our stock exchange announcement that we have booked a pre tax non operating non cash charge of CAD 6,500,000,000 or CAD 3,000,000,000 post tax for impairments in the Q4. These are mainly upstream assets reflecting the impact of the lower near term price environment, revisions to reserves and other factors.
4th quarter operating cash flow was $7,200,000,000 This did not benefit from any unwinding of working capital, which remained broadly flat between quarters. The 4th quarter dividend payable in the Q1 of 2015 remains unchanged at €0.10 per ordinary share. Turning to highlights at a segment level. In Upstream, the underlying 4th quarter replacement cost profit before interest and tax of CAD 2,200,000,000 compares with CAD 3,900,000,000 a year ago and CAD 3,900,000,000 in the 3rd quarter. Compared to the Q4 of 2013, the result reflects significantly lower liquids realizations, the absence of the one off benefit to production taxes in the Q4 of 2013 and higher exploration write offs.
These were partly offset by lower costs, increased production in high margin areas and stronger gas marketing and trading. Excluding Russia, 4th quarter reported production versus a year ago was 2.6% lower, primarily due to the Abu Dhabi onshore concession expiry in January 2014. After adjusting for this and for entitlement and divestment impacts, underlying production increased by 2.3%. Underlying production growth for the full year was 2.2%. Compared to the Q3, the result reflects significantly lower liquids realizations and higher exploration write offs, partly offset by significantly stronger gas marketing and trading, higher production and lower costs.
Looking ahead, we expect Q1 2015 reported production to be higher than the 4th quarter, reflecting higher entitlements in PSA regions based on lower oil prices. For the Q4 of 2014, we have recognized CAD 470,000,000 as our estimate of BP's share of Rosneft's underlying net income compared to CAD 1,100,000,000 a year ago and CAD 110,000,000 in the 3rd quarter. BP's share of Rosneft production for the 4th quarter is estimated at just over 1,000,000 barrels of oil equivalent per day, 4% higher compared with a year ago. Rosneft's results for the period were affected by an unfavorable duty lag, lower oil prices and other items as well as foreign exchange effects, which had a favorable impact on the result. Further details will be provided by they report their 4th quarter results.
In the Downstream, the 4th quarter underlying replacement cost profit before interest and tax was $1,200,000,000 compared with $70,000,000 a year ago and $1,500,000,000 in the 3rd quarter. The fuels business reported an improved underlying replacement cost profit before interest and tax of $930,000,000 in the 4th quarter compared with a loss of CAD 200,000,000 in the same quarter last year. This was driven by higher fuels marketing performance, increased heavy crude processing in the United States and improved results from supply and trading and lower turnaround activity, partly offset by a weaker refining environment, primarily due to falling crude differentials in the United States. The lubricants business delivered an underlying replacement cost profit of CAD 310,000,000 compared with CAD230,000,000 in the same quarter last year. This reflects continued gross margin improvement in growth markets and the absence of restructuring charges partially offset by adverse foreign exchange impacts.
The petrochemicals business reported an underlying replacement cost loss of $30,000,000 in the 4th quarter compared to a profit of $40,000,000 in the same period last year. The result reflects a continuation of the weak margin environment, particularly in the Asian aromatic sector and unplanned operational events. Looking 15, we anticipate weaker refining margins due to narrowing crude differentials in the low crude price environment. We expect the financial impact of refinery turnarounds to be at similar levels as 2014 and the petrochemicals margin environment to gradually improve. In other business and corporate, the pretax underlying replacement cost charge was $120,000,000 for the 4th quarter, a reduction of $490,000,000 on the same period a year ago, mainly due to improved results in our other businesses, lower corporate and functional costs and a number of 1 off credits.
As a result of the very low charge in the 4th quarter, the full year pretax underlying charge of CAD 1,300,000,000 is lower than the guidance range we provided in February. The effective tax rate on underlying replacement cost profit for the 4th quarter was 38%, taking the full year effective tax rate to 36% in line with the guidance for 2014. The charge for the Gulf of Mexico oil spill was $480,000,000 for the 4th quarter, primarily reflecting increased costs related to business economic loss claims, litigation and the ongoing cost of the Gulf Coast Restoration Organization. The total cumulative pretax charge for the incident to date is $43,500,000,000 This does not include any provision for business economic loss claims that are yet to be received, processed or paid other than a provision for claims that have been processed and not subject to appeal within the claims facility. The charge in the 4th quarter relating to business economic
business
for business economic loss claims. We continue to review this each quarter. Regarding the Clean Water Act, we have filed notice of appeal of the Phase 1 gross negligence ruling and the penalty phase is underway. We continue to believe that our original provision of $3,500,000,000 represents a reliable estimate of the penalty in the event we are successful in our appeal and we have maintained the provision at this level. The pretax cash outflow on costs related to the oil spill for the full year 2014 was CAD 1,300,000,000 including CAD740,000,000 relating to fines and penalties.
As previously disclosed, the cumulative amount estimated to be payable from the trust fund has now reached $20,000,000,000 Additional costs not provided for will be charged to the income statement as they arise. At the end of the quarter, the aggregate remaining cash balances in the trust and qualified settlement funds totaled CAD5.1 billion including CAD1.1 billion remaining in the seafood Compensation Fund with $20,000,000,000 paid in and $14,900,000,000 paid out. Now turning to progress on divestments and our objective to divest $10,000,000,000 of assets by the end of 2015. Agreed deals to date have reached $4,700,000,000 These include the sale of a package of assets on the Alaskan North Slope, the farm down of 40% of our interest in the Aman Kazan project, monetization of part of our interest in the Tybur and Heeler fields in the Gulf of Mexico Paleogene and the sale of our global aviation turbine oils business. We remain on track to reach our $10,000,000,000 objective this year.
Now looking at our full year cash flow movements. This slide compares our sources and uses of cash in 20132014. Operating cash flow for 2014 was CAD 32,800,000,000 marking delivery of the 10 Point Plan operating cash flow target. This includes CAD 7,200,000,000 generated in the 4th quarter. Excluding oil spill related outgoings, underlying operating cash flow for the year was CAD 11,600,000,000 higher than in 2013.
This includes a working capital release of $2,200,000,000 for the year. Full year organic capital expenditure was $22,900,000,000 in line with our revised guidance provided with 3rd quarter results. Organic capital expenditure in the 4th quarter was CAD 6,600,000,000 In 2014, we bought back CAD 4,800,000,000 of shares including CAD 800,000,000 in the 4th quarter. The cumulative total since early 2013 is now $10,300,000,000 Around $8,000,000,000 of this reflects the proceeds of the sale of our interests in TNKBP with the balance coming from the proceeds of our $10,000,000,000 divestment program. Turning to our forward looking guidance for 2015.
We expect full year underlying production in 20 15 to be broadly flat compared with 2014 with base decline offset by new major project volumes. The actual reported outcome will depend on divestments, OPEC quotas and entitlement impacts. As mentioned, organic capital expenditure in 2014 was $22,900,000,000 We now expect 20.15 organic capital expenditure to be around CAD 20 1,000,000,000 relative to our previously signaled capital frame of CAD 24,000,000,000 to CAD 26,000,000,000 in 20.15. This reflects a rebalancing of our uses of cash in the current price environment. In the upstream, the reduction is expected to come from pairing back exploration and access spend, shelving a number of marginal projects, prioritizing activity in our base operations and the reduced spending we anticipate in projects operated by others.
This does not rely on supply chain deflation in the near term. Depending on where prices settle, we would expect deflation to become evident in the ongoing review of our capital frame as we move into 2016 and beyond. These interventions in the upstream will be further supported by non advancing selected projects in the downstream and our other businesses. The DD and A charge was $15,200,000,000 in 2014, reflecting a steep rise compared to 2013 as a result of a significant production delivered from new upstream major projects and the commissioning of the refurbished Whiting refinery. In 2015, we see a flatter trend for DD and A relative to 2014.
In other business and corporate, the average underlying quarterly charge is expected to be around $400,000,000 although this may fluctuate between individual quarters. In the current environment and with our current portfolio of assets, the effective tax rate is expected to be lower during 2015. Today's 4th quarter results also includes a CAD 433,000,000 non operating restructuring charge against the CAD1 1,000,000,000 charge we expect to see before the end of this year. Clearly, as Bob outlined, this is a year of transition as we adjust to the reality of current unexpected lower oil prices. As we rebalance the company's sources and uses of cash, we will update you on progress quarter by quarter.
Turning to our financial outlook. Our 2014 operating cash delivery of $32,800,000,000 reflects the reliable operating performance in our business and a release of working capital that is less than half of the build we saw in 2013. This exceeds our 10 point plan target of $30,000,000,000 to $31,000,000,000 in a $100 per barrel oil price environment. Net debt at the year end was $22,600,000,000 putting gearing at 16.7%. We remain committed to keeping gearing in the 10% to 20% range, while uncertainties remain.
We are now entering a phase of uncertainty, while the industry transitions to a period of weaker prices. We are very clear on the actions we need to take to complete our current $10,000,000,000 divestment program, reset our capital frame to around $20,000,000,000 for $2015,000,000 and resize our cost base. With the interventions we are making, we believe we have sufficient flexibility to support our dividend in 2015 in the current price environment, while staying within our gearing band. Current circumstances aside, our objective over time is to reflect a position where underlying operating cash flow covers capital expenditure and dividends. We will be actively working to reestablish this balance in our financial framework over the medium term.
Over the course of this year, we expect industry margin structures to start to respond to deflation as we also reset our own controllable costs to be sustainable to a lower price environment.
This will put us in
a better position to define the longer term financial implications for the group. To reinforce Bob's earlier words, our first priority within the financial framework is the dividend. As we adjust for the new environment, we will continue to judge the uses of cash for discretionary reinvestment in distributions on an ongoing basis with a bias to distributions. We will continue to keep you updated as our plans evolve through the year. Now let me hand over to Lamar to talk about the upstream business.
Thanks, Brian. In December, I shared with you some significant detail about our strategy and plans for the upstream. So I do not intend to go into a lot of detail today. I'll start with a look back at 2014 followed by a reminder of the key activities driving value in our business and other recent and near term developments. I'll end with a brief recap of the key pillars of the strategy I outlined in December.
We achieved a number of key milestones in 2014. 18 exploration wells were drilled in the year. We made 5 new discoveries at Orca in Angola, Notus in Egypt, Chirilette in Brazil, Voralich in the North Sea and Guadalupe in the Gulf of Mexico. We also continue to achieve
We also continue to achieve new access including
the U. K. North Sea licensing round in the 4th quarter. In December, we signed a new production sharing agreement with Sokar in Azerbaijan Azerbaijan to jointly explore for and develop potential prospects in the shallow water area around the Abcheron Peninsula in the Azerbaijan sector of the Caspian Sea pending final government approval. This is in addition to blocks awarded earlier in the year in Morocco, Australia, Greenland, the prior North Sea licensing round and the Gulf of Mexico.
Last month, we formally received the licenses for the El Mataria and Carawan concessions in Egypt following the announcement of the award last year. Turning to major projects, our 2014 startups continue to ramp up as planned. The startup of both Sunrise Phase 1 in Canada and Canoole in the U. K. North Sea during December takes the total 2014 major project start ups to 7.
Production from the Andrew platform, which the Canoole project ties into, is forecast to peak at more than 50,000 barrels per day. Sunrise Phase 1 operated by our 50% joint venture partner Husky represents our 1st in situ oil sands operation and an asset which we expect to generate steady production for decades. Turning to operations. We successfully completed our final 2014 turnaround in December on schedule, taking the total completed in 2014 to 8. Additionally, operations at the Rum Gas Field in the Central North Sea resumed in the 4th quarter in accordance with the agreed temporary management scheme.
Our well delivery execution has also improved in 2014. We completed all of our priority wells and have the highest production from new wells and well work since 2,009. As I described in December, our core business activities are designed to drive value growth and competitive returns. In our base operations, we are focused on driving systematic delivery of safe and increasingly reliable operations. With our operated plant reliability increasing by 7% since 2010 and strong levels of plant reliability in our top fields.
We are also focused on efficient reservoir management and wells execution in order to optimize recovery and value from our base assets. Managing existing wells is just as important and we maintain these through timely well interventions to either restore or enhance production. We continue to move forward with a set of quality major projects. We have around 60 projects with a balance between deepwater, giant fields and gas value chains, which are also balanced across different geographies and stages of development. More on this year's project startups in a moment.
We have reloaded our exploration pipeline over recent years through significant access to new opportunities. This has given us many opportunities for resource progression into the next decade. Finally, but importantly, we have a strong focus on capital and cost discipline. In the current environment, we are intensifying this focus to reset our cost base as Bob and Brian have explained. With regard to capital expenditure, we expect to pare back exploration and access spend to rephase certain projects and we will continually prioritize all of our activity.
We have uncommitted spend and flexibility to manage pace of investment and to take advantage of any deflation in the sector. On cost discipline, we expect to align our cost base with the reduced size of our operations through actively managing our supply chain by again prioritizing activity, focusing our efforts on where we have distinctive capability and making choices in our portfolio. Now I'll look more specifically at the 4 major projects, which we expect to start up in 2015, which are progressing on time and within budgets. In Angola, the Kasamba Satellites Phase 2 project is progressing well. Subsea installation is going to plan and 3 production wells are complete.
Also in Angola, the Greater Plutonium Phase 3 subsea development is making good progress with the first well already completed. In Algeria, Bensalah Southern Fields project is on track. The pipeline is under construction and commissioning of the plant is ongoing. And finally, in Australia, brownfield activities and subsea installations are moving ahead on the Western Flank 8 project. In total, we have 15 projects, which we have passed through the final investment decision and are in the construction stage across the world.
The remaining projects in our pipeline are in the design or appraisal stage. Going forward, we will sanction and progress these projects at the right time. We fully intend to make use of the current environment to secure reasonable contract rates, to continue negotiation of fair price terms in certain regions and to access market deflation by phasing investment for the appropriate projects. I will now focus a little more on our portfolio and recent developments in the United States where we have 3 main upstream efficient operating models in each of these businesses. In March 2014, we announced our plan to separate our U.
S. Lower 48 Oil and Gas Business into a separate unit. The rationale was that a new operating model was needed to improve performance in this business against its direct competitors, the U. S. Independents.
We expect faster decision making, more innovation and shorter cycle times through the value chain and expect that significant capital and cost efficiencies will follow. Our plans, which include reporting separate financials, are on track. We are already seeing positive results from the more streamlined organization. We have had a workforce reduction of 900 employees and contractors and have seen cash costs fall by around 25% between 2012 2014. In Alaska, we sold the Endicott and Northstar assets and farmed down in the Liberty and Melanie Point fields to Hillcorp in the Q2 of 2014.
The intent of this transaction was to put funds towards our obligations to the U. S. Gulf States and to allow us to focus our footprint to operate only one material asset, the giant Prudhoe Bay field, while divesting those worth more to others. At the same time, we sought to find an experienced partner to operate those assets where we diluted our interest in order to drive incremental value. Finally, in the Gulf of Mexico, we focus our efforts on 4 operated hubs and 3 non operated positions, which have the potential to deliver production growth.
At the same time, we will also consider how we can most efficiently support the logistics of these BP operated assets. We also continue to explore and appraise new positions and we participated in 3 exploration wells in the Gulf of Mexico during 2014. As these exploration activities provide potential new development opportunities, we will continue to consider where and how much we operate. In light of this, last week, we announced a new ownership and operating model with Chevron and ConocoPhillips to advance current and future Paleogene discoveries in the Deepwater Gulf of Mexico. We are diluting around half of our current 62 percent equity interest in the HeLa and Tiber fields to Chevron, passing operatorship to them at the same time and we also gain exploration access to the Gibson prospect.
This alliance will enable us to do 3 things that are at the core of our strategy in the Gulf of Mexico, namely to support exploration and development in the Paleogene, which we expect to be a key part of our future in the region to share development costs and maximize synergies, which will allow us to manage and improve capital efficiency and to increase our focus on maximizing production at our existing operated hubs. So to close, I'd like to revisit the key takeaways from our upstream day in December. We are building a track record of delivery. We are improving safety and making our operations more reliable. We are focused on value over volume.
By investing in high quality activities, we have a more focused footprint and we will continue to actively manage our portfolio. We are delivering value today through the efficient execution of our base activities by progressing a quality set of major projects and we continue to make discoveries from our exploration portfolio. In order to deliver long term growth, we will continue to maintain a disciplined investment approach into 3 distinctive classes of assets: Deepwater, Gas Value Chains and Giant Fields. We will continue to maintain a balanced portfolio of opportunities. And finally, we drive the efficient execution of our activities through our functional operating model and this is delivering results.
These remain the pillars of our upstream strategy regardless of the oil price environment. Our strategy aims to deliver competitive operating cash growth through focusing on safe and reliable base operations, selecting and executing our capital projects at the right time and ensuring sustainability through cost and capital discipline. I'll now hand over to Tufan to talk about the downstream.
Thanks, Lamar. In the next few slides, I will provide a brief update on our progress in 2014 will set out the opportunity I see for further performance improvement across the downstream and the strategy we will be following to capture this opportunity. In terms of progress in 2014, we have seen continued improvement in our process safety performance, particularly on loss of primary containment, where we have achieved around 20% reduction in incidents year on year during 2014, which represents our best recorded annual performance. In fuels, we continue to deliver strong operational performance across our refining with Solomon refining availability sustained at around 95% for the year. Our recently repositioned Whiting Refinery near Chicago is now fully on stream.
We also announced our intention to seize refining operations at Woolworth Refinery in Australia during 2015. In lubricants, our focus on growth markets and premium brands continues to deliver like for like profit growth. And in petrochemicals, in response to a continued difficult environment, we have undergone a strategic review to create a higher earnings potential business, which is more resilient to bottom off cycle conditions. I will cover this in more detail later in the presentation. This operational progress across many fronts has resulted in operating cash flow growth.
Our 2014 progress gives us a great base to build on, and I believe there is further performance improvement opportunity for us to capture in downstream. Our strategy focuses on improving returns, growing operating and free cash flow and building a quality downstream business, which leads the industry as measured by net income per refining barrel. Our strategy to deliver this performance opportunity has 5 main themes. Our first priority remains safe and reliable operations, and we will continue to drive for performance improvement both in personnel and process safety. Advantage Manufacturing and Refining means we will continue to build a top quartile refining business by having a competitively advantaged portfolio, which is underpinned by operations excellence.
In petrochemicals, it means creating a business with higher earnings potential, which is significantly more robust to a bottom of cycle environment. In fuels marketing and lubricants, we have material and reliable profit and cash businesses. We will differentially invest in higher returning businesses, which have operating cash growth potential. This should improve downstream returns and operating cash flow growth. Our strategy has a constant focus on portfolio quality through the high grading of assets and capital discipline, Where businesses do not fit our strategic frame, we will seek to divest.
And finally, as Bob has already mentioned, we have launched a simplification and efficiency program to support our strategy to deliver performance improvement and to make our businesses even more competitive. I will now briefly talk about the key elements of our strategy, beginning with Advantage Manufacturing. We have improved our refining portfolio quality in terms of both feedstock advantage and scale and sustained competitive complexity through portfolio rationalization and selective investment. We have divested or closed 14 refineries since 2000. This gives us a smaller, more focused, higher quality refining portfolio, which as the top left chart shows, is largely concentrated in Europe and the United States.
We believe that having a quality refining portfolio connected to strong marketing positions is core to our integrated fuels value chain businesses as this provides optimization opportunities in highly competitive markets. Turning to each of the regions. In the U. S, the top right chart illustrates how feedstock advantage has grown materially and has the potential to further improve due to refinery repositioning and logistics investments, which are largely complete. Our 3 U.
S. Refineries have access to Canadian crudes and U. S. Shale oil, both of which typically price at a discount to other crudes. Our U.
S. Refineries are also location advantaged versus Gulf Coast refineries due to Canadian crude supply proximity. Feedstock flexibility enables us to fully optimize our crude slate depending on relative crude differentials, an important capability given today's volatile energy markets. In Europe, the bottom right chart illustrates we have a top quartile refining portfolio in terms of scale and a smaller refining exposure than our primary competitors. Our refining portfolio is competitive in Nelson complexity, excluding our Rotterdam refinery, which as you know, has significant trading and logistics flexibility, our average European nelson complexity rises to around 11.
And outside the U. S. And Europe, where we have refineries in Africa and Australia, these are industry leading in their region in terms of scale and have top quartile profit capability. Across all regions, we expect to operate our portfolio at top quartile availability and with improved efficiency. The bottom left chart illustrates our performance over time, together with our aim for further improvement.
To underpin this operational delivery, a program of operations excellence has recently been launched. This advantaged portfolio and our business improvement programs should ensure the portfolio delivers further performance improvement and is more resilient to volatility in the environment. This supports our strategy of creating a refining business with last man standing portfolio quality and performance in the regions in which they operate. Our petrochemicals portfolio is focused in large on 2 main end products, purified terephthalic acid or PTA and acetic acid. We are taking steps to significantly improve the cash breakeven performance of the business.
This will improve our earnings potential and make the business more robust to a bottom up cycle environment. These actions include a significant portfolio restructuring in our Aromatics business to shut down older capacity in the United States or Asia and to sell less advantaged assets provided we can get good value for them. We also expect to commission Zhuhai 3 in China, our latest generation of PTA plant in the next couple of months. Secondly, extending the Iplan program to retrofit our best technology into our advantaged sites and thus reduce overall operating costs. Thirdly, creating additional value from our leading petrochemical technologies by growing 3rd party licensing income.
And finally, we plan to deliver operational improvements such as turnaround efficiency and improved reliability. As illustrated in the left hand chart, taken together, we expect these actions will lead to over 35% improvement in our petrochemicals cash breakeven performance. The top right chart confirms that market demand growth for our primary petrochemical products, PTA and acetic acid, has been stronger than the overall chemicals market. Industry analysts forecast continued growth in the 5%, 6% per annum range. We believe the market fundamentals for the acetic acid business are positive and improving with strong demand growth, which presents the opportunity to selectively invest to capture extra earnings potential.
The bottom right chart illustrates the cost advantage enjoyed from our latest technologies. Deployment of these leading technologies plus portfolio actions should deliver performance uplift, improve earnings potential of the business and ensure our portfolio is more resilient to bottom off cycle conditions. Moving now from advantaged manufacturing to marketing. Fios marketing and lubricants are both key to our profitable growth strategy. In the left hand chart, the bubble size illustrates total 2014 business profit generation plotted against business returns and the percentage of profit generated from growth markets.
These are businesses which have good returns and are reliable in terms of profit and cash generation. They deliver these returns and grow through differentiated offers and distinctive partnerships. The retail business is the most material element of Fuel's marketing operations and is proving to be a significant source of growth scale of our retail network, it comprises over 17,000 sites spanning 16 countries and services over 8,000,000 customers per day, which is comparable to Starbucks. This business has good exposure to growth markets and we intend to increase it further. To reinforce our differentiated position, we partner with leading retailers globally, creating distinctive offers, which deliver good returns and material growth potential.
Our partnership with Marks and Spencer M and S in the U. K. Is a good example of this. As illustrated in the top right chart, we are able to generate more than 50% incremental gross margin when we bring in our new offer compared to a traditional BP Connect site. This uplift is primarily through shop sales.
Additionally, this combined quality offer generates incremental customer foothold and positions the sites for further growth. It also provides a more balanced profit mix, helping reduce reliance on fuel margins. This BP owned and operated network delivers returns of over 20%. Including M and S, we have distinctive partnerships underway in 6 countries with leading retailers and have ambitions to further extend elsewhere. The bottom right chart illustrates how our lubricants business has grown profit at 5% per annum at constant foreign exchange rates.
This has been driven by our exposure to growth markets and increasing sales mix of premium lubricants, underpinned by strong brands, technology and customer relationships. With more than 50% of profit sourced from growth markets and with continued growth in premium lubricants, we have an excellent base for further business expansion and sustained profit growth. In summary, both fuels marketing and lubricants businesses have the platform to generate operating cash growth with good returns and reliable earnings profiles. Turning now to our simplification and efficiency program. We have a good track record of generating cost efficiencies as shown in the top right chart.
Going forward, to improve our performance and competitiveness, simplification and efficiency programs will form key elements of our downstream strategy. As you can see in this slide, we have 4 main programs in our efficiency agenda now underway. We are in the process of simplifying and streamlining the downstream head office and functions. A new fuels organization and restructuring within lubricants will eliminate duplication, reduce interfaces and where appropriate simplify our route to market. In manufacturing, our first priority remains safe and reliable operations.
As I mentioned before, in refining, we are building plants by refinery to further improve our competitiveness. And in petrochemicals, we are pursuing the same aims by deploying advantage technology across We have 26 simplification initiatives currently underway across these programs. Taking it all together, we aim to deliver around $1,600,000,000 per annum of efficiencies by 2018 versus a 2014 baseline. This delivery will contribute to our operating cash flow growth and improved returns. It will also further enhance our competitiveness as measured by our ratio of cash cost to gross margin as illustrated in the bottom right chart.
Now let me summarize the key elements of our strategy to capture further performance improvement. Within Refining and Petrochemicals, we will focus on building an advantaged manufacturing portfolio, improving the earnings potential of the business through increasingly advantaged assets, operational excellence and distinctive technology. In marketing, we will selectively invest in higher and to volatility and bottom of cycle conditions. And we will do all of these with safety remaining our first priority. Taking all these together, there is potential to expand the operating cash flow and to improve returns of the downstream from a 2014 base.
Capturing the performance improvement opportunity should deliver industry leading earnings quality measured by net income per barrel of refining capacity, a measure we have shown consistently in the past. Implementation of this strategy is expected to lead to a growing downstream earnings profile and increasingly make the business more robust to external environment impacts. Growing operating cash flows and capital discipline will ensure that the downstream remains a source of increasing cash flows for BP now and into the future. As the new Chief Executive of the Downstream business, I am excited by the opportunity I see and the caliber of our people to deliver it. Let me now hand you back to Bob.
Thanks, Tufan. Now to summarize the key points we want to leave you with today. We leave 2014 behind having delivered milestones over the last 3 years, including everything we said you should expect and be able to measure as part of our 10 point plan. We now have a track record of delivery, real momentum in our business operations and a proven ability to adapt to tough times. We are well aware that the industry is going into a very challenging phase as we reset to a lower price environment, But our business model is a very focused one and we are already well in action to respond.
Our near term priorities are very clear and about delivery in our business, completion of our $10,000,000,000 divestment program, a disciplined reset of both our capital and cost base and a commitment to the dividend is the first priority within our financial framework. Looking beyond the near term, we have a road map for the future. It's based on the potential of our upstream business, the opportunity to leverage advantaged portfolio and improve returns in our downstream business and our resolve to continue our focus on capital and cost efficiency. All of this works towards our intention over time to grow distributions in line with the approving circumstances of the firm and to maintain a progressive dividend policy. Now with that, we're ready to take your questions.
Thank you for polling your questions and for your patience. We will try and get around to everybody today. We'll start today in the U. S. With Blake Fernandez from Howard Weil.
Are you there Blake?
Yes. Thank you, Jess. Good afternoon, everyone. My question is around CapEx. It sounds like most of the reductions are coming from exploration and access.
And Bob, it sounds like you're maintaining your internal $80 oil deck. So I'm just trying to get a sense, does this mean we should expect kind of ongoing FID or sanctioning this year as you would have otherwise?
Blake, thanks. And Lamar is here. There is it's more than just exploration and access. We think we've got some projects that we plan to FID this year actually early in the year. And based on what's happening, we're going to retool them again.
And there's one that you've heard about before that we've taken a step back from. We'll certainly do that again as a big Mad Dog project in the Gulf of
reliability, integrity and the high return base infill type spending. Exploration and appraisal, we do have some flexibility to move some of that sideways or defer high grade and rephase, we'll be doing that. Projects and execute phase, will continue to do those projects, especially the facility side. And we'll look at optimizing, so to speak, the pre drill expenses and the tempo by which we get the drilling done over the next several years. Then in the projects in the pre execute or the pre FID phase, we'll definitely defer rescope and re approach some of those projects.
Mad Dog might be
a good example where we
do think they will benefit
from deflation and we'll in each and every one of those categories because you can imagine we want to be as efficient as we can be and it requires examination of every single dollar. But it's a holistic approach where we make sure that we're safe and reliable and yet we still preserve the future.
Okay, great. Thank you. My second question is on the Lower forty eight. I'm assuming the separation looks like it's still on track, but I assume it has its own balance sheet. Does this macro change as far as the liquidity or balance sheet structure?
And are you still expected to increase rig activity as outlined in December? Thanks.
Blake, yes, everything is continuing as we hoped and expected in Lower 48 and the balance sheet is set. They will react to the environment just like their competitors are, although as you know, we haven't had really high levels of activity in the Lower 48. So you won't see quite as drastic a capital reductions there. But they'll certainly be working just like their competitors in terms of making sure each and every dollar they spend is going to be the right dollar to spend. So we expect that to continue.
We'll be reporting separate financials later this year, which will give you some insight into that. But yes, everything's on track and costs and capital is coming down. So that's good.
Okay. Thank you.
In the U. K. Now, we'll go to Oswald Clint of Bernstein.
Yes. Hi. Good afternoon. Thank you. Yes, maybe a question on return on capital, return on average capital employed.
I guess, one of the things we're also looking for is steadily growing return on capital, which is something Bob that you've been targeting. I don't think it didn't step up too much last year. But as I think about this CapEx reduction, the shelving of marginal projects, the returns here in the downstream business going up, plus also some cost deflation, deflation, which you might access. Is it or do you have more confidence at this point that the return on capital metric might actually step up materially from here? And then secondly, just a question on the North Sea and the impairment.
I noticed part of that was to do with increased abandonment provisions. Maybe some thoughts on the U. K. At this oil price and what sort of abandonment costs? And ultimately does that feed into kind of near term CapEx if you choose to start abandoning some of the North Sea?
Thank you.
Bob, let me take a stab at that. North Sea first. On the abandonment costs, those abandonment costs went up mainly due to a change in the sorry the interest rate we calculate the decommissioning value on in effect. I think the North Sea is an area that we have stated before and I talked about in December is a challenged area. We need better performance out of the North Sea.
Plant reliability is not where it needs to be. And of course, we've got teams working very, very hard to get that up. But we need to see a step change in performance in the North Sea. The quality of the assets is good and we have a set of new projects coming on Clare Ridge and Quad 204 that effectively Sea. We've got all work to get our plant reliability up.
And this particular impairment is related to an interest rate change in the decommissioning cost.
Oswald on return on capital, I think we have been saying that we must increase our return on capital going forward here. I think we've said this publicly, but the average return on capital employed of the roughly $35,000,000,000 of upstream assets that were sold at a return on capital of about 50% to 55%. Now that's a huge return on very mature highly depreciated assets. So that by definition has brought our return on capital employed of the group down. And I would expect it to continue to rise here up and down a little bit with the oil price cycles.
But we're definitely high grading the portfolio for going forward.
Okay. Thank you both.
Okay. Thanks Oswald. Next question from Jason Kenney at Santander.
Good afternoon. Thank you very much for the opportunity. So do you think there'll be a profit or a loss from the Upstream Americas business in 2015 in a $55 a barrel environment? That's the first question. And the second question, I suppose another quarter another surprise for the Russia contribution.
I know there's been accounting changes and it was possibly late in the day to have guided on your thoughts as to where that could have been. But it was a surprise for most people on the divisional result from Russia. With the changes that Rosneft quarterly outlook for what Rosneft might contribute on an EBIT basis under again a $55 oil price? Thanks.
Jason, let me take the first one and then I think the market talked about the profitability in terms of the United States. We'd agree that we can at $55 a barrel given what we're doing around inflation. Yes, Rosneft has adopted a standard actually which makes complete economic sense in terms of locking in their debt against future oil revenues and we'll see what the effects of that are quarter by quarter. So they've adopted IAS 39 which makes complete sense. I'm not sure that could have been signaled to the market any sooner.
It's something which was considered by their board and that they discussed and implemented back in October. But I think it's good that you say you're clear, it's exactly the way we would have approached it ourselves under the same IFRS reporting. In terms of giving indication going forward, I think Rosneft have all the same challenges that we have and the whole sector has around trying to drive deflation in the cost base, managing source and use of cash. So I think Jason you have to be patient and wait a few quarters before you start to see any sort of stable earnings figures going forward. Because when you've seen I mean a 60% drop in correction in the oil price And I suspect we're going to be here for a short to medium while.
That's going to take time before you start to see those results flow through to the earnings numbers. And at these levels, the rules of thumb that you may be able to apply historically, they're pretty tough to apply when you have this bigger correction in the oil performance throughout the year at $55 We've got to see how
asset performance throughout the year at $55 We've got to see how the cost base can adjust, where we're going to concentrate our You'll get a better view by way of seeing the Lower forty eight separate. That will help. But right now, I don't carry my head the and probably wouldn't say anyway the addition of those 3 sets of assets.
And if I could add a footnote to what Brian said about Ross because it is complicated. We came in this morning and at 6:30 in the morning here in London, Vostav had issued a fairly detailed press release explaining the accounting change and the background on it. So some of you who are trying to model that might want to have a look at that. It might help.
Thanks very much.
Thank you. And we'll go next to Tipan Jyoti Lingam of Nomura.
Yes. Hi, good afternoon. Thanks for taking the questions. Just a few on the cash cycle actually. Firstly, just coming back to the 2014 result and the group beating that sort of $30,000,000,000 $31,000,000,000 of cash flow.
Could you just talk about compared to your internal estimates where the beep was? Secondly, Brian, I think you mentioned there wasn't really a working cap unwind release. How do you see that going forward into 2015? And then sort of a broader question. It appears you are more vocal on being a bit more bearish on the duration of where oil prices may be.
What should the aspiration for BP be in terms of sort of balancing the cash cycle going forward? Are you thinking $60 $70 I'm just trying to get a sense compared to your $80 to $100 that you used to talk about? Thank you.
Thanks, T Pen. On the cash cycle question, I think it's the beat and over performance came through across the whole piece actually both in terms of the strength of the upstream EBITDA that we saw coming through in terms of 4Q, I think was certainly underpinned the 4Q operating cash number. The recovery in the Downstream compared to the same period a year ago. And we're starting to see some of these functional costs that we spent the last 18 months to 2 years talking about in terms of simplification effort that Bob had highlighted in previous quarters around the 60 odd initiatives we had around the corporate center and the overhead. So they were starting to flow through.
So I think that underpinned everything towards the back end of the year and that's why you saw such a strong cash number coming through. In terms of working capital, I think we'd signaled we'd expected about 2 thirds of the $5,000,000,000 build we saw in 2013 to reverse out. Actually it was lot less than that. It's about CHF 2,200,000,000 reversed out in terms of working capital release. There's a lot of moving parts around working capital as we go into 2015 with these oil prices and where we are payments out of provisions.
And as you can imagine, TPM, we are looking at everything across the board, which comes back to your third question about rebalancing the books. So I think it's a bit too premature to talk about where we expect it to be. But directionally at lower prices, we tend to get release of working capital. But the price was pretty low at the end of last year. In terms of philosophy on balancing the books, I think we see 2015 as a transition year.
It's about with the capital coming down to around $20,000,000,000 as we reset the company, we drive out further activity in the simplification initiatives that we've talked about before. And it's around getting back to being able to balance the books at the sort of levels that we see today over the medium term. So we're not going to give you an explicit date, but as you've I mean probably 2 points to observe. 1, in the progress report we gave you back in March around the future projections of what we expected for the firm, we were sort of breakeven at around $80 a barrel by 2017 is what we talked about. Last year, we were breakeven below $100 a barrel.
So we were well on that trajectory. Now we need to see how fast we can drive deflation that Lamar talked about in December in terms of deflationary cycle, the 18 month cycle. How fast we can drive that in? What it looks like in terms of projects that Bob and Lamar both talked about? And then you'll get a better feel for this as we go through this year.
But our view is and I think Bob you may want to just sweep in terms of oil prices and where we think they are. But certainly we see as many bearish factors right now, maybe more bearish factors than bullish factors. So we'll probably stick we'll probably work on the basis that the oil price is going to stay somewhere around where we've seen so far this year. The average is about $48 a barrel. And we're going to assume that for the medium term as we start to rebalance the books.
And TeePaid in terms of being bearish on the oil price, I think it's more a function. We look at supply and demand. There is an excess of supply. There's a lot of factors of course on this. Certainly, U.
S. Oil production is not going to adjust overnight to a change in the price. I mean, we see oil production continuing to increase in the U. S. At least through the summer even though the rig counts are dropping very fast.
Stocks are filling up around the world. You've got probably floating storage before long here. And when you have that much storage out there, it takes a long time to work that off. You look at the of course China is growing, no question it's growing, but the rate of growth is off which is accounting for quite a bit of demand growth in the past. We'll just have to we'll have to see.
But time reminds me a little bit of 1986 in terms of the potential here for this to be extended downturn. I think any time the price of oil drops 60%, it's not a correction. It's something different. And of course, geopolitical events could impact things the other way and create some dislocations. But there's a lot of chatter around the world about agreements with Iran and that could seem to be a negative price signal.
So we've got a plan our company quickly to be ready for that without sacrificing a couple of things. I mean, we defer projects like Med Dot. We actually think there'd be more value when the costs come through and we think they'll be lower. We're not going to compromise on safety, reliability or training for hazardous jobs. That's none of that.
Everything's off limits there, certainly all our compliance and ethic commitments. So there are boundaries around what we're going to do, but we're going to continue to drive simplification into what quite frankly had become we have become a really complicated company after 2010 and it's time for us to right size it anyway.
Okay. Thanks, Thi Pan. We'll take the next question from the web from Fadel Geith of Oppenheimer. Thank you, Fadel. The question is, is the reserve write down a reflection of the assets quality?
And how does it reconcile with BP's strategy of value over volume?
Let me take that, Jess. This is Lamar. I don't think it's a reflection of asset quality. If I let me go Anarac for just one second. We have had some reserve revisions.
And once we have those reserve revisions, they can trigger an impairment test. And we've done impairment tests on these assets. And the unfortunate I guess, if you don't like write offs, the unfortunate thing is you do the impairment at least we do, The impairment test with the 5 year strip. So some of these near term assets that had some reserve revisions were tested at the 5 year strip. So 48 to whatever the 5 year strip is and that caused some impairment.
So I think it's a fairly conservative way and a correct way as we understand it under IFRS to look at our assets and the amount we have on the books form.
We're just following IFRS accounting really.
Okay. Thanks, Lamar. We'll take a question now from Thomas Adolff of Credit Suisse. Are you there, Thomas?
Hi. Thank you. Two questions please. Just the first one on your dividend I guess. If I look at your revised CapEx guidance, it's a much bigger cut than your peers, as you know.
Isn't that really an admission that your dividend base right now is the wrong one, particularly as you say 2015 is a bit of a transition year in oil markets and you have a relatively healthy balance sheet. Actually one of your competitors did say earlier this week that the industry is over distributing. Second question is just the point that Brian made on breakeven. I just wanted to get a better sense for how you define it. How does the breakeven look if you ex out the scrip dividend and any disposal proceeds or really organic breakeven?
Thank you.
On the second point, I'm not sure it's actually particularly relevant in that we offer a scrip. Our shareholders like that scrip when they take it up. But certainly for last year, we were surplus around $2,000,000,000 of cash in terms of balancing the books. And we'd look through that in terms of going forward with the new oil price set. In terms of dividend, I mean
I think we're comfortable with the dividend level. We've got a I think that's why partially I think it's prudent to do it regardless of the dividend rebased the company for what could be a new price range. It's absolutely a priority for us and cutting the CapEx has more to do with finding value and making sure we spend the CapEx and the shareholders' money carefully in this lower price environment. So it's not really related to the dividend.
Okay. Thank you.
We'll move now to the U. S. Again and take a question from Doug Terreson of Evercore.
Good morning, everybody. One of the key themes at the Upstream Day and that Brian highlighted today was cost efficiency and working with the service providers to along the cost structure with the more challenging environment that Bob talked about. So my question regards an update on the outlook for cost efficiencies in the upstream and specifically the areas of the supply chain that the company is most optimistic about? Or should we assume that the benefits will be fairly broad based? And also, is there an order of magnitude amount of savings that the company feels it can attain in the upstream maybe along the lines of the decline in cash costs that Tufan highlighted on his slides on 39?
Doug, hi. This is Lamar. Let me try that.
Okay.
I think we will see we've seen this before and in past cycles we see cost reductions both on the capital side and really on the operating side of a reduction of 20% to 30% in 18 to 24 months. We think we'll see the same type of thing. It generally shows up first in rigs and seismic in terms of where the in the contracting space. But it happens everywhere. And we've got in to give you a sense, I don't know how many total contracts we have.
I wish I did, but we've got 12.50 coming up for renewal in 2015. So we'll be using those as opportunities to react to understand what the cost set should be on the activity associated with those contracts going forward. And there are a lot of contractors and obviously other operators out there making big changes today. So I think we'll see broad based cost reductions. It will happen in probably happen fastest in the U.
S. Where some of the capital is being trimmed back quickest. But we'll see it broad based and we'll see I suspect if things stay relatively stable in terms of price and everything, we'll see 20% to 30% reductions in the next 18 to 24 months. And our job will be to access that as best we can.
Sure. And Lamar, I think one of your slides in December talks about the lag effect. And so would you say that this cycle is from a timing perspective about where you thought we would be at this point? Are we running pretty close to your expectations with timing?
It's hard to to be honest, it's hard to judge, but I have thought about that. And I don't know why, but it feels fast right now.
Okay. Good.
Thanks a lot.
And Doug, it's Bob. The other thing I think will also happen in previous times when the price drops this fast, this sharply not only is the supply chain move, but also governments take a look at taxation as well in terms of rebasing the industry.
Good point. Thanks a lot everybody.
Thanks Doug.
Okay. Thank you. Question now from Jason Gammel of Jefferies.
Thanks very much, Jess. I wanted to ask a couple around the divestiture program, if I could, please. My recollection is that the upstream was the area where you intend to generate most of the proceeds. And is that still going to be realistic given the drop in oil price? And indeed, would you be perhaps better off as an acquirer if we start to see distressed assets in the market?
And then the second question is, I believe Brian made reference to having a bias towards distributions for discretionary cash. Would you consider divestiture proceeds to be discretionary cash? And would those then be biased towards share repurchases? Or do you think you're done with share repurchases in the price environment?
So, Jason, let me just pick up that last point first, which is, we'll retain buybacks as part of our armory, but recognize that we're in a transition right now with 60% of our revenues on the oil price side not there. So therefore, as we rebalance the books through this year next, it will be discretionary, but we're going to keep it within our armory. We're not about to suspend buybacks. So they actually would not be in the market so far this year. I think we purchased back about $800,000,000 last year and we were in the market right up to 2057.
So we'll keep it within our armory and we'll make sure that we still have the flexibility to do buybacks, but we're not in the market right now. In terms of investments, I think when we outlined the original CAD 10,000,000,000 I think we said a lot of it would be more early life assets not late life assets. So to that degree not quite as dependent on the oil price. And you saw the transaction that Lamar completed just recently in terms of the Pellegine in the Gulf of Mexico, which I think is an example of that in terms of shorter term in terms of not long life type fields. The bulk of the divestment proceeds left to come, a lot of that's going to be across the piece, less of it now upstream.
So the CHF 4,700,000,000 the remainder will be biased towards downstream, some other corporate businesses that we have, less of it coming out of the upstream and still 1 or 2 midstream assets we have around terminals and pipelines and so on. So I think that's fairly well underpinned for this year and they're less dependent on the absolute oil price.
And are you seeing attractive prices on distressed assets in the upstream? Or is this still too early in the price correction?
Lamar, do you want to just pick up on where we are in terms of potential assets that we might choose to acquire during this period as well?
Yes. I mean, I think it's a little early to be able to talk about it. Certainly any specifics, but I think this is all going through a transition for everyone right now. So I think it's a bit early on that.
Fair enough. Fair enough. Thanks a lot guys.
Okay. Next question from Irene Himona of SocGen. Go ahead, Irene.
Thank you. Good afternoon, gentlemen. Just two quick questions, please. So firstly, in December, you flagged the $1,000,000,000 pretax restructuring charge to be taken over 5 quarters. I just want to clarify, in Q4, it appears that you took EUR 4.33000000 rationalization costs.
Is the EUR 1,000,000,000 unchanged? Or should we expect an increase or perhaps an acceleration in light of the macro environment? And then secondly, India, I note you're impairing the assets. Can you remind us perhaps or clarify what view on Indian gas prices is used behind that impairment please? Thank you.
Eiry, let me just pick up the first piece. The $433,000,000 we took in 4Q is the first tranche as we saw it. The original $1,000,000,000 restriction charge came out of really the simplification efforts that we've been talking about over the last 5 or 6 quarters. And when we came to roll the plans up in December, we could see at least when we could see $1,000,000,000 or thereabouts of restructuring, hence, while we put the announcements out that we did around the Upstream Investor Day. That was really around how we rightsized the company for the smaller footprint off the back of all the disposals.
For now, it's still our best estimate, but we'll keep you updated on that as we progress through this year. And I would certainly anticipate that we will use the $4,000,000,000 But in terms of whether there's more than that, we'll know more as we progress through quarter by quarter given what we're now doing around the rebalancing of the books of the company.
On India, I think if I'm right there's some exploration write offs. I'm not sure there are impairments. And if we had an impairment it was a very, very small one. Isn't there some exploration write offs? There there was.
I think the thing to think about in India is that there has been a good step made on gas prices one step that effectively applies to the base assets. It requires a different gas price to unlock the discoveries and the developments that we've got. And we are hoping in 2015 that we can work with the Indian government and get that done. But it does require a higher basically a gas premium in the gas formula for these projects to be unlocked.
Thank you.
Next question from Martin Ratz at Morgan Stanley. Go ahead, Martin.
Yes. Hi. Good afternoon. I want to ask you two questions. I wanted to take you up on the 1986 comparison, because also back then there were some pretty spectacular cost reductions and CapEx savings.
But also if you go back to the annual reports of the day, the company did look particularly well prepared to deal with that crisis back then as in the sense that BP was growing quite fast and the free cash flows are quite comfortably covering the dividends. I was wondering how you feel you're positioned at this moment, particularly in the context of that 1986 comparison? And secondly, I wanted to ask you about Egypt. In December, you still said to that the company's plan was to invest $100,000,000,000 over the coming sort of 10 years, if I remember correctly, on gas projects. And the West Nile Delta is, of course, a big chunk of that.
But I was wondering how you think about that project given current oil and gas price expectations?
Okay. Thanks, Martin. 1986, if I think back, I'm not sure the company was positioned particularly well going into 'eighty six. I think it had higher oil price assumptions and it was somewhat stressed. But you're right about the amount of capital and cost reductions in the industry that happened that we think could happen now.
How is the company positioned going into this year? Well, having completed now up to over well over $40,000,000,000 of divestments, I'm glad that happened. The timing on that and quality of those are good. I think going into 2015 with a gearing of 16% is good. I think you'll see companies smaller companies in particular in the U.
S. Highly, highly leveraged. I don't think the 16% gearing is particularly highly leveraged. So while it's going to be tough and we needed to do lots of things as well bring our overhead down having sold the $40,000,000,000 and our overheads were actually up a bit. I think we're positioned about as well as anyone going into 2015.
And for Egypt, Lamar?
I don't remember saying $100,000,000,000 over the next 10 years. But nonetheless, Egypt is a place where we do have a lot of investment opportunity and some good projects to do. West Nile Delta that particular project is not entirely, but it's pretty well insulated from the price and the price change that's happened over the last few months. So obviously, we'll do everything we can to make it as efficient as we can. But I think West Nile Delta will still be a project that will go forward.
All right. Thank you.
Okay. Thanks, Martin. Back to the U. S. And Guy Baber of Simmons.
Thank you guys for taking my question. I had a question on the balance between the obvious focus on capital discipline and restraint versus the ability to grow the long term resource base of the company through the cycle over time. So the question is, I guess, in deciding to reset that capital base to a lower level, do you believe that $20,000,000,000 of organic spend is an adequate base level that's sufficient to drive the long term resource base over time? Only the current level of spend need to be supplemented by rising exploration spending over time and be supplemented by acquisition of resource. Just curious about how you think about that balance and then whether moving toward 100 percent organic reserve placement as a goal that you guys believe you have line of sight to?
Bob, maybe this is Lamar again. I think it's a great question. I think, obviously, the $20,000,000,000 is and how much activity we can do off that $20,000,000,000 is contingent on how we get the cost base for that $20,000,000,000 But beyond that I think the root of your question is about renewal through organic means versus a combination. And I quite frankly, I think it's going to take a combination of organic and potentially acquisitions. And I put unconventional resources in an organic category that's not exactly like exploration.
So I think those three pieces of the pie are going to play going forward.
And Giles, just to supplement, when we sat down and went through in great detail the portfolio and we look out to the end of the decade, I mean, we still got 50 to 60 major projects that we're looking at. They may pace it a little bit different timing now, but some of them look good and we'll just keep going with them for sure. And if we were in a position where we were short of major project opportunities, we've got more than we can do. We had that before this price drop. We were always going to have to prioritize.
And then secondly, over the last 3 to 4 years, we have really reloaded the exploration portfolio. Acreage, some discoveries and appraisals. So a slower pace of exploration, I don't think is going to change our ability to grow. And I'll just add that to what Lamar said.
That's very helpful. And then I had one follow-up. You mentioned prioritizing base spending in 2015 is one reason you were able to reduce the overall capital budget. I was just hoping you could elaborate a bit on that comment and just perhaps quantify for us how that spending level has declined in year over year terms and specifically where you may be able to make cuts? I'm just trying to understand those implications, whether that affects your base decline rate at all?
I mean, just how you think about that decision making process?
Guy, I can't give you specifics today, but the base spending that I'm talking about that's going to be maintained around safety reliability and integrity that's going to be the same as it's been. It might be a little bit lower in some instances because we've done a bunch of turnarounds over the last several years. So it may attenuate a little bit. The infill programs generally are very, very high return and I don't think they're going to be attenuated that much. And that I think that's important to secure the cash flow in the near term.
So my point was more that we're going to examine every single dollar in every single category, not so much that we were going to find a silver bullet in the base. I think our base decline, our aim is to keep that base decline in that 3% to 5% range that we talked about in December.
Okay. Thanks, Lamar. That's helpful.
Thanks, Guy. Next question from Anish Kapadia of Tudor, Pickering, Holt.
Hi. Just first question was on your 2014 cash flow from operations. I was just wondering if you could split that between upstream and downstream. And kind of looking at the upstream number, give some kind of updated
oil price?
No, we don't normally give that level of granularity in terms of breaking it down. You could probably do some rule of thumb estimates. But no, we don't normally actually wouldn't break out the operating cash flow. It'd be commercially sensitive in terms of what sits between downstream and upstream.
Okay. Second question is on just looking at your taxes for 2015. I was wondering if there's going to be any significant difference you would expect in terms of cash taxes versus P and L taxes this year?
Cash taxes have been running at about 8% lower than tax charge, which is all to do with how we roll out the provisions versus what we've cash paid versus the provisions that we have in place in terms of deferred tax. So it's typically run at about an 8% difference between paid and charged. I think as we enter this year and we start to see the earnings profiles, there's no question the effective tax rate will be lower than the average that we saw this year. But there are so many factors that influence it, it's impossible at this point to really give you guidance. We've got a rough indication of where we think it will be based on the plans that we've rolled up.
But I think given the sharp drop in the oil price, it's impossible to sort of come up with specific guidance on that at this point.
Okay. Thank you. And just one final one if I can. In terms of your assets in the U. S, I think you pointed to the Eagle Ford assets being fairly high quality.
Just wondering how you kind of think about those assets in this oil price scenario, but then as well some of the lower tier assets in the U. S. In terms of how do they cope in a lower price scenario?
In terms of the Eagle Ford that is a very high quality set of assets in the Eagle Ford. Obviously, we'll be working with our partner, Lewis, on exactly what the activity level is going to be maintained through the year. And I suspect there'll be a little bit of attenuation there. The other assets that we have are more gassy and we've had very, very little capital activity on those assets. And actually ironically, some of our activity may go up a little bit in the Lower forty 8 in certain areas, certain sweet spots.
So I think we're probably a little bit different than the average in the U. S. Independent space.
Great. Thank you.
We'll take the next question from Rob West of Redburn.
Hi, there. Thanks very much
for taking my question. I'd like to return to the theme of you're having lower oil price expectations than your peers, which quite unanimously seem to expect a rapid bounce back in the crude price. So my first question is a specific one. You recently outbid on the Abu Dhabi onshore license renewal by one of your peers. I was wondering is that evidence that with your lower oil price view you see the need to be somewhat more disciplined in investing those marginal dollars in that specific case?
And second, more generally, if your peers are willing to outbid you on new licenses and new service contracts and even project capacity. If we look beyond 2015, does that mean that well, if that happens, you're willing to just let invest less than them for long run growth? And I guess, by extension return that cash instead rather than targeting longer term growth and your peers expect the oil price to bounce back?
Yes. Rob, I think we're keenly aware of the feedback we've got from we've had from major shareholders. And in fact beyond the major shareholders, just people that broadly observe that the oil and gas industry for about half a decade now has generated lots and lots of operating cash flow and puts it back into projects, which have turned out to be pretty low returns and this is even at high $100 oil. So we've been working hard to make sure that we have a discipline around our capital. So I'm perfectly comfortable with the changes that we're making.
It is an investor focused strategy. We do think in terms of value over volume. And I think that a disciplined reset of both capital and cost is very prudent. We've actually seen this movie before. This is there are 4 times when the price has come down say over the last 30 years.
Only once did it was there a rapid jump back and that was probably 2,008 and 2,009. But other times there's more of a rebasing here and we see the fundamentals could do that. And I think we need to do it very carefully, but we need to do it quickly. And I think that's good for all seasons. And I think we are going to keep that commitment to the shareholders.
We'll make sure that we protect the dividend. But I don't have a problem with taking this focused approach now. I don't think we're going to just cut into the really long term value. We may defer some, but that growth will come I believe with lower capital and operating costs. And on Abu Dhabi, I've only read in the press, so don't know anything other than that.
I think Total was awarded a share in that concession. But beyond that, I'm not sure that process is over either. I just don't know. We don't know.
Okay. Very clear. Thank you.
Next question from Lydia Rainforth at Barclays. Go ahead, Lydia.
Thanks, Jess, and good afternoon. A couple of questions. The first one on the cost base or the process of actually trying to reduce the cost base, what sort of proportion of that is actually going to be the corporate overhead as opposed to actually in the individual businesses? And just within that, can you give us a couple of examples? And then secondly, just in terms of actually a very quick question on the reserve replacement rate ex Lozneft if you have it?
Thank you.
Lydia, on the first point, as part of the simplification issues we're talking about, we're already in the process of taking somewhere around 10% to 15% of the corporate and functional overhead costs. As we now look through all of our activity on an activity basis, we will be looking to take out at least as much again, if not more. And we are going through an activity review of all of our activities and the functions, human resources, IT and S, our information systems, all of the activity. But coming back to Bob's earlier point, not compromising safety and operational risk or compliance and ethics, they absolutely will not be compromised. But in terms of everywhere else, we're looking at where we can take activity out, which will all help us within terms of rebalancing the books going forward.
On the reserves piece at this point, we don't normally give that sort of guidance. That will come out as part of our new report and accounts in 20 F filing.
Perfect. Thank you.
Turning now to Fred Lucas of JPMorgan. Are you there Fred?
Yes. I'm Geoff. Thank you, guys. I welcome the intention to rebalance your cash flows under a much more cautious oil price outlook. But I wonder if you could just authenticate the simple arithmetic of how you do that.
I guess it sounds like you still intend to grow your capital employed albeit more slowly with the low rate of CapEx. And just using EP's rule of thumb for oil price sensitivity, we may have lost around $45 going from $100 to say $55 plus or minus. Your EBIT sensitivity would suggest that's an EBIT loss of over €12,000,000,000 And putting that on a post tax basis, that's almost €9,000,000,000 of earnings, which I guess drops straight to the cash flow. And given your capital employed base around $140,000,000,000 that's implied loss of return of 6% on your return on capital, which in 2014 wasn't very good to start with. It was below 10% and versus where you were back in 2011 that was 16%.
So I hear what you say Bob about you sold high return assets, but the facts are your return on capital employed is pretty much halved. And it looks like it may halve again. So I'm trying to square the circle where you get to a cash flow balance. But in order to do that, you've got to be clearing your cost of capital. I just don't see how you get there.
How can you recover that loss of cash flow or is it a magnitude $9,000,000,000 to initiate that balance?
Yes. Fred, there's an awful lot of information you've just dropped into that question. I'd be very happy to go through each of the pieces with you. First of all, you've jumped to $55 when the year to date average is $48 So don't get over infused by where the oil price is in the last few days.
But that's only going
to make the numbers worse.
No, absolutely. So that's exactly what I'm looking at Fred. And that's exactly why we're in the process of rebalancing the books. But I mean, I think it's a little disingenuous to think about the business at $115 a barrel and the returns as you've just described from our perspective weren't satisfactory and that was something we were looking to grow. You can't then assume the oil price goes to your $55 if that's where you want to sit.
And we had a cost base that was built at $115 So we've got to start to drive deflation into that. That will drive out. So we've got a pretty good handle on what level of costs we need to drive out over the next short to medium term to get those returns back where they need to be. But we can't do that overnight as you'd expect. I mean you can't lose that much revenue overnight off a big chunk of your portfolio.
So it is one of the things that we're very focused on. It's kind of one of the things that we're looking at in terms of how we rebalance the books. It's not just about rebalancing the source and use of cash. And the rules of thumb you're using kind of interesting at $115 a barrel. But for someone that's followed the market as long as you have Fred, you will know those jaws of thumb will not be applying down at $45 $50 a barrel.
And that's something we'll look to try and reset through this year to help you with guidance in terms of future quarters. So it's just a bit premature at this point, but absolutely agreeing with your points.
Fred, this is Bob. I think that I think your the question sort of stark reality that you've painted there is an industry one. It's not just a BP one.
I agree. It's not unique to BP, but I'd love to hear how BP is going to bridge those numbers. I mean that EBIT sensitivity was for last year. I appreciate it's not linear when you fall by as much as $40 $50 But assuming it's approximately right and assuming that you continue to grow capital employed and tell me if that's wrong, then it's very difficult to see how you can recover that loss of capital return to get back to that point of cash flow balance? Because I assume cash flow balance is synonymous with a business that earns a return that exceeds the cost of capital.
Well, I think that's why. And you say we have a bearish outlook on prices. I think what we have is a prudent realistic response to what's happening in the industry and we're going to do it fast. We're going to do it rapidly. We're going to go through the cost and the cost base.
And that's how you move the dial quickly. And that's what we're going to do across all of our activities. We've I think we're the only ones who have put in, for example, pay freezes and other things, significant reductions as we go through. But that's exactly why we're going to move fast. I mean, I think you create it sounds like you're distinguishing us, but I'll tell you the industry broadly has the same issue and those that sort of delay it's not wise.
And you need to know we're all over it. And I think we can do it. We've gone through 2015 is a reset year. Obviously cannot get there in 2015, but we're going to get it down in 2016. We see the road map to do that.
We know how to do that. And that's what you should hear from us, a sense of urgency to re base the company in 2016 and beyond.
But what would you
say is a satisfactory return on capital for BP?
Well, again, dollars $45,000,000,000 to $40,000,000,000 of 55% return, That's why you've seen those numbers come down over time. I mean, we just divested even some more of those in December. And you have to know at what price that is as well. But I think you will see taking any price really, you will see an increase in our return on capital employed going forward. And of course that will vary depending on what price
assume. I mean Fred maybe just to sort of help. I mean our long run assumptions haven't changed at this point. So we still assume our long run assumptions of $80 a barrel for our 20 to 30 investments still stand good. And we held that when the price is $148 a barrel we'll hold it now while it's down at $45 to $50 a barrel, because we think long term that's where it will end up.
We just don't want to during this period of transition back to those levels, however long that's going to take. I think we're just planning to be very, very prudent about how we do that.
Sure. When does your long term start, Brian?
What do you mean when does it start?
When do we get back to that $80
Fred, if I could answer that question for you, I'll be a very rich
man. But I think we have to plan on minimum a year and it could be several years.
Right. And over that time horizon, do you think you can recover the loss in capital employed or return on capital employed that you're likely to experience through this year and get back to something at the
right level? Well, again, you get different numbers depending on what price you use.
Yes. Fred, we'll be able to update you on this as we go quarter by quarter and you start to see the progress. Just like we did with the 10 point plan, it was over 12 quarters it was delivered and you'll see progress. And at this point last year, I don't think many people thought we could hit the 30,000,000,000 target. If you looked at all the summation of all the various things and we've exceeded that and I would fully expect that we will be able to do the same thing over the next couple of years assuming the oil price stays what it is.
And if it's above where we expect it to be that's all upside.
Okay, guys. I'll leave it there. Thanks.
Okay. Thanks, Fred.
Okay. We'll take the next question from Chris Coupland of Bank of America.
Thank you, Jess. Hello, good afternoon. Just two quick questions. On the CapEx outlook, just want to see that EUR 3,000,000,000 cut year on year. Can you put a number on your exploration spend budget for 2015?
Where has that gone to? And can you refer to a few FID deferrals? You've talked about Mad Dog. Which other FIDs do you still plan to make during 2015? And if I may, Brian, I appreciate your rule of thumb.
We'll need a bit of time to update. But can you at least confirm in which direction it's going as the oil price drops not just from $100 to $90 but all the way down to $40 Thanks.
Let me go first, Brian. I think on the we're staying on our group numbers today. We're not breaking all these things down into the intricacies of the plan. But the exploration difference in 2015 versus 2014 will be significant, but I'm not going to give a number today. The in terms of FIDs, Mad Dog I listed as a potential deferral.
There have been no decisions made on that. And as far as I think that's a project actually that it's more about just finding the optimum way in time to go to the market to understand what the cost of that project will be. So that's still to be worked with the partners. Other examples, we'll be looking along the normal path. So I think expansions of heavy oil in Canada would be some things that we'll be looking at to defer potentially.
Our portfolio, the whole thing will be looked at, but very similar things to what other people are looking at.
We've got to be a little careful about saying exactly which ones because we have partners in some of these projects and we have to consult with them as well.
Absolutely. And on the rules of thumb, I think it's just premature. I mean, if I had a gut feel, it's probably going to be slightly higher on the oil and slightly lower on the gas. But until we sort of go through the portfolio, look at all the effects of the PSAs, what that means in terms of different price sets, it's just premature at this point. So we will update when we can.
Okay. Thank you.
Okay, Chris. We'll take the next question from Lucas Hermann of Deutsche Bank.
Yeah. Thanks very much, gentlemen. Good afternoon to everyone. At least 2 if I might. And just to bring Tufan into things, I guess, you've been seeing very patiently.
Chemicals, it's a business that over the last 3 years has I guess struggle would be the right phrase. If I go back 3, 4 years, it was delivering nearer €1,000,000,000 of profit. I guess what I don't really understand is you seem to have advantaged assets particularly in the paraxylene PTA chain, Advantage Technology and yet the losses remain I guess surprising relative to the strength of your position. To what extent or over what time period to what extent could and do you think it's still possible to move back towards the kind of numbers that you were delivering in 20 10, 2011? That's the first one.
And secondly, Lamar, I wonder
if you'd like to talk
a little bit more about the transaction you've undertaken with Chevron. It's a shame in ways you haven't disclosed what payment you might receive because this is a classic case in some respects of realizing value from expiration. But what really intrigued me was the decision to seed operatorship in a basin which you have a very strong position in and that you've always been exceptionally proud of? And it's not criticizing what you're doing. It's better understanding the
I think PTA and PX right now is at the bottom of cycle. We knew that loss of capacity came in China. And how long do we believe this bottom up cycle will last? At least, I would say, a couple of years, maybe 3 years or more until the excess supply clears up.
Is that 2 to 3 years from now?
About 2
to 3 years from now?
That's my expectation if I look at that. But I would say, therefore, if you look at the strategy, we actually fundamentally changed the strategy. Strategy is right now to say we have significant restructuring, especially in business to reduce the cash breakeven more than 35% as I mentioned in my presentation. This is good for all seasons frankly. And if the numbers if the environment picks up and gets to the levels you are talking about, then we expanded earnings potential of the business.
If it stays at low levels, we are we have a much more robust business. Hence, why we came up with this strategy, especially in aromatics restructuring. But one thing I want to say, in asset tiles, we actually see a better market and it has been growing and we expect environment to improve even further in asset tiles. So I think we may selectively invest to capture that earnings potential in asset tiles business.
Okay. Thank you.
Lucas, hi, Lamar. I think this was a very important transaction. We haven't no, we haven't given the compensation side of it yet, but I think it was an exceptionally important transaction, one that we've been working on for quite a while. It creates effectively it creates commercial alignment across a number of blocks in a neighborhood of quality discoveries, probably the largest and highest quality paleogene discoveries or some of them at least. And the simple logic is that we can do more optimal development and capital efficiency for the whole through deciding together and collaboratively with Chevron and Conoco where a host may be, what would it look like, what would tie in from where.
There's massive synergy in that. Teams, we think we will have seconded members both ways into teams. We may operate some of the drilling. They may operate the operatorship. It is an emotional issue sometime.
But as I've talked many, many times, we are dedicated to trying to find the absolute best way to do something. Chevron has the ability. They've put up a Paleogene field into operation. They've built a facility, might look very similar to something we may use in this consortia. The technology development needs to be done by multiple companies rather than one.
And don't forget, we still own Cascadia 100% and operate Cascadia as well as other exploration prospects that we operate. So it's a balanced way of trying to get the most value out of this play really.
And does this accelerate delivery over and above the ability of the 3 of you to work on technology? Do you think Chevron is already in a position where it can push this development more aggressively than would have been the case if it had just been in your hands?
I think there is a pretty good chance that working together will accelerate development and it will be the right development rather than everybody for themselves. That's what it's fundamentally about.
Okay. Thank you.
Moving now to Bertrand Hodee of Raymond James.
Hi, everyone. Thank you for taking my question. Two quick ones, if I may. The first one is on Mad Dog. Your latest view on Mad Dog, I think in December 2014 was that development costs were coming down to around $14,000,000,000 How much deflation do you still need on Mad Dog for this project to fly, let's say, at a lower oil price assumption, let's say, dollars 50 or $60 That's my first question.
And the second question, you took an impairment of $1,000,000,000 in Angola around. The North Sea? Or is it something else? Thank you.
Bertrand, this is Lamar. Let me hit the second one first. The impairments in Angola, we're not going to go into detail on individual area impairments too much, but it was a combination of reserve write downs that triggered the impairment test that I talked about earlier with a very pretty much low oil price $48 strip as well as some decommissioning effects on the cost. So it was both. And then I forgot your first question.
Mad Dog. Mad Dog.
We think Mad Dog costs have come down as I talked to about in December partly due to its design and scope and partly due to better prices in effect. I'm not going to give any sort of target in terms of where we're trying to get to make it economic at any oil price. But I do think there is very significant savings yet to come in Mad Dog. And we will take the time to understand how and when to go to the market to try to access those better costs. And I think we will certainly have to work with partners and make sure we're all in the same boat on this and aligned.
But I think that's going to be an example that probably goes to the right a
little bit. And it's really cost Can I check just one follow-up on MIGO? Do you still intend to go to contractors in March as you said in December? Or are you going to push this back?
Well, I think we need to talk to the partners, but I would think well, I'm not going to give guidance on that. We'll go when we think it's ready to go.
Okay. Fair enough. Thank you.
Thank you. And we'll move now to Neil Morton of Investec.
Thanks, Jess. Good afternoon, everyone. A couple of hopefully quick questions. Just firstly on the gearing. You talked about the 10%, 20% band while uncertainties remain.
Now going into 2015, your strong balance sheet is 17%, but it's not 1,000,000 miles away from the top end of that range. Just wondered how is that sort of a line in the sand that you defend at all costs? And just secondly on Macondo, just wonder whether you're looking to appeal the Phase 2 ruling? And if so, would there be a time deadline on that? Thank you.
Thanks, Neil. If I just pick up that first question. You recall the prima condo our gearing band was 20% to 30 percent. So we reset that in 2010 late latter part of 2010. In the 10% to 20% ban which we've always talked about while uncertainties remain and to a degree the environment was one of those uncertainties.
So I wouldn't go as far as saying it's a strong hard line in the sand, but it's been an incredibly powerful way to manage the company going forward. And there's no question that these oil prices, it gets back to rebalancing source and use of cash, which is one of the reasons why we're taking all the actions that we're taking, recognizing that there are a number of uncertainties still out there. So I wouldn't call it a hard line, Asan, but it's absolutely a key part of our financial framework right now. And we would anticipate at the current price levels of where we see today, we can still manage through this year, cover the dividend, rebalance the books the way that we described to you today and still stay within that band of 10% to 20%. We're pretty confident about that for this year.
With some slight flexibility to do some things that we don't anticipate inorganically, but that's small things. On your second question, which was the Phase 2 of the trial for those is complicated. So Phase 2 was the one that looked at what they called source control in response to the spill. The judge ruled that we were not grossly negligent in that and had a value of oil. And we're just considering options for a Phase 2 appeal and really no guidance at this time.
Is there a deadline, Bob?
I don't think there is a deadline. Actually, although I've been exposed to a lot of the legal points, I actually don't know. And there's probably no one right now that can answer whether there's a hard deadline or not. But we won't let ourselves be timed out from what we think is right. For sure.
Thank you very much.
Thank you, Neil. And a question now from Richard Griffith of Canaccord.
Well, good afternoon. I haven't listened to the entire call, so as a quick point of clarification really. You've talked about the CapEx budget coming down this year, if I heard you correctly, driven by activity reduction with a view to capturing industry or sorry, service industry deflation perhaps from 2016 onwards. Would that infer that your CapEx spend from 2016 onwards could be lower given how cautious you are on the oil price outlook? Sorry lower than 15?
Well, I think the CapEx guidance is an adjustment to what we see as an environment not we're not making assumptions of deflation in that CapEx number. But we see opportunities to defer, secure longer term growth by deferring and avoiding the issue of putting CapEx into something that might not get the right returns. I think as we look beyond 2015 into 2016, mean, we'll have to judge this. We're it's hard to say. I mean, it feels like that level is about the right level for us in a lower oil price environment to secure the growth.
But I think it's probably a little bit premature to lock it in.
Yes. I think it's at this point Richard it is a bit premature. And we'll have to see what happens in terms of deflation because of course that will ultimately drive to a low number, but it's just too soon at this point. We'll be able to update you quarter by quarter as we get through this year and see how the plans progress.
Okay. All right. Thank you.
Thank you all. There are no further questions. So I'll just hand back to Bob to say a few last words.
Thanks, Jess. Time is going fast this year. And first, a Happy New Year to everybody. We're already into February. It's quite extraordinary.
I think as you listen to what we've said and what we've been saying now consistently, I can remember that we are an integrated company. So we're responding in the upstream very, very strongly. And of course the downstream actually offers us some growth and a cushion to this. What you're hearing from us is we need to prudently prepare the company for a different environment. This is more than a price correction.
It's quite significant. And we've been through a lot as a company. And I think the company the broad management teams across the company are quite steeled at responding to challenges and problems. And in this case, we're going to have a disciplined reset of both capital and cost. We think it's prudent to do that.
We've got a commitment to the shareholders of maintaining a dividend and over time having it be progressive. We will we have some momentum in what we're doing. I think we've been pretty fast off the mark in our view of adjusting here. We will do it carefully, but we will do it rapidly. And look forward to talking with you next quarter, because think about this, the average price in our industry of $77 in the 4th quarter so far is running at 40 $8 So these are not going to be dull quarters ahead of us, but we're not going to be Thanks.