Relations. Hello, and welcome. This is BP's 2nd Quarter 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 and our Chief Financial Officer, Brian Gilvari. 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.
Thank you, Jess. Hello, everyone, and wherever you are in the world, I'd like to thank you for joining us today. It's been another active and I think a successful quarter at BP. We continue to move with momentum towards our key goals, not least our commitment to delivering the 10 point plan we first laid out to you in 2011. The demonstration of this is in the stronger underlying earnings and operating cash flow you're seeing in our results today compared to a year ago.
We continue to ramp up the new major projects that drive delivery of the $30,000,000,000 to $31,000,000,000 of operating cash flow planned for this year. So we remain confident of achieving this goal. At the same time, we are firmly focused on safe, reliable and increasingly efficient operations. Earlier this year, we also set out our longer term proposition covering the period out to 2018. As you'll recall, we said that we intend to grow sustainable free cash flow through a combination of material growth and operating cash flow and capital discipline with the intention of growing distributions to shareholders.
Today, you will also see the consistent progress towards the milestones that support the delivery of this plan. So turning to today's agenda, I will start off with the headlines for the group in the first half and then Brian will take us through the results for the Q2 along with a reminder of our financial framework and guidance. I will then give a brief update on the ongoing legal proceedings in the U. S. Before a note on Rosneft and a look in more detail at the first half highlights from our upstream and downstream businesses.
And finally, there will be time at the end for questions. So let me start with an overview of progress in the first half of twenty fourteen, beginning with the portfolio. Having completed the $38,000,000,000 divestment program in 2013, we announced a further $10,000,000,000 of divestments by the end of 2015 And we have now agreed $3,400,000,000 of this $10,000,000,000 program and continue to look at other ways of actively managing our portfolio to generate value. You saw this in the announcement we made in March regarding the separation of our U. S.
Lower forty eight business and we have already made a start on defining an operating model for the new business and are busy transitioning to a new streamlined organizational structure. We've also signed a lease on new office premises in Houston for the Lower forty eight business. In the upstream, we have participated in the completion of 10 exploration wells this year with 2 significant discoveries, 1 at Orca in Angola and the other at Natuzz in Egypt. 5 new upstream major projects have come online in the first half of the year, all in key regions for us. At the same time, we have a number of big projects ramping up, helping to drive operating cash flow growth in 2014 and beyond.
We also continue to demonstrate quality in our operations as seen through our increased levels of plant reliability. In the downstream, the modernized Whiting refinery is up and running heavy crude and we continued to focus the portfolio on advantaged assets and high quality products in growth markets. BP has also signed some important deals in the 2nd quarter, notably a heads of agreement with CNOOC, the Chinese National Offshore Oil Corporation for a 20 year LNG supply contract. So progress is visible and all of this supports our longer term commitment to growing distributions. In April, we announced an 8.3% year on year increase in the quarterly dividend, demonstrating our confidence to keep this momentum through the remainder of the year and beyond.
We've also, as promised, bought back $8,000,000,000 worth of our own shares since the start of 2013, completing the buybacks associated with the proceeds from the sale of our interest in TNKBP. The buyback program will continue as Brian will come to later supported by the current program of divestments. So let me now hand over to Brian to take you through the numbers in detail.
Thanks, Bob. BP's underlying replacement cost profit in the second quarter was $3,600,000,000 up 34% on the same period a year ago and 13% higher in the Q1 of 2014. Compared to a year ago, the result reflects increased upstream production in high margin areas, a stronger contribution from Rosneft, the return and ramp up of the modernized Whiting Refinery and stronger oil and gas realizations. These effects were partly offset by higher DD and A, a significantly weaker downstream environment, a lower contribution from supply and trading and the impact of divestments. 2nd quarter operating cash flow was $7,900,000,000 Turning to the highlights at a segment level.
In the upstream, the underlying second quarter replacement cost profit before interest and tax of $4,700,000,000 compares with $4,300,000,000 a year ago and $4,400,000,000 in the Q1 of 2014. Compared to the Q2 of 2013, the result reflects increased production in high margin areas, primarily the Gulf of Mexico and higher liquids and gas realizations, partly offset by higher DD and A and well work costs and the impact of divestments. Excluding Russia, 2nd quarter reported production versus a year ago was 6% lower, primarily due to the Abu Dhabi onshore concession expiry in January and the impact of divestments. After adjusting for these factors and entitlement impacts, underlying production increased by 3.1%. Compared to the Q1, the result reflects increased production in high margin areas and lower exploration write offs, partly offset by a lower gas marketing and trading result following strong first quarter performance and lower gas realizations.
Looking ahead, we expect Q3 2014 reported production to be lower than the 2nd quarter, primarily reflecting planned major turnaround and seasonal maintenance activities in Alaska and the Gulf of Mexico. We expect the seasonal reduction to be slightly larger than we experienced in the same quarter of 2013 due to the phasing of these activities. BP's share of Rosneft underlying net income was $1,000,000,000 in the Q2 compared to $220,000,000 a year ago and $270,000,000 in the 1st quarter. The 2nd quarter result benefited primarily from foreign exchange impacts. BP's share of Rosneft production for the 2nd quarter was 988,000 barrels of oil equivalent per day, an increase of 5% compared with a year ago.
On the 27th June, Rosneft's Annual Shareholders Meeting approved an annual dividend of RUB12.85 per share in respect of 2013 earnings. On the 22nd July, we received our share of this dividend, which amounted to $690,000,000 net of taxes. In the Downstream, the 2nd quarter underlying replacement cost profit before interest and tax was $730,000,000 compared with $1,200,000,000 a year ago and $1,000,000,000 in the Q1. The fuels business reported an underlying replacement cost profit before interest and tax of $520,000,000 in the 2nd quarter compared with $850,000,000 in the same quarter last year. The decrease reflects a significantly weaker refining environment and a weaker contribution from supply and trading, partly offset by significantly higher throughput and processing of heavy crude at Whiting from both the new units, which are now on stream and the absence of last year's planned outage for most of the second quarter.
The lubricants business reported an underlying replacement cost profit before interest and tax of $310,000,000 compared with $370,000,000 in the same quarter last year. The decrease was mainly due to the impact of restructuring programs and foreign exchange effects. The petrochemicals business reported an underlying replacement cost loss of $100,000,000 in the Q2 of 2014 compared to a loss of $20,000,000 in the same period last year. The decrease was mainly due to oversupply in the aromatics market. Looking to the 3rd quarter, in the fuels business, we expect stronger margin capture relative to the Q2 driven by a lower level of turnarounds and Whiting operations.
In the petrochemicals business, the challenging environment is expected to continue, but we should benefit from a lower level of turnarounds in that business. In other business and corporate, we reported a pretax underlying replacement cost charge of $440,000,000 for the 2nd quarter in line with guidance. And the underlying effective tax rate for the Q2 was 33%. The charge for the Gulf of Mexico oil spill was $260,000,000 in the 2nd quarter, primarily reflecting an increase in the provision for future litigation relating to the spill. The total cumulative pre tax charge for the incident to date is now $43,000,000,000 The charge does not include any provision for future business economic loss claims that are yet to be received, processed and paid.
Bob will provide an update on the legal process shortly, but as we have previously advised, it is still not possible to reliably estimate the remaining liability for business economic loss claims. We will revisit this each quarter as we continue to contest what we consider to be unreasonable claims, a process which could take some time. The pretax cash outflow on costs related to the oil spill for the Q2 was $170,000,000 The cumulative amount estimated to be paid from the trust fund was $19,300,000,000 leaving unallocated headroom available for further expenditures of around $700,000,000 In the event that the headroom is fully utilized, subsequent additional costs 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 was $6,300,000,000 with $20,000,000,000 paid in and $13,700,000,000 paid out. And as indicated in previous quarters, we continue to believe that BP was not grossly negligent and have taken a charge against income on that basis.
Turning to divestments. As Bob noted, following the completion of our $38,000,000,000 divestment program and the sale of our share of TNKBP to Rosneft in 2013, we continue to actively manage the portfolio. In October, we announced plans to divest a further $10,000,000,000 of assets by the end of 2015. We have signed deals worth around $400,000,000 during the second quarter, bringing the total agreed against this $10,000,000,000 commitment to $3,400,000,000 Most notably, this includes the sale of a package of assets on the Alaskan North Slope, the farm out of 40% of our interest in the Aman Kazan project and the sale of our Texas Hugoton and Panhandle West Gas assets to Pantera Energy. Moving now to cash flow.
This slide compares our sources and uses of cash in the first half of twenty fourteen for the same period a year ago. Operating cash flow in the first half was $16,100,000,000 of which $7,900,000,000 was generated in the 2nd quarter. Excluding oil spill related outgoings, the first half underlying cash flow of $17,000,000,000 was $6,800,000,000 higher than a year ago. Organic capital expenditure was $11,000,000,000 in the first half and $5,600,000,000 in the second quarter. We received divestment proceeds of $1,800,000,000 in the first half of twenty fourteen, including $800,000,000 in the quarter.
And in the first half of the year, we have bought back $2,400,000,000 of shares, including $500,000,000 in the Q2. Net debt at the end of the second quarter was $24,400,000,000 with gearing of 15.5 percent compared to 12.3% a year ago. This largely reflects the impact of our share buyback program over the course of the year. Our intention remains to keep gearing in a target band of 10% to 20%, while uncertainties remain. Our guidance for the full year remains unchanged as outlined to you in February.
We expect full year underlying production to grow compared to 2013 after adjusting for the impacts of the Abu Dhabi onshore concession expiry and divestments. This increase is mainly driven by the start up of major projects. As mentioned, organic capital expenditure in the first half of twenty fourteen was $11,000,000,000 and we expect the full year to be around $24,000,000,000 to $25,000,000,000 DD and A for the first half of twenty fourteen was $7,300,000,000 and we expect the full year figure to be around $1,000,000,000 higher than 2013. Other business and corporate charges are expected to average $400,000,000 to $500,000,000 per quarter and we continue to expect the full year effective tax rate to be around 35%. Looking at shareholder distributions.
In April, we increased the quarterly dividend by 8.3% year on year, reflecting our confidence in the delivery of the 10 Point Plan and growth in operating cash flow over the medium term. The Board will review the dividend again with the 3rd quarter results. Since the 1st January this year, we have bought back $2,600,000,000 of shares, bringing the cumulative total since early 2013 to 8 $1,000,000,000 This concludes our $8,000,000,000 buyback program from the proceeds of the sale of our interest in TNKVP. We intend to use the post tax proceeds from our current $10,000,000,000 divestment program predominantly for shareholder distributions with a bias to share buybacks. Looking further out to 2018 and to remind you of the outlook we shared with you in March, We remain confident of our delivering operating cash flow of $30,000,000,000 to $31,000,000,000 in 2014.
Our first half operating cash delivery of $16,100,000,000 puts us well on track for the year. Relative to 2013, this reflects the higher expected contribution from major projects in the upstream, the ramp up of the Whiting Refinery and some reversal of the working capital bills seen in 20122013. We expect to sustain this significant increase in operating cash flow in 2015 at broadly similar levels to 2014 and then to see steady growth out of 2018. Growth is driven by the higher cash generating characteristics of our portfolio going forward both upstream and downstream as well as by the opportunity to improve efficiency across the group. In the near term, we expect underlying cash costs for the group to remain broadly flat assuming stable oil and gas prices.
Coupled with our intention to keep capital expenditure in a range of $24,000,000,000 to $26,000,000,000 per annum over the same period, we have a strong platform to grow shareholder distributions. We expect to grow dividend per share progressively in accordance with the growth in underlying operating cash flow from our business over time. We aim to bias surplus cash to further distributions through buybacks or other mechanisms. Now let me hand you back to Bob.
Thank you, Brian. So let me give you a brief update on the main Gulf of Mexico related legal proceedings in the United States. The first and second phases of the MDL-two thousand one hundred and seventy nine trial have been completed and the court yet to rule on either. The 3rd phase has been scheduled to begin on the 20th January next year. This is the penalty phase in which the court will hear evidence regarding the penalty factors set out in the Clean Water Act.
Regarding business economic loss claims, the district court has now approved a new policy that provides for the matching of revenues and and expenses and calculating loss profits for business claims. Additionally, we filed a motion to allow us to seek restitution from claimants who were overpaid as a result of the previous policy. Separately, the 5th Circuit denied further review of the issue of causation and approval of the settlement and certification of the class. We will now seek Supreme Court review of these issues. In the meantime, business economic loss claim payments have resumed.
In the MDL-two thousand one hundred and eighty five secondurities litigation, the trial for the class action is set for the 18th May next year, subject to the ongoing appeals around certification of the class. BP believes that all of the plaintiff's securities claims are meritless and we will continue to vigorously defend against them. As we've said many times, we are determined to pursue fair outcomes in all legal proceedings. BP is committed to protecting the best interest of its shareholders at all times and therefore we fully intend to stay the course in all matters relating to this litigation. We continue to compartmentalize the management of these activities to avoid distraction to the thousands of BP people and contractors working in our U.
S. Operations, who remain firmly focused on delivering our business objectives. In Russia, as you are aware, recent geopolitical events have continued to create levels of uncertainty in the region, which we monitor closely. At the business level, as you've seen, Rosneft had a good quarter. In June, it held its Annual Shareholders Meeting in which I was reelected to the Board and the Rossnev dividend for 2013 was approved by shareholders.
As expected, the dividend was announced as 25 percent of Ross Neff's IFRS reported earnings and represented an increase upon that pay for 2012. We received our share of that dividend in the bank last week at just under $700,000,000 after tax. Turning to the upstream, our primary focus here, of course, continues to be carrying out operations safely and reliably, while delivering the milestones we expect to underpin the growth in operating cash for the long term. Summarizing progress this year, starting with active portfolio management, we have announced a total of $3,000,000,000 of divestments in the upstream as part of the group's objective to divest $10,000,000,000 of assets before the end of 2015. This includes the sale of a package of Alaskan assets to Hillcorp, which will allow us to focus more specifically on maximizing production from Prudhoe Bay and progressing the Alaska LNG opportunity.
We've also sold our farm down assets to others that are better placed to extract additional value. In the Lower forty eight, we signed an agreement to sell our interest in the Panhandle West and Texas Hugoton gas fields to Pantera Energy. In the Gulf of Mexico, we farmed down 17 deepwater exploration leases to Noble Energy. And in the North Sea, we have agreed to sell our partner year. 10 of those have already been completed resulting in the 2 significant new discoveries so far in 2014.
We are encouraged by the results we're seeing in testing these plays at Orca in Angola and Natuzz in Egypt and we are evaluating the others. We continue to access new acreage and in the second quarter, we received regulatory approval of our award of 24 blocks in the March Gulf of Mexico lease sale. We continue with the steady delivery of new projects. As I mentioned earlier, we've seen 5 major project startups in the first half of the year and our remaining 2014 project startups are on track. After a major program of turnarounds in our assets over recent years, we have been able to reduce the number this year.
And to put this in perspective, we undertook 47 turnarounds in 2011, 30 in 2012 and 20 in 2013 and have just 8 planned this year. And we've completed 2 so far in 2014 with a further 6 due by the end of the year. And finally, we have now brought 80% of our priority wells for 2014 online. The majority of them on or ahead of schedule. And we expect the 2014 priority wells to deliver 2 thirds of total new well production.
Looking at major projects in more detail, most recently the Total operated Clove project in Angola achieved 1st oil on the 12th June. Joining this year's other startups the Nikita Phase 3 and the Atlantis North expansion in the Gulf of Mexico and the Shell operated Mars B in addition to the Sharag oil project in Azerbaijan. We are on track with the 2 further start ups planned for 2014. In the North Sea, that's the offshore construction on the Canoole project, which is complete and commissioning is now over 80% complete. And in Canada, the Sunrise Phase 1 project is on track with construction of the central processing facility over 70% complete.
As highlighted in our March strategy presentation, our current year start ups are particularly high margin and more than double the 20 13 up segment average and are expected to deliver significant operating cash flow for us out to 2018. Looking forward, we continue to work on our quality pipeline of over 50 major projects using a disciplined, centralized and careful process of selecting the right development concepts, optimizing the projects and then ensuring we are ready to execute. This is clearly the capital discipline that our shareholders expect. In addition to this momentum on new projects, we are steadily improving the reliability of our operations. We are seeing the result of our investment in turnarounds and systematic defect elimination.
Across our operated assets, we've seen average plant reliability of 92% in the first half of twenty fourteen. This compares to 91% in the first half of twenty thirteen. This is also reflected with strong plant reliability in our high margin areas with Gulf of Mexico at 93% for the first half of the year. And significant improvements are being seen in Thunder Horse with higher average plant reliability in 2014 than in the previous 3 years. In Azerbaijan, another of our key areas, plant reliability has been 99% for the first half of the year and ended the year above 98% in both 2013 2012.
The North Sea continues to remain an area of focus to further improve higher margin production. That said, there are still good examples of progress there. Valhall in Norway has seen significant improvement in plant reliability from an average of just 57% in 2012 to 93% in the first half of twenty fourteen. Turnarounds are also going well. As I mentioned a moment ago, we have already completed 2 this year, the Greater Plutonium facilities in Angola and a Tengu turnaround in Indonesia, both on schedule.
Five turnarounds are well underway in the summer weather window with one further turnaround scheduled to be completed by the end of the year. Turning to wells, our global wells organization is expected to deliver our highest operated production from new wells and interventions since 2010. We have placed 8 Gulf of Mexico wells online in the first half of the year, de risking our 2014 production delivery. We have successfully completed well work intervention programs in the Gulf of Mexico and Trinidad. Drilling performance has continued to improve with non productive time decreasing to the first half of twenty fourteen after reductions in 2013 over 2012 levels.
And all of this is starting to show up in underlying production growth, particularly in the high margin regions. Of course, there can be an inherent lag in the process as well as quarterly seasonality to contend with, but we are encouraged by the trend of greater operating efficiency in many of our assets. In the Downstream, we continue to increase heavy crude processing at the Whiting Refinery reaching a peak of 270,000 barrels per day during the quarter. Also in fuels, our marketing businesses continues enhanced customer offers and building strategic relationships. For example, in June, we had our highest ever week of U.
K. Shop sales as we continue to expand our convenience network with Marks and Spencer's. In Air BP, we have expanded our China International customer airport network from 4 to 20 locations. We continue to reduce cost and implement efficiency programs across all of our businesses, which are delivering year on year improvements despite inflationary pressures. In addition, we continue to focus on actively managing our portfolio, completing the sale of our Specialist Lubricants Global Aviation Turbine Oils business to Eastman Chemicals in June.
The Lubricants business was an official sponsor at the FIFA World Cup in Brazil, which proved to be a great platform for promoting the growing premium Castrol brand to a truly global audience. So let me end today by summing up our central message to you. BP is an increasingly focused oil and gas business, a business with momentum and a business doing exactly what we said we would do. As we've gone about shaping BP's investor proposition, we've listened to shareholders and thought about what we have heard. We know the oil and gas sector still has much to prove.
We need to demonstrate that we can control capital and costs, pick the right projects and then deliver them flawlessly. We have got that message. I hope that's what you see when you look at today's results and the direction we're taking in our business. In short, our priorities are your priorities. We are actively managing our portfolio to maximize value.
We are demonstrating capital discipline and we are focusing on efficiency. Looking out to 2018, we aim to deliver growth and sustainable free cash flow to support growing distributions. We plan to do this through material growth and operating cash flow coupled with strong capital discipline. The first half of twenty fourteen has seen the delivery of some significant milestones towards fulfilling the 10 point plan we laid out for 2011 to 2014. In exploration, we participated in 2 new significant discoveries and 10 completed exploration wells to date, some still being evaluated.
We've seen 5 major upstream project startups, all of them in key regions that are strong drivers of operating cash flow for the group. In the downstream, the upgraded Whiting refinery continues its high throughput of heavy crude and we continue to focus on operating our assets safely, reliably and more efficiently. So we have 2 solid quarters behind us this year and a sense of real momentum in our company. I'm confident this will support our enduring commitment to grow distributions to shareholders. Finally, I'd just like to say a few words about our departing Downstream Chief Executive, Ian Khan.
After 29 years with BP, Ian is leaving the company and will be stepping down from the Board by the end of this year. Ian can be enormously proud of the contribution he's made to BP in that time. In particular, over the past few years when he transformed BP's downstream business, focusing its portfolio and strengthening its performance both operationally and financially. He has been an invaluable member of the executive team and for me and the team a great support. He leaves with my very best wishes and he leaves with strong succession.
So on that note, I'd like to thank you all for listening. And now Brian, Jess and I will be happy to take your questions.
Well, hello again everybody. We're going to start the Q and A session. I think Bob might like to just kick off with a few words first and then we'll take it in the usual way.
Thanks, Jess, and good morning and good afternoon, everyone. I thought it would be worthwhile for me just to make a couple of questions about comments about Russia. We this morning talked to some of the press here and clearly it's on their mind. So I thought maybe I'll maybe cover a number of things just by a few observations. First thing I would like to say that everybody at BP is very, very saddened by the loss of life on the Malaysian airliner.
We do mourn those people that were lost and our strong sympathies to all the families affected. And some of our industry colleagues themselves lost members of their teams including Shell and Exxon and people know them. So that's hit quite close to home. And I think reflecting today on the questions, I think it's important to sort of recognize that sometimes these events occur, they're unexpected, they're unintended and they can actually change the course of history. And I do believe we're in a period of a heat of an emotional debate that's going on and there's lots of wider political implications.
And like many of our peers in many industries, we have commercial interest in Russia as we do in the U. S. And Europe. So we hope that these issues will be resolved among the governments as soon as practical and through dialogue and diplomacy. Meanwhile, we continue to just monitor it very closely.
And that said, the nature of our business and that of our peers, particularly in the upstream part of our business is we invest in many places around the world and we do so for the very long term. And we have to take a very long term view, whether we're looking at Russia or the Middle East or Africa, North Sea or the Gulf of Mexico. Because of the commitments of capital involved, we make our investment decisions on a very long view of a country's future and not on the state of the politics and relationships between a country and other nations at a particular moment. And we're certainly not unique in this. Russia has significant oil and gas resources, actually the largest producer today in the world, which are accessible to commercial arrangements in both exploration and development.
And we know that the world will need 40% more energy by 2,035 and Russia will remain a key producer. And that's why we and many of our international peers from the U. S, U. K. Here and the Netherlands and Norway and France and Italy and others, China have made these very long term investments there.
Having said that, we'll of course abide by any and all that are constructed by governments. The second question that came up quite a bit this morning was around this award to former UCO shareholders or primarily the Minitep previous managers of the company. It's a matter of arbitration matter between the Russian government and a number of those claimants. The arbitration and the judgment, which we're still sorting through, because it's I doubt anybody on the call has read it. It's about 600 pages long.
It's not really an executive summary and it's a small type. But it is the parties in it, the party and the judgment is the Russian Federation and the government of the Russian Federation. It's certainly not BP and neither is it Rossnap. But there's a lot of questions around that, a lot of speculation right now. But quite frankly, it looks like it's something separate from us, although there's lots of questions around it.
I just thought I would pass on a view and a point view of events as they are unfolding as they are almost by the day in many areas of the world right now and maybe that'll put aside a few questions later. So Jess?
Okay. Thank you, Bob. And we'll then go to the questions and we'll start with Oswald Clint of Sanford Bernstein. Are you there Oswald?
Yes. Jess, thank you very much. Thank you very much, Bob, Brian. Maybe just a question on Russia actually, a bit more to do the growth opportunities that you have, especially the unconventionals. And if a scenario did play out that there were some technology restrictions, could you talk about what's needed for your unconventional opportunities in Russia with Rosneft?
And also just kind of linked to that, why you have a strategy to go into the Volga Urals for those unconventionals rather than the Bastionov in West Siberia like some of your peers? And then secondly, maybe just a question on the maybe the quarters and the phasing of the maintenance. I guess I was expecting a bit more or a few more of the turnarounds in the second quarter. Could you say is that planned or at least I think you've spoken about it this afternoon about more of them being in the second half. But is that the original schedule?
Or were some of these actually pushed back into the Q3? Thank you.
Oswald, yes. Thank you. Your first question on the unconventionals in Russia, I think both BP and Statoil have shown interest in the demonic shales in the Volga Urals region and it's an area we know well because of the TNKBP Venture and our experience there before. So that was really what focused us was on something that we think we know that has promise there could be gas, could even be oil. And then we'll see what happens with these there's no details out around sanctions and whether or not it would affect that.
The quarters and the quarterly phasing of the maintenance, I mean, for the most part, we often think of the 3rd quarter and particularly the weather windows in the North Sea in August is a very common time for turnarounds in the North Sea. We've the 2 we've completed in the first half are in the more benign areas, weather areas of Angola and in the Asia Pacific out in Tangu. Those are less weather prone. And in the Q3, 2 turnarounds have been completed in the first half. So it's usually the second and the third quarters.
The Mad Dog, which started up mid to and will go a little bit further out in time. And then the ones in the North Sea, the Bruce platform. And then the weather windows in Alaska as well and Greater Prudhoe Bay would be in the Q3. And I think that's probably more than you wanted to know about the turnaround schedule. So
Thank you. Thank you.
Right. Thanks, Ozweel. We'll then turn to the U. S. And Doug Terreson from ISI.
Hello, Doug.
Hello. Good morning or good afternoon, everybody. Bob, in E and P profitability and margins were very strong versus years past. And I think Brian mentioned the contribution from the Gulf of Mexico, which was clear from the U. S.
E and P result. But I wanted to see if any of the international positions distinguish themselves in this way as well? Or should we expect that more likely to be in the second half of the year?
Yes, Doug. Hi. Thank you. You're right. The Gulf of Mexico has performed extremely well.
The wells have come in not only pretty much on time or a little bit ahead and the margins have been higher and the rates those wells have been higher. The one area that comes to mind first would be the new Chirag oil platform was started up in Azerbaijan in January. And those wells are of course very high margin. Again Angola, Azerbaijan, the North Sea and Gulf of just starting up, so that we don't have the benefit of the full year yet. Just starting up.
So we don't have the benefit of the full year yet, but we will in the second half of the Clove wells of the Total operated project that came in actually ahead of schedule with good well performance there. And then North Sea is kind of a mixed bag. It's probably the area we've had like all of the industry a little bit lower reliability than we want. So I think for this year and for the end of the year Gulf of Mexico, Angola and Azerbaijan.
Okay. Sounds good. And then second in India, I just wanted to
see if we could
get an update on the action plan in the country. There's been a lot of crosscurrents on government gas pricing policy and some other factors too. So if you could just provide an update, I would appreciate it.
Yes, Doug. A bit of frustration for us and everybody in India. We had what we have found additional resources below the one field that we've got. In fact, a couple of TCF of gas deep down underneath the field of the facilities and a couple of other discoveries out there. We've got satellites to develop.
We thought we had agreements with the government to increase the gas price by a formula right before the elections. It was put to the side. And now there's been another delay. My view and our comments we've made to the government, it appears to be more economic to develop expensive Australian gas and import it into India. And if they don't sort of fix this, they're going to lose and they're going to evaporate their offshore gas industry.
I think they know that. I think they've got political issues. But we're not going to invest any further in the offshore gas until this price gets put in place.
Okay. Thanks a lot.
And they did say I think they're talking about by October. That's the last I heard yesterday Doug.
Great. Thanks.
Back in the U. K. Next question from Alastair Syme of Citibank. Are you there Alastair? All right.
We'll move on then to Michele Della Vigna of Goldman Sachs. Are you there Michele? Hello? Is anyone out there?
Jess, can you hear me?
Yes, I can Michele, sorry. We seem to have a delay on the line. Go ahead.
Cool. No worries. Thank you for taking the question. I was wondering on the tax rate. So you had a very low tax rate in the first half of the year.
You are maintaining the guidance for 35%. Should we take this as meaning that from here, we should assume around 37%? Or are you just being conservative? And then a second question on the buybacks. They clearly slowed down in Q2 to about $500,000,000 Should we assume a reacceleration as you receive the proceeds from the $3,400,000,000 of divestments that you have already agreed?
Thanks Michele. On the tax rate, we've come up with a range around the tax rate. So we've said around 35%, but I think something for the second half of the year. It's impossible to predict what will actually happen with foreign exchange rates all the various things that will come through mostly through the Q4 around balancing up the tax rate for the year. But something around 35% for the year would imply something around 36% to 37% for the second half.
But it's not that precise Michele, so I'd just it is what it is through the first half of this year, but something around 35% for the year would seem a reasonable number still in terms of where we are. But it will fluctuate depending on what actually happens and actualizes through the second the 3rd Q4. In terms of the buybacks, as you say, we've now completed the $8,000,000,000 buyback program and we will look to continue to stay in the marketplace. We've said predominantly we'd like to use the post tax proceeds of the $10,000,000,000 program towards distributions with a bias towards buybacks. And we will simply look to opportunistically do that in the marketplace now between now and when we complete the divestment program which is planned for the end of 2015.
So I think you'll see us ticking along with the current rate, but we have various opportunities to either increase that rate or decrease that rate depending on other circumstances within the company.
Thank you.
Over now to Blake Fernandez of Howard Weil. Go ahead Blake.
Hi, folks. Thanks for taking the question. Good afternoon. I had two questions for you. 1, I hate to declare victory on the cash flow targets this year.
But as we progress toward second half of twenty fourteen, all eyes kind of start to roll forward to twenty fifteen. And I know Brian indicated potentially flat cash flow next year, but I'm just trying to see if we can get an idea of what kind of communication or explicit targets we may be looking at as we move toward 15?
So if I can pick that up. We haven't given you any targets for 15 other than to say that it could be flat, it could be higher. We don't expect it to be lower, but it's we've offered you a range of outcomes. I think it really reflects that 2014 was a major repositioning of the company that we laid out back in October 2011. So therefore just to maintain this level through 2015, I think is a very strong signal about the underlying quality of the earnings that have come through this year that are driving that operating cash flow.
We still have more disposals to come. Those disposals will take away some operating cash. But after that, we still expect operating cash to be at least flat next year. So I think it's sort of taking a bit of a breather. We've got the big new projects coming on.
All the things we laid out in October 2011. The stars appear to be aligned. I certainly and I don't think Bob or the team will declare victory until we're here at the end of December and we have all the cash in. But things are looking promising in terms of what we can see from the first half of the year. We are still confident of the $30,000,000,000 to $31,000,000,000 And we're confident that we can maintain that through 2015 and then you'll start to see growth thereafter as we laid out in March.
Great. Thanks, Brian. The second question I had was on the Downstream. For one, I'm just trying to confirm Whiting, I see you've kind of hit a nice run rate here in 2Q. Should we be aware of any kind of maintenance or turnarounds that would impact throughputs there in the second half?
And then secondly on the downstream with Ian's departure, just curious if we should be thinking about any kind of potential strategic shifts?
Blake, on Whiting, as you look out to the end of the year, I think we should continue to see levels of 270 barrels a day of the heavy oil crude oil going through that. I think if there's any logistical issues at all, it might be restricted throughputs through the Enbridge pipeline. But that's I don't see that as a big problem, but it's something we just have to be mindful of. And in terms of strategic shifts also the current WTI WCS differentials in which we had original assumptions in there $20 something low $20 a barrel differentials in our numbers and projections today that's running at $26.60 a barrel. So that's a bit of a boost there.
And then in terms of strategic shifts, I think Tufan has been working with Ian for a number of years. He's been working in the down But we But we'll always be looking at strategy, but I don't see any sharp shocks to the planned direction.
Thank you very much.
Thanks, Blake. Next question from Jon Rigby at UBS.
Hi. Can you hear me?
Yes. Yes.
Thanks, Jess. Hi, guys. Two questions. The first actually is again focusing on the Downstream. I wanted there seems to be a lot of moving parts both sequentially year over year, I guess, with moving refining margins, market margins, your trading results and the contribution of Whiting.
But it doesn't look to me at the moment that the Whiting net income contribution is coming through as one might expect. I think you've talked to a cash flow number of $1,000,000,000 post tax, which I guess can translate something pretty close in EBIT level. So I just wondered whether you can on an annual basis, so I just wonder whether you could talk a little bit more about the moving parts and maybe even characterize against potential what Whiting's contribution was in the Q2? And the second question is just on the Macondo provisioning. What things have to happen, do you think, before you can revisit your provisioning from actuarial point of view?
Because I'm aware that, that number you now have is really quite stale. Thanks.
Thanks, John. Let me take that latter part first and I'll come back to the question around downstream results in 2Q. But in terms of provisioning, we continue to review it every quarter. And the only thing that's changed this quarter is our current view of where we are on litigation. We now expect that to take a long, long time in terms of resolution.
And therefore, you've seen us increase the provision predominantly around litigation costs out into the future. So we've taken a view on what we now think the time line may look at and then therefore stretched out the assumptions on that. So certainly beyond the time period we were looking at originally. Other aspects of the provision we just simply review quarter by quarter. The only thing that will be probably a change going forward will be the new policy is now in place around business economic loss claims.
The matching issue that we had that we talked to you about 15 months ago was resolved on the 5th Circuit appeal where we won that appeal with the 5th Circuit and a new matching policy was put in place by the administrator. That's now being administered within the fund and we continue to monitor that. But that resolved a lot of the issues that we had. And therefore, you'll start to see business economic loss claims were reactivated through June. At this point, de minimis in terms of payments going out in the 1,000,000 of dollars, but we'll monitor that going forward.
And as payments go out in each quarter, we will charge those for the P and L and that will effectively be eaten up through the headroom. So some of those costs will actually be charged against the headroom within the original provision. So until that $700,000,000 of headroom is used up, you can't really expect to see any other movement in terms of the major components of the provision. Notwithstanding, we're still waiting for what happens post Phase 1, Phase 2 and perhaps as late as Phase 3 of the trial. So we'll just continue to review this quarter by quarter.
Will some resolution on causation whichever way it falls just help you get a bit greater clarity on what you think the ultimate cost will be?
I don't think that ruling in itself we'll just have to wait to see what happens at the Supreme Court. But that ruling in itself won't trigger anything in terms of where the provisions are. It will simply be another part of the appeals process around linking the causation components of the fund and the settlement agreement. So that in itself won't be a trigger either way in terms of provision. Then in terms of your first part of the question John, downstream results, we did start to see Whiting come through in the Q2.
We saw it in 2 components. 1 is you'll recall that we had a crude unit out in the Q2 of last year to get ready for the Whiting upgrade that went in. So we're seeing the benefits of that. We're also seeing the benefits of the fact that we hit the 270,000 barrel run rate during the Q2 with the spreads up over $20 So we saw the benefits of that. To some respect that's been meshed or you can't see that come through in 2Q.
And if you just take it through the first versus the Q1 result was because in 1Q our fuels business had a very strong result off the back of supply and trading. The result in 2Q in supply and trading was below an average quarter. We had a significantly higher than average quarter in the Q1 and below average in the second. So that movement in to some degree masks what you saw coming through in terms of Whiting. And also 1Q versus 2Q you have the issue around the lower petchem result which is something like $100,000,000 swing quarter to quarter.
So if you see through all of that actually there are underlying improvements coming through Whiting.
Thank you.
All right. We're going to take a question next from the web from Ian Armstrong at Brew and Dolphin. It's on Russia. And the question is could part of your holding in Rosneft be subject to the recent ruling on Newcross given that it was purchased from the Russian state?
Yeah. Thanks, Jess and thanks, Ian. It goes back a little bit very related to the last comment I made at the introduction, which is really this arbitration between the Russian government and these private claimants, which are the former really the former U. K.OS managers in many ways. This is an arbitration ruling against the Russian Federation, the state government itself.
It's not a ruling on Rosneft and it's certainly not a ruling on BP. I don't see in any way that we're party to this. We'll just watch and see what happens with this. But that's not that's a risk that we don't believe is realistic.
Okay. Thanks Bob. On the telephone lines then in the U. S. Guy Baber from Simmons and Co.
Thank you guys very much. Can you hear me okay?
Yes.
Okay, great. I wanted to dig a little bit deeper today on the strength in Gulf of Mexico production. But your U. S. Liquids output up nearly 100,000 barrels a day year on year clearly material and driving very positive mix shift.
But since there's so many moving parts there, I was just hoping you could perhaps help us better understand the momentum you're seeing in that business. So could you frame for us how much of that growth we're seeing right now is major project driven versus a function of lower turnarounds versus quantifiable improvement to asset reliability relative to prior years? And any other factors that you think might be material for our understanding? And then I had a follow-up as well.
Yes. Okay, Guy. There's a lot of pieces in that. Of course, I'm going to talk about sort of our 4 major hubs here. First, the production outlook and how we see it increasing now.
I will talk about the major project ramp ups on Nikita Phase 3 and the Shell operated Mars B that's part of it. The major project startup on Atlantis Phase 2B. And then Thunder Horse and Atlantis new well deliveries and the well work delivery at Thunder Horse. Those are sort of the big parts of it here. We've got in the Q2 this time, we've got about 38,000 barrels a day above what Q1 was due to what we call strong wedge performance.
We've got 10 rigs now operating in the Gulf. We had 5 at the end of 2,009 to give you a sense of that. The activities in the Q2 were 5 new wells delivered in the well really in the first half. We had 2 on Nikkei, 2 on Atlantis, 1 on Thunder Horse. And the 2nd quarter wedge delivery was about 46,000 barrels a day higher than our plan.
So we've had first half workovers. We brought 3 Thunder Horse wells back to production. So I can continue to give you color on this. We normally don't give the exact figures of the Gulf, But we're producing today over 250,000 barrels a day and I think that's all I'll say. Got Mad Dog down on a turnaround right now.
So it's a mixture of some of the new projects, but I think when you look at the quarter overall, I look at it at the 5 those 5 new high impact wells is where it really exceeds some expectations.
Okay, great. That's very helpful. And then my follow-up is on your thoughts around the evolution of operating costs. But you've obviously mentioned before the need to change the business model in the Lower forty eight as justification for separating that business. And we can imagine business So the question is, are meaningful cost reductions from that business included within your flattish 2015 operating cash flow expectations?
Or should we be thinking of that as potential upside? And are there any other specific units or geographic areas you would highlight where you see meaningful potential for significant operating cost savings that could have an influence on 2015 cash flow?
Okay. Very good question. The Lower forty eight restructuring which we're doing which we're beginning to see the results come through even already. We've taken some it's still located there in our Westlake complex in Houston. We've identified the team and the people that will go with the Lower forty eight.
We've identified and signed a lease actually on a new building to move that to a different, I think, say, cost effective location. We're going to we are already seeing efficiency of decision making quicker. This is what we intended to do with it. We're going to do this to make sure that it remains safe and reliable how we operate this, but there's a lot of improved operating efficiency there. We're going to see spending we're going to spend our money more efficiently most certainly.
We're going to improve and more focus like management of the supply chain. And these numbers are not really in the forecast that we've laid out to 2015. We have an assumption in there in 20 15. And I think probably the bigger factor in terms of the flatness of the 2015 is Brian's point about the divestment programs. We will divest some operating cash.
So that's where it'll lay and be about flat. So there is upside. Guy, most certainly in the Lower 48 and we'll be back and talk to you about this every quarter. For those of you who don't may not be that familiar with it, we're going to separately disclose the financial results for the Lower 48 beginning in 2015, so you'll have more visibility on that. Other areas to do this.
Well, of course, we have kicked off a study probably begin to be driven out of the Lower 48 on our entire Up Stream business. We're going to look at efficiencies primarily across North America and then some in Latin America as well to work to a model to simplify the company. We've said all along that after the accident we put in place processes and systems to make sure that we managed our risk very carefully. We put in place multiple checks and balances in our organizational structure. We're now risk management systems in place.
And so that's allowing us now to simplify our corporate structure. We have returned the confidence to our operating people of making decisions on drilling and in projects in a way that we didn't have. And you can all sort of sympathize with an organization that really had a legal team looking over their shoulders at every e mail they wrote because they saw their colleagues in court. So I think we now have put in place tight systems and process to bring back that confidence of being able to make decisions faster. We've done a whole set of simplification things across the business combining 3 separate internal audit functions into 1, merged our brand and communications is I would say most a lot of that is not yet in the numbers, but there is upside.
And we'll just keep telling you about them. I don't see it. It's not a magic wand that we'll see a giant stair step up unexpectedly, but it will definitely make a difference in the future. That's probably more than you want to hear Guy.
No, no. That's great. That's great.
Thank you. Next up, Chetan Jotirlingam of Nomura.
Yes. Thanks, Jeff. Good afternoon, gentlemen. Two questions just on in the Upstream actually. I think you talked about performance in the base for the U.
K. And the opportunities there. I mean looking forward, particularly beyond 2015 and sort of drivers of cash, could you give an update on the growth projects for Quad204 and Clare Phase 2? And then secondly, Bob, I wanted to pick up on your remarks on Prudhoe Bay and also some of the workovers this year. Will these workovers potentially improve performance with that asset on a more structural basis?
Or is this just a sort of normal seasonal turnaround? Thank you.
Yes. Well, you've asked about Quad 204 and Greater Clare. Let me just start with Greater Clare. We just yesterday approved a 6th appraisal well on Greater Clare. Greater Clare is coming along well the reservoir definition is coming into focus well.
It is like a number of projects around the world somewhat held up by the yard spaces in Korea where we've got things that we want to get done, but they're held up a little bit by some of the big Australian projects. And that's of course is one of the basically is some of the criticisms of our industry in terms of overspending and longer time. It actually has backed up the yards. Although I think we're heading into a phase now where the yards are going to get cleared out and a project that probably would be on time and maybe seeing a little bit of a delay. Quad 204, I think all I'd just like to say is it continues the development of it continues.
I think you can get in touch with Jess here, but 2006 is our start up year. It is in the execute stage. Gross capacity of that facility would be 320,000 barrels a day and we've got a 36% working interest in it. But I don't other than the fact that it's on track, I don't have any real specific comments for you today on that. And in Prudhoe Bay, of course, the change in the oil legislation in Alaska has most certainly helped the state as it is.
And so we're investing more and speeding up some of the work that we've been doing in Frutto Bay. I thought you were going to ask about the LNG projects up there. But I think other than sort of the bread and butter activity that we do in Proto Bay and the oil, there's no real significant news out of that. We did sign an agreement with the state of Alaska and Exxon and Conoco to plan the development of the gas project which is effectively the gas cap out of Prudhoe Bay and the Point Thompson field. An application has been made for the export of that gas.
But no, I think the workover programs in Prudhoe Bay other than they're more economic, so we're doing more of them. There's not much else to say about that.
Okay. Thank you.
Next question Anish Kapadia of Tudor Pickering Holt. Go ahead, Anish.
Thank you. Good afternoon. A couple of questions, please. Firstly, on the Rosneft, so I mentioned in the results that BP prepaid $1,900,000,000 for a 5 year oil supply contract from Rosneft in July. I was just wondering if this impacts your working capital and any of your targets for this year and if there are any further such types of deals on the table.
And then my second question is on your disposal program. It appears to be turning into much more of a buyer's market in when we look at the M and A space. It seems like the majority of your peers are adopting kind of similar, fairly large disposal programs. Just wondering how you see that impacting your disposal program? And are you willing to give away some value just to meet the $10,000,000,000 target?
Thank you.
So, Anish on the first question, it was a pre financing deal where we take the off take, but it was covered by a series syndicate of banks. So that doesn't directly affect BP's working capital. That's actually financed through a syndicate where we guarantee the off take piece. So and we do a lot of those deals outside of this space. So it's something that sits as part of our supply and trading.
We manage that within our existing working capital requirements. So no additional working capital, but we look in terms of the quality of the portfolio.
On the divestments, I think hindsight shows that we got very good value for the over $40,000,000,000 which is now $41,000,000,000 of divestments that have been done. We have pieces of our business that we continue to look at that have more value to others. I mean most recently we divested down to reduce our exposure in the Big Oman Kazan field of the government that was $500,000,000 very fair value there. Aviation Lubricants a very specialty business sold at Easton Chemicals that got a good price. I don't believe they want that price public, but it's a good price to us.
The Texas Hugoton gas assets that we just sold for roughly 400,000,000 dollars good value again. So I don't see that we would be willing to give away value on the divestment programs just to hit the target. They have to make sense. But having said that, when we look through our asset base, we believe we can identify 10,000,000,000 dollars and we're 1 third of the way through that now. But you're right.
The market does have a lot of things on the market, but we've still got some hidden gems in our portfolio.
Okay. Thank you.
Right. I see that Alastair Syme is back on the line. I'm sorry we lost touch with you earlier, Alastair. Are you there now?
I am Jess. Can you hear me this time?
Yes, we can.
Brilliant. Thanks everyone. Can I just ask a question on the sort of suite of pre FID projects? And I'm sort of referencing your comments, Bob, about yard capacity maybe freeing up a bit. I'm thinking sort of Mad Dog 2 and Browse Thunder Horse expansion in Angola about whether collectively you think those projects are robust or getting more robust or there's more work to be done?
Yes. Good question. Mad Dog is one that we recycled. And I think it's getting much more robust. And I think the partners feel that way as well.
So we've sort of in pre FID for it. And I think there's a good chance that that one will come through. We'll review it probably before the end of the year although we're that's not something we've absolutely decided. The Persephone project which is operated by Woodside in Australia, we think that's a good project. And in fact, we're very close to saying giving the go ahead on that one.
Thunder Horse South is another one that the work is going well on. And I expect these all three of these projects to come through. I'm not going to give a date for it, but I wouldn't be surprised if all 3 of them come through in before the end of the year. And they do look good. And recycling these projects has proved to be a very good thing, particularly on the Mad Dog project.
A little bit like Browse in Australia, which is another one that has been recycled.
And maybe just to pick up on browse. As you look across the LNG market, are you sort of confident that the state of the market is going to allow you to push forward on this?
Well, the new development concept on Browse most certainly has made that project economic and competitive out there. The world is just going to continue to need lots of energy. If you look at these growth forecasts over the next 20 years or so, natural gas being the cleanest burning fuel out there, that's without any assumptions around pricing of carbon. So yes, as long as the capital cost can be held within the right tighter boundaries and schedules on place, these projects are going to look pretty good. But we're going to choose very, very carefully.
There are obviously other projects out there that we've had opportunities to be part of or buy into that we have said we're less confident of and we haven't done that.
Great. Thank you very much for your time.
Next question from Lydia Rainforth of Barcap.
Thanks, Jess, and good afternoon, everyone. A couple of questions, if I could. One, just a clarification just on the realizations in the upstream for the U. S. On the liquids side.
So given the greater contribution of the Gulf of Mexico within there, I was a little bit surprised to see them sort of broadly flat both year on year and quarter on quarter. Is there anything unusual within that? Or is there anything that any help that you can give us on how that will develop going forward? And then secondly, Bob, thank you for your comments around the cost side. And if I could just go back to that a little bit just to clarify, is this around changing the way that BP works again from where it is now?
Or is it purely about the fact that you've got BP working how you want it to and it's now all about simplifying the company from the processes that you already have in place?
So, Olivia, on the first question, if I can just pick up the first question around realizations. We did get a benefit in the Q1 in terms of average realizations. I think Gulf of Mexico grades are trading at better grades for WTI than they did through the Q2. So it's really a grade spread issue. It's nothing about That's the only thing that was going on 1Q versus 2Q is around the actual differentials.
Yes. And of course, did you talk about the Brent differentials in Gulf? Sorry, I had my No,
no, sorry. It was there. So Gulf versus WTI in terms of what was happening.
Yes. On the cost side, Lydia, thank you. I think I couldn't agree with you that we have the company working the way we want it. I think there is a lot still to do. We definitely are happy with the functional model with the changing of the decentralized upstream organization to a functional model around projects and drilling and operations through the geographies of the upstream.
I think there's I think we're still a complicated company. I think our partners sometimes feel that way. We're still working our way through separating out the separation of the safety and operational risk organization, which has been separate organization from the line operating organizations. We're combining those, which for our past and history, it was the right thing to separate things just to have double checks and balances on decisions that could affect accidents and safety. And now we've got the confidence to put those organizations together.
That brings with it certain amount of complexity when you make that kind of change. I think we've got things to do in terms costs around training and simplifying and being much more targeted in how we train and develop people. And I think the lessons we're learning in the Lower forty eight, which is a business that we fundamentally rebased to operate at $4 an Mcf, but really wasn't going to be competitive for capital. Now we're going to make another step change there in making that more efficient. And then we'll have learnings from that that we can use in other places around the world.
After the accident, we in many ways began to put offshore safety standards on working onshore and that's absolute that actually wouldn't wasn't making us competitive and that's not necessarily what we needed to do. Right thing to do for our period in history, but we're still simplifying some of that. So I think it's a journey. It's a good start with a functional reorganization, but we've got lots to do. And we've got targets in place, which are not yet in the ones that we've said publicly to both bring more efficiency rather than targets.
We're not going to have cost cutting targets. We're going to have activity reducing targets, because this has to be kind of surgical rather than just as a blunt cost cutting target.
Okay. Thank you very much.
Thanks, Lydia. Next question from Stephen Simcoe of Morningstar.
Hi, good afternoon everybody. My question is just related to the business economic loss payments restarting And visiting the economic settlement website, if you look at the July 1 claims administrator public data, you would see that, lost things hadn't started. So obviously, they've started this month. And it's just a short month or I'm sorry, it's just a short period of time and a small data sample, but it looks like about $41,000,000 of payments have been made. And if you were to look at that, with the number of payments or excuse me, the number of claims that were paid, the average amount paid per claim looks like it's down a lot compared to before the 5th Circuit Court ruling last October.
And what I'm wondering is, are you reading is there anything to read here in terms of the new accounting framework in place affecting the average pay or the average amount paid per claim? And if not, any other comments on that data would be great. Thanks.
Yes. Stephen, I think it's too soon to draw any conclusions at this point. Payments actually start in June, late June. And I think the administrator and the team there are working through different types of claims and working up the various accounting books of how to process those claims. We now have in place in that fund a new Chief Executive that's running the facility.
And they are I think going through each one of the claims carefully to ensure that they are meeting the requirements of the new matching policy that's been put in place. So I think it's just too soon to try to draw any conclusions. But you're right that the nature of the payments being paid so far relatively small compared to what we've seen historically. But I think you'll need a number of months of claims data before we can start to draw any conclusions from that.
Makes sense. Thank you.
Moving now to Thomas Adolff of Credit Suisse. Are you there Thomas?
Hi. Can you hear me?
Yes.
Hi. Thanks for taking my questions. I've got a question on Iraq and a few project specific questions please. Just a quick one on Iraq. Yes, earlier on you said you like to take a long term view.
But I guess in light of your experience since you moved into Iraq in 2,009 and where we stand today, what is your current thinking on Iraq? Clearly, the fiscal terms are pretty bad to begin with and the future opportunities never materialized. Isn't it really bad use of your precious capital and some of your peers begin to think it out? The second question on the project, I'm just trying to get an understanding for whether the Tangu price review was linked to BP. In other words, have you managed to negotiate for a higher slope?
And the other project specific question I had was related to your Brazil upstream asset where your partner was Maersk and Maersk recently took a major impairment charge whether you're still comfortable with your carrying value there? Thank you.
So maybe on that last point, I'll just pick that up to say actually what Maersk did with those three assets is effectively right down to a level pretty close to where BP held those assets today. So there's no implication for BP or read across from what Maersk did around that investment
probably for
the previous ones.
Okay. Hi, Thomas. On Iraq, we've always felt that the Rameela field is different. It is a production sharing contract. It's really a contract with a fee.
It's a low margin, but it produces 1,400,000 barrels a day. It's by far and away the largest project there. For us, the economics have actually very good. The internal rate of return, the return of capital comes back very quickly in the form of a return of your capital plus a fee. But because of the scale of it, this has been a good investment for us and continues to be.
We are in discussions with the government on the enhanced field development plan that could improve the terms as well for that. I mean Iraq is a very troubled country. But just to people to give people a little bit of references, Kurdistan up in the north where we're not operating this new ISIS area of turmoil in the Sunni areas. The major oil fields in the south are sort of bottomed down at the end of the funnel of the country. It's a long, long way from where the trouble is.
It is out in the desert in an unpopulated area near the Kuwait border and has been operating straight through this period without interruptions. Cargoes are being loaded and sold and our ability to work with Baghdad and the ministry to ensure all this continues sort of unbroken. So I understand the nervousness in the industry around Iraq, but I do think the Rameela project is something different compared to the other agreements that have been signed in the country because of the scale.
Okay. And on the Tengu price review?
Yes. We can't go into the real details of the price specifics, but we have improved the price significantly on Tengu using the price review clause in the contract. The price of the Tengu gas will go up at the beginning of this year. It's gradually to the near market pricing levels that both sides feel are fair. And I think that's probably all we should say about that.
We have agreed that the new trains when they come through around 40% of the gas will go into Indonesia which is short gas and needs gas. But the pricing on that is also I think fair and attractive for both sides.
Okay. Perfect. Just the last one. Are you still confident you can take FID on 4 projects this year? Thank you very much.
On 4 projects? Did you say 4?
Yes. Because you said on the Q1 results, it will be 4 projects you want to take FID on this year.
I think it's a bit premature. I mean we originally laid those out. We're still working through those certainly 3 we can see.
That's from here to the end of the year. From
yes, probably premature to make any comments on that at this point.
Okay. Thank you.
Thank you, Thomas. Moving now to Bertrand Hodee of Raymond James.
Yes. Hello. I have two questions. First, you had an impairment in Upstream in the non U. S.
Linked to an asset sale. Can you it was around $444,000,000 Can you tell us to what asset it is linked? And then the second question on India. Given your level of initial investment was around I think $7,000,000,000 Do you think if gas price were to stay at current level, Can we expect or do you feel it would be appropriate sometime to take an impairment?
So on the questions around the Q2, they were related to both North Sea and Alaska. Is where so it's split across the piece. Matt can give you the breakdown for those. And in terms of India, again, I think it's premature, but we review our Indian investment quarterly. And at the moment, our whole value still sits based on the information that we had at the value at which we acquired the assets.
And we'll have to wait and see. It would be premature to try and predict what will happen with gas prices with the new government in place. But as we understand it that will be reviewed by the 1st October.
Yes or in October. Yes. October, so yes. But one thing is clear, if that price doesn't change, you're not going to see us pouring more capital into it. And we'll just say and see.
And the last one, if I may. In during Q1 results, you hinted to an encouraging trend in your upstream cash cost, expecting to see your overall upstream cash cost to be down this year, 2014 compared to 2013. Given, I would say, your good operational performance in Q2, especially do you still confirm that trend in your overall upstream cash cost for this year?
Well, we did see a reduction from the Q1 into the Q2 on the upstream cash cost. We even we had a higher well work and we had a lot of seismic activity. A year ago, we've had higher well work this time, but those cash costs are still kind of gone out. And the full year 2013 to 2014 I'd say are about flat to somewhat down. And I think that's probably all we can say.
And I think we can do that even the sector inflation which we now see is around 4% for both capital and operating costs. And I think a lot of that you're going to see that in a lot of it starting with the North American
Yes.
Thanks. Yes, I just had one thing left to ask please. And that's on Algeria, you've obviously been through some very difficult times there.
But I wonder if you could just
give us an update ahead of starting or planned starting
of production next year, how you view the potential now security challenges? Thanks very much.
Yes. Gordon, thank you. We have those of you will recall in January of last year, we had that terrible tragedy where the terrorists came into the field in the Inaminas field down in Southeast Algeria. We have spent a lot of time as is our partner Statoil and actually working directly with the government and Sonitrack on the security. And so I had a review just this last week of people who had been to Inaminas and seen the increased security down there.
So we didn't take that decision lightly, but we are back at work in Algeria and in Almenis and in Sala. We had plans originally the plans were to start up in Almenis and Insala in 2014. Obviously that was pushed back by these events. We still believe that the start ups have at least 1 if not both of those projects can happen in 2015. There is some risk to it, but that's where we see today.
These are good return projects for us. We've been working there for a long time. The return on capital of these projects has been very good. And both we and Statoil have committed to getting back to work there. Okay.
Thank you. Okay.
Question now from Irene Himona at SocGen.
Thank you, Jess. Good afternoon, everyone. I had three questions, please. So firstly, just to clarify, do you receive the Russian dividend in rubles? Second question on working capital.
You had a big $6,800,000,000 built in 2013, and you said earlier this year that about twothree of would reverse over the next 18 months. In the first half 'fourteen, we've had only about EUR 339,000,000. I just wonder if you see that cash release accelerating in the next few quarters. And finally, Deepwater Horizon, your press release states that the PSC has now filed a motion seeking to amend the revised matching policy. I wonder if that is a new development.
So what are they appealing the appeal which you won? And does it mean that it's all kind of prolonged? And importantly, do you have to settle claims whilst all that is taking place? Thank you.
So, Irene, I'll pick up those first two points. I think Bob will pick up the last one Deepwater Horizon. On the first one, yes, we received the dividend in rubles last week and that was translated into dollars. So we ended up with $690,000,000 in our bank account and that was as predicted. And then in terms of working capital build, just not quite sure what numbers you were working with, but we were talking at the end of 3Q last year that the actual build was around CHF 5 €1,000,000,000 for last year and that we expected around 2 thirds of that to reverse out.
Nothing's changed as you've said through the 1st and second quarter relatively low amount of working capital has come back. But there's many, many moving parts in our working capital position that get driven by price, the volumes that we're carrying at any one particular point in time. But in terms of looking through what we could see building last year, we expect it to reverse back out. We haven't gone back and looked at that with these quarter results. But the majority of the operating cash that you see coming through in the 1st and second quarter is through EBITDA in terms of the improved revenues that we're seeing in earnings off the back of production.
And Irene, hi. This is Bob.
Hi, Bob.
On the matching thing. So to me this is a fairly straightforward common sense thing that business economic losses should have to match their expenses with the revenue they receive. An example if a farm plants its crop and submits a claim as a loss, but doesn't have to count the sale of the crop as revenue, this just wasn't right. So we had did go to court with that appealed won the appeal and those are the detailed processes for processing the claims that are now being used by the claims facility. But that does take I suppose money out of the pockets of plaintiff's attorneys who might get 30% on any claim on these kinds of things and they have filed an appeal.
I don't regard it as it's not really significant. It just doesn't even match common sense in my mind. So I wouldn't get distracted by that. There's lots of other things that we're debating and arguing about, which are more substantive than that one.
Okay. Thank you.
Thanks, Irene. Now Martin Ratz at Morgan Stanley.
Hi. Hello. I wanted to ask you a few questions. First of all, with regards to Egypt, there has been some conflicting reporting on where you are with regards to the next phase of investments, particularly with regards to West Nile Delta. And secondly, I wanted to ask about Chardanese, because with all this sort of turmoil in Eastern Europe, I can see how this would have become a much more attractive project.
But I can also see perhaps some downside risks. And I was just wondering in your assessment, Chaldanese, has that become a better project or worse project?
Okay. Well, let's maybe start with Egypt. West Nile Delta is a large almost shovel ready project on the West Nile Delta. It develops offshore gas and brings it onshore for the domestic market. It's a very economic project.
It's a big project. And I think what we have been doing is working with the government. This is a I think we I think we're looking for ways to accelerate because Egypt needs gas. They'd like us to accelerate. There may be some facilities available through the BG system that may be playing a part in this as an option to accelerate.
But that project is going forward. I know there's turmoil in the country as well. We've operated in the country for more than 50 years. And for example, all of our oil production in the country in the Gulf of Suez has produced without missing a day through all of this period. So I think that's I'm not sure what you read Martin, but that's sort of where things stand there.
Chardanese, we thought it is a good project all along and it's got behind it additional resources down the road that can go through these systems. So we are off and running. Final investment decision was made in December. There's more than $8,000,000,000 of contracts that are out. It's actually ahead of schedule.
This is regarded as a strategic project for all the countries along the way. So we feel very pleased with that. There's been some swaps and changes of ownership. We bought another 3.3% of it in December. Statoil, I think moved their interest from 15% down to 10%.
Total's 10% interest, I believe they sold that. Turkish companies have gotten involved. So there's a lot of interest in the region in it. So no, I don't see this as anything other than continuing to be a good project rather than and it's a strategic for some countries. So it's certainly important remains important for us.
All right. Thank you.
Thanks, Martin. Next question from Chris Coupland at Bank of America Merrill Lynch.
Hi, there. Thanks. Just two left. Firstly, just wanted to see what your views are on the MLP market in the light of your Lower 48% separation? Is that an avenue that you'd consider potentially for other assets?
And secondly, Brian, just wanted to get back on regarding buybacks. You said earlier you want to keep them up at the current rate. Now the current rate has been quite varied, €500,000,000 in the 2nd quarter, €200,000,000 in the 1st quarter. Is it going to fluctuate, continue to fluctuate? Or are you simply looking at a steady rate to end by the end of 2015?
Thanks, Chris. I mean just to clarify my point on the current rate. I was thinking more over the last few days not the last two quarters. So in terms of where we are today, we'll probably maintain the current rate of it's de minimis in the sort of $6,000,000 to $7,000,000 a day at the moment, because we look to rephase things now. Now we've got the $8,000,000,000 piece done.
We'll now look at the post tax proceeds and make choices around how we choose to distribute those back to shareholders. So I don't think read too much into the answer other than the fact that we will maintain complete flexibility around the buyback program, but the intent is the same that we will look to redistribute the divestment proceeds. And as those proceeds come in and we get the cash, we will look to execute that through the next 6 quarters by the end of 2015.
Okay.
On the MLPs, we've looked at MLPs many times over the last 10 years actually. And we still don't see anything attractive. We've actually sold off an awful lot of our midstream in the U. S. And you've heard Bob talk in previous quarters about the amount of derisking that's gone in.
And so we still have 1 or 2 pipelines left which are very strategic to us in terms of our other asset positions within the U. S. But we don't see the MLP options being particularly attractive nor the ability to be able to continue to keep those MLPs topped
up as
you go forward with putting more assets into them. So we've actually sold off a lot of our midstream and what's left is quite strategic. So it's not really something which we would look to try to exploit going forward. But we've kept an eye on it. And as I say we've reviewed it a number of times over the last 10 years.
Yes. We've done so much restructuring in North America, but you have to feed them with assets and we've actually divested so much of that already.
Got it. Thank you.
Right. Moving on to Fred Lucas of JPMorgan.
Thanks, Jess. Two questions, please. First of all, could you put a number to your Rosneft? So here I'm thinking about what if more extreme sanctions were imposed or the situation with UCOS gets messy and dividends are blocked to BP. Would that have an immediate dislocation effect on BP's dividend?
Or is there a buffer to protect the PLC dividend?
I think that's a great question that last one Fred because there's been a lot of speculation this morning about some additional disclosures that we added to our stock exchange announcement around risks and uncertainties, none of which may happen, but we nevertheless for good due diligence and legal purposes we have to put those uncertainties in. But I think just in the context of that question, I mean the dividend for this year represents on an annualized basis around 2% of the operating cash flow we'll generate. And therefore, in terms of the liquidity of the company, it is de minimis in terms of anything further that may happen. So from a financial perspective, I think it's more about the $15,000,000,000 that we hold on the balance sheet around that investment. And therefore, the risks and uncertainties associated with that going forward is what those references were towards if sanctions were to escalate to that position.
But none of that we can see happening right now. Nothing has happened so far that would impact that. But in terms of liquidity and finances, it would be de minimis in terms of any impact if that were to happen. So I think it's a very important question to raise. And sorry Fred, the first part of the question was around cash costs.
We don't even share with you the absolute cash costs for the group. So I'm afraid, I'm sorry, but we can't actually share with you the specific cash costs for the Upstream.
Okay. Well, thanks for clarity on the first one anyway.
Great. Thanks, Fred. Lukas Hermann at Deutsche Bank.
Yes. Jess, thanks very much and afternoon gentlemen. 2 or 3 if I may. I'm sorry to be so late on. Bob, firstly, and partly, I guess, prompted by Ian's departure, I seem to remember 60 was the age for retirement, their CEO at BP.
Can you remind me whether that's correct and the extent to which the company is starting to think around success and planning for your good self? Secondly, I wondered, Brian, whether you could or whether either of you could give us some idea of the split of profitability within the fuels value chain between the Americas and elsewhere. I mean, I have to say that in the context of what you've indicated, you feel you should be capable of moving towards. Your numbers through the Q2 seem, I'd say, very light. And thirdly, Bob, in your capacity as Director of Rosneft, can you make any comments on how you feel the or how you feel the sanctions that have been introduced to date around bank lending and extending loans over 90 days may impact the Rosneft business over the short, medium and longer term?
So Lucas, if I could pick up the easiest of those three questions, which would be around the downstream profitability. And I hope my boss to my left isn't going anywhere anytime soon. But on the profitability, we have seen the improvements around Whiting, the Rhine Pub of Whiting through the first half of the year. So if you looked at that relative to the rest of the fuels business, that would be a positive. I think refining margins, if you look at them year on year they were significantly down in the Q2 versus the same period last year across the piece.
And I think the only salient point to mention between either this quarter versus last quarter or this quarter versus the same quarter last year for Downstream was that we have both in the Q1 this year a very strong supply and trading result and in the Q2 of last year a stronger result than we had in the Q2 of this year. So that would probably be the biggest variance that you'd see around the downstream numbers. The other piece that sits as a backdrop which I mentioned earlier was the chemicals result. Sure. I mean Brian the
mean the U. S. And rest of the world is in the fuels value chain? How does
that break?
We don't disclose that Lucas. But what I would say is simply as you see Whiting, if you look at where the light heavy spreads are today over $26 and you see that we hit the 270,000 barrel a day key point through the Q2. You should assume that therefore we are starting to see more performance coming through the fuels value chain in the U. S. But we don't give that level of disclosure I'm sorry.
Okay. Thank you.
Lucas, hi. This is Bob. Hey, Bob. Maybe first on RossNet. I've got to be careful as a Director, so I'll just sort of make some broad comments about this.
The sanctions were against new debt with 90 days or longer maturities on it, which is where it stands today. Who knows? There's lots of rumors about additional sanctions coming out. But at the moment, I think Rosneft has brought in significant cash from its forward crude sale deals with the Chinese. And I think they have actually held a lot of that cash in anticipation of what uses it might be.
So I think they've got lots of flexibility there because of these partnerships in Asia. And in terms of other things around my dealings with him, Igor Sanction is the nickname Igor Sechin. He's been sanctioned today as an individual. And of course, I don't deal with him and BP doesn't deal with him as an individual. And the U.
S. Government has made statements that said it's okay for me to represent BP on the Board with Rosneft for the business of BP and Rosneft business. So we'll see where all this leads to. But so far that hasn't been an issue. And in terms of my own succession, which I kind of don't think about, it's really a question for the Board, decision for the Board and shareholders.
But I think the retirement age now is 65 in the U. K. So I guess you could say that 65 is the new 60 in terms of
So that's a change since Lord Brown's day.
I think it is, yes. And 60
was regarded as sexist or not sexist sorry, ageist.
I think you're now being rather cordial, Lucas. Actually, I think the law the U. K. Law has changed since then. It's gone to 65.
Yes. You are sanctioned with that comment.
Okay. I'll
accept the sanction. Gentlemen, thank
you. Thanks, Lucas.
Thanks, Lucas. Richard Griffith of Canaccord, are you there?
Yes. Hi. Good afternoon, gentlemen. Just one quick question. It was the comment earlier you made about Whiting in the second half.
And I think you made an aside about a pipeline from Enbridge. And I was wondering if you were referring to the Flanagan South. And if so, does that affect your view on the competitiveness of the Gulf refineries versus Whiting for the heavy oils? And how that would that change any of scenarios for Whiting?
No. I think you've read too much into the comment. I think there were 1 or 2 logistical issues towards the end of the quarter around 1 of the Enbridge paper lines and some curtailments on it. But if you look at it long term, even medium short term, it's still a very attractive location for what our discounted crude oil that will come down through those lines in Canada. And you've seen that happen more recently with the blowout in the spreads out to $26 So no.
It still is the most you'd assume it would still be the most obvious place for Whiting to take its crude oil. However, that said, we would have options to move crude oil from the Gulf Coast if we needed to.
Okay. Thanks.
Thank you, Richard. And now Neil Morton, you've been waiting very patiently. Thank you. Are you still there?
I am indeed, Jess. Thank you very much and good afternoon, everybody. Two quick questions. Firstly, you mentioned a couple of times that post tax proceeds in the disposal program would find a way mainly towards share buybacks. I just wondered, is it fair for us to assume that we can apply your average your typical corporate tax rate when calculating a post tax number?
And then just secondly on some of a condo litigation, on what basis are you trying to avoid being fined under the Clean Water Act? What's the legal argument? Thank you.
So on the first question, Neil, I think you should assume something around our cash tax rate. It depends on what the assets are, but something around 20% 20% to 25% is a reasonable assumption. So it's actually 30 it's about 7% or 8% below our corporate tax rate of the 33% to 35%. So something around 2025 is probably a reasonable assumption going forward. So something around €7,500,000,000 to €8,000,000,000 to be able to be used around distributions.
And Neil on your question on Macondo and trying to avoid being fined, I mean, we're not trying to avoid being fined. What we believe is legitimate fair and reasonable fines is fine. Part of the calculation of the fines also includes response effort taken by a company with the Clean Water Act related to cleanup itself, cooperation with the government. I think we've got I think we demonstrate having helped and funded 48,000 people working on the Gulf. Our cooperation with the government throughout the Coast Guard and the efforts that we've made to clean up are certainly part of the consideration of fines.
So we think that's we think that effort is really very legitimate. We do not believe that we were grossly negligent, which implies some sort of willful negligence in the accident and we vigorously defend that and impact on the fine. So I think it'd be overstating to say we're trying to fight avoid being fined. We just would like them to be representative and reasonable.
Yes. I was just referring to a recent appeals court ruling that both you and Andy Arco, it seemed to imply that you were trying to avoid automatically being liable under the Clean Water Act. Am I sort of misunderstanding my limited knowledge of the U. S. Legal system?
Well, it's a pretty baffling system sometimes. I think, yes, Jess, you seem to know something about it. There's lots and lots of motions being filed by various companies on the
Neil, I think this is a complicated issue about where the oil flowed from and it goes back to some previous legal proceedings. But if it's okay with you, it's been a long call maybe I'll pick that up with you afterwards?
Absolutely. Thank you very much.
Yes. I think what you just made a note there. Yes. Something around whether the well flowed from the vessel or the wellhead and it's a clarification.
Yes. We can pick that up. So thank you everybody. I think that's the end of our questions. It's been a long call.
Thank you for your patience and thank you to all those that have stayed with us. Are there any final remarks you want to make, Bob?
Well, very quickly, again, thanks for your it has been a long call. Thank you very much for your patience around the world. We do appreciate it. We like your questions. It gives us insight into what you're thinking about.
And I do think putting aside all this activity and the news flow around Russia actually what you see in the results is a quarter that's kind of doing what we said we would do. And we hope to do that next quarter as well. Thank you all.
Thank you.