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BP plc (NYSE:BP)

Q3 2007 Earnings Call

October 23, 2007 9:00 am ET

Executives

Fergus Macleod - Head of IR.

Byron Grote - CFO

Analysts

Neil McMohan - Sanford Bernstein

Mark Ianotti - Merrill Lynch

Nikki Decker - Bear Stearns

Jon Rigby - UBS

Jason Kenney – ING

Steven - Morgan Stanley

Stefan Fuco - SG

Mark Gilman - Benchmark Company

Joseph Tovey – Tovey & Company

Neil Morton

Fergus Macleod

Hello and welcome to the BP Third Quarter 2007 Results Conference Call. My name is Fergus Macleod, BP's Head of Investor Relations. Joining me today is Byron Grote, our Chief Financial Officer.

Before we start, I'd like to draw your attention to a two items. First, today's call refers to slides, which we will using during the webcast. Those of who on our distribution list should have already received them by email. If you would like to be placed on that list for future releases, please do let us know.

Second, I would like draw your attention to this the information on this cautionary slide. Now over to Byron.

Byron Grote

Thank you, Fergus and good day to those joining us on this call. I will begin my review of the quarter with the trading environment. The table shows the percentage year-on-year changes in BP's average upstream realizations and refining global indicator margin for the third quarter, as well as year-to-date.

In the third quarter, oil prices continue to strengthen our mid concerns over hurricane activity and draws on U.S. crude stocks. Our average 3Q liquids realization up $71 per barrel was higher than both the previous quarter and last year. By contrast, our third quarter gas realization of around $3.90 per thousand cubic feet was down 12% compared to a year ago, as gas prices were lower in both the United States and the United Kingdom in light of ample supplies and mild weather conditions.

Taking both oil and gas together, our total hydrocarbon realizations for the quarter and year-to-date were comparable to last year. In refining, our 3Q indicator margin built around $8 per barrel on the back of lower seasonal demand, in the increased supply from the switch on the back of lower seasonal demand and the increased supply from switch to integrate gasoline. This indicator margin was half that experienced in 2Q '07 and 4% lower than 3Q '06. The actual margins realized by own refineries were however, significantly lower than the same period last year, mainly due to the narrowing of light heavy crude differentials.

Turning now to the financial, overall our results for the quarter and year-to-date were down year-on-year. This was a result of a number of factors, which included the continued impact of operational issues, as well as the absence of favorable ones off items realized last year. I would describe these factors in more detail when discussing individual segment results. Both our replacement cost profit of $3.9 billion and our profit including inventory gains and losses of $4.4 billion were down significantly compared to 3Q '06.

Operating cash flow of $6.4 billion was up 24% compared to last year. The per share metrics shown reflect the benefit of the reduction in our shares outstanding by 4% over the past year. The $10.825 per share dividend announced today, which will paid in December, is 10% higher than a year ago. The sterling dividend is roughly the same year-on-year, reflecting the sharply weaker dollar.

Moving now to our segments, in E&P we reported a pre-tax profit of $6.3 billion for the third quarter, which include a small non-operating gains primarily from the sale of assets. Excluding these non operating items, our underlying result was down by $1.1 billion compared with last year. The benefit seemed from stronger liquids realizations were more than offset by lower gas realizations, lower production, higher cost and the absence of the disposal gains totaling $1 billion, which we realized in our equity accounted entities last year, primarily from TNK-BP.

Reported production was 3.65 million barrels of oil equivalent per day, a decline of 4% compared with a year earlier. After adjusting for the effective disposals, low entitlements in a production sharing agreements, and the CATS pipeline shutdown in the North Sea, production for the quarter was broadly flat.

Full year production is still expected to be in the range of 3.8 million to 3.9 million barrels of oil equivalent per day as indicated back in February.

In Refining and Marketing, we reported a third quarter result of $380 million, which included a charge of $340 million for non-operating items. These charges were primarily related to new provisions and revisions to existing ones. Excluding these non-operating items, our underlying result was $720 million compared to $1.9 billion a year ago. This reflects weaker refinery margins and the continued impact of operational issues, particularly at the Whiting refinery.

The quarter’s result also reflected greater integrity and repair spend, as well as adverse affects from fair value accounting.

Turning to Gas Power and Renewables, we reported a pretax loss of $60 million compared with the profit of $150 million a year ago. Our 3Q underline results decreased by nearly $300 million relative to the previous year, this reflected a significant reduction in the contribution from the marketing and trading businesses, lower natural gas liquids volumes and higher alternative energy expenditure probably offset by improved margins in the NGL business.

In Other Businesses and Corporate or OB&C, our third quarter's result included a net charge of around $200 million in respect of non operating items, which were primarily comprised of new provisions and revisions to existing ones.

As you may recall, we conduct a review of our environmental and various other provisions each year in the third quarter, the results of which we include in non-operating items. Our expected full year underlying charge remains within the range I indicated in February.

Turning now to cash flow, this slide compares our sources and uses of cash in the first nine months of 2006 and 2007. Operating cash flow of over $20 billion and disposals are $3.9 billion, funded $12.5 billion of organic capital spending and $1.2 billion of acquisitions, plus $12 billion of shareholders distributions. Our net debt ratio remained flat and at the bottom end of our target been of 20% to 30%.

Our shareholder distributions for the first nine months were $12 billion, dividend payments have exceeded $6 billion and we have bought back $6 billion worth of shares. As I've said many times, we remain committed to distributing 100% of excess free cash flow to investors other factors being appropriate.

Now, let me talk about some of the progress we've made. In E&P we are building momentum in our operations through the delivery of major projects. Early in October we achieved the successful start up of greater Great Plutonia, BP's first operated project in Angola. And in the deepwater Gulf of Mexico, we have started commissioning the Atlantis field. In the fourth quarter we expect production to ramp up from these and other upstream projects.

In R&M, we continue to make progress in the recommissioning of both the Texas City and Whiting refineries, inline with prior guidance. By the end of the fourth quarter of 2007, we expect available production capacity to reach 400,000 barrels per day at Texas City. And at Whiting, we plan reach 300,000 barrels per day available production capacity, with sour crude processing by year end. We expect to restore both refineries to their full crude capacity and flexibility in the first half of 2008.

We have recently announced changes, which are designed to simplify the organization and improve productivity and accountability, freeing up operating units to enable them to focus on safe, reliable and profitable operations.

BP will in the future comprise two primary business segments, exploration and production and refining and marketing. A separate division, alternative energy will handle BP's low carbon businesses and future growth options, outside oil and gas. We will continue to report along current lines until the end of the year and we will restate our historic results in February of next year.

We expect to reduce overhead and complexity by reducing layers of management and redeploying staff to strengthen frontline operations. For example, in our exploration production business, we are simplifying the organization with the strength and focus on thirteen strategic performance units as the key delivers of performance. These thirteen strategic performance units will now report directly to Andy Inglis, the head of E&P, and we are selectively removing layers below that level.

We are consolidating our existing centers of expertise in both Houston and Sunbury to pool key skills and resources. Increasing standardization and productivity and reducing cost. And we are strengthening incentivization for the delivery, our plans for continues improvement at our operations, giving frontline staff a clear and more direct stake in our success.

These changes will support more consistent execution of our strategy. We have great positions in many of the major hydrocarbon basins of the world, as well as in the markets of key economies. And we are preparing for the longer term by building a new low carbon energy business.

Our problem has not been the strategy itself, but our execution of it. That’s why our focus remains the same, safety, people and the delivery of improved performance.

That concludes my presentation of our third quarter results.

We'll now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instruction).

Fergus Macleod

Thank you operator and I think we are ready to take the first question, which comes from Neil McMohan with Sanford Bernstein, Neil are you there?

Neil McMohan - Sanford Bernstein

Yes thanks Fergus. Just a few questions, the first one is really and thanks for Byron's remarks on the organizational change, but what might be useful is, if you could just go through, what is the real difference today between the way information will flow, from lets say the reservoir engineer or geologist that the cold phase does it ware up to Andy Inglis as ahead of E&P versus what was happening in the past? Then I've got a follow up question as well? Thanks.

Byron Grote

Thank you for that question Neil. Clearly the changes that we've announced have not been put into full effect yet so I can't talk about the changes that exist today, but the changes that we are in the process of implementing. One thing that will definitely occur is that there'll be less layers between that individual and Andy. Now, we are going to be taking out several layers in all parts of the organization in many cases extending the span of control and by doing that, removing the need for incremental layers in the process. Much of this is about ensuring that the right information is available, the flow of it occurs to the right levels in the organization.

We probably today have far too many people involved in analyzing information from different perspective and one of things that we've done within the organization is announced that we're taking a move to integrate our control and planning and performance analysis activities. Often we are working with data from different perspectives, but doing it independently and treating that as one functional activity as opposed to three. We believe that's an example of where deep efficiencies can be driven through all layers of the organization.

Neil Perry - Morgan Stanley

Okay, great. Just the second question on looking at Russia, obliviously you're saying that – I suppose the memorandum of understanding with Gazprom when are we likely to get some idea of how the relationship is going to work going forward? And with regard to the potential of any LNG swaps R&D getting back into Kovykta?

Byron Grote

Neil, we are in discussions with Gazprom. We are looking for opportunities with them to create a balance in the relationship something that's a win for both sides. We remain confident that that can be achieved, but it'd be inappropriate of me to speak to specifics of that at this time.

Neil Perry - Morgan Stanley

Okay, thanks.

Fergus Macleod

Thank you very much. Now, we'd like to move to Mark Ianotti at Merrill Lynch. Mark, are you there?

Mark Ianotti - Merrill Lynch.

Four questions. Firstly, maybe pardon me just few more granular comments on why we so such accrued results in Gazprom this quarter and maybe try and help us distinguish what's one off and what could be factor going forward? And also, maybe give us some guidance on how much you think this business can earn on an ongoing basis, given that you will be stopping, showing it from the start of this year and next year? Second question, with three or four business side your E&P projects coming into the portfolio, in the fourth quarter, can you maybe give us any early idea of either group or E&P level depreciation for 2008? Again, show your current annualized levels above $10 billion for the group?

Byron Grote

Thank you, Mark. Let me begin in gas and power. As I indicated in my remarks, there are a number of factors that probably the biggest contributor to there been a loss in the quarter was a very weak performance, actually losses from our gas trading and marketing activities. This is I think to be expected there, the contribution goes up and down. It was impacted quite materially as were many trading activities during the July period, when all markets were subjected to deep and unanticipated volatility. So, that is one area where I think it would be appropriate to treat it as a once off.

We did have some additional impacts with respect to what were natural gas liquids volume, so that’s a consequence of just doing the split differently there. And a bit of higher cost in alternative energy, as we are continuing to build our business there. There are cost, business development cost ahead of the actual developments themselves. So, some of these things I think, in fact this most of these things you can treat as ones off effects in the third quarter.

Now as far as how we are breaking the business up, the bulk of this activity will now show through into the exploration production of business and will just be an addition component into Andy Inglis business. The one element that we are going to separate out and we will be next year showing it as a contributor to other business and corporate is alternative energy itself. Although we won't be giving detailed financial disclosure, we certainly will continue to provide you with milestones, as we develop the various businesses that make up alternative energy.

As far exploration and production and guidance on depreciation in 2008 it is too early to do that. There will be additional depreciation from the startup some of which are very big capital project, but I would also like to point out that, as we move SEC reserve supporting in 2007 that in its own right created an increment DD&A because of the way in which the reserves treatment is applied to production sharing contracts and that element has led to increased charges of about $100 million a quarter. And in fact, we have about another $100 million a quarter that is as a consequence of reevaluating, decommissioning expenditures or decommissioning estimates over the course of the past year. So when you are comparing 3Q of '07 back to 3Q of '06 there is about $200 million of non-cash charges that radiate from those two effects.

2008, if oil prices stay where they are, we will have another impact with respect to the way in which production sharing contracts respond on reserves bases to very high year end prices. So, rather than speculate I think its best to wait until our February presentation. We will be able to give you much clear guidance in line with the activities that have progressed in the interim and with full knowledge of the way of prices at the end of the year.

Fergus Macleod

Mark just to add to that without getting in to full accounts for 2008 to give you some sense of the rise in the E&P, DDA that Byron has been referring to for 2007. It's in the order of $1.5 billion within that group number that you mentioned. So, to get you some sense of the momentum there.

Now moving to the United States we have got on the line Nikki Decker from Bear Stearns. Nikki, good morning.

Nikki Decker - Bear Stearns

Good afternoon. Fergus, thank you. Byron, my question is on cost. Would you talk a little bit about where the cost reduction will occur, the magnitude and the timing? I am referring to whether, it will all occur in on the corporate level or perhaps there is some opportunities on the operational level? Thank you.

Byron Grote

Nikki, again thanks for a very important question. As Tony Hayward said we have not set up any specific cost targets. We don’t know what is achievable at this stage and we prefer to lead from the perspective of addressing complexity with in the organization by taking steps to remove it. And then seeing what benefits will flow from that. We are confident that we have far too complex of an organizational structure and that’s standing in the way of excellence on the operational side, as well as adding significant overhead burden to the company as a whole. That overhead doesn't just exist at the corporate level. It is feathered in at various levels within the business segments as well.

So this is aimed at a complete house cleaning from the top to the bottom of the organization. We are not aiming to address frontline staff those who are actually involved in operational activity, in fact on the contrary, we have been taking significant steps to beef up personnel in that area. So in response to your question it's aimed at overheads, but it's primarily at unraveling the complexities that the company has inadvertently developed over the course of the last several years.

Nikki Decker - Bear Stearns

That’s great. Thank you Byron.

Fergus Macleod

Thanks Nikki. And back to London, Jon Rigby from UBS.

Jon Rigby - UBS

Two questions, the first is just a comeback onto your comment on strategy you said that execution was the issue and not strategy. Can you just comment as a person senior member of the board, in the last three years you've clearly been focused very internally. How has that lead you to not be able to think as to why the strategic base is or as a constraint you are taking action strategically because of the things you had to do entirely, I say that because of the last 3 to 3.5 years clearly the world has significantly changed and obviously, your strategy haven’t?.

And the second question is just on the point that you made about consolidating key areas of expertise in E&P, could you give us some examples of what areas of expertise are being consolidated together? And to just get an idea of what's their issue you consider are important to be brought together in, at one place? Thanks.

Byron Grote

John. As a member of the board and as the CFO of a Group, I will tell you that, although we have felt it was appropriate to focus on the fundamental activities of the Group that there was much more value to be unlocked for shareholders by making sure we got our operations right and we've worked very, very hard on that across all of our E&P and refining and marketing operations over the past couple of years. Although, we've been deeply focused on that, having said that we have not felt as though that that has prevented us from pursuing strategic opportunities as they were available.

And I would say that on the E&P side we've worked hard to get access. We've been successful in Oman and Libya this past year. On the refining side we thought there were benefits associated with swapping refinery capacity at Coryton and in Rotterdam and we've done so. And in alternative energy, we've pursed a wide range of transactions to build up our capability and opportunity, in particular in the wind arena.

So, in pursuit of our strategy, we have not been reluctant to pursue our opportunities. What we haven’t done is some big mega deal, if that’s what you are referring to, but we’ve certainly not forgone what we believe were very important strategic steps in support of our attempt to build a value for our investors over the longer term. Fergus?

Fergus Macleod

Yeah. And, Jon, just developing this point Byron made about the centers of excellence in Houston and Sunbury just outside London. Really the idea here is to collocate people with skills, to reduce trends in activity in the field, if you know what I mean, like, let me give you an example, high pressure, high temperature expertise. Now to hold that from early in a central location, two central locations, rather than attempting to deploy it in every one of those strategic performance, the departments I mentioned earlier. It has the incidental effect, of course of reducing cost, particularly expatriate cost in some locations. But, its those technical skills, its front end skills, engineering work on projects. Its those skills, perhaps that are most valuable and most, in most short supply within the upstream industry at the moment. And we do think as a significant productivity and cost and capability uplift that will come from strengthening those two centers in the United States and in Europe.

Jon Rigby - UBS

Okay.

Fergus Macleod

Moving on now, up to Scotland, Jason Kenney from ING. Jason, are you there?

Jason Kenney – ING

Yeah. Good afternoon. Two questions if I may. Firstly, on the downstream, the marketing really surprised, and the key to the quarter, could you enlighten us on some of the moving parts there and maybe the robust ability of marketing near medium term? And then secondly, in Q2 results, share buybacks were seen as slowing, given the revenue additives ahead of that time. Is it too early to see share buyback quickening going into the new year with revenues returning?

Byron Grote

Thank you, Jason. As far as marketing -- when we talk about marketing there is a very wide swath of different activities that are included in that, not just retail marketing where most people naturally go and where we give ongoing indicators to investors. But also in activities such as lubricants, aviation, fuel activities, marine fuels and petrochemicals or isotopes and aromatics businesses. So it's a very wide portfolio of activities, most of which had better margins in the third quarter then in the second. And I think that the difficulty of reading through all of that hydrogenous activity is the explanation for a good portion of the out performance of relative to expectations in refining and marketing.

As far as share buybacks go, I think maybe it would be useful to talk about the momentum of the group, because your question is really a reference to that. As we look in to the fourth quarter, we see a number of milestones that will be met to achieve the things that I referenced in my webcast, in particular various E&P startups and the refining, re-commissioning efforts, both Whiting and Texas City. Much of this is occurring late in the quarter, and therefore will have limited impact on the financials in 4Q.

We will however, see an improvement in our operational metrics, as we move into the first quarter. But in this phase as well, as is especially true in exploration and production projects, there are startup cost, so the operational end tends to run ahead of the financial delivery. But, we would then see this picking up as we roll through 2008 with progressive improvement in the underlying financial performance over the course of the year.

So I think its best start off as three phases, fourth quarter is about meeting milestones and we're on-track to do so. First quarter should be reflected by a much notable improvement in operational metrics, and over the course of 2008, remembering that we've got two refineries that won't meet their full capacity and flexibility until mid-year. Over the course of 2008 we'd see increasing underlying financial performance showing through.

Share buybacks are then a reflection of the cash delivery we have at hand, recognizing that we have a gearing in which we anticipate to operate, as the revenues return. And we find that we have excess cash flow, then we will, all other things being equal, increase our share buyback program again.

Fergus Macleod

Thanks Jason. And coming back to London [Steven] from Morgan Stanley. Good afternoon Steven.

Steven - Morgan Stanley

Yeah, hi good afternoon gentlemen. And just a couple of questions actually, firstly two quick points on the financials, I was just wondering whether you could confirm your guidance of $18 billion CapEx for the full year? And second, just confirm sort of the tax rate for the full year? And secondly, just on refining and the ramp up back in Texas City and Whiting, I was wondering whether you could provide any sort of information on the opportunity cost for the Q3 from Texas and Whiting? And then, where you see sort of the ramp up for Texas in particular into Q4, it does seem if you look at the volumes with this phase in the U.S. and they seemed to have ramped up quite quickly. So I was wondering whether we may see a quicker than expected return to volumes from Texas? Thank you.

Byron Grote

Well let me address your financial questions first, $18 billion does remain our guidance for organic capital spending in 2007. We indicated that at the beginning of the year, if you look at the year-to-date numbers, they are running a little bit less than that on a pro-rata basis, but the fourth quarter is normally a high capital spending quarter. So our expectation is that the number will come out inline with guidance.

Tax rate, the guidance at the beginning of the year was 35% to 37%.Its running year-to-date at the lower end of that. Fourth quarter is always volatile, but I have no doubts that it will fall within that range, probably at the lower end of the band.

As far as opportunity cost goes, the losses at Whiting that I had indicated, that stem from the problems that we were identified there in the second quarter of about $100 million per month or around $300 million per quarter, have continued to be good guidance, not only through to 2Q, but through 3Q. And although Whiting made a contribution to the Group, it was clearly limited as a consequence of being forced to run as sweet crude as opposed to sour crude and at limited capacity as opposed to full capacity at that refinery.

Texas City has continued to operate at a loss. It has, since the beginning of 2006, that continued in the third quarter of 2007. But some of the underlying improvements there have shown through, because the losses in the third quarter were in line with those of the second quarter in spite of a much weaker refining margin environment.

Let met just give you an outline of what's going to happen at Texas City and perhaps this will answer your question. Over the third quarter, Texas City, we’ve been re-commissioning the products cluster, which is designed to desulfurize product streams and upgrade them. So its very critical to do that prior to what we are doing now, which is working on bringing the second crude unit into production. And we still aim at having that done by the end of the year. So that would give us available production at Texas City of 400,000 barrels per day.

If you look out then into 2008, we achieve full capacity and flexibility by re-streaming the heavy upgrading resid hydrotreating unit and bring it on stream along with a second ultra reformers. So there is a bunch of work to be done, still downstream of the crude units there. That will take place over the course of the first half of 2008. So the guidance that we provided, which is to have it to 400,000 barrels a day by year end and to have full capacity and flexibility by mid year, we remain on track and we are not providing any incremental guidance to that.

Steven - Morgan Stanley

Thanks very much.

Fergus Macleod

Thanks, Steven. Now move like to move on to [Stefan Fuco] from SG. Stefan?

Stefan Fuco - SG

Good afternoon, gentlemen. I would ask two questions on operational focus. The first one is about Angola. Some service companies in Angola talked about delays in some infrastructure contractor awards in BP offshore assets Block 31 and 32. And we are also hearing that BP Chinese partner on Block 18 may not be good some cost on block 18. Could you perhaps comment on that and elaborate on any possible impacts on growth for BP in that part of the world. If this -- is these are indeed concerns. My second question is on Thunder Horse, based on the startups of Thunder Horse next year when would you expect to reach plateau production on these fields? Firstly, I was wondering, if you are contemplating a quick ramp-up or rather probably see increase and therefore if we can plateau production in '09 or perhaps later? Thanks.

Fergus Macleod

Stefan, perhaps I’ll take this too. On Angola rumors about delays, obviously we don’t comment on industry rumors, we have our guidance on production, we are not changing any of that. So there is a message there I think about where we stand in terms of the time tables in Angola.

Second on Thunder Horse again the guidance hasn't changed, it'll startup by end '08 and progressively ramping up there after. You can see from the Atlantis startup, that we have being very careful and cautious, as you'd expect us to be with these very complex and sensitive projects. And that we will do it the right way and we will do it progressively. So, you should expect to see production from Thunder Horse build up in the months following commissioning, and commissioning will take place by the end of 2008, as we previously indicated.

Moving back to the United States, Mark Gilman. Mark, you are on the line from Benchmark Company.

Mark Gilman - Benchmark Company

Yes, Fergus thank you. I had a couple of specific, things and a more general question if I could please. On the specific front, I was wondering if you could quantify the volume impact in the third quarter of the unplanned, upstream downtime, as opposed to breaking it out quite the way you did. Secondly, of the specific nature, could you comment on reports of early water encroachment and the impact on production at Chirag in AIOC, and whether or not that would have any going forward impact on volumes in that area?

Thirdly, and more generally, as part of the organizational changes that are going to be implemented, is consideration being given to eliminating the metrics aspect of the current organization, namely having both regional and functional responsibilities with particular reference to the U.S.? Thanks guys.

Byron Grote

Thanks Mark. I'll do these in reverse order. As far as the organizational structure, we believe that there remain benefits from having a regional organization and therefore, a metrics functions, regions, and business segments. That being said, we're looking to simplify the way in which these interfaces occur. There are too many nodes of where functions and regions and segments come together and that's part of what creates complexity.

So, although that we're not eliminating regions, we're structuring them in a much more fit for purpose way. And in most parts of the world, the regional activities have been moved into the business segment, which leads in that region, in most of Europe that's refining and marketing and much of the rest of the world that's exploration and production. We have a bigger regional organization in United States, because of the very large footprint we have there across much business activity from all areas of BP. And so it's is important that we maintain a regional organization there, but it needs to be developed as fit for purpose way and we are certainly progressing to do that.

As far as your question about Chirag, we don't comment on that, so I am not going to provide you any specific guidance in U.S. Fergus, whether or not he can provide some additional perspective

Fergus Macleo

Just a couple of points really, Mark, on, obviously ACG phase III is scheduled to start up next year. The whole field complex is performing as previously expected. Actually the bigger issue in terms of BP's net production, Azerbaijan, of course is cost to company under the production sharing contract under very high prices which we provided information on which I think you saw during the field trip to Azerbaijan just a year ago now. So if you are looking for net production from BP, I'd focus PSC effects, field performance is really much as expected. The bigger issue actually in the fourth quarter is to continued ramp up of production from Shah Deniz as we move into the winter and we should see higher gas deliveries out of that filed, which as has been relatively slow and its ramp up earlier in 2007.

And finally, Mark, I think you asked a question about unplanned upstream downs time. The two major things that were completely unexpected in the third quarter, were the CATS shut down, the North Sea pipeline, it was damaged by ships dragging its anchor. That had an impact of about 50,000 barrels of oil equivalent a day, in the third quarter and that was also a unplanned shut down of the Baku-Ceyhan pipeline at the end of the quarter, just for few days there, which was about 10,000 barrels a day. Those, obviously, this downtime across the rest of the business and the normal course of things to maintenance season is another factor, but the two big ones that might effect your numbers in your forecasting were CATS and the BTC shut down at the end of the quarter.

Mark Gilman - Benchmark Company

No Alaska effect in terms of unplanned down time?

Fergus Macleo

Nothing unplanned, Mark. There was, it is the maintenance season in Alaska in the third quarter. as you know Alaskan production was relative low in the third quarter, but for that reason and because of obviously lowest summer compressor efficiency, but we would expect to see Alaska back up again in the fourth quarter, the incidence that were committed on the press didn’t have any material impact on production.

Coming back to Europe, Ed Westlake CSFB. Ed, are you there?

Ed Westlake - CSFB

Yes, I am. And a lot of questions have been asked, maybe just on TNK-BP, obviously realization rose both domestically and internationally, yet the profit didn’t rise that much relative to short fall in production versus Q2. So just maybe some comments on costs and the tax impacts?

And then secondly, whether you'd be able to give some rough guidance at this stage in terms of CapEx and volumes for 2008 at least in terms of the arms and legs of your thoughts in terms of inflation and overall volume growth? Thanks.

Byron Grote

Thanks for those questions Ed. As far as TNK-BP goes, there is nothing unusual in the third quarter. The tax rate is the rate that we would expect on an ongoing basis. I think perhaps the issues here is the very low tax rate that we booked in the second quarter, there was a right back of a provision in TNK-BP, so it led to a lower rate than would be the expected statutory rate. So, I would look backward as opposed to 3Q in searching for answers on that specific question.

CapEx for 2008 will be an issue that we will discuss with investors in our February strategy presentation. One thing which is obvious is the fact that we are like everyone else, subject to double-digit inflation in the capital spending arena across, not only refining and marketing, but also much of the heavy spending around refineries in refining and marketing. So, with double-digit inflation coming through, one would expect that to be reflected even with the same sort of activity set as we saw in 2007. Beyond that, you will need to wait for the guidance that we provide in February. Volumes remain consistent with the guidance that Andy Inglis provided back in February of this year. And we have not moved it all with respect to that guidance.

Ed Westlake - CSFB

Thank you.

Operator

Thanks Ed. Now going back to United States we have Dan Barcelo on the line from Banc of America.

Dan Barcelo - Banc of America

Hi. Yes, good afternoon. Thank you. If I could just a quick question about like the old business versus the new, on the E&P side, post the Gulf of Mexico lease sale, is any further color you can give, now that you have achieved those leases, in terms of what prospects you find interesting going into ’08, ’09? And also maybe a quick update on the lower treachery?

And then, in terms of the new business on your plans for alternative energy, can you just touch pretty broadly about some of the core businesses you had historically at solar, how those are fairing? And then also in terms of carbon legislation, it seems that seems to be front and center on legislative front. Are you able to comment broadly about any actions done on the U.S. front or changes in Europe? Thank you.

Byron Grote

That’s a wide swat of questions. Let me talk about the alternative energy business and then we will come back to the specifics of the Gulf of Mexico here. Let me give you color on the two main areas within alternative energy and that's wind and solar. In the United States, because that's where the bulk of wind activity is, we are making good progress. We have four wind farms under construction there, with the total of 420 megawatts involved in that at places as Cedar Creek, [Eden Wells], Silver Star and [Dell Way], to name the projects. Cedar Creek, which is the biggest of those, is the largest wind farm in the United States and at 300 megawatts is being commissioned.

We've got a very large land bank in the United States, potentially 15 gigawatts of land portfolio there. So we build a very good platform for the business in United States. And we also have first wind farm in India that's producing electricity. So perhaps that gives you some color there. As far solar goes we're expanding module capacity. We've got installed capacity of 300 megawatts on track for the end of 2008. And in both areas we continue to see substantial growth prospects in the near and longer term.

With respect to your questions about the plans with regard to the blocks that we acquired in the recent Gulf of Mexico lease sales and our views of various structures in the Gulf of Mexico, that is not information that we share publicly. This is the information around, which great value is created in an exploration-production company and we believe we have competitive advantage, we're certainly not going to disclose it publicly.

Dan Barcelo - Banc of America

Okay. Thank you.

Byron Grote

Thanks.

Fergus Macleo

And coming back to London, Colin Smith from Dresdner Kleinwort. Colin, are you there?

Colin Smith - Dresdner Kleinwort

Yes, good afternoon gentlemen. Just coming back to the organizational changes you mentioned Byron, I wondered if you could just provide a little bit more detail about the swift number of SPU's you had before and the number you said you'll end up with by the time the de-layering process has been completed? Can you also touch on how far you think the OMS has been implemented within that? And then on a completely separate topic, I just wondered if, will you might be in a position to talk about where things stand on the SDX-4 well and the implications for Shah Deniz? Thank you.

Byron Grote

As far as the SPU's go, this is actually less about changing the number of strategic performance units. It's much more about concentrating performance around the strategic performance unit structure. So we're in many ways moving things down from the segment levels into the SPU's. And we're removing in many cases, levels below that, not exclusively eliminating business units, but we are eliminating the smaller units in some cases that existed below the SPU's, all of which has lead to duplication of resource if you have activity at the group level, at the segment level, at the strategic performance unit level and at the business unit level you can see how much of that can be eliminated and yet achieve the same result.

So the identification of strategic performance units is a main building blocks of performance delivery of the group, is an important decision and we will do is cluster resources around them as opposed to spread it more broadly. And I believe this is going to have very important lever into reduced overheads and improved performance for the group. Its going to take a while to get there this isn't the sort of thing you do overnight. But certainly I and my colleagues are deeply optimistic on what can be achieved here.

Fergus Macleod

And Colin coming back to your question, detailed question about the well and Azerbaijan. Clearly, one of the main reasons that BP isn't Azerbaijan and when the production chain contract back in the early 90s is our ability to manage the complex geology of the Caspian and the very difficult drilling conditions that can result from that. So we are working a way on that, its not unexpected that this was going to be a technical challenge, its something that we are up to and up for and we are dealing with that, we are beginning completion on that while as we speak and I mentioned in response to Marks question earlier on that Shah Deniz is an asset where we would expect production to continue to ramp up as it has been doing all year. Relatively, slowly, but it has been rising and we expect to further rise in production from Azerbaijan in the fourth quarter of 2007.

Coming back to those who have patiently waited Irene Himona, BNP. Irene, are you there?

Irene Himona - BNP

Good afternoon. I have two questions, first of all could you perhaps update us on where you are in relation to the plan to upgrade the Whiting refinery, given the recent environmental obstacles, when it is realistic to expect a decision on that? And then secondly in E&P, if we actually strip out last year's capital gains at your, at the affiliates, it appears that the upstream result was a bit better than the rules some would indicate. So could you perhaps talk a little bit about trends you are seeing operating cost inflation in the upstream? Thank you.

Byron Grote

Well, let me cover the Whiting question and Fergus will come back on the expiration and production inquiry you made. I think it might be useful to just kind of talk as I did with Texas City about where we are with respect to Whiting at the current time and then I'll use that as a lead-in into the investments that we have planned there.

As far as Whiting goes, it like Texas City is on track with guidance that Iain Conn provided during the July webcast. The key issue there on the operational side is the return of the hydrogen compressors for the CAT feed hydro treating unit, which is necessary to allows to return to sour crude processing. At the current time, we expect to have a couple of hydrogen compressors back in service by year-end, which will then allow the sour crude train, one of the sour crude trains to come up. And then those two events together would allow us to return to the 300, 000 barrels a day and sour crude processing that I indicated in my remarks.

They are too achieving a full capacity and flexibility, is achieved when we have all four of our hydrogen compressors up and running along side, both of this sour crude units. And again, here we expect to achieve that by the middle of next year. So there’s still lot of activity going on in Whiting as there has been over the course of 2007. So we have been very careful to ensure that the activity which is around the major upgrade of the refinery is done on a separate, but parallel track. And that is indeed what’s occurring and we expect to be able to progress according to the time table its been outlined there and we’ve, as Iain Conn indicated in July, even acquired some long lead time items.

With respect to environmental permitting, we are always cognizant of the environmental regulations of the United States, plan on adhering to them. We have a permit and we will meet the requirements of it.

Fergus Macleo

Irene, on your question on costs and the trends we are seeing in cost inflation. Byron has already reference to the rise in non cash costs. As I said you previously and I have indicated that the upward trend in DD&A is in the order of $200million to $300 million in total per quarter. So that’s the sort of change relative to 3Q '06, you are looking at a non cash cost. On the cash cost, the increase is similar. It’s in the order of $200 million to $300 million, clearly that’s been exaggerated by the weakness of the U.S. dollar, so that has, that proportion of our cost particularly in the North Sea, which is not dollar denominated. But behind all of that, there is probably an underlying inflation rate, we think in terms of our upstream cash cost running at about 6% perhaps on the operating cost sides. So, hopefully that gives you some sense of where inflationary trends in that part, the upstream value trend change the line.

Coming back to the U.S. we have Joseph Tovey on the line from Tovey & Company. Joseph are you there.

Joseph Tovey – Tovey & Company

Indeed. Good afternoon and thank you. Couple of questions if I might, maybe more than a couple. Have you set up any sort of reserves for separation cost during this past quarter with respect to the cost expected to origin to result from the organization or the organizational changes in the company? That was one question. Second question was with respect to your refinery outlook and since you're already working some of the refineries of necessity, do you have a view as to whether there is going to be a dieselization of the product barrel rather than at the expense of gasoline. Thirdly, in conjunction with your production operations, do you have a view as, I am not quite interested to where the trading activities take place, are they truly considered downstream or they considered upstream between crude and gas and why do you consider the losses that occur to be one off items? Thanks.

Byron Grote

I'll take you questions, I'll do the first and third and Fergus maybe can respond better to the second one. As far as reserves for various charges is associated with work force implications of the restructuring that we have announced, we've taken nothing. It's far too premature to be doing that. It may well be that when we come to announce our fourth quarter results in February that will have detailed enough plans in place in order to take a provision on a do-so in line with the accounting standards, which require that you cross a number of criteria in order to do so. If that is to occur, we'll provide clear line of site to our investors on the scale of any provisions that might be taken with respect to restructuring associated with the announcements that have been made.

The trading activity, we have a long track record of delivering incremental value to the group through both our oil, and products, and our gas and power trading. These contributions tend to be volatile, they are driven by the nature of the marketplace, that what sort of opportunities it offers. As well as the performance of the teams involved in it, 90 days is a very short period of time and the nature of this activity as any investment bank can speak to is that it tends to be volatile. I'm confident that the track record that we have over many many years is a better indicator than the short-term performance that was delivered over a 90-day period, which had some very unusual characteristics as associated with it. Fergus, second question.

Fergus Macleod

Yeah just on dieselization yes a very interesting question but when I think where the market has the lead clearly there is been significant shift in that direction in Europe and we have made investment plans to meet that increase in diesel demand most recently. We have indicated that [Tew] having taken a 100% control of the Netherlands refining company earlier this year after selling Carten that we would invest there with a view to increasing its diesel production capacity.

If you are talking specifically about the United States, its always an interesting question as to whether consumer preferences in United States will shift towards diesel vehicles. We have seen that happen dramatically in Europe and elsewhere. There's not much sign of it at the moment in the U.S., but clearly we would invest to follow that trend, we wouldn't seek to lead it if it was to take place but we are talking about long periods of time. I hope I have understood your question correctly Joseph was that what you were asking about?

Joseph Tovey – Tovey & Company

Perfectly understood and thank you very much for a comprehensive answer.

Fergus Macleod

Thank you. And now for the last person has been waiting most patiently Neil Morton, Niel are you there?

Neil Morton

I'm indeed. Thank you, Fergus. Just a couple of questions left in the Q3 numbers. In the downstream the rest of unit segment seem to be particularly resilient Q3 versus Q2, just wonder if there was anything over and above the mix shift of marketing affects you mentioned perhaps an early benefits from the purchase of the Nerefco minority? And just secondly your U.S. natural gas utilization does that mean a fairly stubborn discount versus the Henry Hub benchmark, just wondered actually you comment on your expectations going forward as the various stages of the Rockies Express pipeline comes on the stream? Thank you.

Neil Morton

Well let me deal with the second question, Fergus will handle the first as you noted there is a material discount of two Henry Hub of our U.S. gas production the biggest discount is in the Rockies' area as you pointed out where our own Delta there versus Henry Hub was more than $3 and that compares with only a bit over $1 back in 3Q of 2006. So, an incremental $2 discount year-on-year. The way in which these discounts disappear is when there is additional pipeline capacity to evacuate the gas. So, as you have indicated in your question, once we have additional edge from new pipelines that should modify the situation to some extent.

Fergus Macleod

And Neil, your question on refining and marketing, and the contribution of marketing in the third quarter relative to the second. As far as the first point to make is that overall refining business did record a loss in the third quarter of around $100 million and that was more than obviously fully offset by stronger performance in marketing. So you are absolutely right and marketing did strengthen in the third quarter relative to the second. But I just remind you what Byron said earlier that marketing process quite broadly defined includes the form of chemicals business, the NA business.

It includes lubricants, it includes marine, it includes aviation and it was these businesses rather than retail marketing, gasoline station marketing, they did considerately better in the third quarter and provided that quite strong offset to the weakness in refining, which especially I can't see another quarter where refining did record a loss actually that’s on the data I would say. So that was a very weak quarter in refining, obviously reflecting both the margin environment and our own issues in terms of he downtime of Texas City and Whiting.

We do have one very final question actually. Somebody already asked a question, but if you still, I would be happy to take it. Neil McMohan from Bernstein.

Neil McMohan - Sanford Bernstein

Yeah.. It’s actually two quick ones. First of all, just on Azerbaijan, on ACG III, it appears that the platform is undergoing, sort of hookup and is on spot ready to go. Could you give us just some guidance on ACG II. How long it took between getting the topside on place and when it was actually flowing oil? And secondly, are there any high impact exploration wells that are likely to be finished in the fourth quarter or on the start of next year. Thanks.

Fergus Macleod

Neil, on your ACG question I think the best thing is I will take that one offline. I think there is a video I can send you of the hookup process on ACG II, which you might quite enjoy actually. So I will do that offline. High impact wells, as it is a bit like what Byron said about the lower treachery in response to Dan Barcelo question. It’s not something that BP does, which is to talk about these things ahead of time. If we have successes, we will tell you about them after they take place, and not before. I am so sorry I am actually no help on that level, we will come back to you on ACG.

Well, I think that concludes all the questions. I would just like to thank everybody for participating this afternoon. We are always happy in investor relations to take any of your questions at any time. So please do contact us if you have any follow up. Thank you.

Byron Grote

Thank you.

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Source: BP Q3 2007 Earnings Call Transcript
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