BP plc (NYSE:BP)
Q3 2007 Earnings Call
October 23, 2007 9:00 am ET
Fergus Macleod - Head of IR.
Byron Grote - CFO
Neil McMohan - SanfordBernstein
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
Hello and welcome to the BP Third Quarter 2007 ResultsConference Call. My name is Fergus Macleod, BP's Head of Investor Relations. Joiningme today is Byron Grote, our Chief Financial Officer.
Before we start, I'd like to draw your attention to a twoitems. First, today's call refers to slides, which we will using during thewebcast. Those of who on our distribution list should have already receivedthem 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 theinformation on this cautionary slide. Now over to Byron.
Thank you, Fergus and good day to those joining us on thiscall. I will begin my review of the quarter with the trading environment. Thetable shows the percentage year-on-year changes in BP's average upstreamrealizations and refining global indicator margin for the third quarter, aswell as year-to-date.
In the third quarter, oil prices continue to strengthen ourmid concerns over hurricane activity and draws on U.S. crude stocks. Our average 3Qliquids realization up $71 per barrel was higher than both the previous quarterand last year. By contrast, our third quarter gas realization of around $3.90per thousand cubic feet was down 12% compared to a year ago, as gas prices werelower in both the United Statesand the United Kingdomin light of ample supplies and mild weather conditions.
Taking both oil and gas together, our total hydrocarbonrealizations for the quarter and year-to-date were comparable to last year. Inrefining, our 3Q indicator margin built around $8 per barrel on the back oflower seasonal demand, in the increased supply from the switch on the back oflower seasonal demand and the increased supply from switch to integrategasoline. 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 narrowingof light heavy crude differentials.
Turning now to the financial, overall our results for thequarter and year-to-date were down year-on-year. This was a result of a numberof factors, which included the continued impact of operational issues, as wellas the absence of favorable ones off items realized last year. I would describethese factors in more detail when discussing individual segment results. Bothour replacement cost profit of $3.9 billion and our profit including inventorygains and losses of $4.4 billion were down significantly compared to 3Q '06.
Operating cash flow of $6.4 billion was up 24% compared tolast year. The per share metrics shown reflect the benefit of the reduction inour shares outstanding by 4% over the past year. The $10.825 per share dividendannounced 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 sharplyweaker dollar.
Moving now to our segments, in E&P we reported a pre-taxprofit of $6.3 billion for the third quarter, which include a small non-operatinggains primarily from the sale of assets. Excluding these non operating items,our underlying result was down by $1.1 billion compared with last year. Thebenefit seemed from stronger liquids realizations were more than offset bylower gas realizations, lower production, higher cost and the absence of thedisposal gains totaling $1 billion, which we realized in our equity accountedentities last year, primarily from TNK-BP.
Reported production was 3.65 million barrels of oilequivalent per day, a decline of 4% compared with a year earlier. Afteradjusting for the effective disposals, low entitlements in a production sharingagreements, 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 of3.8 million to 3.9 million barrels of oil equivalent per day as indicated backin February.
In Refining and Marketing, we reported a third quarterresult of $380 million, which included a charge of $340 million fornon-operating items. These charges were primarily related to new provisions andrevisions to existing ones. Excluding these non-operating items, our underlyingresult was $720 million compared to $1.9 billion a year ago. This reflectsweaker refinery margins and the continued impact of operational issues,particularly at the Whiting refinery.
The quarter’s result also reflected greater integrity andrepair spend, as well as adverse affects from fair value accounting.
Turning to Gas Power and Renewables, we reported a pretaxloss of $60 million compared with the profit of $150 million a year ago. Our 3Qunderline results decreased by nearly $300 million relative to the previousyear, this reflected a significant reduction in the contribution from themarketing and trading businesses, lower natural gas liquids volumes and higheralternative energy expenditure probably offset by improved margins in the NGLbusiness.
In Other Businesses and Corporate or OB&C, our thirdquarter's result included a net charge of around $200 million in respect of nonoperating items, which were primarily comprised of new provisions and revisionsto existing ones.
As you may recall, we conduct a review of our environmentaland various other provisions each year in the third quarter, the results ofwhich we include in non-operating items. Our expected full year underlyingcharge remains within the range I indicated in February.
Turning now to cash flow, this slide compares our sourcesand uses of cash in the first nine months of 2006 and 2007. Operating cash flowof over $20 billion and disposals are $3.9 billion, funded $12.5 billion oforganic capital spending and $1.2 billion of acquisitions, plus $12 billion ofshareholders distributions. Our net debt ratio remained flat and at the bottomend 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 todistributing 100% of excess free cash flow to investors other factors beingappropriate.
Now, let me talk about some of the progress we've made. InE&P we are building momentum in our operations through the delivery ofmajor projects. Early in October we achieved the successful start up of greaterGreat Plutonia, BP's first operated project in Angola. And in the deepwater Gulf of Mexico, we have started commissioning theAtlantis field. In the fourth quarter we expect production to ramp up fromthese and other upstream projects.
In R&M, we continue to make progress in therecommissioning of both the Texas Cityand Whiting refineries, inline with prior guidance. By the end of the fourthquarter of 2007, we expect available production capacity to reach 400,000barrels per day at Texas City.And at Whiting, we plan reach 300,000 barrels per day available productioncapacity, with sour crude processing by year end. We expect to restore bothrefineries to their full crude capacity and flexibility in the first half of2008.
We have recently announced changes, which are designed tosimplify the organization and improve productivity and accountability, freeingup operating units to enable them to focus on safe, reliable and profitableoperations.
BP will in the future comprise two primary businesssegments, exploration and production and refining and marketing. A separatedivision, alternative energy will handle BP's low carbon businesses and futuregrowth options, outside oil and gas. We will continue to report along currentlines until the end of the year and we will restate our historic results inFebruary of next year.
We expect to reduce overhead and complexity by reducinglayers of management and redeploying staff to strengthen frontline operations.For example, in our exploration production business, we are simplifying theorganization with the strength and focus on thirteen strategic performanceunits as the key delivers of performance. These thirteen strategic performanceunits will now report directly to Andy Inglis, the head of E&P, and we areselectively removing layers below that level.
We are consolidating our existing centers of expertise inboth Houston and Sunbury to pool key skills and resources. Increasingstandardization and productivity and reducing cost. And we are strengtheningincentivization for the delivery, our plans for continues improvement at ouroperations, giving frontline staff a clear and more direct stake in oursuccess.
These changes will support more consistent execution of ourstrategy. We have great positions in many of the major hydrocarbon basins ofthe world, as well as in the markets of key economies. And we are preparing forthe longer term by building a new low carbon energy business.
Our problem has not been the strategy itself, but ourexecution of it. That’s why our focus remains the same, safety, people and thedelivery of improved performance.
That concludes my presentation of our third quarter results.
We'll now be happy to take your questions.
Thank you operator and I think we are ready to take thefirst question, which comes from Neil McMohan with Sanford Bernstein, Neil areyou there?
Neil McMohan - Sanford Bernstein
Yes thanks Fergus. Just a few questions, the first one isreally and thanks for Byron's remarks on the organizational change, but whatmight be useful is, if you could just go through, what is the real differencetoday between the way information will flow, from lets say the reservoirengineer or geologist that the cold phase does it ware up to Andy Inglis asahead of E&P versus what was happening in the past? Then I've got a followup question as well? Thanks.
Thank you for that question Neil. Clearly the changes thatwe've announced have not been put into full effect yet so I can't talk aboutthe changes that exist today, but the changes that we are in the process ofimplementing. One thing that will definitely occur is that there'll be lesslayers between that individual and Andy. Now, we are going to be taking outseveral layers in all parts of the organization in many cases extending thespan of control and by doing that, removing the need for incremental layers inthe process. Much of this is about ensuring that the right information isavailable, the flow of it occurs to the right levels in the organization.
We probably today have far too many people involved inanalyzing information from different perspective and one of things that we'vedone within the organization is announced that we're taking a move to integrateour control and planning and performance analysis activities. Often we areworking with data from different perspectives, but doing it independently andtreating that as one functional activity as opposed to three. We believe that'san example of where deep efficiencies can be driven through all layers of theorganization.
Neil Perry - MorganStanley
Okay, great. Just the second question on looking at Russia,obliviously you're saying that – I suppose the memorandum of understanding withGazprom when are we likely to get some idea of how the relationship is going towork going forward? And with regard to the potential of any LNG swaps R&Dgetting back into Kovykta?
Neil, we are in discussions with Gazprom. We are looking foropportunities with them to create a balance in the relationship somethingthat's a win for both sides. We remain confident that that can be achieved, butit'd be inappropriate of me to speak to specifics of that at this time.
Neil Perry - MorganStanley
Thank you very much. Now, we'd like to move to Mark Ianotti atMerrill Lynch. Mark, are you there?
Mark Ianotti -Merrill Lynch.
Four questions. Firstly, maybe pardon me just few moregranular comments on why we so such accrued results in Gazprom this quarter andmaybe try and help us distinguish what's one off and what could be factor goingforward? And also, maybe give us some guidance on how much you think thisbusiness can earn on an ongoing basis, given that you will be stopping, showingit from the start of this year and next year? Second question, with three orfour business side your E&P projects coming into the portfolio, in thefourth quarter, can you maybe give us any early idea of either group or E&Plevel depreciation for 2008? Again, show your current annualized levels above$10 billion for the group?
Thank you, Mark. Let me begin in gas and power. As Iindicated in my remarks, there are a number of factors that probably thebiggest contributor to there been a loss in the quarter was a very weakperformance, actually losses from our gas trading and marketing activities.This is I think to be expected there, the contribution goes up and down. It wasimpacted quite materially as were many trading activities during the Julyperiod, when all markets were subjected to deep and unanticipated volatility. So, that is onearea where I think it would be appropriate to treat it as a once off.
We did have some additional impacts with respect to whatwere natural gas liquids volume, so that’s a consequence of just doing thesplit differently there. And a bit of higher cost in alternative energy, as weare continuing to build our business there. There are cost, businessdevelopment cost ahead of the actual developments themselves. So, some of thesethings I think, in fact this most of these things you can treat as ones offeffects in the third quarter.
Now as far as how we are breaking the business up, the bulkof this activity will now show through into the exploration production ofbusiness and will just be an addition component into Andy Inglis business. Theone element that we are going to separate out and we will be next year showingit as a contributor to other business and corporate is alternative energyitself. Although we won't be giving detailed financial disclosure, we certainlywill continue to provide you with milestones, as we develop the variousbusinesses that make up alternative energy.
As far exploration and production and guidance ondepreciation in 2008 it is too early to do that. There will be additionaldepreciation from the startup some of which are very big capital project, but Iwould also like to point out that, as we move SEC reserve supporting in 2007that in its own right created an increment DD&A because of the way in whichthe reserves treatment is applied to production sharing contracts and thatelement has led to increased charges of about $100 million a quarter. And infact, we have about another $100 million a quarter that is as a consequence ofreevaluating, decommissioning expenditures or decommissioning estimates overthe 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 twoeffects.
2008, if oil prices stay where they are, we will haveanother impact with respect to the way in which production sharing contractsrespond on reserves bases to very high year end prices. So, rather thanspeculate I think its best to wait until our February presentation. We will beable to give you much clear guidance in line with the activities that haveprogressed in the interim and with full knowledge of the way of prices at the endof the year.
Mark just to add to that without getting in to full accountsfor 2008 to give you some sense of the rise in the E&P, DDA that Byron hasbeen referring to for 2007. It's in the order of $1.5 billion within that groupnumber that you mentioned. So, to get you some sense of the momentum there.
Now moving to the United States we have got on theline Nikki Decker from Bear Stearns. Nikki, good morning.
Nikki Decker - BearStearns
Good afternoon. Fergus, thank you. Byron, my question is oncost. 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 inon the corporate level or perhaps there is some opportunities on theoperational level? Thank you.
Nikki, again thanks for a very important question. As TonyHayward said we have not set up any specific cost targets. We don’t know whatis achievable at this stage and we prefer to lead from the perspective ofaddressing complexity with in the organization by taking steps to remove it.And then seeing what benefits will flow from that. We are confident that wehave far too complex of an organizational structure and that’s standing in theway of excellence on the operational side, as well as adding significantoverhead burden to the company as a whole. That overhead doesn't just exist atthe corporate level. It is feathered in at various levels within the businesssegments as well.
So this is aimed at a complete house cleaning from the topto the bottom of the organization. We are not aiming to address frontline staffthose who are actually involved in operational activity, in fact on thecontrary, we have been taking significant steps to beef up personnel in thatarea. So in response to your question it's aimed at overheads, but it's primarilyat unraveling the complexities that the company has inadvertently developedover the course of the last several years.
Nikki Decker - BearStearns
That’s great. Thank you Byron.
Thanks Nikki. And back to London, Jon Rigby from UBS.
Jon Rigby - UBS
Two questions, the first is just a comeback onto yourcomment on strategy you said that execution was the issue and not strategy. Canyou just comment as a person senior member of the board, in the last threeyears you've clearly been focused very internally. How has that lead you to notbe able to think as to why the strategic base is or as a constraint you aretaking action strategically because of the things you had to do entirely, I saythat because of the last 3 to 3.5 years clearly the world has significantlychanged and obviously, your strategy haven’t?.
And the second question is just on the point that you madeabout consolidating key areas of expertise in E&P, could you give us someexamples of what areas of expertise are being consolidated together? And tojust get an idea of what's their issue you consider are important to be broughttogether in, at one place? Thanks.
John. As a member of the board and as the CFO of a Group, Iwill tell you that, although we have felt it was appropriate to focus on thefundamental activities of the Group that there was much more value to beunlocked for shareholders by making sure we got our operations right and we'veworked very, very hard on that across all of our E&P and refining andmarketing operations over the past couple of years. Although, we've been deeplyfocused on that, having said that we have not felt as though that that hasprevented us from pursuing strategic opportunities as they were available.
And I would say that on the E&P side we've worked hardto get access. We've been successful in Omanand Libyathis past year. On the refining side we thought there were benefits associatedwith swapping refinery capacity at Coryton and in Rotterdam and we've done so. And in alternativeenergy, we've pursed a wide range of transactions to build up our capabilityand opportunity, in particular in the wind arena.
So, in pursuit of our strategy, we have not been reluctantto pursue our opportunities. What we haven’t done is some big mega deal, ifthat’s what you are referring to, but we’ve certainly not forgone what webelieve were very important strategic steps in support of our attempt to builda value for our investors over the longer term. Fergus?
Yeah. And, Jon, just developing this point Byron made aboutthe centers of excellence in Houston and Sunbury just outside London. Really the idea here is to collocatepeople with skills, to reduce trends in activity in the field, if you know whatI mean, like, let me give you an example, high pressure, high temperatureexpertise. Now to hold that from early in a central location, two centrallocations, rather than attempting to deploy it in every one of those strategicperformance, 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 onprojects. Its those skills, perhaps that are most valuable and most, in mostshort supply within the upstream industry at the moment. And we do think as asignificant productivity and cost and capability uplift that will come fromstrengthening those two centers in the United States and in Europe.
Jon Rigby - UBS
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, onthe 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 robustability of marketing near medium term? And then secondly, in Q2 results, sharebuybacks 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 withrevenues returning?
Thank you, Jason. As far as marketing -- when we talk aboutmarketing there is a very wide swath of different activities that are includedin that, not just retail marketing where most people naturally go and where wegive ongoing indicators to investors. But also in activities such aslubricants, aviation, fuel activities, marine fuels and petrochemicals orisotopes 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 Ithink that the difficulty of reading through all of that hydrogenous activityis the explanation for a good portion of the out performance of relative toexpectations in refining and marketing.
As far as share buybacks go, I think maybe it would beuseful to talk about the momentum of the group, because your question is reallya reference to that. As we look in to the fourth quarter, we see a number ofmilestones that will be met to achieve the things that I referenced in mywebcast, in particular various E&P startups and the refining,re-commissioning efforts, both Whiting and Texas City. Much of this is occurring late inthe quarter, and therefore will have limited impact on the financials in 4Q.
We will however, see an improvement in our operationalmetrics, as we move into the first quarter. But in this phase as well, as isespecially true in exploration and production projects, there are startup cost,so the operational end tends to run ahead of the financial delivery. But, wewould then see this picking up as we roll through 2008 with progressiveimprovement in the underlying financial performance over the course of theyear.
So I think its best start off as three phases, fourthquarter is about meeting milestones and we're on-track to do so. First quartershould be reflected by a much notable improvement in operational metrics, andover the course of 2008, remembering that we've got two refineries that won'tmeet their full capacity and flexibility until mid-year. Over the course of2008 we'd see increasing underlying financial performance showing through.
Share buybacks are then a reflection of the cash delivery wehave at hand, recognizing that we have a gearing in which we anticipate tooperate, 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 programagain.
Thanks Jason. And coming back to London [Steven] from Morgan Stanley. Goodafternoon Steven.
Steven - MorganStanley
Yeah, hi good afternoon gentlemen. And just a couple ofquestions actually, firstly two quick points on the financials, I was justwondering whether you could confirm your guidance of $18 billion CapEx for thefull year? And second, just confirm sort of the tax rate for the full year? Andsecondly, just on refining and the ramp up back in Texas City and Whiting, I was wondering whether you could provide anysort of information on the opportunity cost for the Q3 from Texas and Whiting? And then, where you seesort of the ramp up for Texas in particularinto 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 wemay see a quicker than expected return to volumes from Texas? Thank you.
Well let me address your financial questions first, $18billion does remain our guidance for organic capital spending in 2007. Weindicated that at the beginning of the year, if you look at the year-to-datenumbers, they are running a little bit less than that on a pro-rata basis, butthe fourth quarter is normally a high capital spending quarter. So ourexpectation 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 isalways 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 thatI had indicated, that stem from the problems that we were identified there inthe second quarter of about $100 million per month or around $300 million perquarter, have continued to be good guidance, not only through to 2Q, butthrough 3Q. And although Whiting made a contribution to the Group, it wasclearly limited as a consequence of being forced to run as sweet crude asopposed to sour crude and at limited capacity as opposed to full capacity atthat refinery.
Texas Cityhas continued to operate at a loss. It has, since the beginning of 2006, thatcontinued in the third quarter of 2007. But some of the underlying improvementsthere have shown through, because the losses in the third quarter were in linewith those of the second quarter in spite of a much weaker refining marginenvironment.
Let met just give you an outline of what's going to happenat Texas Cityand perhaps this will answer your question. Over the third quarter, Texas City, we’ve beenre-commissioning the products cluster, which is designed to desulfurize productstreams and upgrade them. So its very critical to do that prior to what we aredoing 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 giveus available production at Texas Cityof 400,000 barrels per day.
If you look out then into 2008, we achieve full capacity andflexibility by re-streaming the heavy upgrading resid hydrotreating unit andbring it on stream along with a second ultra reformers. So there is a bunch ofwork to be done, still downstream of the crude units there. That will takeplace 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 fullcapacity and flexibility by mid year, we remain on track and we are notproviding any incremental guidance to that.
Steven - MorganStanley
Thanks very much.
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 onoperational focus. The first one is about Angola. Some service companies in Angolatalked about delays in some infrastructure contractor awards in BP offshoreassets Block 31 and 32. And we are also hearing that BP Chinese partner onBlock 18 may not be good some cost on block 18. Could you perhaps comment onthat and elaborate on any possible impacts on growth for BP in that part of theworld. If this -- is these are indeed concerns. My second question is onThunder Horse, based on the startups of Thunder Horse next year when would youexpect to reach plateau production on these fields? Firstly, I was wondering,if you are contemplating a quick ramp-up or rather probably see increase andtherefore if we can plateau production in '09 or perhaps later? Thanks.
Stefan, perhaps I’ll take this too. On Angola rumors about delays,obviously we don’t comment on industry rumors, we have our guidance onproduction, we are not changing any of that. So there is a message there Ithink 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 seefrom the Atlantis startup, that we have being very careful and cautious, asyou'd expect us to be with these very complex and sensitive projects. And thatwe will do it the right way and we will do it progressively. So, you shouldexpect to see production from Thunder Horse build up in the months followingcommissioning, and commissioning will take place by the end of 2008, as wepreviously 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, thingsand a more general question if I could please. On the specific front, I waswondering if you could quantify the volume impact in the third quarter of theunplanned, upstream downtime, as opposed to breaking it out quite the way youdid. Secondly, of the specific nature, could you comment on reports of earlywater encroachment and the impact on production at Chirag in AIOC, and whetheror not that would have any going forward impact on volumes in that area?
Thirdly, and more generally, as part of the organizationalchanges that are going to be implemented, is consideration being given toeliminating the metrics aspect of the current organization, namely having bothregional and functional responsibilities with particular reference to the U.S.?Thanks guys.
Thanks Mark. I'll do these in reverse order. As far as theorganizational structure, we believe that there remain benefits from having aregional organization and therefore, a metrics functions, regions, and businesssegments. That being said, we're looking to simplify the way in which theseinterfaces occur. There are too many nodes of where functions and regions andsegments come together and that's part of what creates complexity.
So, although that we're not eliminating regions, we'restructuring them in a much more fit for purpose way. And in most parts of theworld, the regional activities have been moved into the business segment, whichleads in that region, in most of Europe that's refining and marketing and muchof the rest of the world that's exploration and production. We have a biggerregional organization in United States, because of the very large footprintwe have there across much business activity from all areas of BP. And so it'sis important that we maintain a regional organization there, but it needs to bedeveloped as fit for purpose way and we are certainly progressing to do that.
As far as your question about Chirag, we don't comment onthat, so I am not going to provide you any specific guidance in U.S. Fergus,whether or not he can provide some additional perspective
Just a couple of points really, Mark, on, obviously ACGphase III is scheduled to start up next year. The whole field complex isperforming as previously expected. Actually the bigger issue in terms of BP'snet production, Azerbaijan, of course is cost to company under the productionsharing contract under very high prices which we provided information on whichI think you saw during the field trip to Azerbaijan just a year ago now. So ifyou are looking for net production from BP, I'd focus PSC effects, fieldperformance is really much as expected. The bigger issue actually in the fourthquarter is to continued ramp up of production from Shah Deniz as we move intothe winter and we should see higher gas deliveries out of that filed, which ashas been relatively slow and its ramp up earlier in 2007.
And finally, Mark, I think you asked a question aboutunplanned upstream downs time. The two major things that were completelyunexpected in the third quarter, were the CATS shut down, the North Sea pipeline, it was damaged by ships dragging its anchor. Thathad an impact of about 50,000 barrels of oil equivalent a day, in the thirdquarter and that was also a unplanned shut down of the Baku-Ceyhan pipeline atthe end of the quarter, just for few days there, which was about 10,000 barrelsa day. Those, obviously, this downtime across the rest of the business and thenormal course of things to maintenance season is another factor, but the twobig ones that might effect your numbers in your forecasting were CATS and theBTC shut down at the end of the quarter.
Mark Gilman -Benchmark Company
No Alaskaeffect in terms of unplanned down time?
Nothing unplanned, Mark. There was, it is the maintenanceseason in Alaskain the third quarter. as you know Alaskan production was relative low in thethird quarter, but for that reason and because of obviously lowest summercompressor efficiency, but we would expect to see Alaska back up again in thefourth quarter, the incidence that were committed on the press didn’t have anymaterial impact on production.
Coming back to Europe, EdWestlake CSFB. Ed, are you there?
Ed Westlake - CSFB
Yes, I am. And a lot of questions have been asked, maybejust on TNK-BP, obviously realization rose both domestically andinternationally, yet the profit didn’t rise that much relative to short fall inproduction versus Q2. So just maybe some comments on costs and the tax impacts?
And then secondly, whether you'd be able to give some roughguidance at this stage in terms of CapEx and volumes for 2008 at least in termsof the arms and legs of your thoughts in terms of inflation and overall volumegrowth? Thanks.
Thanks for those questions Ed. As far as TNK-BP goes, thereis nothing unusual in the third quarter. The tax rate is the rate that we wouldexpect on an ongoing basis. I think perhaps the issues here is the very low taxrate that we booked in the second quarter, there was a right back of aprovision in TNK-BP, so it led to a lower rate than would be the expectedstatutory rate. So, I would look backward as opposed to 3Q in searching foranswers on that specific question.
CapEx for 2008 will be an issue that we will discuss withinvestors in our February strategy presentation. One thing which is obvious isthe fact that we are like everyone else, subject to double-digit inflation inthe capital spending arena across, not only refining and marketing, but alsomuch of the heavy spending around refineries in refining and marketing. So,with double-digit inflation coming through, one would expect that to bereflected even with the same sort of activity set as we saw in 2007. Beyondthat, you will need to wait for the guidance that we provide in February.Volumes remain consistent with the guidance that Andy Inglis provided back inFebruary of this year. And we have not moved it all with respect to thatguidance.
Ed Westlake - CSFB
Thanks Ed. Now going back to United States we have Dan Barceloon the line from Banc of America.
Dan Barcelo - Banc ofAmerica
Hi. Yes, good afternoon. Thank you. If I could just a quickquestion about like the old business versus the new, on the E&P side, postthe Gulf of Mexico lease sale, is any further color you can give, now that youhave achieved those leases, in terms of what prospects you find interestinggoing into ’08, ’09? And also maybe a quick update on the lower treachery?
And then, in terms of the new business on your plans foralternative energy, can you just touch pretty broadly about some of the corebusinesses you had historically at solar, how those are fairing? And then alsoin terms of carbon legislation, it seems that seems to be front and center onlegislative front. Are you able to comment broadly about any actions done onthe U.S. front or changes inEurope? Thank you.
That’s a wide swat of questions. Let me talk about thealternative energy business and then we will come back to the specifics of the Gulf of Mexico here. Let me give you color on the twomain 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 420megawatts involved in that at placesas 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 Statesand at 300 megawatts is being commissioned.
We've got a very large land bank in the United States, potentially 15gigawatts of land portfolio there. So we build a very good platform for thebusiness 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 expandingmodule capacity. We've got installed capacity of 300 megawatts on track for theend of 2008. And in both areas we continue to see substantial growth prospectsin the near and longer term.
With respect to your questions about the plans with regardto the blocks that we acquired in the recent Gulf of Mexico lease sales and ourviews 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 webelieve we have competitive advantage, we're certainly not going to disclose itpublicly.
Dan Barcelo - Banc ofAmerica
Okay. Thank you.
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 theorganizational changes you mentioned Byron, I wondered if you could justprovide a little bit more detail about the swift number of SPU's you had beforeand the number you said you'll end up with by the time the de-layering processhas been completed? Can you also touch on how far you think the OMS has beenimplemented within that? And then on a completely separate topic, I justwondered if, will you might be in a position to talk about where things standon the SDX-4 well and the implications for Shah Deniz? Thank you.
As far as the SPU's go, this is actually less about changingthe number of strategic performance units. It's much more about concentratingperformance around the strategic performance unit structure. So we're in manyways moving things down from the segment levels into the SPU's. And we'reremoving in many cases, levels below that, not exclusively eliminating businessunits, but we are eliminating the smaller units in some cases that existedbelow the SPU's, all of which has lead to duplication of resource if you haveactivity at the group level, at the segment level, at the strategic performanceunit level and at the business unit level you can see how much of that can beeliminated and yet achieve the same result.
So the identification of strategic performance units is amain building blocks of performance delivery of the group, is an importantdecision and we will do is cluster resources around them as opposed to spreadit more broadly. And I believe this is going to have very important lever intoreduced overheads and improved performance for the group. Its going to take awhile to get there this isn't the sort of thing you do overnight. But certainlyI and my colleagues are deeply optimistic on what can be achieved here.
And Colin coming back to your question, detailed questionabout the well and Azerbaijan.Clearly, one of the main reasons that BP isn't Azerbaijan and when the productionchain contract back in the early 90s is our ability to manage the complexgeology of the Caspian and the very difficult drilling conditions that canresult from that. So we are working a way on that, its not unexpected that thiswas going to be a technical challenge, its something that we are up to and upfor and we are dealing with that, we are beginning completion on that while aswe speak and I mentioned in response to Marks question earlier on that ShahDeniz is an asset where we would expect production to continue to ramp up as ithas been doing all year. Relatively, slowly, but it has been rising and weexpect to further rise in production from Azerbaijan in the fourth quarter of2007.
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 youperhaps update us on where you are in relation to the plan to upgrade theWhiting refinery, given the recent environmental obstacles, when it isrealistic to expect a decision on that? And then secondly in E&P, if weactually strip out last year's capital gains at your, at the affiliates, itappears 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 operatingcost inflation in the upstream? Thank you.
Well, let me cover the Whiting question and Fergus will comeback on the expiration and production inquiry you made. I think it might beuseful to just kind of talk as I did with Texas City about where we are with respect to Whiting at thecurrent time and then I'll use that as a lead-in into the investments that wehave planned there.
As far as Whiting goes, it like Texas City is on track with guidance thatIain Conn provided during the July webcast. The key issue there on theoperational side is the return of the hydrogen compressors for the CAT feedhydro treating unit, which is necessary to allows to return to sour crudeprocessing. At the current time, we expect to have a couple of hydrogencompressors back in service by year-end, which will then allow the sour crudetrain, one of the sour crude trains to come up. And then those two eventstogether would allow us to return to the 300, 000 barrels a day and sour crudeprocessing that I indicated in my remarks.
They are too achieving a full capacity and flexibility, isachieved when we have all four of our hydrogen compressors up and running alongside, both of this sour crude units. And again, here we expect to achieve thatby the middle of next year. So there’s still lot of activity going on inWhiting as there has been over the course of 2007. So we have been very carefulto ensure that the activity which is around the major upgrade of the refineryis done on a separate, but parallel track. And that is indeed what’s occurringand we expect to be able to progress according to the time table its beenoutlined there and we’ve, as Iain Conn indicated in July, even acquired somelong lead time items.
With respect to environmental permitting, we are alwayscognizant of the environmental regulations of the United States, plan on adhering tothem. We have a permit and we will meet the requirements of it.
Irene, on your question on costs and the trends we areseeing in cost inflation. Byron has already reference to the rise in non cashcosts. As I said you previously and I have indicated that the upward trend inDD&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 cashcost. On the cash cost, the increase is similar. It’s in the order of $200million to $300 million, clearly that’s been exaggerated by the weakness of theU.S. dollar, so that has, that proportion of our cost particularly in the NorthSea, which is not dollar denominated. But behind all of that, there is probablyan underlying inflation rate, we think in terms of our upstream cash costrunning at about 6% perhaps on the operating cost sides. So, hopefully thatgives you some sense of where inflationary trends in that part, the upstreamvalue 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 ifI might, maybe more than a couple. Have you set up any sort of reserves forseparation cost during this past quarter with respect to the cost expected toorigin to result from the organization or the organizational changes in thecompany? That was one question. Second question was with respect to yourrefinery outlook and since you're already working some of the refineries ofnecessity, do you have a view as to whether there is going to be a dieselizationof the product barrel rather than at the expense of gasoline. Thirdly, inconjunction with your production operations, do you have a view as, I am notquite interested to where the trading activities take place, are they trulyconsidered downstream or they considered upstream between crude and gas and whydo you consider the losses that occur to be one off items? Thanks.
I'll take you questions, I'll do the first and third andFergus maybe can respond better to the second one. As far as reserves forvarious charges is associated with work force implications of the restructuringthat we have announced, we've taken nothing. It's far too premature to be doingthat. It may well be that when we come to announce our fourth quarter resultsin February that will have detailed enough plans in place in order to take aprovision on a do-so in line with the accounting standards, which require thatyou cross a number of criteria in order to do so. If that is to occur, we'llprovide clear line of site to our investors on the scale of any provisions thatmight be taken with respect to restructuring associated with the announcementsthat have been made.
The trading activity, we have a long track record ofdelivering incremental value to the group through both our oil, and products,and our gas and power trading. These contributions tend to be volatile, theyare driven by the nature of the marketplace, that what sort of opportunities itoffers. As well as the performance of the teams involved in it, 90 days is avery short period of time and the nature of this activity as any investmentbank can speak to is that it tends to be volatile. I'm confident that the trackrecord that we have over many many years is a better indicator than theshort-term performance that was delivered over a 90-day period, which had somevery unusual characteristics as associated with it. Fergus, second question.
Yeah just on dieselization yes a very interesting questionbut when I think where the market has the lead clearly there is beensignificant shift in that direction in Europeand we have made investment plans to meet that increase in diesel demand mostrecently. We have indicated that [Tew] having taken a 100% control of theNetherlands refining company earlier this year after selling Carten that wewould invest there with a view to increasing its diesel production capacity.
If you are talking specifically about the United States, its always an interestingquestion as to whether consumer preferences in United States will shift towardsdiesel vehicles. We have seen that happen dramatically in Europeand 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 itif it was to take place but we are talking about long periods of time. I hope Ihave understood your question correctly Joseph was that what you were askingabout?
Joseph Tovey – Tovey& Company
Perfectly understood and thank you very much for acomprehensive answer.
Thank you. And now for the last person has been waiting mostpatiently Neil Morton, Niel are you there?
I'm indeed. Thank you, Fergus. Just a couple of questionsleft in the Q3 numbers. In the downstream the rest of unit segment seem to beparticularly resilient Q3 versus Q2, just wonder if there was anything over andabove the mix shift of marketing affects you mentioned perhaps an earlybenefits 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 HenryHub benchmark, just wondered actually you comment on your expectations goingforward as the various stages of the Rockies Express pipeline comes on thestream? Thank you.
Well let me deal with the second question, Fergus willhandle the first as you noted there is a material discount of two Henry Hub ofour U.S. gas production the biggest discount is in the Rockies' area as youpointed out where our own Delta there versus Henry Hub was more than $3 andthat compares with only a bit over $1 back in 3Q of 2006. So, an incremental $2discount year-on-year. The way in which these discounts disappear is when thereis additional pipeline capacity to evacuate the gas. So, as you have indicatedin your question, once we have additional edge from new pipelines that shouldmodify the situation to some extent.
And Neil, your question on refining and marketing, and thecontribution of marketing in the third quarter relative to the second. As faras the first point to make is that overall refining business did record a lossin the third quarter of around $100 million and that was more than obviouslyfully offset by stronger performance in marketing. So you are absolutely rightand marketing did strengthen in the third quarter relative to the second. But Ijust remind you what Byron said earlier that marketing process quite broadlydefined includes the form of chemicals business, the NA business.
It includes lubricants, it includes marine, it includesaviation and it was these businesses rather than retail marketing, gasolinestation marketing, they did considerately better in the third quarter andprovided that quite strong offset to the weakness in refining, which especiallyI can't see another quarter where refining did record a loss actually that’s onthe data I would say. So that was a very weak quarter in refining, obviouslyreflecting both the margin environment and our own issues in terms of hedowntime of Texas Cityand Whiting.
We do have one very final question actually. Somebodyalready asked a question, but if you still, I would be happy to take it. NeilMcMohan 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 ison spot ready to go. Could you give us just some guidance on ACG II. How longit took between getting the topside on place and when it was actually flowingoil? And secondly, are there any high impact exploration wells that are likelyto be finished in the fourth quarter or on the start of next year. Thanks.
Neil, on your ACG question I think the best thing is I willtake that one offline. I think there is a video I can send you of the hookupprocess on ACG II, which you might quite enjoy actually. So I will do thatoffline. High impact wells, as it is a bit like what Byron said about the lowertreachery 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, wewill tell you about them after they take place, and not before. I am so sorry Iam actually no help on that level, we will come back to you on ACG.
Well, I think that concludes all the questions. I would justlike to thank everybody for participating this afternoon. We are always happyin investor relations to take any of your questions at any time. So please do contactus if you have any follow up. Thank you.
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