BP PLC

LSE:BP

Earnings Call Transcript 2021-Q1

[Operator]

Welcome to the BP presentation to the financial community webcast and conference call. I now hand over to Craig Marshall, Head of Investor Relations.

[Craig Marshall, executive]

Good morning, everyone, and welcome to BP's First Quarter 2021 Results Presentation. I'm here today with Bernard Looney, Chief Executive Officer; and Murray Auchincloss, Chief Financial Officer. Before we begin today, let me draw your attention to our cautionary statement. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note on this slide and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website.

I'll now hand over to Bernard.

[Bernard Looney, executive]

Thanks, Craig. Good morning, and welcome, everyone. It's great to have you join us today. As ever, I hope everyone is staying safe and in what continues to be the most challenging of times. Today, we report our first quarter results, and it has been a strong quarter. We're making great progress right across the business, underpinned by our continued focus on what we call performing while transforming. And this starts with safety, our core value.

As part of our strategy, we have harmonized our safety leadership principles, which define our safety culture and how we expect everyone to lead with care, and with trust and speak up at its foundation. This has my personal oversight at our group operating risk committee, which I chair. We're seeing good progress. Staff and essential roles are beginning to return to the office and the field. Our maintenance activity levels are broadly back to prepandemic levels, and we have focused our assurance activities on our biggest risks during this time of change. And we continue to support our staff, our frontline workers as well as those who continue to work remotely, remaining focused on their health and well-being during this unprecedented period.

This supports our operational performance, which continues to be resilient and is an underpin to strong financial delivery. As we like to say, a safe business is a good business. In the first quarter, cash flow was strong with an inflow of around $11 billion, including the accelerated disposal proceeds. As a result, net debt reduced by $5.6 billion, and we achieved our target of $35 billion during the quarter, around 1 year earlier than expected. We are commencing share buybacks during the second quarter, starting with the intent to offset the full year dilution from employee share schemes, and Murray will talk more about this shortly.

Now at the same time, we continue to make disciplined progress executing on our strategy, including continuing the rollout of our single operating model to drive efficiency throughout our organization, strengthening our position in offshore wind here in the U.K. and accelerating the development of our electrification agenda in Europe. So overall, we're in good shape, and I'm encouraged by the progress we are making in support of our proposition to deliver long-term shareholder value. I'll come back in a little while to share some more about how we are advancing our strategy.

But let me first hand you over to Murray to take you through our results and provide more detail on our financial frame. Murray?

[Murray Auchincloss, executive]

Thanks, Bernard. As usual, let me start with the environment. Oil price rebounded in the quarter with Brent averaging $61, a 38% increase from the fourth quarter. We expect oil prices to remain firm as demand improves driven by strong growth in the U.S. and China, the ongoing vaccine rollout programs and supported by continued supply intervention by OPEC+.

The Henry Hub gas price averaged $3.50, up from $2.50 in the fourth quarter. The increase was due to storm Uri in the middle of February, which resulted in very high gas demand combined with a substantial drop in production, pushing prices to record levels. And refining margins improved. BP's RMM averaged $8.70, up from $5.90 in the previous quarter, supported by improved U.S. margins following storm Uri disruptions and the higher cost of renewable fuel credits in the U.S.

As demand improves, refinery utilization rates are expected to increase although, with net capacity additions of almost 1 million barrels per day in 2021, we expect industry refining margins to improve compared to 2020 but remain below pre-COVID levels. Looking to the second quarter of 2021, realized refining margins are expected to show a smaller improvement due to the slower recovery in diesel and jet demand. In addition, we expect a narrower North American heavy crude differential and a higher level of turnaround activity in our refining portfolio.

Before I turn to results, let me remind you that this is the first quarter reporting under our new segmental structure. Further details on this and our new disclosure framework, including restated and resegmented data for 2019 and 2020, can be found on bp.com. I also want to draw your attention to a change in accounting presentation commencing this quarter. As previously disclosed, we have moved to net presentation of certain derivative contracts related to our trading business. While this is a significant change to revenue and costs, it has no impact on replacement cost profit or cash flow.

Moving then to BP's underlying results. In the first quarter, we reported an underlying replacement cost profit of $2.6 billion compared to $0.8 billion a year ago and $0.1 billion in the fourth quarter of 2020. Compared to the fourth quarter, the result reflects an exceptional gas marketing and trading performance, notably from LNG and the impact of storm Uri in the U.S. The result also reflects significantly higher oil prices and higher refining margins. And of course, my favorite figure on the slide, in the last 4 quarters, net debt has fallen from over $51 billion to around $33 billion in the first quarter. Finally, the first quarter dividend, payable in the second quarter, remains unchanged at $0.0525 per ordinary share.

Turning to cash flow and the balance sheet. Operating cash flow of $6.1 billion was underpinned by strong business performance and included a working capital build of $1.2 billion with $0.5 billion of severance payments. This build was largely offset by other timing differences. Cash flow was supported by the earlier-than-anticipated delivery of disposal proceeds with $4.8 billion of disposal proceeds realized in the first quarter. We now expect proceeds for the year to reach $5 billion to $6 billion during the latter stages of 2021.

Our target of $25 billion of disposal proceeds between the second half of 2020 and 2025 is now underpinned by agreed or completed transactions of around $14.7 billion, with approximately $10 billion of proceeds received. During the quarter, capital expenditure was $3.8 billion. Of this, $1.2 billion was one-off expenditures, including the final payment to Equinor related to the formation of our U.S. offshore wind joint venture and the initial payment following our success in the U.K. offshore wind lease round. We continue to expect capital expenditure of around $13 billion during 2021, including inorganics.

Reflecting the strong cash flow delivery, net debt fell by $5.6 billion during the quarter to $33.3 billion. Surplus cash flow of $1.7 billion was generated during the first quarter after reaching our $35 billion net debt target. Looking ahead to the second quarter, we continue to expect cash flow to be impacted by the $1.2 billion pretax annual Gulf of Mexico oil spill payment, further severance payments associated with our reinvent program and a smaller improvement in realized refining margins relative to the quarter-to-date rise in our RMM. As a result of these factors, we expect a cash flow deficit in the second quarter.

Having reached $35 billion net debt target, we now progress to the second phase of our financial frame. We have a clear set of priorities for the uses of cash and a disciplined approach to capital allocation to support the delivery of our strategy. Our first priority is a resilient dividend intended to remain fixed at $0.0525 per ordinary share per quarter, subject to the Board's discretion each quarter. Second, having reached $35 billion net debt, we now retire this target. We remain committed to maintaining a robust balance sheet with a strong investment-grade credit rating. Third, capital investment. We expect CapEx of $14 billion to $16 billion per year during the second phase, including inorganic spending. However, we continue to expect CapEx of around $13 billion, including inorganics during 2021.

And finally, share buybacks. We're introducing an intent, going forward, to offset dilution from vesting of awards under employee share schemes through buybacks. Surplus cash flow is now defined after the cost of buying back these shares. In addition, having reached our net debt target, we remain committed to allocating at least 60% of surplus cash to share buybacks subject to maintaining a strong investment-grade credit rating. In considering the quantum of buybacks, the Board will take account of the cumulative level of and outlook for surplus cash flow with the intention to provide guidance on a quarter forward basis while macro uncertainties remain.

Now let me explain how we plan to implement our distribution policy in 2021. First, our priority of a resilient dividend remains unchanged. Second, this quarter, we intend to offset, through buybacks, the expected full year dilution from the vesting of awards under employee share schemes at a cost of around $500 million. Third, for 2021, the Board is committed to using 60% of surplus cash flow for buybacks, subject to maintaining a strong investment-grade credit rating. We plan to allocate the remaining 40% to continue strengthening the balance sheet and support our credit rating.

Fourth, given continued macro uncertainty and the expected second quarter cash outflow, we will provide an update on our third quarter buyback plans at the time of the second quarter results, taking into account the surplus cash in the first half of the year as well as the outlook for surplus cash. In the second half of the year, we expect to generate surplus cash above an oil price of around $45 per barrel, with an RMM of around $13 per barrel and Henry Hub of $3. Looking ahead through 2025, we believe our approach to dividend and buybacks provides for attractive total distributions per share with upside to higher prices.

Thanks for listening. And now let me hand back to Bernard.

[Bernard Looney, executive]

Great. Thanks, Murray. As I mentioned earlier, in addition to driving performance of the business, we've been making disciplined progress in advancing our strategy. I thought it might be helpful to share some examples with you. Let me start with some highlights from the quarter. And then I'll look at 3 examples in a bit more depth, and we'll then have time to take your questions. This slide shows the progress we have made so far this year from taking delivery of the Argus platform in Texas after a 16,000-mile journey across the world. They're planning the largest blue hydrogen project in the U.K. I won't call out everything in detail, but I do want to emphasize some key points.

Starting with the cash engine, resilient and focused hydrocarbons. Two new major projects are now online, further underpinning our production target of 900,000 barrels equivalent a day by the end of this year. First, the Raven project in Egypt. This is a significant milestone and is expected to continue to ramp up throughout this year to deliver around 140,000 barrels a day oil equivalent of high-margin production capacity. Second, the KG D6 satellite cluster in India, the second of 3 projects we are developing with our partner, Reliance.

At peak, the projects are expected to produce around 65,000 barrels oil equivalent a day net, enough to meet around 15% of India's gas demand. And in the Gulf of Mexico, the Mad Dog Phase 2 Argus platform arrived safely in Texas. Once online, the project is expected to deliver around 65,000 barrels a day equivalent to BP, supporting high-margin growth through 2025. In addition, we recently announced an oil discovery at the Puma West prospect near Mad Dog, further highlighting the strength of our business in the region.

Turning to low carbon, electricity and energy. During the first quarter, we increased our hopper of offshore wind and solar opportunities by 15 gigawatts while continuing to high-grade, turning down projects that did not meet our strategic or returns requirements. Net to BP, our hopper now stands at 35 gigawatts of opportunities that could be progressed into our renewable pipeline. During the quarter, we grew our pipeline of identified projects by 3 gigawatts, including 1.4 gigawatts of solar pipeline and preferred bidder status on 1.5 gigawatts awarded in the U.K. offshore wind lease round 4. I will come back to talk about this in more detail shortly.

Our pipeline now stands at 13.8 gigawatts, firmly underpinning our 2025 target of 20 gigawatts net to BP developed to final investment decision. And we also announced our plans to develop the U.K.'s largest blue hydrogen facility, targeting 1 gigawatt of production by 2030. Integrated with the BP-operated Net Zero Teesside and Northern Endurance Partnership, this project marks an important step in BP's hydrogen business and would significantly contribute to the U.K.'s 10-point plan. We have also continued to extend our partnerships with countries, cities and industries, recently signing a memorandum of understanding with Infosys in India. Together, we will explore development of a digitally enabled Energy-as-a-Service offer at Infosys campuses, which could later be scaled to industrial parks and cities.

And finally, we continue to advance our convenience and mobility strategy. Compared to the same period a year ago, we have added around 300 strategic convenience sites and increased our convenience gross margin by over 10%. Electrification is core to our next-gen mobility strategy, and we have announced plans to work with a number of OEMs, such as BMW, Daimler and Volkswagen Group to increase the scale, reach and utilization of our EV network.

Let me now explain how these announcements come together to underpin delivery of our EV agenda. Our EV customers want fast, convenient, reliable and seamless charging integrated with leading convenience offers and services. To deliver this, our strategy is to provide the fastest, most convenient and reliable network of chargers situated in advantaged locations, have leading-edge digital technology and drive higher EV adoption and utilization of our network. By 2030, we aim to have more than 70,000 BP-operated EV charging points and expect to have grown margin share from convenience and electrification to around 50%. So how are we progressing? We already have an established presence in the U.K., Germany and China, and we need to continue to rapidly scale up to meet growing customer demand. The announcements we have made this quarter clearly demonstrate that we are in action and leveraging our integrated model, particularly in Europe.

First, our announced investment in Digital Charging Solutions alongside Daimler and BMW. Through apps and in-car dashboards, DCS connects millions of EV drivers to a European network of nearly 230,000 charging points. Through our investment, BP's network of 8,700 charging points will be integrated with those of DCS. We expect this to drive up our utilization rates and increase footfall at our convenience stores. Second, in Germany, we are accelerating deployment of ultrafast charging points at our Aral retail sites. We plan 500 ultrafast charging points at our sites by the end of this year, and we expect to capture significant integration value with our convenience offer.

Third, we have recently signed a memorandum of understanding with Volkswagen Group to explore the expansion of ultrafast EV charging networks and the integration of our own charging networks into their vehicles across Europe. This has the potential to add a further 8,000 charging points by 2025. And finally, bp pulse has announced the rollout of EV-only ultrafast charging hubs in the U.K. with the first due within a year. As we build scale, we expect to create significant demand for electrons and the opportunity for integration synergies with our renewable power business. For example, we plan to grow the bp pulse network to 16,000 charging points by 2030, creating around 1 terawatt hour of annual demand. And by 2040, even in our low case, electron demand from our EV charging network in the U.K. could underpin over half of our net output from the recent U.K. round for offshore wind lease awards, creating offtake optionality and further supporting our aim to be the most efficient price-setter in EV charging.

In summary, we know what our customers want, and we have an integrated strategy designed to meet their needs. The progress we have made this quarter is a clear demonstration of that. We are expanding our network to help drive the adoption of EVs and provide customers with a great experience, and we are leveraging the power of partnerships to enable better and faster utilization of our network. And we are moving at pace to keep up with this fast-evolving market. We believe this strategy will underpin our aim in convenience and mobility to nearly double EBITDA by 2030 from $5 billion in 2019 and deliver 15% to 20% returns.

Turning to offshore wind. In the 9 months since launching our strategy, we've made good progress, growing our offshore wind pipeline to 3.7 gigawatts net to BP and materially growing our hopper. Some have asked us about our strategy and why we believe we can deliver attractive returns. To explain, I'm going to talk about the U.K., where we have been selected as the preferred bidder for 2 leases in the Irish Sea along with our partner, EnBW. We believe this is an advantage project, which compares favorably to other leases offered in round 4. It benefits from 4 key attributes: one, advantaged wind resources; two, a favorable location, optimal connection to infrastructure will enable lower connection costs and stronger operating reliability; three, less complex consenting and grid connection issues, which should result in a shorter development cycle time; and four, adjacent leases offer opportunities for synergies in execution and operations.

We expect this project to meet our investment threshold of 8% to 10% returns. Our integrated model gives us confidence that we will deliver value from this project. A few examples. The development phase will benefit from our centralized projects organization, bringing our offshore hydrocarbon expertise to offshore wind. We plan to leverage our established offshore supply chain using our scale and experience to manage costs and supplier relationships, for example, with turbine manufacturers. And decades of offshore project management experience will help us plan and execute the projects efficiently. In the operational phase, we will use technical skills established during 10 years of onshore wind operations, including our digital know-how. Finally, in the offtake phase, our world-class trading organization will utilize our expertise in power markets to manage risk and market access optionality, likely to include CfD mechanisms. We are building a portfolio of customer demand contracts with companies like Amazon and supply agreements with customers such as Pure Planet and Utilita.

And in our own business, we are creating demand pools, which will allow us to establish integrated value chains through our rapid expansion in EV charging that I described earlier, the potential electrification of our offshore oil and gas facilities, and in the longer term, the potential for green hydrogen underpinned by the optionality of a 60-year offshore wind lease term. In summary, our integrated model gives us confidence in achieving 8% to 10% returns and accessing multiple sources of upside.

Turning to our single operating model, the most significant change to come from our new organization structure. We see a huge prize in running operations across the whole group in one place. This includes oil wells, refineries and offshore wind farms. We expect this to significantly contribute to $1.5 billion of annual cost savings from our hydrocarbon business by 2023, part of our $3 billion to $4 billion reinvent bp target, drive improved reliability and availability and create integration value as we leverage our capabilities into low carbon energy.

So how do we plan to achieve this? First, through a centralized and standardized approach to development and operations. While we had centralized teams in our Upstream oil and gas business, our operating model is now being extended to all of our businesses, including refineries and low carbon. Through our newly created BP solutions team, we are sharing best practices across our global portfolio, deploying our best experts to work on our biggest opportunities in order to add value.

Here are 2 great examples from the last 3 months. We've taken furnace experts from our European refineries to support the safe startup of our Raven major project and we've deployed compressor expertise from the Whiting refinery to a construction yard in Mexico to support the commissioning plan for the Cassia Compression major project. And looking to our low carbon business, in addition to leveraging our established supply chain and project management experience in offshore wind, hydrogen CCUS and biofuels are other areas where our existing capabilities and integrated single operating model can create a competitive advantage.

Second, we are in action to change the way we work. Following a successful pilot in Azerbaijan, we are now rapidly scaling the use of business agility techniques across oil and gas production and our refineries. By the end of this year, we expect to have over 14,000 people working in agile teams across BP. Third, we continue to invest in digital tools as a key enabler for performance delivery and risk reduction. We will manage production from sand phase to export in an integrated, fully digitized workflow assisted by our Apex and Vertex products as well as the use of digital twins across our portfolio.

We're also deploying a proprietary tool called Operator Workbench. This equips field teams with mobile technology and digitized workflows to improve collaboration, safety and efficiency. Two examples. In Oman, its use has freed up thousands of hours to allow operators to focus on priority work and has reduced the amount of driving and risk of human error by signing off on work at site. On our Atlantis platform, we're using it in our operator rounds and it has enabled savings of $1.5 million per annum on water treatment alone. We believe the use of this integrated approach will allow us to leverage our deep skills and knowledge across all operations and will be at the heart of our transformation to an integrated energy company.

So in summary, those are just 3 examples of our strategy in action, and they illustrate the momentum we see in our business. I hope they help you understand what an IEC looks like and why we believe that the energy transition represents such a great business opportunity for BP. As we transform, we will continue to share our progress with you, and we welcome your feedback on how we can provide greater insight into our strategy.

In the 9 months since launching this strategy, we have achieved a lot. We've reset BP and entered 2021 in a strong position to compete. We are leaner, flatter, nimbler and 100% focused on execution. We've delivered a strong set of results for the first quarter. Our financial frame is robust, we are committed to distributions and are commencing share buybacks in the second quarter. As you can see, we are progressing our strategic agenda with discipline and a focus on value. This is what we mean by performing while transforming and how it supports the delivery of long-term value for our shareholders. We're excited about what's to come and look forward to updating you more as the year goes on.

Thank you for your time today, and let's now turn to your questions.

[Operator]

[Operator Instructions]

[Craig Marshall, executive]

Okay. Thank you again, everybody, for listening. Let's turn to questions and answers. Usual guidelines from me before we start. Please do limit your questions to no more than 2. We've got a lot of people on the phone to get through. And on that note, I think we'll turn firstly to Michele Della Vigna at Goldman Sachs. Michele?

[Michele Della Vigna, analyst]

Congratulations on the strong results. I really had a question on dividend and cash return to shareholders. You are about to embark in a major buyback program, which if we take into account the current share price, the current oil price, could effectively reduce the share count by about 20% by the middle of the decade. I was wondering, in this context, why keep the DPS flat? Why keep it static? I can understand why an oil and gas company wouldn't want to actually grow the commitment to the dividend payout. But on the other side, as the share count shrinks, I was just wondering why not grow the DPS without actually increasing the dividend burden for the company? Perhaps you need a bit more time to start reducing the share count now that you've reduced the level of net debt. But I was thinking, is there an opportunity where the dividend comes back to growth?

And my second question is actually simpler, is what are the key macro assumptions you are currently implying into your guidance for the second quarter?

[Bernard Looney, executive]

Michele, your -- Murray will dive in and help me here. Look, I think it's important to realize we just laid out our new financial framework on the 4th of August last year, so we're 6 or 7 months in. There were 2 stages of the framework, Phase 1 and Phase 2. Today, with net debt coming down, in fact, it's now down $18 billion over the pandemic period, we move into Phase 2 and we start that buyback program.

Just 2 things that I would say around the choices that we made around the dividend and around the buybacks. Number one, we want people to be able to rely on, trust the dividend. That's why it's the first call on cash in the financial framework. There are 5 potential calls on cash, and the dividend is the first call, and that's why we call it a resilient dividend. So we want to make sure that people can rely on that and depend on that, and that's what it gives us. And then secondly, we want to give them the upside that they deserve through the buyback program. And with equity prices where they are today, we think that makes a whole lot of sense buying back our shares at this price. And that's why we're very, very delighted actually to announce the buyback program getting kicked off here in the second quarter.

So no change to our financial framework. The dividend policy is as stated. The buyback program has now kicked in, and we believe and believe quite strongly that in a moderate-price world, as we look out over the next year or 2, investors can get back to that prepandemic distribution levels, cash distribution levels and that, that's very possible within -- certainly as we head into next year. So that's really where we're at. And I wouldn't say anything beyond that at the moment.

Murray, anything you'd add on that and maybe the second question around the macro assumptions?

[Murray Auchincloss, executive]

Yes, I don't -- I think maybe, Michele, the thing that we have to hold in mind is there's still an awful lot of surplus oil that the OPEC+ is managing right now. And there's still a lot of uncertainty in the environment with the pandemic. So it's just -- prudence is on our mind as we think about decisions quarter-on-quarter.

As far as your question on 2Q and what our macro assumptions are, obviously you can take a look at what's been realized to date. I think the March and April pricing is in the $60s for Brent and RMM is starting to move up a bit. We won't realize as much of that in the second quarter, given that a lot of our refineries are focused on jet fuel. And of course, with the WTI-WCS differential in North America is remaining quite narrow. But if you think about should -- will we have a surplus in the second quarter, the macro assumptions around that, I think, it's just best to look at what's happened already through the quarter. And you can look at the markets to understand that for March and April inside the oil business, and we publish our RMM on the website. Thanks.

[Craig Marshall, executive]

Thanks, Michele. We'll take the next question from Thomas Adolff at Credit Suisse. Thomas?

[Thomas Adolff, analyst]

Just two questions from me as well. The first one, I guess, is just to get a better sense for the discretionary buyback. You've mentioned you'll give us guidance with the 2Q results looking back at the first half but also looking forward. So are you saying with the 2Q results, we'll get the annual 2021 discretionary buyback announced? That's question one.

Question two is on the disposals. You're aiming for $5 billion to $6 billion this year, and you've done almost $5 billion in the first quarter, and you've got another $10 billion to go over the next few years. So I guess the question I have is, why not more than the $5 billion to $6 billion since you've done already $5 billion? And how should we think about the rest between Downstream and Upstream?

[Bernard Looney, executive]

Great. Thanks, Thomas. Why don't I take the one around disposals? And I'll let Murray take the one around the forward look on the buybacks. Look, I think -- so the team's done a fantastic job accelerating those proceeds into the first quarter. Things came into place for us in a few places that we hadn't quite thought would go so quickly. So took a lot of work, and it meant that we did get that almost $5 billion of cash in the door in 1Q, which we're very, very pleased with, obviously. We have up to -- target for the year to $5 billion to $6 billion. I mean the key thing going forward around divestments is we're just not in a hurry. We're just not in a rush, particularly now with net debt down $18 billion through the pandemic, down $18 billion through the pandemic, down $5.6 billion in the quarter, $33 billion, below our $35 billion target.

And with the buyback program, we'll continue to allocate 40% of surplus cash to balance sheet. So the main message is there's no real rush. There's no real panic. We've got 4 to 5 years to do the next $10 billion and we'll be driven by value. And if we get great prices for assets as we think we did in Oman and what we did with petchems, that's when we'll execute those transactions. There'll be a whole variety of things. There'll be Upstream assets, Downstream assets. There'll be infrastructure assets. There will be things that you would continue to look for.

But the main driver is going to be making sure we get value for the good assets that we have in our company. No rush to do so. And as the environment improves and things begin to stabilize over the coming months and years, I also think we'll probably find a healthier M&A environment. So main message is comfortable with where we're at, continue to focus on the balance sheet, continue to focus on value from the divestments. But importantly, no rush, value-driven.

Murray, Thomas' first question?

[Murray Auchincloss, executive]

Yes. Thomas, so just 3 points around this, really. First of all, we had a surplus of $1.7 billion in the first quarter. Second, we've said we'll have a deficit in the second quarter. In aggregate, our sense is we'll have a surplus, but let's see how life goes. And then -- in the first half, that is. And then for the second half of the year, the guidance we've given you is that we're breakeven around $45 oil, $13 RMM and $3 Henry Hub. And that's on that glide path down to the '21 to '25 target that we talk about, before we breakeven $11 RMM and $3. So you can see we're making good progress. It's just going to take time to continue to take costs out to continue with capital discipline and obviously get new projects online like Mad Dog Phase 2, Tangguh and growing the C&P business. So that's a little bit about the guidance points that we've given so far. We feel pretty pleased about that progress.

As far as how we'll think about the second quarter, what we've said is, while uncertainties remain, and those uncertainties are the overhang on the oil supply and obviously the pace of vaccinations and COVID, so while that uncertainty remains, we'll only be guiding one quarter ahead. We just think right now that we need to be prudent with the balance sheet. That's our #2 priority once we've paid off the dividend. So we're just going to announce one quarter ahead. So in 2Q, when it comes to make the decision with the Board, we'll think about that first half surplus. We'll be thinking about the 60-40 and we'll have an eye towards the future oil price and environment and refining conditions we see in the second half of the year. I hope that helps, Thomas.

[Bernard Looney, executive]

Very good. I think the only thing I could add, if I could, Thomas and Murray, a question I got on the -- from the media this morning is somehow a suggestion that these $500 million of buybacks in the second quarter aren't really buybacks or words to that effect. And of course, they are real buybacks. We've been issuing shares for employees over the last decade. And in fact, the shares that we'd be buying back in the second quarter were issued in the first quarter. So I think an equity investor would look at that as a very positive thing. And I just wanted to clarify that, but I know you're all very much aware of that on this call. But thank you, Thomas.

Back to you, Craig.

[Craig Marshall, executive]

Thanks, Thomas. We'll take the next question from Jason Kenney at Santander. Jason?

[Jason Kenney, analyst]

Congratulations on the gas marketing and trading result and the delivery of Raven, too. Can you remind us about the overall support for cash flow from new project startups, including Raven, by 2022 versus, I think it was 2019 when it was first announced, and the upsides thereof because of the stronger oil macro in year-to-date? Second question, I'm sorry, this is a bit left-field. Is BP looking at or has it considered turning its access to mature or late-life Upstream resources into in-situ clean hydrogen production assets? And if not, is there a reason why not?

[Bernard Looney, executive]

Very good, Jason. Thank you. On the projects one, I think, Murray, dive in and help me out. I think we're -- we said we'd do 900,000 barrels a day of new production by the end of '21. We're at about 770,000 today. Raven has just come online. It's running at about 600 million a day today, on its way to 900 million to 1 billion through the rest of the year. We got the second project on in India, satellites project. Reliance has done a very good job there. They're the operator. So that's come online. That's a good piece of business for us.

And I've actually looked over the next -- out to the end of '23, we've got 14 more projects to come online actually through the end of '23, and some big ones in there, not least Mad Dog Phase 2 in the Gulf of Mexico, and you'll have seen the photograph of the Argus facility having made its 16,000-mile trip around the world and ending up in Texas there in the last few weeks. So a big milestone. All the wells are predrilled there. That's kind of 65 MBD net type of business. So helping the GoM approach that 400,000 barrels a day from the GoM that we talked about some time ago over the coming years. Tangguh expansion, some great projects to come on in the next couple of years as well, all supporting an increase in cash and Raven, in particular, quite leveraged there. Mad Dog, Tangguh expansion, obviously very, very leveraged as well. You can clarify if that helps you or not, but a good sweep.

Murray, anything you'd add on the projects?

[Murray Auchincloss, executive]

Yes. Jason, I don't know if you're thinking about the 35% higher margin that we've talked about from our major project suite. That was -- if you -- you have to go way back in time, back to 2015, where we talk about this 900 MBD of projects coming online is at 35% higher margin than the existing base business. I think we upped that to 2016, and Craig could clarify that after. But the 35% higher margin continues. And particularly, this wedge coming through now for even Mad Dog Phase 2 and Tangguh Train 3, very, very large projects with very high margins.

[Bernard Looney, executive]

And on hydrogen, on your left-field question, as you called it, I don't think it's left-field. It's a good question, Jason. Look, we look at all options for all of our assets. And clearly, if we can take advantage of a traditional asset and a late-life asset and somehow take advantage of the transition, then we will do that as those opportunities arise. You can certainly see that potentially in the case of carbon capture and storage, where in many ways, we'll be doing in Teesside here in the U.K., what I call taking the carbon back.

The carbon that was taken out of those reservoirs, we'll end up putting it back into some of those reservoirs and hydrogen will be part of that solution. So we continue to look at sort of all options and all uses for the assets that we have and are particularly interested if we can take advantage of the transition. And what you see us doing here with hydrogen and carbon capture in the U.K. is one such example in the Southern North Sea. So hopefully, that helps, Jason.

[Craig Marshall, executive]

Okay. Thanks, Jason. We'll take the next question from Lydia Rainforth at Barclays. Lydia.

[Lydia Rainforth, analyst]

Two questions, if I could. The first one, just on CapEx. As you move into Phase 2 and clearly the CapEx numbers were going to move up as well, so that $14 billion to $16 billion, I'm just wondering how you're thinking about that and whether you see opportunities that you want to accelerate because of where the net debt numbers have got to.

And then secondly, just on the U.S. side and the electricity side, I think there was a report yesterday that BP was -- had applied for a retail license. In terms of that, is that a change to you actually wanting to have customers now on the electricity side? Because I think in the past, you said that it wasn't something that you really thought would -- you needed.

[Bernard Looney, executive]

Lydia, yes, indeed, this FERC application has raised some chatter in the media and amongst people. It's something that -- so I guess the first thing to say is there's no change in strategy. We're certainly after customers, but our focus is predominantly on commercial and industrial customers. So that's where our focus has been, and that's where our focus will remain. So zero change in our strategy and our approach. This, you should think of as a local team taking a local option. I actually wasn't personally aware of the application. That gives you a sense of the significance of it inside the company, one of many things that I'm sure happening around the world each and every day. So just think of it as optionality but not a change in strategy in any dimension at all. So we can talk more about that later if you want to. But no change to our strategy, commercial and industrial being our focus on customers.

Secondly, on capital, we have moved to Phase 2. Phase 2 does imply $14 billion to $16 billion of capital guidance. I think the keyword that I would draw our attention to is discipline. I think it's desperately important for us that we both exercise internally and demonstrate to the market, discipline as we go through this transition. And of course, uncertainties remain, as Murray said, and the world recorded its largest number of COVID cases ever on Sunday. So while those of us here in the U.K. and the U.S. may think we're coming out of the pandemic, that does not mean that the world is coming out of the pandemic.

So that's why we made the decision to not change our capital guidance for this year. It remains at around $13 billion. And as we look to next year, we'll assess the situation as we approach the end of the year and make a choice within the framework that's out there. But we are very, very focused. Murray used the word prudent. I use the word disciplined on managing this business carefully and well, taking care of cash returns for the shareholders, taking care of that balance sheet while at the same time being able to transition the company. And I hope that's what people have taken from this morning's results. So hopefully, that helps, Lydia.

[Craig Marshall, executive]

Thanks, Lydia. We'll take the next question from Paul Cheng at Scotia.

[Paul Cheng, analyst]

Two questions. First, can you guys discuss a little bit more about the economic of your e-charger business and that -- also that in the configuration, I think that most of them that is included in your existing service stations. So I mean how many e-charger in each station? So that's number one.

And second question is on your gas and low-carbon business. Obviously, very, very strong. And you indicate that it's exceptional trading. So any kind of maybe that -- trying to understand that what is the underlying oil and gas operating performance within the context of -- in the first quarter when you earned $2.3 billion? Is it $600 million, $700 million is on the underlying oil and gas operation result?

[Bernard Looney, executive]

Thanks so much, Paul. I'm going to give the trading question to deftly avoid saying what the trading number was to Murray in a moment, but thank you for your question. On charging, we have an ambition -- last year, we had about 7,500 charge points in the company. We had an ambition to grow that to 70,000 by 2030, maybe about 25,000 by 2025. Today, we're at a little over 10,000 charge points in the company. The majority of them are in the U.K., around 8,500. We've got a couple of hundred in Germany on our retail sites. And we've got about 1,500 in China, which is around the DiDi joint venture. And reminding you that DiDi is the world's largest mobility provider and the world's largest owner of electric vehicles, and that joint venture is going incredibly well as we build that out.

We hope to add about 500 ultrafast charging points to our Aral network in Germany by the end of the year. I think we'll get up to about 30,000 in China by the end of the decade. And our focus in the U.K. is around ultrafast charging, adding about another 1,000 to 2,000 by the end of the decade here in the U.K. We're also working with fleets. So it's not just a -- on-the-go, we're working with fleets here in London with Uber. We're their partner here in London. We're also their partner in Houston. And the economics of this game are obviously in their early days, but what's going to drive this is, ultimately, it's utilization in terms of the economics of the actual transaction itself. And of course, we will add to that the economics of the convenience business that we have around it.

Utilization is driven by getting people to your site. That's why we've done a deal with DCS, which is all about the in-car dashboard software for vehicles, and we want to be in that dashboard. We want to be pointing people to the BP charge stations, and that's what that does. And the second thing that it relies on is making sure that there are electric vehicles out there. And for there to be electric vehicles out there, you need the infrastructure to be out there, which is why we did a deal with Volkswagen, which is looking at 6,000 to 8,000 charging points across Europe over the coming years. And again, putting us in the dashboard of Volkswagen.

So utilization is key, building the convenience offer around the charging is going to be key. Obviously, it's key on fleets as well. So that's a little bit of a summary of our charging plan for the next couple of years. Personally, I have to say, very excited about it. Very excited about these partnerships with Daimler, with Volkswagen Group. Huge opportunity for us there.

Murray, trading?

[Murray Auchincloss, executive]

Yes. Paul, look, I'm not going to satisfy you because I won't give you a number because we don't disclose numbers on trading. I'll give you the secret key that we use, is average, strong, very strong and exceptional. And I think from memory, we've had 3 exceptional quarters over the past decade or so. The last exceptional quarter we had was second quarter of last year in oil. And obviously, we've had an exceptional quarter on the gas trading side this quarter. So that's -- we just don't provide numbers. It's a choice that we've made as a Board and the management team. And I think if you just look at around the quarters on gas and low carbon from the new disclosures we put in place, you'll be able to draw your own conclusions from that.

[Bernard Looney, executive]

In terms of the underlying business, I guess, Murray, a way to look at it is the fact that in a normal trading environment, so we're not relying on exceptional trading going forward, but in a normal trading environment, this business is breaking even at $45 in the second half of the year, $3 Henry Hub and $13 RMM. So that gives you a sense of we don't rely on exceptional trading to deliver the cash performance that we're delivering. We take that out of the equation when we factor in our breakeven for the second half of the year.

[Murray Auchincloss, executive]

And maybe the last disclosure point we can help you with, Paul, as we talked about on September 16 that our trading business makes about 2% on top of ROACE for the business. So hopefully, that helps you understand scale.

Craig, back to you.

[Craig Marshall, executive]

Okay. Thanks, Paul. We'll take the next question from Biraj Borkhataria, RBC. Biraj?

[Biraj Borkhataria, analyst]

Two, please. First one is on the $500 million for the share awards. Can you just highlight whether that's the typical run rate for each year? I recall there was an announcement a couple of months ago around the new strategy and offering a kind of special round to the employees. I don't know if this is part of that or whether we should expect some roughly $500 million a year for this. Just wondering how to think about the run rate there.

And then the second question is on some news flow overnight. Flows for Shah Deniz have been halted, according to some reports, due to contract issues. I was wondering if you could sort of shed some light on that and what's happening there.

[Bernard Looney, executive]

Biraj, thank you. On the share awards, what we are referring to is the ongoing equity that's issued on an annual basis. What you're referring to in the announcement a couple of months back is what we call a reinvent share plan. That will not become equity until 2025, I think, Murray. So this is not in relation to that. And we've been issuing shares as part of our equity plan every year for the past decade. And this is the point in time where we've chosen to buy back those shares and prevent that dilution. So it's not associated with the reinvent bp share plan, which will become a factor in 2025 and will depend on the price and so on and so forth on that day.

Shah Deniz, Murray, anything you have on that?

[Murray Auchincloss, executive]

Nothing I'm aware of. We'll check back in with you in a minute.

[Bernard Looney, executive]

We'll follow back up with you, Biraj, on that. And I think just on the previous question around gas and low carbon as well. You'll also have seen production growth in the quarter as we've got coming out of maintenance, but importantly, as Raven has ramped up. And you'll also see lower costs in gas and low carbon in the quarter as well. So not just the trading story and underlying business improvement story as well as an exceptional trading result in gas and low carbon.

Murray, back to you on Shah Deniz.

[Murray Auchincloss, executive]

Yes, Biraj, maybe -- I don't know exactly what you're referring to, but we do have a contract for Stage 1 of Shah Deniz that ends with Turkey. That might be what he's talking about and, of course, that's being renegotiated and extended. So maybe there was a press article on the contractual situation, but Shah Deniz is flowing, as far as we know. Thanks.

[Craig Marshall, executive]

Thanks, Biraj. We'll take the next question from Irene Himona.

[Irene Himona, analyst]

My first question -- and congratulations on reaching your -- or beating your net debt target 9 months too early. But having done that, you say that you now intend to devote 40% of the new definition of surplus cash to the balance sheet. So how should we think about what you're trying to achieve with the balance sheet going forward? You don't have a gearing target any longer. And I was wondering how far you intend eventually to de-gear the balance sheet. And the second question, you used to disclose cash flow and working capital, excluding Deepwater Horizon. Is that still available for us to see, please?

[Bernard Looney, executive]

Very good. Murray, second question?

[Murray Auchincloss, executive]

Yes. On Deepwater Horizon, Irene, it's gone to such a level that it's just not material anymore. In the second quarter when we make our annual payment, we'll give you a disclosure on that payment. I think you know that payment cycle of $1.2 billion pretax. But the overall levels just declined to such a level that we don't disclose it. It's probably somewhere around $150 million, would be my guess. So it was just an attempt to clean up some of our disclosures.

[Bernard Looney, executive]

Great. And Murray, why don't you take Irene's first question as well around how far to delever?

[Murray Auchincloss, executive]

Yes. Irene, I think it starts from a place of prudent and making sure that we protect the balance sheet and protect our ratings. As Bernard talked about, our first priority is that resilient dividend. Our second priority is ensuring that we have a strong investment-grade credit rating, having reached our $35 billion net debt target. We obviously work with all 3 ratings agencies, Moody, Fitch and S&P. They all describe strong investment-grade credit rating or the ratings, the mechanisms for calculation are all quite different. So it's very hard to give a specific calculation that would emulate what they do. So instead, we're just trying to focus the market on maintaining strong investment-grade credit rating across those ratings agencies.

We believe, out of an abundance of caution due to the oil overhang and the unfolding situation with vaccines and COVID, that it just makes sense to continue to de-gear the balance sheet. And so we've stated with the Board this week that 40% of surplus cash flow will go towards the balance sheet, and that's the disclosure we can make at this moment in time. We're not guiding on what future targets might be. But we just think, given the uncertainty in the world today, it's very, very sensible that 60% of the surplus goes to shareholders and 40% continues to go to the balance sheet, and we'll reevaluate that at year-end and communicate it appropriately at year-end.

[Bernard Looney, executive]

Great. Thank you, 100% agree. Thanks, Irene.

[Craig Marshall, executive]

Okay. Thanks, Irene. We'll take the next question from Jon Rigby at UBS.

[Jon Rigby, analyst]

Can I just go back to the gas trading figure or not the figure, but the occurrence? Can you just talk a little bit about what happened? Is this just basically sort of serendipity, it just happens to be the way you're positioned structurally benefited from Uri? Or was there, in the moment, adjustments to capture excess returns? And if there is, and this is probably the crux of my question, is that always going to be asymmetric, i.e., that you can always gain but you can avoid the same kind of exceptional losses? And I guess what I'm really concerned about is how much risk and how you're managing that risk in the gas business.

The second question, just on the comments that you made about electrification. Two things, I think. One is a question on the relationship you have with the OEMs. Is that something that's unique to you? Or is it shared or can they be replicated by competitors? And then just sort of picking up on that and then the bp pulse comment. It just occurs to me that when you look at those things, if indeed, these are sort of common agreements is how can you differentiate the supply of power to cars and not just see it commoditize if indeed, you have the same relationship with OEMs and you're providing power to cars without the nonfuel side of the business. I'm still struggling with this concept that the electrification of the transportation fleet leads to you being able to expand your margin in the convenience space.

[Bernard Looney, executive]

Thanks, Jon. I'll let -- I'll say a few words on Uri and North America and let Murray talk about the specifics around risk and so on. On electrification, the deal with Volkswagen places BP in the dashboard and no one else. So that's very, very clear. That's where you will get directed to, a BP charge point, in Europe. That is true of Daimler today or Mercedes-Benz actually here in the U.K. today as well. So these deals are differential in that regard and the deal with DCS will obviously put us in a prominent position on where you get directed. So that's number one.

How do you differentiate an electron from an electron on the back of that? You differentiate it by the experience, quite frankly. If you can charge your car to go 100 miles in 10 minutes, I think that's a differentiated experience. That's why we're focused very heavily on ultrafast charging. If you have a digital solution that is end-to-end, that is easy to use, that allows easy payment, that will differentiate you. If you have a loyalty mechanism, which we have and we're growing, that will bring you back, that will differentiate you. And if you wrap that around a convenience offer, which is differential as we think we have here in the U.K. with Marks & Spencer's and as we have in Germany with Aral, that will differentiate you and that's what gets you the utilization, which in turn gives you the returns. So hopefully, that gives you a little bit of a sense.

Is it going to become more competitive over time? Absolutely. No question about it in my mind. And the rent will move around from maybe early on, it will be the electrons and over time will shift to the total offer. So it will become more convenient, and we're preparing for that, without question. But I absolutely believe that there's an opportunity to provide a differentiated service in this space. So that's a little bit on the thinking around electrification.

On the North America position, I think it is important that people understand that, first and foremost, Texas is not just a market for us. It's our home in America. And we've got thousands of employees, many of whom went without water or power for many, many days. And our first priority was to take care of them as we did, putting some of them up in hotels, providing them with supplies and so on and so forth. Having done that, we then focused on how we can keep power flowing and gas flowing in North America or in Texas, in particular during that time.

And our teams worked, quite frankly, heroically, 24 hours a day driving around the city, trying to find WiFi at Starbucks stores to keep the machine running, calling tens, if not 100 utility companies to find if we could offer more ways of getting power and gas to them. So the whole focus was on maintaining as much supply to our customers as we could, operating within the market and obviously doing everything with the utmost of integrity. So that was very much the focus during the period. I have to say I'm incredibly proud of how hard that team worked to do what they did.

And -- but your specific question around risk and whether we're taking on too much risk and was it serendipity and so on, I'll leave it to Murray. Murray?

[Murray Auchincloss, executive]

Yes, Jon. I think the way to think about this is we don't take short and long positions bare or naked. We have offsetting shorts and longs. And the moments in time we're trading, so I'm escaping here to the highest level on oil and gas trading, we make money when we can arbitrage. So when a price goes up in, say, Asia, we redirect cargoes from one place to the other and we make arbitrage by moving across the different shorts and longs we have. That business is risk-managed constantly. You can imagine the complexity of the mathematical models around it and monitored daily. I get the note that shows us what risk exposure we have and how we're placing risk on and off.

So it's pretty finely managed. We make sure we don't get too short or too long in any particular product for the concern that you just voiced. And I think we have a very, very strong, long history of knowing how to manage these disruptions and doing well. And of course, we had disruptions in the first quarter in Asia and the United States.

[Bernard Looney, executive]

And the only thing I would add, Jon, is that -- and very clear delegations from the Board in the matter of risk in this space as well, which are actively managed as you would expect them to be. So very strong governance in place around things like Empire and so on. So hopefully, that helps, Jon.

[Craig Marshall, executive]

Thanks, Jon. We'll take the next question from Christyan Malek at JPMorgan.

[Christyan Malek, analyst]

So I'm going -- just going to be back to Q3, 2H buyback calibration. When you look at the variables to calibrate the buyback quantum, I think it's fair to say it's heavily procyclical and fall prices move just to, say, $70 a barrel, then that suggests that the return out of sort of 2/3 of your market cap by the middle of the decade. So while that's a clearly nice scenario to contemplate, I can't help wonder whether in reality, would you prefer to reallocate excess funds into debt reduction or further debt reduction or accelerating from just the CapEx? Because I'm just trying to get a sense of how free your free cash flow is against that slide that you've put up on upside around the buyback.

The second question on trading. I get that you don't -- you can't quantify, but given the outsized contribution in Q1, what are the indicators you'd be looking at to get a sense of how the business will perform in future quarters, so contango versus backwardation curve structure, price trends, just to get a sense of the stand deviations given clearly, it was outsized in Q1?

[Bernard Looney, executive]

Murray, I'll ask you to comment on trading and maybe help me out on the buybacks. I mean look, I think, guys, it's great that I think Michele talked about 20% of our share count. I think Christyan is talking about 2/3 of our market cap by the middle of the decade. I think it's sort of great that people are thinking like that. And equally, the world is still in the middle of a pandemic. There's a supply overhang and there's a lot of uncertainty around. So we are delighted that we have started buybacks today on the back of the hard work of the team over the last 12 months, been very, very focused on this. And today, we see some of the fruits of that work. But I think we are also very conscious that we just laid our framework out just on August 4. And therefore, it is far too early in our minds to be considering any change to any part of that. It's very, very clear. The capital framework question within that is very, very clear.

And what I am particularly comfortable with is that even at $13 billion of capital this year, which we will stick to and not increase, we have the ability to do the things that we need to do to transition the business while generating the surplus cash that enables the buybacks to be, I hope, quite healthy. So we're taking it day by day. We're taking it quarter-by-quarter. We've announced $500 million today. We'll check back in at the end of 2Q results, and we'll announce our plan for the third quarter and so on. So while those uncertainties remain, we remain very focused on taking those decisions on a quarter-to-quarter basis. And secondly, we're not moving or tempted to move from the financial framework that we have just set out. It's a good framework, we think. It gives us what we need, and we're now going to execute on it.

Murray, anything you'd add on that?

[Murray Auchincloss, executive]

No, it's very good.

[Bernard Looney, executive]

And then on trading?

[Murray Auchincloss, executive]

Christyan, I'll be careful in what I say here. I don't really want to give up commercial advantage. We have short and long positions when market disruptions occur, we arbitrage between them on a temporal basis as well as a product basis. So that's the general characteristic of our trading business. I don't think I'm going to go any further in describing what we do commercially. It's just not helpful for the traders if I do that. So I hope you don't mind, I'll stop there.

[Bernard Looney, executive]

Yes. And I guess our traders probably wouldn't -- would say that there's more to life than serendipity, as Jon said. So -- but thanks, Murray, for that. And Christyan, thanks for the question. I hope that helps.

[Craig Marshall, executive]

Okay. Thanks, Christyan. We'll take the next question from Chris Kuplent at Bank of America.

[Christopher Kuplent, analyst]

Yes. I've got 2 quick questions, please. One, a bit left-field. Can you comment on Mexico, which seems to be stepping back a little bit from liberalization of the energy industry? Have you already seen any impact? Are you concerned on your growth expectations and margins in the country Downstream?

And the second question, I'm afraid, goes back to buyback and your 60% rule. So I just wanted to see whether, okay, you want to be disciplined and cautious for now, whether still the 60% payout rule, I understand correctly, you've highlighted excess free cash flow of $1.7 billion, $500 million of that is going to be allocated to offsetting the employee award scheme. But then you'd still be left with $1.2 billion. So you could, for now, already announce a 60% payout of that, which would be quite substantial. So are you saying you're going to apply that sort of math with a half year under your belt, considering your 2Q guidance? Just checking why that rule has not yet been applied and whether and when it will be.

[Bernard Looney, executive]

Thanks, Chris. Let me see if I can have a go. It is 1H. And the reason it's 1H is because we have had a very strong, whatever language you want to call it, first quarter, and we have some unusual outgoings in the second quarter, particularly around the Deepwater Horizon, and we have chosen to look at it on a 1H basis. And going forward, it will be on a quarter basis, as Murray has indicated. But 1H comes together at the end of 2Q obviously and we'll announce what surplus there was and what the buyback for the third quarter is there.

The $500 million, you can tie it to the $1.7 million if you wish, but it is simply a decision that we will no longer dilute our shareholders in this way and that we will purchase -- repurchase those shares, and that's what the basis for that decision is. But the reason for 1H rather than 1Q and 2Q is the unusual nature of strong performance in the first quarter and some unusual outgoing items in the second quarter.

Murray?

[Murray Auchincloss, executive]

Yes. Just to clarify that, Chris. So in the second quarter, we will look at the 1H and the outlook for the second half of the year, and make a decision. Just to be super, super clear.

[Bernard Looney, executive]

And on Mexico, look, I think there's probably a lot going on in Mexico. I won't get into commenting on the politics and what is happening there. Mexico is important, but it's not like it's the core of our growth strategy in convenience and mobility. The real area of focus really over the coming years is India, where we're going from 1,500 sites to 5,500 sites. And that's not to say that Mexico doesn't matter. Of course, it's a part of the story. But it's not the story. The story in growth markets in convenience and mobility, in particular, is in India and our plans take account of risks like that in both -- in countries like Mexico and we've drawn up our plans with that risk in mind, Chris.

[Craig Marshall, executive]

Okay. We'll take the next question from Peter Low at Redburn.

[Peter Low, analyst]

Just one follow-up actually on the phasing of disposal proceeds. Some of the largest outstanding payments relate to Alaska, where at year-end, I think you had over $4 billion of assets recognized on the balance sheet related to loan notes and earnout provisions. Could you give any additional color on the expected phasing of payments from Hilcorp? Is it quite a material moving part as your guidance would imply you aren't going to receive much of it this year?

[Bernard Looney, executive]

Excellent question, Peter. Murray?

[Murray Auchincloss, executive]

Thanks, Bernard. Yes, Peter, there are 2 components to it. There's a loan for $2 billion that I think has a 5-year duration. So I think that's -- that will be a choice of does it get paid out earlier, does it get paid out in 5 years, and that's a -- obviously a Hilcorp decision. So that's the first component of it. The rest is through your profit-sharing mechanism. I think with the strong prices we're seeing now, you should presume that the balance of payments will occur over the next 3, 4 years. Pretty hard to predict.

It depends on the performance of the field, the oil price and there are ratchets in the sharing mechanism. So it's pretty hard to predict easily. But you're right to be prudent and assume ratable, probably over 3 or 4 years, would be my gut instinct right now. But let's see how it plays out. There are a quite few variables in there, as you can imagine, production moving up and down, efficiency moving up and down, weather moving up and down, price moving up or down...

[Bernard Looney, executive]

Oil price.

[Murray Auchincloss, executive]

Et cetera, et cetera. So there's a lot of moving parts in it. Hope that helps, Peter.

[Craig Marshall, executive]

Thanks, Peter. We'll take the next question from Jason Gabelman at Cowen. Jason?

[Jason Gabelman, analyst]

I wanted to go back to the EV strategy that you've discussed. You mentioned the utilization values, harder economics. And so I'm just wondering what kind of EV penetration are you assuming in the global market to get the utilization up to levels that support profitability. Given the increase in EV penetration, do you continue to install EV charging points such that you kind of frontrunning EV penetration improvement and so EV utilization stays low until kind of EV kind of penetration starts to flatten? And do you think that's a dynamic that could play out and potentially impact your profitability in the business?

[Bernard Looney, executive]

Jason, thank you. It's a little hard to hear you, but I think I got your question, and let me see if I can help with the answer. I mean it is this classic chicken and egg. Without the infrastructure, the EVs won't come. Without the EVs, there's no need for the infrastructure, so to speak. So -- but here's what we are seeing. I guess we've got 3 scenarios in our energy outlook. Business-as-usual, rapid transition, net-zero transition. The rate of EV penetration today is probably one of the few things in the energy outlook that is actually proceeding at a pace that is consistent with somewhere between a rapid and a net-zero world. So it is actually not the one, but one of the few that is actually proceeding at real pace. And we are seeing that in Europe, in particular, and we're beginning to see it on the coasts in America, and we're obviously seeing it very much in China.

So our job is to make sure that we build the infrastructure at the pace that is consistent with not having assets that sit there doing nothing and conversely, that have lines of cars such that nobody is going to buy an EV. And we think we've got that pace about right. It is important that as we do this, we're directing traffic to our charge stations, which is why these deals with Volkswagen and Daimler and DCS are so important to us because they give us the confidence to invest. They're also why these deals with fleets are so important to us. And that's the deal here with Uber in London. We're looking at Uber in Houston as well, and we'll continue to build out the fleet offering as well.

So we're trying to get that balance right. It is a growth business, and we need to think of it accordingly. But the world is electrifying light-duty transport, I think that is now without question. And we want to make sure that we've got the right infrastructure with the right digital offer, with the right convenience offer and that we've got the right partners that allow us to make the most money out of that, that we can over the coming years. And so far, so good. I hope that gets to your question, Jason.

[Craig Marshall, executive]

Okay. Thanks, Jason. We'll take the next question from Lucas Herrmann at Exane.

[Lucas Herrmann, analyst]

Bernard and Murray, thanks for adding increasing insight and coherence into integration, the way you're running the business. A couple of quick ones, if I might. In the -- in terms of cash flow, working capital clearly worked against you this quarter, but you talk about offsets. I just wondered whether you could indicate whether those offsetting items are likely to reverse through the course of the second quarter.

On savings, can you give us any better idea of the profile of savings by division, by business over the course of this year and into next year? I think you alluded to $1.5 billion of savings in the oil products or in the oil business, but just an idea how things split across the 3 divisions over time and where we are in terms of capturing those. And Murray, just a quick one. Sorry, it's a very simple question. It's -- I can't see a split, at the present time, of results by U.S., Rest of World, et cetera, et cetera. Am I waiting for the F&OI? Or did you decide to withhold those disclosures now?

[Bernard Looney, executive]

No, I think it's coming out tomorrow, to your third question, Lucas. So I think that will be out tomorrow. Is that right, guys?

[Murray Auchincloss, executive]

Yes.

[Craig Marshall, executive]

Yes.

[Bernard Looney, executive]

Okay. So that comes tomorrow.

[Murray Auchincloss, executive]

Look at that. The CEO got that one.

[Bernard Looney, executive]

Yes. I know. Well, I was asking that during the week. So Lucas, thanks. We're on the same page. On working capital, I'll let Murray talk about it, and he'll probably correct me on the savings question. Just high level, $3 billion to $4 billion of savings by 2023, $2.5 billion by end of this year. $2.5 billion by end of this year is ahead of schedule so we'll deliver it this -- in the middle of this year. And it won't be an exit run rate. So that's going well. The program overall is going well. It's focused on the restructuring. It's focused on Agile, where we've got 14,000 people now working in Agile teams in P&O and it's focused on digital, which you're familiar with our history in that space.

The majority of the savings, as you'll see from the $1.5 billion number, do come from the oil and production operations area because that's where the majority of the workforce is in many regards and where the majority of the cost is. So it is heavily weighted there. So $1.5 billion up to $2.5 billion is coming from there. And then it's probably -- on the remainder, it's probably 2/3-1/3 or maybe 2/3 -- 50-50 between gas and low carbon and Emma's business. So hopefully, that gives you a little bit of a sense. But the engine room of where the cost is consumed is obviously in the refineries, in the production facilities, and that's where the majority of the savings and opportunity, quite frankly, comes.

Murray, on working capital and any offsets?

[Murray Auchincloss, executive]

Yes, Lucas, you spotted that a little bit. So working capital did build in the first quarter, $1 billion-ish or something, I think, was the number. Offsetting that was things like variation margin. You'll remember in 4Q, we had a big variation margin outflow on the gas side. That's come back in, in the first quarter, as an example. So the 2 are largely offsetting. I wouldn't expect too much of a working capital release in 2Q would be my suggestion at this moment in time. And of course, Lucas, you know that it's wickedly volatile, especially with oil price, gas price, refining margins moving around as much as they are right now. So in a steady-state world, between 1Q and 2Q, you wouldn't expect much release. But if there's volatility, then it will just depend on what happens with price and it will determine which way that goes. I hope that helps, Lucas.

[Lucas Herrmann, analyst]

Yes. Bernard, can I just come back on the cost savings very briefly? The delta between the savings you'll achieve through the course of this year relative to the savings you achieved in 2021 -- in 2020 and the benefit that you still expect, can you give any insight?

[Bernard Looney, executive]

Do I understand the -- Murray, do you want to? I'm not sure I understood that.

[Murray Auchincloss, executive]

Yes, so...

[Bernard Looney, executive]

There were some -- I mean, there are some charges, there are some costs that were deferred from last year because we couldn't get to a turnaround or something like that. And we're taking those out of that cost-saving number because it's a true synergistic cost saving is what we're after, not simply a deferral of cost. But Murray?

[Murray Auchincloss, executive]

Yes, maybe let me give this a go, Lucas. So we had $20.9 million worth of total cash costs in 2019. That's what we're measuring it against. We think -- we said originally, we'd hit a $2.5 billion run rate by the end of 2021. Bernard's just described that probably by 2Q, we'll declare victory on that. You can take a look at what our 2020 numbers were. I think they were $18.5 million. I can't quite...

[Bernard Looney, executive]

$18.5 million, I think.

[Murray Auchincloss, executive]

$18.5 million, yes. And then we're saying $3 billion to $4 billion by 2023 relative to 2019. So hopefully, if you do the math, that will give you the 2019 or 2020. And then we've given you a strong indication of what 2021 is looking like.

And just to clean up on allocation between -- historic Upstream gets about 60% of it, as Bernard talked about, 20% goes to historic Downstream and 20% to OB&C, give or take, are the rough numbers I hold on my head for how that will shape up. I hope that helps. And you can divide -- you can just take a look at the -- we can take a look at the cost inside gas and low carbon versus [ OPO ], and that will give you that historic Upstream split. I hope that helps, Lucas. If not, I can follow up on the sell-side call.

[Craig Marshall, executive]

Okay. Thanks. We'll take the penultimate -- no, it's not. We've got 3, if I can count. We'll take the third-final question from James Hubbard at Deutsche Bank.

[James Hubbard, analyst]

Two questions. We've seen peers build solar and wind projects and then sell on stakes in various levels of aggressiveness, some in an almost private-equity-like manner. And then there's other people that build and keep it. And I'm wondering, when you talk about your 50 gigawatts by 2030, where do you sit on that spectrum? Do you plan to build it and keep all of that because that's your future earnings that's going to replace oil as it declines? Or will you be open, at some level of aggression, to taking opportunities to sell down stakes should the market allow you to make a quick return as it were? So that's one question.

And the second one is back to EVs. It seems to me, as an electric car owner, the model that works right now is you park, you plug in, you charge for 10, 20, 30 minutes. You get a coffee, you sit down, have a doughnut, whatever, go to the loo. And it doesn't seem that the average BP petrol station, even at the U.K. service stations, fits that model where even if it's only 10 minutes, either people are going to sit in the car for 10 minutes or wander around the aisles buying chocolate for 10 minutes. But ideally, they have somewhere to sit and have a coffee. And I'm wondering if you -- you've obviously looked at that. Do you agree? And if so, how will you adapt to that kind of model? Or do you just think that charging will get so fast, that will become redundant?

[Bernard Looney, executive]

James, thanks. I don't own an EV yet, so I need to get with the experience. Yes, I think our place is actually pretty well-suited to charging, but you're obviously more -- closer to it than I am. But the Marks & Spencer, the convenience offer that we make, people will want to go and grab a coffee and sit down and have a doughnut, as you say, but they may also want to do a bit of a shop. That's -- we're seeing our gross margin in that business up 10% year-on-year, continuing to be a very strong part of the business. We're seeing the same, by the way, in Germany with the REWE offer, with Aral. So I do think the -- our experience says that our convenience sites are actually well-suited to going and getting that coffee. And of course, if there's somewhere to sit, even better. But that is the experience that we have today and it seems to be working. Murray add anything on that, if you wish.

And then on the farm downs, which I think is what you're referring to, it's a good question. We're not in this for a quick return, so to speak. Solar is a farm-down business. So that model is very much a farm-down business, and that's what Lightsource bp does. And I have to say, it does exceptionally well. The offshore wind business, we feel, is different. The option exists to farm down, and many people suggested that we overpaid for those Elizabeth licenses in the Irish Sea. And as I said to somebody this morning, if I had GBP 1 for everyone who wanted to buy into those leases, having won them, we'd be doing quite well.

So there is a very strong market for these assets. But as you suggest, there is the choice between earning a quick buck, so to speak, or actually retaining those for long-term earning streams. And in offshore wind, I think we're probably more in the latter category than in the former category. But we have that option. And of course, there are strategic reasons that you may want to bring in a certain partner for a certain reason that goes beyond the pure financials. So solar very much in that mode. Offshore wind, I think we've got the assets to have the discussion and the options, which is great, and more work to do down the road.

Murray, anything to add on either?

[Murray Auchincloss, executive]

Maybe just on the electrification, Hammersmith roundabout is a good place to go look at. I travel by it once a day. It seems like EV charging bay is always full, retail always full, carwash always full. I think over time, the EV charging will increase in pace, given technology advancements. And we think that at some moment in time, you'll be doing 5- or 6-minute charges, which about equates to what it takes to fill up your tank with gasoline. So it's a perfect chance to go in and get a sandwich or chocolate bar or coffee. So we think over time, it will merge towards that. And as I look at Hammersmith, it's awfully busy. And I think it's a great example for all of us to go feel and touch and see why we believe we can move from fuel and convenience to charging and convenience over the coming decades in the U.K. and help the Prime Minister and his aspirations to move towards a low-carbon economy.

[Craig Marshall, executive]

And I think, James, just maybe a couple of things from me. We are starting to roll out these ultrafast charging hubs with convenience as well, which are much more dedicated to ultrafast charging. So certainly, I think an evolution in the model there as we think about it, the benefit we have with the access to the customer network as we start to understand customer preferences, needs, et cetera. So we'll be looking at that. And I think Emma Delaney and the team at the Capital Markets Day laid out a sense of how we see that model developing over time. So as an EV user yourself, I think you'd recognize this model is going to evolve. So if you haven't, go back and take a look at some of what Emma and the team rolled out of the CMD.

And the last thing on -- I guess I'll just reiterate this, I'm sure you know this. The 50 gigawatts is developed to FID, which basically, as Bernard said, implies that we retain optionality from a value point of view as to what decision we take around farm-down, depending on the business. But that 50 gigawatts, as I say, is developed to FID. It's not held operating in our hands.

Thanks, James. We will take the real penultimate question from us Os Clint at Bernstein now.

[Oswald Clint, analyst]

Two questions, please. Convenience, mobility, just picking up on some of the stuff you've mentioned, 300 strategic sites up over the last year, 1,400 new retail sites in growth markets and the convenience margin is up over 10%. But we've also had the lockdowns and I guess a lot of people using the rest of your 19,000 footprint. So I just wanted to get a sense of how much the new locations and new strategic centers are really driving that a 10%-plus margin uplift and how you're feeling about that sustainability at this point going forward.

Secondly, yes. Just back on U.K. wind. I mean it's a helpful slide you have this morning and you mentioned people saying you overpaid. I mean -- and you also asked for feedback, but there's a lot of renewable companies out there saying, yes, you overpaid. There's even other chief executives in the press saying you overpaid, which frankly isn't helping you convince investors. So I mean I see renewable companies announcing returns on projects to 1 decimal place. So I'm really asking why can't you just put some of these comments to rest and say what you think the internal rate of return is on such a project. It's not the trading business. Why do you have to be so secretive?

[Bernard Looney, executive]

Os, thanks. On the 10% increase, I think retail fuel volumes are down about 9% year-on-year. Aviation is down 45% actually. But on the 10% gross margin on the convenience, it's the size of the basket, but more importantly, it's the value of the basket, and it's also premium fuels driven during this process. And this is a business that's got a track record of growth. And I think we're optimistic. I'm as optimistic that will continue to grow it. So it's not necessarily just about those new sites or those new conversions. It is also about what we are actually giving people in those sites, which is the quality of that basket and also the fuel offering with the premium fuels that we're giving them. So more on that to come.

And on the offshore wind one, look, it's easy to get dragged into a he said, she said, and I'm probably not going to do that other than to say, look, we were successful. We were the winning bidder. We weren't alone. We have a partner who's very experienced in this space, EnBW, so we didn't do it on our own. We would also -- we should also point out that we were prepared to bid on leases in the North Sea, same team, same partnership, same methodology, obviously different environment. And we would not have won those leases on the other side of the British Isles in the North Sea.

So that should give you a sense that we were grounded in reality, so to speak. And as I said, lots of people coming in and wanting to buy and we can publish a return to a decimal point. But it's not going to be right because I think it's simply going to, I hope, and I believe actually, Os, get better over time. And it sort of gives a level of accuracy that isn't consistent with the range of opportunities that we have to create additional returns in that business. And therefore, I worry personally that we'd end up underselling the value of the business.

And when I talk about optionality, I'm not just talking about the fact that we're going to bring our decades of experience and pretty strong project management experience to the offshore wind, that we're going to bring our operating experience, both offshore and onshore wind farms and our digital tools, which give us uptime. And we bring our U.K. supply chain, and we bring our U.K. relationships. But I'm also talking about the point we made in the script today, which is about linking it into the charging business. And that could be up to half, if not more. Murray thinks it could be 2/3 of the power demand from pulse could be offset there. And we just announced the hydrogen deal. So we can take power over to the Teesside place and build hydrogen over there.

So the sort of the optionality in an integrated energy company around an anchor asset like Elizabeth is or what we call Elizabeth is absolutely and utterly fantastic. And the more we learn and the more we do, the more it sort of builds and grows. So other than to say, look, I am supremely confident in our ability to deliver 8% to 10% returns from that project, personally, over time, I think it will get better than that because of the optionality that we have. And we're just going to crack on and execute on it and give people the steps and the milestones along the way that's saying we can execute.

And people will judge for themselves what they think is right. But very, very pleased with it, Os. And people will say what they want to say. And we're different. We leave them to it, so to speak. So I hope that helps. So we won't publish a decimal point return, I'm sorry. But I know you're supportive of the transaction, but it's just -- there's just too much optionality. And quite frankly, there's too much upside and we'll end up underselling -- undervaluing an asset, in my own view.

Murray, do you disagree?

[Murray Auchincloss, executive]

No, it's right. The way that I relate to this thing, guys, is 100 years ago, people discovered oilfields, built refineries to process it, built service stations to sell it to consumers. All you're seeing with the offshore wind is the rebuilding of that 100-year business. So the Upstream isn't an oilfield anymore. It's a wind farm. It takes it through -- we could choose to go through a utility, we can go direct to ourself. The plants that we have will be hydrogen plants that are green hydrogen over time and the service stations are the service stations. So I think it's the recreation of a business that we've known for the past 100 years on oil and gas. And all you can say about the businesses that we built like that is that the integrated energy companies have made material returns on that over time, and we're convinced we'll do the same moving forward with us. I guess pure plays probably can't say that.

[Bernard Looney, executive]

It is different. We do have real optionality and real upside. So -- but anyway, Os, thank you.

[Craig Marshall, executive]

Okay. Thanks, Os. And we'll take the last question from Alastair Syme. Thanks for your patience, Alastair at Citi.

[Alastair Syme, analyst]

So can you talk again about the sort of the global offshore market for wind and seabed leases? It does feel like there might be a little bit of a lack of supply versus industry demand, and that's maybe driven up some of the pricing. Is that a view you share? Or do you think the market dynamic is going to change at any point? And then my follow-up was just on Tortue LNG. It's a relatively recent acquisition of the BP portfolio, but it was also a big part of the 2020 impairments. So I just wanted to get a sense of what's happening there to get to a Phase 2 and Phase 3 development.

[Bernard Looney, executive]

So thanks, I'll let Murray take Tortue. On offshore wind, it is a competitive space. There's no question about that. And you have companies like us playing that used not to play. Our job is to compete. Our job is to bring something that others can't. And therefore, earn a return in a license round when others can't. And I think the more time we spend on it, and Dev's done a brilliant job in getting us into this business, we had zero, zero 9 months ago or 8 months ago. We've got 7 or 8 gigawatt gross today. It's an extraordinary achievement, I think, in a very short space of time, and he deserves a lot of credit and his team deserves a lot of credit. But our job is to be able to compete when others can't. That's bringing things that others can't. So we bring the offshore experience and quite frankly, that is real. It is not made up. It is absolutely real. Ewan Drummond built Shah Deniz. He's now sitting on the Board of our Equinor offshore wind joint venture in the United States.

And we've got many more people who are gone from the Upstream now working in the offshore wind business. And we're going to deliver the same sort of repeatability that we delivered in the Upstream over the past several years. And we bring the integrated energy company. And we've talked about the things that today that integrated energy company brings. So all we have to do is know what we bring and be disciplined. And yes, it's competitive. But as long as we're disciplined and we don't get carried away and we are turning down as much as we're accepting, we'll be fine. But that discipline is a word that we keep coming back to that's going to have to stay and that's how we'll address this. So competitive, yes. We got to know our business, which we do. We got to know what we bring, and we got to say no when we say no.

Murray?

[Murray Auchincloss, executive]

On Tortue, yes, we did have a bit of a write-down last year, you're right, based on changing views of gas prices. As far as the project itself goes, it's been tricky with COVID. We obviously had to slow down as COVID swept across Mauritania and Senegal. We're back to work now. We saw some fantastic pictures last week of the first pylon being loaded out of the shore base in Mauritania and taken out to sea to start to create the breakwater offshore. So we're glad to be back at working out of the FM situation and working away. And we continue to optimize Phase 2 and Phase 3. We're working with our partners and the government to look at how we can take those forward. I think in summary, there's a lot of gas there. It's close to Europe, so it's close to a big market. And over time, I'm sure this will be a very good investment.

Bernard, anything you'd add?

[Bernard Looney, executive]

No. It's all about resource and marketplace and the teams are doing a very good job. So the resource is there, and we'll continue to work it. So Craig.

[Craig Marshall, executive]

Yes, that's the end of the questions. Thanks very much for the interest. We've ran slightly over, but thanks for staying with us. Maybe on that note, let me just hand back to you, Bernard, to close the call.

[Bernard Looney, executive]

Well, thanks, Craig. Thanks, Murray. And thanks to all the teams that helped us put this together. Thanks for -- everyone online for listening. Just a bit of a close, if I can. As we've had many, many conversations with our investors over the last year, and we've had many conversations, I think the key question on many investors' minds has not been so much about strategy but on whether we -- whether it is possible to deliver cash returns, competitive cash returns, at the same time transitioning a company like BP. And I think that's a very understandable question.

And that's why we have been focused so hard on the balance sheet, on capital discipline, on cost discipline, on bringing those major projects on and growing that convenience business. And as the environment improves as it has, I think you're beginning to see those efforts bearing fruit. And our own job is to show that, over time, we can do both. We can transition BP for the future, while at the same time, not or, at the same time, deliver our investors' competitive cash returns. And that's why we have this phrase performing while transforming. And I hope you'll agree that I think this quarter is a great example of us doing just that.

So thanks for the time. We look forward to being in touch and following up with any other questions you have. So thanks very, very much. Take care.