BP PLC

LSE:BP

Earnings Call Transcript 2019-Q4

[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 Fourth Quarter and Full Year Results Presentation for 2019. I'm joined here today by Helge Lund, Chairman; Bob Dudley, Group Chief Executive; Brian Gilvary, Financial Officer; and Bernard Looney, Upstream Chief Executive and CEO Designate.

Before we begin, I need to draw your attention to our cautionary statement. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors 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.

Now over to Helge.

[Helge Lund, executive]

Good morning, everyone. I'm Helge Lund, BP Chairman. It's not usual for the chair to join these calls, but I'm going to make an exception today because it's Bob Dudley's last investor call for BP and his final day as Chief Executive. After a 40-year career and nearly 10 at the top, that's quite something.

Bob is going to speak shortly, but he's not a man giving to self-congratulation, so I wanted to offer some reflections on his period as Chief Executive. But first, I should also acknowledge another announcement made last month. Brian Gilvary has decided to step down, too, after 34 years with BP and 8 as a CFO. I hope Brian won't mind me saying that he has been one of the truly great CFOs. But Brian is going to be around until June, we'll get some more value out of him yet and pay tribute properly when the time comes.

So back to Bob. BP today is very different to the BP of October 2010 when he took on the job. The fact that BP is so strong today is in many ways because of Bob's handling of that early period and his leadership since. His first task was not one to envy, recovery from the Deepwater Horizon tragedy. But Bob quickly stabilized BP, then he changed BP's culture, instilled new values and helped make BP safer and profitable again. I count that as the first great achievement of his leadership.

Then there was the oil price downturn, a big challenge for the whole industry. Bob made BP leaner and more modern, and his phrase, value over volume, became a guide for the business and BP came out even stronger. That was his second great achievement. The third is Bob's leadership into the energy transition. He has invested in low carbon and positioned BP to dynamically drive the energy transition forward. And of course, that story is evolving.

And we're really excited for what Bernard is going to do next. So thank you, Bob, for your leadership and for the position in which you leave BP. You have our gratitude.

[R. Dudley, executive]

Helge, thank you for your kind words and good morning, everyone. As this is my last presentation to you as CEO, I'd like to break from the mold a little and spend a few minutes talking about BP's journey over the last period before handing over to Brian to run through the results. Bernard is here today, too, and he will say a few words to close the presentation before Brian and I take your questions.

Looking back to the beginning of this decade, BP was facing one of the biggest challenges in its history. Deepwater Horizon was a tragic accident, which shook BP to its core. It was clear then that we needed to not only deal with the incident, but also focus clearly on the future of the organization.

To do this, we identified 3 key priorities for the group: safety and operational risk management, rebuilding trust and delivering value growth for our shareholders. We have made many advances since then with these priorities defining the company we have become, one that is well positioned to succeed as the world's energy system transitions.

Now a little more detail on each priority. First, safety and operational risk. Safety is a core value, and we have done an enormous amount to make BP a safer place to work. We have reinforced our safety and operational risk function, putting in place systems and processes to improve our operations and performance. This includes bringing together a set of global requirements under one operating management system. Along with our values of safety, respect, excellence, courage and one team, it defines how we work in a systematic way across BP.

We have also reshaped our businesses and embedded a functional model changing what it feels like to work for BP. And externally, we have changed and enhanced how we work with our partners. And all of this has made a difference. We have seen an almost 70% decline in Tier 1 and Tier 2 process safety events since 2011 and this year achieved our lowest ever recordable injury frequency, both important successes.

We have, however, seen an increase in process safety events in 2019, mainly following some asset acquisitions. This serves as an important reminder that we must remain steadfast in our focus on safety. Our aim remains the same: To have no accidents, no harm to people and no damage to the environment.

Next, rebuilding trust in BP. At the time, I said that the building of trust comes from doing what you say you were going to do, and I believe we did that in meeting our obligations in the Gulf. Not only were we quick to establish a clear process to meet our legal and financial commitments with the U.S. Gulf States and the federal government, but we also applied rigorous standards to our work, going above and beyond regulatory requirements in many regards.

We also implemented the lessons we learned across our operations globally and continue to share our learnings with others. It was also important to rebuild trust in the decisions we were making about BP's future. We had to find a way to move from response to recovery and to be clear and transparent in our communications.

So as some of you will recall, in 2011, we laid out our 10-point plan. It included 5 things you can expect from BP and 5 things to measure us by. We were already in action on many of them, but this plan clearly set out how we were going to move BP forward.

Turning next to growing shareholder value, which has always been a key priority and is based upon some guiding principles which have endured and evolved with the business over time.

Value over volume, taking decisions to maximize the value we can create rather than the volume we can produce. Active portfolio management and following an extensive divestment program, much of which was delivered in an environment of over $100 per barrel, our business looks very different. We think carefully about the shape and scope of our global activities, divesting parts of our portfolio where we don't see a clear strategic fit or where we believe others can create more value.

Developing long-term strategic relationships. We see enormous value in long-term mutual relationships with partners and governments, particularly as we look to focus on key geographies. And establishing strong value growth opportunities. In the Upstream, this means driving growth from high-quality, major projects and optimizing our existing operations. In the Downstream, accessing growth in marketing and advantaged manufacturing to deliver strong underlying growth and returns. And in alternative energy, deploying BP's capabilities or partnering with others to grow in low-carbon businesses and raise capital.

Finally, cost and capital discipline. Staying disciplined around our portfolio and investments with a relentless focus on capital and cost efficiency. These guiding principles have been and remain good for our business and core to our strategic decision-making. They served us well in the immediate aftermath of the Gulf of Mexico oil spill. They provided a set of building blocks to support our recovery and delivery of our 10-point plan. They ensured our business was resilient in the face of the oil price downturn, and they created the foundation which, along with the greater certainty over the Gulf of Mexico liabilities, meant that in early 2017, we were able to lay out our new strategy for getting back to growth.

And so here we are today. We have a powerful investor proposition of growing sustainable free cash flow and distributions to our shareholders over the long term. We are focused on running our operations safely, reliably and efficiently, which I truly believe is essential for the long-term success of BP. We have created a business that is fit for the future, shaping a distinctive portfolio over the last decade that we believe is a well-positioned frame to face the rapidly changing energy landscape. And we will continue to be focused on value and returns, making disciplined investment decisions while also managing our cost.

Our proposition is underpinned by the 5-year growth strategy we laid out in early 2017. Growing advantaged oil and gas in the Upstream, market-led growth in the Downstream, venturing in low-carbon across multiple fronts and modernizing the whole group.

In service of this, we have built up our businesses in existing core regions and grown businesses in new markets. We've started up 24 major projects in the Upstream since 2016, including Shah Deniz 2, together with the Southern Gas Corridor, one of the world's biggest engineering projects; we significantly transformed our Downstream business and are accessing new growth markets such as Mexico and India.

We're back into solar, attracting lots of capital with fast-growing Lightsource BP. We're in biofuels in Brazil, and we're fast-charging vehicles in the U.K. In the U.S. Lower 48, we completed our biggest acquisition in 20 years. We've built distinctive partnerships around the world including with Rosneft in Russia, Reliance in India and Aker BP in Norway. And reinforced strategic relationships with governments in places such as Azerbaijan, Oman and Abu Dhabi. Across the group, we are using technology to look for new ways to build and develop distinctive capabilities for our people and our operations.

All of this is in support of our proposition to grow sustainable free cash flow and distributions to shareholders over the long term. And we are doing just that, having today announced a dividend increase, bringing our dividend for the fourth quarter to $0.105 per ordinary share or $0.63 per ADR.

In summary, we are a global, integrated energy business with a strong set of capabilities, global reach and a talented workforce, and I believe we are in a strong position to manage our business in this fast-changing energy landscape.

So all that leaves me to do is to hand over to Brian to take you through the results in more detail.

[Brian Gilvary, executive]

Thanks, Bob, and good morning, everyone. Looking first to highlights for the year, where in the face of a challenging macro environment, we've delivered a strong set of results.

For the full year, we reported underlying replacement cost profit of $10 billion, with strong underlying operating cash flow of $28.2 billion including a working capital release of $300 million. Return on average capital employed was 8.9%. And over the year, we paid $8.5 billion in cash dividends and share buybacks. I'll talk more on our financial results shortly, but first, let me share some strategic and operational highlights.

In the Upstream, we started up 5 major projects and took 5 final investment decisions in the year, underpinning our 2021 targets and our longer-term growth options. BPX Energy is also making good progress, delivering synergies this year of $240 million, above the target of $90 million we have planned. Well costs continue to decline in the Eagle Ford and Permian under BP operations, and we are progressing high-value, high-impact activities as we continue to focus on value over volume.

In Downstream, we saw record refining throughput for the second consecutive year and continued to expand our retail convenience partnership model, which is now in around 1,600 sites across our network. In December, we signed an agreement with Reliance Industries to form a fuels retail and aviation joint venture in India, providing access to one of the world's largest and fastest-growing energy markets.

We are also making progress in our advanced mobility agenda, forming a joint venture with DiDi, the world's leading mobile transportation platform, to develop electric vehicle charging infrastructure in China, the world's largest market for electric vehicles. And since announcing our new plastic recycling technology, BP Infinia, a consortium of leading companies has been formed to help accelerate commercialization, leading to reduced plastic waste supporting the circular economy.

More broadly, we are progressing our low carbon agenda. In December, we increased our stake in our solar joint venture with Lightsource BP to 50% and completed the formation of BP Bunge Bioenergia, a leading company in Brazil's low-carbon ethanol, sugar and biopower market.

In summary, 2019 was another year of strong financial delivery. We're on track to deliver our 2021 targets, and we continue to explore and develop new business models to provide opportunities through the energy transition.

Turning then to the macro environment, which remains volatile. In 2019, Brent crude averaged $63 per barrel in the fourth quarter and $64 per barrel for the full year. Oil prices were volatile through the year, with supply and demand impacted by changing macroeconomic and geopolitical factors. Slowing demand growth was largely balanced by OPEC+ production cuts and a deceleration in U.S. onshore production growth. In recent weeks, growing concerns over the potential impact of coronavirus on economic growth and global oil demand growth have also weighed on the oil price in the short term.

Looking further into 2020, we expect stronger oil demand growth, driven by improved global economic sentiment and the impact of IMO 2020. Stronger non-OPEC supply growth driven by Norway, Brazil and Canada and solid U.S. growth is expected to support global supply, with OPEC+ continuing to be the balancing factor.

Turning to gas. U.S. Henry Hub was $2.50 per million British thermal units in the fourth quarter, down $1.20 versus a year ago. In average, $2.60 in 2019, down $0.50 from the 2018 average. The U.S. gas price has been impacted by continued supply growth, a mild winter and softer demand growth than that seen in 2018. We expect price to be driven by the balance between continued supply growth versus supply destruction in light of the current challenging price environment.

Finally, BP's global refining marker margin was $12.40 per barrel in the fourth quarter, $1.40 higher versus a year ago and down $2.30 versus the third quarter. For the year, the refining marker margin remained largely unchanged. Yet 2019 was one of the worst refining environments since the financial crisis of 2008, with other crude and product differentials outside BP's RMM significantly impacted. This was largely due to global tightening and temporary disruptions in heavy and sour crude supply. Implementation of IMO 2020 should provide support to margins and widen heavy and sour crude oil differentials this year.

Moving to our fourth quarter results. BP's fourth quarter underlying replacement cost profit was $2.6 billion compared to $3.5 billion a year ago and $2.3 billion in the third quarter of 2019. Compared to the third quarter, the result benefits from a lower effective tax rate, higher production due to improved weather in the Gulf of Mexico and strong commercial performance in refining. This was partly offset by a low Rosneft contribution following a strong third quarter and lower refining margins.

Compared to a year ago, the result was impacted by lower heavy crude differentials and lower liquid and gas realizations, partly offset by a lower effective tax rate and lower refinery turnarounds. And as Bob mentioned, the fourth quarter dividend payable in the first quarter of 2020 has been increased to $0.105 per ordinary share.

Turning to cash flow and our sources and uses of cash. Excluding oil spill-related outgoings, underlying operating cash flow was $28.2 billion for the year, of which $7.6 billion was generated in the fourth quarter. This includes a working capital release of $300 million for the year and a build of $200 million in the fourth quarter. Organic capital expenditure was $4 billion in the fourth quarter and $15.2 billion for the year at the lower end of our targeted range.

Turning to inorganic cash flows. Divestments under the proceeds in 2019 totaled $2.8 billion, and we made post-tax Gulf of Mexico payments of $2.4 billion. Inorganic capital expenditure was $4.2 billion, including the final payments to BHP of $3.5 billion in the first half of the year. Gearing fell in the fourth quarter to 31.1%, reflecting lower net debt, partly offset by the impact of share buybacks on equity and impairments.

As of today, we have completed our share buyback program, fully offsetting dilution from the scrip dividends since the third quarter of 2017. In total, we have repurchased 458 million ordinary shares at a cost of $3 billion. A scrip dividend alternative is not being offered in respect to the fourth quarter dividend, and we do not anticipate offering a scrip election for the foreseeable future.

Now turning to guidance and the first quarter of 2020. In the Upstream, we expect reported production to be lower due to the impact of our ongoing divestment program and planned seasonal maintenance and turnaround activities. While in the Downstream, we expect lower industry refining margins and wider North American heavy crude oil discounts.

Turning to guidance for the full year 2020. Upstream underlying production, excluding Rosneft, is expected to be lower than 2019. I will return shortly on that point. Organic capital expenditure is expected to remain towards the lower end of our $15 billion to $17 billion range. The DD&A charge is expected to be slightly below the 2019 level, reflecting the impact of divestments.

We expect the other businesses and corporate quarterly charge to continue to average around $350 million. The underlying effective tax rate is expected to be below 40%, and Gulf of Mexico oil spill payments are expected to reduce to below $1 billion net of tax adjustments. As usual, we will provide updated rules of thumb for 2020 on price movement impacts for the year and expect to publish these on our website by the end of this month.

I will now provide some detail on the segments and progress towards 2021 cash flow targets. Turning first to the Upstream, where we continue to make progress against our 2021 production and cash flow targets. We've delivered 24 major projects since 2016, including the December start-up of the Alligin field in the North Sea.

These projects range in size, scope and complexity and have, on average, been delivered on schedule and under budget. They are currently producing around 700,000 high-margin barrels a day. We have 11 projects to go, including our West Nile Delta Raven project, which is mechanically complete but is currently addressing issues identified during commissioning. The project is now forecast to start up around the end of 2020. In addition, we expect to start up 3 further major projects in 2020.

Projects in the Gulf of Mexico and North Sea will leverage existing infrastructure. While in India, we expect start-up of the first project in the KG-D6 integrated development series and is eventually expected to contribute to over 10% of the country's projected gas demand.

Our 2021 start-ups are also on track. Ghazeer in Oman is expected to come on stream in early 2021 and boost production by 500 million cubic feet per day and is currently ahead of schedule, under budget and 90% complete. Other material projects, including Mad Dog Phase 2 and Cassia Compression are also progressing well, with both around 65% complete.

In BPX Energy, we continue to focus on value over volume, diverting investment from high-volume, lower-margin gas production to higher-margin oil production in the Permian and Eagle Ford basins, where we continue to ramp up activity.

We expect full year underlying production to be lower than 2019 due to declines in lower-margin gas basins. We expect reported production to be lower due to the above factor and the impact of the ongoing divestment program. We estimate the impact of divestments to be in the range of 200,000 to 250,000 barrels of oil equivalent a day in 2020. Of this, over half comes from lower-margin onshore U.S. gas production and much of the balance from lower-margin oil.

So while we see 2020 as a transition year, we remain confident in the delivery of $14 billion to $15 billion of pretax cash in 2021, this is driven in large part by the expected delivery of around 250,000 barrels of oil equivalent per day from major projects still to come relative to 2019, most of which is due in 2021; and our target of $1 billion of free cash flow from BPX Energy, supported by the ramp-up of liquids production and the realization of synergies, which we now expect to exceed $400 million by 2021.

In the Downstream, we continue to make strong strategic progress towards our 2021 targets. In 2019, earnings stood at $6.4 billion, reflecting a further $1.3 billion of underlying earnings growth in 2019 and bringing total underlying earnings growth since 2016 to $2.3 billion. This puts us firmly on track to deliver our target of more than $3 billion growth by 2021 while maintaining pretax returns of around 20%.

Moving to free cash flow. 2019 pretax cash was $6.5 billion at our planned conditions, net of capital investment of $3 billion. We remain on track to deliver $9 billion to $10 billion of pretax cash by 2021 with the drivers of this growth being, firstly, a recovery of crude and product differentials, which impacted our 2019 results by around $1 billion.

As I've already mentioned, last year was one of the worst refining environments we have seen since the financial crisis. We expect differentials to widen and already see evidence of this in 2020 with North American sour crude and Brent-euros differentials back above our 2020 and 2021 planning assumptions, partly reflecting the introduction of IMO 2020 regulations.

Second, we expect lower turnaround levels in both 2020 and 2021, following record activity over the last 2 years, as we optimize our schedule to capture opportunities in the IMO 2020 changes. And finally, we expect further underlying earnings growth from each of our businesses. It fuels marketing, continue to grow our differentiated retail offer and scale-up of our new market entries, while developing EV positions across China, U.K. and Germany.

In refining, delivering around $1 billion of further earnings growth over the next few years from our business improvement plans and digital operations. In lubricants, increasing growth market exposure and premium lubricants while diversifying into adjacent market spaces and DV products. In petrochemicals, selectively investing in an attractive and growing market, developing technologies to lead the market in circularity as with BP Infinia.

Across the Downstream, we have a strong track record of underlying earnings growth, delivering more than $5 billion of earnings growth over the last 5 years. Looking forward, we have a clear strategy with a focused activity set that underpins the growth momentum to 2021. This progress in the Upstream and Downstream gives us the confidence that we're on track to deliver our 2021 group targets. We are staying disciplined with our capital and maintaining annual organic capital spend within a $15 billion to $17 billion range. We remain confident that return on average capital employed will exceed 10% by 2021 at planned conditions.

On divestments, we have now announced $9.4 billion since the start of 2019 of the $10 billion package, which we now expect to increase to $15 billion by mid-2021. Net debt fell by $1 billion in the fourth quarter. And as further proceeds are received, we expect net debt to continue to decline and gearing to move towards the middle of the range of 20% to 30% through this year, assuming recent average oil prices.

In summary, strong operational momentum is driving growing free cash flow. We remain confident in delivering the 2021 free cash flow target, and divestment proceeds are expected to continue to reduce net debt and gearing.

Taken together, this underpins our announcement today of an increase in the dividend to $0.105 per share and our ongoing commitment to sustainably growing distributions to shareholders over the long term. Let me now hand over to Bernard, who will conclude today's presentation.

[Bernard Looney, executive]

Thanks, Brian. I'm conscious I'm another voice in the room today, and I won't talk for long. But I wanted to be here for 3 reasons. First, it's been quite a year for BP and another strong year of strategic delivery and progress against the targets we have laid out for 2021. I'm really proud of where BP is today. We're in excellent shape.

Secondly, it's a time of change. Tomorrow is my first day in the job, an opportunity I never foresaw 28 years ago when I joined BP, but an opportunity I'm obviously very excited about. I look forward to talking and meeting with many of you in the coming weeks, months and years. And of course, Bob is stepping down as Chief Executive today. I want to personally acknowledge Bob and all that he has done for BP as well as the support he has given me over the years.

In many ways, BP wouldn't be the company it is today were it not for Bob and the leadership he has shown over the past decade. He leaves BP with a strong foundation, governed by a set of values and behaviors that define who we are, and competing again with real strategic momentum and a focus on growing value. I have some big shoes to fill.

As you're also aware, Brian has elected to retire and Murray is set to take over at the start of July. Brian has been the key architect behind BP's financial framework and the progress we have made in this respect. I'm delighted he is staying on through the middle of the year in support of the transition, and we will have a chance to acknowledge Brian in the coming months.

The third reason I wanted to join the call was reassurance. I want to reassure you of my personal commitment to some of our fundamental principles that are unchanged and will remain unchanged when we host our Capital Markets Day later this year: our commitment to safe and reliable operations; our commitment to our investor proposition, growing sustainable free cash flow and distributions to shareholders over the long term; our commitment to maintaining a strong financial frame, including the absolute focus on deleveraging the balance sheet; and importantly, confidence in the delivery of our 2021 proxy free cash flow targets with capital discipline at its core.

I'll talk more about this and my broader ambition for BP going forward next week. And beyond that, we will start to work towards hosting the Capital Markets Day. We have a lot to do to get ready for that. In the meantime, let me close by thanking Bob again for all he has done for this company. Bob, we will miss you.

Thank you for listening. I'm going to leave you in the capable hands of Bob, Brian and Craig to host the usual Q&A session, and I look forward to talking with many of you on the 12th of February.

[Operator]

[Operator Instructions]

[Craig Marshall, executive]

Okay. Thank you again, everybody, for listening. Good morning. We're going to turn to questions and answers. [Operator Instructions] On that note, let's take the first question from Lydia Rainforth at Barclays.

[Lydia Rainforth, analyst]

Bob, thank you, too, as well. Two questions, if I could. And the first one, if I just think back over the last 10 years, and obviously, you've seen that period of safety improvement that you talked about and then the modernization of BP, are you surprised at how quickly the business was able to modernize and sort of what confidence that gives you about what can happen going forward? And then the second question was a little bit more specific around the low carbon businesses that, obviously, we started to go back into. How do you think about whether BP can make money out of those and deliver competitive returns? Is it a case of looking at cost of capital for those businesses in a slightly different way?

[R. Dudley, executive]

Well, thank you, Lydia, and thank you for all your good questions over the years. Your first one about safety and modernization, I have to say, if you were in the company, it didn't feel like it was so quick because it's really been -- it was many years of small changes, including shutting down our facilities around the world and turning them around and retooling things, and getting the culture and speaking up and measuring everything. I think it -- I don't think it was that quick. But I think it was very, very thorough, and I think it's now firmly embedded in the culture.

And then with modernization, I mean, I do think we've very early on embraced, I mean, sort of big words out there, big data. But we really did begin working with some great third parties to work on the big data, which also combines, of course, with safety, but also optimization of reservoirs and how we produce all kinds of things. And this has been steady and has accelerated in the second half of this last decade. So thanks. I think we do have a culture that has firmly got its eye on safety and always thinking about how to modernize things.

On the low carbon side, we've made some big steps. We always, even through the Gulf of Mexico, retained our wind business, retained and began the biofuels businesses. We did move out of solar for a while. In some ways, it's remarkable that we kept not only some of the businesses but all the talent around low carbon. I think -- I hear people say, "Well, you only invest 3% of your capital in low carbon."

But this is where I think it would be good for many of you, as you think about these business models like the one at Lightsource BP, which is 50-50 BP with Lightsource acquiring it and taking from 1 country to 10 countries and has attracted somewhere between $5 billion and $7 billion of capital in that business. And we've taken it around the world. And you look at the economics of that, use solar, for example, in our operations, which means we replace maybe burning gas that can be sold, molecules for the country we're in. So it's -- you have to look at sort of corporate economics around it. And I think we get better and better and better and more efficient.

BP Bunge has got a great future. The combinations in Brazil, 11 mills in a country that will use the ethanol and the sugar for all kinds of things. So I think you're right, there has to be good return on capital on it. But let me ask Brian to add to that.

[Brian Gilvary, executive]

Yes. No, I think that's a good summary, Bob. And what I'd say, Lydia, the way we think about it at the moment is we will have, in some respects, just like we've done through every energy transition. As we're moving into new products and new sources of value, we may do some of that off-balance sheet, which is what you've seen around Lightsource BP and Bio Bunge in terms of what we're doing in BP Bunge in terms of Brazil.

Equally, things will come back onto the balance sheet, at which point where we think there is a viable business going forward. There is no question we've seen a rapid move in the market over the last 3 or 4 years. Solar now is very economic. And you can see that we'll continue to seed investments in smaller ventures, which will give us all sorts of information about how this energy market will transform.

And I also remind you, for example, wind is currently on balance sheet, sits inside our books and is very economic and makes a good return with the tax credits that come with it in the United States. So I think it's looking for things which are complementary to what we do and moving things both off and on balance sheet as we go forward. But I think it's a great time. As Bernard steps in, I think it's a really exciting opportunity for us in terms of what some of those opportunities might look like.

[Craig Marshall, executive]

Thank you, Lydia. We're going to take the next question from Alastair Syme at Citi. Alastair?

[Alastair Syme, analyst]

A couple of questions. One on the BPX business. You previously talked about $1 billion of free cash flow uplift from this business by 2021. So I'm just trying to figure out what the 2019 baseline is in that and how the gap gets bridged. If you could help split between synergies and growth. And my follow-up was really just to ask about Mauritania, Senegal. Those have a lot of exploration work in 2019, so I just wanted to get a status of where that asset is and when should we expect the next project to mature in FID.

[Brian Gilvary, executive]

Thanks, Alastair. So I'll just pick up the first question around BPX. Everything is on track in terms of the $1 billion of free cash by 2021. Activity we've ramped down in the Haynesville as we've ramped up in the Eagle Ford and Permian, as more takeaway capacity comes through. The synergy number we've now expect to be significantly higher than we first set. And I think as I already laid out for you, we're over 3x the level we thought we'd be at this point in terms of 2019. But everything is on track.

And the great thing about our new position, we've now pretty much sold out of all of the gas assets, which is what you saw come through as the final impairment charge that we saw around those packages. There's one small package left to do, but pretty much everything is announced around that. The focus now for Dave and the team is absolutely on the oil business. And everything we see gives us confidence in that $1 billion. But that's absolutely a promise that you should expect to see delivered next year.

And of course, we have the flexibility through this year as to how we ramp activity up, depending on what the price signals are that we see from the marketplace. I mean it's worth just pointing out that on the gas side, we've seen something like a 40% drop across the sector in the gas rig count year-on-year, and about 25% of all the gas you see in the United States comes from associated oil. And that started to taper off a little bit at the back end of last year, but we'll be able to ramp that activity up as opportunities arise.

[Alastair Syme, analyst]

Brian, can I just ask if the business -- if you strip out acquisition costs, if it was free cash positive in 2019.

[Brian Gilvary, executive]

We wouldn't normally give you that specific level of detail, Alastair, but we'll come back to you before the end of the call. But we don't normally provide that. It's a choice because it ultimately is the capital. We did ramp capital down in 2019 to somewhere around about $2 billion that we talked about at 3Q versus -- we were planning also to around close to $2.5 billion. But I think it would be too early. All the synergies will come through this year given where the run rate was as we exit this year. Now we're expecting synergies somewhere close to $400 million. So I would anticipate it will certainly be $1 billion surplus next year, but we wouldn't normally give specific guidance around '19.

[R. Dudley, executive]

And Alastair, this is Bob. On Mauritania and Senegal, those of you who know this project, it's clearly got the potential to be a long-term, large, integrated LNG business with tens of TCF of gas have been discovered. The FID, which we announced in December '18, is in place. The interstate cooperation agreements between the 2 governments of Senegal and Mauritania has been ratified. The unitization has been ratified, and the sales and purchase agreement for the LNG should be coming along really any time now. And the -- so Phase 1, in execution; the planned phases 2 and 3, which are progressing through their optimization right now. So that project is on track. I've got a lot of faith in that.

[Craig Marshall, executive]

Okay. Thanks, Alastair. We'll take the next question from OS Clint at Bernstein. Os?

[Oswald Clint, analyst]

Perhaps first question, I just wanted to ask about the dividend. I guess I walked away from 3Q thinking gearing levels above 30% is a tough level to talk about a dividend hike in terms of your Board meeting. So I just wondered if you could share a bit more color about what happened in this quarter's meeting surrounding the dividend. And is it really just confidence in the 2021 delivery, which Brian has actually spoken to this morning? But have you really interrogated all of the assumptions that underpin Upstream and Downstream delivery here because, obviously, there are some other companies out there that -- get 12 months away and start to worry about macro affecting their kind of end period targets? That's the first question.

And secondly, and thank you very much, Bob, for all your time over the last couple of years. I wanted to ask you, as we think about the value proposition with the Reliance Downstream marketing venture now from here, if you could just perhaps reflect on the Upstream Reliance deal. I guess you did it almost a decade ago. Has that deal delivered everything you thought it would? If anything went wrong or slower and if there's any lessons learned that we should take from that and kind of transplant into the Downstream venture.

[R. Dudley, executive]

Thanks, Oswald. Our partnership with Reliance has been great. I mean, I made no secret about the fact that I was disappointed really with the Indian government at that time for not sort of following through on what I would call the market gas pricing, which was clearly part of the contract. So it took some patience and perseverance. However, we've since gone out and found more gas around there. We just shut down the production facilities in D6 to be able to bring on now shortly, March or April, the new production from the satellite fields around it. So significant production will come back on stream. So that's all been really well-engineered and cost-effective program.

I think for the lessons learned there, and I remain very optimistic about India as a country. Well, you can argue the growth, but roughly 6% growth, I think, in one of the largest countries in the world just beginning to travel in many ways. We look at the Downstream JV as not just one on liquid fuels but also mobility. We'll take all the things that we're working on, electrification of vehicles as well as liquid fuels, marketing, convenience marketing with a great partner who has all this broad-banded up so that it will be fast and quick, a lot of efficiencies, because Reliance is quite a talented company as well.

So we'll rebrand it. It will be called Jio-BP, which I'm told in Hindi means long life BP. But it's a combination, of course, of the 2 companies. The commitment is there. We should close that deal here in first half of the year.

[Brian Gilvary, executive]

And then coming back to the question on dividend dollars. I mean, I think a lot has changed between 3Q and 4Q around uncertainty in terms of the outlook vis-à-vis balance sheet. I think, firstly, to start with, we laid out the targets in 2017 out to 2021 that had a significant surplus free cash to the tune of $5 billion to $6 billion over and above the $8 billion dividend that we have today. And we moved on the dividend as part of that strategy in 2Q '18. So we're in the sort of the right post code in terms of timing around dividend.

The uncertainty around 3Q, I think what we've seen through the fourth quarter is a major derisking of the uncertainty around balance sheet, which investors have said quite clearly to us they're looking through for us to deleverage the balance sheet. And I think the combination of a strong set of earnings in 4Q, strong operating cash in 4Q, we've now announced $9.4 billion of the $10 billion package that we said we'd be doing over '19 and '20. So it's a year early and only $2.8 billion of cash came in around that package in 2019. So the balance -- you'd expect the majority of the balance with some payments out to 2021 to come through in 2020.

We've also announced a further package of $5 billion, which we expect to announce by the mid-2021. CapEx is at the low end of the range. Net debt came down by over $1 billion in the fourth quarter. And one of the important measures was gearing came down from 31.7% at 3Q down to 31.1%, in spite of $2 billion of impairments associated with some of the Lower 48 gas sales, or just shy of $2 billion.

So I think all of the outlook look far more positive. They link back to macro, we worry less about. If you remember what we laid out in 2017, it was a $55 a barrel Brent real. So we've been in the sort of $60, $65 range. We'll come back to that in terms of what the macro outlook looks like. There is no question coronavirus, I suspect, will impact demand this year. We're currently seeing, for the year, something around 300,000 to 500,000 barrels a day impact on demand growth that we were looking at around 1.2 coming into this year. And of course, that will unfold as the year progresses. It may be more or less than that, but that would be our current estimations. And then the question will be whether OPEC balances or not.

But just reflecting on the last 10 years. I mean, it's sort of relevant, I think, vis-à-vis, Bob's tenure. We've dealt with oil prices that have gone from $100 to $28 a barrel. So we have the flexibility to react. What we laid out for you in '17 was a strategy out to 2021, where we'll be able to manage the downside and the upside. In the last 2 or 3 quarters, certainly through last year, we had the benefit of upside in oil prices. Oil prices may stay around 55% in the prompt right now, given what we're seeing around coronavirus, but they may [ regrow ] back by the end of the year. But I think we'll see how that plays out.

But from our perspective, there is no question now you can see probably somewhere in the range of $7 billion to $9 billion of cash from divestment proceeds coming through this year. If you think about the balance of $6.6 billion of the $9.4 billion we've already announced, say 40% of the balance of the $5 billion to come through maybe this year, it sort of says the backdrop is positive, and we've got growing free cash flow out to 2021 and 2021's on the pin. So I think when we looked at it in the round, especially the strong set of 4Q results and the further $5 billion package that we announced, it was sufficient to justify the dividend move now.

[Craig Marshall, executive]

We'll take the next question from Irene Himona. Irene, good morning.

[Irene Himona, analyst]

And Bob, congratulations on a job well done and all the best for the future.

So I had 2 questions. First of all, 2019 reserve replacement, 67%. I wanted to ask is this metric as relevant to BP these days as it used to be. Are you striving consciously to replace reserves in a world where there is an energy transition and we're looking at peak oil at some point? So how should we think of BP's exploration efforts and future reserve replacement ambitions?

And then my second question for Brian. So in Q4, underlying tax, 27%, and for the full year, 35.5%. So well below your guidance, and indeed, as we saw in Q3, well below your expectations. And I think you attribute that in the press release to lower deferred tax. Can you just help us understand what were the key drivers, let's say, the key unanticipated drivers that led to such a discrepancy between your expectations and the actual for the year?

[Brian Gilvary, executive]

So maybe if I just take the tax question first. It was indeed deferred taxes. And actually, in Q3, you remember, we talked about we're expecting taxes we see [to be higher]. The big change is the mix.

And if you look at the year, we just gone now and look at what do we think the tax will look like for 2020. Of course, we've got big swings in profit mix in terms of Downstream to Upstream and, then within the Upstream, depending on what prices are doing. So it's really hard to try and come up with an estimate ahead of time. We started to give guidance along the lines we did when we did the Abu Dhabi deal because, of course, the high tax balance that come with that, which moved our overall tax rate up from a long-term historic level of about 32% to something north of 40%.

We've done the roll-up now for next year, and we've tried to give you guidance here that it's somewhere probably below 40% next year. I would say the range about where we've actually come out this year, around 35%, 36% to 40% is a sort of a good range number. But there is such a huge swing arena in terms of the balance of profits between Upstream and Downstream and the tax characteristics of those.

The big difference in 4Q was really around deferred taxes around some specific assets that will roll forward. And of course, you've also got the impacts of some of the impairments as well that come through that move the tax number around. But even at the end of 3Q, we wouldn't have anticipated tax to be as low as it's come through in the fourth quarter.

[R. Dudley, executive]

Thanks, Brian, and thank you, Irene. Thank you for your comment as well.

On reserve replacement ratio, we have focused for some time now on value over volume. About a year or so ago, we removed reserve replacement ratio from our compensation metrics. Over the last 5 years, we've had a rolling average of 97% in terms of reserve replacement ratio. This last year, 67%, a little lower. We had fewer major development sanctions than typical in 2019 than we've had in the past. The reserves are still healthy. Our reserve production ratio, RP ratio, is still just around 14 years.

But I think the idea of being driven for just reserve replacement ratio is not how we'll drive BP going forward. It doesn't mean we're not going to, though, add reserves. We still have a whole set of projects out going on. We can see to 2025. But I feel that it's the kind of reserves you add, whether it's gas, advantaged oil, advantaged gas going to be key and that's I'm sure what will drive our project sanctions.

[Craig Marshall, executive]

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

[Jon Rigby, analyst]

And excuse the pun, but to drill down on that reserve replacement question a little bit. I noticed exploration charge, both the write-off of carryforward and also the activity in the quarter, has been dropping. It looks now like a pattern, maybe 2 to 3 years. So I just wondered is that reflective of some strategic decision-making around what you want to do around exploration.

And the second question is you've had a couple of, I think, comparatively, in comparative quarters, some very good trading results, but you don't call it out this quarter. But I do notice that your inventory run by ISC, the RMI is quite high for 4Q in absolute terms and if relative to the oil price, very high. So I just wondered whether you are able to characterize what you were doing and whether that is reflective of activity in the fourth quarter around trading.

[Brian Gilvary, executive]

Okay, Jon. I'll take the trading question first. Yes, RMI was driven up. It's actually by higher volumes that we were carrying through the year-end and by higher prices. So that's pretty much -- and that will swing around depending on activity. But we're carrying higher volumes through the end of the year.

In terms of performance of the business, it was a strong quarter for gas. If the more probably below -- there's sort of the [indiscernible] that you used, but below average, certainly, and below plan for the fourth quarter for trading for oil, which is really the big swings that we saw in the last sort of 10, 15 days of the quarter. But overall, for oil trading and gas trading, they both had record years in 2019 and certainly as strong a set of results as we've seen in recent years and certainly over the last decade.

So a lot of things went in the right direction. Some quarters were stronger. Some were weaker for each of them. But overall, it's been a good year for the trading business. But the RMI activity was really about volumes. It's about higher prices.

[R. Dudley, executive]

And Jon, you were asking -- yes, drilling down on exploration. I mean we're still clearly continuing to explore. We've drilled exploration wells this year, 2 of them in Egypt, Gulf of Mexico, 4 of them in Trinidad. We've had 3 announced discoveries so far this year. We've got a whole plan of exploration going out forward.

And in terms of FIDs, we see about 10 projects in '20 and '21 that we would consider FID-ing that are coming down the pipe. We haven't announced which projects exactly, but they're spread across the world from Angola to the Gulf of Mexico, Trinidad. And we've got -- in '20 and then we've got about 7 others that move around from Angola, the North Sea, Australia, Senegal, couple in the Gulf of Mexico and maybe one in Egypt. So we will continue to explore. I'm not sure if that exactly got to your question.

[Jon Rigby, analyst]

It was really just whether this is just a reoptimizing of risk as you splinter into the 2020s and how you apply your capital to exploration. But I think that captures it.

And just also to add my thanks to you for the past 10 years and good luck in the retirement.

[R. Dudley, executive]

Thank you, Jon.

And I'll just add to that, that to your point, yes, we will recharacterize exploration and risk and think about exploration combined with access, which often doesn't necessarily require exploration drilling. We've been steadily reducing our exploration now for a number of years, and we'll keep doing that. We'll focus a lot on, as you'll know, ILX or for Red-led exploration in our existing businesses, focusing around where we already have the facilities, most certainly. Thanks, Jon.

[Craig Marshall, executive]

Okay. Thank you, Jon. Now we'll take the next question from Chris Kuplent, Bank of America. Chris?

[Christopher Kuplent, analyst]

And can I just echo Bob and Brian, thank you for all your help over the years.

Just 2 quick questions, I hope. The 2020 production outlook you've given, of course, production will be impacted by disposals, but you're already pointing at an underlying decline as well and you're referring to low gas margin basins. Does that refer explicitly to BPX or others as well? So any bit of color would be helpful.

And secondly, a bit of a wider question. You said you've completed the buyback program. What do you see the role of buybacks within your progressive distribution policy going forward?

[Brian Gilvary, executive]

Okay, Chris. I just pick up the first part of that. Reported production, I think we've said already today, you'll see about 200,000 to 250,000 barrels of oil equivalent per day that we've disposed out of the asset base. So you'll see that come through this year, which is why reported is lower.

In terms of underlying, you've got lower activity in Haynesville. So you think from a value over volume perspective, that's a good thing. So the rig count is down, I think, just 1 rig or 2 rigs. I think it's about one rig now down in Haynesville. So that will be lower underwriting production. There are lower volumes coming out of Trinidad to do with some infill wells we have there. And of course, you've also got the impact of Raven being delayed out to the back end of this year from last year, which we would've anticipated as part of the underlying growth this year. But they're the 3 major drivers of why the underlying number will be slightly down.

In terms of distributions, the buyback is now complete in terms of what the scrip that we've issued since the third quarter 2017. So that was a big signal, which I probably should have alluded to earlier, having that also behind us. I mean there are 2 things which have helped with the balance sheet: there is completing the buyback, which I think has been good that we promised to do that and we've done it; and the second thing, of course, is Deepwater Horizon payments are now down to below $1 billion a year, around $1 billion a year post tax out to 2032. So that's taken a big piece of risk off the balance sheet.

In terms of further buybacks, I think all options are open within the financial frame, especially given where the equity value sit today. There's no question that's an attractive proposition. But that's really one for the broader financial frame conversation with the Board as we progress through this year, and Bernard will lay out next week his ambition for the company going forward. But I think buybacks will always be an opportunity in terms of our armory of things we can do around distributions, especially when we think the equity value of the company is significantly over -- valued above where we see the market trading.

[Craig Marshall, executive]

Okay. Thank you, Chris. We'll take the next question from Thomas Adolff, Crédit Suisse. Thomas?

[Thomas Adolff, analyst]

Two questions from me as well, please. Firstly, a few years ago, you had a number of gaps in your Upstream portfolio, and they included the Permian and Brazil, and subsequently, you filled them. I was wondering if you can give us an update on Brazil, it's gone quiet somewhat, and whether you're overall happy with the portfolio you have today. Obviously, Suriname and Guyana seem to be getting quite hot.

And then secondly, on Russia. Bob, you have a very long history working in Russia, starting with Amoco, then with TNK-BP and then, of course, today with BP and Rosneft. And I understand that this partnership with Rosneft is very important to you, and you emphasized the importance of partnerships and relationships on today's call. And I'm not sure if Bernard is on the call for the Q&A. But if he is, I was wondering whether Bernard can talk to us about the strategic rationale to have this stake in Rosneft and what it brings to BP and whether it differentiates your investment proposition.

[R. Dudley, executive]

Thomas, I'll comment on Brazil and then Russia, and let Brian also add to that. So in Brazil, we've -- we're happy. We've got a very big integrated business now in Brazil. It's not only the exploration side, but we've got biofuels, Air BP, the jet fuel, the trading operations and supplying and working with a power plant there for the use of gas.

On the exploration side, we've got some good acreage yet to be drilled. We had first well back in -- first quarter of '19 was a disappointment. We've been very, very careful in terms of adding to that. I think that we'll see exploration, not sure. We have stepped back from some of the programs here, like the transfer of rights programs there because it just looked pricy for us. So we're going to be very, very capital disciplined about what we're doing there. But it's obviously a great province for energy going forward.

On Russia, I'll just say Russia is really important to BP. I'll let Brian give a perspective so that you know it's not just mine because Brian -- or Bernard is not here, although, of course, we've talked to Bern, obviously, over the years. To me, it is a great partnership. It's been hard-won, and it's strategic I think. It's got enormous optionality, not only just for the shareholding in Rosneft, but also the joint venture projects that we've worked with and are working and producing from with Rosneft. But Brian?

[Brian Gilvary, executive]

Yes. No, I mean we've been in Russia for over 30 years. The current version of that looks very positive from BP's perspective. Rosneft is probably one of our deepest, most important strategic relationships. Bob has built that up over time. I was on the TNK Board myself for the best part of 10 years. So I know a lot about Russia and the challenges and the opportunities, which have come with it. I think -- we think about Russia strategically in terms of Rosneft in that relationship.

You have to remember because some -- I mean, I think there was some commentary at the weekend about linking this to climate change and to energy transition. I just remind people that Russia has signed up to the Paris climate accord They are doing a lot in terms of the energy transition. They've also signed up to UN sustainability goals, and they're one of the largest oil and gas provinces in the world. So I think it is incredibly important for BP that we continue to deepen that relationship that we have today and I think the things that Bob and the team have been able to do in terms of -- and with Bernard, the additional joint ventures we now have on the ground as BP in places like Taas, which are now generating revenues and production for us.

And I'd also say, while the ownership of Rosneft is an investment in the company and that pays us a dividend, that dividend underpins 10% of our own dividend and is very important for us going forward. So I think any of the news report that the idea that Rosneft will be nonstrategic for us in this next decade have got absolutely no founding at all. And yes, we just still see it as a very important relationship going forward. And I think I can probably say on the call, if Bernard was here, he was in Russia in the last few weeks to cement those relationships going forward.

[R. Dudley, executive]

And I would -- for those of you and many of you maybe don't follow Rosneft. But it's worth looking at because that company is transforming itself. It's a little bit like as TNK changed over the years, the emphasis on safety, efficiency, modernization, reductions of corrosion, baselining their flaring and greatly reducing their flaring. They are doing all the right things that you would expect. And so I think it's a company that's slightly constrained because of the OPEC+ agreements, but they've got developments down the road, great projects ahead of it. And so it's not just a passive investment. We work closely with them on all fronts.

[Craig Marshall, executive]

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

[Jason Kenney, analyst]

Bob, all the best for your retirement. I'm looking forward to the book of your time associated with BP. It should be fascinating. And if ever you're in Edinburgh, definitely, a wee dram is available.

I've got a couple of questions. Firstly, what's happening in Iraq? I think the Kirkuk expansion plans have stalled. And any insight as to where you think that can go over the next 5, 10 years would be interesting.

And then secondly, on the recycling startups, the position you're taking with Unilever and Danone to look at recycling of plastic. What kind of scale do you think that can grow to and over which geographies in the next decade or so?

[R. Dudley, executive]

Well, thanks, Jason. I think I'll take you up on the wee dram. I'm not sure about the book. I don't think I'd live through a book.

But I'd like to say I think there's a lot of things in your question there. So Kirkuk in Iraq, I would say Kirkuk is in hibernation for us. We've stopped. We've done a lot of work there. It's a big field. It's in quite tricky geography. It sort of stands between Northern Iraq or Kurdistan and Southern Iraq and the differences between the companies. To me, someday, Kirkuk will be some sort of key to solving some of the political or maybe being a union point politically, but just not now for BP.

The Southern Fields in Rumaila continue to operate safely with lots of vigilance there. We still have staff there, and that's going fine. Rumaila is just a key field for the Iraqi government. It supplies about 40% of the money to their treasury.

But on Kirkuk, I think I would stay tuned, but it's going to be a long wait, I think.

Now on recycling. Brian, you've been working with that.

[Brian Gilvary, executive]

Yes. And I think it's -- thanks for asking the question. I actually had somebody from another chemical company talk to me recently about it, about how impressed they were with this. I mean this is a big breakthrough. It's a technology BP Infinia that processes polyester plastics, particularly items that are difficult to recycle today. The consortium we've put in place includes exactly companies like you've said, Danone, Unilever, Britvic. The packaging, recycling specialists is in there as well in terms of ALPLA and REMONDIS in terms of the management, recycling specialists in terms of dealing with the recycling side of this.

I think it's a massive opportunity. It's something like $25 million that we're putting into a plant in Naperville that will test out the technology, and then we'll look in terms of full-scale commercialization and optimization. I think it's a huge opportunity for us. It is at the pilot plant stage that we'll be looking to build this to sort of see if we can make this commercial. But I think in terms of -- if you think about all the things we've talked about in the venture space, this is an example of a technology we developed in-house that could have major potential scale up. But it's really too early to say at this point, but all the indications are very positive. And if you look at the consortium we put together and the sort of brands that we're talking about and I think that sort of gives you an indication of just what the potential might look like. So it's a great example of technology in action within the business and coming from not the areas that we would normally talk about. But if you think about the circularity economy and be able to underpin the circularity economy, that's a big part of it.

[Craig Marshall, executive]

Okay. Thank you, Jason. I'll take you up on your dram as well. Let's move to Christyan Malek at JPMorgan. Christyan?

[Christyan Malek, analyst]

It's great to finally see the dividend raise and even better to see that [indiscernible] of $55 barrel breakeven for '19. So with that in mind, to what extent will BP continue to focus on delivering a lower cash breakeven to stay competitive within the oil macro frame that continues to be volatile? And how should we think about the critical path to raise dividends further, given you've chosen to raise the -- even when the gearing is above 30% still.

Secondly, a question on scaling up new energies and capital investment. While I appreciate there's much to look forward to better than Murray presenting the [ parts with ] carbonate, I'm just not sure how to solve for that, effectively walking the walk and investing more in non-oil energy solutions while gearing does remain so high. And with the higher dividend going forward, do you think BP has a capital frame to really drive a holistic plan to invest materially in clean energy? Or is it wholly dependent on your success with investments? So do we need a massive portfolio reshaping is basically what I'm asking.

And sorry to make it a third, apologies. Bob, I just want to echo Hlege's comments to thank you for your graciousness and humility in helping guide us through some very challenging times, 2 qualities of a great leader, if I may be permitted to say. And while we still have you, it'd be great if you could share what were the lessons learned from your tenure at BP and advice you'd give to new management team and the analyst community, especially as concerns around the future of fossil fuels continue to mount.

[Brian Gilvary, executive]

Thanks, Christyan. So the first one on the dividend, now, I think, just to make it clear, it was the move in seeing the trajectory of the gearing coming down through the fourth quarter that allowed us to make the move. Now if gearing has stayed up where it was or it even gone higher off the back of the equity write-offs, I think it'll be a more difficult decision. .

If you look through, though, something in the tune of $7 billion to $9 billion of cash coming through this year in deals that were pretty much done or we're fairly confident we'll get done through this year on a risk basis and the fact that CapEx is at the bottom end of the 15% to 17% range that we set for 2021, we have majorly derisked the balance sheet coming into this year, which I think gave the Board the confidence to move the dividend the way we have in the fourth quarter.

The breakeven of $35 to $40 a barrel still holds true for 2021 in terms of targets. Of course, it moves towards $40 the more that we distribute now through dividends because, of course, that's a measure based on where -- how much dividend you've paid out. So now we're paying out a higher dividend and we're not issuing scrip, you move towards the top end of that range, obviously, as we start to distribute. But no, this year, we'll be somewhere around mid-50s breakeven for the corporation.

Remember, Deepwater Horizon, which was $19 billion of cash, was paid out over the last 4 years. We've absorbed $10 billion or $10.25 billion purchase of BHP. In total, that's $30 billion of cash over the last 4 years and certainly the $10 billion over the last couple of years. I think we're in a very positive position now vis-à-vis where the balance sheet is and the trajectory through the first and second quarter this year. So I think that does give us confidence.

2021 looks well underpinned, and we did premise the 2021 targets around further distribution to shareholders. So I think we have a much clearer runway vis-à-vis the things that we can control. The thing we can't control, of course, is the environment. And as you saw through '15, '16, '17, we have a company that's flexible enough to deal with that in pretty much all the scenarios that you could start to paint out.

[R. Dudley, executive]

Thanks, Brian. And Christyan, thank you for your kind comments there.

And I'll -- maybe just a few things to think about in terms of lessons. And you all cover energy and oil and gas, which I think is one of the world's longest wavelength investment cycles. So that's what we're working in. And I think some of the things around that is because they're such long term, they do -- I do think of BP. We do relationships, not transactions because it's essential in such a long wavelength business.

Next, some lessons learned, and you all will know this. Culture is critical in any company in almost any industry. And in our case, safety, discipline around what we do and being a good partner is just really important and I think patience and perseverance in almost any difficult time. Step-by-step, there are no silver bullets, and not allowing anyone to believe that there's a silver bullet is very important.

And I just noticed that today, one thing I'm always struck by in terms of investing, I always go back to the fundamentals. And I would say, right now, we're in a world where sentiment seems to be more important than the fundamentals. And I think in reality, you'll always have to get back to the fundamentals, including the new energy transitions and how we do it to maintain a successful, long company that continues with its shareholder distributions.

And one thing I always learned, I learned it the hard way, actually, in Russia, but all of us in the company are shareholders, ourselves, so we need to learn to make sure we spend the company's money as if it's your money as shareholders. And that's a fundamental thing we try to drive in our own employees. But I'm kind of rambling now, Christyan. So next question.

[Brian Gilvary, executive]

And then just, Christyan, just to finish off on your question around capital frame. I think 2021's underpinned. We've got a $15 billion to $17 billion framework towards the bottom end of that range now, given the capital efficiency that Bernard and Murray and the team have been driving in the Upstream in particular, and I think you'll see more to follow on that.

Next week, Bernard will come out with his ambition for the company of the next phase of what that will look like. That will then set a frame and a direction for probably at Capital Markets Day at the back end of this year, where we'll then talk about 2025 targets and what the capital frame looks like around that. But I think, certainly, without wishing to steal any of Bernard's thunder, I think more of the same on capital discipline is almost certainly coming as he talks about the future.

[Craig Marshall, executive]

Great. Thank you, Christyan. Thanks for the questions. We'll take the next question from Martijn Rats at Morgan Stanley. Martijn?

[Martijn Rats, analyst]

Yes. And also for me, congratulations with the successful and very long-standing career, and I appreciate all the guidance over the last couple of years.

I had 2 very short questions. Very briefly on the Raven project. I understand it's a year delayed. But could you elaborate a little bit sort of why that is? Because this was a project that was sort of reiterated to be on track for startup end 2019, so a bit more color would be appreciated.

And the second thing I wanted to ask is about the U.S. So BPX 4Q '18 over 4Q '19 still showed about a 10% decline in production cost per barrel. And I was wondering if you could comment on your ability to continue to drive costs there or whether we should expect a return of some inflation in the U.S. shale patch? That'd be much appreciated.

[R. Dudley, executive]

Thanks, Martijn. Maybe just on Raven. I know if Bernard was here, he would tell you how disappointed he is and the team are. I mean it's in the -- it's couched in the what has been a really good run of 3 or 4 years of projects coming in below cost, on budget and, in some cases, ahead of schedule. This one is delayed. It's delayed significantly. And it's pretty much a function of some corrosion issues that we picked up as part of the commissioning. It's going to take longer to resolve than we would have liked. Bernard himself has talked about it and how disappointed he is in where we are.

Nevertheless, it won't impact 2021, which I think is important. It's going to affect 2020, obviously. But we should be able to get full ramp by, as we commission towards the end of this year into 2021. So the 2021 targets are underpinned, but it's effectively around some corrosion issues around the installation that we have and the team have to deal with.

And then in terms of BPX activity, as I said earlier, we're on track in terms of delivering $1 billion of surplus free cash. We'll give you a bigger update on the first quarter around where we are around the next phase of synergies. There is no question that we're seeing more cost reductions coming in as part of that synergy number. But I think 1Q will gives us a chance to give you an update more fully on where we are with BPX now that we've got activity ramping in terms of Eagle Ford and Permian, less so in Haynesville, as I said earlier.

[Craig Marshall, executive]

Okay. We'll take the next question from Lucas Herrmann at Exane. Lucas?

[Lucas Herrmann, analyst]

And Bob and Brian, just to reiterate the comments of others, look, thanks very much for all the help, guidance, persistence over the years.

Two modest questions, if I might. The first was just typically this time of year, you give us a better idea of what's going on in the fuels retailing business, where profit might've been. So really, just if you could disclose what the full year breakout of numbers in that business were.

And secondly, I just wondered if you could comment on the LNG trading business at all, not least given the STAR report and incremental volumes that you'll start to see there, the extent to which those volumes and the -- volumes are effectively underpinned by forward sales into end markets. That's it.

[Brian Gilvary, executive]

Yes. So in terms of LNG, you know that we run the portfolio. It's about 2/3 equity, 1/3 on merchant or commercial. No significant equity volumes to come on this year other than the ramp-up of existing LNG that we have. So it's really around the short and longs that we have. We've got some exports coming out of the United States if they flow at these levels.

I think what you're going to see in the first half of this year, coming out of the mild winter, Lucas, in the States, that prices are going to remain pretty soft at the levels that we see today. We think that will clear out by the time we get to the sort of back-end of this year. So you'll start to see some underpinning on the gas price.

But I think we've pretty much held the position which is that we were pretty bear-even. Third quarter, we talked about this. We've been pretty bearish gas prices certainly through 2020. And the question is do you start to recover in 2021 or 2023, given the 2 effects of gas being backed up in the United States and big LNG projects around the world coming on, where we will be moving some of those volumes through our merchant business.

But I think LNG is all about -- in terms of LNG trading, it's all about the optionality and making sure that we retain those options with different price points that allows the team to optimize in the way they have and had a very successful year last year.

[R. Dudley, executive]

And thanks, Lucas. So a few things on the Downstream: we've had a good track record of growth, 2019 earnings were $2.7 billion, pretax returns of more than 30%, plans to grow earnings by another greater than $1.4 billion from 2016 to 2021.

I mean really, our focus is on the differentiated retail. It's the most material part of the fuels marketing. We try to develop strong market positions, the brand, the distinctive offers. The retail network has grown quite a bit. We've had $1.2 billion in nonfuel gross margin as well. We're up over 10 million customers a day. We've got a 20% premium fuel volumes growth since the active fuels were launched last spring or in the spring of 2016.

We have built up these strategic convenience partnerships, like we have M&S in the U.K. and others in Germany and the Netherlands, 1,600 of those by the end of '19. We've got 1,250 retail sites in new markets such as Mexico, Indonesia and China, and we've got over 520 in Mexico and more than double the volumes in 2019. So these are working well. Mexico has really been a success as that -- despite what you think about what's happening in the country, that has been very successful. And then, of course, in December of '19, we signed the agreements with Reliance to form that big fuels retail and aviation JV across India, which, immediately on closing, will provide about 1,400, 1,500 sites that we hope to grow to 5,500 across the highways of India over the next 5 years. So I could go on with things...

[Lucas Herrmann, analyst]

But Bob, sorry to interrupt and to push. Just in terms of the financials coming out, bottom line EBIT, what -- typically, Tufan would have broken out a number this year, yes, the performance of the retail business as in split from refining. I think last year, it was $2.8 billion or so of EBIT. Do you have a number for this year? Or should I talk to IR later?

[Brian Gilvary, executive]

Yes. No, Lucas, you can pick it up later. But I think there is continued underlying growth in EBIT. It's coming out of places like Mexico, where we're still growing the new market entry there. But we'll come back -- we'll circle back at the end of the call. The actual figure at the moment around 2019, I think the cumulative now is something north of $0.5 billion for this year, but we'll need to come back and confirm that, which we will do through IR.

[Craig Marshall, executive]

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

[Peter Low, analyst]

You're guiding to CapEx being at the lower end of the $15 billion to $17 billion range again in 2020. Is that a decision you've taken based on the current commodity price environment? And can you perhaps give us some color on where the flex have come from, i.e., where have you chosen to either rephase or defer spending you could have done?

[Brian Gilvary, executive]

I mean I think actually -- look, this is more of the same in terms of Bernard and Upstream. If you remember when we set out 2021 targets, Upstream had a range of $13 billion to $14 billion of capital, which it's always -- hindsight's a wonderful thing. But back in '17, we would've anticipated by now we'd be at the top end of the range. .

What we've been doing in the Upstream, in particular, is continuing to drive capital efficiency. CapEx in '19 was down to below $12 billion in Upstream, set against that $13 billion, $14 billion we set. It's about capital efficiency. I think as you see Bernard go from Chief Executive Upstream to Chief Executive of the company, you're going to see more drive on capital efficiency. I think Bernard would say if he was here, there's more that can be done in the Upstream.

So the actual summation of where we've come out, even having absorbed the capital now for BHP and the BHP-BPX transaction that we did, that we'll comfortably be down towards the bottom end of the range. And in some respects, that's not so much set by the macro. It's a function of where we are in terms of the -- we're sort of 12 quarters into the 20 quarter strategy, and it creates some flexibility from a risk perspective if we see a serious downside to the oil price over the next 6 to 9 months, depending what happens with coronavirus.

So I think it's the -- it's a conservative assumption, and I think it's the right assumption. But we are continuing to see continued deflation in the Upstream as we go forward.

[Craig Marshall, executive]

Peter, thank you. We'll take the next question from Henry Tarr at Berenberg. Henry?

[Henry Tarr, analyst]

Just a couple. So one, back on the refining environment. I think you talked about the improving of the underlying environment, hopefully, through the rest of this year. What would you need to see for that to come through? I guess IMO has not yet played out, as some might have thought, and it looks to be kind of too much capacity currently in both pet chems and refining. So how confident are you that we'll see an improvement there over the coming quarters?

And then just, secondly, on divestments. Given the challenging environment, how easy has been to strike deals? And I guess you've got the further $5 billion as we look into 2021. Are there any sort of areas specifically where you're looking -- where you think there's interest around divestments?

[Brian Gilvary, executive]

So let me pick up the divestments first because a big chunk of it was the purchase of BPX's BHP assets and the selling off of BPX's old dry gas. The difficult assets to being sell has been the Lower 48 gas assets. We're pretty much now done with those. And there's been less issues with selling the balance of Midstream, Downstream, Upstream assets, certainly Upstream in terms of oil-linked assets that you've seen in the North Sea in the fourth quarter, so less of an issue with those. We've now done $9.4 billion of the $10 billion as announced. The balance will come very shortly.

And then we've got another $5 billion package. So the $5 billion package is going to be a mix of Upstream, Downstream, Midstream. So it's across the piece. And there'll be some portfolio options in terms of less price-sensitive things that we can do inside that $5 billion, so very confident.

And I think -- look, the -- our M&A team, I think their track record now must be somewhere up to $75 billion to $80 billion, if not $85 billion of disposals over the last decade. So we have a pretty hot, very well-tuned machine. And it's been particularly well-tuned through 2019 as it's had to deal with some of the private equities that we had to deal with in terms of Lower 48 gas. That won't be an issue, I believe, going forward.

In terms of refining margins, actually, we are starting to see MARPOL kick in. I mean it's now active this year. It takes effect March 1. It came into enactment this year. People who have to rather deal with scrubbers use 0.5% sulfur or switch to LNG in terms of its use. But I think that will underpin margins this year, and we're seeing that.

You're going to have to start to see some of these stocks clear out. One of the things, particularly, you need to be [clear], of course, is the light heavy spread. And we will see the benefits of that up at Whiting, where it's up over $20 a barrel now, and I think it averaged somewhere close to $12 last year or certainly below $12. So I think that will -- from our position as a -- BP's position in terms of light heavy will help.

But you're right, there are some stocks to clear out before we start to see that recovery. But MARPOL, definitely in terms of distillate, is underpinning the market right now.

[R. Dudley, executive]

I think I'd add as a footnote. As we look at the scheduled turnarounds around the world and where our refineries are, we have very few coming up and others do. So we'll have a -- it looks like a pretty straight through period of uptime.

[Brian Gilvary, executive]

Yes. That's actually -- Bob, that's really important point. 2Q is going to be a high turnaround quarter, I think, for the industry. We've done most of ours in the last 2 years. So we'll have a relatively low turnaround year this year.

[Craig Marshall, executive]

Thank you, Henry. Okay. We'll take the next question from Jason Gammel at Jefferies. Jason?

[Jason Gammel, analyst]

And Bob, may I just add my best wishes to you for all your future endeavors.

Bob, you've taken over, essentially, leadership on BP's strategy for the energy transition. And I was hoping you can just leave us with some thoughts on what you think BP needs to do to be successful in the energy transition and maybe even any high-level milestones that we should be looking for out of BP.

And then my second question is on the divestiture, the incremental divestitures that were announced today. Just give us some details on that. And I know you don't want to identify specific assets. But does carbon intensity of the assets play a large role in your decision on whether to put them up for sale or not? And I'm really kind of thinking, particular, Canadian oil sands.

[Brian Gilvary, executive]

Yes. I'll just pick up the second part of that question to say that value over volume is what determines everything we do in strategy. We already deploy a carbon price across our whole portfolio. When we look at investments, that take into account -- it's only -- well, only. It's $40 a tonne, and we stress test up to $80 a tonne. So in some respects, that's already built into our valuation as we think of the carrying value of these assets going forward.

So I think -- I won't specifically point to any asset, which you wouldn't expect me to. But it is very much driven by strategy and think about value over volume in terms of portfolio going forward.

[R. Dudley, executive]

Yes, Jason. Thank you very much for your remarks, and thanks for some -- I saw you say in the paper. It was gratifying.

I think the thing as we go forward, we have completely reestablished what we're doing in the low carbon world. The Lightsource BP, as a business model, is quite unique and different that, I think, has clearly grown and been successful. And it attracts a lot of capital that we might not see coming into oil and gas projects, and I don't think we get the credit for that. It's going to continue to grow. I think BP Bunge is another one.

It's the business models that are different, I think, in some of the low carbon and new alternative energies that I think you'll -- you see us done, have done, and I think you will see us continue to do those. So it might require a little bit different way of evaluating them for you as you model things. I think the combinations of our businesses, the integration of our business, it'll be something that I think will -- you'll have to work with us on how we model those going forward.

I think returns are important. But many businesses go through phases and they change their business character over time, and so it's getting the right pace of doing that going forward.

Mobility is remarkably changing. Electrification of car fleets. And of course, there's going to be a huge amount of liquid fuels used in heavy vehicles and automobiles and air transport. But mobility, electric mobility is certainly coming to a city near you, I think. The combination of what we're doing with ultrafast charging and the liquid fuels and the convenience marketing is a key here. And I think you've heard -- Tufan doesn't like me to say it, we actually make more money off of a cup of coffee in London than we do a tank of fuel in terms of margins. So it's how we're using our assets differently and our real estate that I think is going to be part of this future as well.

Partnerships, we'll form some new ones, some interesting ones. You've seen us talk about the creation and the goal of 5 unicorns. And we think we have some of the technologies that can be able to do that, not necessarily in low carbon, but just our capabilities in terms of many things like acoustics going forward.

I think you may see us move into -- we're very intrigued with offshore wind, for example. We obviously think it -- we have offshore capability to get involved with that. You'll probably see that. We didn't for many years, quite frankly, because the gearboxes were in the salt zones. And now they're building them the size of the Eiffel Tower and they're out of that salt. And I think there's a lot of different things that some of the other companies are doing as well that you'll see us pursue. Stay tuned, Jason.

[Craig Marshall, executive]

Thank you, Jason. Okay. We're going to take the penultimate question from Pavel Molchanov at Raymond James. Pavel?

[Pavel Molchanov, analyst]

First, in relation to the ESG topic. Several of your European peers are starting to include scope 3 emissions in their internal targets. You have not historically wanted to do that. I'm curious if you might be rethinking that stance.

And then secondly, as it relates to reserve bookings, you mentioned the small number of project FIDs in 2019. That's the reason for sub-100% replacement. Should we anticipate a revival of FIDs this year as a means of getting the replacement back above 100%?

[R. Dudley, executive]

Well, I'll make a comment, Pavel, on scope 3 emissions. We do report scope 3 emissions. It's a myth that we don't, but we do. But scope 3 emissions has become a real shorthand thing when actually you look into it and you look at the 6 European oil companies, everyone defines it differently. So I think as a starting point, it would help if we all got a common definition on that, but we will. We will define and get clear how we measure it, and I would expect that. But it's too shorthand ahead -- at least for me, too shorthand because it just means so many different things to different people. And Brian, why don't you add to that and I'll come back to...

[Brian Gilvary, executive]

Yes. I mean just to that point, I mean, to Bob's -- what he was alluding. There were 15 -- I can tell you this from the Chairman of the Hundred Group of FTSE 100 directors in the U.K. There are 15 separate definitions within scope 3 that you could look at around scale 3 emissions. We've looked at this exhaustively over the last couple of years. And there is not consistency across sectors, and there's not consistency within sectors. So I do think we do need to get consistency on it going forward.

But I think it will be premature to talk about what we will now do in the next phase ahead of Bernard's ambition that he will lay out for the company next week. So I think there'll be more to follow around the specifics of that on the 12th of February. So I think we can -- if you're happy to leave till then, Pavel, we'll come back to it then.

[R. Dudley, executive]

And then on, Pavel, reserve replacement ratios, we really had the 5 FIDs in 2019 in the Gulf of Mexico, Atlantis, Seagull, Azerbaijan, the Central East projects, Thunder Horse South and our KG fields in India. And as we go forward, we see the ones -- the 4, 5 in 2020 and 7 or 8 in '21. It's never a smooth line with reserve replacement ratios. They kind of move up and down. It's not something -- we're really emphasizing value over volume. So I don't really know whether it'll be -- and I don't look at 67% or 70% as a big drop because we have been measuring about 100% over the last 5 years. Not sure. But again, it's value over the volume.

[Craig Marshall, executive]

Okay. Thank you, Pavel. And we'll take the final question from Bertrand Hodee. Thanks for being patient, Bertrand.

[Bertrand Hodee, analyst]

And congratulation, Bob, Brian, for all the good work and strong achievement at BP.

I have 2 small questions left, one on project delivery. So Brian, appreciate it you to comment on Egypt Raven delays. Can you give us an update on Tangguh [indiscernible] and Shah Deniz Phase II export? When can we expect those to start up?

And the second question is,related to the impact of divestment in your 2020 production. So Brian, you mentioned 250,000 barrel per day of negative impact from divestment. Can you give us a share of U.S. gas inside that number?

[Brian Gilvary, executive]

So yes. So in terms of projects, Tangguh expansion is on track. I think first production is something like 2021. So we'll come back to that at the end of this year in terms of how that looks. I don't have the other figures to hand in terms of Azerbaijan, but as far as I know everything on the project side is on track vis-à-vis what we laid out last year. And then, sorry, Bert, on your second question.

[Bertrand Hodee, analyst]

So the second question was around the divestment impact on your Upstream production in 2020. You mentioned 250,000 barrel per day of negative impact from divestment expected in 2020. I was wondering how much inside that relates to U.S. Lower 48 onshore, so to the natural gas.

[Brian Gilvary, executive]

Yes. Sorry. So the bulk of it will be natural gas-equivalent. There are some assets that we've sold off in the North Sea in terms of oil production. But the bulk of it will be Lower 48 gas. And you'll -- of course, that would be a negative cash right now, given where we see Henry Hub gas prices. So it doesn't really have an impact from a cash perspective. Very good. Thank you, Bertrand. Bertrand, we'll follow up with you after call on the projects specifically around Azerbaijan, but I don't think there are any issues around it.

[Craig Marshall, executive]

Okay. Thank you, everybody, for the questions. That's the end of the Q&A.

I'm now going to hand over to Bob. But just before I do, on a personal note, Bob, it's been an absolute privilege to work for you. And I know I speak on behalf of Investor Relations when I say that, and I'm sure that's echoed from the investment community. So thank you very much.

[R. Dudley, executive]

Well, thank you, Craig, and thank all of you on the call who Brian and I work with so closely over the really many years here.

I think rather than reflecting on the things that I often do at the end of the call, which is about safety, people and BP's culture and the strong portfolio of relationships are going to remain central to this company going forward. BP, I think, has an enormously talented, motivated workforce, and it's what they do that makes BP a great company, in my view.

And as for you all, our investors and our analysts, I think one of the cornerstones of our strategy has been this sort of steadfast focus on growing shareholder value with capital discipline. And admittedly, it took us a while to get on that track. But set against this backdrop of all the challenges and the volatility we've done, I think it's been good. I think we're delivering that investor proposition that many of you have challenged us on over the years.

I met a great number of you all around the world. And quite frankly, I never failed to be impressed with your interest in the company and the industry, your knowledge, the challenge you've given us and the advice many times and the support you've given us at BP. So you have my thanks. It's been a -- for me, a real privilege to work with you and a real pleasure, at least most of the time. Some of those meetings were not always that great, but most of the time. There were a few years there. So I hope you carry on with that same dialogue with Bernard and the team. He takes over with Craig and his terrific IR team.

This is a bit of a historic moment because I'm sharing my very last meeting with you at BP. Because when I walk out of this call, I'm going to go out to lunch with my team and I step down as CEO. So thank you all very much for sharing that.