Further re third quarter 2004

BP PLC
26 October 2004


press release

October 26, 2004


                    BP CEO LORD BROWNE SAYS DEMAND LIKELY TO
                   KEEP OIL AT $30 A BARREL OVER MEDIUM TERM

The following is the text of remarks by BP chief executive Lord Browne at a
briefing for financial media in London following the announcement of the
company's third quarter results today:

Earlier this morning we announced our results for the third quarter which I'm
pleased to say were very strong.
     
•    Replacement cost operating profits rose to $3.9 billion, an increase of
     43 per cent over the same period last year;

•    Dividends paid in dollars were up 9 per cent from last year, unchanged
     from last quarter;

•    Cash flow of $6.1 billion, which was used for capital expenditure,
     dividends and stock buybacks of $2.25 billion, involving 241 million shares.

I will cover all of this in a little more detail later.

First, however, I'd like to talk about the outlook for oil prices, inflation in
the prices of capital goods, capital expenditure and refining margins. Then I
will come back and give a brief review of the third quarter.

The recent surge in the oil price above $50 a barrel has raised many questions
about future prospects and whether or not there has been some fundamental change
in the oil market. To understand what has been happening I think you have to
begin with the context of recent history.

In the 1990s the price of oil averaged almost $18.50 a barrel for Brent. During
that period, prices above $20 a barrel were rare and temporary. In fact, towards
the end of the period, the oil price was much closer to $10 a barrel, leading at
least one well-known publication to forecast a new era of $5 oil. The price only
began to diverge from that $18 average after April 2000 when OPEC established a
target price band of $25 - plus or minus $3 - a barrel for the OPEC basket.

From then until the end of 2003 the OPEC basket price averaged $26 a barrel -
with Brent prices about $1 a barrel higher than that.

OPEC established a track record of achieving targets and of managing production
to keep prices at the desired level.

That level was clearly set by the needs for revenue within the OPEC states -
many of which have growing populations, with very large numbers of people under
the age of 20. In almost all those states the economy remains predominantly
dependent on oil revenues.

This year is proving to be an exceptional year for the oil price, which has set
records in nominal, though not in inflation-adjusted, terms.  The context for
this is set by demand.

Globally, in the late 90s and early 2000s, oil consumption growth has risen by
around 50 per cent of the rate of world economic growth. This year is an
exception, and oil consumption is expected to grow almost as fast as the economy
as a whole - by around 3.4 per cent compared with 4 per cent GDP growth. The
most important driving factor behind this shift appears to have been the demand
for energy-intensive products in China in particular.

Oil production has responded to this demand, and despite disruptions in one
location or another, supplies have been maintained. Production grew by 2.7
million barrels a day in 2003 and is expected to grow by 3.4 million barrels a
day in 2004 - which will be the fourth largest annual rise in history.

OPEC production in aggregate is close to an all-time high. Non-OPEC oil
production continues to expand as well. Between 2000 and 2003, non-OPEC daily
production increased by around 1 million barrels each year and this outpaced the
growth in demand by around 100,000 barrels a day each year.

In spite of this large rise in supplies, oil prices have risen. To some degree
this is because the rapid recent rise in demand has eaten into global spare oil
production capacity, now estimated to be 1 million barrels a day, compared with
an average over the last decade of 3 million barrels a day. As spare capacity
has reduced, prices have responded to demand in a more sensitive way.

Prices also appear to contain a risk premium stemming from concerns over a
variety of security issues which might affect production.

Oil price prospects will clearly depend on the future strength of supply, demand
growth, OPEC politics and perceptions of risks to political stability in the key
producing areas.

Non-OPEC production is expected to continue to grow in aggregate. Growth in
Russian production is expected to continue, but probably at a somewhat slower
pace.  Elsewhere, output should increase in Azerbaijan, Angola and the Gulf of
Mexico, with those increases partially offset by declines in the North Sea and
other parts of the USA. For the next three years, this net growth is estimated
to be around 1 million barrels a day each year - broadly similar to the average
increase over the last five years.

OPEC's crude oil production capacity should also grow and will be supplemented
by an increased extraction of natural gas liquids (NGLs).

The exploration and production (E&P) sector globally has been investing strongly
in the face of increased oil prices. For the top 30 publicly-quoted companies,
investment levels have risen from a low point of $62 billion in 2000 (following
the period of very weak prices) to $98 billion in 2003, a growth rate of more
than 15 per cent a year. We are likely to see further growth in 2004. All of
this supports the expected expansion of non-OPEC production.

The level of demand will determine how much spare capacity will be available.
For example, if demand growth goes back to a level of around 1.3 million barrels
a day per year, which is the historic average, then by the year 2008, assuming
no further geopolitical or other disruptions, global spare capacity should
return gradually to the more normal level of around 3 million barrels a day.

OPEC would need to keep its production only slightly above 2004 levels and so
most of the growth in OPEC's production capacity would increase the amount of
spare capacity available.

Lower demand would increase spare capacity further but if demand were to
continue to grow at this year's level the world would have no spare capacity.

These numbers appear rather precise but of course there are still remain
uncertainties as to the growth in supplies from both OPEC and non-OPEC
producers.

What conclusion can we draw from all this? First, it seems that on the basis of
the recent track record and the supply-demand balance, oil prices have a support
level of around $30 a barrel for at least the medium term, underpinned by OPEC
discipline and their needs for revenue.

Prices could spike above this level if demand strength outpaces the rate at
which additional production capacity comes on stream each year.

As far as BP is concerned, we will continue to use a Brent oil price of $20 a
barrel for the purposes of planning our activity levels in the E&P sector. This
allows us to maintain a portfolio of activities with strong returns. For the BP
Group, a planning assumption of $20 a barrel remains the way to judge the
balance between the amount of cash used for investment and that returned to our
shareholders.

Now let me turn to a separate subject: that of inflation in capital costs in the
E&P sector. Over many years the market prices of our capital goods have
increased in line with sector-specific inflation at around 2 per cent per annum.
We've managed, year after year, to offset this increase primarily by applying
new technology.

In addition, we plan our procurement of capital goods over a run of years. This
means that we take out contracts which extend over time and we build continuing
relationships with our key suppliers.

All of this provides us with prices which are more stable than those available
in the market. We think of this as supply chain management.

In the spring of this year, we began to see that the market prices for our
capital goods were increasing quite strongly. The increased investment within
the global E&P sector, which I referred to earlier, led to a tightening in all
our supply markets.

As activity levels rose, unused capacity was absorbed. Also, steel prices began
to rise significantly, adding further to the overall inflationary pressure in
the sector. As a result, the market price for our mix of capital goods was
rising at a rate of 10 per cent a year. Our supply chain management has offset
around half of this and we had expected in any event to offset 2 per cent
through normal activity. Overall, therefore, we are seeing a 3 per cent increase
in our capital costs this year above the level anticipated in our plans.

In addition our capital expenditure is not all made in dollars. When we had set
our 2004 plan a year ago the dollar was rather stronger. So the impact of the
weaker dollar has increased the dollar-based capital expenditure. All of this
then explains why in August we increased our estimate of E&P capital expenditure
from $9 billion to $9.5 billion for 2004; we now expect it to be just above this
level.

We also said in August that for the Group as a whole, capital expenditure for
2004 would be around $14 billion. This included an estimated increase of $0.2bn
in the capital expenditure of the customer-facing segments, again caused by a
weaker dollar.  We now estimate that total capital expenditure in 2004 will be
just above $14 billion.

What does all this mean for E&P capital expenditure for 2005? It's too early to
be definitive, but we can make some assumptions to gauge the possible impact of
the dollar and sector-specific inflation.

To get the baseline let's assume that the dollar holds its current value - and
that may be a brave assumption - and that the inflation we've seen in the sector
between 2003 and 2004 is 'baked' into our expenditure.

Increased activity in appraisal, as a consequence of exploration successes
(primarily in the Gulf of Mexico and Angola) will take our expenditure to the
top of the range we talked about in last year - ie $8.5 billion.

On top of that we should add $0.2 billion for the weaker dollar, and $0.3
billion for the sector-specific inflation between 2003 and 2004. The total
therefore comes to $9 billion.

If we see more inflation this amount will rise. So if the market price for our
mix of capital goods continues to experience inflation of 10 per cent a year; if
we succeed in offsetting 2 per cent of the price increase in line with our
long-term track record; and if our supply chain management offsets another 2 per
cent (a lower amount than in 2004 because of the maturing of certain contracts);
then the inflation we will actually experience between 2004 and 2005 would
amount to around 6 per cent or about $0.6 billion.

In these circumstances E&P capital expenditure would rise to $9.6 billion.

There may also be greater than expected inflation in the prices of capital goods
used in the customer-facing segments and their capital expenditure level will
also be affected by the strength or weakness of the dollar.

For the BP Group as a whole, all this means that capital expenditure is expected
to be just above $14 billion in 2004 and could be around $14 billion in 2005.
That is higher than we previously estimated.

Capital expenditure has risen because the dollar is weaker and world demand is
up and that has strengthened the oil price.

The contribution of the stronger oil price to our free cash flow overwhelms the
effect of this increase in capital.

Finally, a word on refining margins: strong oil demand growth has raised
refinery throughputs to record levels and has also resulted in increased
production of heavy, sour crudes and low product inventories. This has driven
the premium for light products over fuel oil to exceptional levels and has
favoured upgraded refineries over less complex sites. This is the current
situation and it is likely to prevail for some time. But, progressively, the
refining system is expected to adjust and to expand the level of upgrading
capacity.

Let me turn now to BP as a whole for the third quarter. Our strategy remains as
outlined in March of this year and we are on track to achieve the three targets
we have set:
     
•    Firstly, to underpin growth by a focus on performance, particularly on
     cash returns, investing at a rate appropriate for long term growth;

•    Secondly, to increase the dividend in the light of the considerations
     we have previously outlined;

•    Thirdly, to distribute to shareholders 100 per cent of all free cash
     flows in excess of investment and dividend needs, generally when the price 
     of oil is above $20 a barrel.

First, let me talk about performance. With strong oil and gas prices and
refining margins, the replacement cost result was $3.9 billion, up 43 per cent
from the third quarter of last year.

Adding back so called non-operating items (such as the amounts provided for
environmental remediation), the replacement cost result was $4.3bn, up 46% from
last year.  Underlying return on average capital employed was at 21.5% and cash
proxy returns were 36%, both up significantly.

During the quarter, the E&P segment produced oil and gas at an average rate of
3,906,000 barrels a day, up over 11 per cent on last year. Our investment in
TNK-BP contributed 945,000 barrels a day. These production rates were achieved
in spite of a significant programme of maintenance, the severe impact of
hurricanes, some of which tracked right over our facilities in the Gulf of
Mexico, and a blowout and subsequent fire at a partner-operated platform in
Egypt.

The damage caused by the last two events will also affect our production in the
fourth quarter but we still estimate that full-year production will be around 4
million barrels of oil equivalent a day. Our new production facilities - Atlas
methanol in Trinidad, In Salah in Algeria, Train Four of the North West Shelf
and Kizomba A in Angola - are all up and running, and the Holstein field in the
Gulf of Mexico and the Clair field in the UK are on schedule to come on stream
later this year.

At TNK-BP, oil production grew by 14 per cent. Cash dividends of $1.3 billion
have been received so far this year. The impact of the new tax legislation is
now being felt at today's very high oil prices. The first instalment payment of
$1.25 billion in BP shares was made to our partners. And more widely in Russia,
a significant discovery was made by BP and Rosneft at Sakhalin. This opens up
further exploration promise in this area.

Let me now turn to our refining and marketing segment. The widening of the
spread of value between light and heavy crudes and good performance in choosing
the right crude oils for processing has further added to the performance of our
refineries. With high product prices, margins available from the sale of fuels
were reduced. In spite of this pressure, our fuel volumes were held at a level
similar to that of both the third quarter last year and the previous quarter
this year.

In our gas business, we finalised arrangements for the sale of volumes of LNG to
SEMPRA in Mexico. This, with the recently announced contracts in Korea,
completes the marketing of the volume from the first two trains available from
the Tangguh field in Indonesia. We expect, subject to the finalisation of
contract details with the Government of Indonesia, to approve this development
by the end of this year. The gas field is expected to come on stream by 2008.

To support our growing LNG business, we placed orders for 4 more LNG carriers,
bringing the total to 7 with an option on 4 more.

There is no further news on our Olefins and Derivatives business. We continue to
work to put it into a separate entity with a view to a disposal, potentially by
means of an IPO, in the second half of 2005, subject of course to market
conditions.

Turning now to dividends, the dividend is unchanged from the level of the second
quarter, but increased by 9.2 per cent over the third quarter of 2003. As you
know, dividends are declared in dollars since this is the functional currency of
the Group.  The weakness of the dollar meant that, when translated into
sterling, the dividend increased by just 1 per cent.

Our finances are strong. We ended the quarter with gearing of 22.4 per cent but
we do expect it to be above 25 per cent and thus within our target band at
year-end. Our strong cash flow allowed us to continue strong investment -
capital expenditure was at about the same level as in the second quarter. And in
line with our target, we used the remaining free cash flow to buy back 241
million shares for $2.25 billion. This means that over the year we have bought
back 621 million shares for $5.5 billion while issuing (to Alfa Access Renova)
139 million shares. Share buybacks are continuing.

In summary, this has been a good quarter leading to strong distributions to
shareholders with prospects of more good performance for the rest of this year.
Plans for 2005 are developing in great detail but, overall, the activities
envisaged are in line with our strategy and are unchanged from those we set out
in March.


Further enquiries:

BP Press office, London: [phone]/4624

                                    - ENDS -


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