BP PLC Strategy Update
Feb 28, 2017 AM EST
BP.L - BP PLC
BP PLC Strategy Update
Feb 28, 2017 / 02:00PM GMT
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Corporate Participants
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* Bob Dudley
BP plc - Group Chief Executive
* Lamar McKay
BP plc - Deputy Group Chief Executive
* Bernard Looney
BP plc - CEO of Upstream
* Tufan Erginbilgic
BP plc - CEO of Downstream
* Brian Gilvary
BP plc - CFO
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Conference Call Participants
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* Theepan Jothilingam
Exane BNP - Analyst
* Christian Malek
JP Morgan - Analyst
* Blake Fernandez
Howard Weil - Analyst
* Jon Rigby
UBS - Analyst
* Jason Kenney
Santander - Analyst
* Robert West
Redburn - Analyst
* Lydia Rainforth
Barclays - Analyst
* Chris Kuplent
Bank of America - Analyst
* Irene Himona
Societe Generale - Analyst
* Brendan Warn
BMO Capital Markets - Analyst
* Jason Gammel
Jefferies - Analyst
* Colin Smith
Panmure Gordon - Analyst
* Oswald Clint
Bernstein - Analyst
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Presentation
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Bob Dudley, BP plc - Group Chief Executive [1]
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Well, hello everyone and welcome. We're here in London with many in the investor community and we are joined by more than 1,000 links around the world including North and South America, Europe, the Middle East, and Asia, a warm welcome to you all.
Before we begin, of course, 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 that we note on this slide and in our UK and SEC filings. So please refer to our Annual Report, the stock exchange announcements, and SEC filings for more details. These documents are available, of course, on our website.
Well, ladies and gentlemen, again welcome. Earlier this month, we published our year-end results for 2016, a year where we've come a long way forward from a year ago. That was mainly about looking back. Today, with this strategy update, we're focusing squarely on the future. We'll focus mostly on the immediate five years ahead, but we'll also be looking beyond that so that you can see what you can expect from BP in the longer term. Our aim is to provide you with an opportunity to understand what we're doing as a company and how that stands up as a strong, stable, balanced investment proposition that's good for all seasons.
We'll be giving more detail on our view over the next five years. We have a strong and disciplined financial framework already in place and clear plans and action for the near-term. These plans are made even stronger by our recent portfolio additions and the new long-term agreements. What you'll hear today is more about the measures we're taking to strengthen the path ahead and to ensure increasing value generation into the next decade.
The last few years have been a long and hard road for BP and you have stuck with us on that and we appreciate that support and for those of you who are new to BP, welcome. We're in a very different shape today than five or six years ago. We're stronger and much more focused on the future. We've used the past few years productively, first in recovery mode from the tragic accident and oil spill in the Gulf of Mexico. Second, to build in resilience to the current low price environment by improving our safety and our operational performance, getting simpler, more simpler, more reliable, and more efficient.
And third, to create a strong suite of growth opportunities in our upstream and downstream businesses and in due course in the area of alternative energy and other low carbon options. So what you'll be hearing is the coming together of these individual strands to create a business with strength. It's a business with resilience and discipline to compete, a business that is solid and sustainable year-after-year no matter where we are in the commodity cycle, and a business well aligned to changing consumer demands. We are a company that things long-term and right now our industry is changing very fast, but we are used to navigating change.
We spent time studying the changing demand patterns of our products ahead and the ways to adjust strategy in line with our view of the future trends. What we're sharing today is evolution, not revolution, but its evolution in the best tradition of BP with a clear focus ensuring the reliable delivery of significant value to investors for a long time to come.
In terms of the agenda, I'll start with an overview of the BP Group, you will then hear from Bernard and Tufan on their near to medium-term plans for their respective businesses. Then Lamar, who's been leading our long-term strategy work will take a longer-term view outlining the steps we're taking to position BP for a lower carbon future. Brian will update you on our financial framework and then I'll briefly summarize the key points before we take a short break. We'll then return for questions, making sure we allow plenty of time for you to ask anything and everything on your minds at that stage. So let's start with the environment.
You may have heard a lot from BP on this, so I'll just summarize briefly how we see things. We've seen stability returning to oil markets recently following the OPEC agreement. There is a sizable inventory overhang to work off. We remain optimistic about the market contuining to rebalance in 2017, but the road to a more balanced position still has some uncertainties. This environment requires discipline on costs and strong operating performance. It will reward businesses that can remain highly competitive at these prices. We believe that is a combination that suites BP.
Looking longer term, global energy demand will continue to grow increasing by about 30% over the next two decades on the most likely path with virtually all the demand growth coming from emerging economies around the world like China and India. Growth on this scale means the world will continue to require energy from all sources. We see oil and gas continuing to meet at least half of all demand for the next several decades as renewables grows much faster than any other fuel, but from a low base. Oil will continue to meet the majority of transport demand given its natural advantages. We also see natural gas growing faster than both oil and coal to help fulfill a global need for cleaner energy and lower additions.
One conclusion you can draw from this slide is oil and gas is a growing business out to 2035 as is renewables. As we think about our own strategy over the very long-term, we recognize the need to ensure we are able to continue to meet the energy needs of a changing world. We're a global energy company with the enormous reach. Our energy outlook gives us the ability to think about the future in a much more informed way and to engage with this transition to low carbon at the right pace in a very considered way. You'll notice today the steps we're taking within each of our businesses to think about the world differently and Lamar is going to spend a little time talking about our activities in this area.
First though, let me back up a bit to where we stand today. We spent the last several years reshaping what BP looks like focusing on what we do best and how we deliver. In 2014, we recognized early on that oil prices would be lower for longer and we acted quickly with a plan to right size our cost base and reset the capital expenditure levels.
In 2016, our capital spend was some 35% lower than the peak levels in 2013. Last year, we also reached our targeted $7 billion reduction in controllable cash cost compared with the 2014 number and we did that a year earlier. This agility has also given us the confidence to carefully select attractive growth opportunities throughout the investment cycle. Our focus on reliability and efficiency is showing up in the operational metrics and is helping to strengthen BP's underlying performance.
In the upstream, we brought 24 major projects online over the last five years and in 2017, we expect to see another seven startups. 2017 is one of the largest years for commissioning new major projects in our history. Bernard will update you on this and we'll tell you more about how we're working to deliver these projects on time and on budget. Over the last several years, we've also reshaped the downstream focusing on advantaged manufacturing assets, growth in our marketing businesses, and simplification and efficiency actions. Tufan will take you through this and how it's made the downstream more resilient and delivered $3 billion in underlying performance improvements since 2014.
Of course there's much more to do and the environment still has uncertainties as always, but we believe we are building a strong track record of operational performance and with that greater resilience. Since 2015, we've made substantial progress in resolving the remaining outstanding claims arising from the Deepwater Horizon accident, it's been a tough period for us. The cash flows have weighed on our financial framework, but we expect the financial impact of this to reduce materially from next year.
We're also moving towards rebalancing our financial frame while growing our business in a very disciplined way. Since the oil price downturn, we've made enormous progress in reducing costs and capital. We've embedded a culture of disciplined spending and we will maintain this discipline. This progress has given us confidence to make what we see as some great investments at the right point in the cycle. Many of you had expressed interest in our pipeline for growth post 2020. These new investments deepen our exposure in incumbent areas that we know well and we think of as strategic.
We've also steadily moved ahead with some key projects towards development near the end of this decade and beyond. I believe we're striking a balance between the immediate short-term and our ability to enhance the long-term value. We believe we're making the right choices for our shareholders while also sustaining and strengthening our healthy dividend.
Going forward, we see considerable momentum in our businesses and we will show you that today. Coupled with the ongoing capital discipline and strictly sticking to a disciplined capital frame with a maximum $15 billion to $17 billion per annum spend for the Group out to 2021. We expect this to drive our oil price balance point steadily lower each year as we bring on material growth and new free cash flow and Brian will show you the detail on that later.
So that brings me to what we want to focus most on in today's presentation. That's what the future looks like for BP and what you can expect from us. This is our proposition to you as shareholders. We're seeing patterns of demand changing. As we build that into how we think about our plans, we see our future with different horizons, things that we are doing near-term to make the business more resilient, things that we're doing that extend into the next decade to bring on growth and things we're just starting to do to secure our future over the much longer term, but no matter how one views the time horizon, there are three very important drivers to our proposition.
First, always executing in a way that's safe, reliable, and efficient. Second, continuing to build a portfolio that's distinctive, but also fit for the future. It's a portfolio that builds on our strong resource base and which positions us to be resilient and competitive in any environment. It's a portfolio capable of delivering sustainable growth over the long-term; and third, staying firmly focused on delivering competitive returns.
We believe this is about making the right choices, what we have often referred to as value over volume, investing in the right projects and activities to drive growth while maintaining discipline over our capital spend and ensuring sustainable cost efficiency in every part of our business. We expect to be able to deliver a return on capital employed greater than 10% by 2021. Getting all of this in place supports what remains our principal aim, and that is of growing sustainable free cash flow and distributions to the shareholders over the long-term.
Let me explain each of these drivers a little further. So the first piece of our investment proposition is safe, reliable, and efficient execution. This is simply good business. Getting this right will underpin the delivery of our growth aims in the near and longer term and this means reliable cash flows. We're confident that we have the right operating model to continue to drive progress. We will never be satisfied so long as we are having any accidents, harm to people or damage the environment.
We've come a long way in our safety performance since the beginning of the decade and for the most part we held those gains in 2016 and we continue to see improvements in some of the key measures as well and you can see that the same is true for operating reliability especially in the upstream. Our operating management system reinforces this, promoting continuous improvement and systematic rigorous ways of thinking.
I've often talked with you about our belief that having safety as our Number 1 priority is not just the right thing to do, it's also good business. I'll just pick one example, at our Rotterdam refinery, we've seen a steady decline in Process Safety Events from 12 Tier 2 events in 2012 to just one in 2016 and alongside this, the refinery's availability has increased with 2016 its best year in over a decade. We see examples like this right across our operations, good safety leads to reliable operation of our assets, leads to greater efficiency and ultimately better and more reliable financial results.
The next essential driver of our proposition is building BP's portfolio. So we're starting in a strong place having already reshaped the Group's portfolio to around $75 billion of divestments since 2010 including our interest in TNK-BP. While this was initially in response to the Deepwater Horizon accident, it required an immediate prioritization of our portfolio. It also put us on a road of shaping a portfolio with a much clear purpose, that of delivering value and in today's environment, we also see the benefit of having completed these transactions at a much higher point in the price cycle of our industry.
As we stand today, in the upstream, we still have a deep resource base. Excluding Russia, we produced 2.2 million barrels a day in 2016. In all, including our 19.75% equity interest in Rosneft, we are a 3.3 million barrel a day oil company with 17.8 billion barrels of oil equivalent reserves. This translates to 14.7 years of reserve life, which is very competitive for our peer group. This resource base has sufficient depth and quality to deliver growth right through the next decade as Bernard will show you in detail and this without the need for major acquisitions.
We expect to continue to deepen as you've seen us do recently through a combination of ongoing exploration and appraisal, new access, and selective additions to the portfolio. We will only look to add to the portfolio inorganically where we see this as strategic and accretive in terms of earnings and cash flow within a short time frame and where we do this, we will optimize the Group's overall capital frame to stay within the boundaries of our $15 billion to $17 billion organic capital spending range.
Now looking next at the make-up of this portfolio. Put simply, the core of our portfolio is a strong upstream and a strong downstream business. Our upstream has strong incumbent positions in many of the world's top hydrocarbon basins and a strong pipeline of growth opportunities. Our downstream also has a strong and focused footprint. It has advantaged manufacturing assets and considerable potential for growth in its marketing business. The value we generate in these core business segments is enhanced by the global scale of our integrated supply and trading business or what we call IST. It does this by joining equity sources of production to markets in ways that create additional value.
We think value chains between our businesses and with third parties such as with LNG, we create flexibility and optionality to bring more value from our assets and IST does all of this with very little requirement for capital. To illustrate this, we are the Number 1 marketer of natural gas in North America, selling enough to meet the combined daily needs of France, Germany, Spain, and the UK. We continue to expand the reach of this business and see more value to be added through leveraging our scale, connectivity, relationships with more innovation planned.
Next to all of this, in Russia, we have our equity interest in Rosneft, and the extension of that relationship through participation and opportunities beyond our equity interest. This gives us a position in Russia we consider to be unique in the industry. Rosneft is a resilient business and we expect its earnings to grow as it integrates Bashneft, it ramps up new projects in Russia, increases its domestic gas production, and expands its interest outside of Russia.
We continue to see our involvement in Russia as offering long-term value for BP's shareholders and it doesn't stop there. As we think more about the energy frontiers of the future, here again, we're not starting from a zero base. Our alternative energy business has been up and running for a dozen years. It incorporates a lot of learning from having already made significant investments in this space. Today, we have the largest operated renewables portfolio among our peers and we're busy incubating new options for the future and Lamar is going to share some of that thinking with you today.
So that describes the shape of the BP Group and as I've said before, it's a portfolio we like. Across every dimension, we see a strong platform for growth and we see how the strong relationships and partnerships that we've been building over decades has made this platform sustainable for the very long-term. At the same time, we don't just like the portfolio, we believe our portfolio is competitively positioned for today and the future. As an integrated business, the diversity of the portfolio balances exposure to commodity price and margin risk as well as geopolitical exposure and potential changes in the make-up of energy demand over the longer term.
Our upstream business, when viewed through the lens of production as it is on the chart on the left, has a very balanced portfolio with exposure to different pricing models and fiscal terms. More significant focus into the quality within each of these bricks, within these positions are some of the most attractive and established new hydrocarbon basins in the world with considerable potential for growth. To give a few examples, our advantaged domestic gas positions in Egypt and Oman bring competitive margins and long-term growth potential to our portfolio.
Many of our deepwater positions are built around legacy hubs with considerable potential to add near-field high-return projects that leverage the existing infrastructure and an integrated mix of equity and trading expertise brings selective best-in-class LNG into the portfolio such as the recent FID of the third train in Tangguh in Indonesia. It is one of, if not, the lowest cost of supply additions of its kind this year in the world. You can also see this focus in the quality within our downstream businesses.
We focused our footprint over more than a decade to create a set of advantaged manufacturing assets, a differentiated presence in marketing with growth market exposure and premium global brands. We're busy building a top quartile refining business and in 2016, our fuels marketing and lubricants businesses including Castrol lubricants together generated more than half of our downstream pre-tax earnings. These growing businesses enhance our resilience to volatility in the environment, our downstream is not just about refining margins. So across the upstream and the downstream, there is a combination of balance and quality, which I believe differentiates us amongst the competition.
Now there's always questions on this and I'll expand a little more on our strategic relationship with Rosneft. Russia remains one of the largest and lowest cost hydrocarbon resource basins in the world and their resources play an important role in long-term global energy supply. Through our 19.75% shareholding and our two board seats, we are supporting and influencing the strategic direction of the company and benefiting from a diversified portfolio of existing and potential projects within the Rosneft.
The company continues to produce strong growth and resilient performance, both operationally and financially. Rosneft has also access to international opportunities, expanding its participation in countries such as India, Egypt, and Germany. We've also built on this strategic relationship in signing separate stand-alone joint venture agreements including the Taas JV in Russian Far East, the Yermak exploration JV in Western Siberia, and the Volga-Urals exploration agreement, as well we are working closely to continuously improve the performance across our respective assets and companies. So building on 27 years of successful experience in Russia, our partnership with Rosneft adds still more balance and long-term optionality to our portfolio. It's an important part of our portfolio today and we expect it to remain so for the long-term.
Now focusing for a moment on growth and that is the growth we can see ahead in every part of our Company. In the upstream, we expect to add more than 1 million barrels per day of new oil equivalent production by 2021 from 2016. As we showed you last year in Baku, we expect our major projects to add net to BP around 800,000 barrels per day of new oil equivalent production by 2020 and continue to grow beyond that. This is over and above the natural decline we manage each year. These new projects should deliver on average around 35% better margins compared to the 2015 portfolio, contributing materially to the growth and operating cash flow over the medium-term. In addition, our recent portfolio additions are expected to add more than 200,000 barrels of oil per day equivalent production by the end of the decade driven by the renewal of the ADCO concession in Abu Dhabi and our deepening in Zohr in Egypt, which will start to ramp up second quarter in 2018.
Our portfolio of opportunities for the next decade is taking even stronger shape and it's set to drive growth over the much longer-term. At the same time, the downstream is growing all of its businesses. For example, retail volumes through focused investment in key countries, expansion of differentiated fuels, and strategic convenience partnerships. This is complemented by growth and the margin expansion in our lubricants markets. We are selectively expanding in new geographies such as with our recent announcement of a strategic partnership with Woolworths in Australia and have set our sights on extending partnerships further in other areas. So you can also expect strong growth in operating cash flow from our downstream.
When you add to all of this, our share in the growth and earnings the market expects from Rosneft and the longer term possibilities of our alternatives and low carbon businesses, you have a company that's getting back to growth, growth today, growth over the medium-term, and growth in the very long-term.
So, disciplined growth is key, but as we continue to actively manage our portfolio, we're also thinking about how we want to shape that growth for the future. I've already touched on some of the trends we highlighted as part of our energy outlook earlier this year. As noted, we expect global energy demand to continue to increase, but we also know the demand for cleaner energy will certainly rise. We expect new technologies to enable more oil and gas to be produced more efficiently.
So while we still expect oil and gas to remain dominant sources of energy for decades to come, we know patterns of demand and supply will change. Similarly, we cannot expect price cycles to respond in the ways we've experienced in the past. To be successful, we recognized we need to move with these new trends, to be very considerate about where we invest, and find new ways to compete.
We don't expect there to be a single answer, but we do see some clear priorities. To meet the demand for cleaner energy, we're shifting towards gas by investing in new large-scale gas projects. By the middle of the next decade, we expect around 60% of our production to be gas compared with around 50% today. Our aim over time is to continue to renew the portfolio while shifting the portfolio structurally even lower down the cost of supply curve to ensure we remain competitive in any environment.
So we are pursuing access to advantaged oil projects in core lower cost basins and leveraging exploration around our incumbent positions to capture higher returns. In short, we want to be invested in the best projects in the best basins. This also means there are some higher cost areas where you would expect us to do less in the future. Less heavy oil for example, less focus on high cost frontier exploration, you will have noticed our recent decision not to progress exploration in the Great Australian Bight.
In our downstream, we're focusing on differentiated positions and growth markets to achieve marketing-led growth by building increasingly competitive manufacturing [basins]. On the low carbon front, we invested early beyond traditional oil and gas activities and we've learned from that experience. We are now building on our existing interest in creating new business models to respond to policy and consumer trends. We will be very measured in our investments and learn as we go, but we will be informed and ready for the future. Importantly, in everything we do, we will continue to simplify and modernize to ensure we are fit to compete. We will seize new opportunities with our partners and think creatively about how we engage in this changing world.
Now this brings me to the third driver of our proposition that are focusing on delivering competitive returns. Though the macro environment has been volatile in recent years, we have remained very disciplined in the choices we've made, by focusing on returns we ensure those choices are resilient over the long-term as we rebuild our portfolio. Accessing the best markets and assets allows us to build a diverse pipeline of projects, we also build an established deep incumbency to create a value chain as a committed long-term partner.
We look to find mutually beneficial terms that incentivize not only our investment, but over a diversified exposure to price risk and the sharing of value over the life cycle of a project. In this way, we leverage price upside such as in our established regions in the North Sea and the Gulf of Mexico and build resilience to the downside such as our long-term projects in Azerbaijan and recently announced renewal of the Abu Dhabi concession. Having established this foundation, we protect those returns through disciplined capital and cash cost management and we will come back and talk about this more later.
At the same time, we actively manage the portfolio over the long-term to optimize returns and we have innovative ways of realizing value through our portfolio including recognizing where some of our assets are better placed in the hands of others. Through the continued screening of our portfolio, we aim to realize value for shareholders. This includes divestments such as those made recently in Alaska and the UK and the approach we're taking in Norway as well it includes careful acquisitions such as our recent portfolio additions.
So as mentioned, capital investment is one of the key measures we actively control and we are very disciplined about this. Over the past four years, we've reduced our organic capital expenditure budget by more than $8 billion. This comes in part from capturing deflation, but importantly also, through consciously constraining our capital relative to our opportunity set and in this way, we ensure that the highest quality projects are selected or are only progressed when they are as good as they can be. This is underpinned by a rigorous capital allocation process where we ultimately look to optimize full cycle returns on each project as it progresses through to FID, to development, and ultimately to startup.
We work to strict criteria so that returns are accretive to the current Group position. For example, the FIDs within the upstream, we expect all greenfield projects to achieve mid-teens IRR at $60 oil and all brownfield projects to be greater than 20% IRRs and within our downstream, we similarly expect our portfolio of investments to achieve IRRs in the mid-teens. And we're also being selective in what we invest in and when we invest as evidenced by the decision we took to recycle the Mad Dog Phase 2 project several times, which we have subsequently just sanctioned for less than half the original cost.
We approach our expenditure on cash costs and the efficiency of that spend with equal rigor. Since 2014, we have reduced our Group cash costs by $7 billion, one year ahead of our plan, which is testament to the focus that has been brought to working smarter, simpler, and in a more standardized way. We started the process early, initially streamlining our organization and processes to reduce complexity after the 2010 oil spill. The sharp [drive on all] oil prices then brought greater urgency to this activity.
So we've reached our target, but it doesn't stop there. We're now focusing on driving continuous improvement across every part of the BP Group. An example of this can be seen within our Global Business Services Organization where we're looking at where and how a number of business activities are delivered. This function now delivers a very broad and growing range of services from a small number of global service centers of significant scale including centers in Hungary and Malaysia.
This is expected to continue to drive material value growth for BP through economies of scale and efficiency and a sharp focus on standardizing, automating, and transforming processes at a global level. We expect to continue to transform and modernize our organization and to ensure the changes we've made are embedded and will endure into the future. Bernard and Tufan will talk shortly in more detail about some very specific examples of what we're doing in both the upstream and the downstream to make this cost efficiency and capital discipline stick.
So our focus on returns is about making the right choices, about remaining very disciplined, and about making sure we drive continuous improvement in everything we do. Spending discipline in our industry, I have to say has been notoriously poor, resulting in periods of low returns for shareholders. So you may well ask, why should it be different this time? At BP, I do believe we've adopted a different approach through this down cycle and that we've made changes that are largely structural and sustainable. It is rooted in a belief that to compete in today's world, we need a business model for the Group that is not driven by price cycles.
As I go around the world meeting people in our businesses, I can see the evolving organizational culture. We're transforming the way we operate and work internally, it is being led from our operating locations and we're putting in place new controls to ensure the changes are embedded for the future and spread across the organization. We have become simpler, more efficient, and more streamlined, cutting out I think a lot of unnecessary bureaucracy. We're driving standardization and changing how we interface with third parties. This includes learning from others, working closely with our suppliers to learn how we make the value chain more efficient, and we also know we have a lot more to do to simplify the Company.
And we are modernizing, making use of technology across multiple fronts to open up new frontiers of thinking across our businesses. We're also looking outside of ourselves and our industry. We're benchmarking not only across our peer group, but other extractive and capital-intensive industries. This is an area where I know we still have a lot to learn including how to be more efficient in running our operations and managing our investments as well as benchmarking ourselves against best-in-class, not only the energy business and as you'll see today, we're in action to transform our businesses in ways that are different to the past. I'm confident the outcome will be enduring. So with that, let me hand it over to Bernard who will take you through the plans for the upstream.
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Bernard Looney, BP plc - CEO of Upstream [2]
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Well, thank you, Bob and a very good afternoon everyone. The last time I spoke with many of you was in Baku, eight months ago when we outlined the longer-term direction for the upstream. We have made good progress since then and I'm looking forward to giving you an update today. I would like to start with some key messages that I will come back to again as I finish.
First and foremost, it all starts with safety. It is a core value and will always be our top priority. Fewer people got hurt in our operations in 2016 than ever before, but one injury is one too many and while the long-term trends on process safety measures look good, our 2016 performance reminded us that we must always be diligent and never be satisfied with our performance.
Second, we are delivering what we promised. In Baku, we told you that we planned to reduce our headcount by one-third and reduce costs, that's capital and cash costs by $9 billion all by the end of 2017. I'm pleased to report today that we delivered the $9 billion one year early and our organization is now 36% less than the peak in 2013. Our guidance for base decline was 3% to 5%. We have exceeded this with decline in our reservoirs averaging less than 2.5% over the last five years. In Baku, we said we would startup five major projects in 2016, we started up six as well as taking five final investment decisions.
Third, we are upgrading our plans for medium-term growth. In Baku, we said we would deliver $7 billion to $8 billion of free cash flow in 2020 at $50 per barrel. Today, we upgrade that number to $13 billion to $14 billion at $55 per barrel in 2021, that's $14 billion of incremental pre-tax free cash flow in 2021 as compared to 2016.
Fourth, we have strengthened our long-term outlook. Looking beyond 2021, we have improved both the capacity for growth as well as the quality of that growth. We always look to grow value and returns, not just volume. We have done this through continued optimization of our resources through the development planning process, the recent acquisitions, as well as our modernization and transformation agenda.
So with that backdrop, let us look in greater detail at what we have done and where we are headed. Everything we do is in service of our strategy. Safety, it begins and ends with safety. It is our core value. Execution, quality execution of our projects, our operations, our drilling, and managing our reservoirs is the single greatest source of value and returns that we have. Incumbency, we have a great asset base. Our incumbent positions and the relationships we hold with the resource owners create both stability and opportunity, leadership in the world's best oil and gas basins is what we aspire to.
Growth, we grow value through improving returns and cash flow. We actively manage our portfolio divesting where it makes sense and pursuing acquisitions where value can be created. We like our asset base particularly its balance. Capability, our strategy is underpinned by the capability of our people. They are motivated and equipped to take on the world's greatest oil and gas challenges. We have a global workforce that is embracing digital technology to drive improved productivity in everything we do. So that's our strategy, let me now walk through a more detailed update.
Let me start with taking a closer look at how we have been driving performance and establishing a track record of delivery. We have begun to deliver the projects that make up the 800,000 barrels per day in 2020. Six started-up in 2016. Through working with the supply chain, reducing the size of our organization, and being disciplined with every dollar, we have delivered the $9 billion savings we promised one year early and are confident we can do more. This is not just about deflation, but about simplifying, using industry standard solutions, focusing on quality execution, and eliminating defects all in service of driving efficiency.
We continue to use the same strict investment hurdles to maintain capital discipline. IRRs in the mid-teens for greenfield projects at $60 a barrel, greater than 20% for brownfield projects and our capital frame remains a flat $13 billion to $14 billion through to 2021. In terms of choices, that means some activities won't make the cut and as Bob said, we demonstrated that with our decision regarding the Great Australian Bight.
Over the past five years, we have maintained our base decline at less than 2.5% by improving the reliability of our facilities and delivering valuable well work and infill drilling. 2016 was a particularly good year, [would decline less than 1%]. Plant reliability was 95% and we are focusing on improving overall operating efficiency to in excess of 85%. We are driving down the breakeven oil price each year and are making the business more resilient.
Our teams around the world are working on this and let me give you just one example here from Prudhoe Bay in Alaska. The team there has been focused on developing the most advantaged barrels from across the field, executing well work and optimizing field activities. The results have been fantastic. In spite of reduced drilling, we have reduced decline holding production almost flat and the result is a business whose breakeven overall is down by 40%.
Turning now to our cost base where we're really seeing these efficiencies starting to show up. In Baku, we promised a 33% unit production cost reduction in 2016 over 2013. We actually delivered more than that with a reduction of 36%. I believe this will continue to position us solidly in the top quartile amongst peers. That trend will continue with a further reduction in 2017 resulting in a total unit production cost reduction of over 40% and these changes are sustainable. Around 40% of our savings to date from our supply chain have come from efficiency as opposed to rate. Combined with savings from scope optimization and headcount reductions, around 75% are then sustainable in any environment.
Efficient execution is key as we focus on capital efficiency. We are seeing that pay-off in our drilling performance and as you can see here, we have significantly improved the percent of top quartile offshore wells delivered with 55% achieved in 2016. We have internal targets to improve this further. A great example of capital efficiency is our Thunder Horse South Expansion project. It started up 11 months ahead of schedule and $150 million under budget. This was achieved through early engagement with suppliers to agree the right scope and execution plan and streamlining ways of working.
Looking now at the medium-term, I am pleased to report that the 800,000 barrels per day of new project production is firmly on track. I have reviewed all of the projects in detail over the last two weeks. There is much to do, but I am confident in the trajectory we show here. The portfolio under construction is ahead of schedule and around 15% under budget. We aim to startup seven projects this year, contributing to the 500,000 barrels per day of new capacity by the end of this year. You will see the impact towards the back end of the year with production ramping up as we go into 2018. Looking further out, we have nine major projects under construction that are on track for startup in the 2018 to 2021 time period.
Importantly, our projects deliver operating cash margins 35% better than the base portfolio in 2015. They also carry a development cost, which is around 20% lower on average than the existing portfolio and drive an increase in the percentage of capital in service. In addition to the projects under construction, we have a strong portfolio of potential FIDs including the first phase of the discovered gas in Mauritania and Senegal. A potential exciting extension of our Atlantis field, India gas projects, and the third train of our Khazzan project in Oman to name a few.
We continue to optimize these projects, rigorously testing and only proceeding when they exceed our hurdle rates and are the best that they can be. We also continue to invest for value growth in our existing base businesses. For example, in our Lower 48 onshore business, we have improved capital efficiency through innovative well designs including a very successful multi-lateral program, enhanced completions, and horizontal development.
Wood Mackenzie has acknowledged this by increasing their estimate of the value of the business by [around 70%]. All these efforts result in a 5% per annum average production growth out to 2021 as compared to 2016. All of this work has given us the confidence to upgrade our medium-term growth target that we outlined in Baku. We now expect to deliver $13 billion to $14 billion of pre-tax free cash flow in 2021 at $55 a barrel. That is equivalent to around $14 billion of incremental pre-tax free cash flow in 2021 as compared to 2016.
The key underpinnings of that growth are as follows: 5% per annum average production growth, continued declining unit production costs, $1 billion of free cash flow performance improvement since Baku, all delivered within a constant capital frame of $13 billion to $14 billion. You will begin to see this growth late this year and building each year thereafter.
So that describes our view of the next five years. Longer term, we believe in the strength of our portfolio, which is balanced, competitive, and positioned to reflect the direction of travel in the wider energy sector. We have enhanced the quality of the portfolio since Baku by continuing to optimize the area development plans through the acquisitions and extensions and through our modernization and transformation agenda, which you will hear more about shortly.
Looking at some specifics, we have underpinned our shift towards competitive gas through new acreage in Oman underpinning a third gas train accessing 10% of Zohr in Egypt, deepening in Tangguh and [Kalem] in the North Sea and of course our deal with Kosmos in Mauritania and Senegal, a deal which gives BP a leadership position in a huge low-cost gas resource and creates the opportunity to build a material new leg in our portfolio.
We have also capitalized on incumbency in key regions to access more advantaged oil through, for example, heads of agreement to extend our ACG license in Azerbaijan as well as the extension of the ADCO concession in Abu Dhabi. And we have accessed new exploration acreage in Canada, in Mexico, and in China. Where we have made acquisitions, I would call these not to be missed opportunities, accessing around 5 billion barrels at a very competitive cost of around $1 per barrel.
Going forward, we will progress these new activities within our Baku capital frame of $13 billion to $14 billion. We will also continue to put assets into the right hands to drive the best value and you saw this with the creation of Aker BP. We created a company of around 700 million barrels proved and probable and the valuation has arisen over 80% in less than one year. We recently announced another creative deal with EnQuest around Magnus and Sullom Voe terminal in the North Sea.
Looking now to the longer term, our performance delivery track record, the projects under construction, and our portfolio give us confidence we have the capacity for quality growth through to 2030. We have the ability to be around a 3 million barrel per day company during the next decade excluding Russia. To be very clear, this is not a target. We know all too well that growth in cash and returns is more important than volume. It is simply a measure of our confidence in our portfolio and our ability to execute.
That brings me to our modernization and transformation agenda. This is about delivering a sustainable step change in our performance, getting us fit for the energy transition, and importantly changing what it feels like to work inside the upstream. It's an ambitious agenda. We will make our organization more agile and improve decision-making. We are looking to truly embrace digital and the opportunities presented by big data and we will create a mindset inside the upstream, consistent with our margin business. All is in service of industry-leading capital productivity, operational effectiveness, and returns.
Now I would like to try something a little different. I have a video, hopefully no Oscar moments for me today, but I have a video, which describes a vision of what life could be like in operations in the not too distant future. We're going to create something similar for projects, for drilling, for reservoir management, and its purpose is to show what is possible when we take all these themes and add them to what we are learning from other industries. It is really meant for an internal audience, but I hope that you'll find it helpful, it's about three minutes and if we could have the video please. (video playing).
Much debate about showing that, so it will be great to get your feedback, but I hope it gives you some sense of where we are heading. Working like this will be very, very different and it will unleash ideas and solutions we can't even imagine today and the good news is we are already in action on a lot of what you just saw, not all of it, but a lot of it.
Let's look at digital as one example where our ambition is to become the digital upstream company. Two years ago, we started building BP's proprietary data lake. Today, it holds more than 1 petabyte, that's a billion million bytes of data, which I'm told is a lot of iPhones. We have developed cloud-based platforms, which access our data lake to enable rapid analysis and decision-making with state-of-the-art visualization and predictive tools.
And here are few examples, ARGUS is our wells data platform. Today [2,458 wells or 99%] of all of our well stock are in it. APEX is our system optimizer, it enables us to optimize production real-time by monitoring and modeling physical constraints across the production system life. It will be installed in all operated assets by 2018. SIRAAJ is our field development platform. It was pioneered on the Khazzan field in Oman. It enables live updating of our development plan as results come on-stream from new drilling data in the field.
We are now monitoring and analyzing drilling operations and wells from remote centers around the world. This will improve our decision-making and make our organization more efficient. The Plant Operations Advisor which you saw on the video is in pilot testing at the moment on a facility in the Gulf of Mexico. At the moment, it is running over 20 million calculations per day and assesses the operational state of 150 pieces of equipment every two seconds. Again by the end of 2018, we expect to have it fully deployed. As you can tell, I'm very excited by this. This agenda is real, it's transformative, and I believe it's essential. So that's probably a good point for me to stop and to recap.
First and foremost, safety remains a core value, job number one. Second, we have delivered what we said we would in Baku and continue to make huge strides around efficiency. Third, we have upgraded our plans for medium-term growth, growth in production, growth in free cash flow, growth in returns all without changing our capital frame. And finally, we have improved our portfolio quality, strengthening our long-term growth capacity, and are making progress on our commitment to modernize and transform our business.
So I want to close by reiterating my confidence in our business model, our outstanding people, our long-term relationships, our portfolio, and my confidence in the plan we have laid out for you here today. We have the flexibility, the optionality, the resources to deliver real tangible growth for you, our owners for decades to come. Thank you very much for listening and let me now hand over to Tufan.
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Tufan Erginbilgic, BP plc - CEO of Downstream [3]
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Thank you, Bernard. Good afternoon. I would like to continue the theme of performance improvement and growth by taking you through the significant potential we see across all of our businesses in downstream.
Let me start by recapping briefly on the progress we have made. Two years ago we set out our strategy to build a high quality portfolio of businesses that offer us significant competitive advantages. What you see today is a downstream business that is safer, more resilient, more profitable, and has a strong track record of performance improvement.
We have delivered $3 billion of underlying performance improvement in the last two years and that expands the earnings potential of the business and improves its resilience to environmental volatility and there is more to come. We expect more growth from our marketing businesses, further strengthening of our competitive position in our manufacturing activities, and a continued focus to manage and deliver efficiencies as we pursue profit and cash growth, all of which we do with safety as our first priority, always our first priority.
I'm confident that with the performance improvement we have achieved along with the exciting growth potential that we have, we will deliver between $9 billion to $10 billion of pre-tax free cash flow in 2021. That is more than 50% higher than 2016. So, let me take you through the downstream plans.
The execution of the strategy that I laid out two years ago is delivering results. Our strategic aims are to deliver underlying performance improvement and growth to expand the earnings potential of downstream, improve its resilience, and build competitively advantaged businesses. Our performance improvement is the result of focusing on five strategic priorities. Our first priority and core value is safety. We have seen multi-year improvements in both personal and process safety and in 2016, we delivered our best overall safety performance on record and we will continue to strive to improve safety further.
Second, advantaged manufacturing, we continue to build a top quartile refining business and in petrochemicals, we are improving the cash breakeven performance of the business. Third, our fuels marketing and lubricant businesses are differentiated and high returning and our strategy is to grow these businesses in important global markets.
Fourth, efficiency and simplification programs. These remain central to what we do and they are delivering ahead of plan, and finally, we are pursuing and developing new products and offers that support the transition to a lower carbon and digitally enabled future over the long-term.
Let me now take you through the results that we achieved by implementing this strategy. As you can see from the chart on the left, returns have more than doubled since 2014 [when measured] at a constant refining margin reflecting continued performance improvement. Indeed, 2016 on a reported basis was our second best result on record after 2015 and this was delivered when refining margins were weak. We have also significantly improved our competitiveness on a net income per barrel basis. You can see this from the chart on the right. We are now firmly in the upper-end of the competitive range.
Turning to our performance improvement in more detail. On the left, you see pre-tax earnings. Our full-year earnings in 2016 of $5.6 billion were more than 25% higher than 2014 despite the refining environment being significantly weaker and indeed one of the weakest in the last 10 years. We have delivered $3 billion of underlying performance improvement in two years. This delivery is underpinned by improvements in all of our businesses through margin capture and cost efficiency initiatives.
Looking at it another way, the chart on the right shows the level of refining margin required to generate a downstream pre-tax return of 15%. Through the execution of our strategy, we have now reduced by about half the refining margin required to deliver this level of returns. That means we can deliver attractive returns even at industry refining margins below the five-year historic range. Indeed, in 2016, we delivered the returns of 15% when refining margins were well below the historic range. So we're expanding downstream earnings potential and building a business that is more resilient to the environment and we are doing so in a way that is not just sustainable, but which we expect will further improve and we have plans to achieve that. Now, let me take you through each of our businesses in turn.
Starting with our manufacturing businesses, in refining, we continue to build a top quartile business. We measure this through net cash margin per barrel, which is a metric that measures refining competitive profitability. In 2016, our refining portfolio ranked within the top quartile of this metric when compared to the most recent Sullivan benchmarking study. This means we are delivering leading competitive profitability.
As you can see from the chart, refining earnings have grown by more than $1 billion since 2014 at a constant refining environment and we expect to deliver more underlying earnings growth in fact around another $1 billion at a constant BP Refining Marker Margin of [$14 per barrel]. This will come from our side-by-side programs which are focusing on operating reliability, efficiency improvements, advantaged feedstock, and commercial optimization. These improvements will make our refining portfolio even more competitive and more resilient to the environment.
In petrochemicals, we have an increasingly competitive business in a growing market. Over the last number of years, the environment has been challenging in part due to oversupply. However, demand growth for our primary products are aromatics and acetyls is strong and industry analysts forecast continued demand growth in the range of 4% to 6% per annum. Against this backdrop, we're leveraging our industry-leading technology to make the business more efficient and more competitive. Indeed, our latest Zhuhai PTA plant in China now operates with industry-leading cost efficiency and environmental performance.
In a cyclical industry like petrochemicals, reducing cash breakeven is key to improving resilience to environmental volatility. Since 2014, we have reduced the breakeven of petrochemicals by 27%. This has helped support more than $400 million of earnings growth over this period and we see further opportunities and now plan to reduce breakeven more than 40% by 2018. This will ensure that we will have competitively advantaged assets in each of the regions in which we operate.
These improvements along with our access to market growth and leading technology positions us -- our petrochemical business strongly for the future. It supports underlying earnings growth and the delivery of double-digit returns over the next couple of years even in a similar environment to today as well as creating optionality to invest in this growing market.
Moving now to our lubricants and fuels marketing businesses, which delivered material and reliable earnings with attractive returns where we have a track record of growth. Together, these businesses generated around $3.7 billion of pre-tax earnings in 2016. Here we are differentiated through our strong market positions and distinctive customer offers. This is underpinned by strong brands, technology, customer relationships, and retail partnerships.
Our strategy is to grow these businesses which have good exposure to growth opportunities in existing and new markets. Indeed, in addition to our recently announced retail growth investment plans in Australia, we are actively looking to build and expand our footprint in Mexico, India, Indonesia, and China and we are also developing new products and offers that support the transition to a lower carbon future over the long-term, which I will talk about later. In lubricants, earnings have grown by $400 million since 2014 at constant currencies with around 60% of total earnings coming from growth markets last year and as you can see from the chart on the left there is more to come. We plan to deliver this growth through increasing the sales mix of premium lubricants, our growth market exposure, and leveraging our differentiated offer.
In fuels marketing, earnings have also materially grown. We have seen growth of $600 million since 2014 at constant currencies and as with lubricants, there is more to come. This growth will come from all parts of fuels marketing, from retail, the B2B fuels businesses, and aviation fuels. Retail is the most material part of our fuels marketing operations. It has strong and growing earnings, reliable cash streams, and high returns. The continued success of premium fuels, expansion of our convenience partnerships, new customer offers, and growth market access will all underpin this growth.
Together, our lubricants and fuels marketing businesses have delivered around $1 billion of underlying earnings growth since 2014 and through the effective delivery of our marketing strategy, we expect to deliver around another $2 billion to $2.5 billion by 2021. Let me now talk about one specific retail growth opportunity. As we announced recently, we plan to establish a new strategic partnership with Woolworths in Australia. Woolworths is one of Australia's largest supermarket retailers and the agreement we announced includes BP acquiring and operating over 500 Woolworths fuel and convenience sites across the country including providing these sites with the wholesale supply of fuels. We will also be creating a world-class convenience partnership with the Woolworths Group called Metro at BP. This new partnership will be accretive to earnings and operating cash flow with returns that are competitive with the rest of our downstream portfolio.
If you look at the chart on the left, you can see that by bringing together Woolworths' retail network, high-quality food products, loyalty program, and our international expertise in fuels and convenience offers, we expect to deliver significant incremental value, value from convenience partnership and loyalty offers along with midstream and refining opportunities.
We have the expertise to deliver leading convenience and loyalty offers through major partnerships around the world. It is a proven model for us. Our UK offer, partnered with Marks & Spencer is a good example. If you look at the right hand chart, you can see how through our BP-owned and operated network and distinctive offer including differentiated fuels, we have been able to deliver a strong value proposition to our customers as well as very differentiated results for BP. The transaction is subject to Australian Competition and Consumer Commission and Foreign Investment Review Board approval, which we expect to complete over the next 12 months. This is an exciting opportunity not just for us, but our Australian customers.
Turning to efficiency and simplification, the work we have done over the past two years has driven our cash costs down to their lowest level in more than 10 years. As Bob shared with you earlier in the month, our cash flows are now $3 billion lower than in 2014. Third-party spend continues to reduce and our simplification and efficiency program covers all parts of downstream.
For example, we delivered around $350 million cost savings in downstream head office through the streamlining and elimination of activities. Across downstream since 2014, we reduced the number of roles by more than 5,000, a year ahead of schedule and we have plans in place to reduce this further to 6,500 by 2018. All of this has supported a material improvement in our ratio of cash costs to gross margin since 2014. This is a metric we use to help run the business and measure its competitiveness. We will continue to maintain a rigorous focus on cost management and efficiencies while capturing profit growth opportunities.
Now turning to new trends we are seeing in our industry in mobility and transition to a lower carbon future. We have a clear strategic frame to develop new customer offers in mobility and to transition downstream towards a lower carbon future over the long-term covering three focus areas: bio and low carbon products, advanced mobility, and digital. We plan to create differentiated offers that builds on our capabilities, retail assets, and brand strengths and which represent material and scalable business options in each of these areas.
We will form new strategic partnerships and create innovative ventures as we develop new business models. Let me take you through some of the progress we are making. In the first area of bio and low carbon products, Castrol have recently launched a new bio variant of Castrol EDGE and Castrol MAGNATEC with 25% of the oil derived from plant sources. We have also invested in a company called Biosynthetic Technologies, a company that produces renewable base oils for lubricants and through our venture investment in Fulcrum BioEnergy, we are involved in making biojet from municipal solid waste.
In the second area, advanced mobility, we are exploring opportunities presented by electrification, connected cars, and autonomous vehicles. We already have electric car charging facilities at selected petrol stations such as in Auckland, New Zealand as shown on the slide where the charging facilities have been developed in partnership with Vector, New Zealand's largest distributor of electricity and gas. We are looking to learn from these installations as we explore the best model for us to pursue across our global network.
And in the third area, digital, which actually underpins many of our new offers, we have invested in a new venture RocketRoute which is transforming the aviation industry through the provision of flight planning and integrated support services. We also recently launched our new retail app BPMe, which customers can use to find their most convenient BP petrol station and can pay for fuel from within their vehicle. This provides us with a direct personalized channel to our high-value customers and provides a platform for the continuing digitization of our customer offer.
This is just a small taster of activity we have in progress, but as you can see, we are well underway with our plans with the transition to a lower carbon downstream business and we have the first-mover advantage with a number of our developments. So what does this all mean? Since 2014, we have delivered $3 billion of sustainable underlying performance improvement and we have [halved] the refining margin required to deliver 15% pre-tax returns for downstream and as you have heard, there is more to come.
We are [now] in the top quartile of the refining net cash margin industry benchmark and we have robust programs in place to further strengthen this position and to continue to grow the profitability of the refining business. In petrochemicals, we have improved performance and are ahead of our target to reduce the cash breakeven, making the business more resilient and supporting further profitable growth.
Our marketing businesses continue to deliver material and reliable earnings with attractive returns and we have plans to significantly grow earnings further and we will do all of this while rigorously managing costs and delivering efficiencies. Taking all this together, we expect downstream to deliver between $9 billion to $10 billion of free cash flow with returns of around 20% in 2021.
So in summary, through the disciplined execution of our strategy, we have made significant strategic and financial progress and that will continue. Safety will always remain our core value and first priority. In manufacturing, we are growing our underlying earnings by more than $2.5 billion and in marketing by more than $3 billion by 2021 compared to 2014. That means more than $3 billion is still to come across downstream between now and 2021. All of this underpins the growth of our free cash flow to $9 billion to $10 billion with returns of around 20% in 2021. The plans we have in place to deliver this are robust and I am very excited by the opportunities I see across downstream. Now, let me hand you over to Lamar.
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Lamar McKay, BP plc - Deputy Group Chief Executive [4]
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Thank you very much, Tufan. We've spent much of today in the presentation talking about the nearer term, but I now want to focus a bit on the medium-term and the longer term and describe how we plan to incubate and grow new business models for the future, which are built around our core businesses.
So in developing our strategic priorities over a very long-term time horizon, we've used our energy and technology outlooks as key inputs for thinking about the future. Specifically, we've developed three scenarios to frame our strategy and to make portfolio choices. In broad terms, these scenarios corresponded to a return to the oil price cycle as we've experienced before as one of the scenarios, a second scenario was of oil and gas over supply chiefly from US shale and OPEC, and a third scenario represents our faster transition cases that we've described in this year's energy outlook of strong climate policies including faster renewable energy penetration and mobility revolution.
Now key for us is a strategy and investment choices that are robust to this range of scenarios and given the uncertainties of the energy outlook, they should not be fixed on a single view. Our strategy is resilient to and can achieve growth under a range of outcomes. You've heard from Tufan and Bernard today talk about our plans to grow in downstream growth markets and our shift to gas and advantaged oil in the upstream as well as the recent investments we've made to support these priorities. We also have solid operating performance in alternative energy, run by Dev and potential opportunities for growth there and in addition to these well-established pieces and parts of the BP Group, we've created a new set of activities to develop new business models for the future, through venturing and partnerships, you heard Tufan talk about a little bit of that, aimed at a multi-decade transition. More on this in a moment.
First I want to spend some time to talk about our existing and sizable alternative energy portfolio as it stands today, Bob referenced it. BP's alternative energy business started in the last decade and since that time, we've learned a lot and we focused on two businesses that fit well within our core activities. Our Brazilian biofuels business and our US wind businesses represent the largest operated renewables businesses amongst our oil and gas peers. The hard work put into focusing on safe, reliable, and efficient operations has transformed both businesses positioning them strongly amongst competitors.
Last year, the reliability of operated biofuels and wind operations was 93% and 91% respectively. We've also continued to see improved performance on safety, especially process safety, and we continue to drive efficiencies across the business and in 2016, these businesses were generating positive operating cash. To further progress the optimization of our wind energy assets, we are upgrading some of our existing turbines through a re-powering program. We're also utilizing digital technologies analyzing some 2 billion data points a day to continually optimize turbine performance.
In biofuels, we continue to improve the efficiency of our operations through improvement in feedstock yields and costs. In 2016, our Tropical site in Brazil achieved a 39% increase in production from debottlenecking activities. We are looking at options to commercialize technology at scale in renewable fuels. An example is our Butamax joint venture with DuPont and in addition to our current focus on biofuels and wind, we are also evaluating other areas where we can access lower carbon, commercially attractive opportunities to work synergistically with our existing businesses in alternative energy and the upstream.
So in summary, in the alternative energy space that we occupy, we believe that we can continue to deliver disciplined and value accretive growth options through sound business models, but we're developing more. We're also actively developing new business models in the venturing and low-carbon space and these are broadly in five areas.
First, you heard Tufan talk about one of them, sustainable and what we call advanced mobility, which includes vehicle electrification, new mobility models, autonomy, automation sharing. Secondly, advanced bio products including bio plastics, bioPX, bio lubricants, and biojet. Tufan mentioned an example of a recent investment in this area is called -- it's in a company called [Fulcrum Energy], a biojet from waste company in the US and it has material growth options in this new market.
The third area is carbon management and this could include carbon markets, carbon offsets, carbon capture use and storage. We are one of the leaders in the Chinese carbon market. We've invested in some breakthrough technology ventures in carbon capture and use. An example would be Solidia, which manufactures low-carbon cement and concrete. We also are pursuing potential opportunities in renewable and natural gas space and we do plan on being part of that growing market.
The fourth area is low-carbon power and storage, in particular where it links with our existing alternative energy and upstream businesses. And lastly, digital transformation, which looks beyond the near and medium-term operational efficiency and data analytics and it looks to new digital platforms such as block chain, quantum computing, and cognitive computing.
Now, we don't expect these new business models to deliver profits overnight, but our current portfolio of 30 projects, ventures, partnerships, and proofs of concepts we believe will yield material businesses of the future. To that end, we're investing about $200 million per year for now and that's included within our capital framework and that is to incubate and grow options.
I've given you an overview of the existing alternative energy portfolio and some of the new business models we're working on, I want to talk about the advocacy actions that we're taking that extend outside BP and our industry. Alongside the operational efficiency you've heard a lot about today, we also continue to improve the efficiency and quality of our fuels and lubricant products. As the vast majority as you know, 80% to 90% of the carbon emissions come from their use. Recent examples include [PT Air], which is a low-carbon product in our petrochemicals business and our new Ultimate fuels with ACTIVE technology that was launched in 2016.
And as we shift our portfolio to be more weighted towards gas, we also look to manage methane emissions, which will only help to strengthen the case for gas and today we're announcing a further leg of our Carbon Mitigation Initiative with Princeton University, which will help further develop scientific understanding of the methane cycle. We also continue to make the case for carbon pricing as we've long advocated. We see this as likely to be the most efficient mechanism through which to achieve emissions reductions at scale. Carbon pricing would make energy efficiency more attractive and lower emissions energy sources such as natural gas and renewables more cost competitive.
The role of technology and research is also a very important one. This of course includes our research support at universities as well as our scanning of and investment in emerging and disruptive technology companies. These efforts are very active in the areas -- those five areas I discussed previously in terms of the new business models. And last is our involvement in partnerships and initiatives such as the World Bank Flaring initiative, the Carbon Pricing Leadership Coalition, and the Oil and Gas Climate Initiative (OGCI), which Bob now chairs. One practical outcome of this collaboration is the new OGCI investment partnership. That's a $1 billion commitment to support the development of innovative technologies that have the potential to reduce greenhouse gas emissions significantly.
So to summarize, we are engaged and we're active in the lower carbon transition and what we are focused on is continuing to grow knowledge, relationships, and real options. So with that, I'll pass you over to Brian to take you through the full financial frame.
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Brian Gilvary, BP plc - CFO [5]
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Great. Thanks Lamar. Okay, let me just try and summarize all those plans for you, bring them all together, shape what that means in terms of the shape of the financial outlook for the corporation and most importantly, what it means for our shareholders. I'll start first with some context around our financial framework as it stands today and what to expect for 2017.
Two years ago, we presented an outlook that expected oil prices to remain suppressed over the medium-term as a result of the supply overhang at the end of 2014. We said that prices would be lower for longer, at the time, there was uncertainty in the market with some predicting a rebound in oil prices by the [summer of 2015]. That said, we remained bearish over that period of time and we moved quickly to reduce capital spending and cash costs with a simple goal of rebalancing cash flows over the subsequent eight quarters at the prevailing oil price and what I'd like to report back to you today is you've heard through all of the previous presentations, we have made very strong progress against those deliverables, delivering on both capital and cost targets a year ahead of time and our plans showed the portfolio balancing organically at a Brent oil price of $55 a barrel with a lower assumption on refining margins and natural gas prices and with capital at the lower-end of our target range. This gave us confidence, as the team has described, to complete a number of deals at the end of last year creating optionality in the portfolio with new growth vectors for the future.
Now these require in 2017 a modest amount of capital, however still within our existing $15 billion to $17 billion capital frame and as Bernard has shown and I will come back to, they do not require any further capital spend outside of this frame going forward. As outlined earlier this month, this increase in capital has a near-term technical effect of raising our forecast organic cash rebalance point to around $60 per barrel by the end of 2017 before reducing steadily thereafter.
That said, capital discipline and focus on costs is undiminished. As we further assimilate these deals into our plans and maintain our focus on both capital and costs, we will continue to optimize our overall spend driving the balance point down through the year and indeed, we will drive the balance point closer to $55 per barrel by the end of this year including the impacts of these portfolio additions. At the same time, in 2017, we expect to benefit from the continued startup of our extensive suite of upstream major projects as Bernard described. This will become very visible to you later in the year with the ramp-up resulting in a material improvement in the Group's operating cash flow in the second half of the year.
At the same time, as you heard from Tufan, we expect continued underlying performance improvement in our downstream businesses. Having already rebased the Group's cash costs a year ahead of schedule, operating cash flow will also reflect the ongoing focus on continuous efficiency improvement and transformation taking place across the Group. Non-operating restructuring charges are expected to continue into 2017 although we expect the cash flow impact to be lower than last year, actually significantly lower.
Looking to inorganic sources and uses of cash, Deepwater Horizon cash payments are expected to be in the range of $4.5 billion to $5.5 billion with the larger part of the outflow in the first half as we make payments on the annual settlement amounts. Divestments are also expected to be in the range of $4.5 billion to $5.5 billion for the year with the disposal proceeds weighted towards the second half of the year.
Now looking further out, we expect to deliver material growth in free cash flow in line with the shape that we show you here. As you can see, this plan does not rely on materially higher oil prices. The outlook is driven by a combination of underlying momentum in operating cash flow in both our core businesses coupled with strong capital discipline across the Group. In the upstream, growth in operating cash flow is substantially driven by the ramp up of our major projects as well as the average 35% higher operating cash margins of the new project pipeline compared to our 2015 portfolio, a strong focus on ongoing operating efficiency and modernization as Bernard described, and the impact of our recent portfolio additions which deliver incremental free cash flow over the longer term.
In the downstream, the key source of incremental cash flow includes continued operating reliability and efficiency improvements in our manufacturing assets, strong marketing growth in both existing and new markets, and a continued focus on simplification and efficiency across the segment. At the same time, having absorbed the marginal increase in capital associated with our recent portfolio additions, we expect to be able to maintain the organic capital expenditure of the Group within a range of $15 billion to $17 billion per annum across this timeframe including 2017 while also keeping gearing within our 20% to 30% target band.
As Bob said, we're going to be very disciplined about the $15 billion to $17 billion capital frame. Expenditure in individual years can vary and we will optimize the spend levels across the businesses to ensure the optimal outcome for the Group, but we do not expect to exceed $17 billion of expenditure for the Group in any one year. As already noted, the capital frame remains the same as we showed you in Baku including the new portfolio. It represents a substantial reduction in spend relative to the peak of $24.6 billion for the Group in 2013 primarily reflecting material improvements in capital efficiency across the Company along with capturing deflation in the upstream.
The upstream will continue to invest in a high quality pipeline of new projects to drive growth out to 2021 and through the end of the next decade and the downstream will continue to invest mainly in strengthening the competitive position of our manufacturing businesses along with high return marketing growth, which as Tufan described is highly accretive to free cash flow for the Group.
We do not see a need to increase capital expenditure above the range to support the growth agenda for the Group. The lower-end of this range indicates the flexibility we have to tighten capital expenditure in the event of periods with lower oil prices without materially impacting our longer term outlook. So our current dividend is underpinned both in the near and longer term by the strong momentum we see ahead in our businesses as well as the flexibility that we've retained within the capital frame. So putting all of this together, from 2018, we expect our organic oil price cash balance point for the Group to fall steadily as already material growth in free cash flow is further improved by the additions to the portfolio.
Based on our current planning assumptions, we would expect our cash balance point to reduce to around $35 per barrel to $40 per barrel over the next five years. This is a further indicator of flexibility within our financial frame even if oil prices are lower than they are today. As always, we will work to ensure that the dividend can be sustained by underlying cash generation of our businesses over time. With organic free cash flow growing, we would look in the first instance to address the dilution that arises from the undiscounted scrip dividend alternative we currently have in place for shareholders. We would then aim to balance disciplined investment through even stronger growth with our objective of growing distributions to shareholders over the longer term.
Now turning to Deepwater Horizon and divestments, divestment proceeds amounted to $3.2 billion in 2016. As already noted, we expect divestment proceeds to be higher in 2017 in the range of around $4.5 billion to $5.5 billion for the year. A good number of these divestment projects are in progress and we expect to receive proceeds from most of these projects within 2017. Beyond 2017, the level of divestments will be a function of ongoing active management of our portfolio, which typically results in around $2 billion to $3 billion of divestments per annum.
At the same time, we also estimate 2017 Deepwater Horizon cash payments to be lower than last year and also in the range of $4.5 billion to $5.5 billion. [We've announced] to resolve the remaining business economic loss claims expected to be substantially paid this year, we expect the total loss claims expected to be substantially paid this year. We expect the total Deepwater Horizon cash payments to fall to around $2 billion in 2018 and to then step down to a little over $1 billion per annum from 2019 onwards. Looking next to returns, Bob talked earlier about our focus on returns and the drivers of this at both the Group and business segment level. Given the volatility in our industry, we generally regard sustainable free cash flow as we've laid out today to be a more reliable measure of shareholder value growth.
Now that said, we recognize the return on average capital employed is an important long-term indicator of the business. Returns over the last few years have been low right across the sector. This reflects the very challenging environment we all face as we rebase our business after paired investing at historically high oil prices and costs.
For BP, we have also been in a strong build face related to our upcoming projects, post the sale of around $50 billion of high returning assets excluding TNK-BP when prices were over $100 per barrel.
Looking ahead, we expect volume and margin growth across our businesses to drive our returns higher, in line with increasing levels of capital in service. Greater capital discipline and improved contract in fiscal terms in some areas will also support the sustainability of these returns. To see a meaningful trend, we have assumed a stable price environment and portfolio. On this basis, with the strong growth we see ahead and our focus on costs, we expect BPs ROACE to recover steadily over the next few years and to exceed 10% by 2021 and oil prices similar to the levels that we see today.
So in summary, we have greater clarity on our Deepwater Horizon commitments with payments expected to step down materially in 2018. As we continue to integrate our new portfolio additions and drive further capital and cost efficiency, we are working towards rebalancing the financial framework of the Group by the end of 2017 with a balance point falling steadily thereafter.
And please be no doubt, we have not taken our focus off capital discipline with the new portfolio. Our financial frame is strongly underpinned over the medium-term by growth in our businesses and continued disciplined capital and cost management
Our balance sheet is strong, and we intend to maintain gearing within our 20% to 30% band over time. So looking out to 2021, the package the team have laid out today is expected to deliver material growth in free cash flow and steadily improving returns at modest price assumptions, in turn supporting growth in shareholder distributions over the longer-term.
I'll now handle you back to the final straight with Bob.
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Bob Dudley, BP plc - Group Chief Executive [6]
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Thank you very much, Brian. And ladies and gentlemen, thank you for your resilience, that's a lot of information from us today. I do hope what you've seen coming across as evidence -- substantive evidence of a business its fit for all seasons. After a long session of talking, we will be clear, we know it's not what we say, it's what we do, we're building a company that is competitive in a low price environment increasingly so to the progress we've made on efficiency, reliability use of technology the discipline you're seeing on capital and cost. We're a business that is building resilience to a range of different conditions, resilience is coming from the balance and the quality we have right across our portfolio. Upstream and downstream both of which are fully prime with growth opportunities. And in the business that will remain competitive as the world changes, which is doing faster than ever. We're going to see increasing demands on the energy sector in support of low carbon, lower emission fuels and products, and we'll be ready for that.
In the upstream, Bern and his team have agreements in place around the world for a very competitive oil and gas with substantial growth potential existing and extending out through this decade, the next decade and beyond that. We also have an outstanding growth potential in the downstream. Our downstream business has been performing really well for us for a couple of years now and Tufan and the team see there is still more to do and more growth to come.
And we have a viable and growing business in alternative energy and the potential to excel in the low-carbon space in due course, and with informed discipline. At the same time as a team, we're driving safety, reliability and efficiency and translating that into better operational and financial performance. So you're seeing the outcome in the base business that's working well, which will continue to do so as we add new barrels and launch new products and enter new markets. We have now built a solid platform of strong underlying performance and I think excellent growth prospects. I believe this positions BP to be a very attractive, very dependable investment proposition for you, the shareholders. Throughout the events of recent years, that has always been the underlying focus of this management team, shareholders. So now, as a reward for your resilience -- amazing resilience, we look forward to hearing your views after we've taken a short 20-minute break for some refreshments. For those of you on the webcast, the lines will stay open and we will come back and join at let's say 10 minutes after the hour. Thank you very much. Join us outside.
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Questions and Answers
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Bob Dudley, BP plc - Group Chief Executive [1]
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So thank you very much for coming back and joining us. What we'll do now is open it up to any questions you want. I would say, you can ask us about anything, but I would just suggest we keep it to the oil and gas industry. Let me start with Theepan here in first, one, two, three, and then four. Right down in a row, they were very quick, okay.
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Theepan Jothilingam, Exane BNP - Analyst [2]
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Thank you. It's Theepan Jothilingam from Exane BNP.
Two questions please on the upstream, firstly, you talked about the flat $13 billion to $14 billion of CapEx. So I just wanted to understand if you could break that down between base integrity, exploration and growth. Just trying to understand that piece and what assumptions you've made in terms of cost deflation or reflation please. Secondly, I guess in terms of the improvement in free cash flow, primarily driven in part in the upstream and I want to just try to bridge the gap from essentially flat or slightly negative free cash flow in 2016 to the $13 billion to $14 billion. I mean, clearly there is a big volume driver and price but I was interested in terms of assumptions on improved productivity, any assumption on the decline rate, and also that billion dollars improvement today versus Baku. Thank you.
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Bernard Looney, BP plc - CEO of Upstream [3]
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Thank you, Theepan. Let me take the second question first, if I may. So from today, while from 2016 as you say, we're planning by 2021 to generate about an extra $14 billion of pre-tax free cash flow in the upstream, that is made up roughly as follows; obviously, the price in 2016 was $44, we're saying $55 [real] in 2021, so that's about $59. Our portfolio has price leverage, so we will see a response to that price, that's very clearly. If I could combine price then with the extension of ADCO in Abu Dhabi, in a pretax sense that's a material source of growth in our free cash flow. The combination of price in Abu Dhabi would make up about 60% give or take of the $14 billion. The remainder of the $14 billion is underlying improvement in the business and that comes, Theepan, across a number of dimensions, which you are well familiar with. We will expand the volume through this period of time, we're saying, we will grow volume by 5%. We say that we will continue to drive unit costs down through this period of time. We say that we will hold our capital frame constant through this time, fighting off any inflationary measures that we see and we say that the new production, the new-project production has margins which are 35% accretive. So that's what gets you to the other 40% of the $14 billion of free cash flow.
With regards your question around the makeup of our capital program in the upstream, where again, we have said to reiterate that we will maintain capital constant at $13 billion to $14 billion including the recent acquisitions, through this time period, around 60% of our capital continues to go into our major projects around less than 10% of our capital goes into exploration, less than 10% of our capital goes into license operate/integrity and the remaining capital goes into very profitable infield drilling in the wedge to manage that decline. So that's a rough split of where the money continues to go, the hurdle rates remain as we outlined in the pack, no changes to those.
You mentioned base decline, we have said that in history, we've guided people to 3% to 5%, that guidance remains unchanged today but instead of you having 3% to 5% and adding on new production, we try to just make it simple and say that on average, we expect 5% volume growth through to 2021. Does that help?
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Unidentified Audience Member [4]
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Hi, hello. I wanted to ask you about tax because I know that all the guidance is pre-tax, but of course we are mostly interested in post-tax free cash flow. In terms of the free cash flow improvement, can you talk a bit about what the impact on tax will be and specifically, how much of this will be in the United States, where you still have significant deferred tax assets to be utilized if the earnings improve. The second thing, I wanted to ask you about is the following, I think we all know that cost and prices in the industry are related. So, of course, 2014 oil prices fall a lot, we see a lot of cost savings but I have to say, I'm positively surprised by the cost savings achieved so far and the guidance suggests that this is going to last for an awful lot long further and will deliver an awful lot more and I was wondering if in your experience there is a historical precedent for cost savings and improvements, which have been so significant for so long, because I'm wondering whether it starts to fall in the sort of never been done before category that will be helpful.
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Brian Gilvary, BP plc - CFO [5]
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So let me pick up tax. I think we said at 4Q, [Martin], that the tax rate -- Abu Dhabi has a big impact. It's a very high tax regime versus pretax, versus post-tax. So we talked at 4Q about assuming an effective tax rate this year charge of around 40%, that number will come down to around 37% as the new portfolio kicks in. So if you look at what's been laid out today to 2021, think about something around 35% to 37% charge, and think about a cash tax rate on that portfolio which is skewed a little bit by Abu Dhabi in the early years and then gets balanced out as the rest of portfolio comes through of around 30% on a cash tax basis.
So as you look at all these numbers, and I know, you will want to do this, you will add up the upstream, you will add up the downstream, you will hopefully take something off things like pensions and corporate and other pieces and you will get yourself to free cash flow number and if you apply 30% tax rate that will give you an order of magnitude of the sort of free cash that the company should be generating after tax.
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Bob Dudley, BP plc - Group Chief Executive [6]
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Then I'll add and then Bernard, you can add something as well. On the productivity, I think, the world is changing. I think, productivity technology is driving sustainable reductions and if you can get your business processes organized right, there is something here that maybe never been done before in our industry and of course, it is a cyclical industry to do it, you've got to maintain the discipline. You can't go back with the same mind set and if you instil that discipline, you keep driving against some of the new technologies. I think, this is a different world in terms of productivity and efficiency. It's not all going to be that way, because some of the rates will come back up, but the kinds of changes that our teams have been driving in to the businesses, I think we'll stick is what we call it, Bernard you want to ?
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Bernard Looney, BP plc - CEO of Upstream [7]
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Yes, Bob, I mean as we look at inside the upstream, I think, Martin, there's two things that we feel are different and one is a sort of a belief around competitiveness, you could argue that the upstream has been isolated from true competition like the downstream has to face every day of every month of every year for the last several decades. One could argue that the upstream as a sector has been somewhat insulated from that over time. Our belief is that's changing and that we are beginning to face competition from alternative sources of energy. So we have to respond. So that's one thing that's different this time. And then, as Bob said, digitization and technology, there is no question that they are game changers. We're talking about running hundreds of thousands of full field simulations on one of our reservoirs in the Gulf of Mexico before that would have taken 12 months to execute that number of simulations to progress and visualize a subsea development there, it was done in less than two months, that's productivity at scale, that cycle time on a project, which is probably the greatest source of value in a project, that's very, very different. So I think, we're just beginning to imagine what's possible with digital. I don't think, we fully understand the spectrum, but I think, we're just scratching the surface. So digital and technology in that space are definitely a new tool in the toolkit that hasn't been around in the past.
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Bob Dudley, BP plc - Group Chief Executive [8]
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So then one, two, and then we have a couple on the line and then --
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Christian Malek, JP Morgan - Analyst [9]
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Hi good afternoon, gentlemen. Two questions, Christian Malek from JP Morgan. First, on your financial framework, coming back to CapEx guidance $15 billion to $17 billion, (inaudible) elastic to oil prices, I mean, just to be clear, so you've got an oil price range $55 to $60 but to what extent is there upside risk of oil prices are at $65 and downside risk for the, I just wanted to understand what is the standardization on that guidance? And the second question is your portfolio, it sounds to me in this presentation that you're very comfortable in your own skin in terms of what you deem as the organic outlook, but you've also given organic guidance of $15 billion to $17 billion of CapEx. So does that imply that there is additional CapEx you could put in, if you find the right deal coming back to the Q4 conference call or you being disciplined around that being up at both a hard floor and a hard cap, i.e. even if there is a very tempting deal, you are happy with your portfolio, you are happy with your production growth and you are not going to move?
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Bob Dudley, BP plc - Group Chief Executive [10]
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Well $13 billion to $14 billion in the upstream, I want you to comment on that, the rigor you got around that oil prices, Bernard?
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Bernard Looney, BP plc - CEO of Upstream [11]
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I think, we will be extremely cautious Christyan before thinking of changing that framework. I think, it's, we believe that what we've got to do ahead of us for the next five years that framework will service well, it drives the key thing for us, is it drives the discipline that is necessary. So we have options that are beyond that $13 billion to $14 billion, but when we test the projects against the hurdle rates that we have and when we test are the projects as good as we -- as they can be, this framework creates that discipline to continually test the effectiveness of them. And as Brian pushes us on having that framework also causes the discipline to continually sort, we have sorted project since Baku, some have left, that didn't compete, some have entered. And that's the rigor that the framework brings for us in the upstream.
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Bob Dudley, BP plc - Group Chief Executive [12]
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And if there are really good things to do, we won't -- we are not looking on the hunt for big acquisitions at all, but if there are good things to do like we've just done, we can do them, and then we can defer some of the other things or divestment some things. John in the back, and then I'm going to go to web.
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Jon Rigby, UBS - Analyst [13]
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Thanks, Bob. It's Jon Rigby from UBS. The first is, can we just maybe Brian, talk about the disposal programs that you have. I just want to understand exactly what it is you're intending on selling the nature of it. So we can kind of understand exactly what those earnings and cash flow impacts of those are and maybe how you're reshaping the portfolio from that angle. And then secondly, just talk on the downstream maybe, Tufan, if you could perhaps do something like Bernard did on the upstream and just do bit more detail bridging of what you're suggesting because it seems to me is that particularly two very, what I would have thought quite mature businesses, they have been around a long time, so lubricants retail, you certainly got big steps up in earnings expectations from both of those elements, which if I were to divide them into your oil price sensitivity, a very significant in the way that you expect your breakeven to move over the next four or five years. So perhaps if you could help me with that that will be great, thank you.
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Brian Gilvary, BP plc - CFO [14]
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So Jon, on disposals, for last year, it was a balanced suite of midstream, downstream quite a sizable property portfolio that you may have seen some of the announcements around those in terms of selling some of the offices that we've sold on a sale and leaseback basis. And I think going forward, it will be similar, it will be more midstream, downstream infrastructure. We've got line of sight and are deep into negotiations on a number of deals that give us a fairly high confidence around the low end of that range. In terms of what we'll get delivered through this year and then we have a whole suite of options that we're looking at and pursuing, obviously I can't get into specifics because some of them are commercially sensitive right now, but what I'd say is we have a high level of confidence around the low end of that range the $4.5 billion in terms of this year, and we're working on suite of options above that, but it's typically terminals, it's pipelines, it's other options that we're looking at, but if you'll recall that we sold over $50 billion or close to $50 billion if you take out TNK-BP of mostly upstream assets after 2010. So, this is really about how we high-grade the portfolio and coming back to how Bernard talked about the capital frame, it's across the whole portfolio, we are looking to high grade all the time and ensuring if something gets strategic and stays within the portfolio or other things that are not likely to get investment over the next two or three years and therefore become candidates for disposal.
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Bob Dudley, BP plc - Group Chief Executive [15]
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I think behind your question is how much operating cash flow is going to go out? And the assets we've got tend to be kind of annuity-type assets we can measure, but we're not talking about large operating cash flows. If you subtract it.
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Tufan Erginbilgic, BP plc - CEO of Downstream [16]
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I think Jon, on downstream. So first of all just to frame it, we talk about more than $3 billion underlying earnings to come from downstream and given that so you should take that and the combination breakdown of it is sort of $2 billion of it more than $2 billion is marketing, which I will come back to your question, and more than sort of around a little bit more than $1 billion is petrochemicals and refining. And then any refining margin upside you need to that obviously because I'm talking about underlying earnings here. So let's go to your question, retail and lubricants, where is it coming from? First of all in last -- look at the track record last two years. From those businesses in two years, we delivered $1 billion underlying earnings and where is that coming from? Just to give you a little bit color and if you actually project next five years take this $1 billion, look at next five years another more than $2 billion will not look enormous, I would suggest, but I will give you a little bit color on lubricants, yes, it is globally 1% growing market, but actually growth markets are growing much more than that and now 60% of our earnings are coming from growth markets and more to come, actually premium lubricants is growing 3%, 4% in the world. So that is where you have much higher margins. And on fuels marketing, even in mature markets, we again have exposure to growth markets and new markets, you should put that as [one block], but even in mature markets because of our differentiated strategy, one thing, I don't believe has [landed] yet, our retail strategy and our retail is very differentiate. Convenience partnerships, I just showed you a UK example, we have been, it is a mature market, we have been growing our earnings in the UK last three or four years double digit every year driven by this kind of, sort of a different knowhow and different offer and that will continue and that creates another break there. And the third one is, third and fourth one Woolworths deal will add something obviously, it is in the numbers. And then the aviation, Air BP is probably the best air business globally right now. And that is, that's exposed to growth and that is growing, that has been growing and we expect that to grow further. I hope, I gave you some color at least.
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Bob Dudley, BP plc - Group Chief Executive [17]
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We have people coming to our stations that aren't buying petrol, they come for the convenience offer. Let me go to the U.S., Blake Fernandez of Howard Weil, are you on the line?
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Blake Fernandez, Howard Weil - Analyst [18]
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Hi, Bob. Thanks for taking the question. I think the first question is probably for Brian, I believe Bernard mentioned, new projects having about a 20% lower development cost, yet on the guidance, I noticed DD&A was missing where historically, we've had that guidance, can you comment on how we should think about that moving forward? I presume that's a big driver of the 10% ROACE target?
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Bob Dudley, BP plc - Group Chief Executive [19]
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Did you have a second question there?
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Blake Fernandez, Howard Weil - Analyst [20]
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Yes, sorry, the second question is basically on the base decline, it's not just BP, but industry we've really seen kind of come down toward the lower end of historical levels. And I presume that's a function of short cycle or infield type drilling, I'm just trying to get a sense of how confident you are that we're going to remain at that low level for the next five years, which I presume kind of underpins that 5% guidance? Thank you.
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Brian Gilvary, BP plc - CFO [21]
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On DD&A, Blake, we can come back to, I'm pretty confident, it's pretty flat going forward from where we are today given that we've got the limits on the amount of capital going in and that we've got all the new projects coming on-stream this year. So you shouldn't expect a bump in DD&A going forward. And of course DD&A has been trending up over the last four or five years as we've rebuilt the portfolio.
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Blake Fernandez, Howard Weil - Analyst [22]
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Okay.
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Bernard Looney, BP plc - CEO of Upstream [23]
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Blake, on the base decline number, I think for us in BP, there's been a number of dimensions that have given rise to our performance exceeding our guidance and our historical track record. Yes, its been improved productivity of the wedge, but it's more than that as well. It's also -- we have taken the reliability of the facilities over the last four years from 84% to 95% that's been a material improvement. We've done, we're putting about 1 million barrels a day extra of water in the ground in our reservoirs over the last of couple years compared to what we used to be, but there is more that we see that we have to do. So plant reliability now at 95% is probably up there amongst the best. We're now looking to broaden the metric and look at operating efficiency and it's a measure across four separate chokes with the plant being just one. Today, if we look at that metric, we're about 80%. We want to drive that number in excess of 85% over the next three to four years. So we think there is running room there, we're going to continue to push the productivity of the drilling wedge, that is clear, that we've made improvement there. We have internal targets to make that more efficient and then doing so make more of those barrels economic. So I think, our guidance would remain at the 3% to 5% range. We will be fighting very hard to make sure that the track record of 2.5% over the last five years continues. I hope that's helpful.
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Bob Dudley, BP plc - Group Chief Executive [24]
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One more from the web, Jason Kenney, Santander.
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Jason Kenney, Santander - Analyst [25]
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Thanks for taking the question. So I am going back to Blake's question, I just wondered where you think capital employed [would] move over the next four to five years, I suppose being bit more explicit on that. I think you were looking at around $135 billion, $140 billion last year. Do you think capital employed could go below $100 billion in the next four to five years and maybe associated with that, just looking at the target for 10% ROACE, is there a reason for oil companies to probably more aggressive with return on capital employed. I mean, I'm thinking back to 2002, 2003 before oil prices really began to fly, you were still getting 12%, 15% return on capital employed, but obviously, I can understand 15%, 20% return on capital employed when the oil prices rising and [some costs] three, four years prior but 10% to me just seems pretty average or pretty normal, it's not an exciting number, I was hoping to see 12%,14% return on capital employed targets within the next four or five years, is that a possibility?
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Brian Gilvary, BP plc - CFO [26]
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So, Jason, if I could, so first of all on the capital employed question, you're right, it's around about $140 billion, splits about roughly [60-40] or [66-33] upstream, downstream and you would expect it to see given where DD&A is and the amount of capital that's going in between[15-17], you expect the capital employed to start to grow at a relatively steady rate but not on a sort of rapid rate. So you'd expect some increase in capital employed as you lay in the capital in. On the returns question, you sort of have to remember where the base from where you're coming from over the next five years. So longer term, there is no question of course so despite a higher return and actually the number what we've shown here is above 10%. If you look at the IRRs on a post-tax basis, that Bernard and Tufan both talked about in terms of the nature of the new projects, they continue to be in the mid-teens, some towards the high teens, some higher than that. And that is the question whether a particular project is strategic or it's off the back of the income and positions that we have. So of course, we would aspire to get to a lot higher than 10%. Nevertheless, we're only talking about a five-year time frame from where we start today, where you've got the combination of the capital that's gone in over the last five years at relatively high prices, if you look at 2010 to 2014 period. And the disposals of assets that were returning 50% post tax, if you looked at the $50 billion they were significantly high-returning assets that were sold off. So, we're in a rebuild phase, if you like the next rebuild phase after the ten point plan. Of course, we aspire for higher returns, but if you also look at where the markets are today, I think something above 10% in the sector five years from now is still a strong competitive result.
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Bob Dudley, BP plc - Group Chief Executive [27]
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Just to stress the math on that $50 billion of divestments, many of which had over 50% returns, highly depreciated assets we sold, it puts us I think in a slightly different, so special sort of circumstances for us to get to 10% which is a tough target. And we'll go.
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Lydia Rainforth, Barclays - Analyst [28]
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Thanks, its Lydia from Barclays. I have got -- ask three questions, if I could. The first one, and if I probably for Brian and Bob. In terms of, it was clear you made a choice in terms of the acquisitions that you did in terms of those acquisitions sacrificing almost short-term the breakeven. Can you just talk through a little bit more that decision and at what point and what might trigger you stopping this grip and offsetting that dilution. The second one was to come back to Rosneft, and I appreciate all the [advances] it does give you, but in terms of financial returns, the yield is relatively low, and when I look at the growth that Tufan and Bernard, and the returns that they are offering, do you ever see that as an opportunity cost in terms of those and the assets. And the third one is probably little bit for Lamar and for Bern as well. In terms of the carbon pricing side, how are you looking at how you do the gas projects, given the uncertainties on the carbon regulation actually exist at the moment?
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Bob Dudley, BP plc - Group Chief Executive [29]
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Well, on the acquisitions, we could see the balance point insight that gave us the confidence to be able to move forward with those. The OPEC agreement on November 30 was a factor because we did about three of those after that during the month of December. Abu Dhabi is one, we've been working in a long time, I can't really-- we should not really talk about the terms there, but the terms are different than what we were offered in 2014. So they became something that became attractive to us. We were very clear, we were not going to be in a position to pay the $2.2 billion in cash and so that that deal was accretive, I think we got a strategic shareholder now and I think that one really make sense for us which is an agreement that will go out to 2055. The Zohr addition, we've been working in Egypt for a long time, we've got a massive gas position there. We believe that it was important for us to be part of that and there is all kinds of things that will come on the back of that working with our partner Eni and other things as well. Tangguh Train 3, easy bolt on decision for us, not a dollar of extra overhead for 3%, that opportunistically came along. So I think, it was the confidence, had we not been able to make the -- reach the settlement in 2015 with the US government, it all traces back to that, that began to make us confident that we could plan the future of BP, renew with those cash flows are going to be like. And then the pace of cost reductions out of the system gave us a confidence on those, I feel really good about those that set of acquisitions and they're accretive that was the other criteria. Anything you want to add?
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Lamar McKay, BP plc - Deputy Group Chief Executive [30]
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No, nothing, it's second part of that first question and of course the first thing we'll do is offset the script, and this whole question of balance point was maybe a little bit overblown at 4Q because actually, we'd lay plans in place without the portfolio to better describe is not to be missed, because there's no regrets around the portfolio that we acquired absolutely no regrets across the team. This is a great set of assets that I'm sure a lot of companies would like to been able to find themselves in those position. So that was important. The fact that we've actually managed to get all of our [plants] into balance within [a quarters] that would set ourselves an internal target of doing that, basically gave us the confidence to say, if we have to, we may not need to flex the financial frame this year, i.e. the balance sheet and we're talking about hundreds of millions of dollars. We're not talking billions in terms of this -- this in terms of 2017, so it's actually not that too difficult decision to make. And then as we get into 2018 and the end of this year, we'll see how this year pans out, but we'd look to offset the script of the first opportunity we can and we are back to surplus cash.
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Bob Dudley, BP plc - Group Chief Executive [31]
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In terms of Rosneft, this is an amazing long-term option for the company. They have moved the dividend policy up now starting next year to 35% of IFRS earnings will be paid out in dividends. The company, we know from in a way transforming TNK-BP how much efficiency is yet to be driven in the Rosneft and we've been working with them now closely and they are really interested, so we have people working with them in all kinds of different areas. I think the company has enormous potential to become more efficient. They are good company, it's a real oil and gas company, made up of real oil and gas professionals. We also don't want to be just a financial investor in Rosneft or in Russia. We think that's not wise. So we're investing in a series of projects, some that are producing properties today in East Siberia, areas of exploration in the heartlands of West Siberia with acreage the size of Britain some with existing discoveries. We've got a lot of potential there in Russia. We have to pace our capital, we're going to do it within the discipline of the framework that we talked about, but I remain very optimistic about that as an option. Carbon pricing?
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Bernard Looney, BP plc - CEO of Upstream [32]
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Yes, carbon pricing for new project, we approach it from several different dimensions. First, we do like a lot of people do, we run carbon pricing per ton in our project economics. We normally run for gas project that's going to have any touch to an international market $40 a ton, we'll bracket scenarios above that to things that we think are at the upper end of the timeframe that we're evaluating. The other dimension is we try to design these new projects to minimize number one flaring, number two methane emissions, so you come at it from the project itself standpoint. The third thing is we are continuing to look for integrated solutions in certain areas where you can provide something for a host government that might be an integrated solution, they might have some renewables, they might have gas. Might be offsetting coal, so you can come at it from not only the project itselfs viewpoint, but also what you're trying to do holistically with the host government. So we look at -- we try to think about those things in each and every project.
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Oswald Clint, Bernstein - Analyst [33]
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Thank you very much, Oswald Clint at Bernstein. I just wanted to come back to the 10% percent return on capital again please if I could and more on the gas, the gas component to getting to that number, I understand Egypt, Oman, Trinidad, Tangguh et cetera that high returns are, but in the US, I think it's easy to portray a picture where gas could stay very low and get much lower and go into the twos and stay there, so if that was happening, would you look at this number one US gas position that you mentioned the thing or maybe that's too much, it's risking this 10% capital -- return on capital by 2020. Just curious to see how you think about that? And then also as with Bernard's point on another chunky asset up in Prudhoe Bay, you talked about not drilling very much but still detecting, identifying advantaged barrels and pulling them out and keeping that asset flatter, just curious to see what exactly is happening there and what the sort of upside from that particular asset? Thank you.
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Bob Dudley, BP plc - Group Chief Executive [34]
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Thanks Oswald.
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Lamar McKay, BP plc - Deputy Group Chief Executive [35]
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Maybe just on the first part, because there is two parts of that question. When Bob talked about being the number one gas marketer, do not assume that means capital employed. So as a big gas marketing and trader in the United States and actually in the renewable space, we trade 40% of the carbon credits in the United States, we have significant position. On the gas marketing side, there is very little capital other than capital employed around tanks and storing the gas actually inside the calculation, so that's quite distinct from our Lower 48 position whose capital employed is relatively not small, but nothing like as large it was back in 2010, but I don't know if you want to add anything on the Lower 48 position, Bern.
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Bernard Looney, BP plc - CEO of Upstream [36]
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Yes, I think on the Lower 48, Oswald, I think just to put a few things in perspective. The performance of that business has been transformed over the last couple of years under Dave Lawler's leadership. Costs are down by one-third, headcount is down 53% and the cost of the amount of dollars it takes to create a flowing bar -- 1,000 barrels a day of production has improved by 63% over this time period. So this is a business that is fundamentally in different competitive shape to when it was a couple of years ago. Now if you look to your question at the competitiveness of it in a sub $3 Henry Hub environment, the team is driving that performance each and every day. If you look in the San Juan, our breakeven operating cash there is $0.90 is what the team is working on, $0.90 an mmBtu. So this is a business that had its performance transformed, they're chasing new zones, they're chasing new fields. We've got five rigs a day working in the Hinesville. We've just acquired acreage there. You're talking rates of return, which are extremely competitive well in excess of our 20% at current prices and obviously robust to a lower price environment. Operating costs, which are now below the peer average for the first time in our history. So as long as we continue to drive the performance and digitization, by the way is taking hold in this team in a way that we and the rest of the [option] can learn, as long as we can continue to upgrade the portfolio in a very, very cheap way, we've accessed 850 million barrels for $0.30 or $0.40 a barrel. This is a business that can absolutely re-robust in a low price environment and we're not betting on prices being $3 to make the business successful.
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Bob Dudley, BP plc - Group Chief Executive [37]
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There is a myth that it's all dry gas as well.
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Bernard Looney, BP plc - CEO of Upstream [38]
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The recent acquisitions we've done in the north and ones that we are chasing liquids, in the swoop, we're chasing liquids. And so, it's not a completely dry gas business, but we're definitely not betting on a $3 Henry Hub environment. We recognize that it has to be competitive and the returns have got to meet those hurdles. On Prudhoe Bay -- Prudhoe Bay is about to celebrate its 40th year. Will be up there, later in the year in June and summer, a good time to visit, but 40 years, it was supposed to have a 25-year life, so the team on the ground has done an extraordinary job. We've driven the breakeven down by 40%, we think there is more to come, Janet Weiss and the team believe there is more to come. Its right across the spectrum. We think there is more operating efficiency we can get. The tie-ins are being tied in faster. The cost base there is continuing to improve and needs to improve further. The team has just been down in the Lower 48 with Dave Lawler looking at that basin and what they can take home from them, they are looking at local competition in Prudhoe and Alaska. So we believe that there is decades ahead of us in Prudhoe, but it's going to continue to drive that breakeven price in the right direction. And again, as we look at technology, I think this is an area where the modernization transformation agenda has got massive, massive leverage. So lots to do in Prudhoe yet.
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Irene Himona, Societe Generale - Analyst [39]
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Thank you, it's Irene Himona at Societe Generale. I wanted to focus on natural gas, if I may, which is growing from 50% of your production, I think you mentioned towards 60%. First question is how much of your current gas output is oil price linked and how does that change by 2021? And then secondly about five or six years ago, you made a fairly sizable acquisition in [Indian gas]. I wonder if you can update us on that part of the portfolio and how it fits in your plans. My final question is, Bob, you mentioned that there is a lot more to do on simplifying BP, I wonder, what is your timeframe to reach a point where you're sort of satisfied, you've done most of it. So how long does that take? Thank you.
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Bob Dudley, BP plc - Group Chief Executive [40]
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Well, Bern, you can add to this. Natural gas, a lot of our natural gas in Oman and Egypt for example are contract -- fixed contract prices. We like operating, developing advantaged gas, where a country is short of gas and the rates of return on the projects have been sort of fixed for the gas price contract, so very happy with that. Our LNG pricing still -- our contracts out of Tangguh and out of Trinidad generally are still oil price linked with different slopes there. So we -- very selective about these investments in natural gas, because you can get into a spot where you've got volumes as you can't get away at a reasonable price, but on the --
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Bernard Looney, BP plc - CEO of Upstream [41]
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The only other one I'd add Bob is Mauritania and Senegal, where we've accessed a giant competitive, what we believe is a giant competitive gas position in Mauritania and Senegal through the [Torzhu] discovery. To Oswald's point, we believe that, that gas will have to compete with US Henry Hub pricing. And we believe that it can compete with US Henry Hub and we believe it will compete. We also believe that project when it comes to be sanctioned will meet the thresholds that we have laid out here today. It's modular, it's flexible, we can grow it over time. So we don't have to put a massive, massive project on the ground on day one. I would add that it's not FLNG as in the big FLNG that you've seen is very, very different concept, very near shore. shallow water, module sitting on barges basically. So that's an example of a piece of access that will be very competitive, Irene, we believe. And offers real upside to us. Exploration, there will be four exploration wells drilled in Mauritanian and Senegal over the next 18 months, and who knows what we'll find, but we are drilling some of the largest prospects in that basin that the entire industry will drill worldwide this year, so more to come on that hopefully.
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Bob Dudley, BP plc - Group Chief Executive [42]
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On India, there's a new pricing model in India that came in January of this year. We have just retooled all these satellite development plans that we have and deeper fields under D6 and they are very competitive for the capital in the frame. We are not going to go forward with that unless there are really clear written procedures on cost recovery out of those contracts and that the pricing mechanism is actually really clear, but we've got loaded our pipeline of very competitive projects there. It still sort of astounds me a little bit that a country would pay so much for imported LNG and not develop its own gas. And I think that message is now hotly debated and that's probably going to happen this year, but we're not going to guarantee those FIDs will get down yet.
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Brendan Warn, BMO Capital Markets - Analyst [43]
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So, it's Brendan Warn from BMO Capital Markets. Two questions, I guess, the first question circling back to the Lower 48, I notice you've got it producing about 15% of your production by 2020, you included in your managed sort of base. Can you just talk around by 2021, is it what sort of percentage of your free cash flow or is this the business segment that is still in outspend and demands from the parent? And then just back on Irene's question on LNG and Mauritania and Senegal, you are going to be both the seller of LNG and a buyer of LNG, or seller on behalf of your partner. Can you talk and these volumes post 2021? Are you looking still that they are all price linked, even though they're into Europe. And in terms of your financial framework to keep your CapEx development down, are you looking at project financing of that project and plus before FID, which I think, believe you're saying will be ready by 2018, would call a contracting of the [gas B] requirement.
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Bernard Looney, BP plc - CEO of Upstream [44]
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Let me take the Lower 48 and percentage of free cash flow and so on. I think Brendan, what I would say is, what the Lower 48 gives us is a very, very flexible investment option. What we're very clear and the team is very clear on is that, when we invest, the investment has to be competitive on a rate of return basis. So we are looking for 20% rate of return at prevailing gas prices in the Lower 48. That's what the team has enabled now and that's what they have. And we are increasing our investment into the business. So this year, the business will produce a little over -- or last year it will produce a little over 300,000 barrels a day. By the end of this year, it'll be up to about 300. We've got 12 rigs working. We see investment rising over time, Brendan in the Lower 48. We see production growing on the back of it, we see returns being maintained to meet that 20% threshold. There is always a debate about the cash out of the business versus the investment quality and the growth potential. And that's a very healthy debate that we are continually having inside the business, but what we've got is an option that is flexible, that we didn't have before, because we didn't have the performance to enable the conversation to even to be had. So we've created that within the frame, it does grow, it gross production, there is growing investment, it meets the returns threshold and it is a business that has the potential to throw off material free cash flow if indeed as you said, that's what the parent decides over time that it wants to do.
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Brian Gilvary, BP plc - CFO [45]
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Now in terms of -- obviously it will be too soon to say, what sort of price that we would be looking for, but we have a significant trading LNG business that has both shorten length and we have a whole suite of potential pricing options. We have prices [that are oil linked], we have Henry Hub deals into the Far East. So we'll look to optimize within the overall portfolio in terms of where the lengthen short are at the time, but it will be too soon and this probably wouldn't be a place to be sharing what the contractual pricing may look like for those particular barrels.
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Bob Dudley, BP plc - Group Chief Executive [46]
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And there is also power -- need for power there as well. So it would be a combination of LNG and local power in Senegal in particular. Irene, I missed one of your questions about simplification, I'm sorry. I don't think there is a destination time on simplification, simplifying BP. The things that we are learning on what digitizing our business means, the mining of Big Data and what it's meaning for all kinds of processes across the company, still sort of amaze us all every day. Standardization of what we're doing, the new functional model, I mean we had to put a functional model in after the accident to standardize BP that's created the platform now to make sure we can share quickly expertise and learnings, but I think the world of technology is going to simplify, many, many things that we all do actually beyond even our imagination now. So we just keep driving it.
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Robert West, Redburn - Analyst [47]
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Robert West, Redburn. I have done something a little bit dangerous, I've taken out my calculator and I've gone through just a bit of compounding. So you said like 3% to 5% decline rate, 5% total growth, 800,000 barrels a day of project growth, I've probably already lost you all with numbers, but if I look at that, I think that there's maybe 200,000 barrels to 300,000 barrels a day of growth by 2021 not explained by that 800,000 barrels you already have coming through. Could you talk a bit about where that is going to come from? And is it maybe tight gas contributing to that in the US or secondarily, this is my second question, elsewhere. So one thing you didn't talk much about today is something I have been wondering about for a while, which is whether BP has kind of advantage in tight gas. I mean that not as looking at the US business, but by the way I reckon it, Amoco there has about the first big successful high cash margin tight gas projects, you or any of your competitors have done internationally. Do you see yourself following that up with further international tight gas, is that an area where you could grow? And the final one I wanted to ask you, it's already three, is just, Lamar, you mentioned in your presentation about I think $200 million of spend on renewables. And so I guess that's maybe about 1.5% of the total CapEx of the Group, I think some of your peers are closer to 5% to 7%, in a world where oil and gas CapEx is maybe $700 billion a year and renewables CapEx already is about $300 billion a year, why still so low, why the reluctance to go into that space a bit more firmly especially start looking at some of these technologies on a cents per kilowatt hour basis. Thanks.
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Bob Dudley, BP plc - Group Chief Executive [48]
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Let me take the first one, because it just proves digitization and technology is very -- you got your calculator with you. You get the 800,000 barrels a day was before the Abu Dhabi, the Zohr, those transactions that we were talking about and that right there is probably more than 200,000 barrels a day. So that's one gap and we talk about the upstream and then we talk about Russia as well, if you talk about today 3.3 million barrels a day, Rosneft is about [1.1] in that for -- I would expect Rosneft itself to be [1.5] for us, we are heading out that far as well. So there is a lot of I think cushion in that number. Tight gas, I absolutely think we do have capability in this, that is quite distinctive applying it at scale, taking what we learned in the Lower 48 to Oman, tying that with the digitization and the field development plan early enough to be able to change it and optimize it as we go. It's quite exciting the Oman field. We signed an agreement earlier this year to expand it by another 50%. There is more there. So, I think, we're proving, we do have that capability and we can use that capability in place as well like Argentina in the shales there with our Pan-American joint venture which may be more liquids but trying to use what you learn in the Lower 48 and take it around the world is definitely an objective of ours. 1%?
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Lamar McKay, BP plc - Deputy Group Chief Executive [49]
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So I think the simplest answer is that we don't -- $200 million is what we're saying for this year and is based on sort of wide aperture venturing approaching those [five lands]. I don't personally think it -- we don't think that money going in is the measure of the industry in terms of how you should measure your investments, because I think money coming out would be something we've got to look at as well. So the quality and the value -- of the value pools that we need to access is still something of a fair amount of uncertainty, so what we're doing is laying out options to try to see when we would press the accelerator in some of these land. So I don't think money going in is the measure right now.
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Bob Dudley, BP plc - Group Chief Executive [50]
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We know the world is going to change, and we invested probably $8 billion to $10 billion in renewables early I think, an early adopter and probably too early and as you know about $8 billion of that was written off in the last decade. So what we want to do this time is screen the world, scan, look at all kinds of things, step-in with small interest in technologies and partnerships, so that we really know where to invest heavily when the time comes, and I think that's best for our strategy, but the amount of work that's going on screening and scanning and partnering is quite large.
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Lamar McKay, BP plc - Deputy Group Chief Executive [51]
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Our job right now is participation and engagement in the right areas and try to understand where value may be created.
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Chris Kuplent, Bank of America - Analyst [52]
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Chris Kuplent, Bank of America. Two questions, first one for you Bernard. Sorry, I'm asking for another bridge. And as you said, it's only been eight months and you gave us a free cash flow number in Baku of $7 billion to $8 billion in 2020 and maybe that's another way of getting at it. And I haven't used a calculator, so maybe that's dangerous. Where do you find those $6 billion? I understand, you've used a slightly higher oil price assumption and make that $1.5 billion, an additional $1 billion of cost cutting, there is probably Mad Dog in there in 2021 , ADCO, which we didn't have in Baku, if you can just help us bridge those two years or one year, frankly. And the second question maybe for you Bob or Tufan, how are you positioning yourself ahead of what could be quite significant political changes in the US, how concerned are you about profitability value at risk in waiting for example from border tax adjustments, where is BP in lobbying the US government from here on out? Thanks.
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Bernard Looney, BP plc - CEO of Upstream [53]
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There are four parts to it, Chris and you've alluded to them. So just to help but the four points are price compared to Baku, so we're going from [BRL50 to BRL55], number one. Number two, is the acquisitions in particular Abu Dhabi , number three is we've added a year, so we've extended the guidance from 2020 to 2021 and, number four, underlying performance improvement and the breakdown is roughly price as you said is a little under $2 billion. So we have price leverage, number one. The acquisitions are a little over $2 billion, the extra year is a little under $1 billion and the $1 billion of performance improvement is $1 billion, and that's how you get to the bridge from Baku. What we're simply trying to point out is that that's $1 billion of performance improvement in six to eight months. The underlying business from 2016 is generating in excess of $5 billion of underlying improvement through that time period. So, that's hopefully the bridge from the period in Baku.
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Bob Dudley, BP plc - Group Chief Executive [54]
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Well, I think on the political front in the US. I was just in Washington this week, BP is active in the Business Council, Business Roundtable. I will say this, the White House is wide open for people to coming in and talking to them and giving their views now and they are seeking them out more so than any day in the last eight years really. So they're very interested in what we think as a company, there is BP individually, and collectively as industry goes, I think there is a huge debate about the border tax that I think is a political issue between the White House and the Congress actually and I actually don't think that, I think there is negotiation going on, and I don't actually see that happening myself. I think our business is there, a very robust. The oil and gas industry has certainly got a boost in the US, generally. So I don't see it as a threat, and so I'm actually think we're very well positioned there. Tufan, with the Whiting refinery, but not going into what a border tax would do or not, but I think that's well positioned.
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Tufan Erginbilgic, BP plc - CEO of Downstream [55]
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I mean, Bob said it all actually, so it's still early days, obviously we will be closely watching that, so.
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Bob Dudley, BP plc - Group Chief Executive [56]
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It's a remarkably open administration to business, I mean, I came away last week shocked actually from meeting specifically cabinet officials one on one asking, what do you think where are your problems? I'll give you one example, we talked about the United States probably only country in the world with the Gulf of Mexico leases, where you've got to keep spending every 18 months to hold on to a lease and in the deepwater that doesn't make sense today. So effectively, we were heading down the path where lot of companies, the leases were going to expire and the administration today says, but why would we do that? We said, well you shouldn't do that, no country in the world will do that. So I think things like that have the potential anyway to help businesses -- high capital intensive businesses, manufacturing businesses. That's probably enough on politics, let me right here.
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Jason Gammel, Jefferies - Analyst [57]
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Hi, thanks, this is Jason Gammel with Jefferies. I had two questions please. The first, we've talked about gas becoming a bigger component of the upstream business, about marketing and lubricants becoming a bigger component of the downstream business. So the question is do you really think that the volatility of your underlying earnings is going to be decreasing over the next several years. And if so, how does that affect how you manage the financial risk of the company, I'm really thinking more in terms of are you comfortable allowing the debt level to move up towards the top end of the gearing range or perhaps [that bothers] so you can prioritize returning cash to shareholders and perhaps whether that's through buyback or dividends, you can address that. Second question, we haven't had any incremental acquisition questions yet, so Bernard, just like to ask you if the taxable position that you have in the US has any effect about how you think about perhaps picking up more shale acreage in the US in general rather liquid shales is too expensive on a full cycle basis and rather something like the San Juan where you already have a dominant position would be somewhere that you would add to preferentially.
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Brian Gilvary, BP plc - CFO [58]
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So, maybe on financial frame in terms of the balance sheet and gearing. We run stress tests routinely as part of our group financial risk oversight both that we have within the company and that gets review with the audit committee. And we're well within all the stress tests in terms of liquidity stress tests that you look at in terms of the gearing. Within today's financial frame, we have up to $7 billion of capacity, even within the range that we set today around 20% to 30%. So I think that gives you some confidence, that actually we can deal with most volatile situations, but I think more importantly the acid test is we did deal with a very volatile situation back in 2010 and came through that and really reached the whole balance sheet with a provision of $62.6 billion, so that says actually, there aren't many companies could have come through that and lot of the things we deployed then, we still have in place today that we could use and do use. And the second piece is around the future cash flows that you can see coming through in terms of the -- looking at the balance sheet that -- well that says, if you look at forward trajectory, what we've laid down for you today, the balance sheet simply gets strong as we go forward. So I think there's a lot of capacity within it. In terms of volatility of earnings, we're in a volatile business and there will always be volatility of earnings inside that business nature by the cycle or the commodity cycle.
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Bob Dudley, BP plc - Group Chief Executive [59]
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You're right. Jason, as the portfolio goes to gas, the volatility overall should come down somewhat, whether that's a good thing or not, I think we need to continue to debate that as a management team. We don't want to be completely unexposed to oil for example as a company, but we recognize what you're saying, which gives us more stability actually in the balance sheet I think for long run in the dividend.
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Bernard Looney, BP plc - CEO of Upstream [60]
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On the acquisitions, Jason, I think -- first, the starting point is, we don't need to do anything. Again, we like the portfolio that we had, we said that in Baku by the way. We said, we like the portfolio that we have. We just happen to like the portfolio that we have today, even better following the [5 billion at a dollar]. So, but we're not in a position today where we're out there desperate to do something. Your points are well made, anything that we have to do here, Brian will be the first to remind us has to be accretive, accretive to earnings. We have to generate value were we to look at anything. Any of the oil plays in the United States seem -- you got to have a pretty bullish expectation on price to figure out how you make money out of them and even on gas acreage in the area that you alluded to, I would say that the prices that are being looked for there are also way out of the money, so we will continue to test and to look for bolt-ons as we have done, where we can deepen, where we can apply, Dave and his teams, what I think is becoming a pretty competitive edge, but look to do it in a very focused way and only do something larger were it to be truly accretive and truly strategic, and right now as we sit today, very difficult to see that.
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Colin Smith, Panmure Gordon - Analyst [61]
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Thank you, it's Colin Smith from Panmure Gordon. I've got two questions, first of all, the [ethanol ADCO] concession, I think expires next year, its about 100,000 barrels a day net to you, I just wondered if you could confirm that that's assumed to continue or to be renewed in the guidance that you've given, and whether you think that would be done for stock as the ADCO deals was done or what status is on that?
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Bob Dudley, BP plc - Group Chief Executive [62]
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It's not in our projections, it's not in our projections, doesn't mean, we're not interested in doing that, but it's not in the numbers.
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Colin Smith, Panmure Gordon - Analyst [63]
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Bob, perhaps and you might like to comment about whether you think it's likely that you would renew it or not?
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Bob Dudley, BP plc - Group Chief Executive [64]
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Well, we just don't want to be presumptuous with our friends in Abu Dhabi.
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Colin Smith, Panmure Gordon - Analyst [65]
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Fair enough and the second one was just on Gulf of Mexico, obviously I appreciate you take the charges at it when you're looking at underlying earnings, but you took a pretty big provision last summer and you were still running with a $700 million charge in 4Q and I just wondered prospectively that charge sort of completely disappears or if we should still be expecting it to be a noticeable number, small hundred and millions or something like that rolling forward?
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Brian Gilvary, BP plc - CFO [66]
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So, I'll pick up that question. So, we did, actually what we did the middle of last year was actually come out with an estimate around the business economic loss claims. So if you look at Macondo Deepwater Horizon there are about eight or nine different components. Eight of which are locked down in the payment schedule. The one that was uncertain, we couldn't provide for we've provided for that was a sizable $5 billion that we took in the middle of last year, because we could actually come up with an actuarial calculation. The simple answer is back then there were 34,000 claims to be processed, today of a 150,000, so 150,0000 claims in the system, middle of last year, 34,000 still to be processed. The estimates were revised again at 4Q based on a higher payment rate that went out in the fourth quarter and that was the extra [$625 million] we took of 4Q. We re-estimate at every quarter going forward. All I can say in terms of giving you some confidence around where that number may or may not go to in terms of uncertainties around that is we're down to now less than 5% of claims still to be processed, and we'd expect those claims to be all processed through this year. So we're down to last 5% of those claims. So I think that gives you something in terms of a boundary around how that may move, we'll make a best estimate every quarter based on the claims that are being processed through the quarter. We're in the last final strokes of that particular claims facility and those claims.
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Bob Dudley, BP plc - Group Chief Executive [67]
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Ladies and gentlemen, I'm going to take the last question, because I realize, this is number of us, we got to get to Heathrow to catch the --
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Bernard Looney, BP plc - CEO of Upstream [68]
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Flight to New York and two of you just left to on that flight, so maybe nervous.
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Unidentified Audience Member [69]
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Thanks very much, I'll try not to hold up too long, but unfortunately it's through, you will be, they are relatively brief. The first was, I'm delighted to hear about you talking about constraining CapEx and living within a [15 to 17] band. I just wanted, how, in terms of the opportunity set going forward and that the 15% to 20% returns that you're looking at, how long do you or how deep is the portfolio such that you have opportunity to invest that rate of return into the medium-term, the industry tendency I guess over the last 10 years has been to take down on return and unfortunately well hardly for the benefit of shareholders. Secondly, just out of interest, in Baku, the oil price used was $50. I'm just intrigued, not least given Spencer Dale's comments, but also your conservative nature on oil prices, why you've decided to move to [$55] in terms of planning such as what was the thinking was behind that. And finally, because I just have to ask this to Tufan, anyway, within the 20% return on capital that you're looking for in the downstream by 2021, is chemicals expected to attain that level of return?
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Brian Gilvary, BP plc - CFO [70]
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Let me take the second question around planning assumptions, we revise them every year. [$55] seems like a good number, certainly for this year or next year, we could into a whole coverage of the demand of [1.3] this year another demand next year of [1.3]. I think [$55] is well underpinned. So that sort of explains why we have the planning assumption and that -- and what we try to with this is keep it flat going forward [$55] and in a year's time, we may revise up or down based on the noise that we have at that point in time.
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Bob Dudley, BP plc - Group Chief Executive [71]
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We planned last year at [45] drifting up to [50] by the end of the year.
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Tufan Erginbilgic, BP plc - CEO of Downstream [72]
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Should I pick up petrochemicals? On petrochemicals, so what I said is in a similar environment today, which is actually bottom of cycle, if you are thinking about it, we will achieve double-digit returns because we make that progress, I can actually see in the next couple of years, we will get there, not 2021. So that is all underlying, but if you look at petrochemicals actually demand is still growing and we don't actually see much capacity coming in next couple of years. So we expect utilizations in the industry to go up, which should normally result in margins to go up. And therefore actually what petrochemicals does to you is effectively even if environment doesn't improve, it gives you double-digit returns, when environment improves, it actually gives a much better returns, but also optionality to grow in a growing market, because actually fuel efficiency, electrification all the things we talk about, none of which actually affect petrochemicals. It is always good optionality in the portfolio.
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Bob Dudley, BP plc - Group Chief Executive [73]
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And [Lucas] your question on 2015 to 2017, I think it was about the portfolio depth and do we have it? Is that why we're not raising it, is it?
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Unidentified Audience Member [74]
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I am delighted that you should have put that ceiling and wrap it around yourself. It's more that if I think about all of you, you've been recycling, recycling, recycling capital, recycling, recycling, recycling project, trying to get to a point where the return is acceptable and you take decision, we are seeing that the best are clearly coming through now, the Mad Dogs et cetera of this world, I presume that the best options for your capital in the portfolio. So the question is much more about, let's start moving to subsequent years, do you feel that there is sufficient opportunity within the resource base to continue to recycle at that level?
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Bob Dudley, BP plc - Group Chief Executive [75]
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Absolutely. We see it continuing expansion in Oman for example, we've got things yet to do in Azerbaijan, the India projects are examples, so just a few.
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Bernard Looney, BP plc - CEO of Upstream [76]
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Yes, I think, I will just add, Bob. I mean, we've been through our resource base again since Baku as part of our area development plan updates and the short answer is as Bob said, absolutely yes, Lucas, there is absolutely the depth in the portfolio to meet that growth capacity that we outlined through to 2030 without having to dilute returns. We've been through [all the barrels], as Bob says, there is more coming through in Oman. We've got the third train now, there will be another expansion of what's happening in Oman. There is next phase of Atlantis potentially in the Gulf of Mexico, the list goes on and on, but rest assured, we know it in pretty good detail. We've got the track record now of what we can do, we know what these things should cost and the hopper depth is there without question and we've been through it. So we know it pretty intimately now.
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Bob Dudley, BP plc - Group Chief Executive [77]
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Ladies and gentlemen, I think, we do have to call a halt. Those of you, who are still on the lines and I see there is 598 lines open on the webcast, thank you very much for your resilience and persistence and patience. Everyone who's here in London, thank you very much for joining us.
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