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BP p.l.c (NYSE:BP)
Q2 2019 Earnings Call
July 30, 2019, 4:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Craig Marshall -- Head of Investor Relations 

Good morning and welcome to BP's second quarter 2019 results presentation. I'm Craig Marshall, BP's Head of Investor Relations. I'm here today with Bob Dudley, Group Chief Executive, and Brian Gilvary, Chief Financial Officer. Before we begin today's presentation, please take a moment to review our cautionary statement.

During today's presentation, we will make forward-looking statements that refer to our estimates, plans, and expectations. Actual results and outcomes could differ materially due to factors we note on this slide and in our UK and SEC filings. Please refer to our annual report, stock exchange announcement, and SEC filings for more details. These documents are available on our website.

Now, over to Bob.

Bob Dudley -- Group Chief Executive

Thanks, Craig and thank you to everybody joining us on the call today. This is an important quarter, not just because we're at the midpoint of the year, but also because we're at the midpoint of the five-year strategy we laid out in early 2017. I'll begin by taking you through some key highlights from the second quarter and provide some reflections on what has continued to be a challenging macro environment.

I also want to talk about the focus we're giving to the energy transition and our low carbon agenda. Brian will then take you through the financial results in detail and I'll come back to talk about three specific areas of our business that you have been asking to hear more about -- BPX Energy in the US, our global fuels marketing business, and the activity we are progressing across our low carbon businesses, including the biofuels announcement we made last week.

All of these businesses are central to our growth agenda into the next decade and beyond and core to the integrated global energy business we are continuing to shape. I'll then close and we will ensure we have plenty of time to take your questions.

So, getting straight into highlights from the quarter -- we reported underlying replacement cost profit of $2.8 billion for the second quarter of 2019. Underlying operating cash flow was $8.2 billion, which included a $1.5 billion working capital release. This strong financial performance, alongside our strategic growth agenda, underpins our commitment to growing sustainable free cash flow and distributions to our shareholders over the long-term.

You see that in the upstream, where four of our five major projects planned for this year are now online following the start-up of the Culzean project in the North Sea. This takes us to 23 major projects online since early 2016, further underpinning the delivery of our 2021 free cash flow target and on track for our 900,000 barrels per day of new production.

We have also taken five final investment decisions in the first half of this year, including two projects in the Gulf of Mexico, in Azerbaijan, the North Sea, and India, keeping us well-positioned for continued growth into the next decade.

We've been just as busy in the downstream, with a large turnaround program taking place across our refining system, upgrading our facilities in advance of the new IMO 2020 regulation -- or some call it MARPOL -- which will come into force at the end of this year. We are continuing to grow our fuels marketing business with more than 15% underlying fuels marketing earnings growth compared to the first half of 2018.

We've had some exciting developments with our partners, notably Groupe Renault. From the 1st of January 2020, Castrol will become Renault's global service fill partner for engine oil lubricants. Castrol also extended its Formula 1 sponsorship of Renault Sport Racing through to the end of 2024. This further strengthens the relationship we have with a highly valued strategic partner.

Another area of strategic focus is the work we're doing to advance the energy transition. We supported a progressive shareholder resolution on corporate reporting. It passed with overwhelming support at our AGM in May and means we'll provide more information about how our strategy is consistent with the goals of the Paris Agreement.

We have made strong progress on operational emissions reductions and also linked the pay to around 36,000 employees or around half our workforce, including executive directors, to progress on that. We've joined the Hydrogen Council. We will work alongside fellow members to promote large scale, low carbon, hydrogen-based opportunities, an important step given the major role hydrogen is expected to pay as part of a lower carbon energy mix.

We've also taken a number of significant steps to grow our alternative energy business. Our solar business, Lightsource BP, continues to grow with a big expansion in Brazil following the acquisition of 1.9 gigawatts of greenfield solar projects. Lightsource BP now has a presence in ten countries and continues to progress its ambition to become a significant player in the local solar market.

Just last week, we announced plans to expand our biofuels business in Brazil by more than 50% through a joint venture with Bunge. We are combining our well-established ethanol businesses to create BP Bunge Bioenergia, a leading bioenergy company in one of the world's largest, fastest-growing markets for biofuels.

That's a very high-level summary of the progress we're making in what continues to be a volatile macro environment. Oil prices are currently trading at a range of $60-$70 per barrel, having recovered from around $50 per barrel at the start of the year. We expect prices to remain volatile as continued supply growth, notably in the US onshore, competes with slowing demand growth, along with ongoing concerns around the possible impact of geopolitical tensions, especially in Iran and Venezuela.

In the gas markets, an easing in demand growth following the exceptional strength seen last year and continued expansion of LNG supply has led to significantly lower prices. The Henry Hub gas price remains well below $3.00 per million British thermal units and spot prices in Europe and Asia are about 40% below their levels a year ago. In the absence of extreme weather conditions, LNG is expected to be oversupplied through 2019 and 2020 with gas prices expected to remain under pressure.

That macro view of the environment sits alongside the big energy system change that is under way as society looks to move toward a more sustainable, low carbon future. You'll see I'm putting significant emphasis on the energy transition today. I want to be absolutely clear about our approach, how our strategy is consistent with the Paris Agreement, and how we are framing our future.

If the climate goals laid out in the Paris Agreement are to be met, we need to all come together and take action collectively to bring about a rapid transition to a low carbon future. In fact, in a world that is not currently on a sustainable path, we are actively supportive of advancing a faster transition.

As well as being in the world's best interests, we believe it is in the best interests of BP and all its stakeholders. It means less uncertainty in planning our business and greater clarity about how we can help meet society's needs for more energy with lower greenhouse gas emissions with good returns for our shareholders. We're guided in that by the work our economics team does in compiling our annual BP statistical review and BP energy outlook and we're proud to make those available to support discussion and public debate, something we've done for many years now.

Within BP, we have a clear approach that we set out last year, our reduce, improve, create framework. It focuses the group as a whole on reducing emissions in our operations, improving the quality of our products to so that our customers can reduce their emissions and on creating new low or zero carbon businesses.

We have the right strategy, one that is very much consistent with the Paris Agreement and supported by our technical capabilities, financial resources, and global reach. We have a flexible portfolio of many forms of energy that is shaped by our four strategic priorities and enables us to adapt and move in line with the fast pace of change or as opportunities arise.

We're supporting improved transparency and engagement to help our investors better understand how we are managing BP through the transition, as seen in the resolution we supported at our AGM. We continue to advocate for well-designed policy measures, including putting a price on carbon for producers and consumers, which only governments can do. We believe this is the most efficient and equitable tool to drive changes in behaviors across the entire energy system. Everyone has to contribute -- companies, consumers, and governments.

There is a lot we are doing within BP without waiting on that. We're framing our future by actively growing our low carbon activities today, looking ahead at how we decarbonize our portfolio in a low-carbon world, and as we move through this transition, ensuring we remain focused on demand delivering value for our shareholders. So, unlike what some of our critics may say, we believe we have a significant role to play and can be part of the solution.

Let me now hand over to Brian.

Brian Gilvary -- Chief Financial Officer

Thanks, Bob. Turning firstly to the environment, Brent crude averaged $69 per barrel in the second quarter compared with $63 dollars per barrel in the first quarter. Crude prices increased early in the quarter, supported by OPEC plus production cuts as well as supply impacts from lower Iranian exports and ongoing production disruptions in Venezuela.

Prices have since declined, driven by increasing concerns around global economic slowdown and the potential impact on oil demand, together with continuing robust growth of US tight oil. OECD oil stocks remain around five-year average levels, with continued supply growth from the US onshore and Brazil being largely offset by OPEC plus countries' production cuts and continued, albeit weaker, demand growth.

As Bob mentioned, we expect prices to remain volatile. Recent geopolitical events, particularly in the Strait of Hormuz and the potential for worsening global economic conditions, are creating concerns around supply and demand fundamentals, driving volatility in prices.

Turning to US gas prices, which remained weak during the second quarter, with Henry Hub averaging $2.60 per million Btu compared with $3.20 in the first quarter. The weakness in price reflects continued strong supply growth and inventory levels increasing relative to the low levels of the previous two quarters. In Europe and Asia, spot prices have reduced significantly as LNG supply continues to grow with demand easing, particularly in China.

BP's global refining market margin averaged $15.20 per barrel in the second quarter compared with $10.20 per barrel in the first quarter, primarily driven by stronger gasoline demand and US refining disruptions. In the medium term, refining margins are expected to see some support with the implementation of IMO 2020, which should also contribute to increased widening of light-heavy crude differentials.

Moving to our result s—BP's second quarter underlying replacement cost profit was $2.8 billion compared to $2.8 billion a year ago and $2.4 billion in the first quarter of 2019. Compared to the first quarter, the result reflects higher upstream liquids realizations, higher refining margins, and lower exploration write-offs. This was offset by a reduced supply and training contribution in both oil and gas compared to very strong first quarters for both, lower gas realizations, and a higher level of refinery turnarounds.

Compared to a year ago, the result reflects lower North American heavy crude discounts, lower upstream liquids realizations, and a higher level of refinery turnarounds. This was offset by a relatively strong supply and trading result in both oil and gas and the ramp of major projects. Finally, the second quarter dividend, payable in the third quarter, remains unchanged at 10.25 cents per ordinary share.

Turning to cash flow -- excluding Gulf of Mexico oil spill-related outgoings, underlying cash flow was $8.2 billion for the second quarter and $14.2 billion for the first half of 2019. This included a working capital release of $1.5 billion in the second quarter and $0.5 billion for the first half of the year. Organic capital expenditure was $3.7 billion in the second quarter and $7.3 billion in the first half of 2019.

Turning to inorganic cash flows, in the first half of 2019, divestment and other proceeds totaled $700 million and we made post-tax Gulf of Mexico payments of $2.1 billion. Inorganic capital expenditure was $4 billion, including the two final payments made to BHP in April of $1.7 billion. Consequently, as anticipated, gearing rose to 31% at the end of the second quarter. We continued our share buyback program, buying back $17 million ordinary shares in the first half of 2019 at a cost of $125 million.

Turning to guidance -- looking at the third quarter, we expect upstream production to be lower than in the second quarter due to seasonal turnaround and maintenance activities, including the North Sea, Angola, and Gulf of Mexico, as well as weather impacts in the Gulf of Mexico, where we experienced 14 days of production disruption associated with Hurricane Barry. In the downstream, we expect a lower level of turnaround activity and lower industry refining margins.

At the midpoint of the year, we are maintaining our full year 2019 guidance. We expect organic capital expenditure to be in the range of $15 billion to $17 billion and the DD&A charge to be around $18 billion. Gulf of Mexico oil spill payments are expected to be around $2 billion. Assuming recent average oil prices, we expect gearing to trend down through the second half of the year back into the 20% to 30% range.

We expect to continue our share buyback program and to fully offset the impact of script dilution since the third quarter of 2017 by the end of the year. In other business in corporate, the average underlying quarterly charge is expected to be around $350 million, although this may fluctuate between individual quarters. And in the current environment, the underlying effective tax rate is expected to remain around 40%.

In summary, we've delivered another resilient set of quarterly results. We remain committed to delivering more than $10 billion of divestments through 2019 and 2020 and so far this year, divestment proceeds and announced transactions have totaled $1.5 billion.

We have now completed the final payments to BHP and expect Gulf of Mexico oil spill payments to reduce. Assuming recent average oil prices and in line with expected growth in free cash flow and receipt of divestment proceeds, we continue to expect gearing to move toward the middle of our targeted range of 20% to 30% through 2020.

With the continuing momentum across the business and growing free cash flow, we remain confident in our medium-term financial frame and the strength of our balance sheet. This in turn underpins our commitment to growing distributions to shareholders over the longer term.

With that, let me now hand back to Bob.

Bob Dudley -- Group Chief Executive

Thanks, Brian. As I mentioned earlier, let me now review the three business areas that you've asked about.

Firstly, BPX energy -- while the team has only been operating the assets acquired from BHP since March 1st this year, the early results from the ongoing integration process are encouraging. First, as we discussed when we announced the acquisition, we're now very confident in delivering over $350 million of annual synergies by 2021.

At the time of the transaction, we had expected to achieve about $90 million of this in 2019, but now expect to achieve around $240 million, or 70% of the full run rate. The majority of this has been made through our organizational efficiencies, designing the combined organization for scale and enabling us to grow with less overhead.

We also continue to ramp up activity in the newly acquired assets, with ten rigs operating, seven in the Eagle Ford and three in the Permian. The early results from our operations have been promising. In both basins, the wells we have drilled are performing at or above their planned production levels and costs for new wells are coming down.

We're also working to optimize life of field development. In the Permian, we are designing infrastructure that will improve reliability and reduce costs and help us minimize emissions. We plan to continue testing, promising new zones this year in the Permian and Austin Chalk in the Eagle Ford. The progress to date in capturing the synergies early and the well results continues to give us confidence in the future of the business. Given it is only four months in, we will have more to update you on at the end of the year.

Turning to the downstream, we continue to grow our fuels marketing business, supporting our target to increase downstream earnings by $3 billion by 2021. We are now halfway through that journey and remain on track to deliver this growth. We have grown fuels marketing earnings on an underlying basis by more than 15% in the first half of this year and by over 40% since 2016.

Convenience sales are forecast to grow by over 8% per year out to 2025, which we are well-placed to capture through our differentiated offer. Since 2016, we have grown the number of convenience partnership sites by around 65%, delivering $1.2 billion of non-fuel retail gross margin in the last 12 months. This model continues to deliver a strong customer value proposition while capturing higher per-site earnings and differentiated returns.

In fast-growing emerging markets, we continue to expand our footprint and now have more than 1,200 sites in the fast-growing economies of China, Mexico, and Indonesia. In Mexico, where we were the first international oil company to enter the deregulated fuel retail market, we now have more than 460 sites, making this the fifth-largest market in our portfolio by volume.

In digital, we continue to evolve and enhance our global customer engagement platform, BPme. This app provides an easy, fast, and convenient way for customers to pay for fuel from their car and downloads have doubled over the last six months to more than 2 million.

In the UK, we've just launched our new loyalty program, BPme Rewards, allowing us to interact with our customers and deliver a better personalized experience. Customer reaction has been good with around 500,000 registrations in the first weeks since its launch.

Another way we are enhancing our customer experience and strong convenient offer is the introduction of ultrafast charging at our forecourts, focusing initially on the UK, China, and Germany. Following last year's acquisition of Chargemaster, we now have more than 7,000 charging points across the UK.

In the coming weeks, we will begin installing ultrafast chargers at BP forecourts, building a national network of high-powered charging, one which will closely replicate the current fueling experience, allowing customers to charge their cars on average for ten minutes for up to a 100-mile range.

The final business to mention now is one of our four strategic priorities, our growing low carbon activities. We have a lot going on, both in terms of existing renewable energy businesses as well as our investment in new low carbon activity. We have learned a lot from our operations in renewable energies for over 20 years. This may seem like a long time, but it's a sector that is still evolving, especially in comparison to our foundation oil and gas business, where we've been operating for over 110 years.

Through our investment in oil and gas, we provide energy to meet the world's needs, as well as deliver a competitive return for our shareholders. It is now helping fund the growth of new energies. This year, we will invest more than $500 million of capital, which is more than the total annual capital expenditure for each of the companies in the lower half of the FTSE 100.

We invest in these low carbon opportunities under a capital-light model, ensuring we remain in our disciplined capital frame while creating a material impact. A good example of this is the $200 million investment we made in Lightsource BP in 2018, a larger in solar development. That business has now attracted $7 billion of financing from infrastructure funds to develop large-scale solar projects around the world. When people say our capital spending on new energies is small, I think you have to consider the leverage we enable of $200 million, in this case, to $7 billion.

Our activity spans a number of renewable energy businesses -- renewable fuels, renewable products, wind energy, solar energy, and biopower, including in biofuels and in biopower through the joint venture with Bunge, which brings together a combination of scale, capability, and synergies in one of the world's leading markets for ethanol as a transport fuel, which we believe to be key to de-carbonizing road transportation, in wind energy, where we have a leading portfolio in the US onshore sector and, as mentioned, in solar, where our investment in Lightsource BP is growing rapidly with the ambition of reaching 8 gigawatts of installed solar capacity by 2022, enough to power more than 2 million homes.

Beyond our renewable energy businesses, we are also actively developing low carbon businesses and customer offers across our five focus areas. We are participating in a number of ways through direct equity investments to supporting start-ups or developing our own projects. This gives us access to a wide range of new and innovative ideas, technologies, and businesses, and we can be agile in our approach.

Some of our investments will have clear adjacencies to our existing businesses such as our investments in BP Chargemaster, which fits within the downstream's advanced mobility agenda, along with Storedot, an ultrafast charging battery developer, and Fulcrum, which will turn municipal waste into bio jet fuels.

These are scalable businesses that complement our existing offerings and we will give customers differentiated low carbon options. Others may be in areas that are more novel but have the potential to support our products, such as Calysta's use of methane in the production of proteins for fish food.

Each investment has to meet our investment criteria and support our strategy. Our experience in investing in start-ups over recent years, where we have invested around $600 million has established a track record that we are using to tap into some fo the world's most interesting markets. We have an active presence across Europe, China, Tel Aviv, and Silicon Valley. We partner with leading developers, where we are leveraging our relationships around the world and deploy these technologies. Then we support the scale-up of these businesses.

Finally, we are actively working together across the industry and with other external organizations. This includes the Oil and Gas Climate Initiative or OGCI, the Climate Leadership Council, as well as leveraging our expertise to help in educational and research projects, just to name a few. There will be lots more to come in this area as we continue to learn and grow these businesses as an important part of our role in the energy transition.

I'll briefly summarize now before we move to Q&A. We're midway through our five-year strategy. We are continuing to deliver strong underlying operational and financial performance and are making clear progress against the five-year plan. Quarter ten of that plan has been a strong one. Safety remains our number one priority and alongside reliable operations and a disciplined financial framework provides the foundation for growing the value of your company.

Strong financial performance also allows us to grow our low carbon activities, where we're investing with discipline in fast-growing alternative energy businesses as well as emerging low carbon businesses. Together, these can make a significant contribution to the energy transition. We have plans to host an investor event in November this year, where we will update the market on our current low carbon activities and future ambitions.

On that note, thank you for listening. Brian, Craig, and I would now be happy to take your questions.

Questions and Answers:

Craig Marshall -- Head of Investor Relations 

Okay. Thank you again, everybody for listening. We're going to turn, again, to questions and answers. The usual reminder, please, to limit your questions to no more than two per person so everybody gets a chance to ask one.

We're going to take the first question this morning from Alastair Syme at Citi. Alastair?

Alastair Syme -- Citi -- Managing Director

Brian, I wonder if you could talk a little bit about the profitability of the Midwest refining business this quarter, stock differentials I know are lower than 2Q last year, but wider than they were in the first quarter. So, how is that impacting it are you still being apportioned on availability? And secondly, one for Bob -- in the last quarter, there's obviously been this BP BBC Panorama program around Senegal. I just wonder if you could respond to those claims and what BP is looking at or not looking at in response. Thank you.

Brian Gilvary -- Chief Financial Officer

Thanks, Alastair. So, in terms of Midwest refining, basically Whiting Refinery, we saw the TICS diff average around $11.70 for the second quarter, which is down a little bit on the first quarter, 1Q 19, which is around $12.70, on a lag basis. We're still seeing curtailment issues coming out of Alberta, although that's eased to a degree. Then of course, you've also got the issues around the big heavy cut grades from the Gulf Coast in terms of Venezuelan crude.

So, I think you are seeing a little bit of pressure on WTICS. I think if you look at the forward margins, we're starting to see that open up. So, it may start to open up in the second half of the year. But I would suspect for the second half, you'll still see spreads trading in the range of about $12.00 to $18.00 a barrel. And of course, therefore, that directly feeds through in terms of Whiting.

In terms of overall performance for the downstream performance coming through the second quarter, these of course have those big turnarounds we talked about in the first quarter, which also included Whiting this quarter. But that will start to clear out the second half of the year. You may see some recovery in TICS differentials as we ease curtailment coming out of Alberta. Of course, they also had the wildfire issues as well in the second quarter.

Bob Dudley -- Group Chief Executive

Alastair, thanks for your question about BBC Panorama. For those of you who don't know, there was a story on Senegal in there. Quite frankly, it is a sensational, inaccurate, and irresponsible story by the BBC, including numbers that are wildly inaccurate, including showing documents that are purportedly from BP and they are not.

We have responded very strongly to the BBC around that. It has led to some investigations, as you would expect, in Senegal. Quite frankly, the really disappointing thing about this is it perpetuates the idea that European companies or British companies cannot and should not do business in Africa. I think that's the really disappointing thing about it. I'd be happy to talk to anybody about it. Again, we've responding really strongly to the BBC. That's probably all I should say, Alastair.

Craig Marshall -- Head of Investor Relations 

We'll take the next question from Oswald Clint at Bernstein. Oswald, good morning.

Oswald Clint -- Sanford C. Bernstein -- Analyst

I guess one of the messages you have today is right on target at the midpoint of the five-year plan. I just wanted to put that in context of the upstream free cash flow performance. I guess if I play with some of your numbers for the first half and think about those annualized for 2019 and probably put in the right $13 billion to $14 billion upstream capex, I'm getting to around $13 billion of pre-tax upstream free cash flow.

So, that's the number relative to your $14 billion-$15 billion by 2021 and obviously, and obviously, I'm adjusting for your oil price. I'm just trying to get a sense -- is that $13 billion roughly right for 2019? Is that according to your plan? Does it step up by a $1 billion or so each year from here into 2021 is the first question?

Secondly, I just wanted to focus in on the BHP acquisition. It looks like you said operatorship since the first of March. I do know a decent reduction in production cost per barrel, 14% or so sequentially. You talked about less overhead, which I guess is in SG&A. I just wanted to know what's going on, particularly with the production cost to bring it down so substantially sequentially. So, I just link to that.

I see you have a lot of three Permian rigs, which I think you talked about going to the Permian next year or after the pipelines open up. I'm just curious -- are you fast-tracking your push into the Permian? Thank you.

Brian Gilvary -- Chief Financial Officer

So, Oswald, I'll try and unpack those and I'll work backwards. In terms of Permian, we're going to take our time. I think Bernard in the most recent discussion we had would have said that we'll look to make sure that we can evacuate the oil that we start to create out of the Permian. We have got the rigs running. We will build into that slowly. We've ramped up Eagle Ford, which is priced straight into WTI.

But in terms of Permian, it will be slow progress through this year as we make sure that we have the evacuation routes available. So, the midstream is going to be a really big important part of that. In terms of your question on the $14 billion to $15 billion target in terms of upstream, it's going to be a big function of what happens, of course, in the second half of this year in terms of production volumes.

We've already signaled the 3Q volumes will be down somewhat. We've got some seasonal turnarounds in upstream in some of the big high-margin areas like the North Sea, Angola, and Gulf of Mexico, up to and around 50,000 barrels a day could be out through the third quarter. And of course, we've also already had issues with Hurricane Barry this quarter with 14 days' outage in Gulf of Mexico. I think that will impinge a little bit on volumes.

In terms of the cash coming out of the upstream, the $14 billion to $15 billion is pretty well-underpinned now for 2021 with the projects we've got on stream. For the precise number adjusted for oil prices, I think we're certainly 70% of the way there. Whether we're up as high as the numbers that you're talking about, I've not gone back and done that calculation, but we can come back to you offline on that and we'll certainly pick it up at 3Q, but as I say, 3Q volumes will be a little bit under pressure with the seasonal turnarounds that we've got planned in those big high-margin areas.

Bob Dudley -- Group Chief Executive

If I could add a footnote -- on the BHP, for example, Oswald, the production costs have come down. Some of that is the reduction in staff. So, synergies have come through very quickly. In addition, the cost came down because of a cessation of transition services costs with BHP that were in there. That's just a little more insight on the Permian piece.

Oswald Clint -- Sanford C. Bernstein -- Analyst

Super. That's great. Thank you.

Craig Marshall -- Head of Investor Relations 

We'll take the next question from Thomas Adolff of Credit Suisse. Thomas?

Thomas Adolff -- Credit Suisse -- Analyst

Good afternoon. Two questions from me as well -- firstly, just on dividend -- in the second quarter of 2018, you chose to increase dividend. A year on, you chose to keep the dividend steady. You discuss the dividend every quarter. I was wondering why the decision went against it this time around considering you're delivering on the five-year plan.

Secondly, out of the 35 projects in your five-year plan, you've said 23 have now been delivered and delivered ahead of schedule and below budget. You have another 12 to go. I was wondering whether Tangguh LNG expansion is the only project with some challenges to meet the original timeline. Thank you.

Brian Gilvary -- Chief Financial Officer

Thanks, Thomas. I think on dividend, I think it's pretty clear, actually, in terms of what we signaled at the start of this year. We had the BHP transaction to close this year, which we chose to do with cash rather than a few shares when we originally envisaged the original transaction. That was a $10.25 billion transaction.

So, the fact that we used cash, we expected gearing to go up to accommodate that and that is the disposal proceeds came in, we'd use the disposal proceeds to deleverage the balance sheet. What that avoided was the friction costs then in terms of issuing shares around BHP and then buying those shares back.

In terms of the conversation of the board on dividend, you're right. 2Q last year, we did signal the increase in the dividend. I think as you see now, given where gearing is at 31%, as we see the disposal proceeds get de-risked this year and we still anticipate that of a $10 billion program, we've announced $1.5 billion up to the end of 2Q. We'd anticipate $4 billion to $5 billion this year. It should get announced and we signal that at 1Q. There's no change there.

We're still seeing a pretty good suite of buyers for the assets that we have for sale. Some are taking a little bit longer. Some are offering up other opportunities. So, I think as you see that deleverage, that will be a signal in terms of distributions and a move on the dividend later in the second half of this year. I think the board will definitely want to come back to dividend, but it will be really be triggered by, as we said to our investors, we'll see the balance sheet deleverage, we'll bring net debt down, and then that will be an opportunity, certainly in the second half of this year, to go back and look at dividend.

I think what you're seeing in terms of strong cash flow and now, what is a tenth quarter certainly above the expectations we had in terms of where we'd be in this process in terms of the five-year target, I think we are more than well-underpinned on the cash flow targets we laid out to 2021. So, I think that will give us a great confidence in terms of any move or look at distribution.

And of course, we've also got some work close to $1.8 billion of buybacks to come in the second half of this year that will offset the script from the third quarter of 2017. So, I think you will see, from a shareholder perspective, distributions in the second half of the year through buybacks and a potential move on the dividend as the disposal proceeds get de-risked.

Bob Dudley -- Group Chief Executive

Thanks. Thomas, as we look out, we've got 23 major projects with 35 under our belt now to get to 2021 and Tangguh Train 3 is one of those that we see as with a delay. It's been delayed in our planning now from the fourth quarter of 2020 to the third quarter of '21. It's not going to impact delivery of the targeted 900,000 barrels a day of new production from projects. Train 3 will add about a gross capacity of 3.8 million tons of LNG per year. It will take Tangguh up to 11.4 million tons a year.

The status of the project right now is the offshore scope is nearing completion ahead of planned. Onshore has been impacted by a number of things, including some very unpredictable environmental factors in the area, the 2018 tsunami events in Sulawesi disrupted some of the local supply chains and now, that's got to require additional work, not our site, but the supply chains. I think it's well-known that one of the contractors is having some financial difficulties. We remain on track for bringing that on by the end of 2021.

Craig Marshall -- Head of Investor Relations 

Thomas, I just had a little bit more context, just to put the 23 of the 35 major projects in context, that's equivalent to around 600,000 barrels a day at the end of 2Q onstream. So, progressing well against that 900,000 barrel a day plan that we had. Okay. Thanks.

We'll move to the next question from Lydia Rainforth at Barclays. Lydia?

Lydia Rainforth -- Barclays -- Analyst

Thanks. Good morning. Two questions, if I could -- the first one, just going back to the buybacks, is it right that -- I think it's close to about 400 million shares in the second half that you need to buy back. Is that the sort of run rate we need to think about going into 2020 as well?

Then the second one, going back to the low carbon businesses, at the point you make around the financing that you put $200 million equity in for $7 billion overall finance, how do you see that low carbon business of BP evolving over time? Is it that you want to keep going down the joint venture route as you've done with the Bunge side or do you think over time more and more that will come on to the BP balance sheet? Thanks.

Brian Gilvary -- Chief Financial Officer

Lydia, on the share buyback, the balance from the third quarter '17 is around about 270 million shares to buy back in terms of scrip. There is some other dilution which we'll come on to later, but in terms of the pure scrip buyback, it would be about 270 million shares, which is around about $1.8 billion. We'll obviously also have a scrip that will get issued through the third quarter and we'll look to buy that back as well as we get into 4Q. You'll see the run rate of buybacks in terms of offsetting the scrip ramp up through the second half of the year now, especially through the disposal program that gets de-risked.

Bob Dudley -- Group Chief Executive

And thanks, Lydia. On the low carbon -- Lightsource BP is a really interesting story because we get told many, many times we spend only 3% to 5% of our capital on new energy ventures. But when you look at what we enable, things that I don't think would happen, Lightsource BP is a great example.

The UK's largest solar development is one country -- within a year, year and a half, we're in a ten countries now. It's attracted that $7 billion of investment from infrastructure funds, big ones into India, for example, and now into Brazil. It's a great way to leverage capital and it's not using our capital to do that. These things I don't think would happen without our involvement in opening the doors in good partnership with Lightsource around the world.

Going forward, these business models, I think there are a number of different ways we think about it. We could see our role as taking and working on these projects, Lightsource BP then selling on the projects and using our capability to raise finance outside to do more projects down the road. We may not even have all these projects going forward, but turning over the portfolio.

The JV model with BP and Bunge is a great combination of things. Some of these, of course, will depend on what our co-venture would like to do, for example, with Bunge going forward. But these are really good business models that allow us to really leverage off of our balance sheet but not use the capital directly. That will happen as well with BP Bunge.

So, stay tuned. We've got lots of ideas. We like to think of these things as smart M&A. In the past, we used to want to do everything 100%. That's our history with solar and wind and biofuels and I think we've just seen there's a different way to use our capability to raise financing going forward and making these new energy businesses happen that might not otherwise.

Lydia Rainforth -- Barclays -- Analyst

Thank you.

Craig Marshall -- Head of Investor Relations 

Okay. Thanks, Lydia. We'll take the next question from Michele Della Vigna. Michele, good morning.

Michele Della Vigna -- Goldman Sachs -- Analyst

Good morning. Thank you for taking my questions, two if I may. The first one is about refining margins. You provide a guidance for lower refining margins in Q3. I was wondering is this a conservative guidance or do you actually see reasons for concerns over the margins in Q3, given that quarter to date has probably seen an improvement in most regions.

Secondly, I wanted to see if you could give us some guidance on what is behind the write downs this quarter. It looks like you're progressing well with some disposals. Probably these write downs are behind some of those with US gas and the Egyptian assets. But if you could give us more visibility, that would be great.

Brian Gilvary -- Chief Financial Officer

Okay. So, maybe just starting with the last question, the impairments -- we had the bulk of about $800 million in the upstream. It's a mix across the piece. Some of it is associated with some of the BPX legacy assets. So, some of the gas assets, some of the smaller packages we've already sold, and some impairment triggers on some of the bigger assets, as you can see from some of the gas prices that you see today. That was part of it.

Also, a loss on sale around one of the big assets that we got away in the first and second quarter. And actually, we also had about just north of $100 million, slightly higher than that decommissioning provision move. It was across a suite of pieces. It was nothing specific. So, that's where the bulk of the impairments came from, which is mostly inside the upstream.

Then in terms of refining margins, you saw some recovery in margins due to the big high turnaround schedules that we saw that we signal for ourselves, particularly in Europe. We're also seeing some weakness in demand in the first half of this year, although there's been more recent pickup in that. If you look at demand for the first half of this year, it's been tracking around about 1 million barrels a day compared to 1.5 million last year.

So, it was down a little bit. A lot of that was driven by what was going on economically between the US and China and general economic concerns around the globe. We are now starting to see a little bit of pickup. So, that may help a bit. But you've also got all the refineries coming back out of turnaround. I think what that will therefore do is put a little bit of pressure on refining margins and of course, the fourth quarter will always historically be a weak quarter typically for margins in terms of refining.

Now, IMO 2020 should start to underpin margins at the back end of this year in terms of distillate cracks. We're starting to see some benefits of that into 2020, but no, we do think margins in the second half of this year, as refineries come back out of those turnarounds, we'll start to be a little bit weaker.

Michele Della Vigna -- Goldman Sachs -- Analyst

Thank you.

Craig Marshall -- Head of Investor Relations 

Thank you, Michele. We'll take the next question from Biraj Borkhataria at RBC. Biraj?

Biraj Borkhataria -- RBC Capital -- Analyst

Thanks for taking my questions. Just one follow-up on Michele's question -- could you just confirm that the impairment for BPX, none of it was related to the newly acquired assets? The second question is on flaring. There were a number of articles recently going around highlighting BPX as one of the largest flarers of gas in the Permian. Could you just talk about what you're putting in place to reduce that and what kind of timeline you're talking about? Thank you.

Brian Gilvary -- Chief Financial Officer

I can confirm that none of the impairments are associated with the assets we've just acquired. If anything, it would probably be in the opposite direction, given the oil-rich nature of them and the price at which we bought them. There has been no change in terms of balance sheet around the acquired assets.

Bob Dudley -- Group Chief Executive

And on the flaring, I've seen the story. I'm not sure the accuracy of it. I haven't looked and fact checked it. I can tell you we're absolutely going to be installing across those assets very efficient infrastructure across the field, electricity vapor recovery units, right size facilities. We'll get on this very, very fast.

Having taken over the operations on the 1st of March, there are a lot of things that we're doing. That's not to say they weren't run well. The Permian, quite frankly, right now, the United States is the largest flarer of natural gas in the world right now. I'd really like to go in and see those figures because they seem a touch high to me. Don't worry. We'll be all over it, Biraj.

Craig Marshall -- Head of Investor Relations 

Thank you, Biraj. We'll take the next question from Christian Malek at JP Morgan. Christian?

Christian Malek -- JP Morgan -- Analyst

Good morning, gentlemen. Two questions from me -- first, the path to returning more cash to shareholders, what gives you the confidence in delivering on your divestments the second half, especially given the volatile macro backdrop and weak US gas prices? Just to be clear -- should we expect cash return to be entirely a function of the outcome of divestments?

The second question, Bob, I have a question on energy transition -- the investment you're putting through feels relatively disproportionate vis-à-vis your total capex relative to some of your peers. I understand the long-term [inaudible], but I'm not as clear what the industrial logic and returns you're looking to achieve over the medium term.

Brian Gilvary -- Chief Financial Officer

Okay, Christian. So, on divestments, I think you know we would have done about $75 billion since 2010 and Deepwater Horizon. So, we're pretty confident in the process. The team is a very well-oiled machine in terms of the M&A group. We have more than sufficient assets to cover the $10 billion. We're $1.5 billion of the $10 billion two quarters in. Deals typically take 9 to 12 months to complete an ounce. So, actually, we're pretty much on track and we're very confident we'll get four to five done this year, which is what we laid out at 1Q.

I think as we announced those deals, then I think the market gets confidence in terms of leveraging the balance sheet and you'll start to see gearing come down. That opens up the path over and above the buyback program for the second half of this year to look at further distributions beyond them. We're pretty confident in terms of the disposal program. It's just taking longer. There's more private equity involved in some of those low 48 assets and frankly, it's not a fire sale. We don't need to sale some of these assets. So, we may well end up retaining some of if we need to, but we have more than sufficient cover for the $10 billion.

Bob Dudley -- Group Chief Executive

And Christian, on the capex number, our accounting capex is about $500 million a year and our total spend on the new energies from BP are really over $1 billion. That $500 million of capex is more the capex than half the FTSE 100 spend. So, it's not a small amount of money. As I mentioned earlier, in the past, BP would invest in new businesses. We do it 100% model.

We've now realized that working with other people's capital and spending like we're doing with Lightsource BP and BP Bunge is a great way to leverage spending in the new energy sector, not necessarily coming out of our capex. I am a believer because I read an article of someone outside the industry that noted in terms of low carbon spending on capital inside the company, I think we are like many of the companies that spend more than 50% on low carbon because I am a believer that natural gas has got to be part of the solution in energy combined with renewables. I think we're -- this is our strategy. I think you can't measure it just by one number.

Thank you. You had a second question?

Christian Malek -- JP Morgan -- Analyst

That was it for me. Thank you very much.

Craig Marshall -- Head of Investor Relations 

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

Irene Himona -- Societe Generale -- Managing Director

Thank you. Two questions -- firstly, Brian, you referred to lower trading in the second quarter. I wonder if you could talk a little bit about it. Also, what are you seeing so far in 3Q on that? Secondly, you referred to strong marketing results in areas such as Mexico. I wonder if you could give us a sense either for the first half or the second quarter, of the split between refining and marketing.

Then finally, on the disposals, you have sold $70 billion of assets in the past. So, looking to sell $10 billion sounds like a low number. However, you did say that it's taken a bit longer. The buyers sound different. My question is as a seller, given you were selling the $70 billion when the environment was very different and we had $100 oil. Is this a radically different environment that you're trying to sell the $10 billion to? Thank you.

Brian Gilvary -- Chief Financial Officer

So, on the last question, Irene, I think the answer is no. Actually, we sold assets in 2015-2016. The oil price was $28 a barrel. I think people see through that and look at the forward curve. They weren't focused on the spot price. It's always an interesting conversation when you're in a negotiation because depending on whether you're buying and selling, you will try and use whatever numbers you can, but we see through that in terms of long-term forward stripped prices helps to cut through some of that. I don't think that's gotten any more difficult.

In terms of IST, probably the way to describe it is on the gas trading side where the results appear in the upstream, it was a very strong first half. It was a strong 1Q and it was a strong 2Q. 2Q was slightly down on 1Q in the gas trading, but that's strong in both quarters. On oil trading, it was a very strong 1Q and a more typical average 2Q. So, therefore not all guests reported the downstream. That will help you with guiding through the relative performance as you then look at it in terms of the segment results.

In terms of marketing, actually, it was a very strong quarter and first half with about a 15% improvement in fuels marketing earnings 1H compared to the previous year. It is a good performance that we're seeing coming through. We are seeing some weakness in demand, but we are seeing growth in the convenience partnership side and have increased by 65% since 2016 and the strategy laid out. That's delivered around $1.2 billion of nonfuel retail gross margin.

So, I think what you're seeing is maintain strong performance coming through the marketing businesses. Mexico, I think, has been a great story of expansion as the business and Tufan have gone after that. We now have more than 1,200 sites in China, Mexico, and Indonesia in terms of gross markets. I think there's more to come on that. You'll get a full year update in terms of where downstream are. What I would say is making good solid progress.

Craig Marshall -- Head of Investor Relations 

Irene, thank you. We'll take the next question from Jason Gammel at Jefferies. Jason?

Jason Gammel -- Jefferies -- Analyst

Thank you very much, gentlemen. The first question I had was on Angola, where during the quarter you made some progress in terms of being able to potentially reinvest more money into Angola and achieved an extension. Is there a possibility for further progress on in particular your operated blocks there.

Then the second question does come back to the low carbon business again. I guess it's really a high-level question of how you think about investment criteria in that business. My supposition would be that the IRR is going to be lower than your traditional upstream business, but given your ability to significantly lever it up, do you think it more on a return on equity basis? Do you think about a potentially lower rate of return because of its non-declined nature? Anything you could give me on that would be great.

Bob Dudley -- Group Chief Executive

Okay. Jason, hello. On Angola, we have had some breakthroughs there. We've extended our terms on Block 18 now to 2032. That's been a breakthrough for us. Block 17, other people operating, negotiations are going on there because the life extensions are coming up for review, same in Block 15, the Exxon operated block.

They've signed an agreement with the National Petroleum Agency, that extends that license from out to 2032. So, there are some good things happening there. They also bring Senegal into the partnerships. We've been looking at some field developments there now as a result of the extensions in '18 that will give us some more running room there. Costs will come down quite a bit in Angola. It's a challenging environment, of course, in general. But the government has taken some time after the oil prices fell to adjust things.

So, we have a potential FID coming up that I can mention maybe later this year, but I won't say the project because of course we have partners in it as well. All in all, a lot has happened in the last eight months in Angola that are very positive.

Brian Gilvary -- Chief Financial Officer

And then in terms of the low carbon value in terms of returns and IRRs that we look at, we have a separate committee that oversees all of our ventures, investments, and alternative energy investments. It's called the Renewal Agenda in terms of new energy frontiers. Maybe just to describe this, we focus on the base business in terms of trying to carbonize.

So, the work that Bernard and Tufan are doing in our base businesses that generate all the revenue and drive earnings, drive returns, and drive the targets out to 2021, there is a very strong monumental effort in terms of decarbonizing that business. We're really taking out 2.5 million tons of CO2 in that business over the last three years and have a target to take another million tons out to 2025. We're making good progress on that this year.

We then look at improving our products, which we've talked about in terms of the rig framework, but in terms of creating the new opportunities, the IRR is actually some of those renewables businesses look a lot more now like what we would call a traditional business ten years ago. So, wind sits comfortably inside our portfolio, on shore wind in terms of the US. It makes good returns that compete with the rest of the portfolio and integrates with the rest of our business in terms of lower 48 and where we are in the United States.

You then have the deal we talked about in terms of BP Bunge, which is a real step out opportunity for us in terms of getting that business and leveraging that business going forward with a 50% in our own portfolio in terms of volumes coming out of that. I think that's a massive opportunity that Dev's created for us in terms of going forward. That will be able to benefit from being in a joint venture structure with the strengths of both sides of that business.

Then you've got Lightsource BP, which does have a leveraged investment model. It's a huge opportunity. Solar is very economic today. The IRRs compete. Of course, we can use solar as an integrated solution in terms of integrated energy solutions, both with trading but also with our base business in terms of renewal, in terms of natural gas and oil. So, I think what you're starting to see is a lot of those businesses interacting with our base businesses generating revenues going forward.

Then of course, there are going to be adjacent opportunities that will come up in this incredible new energy frontier space, where there will be a multitude of solutions to the energy conundrum that we've caught, the dual challenge going forward. You're going to see some more of those come along. Those IRRs may not look like a typical IRR that you see in, say, an oil project, which may look different to a natural gas project, but will have huge amounts of optionality.

In those cases, that's really where we're looking at the value, the potential value those opportunities will bring before they cycle into growing a steady base business in the future. We are actually looking at this with two very different frames. The first one is the base business that drives equity earnings. The second is around a value, almost private equity model that looks to leverage the finances in what is a really exciting, expanding business in terms of energy.

Craig Marshall -- Head of Investor Relations 

We'll take the next question from Chris Kuplent at Bank of America. Chris, good morning.

Chris Kuplent -- Bank of America Merrill Lynch -- Analyst

Good morning. Thank you for taking my questions and thank you for laying out some of your activities on the energy transition front. That's really where I want to focus on with my first question. You laid out, Bob, that your goal is to be consistent with the Paris Agreement. Can you help us a little bit building a bridge from all these activities and the detail levels you've given us and I assume you will give us going forward to how you measure that consistency with the Paris agreement?

What kind of framework can you give us to build that bridge between the activity level and that statement that your overall activity is consistent with the Paris Agreement? The second question is really just a tiny detailed question -- Brian, you've got $2.1 billion oil spill payments in the first half and a full year guidance of $2 billion. That pretty much means that the Bell claims are done, doesn't it? Thank you.

Brian Gilvary -- Chief Financial Officer

I'll pick up the latter one, first, if that's OK. We said around $2 billion for this year. Bell, I think we're down to -- all the Bell claims are done. They're done full stop, but they're in what's called the recycle appeal phase. So, there is still something to go back through. I think we had five claims get settled through this quarter, but there will still be a tail of claims going through the Fifth Circuit Appeals process.

Pretty much, Bell is done in terms of any major moves in terms of Deepwater Horizon. I don't believe there will be any surprises in terms of all the agreements that have been put in place. The fund itself is pretty inactive right now in terms of activity. It's really about the appeals process and closing out the final piece of that.

Bob Dudley -- Group Chief Executive

Chris, on the energy transition and the Paris goals -- we absolutely support the Paris Agreement and the goals. We do believe the world is not on a sustainable path. We've recognized the importance of climate change for some time. We recognize this IPCC as the primary source of information on climate science and the call action for 20 years. We include in our goals reaching net zero in the second half of the century, specifically, we're looking at limiting temperature rise to well below 2 degrees C.

So, we support this transition. It's good for society and it's going to be in BP's best interest as well. A slow or very delayed transition increases the risk of some sort of costly and disruptive event later on. So, as a global energy company, we've got to contribute to the dual challenge. That includes the two billion more people that will be on the planet and the world is going to need lots of energy in all forms while at the same time reducing emissions.

And we've said it's not a race to renewables. It's a race to reduce emissions from all kinds of fuels. We're not going to promote only one energy source, improve energy efficiency. We're going to use all kinds of new technologies, including carbon capture use and storage. We absolutely believe there's a price on carbon to help drive action. We do think our strategy is consistent with the Paris goals. We've got to so we can prosper and deliver throughout the transition.

We are going to be investing the four points of our strategy around advantaged oil and gas, developing low carbon businesses as part of that. We signed and supported a resolution from a group of shareholders earlier this year to describe in our corporate reporting how the strategy is consistent with the Paris goals. We've been laying that out really now every year. March, April, of course, next year in our corporate reporting, and as Craig said earlier, we'll get together a group in November and lay this out in more details.

I can probably talk quite a bit about this. Obviously, all the people we have, the thousands of people we have working with these new energies. It's part of a demonstration in not just words but action, but our traditional businesses in moving our portfolio, which will shift in oil going forward, but it's certainly not a business we would intend to exit. We don't think that's going to help the energy transition. We've got to be able to make sure that we remain a very good investible proposition for our investors as well.

So, Chris, that's probably a longer answer than you wanted. I'll give you one chance to clarify anything I've said.

Chris Kuplent -- Bank of America Merrill Lynch -- Analyst

Not at all. I look forward to November then. Thank you, Bob.

Craig Marshall -- Head of Investor Relations 

Thanks, Chris. We'll take the next question from Peter Low at Redburn. Peter?

Peter Low -- Redburn -- Analyst

Hi, thanks for taking my questions. Just to follow up on the second half step up in the buyback run rate to around $1.8 billion -- is that contingent on disposals getting away or can you deliver that from underlying free cash flow? Secondly, on the biofuels combination in Brazil, clearly it's a big increase in volumes, but Bunge's business has been challenged in recent years. Can you give us any more color on how you expect the new combination to improve performance and over what timeframe? Thanks.

Brian Gilvary -- Chief Financial Officer

In terms of the buybacks, if you take out the inorganic spend, the BHP payments and Deepwater Horizon in the first half, we were surplus cash at the prices you're looking at. Comfortably in 2Q, we were balanced around $50 a barrel. The second half this year, operating cash will sufficiently cover the buybacks. It's not going to be contingent on the disposals, but as I say, we're pretty confident on the disposal program. So, yes, we'll be able to execute those buybacks in the second half of this year irrespective of where we get to with the disposal proceeds.

Bob Dudley -- Group Chief Executive

And Peter, on the new BP Bunge combination, today, we have three world class, world size sugar cane ethanol plants in Brazil. This combination will take it up to 11. That will take the volumes up to over a billion liters. We just look at all the synergies that will come from combining those two businesses. They're geographically relatively in the same areas.

The cost structures of the two systems are very different. We've got our reliability up to 96%. Our safety record is good. We intend to bring this together. It operates well, but we're going to bring new technology and automation in that will reduce the scale of the size of the organization. Trading activities will continue to be an important part of it, both sugar and ethanol and we now produce quite a bit of biopower with what's left over after the crushing happens. We now put that into the system as bioelectricity.

I'm really excited about this business. It's got the potential to grow going forward. It has amazing characteristics. Somebody said to me the other day that it's not really a renewables business, which is just the wrong way to look at it. It's basically energy from photosynthesis that puts it into a choice of sugar and even the automobile sector that has a choice of running on gasoline or pure ethanol.

Lots of flexibility here. Brazil is quite blessed with these resources. Even sugar cane itself is one of the most carbon sink plants on the planet. So, stay tuned on that, Peter.

Peter Low -- Redburn -- Analyst

Thank you. That's very clear.

Craig Marshall -- Head of Investor Relations 

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

Jason Kenney -- Banco Santander -- Analyst

Good morning. Two questions if I can -- Brian, how relevant is the refining margin indicator, given I think the actual gasoline yield in the second quarter was below 40% and, in your assumption, the indicator margin is typically around 55% to 60%. Secondly, do you have a figure in mind for what kind of total cash return BP could afford or support over the period of 2025? I know one of your major competitors has a number in place either annually or a percentage relative to market cap.

Then maybe a third question, if I might, to Bob -- do you think there is a disproportionate pressure on BP currently around climate change and climate consciousness relative to other international oil companies at this time? You do seem to be in the press consistently defending your actions in respect to climate.

Brian Gilvary -- Chief Financial Officer

Thanks, Jason. On the refining margin, you've kind of articulated quite well the issue, which is it's an indicative marker margin. It assumes a certain crack spread across a portfolio of refineries. And of course, what it doesn't do, as you saw in 2Q, is it would have overstated the margins we would have made from gasoline because our proportionate of gasoline coming through our systems is lower than where the marker margin would have been.

It is an indicative thing, Jason. There's not much we can do about it. We've had various machinations of it previously of different types of marker margins. This is the one that we've converged on. It's one the industry tends to use in terms of I think it's something like a three, two, one crack out of the US, but it varies by region and therefore, you will get these distortions quarter on quarter.

I know that's not particularly helpful for you as you try and predict results quarter to quarter, but that's certainly impacted the downstream, one of the things that impacted the downstream in 2Q was, of course, that we didn't have as much gasoline there that the marker margin would have contributed to the results.

On total cash returns, we've got to measure out to 2021. We're not moving to 2025 just yet. I think we're only halfway through the original set of targets we gave you. But if you distillate down those two sets of targets in upstream and downstream, take off assumptions around corporate costs and pension requirements and our pensions are more than funded at the moment, so, they're in relatively good shape.

But if you just assume $1 billion to $2 billion in corporate costs and pension charges and you look at the two sets of measures, upstream, downstream, it gets you to somewhere around $15 billion of free cash against an $8 billion dividend in 2021 and of course, that dividend may well move between now and the 2021 date when this arrives and so, therefore, there will be less cash available.

We see very strong -- in this 2021 plan that we laid out and targets we laid out, we see very strong cash flow delivery and I think as Bob highlighted earlier, we're now ten quarters in and we're slightly ahead of where we thought we would be.

Actually, we're way ahead of where we thought we'd be. At this point, we're not complacent. We have a lot more to do. It's only ten quarters in. We've still got ten quarters more to deliver. In terms of distributions, I think you'll start to see some of that change as we move into the second half this year.

Bob Dudley -- Group Chief Executive

Thanks, Brian. Jason, thanks for your question about do we feel like there's disproportionate pressure on BP than others in the industry -- I think it feels a little bit that way. London has become sort of the epicenter for climate demonstrations and this is our hometown. I think we're clearly singled out in that. We're happy to engage. We don't mind demonstrations. We want to talk with people. We need to talk with people that also want to have dialogue.

I do think this demonization and polarization of companies and people is not going to help solve what is a really difficult problem. We're not going to shy away from that. I do find it a little bit of irony because London and the UK here, you go around the world, the UK is often used as a great example for what it's done to reduce greenhouse gas emissions. The country's emissions are now down to 1880 levels, mainly because of the phasing out of coal and replacement with both renewables and natural gas.

I think people don't realize all the things we're doing. I'm a big one to say it's not what you say, it's what you do. I keep looking at what we do around the world -- wind farms on ten sites, we've got light source BP in ten countries now. We've got this renewable products portfolio, plan for new JVs with DuPont making biobutanol in the United States. Fulcrum bioenergy -- keep your eye on that one. It makes bio jet fuel just from municipal waste. We're just doing a lot. We just need to keep doing it.

But I do urge everyone who takes a very single view of the world that there should be no natural gas. There should be only renewable energy. That's not really helping the debate. So, we're going to contribute to the debate. But we have pretty thick skin. We have a plan. We know what we're going to do. Even though we get a lot of pressure, we've also got to maintain the fact that we have to be an investable proposition for you all. Many of you are owners of the company on the call. That's firmly in our sites as well. So, Jason, do you want to add anything or clarify anything?

Jason Kenney -- Banco Santander -- Analyst

No, that's perfect. Thanks very much.

Craig Marshall -- Head of Investor Relations 

Okay. Thank you, Jason. We'll go to Pavel Molchanov, who must be drinking strong coffee at 4:00 a.m. in the morning in Houston. Pavel, good morning.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question. One more about Bunge, if I may -- clearly, land use in Brazil particularly under the current administration, deforestation has been getting a lot of headlines from an ESG perspective. I'm curious how the Bunge investment fits into some of those pushbacks. We hear about sugar cane-based biofuels. Then on traditional business, an update on exploration in Azerbaijan would be helpful, since my understanding is that's supposed to accelerate toward the end of the year. Thank you.

Bob Dudley -- Group Chief Executive

Pavel, thanks, well, on the BP Bunge sites, those sites are not in the Amazon, really. They're areas I would describe as, having seen them, sort of scrubby grassland that prior to this had several cattle per hector. So, people say it's taking away land for food, I actually wouldn't see it that way.

So, this joint venture -- I read about, like you do, around the Amazon. But that's not where this is Central Brazil. I think it's just a really good use of land in Brazil and I think this is a different issue than what's happening further north, where I believe the country has said small populations, they need to use land for other things, but that's not what BP Bunge is really involved with. I'm not sure that it does create sugar as well. So, it isn't that it displaces food.

On exploration in Azerbaijan, we've got to be careful what we say here because we have so many partners, it's a very big area, but once the rig becomes available, spudding the Shafig-Asiman well in 2019. We need to have the rig, which is being used by another company first. There's a shallow water Absheron. We plan to spud that in the first half of 2020 and we've got two other wells to follow.

So, I think like you said, we're -- we've got a lot to do in Azerbaijan, it's very exciting. We've got an advantage gas project beneath the existing shot in these developments that we think it has multi-TCF potential and that's currently planned to spud maybe in 2020 as well. So, people say Azerbaijan is a late life province. We think there's lots of potential still there.

Craig Marshall -- Head of Investor Relations 

Thanks, Pavel. We are down to the last question now from Colin Smith of Panmure Gordon. Colin?

Colin Smith -- Panmure Gordon -- Analyst

Hi, good morning. Thanks for taking my question. On a completely different topic, I was wondering whether you would like to be bidders in the Brazil transfer of rates auction later on this year. And if you were successful and presumably could absorb a fairly decent chunk of additional inorganic capex, I just wondered if that might make a difference around some of the comments they've been making around the potential to increase distribution or more general set it within the framework about how you're thinking about gearing in further significant chunks of inorganic capex, thank you.

Bob Dudley -- Group Chief Executive

Well, Colin, these transfer of rights, of course the terms are not all out there, they look very expensive. And we're just going to remain very disciplined within our capital framework. We haven't made a decision yet. We're still in discussions, of course, with Petrobras and looking at it, but we're going to be really, really careful before we leap into that.

Craig Marshall -- Head of Investor Relations 

Okay. I think that's the end of the questions. Let me just hand over to Bob for a couple of closing comments.

Bob Dudley -- Group Chief Executive

All right. Thank you, Craig. Thanks, everybody for joining us today. Again, we're now halfway through or ten quarters through the five-year strategy we laid out in early 2017. I do think this quarter was a strong quarter. We've got a set of cash payments that are behind us this year, the good strong cash generation this quarter. I'll just note that the cash payments to wrap up the BHP acquisition are in the rearview mirror now and the annual payment we make to the Gulf of Mexico is behind us.

Overall, the strategy I think is on track. Projects coming on stream, new significant investments in new energy, consistent with the energy transition that's under way, being careful with our capital. Maybe it's just worth summing up reminding how we think about it. We think as an investment proposition, really, four points and then four basic strategic priorities -- so, our proposition to you as owners, we want to be safe, reliable, and efficient execution of projects. That's simply good business. It underpins the delivery of our growth aims for near-term and longer-term.

As a company, an investment proposition, we want to be fit for the future. So, a distinctive portfolio that will change for the challenging world we're in. We want strong upstream, strong downstream as well as the new energies that have got to be competitively positioned. The third -- we do focus on returns, value-based, disciplined investment and cost focus with the investment proposition to you growing sustainable free cash and distributions to shareholders over the long-term.

Now, how do we do that? Our strategic priorities, again, growing advantaged oil and gas in the upstream, and a lot of focus on clean gas and low-cost gas and high-margin advantaged oil. Secondly, market-led growth in the downstream. We market a lot of things. We have millions of customers a day for advanced fuels, lubricants, petrochemicals, bioproducts, electric vehicle charging, carbon neutral officers, retailing in combination with other businesses as well.

Third priority, strategic priority is just venturing in low carbon across multiple fronts. We're going to keep testing new and potentially disruptive technologies, try to develop those businesses with a return.

Then the fourth strategic priority is just modernize the whole group, including our plants, processes, portfolio, ways of working. I think with these strategic priorities, we're going to embrace this energy transition and it will shape how we continue to create really value for you in what is going to be a changing world.

So, that's maybe too long of a summary of what we talked about today, but again, I would like to thank you all for taking your very valuable time and spending it with us today.

Duration: 81 minutes

Call participants:

Craig Marshall -- Head of Investor Relations 

Bob Dudley -- Group Chief Executive

Brian Gilvary -- Chief Financial Officer

Alastair Syme -- Citi -- Managing Director

Oswald Clint -- Sanford C. Bernstein -- Analyst

Thomas Adolff -- Credit Suisse -- Analyst

Lydia Rainforth -- Barclays -- Analyst

Michele Della Vigna -- Goldman Sachs -- Analyst

Biraj Borkhataria -- RBC Capital -- Analyst

Christian Malek -- JP Morgan -- Analyst

Irene Himona -- Societe Generale -- Managing Director

Jason Gammel -- Jefferies -- Analyst

Chris Kuplent -- Bank of America Merrill Lynch -- Analyst

Peter Low -- Redburn -- Analyst

Jason Kenney -- Banco Santander -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Colin Smith -- Panmure Gordon -- Analyst

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