BP (BP)

EXPLORATION AND PRODUCTION (concluded)

Sales and other operating revenues for the three months ended 30 June 2007 were $12.7 billion and were $13.5 billion in the corresponding period in 2006, primarily reflecting a decrease of around $0.5 billion due to lower production volumes from subsidiaries (realizations were broadly flat).

Sales and other operating revenues for the six months ended 30 June 2007 were $25 billion, compared with $27 billion in the corresponding period in 2006, primarily reflecting a decrease of around $1 billion related to lower liquids and gas realizations and a decrease of around $1 billion due to lower production volumes from subsidiaries.

The profit before interest and tax for the second quarter was $6,894 million, a decrease of 12% from the second quarter of 2006. This included inventory holding gains of $1 million in both periods. This result was impacted by lower reported volumes, decreasing the result by around $400 million, and higher costs of around $700 million, reflecting the continued impact of sector-specific inflation, increased integrity spend and higher depreciation charges associated primarily with the change to SEC guidelines for reserves reporting as well as increased decommissioning provisions. The result for the second quarter of 2007 included net disposal gains of $212 million (mainly arising from net gains on the disposal of interests in the Permian, Entrada and Kaybob assets in North America) and fair value gains of $299 million on embedded derivatives relating to North Sea gas contracts, and was after an impairment charge of $112 million related to the cancellation of the DF1 project in Scotland. The result for the second quarter of 2006 included net disposal gains of $330 million and fair value gains on embedded derivatives of $149 million.

Reported production for the quarter was 2,517 mboe/d for subsidiaries and 1,287 mboe/d for equity-accounted entities, compared with 2,686 mboe/d and 1,332 mboe/d respectively in the second quarter of 2006. For subsidiaries, the decrease primarily reflects the effect of disposals and entitlement changes in our production-sharing agreements. For equity-accounted entities, the decrease primarily reflects the effect of disposals.

The profit before interest and tax of $12,948 million for the half year represented a decrease of 12% over the same period of the previous year. This included inventory holding gains of $12 million in the first half of 2007 compared with inventory holding losses of $6 million in the first half of 2006. This result was impacted by lower oil and gas realizations, decreasing the result by around $700 million, as well as lower reported volumes, decreasing the result by around $700 million and higher costs of around $1,400 million, reflecting sector-specific inflation, increased integrity spend and higher depreciation charges. The half-year 2007 result included net disposal gains of $815 million and net fair value gains on embedded derivatives of $444 million and was after an impairment charge of $112 million. The first half of 2006 included net disposal gains of $339 million and was after net fair value losses on embedded derivatives of $246 million.

Reported production for the half year was 2,588 mboe/d for subsidiaries and 1,269 mboe/d for equity-accounted entities compared with 2,706 mboe/d and 1,320 mboe/d respectively in the first half of 2006. The decrease for subsidiaries primarily reflects the effect of disposals and entitlement changes in our production-sharing agreements. For equity-accounted entities, the decrease primarily reflects the effect of disposals.

During the quarter, we had first production from the Rosa project in Angola, where BP holds a 16.67% working interest. Also in Angola, we made our 14th discovery in Block 31 (Cordelia). Additionally, we announced the Isabela discovery in the deepwater Gulf of Mexico.

In May, we signed agreements with Occidental Petroleum Corporation to dispose of our 100% interest in the West Texas pipeline system and our interests in non-core Permian assets in the US. In exchange, BP acquired a 42% interest in the Badin field in Pakistan and a 33¹/₃% interest in Horn Mountain in the deepwater Gulf of Mexico and received a cash payment. Separately, in April, we divested our interest in the Entrada field in the Gulf of Mexico and in June we divested some of our interests in the Kaybob field in Alberta, Canada.

During the quarter, we also announced a major exploration and production agreement with Libya’s National Oil Company, a memorandum of understanding to establish a global strategic alliance with Gazprom and TNK-BP and the proposed divestment of TNK-BP’s interests in the Kovytka gas project.

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EXPLORATION AND PRODUCTION (concluded)

In September, we determined that the oil transit lines in the Eastern Operating Area of Prudhoe Bay could be returned to service for the purposes of in-line inspection. We have now returned to service all three flow stations previously shut down, and current production from Prudhoe Bay is around 400,000 barrels of oil and natural gas liquids per day (BP has a 26% interest in the Prudhoe Bay field). We are still committed to replacing the main oil transit lines (16 miles) in both the Eastern and Western Operating Areas of Prudhoe Bay and expect to complete this next year. In addition, BP plans to spend over $550 million (net) over the next two years on integrity management in Alaska. BP has retained three eminent corrosion experts to independently evaluate and make recommendations for improving the corrosion program in Alaska. BP has also asked an independent ombudsman to undertake a review of worker allegations raised on the North Slope of Alaska since the acquisition of ARCO in 2000 to determine if the problems have been addressed and rectified. The effect of reduced production at Prudhoe Bay on average third quarter production was 27 mboe/d.

Offshore commissioning work on the Thunder Horse platform is proceeding. Following a series of tests carried out over the past few months, which revealed metallurgical failures in components of the subsea system, we plan to retrieve and replace all the subsea components we believe could be at risk. We expect this to be an extensive and costly undertaking, although at this stage it is too early to estimate the additional costs. This work will be done over the course of the next year and we do not expect production from Thunder Horse to begin before the middle of 2008.

In our other major projects we continue to make good progress. In Azerbaijan, ACG and BTC continue to ramp up. The Shah Deniz gas field and East Azeri are on track to start up in the fourth quarter. In Angola, the FPSO for the Dalia field is now being moored.

During the quarter, we made a significant oil exploration discovery on the Kaskida prospect in approximately 5,900 feet of water in the Gulf of Mexico and in Angola, we announced the Titania discovery, our 11^th discovery in Block 31. In addition we have been awarded the Birbhum coal bed methane licence in India and have reached agreement to acquire acreage in the UK Central North Sea which contains two discovered fields and further exploration potential.

During the quarter, we completed the sale of our remaining Gulf of Mexico Shelf assets which have been subject to pre-emption rights. In July, we completed the sale of our 28% interest in the Shenzi discovery in the Gulf of Mexico to Repsol. To date we have received $3.8 billion of proceeds from our divestment activity in 2006. In August, TNK-BP completed the sale of its interest in the Urdmurtneft assets to Sinopec and we announced the sale of five onshore properties in South Louisiana.

TNK-BP continues to deliver strong performance with production of 950 mboe/d in the third quarter, down about 60 mboe/d from the third quarter in 2005 as a result of the divestment in its interest in the Urdmurtneft assets to Sinopec. TNK-BP’s two licenses covering the Samatlor area have recently been extended by 25 years.

In October, TNK-BP's subsidiary Rusia Petroleum received a letter from federal prosecutors in Russia alleging a number of violations of the conditions related to a license covering part of the Kovykta field in East Siberia. Rusia Petroleum has sent a full reply to the letter, and there is a continuing exchange of information between the company and the relevant authorities.

In November, following a review of the results of an inspection by the licensing authorities, regional prosecutors made a request for revocation of the two licenses held by TNK-BP subsidiary Rospan International on grounds of violation of license conditions and applicable legislation. Following discussion with the licensing authorities, renewal was granted of certain documents associated with the licenses for which TNK-BP had previously applied. In addition, Rospan presented a plan to rectify the license non-compliances, following which the licensing authorities have granted a six-month period to fulfill this plan.

On October 23, 2006, TNK-BP received decisions from the Russian tax authorities in relation to the tax audits of certain TNK-BP Group companies for the years 2002 and 2003, resulting in a payment by TNK-BP of approximately $1.4 billion in settlement of these claims. At the present time, BP believes that its provisions are adequate for its share of any liabilities arising from these and other outstanding tax decisions not covered by the indemnities provided by our co-venturers in respect of historical tax liabilities related to assets contributed to the joint venture.

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EXPLORATION AND PRODUCTION (concluded)

In September, we determined that the oil transit lines in the Eastern Operating Area of Prudhoe Bay could be returned to service for the purposes of in-line inspection. We have now returned to service all three flow stations previously shut down, and current production from Prudhoe Bay is around 400,000 barrels of oil and natural gas liquids per day (BP has a 26% interest in the Prudhoe Bay field). We are still committed to replacing the main oil transit lines (16 miles) in both the Eastern and Western Operating Areas of Prudhoe Bay and expect to complete this next year. In addition, BP plans to spend over $550 million (net) over the next two years on integrity management in Alaska. BP has retained three eminent corrosion experts to independently evaluate and make recommendations for improving the corrosion program in Alaska. BP has also asked an independent ombudsman to undertake a review of worker allegations raised on the North Slope of Alaska since the acquisition of ARCO in 2000 to determine if the problems have been addressed and rectified. The effect of reduced production at Prudhoe Bay on average third quarter production was 27 mboe/d.

Offshore commissioning work on the Thunder Horse platform is proceeding. Following a series of tests carried out over the past few months, which revealed metallurgical failures in components of the subsea system, we plan to retrieve and replace all the subsea components we believe could be at risk. This work will be done over the course of the next year and we do not expect production from Thunder Horse to begin before the middle of 2008. It is too early to estimate the additional costs involved in replacing the affected systems.

In our other major projects we continue to make good progress. In Azerbaijan, ACG and BTC continue to ramp up. The Shah Deniz gas field and East Azeri are on track to start up in the fourth quarter. In Angola, the FPSO for the Dalia field is now being moored.

During the quarter, we made a significant oil exploration discovery on the Kaskida prospect in approximately 5,900 feet of water in the Gulf of Mexico and in Angola, we announced the Titania discovery, our 11^th discovery in Block 31. In addition we have been awarded the Birbhum coal bed methane licence in India and have reached agreement to acquire acreage in the UK Central North Sea which contains two discovered fields and further exploration potential.

During the quarter, we completed the sale of our remaining Gulf of Mexico Shelf assets which have been subject to pre-emption rights. In July, we completed the sale of our 28% interest in the Shenzi discovery in the Gulf of Mexico to Repsol. To date we have received $3.8 billion of proceeds from our divestment activity in 2006. In August, TNK-BP completed the sale of its interest in the Urdmurtneft assets to Sinopec and we announced the sale of five onshore properties in South Louisiana.

TNK-BP continues to deliver strong performance with production of 950 mboe/d in the third quarter, down about 60 mboe/d from the third quarter in 2005 as a result of the divestment in its interest in the Urdmurtneft assets to Sinopec. TNK-BP’s two licenses covering the Samatlor area have recently been extended by 25 years. TNK-BP continues discussions with the authorities over licence issues relating to Kovykta and more recently on Rospan.

On October 23, 2006, TNK-BP received decisions from the Russian tax authorities in relation to the tax audits of certain TNK-BP Group companies for the years 2002 and 2003. At the present time, BP believes that its provisions are adequate for its share of any liabilities arising from these and other outstanding tax decisions not covered by the indemnities provided by our co-venturers in respect of historical tax liabilities related to assets contributed to the joint venture. However, our review of the decisions is ongoing.

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EXPLORATION AND PRODUCTION (concluded)

We estimate the opportunity losses caused by the hurricanes in the fourth quarter and year 2005 to be in the region of $950 million for the fourth quarter and $1,600 million, for the full year.

Projects in our New Profit Centres are progressing well. During the quarter the West Azeri project in Azerbaijan achieved first production four months ahead of schedule, and good progress is being made on the completion of the BTC pipeline with the first lifting at Ceyhan in Turkey expected in the second quarter of 2006. In Trinidad, Atlantic LNG Train 4 started production in mid December with the Cannonball gas development expected to start production in the first quarter of 2006. Repairs and construction of the Thunder Horse platform in the Gulf of Mexico are proceeding offshore, and production is expected to start in the second half of 2006. BP has conducted a thorough investigation of the incident. We have concluded that it was not storm related, but was caused by design weakness in the ballast system, which can be corrected offshore. In Russia, TNK-BP disposed of non-core producing assets in the Saratov region, along with the Orsk refinery. In our Existing Profit Centres, production commenced from the Rhum and Farragon fields in the North Sea.

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EXPLORATION AND PRODUCTION (concluded)

Elsewhere, projects remain on track. In Azerbaijan, line-fill of the Baku-Tbilisi-Ceyhan (BTC) oil export pipeline continues and the inauguration of the Georgian section of the pipeline was held in early October. In Angola, Kizomba B started producing in early July. In Trinidad, both the Cannonball project and the Atlantic LNG Train 4 remain on course for start-up of production in the fourth quarter. In October, we announced the planned investment of $2.2 billion in the Wamsutter natural gas field in Wyoming, USA.

We have had continued exploration success in Angola with the ‘Juno-1’ ‘Astraea-1’ and ‘Hebe-1’ oil discoveries in ultra-deepwater Block 31. These bring the number of successful discoveries that BP has drilled in Block 31 to nine. Also, we have made a second discovery offshore Sakhalin Island with the Udachnaya well.

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EXPLORATION AND PRODUCTION (concluded)

In the fourth quarter we had further exploration success in Trinidad with the Chachalaca well.

BP’s proved reserve replacement ratio on a US GAAP/SEC basis was 78% for subsidiaries, and for equity-accounted entities was 114%.

Our proved reserve replacement ratios represent bookings through discoveries, extensions, revisions and improved recovery and exclude the impact of acquisitions and divestments.

During the quarter we completed our divestments of certain properties in the Gulf of Mexico and the North Sea and in Australia we sold 5.3% of our reserves in the North West Shelf to the China National Offshore Oil Company, resulting in total exceptional gains in the quarter of $32 million.

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