Lower oil price takes more than half out of BP's profits

But effect on supply chain costs should save an extra $1bn by the end of the year

Lower oil prices cut BP's profis in half in the second quarter, but the oil giant is anticipating an extra $1bn (£607m) in cost savings as costs in its supply chain tumble.

The company reported replacement cost profit of $3.14bn yesterday, less than half of the 2008 level but still more than 30 per cent higher than the previous quarter. "It has been a pretty turbulent few months, best characterised by continued uncertainty and volatility," Tony Hayward, the BP chief executive, said. "BP continues to steer a steady course through choppy waters."

Production rose by more than 4 per cent to 4 million barrels per day (bpd) in the three months to June, and unit costs came down by 12 per cent. But BP's exploration and production division reported pre-tax underlying profits of just $4.4bn, a massive $8.7bn lower than the same period last year as recession pulled oil prices down to around $60 per barrel compared with last year's $147 peak.

The downstream business was also affected. In June, refinery margins were at their lowest level in six years as global utilisation rates dropped to 80 per cent. But BP's refining availability hit 94 per cent in the quarter, the highest level for six years, and refining and marketing costs fell by 15 per cent, pushing pre-tax underlying profits up by nearly $200m to $970m.

Although the oil price has risen significantly this year, currently hovering around the $68 mark, up from little more than $30 in December, demand is still weak. Developed countries' demand has dropped by around 3 million bpd this year, and BP expects the price to stay at the bottom of the $60 to $90 range for the time being. "The overall picture is of energy demand stabilising following the significant falls in the first half of the year," Mr Hayward said. "At this point we see little evidence of any growth in demand and expect the recovery to be long and drawn out."

But there is an upside to the lower oil prices. When Mr Hayward took the top job in May 2007, he launched a strategy to simplify BP's sprawling fiefdoms and improve the efficiency of a business struggling with a string of safety issues and deteriorating financial performance. The group has already met the 2009 target for cash savings of $2bn – through a combination of last year's 5000 job cuts, plus foreign exchange benefits and lower energy bills. The extra $1bn now targeted for the second half of the year will be met without either significant further redundancies or changes in the dividend policy, as recession-hit supply chain costs start to feed through to the bottom line, Mr Hayward said yesterday.

"We have done pretty much everything we wanted to do in making BP leaner, smaller and more efficient," he said. "Going forward, we will begin to see the benefits of deflation beginning to enter the supply chain, which means we will be able to continue with the level of activity necessary to grow the company, but for a lower cost."

Meanwhile, BP paid a dividend of 28 cents per share, equivalent to $5.5bn, for the first half. Net cash stands at $6.8bn, largely flat compared with last year but 21 per cent up on the previous quarter. Net debt of $27.1bn leaves the group's gearing at 22 per cent.

Capital spending of $4.8bn in the second quarter and $9.4bn in the first six months leaves the group on track for an annual capital expenditure of just shy of $20bn. Disposals brought in $1bn in the first six months – a $359m chunk of which came from last month's sale of the ground fuels marketing business in Greece to Hellenic Petroleum – and are expected to hit two or three times that by the end of the year.

BP's shares responded by closing down 3.1 per cent.