BP, Europe's second-largest oil and gas group, yesterday reported a 17% drop in first-quarter net profit as lower crude prices and falling production took a bite out of earnings.
BP, which is Britain's largest company by stock market value, said its replacement cost profit, which strips out the impact of changes in the value of fuel inventories, was $4.36bn (£2.18bn) in the first quarter, slightly less than City forecasts.
Profits also fell in the fourth quarter of 2006, although the figure for the full year still came in 15% higher at $22.25bn.
BP's shares traded higher in early dealing but later dipped after investors digested the latest news on profits. The company's shares closed 9p lower at 568.5p.
BP shares fell sharply earlier this year after the company was strongly criticised over a number of safety lapses in the United States but have since recovered by about 8%.
BP is the first of the international oil majors to report first-quarter earnings, and analysts expect profits to be down across the sector, due to weaker oil prices in the early part of the year and generally lower output.
It said oil production fell 3%, due to field sales and delays in bringing new fields on line, to 3.91 million barrels of oil equivalent per day (boepd) in the quarter, slightly ahead of an average forecast of 3.89 million boepd.
BP said the price it received for its oil was down by more than 4% while higher costs also hit profits at the upstream oil and gas production division, which generates most of BP's profit.
Refining profits dropped sharply, and lagged estimates considerably, despite a rise in margins and in the volumes of crude processed.
BP blamed operational problems and increased spending on safety after an internal investigation said poor safety procedures contributed to an explosion at a Texas refinery which killed 15 workers.
BP is recovering from a difficult two years during which oil spills, allegations of market manipulation, safety lapses, a row between its chairman and chief executive and lower growth targets eroded investor confidence.
"Faced as it is with reduced production and higher costs, lower oil prices and the ongoing barrage resulting from its earlier failures, its challenges are not yet over," said Richard Hunter, an analyst at broker Hargreaves Lansdown.
Tony Hayward, the current exploration and production chief, has been charged with the task of reviving investor confidence in BP when he takes over as chief executive in the summer, replacing Lord John Browne.
Browne's annual performance bonus for last year was cut almost in half as oil spills and safety problems in the United States cast a shadow over record profits for the oil company. He is stepping down by the end of July.
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