LONDON: BP’s second-quarter profit slumped by nearly two thirds from a year ago as it grappled with lower crude prices and took a huge $10.8 billion charge related to the 2010 Gulf of Mexico oil spill.

In a sign it was hunkering down for an extended period of lower oil prices, the British oil and gas company also cut its planned full-year capital spending again to “below $20 billion”, after cutting it 13 per cent to $20 billion (Dh73.4 billion) earlier this year.

BP reached an $18.7 billion settlement with the US government and five states this month to resolve most claims from the oil spill five years ago, the largest corporate settlement in US history.

While BP had been expected to take a $10 billion charge for this at some point, it said on Tuesday it had also agreed to pay up to $1 billion to resolve claims from local government entities, taking cumulative pretax charges for the Macondo rig explosion and spill that killed 11 workers to $55 billion.

As a result, the company took a pretax charge of $10.8 billion in the second quarter, including a $9.8 billion charge related to the government settlements.

Profits were also hit by a $600 million exploration write off in Libya as a result security issues, leaving underlying replacement cost profit, BP’s definition of net income, at $1.3 billion, below analysts expectations of $1.64 billion.

BP also raised costs linked to restructuring following the oil price slide to $1.5 billion from the $1 billion announced in December.

“The external environment remains challenging,” Chief Executive Officer Bob Dudley said in a statement.

BP shares traded 1 percent higher in London at 0830 GMT outperforming a 0.6 percent gain for the European oil and gas sector index.

“BP’s earnings were weak as second-quarter production was weaker than we had expected, but the market will take the (capital spending) cut positively,” said Anish Kapadia, analyst at investment bank Tudor, Pickering Holt and Co.

In a repeat of first-quarter trends, BP’s refining and trading division, known as downstream, performed strongly while production delivered weak results amid falling oil prices.

Downstream generated $1.63 billion in replacement cost profit for BP, up from $933 million a year earlier but down from an exceptionally strong $2.08 billion in the first quarter.

Oil prices averaged $60 a barrel in the second quarter, up about $5 a barrel from the first quarter but down from $110 a year earlier.

For the third quarter, BP said it expected “reduced refining margins and lower levels of turnaround activity”.

BP’s upstream operations delivered a replacement cost profit of just $228 million versus $4.05 billion a year earlier and $372 million in the first quarter.

BP’s global refining margin benchmark rose in the second quarter to $19.4 a barrel from $15.55 a year earlier and from $15.3 in the first quarter.

As a rule of thumb, each $1 in refining margins equates to around $500 million in BP’s pretax replacement cost operating profit, according to the company.

BP said its second-quarter results reflected the impact of continued low oil and gas prices, and a reduced contribution from its 19.75 per cent stake in Russia’s Rosneft.

BP’s net cash flow significantly recovered to $6.3 billion from $1.9 billion in the first quarter. BP also sold $7.4 billion of assets as part of a $10 billion divestment programme.

BP maintained its dividend at 10 cents per ordinary share.

Norwegian oil major Statoil posted higher-than-forecast earnings on Tuesday and also said it was lowering its capital spending outlook for the year.