Both refining and marketing felt the effects of the poorest trading environment seen for a decade

Lord Browne, BP

The firm blamed the decline on a trading environment "significantly less favourable than a year ago".

But it stuck by targets for full-year profits, reassuring investors who sent BP shares up 18.5p to 587p by 1000 GMT.

The profits figure was marginally better than expected by analysts, who were disappointed last week by data from US oil giant ExxonMobil.

Forecourt challenge

BP blamed its profits decline largely on "severely depressed" margins in the refining and marketing division, which includes forecourt operations.

"Both refining and marketing felt the effects of the poorest trading environment seen for a decade," chief executive Lord Browne said.

Earnings at the unit slumped by more than one third to $287m, with the slowdown-hit US leading the decline.

Margins at US retail outlets were 80% lower in the January to March period than in the last three months of 2001.

Worldwide refining margins fell 60% although, ironically, lower energy costs provided some benefit, through reducing refinery overheads.

Production up

BP's exploration and production arm saw profits decline by more than one half to $2.4bn over the quarter, as revenues from crude sales slid by an average of $6 per barrel.

"The result was significantly affected by lower oil and natural gas prices," Tuesday's statement said.

But revenues were supported by an increase in production, as fields in Alaska, Norway and Angola came online, helping offset output cuts ordered by the oil producers' cartel Opec.

The Opec squeeze hit BP operations in Abu Dhabi and Venezuela.

Price recovery

Revenues from oil sales have shown some recovery, thanks to the effect on demand of the Opec output cuts, rising Middle East tensions and US economic recovery, Lord Browne said.

US natural gas prices have also risen, Lord Brown added, citing "evidence of a recovery in demand".

But he warned that the outlook for refinery and forecourt operations remained "challenging".