BP, Europe's second-largest oil company, said fourth-quarter profit fell from a year earlier as output declined and refining margins weakened.

The oil giant posted a 37 per cent drop in fourth quarter profit due to a weaker performance in both its production and refining businesses and said it would increase the accounting provision for the 2010 oil spill by $200 million.

Profit adjusted for one-time items and inventory changes dropped to $2.8 billion from $3.9 billion a year earlier, the London-based company said in a statement.

BP also said the provision to cover the costs of the Gulf of Mexico spill had risen to $42.7 billion from $42.5 billion last year.

BP follows Royal Dutch Shell and Exxon Mobil, the two biggest oil companies by market value, in reporting lower profit as the cost of extracting crude rises and oil prices stagnate.

Chief executive officer Bob Dudley has promised to focus on BP's most profitable fields so the company's cash flow is 50 per cent higher this year than 2011. Production in the quarter, excluding Russia, fell 1.9 per cent to 2.25 million barrels of oil equivalent a day.

Adjusting for disposals and excluding Russia, underlying output rose 3.7 per cent.

BP said it expects underlying output to rise this year, though reported production will drop because of divestments and the loss of about 140,000 barrels a day from the expiration of its concession in Abu Dhabi.

Brent crude prices averaged $109.35 a barrel in the fourth quarter, 0.7 per cent lower than a year earlier, while BP’s refining marker margin, a generic measure of the profitability of processing oil, dropped to $11 a barrel from $18.17 in the last three months of 2012.

BP has gained 4.8 per cent since October 29, when it announced third-quarter results that beat analyst estimates and unexpectedly raised the dividend.

It completed a $38 billion asset-sale programme ahead of schedule to shore up the balance sheet after the 2010 Gulf of Mexico oil spill.

Agencies