BP 2006 Annual Report Download - page 49

In 2005, the EC published a proposed EC Marine Strategy Directive,
which would adopt an approach akin to that in the Water Framework
Directive by requiring achievement of ‘good environmental status’ for
marine waters by 2021 through the implementation of programmes of
measures.
In 2006, the EC published a proposed Soil Framework Directive that, as
currently drafted, would encompass all soils, not just those for agricultural
uses. If adopted in its current form, the directive would require member
states to develop, over time, a register of ‘contaminated sites’ and to
require their remediation so that they do not pose significant risks to
human health or the environment. Unlike the Environmental Liability
Directive, this is intended to apply to historic as well as new
contamination. Member states may well need to carry out or require
intrusive site investigations in order to establish whether particular sites
are ‘contaminated sites’; coupled with a requirement (which will be new
for some member states) for site investigations to be carried out on any
sale of land that may be contaminated, this could lead to the crystallization
of liabilities for BP in respect of its current or former operational and other
land holdings, if any such land is found to be contaminated.
Property, plants and equipment
BP has freehold and leasehold interests in real estate in numerous countries
throughout the world, but no individual property is significant to the group as
a whole. See Exploration and Production on page 16 for a description of the
group’s significant reserves and sources of crude oil and natural gas.
Significant plans to construct, expand or improve specific facilities are
described under each of the business headings within this section.
Organizational structure
The significant subsidiaries of the group at 31 December 2006 and the
group percentage of ordinary share capital (to nearest whole number) are
set out in Financial statements – Note 50 on page 171. See Financial
statements – Notes 29, 30 and 55 on pages 136, 137 and 195
respectively for information on significant jointly controlled entities and
associates of the group.
Financial and operating performance
Group operating results
The following summarizes the group’s operating results.
$ million except per share amounts
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2006 2005 2004
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Sales and other operating revenues from continuing operationsa265,906 239,792 192,024
Profit from continuing operationsa22,311 22,448 17,884
Profit for the year 22,286 22,632 17,262
Profit for the year attributable to BP shareholders 22,000 22,341 17,075
Profit attributable to BP shareholders per ordinary share – cents 109.84 105.74 78.24
Dividends paid per ordinary share – cents 38.40 34.85 27.70
aExcludes Innovene, which was treated as a discontinued operation in accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’. See Financial
statements – Note 5 on page 111.
Business environment
The business environment in 2006 was mixed compared with 2005,
but still robust in comparison with historical averages. Crude oil and
UK natural gas prices increased, while US natural gas prices and global
refining margins fell.
Crude oil prices reached record highs in 2006 in nominal terms, driven
by low surplus oil production capacity, continued demand growth and
concern about vulnerability of supply.The dated Brent price averaged
$65.14 per barrel, an increase of more than $10 per barrel over the
$54.48 per barrel average seen in 2005, and varied between $78.69 and
$55.89 per barrel. Prices peaked in early August before retreating in the
face of a mild hurricane season and rising inventories. OPEC action late
in the year helped support prices.
Natural gas prices in the US declined in 2006 but remained well above
historical averages. The Henry Hub First of the Month Index averaged
$7.24 per mmBtu, $1.41 per mmBtu below the 2005 average of $8.65
per mmBtu. Rising production and weak consumption resulted in above-
average inventories, depressing gas prices relative to crude oil. UK gas
prices rose slightly in 2006, averaging 42.19 pence per therm at the
National Balancing Point, compared with a 2005 average of 40.71 pence
per therm.
Refining margins were only slightly lower in 2006, with the BP Global
Indicator Margin (GIM) averaging $8.39 per barrel. This reflected further
oil demand growth, lingering effects on US refinery production from the
2005 hurricanes and gasoline formulation changes in several US states.
The premium for light products over fuel oils remained exceptionally high,
favouring upgraded refineries over less complex sites.
Retail margins improved slightly in 2006, benefiting from a decline in the
cost of product during the second half of the year, despite
intense competition.
The business environment in 2005 was stronger than in 2004, with
higher oil and gas realizations and higher refining and olefins margins
but lower retail marketing margins.
In 2005, the dated Brent price averaged $54.48 per barrel, an increase
of more than $16 per barrel above the $38.27 per barrel average seen
in 2004, and varied between $38.21 and $67.33 per barrel. Hurricanes
Katrina and Rita severely disrupted oil and gas production in the Gulf of
Mexico for an extended period but supply availability was maintained.
Natural gas prices in the US were also higher during 2005 than in 2004
in the face of rising oil prices and hurricane-induced production losses.
In 2005, the Henry Hub First of the Month Index averaged $8.65 per
mmBtu, up by around $2.50 per mmBtu compared with the 2004 average
of $6.13 per mmBtu. High gas prices in 2005 stimulated a fall in demand,
especially in the industrial sector. UK gas prices were up strongly in
2005, averaging 40.71 pence per therm at the National Balancing Point,
compared with a 2004 average of 24.39 pence per therm.
Refining margins also reached record highs in 2005, with the BP GIM
averaging $8.60 per barrel. This reflected further oil demand growth and
the loss of refining capacity as a result of the US hurricanes. The premium
for light products above fuel oils remained exceptionally high, favouring
upgraded refineries over less complex sites.
Retail margins weakened in 2005 as rising product prices and price
volatility made their impact felt in a competitive marketplace.
Hydrocarbon production
Hydrocarbon production for subsidiaries decreased by 3.3% in 2006
reflecting a decrease of 5.1% for liquids and a decrease of 1.3% for
natural gas. Increases in production in our new profit centres were offset
by anticipated decline in our existing profit centres and the effect of
disposals. Hydrocarbon production for equity-accounted entities increased
by 0.1%, reflecting a decrease of 1.3% for liquids and an increase of
10.2% for natural gas.
Hydrocarbon production for subsidiaries decreased by 2.8% in 2005
compared with 2004, reflecting a decrease of 3.9% for liquids and a
decrease of 1.5% for natural gas. Increases in production in our new
profit centres were more than offset by the effect of hurricanes, higher
BP Annual Report and Accounts 2006 47