BP 2007 Annual Report Download - page 41

BP ANNUAL REPORT AND ACCOUNTS 2007 39
2005 (2005 includes $374 million in respect of continuing operations).
See Financial statements note 14 on page 125. The 43% increase in
2007 compared with 2006 reflects increased investment in enhanced oil
recovery, heavy oil, advanced refining, conversion, biosciences and
renewables technology.
Insurance
The group generally restricts its purchase of insurance to situations
where this is required for legal or contractual reasons. This is because
external insurance is not considered an economic means of financing
losses for the group. Losses will therefore be borne as they arise, rather
than being spread over time through insurance premiums with attendant
transaction costs. This position is reviewed periodically.
Technology
The realization of technological advancements is pivotal to our strategic
progress and business performance. It is also the key to finding and
developing solutions that meet the energy and climate challenges of the
21st century.
Our three-year technology plan provides sustained investment in our
core technologies and increasing investment in long-term technologies.
As we have deepened our current areas of leadership, extended their
application in the field and broadened our long-term technology portfolio,
our technology investment has grown at an average of 15% per annum
during the period 2003-2007. In 2007, total technology investment was
around $1.1 billion.
The sheer range and complexity of technologies that can impact our
businesses, and the wide variety of sources for these technologies
proprietary, energy service sector, universities and research institutions
and other industries means that no single approach can meet all our
needs.
The following guiding principles underpin our approach to technology:
– Deliver technology leadership in a select few areas.
– Develop sustainable technology-based solutions for corporate
renewal.
– Drive rapid take-up of proprietary and commercially available
technologies.
– Innovate and test technology at material scale.
– Develop and access world-class skills; collaborate internally and
externally.
These principles are reflected in how we define technology
investment. Whereas research and development is an externally reported
number, internally we use a broader but very specific definition for
technology investment. This consists of four elements: technology
development for incremental improvement of our base businesses;
technology leadership areas to create and sustain material, advantaged
business positions; long-term technology investments to secure our
future; and application and propagation of technology through formalized
technology networks and knowledge management processes.
During 2007, we continued to advance and employ new technologies
in drilling and well construction, unconventional gas development,
enhanced oil recovery and seismic imaging. These technologies and
know-how have enabled a new agreement with the Sultanate of Oman
to develop gas resources, discoveries in Azerbaijan, Angola, Egypt and
the Gulf of Mexico, increased production from tight gas fields in the
continental US and increased recoveries from our fields in maturing
basins such as Alaska and the North Sea.
Technology advancements are also broadening our refining capability
to understand and process feedstocks of varying quality and optimize our
assets in real time, enhancing the flexibility and reliability of our refineries
and, in turn, improving the margins of our existing asset base. Our
proprietary technologies in PTA have continued to reduce manufacturing
costs and environmental impact: the new Zhuhai 2 unit in China, which
started in 2007, has a lower energy consumption and environmental
footprint than any other PTA unit in the world.
We also continue to progress our strategic longer-term technologies.
In the field of bioscience, we selected the University of California
Berkeley and its partners the University of Illinois, Urbana-Champaign and
the Lawrence Berkeley National Laboratory to join us in the previously-
announced $500-million research programme to explore how bioscience
can be used to increase energy production and reduce the impact of
energy consumption on the environment. This energy research laboratory
is now operational. We also entered into research agreements with two
biotechnology companies in the US to focus on next generation energy
crops for biofuels and to research microbial processes in subsurface
hydrocarbons. We have formed a research partnership with the
Massachusetts Institute of Technology to complement our internal
technology capabilities in converting low-value carbon feedstocks such as
petcoke and coal to high-value products such as electricity, liquid fuels
and chemicals while minimizing CO
2
emissions.
Carbon capture and storage (CCS) technologies are a key enabler to
the success of low-carbon power generation and product manufacturing.
Having integrated the learning from our CO
2
storage project in Algeria
with our extensive Exploration and Production capabilities, our CCS
technologies are ready for deployment at scale.
Regulation of the group’s business
BP’s exploration and production activities are conducted in many
different countries and are therefore subject to a broad range of
legislation and regulations. These cover virtually all aspects of exploration
and production activities, including matters such as licence acquisition,
production rates, royalties, pricing, environmental protection, export,
taxes and foreign exchange. The terms and conditions of the leases,
licences and contracts under which these oil and gas interests are held
vary from country to country. These leases, licences and contracts are
generally granted by or entered into with a government entity or state
company and are sometimes entered into with private property owners.
These arrangements with governmental or state entities usually take the
form of licences or production-sharing agreements. Arrangements with
private property owners are usually in the form of leases.
Licences (or concessions) give the holder the right to explore for and
exploit a commercial discovery. Under a licence, the holder bears the risk
of exploration, development and production activities and provides the
financing for these operations. In principle, the licence holder is entitled
to all production, minus any royalties that are payable in kind. A licence
holder is generally required to pay production taxes or royalties, which
may be in cash or in kind. Less typically, BP may explore for and exploit
hydrocarbons under a service agreement with the host entity in
exchange for reimbursement of costs and/or a fee paid in cash rather
than production.
Production-sharing agreements entered into with a government entity
or state company generally require BP to provide all the financing and
bear the risk of exploration and production activities in exchange for a
share of the production remaining after royalties, if any.
In certain countries, separate licences are required for exploration and
production activities and, in certain cases, production licences are limited
to a portion of the area covered by the exploration licence. Both
exploration and production licences are generally for a specified period of
time (except for licences in the US, which typically remain in effect until
production ceases). The term of BP’s licences and the extent to which
these licences may be renewed vary by area.
Frequently, BP conducts its exploration and production activities in
joint venture with other international oil companies, state companies or
private companies.
In general, BP is required to pay income tax on income generated from
production activities (whether under a licence or production-sharing
agreement). In addition, depending on the area, BP’s production activities
may be subject to a range of other taxes, levies and assessments,
including special petroleum taxes and revenue taxes. The taxes imposed
on oil and gas production profits and activities may be substantially
higher than those imposed on other activities, particularly in Angola,
Norway, the UK, Russia, South America and Trinidad & Tobago.