BP 2009 Annual Report Download - page 42

BP Annual Report and Accounts 2009
Business review
Refining throughputs in 2009 increased by 6% relative to 2008, driven
principally by improved operational performance in the US. Higher US
throughputs were largely attributable to the recovery at the Texas City
refinery, partially offset by the reduced equity interest in the Toledo
refinery stemming from the Husky joint venture.
Supply and trading
The group has a long-established integrated supply and trading function
responsible for delivering value across the overall crude and oil products
supply chain. This structure enables the optimization of BP’s FVCs to
maintain a single interface with the oil trading markets and to operate
with a single set of trading compliance processes, systems and controls.
The business is organized along global commodity lines and with trading
offices in Europe, the US and Asia, the function is able to maintain a
presence in the regionally connected global markets. The supply and
trading function has supported the Refining and Marketing segment
through a period of higher volatility of crude and oil product prices and
increased credit risk following the global financial crisis.
The function seeks to identify the best markets and prices for our
crude oil, source optimal feedstocks for our refineries and provide
competitive supply for our marketing businesses. In addition, where
refinery production is surplus to marketing requirements or can be
sourced more competitively, it is sold into the market. Wherever possible,
the group will look to optimize value across the supply chain. For
example, BP will often sell its own crude production into the market
and purchase alternative crude for its refineries where this will provide
incremental margin.
Along with the supply activity described above, the function seeks
to create incremental trading opportunities. It enters into the full range of
exchange-traded commodity derivatives, over-the-counter (OTC) contracts
and spot and term contracts that are described in detail below. In order to
facilitate the generation of trading margin from arbitrage, blending and
storage opportunities, it also both owns and contracts for storage and
transport capacity. The group has developed a risk governance framework
to manage and oversee the financial risks associated with this trading
activity, which is described in the Financial statements – Note 24 on
pages 144-149.
The range of transactions that the group enters into is described
below.
Exchange-traded commodity derivatives
These contracts are typically in the form of futures and options traded on
a recognized exchange, such as Nymex, SGX, ICE and Chicago Board of
Trade. Such contracts are traded in standard specifications for the main
marker crude oils, such as Brent and West Texas Intermediate and the
main product grades, such as gasoline and gasoil. Gains and losses,
otherwise referred to as variation margins, are settled on a daily basis
with the relevant exchange. These contracts are used for the trading and
risk management of both crude oil and refined products. Realized and
unrealized gains and losses on exchange-traded commodity derivatives
are included in sales and other operating revenues for accounting
purposes.
OTC contracts
These contracts are typically in the form of forwards, swaps and options.
Some of these contracts are traded bilaterally between counterparties;
others may be cleared by a central clearing counterparty. These contracts
can be used both as part of trading and risk management activities.
Realized and unrealized gains and losses on OTC contracts are included
in sales and other operating revenues for accounting purposes.
The main grades of crude oil bought and sold forward using standard
contracts are West Texas Intermediate and a standard North Sea crude
blend (Brent, Forties and Osberg or BFO). Although the contracts specify
physical delivery terms for each crude blend, a significant volume are not
settled physically. The contracts typically contain standard delivery, pricing
and settlement terms. Additionally, the BFO contract specifies a standard
volume and tolerance given that the physically settled transactions are
delivered by cargo. Swaps are often contractual obligations to exchange
cash flows between two parties: a typical swap transaction usually
references a floating price and a fixed price with the net difference of the
cash flows being settled. Options give the holder the right, but not the
obligation, to buy or sell crude or oil products at a specified price on or
before a specific future date. Amounts under these derivative financial
instruments are settled at expiry, typically through netting agreements,
to limit credit exposure and support liquidity.
Spot and term contracts
Spot contracts are contracts to purchase or sell crude and oil products at
the market price prevailing on or around the delivery date when title to
the inventory is taken. Term contracts are contracts to purchase or sell a
commodity at regular intervals over an agreed term. Though spot and
term contracts may have a standard form, there is no offsetting
mechanism in place. These transactions result in physical delivery with
operational and price risk. Spot and term contracts relate typically to
purchases of crude for a refinery, purchases of products for marketing,
sales of the group’s oil production and sales of the group’s oil products.
For accounting purposes, spot and term sales are included in sales and
other operating revenues, when title passes. Similarly, spot and term
purchases are included in purchases for accounting purposes.
Fuels marketing and logistics
Our fuels strategy focuses on optimizing the integrated value of each FVC
that is responsible for the delivery of ground fuels to the market. We do
this by co-ordinating our marketing, refining and trading activities to
maximize synergies across the whole value chain. Our priorities are to
operate an advantaged infrastructure and logistics network (which
includes pipelines, storage terminals and road or rail tankers), drive
excellence in operating and transactional processes and deliver
compelling customer offers in the various markets where we operate.
The fuels business markets a comprehensive range of refined oil
products primarily focused on the ground fuels sector.
The ground fuels business supplies fuel and related convenience
services to retail consumers through company-owned and franchised
retail sites as well as other channels including wholesalers and jobbers.
It also supplies commercial customers within the transport and industrial
sectors.
Our retail network is largely concentrated in Europe and the US
but also has established operations in Australasia, southern and eastern
Africa. We are developing networks in China in two separate joint
ventures, one with Petrochina and the other with China Petroleum and
Chemical Corporation (Sinopec).
Number of retail sites operated under a BP brand
Retail sitesa b 2009 2008 2007
US 11,500 11,700 12,200
Europe 8,600 8,600 8,600
Rest of World 2,300 2,300 2,500
To t al 22,400 22,600 23,300
aThe number of retail sites includes sites not operated by BP but instead operated by dealers,
jobbers, franchisees or brand licensees that operate under a BP brand. These may move to or from
the BP brand as their fuel supply or brand licence agreements expire and are renegotiated in the
normal course of business.
bExcludes our interest in equity-accounted entities which are dual-branded.
40