BP 2010 Annual Report Download - page 29

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Businessreview
Business review
Riskfactors
Weurgeyoutoconsidercarefullytherisksdescribedbelow.Thepotential
impactoftheiroccurrencecouldbeforourbusiness,nancialconditionand
resultsofoperationstosufferandthetradingpriceandliquidityofour
securitiestodecline.
Oursystemofriskmanagementidentiesandprovidesthe
responsetorisksofgroupsignicancethroughtheestablishmentof
standardsandothercontrols.Anyfailureofthissystemcouldleadtothe
occurrence,orre-occurrence,ofanyoftherisksdescribedbelowanda
consequentmaterialadverseeffectonBP’sbusiness,nancialposition,
resultsofoperations,competitiveposition,cashows,prospects,liquidity,
shareholderreturnsand/orimplementationofitsstrategicagenda.
Therisksarecategorizedagainstthefollowingareas:strategic;
complianceandcontrol;andsafetyandoperational.Inaddition,wehave
alsosetouttwofurtherrisksforyourattention–thoseresultingfromthe
GulfofMexicooilspill(theIncident)andthoserelatedtothegeneral
macroeconomicoutlook.
The Gulf of Mexico oil spill has had and could continue to have a
material adverse impact on BP.
Thereissignicantuncertaintyintheextentandtimingofcostsand
liabilitiesrelatingtotheIncident,theimpactoftheIncidentonour
reputationandtheresultingpossibleimpactonourabilitytoaccessnew
opportunities.Thereisalsosignicantuncertaintyregardingpotential
changesinapplicableregulationsandtheoperatingenvironmentthatmay
resultfromtheIncident.Theseincreasetheriskstowhichthegroupis
exposedandmaycauseourcoststoincrease.Theseuncertaintiesare
likelytocontinueforasignicantperiod.Thus,theIncidenthashad,and
couldcontinuetohave,amaterialadverseimpactonthegroup’sbusiness,
competitiveposition,nancialperformance,cashows,prospects,liquidity,
shareholderreturnsand/orimplementationofitsstrategicagenda,
particularlyintheUS.
Werecognizedchargestotalling$40.9billionin2010asaresultof
theIncident.ThetotalamountsthatwillultimatelybepaidbyBPinrelation
toallobligationsrelatingtotheIncidentaresubjecttosignicant
uncertaintyandtheultimateexposureandcosttoBPwillbedependenton
manyfactors.Furthermore,theamountofclaimsthatbecomepayableby
BP,theamountofnesultimatelyleviedonBP(includinganydetermination
ofBP’snegligence),theoutcomeoflitigation,andanycostsarisingfrom
anylonger-termenvironmentalconsequencesoftheoilspill,willalso
impactupontheultimatecostforBP.Althoughtheprovisionrecognizedis
thecurrentbestestimateofexpendituresrequiredtosettlecertainpresent
obligationsattheendofthereportingperiod,therearefutureexpenditures
forwhichitisnotpossibletomeasuretheobligationreliably.Therisks
associatedwiththeIncidentcouldalsoheightentheimpactoftheother
riskstowhichthegroupisexposedasfurtherdescribedbelow.
The general macroeconomic outlook can affect BP’s results given
the nature of our business.
Inthecontinuinguncertainnancialandeconomicenvironment,certain
risksmaygainmoreprominenceeitherindividuallyorwhentakentogether.
Oilandgaspricescanbeveryvolatile,withaveragepricesandmargins
inuencedbychangesinsupplyanddemand.Thisislikelytoexacerbate
competitioninallbusinesses,whichmayimpactcostsandmargins.Atthe
sametime,governmentsarefacinggreaterpressureonpublicnances,
whichmayincreasetheirmotivationtointerveneinthescalandregulatory
frameworksoftheoilandgasindustry,includingtheriskofincreased
taxation,nationalizationandexpropriation.Theglobalnancialand
economicsituationmayhaveanegativeimpactonthirdpartieswithwhom
wedo,ormaydo,business.Anyofthesefactorsmayaffectourresultsof
operations,nancialcondition,businessprospectsandliquidityandmay
resultinadeclineinthetradingpriceandliquidityofoursecurities.
Capitalmarketshaveregainedsomecondenceafterthebanking
crisisof2008butarestillsubjecttovolatilityandifthereareextended
periodsofconstraintsinthesemarkets,orifweareunabletoaccessthe
markets,includingduetoournancialpositionormarketsentimentasto
ourprospects,atatimewhencashowsfromourbusinessoperations
maybeunderpressure,ourabilitytomaintainourlong-terminvestment
programmemaybeimpactedwithaconsequenteffectonourgrowthrate,
andmayimpactshareholderreturns,includingdividendsandshare
buybacks,orshareprice.Decreasesinthefundedlevelsofourpension
plansmayalsoincreaseourpensionfundingrequirements.
Strategic risks
Access and renewal – BP’s future hydrocarbon production depends
on our ability to renew and reposition our portfolio. Increasing
competition for access to investment opportunities, the effects of
the Gulf of Mexico oil spill on our reputation and cash ows, and
more stringent regulation could result in decreased access to
opportunities globally.
Successfulexecutionofourgroupstrategydependsonimplementing
activitiestorenewandrepositionourportfolio.Thechallengestorenewalof
ourupstreamportfolioaregrowingduetoincreasingcompetitionfor
accesstoopportunitiesgloballyandheightenedpoliticalandeconomic
risksincertaincountrieswheresignicanthydrocarbonbasinsarelocated.
Lackofmaterialpositionsinnewmarketscouldimpactourfuture
hydrocarbonproduction.
Moreover,theGulfofMexicooilspillhasdamagedBP’sreputation,
whichmayhavealong-termimpactonthegroup’sabilitytoaccessnew
opportunities,bothintheUSandelsewhere.Adversepublic,politicaland
industrysentimenttowardsBP,andtowardsoilandgasdrillingactivities
generally,coulddamageorimpairourexistingcommercialrelationships
withcounterparties,partnersandhostgovernmentsandcouldimpairour
accesstonewinvestmentopportunities,explorationproperties,
operatorshipsorotheressentialcommercialarrangementswithpotential
partnersandhostgovernments,particularlyintheUS.Inaddition,
respondingtotheIncidenthasplaced,andwillcontinuetoplace,a
signicantburdenonourcashowoverthenextseveralyears,which
couldalsoimpedeourabilitytoinvestinnewopportunitiesanddeliver
long-termgrowth.
Morestringentregulationoftheoilandgasindustrygenerally,
andofBP’sactivitiesspecically,arisingfromtheIncident,couldincrease
thisrisk.
Prices and markets – BP’s nancial performance is subject to the
uctuating prices of crude oil and gas as well as the volatile prices
of rened products and the protability of our rening and
petrochemicals operations.
Oil,gasandproductpricesaresubjecttointernationalsupplyanddemand.
PoliticaldevelopmentsandtheoutcomeofmeetingsofOPECcan
particularlyaffectworldsupplyandoilprices.Previousoilpriceincreases
haveresultedinincreasedscaltake,costinationandmoreonerous
termsforaccesstoresources.Asaresult,increasedoilpricesmaynot
improvemarginperformance.Inadditiontotheadverseeffecton
revenues,marginsandprotabilityfromanyfallinoilandnaturalgasprices,
aprolongedperiodoflowpricesorotherindicatorswouldleadtofurther
reviewsforimpairmentofthegroup’soilandnaturalgasproperties.Such
reviewswouldreectmanagement’sviewoflong-termoilandnaturalgas
pricesandcouldresultinachargeforimpairmentthatcouldhavea
signicanteffectonthegroup’sresultsofoperationsintheperiodinwhich
itoccurs.Rapidmaterialorsustainedchangeinoil,gasandproductprices
canimpactthevalidityoftheassumptionsonwhichstrategicdecisionsare
basedand,asaresult,theensuingactionsderivedfromthosedecisions
maynolongerbeappropriate.Aprolongedperiodoflowoilpricesmay
impactourabilitytomaintainourlong-terminvestmentprogrammewitha
consequenteffectonourgrowthrateandmayimpactshareholderreturns,
includingdividendsandsharebuybacks,orshareprice.Periodsofglobal
recessioncouldimpactthedemandforourproducts,thepricesatwhich
theycanbesoldandaffecttheviabilityofthemarketsinwhichweoperate.
Reningprotabilitycanbevolatile,withbothperiodicover-supply
andsupplytightnessinvariousregionalmarkets,coupledwithuctuations
indemand.Sectorsofthepetrochemicalsindustryarealsosubjectto
uctuationsinsupplyanddemand,withaconsequenteffectonprices
andprotability.
BPAnnualReportandForm20-F2010 27