BP 2010 Annual Report Download - page 30

Businessreview
Climate change and carbon pricing – climate change and carbon
pricing policies could result in higher costs and reduction in future
revenue and strategic growth opportunities.
Compliancewithchangesinlaws,regulationsandobligationsrelatingto
climatechangecouldresultinsubstantialcapitalexpenditure,taxes,
reducedprotabilityfromchangesinoperatingcosts,andrevenue
generationandstrategicgrowthopportunitiesbeingimpacted.Our
commitmenttothetransitiontoalower-carboneconomymaycreate
expectationsforouractivities,andthelevelofparticipationinalternative
energiescarriesreputational,economicandtechnologyrisks.
Socio-political – the diverse nature of our operations around the
world exposes us to a wide range of political developments and
consequent changes to the operating environment, regulatory
environment and law.
Wehaveoperationsincountrieswherepolitical,economicandsocial
transitionistakingplace.Somecountrieshaveexperienced,ormay
experienceinthefuture,politicalinstability,changestotheregulatory
environment,changesintaxation,expropriationornationalizationof
property,civilstrife,strikes,actsofwarandinsurrections.Anyofthese
conditionsoccurringcoulddisruptorterminateouroperations,causingour
developmentactivitiestobecurtailedorterminatedintheseareas,orour
productiontodecline,andcouldcauseustoincuradditionalcosts.In
particular,ourinvestmentsintheUS,Russia,Iraq,Egypt,Libyaandother
countriescouldbeadverselyaffectedbyheightenedpoliticalandeconomic
environmentrisks.Seepages14-15forinformationonthelocationsofour
majorassetsandactivities.
Wesetourselveshighstandardsofcorporatecitizenshipandaspire
tocontributetoabetterqualityoflifethroughtheproductsandservices
weprovide.Ifitisperceivedthatwearenotrespectingoradvancingthe
economicandsocialprogressofthecommunitiesinwhichweoperate,our
reputationandshareholdervaluecouldbedamaged.
Competition – BP’s group strategy depends upon continuous
innovation in a highly competitive market.
Theoil,gasandpetrochemicalsindustriesarehighlycompetitive.Thereis
strongcompetition,bothwithintheoilandgasindustryandwithother
industries,insupplyingthefuelneedsofcommerce,industryandthe
home.Competitionputspressureonproductprices,affectsoilproducts
marketingandrequirescontinuousmanagementfocusonreducingunit
costsandimprovingefciency,whileensuringsafetyandoperationalriskis
notcompromised.Theimplementationofgroupstrategyrequires
continuedtechnologicaladvancesandinnovationincludingadvancesin
exploration,production,rening,petrochemicalsmanufacturingtechnology
andadvancesintechnologyrelatedtoenergyusage.Ourperformance
couldbeimpededifcompetitorsdevelopedoracquiredintellectualproperty
rightstotechnologythatwerequiredorifourinnovationlaggedthe
industry.
Investment efciency – poor investment decisions could negatively
impact our business.
Ourorganicgrowthisdependentoncreatingaportfolioofqualityoptions
andinvestinginthebestoptions.Ineffectiveinvestmentselectionand
developmentcouldleadtolossofvalueandhighercapitalexpenditure.
Reserves replacement – inability to progress upstream resources in
a timely manner could adversely affect our long-term replacement
of reserves and negatively impact our business.
Successfulexecutionofourgroupstrategydependscriticallyonsustaining
long-termreservesreplacement.Ifupstreamresourcesarenotprogressed
inatimelyandefcientmanner,wewillbeunabletosustainlong-term
replacementofreserves.
Liquidity, nancial capacity and nancial exposure – failure to
operate within our nancial framework could impact our ability to
operate and result in nancial loss. Exchange rate uctuations can
impact our underlying costs and revenues.
Thegroupseekstomaintainanancialframeworktoensurethatitisable
tomaintainanappropriatelevelofliquidityandnancialcapacity.This
frameworkconstrainsthelevelofassessedcapitalatriskforthepurposes
ofpositionstakeninnancialinstruments.Failuretoaccuratelyforecastor
maintainsufcientliquidityandcredittomeettheseneedscouldimpact
ourabilitytooperateandresultinanancialloss.Commercialcreditriskis
measuredandcontrolledtodeterminethegroup’stotalcreditrisk.Inability
todetermineadequatelyourcreditexposurecouldleadtonancialloss.A
creditcrisisaffectingbanksandothersectorsoftheeconomycouldimpact
theabilityofcounterpartiestomeettheirnancialobligationstothegroup.
Itcouldalsoaffectourabilitytoraisecapitaltofundgrowthandtomeet
ourobligations.Thechangeinthegroup’snancialframeworktomakeit
moreprudentmaynotbesufcienttoavoidasubstantialandunexpected
cashcall.
BP’sclean-upcostsandpotentialliabilitiesresultingfrompending
andfutureclaims,lawsuitsandenforcementactionsrelatingtotheGulfof
Mexicooilspill,togetherwiththepotentialcostofimplementingremedies
soughtinthevariousproceedings,cannotbefullyestimatedatthistime
buttheyhave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.Furthermore,wehaverecognizeda
totalchargeof$40.9billionduring2010andfurtherpotentialliabilitiesmay
continuetohaveamaterialadverseeffectonthegroup’sresultsof
operationsandnancialcondition.SeeFinancialstatements–Note2on
page158andLegalproceedingsonpages130-131.Morestringent
regulationoftheoilandgasindustryarisingfromtheIncident,andofBP’s
activitiesspecically,couldincreasethisrisk.
CrudeoilpricesaregenerallysetinUSdollars,whilesalesof
renedproductsmaybeinavarietyofcurrencies.Fluctuationsinexchange
ratescanthereforegiverisetoforeignexchangeexposures,witha
consequentimpactonunderlyingcostsandrevenues.
Formoreinformationonnancialinstrumentsandnancialrisk
factorsseeFinancialstatements–Note27onpage185.
Insurance – BP’s insurance strategy means that the group could,
from time to time, be exposed to material uninsured losses which
could have a material adverse effect on BP’s nancial condition and
results of operations.
Thegroupgenerallyrestrictsitspurchaseofinsurancetosituationswhere
thisisrequiredforlegalorcontractualreasons.Thismeansthatthegroup
couldbeexposedtomaterialuninsuredlosses,whichcouldhaveamaterial
adverseeffectonitsnancialconditionandresultsofoperations.Inparticular,
theseuninsuredcostscouldariseatatimewhenBPisfacingmaterialcosts
arisingoutofsomeothereventwhichcouldputpressureonBP’sliquidity
andcashows.Forexample,BPhasborneandwillcontinuetobearthe
entireburdenofitsshareofanypropertydamage,wellcontrol,pollution
clean-upandthird-partyliabilityexpensesarisingoutoftheGulfofMexico
oilspillincident.
28BPAnnualReportandForm20-F2010