BP 2011 Annual Report Download - page 109

BP Annual Report and Form 20-F 2011 107
Business review: BP in more depth
Business review
Frequently, work (including drilling and related activities) will be contracted
out to third-party service providers who have the relevant expertise
and equipment not available within the joint venture or the co-owning
operator’s organization. The relevant contract will specify the work to
be done and the remuneration to be paid and typically will set out how
major risks will be allocated between the joint venture or co-ownership
and the service provider. Generally, the joint venture or co-owner and
the contractor would respectively allocate responsibility for and provide
reciprocal indemnities to each other for harm caused to their respective
staff and property. Depending on the service to be provided, an oil and gas
industry service contract may also contain provisions allocating risks and
liabilities associated with pollution and environmental damage, damage
to a well or hydrocarbon reservoir and for claims from third parties or
other losses. The allocation of those risks vary among contracts and are
determined through negotiation between the parties.
In general, BP is required to pay income tax on income generated
from production activities (whether under a licence or PSAs). 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, for example in Abu Dhabi, Angola, Egypt, Norway, the UK, the
US, Russia and Trinidad & Tobago.
Environmental regulation
BP operates in more than 80 countries and is subject to a wide variety
of environmental regulations concerning our products, operations
and activities. Current and proposed fuel and product specifications,
emission controls and climate change programmes under a number of
environmental laws may have a significant effect on the production, sale
and profitability of many of our products.
There are also environmental laws that require us to remediate
and restore areas damaged by the accidental or unauthorized release
of hazardous substances or petroleum associated with our operations.
These laws may apply to sites that BP currently owns or operates, sites
that it previously owned or operated, or sites used for the disposal of its
and other parties’ waste. Provisions for environmental restoration and
remediation are made when a clean-up is probable and the amount of BP’s
legal obligation can be reliably estimated. The cost of future environmental
remediation obligations is often inherently difficult to estimate.
Uncertainties can include the extent of contamination, the appropriate
corrective actions, technological feasibility and BP’s share of liability. See
Financial statements – Note 36 on page 231 for the amounts provided in
respect of environmental remediation and decommissioning.
A number of pending or anticipated governmental proceedings
against BP and certain subsidiaries under environmental laws could
result in monetary sanctions. We are also subject to environmental
claims for personal injury and property damage alleging the release of
or exposure to hazardous substances. The costs associated with such
future environmental remediation obligations, governmental proceedings
and claims could be significant and may be material to the results
of operations in the period in which they are recognized. We cannot
accurately predict the effects of future developments on the group, such
as stricter environmental laws or enforcement policies, or future events
at our facilities, and there can be no assurance that material liabilities and
costs will not be incurred in the future. For a discussion of the group’s
environmental expenditure see page 71.
Approximately 56% of our fixed assets are located in the US
and the EU. US and EU environmental, health and safety regulations
significantly affect BP’s exploration and production, refining and marketing,
transportation and shipping operations. Significant legislation and regulation
in the US and the EU affecting our businesses and profitability includes the
following:
United States
• The Clean Air Act (CAA) regulates air emissions, permitting, fuel
specifications and other aspects of our production, distribution and
marketing activities. Stricter limits on sulphur and benzene in fuels will
affect us in future, as will actions on greenhouse gas (GHG) emissions
and other air pollutants. Additionally, states may have separate, stricter
air emission laws in addition to the CAA.
• The Energy Policy Act of 2005 and the Energy Independence and
Security Act of 2007 affect our US fuel markets by, among other things,
imposing renewable fuel mandates and imposing GHG emissions
thresholds for certain renewable fuels. States such as California also
impose additional fuel carbon standards.
• The Clean Water Act regulates wastewater and other effluent discharges
from BP’s facilities, and BP is required to obtain discharge permits, install
control equipment and implement operational controls and preventative
measures.
• The Resource Conservation and Recovery Act regulates the generation,
storage, transportation and disposal of wastes associated with our
operations and can require corrective action at locations where such
wastes have been released.
• The Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) can, in certain circumstances, impose the entire
cost of investigation and remediation on a party who owned or operated
a site contaminated with a hazardous substance, or arranged for disposal
of a hazardous substance at the site. BP has incurred, or expects to
incur, liability under the CERCLA or similar state laws, including costs
attributed to insolvent or unidentified parties. BP is also subject to claims
for remediation costs under other federal and state laws, and to claims
for natural resource damages under the CERCLA, the Oil Pollution Act
of 1990 (OPA 90) (discussed below) and other federal and state laws.
CERCLA also requires hazardous substance release notification.
• The Toxic Substances Control Act regulates BP’s import, export and sale
of new chemical products.
• The Occupational Safety and Health Act imposes workplace safety and
health requirements on our operations along with significant process
safety management obligations.
• The Emergency Planning and Community Right-to-Know Act requires
emergency planning and hazardous substance release notification as
well as public disclosure of our chemical usage and emissions.
• The US Department of Transportation (DOT) regulates the transport of
BP’s petroleum products such as crude oil, gasoline, and petrochemicals,
and other hydrocarbon liquids.
• The Marine Transportation Security Act (MTSA), the DOT Hazardous
Materials (HAZMAT) and the Chemical Facility Anti-Terrorism Standard
(CFATS) regulations impose security compliance regulations on
around 50 BP facilities. These regulations require security vulnerability
assessments, security risk mitigation plans and security upgrades,
increasing our cost of operations.
OPA 90 is implemented through regulation issued by the US Environmental
Protection Agency (EPA), the US Coast Guard, the DOT, the Occupational
Safety and Health Administration and various states, Alaska and the west
coast states currently have the most demanding state requirements
although regulation in the Gulf of Mexico has increased following the
2010 Deepwater Horizon oil spill. There is an expectation that OPA 90 and
its regulations will become more stringent in the future. The impact will
likely be more rigorous preparedness requirements (the ability to respond
over a longer period to larger spills), including the demonstration of that
preparedness. There will be additional costs associated with this increased
regulation. In 2012, we expect more unannounced exercises and potential
penalties for any failure to demonstrate required preparedness even
without any OPA 90 amendments.
As a consequence of the Deepwater Horizon oil spill we
have become subject to claims under OPA 90 and other laws and
have established a $20-billion trust fund for legitimate state and local
government response claims, final judgments and settlement claims,
legitimate state and local response costs, natural resource damages and
related costs and legitimate individual and business claims. We are also
subject to Natural Resource Damages claims and numerous civil lawsuits