BP 2011 Annual Report Download - page 111

BP Annual Report and Form 20-F 2011 109
Business review: BP in more depth
Business review
Hazardous and Noxious Substance (HNS) Convention 2010 was adopted
to address issues that have inhibited ratification of the International
Convention on Liability and Compensation for Damage in Connection
with the Carriage of Hazardous and Noxious Substances by Sea 1996
(the HNS Convention). This protocol will enter into force when at least
12 states have agreed to be bound by it (four of the states must have at
least 2 million gross tonnes of shipping) and contributing parties in the
consenting states have received at least 40 million tonnes of contributing
cargoes in the preceding year.
• International marine fuel regulations under International Maritime
Organization (IMO) and International Convention for the Prevention
of Pollution from Ships (MARPOL) regimes impose stricter sulphur
emission restrictions on ships in EU ports and inland waterways and
the North and Baltic seas since 2010 and with a stricter global cap on
marine sulphur emissions beginning in 2012. Further reductions are to
be phased in thereafter. These restrictions require the use of compliant
heavy fuel oil (HFO) or distillate, or the installation of abatement
technologies on ships. These regulations will place additional costs on
refineries producing marine fuel, including costs to dispose of sulphur,
as well as increased GHG emissions and energy costs for additional
refining.
To meet its financial responsibility requirements, BP Shipping maintains
marine liability pollution insurance to a maximum limit of $1 billion for each
occurrence through mutual insurance associations (P&I Clubs) but there
can be no assurance that a spill will necessarily be adequately covered by
insurance or that liabilities will not exceed insurance recoveries.
Greenhouse gas regulation
Increasing concerns about climate change have led to a number of
international climate agreements and negotiations are ongoing.
• The Kyoto Protocol commits the parties and other entities to meet
emissions targets in the first commitment period from 2008 to 2012.
• The UN summit in Cancun in December 2010 where parties to the
UN Framework Convention on Climate Change (UNFCCC) reached
formal agreement on a balanced package of measures to 2020. The
Cancun Agreement recognizes that deep cuts in global GHG emissions
are required to hold the increase in global temperature to below 2°C.
Signatories formally commit to carbon reduction targets or actions by
2020. Around 114 countries, including all the major economies and many
developing countries, have made such commitments supplemented
currently by an additional 27 parties that have agreed to be listed as
agreeing to the accord. Supporting those efforts, principles were
agreed for monitoring, verifying and reporting emissions reductions;
establishment of a green fund to help developing countries limit and
adapt to climate change; and measures to protect forests and transfer
low-carbon technology to poorer nations.
• In November 2011, parties to the UNFCCC conference in Durban (COP
17) agreed several measures. One was a ‘roadmap’ for negotiating
a legal framework by 2015 for action on climate change involving all
countries by 2020, to close the ’ambition gap’ between existing GHG
reduction pledges and what is required to achieve the goal of limiting
global temperature rise to 2°C. Another was a second commitment
period for the Kyoto Protocol, to begin immediately after the first period
and run for five or eight years. However, it will not include the US,
Canada, Japan and Russia, and quantitative targets and the rules for
carry-over of allowances from the first commitment will not be agreed
until the end of 2012.
These international concerns and agreements are reflected in national
and regional measures to limit GHG emissions. Additional stricter
measures can be expected in the future. These measures can increase
our production costs for certain products, increase demand for competing
energy alternatives or products with lower-carbon intensity and affect the
sales and specifications of many of our products. Current measures and
developments potentially affecting our businesses include the following:
• The European Union (EU) has agreed an overall GHG reduction target
of 20% by 2020. To meet this, a ‘Climate and Energy Package’ of
regulatory measures has been adopted including: national reduction
targets for emissions not covered by the EU Emissions Trading Scheme
(ETS); binding national renewable energy targets to double renewable
energy in the EU including at least a 10% share of final energy in
transport; a legal framework to promote carbon capture and storage
(CCS); and a revised EU ETS Phase 3. EU ETS revisions include a GHG
reduction of 21% from 2005 levels, a significant increase in allowance
auctioning, an expanded scope (sectors and gases), no free allocations
for electricity production but free allocations for energy-intense and trade
exposed industrial sectors. The EU ETS regulates approximately one-
fifth of our reported 2011 global GHG emissions and can be expected
to require additional expenditure from 2013 when Phase 3 comes into
effect. Finally, EU energy efficiency policy is currently addressed via
national energy efficiency action plans.
• Article 7a of the revised EU Fuels Quality Directive requires fuel suppliers
to reduce the life cycle GHG emissions per unit of fuel and energy
supplied in certain transport markets.
• Australia has committed to reduce its GHG emissions by at least 5%
below 2000 levels by 2020. In support of this, a Clean Energy legislative
package of 19 bills was passed in November 2011 which includes
imposing a carbon price on the top 500 emitting entities meeting the
thresholds in the bill. The carbon price is scheduled to take effect
from 1 July 2012 with a fixed price of $23 Australian dollar (indexed to
forecast inflation) until 1 July 2015, an international linked price (trading)
with floor and ceiling prices from 1 July 2015 through to 1 July 2018, and
a market based price (trading) forward. A certain portion of allowances
will be distributed to ‘emission intensive trade exposed’ businesses for
no cost; this transitional support decreases with time. The majority of our
Australia business emissions will be subject to the pricing scheme and
will require additional expenditures for compliance.
• New Zealand has agreed to cut GHG emissions by 10-20% below
1990 levels by 2020, subject to a comprehensive global agreement
for emissions reductions coming into force. New Zealand’s emission
trading scheme (NZ ETS) commenced on 1 July 2010 for transport fuels,
industrial processes, and stationary energy. The agriculture sector (45%
of New Zealand’s GHG emissions) has been proposed to join the NZ ETS
in January 2015. New Zealand also employs a portfolio of mandatory
and voluntary complementary measures aimed at GHG reductions. A
September 2011 review of the scheme recommended effective delays
to near-term emissions reductions targets, citing a lack of international
action on cutting emissions.
• In the US, with no current potential for passing comprehensive climate
legislation, the US Environmental Protection Agency (EPA) continues to
pursue regulatory measures to address GHGs under the Clean Air Act (CAA).
– In late 2009, the EPA released a GHG endangerment finding to
establish its authority to regulate GHG emissions under the CAA.
– Subsequent to this, the EPA finalized regulations imposing light duty
vehicle emissions standards for GHGs.
– The EPA finalized the initial GHG mandatory reporting rule (GHGRR)
in 2009 and continues to make amendments to the rule. The first
reports under the GHGRR were due on or before 30 September 2011.
The majority of BP’s US businesses were affected by the GHGRR
and submitted their first GHG emissions reports to the EPA under the
GHGRR on or before the 30 September 2011 deadline. In addition
to direct emissions from affected facilities, producers and importers/
exporters of petroleum products, certain natural gas liquids, and GHG’s
were required to report product volumes and notional GHG emissions
should these products be fully combusted. The EPA released
direct emission data and a small subset of product supplier data on
11 January 2012, with certain ‘confidential business information’
protections, in a ‘tool enabled’ database which allows transparency
to the individual facility/entity level. Release of the balance of the
product supply data is expected soon along with release of additional
non-confidential information which will enable aggregation of reported
emissions to the highest level US parent company.
– The EPA finalized permitting requirements for new or modified large
GHG emission sources in 2010, with these regulations taking effect in
January 2011 and the second phase taking effect on 1 July 2011. The
EPA has committed to additional actions, beginning in 2012, relating
to smaller sources of GHG emissions.