BP 2011 Annual Report Download - page 59

Business review: BP in more depth
BP Annual Report and Form 20-F 2011 57
Business review
The primary additional factors affecting the financial results for 2011,
compared with 2010, were higher realizations, higher earnings from equity-
accounted entities, a higher refining margin environment and a stronger
supply and trading contribution, partly offset by lower production volumes,
rig standby costs in the Gulf of Mexico, higher costs related to turnarounds,
higher exploration write-offs, and negative impacts of increased relative
sweet crude prices in Europe and Australia, primarily caused by the loss of
Libya production and the weather-related power outages in the US.
The primary additional factors affecting the financial results for
2010, compared with 2009, were higher realizations, lower depreciation,
higher earnings from equity-accounted entities, improved operational
performance, further cost efficiencies and a more favourable refining
environment in Refining and Marketing, partly offset by lower production,
a significantly lower contribution from supply and trading (including gas
marketing) and higher production taxes.
See Exploration and Production on page 80, Refining and Marketing
on page 94 and Other businesses and corporate on page 101 for further
information on segment results.
a
Inventory holding gains and losses represent the difference between the cost of sales calculated
using the average cost to BP of supplies acquired during the year and the cost of sales calculated
on the first-in first-out (FIFO) method, after adjusting for any changes in provisions where the net
realizable value of the inventory is lower than its cost. BP’s management believes it is helpful to
disclose this information. An analysis of inventory holding gains and losses by business is shown in
Financial statements – Note 6 on page 200 and further information on inventory holding gains and
losses is provided on page 110.
Finance costs and net finance expense relating to pensions and other
post-retirement benefits
Finance costs comprise interest payable less amounts capitalized, and
interest accretion on provisions and long-term other payables. Finance
costs in 2011 were $1,246 million compared with $1,170 million in 2010
and $1,110 million in 2009.
Net finance income relating to pensions and other post-retirement
benefits in 2011 was $263 million compared with net finance income
of $47 million in 2010 and net finance expense of $192 million in 2009.
In 2011, compared with 2010, the improvement largely reflected the
additional expected returns on assets following the increases in the
pension asset base at the end of 2010 compared with the end of 2009.
During 2011 the value of our pension assets declined and this,
combined with changes to assumptions used to value benefit obligations,
most notably lower discount rates, meant that the deficit relating to
pension and other post-retirement benefits increased to $12.0 billion at the
end of the year (2010 $7.7 billion).
Taxation
The charge for corporate taxes in 2011 was $12,737 million, compared
with a credit of $1,501 million in 2010 and a charge of $8,365 million in
2009. The effective tax rate was 33% in 2011, 31% in 2010 and 33% in
2009. The group earns income in many countries and, on average, pays
taxes at rates higher than the UK statutory rate of 26%. The increase in the
effective tax rate in 2011 compared with 2010 primarily reflects a higher
level of income earned in jurisdictions with a higher tax rate. The decrease
in the effective tax rate in 2010 compared with 2009 primarily reflected the
absence of a one-off disbenefit that featured in 2009 in respect of goodwill
impairment, and other factors.
Acquisitions and disposals
In 2011, BP acquired from Reliance Industries Limited (Reliance) a 30%
interest in each of 21 oil and gas production-sharing agreements operated
by Reliance in India for $7.0 billion. We completed the purchase, for
$3.6 billion, of 10 exploration and production blocks in Brazil, which was
the final part of a $7-billion transaction with Devon Energy that had been
announced in March 2010, and our Alternative Energy business acquired
the Brazilian sugar and ethanol producer Companhia Nacional de Açúcar e
Álcool (CNAA) for $0.7 billion. See Financial statements – Note 3 on page
194 for further details of the business combinations undertaken during
the year.
Total disposal proceeds received during 2011, including the repayment
of the disposal deposit relating to Pan American Energy LLC (PAE) (see
below), were $2.7 billion.
In Exploration and Production, disposal proceeds included
$0.6 billion from the sale of our upstream assets in Pakistan to United
Energy Pakistan Limited, a subsidiary of United Energy Group (UEG),
$0.5 billion from the sale of half of the 3.29% interest in the Azeri-Chirag-
Gunashli (ACG) development in the Caspian Sea which we had acquired
from Devon Energy in 2010 to Azerbaijan (ACG) Limited and $0.5 billion
from the sale of our interests in the Wytch Farm, Wareham, Beacon and
Kimmeridge fields to Perenco UK Ltd. In addition, further payments of
$1.1 billion were received on completion of the sales of our upstream and
certain midstream interests in Venezuela and Vietnam and our oil and gas
exploration, production and transportation business in Colombia, for which
we had received $2.3 billion in 2010 as deposits. In November 2011, BP
received from Bridas Corporation (Bridas) a notice of termination of the
agreement for their purchase of BP’s 60% interest in PAE. As a result, the
deposit of $3.5 billion relating to the sale of PAE which had been received
by BP in 2010 was repaid to Bridas.
In Refining and Marketing we made disposals totalling $0.7 billion,
which included completion of the divestment of non-strategic pipelines and
terminals in the US, announced in 2009, for $0.3 billion and the disposal of
our fuels marketing businesses in several African countries (see Refining
and Marketing on page 97 for more details) for $0.2 billion.
Within Other businesses and corporate, we completed the sale of
BP’s wholly-owned subsidiary, ARCO Aluminum Inc., to a consortium of
Japanese companies for $0.7 billion.
In 2010, BP acquired a major portfolio of deepwater exploration
acreage and prospects in the US Gulf of Mexico and an additional interest
in the BP-operated ACG developments in the Caspian Sea, Azerbaijan for
$2.9 billion, as part of a $7-billion transaction with Devon Energy. Total
disposal proceeds during 2010 were $17 billion, which included $7 billion
from the sale of US Permian Basin, Western Canadian gas assets, and
Western Desert exploration concessions in Egypt to Apache Corporation
(and an existing partner that exercised pre-emption rights), and $6.2 billion
of deposits received in advance of disposal transactions expected to
complete in 2011. Of these deposits received, $3.5 billion was for the sale
of our interest in PAE to Bridas, however, this was subsequently repaid to
Bridas at the end of 2011 following the termination of the sale agreement.
See above and Financial statements – Note 4 on page 196 for further
information. The deposits received also included $1 billion for the sale of
our upstream and midstream interests in Venezuela and Vietnam to TNK-
BP, and $1.3 billion for the sale of our oil and gas exploration, production
and transportation business in Colombia to a consortium of Ecopetrol and
Talisman.
In Refining and Marketing we made disposals totalling $1.8 billion in
2010, which included our French retail fuels and convenience business to
Delek Europe, the fuels marketing business in Botswana to Puma Energy,
certain non-strategic pipelines and terminals in the US, our interests in
ethylene and polyethylene production in Malaysia to Petronas and our
interest in a futures exchange.
There were no significant acquisitions in 2009. Disposal proceeds in
2009 were $2.7 billion, principally from the sale of our interests in BP West
Java Limited, Kazakhstan Pipeline Ventures LLC and LukArco, and the sale
of our ground fuels marketing business in Greece and retail churn in the
US, Europe and Australasia. Further proceeds from the sale of LukArco
were received in 2011.