BP 2011 Annual Report Download - page 62

60 BP Annual Report and Form 20-F 2011
Business review
Refining profitability can be volatile, with both periodic over-supply and
supply tightness in various regional markets, coupled with fluctuations
in demand. Sectors of the petrochemicals industry are also subject to
fluctuations in supply and demand, with a consequent effect on prices and
profitability.
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 profitability 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, and are seeking new opportunities, 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, could limit our
ability to pursue new opportunities and could cause us to incur additional
costs. In particular, our investments in the US, Russia, Iraq, Egypt, Libya,
Bolivia, Argentina and other countries could be adversely affected by
heightened political and economic environment risks. See pages 34-35 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 efficiency, 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, refining, 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 efficiency – 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 efficient manner, we will be unable to sustain long-term
replacement of reserves.
Liquidity, financial capacity and financial exposure – failure to operate
within our financial framework could impact our ability to operate
and result in financial loss. Exchange rate fluctuations can impact our
underlying costs and revenues.
The group seeks to maintain a financial framework to ensure that it is
able to maintain an appropriate level of liquidity and financial capacity. This
framework constrains the level of assessed capital at risk for the purposes
of positions taken in financial instruments. Failure to accurately forecast or
maintain sufficient liquidity and credit to meet these needs could impact
our ability to operate and result in a financial 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 financial loss. A
credit crisis affecting banks and other sectors of the economy could impact
the ability of counterparties to meet their financial 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 financial framework during 2010
to make it more prudent may not be sufficient to avoid a substantial and
unexpected cash call.
BP’s clean-up costs and potential liabilities resulting from pending
and future claims, lawsuits, settlements 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,
financial performance, cash flows, prospects, liquidity, shareholder
returns and/or implementation of its strategic agenda, particularly in the
US. Furthermore, we recognized a pre-tax charge of $40.9 billion in 2010
and a pre-tax credit of $3.7 billion in 2011, and further potential liabilities
may continue to have a material adverse effect on the group’s results of
operations and financial condition. See Financial statements – Note 2 on
pages 190-194 and Legal proceedings on pages 160-166. More stringent
regulation of the oil and gas industry arising from the Incident, and of BP’s
activities specifically, could increase this risk.
Crude oil prices are generally set in US dollars, while sales of
refined 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.
See Financial statements – Note 26 on page 217 for more
information on financial instruments and financial risk factors.
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 financial condition and
results of operations.
In the context of the limited capacity of the insurance market, many
significant risks are retained by BP. 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 financial 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 flows. 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.
Compliance and control risks
Regulatory – the oil industry in general, and in particular the US
industry following the Gulf of Mexico oil spill, faces increased
regulation that could increase the cost of regulatory compliance and
limit our access to new exploration properties.
After the Gulf of Mexico oil spill, it is likely that there will be more stringent
regulation of oil and gas activities in the US and elsewhere, particularly
relating to environmental, health and safety controls and oversight of
drilling operations, as well as access to new drilling areas. Regulatory or
legislative action may impact the industry as a whole and could be directed
specifically towards BP. The US government imposed a moratorium on
certain offshore drilling activities, which was subsequently lifted in October