BP 2011 Annual Report Download - page 63

Business review: BP in more depth
BP Annual Report and Form 20-F 2011 61
Business review
2010. Similar actions may be taken by governments elsewhere in the
world. New regulations and legislation, as well as evolving practices, could
increase the cost of compliance and may require changes to our drilling
operations, exploration, development and decommissioning plans, and
could impact our ability to capitalize on our assets and limit our access to
new exploration properties or operatorships, particularly in the deepwater
Gulf of Mexico. In addition, increases in taxes, royalties and other amounts
payable to governments or governmental agencies, or restrictions on
availability of tax relief, could also be imposed as a response to the
Incident.
In addition, the oil industry is subject to regulation and intervention
by governments throughout the world in such matters as the award of
exploration and production interests, the imposition of specific drilling
obligations, environmental, health and safety controls, controls over the
development and decommissioning of a field (including restrictions on
production) and, possibly, nationalization, expropriation, cancellation or
non-renewal of contract rights. We buy, sell and trade oil and gas products
in certain regulated commodity markets. Failure to respond to changes
in trading regulations could result in regulatory action and damage to our
reputation. The oil industry is also subject to the payment of royalties and
taxation, which tend to be high compared with those payable in respect
of other commercial activities, and operates in certain tax jurisdictions that
have a degree of uncertainty relating to the interpretation of, and changes
to, tax law. As a result of new laws and regulations or other factors, we
could be required to curtail or cease certain operations, or we could incur
additional costs.
See pages 107-110 for more information on environmental
regulation.
Ethical misconduct and non-compliance – ethical misconduct or
breaches of applicable laws by our employees could be damaging to
our reputation and shareholder value.
Our code of conduct, which applies to all employees, defines our
commitment to integrity, compliance with all applicable legal requirements,
high ethical standards and the behaviours and actions we expect of our
businesses and people wherever we operate. Our renewed values,
which were launched in 2011, are intended to guide the way we and our
employees behave and do business. Incidents of ethical misconduct or
non-compliance with applicable laws and regulations, including non-
compliance with anti-bribery, anti-corruption and other applicable laws
could be damaging to our reputation and shareholder value. Multiple events
of non-compliance could call into question the integrity of our operations.
For example, in our trading businesses, there is the risk that a determined
individual could operate as a ‘rogue trader’, acting outside BP’s delegations,
controls or code of conduct and in contravention of our renewed values in
pursuit of personal objectives that could be to the detriment of BP and its
shareholders.
For certain legal proceedings involving the group, see Legal
proceedings on pages 160-166. For further information on the risks
involved in BP’s trading activities, see Operational risks – Treasury and
trading activities on page 63.
Liabilities and provisions – BP’s 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 and burdens of implementing remedies sought in the
various proceedings, cannot be fully estimated at this time but they
have had, and are expected to continue to have, a material adverse
impact on the group’s business.
Under the Oil Pollution Act of 1990 (OPA 90), BP Exploration & Production
Inc. is one of the parties financially responsible for the clean-up of the Gulf
of Mexico oil spill and for certain economic damages as provided for in
OPA 90, as well as certain natural resource damages associated with the
spill and certain costs determined by federal and state trustees engaged in
a joint assessment of such natural resource damages.
BP and certain of its subsidiaries have also been named as
defendants in numerous lawsuits in the US arising out of the Incident,
including actions for personal injury and wrongful death, purported class
actions for commercial or economic injury, actions for breach of contract,
violations of statutes, property and other environmental damage, securities
law claims and various other claims. See Legal proceedings on pages
160-166.
BP is subject to a number of investigations related to the Incident
by numerous federal and State agencies. See Legal proceedings on pages
160-166. The types of enforcement action pursued and the nature of the
remedies sought will depend on the discretion of the prosecutors and
regulatory authorities and, in some circumstances, their assessment of
BP’s culpability, if any, following their investigations. Such enforcement
actions could include criminal proceedings against BP and/or employees
of the group. In addition to fines and penalties, such enforcement actions
could result in the suspension of operating licences and debarment from
government contracts. Debarment of BP Exploration & Production Inc.
would prevent it from bidding on or entering into new federal contracts or
other federal transactions, and from obtaining new orders or extensions
to existing federal contracts, including federal procurement contracts or
leases. Dependent on the circumstances, debarment or suspension may
also be sought against affiliated entities of BP Exploration & Production
Inc. Although BP believes that there are costs arising out of the spill that
are recoverable from its partners and other parties responsible under OPA
90, and although settlements have been agreed during 2011 with both
partners, one contractor, and the manufacturer of the blowout preventer at
the Macondo well, further recoveries are not certain and so have not been
recognized in the financial statements (see Financial statements – Note 2
on pages 190-194).
Any finding of gross negligence for purposes of penalties sought
against the group under the Clean Water Act would also have a material
adverse impact on the group’s reputation, would affect our ability to
recover costs relating to the Incident from other parties responsible under
OPA 90 and could affect the fines and penalties payable by the group with
respect to the Incident under enforcement actions outside the Clean Water
Act context.
The Gulf of Mexico oil spill has damaged BP’s reputation. This,
combined with other past events in the US (including the 2005 explosion
at the Texas City refinery and the 2006 pipeline leaks in Alaska), may lead
to an increase in the number of citations and/or the level of fines imposed
in relation to the Gulf of Mexico oil spill and any future alleged breaches of
safety or environmental regulations.
Claims by individuals and businesses under OPA 90’s claims
process have been administered by the Gulf Coast Claims Facility (GCCF)
headed by Kenneth Feinberg, who was appointed jointly by BP and the
US Administration. The proposed economic loss settlement reached with
the Plaintiffs’ Steering Committee (PSC), acting on behalf of individual and
business plaintiffs in MDL 2179, provides for a transition from the GCCF. A
court-supervised transitional claims process for economic loss claims will be
in operation while the infrastructure for the new settlement claims process
is put in place. During this transitional period, the processing of claims that
have been submitted to the GCCF will continue, and new claimants may
submit their claims.
The proposed settlement is subject to final written agreement and
court approvals and payments under the proposed settlement, and any
other payments that may be made by BP in respect of any other individual
and business claims under OPA 90, could ultimately be higher than the
amount for which we have recognized a provision. See Legal proceedings
on pages 160-164 and Financial statements – Note 36 on pages 231-234.
Changes in external factors could affect our results of operations and
the adequacy of our provisions.
We remain exposed to changes in the external environment, such as
new laws and regulations (whether imposed by international treaty or by
national or local governments in the jurisdictions in which we operate),
changes in tax or royalty regimes, price controls, government actions to
cancel or renegotiate contracts, market volatility or other factors. Such
factors could reduce our profitability from operations in certain jurisdictions,
limit our opportunities for new access, require us to divest or write-down
certain assets or affect the adequacy of our provisions for pensions, tax,
environmental and legal liabilities. Potential changes to pension or financial
market regulation could also impact funding requirements of the group.