BP 2012 Annual Report Download - page 40

Business review: BP in more depth
BP Annual Report and Form 20-F 2012
38
Risk factors
We urge you to consider carefully the risks described below. The potential
impact of the occurrence, or reoccurrence, of any of the risks described
below could have a material adverse effect on BP’s business, financial
position, results of operations, competitive position, cash flows,
prospects, liquidity, shareholder returns and/or implementation of its
strategic agenda.
The risks are categorized against the following areas: strategic and
commercial; compliance and control; and safety and operational. In
addition, we have also set out one further risk for your attention – those
resulting from the 2010 Gulf of Mexico oil spill (the Incident).
The Gulf of Mexico oil spill has had and could continue to have a
material adverse impact on BP.
While significant charges have been recognized in the income statement
since the Incident occurred in 2010, there is significant uncertainty regarding
the extent and timing of the remaining costs and liabilities relating to the
Incident, the potential changes in applicable regulations and the operating
environment that may result from the Incident, the impact of the Incident on
our reputation and the resulting possible impact on our licence to operate
including our ability to access new opportunities. The amount of claims that
become payable by BP, the amount of fines ultimately levied on BP (including
any potential determination of BP’s negligence or gross negligence), the
outcome of litigation, the terms of any further settlements including the
amount and timing of any payments thereunder, and any costs arising from
any longer-term environmental consequences of the Incident, will also impact
upon the ultimate cost for BP. Although the provisions recognized represent
the current best estimates of expenditures required to settle certain present
obligations that can be reasonably estimated at the end of the reporting
period, there are future expenditures for which it is not possible to measure
our obligations reliably and the total amounts paid by BP in relation to all
obligations relating to the Incident are subject to significant uncertainty. These
uncertainties are likely to continue for a significant period, increase the risks to
which the group is exposed and may cause our costs to increase. Thus, the
Incident has 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. The risks associated with the Incident
could also heighten the impact of the other risks to which the group is
exposed as further described below.
Strategic and commercial risks
Access and renewal – BP’s future hydrocarbon production depends
on our ability to renew and reposition our portfolio. Increasing
competition for access to investment opportunities, the effects of
the Gulf of Mexico oil spill on our reputation and cash flows, and
more stringent regulation could result in decreased access to
opportunities globally.
Successful execution of our group strategy depends on implementing
activities to renew and reposition our portfolio. The challenges to renewal
of our upstream portfolio are growing due to increasing competition for
access to opportunities globally among both national and international oil
companies, and heightened political and economic risks in certain
countries where significant hydrocarbon basins are located. Lack of
material positions could impact our future hydrocarbon production.
Moreover, the Incident has damaged BP’s reputation, which may have a
long-term impact on the group’s ability to access new opportunities, both
in the US and elsewhere. Adverse public, political, regulatory and industry
sentiment towards BP, and towards oil and gas drilling activities generally,
could damage or impair our existing commercial relationships with
counterparties, partners and host governments and could impair our
access to new investment opportunities, exploration properties,
operatorships or other essential commercial arrangements with potential
partners and host governments, particularly in the US. In addition,
responding to the Incident has placed, and will continue to place, a
significant burden on our cash flow over the next several years, which
could also impede our ability to invest in new opportunities and deliver
long-term growth.
More stringent regulation of the oil and gas industry generally, and of BP’s
activities specifically, following the Incident, could increase this risk.
Prices and markets – BP’s financial performance is subject to the
fluctuating prices of crude oil and gas, the volatile prices of refined
products and the profitability of our refining and petrochemicals
operations, as well as the general macroeconomic outlook.
Oil, gas and product prices and margins can be very volatile, and are
subject to international supply and demand. Political developments
(including conflict situations) and the outcome of meetings of OPEC can
particularly affect world supply and oil prices. Previous oil price increases
have resulted in increased fiscal take, cost inflation and more onerous
terms for access to resources. As a result, increased oil prices may not
improve margin performance. In addition to the adverse effect on
revenues, margins and profitability from any fall in oil and natural gas
prices, a prolonged period of low prices or other indicators would lead to
further reviews for impairment of the group’s oil and natural gas
properties. Such reviews would reflect management’s view of long-term
oil and natural gas prices and could result in a charge for impairment that
could have a significant effect on the group’s results of operations in the
period in which it occurs. Rapid material or sustained change in oil, gas
and product prices can impact the validity of the assumptions on which
strategic decisions are based and, as a result, the ensuing actions derived
from those decisions may no longer be appropriate. A prolonged period of
low oil prices may impact our cash flow, profit and ability to maintain our
long-term investment programme with a consequent effect on our growth
rate, and may impact shareholder returns, including dividends and share
buybacks, or share price.
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. Periods of global recession could impact the demand for
our products, the prices at which they can be sold and affect the viability
of the markets in which we operate.
Governments are facing greater pressure on public finances, which may
increase their motivation to intervene in the fiscal and regulatory
frameworks of the oil and gas industry, including the risk of increased
taxation, nationalization and expropriation.
The global financial and economic situation may have a negative impact
on third parties with whom we do, or may do, business. In particular,
ongoing instability in or a collapse of the eurozone could trigger a new
wave of financial crises and push the world back into recession, leading to
lower demand and lower oil and gas prices.
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, could affect the recoverability
of our assets and could cause us to incur additional costs. In particular, our
investments in the US, Russia, the Middle East region, North Africa,
Bolivia, Argentina, Angola, Azerbaijan and other countries could be
adversely affected by heightened political and economic environment
risks. See pages 6-7 for information on the locations of our major areas of
operation and activities.