BP 2012 Annual Report Download - page 96

Business review: BP in more depth
BP Annual Report and Form 20-F 2012
94
Regulation of the group’s business
BP’s activities, including its oil and gas exploration and production,
pipelines and transportation, refining and marketing, petrochemicals
production, trading, alternative energy and shipping activities, are
conducted in many different countries and are subject to a broad range
of EU, US, international, regional and local legislation and regulations,
including legislation that implements international conventions and
protocols. These cover virtually all aspects of BP’s activities and include
matters such as licence acquisition, production rates, royalties,
environmental, health and safety protection, fuel specifications and
transportation, trading, pricing, anti-trust, export, taxes and foreign
exchange.
The terms and conditions of the leases, licences and contracts under
which our oil and gas interests are held vary from country to country.
These leases, licences and contracts are generally granted by or entered
into with a government entity or state owned or controlled company and
are sometimes entered into with private property owners. These
arrangements with governmental or state entities usually take the form of
licences or production-sharing agreements (PSAs), although
arrangements with the US government can be by lease. Arrangements
with private property owners are usually in the form of leases.
Licences (or concessions) give the holder the right to explore for and
exploit a commercial discovery. Under a licence, the holder bears the risk
of exploration, development and production activities and provides the
financing for these operations. In principle, the licence holder is entitled to
all production, minus any royalties that are payable in kind. A licence
holder is generally required to pay production taxes or royalties, which
may be in cash or in kind. Less typically, BP may explore for and exploit
hydrocarbons under a service agreement with the host entity in
exchange for reimbursement of costs and/or a fee paid in cash rather
than production.
PSAs entered into with a government entity or state-owned or controlled
company generally require BP to provide all the financing and bear the risk
of exploration and production activities in exchange for a share of the
production remaining after royalties, if any.
In certain countries, separate licences are required for exploration and
production activities and, in certain cases, production licences are limited
to only a portion of the area covered by the original exploration licence.
Both exploration and production licences are generally for a specified
period of time. In the US, leases from the US government typically remain
in effect for a specified term, but may be extended beyond that term as
long as there is production in paying quantities. The term of BP’s licences
and the extent to which these licences may be renewed vary from
country to country.
Frequently, BP conducts its exploration and production activities in joint
ventures or co-ownership arrangements with other international oil
companies, state-owned or controlled companies and/or private
companies. These joint ventures may be incorporated or unincorporated
ventures, while the co-ownerships are typically unincorporated. Whether
incorporated or unincorporated, relevant agreements set out each party’s
level of participation or ownership interest in the joint venture or
co-ownership. Conventionally, all costs, benefits, rights, obligations,
liabilities and risks incurred in carrying out joint-venture or co-ownership
operations under a lease or licence are shared among the joint-venture or
co-owning parties according to these agreed ownership interests.
Ownership of joint-venture or co-owned property and hydrocarbons to
which the joint venture or co-ownership is entitled is also shared in these
proportions. To the extent that any liabilities arise, whether to
governments or third parties, or as between the joint venture parties or
co-owners themselves, each joint venture party or co-owner will generally
be liable to meet these in proportion to its ownership interest (see
Financial statements – Note 2 on page 194 in relation to the Gulf of
Mexico oil spill). In many upstream operations, a party (known as the
operator) will be appointed (pursuant to a joint operating agreement (JOA))
to carry out day-to-day operations on behalf of the joint venture or
co-ownership. The operator is typically one of the joint venture parties or a
co-owner and will carry out its duties either through its own staff, or by
contracting out various elements to third-party contractors or service
providers. BP acts as operator on behalf of joint ventures and co-
ownerships in a number of countries where we have exploration and
production activities.
Frequently, work (including drilling and related activities) will be contracted
out to third-party service providers who have the relevant expertise and
equipment not available within the joint venture or the co-owning
operator’s organization. The relevant contract will specify the work to be
done and the remuneration to be paid and typically will set out how major
risks will be allocated between the joint venture or co-ownership and the
service provider. Generally, the joint venture or co-owner and the
contractor would respectively allocate responsibility for and provide
reciprocal indemnities to each other for harm caused to their respective
staff and property. Depending on the service to be provided, an oil and
gas industry service contract may also contain provisions allocating risks
and liabilities associated with pollution and environmental damage,
damage to a well or hydrocarbon reservoir and for claims from third
parties or other losses. The allocation of those risks vary among contracts
and are determined through negotiation between the parties.
In general, BP is required to pay income tax on income generated from
production activities (whether under a licence or PSAs). In addition,
depending on the area, BP’s production activities may be subject to a
range of other taxes, levies and assessments, including special petroleum
taxes and revenue taxes. The taxes imposed on oil and gas production
profits and activities may be substantially higher than those imposed on
other activities, for example in Abu Dhabi, Angola, Egypt, Norway, the UK,
the US, Russia and Trinidad & Tobago.
Environmental regulation
BP operates in more than 80 countries and is subject to a wide variety of
environmental regulations concerning its products, operations and
activities. Current and proposed fuel and product specifications, emission
controls, climate change programmes and regulation of unconventional
gas extraction under a number of environmental laws may have a
significant effect on the production, sale and profitability of many of BP’s
products.
There are also environmental laws that require BP to remediate and
restore areas affected by the release of hazardous substances or
hydrocarbons associated with our operations. These laws may apply to
sites that BP currently owns or operates, sites that it previously owned or
operated, or sites used for the disposal of its and other parties’ waste.
Provisions for environmental restoration and remediation are made when
a clean-up is probable and the amount of BP’s legal obligation can be
reliably estimated. The cost of future environmental remediation
obligations is often inherently difficult to estimate.
Uncertainties can include the extent of contamination, the appropriate
corrective actions, technological feasibility and BP’s share of liability. See
Financial statements – Note 36 on page 235 for the amounts provided in
respect of environmental remediation and decommissioning.
A number of pending or anticipated governmental proceedings against
BP and certain subsidiaries under environmental laws could result in
monetary or other sanctions. We are also subject to environmental claims
for personal injury and property damage alleging the release of or
exposure to hazardous substances. The costs associated with such future
environmental remediation obligations, governmental proceedings and
claims could be significant and may be material to the results of
operations in the period in which they are recognized. We cannot
accurately predict the effects of future developments on the group, such
as stricter environmental laws or enforcement policies, or future events at
our facilities, and there can be no assurance that material liabilities and
costs will not be incurred in the future. For a discussion of the group’s
environmental expenditure see page 53.
A significant proportion of our fixed assets are located in the US and the
EU. US and EU environmental, health and safety regulations significantly
affect BP’s exploration and production, refining and marketing,
transportation and shipping operations. Significant legislation and