BP 2014 Annual Report Download - page 52

Risk factors
The risks discussed below, separately or in combination, could have a
material adverse effect on the implementation of our strategy, our
business, financial performance, results of operations, cash flows, liquidity,
prospects, shareholder value and returns and reputation.
Gulf of Mexico oil spill
The spill has had and could continue to have a material adverse impact
on BP.
There is significant uncertainty regarding the extent and timing of the
remaining costs and liabilities relating to the 2010 Gulf of Mexico oil spill
(the incident), including the amount of claims, fines and penalties that
become payable by BP (including as a result of any ultimate determination
of BP’s appeal of the ruling of gross negligence), the outcome or resolution
of current or future litigation and any costs arising from any longer-term
environmental consequences of the incident, the impact of the incident on
our reputation and the resulting possible impact on our licence to operate.
The provisions recognized in the income statement represent the current
best estimates of expenditures required to settle certain present
obligations that can be reliably estimated at the end of the reporting period,
and there are future expenditures for which we currently cannot measure
our obligations reliably. These uncertainties are likely to continue for a
significant period. See Financial statements – Note 2.
The risks associated with the incident could also heighten the impact of
other risks the group is exposed to as described below.
Strategic and commercial risks
Prices and markets – our financial performance is subject to fluctuating
prices of oil, gas, refined products, exchange rate fluctuations and the
general macroeconomic outlook.
Oil, gas and product prices are subject to international supply and demand
and margins can be volatile. Political developments, increased supply from
new oil and gas sources, technological change, global economic conditions
and the influence of OPEC can impact supply and prices for our products.
Decreases in oil, gas or product prices could have an adverse effect on
revenue, margins and profitability and, if significant, we may have to write
down assets and re-assess the viability of certain projects. A prolonged
period of low prices may impact our cash flows, profit, capital expenditure
and ability to maintain our long-term investment programme. Conversely,
an increase in oil, gas and product prices may not improve margin
performance as there could be increased fiscal take, cost inflation and
more onerous terms for access to resources. The profitability of our
refining and petrochemicals activities can be volatile, with periodic
over-supply or supply tightness in regional markets and fluctuations in
demand.
Exchange rate fluctuations can create currency exposures and impact
underlying costs and revenues. Crude oil prices are generally set in US
dollars, while products vary in currency. Many of our major project
development costs are denominated in local currencies, which may be
subject to fluctuations against the US dollar.
Access, renewal and reserves progression – our inability to access,
renew and progress upstream resources in a timely manner could
adversely affect our long-term replacement of reserves.
Delivering our group strategy depends on our ability to continually replenish
a strong exploration pipeline of future opportunities to access and produce
oil and natural gas. Competition for access to investment opportunities,
heightened political and economic risks in certain countries where
significant hydrocarbon basins are located and increasing technical
challenges and capital commitments may adversely affect our strategic
progress. This, and our ability to progress upstream resources and sustain
long-term reserves replacement, could impact our future production and
financial performance.
Major project delivery – failure to invest in the best opportunities
or deliver major projects successfully could adversely affect our
financial performance.
We face challenges in developing major projects, particularly in
geographically and technically challenging areas. Operational challenges
and poor investment choice, efficiency or delivery at any major project that
underpins production or production growth could adversely affect our
financial performance.
Geopolitical – we are exposed to a range of political developments and
consequent changes to the operating and regulatory environment.
We operate and may seek new opportunities in countries and regions
where political, economic and social transition may take place. Political
instability, changes to the regulatory environment or taxation, international
sanctions, expropriation or nationalization of property, civil strife, strikes,
insurrections, acts of terrorism and acts of war may disrupt or curtail our
operations or development activities. These may in turn cause production
to decline, limit our ability to pursue new opportunities, affect the
recoverability of our assets or cause us to incur additional costs, particularly
due to the long-term nature of many of our projects and significant capital
expenditure required.
Rosneft investment – our investment in Rosneft may be impacted by
events in or relating to Russia and our ability to recognize our share of
Rosneft’s income, production and reserves may be adversely impacted.
Events in or relating to Russia, including further trade restrictions and other
sanctions, could adversely impact our investment in Russia. To the extent
we are unable in the future to exercise significant influence over our
investment in Rosneft or pursue growth opportunities in Russia, our
business and strategic objectives in Russia and our ability to recognize our
share of Rosneft’s income, production and reserves may be adversely
impacted.
Liquidity, financial capacity and financial, including credit,
exposure – failure to work within our financial framework could impact our
ability to operate and result in financial loss.
Failure to accurately forecast, manage or maintain sufficient liquidity and
credit could impact our ability to operate and result in financial loss. Trade
and other receivables, including overdue receivables, may not be recovered
and a substantial and unexpected cash call or funding request could disrupt
our financial framework or overwhelm our ability to meet our obligations.
An event such as a significant operational incident, legal proceedings or a
geopolitical event in an area where we have significant activities, could
reduce our credit ratings. This could potentially increase financing costs
and limit access to financing or engagement in our trading activities on
acceptable terms, which could put pressure on the group’s liquidity. Credit
rating downgrades could trigger a requirement for the company to review
its funding arrangements with the BP pension trustees and may cause
other impacts on financial performance. In the event of extended
constraints on our ability to obtain financing, we could be required to
reduce capital expenditure or increase asset disposals in order to provide
additional liquidity. See Liquidity and capital resources on page 211 and
Financial statements – Note 27.
Joint arrangements and contractors – we may have limited control
over the standards, operations and compliance of our partners, contractors
and sub-contractors.
We conduct many of our activities through joint arrangements,
associates or with contractors and sub-contractors where we may have
limited influence and control over the performance of such operations. Our
partners and contractors are responsible for the adequacy of the resources
and capabilities they bring to a project. If these are found to be lacking,
there may be financial, operational or safety risks for BP. Should an incident
occur in an operation that BP participates in, our partners and contractors
may be unable or unwilling to fully compensate us against costs we may
incur on their behalf or on behalf of the arrangement. Where we do not
have operational control of a venture, we may still be pursued by regulators
or claimants in the event of an incident.
BP Annual Report and Form 20-F 201448