BP 2006 Annual Report Download - page 147

BP Annual Report and Accounts 2006 145
36 Derivative financial instruments continued
Gains and losses relating to derivative contracts are included within sales and other operating revenues in the income statement. The contract types
treated in this way include futures, options, swaps and certain forward sales and purchase contracts where delivery is routinely obviated by the
purchase or sale of offsetting contracts. Also included within sales and other operating revenues are gains and losses on inventory held for trading
purposes and the change in fair value of derivative contracts which have been determined to be not for trading purposes but are required to be fair
valued. The total amount relating to these items was a gain of $2,842 million (2005 $838 million gain and 2004 $1,216 million gain).
Derivative assets held for trading denominated in currencies other than the functional currency of individual operating units are summarized below.
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Currency of denomination Currency of denomination
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
US dollar Sterling Euro
Other
currencies Total US dollar Sterling Euro
Other
currencies Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Functional currency
US dollar – 55 – 244 299 – 137 – 4 141
Sterling 198 – 2,227 1 2,426 – – 1,504 – 1,504
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
198 55 2,227 245 2,725 – 137 1,504 4 1,645
Derivative liabilities held for trading denominated in currencies other than the functional currency of individual operating units are summarized below.
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Currency of denomination Currency of denomination
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
US dollar Sterling Euro
Other
currencies Total US dollar Sterling Euro
Other
currencies Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Functional currency
US dollar – (59) – (276) (335) – (110) – – (110)
Sterling (18) – (2,383) – (2,401) – – (1,523) – (1,523)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(18) (59) (2,383) (276) (2,736) – (110) (1,523) – (1,633)
Embedded derivatives
Prior to the development of an active gas trading market, UK gas contracts were priced using a basket of available price indices, primarily relating to oil
products. After the development of an active UK gas market, certain contracts were entered into or renegotiated using pricing formulae not directly
related to gas prices, for example, oil product and power prices. In these circumstances, pricing formulae have been determined to be derivatives,
embedded within the overall contractual arrangements that are not clearly and closely related to the underlying commodity. The resulting fair value
relating to these contracts is recognized on the balance sheet with gains or losses recognized in the income statement.
These contracts are valued using price curves for each of the different products that are built up from active market pricing data and extrapolated to
2018 using the maximum available external pricing information. Additionally, where limited data exists for certain products, prices are interpolated using
historic and long-term pricing relationships.
The following table shows the changes during the year in the net fair value of embedded derivatives.
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Natural gas
and LNG
price
Interest
rate
Natural gas
and LNG
price
Interest
rate
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fair value of contracts at 1 January (2,511) (30) (659) (17)
Contracts realized or settled in the year 762 – 138 –
Other changes in fair values relating to price 21 4 (2,287) (13)
Exchange adjustments (336) – 297 –
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fair value of contracts at 31 December (2,064) (26) (2,511) (30)
Embedded derivative assets have the following fair values, contractual or notional values and maturities.
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Less than
1 year 1-2 years 2-3 years 3-4 years 4-5 years
Over
5 years Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Natural gas and LNG embedded derivatives
Fair value 4958––––107
Notional value 119100––––219