BP 2006 Annual Report Download - page 36

assets, including the purchase of product components that are blended
into finished products. The group also owns and contracts for storage and
transport capacity to facilitate this activity.
The range of transactions that the group enters into is described below
in more detail:
– Exchange-traded commodity derivatives
These contracts are typically in the form of futures and options traded
on a recognized exchange, such as Nymex, Simex, ICE and Chicago
Board of Trade. Such contracts are traded in standard specifications
for the main marker crude oils, such as Brent and West Texas
Intermediate, and the main product grades, such as gasoline and gas
oil. Though potentially settled physically, these contracts are typically
settled financially. Gains and losses, otherwise referred to as variation
margins, are settled on a daily basis with the relevant exchange. These
contracts are used for the trading and risk management of both crude
and products. Realized and unrealized gains and losses on exchange
traded commodity derivatives are included in sales and other operating
revenues for accounting purposes.
– Over-the-counter (OTC) contracts
These contracts are typically in the form of forwards, swaps and
options. OTC contracts are negotiated between two parties and are not
traded on an exchange. These contracts can be used both as part of
trading and risk management activities. Realized and unrealized gains
and losses on OTC contracts are included in sales and other operating
revenues for accounting purposes.
The main grades of crude oil bought and sold forward using standard
contracts are West Texas Intermediate and a standard North Sea
crude blend (Brent, Forties and Osberg – BFO). Although the contracts
specify physical delivery terms for each crude blend, a significant
volume are not settled physically. The contracts contain standard
delivery, pricing and settlement terms. Additionally, the BFO contract
specifies a standard volume and tolerance given that the physically
settled transactions are delivered by cargo.
Swaps are contractual obligations to exchange cash flows between
two parties; one usually references a floating price and the other a
fixed price with the net difference of the cash flows being settled.
Options give the holder the right, but not the obligation, to buy or sell
crude or oil products at a specified price on or before a specific future
date. Amounts under these derivative financial instruments are settled
at expiry, typically through netting agreements, to limit credit exposure
and support liquidity.
– Spot and term contracts
Spot contracts are contracts to purchase or sell crude and oil products
at the market price prevailing on and around the delivery date when
title to the inventory is taken. Term contracts are contracts to purchase
or sell a commodity at regular intervals over an agreed term. Though
spot and term contracts may have a standard form, there is no
offsetting mechanism in place. These transactions result in physical
delivery with operational and price risk. Spot and term contracts relate
typically to purchases of crude for a refinery, sales of the group’s
oil production and sales of the group’s oil products. For accounting
purposes, spot and term sales are included in sales and other
operating revenues, when title passes. Similarly, spot and term
purchases are included in purchases for accounting purposes.
Trading investigations
See Legal proceedings on page 85 for further details regarding
investigations into various aspects of BP’s trading activities.
The independent review, commissioned by BP, of the current
compliance approach in the group’s US trading organization has been
completed. A number of recommendations have been made in regard
to the design and effectiveness of the compliance processes and
procedures. BP is fully implementing these recommendations.
Transportation
Our Refining and Marketing business owns, operates or has an interest
in extensive transportation facilities for crude oil, refined products and
petrochemicals feedstock.
We transport crude oil to our refineries principally by ship and through
pipelines from our import terminals. We have interests in crude oil
pipelines in Europe and the US.
Bulk products are transported between refineries and storage terminals
by pipeline, ship, barge and rail. Onward delivery to customers is primarily
by road. We have interests in major product pipelines in the UK, the Rest
of Europe and the US.
Shipping
We transport our products across oceans, around coastlines and along
waterways, using a combination of BP-operated time-chartered and spot-
chartered vessels. All vessels on BP business are subject to our health,
safety, security and environmental requirements. In 2006, we continued
to expand our operated and time-chartered fleet in order to provide more
protection against the risk of a major oil spill. This fleet transformation
is ahead of the international requirements for phase-out of single-
hulled vessels.
International fleet
In 2005 we managed an international fleet of 52 vessels (44 oil tankers
and eight LNG carriers). At the end of 2006, we had 57 international
vessels (42 medium-size crude and product carriers, four very large crude
carriers, one North Sea shuttle tanker, seven LNG carriers and three new
LPG carriers). All these ships are double-hulled.
Of the seven LNG carriers, BP manages four on behalf of joint ventures
in which it is a participant and operates three LNG carriers, with a further
four on order for delivery in 2007 and 2008.
Regional and specialist vessels
In Alaska, we took delivery of the fourth and final ship in a series of new-
build double-hulled tankers and redelivered one of our time-chartered
vessels back to the owner. The entire Alaskan fleet of six vessels is
double-hulled.
In the Lower 48, two of the four heritage Amoco barges remain in
service, one of which is due to be phased out of BP’s service in 2007.
We now intend to retain the other, which is double-hulled, until 2009.
Outside the US, the specialist fleet has grown from six ships in 2005
to 16 in 2006 (three tugs, two double-hulled lubricants oil barges and 11
offshore support vessels).
Time charter vessels
BP has 100 hydrocarbon-carrying vessels above 600 deadweight
tonnes on time charter, of which 83 are double-hulled and three are
double-bottomed. All these vessels are enrolled in BP’s Time Charter
Assurance Programme.
Spot charter vessels
To transport the remainder of the group’s products, BP spot charters
vessels, typically for single voyages. These vessels are always vetted
prior to use.
Other vessels
BP uses miscellaneous craft such as tugs, crew boats and seismic
vessels in support of the group’s business. We also use sub 600
deadweight tonne barges to carry hydrocarbons on inland waterways.
34