BP 2006 Annual Report Download - page 37

BP Annual Report and Accounts 2006 35
Gas, Power and Renewables
The Gas, Power and Renewables segment includes four main activities:
marketing and trading of gas and power; marketing of liquefied natural
gas (LNG); natural gas liquids (NGLs); and low-carbon power generation
through our Alternative Energy business.
The strategic purpose of the segment comprises four elements:
– Develop a leading low-carbon power generation business across the
value chain.
– Access cost competitive supply.
– Capture distinctive world-scale gas market positions by accessing
key pieces of infrastructure.
– Expand gross margin by providing distinctive energy products and
services to selected customer segments and by optimizing the gas
and power value chains.
Key statistics $million
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2006 2005a2004a
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Sales and other operating revenues
from continuing operations 23,708 25,696 23,969
Profit before interest and tax from
continuing operations 1,321 1,172 1,003
Total assets 27,398 28,952 17,753
Capital expenditure and acquisitions 688 235 530
Profit before interest and tax from continuing operations includes profit after tax of
equity-accounted entities.
aOn 1 January 2006, following the formation of the Alternative Energy business, certain
mid-stream assets and activities were transferred into Gas, Power and Renewables
and the 2005 and 2004 data above has been restated to reflect these transfers:
– South Houston Green Power co-generation facility (in the Texas City refinery) from
Refining and Marketing.
– Watson co-generation facility (in the Carson refinery) from Refining and Marketing.
– Phu My Phase 3 combined cycle gas turbine (CCGT) plant in Vietnam from
Exploration and Production.
The changes in sales and other operating revenues are explained in more
detail below.
$million
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2006 2005 2004
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Gas marketing sales 11,428 15,222 13,532
Other sales (including NGLs
marketing) 12,280 10,474 10,437
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23,708 25,696 23,969
mmcf/d
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Gas marketing sales volumes 3,685 5,096 5,244
Natural gas sales by Exploration
and Production 5,152 4,747 3,670
We seek to maximize the value of our gas by targeting high-value
customer segments in selected markets and to optimize supply around
our physical and contractual rights to assets. Marketing and trading
activities are focused on the relatively open and deregulated natural gas
and power markets of North America, the UK and the most liquid trading
locations in continental Europe. Some long-term natural gas contracting
activity is included within the Exploration and Production business
segment because of the nature of the gas markets when the long-term
sales contracts were agreed.
Our LNG business develops opportunities to capture sales for our
upstream natural gas resources, working in close collaboration with the
Exploration and Production business. For sales into non-liquid markets
such as Japan and Korea, we aim to secure contracts with high-value
customers. For the majority of sales into liquid wholesale markets such
as the US and UK, we are building integrated supply chains covering
production, liquefaction, shipping, regasification and access to the
wholesale transmission grid. Our strategy is to capture a growing share
of the internationally traded gas market. We are focusing on markets that
offer significant prospects for growth. Our LNG activities involve the
marketing of third-party LNG as well as BP equity volumes, where this
allows us to optimize our existing asset and contractual positions.
Our NGLs business is engaged in the processing, fractionation and
marketing of ethane, propane, butanes and pentanes extracted from
natural gas. We have a significant NGLs processing and marketing
business in North America. Our NGLs activity is underpinned by our
upstream resources and serves third-party markets for chemicals and
clean fuels as well as supplying BP’s refining activities.
Globally, the power sector is the largest source of greenhouse gas
(GHG) emissions, which are responsible for about twice the emissions
from transport. Creating low-carbon power is therefore critical in the effort
to stabilize global GHG emissions. BP is focused on power generation
activities with low-carbon emissions. In 2005, we announced our plans
to invest in a new business called BP Alternative Energy, which aims to
extend significantly our capabilities in solar, wind power, hydrogen power
and gas-fired power generation.
Capital expenditure and acquisitions for 2006 was $688 million,
compared with $235 million in 2005 and $530 million in 2004. In 2006,
this included the acquisitions of Orion Energy, LLC, and Greenlight
Energy, Inc. In 2005 and 2004, there were no acquisitions. Capital
expenditure excluding acquisitions for 2007 is planned to be around
$900 million. The increase over the 2006 level primarily reflects our
project programme, including continuing investment in the Alternative
Energy business.
Marketing and trading activities
Gas and power marketing and trading activity is undertaken primarily in
the US, Canada, the UK and continental Europe to market BP’s gas and
power production and manage market price risk as well as to create
incremental trading gains through the use of commodity derivative
contracts. Additionally, this activity generates fee income and enhanced
margins from sources such as the management of price risk on behalf
of third-party customers. These markets are large, liquid and volatile
and the group enters into these transactions on a large scale to meet
these objectives.
The group also has an NGLs trading activity in the US for delivering
value across the overall NGLs supply chain, sourcing optimal feedstock to
our processing assets and securing access to markets with flexible and
competitive supply.
In connection with the above activities, the group uses a range of
commodity derivative contracts and storage and transport contracts.
These include commodity derivatives such as futures, swaps and options
to manage price risk and forward contracts used to buy and sell gas and
power in the marketplace. Using these contracts, in combination with
rights to access storage and transportation capacity, allows the group to
access advantageous pricing differences between locations, time periods
and arbitrage between markets. Gas futures and options are traded
through exchanges, while over-the-counter options and swaps are used
for both gas and power transactions through bilateral arrangements.
Futures and options are primarily used to trade the key index prices such
as Henry Hub, while swaps can be tailored to price with reference to
specific delivery locations where gas and power can be bought and sold.
Over-the-counter forward contracts have evolved in both the US and
UK markets, enabling gas and power to be sold forward in a variety of
locations and future periods. These contracts are used both to sell
production into the wholesale markets and as trading instruments to
buy and sell gas and power in future periods. Capacity contracts allow
the group to store, transport gas and transmit power between these
locations. Additionally, activity is undertaken to risk manage power
generation margins related to the Texas City co-generation plant using
a range of gas and power commodity derivatives.
The range of contracts that the group enters into is described below in
more detail:
– Exchange traded commodity derivatives
Exchange traded commodity derivatives include gas and power futures
contracts. 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. 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