BP 2008 Annual Report Download - page 52

BP Annual Report and Accounts 2008
Performance review
The primary additional factors reflected in profit for 2008, compared
with 2007, were higher realizations, a higher contribution from the gas
marketing and trading business, improved oil supply and trading
performance, improved marketing performance and strong cost
management; however, these positive effects were partly offset by
weaker refining margins, particularly in the US, higher production taxes,
higher depreciation, and adverse foreign exchange impacts.
The primary additional factors reflected in profit for 2007,
compared with 2006, were higher liquids realizations, stronger refining
and marketing margins and improved NGLs performance; however,
these were more than offset by lower gas realizations, lower reported
production volumes, higher production taxes in Alaska, higher costs
(primarily reflecting the impact of sector-specific inflation and higher
integrity spend), the impact of outages and recommissioning costs at the
Texas City and Whiting refineries, reduced supply optimization benefits
and a lower contribution from the marketing and trading business.
Profits and margins for the group and for individual business
segments can vary significantly from period to period as a result of
changes in such factors as oil prices, natural gas prices and refining
margins. Accordingly, the results for the current and prior periods do not
necessarily reflect trends, nor do they provide indicators of results for
future periods.
Employee numbers were approximately 92,000 at 31 December
2008, 98,100 at 31 December 2007 and 97,000 at 31 December 2006.
a Inventory holding gains and losses represent the difference between the cost of sales calculated
using the average cost to BP of supplies incurred during the year and the cost of sales calculated
on the first-in first-out (FIFO) method including any changes in provisions where the net realizable
value of the inventory is lower than its cost. Under the FIFO method, which we use for IFRS
reporting, the cost of inventory charged to the income statement is based on the historic cost of
acquisition or manufacture rather than the current replacement cost. In volatile energy markets,
this can have a significant distorting effect on reported income. The amounts disclosed represent
the difference between the charge to the income statement on a FIFO basis (and any related
movements in net realizable value provisions) and the charge that would arise using average cost
of supplies incurred during the period. For this purpose, average cost of supplies incurred during
the period is calculated by dividing the total cost of inventory purchased in the period by the
number of barrels acquired. The amounts disclosed are not separately reflected in the financial
statements as a gain or loss. No adjustment is made in respect of the cost of inventories held as
part of a trading position and certain other temporary inventory positions.
Management believes this information is useful to illustrate to investors the fact that crude
oil and product prices can vary significantly from period to period and that the impact on our
reported result under IFRS can be significant. Inventory holding gains and losses vary from period
to period due principally to changes in oil prices as well as changes to underlying inventory levels.
In order for investors to understand the operating performance of the group excluding the impact
of oil price changes on the replacement of inventories, and to make comparisons of operating
performance between reporting periods, BP’s management believes it is helpful to disclose this
information.
Capital expenditure and acquisitions
$ million
2008 2007 2006
Exploration and Production 22,026 13,904 13,209
Refining and Marketing 4,710 4,356 3,105
Other businesses and corporate 1,450 934 596
Capital expenditure 28,186 19,194 16,910
Acquisitions and asset exchanges 2,514 1,447 321
30,700 20,641 17,231
Disposals (929) (4,267) (6,254)
Net investment 29,771 16,374 10,977
Capital expenditure and acquisitions in 2008, 2007 and 2006 amounted
to $30,700 million, $20,641 million and $17,231 million respectively.
In 2008, this included $4,731 million in respect of our transaction with
Husky Energy Inc. and $3,667 million in respect of our purchase of all
Chesapeake Energy Corporation’s interest in the Arkoma Basin Woodford
Shale assets and the purchase of a 25% interest in Chesapeake’s
Fayetteville Shale assets. Acquisitions in 2007 included the remaining
31% of the Rotterdam (Nerefco) refinery from Chevron’s Netherlands
manufacturing company.
Excluding acquisitions and asset exchanges, capital expenditure
for 2008 was $28,186 million compared with $19,194 million in 2007 and
$16,910 million in 2006. In 2006, this included $1 billion in respect of our
investment in Rosneft.
Finance costs and net finance income relating to pensions and other
post-retirement benefits
Finance costs comprises group interest less amounts capitalized, and
interest accretion on provisions and long-term other payables. Finance
costs for continuing operations in 2008 were $1,547 million compared
with $1,393 million in 2007 and $986 million in 2006. The increase in
2008, when compared with 2007, is largely the outcome of reductions
in capitalized interest as capital construction projects concluded. The
increase in 2007, when compared with 2006, reflected a higher average
gross debt balance and lower capitalized interest as capital construction
projects concluded.
Net finance income relating to pensions and other post-retirement
benefits in 2008 was $591 million compared with $652 million in 2007
and $470 million in 2006. The expected return on assets has increased
year on year as the pension asset base applicable to each year increased,
but this has been offset in 2008 by higher interest costs reflecting the
increase in discount rates applied to pension plan liabilities.
Taxation
The charge for corporate taxes for continuing operations in 2008 was
$12,617 million, compared with $10,442 million in 2007 and $12,331
million in 2006. The effective rate was 37% in 2008, 33% in 2007 and
36% in 2006. The group earns income in many countries and, on average,
pays taxes at rates higher than the UK statutory rate of 28% for 2008.
The increase in the effective rate in 2008 compared with 2007 primarily
reflects the change in the country mix of the group’s income, resulting in
a higher overall tax burden. The reduction in the effective rate in 2007
compared with 2006 primarily reflects the reduction in the UK tax rate
and the fact that a higher proportion of income arose in countries bearing
a lower tax rate and other factors.
Business results
Profit before interest and taxation from continuing operations, which is
before finance costs, other finance expense, taxation and minority
interests, was $35,239 million in 2008, $32,352 million in 2007 and
$35,158 million in 2006.
Performance review
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