BP 2009 Annual Report Download - page 21

BP Annual Report and Accounts 2009
Business review
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Investment efficiency
Our organic growth is dependent on creating a portfolio of quality options
and investing in the best options. Ineffective investment selection could
lead to loss of value and higher capital expenditure.
Reserves replacement
Successful execution of our group strategy depends critically on
sustaining long-term reserves replacement. If upstream resources are
not progressed in a timely and efficient manner, we will be unable to
sustain long-term replacement of reserves.
Liquidity, financial capacity and financial exposure
The group has established a financial framework to ensure that it is able
to maintain an appropriate level of liquidity and financial capacity and to
constrain the level of assessed capital at risk for the purposes of
positions taken in financial instruments. Failure to operate within our
financial framework could lead to the group becoming financially
distressed leading to a loss of shareholder value. Commercial credit risk
is measured and controlled to determine the group’s total credit risk.
Inability to determine adequately our credit exposure could lead to
financial loss. A credit crisis affecting banks and other sectors of the
economy could impact the ability of counterparties to meet their financial
obligations to the group. It could also affect our ability to raise capital to
fund growth.
Crude oil prices are generally set in US dollars, while sales of
refined products may be in a variety of currencies. Fluctuations in
exchange rates can therefore give rise to foreign exchange exposures,
with a consequent impact on underlying costs and revenues.
For more information on financial instruments and financial risk
factors see Financial statements – Note 24 on page 144.
Compliance and control risks
Regulatory
The oil industry is subject to regulation and intervention by governments
throughout the world in such matters as the award of exploration and
production interests, the imposition of specific drilling obligations,
environmental and health and safety protection controls, controls over
the development and decommissioning of a field (including restrictions
on production) and, possibly, nationalization, expropriation, cancellation
or non-renewal of contract rights. We buy, sell and trade oil and gas
products in certain regulated commodity markets. Failure to respond
to changes in trading regulations could result in regulatory action and
damage to our reputation. The oil industry is also subject to the payment
of royalties and taxation, which tend to be high compared with those
payable in respect of other commercial activities, and operates in certain
tax jurisdictions that have a degree of uncertainty relating to the
interpretation of, and changes to, tax law. As a result of new laws and
regulations or other factors, we could be required to curtail or cease
certain operations, or we could incur additional costs.
For more information on environmental regulation, see
Environment on pages 47-49.
Ethical misconduct and non-compliance
Our code of conduct, which applies to all employees, defines our
commitment to integrity, compliance with all applicable legal
requirements, high ethical standards and the behaviours and actions we
expect of our businesses and people wherever we operate. Incidents
of ethical misconduct or non-compliance with applicable laws and
regulations could be damaging to our reputation and shareholder value.
Multiple events of non-compliance could call into question the integrity
of our operations.
For certain legal proceedings involving the group, see Legal
proceedings on pages 99-100.
Business review
Business review – Group overview
Liabilities and provisions
Changes in the external environment, such as new laws and regulations,
market volatility or other factors, could affect the adequacy of our
provisions for pensions, tax, environmental and legal liabilities.
Reporting
External reporting of financial and non-financial data is reliant on the
integrity of systems and people. Failure to report data accurately and in
compliance with external standards could result in regulatory action, legal
liability and damage to our reputation.
Operational risks
Process safety
Inherent in our operations are hazards that require continuous oversight
and control. There are risks of technical integrity failure and loss of
containment of hydrocarbons and other hazardous material at operating
sites or pipelines. Failure to manage these risks could result in injury or
loss of life, environmental damage, or loss of production and could result
in regulatory action, legal liability and damage to our reputation.
Personal safety
Inability to provide safe environments for our workforce and the public
could lead to injuries or loss of life and could result in regulatory action,
legal liability and damage to our reputation.
Environmental
If we do not apply our resources to overcome the perceived trade-off
between global access to energy and the protection or improvement of
the natural environment, we could fail to live up to our aspirations of no or
minimal damage to the environment and contributing to human progress.
Failure to comply with environmental laws, regulations and permits could
lead to damage to the environment and could result in regulatory action,
legal liability and damage to our reputation.
Security
Security threats require continuous oversight and control. Acts of
terrorism against our plants and offices, pipelines, transportation or
computer systems could severely disrupt business and operations and
could cause harm to people.
Product quality
Supplying customers with on-specification products is critical to
maintaining our licence to operate and our reputation in the marketplace.
Failure to meet product quality standards throughout the value chain
could lead to harm to people and the environment and loss of customers.
Drilling and production
Exploration and production require high levels of investment and are
subject to natural hazards and other uncertainties, including those
relating to the physical characteristics of an oil or natural gas field. The
cost of drilling, completing or operating wells is often uncertain. We may
be required to curtail, delay or cancel drilling operations because of a
variety of factors, including unexpected drilling conditions, pressure or
irregularities in geological formations, equipment failures or accidents,
adverse weather conditions and compliance with governmental
requirements.
Transportation
All modes of transportation of hydrocarbons involve inherent risks. A loss
of containment of hydrocarbons and other hazardous material could
occur during transportation by road, rail, sea or pipeline. This is a
significant risk due to the potential impact of a release on the
environment and people and given the high volumes involved.