BP 2011 Annual Report Download - page 108

106 BP Annual Report and Form 20-F 2011
Business review
Trend information
For information on external market trends, see Our market on pages 18-24.
We expect production excluding TNK-BP in 2012 to be broadly flat
compared with 2011, after adjusting for divestments and at an oil price of
$100 per barrel.
In Refining and Marketing, the level of BP’s refinery turnaround
activity is expected to be broadly similar in 2012 compared with 2011.
We also expect the marketing environment in fuels, lubricants and
petrochemicals to remain subdued given the outlook for global demand.
In 2012, we expect the quarterly loss, excluding non-operating
items, for Other businesses and corporate to average around $500 million.
As in previous years, this is likely to be volatile on an individual quarterly
basis.
We expect capital expenditure, excluding acquisitions and asset
exchanges, to increase to around $22 billion in 2012, as we invest to grow
in our Exploration and Production segment.
Having completed disposals of almost $20 billion during 2010 and
2011 combined, we expect to make further disposals that would bring the
total to $38 billion by the end of 2013.
We intend to reduce the net debt ratio to the lower half of the
10–20% range over time. Net debt is a non-GAAP measure.
Depreciation, depletion and amortization in 2012 is expected to be
around $1.0 billion higher than in 2011.
The discussion above contains forward-looking statements,
particularly those regarding external market trends, the future level of
production excluding TNK-BP, the expected level of turnarounds, the
marketing environment in fuels, lubricants and petrochemicals, the
expected quarterly loss for Other businesses and corporate, the expected
level of capital expenditures, expectations regarding future disposals, net
debt and net debt ratio, and future levels of depreciation, depletion and
amortization. These forward-looking statements are based on assumptions
that management believes to be reasonable in the light of the group’s
operational and financial experience. However, no assurance can be given
that the forward-looking statements will be realized. You should not rely on
past performance as an indicator of future performance. You are urged to
read the cautionary statement on page 5 and Risk factors on pages 59-63,
which describe the risks and uncertainties that may cause actual results
and developments to differ materially from those expressed or implied by
these forward-looking statements. The company provides no commitment
to update the forward-looking statements or to publish financial projections
for forward-looking statements in the future.
Regulation of the group’s business
BP’s activities, including its oil and gas exploration and production, pipelines
and transportation, refining and marketing, petrochemicals production,
trading, alternative energy and shipping activities, are conducted in
many different countries and are subject to a broad range of EU, US,
international, regional and local legislation and regulations, including
legislation that implements international conventions and protocols. These
cover virtually all aspects of our activities and include matters such as
licence acquisition, production rates, royalties, environmental, health and
safety protection, fuel specifications and transportation, trading, pricing,
anti-trust, export, taxes and foreign exchange.
The terms and conditions of the leases, licences and contracts
under which our oil and gas interests are held vary from country to country.
These leases, licences and contracts are generally granted by or entered
into with a government entity or state owned or controlled company
and are sometimes entered into with private property owners. These
arrangements with governmental or state entities usually take the form of
licences or production-sharing agreements (PSAs), although arrangements
with the US government can be by lease. Arrangements with private
property owners are usually in the form of leases.
Licences (or concessions) give the holder the right to explore for
and exploit a commercial discovery. Under a licence, the holder bears the
risk of exploration, development and production activities and provides the
financing for these operations. In principle, the licence holder is entitled to
all production, minus any royalties that are payable in kind. A licence holder
is generally required to pay production taxes or royalties, which may be in
cash or in kind. Less typically, BP may explore for and exploit hydrocarbons
under a service agreement with the host entity in exchange for
reimbursement of costs and/or a fee paid in cash rather than production.
PSAs entered into with a government entity or state owned or
controlled company generally require BP to provide all the financing and
bear the risk of exploration and production activities in exchange for a share
of the production remaining after royalties, if any.
In certain countries, separate licences are required for exploration
and production activities and, in certain cases, production licences are
limited to only a portion of the area covered by the original exploration
licence. Both exploration and production licences are generally for a
specified period of time. In the US, leases from the US government
typically remain in effect for a specified term, but may be extended beyond
that term as long as there is production in paying quantities. The term of
BP’s licences and the extent to which these licences may be renewed vary
from country to country.
Frequently, BP conducts its exploration and production activities
in joint ventures or co-ownership arrangements with other international
oil companies, state owned or controlled companies and/or private
companies. These joint ventures may be incorporated or unincorporated
ventures, while the co-ownerships are typically unincorporated. Whether
incorporated or unincorporated, relevant agreements will set out each
party’s level of participation or ownership interest in the joint venture or co-
ownership. Conventionally, all costs, benefits, rights, obligations, liabilities
and risks incurred in carrying out joint venture or co-ownership operations
under a lease or licence are shared among the joint venture or co-owning
parties according to these agreed ownership interests. Ownership of
joint venture or co-owned property and hydrocarbons to which the joint
venture or co-ownership is entitled is also shared in these proportions.
To the extent that any liabilities arise, whether to governments or third
parties, or as between the joint venture parties or co-owners themselves,
each joint venture party or co-owner will generally be liable to meet these
in proportion to its ownership interest (see Financial statements – Note 2
in relation to the Gulf of Mexico oil spill). In many upstream operations,
a party (known as the operator) will be appointed (pursuant to a joint
operating agreement (JOA)) to carry out day-to-day operations on behalf of
the joint venture or co-ownership. The operator is typically one of the joint
venture parties or a co-owner and will carry out its duties either through its
own staff, or by contracting out various elements to third-party contractors
or service providers. BP acts as operator on behalf of joint ventures and
co-ownerships in a number of countries where we have exploration and
production activities.