BP 2012 Annual Report Download - page 41

Business review: BP in more depth
Business review: BP in more depth
BP Annual Report and Form 20-F 2012
39
We set ourselves high standards of corporate citizenship and aspire to
contribute to a better quality of life through the products and services we
provide. If it is perceived that we are not respecting or advancing the
economic and social progress of the communities in which we operate or
that we have not satisfactorily addressed all relevant stakeholder concerns
in respect of our operations, our reputation and shareholder value could be
damaged and development opportunities may be precluded.
Competition – BP’s group strategy depends upon continuous
innovation and efficiency in a highly competitive market.
The oil, gas and petrochemicals industries are highly competitive. There
is strong competition, both within the oil and gas industry and with other
industries, in supplying the fuel needs of commerce, industry and the
home. Competition puts pressure on the terms of access to new
opportunities, licence costs and product prices, affects oil products
marketing and requires continuous management focus on reducing unit
costs and improving efficiency, while ensuring safety and operational risk
is not compromised. The implementation of group strategy requires
continued technological advances and innovation including advances in
exploration, production, refining, petrochemicals manufacturing
technology and advances in technology related to energy usage. Our
performance could be impeded if competitors developed or acquired
intellectual property rights to technology that we require, if our innovation
lagged the industry, or if we fail to adequately protect our company brands
and trade marks. Our competitive position in comparison to our peers
could be adversely affected if competitors offer superior terms for access
rights or licences, if we fail to control our operating costs or manage our
margins, or if we fail to sustain, develop and operate efficiently a high
quality portfolio of assets.
Joint ventures and other contractual arrangements – BP may
not have full operational control and may have exposure to
counterparty credit risk and disruptions to our operations and
strategic objectives due to the nature of some of its business
relationships.
Many of our major projects and operations are conducted through joint
ventures or associates and through contracting and sub-contracting
arrangements. These arrangements often involve complex risk allocation,
decision-making processes and indemnification arrangements. In certain
cases, we may have less control of such activities than we would have if
BP had full operational control. Our partners may have economic or
business interests or objectives that are inconsistent with, or opposed to,
those of BP and may exercise veto rights to block certain key decisions or
actions that BP believes are in its or the joint venture’s or associate’s best
interests, or approve such matters without our consent. Additionally, our
joint venture partners or associates or contractual counterparties are
primarily responsible for the adequacy of the human or technical
competencies and capabilities which they bring to bear on the joint project
and, in the event these are found to be lacking, our joint-venture partners
or associates may not be able to meet their financial or other obligations
to their counterparties or to the relevant project, potentially threatening
the viability of such projects. Furthermore, should accidents or incidents
occur in operations in which BP participates, whether as operator or
otherwise, and where it is held that our sub-contractors or joint-venture
partners are legally liable to share any aspects of the cost of responding to
such incidents, the financial capacity of these third parties may prove
inadequate to fully indemnify BP against the costs we incur on behalf of
the joint venture or contractual arrangement. Should a key sub-contractor,
such as a lessor of drilling rigs, be no longer able to make these assets
available to BP, this could result in serious disruption to our operations.
Where BP does not have operational control of a venture, BP may
nonetheless still be pursued by regulators or claimants in the event of an
incident.
Rosneft transaction – BP’s failure to complete the agreed
transaction with Rosneft, or any future erosion of our relationship
with Rosneft, could adversely impact our business, the level of our
reserves and our reputation.
On 22 November 2012, BP announced that it had signed definitive and
binding agreements in respect of the sale of BP’s 50% interest in TNK-BP
to Rosneft and BP’s investment in Rosneft (the Rosneft transaction). See
TNK-BP on pages 80-81. Completion of the Rosneft transaction is subject
to certain customary closing conditions, including governmental,
regulatory and anti-trust approvals. Failure by BP to complete the Rosneft
transaction as contemplated due to the failure to receive required
approvals or otherwise could negatively impact our reputation and result
in a loss of stakeholder confidence in BP’s ability to meet its identified
strategic objectives in Russia. In addition, to the extent we fail to maintain
a good commercial relationship with Rosneft in the future, or to the extent
that as a minority shareholder in Rosneft we are unable in the future to
exercise influence over our investment in Rosneft or other growth
opportunities in Russia, our business and strategic objectives in Russia
and our ability to recognize our share of Rosneft’s reserves as
contemplated may be adversely impacted.
Investment efficiency – poor investment decisions could negatively
impact our business.
Our organic growth is dependent on creating a portfolio of quality options
and investing in the best options. Ineffective investment selection and/or
subsequent execution could lead to loss of value and higher capital
expenditure.
Reserves progression – inability to progress upstream resources in
a timely manner could adversely affect our long-term replacement
of reserves and negatively impact our business.
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 due to commercial, technical
or regulatory reasons or otherwise, we will be unable to sustain long-term
replacement of reserves.
Major project delivery – our group plan depends upon successful
delivery of major projects, and failure to deliver major projects
successfully could adversely affect our financial performance.
Successful execution of our group plan depends critically on implementing
the activities to deliver the major projects over the plan period. Poor
delivery of any major project that underpins production or production
growth and/or any other major programme designed to enhance
shareholder value, including maintenance turnaround programmes, could
adversely affect our financial performance. Successful project delivery
requires, among other things, adequate engineering and other capabilities
and therefore successful recruitment and development of staff is central
to our plans. See People and capability on page 40.
Digital infrastructure is an important part of maintaining our
operations, and a breach of our digital security could result in
serious damage to business operations, personal injury, damage to
assets, harm to the environment, reputational damage, breaches of
regulations, litigation, legal liabilities and reparation costs.
The reliability and security of our digital infrastructure are critical to
maintaining the availability of our business applications, including the
reliable operation of technology in our various business operations and the
collection and processing of financial and operational data, as well as the
confidentiality of certain third-party information. A breach of our digital
security, either due to intentional actions or due to negligence, could
cause serious damage to business operations and, in some
circumstances, could result in the loss of data or sensitive information,
injury to people, damage to assets, harm to the environment, reputational
damage, breaches of regulations, litigation, legal liabilities and reparation
costs.
Business continuity and disaster recovery – the group must be able
to recover quickly and effectively from any disruption or incident,
as failure to do so could adversely affect our business and
operations.
Contingency plans are required to continue or recover operations following
a disruption or incident. Inability to restore or replace critical capacity to an
agreed level within an agreed timeframe would prolong the impact of any
disruption and could severely affect our business and operations.
Crisis management – crisis management plans are essential to
respond effectively to emergencies and to avoid a potentially
severe disruption in our business and operations.
Crisis management plans and capability are essential to deal with
emergencies at every level of our operations. If we do not respond, or are
perceived not to respond, in an appropriate manner to either an external or
internal crisis, our business and operations could be severely disrupted.