BP 2012 Annual Report Download - page 42

Business review: BP in more depth
BP Annual Report and Form 20-F 2012
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People and capability – successful recruitment, development and
utilization of staff is central to our plans.
Successful recruitment of new staff, employee training, development and
continuing enhancement of skills, in particular technical capabilities such
as petroleum engineers and scientists, are key to implementing our plans.
Inability to develop human capacity and capability, both across the
organization and in specific operating locations, could jeopardize
performance delivery. The group relies on recruiting and retaining
high-quality employees to execute its strategic plans and to operate its
business. The reputational damage suffered by the group as a result of the
Incident and any consequent adverse impact on our business could affect
employee recruitment and retention.
In addition, significant board and management focus continues to be
required in responding to matters related to the Incident. Although BP
set up the Gulf Coast Restoration Organization to manage the group’s
long-term response, other key management personnel will need to
continue to devote substantial attention to addressing the associated
consequences for the group, which may negatively impact our staff’s
capability to address and respond to other operational matters affecting
the group but unrelated to the Incident.
Liquidity, financial capacity and financial, including credit, exposure
– failure to operate within our financial framework could impact
our ability to operate and result in financial loss. Exchange rate
fluctuations can impact our underlying costs and revenues.
The group seeks to maintain a financial framework to ensure that it is able
to maintain an appropriate level of liquidity and financial capacity. This
framework constrains the level of assessed capital at risk for the purposes
of positions taken in financial instruments. Failure to accurately forecast or
maintain sufficient liquidity and credit to meet these needs (including a
failure to understand and respond to potential liabilities) could impact our
ability to operate and result in a financial loss. 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.
Trade and other receivables, including overdue receivables, may not be
recovered whether an impairment provision has been recognized or not.
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, to
maintain our long-term investment programme and to meet our
obligations, and may impact shareholder returns, including dividends and
share buybacks, or share price. Decreases in the funded levels of our
pension plans may also increase our pension funding requirements. The
group’s financial framework may not be sufficient to respond to a
substantial and unexpected cash call or funding request, and external
events may materially impact the effectiveness of the group’s financial
framework. In addition, operational challenges could impact the availability
of the group’s assets, which could adversely affect the group’s operating
cash flows.
BP’s potential liabilities resulting from pending and future claims, lawsuits,
settlements and enforcement actions relating to the Gulf of Mexico oil
spill, together with the potential cost of implementing remedies sought in
the various proceedings, cannot be fully estimated at this time but they
have had, and could continue to have, a material adverse impact on the
group’s financial performance and liquidity. Further potential liabilities may
continue to have a material adverse effect on the group’s results of
operations and financial condition. See Financial statements – Note 43 on
page 253 and Legal proceedings on pages 162-171. More stringent
regulation of the oil and gas industry arising from the Incident, and of BP’s
activities specifically, could increase this risk.
Crude oil prices are generally set in US dollars, while sales of refined
products may be in a variety of currencies. In addition, a high proportion of
our major project development costs are denominated in local currencies,
which may be subject to volatile fluctuations against the US dollar.
Fluctuations in exchange rates can therefore give rise to foreign exchange
exposures, with a consequent impact on underlying costs and revenues.
See Prices and markets on page 38.
See Financial statements – Note 26 on page 220 for more information on
financial instruments and financial risk factors.
Insurance – BP’s insurance strategy means that the group could,
from time to time, be exposed to material uninsured losses which
could have a material adverse effect on BP’s financial condition and
results of operations.
In the context of the limited capacity of the insurance market, many
significant risks are retained by BP. The group generally restricts its
purchase of insurance to situations where this is required for legal or
contractual reasons. This means that the group could be exposed to
material uninsured losses, which could have a material adverse effect
on its financial condition and results of operations. In particular, these
uninsured costs could arise at a time when BP is facing material costs
arising out of some other event which could put pressure on BP’s liquidity
and cash flows. For example, BP has borne and will continue to bear the
entire burden of its share of any property damage, well control, pollution
clean-up and third-party liability expenses arising out of the Gulf of Mexico
oil spill.
Compliance and control risks
Our settlement with the US Department of Justice and the SEC in
respect of federal criminal charges and US securities law violations
related to the Gulf of Mexico oil spill may expose us to further
penalties, liabilities and private litigation, and may impact our
operations and adversely affect our ability to quickly and efficiently
access US capital markets.
On 15 November 2012, BP reached an agreement with the US government
to resolve all federal criminal and securities claims arising out of the Incident
and comprising settlements with the US Department of Justice (DoJ) and
the SEC. On 29 January 2013, the US District Court for the Eastern District
of Louisiana accepted BP’s pleas regarding the federal criminal charges, and
sentenced BP in accordance with the criminal plea agreement. BP pleaded
guilty to 11 felony counts of Misconduct or Neglect of Ships Officers relating
to the loss of 11 lives; one misdemeanour count under the Clean Water Act;
one misdemeanour count under the Migratory Bird Treaty Act; and one
felony count of obstruction of Congress. Pursuant to that sentence, BP will
pay $4 billion, including $1.256 billion in criminal fines, in instalments over a
period of five years. The court also ordered, as previously agreed with the
US government, that BP serve a term of five years’ probation. Pursuant to
the terms of the plea agreement, the court also ordered certain equitable
relief, including additional actions, enforceable by the court, to further
enhance the safety of drilling operations in the Gulf of Mexico. In addition,
BP will undertake several initiatives with academia and regulators to develop
new technologies related to deepwater drilling safety. The resolution also
provides for the appointment of two monitors, both with terms of four years.
A process safety monitor will review, evaluate, and provide
recommendations for the improvement of BP’s process safety and risk
management procedures concerning deepwater drilling in the Gulf of
Mexico. An ethics monitor will review and provide recommendations for the
improvement of BP’s code of conduct and its implementation and
enforcement. BP has also agreed to hire an independent third-party auditor
who will review and report to the probation officer, the DoJ, and BP
regarding BP’s implementation of key terms of the proposed settlement,
including procedures and systems related to safety and environmental
management, operational oversight, and oil spill response training and drills.
Under the plea agreement, BP has also agreed to co-operate in ongoing
criminal actions and investigations, including prosecutions of four former
employees who have been separately charged.
Also on 15 November 2012, BP reached a settlement with the SEC to
resolve the SEC’s Deepwater Horizon-related claims against the company
under Sections 10(b) and 13(a) of the Securities Exchange Act of 1934
and the associated rules. Under the SEC settlement, BP has agreed to a civil
penalty of $525 million, payable in three instalments over a period of three
years, and has consented to the entry of an injunction prohibiting it from
violating certain US securities laws and regulations. The SEC settlement was
approved by the US District Court for the Eastern District of Louisiana on 10
December 2012. See Legal proceedings on pages 162-171.
On 28 November 2012, the US Environmental Protection Agency (EPA)
notified BP that it had temporarily suspended BP p.l.c., BP Exploration &
Production Inc. (BPXP) and a number of other BP subsidiaries from
participating in new federal contracts. As a result of the temporary
suspension, the BP entities listed in the EPA notice are ineligible to receive
any US government contracts either through the award of a new contract, or
the extension of the term or renewal of an expiring contract. The suspension