BP 2012 Annual Report Download - page 66

Business review: BP in more depth
BP Annual Report and Form 20-F 2012
64
With effect from 1 January 2012, the Exploration and Production segment
was split to form two new operating segments, Upstream and TNK-BP,
reflecting the way in which we were managing our investment in TNK-BP.
Comparative data has been restated to reflect this change. For information
on our subsequent agreement to sell our interest in TNK-BP to Rosneft,
see pages 80-81.
Market commentary
The growth in world oil consumption remained weak in 2012, with
continued growth in China and other non-OECD countries offsetting yet
another decline in OECD countries. With oil markets balancing supply
losses against weak consumption and high OPEC production, average
crude oil prices in 2012 were similar to the previous year. Natural gas
prices continued to show divergence amongst markets globally in 2012.
2012 2011 2010
Average oil marker pricesa$ per barrel
West Texas Intermediate 94.13 95.04 79.45
Brent 111.67 111.26 79.50
Average natural gas marker prices $ per million British thermal units
Average Henry Hub gas priceb 2.79 4.04 4.39
pence per therm
Average UK National Balancing Point
gas pricea 59.74 56.33 42.45
a All traded days average.
b Henry Hub First of Month Index.
Crude oil prices
Crude oil prices, as demonstrated by the industry benchmark of dated
Brent for the year, averaged $111.67 per barrel in 2012, similar to the 2011
average of $111.26 per barrel. This represented the highest annual average
ever (in nominal terms).
Brent remains an integral marker to the production portfolio with a
significant proportion of production being priced directly or indirectly from
this. Certain regions use other local markers, which are derived using
differentials, premiums or a lagged impact from the Brent crude oil price.
Prices rose early in 2012 due to concerns about risks to supply stemming
from the stand-off over Iran’s nuclear programme, with prices reaching a
peak of $128 per barrel in March. Thereafter, weaker economic growth,
high OPEC production and rising OECD commercial inventories pushed oil
prices to a low of $89 per barrel in June, before better economic news, a
substantial reduction in Iranian production, and renewed concerns about
risks to supply drove a recovery in prices.
Against this backdrop of a weak economy and high oil prices, global oil
consumption remained weak, rising by roughly 1 million barrels per day for
the year (1.1%)a. Growth in 2012 was once again led by non-OECD
countries including China. OECD consumption fell for the sixth time in the
past seven years. Non-OPEC production rose slightly, with strong US
growth offset by declines elsewhere. OPEC crude oil production remained
robust despite a large decline in Iranian output due to US and EU
sanctions. As a result, OECD commercial oil inventories rose above
average in late 2012.
By comparison, global oil consumption in 2011 grew by roughly 0.6 million
barrels per day (0.7%)b. OPEC production met the growth in consumption
despite the disruption of Libyan production due to large increases in Saudi
Arabia and other Middle-Eastern producers, but the loss of production
drove oil prices sharply higher.
We expect oil price movements in 2013 to continue to be driven by the
pace of global economic growth and its resulting implications for oil
consumption, by the supply growth in North America, and OPEC
production decisions. The path of Iranian production in the face of ongoing
US and EU sanctions remains a key uncertainty.
Natural gas prices
Natural gas prices continued to diverge globally in 2012. The average
US Henry Hub First of Month Index fell 31% to average $2.79/mmBtu in
2012, while European spot prices increased. In Upstream, with the
exception of our North American gas business, a significant amount of our
gas production is based on long-term contracts with fixed prices, meaning
that market fluctuations have less of an impact on our revenues.
The US gas market in 2012 was dominated by an unusually warm winter
at the start of the year, causing a collapse of heating demand. Spot prices
fell to 10-year lows, promoting an unprecedented coal-to-gas switch in
power generation, and a slowdown in gas drilling activity. Together with
an unusually warm summer, boosting electricity demand for air-
conditioning, these short-run market responses led to a modest recovery
in US prices, which was stalled by a return to an unusually warm
December towards the end of 2012.
In Europe, spot gas prices at the UK National Balancing Point increased by
6% to an average of 59.74 pence per therm for 2012. This increase came
despite weak demand in European gas markets, due to the economic
turmoil in Europe and gas being uncompetitive in power generation
relative to coal. European spot prices were supported by the tight global
LNG market as strong demand and high spot prices in Asia, driven by
Japan’s need for LNG to replace lost nuclear power and cover demand
during an unusually cold December in 2012, continued to attract LNG
away from Europe. LNG deliveries to Europe in 2012 were 23% lower
than in 2011.
In 2011, compared with 2010, the strength of shale gas production growth
had led the average Henry Hub First of Month Index to weaken, falling by
8% to $4.04/mmBtu. In the UK, National Balancing Point prices averaged
56.33 pence per therm, 33% above prices in 2010.
In 2013, we expect gas markets to continue to be driven by the economy,
weather, domestic production, limited increases in LNG supplies and
continuation of the uncertainty surrounding nuclear power generation in
Japan. Futures markets indicate that the large gap between US and
European gas prices is expected to persist through 2013.
2012 performance
Safety performance
In Upstream, delivering safe, reliable and compliant operations remains
our highest priority. The group safety and operational risk (S&OR) function
supports the business line in delivering safe, reliable and compliant
operations across the group’s operated businesses. S&OR staff are
deployed at the operating level throughout the Upstream segment to
support the systematic and disciplined application of those standards.
This creates an independent reporting line, working alongside line
management while having the power to intervene, supported by a
systematic framework provided by BP’s operating management system
(OMS). All upstream operated businesses are applying OMS to govern BP
operations and continue to work to achieve conformance to standards and
practices required by OMS through the performance improvement cycle
process. We continue to work to enhance local systems and processes at
all our sites. See Safety on pages 46-50 for more information on OMS.
Safety performance is monitored by a suite of input and output metrics
that focus on personal and process safety including operational integrity,
occupational health and legal compliance.
20092008 2010 2011 2012
Key safety metrics 2008-2012
(number of incidents)
80
60
40
20
100
120
Loss of primary containment Day away from work case frequency
Recordable injury frequency
Indexed (2008=100)
In 2012 there was one workforce fatality in Upstream. In 2011, there were
no workforce fatalities.
a From Oil Market Report 18 January 2013©, OECD/IEA 2013, page 4.
b BP Statistical Review of World Energy June 2012.