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Making energy more
Annual Report and Accounts 2005

Table of contents

  • Page 1
    Making energy more Annual Report and Accounts 2005

  • Page 2
    ..., costs, development of business strategy, discovery, development and management of oil and gas resources, dividends, share repurchases and other distributions to shareholders, earnings, availability of free cash flow, future performance, gearing, growth, investments, new markets, production...

  • Page 3
    2 4 6 8 27 158 164 174 176 177 Chairman's letter Group chief executive's review Measuring our progress Performance review Financial statements Governance: board performance report Directors' remuneration report Board of directors Shareholdings and annual general meeting Further information

  • Page 4
    ...increasing annually. For instance, the ethics and environment assurance committee under Walter Massey's chairmanship enhanced its focus in the area of personal and process safety procedures in the light of the Texas City incident, while the challenge of meeting new financial reporting and accounting...

  • Page 5
    ... to shareholders, governance practices must evolve to fill that gap. While the board evaluation exercise we undertook this year indicated areas in which our practices should develop, the internal and external endorsement our board has received reassures us that the governance of your company is...

  • Page 6
    ... fund not only the dividends, which we are delighted to have been able to increase once again during 2005, and the buybacks of shares, which totalled $11.6 billion during the year, but also the investment in new developments that will form the basis of the group's business for years to come. Capital...

  • Page 7
    ... ships and the extensive networks of pipelines we operate in many different parts of the world, helped to sustain global supplies through all the disruptions experienced in 2005. EXTERNAL CHALLENGES The oil and gas markets remain volatile. While we expect prices to remain above the long-run average...

  • Page 8
    ...investing at a rate appropriate for long-term growth. To increase the dividend per share in light of our policy. To return to shareholders all free cash flows in excess of investment and dividend needs. ••• REPLACEMENT COST PROFIT PER ORDINARY SHARE (cents) RETURN ON AVERAGE CAPITAL EMPLOYED...

  • Page 9
    ...or more of our production for 13 consecutive years on a UK SORP basis. We are number 1 or 2 in 85% of the retail markets in which we operate. Planned investment in BP Alternative Energy business over next 10 years. a tonnes (Mte) compared with 81.7Mte in 2004. BP share of emissions expressed as an...

  • Page 10
    ... To underpin growth by a focus on performance, particularly on returns, investing at a rate appropriate for long-term growth. To increase the dividend per share in light of our policy. To return to shareholders all free cash flows in excess of investment and dividend needs. 8 Making energy more

  • Page 11
    ... the fuel needs of commerce, industry and the home. Competition puts pressure on product prices, affects oil products marketing and requires continuous management focus on reducing unit costs and improving efficiency. Price risk Oil, gas and product prices are subject to international supply...

  • Page 12
    ... in 2005, with the BP global indicator margin (GIM) averaging $8.60 per barrel. This reflected further oil demand growth and the loss of refining capacity as a result of the US hurricanes. The premium for light products above fuel oils remained exceptionally high, favouring upgraded refineries over...

  • Page 13
    ... Texas City fatality and personal injury claims nor Gulf of Mexico Shelf impairment charges related to hurricane damage, which are included in the non-operating items above. Return on average capital employed on a replacement cost basis was 20%, compared with 16% in 2004; based on profit including...

  • Page 14
    ...million 2005 2004 2003 b Profit from continuing operations and includes profit after interest and tax of equity-accounted entities. UK SORP basis including equity-accounted entities. Exploration and Production Refining and Marketing Gas, Power and Renewables Other businesses and corporate Capital...

  • Page 15
    ...Gulf of Mexico and Angola, and a second discovery in offshore Sakhalin Island in Russia. BUILDING PRODUCTION AND RETURNS THROUGH FOCUS AND CHOICE BP exploration and production locations Reserves On the basis of UK generally accepted accounting practice (SORP), our proved reserves replacement ratio...

  • Page 16
    ...City refinery outage, adverse impacts related to fair value accounting and costs associated with rationalization and efficiency programmes. The full year average GIM was higher than that for the full year 2004 and consistent with the increase in BP's actual realized refining margin. Retail marketing...

  • Page 17
    ... made in relation to associated shipping, environmental and legal matters. BP also has a long-term contract to supply LNG into the Dominican Republic. LNG POSITIONS AND MARKETS Profit before interest and taxa Inventory holding (gains) losses Replacement cost profit before interest and tax Results...

  • Page 18
    ...quarter of 2005 and the plant reached full gas processing capacity of close to 1.1bcf/d in the second half of the year. BP Alternative Energy In 2005, we announced the launch of BP Alternative Energy, a business dedicated to the development and wholesale marketing and trading of low-carbon power. We...

  • Page 19
    ... to 2010. Environmental and social performance In this section of the Report, we review our 2005 performance in managing some of the longer-term environmental and social risks we have identified. A more comprehensive overview of our non-financial performance will be found in BP Sustainability Report...

  • Page 20
    ... structure to focus on these issues, including a new senior group vice president for safety and operations, a role filled by the senior executive who led the investigation into the Texas City incident. This team has drawn up plans for measures in three areas: plant, people and processes. In terms...

  • Page 21
    ...competent to do their job. In terms of processes, we are augmenting our current system, 'getting HSSE right', to produce a more comprehensive operating management system that aims to improve our safety management processes and better integrate them with our operational procedures. The new management...

  • Page 22
    ..., BP continues to support the implementation of the EITI in Azerbaijan, publishing relevant figures in our reports there in 2005. We have also funded a new research centre at Oxford University, UK, which will conduct academic research on resource-rich economies and share best practice in managing...

  • Page 23
    ... Accounting Standard IAS 19 Employee Benefits: Actuarial Gains and Losses, Group Plans and Disclosures', the amendment to IAS 39 'Amendment to International Accounting Standard IAS 39 Financial Instruments: Recognition and Measurement: Cash Flow Hedge Accounting of Forecast Intragroup Transactions...

  • Page 24
    ... future decommissioning costs. The impact of changes in estimated proved reserves is dealt with prospectively by amortizing the remaining book value of the asset over the expected future production. If proved reserve estimates are revised downwards, earnings could be affected by higher depreciation...

  • Page 25
    ... based on the group's best estimate of future oil and gas prices. Prices for oil and natural gas used for future cash flow calculations are assumed to decline from existing levels in equal steps during the next three years to the long-term planning assumptions as at 31 December 2005 ($25 per barrel...

  • Page 26
    ...that changes in currency exchange rates, interest rates or oil, natural gas and power prices will adversely affect the value of the group's financial assets, liabilities or expected future cash flows. The group has developed policies aimed at managing the market risk inherent in its natural business...

  • Page 27
    ... of exchange rate fluctuations is not identifiable separately in the group's reported profit. The main underlying economic currency of the group's cash flows is the US dollar. This is because BP's major products are priced internationally in US dollars. BP's foreign exchange management policy is...

  • Page 28
    ... governed by the group's policy commitment to long-term relationships founded on trust and mutual advantage. Within this overall policy, individual operating companies are responsible for agreeing terms and conditions for their business transactions and ensuring that suppliers are aware of the terms...

  • Page 29
    ... of financial assets and liabilities (UK GAAP) Finance debt Analysis of changes in net debt Provisions Pensions and other post-retirement benefits Called up share capital Capital and reserves Share-based payments Employee costs and numbers Remuneration of directors and key management Contingent...

  • Page 30
    ... financial statements for each financial year that present fairly the financial position of the group and the financial performance and cash flows of the group for that period. In preparing those financial statements, the directors are required: To select suitable accounting policies and then apply...

  • Page 31
    ... Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group's corporate...

  • Page 32
    ... financial statements using the equity method of accounting. Under the equity method, the investment in an associate is carried in the balance sheet at cost plus post-acquisition changes in the group's share of net assets of the associate, less distributions received and less any impairment in value...

  • Page 33
    ... ASSETS Business combinations are accounted for using the acquisition method of accounting. The cost of an acquisition is measured as the cash paid and the fair value of other assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly...

  • Page 34
    ... future cash flows are adjusted for the risks specific to the asset group and are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money. An assessment is made at each reporting date as to whether there is any indication...

  • Page 35
    ... initially, they are measured at fair value, normally being the transaction price plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs. As explained in Note 50, the group has not restated comparative amounts, on first applying IAS 32...

  • Page 36
    ...the date of acquisition. For the purpose of the group cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. TRADE AND OTHER PAYABLES Where the group has transferred its rights to receive cash flows from an asset and...

  • Page 37
    ... losses arising from changes in fair value are taken directly to net profit or loss for the period. PROVISIONS reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market...

  • Page 38
    ...to be settled directly. Fair value is based on market price information and, in the case of quoted securities, is the published bid price. The value of a net pension benefit asset is restricted to the sum of any unrecognized past service costs and the present value of any amount the group expects to...

  • Page 39
    ... issue or cancellation of equity shares. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet date and the reported...

  • Page 40
    ... of these financial statements: International Accounting Standards (IAS/IFRSs) IFRS 7 IAS 1 IAS 21 Financial Instruments: Disclosures Amendment - Presentation of Financial Statements: Capital Disclosures Amendment - Net Investment in Foreign Operation (Yet to be adopted by the EU) Fair Value Option...

  • Page 41
    ... operations Finance costs Other finance expense Profit before taxation from continuing operations Taxation Profit from continuing operations Profit (loss) from Innovene operations Profit for the year Attributable to BP shareholders Minority interest Earnings per share - cents Profit for the year...

  • Page 42
    ... Other payables Derivative financial instruments Accruals and deferred income Finance debt Deferred tax liabilities Provisions Defined benefit pension plan and other post-retirement benefit plan deficits Total liabilities Net assets Equity Share capital Reserves BP shareholders' equity Minority...

  • Page 43
    ... businesses Proceeds from loan repayments Other Net cash used in investing activities Financing activities Net repurchase of shares Proceeds from long-term financing Repayments of long-term financing Net increase (decrease) in short-term debt Dividends paid BP shareholders Minority interest Net cash...

  • Page 44
    ...gain or loss on sale of businesses and fixed assets Tax on actuarial gain (loss) relating to pensions and other post-retirement benefits Tax on available-for-sale investments Tax on cash flow hedges Tax on share-based payment accrual Net income recognized directly in equity Profit for the year Total...

  • Page 45
    ... 2005, there have been the following changes to the business segments reported by the group: (a) The Mardi Gras pipeline system in the Gulf of Mexico has been transferred from Exploration and Production to Refining and Marketing. (b) The aromatics and acetyls operations and the petrochemicals assets...

  • Page 46
    Notes on financial statements continued 2 Change in accounting policy continued Sales and other operating revenues By geographical area - as reported Segment revenues Less: sales attributable to Innovene operations Segment revenues from continuing operations Less: sales between areas Less: sales by ...

  • Page 47
    ... 2004 Book value on acquisition Fair value adjustments Fair value Property, plant and equipment Intangible assets Current assets (excluding cash) Cash and cash equivalents Trade and other payables Deferred tax liabilities Defined benefit pension plan deficits Net investment in equity-accounted...

  • Page 48
    ... to fair value less costs to sell and on disposal Profit (loss) from Innovene operations Earnings (loss) per share from Innovene operations - cents Basic Diluted The cash flows of Innovene operations are presented below Net cash provided by (used in) operating activities Net cash used in investing...

  • Page 49
    ... exchangeable for Lukoil American Depositary Shares (ADSs). Bondholders converted to ADSs before the redemption date. Refining and Marketing The churn of retail assets represents a significant element of the total in all three years. During 2005, the group sold a number of regional retail networks...

  • Page 50
    ... Current tax payable Finance debt Deferred tax liabilities Total liabilities OTHER SEGMENT INFORMATION Capital expenditure Intangible assets Property, plant and equipment Other Total Depreciation, depletion and amortization Impairment Loss on remeasurement to fair value less costs to sell and...

  • Page 51
    ...tax Finance costs and other finance expense Profit (loss) before taxation Taxation Profit (loss) for the year Includes Equity-accounted income ASSETS AND LIABILITIES Segment assets Tax receivable Total assets Includes Equity-accounted investments Segment liabilities Current tax payable Finance debt...

  • Page 52
    ... Total assets Includes Equity-accounted investments Segment liabilities Current tax payable Finance debt Deferred tax liabilities Total liabilities OTHER SEGMENT INFORMATION 79,446 - 79,446 12,897 (15,723) - - - (15,723) Capital expenditure Intangible assets 566 Property, plant and equipment 8,390...

  • Page 53
    ... payable Finance debt Deferred tax liabilities Total liabilities OTHER SEGMENT INFORMATION Capital expenditure Intangible assets Property, plant and equipment Other Total Depreciation, depletion and amortization Exploration expense Impairment Loss on remeasurement to fair value less costs to sell...

  • Page 54
    ... operations Profit for the year Includes Equity-accounted income ASSETS AND LIABILITIES Segment assets Tax receivable Total assets Includes Equity-accounted investments Segment liabilities Current tax payable Finance debt Deferred tax liabilities Total liabilities OTHER SEGMENT INFORMATION Capital...

  • Page 55
    ...loss) before interest and tax Minority interest $ million 2005 Profit (loss) for the year Interest Tax By business Exploration and Production Refining and Marketing Gas, Power and Renewables Other businesses and corporate Innovene operations Continuing operations Earnings from jointly controlled...

  • Page 56
    Notes on financial statements continued 7 Earnings from jointly controlled entities and associates continued Profit (loss) before interest and tax Minority interest $ million 2004 Profit (loss) for the year Interest Tax By business Exploration and Production Refining and Marketing Gas, Power and ...

  • Page 57
    .... 10 Production and similar taxes 2005 2004 $ million 2003 UK Overseas Continuing operations 495 2,515 3,010 335 1,814 2,149 300 1,423 1,723 11 Depreciation, depletion and amortization By business Exploration and Production UK Rest of Europe USA Rest of World Refining and Marketing UK a Rest...

  • Page 58
    ... sale of businesses or termination of operations Refining and Marketing Other businesses and corporate Loss on sale of fixed assets Exploration and Production Refining and Marketing Gas, Power and Renewables Other businesses and corporate Loss on remeasurement to fair value less costs to sell and on...

  • Page 59
    ... derived from the group's post-tax weighted average cost of capital. A different pre-tax discount rate is used where the local tax rate is significantly different from the UK or US corporate tax rates. The five-year group plan, which is approved on an annual basis by senior management, is the source...

  • Page 60
    ... than the long-term average growth rate for the first five years. The terminal value for the Lubricants unit represents cash flows discounted to perpetuity. For the Lubricants unit, the key assumptions to which the calculation of value in use is most sensitive are operating margin, sales volumes and...

  • Page 61
    ... the polyethylene joint venture. Management believed that this price was high compared with the likely recoverable amount for the businesses and conducted an impairment test. The cash flows for the next five years were derived from the five-year group plan. Cost inflation rate was assumed to be...

  • Page 62
    ... activity. $ million 2005 2004 2003 Exploration and evaluation costs Exploration expenditure written off Other exploration costs Exploration expense for the year Intangible assets Net assets Capital expenditure Net cash used in operating activities Net cash used in investing activities 305 379 684...

  • Page 63
    ... return on pension and other post-retirement benefit plan assets Interest net of expected return on plan assets Unwinding of discount on provisions Unwinding of discount on deferred consideration for acquisition of investment in TNK-BP Change in discount rate for provisionsa Innovene operations...

  • Page 64
    ... transferred to loss on sale of businesses Actuarial gain relating to pensions and other post-retirement benefits Share-based payment accrual Net (gain) loss on revaluation of cash flow hedges Unrealized (gain) loss on available-for-sale financial assets Tax included in statement of recognized...

  • Page 65
    ...) and derivative financial instruments. Based on current capital investment plans, the group expects that temporary differences arising in future years from differences between tax allowances and depreciation will be at levels similar to the current year. BP Annual Report and Accounts 2005 63

  • Page 66
    ... outstanding during the year. The average number of shares outstanding excludes treasury shares and the shares held by the Employee Share Ownership Plans. For the diluted earnings per share calculation, the profit attributable to ordinary shareholders is adjusted for the unwinding of the discount...

  • Page 67
    ... shareholders' equity a Operating b 1,598 980 5,469 6,102 14,149 capital employed is total assets less total liabilities, excluding finance debt and current and deferred taxation. UK area includes the UK-based international activities of Refining and Marketing. BP Annual Report and Accounts 2005...

  • Page 68
    ... 26 Property, plant and equipment Oil and gas properties Plant, machinery and equipment Fixtures, fittings and office equipment Transportation Oil depots, storage tanks and service stations $ million Of which: assets under construction Land Buildings Total Cost At 1 January 2005 Exchange...

  • Page 69
    ...2005 2004 $ million 2003 Cost At 1 January Exchange adjustments Acquisitions Fair value adjustment Deletions At 31 December Impairment losses At 1 January Exchange adjustments Impairment in the year Deletions At 31 December Net book... 374 (66) (267) 1,456 4,471 BP Annual Report and Accounts 2005 67

  • Page 70
    ... gas businesses to create TNK-BP , a new company owned and managed 50:50 by BP and AAR. TNK-BP is a jointly controlled entity accounted for under the equity method. BP contributed its 29% interest in Sidanco, its 29% interest in Rusia Petroleum and its holding in the BP Moscow retail network. There...

  • Page 71
    ... 2005 Amount payable at 31 December 2004 Amount payable at 31 December 2003 Amount payable at 31 December Product Purchases Purchases Purchases Abu Dhabi Marine Areas Abu Dhabi Petroleum Co. Atlantic LNG 2/3 Company of Trinidad and Tobago BP Solvay Polyethylene North Americaa China American...

  • Page 72
    Notes on financial statements continued 31 Inventories 2005 2004 $ million 2003 Crude oil Natural gas Refined petroleum and petrochemicals products Supplies Trading inventories Cost of inventories expensed in the income statement 5,457 164 10,700 16,321 919 17,240 2,520 19,760 172,699 3,659 75 8,...

  • Page 73
    ... financial assets and as such are recorded at fair value. Prior to 2005, cash equivalents were stated at cost. 34 Trade and other payables 2005 Current Noncurrent Current 2004 Noncurrent Current $ million 2003 Noncurrent Trade Jointly controlled entities Associates Production and similar taxes...

  • Page 74
    ...a cash flow or fair value hedge, and requires that any derivative that does not meet these criteria should be classified as trading and marked-to-market. BP adopted IAS 32 and IAS 39 with effect from 1 January 2005 without restating prior periods. Consequently, the group's accounting policy under UK...

  • Page 75
    ... at inception not recognized in the income statement Fair value recycled from equity into the income statement Other changes in fair values Fair value of contracts not recognized through profit at 31 December 2005 (73) - (3) (122) (198) 247 - (109) (202) (64) BP Annual Report and Accounts 2005 73

  • Page 76
    ... group held currency swap contracts as a hedge of a long-term investment in a UK subsidiary. The hedge was assessed to be highly effective. At 31 December 2005, the hedge had a fair value of $63 million and the gain on the hedge recognized in equity was $58 million. US dollars have been sold forward...

  • Page 77
    ... fair value of a contract valued in part using internal models due to the absence of quoted prices, including over-the-counter options. The net change in fair value of contracts based on models and other valuation methods during the year is a gain of $130 million. BP Annual Report and Accounts 2005...

  • Page 78
    ... models. The following table shows values at risk for held for trading activities described above. Value at risk on three standard deviations High Low Average $ million 2005 Year end Interest rate trading Foreign exchange trading Oil price trading Natural gas price trading Power price trading Value...

  • Page 79
    ... external pricing information. Additionally, where limited data exists for certain products, prices are interpolated using historic and long-term pricing relationships. The fair values of embedded derivatives are included on the balance sheet within the following headings. $ million 2005 Current...

  • Page 80
    ... 2005 Remaining contract terms Contractual/notional amount Discount rate - nominal risk free Fair value asset (liability) 3 to 13 years 8,220 million therms 4.5% $(2,590) million $ million Natural gas price Gas oil and fuel oil price Power price Discount rate Favourable 10% change Unfavourable...

  • Page 81
    ...a process of sensitivity analysis. Assuming no changes to the finance debt and hedges described above, it is estimated that a change of 1% in the general level of interest rates on 1 January 2005 would change 2005 profit before tax by approximately $215 million. BP Annual Report and Accounts 2005 79

  • Page 82
    ...managing foreign exchange rate risk, the group enters into various types of foreign exchange contracts, such as currency swaps, forwards and options. The fair values and carrying amounts of these derivatives are shown in the fair value table in Note 38. INTEREST RATE AND CURRENCY OF FINANCIAL ASSETS...

  • Page 83
    ... used to manage interest rate risk or to convert non-US dollar debt or to hedge other anticipated cash flows are terminated before the underlying debt matures or the hedged transaction occurs, the resulting gain or loss is recognized on a basis that matches the timing and accounting treatment of...

  • Page 84
    ...power price futures, swap agreements and options. Financial assets and liabilities and physical crude oil and refined products that are treated as trading positions are also included in these calculations. The value-at-risk calculation for oil, natural gas and power price exposure also includes cash...

  • Page 85
    ... exchange contracts are based on pricing models that take into account relevant market data. The fair value of the group's oil, natural gas and power price contracts (future contracts, swap agreements, options and forward contracts) is based on market prices. BP Annual Report and Accounts 2005...

  • Page 86
    ... is estimated using quoted prices or, where these are not available, discounted cash flow analyses based on the group's current incremental borrowing rates for similar types and maturities of borrowing. $ million 2005 Fair value Carrying amount Short-term borrowings Long-term borrowings Net...

  • Page 87
    ... estimated that a change of 1% in the general level of interest rates on 1 January 2006 would change 2006 profit before tax by approximately $180 million. The group uses finance leases to acquire property, plant and equipment. These leases have terms of renewal but no purchase options and escalation...

  • Page 88
    ... 2003 Net debt Movement in net debt At 1 January Adoption of IAS 39 Restated Exchange adjustments Debt acquired Net cash flow Fair value hedge adjustment Debt transferred to TNK-BP Exchange of Exchangeable Bonds for Lukoil American Depositary Shares Other movements At 31 December Equity (23,091...

  • Page 89
    ...of service. The plans are funded to a limited extent. The cost of providing pensions and other post-retirement benefits is assessed annually by independent actuaries using the projected unit method. The date of the most recent actuarial review was 31 December 2005. The material financial assumptions...

  • Page 90
    ...-term asset allocation policy for the major plans is as follows: Asset category Total equity Fixed income/cash Property/real estate Policy range (%) 55-85 15-35 0-10 Some of the group's pension funds use derivatives to manage their asset mix and the level of risk. The group's main pension funds...

  • Page 91
    ...-retirement benefits continued UK pension plans US pension plans US postretirement benefit plans Other plans $ million 2005 ANALYSIS OF THE AMOUNT CHARGED TO PROFIT BEFORE INTEREST AND TAXATION Total Current service cost Past service cost Settlement, curtailment and special termination benefits...

  • Page 92
    ... financial statements continued 42 Pensions and other post-retirement benefits continued UK pension plans US pension plans US postretirement benefit plans Other plans $ million 2004 ANALYSIS OF THE AMOUNT CHARGED TO PROFIT BEFORE INTEREST AND TAXATION Total Current service cost Past service cost...

  • Page 93
    ... service cost Plan amendments Interest cost Special termination benefits Contributions by plan participants Benefit payments Acquisitions Disposals Actuarial (gain) loss on obligation Benefit obligation at 31 December Fair value of plan assets at 1 January Exchange adjustment Expected return on plan...

  • Page 94
    ...financial statements continued 42 Pensions and other post-retirement benefits continued HISTORY OF EXPERIENCE GAINS AND LOSSES UK pension plans US pension plans US postretirement benefit plans Other plans Total 2005 Difference between the expected and actual return on plan assets... Making energy more

  • Page 95
    ... average market price of such shares on the London Stock Exchange during the previous six months over par value. EMPLOYEE SHARE SCHEMES During the year 68,499,852 ordinary shares (2004 62,224,092 and 2003 32,889,234 ordinary shares) were issued under the BP , Amoco and Burmah Castrol employee share...

  • Page 96
    ...acquisition of further investment in equity-accounted investments Employee share schemes Atlantic Richfield Issue of ordinary share capital for TNK-BP Purchase of shares by ESOP trusts Repurchase of ordinary share capital Share-based payments (net of tax) Profit for the year Dividends At 31 December...

  • Page 97
    ...(8,186) 80,765 $ million Other reserve Own shares Treasury shares Availablefor-sale investments Cash flow hedges Profit and loss account BP shareholders' equity Minority interest Total equity 129 - - - - - (85 44 ...999) 334 317 12,618 (5,674) 70,264 BP Annual Report and Accounts 2005 95

  • Page 98
    Notes on financial statements continued 44 Capital and reserves continued The profit and loss account reserve includes the following amounts, the distribution of which is limited by statutory or other restrictions: $ million 2005 2004 2003 Parent company Subsidiaries Jointly controlled entities and...

  • Page 99
    ... be exercised within seven years of the date of grant. Last grants were made in 2004. For 2005 onwards the remuneration committee's policy is not to make further grants of share options to executive directors. PLANS FOR SENIOR EMPLOYEES Medium Term Performance Plan (MTPP) (2005 onwards) An equity...

  • Page 100
    ... group to pay the intrinsic value of the cash option/SAR to the employee at the date of exercise. There are no performance conditions; however, participants must continue in employment with BP for the first three calendar years of the plan for the options/SARs to vest. Special arrangements may apply...

  • Page 101
    ...SHARES GRANTED Options granted in 2005 Option pricing model used Weighted average fair value Weighted average share price Weighted average exercise price Expected volatility Option life Expected dividends Risk free interest rate Expected exercise behaviour BPSOP ShareSave 3 year ShareSave 5 year...

  • Page 102
    ... 27,900 and 2003 27,000) service station staff. 2005 2004 UK Rest of Europe USA Rest of World Total Average number of employees Exploration and Production Refining and Marketing Gas, Power and Renewables Other businesses and corporate UK Rest of Europe USA Rest of World Total 3,000 11,100 200...

  • Page 103
    ... of the current year of service measured in accordance with IAS 19 'Employee Benefits'. Share-based payments This is the cost to the group of key management's participation in share-based payment plans, as measured by the fair value of options and shares granted accounted for in accordance with...

  • Page 104
    ... through insurance premiums with attendant transaction costs. The position is reviewed periodically. 49 Capital commitments Authorized future capital expenditure for property, plant and equipment by group companies for which contracts had been placed at 31 December 2005 amounted to $7,596 million...

  • Page 105
    ... for the fair value of employee share option schemes. Recording asset swaps on the basis of fair value. Recognizing changes in the fair value of embedded derivatives in the income statement. The new accounting policies adopted by the group are summarized on pages 30-38. The financial information...

  • Page 106
    ... of International Financial Reporting Standards continued GROUP INCOME STATEMENT RECONCILIATIONS FROM UK GAAP TO IFRS For the year ended 31 December 2004 UK GAAP in IFRS format Joint arrangements Sales and other operating revenues Earnings from jointly controlled entities - after interest and tax...

  • Page 107
    $ million Net equity accounting Goodwill amortization Deferred tax Major maintenance expenditure Sharebased payments Asset swaps Recycling foreign exchange on disposal Total IFRS adjustments Other IFRS - (1,251) (171) - (1,422) - ... 12,618 12,448 170 12,618 BP Annual Report and Accounts 2005 105

  • Page 108
    ...-current liabilities Other payables Derivative financial instruments Accruals and deferred income Finance debt Deferred tax liabilities Provisions Defined benefit pension plan and other post-retirement benefit plan deficits Total liabilities Net assets BP shareholders' equity Minority interest Total...

  • Page 109
    $ million Liquid resources Goodwill amortization Deferred tax Major maintenance expenditure Share-based payments Asset swaps Dividend accrual Total IFRS adjustments Other IFRS 328) - - - 328 - 2,985 - - - - 2,985 - - - - - 2,985 2,985...,892 1,343 78,235 BP Annual Report and Accounts 2005 107

  • Page 110
    ...-current liabilities Other payables Derivative financial instruments Accruals and deferred income Finance debt Deferred tax liabilities Provisions Defined benefit pension plan and other post-retirement benefit plan deficits Total liabilities Net assets BP shareholders' equity Minority interest Total...

  • Page 111
    $ million Liquid resources Goodwill amortization Deferred tax Major maintenance expenditure Share-based payments Asset swaps Dividend accrual Total IFRS adjustments Other IFRS 185) - - - 185 - - - 1,421 - - - - 1,421...444 102,227 70,264 69,139 1,125 70,264 BP Annual Report and Accounts 2005 109

  • Page 112
    ...-current liabilities Other payables Derivative financial instruments Accruals and deferred income Finance debt Deferred tax liabilities Provisions Defined benefit pension plan and other post-retirement benefit plan deficits Total liabilities Net assets BP shareholders' equity Minority interest Total...

  • Page 113
    $ million Liquid resources Goodwill amortization Deferred tax Major maintenance expenditure Share-based payments Asset swaps Dividend accrual Total IFRS adjustments Other IFRS (577 577 577) (280 280 280)...93,608 60,867 60,229 638 60,867 BP Annual Report and Accounts 2005 111

  • Page 114
    ... plant and equipment Proceeds from disposal of businesses Proceeds from loan repayments Net cash used in investing activities Financing activities Net repurchase of shares Proceeds from long-term financing Repayments of long-term financing Net (decrease) increase in short-term debt Dividends paid BP...

  • Page 115
    $ million Net equity accounting Goodwill amortization Deferred tax Major maintenance expenditure Sharebased payments Asset swaps Recycling foreign exchange on disposal Total IFRS adjustments Other IFRS (1,216) -...24) (6,041) (33) (12,835) 91 (697) 2,056 1,359 BP Annual Report and Accounts 2005 113

  • Page 116
    ... financial statements continued 50 First-time adoption of International Financial Reporting Standards continued GROUP CASH FLOW RECONCILIATION FROM UK GAAP TO IFRS For the year ended 31 December 2003 UK GAAP in IFRS format Operating activities Profit before taxation Adjustments to reconcile profit...

  • Page 117
    $ million Joint arrangements Net equity accounting Goodwill amortization Major maintenance expenditure Sharebased payments Asset swaps Recycling foreign exchange on disposal Total IFRS adjustments Other IFRS (4) - (... (5,654) (20) (6,803) 121 340 1,716 2,056 BP Annual Report and Accounts 2005 115

  • Page 118
    ...of equity-accounted entities UK practice in respect of equity accounting is to present the group's share of the profit before interest and tax, finance costs, other finance expense, and tax charge of jointly controlled entities and associates in the corresponding line of the group's income statement...

  • Page 119
    ... of International Financial Reporting Standards continued Presentation of pensions and other post-retirement benefit obligations BP adopted the UK standard on retirement benefits, FRS 17, in 2004. Under this standard, retirement benefit obligations and assets are presented on a net-of-tax basis...

  • Page 120
    .... Increase (decrease) in caption heading $ million Years ended 31 December 2004 2003 Impairment and losses on sale of businesses and fixed assets Taxation Profit for the year 25 (418) 393 - (873) 873 $ million At 31 December 2004 2003 1 January 2003 Property, plant and equipment Deferred tax...

  • Page 121
    ... Taxation Profit for the year 586 (296) (73) (217) 417 (216) (81) (120) $ million At 31 December 2004 2003 1 January 2003 Property, plant and equipment Deferred tax liabilities Total equity (1,148) (354) (794) (818) (273) (545) (577) (183) (394) BP Annual Report and Accounts 2005 119

  • Page 122
    .... BP has developed a binomial (or lattice-type) pricing model, which has been used to arrive at the fair value at the grant date of the share option schemes and part of the award under the long-term incentive plans. The other part of the long-term incentive plans is based on market conditions and...

  • Page 123
    50 First-time adoption of International Financial Reporting Standards continued Dividend accrual The UK GAAP approach to the recognition of proposed dividends was to account for the dividend in the period to which it related, e.g. the dividend proposed in February 2005 in respect of the final ...

  • Page 124
    ...financial statements continued 50 First-time adoption of International Financial Reporting Standards continued GROUP BALANCE SHEET RECONCILIATION FROM UK GAAP TO IFRS At 1 January 2005 IFRS at 31 December 2004 Non-current assets Property, plant and equipment Goodwill Intangible assets Investments...

  • Page 125
    ...fair value Elimination of deferred gains/ losses Fair value hedges Cash flow hedges Nonqualifying hedge derivatives Availablefor-sale financial assets Embedded derivatives Total IAS 39 adjustments IFRS at 1 January 2005...118,385 77,992 76,649 1,343 77,992 BP Annual Report and Accounts 2005 123

  • Page 126
    ... and receivables; and iii) available-for-sale financial assets (including certain investments held for the long term). Fair value hedges Where fair value hedge accounting was applied to transactions that hedge the group's exposure to the changes in the fair value of a firm commitment or a recognized...

  • Page 127
    ... available-for-sale financial assets, and as such need to be recorded at fair value with the gain or loss arising as a result of the change in fair value being recorded directly in equity. The transition adjustment relates to the fair value of listed investments held by the group. In accordance with...

  • Page 128
    ... are used to manage interest rate risk, to convert non-US dollar debt or to hedge other anticipated cash flows are terminated before the underlying debt matures or the hedged transaction occurs, the resulting gain or loss is recognized on a basis that matches the timing and accounting treatment of...

  • Page 129
    ... BP Oil New Zealand Norway BP Norge Spain BP España South Africa *BP Southern Africa Trinidad BP Trinidad (LNG) BP Trinidad and Tobago UK BP Capital Markets BP Chemicals BP Oil UK Britoil Jupiter Insurance US Atlantic Richfield Co. *BP America BP America Production Company BP Amoco Chemical Company...

  • Page 130
    ... group's share of jointly controlled entities' and associates' costs incurred in 2005 was $1,205 million. RESULTS OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER Sales and other operating revenuesc Third parties Sales between businesses Exploration expenditure Production costs Production taxes Other...

  • Page 131
    ... the value of royalty oil sold on behalf of others where royalty is payable in cash, property taxes and other government take. e The Exploration and Production profit before interest and tax comprises: $ million 2004 Exploration and production activities Group (as above) Jointly controlled entities...

  • Page 132
    ... the value of royalty oil sold on behalf of others where royalty is payable in cash, property taxes and other government take. e The Exploration and Production profit before interest and tax comprises: $ million 2003 Exploration and production activities Group (as above) Jointly controlled entities...

  • Page 133
    ... on cash flow expectations over the long term. The group's planning prices for estimating reserves through the end of 2005 were $25 per barrel for oil and $4.00 per mmBtu for natural gas. In determining 'reasonable certainty' for UK SORP purposes, BP applies a number of additional internally imposed...

  • Page 134
    ... year-end price, offset by a net increase of 19mmboe in respect of fuel gas and technology interpretations. Following SEC rules for reserves, our total proved reserves for subsidiaries and equity-accounted entities at the end of 2005 were 17,893mmboe, representing a proved reserve replacement ratio...

  • Page 135
    ... gas liquids (NGLs) and condensate. Net proved reserves of crude oil exclude production royalties due to others, whether royalty is payable in cash or in kind. LLC. Includes 97 million barrels of crude oil in respect of the 4.47% minority interest in TNK-BP. BP Annual Report and Accounts 2005 133

  • Page 136
    ...609 Developed Undeveloped TOTAL GROUP AND BP SHARE OF EQUITY-ACCOUNTED ENTITIES a Net proved reserves of natural gas exclude production royalties due to others, whether royalty is payable in cash or in b Includes 64 billion cubic feet of natural gas consumed in operations. c Includes 3,872 billion...

  • Page 137
    ... gas liquids (NGLs) and condensate. Net proved reserves of crude oil exclude production royalties due to others, whether royalty is payable in cash or in kind. LLC. Includes 95 million barrels of crude oil in respect of the 4.47% minority interest in TNK-BP. BP Annual Report and Accounts 2005 135

  • Page 138
    ... EQUITY-ACCOUNTED ENTITIES (BP SHARE) At 1 January 2005 Developed Undeveloped Changes ...production royalties due to others, whether royalty is payable in cash or in kind. b Includes 174 billion cubic feet of natural gas consumed in operations (147 bcf in subsidiaries, 27 bcf in equity-accounted...

  • Page 139
    ... - Pan American Energy Russia - TNK-BP Other Various Various Various Various Various Various Various Various Total equity-accounted entities Total group and BP share of equity-accounted entitiesd a Net of royalty, whether payable in cash or in kind. b Out of nine fields, BP operates six and...

  • Page 140
    ...50.0 78.2 Gulf of Mexico Alaska Rest of World Australia Canada China Egypt Indonesia Sharjah Trinidad & Tobago Various Various 15.8 Various 34.3 50.0 Various 26.3 46.0 40.0 40.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Other Total group Equity-accounted entities (BP share) Various Argentina...

  • Page 141
    ... year and to BP shareholders' equity that would be required if generally accepted accounting principles in the United States (US GAAP) had been applied instead of International Financial Reporting Standards. PROFIT FOR THE YEAR UNDER US GAAP 2005 2004 $ million 2003 Profit for the year as reported...

  • Page 142
    ... Return on average capital employed (Based on profit after taxation before deducting finance costs)a Return on average BP shareholders' interest (Based on profit after taxation and minority interest) Payout ratio (Dividend: profit) Debt to debt-plus-equity ratio (Finance debt: finance debt plus BP...

  • Page 143
    ...BP and third parties. 35.39 3.86 38.27 6.13 27.25 3.39 28.83 5.37 Net proved reserves of natural gas exclude production royalties due to others. Further information is included in BP Financial and Operating Information 2001-2005. To obtain a copy see page 177. BP Annual Report and Accounts 2005...

  • Page 144
    ...Kingdom law and United Kingdom generally accepted accounting practice. Company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the company. In preparing these financial statements, the directors are required...

  • Page 145
    ... with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the Directors' Remuneration Report to...

  • Page 146
    ... changes in accounting policy for dividends. FRS 20 requires that the fair value of options and shares awarded to employees is charged to the income statement over the vesting period. Under UK GAAP , no charge was made in respect of share options. Dividends proposed or declared on equity instruments...

  • Page 147
    ..., based on tax rates and laws enacted or substantively enacted at the balance sheet date. USE OF ESTIMATES The preparation of accounts in conformity with generally accepted accounting practice requires management to make estimates and assumptions that affect the reported amounts of assets and...

  • Page 148
    ... one year Net assets excluding pension surplus Defined benefit pension plan surplus Net assets Represented by Capital and reserves Called up share capital Share premium account Capital redemption reserve Merger reserve Other reserves Shares held by ESOP trusts Treasury shares Profit and loss account...

  • Page 149
    ... cash flow statement For the year ended 31 December Note 2005 2004 $ million 2003 Profit before interest and tax Depreciation and amounts provided Net operating charge for pensions less contributions Dividends, interest and other income Share-based payments (Increase) decrease in debtors Increase...

  • Page 150
    ... This comprises Actuarial gain relating to pensions Tax included in statement of total recognized gains and losses DEFERRED TAX 348 348 59 59 252 252 348 348 59 59 252 252 $ million Balance sheet 2005 2004 2003 Deferred tax liability Pensions Deferred tax asset Other taxable temporary...

  • Page 151
    ... International BP Shipping Burmah Castrol South Africa BP Southern Africa US BP America 100 100 100 100 75 100 England England England Scotland South Africa US Investment holding Integrated oil operations Shipping Lubricants Refining and marketing Investment holding 4 Debtors 2005 Within 1 year...

  • Page 152
    ... that date and the pension cost for 2006. % 2005 2004 2003 Expected long-term rate of return Discount rate for plan liabilities Rate of increase in salaries Rate of increase for pensions in payment Rate of increase in deferred pensions Inflation The market values of the various categories of asset...

  • Page 153
    ...) 841 Surplus in scheme at 1 January Movement in year Current service cost Past service cost Settlement, curtailment and special termination benefits Other finance income Actuarial gain (loss) Employers' contributions Exchange adjustments Surplus in plan at 31 December HISTORY OF EXPERIENCE GAINS...

  • Page 154
    ... average market price of such shares on the London Stock Exchange during the previous six months over par value. EMPLOYEE SHARE SCHEMES During the year 68,499,852 ordinary shares (2004 62,224,092 and 2003 32,889,234 ordinary shares) were issued under the BP , Amoco and Burmah Castrol employee share...

  • Page 155
    ... share capital Profit for the year Dividends At 31 December 2005 At 1 January 2004 Prior year adjustment - change in accounting policy Restated Currency translation differences Actuarial gain (loss) (net of tax) Employee share schemes Atlantic Richfield Issue of ordinary share capital for TNK-BP...

  • Page 156
    ... be exercised within seven years of the date of grant. Last grants were made in 2004. For 2005 onwards the remuneration committee's policy is not to make further grants of share options to executive directors. PLANS FOR SENIOR EMPLOYEES Medium Term Performance Plan (MTPP) (2005 onwards) An equity...

  • Page 157
    .... BP Share Option Plan (BPSOP) An equity-settled share option plan that applies to certain categories of employees. Participants are granted share options with an exercise price no lower than market price of a share immediately preceding the date of grant. There are no performance conditions and...

  • Page 158
    ... AND SHARES GRANTED Options granted in 2005 Option pricing model used Weighted average fair value Weighted average share price Weighted average exercise price Expected volatility Option life Expected dividends Risk free interest rate Expected exercise behaviour EDIP Options BPSOP ShareSave 3 year...

  • Page 159
    ...exercise of share options Amounts awarded under incentive schemes 18 - - 8 19 - 3 6 17 1 1 4 Emoluments These amounts comprise fees paid to the non-executive chairman and the non-executive directors and, for executive directors, salary and benefits earned during the relevant financial year, plus...

  • Page 160
    ...which BP shares are listed, as well as through the annual general meeting Owners/shareholders Authority Accountability Delegation through policy with monitoring Board Assurance through monitoring and reporting Group chief executive (GCE's management framework delegations) Executive management...

  • Page 161
    ... Davis) are considered independent since the most senior executive management of BP comprises individuals who were not previously Amoco employees. While Amoco businesses and assets are a key part of the group, the scope and scale of BP since its acquisition of BP Annual Report and Accounts 2005 159

  • Page 162
    ... the principal board committees, the powers delegated to those committees, the board's governance policies and practices, and the latest financial information about the group. The chairman is accountable for the induction of new board members. Training Our directors are updated on BP's business, the...

  • Page 163
    ... the year, specific reports on risk management and internal control were reviewed for the exploration and production, refining and marketing, and gas, power and renewables segments, along with the controls and systems underpinning the trading functions that service all BP's businesses. Reviews were...

  • Page 164
    ..., employee health, greenhouse gas emissions, oil spills and plant integrity was considered during 2005. Specific attention was given to the progress made by TNK-BP in improving HSE standards in its operations in Russia. Regional reviews Most board-level monitoring is conducted through a business...

  • Page 165
    ... control as required by Code provision C.2.1. As part of this process, the board and the audit and ethics and environment assurance committees requested, received and reviewed reports from executive management, including management of the principal business BP Annual Report and Accounts 2005...

  • Page 166
    ... approval of shareholders at the annual general meeting (AGM). Part 1 - Executive directors' remuneration DEAR SHAREHOLDER As described in this Annual Report, 2005 was a year of strong financial performance for the group set against a background of a number of significant events - both positive and...

  • Page 167
    ...: 50% financial and operational metrics from the annual plan, principally earnings before interest, tax, depreciation and amortization (EBITDA) and return on average capital employed (ROACE). 30% annual strategic milestones taken from the five-year group business plan, including those relating to...

  • Page 168
    ... of the underlying health of BP's business relative to competitors, as shown by a range of other measures including, but not limited to, ROACE, earnings per share (EPS) growth, reserves replacement and cash flow. This will enable a more comprehensive review of long-term performance, with the aims of...

  • Page 169
    ...regular employee benefit plans and in all-employee share schemes and savings plans applying in their home countries. Benefits in kind are not pensionable. Resettlement allowance: Expatriates may receive a resettlement allowance for a limited period. ••• ••• SERVICE CONTRACTS Director...

  • Page 170
    ... reductions in cash flow caused by adverse events. Production rates, allowing for the impact of oil prices on production-sharing contracts and weather-related downtime, were within internal expectations. Annual strategic metrics and milestones were taken from the five-year group business plan. There...

  • Page 171
    ... by shareholders in April 2005 as described on pages 165-167. BPA = BP Amoco share option plan, which applied to US executive directors prior to the adoption of the EDIP . SAR = Stock Appreciation Rights under BP America Inc. Share Appreciation Plan. SAYE = Save As You Earn employee share scheme...

  • Page 172
    ... 2003-2005 share element of the EDIP and the LTPPs, BP's performance was assessed in terms of SHRAM, ROACE and EPS growth. BP's three-year SHRAM was measured against the companies in the FTSE All World Oil & Gas Index. Companies within the index are weighted according to their market capitalization...

  • Page 173
    ... £728 £560 pension earned during the year includes an inflation increase of 3.5%. Transfer values have been calculated in accordance with version 8.1 of guidance note GN11 issued by the actuarial profession. HISTORICAL TSR PERFORMANCE PAST DIRECTORS This graph is included to meet a legislative...

  • Page 174
    ... recognized best-practice standards for non-executive directors' remuneration. Remuneration should be in the form of cash fees, payable monthly. Non-executive directors should not receive share options from the company. Non-executive directors should be encouraged to establish a holding in BP shares...

  • Page 175
    ... 4 Nov 2007 No awards were granted and no awards lapsed during the year. The awards were granted over Amoco stock prior to the merger but their notional weighted average market value at the date of grant (applying the subsequent merger ratio of 0.66167 of a BP ADS for every Amoco share) was $27.87...

  • Page 176
    ... and marketing business. From 2002 to 2004, he was chief executive of petrochemicals. He was appointed group executive officer with a range of regional and functional responsibilities and an executive director in July 2004. He was appointed to the board of Rolls-Royce Group plc in January 2005. He...

  • Page 177
    ... retired on 14 April 2005. COMPANY SECRETARY David Jackson (53) was appointed company secretary in 2003. A solicitor, he is a director of BP Pension Trustees Ltd, a director of Business in the Community and a member of the Listing Authorities Advisory Committee. BP Annual Report and Accounts 2005...

  • Page 178
    .... At 31 December 2005, there were also 1,588 preference shareholders. SUBSTANTIAL SHAREHOLDINGS ANNUAL GENERAL MEETING At the date of this report, the company had been notified that JPMorgan Chase Bank, as depositary for American depositary shares (ADSs), holds interests through its nominee...

  • Page 179
    ..., change of ownership, dividend payments, the dividend reinvestment plan or the ADS direct access plan, please contact the Registrar or ADS Depositary. To elect to receive the Directors' Report and Annual Accounts in place of summary financial statements for all future financial years, please write...

  • Page 180
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