BP 2006 Annual Report Download - page 14

Risk factors
We urge you to consider carefully the risks described below. If any
of these risks occur, our business, financial condition and results of
operations could suffer and the trading price and liquidity of our securities
could decline, in which case you could lose all or part of your investment.
Our system of risk management provides the response to enduring
risks of group significance through the establishment of standards and
other controls. Inability to identify, assess and respond to risks through
this and other controls could lead to inability to capture opportunities,
threats materializing, inefficiency and legal non-compliance.
The risks are categorized against the following areas: Strategy,
Compliance and ethics, Financial control and operations.
Strategic risks
Access and renewal
Successful execution of our group plan depends critically on implementing
activities to renew and reposition our portfolio. The challenges to renewal
of our upstream portfolio are growing due to increasing competition for
access to opportunities globally. Inability to complete planned disposals
and/or lack of material positions in new markets could result in an inability
to capture above-average market growth.
Prices and markets
Oil, gas and product prices are subject to international supply and
demand. Political developments (especially in the Middle East) and the
outcome of meetings of OPEC can particularly affect world supply and
oil prices. In addition to the adverse effect on revenues, margins and
profitability from any future fall in oil and natural gas prices, a prolonged
period of low prices or other indicators would lead to a review for
impairment of the group’s oil and natural gas properties. This review
would reflect management’s view of long-term oil and natural gas prices.
Such a review could result in a charge for impairment that could have a
significant effect on the group’s results of operations in the period in
which it occurs.
Refining profitability can be volatile, with both periodic oversupply and
supply tightness in various regional markets. Sectors of the chemicals
industry are also subject to fluctuations in supply and demand within the
petrochemicals market, with consequent effect on prices and profitability.
Socio-political
We have operations in developing countries where political, economic
and social transition is taking place. Some countries have experienced
political instability, changes to the regulatory environment, expropriation
or nationalization of property, civil strife, strikes, acts of war and
insurrections. Any of these conditions occurring could disrupt or terminate
our operations, causing our development activities to be curtailed or
terminated in these areas or our production to decline, and could cause
us to incur additional costs.
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,
our reputation and shareholder value could be damaged.
Competition
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 product prices, affects oil products
marketing and requires continuous management focus on reducing unit
costs and improving efficiency.
Compliance and ethics risks
Regulatory
The oil industry is subject to regulation and intervention by governments
throughout the world in such matters as the award of exploration and
production interests, the imposition of specific drilling obligations,
environmental protection controls, controls over the development and
decommissioning of a field (including restrictions on production) and,
possibly, nationalization, expropriation, cancellation or non-renewal of
contract rights. We buy, sell and trade oil and gas products in certain
regulated commodity markets. The oil industry is also subject to the
paymentofroyaltiesandtaxation,whichtendtobehighcomparedwith
those payable in respect of other commercial activities, and operates in
certain tax jurisdictions that have a degree of uncertainty relating to the
interpretation of, and changes to, tax law. As a result of new laws and
regulations or other factors, we could be required to curtail or cease
certain operations, or we could incur additional costs.
Ethical misconduct and non-compliance
Our code of conduct, which applies to all employees, defines our
commitment to integrity, compliance with all applicable legal
requirements, high ethical standards and the behaviours and actions we
expect of our businesses and people wherever we operate. Incidents of
non-compliance with applicable laws and regulation or ethical misconduct
could be damaging to our reputation and shareholder value. Multiple
events of non-compliance could call into question the integrity of
our operations.
Financial control risks
Liquidity, financial capacity and financial exposure
The group has established a financial framework to ensure that it is able
to maintain an appropriate level of liquidity and financial capacity and to
constrain the level of assessed capital at risk for the purposes of positions
taken in financial instruments. Failure to operate within our financial
framework could lead to the group becoming financially distressed leading
to a loss of shareholder value. Commercial credit risk is measured and
controlled to determine the group’s total credit risk. Inability adequately to
determine our credit exposure could lead to financial loss. Crude oil prices
are generally set in US dollars, while sales of refined products may be in
a variety of currencies. Fluctuations in exchange rates can therefore give
rise to foreign exchange exposures, with a consequent impact on
underlying costs.
Liabilities and provisions
Changes in the external environment, such as new laws and regulations,
market volatility or other factors, could affect the adequacy of our
provisions for pensions, tax, environmental and legal liabilities.
Operations risks
Operations — safety and operations
Process safety
Inherent in our operations are hazards that require continual oversight
and control. There are risks of technical integrity failure and loss of
containment of hydrocarbons and other hazardous material at operating
sites or pipelines. Failure to manage these risks could result in injury or
loss of life, environmental damage and/or loss of production.
Personal safety
Inability to provide safe environments for our workforce and the public
couldleadtoinjuriesorlossoflife.
Environmental
If we do not apply our resources to overcome the perceived trade-off
between global access to energy and the protection or improvement of
the natural environment, we could fail to live up to our aspirations of no or
minimal damage to the environment and contributing to human progress.
Product quality
Supplying customers with on-specification products is critical to
maintaining our licence to operate and our reputation in the marketplace.
Failure to meet product quality standards throughout the value chain could
lead to harm to people and the environment and loss of customers.
Drilling and production
Exploration and production require high levels of investment and are
subject to natural hazards and other uncertainties, including those relating
to the physical characteristics of an oil or natural gas field. The cost of
drilling, completing or operating wells is often uncertain. We may be
required to curtail, delay or cancel drilling operations because of a
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