BP 2010 Annual Report Download - page 188

Notesonnancialstatements
(i) Commodity price risk
Thegroup’sintegratedsupplyandtradingfunctionusesconventionalnancialandcommodityinstrumentsandphysicalcargoesavailableintherelated
commoditymarkets.Oilandnaturalgasswaps,optionsandfuturesareusedtomitigatepricerisk.Powertradingisundertakenusingacombinationof
over-the-counterforwardcontractsandotherderivativecontracts,includingoptionsandfutures.Thisactivityisonbothastandalonebasisandin
conjunctionwithgasderivativesinrelationtogas-generatedpowermargin.Inaddition,NGLsaretradedaroundcertainUSinventorylocationsusing
over-the-counterforwardcontractsinconjunctionwithover-the-counterswaps,optionsandphysicalinventories.Tradingvalue-at-riskinformationinrelation
totheseactivitiesisshowninthetableabove.
Asdescribedabove,thegroupalsocarriesoutriskmanagementofcertainnaturalbusinessexposuresusingover-the-counterswapsandexchange
futurescontracts.Togetherwithcertainphysicalsupplycontractsthatareclassiedasderivatives,thesecontractsfalloutsideofthevalue-at-risk
framework.Forthesederivativecontractsthesensitivityofthenetfairvaluetoanimmediate10%increaseordecreaseinallreferencepriceswouldhave
been$104millionat31December2010(2009$73million).Thisguredoesnotincludeanycorrespondingeconomicbenetordisbenetthatwouldarise
fromthenaturalbusinessexposurewhichwouldbeexpectedtooffsetthegainorlossontheover-the-counterswapsandexchangefuturescontracts
mentionedabove.
Inaddition,thegrouphasembeddedderivativesrelatingtocertainnaturalgascontracts.Thenetfairvalueofthesecontractswasaliabilityof
$1,607millionat31December2010(2009liabilityof$1,331million).Keyinformationonthenaturalgascontractsisgivenbelow.
At31December    2010   2009
Remainingcontractterms 4 years and 5 months to 7 years and 9 months 9monthsto8years9months
Contractual/notionalamount 1,688 million therms 2,460milliontherms

Fortheseembeddedderivativesthesensitivityofthenetfairvaluetoanimmediate10%favourableoradversechangeinthekeyassumptionsis
asfollows.
 $million
At31December   2010    2009
   Discount Discount
   Gas price Oil price Power price rate Gasprice Oilprice Powerprice rate
Favourable10%change 145 48 10 10  175 26 23 20
Unfavourable10%change (180) (68) (10) (10) (215) (43) (19) (20)

27.Financialinstrumentsandnancialriskfactorscontinued
(a)Marketrisk
Marketriskistheriskoruncertaintyarisingfrompossiblemarketpricemovementsandtheirimpactonthefutureperformanceofabusiness.Theprimary
commoditypricerisksthatthegroupisexposedtoincludeoil,naturalgasandpowerpricesthatcouldadverselyaffectthevalueofthegroup’snancial
assets,liabilitiesorexpectedfuturecashows.Thegroupentersintoderivativesinawell-establishedentrepreneurialtradingoperation.Inaddition,the
grouphasdevelopedacontrolframeworkaimedatmanagingthevolatilityinherentincertainofitsnaturalbusinessexposures.Inaccordancewiththe
controlframeworkthegroupentersintovarioustransactionsusingderivativesforriskmanagementpurposes.
Thegroupmeasuresmarketriskexposurearisingfromitstradingpositionsusingvalue-at-risktechniques.For2010,thevariousvalue-at-riskmodels
usedinprioryearswereconsolidatedaspartofaprocesssimplicationintoaMonteCarloframework.Thismakesastatisticalassessmentofthemarket
riskarisingfrompossiblefuturechangesinmarketpricesoveraone-dayholdingperiod.Thecalculationoftherangeofpotentialchangesinfairvaluetakes
intoaccountasnapshotoftheend-of-dayexposuresandthehistoryofone-daypricemovements,togetherwiththecorrelationofthesepricemovements.
Thevalue-at-riskmeasureissupplementedbystresstesting.
Thevalue-at-risktabledoesnotincorporateanyofthegroup’snaturalbusinessexposuresoranyderivativesenteredintotoriskmanagethose
exposures.TheresultsofthegaspricetradingareincludedwithinExplorationandProductionsegmentresults,andthegaspricetradingvalue-at-risk
includesgasandpowertrading.TheresultsoftheoilpricetradingareincludedwithinReningandMarketingsegmentresults,andtheoilpricetrading
value-at-riskincludesoil,interestrateandcurrencytrading.Marketriskexposureinrespectofembeddedderivativesisalsonotincludedinthevalue-at-risk
table.Insteadseparatesensitivityanalysesaredisclosedbelow.
Value-at-risklimitsareinplaceforeachtradingactivityandforthegroup’stradingactivityintotal.Theboardhasdelegatedalimitof$100million
valueatriskinsupportofthistradingactivity.Thehighandlowvaluesatriskindicatedinthetablebelowforeachtypeofactivityareindependentofeach
other.Throughtheportfolioeffectthehighvalueatriskforthegroupasawholeislowerthanthesumofthehighsfortheconstituentparts.Thepotential
movementinfairvaluesisexpressedtoa95%condenceinterval.Thismeansthat,instatisticalterms,onewouldexpecttoseeadecreaseinfairvalues
greaterthanthetradingvalueatriskononeoccasionpermonthiftheportfoliowereleftunchanged.
 $million
Valueatriskfor1dayat95%condenceinterval 2010 2009
   High Low Average Year end High Low Average Yearend
Grouptrading 70 15 34 33 79 24 45 30
Gaspricetrading 62 7 27 18 62 11 28 26
Oilpricetrading 39 10 19 25 75 11 29 13

Themajorcomponentsofmarketriskarecommoditypricerisk,foreigncurrencyexchangerisk,interestrateriskandequitypricerisk,eachofwhichis
discussedbelow.
186BPAnnualReportandForm20-F2010