BP 2010 Annual Report Download - page 80

Businessreview
Regulationofthegroup’sbusiness
BP’sactivities,includingitsoilandgasexplorationandproduction,pipelines
andtransportation,reningandmarketing,petrochemicalsproduction,
trading,alternativeenergyandshippingactivities,areconductedinmany
differentcountriesandarethereforesubjecttoabroadrangeofEU,US,
international,regionalandlocallegislationandregulations,including
legislationthatimplementsinternationalconventionsandprotocols.These
covervirtuallyallaspectsofouractivitiesandincludematterssuchas
licenceacquisition,productionrates,royalties,environmental,healthand
safetyprotection,fuelspecicationsandtransportation,trading,pricing,
anti-trust,export,taxesandforeignexchange.
Thetermsandconditionsoftheleases,licencesandcontracts
underwhichouroilandgasinterestsareheldvaryfromcountrytocountry.
Theseleases,licencesandcontractsaregenerallygrantedbyorentered
intowithagovernmententityorstatecompanyandaresometimes
enteredintowithprivatepropertyowners.Thesearrangementswith
governmentalorstateentitiesusuallytaketheformoflicencesor
production-sharingagreements(PSAs).Arrangementswithprivateproperty
ownersareusuallyintheformofleases.
Licences(orconcessions)givetheholdertherighttoexplorefor
andexploitacommercialdiscovery.Underalicence,theholderbearsthe
riskofexploration,developmentandproductionactivitiesandprovidesthe
nancingfortheseoperations.Inprinciple,thelicenceholderisentitledto
allproduction,minusanyroyaltiesthatarepayableinkind.Alicenceholder
isgenerallyrequiredtopayproductiontaxesorroyalties,whichmaybein
cashorinkind.Lesstypically,BPmayexploreforandexploithydrocarbons
underaserviceagreementwiththehostentityinexchangefor
reimbursementofcostsand/orafeepaidincashratherthanproduction.
PSAsenteredintowithagovernmententityorstatecompany
generallyrequireBPtoprovideallthenancingandbeartheriskof
explorationandproductionactivitiesinexchangeforashareofthe
productionremainingafterroyalties,ifany.
Incertaincountries,separatelicencesarerequiredforexploration
andproductionactivitiesand,incertaincases,productionlicencesare
limitedtoaportionoftheareacoveredbytheexplorationlicence.Both
explorationandproductionlicencesaregenerallyforaspeciedperiodof
time(exceptforlicencesintheUS,whichtypicallyremainineffectuntil
productionceases).ThetermofBP’slicencesandtheextenttowhich
theselicencesmayberenewedvarybyarea.
Frequently,BPconductsitsexplorationandproductionactivitiesin
jointventureswithotherinternationaloilcompanies,statecompaniesor
privatecompanies.Thesejointventuresmaybeincorporatedor
unincorporatedventures.Whetherincorporatedorunincorporated,relevant
agreementswillsetouteachparty’slevelofparticipationorownership
interestinthejointventure.Conventionally,allcosts,benets,rights,
obligations,liabilitiesandrisksincurredincarryingoutjointventure
operationsunderaleaseorlicencearesharedamongthejointventure
partiesaccordingtotheseagreedownershipinterests.Ownershipofjoint
venturepropertyandhydrocarbonstowhichthejointventureisentitledis
alsosharedintheseproportions.Totheextentthatanyliabilitiesarise,
whethertogovernmentsorthirdparties,orasbetweenthejointventure
partiesthemselves,eachjointventurepartywillgenerallybeliabletomeet
theseinproportiontoitsownershipinterest.Inmanyupstreamoperations,
aparty(knownastheoperator)willbeappointed(pursuanttoajoint
operatoragreement(JOA))tocarryoutday-to-dayoperationsonbehalfof
thejointventure.Theoperatoristypicallyoneofthejointventureparties
andwillcarryoutitsdutieseitherthroughitsownstaff,orbycontracting
outtothird-partycontractorsorserviceproviders.BPactsasoperatoron
behalfofjointventuresinanumberofcountrieswherewehaveexploration
andproductionactivities.
Frequently,workwillbecontractedouttothird-partyservice
providerswhohavetherelevantexpertisenotavailablewithinthejoint
ventureoroperator’sorganization.Therelevantcontractwillspecifythe
worktobedoneandtheremunerationtobepaidandwillsetouthow
majorriskswillbeallocatedbetweenthejointventureandtheservice
provider.Typically,thejointventureandthecontractorwouldrespectively
allocateresponsibilityforandprovidereciprocalindemnitiestoeachother
forharmcausedtotheirrespectivestaffandproperty.Dependingonthe
servicetobeprovided,anoilandgasindustryservicecontractmightalso
containdetailedprovisionsallocatingrisksandliabilitiesassociatedwith
pollutionandenvironmentaldamage,damagetoawellorhydrocarbon
reservoirandforclaimsfromthirdpartiesorotherlosses.Contractorswill
alsotypicallyseektocaptheiroverallliabilitytothejointventureparties.
Theallocationofthoserisksandtheprovisionofanycaponliabilitywillbe
determinedfollowingnegotiationbetweentheparties.
Ingeneral,BPisrequiredtopayincometaxonincomegenerated
fromproductionactivities(whetherunderalicenceorPSAs).Inaddition,
dependingonthearea,BP’sproductionactivitiesmaybesubjecttoarange
ofothertaxes,leviesandassessments,includingspecialpetroleumtaxes
andrevenuetaxes.Thetaxesimposedonoilandgasproductionprotsand
activitiesmaybesubstantiallyhigherthanthoseimposedonother
activities,particularlyinAbuDhabi,Angola,Egypt,Norway,theUK,theUS,
Russia,SouthAmericaandTrinidad&Tobago.
Environmental regulation
BPoperatesinmorethan80countriesandissubjecttoawidevarietyof
environmentalregulationsconcerningourproducts,operationsand
activities.Currentandproposedfuelandproductspecications,emission
controlsandclimatechangeprogrammesunderanumberofenvironmental
lawsmayhaveasignicanteffectontheproduction,saleandprotability
ofmanyofourproducts.
Therealsoareenvironmentallawsthatrequireustoremediateand
restoreareasdamagedbytheaccidentalorunauthorizedreleaseof
hazardousmaterialsorpetroleumassociatedwithouroperations.These
lawsmayapplytositesthatBPcurrentlyownsoroperates,sitesthatit
previouslyownedoroperated,orsitesusedforthedisposalofitsandother
parties’waste.Provisionsforenvironmentalrestorationandremediation
aremadewhenaclean-upisprobableandtheamountofBP’slegal
obligationcanbereliablyestimated.Thecostoffutureenvironmental
remediationobligationsisofteninherentlydifculttoestimate.
Uncertaintiescanincludetheextentofcontamination,theappropriate
correctiveactions,technologicalfeasibilityandBP’sshareofliability.See
Financialstatements–Note37onpage199fortheamountsprovidedin
respectofenvironmentalremediationanddecommissioning.
Anumberofpendingoranticipatedgovernmentalproceedings
againstBPandcertainsubsidiariesunderenvironmentallawscouldresult
inmonetarysanctionsof$100,000ormore.Wearealsosubjectto
environmentalclaimsforpersonalinjuryandpropertydamageallegingthe
releaseoforexposuretohazardoussubstances.Thecostsassociatedwith
suchfutureenvironmentalremediationobligations,governmental
proceedingsandclaimscouldbesignicantandmaybematerialtothe
resultsofoperationsintheperiodinwhichtheyarerecognized.Wecannot
accuratelypredicttheeffectsoffuturedevelopmentsonthegroup,suchas
stricterenvironmentallawsorenforcementpolicies,orfutureeventsatour
facilities,andtherecanbenoassurancethatmaterialliabilitiesandcosts
willnotbeincurredinthefuture.Foradiscussionofthegroup’s
environmentalexpenditureseepage73.
Greenhousegasregulation
Increasingconcernsaboutclimatechangehaveledtoanumberof
international,nationalandregionalmeasurestolimitgreenhousegas(GHG)
emissions;additionalstrictermeasurescanbeexpectedinthefuture.
Currentmeasuresanddevelopmentsaffectingourbusinessesinclude
thefollowing:
• TheKyotoProtocolcurrentlycommits38ratiedpartiestomeet
emissionstargetsinthecommitmentperiod2008to2012.
• TheUNsummitinCancuninDecember2010wherePartiestotheUN
FrameworkConventiononClimateChange(UNFCCC)reachedformal
agreementonabalancedpackageofmeasuresto2020.TheCancun
AgreementrecognizesthatdeepcutsinglobalGHGemissionsare
requiredtoholdtheincreaseinglobaltemperaturetobelow2°C.
78BPAnnualReportandForm20-F2010