BP 2011 Annual Report Download - page 61

Business review: BP in more depth
BP Annual Report and Form 20-F 2011 59
Business review
Risk factors
We urge you to consider carefully the risks described below. The potential
impact of their occurrence could be for our business, financial condition
and results of operations to suffer (including through the failure to achieve
our current strategic priorities (see ‘10-point plan’ – pages 38-39)) and the
trading price and liquidity of our securities to decline.
Our system of risk management identifies and provides the
response to risks of group significance through the establishment of
standards and other controls. Any failure of this system could lead to the
occurrence, or re-occurrence, of any of the risks described below and a
consequent material adverse effect on BP’s business, financial position,
results of operations, competitive position, cash flows, prospects, liquidity,
shareholder returns and/or implementation of its strategic agenda.
The risks are categorized against the following areas: strategic;
compliance and control; and safety and operational. In addition, we have
also set out two further risks for your attention – those resulting from the
2010 Gulf of Mexico oil spill (the Incident) and those related to the general
macroeconomic outlook.
The Gulf of Mexico oil spill has had and could continue to have a
material adverse impact on BP.
There is significant uncertainty in the extent and timing of costs and
liabilities relating to the Incident, the impact of the Incident on our
reputation and the resulting possible impact on our licence to operate
including our ability to access new opportunities. There is also significant
uncertainty regarding potential changes in applicable regulations and
the operating environment that may result from the Incident. These
increase the risks to which the group is exposed and may cause our costs
to increase. These uncertainties are likely to continue for a significant
period. Thus, the Incident has had, and could continue to have, a material
adverse impact on the group’s business, competitive position, financial
performance, cash flows, prospects, liquidity, shareholder returns and/or
implementation of its strategic agenda, particularly in the US.
We recognized a pre-tax charge of $40.9 billion in 2010 and a pre-tax
credit of $3.7 billion in 2011 as a result of the Incident. The total amounts
that will ultimately be paid by BP in relation to all obligations relating to the
Incident are subject to significant uncertainty and the ultimate exposure and
cost to BP will be dependent on many factors. Furthermore, the amount
of claims that become payable by BP, the amount of fines ultimately
levied on BP (including any potential determination of BP’s negligence
or gross negligence), the outcome of litigation, the amount and timing of
payments under any settlements, and any costs arising from any longer-
term environmental consequences of the oil spill, will also impact upon the
ultimate cost for BP. Although the provision recognized is the current best
estimate of expenditures required to settle certain present obligations at the
end of the reporting period, there are future expenditures for which it is not
possible to measure the obligation reliably. The risks associated with the
Incident could also heighten the impact of the other risks to which the group
is exposed as further described below.
The general macroeconomic outlook can affect BP’s results given the
nature of our business.
In the continuing uncertain financial and economic environment, certain
risks may gain more prominence either individually or when taken together.
Oil and gas prices can be very volatile, with average prices and margins
influenced by changes in supply and demand. This is likely to exacerbate
competition in all businesses, which may impact costs and margins.
At the same time, governments are facing greater pressure on public
finances, which may increase their motivation to intervene in the fiscal
and regulatory frameworks of the oil and gas industry, including the risk of
increased taxation, nationalization and expropriation. The global financial
and economic situation may have a negative impact on third parties with
whom we do, or may do, business. In particular, ongoing instability in or a
collapse of the eurozone could trigger a new wave of financial crises and
push the world back into recession, leading to lower demand and lower oil
and gas prices. Any of these factors may affect our results of operations,
financial condition, business prospects and liquidity and may result in a
decline in the trading price and liquidity of our securities.
Capital markets are subject to volatility amid concerns over the European
sovereign debt crisis and the slow-down of the global economy. If there
are extended periods of constraints in these markets, or if we are unable
to access the markets, including due to our financial position or market
sentiment as to our prospects, at a time when cash flows from our
business operations may be under pressure, our ability to maintain our
long-term investment programme may be impacted with a consequent
effect on our growth rate, and may impact shareholder returns, including
dividends and share buybacks, or share price. Decreases in the funded
levels of our pension plans may also increase our pension funding
requirements.
Strategic risks
Access and renewal – BP’s future hydrocarbon production depends
on our ability to renew and reposition our portfolio. Increasing
competition for access to investment opportunities, the effects
of the Gulf of Mexico oil spill on our reputation and cash flows,
and more stringent regulation could result in decreased access to
opportunities globally.
Successful execution of our group strategy depends 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 among both national and international oil
companies, and heightened political and economic risks in certain countries
where significant hydrocarbon basins are located. Lack of material
positions in new markets could impact our future hydrocarbon production.
Moreover, the Gulf of Mexico oil spill has damaged BP’s reputation,
which may have a long-term impact on the group’s ability to access new
opportunities, both in the US and elsewhere. Adverse public, political
and industry sentiment towards BP, and towards oil and gas drilling
activities generally, could damage or impair our existing commercial
relationships with counterparties, partners and host governments and
could impair our access to new investment opportunities, exploration
properties, operatorships or other essential commercial arrangements
with potential partners and host governments, particularly in the US. In
addition, responding to the Incident has placed, and will continue to place,
a significant burden on our cash flow over the next several years, which
could also impede our ability to invest in new opportunities and deliver
long-term growth.
More stringent regulation of the oil and gas industry generally, and
of BP’s activities specifically, arising from the Incident, could increase this
risk.
Prices and markets – BP’s financial performance is subject to
the fluctuating prices of crude oil and gas as well as the volatile
prices of refined products and the profitability of our refining and
petrochemicals operations.
Oil, gas and product prices are subject to international supply and
demand. Political developments and the outcome of meetings of OPEC
can particularly affect world supply and oil prices. Previous oil price
increases have resulted in increased fiscal take, cost inflation and more
onerous terms for access to resources. As a result, increased oil prices
may not improve margin performance. In addition to the adverse effect
on revenues, margins and profitability from any fall in oil and natural
gas prices, a prolonged period of low prices or other indicators would
lead to further reviews for impairment of the group’s oil and natural gas
properties. Such reviews would reflect management’s view of long-term
oil and natural gas prices and 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. Rapid material or sustained change in
oil, gas and product prices can impact the validity of the assumptions on
which strategic decisions are based and, as a result, the ensuing actions
derived from those decisions may no longer be appropriate. A prolonged
period of low oil prices may impact our ability to maintain our long-term
investment programme with a consequent effect on our growth rate and
may impact shareholder returns, including dividends and share buybacks,
or share price. Periods of global recession could impact the demand for our
products, the prices at which they can be sold and affect the viability of the
markets in which we operate.