BP 2011 Annual Report Download - page 65

Business review: BP in more depth
BP Annual Report and Form 20-F 2011 63
Business review
Business continuity and disaster recovery – the group must be able
to recover quickly and effectively from any disruption or incident, as
failure to do so could adversely affect our business and operations.
Contingency plans are required to continue or recover operations following
a disruption or incident. Inability to restore or replace critical capacity to an
agreed level within an agreed timeframe would prolong the impact of any
disruption and could severely affect our business and operations.
Crisis management – crisis management plans are essential to
respond effectively to emergencies and to avoid a potentially severe
disruption in our business and operations.
Crisis management plans and capability are essential to deal with
emergencies at every level of our operations. If we do not respond, or are
perceived not to respond, in an appropriate manner to either an external or
internal crisis, our business and operations could be severely disrupted.
People and capability – successful recruitment and development of
staff is central to our plans.
Successful recruitment of new staff, employee training, development
and long-term renewal of skills, in particular technical capabilities such
as petroleum engineers and scientists, are key to implementing our
plans. Inability to develop human capacity and capability, both across
the organization and in specific operating locations, could jeopardize
performance delivery.
In addition, significant management focus is required in responding
to the Gulf of Mexico oil spill Incident. Although BP set up the Gulf Coast
Restoration Organization to manage the group’s long-term response, key
management and operating personnel will need to continue to devote
substantial attention to responding to the Incident and to address the
associated consequences for the group. The group relies on recruiting
and retaining high-quality employees to execute its strategic plans and
to operate its business. The Incident response has placed significant
demands on our employees, and the reputational damage suffered by the
group as a result of the Incident and any consequent adverse impact on our
performance could affect employee recruitment and retention.
Treasury and trading activities – control of these activities depends
on our ability to process, manage and monitor a large number of
transactions. Failure to do this effectively could lead to business
disruption, financial loss, regulatory intervention or damage to our
reputation.
In the normal course of business, we are subject to operational risk around
our treasury and trading activities. Control of these activities is highly
dependent on our ability to process, manage and monitor a large number of
complex transactions across many markets and currencies. Shortcomings
or failures in our systems, risk management methodology, internal control
processes or people could lead to disruption of our business, financial loss,
regulatory intervention or damage to our reputation.
Following the Gulf of Mexico oil spill, Moody’s Investors Service,
Standard and Poor’s and Fitch Ratings downgraded the group’s long-term
credit ratings. Since that time, the group’s credit ratings have improved
somewhat but are still lower than they were immediately before the Gulf
of Mexico oil spill. The impact that a significant operational incident can
have on the group’s credit ratings, taken together with the reputational
consequences of any such incident, the ratings and assessments published
by analysts and investors’ concerns about the group’s costs arising from
any such incident, ongoing contingencies, liquidity, financial performance
and volatile credit spreads, could increase the group’s financing costs and
limit the group’s access to financing. The group’s ability to engage in its
trading activities could also be impacted due to counterparty concerns
about the group’s financial and business risk profile in such circumstances.
Such counterparties could require that the group provide collateral or
other forms of financial security for its obligations, particularly if the
group’s credit ratings are downgraded. Certain counterparties for the
group’s non-trading businesses could also require that the group provide
collateral for certain of its contractual obligations, particularly if the group’s
credit ratings were downgraded below investment grade or where a
counterparty had concerns about the group’s financial and business risk
profile following a significant operational incident. In addition, BP may be
unable to make a drawdown under certain of its committed borrowing
facilities in the event we are aware that there are pending or threatened
legal, arbitration or administrative proceedings which, if determined
adversely, might reasonably be expected to have a material adverse effect
on our ability to meet the payment obligations under any of these facilities.
Credit rating downgrades could trigger a requirement for the company to
review its funding arrangements with the BP pension trustees. Extended
constraints on the group’s ability to obtain financing and to engage in its
trading activities on acceptable terms (or at all) would put pressure on the
group’s liquidity. In addition, this could occur at a time when cash flows
from our business operations would be constrained following a significant
operational incident, and the group could be required to reduce planned
capital expenditures and/or increase asset disposals in order to provide
additional liquidity, as the group did following the Gulf of Mexico oil spill.
Joint ventures and other contractual arrangements – BP may not
have full operational control and may have exposure to counterparty
credit risk and disruptions to our operations and strategic objectives
due to the nature of some of its business relationships.
Many of our major projects and operations are conducted through joint
ventures or associates and through contracting and sub-contracting
arrangements. These arrangements often involve complex risk allocation,
decision-making processes and indemnification arrangements. In certain
cases, we may have less control of such activities than we would have
if BP had full operational control. Our partners may have economic or
business interests or objectives that are inconsistent with or opposed to,
those of BP, and may exercise veto rights to block certain key decisions
or actions that BP believes are in its or the joint venture’s or associate’s
best interests, or approve such matters without our consent. Additionally,
our joint venture partners or associates or contractual counterparties
are primarily responsible for the adequacy of the human or technical
competencies and capabilities which they bring to bear on the joint project,
and in the event these are found to be lacking, our joint venture partners
or associates may not be able to meet their financial or other obligations to
their counterparties or to the relevant project, potentially threatening the
viability of such projects. Furthermore, should accidents or incidents occur
in operations in which BP participates, whether as operator or otherwise,
and where it is held that our sub-contractors or joint-venture partners
are legally liable to share any aspects of the cost of responding to such
incidents, the financial capacity of these third parties may prove inadequate
to fully indemnify BP against the costs we incur on behalf of the joint
venture or contractual arrangement. Should a key sub-contractor, such as
a lessor of drilling rigs, be no longer able to make these assets available
to BP, this could result in serious disruption to our operations. Where BP
does not have operational control of a venture, BP may nonetheless still be
pursued by regulators or claimants in the event of an incident.