BP 2012 Annual Report Download - page 101

Business review: BP in more depth
Business review: BP in more depth
BP Annual Report and Form 20-F 2012
99
management of crude oil, refined products, natural gas and power.
Realized and unrealized gains and losses on exchange-traded commodity
derivatives are included in sales and other operating revenues for
accounting purposes.
Over-the-counter contracts
These contracts are typically in the form of forwards, swaps and options.
Some of these contracts are traded bilaterally between counterparties;
others may be cleared by a central clearing counterparty. These contracts
can be used both for trading and risk management activities. Realized and
unrealized gains and losses on over-the-counter (OTC) contracts are
included in sales and other operating revenues for accounting purposes.
The main grades of crude oil bought and sold forward using standard
contracts are West Texas Intermediate and a standard North Sea crude
blend (Brent, Forties and Oseberg or BFO). Although the contracts specify
physical delivery terms for each crude blend, a significant number are not
settled physically. The contracts typically contain standard delivery, pricing
and settlement terms. Additionally, the BFO contract specifies a standard
volume and tolerance given that the physically settled transactions are
delivered by cargo.
Gas and power OTC markets are highly developed in North America and
the UK, where the commodities can be bought and sold for delivery in
future periods. These contracts are negotiated between two parties to
purchase and sell gas and power at a specified price, with delivery and
settlement at a future date. Typically, these contracts specify delivery
terms for the underlying commodity. Certain of these transactions are not
settled physically, which can be achieved by transacting offsetting sale or
purchase contracts for the same location and delivery period that are
offset during the scheduling of delivery or dispatch. The contracts contain
standard terms such as delivery point, pricing mechanism, settlement
terms and specification of the commodity. Typically, volume and price are
the main variable terms.
Swaps are often contractual obligations to exchange cash flows between
two parties: a typical swap transaction usually references a floating price
and a fixed price with the net difference of the cash flows being settled.
Options give the holder the right, but not the obligation, to buy or sell
crude, oil products, natural gas or power at a specified price on or before a
specific future date. Amounts under these derivative financial instruments
are settled at expiry. Typically, netting agreements are used to limit credit
exposure and support liquidity.
Spot and term contracts
Spot contracts are contracts to purchase or sell a commodity at the
market price prevailing on or around the delivery date when title to the
inventory is taken. Term contracts are contracts to purchase or sell a
commodity at regular intervals over an agreed term. Though spot and
term contracts may have a standard form, there is no offsetting
mechanism in place. These transactions result in physical delivery with
operational and price risk. Spot and term contracts typically relate to
purchases of crude for a refinery, purchases of products for marketing,
purchases of third-party natural gas, sales of the group’s oil production,
sales of the group’s oil products and sales of the group’s gas production to
third parties. For accounting purposes, spot and term sales are included in
sales and other operating revenues, when title passes. Similarly, spot and
term purchases are included in purchases for accounting purposes.
Associate
An entity, including an unincorporated entity such as a partnership, over
which the group has significant influence and that is neither a subsidiary
nor a joint venture. Significant influence is the power to participate in the
financial and operating policy decisions of an entity but is not control or
joint control over those policies.
Joint control
Joint control is the contractually agreed sharing of control over an
economic activity, and exists only when the strategic financial and
operating decisions relating to the activity require the unanimous consent
of the parties sharing control (the venturers).
Joint venture
A contractual arrangement whereby two or more parties undertake an
economic activity that is subject to joint control.
Jointly controlled asset
A joint venture where the venturers jointly control, and often have a direct
ownership interest in the assets of the venture. The assets are used to
obtain benefits for the venturers. Each venturer may take a share of the
output from the assets and each bears an agreed share of the expenses
incurred.
Jointly controlled entity
A joint venture that involves the establishment of a corporation, partnership
or other entity in which each venturer has an interest. A contractual
arrangement between the venturers establishes joint control over the
economic activity of the entity.
Subsidiary
An entity that is controlled by the BP group. Control is the power to
govern the financial and operating policies of an entity so as to obtain the
benefits from its activities.
PSA
A production-sharing agreement (PSA) is an arrangement through which
an oil company bears the risks and costs of exploration, development and
production. In return, if exploration is successful, the oil company receives
entitlement to variable physical volumes of hydrocarbons, representing
recovery of the costs incurred and a stipulated share of the production
remaining after such cost recovery.