BP 2013 Annual Report Download - page 55

Strategic report
BP Annual Report and Form 20-F 2013 51
Risk factors
We urge you to consider carefully the risks described below. The potential
impact of the occurrence, or recurrence, of any of the risks described
below could have a 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,
including the 10-point plan.
The risks are categorized against the following areas: strategic and
commercial; compliance and control; and safety and operational. In
addition, we have set out one separate risk for your attention – the risk
resulting from the 2010 Gulf of Mexico oil spill.
Gulf of Mexico oil spill
The spill has had and could continue to have a material adverse impact
on BP.
There is significant uncertainty regarding the extent and timing of the
remaining costs and liabilities relating to the 2010 Gulf of Mexico oil spill
(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. The amount of claims, fines and penalties that become
payable by BP (including as a result of any potential determination of BP’s
negligence or gross negligence), the outcome of litigation, the terms of any
further settlements including the amount and timing of any payments
thereunder, and any costs arising from any longer-term environmental
consequences of the Incident, will also impact upon the ultimate cost for
BP. These uncertainties are likely to continue for a significant period and
may cause our costs to increase materially. 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. 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. See, in particular, Access and renewal; Liquidity,
financial capacity and financial, including credit, exposure; Insurance; US
government settlements and debarment; Regulatory; Liabilities and
provisions; Reporting; and Process safety, personal safety and
environmental risks below.
Strategic and commercial 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 and the effects of the Incident on our
reputation and cash flows 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 could impact our future hydrocarbon production.
Moreover, the Incident has affected 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, regulatory 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, costs
and liabilities relating to the Incident have placed, and will continue to
place, a significant burden on our cash flow, which could impede our ability
to invest in new opportunities and deliver long-term growth.
Prices and markets – BP’s financial performance is subject to the
fluctuating prices of crude oil and gas, the volatile prices of refined
products and the profitability of our refining and petrochemicals operations,
as well as exchange rate fluctuations and the general macroeconomic
outlook.
Oil, gas and product prices and margins can be very volatile, and are subject
to international supply and demand. Political developments (including
conflict situations), increased supply from the development of new oil and
gas sources, technological change, global economic conditions and the
influence 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. Decreases in oil,
gas or product prices are likely to have an adverse effect on revenues,
margins and profitability, and a material rapid change, or a sustained
change, in oil, gas or product prices may mean investment or other
decisions need to be reviewed, assets may be impaired, and the viability of
projects may be affected. A prolonged period of low oil prices may impact
our cash flow, profit and 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.
Refining profitability can be volatile, with both periodic over-supply and
supply tightness in various regional markets, coupled with fluctuations in
demand. Sectors of the petrochemicals industry are also subject to
fluctuations in supply and demand, with a consequent effect on prices and
profitability.
Crude oil prices are generally set in US dollars, while sales of refined
products may be in a variety of currencies. In addition, a high proportion of
our major project development costs are denominated in local currencies,
which may be subject to volatile fluctuations against the US dollar.
Fluctuations in exchange rates can therefore give rise to foreign exchange
exposures, with a consequent impact on underlying costs and revenues.
Periods of global recession or prolonged instability in financial markets
could negatively impact parties with whom we do or may do business, the
demand for our products and the prices at which they can be sold and
could affect the viability of the markets in which we operate.
Climate change and carbon pricing – climate change and carbon pricing
policies could result in higher costs and reduction in future revenue and
strategic growth opportunities.
Compliance with changes in laws, regulations and obligations relating to
climate change could result in substantial capital expenditure, taxes,
reduced profitability from changes in operating costs, potential restrictions
on the commercial viability of, or our ability to progress, upstream
resources and reserves, and impacts on revenue generation and strategic
growth opportunities. In addition, the changed nature of our participation in
alternative energies could carry reputational, economic and technology
risks.
Geopolitical – the diverse nature of our operations around the world
exposes us to a wide range of political developments and consequent
changes to the operating environment, regulatory environment and law.
We have operations, and are seeking new opportunities, in countries and
regions where political, economic and social transition is taking place.
Some countries have experienced, or may experience in the future,
political instability, changes to the regulatory environment, changes in
taxation, expropriation or nationalization of property, civil strife, strikes, acts
of terrorism, acts of war and insurrections. Any of these conditions
occurring could disrupt or terminate our operations, causing our
development activities to be curtailed or terminated in these areas, or our
production to decline, could limit our ability to pursue new opportunities,
could affect the recoverability of our assets and could cause us to incur
additional costs. See page 4 for information on the locations of our major
areas of operation and activities.
We set ourselves high standards of corporate citizenship and aspire to
contribute to a better quality of life through the products and services we
provide. If it is perceived that we are not respecting or advancing the
economic and social progress of the communities in which we operate or
that we have not satisfactorily addressed all relevant stakeholder concerns