BP 2013 Annual Report Download - page 57

Strategic report
BP Annual Report and Form 20-F 2013 53
People and capability – successful recruitment, development and
utilization of staff is central to our plans.
Successful recruitment of new staff, employee training, development and
continuing enhancement of skills, in particular technical capabilities such as
petroleum engineers and scientists, are key to implementing our plans.
Inability to develop and retain human capacity and capability, both across
the organization and in specific operating locations, could jeopardize
performance delivery. The group relies on recruiting and retaining
high-quality employees to execute its strategic plans and to operate its
business.
In addition, significant board and management focus continues to be
required in responding to matters related to the Incident. Although BP set
up the Gulf Coast Restoration Organization to manage the group’s
long-term response, other key management personnel will need to
continue to devote substantial attention to addressing the associated
consequences for the group, which may negatively impact our staff’s
capability to address and respond to other operational matters affecting the
group but unrelated to the Incident.
Liquidity, financial capacity and financial, including credit, exposure
– failure to operate within our financial framework could impact our ability
to operate and result in financial loss.
The group seeks to maintain a financial framework to ensure that it is able
to maintain an appropriate level of liquidity and financial capacity, and
commercial credit risk is measured and controlled to determine the group’s
total credit risk. Failure to accurately forecast, manage or maintain
sufficient liquidity and credit to meet our needs (including a failure to
understand and respond to potential liabilities) could impact our ability to
operate and result in a financial loss. Trade and other receivables, including
overdue receivables, may not be recovered whether an impairment
provision has been recognized or not. Inability to determine adequately our
credit exposure could lead to financial loss. Furthermore, a substantial and
unexpected cash call or funding request could disrupt our financial
framework or overwhelm our capacity to meet our obligations.
External events could materially impact the effectiveness of the group’s
financial framework. A credit crisis or significant economic shock affecting
banks and other sectors of the economy could impact the ability of
counterparties to meet their financial obligations to the group. It could also
affect our ability to raise capital to fund growth, to maintain our long-term
investment programme and to meet our obligations, 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.
In addition, a significant operational incident could result in decreases in
our credit ratings which, together with the assessments published by
analysts, the reputational consequences of any such incident and concerns
about the group’s costs arising from any such incident, ongoing
contingencies, liquidity, financial performance and credit spreads, could
increase the group’s financing costs and limit the group’s access to
financing. The group’s ability to engage in both its trading activities and
non-trading businesses could also be impacted in such circumstances due
to counterparty concerns about the group’s financial and business risk
profile and resulting collateral demands, which could be significant. In
addition, BP may be unable to make a drawdown under certain of its
committed borrowing facilities in the event that 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. Any 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. If such constraints
occur at a time when cash flows from our business operations are
constrained, such as following a significant operational incident, 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 Incident.
See Financial statements – Note 19 for more information on financial
instruments and financial risk factors.
Insurance – The limited capacity of the insurance market and BP’s
insurance strategy could, from time to time, expose the group to material
uninsured losses which could have a material adverse effect on BP’s
financial condition and results of operations.
In the context of the limited capacity of the insurance market, many
significant risks are retained by BP. The group generally restricts its
purchase of insurance to situations where this is required for legal or
contractual reasons. This means that the group could be exposed to
material uninsured losses, which could have a material adverse effect on
its financial condition and results of operations. In particular, these
uninsured costs could arise at a time when BP is facing material costs
arising out of some other event which could put pressure on BP’s liquidity
and cash flows. For example, BP has borne and may continue to bear the
entire burden of its share of any property damage, well control, pollution
clean-up and third-party liability expenses arising out of the Incident.
Compliance and control risks
US government settlements and debarment – our settlement with the
US Department of Justice and the SEC in respect of certain charges
related to the Incident may expose us to further penalties, liabilities and
private litigation, and may impact our operations and adversely affect our
ability to quickly and efficiently access US capital markets.
On 15 November 2012, BP reached an agreement with the US government
to resolve all federal criminal and securities claims arising out of the
Incident and comprising settlements with the US Department of Justice
(DoJ) and the SEC. For a description of the terms of the DoJ and SEC
settlements, see Legal proceedings on page 264. Under the DoJ
settlement, BP has agreed to retain an independent third-party auditor who
will review and report to the probation officer, the DoJ, and BP regarding
BP Exploration & Production’s (BPXP) compliance with the key terms of
the settlement including the completion of safety and environmental
management systems audits, operational oversight enhancements, oil spill
response training and drills and the implementation of best practices. The
DoJ settlement also provides for the appointment of an ethics monitor and
a process safety monitor. See Gulf of Mexico oil spill on page 39. The DoJ
criminal and SEC settlements impose significant compliance and remedial
obligations on BP and its directors, officers and employees. Failure to
comply with the terms of these settlements could result in further
enforcement action by the DoJ and the SEC, expose BP to severe
penalties, financial or otherwise, and subject BP to further private litigation,
each of which could impact our operations and have a material adverse
effect on the group’s business.
The US Environmental Protection Agency (EPA) has temporarily
suspended a number of BP entities from participating in new federal
contracts and subjected BPXP to mandatory debarment at its Houston
headquarters. In addition, the EPA has initiated administrative proceedings
to convert the temporary suspension of these BP entities into discretionary
debarment. On 26 November 2013, the EPA issued a Notice of Continued
Suspensions and Proposed Debarments that continued the suspensions of
the previously suspended BP entities, suspended two new BP entities
(BP Alternative Energy and BP Pipelines (Alaska) Inc.), and proposed
discretionary debarment of all suspended BP entities. Both temporary
suspension and mandatory debarment prevent a company from entering
into new contracts or new leases with the US government that would be
performed at the facility where a Clean Water Act violation occurred. See
Legal proceedings on page 264. BP has a significant amount of operations
in the US. See Upstream on page 25 and Oil and gas disclosures for the
group on page 245. Prolonged suspension or debarment from entering
new federal contracts, or further suspension or debarment proceedings in
the future against BP and/or its subsidiaries as a result of violations of the
terms of the DoJ or SEC settlements or otherwise, could have a material
adverse impact on the group’s operations in the US in the future. In
particular, prolonged suspension or debarment could prevent BP from
accessing and developing material new oil and gas resources located in the
US, or prevent BP from engaging in certain development arrangements
with third parties that are standard in the oil and gas industry, which could
make the development of certain of BP’s existing reserves located in the
US less commercially attractive than if relevant BP entities were not
suspended or debarred.