BP 2014 Annual Report Download - page 257

Glossary
Unless the context indicates otherwise, the definitions for the following
glossary terms are given below.
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 arrangement of the group. Significant influence is the power to
participate in the financial and operating policy decisions of the investee
but is not control or joint control over those policies.
Consolidation adjustment – UPII
Unrealized profit in inventory arising on inter-segment transactions.
Commodity trading contracts
BP’s Upstream and Downstream segments both participate in regional
and global commodity trading markets in order to manage, transact and
hedge the crude oil, refined products and natural gas that the group
either produces or consumes in its manufacturing operations. These
physical trading activities, together with associated incremental trading
opportunities, are discussed in Upstream on page 28 and in Downstream
on page 31. The range of contracts the group enters into in its
commodity trading operations is described below. Using these contracts,
in combination with rights to access storage and transportation capacity,
allows the group to access advantageous pricing differences between
locations, time periods and arbitrage between markets.
Exchange-traded commodity derivatives
Contracts that are typically in the form of futures and options traded on a
recognized exchange, such as Nymex, SGX and ICE. Such contracts are
traded in standard specifications for the main marker crude oils, such as
Brent and West Texas Intermediate; the main product grades, such as
gasoline and gasoil; and for natural gas and power. Gains and losses,
otherwise referred to as variation margins, are settled on a daily basis
with the relevant exchange. These contracts are used for the trading and
risk management of crude oil, refined products, and 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
Contracts that are typically in the form of forwards, swaps and options.
Some of these contracts are traded bilaterally between counterparties or
through brokers, 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. Many grades of crude oil bought and
sold use standard contracts including US domestic light sweet crude oil,
commonly referred to as West Texas Intermediate, and a standard North
Sea crude blend –Brent, Forties, Oseberg and Ekofisk (BFOE). Forward
contracts are used in connection with the purchase of crude oil supplies
for refineries, products for marketing and sales of the group’s oil
production and refined products. The contracts typically contain standard
delivery and settlement terms. These transactions call for physical
delivery of oil with consequent operational and price risk. However,
various means exist and are used from time to time, to settle obligations
under the contracts in cash rather than through physical delivery.
Because the physically settled transactions are delivered by cargo, the
BFOE contract additionally specifies a standard volume and tolerance.
Gas and power OTC markets are highly developed in North America and
the UK, where 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, the contracts specify delivery terms for the
underlying commodity. Some of these transactions are not settled
physically as they 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, price and
term (e.g. daily, monthly and balance of month) are the main variable
contract 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, products for marketing, or third-party
natural gas, or sales of the group’s oil production, oil products or 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.
Dividend yield
Sum of the four quarterly dividends declared in the year as a percentage
of the year-end share price on the respective exchange.
Fair value accounting effects
We use derivative instruments to manage the economic exposure
relating to inventories above normal operating requirements of crude oil,
natural gas and petroleum products. Under IFRS, these inventories are
recorded at historical cost. The related derivative instruments, however,
are required to be recorded at fair value with gains and losses recognized
in the income statement. This is because hedge accounting is either not
permitted or not followed, principally due to the impracticality of
effectiveness-testing requirements. Therefore, measurement differences
in relation to recognition of gains and losses occur. Gains and losses on
these inventories are not recognized until the commodity is sold in a
subsequent accounting period. Gains and losses on the related derivative
commodity contracts are recognized in the income statement from the
time the derivative commodity contract is entered into on a fair value
basis using forward prices consistent with the contract maturity.
BP enters into commodity contracts to meet certain business
requirements, such as the purchase of crude for a refinery or the sale of
BP’s gas production. Under IFRS these contracts are treated as
derivatives and are required to be fair valued when they are managed as
part of a larger portfolio of similar transactions. Gains and losses arising
are recognized in the income statement from the time the derivative
commodity contract is entered into.
IFRS require that inventory held for trading is recorded at its fair value
using period-end spot prices, whereas any related derivative commodity
instruments are required to be recorded at values based on forward
prices consistent with the contract maturity. Depending on market
conditions, these forward prices can be either higher or lower than spot
prices, resulting in measurement differences. BP enters into contracts for
pipelines and storage capacity, oil and gas processing and liquefied
natural gas (LNG) that, under IFRS, are recorded on an accruals basis.
These contracts are risk-managed using a variety of derivative
instruments that are fair valued under IFRS. This results in measurement
differences in relation to recognition of gains and losses.
The way BP manages the economic exposures described above, and
measures performance internally, differs from the way these activities
are measured under IFRS. BP calculates this difference for consolidated
entities by comparing the IFRS result with management’s internal
measure of performance. Under management’s internal measure of
performance the inventory and capacity contracts in question are valued
based on fair value using relevant forward prices prevailing at the end of
the period. The fair values of certain derivative instruments used to risk
manage LNG and oil and gas processing contracts are deferred to match
with the underlying exposure and the commodity contracts for business
requirements are accounted for on an accruals basis. We believe that
Shareholder information
BP Annual Report and Form 20-F 2014 253