BP 2015 Annual Report Download - page 260

Glossary
Unless the context indicates otherwise, the definitions for the following
glossary terms are given below.
Associate
An entity 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.
Brent
A trading classification for North Sea crude oil that serves as a major
benchmark price for purchases of oil worldwide.
Cash costs
Non-GAAP measure. Cash costs are a subset of production and
manufacturing expenses plus distribution and administration expenses
and excludes costs that are classified as non-operating items. They
represent the substantial majority of the remaining expenses in these line
items but exclude certain costs that are variable, primarily with volumes
(such as freight costs). Management believes that the presentation of
cash costs is a performance measure that provides investors with useful
information regarding the company’s financial condition because it
considers these expenses to be the principal operating and overhead
expenses that are most directly under their control although they also
include certain foreign exchange and commodity price effects.
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 34. 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 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 margin, are generally 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 announced in respect of the year as a
percentage of the year-end share price on the respective exchange. The
ordinary shareholders annual dividend yield includes an estimate of the
sterling amount expected to be paid in respect of the dividend for the
fourth quarter 2015 which was announced on 2 February 2016 in US
dollars.
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
256 BP Annual Report and Form 20-F 2015