BP 2010 Annual Report Download - page 84
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Non-GAAP information on fair value accounting effects
BPusesderivativeinstrumentstomanagetheeconomicexposurerelating
toinventoriesabovenormaloperatingrequirementsofcrudeoil,naturalgas
andpetroleumproductsaswellascertaincontractstosupplyphysical
volumesatfuturedates.UnderIFRS,theseinventoriesandcontractsare
recordedathistoriccostandonanaccrualsbasisrespectively.Therelated
derivativeinstruments,however,arerequiredtoberecordedatfairvalue
withgainsandlossesrecognizedinincomebecausehedgeaccountingis
eithernotpermittedornotfollowed,principallyduetotheimpracticalityof
effectivenesstestingrequirements.Therefore,measurementdifferencesin
relationtorecognitionofgainsandlossesoccur.Gainsandlossesonthese
inventoriesandcontractsarenotrecognizeduntilthecommodityissoldin
asubsequentaccountingperiod.Gainsandlossesontherelatedderivative
commoditycontractsarerecognizedintheincomestatementfromthe
timethederivativecommoditycontractisenteredintoonafairvaluebasis
usingforwardpricesconsistentwiththecontractmaturity.
IFRSrequiresthatinventoryheldfortradingberecordedatitsfair
valueusingperiod-endspotpriceswhereasanyrelatedderivative
commodityinstrumentsarerequiredtoberecordedatvaluesbasedon
forwardpricesconsistentwiththecontractmaturity.Dependingonmarket
conditions,theseforwardpricescanbeeitherhigherorlowerthanspot
pricesresultinginmeasurementdifferences.
BPentersintocontractsforpipelinesandstoragecapacitythat,
underIFRS,arerecordedonanaccrualsbasis.Thesecontractsare
risk-managedusingavarietyofderivativeinstruments,whicharefairvalued
underIFRS.Thisresultsinmeasurementdifferencesinrelationto
recognitionofgainsandlosses.
ThewaythatBPmanagestheeconomicexposuresdescribed
above,andmeasuresperformanceinternally,differsfromthewaythese
activitiesaremeasuredunderIFRS.BPcalculatesthisdifferencefor
consolidatedentitiesbycomparingtheIFRSresultwithmanagement’s
internalmeasureofperformance,underwhichtheinventoryandthesupply
andcapacitycontractsinquestionarevaluedbasedonfairvalueusing
relevantforwardpricesprevailingattheendoftheperiod.Webelievethat
disclosingmanagement’sestimateofthisdifferenceprovidesuseful
informationforinvestorsbecauseitenablesinvestorstoseetheeconomic
effectoftheseactivitiesasawhole.Theimpactsoffairvalueaccounting
effects,relativetomanagement’sinternalmeasureofperformanceanda
reconciliationtoGAAPinformationisshownonpage26.
Commodity trading contracts
BP’sExplorationandProductionandReningandMarketingsegments
bothparticipateinregionalandglobalcommoditytradingmarketsinorder
tomanage,transactandhedgethecrudeoil,renedproductsandnatural
gasthatthegroupeitherproducesorconsumesinitsmanufacturing
operations.Thesephysicaltradingactivities,togetherwithassociated
incrementaltradingopportunities,arediscussedfurtherinExplorationand
Productiononpages49-50andinReningandMarketingonpages58-59.
Therangeofcontractsthegroupentersintoinitscommoditytrading
operationsisasfollows.
Exchange-tradedcommodityderivatives
Thesecontractsaretypicallyintheformoffuturesandoptionstradedona
recognizedexchange,suchasNymex,SGXandICE.Suchcontractsare
tradedinstandardspecicationsforthemainmarkercrudeoils,suchas
BrentandWestTexasIntermediate,themainproductgrades,suchas
gasolineandgasoil,andfornaturalgasandpower.Gainsandlosses,
otherwisereferredtoasvariationmargins,aresettledonadailybasiswith
therelevantexchange.Thesecontractsareusedforthetradingandrisk
managementofcrudeoil,renedproducts,naturalgasandpower.Realized
andunrealizedgainsandlossesonexchange-tradedcommodityderivatives
areincludedinsalesandotheroperatingrevenuesforaccountingpurposes.
OTCcontracts
Thesecontractsaretypicallyintheformofforwards,swapsandoptions.
Someofthesecontractsaretradedbilaterallybetweencounterparties;
othersmaybeclearedbyacentralclearingcounterparty.Thesecontracts
canbeusedbothfortradingandriskmanagementactivities.Realizedand
unrealizedgainsandlossesonOTCcontractsareincludedinsalesand
otheroperatingrevenuesforaccountingpurposes.
Themaingradesofcrudeoilboughtandsoldforwardusing
standardcontractsareWestTexasIntermediateandastandardNorthSea
crudeblend(Brent,FortiesandOsebergorBFO).Althoughthecontracts
specifyphysicaldeliverytermsforeachcrudeblend,asignicantnumber
arenotsettledphysically.Thecontractstypicallycontainstandarddelivery,
pricingandsettlementterms.Additionally,theBFOcontractspeciesa
standardvolumeandtolerancegiventhatthephysicallysettledtransactions
aredeliveredbycargo.
GasandpowerOTCmarketsarehighlydevelopedinNorthAmerica
andtheUK,wherethecommoditiescanbeboughtandsoldfordeliveryin
futureperiods.Thesecontractsarenegotiatedbetweentwopartiesto
purchaseandsellgasandpowerataspeciedprice,withdeliveryand
settlementatafuturedate.Typically,thesecontractsspecifydeliveryterms
fortheunderlyingcommodity.Certainofthesetransactionsarenotsettled
physically,whichcanbeachievedbytransactingoffsettingsaleorpurchase
contractsforthesamelocationanddeliveryperiodthatareoffsetduring
theschedulingofdeliveryordispatch.Thecontractscontainstandardterms
suchasdeliverypoint,pricingmechanism,settlementtermsand
specicationofthecommodity.Typically,volumeandpricearethemain
variableterms.
Swapsareoftencontractualobligationstoexchangecashows
betweentwoparties:atypicalswaptransactionusuallyreferencesa
oatingpriceandaxedpricewiththenetdifferenceofthecashows
beingsettled.Optionsgivetheholdertheright,butnottheobligation,to
buyorsellcrude,oilproducts,naturalgasorpowerataspeciedpriceon
orbeforeaspecicfuturedate.Amountsunderthesederivativenancial
instrumentsaresettledatexpiry.Typically,nettingagreementsareusedto
limitcreditexposureandsupportliquidity.
Spotandtermcontracts
Spotcontractsarecontractstopurchaseorsellacommodityatthemarket
priceprevailingonoraroundthedeliverydatewhentitletotheinventoryis
taken.Termcontractsarecontractstopurchaseorsellacommodityat
regularintervalsoveranagreedterm.Thoughspotandtermcontractsmay
haveastandardform,thereisnooffsettingmechanisminplace.These
transactionsresultinphysicaldeliverywithoperationalandpricerisk.Spot
andtermcontractstypicallyrelatetopurchasesofcrudeforarenery,
purchasesofproductsformarketing,purchasesofthird-partynaturalgas,
salesofthegroup’soilproduction,salesofthegroup’soilproductsand
salesofthegroup’sgasproductiontothirdparties.Foraccounting
purposes,spotandtermsalesareincludedinsalesandotheroperating
revenues,whentitlepasses.Similarly,spotandtermpurchasesare
includedinpurchasesforaccountingpurposes.
82BPAnnualReportandForm20-F2010