BP Annual Report and Form 20-F 2011 - Company Reporting

Business reviewTrend informationFor information on external market trends, see Our market on pages 18-24.We expect production excluding TNK-BP in 2012 to be broadly flatcompared with 2011, after adjusting for divestments and at an oil price of$100 per barrel.In Refining and Marketing, the level of BP’s refinery turnaroundactivity is expected to be broadly similar in 2012 compared with 2011.We also expect the marketing environment in fuels, lubricants andpetrochemicals to remain subdued given the outlook for global demand.In 2012, we expect the quarterly loss, excluding non-operatingitems, for Other businesses and corporate to average around $500 million.As in previous years, this is likely to be volatile on an individual quarterlybasis.We expect capital expenditure, excluding acquisitions and assetexchanges, to increase to around $22 billion in 2012, as we invest to growin our Exploration and Production segment.Having completed disposals of almost $20 billion during 2010 and2011 combined, we expect to make further disposals that would bring thetotal to $38 billion by the end of 2013.We intend to reduce the net debt ratio to the lower half of the10–20% range over time. Net debt is a non-GAAP measure.Depreciation, depletion and amortization in 2012 is expected to bearound $1.0 billion higher than in 2011.The discussion above contains forward-looking statements,particularly those regarding external market trends, the future level ofproduction excluding TNK-BP, the expected level of turnarounds, themarketing environment in fuels, lubricants and petrochemicals, theexpected quarterly loss for Other businesses and corporate, the expectedlevel of capital expenditures, expectations regarding future disposals, netdebt and net debt ratio, and future levels of depreciation, depletion andamortization. These forward-looking statements are based on assumptionsthat management believes to be reasonable in the light of the group’soperational and financial experience. However, no assurance can be giventhat the forward-looking statements will be realized. You should not rely onpast performance as an indicator of future performance. You are urged toread the cautionary statement on page 5 and Risk factors on pages 59-63,which describe the risks and uncertainties that may cause actual resultsand developments to differ materially from those expressed or implied bythese forward-looking statements. The company provides no commitmentto update the forward-looking statements or to publish financial projectionsfor forward-looking statements in the future.Regulation of the group’s businessBP’s activities, including its oil and gas exploration and production, pipelinesand transportation, refining and marketing, petrochemicals production,trading, alternative energy and shipping activities, are conducted inmany different countries and are subject to a broad range of EU, US,international, regional and local legislation and regulations, includinglegislation that implements international conventions and protocols. Thesecover virtually all aspects of our activities and include matters such aslicence acquisition, production rates, royalties, environmental, health andsafety protection, fuel specifications and transportation, trading, pricing,anti-trust, export, taxes and foreign exchange.The terms and conditions of the leases, licences and contractsunder which our oil and gas interests are held vary from country to country.These leases, licences and contracts are generally granted by or enteredinto with a government entity or state owned or controlled companyand are sometimes entered into with private property owners. Thesearrangements with governmental or state entities usually take the form oflicences or production-sharing agreements (PSAs), although arrangementswith the US government can be by lease. Arrangements with privateproperty owners are usually in the form of leases.Licences (or concessions) give the holder the right to explore forand exploit a commercial discovery. Under a licence, the holder bears therisk of exploration, development and production activities and provides thefinancing for these operations. In principle, the licence holder is entitled toall production, minus any royalties that are payable in kind. A licence holderis generally required to pay production taxes or royalties, which may be incash or in kind. Less typically, BP may explore for and exploit hydrocarbonsunder a service agreement with the host entity in exchange forreimbursement of costs and/or a fee paid in cash rather than production.PSAs entered into with a government entity or state owned orcontrolled company generally require BP to provide all the financing andbear the risk of exploration and production activities in exchange for a shareof the production remaining after royalties, if any.In certain countries, separate licences are required for explorationand production activities and, in certain cases, production licences arelimited to only a portion of the area covered by the original explorationlicence. Both exploration and production licences are generally for aspecified period of time. In the US, leases from the US governmenttypically remain in effect for a specified term, but may be extended beyondthat term as long as there is production in paying quantities. The term ofBP’s licences and the extent to which these licences may be renewed varyfrom country to country.Frequently, BP conducts its exploration and production activitiesin joint ventures or co-ownership arrangements with other internationaloil companies, state owned or controlled companies and/or privatecompanies. These joint ventures may be incorporated or unincorporatedventures, while the co-ownerships are typically unincorporated. Whetherincorporated or unincorporated, relevant agreements will set out eachparty’s level of participation or ownership interest in the joint venture or coownership.Conventionally, all costs, benefits, rights, obligations, liabilitiesand risks incurred in carrying out joint venture or co-ownership operationsunder a lease or licence are shared among the joint venture or co-owningparties according to these agreed ownership interests. Ownership ofjoint venture or co-owned property and hydrocarbons to which the jointventure or co-ownership is entitled is also shared in these proportions.To the extent that any liabilities arise, whether to governments or thirdparties, or as between the joint venture parties or co-owners themselves,each joint venture party or co-owner will generally be liable to meet thesein proportion to its ownership interest (see Financial statements – Note 2in relation to the Gulf of Mexico oil spill). In many upstream operations,a party (known as the operator) will be appointed (pursuant to a jointoperating agreement (JOA)) to carry out day-to-day operations on behalf ofthe joint venture or co-ownership. The operator is typically one of the jointventure parties or a co-owner and will carry out its duties either through itsown staff, or by contracting out various elements to third-party contractorsor service providers. BP acts as operator on behalf of joint ventures andco-ownerships in a number of countries where we have exploration andproduction activities.106 BP Annual Report and Form 20-F 2011