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

Business reviewFrequently, work (including drilling and related activities) will be contractedout to third-party service providers who have the relevant expertiseand equipment not available within the joint venture or the co-owningoperator’s organization. The relevant contract will specify the work tobe done and the remuneration to be paid and typically will set out howmajor risks will be allocated between the joint venture or co-ownershipand the service provider. Generally, the joint venture or co-owner andthe contractor would respectively allocate responsibility for and providereciprocal indemnities to each other for harm caused to their respectivestaff and property. Depending on the service to be provided, an oil and gasindustry service contract may also contain provisions allocating risks andliabilities associated with pollution and environmental damage, damageto a well or hydrocarbon reservoir and for claims from third parties orother losses. The allocation of those risks vary among contracts and aredetermined through negotiation between the parties.In general, BP is required to pay income tax on income generatedfrom production activities (whether under a licence or PSAs). In addition,depending on the area, BP’s production activities may be subject to a rangeof other taxes, levies and assessments, including special petroleum taxesand revenue taxes. The taxes imposed on oil and gas production profitsand activities may be substantially higher than those imposed on otheractivities, for example in Abu Dhabi, Angola, Egypt, Norway, the UK, theUS, Russia and Trinidad & Tobago.Environmental regulationBP operates in more than 80 countries and is subject to a wide varietyof environmental regulations concerning our products, operationsand activities. Current and proposed fuel and product specifications,emission controls and climate change programmes under a number ofenvironmental laws may have a significant effect on the production, saleand profitability of many of our products.There are also environmental laws that require us to remediateand restore areas damaged by the accidental or unauthorized releaseof hazardous substances or petroleum associated with our operations.These laws may apply to sites that BP currently owns or operates, sitesthat it previously owned or operated, or sites used for the disposal of itsand other parties’ waste. Provisions for environmental restoration andremediation are made when a clean-up is probable and the amount of BP’slegal obligation can be reliably estimated. The cost of future environmentalremediation obligations is often inherently difficult to estimate.Uncertainties can include the extent of contamination, the appropriatecorrective actions, technological feasibility and BP’s share of liability. SeeFinancial statements – Note 36 on page 231 for the amounts provided inrespect of environmental remediation and decommissioning.A number of pending or anticipated governmental proceedingsagainst BP and certain subsidiaries under environmental laws couldresult in monetary sanctions. We are also subject to environmentalclaims for personal injury and property damage alleging the release ofor exposure to hazardous substances. The costs associated with suchfuture environmental remediation obligations, governmental proceedingsand claims could be significant and may be material to the resultsof operations in the period in which they are recognized. We cannotaccurately predict the effects of future developments on the group, suchas stricter environmental laws or enforcement policies, or future eventsat our facilities, and there can be no assurance that material liabilities andcosts will not be incurred in the future. For a discussion of the group’senvironmental expenditure see page 71.Approximately 56% of our fixed assets are located in the USand the EU. US and EU environmental, health and safety regulationssignificantly affect BP’s exploration and production, refining and marketing,transportation and shipping operations. Significant legislation and regulationin the US and the EU affecting our businesses and profitability includes thefollowing:United States• The Clean Air Act (CAA) regulates air emissions, permitting, fuelspecifications and other aspects of our production, distribution andmarketing activities. Stricter limits on sulphur and benzene in fuels willaffect us in future, as will actions on greenhouse gas (GHG) emissionsand other air pollutants. Additionally, states may have separate, stricterair emission laws in addition to the CAA.• The Energy Policy Act of 2005 and the Energy Independence andSecurity Act of 2007 affect our US fuel markets by, among other things,imposing renewable fuel mandates and imposing GHG emissionsthresholds for certain renewable fuels. States such as California alsoimpose additional fuel carbon standards.• The Clean Water Act regulates wastewater and other effluent dischargesfrom BP’s facilities, and BP is required to obtain discharge permits, installcontrol equipment and implement operational controls and preventativemeasures.• The Resource Conservation and Recovery Act regulates the generation,storage, transportation and disposal of wastes associated with ouroperations and can require corrective action at locations where suchwastes have been released.• The Comprehensive Environmental Response, Compensation andLiability Act (CERCLA) can, in certain circumstances, impose the entirecost of investigation and remediation on a party who owned or operateda site contaminated with a hazardous substance, or arranged for disposalof a hazardous substance at the site. BP has incurred, or expects toincur, liability under the CERCLA or similar state laws, including costsattributed to insolvent or unidentified parties. BP is also subject to claimsfor remediation costs under other federal and state laws, and to claimsfor natural resource damages under the CERCLA, the Oil Pollution Actof 1990 (OPA 90) (discussed below) and other federal and state laws.CERCLA also requires hazardous substance release notification.• The Toxic Substances Control Act regulates BP’s import, export and saleof new chemical products.• The Occupational Safety and Health Act imposes workplace safety andhealth requirements on our operations along with significant processsafety management obligations.• The Emergency Planning and Community Right-to-Know Act requiresemergency planning and hazardous substance release notification aswell as public disclosure of our chemical usage and emissions.• The US Department of Transportation (DOT) regulates the transport ofBP’s petroleum products such as crude oil, gasoline, and petrochemicals,and other hydrocarbon liquids.• The Marine Transportation Security Act (MTSA), the DOT HazardousMaterials (HAZMAT) and the Chemical Facility Anti-Terrorism Standard(CFATS) regulations impose security compliance regulations onaround 50 BP facilities. These regulations require security vulnerabilityassessments, security risk mitigation plans and security upgrades,increasing our cost of operations.OPA 90 is implemented through regulation issued by the US EnvironmentalProtection Agency (EPA), the US Coast Guard, the DOT, the OccupationalSafety and Health Administration and various states, Alaska and the westcoast states currently have the most demanding state requirementsalthough regulation in the Gulf of Mexico has increased following the2010 Deepwater Horizon oil spill. There is an expectation that OPA 90 andits regulations will become more stringent in the future. The impact willlikely be more rigorous preparedness requirements (the ability to respondover a longer period to larger spills), including the demonstration of thatpreparedness. There will be additional costs associated with this increasedregulation. In 2012, we expect more unannounced exercises and potentialpenalties for any failure to demonstrate required preparedness evenwithout any OPA 90 amendments.As a consequence of the Deepwater Horizon oil spill wehave become subject to claims under OPA 90 and other laws andhave established a $20-billion trust fund for legitimate state and localgovernment response claims, final judgments and settlement claims,legitimate state and local response costs, natural resource damages andrelated costs and legitimate individual and business claims. We are alsosubject to Natural Resource Damages claims and numerous civil lawsuitsBusiness review: BP in more depthBP Annual Report and Form 20-F 2011 107