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

Business reviewHazardous and Noxious Substance (HNS) Convention 2010 was adoptedto address issues that have inhibited ratification of the InternationalConvention on Liability and Compensation for Damage in Connectionwith the Carriage of Hazardous and Noxious Substances by Sea 1996(the HNS Convention). This protocol will enter into force when at least12 states have agreed to be bound by it (four of the states must have atleast 2 million gross tonnes of shipping) and contributing parties in theconsenting states have received at least 40 million tonnes of contributingcargoes in the preceding year.• International marine fuel regulations under International MaritimeOrganization (IMO) and International Convention for the Preventionof Pollution from Ships (MARPOL) regimes impose stricter sulphuremission restrictions on ships in EU ports and inland waterways andthe North and Baltic seas since 2010 and with a stricter global cap onmarine sulphur emissions beginning in 2012. Further reductions are tobe phased in thereafter. These restrictions require the use of compliantheavy fuel oil (HFO) or distillate, or the installation of abatementtechnologies on ships. These regulations will place additional costs onrefineries producing marine fuel, including costs to dispose of sulphur,as well as increased GHG emissions and energy costs for additionalrefining.To meet its financial responsibility requirements, BP Shipping maintainsmarine liability pollution insurance to a maximum limit of $1 billion for eachoccurrence through mutual insurance associations (P&I Clubs) but therecan be no assurance that a spill will necessarily be adequately covered byinsurance or that liabilities will not exceed insurance recoveries.Greenhouse gas regulationIncreasing concerns about climate change have led to a number ofinternational climate agreements and negotiations are ongoing.• The Kyoto Protocol commits the parties and other entities to meetemissions targets in the first commitment period from 2008 to 2012.• The UN summit in Cancun in December 2010 where parties to theUN Framework Convention on Climate Change (UNFCCC) reachedformal agreement on a balanced package of measures to 2020. TheCancun Agreement recognizes that deep cuts in global GHG emissionsare required to hold the increase in global temperature to below 2°C.Signatories formally commit to carbon reduction targets or actions by2020. Around 114 countries, including all the major economies and manydeveloping countries, have made such commitments supplementedcurrently by an additional 27 parties that have agreed to be listed asagreeing to the accord. Supporting those efforts, principles wereagreed for monitoring, verifying and reporting emissions reductions;establishment of a green fund to help developing countries limit andadapt to climate change; and measures to protect forests and transferlow-carbon technology to poorer nations.• In November 2011, parties to the UNFCCC conference in Durban (COP17) agreed several measures. One was a ‘roadmap’ for negotiatinga legal framework by 2015 for action on climate change involving allcountries by 2020, to close the ’ambition gap’ between existing GHGreduction pledges and what is required to achieve the goal of limitingglobal temperature rise to 2°C. Another was a second commitmentperiod for the Kyoto Protocol, to begin immediately after the first periodand run for five or eight years. However, it will not include the US,Canada, Japan and Russia, and quantitative targets and the rules forcarry-over of allowances from the first commitment will not be agreeduntil the end of 2012.These international concerns and agreements are reflected in nationaland regional measures to limit GHG emissions. Additional strictermeasures can be expected in the future. These measures can increaseour production costs for certain products, increase demand for competingenergy alternatives or products with lower-carbon intensity and affect thesales and specifications of many of our products. Current measures anddevelopments potentially affecting our businesses include the following:• The European Union (EU) has agreed an overall GHG reduction targetof 20% by 2020. To meet this, a ‘Climate and Energy Package’ ofregulatory measures has been adopted including: national reductiontargets for emissions not covered by the EU Emissions Trading Scheme(ETS); binding national renewable energy targets to double renewableenergy in the EU including at least a 10% share of final energy intransport; a legal framework to promote carbon capture and storage(CCS); and a revised EU ETS Phase 3. EU ETS revisions include a GHGreduction of 21% from 2005 levels, a significant increase in allowanceauctioning, an expanded scope (sectors and gases), no free allocationsfor electricity production but free allocations for energy-intense and tradeexposed industrial sectors. The EU ETS regulates approximately onefifthof our reported 2011 global GHG emissions and can be expectedto require additional expenditure from 2013 when Phase 3 comes intoeffect. Finally, EU energy efficiency policy is currently addressed vianational energy efficiency action plans.• Article 7a of the revised EU Fuels Quality Directive requires fuel suppliersto reduce the life cycle GHG emissions per unit of fuel and energysupplied in certain transport markets.• Australia has committed to reduce its GHG emissions by at least 5%below 2000 levels by 2020. In support of this, a Clean Energy legislativepackage of 19 bills was passed in November 2011 which includesimposing a carbon price on the top 500 emitting entities meeting thethresholds in the bill. The carbon price is scheduled to take effectfrom 1 July 2012 with a fixed price of $23 Australian dollar (indexed toforecast inflation) until 1 July 2015, an international linked price (trading)with floor and ceiling prices from 1 July 2015 through to 1 July 2018, anda market based price (trading) forward. A certain portion of allowanceswill be distributed to ‘emission intensive trade exposed’ businesses forno cost; this transitional support decreases with time. The majority of ourAustralia business emissions will be subject to the pricing scheme andwill require additional expenditures for compliance.• New Zealand has agreed to cut GHG emissions by 10-20% below1990 levels by 2020, subject to a comprehensive global agreementfor emissions reductions coming into force. New Zealand’s emissiontrading scheme (NZ ETS) commenced on 1 July 2010 for transport fuels,industrial processes, and stationary energy. The agriculture sector (45%of New Zealand’s GHG emissions) has been proposed to join the NZ ETSin January 2015. New Zealand also employs a portfolio of mandatoryand voluntary complementary measures aimed at GHG reductions. ASeptember 2011 review of the scheme recommended effective delaysto near-term emissions reductions targets, citing a lack of internationalaction on cutting emissions.• In the US, with no current potential for passing comprehensive climatelegislation, the US Environmental Protection Agency (EPA) continues topursue regulatory measures to address GHGs under the Clean Air Act (CAA).– In late 2009, the EPA released a GHG endangerment finding toestablish its authority to regulate GHG emissions under the CAA.– Subsequent to this, the EPA finalized regulations imposing light dutyvehicle emissions standards for GHGs.– The EPA finalized the initial GHG mandatory reporting rule (GHGRR)in 2009 and continues to make amendments to the rule. The firstreports under the GHGRR were due on or before 30 September 2011.The majority of BP’s US businesses were affected by the GHGRRand submitted their first GHG emissions reports to the EPA under theGHGRR on or before the 30 September 2011 deadline. In additionto direct emissions from affected facilities, producers and importers/exporters of petroleum products, certain natural gas liquids, and GHG’swere required to report product volumes and notional GHG emissionsshould these products be fully combusted. The EPA releaseddirect emission data and a small subset of product supplier data on11 January 2012, with certain ‘confidential business information’protections, in a ‘tool enabled’ database which allows transparencyto the individual facility/entity level. Release of the balance of theproduct supply data is expected soon along with release of additionalnon-confidential information which will enable aggregation of reportedemissions to the highest level US parent company.– The EPA finalized permitting requirements for new or modified largeGHG emission sources in 2010, with these regulations taking effect inJanuary 2011 and the second phase taking effect on 1 July 2011. TheEPA has committed to additional actions, beginning in 2012, relatingto smaller sources of GHG emissions.Business review: BP in more depthBP Annual Report and Form 20-F 2011 109