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

Our marketLeft Operations atBP’s Na Kika field indeepwater Gulf ofMexico. BP is one ofthe largest producersof hydrocarbons inthe region.Natural gas pricesNatural gas prices diverged globally in 2011, reflecting different regional dynamics.The average US Henry Hub First of Month Index fell to $4.04/mmBtu, 8% lowerthan the prices in 2010, while in Europe prices increased.After a record increase in 2010, global gas consumption growth moderatedin 2011. In the US, economic momentum supported gas use in the first half ofthe year and a hot summer raised demand. Yet domestic production outpacedconsumption growth due to further increases in the availability of shale gas.Henry Hub gas prices fell and traded below coal parity in US power generationthroughout the year, leading to the displacement of coal by gas. Unusually mildwinter weather weakened prices at the end of year. The differentials of productionarea prices to Henry Hub prices continued to narrow as pipeline bottlenecks werereduced.In Europe, spot gas prices at the UK National Balancing Point increasedby 33% to an average of 56.33 pence per therm for 2011 – the highest levelsince 2008. The loss of Libyan gas supply raised continental European demandfor Russian gas in early 2011, but LNG supply and weak general demand keptspot gas prices below oil-indexed contract levels. Competition between spotand contract pipeline supplies continued. High volumes of LNG were availableto Europe, despite the Japanese earthquake and tsunami in March 2011, whichcaused major nuclear outages and significantly increased LNG purchases inJapan. This contributed to a tightening global LNG market over the year.The economic rebound had led the average Henry Hub First of Month Indexto recover in 2010 from eight-year lows, rising by 10% to $4.39/mmBtu. In theUK, National Balancing Point prices averaged 42.45 pence per therm in 2010 –38% above the depressed prices in 2009.In 2012, we expect gas markets to continue to be driven by the economy,weather, domestic production, LNG supply and reductions in nuclear powergeneration following the Fukushima disaster in Japan in March 2011.20 BP Annual Report and Form 20-F 2011