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

Business reviewThe primary additional factors affecting the financial results for 2011,compared with 2010, were higher realizations, higher earnings from equityaccountedentities, a higher refining margin environment and a strongersupply and trading contribution, partly offset by lower production volumes,rig standby costs in the Gulf of Mexico, higher costs related to turnarounds,higher exploration write-offs, and negative impacts of increased relativesweet crude prices in Europe and Australia, primarily caused by the loss ofLibya production and the weather-related power outages in the US.The primary additional factors affecting the financial results for2010, compared with 2009, were higher realizations, lower depreciation,higher earnings from equity-accounted entities, improved operationalperformance, further cost efficiencies and a more favourable refiningenvironment in Refining and Marketing, partly offset by lower production,a significantly lower contribution from supply and trading (including gasmarketing) and higher production taxes.See Exploration and Production on page 80, Refining and Marketingon page 94 and Other businesses and corporate on page 101 for furtherinformation on segment results.aInventory holding gains and losses represent the difference between the cost of sales calculatedusing the average cost to BP of supplies acquired during the year and the cost of sales calculatedon the first-in first-out (FIFO) method, after adjusting for any changes in provisions where the netrealizable value of the inventory is lower than its cost. BP’s management believes it is helpful todisclose this information. An analysis of inventory holding gains and losses by business is shown inFinancial statements – Note 6 on page 200 and further information on inventory holding gains andlosses is provided on page 110.Finance costs and net finance expense relating to pensions and otherpost-retirement benefitsFinance costs comprise interest payable less amounts capitalized, andinterest accretion on provisions and long-term other payables. Financecosts in 2011 were $1,246 million compared with $1,170 million in 2010and $1,110 million in 2009.Net finance income relating to pensions and other post-retirementbenefits in 2011 was $263 million compared with net finance incomeof $47 million in 2010 and net finance expense of $192 million in 2009.In 2011, compared with 2010, the improvement largely reflected theadditional expected returns on assets following the increases in thepension asset base at the end of 2010 compared with the end of 2009.During 2011 the value of our pension assets declined and this,combined with changes to assumptions used to value benefit obligations,most notably lower discount rates, meant that the deficit relating topension and other post-retirement benefits increased to $12.0 billion at theend of the year (2010 $7.7 billion).TaxationThe charge for corporate taxes in 2011 was $12,737 million, comparedwith a credit of $1,501 million in 2010 and a charge of $8,365 million in2009. The effective tax rate was 33% in 2011, 31% in 2010 and 33% in2009. The group earns income in many countries and, on average, paystaxes at rates higher than the UK statutory rate of 26%. The increase in theeffective tax rate in 2011 compared with 2010 primarily reflects a higherlevel of income earned in jurisdictions with a higher tax rate. The decreasein the effective tax rate in 2010 compared with 2009 primarily reflected theabsence of a one-off disbenefit that featured in 2009 in respect of goodwillimpairment, and other factors.Acquisitions and disposalsIn 2011, BP acquired from Reliance Industries Limited (Reliance) a 30%interest in each of 21 oil and gas production-sharing agreements operatedby Reliance in India for $7.0 billion. We completed the purchase, for$3.6 billion, of 10 exploration and production blocks in Brazil, which wasthe final part of a $7-billion transaction with Devon Energy that had beenannounced in March 2010, and our Alternative Energy business acquiredthe Brazilian sugar and ethanol producer Companhia Nacional de Açúcar eÁlcool (CNAA) for $0.7 billion. See Financial statements – Note 3 on page194 for further details of the business combinations undertaken duringthe year.Total disposal proceeds received during 2011, including the repaymentof the disposal deposit relating to Pan American Energy LLC (PAE) (seebelow), were $2.7 billion.In Exploration and Production, disposal proceeds included$0.6 billion from the sale of our upstream assets in Pakistan to UnitedEnergy Pakistan Limited, a subsidiary of United Energy Group (UEG),$0.5 billion from the sale of half of the 3.29% interest in the Azeri-Chirag-Gunashli (ACG) development in the Caspian Sea which we had acquiredfrom Devon Energy in 2010 to Azerbaijan (ACG) Limited and $0.5 billionfrom the sale of our interests in the Wytch Farm, Wareham, Beacon andKimmeridge fields to Perenco UK Ltd. In addition, further payments of$1.1 billion were received on completion of the sales of our upstream andcertain midstream interests in Venezuela and Vietnam and our oil and gasexploration, production and transportation business in Colombia, for whichwe had received $2.3 billion in 2010 as deposits. In November 2011, BPreceived from Bridas Corporation (Bridas) a notice of termination of theagreement for their purchase of BP’s 60% interest in PAE. As a result, thedeposit of $3.5 billion relating to the sale of PAE which had been receivedby BP in 2010 was repaid to Bridas.In Refining and Marketing we made disposals totalling $0.7 billion,which included completion of the divestment of non-strategic pipelines andterminals in the US, announced in 2009, for $0.3 billion and the disposal ofour fuels marketing businesses in several African countries (see Refiningand Marketing on page 97 for more details) for $0.2 billion.Within Other businesses and corporate, we completed the sale ofBP’s wholly-owned subsidiary, ARCO Aluminum Inc., to a consortium ofJapanese companies for $0.7 billion.In 2010, BP acquired a major portfolio of deepwater explorationacreage and prospects in the US Gulf of Mexico and an additional interestin the BP-operated ACG developments in the Caspian Sea, Azerbaijan for$2.9 billion, as part of a $7-billion transaction with Devon Energy. Totaldisposal proceeds during 2010 were $17 billion, which included $7 billionfrom the sale of US Permian Basin, Western Canadian gas assets, andWestern Desert exploration concessions in Egypt to Apache Corporation(and an existing partner that exercised pre-emption rights), and $6.2 billionof deposits received in advance of disposal transactions expected tocomplete in 2011. Of these deposits received, $3.5 billion was for the saleof our interest in PAE to Bridas, however, this was subsequently repaid toBridas at the end of 2011 following the termination of the sale agreement.See above and Financial statements – Note 4 on page 196 for furtherinformation. The deposits received also included $1 billion for the sale ofour upstream and midstream interests in Venezuela and Vietnam to TNK-BP, and $1.3 billion for the sale of our oil and gas exploration, productionand transportation business in Colombia to a consortium of Ecopetrol andTalisman.In Refining and Marketing we made disposals totalling $1.8 billion in2010, which included our French retail fuels and convenience business toDelek Europe, the fuels marketing business in Botswana to Puma Energy,certain non-strategic pipelines and terminals in the US, our interests inethylene and polyethylene production in Malaysia to Petronas and ourinterest in a futures exchange.There were no significant acquisitions in 2009. Disposal proceeds in2009 were $2.7 billion, principally from the sale of our interests in BP WestJava Limited, Kazakhstan Pipeline Ventures LLC and LukArco, and the saleof our ground fuels marketing business in Greece and retail churn in theUS, Europe and Australasia. Further proceeds from the sale of LukArcowere received in 2011.Business review: BP in more depthBP Annual Report and Form 20-F 2011 57