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

Business reviewGreenhouse gas regulationIn the future, we expect that additional regulation of GHG emissionsaimed at addressing climate change will have an increasing impact onour businesses, operating costs and strategic planning, but may alsooffer opportunities for the development of low-carbon technologies andbusinesses. See Regulation of the group’s business – Greenhouse gasregulation on page 109.To help address potential future regulation, we factor a carbon costinto our investment appraisals and engineering designs for new projects.We do this by requiring larger projects, and those for which emissionscosts would be a material part of the project, to apply a standard carboncost to the projected GHG emissions over the life of the project. Thestandard cost is based on our estimate of the carbon price that mightrealistically be expected in particular parts of the world. In industrializedcountries, this standard cost assumption is currently $40 per tonne ofCO 2equivalent. We use this as a basis for assessing the economic valueof the investment and as one consideration in optimizing the way theproject is engineered with respect to emissions. This helps to assess ourinvestments under scenarios in which the price of carbon emissions ishigher than the current market price.Adaptation to impacts resulting from a changing climateWe have funded research into the impacts of climate change on ouroperations for many years, to better understand the possible types ofclimate change impacts, potential effects on the environment and on ourfacilities and to develop potential responses to these impacts.In the Beaufort Sea in Canada, for example, where BP is in the earlystages of an oil exploration project, we have collaborated with ArcticNet,a local research organization devoted to understanding climate changeimpacts in the Arctic, on a two-year environmental baseline study. ForArcticNet the information gleaned will provide valuable data for analysis,while for BP the data will provide a useful baseline with which to comparefuture research, helping us to understand and chart the effects of climatechange in this deepwater ocean environment.Projects implementing our environmental and social practices arerequired to assess the potential impacts to the project from the changingclimate. Any significant potential impacts identified are managed via theproject’s risk management process. To support this risk assessmentprocess, we continually update and improve our climate impact modellingtools. In the Caspian region, for example, we are working with meteorologyand oceanology consultants to enhance the existing modelling capabilityand develop a regional climate model to provide long-term forecasts andtrends of wind speed, wave height and sea level.We also have a guide on adapting to a changing climate which isavailable for all projects and operations. This document sets out guidanceto help businesses across BP make appropriate allowance for the potentialeffects of climate change.For projects where climate change impacts are identified as arisk, our engineers typically seek to address them like any other physicaland ecological hazard, rather than as a discrete category. We periodicallyreview and adjust existing design criteria and engineering technologypractices. For example, we adapt our drainage design practices basedon the frequency and severity of storms as well as rainfall and runoffamounts; if storms are anticipated to become more frequent, or heavier,the engineering design will accommodate this.WaterWe are taking a more strategic approach to water use and assessingwater-related risks within our businesses, including those associated withthe growing global issue of water scarcity. Our focus is on increasingour ability to forecast, measure and manage emerging water risks andengaging with external organizations to better understand these risks anddevelop sustainable water management practices, particularly where wateris scarce.With our industry association IPIECA, BP has also participated in thedevelopment of a new customized oil and gas version of the WorldBusiness Council for Sustainable Development’s Global Water Tool, whichhelps oil and gas companies map their water use and assess risks offreshwater scarcity and related biodiversity impacts, across their portfolioof sites. BP has also invested in a water risk management tool, which iscurrently being piloted at a number of BP’s operations, to investigate therisks of water use and availability at a local level.In the future, these tools will provide BP with a means ofconsistently defining water risks and opportunities across a number ofour operations, enabling us to establish a more consistent approach tomanaging water issues throughout the group.Hydraulic fracturingTechnology helps to make it possible for BP to extract unconventional gasresources safely and responsibly to help meet the growing global demandfor gas. Unconventional gas can be classified into three categories: tightgas, coalbed methane and shale gas. BP is pursuing unconventional gas inthe US and in other countries such as Algeria, Oman and Indonesia.Hydraulic fracturing, or ‘fracking’, is a process of pumping watermixed with a small proportion of sand and chemicals underground athigh pressure to fracture the rock and release gas that would otherwisenot be accessible. Some stakeholders have expressed concerns aboutthe potential environmental impacts. BP recognizes these concerns andseeks to apply responsible well design and construction, surface operationand fluid handling practices and engages constructively with governmentand industry to promote sound policies and regulation that protect waterresources and the environment. We expect that many of the jurisdictionsin which we operate will adopt stricter regulations governing ‘fracking’ andother unconventional gas extraction technologies in the future which couldadversely affect our operations and profitability in our unconventional gasbusiness.Environmental expenditure$ million2011 2010 2009Environmental expenditure relating tothe Gulf of Mexico oil spillSpill response 586 13,628 –Additions to environmentalremediation provision 1,167 929 –Other environmental expenditureOperating expenditure 704 716 701Capital expenditure 819 911 955Clean-ups 53 55 70Additions to environmentalremediation provision 510 361 588Additions to decommissioningprovision 4,596 1,800 169BP continues to incur significant costs related to the 2010 Gulf of Mexicooil spill. Of the spill response cost of $586 million incurred in the year (2010$13,628 million) $336 million (2010 $1,043 million) remains as a provisionat 31 December 2011.The environmental remediation provision includes amountsfor BP’s commitment to fund the Gulf of Mexico Research Initiative,natural resource damage (NRD) assessment costs and emergency NRDrestoration projects. In addition, during the year BP entered a frameworkagreement with natural resource trustees for the United States andfive Gulf Coast states, providing for up to $1 billion to be spent on earlyrestoration projects to address natural resource injuries resulting fromthe Gulf of Mexico oil spill. Further amounts for spill response costs wereprovided during the year primarily to recognize increased costs of shorelineclean-up, patrolling and maintenance and vessel decontamination. Themajority of the active clean-up of the shorelines had been completed by theend of the year.See Financial statements – Note 2 on page 190, Note 36 on page231 and Note 43 on page 249 for further information relating to the Gulf ofMexico oil spill.Business review: BP in more depthBP Annual Report and Form 20-F 2011 71