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

Business reviewExploration and ProductionAt the end of 2010, as part of our response to the Deepwater Horizonoil spill, we announced the decision to reorganize the Exploration andProduction segment to create three separate divisions: Exploration,Developments and Production, integrated through a Strategy andIntegration organization. This structure was established in March 2011and each of the four parts is led by an executive vice president reportingdirectly to the group chief executive. The new organization is designedto change the way we operate, with a particular focus on managingrisk, delivering common standards and processes and building technicalcapability. The new organization has not changed the way we report ouroperating segments under IFRS.The Exploration division is accountable for renewing our resourcebase through access, exploration and appraisal. The Developmentsdivision is accountable for the safe and compliant execution of wells(drilling and completions) and major projects and comprises the globalwells organization and the global projects organization, which wereestablished in 2011. The Production division is accountable for safe andcompliant operations, including upstream production assets, midstreamtransportation and processing activities, and the development of ourresource base. Divisional activities are integrated on a regional basis by aregional president reporting to the Production division. The Strategy andIntegration organization is accountable for optimization and integrationacross the divisions, including the delivery of support from the group’sfinance, procurement and supply chain, human resources, technology andinformation technology functions.From 1 January 2012, the group’s investment in TNK-BP willbe reported as a separate operating segment, rather than within theExploration and Production segment, reflecting the way in which theinvestment is now managed.The group safety and operational risk (S&OR) function maintainsour global safety standards. S&OR staff are deployed at the operating levelwithin the Exploration and Production segment to support the systematicand disciplined application of those standards. This creates an independentreporting line, working alongside line management while having the powerto intervene.Our Exploration and Production segment included upstreamand midstream activities in 30 countries in 2011, including Angola,Azerbaijan, Brazil, Canada, Egypt, India, Iraq, Norway, Russia, Trinidad &Tobago (Trinidad), the UK, the US and other locations within Africa, Asia,Australasia and South America, as well as gas marketing and tradingactivities, primarily in Canada, Europe and the US. Upstream activitiesinvolve oil and natural gas exploration, field development and production.Our exploration and appraisal programme is currently focused on Angola,Australia, Azerbaijan, Brazil, Canada, Egypt, the deepwater Gulf of Mexico,the UK North Sea, Oman and onshore US. Major development areasinclude Angola, Australia, Azerbaijan, Canada, Egypt, the deepwater Gulf ofMexico, North Africa, and the UK North Sea. During 2011, production camefrom 24 countries. The principal areas of production are Angola, Argentina,Azerbaijan, Egypt, Russia, Trinidad, the UAE, the UK and the US.Midstream activities involve the ownership and managementof crude oil and natural gas pipelines, processing facilities and exportterminals, LNG processing facilities and transportation, and our NGLextraction businesses in Canada, Indonesia, the US and the UK. Our mostsignificant midstream pipeline interests are the Trans-Alaska PipelineSystem in the US; the Forties Pipeline System and the Central AreaTransmission System pipeline, both in the UK sector of the North Sea;the South Caucasus Pipeline, which runs from Azerbaijan through Georgiato the Turkish border; and the Baku-Tbilisi-Ceyhan pipeline, which runsthrough Azerbaijan, Georgia and Turkey. Major LNG activities are located inAustralia, Indonesia and Trinidad. BP is also investing in the LNG businessin Angola.Additionally, our activities include the marketing and trading of natural gas,power and natural gas liquids. These activities provide routes into liquidmarkets for BP’s produced gas, and generate margins and fees associatedwith the provision of physical products and derivatives to third parties andincome from asset optimization and trading.Our oil and natural gas production assets are located onshore andoffshore and include wells, gathering centres, in-field flow lines, processingfacilities, storage facilities, offshore platforms, export systems (e.g. transitlines), pipelines and LNG plant facilities.Upstream operations in Abu Dhabi, Argentina, Bolivia, Chile, Russia,Venezuela and Vietnam as well as some of our operations in Angola,Canada, Indonesia and Trinidad are conducted through equity-accountedentities.Our marketEnergy demand, and in particular oil demand, has followed overalleconomic trends in recent years, recovering strongly in 2010 but facingmore challenging conditions in 2011.Dated Brent for the year averaged $111.26 per barrel, 40%above 2010’s average of $79.50 per barrel. In 2012, we expect oil pricemovements to continue to be driven by the pace of global economicgrowth and its resulting implications for oil consumption, and by OPECproduction decisions.Natural gas prices diverged globally in 2011, reflecting differentregional dynamics. The average US Henry Hub First of Month Index fellto $4.04/mmBtu, an 8% decrease from 2010, while in Europe pricesincreased. Spot gas prices at the UK National Balancing Point increased by33% to an average of $56.33 pence per therm for 2011.After a record increase in 2010, global gas consumption growthmoderated in 2011. In the US, economic momentum supported gas usein the first half of the year and a hot summer raised demand. Yet domesticproduction outpaced consumption growth due to further increases in theavailability of shale gas.In 2012, we expect gas markets to continue to be driven by theeconomy, weather, domestic production, LNG supply and reductions innuclear power generation following the Fukushima disaster in Japan inMarch 2011.Our strategyIn Exploration and Production, our highest priority is to ensure safe, reliableand compliant operations worldwide. Our strategy is to invest to grow longtermvalue by continuing to build a portfolio of material, enduring positionsin the world’s key hydrocarbon basins with a focus on deepwater, gasvalue chains and giant fields. Our strategy is enabled by:• A continued focus on safety and managing risk.• Strong relationships built on mutual advantage, deep knowledge of thebasins in which we operate, and technology.• Building capability along the value chain in Exploration, Developmentsand Production.• Actively managing our portfolio.We intend to increase investment with a focus on Exploration, a keysource of value creation, and evolve the nature of our relationships,particularly with national oil companies.80 BP Annual Report and Form 20-F 2011