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

Business reviewEgyptBP has a long-standing history in Egypt, successfully operating therefor close to 50 years. To date BP with its partners has produced almost40% of Egypt’s entire oil production and supplies more than 35% of thedomestic gas demand. BP’s total assets in Egypt at 31 December 2011were $8,784 million ($4,768 non-current and $4,016 current).• The 25 January 2011 civil uprising resulted in the BP office in Cairoclosing for a period of 10 days, reopening on 7 February. Production andoperations were, and continue to be, unaffected. Parliamentary electionsstarted in late November 2011 and are expected to run until mid-March2012. We continue to closely monitor the developing situation in thecountry and its potential impact on the business and our people.• In October 2011, BP announced the Salmon gas discovery in the NorthEl Burg (BP 50% and operator) offshore concession in the Nile Delta.Salmon is the third discovery in the concession, following the Satis 1 andSatis 3 gas discoveries. Further appraisal work to evaluate the resourcesis under way.AsiaWestern IndonesiaBP has a joint interest in Virginia Indonesia Company LLC (VICO), theoperator of the Sanga-Sanga PSA (BP 38%) supplying gas to Indonesia’slargest LNG export facility, the Bontang LNG plant in Kalimantan. BP alsoparticipates in the Sanga-Sanga coalbed methane (CBM) PSA (BP 38%), abrownfield, unconventional development overlaying the conventional PSA.Sanga-Sanga CBM is the cornerstone of the BP Asia Pacific CBM growthstrategy.• In March 2011, the first CBM long-term production test well was tiedinto the system that supplies Bontang LNG plant.• On 1 April 2011, BP signed four new CBM PSAs – Tanjung IV, Kapuas I,II, and III in the Barito Basin of Central Kalimantan, covering a contiguousarea of approximately 4,800km 2 . BP holds a 44% interest in thePertamina-operated Tanjung IV PSA, and a 45% operating interest ineach of the Kapuas I, II, and III PSAs. Subsurface evaluation of the areascovered by the new PSAs is under way.ChinaBP’s upstream activities in the country include production from the ChinaNational Offshore Oil Corporation (CNOOC) operated Yacheng offshore gasfield (BP 34.3%) as well as deepwater exploration in the South China Sea’sBlock 42/05 (BP 40.82%). Yacheng supplies gas to the Castle Peak PowerCompany for up to 70% of Hong Kong’s gas-fired electricity generation.Additional gas is sold to the Hainan Holdings Fuel & Chemical CorporationLimited.• On 10 January 2011, BP announced that it had signed a new agreementwith CNOOC for deepwater exploration in Block 43/11 in the SouthChina Sea and government approval was received on 30 January 2012.AzerbaijanBP is the largest foreign investor in the country. BP operates two PSAs,Azeri-Chirag-Gunashli (ACG) and Shah Deniz, and also holds otherexploration leases.• In June 1996, when the Shah Deniz PSA was awarded, Oil IndustriesEngineering and Construction, an affiliate of the National Iranian OilCompany and assignor to the current Iranian interest holder, NaftiranIntertrade Co. Ltd (NICO), was selected as a Shah Deniz projectparticipant by the State of Azerbaijan, and has a 10% non-operatinginterest under the Shah Deniz PSA. NICO also has a 10% or less, nonoperating,interest in both the Shah Deniz project gas marketing entityand its gas transportation entity, both of which were incorporated in2002 and derive from the award of the Shah Deniz PSA. Under article30 of the new EU Regulations concerning restrictive measures againstIran, any body, entity or holder of rights derived from an award of aPSA before the entry into force of the EU Regulations by a sovereigngovernment other than Iran, shall not be considered an ‘Iranian person,entity or body’ for the purposes of the main operative provisions of theEU Regulations. As such, the restrictive measures do not apply toNICO and Shah Deniz continues to operate in full compliance with EUand US law.• On 6 May 2011, the Parliament of the Republic of Azerbaijan ratified thenew PSA between BP and the State Oil Company of Azerbaijan (SOCAR)on joint exploration and development of the Shafag-Asiman structurein the Azerbaijan sector of the Caspian Sea. The ratification follows thesigning of the PSA in Baku in October 2010. Under the PSA, which hasa 30-year term, BP will be the operator with 50% interest while SOCARwill hold the remaining 50% interest.• Following the Memorandum of Understanding signed in June 2010between Turkey and Azerbaijan for gas sales and transportation of gasfrom the new Shah Deniz full field development to be sold to consumersin Turkey and across Europe, on 25 October 2011, Azerbaijan and Turkeysigned a number of key gas export related agreements to enable Turkeyto buy gas from Azerbaijan and to transit gas from Azerbaijan throughTurkey to Europe. The documents signed included an intergovernmentalagreement between the government of Azerbaijan and the governmentof Turkey, gas sales agreements between SOCAR and BOTAS andalso between the Azerbaijan Gas Supply Company (AGSC) and BOTASInternational Limited (BIL), a gas transit agreement between SOCARand BIL and a framework agreement setting the general terms andconditions for transit of gas sourced from Azerbaijan through the territoryof Turkey. The agreements provide a legal framework to regulate thesale of Shah Deniz gas to Turkey and its transportation to Europeanmarkets through Turkey.Russia• In May 2011, BP announced that both the Rosneft a share swapagreement and the Arctic Opportunity, originally announced on14 January 2011, had terminated. This termination was a resultof the deadline for the satisfaction of conditions precedent havingexpired following delays resulting from interim orders granted by theEnglish High Court and a UNCITRAL arbitration tribunal. This followedapplications brought by Alfa Petroleum Holdings Limited (Alfa) and OGIPVentures Limited (OGIP) against BP International Limited (BPIL) and BPRussian Investments Limited (BPRIL) alleging breach of the TNK-BPshareholders agreement (SHA). These interim orders did not addressthe question of whether or not BP breached the SHA. The UNCITRALarbitration proceedings with Alfa, Access and Renova (AAR) whichare subject to strict confidentiality obligations are ongoing. See Legalproceedings on page 166 for further information.TNK-BPTNK-BP, an associate owned by BP (50%) and AAR (50%), is an integratedoil company operating in Brazil, Russia, Ukraine, Venezuela and Vietnam.TNK-BP’s strategic goal is to become an international oil and gas companywith a leading position in the Russian oil and gas industry. BP’s investmentin TNK-BP is reported in the Exploration and Production segment. From2012 onward TNK-BP will be reported as a separate operating segment,as explained more fully on page 80. The TNK-BP group’s major assetsare held in OAO TNK-BP Holding. Other assets include OAO Slavneft,an equity-accounted joint venture. The workforce is comprised of morethan 50,000 people. TNK-BP’s main board is currently comprised of fourBP, four AAR, and one independent director, with two vacancies forindependent directors. The boards of key TNK-BP subsidiaries have bothBP and AAR directors. In December 2011, two independent non-executivedirectors of TNK-BP Limited, Gerhard Schroeder and James Leng,announced that they would be stepping down from their positions on theboard at the end of 2011.• Upstream, TNK-BP operates either directly, or through equity-accountedjoint ventures, a number of oil and gas fields in Russia, Vietnam andVenezuela which produced approximately 1.99mboe/d in 2011.• Downstream, TNK-BP has interests in six refineries in Russia andUkraine (including Ryazan and Lisichansk and Slavneft’s Yaroslavlrefinery), with throughput of approximately 711 thousand barrels per dayin 2011. TNK-BP has over 1,400 branded retail stations in Russia andUkraine.a BP already holds a 1.3% investment in Rosneft Oil Company with a carrying value of $873 million.86 BP Annual Report and Form 20-F 2011