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

Business reviewMidstream activitiesOil and natural gas transportationThe group has direct or indirect interests in certain crude oil and naturalgas transportation systems. The following narrative details the significantevents that occurred during 2011 by country.BP’s onshore US crude oil and product pipelines and relatedtransportation assets are included under Refining and Marketing (seepage 94).AlaskaBP owns a 46.9% interest in the Trans-Alaska Pipeline System (TAPS),with the balance owned by four other companies. The TAPS transportscrude oil from Prudhoe Bay on the Alaska North Slope to the port ofValdez in south-east Alaska. BP also owns a 50% interest in a joint venturecompany called ‘Denali – The Alaska Gas Pipeline’ (Denali).• On 16 May 2011, Denali announced that its open season efforts did notresult in the commitments necessary to continue work on the AlaskaNorth Slope gas pipeline project. Denali also indicated that it planned toclose out its operations over the remainder of 2011. As a 50% owner inDenali, BP, along with co-owner ConocoPhillips, was directly involvedin the decision to terminate Denali’s activities. BP’s focus as an ownerin Denali was to create a viable alternative for the owners of the NorthSlope gas resource to commercialize their gas. BP has determined thatthe North American natural gas market does not support the project atthis time. The Denali effort marked an important step in advancing theindustry understanding of the gas pipeline opportunity in Alaska. BP willcontinue to pursue ways to commercialize our Alaskan gas resource.North SeaIn the UK sector of the North Sea, BP operates the Forties Pipeline System(FPS) (BP 100%), an integrated oil and NGLs transportation and processingsystem that handles production from more than 50 fields in the centralNorth Sea. The system has a capacity of more than 1 million barrels perday, with average throughput in 2011 of 473mboe/d. BP also operatesand has a 36% interest in the Central Area Transmission System (CATS),a 400-kilometre natural gas pipeline system in the central UK sector ofthe North Sea. The pipeline has a transportation capacity of 293mboe/dto a natural gas terminal at Teesside in north-east England. Averagethroughput in 2011 was 39mboe/d. CATS offers natural gas transportationand processing services. In addition, BP operates the Sullom Voe oiland gas terminal in Shetland and the Dimlington/Easington Terminals inHumberside. Dimlington and Easington form part of the southern gasassets that BP announced its intention to sell in February 2011 (seeDisposals on page 83).AsiaBP, as operator, holds a 30.1% interest in and manages the Baku-Tbilisi-Ceyhan (BTC) oil pipeline. The 1,768-kilometre pipeline transports oilfrom the BP-operated ACG oilfield in the Caspian Sea to the easternMediterranean port of Ceyhan and has a capacity of 1.2 million barrelsper day. BP is technical operator of, and holds a 25.5% interest in, the693-kilometre South Caucasus Pipeline, which takes gas from Azerbaijanthrough Georgia to the Turkish border and has a capacity of 780mmscf/d.In addition, BP operates the Azerbaijan section of the Western ExportRoute Pipeline between Azerbaijan and the Black Sea coast of Georgia(as operator of Azerbaijan International Operating Company).Liquefied natural gasOur LNG activities are focused on building competitively advantagedliquefaction projects, establishing diversified market positions to createmaximum value for our upstream natural gas resources and capturing thirdpartyLNG supply to complement our equity flows. Assets and significantevents in 2011 included:• In Trinidad, BP’s net share of the capacity of Atlantic LNG trains a 1,2, 3 and 4 is 6 million tonnes of LNG per year (292 billion cubic feetequivalent regasified). All of the LNG from Atlantic train 1 and most ofthe LNG from trains 2 and 3 is sold to third parties in the US and Spainunder long-term contracts. All of BP’s LNG entitlement from AtlanticLNG train 4 and some of its entitlement from trains 2 and 3 is marketedvia BP’s LNG marketing and trading business to a variety of marketsincluding the US, the Dominican Republic, Spain, the UK, Japan, Indiaand South Korea.• We have a 10% equity shareholding in the Abu Dhabi Gas LiquefactionCompany, which in 2011 supplied 5.76 million tonnes of LNG (297 billioncubic feet equivalent regasified).• BP has a 13.6% share in the Angola LNG project, which is expected toreceive approximately 1 billion cubic feet of associated gas per day fromoffshore producing blocks and to produce 5.2 million tonnes per annumof LNG (gross), as well as related gas liquids products. Construction andimplementation of the project is proceeding and the plant is expected tostart up in 2012.• In Indonesia, BP is involved in two of the three LNG centres in thecountry. BP participates in Indonesia’s LNG exports through its holdingsin the Sanga-Sanga PSA (BP 38%). Sanga-Sanga currently deliversaround 13% of the total gas feed to Bontang, one of the world’s largestLNG plants. The Bontang plant produced more than 15 million tonnes ofLNG in 2011.• Also in Indonesia, BP has its first operated LNG plant, Tangguh (BP37.16%), in Papua Barat. The asset comprises of 14 producing wells,two offshore platforms, two pipelines and an LNG plant with twoproduction trains with a total capacity of 7.6 million tonnes per annum.Tangguh supplies LNG to customers in China, South Korea, Mexico andJapan through long-term contracts. BP is currently progressing options toexpand the Tangguh facilities.• In Australia, BP is one of seven partners in the NWS venture. The jointventure operation covers offshore production platforms, trunklines,onshore gas and LNG processing plants and LNG carriers. BP’s net shareof the capacity of NWS LNG trains 1-5 is 2.7 million tonnes per annumof LNG. BP is one of five partners in the Browse LNG venture (operatedby Woodside) and holds approximately a 17% interest. A greenfieldLNG development at a proposed state government LNG precinct inthe Kimberley region is currently in the early design stage and remainssubject to regulatory, company and partner approvals.• BP has a 30% equity stake in the 7mtpa capacity Guangdong LNGregasification and pipeline project in south-east China, making it theonly foreign partner in China’s LNG import business. The terminal isalso supplied under a long-term contract with Australia’s NWS project inwhich BP has an interest.• In both the Atlantic and Asian regions, BP is marketing LNG using BPLNG shipping and contractual rights to access import terminal capacity inthe liquid markets of the US (via Cove Point and Elba Island), the UK (viathe Isle of Grain) and Italy (Rovigo), and is supplying Asian customers inJapan, South Korea and Taiwan.Gas marketing and trading activitiesGas and power marketing and trading activity is undertaken primarily inthe US, Canada and Europe to market both BP production and third-partynatural gas, to support group LNG activities and manage market price risk,as well as to create incremental trading opportunities through the use ofcommodity derivative contracts. Additionally, this activity generates feeincome and enhances margins from sources such as the management ofprice risk on behalf of third-party customers. These markets are large, liquidand volatile. Market conditions have become more challenging over thepast few years due to the availability of shale gas and increased pipelinebuilds in North America. This has resulted in limited basis differentials andfaster changes in production volumes in response to price movements.However, new markets are continuing to develop with continentalEuropean markets opening up and LNG becoming more liquid. Thebusiness (including support functions) operates primarily from offices inHouston and London and employs around 1,500 people.In connection with its trading activities, the group uses a rangeof commodity derivative contracts and storage and transport contracts.These include commodity derivatives such as futures, swaps and optionsto manage price risk and forward contracts used to buy and sell gas andpower in the marketplace. Using these contracts, in combination withrights to access storage and transportation capacity, allows the group toa See footnote a on page 87.88 BP Annual Report and Form 20-F 2011