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

Business reviewRefining and MarketingOur Refining and Marketing segment is responsible for the refining,manufacturing, marketing, transportation, and supply and trading of crudeoil, petroleum, petrochemicals products and related services to wholesaleand retail customers. We have significant operations in Europe, NorthAmerica and Asia, and we also manufacture and market our productsacross Australasia, southern Africa and Central and South America; in totalwe market our products in more than 70 countries.The segment operates hydrocarbon value chains covering threemain businesses: fuels, lubricants and petrochemicals. Previously wereferred to lubricants and petrochemicals as international businesses, butto provide greater transparency of the performance of these businesseswe are now providing our financial information separately for fuels,lubricants and petrochemicals.The fuels businesses sell refined petroleum products includinggasoline, diesel, aviation fuel and liquefied petroleum gas (LPG). Withinthis, the fuels value chains (FVCs) integrate the activities of refining,logistics, marketing, and supply and trading on a regional basis. Thisrecognizes the geographic nature of the markets in which we compete,providing the opportunity to optimize our activities from crude oil purchasesto end-consumer sales through our physical assets (refineries, terminals,pipelines and retail stations). In addition, we operate a global aviation fuelsmarketing business and an LPG marketing business.Our lubricants business is involved in manufacturing and marketinglubricants and related services to markets around the world. We marketlubricants to the automotive, industrial, marine, aviation and energymarkets through our key brands of Castrol, BP and Aral. Our Castrol brandis a highly recognized and popular lubricant brand worldwide. Distinctivebrands, cutting-edge technology and building and sustaining customerrelationships are cornerstones to our approach to market and underpin oursuccess. We are particularly strong in Europe and key Asia Pacific marketsincluding India.Our petrochemicals business operates on a global basis andincludes the manufacture and marketing of petrochemicals that areused in many everyday products, such as plastic bottles and textiles forclothing. Technology is at the heart of our business and we own proprietaryworld class technology for each of our main products. Our technologicaladvantage, operational experience and project execution track recordhas made us an attractive partner which leads to material and distinctivegrowth opportunities. Petrochemicals growth is focused on the demandcentre of Asia.Our marketOverall world economic growth slowed in 2011, as did growth in worldoil consumption. Global oil demand grew by 0.7 million b/d, but in theOECD, demand contracted again after growing for the first time in fiveyears in 2010. By contrast, there was demand growth in Australia andJapan, where oil partially replaced nuclear power after the earthquake andtsunami. Aggregate OECD oil demand in 2011 was 4.3 million b/d belowthe 2005 peak.The annual average BP refining marker margin (RMM) in 2011 was16% higher than in 2010, averaging $11.64 per barrel. Margins followeda typical seasonal pattern, with a peak in the second quarter in the run-upto the summer driving season. The RMM is an environmental indicator,similar to those used by many of our competitors, and is weightedregionally based on our refining capacity in that part of the world. Eachregional marker margin is based upon product yields and a marker crude oildeemed appropriate for the region.The RMM uses regional crack spreads to calculate the marginindicator, and does not include estimates of fuel costs and other variablecosts. The RMMs may not be representative of the margins achieved byBP in any period because of BP’s particular refinery configurations andcrude and product slate. However, the RMM is useful for understandingthe indicative refining margin environment that is available to refiners ineach region.$ per barrelCrude marker 2011 2010 2009Refining marker margin (RMM)US West Coast ANS 13.63 13.09 13.40US Gulf Coast Mars 11.87 10.17 9.16US Midwest LLS 7.46 6.00 6.02Northwest Europe Brent 11.85 10.36 8.95Mediterranean Azeri Light 9.03 8.82 7.93Singapore Dubai/Tapis blend 14.57 10.69 8.51BP Average RMM 11.64 10.02 9.19In 2011, refining margins increased in all the main US regions, despite acontraction in domestic gasoline demand, with reduced gasoline importvolumes compensated for by higher domestic crude runs.In Europe, where diesel accounts for a large proportion of regionalconsumption, refining margins increased for a second year running despitethe loss of Libyan sweet crude supplies for much of the year, as demandfor commercial transport improved.Refining margins also improved in Asia Pacific, averaging$14.57 per barrel due to continuing oil demand growth and the disruptionto Japanese refining operations caused by the earthquake and tsunami.US mid-continent crude oils (including West Texas Intermediate(WTI)) were heavily discounted throughout the year because of increasingproduction in the US mid‐continent and Canada, coupled with constrainedinfrastructure for crude transportation. This particularly benefited BP’slocation-advantaged refineries of Toledo and Whiting in the US Midwest.In addition, fuel oil price discounts versus crude oil widened in 2011,benefiting our highly upgraded refineries that produce relatively littlefuel oil.In oil markets in 2011, supply was hampered by geo-politicalissues and a series of technical problems in non-OPEC crude production.This supply deficit brought OECD stocks down from historical highs tonear-average levels within the first nine months of the year. After very lowvolatility levels in the second half of 2009 and in 2010, 2011 saw a returntowards more average volatility.In lubricants, we saw modest improvement in demand for theautomotive and industrial sectors early in the year, but this came underincreasing pressure as the year progressed and by the fourth quarterdemand was declining in many geographies. Base oil prices rose markedlyin the first half of the year, increasing our input costs. We continued tosee a gradual shift towards higher-quality and higher-margin premium andsynthetic lubricants.In the first half of 2011, the petrochemicals margin environmentwas markedly different from the second half, due to strong demandfor purified terephthalic acid (PTA) coupled with supply interruptions inboth PTA and paraxylene (PX) leading to robust margins. In contrast thesecond half of the year saw the installed capacity run normally along withsignificant new capacity coming onstream. In addition concerns over theglobal economy affected demand, leading to a rapid reduction in margins.Acetic acid had a similar margin profile to PTA with supply interruptions inthe first half leading to higher margins followed by weaker margins in thesecond half of the year as additional capacity came onstream.Our strategyRefining and Marketing is the product and service-led arm of BP, focusedon fuels, lubricants and petrochemicals products and related services. Weaim to be excellent in the markets in which we choose to participate –those that allow BP to serve the major energy markets of the world. Wepursue competitive returns and sustainable growth, underpinned by safemanufacturing operations and technology, as we serve customers andpromote BP and our brands through high-quality products.We are focused on a consistent set of priorities executed in asystematic and disciplined way. These priorities begin with safety andinclude excellence of execution, portfolio quality and integration andgrowing margin share via exposure to growth. This is all underpinned by adisciplined financial framework. We believe that we now have a platformto sustain a world-class downstream business, which will enable us to bea leader in each of our chosen markets. Over time, we expect to shift the94 BP Annual Report and Form 20-F 2011