BP Annual Report and Form 20-F 2010

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Business review Profit or loss for the year Loss attributable to BP shareholders for the year ended 31 December 2010 was $3,719 million and included inventory holding gains a , net of tax, of $1,195 million and a net charge for non-operating items, after tax, of $25,449 million. In addition, fair value accounting effects had a favourable impact, net of tax, of $13 million relative to management’s measure of performance. Non-operating items in 2010 included a $40.9 billion pre-tax charge relating to the Gulf of Mexico oil spill. More information on non-operating items and fair value accounting effects can be found on pages 25-26. See Gulf of Mexico oil spill on page 34 and in Financial statements – Note 2 on page 158 for further information on the impact of the Gulf of Mexico oil spill on BP’s financial results. See Exploration and Production on page 40, Refining and Marketing on page 55 and Other businesses and corporate on page 61 for further information on segment results. Profit attributable to BP shareholders for the year ended 31 December 2009 included inventory holding gains, net of tax, of $2,623 million and a net charge for non-operating items, after tax, of $1,067 million. In addition, fair value accounting effects had a favourable impact, net of tax, of $445 million relative to management’s measure of performance. Profit attributable to BP shareholders for the year ended 31 December 2008 included inventory holding losses, net of tax, of $4,436 million and a net charge for non-operating items, after tax, of $796 million. In addition, fair value accounting effects had a favourable impact, net of tax, of $146 million relative to management’s measure of performance. The primary additional factors affecting the financial results for 2010, compared with 2009, were higher realizations, lower depreciation, higher earnings from equity-accounted entities, improved operational performance, further cost efficiencies and a more favourable refining environment in Refining and Marketing, partly offset by lower production, a significantly lower contribution from supply and trading (including gas marketing) and higher production taxes. The primary additional factors reflected in profit for 2009, compared with 2008, were lower realizations and refining margins and higher depreciation, partly offset by higher production, stronger operational performance and lower costs. Finance costs and net finance expense relating to pensions and other post-retirement benefits Finance costs comprise interest payable less amounts capitalized, and interest accretion on provisions and long-term other payables. Finance costs in 2010 were $1,170 million compared with $1,110 million in 2009 and $1,547 million in 2008. The decrease in 2009, when compared with 2008, is largely attributable to the reduction in interest rates. Net finance income relating to pensions and other post-retirement benefits in 2010 was $47 million compared with net finance expense of $192 million in 2009 and net finance income of $591 million in 2008. In 2010, compared with 2009, the improvement reflected the additional expected returns on assets following the increases in the pension asset base at the end of 2009 compared with the end of 2008. In 2009, the expected return on assets decreased significantly as the pension asset base reduced, consistent with falls in equity markets during 2008. a Inventory holding gains and losses represent the difference between the cost of sales calculated using the average cost to BP of supplies acquired during the year and the cost of sales calculated on the first-in first-out (FIFO) method, after adjusting for any changes in provisions where the net realizable value of the inventory is lower than its cost. BP’s management believes it is helpful to disclose this information. An analysis of inventory holding gains and losses by business is shown in Financial statements – Note 7 on page 167 and further information on inventory holding gains and losses is provided on page 81. 24 BP Annual Report and Form 20-F 2010 Taxation The credit for corporate taxes in 2010 was $1,501 million, compared with a charge of $8,365 million in 2009 and a charge of $12,617 million in 2008. The effective tax rate was 31% in 2010, 33% in 2009 and 37% in 2008. The group earns income in many countries and, on average, pays taxes at rates higher than the UK statutory rate of 28%. The decrease in the effective tax rate in 2010 compared with 2009 primarily reflects the absence of a one-off disbenefit that featured in 2009 in respect of goodwill impairment, and other factors.The decrease in the effective tax rate in 2009 compared with 2008 primarily reflects a higher proportion of income from associates and jointly controlled entities where tax is included in the pre-tax operating result, foreign exchange effects and changes to the geographical mix of the group’s income. Acquisitions and disposals In 2010, BP acquired a major portfolio of deepwater exploration acreage and prospects in the US Gulf of Mexico and an additional interest in the BP-operated Azeri-Chirag-Gunashli (ACG) developments in the Caspian Sea, Azerbaijan for $2.9 billion, as part of a $7-billion transaction with Devon Energy. For further information on this transaction, including required government approvals, see Exploration and Production on page 43. As part of the response to the Gulf of Mexico oil spill, the group plans to deliver up to $30 billion of disposal proceeds by the end of 2011. Total disposal proceeds during 2010 were $17 billion, which included $7 billion from the sale of US Permian Basin, Western Canadian gas assets, and Western Desert exploration concessions in Egypt to Apache Corporation (and an existing partner that exercised pre-emption rights), and $6.2 billion of deposits received in advance of disposal transactions expected to complete in 2011. Of these deposits received, $3.5 billion is for the sale of our interest in Pan American Energy to Bridas Corporation, $1 billion for the sale of our upstream interests in Venezuela and Vietnam to TNK-BP, and $1.3 billion for the sale of our oil and gas exploration, production and transportation business in Colombia to a consortium of Ecopetrol and Talisman, the latter completing in January 2011. See Financial statements – Note 4 on page 163. In Refining and Marketing we made disposals totalling $1.8 billion, which included our French retail fuels and convenience business to Delek Europe, the fuels marketing business in Botswana to Puma Energy, certain non-strategic pipelines and terminals in the US, our interests in ethylene and polyethylene production in Malaysia to Petronas and our interest in a futures exchange. There were no significant acquisitions in 2009. Disposal proceeds in 2009 were $2.7 billion, principally from the sale of our interests in BP West Java Limited, Kazakhstan Pipeline Ventures LLC and LukArco, and the sale of our ground fuels marketing business in Greece and retail churn in the US, Europe and Australasia. Further proceeds from the sale of LukArco are receivable in 2011. See Financial statements – Note 5 on page 164. In 2008, we completed an asset exchange with Husky Energy Inc., and asset purchases from Chesapeake Energy Corporation as described on page 23.
Business review Non-operating items Non-operating items are charges and credits arising in consolidated entities that BP discloses separately because it considers such disclosures to be meaningful and relevant to investors. They are provided in order to enable investors to better understand and evaluate the group’s financial performance. An analysis of non-operating items is shown in the table below. 2010 2009 $ million 2008 Exploration and Production Impairment and gain (loss) on sale of businesses and fixed assets 3,812 1,574 (1,015) Environmental and other provisions (54) 3 (12) Restructuring, integration and rationalization costs (137) (10) (57) Fair value gain (loss) on embedded derivatives (309) 664 (163) Other (113) 34 257 Refining and Marketing 3,199 2,265 (990) Impairment and gain (loss) on sale of businesses and fixed assetsa 877 (1,604) 801 Environmental and other provisions (98) (219) (64) Restructuring, integration and rationalization costs (97) (907) (447) Fair value gain (loss) on embedded derivatives – (57) 57 Other (52) 184 – Other businesses and corporate 630 (2,603) 347 Impairment and gain (loss) on sale of businesses and fixed assets 5 (130) (166) Environmental and other provisions (103) (75) (117) Restructuring, integration and rationalization costs (81) (183) (254) Fair value gain (loss) on embedded derivatives – – (5) Other (21) (101) (91) (200) (489) (633) Gulf of Mexico oil spill response (40,858) – – Total before interest and taxation (37,229) (827) (1,276) Finance costsb (77) – – Total before taxation (37,306) (827) (1,276) Taxation credit (charge) c 11,857 (240) 480 Total after taxation (25,449) (1,067) (796) a 2009 includes $1,579 million in relation to the impairment of goodwill allocated to the US West Coast fuels value chain. b Finance costs relate to the Gulf of Mexico oil spill. See Financial statements – Note 2 on page 158 for further details. c Tax is calculated by applying discrete quarterly effective tax rates (excluding the impact of the Gulf of Mexico oil spill) on group profit or loss, to the non-operating items as they arise each quarter. However, the US statutory tax rate has been used for expenditures relating to the Gulf of Mexico oil spill that qualify for tax relief. In 2009, no tax credit was calculated on the goodwill impairment in Refining and Marketing because the charge is not tax deductible. BP Annual Report and Form 20-F 2010 25 Business review
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BP Annual Report and Form 20-F 2010

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