-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gk3ilsdRS8tztsaKEDdPKm1XnHbKS05sDJKke84Cgj8WxUX08Q3T7QB9NA2k4/s8 hZ7VWTwU3s717HrNX8N90A== 0000950123-99-002941.txt : 19990406 0000950123-99-002941.hdr.sgml : 19990406 ACCESSION NUMBER: 0000950123-99-002941 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BP AMOCO PLC CENTRAL INDEX KEY: 0000313807 STANDARD INDUSTRIAL CLASSIFICATION: 2911 IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 001-06262 FILM NUMBER: 99585137 BUSINESS ADDRESS: STREET 1: BRITANNIC HOUSE STREET 2: 1 FINSBURY CIRCUS CITY: LONDON EC2M 7BA ENGL STATE: X0 BUSINESS PHONE: 2165865193 MAIL ADDRESS: STREET 1: BP AMERICA INC STREET 2: 200 PUBLIC SQ CITY: CLEVELAND STATE: OH ZIP: 44114 FORMER COMPANY: FORMER CONFORMED NAME: BRITISH PETROLEUM CO PLC DATE OF NAME CHANGE: 19970226 20-F 1 BP AMOCO P.L.C. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F (Mark One) [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER 1-6262 - - -------------------------------------------------------------------------------- BP AMOCO P.L.C. - - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) ENGLAND AND WALES - - -------------------------------------------------------------------------------- (Jurisdiction of incorporation or organization) BRITANNIC HOUSE 1 FINSBURY CIRCUS LONDON EC2M 7BA ENGLAND - - -------------------------------------------------------------------------------- (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class Name of each exchange on which registered ORDINARY SHARES OF 50C EACH NEW YORK STOCK EXCHANGE* - - --------------------------------------------- ----------------------------------------------------- *Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission
Securities registered or to be registered pursuant to Section 12(g) of the Act. NONE - - -------------------------------------------------------------------------------- Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. NONE - - -------------------------------------------------------------------------------- Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. ORDINARY SHARES OF 50C EACH................................. 9,683,010,023 CUMULATIVE FIRST PREFERENCE SHARES OF L1 EACH............... 7,232,838 CUMULATIVE SECOND PREFERENCE SHARES OF L1 EACH.............. 5,473,414
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No. _____ Indicate by check mark which financial statement item the Registrant has elected to follow. Item 17 _____ Item 18 X 2 TABLE OF CONTENTS
PAGE ---- Certain Definitions......................................... 3 Exchange Rates.............................................. 4 PART I Item 1 Description of Business..................................... 5 General..................................................... 5 Exploration and Production.................................. 8 Refining and Marketing...................................... 22 Chemicals................................................... 27 Other Businesses and Corporate.............................. 31 Regulation of the Group's Business.......................... 32 Environmental Protection.................................... 34 Additional Factors Which May Affect Business................ 39 Item 2 Description of Property..................................... 39 Item 3 Legal Proceedings........................................... 40 Item 4 Control of Registrant....................................... 40 Item 5 Nature of Trading Market.................................... 41 Item 6 Exchange Controls and Other Limitations Affecting Security Holders..................................................... 42 Item 7 Taxation.................................................... 42 Item 8 Selected Financial Data..................................... 46 Summarized Financial Information............................ 46 Dividends................................................... 48 Item 9 Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 49 Item 9A Quantitative and Qualitative Disclosures about Market Risk........................................................ 59 Item 10 Directors and Officers of Registrant........................ 65 Item 11 Compensation of Directors and Officers...................... 67 Item 12 Options to Purchase Securities from Registrant or Subsidiaries................................................ 76 Item 13 Interest of Management in Certain Transactions.............. 76 PART III Item 15 Defaults upon Senior Securities............................. 77 Item 16 Changes in Securities, Changes in Security for Registered Securities and Use of Proceeds......................................... 77 PART IV Item 18 Financial Statements........................................ 78 Item 19 Financial Statements and Exhibits........................... 78
- - ------------ Note: Omitted items are inapplicable. 2 3 CERTAIN DEFINITIONS Unless the context indicates otherwise, the following terms have the meanings shown below: OIL AND NATURAL GAS RESERVES 'Proved reserves' -- Estimated quantities of crude oil or natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date the estimate is made. 'Proved developed reserves' -- Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing natural forces and mechanisms of primary recovery are included as 'proved developed reserves' only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. 'Proved undeveloped reserves' -- Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances are estimates of proved undeveloped reserves attributable to acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. MISCELLANEOUS TERMS 'ADR' -- American Depositary Receipt. 'ADS' -- American Depositary Share. 'Amoco' -- Amoco Corporation and its subsidiaries. 'Associated undertaking' -- An undertaking in which the BP Amoco Group has a participating interest and over whose operating and financial policy the BP Amoco Group exercises a significant influence (presumed to be the case where 20% or more of the voting rights are held) and which is not a subsidiary undertaking. 'Barrel' -- 42 US gallons. 'Billion' -- 1,000,000,000. 'BP' or 'BP Group' -- The British Petroleum Company p.l.c. and its subsidiaries. 'BP p.l.c.' -- The British Petroleum Company p.l.c. 'BP Amoco', 'BP Amoco Group' or the 'Group' -- The Company and its subsidiaries. 'Cent' or 'c' -- One hundredth of the US dollar. The 'Company' -- BP Amoco p.l.c. 'Crude oil' -- Includes condensate and natural gas liquids. 'Dollar' or '$' -- The US dollar. 'Gas' -- Natural Gas. 'LNG' -- Liquefied Natural Gas. 'London Stock Exchange' or 'LSE' -- London Stock Exchange Limited. 'LPG' -- Liquefied Petroleum Gas. 'NGL' -- Natural Gas Liquids. 3 4 'Noon Buying Rate' -- The noon buying rate in New York City for cable transfers in pounds as certified for customs purposes by the Federal Reserve Bank of New York. 'OECD' -- Organization for Economic Cooperation and Development. 'Oil' -- Crude oil, condensate and natural gas liquids. 'OPEC' -- The Organization of Petroleum Exporting Countries. 'Ordinary Shares' -- Ordinary fully paid shares in BP Amoco p.l.c. of 50c each. 'Pence' or 'p' -- One hundredth of a pound. 'Pound', 'sterling' or 'L' -- The pound sterling. 'Preference Shares' -- Cumulative First Preference Shares and Cumulative Second Preference Shares in BP Amoco p.l.c. of L1 each. 'Subsidiary undertaking' -- An undertaking in which the BP Amoco Group holds a majority of the voting rights. 'Tonne' or 'metric ton' -- 2,204.6 pounds. 'Trillion' -- 1,000,000,000,000. 'UK' -- United Kingdom of Great Britain and Northern Ireland. 'UK GAAP' -- Generally Accepted Accounting Practice in the UK. 'Undertaking' -- A body corporate, partnership or an unincorporated association, carrying on a trade or business. 'US' or 'USA' -- United States of America. 'US GAAP' -- Generally Accepted Accounting Principles in the USA. EXCHANGE RATES The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate for the pound in New York City for cable transfers in pounds as certified for customs purposes by the Federal Reserve Bank of New York. This is expressed in dollars per L1.
Calendar year at Year End Average(a) High Low - - ------------- ----------- ---------- ---- ---- 1994.................................................. 1.57 1.54 1.64 1.46 1995.................................................. 1.55 1.58 1.64 1.53 1996.................................................. 1.71 1.57 1.71 1.49 1997.................................................. 1.64 1.64 1.70 1.58 1998.................................................. 1.66 1.66 1.72 1.61 1999 (through March 29)(b)............................ -- -- 1.66 1.60
- - ------------ (a) The average of the Noon Buying Rates on the last day of each month during the calendar year. (b) The Noon Buying Rate on March 29, 1999 was $1.61 = L1. 4 5 PART I ITEM 1 -- DESCRIPTION OF BUSINESS GENERAL Unless otherwise indicated, information in this Item reflects 100% of the assets and operations of the Company and its subsidiaries which were consolidated at the date or for the periods indicated, without the exclusion of minority interests. Also, unless otherwise indicated, figures for business turnover include sales between BP Amoco businesses. BP Amoco was created on December 31, 1998 by the merger of Amoco Corporation of the USA and The British Petroleum Company p.l.c. of the UK. The merger was effected by BP p.l.c. issuing ordinary shares to holders of Amoco common stock with an exchange ratio of 3.97:1. Following this merger, Amoco Corporation became a wholly owned subsidiary of BP p.l.c. and was renamed BP Amoco Corporation, and The British Petroleum Company p.l.c. was renamed BP Amoco p.l.c. Amoco Corporation was incorporated in Indiana, USA, in 1889 and The British Petroleum Company p.l.c. was incorporated in 1909 in England. BP Amoco's worldwide headquarters is located in London, UK. Amoco's former head office in Chicago, Illinois, USA, is the headquarters for our North American refining, marketing and transportation business. BP Amoco's operations are substantially US dollar-based. The share capital of BP p.l.c. was redenominated into US dollars at the time of the merger. Dividends are announced in US dollars. To reflect this, we now report our annual results and other financial information in US dollars under UK GAAP. BP Amoco has accounted for the merger using the merger method of accounting under UK GAAP. The merger qualifies for the pooling-of-interests method of accounting under US GAAP. Our main businesses are Exploration and Production, Refining and Marketing, and Chemicals. Exploration and Production's activities include oil and natural gas exploration and field development and production (upstream activities), together with pipeline transportation, gas processing and gas marketing (midstream activities). The activities of Refining and Marketing include oil supply and trading as well as refining and marketing (downstream activities). Chemicals activities include petrochemicals manufacturing and marketing. The Group provides high quality technological support for all its businesses through its research and engineering activities. We have well established operations in Europe, the USA, Canada, South America, Australasia and parts of Africa. The proposal, in August 1998, to merge BP and Amoco was a ground-breaking deal for the oil industry. Our aim was to create a new 'super-major' with significantly greater competitive strengths than either partner could achieve on its own. We believe there will be increased opportunities for the merged enterprise in remote regions of the world which have recently become accessible to the international exploration and production industry, and for satisfying increased energy and petrochemical demand in a number of the emerging markets. We also believe that combining the two companies' technical skills and commercial experience will enable us to achieve ongoing performance improvement relative to our main competitors. As a result of the merger, BP Amoco is Britain's largest company and one of the world's top three oil companies on the basis of market capitalization and proved reserves. The newly merged Group: -- has a daily production worldwide of 2.0 million barrels of crude oil and 5.8 billion cubic feet of natural gas -- is the largest producer of both oil and natural gas in the USA and in the UK, producing respectively 1.25 and 0.74 million barrels of oil equivalent a day -- has reserves of more than 14.9 billion barrels of oil and gas on an oil equivalent basis -- has 16,300 service stations in the USA and 12,000 in the rest of the world -- has chemicals revenues of $9 billion a year -- is one of the world's leading businesses in photovoltaics and solar power 5 6 -- is founded on a secure base with more than 70% of its capital invested in OECD countries with approximately one half of the Group's fixed assets located in the USA, and about one third located in the UK and the Rest of Europe. We believe that the merger will bring benefits to our three main businesses: -- Exploration and Production: in the USA BP's established oil production base in Alaska and its increasing presence in the Gulf of Mexico were combined with Amoco's Gulf of Mexico interests and its extensive oil and natural gas production in the Lower 48 states to create the largest producer of both oil and natural gas in the USA. The addition of Amoco's UK North Sea oil and natural gas operations and infrastructure to BP's existing position as the largest oil producer in the UK means that BP Amoco is the largest producer of both oil and natural gas from UK fields. The two companies also had complementary presences in several areas including Latin America, the Caspian Sea region and Africa. -- Refining and Marketing: Amoco's strong presence and brand in the midwest, east and southeast of the USA was reinforced by BP's business in the midwest and southeast. BP has a strong retail position in Europe (through its joint venture with Mobil) and in certain other markets where Amoco was not represented. The Amoco brand is expected to be extended over time to all of BP's retail, gasoline and convenience store outlets in the USA. Retail sites elsewhere in the world are expected to carry the BP brand. -- Chemicals: BP's strong position in the technology and production of olefins and derivative products, (polyethylene, acetic acid and acrylonitrile) was complemented by Amoco's leading position in aromatics and derivative products (purified terephthalic acid (PTA), paraxylene and metaxylene). We believe that the merged enterprise will be able to achieve $2 billion per annum of cost savings before tax by early 2000. The estimated cost savings, which are in addition to cost savings previously targeted by the two companies separately, are expected to come from staff reductions in areas of overlap, more focused exploration efforts, standardization and simplification of business processes, improved procurement and elimination of duplicated operations. We expect to bear a substantial part of the costs associated with this restructuring, likely to be around $1.5 billion pre-tax, during 1999. The following table summarizes the Group's turnover, results and capital expenditure for the last five years and total assets at the end of each of those years.
Years ended December 31, ----------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- ($ million) Turnover.................................... 83,732 108,564 102,064 84,216 76,809 Less: Joint ventures........................ 15,428 16,804 -- -- -- ------- ------- ------- ------- ------- Group turnover (sales to third parties)..... 68,304 91,760 102,064 84,216 76,809 Total replacement cost operating profit..... 6,437 10,583 10,544 8,170 7,004 Profit for the year *....................... 3,260 6,030 7,241 3,602 4,352 Capital expenditure and acquisitions........ 10,362 11,420 10,288 8,380 6,710 Total assets................................ 84,500 85,947 88,315 81,165 78,679
- - ------------ * After minority shareholders' interest Information for 1998, 1997 and 1996 concerning the profits and assets attributable to the businesses and to the geographical areas in which the Group operates is set forth in Item 18 -- Note 46 of Notes to Financial Statements. 6 7 The following table shows our production for the last five years and the estimated proved oil and natural gas reserves at the end of each of those years.
Years ended December 31, ----------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Total crude oil production (thousand barrels per day) (a).............................. 2,049 1,930 1,903 1,873 1,933 Total natural gas production (million cubic feet per day) (a)......................... 5,808 5,858 5,917 5,485 5,490 Total estimated net proved crude oil reserves (million barrels) (b)............ 7,304 7,612 7,325 6,987 6,790 Total estimated net proved natural gas reserves (billion cubic feet) (b)......... 31,001 30,374 30,349 29,534 28,766
- - ------------ (a) Includes BP Amoco's share of equity-accounted entities. (b) Net proved reserves of crude oil and natural gas exclude production royalties due to others and reserves of equity-accounted entities. During 1998, 1,339 million barrels of oil and natural gas, on an oil equivalent* basis (mmboe), were added to BP Amoco's proved reserves, more than replacing the volume produced. After allowing for production which amounted to 1,012 mmboe and sales net of purchases totalling 527 mmboe, BP Amoco's proved reserves decreased to 12,649 mmboe. These proved reserves are mainly located in the USA (47%), the UK (18%) and Trinidad and Tobago (13%). RECENT DEVELOPMENT On April 1, 1999 we announced that we had reached agreement to combine with the Atlantic Richfield Company ('ARCO') of Los Angeles. The all-share transaction, approved by the boards of both companies, provides for the exchange of 0.82 of a BP Amoco American Depositary Share (4.92 BP Amoco Ordinary Shares) for each share of ARCO common stock. Completion of the transaction is subject to certain conditions including the approval of shareholders of both companies and the consent of various state and regulatory authorities including the US Federal Trade Commission and the European Commission. Our report on Form 6-K, dated April 1, 1999, filed with the Securities and Exchange Commission contains additional information regarding this announcement. - - ------------ * Natural gas is converted to oil equivalent at 5.8 billion cubic feet = 1 million barrels. 7 8 EXPLORATION AND PRODUCTION The activities of our Exploration and Production business include oil and natural gas exploration and field development and production -- the upstream activities -- as well as processing and marketing natural gas and the management of crude oil and natural gas pipeline assets -- the midstream activities. We have Exploration and Production interests in 26 countries, with the main concentration in the USA and in the UK sector of the North Sea. Production during 1998 came from 19 countries. Our most significant midstream activities are the Trans Alaska Pipeline System (BP Amoco 50%), the Forties Pipeline System (BP Amoco 100%), the Central Area Transmission System pipeline (BP Amoco 29.5%) in the UK sector of the North Sea, and the Atlantic LNG Project (BP Amoco 34%) in Trinidad.
Years ended December 31, --------------------------- 1998 1997 1996 ------- ------ ------ ($ million) Turnover (a)................................................ 17,276 23,171 23,404 Total replacement cost operating profit..................... 3,147 7,285 7,673 Total assets................................................ 47,393 45,692 44,114 Capital expenditure and acquisitions........................ 6,318 7,879 6,433 ($ per barrel) Average BP Amoco oil realizations........................... 12.1 18.3 19.5 ($ per thousand cubic feet) Average BP Amoco US natural gas realizations................ 1.8 2.2 1.9
- - ------------ (a) Excludes BP Amoco's share of joint venture turnover of $348 million in 1998, $112 million in 1997 and nil in 1996. Our Exploration and Production strategy has two key elements. The first is to maximize the value realized from our existing assets and resource base. This includes the following actions: -- We actively manage existing producing assets to maintain and improve the net income and operating cash flow realized from our oil and natural gas production. In addition, we strive to reduce the cost and improve the efficiency of new investment projects. Significant savings have been achieved by developing closer relationships with partners, contractors and suppliers, and by agreeing with these parties common incentives to improve productivity. We also link internal compensation to operating and investment efficiency, as well as safety and environmental performance. -- We seek opportunities for profitable growth in both the upstream and midstream activities, within the context of the market environment and Group financial policies. This includes the use of decline management and enhanced recovery technologies to increase recoveries and temper the volume decline in mature fields. It also includes investing in midstream activities which are relatively unaffected by oil and natural gas price movements, and using our pipeline infrastructure and natural gas marketing expertise to secure additional revenue by transporting and processing volumes owned by other companies. -- We continually upgrade the quality of our asset portfolio by focusing investments in core areas and disposing of non-strategic assets. This can be achieved through asset swaps, purchases and sales. Examples of recent strategic divestments include our $1.8 billion sale of non-core North American assets in 1997 and 1998, and our exit from Papua New Guinea in 1998. The second element of our Exploration and Production strategy is to renew the business and to provide growth for the future. We do this through exploration and selected business development activity, as described below: -- Our exploration program focuses on areas which have been relatively unexplored for political or technical reasons, and where we believe substantial volumes of low cost, high value reserves remain to be found. We are concentrating our exploration activity in areas of recent success, such as Angola, Azerbaijan, Colombia, Egypt, Trinidad, UK waters west of the Shetland Islands, the deep waters of the US Gulf of Mexico and Venezuela. 8 9 -- Our business development activities focus on obtaining an interest in already discovered reserves and extending our interests into selected midstream areas. For example, we are building business relationships in Kuwait with technical service agreements, and have secured long-term opportunities in a range of areas including Algeria, Kazakhstan and, in alliance with A O Sidanco, Siberia. We have also captured opportunities which broaden our position and capitalize on the rapid growth of midstream natural gas and power markets in such countries as Argentina, Netherlands, Trinidad and the UK. BP Amoco is acquiring an interest in Rusia, an Irkutsk-based company, from A O Sidanco, by contributing to the appraisal costs of Rusia's Siberian fields, which include the major gas condensate field Koviktinskoye. The investment in A O Sidanco has been written down by $200 million to reflect recent developments in the Russian economy. The merger of BP and Amoco will benefit both elements of our strategy. We expect to be able to capitalize on cost reduction opportunities where we had parallel operations, and can now draw on the best practices and experience of two successful companies to optimize further our operations and investment program. The merger has also provided a better geographic, oil/natural gas and upstream/midstream balance in our portfolio. UPSTREAM ACTIVITIES EXPLORATION The Group explores for and produces oil and natural gas under a wide range of licensing, joint venture and other contractual agreements. We may do this alone or, more frequently, with partners. BP Amoco acts as operator for many of these ventures. The Group's worldwide capital expenditure on exploration and appraisal in 1998 was $1,644 million, a decrease of $312 million or 16% compared with 1997. We expect further reductions in the near term because of the low oil price environment and the high-grading opportunities provided by merging the BP and Amoco exploration portfolios. In 1998, we participated in 191 gross (95.6 net) exploration and appraisal wells in 17 countries. The principal areas of activity were Algeria, Angola, Canada, Colombia, Egypt, the UK, the USA and Venezuela. In 1998, BP Amoco obtained upstream rights in several new tracts, which are expected to provide a foundation for continued exploration success. These include the following: -- In Alaska, BP Amoco and partners won more than 90% of the blocks bid for in Offshore Continental Shelf Lease Sale 170. -- In Algeria, we signed an agreement with Sonatrach, the Algerian state oil and gas company, covering the In Amenas area in southern Algeria. BP Amoco and Sonatrach expect to develop jointly several fields containing more than 3 trillion cubic feet (tcf) of natural gas and 200 million barrels (mmb) of liquids, build pipeline infrastructure, and construct a 700 million cubic feet per day (mmcf/d) gas treatment plant. First gas production is expected to occur in 2002. This is in addition to the 1995 agreement with Sonatrach to explore and produce gas in the Sahara desert in Algeria with the aim of marketing to Europe through the In Salah marketing company. Our In Salah appraisal program continued in 1998. -- In Angola, we acquired a 20% interest in a production sharing agreement covering deep water block 21. This new block is adjacent and geologically similar to other acreage where BP Amoco and partners have discovered several large fields. -- On Australia's North West Shelf, we obtained an additional license (BP Amoco 20%) as part of the 1997 Gazettal round. -- In Azerbaijan, we obtained operating rights and 15% ownership interest in the Alov, Araz and Sharg production sharing agreement, as well as a 25% interest in production sharing rights in the Inam geological structure in the offshore Caspian Sea. -- In Colombia, we were awarded two blocks in July 1998. We signed an agreement with Arco in October 1998 to jointly explore this acreage. Geological and geophysical analyses are now underway. 9 10 -- In Kazakhstan, BP Amoco and a subsidiary of the national oil company of Turkey, as equal partners, established a joint venture company to explore for and produce oil and natural gas. We expect to begin drilling in mid-1999. -- In Mozambique, we were awarded a production sharing agreement providing exploration and development rights in the offshore Zambesi area (BP Amoco 100%). In 1998, we announced significant discoveries in Angola, Canada, Norway, the UK, the USA and Venezuela. In most cases, reserve bookings from these fields will depend on the results of ongoing technical and commercial evaluations, including appraisal drilling. Our 1998 discoveries included the following: -- In Angola, we participated in the Rosa-1 discovery in Block 17 (BP Amoco 16.7%), close to the Girassol and Dalia finds announced in 1997, as well as the Kissanje, Marimba, Hungo and Dikanza discoveries in Block 15 (BP Amoco 26.7%). -- In Canada, we drilled the Weejay discovery (BP Amoco 51%) in British Columbia, which was tested at 20 mmcf/d. We are proceeding with a multi-well drilling program, including a second well, West Ojay, to be tested in May 1999. -- In Norway, the Barden well confirmed significant natural gas reserves in the southern extension of the Ormen Lange Dome (BP Amoco 45%). We also made a significant oil and natural gas discovery approximately 200 kilometres off the coast of Helgeland (BP Amoco 30%). -- In Venezuela, we drilled the Tropical-1X exploratory discovery on the Quiriquire block (BP Amoco 45%) and participated in the Cotoperi-2X discovery on the Jusepin block (BP Amoco 45%). -- Offshore in the UK, we completed well 49/23-9, which confirmed the economic viability of the Bell field. -- In the US Gulf of Mexico, we participated in the Crosby deep water discovery (BP Amoco 44.4%) close to the Mars field. -- Also in the USA, BP Amoco made a new natural gas discovery at a record depth of 22,000 feet in the Judge Digby Field (BP Amoco 85%), onshore Louisiana. We put the well into immediate production at around 30 mmcf/d. This was the 19th successful well in the ongoing Tuscaloosa Trend drilling program, where application of new technology has enabled us significantly to enhance the value of a core onshore US producing area. In 1998, total additions to our proved reserves (excluding purchases and sales) amounted to 1,339 mmboe. We added 1,141 mmboe through extensions to existing fields and discoveries of new fields, and a further 198 mmboe through revisions to previous estimates and the application of improved recovery techniques. The principal reserve additions were in Angola, Egypt and Trinidad as follows: -- In Angola, appraisal drilling has confirmed 101 million barrels of oil reserves in the Girassol field (BP Amoco 16.7%). We approved full development of the field in June 1998. -- In Egypt, we added 758 billion cubic feet (bcf) of natural gas reserves following successful gas sales contract negotiation. This includes 304 bcf in the Ha'py and East Baltim natural gas fields (BP Amoco 29%) and a further 259 bcf net in the Temsah discovery (BP Amoco 25%). -- In Trinidad and Tobago, we added through discoveries and extensions 1,760 bcf of natural gas reserves. This followed successful drilling in the Immortelle and Flamboyant fields, as well as the Perang discovery (all BP Amoco 100%). Out of 21 exploratory wells drilled in Trinidad over the last 5 years, 15 were successful, establishing net natural gas reserves exceeding 8,400 bcf for growing domestic and liquefied natural gas (LNG) export markets. RESERVES AND PRODUCTION We annually review our total reserves of crude oil, condensate, natural gas liquids and natural gas to take account of production, field reassessments, the application of improved recovery techniques, the addition of new reserves from discoveries and economic factors. We also conduct selective periodic reserve reviews for individual fields. 10 11 Details of our net proved reserves of crude oil, condensate, natural gas liquids and natural gas at December 31, 1998, 1997, and 1996 and production for each of the three years then ended are set out in the Supplementary Oil and Gas Information in Item 19 -- Financial Statements and Exhibits. On an oil equivalent basis, natural gas represents some 42% of the Group's hydrocarbon reserves (excluding equity-accounted entities). Our total hydrocarbon production (including equity-accounted entities) during 1998 averaged 3,050,000 barrels of oil equivalent per day (boe/d), an increase of 110,000 boe/d compared with 1997. About 41% of production was in the USA and 24% in the UK. 11 12 The following tables show BP Amoco's estimated proved oil and natural gas reserves at December 31, 1998 and production by major field (asterisks denote major fields operated by BP Amoco) for the last three years: CRUDE OIL (a)
Net proved reserves as of Net production December 31, ------------------------ Field or Area Interest 1998 1998 1997 1996 ------------- --------- ----------------- ------ ------ ------ (%) (million barrels) (thousand barrels per day) Alaska (b) Prudhoe Bay* 51.2/13.8(c) 1,143 232 266 297 Kuparuk 39.2 445 92 90 93 Milne Point* 91.2 257 43 40 30 Point McIntyre 32.2 47 36 44 43 Endicott* 67.9 139 30 36 43 Other Various 305 21 22 25 ----------------- ------ ------ ------ Total Alaska 2,336 454 498 531 Lower 48 onshore (b) Wasson* 43.0 253 28 28 6 Other Various 883 234 257 259 ----------------- ------ ------ ------ Total Lower 48 onshore 1,136 262 285 265 Gulf of Mexico (b) Pompano* 75.0 42 34 29 24 Mars 28.5 111 29 22 4 Other Various 336 54 34 35 ----------------- ------ ------ ------ Total Gulf of Mexico 489 117 85 63 ----------------- ------ ------ ------ TOTAL USA 3,961 833 868 859 ----------------- ------ ------ ------ UK North Sea (b) Forties* 95.4 153 76 75 93 Magnus* 85.0 106 61 59 81 Harding* 70.0 100 60 50 25 Foinaven* 72.0 193 51 3 -- Andrew* 62.8 64 43 37 11 Miller* 40.0 18 31 43 54 ETAP Various 307 30 -- 10 Other Various 490 118 124 136 ----------------- ------ ------ ------ Total UK North Sea 1,431 470 391 410 Onshore Wytch Farm* 50.5 96 48 45 47 Other Various 1 -- 1 1 ----------------- ------ ------ ------ TOTAL UK 1,528 518 437 458 ----------------- ------ ------ ------ Rest of Europe Norway (b) Various Various 269 103 113 78 Netherlands Various Various 2 2 2 2 ----------------- ------ ------ ------ TOTAL REST OF EUROPE Various 271 105 115 80 ----------------- ------ ------ ------
12 13
Net proved reserves as of Net production December 31, ------------------------ Field or Area Interest 1998 1998 1997 1996 ------------- --------- ----------------- ------ ------ ------ (%) (million barrels) (thousand barrels per day) Rest of World Egypt October 30.4 50 30 38 40 Other Various 100 75 66 71 Canada (b) Primrose* 99.0 206 29 16 8 Other Various 157 39 45 52 Colombia Various Various 195 54 33 26 Trinidad Various Various 181 47 48 51 Venezuela Various Various 215 31 21 12 Australia Various 16.7 102 30 28 25 Azerbaijan Chirag 34.1 184 16 -- -- Other (b) Various Various 154 34 43 57 ----------------- ------ ------ ------ TOTAL REST OF WORLD 1,544 385 338 342 ----------------- ------ ------ ------ TOTAL GROUP 7,304 1,841 1,758 1,739 ================= ====== ====== ====== Equity-accounted entities Abu Dhabi (d) Various Various 1,791 124 118 116 Argentina Various Various 135 45 48 48 Other Various Various 87 39 6 -- ----------------- ------ ------ ------ TOTAL EQUITY-ACCOUNTED ENTITIES 2,013 208 172 164 ----------------- ------ ------ ------ TOTAL GROUP AND BP AMOCO SHARE OF EQUITY-ACCOUNTED ENTITIES 9,317 2,049 1,930 1,903 ================= ====== ====== ======
13 14 NATURAL GAS (a)(e)
Net proved reserves as of Net production December 31, ------------------------ Field or Area Interest 1998 1998 1997 1996 ------------- --------- -------------------- ------ ------ ------ (%) (billion cubic feet) (million cubic feet per day) Lower 48 onshore (b) Colorado Coal* Various 1,269 172 154 222 Hugoton* Various 467 122 172 202 Moxa Arch* Various 313 110 59 82 New Mexico Coal* Various 298 104 93 146 Red Oak* Various 512 83 92 104 Wamsutter* Various 428 82 80 73 Port Hudson* Various 105 73 70 75 Other Various 3,700 997 1,229 1,215 -------------------- ------ ------ ------ Total Lower 48 onshore 7,092 1,743 1,949 2,119 Alaska Various Various 2,387(f) 10 12 15 Gulf of Mexico (b) Various Various 1,816 568 488 516 -------------------- ------ ------ ------ TOTAL USA 11,295 2,321 2,449 2,650 -------------------- ------ ------ ------ UK North Sea (b) Bruce* 37.0 601 182 202 233 Village Fields* 100.0 234 153 282 239 West Sole* 100.0 424 102 99 73 Armada 18.2 173 74 14 -- East Leman* 48.4 182 71 49 72 Braes Various 477 69 76 44 Other Various 2,547 601 695 668 Onshore Various Various 5 6 6 6 -------------------- ------ ------ ------ TOTAL UK 4,643 1,258 1,423 1,335 -------------------- ------ ------ ------ Netherlands Various Various 200 141 126 124 Norway Various Various 162 59 69 49 -------------------- ------ ------ ------ TOTAL REST OF EUROPE 362 200 195 173 -------------------- ------ ------ ------ Canada (b) Various Various 2,077 767 764 803 Trinidad Flamboyant* 100.0 564 187 121 123 Immortelle* 100.0 1,280 125 105 108 Other Various 6,565 127 104 125 Sharjah Sajaa 40.0 270 157 134 136 Other Various 74 62 97 88 Australia Various 16.7 1,755 211 202 203 Indonesia Pagerungan 40.0 683 108 129 119 Other (b) Various Various 1,433 64 22 54 -------------------- ------ ------ ------ TOTAL REST OF WORLD 14,701 1,808 1,678 1,759 -------------------- ------ ------ ------ TOTAL GROUP 31,001 5,587 5,745 5,917 ==================== ====== ====== ======
14 15
Net proved reserves as of Net production December 31, ------------------------ Field or Area Interest 1998 1998 1997 1996 ------------- -------- -------------------- ------ ------ ------ (%) (billion cubic feet) (million cubic feet per day) Equity-accounted entities Argentina Various Various 939 128 19 -- Other Various Various 827 93 94 -- -------------------- ------ ------ ------ TOTAL EQUITY-ACCOUNTED ENTITIES 1,766 221 113 -- -------------------- ------ ------ ------ TOTAL GROUP AND BP AMOCO SHARE OF EQUITY-ACCOUNTED ENTITIES 32,767 5,808 5,858 5,917 ==================== ====== ====== ======
- - ------------ (a) Net proved reserves of crude oil and natural gas, stated as of December 31, 1998, exclude production royalties due to others, and include minority interests in fully consolidated operations. (b) In 1998, BP Amoco sold its interests in Papua New Guinea, and non-core interests in the USA and the UK sector of the North Sea were sold, purchased or swapped. In 1997 BP Amoco sold, purchased or swapped a number of interests in the North Sea. These transactions increased our interest in a number of fields, including Ula, Gyda and Draugen in Norway and Amethyst and Ravenspurn North in the UK sector of the Southern North Sea. We also sold non-core assets in the USA. Late in 1997, BP Amoco purchased a 10% interest in A O Sidanco, a Russian oil company, for which reserves are included within associated undertakings in 1998. In 1996 BP Amoco sold or swapped a number of minor interests in the North Sea and the Gulf of Mexico. This was offset by increases in BP Amoco's interest in a number of fields including Forties and elsewhere in the North Sea, Norway and Milne Point in Alaska. Additionally, in the USA and Canada we added to core operating areas while selling interests in non-core areas. (c) BP Amoco has a 51.2% interest in the oil rim and a 13.8% interest in the gas cap. (d) The BP Amoco Group holds proportionate interests, through associated undertakings, in onshore and offshore concessions in Abu Dhabi expiring in 2014 and 2018, respectively. (e) Natural gas production volumes exclude gas consumed in operations. (f) Includes natural gas to be consumed in operations. 15 16 United States We are the largest producer of both oil and natural gas in the USA. Our 1998 US oil production averaged 833,000 barrels per day (b/d), with an additional 8,000 b/d from equity-accounted entities. This was a decline of 3% from 1997. Approximately 55% of 1998 oil production came from Alaska, 31% from onshore Lower 48 states, and the remainder from the Gulf of Mexico. Our 1998 US natural gas production averaged 2,321 mmcf/d, with an additional 80 mmcf/d from equity-accounted entities. This was down 5% from 1997. Our current principal producing fields in Alaska are in production decline. Several developments are either planned or under construction to temper this decline and enable Alaska to remain a major producing area for the foreseeable future. Elsewhere in the USA, we expect increases in the Gulf of Mexico to more than offset the decline onshore. Development expenditure in the USA (excluding pipelines) during 1998 was $1,670 million, compared with $1,744 million in 1997. Current development activity in Alaska includes the following: -- The Badami oil field (BP Amoco 70% and operator) came onstream in the third quarter of 1998, but we temporarily suspended production in early 1999 in order to perform well work and analyze additional reservoir data. -- The first phase of development of the Northstar field (BP Amoco 98% and operator) began in 1998. We are now building an ice road needed to construct the gravel island where field facilities will be located. However, we suspended facility fabrication work for one year due to low oil prices. We now expect production to commence in 2001 with a plateau rate of 52,000 b/d net. Onshore in the Lower 48 states, BP Amoco's production of crude oil, condensate, NGL and natural gas averaged 563,000 boe/d, down from 621,000 boe/d in 1997. Production comes from a large number of fields situated principally in the states of Alabama, Colorado, Kansas, Louisiana, New Mexico, Oklahoma, Texas and Wyoming. In the Permian Basin area of west Texas and southeast New Mexico our production activity is conducted through Altura Energy Ltd. (Altura), a partnership with Shell Oil Company in which we have a 64% interest. Since Altura was formed in 1997, the partnership has achieved significant progress in reducing costs and capitalizing on economies of scale. In 1998, Altura produced 135,000 b/d of crude oil and 132 mmcf/d of natural gas. In the areas of our Lower 48 portfolio not operated through Altura, our production is predominantly natural gas. Through divestments and property exchanges, we have focused our onshore producing activities in areas where we are a leading producer. Major activity areas include the following: -- Overthrust Belt, Moxa Arch and Wamsutter -- southern Wyoming -- San Juan Basin coal and conventional gas fields -- Colorado and New Mexico -- Hugoton and Panoma fields -- western Kansas -- Oklahoma and Texas panhandles (through Crescendo Resources, a joint venture with YPF, a major Argentina based energy company) -- Red Oak and Wilburton fields -- Arkoma Basin, eastern Oklahoma -- Cotton Valley trend -- east Texas -- Tuscaloosa trend -- Louisiana. In the Gulf of Mexico, combined offshore oil and natural gas production increased from some 169,000 boe/d net to 215,000 boe/d in 1998. Significant 1998 development activity in the Gulf of Mexico included the following: -- In the Mars field (BP Amoco 28.5%) we brought three new wells online. Production increased to 135,000 boe/d gross, and is expected to peak at 150,000 boe/d gross in 1999. -- In the Troika field (BP Amoco 33.3% and operator) we started production from a third well, with two or three more wells planned for the future. Production averaged 77,000 boe/d gross compared with 59,000 boe/d gross in 1997. -- Ram/Powell (BP Amoco 31%) development continued following the commencement of production in September 1997. Production averaged 84,000 boe/d gross in 1998. 16 17 -- Development of the Marlin project (BP Amoco 88% and operator) continued during 1998, with initial production expected in the second half of 1999. The Marlin facilities now being built will serve as a hub for future BP Amoco developments in the area. -- Development continued on the Ursa oil and natural gas field (BP Amoco 22.7%), which is located 13 kilometres east of the Mars field. Production is scheduled to begin in 1999 and peak at 200,000 boe/d gross in 2001. -- Development of the Hoover/Diana oil and natural gas fields (BP Amoco 33.3%) continued in 1998. This simultaneous development of two fields, with combined resources of 300 mmboe gross, represents BP Amoco's deepest water project to date. It is also our first deep water development in the western Gulf of Mexico. Facilities fabrication work is ongoing. First production is targeted for mid-2000. United Kingdom We are the largest producer of both oil and natural gas in the UK. Our 1998 UK oil production of 518,000 b/d was 81,000 b/d higher than in 1997, as production from the recently commissioned fields more than offset declines in mature fields. Our UK natural gas production fell 12% from 1,423 mmcf/d in 1997 to 1,258 mmcf/d in 1998. This reflected the decline at older UK offshore fields, which is expected to be offset in the future by new production from the Eastern Trough Area Project (ETAP). Our 1998 development expenditure in the UK (excluding pipelines) was $1,432 million, compared with $1,463 million in 1997. Significant 1998 activity included the following: -- Production continued to build up from the first phase of the Foinaven field (BP Amoco 72% and operator), which was brought on line in November 1997. Development was completed in 1998. Located in waters 500 metres deep, Foinaven was the first producing oil field in the deep water Atlantic Margin, west of the Shetland Islands. Oil flows from the well through flexible flow lines to a floating production storage and offshore loading vessel (FPSO) and is then carried by dedicated shuttle tanker to the Flotta oil terminal, Orkney. Plateau production level is estimated at 85,000 b/d gross. -- Schiehallion (BP Amoco 33.4% and operator), our second west of Shetland development, commenced production in the third quarter of 1998 and is expected to reach 148,000 b/d gross in 1999. -- ETAP achieved first production in the summer of 1998. The project comprises seven initial fields -- Marnock, Machar, Mungo and Monan (BP Amoco-operated) and Heron, Egret and Skua (Shell-operated). We have no equity interest in the Shell-operated fields. This integrated development project includes central processing facilities over the Marnock field, a normally unmanned facility over the Mungo field and subsea facilities for the other fields linked back to the central facilities. -- We established first production in late 1998 from the Phase 2 expansion of Bruce field (BP Amoco 37% and operator). This expansion involves subsea development of the western area of the field, linked by a bundled pipeline to a new steel platform. -- The Viking Phoenix project (BP Amoco 50%) achieved first natural gas production in 1998. This project also includes modernization and rationalization for the existing Viking B complex to convert it to a normally unmanned installation by the year 2000, and is expected to increase Viking natural gas recovery by 350 bcf gross. Rest of Europe Our oil production in Norway decreased from 111,000 b/d in 1997 to 101,000 b/d in 1998 as a result of field decline. Net production was 35,000 b/d from Draugen (BP Amoco 18.4%), 24,000 b/d from Valhall (BP Amoco 28.1% and operator), 23,000 b/d from Ula (BP Amoco 80% and operator), 19,000 b/d from Gyda (BP Amoco 56% and operator). In the Netherlands, BP Amoco has supplemented long-standing upstream operations with recent investments in natural gas storage activities. In 1998, our upstream production increased to 141 mmcf/d from 126 mmcf/d in 1997. This included an increase to 73 mmcf/d from 42 mmcf/d in the P/18-2 field (BP 17 18 Amoco 48.7% and operator). We also completed facilities to process production at the Q/16 development, expanding our position as a processing hub for other operators. Rest of World The Group's net share of oil production from the rest of the world increased 15% from 1997, averaging 585,000 b/d in 1998. This included 200,000 b/d from associated undertakings, of which 124,000 b/d came from Abu Dhabi, where we have equity interests of 9.5% and 14.7% in onshore and offshore concessions expiring in 2014 and 2018, respectively. Other areas of oil production in 1998 were Australia, Argentina, Azerbaijan, Bolivia, Canada, China, Colombia, Egypt, Indonesia, Papua New Guinea, Russia, Sharjah, Trinidad and Venezuela. Our share of natural gas production from the rest of the world increased 13% from 1997, averaging 1,949 mmcf/d in 1998 including 141 mmcf/d from associated undertakings. The largest part of the 1998 production came from Canada, with the remainder from Argentina, Australia, Bolivia, Colombia, Egypt, Indonesia, Papua New Guinea, Sharjah and Trinidad and Tobago. In Australia, our share of LNG from the North West Shelf gas development (BP Amoco 16.7%) remained in line with that of the previous year at 1.3 million tonnes (approximately equivalent to 180 mmcf/d of gas). Development expenditure in the rest of the world (excluding pipelines) amounted to $1,569 million in 1998, compared with $1,714 million in 1997. In 1998, this expenditure was primarily in Colombia, Venezuela, Canada and Trinidad: -- In Colombia, the second phase of the Cusiana/Cupiagua development (BP Amoco 19% and operator) started up. This includes a pipeline from Cusiana to the Covenas terminal, upgraded by replacement with a new pipeline in some places and by installation of additional pumping stations, and the start-up of the Cupiagua reservoir. Following disappointing performance from the Opon natural gas reservoir, we wrote down the carrying value of the field and related assets by $214 million. We subsequently dismantled and sold the major equipment of the associated electric power generation operation. -- In Venezuela, we own varying interests in five blocks in the eastern part of the country. Our activities include exploration, development, and reactivation of old reservoirs. In 1998, we continued appraisal and development work in the Quiriquire reactivation program (BP Amoco 45%) and drilled a number of wells as part of the second phase of development of the Pedernales field (BP Amoco 100% and operator) in the Orinoco Delta. We drilled and brought into production four wells, including a new discovery, in the Jusepin Block (BP Amoco 45%), where net production reached 15,000 b/d in 1998. We completed 3-D seismic programs and began exploration drilling in the Punta Pescador (BP Amoco 50% and operator) and Guarapiche (BP Amoco 75% and operator) blocks. -- In Canada, we have substantial heavy oil operations in the Primrose, Wolf Lake and Wabasca areas near Edmonton, Alberta. We suspended our drilling program in the area in the first quarter of 1998 due to the sharp decline in heavy oil prices. In 1997, we entered into an agreement with CU Power International Limited to develop a co-generation plant in the Primrose area, which will reduce operating costs and provide steam and power for field use, and electricity sales to third parties. The plant was completed in 1998. We are evaluating opportunities to increase well productivity and reduce future development costs. A resumption of development activity is largely dependent on improvements in both costs and prices. In the Alberta foothills, we brought into production a new natural gas well producing over 70 mmcf/d (BP Amoco 55%). This new well increases our share of production from the Blackstone Swan Hills pool by 70%. -- We have been engaged in exploration and production activities in Trinidad and Tobago since 1961. We hold a 100% interest in 121 tax and royalty licenses and a partial interest in production sharing contracts on two recently acquired licenses. Our Trinidad operations are in a transition from primarily oil to a balance of oil and natural gas activities. Our 1998 oil production decreased 2% to 47,000 b/d, while our natural gas production increased 33% to 439 mmcf/d. Since 1994, we have discovered oil and natural gas resources, and established markets sufficient to record 8.4 tcf of proved natural gas reserves at the end of 1998. In addition to domestic sales contracts for up to 700 mmcf/d with the National Gas Company of Trinidad and Tobago, and varying interests in local power and industrial companies, we hold a 34% ownership interest in Atlantic LNG Company of 18 19 Trinidad and Tobago's liquefied natural gas plant. We will supply 100% of the plant's initial natural gas requirement of approximately 450 mmcf/d beginning in mid-1999. In 1998 an alliance was formed between Amoco and the Spanish integrated oil company, Repsol S.A. The alliance will pursue new gas-fired power generation projects in Spain and natural gas opportunities in Latin America and the Caribbean. Subject to government and partner approval of an expanded LNG infrastructure, natural gas is expected to be supplied to the expanded facilities largely by Amoco for LNG sales primarily into Spanish markets. -- In early 1998, we achieved first production from the Azeri-Chirag-Gunashli (ACG) early oil project in the Caspian Sea, offshore Azerbaijan. The ACG complex is operated by the Azerbaijan International Operating Company (AIOC), a consortium in which we are the leading participant with a 34.1% interest. Production from the early oil project is expected to plateau at 105,000 b/d gross by 1999. We have developed two pipeline routes to meet short-term export requirements. Several additional development phases are planned, with total capital investment projected to exceed $8 billion gross over the 30-year term of AIOC's contract. Approximately half of this investment is expected to occur over the next five years. -- Through the Gulf of Suez Petroleum Company (GUPCO), a joint operating company with the Egyptian General Petroleum Corporation, we operate seven production sharing contracts in the Gulf of Suez and the Western Desert. GUPCO operates 45 fields, including more than 600 oil and natural gas wells and has established substantial infrastructure. In 1998, GUPCO produced its 4 billionth barrel of oil from these areas. GUPCO produces approximately 300,000 b/d (105,000 b/d net), which is 37% of Egypt's total oil production. In early 1999, we agreed with the Egyptian government to modernize our principal Gulf of Suez and Western Desert contracts in order to enable sustained profitable investment in the current oil price environment. -- BP Amoco entered the Nile Delta in the early 1990's, in a variety of partnerships with AGIP, Egyptian General Petroleum Corporation and others. We are currently developing the Ha'py and East Baltim natural gas fields with start-up expected in 1999 and 2000, respectively. In 1998, we signed an additional gas sales agreement which provides a market for initial development of the Temsah natural gas field. Collectively, we have agreements in place to supply 250 mmcf/d of gas from these and other Nile Delta fields to the domestic Egyptian market. We are also pursuing natural gas export opportunities in the Eastern Mediterranean. Through our equity-accounted investments in Empresa Petrolera Chaco S.A. (Chaco) (BP Amoco 30%) and Pan American Energy (PAE) (BP Amoco 60%), we are the second largest energy producer in the southern cone of South America, behind Argentina's YPF. In 1998, these entities produced 48,000 b/d of oil and 155 mmcf/d of natural gas (net to BP Amoco) in Argentina and Bolivia. Chaco and PAE also have significant interests in natural gas liquids plants, oil and gas pipelines, electric generation plants, and other midstream infrastructure. In 1998, the Uruguayan government selected a consortium including PAE to build, own and operate a 215-kilometre network gas pipeline linking Argentina to Montevideo, Uruguay, where PAE owns 34% of the local gas distribution company. This project is expected to involve gross investment of $140 million over two years, and is the first part of a gas pipeline system which is intended to ultimately serve the major gas markets in southeast Brazil. MIDSTREAM ACTIVITIES GAS PROCESSING, TRANSPORTATION AND MARKETING In addition to midstream activities associated directly with upstream operations, as described above, the Group has substantial natural gas transportation, processing and marketing operations in North America, Europe and Abu Dhabi as described below. We are the largest producer-marketer of natural gas in North America. Our 1998 gas sales volumes averaged 5.3 billion cubic feet per day (bcf/d) from the USA and Canada. This consisted of 3.3 bcf/d from BP Amoco producing operations (including royalty volumes we marketed under terms of our lease agreements), plus supplies we purchased from third parties. As a result of the deregulation of the US natural gas markets since the late 1980s, approximately 70% of our North American natural gas production is now sold pursuant to short term gas contracts which are renegotiated on a monthly, yearly or other short term basis, thereby allowing us flexibility in production and distribution. As the North 19 20 American energy markets continue to evolve, we are investigating ways to enhance our current positions in the upstream and midstream natural gas businesses, as we have done successfully in Europe. BP Amoco's policy toward natural gas price risk in the North American markets is described in Item 9A -- Quantitative and Qualitative Disclosures about Market Risk. BP Gas is a UK natural gas marketing company which started trading in 1996 as a result of the restructuring of Alliance Gas Limited, in which BP Amoco had a 50% interest. Its principal business is gas sales to industrial, commercial and power generation customers in the UK, as well as gas sales to continental Europe. In addition, we provide facilities and combined heat and power development and contract energy management services to industrial customers in the UK. The significance of long-term gas supply contracts with large customers such as Centrica, the prices of which are typically indexed against oil or electricity, has been declining as BP Gas takes advantage of increasingly liquid UK gas markets to make more short-term sales to commercial and industrial companies. The breakdown of gas sale arrangements in 1998 was as follows: 37% of production sold to Centrica, 20% pursuant to other long-term arrangements, and 43% in the commercial and industrial and spot markets. The main source of gas is BP Amoco's equity share of gas from UK North Sea fields. We also have a 50% interest in Beacon Gas Limited, whose principal activity is the retail distribution of natural gas in the UK. In late 1998, we began construction of a 400 megawatt capacity gas fired power plant (BP Amoco 60%) at Great Yarmouth in the UK. We have a 25.5% interest in Ruhrgas, Germany's largest gas distribution company. In 1997 BP Amoco signed a 15-year agreement to supply 15 billion cubic meters of natural gas valued in excess of $1 billion to Ruhrgas, commencing October 1, 1998. We supply this gas from our UK North Sea fields, delivered via the Interconnector, which is described below. The Interconnector is a 240-kilometre, 40-inch subsea natural gas pipeline linking the UK national grid system at Bacton in Norfolk to the continental grid system at Zeebrugge in Belgium. Construction work began in late 1996, and first operation of the pipeline was in October 1998. We are one of ten international energy companies with shareholdings in the Interconnector, which has a shipping capacity of 1.9 bcf/d (BP Amoco 10%). BP Amoco has a 29.5% interest in, and operates, the Central Area Transmission System (CATS), a 400-kilometre natural gas pipeline system in the UK sector of the North Sea. CATS has a capacity of 1.7 bcf/d, and carries both proprietary and other companies' volumes to the Teesside natural gas terminal. During 1998 it handled 1.1 bcf/d. We also have a 10% equity shareholding in the Abu Dhabi Gas Liquefaction Company (ADGAS), which in 1998 supplied 5.4 million tonnes of LNG. OIL TRANSPORTATION The Group has direct or indirect interests in certain crude oil transportation systems, the principal of which are the Trans Alaska Pipeline System in the USA and the Forties Pipelines System in the UK Sector of the North Sea. Our onshore US crude and product pipelines and related transportation assets are included under Refining and Marketing. The Trans Alaska Pipeline System (TAPS) consists of a 48-inch diameter crude oil pipeline running approximately 1,300 kilometres from Prudhoe Bay to a tank farm and marine terminal at the ice-free port of Valdez on Alaska's southern coast. Alyeska Pipeline Service Company operates the pipeline and terminal at Valdez. BP Amoco owns a 50% interest in TAPS, with the balance owned by six other companies. Each of the TAPS participants uses its undivided interest in TAPS as a common carrier, separately publishing tariffs and receiving tenders for shipments through its share in the capacity of TAPS, and paying its respective share of operating costs. At peak throughput the TAPS system carried around 2 million b/d. In 1998, TAPS transported production from Prudhoe Bay and the other North Slope fields averaging 1.22 million b/d. For a description of the procedures relating to the tariffs to be charged to users of TAPS and a general description of pipeline regulation, see Regulation of the Group's Business -- United States. Various protests have been filed by the State of Alaska and others with regard to the yearly tariffs (for 1989 to 1999) which are filed and which set out the charges for shipping oil through TAPS. The protesters seek to exclude from the tariff various costs incurred by the TAPS owners in relation to the pipeline. 20 21 These items are in the process of resolution at the Federal Energy Regulatory Commission (FERC) and the Alaska Public Utilities Commission. The dispute among the TAPS owners as to the method of allocation of capacity in the pipeline (known as the 'TAPS capacity litigation') was settled between the TAPS owners and the State of Alaska in 1997, and approval of the settlement was given by the FERC in 1998. The use of US-built and US-flagged ships when transporting Alaskan oil to markets in the USA and abroad is required by law. In accordance with this, BP America Inc. has a chartered fleet of US-flagged tankers to transport Alaskan crude oil to markets. Over the next few years, we plan to begin replacing our US-flagged fleet as existing ships are retired in accordance with the Oil Pollution Act of 1990. For discussion of the Oil Pollution Act of 1990, see Regulation of the Group's Business -- Environmental Protection. For a discussion of the proceedings arising from the Exxon Valdez oil spill, see Item 3 -- Legal Proceedings. The Forties Pipeline System in the UK (BP Amoco 100%) is an integrated oil and natural gas liquids transportation and processing system which handles production from over 20 fields in the central North Sea. The system was upgraded in 1993 and has a capacity of more than 1 million b/d. During 1998, it handled approximately 880,000 b/d, compared with 873,000 b/d in 1997. As noted previously, we also own 34.1% of the Azerbaijan International Oil Company which operates part of the International Northern Export Route Pipeline between Baku in Azerbaijan and Novorossiysk on the Black Sea coast in Russia. Construction of this pipeline is complete and the first exports were made in 1998. The tested capacity is 125,000 b/d. Work is nearing completion on the Western Export Route pipeline from Baku west to the related terminal and loading systems at Supsa on the Black Sea coast of Georgia which is expected to provide an additional export capacity of in excess of 100,000 b/d. First lifting from Supsa is planned for April 1999. Additional oil export pipelines from the Caspian region are the subject of discussions between the upstream participants in Azerbaijan, the Azerbaijan government and the governments of neighbouring countries. 21 22 REFINING AND MARKETING Our Refining and Marketing business is responsible for the supply and trading, refining, marketing and transportation of crude oil and petroleum products to wholesale and retail customers, and the wholesale marketing of NGL in the USA and Canada. BP Amoco markets its products in about 100 countries. It has operations in Europe, the USA and Australasia and in parts of South East Asia and Africa.
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Turnover (a)................................................ 48,437 67,704 78,741 Total replacement cost operating profit..................... 2,564 2,292 1,708 Total assets................................................ 21,029 24,055 27,646 Capital expenditure and acquisitions........................ 1,937 1,824 1,731 ($ per barrel) Indicative industry global refining margin (b).............. 1.7 1.8 2.2
- - ------------ (a) Excludes BP Amoco's share of joint venture turnover of $15,080 million in 1998, $16,692 million in 1997, and nil in 1996. (b) The indicative industry global refining margin is a weighted average of global margins for the whole refining industry and is calculated by BP Amoco. It reflects the margins generated by a standard cracking refinery, running similar quality crudes, to similar yields, located in each refining market. The weighting used reflects the presence of BP Amoco's refineries in these markets -- principally those of the USA, Europe, Australasia, Southern Africa and Singapore. Refining and Marketing aims to manage a portfolio of assets which are believed to be competitively advantaged across the chain of downstream activities. Such advantage may derive from several factors, including location, operating cost and physical asset quality. The merger of BP and Amoco has created a top-tier player in refining and marketing. Prior to the merger, Amoco was one of the leading gasoline marketers in the USA and a market-leader in premium gasoline. BP had a strong retail business in the midwest and southeastern USA, supported by refining assets. BP also had extensive retail and commercial businesses in the UK, the rest of Europe, Australasia, Africa and South East Asia. On the basis of 1997 sales, the merger will create a strong competitor in the USA where the BP Amoco Group will share top place for retail sales east of the Rocky Mountains, with first or second position in some 20 states. Worldwide, we will continue to be a leading marketer of fuels, served by a global refining network with key refineries among the top performers in their regions. As part of the Federal Trade Commission's approval process for the merger, we undertook to complete the sale of nine terminals formerly owned by Amoco in the southeast of the USA where there was an overlap with existing BP terminals. In addition, in order to resolve antitrust concerns relating to the sale of gasoline, BP and Amoco agreed to the divestiture of 134 service stations in six states where there were ownership overlaps. The divestitures are to be completed by the end of June 1999. In the UK and the rest of Europe, BP Amoco's refining and marketing operations in fuels and lubricants are operated as part of a joint venture with Mobil Corporation (Mobil). The international aviation, marine, oil trading and shipping activities are excluded from the joint venture. Under the terms of the joint venture, BP Amoco operates and has a 70 per cent interest in the fuels refining and marketing operation, and Mobil operates and has a 51 per cent interest in the lubricants business. A charge of $532 million before tax was made to income in 1996 to cover the anticipated costs of the implementation of the joint venture. These costs were incurred by the end of 1998, with some $400 million having been spent by the end of 1997. The benefits originally foreseen from the joint venture through cost-sharing, the elimination of duplication and the realization of economies of scale, amounting to some $500 million per annum, have now been achieved. REFINING In refining, our key objective is to operate a deficit refining system (i.e. where Marketing's requirements for product exceed the output from the Group's refineries) more profitably than those of our 22 23 competitors. We have been achieving this by reducing operating costs, optimizing yields and focusing production at a few key sites. In the USA, BP Amoco owns and operates seven refineries: Texas City, Texas; Whiting, Indiana; Alliance, Louisiana; Toledo, Ohio; Mandan, North Dakota; Yorktown, Virginia; and Salt Lake City, Utah. BP Amoco's refinery at Lima, Ohio, was sold in mid-1998. As operator of the fuels business of the BP/Mobil joint venture, we operate seven European fuels refineries on behalf of the joint venture. These are Bayernoil (Germany), Castellon (Spain), Coryton (UK), Grangemouth (UK), Lavera (France), Mersin (Turkey) and Nerefco (the Netherlands). Additionally, BP Amoco has an interest in the Reichstett refinery in France. All the refineries are wholly-owned by BP Amoco or Mobil, except for Bayernoil, Mersin, Nerefco and Reichstett where BP Amoco's and Mobil's combined interest is 55%, 69%, 69% and 17%, respectively. Mobil's refinery at Gravenchon (France), which is primarily a lubricants refinery, and BP Amoco's two lubricants base oil refineries in France and Germany are operated by Mobil on behalf of the joint venture. BP Amoco's UK base oil refinery at Llandarcy was closed in 1998 as part of a major restructuring of the lubricants business. In the rest of the world we operate three other principal refineries: Brisbane and Kwinana in Australia, and one in Singapore. We also have interests in three other refineries: Mombasa in Kenya, Durban in South Africa and Whangerei in New Zealand. The following tables set out by area the crude oil and other feedstocks processed in the years 1996 through 1998 by the BP Amoco Group for its own account and for third parties, and for the Group by other refiners under processing agreements, and the Group's refinery capacity utilization.
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- REFINERY THROUGHPUTS (thousand barrels per day) United Kingdom (a).......................................... 296 299 206 Rest of Europe (a).......................................... 551 583 642 United States............................................... 1,489 1,600 1,609 Rest of World............................................... 362 373 347 ------- ------- ------- 2,698 2,855 2,804 For BP Amoco by others...................................... 13 12 8 ------- ------- ------- Total....................................................... 2,711 2,867 2,812 ======= ======= ======= REFINERY CAPACITY UTILIZATION Crude distillation capacity at December 31, (b)............. 2,815 2,937 3,027 Crude distillation capacity utilization (c)................. 94% 96% 97%
- - ------------ (a) Includes the BP Amoco share of the BP/Mobil joint venture. (b) The crude distillation capacity figures are based on gross rated capacity which assumes no loss of capacity due to shutdowns. The figures for 1998 reflect the disposal of the Lima refinery in mid-1998. The figures for 1997 reflect the impact of the BP/Mobil joint venture for those countries for which implementation was completed by the end of 1997. The figures for 1996 reflect the impact of the BP/Mobil joint venture in the UK and Turkey from the date of implementation. The implementation of the joint venture did not have a material impact on BP Amoco's overall crude distillation capacity in Europe. (c) Crude distillation capacity utilization is defined as the percentage utilization of capacity per calendar day over the year after making allowances for average annual shutdowns at BP Amoco refineries (net rated capacity). In 1998, we operated our refineries in the USA at an average of 95% of net rated capacity (1997, 95% and 1996, 96%), our European refineries at 95% (1997, 98% and 1996, 100%) and our refineries in the rest of the world at 89% (1997, 99% and 1996, 96%). In the past three years, BP Amoco has spent approximately $1.0 billion on upgrading refineries in Europe, the USA, Australia, Singapore and South Africa. During 1996 at our Grangemouth refinery in the 23 24 UK, projects to upgrade the fluidized catalytic cracker and hydrocracker were begun. The hydrocracker and the first phase of the fluidized catalytic cracker projects being completed in 1997. The second phase aimed at increasing middle distillate yields was completed in 1998. We are investing some $235 million upgrading the Toledo refinery, which should enable the refinery to process lower-cost heavy sour crude oil. The project is expected to be completed in 1999. In view of current low refining margins we expect our investment in refineries to be at a lower level in the future. MARKETING We market a comprehensive range of refined oil products worldwide. These products include gasoline, gasoil, marine and aviation fuels, heating fuels, LPG, lubricants and bitumen. The following table sets out refined product sales by area.
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Sales of refined products (a) (thousand barrels per day) Marketing sales: United Kingdom (b)(c)..................................... 261 260 242 Rest of Europe (b)........................................ 769 752 672 United States............................................. 1,504 1,465 1,439 Rest of World............................................. 603 606 571 ------- ------- ------- Total marketing sales (d)................................... 3,137 3,083 2,924 Trading/supply sales (d).................................... 1,665 1,592 1,530 ------- ------- ------- Total refined products...................................... 4,802 4,675 4,454 ======= ======= ======= ($ million) Proceeds from sale of refined products (b).................. 44,446 57,026 53,809
- - ------------ (a) Excludes sales to other BP Amoco businesses. (b) Includes the BP Amoco share of the BP/Mobil joint venture in 1998 and 1997. (c) UK area includes the UK-based international activities of Refining and Marketing. (d) Marketing sales are sales to service stations, end-consumers, bulk buyers, jobbers and small resellers. Trading/supply sales are to large unbranded resellers and other oil companies. The following table sets out marketing sales by major product group.
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- MARKETING SALES BY PRODUCT (thousand barrels per day) Aviation fuel............................................... 292 271 258 Gasolines................................................... 1,256 1,204 1,164 Middle distillates.......................................... 796 780 770 Fuel oil.................................................... 322 410 322 Other products.............................................. 471 418 410 ------- ------- ------- Total marketing sales....................................... 3,137 3,083 2,924 ======= ======= =======
Our retail network is concentrated in Europe and the USA, with established operations in Australasia and Southern Africa. Networks are being grown in China, Poland, Russia and Venezuela. BP Amoco is continuing to improve the efficiency of its retail network by reducing operating costs and improving customer service, through a process of regularly reviewing the network. Actions taken include divesting the least profitable sites, upgrading existing sites and investing in new sites. An essential element of this strategy is the development of convenience stores and the provision of related services. Such facilities are often provided through alliances or other arrangements with partners. This strategy is applied to all our retail networks, including those operated as part of the BP/Mobil joint venture. At 24 25 December 31, 1998, there were approximately 28,300 BP and Amoco branded service stations worldwide, including those associated with the BP/Mobil joint venture. At December 31, 1998 BP Amoco's retail network in the USA comprised some 16,300 service stations concentrated in the midwest, east and southeast. In 1998 34 new 'Split Second' convenience stores were opened in Atlanta, Georgia; Philadelphia, Pennsylvania; Denver, Colorado; and south Florida, bringing the total to 59 stores. In the UK and the Rest of Europe, BP Amoco's network covered about 8,400 service stations at December 31, 1998, including some 2,900 Mobil service stations which had been integrated into the joint venture. The rebranding of the Mobil service stations to BP brand green is substantially complete; around 700 were completed during 1998, bringing the total number of rebranded stations to some 2,800. Other significant developments in Europe during 1998 included the following: -- Following a successful pilot scheme, BP Amoco entered into a joint venture agreement with Safeway plc to redevelop some 100 sites in the UK incorporating a Safeway convenience store. By December 31, 1998, nine such sites had been redeveloped. -- In Portugal, the development of Modelo Express stores at BP Amoco's service stations continued with a further six new stores being opened. Following the results of the pilot sites we have set a target of 50 sites. -- In Poland and Russia, we continue to grow our retail network towards our target of 300 sites, with the construction of a further 50 retail sites during 1998. -- As part of the continued drive to improve the Group's asset base, the retail networks in both Belgium and the Czech Republic were divested during 1998. In addition, agreement was reached to divest the retail network in Hungary in early 1999. At December 31, 1998, BP Amoco's retail network in the rest of the world (primarily Australia, New Zealand, Southern Africa and South East Asia) comprised some 3,600 service stations. BP Amoco now has over 100 new branded sites in the new markets of Venezuela, China and Japan. In addition, through the Amoxxo joint venture with Femsa, the Group now has a network of 27 convenience stores in Mexico. We also operate a Commercial and Industrial business in Australasia, Europe, South Africa and the USA. This business includes the supply of fuel, LPG, bitumen and, outside Europe, lubricants to industrial and domestic users. In Europe, the Group has a 49% interest in the lubricants activity operated by Mobil in the BP/Mobil joint venture. In 1998, we continued to reshape our Commercial and Industrial portfolio where we believe it to be appropriate. -- In the USA, the lubricants business unit of Amoco was sold to Chevron Products Co. -- In the UK, BP Amoco's LPG business expanded its market share in Scotland, through the acquisition of Border Gas. The aviation business sells jet and other aviation fuels to airlines and general aviation customers as well as providing technical services to airlines and airports. During the last few years, the aviation business has strengthened its position in established markets and pursued opportunities in new or emerging markets. In 1998, BP Amoco's aviation business entered three new markets: Romania, Georgia and the Lebanon. The business now markets in some 82 countries. It is the third largest jet fuel supplier globally. BP Amoco's marine business sells ship's fuel and lubricants to a variety of customers including ship owners and operators, covering a wide range of vessels, from large oil tankers to small fishing boats. We operate a network of offices and supply points in more than 900 ports across 90 countries, reflecting the international nature of this marketing operation. BP Amoco is continuing to develop the marine business, and is pursuing new market opportunities in Latin America, Asia and the Middle East. SUPPLY AND MARKETING OF NGL In the USA and Canada, BP Amoco is engaged in the wholesale marketing of NGL, which consists of ethane, propane, butanes and pentanes extracted from natural gas. The majority of BP Amoco's NGL is marketed on a wholesale basis under annual supply contracts which provide for price redetermination based on prevailing market prices. Sales volumes of NGL for 1998 averaged 318,000 b/d (1997 298,000 b/d and 1996 296,000 b/d). 25 26 We own or have an interest in four fractionator plants in Canada and the United States. Two are located in Canada in Fort Saskatchewan, Alberta and Sarnia, Ontario and two are located in the United States in Hobbs, New Mexico and Mont Belvieu, Texas. SUPPLY AND TRADING We are one of the world's major traders of crude oil and refined products, dealing extensively in physical and futures markets. Our portfolio of purchases and sales is spread among spot, term, exchange and other arrangements, and covers a range of sources and customers to match the location and quality requirements of the Group's refineries and the various markets, while seeking to ensure flexibility and cost-competitiveness. In addition, the Group's oil-trading division undertakes trading in physical and paper markets in order to contribute to the Group's income. TRANSPORTATION Our Refining and Marketing business owns, operates or has an interest in extensive transportation facilities for crude oil, refined products, NGL, carbon dioxide and petrochemical feedstocks in the US. It also has interests in a number of crude oil and product pipelines in the UK and the Rest of Europe. We transport crude oil to our refineries principally by ship and through pipelines linking our refineries with import terminals. We have interests in eight major crude oil pipelines in the UK and the Rest of Europe and a further thirteen in the USA. Bulk products are transported between refineries and storage terminals by ship, barge, pipeline and rail. Onward delivery to customers is primarily by road. We have interests in nine major product pipelines in the UK and the Rest of Europe and four in the USA. We also have interests in a major gas pipeline, four NGL pipelines, two carbon dioxide pipelines and many smaller pipelines. In total, we have interests in some 33,000 kilometres of pipeline, of which about three-quarters are located in North America. In 1998 the most significant development in this area of BP Amoco's operations was the completion of the Destin gas trunk line from offshore in the Gulf of Mexico to Pascagoula, Mississippi and inland. BP Amoco's share of investment was approximately $122 million. The connection of lateral pipelines to the main line is expected to be completed in 1999 (BP Amoco share $15 million). This will allow connection with a number of other gas pipelines and access to numerous natural gas markets throughout the southeast and the east coast of the USA. SHIPPING BP Amoco Shipping owns or operates an international fleet of crude and product tankers carrying cargoes for the Group and for third parties. It also offers a wide range of services to Group and third party marine customers. At December 31, 1998 the Group owned an international fleet of 13 tankers, totalling approximately 1.76 million deadweight tons (dwt). Excluding BP America Inc., the Group had 11 tankers (three Very Large Crude Carriers, seven Medium Crude Carriers, one Product Carrier) and four barges, totalling 1.82 million dwt on long-term charter at December 31, 1998. BP America Inc. had 15 tankers, totalling about 2.0 million dwt, on long-term charter from third parties, although four of these vessels, totalling 0.65 million dwt, were in lay-up at the end of the year. In addition, a large number of small coastal vessels are used by Group companies around the world. BP Shipping Limited has contracted to bareboat charter four Very Large Crude Carriers for delivery during 1999 and 2000. 26 27 CHEMICALS Our Chemicals business is a major producer of petrochemicals through subsidiaries and associated undertakings. BP Amoco has operations principally in the USA and Europe, and increasingly, in the Asia-Pacific region. Chemicals is also responsible for the supply, marketing and distribution of chemical products to bulk, wholesale and retail customers.
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Turnover.................................................... 9,691 11,445 10,979 Total replacement cost operating profit..................... 1,100 1,530 1,654 Total assets................................................ 12,562 12,141 12,128 Capital expenditure and acquisitions........................ 1,606 1,145 1,964 (thousand tonnes) Production (a).............................................. 20,073 19,491 17,498
- - ------------ (a) Includes BP Amoco's share of associated undertakings and other interests in production. Chemicals margins are driven by the economics of supply and demand and, as a result, are cyclical in nature. An illustration of this is the industry integrated ethylene/low density polyethylene cash margin, which rose from 523 Deutschmarks (DM) per tonne in 1996 to DM 890 per tonne in 1997, then fell to DM 812 per tonne in 1998. In 1999, the chemicals industry is facing a weaker external environment, which is expected to cause competitive pressures to increase. This has been caused by recent new capacity growth at the same time as demand is weakening due to a general slowdown in the global economy. The continued effect of the Asian economic crisis has had an impact upon short-term growth rates in the region. While BP Amoco intends to continue to expand into Asia, the pace of development will take into account the prevailing market conditions. Our strategy is to create competitive advantage in petrochemicals by investing in world-scale integrated sites to optimize manufacturing; by selectively owning the best technology; and by focusing on key products and markets which offer potential for growth. The potential for integration has been increased by the merger, with BP's leading positions in olefins and polyolefins complemented by Amoco's leading positions in aromatics and aromatic derivatives. Furthermore, both BP and Amoco Chemicals separately had created footholds in Asia. While still a small part of the combined portfolio, together these positions create a solid base from which to deal with the current environment and to position the Group for growth when conditions improve. The drive for integration covers not only different elements of chemicals production but also integration with oil supply and refining activities to achieve cost savings and production synergies. The strategy is illustrated in the major polyolefins expansion program currently underway at Grangemouth in Scotland. Integration of the project with the existing Chemicals facilities and the upstream and downstream facilities on site, combined with the utilization of our proprietary Innovene polyethylene technology, results in a competitively advantaged facility. Polypropylene and metaxylene expansions at Chocolate Bayou and Texas City, respectively, are two other examples of capacity additions at integrated sites; they are both in close proximity to, and use feedstocks from, our Texas City refinery. Technology will continue to distinguish the most successful companies from their competitors. We intend to maintain and extend our leadership in the fundamental technologies which underpin our core businesses. By way of example, our strengths in catalysis, oxidation and fluid bed technology continue to enhance our leadership positions across the portfolio from polymers to basic petrochemicals. In the last quarter of 1998 we announced investments in butanediol, vinyl acetate and ethyl acetate which are all based upon proprietary, leading-edge technologies and bear testimony to our ability to innovate and rapidly translate in-house development to commercial reality. Further examples of investments based on BP Amoco technology include the commissioning of new acrylonitrile capacity in the US and the debottlenecking of an acetic acid plant in Korea. 27 28 We will continue to focus our portfolio in areas where we have clear competitive advantage driven by the strategy elements described above. For example, we purchased the Styrenix Kunststoffe business in early 1998 and integrated it into our existing styrenics business over the remainder of the year. We sold our speciality chemicals distribution business and Adibis, a fuels and lubricants additive business, during 1998, and a further specialities business, Verdugt, in early 1999. BP Amoco has large-scale manufacturing facilities in Europe and the USA. The Group's major sites, with our share of their capacities in thousands of metric tonnes per annum (ktepa), are Grangemouth (2,160 ktepa) and Hull (1,415 ktepa) in the UK; Lavera (1,765 ktepa) in France; Marl (1,610 ktepa) and Dormagen (2,330 ktepa) in Germany; Geel (1,135 ktepa) in Belgium; and Texas City, Texas (2,825 ktepa), Chocolate Bayou, Texas (2,740 ktepa), Decatur, Alabama (2,220 ktepa), and Cooper River, South Carolina (1,310 ktepa) in the USA. BP Amoco's European and US manufacturing base remains key to its continued success. We also aim to grow in the Asia Pacific region, which offers prospects for demand growth. The intention is to build upon the existing bridgeheads which the Group now holds in Indonesia, China, Malaysia and Korea. Our share of capacity in Asia (largely through joint ventures) amounts to nearly 3 million tonnes as follows: Indonesia (440 ktepa), Korea (620 ktepa), Malaysia (880 ktepa), Taiwan (730 ktepa), China (80 ktepa) and Singapore (140 ktepa). The following table shows BP Amoco's production capacity by major product and by business at December 31, 1998.
Chemical Performance Feedstocks Intermediates Polymers Products Total (a) ------------ ------------- ------------ ------------ ------------ (thousand tonnes per annum) Purified terephthalic acid (PTA)....................... -- 4,870 -- -- 4,870 Ethylene...................... 2,865 -- 455 -- 3,320 Paraxylene.................... 2,360 -- -- -- 2,360 Polypropylene................. -- -- 1,650 -- 1,650 Styrenics..................... -- -- 1,750 -- 1,750 Polyethylene.................. -- -- 1,605 -- 1,605 Acetic Acid/Anhydride......... -- -- -- 1,295 1,295 Linear/poly alpha olefins..... -- -- -- 855 855 Acrylonitrile................. -- 660 150 -- 810 Other......................... 2,020 625 1,525 3,245 7,415 ------------ ------------ ------------ ------------ ------------ Total......................... 7,245 6,155 7,135 5,395 25,930 ============ ============ ============ ============ ============
- - ------------ (a) This includes the Group's proportionate interest through associated undertakings in production capacity and production from third-party facilities made available to BP Amoco under long-term agreements. BP Amoco's petrochemical products are sold to companies in a number of industries that manufacture components used in a wide range of applications, including the agriculture, automotive, construction, furniture, household products, insulation, packaging, paint, pharmaceuticals and textile industries. BP Amoco's petrochemical products are marketed through a network of sales personnel and agents that also provides technical services. Our Chemicals business is organized into four broad groupings: -- Feedstocks, including olefins and aromatics; -- Chemical Intermediates, including nitriles and PTA; -- Polymers, including polyethylene, polypropylene and styrenics; and -- Performance Products, including acetyls, plastic fabrications, solvents, fabric and fibers. FEEDSTOCKS Our feedstocks group produces and markets the basic petrochemical building blocks which are used primarily as raw material for other chemical products. These basic petrochemicals include ethylene, propylene, butadiene, paraxylene and metaxylene. 28 29 BP Amoco manufactures and markets chemicals produced from the steam cracking of liquid and gaseous hydrocarbon feedstocks. The olefins -- ethylene, propylene and butadiene -- are produced by crackers at Grangemouth, UK; Lavera, France (BP Amoco 50%); Dormagen, Germany by Erdolchemie (BP Amoco 50%); Wilton, UK (BP Amoco 20%); Chocolate Bayou, Texas; and Kertih, Malaysia (BP Amoco 15%). These crackers produce the raw materials for the production of derivative products including polyethylene, polypropylene, acrylonitrile, styrene, ethanol and ethylene oxide, which are also produced at various BP Amoco plants. BP Amoco is the world's largest producer of the aromatics paraxylene (PX) and metaxylene (MX), the feedstocks for PTA and purified isophthalic acid (PIA), respectively. We recover PX and MX from reformed gasoline streams at BP Amoco and other refineries and then deliver this into our aromatic acids plants. PX is produced at Texas City, Texas and Decatur, Alabama in the USA and at Singapore Aromatics (BP Amoco 45%). MX is produced at Texas City. -- In October 1998, a 350 ktepa PX unit was started up in Decatur. The unit employs a new proprietary catalyst that was first commercialized in 1997. The catalyst allows the unit to operate with lower total recovery costs. -- In Belgium, work proceeded on the construction of a 420 ktepa PX unit at our Geel site. This unit will employ our technology for PX crystallization and will incorporate new process and catalyst technologies commercialized at Decatur in 1997. The project is scheduled for start-up in early 2000. -- BP Amoco's second MX unit was brought on line in October, 1998 at the Texas City chemical site. The 100 ktepa unit is the largest unit that uses UOP's Sorbex technology to recover the MX. The Sorbex technology, sale and integration with existing xylene recovery units makes this unit extremely cost competitive. CHEMICAL INTERMEDIATES The Chemical intermediates group produces and markets PTA, which is the preferred raw material for the manufacture of polyester; acrylonitrile, a raw material for acrylic fiber, varieties of synthetic rubber, a range of plastics and other chemical products; linear alpha olefins (LAO) used for polyethylene, detergents and plasticizers; PIA used for isopolyester resins and gel coats; and napthalene dicarboxylate (NDC), used for photographic film and specialized packaging. BP Amoco is the world's largest producer of PTA, with an interest in approximately 23% of the world's PTA capacity. PTA is manufactured at Cooper River, South Carolina and Decatur, Alabama, in the USA, Geel in Belgium, and Kuantan in Malaysia. We also produce PTA through joint ventures in Korea (BP Amoco 35%), Taiwan (BP Amoco 50%), Brazil (BP Amoco 49%), Mexico (BP Amoco 8.55%) and Indonesia (BP Amoco 50%). The Taiwan joint venture operation, Cooper River, and Decatur represent the three largest PTA production sites in the world. -- In 1998, a new 500 ktepa PTA unit at the Geel, Belgium site was completed. The project marked the latest in a series of recent global PTA investments to support expected long-term growth in polyester demand. The unit was subsequently shut down because of a fire, but is expected to come back on line during the second quarter of 1999. BP Amoco is the world's largest producer and marketer of acrylonitrile. It operates two acrylonitrile plants located at Green Lake, Texas and Lima, Ohio. Green Lake, with a capacity of 460 ktepa, is the largest acrylonitrile production site in the world. Acrylonitrile is also produced by Erdolchemie. BP Amoco markets acrylonitrile throughout the world to a variety of industrial customers. -- In September 1998, we announced the construction of a $10 million demonstration unit for our proprietary propane-to-acrylonitrile technology process at the Green Lake manufacturing facility. The project involves the construction of an innovative recovery and purification unit of unique design which will be integrated with one of the three fluid-bed reactors at the Green Lake plant. In 1998, BP Amoco and Sterling Chemicals, Inc. announced the establishment of Anexco LLC., a 50/50 joint venture marketing company which markets acrylonitrile in Asia and South America on behalf of both partners. The joint venture is expected to sell some 500 ktepa. 29 30 The construction of the Company's first world-scale 1,4-butanediol (BDO) plant in Lima, Ohio and the foundation of a new butanediol business unit marks the company's entry into the worldwide BDO market. Butanediol and its derivatives are used in pharmaceuticals, a variety of personal care products, plastics, auto parts and sports clothing. LAO is produced at Texas City, Texas and Feluy, Belgium. A $45 million project to expand Feluy's capacity by 100 ktepa is expected to come on line in the second quarter of 1999. In early 1999, we authorized the construction of a new 250 ktepa LAO plant in Alberta, Canada; this plant is scheduled to come on line late in 2001. PIA is produced in Joliet, Illinois, Geel and by the AGIC joint venture (BP Amoco 50%) in Japan. NDC is produced at our plant in Decatur, Alabama. POLYMERS The polymers product line includes polypropylene, used for molded products, fibers and films; polyethylene, used for packaging, pipes and containers; engineering polymers used for medical, automotive and electronic applications; carbon fibers used in sporting goods and aerospace applications; and styrene monomers and polymers used in packaging and containers. We are the second-largest producer of polypropylene in the world. Polypropylene is manufactured at Chocolate Bayou and Cedar Bayou, Texas and Geel, Belgium. Appryl (BP Amoco 49%) operates plants at Lavera and at Gonfreville, France. Much of the Group's polypropylene output is consumed internally in its Fabrics and Fibers business. BP Amoco has its own proprietary polypropylene technology. We are one of Europe's leading producers and suppliers of polyethylene, the world's most widely used plastic. BP Amoco operates linear low density polyethylene (LLDPE) and high density polyethylene (HDPE) plants at Grangemouth, Lavera, Merak in Indonesia (BP Amoco 51%) and at Kertih in Malaysia (BP Amoco 60%). A low density polyethylene (LDPE) plant is operated at Wilton, UK. Erdolchemie (BP Amoco 50%) also produces LLDPE and LDPE at Dormagen in Germany. Innovene, our proprietary gas-phase production process for polyethylene based on a clean and cost-effective technology has been licensed to 24 different companies in 16 countries as of December 1998. In July 1997, we launched an enhanced version of our High Productivity technology and are also working with The Dow Chemical Company (Dow) to develop and license a combination of Innovene polyethylene technology and Dow's constrained geometry catalyst technology. We completed the purchase of the Styrenix Kunststoffe business in February 1998. The process of integrating this business with the existing BP Amoco styrenics business took place during the remainder of the year. We operate styrene monomer plants at Texas City, Texas in the USA, Baglan Bay in the UK and Marl in Germany. Polystyrene plants are operated at Marl, Wingles in France and Trelleborg in Sweden. Expanded polystyrene plants are operated at Wingles and Marl. BP Amoco's Engineering Polymers and Carbon Fibers business has manufacturing facilities at Marietta, Ohio; Greenville and Rock Hill, South Carolina; and Atlanta and Augusta, Georgia in the USA. Over the last year a number of capital investment projects were progressed at various sites around the world, including: -- In the UK, work is continuing on a major $825 million development program. The first stage, a 50 ktepa expansion of ethylene capacity at Grangemouth, will be commissioned in the first quarter of 1999. A second 270 ktepa expansion is underway with completion scheduled for the first quarter of 2001. When the second expansion is complete Grangemouth will have 1 million tonnes of ethylene capacity. This additional production is intended to feed a new 300 ktepa polyethylene plant which is currently under construction. This is the major part of the UK development program expected to be realized over the next three years. -- Appryl (BP Amoco 49%) commenced the construction of a 250 ktepa polypropylene plant at Grangemouth, with commissioning expected in 1999. -- At PT Peni (BP Amoco 51%) in Indonesia, the expansion of polyethylene capacity from 250 to 450 ktepa was brought on stream in 1998. In addition, we have announced plans for the construction of a 900-ktepa ethylene cracker integrated with the polyethylene plant. The project will be progressed at a pace appropriate to the prevailing market conditions. 30 31 -- BP Amoco continued feasibility studies on the $2.5 billion project for an integrated ethylene cracker complex at Jinshan, China, with the Shanghai Petrochemical Company. The timing of this plant will be contingent on the outcome of the feasibility studies and on market conditions. -- We continued construction of a 250 ktepa polypropylene expansion in Chocolate Bayou which will commence operations in 1999. -- We commenced construction of a 250 ktepa polyethylene plant for the Bataan Polyethylene Corporation (BP Amoco 38%) in the Philippines, which will use BP Amoco's Innovene technology. The plant is due on stream in 2000. PERFORMANCE PRODUCTS This group of businesses covers the following: Acetic Acid/Anhydride, Oxygenated Solvents, Industrial Products, Polybutenes, Plastic Fabrications Group, and Fabrics and Fibers. These businesses add value to raw materials produced by our other chemicals businesses. We are a major supplier of acetic acid, a versatile chemical used in a variety of products, such as foodstuffs, textiles, paints, dyes and pharmaceuticals. Chemicals has acetyls operations in Europe, the USA and Korea (BP Amoco 51%), and commissioned a 150 ktepa acetic acid plant in Sichuan, China, with local partners (BP Amoco 51%) in late 1998. In Korea, the Asian Acetyls Company (BP Amoco 34%) operates a 150 ktepa vinyl acetate monomer plant. We are investing with Petroliam Nasional Berhad (Petronas) in an acetic acid plant at Kertih, Malaysia, with a capacity of 400 ktepa (BP Amoco 70%). Construction of the plant, which will use our Cativa technology, started in 1998, and production is scheduled to commence at the end of 1999. The Oxygenated Solvents business manufactures and markets acetate esters, iso-propanol, acetone, glycol esters, aerosols and ethanol at plants in the UK, France, Belgium, Italy and Korea. The products have many applications including pharmaceuticals, inks and paints. A major asset restructuring was announced in 1998 with plans to construct a 220 ktepa ethyl acetate plant at Hull and 110 ktepa ethanol plant at Grangemouth, both scheduled for completion in 2001. The ethyl acetate investment is based on BP Amoco's innovative proprietary 'direct addition' method for making ethyl acetate from ethylene and acetic acid which does not require ethanol as a raw material. In Korea, the International Esters Company's acetate esters plant (BP Amoco 45%) was expanded from 45 to 75 ktepa in 1998 by the application of the new BP Amoco technology. Our other Performance Product businesses include Industrial Products, which comprises ethylene oxide, ethanolamines, brake fluids, antifreeze, oxo alcohols, oilfield chemicals and plasticizers; Polybutenes, used in fuel additives, adhesives and sealants; Plastic Fabrications, with a number of European and US sites converting polymer resins into plastic films, rigid containers, non-woven fibers and engineering components; and Fabrics and Fibers, which makes products for carpet backing, home furnishings, and industrial uses such as civil engineering fabrics and bulk bags. The speciality chemicals distribution business and Adibis, the fuels and lubricants additives business, were sold during 1998. Amoco's European polybutenes business was sold in late 1998 to facilitate the merger. In the first quarter of 1999, the disposal of a further specialities business, Verdugt, was completed. OTHER BUSINESSES AND CORPORATE Other Businesses and Corporate comprises Finance, the solar businesses, the Group's remaining coal asset, interest income and costs relating to corporate activities worldwide. FINANCE manages the Group's financial assets and liabilities. From locations in the UK, Europe, the USA and the Asia-Pacific region, it provides the link between BP Amoco and the international financial markets, and makes available a range of financial services to the Group including supporting the financing of BP Amoco's projects around the world. In 1999 both Moody's and Standard and Poor's assigned long-term debt ratings of Aa1 and AA+, respectively, to BP Amoco. 31 32 Finance has in place a Debt Issuance Program, under which the Group may raise an aggregate of $2 billion of debt for maturities of one month or longer. At March 29, 1999, the amount drawn down against this program was $1,134 million. Our SOLAR businesses are involved in the manufacture and marketing of photovoltaic cells and modules, and the development of solar-powered electric generation facilities. BP Solar, excluding Solarex, is one of the largest businesses in the solar energy industry and the most international. The principal manufacturing and marketing units are located in Australia, India, Spain and the USA. In early 1998 BP Solar opened a thin-film solar manufacturing plant in California and towards the end of the year capacity was increased at the manufacturing facility in Spain. Solarex is a 50/50 joint venture established between Amoco and Enron Corporation. In 1998, it made significant progress on the introduction of the new Millenia amorphous silicon module, the world's first large-area, monolithic double-junction thin film module. The modules were used in grid-connected solar systems installed in Japan, Germany, Sweden and the USA. COAL activity consists of our 50% interest in PT Kaltim Prima Coal, an Indonesian company. This company operates an opencast coal mine at Sangatta in Kalimantan, Indonesia. RESEARCH, TECHNOLOGY AND ENGINEERING activities are carried out by each of the major business streams on the basis of a distributed program coordinated by the BP Amoco Technology Council. This body provides leadership for scientific, technical and engineering activities throughout the Group and in particular promotes cross-business initiatives and the transfer of best practice between businesses. In addition, a group of eminent industrialists and academics form the Technology Advisory Council, which advises senior management on the state of technology within the Group and helps identify current trends and future developments in technology. Research and development is carried out using a balance of internal and external resources. The principal sites for the internal activities are located in the USA, the UK and France. The allocation of work to each location is currently under review as part of the process of achieving synergies resulting from the merger. The innovative application of technology makes a key contribution to improving BP Amoco's business performance, particularly in the areas of safety, the environment, cost reduction and efficiency of business operations. Involving third parties in the various steps of technology development and application enables a wider range of technology solutions to be considered and implemented, improving the productivity of research and development activities. INSURANCE. Although practice differed in certain respects between BP and Amoco in 1998, the combined Group generally restricts its purchase of insurance to situations where this is required for legal or contractual reasons. This is because external insurance is not considered economic for BP Amoco. Losses will therefore be borne as they arise, rather than being spread over time through insurance premia. The position will be reviewed each year. REGULATION OF THE GROUP'S BUSINESS UNITED KINGDOM LICENSING. Pursuant to, among other things, the Petroleum (Production) Act 1934, all petroleum existing in its natural condition in strata in the UK or beneath its territorial waters (including its continental shelf) is the property of the Crown, and licenses to explore for and produce it may be granted, subject to conditions, by the Secretary of State for Trade and Industry (Secretary of State). These conditions include provisions relating to the term of the license, the imposition of specific drilling obligations, environmental protection controls, controls over the development and decommissioning of a field (including restrictions on production) and the payment of royalties. DEVELOPMENT OF OIL AND NATURAL GAS RESERVES. The development and production of UK oil and natural gas reserves (including rates of production) require the approval or consent of the Secretary of State. There have been a number of policy statements by various UK Governments over the years with respect to production controls. Although successive Governments have made it clear that the imposition of production cut-backs in order to facilitate a coherent depletion policy has been kept under review, the steps taken by the Government since the early 1980s have tended to concentrate on encouraging 32 33 exploration, development and production and no significant cut-backs of previously agreed rates of production are known to have been imposed. OTHER CONTROLS. In addition to the regulatory powers of the Government referred to above, the Secretary of State has wide powers over the oil field operations, including gas flaring, the installation, use and tariffs of sub-marine pipelines, the construction or expansion of refining capacity and powers to impose programs for the eventual decommissioning of offshore installations. Furthermore, the Secretary of State for Transport has powers to control the positioning of offshore installations if the chosen location is in or close to a shipping lane. The UK Health and Safety Executive has wide powers and duties in relation to offshore health and safety. BP Amoco is also subject to European Union legislation, in particular the Procurement Directive which regulates the procedure for awarding major contracts. PETROLEUM REVENUE TAX. Petroleum revenue tax (PRT) was abolished in the Finance Act 1993 in respect of oil and natural gas fields given development consent on or after March 16, 1993 (Non-Taxable Fields). Profits from Non-Taxable Fields are charged to corporation tax under general principles. PRT is still charged on profits from fields given development consent before that date (Taxable Fields). PRT is charged in relation to Taxable Fields on profits from oil (which includes gas except where specifically excluded by statute) won under licenses granted under either the Petroleum (Production) Act 1934 or the Petroleum (Production) Act (Northern Ireland) 1964. It is charged on a field-by-field basis, at the rate of 50% for chargeable periods ending after June 30, 1993 (75% for periods ending on or before that date), on the assessable profit arising in each chargeable period (normally the six months ending on June 30 and December 31 in each year), as reduced by any allowable losses and by an oil allowance (unless the maximum amount of oil allowance has already been used), and subject in certain years to an overall limit (safeguard). PRT is also chargeable on any consideration received in connection with the use by other fields and the disposal of certain 'qualifying assets', the expenditure on which is allowable for PRT, subject to an allowance in the case of the use of assets. The assessable profit reflects, very broadly, the market value of oil won less the costs of discovery and production, including any Government royalties payable. Interest and other financing costs are not deductible in determining the assessable profit; instead, certain costs are designated as qualifying for a supplement of 35% (uplift). Uplift ceases for costs incurred after the end of the chargeable period in which the field's cumulative income exceeds its cumulative expenditure (payback). Oil allowance exempts certain amounts from PRT. For each onshore field and offshore field given development consent before April 1982, an allowance of up to 250,000 tonnes of oil per chargeable period is available, subject to a cumulative total of 5 million tonnes. For each onshore field and each offshore field situated in the Southern Basin of the North Sea given development consent after March 1982, the oil allowance for chargeable periods ending after June 30, 1988 is 125,000 tonnes per chargeable period and the cumulative total is 2.5 million tonnes. For each offshore field not situated in the Southern Basin given development consent after March 1982, the allowance is 500,000 tonnes per chargeable period subject to a cumulative total of 10 million tonnes. The oil allowance is shared by the participants in each field in proportion to their shares of oil. Safeguard provides that the total PRT payable in respect of a field is limited to 80% of the amount (if any) by which the PRT profits for a chargeable period (specially adjusted for this purpose) exceed 15% of accumulated expenditure (as adjusted). Safeguard remains available after payback has been reached for half as many periods again as it took to reach payback from the first chargeable period. Allowable losses in any chargeable period can be set off against the assessable profits of subsequent or, after making an appropriate claim, previous periods from the same field but, in relation to losses arising in respect of chargeable periods ending after June 30, 1993, the PRT repayment plus any interest thereon arising from the set-off of losses against profits of previous periods cannot exceed 60% of the losses set off (85% in respect of chargeable periods ending after June 30, 1991 and on or before June 30, 1993). In addition, relief is available against the assessable profit from a field for certain expenditure incurred outside the field. There are restrictions to prevent the obtaining of relief for expenditure incurred in connection with Non-Taxable Fields against profits from Taxable Fields. Exploration or appraisal expenditure incurred on or after March 16, 1983 and before March 16, 1993, in respect of an area for which no development decision has been made, may be set against the assessable profits of any Taxable Field together with any such expenditure incurred prior to that date which is designated as abortive. There is no relief for exploration and appraisal incurred after March 16, 1993 unless the Company was already committed to it at that date and it is incurred on or before March 16, 1995. There is an additional transitional 33 34 relief for exploration and appraisal expenditure, subject to certain conditions, limited to a maximum of L10 million for expenditure incurred on or after March 16, 1993 and before January 1, 1995. Finally, a loss from a Taxable Field in which the winning of oil has permanently ceased which cannot be relieved against the assessable profits of that field can be claimed against the assessable profit from any other Taxable Field. The offset of reliefs is limited to prevent a company buying into mature oil fields and setting pre-acquisition expenditures against the assessable profits of that field. CORPORATION TAX. Companies are also subject to corporation tax on their profits or gains from oil extraction activities, although PRT is deductible in computing any corporation tax liability. There are restrictions on using reliefs from other activities against profits or gains from oil extraction activities, or from the disposal of interests in oil or of assets used in connection with a field in the UK or a designated area. There is also an exemption from capital gains taxation and capital allowance clawback for certain exchanges of license interests before the development stage. An election can be made in relation to expenditure incurred after June 30, 1991 for 100% reliefs for certain net offshore decommissioning expenditure. Losses created by these decommissioning reliefs are available for set-off against profits of the previous three years. In his Budget of July 1997 the UK Chancellor announced a review of the North Sea fiscal regime to ensure that an appropriate share of North Sea profits is being taxed while continuing to maintain a high level of oil industry interest in the future development of the UK's oil and gas reserves. In BP Amoco's submission to the review it argued that the existing fiscal regime broadly succeeds in both areas. In September 1998 the Chancellor announced that the existing regime would not be changed. UNITED STATES TAX. The State of Alaska imposes various taxes on the Group's operations in Alaska. At present, these include a severance tax on oil and natural gas produced, an ad valorem tax on all oil and gas exploration, production and pipeline equipment and a corporate income tax on companies doing business in Alaska. Following the Exxon Valdez oil spill, the State of Alaska passed an act to finance the State's Oil and Hazardous Substance Release Response Fund by imposing a conservation surcharge of $0.05 per barrel on all oil subject to the State's oil and gas properties production tax. Subsequently, the State amended the surcharge to suspend $0.02 per barrel of it when the balance in the Response Fund exceeds $50 million, and as a result the net surcharge is $0.03 per taxable barrel unless there is a spill that draws the Fund's balance below $50 million. Further, losses occurring in connection with a catastrophic oil discharge are not deductible as business expenses in determining the gross value of oil for tax purposes in the State of Alaska. PIPELINE REGULATIONS. The Interstate Commerce Act requires common carriers engaged in the transport by pipeline of oil in interstate or foreign commerce to file tariffs with the Federal Energy Regulatory Commission (the FERC) showing all rates, classifications, rules and practices between all points on their system. It also prohibits them from collecting any different compensation for transportation from that specified in their approved tariffs. Third parties, or the FERC on its own motion, may initiate an investigation of any proposed tariff, which involves the scheduling of a hearing. If the FERC, at the conclusion of a hearing, finds that a new or increased rate is unreasonable or discriminatory, or otherwise in violation of the Interstate Commerce Act, it may order the carrier to cease and desist from charging that rate, may prescribe a rate for the future and order refunds to shippers of collected amounts found to be unreasonable. ENVIRONMENTAL PROTECTION HEALTH, SAFETY AND ENVIRONMENTAL REGULATION The Group is subject to numerous national and local environmental laws and regulations concerning its products, operations and other activities. These laws and regulations may require the Group to take future action to remediate or otherwise redress the effects on the environment of prior disposal or release of chemicals or petroleum substances by the Group or other parties. Such contingencies may exist for various sites including refineries, chemicals plants, oil fields, service stations, terminals and waste disposal sites. In addition, the Group may have obligations relating to prior asset sales or closed facilities. Provisions for environmental restoration and remediation are made when a clean-up is probable and the amount is reasonably determinable. Generally, their timing coincides with the commitment to a formal 34 35 plan of action or, if earlier, on divestment or on closure of inactive sites. The provisions made are considered by management to be sufficient for known requirements. The extent and cost of future environmental restoration and remediation programs are inherently difficult to estimate. They depend on the magnitude of any possible contamination, the timing and extent of the corrective actions required and BP Amoco's share of liability relative to that of other responsible parties. Though the costs of future restoration and remediation could be significant, and may be material to the results of operations in the period in which they are recognized, it is not expected that such costs will have a material impact on the Group's financial position or liquidity. Management cannot predict future developments, such as increasingly strict requirements of environmental laws and enforcement policies thereunder, that might affect the Group's operations or affect the exploration for new reserves or the products merchandized by the Group. A risk of increased environmental costs and liabilities is inherent in particular operations and products of the Group and there can be no assurance that material costs and liabilities will not be incurred in the future. In general, the Group does not expect that it will be affected differently from other companies with comparable assets engaged in similar businesses. Management believes that the Group's activities are in compliance in all material respects with applicable environmental laws and regulations. For a discussion of the Group's environmental expenditures see Item 9 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Environmental Investment. In December 1997, at the Third Conference of the Parties to the United Nations Framework Convention on Climate Change in Kyoto, Japan, the participants agreed on a system of differentiated internationally legally binding targets for the first commitment period of 2008-2012. The range in Annex I countries (OECD, former Soviet Union and Eastern Bloc countries) is from -8% to +10%. The USA agreed on a reduction of 7%, and the European Union on a reduction of 8%, on 1990 levels of emissions of greenhouse gases. Projections of the increase in emissions without any reduction measures are estimated at 32% for the USA and 19% for the European Union. If these targets are to be met a major reduction in the use of fossil fuels would be required, and this would be likely to have a significant effect on BP Amoco's main businesses, but the Group does not expect that it will be affected differently from other companies with comparable assets engaged in similar businesses. The following is a summary of significant health, safety and environmental legislation affecting the Group in 1998. UNITED STATES The Clean Air Act Amendments of 1990 (the Amendments) and regulations issued pursuant thereto require, among other things, enhanced monitoring of major sources of specified pollutants, more stringent limits on chemical plant, refinery, marine and distribution terminal emissions, risk management plans for storage of hazardous substances, and new fuel specifications. Title V of the Amendments requires major emission sources to obtain new air permits. This permitting effort is underway at the Group's US operations. Title V also requires continuous and more comprehensive measurement of specified air pollutants from major emission sources. Two aims of this regulation are to provide regulating bodies with accurate data on emissions from major sources, and to enable regulatory authorities to better evaluate compliance with applicable emission limitations. Federal continuous monitoring requirements have recently been promulgated. Risk Management Plan regulations will require that any non-exempted facility that processes or stores a threshold amount of a regulated substance prepare and implement a risk management plan to detect, prevent and minimize accidental releases. Undertaking an offsite hazard assessment, preparing a response plan and dialogue with the local community are the primary components of the program. Additionally, the Amendments imposed new specifications for motor vehicle fuels that significantly impact petroleum refining and marketing operations. In nine urban areas with the highest ozone levels, reformulated gasoline (RFG) containing oxygenates and lower levels of benzene, and having lower levels of volatility was introduced beginning January 1995. The emission reduction requirements came into effect in 1998, with further requirements scheduled for 2000. BP Amoco manufactures and markets fuels in some of these nine areas, as well as in other areas that chose to join the RFG program. 35 36 Since 1992, gasoline sold during the winter in approximately 40 metropolitan areas with high carbon monoxide levels must have higher levels of oxygenates such as methyl-tertiary-butyl-ether (MTBE) and ethanol. BP Amoco is providing such oxygenated fuels in a number of US markets. Seven metropolitan areas have been able to achieve compliance with carbon monoxide standards and terminate their oxygenated fuels programs. Beginning 1993, the Amendments limited highway diesel fuel sulfur content to 0.05%. BP Amoco has been producing this fuel in many of its US markets. The Amendments also require service stations located in certain ozone non-attainment areas to install equipment to capture gasoline vapors released during refuelling. The Amendments also require installation of 'maximum achievable control technology' (MACT) over a ten-year period at certain types of industry facilities that release certain specified toxic chemicals. Additional controls could be required if the US Environmental Protection Agency (EPA) determines that an unacceptable residual risk remains after installation of MACT. The EPA has finalized MACT control requirements for certain categories of chemical plants, refineries, gasoline marketing terminals and marine terminals. Additional regulations on some sources in petroleum refineries were proposed in 1998. These are expected to be finalized in 1999 with compliance required in 2002. The Clean Water Act regulates the discharge of wastewater and other pollutants into US waters. Facilities are required to obtain permits for most discharges and implement operational controls and preventative measures. Requirements under the Clean Water Act have become more stringent in recent years, including coverage of storm and surface water discharges at many facilities. The trustee agencies for the Clean Water Act and the Endangered Species Act formalized agreements linking those statutes with the potential to limit access because of habitat concerns to certain areas with development potential. During 1995 a final federal rule was issued regarding protection of the Great Lakes watershed which will have local and national impacts on water protection requirements. During 1998, individual states in the Great Lakes watershed were working on regulations implementing the federal rule. The Oil Pollution Act of 1990 (the Oil Pollution Act) significantly increased oil spill prevention requirements, spill response planning obligations and spill liability for vessels, offshore facilities (such as platforms) and onshore terminals. To provide compensation for oil spill response where the spiller is unable to do so, the Oil Pollution Act created a $1 billion fund, funded by a tax on imported and domestic oil. The Oil Pollution Act also requires double hulls on all new tankers operating in US waters and double hulls installed on existing tankers on a phased schedule between the years 1995 to 2015. Major oil shippers and handling facilities are expected to be most affected by the expanded technical and operational requirements for tankers under the Oil Pollution Act. Regulations require businesses covered by this Act to carry specified levels of insurance or other documentation of financial responsibility and maintain facility response plans that, among other things, identify and prepare for worst case spill scenarios. Facilities must also conduct emergency response programs in coordination with area and national response plans. BP Amoco has set performance objectives to enhance emergency preparedness and crisis management at all facilities, and to promote compliance with all related legislation such as the Oil Pollution Act. These objectives are designed to be met through appropriate assessment, planning, training and routine exercises, and by the provision or identification of sufficient human and physical resources. The Resource Conservation and Recovery Act (RCRA) regulates the storage, handling, treatment and disposal of hazardous and non-hazardous wastes. It also requires the investigation and remediation of locations where such wastes have been previously handled or disposed of. RCRA requirements have become increasingly stringent in recent years. BP Amoco facilities generate a number of wastes regulated by RCRA and have units that have been used for the storage, handling or disposal of RCRA wastes. The Prince William Sound port-specific vessel escort plan required by regulations that became effective late in 1994, was updated during 1995, including operational requirements such as enhanced tanker steering capabilities, rudder failure response procedures, and reduced speed in the Valdez Narrows, plus directives on communications and training. Under the Comprehensive Environmental Response, Compensation, and Liability Act (also known as CERCLA or Superfund), waste generators, site owners, facility operators and certain other parties may be 36 37 liable for the entire cost of addressing sites contaminated by spills or waste disposal. Additionally, most states have laws similar to CERCLA. BP Amoco has been identified as a Potentially Responsible Party (PRP) under CERCLA and similar state statutes at approximately 390 sites. A PRP has a joint and several liability for site remediation costs and so BP Amoco may be required to assume the cost share attributed to insolvent, unidentified or other parties. BP Amoco is the PRP identified as having the most significant exposure for remediation costs at 27 of these sites. For the remaining sites the number of PRPs ranges generally from 20 to 200, and BP Amoco expects its share of remediation costs in respect of these sites to be small. BP Amoco has estimated its potential exposure at all sites where it has been identified as a PRP and has accrued provisions accordingly. BP Amoco does not anticipate that its ultimate liability at these sites individually, or in aggregate, will be significant. The Group is also subject to claims made for natural resource damage under several federal and state laws. Other relevant legislation includes the Toxic Substances Control Act which, among other things, regulates the development, testing, import, export and introduction of new chemical products into commerce; the Occupational Safety and Health Act which, among other things, imposes workplace safety and health, training and process standards to reduce the risks of chemical exposure and injury to employees; and the Emergency Planning and Community Right-to-Know Act which requires emergency planning and spill notification as well as public disclosure of chemical usage and emissions. The Occupational Safety and Health Administration's Process Safety Management (PSM) rule formalizes the procedures used in operating and maintaining a covered facility and also in conducting formal documented hazard reviews of all covered processes. UNITED KINGDOM AND EUROPEAN UNION Part 1 of the UK Environmental Protection Act 1990 introduced the concept of Integrated Pollution Control (IPC) of pollution to air, water and land by requiring each prescribed process (including petroleum and gasification processes) to be authorized. The controls apply to new processes in England and Wales from April 1, 1991 and in Scotland from April 1, 1992. The standard to be achieved by each process is the Best Available Techniques Not Entailing Excessive Cost (BATNEEC). Existing petroleum and gasification processes were required to have applied for an IPC authorization by June 30, 1992. These processes were to be upgraded to the BATNEEC standard at the earliest opportunity and generally for petroleum and gasification processes by April 1, 1998. BP Amoco has registered all sites affected by the IPC legislation and is carrying out monitoring and upgrading of processes as required. Onshore oil production facilities are covered by separate guidance notes issued in November 1995. BP Amoco has IPC authorizations for its onshore production facilities which effectively equate to BATNEEC compliance. Where they do not, the authorization includes an agreed improvement program which BP Amoco is working towards with its Environment Agency IPC Inspector. A European Commission directive for a similar system of Integrated Pollution Prevention and Control (IPPC) is based on a combined approach of Best Available Technology and Environmental Quality Standards. This encompasses, among other things, most activities and processes undertaken by the oil industry within the European Union. The European Commission has stated that it hopes that all processes to which it applies will be licensed by July 2005. When implemented, this directive will replace the IPC regulation in the UK. The European Union Large Combustion Plant Directive sets emission limit values for sulfur dioxide, nitrogen oxides and particulates from large combustion plants; it also requires phased reductions in emissions from existing large combustion plants. Implementation by Member States was required by June 1990. In the UK, it has been given effect through the authorization mechanism in Part 1 of the Environmental Protection Act 1990. Large combustion plants required an IPC application to be made by April 30, 1991. Upgrading to the BATNEEC standard is required at the earliest opportunity, at the latest by April 1, 2001. The European Commission has considered proposals to impose emission limit values on small combustion plants. A revised Large Combustion Plant Directive was proposed by the Commission in 1998 to be considered by the Council and Parliament during 1999-2000. As part of its overall program to combat air pollution, the European Union has set stringent emission limits for new cars and commercial vehicles which are being implemented in stages. From October 1994, the sulfur content of diesel fuel was limited to 0.2% and from October 1996 the limit was further reduced to 0.05%. Heating oils were initially limited to 0.2% with further reductions subject to review. Additional 37 38 controls on heating and marine gas oils are also anticipated. The UK Environmental Protection Act may also impose new investigation and remediation obligations on the Group's UK facilities upon the adoption of implementing regulations. In June 1996, the Commission proposed emission limits for cars to apply from year 2000, together with specifications for gasoline and diesel fuel to apply from that date. During 1997, the Commission followed this with proposed emission limits for light and heavy commercial vehicles, also based on the Auto/Oil Program conclusions. These proposals are now with the Council of Ministers and the European Parliament. In December 1998, the Council reached agreement on a common position to set more stringent truck and bus emission limits in 2000, 2005 and 2008. The Commission is also undertaking a second Auto/Oil Program to agree further changes to fuels and cars after 2005. As part of its overall approach to improving air quality, in 1997 the Commission proposed its Acidification Strategy, and followed this with its proposal for a strategy to combat tropospheric ozone. The Ozone Strategy was adopted in 1998. Four air quality targets have been adopted as Commission Directives, two more have been proposed and more are expected in 1999. Upon adoption by the Council, these targets will be the reference point for further environmental controls of industrial installations. As part of a package to stabilize carbon dioxide (CO(2)) emissions at 1990 levels by the year 2000, the European Commission proposed a combined CO(2)/energy tax. In March 1997, the Commission adopted an energy tax proposal that is intended to be fiscally neutral when applied by Member States. Formally, the proposal replaces the CO(2)/energy tax proposal that was blocked in Council but has as its main objective to provide a harmonized framework for national excise taxes, and to allow Member States greater flexibility to offer tax incentives based on environmental criteria, whilst avoiding barriers to trade within the Single Market. Europe is also taking action on volatile organic compounds (VOCs). In late 1994, the European Union adopted Stage 1 VOC controls which requires a 90% cut in emissions over ten years from petrol transport and storage. In November 1996, the Commission proposed a directive on control of emissions of organic solvents from the solvent-using industry which has the goal of combating low-level ozone by setting emission limits and, as an alternative, targets to be met by national plans. Existing installations would be required to reach compliance by 2007 (VOC). This proposal was adopted as a directive during 1998. The European Union enacted the Major Hazards (Seveso) Directive (the Seveso Directive) in 1982. The intention of this legislation is to identify industrial sites which have the potential to suffer a major accident which would impact on the neighboring population. Such sites are defined by the hazards that exist on them, in some cases by the process in operation, but mainly by exceeding the defined threshold quantities of various categories of 'dangerous substances' in storage or use on the premises. It is the responsibility of the site to evaluate their hazards. Those which fall into the category of a major hazard site must produce a safety case which contains the evaluation of the hazards, an assessment of the consequences of the most serious credible incidents which can occur, and a description of the emergency plan which they have in place to deal with them. The safety case must be submitted to the national regulator, who acts on behalf of the local authority. The site is also expected to communicate the relevant aspects of its emergency plan to the local community. All BP Amoco sites in Europe are in compliance with the Seveso Directive as has been enacted in each specific country. The European Union has now adopted a revised Seveso Directive known as the Control of Major Accident Hazards Regulation, which came into force in February 1999. Detailed guidance on the changes is still awaited. The UK Offshore Safety Act 1992 came into force on March 6, 1992. Detailed implementation is through regulations made under existing health and safety legislation enforced by the UK Health and Safety Executive. The Offshore Installations (Safety Case) Regulations 1992 came into force in May 1993. BP Amoco submitted all safety cases by the required date of November 1993. This included 22 operational safety cases, all of which have been accepted, and two design safety cases on new installations. As part of the safety case, BP Amoco was required to justify continued operation and outline remedial measures identified as part of the risk assessment completed. Work on these remedial works was completed by the November 1995 deadline. MANAGEMENT OF HEALTH, SAFETY AND ENVIRONMENTAL ISSUES The Group's world-wide HSE policy is developed within a framework set by BP Amoco p.l.c.'s board of directors. The policy is implemented through targets in the corporate and business performance 38 39 contracts and programs ranging from pollution prevention through safety management and product stewardship. Each part of the BP Amoco Group reviews its own performance and an assurance report is presented annually to the Group Chief Executive. The Ethics and Environment Assurance Committee of the board of directors, comprising five non-executive directors, reviews policies and processes which bear upon the Group's health, safety and environmental relationships. ADDITIONAL FACTORS WHICH MAY AFFECT BUSINESS In order to utilize the 'Safe Harbor' provisions of the United States Private Securities Litigation Reform Act of 1995, BP Amoco is providing the following cautionary statement. This document contains certain forward-looking statements with respect to the financial condition, results of operations and business of BP Amoco and certain of the plans and objectives of BP Amoco with respect to these items. In particular, among other statements, certain statements in Item 1 -- Description of Business and Item 9 -- Management's Discussion and Analysis of Financial Condition and Results of Operations with regard to management aims and objectives, planned expansion, investment or other projects, expected or targeted production volume, capacity or rate, the date or period in which production is scheduled or expected to come on stream or a project or action is scheduled or expected to be completed, and the statements in Item 9 -- Management's Discussion and Analysis of Financial Condition and Results of Operations with regard to trends in results of operations, margins, overall market trends, risk management and exchange rates are forward-looking in nature. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. In addition to factors set forth elsewhere in this report, the following are important factors, although not exhaustive, that may cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. There is strong competition, both within the oil industry and with other industries, in supplying the fuel needs of commerce, industry and the home. The oil industry is also particularly subject to regulation and intervention by governments throughout the world in such matters as the award of exploration and production interests, the imposition of specific drilling obligations, environmental protection controls, control over the development and decommissioning of a field (including restrictions on production) and, possibly, nationalization, expropriation or cancellation of contract rights. The oil industry is also subject to the payment of royalties and taxation, which tend to be high compared with those payable in respect of other commercial activities. Exploration and production require high levels of investment and have particular economic risks and opportunities. They are subject to natural hazards and other uncertainties including those relating to the physical characteristics of an oil or natural gas field. Oil prices are subject to international supply and demand. Political developments (especially in the Middle East) and the outcome of meetings of OPEC can particularly affect world oil supply and oil prices. The refining industry is suffering from severe oversupply. Crude oil prices are generally set in dollars while sales of refined products may be in a variety of currencies. Fluctuation in exchange rates can therefore give rise to foreign exchange exposures. Sectors of the chemicals industry are also subject to fluctuations in supply and demand within the chemicals market, with consequent effect on prices and profitability, and to governmental regulation and intervention in such matters as safety and environmental controls. ITEM 2 -- DESCRIPTION OF PROPERTY BP Amoco has freehold and leasehold interests in real estate in numerous countries throughout the world, but no one individual property is significant to the Group as a whole. See Item 1 -- Description of Business for a description of the Group's reserves and sources of crude oil and natural gas. 39 40 ITEM 3 -- LEGAL PROCEEDINGS Save as disclosed in the following paragraph, no member of the Group is a party to, and no property of a member of the Group is subject to, any pending legal proceedings which are significant to the Group. Approximately 200 lawsuits were filed in State and Federal Courts in Alaska seeking compensatory and punitive damages arising out of the Exxon Valdez oil spill in Prince William Sound in March 1989. Most of those suits named Exxon, Alyeska Pipeline Service Company (Alyeska), which operates the oil terminal at Valdez, and the seven oil companies which own Alyeska. Alyeska initially responded to the spill until the response was taken over by Exxon. BP Amoco owns a 50% interest in Alyeska through a subsidiary of BP America Inc. Alyeska and its owners have settled all of the claims against them under these lawsuits. Exxon has indicated that it may file a claim for contribution against Alyeska for a portion of the costs and damages which it has incurred. If any claims are asserted by Exxon which affect Alyeska and its owners, BP Amoco would defend the claims vigorously. The Internal Revenue Service (IRS) has challenged the application of certain foreign income taxes as credits against BP Amoco Corporation's US taxes that otherwise would have been payable for the years 1980 to 1992. On June 18, 1992, the IRS issued a statutory Notice of Deficiency for additional taxes in the amount of $466 million, plus interest, relating to 1980 to 1982. BP Amoco filed a petition in the US Tax Court contesting the IRS statutory Notice of Deficiency. Trial on the matter was held in April 1995, and a decision was rendered by the US Tax Court in March 1996, in BP Amoco's favour. The IRS has appealed the Tax Court's decision to the US Court of Appeals for the Seventh Circuit and on March 11, 1998, the Seventh Circuit affirmed the Tax Court's prior decision. A comparable adjustment of foreign tax credits for each year has been proposed for the years 1983 to 1992 based upon subsequent IRS audits. BP Amoco Corporation believes that the foreign income taxes have been reflected properly in its US federal tax returns. Consequently, this dispute is not expected to have a material adverse effect on liquidity, results of operations, or the financial position of the Group. In February 1998, a jury in a Texas state court awarded compensatory and punitive damages in the aggregate amount of $115 million to former employees of a steel company. The plaintiffs had alleged that they suffered injuries following their use of products containing asbestos, sold during 1965 to 1983 by Carborundum, a former subsidiary of BP America. These proceedings have now been settled between the parties on the basis of an annulment of the court judgement. Other such claims will be defended vigorously. In 1994, BP Amoco agreed a $1.4-billion settlement with the State of Alaska in respect of disputed taxes for 1978-91. The settlement was reduced by federal tax offsets and did not affect the results of operations, since adequate provisions had already been made. The effects were a net cash payment of $575 million in 1994, a net receipt of $360 million in 1995 and a net payment of $300 million in 1996. ITEM 4 -- CONTROL OF REGISTRANT The following table sets forth certain shareholding information as of March 29, 1999, concerning the directors and the secretary of BP Amoco p.l.c.
Title of class Identity of person or group Number owned Percent of class - - -------------- --------------------------- ------------ ---------------- Ordinary Shares of Directors and the 50 cents each secretary of BP Amoco p.l.c. 2,490,119(a) less than 1/10th of 1%
- - ------------ (a) Includes 1,034,956 Ordinary Shares held by directors in the form of ADSs. There are no interests of more than 10% of the Company's Ordinary Shares, other than Morgan Guaranty Trust Company of New York as Depositary for the ADRs evidencing the ADSs. See Item 5 -- Nature of Trading Market. 40 41 ITEM 5 -- NATURE OF TRADING MARKET The primary market for the Company's Ordinary Shares is the London Stock Exchange. The Company's Ordinary Shares are a constituent element of the Financial Times Stock Exchange 100 Index. The Company's Ordinary Shares are also traded on stock exchanges in France, Germany, Japan and Switzerland. Trading of BP Amoco's shares on the LSE is primarily through the use of the Stock Exchange Electronic Trading Service (SETS), introduced in 1997 for the largest companies in terms of market capitalization whose primary listing is the LSE. Under SETS, buy and sell orders at specific prices may be sent to the exchange electronically by any firm which is a member of the LSE, on behalf of a client or on behalf of itself acting as a principal. The orders are then anonymously displayed in the order book. When there is a match on a 'buy' and a 'sell' order, the trade is executed and automatically reported to the LSE. Trading is continuous from 9:00 a.m. to 4:30 p.m. UK time, but in the event of a 10% movement in the share price either way the LSE may impose a temporary halt in the trading of that company's shares in the order book, to allow the market to re-establish equilibrium. Dealings in the Company's Ordinary Shares may also take place between an investor and a market-maker, via a member firm, outside the electronic order book. In the United States the Company's securities are traded in the form of American Depositary Shares (ADSs), for which Morgan Guaranty Trust Company of New York is the depositary (the 'Depositary') and transfer agent. Each ADS represents six Ordinary Shares. ADSs are listed on the New York Stock Exchange, and are also traded on the Chicago, Pacific and Toronto Stock Exchanges. The Ordinary Shares represented by ADSs issued pursuant to the merger between BP and Amoco were issued in bearer form at the time of the merger. As at March 29, 1999, 3,182,944,491 Ordinary Shares in bearer form are held by the Depositary in London, with 89,127,309 Ordinary Shares being held by Boston Equiserve Limited, as exchange agent on behalf of Amoco shareholders that have yet to exchange their Amoco shares for BP Amoco ADSs. The following table sets forth for the periods indicated the highest and lowest middle market quotations for the Ordinary Shares of The British Petroleum Company p.l.c. for 1997 and 1998, and of BP Amoco p.l.c. for 1999. These are derived from the Daily Official List of the LSE, and the highest and lowest sales prices of ADSs as reported on the New York Stock Exchange composite tape.
American Depositary Ordinary Shares Shares (a) ---------------- -------------- High Low High Low ------ ------ ----- ----- (Pence) (Dollars) 1997: First quarter..................................... 748 663 73 1/2 64 7/8 Second quarter.................................... 759 670 75 3/8 65 11/16 Third quarter..................................... 956 756 93 74 5/8 Fourth quarter.................................... 939 797 91 7/8 79 1998: First quarter..................................... 934 746 96 73 3/4 Second quarter.................................... 968 833 97 5/16 82 7/8 Third quarter..................................... 910 737 91 3/4 73 Fourth quarter.................................... 957 815 95 3/8 81 7/16 1999: First quarter (through March 29).................. 1,077 822 105 81 1/8
- - ------------ (a) With effect from June 6, 1997, the Company split existing ADSs on a two-for-one basis so that an ADS is now equivalent to six Ordinary Shares. Market prices for the Ordinary Shares on the LSE and in after-hours trading off the LSE, in each case while the New York Stock Exchange is open, and the market prices for ADSs on the New York Stock Exchange and other North American stock exchanges, are closely related due to arbitrage among the various markets, although differences may exist from time to time due to various factors including UK stamp duty reserve tax. Trading in ADSs began on the LSE on August 3, 1987. On March 29, 1999, 544,861,253 ADSs (equivalent to 3,269,167,518 Ordinary Shares or some 33.6% of the total) were outstanding and were held by approximately 107,000 ADR holders. Of these, about 105,000 had registered addresses in the USA at that date. 41 42 On March 29, 1999, there were approximately 366,000 holders of record of Ordinary Shares. Of these holders, around 1,170 had registered addresses in the United States and held a total of some 1,670,000 Ordinary Shares. In addition, certain accounts of record with registered addresses other than in the United States hold Ordinary Shares, in whole or in part, beneficially for United States persons. ITEM 6 -- EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS There are currently no UK foreign exchange controls or restrictions on remittances of dividends on the Ordinary Shares or on the conduct of the Company's operations. There are no limitations, either under the laws of the UK or under the Articles of Association of BP Amoco p.l.c., restricting the right of non-resident or foreign owners to hold or vote Ordinary or Preference Shares in the Company. ITEM 7 -- TAXATION The following summary of the principal UK and certain US tax consequences of ownership of ADSs or Ordinary Shares is based in part on representations of Morgan Guaranty Trust Company of New York as Depositary for the ADRs evidencing the ADSs and assumes that each obligation in the deposit agreement among the Company, the Depositary and the holders from time to time of ADRs and any related agreement will be performed in accordance with its terms. Beneficial owners of ADSs who are resident in the USA are treated as the owners of the underlying Ordinary Shares for the purposes of the income tax convention between the USA and the UK (the Convention) and for the purposes of the US Internal Revenue Code of 1986, as amended (the Code). Unless otherwise stated, references to 'shareholders' or 'shareholder' below are to persons who are the beneficial owners of the underlying Ordinary Shares. It should be noted that the UK Inland Revenue is currently negotiating with the US Internal Revenue Service about updating and revising the Convention. UK TAXATION OF DIVIDENDS POSITION FOR DIVIDENDS PAID BEFORE APRIL 6, 1999 BP Amoco p.l.c. is required, when paying a cash dividend, to account to the UK Inland Revenue for a payment of advance corporation tax (ACT). The current rate of ACT is 1/4 of the net dividend (equivalent to 20% of the combined dividend and ACT). Under current UK law, an individual shareholder resident in the UK for UK income tax purposes is treated as having taxable income equal to the sum of any dividend paid plus a tax credit equal to 1/4 of the amount of the net dividend. The tax credit is available to be set against the individual's tax liability on the dividend, and may in appropriate cases be refunded. A UK resident corporate shareholder will not generally be liable to UK corporation tax on any dividend received. Under the Convention, a beneficial owner of the Company's shares who for the purposes of the Convention is a resident of the USA and is not a resident of the UK (a US Holder) and whose holding of the Company's shares is not effectively connected with (i) a permanent establishment in the UK through which the US Holder carries on a business in the UK, or (ii) a fixed base from which the US Holder performs independent personal services in the UK, will generally be entitled to receive from the UK Inland Revenue, in addition to any dividend paid by the Company, an amount equal to the tax credit available to individual shareholders resident in the UK in respect of such dividend, less a withholding tax equal to 15% of the aggregate of such tax credit and such dividend (the Refund). For example, a dividend of $8.00 will entitle such a US Holder to receive a Refund of $0.50 (a tax credit of $2.00, less a withholding of $1.50), giving a total net receipt, after UK taxes but before US taxes, of $8.50. Special rules may apply under certain circumstances if the US Holder (a) is exempt from tax in the USA on dividends paid by the Company, or (b) is an investment or holding company, 25% of the capital of which is held directly or indirectly by one or more persons who are not individual residents or nationals of the USA and (i) which has imposed on it by the USA, in respect of the dividend, a tax substantially less than the tax generally imposed by the USA on corporate profits, or (ii) which receives more than 80% of its gross income from sources outside the USA as determined in accordance with the Convention. Special rules apply to a US Holder who owns 10% or more of the Ordinary Shares and to US corporate 42 43 shareholders which directly or indirectly control, alone or with one or more associated corporations, at least 10% of the voting power of the Company or are residents of the UK. Arrangements exist with the UK Inland Revenue under which a holder of ADRs resident in the USA that is (i) a US corporation whose business is not managed and controlled in the UK, (ii) an individual resident in the USA and not resident in the UK, or (iii) a trust or estate, all the beneficiaries of which are resident in the USA, will receive payment of the Refund to which such holder is entitled, together with payment of the associated cash dividend, provided that the holder is not subject to the special rules described in the preceding paragraph, completes the declaration on the reverse of the dividend check and presents the check for payment within three months from its date of issue. The holder must declare, among other things, that he is neither engaged in business nor performing independent personal services through a permanent establishment or fixed base in the UK. These arrangements can be terminated without notice by the UK Inland Revenue. A US Holder who does not receive the Refund to which such US Holder is entitled must, in order to obtain payment, file in the manner and at the time described in Revenue Procedure 80-18, 1980-1 C.B. 623 (as amended by Revenue Procedure 90-61, 1990-2 C.B. 657) and Revenue Procedure 81-58, 1981-2 C.B. 678, a claim for payment identifying the dividends with respect to which the ACT was paid. The first claim by such a US Holder for a payment is made by sending the appropriate UK tax form in duplicate to the Director of the Internal Revenue Service Center with which the US Holder's last Federal income tax return was filed. Forms may be obtained from the IRS Assistant Commissioner (International), 950 L'Enfant Plaza South, S.W., Washington, D.C. 20024. If the US Holder qualifies as a US resident, the Internal Revenue Service (IRS) will certify the form to that effect and forward it to the UK tax authorities. Claims must be made within six years of the end of the UK year of assessment (generally the 12-month period ending April 5 in each year) in which the related dividend was paid. As a claim is not considered made until the UK tax authorities receive the appropriate form from the IRS, forms should be sent to the IRS well before the end of the applicable limitation period. Any Refund claim by a US Holder after the first claim should be filed directly with the Financial Intermediaries and Claims Office (International), FitzRoy House, PO Box 46, Nottingham, NG2 1BD, England. Legislation exists in the UK which, if brought into effect, could withdraw the entitlement of a US corporation to a Refund if it or an associated company has a qualifying presence (as defined) in a State which operates a unitary system of corporate taxation. The legislation, as currently drafted, will only apply to US corporations which either alone or together with one or more associated corporations control, directly or indirectly, at least 10% of the voting stock of the Company. The likelihood of this legislation being brought into effect, its effective date (and whether retrospective or not) and its precise form cannot be predicted. Dividends (including amounts in respect of the tax credit and any amounts withheld) must be included in gross income by a shareholder subject to US taxation and will generally be treated as foreign source 'passive income' or, in the case of certain US holders, 'financial services income' for Federal income tax purposes. Such dividends will generally not be eligible for the dividends received deduction allowed to US corporations. Subject to certain limitations, the applicable UK withholding tax will be treated as a foreign tax eligible for credit against such shareholder's US Federal income tax. Whether shareholders who reside in countries other than the USA are entitled to the tax credit in respect of dividends on such shares depends in general upon the provisions of such conventions or agreements as may exist between such countries and the UK. In addition to that with the USA, conventions or agreements presently exist between the UK and, among other countries, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden and Switzerland. POSITION FOR DIVIDENDS PAID ON OR AFTER APRIL 6, 1999 The Finance (No 2) Act 1997 introduced new legislation which will significantly alter the tax treatment of dividends paid on or after April 6, 1999. As from that date the tax credit for an individual shareholder resident in the UK will be reduced to 1/9 (or 10% of the net dividend plus the tax credit) of the amount of the net dividend. This tax credit will continue to be available to set against the individual's tax liability on the dividend, but will no longer be refundable to the individual. 43 44 For a US Holder as defined above this amendment will have the effect of reducing the Refund available under the Convention to nil, since the amount of the withholding tax (at 15%) will exceed the 10% tax credit available to individual shareholders resident in the UK. Following the example given above, a dividend of $8.00 will result in a net receipt after UK tax but before US tax of $8.00, rather than $8.50 (the withholding tax will not reduce the dividend below the net dividend of $8.00). The Finance Act 1998 also abolished the requirement for UK companies to pay ACT on cash dividends as from April 1, 1999. This will not affect the tax treatment of dividends described above. SHARE DIVIDEND CHOICE FOR BP AMOCO ADR HOLDERS ADR holders electing to receive ADSs instead of a cash dividend (see Item 8 - - -- Selected Financial Data -- Dividends) will not be entitled to any Refund from the UK Inland Revenue, nor will the 15% withholding tax apply, with respect to such dividends. For US tax purposes the receipt of additional ADSs will be treated as a dividend distribution. An ADR holder who is subject to US taxation will generally be treated as having received gross income equal to the fair market value of the ADSs (or fraction thereof) on the date of the share distribution in London (with no reduction for the stamp duty reserve tax referred to below). The US resident ADR holder will receive a tax basis in the ADSs equal to such fair market value. Corporations will not be entitled to a dividends received deduction on receipt of a share dividend. FOREIGN INCOME DIVIDENDS The Finance Act 1994 introduced new legislation under which companies are able on or after July 1, 1994 to elect to pay a 'foreign income dividend' with special tax treatment. ACT would be payable by the Company on such a dividend, but surplus ACT not creditable against mainstream corporation tax liabilities may be repayable to the Company later, based on the extent to which the dividend was shown to have been paid out of sufficiently taxed foreign source profits. Shareholders would obtain no tax credit. However, they would be treated for UK tax purposes as having received income which had suffered tax at 20%. No Refund would be available to US Holders in respect of any such dividends. BP Amoco has not elected to pay a foreign income dividend. The Finance (No. 2) Act 1997 repeals the foreign income dividend legislation with effect from April 6, 1999. UK TAXATION OF CAPITAL GAINS A US Holder will be liable to UK tax on capital gains realized on the sale or other disposition of Ordinary Shares only if the US Holder is resident (or, in the case of an individual, ordinarily resident) for UK tax purposes in the UK or if he carries on a trade, profession or vocation in the UK through a permanent establishment and the Ordinary Shares are (i) used for the purposes of the trade, profession or vocation, or (ii) used, held or acquired for the purposes of the permanent establishment. The liability to UK capital gains tax for US holders of ADRs is the same as that for a US holder of Ordinary Shares, except that a US holder of ADRs who is resident but not domiciled in the UK will not be taxed on gains realized on the sale or other disposition of ADSs if the proceeds are not remitted to the UK. UK INHERITANCE TAX UK capital transfer tax was restructured and renamed 'inheritance tax' in 1986. The US-UK double taxation convention relating to estate and gift taxes (the Estate Tax Convention) applies to inheritance tax. ADRs held by an individual who is domiciled for the purposes of the Estate Tax Convention in the USA and is not for the purposes of the Estate Tax Convention a national of the UK will not be subject to inheritance tax on death or on transfer during the individual's lifetime unless, among other things, the ADSs are part of the business property of a permanent establishment situated in the UK or pertain to a fixed base situated in the UK used for the performance of independent personal services. In the exceptional case where ADSs are subject both to inheritance tax and to US Federal gift or estate tax, the Estate Tax Convention generally provides for tax paid in the UK to be credited against tax payable in the USA or for tax paid in the USA to be credited against tax payable in the UK based on priority rules set forth in the Estate Tax Convention. 44 45 UK STAMP DUTY AND STAMP DUTY RESERVE TAX The statements below relate to what is understood to be the current practice of the UK Inland Revenue under existing law. Provided that the instrument of transfer is not executed in the UK and remains at all times outside the UK, and the transfer does not relate to any matter or thing done or to be done in the UK, no UK stamp duty is payable on the acquisition or transfer of ADSs. Neither will an agreement to transfer ADSs in the form of ADRs give rise to a liability to stamp duty reserve tax. Purchases of Ordinary Shares, as opposed to ADSs, through the CREST system of paperless share transfers will be subject to stamp duty reserve tax at a rate of 0.5%. The charge will arise as soon as there is an agreement for the transfer of the shares (or, in the case of a conditional agreement, when the condition is fulfilled). The stamp duty reserve tax will apply to agreements to transfer Ordinary Shares even if the agreement is made outside the UK between two non-residents. Purchases of Ordinary Shares outside the CREST system are subject either to stamp duty at a rate of 50 pence per L100 (or part), or stamp duty reserve tax at 0.5%. Stamp duty and stamp duty reserve tax are generally the liability of the purchaser. A subsequent transfer of Ordinary Shares to the Depositary's nominee will give rise to further stamp duty at the rate of L1.50 per L100 (or part) or stamp duty reserve tax at the rate of 1.5% of the value of the Ordinary Shares at the time of the transfer. A transfer of the underlying Ordinary Shares to an ADR holder upon cancellation of the ADSs without transfer of beneficial ownership will give rise to UK stamp duty at the rate of 50 pence per transfer (which is increased to L5 in the 1999 UK budget). An ADR holder electing to receive ADSs instead of a cash dividend will be responsible for the stamp duty reserve tax due on issue of shares to the Depositary's nominee and calculated at the rate of 1.5% on the issue price of the shares. Current UK Inland Revenue practice is to calculate the issue price by reference to the total cash receipt (i.e. cash dividend plus the Refund if any) to which a US Holder would have been entitled had the election to receive ADSs instead of a cash dividend not been made. ADR holders electing to receive ADSs instead of the cash dividend authorize the Depositary to sell sufficient shares to cover this liability. 45 46 ITEM 8 -- SELECTED FINANCIAL DATA SUMMARIZED FINANCIAL INFORMATION The information shown below for 1998, 1997 and 1996 has been extracted or derived from the audited financial statements of the BP Amoco Group presented elsewhere herein. The unaudited pro forma financial information for 1995 and 1994 has been derived by combining historical financial information for BP and Amoco (after adjusting onto a UK GAAP basis). In presenting this information the merger is assumed to have occurred on January 1, 1994. See Item 9 -- Management's Discussion and Analysis of Financial Condition and Results of Operations.
Years ended December 31, --------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- ($ million except per share amounts) UK GAAP INCOME STATEMENT DATA Turnover................................. 83,732 108,564 102,064 84,216 76,809 Less: Joint ventures..................... (15,428) (16,804) -- -- -- ------- ------- ------- ------- ------- Group turnover........................... 68,304 91,760 102,064 84,216 76,809 Total replacement cost operating profit (a).................................... 6,437 10,583 10,544 8,170 7,004 Replacement cost profit before exceptional items (b).................. 3,999 6,649 6,696 4,962 3,945 Profit for the year...................... 3,260 6,030 7,241 3,602 4,352 Per Ordinary Share: Profit for the year: Basic............................... $ 0.34 $0.63 $0.76 $0.38 $0.46 Diluted............................. $ 0.34 $0.63 $0.75 $0.38 $0.46 Dividends (c)............................ $0.395 $0.36 $0.31 $0.27 $0.21 BALANCE SHEET DATA Total assets............................. 84,500 85,947 88,315 81,165 78,679 BP Amoco Shareholders' interest.......... 41,786 41,748 41,019 35,851 34,255 Finance debt due after more than one year................................... 10,918 10,021 10,088 11,375 13,284 Debt to borrowed and invested capital (d).................................... 20% 19% 20% 24% 28% OTHER DATA Per Ordinary Share: Replacement cost profit before exceptional items................... $ 0.42 $0.69 $0.70 $0.52 $0.42 Net cash inflow from operating activities (e).................................... 9,586 15,558 13,679 12,682 11,877 Net cash outflow from capital expenditure acquisitions and disposals............. 6,520 10,056 8,056 7,183 4,629 US GAAP INCOME STATEMENT DATA Revenues................................. 68,304 91,760 102,064 84,216 76,809 Profit for the year...................... 2,826 5,686 6,795 3,991 4,050 Comprehensive income..................... 2,848 4,106 7,218 4,346 4,918 Profit per Ordinary Share (f): Basic.................................. $ 0.29 $0.59 $0.71 $0.42 $0.43 Diluted................................ $ 0.29 $0.59 $0.71 $0.42 $0.43 Profit per American Depositary Share (f)(g): Basic.................................. $ 1.74 $3.54 $4.26 $2.52 $2.58 Diluted................................ $ 1.74 $3.54 $4.26 $2.52 $2.58 BALANCE SHEET DATA Total assets............................. 85,538 87,076 89,934 89,929 80,615 BP Amoco Shareholders' interest.......... 37,334 37,504 37,259 32,475 30,413 OTHER DATA Net cash used in investing activities.... 6,861 10,151 8,311 7,160 4,594 Net cash used in financing activities.... 2,161 3,449 3,239 3,723 4,102
- - ------------ (a) Operating profit is a UK GAAP measure of trading performance. It excludes profits and losses on the sale of businesses and fixed assets and fundamental restructuring costs, interest expense and taxation. 46 47 BP Amoco determines operating profit on a replacement cost basis, which eliminates the effect of inventory holding gains and losses. For the oil and gas industry, the price of crude oil can vary significantly from period to period; hence the value of crude oil (and products) also varies. As a consequence, the amount that would be charged to cost of sales on a first-in, first-out (FIFO) basis of inventory valuation would include the effect of oil price fluctuations on oil and products inventories. BP Amoco therefore charges cost of sales with the average cost of supplies incurred during the period rather than the historical cost of supplies on a FIFO basis. For this purpose, inventories at the beginning and end of the period are valued at the average cost of supplies incurred during the period rather than at their historical cost. These valuations are made quarterly by each business unit, based on local oil and product price indices applicable to their specific inventory holdings, following a methodology that has been consistently applied by BP Amoco for many years. Operating profit on the replacement cost basis is used by BP Amoco management as the primary measure of business unit trading performance and BP Amoco management believes that this measure assists investors to assess BP Amoco's underlying trading performance from period to period. Replacement cost is not a US GAAP measure. The major US oil companies apply the last-in, first-out (LIFO) basis of inventory valuation. The LIFO basis is not permitted under UK GAAP. The LIFO basis eliminates the effect of price fluctuations on crude oil and product inventory except where an inventory drawdown occurs in a period. BP Amoco management believes that where inventory volumes remain constant or increase in a period, operating profit on the LIFO basis will not differ materially from operating profit on BP Amoco's replacement cost basis. Where an inventory drawdown occurs in a period, cost of sales on a LIFO basis will be charged with the historical cost of the inventory drawn down, whereas BP Amoco's replacement cost basis charges cost of sales at the average cost of supplies for the period. To the extent that the historical cost on the LIFO basis of the inventory drawn down is lower than the current cost of supplies in the period, operating profit on the LIFO basis will be greater than operating profit on BP Amoco's replacement cost basis. To the extent that the historical cost on the LIFO basis of the inventory drawdown is greater than the current cost of supplies in the period operating profit on the LIFO basis will be lower than operating profit on BP Amoco's replacement cost basis. (b) Replacement cost profit before exceptional items excludes profits and losses on the sale of businesses and fixed assets and fundamental restructuring costs, which are defined by UK GAAP. This is the measure of profit used by the BP Amoco board in setting targets for and monitoring performance within BP Amoco. BP Amoco's management believes this indicator provides the most relevant and useful measure for investors because it most accurately reflects underlying trading performance. (c) BP Amoco dividends per share represent historical dividends per share paid by BP. (d) Finance debt due after more than one year, compared with such debt plus BP Amoco and minority shareholders' interests. (e) The net cash inflows from operating activities are presented in accordance with the requirements of Financial Reporting Standard No. 1 (Revised 1996) issued by the UK Accounting Standards Board. For a cash flow statement prepared on a US GAAP basis see Item 18 -- Note 45 of Notes to Financial Statements. (f) FASB Statement of Financial Accounting Standards No. 128 -- 'Earnings per Share' (SFAS 128) was adopted for the accounting period ending December 31, 1997. Amounts for prior periods have been restated as required by SFAS 128. (g) With effect from June 6, 1997, the Company split existing ADSs on a two-for-one basis so that an ADS is now equivalent to six Ordinary Shares. Comparative figures for 1994 to 1996 inclusive have been restated accordingly. 47 48 DIVIDENDS BP p.l.c. has paid dividends on its Ordinary Shares in each year since 1917. In 1999, there was a dividend payment in February to holders of BP p.l.c. Ordinary Shares and ADSs as at November 13, 1998. There will be further dividend payments in April, June, September and December to harmonize payment dates for former BP and Amoco shareholders. In 2000 and thereafter, dividends will be paid quarterly in March, June, September and December. Until their shares have been exchanged into the form of BP Amoco ADSs, Amoco Shareholders do not have the right to receive dividends. Following the merger, BP Amoco announces dividends on Ordinary Shares in US dollars and at the same time states an equivalent sterling dividend. Previously BP p.l.c. announced dividends in sterling. Foreign exchange rates may affect dividends paid. However, when setting the dividend the directors are mindful of dividend fluctuation in sterling terms. The following table shows dividends announced by the Company per ADS for each of the past five years, together with the Refund but before deduction of withholding taxes as described in Item 7 -- Taxation. Dividends have been translated from pounds per ADS up to and including the third quarterly dividend for 1998, and from dollars per ADS for the fourth quarterly dividend of 1998, at an exchange rate in London on the business day last preceding the day when the directors announced their intention to pay the quarterly dividends for those years. DIVIDENDS PER AMERICAN DEPOSITARY SHARE (a)
Quarterly ---------------------------------------- First Second Third Fourth Total ------- ------- ------- ------- ------- 1994........................ UK pence 18.7 18.8 18.7 22.5 78.7 US cents 28.1 28.8 30.6 35.2 122.7 Can. cents 38.9 40.1 41.3 49.4 169.7 1995........................ UK pence 22.5 30.0 30.0 31.9 114.4 US cents 36.0 48.1 47.4 48.8 180.3 Can. cents 48.8 65.2 64.0 67.0 245.0 1996........................ UK pence 31.9 37.5 37.5 39.4 146.3 US cents 47.8 57.9 61.8 64.3 231.8 Can. cents 65.3 79.6 82.5 86.9 314.3 1997........................ UK pence 39.4 41.2 41.3 43.1 165.0 US cents 63.7 67.3 69.2 70.5 270.7 Can. cents 88.1 92.8 97.1 101.1 379.1 1998........................ UK pence 43.1 45.0 45.0 45.9 179.0 US cents 71.9 73.1 75.1 66.7 286.8 Can. cents 102.8 110.7 115.5 100.0 429.0
- - ------------ (a) With effect from June 6, 1997, the Company split existing ADSs on a two-for-one basis so that an ADS is now equivalent to six Ordinary Shares. Comparative figures for 1994 to 1996 inclusive have been restated accordingly. The share dividend plan whereby holders of Ordinary Shares could elect to receive new shares (out of unissued share capital) instead of cash dividends at a rate equivalent to the sum of the net cash dividend and related tax credit, was withdrawn following the third quarterly 1998 dividend. A dividend reinvestment plan was introduced with effect from the fourth quarterly 1998 dividend, whereby holders of Ordinary Shares can elect to reinvest the net cash dividend in shares purchased on the London Stock Exchange. This plan is not available to any person resident in the USA or Canada, or in any jurisdiction outside the UK where such an offer requires compliance by the Company with any governmental or regulatory procedures or any similar formalities. A dividend reinvestment plan is, however, available for holders of ADSs through Morgan Guaranty Trust Company of New York. Future dividends of BP Amoco p.l.c. will be dependent upon future earnings, the financial condition of the Group, the Additional Factors which may affect the business of the Group set out in Item 1 -- Description of Business, and other factors. 48 49 ITEM 9 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GROUP RESULTS
Years ended December 31, --------------------------- 1998 1997 1996 HIGHLIGHTS ------- ------- ------- Total replacement cost operating profit.............. ($ million) 6,437 10,583 10,544 Replacement cost profit before exceptional items..... ($ million) 3,999 6,649 6,696 Replacement cost profit for the year................. ($ million) 4,651 6,969 6,069 Historical cost profit for the year.................. ($ million) 3,260 6,030 7,241 Profit per Ordinary Share (diluted).................. (cents) 34 63 75 Dividends per Ordinary Share......................... (cents) 39.5 36.0 31.0
The merger between BP and Amoco became effective on December 31, 1998, resulting in the Company being owned 60% by former BP shareholders and 40% by former Amoco stock holders. In accordance with UK GAAP, the merger method of accounting has been applied in preparing the financial statements. The merger qualifies for the pooling of interests method of accounting under US GAAP. Under merger accounting, the results and cash flows of BP and Amoco are combined from the beginning of the financial period in which the merger occurred. The assets and liabilities of the two companies are combined at the amounts at which they were previously recorded after adjusting to achieve consistency of accounting policies. Consequently, the financial and operating information and discussion for 1998 and prior periods are presented for BP Amoco on a combined basis. The separate results of each company, on a UK GAAP basis, are shown in Item 18 -- Note 44 of Notes to Financial Statements. BP Amoco's operations are substantially US dollar-based. To reflect this, the reporting currency of the Group has been changed to the US dollar. Financial information for all periods presented is shown in US dollars. The US dollar was relatively stable against European currencies in 1998. In 1997 most currencies declined against the dollar, except for sterling which strengthened to an average of $1.64/L1 from $1.56/L1 in 1996. In 1998, financial performance was affected by general price deflation and erosion of margins, with a 34% fall in average oil realizations and deterioration in both the downstream and chemicals environments. Productivity improvements, cost savings and higher sales volumes partially offset this significant downturn in the operating environment. Replacement cost profit before exceptional items (which excludes inventory holding gains and losses) for 1998 was $3,999 million compared with $6,649 million in 1997. In addition to exceptional items (as identified under UK GAAP) these results included net special charges of $597 million ($469 million after tax) in 1998 and $133 million ($106 million after tax) in 1997. Special items are non-recurring charges and credits reported in the period, which are not exceptional items. The special items in both years consisted principally of asset write-downs in respect of fixed asset impairments. After excluding these special items, the 1998 results were 34% lower than that of 1997. 1998 results reflect the new requirement to capitalize certain information technology expenditure of a type which had been expensed in previous years. The amount capitalized in 1998 was some $160 million. For further details of the accounting for computer software costs, see Item 18 -- Note 45 of Notes to Financial Statements. The return on average capital employed, based on replacement cost profit before exceptional items, was 9% compared to 14% in 1997. The historical cost profit for 1998 was $3,260 million after inventory holding losses of $1,391 million. This compared with a profit of $6,030 million after inventory holding losses of $939 million for 1997. The results for 1998 included net exceptional profits of $850 million ($652 million after tax); those of 1997 included net exceptional profits of $511 million ($320 million after tax). The 1997 replacement cost profit before exceptional items represented a small decrease compared with 1996. It was achieved against mixed operating conditions. Oil prices, down by a dollar per barrel compared with 1996, were compensated for to some extent by higher natural gas prices, operating improvements and higher oil production. Refining margins experienced by BP Amoco were more favorable than those of 1996 and retail margins recovered to some extent in the UK. Offsetting these effects were increasing competition in the US and Australasian retail markets and the decline of most currencies 49 50 against the dollar. Higher income was achieved through improved operating performance in both refining and marketing, including the benefits of the BP/Mobil joint venture in Europe. Chemicals experienced improved volumes and some higher margins but was adversely affected by lower paraxylene margins, the strength of the dollar against the Deutschmark and Asian currency weakness in the latter part of the year. The 1996 result included net special charges of $74 million, before tax, relating to early redemption of debt. The historical cost profit for 1996 was $7,241 million. This included inventory holding gains of $1,172 million and net exceptional charges of $703 million ($627 million after tax and minority interests). The replacement cost profit before exceptional items was $6,696 million. The total dividends announced in respect of 1998 were $4,121 million, against $3,452 million in 1997. Over half of this increase was a non-recurring effect of the entitlement of former Amoco shareholders to the BP Amoco dividend in respect of the fourth quarter of 1998 in addition to the Amoco dividend announced in the fourth quarter. The Company intends to announce dividends in the future with a payout of around 50% of our estimated average earnings through the business cycle. Capital expenditure and acquisitions amounted to $10,362 million, 9% down on 1997. Expenditure in 1998 included the acquisition of Styrenix Kunststoffe, a plastics business in Germany. In 1997 expenditure included the acquisition of interests in A O Sidanco in Russia, Pan American Energy in Argentina and Empresa Petrolera Chaco in Bolivia. Expenditure in 1999 is likely to be around $7 billion, reflecting sharpened focus in the capital program. Exploration and Production expenditure is likely to be reduced to take into account the current low oil prices and investment projects in Asia are expected to be carried out over a longer time-frame than previously envisaged. Capital expenditure net of divestments in 1998 was $8,195 million (1997 $9,588 million). At the April 1998 annual general meeting, BP shareholders gave authority for the directors to repurchase up to 5% of the company's ordinary share capital for cancellation. Prior to the completion of the merger with Amoco the board resolved not to exercise this authority and this was communicated to shareholders at the extraordinary general meeting held to approve the merger. During 1998 BP completed its program to buy shares in the market to the value of $500 million to meet future obligations under employee share schemes. Amoco began a two-year, $2 billion stock repurchase program in 1997 which was terminated as a result of the merger. In 1998, 13.8 million shares of common stock were repurchased and cancelled at a cost of $584 million. EXCEPTIONAL ITEMS Exceptional items comprise profits or losses on the sale of businesses and fixed assets, merger transaction costs and fundamental restructuring charges. In 1998 sales of businesses and fixed assets generated net profits before tax of $1,048 million. The principal sales were exploration and production properties in the USA and Papua New Guinea, the refinery in Lima, Ohio, the sale and leaseback of the Amoco building in Chicago, Illinois, the retail network in the Czech Republic, the Adibis fuel additives business and a speciality chemicals distribution business. Also included was the disposal by the BP/Mobil joint venture of its retail network in Belgium. Merger transaction costs of $198 million in respect of advisers' fees and expenses were incurred in 1998. The major elements of the net profit before tax on the sale of businesses and fixed assets in 1997 of $440 million were the sales of US exploration and production properties and an intrastate natural gas pipeline unit in Texas. The loss on sale of businesses by joint ventures relates principally to the costs of the BP/Mobil joint venture terminating base oil manufacturing operations at Llandarcy in the UK. Also in 1997, provisions of $71 million originally set up in 1995 as part of the refinery network rationalization were written back as a result of the decision to continue operating the Lavera, France, refinery. In 1996 the net loss of $171 million before tax resulted principally from the sale of the polystyrene foam products and Carborundum businesses, properties in the UK and USA and Canadian upstream assets. The implementation costs relating to the European downstream joint venture with Mobil charged against income in 1996 represented BP Amoco's share of severance, restructuring and rebranding in the joint venture which, together with asset write-downs and some BP-specific costs, amounted to $532 million 50 51 before tax. Cash outflows relating to these costs were $122 million in 1998, $307 million in 1997 and $69 million in 1996. BUSINESS OPERATING RESULTS Total replacement cost operating profit, which is arrived at before inventory holding gains and losses, interest expense, taxation and minority interests, and before exceptional items, was $6,437 million in 1998, $10,583 million in 1997 and $10,544 million in 1996. The business results which follow are presented on this basis. EXPLORATION AND PRODUCTION
Years ended December 31, --------------------------- 1998 1997 1996 ------- ------- ------- Total replacement cost operating profit.............. ($ million) 3,147 7,285 7,673 Results included: Exploration expense................................ ($ million) 921 962 997 Key statistics: Average prices realized by BP Amoco: North Sea....................................... ($/bbl) 12.7 19.1 20.4 Alaskan North Slope............................. ($/bbl) 12.6 19.0 19.7 US natural gas.................................. ($/mcf) 1.8 2.2 1.9 Crude oil production (a)............................. (mb/d) 2,049 1,930 1,903 Natural gas production (a)........................... (mmcf/d) 5,808 5,858 5,917 Total production (a)(b).............................. (mboe/d) 3,050 2,940 2,924
- - ------------ (a) Includes BP Amoco's share of associated undertakings. (b) Expressed in thousands of barrels of oil equivalent per day (mboe/d). Natural gas is converted to oil equivalent at 5.8 billion cubic feet : 1 million barrels. In 1998 our upstream business performed well in a most difficult environment. Replacement cost operating profit, adjusted for net special charges, declined by 50%. The special charges of $485 million principally comprised $200 million for the write-down of the Group's investment in A O Sidanco and $121 million for the impairment of the Opon field and $93 million for the adjacent power plant in Colombia. Brent North Sea oil averaged $6.4 a barrel below the 1997 level while North American natural gas prices were some 40 cents per thousand cubic feet below the 1997 average. Increased production volumes, coupled with a sustained focus on costs, boosted this performance. Production grew 3.7% to 3,050 thousand barrels of oil equivalent a day (mboe/d). Production of oil, condensate and natural gas liquid increased by 6.2% to 2,049 thousand barrels a day (mb/d), while natural gas production fell 0.9% to 5,808 million standard cubic feet a day (mmcf/d) because of the decline at older UK offshore fields. This decline is expected to be offset in 1999 by a full year's production from the Eastern Trough Area Project (ETAP). This production growth was supported by strong performance from our 1997 start-ups, and completion of a large number of new projects in 1998. These included ETAP, Viking Phoenix, Brown and Bruce Phase 2 in the North Sea; Schiehallion and Loyal, west of Shetland; Hugoton natural gas plant in the USA; the second phase of development of the Cusiana/Cupiagua project in Colombia; and Pedernales phase 2 in Venezuela. Start-up of these projects contributed towards the transfer of 1.38 billion barrels of oil equivalent of reserves to developed status. In 1998, finding and development costs averaged $4.7 a barrel of oil equivalent, within our targeted range of $4 to $5. Lifting costs averaged $3.2 a barrel of oil equivalent, compared with $3.0 in 1997. Exploration and Production's total replacement cost profit for 1997 of $7,285 million represented a decrease of $388 million compared with 1996. Although production was increased by 1% and higher worldwide natural gas prices contributed favourably to 1997 results, these effects were more than offset by the impact of lower oil prices which, at $19.1 per barrel, were down on average by some 6% compared with 1996. 51 52 Crude oil production in 1997 averaged 1,930 mb/d, an increase of 27 mb/d on 1996, while natural gas production fell to 5,858 mmcf/d from 5,917 mmcf/d in 1996. The increase in oil production included a full year's production from fields in the North Sea and the Gulf of Mexico commissioned in 1996 and new or incremental production in 1997 in a number of areas. These increases compensated for normal declines in production from mature fields in areas such as Alaska and the North Sea, the effect of major maintenance shut-downs and disposals of non-core interests. The decrease in natural gas production resulted from normal declines in production in mature fields and disposals of interests, primarily in the USA. These were partially compensated for by strong natural gas sales in the UK and new production from equity-accounted entities. Reserve replacement in 1998 was 132% of production, with 1,339 million barrels of oil equivalent added to proved reserves. This was the fifth consecutive year in which we successfully replaced our reserves. Within this growth, natural gas reserve replacement of 244% of production exceeded oil reserve replacement of 71% of production. During 1998, discoveries occurred in many parts of the world. Our success in Angola continued with new finds in Kissanje, Marimba, Hungo and Dikanza in Block 15. In South America, there was a successful discovery at the Tropical-1X well on the Quiriquire block in Venezuela, in which we have a 45% stake. In Norway, the Barden well confirmed significant natural gas reserves in the Southern extension of the Ormen Lange Dome. Other substantial oil and natural gas discoveries were made off the coast of Trinidad and in Egypt, Canada and the USA. Capital expenditure and acquisitions decreased from $7,879 million in 1997 to $6,318 million in 1998. In 1999, projects coming on stream should include the Ursa, Europa and Marlin developments in the Gulf of Mexico which are on, or ahead of, schedule, and the Pascagoula natural gas liquid processing plant for deepwater production is expected to begin operations. We have also started construction of the Great Yarmouth power plant in eastern England. REFINING AND MARKETING
Years ended December 31, ------------------------------ 1998(a) 1997(a) 1996 ------- -------- ------- Total replacement cost operating profit........... ($ million) 2,564 2,292 1,708 Indicative industry global refining margin........ ($/bbl) 1.7 1.8 2.2 Refinery throughputs.............................. (mb/d) 2,698 2,855 2,804 Total marketing sales............................. (mb/d) 3,137 3,083 2,924
- - ------------ (a) Includes BP Amoco's share of the BP/Mobil joint venture. 1998 was a year of strong performance for the downstream business. Underlying performance delivered total replacement cost operating profit of $2,564 million, an increase of 12% over 1997, with a competitive return on fixed assets of 12%. This outcome was achieved in spite of difficult trading conditions, characterized by reduced refining margins in the second half of the year and the impact of economic slowdown in our growth markets. 1998 also benefited from the capitalization of IT expenditure of $70 million which would have been expensed in earlier periods. Marketing volumes rose in spite of divestments across both the retail and commercial segments, with continued improvement flowing from our US and European operations. The retail business grew during the year, with volumes up 3%. The focus on growing our convenience retailing activity as one of our key strategic objectives continued. The 'Split Second' US convenience store format was rolled out in Atlanta, Georgia; Philadelphia, Pennsylvania; Chicago, Illinois; Denver, Colorado and south Florida, with high customer satisfaction ratings. Our commercial marketing activities continued to deliver strong growth in income with the drive towards customer-focused marketing solutions. In 1998, despite lower overall margins our refining business achieved good results. A combination of cost savings and improved operating efficiency produced a 12% improvement in total replacement cost operating profit compared with 1997. In 1997, Refining and Marketing's total replacement cost operating profit was $2,292 million, a year-on-year increase of 34%. The increase reflected continuing operating improvements in both refining and marketing, a good trading performance, and the benefits derived from the BP/Mobil joint venture in 52 53 Europe. The impact of the operating conditions was mixed, with better BP Amoco refining margins generally and improved retail margins in the UK, offset by an increase in competitive pressures in the US and Australasian retail markets. Marketing volumes in 1997 were 5% higher than in 1996, reflecting the benefits of the European joint venture with Mobil, expansion into emerging markets, and a concerted effort to improve retail facilities in established markets. In 1997 crude oil processing at the Pernis site in Rotterdam, the Netherlands, was terminated, and the refurbished crude unit at the Europoort site commenced operations. A review of options in respect of the Lavera refinery in France indicated that the sale or closure anticipated as part of BP's global refinery network rationalization, announced in 1995, was no longer the optimal solution and the refinery continues in operation within the BP/Mobil joint venture. In Germany, the new refining company Bayernoil, created by the merger of the RVI refinery (BP 62.5%) and ERN (Neustadt) refinery (Mobil 50%), was established on January 1, 1998. Capital expenditure in 1998 was $1,937 million compared with $1,824 million in 1997. The Group's capital expenditure on refinery assets, including environmental and investments in line with regulatory requirements to improve product quality, totalled $685 million in 1998 compared with $581 million in 1997. Major investment in the Grangemouth refinery in Scotland to increase middle distillate yields was completed successfully in 1998, while the program to position the Toledo, Ohio, refinery to run on cheaper heavy crudes progressed as planned towards commissioning in 1999. We also successfully completed the sale of the Lima refinery in Ohio. Capital expenditure on marketing assets was $1,252 million compared with $1,243 million in 1997. CHEMICALS
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Total replacement cost operating profit.... ($ million) 1,100 1,530 1,654 Chemicals production (a)................... (thousand tonnes) 20,073 19,491 17,498
- - ------------ (a) Includes BP Amoco's share of associated undertakings and other interests in production. In 1998, margins for most commodity chemicals deteriorated compared with 1997. This reflected increased industry capacity, weak demand in Europe and the financial crisis in Asia. These factors were offset to some extent by our continued focus on self-help initiatives, such as cost reduction, and by the benefits of our investment in proprietary technology. The total volume of product manufactured rose by 3% in the year, principally reflecting our styrenics acquisition in early 1998. As a result of all these factors total replacement cost operating profit was $1,100 million compared with $1,530 million in 1997. Total replacement cost operating profit for Chemicals in 1997 represented a decrease of some 7% compared with 1996. Improved volumes and higher margins for several products during 1997 were offset by a decline in paraxylene margins, the strength of sterling and a weaker Deutschmark, and Asian currency weakness in the latter part of the year. Chemicals production in 1997 benefited from capacity expansions brought onstream towards the end of 1996. This resulted in a year-on-year production increase of 11%. In 1998, divestments included the Adibis lubricants and fuel additives business and speciality chemicals distribution businesses in Europe and Australasia. During 1997 BP Amoco sold its advanced materials and phenolic resins business in the UK. In 1996, we completed the sale of our polystyrene foam products and Carborundum businesses. Capital expenditure and acquisitions in 1998 was $1,606 million compared with $1,145 million in 1997. During 1998 we acquired Styrenix Kunststoffe. Projects completed in 1998 included the purified terephthalic acid unit and paraxylene unit at Geel, a new metaxylene plant at Texas City, and the first stage of the planned $825 million investment program in the UK. Capital expenditure in 1997 included a number of expansions and constructions of new facilities. 53 54 OTHER BUSINESSES AND CORPORATE
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Replacement cost operating loss................... ($ million) 374 524 491
Other Businesses and Corporate comprises Finance, the solar businesses, the Group's coal interest, interest income and costs relating to corporate activities worldwide. The net cost of Other Businesses and Corporate of $374 million for 1998 included $50 million for integration costs in respect of the BP Amoco merger. 1998 benefited from the capitalization of IT expenditure amounting to $65 million which would have been expensed in earlier periods. INTEREST EXPENSE Interest expense in 1998 was $1,053 million compared with $908 million in 1997. The increase reflected higher average debt, partly offset by lower interest rates. Total interest expense was reduced from $1,004 million in 1996 to $908 million in 1997 as a result of debt repayments and lower interest rates. The reported interest expense in 1996 included a net special charge of $74 million caused by the early redemption of $1 billion of bonds. TAXATION The charge for corporate taxes in 1998 was $1,520 million compared with $3,066 million in 1997, and $2,755 million in 1996. The effective tax rate on historical cost profit was 31% in 1998, 33% in 1997 and 28% in 1996. Excluding the effects of exceptional items, the charge for corporate taxes was $1,322 million in 1998, $2,875 million in 1997 and $2,825 million in 1996. The decline in tax charge from 1997 to 1998 reflected the fall in income between those two years. The effective tax rate on replacement cost profit before exceptional items was 25%, compared with 30% in the previous year and in 1996. This reduction reflected the effects of tax relief on higher inventory holding losses and timing benefits. This rate is likely to rise in the future as these effects are expected to be less marked. BP AMOCO GROUP'S FINANCIAL CONDITION CASH FLOW
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Net cash inflow from operating activities................... 9,586 15,558 13,679 Net cash inflow (outflow)................................... (906) 878 377
Net cash flow for 1998 was an outflow of $906 million, compared with an inflow of $878 million in 1997. The change reflects lower operating cash flow resulting from lower income and a smaller reduction in working capital requirements than in 1997, partially offset by a turnaround in the funding position of the BP/Mobil joint venture, lower net capital expenditures and lower tax payments. Net cash inflow from operating activities fell from $15,558 million in 1997 to $9,586 million in 1998. Most of this decrease was caused by the effect on profits of the deterioration in the operating environment for all of our businesses. The requirement for funding working capital decreased in 1998 by $352 million, compared with a reduction of $1,396 million in 1997. Dividends from joint ventures and associated undertakings increased to $966 million in 1998 from $741 million in 1997, mainly as a result of improved profits from the BP/Mobil joint venture. The net cash outflow from servicing of finance and from returns on investments increased to $825 million from $655 million in 1997, principally because of the payment of dividends to minority shareholders. Tax payments fell from $2,273 million in 1997 to $1,705 million in 1998. Payments for capital expenditures on fixed assets and purchase of shares for employee share schemes, net of proceeds from sales of fixed assets, amounted to $7,298 million in 1998. This represented a small increase over the net payments of $7,432 million in 1997. 54 55 Acquisitions and disposals of businesses resulted in a net cash inflow of $778 million in 1998 compared with an outflow of $2,624 million in 1997. This was due in part to an increase in disposal proceeds but principally to the funding situation with joint ventures. A turnaround in the funding position of the BP/Mobil joint venture produced net cash inflows of $708 million in 1998, whereas in 1997 the initial funding of this and certain other joint ventures caused an outflow of $1,967 million. Dividend payments decreased by $29 million to $2,408 million in 1998, reflecting an increase in distributions offset by a higher proportion of shareholders opting for the share dividend. In 1997 the net cash inflow of $878 million represented an increase of $501 million over 1996. The main elements in the improvement in 1997 over 1996 were increased operating cash flows, resulting mainly from decreased working capital requirements, and lower payments for capital expenditures. There were also lower net interest and tax payments, and increased dividends from associated undertakings and joint ventures. Net cash inflow from operating activities increased in 1997 to $15,558 million from $13,679 million in 1996. The major element of this was a reduction in working capital requirements in 1997 compared with an increase in 1996 caused principally by the effect of a rising oil price in the latter part of 1996. Dividend payments from joint ventures and associated undertakings increased to $741 million in 1997 from $476 million in 1996. The major part of this increase was the payment of dividends from the BP/ Mobil joint venture in its first full year of operation. Net interest paid fell from $910 million in 1996 to $668 million in 1997. Tax payments of $2,431 million in 1996 included $300 million in respect of the final net tax payment relating to the settlement, in 1994, of a tax dispute with the State of Alaska. After excluding this item, tax payments of $2,273 million in 1997 represented a decrease of $142 million on 1996. Net payments for capital expenditures on fixed assets and purchase of shares for employee share schemes, net of proceeds from sales of fixed assets, amounted to $7,432 million in 1997 compared with $7,965 million in 1996. The principal element in this reduction was an increase in disposal proceeds, which rose to $1,468 million in 1997 compared with $973 million in 1996. The increase in net cash outflow from acquisitions and disposals of businesses in 1997 to $2,624 million from $91 million in 1996 was principally due to the initial funding of joint ventures in 1997, as well as a reduction in disposal proceeds. FINANCING THE GROUP'S ACTIVITIES The Group's principal commodity, oil, is priced internationally in dollars. Group policy has been to minimize economic exposure to currency movements by financing operations with dollar debt wherever possible, achieving this by currency swaps when funds have been raised in currencies other than dollars. The Group's finance debt is almost entirely in US dollars. Net debt, that is debt less cash and liquid resources, increased by $1,425 million during 1998, and net debt at the year-end stood at $12.9 billion. The ratio of net debt to net debt plus equity was 23% compared with 21% a year ago. In the absence of unforeseen events, we expect to keep this ratio below a target ceiling of 30%. At December 31, 1998 contracts had been placed for authorized future capital expenditure estimated at $3,691 million, mainly in respect of exploration and production activities. Such expenditure is expected to be financed largely by cash flow from operating activities. At December 31, 1998, the Group had substantial amounts of undrawn borrowing facilities available, including $2,800 million ($2,500 million at December 31, 1997) which were covered by formal commitments. BP Amoco has in place a Debt Issuance Program (the Program). Under the Program certain subsidiaries of the Group may from time to time issue debt securities guaranteed by the Company. The debt may have a minimum maturity of one month and no maximum maturity. Aggregate debt outstanding under the Program will not at any time exceed $2 billion or the equivalent in other currencies. At March 29, 1999, the amount drawn down against this Program was $1,134 million. OUTLOOK Crude oil supply remains in excess of weakened demand, and inventory levels remain high. An enduring change in the oil price is likely to depend on the supply-side response to this situation. 55 56 Downstream, margins and volumes are likely to remain under pressure, due to moderating demand and high inventory levels for oil products. In Chemicals, the downward pressure on margins and volumes is expected to continue for some time. This is caused by a combination of new industry capacity coming on stream at the same time as demand is weakening. The foregoing discussions focus on certain trends and general market and economic conditions and outlook on production levels or rates, prices and margins and, as such, are forward-looking statements that involve risk and uncertainty that could cause actual results and developments to differ materially from those expressed or implied by these discussions. By their nature, trends and outlook on production, price or margin are difficult to forecast with any precision, and there are a number of factors, including the dynamic nature of economic conditions, that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. For a discussion of additional factors that may affect the above discussion, see Item 1 -- Description of Business -- Additional Factors Which May Affect Business. FINANCIAL RISK MANAGEMENT Fluctuations in exchange rates can have significant effects on BP Amoco's operating results. The effects of most exchange rate fluctuations are subsumed within business operating results through changing cost competitiveness, lags in market adjustment to movements in rates, and conversion differences accounted on specific transactions. For this reason the total effect of exchange rate fluctuations is not identifiable separately in the Group's reported results. The underlying economic currency of the Group's cash flows is mainly the US dollar. Our foreign exchange management policy is to minimize economic and material transactional exposures from currency movements against the US dollar. Wherever possible, BP Amoco nets exposures using natural offsets to reduce foreign exchange risk. Significant residual non-dollar exposures are managed using a range of derivatives. In addition, most of the Group's borrowings are in US dollars, are hedged with respect to the US dollar or are swapped into dollars where this achieves a lower cost of financing. We are exposed to market risks arising from our normal business activities. Market risk is the possibility that changes in interest rates, currency exchange rates or commodity prices will adversely affect the value of the Group's financial assets, liabilities or expected future cash flows. These risks are managed using a range of financial and commodity instruments including derivatives. We also trade derivatives in conjunction with these risk management activities. BP Amoco is exposed to interest rate risk on short- and long-term floating rate instruments and as a result of the refinancing of fixed rate instruments included in the Group's finance debt. Consequently, as well as managing the currency and the maturity of debt, BP Amoco manages interest costs through the balance between lower-cost floating-rate debt, which has inherently higher risk, and more expensive, but lower-risk, fixed-rate debt. The Group is exposed predominantly to US dollar LIBOR (London Inter-Bank Offer Rate) interest rates as borrowings are mainly denominated in, or are swapped into, US dollars. Historically BP has used derivatives to achieve the required mix between fixed and floating rate debt. Although Amoco was authorized to use derivative financial instruments as an additional tool in this regard, no derivatives have been used. During 1998, BP's upper limit for the proportion of floating rate debt was 65% of total net debt while Amoco's upper limit was 60% of total debt outstanding. An appropriate strategy for managing the interest rate risk of the new Group is currently being formulated. The Group's oil trading division uses financial and commodity derivatives as part of the overall optimization of the value of the Group's equity oil production and as part of the associated trading of crude oil, products and related instruments. The Group also uses financial and commodity derivatives to manage certain of its exposures to price fluctuations on natural gas transactions. In risk management and trading, only well-understood conventional derivative instruments are used. These include futures and options traded on regulated exchanges, and 'over-the-counter' swaps, options and forward contracts. Where derivatives constitute a hedge, the Group's exposure to market risk created by the derivative is offset by the opposite exposure arising from the asset, liability or transaction being hedged. By contrast, 56 57 where derivatives are held for trading purposes, changes in market risk factors give rise to realized and unrealized gains and losses, which are recognized in the current period. All material derivatives activity, whether for risk management or trading, is carried out by specialist teams which have the appropriate skills, experience and supervision. These teams are subject to close financial and management control, meeting generally accepted industry practice and reflecting the principles of the Group of Thirty Global Derivatives Study recommendations. An independent control function monitors compliance with BP Amoco's derivative management policies. The control framework includes prescribed trading limits that are reviewed regularly by senior management, daily monitoring of risk exposure, marking trading exposures to market and reviewing open positions to assess BP Amoco's exposure in potentially adverse situations. Counterparty credit validation, independent of the dealers, is undertaken before contractual commitment. Further details of BP Amoco's use of derivatives appear in Item 9A -- Quantitative and Qualitative disclosures about Market Risk, and in Item 18 -- Note 28 of Notes to Financial Statements. INSURANCE Although practice differed in certain respects between BP and Amoco in 1998, the combined Group will generally restrict its purchase of insurance to situations where this is required for legal or contractual reasons. This is because external insurance is not considered economic for BP Amoco. Losses will therefore be borne as they arise, rather than being spread over time through insurance premia. The position will be reviewed each year. MILLENNIUM IT RISK The Year 2000 issue, which stems from computer programs written using two digits rather than four to define the applicable year, could result in processing faults on the change of century, producing a wide range of consequences. We have conducted a risk-based review of our computer systems and computer-controlled processes and have developed plans to remediate Year 2000-related faults by replacement or repair. Apart from some global and regional systems, which are handled centrally, project implementation is devolved to the management of operating units so as to ensure complete coverage. The project is designed to minimize risks arising from the Year 2000 problem which might endanger health, safety, the environment, the Group's reputation or its cash flow. The estimated total cost of BP Amoco's Year 2000 program is approximately $300 million. As at December 31, 1998, some $210 million had been incurred, and the balance is expected to be spent in 1999. This estimate excludes the costs of existing major systems replacement projects launched independently of the Year 2000 remediation. The Year 2000 costs are charged against income in the period in which they are incurred. Our Year 2000 program covers all areas that are known to be impacted by the issue including IT application systems and infrastructure, process control systems and embedded microprocessors in plants, oil and gas fields and building facilities. The Year 2000 process also includes the ongoing assessment of Year 2000 readiness of critical suppliers, customers, joint ventures and partners. We have finished the global inventory and risk analysis work, and a substantial part of the remediation and testing effort is also complete. Outstanding remediation dependent on planned plant shutdowns and other remediation work consisting mainly of implementation of package software releases are scheduled for completion by mid-1999. Systems rationalization and organizational restructuring made necessary by the BP Amoco merger are being managed to avoid risks which might reduce the Group's ability to meet 2000 with confidence. BP Amoco is providing information to third parties, on request, as to the progress of its Year 2000 project. Because of the Group's widespread use of standardized hardware and global package software, in many instances the bulk of the work is achieved by upgrading to the supplier's most recent software release. BP Amoco believes its Year 2000 process is in line with best practice and is underpinned by an internal assurance process. We have not made extensive use of external verification. The Year 2000 project has caused the deferral of some other computer systems work. Other systems projects continue to be assessed on their economic value, and are resourced from internal and external 57 58 personnel. BP Amoco has not experienced significant difficulties in retaining the necessary IT skills internally or obtaining them in the market. The Year 2000 problem may affect the operation of automated non-IT systems such as those used to control certain processes in oil production facilities, pipelines, refineries and chemicals plants. In relation to the engineering process control risk in these operations, BP Amoco has made some use of external engineering consultancies to help develop the methodology of risk assessment and analysis, to review progress and to ensure that the work has been carried out to an acceptable standard. The Group has also commissioned some of its engineering equipment suppliers to perform reviews of site systems adaptations where the supplier's expertise provides the most cost-effective means of completing this work. Emergency response systems are generally not dependent on IT and IT-related processes. To meet any unexpected Year 2000 failure in the Group or by key third parties, contingency plans are being developed, to deliver a flexible response, especially for critical systems in the first days of 2000. Each business entity is accountable for identifying, categorizing, and prioritizing risks associated with the Year 2000 transition and developing and implementing appropriate contingency plans to mitigate those risks. BP Amoco intends to use existing Crisis Management, Emergency Response and Business Continuity organizations, plans and procedures in Year 2000 contingency planning. The Group's objective is to ensure 'business as usual' in respect of its own operations. However, the Group's detailed plans are based on assumptions about the robustness of infrastructure suppliers such as power and telecommunications, upon which its businesses are dependent. BP Amoco, together with other companies, remains exposed, to an unquantifiable degree, to the risk of major non-compliance by those suppliers and other third parties, and also to any abnormal customer demand patterns resulting from concerns about supply constraints around the 1999 year-end. The failure by third parties to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain of BP Amoco's normal business activities or operations. Due to the general uncertainty inherent in the Year 2000 problem, BP Amoco is unable to determine at this time whether any such interruptions and failures will have a material impact on the Group's results of operations. They are not, however, expected to have a material effect on the Group's liquidity or financial condition. THE EURO As a result of the Treaty establishing the European Community, as amended by the Treaty on European Union, (the Treaty), European economic and monetary union (EMU) has occurred for eleven out of the fifteen member countries of the European Union (participating countries). The final stage of the Treaty began on January 1, 1999. For the participating countries, the fixed conversion rates between their sovereign currencies (legacy currencies) prior to January 1, 1999 and the euro have been established. The euro has been adopted as their common legal currency. The legacy currencies are scheduled to remain legal tender as denominations of the euro between January 1, 1999 and January 1, 2002 (the transition period). The United Kingdom has not participated initially in EMU, but may do so at a later time. The current policy of the UK government is that any decision to join EMU will only be taken after a national referendum of the people and, in any event, not before 2002. BP Amoco had adapted its commercial and financial processes so that its European operations were able to undertake transactions in the euro and capture competitive advantages offered by the new currency from January 1, 1999. The currency of accounting records and the related systems will be converted as appropriate during the transition period, which ends on January 1, 2002. The capability to conduct business in national currencies will be retained as long as necessary. The costs associated with these changes are estimated at $100 million, of which some $20 million had been incurred and expensed by the end of 1998. It is difficult to predict whether the euro will affect the level or volatility of foreign exchange rates. However, we do not expect that the introduction of the euro will have a significant effect on the Group's results of operations, its financial position or liquidity. 58 59 ENVIRONMENTAL INVESTMENT
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Operating expenditure (a)................................... 539 477 620 Capital expenditure (b)..................................... 426 376 370 Clean-ups................................................... 129 129 146 (Credit)/charge for environmental remediation (c)........... 13 (21) 30 Charge for decommissioning.................................. 130 162 147
- - ------------ (a) Expenditure for 1998 includes $44 million (1997 $10 million) incurred by the BP/Mobil joint venture. (b) Expenditure for 1998 includes $89 million (1997 $69 million) incurred by the BP/Mobil joint venture. (c) The net credit for 1997 includes the write-back of the environmental provision at Lavera refinery totalling $54 million. Operating and capital expenditure on the prevention, control, abatement or elimination of air, water and solid waste pollution is often not incurred as a separately identifiable transaction. Instead, it forms part of a larger transaction which includes, for example, normal maintenance expenditure. The figures for environmental operating and capital expenditure in the table are therefore estimates, based on the definitions and guidelines of the American Petroleum Institute. Operating and capital environmental expenditure and amounts spent on clean-ups were at much the same level as in 1997 and similar levels of operating and capital expenditure are expected in the foreseeable future. In addition to operating and capital expenditure, the table shows the charges to current profits to create provisions for future environmental remediation. Expenditure against such provisions is normally incurred in subsequent periods and is not included in environmental operating expenditure reported for such periods. Provisions for environmental remediation are made when a clean-up is probable and the amount reasonably determinable. Generally, their timing coincides with commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. The extent and cost of future remediation programs are inherently difficult to estimate. They depend on the scale of any possible contamination, the timing and extent of corrective actions, and also BP Amoco's share of the liability. Although the cost of any future remediation could be significant, and may be material to the result of operations in the period in which it is recognized, we do not expect that such costs will have a material effect on BP Amoco's financial position or liquidity. We believe our provisions are sufficient for known requirements; and we do not believe that our costs will differ significantly from those of other companies engaged in similar industries or that our competitive position will be adversely affected as a result. In addition, we make provisions over the useful lives of our oil- and gas-producing assets and related pipelines to meet the cost of eventual decommissioning. The charge for decommissioning made in 1998, 1997 and 1996 is shown in the table. Further details of decommissioning and environmental provisions appear in Item 18 -- Note 27 of Notes to Financial Statements. See also Item 1 -- Description of Business -- Environmental Protection. ITEM 9A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK BP Amoco is exposed to a number of different market risks arising from the Group's normal business activities. Market risk is the possibility that changes in interest rates, currency exchange rates or commodity prices will adversely affect the value of the Group's financial assets, liabilities or expected future cash flows. The Group has developed policies aimed at managing the volatility inherent in certain of these natural business exposures and in accordance with these policies the Group enters into various transactions using derivative financial and commodity instruments (derivatives). Derivatives are contracts whose value is derived from one or more underlying financial instruments, indices or prices which are defined in the contract. We also trade derivatives in conjunction with these risk management activities. 59 60 In risk management and in trading, only well-understood conventional derivative instruments are used. These include futures and options traded on regulated exchanges, and 'over-the-counter' swaps, options, and forward contracts. Where derivatives constitute a hedge, the Group's exposure to market risk created by the derivative is offset by the opposite exposure arising from the asset, liability or transaction being hedged. By contrast, where derivatives are held for trading purposes, changes in market value give rise to realized and unrealized gains and losses, which are recognized in the current period. All material derivatives activity, whether for risk management or trading, is carried out by specialist teams which have appropriate skills, experience and supervision. These teams are subject to close financial and management control, meeting generally accepted industry practice and reflecting the principles of the Group of Thirty Global Derivatives Study recommendations. An independent control function monitors compliance with BP Amoco's derivative management policies. The control framework includes prescribed trading limits that are reviewed regularly by senior management, daily monitoring of risk exposure, marking trading exposures to market and reviewing open positions to assess BP Amoco's exposure in potentially adverse situations. Counterparty credit validation, independent of the dealers, is undertaken before contractual commitment. Further information about BP Amoco's use of derivatives, their characteristics, and the accounting treatment thereof is given in Item 18 -- Note 28 of Notes to Financial Statements. RISK MANAGEMENT FOREIGN CURRENCY EXCHANGE RATE RISK Fluctuations in exchange rates can have significant effects on BP Amoco's operating results. The effects of most exchange rate fluctuations are subsumed within business operating results through changing cost-competitiveness, lags in market adjustment to movements in rates, and conversion differences accounted on specific transactions. For this reason, the total effect of exchange rate fluctuations is not identifiable separately in the Group's reported results. The underlying economic currency of the Group's cash flows is mainly the US dollar. This is because BP Amoco's major product, oil, is priced internationally in US dollars. BP Amoco's foreign exchange management policy is to minimize economic exposures from currency movements against the US dollar. Wherever possible, BP Amoco nets exposures using natural offsets to reduce foreign exchange risk. Significant residual non-dollar exposures are managed using a range of derivatives. The most significant of such exposures are the sterling cash flow requirements for UK Corporation Tax, and the capital expenditure and operational requirements of Exploration in the UK. In addition, most of the Group's borrowings are in US dollars, are hedged with respect to the US dollar, or are swapped into dollars where this achieves a lower cost of financing. The following tables provide information about the Group's foreign currency derivative financial instruments. These include foreign currency forward exchange agreements (forwards) and cylinder option contracts (cylinders) that are sensitive to changes in the sterling/dollar exchange rate. Where foreign currency denominated borrowings are swapped into dollars using forwards or currency interest rate swaps such that currency risk is completely eliminated, neither the borrowing nor the derivative are included in the table. At December 31, 1998 the total of foreign currency borrowings not swapped into dollars amounted to $1,019 million (1997 $992 million). The principal element of this is $561 million of sterling borrowings (1997 $624 million). For forwards, the tables present the notional amounts and weighted average contractual exchange rates by contractual maturity dates and exclude forwards that have offsetting positions. Only significant forward positions are included in the tables. The notional amounts of forwards are translated into US dollars at the exchange rate included in the contract at inception. The majority of the sterling contracts consist of forwards relating to sterling-based capital leases and the sterling credit facility. These effectively convert the lease obligation from sterling into dollars and hedge the exchange rate risk attached to the capital portion of the sterling credit facility. The remaining contracts relate to sterling requirements for 60 61 operational expenditures. The fair value represents an estimate of the gain or loss which would be realized if the contracts were settled at the balance sheet date. For cylinders, the tables present the notional amounts of the constituent purchased call and written put option contracts at December 31, 1998 and 1997 and the weighted average strike rates by contractual maturity dates. The sterling cylinders relate to the Group's hedging of its expected sterling dividend and tax payments over the next year as well as certain sterling-based operational and capital expenditures. The non-sterling cylinders relate to hedging of expected capital expenditures. The fair values for the foreign exchange contracts in the table below are based on market prices of comparable instruments (forwards) and pricing models which take into account relevant market data (options). These derivative contracts constitute a hedge; any change in the fair value or expected cash flows is offset by an opposite change in the market value or expected cash flows of the asset, liability or transaction being hedged.
Notional amount by expected maturity date ------------------------------------------ Fair 1999 2000 2001 Thereafter Total value ------- ------- ------- ------------ ----- ----- ($ million) AT DECEMBER 31, 1998 Forwards Receive Sterling/pay US dollars Contract amount...................... 2,494 -- -- -- 2,494 32 Weighted average contractual exchange rate...................... 1.65 Cylinders Receive sterling/pay US dollars Purchased call Contract amount...................... 1,249 -- -- -- 1,249 11 Weighted average strike rate......... 1.73 Written put Contract amount...................... 1,249 -- -- -- 1,249 (11) Weighted average strike rate......... 1.58 Receive deutschmarks/pay US dollars Purchased call Contract amount...................... 175 -- -- -- 175 6 Weighted average strike rate......... 1.72 Written put Contract amount...................... 175 -- -- -- 175 (1) Weighted average strike rate......... 1.77
Notional amount by expected maturity date ------------------------------------------ Fair 1998 1999 2000 2001 Thereafter Total value ----- ----- ----- ----- ---------- ----- ----- ($ million) AT DECEMBER 31, 1997 Forwards Receive Sterling/pay US dollars Contract amount........................ 1,707 878 -- -- -- 2,585 5 Average contractual exchange rate...... 1.62 1.63 Cylinders Receive Sterling/pay US dollars Purchased call Contract amount........................ 2,382 -- -- -- -- 2,382 25 Weighted average strike rate........... 1.70 Written put Contract amount........................ 2,382 -- -- -- -- 2,382 (26) Weighted average strike rate........... 1.55
61 62 INTEREST RATE RISK BP Amoco is exposed to interest rate risk on short- and long-term floating-rate instruments and as a result of the refinancing of fixed-rate instruments included in the Group's finance debt. Consequently, as well as managing the currency and the maturity of debt, BP Amoco manages interest costs through the balance between lower-cost floating rate debt, which has inherently higher risk, and more expensive but lower-risk, fixed-rate debt. The Group is exposed predominantly to US dollar LIBOR interest rates as borrowings are mainly denominated in, or swapped into, US dollars. Historically BP has used derivatives to achieve the required mix between fixed and floating rate debt. Although Amoco was authorized to use derivative financial instruments as an additional tool in this regard, no derivatives have been used. During 1998 BP's upper limit for the proportion of floating rate debt was 65% of total net debt while Amoco's upper limit was 60% of total debt outstanding. An appropriate strategy for managing the interest rate risk of the new Group is currently being formulated. The following table shows, by major currency, the Group's borrowings at December 31, 1998 and 1997 and the weighted average interest rates achieved at those dates through a combination of borrowings and other interest rate sensitive instruments entered into to manage interest rate exposure.
Fixed rate debt Floating rate debt -------------------------------------- ---------------------- Weighted Weighted Weighted average average time average interest for which interest rate rate is fixed Amount rate Amount Total -------- ------------- ----------- -------- ----------- ----------- (%) (Years) ($ million) (%) ($ million) ($ million) AT DECEMBER 31, 1998 US dollars.......................... 7 10 7,392 5 3,460 10,852 Sterling............................ -- -- -- 6 613 613 South African rands................. -- -- -- 15 42 42 Other currencies.................... 7 9 189 7 175 364 ----------- ----------- ----------- Total loans......................... 7,581 4,290 11,871 =========== =========== =========== AT DECEMBER 31, 1997 US dollars.......................... 8 12 5,858 6 4,135 9,993 Sterling............................ -- -- -- 6 679 679 South African rands................. -- -- -- 19 63 63 Other currencies.................... 7 7 67 7 183 250 ----------- ----------- ----------- Total loans......................... 5,925 5,060 10,985 =========== =========== ===========
The Group's earnings are sensitive to changes in interest rates over the forthcoming year as a result of the floating rate instruments included in the Group's finance debt at December 31, 1998. These include the effect of interest rate and currency swaps and forwards utilized to manage interest rate risk. If the interest rates applicable to floating rate instruments were to have increased by 1% on January 1, 1999, the Group's 1999 earnings before taxes would decrease by approximately $55 million (1997 $60 million). This assumes that the amount and mix of fixed and floating rate debt, including capital leases, remains unchanged from that in place at December 31, 1998 and that the change in interest rates is effective from the beginning of the year. Where the interest rate applicable to an instrument is reset during a quarter it is assumed that this occurs at the beginning of the quarter and remains unchanged for the rest of the year. In reality, the fixed/floating rate mix will fluctuate over the year and interest rates will change continually. Furthermore the effect on earnings shown by this analysis does not consider the effect of an overall reduction in economic activity which could accompany such an increase in interest rates. OIL PRICE RISK The Group's risk management policy with respect to oil price risk is to manage only those exposures associated with the immediate operational program for certain of its equity share of production and certain of its refinery and marketing activities. To this end, BP Amoco's oil trading division uses the full range of conventional oil price-related financial and commodity derivatives available in the oil markets. 62 63 The market risk arising from this risk management activity is represented by the values at risk shown below. However, these instruments are used for hedging purposes and do not expose the Group to market risk because the change in their market value is offset by an equal and opposite change in the market value of the asset, liability or transaction being hedged. The items being hedged are not included in the values at risk. The value at risk model used is that discussed under Trading below, except that value at risk in respect of oil price risk management does not take into account physical crude oil or refined product positions held by the Group. Thus the value at risk calculation for oil price exposure includes derivative financial instruments such as exchange-traded futures and options, swap agreements and over-the-counter options and derivative commodity instruments (commodity contracts that permit settlement either by delivery of the underlying commodity or in cash) such as forward contracts. The values at risk represent the potential gain or loss in fair values over a 24-hour period with a 99.7% confidence level. The following table shows values at risk for oil price risk management activities.
1998 1997 ----------------------------------------- --------------------- High Low Average December 31 Average December 31 ------- ------- ------- ----------- ------- ----------- ($ million) Oil price contracts.......... 9 4 5 4 7 4
NATURAL GAS PRICE RISK BP Amoco's general policy with respect to natural gas price risk is to manage only a portion of its exposure to price fluctuations. Natural gas swaps, options and futures are used to convert specific sales and purchases contracts from fixed prices to market prices. Swaps are also used to hedge exposure to price differentials between locations. We also use derivatives to fix prices which are favourable with respect to our forecasts of future prices. The table below provides information about the Group's material swaps contracts that are sensitive to changes in natural gas prices. Contract amount represents the notional amount of the contract. Fair value represents an estimate of the gain or loss which would be realized if the contracts were settled at the balance sheet date. Weighted average price represents the year-end forward price for futures, the fixed price and the year-end forward price related to the settlement month for swaps; and the weighted average strike price for options. At December 31, 1998, in addition to the contracts shown in the table there were various swaps, options and futures contracts with aggregate notional amounts of $103 million and terms of between one and two years. At December 31, 1997, there were swaps, options and futures contracts with aggregate notional amounts of $99 million and terms of between one and three years. Fair values of these contracts were not material in either year.
Weighted Fair value average price Contract ----------------- --------------- Quantity amount Asset Liability Receive Pay --------------- ----------- ----- --------- ------- ----- (Btus ($ million) ($ million) ($ per trillion)(a) mmbtu)(b) AT DECEMBER 31, 1998 Maturing in 1999 Swaps Receive variable/pay fixed.......... 154 300 4 (31) 1.77 1.95 Receive fixed/pay variable.......... 137 268 28 (2) 1.96 1.77 Receive and pay variable............ 463 863 15 (9) 1.88 1.86 AT DECEMBER 31, 1997 Maturing in 1998 Swaps Receive variable/pay fixed.......... 95 166 4 (14) 1.64 1.75 Receive fixed/pay variable.......... 52 88 12 (1) 1.69 1.48 Receive and pay variable............ 198 410 4 (5) 2.07 2.07
- - ------------ (a) British thermal units (btus) (b) Million british thermal units (mmbtu) 63 64 TRADING In conjunction with the risk management activities discussed above, BP Amoco also trades interest rate and foreign currency exchange rate derivatives. The Group controls the scale of the trading exposures by using a value at risk model with a maximum value at risk limit authorized by the board. In addition to the risk management activities related to equity crude disposal, refinery supply and marketing, BP Amoco's oil trading division undertakes trading in the full range of conventional derivative financial and commodity instruments and physical cargoes available in the oil markets. This activity is monitored and measured separately from the risk management activity and is subject to maximum value at risk limits authorized by the board. The Group measures its market risk exposure, i.e. potential gain or loss in fair values, on its trading activity using a value at risk technique. This technique is based on a variance/covariance model and makes a statistical assessment of the market risk arising from possible future changes in market values over a 24-hour period. The calculation of the range of potential changes in fair value takes into account a snapshot of the end-of-day exposures, and the history of one day price movements over the previous twelve months, together with the correlation of these price movements. The potential movement in fair values is expressed to three standard deviations which is equivalent to a 99.7% confidence level. This means that, in broad terms, one would expect to see an increase or a decrease in fair values greater than the value at risk on only one occasion per year if the portfolio were left unchanged. The Group calculates value at risk on all instruments that are held for trading purposes and that therefore give an exposure to market risk. The value at risk model takes account of derivative financial instruments such as interest rate forward and futures contracts, swap agreements, options and swaptions; foreign exchange forward and futures contracts, swap agreements and options; and oil price futures, swap agreements and options. Financial assets and liabilities and physical crude oil and refined products that are treated as trading positions are also included in these calculations. The value at risk calculation for oil price exposure also includes derivative commodity instruments (commodity contracts that permit settlement either by delivery of the underlying commodity or in cash), such as forward contracts. The following table shows values at risk for trading activities.
1998 1997 ----------------------------------- --------------------- High Low Average December 31 Average December 31 ---- ---- ------- ----------- ------- ----------- ($ million) Interest rate contracts......... 6 -- 2 -- 3 2 Foreign exchange contracts...... 6 -- 4 -- 3 2 Oil price contracts............. 13 4 8 12 6 4
64 65 ITEM 10 -- DIRECTORS AND OFFICERS OF REGISTRANT There are currently 21 directors on the board.
Initially elected Name or appointed - - ---- ----------------- P D Sutherland....................... Non-executive co-chairman (a) Chairman since May 1997 Director since July 1995 H L Fuller........................... Executive co-chairman (a) December 1998 Sir Ian Prosser...................... Non-executive deputy chairman (a)(b)(c) Deputy chairman since February 1999 Director since May 1997 Sir John Browne...................... Executive director (Group chief September 1991 executive) Dr J G S Buchanan.................... Executive director October 1996 R F Chase............................ Executive director (Deputy group chief March 1992 executive) Dr C S Gibson-Smith.................. Executive director September 1997 R L Olver............................ Executive director January 1998 B K Sanderson........................ Executive director April 1992 R S Block............................ Non-executive director (a)(b)(d) December 1998 J H Bryan............................ Non-executive director (a)(c) December 1998 E B Davis, Jr........................ Non-executive director (a)(b)(c) December 1998 R J Ferris........................... Non-executive director (a)(b) December 1998 C F Knight........................... Non-executive director (a)(b) October 1987 F A Maljers.......................... Non-executive director (a)(d) December 1998 Dr W E Massey........................ Non-executive director (a)(d) December 1998 H M P Miles.......................... Non-executive director (a)(c)(d) June 1994 Sir Robin Nicholson.................. Non-executive director (a) October 1987 M H Wilson........................... Non-executive director (a)(c) December 1998 R P Wilson........................... Non-executive director (a)(c)(d) July 1998 Lord Wright of Richmond.............. Non-executive director (a)(b)(d) October 1991 J C Hanratty......................... Secretary October 1994
- - ------------ (a) Member of the Chairman's Committee. (b) Member of the Remuneration Committee. (c) Member of the Audit Committee. (d) Member of the Ethics and Environment Assurance Committee. Mr R P Wilson was appointed a non-executive director of BP on July 30, 1998. Sir James Glover, Dr K N Horn and Sir Patrick Sheehy resigned as non-executive directors with effect from December 31, 1998. Mr D R Beall, Mr A C Martinez, Dr M R Seger and Mr T M Solso resigned as non-executive directors of Amoco with effect from December 31, 1998. Mr H L Fuller and Mr W G Lowrie were appointed executive directors and Mrs R S Block, Mr J H Bryan, Mr E B Davis, Jr, Mr R J Ferris, Mr F A Maljers, Dr W E Massey and Mr M H Wilson were appointed non-executive directors of BP Amoco with effect from December 31, 1998. Mr H L Fuller was appointed executive co-chairman of the board on the same date. Mr W G Lowrie resigned as a director of BP Amoco on February 12, 1999. BP Amoco's articles of association require directors who have held office for three years or more since they were appointed or re-elected to retire from office at the company's annual general meeting, together with directors appointed by the board since the last annual general meeting. Retiring directors may offer themselves for re-election. The directors retiring and offering themselves for re-election at this year's meeting are Mr B K Sanderson, Mr P D Sutherland and Mr R P Wilson. The biographies of the directors and the secretary are set out below. 65 66 P D Sutherland, SC -- Peter Sutherland (52) rejoined BP's board in 1995 having previously been a non-executive director from 1990 to 1993. He was appointed chairman of BP in May 1997. He is chairman of Goldman Sachs International and is a non-executive director of Investor AB, ABB Asea Brown Boveri and Telefonaktiebolaget LM Ericsson. He is on the advisory board of the Council of Foreign Relations and is chairman of the Overseas Development Council. He is also a trustee of the Royal Academy of Arts. H L Fuller -- Larry Fuller (60) was appointed a director of Amoco in 1981 and was elected chairman and chief executive officer in February 1991. He is a non-executive director of Chase Manhattan Corporation, Chase Manhattan Bank, Motorola, Security Capital Group and Abbott Laboratories. He also serves on the boards of Catalyst, the American Petroleum Institute and the Rehabilitation Institute of Chicago, and is a trustee of The Orchestral Association. Sir Ian Prosser -- Sir Ian (55) joined BP's board in 1997 and was appointed deputy chairman in February 1999. He is chairman and chief executive of Bass, a non-executive director of Lloyds TSB and vice president of the council of the Brewers and Licensed Retailers Association. Sir John Browne, F. Eng, -- Sir John (51) was appointed an executive director of BP in 1991 and group chief executive in 1995. He is a non-executive director of SmithKline Beecham and the Intel Corporation, a trustee of the British Museum and a member of the supervisory board of DaimlerChrysler. He is also vice president and a member of the board of the Prince of Wales Business Leaders Forum. Dr J G S Buchanan -- John Buchanan (55) was appointed an executive director of BP in 1996. He is a non-executive director of Boots and a member of the UK Accounting Standards Board. R F Chase -- Rodney Chase (55) was appointed an executive director of BP in 1992. He is a non-executive director of Diageo and the BOC Group. Dr C S Gibson-Smith -- Chris Gibson-Smith (53) was appointed an executive director of BP in 1997. He is a non-executive director of Lloyds TSB. R L Olver -- Dick Olver (52) was appointed an executive director of BP in January 1998. He is a non-executive director of Reuters Holdings. B K Sanderson -- Bryan Sanderson (58) was appointed an executive director of BP in 1992. He is chairman of Sunderland PLC, a non-executive director of British Steel, president of CEFIC (the European Chemical Industry Council) and vice president of the court of governors of the London School of Economics. R S Block -- Ruth Block (68) joined Amoco's board in 1986. She retired as executive vice president and chief insurance officer of The Equitable in 1987. She is a non-executive director of Ecolab and 39 Alliance Capital Mutual Funds. J H Bryan -- John Bryan (62) joined Amoco's board in 1982. He is chairman and chief executive officer of Sara Lee Corporation and a non-executive director of Bank One Corporation, The First National Bank of Chicago and General Motors Corporation. E B Davis, Jr -- Erroll B Davis, Jr (54) joined Amoco's board in 1991. He is president and chief executive officer of Alliant Energy. He is a non-executive director of PPG Industries and a member of the American Society of Corporate Executives, Association of Edison Illuminating Companies, the Wisconsin Association of Manufacturers and Commerce, the Iowa Business Council and the Edison Electric Institute. R J Ferris -- Richard Ferris (62) joined Amoco's board in 1981. He retired as co-chairman of Doubletree Corporation in 1997. He is a non-executive director of The Proctor & Gamble Company and Candlewood Hotel Corporation. C F Knight -- Charles Knight (63) joined BP's board in 1987. He is chairman and chief executive officer of Emerson Electric and is a non-executive director of Anheuser-Busch, Morgan Stanley Dean Witter, SBC Communications and IBM. F A Maljers -- Floris Maljers (65) joined Amoco's board in 1994. He is a member of the supervisory boards of SHV Holding, Vendex and KLM Royal Dutch Airlines. He is chairman of the supervisory board of the Amsterdam Concertgebouw. 66 67 Dr W E Massey -- Walter Massey (60) rejoined Amoco's board in 1993 having previously been a director from 1983 to 1991. He is president of Morehouse College and is a non-executive director of Motorola, Bank of America, McDonald's Corporation and the Mellon Foundation. H M P Miles, OBE -- Michael Miles (62) joined BP's board in 1994. He is chairman of Johnson Matthey and a director of John Swire & Sons, ING Baring Holdings and BICC. Sir Robin Nicholson, F Eng, FRS -- Sir Robin (64) joined BP's board in 1987. He retired as chairman of Pilkington Optronics in November 1998. He is a non-executive director of Rolls-Royce and a member of the UK government's Council for Science and Technology. M H Wilson -- Michael Wilson (61) joined Amoco's board in 1993. He is vice chairman and a director of RBC Dominion Securities. He is a non-executive director of Manufacturers Life Insurance Company and Rio Algom. R P Wilson -- Robert Wilson (55) joined BP's board in July 1998. He is chairman of Rio Tinto, a non-executive director of Diageo and a trustee of the Camborne School of Mines. The Lord Wright of Richmond, GCMG -- Lord Wright (67) joined BP's board in 1991, having been Permanent Under-Secretary and Head of the UK Diplomatic Service. He is a non-executive director of De La Rue and an advisory director of Unilever. He is chairman of the Royal Institute of International Affairs. J C Hanratty -- Judith Hanratty (55) joined BP in London in 1986 and was appointed company secretary in October 1994. She is a nominated member of the Council of Lloyds (the London Insurance Market), a member of the Monopolies and Mergers Commission (the Competition Commission from April 1, 1999) and the Takeover Panel. She is also a governor of the College of Law and a Fellow of Lucy Cavendish College, Cambridge. ITEM 11 -- COMPENSATION OF DIRECTORS AND OFFICERS This summary sets out the remuneration policy of BP Amoco presented at the meetings of BP and Amoco shareholders called to approve the merger. It also contains details of awards made in 1998 under the incentive remuneration plans of BP and Amoco, and includes the remuneration data required by the London Stock Exchange. The summary contains the following sections: -- Reward philosophy -- Reward process -- the Remuneration Committee -- Reward process -- reward plans and performance targets -- Report on 1998 -- remuneration data for executive directors and senior management -- Long-term incentive awards -- Other remuneration features -- Remuneration of non-executive directors REWARD PHILOSOPHY The performance of BP Amoco will be dependent on the quality and commitment of its workforce. The board believes that directors and senior executives of the right calibre will be attracted and incentivized to maximize shareholder returns if the BP Amoco Group adopts remuneration policies which are comparable to the highest standards of international industry. The aim is to provide a competitive reward for delivering on-target performance while superior awards can be earned for delivering outstanding results. The remuneration package balances long-term and short-term goals through three elements: base salary, annual bonuses and long-term incentive plans. As the seniority of the executive increases, so the proportion of the base salary declines and the proportion of the two performance-linked 'at risk' elements increases. A key element of remuneration policy is the Long Term Performance Plan (LTPP). The board attaches importance to the alignment of rewards and incentives to business goals and believes there are considerable benefits in linking the remuneration of employees to shareholder returns. Share ownership by employees is considered an important mechanism for enabling them to identify their interests with 67 68 those of other shareholders. The design of the LTPP ensures that BP Amoco's top leaders hold significant shareholdings in the company over an extended period, which further reinforces the alignment of interests between executives and shareholders. The LTPP was approved by BP shareholders at their Extraordinary General Meeting on November 25, 1998. Shareholders also approved the introduction of a new discretionary share option plan, the BP Amoco Share Option Plan (the 'Option Plan'). The Option Plan will provide a vehicle for options to be granted to former Amoco Group employees which, under the terms of the merger agreement, must for at least two years be no less favorable than their previous arrangements. The Option Plan will also be used to grant options to other employees. Options granted under the Option Plan to employees outside North America will be granted on a similar basis to options currently granted under the previous scheme, the BP Executive Share Option Scheme. Employees other than North Americans who participate in the LTPP will not be awarded options. In this way, BP Amoco will utilize the LTPP as the primary vehicle for rewarding long-term success in its executive population. REWARD PROCESS -- THE REMUNERATION COMMITTEE The Remuneration Committee's role is to determine the terms of engagement and remuneration of the group chief executive and the executive directors. The Remuneration Committee (the Committee) also establishes the principles for the remuneration of other senior executives, which in turn provide the framework for remunerating all employees. The Committee works with the executive directors to set challenging and demanding performance targets for the Company at the beginning of the year and to make awards at year-end which reflect the year's performance. The Committee members have no personal financial interest, other than as shareholders, in the matters to be decided. They have no conflicts arising from cross-directorships or day-to-day involvement in running BP Amoco. For membership of the Committee see Item 10 -- Directors and Officers of Registrant. The Committee actively solicits professional advice both from within the company and from independent external consultants. REWARD PROCESS -- REWARD PLANS AND PERFORMANCE TARGETS DESCRIPTION OF THE PLAN Base salary -- This is a fixed sum, payable monthly in pensionable cash, recognizing ongoing market worth. -- Salaries are reviewed annually in line with national markets, and targeted at the median of the appropriate national survey groups for fully effective job performance. -- Higher salaries are paid only where justified by sustained higher level of individual contribution. -- Surveys are conducted on a regular basis looking at remuneration levels in companies with comparable size, complexity and global spread of operations. (In the USA, surveys of Fortune 100 organizations and the other hydrocarbon companies are used, and in the UK surveys of FTSE 100 companies are used). Annual performance bonus -- This is a variable sum, potentially awarded annually in non-pensionable cash. The bonuses to H L Fuller and W G Lowrie are pensionable, in line with the Amoco Corporate Retirement Plan. -- It recognizes performance against demanding annual targets set out in annual performance contracts. -- Target bonus level for executive directors is 70% of base salary in 1999. 70% target bonus applies to all executive directors except H L Fuller (80% target/120% maximum). If contract levels of performance are achieved so that the target bonus is earned, executive annual remuneration levels can reach a position in the top quartile of the relevant employment market. -- A maximum bonus level is also identified for when targets are substantially exceeded. (For directors, this is 105% of salary in 1999). 68 69 Long-term incentive -- The Long Term Performance Plan (LTPP) consists of rolling, three-year performance periods, at the beginning of which participants receive a grant of performance units. -- Any potential LTPP award is a variable, taxable sum, in shares, given after the performance period. Any awards from the Plan are taxable in full and sufficient shares will be released immediately and sold to meet the relevant tax liability. Depending on the technical constraints in each country in which the Plan is operated, the committee may award shares to participants or fund the purchase of shares by participants. -- Share awards have a minimum of a further three years retention in trust. Extensive share ownership/retention guidelines exist -- at director level, no shares will be released from future plans until the director has a personal holding in BP Amoco shares, within the Plans, equivalent to five times salary. -- Share options will also be awarded to all North American executives only to bridge the gap between the value of the global LTPP and higher US market practise in long-term incentives. PLAN PERFORMANCE MEASURES AND TARGETS FOR VARIABLE REWARD ELEMENTS Annual performance bonus -- Bonus targets are a mix of financial and non-financial measures (including health, safety, environment, people and organization issues). -- Performance contracts reflect the operating plan of the company and are subject to board approval. -- Each year's performance provides the platform for the next year's targets, providing a continuous drive to higher levels of achievement. Long-term incentive -- LTPP looks at performance against demanding three-year shareholder return, profitability and growth targets. -- For all three measures BP Amoco's performance is assessed in relation to the oil majors: Arco, Chevron, Exxon, Mobil, Shell, Texaco and Total. Participants benefit only when they deliver results above the median for this group. -- The maximum award can be made only when performance has been ahead of the competitor group on all three performance measures. For second and lower rankings progressively lower awards are made. No award is made to directors if BP Amoco's performance is below the median of the selected competitors. -- Share options (for North American executives only): The value of option gains depends entirely on appreciation of the company's stock price. These are not otherwise subject to performance conditions, in line with the practise followed previously by Amoco. REPORT ON 1998 -- REMUNERATION DATA FOR EXECUTIVE DIRECTORS AND SENIOR MANAGEMENT BASE SALARY AWARDS The base salary structure for UK executives in BP was increased by 4% on April 1, 1998 but directors elected to defer receiving an increase until October 1998 due to the weak external environment. At Amoco, the equivalent increase for senior executives during 1998 was also 4%. BONUS AWARDS Bonuses paid (see table below) refer to separate bonus plans which were in place throughout 1998 in BP and Amoco respectively. 69 70 At the end of 1998, the BP Remuneration Committee established a rating of 75%, based on the achievement of targets set out in the performance contracts and in recognition of the effort required to achieve the merger. This rating represents the percentage of target bonus paid to each director. In December 1998 the Amoco board's Compensation and Organization Committee reviewed Amoco's performance results against the pre-set goals for the year in the areas of finance, operations, people and safety, as well as the strategic initiatives of the corporation relative to the merger. They determined a bonus outcome of 65% of target was appropriate and this is applicable to senior executives in the corporate plan, including Mr Fuller and Mr Lowrie. ANNUAL REMUNERATION
Annual Benefits performance and other 1998 1997 Base salary bonus emoluments Total Total ----------- ----------- ---------- ------- ------- ($ thousand) Sir John Browne......................... 895 492 127 1,514 1,538 Dr J G S Buchanan....................... 533 296 70 899 927 R F Chase............................... 581 331 50 962 986 H L Fuller (a).......................... 1,073 572 29 1,674 n/a Dr C S Gibson-Smith..................... 506 279 53 838 522 W G Lowrie (a).......................... 708 328 13 1,049 n/a R L Olver (b)........................... 506 279 163 948 n/a B K Sanderson........................... 581 331 75 987 999 K R Seal................................ -- -- -- -- 879 Dr R W H Stomberg....................... -- -- -- -- 1,209 ----------- ----------- ---------- ------- ------- Totals.................................. 5,383 2,908 580 8,871 7,060 =========== =========== ========== ======= =======
- - ------------ The table above represents annual remuneration earned by, and paid to, executive directors in the 1998 financial year, with the exception of bonuses (which were earned in 1998 but paid in 1999). A conversion rate of L1 = $1.66 has been used for 1998, L1 = $1.64 for 1997. (a) H L Fuller and W G Lowrie were appointed to the board on December 31, 1998, the effective date of the merger. However, the figures shown represent earnings for the whole 1998 calendar year. (b) R L Olver was appointed to the board on January 1, 1998. His benefits and other emoluments include expatriation costs which were incurred before his board appointment. LONG-TERM INCENTIVE AWARDS BP LONG TERM PERFORMANCE PLAN Awards made in 1998 under the BP Long Term Performance Plan relate to the 1995-97 Plan (estimates of grant values were indicated in BP's 1997 Annual Report on Form 20-F). Awards made in 1999 under the BP Long Term Performance Plan relate to the 1996-98 Plan. BP came first in the 1996-98 Plan, and the Remuneration Committee made a maximum award. (The primary performance measure, BP's shareholder return against the market (SHRAM) was, at 22%, 18% ahead of the second-performing company in the peer group). The BP Remuneration Committee decided to set minimum award levels for the 1997 and 1998 plans. This decision was based on pre-merger announcement comparisons of total shareholder returns, and provides an indication for participants that the final outcome will be no less than the SHRAM performance measure position which BP held, in relation to its peer group comparators, before the merger. The total number of shares that may be awarded to all participants under the 1996-98 Plan is 3,399,000, with a value of $48 million based on a share price of $13.99 (mid-market price on February 16, 1999). Serving recipients in the LTPP are obliged to have the balance of their 1996-98 awards (after payment of taxes) retained in trust for at least a further three years. This restriction also applies to future Plans, together with additional share ownership requirements. 70 71 Potential awards to executive directors, including an indicative range of potential awards under the 1997 and 1998 Plans, are set out in the table below. LONG-TERM PERFORMANCE PLANS
1995-97 1996-98 1997-99 1998-2000 ------------ ------------------------ ----------------- ----------------- Performance period of Plan 1998 1999 1999 2000 2001 ------------ --------- ------------ ----------------- ----------------- Range of potential awards(d) Year of award Value of Potential Award ------------------------------------- award(a) award(b) value(c) Minimum Maximum Minimum Maximum ------------ --------- ------------ ------- ------- ------- ------- ($ thousand) (shares) ($ thousand) (shares) (shares) CURRENT EXECUTIVE DIRECTORS Sir John Browne........... 1,331 81,300 1,137 48,780 81,300 40,140 133,800 Dr J G S Buchanan......... 776 64,400 901 48,780 81,300 23,850 79,500 R F Chase................. 1,331 81,300 1,137 48,780 81,300 25,770 85,900 Dr C S Gibson-Smith....... 498 55,800 781 42,000 70,000 22,740 75,800 R L Olver................. 498 47,500 665 42,000 70,000 22,740 75,800 B K Sanderson............. -- 81,300 1,137 48,780 81,300 25,770 85,900 FORMER EXECUTIVE DIRECTORS S J Ahearne............... -- 27,100 379 -- -- -- -- K R Seal.................. 1,331 54,200 758 16,260 27,100 -- -- Dr R W H Stomberg......... 776 54,200 758 16,260 27,100 -- --
- - ------------ (a) Based on average market price on date of award (L8.00/$13.28) at L1 = $1.66. (b) Based on assessed performance and the other terms of the Plan. (c) Based on mid-market price of BP Amoco shares on February 16, 1999 ($13.99). (d) Minimum awards were determined for these Plans prior to the completion of the merger. Actual awards will be determined at the end of each performance period. AMOCO SHARE OPTION AWARDS In common with US market practice, long-term incentives in Amoco in 1998 were in the form of grants of executive share options. Those options were granted at a level in line with the oil and general industry markets in the USA and they had no performance conditions. OTHER REMUNERATION FEATURES SHARE SCHEMES AND OTHER BENEFITS In 1998, five UK directors were allocated shares under the BP Participating Share Scheme which is available to most UK employees. Under the Participating Scheme, the company matches employees' own contribution of shares, all of which are held for a defined period (see Item 18 -- Note 33 of Notes to Financial Statements). Five directors continued to participate in the Savings-Related Share Option Scheme, under which employees enter a savings plan to purchase shares after three or five years. This plan is also open to most UK employees. Mr Fuller and Mr Lowrie were eligible to participate in Amoco Corporate Benefit plans generally provided to Amoco employees, including an employee savings plan, containing a company matching contribution of up to 7% of annual earnings, and certain health and welfare plans, including medical and dental coverage, non-contributory group life insurance of one times annual earning, additional employee paid group life insurance, and short- and long-term sickness and disability coverage. In 1998, the company contributed $141,177 and $87,946 respectively to the Savings Plan as a company matching contribution. 71 72 DIRECTORS' EXECUTIVE SHARE OPTIONS (a)
Number of options ------------------------------------------------- At At Dates January 1, December 31, Average from which Expiry 1998 Granted Exercised 1998 option price(b) exercisable dates ---------- --------- --------- ------------ ---------------- --------------- --------------- (L) Sir John Browne......... 79,400 -- 79,400(c) -- n/a n/a n/a Dr J G S Buchanan....... 59,600 -- -- 59,600 2.87 3/9/92-3/27/93 3/8/99-3/26/00 H L Fuller.............. 6,542,560 1,191,000(d) 349,360(e) 7,384,200 5.14 3/27/92-3/24/00 3/27/00-3/24/08 W G Lowrie.............. 3,120,420 635,200(d) 222,320(f) 3,533,300 5.28 3/27/92-3/24/00 3/27/00-3/24/08
- - --------------- (a) To allow meaningful comparison, all options in the above table are denoted in BP Amoco ordinary stock. (Mr Fuller's and Mr Lowrie's options were originally denoted in Amoco common stock, at the time of grant, but were converted to BP Amoco ADS shares at the time of merger. They are shown here for convenience as the equivalent number of BP Amoco ordinary shares at a sterling price, using an exchange rate of L1 = $1.66). (b) These are the weighted average prices applicable to all shares under option at the end of the year. Full details of directors' shareholdings and options are available for inspection in the company's register of directors' interests. (c) Exercise price L3.38 and market price at date of exercise L9.50. (d) Grant price L6.61. (e) Exercise price L3.08, and market price at date of exercise L6.25. (f) Exercise price L2.87 for 95,280 shares and L3.08 for 127,040 shares, and market price at dates of exercise L6.25 and L8.89 respectively. The market price of BP Amoco ordinary shares at December 31, 1998 was L8.98 ($14.91). The highest and lowest market price of BP ordinary shares during 1998 were L9.68 and L7.37 respectively. DIRECTORS' SAVE AS YOU EARN (SAYE) SHARE OPTIONS
Number of options ------------------------------------------------- At At Dates January 1, December 31, Average from which Expiry 1998 Granted Exercised 1998 option price(a) exercisable dates ---------- --------- --------- ------------ ---------------- --------------- --------------- (L) Sir John Browne......... 2,984 -- -- 2,984 5.78 9/1/02 2/28/03 Dr J G S Buchanan....... 6,201 928(b) 3,640(c) 3,489 4.94 9/1/99-9/1/03 2/28/00-2/28/04 R F Chase............... 4,662 -- -- 4,662 3.70 9/1/00 2/28/01 R L Olver............... 7,809 -- 4,381(d) 3,428 5.03 9/1/01-9/1/02 2/28/02-2/28/03 B K Sanderson........... 4,267 -- -- 4,267 4.04 9/1/99-9/1/02 2/28/00-2/28/03
- - --------------- (a) These are the weighted average prices applicable to all shares under option at the end of the year. Full details of directors' shareholdings and options are available for inspection in the company's register of directors' interests. (b) Grant price L7.43. (c) Exercise price L2.06, and market price at date of exercise L8.28. (d) Exercise price L2.06 for 3,640 shares and L2.48 for 741 shares, and market price at dates of exercise L7.95 and L9.11 respectively. (e) For further details on SAYE Schemes see Item 18 -- Note 33 of Notes to Financial Statements. All executive directors are also deemed to have an interest in such shares of the company held from time to time by BP QUEST Company Limited to facilitate the operation of the company's SAYE option scheme. PENSIONS Pension and other benefits relate to competitor practice in the home country of each senior executive. 72 73 In the UK, eligible staff can join the BP Pension Scheme, which offers Inland Revenue-approved retirement benefits, based on final salary. Scheme members' core benefits, which are non-contributory, comprise a pension accrual rate of 1/60th of final basic salary for each year of service (inclusive of a proportion of the basic State pension) up to a limit of two-thirds of final basic salary; a lump-sum death-in-service benefit of three times salary; and a dependant's benefit of two-thirds of actual or prospective pension. Normal retirement age is 60, but members who have more than 30 years' service at age 55 can retire early without an actuarial pension reduction. Postretirement pensions are reviewed annually, and increases equivalent to Retail Price Index (up to 5%) are guaranteed. Directors in the BP Pension Scheme accrue pension at the enhanced rate of 2/60ths of their final basic salary for each year of service as executive directors (up to the same two-thirds limit). None of the UK resident directors is affected by the 'pensionable earnings cap'. The BP Pension Scheme is the principal section of the BP Pension Fund, the latter being established under a trust deed. Contributions to the Fund are made on the advice of the actuary appointed by the Trustee directors. No contributions were made to the Fund by the Company in 1998 in respect of pensions accruing under the BP Pension Scheme. Mr Fuller and Mr Lowrie participate in Amoco's Corporate Retirement Plan. Under this Plan, the amount of annuity they are eligible to receive on a single-life basis is determined under an annuity benefit formula. The annuity benefit formula (including a percentage of US Social Security benefits) is calculated at 1 2/3 x years of participation x average annual earnings. (Average annual earnings for Plan purposes are determined by the three highest consecutive years' salaries plus the three highest consecutive years' bonuses -- in the 10 years preceding retirement). The maximum annuity is 60% of this average. While normal benefit is calculated as a single life annuity payable at age 65, eligible employees can opt to receive this benefit in a number of actuarially equivalent forms (e.g. lump sum or joint and survivor annuity). Normal pensionable age in the US Plan is 65. Between 60 and 65 there is no actuarial reduction but the reduction is 5% per year between 50 and 59. In line with US tax regulations, benefits are provided as appropriate through a qualified and a restoration/non-qualified plan. PENSION ENTITLEMENT -- UK EXECUTIVE DIRECTORS
Additional Additional pension earned pension earned Accrued during the during Years of service entitlement at year ended the year ended at December 31, December 31, December 31, December 31, 1998 1998(a) 1998(a) 1997(a) ---------------- -------------- -------------- -------------- ($ thousand) ($ thousand) ($ thousand) Sir John Browne................... 32 626 45 118 Dr J G S Buchanan................. 29 327 32 20 R F Chase......................... 34 420 32 18 Dr C S Gibson-Smith............... 28 295 27 5(b) R L Olver......................... 25 300 27 n/a(b) B K Sanderson..................... 34 420 32 16
- - ------------ (a) A conversion rate of L1 = $1.66 has been used for 1998, L1 = $1.64 for 1997. (b) Only includes pension earned from date of board appointment. 73 74 PENSION ENTITLEMENT -- US EXECUTIVE DIRECTORS
Additional pension earned Accrued during the Years of service entitlement at year ended at December 31, December 31, December 31, 1998 1998(a) 1998(a) ---------------- -------------- -------------- ($ thousand) ($ thousand) H L Fuller....................................... 37 1,146 128 W G Lowrie....................................... 32 475 111
- - ------------ (a) Expressed as a single life annuity with benefit commencement at December 31, 1998. SERVICE CONTRACTS All UK executive directors appointed since 1996 hold a contract of service which includes a one-year period of notice. Sir John Browne and Mr Chase were appointed before 1996 and have contracts which include a two-year notice period. Mr Sanderson's contract is due to expire within two years when he reaches the age of 60. Under each contract, the company reserves the right to make a payment in lieu of notice. Dr Stomberg was a director of BP prior to his retirement at the end of 1997. He now serves as a special adviser to the group chief executive on European matters at a fixed annual salary of DM1.1 million until the end of 1999. Mr Fuller's and Mr Lowrie's secondments to BP Amoco began on December 31, 1998. Mr Lowrie's underlying US employment agreement with BP Amoco Corporation was fixed for a three-year period which reflected his contract with Amoco. Mr Fuller's contract runs until the end of March 2000, when he is due to retire. Pursuant to Mr Fuller's and Mr Lowrie's service contracts, BP Amoco must pay each executive a severance payment which is substantially equal to three years of base salary if BP Amoco terminates his employment, other than for cause, disability or death, or if the executive terminates his employment with BP Amoco for 'good reason' as such term is defined in the service contract. Mr Lowrie resigned from the board on February 12, 1999 and will be retiring from BP Amoco Corporation in the first half of the year. He will be entitled to receive the severance payment upon his retirement. REMUNERATION OF NON-EXECUTIVE DIRECTORS The Articles of Association provide that the remuneration paid to non-executive directors shall be determined by the board within the limits set by the shareholders. Non-executive directors do not have service contracts with the company. During 1998 the chairman of BP received a fee of $265,600. The non-executive directors of BP received a basic fee of $41,500 per annum and extra remuneration for duties on board committees. Details of individual fees are set out below. The non-executive directors of Amoco received fees of $64,000 per annum during 1998. In addition, each Amoco non-executive director was granted 600 shares of Amoco common stock, subject to forfeiture and transfer restrictions relating to continued service on the board. At the date of the awards the shares were worth $25,762, giving a total remuneration as at the date of the award of $89,762 per director. Those Amoco directors who left the board in December 1998 following the merger were also paid the amounts shown in the footnotes to the table in recognition of their years of service and contributions to the Amoco board. The remuneration of non-executive directors of BP Amoco was revised following the merger. This has been set at $66,400 per annum, plus an allowance of $4,890 for occasions on which a director is required to travel across the Atlantic for a board meeting or committee meeting. During 1999 the board will meet eight times, five times in the UK and three times in the USA. Committee meetings are held in conjunction with board meetings whenever feasible. 74 75 REMUNERATION OF NON-EXECUTIVE DIRECTORS
Year ended Year ended December 31, 1998 December 31, 1997 ----------------- ----------------- ($ thousand) CURRENT DIRECTORS R S Block......................................... 90 80 J H Bryan......................................... 90 80 E B Davis, Jr..................................... 90 80 R J Ferris........................................ 90 80 C F Knight........................................ 52(a) 51(b) F A Maljers....................................... 90 80 Dr W E Massey..................................... 90 80 H M P Miles....................................... 61(a)(c) 61(b)(d) Sir Robin Nicholson............................... 46(a)(e) 73(b) Sir Ian Prosser................................... 55(a) 34(b) P D Sutherland.................................... 266(a) 216(b) M H Wilson........................................ 90 80 R P Wilson........................................ 18(a) -- The Lord Wright of Richmond....................... 61(a) 61(b) DIRECTORS LEAVING THE BOARD IN 1998 D R Beall......................................... 393(f) 80 Sir James Glover.................................. 61(a) 69(b) Dr K N Horn....................................... 51(a) 51(b) A C Martinez...................................... 244(g) 80 M R Seger......................................... 393(f) 80 Sir Patrick Sheehy................................ 51(a) 54(b) T M Solso......................................... 214(h) 80 DIRECTORS WHO RETIRED BEFORE 1998 The Lord Simon of Highbury........................ -- 535(b) ----------------- ----------------- Total............................................. 2,596 2,085 ================= =================
- - ------------ (a) Sterling payments converted at the average 1998 exchange rate of L1 = $1.66. (b) Sterling payments converted at the average 1997 exchange rate of L1 = $1.64. (c) Paid in part to his employer. (d) Paid to his employer. (e) Also received $22,687 for serving on the Technical Advisory Council. (f) Includes standard non-executive director remuneration of $89,762 and a special payment of $304,000 in recognition of service to the Amoco board. (g) Includes standard non-executive director remuneration of $89,762 and a special payment of $154,000 in recognition of service to the Amoco board. (h) Includes standard non-executive director remuneration of $89,762 and a special payment of $124,000 in recognition of service to the Amoco board. Total emoluments include salary and benefits earned and paid during the relevant financial year, plus bonuses, which are paid in the following year, plus for 1998 the value of the awards made under the 1996-98 Plan in respect of the three years covered by that Plan. The total remuneration paid during 1998 to all directors and the secretary as a group was $11,892,000. As the merger between BP and Amoco occurred on December 31, 1998 this represents the total remuneration of the BP directors and secretary only. 75 76 ITEM 12 -- OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES (A) Pursuant to the various BP Amoco Group share option schemes, the following options for Ordinary Shares of the Company were outstanding at March 29, 1999:
Expiry Exercise Options dates of price outstanding options per share - - ----------- ------------ --------------- (shares) 162,397,886 1999 to 2009 $3.70 to $15.83
No options under the BP executive share option scheme were granted to executive directors during the year. For options granted to Mr Fuller and Mr Lowrie, see Item 11 -- Compensation of Directors and Officers. As at March 29, 1999, the following directors, together with the secretary of BP Amoco p.l.c., held options under the BP Amoco Group share option schemes for Ordinary Shares as set out below: Sir John Browne....................... 2,984 J G S Buchanan........................ 3,489 R F Chase............................. 4,662 H L Fuller............................ 7,384,200 R L Olver............................. 3,428 B K Sanderson......................... 4,267 J C Hanratty.......................... 4,662 --------- Total................................. 7,407,692 =========
- - ------------ (a) See also Item 18 -- Note 33 of Notes to Financial Statements. ITEM 13 -- INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS In the ordinary course of its business the Group has transactions with various organizations with which certain of its directors are associated but, except as described in this report, no such material transactions have been entered into in the period commencing January 1, 1998 to March 29, 1999. 76 77 PART III ITEM 15 -- DEFAULTS UPON SENIOR SECURITIES None. ITEM 16 -- CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS BP Amoco p.l.c.'s Articles of Association were amended by special resolution on November 25, 1998. The Deposit Agreement, among BP Amoco p.l.c., Morgan Guaranty Trust Company of New York and the holders of ADRs from time to time, was amended effective December 31, 1998. The 'Description of BP Amoco Ordinary Shares' and 'Description of BP Amoco American Depositary Shares' contained in BP Amoco's Report on Form 6-K filed on March 25, 1999, are incorporated herein by reference. 77 78 PART IV ITEM 18 -- FINANCIAL STATEMENTS See pages F-3 through F-97 and page S-1, incorporated herein by reference. ITEM 19 -- FINANCIAL STATEMENTS AND EXHIBITS (A) FINANCIAL STATEMENTS The following financial statements, together with the reports of the Independent Auditors thereon, are filed as part of this annual report:
Page ---- Reports of Independent Auditors and Consents of Independent Auditors.................................................. F-1 Consolidated Statement of Income for the Years Ended December 31, 1998, 1997 and 1996.......................... F-3 Consolidated Balance Sheet at December 31, 1998 and 1997.... F-4 Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.......................... F-5 Statement of Total Recognized Gains and Losses for the Years Ended December 31, 1998, 1997 and 1996.................... F-5 Statement of Changes in BP Amoco Shareholders' Interest for the Years Ended December 31, 1998, 1997 and 1996.......... F-6 Notes to Financial Statements............................... F-8 Supplementary Oil and Gas Information (Unaudited)........... F-87 Schedule for the Years Ended December 31, 1998, 1997 and 1996 Schedule II Valuation and Qualifying Accounts............. S-1
All other Schedules have been omitted since they are not required under the applicable instructions or the substance of the required information is shown in the financial statements. (B) EXHIBITS The following documents are filed as part of this annual report:
Page ---- Computation of Ratio of Earnings to Fixed Charges (Unaudited)............................................... E-1
Amended Memorandum and Articles of Association of BP Amoco p.l.c. (incorporated herein by reference to Report on Form 6-K dated January 4, 1999). Amended and Restated Deposit Agreement effective as of December 31, 1998, among BP Amoco p.l.c., Morgan Guaranty Trust Company of New York, as Depositary and all holders from time to time of American Depositary Receipts issued thereunder (incorporated herein by reference to the Registration Statement on Form F-6 (file no. 333-9566)). The total amount of long-term debt securities of the Registrant and its subsidiaries authorized under any one instrument does not exceed 10% of the total assets of BP Amoco p.l.c. and its subsidiaries on a consolidated basis. The Company agrees to furnish copies of any or all such instruments to the Securities and Exchange Commission upon request. 78 79 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. BP AMOCO p.l.c. (Registrant) /s/ JUDITH C. HANRATTY ---------------------------------------------------------------------- Judith C. Hanratty (Secretary) Dated: April 1, 1999 79 80 BP AMOCO P.L.C. AND SUBSIDIARIES REPORT OF INDEPENDENT AUDITORS To: THE BOARD OF DIRECTORS BP Amoco p.l.c. We have audited the accompanying consolidated balance sheets of BP Amoco p.l.c. as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in BP Amoco shareholders' interest, total recognized gains and losses, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 19(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The consolidated financial statements give retroactive effect to the merger of The British Petroleum Company p.l.c. and Amoco Corporation, which has been accounted for as a merger as described in Note 44 to the consolidated financial statements. We did not audit the financial statements of Amoco Corporation, which statements reflect total assets constituting 39% for 1997 of the related consolidated financial statement total, and which reflect net income constituting approximately 33% and 45% of the related consolidated financial statement totals for the years ended December 31, 1997 and 1996, respectively. Those statements, which were prepared in accordance with accounting principles generally accepted in the United States, were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to amounts included for Amoco Corporation for 1997 and 1996 (before the conversion to accounting principles generally accepted in the United Kingdom), is based solely on the report of the other auditors. We conducted our audits in accordance with United Kingdom auditing standards which do not differ in any significant respect from United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation (including the conversion of the financial statements of Amoco Corporation to accounting principles generally accepted in the United Kingdom). We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BP Amoco p.l.c. at December 31, 1998 and 1997, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United Kingdom which differ in certain respects from those followed in the United States (see Note 45 of Notes to Financial Statements). Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG ------------------------------ London, England Ernst & Young February 17, 1999
- - -------------------------------------------------------------------------------- CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated February 17, 1999, with respect to the consolidated financial statements of BP Amoco p.l.c. included in this Annual Report (Form 20-F) for the year ended December 31, 1998 in the following Registration Statements: Registration Statement on Form F-3 (File No. 333-9790) of BP Amoco p.l.c. Registration Statements on Form F-3 (File Nos. 33-39075 and 33-20338) of BP America Inc. and BP Amoco p.l.c.; Registration Statement on Form F-3 (File No. 33-29102) of The Standard Oil Company and BP Amoco p.l.c.; and Registration Statements on Form S-8 (File Nos. 33-21868, 333-9020 and 333-9798) of BP Amoco p.l.c. /s/ ERNST & YOUNG ------------------------------ London, England Ernst & Young April 1, 1999
F-1 81 REPORT OF INDEPENDENT ACCOUNTANTS To: THE BOARD OF DIRECTORS AND Shareholders of Amoco Corporation In our opinion, the consolidated statement of financial position and the related consolidated statements of income, shareholders' equity, and cash flows (not presented separately herein) present fairly, in all material respects, the financial position of Amoco Corporation and its subsidiaries at December 31, 1997, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Amoco Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP - - ------------------------------------------ Chicago, Illinois February 24, 1998 - - -------------------------------------------------------------------------------- CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-21868, 333-9020 and 333-9798) of BP Amoco p.l.c. and in the Prospectuses constituting part of the Registration Statements on Form F-3 (No. 33-39075 and 33-20338) of BP America and BP Amoco p.l.c. and (No. 33-29102) of The Standard Oil Company and BP Amoco p.l.c. and (No. 333-9790) of BP Amoco p.l.c. of our report dated February 24, 1998, appearing in Item 19 of this Annual Report on Form 20-F. /s/ PRICEWATERHOUSECOOPERS LLP - - ------------------------------------------ PRICEWATERHOUSECOOPERS LLP CHICAGO, ILLINOIS APRIL 1, 1999 F-2 82 BP AMOCO P.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME - - -------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------
Years ended December 31, ----------------------------- Note 1998 1997 1996 ---- ------- ------- ------- ($ million, except per share amounts) TURNOVER.............................................. 83,732 108,564 102,064 Less: Joint ventures.................................. 15,428 16,804 -- ------- ------- ------- GROUP TURNOVER........................................ 2 68,304 91,760 102,064 Replacement cost of sales............................. 56,354 73,928 81,922 Production taxes...................................... 3 604 1,307 1,611 ------- ------- ------- GROSS PROFIT.......................................... 11,346 16,525 18,531 Distribution and administration expenses.............. 4 6,044 6,742 8,367 Exploration expense................................... 921 962 997 ------- ------- ------- 4,381 8,821 9,167 Other income.......................................... 5 709 662 714 ------- ------- ------- GROUP REPLACEMENT COST OPERATING PROFIT............... 5,090 9,483 9,881 Share of profits of joint ventures.................... 825 544 -- Share of profits of associated undertakings........... 522 556 663 ------- ------- ------- TOTAL REPLACEMENT COST OPERATING PROFIT............... 6,437 10,583 10,544 Profit (loss) on sale of businesses................... 6 395 127 127 Profit (loss) on sale of fixed assets................. 6 653 313 (298) Merger expenses....................................... 6 (198) -- -- Refinery network rationalization...................... 6 -- 71 -- European refining and marketing joint venture implementation...................................... 6 -- -- (532) ------- ------- ------- REPLACEMENT COST PROFIT BEFORE INTEREST AND TAX....... 7,287 11,094 9,841 Inventory holding gains (losses)...................... (1,391) (939) 1,172 ------- ------- ------- HISTORICAL COST PROFIT BEFORE INTEREST AND TAX........ 5,896 10,155 11,013 Interest expense...................................... 7 1,053 908 1,004 ------- ------- ------- PROFIT BEFORE TAXATION................................ 4,843 9,247 10,009 Taxation.............................................. 9 1,520 3,066 2,755 ------- ------- ------- PROFIT AFTER TAXATION................................. 3,323 6,181 7,254 Minority shareholders' interest....................... 63 151 13 ------- ------- ------- PROFIT FOR THE YEAR*.................................. 3,260 6,030 7,241 Dividend requirements on preference shares*........... 1 1 1 ------- ------- ------- PROFIT FOR THE YEAR APPLICABLE TO ORDINARY SHARES*.... 3,259 6,029 7,240 ======= ======= ======= PROFIT PER ORDINARY SHARE -- CENTS Basic................................................. 11 34 63 76 Diluted............................................... 11 34 63 75 ======= ======= ======= DIVIDENDS PER ORDINARY SHARE -- CENTS................. 10 39.5 36 31 ======= ======= ======= Average number outstanding of 50 cents ordinary shares (in millions)....................................... 9,596 9,592 9,559 ======= ======= =======
- - ------------ * A summary of the adjustments to profit for the year of the Group which would be required if generally accepted accounting principles in the United States had been applied instead of those generally accepted in the United Kingdom is given in Note 45. The Notes to Financial Statements are an integral part of this Statement. F-3 83 BP AMOCO P.L.C. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - - -------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------
December 31, --------------------------------- Note 1998 1997 ---- --------------- --------------- ($ million) FIXED ASSETS Intangible assets................................ 19 3,037 2,582 Tangible assets.................................. 20 54,465 52,263 Investments Joint ventures Gross assets................................ 9,053 9,147 Gross liabilities........................... 4,048 3,523 ------ ------ Net investment................................ 21 5,005 5,624 Associated undertakings....................... 21 4,162 4,354 Other......................................... 21 605 398 ------ ------ 9,772 10,376 ------ ------ TOTAL FIXED ASSETS................................. 67,274 65,221 CURRENT ASSETS Inventories...................................... 22 3,642 4,923 Trade receivables................................ 23 5,778 7,725 Other receivables falling due Within one year............................... 23 3,626 3,658 After more than one year...................... 23 3,305 2,998 Investments...................................... 24 470 1,067 Cash at bank and in hand......................... 405 355 ------ ------ 17,226 20,726 ------ ------ CURRENT LIABILITIES -- FALLING DUE WITHIN ONE YEAR Finance debt..................................... 25 2,837 2,856 Trade payables................................... 26 5,091 5,854 Other accounts payable and accrued liabilities... 26 10,238 11,817 ------ ------ 18,166 20,527 ------ ------ NET CURRENT (LIABILITIES) ASSETS................... (940) 199 ------ ------ TOTAL ASSETS LESS CURRENT LIABILITIES.............. 66,334 65,420 Noncurrent liabilities Finance debt..................................... 25 10,918 10,021 Accounts payable and accrued liabilities......... 26 2,109 2,562 Provisions for liabilities and charges Deferred taxation................................ 9 1,632 1,183 Other............................................ 27 8,817 8,806 ------ ------ 23,476 22,572 ------ ------ NET ASSETS......................................... 42,858 42,848 Minority shareholders' interest.................... 1,072 1,100 ------ ------ BP AMOCO SHAREHOLDERS' INTEREST*................... 41,786 41,748 ====== ====== REPRESENTED BY: Capital shares Preference....................................... 21 21 Ordinary......................................... 4,842 4,309 Paid in surplus.................................... 29 3,386 3,777 Merger reserve..................................... 29 697 650 Retained earnings.................................. 30 32,840 32,991 ------ ------ 41,786 41,748 ====== ======
- - ------------ * A summary of the adjustments to BP Amoco shareholders' interest which would be required if generally accepted accounting principles in the United States had been applied instead of those generally accepted in the United Kingdom is given in Note 45. The Notes to Financial Statements are an integral part of this Balance Sheet. F-4 84 BP AMOCO P.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- - ------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------ Years ended December 31, -------------------------- Note 1998 1997 1996 ---- ------ ------ ------ ($ million) NET CASH INFLOW FROM OPERATING ACTIVITIES................... 31 9,586 15,558 13,679 ------ ------ ------ DIVIDENDS FROM JOINT VENTURES............................... 544 190 -- DIVIDENDS FROM ASSOCIATED UNDERTAKINGS...................... 422 551 476 ------ ------ ------ SERVICING OF FINANCE AND RETURNS ON INVESTMENTS Interest received........................................... 223 243 199 Interest paid............................................... (961) (911) (1,109) Dividends received.......................................... 43 13 30 Dividends paid to minority shareholders..................... (130) -- -- ------ ------ ------ NET CASH OUTFLOW FROM SERVICING OF FINANCE AND RETURNS ON INVESTMENTS............................................... (825) (655) (880) ------ ------ ------ TAXATION UK corporation tax.......................................... (391) (500) (450) Overseas tax................................................ (1,314) (1,773) (1,981) ------ ------ ------ TAX PAID.................................................... (1,705) (2,273) (2,431) ------ ------ ------ CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Payments for fixed assets................................... (8,431) (8,600) (8,924) Purchase of shares for employee share schemes............... (254) (300) (14) Proceeds from the sale of fixed assets...................... 18 1,387 1,468 973 ------ ------ ------ NET CASH OUTFLOW FOR CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT................................................ (7,298) (7,432) (7,965) ------ ------ ------ ACQUISITIONS AND DISPOSALS Investments in associated undertakings...................... (396) (1,021) (383) Acquisitions................................................ 17 (314) -- (535) Net investment in joint ventures............................ 708 (1,967) -- Proceeds from the sale of businesses........................ 18 780 364 827 ------ ------ ------ NET CASH INFLOW (OUTFLOW) FOR ACQUISITIONS AND DISPOSALS.... 778 (2,624) (91) ------ ------ ------ EQUITY DIVIDENDS PAID....................................... (2,408) (2,437) (2,411) ------ ------ ------ NET CASH INFLOW (OUTFLOW)................................... (906) 878 377 ====== ====== ====== FINANCING................................................... 31 (377) 1,012 828 MANAGEMENT OF LIQUID RESOURCES.............................. 31 (596) (167) (147) INCREASE (DECREASE) IN CASH................................. 31 67 33 (304) ------ ------ ------ (906) 878 377 ====== ====== ======
- - -------------------------------------------------------------------------------- STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
Years ended December 31, -------------------------- 1998 1997 1996 ------ ------ ------ ($ million) PROFIT FOR THE YEAR......................................... 3,260 6,030 7,241 Currency translation differences............................ 55 (1,587) 367 ------ ------ ------ TOTAL RECOGNIZED GAINS AND LOSSES FOR THE YEAR.............. 3,315 4,443 7,608 ====== ====== ======
- - ------------ For a cash flow statement and a statement of comprehensive income prepared on the basis of US GAAP see Note 45 -- US generally accepted accounting principles. - - -------------------------------------------------------------------------------- The Notes to Financial Statements are an integral part of these Statements. F-5 85 BP AMOCO P.L.C. AND SUBSIDIARIES STATEMENT OF CHANGES IN BP AMOCO SHAREHOLDERS' INTEREST - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- During 1998 the parent company's authorized share capital of L2,000 million was redenominated and increased to 12 billion ordinary shares of 50 cents each amounting to $6 billion plus preference shares of L12,750,000 ($21 million). On December 31, 1998, the parent company issued 3,797,071,800 ordinary shares to Amoco shareholders on completion of the BP/Amoco merger and also during the year 110,285,094 ordinary shares were issued under the share dividend plan by capitalization of the share premium account and 13,069,529 ordinary shares were issued under employee share schemes. The authorized ordinary share capital of The British Petroleum Co. p.l.c. at December 31, 1997 and 1996 was 7,949,000,000 ordinary shares of 25 pence each. The share capital at December 31, was as follows:
Shares --------------------------- Authorized Issued Amount -------------- ---------- ---------- ($ million) NON-EQUITY -- PREFERENCE SHARES 8% (now 5.6% + tax credit) cumulative first preference shares of L1 each at December 31, 1998, 1997 and 1996..................................... 7,250,000 7,232,838 12 ============== ========== ========== 9% (now 6.3% + tax credit) cumulative second preference shares of L1 each at December 31, 1998, 1997 and 1996..................................... 5,500,000 5,473,414 9 ============== ========== ========== EQUITY -- ORDINARY SHARES OF 50 CENTS EACH Authorized December 31, 1998................................. 12,000,000,000 ==============
Years ended December 31, --------------------------------------------------------------------- 1998 1997 1996 --------------------- --------------------- --------------------- Shares Amount Shares Amount Shares Amount Issued --------- --------- --------- --------- --------- --------- (thousands) ($ (thousands) ($ (thousands) ($ million) million) million) January 1.......................... 9,597,793 4,309 9,598,573 4,361 9,516,786 4,144 Employee share schemes -- Amoco.... 16,763 8 15,209 8 10,556 5 Employee share schemes -- BP....... 13,070 5 25,198 10 20,007 8 Share dividend plan -- BP.......... 110,285 46 87,179 36 54,849 22 Share repurchases -- Amoco......... (54,901) (27) (128,366) (64) (3,625) (2) Redenomination of BP shares into US dollars......................... -- 484 -- -- -- -- Exchange adjustment................ -- 17 -- (42) -- 184 --------- --------- --------- --------- --------- --------- December 31........................ 9,683,010 4,842 9,597,793 4,309 9,598,573 4,361 ========= ========= ========= ========= ========= ========= PAID IN SURPLUS January 1.......................... 3,777 3,733 3,348 Premium on shares issued: Employee share schemes -- BP.... 117 144 120 Share dividend plan -- BP (a)... (46) (36) (22) Exchange adjustment................ 22 (64) 287 Redenomination of BP shares into US dollars......................... (484) -- -- --------- --------- --------- December 31........................ 3,386 3,777 3,733 ========= ========= =========
The Notes to Financial Statements are an integral part of this Statement. F-6 86 BP AMOCO P.L.C. AND SUBSIDIARIES STATEMENT OF CHANGES IN BP AMOCO SHAREHOLDERS' INTEREST (CONCLUDED) - - -------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) MERGER RESERVE January 1................................................. 650 673 620 Employee share schemes -- Amoco........................... 97 92 53 Share repurchases -- Amoco................................ (50) (115) -- ------- ------- ------- December 31............................................... 697 650 673 ======= ======= ======= RETAINED EARNINGS January 1................................................. 32,991 32,231 27,718 Profit for the year....................................... 3,260 6,030 7,241 Exchange adjustment....................................... 16 (1,481) (104) Share repurchase -- Amoco................................. (507) (1,244) (36) Dividends (c) Preference (non-equity)................................ (1) (1) (1) Ordinary (equity)...................................... (4,120) (3,451) (3,006) Qualifying Employee Share Ownership Trust (d)............. (42) -- -- Share dividend plan....................................... 1,243 907 417 ------- ------- ------- December 31............................................... 32,840 32,991 32,231 ======= ======= =======
- - ------------ (a) During 1998, 110,285,094 Ordinary Shares (1997, 87,179,495 and 1996, 54,848,723) were issued under the share dividend plan at par value, by capitalization of paid in surplus. (b) On a show-of-hands vote on an ordinary resolution at a general meeting, shareholders present in person or by proxy have one vote each. Special resolutions are voted on by poll. On a poll, shareholders present in person or by proxy have two votes for every L5 in nominal amount of the first and second preference shares held and one vote for every ordinary share held. (c) See Note 10 -- Dividends. (d) See Note 33 -- Employee share schemes. (e) See Note 30 -- Retained earnings. The Notes to Financial Statements are an integral part of this Statement. F-7 87 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 1 -- ACCOUNTING POLICIES ACCOUNTING STANDARDS The accounts are prepared in accordance with applicable UK accounting standards. The Group has adopted the following Financial Reporting Standards (FRSs) during 1998: FRS9 'Associates and Joint Ventures'; FRS10 'Goodwill and Intangible Assets'; FRS11 'Impairment of Fixed Assets and Goodwill' and FRS14 'Earnings per Share'. The financial information for 1997 and 1996 has been restated to comply with the requirements of FRS9. See Note 43 for further information. The restatement has had no effect on the profit for the year and net assets. BASIS OF PREPARATION The Group's main activities are the exploration and production of crude oil and natural gas; the refining, marketing, supply and transportation of petroleum products; and the manufacturing and marketing of petrochemicals. The preparation of financial statements in conformity with UK generally accepted accounting principles requires that management make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses; and the disclosure of contingent assets and liabilities. Actual results could differ from the estimates and assumptions used. MERGER ACCOUNTING The financial statements have been prepared using the merger method of accounting in relation to the merger of BP and Amoco. Under merger accounting, the results and cash flows of BP and Amoco are combined from the beginning of the financial period in which the merger occurred and their assets and liabilities combined at the amounts at which they were previously recorded after adjusting to achieve consistency of accounting policies. Income statement, balance sheet and cash flow comparatives are restated on the combined basis. See Note 44 for further information. GROUP CONSOLIDATION The Group financial statements comprise a consolidation of the accounts of the parent company and its subsidiary undertakings (subsidiaries). The results of subsidiaries acquired or sold are consolidated for the periods from or to the date on which control passes. An associated undertaking (associate) is an entity in which the Group has a long term equity interest and over which it exercises significant influence. The consolidated financial statements include the Group proportion of the operating profit or loss, exceptional items, inventory holding gains or losses, interest expense, taxation and net assets of associates (the equity method). A joint venture is an entity in which the Group has a long-term interest and shares control with one or more co-venturers. The consolidated financial statements include the Group proportion of turnover, operating profit or loss, exceptional items, inventory holding gains or losses, interest expense, taxation, gross assets and gross liabilities of the joint venture (the gross equity method). Certain of the Group's activities are conducted through joint arrangements and are included in the consolidated financial statements in proportion to the Group's interest in the income, expenses, assets and liabilities of these joint arrangements. On the acquisition of a subsidiary, or of an interest in a joint venture or associated undertaking, fair values reflecting conditions at the date of acquisition are attributed to the identifiable net assets acquired. When the cost of acquisition exceeds the fair values attributable to the Group's share of such net assets F-8 88 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 1 -- ACCOUNTING POLICIES (CONTINUED) GROUP CONSOLIDATION (CONCLUDED) the difference is treated as purchased goodwill. This is capitalized and amortized over its estimated useful economic life, limited to a maximum period of 20 years. ACCOUNTING CONVENTION The accounts are prepared under the historical cost convention. Historical cost accounts show the profits available to shareholders and are the most appropriate basis for presentation of the Group's balance sheet. Profit or loss determined under the historical cost convention includes inventory holding gains or losses and, as a consequence, does not necessarily reflect underlying trading results. REPLACEMENT COST The results of individual businesses and geographical areas are presented on a replacement cost basis. Replacement cost operating results exclude inventory holding gains or losses and reflect the average cost of supplies incurred during the year, and thus provide insight into underlying trading results. Inventory holding gains or losses represent the difference between the replacement cost of sales and the historical cost of sales calculated using the first-in first-out method. INVENTORY VALUATION Inventories are valued at cost to the Group using the first-in first-out method or at net realizable value, whichever is the lower. Stores are stated at or below cost calculated mainly using the average method. FOREIGN CURRENCIES On consolidation, assets and liabilities of subsidiary undertakings are translated into US dollars at closing rates of exchange. Income and cash flow statements are translated at average rates of exchange. Exchange differences resulting from the retranslation of net investments in subsidiary and associated undertakings at closing rates, together with differences between income statements translated at average rates and at closing rates, are dealt with in retained earnings. Exchange gains and losses arising on long-term foreign currency borrowings used to finance the Group's foreign currency investments are also dealt with in retained earnings. All other exchange gains or losses on settlement or translation at closing rates of exchange of monetary assets and liabilities are included in the determination of profit for the year. DERIVATIVE FINANCIAL INSTRUMENTS The Group is a party to derivative financial instruments (derivatives) primarily to manage exposures to fluctuations in foreign currency exchange rates and interest rates, and to manage some of its margin exposure from changes in oil and natural gas prices. All derivatives which are held for trading purposes and all oil price derivatives held for risk management purposes are marked to market and all gains and losses recognized in the income statement. Interest rate swap agreements, swaptions and futures contracts are used to manage interest rate exposures. Amounts payable or receivable in respect of these derivatives are recognized as adjustments to interest expense over the period of the contracts. As part of exchange rate risk management, foreign currency swap agreements and forward contracts are used to convert non-US dollar borrowings into US dollars. Gains and losses on these derivatives are deferred and recognized on maturity of the underlying debt, together with the matching loss or gain on the debt. Foreign currency forward contracts and options are used to hedge significant non-US dollar firm F-9 89 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 1 -- ACCOUNTING POLICIES (CONTINUED) DERIVATIVE FINANCIAL INSTRUMENTS (CONCLUDED) commitments or anticipated transactions. Gains and losses on these contracts and option premia paid are also deferred and recognized in the income statement or as adjustments to carrying amounts, as appropriate, when the hedged transaction occurs. EXPLORATION EXPENDITURE Exploration expenditure is accounted for in accordance with the successful efforts method. Exploration and appraisal drilling expenditure is initially capitalized as an intangible fixed asset. When proved reserves of oil and natural gas are determined and development is sanctioned, the relevant expenditure is transferred to tangible production assets. All exploration expenditure determined as unsuccessful is charged against income. Exploration license acquisition costs are amortized over the estimated period of exploration. Geological and geophysical exploration costs are charged against income as incurred. DEPRECIATION Oil and gas production assets are depreciated using a unit-of-production method based upon estimated proved reserves. Other tangible and intangible assets are depreciated on the straight line method over their estimated useful lives. The average estimated useful lives of refineries are 20 years, chemicals manufacturing plants are 20 years and service stations 15 years. Other intangibles are amortized over a maximum period of 20 years. The Group undertakes a review for impairment of a fixed asset or goodwill if events or changes in circumstances indicate that the carrying amount of the fixed asset or goodwill may not be recoverable. To the extent that the carrying amount exceeds the recoverable amount, that is the higher of net realizable value and value in use, the fixed asset or goodwill is written down to its recoverable amount. The value in use is determined from estimated discounted future net cash flows. DECOMMISSIONING Provision is made for the decommissioning of production facilities in accordance with local conditions and requirements on the basis of costs estimated as at the balance sheet date. The provision is allocated over accounting periods using a unit-of-production method based on estimated proved reserves. PETROLEUM REVENUE TAX The charge for petroleum revenue tax is calculated using a unit-of-production method. CHANGES IN UNIT-OF-PRODUCTION FACTORS Changes in factors which affect unit-of-production calculations are dealt with prospectively, not by immediate adjustment of prior years' amounts. ENVIRONMENTAL LIABILITIES Environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future earnings are expensed. Liabilities for environmental costs are recognized when environmental assessments or clean-ups are probable and the associated costs can be reasonably estimated. Generally, the timing of these provisions F-10 90 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 1 -- ACCOUNTING POLICIES (CONCLUDED) ENVIRONMENTAL LIABILITIES (CONCLUDED) coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. LEASES Assets held under leases which result in Group companies receiving substantially all risks and rewards of ownership (capital leases) are capitalized as tangible fixed assets at the estimated present value of underlying lease payments. The corresponding capital lease obligation is included with borrowings. Rentals under operating leases are charged against income as incurred. RESEARCH Expenditure on research is written off in the year in which it is incurred. INTEREST Interest is capitalized gross during the period of construction where it relates either to the financing of major projects with long periods of development or to dedicated financing of other projects. All other interest is charged against income. PENSIONS AND OTHER POSTRETIREMENT BENEFITS The cost of providing pensions and other postretirement benefits is charged to income on a systematic basis, with pension surpluses and deficits amortized over the average expected remaining service lives of current employees. The difference between the amounts charged to income and the contributions made to pension plans is included within other provisions or debtors as appropriate. The amounts accrued for other postretirement benefits and unfunded pension liabilities are included within other provisions. DEFERRED TAXATION Deferred taxation is calculated, using the liability method, in respect of timing differences arising primarily from the difference between the accounting and tax treatments of both depreciation and petroleum revenue tax. Provision is made or recovery anticipated where timing differences are expected to reverse in the foreseeable future. NOTE 2 -- TURNOVER
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Sales and operating revenue................................. 76,448 100,913 128,325 Customs duties and sales taxes.............................. 8,144 9,153 26,261 ------- ------- ------- 68,304 91,760 102,064 ======= ======= =======
F-11 91 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 3 -- PRODUCTION TAXES
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) UK petroleum revenue tax.................................... 45 306 480 Overseas production taxes................................... 559 1,001 1,131 ------- ------- ------- 604 1,307 1,611 ======= ======= =======
NOTE 4 -- DISTRIBUTION AND ADMINISTRATION EXPENSES
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Distribution................................................ 4,714 5,178 6,927 Administration.............................................. 1,330 1,564 1,440 ------- ------- ------- 6,044 6,742 8,367 ======= ======= =======
NOTE 5 -- OTHER INCOME
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Income from other fixed asset investments................... 74 101 173 Other interest and miscellaneous income..................... 635 561 541 ------- ------- ------- 709 662 714 ======= ======= ======= Income from investments publicly traded included above...... -- 2 3 ------- ------- -------
F-12 92 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 6 -- EXCEPTIONAL ITEMS Exceptional items comprise profit (loss) on sale of businesses and fixed assets, merger expenses, refinery network rationalization costs and European refining and marketing joint venture implementation costs as follows:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Profit (loss) on sale of businesses - - -- Group.................................................... 310 250 127 - - -- Joint ventures........................................... 85 (123) -- Profit (loss) on sale of fixed assets -- Group.............. 653 313 (298) ------- ------- ------- 1,048 440 (171) Merger expenses -- Group.................................... (198) -- -- Refinery network rationalization -- Group................... -- 71 -- European refining and marketing joint venture implementation -- Group................................... -- -- (532) ------- ------- ------- Exceptional items........................................... 850 511 (703) Taxation credit (charge): Sale of businesses.......................................... (36) (7) (92) Sale of fixed assets........................................ (185) (208) 52 Merger expenses............................................. 23 -- -- Refinery network rationalization............................ -- 24 -- European refining and marketing joint venture implementation............................................ -- -- 110 ------- ------- ------- Exceptional items, net of tax............................... 652 320 (633) Minority shareholders interest (MSI)........................ -- -- 6 ------- ------- ------- 652 320 (627) ======= ======= =======
SALES OF BUSINESSES AND FIXED ASSETS The principal sales of businesses and fixed assets during 1998 were exploration and production properties in the USA and Papua New Guinea, the refinery in Lima, Ohio, the sale and leaseback of the Amoco building in Chicago, Illinois the retail network in the Czech Republic, the Adibis fuel additives business and a speciality chemicals distribution business. The profit on sale of businesses by joint ventures relates mainly to the disposal by the BP/Mobil joint venture of its retail network in Belgium. The major element of the profit in 1997 comprised the sale of US exploration and production properties and an intrastate natural gas pipeline unit in Texas. The loss on sale of businesses by joint ventures related principally to the costs of the BP/Mobil joint venture terminating base oil manufacturing operations at Llandarcy in the UK. The 1996 loss comprises the sale of the polystyrene foam products and Carborundum businesses, the BP America office building in Cleveland, Ohio, certain Canadian exploration and production properties, the Group's interest in the undeveloped Ross field in the North Sea and the floating production storage vessel Seillean. Additional information on the sale of businesses and fixed assets is given in Note 18 -- Disposals. F-13 93 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 6 -- EXCEPTIONAL ITEMS (CONCLUDED) MERGER EXPENSES BP Amoco incurred fees and expenses of $198 million in connection with the merger. These costs relate principally to investment banking fees as well as legal, accounting and regulatory filing fees. REFINERY NETWORK RATIONALIZATION The credit for refinery network rationalization in 1997 relates to the release of provisions for environmental and severance costs charged in 1995 in respect of the anticipated sale or closure of the Lavera refinery in France. This release reflects the decision to continue operating the refinery. EUROPEAN REFINING AND MARKETING JOINT VENTURE IMPLEMENTATION The one-off costs associated with the setting up of the European refining and marketing joint venture with Mobil were recognized in 1996. These costs include $491 million which represents the Group's share of charges for severance, restructuring, rebranding and other implementation charges and $41 million of own costs for asset write-downs and professional fees. NOTE 7 -- INTEREST EXPENSE
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Bank loans and overdrafts................................... 158 188 170 Other loans................................................. 762 651 765 Capital leases.............................................. 90 102 82 ------- ------- ------- 1,010 941 1,017 Capitalized................................................. 119 116 81 ------- ------- ------- Group....................................................... 891 825 936 Joint ventures.............................................. 54 -- -- Associated undertakings..................................... 108 83 68 ------- ------- ------- Total charged against profit................................ 1,053 908 1,004 ======= ======= =======
Interest expense for 1996 included net charges of $75 million relating to early redemption of debt. F-14 94 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 8 -- DEPRECIATION AND AMOUNTS PROVIDED Included in the income statement under the following headings:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Depreciation: Replacement cost of sales................................. 4,620 4,570 4,623 Distribution.............................................. 335 390 640 Administration............................................ 100 88 101 Exceptional items......................................... -- 8 5 ------- ------- ------- 5,055 5,056 5,369 ======= ======= ======= Depreciation of capitalized leased assets included above.... 71 76 90 ------- ------- ------- Amounts provided against fixed asset investments: Replacement cost of sales................................. 200 -- -- ======= ======= =======
The charge for depreciation, within replacement cost of sales, in 1998 includes $214 million for the impairment of the Opon field in Colombia and $61 million for the write-down of various other oil and natural gas properties. The impairment of the Opon field reflected lower than anticipated natural gas production and related reserve estimates. The charge also reflected impairment of the adjacent power plant because of the unavailability of an economic fuel supply. As a result of increased economic uncertainty in Russia, the Group has written down the carrying value of its investment in A O Sidanco by $200 million. In assessing the value in use of impaired assets, a real discount rate of 7% has been used. F-15 95 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 9 -- TAXATION CHARGE FOR TAXATION
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) United Kingdom corporation tax: Current at 31% (1997 at 31.5% and 1996 at 33%)............ 1,325 1,329 1,353 Overseas tax relief....................................... (566) (777) (624) ------- ------- ------- 759 552 729 Deferred at 31% (1997 at 31.5% and 1996 at 33%)........... (188) 217 32 ------- ------- ------- 571 769 761 Advance corporation tax................................... (76) (116) (188) ------- ------- ------- 495 653 573 ------- ------- ------- Overseas: Current................................................... 896 2,300 1,971 Deferred.................................................. (4) 7 80 Joint ventures............................................ (15) -- -- Associated undertakings................................... 148 106 131 ------- ------- ------- 1,025 2,413 2,182 ------- ------- ------- Taxation charge for the year................................ 1,520 3,066 2,755 ======= ======= =======
Included in the charge for the year is a charge of $198 million (1997 $191 million charge and 1996 $70 million credit) relating to exceptional items. PROVISIONS FOR DEFERRED TAXATION
Gross potential Provisions liability ------------------ ------------------ Years ended December 31, ---------------------------------------- 1998 1997 1998 1997 ------- ------- ------- ------- ($ million) Analysis of movements during the year: At January 1.................................... 1,183 1,203 5,486 5,473 Exchange adjustments............................ 37 (52) 20 (165) Charge (credit) for the year.................... (192) 224 199 370 Deletions/transfers............................. 604 (192) 604 (192) ------- ------- ------- ------- At December 31.................................. 1,632 1,183 6,309 5,486 ======= ======= ======= ======= of which -- United Kingdom...................... 927 499 1,626 1,232 -- Overseas........................... 705 684 4,683 4,254 ======= ======= ======= =======
F-16 96 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 9 -- TAXATION (CONTINUED)
Provisions Gross potential Liability ------------------ -------------------------- December 31, ------------------------------------------------ 1998 1997 1998 1997 ------- ------- ----------- ----------- ($ million) Analysis of provision: Depreciation.................................... 2,413 2,492 9,917 9,906 Petroleum revenue tax........................... (420) (484) (420) (484) Other timing differences........................ (328) (176) (3,155) (3,211) Advance corporation tax......................... (33) (649) (33) (725) ------- ------- ------- ------- 1,632 1,183 6,309 5,486 ======= ======= ======= =======
If provision for deferred taxation had been made on the basis of the gross potential liability, the taxation charge for the year would have been increased (decreased) as follows:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) United Kingdom.............................................. (39) 84 181 Overseas.................................................... 430 62 201 ------- ------- ------- 391 146 382 ======= ======= =======
Deferred taxation is not generally provided in respect of liabilities which may arise on the distribution of accumulated reserves of overseas subsidiaries, joint ventures and associates. RECONCILIATION OF THE UK STATUTORY TAX RATE TO THE EFFECTIVE TAX RATE OF THE GROUP ON REPLACEMENT COST PROFIT BEFORE EXCEPTIONAL ITEMS
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (%) United Kingdom statutory tax rate........................... 31 31 33 Increase (decrease) resulting from: Current year timing differences not provided (including prior year loss utilization)........................... (6) (4) (6) Tax credits............................................... (2) (2) (2) Overseas taxes at higher rates............................ 4 4 3 Inventory holding gains taxed (losses relieved)........... (3) (1) 1 Advance corporation tax................................... (1) (1) (2) Other..................................................... 2 3 3 ------- ------- ------- Effective tax rate on replacement cost profit before exceptional items...................................... 25 30 30 ======= ======= =======
Further information presented in compliance with the requirements of FASB Statement of Financial Accounting Standards No. 109 -- 'Accounting For Income Taxes' is set out below. F-17 97 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 9 -- TAXATION (CONCLUDED) EFFECTIVE TAX RATE
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Analysis of profit before taxation: United Kingdom.............................................. 2,278 3,360 3,222 Overseas.................................................... 2,565 5,887 6,787 ------- ------- ------- 4,843 9,247 10,009 ======= ======= ======= Taxation.................................................... 1,520 3,066 2,755 ======= ======= ======= Effective tax rate.......................................... 31% 33% 28% ======= ======= =======
The following relates the United Kingdom statutory tax rate to the effective tax rate of the Group based on profit before taxation:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (%) United Kingdom statutory tax rate........................... 31 31 33 Increase (decrease) resulting from: Current year timing differences not provided.............. (13) (4) (2) (Use of losses brought forward) losses unrelieved......... 5 (2) (2) Overseas taxes at higher rates............................ 7 6 3 Tax credits............................................... (2) (2) (2) Advance corporation tax................................... (2) (1) (2) Amortization of purchase price allocation................. 1 1 1 Inventory (gains not taxed) losses unrelieved............. 5 2 (4) Other differences......................................... (1) 2 3 ------- ------- ------- Effective tax rate.......................................... 31 33 28 ======= ======= =======
F-18 98 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 10 -- DIVIDENDS
Years ended December 31, --------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ----- ----- ----- ----- ----- ----- ----- ----- ----- (pence per share) (cents per share) ($ million) BP Preference dividends (non-equity)................... 1 1 1 Dividends per ordinary share: First quarterly................ 5.75 5.25 4.25 9.5 8.6 6.6 551 490 373 Second quarterly............... 6.00 5.50 5.00 10.0 9.0 7.8 579 517 438 Third quarterly................ 6.00 5.50 5.00 10.0 9.0 7.8 584 519 443 Fourth quarterly............... -- 5.75 5.25 -- 9.4 8.2 -- 543 465 ----- ----- ----- ----- ----- ----- ----- ----- ----- 17.75 22.00 19.50 29.5 36.0 30.4 1,715 2,070 1,720 ----- ----- ----- ----- ----- ----- ----- ----- ----- AMOCO Dividends per common stock: First quarterly................ 37.5 35.0 32.5 362 345 312 Second quarterly............... 37.5 35.0 32.5 360 349 323 Third quarterly................ 37.5 35.0 32.5 358 344 323 Fourth quarterly............... 37.5 35.0 32.5 358 344 329 ----- ----- ----- ----- ----- ----- 150.0 140.0 130.0 1,438 1,382 1,287 ----- ----- ----- ----- ----- ----- BP AMOCO Dividend per ordinary share: Fourth quarterly............... 6.119 -- -- 10.0 -- -- 968 -- -- ----- ----- ----- ----- ----- ----- ----- ----- ----- TOTAL GROUP...................... 4,121 3,452 3,007 ===== ===== =====
On an ordinary share equivalent basis, the Amoco quarterly dividends for 1998 were 9.4 cents (1997 8.8 cents and 1996 8.2 cents) NOTE 11 -- PROFIT PER ORDINARY SHARE The calculation of basic earnings per ordinary share is based on the profit attributable to ordinary shareholders i.e. profit for the year less preference dividends, related to the weighted average number of ordinary shares in issue during the year. The weighted average number of shares includes the weighted average number of Amoco common stock multiplied by the conversion ratio of 3.97:1. The profit attributable to ordinary shareholders is $3,259 million (1997 $6,029 million and 1996 $7,240 million). The average number of shares outstanding excludes the shares held by the Employee Share Ownership Plans. For BP Amoco, the calculation of diluted earnings per share is based on profit attributable to ordinary shareholders as for basic earnings per share. However, the number of shares outstanding is adjusted to show the potential dilution if employee share options are converted into ordinary shares. The number of ordinary shares outstanding for basic and diluted earnings per share may be reconciled as follows:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (millions) Weighted average number of ordinary shares.................. 9,596 9,592 9,559 Ordinary shares issuable under employee share schemes....... 42 49 43 ------- ------- ------- 9,638 9,641 9,602 ======= ======= =======
F-19 99 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 11 -- PROFIT PER ORDINARY SHARE (CONCLUDED) In addition to basic earnings per share based on the historical cost profit for the year, a further measure, based on replacement cost profit before exceptional items, is provided as it is considered that this measure gives an indication of underlying performance.
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (cents per share) Profit for the year......................................... 34 63 76 Inventory holding (gains) losses............................ 15 10 (12) ------- ------- ------- Replacement cost profit for the year........................ 49 73 64 Exceptional items, net of tax............................... (7) (4) 6 ------- ------- ------- Replacement cost profit before exceptional items............ 42 69 70 ======= ======= =======
NOTE 12 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Historical cost Profit per Group profit before ordinary turnover interest and tax Profit share -------- ---------------- ------- ---------- ($ million) (cents) Year ended December 31, 1998 First quarter................................ 17,863 1,356 650 7 Second quarter............................... 17,262 1,824 1,001 10 Third quarter................................ 17,346 2,258 1,588 17 Fourth quarter............................... 15,833 458 21 -- ------- ---------------- ------- ---------- Total........................................ 68,304 5,896 3,260 34 ======= ================ ======= ========== Year ended December 31, 1997 First quarter................................ 24,875 2,435 1,396 15 Second quarter............................... 22,374 2,497 1,438 15 Third quarter................................ 22,054 2,746 1,743 18 Fourth quarter............................... 22,457 2,477 1,453 15 ------- ---------------- ------- ---------- Total........................................ 91,760 10,155 6,030 63 ======= ================ ======= ==========
NOTE 13 -- RENTAL EXPENSE UNDER OPERATING LEASES
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Minimum rentals: Tanker charters........................................... 396 447 441 Plant and machinery....................................... 429 335 386 Land and buildings........................................ 315 268 364 ------- ------- ------- 1,140 1,050 1,191 Less: Rentals from sub-leases............................... (105) (99) (131) ------- ------- ------- 1,035 951 1,060 ======= ======= =======
F-20 100 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 14 -- RESEARCH AND DEVELOPMENT Expenditure on research and development amounted to $412 million (1997 $382 million and 1996 $369 million). NOTE 15 -- AUDITORS' REMUNERATION
Years ended December 31, --------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- UK Total UK Total UK Total ----- ----- ----- ----- ----- ----- ($ million) Audit fees -- Ernst & Young: Group audit........................................ 5.8 12.1 3.9 8.9 4.1 8.4 Local statutory audit and quarterly review......... 0.8 5.1 0.7 4.2 0.6 4.2 ----- ----- ----- ----- ----- ----- 6.6 17.2 4.6 13.1 4.7 12.6 ===== ===== ===== ===== ===== ===== Audit fees -- PricewaterhouseCoopers LLP: Group audit........................................ 0.1 2.7 0.1 2.8 0.1 2.6 Local statutory audit and quarterly review......... 0.2 0.9 0.2 1.1 0.1 1.3 ----- ----- ----- ----- ----- ----- 0.3 3.6 0.3 3.9 0.2 3.9 ===== ===== ===== ===== ===== ===== Total Group.......................................... 6.9 20.8 4.9 17.0 4.9 16.5 ===== ===== ===== ===== ===== ===== Fees for other services -- Ernst & Young: Sales of businesses and merger transaction fees.... 3.5 3.5 1.5 1.5 1.6 2.3 Consultancy, tax and other advisory services....... 5.2 21.7 3.4 16.3 4.0 18.1 ----- ----- ----- ----- ----- ----- 8.7 25.2 4.9 17.8 5.6 20.4 ===== ===== ===== ===== ===== =====
Fees to major firms of accountants other than Ernst & Young for non-audit services amounted to $181 million (1997 $175 million and 1996 $102 million). NOTE 16 -- CURRENCY EXCHANGE GAINS AND LOSSES Accounted net foreign currency exchange losses included in the determination of profit for the year amounted to $23 million (1997 $126 million loss and 1996 $11 million profit). NOTE 17 -- ACQUISITIONS During 1998 the Group acquired Styrenix Kunststoffe, a plastics business based in Germany and a number of minor refining and marketing businesses. In 1997 BP Amoco and Shell Oil completed the formation of Altura Energy, a partnership combining their oil and gas interests in west Texas and southeast New Mexico, USA, Altura Energy is consolidated within these accounts. In 1996 BP Amoco acquired the alpha-olefins and related businesses of Albemarle Corporation for $535 million. F-21 101 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 17 -- ACQUISITIONS (CONCLUDED) The cost of acquisitions in the Group cash flow statement comprises:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Goodwill.................................................... 38 -- -- Other intangible assets..................................... 1 -- -- Tangible assets............................................. 194 810 395 Fixed assets -- investments................................. 71 -- -- Working capital............................................. 27 25 140 MSI......................................................... -- (835) -- ------- ------- ------- 331 -- 535 Finance debt................................................ (17) -- -- ------- ------- ------- Cash consideration.......................................... 314 -- 535 Cash acquired............................................... -- -- -- ------- ------- ------- Net cash outflow............................................ 314 -- 535 ======= ======= =======
Investment in associated undertakings in 1997 included the acquisition of a 10% interest in A O Sidanco, a Russian integrated oil company, for $484 million. The investment in joint ventures in 1997 as well as the operational funding of the BP/Mobil joint venture included the acquisition of a 60% interest in Pan American Energy in Argentina and a 50% interest in Empresa Petrolera Chaco in Bolivia, two oil and natural gas producing companies, for $865 million. NOTE 18 -- DISPOSALS The principal divestments during 1998 were exploration and production properties in the USA and Papua New Guinea, the refinery in Lima, Ohio, the sale and leaseback of the Amoco building in Chicago, Illinois, the retail network in the Czech Republic, the Adibis fuel additives business and a speciality chemicals distribution business. In 1997 the major disposals were the sale of US exploration and production properties and an intrastate natural gas pipeline in Texas. Other divestments included oil marketing assets in Thailand and advanced materials and phenolic resin businesses in the UK. The principal disposals in 1996 were the sale of the polystyrene foam products and Carborundum businesses, the BP America office building in Cleveland, Ohio, certain Canadian exploration and production properties, the Group's interest in the undeveloped Ross field and the floating production and storage vessel Seillean. Total proceeds received for disposals represent the following amounts shown in the cash flow statement:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Proceeds from the sale of businesses........................ 780 364 827 Proceeds from the sale of fixed assets...................... 1,387 1,468 973 ------- ------- ------- 2,167 1,832 1,800 ======= ======= =======
F-22 102 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 18 -- DISPOSALS (CONCLUDED) The disposals comprise the following:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Intangible assets........................................... 151 21 67 Tangible assets............................................. 945 1,184 1,508 Fixed assets -- investments................................. 157 40 62 Working capital............................................. 88 203 355 Other....................................................... (125) (110) (135) ------- ------- ------- 1,216 1,338 1,857 Profit (loss) on sale of businesses......................... 310 250 127 Profit (loss) on sale of fixed assets....................... 653 313 (298) ------- ------- ------- Total consideration......................................... 2,179 1,901 1,686 Deferred consideration...................................... (9) (69) 137 Cash transferred on sale.................................... (3) -- (23) ------- ------- ------- Net cash inflow............................................. 2,167 1,832 1,800 ======= ======= =======
NOTE 19 -- INTANGIBLE ASSETS
Exploration Other expenditure Goodwill intangibles Total ----------- ----------- ----------- ----------- ($ million) Cost At January 1, 1998......................... 3,239 106 365 3,710 Exchange adjustments....................... (7) 3 4 -- Acquisitions............................... -- 38 1 39 Additions.................................. 1,058 1 11 1,070 Transfers.................................. (79) (6) (27) (112) Deletions.................................. (610) (3) (16) (629) ----------- ----------- ----------- ----------- At December 31, 1998....................... 3,601 139 338 4,078 =========== =========== =========== =========== Depreciation At January 1, 1998......................... 801 67 260 1,128 Exchange adjustments....................... 9 3 2 14 Charge for the year........................ 373 14 10 397 Transfers.................................. -- (4) (16) (20) Deletions.................................. (468) (1) (9) (478) ----------- ----------- ----------- ----------- At December 31, 1998....................... 715 79 247 1,041 =========== =========== =========== =========== Net book amount At December 31, 1998....................... 2,886 60 91 3,037 At December 31, 1997....................... 2,438 39 105 2,582 =========== =========== =========== ===========
F-23 103 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 20 -- TANGIBLE ASSETS Property, plant and equipment:
Other of which Exploration Refining businesses Assets and and and under Production Marketing Chemicals corporate Total construction ----------- --------- --------- ---------- ------- ------------ ($ million) Cost At January 1, 1998................. 78,862 18,306 12,645 2,070 111,883 6,183 Exchange adjustments............... 309 (181) 169 6 303 (9) Acquisitions....................... -- 17 177 -- 194 -- Additions.......................... 5,163 1,165 1,175 198 7,701 4,339 Transfers.......................... 455 (164) 195 99 585 (5,541) Deletions.......................... (1,804) (991) (183) (469) (3,447) (827) ---------- -------- -------- ---------- ------- ---------- At December 31, 1998............... 82,985 18,152 14,178 1,904 117,219 4,145 ========== ======== ======== ========== ======= ========== Depreciation At January 1, 1998................. 43,841 8,889 5,896 994 59,620 Exchange adjustments............... 334 (46) 73 2 363 Charge for the year................ 3,652 789 478 112 5,031 Transfers.......................... 127 (41) 108 48 242 Deletions.......................... (1,306) (847) (120) (229) (2,502) ---------- -------- -------- ---------- ------- At December 31, 1998............... 46,648 8,744 6,435 927 62,754 ========== ======== ======== ========== ======= Net book amount At December 31, 1998............... 36,337 9,408 7,743 977 54,465 4,145 At December 31, 1997............... 35,021 9,417 6,749 1,076 52,263 6,183 ========== ======== ======== ========== ======= ==========
Assets held under capital leases, capitalized interest and land at net book amount included above:
Leased assets Capitalized interest ------------------------------ ------------------------------ Cost Depreciation Net Cost Depreciation Net ------ ------------ ------ ------ ------------ ------ ($ million) At December 31, 1998...................... 1,887 918 969 2,843 1,661 1,182 At December 31, 1997...................... 1,949 893 1,056 2,814 1,684 1,130 ====== ========== ====== ====== ========== ======
Leasehold land --------------------------- Over 50 years Freehold land unexpired Other ------------- ------------- ----------- ($ million) At December 31, 1998................................... 963 42 29 At December 31, 1997................................... 964 41 30 =========== =========== ===========
F-24 104 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 21 -- FIXED ASSETS -- INVESTMENTS
Associated undertakings -------------------------- Share of retained Joint Own Other Shares Loans profit ventures Loans shares(a) investments(b) Total ------ ------ -------- -------- ------ --------- -------------- ------ ($ million) Cost At January 1, 1998........ 2,661 799 917 5,624 39 319 42 10,401 Exchange adjustments...... 48 1 45 148 (3) 2 4 245 Additions and net movements in joint ventures................ 244 82 (165) (752) 19 254 6 (312) Acquisitions.............. 71 -- -- -- -- -- -- 71 Transfers................. (234) (9) (7) (15) 25 -- -- (240) Deletions................. (31) (38) (7) -- -- (86) (1) (163) ------ ------ ------- ------ ------ ------ ----------- ------ At December 31, 1998...... 2,759 835 783 5,005 80 489 51 10,002 ====== ====== ======= ====== ====== ====== =========== ====== Amounts provided At January 1, 1998........ 23 -- -- -- -- -- 2 25 Exchange adjustments...... 1 -- -- -- -- -- (1) -- Provided in the year...... 200 -- -- -- -- -- -- 200 Transfers................. (3) -- -- -- 14 -- -- 11 Deletions................. (6) -- -- -- -- -- -- (6) ------ ------ ------- ------ ------ ------ ----------- ------ At December 31, 1998...... 215 -- -- -- 14 -- 1 230 ====== ====== ======= ====== ====== ====== =========== ====== Net book amount At December 31, 1998...... 2,544 835 783 5,005 66 489 50 9,772 At December 31, 1997...... 2,638 799 917 5,624 39 319 40 10,376 ====== ====== ======= ====== ====== ====== =========== ======
- - ------------ (a) Own shares are held in Employee Share Ownership Plans (ESOPs) to meet the future requirements of the Employee Share Schemes (see Note 33) and prior to award under the Long Term Performance Plan (see Note 34). At December 31, 1998 the ESOPs held 31,384,000 (18,790,000 at December 31, 1997) shares for the Employee Share Schemes and 3,133,000 (3,274,000 at December 31, 1997) shares for the Long Term Performance Plan. The market value of these shares at December 31, 1998 was $517 million ($292 million at December 31, 1997). (b) Other investments are unlisted. F-25 105 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 22 -- INVENTORIES
December 31, ------------------ 1998 1997 ------- ------- ($ million) Petroleum................................................... 1,896 3,140 Chemicals................................................... 917 1,043 Other....................................................... 174 86 ------- ------- 2,987 4,269 Stores...................................................... 655 654 ------- ------- 3,642 4,923 ======= ======= Replacement cost............................................ 3,747 4,985 ======= =======
NOTE 23 -- RECEIVABLES
December 31, 1998 December 31, 1997 ------------------ ------------------ Within After Within After 1 year 1 year 1 year 1 year ------- ------- ------- ------- ($ million) Trade receivables................................. 5,778 -- 7,725 -- ======= ======= ======= ======= Other receivables: Joint ventures.................................. 644 -- 905 -- Associated undertakings......................... 153 7 154 3 Prepayments and accrued income.................. 786 509 773 164 Taxation recoverable............................ 248 165 50 242 Pension prepayment.............................. -- 2,213 -- 1,880 Other........................................... 1,795 411 1,776 709 ------- ------- ------- ------- 3,626 3,305 3,658 2,998 ======= ======= ======= =======
Provisions for doubtful debts deducted from Trade receivables amounted to $126 million ($130 million at December 31, 1997). - - ------------ See Note 45 -- US generally accepted accounting principles. NOTE 24 -- CURRENT ASSETS -- INVESTMENTS
December 31, ------------------ 1998 1997 ------- ------- ($ million) Publicly traded -- United Kingdom........................... 48 50 -- Foreign................................. 33 31 ------- ------- 81 81 Not publicly traded......................................... 389 986 ------- ------- 470 1,067 ======= ======= Stock exchange value of publicly traded investments......... 83 81 ======= =======
F-26 106 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 25 -- FINANCE DEBT
December 31, 1998 December 31, 1997 ------------------ ------------------ Within After Within After 1 year 1 year 1 year 1 year ------- ------- ------- ------- ($ million) Bank loans and overdrafts......................... 302(a) 1,778 426(a) 1,574 Other loans....................................... 2,434(a) 7,357 2,338(a) 6,647 ------- ------- ------- ------- Total borrowings.................................. 2,736 9,135 2,764 8,221 Obligations under capital leases.................. 101 1,783 92 1,800 ------- ------- ------- ------- 2,837 10,918 2,856 10,021 ======= ======= ======= =======
- - ------------ (a) Amounts due within one year include current maturities of long-term debt. Where the liability for any borrowing is swapped into another currency the borrowing is accounted in the swap currency and not in the original currency of denomination. Total borrowings include $86 million ($113 million at December 31, 1997) for the carrying value of currency swaps. ANALYSIS OF BORROWINGS BY YEAR OF REPAYMENT
December 31, 1998 December 31, 1997 ------------------------------ ------------------------------ Bank loans Bank loans and Other and Other overdrafts loans Total overdrafts loans Total ---------- ------- ------- ---------- ------- ------- ($ million) Due after 10 years.................. 11 2,540 2,551 19 2,706 2,725 Due within 6-10 years................. 266 1,953 2,219 354 1,306 1,660 5 years.................. 201 365 566 332 1,084 1,416 4 years.................. 785 1,081 1,866 347 453 800 3 years.................. 288 652 940 301 430 731 2 years.................. 227 766 993 221 668 889 ---------- ------- ------- ---------- ------- ------- 1,778 7,357 9,135 1,574 6,647 8,221 1 year................... 302 2,434 2,736 426 2,338 2,764 ---------- ------- ------- ---------- ------- ------- 2,080 9,791 11,871 2,000 8,985 10,985 ========== ======= ======= ========== ======= =======
Amounts included above repayable by instalments part of which falls due after five years from December 31, are as follows:
December 31, ------------------ 1998 1997 ------- ------- ($ million) After five years............................................ 174 114 Within five years........................................... 406 465 ------- ------- 580 579 ======= =======
Interest rates on borrowings repayable wholly or partly more than five years from December 31, 1998 range from 3% to 10% with a weighted average of 6%. The weighted average interest rate on finance debt is 7%. F-27 107 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 25 -- FINANCE DEBT (CONTINUED) At December 31, 1998 the Group had substantial amounts of undrawn borrowing facilities available, including $2,800 million ($2,500 million at December 31, 1997) which were covered by formal commitments. These committed facilities are mainly with a number of international banks and expire in 2001. Commitment fees are paid on the unused portions of the lines of credit and borrowings would be at pre-agreed rates. Certain of these facilities support the Group's commercial paper program. ANALYSIS OF BORROWINGS BY CURRENCY
December 31, December 31, 1998 1997 ----------------------------------------------------------------------------- ------------ Fixed rate debt Floating rate debt -------------------------------------- ---------------------- Weighted Weighted Weighted average average time average interest for which interest rate rate is fixed Amount rate Amount Total Total -------- ------------- ----------- -------- ----------- ----------- ------------ (%) (Years) ($ million) % ($ million) ($ million) ($ million) US dollars............... 7 10 7,392 5 3,460 10,852 9,993 Sterling................. -- -- -- 6 613 613 679 South African rands...... -- -- -- 15 42 42 63 Other currencies......... 7 9 189 7 175 364 250 ----------- ----------- ----------- ----------- Total loans.............. 7,581 4,290 11,871 10,985 =========== =========== =========== ===========
The Group aims for a balance between floating and fixed interest rates and, in 1998, BP's upper limit for the proportion of floating rate debt was 65% of total net debt while Amoco's upper limit was 60% of total debt outstanding. Aside from debt issued in the US municipal bond markets, interest rates on floating rate debt denominated in US dollars are linked principally to LIBOR, while rates on debt in other currencies are based on local market equivalents. The Group monitors interest rate risk using a process of sensitivity analysis. Assuming no changes to the borrowings and hedges described above, it is estimated that a change of 1% in the general level of interest rates on January 1, 1999 would change 1999 profit before tax by approximately $55 million. FAIR VALUES AND CARRYING AMOUNTS OF BORROWINGS
December 31, ------------------------------------------------ 1998 1997 ---------------------- ---------------------- Carrying Carrying Fair value amount Fair value amount ---------- -------- ---------- -------- ($ million) Short-term borrowings............................. 1,659 1,659 1,817 1,817 Long-term borrowings.............................. 10,555 10,126 9,319 9,055 ---------- -------- ---------- -------- Total borrowings.................................. 12,214 11,785 11,136 10,872 ========== ======== ========== ========
The fair value and carrying amounts of borrowings shown above exclude the effects of currency swaps (which are included for presentation in the balance sheet). Long-term borrowings include debt which matures in the year from December 31, 1998, whereas in the balance sheet long-term debt of current maturity is reported under amounts falling due within one year. The carrying amount of the Group's short-term borrowings, which mainly comprise commercial paper, bank loans and overdrafts, approximate their fair value. The fair value of the Group's long-term borrowings are estimated using quoted prices or, F-28 108 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 25 -- FINANCE DEBT (CONTINUED) where these are not available, discounted cash flow analyses, based on the Group's current incremental borrowing rates for similar types and maturities of borrowing. OBLIGATIONS UNDER CAPITAL LEASES The future minimum lease payments together with the present value of the net minimum lease payments were as follows:
December 31, 1998 ------------ ($ million) 1999........................................................ 119 2000........................................................ 185 2001........................................................ 193 2002........................................................ 184 2003........................................................ 174 Thereafter.................................................. 3,882 ------------ 4,737 Less: amount representing lease interest.................... 2,853 ------------ Present value of net minimum capital lease payments......... 1,884 ============ of which -- due within one year............................. 101 -- due after one year............................. 1,783 ------------
The following information is presented in compliance with the requirements of US GAAP. Bank loans and overdrafts and other loans -- long term
Weighted average December 31, interest rate at -------------------------- December 31, 1998 1998 1997 ----------------- ------- ------- (%) ($ million) Sterling.................................... 6 486 504 US dollars.................................. 7 8,457 7,469 South African rands......................... 15 34 53 Other currencies............................ 7 158 195 ------- ------- 9,135 8,221 ======= =======
Bank loans and overdrafts and other loans -- short term
December 31, -------------------------- 1998 1997 ------- ------- ($ million) Current maturities of long-term debt....................... 1,077 920 Commercial paper........................................... 1,333 1,583 Bank loans and overdrafts.................................. 300 228 Other...................................................... 26 33 ------- ------- 2,736 2,764 ======= =======
F-29 109 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 25 -- FINANCE DEBT (CONCLUDED)
Weighted average interest rate at December 31, ------------------ 1998 1997 ------- ------- (%) Commercial paper............................................ 5 6 Bank loans, overdrafts and other borrowings................. 7 7
NOTE 26 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
December 31, 1998 December 31, 1997 ------------------ ------------------ Within After Within After 1 year 1 year 1 year 1 year ------- ------- ------- ------- ($ million) Trade payables.................................... 5,091 -- 5,854 -- ======= ======= ======= ======= Other accounts payable and accrued liabilities: Joint ventures.................................. 205 -- 241 -- Associated undertakings......................... 154 4 272 2 Production taxes................................ 241 1,300 408 1,564 Taxation on profits............................. 2,395 39 3,034 -- Social security................................. 14 -- 26 -- Accruals and deferred income.................... 2,642 454 2,928 417 Dividends....................................... 1,552 -- 1,074 -- Other........................................... 3,035 312 3,834 579 ------- ------- ------- ------- 10,238 2,109 11,817 2,562 ======= ======= ======= =======
NOTE 27 -- OTHER PROVISIONS
Unfunded Other pension postretirement Decommissioning Environmental plans benefits Other Total --------------- ------------- -------- -------------- ----- ----- ($ million) At January 1, 1998.............. 3,201 1,452 1,526 2,348 279 8,806 Exchange adjustments............ 10 2 99 -- -- 111 Charged to income............... 130 13 195 101 68 507 Utilized/deleted................ (31) (310) (53) (138) (75) (607) --------------- ------------- -------- -------------- ----- ----- At December 31, 1998............ 3,310 1,157 1,767 2,311 272 8,817 =============== ============= ======== ============== ===== =====
NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business the Group is a party to derivative financial instruments (derivatives) with off-balance sheet risk, primarily to manage its exposure to fluctuations in foreign currency exchange rates and interest rates, including management of the balance between floating rate and fixed rate debt. The Group also manages its exposure to some movements in oil and natural gas prices. The underlying economic currency of the Group's cash flows is mainly US dollars. Accordingly, most of our borrowings are in US dollars, are hedged with respect to the US dollar or swapped into dollars where this achieves a lower cost of financing. Significant non-dollar cash flow exposures are hedged. Gains and losses arising on these hedges are deferred and recognized in the income statement or as adjustments to carrying amounts, as appropriate, only when the hedged item occurs. In addition, we trade derivatives in F-30 110 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) conjunction with these risk management activities. The results of trading are recognized in the current period. These derivatives involve, to varying degrees, credit and market risk. With regard to credit risk, the Group may be exposed to loss in the event of non-performance by a counterparty. The Group controls credit risk by entering into derivative contracts only with highly credit-rated counterparties and through credit approvals, limits and monitoring procedures and does not usually require collateral or other security. The Group has not experienced material non-performance by any counterparty. Market risk is the possibility that a change in interest rates, currency exchange rates or oil and natural gas prices will cause the value of a financial instrument to decrease or its obligations to become more costly to settle. When derivatives are used for the purpose of risk management they do not expose the Group to market risk because the exposure to market risk created by the derivative is offset by the opposite exposure arising from the asset, liability or transaction being hedged. When derivatives are held for trading purposes, the exposure of the Group to market risk is represented by potential changes in their fair (market) values. The measurement of market risk in trading activities is discussed further below. The table shows the 'fair value' of the asset or liability created by derivatives. This represents the market value at the balance sheet date. Credit exposure at December 31 is represented by the column 'fair value asset'. The table also shows the 'net carrying amount' of the asset or liability created by derivatives. This amount represents the net book value, i.e. market value when acquired or later marked to market.
Gross Net carrying contract Fair value Fair value amount asset amount asset (liability) (liability) -------- ---------- ----------- ------------ ($ million) AT DECEMBER 31, 1998 Risk management Interest rate contracts..................... 5,866 69 (328) (45) Foreign exchange contracts.................. 8,908 181 (160) (75) Oil price contracts......................... 491 12 (5) 7 Natural gas price contracts................. 1,511 51 (44) -- Trading Interest rate contracts..................... 189 -- -- -- Foreign exchange contracts.................. 9,441 30 (39) (9) Oil price contracts......................... 4,038 134 (123) 11 AT DECEMBER 31, 1997 Risk management Interest rate contracts..................... 4,779 54 (240) (53) Foreign exchange contracts.................. 11,410 153 (187) 126 Oil price contracts......................... 628 20 (25) (5) Natural gas price contracts................. 763 20 (20) -- Trading Interest rate contracts..................... 747 1 (7) (6) Foreign exchange contracts.................. 4,094 42 (40) 2 Oil price contracts......................... 4,707 160 (114) 46
F-31 111 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Interest rate contracts include forward and futures contracts, swap agreements and options. Foreign exchange contracts include forward and futures contracts, swap agreements and options. Oil and natural gas price contracts are those which require settlement in cash and include futures contracts, swap agreements and options. The following table shows the average net fair value of derivatives and other financial instruments held for trading purposes during the year.
Years ended December 31, -------------------------------------- 1998 1997 ----------------- ----------------- Average net Average net fair value fair value asset (liability) asset (liability) ----------------- ----------------- ($ million) Interest rate contracts..................................... (8) (3) Foreign exchange contracts.................................. 21 1 Oil price contracts......................................... 54 24 ----------------- ----------------- 67 22 ================= =================
The Group measures its market risk exposure, i.e. potential gain or loss in fair values, on its trading activity using a value at risk technique. This technique is based on a variance/covariance model and makes a statistical assessment of the market risk arising from possible future changes in market values over a 24-hour period. The calculation of the range of potential changes in fair value takes into account a snapshot of the end-of-day exposures, and the history of one-day price movements over the previous twelve months, together with the correlation of these price movements. The potential movement in fair values is expressed to three standard deviations which is equivalent to a 99.7% confidence level. This means that, in broad terms, one would expect to see an increase or a decrease in fair values greater than the value at risk on only one occasion per year if the portfolio were left unchanged. The Group calculates value at risk on all instruments that are held for trading purposes and that therefore give an exposure to market risk. The value at risk model takes account of derivative financial instruments such as interest rate forward and futures contracts, swap agreements, options and swaptions, foreign exchange forward and futures contracts, swap agreements and options and oil price futures, swap agreements and options. Financial assets and liabilities and physical crude oil and refined products that are treated as trading positions are also included in these calculations. The value at risk calculation for oil price exposure also includes derivative commodity instruments (commodity contracts that permit settlement either by delivery of the underlying commodity or in cash), such as forward contracts. The following table shows values at risk for trading activities.
Years ended December 31, ---------------------------------------------------------------- 1998 1997 ----------------------------------------- ------------------- High Low Average Year end Average Year end ------- ------- ------- -------- ------- -------- ($ million) Interest rate contracts...... 6 -- 2 -- 3 2 Foreign exchange contracts... 6 -- 4 -- 3 2 Oil price contracts.......... 13 4 8 12 6 4
In the light of evolving disclosure requirements in both the UK and the USA, the presentation of trading results shown below includes certain activities of the Group's oil trading division which involve the F-32 112 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) use of derivative financial instruments in conjunction with physical and paper trading of oil. It is considered that a more comprehensive representation of the Group's oil trading activities is given by the classification of the gains or losses on such derivatives along with the physical and paper trades to which they relate. The following table shows the trading income arising from derivatives and other financial instruments. For oil price contract trading, this also includes income or losses arising on trading of derivative commodity instruments and physical oil trades, representing the net result of the oil-trading portfolio.
Years ended December 31, -------------------- 1998 1997 -------- -------- Net gain (loss) Net gain -------- -------- ($ million) Interest rate contracts..................................... (26) 2 Foreign exchange contracts.................................. 38 23 Oil price contracts......................................... 215 144 -------- -------- 227 169 ======== ========
FURTHER INFORMATION ON ACCOUNTING POLICIES The following information is presented in amplification of the accounting policies presented in Note 1 -- Accounting policies. The Group accounts for derivatives using the following methods: (a) The fair value method, whereby derivatives are carried on the balance sheet at fair value ('marked to market') with changes in that value recognized in earnings of the period, is used for all derivatives which are held for trading purposes. Interest rate contracts traded by the Group include futures, swaps, options and swaptions. Foreign exchange contracts traded include forwards and options. Oil price contracts traded include swaps, options and futures. The fair value method is also used for all oil price derivatives held for risk management purposes, such as swaps, options and futures. (b) The accrual method, whereby amounts payable or receivable in respect of derivatives are recognized in earnings over the period of the contracts, is used for derivatives held to manage interest rate risk. These are principally swap agreements used to manage the balance between fixed and floating interest rates on long-term finance debt. Other derivatives held for this purpose may include swaptions and futures contracts. Changes in the derivative's fair value are not recognized. (c) The deferral method, whereby gains and losses from the derivatives are deferred and recognized in earnings or as adjustments to carrying amounts, as appropriate, when the underlying debt matures or the hedged transaction occurs, is used for derivatives used to convert non-US dollar borrowings into US dollars, and for derivatives and related option premia which are used to hedge significant non-US dollar firm commitments or anticipated transactions. Derivatives used to convert non-US dollar borrowings into US dollars include foreign currency swap agreements and forward contracts. Derivatives used to hedge significant non-US dollar transactions include foreign currency forward contracts and options. The deferral method is also used for derivatives used to manage some of the Group's exposure to natural gas price fluctuations. F-33 113 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) DETERMINATION OF ACCOUNTING METHOD All oil price derivatives, whether held for trading purposes or for risk management, are accounted for using the fair value method. The primary criterion applied to determine the accounting method to be used for interest rate, natural gas price and foreign currency exchange rate derivatives is the purpose for which the contract is entered into. The purpose of the contract is identified at inception. To qualify as a derivative for interest rate, natural gas price, or for foreign currency exchange rate risk management, the contract must be in accordance with established guidelines which ensure that it is effective in achieving its objective. The corresponding accounting method, as described above, is applied to the contract. All contracts not identified at inception as being for the purpose of risk management are designated as trading derivatives and accounted for using the fair value method. TERMINATION Where derivatives used to manage interest rate risk or to convert non-US dollar debt or to hedge other anticipated cash flows are terminated before the underlying debt matures or the hedged transaction occurs, the resulting gain or loss is recognized on a basis which matches the timing and accounting treatment of the underlying debt or hedged transaction. When an anticipated transaction or finance debt hedged by a derivative is no longer likely to occur or is terminated before maturity, as appropriate, any deferred gain or loss that has arisen on the derivative is recognized in the income statement together with any gain or loss on the terminated item. REPORTING IN THE INCOME STATEMENT Gains and losses on oil price contracts held for trading and for risk management purposes are reported in cost of sales in the income statement in the period in which the change in value occurs. Gains and losses on interest rate or foreign currency derivatives used for trading are reported in other income and cost of sales, respectively. Gains and losses in respect of derivatives used to manage interest rate exposures are recognized as adjustments to interest expense. Where derivatives are used to convert non-US dollar borrowing into US dollars, the gains and losses are deferred and recognized on maturity of the underlying debt, together with the matching loss or gain on the debt. The two amounts offset each other in the income statement. Gains and losses on derivatives identified as hedges of significant non-US dollar firm commitments or anticipated transactions are not recognized until the hedged transaction occurs. The treatment of the gain or loss arising on the designated derivative reflects the nature and accounting treatment of the hedged item. The gain or loss is recorded in cost of sales in the income statement or as an adjustment to carrying values in the balance sheet, as appropriate. Gains and losses arising from natural gas price derivatives are recognized in earnings when the hedged transaction occurs. The gains or losses are reported as components of the related transactions. REPORTING IN THE BALANCE SHEET The carrying amounts of foreign exchange contracts that hedge finance debt are included within finance debt in the balance sheet. The carrying amounts of other derivatives, including option premiums paid or received, are included in the balance sheet under receivables or payables within current assets and current liabilities respectively, as appropriate. F-34 114 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) CASH FLOW EFFECTS Interest rate swaps give rise, at specified intervals, to cash settlement of interest differentials. Under currency swaps the counterparties initially exchange a principal amount in two currencies, agreeing to re-exchange the currencies at a future date at the same exchange rate. The Group's currency swaps have terms of between one and five years. Interest rate futures require an initial margin payment and daily settlement of margin calls. Interest rate forwards require settlement of the interest rate differential on a specified future date. Currency forwards require purchase or sale of an agreed amount of foreign currency at a specified exchange rate at a specified future date, generally over periods of up to one year for the Group. Currency options involve the initial payment or receipt of a premium and will give rise to delivery of an agreed amount of currency at a specified future date if the option is exercised. For oil and natural gas price futures and options traded on regulated exchanges, BP Amoco meets initial margin requirements by bank guarantees and daily margin calls in cash. For swaps and over-the-counter options, BP Amoco settles with the counterparty on conclusion of the pricing period. In the statement of cash flows the effect of interest rate derivatives is reflected in interest paid. The effect of foreign currency derivatives used for hedging non-US dollar debt is included under financing. The cash flow effects of foreign currency derivatives used to hedge non-US dollar firm commitments and anticipated transactions are included in net cash inflow from operating activities for items relating to earnings or in capital expenditure or acquisitions, as appropriate, for items of a capital nature. The cash flow effects of all oil and natural gas price derivatives and all traded derivatives are included in net cash inflow from operating activities. FAIR VALUE OF FINANCIAL INSTRUMENTS The following information is presented in compliance with the requirements of FASB Statement of Financial Accounting Standards No. 107 -- 'Disclosures about Fair Value of Financial Instruments'. The carrying amounts and fair values of finance debt are as follows:
December 31, ------------------------------------------ 1998 1997 ------------------- ------------------- Carrying Fair Carrying Fair amount value amount value -------- ------- -------- ------- ($ million) Finance debt Long-term....................................... 10,126 10,555 9,055 9,319 Short-term...................................... 1,659 1,659 1,817 1,817
The carrying amounts and fair values of finance debt shown above exclude the effects of currency swaps (which are included for presentation in the balance sheet). Current maturities of long-term finance debt are included under long-term finance debt above. The following methods and assumptions were used by the Group in estimating its fair value disclosures for its financial instruments: Cash at bank and in hand: The carrying amount reported in the balance sheet for cash at bank and in hand approximates its fair value. Finance debt: The carrying amount of the Group's short-term borrowings, which mainly comprise commercial paper, bank loans and overdrafts, approximate their fair value. The fair value of the Group's F-35 115 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) long-term debt borrowings is estimated using quoted prices or, where these are not available, discounted cash flow analyses, based on the Group's current incremental borrowing rates for similar types and maturities of borrowing. Derivative financial instruments: The fair values of the Group's interest rate contracts (futures contracts and swap agreements) are based on quoted prices (futures) and pricing models which take into account relevant market data (swaps and swaptions). Fair values for the Group's foreign exchange contracts (forward contracts, swap agreements and options) are based on market prices of comparable instruments. The fair values of the Group's oil and natural gas price contracts (futures contracts, swap agreements and options) are based on market prices. The following information is presented in compliance with the requirements of FASB Statement of Financial Accounting Standards No. 119 -- 'Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments'. The carrying amounts of foreign exchange contracts that hedge finance debt are included within finance debt in the balance sheet. The carrying amounts of other derivatives are included in the balance sheet under receivables or payables as appropriate. In addition to the above financial instruments, the Group has issued third party guarantees and indemnities amounting to $436 million ($392 million at December 31, 1997). The credit risk and maximum cash requirement of these guarantees and indemnities is the full contractual amount, however no material loss is expected to arise. INTEREST RATE RISK MANAGEMENT The Group enters into interest rate contracts to manage its cost of borrowing as indicated in the following table:
December 31, 1998 December 31, 1997 -------------------------------- -------------------------------- Gross Fair Fair Gross Fair Fair contract value value contract value value amount asset liability amount asset liability -------- ------- --------- -------- ------- --------- ($ million) Swaps........................ 5,866 69 (328) 4,779 54 (240) ======= ======= ======= ======= ======= =======
Interest rate swaps allow BP Amoco to modify the interest characteristics of its long-term borrowings from a fixed to a floating rate basis or vice versa. Under interest rate swaps, the Group agrees with other parties to exchange, at specified intervals, the interest differentials calculated by reference to an agreed notional principal amount. There is no exchange of the underlying principal amount. F-36 116 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) The following table indicates the types of swaps used and their weighted average interest rates. Average variable rates are based on the actual rates in place at December 31; these may change significantly, affecting future cash flows. Swap contracts mainly have maturities between one and ten years.
December 31, ------------------ 1998 1997 ------- ------- ($ million, except percentages) Receive -- fixed swaps -- notional amount................... 2,125 2,076 Average receive fixed rate.................................. 6.6% 7.1% Average pay floating rate................................... 5.4% 5.8% Pay -- fixed swaps -- notional amount....................... 3,741 2,703 Average pay fixed rate...................................... 7.3% 8.0% Average receive floating rate............................... 5.3% 5.9%
Interest rate futures contracts may be used by the Group, on occasion, in preference to interest rate swaps to achieve a more cost effective method of managing the mix between fixed and floating rate debt. These contracts are commitments to either purchase or sell designated financial instruments at a future date for a specified price, and may be settled in cash or through delivery. The Group holds highly liquid contracts, such as Eurodollar futures, with terms ranging up to a year. Initial margin requirements and daily calls are met either by the deposit of securities or in cash. Futures contracts have little credit risk as regulated exchanges are the counterparties. Interest rate forward contracts, which include forward rate agreements and options on forward rate agreements, may also be used by the Group to manage interest rate risk on debt. These contracts are agreements which allow the interest rate cost on a principal amount to be fixed for a specified period commencing on a future date. Swaptions may also be employed to manage interest rate risk on debt. A swaption is an agreement that conveys the right, but not the obligation, to swap a series of fixed rate interest payments for floating rate interest payments, or vice versa, at a given future point in time. Typically the swaptions entered into by the Group are cash settled at expiry. FOREIGN EXCHANGE RISK MANAGEMENT The Group enters into various types of foreign exchange contracts in managing its foreign exchange risk as indicated in the following table:
December 31, 1998 December 31, 1997 -------------------------------- -------------------------------- Gross Fair Fair Gross Fair Fair contract value value contract value value amount asset liability amount asset liability -------- ------- --------- -------- ------- --------- ($ million) Currency swaps............... 1,797 99 (107) 1,690 84 (119) Forwards..................... 4,046 63 (38) 4,816 43 (41) Options...................... 3,065 19 (15) 4,904 26 (27) ------- ------- ------- ------- ------- ------- 8,908 181 (160) 11,410 153 (187) ======= ======= ======= ======= ======= =======
The Group's foreign exchange management policy is to minimize economic exposures from currency movements against the US dollar. This is achieved by raising finance in US dollars, hedging with respect to the US dollar or swapping into US dollars where this achieves a lower cost of financing, and hedging F-37 117 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) significant non-dollar cash flows. Examples of significant non-dollar cash flows are sterling tax payments and capital expenditure and operational requirements of Exploration in the UK. Under currency swaps the counterparties initially exchange a principal amount in two currencies, agreeing to re-exchange the currencies at a future date and at the same exchange rate. In addition, interest payments in the respective currencies are exchanged at specified intervals over the term of the agreement. The Group's currency swaps have terms between one and seven years. The majority of the Group's currency swaps relate to major currencies such as Sterling, Deutschmarks, Swiss Francs and Japanese Yen. Currency forward contracts are commitments to purchase or sell an agreed amount of foreign currency at a specified exchange rate at a specified future date. The Group's forward contracts are generally settled over periods of up to one year. Currency options, which are normally directly negotiated, allow but do not require, the holder to buy from or sell to the writer an agreed amount of currency at a specified exchange rate within a stated period, and involve the initial payment or receipt of a premium. The Group's option contracts have an average term of less than one year. Included in currency options are currency cylinder option contracts. A cylinder is the purchase of an option to buy foreign currency and the simultaneous selling of an option to sell the same amount of foreign currency to BP Amoco at a different exchange rate. The effect is to limit the risk of both gain and loss. This is achieved at little or no cost as the symmetry of the options means that the premium paid for one option is balanced by the premium received from the sale of the other. OIL AND NATURAL GAS PRICE RISK MANAGEMENT The Group enters into various types of oil and natural gas price contracts to manage its exposure to some movements in hydrocarbon prices as indicated in the following table. Contracts which are capable of being settled by delivery of oil, oil products or natural gas are excluded.
December 31, 1998 December 31, 1997 ---------------------------------- ---------------------------------- Gross Fair Fair Gross Fair Fair contract value value contract value value amount asset (liability) amount asset (liability) -------- ------- ----------- -------- ------- ----------- ($ million) Oil Swaps...................... 421 12 (5) 544 20 (25) Options.................... -- -- -- 1 -- -- Futures.................... 70 -- -- 83 -- -- ------- ------- ------- ------- ------- ------- 491 12 (5) 628 20 (25) ======= ======= ======= ======= ======= ======= Natural gas Swaps...................... 1,478 48 (43) 719 20 (20) Options.................... 33 3 (1) 38 -- -- Futures.................... -- -- -- 6 -- -- ------- ------- ------- ------- ------- ------- 1,511 51 (44) 763 20 (20) ======= ======= ======= ======= ======= =======
The Group uses swaps, options and futures to hedge future purchases and sales of crude oil and refined oil products. The term of the oil price derivatives is usually less than one year. Natural gas swaps, options and futures are used to convert specific sales and purchase contracts from fixed prices to market F-38 118 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) prices. Swaps are also used to hedge exposure for price differentials between locations. The term of most natural gas price derivatives is less than one year, with some having terms of two years. Under swaps, BP Amoco agrees with other parties to pay or receive the difference between a fixed and variable price at a range of specified dates determined by reference to an agreed notional volume. The option and futures contracts are traded on regulated exchanges. Exchange-traded options allow, but do not require, the holder to either buy from or sell to the writer an agreed amount of futures contracts at a specified price at a specified future date. Futures are fixed price commitments to purchase or sell a contract, whose value is derived from the price of oil at a specified future date. Initial margin requirements and daily cash settlements for both these types of contracts are met either by bank guarantees or in cash. There is little credit risk under these contracts as regulated exchanges are the counterparties. TRADING ACTIVITIES The Group maintains active trading positions in a variety of derivatives. This activity is undertaken in conjunction with risk management. Derivatives held for trading purposes are marked to market and any gain or loss recognized in the income statement. For traded derivatives, many positions have been neutralized, with trading initiatives being concluded by taking opposite positions to fix a gain or loss, thereby achieving a zero net market risk. The following table discloses the contract or notional amount and fair value of the derivatives held for trading purposes at December 31, 1998 and 1997 and the average fair value for the year.
1998 1997 -------------------------------------- -------------------------------------- Net Average Net Average Gross fair value fair value Gross fair value fair value contract asset asset contract asset asset amount (liability) (liability) amount (liability) (liability) -------- ----------- ----------- -------- ----------- ----------- ($ million) Interest rate contracts Swaps...................... -- -- -- 50 -- -- Futures.................... 185 -- (1) 42 -- -- Options.................... 4 -- -- 375 -- -- Swaptions.................. -- -- (7) 280 (6) (3) ------- ------- ------- ------- ------- ------- 189 -- (8) 747 (6) (3) ======= ======= ======= ======= ======= ======= Foreign exchange contracts Forwards................... 3,012 (9) 23 2,438 1 (2) Options.................... 6,429 -- (2) 1,656 1 3 ------- ------- ------- ------- ------- ------- 9,441 (9) 21 4,094 2 1 ======= ======= ======= ======= ======= ======= Oil price contracts Swaps...................... 3,460 11 54 4,011 46 24 Futures.................... 413 -- -- 608 -- -- Options.................... 165 -- -- 88 -- -- ------- ------- ------- ------- ------- ------- 4,038 11 54 4,707 46 24 ======= ======= ======= ======= ======= =======
F-39 119 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 28 -- DERIVATIVE FINANCIAL INSTRUMENTS (CONCLUDED) CONCENTRATIONS OF CREDIT RISK The primary activities of the Group are oil and gas exploration and production, oil refining and marketing and the manufacture and marketing of chemicals. The Group's principal customers, suppliers and financial institutions with which it conducts business are located throughout the world. The credit ratings of interest rate and currency swap counterparties are all of a quality equal to or better than BP Amoco's when agreed. The credit quality is actively managed over the life of the swap. NOTE 29 -- CAPITAL AND RESERVES
Paid Share in Merger Retained capital surplus reserve earnings Total ------- ------- ------- -------- ------- ($ million) At January 1, 1998.......................... 4,330 3,777 650 32,991 41,748 Employee share schemes -- Amoco............. 8 -- 97 -- 105 Employee share schemes -- BP................ 5 117 -- (42) 80 Share dividend plan -- BP................... 46 (46) -- 1,243 1,243 Share repurchases -- Amoco.................. (27) -- (50) (507) (584) Redenomination of BP shares into US dollars................................... 484 (484) -- -- -- Profit for the year......................... -- -- -- 3,260 3,260 Dividends................................... -- -- -- (4,121) (4,121) Exchange adjustment......................... 17 22 -- 16 55 ------- ------- ------- ------- ------- At December 31, 1998........................ 4,863 3,386 697 32,840 41,786 ======= ======= ======= ======= =======
The movements in the Group's share capital during the year are set out above. All movements are quantified in terms of the number of BP Amoco shares issued or repurchased. EMPLOYEE SHARE SCHEMES. During the year 13,069,529 ordinary shares were issued under the BP employee share schemes and 16,763,559 under Amoco employee share option and other employee benefit schemes. Certain of these shares were issued via a QUEST. See Note 33 for further details. SHARE DIVIDEND PLAN. 110,285,094 ordinary shares were issued under the share dividend plan by capitalization of the paid in surplus. SHARE REPURCHASE. Prior to the announcement of the merger Amoco repurchased 54,900,795 shares for a total consideration of $584 million. REDENOMINATION OF BP SHARES INTO US DOLLARS. The increase in the nominal value of the ordinary shares for existing BP shareholders from 25 pence to 50 cents was effected by transferring $484 million from the paid in surplus. NOTE 30 -- RETAINED EARNINGS Retained earnings of $32,840 million ($32,991 million at December 31, 1997) include the following amounts, the distribution of which is limited by statutory or other restrictions: F-40 120 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 30 -- RETAINED EARNINGS (CONCLUDED)
December 31, ------------------ 1998 1997 ------- ------- ($ million) Parent company.............................................. 16 16 Subsidiary undertakings..................................... 4,196 4,425 Associated undertakings..................................... 1,162 1,144 ------- ------- 5,374 5,585 ======= =======
Cumulative net exchange losses of $453 million are included in retained earnings ($508 million losses at December 31, 1997). There were no unrealized currency translation differences for the year on long-term borrowings used to finance equity investments in foreign currencies (1997 unrealized losses of $2 million and 1996 unrealized losses of $2 million). NOTE 31 -- ANALYSIS OF CONSOLIDATED STATEMENT OF CASH FLOWS (I) RECONCILIATION OF HISTORICAL COST PROFIT BEFORE INTEREST AND TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Year ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Historical cost profit before interest and tax.............. 5,896 10,155 11,013 Depreciation and amounts provided........................... 5,255 5,056 5,369 Exploration expenditure written off......................... 373 365 574 Share of (profits) losses of joint ventures and associated undertakings.............................................. (1,102) (777) (663) Interest and other income................................... (272) (255) (247) (Profit) loss on sale of businesses and fixed assets........ (963) (563) 171 Charge for provisions....................................... 507 582 601 Utilization of provisions................................... (460) (401) (460) Decrease (increase) in inventories.......................... 584 1,740 (1,261) Decrease (increase) in receivables.......................... 1,768 2,033 (3,551) (Decrease) increase in payables............................. (2,000) (2,377) 2,133 ------- ------- ------- Net cash inflow from operating activities................... 9,586 15,558 13,679 ======= ======= =======
(II) EXCEPTIONAL ITEMS The cash outflow relating to the merger expenses charged in 1998 was $32 million. The cash outflow in respect of the European refining and marketing joint venture implementation costs charged in 1996 was $122 million (1997 $307 million and 1996 $69 million). These amounts were included in the net cash inflow from operating activities. F-41 121 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 31 -- ANALYSIS OF CONSOLIDATED STATEMENT OF CASH FLOWS (CONCLUDED) (III) FINANCING
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Long-term borrowing......................................... (2,196) (1,179) (398) Repayments of long-term borrowing........................... 1,217 884 2,421 Short-term borrowing........................................ (513) (1,285) (1,503) Repayments of short-term borrowing.......................... 692 1,342 381 ------- ------- ------- (800) (238) 901 Issue of share capital...................................... (161) (172) (112) Repurchase of share capital................................. 584 1,422 39 ------- ------- ------- Net cash (inflow) outflow................................... (377) 1,012 828 ======= ======= =======
(IV) MANAGEMENT OF LIQUID RESOURCES Liquid resources comprise current asset investments which are principally commercial paper issued by other companies. The net cash inflow from the management of liquid resources was $596 million (1997 $167 million and 1996 $147 million). (V) COMMERCIAL PAPER Net movements in commercial paper are included within short-term borrowings or repayment of short-term borrowings as appropriate. (VI) MOVEMENT IN NET DEBT
Years ended December 31, ------------------------------------------------------------------------------------- 1998 1997 ----------------------------------------- ----------------------------------------- Current Current Finance asset Net Finance asset Net debt Cash investments debt debt Cash investments debt ------- ------- ----------- ------- ------- ------- ----------- ------- ($ million) At January 1.............. (12,877) 355 1,067 (11,455) (12,848) 347 1,233 (11,268) Net cash flow............. (800) 67 (596) (1,329) (238) 33 (167) (372) Other movements........... (53) -- -- (53) 133 -- 5 138 Exchange adjustments...... (25) (17) (1) (43) 76 (25) (4) 47 ------- ------- ----------- ------- ------- ------- ----------- ------- At December 31............ (13,755) 405 470 (12,880) (12,877) 355 1,067 (11,455) ======= ======= =========== ======= ======= ======= =========== =======
F-42 122 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 32 -- OPERATING LEASE COMMITMENTS Annual commitments under operating leases were as follows:
December 31, -------------------------------------------- 1998 1997 -------------------- -------------------- Land and Land and buildings Other buildings Other --------- ------- --------- ------- ($ million) Expiring within: 1 year......................... 50 149 23 140 2 to 5 years.................. 92 432 106 405 Thereafter.................... 174 99 165 74 -------- ------- -------- ------- 316 680 294 619 ======== ======= ======== =======
The future minimum lease payments (after deducting related rental income from operating sub-leases of $466 million) were as follows:
December 31, 1998 ------------ ($ million) 1999........................................................ 909 2000........................................................ 661 2001........................................................ 578 2002........................................................ 492 2003........................................................ 316 Thereafter.................................................. 1,868 ------------ 4,824 ============
NOTE 33 -- EMPLOYEE SHARE SCHEMES During 1998 BP and Amoco operated share schemes for their employees. However, the arrangements of the two companies differed reflecting market practice in the UK and the USA. Consequently the arrangements of each company are described separately. A review will be undertaken during 1999 in order to formulate an integrated employee share ownership strategy for BP Amoco. At the extraordinary general meeting in November 1998 shareholders approved a new discretionary share option plan (the BP Amoco Share Option Plan). BP offered its employees and those of most of its principal operating companies the opportunity to acquire a shareholding in the Company. Scheme design varied by country, reflecting local legislation, culture and employment practice. There were two categories of scheme: those which were generally available to most staff (e.g. the Participating and Savings Related Share Option Schemes in the UK) and those for defined categories of staff (e.g. the Executive Share Option Scheme (ESOS) for middle managers). Under participating schemes, the Company matched employees' own contributions of shares, all of which were then held for defined periods. With savings-related schemes, employees saved regularly toward the purchase of shares at a price fixed when their savings contract commenced. The ESOS offered middle managers the opportunity to exercise share options between the third and tenth anniversaries of the date of grant, at the market price set at the time of grant. Grants made since 1995 under the ESOS will not be exercisable until a performance condition has been satisfied. Before any options can be exercised, the Remuneration Committee will require the total return to shareholders (share price increase with all dividends reinvested) on an investment in BP Amoco shares to exceed the mean total return to F-43 123 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 33 -- EMPLOYEE SHARE SCHEMES (CONTINUED) shareholders of a representative group of UK companies by a margin set from time to time by the committee. The performance period for each grant will normally be three years. An Employee Share Ownership Plan (ESOP) has been established to acquire BP Amoco shares to satisfy future requirements of certain employee share schemes. Funding is provided to the ESOP by the Company. The assets and liabilities of the ESOP are recognized as assets and liabilities of the Company within these accounts. The ESOP has waived its rights to dividends. During 1998 the ESOP acquired a further 16,853,000 shares and released 4,259,000 shares for the participating share schemes. The cost of shares released for these schemes has been charged in these accounts. At December 31, 1998 the ESOP held 31,384,000 shares (December 31, 1997, 18,790,000). In January 1998 BP established a Qualifying Employee Share Ownership Trust (QUEST) for the purpose of share option schemes for employees and executive directors of the Company and its subsidiaries. During the year, contributions of $42 million were made by the Company to the QUEST which, together with option-holder contributions, were used by the QUEST to subscribe for new ordinary shares at market price. The cost of this contribution has been transferred by the Company directly to retained profits and the excess of the subscription price over nominal value has increased the paid in surplus. At December 31, 1998, all the 4,825,188 ordinary shares issued to the QUEST had been transferred to option holders exercising options under the BP Group Savings Related Share Option Scheme. In Amoco stock options were used to a greater extent than in BP as an element of employee remuneration. Under the Amoco Stock Option Plan options were granted to key managerial and other eligible employees. The exercise price was the market price of Amoco stock on the date of grant. Options granted under the plans generally become exercisable one or two years after the date of grant and lapse on the tenth anniversary of the date of grant. There were no performance conditions. Following the merger outstanding Amoco stock options were converted into BP Amoco share options on the basis of the ratio of 3.97:1. In addition Amoco also had a Restricted Stock Grant Plan. This plan provided for the awarding of Amoco stock to selected employees and non-executive directors. Shares issued under the plan may not be sold or otherwise transferred for a minimum period as established at the time of grant.
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (Options thousands) Employee share options granted during the year: BP Savings related and similar schemes.................... 4,867 7,389 5,242 BP ESOS................................................... 1,288 2,269 1,905 Amoco Stock Option Plan................................... 30,348 26,991 22,168 ------- ------- ------- 36,503 36,649 29,315 ======= ======= =======
F-44 124 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 33 -- EMPLOYEE SHARE SCHEMES (CONTINUED) The exercise prices for BP options granted during the year were $12.41 (4,773,000 options) and $11.68 (94,000 options) for savings-related and similar schemes and $14.04 (1,243,000 options) and $15.75 (45,000 options) for the ESOS. Amoco stock options were granted at an average price of $43.55 ($44.90) which equates to a BP Amoco share price of $10.97 ($11.31).
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- (Shares thousands) Shares issued in respect of options exercised during the year: BP Savings related and similar schemes.................... 6,291 13,974 5,545 BP ESOS................................................... 5,130 4,402 6,222 Amoco Stock Option Plan................................... 15,317 14,197 9,671 ------- ------- ------- 26,738 32,573 21,438 ======= ======= =======
In addition, 1,649,000 shares (1997, 6,822,000 shares and 1996, 8,240,000 shares) were issued under participating share schemes.
Years ended December 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Options outstanding: Options...................................... 173,448,911 168,033,050 168,445,794 Exercise period.............................. 1999-2008 1998-2007 1997-2006 Price........................................ $3.70-$15.75 $3.70-$11.95 $2.35-$8.28
The following information is presented in compliance with the requirements of FASB Statement of Financial Accounting Standards No. 123 -- 'Accounting for Stock-based Compensation' (SFAS 123). Share option transactions under employee share schemes are summarized as follows:
Years ended December 31, ------------------------------------------------------------------------ 1998 1997 1996 ---------------------- ---------------------- ---------------------- Weighted Weighted Weighted average average average Number of exercise Number of exercise Number of exercise shares price shares price shares price ----------- -------- ----------- -------- ----------- -------- ($) ($) ($) Outstanding at January 1...... 168,033,050 7.71 168,445,794 6.50 165,136,286 5.91 Reinstated.................... 16,743 5.64 960 7.44 31,641 5.24 Granted....................... 36,502,780 11.27 36,649,327 10.95 29,315,293 8.79 Exercised..................... (26,737,746) 6.01 (32,572,683) 5.17 (21,437,745) 5.26 Stock appreciation rights exercised................... (349,360) 5.11 (317,600) 4.80 (960,740) 4.48 Cancelled..................... (4,016,556) 9.45 (4,172,748) 7.36 (3,638,941) 6.09 ----------- ----------- ----------- Outstanding at December 31.... 173,448,911 8.68 168,033,050 7.71 168,445,794 6.50 =========== =========== =========== Exercisable at December 31.... 101,066,358 94,105,298 90,832,077 =========== =========== =========== Available for grant at December 31................. 588,809,092 246,944,428 243,084,577 =========== =========== ===========
F-45 125 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 33 -- EMPLOYEE SHARE SCHEMES (CONCLUDED) Options outstanding at December 31, 1998 will be exercisable between 1999 and 2008. Available for grant figures for 1997 and 1996 are as previously reported for BP p.l.c. For the share options outstanding and exercisable at December 31, 1998 the exercise price ranges and average remaining lives were:
Options outstanding Options exercisable ---------------------------------- ---------------------- Weighted Weighted Weighted average average average Number of remaining exercise Number of exercise Shares life price shares price ----------- --------- -------- ----------- -------- (years) ($) ($) Range of exercise prices $3.70 -- $6.94............................ 55,855,118 3.18 6.16 46,484,963 6.30 $7.01 -- $9.59............................ 55,725,944 5.57 8.34 42,661,506 8.26 $10.04 -- $15.75.......................... 61,867,849 8.45 11.30 11,919,885 11.35 ----------- --------- -------- ----------- -------- 173,448,911 5.83 8.69 101,066,354 7.72 =========== ========= ======== =========== ========
As allowed by SFAS 123 the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees'. In accordance with this accounting statement the Company does not recognize compensation expense on the grant of the options. Had compensation expense been determined based upon the fair value of the stock options at grant date consistent with the method of SFAS 123, the Company's net income and profit per Ordinary Share for 1998 would have been reduced by $47 million (1997 $43 million and 1996 $30 million) and 1 cent (1997 1 cent and 1996 1 cent), respectively. The weighted average fair value of BP share options granted in 1998 was $2.29 (1997 $2.97 and 1996 $2.37). The fair value of each option grant was estimated on the date of grant using a Black-Scholes option pricing model with the following assumptions for 1998, 1997 and 1996, respectively; risk-free interest rates of 6.0, 7.0 and 8.0%; dividend yield of 3%; expected lives of three to five years and volatility of 18%. The weighted average fair value of Amoco stock options granted in 1998 was $7.40 (1997 $8.41 and 1996 $6.78). On the basis of BP Amoco shares these equate to values of $1.86 (1997 $2.12 and 1996 $1.71). The fair value of each option grant was estimated on the date of grant using a Black-Scholes option pricing model with the following assumptions for 1998, 1997 and 1996, respectively; risk-free interest rates of 5.7, 6.7 and 6.1%, dividend yield of 4%, expected lives of six years and volatility of 17%, 17% and 19%. The effects of applying SFAS 123 for the proforma disclosures are not representative of the effects expected on reported net income and profit per Ordinary Share in future years, since the disclosures do not reflect compensation expense for options granted prior to 1995. NOTE 34 -- LONG TERM PERFORMANCE PLAN During 1998 BP senior executives and executive directors participated in the Long Term Performance Plan (the Plan). This is an incentive scheme under which the Remuneration Committee may award shares to participants or fund the purchase of shares for participants if long-term targets are met. The Plan had replaced the granting of executive share options to those participants. For 1999, the Plan will be extended to cover senior executives and executive directors of the BP Amoco Group. Participants based in North America will continue to receive share options in line with local market practice. The cost of potential future awards is accrued over the three-year performance periods of the Plans. The amount charged in 1998 was $45 million (1997 $28 million 1996 $31 million). F-46 126 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 34 -- LONG TERM PERFORMANCE PLAN (CONCLUDED) The value of awards under the 1995-7 Plan made in 1998 was $36 million (1994-6 Plan $28 million). Employee Share Ownership Plans (ESOPs) have been established to acquire BP Amoco shares to satisfy any awards made to participants under the Plan and then to hold them for the participants during the retention period of the Plan. In order to hedge the cost of potential future awards the ESOPs may, from time to time over the performance period of the Plans, purchase BP Amoco shares in the open market. Funding is provided to the ESOPs by the Company. The assets and liabilities of the ESOPs are recognized as assets and liabilities of the Company within these accounts. The ESOPs have waived their rights to dividends. At December 31, 1998 the ESOPs held 3,133,000 (1997 3,274,000) shares for potential future awards. NOTE 35 -- DIRECTORS' REMUNERATION
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ thousand) Total for all directors Emoluments (a).............................................. 6,870 8,264 7,235 Gains made on the exercise of share options................. 888 146 2,276 Amount awarded under long-term incentive schemes............ 4,434 6,844 13,188 ======= ======= ======= Highest paid director Emoluments.................................................. 1,514 1,538 1,173 Gains made on the exercise of share options................. 806 105 -- Amounts awarded under long-term incentive schemes........... 1,331 1,346 2,677 Accrued pension at December 31.............................. 626 554 406 ======= ======= =======
- - --------------- (a) Fees of $45,730 (1997 $60,680 and 1996 $51,480) in respect of Mr H M P Miles' services as a non-executive director were paid to his employer. As the merger between BP and Amoco occurred on December 31, 1998, the information shown for 1998, 1997 and 1996 is the remuneration of BP directors only. EMOLUMENTS These amounts comprise fees paid to the chairman and non-executive directors, and, for executive directors, salary and benefits earned during the relevant financial year, plus bonuses awarded for the year. PENSION CONTRIBUTIONS Six executive directors participate in a non-contributory pension scheme established for UK staff by a separate trust fund to which contributions are made by BP Amoco based on actuarial advice. There were no contributions to this pension scheme in 1998 or 1997. NOTE 36 -- LOANS TO OFFICERS Miss J C Hanratty has a low interest loan of $43,000 made to her prior to her appointment as Company Secretary on October 1, 1994. F-47 127 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 37 -- EMPLOYEE COSTS AND NUMBERS
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) EMPLOYEE COSTS Wages and salaries.......................................... 4,995 5,114 4,560 Social security costs....................................... 412 388 410 Pension costs............................................... 139 141 266 ------- ------- ------- 5,546 5,643 5,236 ======= ======= =======
December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- NUMBER OF EMPLOYEES Exploration and Production.................................. 18,800 19,150 18,300 Refining and Marketing (a).................................. 52,100 53,800 49,150 Chemicals................................................... 23,050 24,000 24,100 Other businesses and corporate.............................. 2,700 3,850 3,350 ------- ------- ------- 96,650 100,800 94,900 ======= ======= =======
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- AVERAGE NUMBER OF EMPLOYEES 1998 Exploration and Production....................... 4,050 900 7,900 6,200 19,050 Refining and Marketing (b)....................... 10,300 9,700 23,600 9,150 52,750 Chemicals........................................ 4,650 5,150 11,600 2,450 23,850 Other businesses and corporate................... 950 300 1,550 450 3,250 ------- ------- ------- ------- ------- 19,950 16,050 44,650 18,250 98,900 ======= ======= ======= ======= ======= 1997 Exploration and Production....................... 3,750 900 8,450 5,700 18,800 Refining and Marketing (b)....................... 9,550 10,000 23,650 9,000 52,200 Chemicals........................................ 5,000 4,650 11,850 2,550 24,050 Other businesses and corporate................... 900 200 1,950 600 3,650 ------- ------- ------- ------- ------- 19,200 15,750 45,900 17,850 98,700 ======= ======= ======= ======= ======= 1996 Exploration and Production....................... 3,450 950 8,950 5,100 18,450 Refining and Marketing........................... 7,550 9,650 22,850 8,200 48,250 Chemicals........................................ 5,200 4,600 13,300 2,400 25,500 Other businesses and corporate................... 750 150 1,850 950 3,700 ------- ------- ------- ------- ------- 16,950 15,350 46,950 16,650 95,900 ======= ======= ======= ======= =======
- - --------------- (a) Includes 17,300 (1997, 18,050) employees assigned to the BP/Mobil joint venture (b) Includes 8,550 (1997, 7,850) employees assigned to the BP/Mobil joint venture in the UK and 9,350 (1997, 9,600) employees in the Rest of Europe. F-48 128 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 38 -- PENSIONS Most Group companies have pension plans, the forms and benefits of which vary with conditions and practices in the countries concerned. The main plans provide benefits that are computed based on an employee's years of service and final pensionable salary. In most cases Group companies make contributions to separately administered trusts, based on advice from independent actuaries using actuarial methods, the objective of which is to provide adequate funds to meet pension obligations as they fall due. In certain countries the plans are unfunded and the accrued liabilities for pension benefits is included within other provisions. The net charge to income for pensions in 1998 was $139 million (1997 $141 million and 1996 $266 million). This was assessed in accordance with independent actuarial advice using the projected unit credit method for the Group's major pension plans. The principal assumptions used in calculating the credit/charge were in the following ranges:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- UK and other European plans: Rate of return on assets.................................... 7% 8.1% 8.3% Discount rate............................................... 7% 8.1% 8.3% Future salary increases..................................... 5.1% 5.9% 6.2% Future pension increases.................................... 3.2% 4.0% 4.3% US plans: Rate of return on assets.................................... 10% 10% 10% Discount rate............................................... 6.9% 7% 7% Future salary increases..................................... 4.7% 4.7% 4.7% Future pension increases.................................... nil nil nil
At January 1, 1998 the date of the latest actuarial valuations or reviews, the market value of assets in the Group's major externally funded pension plans in the UK and the USA was $20,689 million ($17,988 million at January 1, 1997). The actuarial value of the assets of these plans represented 123% (1997 119%) of the benefits that had accrued to members of those plans, after allowing for expected future increases in salaries. At December 31, 1998 the obligation for accrued benefits in respect of the principal unfunded plans in Europe was $1,714 million ($1,543 million at December 31, 1997). Of this amount, $1,345 million ($1,220 million at December 31, 1997) has been provided in these accounts. F-49 129 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 38 -- PENSIONS (CONTINUED) Further information in respect of the Group's principal defined benefit pension plans required under FASB Statement of Financial Accounting Standards No. 132 -- 'Employers' Disclosures about Pensions and Other Postretirement Benefits' is set out below.
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Principal plans: Service cost -- benefits earned during year............... 375 335 317 Interest cost on projected benefit obligation............. 1,089 1,136 1,103 Expected return on plan assets............................ (1,339) (1,364) (1,256) Amortization of transition asset.......................... (84) (82) (77) Recognized net actuarial gain............................. (87) (65) (13) Recognized prior service cost............................. 14 30 28 Curtailment and settlement................................ 12 9 4 ------- ------- ------- (20) (1) 106 Other defined benefit plans................................. 51 39 55 Defined contribution schemes................................ 108 103 105 ------- ------- ------- Total pension expense....................................... 139 141 266 ======= ======= =======
F-50 130 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 38 -- PENSIONS (CONTINUED)
UK and other European plans US plans ------------------ ------------------ 1998 1997 1998 1997 ------- ------- ------- ------- ($ million) Benefit obligation at January 1................... 11,567 11,183 4,388 4,334 Service cost...................................... 221 195 154 140 Interest cost..................................... 787 840 302 296 Plan amendments................................... -- -- -- (100) Settlement loss................................... -- -- 12 9 Actuarial loss.................................... 518 383 60 166 Plan participants' contributions.................. 20 13 -- -- Settlement payments............................... -- -- (26) (16) Benefit payments.................................. (619) (666) (466) (441) Exchange adjustment............................... 176 (381) -- -- ------- ------- ------- ------- Benefit obligation at December 31................. 12,670 11,567 4,424 4,388 ------- ------- ------- ------- Fair value of plan assets at January 1............ 15,915 13,762 4,774 4,226 Actual return on plan assets...................... 2,456 2,903 833 914 Plan participants' contributions.................. 20 13 -- -- Employer contributions............................ 8 9 115 92 Settlement payments............................... -- -- (26) (16) Benefit payments.................................. (515) (558) (466) (442) Exchange adjustment............................... 107 (214) -- -- ------- ------- ------- ------- Fair value of plan assets at December 31.......... 17,991 15,915 5,230 4,774 ------- ------- ------- ------- Funded status..................................... 5,321 4,349 806 386 Unrecognized transition asset..................... (318) (394) (32) (47) Unrecognized net actuarial (gain) loss............ (4,914) (4,010) (207) 138 Unrecognized prior service cost................... 111 125 (53) (62) ------- ------- ------- ------- Net amount recognized............................. 200 70 514 415 ======= ======= ======= ======= Prepaid benefit cost.............................. 1,545 1,290 656 528 Accrued benefit liability......................... (1,644) (1,479) (190) (161) Intangible asset.................................. 126 138 -- -- Accumulated other comprehensive income............ 173 121 48 48 ------- ------- ------- ------- 200 70 514 415 ======= ======= ======= =======
Major assumptions used to determine projected benefit obligations for the principal pension plans were as follows:
December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- UK and other European plans: Compensation increase....................................... 4.3% 5.1% 5.9% Discount rate............................................... 6.1% 7% 8.1% US plans: Compensation increase....................................... 4.7% 4.7% 4.7% Discount rate............................................... 6.5% 6.9% 7%
F-51 131 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 38 -- PENSIONS (CONCLUDED) Plan assets are held in equity securities, fixed income securities and real estate. NOTE 39 -- OTHER POSTRETIREMENT BENEFITS Certain Group companies, principally in the United States, provide postretirement healthcare and life insurance benefits to their retired employees and dependants. The entitlement to these benefits is usually based on the employee remaining in service until retirement age and completion of a minimum period of service. The plans are partly funded and the accrued net liability for postretirement benefits is included within other provisions. The charge to income for postretirement benefits in 1998 of $101 million (1997 $110 million and 1996 $130 million) was assessed in accordance with independent actuarial advice using the projected unit credit method. At December 31, 1998 the independent actuaries have reassessed the obligation for postretirement benefits at $1,814 million ($1,709 million at December 31, 1997). The provision for postretirement benefits at December 31, 1998 was $2,311 million ($2,348 million at December 31, 1997). The discount rate used to assess the obligation at December 31, 1998 was 6.5% (6.9% at December 31, 1997). The assumed future healthcare cost trend rate for 1999 are 5% to 7.6% for beneficiaries aged under 65 and 5% to 6.5% for beneficiaries aged over 65, which reduce to 5% for both age groups in the year 2002 and for subsequent years. Further information presented in compliance with the requirements of FASB Statement of Financial Accounting Standards No. 132 -- 'Employers' Disclosures about Pensions and Other Postretirement Benefits' is set out below.
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Service cost -- benefits earned during year................. 39 40 45 Interest cost on projected benefit obligation............... 114 116 126 Expected return on plan assets.............................. (1) -- -- Recognized net actuarial gain............................... (28) (24) (19) Amortization of prior service cost recognized............... (23) (22) (22) ------- ------- ------- Postretirement benefit expense.............................. 101 110 130 ======= ======= =======
F-52 132 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 39 -- OTHER POSTRETIREMENT BENEFITS (CONCLUDED)
1998 1997 ------- ------- ($ million) Benefit obligation at January 1............................. 1,709 1,704 Service cost................................................ 39 40 Interest cost............................................... 114 116 Actuarial (gain) loss....................................... 52 (51) Benefit payments............................................ (100) (100) ------- ------- Benefit obligation at December 31........................... 1,814 1,709 ------- ------- Fair value of plan assets at January 1...................... -- -- Actual return on plan assets................................ 9 -- Employer contributions...................................... 40 -- ------- ------- Fair value of plan assets at December 31.................... 49 -- ------- ------- Funded status............................................... (1,765) (1,709) Unrecognized net actuarial gain............................. (382) (452) Unrecognized prior service cost............................. (164) (187) ------- ------- Provision for postretirement benefits....................... (2,311) (2,348) ======= =======
The assumed healthcare cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed healthcare cost trend rate would have the following effects:
1-Percentage 1-Percentage point increase point decrease -------------- -------------- ($ million) Effect on total of service and interest cost in 1998........ 20 (16) Effect on postretirement obligation at December 31, 1998.... 180 (149)
NOTE 40 -- CONTINGENT LIABILITIES There were contingent liabilities at December 31, 1998 in respect of guarantees and indemnities entered into as part of, and claims arising from, the ordinary course of the Group's business, upon which no material losses are likely to arise. Approximately 200 lawsuits were filed in State and Federal Courts in Alaska seeking compensatory and punitive damages arising out of the Exxon Valdez oil spill in Prince William Sound in March 1989. Most of those suits named Exxon, Alyeska Pipeline Service Company (Alyeska), which operates the oil terminal at Valdez, and the seven oil companies which own Alyeska. Alyeska initially responded to the spill until the response was taken over by Exxon. BP Amoco owns a 50% interest in Alyeska through a subsidiary of BP America Inc. Alyeska and its owners have settled all of the claims against them under these lawsuits. Exxon has indicated that it may file a claim for contribution against Alyeska for a portion of the costs and damages which it has incurred. If any claims are asserted by Exxon which affect Alyeska and its owners, BP Amoco would defend the claims vigorously. The Internal Revenue Service (IRS) has challenged the application of certain foreign income taxes as credits against BP Amoco Corporation's US taxes that otherwise would have been payable for the years 1980 to 1992. On June 18, 1992, the IRS issued a statutory Notice of Deficiency for additional taxes in the amount of $466 million, plus interest, relating to 1980 to 1982. BP Amoco filed a petition in the US Tax Court contesting the IRS statutory Notice of Deficiency. Trial on the matter was held in April 1995, and a decision was rendered by the US Tax Court in March 1996, in BP Amoco's favor. The IRS has appealed the F-53 133 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 40 -- CONTINGENT LIABILITIES (CONCLUDED) Tax Court's decision to the US Court of Appeals for the Seventh Circuit and on March 11, 1998 the Seventh Circuit affirmed the Tax Court's prior decision. A comparable adjustment of foreign tax credits for each year has been proposed for the years 1983 to 1992 based upon subsequent IRS audits. BP Amoco Corporation believes that the foreign income taxes have been reflected properly in its US federal tax returns. Consequently, this dispute is not expected to have a material adverse effect on liquidity, results of operations, or the financial position of the Group. The Group is subject to numerous national and local environmental laws and regulations concerning its products, operations and other activities. These laws and regulations may require the Group to take future action to remediate the effects on the environment of prior disposal or release of chemical or petroleum substances by the Group or other parties. Such contingencies may exist for various sites including refineries, chemical plants, oil fields, service stations, terminals and waste disposal sites. In addition, the Group may have obligations relating to prior asset sales or closed facilities. The ultimate requirement for remediation and its cost is inherently difficult to estimate. However, the estimated cost of known environmental obligations has been provided in these accounts in accordance with the Group's accounting policies. While the amounts of future costs could be significant and could be material to the Group's results of operations in the period in which they are recognized, BP Amoco does not expect these costs to have a material effect on the Group's financial position or liquidity. NOTE 41 -- JOINT VENTURES AND ASSOCIATED UNDERTAKINGS Summarized financial information for the Group's share of its joint ventures is shown below. The principal joint venture is the pan-European refining and marketing joint venture with Mobil, which is jointly controlled. The other significant joint ventures of the BP Amoco Group at December 31, 1998 are shown in Note 47.
December 31, ---------------- 1998 1997 ------ ------ ($ million) Turnover.................................................... 15,428 16,804 ------ ------ Profit for the period before tax............................ 546 221 ------ ------ Profit for the period after tax............................. 561 221 ------ ------ Fixed assets................................................ 5,681 5,349 Current assets.............................................. 3,372 3,798 ------ ------ 9,053 9,147 Liabilities due within one year............................. 3,586 2,993 Liabilities due after one year.............................. 462 530 ------ ------ 5,005 5,624 ====== ======
Within the BP/Mobil joint venture BP Amoco operates and has a 70% interest in the fuels refining and marketing operation and has a 49% interest in the lubricants business. Funding is provided to the joint venture by both BP Amoco and Mobil in proportion to their respective interests as required. Surplus cash in the joint venture is returned to BP Amoco and Mobil on a regular, usually daily, basis. BP Amoco has made available to the joint venture on a long-term basis the tangible fixed assets formerly used by its European refining and marketing operations. Staff working for the fuels business are BP Amoco employees, while those working for the lubricants business are Mobil employees. Staff costs for BP Amoco employees were $902 million (1997 $889 million). F-54 134 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 41 -- JOINT VENTURES AND ASSOCIATED UNDERTAKINGS (CONCLUDED) During the year the BP Amoco Group sold crude oil and products totalling $2,264 million (1997 $3,126 million) to the BP/Mobil joint venture and purchased crude oil and products totalling $1,335 million (1997 $1,963 million). At December 31, 1998 the outstanding balances receivable and payable were $351 million (December 31, 1997 $526 million) and $144 million (December 31, 1997 $241 million) respectively. In addition there were net receipts of $675 million (December 31, 1997 advances of $367 million) outstanding at December 31, 1998. The more significant associated undertakings of the BP Amoco Group at December 31, 1998 are shown in Note 47. During the year the BP Amoco Group purchased crude oil from two associated undertakings, Abu Dhabi Marine Areas and Abu Dhabi Petroleum to the value of $715 million (1997 $1,014 million and 1996 $1,055 million). At December 31, 1998 $45 million (December 31, 1997 $93 million) was payable in respect of these purchases. During the year the BP Amoco Group sold chemical feedstocks totalling $395 million (1997 $549 million and 1996 $487 million) to Erdolchemie, an associated undertaking, and bought petrochemicals, mainly polyethylene, to the value of $76 million (1997 $64 million and 1996 $396 million). At December 31, 1998 the outstanding balance receivable from Erdolchemie was $1 million (December 31, 1997 $5 million). F-55 135 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 42 -- OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (a) CAPITALIZED COSTS AT DECEMBER 31
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- ($ million) 1998 Gross capitalized costs: Proved properties.................... 22,116 2,802 34,953 15,013 74,884 Unproved properties.................. 400 76 890 1,915 3,281 ------- ------- ------- ------- ------- 22,516 2,878 35,843 16,928 78,165 Accumulated depreciation (b)........... 11,982 1,778 20,238 8,141 42,139 ------- ------- ------- ------- ------- Net capitalized costs.................. 10,534 1,100 15,605 8,787 36,026 ======= ======= ======= ======= ======= 1997 Gross capitalized costs: Proved properties.................... 20,206 2,785 33,736 14,072 70,799 Unproved properties.................. 323 55 914 1,776 3,068 ------- ------- ------- ------- ------- 20,529 2,840 34,650 15,848 73,867 Accumulated depreciation (b)........... 10,318 1,655 19,799 7,849 39,621 ------- ------- ------- ------- ------- Net capitalized costs.................. 10,211 1,185 14,851 7,999 34,246 ======= ======= ======= ======= ======= 1996 Gross capitalized costs: Proved properties.................... 18,988 2,899 31,973 13,475 67,335 Unproved properties.................. 343 50 871 1,809 3,073 ------- ------- ------- ------- ------- 19,331 2,949 32,844 15,284 70,408 Accumulated depreciation (b)........... 9,259 1,691 18,416 8,119 37,485 ------- ------- ------- ------- ------- Net capitalized costs.................. 10,072 1,258 14,428 7,165 32,923 ======= ======= ======= ======= =======
F-56 136 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 42 -- OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (a) (CONTINUED) COSTS INCURRED FOR THE YEAR ENDED DECEMBER 31
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- ($ million) 1998 Acquisition of properties: Proved............................... -- -- 3 54 57 Unproved............................. -- 1 58 62 121 ------- ------- ------- ------- ------- -- 1 61 116 178 Exploration and appraisal costs (c).... 177 106 476 764 1,523 Development costs...................... 1,432 100 1,670 1,569 4,771 ------- ------- ------- ------- ------- Total costs............................ 1,609 207 2,207 2,449 6,472 ======= ======= ======= ======= ======= 1997 Acquisition of properties: Proved............................... -- 95 7 7 109 Unproved............................. 15 3 121 26 165 ------- ------- ------- ------- ------- 15 98 128 33 274 Exploration and appraisal costs (c).... 192 133 524 942 1,791 Development costs...................... 1,463 161 1,744 1,714 5,082 ------- ------- ------- ------- ------- Total costs............................ 1,670 392 2,396 2,689 7,147 ======= ======= ======= ======= ======= 1996 Acquisition of properties: Proved............................... -- 22 113 33 168 Unproved............................. -- -- 106 114 220 ------- ------- ------- ------- ------- -- 22 219 147 388 Exploration and appraisal costs (c).... 167 103 543 837 1,650 Development costs...................... 1,622 228 1,502 1,262 4,614 ------- ------- ------- ------- ------- Total costs............................ 1,789 353 2,264 2,246 6,652 ======= ======= ======= ======= =======
F-57 137 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 42 -- OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (a) (CONTINUED) RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- ($ million) 1998 Turnover (d): Third parties........................ 1,063 73 2,782 2,133 6,051 Sales between businesses............. 2,481 520 2,027 905 5,933 ------- ------- ------- ------- ------- 3,544 593 4,809 3,038 11,984 ------- ------- ------- ------- ------- Exploration expense.................... 134 89 240 458 921 Production costs....................... 878 146 1,548 888 3,460 Production taxes....................... 15 6 233 320 574 Other costs (income) (e)............... (50) (18) 780 384 1,096 Depreciation and amounts provided...... 1,155 163 1,160 1,070 3,548 Decommissioning........................ 94 5 6 20 125 ------- ------- ------- ------- ------- 2,226 391 3,967 3,140 9,724 ------- ------- ------- ------- ------- Profit (loss) before taxation (f)...... 1,318 202 842 (102) 2,260 Allocable taxes........................ 378 79 111 115 683 ------- ------- ------- ------- ------- Results of operations.................. 940 123 731 (217) 1,577 ======= ======= ======= ======= ======= 1997 Turnover (d): Third parties........................ 2,680 559 5,639 1,553 10,431 Sales between businesses............. 1,817 341 1,132 2,884 6,174 ------- ------- ------- ------- ------- 4,497 900 6,771 4,437 16,605 ------- ------- ------- ------- ------- Exploration expense.................... 156 79 273 454 962 Production costs....................... 743 176 1,378 944 3,241 Production taxes....................... 283 19 446 536 1,284 Other costs (income) (e)............... 50 (11) 720 690 1,449 Depreciation........................... 1,197 178 1,154 705 3,234 Decommissioning........................ 78 12 35 24 149 ------- ------- ------- ------- ------- 2,507 453 4,006 3,353 10,319 ------- ------- ------- ------- ------- Profit before taxation (f)............. 1,990 447 2,765 1,084 6,286 Allocable taxes........................ 655 206 896 501 2,258 ------- ------- ------- ------- ------- Results of operations.................. 1,335 241 1,869 583 4,028 ======= ======= ======= ======= =======
F-58 138 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 42 -- OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (a) (CONTINUED)
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- ($ million) 1996 Turnover (d): Third parties........................ 2,708 371 5,999 1,869 10,947 Sales between businesses............. 2,304 342 1,134 2,884 6,664 ------- ------- ------- ------- ------- 5,012 713 7,133 4,753 17,611 ------- ------- ------- ------- ------- Exploration expense.................... 161 90 284 462 997 Production costs....................... 811 142 1,253 789 2,995 Production taxes....................... 450 15 503 605 1,573 Other costs (income) (e)............... 161 (25) 973 701 1,810 Depreciation........................... 1,337 169 1,150 684 3,340 Decommissioning........................ 83 4 23 26 136 ------- ------- ------- ------- ------- 3,003 395 4,186 3,267 10,851 ------- ------- ------- ------- ------- Profit before taxation (f)............. 2,009 318 2,947 1,486 6,760 Allocable taxes........................ 700 199 1,086 690 2,675 ------- ------- ------- ------- ------- Results of operations.................. 1,309 119 1,861 796 4,085 ======= ======= ======= ======= =======
- - --------------- The Group's share of associated undertakings results of operations in 1998 was a profit of $40 million (profit $13 million and 1996 $1 million loss) after adding a tax credit of $19 million (1997 and 1996 nil). The Group's share of associated undertakings net capitalized costs at December 31, 1998 was $2,212 million (December 31, 1997 $2,662 million and December 31, 1996 nil). The Group's share of associated undertakings costs incurred in 1998 was $282 million (1997 $1,349 million and 1996 nil). (a) Information given in this note relates to the Group's oil and natural gas activities. Midstream activities of natural gas gathering and distribution and the operation of the main pipelines and tankers are excluded. The main midstream activities are the Alaskan transportation facilities, the Forties Pipeline system, the Central Area Transmission system and Ruhrgas gas distribution operations. Profits on sale of businesses and fixed assets relating to the oil and natural gas exploration and production activities which have been accounted as exceptional items are also excluded. (b) Accumulated depreciation consists of depreciation, depletion and amortization related to oil and natural gas producing activities. (c) Exploration and appraisal drilling expenditure and licence acquisition costs are initially capitalized within intangible fixed assets in accordance with the Group's accounting policy. (d) Turnover represents sales of production excluding royalty oil where royalty is payable in kind. (e) Includes cost of royalty oil not taken in kind and property taxes. F-59 139 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 42 -- OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES (a) (CONCLUDED) (f) The exploration and production total replacement cost operating profit comprises:
Years ended December 31, -------------------------- 1998 1997 1996 ------ ------ ------ ($ million) Exploration and production activities Group..................................................... 2,260 6,286 6,760 Associated undertakings................................... 21 13 (1) Midstream activities........................................ 866 986 914 ----- ----- ----- Total replacement cost operating profit..................... 3,147 7,285 7,673 ===== ===== =====
NOTE 43 -- NEW ACCOUNTING STANDARD With effect from January 1, 1998 the BP Amoco Group has adopted FRS9. This has four effects: (a) The BP/Mobil joint venture and Crescendo Resources are accounted for using the gross equity method rather than by proportional consolidation. This change has reduced the amounts reported against most income statement, balance sheet and cash flow statement captions. Profit for the year and net assets are unaffected by this change in treatment. (b) Altura Energy is consolidated rather than being accounted for by proportional consolidation. This change has increased the amounts reported against most income statement, balance sheet and cash flow statement captions and creates a minority shareholder interest in the income statement and balance sheet. Profit for the period and BP Amoco shareholders' interest are unaffected by this change in treatment. (c) Pan American Energy and Empresa Petrolera Chaco are treated as joint ventures rather than associates and are accounted for by the gross equity method rather than the equity method. Profit for the period and net assets are unaffected by this change in treatment. (d) Income from associated undertakings and joint ventures is shown before charging interest expense. Interest expense for associated undertakings and joint ventures is now included in the total interest expense reported. Interest expense for associated undertakings which would have been charged against replacement cost operating profit in 1996, 1997 and the corresponding amounts for 1998 are shown below.
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Exploration and Production.............................. 58 6 11 Refining and Marketing.................................. 22 7 6 Chemicals............................................... 66 55 44 Other businesses and corporate.......................... 16 15 7 ------- ------- ------- 162 83 68 ======= ======= =======
Information for 1997 and 1996 has been restated to conform with the 1998 presentation. A summarized income statement, balance sheet and cash flow statement for 1997 for BP Amoco on a FRS9 basis and as would have been prepared previously are shown below. F-60 140 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 43 -- NEW ACCOUNTING STANDARD (CONTINUED) As the BP/Mobil joint venture, Crescendo Resources, Altura Energy, Pan American Energy and Empresa Petrolera Chaco were set up or acquired in 1997, financial information for 1996 is unaffected by the adoption of FRS9 except for the reclassification of interest expense in note (d) above. INCOME STATEMENT
Year ended December 31, 1997 -------------------- Restated Pre FRS9 -------- -------- ($ million) TURNOVER.................................................... 108,564 103,418 Less: Joint ventures........................................ 16,804 -- ------- ------- GROUP TURNOVER.............................................. 91,760 103,418 ------- ------- TOTAL REPLACEMENT COST OPERATING PROFIT..................... 10,583 10,357 Profit (loss) on sale of businesses......................... 127 127 Profit (loss) on sale of fixed assets....................... 313 313 Refinery network rationalization............................ 71 71 ------- ------- REPLACEMENT COST PROFIT BEFORE INTEREST AND TAX............. 11,094 10,868 Inventory holding gains (losses)............................ (939) (939) ------- ------- HISTORICAL COST PROFIT BEFORE INTEREST AND TAX.............. 10,155 9,929 Interest expense............................................ 908 825 ------- ------- PROFIT BEFORE TAXATION...................................... 9,247 9,104 Taxation.................................................... 3,066 3,066 ------- ------- PROFIT AFTER TAXATION....................................... 6,181 6,038 Minority shareholders' interest............................. 151 8 ------- ------- PROFIT FOR THE YEAR......................................... 6,030 6,030 ======= =======
F-61 141 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 43 -- NEW ACCOUNTING STANDARD (CONTINUED) BALANCE SHEET
December 31, 1997 -------------------- Restated Pre FRS9 -------- -------- ($ million) FIXED ASSETS Intangible assets......................................... 2,582 2,723 Tangible assets........................................... 52,263 54,637 Investments............................................... 10,376 5,899 ------- ------- TOTAL FIXED ASSETS.......................................... 65,221 63,259 ------- ------- CURRENT ASSETS Inventories............................................... 4,923 6,399 Trade receivables and other receivables................... 14,381 16,075 Investments............................................... 1,067 1,067 Cash at bank and in hand.................................. 355 354 ------- ------- 20,726 23,895 CURRENT LIABILITIES -- AMOUNTS FALLING DUE WITHIN ONE YEAR Finance debt.............................................. 2,856 2,856 Trade payables, other accounts payable and accrued liabilities............................................ 17,671 19,863 ------- ------- NET CURRENT ASSETS.......................................... 199 1,176 ------- ------- TOTAL ASSETS LESS CURRENT LIABILITIES....................... 65,420 64,435 NONCURRENT LIABILITIES Finance debt.............................................. 10,021 10,021 Accounts payable and accrued liabilities.................. 2,562 2,569 PROVISIONS FOR LIABILITIES AND CHARGES...................... 9,989 9,873 ------- ------- NET ASSETS.................................................. 42,848 41,972 Minority shareholders' interest............................. 1,100 224 ------- ------- BP AMOCO SHAREHOLDERS' INTEREST............................. 41,748 41,748 ======= ======= REPRESENTED BY CAPITAL AND RESERVES: Capital shares.............................................. 4,330 4,330 Reserves.................................................... 37,418 37,418 ------- ------- 41,748 41,748 ======= =======
F-62 142 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 43 -- NEW ACCOUNTING STANDARD (CONCLUDED) CASH FLOW STATEMENT
Year ended December 31, 1997 -------------------- Restated Pre FRS9 -------- -------- ($ million) Net cash inflow from operating activities................... 15,558 15,734 Dividends from joint ventures and associated undertakings... 741 -- Net cash outflow from servicing of finance and returns on investments............................................... (655) (650) Tax paid.................................................... (2,273) (2,273) Net cash outflow for capital expenditure.................... (7,432) (7,902) Net cash outflow for acquisitions and disposals............. (2,624) (1,595) Equity dividends paid....................................... (2,437) (2,437) ------- ------- NET CASH INFLOW............................................. 878 877 ======= ======= Financing................................................... 1,012 1,012 Management of liquid resources.............................. (167) (167) Increase in cash............................................ 33 32 ------- ------- 878 877 ======= =======
NOTE 44 -- MERGER ACCOUNTING The financial statements have been prepared using the merger method of accounting in relation to the merger of BP and Amoco. Under merger accounting, the results and cash flows of BP and Amoco are combined from the beginning of the financial period in which the merger occurred and their assets and liabilities combined at the amounts at which they were previously recorded after adjusting to achieve consistency of accounting policies. Income statement, balance sheet and cash flow comparatives are restated on the combined basis. The merger became effective on December 31, 1998. As both BP and Amoco had financial year ends of December 31, income statements for each company for the year ended December 31, 1998 are presented below together with their respective balance sheets at December 31, 1998. On December 31, 1998 the Company issued 3,797,071,800 ordinary shares with a nominal value of $1,898,535,900 and a fair value of $56,943,166,956 to Amoco shareholders under the terms of the merger agreement between BP and Amoco. Following the merger, former BP shareholders held 5,885,938,223 shares. Assuming conversion of all outstanding BP share options and Amoco stock options into shares on that date and excluding shares held by the respective companies, the ownership interests of former BP and Amoco shareholders in the combined company were 59.98% and 40.02% respectively. The following information is set out below: (a) The nature and the amount of the accounting adjustments made to align Amoco's accounting policies with those of BP. (b) Income statements and statements of total recognized gains and losses of BP and Amoco for the current and prior year. (c) Balance sheets of BP and Amoco at December 31, 1998. Reclassifications have been made to the Amoco historical financial information presented under US generally accepted accounting principles (US GAAP) to conform to BP's presentation under UK generally accepted accounting practice (UK GAAP). F-63 143 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 44 -- MERGER ACCOUNTING (CONTINUED) UK GAAP ADJUSTMENTS TO AMOCO HISTORICAL FINANCIAL STATEMENTS Amoco prepared its financial statements in accordance with US GAAP. The income statements and balance sheets of Amoco have been restated to conform with BP accounting policies under UK GAAP by giving effect to the following adjustments: (a) CONSOLIDATION BASES Under US GAAP, certain oil and natural gas joint ventures are proportionately consolidated, whereas under UK GAAP the joint ventures would either be equity accounted or consolidated depending on the ownership interest. Amoco's joint ventures were set up in early 1997. This adjustment does not alter profit for the year or net assets, but does change the amounts reported against a number of income statement and balance sheet captions; including creating a minority shareholders' interest of $59 million (1997 $143 million and 1996 nil) in the income statement and of $826 million (1997 $876 million) in the balance sheet for 1998. (b) INVENTORY ACCOUNTING Amoco carried inventories at the lower of current market values or cost. Cost is determined under the last-in, first-out (LIFO) method for the majority of inventories of crude oil, petroleum products and chemical products. The costs of remaining inventories are determined on the first-in, first-out (FIFO) or average cost methods. BP carried inventories at the lower of cost or net realizable value. Cost to BP is determined using the FIFO method. Cost of sales determined on a FIFO basis is adjusted to a replacement cost basis, i.e. to reflect the average cost of supplies incurred during the year, by excluding inventory holding gains and losses. As a result of this adjustment replacement cost of sales for 1998 is reduced by $7 million (1997 increased by $130 million and 1996 increased by $195 million); there are inventory holding losses of $415 million (1997 $419 million loss and 1996 $545 million gain); profit for the year is reduced by $408 million (1997 reduced by $549 million and 1996 increased by $350). The carrying value of inventory is increased by $549 million in 1998 (1997 $955 million). (c) DEFERRED TAXATION Under the UK GAAP restricted liability method, deferred taxation is only provided for where timing differences are expected to reverse in the forseeable future. For US GAAP under the liability method, deferred taxation is provided for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. This adjustment increases the charge for taxation in 1998 by $76 million (1997 $110 million increase and 1996 $3 million decrease) and reduces the profit for the year by the same amount. The provision for deferred taxation in the balance sheet is reduced by $1,761 million in 1998 (1997 $1,534 million). (d) FOREIGN CURRENCY TRANSLATION BP considered that the functional currency of its non-UK operations is the local currency except for certain exploration and production operations where the US dollar is the functional currency. Amoco considered the functional currency of substantially all of its operations to be the US dollar. Where F-64 144 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 44 -- MERGER ACCOUNTING (CONTINUED) there is a difference between the two companies in terms of functional currency, the functional currency of Amoco's operations has been changed to the local currency. The retranslation of Amoco's assets and liabilities resulting from this gives rise to currency translation differences. The net effects of this adjustment are to increase profit for the year by $11 million (1997 reduce by $82 million and 1996 increase by $73 million) and to reduce net assets by $633 million in 1998 (1997 $583 million). (e) EXCEPTIONAL ITEMS Under UK GAAP, certain exceptional items should be shown separately on the face of the income statement after operating profit. Under US GAAP these items would be classified as operating income or expenses. For 1998 there were profits on the sale of businesses of $8 million (1997 $117 million and 1996 $144 million) and on the sale of fixed assets of $312 million (1997 $495 million profit and 1996 $42 million loss) and merger expenses of $119 million. (f) EQUITY ACCOUNTING UK GAAP requires the operating profit or loss, exceptional items and interest expense and taxation of associated undertakings and joint ventures to be shown separately from those of the Group. For US GAAP, the after-tax profits or losses (i.e. operating results after exceptional items, interest expense and taxation) should be included in the income statement as a single line item. UK GAAP requires the investor's share of the gross assets and gross liabilities of the joint venture to be shown on the face of the balance sheet, whereas under US GAAP the net investment should be included as a single line item. This adjustment has no overall effect on profit for the year or net assets. (g) SALE AND LEASEBACK The sale and leaseback of the Amoco building in Chicago, Illinois in 1998 is treated as a sale for UK GAAP whereas for US GAAP it is treated as a financing transaction. The effect of this adjustment is to increase exceptional items and profit for the year by $211 million. Net assets are increased by $211 million. F-65 145 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 44 -- MERGER ACCOUNTING (CONTINUED) INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1998
US/UK Amoco GAAP Amoco Total US GAAP adjustment UK GAAP BP BP Amoco -------- ---------- -------- ------- -------- ($ million) TURNOVER.................................... 26,695 (36) 26,659 57,073 83,732 Less: Joint ventures........................ -- 348 348 15,080 15,428 -------- --------- -------- ------- -------- GROUP TURNOVER.............................. 26,695 (384) 26,311 41,993 68,304 Replacement cost of sales................... 21,750 (87) 21,663 34,691 56,354 Production taxes............................ 149 18 167 437 604 -------- --------- -------- ------- -------- GROSS PROFIT................................ 4,796 (315) 4,481 6,865 11,346 Distribution and administration expenses.... 2,543 (77) 2,466 3,578 6,044 Exploration expense......................... 658 -- 658 263 921 -------- --------- -------- ------- -------- 1,595 (238) 1,357 3,024 4,381 Other income................................ (30) 335 305 404 709 -------- --------- -------- ------- -------- GROUP REPLACEMENT COST OPERATING PROFIT..... 1,565 97 1,662 3,428 5,090 Share of profits of joint ventures.......... -- 65 65 760 825 Share of profits associated undertakings.... -- 69 69 453 522 -------- --------- -------- ------- -------- REPLACEMENT COST OPERATING PROFIT........... 1,565 231 1,796 4,641 6,437 Profit (loss) on sale of businesses and fixed assets.............................. -- 320 320 728 1,048 Merger expenses............................. -- (119) (119) (79) (198) -------- --------- -------- ------- -------- REPLACEMENT COST PROFIT BEFORE INTEREST AND TAX....................................... 1,565 432 1,997 5,290 7,287 Inventory holding gains (losses)............ -- (415) (415) (976) (1,391) -------- --------- -------- ------- -------- HISTORICAL COST PROFIT BEFORE INTEREST AND TAX....................................... 1,565 17 1,582 4,314 5,896 Interest expense............................ 380 93 473 580 1,053 -------- --------- -------- ------- -------- PROFIT BEFORE TAXATION...................... 1,185 (76) 1,109 3,734 4,843 Taxation.................................... 227 91 318 1,202 1,520 -------- --------- -------- ------- -------- PROFIT AFTER TAXATION....................... 958 (167) 791 2,532 3,323 Minority shareholders' interest............. -- 59 59 4 63 -------- --------- -------- ------- -------- PROFIT FOR THE YEAR......................... 958 (226) 732 2,528 3,260 Distribution to shareholders................ 1,438 -- 1,438 2,683 4,121 ======== ========= ======== ======= ======== REPLACEMENT COST RESULTS HISTORICAL COST PROFIT FOR THE YEAR......... 732 2,528 3,260 Inventory holding (gains) losses............ 415 976 1,391 -------- ------- -------- REPLACEMENT COST PROFIT FOR THE YEAR........ 1,147 3,504 4,651 Exceptional items, net of tax............... (125) (527) (652) -------- ------- -------- REPLACEMENT COST PROFIT BEFORE EXCEPTIONAL ITEMS..................................... 1,022 2,977 3,999 ======== ======= ========
F-66 146 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 44 -- MERGER ACCOUNTING (CONTINUED) INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1997
US/UK Amoco GAAP Amoco Total US GAAP adjustment UK GAAP BP BP Amoco -------- ---------- -------- ------- -------- ($ million) TURNOVER.................................... 32,103 98 32,201 76,363 108,564 Less: Joint ventures........................ 71 41 112 16,692 16,804 -------- --------- -------- ------- -------- GROUP TURNOVER.............................. 32,032 57 32,089 59,671 91,760 Replacement cost of sales................... 25,304 41 25,345 48,583 73,928 Production taxes............................ 286 9 295 1,012 1,307 -------- --------- -------- ------- -------- GROSS PROFIT................................ 6,442 7 6,449 10,076 16,525 Distribution and administration expenses.... 2,633 120 2,753 3,989 6,742 Exploration expense......................... 635 1 636 326 962 -------- --------- -------- ------- -------- 3,174 (114) 3,060 5,761 8,821 Other income................................ 902 (574) 328 334 662 -------- --------- -------- ------- -------- GROUP REPLACEMENT COST OPERATING PROFIT..... 4,076 (688) 3,388 6,095 9,483 Share of profits of joint ventures.......... 5 19 24 520 544 Share of profits associated undertakings.... 19 17 36 520 556 -------- --------- -------- ------- -------- REPLACEMENT COST OPERATING PROFIT........... 4,100 (652) 3,448 7,135 10,583 Profit (loss) on sale of businesses and fixed assets.............................. -- 612 612 (172) 440 Refinery network rationalization............ -- -- -- 71 71 -------- --------- -------- ------- -------- REPLACEMENT COST PROFIT BEFORE INTEREST AND TAX....................................... 4,100 (40) 4,060 7,034 11,094 Inventory holding gains (losses)............ -- (419) (419) (520) (939) -------- --------- -------- ------- -------- HISTORICAL COST PROFIT BEFORE INTEREST AND TAX....................................... 4,100 (459) 3,641 6,514 10,155 Interest expense............................ 339 34 373 535 908 -------- --------- -------- ------- -------- PROFIT BEFORE TAXATION...................... 3,761 (493) 3,268 5,979 9,247 Taxation.................................... 1,046 105 1,151 1,915 3,066 -------- --------- -------- ------- -------- PROFIT AFTER TAXATION....................... 2,715 (598) 2,117 4,064 6,181 Minority shareholders' interest............. (5) 143 138 13 151 -------- --------- -------- ------- -------- PROFIT FOR THE YEAR......................... 2,720 (741) 1,979 4,051 6,030 Distribution to shareholders................ 1,382 -- 1,382 2,070 3,452 ======== ========= ======== ======= ======== REPLACEMENT COST RESULTS HISTORICAL COST PROFIT FOR THE YEAR......... 1,979 4,051 6,030 Inventory holding (gains) losses............ 419 520 939 -------- ------- -------- REPLACEMENT COST PROFIT FOR THE YEAR........ 2,398 4,571 6,969 Exceptional items, net of tax............... (377) 57 (320) -------- ------- -------- REPLACEMENT COST PROFIT BEFORE EXCEPTIONAL ITEMS..................................... 2,021 4,628 6,649 ======== ======= ========
F-67 147 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 44 -- MERGER ACCOUNTING (CONTINUED) INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996
US/UK Amoco GAAP Amoco Total US GAAP adjustment UK GAAP BP BP Amoco -------- ---------- -------- ------- -------- ($ million) TURNOVER.................................... 32,284 -- 32,284 69,780 102,064 Less: Joint ventures........................ -- -- -- -- -- -------- --------- -------- ------- -------- GROUP TURNOVER.............................. 32,284 -- 32,284 69,780 102,064 Replacement cost of sales................... 25,062 193 25,255 56,667 81,922 Production taxes............................ 327 -- 327 1,284 1,611 -------- --------- -------- ------- -------- GROSS PROFIT................................ 6,895 (193) 6,702 11,829 18,531 Distribution and administration expenses.... 2,646 (56) 2,590 5,777 8,367 Exploration expense......................... 680 -- 680 317 997 -------- --------- -------- ------- -------- 3,569 (137) 3,432 5,735 9,167 Other income................................ 432 (82) 350 364 714 -------- --------- -------- ------- -------- GROUP REPLACEMENT COST OPERATING PROFIT..... 4,001 (219) 3,782 6,099 9,881 Share of profits of joint ventures.......... -- -- -- -- -- Share of profits associated undertakings.... 144 34 178 485 663 -------- --------- -------- ------- -------- REPLACEMENT COST OPERATING PROFIT........... 4,145 (185) 3,960 6,584 10,544 Profit (loss) on sale of businesses and fixed assets.............................. -- 102 102 (273) (171) European refining and marketing joint venture implementation.................... -- -- -- (532) (532) -------- --------- -------- ------- -------- REPLACEMENT COST PROFIT BEFORE INTEREST AND TAX....................................... 4,145 (83) 4,062 5,779 9,841 Inventory holding gains (losses)............ -- 545 545 627 1,172 -------- --------- -------- ------- -------- HISTORICAL COST PROFIT BEFORE INTEREST AND TAX....................................... 4,145 462 4,607 6,406 11,013 Interest expense............................ 295 24 319 685 1,004 -------- --------- -------- ------- -------- PROFIT BEFORE TAXATION...................... 3,850 438 4,288 5,721 10,009 Taxation.................................... 1,016 12 1,028 1,727 2,755 -------- --------- -------- ------- -------- PROFIT AFTER TAXATION....................... 2,834 426 3,260 3,994 7,254 Minority shareholders' interest............. -- -- -- 13 13 -------- --------- -------- ------- -------- PROFIT FOR THE YEAR......................... 2,834 426 3,260 3,981 7,241 Distribution to shareholders................ 1,287 -- 1,287 1,720 3,007 ======== ========= ======== ======= ======== REPLACEMENT COST RESULTS HISTORICAL COST PROFIT FOR THE YEAR......... 3,260 3,981 7,241 Inventory holding (gains) losses............ (545) (627) (1,172) -------- ------- -------- REPLACEMENT COST PROFIT FOR THE YEAR........ 2,715 3,354 6,069 Exceptional items, net of tax............... (106) 733 627 -------- ------- -------- REPLACEMENT COST PROFIT BEFORE EXCEPTIONAL ITEMS..................................... 2,609 4,087 6,696 ======== ======= ========
F-68 148 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 44 -- MERGER ACCOUNTING (CONTINUED) BALANCE SHEET AS AT DECEMBER 31, 1998
Amoco US/UK GAAP Amoco Total US GAAP adjustment UK GAAP BP BP Amoco ------- ---------- ------- ------ -------- ($ million) FIXED ASSETS Intangible assets........................... 756 (21) 735 2,302 3,037 Tangible assets............................. 23,378 (33) 23,345 31,120 54,465 Investments Joint ventures -- Gross assets........... 2,009 7,044 9,053 -- Gross liabilities...... 719 3,329 4,048 ------ ------ ------ -- Net investment......... 1,290 3,715 5,005 Associated undertakings.................. 939 3,223 4,162 Other.................................... -- 605 605 ------ ------ ------ 2,234 (5) 2,229 7,543 9,772 ------- ------ ------ ------ ------ TOTAL FIXED ASSETS............................ 26,368 (59) 26,309 40,965 67,274 ------- ------ ------ ------ ------ CURRENT ASSETS Inventories................................. 1,175 542 1,717 1,925 3,642 Trade and other receivables -- falling due: Within one year.......................... 3,160 37 3,197 6,207 9,404 After more than one year................. 612 72 684 2,621 3,305 Investments................................. 387 -- 387 83 470 Cash at bank and in hand.................... 65 -- 65 340 405 ------- ------ ------ ------ ------ 5,399 651 6,050 11,176 17,226 CURRENT LIABILITIES -- AMOUNTS FALLING DUE WITHIN ONE YEAR Finance debt................................ 836 -- 836 2,001 2,837 Trade payables, other accounts payable and accrued liabilities...................... 3,972 265 4,237 11,092 15,329 ------- ------ ------ ------ ------ NET CURRENT ASSETS (LIABILITIES).............. 591 386 977 (1,917) (940) ------- ------ ------ ------ ------ TOTAL ASSETS LESS CURRENT LIABILITIES......... 26,959 327 27,286 39,048 66,334 NONCURRENT LIABILITIES Finance debt................................ 5,838 (412) 5,426 5,492 10,918 Accounts payable and accrued liabilities.... 265 -- 265 1,844 2,109 PROVISIONS FOR LIABILITIES AND CHARGES Deferred taxation........................... 2,350 (1,759) 591 1,041 1,632 Other....................................... 2,873 (29) 2,844 5,973 8,817 ------- ------ ------ ------ ------ NET ASSETS.................................... 15,633 2,527 18,160 24,698 42,858 Minority shareholders' interest............... 163 826 989 83 1,072 ------- ------ ------ ------ ------ BP AMOCO SHAREHOLDERS' INTEREST............... 15,470 1,701 17,171 24,615 41,786 ======= ====== ====== ====== ======
F-69 149 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 44 -- MERGER ACCOUNTING (CONTINUED) BALANCE SHEET AS AT DECEMBER 31, 1997
Amoco US/UK GAAP Amoco Total US GAAP adjustment UK GAAP BP BP Amoco ------- ---------- ------- ------ -------- ($ million) FIXED ASSETS Intangible assets........................... 812 (15) 797 1,785 2,582 Tangible assets............................. 22,813 (7) 22,806 29,457 52,263 Investments Joint ventures -- Gross assets........... 2,308 6,839 9,147 -- Gross liabilities...... 774 2,749 3,523 ------ ------ ------ -- Net investment......... 1,534 4,090 5,624 Associated undertakings.................. 787 3,567 4,354 Other.................................... -- 398 398 ------ ------ ------ 2,099 222 2,321 8,055 10,376 ------- ------ ------ ------ ------ TOTAL FIXED ASSETS............................ 25,724 200 25,924 39,297 65,221 ------- ------ ------ ------ ------ CURRENT ASSETS Inventories................................. 1,174 940 2,114 2,809 4,923 Trade and other receivables -- falling due: Within one year.......................... 3,723 31 3,754 7,629 11,383 After more than one year................. 515 46 561 2,437 2,998 Investments................................. 979 -- 979 88 1,067 Cash at bank and in hand.................... 166 1 167 188 355 ------- ------ ------ ------ ------ 5,383 78 5,461 10,342 15,803 CURRENT LIABILITIES -- AMOUNTS FALLING DUE WITHIN ONE YEAR Finance debt................................ 969 -- 969 1,887 2,856 Trade payables, other accounts payable and accrued liabilities...................... 4,918 (45) 4,873 12,798 17,671 ------- ------ ------ ------ ------ NET CURRENT ASSETS (LIABILITIES).............. 670 1,063 1,733 (1,534) 199 ------- ------ ------ ------ ------ TOTAL ASSETS LESS CURRENT LIABILITIES......... 26,394 1,263 27,657 37,763 65,420 NONCURRENT LIABILITIES Finance debt................................ 4,691 -- 4,691 5,330 10,021 Accounts payable and accrued liabilities.... 308 -- 308 2,254 2,562 PROVISIONS FOR LIABILITIES AND CHARGES Deferred taxation........................... 2,085 (1,549) 536 647 1,183 Other....................................... 2,860 (67) 2,793 6,013 8,806 ------- ------ ------ ------ ------ NET ASSETS.................................... 16,450 2,879 19,329 23,519 42,848 Minority shareholders' interest............... 131 876 1,007 93 1,100 ------- ------ ------ ------ ------ BP AMOCO SHAREHOLDERS' INTEREST............... 16,319 2,003 18,322 23,426 41,748 ======= ====== ====== ====== ======
F-70 150 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 44 -- MERGER ACCOUNTING (CONCLUDED) STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
Amoco Total UK GAAP BP BP Amoco ------- ------ -------- ($ million) FOR THE YEAR ENDED DECEMBER 31, 1998 PROFIT FOR THE YEAR......................................... 732 2,528 3,260 Currency translation differences............................ 30 25 55 ----- ------ ------ TOTAL RECOGNIZED GAINS AND LOSSES........................... 762 2,553 3,315 ===== ====== ====== FOR THE YEAR ENDED DECEMBER 31, 1997 PROFIT FOR THE YEAR......................................... 1,979 4,051 6,030 Currency translation differences............................ (348) (1,239) (1,587) ----- ------ ------ TOTAL RECOGNIZED GAINS AND LOSSES........................... 1,631 2,812 4,443 ===== ====== ====== FOR THE YEAR ENDED DECEMBER 31, 1996 PROFIT FOR THE YEAR......................................... 3,260 3,981 7,241 Currency translation differences............................ (19) 386 367 ----- ------ ------ TOTAL RECOGNIZED GAINS AND LOSSES........................... 3,241 4,367 7,608 ===== ====== ======
NOTE 45 -- US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The consolidated financial statements of the BP Amoco Group are prepared in accordance with UK GAAP which differs in certain respects from US GAAP. The principal differences between US GAAP and UK GAAP for BP Amoco Group reporting relate to the following: (A) GROUP CONSOLIDATION Investments in entities over which the Group does not exercise control (associates and joint ventures) are accounted for by the equity method. UK GAAP requires the consolidated financial statements to show separately the Group proportion of operating profit or loss, exceptional items, inventory holding gains or losses, interest expense and taxation of associated undertakings and joint ventures. In addition the turnover of joint ventures should be disclosed. For US GAAP the after tax profits or losses (i.e. operating results after exceptional items, inventory holding gains or losses, interest expense and taxation) is included in the income statement as a single line item. UK GAAP requires the Group's share of the gross assets and gross liabilities of joint ventures to be shown on the face of the balance sheet whereas under US GAAP the net investment is included as a single line item. Where the Group conducts activities through a joint arrangement that is not carrying on a trade or business in its own right the Group accounts for its own assets, liabilities and cash flows of the activity measured according to the terms of the arrangement. For the Group this method of accounting applies to certain oil and natural gas activities and undivided interests in pipelines. US GAAP requires these activities to be accounted for by proportional consolidation, which is equivalent to UK GAAP. F-71 151 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 45 -- US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (A) GROUP CONSOLIDATION (CONCLUDED) The following summarizes the reclassifications for associates and joint ventures necessary to accord with US GAAP.
Year ended December 31, 1998 -------------------------------------------- As US GAAP Reported Reclassification Presentation -------- ---------------- ------------ ($ million) CONSOLIDATED STATEMENT OF INCOME Other income....................................... 709 808 1,517 Share of profits of JVs and associated undertakings..................................... 1,347 (1,347) -- Exceptional items before taxation.................. 850 (85) 765 Inventory holding gains (losses)................... (1,391) 330 (1,061) Interest expense................................... 1,053 (162) 891 Taxation........................................... 1,520 (132) 1,388 Profit for the year................................ 3,260 -- 3,260
Year ended December 31, 1997 -------------------------------------------- As US GAAP Reported Reclassification Presentation -------- ---------------- ------------ ($ million) CONSOLIDATED STATEMENT OF INCOME Other income....................................... 662 586 1,248 Share of profits of JVs and associated undertakings..................................... 1,100 (1,100) -- Exceptional items before taxation.................. 511 123 634 Inventory holding gains (losses)................... (939) 200 (739) Interest expense................................... 908 (83) 825 Taxation........................................... 3,066 (108) 2,958 Profit for the year................................ 6,030 -- 6,030
Year ended December 31, 1996 -------------------------------------------- As US GAAP Reported Reclassification Presentation -------- ---------------- ------------ ($ million) CONSOLIDATED STATEMENT OF INCOME Other income....................................... 714 454 1,168 Share of profits of JVs and associated undertakings..................................... 663 (663) -- Exceptional items before taxation.................. (703) -- (703) Inventory holding gains (losses)................... 1,172 -- 1,172 Interest expense................................... 1,004 (68) 936 Taxation........................................... 2,755 (141) 2,614 Profit for the year................................ 7,241 -- 7,241
(B) INCOME STATEMENT The income statement prepared under UK GAAP shows sub-totals for replacement cost profit before interest and tax, historical cost profit before interest and tax and profit after taxation. These line items are not recognized under US GAAP. F-72 152 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 45 -- US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (C) EXCEPTIONAL ITEMS Under UK GAAP certain exceptional items are shown separately on the face of the income statement after operating profit. These items are profits or losses on the sale of businesses and fixed assets and fundamental restructuring charges. Under US GAAP these items are classified as operating income or expenses. (D) IMPAIRMENT Both UK and US GAAP require that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. US GAAP requires, in performing the review for recoverability, the entity to estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, no impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use is based on the fair value of the assets. For UK GAAP to the extent that the carrying amount exceeds the recoverable amount, that is the higher of net realizable value and value in use (fair value) the fixed asset is written down to its recoverable amount. No UK/US GAAP adjustment was required for impairment. (E) DEFERRED TAXATION Under the UK GAAP restricted liability method, deferred taxation is only provided where timing differences are expected to reverse in the foreseeable future. Under US GAAP for FASB Statement of Financial Accounting Standards No. 109 -- 'Accounting for Income Taxes' (SFAS 109) deferred taxation is provided for temporary differences between the financial reporting basis and the tax basis of the Group's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. For the purchase business combinations occurring prior to the year in which the statement is first applied, SFAS 109 requires that, where practicable, remaining balances of assets and liabilities acquired in such combinations be adjusted from a net-of-tax amount to a pretax amount. At December 31, 1998, the adjustment to the carrying amount of fixed assets was $1,325 million ($1,448 million at December 31, 1997) and the related deferred tax liability $1,236 million ($1,492 million at December 31, 1997). The charge for depreciation in 1998 in respect of these assets was $123 million (1997 $162 million and 1996 $176 million) and the credit for taxation $256 million (1997 $166 million and 1996 $127 million). F-73 153 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 45 -- US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (E) DEFERRED TAXATION -- (CONCLUDED) The UK/US GAAP adjustment for deferred taxation may be summarized as follows:
1998 1997 ----- ----- ($ million) Increase in provision from restricted liability to gross potential liability....................................... 4,677 4,303 Tax liability resulting from business combination........... 1,236 1,492 Net tax asset on sale and leaseback of Chicago office building, severance costs, European joint venture implementation costs, and other adjustments............... (137) (74) ----- ----- 5,776 5,721 ===== =====
The major components of deferred tax liabilities and assets on a US GAAP basis were as follows:
December 31, ------------------ 1998 1997 ------- ------- ($ million) Depreciation................................................ (11,087) (11,399) Other taxable temporary differences......................... (1,249) (1,165) ------- ------- Total deferred tax liabilities.............................. (12,336) (12,564) ------- ------- Petroleum revenue tax....................................... 420 484 Decommissioning and other provisions........................ 2,279 2,286 Advance corporation tax..................................... 33 725 Tax credit and loss carry forward........................... 1,870 2,271 Other deductible temporary differences...................... 1,080 901 ------- ------- Gross deferred tax assets................................... 5,682 6,667 Valuation allowance......................................... (754) (1,007) ------- ------- Net deferred tax assets..................................... 4,928 5,660 ------- ------- Net deferred tax liability*................................. 7,408 6,904 ======= =======
- - ------------ * Primarily noncurrent. (F) SEVERANCE COSTS Under the provisions of US GAAP (FASB Emerging Issues Task Force Abstract No. 94-3), the cost of certain employee termination benefits is recognized (i) when specific conditions exist, in the period management approves of the plan of termination or (ii) in such later accounting period when the specified conditions have been satisfied. Under US GAAP severance costs of $142 million were not recognized in 1995. Of these costs $39 million was recognized in 1998, $39 million in 1997 and $20 million in 1996. (G) JOINT VENTURE IMPLEMENTATION COSTS Under the provisions of US GAAP (FASB Emerging Issues Task Force Abstract No. 94-3), certain restructuring costs are not recognized until incurred. Certain costs associated with the implementation of the European joint venture accrued in 1996 would not have been recognized under US GAAP. F-74 154 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 45 -- US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) These costs relate to rebranding, relocation and systems development costs and amount to $265 million. Of these costs $8 million was recognized in 1998 and $257 million in 1997. (H) ORDINARY SHARES HELD FOR FUTURE AWARDS TO EMPLOYEES Under UK GAAP, Company shares held by an ESOP to meet future requirements of employee share schemes are recorded in the balance sheet as Fixed assets -- investments. Under US GAAP, such shares are recorded in the balance sheet as a reduction of shareholders' interest. (I) SALE AND LEASEBACK The sale and leaseback of the Amoco building in Chicago, Illinois is treated as a sale for UK GAAP whereas for US GAAP it is treated as a financing transaction. (J) DIVIDENDS Under UK GAAP, dividends are recorded in the year in respect of which they are announced or declared by the board of directors to the shareholders. Under US GAAP, dividends are recorded in the period in which dividends are declared. The following is a summary of the adjustments to profit for the year and to BP Amoco shareholders' interest which would be required if US GAAP had been applied instead of UK GAAP: PROFIT FOR THE YEAR
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million except per share amounts) Profit as reported in the consolidated statement of income.................................................... 3,260 6,030 7,241 Adjustments: Depreciation charge....................................... (123) (162) (176) Deferred taxation......................................... (72) 94 (518) Severance costs........................................... (39) (39) (20) European joint venture implementation costs............... (8) (257) 265 Sale and leaseback of Chicago office building............. (211) -- -- Other..................................................... 19 20 3 ------- ------- ------- Profit for the year as adjusted to accord with US GAAP...... 2,826 5,686 6,795 Dividend requirements on preference shares.................. 1 1 1 ------- ------- ------- Profit for the year applicable to Ordinary Shares as adjusted to accord with US GAAP........................... 2,825 5,685 6,794 ======= ======= ======= Profit for the year as adjusted: Per Ordinary Share Basic..................................................... $0.29 $0.59 $0.71 Diluted................................................... $0.29 $0.59 $0.71 ======= ======= ======= Per American Depositary Share Basic..................................................... $1.74 $3.54 $4.26 Diluted................................................... $1.74 $3.54 $4.26 ======= ======= =======
F-75 155 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 45 -- US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) BP AMOCO SHAREHOLDERS' INTEREST
December 31, ------------------ 1998 1997 ------- ------- ($ million) BP Amoco shareholders' interest as reported in the consolidated balance sheet................................ 41,786 41,748 Adjustments: Fixed assets.............................................. 1,527 1,448 Deferred taxation......................................... (5,776) (5,721) Severance costs........................................... 32 71 European joint venture implementation costs............... -- 8 Ordinary shares held for future awards to employees....... (489) (319) Sale and leaseback of Chicago office building............. (413) -- Fourth quarterly dividend................................. 968 543 Pension liability adjustment.............................. (143) (110) Other..................................................... (158) (164) ------- ------- BP Amoco shareholders' interest as adjusted to accord with US GAAP................................................... 37,334 37,504 ======= =======
CONSOLIDATED BALANCE SHEET Under US GAAP Trade and Other receivables due after one year of $3,305 million at December 31, 1998 ($2,998 million at December 31, 1997), included within current assets, would have been classified as noncurrent assets. The provision for deferred taxation is primarily in respect of noncurrent items. Severance costs and European joint venture implementation costs are included within accrued liabilities within Current liabilities -- falling due within one year. CONSOLIDATED STATEMENT OF CASH FLOWS The Group's financial statements include a consolidated statement of cash flows in accordance with the revised UK Financial Reporting Standard No. 1 (FRS1). The statement prepared under FRS1 presents substantially the same information as that required under FASB Statement of Financial Accounting Standards No. 95 'Statement of Cash Flows' (SFAS 95). Under FRS1 cash flows are presented for (i) operating activities; (ii) dividends from joint ventures; (iii) dividends from associated undertakings; (iv) servicing of finance and returns on investments; (v) taxation; (vi) capital expenditure and financial investment; (vii) acquisitions and disposals; (viii) dividends; (ix) management of liquid resources; and (x) financing. SFAS 95 only requires presentation of cash flows from operating, investing and financing activities. Cash flows under FRS1 in respect of dividends from joint ventures and associated undertakings, taxation and servicing of finance and returns on investments are included within operating activities under SFAS 95. Interest paid includes payments in respect of capitalized interest, which under SFAS 95 are included in capital expenditure under investing activities. Cash flows under FRS1 in respect of capital expenditure and acquisitions and disposals are included in investing activities under SFAS 95. Dividends paid are included within financing activities. All short-term investments are regarded as liquid resources for FRS1. Under SFAS 95 short-term investments with original maturities of three months or less are classified as cash equivalents and aggregated with cash in the cash flow statement. Cash flows in respect of short-term investments with original maturities exceeding three months are included in operating activities. F-76 156 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 45 -- US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) The statement of consolidated cash flows presented in accordance with SFAS 95 is as follows:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) OPERATING ACTIVITIES Profit after taxation....................................... 3,323 6,181 7,254 Adjustments to reconcile profit after tax to net cash provided by operating activities: Depreciation and amounts provided......................... 5,255 5,056 5,369 Exploration expenditure written off....................... 373 365 574 Share of profit (losses) of joint ventures and associated undertakings less dividends received................... (136) (36) (187) Profit (loss) on sale of businesses and fixed assets...... (963) (563) 171 Working capital decrease (increase)(a).................... 380 2,040 (2,348) Other..................................................... 261 416 274 ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES................... 8,493 13,459 11,107 ------- ------- ------- INVESTING ACTIVITIES Capital expenditures........................................ (9,026) (8,995) (9,193) Acquisitions................................................ (314) -- (535) Investment in associated undertakings....................... (396) (1,021) (383) Net investment in joint ventures............................ 708 (1,967) -- Proceeds from disposal of assets............................ 2,167 1,832 1,800 ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES....................... (6,861) (10,151) (8,311) ------- ------- ------- FINANCING ACTIVITIES Proceeds from shares (repurchased) issued................... (423) (1,250) 73 Proceeds from long-term financing........................... 2,196 1,179 398 Repayments of long-term financing........................... (1,217) (884) (2,421) Net increase (decrease) in short-term debt.................. (179) (57) 1,122 Dividends paid -- Shareholders.............................. (2,408) (2,437) (2,411) -- Minority shareholders.................... (130) -- -- ------- ------- ------- NET CASH USED IN FINANCING ACTIVITIES....................... (2,161) (3,449) (3,239) ------- ------- ------- Currency translation differences relating to cash and cash equivalents............................................... (15) (28) 2 ------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (544) (169) (441) Cash and cash equivalents at beginning of year.............. 1,338 1,507 1,948 ------- ------- ------- Cash and cash equivalents at end of year.................... 794 1,338 1,507 ======= ======= =======
- - --------------- (a) Working capital: Inventories decrease (increase)........................ 584 1,740 (1,261) Receivables decrease (increase)........................ 1,777 2,119 (3,736) Current liabilities (excluding finance debt) (decrease) increase............................................. (1,981) (1,819) 2,649 ------- ------- ------- 380 2,040 (2,348) ======= ======= =======
F-77 157 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 45 -- US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) IMPACT OF NEW ACCOUNTING STANDARDS REPORTING COMPREHENSIVE INCOME: Effective January 1, 1998, the Group adopted FASB Statement of Financial Accounting Standards No 130, 'Reporting Comprehensive Income' (SFAS 130). This Statement establishes standards for the reporting and display of comprehensive income and its components. The adoption of SFAS 130 had no impact on the Group's results of operations or financial position as adjusted to accord with US GAAP. For the Group, SFAS 130 requires foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, and pension liability adjustments to be included in other comprehensive income. Prior year financial information has been reclassified to conform to the requirements of SFAS 130. The components of comprehensive income, net of related tax are as follows:
Years ended December 31, ------------------------ 1998 1997 1996 ----- ------ ----- ($ million) Profit for the period as adjusted to accord with US GAAP.... 2,826 5,686 6,795 Currency translation differences............................ 55 (1,587) 367 Pension liability adjustment................................ (33) 7 56 ----- ------ ----- Comprehensive income........................................ 2,848 4,106 7,218 ===== ====== =====
Accumulated other comprehensive income at December 31, 1998 comprised currency translation losses of $453 million (December 31, 1997 losses $508 million) and pension liability adjustments of $143 million (December 31, 1997 $110 million). SEGMENTAL REPORTING: Effective January 1, 1998, the Group adopted FASB Statement of Financial Accounting Standards No. 131, 'Disclosures about Segments of an Enterprise and Related Information' (SFAS 131). This Statement establishes standards regarding the way information about operating segments is reported in annual financial statements and requires the inclusion of selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Under SFAS 131, the composition and number of the Group's operating segments did not change. The adoption of SFAS 131 had no impact on the Group's results of operations or financial position as adjusted to accord with US GAAP. PENSIONS AND OTHER POSTRETIREMENT BENEFITS: In 1998, the Group adopted FASB Statement of Financial Accounting Standards No. 132, 'Employers' Disclosures about Pensions and Other Postretirement Benefits' (SFAS 132). This Statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS 132 requires, except where information is not readily available, restatement of prior year financial information. The adoption of SFAS 132 had no impact on the Group's results of operations or financial position as adjusted to accord with US GAAP. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, 'Accounting for Derivative Instruments and Hedging Activities' (SFAS 133). This new standard is effective for accounting periods beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction F-78 158 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 45 -- US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONCLUDED) and, if it is, the type of hedge transaction. The Company has not yet completed its evaluation of the impact of adopting SFAS 133 on the Group's results of operations and financial position as adjusted to accord with US GAAP. COMPUTER SOFTWARE COSTS: Effective January 1, 1998, the Group adopted the American Institute of Certified Public Accountants Statement of Position No. 98-1, 'Accounting for the Cost of Computer Software Developed or Obtained for Internal Use' (SOP 98-1). This Statement establishes standards regarding the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. SOP 98-1 is to be applied prospectively. There was no impact on the Group's results of operations and financial position as adjusted to accord with US GAAP as its UK GAAP accounting policy is consistent with SOP 98-1. START-UP COSTS: In April 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-5, 'Reporting on the Costs of Start-up Activities' (SOP 98-5). This Statement requires costs associated with start-up activities and organization costs be expensed as incurred. Under current practice, the Group generally expenses such costs as incurred. SOP 98-5 is effective for accounting periods beginning after December 15, 1998 with early adoption permitted. The Company has not yet determined the impact of adopting SOP 98-5 on the Group's future results of operations and financial position as adjusted to accord with US GAAP. NOTE 46 -- BUSINESS AND GEOGRAPHICAL ANALYSIS BP Amoco has three reportable operating segments -- Exploration and Production, Refining and Marketing and Chemicals. Exploration and Production's activities include oil and natural gas exploration and field development and production (upstream activities), together with pipeline transportation, natural gas processing and natural gas marketing (midstream activities). The activities of Refining and Marketing include oil supply and trading as well as refining and marketing (downstream activities). Chemicals activities include petrochemicals manufacturing and marketing. The Group is managed on a unified basis. Reportable segments are differentiated by the activities that each undertakes and the products they manufacture and market. The accounting policies of operating segments are the same as those described in Note 1, Accounting Policies. Performance is evaluated based on replacement cost operating profit or loss, which excludes exceptional items, inventory holding gains and losses, interest income and expense, taxation and minority shareholders' interests. Sales between segments are made at prices that approximate market prices taking into account the volumes involved. F-79 159 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 46 -- BUSINESS AND GEOGRAPHICAL ANALYSIS (CONTINUED) BY BUSINESS
Other Exploration Refining business and and and Production Marketing Chemicals corporate(a) Eliminations Total ----------- --------- --------- ------------ ------------ ------- ($ million) 1998 Group turnover -- third parties.... 12,216 46,625 9,312 151 -- 68,304 -- sales between businesses (b)........... 5,060 1,812 379 48 (7,299) -- ----------- --------- --------- --------- ------------ ------- 17,276 48,437 9,691 199 (7,299) 68,304 ----------- --------- --------- --------- ------------ Share of joint venture sales....... 15,428 ------- 83,732 ------- Equity accounted income (c)........ 244 852 150 101 1,347 ----------- --------- --------- --------- ------- Total replacement cost operating profit (loss) (d)................ 3,147 2,564 1,100 (374) 6,437 Exceptional items (e).............. 396 394 43 17 850 Inventory holding gains (losses)... (17) (1,228) (146) -- (1,391) ----------- --------- --------- --------- ------- Historical cost profit (loss) before interest and tax.......... 3,526 1,730 997 (357) 5,896 ----------- --------- --------- --------- ------- Total assets (f)................... 47,393 21,029 12,562 3,516 84,500 Operating capital employed (g)..... 38,586 13,091 10,488 (1,899) 60,266 Depreciation and amounts provided (h).............................. 4,226 790 497 115 5,628 Capital expenditure and acquisitions (i)................. 6,318 1,937 1,606 501 10,362 1997 Group turnover -- third parties.... 15,475 65,283 10,853 149 -- 91,760 -- sales between businesses (b)........... 7,696 2,421 592 -- (10,709) -- ----------- --------- --------- --------- ------------ ------- 23,171 67,704 11,445 149 (10,709) 91,760 ----------- --------- --------- --------- ------------ Share of joint venture sales....... 16,804 ------- 108,564 ------- Equity accounted income (c)........ 292 604 125 79 1,100 ----------- --------- --------- --------- ------- Total replacement cost operating profit (loss) (d)................ 7,285 2,292 1,530 (524) 10,583 Exceptional items (e).............. 587 (39) (15) (22) 511 Inventory holding gains (losses)... 12 (849) (102) -- (939) ----------- --------- --------- --------- ------- Historical cost profit (loss) before interest and tax.......... 7,884 1,404 1,413 (546) 10,155 ----------- --------- --------- --------- ------- Total assets (f)................... 45,692 24,055 12,141 4,059 85,947 Operating capital employed (g)..... 36,184 14,578 9,979 (1,091) 59,650 Depreciation (h)................... 3,896 842 559 124 5,421 Capital expenditure and acquisitions (i)................. 7,879 1,824 1,145 572 11,420
F-80 160 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 46 -- BUSINESS AND GEOGRAPHICAL ANALYSIS (CONTINUED)
Other Exploration Refining business and and and Production Marketing Chemicals corporate(a) Eliminations Total ----------- --------- --------- ------------ ------------ ------- ($ million) 1996 Group turnover -- third parties.... 15,169 76,026 10,666 203 -- 102,064 -- sales between businesses (b)........... 8,235 2,715 313 -- (11,263) -- ----------- --------- --------- --------- ------------ ------- 23,404 78,741 10,979 203 (11,263) 102,064 ----------- --------- --------- --------- ------------ ------- Equity accounted income (c)........ 228 116 235 84 663 ----------- --------- --------- --------- ------- Total replacement cost operating profit (loss) (d)................ 7,673 1,708 1,654 (491) 10,544 Exceptional items (e).............. (100) (554) 169 (218) (703) Inventory holding gains (losses)... 8 1,076 88 -- 1,172 ----------- --------- --------- --------- ------- Historical cost profit (loss) before interest and tax.......... 7,581 2,230 1,911 (709) 11,013 ----------- --------- --------- --------- ------- Total assets (f)................... 44,114 27,646 12,128 4,427 88,315 Operating capital employed (g)..... 34,076 14,496 9,825 (856) 57,541 Depreciation (h)................... 4,230 1,146 447 120 5,943 Capital expenditure and acquisitions..................... 6,433 1,731 1,964 160 10,288
BY GEOGRAPHICAL AREA
United Rest of Rest of Kingdom(j) Europe USA World Eliminations Total ---------- ------- ------- ------- ------------ ------- ($ million) 1998 Group turnover -- third parties (k)... 19,662 5,123 31,945 11,574 -- 68,304 -- sales between areas.................. 2,848 700 1,215 2,458 (7,221) -- ------- ------- ------- ------- ------------ ------- 22,510 5,823 33,160 14,032 (7,221) 68,304 ------- ------- ------- ------- ------------ Share of joint venture sales.......... 3,467 14,186 43 305 (2,573) 15,428 ------- 83,732 ------- Equity accounted income (c)........... 135 904 125 183 -- 1,347 ------- ------- ------- ------- ------- Total replacement cost operating profit (d).......................... 1,891 1,249 2,602 695 6,437 Exceptional items (e)................. (39) 106 511 272 850 Inventory holding gains (losses)...... (136) (283) (720) (252) (1,391) ------- ------- ------- ------- ------- Historical cost profit before interest and tax............................. 1,716 1,072 2,393 715 5,896 ------- ------- ------- ------- ------- Total assets (f)...................... 22,236 8,493 35,987 17,784 84,500 Operating capital employed (g)........ 14,361 5,034 25,758 15,113 60,266 Capital expenditure and acquisitions (i)................................. 2,463 1,248 3,720 2,931 10,362
F-81 161 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 46 -- BUSINESS AND GEOGRAPHICAL ANALYSIS (CONTINUED)
United Rest of Rest of Kingdom(j) Europe USA World Eliminations Total ---------- ------- ------- ------- ------------ ------- ($ million) 1997 Group turnover -- third parties (k)... 27,473 7,943 40,322 16,022 -- 91,760 -- sales between areas.................. 3,787 553 1,438 3,377 (9,155) -- ------- ------- ------- ------- ------------ ------- 31,260 8,496 41,760 19,399 (9,155) 91,760 ------- ------- ------- ------- ------------ Share of joint venture sales.......... 4,584 15,414 41 71 (3,306) 16,804 ------- 108,564 Equity accounted income (c)........... 26 758 84 232 1,100 ------- ------- ------- ------- ------- Total replacement cost operating profit (d).......................... 2,727 1,320 4,325 2,211 10,583 Exceptional items (e)................. (85) 80 506 10 511 Inventory holding gains (losses)...... (85) (103) (647) (104) (939) ------- ------- ------- ------- ------- Historical cost profit before interest and tax............................. 2,557 1,297 4,184 2,117 10,155 ------- ------- ------- ------- ------- Total assets (f)...................... 22,108 9,195 36,689 17,955 85,947 Operating capital employed (g)........ 13,035 4,800 25,556 16,259 59,650 Capital expenditure and acquisitions (i)................................. 2,413 1,243 3,315 4,449 11,420 1996 Group turnover -- third parties (k)... 29,222 16,839 41,171 14,832 -- 102,064 -- sales between areas.................. 7,009 2,337 1,595 3,387 (14,328) -- ------- ------- ------- ------- ------------ ------- 36,231 19,176 42,766 18,219 (14,328) 102,064 ------- ------- ------- ------- ------------ ------- Equity accounted income (loss) (c).... (12) 278 59 338 663 ------- ------- ------- ------- ------- Total replacement cost operating profit (d).......................... 2,694 990 4,242 2,618 10,544 Exceptional items (e)................. (303) (399) 153 (154) (703) Inventory holding gains (losses)...... 60 219 717 176 1,172 ------- ------- ------- ------- ------- Historical cost profit before interest and tax............................. 2,451 810 5,112 2,640 11,013 ------- ------- ------- ------- ------- Total assets (f)...................... 23,177 10,666 36,546 17,926 88,315 Operating capital employed (g)........ 12,202 5,055 24,885 15,399 57,541 Capital expenditure and acquisitions........................ 2,280 1,121 4,005 2,882 10,288
- - ------------ (a) Other businesses and corporate comprises Finance, the solar businesses, the Group's coal interest, interest income, and costs relating to corporate activities worldwide. (b) Sales and transfers between businesses are made at market prices taking into account the volumes involved. (c) Equity accounted income (loss) represents the Group's share of income (loss) before interest expense and taxes of joint ventures and associated undertakings. (d) Total replacement cost operating profit (loss) is before inventory holding gains and losses and interest expense, which is attributable to the corporate function. (e) Exceptional items comprise profit (loss) on sale of businesses and sale of fixed assets of $1,048 million in 1998 (1997 $440 million profit and 1996 $171 million loss), European refining and marketing joint F-82 162 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 46 -- BUSINESS AND GEOGRAPHICAL ANALYSIS (CONCLUDED) venture implementation costs of $532 million in 1996 and a credit for refinery network rationalization costs in 1998 of nil (1997 $71 million and 1996 nil) and merger costs in 1998 of $198 million. (f) Total assets comprise fixed and current assets and include investments in joint ventures and associated undertakings analyzed between activities as follows:
Other Exploration Refining businesses and and and Production Marketing Chemicals corporate(a) Total ----------- --------- --------- ------------ ------- ($ million) 1998........................... 3,416 4,345 1,281 125 9,167 ----------- --------- --------- ------------ ------- 1997........................... 3,782 4,796 1,270 130 9,978 ----------- --------- --------- ------------ ------- 1996........................... 1,677 702 1,362 250 3,991 ----------- --------- --------- ------------ -------
(g) Operating capital employed comprises net assets before deducting finance debt and liabilities for current and deferred taxation. (h) Depreciation consists of charges for depreciation, depletion and amortization of property, plant and equipment, exploration expense and amounts provided against fixed asset investments. (i) Capital expenditure and acquisitions includes $620 million in 1998 (1997 $646 million) for the BP/Mobil joint venture. (j) United Kingdom area includes the UK-based international activities of Refining and Marketing. (k) Turnover to third parties is stated by origin which is not materially different from turnover by destination. NOTE 47 -- SUMMARIZED FINANCIAL INFORMATION ON ASSOCIATED UNDERTAKINGS AND JOINT VENTURES A summarized statement of income and assets and liabilities based on latest information available, with respect to the Group's equity accounted associated undertakings and joint ventures, is set out below:
Years ended December 31, ----------------------------- 1998 1997(a) 1996 ------- ------- ------- ($ million) Sales and other operating revenue........................... 42,801 45,330 19,366 Gross profit................................................ 7,484 7,641 3,906 Profit for the year......................................... 675 1,754 1,583 ======= ======= =======
December 31, ------------------ 1998 1997(a) ------- ------- ($ million) Fixed and other assets...................................... 25,534 21,243 Current assets.............................................. 11,626 12,671 ------- ------- 37,160 33,914 Current liabilities......................................... (12,703) (11,098) Noncurrent liabilities...................................... (7,604) (7,111) ------- ------- Net assets.................................................. 16,853 15,705 ======= =======
- - ------------ F-83 163 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 47 -- SUMMARIZED FINANCIAL INFORMATION ON ASSOCIATED UNDERTAKINGS AND JOINT VENTURES (CONCLUDED) (a) Excludes Sidanco and Rusia. The more important associated undertakings and joint ventures of the Group at December 31, 1998 and the percentage of equity capital owned or joint venture interest are:
% Country of operation Principal activities ----- -------------------- -------------------------- ASSOCIATED UNDERTAKINGS Abu Dhabi Marine Areas................. 33 Abu Dhabi Crude oil production Abu Dhabi Petroleum.................... 24 Abu Dhabi Crude oil production Erdolchemie............................ 50 Germany Chemicals Ruhrgas................................ 25 Germany Gas distribution Sidanco (b)............................ 10 Russia Integrated oil operations Rusia.................................. 20 Russia Exploration and production JOINT VENTURES BP/Mobil............................... 70/49(c) Europe Refining and marketing Empresa Petrolera Chaco................ 30 Bolivia Exploration and production Pan American Energy.................... 60 Argentina Exploration and production Crescendo Resources.................... 36 USA Exploration and production
- - ------------ (b) 20% voting interest. (c) Fuels/lubricants NOTE 48 -- SUMMARIZED FINANCIAL INFORMATION ON CERTAIN US SUBSIDIARIES BP AMERICA INC. (a)
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Sales and other operating revenue........................... 12,502 16,789 17,527 Gross profit (b)............................................ 1,813 3,196 3,699 Profit for the year (c)(e).................................. 562 963 1,197 ======= ======= =======
December 31, ------------------ 1998 1997 ------- ------- ($ million) Fixed and other assets...................................... 13,958 13,424 Current assets.............................................. 3,002 3,642 ------- ------- Total assets................................................ 16,960 17,066 ======= ======= Current liabilities......................................... 5,172 5,048 Noncurrent liabilities...................................... 6,761 7,457 Shareholders' interest...................................... 5,027 4,561 ------- ------- Total liabilities and shareholders' interest................ 16,960 17,066 ======= =======
F-84 164 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 48 -- SUMMARIZED FINANCIAL INFORMATION ON CERTAIN US SUBSIDIARIES (CONTINUED) THE STANDARD OIL COMPANY (a)
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Sales and other operating revenue........................... 12,111 16,312 17,077 Gross profit (b)............................................ 1,611 2,889 3,405 Profit for the year (c)(d)(e)(f)............................ 690 1,043 1,613 ======= ======= =======
December 31, ------------------ 1998 1997 ------- ------- ($ million) Fixed and other assets...................................... 12,562 11,852 Current assets.............................................. 4,547 5,032 ------- ------- Total assets................................................ 17,109 16,884 ======= ======= Current liabilities......................................... 2,772 2,687 Noncurrent liabilities...................................... 6,559 6,863 Shareholders' interest...................................... 7,778 7,334 ------- ------- Total liabilities and shareholders' interest................ 17,109 16,884 ======= =======
BP PIPELINES (ALASKA) INC. (a)
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Sales and other operating revenue........................... 547 638 755 Gross profit (b)............................................ 239 240 268 Profit for the year (c)(d)(f)............................... 149 130 340 ======= ======= =======
December 31, ------------------ 1998 1997 ------- ------- ($ million) Fixed and other assets...................................... 1,453 1,458 Current assets.............................................. 803 614 ------- ------- Total assets................................................ 2,256 2,072 ======= ======= Current liabilities......................................... 152 97 Noncurrent liabilities...................................... 1,366 1,360 Shareholders' interest...................................... 738 615 ------- ------- Total liabilities and shareholders' interest................ 2,256 2,072 ======= =======
F-85 165 BP AMOCO P.L.C. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE 48 -- SUMMARIZED FINANCIAL INFORMATION ON CERTAIN US SUBSIDIARIES (CONCLUDED) BP EXPLORATION (ALASKA) INC. (a)
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Sales and other operating revenue........................... 5,666 9,228 10,079 Gross (loss) profit (b)..................................... (68) 1,143 1,370 (Loss) profit for the year (d)(f)........................... (53) 963 824 ======= ======= =======
December 31, ------------------ 1998 1997 ------- ------- ($ million) Fixed and other assets...................................... 9,364 9,917 Current assets.............................................. 2,273 2,507 ------- ------- Total assets................................................ 11,637 12,424 ======= ======= Current liabilities......................................... 628 1,084 Noncurrent liabilities...................................... 2,041 2,070 Shareholders' interest...................................... 8,968 9,270 ------- ------- Total liabilities and shareholders' interest................ 11,637 12,424 ======= =======
- - ------------ (a) BP America Inc. is a wholly-owned subsidiary of BP Amoco p.l.c.; The Standard Oil Company is a wholly-owned subsidiary of BP America Inc.; and BP Pipelines (Alaska) Inc. and BP Exploration (Alaska) Inc. are wholly-owned subsidiaries of The Standard Oil Company. (b) Gross profit (loss) equals sales and other operating revenue less associated costs, which exclude distribution and administration expenses and exploration expense. (c) During 1996, certain deferred tax liabilities provided in the financial statements of The Standard Oil Company and BP Pipelines (Alaska) Inc. were transferred to BP America Inc. As a result of this transfer, profit for 1996 for The Standard Oil Company and BP Pipelines (Alaska) Inc. includes a tax benefit of $157 million and $208 million, respectively. (d) During 1997, as part of a restructuring of ownership interests among certain wholly owned subsidiaries of BP America Inc., the obligation for certain employee benefits provided in the financial statements of BP Exploration (Alaska) Inc. was transferred to The Standard Oil Company. As a result of this transfer, profit for 1997 for BP Exploration (Alaska) Inc. includes a credit of $223 million. (e) In August 1998, The Standard Oil Company completed the sale of its Lima, Ohio, refinery and related terminal facilities. The after-tax gain resulting from this sale amounts to $255 million, which includes the write-back of certain provisions no longer required. (f) During 1998, certain tax liabilities provided in the financial statements of BP America Inc. were transferred to The Standard Oil Company, BP Pipelines (Alaska) Inc. and BP Exploration (Alaska) Inc. As a result of this transfer profit (loss) for 1998 for The Standard Oil Company, BP Pipelines (Alaska) Inc. and BP Exploration (Alaska) Inc. includes a tax charge of $80 million, $22 million and $28 million, respectively. F-86 166 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- The following tables show estimates of the Group's net proved reserves of crude oil and natural gas at December 31, 1998, 1997 and 1996. ESTIMATED NET PROVED RESERVES OF CRUDE OIL (a)
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- (millions of barrels) 1998 SUBSIDIARY UNDERTAKINGS At January 1 Developed................................... 779 241 3,039 916 4,975 Undeveloped................................. 744 46 1,210 637 2,637 ------- ------- ------- ------- ------- 1,523 287 4,249 1,553 7,612 ======= ======= ======= ======= ======= Changes in year attributable to: Revisions of previous estimates............. 106 17 (90) (76) (43) Purchases of reserves-in-place.............. 3 -- 10 1 14 Extensions, discoveries and other additions................................ 38 4 57 222 321 Improved recovery........................... 80 1 69 32 182 Production.................................. (189) (38) (283) (141) (651) Sales of reserves-in-place.................. (33) -- (51) (47) (131) ------- ------- ------- ------- ------- 5 (16) (288) (9) (308) ======= ======= ======= ======= ======= At December 31 Developed................................... 1,258 220 2,982 858 5,318 Undeveloped................................. 270 51 979 686 1,986 ------- ------- ------- ------- ------- 1,528 271 3,961(b)(c) 1,544 7,304 ======= ======= ======= ======= ======= ASSOCIATED UNDERTAKINGS BP Amoco share At January 1........................................................................... 1,995 Purchases of reserves-in-place....................................................... 90 Production........................................................................... (72) ------- At December 31......................................................................... 2,013(d) ======= TOTAL GROUP AND BP AMOCO SHARE OF ASSOCIATED UNDERTAKINGS.............................. 9,317 =======
F-87 167 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION -- (CONTINUED) (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- ESTIMATED NET PROVED RESERVES OF CRUDE OIL (a) (CONTINUED)
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- (millions of barrels) 1997 SUBSIDIARY UNDERTAKINGS At January 1 Developed.............................. 655 198 2,933 911 4,697 Undeveloped............................ 924 49 924 731 2,628 ------- ------- ------- ------- ------- 1,579 247 3,857 1,642 7,325 ======= ======= ======= ======= ======= Changes in year attributable to: Revisions of previous estimates........ 33 13 139 50 235 Purchases of reserves-in-place......... 9 67 364 48 488 Extensions, discoveries and other additions........................... 88 28 338 144 598 Improved recovery...................... 35 1 66 34 136 Production............................. (160) (42) (302) (140) (644) Sales of reserves-in-place............. (61) (27) (213) (225) (526) ------- ------- ------- ------- ------- (56) 40 392 (89) 287 ======= ======= ======= ======= ======= At December 31 Developed.............................. 779 241 3,039 916 4,975 Undeveloped............................ 744 46 1,210 637 2,637 ------- ------- ------- ------- ------- 1,523 287 4,249(b)(c) 1,553 7,612 ======= ======= ======= ======= =======
ASSOCIATED UNDERTAKINGS BP Amoco share At January 1................................................ 1,869 Net revisions and other changes........................... (23) Purchases of reserves-in-place............................ 194 Production................................................ (45) At December 31.............................................. 1,995(d)(e) ===== TOTAL GROUP AND BP AMOCO SHARE OF ASSOCIATED UNDERTAKINGS... 9,607 =====
F-88 168 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION -- (CONTINUED) (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- ESTIMATED NET PROVED RESERVES OF CRUDE OIL (a) (CONCLUDED)
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- (millions of barrels) 1996 SUBSIDIARY UNDERTAKINGS At January 1 Developed............................ 574 189 2,998 857 4,618 Undeveloped.......................... 971 55 841 502 2,369 ------- ------- ------- ------- ------- 1,545 244 3,839 1,359 6,987 ======= ======= ======= ======= ======= Changes in year attributable to: Revisions of previous estimates...... (58) 13 27 23 5 Purchases of reserves-in-place....... 3 16 16 -- 35 Extensions, discoveries and other additions......................... 176 1 224 412 813 Improved recovery.................... 105 3 62 39 209 Production........................... (167) (30) (298) (142) (637) Sales of reserves-in-place........... (25) -- (13) (49) (87) ------- ------- ------- ------- ------- 34 3 18 283 338 ======= ======= ======= ======= ======= At December 31 Developed............................ 655 198 2,933 911 4,697 Undeveloped.......................... 924 49 924 731 2,628 ------- ------- ------- ------- ------- 1,579 247 3,857(b) 1,642 7,325 ======= ======= ======= ======= ======= ASSOCIATED UNDERTAKINGS BP Amoco share At January 1....................................................................... 1,912 Net revisions and other changes.................................................. (1) Production....................................................................... (42) ------- At December 31..................................................................... 1,869(d) ======= TOTAL GROUP AND BP AMOCO SHARE OF ASSOCIATED UNDERTAKINGS.......................... 9,194 =======
- - ------------ (a) Crude oil includes natural gas liquids and condensate. Net proved reserves of crude oil exclude production royalties due to others. (b) Proved reserves in the Prudhoe Bay field in Alaska include an estimated nil barrels (65 million barrels at December 31, 1997 and 111 million barrels at December 31, 1996) upon which a net profits royalty will be payable over the life of the field under the terms of the BP Prudhoe Bay Royalty Trust. (c) Minority interest in Altura Energy included 280 million barrels of crude oil (334 million oil barrels at December 31, 1997). ASSOCIATED UNDERTAKINGS (d) Includes 1,791, 1,825 and 1,869 million barrels for 1998, 1997 and 1996 respectively of proportionate interests held through associated undertakings in onshore and offshore concessions in Abu Dhabi expiring in 2014 and 2018, respectively. If recent production levels were to continue, these reserves would not be fully recovered during the period of the concessions. (e) Excludes reserves in Sidanco and Rusia. F-89 169 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION -- (CONTINUED) (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- ESTIMATED NET PROVED RESERVES OF NATURAL GAS (a)
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- (billions of cubic feet) 1998 At January 1 Developed.................................... 3,161 372 10,284 5,612 19,429 Undeveloped.................................. 1,868 50 1,819 7,208 10,945 ------- ------- ------- ------- ------- 5,029 422 12,103 12,820 30,374 ======= ======= ======= ======= ======= Changes in year attributable to: Revisions of previous estimates.............. (16) -- 161 (148) (3) Purchases of reserves-in-place............... -- -- 104 37 141 Extensions, discoveries and other additions................................. 129 11 176 4,439 4,755 Improved recovery............................ 25 -- 277 47 349 Production................................... (460) (71) (897)(b) (665) (2,093) Sales of reserves-in-place................... (64) -- (629) (1,829) (2,522) ------- ------- ------- ------- ------- (386) (60) (808) 1,881 627 ======= ======= ======= ======= ======= At December 31 Developed.................................... 3,536 324 9,637 6,054 19,551 Undeveloped.................................. 1,107 38 1,658 8,647 11,450 ------- ------- ------- ------- ------- 4,643 362 11,295(c) 14,701 31,001 ======= ======= ======= ======= =======
ASSOCIATED UNDERTAKINGS BP Amoco share At January 1................................................ 1,748 Net revisions and other changes........................... 47 Purchases of reserves-in-place............................ 52 Production................................................ (81) ------- At December 31.............................................. 1,766 ======= TOTAL GROUP AND BP AMOCO SHARE OF ASSOCIATED UNDERTAKINGS... 32,767 =======
F-90 170 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION -- (CONTINUED) (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- ESTIMATED NET PROVED RESERVES OF NATURAL GAS (a) (CONTINUED)
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- (billions of cubic feet) 1997 At January 1 Developed............................ 3,085 402 11,722 5,508 20,717 Undeveloped.......................... 2,204 76 1,617 5,735 9,632 ------- ------- ------- ------- ------- 5,289 478 13,339 11,243 30,349 ======= ======= ======= ======= ======= Changes in year attributable to: Revisions of previous estimates...... 94 -- (227) 992 859 Purchases of reserves-in-place....... 196 13 283 1,007 1,499 Extensions, discoveries and other additions......................... 122 289 1,035 1,221 2,667 Improved recovery.................... 10 1 99 200 310 Production........................... (519) (70) (950)(b) (629) (2,168) Sales of reserves-in-place........... (163) (289) (1,476) (1,214) (3,142) ------- ------- ------- ------- ------- (260) (56) (1,236) 1,577 25 ======= ======= ======= ======= ======= At December 31 Developed............................ 3,161 372 10,284 5,612 19,429 Undeveloped.......................... 1,868 50 1,819 7,208 10,945 ------- ------- ------- ------- ------- 5,029 422 12,103(c) 12,820 30,374 ======= ======= ======= ======= =======
ASSOCIATED UNDERTAKINGS BP Amoco share At January 1................................................ -- Net revisions and other changes........................... 54 Purchases of reserves-in-place............................ 1,723 Production................................................ (29) ------- At December 31.............................................. 1,748(d) ======= TOTAL GROUP AND BP AMOCO SHARE OF ASSOCIATED UNDERTAKINGS... 32,122 =======
F-91 171 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION -- (CONTINUED) (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- ESTIMATED NET PROVED RESERVES OF NATURAL GAS (a) (CONCLUDED)
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- (billions of cubic feet) 1996 At January 1 Developed............................ 3,179 418 12,893 5,543 22,033 Undeveloped.......................... 2,595 92 1,411 3,403 7,501 ------- ------- ------- ------- ------- 5,774 510 14,304 8,946 29,534 ======= ======= ======= ======= ======= Changes in year attributable to: Revisions of previous estimates...... (79) 18 (791) 22 (830) Purchases of reserves-in-place....... -- 6 300 21 327 Extensions, discoveries and other additions......................... 61 3 490 3,160 3,714 Improved recovery.................... 23 4 253 12 292 Production........................... (490) (63) (1,030)(b) (639) (2,222) Sales of reserves-in-place........... -- -- (187) (279) (466) ------- ------- ------- ------- ------- (485) (32) (965) 2,297 815 ======= ======= ======= ======= ======= At December 31 Developed............................ 3,085 402 11,722 5,508 20,717 Undeveloped.......................... 2,204 76 1,617 5,735 9,632 ------- ------- ------- ------- ------- 5,289 478 13,339 11,243 30,349 ======= ======= ======= ======= =======
- - --------------- (a) Net proved reserves of natural gas exclude production royalties due to others. (b) Includes 79 billion cubic feet of natural gas consumed in Alaskan operations (1997 81 billion cubic feet and 1996 83 billion cubic feet). (c) Minority interest in Altura Energy included 117 billion cubic feet of natural gas (161 billion cubic feet at December 31, 1997). (d) Excludes reserves in Sidanco and Rusia. F-92 172 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION -- (CONTINUED) (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES The following tables set out the standardized measures of discounted future net cash flows, and changes therein, relating to crude oil and natural gas production from the Group's estimated proved reserves. This information is prepared in compliance with the requirements of FASB Statement of Financial Accounting Standards No. 69 -- 'Disclosures about Oil and Gas Producing Activities'. Future net cash flows have been prepared on the basis of certain assumptions which may or may not be realized. These include the timing of future production, the estimation of crude oil and natural gas reserves and the application of year end crude oil and natural gas prices and exchange rates. Furthermore, both reserve estimates and production forecasts are subject to revision as further technical information becomes available and economic conditions change. BP Amoco cautions against relying on the information presented because of the highly arbitrary nature of assumptions on which it is based and its lack of comparability with the historical cost information presented in the financial statements.
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- ($ million) AT DECEMBER 31, 1998 Future cash inflows (a)................ 27,100 3,700 44,800 36,500 112,100 Future production and development costs (b).................................. 18,700 2,200 27,500 14,300 62,700 Future taxation (c).................... 2,000 800 3,100 9,900 15,800 ------- ------- ------- ------- ------- Future net cash flows.................. 6,400 700 14,200 12,300 33,600 10% annual discount (d)................ 1,300 100 7,000 6,600 15,000 ------- ------- ------- ------- ------- Standardized measure of discounted future net cash flows................ 5,100 600 7,200 5,700 18,600 ======= ======= ======= ======= ======= AT DECEMBER 31, 1997 Future cash inflows (a)................ 38,400 6,000 86,200 48,600 179,200 Future production and development costs (b).................................. 20,300 2,300 35,600 18,400 76,600 Future taxation (c).................... 4,700 2,300 15,500 12,600 35,100 ------- ------- ------- ------- ------- Future net cash flows.................. 13,400 1,400 35,100 17,600 67,500 10% annual discount (d)................ 4,300 400 19,100 8,700 32,500 ------- ------- ------- ------- ------- Standardized measure of discounted future net cash flows................ 9,100 1,000 16,000 8,900 35,000 ======= ======= ======= ======= ======= AT DECEMBER 31, 1996 Future cash inflows (a)................ 51,400 9,600 124,000 56,000 241,000 Future production and development costs (b).................................. 24,000 2,700 33,800 17,000 77,500 Future taxation (c).................... 8,800 3,600 30,000 15,000 57,400 ------- ------- ------- ------- ------- Future net cash flows.................. 18,600 3,300 60,200 24,000 106,100 10% annual discount (d)................ 6,200 1,300 32,500 11,400 51,400 ------- ------- ------- ------- ------- Standardized measure of discounted future net cash flows................ 12,400 2,000 27,700 12,600 54,700 ======= ======= ======= ======= =======
F-93 173 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION -- (CONTINUED) (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES (CONCLUDED) The following are the principal sources of change in the standardized measure of discounted future net cash flows during the years ended December 31, 1998, 1997 and 1996:
Years ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- ($ million) Sales and transfers of oil and natural gas produced, net of production costs.......................................... (6,500) (10,400) (11,400) Development costs incurred during the year.................. 4,700 5,100 4,600 Extensions, discoveries and improved recovery, less related costs..................................................... 3,200 4,000 9,200 Net changes in prices and production costs (e).............. (30,900) (34,300) 25,800 Revisions of previous reserve estimates..................... -- 1,000 400 Net change in taxation...................................... 10,800 14,000 (10,400) Future development costs.................................... (1,000) (3,000) (2,300) Net change in purchase and sales of reserves-in-place....... (200) (1,000) (200) Addition of 10% annual discount............................. 3,500 5,400 3,200 Other....................................................... -- (500) 1,900 ------- ------- ------- Total change in the standardized measure during the year.... (16,400) (19,700) 20,800 ======= ======= =======
- - ------------ (a) Future cash inflows are computed by applying year-end oil and natural gas prices and exchange rates to future annual production levels estimated by the Group's petroleum engineers. (b) Production costs (which include petroleum revenue tax in the UK) and development costs relating to future production of proved reserves are based on year-end cost levels and assume continuation of existing economic conditions. Future decommissioning costs are included. (c) Taxation is computed using appropriate year-end income tax rates. (d) Future net cash flows from oil and natural gas production are discounted at 10% regardless of the Group assessment of the risk associated with its producing activities. (e) Net changes in prices and production costs includes the effect of exchange movements. ASSOCIATED UNDERTAKINGS In addition, at December 31, 1998 the Group's share of the standardized measure of discounted future net cash flows of associated undertakings amounted to nil ($830 million at December 31, 1997 and $560 million at December 31, 1996). F-94 174 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION -- (CONTINUED) (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- OPERATIONAL AND STATISTICAL INFORMATION The following tables present operational and statistical information related to production, drilling, productive wells and acreage. PRODUCED FROM OWN RESERVES The following table shows crude oil and natural gas production from the Group's own reserves for the years indicated:
United Rest of Rest of Kingdom Europe USA World Total (d) ------- ------- ------- ------- --------- (thousand barrels per day) PRODUCTION FOR THE YEAR (a) Crude oil (b) 1998................................... 518 105 841 585 2,049 1997................................... 437 115 869 509 1,930 1996................................... 458 80 859 506 1,903
United Rest of Rest of Kingdom Europe USA World Total (e) ------- ------- ------- ------- --------- (million cubic feet per day) Natural gas (c) 1998................................... 1,258 200 2,401 1,949 5,808 1997................................... 1,423 195 2,513 1,727 5,858 1996................................... 1,335 173 2,650 1,759 5,917
- - ------------ (a) All volumes are net of royalty. (b) Crude oil includes natural gas liquid and condensate. (c) Natural gas production excludes gas consumed in operations. (d) Includes amounts produced for the Group by associated undertakings of 208,000 b/d in 1998 (1997, 172,000 b/d and 1996, 164,000 b/d). (e) Includes amounts produced for the Group by associated undertakings of 221 mmcf/d in 1998 (1997, 113 mmcf/d 1996, nil). F-95 175 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION -- (CONTINUED) (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- PRODUCTIVE OIL AND NATURAL GAS WELLS AND ACREAGE The following tables show the number of gross and net productive oil and natural gas wells and total gross and net developed and undeveloped oil and natural gas acreage in which the Group and its associated undertakings had interests as of December 31, 1998. A 'gross' well or acre is one in which a whole or fractional working interest is owned, while the number of 'net' wells or acres is the sum of the whole or fractional working interests in gross wells or acres. Productive wells are producing wells and wells capable of production. Developed acreage is the acreage within the boundary of a field, on which development wells have been drilled, which could produce the reserves; while undeveloped acres are those on which wells have not been drilled or completed to a point that would permit the production of commercial quantities, whether or not such acres contain proved reserves. NUMBER OF PRODUCTIVE OIL AND NATURAL GAS WELLS
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- -------- AT DECEMBER 31, 1998 Oil wells (a) -- gross............... 520 91 23,726 15,910 40,247 -- net................ 224.9 32.9 9,542.3 5,067.6 14,867.7 Gas wells (b) -- gross................ 409 41 14,458 2,262 17,170 -- net................. 184.8 14.2 7,690.8 1,417.2 9,307.0
- - ------------ (a) Includes approximately 1,174 gross (319.3 net) multiple completion wells (more than one formation producing into the same well bore). (b) Includes 1,419 gross (702.3 net) multiple completion wells. (c) If one of the multiple completions in a well is an oil completion, the well is classified as an oil well. OIL AND NATURAL GAS ACREAGE
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- (thousands of acres) AT DECEMBER 31, 1998 Developed -- gross............................. 1,133 71 11,682 9,298 22,184 -- net............................... 433 24 3,865 3,302 7,624 Undeveloped (a) -- gross............................. 5,767 3,335 10,440 171,834 191,376 -- net............................... 2,554 993 5,216 75,147 83,910
- - ------------ (a) Undeveloped acreage includes leases and concessions. F-96 176 BP AMOCO P.L.C. AND SUBSIDIARIES SUPPLEMENTARY OIL AND GAS INFORMATION -- (CONCLUDED) (UNAUDITED) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NET OIL AND NATURAL GAS WELLS COMPLETED OR ABANDONED The following table shows the number of net productive and dry exploratory and development oil and natural gas wells completed or abandoned in the years indicated by the Group and its associated undertakings. Productive wells include wells in which hydrocarbons were encountered and the drilling or completion of which, in the case of exploratory wells, has been suspended pending further drilling or evaluation. A dry well is one found to be incapable of producing hydrocarbons in sufficient quantities to justify completion.
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- 1998 Exploratory -- productive........................ 2.3 3.6 18.9 32.1 56.9 -- dry............................... 2.1 2.1 12.1 22.4 38.7 Development -- productive........................ 32.2 1.4 424.4 261.5 719.5 -- dry............................... 1.1 -- 16.7 30.6 48.4 1997 Exploratory -- productive........................ 2.8 2.5 27.2 42.4 74.9 -- dry............................... 5.4 11.5 15.0 13.4 45.3 Development -- productive........................ 32.5 4.7 258.8 282.1 578.1 -- dry............................... 1.2 -- 14.7 23.2 39.1 1996 Exploratory -- productive........................ 6.0 8.7 59.2 69.0 142.9 -- dry............................... 5.9 4.9 82.6 28.2 121.6 Development -- productive........................ 40.6 4.8 338.1 314.1 697.6 -- dry............................... 3.1 0.3 33.0 28.2 64.6
DRILLING AND PRODUCTION ACTIVITIES IN PROGRESS The following table shows the number of exploratory and development oil and natural gas wells in the process of being drilled by the Group and its associated undertakings as of December 31, 1998. Suspended development wells and long-term suspended exploratory wells are also included in the table.
United Rest of Rest of Kingdom Europe USA World Total ------- ------- ------- ------- ------- AT DECEMBER 31, 1998 Exploratory -- gross............................. 5 8 42 99 154 -- net............................... 1.7 2.6 24.4 30.9 59.6 Development -- gross............................. 33 1 216 93 343 -- net............................... 15.2 0.3 89.8 41.2 146.5
F-97 177 SCHEDULE II BP AMOCO P.L.C. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS - - -------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------
Additions -------------------------- Charged to Charged to Balance at costs and other Transfers/ Balance at January 1, expenses accounts (a) Deductions December 31, ---------- ---------- ------------ ---------- ------------ ($ million) 1998 Fixed assets -- Investments (b)........................... 25 200 -- 5 230 ========== ========== ========== ========== ============ Doubtful debts (b).............. 130 35 (22) (17) 126 ========== ========== ========== ========== ============ Decommissioning provisions...... 3,201 130 10 (31) 3,310 ========== ========== ========== ========== ============ 1997 Fixed assets -- Investments (b)........................... 34 -- (1) (8) 25 ========== ========== ========== ========== ============ Doubtful debts (b).............. 159 45 (6) (68) 130 ========== ========== ========== ========== ============ Decommissioning provisions...... 3,153 162 (29) (85) 3,201 ========== ========== ========== ========== ============ 1996 Fixed assets -- Investments (b)........................... 34 -- 2 (2) 34 ========== ========== ========== ========== ============ Doubtful debts (b).............. 155 37 (2) (31) 159 ========== ========== ========== ========== ============ Decommissioning provisions...... 3,094 (77) 296 (160) 3,153 ========== ========== ========== ========== ============
- - ------------ (a) Principally currency translations. (b) Deducted in the balance sheet from the assets to which they apply. S-1 EX-99.1 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 1 BP AMOCO P.L.C. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED) - - -------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------
Year ended December 31, 1998 ------------ ($ million except ratios) Profit before taxation...................................... 4,843 BP Amoco's share of income in excess of dividends from joint ventures and associated undertakings...................... (136) Capitalized interest........................................ (119) ------------ Profit as adjusted.......................................... 4,588 ============ Fixed charges Interest net of interest expense of joint ventures and associated undertakings................................ 891 Rental expense representative of interest................. 369 Capitalized interest...................................... 119 ------------ 1,379 ============ Total adjusted earnings available for payment of fixed charges................................................... 5,967 ============ Ratio of earnings to fixed charges.......................... 4.33 ============ Total adjusted earnings available for payment of fixed charges, after taking account of adjustments to profit before taxation to accord with US GAAP.................... 5,605 ============ Ratio of earnings to fixed charges with adjustments to accord with US GAAP....................................... 4.06 ============
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