20-F 1 d248481d20f.htm 20-F 20-F
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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

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended 31 December 2016

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-6262

 

 

BP p.l.c.

(Exact name of Registrant as specified in its charter)

 

 

England and Wales

(Jurisdiction of incorporation or organization)

1 St James’s Square, London SW1Y 4PD

United Kingdom

(Address of principal executive offices)

Dr Brian Gilvary

BP p.l.c.

1 St James’s Square, London SW1Y 4PD

United Kingdom

Tel +44 (0) 20 7496 5311

Fax +44 (0) 20 7496 4573

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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 25c each   New York Stock Exchange*
Floating Rate Guaranteed Notes due February 2018   New York Stock Exchange
Floating Rate Guaranteed Notes due May 2018   New York Stock Exchange
Floating Rate Guaranteed Notes due August 2018   New York Stock Exchange
Floating Rate Guaranteed Notes due September 2018   New York Stock Exchange
Floating Rate Guaranteed Notes due 2019   New York Stock Exchange
Floating Rate Guaranteed Notes due 2021   New York Stock Exchange
1.375% Guaranteed Notes due 2017   New York Stock Exchange
1.846% Guaranteed Notes due 2017   New York Stock Exchange
1.375% Guaranteed Notes due 2018   New York Stock Exchange
1.674% Guaranteed Notes due 2018   New York Stock Exchange
2.241% Guaranteed Notes due 2018   New York Stock Exchange
4.750% Guaranteed Notes due 2019   New York Stock Exchange
2.237% Guaranteed Notes due 2019   New York Stock Exchange
1.676% Guaranteed Notes due 2019   New York Stock Exchange
2.315% Guaranteed Notes due 2020   New York Stock Exchange
2.521% Guaranteed Notes due 2020   New York Stock Exchange
4.500% Guaranteed Notes due 2020   New York Stock Exchange
4.742% Guaranteed Notes due 2021   New York Stock Exchange
3.561% Guaranteed Notes due 2021   New York Stock Exchange
2.112% Guaranteed Notes due 2021   New York Stock Exchange
2.500% Guaranteed Notes due 2022   New York Stock Exchange
3.245% Guaranteed Notes due 2022   New York Stock Exchange
3.062% Guaranteed Notes due 2022   New York Stock Exchange
2.750% Guaranteed Notes due 2023   New York Stock Exchange
3.216% Guaranteed Notes due 2023   New York Stock Exchange
3.994% Guaranteed Notes due 2023   New York Stock Exchange
3.535% Guaranteed Notes due 2024   New York Stock Exchange
3.814% Guaranteed Notes due 2024   New York Stock Exchange
3.224% Guaranteed Notes due 2024   New York Stock Exchange
3.506% Guaranteed Notes due 2025   New York Stock Exchange
3.119% Guaranteed Notes due 2026   New York Stock Exchange
3.017% Guaranteed Notes due 2027   New York Stock Exchange
3.588% Guaranteed Notes due 2027   New York Stock Exchange
3.723% Guaranteed Notes due 2028   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 25c each

     21,049,696,078  

Cumulative First Preference Shares of £1 each

     7,232,838  

Cumulative Second Preference Shares of £1 each

     5,473,414  

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).*    Yes  ☐    No  ☐

 

* This requirement does not apply to the registrant in respect of this filing.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ☒                        Accelerated filer  ☐                        Non-accelerated filer  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐

    

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ☐                Item  18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

 

 


Table of Contents

LOGO


Table of Contents

    

 

 

 

The energy we produce serves to power economic growth and lift people out of poverty. In the future, the way heat, light and mobility are delivered will change. We aim to anchor our business in these changing patterns of demand, rather than in the quest for supply. We have a real contribution to make to the world’s ambition of a low carbon future.    LOGO

 

 

Contents

 

Strategic report

Overview
2    BP at a glance
4    Chairman’s letter
6    Group chief executive’s letter
8    The changing world of energy
10    How we run our business
Strategy
14    Our strategy
18    Measuring our 2016 progress
Performance
20    Challenging global energy markets
21    Group performance
24    Upstream
30    Downstream
35    Rosneft
37    Other businesses and corporate
   37    Gulf of Mexico oil spill
     38    Alternative energy
40    Sustainability
   40    Safety
   43    Climate change
   44    Value to society
   44    Human rights
   44    Local environmental impacts
   45    Ethical conduct
     46    Our people
47    How we manage risk
49    Risk factors

 

 

Additional disclosures

239    Contents
     Including information on liquidity and capital resources, oil and gas disclosures, upstream regional analysis and legal proceedings.
          
Shareholder information
271    Contents
     Including information on dividends, our annual general meeting and share prices.
          
280    Glossary
285    Non-GAAP measures reconciliations
288    Signatures
289    Cross-reference to Form 20-F
290    Information about this report

 

«  

Glossary

Words with this symbol« are defined in the glossary on page 280.

 

 

Cautionary statement

This document should be read in conjunction with the cautionary statement on page 269.

 

 

    
    
 

 

  


Table of Contents

LOGO

 

   BP Annual Report and Form 20-F 2016      1  


Table of Contents

LOGO

 

2    BP Annual Report and Form 20-F 2016


Table of Contents

LOGO

 

« See Glossary.    BP Annual Report and Form 20-F 2016      3  


Table of Contents

    

 

Chairman’s letter

 

LOGO  

Dear fellow shareholder,

 

2016 was a year of change on many fronts. The global community witnessed further challenges raised by economic, political and social forces, and many nations experienced internal stresses and tensions, which remain present. In the energy world, our world, it has been a period of transition. From a 12-year low in oil prices, to digital technologies that are transforming how we work, and the drive to a lower carbon economy, our team has had to manage through a period of uncertainty, complexity and volatility.

 

Against this backdrop, we have shown great resilience and character: we returned to profit and maintained our dividend. We had a good year in a tough environment. We have set a new strategic direction for BP – and we have a great team carrying it out.

 

The record since 2010

 

BP’s performance in 2016 was based on the foundations rebuilt following the 2010 Deepwater Horizon accident – an event that could have put the very existence of our company at risk.

 

Over the past six years, Bob Dudley and his team have steered the business through the recovery from the crisis of 2010 and then through the response to lower oil and gas prices.

 

During that period, safety has improved significantly. The portfolio has been strengthened. Operating cash flow has remained strong. The dividend has been restored and increased. Investment for growth has continued, while capital and costs have been controlled. The relationships on which we depend have been deepened. And all of this has been done while managing a charge of $63 billion for the 2010 accident, for which the major liabilities have now been clarified and for which we have a plan to manage the remaining payments and residual litigation. All of this sets a firm base for the future, which is bound to have its own challenges.

 

2016 performance and shareholder distributions

 

In 2016 the team has again focused on the careful stewardship of shareholders’ investments.

 

We continued making progress in safety performance, with serious incidents and injury rates falling. We delivered strong cash flow, disciplined capital spending and lower costs. We met our cost reduction target a year early. New major projects took shape. And we have continued to invest in opportunities for future growth, securing a set of innovative portfolio additions as well as divesting non-strategic assets.

 

This performance enabled us to maintain the dividend at 10 cents per ordinary share through 2016 and the board’s policy remains to grow sustainable free cash flow and distributions to shareholders.

 

Looking ahead

 

We can now look forward and outward, and the board and executive team have set out BP’s strategic priorities for the future.

Caption: Members of the board

examine BP operations at Baku

in Azerbaijan.

 

 

    
    
 

 

4    BP Annual Report and Form 20-F 2016


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Our refreshed strategy is designed to ensure BP is ‘good for all seasons’ in an uncertain environment. It enables us to compete in a world of volatile oil and gas prices, changing customer preferences and of course, the transition to a lower carbon future.

 

As our BP Energy Outlook 2035 predicts, the growth in consumption of oil will gradually slow and likely peak. This is a result of slowing demand growth, not limited supply, as was once thought. In a world of longer-term abundance, oil prices are likely to remain under pressure. Focus will shift to greater efficiency and low-cost production. Gas will grow as a cleaner alternative to coal. Advanced fuels and lubricants will help motorists reduce emissions. Renewable energy will grow rapidly to become commercial at scale.

 

As a global business, we plan to play our part in this energy transition. Our strategy provides BP with greater agility – combining lower cost oil production, increasing gas supply, greater market-led downstream activities, and growing renewables and venturing businesses.

 

We are also proud to be playing a leading role among our peers through the Oil and Gas Climate Initiative, where Bob’s chairmanship has seen an unprecedented convergence of national and international energy companies to act on this issue.

 

Remuneration

 

At the 2016 AGM, we heard a clear message from shareholders on executive pay. During the past year we have sought to address these concerns, recognizing they reflect the concerns of society more broadly.

 

The decisions we have taken, and for which we seek shareholder approval, mark a significant break from past policy. The total pay for executive directors in 2016 is much reduced compared to 2015.

 

The policy we propose for 2017 and beyond is a simpler approach to executive remuneration and reduces the total amount executive directors can earn compared with the previous policy. Executive reward will be driven even more closely than before by the company’s performance and shareholder returns. I particularly want to emphasize that the future remuneration of senior management will be directly linked to the delivery of our new strategic priorities, including BP’s contribution to the longer-term transition in supplying lower carbon energy to drive the global economy.

 

This new approach aims to take account of shareholder concerns on the level of executive pay while recognizing the clear need for a global business like BP to attract and retain the best talent. With those two primary considerations in mind, my fellow board members and I believe the new policy to be appropriate, balanced and responsive to all those we serve as a business.

 

Governance and the board

 

Today’s world presents a range of risks – operational, commercial, geopolitical, environmental and financial. On the board, we aim to maintain the breadth and depth of experience needed to fulfil our critical role of monitoring and managing those risks, working with the executive team.

  

LOGO

 

In 2016 Nils Andersen joined us as a non-executive director, bringing considerable insight gained in the energy, shipping and consumer goods industries. He has led major companies, including as chief executive of A.P. Møller-Mærsk A/S and Carlsberg A/S.

 

Cynthia Carroll and Andrew Shilston are standing down as directors at the forthcoming AGM. On behalf of the board I thank them for the substantial contributions they have made to our work both in the board and its committees over the years in some difficult times.

 

The board is proposing that Melody Meyer is elected as a director at the AGM. Melody has had an extensive career in the global oil and gas industry with Chevron and will bring experience of safe and efficient operations and world class projects. We continue to work to increase the diversity of the board as this enhances independent thinking and healthy challenge.

 

Conclusion

 

BP is a global business operating in over 70 countries. To do this effectively over the long term, we need the trust of our shareholders that we will deliver value, but also the trust of the societies where we work – both at home and across the world.

 

I believe this report, along with our Sustainability Report, demonstrates BP’s progress in working for all stakeholders, shareholders, customers, partners, governments, employees and communities.

 

Bob and his team have guided BP from a time of crisis in 2010 to a position where we have sound prospects for greater value creation and growth in the years ahead. Please join me in thanking Bob and his team for their exceptional stewardship of BP. Thank you to the board and to all our employees – and thank you all for your continued support.

 

We are now beginning a new journey.

 

LOGO

 

Carl-Henric Svanberg

Chairman

6 April 2017

  

$7.5bn

    

    

total dividends distributed
to BP shareholders

 

6.0%

    

    

ordinary shareholders
annual dividend yield«

 

6.4%

    

    

ADS shareholders
annual dividend yield

 

Caption: Meeting employees in Brazil.

 

LOGO More information
    

Corporate governance

Page 51

 

LOGO
    
 

 

« See Glossary.    BP Annual Report and Form 20-F 2016      5  


Table of Contents

    

 

Group chief executive’s letter

 

LOGO  

Dear fellow shareholder,

 

In 2016 BP started to look forward again. It may have been one of the toughest years we have yet seen in the business environment, with oil prices the lowest since 2004. But it was a year when we turned the challenges into opportunities, finding new ways to compete and grow in a fast-changing industry. Over the last six years, we have been making BP safer, stronger and more resilient. And in 2016 we once again began building for growth and setting a course for a low cost, lower carbon future.

 

Our results

 

Our top priority is always safety and in 2016 we continued the progress made in recent years, with 80% fewer serious incidents and a 40% lower injury rate than in 2011. A good safety record is one sign of disciplined operations. Another sign is reliability – and here too we have seen improvement, with upstream plant reliability of 95% – up from 86% in 2011 – and refining availability of 95.3%, maintaining our strong record in recent years.

 

The good progress that the team made was reflected in the financial results – with a return to headline profit in 2016 compared with a significant headline loss in 2015, which reflected our provisioning for Gulf of Mexico settlements. Our underlying replacement cost profit represents resilient performance given the environment of low oil and gas prices and weak refining margins. Net cash provided by our operating activities was $10.7 billion after payments for the oil spill of $6.9 billion.

 

The work we have done to reduce capital spending and costs played a large part in these results. More than two years ago we recognized that energy prices could be ‘lower for longer’. Since then, we have been dedicated to changing the way we work, putting in place cost savings and efficiencies that can be sustained. As a result, our 2016 capital spend was significantly lower than peak levels in 2013. Not only did we meet our 2017 target for cash cost reduction – we did so a year ahead of schedule.

 

Capital discipline is not only about reducing spending, but ensuring that the money we continue to invest is spent well. One example in 2016 was the sanction of the second phase of our Mad Dog operation in the US Gulf of Mexico at a budget of $9 billion – less than half the original estimate. This helps make this project highly competitive – even in a lower oil price environment.

 

I am pleased to report that the major liabilities from the Deepwater Horizon accident have been resolved – with most of the outstanding governmental and commercial claims clarified. Cash payments were around $7 billion in 2016 which we expect to fall to $4.5-5.5 billion in 2017, $2 billion in 2018 and a little over $1 billion per year thereafter. Our disciplined financial

Caption: The BP Energy Outlook Launch

at our headquarters in London, UK.

 

 

    
    
 

 

6    BP Annual Report and Form 20-F 2016


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framework can accommodate these outflows and, with this resolution, our management team can focus with greater confidence on the future.

 

Our portfolio

 

We started the year with a goal to increase production from new projects by 800,000 barrels a day by 2020. During 2016 we remained on track for that goal, and we have increased our ambition to over a million barrels a day by 2021. Given the competitive environment, this goal goes hand in hand with a disciplined focus on costs.

 

In the Upstream, we launched six major project start-ups, from Algeria to the Gulf of Mexico, and made final investment decisions on a further five. We are maintaining that momentum in 2017 with more significant start-ups scheduled – including the Quad 204 development in the UK, the giant Khazzan field in Oman and the West Nile Delta project in Egypt. These projects bring us significant reserves, flowing supplies and lower our per unit cost structure. They reposition our portfolio for the future.

 

The Downstream has continued to improve performance and grow with earnings up more than 25% compared with 2014, despite lower industry refining margins. We have enhanced our retail offer to customers – rolling out our new fuels with ACTIVE technology in 13 countries and building great retail partnerships such as with M&S in the UK, REWE in Germany and, subject to regulatory approvals, Woolworths in Australia. Plus, our partnership with Fulcrum BioEnergy should help bring low carbon jet fuel to the market at scale.

 

We have announced a number of strategic additions to our portfolio. We broadened our positions in world-class gas fields: in the West African basin through an agreement with Kosmos Energy; in Egypt’s Zohr field, thought to be the largest discovered in the Mediterranean; and in Oman’s Khazzan development, a giant project that has now become even bigger. These underline our focus on gas, the fastest growing hydrocarbon fuel with the lowest carbon content.

 

We have also been innovative in terms of business models. In Abu Dhabi, we concluded an agreement to renew an onshore oil concession, stretching to 2050, in exchange for a 2% stake in BP. We have operated there for 75 years and this transaction underscores the value of long-term relationships. In Norway, we combined Det norske’s nimble business practices, Aker’s industrial experience and our global scale expertise to form Aker BP – the country’s largest independent oil company. This gives us access to substantive offshore oil and gas resources as well as dividends for shareholders.

 

Putting all these initiatives together, we are creating a substantial core of long-term, cost-efficient major projects that can deliver material operating cash flow and earnings for decades to come.

 

 

LOGO

 

Our future

 

This was also a year when we set out our strategic priorities for the longer term. They are rooted in society’s need to use more energy – bringing heat, light and mobility to millions of people – while positioning BP for a lower carbon world. These priorities will help us drive progress and respond with agility to external changes – whether in supply and demand, oil and gas prices, in environmental policy or in technology.

 

Competitive upstream portfolio: we will expand the gas portfolio alongside lower cost oil production, managing these cost-effectively.

 

Market-led Downstream: we will provide a range of fuels and lubricants that help make vehicles more efficient and grow our fuels marketing and lubricants businesses.

 

Low carbon and venturing: we will broaden our renewable energy and low carbon businesses through reinvestment in the current portfolio, build a dynamic venturing arm, and further our work in tackling climate change.

 

Modernizing the whole group: we will be deploying advanced technologies such as robotics and big data analytics to improve and simplify our processes – as well as using our trading expertise to maximize the value from our assets.

 

I am extremely proud of the global BP team. Without the women and men of BP, we would not have been able to preserve and transform the business over the past six years. I am grateful to our partners, host governments, and other stakeholders who have stood by us as we have stabilized BP and built up our resilience. And I say thank you, to you, our shareholders who have afforded us the time and support to take the actions needed to restore BP to a position of strength from which we can grow and prosper in the years ahead.

 

Since 2010, BP’s story has been one of recovery, rebuilding and resilience. Now we are increasingly looking ahead with a spirit of purpose and invention. From 2017, you can expect a story of growth.

 

LOGO

 

Bob Dudley

Group chief executive

6 April 2017

 

95.3%

    

    

2016 refining availability«

 

95%

    

    

Upstream BP-operated plant reliability«

 

Caption: Speaking with investors at the field trip in Baku, Azerbaijan.

 

LOGO More information
    

Business model

Page 10

 

Strategy

Page 14

 

Performance

Page 21

 

 

LOGO
    
 

 

« See Glossary.    BP Annual Report and Form 20-F 2016      7  


Table of Contents

LOGO

 

Main image: Sherbino wind farm in Pecos County, Texas.

 

Inset image: Service station in Chippenham, UK, selling our latest fuels with ACTIVE technology.

  

Lower oil price environment

 

Oil prices have been substantially lower since 2014, primarily due to oversupply. The market is gradually readjusting, as both demand and supply respond to lower prices. However, the high level of oil inventories suggests this adjustment is likely to take some time.

 

In line with our refreshed strategy, we test our investments against a range of oil and gas prices to check their profitability over the long term. We take into account current price levels and our long-term outlook.

 

Importantly, the break-even price of many of our investments is going down as BP and industry suppliers reduce costs to meet market conditions.

 

Energy consumption by region

(billion tonnes of oil equivalent)

 

LOGO

  

Growing demand for energy

 

Affordable energy is essential for economic prosperity. Energy provides heat and light for homes, fuel for transportation and power for industry. And everyday objects – from plastics to fabrics – are derived from oil.

 

We expect world demand for energy to increase by around 30% between 2015 and 2035 – largely driven by rising incomes in emerging economies. The extent of this increase is being curbed by gains in energy efficiency, as there is greater attention around the world on using energy more sustainably.

 

Energy mix is shifting

 

New technologies and consumer preferences for low carbon energy are leading to changes in the fuel mix, resulting in a gradual decarbonization. Renewables are the fastest-growing energy source. They are expected to increase at around 7% a year and account for 40% of the growth in power generation over the next two decades. Renewables currently contribute around 3% of total global energy demand, and we estimate that, as a result of rapid improvements in their competitiveness, they will contribute around 10% by 2035.

 

Over the same period, we think oil and natural gas are likely to continue to play a significant part in meeting demand for energy. They currently account for around 56% of total energy consumption.

 

By 2035 we think oil will have around a 29% share, with annual growth slowing down over this period. Meanwhile we believe the share of gas will go up slightly to 25% of global energy, placing it ahead of coal and not far behind oil.

 

BP is gearing up to meet this shifting demand by increasing its gas and renewables activities.

 

8    BP Annual Report and Form 20-F 2016


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Advances in technology

 

Emerging technologies – such as improved batteries, solar conversion, electricity storage and autonomous vehicles – are accelerating the energy transition. For example, the base case scenario in our Energy Outlook suggests that the use of electric vehicles will grow almost one hundred-fold by 2035. That means that about 6% of the cars on the road would be electric, with a reduction in total oil demand of around one million barrels a day. However, a faster mobility revolution – including car sharing, ride pooling, autonomous vehicles and electric cars – could reduce oil demand by several times that amount.

 

Our Technology Outlook shows how technology can play a major role in meeting the energy challenge by widening energy resource choices, transforming the power sector, improving transport efficiency and helping to address climate concerns out to 2050.

 

We prioritize certain new technologies for in-depth analysis – based on their fit with our strategy and how soon and likely we think they are to break through technological and commercial barriers. We also invest in start-up companies to understand and participate in these potentially transformational technologies. See page 12.

  

Emerging greenhouse gas policy and regulation

 

Governments are putting in place taxes, carbon trading schemes and other measures to limit greenhouse gas (GHG) emissions. We expect around two-thirds of BP’s direct emissions will be in countries subject to emissions and carbon policies by 2020.

 

To help anticipate greater regulatory requirements for GHG emissions, we factor a carbon cost into our own investment decisions and engineering designs for large new projects and those for which emissions costs would be a material part of the project. In industrialized countries, this is currently $40 per tonne of carbon dioxide equivalent, and we also stress test at a carbon price of $80 per tonne.

 

Our carbon cost, along with energy efficiency considerations, encourages projects to be set up in a way that will have lower GHG emissions.

  

LOGO

 

BP Energy Outlook provides our projections of future energy trends and factors that could affect them out to 2035.

 

See bp.com/energyoutlook

 

LOGO

 

See bp.com/technologyoutlook

 

LOGO

 

See bp.com/sustainability for performance data, case studies and information on our approach to managing our sustainability impacts.

      LOGO More information   
        
     

Challenging global energy markets

Page 20

 

Our strategy

Page 14

  
        
        

 

A changing energy mix     
 
Energy consumption – billion tonnes of oil equivalenta   

Change in COemissions

from 2015

LOGO

 

a The sum of the fuel shares may not equal 100% due to rounding.

 

          
 
Energy outlook    Base case    Faster transition    Even faster transition
 
The three scenarios reflect different assumptions about the pace of the energy transition due to factors such as policy and consumer behaviour.   

This scenario outlines our view of the most likely path for energy to 2035. The growing world economy will require more energy but consumption will increase less quickly than in the past.

 

   This scenario sees carbon prices in leading economies rise to $100/tonne by 2035 and policy interventions encourage more rapid efficiency gains and fuel switching.    This scenario matches the path of the International Energy Agency’s ‘450 scenario’, which aims to limit the global temperature rise to 2ºC.
                

 

LOGO
    
 

 

   BP Annual Report and Form 20-F 2016      9  


Table of Contents

    How we run our business

 

   

 

From the deep sea to the desert, from rigs to retail, we deliver energy products and services to people around the world. We provide customers with fuel for transport, energy for heat and light, lubricants to keep engines moving and the petrochemicals products used to make everyday items as diverse as paints, clothes and packaging.

         

 

Enabling our business model

    

 

           

 

Safe and reliable operations

 

   

 

Talented people

 

 
           

 

We strive to create and maintain a safe operating culture where safety is front and centre. This is not only safer for people and the environment – it also improves the reliability of our assets.

 

See Safety on page 40.

 

   

 

We work to attract, motivate, develop and retain the best talent the world offers – our performance and ability to thrive globally depends on it.

 

See People on page 46.

 

 
   

 

Our diverse portfolio is balanced across businesses, resource types and geographies. Having upstream and downstream businesses, along with well-established trading capabilities, helps to mitigate the impact of lower oil and gas prices. Our geographic reach gives us access to growing markets and new resources, as well as diversifying exposure to geopolitical events.

 

 

Our role in society

  

 

The energy we produce helps to support economic growth and improve quality of life for millions of people. We strive to be a world-class operator, a responsible corporate citizen and a good employer.

 

We believe that the societies and communities we work in should benefit from our presence. In supplying energy we contribute to economies around the world by employing local staff, helping to develop national and local suppliers, and through the taxes we pay to governments. Additionally, we aim to create meaningful and sustainable impacts in those communities through our social investments.

      LOGO  
           

 

Creating shareholder value

 

   

 

$11.2bn

    

employee wages and benefits

 

$2.2bn

    

taxes paid to governments –

comprising income and

production taxes

 

$7.5bn

    

total dividends distributed to BP

shareholders

 

       

Finding oil and gas

 

New access allows us to renew our portfolio, discover additional resources and replenish our development options. We focus our exploration activities in the areas that are competitive in the portfolio. We develop and use technology to reduce costs and risks.

 

Developing and extracting

oil and gas

 

We create value by seeking to progress hydrocarbon resources and turn them into proved reserves, or sell them on if they do not fit with our strategic priorities. We develop and produce the resources that meet our return threshold, which we then sell to the market or distribute to our downstream facilities. Our upstream pipeline of future

   

projects gives us choice about which we pursue – see page 28.

 

We also seek to grow or extend the life of existing fields and are using new business models to increase value. Our US Lower 48 onshore business and Aker BP in Norway (see page 26) are two examples of how we’ve used innovative new business models in response to the competitive environment.

 

Transporting and trading

 

We move oil and gas through pipelines and by ship, truck and rail. We also trade a variety of products including oil, natural gas, liquefied natural gas, power and currencies. Our traders complete around 550,000 transactions and serve more than 12,000 customers across some 140 countries in a year.

 
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 Technology, innovation and venturing

 

New technologies are enabling us to produce energy safely and more efficiently. We selectively research and invest in areas with the potential to add greatest value to our business now and in the future.

See Using technology on page 12.

 

 Partnerships and collaboration

 

We aim to build enduring relationships with governments, customers, partners, suppliers and communities in the countries where we operate.

See Rosneft on page 35.

 

 Governance and oversight

 

Our risk management systems and policy provide a consistent and clear framework for managing and reporting risks. The board regularly reviews how we identify, evaluate and manage risks.

See How we manage risk on page 47.

 

 

 

 

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We use our market intelligence to analyse supply and demand for commodities across our global network. This helps us deliver what the market needs, when it needs it, identify the best markets for BP’s crude oil, source optimal raw materials for our refineries and provide competitive supply for our marketing businesses.

Manufacturing and marketing fuels and products

We produce refined petroleum products at our refineries and supply distinctive fuel and convenience retail services to consumers. Our advantaged infrastructure, logistics network and key partnerships help us to have differentiated fuels businesses and deliver compelling customer offers.

Our lubricants business has premium brands and access to growth markets. It also leverages technology and customer relationships, all of which we believe gives us competitive advantage. We serve automotive, industrial, marine and energy markets across the world.

And in petrochemicals our proprietary technology solutions deliver leading cost positions compared to our competitors. In addition to our own petrochemicals plants, we work with partners and license our technology to third parties.

Generating renewable energy

We have the largest operated renewables business among our oil and gas peers. We operate a biofuels business in Brazil, using

one of the world’s most sustainable and advantaged feedstocks to produce both low carbon ethanol and low carbon power.

We provide renewable power through our significant interests in onshore wind energy in the US. We develop and deploy technology in our wind business to drive efficiency and capacity.

 

 

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Upstream

Page 24

 

Downstream

Page 30

 

Alternative energy

Page 38

 
 

 

 

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Using technology

    

           
   

Developments in technology will shape and influence the way we identify, extract, convert, store and ultimately consume energy in the future.

 

Our approach is not about trying to do everything, but to focus on the areas that have the greatest potential value to our business now and in the future.

 

We focus our activities on:

  managing safety and operational risk

  capturing business value

  competitively differentiating BP from others.

 

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The right technology is central to the safety and reliability of our operations. This covers everything from assessment and management of technical risk to maximizing our businesses efficiency and performance. It helps us to grow value through innovation, acquisition of competitive new capabilities and application of best practice.

 

In Upstream, this technology investment also supports business strategy by focusing on increased recovery and gaining new access. And in Downstream we develop and apply technology that enhances operational integrity, boosts conversion efficiency or reduces CO2 emissions in some of our operations and provides high-performance products for our customers.

 

   

When a facility is unexpectedly out of action, production revenues are lost and costs rise from unscheduled maintenance. But ‘plant operations advisor’, a new digital solution we are developing in collaboration with GE Oil & Gas, will help our engineers respond to issues in real time, reducing unplanned downtime and improving the reliability of operational facilities. The system

 

  identifies early warning signs of potential performance problems. It gathers machinery and plant data, analyses it and brings it all to a single screen so that engineers can troubleshoot quickly and resolve potential issues. We are now piloting the system at an offshore operating hub in the Gulf of Mexico.
   

We have scientists and technologists at seven major technology centres in the US, UK and Germany. BP and its subsidiaries hold more than 3,800 granted patents and pending patent applications throughout the world. In 2016 we invested $400 million in research and development (2015 $418 million, 2014 $663 million). The reduction was largely due to halting major conversion technology programmes in Downstream and biofuels.

 

Around the world, BP engineers are now using the ‘big data’ Argus platform to make critical decisions about wells, reservoirs and fields with state-of-the-art analytical tools that draw on historical and real-time data points. With these new capabilities, well-sensor data is being made available to engineers and operators within seconds for monitoring, analysis and value optimization.

 

BP is partnering with others to understand and develop solutions for the future including sustainable mobility, carbon management, power and storage, bio-products and digital energy.

 

   

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Seismic data helps us see into reservoir rock and detect where hydrocarbon potential may lie. Achieving high-quality images in difficult terrains is costly and needs many people in the field

 

 

with existing technology. In partnership with Rosneft and Schlumberger’s WesternGeco, we are developing innovative technologies to improve our surveys with faster, better-quality data, captured at a lower cost with less risk. Our project has the potential to expand the industry’s ability to image the subsurface, especially in challenging land environments across the world – and it also offers environmental and safety benefits when working in extreme climates and areas that are difficult to access.

 

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Our long-term research is vital to BP’s capacity to adapt and grow. For example, the BP Institute for Multiphase Flow at the University of Cambridge has examined a range of complex and challenging problems associated with the flow of matter for the past 15 years. Our research into rock and fluid interactions has led to significant developments in the use of low salinity water to improve oil recovery from our fields.

 

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People are increasingly choosing to live in cities, so roads have become much busier – meaning repetitive stopping, waiting and starting again. In fact, independent global research shows that drivers spend up to a third of urban journeys idling – and slowly, but permanently, this wears away critical engine parts. That’s why we’ve launched new engine oils containing our latest patented molecules, designed for the needs of today’s engines. Castrol MAGNATEC with

 

  DUALOCK contains molecules that lock together to form a powerful layer of engine protection. We’ve been helping to protect engines worldwide against warm-up wear for 20 years. Now our unique DUALOCK technology builds on that by reducing both warm-up and stop-start wear by up to 50%.

 

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Working smarter

    

   
   

We have been reshaping our portfolio for some years, with a focus on achieving operational excellence to grow margins.

 

We seek to get more from our existing assets and capture value from each dollar we spend. We encourage everyone at BP to find and implement smarter ways of working, without compromising safety. From small and simple ideas to large-scale deployment of tools – like Argus, which has

 

 

optimized monitoring and analysis for 99.5% of our wells (see page 12), our people are helping to make a positive difference to our operations.

 

In the Upstream we also launched a modernization and transformation programme to find ways to improve flexibility, embrace digitization and drive capital and operational performance. This includes a series of online events to allow employees to offer ideas on how we can simplify and improve many of our processes and ways of working.

 

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A lot for less

 

Each year we buy an annual supply of caustic soda for use at Cherry Point refinery. To help achieve competitive pricing for this product we introduced a fair and transparent reverse auction – where sellers compete to obtain our business. Compared with the standard purchase prices offered to us, the auction generated savings of more than $250,000 for this one commodity in a challenging supply market. We now aim to use reverse auctions more widely in markets where the level of competition lends itself to this approach.

 

Less data, more know-how

 

Before beginning seismic acquisition in the shallow water area around the Absheron Peninsula in the Azerbaijani Caspian Sea, a subsea hazard identification survey was needed. This process required a lot of data collection for analysis and processing – causing a backlog that was costing time and money. We assessed this and discovered time was being wasted gathering and analysing data, regardless of height from the seabed, when we only needed to identify targets with heights greater than half a metre. By reassessing the survey’s scope with the contractor and establishing a new process to only capture what was needed, we saved around $750,000.

 

   
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Improving competitiveness

 

In the UK we have historically supplied fuels to our retail sites using our own in-house transportation fleet. After a strategic review to continue to improve competitiveness, we transferred all our UK secondary transport activities including scheduling, dispatching and delivery operations to Hoyer – a leading large-scale logistics service provider. This change further strengthens our business by giving us access to a cost-effective and flexible service from a professional international haulier with a reliable safety track record.

 

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Getting onboard savings

 

To access a rig in Trinidad, operators used complex scaffolding that took around 11 days to set up. By replacing this with a fixed-structure platform we decreased set up time by nine days and reduced risk of joint failure by removing scaffolding connections. This has made significant savings in rig costs and is already being reused to achieve further savings at other facilities in Trinidad.

 

 

Lightening the load

 

As part of our review of rental equipment at the PSVM development in Angola, we removed a number of items – like tool boxes, gas racks and welding machines – that were being held on the vessel but not used. This has already delivered equipment savings of $750,000 in 2016 and eliminated man hours required for maintaining and inspecting the equipment. We are now looking for similar opportunities to review excess equipment and inventories elsewhere.

 

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Our strategy

 

   

 

Fit for the future

  

    
   
   

Our industry is changing at a pace not seen in decades. All forms of energy – fossil fuels and renewables – are becoming more abundant and less costly. Through new technologies, energy will be produced more efficiently and in new ways, helping to meet the expected rise in demand. And the world is working towards a lower carbon future.

 

  

Shift to gas and advantaged oil in the upstream

 

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We are evolving our strategy – allowing us to be competitive in a time when prices, policy, technology and customer preferences are changing.

 

Our strategic priorities help us to deliver heat, light and mobility solutions for a changing world.

 

  

Invest in new large-scale gas

projects, pursue quality oil projects

in core basins and seek out new

opportunities in selected regions.

          
   
   

How we do this

  

  

  Around 75% of our planned start-ups by 2021 are in gas projects.

 

  All of our planned oil start-ups out to 2021 are lower cost or around our existing basins.

 

  Maximize recovery, manage decline and extend the life of our existing oil and gas fields.

 

  Optimize our portfolio by making investments and divestments to deliver long-term value, with the potential to start increasing earnings or cash flow within a short time frame.

 

          
   
   

2016 activities

  

  

We renewed our interest in the Abu Dhabi ADCO onshore concession and signed a letter of intent for the future development of the Azeri-Chirag-Gunashli field – boosting our lower-cost oil production for decades to come. We also made deals to expand our gas exposure in China, Egypt, Indonesia, Mauritania and Senegal, and Oman.

 

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Market-led growth

in the downstream

 

 

Venturing and

low carbon across

multiple fronts

 

 

Modernizing the

whole group

   

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Build competitively advantaged businesses in manufacturing and expand our marketing businesses.  

Pursue new ventures and partnerships to meet rapidly evolving technology, consumer and policy trends, and develop cross-business solutions to create new opportunities or strengthen our existing relationships.

 

  Simplify and modernize so we can continue to compete and seize new opportunities with our partners and stakeholders in a changing world.
   

Strengthen the competitiveness of our refineries and petrochemicals plants.

 

 Grow our fuels marketing and lubricants businesses in existing and new markets.

 

 Create new fuels, lubricants and petrochemicals offers to meet the evolving needs of our customers and partners.

 

Develop and prove new business models through partnerships with vehicle manufacturers and others.

 

Optimize and grow our renewables activities.

 

Partner with start-ups to broaden our options and use our ability to bring successful technologies to fruition on a large scale.

 

Help customers offset their personal and business emissions through renewables generation or carbon trading.

 

Deepen our understanding of future energy, technology and climate change trends through collaboration with academic and research institutions.

 

 

Simplify our organizational structures and processes.

 

Introduce digital solutions to enhance our productivity and services for our customers.

 

Maximize value from our assets through our oil, gas, power and renewables trading activities.

 

Transform how it feels to work for BP – motivating our people to perform at their best.

 

Strive for ways to continue improving the safety and reliability of our operations.

 

   
We released BP fuels with ACTIVE technology, designed to fight engine dirt and protect against it building up. Now sold in 13 countries, this was our largest fuel launch in a decade. BP announced a strategic partnership with one of Australia’s largest supermarket retailers Woolworths to acquire, rebrand and operate their fuel and convenience sitesa.   We established a presence in China’s fast developing emissions trading market, striking the largest deal yet. And we are partnering with Fulcrum BioEnergy – a company that produces lower carbon jet fuel from household waste – to help them bring biojet to the market at scale.  

We are using cloud-based platforms for rapid analysis and decision making with state-of-the-art visualization and predictive tools. We are introducing digital apps in our retail and aviation businesses that can improve customer service and convenience. Our new fleet of underwater robots are improving how we monitor the ocean environment and assess risks. And we have expanded our global business services organization, with plans to open our 10th BP centre in late 2017.

 

   

LOGO Read more in Downstream on page 30.

 

a Subject to regulatory approval.

 

 

LOGO  Read about our activities in Using technology on page 12 and Alternative energy on page 38.

 

 

LOGO  Read more in Group performance on page 21.

 

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The foundations for strong performance

 

 

Safe and reliable operations, a balanced portfolio and a focus on returns provide the platform for growth which is critical to the successful delivery of our strategy.

 

These build on our group business model: having the right people, partnerships, processes and technology in place to deliver value across all our activities.

 

  

 

Safe, reliable and efficient execution

  

 

Distinctive portfolio with optionality

   
Operational excellence is essential to our success. Good safety leads to reliable operation of our assets, greater efficiency and ultimately better financial results. Our operating management system« promotes continuous improvement and systematic ways of working. And, we are using technology to produce energy more safely and efficiently.   

We benefit from having upstream, downstream and alternative energy businesses – challenges in one part of the group can create opportunities in another. Around the world, we are investing in upstream projects – expected to deliver operating cash marginsa« 35% better than 2015 levels. We are driving sustainable competitiveness in our downstream business, with a focus on customers, cost efficiency and margin capture.

 

 

 

Operating reliability and availability

 

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Our well-established oil and gas trading function can generate value by providing the link between our businesses and third parties. And our equity interest in Rosneft gives us access to one of the largest and lowest-cost hydrocarbon resource bases in the world.

 

a Based on 2015 oil prices.

 

  

 

Disciplined growth

 

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Personal and process safety performance

 

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Marketing and customer focus

 

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More than 50% of downstream profits are from marketing activities.

 

    
    
 

 

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Focused on delivering competitive returns

 

In 2014 we set out our financial framework in response to the sharp decline in the oil price. The framework underpins our commitment to sustain the dividend for our shareholders. We have been meeting those expectations each year – and even reaching our cash cost reduction target a year early. We also reduced our upstream and downstream headcount by a total of 6,000 in 2016 – a reduction of 17% since 2014.

We have now updated and extended the framework out to 2021. We expect our strong balance sheet to be able to deal with any near-term volatility. Beyond that, we aim to increase operating cash flow – from our planned upstream start-ups and growth in the downstream. With a constant capital frame we intend to grow sustainable free cash flow and distributions to shareholders in the long term.

 

 

Principle

 

>

  2016 achievement  

>

  2017 guidance   >   Looking ahead – 2018 to 2021

Optimize capital expenditure

 

2016 organic capital expenditure was $16 billion* – after excluding the consideration for the renewal of 10% of the Abu Dhabi ADCO onshore oil concession.

 

This was well below our original guidance of $17-19 billion.

 

  We expect organic capital expenditure of $15-17 billion.   We expect organic capital expenditure of $15-17 billion per year.

Make selective divestments

 

$3.2 billiona achieved in 2016.

 

This was within the expected guidance of $3-5 billion for the year.

  We expect divestments of $4.5-5.5 billion.   $2-3 billion of divestments as a result of active portfolio management.

Payments related to the Gulf of Mexico oil spill

 

2016 payments totalled $6.9 billion, reflecting faster resolution of outstanding claims.

 

  We expect $4.5-5.5 billion of cash payments.  

Around $2 billion in 2018 and moving to annual payments of just over $1 billion from 2019 onwards.

 

Maintain flexibility around gearing

 

Gearing« at the end of 2016 was 26.8%**.

 

This was within our target range of 20-30%.

 

  Within the 20-30% band.   Within the 20-30% band.

Group ROACE«

  ROACE was 2.8%*** in 2016.        

We are aiming to exceed 10% by 2021 at real oil prices around $55/barrel.

 

 

a  Includes $0.6 billion for the sale of 20% from our shareholding in Castrol India Limited.

 

Balancing our sources and uses of cash

We aim for our operating cash flow (excluding payments related to the Gulf of Mexico oil spill) to cover our dividend payments and organic capital expenditure«.

 

Nearest GAAP equivalent measures

 

* Additions to non-current assets: $21 billion.

 

** Ratio of gross debt to gross debt plus equity: 37.6%.

 

*** Numerator: Profit attributable to BP shareholders $115 million; Denominator: Average capital employed $153 billion.

For the year ended 31 December ($ billion)

 

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Measuring our 2016 progress

We assess our performance across a wide range of measures and indicators.

 

Our key performance indicators (KPIs) help the board and executive management assess performance against our strategic priorities and business plans. We believe non-financial measures – such as safety and an engaged and diverse workforce – have a useful role to play as leading indicators of future performance.

 

Remuneration

 

To help align the focus of our board and executive management with the interests of our shareholders, certain measures are used for executive remuneration. Overall annual bonuses and performance shares for 2016 are all based on performance against measures and targets linked directly to the strategy and KPIs.

 

Changes to KPIs

 

We have updated some of our KPIs this year to better align to our evolved strategy and future remuneration policy.

 

  We’ve added return on average capital employed and upstream unit production costs as these will be important measures for assessing future performance and pay outcomes.

 

  We’re showing replacement cost profit at group level rather than on a per-share basis as this aligns with the measure used for executive remuneration.

 

  We’ve removed gearing, or net debt ratio, as a group KPI but will continue to report it in Group performance.

 

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Underlying RC profit« is a useful measure for investors because it is one of the profitability measures BP management uses to assess performance. It assists management in understanding the underlying trends in operational performance on a comparable year-on-year basis.

 

It reflects the replacement cost of inventories sold in the period and is arrived at by excluding inventory holding gains and losses« from profit or loss. Adjustments are also made for non-operating items and fair value accounting effects«.

 

2016 performance Profit for the year reflected lower charges for the Gulf of Mexico oil spill than 2015. The reduction in underlying RC profit compared with 2015 was mainly due to lower oil and gas prices and the weaker refining environment, see pages 24 and 30.

 

 

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Operating cash flow is net cash flow provided by operating activities, as reported in the group cash flow statement. Operating activities are the principal revenue-generating activities of the group and other activities that are not investing or financing activities.

 

2016 performance Operating cash flow of $10.7 billion was lower, mainly due to higher Gulf of Mexico oil spill payments which amounted to $6.9 billion in 2016. Operating cash flow was also impacted by lower realizations, partly offset by lower costs and working capital effects.

 

   

 

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Major projects are defined as those with a BP net investment of at least $250 million, or considered to be of strategic importance to BP, or of a high degree of complexity.

 

We monitor the progress of our major projects to gauge whether we are delivering our core pipeline of activity.

 

Projects take many years to complete, requiring differing amounts of resource, so a smooth or increasing trend should not be anticipated.

 

2016 performance We started up two major projects in Algeria, two in the Gulf of Mexico, and one each in Alaska and Angola.

 

 

 

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We report production of crude oil, condensate, natural gas liquids (NGLs), natural bitumen and natural gas on a volume per day basis for our subsidiaries and equity-accounted entities. Natural gas is converted to barrels of oil equivalent at 5,800 standard cubic feet of natural gas = 1 boe.

 

A minor adjustment has been made to 2015 and 2014, see page 25 for further information.

 

2016 performance BP’s total reported production including Upstream and Rosneft segments was slightly higher than in 2015.

   

 

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We report tier 1 process safety events which are losses of primary containment of greatest consequence – causing harm to a member of the workforce, costly damage to equipment or exceeding defined quantities.

 

2016 performance The number of tier 1 process safety events has decreased since 2012. We believe our systematic approach to safety management and assurance is contributing to improved performance over the long term and will maintain our focus in these areas.

 

 

 

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Loss of primary containment (LOPC) is the number of unplanned or uncontrolled releases of oil, gas or other hazardous materials from a tank, vessel, pipe, railcar or other equipment used for containment or transfer.

 

2016 performance We saw an increase of LOPCs in 2016, partly due to harsher winter operating conditions in our unconventional gas operations in the US. Figures for 2014 to 2016 include increased reporting due to the introduction of enhanced automated monitoring for remote sites in our US Lower 48 business. Using a like-for-like approach with previous years’ reporting, our LOPC figure is 233 (2015 208, 2014 246).

 

    
    
 

 

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Total shareholder return (TSR) represents the change in value of a BP shareholding over a calendar year.

 

It assumes that dividends are reinvested to purchase additional shares at the closing price on the ex-dividend date. We are committed to maintaining a progressive and sustainable dividend policy.

 

2016 performance Increased TSR reflects share price growth in 2016, as well as maintaining the dividend per share.

  

 

Return on average capital employed (ROACE) gives an indication of a company’s capital efficiency, dividing the underlying RC profit after adding back net interest by average capital employed, excluding cash and goodwill. See page 285 for more information including the nearest GAAP equivalent data.

 

For the past few years, ROACE has been lower in the oil and gas sector, due to the impact of lower oil prices on earnings and the capital overhang of investments made during the preceding period of $100 per barrel oil prices.

 

2016 performance The 2016 reduction in ROACE is mainly due to weaker oil and gas prices and refining margins, partly offset by lower costs.

  

 

Proved reserves replacement ratio is the extent to which the year’s production has been replaced by proved reserves added to our reserve base.

 

The ratio is expressed in oil-equivalent terms and includes changes resulting from discoveries, improved recovery and extensions and revisions to previous estimates, but excludes changes resulting from acquisitions and disposals. The ratio reflects both subsidiaries« and equity-accounted entities. This measure helps to demonstrate our success in accessing, exploring and extracting resources.

 

2016 performance This year’s reserves replacement ratio was higher than our five-year average primarily as a result of the Abu Dhabi onshore concession renewal. See page 244 for more information.

 

 

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The upstream unit production cost indicator shows how supply chain, headcount and scope optimization impact cost efficiency.

 

2016 performance The lower unit production costs in 2016 reflect increased efficiency, reduced headcount, as well as deflation. This continues the cost reduction trend, down by over 35% since 2013.

  

Refining availability represents Solomon Associates’ operational availability. The measure shows the percentage of the year that a unit is available for processing after deducting the time spent on turnaround activity and all mechanical, process and regulatory downtime.

 

Refining availability is an important indicator of the operational performance of our Downstream businesses.

 

2016 performance Refining availability increased by 0.6% from 2015 to 95.3%, reflecting strong operational performance across our portfolio. This performance is underpinned by our global reliability improvement programme which provides our refineries with a more structured and systematic approach to improving availability.

  

Reported recordable injury frequency (RIF) measures the number of reported work-related employee and contractor incidents that result in a fatality or injury per 200,000 hours worked.

 

2016 performance Our workforce RIF has improved steadily over five years and is also reflected in our other occupational safety metrics. While this is encouraging, continued vigilance is needed. For detail on employee and contractor safety against industry benchmarks, see page 40.

 

a  This represents reported incidents occurring within BP’s operational HSSE reporting boundary. That boundary includes BP’s own operated facilities and certain other locations or situations.

     

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We provide data on greenhouse gas (GHG) emissions material to our business on a carbon dioxide-equivalent basis. This includes carbon dioxide (CO2) and methane for direct emissions. Our GHG KPI encompasses all BP’s consolidated entities as well as our share of equity-accounted entities other than BP’s share of TNK-BP and Rosneft for the relevant periods.

 

Minor adjustments have been made to the 2014 and 2015 figures. See page 43.

 

2016 performance The increase in our reported emissions is primarily due to operational variations such as returning to normal operations after planned shutdowns and start-up activities in Canada and Angola.

  

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We track how engaged our employees are with our strategic priorities using our group priorities index. This is derived from survey questions about their perceptions of BP and how it is managed in terms of leadership and standards.

 

2016 performance Our group priorities engagement measure increased in 2016. Confidence in the future of BP also rose to 64% (2015 58%, 2014 63%).

 

b Relates to BP employees.

  

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Each year we report the percentage of women and individuals from countries other than the UK and the US among BP’s group leaders. This helps us track progress in building a diverse and well-balanced leadership team.

 

2016 performance The percentage of our group leaders who are women or non-UK/US rose. We remain committed to our aim that women will represent at least 25% of our group leaders by 2020.

 

 

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The world economy remained weak in 2016, with global GDP growth at 2.3%. This was significantly lower than the average of nearly 3% over the past 20 years. Economic growth in the OECD slowed to 1.7%, (2.3% 2015) – partly due to weak global trade and lower business investment in the US.

 

In contrast, the non-OECD economy grew by 3.4% (3.3% 2015). This follows six years of declining growth and is partly driven by relative stability in China and improvements in Russia and Brazil.

 

Oil

 

Crude oil prices ($/bbl – quarterly average)

 

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Prices

Dated Brent« crude oil prices averaged $43.73 per barrel in 2016 – a further drop from the 2015 average of $52.39. But prices recovered over the year, rising from around $30 per barrel in January to nearly $54 in December.

 

Consumption

Global consumption increased by 1.6 million barrels per day (mmb/d) to 96.6mmb/d for the year (1.7%) – mostly due to continued low oil prices.a Demand grew most rapidly in Asia’s emerging economies, but OECD demand also increased for the second consecutive year.

 

Production

Strong consumption growth outpaced growth in global production. Non-OPEC production fell by 0.8mmb/d – the largest drop since 1992 – driven by the collapse of drilling in the US and a sharp decline in Chinese investment. However, OPEC production grew by 1.2mmb/d, reaching a record level of 39.3mmb/d, due to the recovery of Iranian production and large increases in Saudi Arabia and Iraq.

 

Inventories

Oil inventories remained high. And although data on global inventories is not available, OECD commercial inventories, as at 31 December, remained 290 million barrels above the five-year average, even though they had begun to reduce.

  

Natural gas

 

Natural gas prices ($/mmBtu – quarterly average)

 

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Prices

Gas prices were low in all key markets in 2016 as markets continued to adjust to the oversupply that built up during 2015, with increasing trade ensuring that the effect of ample supplies was felt globally.

 

Gas prices in the US averaged $2.46 per million British thermal units (mmBtu), slightly lower than 2015 ($2.67). The Japanese spot price fell to an average of $5.7/mmBtu in 2016 (2015 $7.4) with rising supplies in the region outpacing growth in demand, including new and emerging markets. The UK National Balancing Point« hub price was 34.63 pence per therm, 19% lower than in 2015 (42.61), as higher demand was easily met by rising pipeline imports, especially from Russia.

 

Broad differentials between regional gas prices also remained low, as US gas prices moved closer to Asian and European spot prices.

 

Consumptionb

Global consumption grew significantly faster than in 2015. The pattern of growth across markets shifted, with strong demand growth in the OECD and China offsetting weakness in other markets. Gas consumption in the power sector continued to grow globally, gaining share from coal helped by the local production curbs in China. And with coal production curbs in China taking hold, the market tightened in 2016. In addition, higher weather-related demand towards the end of the year boosted the total annual demand.

 

Productionb

Total production in 2016 was similar to 2015, with strong growth in Australia and Russia making up for declining production in Europe where existing fields are maturing and not being replaced.

 

Global LNG supply capacity expanded strongly in 2016, following a small increase in 2015.

 

a From IEA Oil Market Report, February 2017 ©, OECD/IEA 2017.

b Based on BP estimates from the BP Energy Outlook.

 

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Prices and margins

Pages 25 and 32

 

 

20    BP Annual Report and Form 20-F 2016


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$2.6bn

    

$7bn

underlying replacement
cost profit«

(2015 $5.9bn)

     cash cost« reduction versus 2014 – the costs which we consider to be controllable

$115m

    

$69m

profit attributable to BP
shareholders

(2015 $6.5bn loss)

     reduction in total costsa versus 2014 – reflects an increase in Gulf of Mexico oil spill charges of $5.9bn, and a reduction of $6.0bn in other costs, some of which are not considered controllable

Segment RC profit (loss) before interest and tax

($ billion)

 

 

 

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Financial and operating performance

 

      
                  

$ million

except per share amounts

 

 

           2016       2015       2014  
   

Profit (loss) before interest and taxation

     (430     (7,918     6,412  
   

Finance costs and net finance expense relating to pensions and other post-retirement benefits

     (1,865     (1,653     (1,462
   

Taxation

     2,467       3,171       (947
   

Non-controlling interests

     (57     (82     (223
   

Profit (loss) for the yearb

     115       (6,482     3,780  
   

Inventory holding (gains) losses«, before tax

     (1,597     1,889       6,210  
   

Taxation charge (credit) on inventory holding gains and losses

     483       (569     (1,917
   

Replacement cost profit (loss)«

     (999     (5,162     8,073  
   

Net charge (credit) for non-operating items«, before tax

     5,661       15,328       9,132  
   

Taxation charge (credit) on non-operating items

     (2,833     (4,056     (4,512

Main Image: A pipe rack on board the Discoverer Luanda drill ship, off the coast of Angola.

 

   

Net (favourable) unfavourable impact of fair value accounting effects«, before tax

     1,085       (261     (898
   

Taxation charge (credit) on fair value accounting effects

     (329     56       341  
   

Underlying replacement cost profit

     2,585       5,905       12,136  
   

Dividends paid per share – cents

     40.0       40.0       39.0  
   

     – pence

     29.418       26.383       23.850  
   

Additions to non-current assetsc

     21,204       20,080       26,492  
   

Capital expenditure on an accruals basis«d e

      
   

Organic capital expenditure«f

     18,440       18,748       22,892  

 

LOGO More information

Upstream

Page 24

 

Downstream

Page 30

 

Rosneft

Page 35

 

Other businesses and corporate

Page 37

 

Oil and gas disclosures
for the group

Page 251

 

   

Inorganic capital expenditure«

     939       710       601  
           19,379       19,458       23,493  
   

 

a Production and manufacturing expenses and distribution and administration expenses from the income statement.

b Profit (loss) attributable to BP shareholders.

c Includes additions to property, plant and equipment; goodwill; intangible assets; investments in joint ventures; and investments in associates.

d A reconciliation to GAAP information is provided on page 285.

e The definitions of capital expenditure on an accruals basis and inorganic capital expenditure have been revised to exclude asset exchanges as they are non-cash transactions. Previously reported amounts have been amended. Previously reported amounts for organic capital expenditure are unchanged.

f  2016 includes amounts relating to the renewal of a 10% interest in the Abu Dhabi onshore oil concession for which new ordinary shares in BP were issued.

 

 

 

 

 

 

          

 

« See Glossary.    BP Annual Report and Form 20-F 2016      21  


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The profit for the year ended 31 December 2016 was $115 million, compared with a loss of $6.5 billion in 2015. Excluding inventory holding gains, replacement cost (RC) loss was $1.0 billion, compared with a loss of $5.2 billion in 2015.

The net charge for non-operating items mainly relates to additional charges for the Gulf of Mexico oil spill which are partially offset by net impairment reversals. There were net unfavourable fair value accounting effects. After adjusting for non-operating items and fair value accounting effects, underlying RC profit for the year ended 31 December 2016 was $2.6 billion, a decrease of $3.3 billion compared with 2015. The reduction was predominantly due to lower results in both the Upstream and Downstream segments reflecting lower oil and gas prices and the weaker refining environment (see pages 24 and 30).

Non-operating items in 2016 also include a restructuring charge of $0.8 billion (2015 $1.1 billion), cumulative restructuring charges from the beginning of the fourth quarter 2014 totalled $2.3 billion by the end of 2016. Non-operating restructuring charges are expected to continue into 2017.

The loss for the year ended 31 December 2015 was $6.5 billion, compared with a profit of $3.8 billion in 2014. Excluding inventory holding losses, RC loss was $5.2 billion, compared with a profit of $8.1 billion in 2014.

After adjusting for a net charge for non-operating items, which mainly related to the agreements in principle to settle federal, state and the vast majority of local government claims arising from the 2010 Deepwater Horizon accident and impairment charges; and net favourable fair value accounting effects, underlying RC profit for the year ended 31 December 2015 was $5.9 billion, a decrease of $6.2 billion compared with 2014. The reduction was mainly due to a significantly lower profit in Upstream, partially offset by improved earnings from Downstream.

More information on non-operating items and fair value accounting effects can be found on page 285. See Other businesses and corporate on page 37 and Financial statements – Note 2 for further information on the impact of the Gulf of Mexico oil spill on BP’s financial results.

Taxation

The credit for corporate income taxes in 2016 and 2015 reflects the deferred tax impact of the increased provisions in respect of the Gulf of Mexico oil spill. The effective tax rate (ETR) on the loss for the year was 107% in 2016 and 33% in 2015; the ETR on the profit for the year in 2014 was 19%. The ETR in 2016 and 2015 was impacted by various one-off items.

Adjusting for inventory holding impacts, non-operating items, fair value accounting effects and the deferred tax adjustments as a result of the reductions in the UK North Sea supplementary charge in 2016 and 2015, the adjusted ETR« on RC profit was 23% in 2016 (2015 31%, 2014 36%). The adjusted ETR for 2016 is lower than 2015 predominantly due to changes in the geographical mix of profits as a result of the lower oil price and the absence of foreign exchange impacts from the strengthening of the US dollar in 2015. The adjusted ETR for 2015 was lower than 2014 mainly due to changes in the geographical mix of profits.

In the current environment, and reflecting the recent transaction to renew a 10% interest in the Abu Dhabi onshore oil concession, the adjusted ETR in 2017 is expected to be in the region of 40%.

Cash flow and net debt information

 

                       $ million  
       2016       2015       2014  

Operating cash flow«

     10,691       19,133       32,754  

Net cash used in investing activities

     (14,753     (17,300     (19,574

Net cash provided by (used in) financing activities

     1,977       (4,535     (5,266

Cash and cash equivalents at end of year

     23,484       26,389       29,763  

Gross debt

     58,300       53,168       52,854  

Net debt«

     35,513       27,158       22,646  

Gross debt to gross debt plus equity

     37.6%       35.1%       31.9%  

Net debt to net debt plus equity«

         26.8%           21.6%           16.7%  

Operating cash flow

Net cash provided by operating activities for the year ended 31 December 2016 was $8.4 billion lower than 2015. Of this amount, $6.0 billion was a result of higher pre-tax cash outflows associated with the Gulf of Mexico oil spill ($7.1 billion in 2016 compared with $1.1 billion in 2015). Cash flows were impacted by the continuing low oil price environment, with a lower average oil price in 2016 compared with 2015, working capital effects, and a reduction of $0.7 billion in income taxes paid.

Movements in inventories and other current and non-current assets and liabilities adversely impacted cash flow in the year by $3.2 billion. There was an adverse impact from the Gulf of Mexico oil spill of $4.8 billion. Other working capital effects, arising from a variety of different factors, had a favourable impact of $1.6 billion. The group actively manages its working capital balances to optimize cash flow, particularly in the current lower oil price environment. Inventories increased during the year because volumes were increased in our trading business to benefit from market opportunities, and due to higher prices towards the end of the year. The increase in inventory was largely offset by a corresponding increase in payables, limiting the increase in working capital.

There was a decrease in net cash provided by operating activities of $13.6 billion in 2015 compared with 2014 of which $1.1 billion related to the Gulf of Mexico oil spill. This was principally a result of the lower oil price environment, although there were benefits of reduced working capital requirements and lower tax paid.

Net cash used in investing activities

Net cash used in investing activities for the year ended 31 December 2016 decreased by $2.5 billion compared with 2015.

The decrease mainly reflected a reduction in cash outflow in respect of capital expenditure, including investment in joint ventures« and associates«, of $2.8 billion. The decrease of $2.3 billion in 2015 compared with 2014 reflected a reduction in cash outflow in respect of capital expenditure of $3.9 billion, partly offset by a reduction of $0.7 billion in disposal proceeds. The reductions in cash capital expenditure in both years reflect the group’s response to the lower oil price environment.

There were no significant cash flows in respect of acquisitions in 2016, 2015 and 2014.

The group has had significant levels of capital investment for many years. Cash flow in respect of capital investment, excluding acquisitions, was $17.5 billion in 2016 (2015 $20.2 billion and 2014 $23.1 billion). Sources of funding are fungible, but the majority of the group’s funding requirements for new investment comes from cash generated by existing operations.

 

 

    
    
 

 

22    BP Annual Report and Form 20-F 2016


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We expect organic capital expenditure on an accruals basis to be in the range of $15-17 billion in 2017.

Disposal proceeds for 2016, as per the cash flow statement, were $2.6 billion (2015 $2.8 billion, 2014 $3.5 billion), including amounts received for the sale of certain midstream assets in the Downstream fuels business and our Decatur petrochemicals complex. In addition, in 2016 we also received $0.6 billion in relation to the sale of 20% from our shareholding in Castrol India Limited, shown within financing activities in the cash flow statement, giving total proceeds of $3.2 billion for the year. In 2015 disposal proceeds included amounts received from our Toledo refinery partner, Husky Energy, in place of capital commitments relating to the original divestment transaction that have not been subsequently sanctioned. We expect disposal proceeds to be in the range of $4.5-5.5 billion in 2017.

Net cash used in financing activities

Net cash provided by financing activities for the year ended 31 December 2016 was $2.0 billion, compared with $4.5 billion used in 2015. This was mainly the result of higher net proceeds from financing of $3.6 billion ($4.0 billion higher net proceeds from long-term debt offset by a decrease of $0.4 billion in short-term debt). In addition, there was a cash inflow of $0.9 billion relating to increases in non-controlling interests, including the sale of 20% from our shareholding in Castrol India Limited noted above. The total dividend paid in cash in 2016 was $2.1 billion lower than in 2015 – see below for further information.

The decrease in net cash used in financing activities of $0.7 billion in 2015 compared with 2014 reflected no share repurchases in 2015, compared with $4.6 billion in 2014. This was largely offset by lower net proceeds from financing of $3.2 billion ($4.4 billion lower net

proceeds from long-term debt offset by an increase of $1.2 billion in short-term debt), and an increase in the total dividend paid in cash of $0.8 billion – see below for further information.

Total dividends distributed to shareholders in 2016 were 40 cents per share, the same as 2015 on a US dollar basis and up 11.5% in sterling terms. This amounted to a total distribution to shareholders of $7.5 billion (2015 $7.3 billion, 2014 $7.2 billion), of which shareholders elected to receive $2.9 billion (2015 $0.6 billion, 2014 $1.3 billion) in shares under the scrip dividend programme. The total amount distributed in cash amounted to $4.6 billion during the year (2015 $6.7 billion, 2014 $5.9 billion).

Net debt

Gross debt at the end of 2016 increased by $5.1 billion from the end of 2015. The gross debt ratio at the end of 2016 increased by 2.5%. Net debt at the end of 2016 increased by $8.4 billion from the 2015 year-end position. The net debt ratio« at the end of 2016 increased by 5.2%.

We continue to target a net debt ratio in the range of 20-30%. Net debt and the net debt ratio are non-GAAP measures. See Financial statements – Note 26 for gross debt, which is the nearest equivalent measure on an IFRS basis, and for further information on net debt.

The total cash and cash equivalents at the end of 2016 were $2.9 billion lower than 2015.

For information on financing the group’s activities, see Financial statements – Note 28 and Liquidity and capital resources on page 242.

Group reserves and production (including Rosneft segment)

 

      2016       2015       2014  

Estimated net proved reservesa
(net of royalties)

     

Liquids« (mmb)

    10,333       9,560       9,817  

Natural gas (bcf)

    43,368       44,197       44,695  

Total hydrocarbons« (mmboe)

    17,810       17,180       17,523  

Of which: Equity-accounted

                entitiesb

    8,679       7,928       7,828  

Productiona (net of royalties)

     

Liquids (mb/d)c

    2,048       2,007       1,917  

Natural gas (mmcf/d)

    7,075       7,146       7,100  

Total hydrocarbonsc (mboe/d)

    3,268       3,239       3,141  

Of which: Subsidiaries«c

    1,939       1,969       1,889  

                Equity-accounted

                entitiesd

    1,329       1,270       1,253  

 

a  Because of rounding, some totals may not agree exactly with the sum of their component parts.
b  Includes BP’s share of Rosneft. See Rosneft on page 35 and Supplementary information on oil and natural gas on page 187 for further information.
c  A minor adjustment has been made to comparative periods, see page 25 for further information.
d  Includes BP’s share of Rosneft. See Rosneft on page 35 and Oil and gas disclosures for the group on page 251 for further information.

Total hydrocarbon proved reserves at 31 December 2016, on an oil-equivalent basis including equity-accounted entities, increased by 4% compared with 31 December 2015. The change includes a net increase from acquisitions and disposals of 520mmboe (decrease of 128mmboe within our subsidiaries, increase of 648mmboe within our equity-accounted entities). Acquisition activity in our subsidiaries occurred in Abu Dhabi (increase of interest in ADCO concession from 9.5% to 10%) Indonesia, the US and the UK, and divestment activity in our subsidiaries occurred in Norway, Indonesia, Australia, Trinidad and the US. In our equity-accounted entities the most significant items were purchases in Russia, Norway and Venezuela.

Our total hydrocarbon production for the group was 0.9% higher compared with 2015. The increase comprised a 1.5% decrease (0.3% increase for liquids and 3.5% decrease for gas) for subsidiaries and a 4.7% increase (3.9% increase for liquids and 7.4% increase for gas) for equity-accounted entities.

 

 

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« See Glossary.    BP Annual Report and Form 20-F 2016      23  


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71,000km2

    

    

new exploration access

(2015 8,000km2)

 

6

    

    

major project«

start-ups

(2015 3)

 

 

11

    

    

successful completion

of turnarounds

(2015 15)

 

Upstream profitability ($ billion)

 

 

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5

    

    

final investment

decisions

(2015 4)

 

95%

    

    

upstream BP-operated

plant reliability«

(2015 95%)

 

2.2

    

    

million barrels of oil

equivalent per day –

hydrocarbon production

(2015 2.2mmboe/d)

 

 

 

 

 

 

Main image: Deep Blue and Grand
Canyon II vessels support the
Thunder Horse South expansion project in the US Gulf of Mexico.

 

      

Our business model and strategy

 

The Upstream segment is responsible for our activities in oil and natural gas exploration, field development and production, as well as midstream transportation, storage and processing. We also market and trade natural gas, including liquefied natural gas, power and natural gas liquids. In 2016 our activities took place in 28 countries.

 

With the exception of our US Lower 48 onshore business, we deliver our exploration, development and production activities through five global technical and operating functions:

 

   The exploration function is responsible for renewing our resource base through access, exploration and appraisal, while the reservoir development function is responsible for the stewardship of our resource portfolio over the life of each field.

 

   The global wells organization and the global projects organization are responsible for the safe, reliable and compliant execution of wells (drilling and completions) and major projects.

 

   The global operations organization is responsible for safe, reliable and compliant operations, including upstream production assets and midstream transportation and processing activities.

 

We optimize and integrate the delivery of these activities across 13 regions, with support provided by global functions in specialist areas of expertise: technology, finance, procurement and supply chain, human resources, information technology and legal.

 

The US Lower 48 continues to operate as a separate, asset-focused, onshore business.

 

Our strategy is to have a balanced portfolio across the world’s key oil and gas basins, while maintaining a focus on capital discipline and quality execution to deliver value. Our incumbent positions and the relationships we hold with resource owners create both stability and opportunity.

 

Our strategy is enabled by:

 

   A relentless focus on safety, reliability and the systematic management of risk.

 

   The quality execution of our projects, our operations, our drilling, and managing our reservoirs – the greatest source of value and returns that we have.

 

   Growing value through improving returns and cash flow. We actively manage our portfolio, divesting where it makes sense, and pursue acquisitions where value can be created.

 

   The capability of our people, who are motivated and equipped to take on the world’s great oil and gas challenges. We have a global workforce that is embracing digital technology to drive improved productivity in everything we do.

 

Our future growth includes an expected 800,000 barrels of oil equivalent per day of production from new projects by 2020, with 500,000 barrels of oil equivalent per day of this new capacity planned to be online by end of 2017. This, combined with our recent portfolio additions, is expected to increase our production by around 1 million barrels per day by 2021.

 

LOGO   More information

 

     
     

 

Upstream regional analysis

Page 244

 

     

 

24    BP Annual Report and Form 20-F 2016


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We see our scale and long history in many of the great basins in the world as a differentiator for BP and believe in the strength of our incumbent positions. We are resilient and balanced – in terms of geography, hydrocarbon type and geology – and rather than being restricted by a traditional way of working, we have and will continue to use creative business models to generate value. We are also investing to modernize and transform the Upstream – embracing innovation, digitization and the adoption of big data, which we believe can drive a real step change in performance and efficiency.

Financial performance

 

                      $ million  
      2016       2015       2014  

Sales and other operating revenuesa

    33,188       43,235       65,424  

RC profit (loss) before interest and tax

    574       (937     8,934  

Net (favourable) unfavourable impact of non-operating items« and fair value accounting effects«

    (1,116     2,130       6,267  

Underlying RC profit (loss) before interest and tax

    (542     1,193       15,201  

Organic capital expenditure«

    16,048 b      16,307       18,994  

Additions to non-current assets

    17,879       17,635       22,587  
BP average realizationsc             $ per barrel  

Crude oild e

    39.99       49.72       94.74  

Natural gas liquids

    17.31       20.75       36.15  

Liquids«d

    38.27       47.32       88.88  
              $ per thousand cubic feet  

Natural gas

    2.84       3.80       5.70  

US natural gas

    1.90       2.10       3.80  
              $ per barrel of oil equivalent  

Total hydrocarbons«d

    28.24       35.46       61.17  
Average oil marker pricesf                     $ per barrel  

Brent«

    43.73       52.39       98.95  

West Texas Intermediate

    43.34       48.71       93.28  

Average natural gas

    marker prices

    $ per million British thermal units  

Average Henry Hub« gas priceg

    2.46       2.67       4.43  
              pence per therm  

Average UK National Balancing Point gas price«f

    34.63       42.61       50.01  

 

a  Includes sales to other segments.
b  2016 includes the consideration for the Abu Dhabi ADCO onshore oil concession renewal.
c  Realizations are based on sales by consolidated subsidiaries only, which excludes equity-accounted entities.
d  Production volume recognition methodology for our Technical Service Contract arrangement in Iraq has been simplified to exclude the impact of oil price movements on lifting imbalances. A minor adjustment has been made to comparative periods. There is no impact on the financial results.
e  Includes condensate and bitumen.
f  All traded days average.
g  Henry Hub First of Month Index.

Market prices

Brent remains an integral marker to the production portfolio, from which a significant proportion of production is priced directly or indirectly. Certain regions use other local markers that are derived using differentials or a lagged impact from the Brent crude oil price.

Brent ($/bbl)

 

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The dated Brent price in 2016 averaged $43.73 per barrel. Prices were lowest early in the year, averaging just $34 in the first quarter; rebounding to an average of about $46 in both the second and third quarters, and rising again in the fourth quarter to $49 as OPEC and non-OPEC members discussed – and ultimately agreed – co-ordinated production cuts.

 

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The 2016 Henry Hub First of Month Index price was slightly lower than 2015 ($2.67).

The average UK National Balancing Point gas price in 2016 fell by 19% compared with 2015 (2015 a decrease of 15% on 2014). This reflected ample supplies in Europe with record Russian flows offsetting declining indigenous production. For more information on the global energy market in 2016, see page 20.

Financial results

Sales and other operating revenues for 2016 decreased compared with 2015, primarily reflecting lower liquids and gas realizations, and lower gas marketing and trading revenues. The decrease in 2015 compared with 2014 primarily reflected significantly lower liquids and gas realizations and lower gas marketing and trading revenues partly offset by higher production.

Replacement cost loss before interest and tax for the segment included a net non-operating gain of $1,753 million. This primarily relates to the reversal of impairment charges associated with a number of assets, following a reduction in the discount rate applied and changes to future price assumptions. See Financial statements – Note 4 for further information. Fair value accounting effects had an unfavourable impact of $637 million relative to management’s view of performance.

 

 

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« See Glossary.    BP Annual Report and Form 20-F 2016      25  


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The 2015 result included a net non-operating charge of $2,235 million, primarily related to a net impairment charge associated with a number of assets, following a further fall in oil and gas prices and changes to other assumptions. Fair value accounting effects had a favourable impact of $105 million relative to management’s view of performance. The 2014 result included a net non-operating charge of $6,298 million, primarily related to impairments associated with several assets, mainly in the North Sea and Angola reflecting the impact of the lower near-term price environment, revisions to reserves and increases in expected decommissioning cost estimates. Fair value accounting effects had a favourable impact of $31 million relative to management’s view of performance.

After adjusting for non-operating items and fair value accounting effects, the underlying RC result before interest and tax was a loss, compared with a profit in 2015. This lower result primarily reflected lower liquids and gas realizations, as well as adverse foreign exchange impacts and lower gas marketing and trading results. This was partly offset by lower costs including the benefits of simplification and efficiency activities, lower exploration write-offs, lower depreciation, depletion and amortization expense and lower rig cancellation charges.

Compared with 2014 the 2015 result reflected significantly lower liquids and gas realizations, as well as rig cancellation charges and lower gas marketing and trading results, partly offset by lower costs including benefits from simplification and efficiency activities and lower exploration write-offs, and higher production.

Additions to non-current assets were $17.9 billion and organic capital expenditure on an accruals basis was $16.0 billion. Excluding the Abu Dhabi onshore oil concession renewal for which shares were used as consideration, organic capital expenditure was $13.6 billion, significantly lower than the $16.3 billion in 2015.

In total, disposal transactions generated $0.8 billion in proceeds in 2016, with a corresponding reduction in net proved reserves of 241mmboe within our subsidiaries.

The major disposal transaction during 2016 was the transfer of our Norway assets to Aker BP. More information on disposals is provided in Upstream analysis by region on page 244 and Financial statements – Note 4.

Outlook for 2017

 

  We expect to start up seven new major projects in 2017.

 

  We expect underlying production« to be higher than 2016. The actual reported outcome will depend on the exact timing of project start-ups, divestments, OPEC quotas and entitlement impacts in our production-sharing agreements«.

 

  Capital investment is expected to decrease, largely reflecting our commitment to continued capital discipline and the rephasing and refocusing of our activities and major projects where appropriate in response to the current business environment.

 

  We expect oil prices will continue to be challenging in the near term (see page 20).

Exploration

The group explores for oil and natural gas under a wide range of licensing, joint arrangement« and other contractual agreements. We may do this alone or, more frequently, with partners.

Our exploration and new access teams work to enable us to optimize our resource base and provide us with a greater number of options. In the current environment, we are spending less on exploration and we will spend a material part of our exploration budget on lower-risk, shorter-cycle-time opportunities around our incumbent positions.

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New access in 2016

We gained access to new acreage covering almost 71,000km2 in 10 countries – Australia, Canada, China, Egypt, Ireland, Mauritania, Norway, Russia, the UK and the US.

Exploration success

We participated in eight potentially commercial discoveries in 2016 – Baltim SW-1, Baltim SW-2, Nooros East and Nooros West in Egypt, Gibson and Nozomi in the Gulf of Mexico, and Golfinho and Zalophus in Angola.

Exploration and appraisal costs

Excluding lease acquisitions, the costs for exploration and appraisal were $1,402 million (2015 $1,794 million, 2014 $2,911 million). These costs included exploration and appraisal drilling expenditures, which were capitalized within intangible fixed assets, and geological and geophysical exploration costs, which were charged to income as incurred.

Approximately 20% of exploration and appraisal costs were directed towards appraisal activity. We participated in 40 gross (21.68 net) exploration and appraisal wells in seven countries.

Exploration expense

Total exploration expense of $1,721 million (2015 $2,353 million, 2014 $3,632 million) included the write-off of expenses related to unsuccessful drilling activities, lease expiration or uncertainties around development in the Gulf of Mexico ($611 million), Brazil ($601 million), and others ($167 million), partially offset by a net write-back of $103 million across several blocks in India (see Financial statements – Note 7).

Reserves booking

Reserves bookings from new discoveries will depend on the results of ongoing technical and commercial evaluations, including appraisal drilling. The segment’s total hydrocarbon reserves on an oil-equivalent basis, including equity-accounted entities at 31 December 2016, decreased by less than 1% (a decrease of 1% for subsidiaries and an increase of 9% for equity-accounted entities) compared with reserves at 31 December 2015.

 

 

    
    
 

 

26    BP Annual Report and Form 20-F 2016


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Proved reserves replacement ratio«

The proved reserves replacement ratio for the segment in 2016, including the impact of the Abu Dhabi onshore oil concession renewal, was 96% for subsidiaries and equity-accounted entities (2015 33%), 101% for subsidiaries alone (2015 28%) and 61% for equity-accounted entities alone (2015 76%). For more information on proved reserves replacement for the group see page 251.

Upstream proved reservesa (mmboe)

 

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Estimated net proved reservesa (net of royalties)

 

      2016       2015       2014  
Liquids             million barrels  

Crude oilb

     

Subsidiaries«

    3,778       3,560       3,582  

Equity-accounted entitiesc

    771       694       702  
      4,549       4,254       4,283  

Natural gas liquids

     

Subsidiaries

    373       422       510  

Equity-accounted entitiesc

    16       13       16  
      389       435       526  

Total liquids

     

Subsidiariesd

    4,151       3,982       4,092  

Equity-accounted entitiesc

    787       707       717  
      4,938       4,689       4,809  
Natural gas             billion cubic feet  

Subsidiariese

    28,888       30,563       32,496  

Equity-accounted entitiesc

    2,580       2,465       2,373  
      31,468       33,027       34,869  
Total hydrocarbons     million barrels of oil equivalent  

Subsidiaries

    9,131       9,252       9,694  

Equity-accounted entitiesc

    1,232       1,132       1,126  
        10,363         10,384         10,821  

 

a  Because of rounding, some totals may not agree exactly with the sum of their component parts.
b  Includes condensate and bitumen.
c  BP’s share of reserves of equity-accounted entities in the Upstream segment. During 2016 upstream operations in Argentina, Bolivia, Russia and Norway as well as some of our operations in Angola, Abu Dhabi and Indonesia, were conducted through equity-accounted entities.
d  Includes 16 million barrels (19 million barrels at 31 December 2015 and 21 million barrels at 31 December 2014) in respect of the 30% non-controlling interest in BP Trinidad & Tobago LLC.
e  Includes 2,026 billion cubic feet of natural gas (2,359 billion cubic feet at 31 December 2015 and 2,519 billion cubic feet at 31 December 2014) in respect of the 30% non-controlling interest in BP Trinidad & Tobago LLC.

LOGO

Developments

We achieved six major project« start-ups in 2016: two in Algeria, one in Alaska, one in Angola and two in the Gulf of Mexico. In addition to these, we made good progress in projects in AGT (Azerbaijan, Georgia, Turkey), the Gulf of Mexico, Oman and Egypt.

 

  Azerbaijan, Georgia, Turkey – the Shah Deniz 2 project continues to move ahead with the award of contract for the transport and installation of the deep water subsea production systems. We also signed a letter of intent for the future development of the Azeri-Chirag-Gunashli field, covering the development of the field to the end of 2049.

 

  Gulf of Mexico – we sanctioned the re-evaluated Mad Dog Phase 2 project, having reduced overall project cost by approximately 60% compared to initial design.

 

  Oman – development of the Khazzan project continued, with the project being more than 92% complete as at the year-end. We also signed an agreement to extend the licence area, allowing for a second phase of development in the future.

 

  Egypt – we sanctioned the development of the Atoll Phase 1 project and signed concession amendments in three other projects that allow for the economic development of the Nooros field.

Subsidiaries’ development expenditure incurred, excluding midstream activities, was $11.1 billion (2015 $13.5 billion, 2014 $15.1 billion).

 

 

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Our project pipeline       LOGO  Gas
 
*BP operated     LOGO  Oil
 
Project   Location   Type    
2016 start-ups        
Angola LNG (restart)   Angola   LOGO
In Amenas compression   Algeria   LOGO
In Salah Southern Fields   Algeria   LOGO
Point Thomson   US Alaska   LOGO
Thunder Horse water injection*   US Gulf of Mexico   LOGO
Thunder Horse South expansion*   US Gulf of Mexico   LOGO
         
Expected start-ups 2017-2021        
Projects currently under constructiona    
Atoll Phase 1*   Egypt   LOGO
Culzean   UK North Sea   LOGO
Juniper*   Trinidad   LOGO
Oman Khazzan Phase 1*   Oman   LOGO
Persephone   Australia   LOGO
Shah Deniz Stage 2*   Azerbaijan   LOGO
Tangguh expansion*   Indonesia   LOGO
Trinidad onshore compression*   Trinidad   LOGO
West Nile Delta Giza/Fayoum/Raven*   Egypt   LOGO
West Nile Delta Taurus/Libra*   Egypt   LOGO
Western Flank Phase B   Australia   LOGO
Zohr   Egypt   LOGO
Clair Ridge*   UK North Sea   LOGO
Constellation   US Gulf of Mexico   LOGO
Quad 204*   UK North Sea   LOGO
Mad Dog Phase 2*   US Gulf of Mexico   LOGO
         
Expected start-ups 2017-2021        
Design and appraisal phase        
Angelin*   Trinidad   LOGO
Trinidad offshore compression*   Trinidad   LOGO
KG-D6 D55   India   LOGO
KG-D6 R-Series   India   LOGO
Oman Khazzan Phase 2*   Oman   LOGO
Vorlich*   UK North Sea   LOGO
West Nile Delta 2 Follow On*   Egypt   LOGO
Alligin*   UK North Sea   LOGO
Atlantis Phase 3*   US Gulf of Mexico   LOGO
         
Beyond 2021        

We have a deep hopper of projects that are currently under appraisal. Our focus here is to ensure we maximize the business opportunity and select the optimum project concept before we move it forward into design. We do not expect to progress all of the projects – only the best. This includes:

 

•  a mix of resource types: split across conventional oil, deepwater oil, conventional gas and unconventionals«

 

•  geographic spread: from Alaska to Australia and Argentina to Russia

 

•  a range of development types: from exploration to brownfield and near-field.

 

a For further information on the development of the Taas-Yuryakh oil field (also expected to start up in the period 2017-2021) see page 248.

 

Production

Our offshore and onshore oil and natural gas production assets include wells, gathering centres, in-field flow lines, processing facilities, storage facilities, offshore platforms, export systems (e.g. transit lines), pipelines and LNG plant facilities. These include production from conventional and unconventional (coalbed methane and shale) assets. Our principal areas of production are Angola, Argentina, Australia, Azerbaijan, Egypt, Iraq, Trinidad, the UAE, the UK and the US.

With BP-operated plant reliability increasing from around 86% in 2011 to 95% in 2016, efficient delivery of turnarounds and strong infill drilling performance, we have flattened base decline to less than 3% on average over the last four years. Our long-term expectation for managed base decline remains at the 3-5% per annum guidance we have previously given.

Production (net of royalties)a

 

      2016       2015       2014  
Liquids     thousand barrels per day  

Crude oilb

     

Subsidiariesc

    943       933       834  

Equity-accounted entitiesd

    179       165       163  
      1,122       1,099       997  

Natural gas liquids

     

Subsidiaries

    82       88       91  

Equity-accounted entitiesd

    4       7       7  
      86       95       99  

Total liquids

     

Subsidiariesc

    1,025       1,022       926  

Equity-accounted entitiesd

    184       172       170  
      1,208       1,194       1,096  
Natural gas     million cubic feet per day  

Subsidiaries

    5,302       5,495       5,585  

Equity-accounted entitiesd

    494       456       431  
      5,796       5,951       6,016  
Total hydrocarbons     thousand barrels of oil equivalent per day  

Subsidiariesc

    1,939       1,969       1,889  

Equity-accounted entitiesd

    269       251       245  
      2,208       2,220       2,133  

 

a  Because of rounding, some totals may not agree exactly with the sum of their component parts.
b  Includes condensate and bitumen.
c  Production volume recognition methodology for our Technical Service Contract arrangement in Iraq has been simplified to exclude the impact of oil price movements on lifting imbalances. A minor adjustment has been made to comparative periods. There is no impact on the financial results.
d  Includes BP’s share of production of equity-accounted entities in the Upstream segment.
 

 

    
    
 

 

28    BP Annual Report and Form 20-F 2016


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Our total hydrocarbon production for the segment in 2016 was 0.5% lower compared with 2015. The decrease comprised a 1.5% decrease (0.3% increase for liquids and 3.5% decrease for gas) for subsidiaries and a 7.2% increase (6.7% increase for liquids and 8.3% increase for gas) for equity-accounted entities compared with 2015. For more information on production see Oil and gas disclosures for the group on page 251.

In aggregate, underlying production was flat versus 2015.

The group and its equity-accounted entities have numerous long-term sales commitments in their various business activities, all of which are expected to be sourced from supplies available to the group that are not subject to priorities, curtailments or other restrictions. No single contract or group of related contracts is material to the group.

Gas marketing and trading activities

Our integrated supply and trading function markets and trades our own and third-party natural gas (including LNG), power and NGLs. This provides us with routes into liquid markets for the gas we produce and generates margins and fees from selling physical products and derivatives to third parties, together with income from asset optimization and trading. This means we have a single interface with gas trading markets and one consistent set of trading compliance and risk management processes, systems and controls.

The activity primarily takes place in North America, Europe and Asia, and supports group LNG activities, managing market price risk and creating incremental trading opportunities through the use of commodity derivative contracts. It also enhances margins and generates fee income from sources such as the management of price risk on behalf of third-party customers.

Our trading financial risk governance framework is described in Financial statements – Note 28 and the range of contracts used is described in Glossary – commodity trading contracts on page 280.

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LOGO

 

95.3%

    

    

refining availability«

(2015 94.7%)

 

1.7

    

    

million barrels of oil refined per day

(2015 1.7mmb/d)

 

   

 

Downstream profitability ($ billion)

 

LOGO

43%

    

    

of lubricants sales were

premium grade

(2015 42%)

 

14.2

    

    

million tonnes of

petrochemicals produced

(2015 14.8mmte)

   

 

 

 

 

 

Main Image: Vaporizer towers

convert liquid nitrogen to gas

at our US Whiting refinery.

 

        

Our business model and strategy

 

The Downstream segment has global manufacturing and marketing operations. It is the product and service-led arm of BP, made up of three businesses:

 

   Fuels – includes refineries, logistic networks, fuels marketing and convenience retail businesses, together with global oil supply and trading activities that make up our integrated fuels value chains (FVCs). We sell refined petroleum products including gasoline, diesel and aviation fuel.

 

   Lubricants – manufactures and markets lubricants and related products and services globally, adding value through brand, technology and relationships, such as collaboration with original equipment manufacturing partners.

 

   Petrochemicals – manufactures, sells and distributes products, that are produced mainly using proprietary BP technology, and are then used by others to make essential consumer products such as paint, plastic bottles and textiles. We also license our technologies to third parties.

 

We aim to run safe and reliable operations across all our businesses, supported by leading brands and technologies, to deliver high-quality products and services that meet our customers’ needs.

 

Our strategy focuses on a quality portfolio that aims to lead the industry, as measured by net income per barrel«, with improving returns and growing operating cash flow«.

 

Our strategic priorities are:

 

   Safe and reliable operations – this remains our first priority and we continue to drive improvement in personal and process safety performance.

 

   Advantaged manufacturing – we continue to build a top-quartile refining business as measured through net cash margin per barrel«, by having a competitively advantaged portfolio underpinned by operational excellence that helps to reduce exposure to margin volatility. In petrochemicals we seek to sustainably improve earnings potential and make the business more resilient to a bottom-of-cycle environment through portfolio repositioning, improved operational performance and efficiency benefits.

 

   Fuels and lubricants marketing – we invest in higher-returning businesses with reliable cash flows and growth potential.

 

   Simplification and efficiency – this remains central to what we do to support performance improvement and make our businesses even more competitive.

 

   Transition to a lower carbon and digitally enabled future – we are pursuing and developing new offers and products that support the transition to a lower carbon and digitally enabled future over the long term.

 

Disciplined execution of our strategy is helping improve our underlying performance, capture opportunities for further growth, generate attractive returns and create a more resilient business that is better able to withstand a range of market conditions; and create opportunities for future growth. We aim to ensure Downstream remains a reliable source of cash flow growth for BP.

 

LOGO   More information

 

     
     

 

Downstream plant capacity

Page 249

 

     

 

30    BP Annual Report and Form 20-F 2016


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Financial performance

 

                      $ million  
      2016       2015       2014  

Sale of crude oil through spot and term contracts«

    31,569       38,386       80,003  

Marketing, spot and term sales of refined products

    126,419       148,925       227,082  

Other sales and operating revenues

    9,695       13,258       16,401  

Sales and other operating revenuesa

    167,683       200,569       323,486  

RC profit (loss) before interest and taxb

     

Fuels

    3,337       5,858       2,830  

Lubricants

    1,439       1,241       1,407  

Petrochemicals

    386       12       (499
      5,162       7,111       3,738  

Net (favourable) unfavourable impact of non-operating items« and fair value accounting effects«

     

Fuels

    390       137       389  

Lubricants

    84       143       (136

Petrochemicals

    (2     154       450  
      472       434       703  

Underlying RC profit (loss) before interest and taxb

     

Fuels

    3,727       5,995       3,219  

Lubricants

    1,523       1,384       1,271  

Petrochemicals

    384       166       (49
      5,634       7,545       4,441  

Organic capital expenditure«

    2,141       2,101       2,995  

Additions to non-current assets

    3,109       2,130       3,121  

 

a  Includes sales to other segments.
b  Income from petrochemicals produced at our Gelsenkirchen and Mülheim sites in Germany is reported in the fuels business. Segment-level overhead expenses are included in the fuels business result.

Financial results

Sales and other operating revenues in 2016 and 2015 were lower due to lower crude and product prices.

Replacement cost profit before interest and tax for the year ended 31 December 2016 included a net non-operating charge of $24 million, mainly relating to a gain on disposal in our fuels business which was more than offset by restructuring and other charges. The 2015 result included a net non-operating charge of $590 million, mainly relating to restructuring charges, while the 2014 result included a net non-operating charge of $1,570 million, primarily relating to impairment charges in our petrochemicals and fuels businesses. In addition, fair value accounting effects had an unfavourable impact of $448 million, compared with a favourable impact of $156 million in 2015 and $867 million in 2014.

After adjusting for non-operating items and fair value accounting effects, underlying RC profit before interest and tax in 2016 was $5,634 million.

Additions to non-current assets in 2016 included the asset exchange relating to the dissolution of our German refining joint operation with Rosneft as well as organic capital expenditure.

Outlook for 2017

 

  We anticipate a gradual improvement in the refining environment, although refining margins for the year are expected to remain at the lower end of the recent historical range.

 

  We expect the financial impact of routine refinery turnarounds to be slightly higher than 2016 as a result of increased turnaround activity, particularly in Europe.

Our fuels business

The fuels strategy focuses primarily on fuels value chains (FVCs). This includes building a top-quartile net cash margin refining business through operating reliability, feedstock and location advantage and efficiency improvements to our already competitively advantaged portfolio.

We believe that having a quality refining portfolio connected to strong marketing positions is core to our integrated FVC businesses as this provides optimization opportunities in highly competitive markets.

We continue to grow our fuels marketing businesses through differentiated marketing offers and strategic convenience partnerships. We partner with leading retailers, creating distinctive offers that aim to deliver good returns and reliable profit and cash generation.

Underlying RC profit before interest and tax was lower compared with 2015 reflecting a significantly weaker refining environment and the impact from a particularly large turnaround at Whiting refinery, partially offset by lower costs reflecting the benefits from our simplification and efficiency programmes, an increased fuels marketing performance driven by retail growth and higher refining margin capture in our operations. Compared with 2014, the 2015 result was higher reflecting a strong refining environment, improved refining margin optimization and operations, and lower costs from simplification and efficiency programmes.

 

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Refining marker margin«

We track the margin environment by a global refining marker margin (RMM). Refining margins are a measure of the difference between the price a refinery pays for its inputs (crude oil) and the market price of its products. Although refineries produce a variety of petroleum products, we track the margin environment using a simplified indicator that reflects the margins achieved on gasoline and diesel only. The RMM may not be representative of the margin achieved by BP in any period because of BP’s particular refinery configurations and crude and product slates. In addition, the RMM does not include estimates of energy or other variable costs.

 

                    $ per barrel  
Region   Crude marker      2016        2015        2014  

US North West

  Alaska North         
  Slope      16.9        24.0        16.6  

US Midwest

  West Texas         
  Intermediate      13.2        19.0        17.4  

Northwest Europe

  Brent«      10.0        14.5        12.5  

Mediterranean

  Azeri Light      9.0        12.7        10.6  

Australia

  Brent      10.9        15.4        13.5  

BP RMM

         11.8            17.0            14.4  

BP refining marker margin ($/bbl)

 

LOGO

The average global RMM in 2016 was $11.8/bbl, $5.2/bbl lower than in 2015, and the lowest since 2010. The decrease was driven by product oversupply resulting from higher refinery utilization which outstripped growth in demand.

Refining

At 31 December 2016 we owned or had a share in 11 refineries producing refined petroleum products that we supply to retail and commercial customers. For a summary of our interests in refineries and average daily crude distillation capacities see page 249.

In 2016 refinery operations were strong, with refining availability« sustained at around 95.3% and utilization rates of 91% for the year. Overall refinery throughputs in 2016 were flat compared with 2015 with increased throughputs in our refining portfolio offset by the impact from ceasing operations at Bulwer in 2015 and the large turnaround at Whiting.

In December 2016 the previously announced dissolution of our German refining joint operation with Rosneft was completed. This will simplify and refocus our refining business in the heart of Europe.

       2016        2015        2014  
Refinery throughputsa      thousand barrels per day  

US

     646        657        642  

Europe

     803        794        782  

Rest of worldb

     236        254        297  

Total

     1,685        1,705        1,721  
                %  

Refining availability

     95.3        94.7        94.9  

Sales volumes

     thousand barrels per day  

Marketing salesc

     2,825        2,835        2,872  

Trading/supply salesd

     2,775        2,770        2,448  

Total refined product sales

     5,600        5,605        5,320  

Crude oile

     2,169        2,098        2,360  

Total

     7,769            7,703            7,680  

 

a  Refinery throughputs reflect crude oil and other feedstock volumes.
b  Bulwer refinery in Australia ceased refining operations in 2015.
c  Marketing sales include sales to service stations, end-consumers, bulk buyers and jobbers (i.e. third parties who own networks of a number of service stations) and small resellers.
d  Trading/supply sales are sales to large unbranded resellers and other oil companies.
e  Crude oil sales relate to transactions executed by our integrated supply and trading function, primarily for optimizing crude oil supplies to our refineries and in other trading. 71,000 barrels per day relate to revenues reported by the Upstream segment.

Marketing and logistics

Downstream of our refineries, we operate an advantaged infrastructure and logistics network that includes pipelines, storage terminals and tankers for road and rail. We seek to drive excellence in operational and transactional processes and deliver compelling customer offers in the various markets where we operate. In 2016 we completed the sale of our Amsterdam oil terminal and announced our intention to divest some of our fuels terminals in the UK. This reflects our continued focus on increasing our competitiveness through having an advantaged portfolio. We supply fuel and related retail services to consumers through company-owned and franchised retail sites, as well as other channels, including dealers and jobbers. We also supply commercial customers within the transport and industrial sectors.

 

       Number of retail sites operated under a BP brand  
Retail sitesf      2016        2015        2014  

US

     7,100        7,000        7,100  

Europe

     8,100        8,100        8,000  

Rest of world

     2,800        2,900        2,900  

Total

     18,000        18,000        18,000  

 

f  Reported to the nearest 100. Includes sites not operated by BP but instead operated by dealers, jobbers, franchisees or brand licensees under a BP brand. These may move to or from the BP brand as their fuel supply or brand licence agreements expire and are renegotiated in the normal course of business. Retail sites are primarily branded BP, ARCO and Aral and includes our interest in equity-accounted entities.

Retail is the most material element of our fuels marketing operations and has good exposure to growth markets. In addition we have distinctive partnerships with leading retailers and plan to expand our networks further. Retail is a significant source of growth today and is expected to be so in the future. This year we continued the rollout of our new BP fuels with ACTIVE technology which are now sold in 13 countries globally (see page 34). We also entered into two new convenience partnerships in Europe with leading food retailing companies, REWE to go® in Germany and Albert Heijn to go® in the Netherlands.

In December 2016 we announced that we will be establishing a strategic partnership with Woolworths in Australia. The agreement includes us acquiring Woolworths’ fuel and convenience sites for a total consideration of $1.3 billion and entering into a strategic convenience partnership with them. The transaction is subject to regulatory approvals.

 

 

    
    
 

 

32    BP Annual Report and Form 20-F 2016


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Supply and trading

Our integrated supply and trading function is responsible for delivering value across the overall crude and oil products supply chain. This structure enables our downstream businesses to maintain a single interface with oil trading markets and operate with one set of trading compliance and risk management processes, systems and controls. It has a two-fold purpose:

First, it seeks to identify the best markets and prices for our crude oil, source optimal raw materials for our refineries and provide competitive supply for our marketing businesses. We will often sell our own crude and purchase alternative crudes from third parties for our refineries where this will provide incremental margin.

Second, it aims to create and capture incremental trading opportunities by entering into a full range of exchange-traded commodity derivatives«, over-the-counter contracts« and spot and term contracts«. In combination with rights to access storage and transportation capacity, this allows it to access advantageous price differences between locations and time periods, and to arbitrage between markets.

The function has trading offices in Europe, North America and Asia. Our presence in the more actively traded regions of the global oil markets supports overall understanding of the supply and demand forces across these markets.

Our trading financial risk governance framework is described in Financial statements – Note 28 and the range of contracts used is described in Glossary – commodity trading contracts on page 280.

 

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Aviation

Air BP is one of the world’s largest global aviation fuels suppliers. Our strategic aim is to maintain a strong presence in our core locations of Europe and the US, while expanding our portfolio in airports that offer long-term competitive advantage in material growth markets such as Asia and South America. Air BP serves many major commercial airlines as well as the general aviation sector. We have marketing sales of more than 430,000 barrels per day, and in 2016 entered into two joint venture« partnerships to market aviation fuels in Peru and Indonesia. We also announced a strategic partnership with Fulcrum BioEnergy® and partnered with RocketRoute® to launch a digital app that provides online fuel purchasing and payment functionality across our global network of aviation fuel locations.

Our lubricants business

Our lubricants strategy is to focus on our premium brands and growth markets while leveraging technology and customer relationships. With more than 60% of profit generated from growth markets and continued growth in premium lubricants, we have an excellent base for further expansion and sustained profit growth.

Our lubricants business manufactures and markets lubricants and related products and services to the automotive, industrial, marine and energy markets across the world. Our key brands are Castrol, BP and Aral. Castrol is a recognized brand worldwide that we believe provides us with significant competitive advantage.

In technology, we apply our expertise to create differentiated, premium lubricants and high-performance fluids for customers in on-road, off-road, sea and industrial applications globally. This year we launched Castrol MAGNATEC with DUALOCK technology, our latest premium brand lubricant, which reduces warm-up and stop-start wear by up to 50% (see page 12).

We are one of the largest purchasers of base oil in the market, but have chosen not to produce it or manufacture additives at scale. Our participation choices in the value chain are focused on areas where we can leverage competitive differentiation and strength, such as:

 

  Applying cutting-edge technologies in the development and formulation of advanced products.

 

  Creating and developing product brands and clearly communicating their benefits to customers.

 

  Building and extending our relationships with customers to better understand and meet their needs.

The lubricants business delivered an underlying RC profit before interest and tax that was higher compared with 2015 – which in turn was higher than 2014. In fact this 2016 result was a record performance for lubricants. Both the 2016 and 2015 results reflected continued strong performance in growth markets and premium brands as well as lower costs achieved through simplification and efficiency programmes.

In 2016 we sold approximately 20% from our shareholding in Castrol India Limited, reducing our shareholding to 51%. We continue to be the majority shareholder and have strategic control of the company.

 

 

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LOGO

Our petrochemicals business

Our petrochemicals strategy is to improve our earnings potential and make the business more resilient to a bottom-of-cycle environment. We develop proprietary technology to deliver leading cost positions compared with our competition. We manufacture and market four main product lines:

 

  Purified terephthalic acid (PTA).

 

  Paraxylene (PX).

 

  Acetic acid.

 

  Olefins and derivatives.

We also produce a number of other specialty petrochemicals products.

In addition to the assets we own and operate, we have also invested in a number of joint arrangements« in Asia, where our partners are leading companies in their domestic market.

We are two years into our strategic programme to significantly improve the resilience of the business to a bottom-of-cycle environment through:

 

  Repositioning a significant portion of our portfolio including shutting down older capacity in the US and Asia.

 

  Retrofitting our best technology at our advantaged sites to reduce overall operating costs.

 

  Growing third-party licensing income to create additional value.

 

  Delivering operational improvements focused on turnaround efficiency and improved reliability.

 

  Delivering additional value through simplification and efficiency programmes.

In 2016 the petrochemicals business delivered a higher underlying RC profit before interest and tax compared with 2015 – which in turn was higher than 2014. The result reflected strong operations and margin capture supported by the continued rollout of our latest advanced technology, as well as benefits from a slightly improved environment particularly in olefins and derivatives. Compared with 2014, the 2015 result reflected improved operational performance and benefited from our simplification and efficiency programmes leading to lower costs. Our petrochemicals production of 14.2 million tonnes in 2016 was lower than 2015 but higher than 2014 (2015 14.8mmte, 2014 14.0mmte), due to the divestment of the Decatur petrochemicals complex in 2016 and the low margin environment in 2014 compared with 2015 driving reduced output.

As part of our strategy to refocus our global petrochemicals business for long-term growth, we completed the sale of the Decatur petrochemicals complex in Alabama, US in March 2016.

We completed the upgrade of our PTA plant in Geel, Belgium, using our latest proprietary technology and are continuing the upgrade at Cooper River in South Carolina, US, which is scheduled to complete in early 2017. We expect these investments to significantly increase manufacturing efficiency at both facilities.

We are also leveraging our proprietary technology to offer a low carbon PTA solution to manufacturers, brand owners and their customers. In 2016 we launched PTAir, which supports a carbon footprint of around 30% lower than the average European PTA production.

Our licensing business continues to be a core part of our growth strategy and in December 2016 Reliance Industries Limited successfully commissioned the first phase of its paraxylene plant in Gujarat, India using BP’s proprietary technology. The plant, with a capacity of 1.8 million tonnes, is the world’s largest paraxylene unit and is built with BP’s leading crystallization technology which delivers greater energy efficiency.

 

 

    
    
 

 

34    BP Annual Report and Form 20-F 2016


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BP and Rosneft

 

  BP’s 19.75% shareholding in Rosneft allows us to benefit from a diversified set of existing and potential projects in the Russian oil and gas sector.

 

  Russia has one of the largest and lowest cost hydrocarbon resource bases in the world and its resources play an important role in long-term energy supply to the global economy.

 

  BP’s strategy in Russia is to support Rosneft’s overall performance and growth through collaboration on technology and best practice, and to build a material business based on standalone projects with Rosneft in Russia and internationally. BP remains committed to our strategic investment in Rosneft, while complying with all relevant sanctions.

2016 summary

 

  Rosneft continued optimizing its portfolio and increased total hydrocarbon production by 4%.

 

  Rosneft’s largest shareholder is Rosneftegaz JSC (Rosneftegaz), which is wholly owned by the Russian government. In December an agreement was signed to sell 19.5% from Rosneftegaz’s 69.5% shareholding in Rosneft to a consortium of international investors, comprising Qatar Investment Authority and Glencore. Following completion of the transaction, at the year-end Rosneftegaz’s shareholding in Rosneft was 50% plus one share.

 

  Rosneft acquired a 50.0755% stake in Russian oil company Bashneft in October and subsequently increased its shareholding to 60.33% as a result of an offer to buy out minority shareholders. This acquisition is expected to provide Rosneft with significant synergies and additional refining throughput and liquid hydrocarbon production. BP accounts for its share of production and reserves resulting from the acquisition through its 19.75% stake in Rosneft.

 

  Rosneft also agreed to purchase a 49% stake in Essar Oil Limited, which owns the Vadinar refinery in India, one of the largest and most advanced refineries in the world.

 

  In July BP received $332 million, net of withholding taxes (2015 $271 million, 2014 $693 million), representing its share of Rosneft’s dividend of 11.75 Russian roubles per share. This dividend stood at 35% of Rosneft’s 2015 IFRS net profit, an increase from the 25% paid in the previous year.

 

  Two BP nominees, Bob Dudley and Guillermo Quintero, serve on Rosneft’s nine member Board of Directors. Bob Dudley is a member of its Strategic Planning Committee and Guillermo Quintero is a member of its HR and Remuneration Committee.

 

  US and EU sanctions remain in place on certain Russian activities, individuals and entities, including Rosneft.

About Rosneft

Rosneft is the largest oil company in Russia and the largest publicly traded oil company in the world, based on hydrocarbon production volume. Rosneft has a major resource base of hydrocarbons onshore and offshore, with assets in all Russia’s key hydrocarbon regions. Rosneft’s hydrocarbon production reached a record of 5.4mmboe/d in 2016. Gas production for the year increased by 7.3% to 67.1bcma or 6.47bcf/d compared with 2015.

Rosneft is also the leading Russian refining company based on throughput. It owns and operates 13 refineries in Russia, including three recently acquired in the Bashneft transaction. Rosneft also owns and operates more than 2,950 retail service stations in Russia and abroad. These include BP-branded sites operating under a licensing agreement acquired as part of the TNK-BP acquisition in 2013, and Bashneft-branded stations. Downstream operations include jet fuel, bunkering, bitumen and lubricants. Rosneft refinery throughput in 2016 reached a record level of 2.028mmb/d versus 1.966mmb/d in 2015.

BP‘s strategy in Russia

Our strategy is to work in co-operation with Rosneft to increase total shareholder return and partner with it in building a material business outside of the shareholding. This strategy is implemented through our activities in four areas:

 

  Rosneft Board of Directors: BP has two nominees on the Rosneft Board of Directors and its committees.

 

  Technology: develop and apply technology to improve oil and gas field and refining performance in collaboration with Rosneft.

 

  Joint ventures: partner with Rosneft to generate incremental value from joint ventures that are separate from BP’s core shareholding.

 

  Technical services: the partners collaborate on the provision of technical services on a contractual basis to improve asset performance.

The following developments and activities in 2016 have served to support and progress this strategy:

 

  BP holds a 20% interest in Taas-Yuryakh Neftegazodobycha (Taas), a joint venture« with Rosneft that is developing the Srednebotuobinskoye oil and gas condensate field in East Siberia. In October Rosneft sold a 29.9% interest in the joint venture to a consortium consisting of Oil India Limited, Indian Oil Corporation Limited and Bharat PetroResources Limited. BP’s interest in Taas is reported through the Upstream segment.

 

  Rosneft and BP completed a transaction in October to create a new joint venture, Yermak Neftegaz LLC (Yermak). It will conduct onshore exploration in the West Siberian and Yenisei-Khatanga basins. Yermak is 51% owned by Rosneft and 49% by BP, and currently holds seven exploration and production licences. The venture will also carry out further appraisal work on the Baikalovskoye field, an existing Rosneft
 

 

« See Glossary.    BP Annual Report and Form 20-F 2016      35  


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   discovery in the Yenisei-Khatanga area of mutual interest. BP’s interest in Yermak is reported through the Upstream segment.

 

  Rosneft, BP and Schlumberger signed agreements in September for collaboration on seismic research and the development of an innovative cableless onshore seismic acquisition technology. The technology aims to revolutionize the design and acquisition of seismic surveys and increase the efficiency of exploration, appraisal and field development (see page 12).

 

  BP and Rosneft completed the dissolution of their German refining joint operation Ruhr Oel GmbH (ROG) in December.

During the year Rosneft continued actively managing its portfolio. Highlights included:

 

  Selling a 49.9% share in its subsidiary Vankorneft (excluding infrastructure) to ONGC Videsh Limited and a consortium of Indian companies comprising Oil India Limited, Indian Oil Corporation Limited and Bharat PetroResources Limited. The base price was $4.2 billion.

 

  Signing an agreement to sell a 20% interest in its Verkhnechonskneftegaz subsidiary to the Beijing Gas Group in November. The parties are in the process of obtaining the necessary regulatory approvals.

 

  Signing an agreement for the purchase of a 49% stake in Essar Oil Limited (EOL), an Indian downstream business, from the Essar group in October. As a result of this transaction, Rosneft will acquire an interest in the Vadinar refinery and related infrastructure in India, which is among the top 10 refineries in terms of scale and complexity worldwide. EOL’s business also includes a network of Essar-branded retail outlets across India. The parties are in the process of obtaining the necessary regulatory approvals.

 

  Signing an agreement for the acquisition of 30% of the concession agreement for the development of the Zohr gas field in Egypt in December for $1.125 billion plus $450 million as reimbursement of 2016 historical expenses. The agreement also includes an option for Rosneft to acquire an additional 5% interest on the same terms. The parties are in the process of obtaining the necessary regulatory approvals.

Rosneft segment performance

BP’s investment in Rosneft is managed and reported as a separate segment under IFRS. The segment result includes equity-accounted earnings, representing BP’s 19.75% share of the profit or loss of Rosneft, as adjusted for the accounting required under IFRS relating to BP’s purchase of its interest in Rosneft and the amortization of the deferred gain relating to the disposal of BP’s interest in TNK-BP. See Financial statements – Note 16 for further information.

 

                       $ million  
       2016       2015       2014  

Profit before interest and taxa b

     643       1,314       2,076  

Inventory holding (gains) losses«

     (53     (4     24  

RC profit before interest and tax

     590       1,310       2,100  

Net charge (credit) for non-operating items«

     (23           (225

Underlying RC profit before interest and tax«

     567       1,310       1,875  
Average oil marker prices                      $ per barrel  

Urals (Northwest Europe – CIF)

     41.68           50.97       97.23  

 

a  BP’s share of Rosneft’s earnings after finance costs, taxation and non-controlling interests is included in the BP group income statement within profit before interest and taxation.
b  Includes $3 million (2015 $16 million, 2014 $25 million) of foreign exchange losses arising on the dividend received.

Market price

The price of Urals delivered in North West Europe (Rotterdam) averaged $41.68/bbl in 2016, $2.05/bbl below dated Brent«. The differential to Brent widened from $1.42/bbl in 2015, amid increased supplies of competing medium sour crude from the Middle East.

Financial results

Replacement cost (RC) profit before interest and tax for the segment for 2016 and 2014 included non-operating gains of $23 million and $225 million respectively whereas the 2015 result did not include any non-operating items.

After adjusting for non-operating items, the decrease in the underlying RC profit before interest and tax compared with 2015 primarily reflected lower oil prices and increased government take, partially offset by favourable duty lag effects. Compared with 2014, the 2015 result primarily was affected by lower oil prices and foreign exchange, partially offset by favourable duty lag effects. See also Financial statements – Notes 16 and 31 for other foreign exchange effects.

Balance sheet

 

                      $ million  
      2016       2015       2014  

Investments in associates«c

     

(as at 31 December)

    8,243       5,797       7,312  

Production and reserves

                       
      2016       2015       2014  

Production (net of royalties)
(BP share)

     

Liquids« (mb/d)

     

Crude oild

    836       809       816  

Natural gas liquids

    4       4       5  

Total liquids

    840       813       821  

Natural gas (mmcf/d)

    1,279       1,195       1,084  

Total hydrocarbons (mboe/d)

    1,060       1,019       1,008  

Estimated net proved reservese
(net of royalties) (BP share)

     

Liquids (million barrels)

     

Crude oild

    5,330       4,823       4,961  

Natural gas liquids

    65       47       47  

Total liquids

    5,395 f      4,871       5,007  

Natural gas (billion cubic feet)

    11,900 g        11,169         9,827  

Total hydrocarbons (mmboe)

    7,447       6,796       6,702  

 

c  See Financial statements – Note 16 for further information.
d  Includes condensate.
e  Because of rounding, some totals may not agree exactly with the sum of their component parts.
f  Includes 347 million barrels of crude oil in respect of the 6.58% non-controlling interest in Rosneft held assets in Russia including 28 million barrels held through BP’s equity-accounted interest in Taas-Yuryakh Neftegazodobycha.
g  Includes 300 billion cubic feet of natural gas in respect of the 2.53% non-controlling interest in Rosneft held assets in Russia including 3 billion cubic feet held through BP’s equity-accounted interest in Taas-Yuryakh Neftegazodobycha.
 

 

    
    
 

 

36    BP Annual Report and Form 20-F 2016                                                                  « See Glossary.


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Financial performance

 

                      $ million  
      2016       2015       2014  

Sales and other operating revenuesa

    1,667       2,048       1,989  

RC profit (loss)« before interest and tax

     

Gulf of Mexico oil spill

    (6,640     (11,709     (781

Other

    (1,517     (1,768     (2,010

RC profit (loss) before interest and tax

    (8,157     (13,477     (2,791

Net unfavourable impact of non-operating items«

     

Gulf of Mexico oil spill

    6,640       11,709       781  

Other

    279       547       670  

Net charge (credit) for non-operating items

    6,919       12,256       1,451  

Underlying RC profit (loss) before interest and tax«

    (1,238     (1,221     (1,340

Organic capital expenditure«

    251       340       903  

Additions to non-current assets

    216       315       784  

 

a  Includes sales to other segments.

The replacement cost (RC) loss before interest and tax for the year ended 31 December 2016 was $8.2 billion (2015 $13.5 billion, 2014 $2.8 billion). The 2016 result included a net charge for non-operating items of $6,919 million primarily relating to costs for the Gulf of Mexico oil spill (2015 $12,256 million, 2014 $1,451 million). For further information, see Gulf of Mexico oil spill and Financial statements – Note 2.

After adjusting for these non-operating items, the underlying RC loss before interest and tax for the year ended 31 December 2016 was $1.2 billion, similar to prior years (2015 $1.2 billion, 2014 $1.3 billion).

Outlook

Other businesses and corporate annual charges, excluding non-operating items, are expected to be around $1.4 billion in 2017.

Gulf of Mexico oil spill

Following the 2015 settlements with the United States and the Gulf states, that were approved by the federal district court in 2016, further significant progress was made in 2016 towards resolving outstanding claims arising from the 2010 Deepwater Horizon accident and oil spill.

This included:

 

  Progress in resolving the outstanding business economic loss claims under the Plaintiffs’ Steering Committee (PSC) settlement.

 

  Progress in resolving economic loss and property damage claims from individuals and businesses that either opted out of the PSC settlement and/or were excluded from that settlement.

 

  The finalization by the claims administrator of six of the claims categories under the PSC settlement, the largest of which was the seafood compensation programme.

 

  The settlement of the class action brought by ADS holders who purchased their shares after the accident.

As a result of this progress, we have clarified the remaining material uncertainties arising from the incident.

The cumulative pre-tax income statement charge since the incident, in April 2010, amounted to $62.6 billion.

 

 

LOGO More information

 

 

Financial statements Note 2.
Process safety and ethics monitors page 42.
Legal proceedings page 261.

 

 

 

Main image: The fermentation

tanks at our biofuels Ituiutaba

sugar cane to ethanol plant

in Brazil.

Inset image: An engineer at the

top of a wind turbine tower at

Sherbino wind farm in Texas.

 

                                                             « See Glossary.    BP Annual Report and Form 20-F 2016      37  


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Alternative energy

 

BP has the largest operated renewables business among our oil and gas peers.

 

Renewables will play an increasingly important role in a lower carbon future. They are projected to grow seven times faster than all other energy types combined. Today, they account for around 3% of global energy demand, excluding large-scale hydroelectricity.

 

BP has been producing renewable energy for more than a decade. Our strategy is to invest where we can build commercially viable businesses at scale. With a focus on biofuels and wind, we have the largest operated renewables business among our oil and gas peers. This means that we are directly managing these businesses – from manufacturing biofuels from sugar cane feedstock to generating and distributing wind energy.

 

We are also evaluating other areas where we can grow our involvement in lower carbon opportunities, particularly where they may play a role in complementing existing businesses such as natural gas.

 

Find out about the actions we are taking to address climate change including low carbon venturing on pages 12 and 43.

 

Biofuels business model and strategy

 

Biofuels can help reduce emissions from transportation, the fourth largest source of greenhouse gas (GHG) emissions today. They can be used in existing cars and infrastructure without major changes. BP is working to produce biofuels that are low cost, low carbon, scalable and competitive without subsidies.

 

Our main activity is in Brazil where we operate three bioethanol sites with a combined nameplate capacity of 10 million tonnes per year. We also export power made from sugar cane waste to the local grid. We use our expertise and technology capabilities to drive continuing improvements in operational efficiency.

 

Our strategy is enabled by:

 

  Safe and reliable operations continuing to drive improvements in personal, process and transport safety.

 

  Competitive sourcing concentrating our efforts in Brazil, which has one of the most cost-competitive biofuel feedstocks currently available in the world.

 

  Low carbon producing bioethanol supported by low carbon power generated from burning sugar cane waste. These processes reduce life cycle GHG emissions by around 70% compared with gasoline.

 

  Domestic and international markets selling bioethanol domestically in Brazil and also to international markets such as the US and Europe through our integrated supply and trading function.

     

Our Tropical site achieved the Bonsucro certification for sustainability, legal compliance and production processes for the fourth consecutive year.

 

We produced 733 million litres of ethanol equivalent and generated 562GWh of power for Brazil’s national grid.

 

We continue to invest in the development and commercialization of biobutanol, in conjunction with our partner, DuPont. Compared with other biofuels, biobutanol has the potential to be blended with fuels in higher proportions and be easier to transport, store and manage. We are also investigating a number of chemical applications for this advanced biofuel.

 

Wind

 

BP is among the top wind energy producers in the US. At 31 December 2016, we directly operated 14 wind farms across eight US states, while holding an interest in a separate facility in Hawaii. Our net generating capacity« from this portfolio, based on our financial stake was 1,452MW of electricity.

 

Our net share of US wind generation for 2016 was 4,389GWh.

 

BP also runs one wind farm at our refinery sites in the Netherlands, operating on a much smaller scale and managed by our Downstream segment, with 22.5MW of generating capacity.

 

Safety remains our number one priority and a number of sites achieved safety milestones in 2016. For example, Silver Star and Titan both achieved seven years without a recordable injury, and Fowler 1 and 3 have received awards from Vestas – a leading wind turbine manufacturer – for ‘best overall balanced scorecard’ which includes metrics for safety and availability.

 
     

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Caption: Producing biofuels from sugar

cane at our Tropical site in Brazil.

   
   
   
   
   
   
   
   

 

LOGO More information

 

   

 

See bp.com/renewables or our Sustainability Report.

 

         

 

    
    
 

 

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Caption: Our British Merchant LNG

tanker was built in 2003 and measures

279 metres in length.

Shipping

BP’s shipping and chartering activities help to ensure the safe transportation of our hydrocarbon products using a combination of BP-operated, time-chartered and spot-chartered vessels. At 31 December 2016, BP had four vessels supporting operations in Alaska, and 46 BP-operated and 28 time-chartered vessels for our international oil and gas shipping operations. In 2016 13 new oil tankers were delivered into the BP-operated fleet, a further 13 are expected in 2017, and six technically advanced LNG tankers are on order and planned for delivery into the BP-operated fleet between 2018 and 2019.

As part of our fleet rejuvenation programme, the new ships will all be equipped with new technologies that help improve their safety, efficiency and emissions. For example tankers and product carriers are built with extra-long stroke engines that reduce fuel consumption with fewer revolutions per minute. And within the fleet certain ships have low enough sulphur dioxide emissions to enable us to trade in parts of the world with the most stringent regulations. All vessels conducting BP shipping activities are required to meet BP approved health, safety, security and environmental standards.

Treasury

Treasury manages the financing of the group centrally, with responsibility for managing the group’s debt profile, share buyback programmes and dividend payments, while ensuring liquidity is sufficient to meet group requirements. It also manages key financial risks including interest rate, foreign exchange, pension funding and investment, and financial institution credit risk. From locations in the UK, US and Singapore, treasury provides the interface between BP and the international financial markets and supports the financing of BP’s projects around the world. Treasury trades foreign exchange and interest-rate products in the financial markets, hedging group exposures and generating incremental value through optimizing and managing cash flows and the short-term investment of operational cash balances. Trading activities are underpinned by the compliance, control and risk management infrastructure common to all BP trading activities. For further information, see Financial statements – Note 28.

Insurance

The group generally restricts its purchase of insurance to situations where this is required for legal or contractual reasons. Some risks are insured with third parties and reinsured by group insurance companies. This approach is reviewed on a regular basis or if specific circumstances require such a review.

 

 

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See bp.com/sustainability for case studies, country reports and an interactive tool for health, safety and environmental data.

  

Safety

 

Safety is one of our values and our number one priority. Our stated aim is to have no accidents, no harm to people and no damage to the environment.

 

The fundamentals of how we deliver safe and reliable operations remain unchanged in a lower oil price environment. We are working to continuously improve personal and process safety and operational risk management across BP, with our group-wide operating management system at its core. Our approach builds on our experience, including learning from incidents, operations audits, annual risk reviews and sharing lessons learned with our industry peers.

 

In 2016 BP reported three workforce fatalities. One contractor died following a leg injury sustained at our biofuels business in Brazil and two contractors died in a pipeline construction incident in Oman. We deeply regret the loss of these lives and continue to focus our efforts on eliminating the risk of injuries and fatalities in our work.

 

Process safety

Major accidents or spills can result in serious harm to people and the environment, which is why process safety is so important. Process safety means designing our facilities to appropriate standards and using robust engineering principles. It also underlines the importance of having capable people and rigorous operating and maintenance practices.

  

Process safety events

(number of incidents)

 

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Recordable injury frequency

(workforce incidents per 200,000 hours worked)

 

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Main image: Mad Dog platform

in the Deepwater Gulf of

Mexico.

Inset image: Two of our wind

farms achieved seven years

without a recordable injury

in 2016.

 

    
    
 

 

40    BP Annual Report and Form 20-F 2016


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       2016        2015        2014  

Tier 1 process safety events«

     16        20        28  

Tier 2 process safety events

     84        83        95  

Loss of primary containment – number of incidentsa

     275        235        286  

Oil spills – numberb

     149        146        156  

Oil spills contained

     91        91        93  

Oil spills reaching land and water

     58        55        63  

Oil spilled – volume (thousand litres)

     677            432            400  

Oil unrecovered (thousand litres)

     311        142        155  

 

a Does not include non-hazardous releases.

b Number of spills greater than or equal to one barrel (159 litres, 42 US gallons).

To track our safety performance we use industry metrics, such as the American Petroleum Institute recommended practice 754 and the International Association of Oil and Gas Producers recommended practice 456. These include tier 1 process safety events, which are losses of primary containment of greater consequence – such as causing harm to a member of the workforce, costly damage to equipment or exceeding defined quantities. Tier 2 events are those of lesser consequence. The overall number of process safety events decreased in 2016, continuing the downward trend of the past five years.

Another metric that tracks unplanned or uncontrolled releases of our products from pipes, containers or vehicles is loss of primary containment (LOPC). This is a BP metric that includes events within our operational boundary, excluding releases of non-hazardous substances such as water. We saw an increase of LOPCs in 2016, partly due to harsher winter operating conditions in our unconventional gas operations in the US.

We have seen improvements in our process safety performance over the past five years. For example, at our Rotterdam refinery the number of tier 2 events has reduced from 12 in 2012 to just one in 2016. Alongside this, the refinery’s availability has increased, with 2016 its best year in over a decade. We see examples of this right across our operations – we believe this shows that the rigour needed to produce safe operations tends also to produce reliable operations.

Personal safety

All members of our workforce have the responsibility and the authority to stop unsafe work. Our golden rules of safety guide our workers on staying safe while performing tasks with the potential to cause most harm. The rules are aligned with our operating management system« and focus on areas such as working at heights, lifting operations and driving safety.

 

       2016        2015        2014  

Recordable injury frequencyc

     0.21        0.24        0.31  

Day away from work case frequencyc d

     0.051        0.061        0.081  

Severe vehicle accident ratee

     0.05        0.11        0.13  

c Incidents per 200,000 hours worked.

d Incidents that resulted in an injury where a person is unable to work for a day (shift) or more.

e This figure is based on our new definition which aligns with industry practice. We estimate that based on our previous definition, the rate would have been around 0.09%.

We monitor and report on key workforce personal safety metrics and include both employees and contractors in our data.

We measure our workforce recordable injury frequency, which is the number of reported work-related incidents that result in a fatality or injury per 200,000 hours worked. We also measure our day away from work case frequency, which is the number of incidents per 200,000 hours worked that resulted in an injury where a person is unable to work for a day (or shift) or more.

Our recordable injury frequency and our day away from work rates have reduced across BP in 2016. This continues a pattern of improvement in personal safety over a number of years, which is encouraging. However

LOGO

Caption: Using technology to monitor

conditions on board our Thunder Horse

platform in the Gulf of Mexico.

we know we must maintain our efforts to continue improving safety in our operations.

Managing safety

BP-operated businesses are responsible for identifying and managing operating risks and bringing together people with the right skills and competencies to address them. They are required to carry out self-verification and are also subject to independent scrutiny and assurance. Our safety and operational risk team works alongside BP-operated businesses to provide oversight and technical guidance, while our group audit team visits sites on a risk-prioritized basis, including third-party drilling rigs, to check how they are managing risks.

Each business segment has a safety and operational risk committee, chaired by the business head, to oversee the management of safety and operational risk in their respective areas of the business. In addition, the group operations risk committee facilitates the group chief executive’s oversight of safety and operational risk management across BP.

The board’s safety, ethics and environment assurance committee (SEEAC) receives updates from the group chief executive and the head of safety and operational risk on the management of the highest priority risks. SEEAC also receives updates on BP’s process and personal safety performance, and the monitoring of major incidents and near misses across the group. See How we manage risk on page 47 and SEEAC’s report on page 74.

Operating management system

BP’s OMS is a group-wide framework designed to help us manage risks and drive performance improvements in BP-operated businesses. It brings together BP requirements on health, safety, security, the environment, social responsibility and operational reliability, as well as related issues such as maintenance, contractor relations and organizational learning, into a common management system.

We review and amend our group requirements within OMS from time to time to reflect BP’s priorities and experience. Any variations in the application of OMS – in order to meet local regulations or circumstances – are subject to a governance process.

OMS also helps us improve the quality of our activities. All businesses covered by OMS undertake an annual performance improvement cycle and assess alignment with the applicable requirements of the OMS framework. Recently acquired operations need to transition to OMS. See page 42 for information about contractors and joint arrangements«.

 

 

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Technology

New technologies are helping us increase the amount and quality of data we gather from our operations and speed up our analysis, allowing us to act more quickly. For example, we are piloting software that identifies early warning signs of potential performance problems by gathering machinery and plant data, analysing it and bringing it all to a single screen so engineers can more quickly troubleshoot and resolve potential issues. See page 12 for more information.

We are also testing magnetic crawler robots to inspect the pipelines that connect our deepwater wells with our platforms in the Gulf of Mexico. The robots use lasers to identify corrosion or damage. This can provide us with earlier warnings of potential safety issues.

Emergency preparedness and response

The scale and spread of BP’s operations means we must be prepared to respond to a range of possible disruptions and emergency events. We maintain disaster recovery, crisis and business continuity management plans and work to build day-to-day response capabilities to support local management of incidents.

Security

BP monitors for hostile actions that could cause harm to our people or disrupt our operations. We assess risk on an ongoing basis in those areas that are affected by political and social unrest, terrorism, armed conflict or criminal activity. Our central security team provides guidance and support to our businesses through a network of regional security advisers.

Oil spill response

Our requirements for oil spill preparedness and response planning incorporate what we have learned over many years of operations. We take steps to improve our ability to respond to spills. For example, we used satellite technology to enhance our response in the UK North Sea in 2016.

Cyber security

Cyber attacks present a risk to the security of our information, IT systems and operations. We maintain a range of defences to help prevent and respond to this threat, including a 24-hour monitoring centre in the US and employee cyber awareness programmes. See page 48.

Process safety and ethics monitors

Two independent monitors – an ethics monitor and a process safety monitor – were appointed under the terms of the plea agreement that BP reached with the US government in 2012, following the Deepwater Horizon accident in 2010. The ethics monitor was also appointed under the terms of an administrative agreement reached with the US Environmental Protection Agency in 2014. Under the terms of both agreements, we are taking additional actions to further enhance ethics and compliance across BP and the safety of our drilling operations in the Gulf of Mexico.

The agreements have terms of five years and we are working closely with the monitors who will review ongoing progress until the agreements end.

Working with contractors and partners

With more than half the hours worked in BP carried out by contractors, our ability to be a safe operator depends in part on the capability and performance of those who help us carry out our work. We seek to set clear and consistent expectations of our contractors. Our standard model contracts include health, safety, security, human rights and environmental requirements. Bridging documents are necessary in some cases to define how our safety management system and those of our contractors co-exist to manage risk on a site.

We expect and encourage our contractors and their employees to act in a way that is consistent with our code of conduct and we take appropriate actions where we believe they have not met our expectations or their contractual obligations. Our OMS includes requirements and practices for working with contractors.

Our partners in joint arrangements

In joint arrangements where we are the operator, our OMS, code of conduct and other policies apply. We aim to report on all aspects of our business where we are the operator – as we directly manage the performance of these operations.

Where we are not the operator, our OMS is available as a reference point for BP businesses when engaging with operators and co-venturers. We monitor performance and how risk is managed in our joint arrangements, whether we are the operator or not. For example, in Canada we have 50% ownership of the Sunrise oil sands project but it is operated by another company. We benchmark the operator’s safety, financial and environmental performance against our expectations. And BP representatives on the venture’s governance committee are responsible for confirming that activities are consistent with our investment requirements and code of conduct.

We have a group framework to assess BP’s exposure related to safety, operational and bribery and corruption risk from our participation in non-operated joint arrangements.

 

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Caption: Monitoring activities

at our office in Cairo, Egypt.

 

 

    
    
 

 

42    BP Annual Report and Form 20-F 2016


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Climate change

Working with others, BP can help drive the transition to a lower carbon future.

 

 

Calling for a price on carbon

 

 
BP believes that carbon pricing by governments is the most comprehensive and economically efficient policy to limit GHG emissions. We assess how potential carbon policy could affect our businesses now and in the future.
 

To help anticipate greater regulatory requirements for GHG emissions, we factor a carbon price into our own investment decisions and engineering designs for large new projects and those for which emissions costs would be a material part of the project. In industrialized countries, this is currently $40 per tonne of CO2 equivalent and we also stress test at a carbon price of $80 per tonne.

 

 

Supplying natural gas

 

 

Around half of BP’s upstream portfolio is currently natural gas, which produces about half as much GHG emissions as coal when burned to generate power. We have several new big gas projects coming onstream in the next few years including Khazzan in Oman, West Nile Delta and Zohr in Egypt, Juniper in Trinidad and the Southern Gas Corridor from the Caspian Sea to Europe.

 

 

Providing renewable energy

 

 

BP invests in renewable energy where we can build commercially viable businesses at scale. With a focus on biofuels and wind, we have the largest operated renewables business among our oil and gas peers.

 

 

Pursuing efficient operations

 

 

We are focusing on ways to reduce our GHG emissions. This includes looking to improve the energy efficiency of our operations and reducing flaring and methane emissions.

 

 

Investing in start-ups and innovation

 

 

Over the past decade, we have invested in start-up companies to help accelerate development and commercial viability of certain technologies. As at 31 December 2016, we had invested around $300 million in emerging technology companies – around half of these investments focus on low carbon solutions.

 

 

Helping customers reduce their emissions

 

 

BP provides an increasing number of lower carbon, energy-efficient and high-performance products to help our customers reduce their carbon footprint – from Castrol lubricants with lower viscosity, which helps manufacturers improve the efficiency of their vehicles – to PTAir – PTA with around a 30% lower carbon footprint than average European production.

 

We are collaborating with others to help address this global challenge. As one example, the Oil and Gas Climate Initiative – currently chaired by our chief executive Bob Dudley – brings together 10 oil and gas companies working to reduce the GHG emissions from our industry’s operations and the use of our products.

See bp.com/climatechange for more information.

Greenhouse gas emissions

We report on direct and indirect GHG emissions on a carbon dioxide-equivalent (CO2e) basis. Direct emissions include CO2 and methane from the combustion of fuel and the operation of facilities, and indirect emissions include those resulting from the purchase of electricity, heat, steam or cooling.

Our approach to reporting GHG emissions broadly follows the IPIECA/API/IOGP Petroleum Industry Guidelines for Reporting GHG Emissions. We calculate emissions based on the fuel consumption and fuel properties for major sources rather than the use of generic emission factors. We do not include nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride as they are not material and it is not practical to collect this data.

Greenhouse gas emissionsab

(MteCO2 equivalent)

 

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a This is based on BP’s equity share basis (excluding BP’s share of Rosneft).

b A minor adjustment has been made from the reported 2015 figure of 48.9.

Our direct GHG emissions are impacted year-on-year by changes in our portfolio and operations. For example, emissions can increase when we start up new projects or when we bring operations back online after planned maintenance. Both of these activities are essential for the safe performance and growth of BP’s portfolio. In 2016, the increase in our direct GHG emissions was primarily due to operational changes that include the start-up activities of the Sunrise oil sands project in Canada and the LNG plant in Angola. And one of our US refineries restarted operations following a planned shutdown for maintenance. Around a quarter of the increase is due to changes in how we calculate emissions.

This increase has been partially offset by our ‘real sustainable reductions’ – these are actions taken by our businesses to permanently reduce their GHG emissions in areas such as flaring, methane and energy efficiency. We began tracking this in 2002, and the running total by the end of 2016 exceeded 9.1Mte.

Greenhouse gas emissions (MteCO2e)

       2016        2015       2014  

Operational controla

                         

Direct emissions

     51.4        51.2 b      54.1  

Indirect emissions

     6.2        7.0       7.5  

BP equity sharec

                         

Direct emissions

     50.1              49.0 d            48.7 e 

Indirect emissions

     6.2        6.9       6.8  

 

a  Operational control data comprises 100% of emissions from activities that are operated by BP, going beyond the IPIECA guidelines by including emissions from certain other activities such as contracted drilling activities.
b  A minor adjustment has been made from the reported 2015 figure of 51.4.
c  BP equity share comprises our share of BP’s consolidated entities and equity-accounted entities, other than BP’s share of Rosneft.
d  A minor adjustment has been made from the reported 2015 figure of 48.9.
e  A minor adjustment has been made from the reported 2014 figure of 48.6.

The ratio of our total GHG emissions reported on an operational control basis to gross production was 0.24teCO2e/te production in 2016 (2015 0.24teCO2e/te, 2014 0.25teCO2e/te). Gross production comprises upstream production, refining throughput and petrochemicals produced.

 

 

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Value to society

We aim to have a positive and enduring impact on the communities in which we operate.

We contribute to economies through our core business activities, such as helping to develop the national and local supply base, and through the taxes we pay to governments. Additionally, our social investments support communities’ efforts to increase their incomes and improve standards of living. For example, in Egypt we support healthcare in the communities that are closest to our West Nile Delta project by funding emergency equipment for local hospitals.

We run programmes to help build the skills of businesses and develop the local supply chain in a number of locations. In Angola, for example, we have supported the foundation of local businesses, providing community members with technical and hands-on training. Our enterprise and development programme in Azerbaijan helps local companies build their skills so that they can improve their competitiveness when bidding for work with international firms.

We aim to recruit our workforce from the community or country in which we operate. At our Tangguh LNG plant in West Papua, Indonesia, more than half of our workforce is Papuan. This is a direct result of internship and apprentice programmes that focus on training graduates from Papua and Papua Barat. We are committed to reaching an 85% Papuan workforce by 2029.

We contributed $61.1 million in social investment in 2016.

See bp.com/society for more information on how we are maximizing value to society.

Tax and financial transparency

We contribute to economies around the world through the taxes that we pay. We paid $2.2 billion in income and production taxes to governments in 2016 (2015 $3.5bn, 2014 $8.0bn).

BP is committed to complying with tax laws in a responsible manner and having open and constructive relationships with tax authorities. We participate in initiatives to simplify and improve tax regimes to encourage investment and economic growth. We also support efforts to increase public trust in tax systems.

The Extractive Industries’ Transparency Initiative (EITI) supports disclosure of payments made to, and received by, government in relation to oil, gas and mining activity. As a member of EITI, BP works with governments, non-governmental organizations and international agencies to improve the transparency of payments to governments.

BP discloses information on payments to governments for our upstream activities. We report on a country-by-country and project basis as required by UK regulation which incorporates the EU Accounting Directive. These payments could be made in the form of production entitlements, taxes, royalties, bonuses, fees and infrastructure improvements. We also make payments to governments in connection with other parts of our business – such as the transporting, trading, manufacturing and marketing of oil and gas.

See bp.com/tax for our approach to tax and our payments to governments report.

Human rights

We strive to conduct our business in a manner that respects the rights and dignity of all people.

We respect internationally recognized human rights as set out in the International Bill of Human Rights and the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work. We set out our commitments in our human rights policy and our code of conduct. Through our code of conduct, employees are required to report any human rights abuse in either our operations or those of our business partners.

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Caption: Operations at the Rumaila oil

field in southern Iraq.

We are working towards alignment with the UN Guiding Principles on Business and Human Rights by implementing our human rights policy. Our focus is on identifying and addressing human rights risks, including those associated with the recruitment and living conditions of contracted workforces on our sites, and on enhancing community grievance mechanisms and channels for workforces to raise their concerns.

In 2016 our actions included:

 

  Initiation of a review examining the risk of modern slavery, focusing on the parts of our business and supply chain where we believe there could be greater risk.

 

  Development and piloting of a human rights due diligence process that can be used to screen suppliers in a consistent way anywhere in the world.

 

  Evaluation of key sites’ community complaints mechanisms against the Guiding Principles to identify good practice and areas for improvement.

 

  Continued implementation of the Voluntary Principles on Security and Human Rights, with periodic internal assessments to identify areas for improvement.

See bp.com/humanrights for more information about our approach to human rights.

Local environmental impacts

We work to avoid, minimize and mitigate environmental impacts from our activities.

We consider local conditions when determining which issues would benefit from the greatest focus. At a site close to communities, for example, the immediate concern may be air quality, whereas a remote desert site may require greater consideration of water management issues.

Water

BP recognizes the importance of managing freshwater use and water discharges in our operations and we review our water risks annually. We consider the local environment and quantity, quality and regulatory impacts. We assess different approaches for optimizing water consumption and wastewater treatment performance. For example, at our Khazzan operation in Oman, we treat wastewater from our sewage treatment plant and re-use it for irrigation, road construction and dust suppression, reducing freshwater demand in an area of water scarcity.

 

 

    
    
 

 

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We monitor the increasing number of regulations pertaining to freshwater withdrawals and water discharge quality where we operate. This has led to investments in our wastewater treatment plants at our refineries in Germany and the US.

See bp.com/water for information about our approach to water.

Air quality

We put measures in place to manage our air emissions, in line with regulations and guidelines designed to protect the environment and the health of local communities.

For example, our Whiting refinery is one of the largest refineries in the US, with the potential to have a significant impact on local air quality. We have reduced our air emissions there by more than 50% over the past five years by minimizing the amount of gas flared and emissions from process equipment. We monitor sulphur dioxide, hydrogen sulphide, benzene and other pollutants at the periphery of the refinery and make this data available on the refinery’s website.

Unconventional gas and hydraulic fracturing

Some stakeholders have raised concerns about the potential environmental and community impacts of hydraulic fracturing during unconventional gas development. BP seeks to apply responsible well design practices to mitigate these risks. For example, our wells are designed, constructed, operated and decommissioned to prevent gas and hydraulic fracturing fluids entering underground aquifers, such as drinking water sources.

We list the chemicals we use in the fracturing process in material safety data sheets at each site. We also submit data on chemicals used at our hydraulically fractured wells in the US, to the extent allowed by our suppliers, who own the chemical formulas, at fracfocus.org or other state-designated websites.

We are working to minimize air pollutant and GHG emissions, such as methane, at our operating sites. At our Khazzan site in Oman we have built a central processing facility that reduces the need for processing equipment at each individual well site, which can be additional sources of methane emissions in gas production. In the US we use a process called green completions at our gas operations. This process captures natural gas that would otherwise be flared or vented during the completion and commissioning of wells.

See bp.com/unconventionalgas for information about our approach to unconventional gas and hydraulic fracturing.

Caption: Safety checks at Cherry

Point refinery, US.

 

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Ethical conduct

Our code of conduct defines our commitment to high ethical standards.

Our values

 

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Our values represent the qualities and actions we wish to see in BP, they guide the way we do business and the decisions we make. We use these values as part of our recruitment, promotion and individual performance assessment processes.

See bp.com/values for more information.

The BP code of conduct

Our code of conduct is based on our values and clarifies the principles and expectations for how we work at BP. It applies to all BP employees and members of the board.

Employees, contractors or other third parties who have a question about our code of conduct or see something they feel is potentially unsafe, unethical or harmful can discuss these with their managers, supporting teams, works councils (where relevant) or through OpenTalk, a confidential helpline operated by an independent company.

A total of 956 people contacted OpenTalk with concerns or enquiries in 2016 (2015 1,158, 2014 1,114). The most common concerns related to the people section of the code. This includes treating people fairly, with dignity and giving everyone equal opportunity; creating a respectful, harassment-free workplace; and protecting privacy and confidentiality.

We take steps to identify and correct areas of non-conformance and take disciplinary action where appropriate. In 2016 our businesses dismissed 109 employees for non-conformance with our code of conduct or unethical behaviour (2015 132, 2014 157). This excludes dismissals of staff employed at our retail service stations.

See bp.com/codeofconduct for more information.

Anti-bribery and corruption

Bribery and corruption are significant risks in the oil and gas industry. We have a responsibility to our employees, our shareholders and to the countries and communities in which we do business to be ethical and lawful in all our work. Our code of conduct explicitly prohibits engaging in bribery or corruption in any form.

Our group-wide anti-bribery and corruption policy applies to all BP-operated businesses. The policy governs areas such as the inclusion of appropriate clauses in contracts, risk assessments and training. We provide training to those employees for whom we believe it is most relevant, for example, depending on the nature or location of their role or in response to specific incidents.

 

 

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Lobbying and political donations

We prohibit the use of BP funds or resources to support any political candidate or party.

We recognize the rights of our employees to participate in the political process. Their rights to do so are governed by the applicable laws in the countries in which we operate. For example, in the US we support the operation of the BP employee political action committee (PAC), which is a non-partisan committee that encourages voluntary employee participation in the political process. All BP employee PAC contributions are reviewed for compliance, comply with the law and are publicly reported in accordance with US election laws.

The way in which we interact with governments depends on the legal and regulatory framework in each country. We engage across a range of issues that are relevant to our business, from regulatory compliance, to understanding our tax liabilities, to collaborating on community initiatives.

Our people

BP’s success depends on having a highly skilled and motivated workforce that reflects the societies where we operate.

BP employees

Number of employees at 31 Decembera      2016        2015        2014  

Upstream

     18,700        21,700        24,400  

Downstream

     41,800        44,800        48,000  

Other businesses and corporate

     14,000        13,300        12,100  

Total

     74,500        79,800        84,500  

Service station staff

     16,200        15,600        14,400  

Agricultural, operational and seasonal workers in Brazil

     4,600        4,800        5,300  

Total excluding service station staff and workers in Brazil

     53,700        59,400        64,800  

 

a  Reported to the nearest 100. For more information see Financial Statements – Note 34.

A lower oil price has meant that we have continued to adapt and reshape our organization. This has contributed to a reduction in overall headcount of 10,000 over the past two years. Our focus is on retaining the skills we require to maintain safe and reliable operations.

The group people committee helps facilitate the group chief executive’s oversight of policies relating to employees. In 2016 the committee discussed longer-term people priorities, reward, progress in our diversity and inclusion programme, employee engagement, and improvements to our training and development programmes.

Attracting and retaining the right people

We prefer building capability and promoting people from within our organization and we complement this with selective external recruitment for specialist roles.

We provide on-the-job learning and mentoring programmes, as well as online and classroom-based courses. Structured leadership courses help employees move into more senior positions. Our average expenditure on learning and development was around $4,000 per person in 2016 (2015 $4,000).

We continued to invest in graduate recruitment and early career recruitment in 2016, albeit at a reduced level. A total of 231 global graduates joined BP in 2016 (2015 298, 2014 670). We are working to increase our visibility in the graduate job market and in 2016, students voted us the UK’s Most Popular Graduate Recruiter in the energy and utilities sector at the Target Jobs Sector Awards.

Diversity

We are a global company and aim for a workforce that is representative of the societies in which we operate.

Our gender balance is steadily improving, with women representing 33% of BP’s population and 22% of group leaders – our most senior managers – at the end of 2016. Our aim is for women to represent at least 25% of group leaders by 2020. Following the retirement of our executive vice president of corporate business activities in 2016, we are considering how best to increase female representation at executive level.

At the end of 2016 there were three female directors (2015 3, 2014 2) on our board. Our nomination committee remains mindful of diversity when considering potential candidates.

For more information on the composition of our board, see page 65.

Workforce by gender

 

Numbers as at 31 December              Male                  Female                  Female %  

Board directors

     11        3        21%  

Group leaders

     308        86        22%  

Subsidiary« directors

     1,056        174        14%  

All employees

     50,200        24,300        33%  

We are also committed to increasing the national diversity of our workforce to reflect the countries in which we operate. A total of 26% of our group leaders came from countries other than the UK and the US in 2016 (2015 23%, 2014 22%).

Inclusion

Our goal is to create an environment of inclusion and acceptance, where everyone is treated equally and without discrimination.

We aim to ensure equal opportunity in recruitment, career development, promotion, training and reward for all employees – regardless of ethnicity, national origin, religion, gender, age, sexual orientation, marital status, disability, or any other characteristic protected by applicable laws. Where existing employees become disabled, our policy is to provide continued employment, training and occupational assistance where needed.

Employee engagement

Managers hold regular team and one-to-one meetings with their staff, complemented by formal processes through works councils in parts of Europe. We regularly communicate with employees on factors that affect company performance, and seek to maintain constructive relationships with labour unions formally representing our employees.

Our annual employee survey found that confidence in the future of BP has risen to 64% in 2016 (2015 58%, 2014 63%), with solid improvements in pride in working for BP and trust in management.

However, scores related to career opportunities, reward and recognition are not as high as we would like them to be and we will review actions to address these areas in 2017.

Share ownership

We encourage employee share ownership and have a number of employee share plans in place. For example, under our ShareMatch plan, which operates in more than 50 countries, we match BP shares purchased by our employees. We also operate a group-wide discretionary share plan, which allows employee participation at different levels globally and is linked to the company’s performance.

 

 

    
    
 

 

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How we manage risk

 

BP manages, monitors and reports on the principal risks and uncertainties that can impact our ability to deliver our strategy of meeting the world’s energy needs responsibly while creating long-term shareholder value; these risks are described in the Risk factors on page 49.

Our management systems, organizational structures, processes, standards, code of conduct and behaviours together form a system of internal control that governs how we conduct the business of BP and manage associated risks.

BP’s risk management system

BP’s risk management system and policy is designed to be a consistent and clear framework for managing and reporting risks from the group’s operations to the board. The system seeks to avoid incidents and maximize business outcomes by allowing us to:

 

  Understand the risk environment, and assess the specific risks and potential exposure for BP.

 

  Determine how best to deal with these risks to manage overall potential exposure.

 

  Manage the identified risks in appropriate ways.

 

  Monitor and seek assurance of the effectiveness of the management of these risks and intervene for improvement where necessary.

 

  Report up the management chain and to the board on a periodic basis on how significant risks are being managed, monitored, assured and the improvements that are being made.

Our risk management activities

 

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Day-to-day risk management – management and staff at our facilities, assets and functions seek to identify and manage risk, promoting safe, compliant and reliable operations. BP requirements, which take into account applicable laws and regulations, underpin the practical plans developed to help reduce risk and deliver strong, sustainable performance. For example, our operating management system« (OMS) integrates BP requirements on health, safety, security, environment, social responsibility, operational reliability and related issues.

Business and strategic risk management – our businesses and functions integrate risk management into key business processes such as strategy, planning, performance management, resource and capital allocation, and project appraisal. We do this by using a standard framework for collating risk data, assessing risk management activities, making further improvements and planning new activities.

Oversight and governance – functional leadership, the executive team, the board and relevant committees provide oversight to identify, understand and endorse management of significant risks to BP. They also put in place systems of risk management, compliance and control designed to mitigate these risks. Executive committees set policy and

oversee the management of significant risks, and dedicated board committees review and monitor certain risks throughout the year.

BP’s group risk team analyses the group’s risk profile and maintains the group risk management system. Our group audit team provides independent assurance to the group chief executive and board as to whether the group’s system of internal control is adequately designed and operating effectively to respond appropriately to the risks that are significant to BP.

Risk governance and oversight

Key risk governance and oversight committees include the following:

 

 

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•  Executive team meeting – for strategic and commercial risks.

 

•  Group operations risk committee – for health, safety, security, environment and operations integrity risks.

 

•  Group financial risk committee – for finance, treasury, trading and cyber risks.

 

•  Group disclosure committee – for financial reporting risks.

 

•  Group people committee – for employee risks.

 

•  Group ethics and compliance committee – for legal and regulatory compliance and ethics risks.

 

•  Resource commitment meeting – for investment decision risks.

 

 

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•  BP board.

 

•  Audit committee.

 

•  Safety, ethics and environment assurance committee.

 

•  Geopolitical committee.

 

Risk management processes

As part of BP’s annual planning process, we review the group’s principal risks and uncertainties. These may be updated throughout the year in response to changes in internal and external circumstances.

We aim for a consistent basis of measuring risk to allow comparison on a like-for-like basis, taking into account potential likelihood and impact, and to inform how we prioritize specific risk management activities and invest resources to manage them.

Our risk profile

The nature of our business operations is long term, resulting in many of our risks being enduring in nature. Nonetheless, risks can develop and evolve over time and their potential impact or likelihood may vary in response to internal and external events.

We identify those risks as having a high priority for particular oversight by the board and its various committees in the coming year. Those identified for 2017 are listed in this section. These may be updated throughout the year in response to changes in internal and external circumstances. The oversight and management of other risks is undertaken in the normal course of business throughout the business and in executive and board committees.

There can be no certainty that our risk management activities will mitigate or prevent these, or other risks, from occurring.

Further details of the principal risks and uncertainties we face are set out in Risk factors on page 49.

 

 

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Board and committee reports page 64.

 

 
 

 

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Risks for particular oversight by the board and its committees in 2017

The risks for particular oversight by the board and its committees in 2017 have been reviewed and updated. These risks remain the same as for 2016.

Strategic and commercial risks

Financial resilience

External market conditions can impact our financial performance. Supply and demand and the prices achieved for our products can be affected by a wide range of factors including political developments, technological change, global economic conditions and the influence of OPEC.

We actively manage this risk through BP’s diversified portfolio, our financial framework, liquidity stress testing, regular reviews of market conditions and our planning and investment processes.

Geopolitical

The diverse locations of our operations around the world expose us to a wide range of political developments and consequent changes to the economic and operating environment. Geopolitical risk is inherent to many regions in which we operate, and heightened political or social tensions or changes in key relationships could adversely affect the group.

We seek to actively manage this risk through development and maintenance of relationships with governments and stakeholders and becoming trusted partners in each country and region. In addition, we closely monitor events and implement risk mitigation plans where appropriate.

Cybersecurity

The threats to the security of our digital infrastructure continue to evolve rapidly and, like many other global organizations, we rely on digital systems and network technology. A cybersecurity breach could have a significant impact on business operations.

We seek to manage this risk through a range of measures, which include cybersecurity standards, ongoing monitoring of threats and testing of cyber response procedures and equipment. We collaborate closely with governments, law enforcement agencies and industry peers to understand and respond to new and emerging cyber threats. Campaigns and presentations on topics such as email phishing and protecting our information and equipment have helped to raise employee awareness of these issues.

Safety and operational risks

Process safety, personal safety and environmental risks

The nature of the group’s operating activities exposes us to a wide range of significant health, safety and environmental risks such as incidents associated with releases of hydrocarbons when drilling wells, operating facilities and transporting hydrocarbons.

Our OMS helps us manage these risks and drive performance improvements. It sets out the rules and principles which govern key risk management activities such as inspection, maintenance, testing, business continuity and crisis response planning and competency development. In addition, we conduct our drilling activity through a global wells organization in order to promote a consistent approach for designing, constructing and managing wells.

Security

Hostile acts such as terrorism or piracy could harm our people and disrupt our operations. We monitor for emerging threats and vulnerabilities to manage our physical and information security.

Our central security team provides guidance and support to our businesses through a network of regional security advisers who advise and conduct assurance with respect to the management of security risks affecting our people and operations. We also maintain disaster recovery, crisis and business continuity management plans. We

 

continue to monitor threats globally and, in particular, the situation in the Middle East, North Africa and Europe.

Compliance and control risks

Ethical misconduct and legal or regulatory non-compliance

Ethical misconduct or breaches of applicable laws or regulations could damage our reputation, adversely affect operational results and shareholder value, and potentially affect our licence to operate. Our code of conduct and our values and behaviours, applicable to all employees, are central to managing this risk. Additionally, we have various group requirements and training covering areas such as anti-bribery and corruption, anti-money laundering, competition/anti-trust law and international trade regulations. We seek to keep abreast of new regulations and legislation and plan our response to them. We offer an independent confidential helpline, OpenTalk, for employees, contractors and other third parties. Under the terms of the 2012 plea agreement with the US government and the 2014 settlement with the US Environmental Protection Agency, an ethics monitor is reviewing and providing recommendations concerning BP’s ethics and compliance programme.

Trading non-compliance

In the normal course of business, we are subject to risks around our trading activities which could arise from shortcomings or failures in our systems, risk management methodology, internal control processes or employees.

We have specific operating standards and control processes to manage these risks, including guidelines specific to trading, and seek to monitor compliance through our dedicated compliance teams. We also seek to maintain a positive and collaborative relationship with regulators and the industry at large.

 

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Risk factors

 

The risks discussed below, separately or in combination, could have a material adverse effect on the implementation of our strategy, our business, financial performance, results of operations, cash flows, liquidity, prospects, shareholder value and returns and reputation.

Strategic and commercial risks

Prices and markets – our financial performance is subject to fluctuating prices of oil, gas, refined products, technological change, exchange rate fluctuations, and the general macroeconomic outlook.

Oil, gas and product prices are subject to international supply and demand and margins can be volatile. Political developments, increased supply from new oil and gas sources, technological change, global economic conditions and the influence of OPEC can impact supply and demand and prices for our products. Decreases in oil, gas or product prices could have an adverse effect on revenue, margins, profitability and cash flows. If significant or for a prolonged period, we may have to write down assets and re-assess the viability of certain projects, which may impact future cash flows, profit, capital expenditure and ability to maintain our long-term investment programme. Conversely, an increase in oil, gas and product prices may not improve margin performance as there could be increased fiscal take, cost inflation and more onerous terms for access to resources. The profitability of our refining and petrochemicals activities can be volatile, with periodic over-supply or supply tightness in regional markets and fluctuations in demand.

Exchange rate fluctuations can create currency exposures and impact underlying costs and revenues. Crude oil prices are generally set in US dollars, while products vary in currency. Many of our major project« development costs are denominated in local currencies, which may be subject to fluctuations against the US dollar.

Access, renewal and reserves progression – our inability to access, renew and progress upstream resources in a timely manner could adversely affect our long-term replacement of reserves.

Delivering our group strategy depends on our ability to continually replenish a strong exploration pipeline of future opportunities to access and produce oil and natural gas. Competition for access to investment opportunities, heightened political and economic risks in certain countries where significant hydrocarbon basins are located and increasing technical challenges and capital commitments may adversely affect our strategic progress. This, and our ability to progress upstream resources and sustain long-term reserves replacement, could impact our future production and financial performance.

Major project delivery failure to invest in the best opportunities or deliver major projects successfully could adversely affect our financial performance.

We face challenges in developing major projects, particularly in geographically and technically challenging areas. Operational challenges and poor investment choice, efficiency or delivery at any major project that underpins production or production growth could adversely affect our financial performance.

Geopolitical – we are exposed to a range of political developments and consequent changes to the operating and regulatory environment.

We operate and may seek new opportunities in countries and regions where political, economic and social transition may take place. Political instability, changes to the regulatory environment or taxation, international sanctions, expropriation or nationalization of property, civil strife, strikes, insurrections, acts of terrorism and acts of war may disrupt or curtail our operations or development activities. These may in turn cause production to decline, limit our ability to pursue new opportunities, affect the recoverability of our assets or cause us to incur additional costs, particularly due to the long-term nature of many of our projects and significant capital expenditure required.

Events in or relating to Russia, including further trade restrictions and other sanctions, could adversely impact our income and investment in Russia. Our ability to pursue business objectives and to recognize production and reserves relating to Russia could also be adversely impacted.

Liquidity, financial capacity and financial, including credit, exposure – failure to work within our financial framework could impact our ability to operate and result in financial loss.

Failure to accurately forecast, manage or maintain sufficient liquidity and credit could impact our ability to operate and result in financial loss. Trade and other receivables, including overdue receivables, may not be recovered and a substantial and unexpected cash call or funding request could disrupt our financial framework or overwhelm our ability to meet our obligations.

An event such as a significant operational incident, legal proceedings or a geopolitical event in an area where we have significant activities, could reduce our credit ratings. This could potentially increase financing costs and limit access to financing or engagement in our trading activities on acceptable terms, which could put pressure on the group’s liquidity. Credit rating downgrades could trigger a requirement for the company to review its funding arrangements with the BP pension trustees and may cause other impacts on financial performance. In the event of extended constraints on our ability to obtain financing, we could be required to reduce capital expenditure or increase asset disposals in order to provide additional liquidity. See Liquidity and capital resources on page 242 and Financial statements – Note 28.

Joint arrangements and contractors – we may have limited control over the standards, operations and compliance of our partners, contractors and sub-contractors.

We conduct many of our activities through joint arrangements«, associates« or with contractors and sub-contractors where we may have limited influence and control over the performance of such operations. Our partners and contractors are responsible for the adequacy of the resources and capabilities they bring to a project. If these are found to be lacking, there may be financial, operational or safety risks for BP. Should an incident occur in an operation that BP participates in, our partners and contractors may be unable or unwilling to fully compensate us against costs we may incur on their behalf or on behalf of the arrangement. Where we do not have operational control of a venture, we may still be pursued by regulators or claimants in the event of an incident.

Digital infrastructure and cybersecurity – breach of our digital security or failure of our digital infrastructure could damage our operations and our reputation.

A breach or failure of our digital infrastructure due to intentional actions such as attacks on our cybersecurity, negligence or other reasons, could seriously disrupt our operations and could result in the loss or misuse of data or sensitive information, injury to people, disruption to our business, harm to the environment or our assets, legal or regulatory breaches and potentially legal liability. These could result in significant costs or reputational consequences.

Climate change and carbon pricing – public policies could increase costs and reduce future revenue and strategic growth opportunities.

Changes in laws, regulations, policies and obligations relating to climate change, including carbon pricing, could impact our assets, costs, revenue generation and strategic growth opportunities and demand for our products.

Competition – inability to remain efficient, innovate and retain an appropriately skilled workforce could negatively impact delivery of our strategy in a highly competitive market.

Our strategic progress and performance could be impeded if we are unable to control our development and operating costs and margins, or to sustain, develop and operate a high-quality portfolio of assets efficiently. We could be adversely affected if competitors offer superior terms for access rights or licences, or if our innovation in areas such as exploration, production, refining or manufacturing lags the industry. Our performance could also be negatively impacted if we fail to protect our intellectual property.

Our industry faces increasing challenge to recruit and retain skilled and experienced people in the fields of science, technology, engineering and mathematics. Successful recruitment, development and retention of specialist staff is essential to our plans.

Crisis management and business continuity – potential disruption to our business and operations could occur if we do not address an incident effectively.

Our business and operating activities could be disrupted if we do not respond, or are perceived not to respond, in an appropriate manner to any major crisis or if we are not able to restore or replace critical operational capacity.

 

 

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Insurance – our insurance strategy could expose the group to material uninsured losses.

BP generally purchases insurance only in situations where this is legally and contractually required. Some risks are insured with third parties and reinsured by group insurance companies. Uninsured losses could have a material adverse effect on our financial position, particularly if they arise at a time when we are facing material costs as a result of a significant operational event which could put pressure on our liquidity and cash flows.

Safety and operational risks

Process safety, personal safety, and environmental risks – we are exposed to a wide range of health, safety, security and environmental risks that could result in regulatory action, legal liability, increased costs, damage to our reputation and potentially denial of our licence to operate.

Technical integrity failure, natural disasters, extreme weather, human error and other adverse events or conditions could lead to loss of containment of hydrocarbons or other hazardous materials, as well as fires, explosions or other personal and process safety incidents, including when drilling wells, operating facilities and those associated with transportation by road, sea or pipeline.

There can be no certainty that our operating management system« or other policies and procedures will adequately identify all process safety, personal safety and environmental risks or that all our operating activities will be conducted in conformance with these systems. See Safety on page 40.

Such events, including a marine incident, or inability to provide safe environments for our workforce and the public while at our facilities, premises or during transportation, could lead to injuries, loss of life or environmental damage. We could as a result face regulatory action and legal liability, including penalties and remediation obligations, increased costs and potentially denial of our licence to operate. Our activities are sometimes conducted in hazardous, remote or environmentally sensitive locations, where the consequences of such events could be greater than in other locations.

Drilling and production – challenging operational environments and other uncertainties can impact drilling and production activities.

Our activities require high levels of investment and are sometimes conducted in extremely challenging environments which heighten the risks of technical integrity failure and the impact of natural disasters and extreme weather. The physical characteristics of an oil or natural gas field, and cost of drilling, completing or operating wells is often uncertain. We may be required to curtail, delay or cancel drilling operations because of a variety of factors, including unexpected drilling conditions, pressure or irregularities in geological formations, equipment failures or accidents, adverse weather conditions and compliance with governmental requirements.

Security – hostile acts against our staff and activities could cause harm to people and disrupt our operations.

Acts of terrorism, piracy, sabotage and similar activities directed against our operations and facilities, pipelines, transportation or digital infrastructure could cause harm to people and severely disrupt business and operations. Our activities could also be severely affected by conflict, civil strife or political unrest.

Product quality – supplying customers with off-specification products could damage our reputation, lead to regulatory action and legal liability, and potentially impact our financial performance.

Failure to meet product quality standards could cause harm to people and the environment, damage our reputation, result in regulatory action and legal liability, and impact financial performance.

Compliance and control risks

US government settlements – failure to comply with the terms of our settlements with legal and regulatory bodies in the US announced in November 2012 in respect of certain charges related to the Gulf of Mexico oil spill may expose us to further penalties or liabilities or could result in suspension or debarment of certain BP entities.

Settlements with the US Department of Justice (DoJ) and the US Securities and Exchange Commission (SEC) impose significant compliance and remedial obligations on BP and its directors, officers and employees, including the appointment of an ethics monitor, a process safety monitor and an independent third-party auditor. Failure to comply with the terms of these settlements could result in further enforcement action by the DoJ and the SEC and expose us to severe penalties,

financial or otherwise, each of which could impact our operations and have a material adverse effect on the group’s reputation and financial performance. Failure to satisfy the requirements or comply with the terms of the administrative agreement with the US Environmental Protection Agency (EPA), under which BP agreed to a set of safety and operations, ethics and compliance and corporate governance requirements, could result in suspension or debarment of certain BP entities.

Regulation – changes in the regulatory and legislative environment could increase the cost of compliance, affect our provisions and limit our access to new exploration opportunities.

Governments that award exploration and production interests may impose specific drilling obligations, environmental, health and safety controls, controls over the development and decommissioning of a field and possibly, nationalization, expropriation, cancellation or non-renewal of contract rights. Royalties and taxes tend to be high compared with those imposed on similar commercial activities, and in certain jurisdictions there is a degree of uncertainty relating to tax law interpretation and changes. Governments may change their fiscal and regulatory frameworks in response to public pressure on finances, resulting in increased amounts payable to them or their agencies.

Such factors could increase the cost of compliance, reduce our profitability in certain jurisdictions, limit our opportunities for new access, require us to divest or write down certain assets or curtail or cease certain operations, or affect the adequacy of our provisions for pensions, tax, decommissioning, environmental and legal liabilities. Potential changes to pension or financial market regulation could also impact funding requirements of the group. Following the Gulf of Mexico oil spill, there have been cases of additional oversight and more stringent regulation of BP and other companies’ oil and gas activities in the US and elsewhere, particularly relating to environmental, health and safety controls and oversight of drilling operations, which could result in increased compliance costs. In addition, we may be subjected to a higher number of citations and level of fines imposed in relation to any alleged breaches of safety or environmental regulations, which could result in increased costs.

Ethical misconduct and non-compliance – ethical misconduct or breaches of applicable laws by our businesses or our employees could be damaging to our reputation, and could result in litigation, regulatory action and penalties.

Incidents of ethical misconduct or non-compliance with applicable laws and regulations, including anti-bribery and corruption and anti-fraud laws, trade restrictions or other sanctions, or non-compliance with the recommendations of the ethics monitor appointed under the terms of the DoJ and EPA settlements, could damage our reputation, result in litigation, regulatory action and penalties.

Treasury and trading activities – ineffective oversight of treasury and trading activities could lead to business disruption, financial loss, regulatory intervention or damage to our reputation.

We are subject to operational risk around our treasury and trading activities in financial and commodity markets, some of which are regulated. Failure to process, manage and monitor a large number of complex transactions across many markets and currencies while complying with all regulatory requirements could hinder profitable trading opportunities. There is a risk that a single trader or a group of traders could act outside of our delegations and controls, leading to regulatory intervention and resulting in financial loss and potentially damaging our reputation. See Financial statements – Note 28.

Reporting – failure to accurately report our data could lead to regulatory action, legal liability and reputational damage.

External reporting of financial and non-financial data, including reserves estimates, relies on the integrity of systems and people. Failure to report data accurately and in compliance with applicable standards could result in regulatory action, legal liability and damage to our reputation.

The Strategic report was approved by the board and signed on its behalf by David J Jackson, company secretary on 6 April 2017.

 

 

    
    
 

 

50    BP Annual Report and Form 20-F 2016                                                                  « See Glossary.


Table of Contents

 

         
         
   

 

 

Corporate

governance

    52   Board of directors  
         
   

 

 
    58   Executive team  
         
      60   Executive management teams  
         
   

 

 
    62   Introduction from the chairman  
         
      63   Governance framework  
      63   Board and committee attendance  
         
   

 

 
    64   Board activity in 2016  
         
      64   Role of the board  
      65   Skills and expertise  
      65   Diversity  
      65   Independence  
      65   Appointment and time commitment  
      66   Training and induction   LOGO
      66   Board evaluation  
      67   Field visits  
         
   

 

 
    68   Shareholder engagement  
         
      68   Institutional investors  
      68   Private investors  
      68   AGM  
      68   UK Corporate Governance Code Compliance  
         
   

 

 
    68   International advisory board  
         
   

 

 
    69   Committee reports  
         
      69   Audit committee  
      74   Safety, ethics and environment assurance committee  
      76   Remuneration committee  
      78   Geopolitical committee  
      79   Chairman’s committee  
      79   Nomination committee  
         
   

 

 
    80   Directors remuneration report  
         
      80   Letter from the remuneration committee chair  
      83   Summary of our pay and performance for 2016  
      84   Summary of our remuneration policy and approach for 2017  
      86   Features of 2017 policy  
      87   Implementation of the 2017 policy  
      90   Single figure table for 2016  
      91   Pay and performance for 2016  
      95   Stewardship and regulatory information  
      101   2017 proposed policy  
         

 

   BP Annual Report and Form 20-F 2016      51  

 


Table of Contents
Board of directors   
As at 6 April 2017   

See BP’s board governance principles relating

to director independence on page 266.

 

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Carl-Henric Svanberg

 

Chairman

 

Tenure

Appointed 1 September 2009

 

Board and committee activities

Chair of the nomination and chairman’s committees; attends the safety, ethics and environment assurance, remuneration and geopolitical committees

 

Outside interests

• Chairman of AB Volvo

 

Age 64 Nationality Swedish

 

Career

Carl-Henric Svanberg became chairman of the BP board on 1 January 2010.

He spent his early career at Asea Brown Boveri and the Securitas Group, before moving to the Assa Abloy Group as president and chief executive officer.

From 2003 until December 2009, he was president and chief executive officer of Ericsson, also serving as the chairman of Sony Ericsson Mobile Communications AB. He was a non-executive director of Ericsson between 2009 and 2012. He was appointed chairman and a member of the board of AB Volvo in April 2012.

He is a member of the External Advisory Board of the Earth Institute at Columbia University and a member of the Advisory Board of Harvard Kennedy School. He is also the recipient of the King of Sweden’s medal for his contribution to Swedish industry.

Relevant skills and experience

Carl-Henric Svanberg is a highly experienced leader of global corporations. He has served as chief executive officer and chairman to several high profile businesses, leading them through both periods of growth and restructuring. These experiences bring not only a deep understanding of international strategic and commercial issues, but the skills to co-ordinate the diverse range of knowledge and perspectives provided by the board. He therefore enables the board to present clear and united leadership on behalf of shareholders.

Carl-Henric’s performance has been evaluated by the chairman’s committee, led by Andrew Shilston.

 

Bob Dudley

 

Group chief executive

 

Tenure

Appointed to the board 6 April 2009

 

Outside interests

•  Non-executive director of Rosneft

•  Member of the Tsinghua Management University Advisory Board, Beijing, China

•  Member of the BritishAmerican Business International Advisory Board

•  Member of the US Business Council

•  Member of the US Business Roundtable

•  Member of the UAE/UK CEO Forum

•  Member of the Emirates Foundation Board of Trustees

•  Member of the World Economic Forum (WEF) International Business Council

•  Chair of the WEF Oil and Gas Climate Initiative

•  Member of the Russian Geographical Society Board of Trustees

•  Fellow of the Royal Academy of Engineering

 

Age 61 Nationality American and British

 

Career

Bob Dudley became group chief executive on 1 October 2010.

Bob joined Amoco Corporation in 1979, working in a variety of engineering and commercial posts. Between 1994 and 1997 he worked on corporate development in Russia. In 1997 he became general manager for strategy for Amoco and in 1999, following the merger between BP and Amoco, was appointed to a similar role in BP.

Between 1999 and 2000 he was executive assistant to the group chief executive subsequently becoming group vice president for BP’s renewables and alternative energy activities. In 2002 he became group vice president responsible for BP’s upstream businesses in Russia, the Caspian region, Angola, Algeria and Egypt.

From 2003 to 2008 he was president and chief executive officer of TNK-BP. On his return to BP in 2009 he was appointed to the BP board and oversaw the group’s activities in the Americas and Asia. Between 23 June and 30 September 2010, he served as the president and chief executive officer of BP’s Gulf Coast Restoration Organization in the US. He was appointed a director of Rosneft in March 2013 following BP’s acquisition of a stake in Rosneft.

Relevant skills and experience

Bob Dudley has spent his whole career in the oil and gas industry. During his tenure as group chief executive, Bob has transformed BP into a safer, stronger and simpler business. This approach, governed by a consistent set of values, has guided BP to a position of greater resilience, enabling it to continue delivering results in an uncertain economic environment. Bob has demonstrated excellent leadership and vision throughout this process and continues to develop the group’s strategy to adapt to new challenges ahead.

Bob Dudley’s performance has been considered and evaluated by the chairman’s committee.

 

Dr Brian Gilvary

 

Chief financial officer

 

Tenure

Appointed 1 January 2012

 

Outside interests

•  Non-executive director of L’Air Liquide

•  Non-executive director of the Navy Board

•  Member of the 100 Group Committee

•  Visiting professor at Manchester University

•  GB Age Group triathlete

 

Age 55 Nationality British

 

Career

Dr Brian Gilvary was appointed chief financial officer in January 2012. The role includes responsibility for tax, planning, treasury, mergers and acquisitions, investor relations and audit.

He joined BP in 1986 after obtaining a PhD in mathematics from the University of Manchester. Following a variety of roles in Upstream, Downstream and trading in Europe and the US, he became Downstream’s chief financial officer and commercial director from 2002 to 2005. From 2005 until 2009 he was chief executive of the integrated supply and trading function, BP’s commodity trading arm. In 2010 he was appointed deputy group chief financial officer with responsibility for the finance function.

He was a director of TNK-BP over two periods, from 2003 to 2005 and from 2010 until the sale of the business and acquisition of Rosneft equity in 2013.

Brian is also accountable for integrated supply and trading, global business services, information technology activities, procurement and shipping.

 

 

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Relevant skills and experience

Dr Brian Gilvary has spent his entire career with BP. His broad experience across the group has given him a deep insight into BP’s assets and businesses. This knowledge has been invaluable as BP has implemented its strategy to transform into a ‘value not volume’ based business and adapt to a low oil price environment.

His strong understanding of finance and trading has been vital in adjusting capital structures and operational costs while ensuring the group continues to be capable of meeting new opportunities going forward.

Brian Gilvary’s performance has been evaluated by the group chief executive and considered by the chairman’s committee.

 

Nils Andersen

 

Independent non-executive director

 

Tenure

Appointed 31 October 2016

 

Board and committee activities

Member of the audit and chairman’s committees

 

Outside interests

•  Non-executive director of Unilever Plc and Unilever NV

•  Chairman of Dansk Supermarked Group A/S

 

Age 58 Nationality Danish

 

Career

Nils Andersen was group chief executive of A.P. Møller-Mærsk from 2007 to June 2016. Prior to this he was executive vice president of Carlsberg A/S and Carlsberg Breweries A/S from 1999 to 2001, becoming president and chief executive officer from 2001 to 2007.

Previous roles include non-executive director of Inditex S.A. and William Demant A/S. He has also served as managing director of Union Cervecera, Hannen Brauerei and chief executive officer of the drinks division of the Hero Group.

Nils received his graduate degree from the University of Aarhus.

Relevant skills and experience

Nils Andersen has extensive experience in consumer goods, retail and logistics, and leading global corporations with integrated operations worldwide. The skills and knowledge gained in these roles make him an ideal addition for the board given his experience in marketing, brand and reputation issues. His specialist logistics awareness also aligns with BP’s shipping business. His leadership in earlier roles was notable for the transformation of businesses through focused portfolios, leaner organizations and increasing competitiveness, as well as increasing transparency and communication with stakeholders.

Nils’ economics and broad financial background make him well suited to his role on the audit committee.

 

Paul Anderson

 

Independent non-executive director

 

Tenure

Appointed 1 February 2010

 

Board and committee activities

Member of the safety, ethics and environment assurance, geopolitical and chairman’s committees

 

Outside interests

No external appointments

 

Age 72 Nationality American

 

Career

Paul Anderson was formerly chief executive at BHP Billiton and Duke Energy, where he also served as chairman of the board. Having previously been chief executive officer and managing director of BHP Limited and then BHP Billiton Limited and BHP Billiton Plc, he rejoined these latter two boards in 2006 as a non-executive director, retiring in January 2010. Previously he served as a non-executive director of BAE Systems PLC and on a number of boards in the US and Australia, and was also chief executive officer of Pan Energy Corp.

Relevant skills and experience

Paul Anderson has spent his career in the energy industry working with global organizations, and brings the skills of an experienced chairman and chief executive officer to the board. His specific experience of driving safety-related cultural change throughout a business has been invaluable during his tenure as chair of the safety, ethics and environment assurance committee from 2012 to 2016, and he remains a valuable member of the committee.

Paul’s experience of business in the US and its regulatory environment is a great asset to the geopolitical committee.

 

Alan Boeckmann

 

Independent non-executive director

 

Tenure

Appointed 24 July 2014

 

Board and committee activities

Chair of the safety, ethics and environment assurance committee; member of the remuneration, nomination and chairman’s committees

 

Outside interests

•  Non-executive director of Sempra Energy

•  Non-executive director of Archer Daniels Midland

 

Age 68 Nationality American

 

Career

Alan Boeckmann retired as non-executive chairman of Fluor Corporation in February 2012, ending a 35-year career with the company. Between 2002 and 2011 he held the post of chairman and chief executive officer, having previously been president and chief operating officer from 2001 to 2002. His tenure with the company included responsibility for global operations.

As chairman and chief executive officer, he refocused the company on engineering, procurement, construction and maintenance services.

After graduating from the University of Arizona with a degree in electrical engineering, he joined Fluor in 1974 as an engineer and worked in a variety of domestic and international locations, including South Africa and Venezuela.

Alan was previously a non-executive director of BHP Billiton and the Burlington Santa Fe Corporation, and has served on the boards of the American Petroleum Institute, the National Petroleum Council, the Eisenhower Medical Center and the advisory board of Southern Methodist University’s Cox School of Business.

He led the formation of the World Economic Forum’s ‘Partnering Against Corruption’ initiative in 2004.

Relevant skills and experience

Alan Boeckmann has worked in a wide range of industries including engineering, construction, chemicals and in the energy sector. In his senior roles he directed the focus of global corporations towards the advanced technology needed to remain competitive in response to the growth of the internet, e-commerce and the globalization of the workforce. At the same time he actively promoted fairness, transparency, accountability and responsibility in business dealings at a time when many corporations were struggling with these issues.

 

 

    
    
 

 

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This experience as a chairman and chief executive makes Alan ideal to lead the SEEAC and brings added value to both the remuneration and nomination committees.

 

Admiral Frank Bowman

 

Independent non-executive director

 

Tenure

Appointed 8 November 2010

 

Board and committee activities

Member of the safety, ethics and environment assurance, geopolitical and chairman’s committees

 

Outside interests

•  President of Strategic Decisions, LLC

•  Director of Morgan Stanley Mutual Funds

•  Director of Naval and Nuclear Technologies, LLP

 

Age 72 Nationality American

 

Career

Frank L Bowman served for more than 38 years in the US Navy, rising to the rank of Admiral. He commanded the nuclear submarine USS City of Corpus Christi and the submarine tender USS Holland. After promotion to flag officer, he served on the joint staff as director of political-military affairs and as the chief of naval personnel. He served over eight years as director of the Naval Nuclear Propulsion Program where he was responsible for the operations of more than 100 reactors aboard the US navy’s aircraft carriers and submarines. He holds two masters degrees in engineering from the Massachusetts Institute of Technology.

After his retirement as an Admiral in 2004, he was president and chief executive officer of the Nuclear Energy Institute until 2008. He served on the BP Independent Safety Review Panel and was a member of the BP America External Advisory Council. He was appointed Honorary Knight Commander of the British Empire in 2005. He was elected to the US National Academy of Engineering in 2009.

Frank is a member of the US CNA military advisory board and has participated in studies of climate change and its impact on national security, and on future global energy solutions and water scarcity. Additionally he was co-chair of a National Academies study investigating the implications of climate change for naval forces.

Relevant skills and experience

Frank Bowman’s exemplary safety record in running the US Navy’s nuclear submarine program indicates his deep understanding of process safety and its implementation in a widely dispersed workforce. Combined with his specific knowledge of BP’s safety goals from his work on the BP Independent Safety Review Panel, and his special interest in climate change, he brings a unique perspective to the board and the SEEAC.

In addition, Frank’s experience of the US and global political and regulatory systems is a valuable asset to the geopolitical committee.

 

Cynthia Carroll

 

Independent non-executive director

 

Tenure

Appointed 6 June 2007

 

Board and committee activities

Member of the safety, ethics and environment assurance, geopolitical and chairman’s committees

 

Outside interests

•  Chair of Vedanta Resources Holding Ltd

•  Non-executive director of Hitachi Ltd

•  Advisory board member of America Securities LLC

 

Age 60 Nationality American

 

Career

Cynthia began her career as a petroleum geologist with Amoco Production company in Denver, Colorado, after completing a masters degree in geology. In 1989 she joined Alcan (Aluminum Company of Canada) and ran a packaging company, led a global bauxite, alumina and speciality chemicals business and later was president and chief executive officer of the Primary Metal Group, responsible for operations in more than 20 countries. In 2007 she became chief executive of Anglo American plc, the global mining group, operating in 45 countries with 150,000 employees, and was chairman of De Beers s.a. and Anglo Platinum Limited. She stepped down from these roles in April 2013.

Relevant skills and experience

Cynthia Carroll is an experienced former chief executive who has spent all of her career in the extractive industries. Her leadership experience, related to enhancing safety in the mining industry, brings a strong contribution to the work of the SEEAC, as does her understanding of business strategy in an industry with a long capital return cycle.

Her experience of leading large complex global businesses which require a high level of interaction with governments, the media and other stakeholders is an asset to both the board and the geopolitical committee.

 

Ian Davis

 

Independent non-executive director

 

Tenure

Appointed 2 April 2010

 

Board and committee activities

Member of the remuneration, geopolitical, nomination and chairman’s committees

 

Outside interests

•  Chairman of Rolls-Royce Holdings plc

•  Non-executive director of Majid Al Futtaim Holding LLC

•  Non-executive director of Johnson & Johnson, Inc.

•  Non-executive director of Teach for All

 

Age 66 Nationality British

 

Career

Ian Davis is senior partner emeritus of McKinsey & Company. He was a partner at McKinsey for 31 years until 2010 and served as chairman and managing director between 2003 and 2009.

Ian has a MA in Politics, Philosophy and Economics from Balliol College, University of Oxford.

Relevant skills and experience

Ian Davis brings significant financial and strategic experience to the board. He has worked with and advised global organizations and companies in a wide variety of sectors including oil and gas and the public sector. This enables him to draw on knowledge of diverse issues and outcomes to assist the board and, in particular, the remuneration and nomination committees.

He led the board’s oversight of the response in the Gulf and chaired the Gulf of Mexico committee from its formation until it was stood down in 2016. His previous role in the Cabinet Office gives him a unique perspective on government affairs which is an asset to both the board and the geopolitical committee.

 

 

    
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Professor Dame Ann Dowling

 

Independent non-executive director

 

Tenure

Appointed 3 February 2012

 

Board and committee activities

Chair of the remuneration committee; member of the safety, ethics and environment assurance, nomination and chairman’s committees

 

Outside interests

•  President of the Royal Academy of Engineering

•  Deputy vice-chancellor and professor of Mechanical Engineering at the University of Cambridge

•  Member of the Prime Minister’s Council for Science and Technology

•  Non-executive director of the Department for Business, Energy and Industrial Strategy (BEIS)

 

Age 64 Nationality British

 

Career

Dame Ann Dowling is a deputy vice-chancellor at the University of Cambridge where she was appointed a professor of mechanical engineering in the department of engineering in 1993. She was head of the department of engineering at the University from 2009 to 2014. Her research is in fluid mechanics, acoustics and combustion, and she has held visiting posts at MIT and at Caltech. She chairs BP’s technical advisory committee.

Dame Ann is a fellow of the Royal Society and the Royal Academy of Engineering and a foreign associate of the US National Academy of Engineering and the French Academy of Sciences. She has honorary degrees from fifteen universities, including the University of Oxford, Imperial College London and the KTH Royal Institute of Technology, Stockholm.

She was elected President of the Royal Academy of Engineering in September 2014 and in December 2015 was appointed to the Order of Merit.

Relevant skills and experience

Dame Ann is an internationally respected leader in engineering research and the practical application of new technology in industry. Her contribution in these fields has been widely recognized by universities around the world. Her academic background provides balance to the board and brings a different perspective to the SEEAC and nomination committee.

Dame Ann became chair of the remuneration committee in 2015 and worked tirelessly over the past year to understand key issues with a large number of major shareholders and their advisers.

 

Brendan Nelson

 

Independent non-executive director

 

Tenure

Appointed 8 November 2010

 

Board and committee activities

Chair of the audit committee; member of the chairman’s committee

 

Outside interests

•  Non-executive director and chairman of the group audit committee of The Royal Bank of Scotland Group plc

•  Member of the Financial Reporting Review Panel

 

Age 67 Nationality British

 

Career

Brendan Nelson is a chartered accountant. He was made a partner of KPMG in 1984. He served as a member of the UK board of KPMG from 2000 to 2006, subsequently being appointed vice chairman until his

retirement in 2010. At KPMG International he held a number of senior positions including global chairman, banking and global chairman, financial services.

He served for six years as a member of the Financial Services Practitioner Panel and in 2013 was the president of the Institute of Chartered Accountants of Scotland.

Relevant skills and experience

Over the course of his career, Brendan Nelson has completed a wide variety of audit, regulatory and due-diligence engagements. He played a significant role in the development of the profession’s approach to the audit of banks in the UK with particular emphasis on establishing auditing standards. He continues to contribute in his role as a member of the Financial Reporting Review Panel.

This wide experience makes him ideally suited to chair the audit committee and to act as its financial expert and he brings related input from his role as the chair of the audit committee of a major bank. His specialism in the financial services industry allows him to contribute insight into the challenges faced by global businesses by regulatory frameworks.

 

Paula Rosput Reynolds

 

Independent non-executive director

 

Tenure

Appointed 14 May 2015

 

Board and committee activities

Member of the audit and chairman’s committees

 

Outside interests

•  Non-executive director of BAE Systems Ltd

•  Non-executive director of TransCanada Corporation

•  Non-executive director of CBRE Group

 

Age 60 Nationality American

 

Career

Paula Rosput Reynolds is the former chairman, president and chief executive officer of Safeco Corporation, a Fortune 500 property and casualty insurance company that was acquired by Liberty Mutual Insurance Group in 2008. She also served as Vice Chair and Chief Restructuring Officer for American International Group (AIG) for a period after the US government became the financial sponsor from 2008 to 2009.

Previously, Paula was an executive in the energy industry. She was chairman, president and chief executive officer of AGL Resources Inc., an operator of natural gas infrastructure in the US, now a subsidiary of Southern Company. Prior to this, she led a subsidiary of Duke Energy Corporation that was a merchant operator of electricity generation. She commenced her energy career at PG&E Corp.

Paula was awarded the National Association of Corporate Directors (US) Lifetime Achievement Award in 2014.

Relevant skills and experience

Paula Rosput Reynolds has had a long career leading global companies in the energy and financial sectors. Her financial background makes her ideally suited to serve on the audit committee.

Her experience with international and US companies, including several restructuring processes and mergers, gives her insight into strategic and regulatory issues, which is an asset to the board.

 

 

    
    
 

 

56    BP Annual Report and Form 20-F 2016


Table of Contents

 

 

Sir John Sawers

 

Independent non-executive director

 

Tenure

Appointed 14 May 2015

 

Board and committee activities

Chair of the geopolitical committee; member of the safety, ethics and environment assurance, nomination and chairman’s committees

 

Outside interests

•  Chairman and partner of Macro Advisory Partners LLP

•  Visiting professor at King’s College London

•  Governor of the Ditchley Foundation

 

Age 61 Nationality British

 

Career

John Sawers spent 36 years in public service in the UK working on foreign policy, international security and intelligence.

John was Chief of the Secret Intelligence Service, MI6, from 2009 to 2014, a period of international upheaval and growing security threats as well as closer public scrutiny of the intelligence agencies. Prior to that, the bulk of his career was in diplomacy, representing the British government around the world and leading negotiations at the UN, in the European Union and in the G8. He was the UK ambassador to the United Nations (2007-09), political director and main board member of the Foreign Office (2003-07), special representative in Iraq (2003), ambassador to Egypt (2001-03) and foreign policy advisor to the Prime Minister (1999-2001). Earlier in his career, he was posted to Washington, South Africa, Syria and Yemen.

John is now chairman of Macro Advisory Partners, a firm that advises clients on the intersection of policy, politics and markets.

Relevant skills and experience

Sir John Sawers’ deep experience of international political and commercial matters is an asset to the board in navigating the complex issues faced by a modern global company. Sir John brings a unique perspective and broad experience which makes him ideal to lead the geopolitical committee. His knowledge and skills related to analysing and negotiating on a worldwide basis are invaluable to both the board and the SEEAC.

 

Andrew Shilston

 

Independent non-executive director

 

Tenure

Appointed 1 January 2012

 

Board and committee activities

Senior independent director and member of the audit, remuneration, geopolitical, nomination and chairman’s committees

 

Outside interests

•  Chairman of Morgan Advanced Materials plc

•  Non-executive director of Circle Holdings plc

 

Age 61 Nationality British

 

Career

Andrew Shilston trained as a chartered accountant before joining BP as a management accountant. He subsequently joined Abbott Laboratories before moving to Enterprise Oil plc in 1984 at the time of flotation. In 1989 he became treasurer of Enterprise Oil and was appointed finance director in 1993. In 2003, after the sale of Enterprise Oil to Shell in 2002, he became finance director of Rolls-Royce plc until his retirement in December 2011.

He has served as a non-executive director on the board of Cairn Energy plc where he chaired the audit committee.

Relevant skills and experience

Andrew Shilston is a highly knowledgeable director with wide experience in the oil and gas, energy and engineering industries. He has held several positions as a chief financial officer from which he brings detailed knowledge and skills to the audit and remuneration committees.

His deep understanding of commercial issues has assisted the board in its work in overseeing the group’s strategy and his global expertise across several sectors is an asset to the geopolitical committee.

As senior independent director he oversaw the evaluation of the chairman.

 

David Jackson

 

Company secretary

 

Tenure

Appointed 2003

 

 

David Jackson, a solicitor, is a director of BP Pension Trustees Limited.

 

 

 

The ages of the board are

correct as at 6 April 2017.

 

 

LOGO
 

 

   BP Annual Report and Form 20-F 2016      57  


Table of Contents

Executive team

As at 6 April 2017

 

Tufan Erginbilgic

Chief executive, Downstream

 

 

LOGO

Executive team tenure

Appointed 1 October 2014

 

Outside interests

•  Independent non-executive director of GKN plc

•  Member of the Turkish-British Chamber of Commerce & Industry Board of Directors

 

Age 57 Nationality British and Turkish

 

Career

Tufan Erginbilgic was appointed chief executive, Downstream on 1 October 2014.

Prior to this, Tufan was the chief operating officer of the fuels business, accountable for BP’s fuels value chains worldwide, the global fuels businesses and the refining, sales and commercial optimization functions for fuels. Tufan joined Mobil in 1990 and BP in 1997 and has held a wide variety of roles in refining and marketing in Turkey, various European countries and the UK.

In 2004 he became head of the European fuels business. Tufan took up leadership of BP’s lubricant business in 2006 before moving to head the group chief executive’s office. In 2009 he became chief operating officer for the eastern hemisphere fuels value chains and lubricants businesses.

 

Bob Fryar

Executive vice president,

safety and operational risk

 

 

LOGO

Executive team tenure

Appointed 1 October 2010

 

Outside interests

No external appointments

 

 

Age 53 Nationality American

 

Career

Bob Fryar is responsible for strengthening safety, operational risk management and the systematic management of operations across the BP group. He is group head of safety and operational risk, with accountability for group-level disciplines including engineering, health, safety, security, remediation management and the environment. In this capacity, he looks after the group-wide operating management system implementation and capability programmes.

Bob has over 30 years’ experience in the oil and gas industry, having joined Amoco Production Company in 1985. Between 2010 and 2013, Bob was executive vice president of the production division, accountable for safe and compliant exploration and production operations and stewardship of resources across all regions.

Prior to this, Bob was chief executive of BP Angola and also held several management positions in Trinidad, including chief operating officer for Atlantic LNG and vice president of operations. Bob has also served in a variety of engineering and management positions in onshore US and the deepwater Gulf of Mexico.

Andy Hopwood

Executive vice-president,

chief operating officer,

strategy and regions, Upstream

 

 

LOGO

Executive team tenure

Appointed 1 November 201