Chairman's letter

Peter Sutherland Chairman
24 February 2009

Highlights
Dramatic change in business environment.
BP in strong position.

2008 was a year we will all remember. There are few precedents in history for such a rapid and dramatic change in the business environment. In the space of a few months we went from a record oil price of more than $140 per barrel, and BP reporting two consecutive quarters of record profits for the group, to a recession in most of our major markets. Despite this changing environment, I am glad to say that BP is in an enviably strong position in terms of its balance sheet, its assets and its people.

That strength is in no small part due to the period of critical self-examination the group has undergone since 2005. The resulting strategy, devised by Tony Hayward and his team and endorsed by the board, is already bearing fruit and has put us in a much better position to weather the savage economic storms we now face.

Peter Sutherland, Chairman - BP and its peers make the energy markets work, by forming partnerships with resource-holding governments and applying our technology to bringing supplies of energy to millions of customers, every day. 2008 has been a reminder that the world economy depends on our efforts.

The price of oil ended the year at its lowest level for more than four years. That has obviously affected our financial performance. The board understands the importance of the dividend to investors in these difficult times and, despite the weaker environment, we have held the quarterly dividend to be paid in March at 14 cents per share, compared with 13.525 cents per share for the same quarter of 2007. In sterling terms, the quarterly dividend is 9.818 pence per share, compared with 6.813 pence per share for the same quarter of 2007. During the year $2.9 billion of shares were repurchased for cancellation, compared with $7.5 billion in 2007. In response to feedback from investors we are now weighting shareholder returns towards dividends, as opposed to buybacks.

The search for my successor has unfortunately taken longer than originally expected, in part due to the turbulent business environment. It is important that we find the right person and we envisage making an announcement in the coming months. In the meantime I have agreed, at the board’s request, to stay on as chairman and will seek re-election.

So, this will be my last annual general meeting. It has truly been an honour for me to serve 12 years as chairman – and before that as a director – of what is one of the world’s great enterprises. During that time I have seen BP constantly evolve and, by most measures, nearly double in size. But the underlying principles of the international oil company’s business model continue to endure. BP and its peers make the energy markets work, by forming partnerships with resource-holding governments and applying our technology to bringing supplies of energy to millions of customers, every day. 2008 has been a reminder that the world economy depends on our efforts.

Throughout the year the board has supported Tony and his executive team in reforming the way in which the group works to ensure that everyone within BP is clear on its long-term purpose. It is vital that the role of the international oil company is defined and understood both inside and outside the organization. While sticking to its principles, BP needs to be flexible in the manner in which business is approached, developing a diverse portfolio of projects, with a robust cost structure, enabling the group to perform throughout the cycle.

All our activities need to take place against a very clear view of risk. Events during the year have powerfully reinforced the need for boards to have a very clear understanding of the risks their businesses face. I believe the BP board and its committees have set a high standard in this regard and we continue to improve the manner in which we understand and evaluate risks whether they be strategic, geopolitical, compliance or operational. No business can be without risk. Indeed it is by taking strategic and commercial risks that we earn a return.

We have had some notable operational and engineering successes in the year, which are described within this Annual Review. There are several I could mention, including restoring economic capability at the Texas City refinery, but I would particularly like to focus on the Gulf of Mexico, which is a proving to be a showcase for BP’s deepwater skills and technology. BP is now the number one producer there and Thunder Horse, the world’s largest semi-submersible platform, is on track to reach capacity of about 280,000 barrels of oil equivalent per day (boe/d) in 2009. Thunder Horse is expected to be the second biggest producing field in the US and is a powerful symbol of what BP can achieve.

I am pleased we have reached an amicable settlement with our partners in our Russian joint venture, TNK-BP. This means BP has retained 50% ownership of what is an important option in one of the world’s most prolific hydrocarbon provinces.

I would not normally single out individual executives, but I do want to pay tribute to the work that Bob Dudley has done as chief executive of TNK-BP. During his five-year tenure he transformed TNK-BP and it now leads the Russian oil industry on the basis of production growth, reserves replacement and total shareholder return. I am delighted that Bob will join the BP board in April. As a managing director, he will assume responsibility for broad oversight of the group's activities in the Americas and Asia. We had a settled board for much of 2008, but we expect Bob to be the first of several new appointments as we refresh the cadre of non-executive directors through 2009.

In the past 12 years the energy industry has consolidated and taken major technical steps forward, beginning production in some of the more remote areas of the world, such as the deepwater Gulf of Mexico and the Russian Arctic. Our role has been defined and redefined and BP has led the way in accepting the need to tackle the threat of climate change. Throughout that time the BP board has had outstanding members and, without exception, I have worked with a group of extremely talented executives.

I would like to thank all my board and executive colleagues past and present, and all BP’s employees. I would also like to thank the two company secretaries, Judith Hanratty and David Jackson, who have provided me with admirable support during my term. Finally, I thank all our shareholders for their support. During 2009 we are celebrating BP’s centenary and I am confident that BP can face the next 100 years with pride and a renewed sense of purpose.

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