Annual reporting 2011

BP in 2011

2011 was a year of recovery, consolidation and change for BP. The board set out three priorities for the company. Safety must be enhanced and embedded. Trust must be regained. Value must be created through a clear strategic plan. Progress was achieved in all three areas. In terms of financial performance; operating cash flow reached $22 billion in 2011 - over 60 per cent higher than in 2010.

Stronger and safer

BP went into 2011 facing a range of uncertainties. By the end of the 12 months we had successfully resolved some significant uncertainties facing the company. We were able to restore the dividend for our shareholders, and then increased it by 14% in February 2012. Throughout the year, we remained mindful of the tragic events seen in the Gulf of Mexico in 2010, and the need to ensure such an accident never happens again.

Relentless focus on safety

We have been developing and implementing a wide-ranging programme designed to further enhance safety, risk management and compliance. For example, we introduced new systems and technologies to further enhance oversight of operations. We increased the capacity of our independent safety and operational risk organization. We shut down platforms and operations to make necessary upgrades. And we set new voluntary standards for blowout preventers, which shut off the flow of oil in an emergency.

Earning back trust

At the end of 2011, we had made a pre-tax cash outlay of more than $26 billion to cover oil spill response costs, meet claims and litigation expenses, support research, promote tourism and help restore the environment in the Gulf of Mexico. We were also invited to 25 countries to share what we have learned. In turn, we gained insights from organizations in other high-hazard sectors, including NASA and the UK Atomic Energy Authority.

Growing value

Captured in our 10-point plan, our renewed strategy is designed to make BP a simpler, stronger company that plays to its strengths. We expect operating cash flow to be around 50% higher by 2014^a. We plan to use around half of that for increased investment in our project inventory for growth and around half for other purposes which may include increased distributions to shareholders.

^a The expectation of operating cash growth of around 50% by 2014, compared to 2011, is based on an oil price of $100 per barrel and BP having fully funded the $20-billion Deepwater Horizon Oil Spill Trust fund and having no outstanding Gulf of Mexico liabilities at that time.

Managing our portfolio

We are constantly looking for ways to create value through new access, divestment, acquisition and partnerships. In 2011 BP was awarded 55 new exploration licences in nine countries. During 2010 and 2011 combined, we strengthened the group's financial position by completing asset sales totalling almost
$20 billion and we have announced our intention to make further disposals that would bring the total to $38 billion by the end of 2013. We also acquired deepwater assets in Brazil and established a partnership with Reliance Industries in India.

Exploration and Production

Our replacement cost profit before interest and tax was $30.5 billion - compared with $30.9 billion in 2010. Production was lower than 2010 due to divestments, and the suspension of drilling in the Gulf of Mexico and a high number of turnarounds and maintenance projects undertaken during the year. Our highest priority is safe, reliable and compliant operations. Our strategy is to invest to grow long-term value by continuing to build a portfolio of enduring positions in the world's key hydrocarbon basins. Our focus is on deepwater, gas value chains and giant fields.

^a 83% when excluding 2011 move to life-of-field measurement in
TNK-BP.

Upstream safety

During the year, as part of our response to the Deepwater Horizon oil spill, we completed our reorganization of the segment into three divisions: exploration, developments, and production. The new organization is designed to change the way we operate, focusing on managing risk, delivering common standards and processes, and building technical capability. Employees from the safety and operational risk function work alongside line management to support the systematic and disciplined application of our standards.

Deepwater

We are one of the real pioneers of deepwater exploration and are confident in our ability to design, engineer and operate large installations safely. In 2012 we gained our first US exploration permit since the Deepwater Horizon oil spill – for the Kaskida field in the Gulf of Mexico. 2012 will be a busy year for us in the deepwater regions of Angola, Brazil and the Gulf of Mexico.

Rapid growth for gas

Natural gas is set to be the fastest growing fossil fuel globally to 2030^a. We are adding value by forging new partnerships in this market, such as the strategic alliance created in 2011 with Reliance Industries, in India. We also have exceptional expertise in building supply chains. For example, we move gas from 6,000 metres below sea level in the Shah Deniz field in Azerbaijan to markets in Western Europe 3,000 kilometres away.

^a BP Energy Outlook 2030.

Giant fields

Our expertise in managing the subsurface, combined with advances in seismic, is continuing to redefine and improve recovery from our giant fields. Work with our partners has increased output at Iraq's Rumaila field by more than 10 per cent. BP was the first supermajor to exceed its production target in Iraq. In 2011 we also announced plans to make investments of approximately $14 billion – with our partners - in the UK North Sea.

Opportunities for upstream growth

2011 was a record year for new access to exploration prospects. We added 55 licences in nine countries. Around 315,000km² have been opened up to exploration as a result, helping to build a portfolio of assets that is well positioned and competitive. Overall capital investment into upstream will grow, led by the doubling of our investment in exploration over the next three years.

Upstream technology

We develop industry-leading technologies in imaging, facilities, well design and completions, and field recovery, applying these in the field to drive risk reduction and excellence in exploration, developments and production. An example of this is our Project 20K^TM, a significant new initiative investing in technology to enable exploration, development and production of reservoirs that were previously beyond reach.

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Refining and Marketing

In 2011, the segment generated a replacement cost profit before interest and tax of $5.5 billion. This included a net loss for non-operating items of $602 million. After adjusting for non-operating items and fair value accounting effects, Refining and Marketing reported record earnings in 2011. We are on track to deliver a performance improvement of at least $2 billion by 2012, compared to 2009^a.

^a Improvement measured by comparing Refining and Marketing's replacement cost profit before interest and tax for 2009 with that of 2012, after adjusting for non-operating items, fair value accounting effects and impact of changes in refining margin and petrochemical environment (including energy costs), foreign exchange impacts and price-lag effects for crude and product purchases.

Downstream safety and operations

All of our manufacturing entities are on the group's operating management system (OMS) and our major manufacturing entities (refineries and petrochemical sites) have completed two performance improvement cycles. We continue to work to enhance local systems and processes at all our sites. In 2011, our US refineries completed process safety competency assessments of over 3,500 employees in safety-critical roles and developed gap closure plans.

Refining margins up

The measure of our annual average refining margin – the BP refining marker margin – was 11.64bbl, an increase of 16% on 2010. We were able to benefit from the heavy discount in US mid-continent crudes during the year due to our refinery location advantage. By contrast, margins in Australia and New Zealand were hit by the loss of Libyan supplies, which increased premiums for sweet crudes.

Focusing on fuels

In 2011 our refinery utilization was 88%. During the year, we continued to sell non-core assets, and we are progressing with our intention to divest about half of our US refining capacity. Modernization work at the Whiting refinery made significant progress in 2011, with the coker's six new drums now in place and the Southern Lights pipeline to Canada, and Whiting's connection to it, in operation. When completed in the second half of 2013, the upgraded refinery will give the potential to capture additional margins by processing heavy Canadian crudes.

Lubricants set for further growth

The lubricants business was hit by significant base oil price increases and weaker demand in the second half of 2011 but we were able to offset most of these impacts. We continued to see a gradual shift towards higher-quality, higher-margin premium and synthetic lubricants. Approximately 45% of the lubricants replacement cost profit before interest and tax was generated from non-OECD markets.

Petrochemicals set to expand
in high-growth Asian markets

In petrochemicals, our strategy is to leverage industry-leading technology in the markets in which we choose to participate, grow the business and deliver industry-leading returns. New investments are targeted principally in higher-growth Asian markets. In 2011, we announced we are exploring the potential for a 50:50 joint venture with IndianOil to invest in a 1mt/annum acetic acid plant in Gujarat. We also obtained local government approval for our 1.25 mtpa Zhuhai 3 PTA plant in China.

Downstream technology

We develop and apply technology to monitor operational integrity, to optimize product yields as a function of feedstock changes to ensure quality attainment, and improve energy efficiency. For example, in 2011 we deployed over 1,000 wireless Permasense sensors at our refineries worldwide. The product of collaborative research and development between BP and Imperial College London, these systems are helping engineers to monitor corrosion inside pipes.

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Alternative Energy

We expect to see strong growth in energy consumption over the next 20 years, with emerging economies responsible for 96% of energy demand growth^a. A diverse mix of fuels and technologies will be required to meet long-term future demand. During 2011 we invested a further $1.6 billion in our Alternative Energy business. We have made a total investment of around $6.6 billion since 2005. Our investments are now focused on biofuels, wind and a range of strategic investments.

^a BP Energy Outlook 2030.

Biofuels set to play a vital role

BP is working to produce biofuels that are low cost, low carbon, sustainable and able to fulfil the world's transportation fuel needs on a large scale. Our investments span the biofuels value chain, from feedstock that minimize pressure on food supplies to biobutanol - a fuel molecule that delivers better fuel economy. In 2011, we grew our operations in Brazil and BP now owns and operates three producing ethanol mills.

Wind powers forward

We have focused our wind business in the US, where we have one of the leading portfolios. During 2011, we increased our total capacity by 35% over the prior year. Commercial operations started at the Cedar Creek 2 wind farm in Colorado and Sherbino 2 wind farm in Texas. BP now has interests in more than 1,000 wind turbines across the US.

Developing sustainable energy solutions

Our venturing portfolio puts us on the front foot in terms of innovation. We have investments in bioenergy, electrification and carbon solutions. In 2011, for example, we have an investment stake in GMZ Energy, which is commercializing materials that allow the efficient conversion of heat to electricity. By pooling our venturing, carbon markets and carbon abatement technology expertise, we are building value for BP around new sustainable energy technologies.