Company Spotlight

MarketWatch: Energy

Company Spotlight: BP plc

BP has reported fourth quarter replacement cost profit of $2.97 billion in 2007, a 24% decrease from $3.89 billion during the same period in 2006. The company has announced that the replacement cost profit for 2007 was $17.28 billion, down 22% when compared with $22.25 billion in 2006. Net cash provided by operating activities for the fourth quarter and full year 2007 was $4.3 billion and $24.7 billion, respectively, compared with $5 billion and $28.2 billion in the preceding year. The effective tax rate on replacement cost profit from continuing operations was 45% in the fourth quarter of 2007, compared with 25% in the same period of 2006. The rate for the full year 2007 was 37%, while it was 35% in 2006. BP said that the increased rate in the fourth quarter reflected the effect of inventory holding gains and losses, which were eliminated in the replacement cost profit, while the tax charge remained unadjusted and included the tax effect on inventory holding gains and losses. If this effect was excluded, the rate would have been 38% for the quarter in 2007 compared to 31% a year ago. Business Description British Petroleum (BP) is one of the world's largest oil and gas companies. It has presence in more than 100 countries across six continents. The company operates through three business segments: exploration and production; refining and marketing; and gas, power and renewables. Through these business segments, the company provides fuel for transportation, retail brands and energy for heat and light. The exploration and production business include oil and natural gas exploration and field development and production (the upstream activities), as well as the management of crude oil and natural gas pipelines, processing and export terminals and LNG (liquefied natural gas) processing facilities (the midstream activities). This business segment has interests in 25 countries. Major areas of activity include the US, the UK, Norway, Canada, South America, Africa, the Middle East and Asia Pacific. The segment's most significant midstream operations are in three major pipelines: the Trans Alaska Pipeline System (BP 46.9%), the Forties Pipeline System (BP 100%) and the Central Area Transmission System pipeline (BP 29.5%). Its most significant midstream activities are in three major LNG plants: the Atlantic LNG plant in Trinidad, in Indonesia through its interests in the Sanga-Sanga Production Sharing Agreement (BP 38%), which supplies natural gas to the Bontang LNG plant, and in Australia through its share of LNG from the North West Shelf natural gas development (BP 16.7%). The refining and marketing segment is responsible for the supply and trading, refining, marketing and transportation of crude oil and petroleum products to wholesale and retail customers. There are four areas of business in refining and marketing: refining, retail, lubricants and business to business marketing. BP is a refiner of gasoline and hydrocarbon products in the US, Europe and Australia. Its retail network is largely concentrated in Europe and the US, with established operations in Australasia, Southeast Asia and Southern Africa.

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Company Spotlight

MarketWatch: Energy

BP owns - wholly or in part - 17 refineries. Of these, five refineries are in the US, seven are in Europe, and five are in other parts of the world. Through a joint venture with TNK, it also has access to four refineries in Russia. BP is also developing networks in China and Mexico. The company's worldwide network consists of approximately 28,000 stations under the brand names of BP, Amoco, ARCO and Aral. BP manufactures and markets lubricant products and also supplies related products and services to business customers and endconsumers in over 60 countries directly, and to the rest of the world through local distributors. The company markets lubricants through the two major brands of Castrol and BP, and several secondary brands including Duckhams and Veedol. In the commercial vehicle and general industrial markets, it supplies lubricants and lubricant-related services to the transportation industry and to automotive manufacturers. The gas, power and renewables segment is organized into four main parts: marketing and trading; natural gas liquids (NGL); new market development and LNG; and solar and renewables. Marketing and trading activities are focused on the relatively open and deregulated natural gas and power markets of North America, the UK and certain parts of continental Europe. The NGLs business is engaged in the processing, fractionation and marketing of ethane, propane, butanes and pentanes extracted from natural gas. New market development and LNG activities involve developing opportunities to capture sales for the company's upstream natural gas resources and are conducted in close collaboration with the exploration and production business. The segment's LNG activities involve the marketing of BP and third-party LNG. The solar and renewables activities include the development, production and marketing of solar panels and the development of wind farms on certain company sites. Other operations include gas-fired power generation projects, where the company's principal focus is on projects that utilize its natural gas. The segment also pursues the development of hydrogen fuel technology.

Key Facts Head Office BP plc 1 Street James's Square London SW1Y 4PD GBR

Major Products & Services Oil and gas exploration and production Oils and lubricants Aviation fuels Fuel stations Fuel cards Hydro power Liquefied petroleum gas Solar power Wind power Solvents and industrial chemicals Oil and natural gas transportation Oil and natural gas distribution Oil and natural gas marketing

Website Telephone Fax Turnover ($ m) Financial Year End

www.bp.com 44 20 7496 4000 44 20 7496 4630 270,600 December

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Company Spotlight

MarketWatch: Energy

SWOT Analysis British Petroleum (BP) is the second largest oil and gas company based on market capitalization and the largest producer of oil and natural gas in the US. BP has vertically integrated operations as it is involved in both upstream and downstream oil businesses. The company's vertically integrated businesses provide the company with operational efficiencies. However, instability in some oil-producing regions could seriously impair its operations and disrupt the flow of output.

Table: SWOT Analysis Strengths Dominant market position Vertically integrated operations Diversified revenue stream Opportunities Increasing demand for LNG Rising demand for refined products and petrochemicals in China Increasing demand for aviation fuel Rise in oil prices Source: Datamonitor

Weaknesses Declining oil reserves Low revenue per employee

Threats Saturation of resources in the North Sea Instability in some oil-producing regions Environmental regulations

Strengths Dominant market position British Petroleum (BP) is the second largest oil and gas company based on market capitalization and the largest producer of oil and natural gas in the US. Its operations include upstream activities, refining and marketing of gas and crude oil across 100 countries. It serves more than 13 million customers through 28,500 service stations every day across the globe. The company has oil production and exploration operations in 26 countries and owns 19 refineries worldwide. In addition, the company has established a robust brand image over 100 years of operation across the globe. Brands such as BP, am/pm, Aral, ARCO and Castrol are well recognized and trusted by customers all over the world. The company's dominant market position gives it significant bargaining power in the global oil industry.

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Company Spotlight

MarketWatch: Energy

Vertically integrated operations BP has vertically integrated operations as it is involved in both upstream and downstream oil businesses. The company operates through three business segments: exploration and production; refining and marketing; and gas, power and renewables. Through these business segments, the company provides fuel for transportation, retail brands and energy for heat and light. The company's vertically integrated businesses confer advantages related to operational efficiencies. Vertically integrated operations provide control over the entire value chain, which enable the company to produce products, which are used at different stages in the entire value chain. The company's vertically integrated operations give it significant competitive advantage in the global oil market. Diversified revenue stream The company has a presence in over 100 countries across all major energy markets like US, Middle East, China, etc. Over a period of time the company has developed diverse revenue streams and is not overly dependent on any one market. In 2006, US, the company's largest geographical market accounted for 35.2% of the company's revenue, while UK, Rest of Europe, and Rest of World accounted for 20.9%, 22.9%, and 21.6%, respectively. The company has a large consumer base and widespread source of revenues. This helps in reducing the impact of market volatility and provides economic stability. Weaknesses Declining oil reserves BP's crude oil and gas reserves have declined over the years. The company's estimated crude oil reserves for subsidiaries declined from 6,755 million barrels in 2004 to 5,893 million barrels in 2006, while the natural gas reserves declined from 45,650 million barrels in 2005 to 42,168 million barrels. The company's oil and natural reserves position has been further affected by declining reserves replacement ratio (RRR), excluding equity-accounted entities. The RRR for BP subsidiaries have declined from 78% in 2004 to 34% in 2006. A declining stock of oil and gas reserves can impact BP's operating margins. Low revenue per employee BP posted weak revenues in proportion to the total number of its employees. During 2006, the company recorded total revenues of $270,602 million with a total of 97,000 employees. The revenue per employee of the company stood at $2.7 million, significantly lower when compared to its competitors like ConocoPhillips and ExxonMobil Corporation. The revenue per employee of ConocoPhillips stood at $4.7 million in 2006, significantly higher than the revenue per employee of BP. And also the revenue per employee of ExxonMobil Corporation, another competitor stood at $4.5 million in 2006. The weak revenue per employee of the company compared to the competitors indicates its weaker productivity and operational inefficiency.

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Company Spotlight

MarketWatch: Energy

Opportunities Increasing demand for LNG The natural gas demand, driven by the demand for LNG and high fuel prices, is expected to grow significantly. Global consumption of natural gas is projected to increase by nearly 70% between 2002 and 2025, to reach 156 trillion cubic feet in 2025. During 2005 to 2010, demand for natural gas is expected to increase at 2-3% per annum. The company has substantial operations in the North American region. This position is anchored by its strong upstream positions around the Gulf of Mexico, the mid-continent, the Rockies, Canada and Trinidad & Tobago. The company also has strong positions in the North Sea, the Caspian and North Africa. It has significant gas sales via pipeline and LNG in Asia. Also, its Atlantic basin LNG business is underpinned by its upstream positions in Trinidad & Tobago, Egypt and, in future, Angola. In addition, the company is currently expanding its LNG business by accessing import terminals in Asia Pacific, North America and Europe. With a strong market position and company's focus on natural gas and LPG, it is well positioned to tap into opportunities in the growing LNG market worldwide. Rising demand for refined products and petrochemicals in China The demand for refined petroleum products and petrochemicals in China is expected to rise sharply in the coming decades. China, despite substantial additions to refining capacity over the next three decades, is expected to remain a net importer of refined products in 2030. The refining capacity in China is forecast to increase from 5.8 million barrels per day in 2005 to 14.6 million barrels per day in 2030, yet China will remain a net importer of refined products in 2030. Similarly, the demand for ethylene is forecast to grow at an annual rate of over 12% between 2005 and 2010, while demand for propylene is expected to grow by 9% during the same period. The demand for polymers such as polyethylene is forecast to grow at an annual rate of 7% during 2005 and 2010. BP already has a manufacturing base in China, and is well positioned to tap into opportunities in the growing petrochemicals market. Increasing demand for aviation fuel Owing to a surge in international and domestic air traffic, all major regional airlines are expanding their respective fleets. In 2005, Chinese airlines ordered 60 B-787 aircraft and 70 B-737s, costing over $11 billion. According to Boeing, China would require more than 2600 new planes in the next two decades, resulting in even greater demand for aviation fuel. Jet fuel costs for Asia Pacific airlines are expected to increase by 50% in 2006. Air BP, specialized aviation fuels and lubricants division of BP, is one of the world's largest suppliers of aviation fuels, currently supplying over 488,000 barrels per day of aviation fuels and lubricants to the customers across the globe. It is represented at over 1200 airports in over 90 countries and with local offices in almost half of these countries. Leveraging its extensive network, and its existing client base, the company is well positioned to gain from the increasing demand for aviation fuel. Rise in oil prices The WTI crude oil prices in 2006 were $66.0 per barrel in 2006, up by 16.9% compared with 2005 prices. WTI crude oil prices are projected to average $73.5 per barrel in 2008, up from a projected $68.8 per barrel average in 2007. Oil is BP's core competency. BP derives most of its revenues from the sale of oil and its derivatives. A rise in oil prices could enhance BP's top line growth.

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Company Spotlight

MarketWatch: Energy

Threats Saturation of resources in the North Sea The company has extensive offshore exploration operations in the North Sea. Offshore exploration in the North Sea has been highly prospective in the past and intensive exploration work has been carried out in this region in the past few decades. Reserves in the region are maturing and are slowly getting saturated. There has been a succession of dry holes being drilled in the last few years. The saturation of reserves in this region is a key challenge for the company; especially as newer exploration activity in other parts of the world is far more localized and entails significantly higher investments. Instability in some oil-producing regions BP has exploration and production interests in 26 countries. Many of these regions, including Africa, the Middle East, and South America, are prone to political instability. Though BP has been operating in these countries for a long time and understands the local environment very well, much of the geo-political risks are outside its control. Failure to anticipate some of these events or the inability to mitigate risks in these regions could seriously impair its operations and disrupt the flow of output. Environmental regulations With the increase in global warming, environmental regulations have become more rigid in recent years. One of the most important developments in this area has been the introduction of the Kyoto Protocol for the reduction of greenhouse gases. The protocol calls on industrialized countries to reduce their greenhouse gas emissions level by 5.2% on an annual average during 2008 to 2012, as compared to the emissions level in 1990. Further, the US environmental protection agency (EPA) issued a 'clean air interstate rule' (CAIR), according to which, states have to reduce the allowable SO2 emissions by 70% and reduce nitrogen oxides emissions by 60%, by 2015 as compared to the 2003 levels. BP already has a weak record in environmental matters and a further introduction of these stringent regulations may impose new liabilities or increase operating expenses, either of which could result in a material decline in profitability.

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