Business review

Group overview 

An overview of the key actions,
events and results in 2012,
together with commentary
on BP’s performance in the
year and our priorities as we
move forward.

BP at a glance

8

Chairman’s letter

Carl-Henric Svanberg sets out the board’s priorities

in 2012 and BP’s prospects moving forward.

10

Group chief executive’s letter

Bob Dudley reviews the company’s progress as we work

to build a stronger, safer BP.

12

Energy outlook

Our views on the factors likely to shape energy demand and supply, from

population and the energy mix, to policy, prices and access.

15

Our business model

An overview of how we are organized, the ways in which

we create value, and our distinctive strengths.

20

Our strategy

Our priorities as we work to create a distinctive

platform for growth.

22

Our performance

From progress in Russia to new exploration access; a

review of important actions and events during the year.

28

Our key performance indicators

How we performed as measured by our key financial

and non-financial indicators.

30

Our management of risk

A summary of the risks we face in our business.

32

Cautionary statement

Business review: Group overview      3

BP Annual Report and Form 20-F 2012        

 Our strategy
For more on our strategic priorities and longer-term objectives see pages 20-21.

Carl-Henric Svanberg at the Sangachal terminal control room during his three-day trip to Azerbaijan (top); Professor Dame Ann Dowling on the Thunder Horse platform in the Gulf of Mexico (middle); Brendan Nelson and Phuthuma Nhleko at BP’s North America Gas operations in east Texas, US (bottom).

As 2012 progressed the board saw the company start to move forward with greater confidence. It is important that this momentum continues.

Our board committees have provided effective oversight of the company and its operations, which has enabled the board to focus on its three priorities. Outside the boardroom, our non-executive directors have continued to pay visits to key parts of the business. My own visits this year included Angola, Azerbaijan, the North Sea, Japan and the US.

The board has seen substantial change. For this reason, we have asked Antony Burgmans to serve for a further three years. I am pleased that we will continue to benefit from his experience and understanding of the company. Byron Grote is retiring after 33 years with BP, including more than 12 years on the board. I thank him for his dedication and the exceptional contribution he has made to this company. As we move through 2013, the board is well balanced, with deep experience in our industry and a broad range of skills across business and finance.

We will refresh the board as and when required. I believe board diversity – including the representation of women at the top – helps to make boards more effective. We will continue to work to identify candidates from a range of backgrounds who can make a unique and powerful contribution to BP.

One of the vital tasks of the board is to ensure strategy is matched to the world we see ahead. Energy remains the engine of progress, and we expect rising populations and increasing industrialization to generate strong demand to 2030 and beyond. The world will continue to be dependent on fossil fuels in the medium term. Along with providing the hydrocarbons needed, we are also involved in developing the resources, technologies and policies required over the long term.

Our industry keeps evolving. In the past international oil companies dominated access to resources. Then national oil companies took control of the greater share. But much of the easiest-to-reach oil has been developed. So we are now entering a third era, where co-operation between partners is the key to unlocking the resources found in the most challenging locations. For BP, advantage now comes from exceptional capability rather than exceptional scale. Our future is about high-margin, high-quality production, not simply volume.

Oil will continue to be BP’s prime focus, and we aim to extend our extraordinary track record in finding and developing new resources. We will keep making selective investments in natural gas, with an emphasis on assets that generate good margins. And we will be selective in the Downstream too, choosing to operate where our refining and marketing assets are connected to attractive markets.

Over the past three years BP has had to change. Through our reorganization, we are a simpler company. Through our asset sales, we are stronger financially. Through our actions, we have reduced complexity and risk. Our plans, priorities and direction are clear. I see great opportunities ahead, as we continue to build a stronger, safer BP that meets the expectations of our shareholders and the wider world.

Carl-Henric Svanberg

Chairman

6 March 2013

$19   billion

Dividends received by BP from TNK-BP since 2003.

The new US-based High-Performance Computing centre, which is currently under construction, will enable BP scientists to complete an imaging project in one day – whereas it would have taken four years nearly a decade ago.

^a   Downstream underlying profit is not a recognized GAAP measure. See page 27 for the equivalent measure on an IFRS basis, which is replacement cost profit before interest and tax. See Certain definitions on page 98 for further information on underlying profit.

^b   See footnote e on page 21 for a definition of free cash flow.

The new agreement will provide us with an 18.5% share in Rosneft and $12.3 billion of cash, including a dividend of $0.7 billion received from TNK-BP in December 2012. Combined with our existing 1.25% shareholding, we will own 19.75% of Rosneft. We expect the transaction to be completed in the first half of 2013. Through it, we will maintain a strong position in the world’s largest oil and gas producing country. And we will be a major investor in a company transforming its asset base, management processes and corporate governance.

We will use our experience in large acquisitions and mergers to support Rosneft as it assimilates TNK-BP’s assets. We can also contribute technical skills in areas from exploration and enhanced oil recovery to integrating downstream businesses and international developments. We have confidence in the Russian business environment and we look forward to playing a valued role in the country’s future.

We are enhancing safety and risk management

Our employees have been working systematically to enhance safety and risk management. We have changed how we are organized, bringing greater clarity and consistency across the company. In the Gulf of Mexico and elsewhere, we are holding our operations to standards that in many cases go beyond regulatory requirements. And we have turned lessons learned from the 2010 accident into new oil spill response plans and technologies, which we are adopting within BP and sharing with others. I take encouragement from our 19% reduction in loss of primary containment this past year, continuing a multi-year trend.

2012 saw the appointment of Carl Sandlin, who will oversee the implementation of the recommendations of the Bly Report, BP’s internal accident investigation. In addition, following our agreement with the US government to resolve all federal criminal claims, we have agreed to take additional actions designed to further enhance the safety of drilling operations in the Gulf. Two independent monitors will be appointed to review and provide recommendations, one regarding process safety for deepwater drilling in the Gulf and the other BP’s code of conduct. An independent auditor will review and report on BP’s implementation of key terms of the agreement.

We are building a distinctive platform for growth

In shaping our portfolio, we are prioritizing shareholder value. Scale remains important, but we are focused on driving forward our financial performance rather than simply growing production volumes. Operating cash flow and replacement cost profit will take precedence over barrels of production. We are increasing investment in the areas with the greatest potential to generate strong and reliable growth in operating cash flow, from exploration and deepwater operations to giant fields and gas value chains. In the Downstream, we have a portfolio of world-class businesses that are positioned to deliver material and growing free cash flows.^b

There is plenty for us to explore. During the year we gained new access in six countries. Since 2010 we have accessed around 400,000 square kilometres of new acreage. That is roughly the size of California and more than double the exploration acreage gained from 2000 to 2009.

We continue to have an important presence in many of the world’s largest economies and in fast-developing countries too. BP’s global footprint and prudent financial approach are important given the potential for turbulence in the world, including further economic and political upheaval. We are well placed to respond to unsettled conditions if and when they appear.

Looking ahead

While facing uncertainties and navigating through testing times, BP emerged from 2012 a somewhat smaller, but stronger company. As we move forward, you will see us keep working to focus, standardize and improve what we do and how we do it. We are building a platform for growth that should serve us well for many years to come.

I want to end by paying tribute to everyone here at BP. This has been another truly demanding year, and our employees have dedicated themselves to their jobs in a way that I find humbling. I am proud of the talent and the terrific spirit of determination to improve that is found within BP. Over the next 12 months and beyond, we will continue our work to enhance safety, earn back trust and create value.

Bob Dudley

Group Chief Executive

6 March 2013

The facts and figures used in this section are derived from BP Energy Outlook 2030, published in January 2013, unless otherwise indicated, and represent a ‘base case’ or most likely projection.

For more information see

bp.com/energyoutlook

Energy consumption by region

(billion tonnes of oil equivalent)

Source: BP Energy Outlook 2030.

Energy consumption by fuel

(billion tonnes of oil equivalent)

*Includes biofuels.

Source: BP Energy Outlook 2030.

1.6^% per annum

Projected world primary energy consumption growth to 2030.

Longer-term outlook

Challenges and opportunities

The world’s population is projected to increase by 1.3 billion from 2011 to 2030, with real income likely to double over the same period. These factors will lead to increased energy demand and consumption. Energy and climate policies, efficiency gains and a long-term structural shift in fast-growing economies away from industry and towards less energy-intensive activities will help to restrain any increase, but the overall trend is likely to be one of strong growth. We expect demand for energy to increase by as much as 36% between 2011 and 2030, with nearly 93% of the growth to occur in non-OECD countries.

We estimate that there are enough energy resources available to meet the increases in demand in the foreseeable future, but there will be challenges as well as opportunities.

Energy security represents a challenge. More than 60% of the world’s natural gas is concentrated in just four countries. More than 80% of global oil reserves are located in nine countries, most of which are well away from the hubs of energy consumption.

Meeting growing demand for secure and sustainable energy will also present an affordability challenge as the availability of easily accessible fossil fuels slowly diminishes, with many lower-carbon resources and technologies remaining costly to produce at scale.

While energy is available to meet growing demand, action is needed to limit carbon dioxide (CO₂ ) and other greenhouse gases being emitted through fossil fuel use. Burning fossil fuels can also raise local and regional air quality issues.

Meeting the energy challenge

We believe that, increasingly, the global energy challenge can only be met through a diverse mix of fuels and technologies. A broad mix can enhance national and global energy security while supporting the transition to a lower-carbon economy. This is one reason why BP’s portfolio includes oil sands, shale gas, deepwater oil and natural gas production, biofuels and wind.

We estimate that today’s oil reserves could meet more than 45 years of demand at current consumption rates, while known supplies of natural gas could meet demand for nearly 60 years and coal could meet demand for up to 120 years.^a

Our industry has a track record in expanding the availability of resources through investment and the application of technology. For example, in 1981 the world’s oil reserves stood at an estimated 700 billion barrels. By 2011 this had risen to 1,650 billion barrels, even though 800 billion barrels had been consumed in the intervening three decades.

Oil and natural gas

We believe oil and natural gas are likely to represent about 53% of total energy consumption in 2030. Even under the International Energy Agency’s (IEA) most ambitious climate policy scenario (the 450 scenario), oil and gas would still make up 50% of the energy mix in 2030, with combined demand projected to exceed current levels in absolute terms.^b The 450 scenario assumes governments adopt commitments to limit the long-term concentration of greenhouse gases in the atmosphere to 450 parts-per-million of CO₂ equivalent.

^a   BP Statistical Review of World Energy June 2012. These reserve estimates are compiled from official sources and other third-party data, which may not be based on proved reserves as defined by SEC rules.

^b   From World Energy Outlook 2012^©, OECD/IEA 2012, page 553.

Who we are

BP is one of the world’s leading integrated oil and gas companies.^a We aim to create value for shareholders by helping to meet growing demand for energy in a responsible way. We strive to be a safety leader in our industry, a world-class operator, a responsible corporate citizen and a good employer.

Through our work we provide customers with fuel for transportation, 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. Our projects and operations help to generate employment, investment and tax revenues in countries and communities around the world.

At each stage of the hydrocarbon value chain there are opportunities for us to create value – both through the successful execution of activities that are core to our industry, and through the application of our own distinctive strengths and capabilities in performing those activities.

How we are organized

We have two main business segments: Upstream and Downstream. Through these we find, develop and produce essential sources of energy, and turn these sources into products that people need.

^a   On the basis of market capitalization, proved reserves and production.

We also hold a 50% shareholding in the major Russian oil company TNK-BP, which owns upstream and downstream assets. In November, marking what we expect to be an exciting new future for BP in Russia, we signed final, binding agreements with Rosneft, Russia’s leading oil company, for the sale of our share in TNK-BP for $12.3 billion in cash (which includes a dividend of $0.7 billion received from TNK-BP in December 2012) and an 18.5% stake in Rosneft. The transaction is expected to complete in the first half of 2013. Combined with BP’s existing 1.25% shareholding, this will result in BP owning 19.75% of Rosneft.

In renewable energy, our investments and activities are focused on biofuels and wind. In addition, our emerging businesses and ventures unit invests in a broad range of energy projects and technologies. Our renewables and venturing activities are managed through our Alternative Energy business, which is reported in Other businesses and corporate on page 82.

Our commitments

Keeping a relentless focus on safety is the top priority for everyone at BP.

Rigorous management of risk helps to protect the people at the front line, the places in which we operate and the value we create. We understand that operating in politically complex regions and technically demanding geographies requires particular sensitivity to local environments.

Our business model

For more information see BP at a glance on pages 4-5.

We aim to protect value by maintaining a rigorous focus on safety, reliability and efficiency across our range of activities. We often work with partners to mitigate risk or gain from complementary skills.

Finding oil and gas

First, we acquire the rights to explore for oil and gas. Through new access we are able to renew our portfolio, discover new resources and replenish our development options.

Developing and extracting oil
and gas

When we are successful in finding hydrocarbon resources, we create value by seeking to progress them into proved reserves or by selling them on if they do not fit with our strategic objectives.

If we believe developing and producing the reserves will be advantageous for BP, we will produce the oil and gas, then sell it to the market or distribute it to our downstream facilities.

Transporting and trading oil
and gas

We move oil and gas through pipelines and by ship, truck and rail. We use our trading and supply skills and knowledge to find the best routes to deliver supplies to the most attractive markets.

Manufacturing and marketing fuels and products

Using our technology and expertise, we manufacture fuels and products, creating value by seeking to operate a high-quality portfolio of well-located assets safely, reliably and efficiently. We market our products to consumers and other end-users and add value through the strength of our brands.

Our distinctive strengths and capabilities

We consider our areas of distinctive strength to include:

• Exploration – acquiring access and searching for hydrocarbons.

• Deep water – we have a long track record in finding, developing and producing hydrocarbons in deep water.

• Giant fields – managing the scale and complexity of fields with resources believed to exceed 500 million boe.^a

• Gas value chains – seeking to add value as gas moves from field to customer.

• Downstream – the pursuit of safe, reliable and efficient operations, and leading returns, across fuels, lubricants and petrochemicals.

These are underpinned by our development and application of technology and our ability to build strong relationships. In addition, we have a long-established integrated supply and trading function.

Strong relationships

We are seeing an evolution in our industry, with international oil companies such as BP establishing new kinds of partnerships and co-operation with governments, national oil companies and other resource holders. The benefits of our value-creating activity are shared with governments and other partners.

We seek opportunities to develop and deploy distinctive capabilities that complement those of our partners. We also partner with universities and governments in pursuit of improving the technologies available to us, so we can enhance our operations and develop new products. We aim to support and improve standards in our

^a   Actual amount of proved reserves of such fields on a basis recognized by the SEC may be less than this.

    Downstream

            For more on our downstream activities

            in 2012 see pages 72-79.

The lubricants business is focusing on the growth markets of Brazil, India and China. Below, a Castrol laboratory technician in Brazil, where Castrol lubricants have been sold since the 1950s.

Downstream

co-engineered with Ford during the development of its newly released EcoBoost™ engine, which offers a significant improvement in efficiency.

The segment comprises three businesses: fuels, lubricants and petrochemicals, each of which operates as a value chain.

Our fuels business sells refined petroleum products including gasoline, diesel and aviation fuel and liquefied petroleum gas. Within the fuels business, fuels value chains integrate the activities of refining, logistics, marketing, and supply and trading on a regional basis. This provides the opportunity to optimize our activities – from crude oil purchases to end-consumer sales – all the way through our refineries, terminals, pipelines and retail stations.

Our lubricants business is involved in manufacturing and marketing lubricants and related services to markets around the world. We add value through the strength of our brands and through strategic collaboration with original equipment manufacturing partners where we seek to develop new high-performance lubricants such as Castrol EDGE.

Our global petrochemicals business manufactures and markets petrochemicals that are used in many everyday products, such as paints, plastic bottles and textiles. Value is derived from our strong customer relationships and joint-venture partners, and through the application of our world-class, proprietary technology.

Our Downstream segment is the product and service-led arm of BP, focused on fuels, lubricants and petrochemicals. It is responsible for the refining, manufacturing, marketing, transportation, and supply and trading of crude oil, petroleum, petrochemicals products and related services to wholesale and retail customers.

The Downstream segment markets products in over 70 countries and has significant operations in Europe, North America, Australasia and Asia. We also manufacture and market our products across southern Africa and Central and South America.

We aim to be excellent in the markets in which we choose to participate – those that allow BP to serve the major energy markets of the world. Our aim is to operate all of our businesses as safe and reliable value chains, where we participate in multiple stages of each supply chain, as we believe that way we can deliver greater returns than would arise from owning a collection of discrete assets. These value chains, combined with our advantaged manufacturing operations and expertise in technology, allow us to pursue competitive returns and sustainable growth, as we serve customers and promote BP and our brands through high quality products. As in our Upstream segment, we will sell assets when we believe that to do so would generate more value than retaining them in our own portfolio.

Technology makes a critical contribution to our downstream activities. Through the research, development and deployment of a wide range of technologies, processes and techniques, we aim to enhance safety and risk management, improve our margins, increase efficiency and reliability, and create new market opportunities. For example, in lubricants we launched an oil

The Skarv floating production, storage and offloading unit – one of the major project start-ups in 2012 – on tow in a Norwegian fjord.

10-point plan

Launched in October 2011 and set out in BP Annual Report and Form 20-F 2011, our 10-point plan described our intentions for building a stronger, safer BP.

What you can expect

1      A relentless focus on safety and managing risk through the systematic application of global standards.

2      We will play to our strengths in exploration, deep water, giant fields and gas value chains.

3      Stronger and more focused with an asset base that is high graded and higher performing.

4      Simpler and more standardized with fewer assets and operations in fewer countries; more streamlined internal reward and performance management processes.

5      Improved transparency through reporting TNK-BP as a separate segment and breaking out the numbers for the three downstream businesses.

What you can measure

6      Active portfolio management to continue by completing $38 billion of disposals over the four years to the end of 2013, in order to focus on our strengths.

7      We expect to bring new upstream projects onstream with unit operating cash margins^a around double the 2011 average by 2014.^b

8      We are aiming to generate an increase of around 50% in net cash provided by operating activities by 2014 compared with 2011.^c

9      We intend to use half our incremental operating cash for reinvestment, half for other purposes.

10    Strong balance sheet with intention to target our level of gearing^d in the lower half of the 10-20% range over time.

We will pursue new opportunities by applying our distinctive strengths of relationships, technology and a strong balance sheet. Our past experience of co-ordinating complex projects around the world can help us to gain access to new areas.

Business model

For more information on our distinctive strengths and how we create value see pages 15-19.

conventional and unconventional resources. We expect to continue to invest in giant fields, where this expertise is particularly valuable.

We believe our ability to integrate complex gas value chains is another key strength. We intend to hold a portfolio of gas positions selected according to expected returns, with a balance across conventional and unconventional gas. We will optimize these through our trading activities.

We are committed to Russia and the Middle East – areas where we have a long history.

Upstream

Our analysis indicates that oil offers us the most attractive opportunities. Our investments will therefore be biased to oil. We also believe there will be opportunities to create high returns from advantaged gas assets.

We have a long track record of value creation through exploration. We will invest in our strong incumbent positions and look for new opportunities. Deepwater developments can provide good opportunities for companies with the requisite expertise. We will utilize our scale and capability as we invest further in this area. We believe we are able to manage scale and complexity, and improve the recovery of

Downstream

We believe BP has world-class downstream operations with a strong and improving track record of performance in recent years. We will continue to focus on safe and reliable operations and excellent execution, together with disciplined investment and portfolio management. Our focus on portfolio quality will include improving the margin capability of all of our businesses, and a focus on investing in attractive markets.

As the world changes, we expect to increase our exposure to growth markets and demand from new consumers.

^a     Unit cash margin is net cash provided by operating activities for the relevant projects in our Upstream segment, divided by the total number of barrels of oil and gas equivalent produced for the relevant projects. It excludes dividends and production for TNK-BP.

^b     Assuming a constant oil price of $100 per barrel.

^c     Assuming an oil price of $100 per barrel and a Henry Hub gas price of $5/mmBtu in 2014. The projection assumes the completion of the agreed transaction with Rosneft and receipt of the projected Rosneft dividend and excludes BP’s share of the TNK-BP dividends from operating cash flow for 2011 and 2014. The projection includes BP’s payment commitments under the Department of Justice and SEC settlements. It does not reflect any cash flows relating to other liabilities, contingent liabilities, settlements or contingent assets arising from the Gulf of Mexico oil spill which may or may not arise at that time. We are not able to reliably estimate the amount or timing of a number of contingent liabilities. See Financial statements – Note 43 on page 253 for further information.

^d     Gearing refers to the ratio of the group’s net debt to net debt plus equity and is a non-GAAP measure. See Financial statements – Note 35 on page 234 for further information including a reconciliation to gross debt, which is the nearest equivalent measure on an IFRS basis.

^e     Free cash flow: net cash provided by operating activities less net cash used in investing activities.

$20 billion

Total BP payments made to the Deepwater Horizon Oil Spill Trust fund.

$11.6 billion

BP’s profit^a in 2012.

$12.0 billion

BP’s replacement cost profit^{a b} in 2012.

^a Profit attributable to BP shareholders. This is the measure of profit required for the group under IFRS.

^b Replacement cost profit reflects the replacement cost of supplies and, for the group, is not a recognized GAAP measure. See footnote b on page 34.

High-margin production was brought back onstream in 2012 in Angola – where the Deepsea Stavanger rig is currently operating at the Greater Plutonio development.

In 2012 we completed the acquisition of Shell and Cosan Industria e Commercio’s interests in aviation fuels assets at seven Brazilian airports, which is an important growth market (below).

enhance the safety of drilling operations in the Gulf of Mexico (see US regulatory update on page 24). These actions include the appointment of two monitors, both with terms of four years. A process safety monitor will review, evaluate, and provide recommendations for the improvement of BP’s process safety and risk management procedures concerning deepwater drilling in the Gulf of Mexico. An ethics monitor will review and provide recommendations for the improvement of BP’s code of conduct and its implementation and enforcement. Additionally, an independent third-party auditor will review and report on BP’s implementation of key terms of the agreement, including procedures and systems related to safety and environmental management, operational oversight, and oil spill response training and drills.

Trust

BP has continued to meet its commitments to the Gulf Coast. During the year we worked with state and federal trustees to assess impacts on natural resources and progress early environmental restoration work. We supported independent research through the Gulf of Mexico Research Initiative, so we can better understand and mitigate the potential impacts of future oil spills. And we continued to clean up the Gulf shoreline, which involved responding promptly when Hurricane Isaac brought deposits of buried residual oil to the surface at some beaches. Of the 4,376 miles (7,043km) that were in the area

of response covered in the Shoreline Clean-up Completion Plan^a, 4,029 miles (6,484km) were deemed complete by the end of 2012.

We have continued to promote economic recovery by resolving legitimate claims and providing support to two of the region’s most important industries – tourism and seafood. In the fourth quarter we made a final payment into the Deepwater Horizon Oil Spill Trust fund (Trust), bringing our total payments to $20 billion. The Trust and BP had paid a total of $11.7 billion in claims, advances and other payments by the end of 2012.

Settlement reached with PSC

In April we announced we had reached definitive and fully documented agreements with the Plaintiffs’ Steering Committee (PSC) to resolve the substantial majority of eligible private economic loss and medical claims stemming from the Deepwater Horizon accident and oil spill. The agreements were approved by the court in December 2012 and January 2013 although BP is challenging a recent ruling by the court regarding the interpretation of certain protocols established in the economic and property damages settlement agreement. See Legal proceedings on page 167. The settlement includes BP’s commitment of $2.3 billion to help resolve economic loss claims related to the Gulf seafood industry.

^a  Approved by the US Coast Guard’s Federal On-Scene Coordinator, the Shoreline Clean-up Completion Plan sets standards for the surveying, verification and completion of clean-up activities.

2012 in summary

g   We drew our TNK-BP partnership in Russia to a close through an agreed transaction with Rosneft, which will provide BP with a net $12.3 billion in cash (which includes a dividend of $0.7 billion received from TNK-BP in December 2012) and an additional 18.5% share in Rosneft, bringing our total shareholding to 19.75%.

g   We took the total of asset sales announced since the start of 2010 to around $38 billion, effectively reaching our target a year early.

g   We gained new exploration access in six countries.

g   Our 2012 reserves replacement ratio, on a combined basis of subsidiaries and equity-accounted entities, excluding acquisitions and disposals, was 77%, with net additions to reserves in 2012 being wholly from equity-accounted entities (see page 86).

The following points relate to particular milestones we set for 2012:

g   High-margin production was brought back onstream successfully in Angola, the North Sea and other regions during 2012.

g   Exploration drilling activity took place at nine wells against a target of 12 because additional time was required to ensure the rigs meet our enhanced safety standards.

g   Five major project start-ups were achieved (against a target of six): at Galapagos in the Gulf of Mexico; Clochas Mavacola and block 31 in PSVM in Angola; Devenick in the North Sea; and Skarv in Norway. The Angola LNG plant is being commissioned and is expected to start production in 2013.

g   Seven rigs were operational in the Gulf of Mexico in 2012 against a target of eight. An eighth rig is in place on the Mad Dog platform and is being commissioned and tested. It is expected to start up in 2013.

g   We made the final payment to the Deepwater Horizon Oil Spill Trust, taking total payments to the Trust to $20 billion.

g   In Downstream, we were unable to fully deliver the $2 billion of financial performance improvement^b since 2009, which we had identified as an opportunity in 2010, due mainly to a significant reduction in the supply and trading contribution in 2012.

g   Organic capital expenditure^c during the year was $23.1 billion compared with our original expectation of around $22 billion.

^b See page 74 for further information on Downstream’s performance improvement, which is a non-GAAP measure.

^c Organic capital expenditure excludes acquisitions and asset exchanges and, in 2012, expenditure associated with deepening our US natural gas and North Sea asset bases (see footnote b on page 35).

We made good progress on the Whiting refinery modernization programme (right) in 2012, and the project is on track to come onstream in the second half of 2013.

BP is accelerating the commercialization of advanced biobutanol technology – with partner Du Pont – at a purpose-built development and demonstration facility at our Saltend site, near Hull, UK (above).

$22.5 billion

Our Upstream segment’s replacement cost profit before interest and tax in 2012.

Upstream

For more on the segment’s financial performance see page 65 and for information on segmental changes affecting Upstream at the beginning of 2012 see page 64.

with the US government at those premises. We continue to work with the EPA to resolve suspension and debarment issues.

Value

We achieved a profit of $11.6 billion in 2012 compared with $25.7 billion in 2011. Excluding inventory holding gains, our replacement cost (RC) profit^a in 2012 was $12.0 billion compared with $23.9 billion in 2011. After adjusting for non-operating items and fair value accounting effects^b, our underlying RC profit^b was $17.6 billion in 2012 compared with $21.7 billion in 2011. Underlying RC profit is a measure closely tracked by management to evaluate BP’s operating performance and to make financial, strategic and operating decisions.

Our goal is to grow operating cash flow^c to enable us to invest for future growth and increase distributions to shareholders. This year we generated operating cash flow of $20.4 billion, compared with $22.2 billion in 2011. The cash outflow in respect of the Gulf of Mexico oil spill reduced from $6.8 billion in 2011 to $2.4 billion in 2012. Cash and cash equivalents at the end of 2012 totalled $19.5 billion. Gross debt at 31 December 2012 was $48.8 billion compared with $44.2 billion at 31 December 2011. Net debt^a was $27.5 billion at 31 December 2012, leaving our gearing (net debt ratio)^d at 18.7% compared with 20.5% at the end of 2011. We continue to target gearing in the 10-20% range while uncertainties remain.

Dividends

Total dividends paid in 2012 were 33 cents per share, up 18% compared with 2011 on a dollar basis and 20% in sterling terms. This equated to a total cash distribution to shareholders of $5.3 billion during the year. We announced two increases in the quarterly dividend during 2012 – by 14%, to 8 cents per share, in February and by a further 12.5%, to 9 cents per share, in October. These increases reflected our confidence in the company’s progress against the 10-point plan and our growing belief in its longer-term prospects.

Portfolio reshaped

During the year we strengthened the group’s financial position, announcing further asset sales and, by the end of 2012, we had essentially reached our $38 billion target.

We began the divestment programme in 2010, increasing the focus of the company’s core portfolio on BP’s areas of distinctive strength and capability, while reducing operational complexity. We have since sold around 50% of our upstream installations, 32% of our wells and 50% of our pipelines, while only reducing our proved reserves base by approximately 10% and our production by about 9%. We have traded mature assets with declining cash flows so we can concentrate on assets with greater potential for growth.

In November 2012 we took a major step forward in repositioning BP within Russia, agreeing to sell our 50% shareholding in TNK-BP to Rosneft – the world’s largest publicly traded oil company in terms of oil production and reserves. Our intention is to use part of the cash proceeds from the agreed transaction to offset any dilution to BP’s earnings per share.

Upstream

We reported RC profit before interest and tax of $22.5 billion, compared with $26.4 billion in 2011. After adjusting for non-operating items and fair value accounting effects, underlying RC profit before interest and tax^e was $19.4 billion in 2012, compared with $25.2 billion in 2011 reflecting higher costs, lower production and lower realizations.

^a   Replacement cost profit for the group is not a recognized GAAP measure. The equivalent measure on an IFRS basis is ‘Profit for the year attributable to BP shareholders’. See footnote b on page 34 and page 98 for further information.

^b   Underlying replacement cost profit and fair value accounting effects are not recognized GAAP measures. See pages 34, 37 and 98 for further information.

^c   Operating cash flow is shown in our cash flow statement as net cash provided by operating activities.

^d   Net debt and gearing are non-GAAP measures. See footnote d on page 21 for further information.

^e   See footnote b on page 34.

Downstream

RC profit before interest and tax for 2012 was $2.8 billion, compared with $5.5 billion in 2011. After adjusting for non-operating items and fair value accounting effects, underlying RC profit before interest and tax^b in 2012 was an all-time record of $6.4 billion compared with $6.0 billion in 2011. This reflected a favourable refining environment, which we were able to capture by virtue of our strong operations, partly offset by weak petrochemicals margins and a significantly lower supply and trading contribution than in 2011. 2012 was also our fourth consecutive year of growth in underlying RC profit before interest and tax. We also continued to make good progress in repositioning Downstream to improve our margin quality and the efficiency of the portfolio.

Since the start of 2008, our focus on safe and reliable operations in Downstream has translated into improvements in process safety. We have seen a 55% reduction in loss of primary containment and a 40% reduction in our process safety incident index over the period.

Refinery operations were strong this year, with Solomon refining availability of 94.8%. (See refining availability on page 74.) Utilization rates were at 88% despite a relatively high level of turnaround activity in 2012.

Our lubricants business continued to deliver robust performance in 2012, despite weak demand.

In petrochemicals, a combination of increased supply and lower demand growth in the market narrowed margins for our business in 2012, although we were able to maintain production volumes at around the same levels as 2011.

During the year we continued to make good progress in repositioning the Downstream business. In August 2012 we announced an agreement to sell our Carson refinery, in California, and related logistics and marketing assets in the region to Tesoro Corporation for an estimated $2.5 billion. In October 2012 we announced an agreement to sell our Texas City refinery and all associated assets in the south-east US to Marathon Petroleum Corporation. This sale was completed on 1 February 2013 for proceeds of up to $2.4 billion (see page 72).

Meanwhile, we made significant progress with the upgrade of our Whiting refinery. On completion, this modernization project is expected to allow us to capture additional margin through the processing of a greater proportion of heavy crudes. During the year the new crude oil unit, coker, upgraded sulphur recovery complex and gasoil hydrotreater all advanced towards their targeted start-up dates in 2013 and the whole project remains on schedule to start up in the second half of 2013.

We also made good progress towards our aim of divesting the LPG bulk and bottled business, completing the exit from three of the nine countries we originally identified and

announcing the sale of our operations in a further three countries in 2012.

In petrochemicals we sold our PTA interest in Malaysia during the year and made progress on major new projects in China and India. We also signed two licensing agreements for our proprietary petrochemicals technology (see page 16 for further details).

TNK-BP

We began reporting TNK-BP as a separate operating segment with effect from 1 January 2012, reflecting the way in which we were managing our investment.

Following the announcement of our proposed transaction with Rosneft on 22 October 2012, BP’s investment in TNK-BP met the criteria to be classified as an asset held for sale. Consequently, BP ceased equity accounting for its share of TNK-BP’s earnings from the date of the announcement.

RC profit before interest and tax^bc for 2012 was $3.4 billion, compared with $4.1 billion in 2011. After adjusting for non-operating items, underlying RC profit before interest and tax^bc for 2012 was $3.1 billion, compared with $4.1 billion in 2011. The most significant factor affecting performance in 2012 compared with 2011 was the absence of more than two months’ income following the cessation of equity accounting.

^b   See footnote b on page 34.

^c   Under equity accounting, BP’s share of TNK-BP’s earnings after interest and tax has been included in the BP group income statement within profit before interest and tax.

Outlook

The company’s divestment programme is fundamentally reshaping and repositioning our upstream and downstream portfolios. In the Upstream segment, we now have a portfolio that we believe plays to our distinctive strengths and capabilities in exploration, deep water, giant fields and gas value chains. In the Downstream segment, we expect that the measures we are taking to improve efficiency and margin quality will be largely complete by the end of 2013.

Looking ahead, we continue to expect that we can deliver around 50% growth in operating cash flow by 2014 compared with 2011.^d We intend to use the proceeds of improved cash flow in a number of ways, including increased investment in upstream development. This will focus on four high-margin areas: Angola, Azerbaijan, the Gulf of Mexico and the North Sea.

More development, more exploration

The level of planned activity is reflected in the number of rigs we have at work. Across our portfolio, we had 53 rigs in operation at the end of 2012 – 20 onshore and 33 offshore, including 11 in the deep water. We expect to have around 60 rigs in operation in 2014.

We intend to increase investment in exploration. Our drilling programme is expected to test 15 new plays between 2012 and 2015.

^d See footnote c on page 21.

Investing in renewable energy

Since 2005 we have invested $7.6 billion in lower-carbon businesses and are on track to meet our commitment to invest $8 billion by 2015. In biofuels, our three sugar cane mills in Brazil now have a total crush capacity of 7.2 million tonnes and produce fuels for use in transport and power. At the end of 2012 we started up the Vivergo JV bioethanol plant in Hull, UK. We also have research, demonstration and production facilities planned or operating in the US, UK and Brazil. During the year we cancelled plans to build a commercial-scale cellulosic ethanol plant in Florida and refocused our cellulosic strategy on research, development and technology licensing. In wind we have interests in 16 wind farms in the US, which together provide BP with a net generating capacity of 1,558MW.^a

Alternative Energy

For more on our activities see Other businesses and corporate page 82.

^a   Excludes 32MW of capacity in the Netherlands, which is managed by our Downstream segment.

TNK-BP

For more on the segment’s financial performance see pages 80-81.

PSVM is one of the largest subsea developments in the world and was one of BP’s key project start-ups for 2012. It is the second BP-operated development in Angola after Block 18’s Greater Plutonio (below).

Total shareholder return (%)

Reserves replacement ratio (%)

Total shareholder return (TSR) represents the change in value of a BP shareholding over a calendar year, assuming that dividends are re-invested to purchase additional shares at the closing price applicable on the ex-dividend date.

2012 performance In 2012 the growth in TSR resulted from increases in the dividend, with the improvement for ordinary shares diminished by exchange rate effects.

Proved reserves replacement ratio (also known as the production replacement ratio) is the extent to which production is replaced by proved reserves additions. The ratio is expressed in oil-equivalent terms and includes changes resulting from revisions to previous estimates, improved recovery and extensions, and discoveries. The measure reflects both subsidiaries and equity-accounted entities, but excludes acquisitions and disposals.

2012 performance Our reserves replacement ratio was impacted by a lower than usual number of final investment decisions related to major projects, lower than expected reservoir performance, and the curtailing or replanning of certain development activities due to lower natural gas prices and higher costs.

We report crude oil, natural gas liquids (NGLs) and natural gas produced from subsidiaries and equity-accounted entities. These are converted to barrels of oil equivalent (boe) at 1 barrel of NGL = 1boe and 5,800 standard cubic feet of natural gas = 1boe.

2012 performance BP’s total reported production in 2012, including both our Upstream and TNK-BP segments, was 3.6% lower than in 2011, mainly due to the effect of transactions completed in Upstream as part of our $38-billion divestment programme.

Refining availability represents Solomon Associates’ operational availability, which is defined as the percentage of the year that a unit is available for processing after subtracting the annualized time lost due to turnaround activity and all planned mechanical, process and regulatory maintenance downtime.

2012 performance Refining availability remained at a high level of 94.8%, reflecting strong operations around our global refining portfolio.

Greenhouse gas emissions

(million tonnes of CO₂ equivalent)

We report greenhouse gas (GHG) emissions on a CO₂-equivalent basis, including CO₂ and methane. This represents all consolidated entities and BP’s share of equity-accounted entities, except TNK-BP. In 2010 we did not report on GHG emissions associated with the Deepwater Horizon incident or response (see page 52).

2012 performance The 2.0Mte decrease in direct GHG emissions in 2012 is primarily explained by operational changes due to temporary reductions in activity in some of our businesses and by the sale of upstream assets as part of our divestment programme.

We track how engaged our employees are with our strategic priorities of strengthening safety, earning back trust and building long-term value. The measure is derived from 12 questions about employee perceptions of BP as a company and how it is managed in terms of leadership and standards.

2012 performance Aggregate results for these questions showed a 4% improvement on 2011 to 71%.

Each year we record the percentage of women and individuals from countries other than the UK and US among BP’s group leaders.

2012 performance BP has increased the percentage of female leaders in 2012 and remains focused on building a more sustainable pipeline of diverse talent for the future.

^a  Not a recognized GAAP measure.

^b  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.

^c  Relates to BP employees.

Operators descending coker structure, Castellon oil refinery, Castellon, Spain.

We seek to manage our reputation through actively managing our relationships with key stakeholders and through clear, consistent and coherent communications. We seek to engage with local communities in order to foster improved relationships.

There have been many important developments in 2012 related to the Deepwater Horizon accident, oil spill, and response including the agreement reached with the US government to resolve all federal criminal claims and with the SEC regarding its securities claims. There remains, however, continuing uncertainty regarding the final extent and timing of civil costs and liabilities relating to the incident (with the trial to address many of these issues, which started on 25 February 2013). Further, BP is in ongoing discussions with the EPA to lift the temporary suspension and mandatory debarment. As such, the long-term impact of the incident on our reputation remains uncertain.

In addressing these risks we have been working to review and adapt where necessary our current controls and procedures to assure compliance with the requirements contained within the settlements.

In addition we have been preparing for trial while remaining open to settlement of the remaining civil claims on reasonable terms. We are committed to rebuilding trust with all our stakeholders and continue to co-operate with all investigators, monitors and regulators. Further, we are clear that we always seek to comply with local regulations and, in some cases, our required practices will exceed regulations if our assessment of the operating risk indicates it would be beneficial to do so.

Safety and operational risk

The nature of the group’s operations exposes us to a wide range of significant health, safety and environmental risks such as incidents associated with the drilling of wells, operation of facilities, transportation of hydrocarbons and product quality. In addressing these risks we seek to apply our operating management system (OMS), including group and engineering technical practices, as applicable.

We seek to conduct maintenance and equipment testing and to apply product quality control and testing procedures. We also provide our staff with training and competency development. To better manage the risks inherent in drilling wells where we are the operator, we conduct activity through a global wells organization that is accountable for systems and processes for designing, constructing and managing wells.

We have also appointed an independent adviser to provide oversight and assurance regarding the company’s implementation of the Bly Report’s recommendation and to report on observed process safety culture.

Crisis and continuity management plans, including in respect of oil spill preparedness and response, have been developed to help us to respond effectively to emergencies to minimize impacts and to avoid potentially severe disruption in our business and operations. See Safety on pages 46-50 for information on the recommendations of BP’s internal investigation into the Deepwater Horizon oil spill and the actions we are pursuing to address them.

Security threats require continuous monitoring and control as hostile actions against our staff, our facilities (as in the In Amenas joint venture in Algeria) and our digital infrastructure (cyber security) could cause harm to people and could disrupt our operations. We have procedures that are intended to monitor for threats and vulnerabilities and policies to manage our physical and digital security. We also maintain disaster recovery, crisis and business continuity management plans.

Compliance and control risk

Ethical misconduct or breaches of applicable laws or regulations could be damaging to our reputation, results of operations and shareholder value and could affect our licence to operate. Central to managing these risks is our code of conduct and our values and behaviours (see page 56), the requirements of which apply to all employees, supported by our various group requirements covering issues such as anti-bribery and corruption, anti-money laundering, competition/anti-trust law compliance and trade sanctions. We seek to monitor for new regulations and legislation and plan our response to them. We also operate a range of compliance training and monitoring programmes for our employees, including OpenTalk, our confidential helpline for employees.

In the normal course of business, we are subject to risks around our treasury and trading activities, which could arise from shortcomings or failures in our systems, risk management methodology, internal control processes or employees. In addressing these risks, we have adopted specific operating standards and control processes, including guidelines in relation to trading, and seek to monitor compliance through dedicated compliance organizations. We also seek to maintain a positive and collaborative relationship with regulators and the industry at large.

Business review

BP in more
depth

Detailed reporting on activity        
across the group during a
busy year.

Financial review

Risk factors

Safety

Environmental and social responsibility

Employees

Technology

Gulf of Mexico oil spill

Upstream

Downstream

TNK-BP

Other businesses and corporate

Oil and gas disclosures for the group

Liquidity and capital resources

Regulation of the group’s business

Business review: BP in more depth      33

BP Annual Report and Form 20-F 2012