Financial Risk Management at BP

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Excerpts

BP was involved in different stages of the hydrocarbon value chain. It produced fuel and other products from hydrocarbons. The company refined, processed, and blended hydrocarbons to made fuels, lubricants, and petrochemicals. Once the products were ready, the company marketed them to consumers and other end users. (Refer to Figure 1 for business model of BP). According to the company’s annual report 2013, BP had generated economic value of US$403.3 billion which included revenue plus interest and dividend receipts and disposal proceeds. This segment managed oil and gas exploration, filed development and production activities; midstream transportation, storage and processing; and marketing and trading of natural gas, including Liquefied Natural Gas (LNG), power, and Natural Gas Liquids (NGLs). In 2013, this segment reported sales and other operating revenue of $70.37 billion, more than 2.5% lower than the previous year’s revenue of $72.23 million.

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The company had a simple, reliable, and clear framework for risk management and risk reporting to the board. The risk management system helped the company to clearly understand the risks. It also helped to assess a particular risk and the company’s exposure to it. The risk management system helped the company to decide on the best possible way to deal with various risks. It allowed the company to monitor and assure efficient management of risk .....

The chief financial officer (CFO) of the group looked after financial risk on the advice of the Group Financial Risk Committee (GFRC). The GFRC, chaired by the CFO and included various senior executives including group treasurer and heads of the group finance, tax, and the integrated supply and trading functions. The GFRC advised the group on financial risk and a suitable financial risk governance framework.....

Beyond these financial risks, BP also faced various other risks such as water scarcity risk, geographical risk, political risk, operation risk, legal risk, exploration risk, vehicle-related incidents, terrorist attacks, driving safety risks, etc. Experts opined that the company had to focus on these risks for better financial performance and to create value for shareholders. Due to the various risks, experts felt that investment in BP was complex. The evolving Russian political situation would definitely not only affect BP but also all the oil majors....

Exhibit I: BP’s Second Quarter, 2014 Summary
Exhibit II: Income statement of BP Group
Exhibit III: Various Risk Governance and Oversight Committees at BP
Exhibit IV: Balance Sheet of BP Group (At 31 December)