Miscellaneous terms

This document constitutes the Annual Report and Accounts in accordance with UK requirements and the Annual Report on Form 20-F in accordance with the US Securities Exchange Act of 1934, for BP p.l.c. for the year ended 31 December 2011. A cross reference to Form 20-F requirements is on page 2.

This document contains the Directors’ Report, including the Business Review and Management Report, on pages 7-138 and 153-172. The Directors’ Remuneration Report is on pages 139-151. The consolidated financial statements of the group are on pages 173-281 and the corresponding reports of the auditor are on pages 176-177.

BP Annual Report and Form 20-F 2011 and BP Summary Review 2011 may be downloaded from bp.com/annualreport. No material on the BP website, other than the items identified as BP Annual Report and Form 20-F 2011 or BP Summary Review 2011, forms any part of those documents.

BP p.l.c. is the parent company of the BP group of companies. Unless otherwise stated, the text does not distinguish between the activities and operations of the parent company and those of its subsidiaries.

The term ‘shareholder’ in this report means, unless the context otherwise requires, investors in the equity capital of BP p.l.c., both direct and indirect. As BP shares, in the form of ADSs, are listed on the New York Stock Exchange (NYSE), an Annual Report on Form 20-F is filed with the US Securities and Exchange Commission (SEC).

Cautionary statement

In order to utilize the ‘Safe Harbor’ provisions of the United States Private Securities Litigation Reform Act of 1995 (the “PSLRA”), BP is providing the following cautionary statement. This document contains certain forward looking statements within the meaning of the PSLRA with respect to the financial condition, results of operations and businesses of BP and certain of the plans and objectives of BP with respect to these items. These statements may generally, but not always, be identified by the use of words such as ‘will’, ‘expects’, ‘is expected to’, ‘aims’, ‘should’, ‘may’, ‘objective’, ‘is likely to’, ‘intends’, ‘believes’, ‘anticipates’, ‘plans’, ‘we see’ or similar expressions. In particular, among other statements, (i) certain statements in the Chairman’s letter (pages 8-11), the Group chief executive’s letter (pages 14-17) and the Business review (pages 18-111), including but not limited to statements under the headings ‘Our Strategy’, ‘Outlook’ and ‘Looking Ahead’, with regard to strategy and strategic priorities, plans to deliver shareholder value, expectations regarding the ‘10-point plan’, expectations regarding future dividend payments, BP’s outlook on global energy trends to 2030 and beyond, the intention to make $38 billion of disposals, anticipated increase in operating cash flow and margins, future capital expenditure, expected level of investments, the anticipated timing for completion of and final proceeds from the disposition of certain BP assets, future production levels including expectations for an increase in high-margin production, the timing and composition of future projects including expected start up, completion, timing of production, level of production and margins, expectations for drilling and rig activity in the Gulf of Mexico, the timing and quantum of and timing for completion of contributions to and payments from the $20-billion Trust fund, the expected terms of the proposed settlement agreement with the Plaintiffs’ Steering Committee in MDL 2179 and the expected timing of the fairness hearing and court approvals in respect thereof, the expected amount, source and timing of payments under any settlements, expectations regarding regulation and taxation of the energy industry and energy users, future global refinery capacity and utilization, the timing for completion of the Whiting refinery upgrade, plans regarding the implementation of enhancements to BP’s risk management system, expectations regarding the reduction of net debt and the net debt ratio, the expected future level of depreciation, depletion and amortization, the expected level of the refining marker margin, the completion of planned and announced divestments, including the planned disposals of the Texas City refinery and the southern part of the US West Coast FVC, dates or periods in which production is scheduled or expected to come onstream or a project or action is scheduled or expected to begin or be completed, and the level of future turnaround activity; (ii) the statements in the Business review (pages 18-111), Corporate governance (pages 119-138), the Directors’ remuneration report (pages 139-151) and Additional information for shareholders (pages 153-172) with regard to plans to continue the ongoing process of embedding OMS, the timing for the implementation of the Bly report recommendations, intentions to implement group-wide practices for oil spill preparedness

and response and crisis management, plans to spend $700 million on certain refinery-related safety measures, plans to implement enhanced and standardized technical practices across the refining business, the timing for the completion of the Shoreline Clean-up, the timing of, cost of, source of payment and provision for future remediation and restoration programmes and environmental operating and capital expenditures, the anticipated future level of time for conversion of proved undeveloped reserves to proved reserves, expectations regarding Refining and Marketing’s intentions to achieve $2 billion in performance improvement by the end of 2012, plans to halve US refining capacity by the end of 2012, the timing for the completion of construction at the Cherry Point refinery, anticipated investment in Alternative Energy, expectations regarding greater regulation and increased operating costs in the Gulf of Mexico in the future, and costs for providing pension and other post-retirement benefits; (iii) the statements in the Business review (pages 103-106) with regard to future dividend and optional scrip dividend payments, future capital expenditures and capital expenditure commitments, taxation, intentions to maintain a significant liquidity buffer, future working capital and cash flows, gearing and the net debt ratio, expected payments under contractual and commercial commitments and purchase obligations, and including under ‘Liquidity and capital resources – Trend information’, with regard to production excluding TNK-BP, the expected level of turnarounds, the marketing environment in fuels, lubricants and petrochemicals, underlying average quarterly charge from Other businesses and corporate, and expectations regarding future disposals; and (iv) certain statements in the Business review (page 84) and Additional information for shareholders (pages 160-166) regarding the anticipated timing of trial proceedings, court decisions and potential investigations and civil or criminal actions by US state and/or local governments; are all forward looking in nature.

By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will or may occur in the future and are outside the control of BP. Actual results may differ materially from those expressed in such statements, depending on a variety of factors, including the specific factors identified in the discussions accompanying such forward-looking statements; the timing of bringing new fields onstream; the timing of certain disposals; future levels of industry product supply, demand and pricing; OPEC quota restrictions; PSA effects; operational problems; general economic conditions; political stability and economic growth in relevant areas of the world; changes in laws and governmental regulations; regulatory or legal actions including the types of enforcement action pursued and the nature of remedies sought; the actions of prosecutors, regulatory authorities and courts; the actions of all parties to the Deepwater Horizon oil spill-related litigation at various phases of the litigation; exchange rate fluctuations; development and use of new technology; the success or otherwise of partnering; the actions of competitors; the actions of contractors; natural disasters and adverse weather conditions; changes in public expectations and other changes to business conditions; wars and acts of terrorism or sabotage; and other factors discussed elsewhere in this report including under ‘Risk factors’ (pages 59-63). In addition to factors set forth elsewhere in this report, those set out above are important factors, although not exhaustive, that may cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements.

Statements regarding competitive position

Statements referring to BP’s competitive position are based on the company’s belief and, in some cases, rely on a range of sources, including investment analysts’ reports, independent market studies and BP’s internal assessments of market share based on publicly available information about the financial results and performance of market participants.

Carl-Henric Svanberg

Chairman

Dear fellow shareholder,

In 2011 we re-laid the foundations of BP. Our objective was to ensure your company is able to deliver sustainable shareholder value in the months and years ahead. Above all else, this is dependent on BP having the trust of the societies in which it works – today and over the long term.

During the year the board oversaw a major reorganization designed to establish a stronger, safer BP. The progress made demonstrates that the company can and will recover from the consequences of the Deepwater Horizon accident. We remained mindful of the tragic events seen in 2010 and the need to ensure such an accident never happens again.

I thank you for the patience you have shown as we work to rebuild your company.

The board set three priorities for BP. Safety must be enhanced and embedded. Trust must be regained. Value must be created through a clear strategic plan. While these priorities are simple to express, substantial activity is required to turn them into tangible and lasting change.

On safety, the board supported and challenged Bob Dudley and his executive team as they restructured and enhanced BP’s processes, systems and culture. Furthermore, the board initiated a review of the way BP manages, reports and acts on risk, including board oversight.

On trust, we ensured that BP continued to meet its commitments in the Gulf of Mexico. We co-operated with every official investigation and prepared for litigation. We worked closely with governments and regulators, and we communicated openly with shareholders and the wider world.

On value, the board set a 10-point plan focused on growing operating cash flow and increasing shareholder returns. The company will play to its greatest strengths and prioritize value over volume. Relentless execution of this strategy is now needed so we deliver value to our shareholders.

BP’s financial and operating performance in 2011 has created a springboard for growth. In the upstream, we secured 55 new exploration licences in nine

countries, and our Refining and Marketing segment delivered very strong earnings. Our $38-billion divestment programme is strengthening the group’s financial position and focusing our portfolio.

In 2011 we restored your dividend, and I am pleased to report that we increased the dividend by 14% in February 2012, in accordance with our policy.

The wider world did not stand still in 2011. We saw rapid and sometimes unpredictable change. This included escalation of the European debt crisis and political upheaval in countries where BP has significant operations, such as Libya and Egypt. We kept a close watch on these developments and acted where required. Our international advisory board assisted us in this task.

The company continually looks for ways to form new relationships and enhance its partnerships around the world. Our new alliance with Reliance Industries in India is a significant venture in a fast-growing market. Russia is particularly important for BP. Our TNK-BP alliance is hugely successful. Since acquiring 50% of the company for around $8 billion, BP has received around $19 billion in dividends - which equates to around $2 billion per year. In 2011, we saw new opportunities in Russia, but these did not progress. This region still has excellent potential for BP and we remain committed to it. The nature of our industry is rarely straightforward, and BP will never shrink from pursuing opportunities simply because they involve challenges.

In my letter last year, I commented on the evolution of the board. This has continued. My goal is to ensure that the board combines a broad set of skills and experience. BP’s board should be diverse in the widest sense. It should have the best blend of the best people from our industry and from other sectors. BP remains committed to meritocracy as well as diversity.

Andrew Shilston and Professor Dame Ann Dowling have joined the board as non-executive directors and Brian Gilvary has joined as an executive director.

Andrew, a former finance director at Rolls-Royce, brings substantial experience in the oil and gas industry through previous roles at Enterprise Oil and Cairn Energy. Ann is Head of the Department of Engineering at the University of Cambridge, where she is Professor of Mechanical Engineering. She brings exceptional academic and engineering expertise to BP.

Brian Gilvary is now our chief financial officer. His broad experience of BP, gained over 25 years in influential roles such as the chief executive of integrated supply and trading and as deputy group CFO, makes him a valuable addition. Our previous CFO Byron Grote takes up a new role as the director responsible for corporate business activities. Byron has made a substantial contribution over his lengthy BP career and I am pleased we have retained his services as a board member.

Left The East Azeri

platform in the Caspian

Sea in Azerbaijan. BP

is the largest foreign

investor in the country.

Right In 2011, the

chairman visited the

Alberta oil sands in

Canada including the

Sunrise Energy Project

– BP’s joint venture

with Husky Energy.

In detail

For more information

on the board and its

committees, see

Corporate governance

report.

Page 126

Bill Castell has decided not to seek re-election at the forthcoming AGM. Bill has made a substantial contribution to the board, not least as chair of the safety, ethics and environment assurance committee. Bill has devoted all the time that was asked of him and more in the service of the board and the company. I speak for the whole board when I thank him sincerely for all he has done. Bill’s role as senior independent director will be taken by Andrew Shilston, who will be supported on internal matters by Antony Burgmans.

The board committees have always played an important oversight role, freeing the main board to concentrate on strategic matters. All of our committees have been heavily involved this year. Each committee has dealt with different challenges, and all of the directors have been unstinting in the time they have given.

The Gulf of Mexico committee, formed in 2010 and chaired by Ian Davis, has been invaluable in allowing the board to prioritize its work during the restoration of the Gulf of Mexico and the ensuing litigation. During the year, Antony Burgmans became chair of the remuneration committee and Brendan Nelson became chair of the audit committee. Paul Anderson took over the chair of the safety, ethics and environmental assurance committee in December.

During the year, the remuneration committee has worked with Bob Dudley and his team to remodel the reward system within the group. The system below the board is now clearly focused on the long term and is similar to that used for executive directors. I believe our approach to rewarding directors balances the company’s priorities of driving financial performance, meeting our responsibilities as a corporate citizen and providing value for our shareholders.

Against all of this background, I have been keen to see how the board could work more effectively. During the year, a working group of

non-executive directors reviewed board tasks, roles and processes. This work, coupled with our board evaluation, has led to a number of changes in the way in which the board operates. These are set out in the board performance section of this annual report.

2011 was a testing year for everyone at the company. The board was impressed by the way in which Bob and his executive team tackled a range of considerable issues. We were also struck by the tenacity and dedication of BP’s employees. On behalf of the board, I thank everyone for their efforts.

In 2012 we must execute our 10-point plan and continue to meet our commitments in the Gulf of Mexico. While many of the investigations into the causes of the accident have been completed, we still face major litigation in the US during 2012. This must run its course, although we are pleased with the continuing progress that we are making with settling some of these claims.

As part of its strategic role, the board must be mindful of the long-term developments in our industry. BP Energy Outlook 2030 tells us that rising populations, increasing levels of life expectancy and improving standards of living will continue to generate growing demand for energy. The challenges in terms of supply are immense. I expect these dynamics to provide BP with opportunities for decades to come. The report projects that fossil fuels will be providing around 80% of the world’s energy in 2030. This will require companies such as ours to overcome substantial technical and physical challenges. Lower carbon resources and energy efficiency technologies are required to play their part in addressing both demand and emissions. BP must understand and adapt to these changes in order to remain sustainable in this changing world.

I believe BP ended the year stronger and safer, with increasing forward momentum and a clear strategy matched to the world we see ahead. This is a great company, with a strong board and excellent people. I thank you for your continued support. I will report back to you on BP’s progress at this point next year.

Carl-Henric Svanberg

Chairman

6 March 2012

Bob Dudley

Group Chief Executive

Dear fellow shareholder,

Following the tragic Deepwater Horizon accident of 2010, BP entered 2011 facing a range of uncertainties. These included concerns about our ability to operate safely in deep water, meet our financial commitments in the Gulf of Mexico, and recover the trust and value we had lost. We were also subject to intense speculation around the future and direction of the company.

By the end of the year we had successfully resolved some significant uncertainties facing the company. We set new standards for safety, led by our safety and operational risk organization, and we reshaped our upstream business. We strengthened the group’s financial position by progressing our divestment programme. We worked to earn back trust through co-operation with the official investigations and actively sharing the lessons learned. We set a clear strategic direction through a 10-point plan focused on building value for shareholders. We also received permission to resume operations in the Gulf of Mexico – a significant milestone.

During the year more clarity also emerged over the 2010 accident as official investigation reports were published. Their central conclusions supported that of our own investigation – namely that what happened in the Gulf of Mexico was a complex accident involving multiple causes and multiple parties. I am pleased that we were able to reach settlements with Mitsui, Weatherford, Anadarko and Cameron during 2011. On 3 March 2012 we announced a settlement with the Plaintiffs’ Steering Committee, subject to final written agreement and court approvals, to resolve the substantial majority of legitimate economic loss and medical claims made by individual and business plaintiffs in the Multi-District Litigation proceedings pending in New Orleans (MDL 2179). The legal process continues with other parties.

We recognize there is a great deal more to do, but I can report that BP finished its year of consolidation in robust shape.

Through the year, BP’s employees worked with great determination to enhance what we do and how we do it. This work will continue. I want to make it absolutely clear that we are not seeking a return to business as usual. The events of 2010 demand more than that. As we move ahead, our job is to make BP a stronger, safer company by further embedding safety at the heart of the company, continuing to earn back trust, and creating long-term value for shareholders once again. In this letter, I outline in more detail the actions taken in 2011 to achieve these objectives.

Above During the

year BP gained its first

US exploration drilling

permit since the 2010

Deepwater Horizon oil

spill - for the Kaskida

field, Gulf of Mexico.

Safety

During the year, we reorganized our upstream segment to improve clarity and accountability. We introduced new systems and technologies to further enhance oversight of operations. We continued to increase the capacity of our independent safety and operational risk organization, and recruited experts from other high-hazard industries to add new expertise and perspectives. We also renewed the company’s performance and reward systems, values and code of conduct, which require whoever works for BP to put safety first.

At the front line, we shut down platforms and operations to make necessary upgrades. We set new, voluntary standards for blowout preventers, which shut off the flow of oil in an emergency. We also designed a new type of capping stack, which now stands ready for deployment anywhere in the world in the event of a leak in deep water.

Trust

Looking back over events in the Gulf of Mexico, I am proud of how BP responded. Just in financial terms, during 2010 and 2011 combined we 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. The test of corporate responsibility is whether a company follows up its words with actions. I believe we have. And we will continue to do so.

During the year we were invited to 25 countries to share what we have learned in the Gulf. In turn, we have gone out to gain insights from organizations in other high-hazard sectors, including NASA, the UK Atomic Energy Authority and various naval bodies. We will keep listening to others and applying what we learn.

Value

As I write this letter, the market value of the company remains significantly lower than it was before the incident. Our 10-point plan shows our belief that the company can realize improved returns for shareholders. The plan sets out what you can expect from us, and what you will be able to measure, over the next three years.

^a See footnote c on page 39.

In detail

For more on the

strategic priorities set

out in the 10-point plan,

see Our strategy.

Pages 37-41

The plan makes a greater priority of creating value for the shareholder, rather than simply increasing production volume. We will sell assets earlier in their lifecycle following discovery if we spot opportunities to reinvest in higher growth areas. We are also being selective in where we invest along the supply chain. For example, we are selling certain mature fields that hold more value for others, and we are selling a number of refining and marketing assets that do not match our aspirations.

I want to say a little more about the areas of strength at the heart of our strategy.

Exploration is our lifeblood. We had a record year for new access in 2011, gaining 55 exploration licences in nine countries. This opened up around 315,000km² for exploration. We intend to more than double exploration investment over the next three years.

In deep water, we are confident in our ability to design, engineer and operate large installations safely. 2012 will be a busy year for us in the deepwater regions of Angola, Brazil and the Gulf of Mexico.

Left New investment

announced in 2011 may

extend production at the

Clair field of the UK North

Sea to 2050.

Right February 2011

saw BP announce a

partnership with Reliance Industries spanning the

gas value chain in India,

from exploration to

marketing.

In giant fields, work with our partners has increased output at Iraq’s Rumaila field by more than 10%. BP was the first supermajor to exceed its production target in Iraq. During the year we also announced we will be investing approximately $14 billion – with our partners – in the UK North Sea.

Natural gas is set to be the fastest-growing fossil fuel globally to 2030. Here, we are forging new partnerships, such as the strategic alliance created in 2011 with Reliance Industries in India. We continue to have a significant focus on developing unconventional resources around the world. Taking technology and skills developed in North America, we are working with the governments of Oman and Algeria to develop their large tight gas reservoirs, and we also continue to work in Indonesia to develop their onshore coalbed methane fields.

We also have exceptional expertise in building supply chains. For example, we move gas from 6,000 metres below the Shah Deniz field in Azerbaijan to markets in Western Europe, 3,000 kilometres away.

In Refining and Marketing, our world-class fuels, lubricants and petrochemicals businesses are shifting the balance of their activity towards higher growth markets, including China and India. We are moving forward with our plans to sell around half of our refining capacity in the US, and we have made good progress on the modernization of the Whiting refinery. Looking ahead, we expect our downstream operations to be a material contributor to the cash flow we anticipate over the next few years.

These strengths are supported by our long-standing track record in developing and applying leading technology, and the deep and enduring relationships we form. We were disappointed that our exploration plans with Rosneft did not progress, but we remain committed to our TNK-BP investment in Russia, which continues to be successful.

A well-balanced business

As the BP Energy Outlook 2030 shows, the world is now in a long wavelength transition to a lower-carbon energy mix. For BP, that means helping to meet current demand through the supply of oil and gas – including unconventional resources – while developing a number of the lower-carbon options needed at scale tomorrow.

During 2011, we invested a further $1.6 billion in our Alternative Energy business, which takes total investment since 2005 to $6.6 billion. We have a growing biofuels business in Brazil and we added 401MW^a of wind generation capacity during the year, with interests in more than 1,000 wind turbines now turning across the US. In contrast, solar has evolved into a low-margin commodity market, and in 2011 we began winding down our remaining solar operations as we prepare to exit the business.

Looking ahead

BP is meeting its commitments and moving forward with increasing momentum. 2012 will be a year of milestone delivery, with financial momentum building in 2013 and 2014. In 2012, you can expect high-margin production coming back on stream, major project start-ups and new exploration wells, further progress on our divestment programme, continued improvement in downstream financial performance and completion of payments into the Deepwater Horizon Oil Spill Trust fund.

The company has a strong leadership team and non-executive directors who provide rigorous oversight – challenging and supporting executives as circumstances dictate. I want to thank BP’s employees for their resilience. They were again tested hard this year. The character of BP’s people was evident wherever we operate, not least in Egypt and Libya, where our teams evacuated colleagues and their families safely during the upheavals in the region.

I thank investors for their continued patience through a tough time. One by one, we are addressing the uncertainties facing our company. The days ahead may bring further challenges, but we are in a much stronger position than this time last year. There is a great deal more to do, but we are building a stronger, safer BP that can play an important role in the world for many years to come.

Bob Dudley

Group Chief Executive

6 March 2012

In 2011, energy markets proved resilient, with continued growth despite volatile conditions in the global economy.

Left Modernization

work at BP's Whiting

refinery, Indiana, made

significant progress

in 2011, with the

completion of a new

pipeline to Canada.

Right Operations

at our East Azeri

platform. BP

production in

Azerbaijan is an

important source of

natural gas for markets

in Western Europe.

The growth in world oil consumption slowed in 2011, albeit with continued robust growth in China and certain other non-OECD countries partially offsetting an overall decline in OECD countries. However, despite the slowdown in demand, average crude oil prices in 2011 were significantly higher than in the previous year, exceeding $100 per barrel for the first time (in nominal terms). Natural gas prices diverged globally in 2011. Globally, refining margins improved on average as oil product demand continued to grow.

Economic context

After a very strong 2010, world economic growth slowed in 2011 and we expect subdued global growth to continue in 2012. Emerging economies with stronger productivity and rising populations led by China and India are set to drive growth, while developed countries may lag behind as they seek to address their internal fiscal imbalances.

Energy demand, and in particular oil demand, has followed overall economic trends in recent years, recovering strongly in 2010 but facing more challenging conditions in 2011, especially in OECD markets.

Concerns about the volatility of commodity and financial markets, energy security and climate change have led to continued debate over the appropriate role of markets, government regulation and other policy measures that affect the supply and consumption of energy. Given the pressures in the sector, we expect regulation and taxation of the energy industry and energy users to increase in many areas in the future.

Below Work at BP's

Castellón refinery,

Spain. Refining

margins in Europe

increased in 2011,

as demand for

commercial transport

improved.

Crude oil prices

Crude oil prices, as demonstrated by the industry benchmark of dated Brent for the year, averaged $111.26 per barrel in 2011, about 40% above 2010’s average of $79.50 per barrel. This represents the highest annual average ever (in nominal terms), as well as the largest one-year increase ever.

Prices rose early in 2011 and then increased further following the loss of Libyan supplies, which drove prices briefly above $125 per barrel in April. Thereafter, weakening global economic growth, increased production by other OPEC producers and the release of International Energy Agency (IEA) strategic stocks helped to cushion the disruption. While oil prices eased over the remainder of the year, they still ended the year above $100 per barrel.

These record prices prevailed despite the fact that the growth in global oil consumption slowed in 2011 with demand rising by roughly 0.7 million barrels per day for the year (0.8%)^a in the face of slower economic growth and higher prices. Growth in 2011 was concentrated in non-OECD countries, led by China. There was relatively little change in non-OPEC production and, with the loss of Libyan supplies beginning in February, OPEC crude oil production did not return to its January peak until November. As a result, by mid-year OECD commercial oil inventories were consistently below average for the first time since 2008.

By comparison, global oil consumption in 2010 grew by roughly 2.7 million barrels per day (3.1%)^b, the strongest growth in annual consumption since 2004, driven by a renewed global economy. Crude oil prices in 2010 remained stable in a range of $70-80 per barrel before beginning to increase in the fourth quarter due to rising consumption and continuing OPEC production.

We expect oil price movements in 2012 to continue to be driven by the pace of global economic growth and its resulting implications for oil consumption, and by OPEC production decisions, especially in reaction to the recovery of Libyan supplies and the EU embargo on Iranian crude.

^b BP Statistical Review of World Energy June 2011.

Natural gas prices

Natural gas prices diverged globally in 2011, reflecting different regional dynamics. The average US Henry Hub First of Month Index fell to $4.04/mmBtu, 8% lower than the prices in 2010, while in Europe prices increased.

After a record increase in 2010, global gas consumption growth moderated in 2011. In the US, economic momentum supported gas use in the first half of the year and a hot summer raised demand. Yet domestic production outpaced consumption growth due to further increases in the availability of shale gas. Henry Hub gas prices fell and traded below coal parity in US power generation throughout the year, leading to the displacement of coal by gas. Unusually mild winter weather weakened prices at the end of year. The differentials of production area prices to Henry Hub prices continued to narrow as pipeline bottlenecks were reduced.

In Europe, spot gas prices at the UK National Balancing Point increased by 33% to an average of 56.33 pence per therm for 2011 – the highest level since 2008. The loss of Libyan gas supply raised continental European demand for Russian gas in early 2011, but LNG supply and weak general demand kept spot gas prices below oil-indexed contract levels. Competition between spot and contract pipeline supplies continued. High volumes of LNG were available to Europe, despite the Japanese earthquake and tsunami in March 2011, which caused major nuclear outages and significantly increased LNG purchases in Japan. This contributed to a tightening global LNG market over the year.

The economic rebound had led the average Henry Hub First of Month Index to recover in 2010 from eight-year lows, rising by 10% to $4.39/mmBtu. In the UK, National Balancing Point prices averaged 42.45 pence per therm in 2010 - 38% above the depressed prices in 2009.

In 2012, we expect gas markets to continue to be driven by the economy, weather, domestic production, LNG supply and reductions in nuclear power generation following the Fukushima disaster in Japan in March 2011.

In detail

For more information, see

Refining and Marketing.

Page 94

Refining margins

In 2011, demand for oil products continued to grow, albeit more slowly than a year ago, with all of the demand increase occurring in non-OECD markets and with overall demand in the OECD resuming its structural decline. As new refining capacity continued to be commissioned in Asia and the Far East, global refinery utilization rates fell in 2011. Despite this, a number of factors supported an increase in refining margins across all regions for a second consecutive year. The BP refining marker margin (RMM)^a averaged $11.64 per barrel in 2011, compared with $10.02 per barrel in 2010 and $9.19 per barrel in 2009.

In 2011, diesel prices relative to crude reached highs not seen since 2008 as the trend to lower-sulphur fuels continued and demand grew. Gasoline prices were volatile in 2011. In the US, short-term supply issues supported gasoline prices in the middle of the year despite a reduction in demand compared with last year. By the fourth quarter, US gasoline prices relative to crude had fallen to the lowest levels seen for at least 23 years. Refining margins improved in Asia Pacific, due to continuing oil demand growth and the disruption to Japanese refining operations caused by the earthquake and tsunami.

US mid-continent crude oils (including the key marker grade of West Texas Intermediate) were heavily discounted throughout the year because of increasing production in the US Lower 48 states and in Canada, coupled with constrained logistics. This allowed refiners that are able to access these crudes to capture additional margins.

The loss of Libyan crude oil supply in the first quarter of 2011 and production problems in the North Sea during the summer resulted in record high prices for low-sulphur grades of crude oil. This adversely impacted the margin for refiners configured to process these grades, particularly in Europe, the US East Coast and Asia.

By contrast, in 2010 the RMM increase compared with 2009 was due to strongly-improved demand for oil products, in line with the economic bounce-back from recession, despite unused refining capacity.

Looking ahead, the overall economic environment is expected to result in limited demand growth such that refinery utilization levels are likely to remain low, despite the announced shutdown of capacity in Europe and the US.

^a See page 94 for further information on RMM.

The long-term outlook is one of growing demand for energy and increasing challenges for our industry in meeting the world’s needs.

The facts and figures used

in our longer-term outlook commentary in this section

are derived from BP Energy Outlook 2030, published in

January 2012, unless otherwise indicated, and represent a 'base case' or most likely projection.

Long-term growth in energy demand

Energy demand is linked to economic growth, development and population. The world’s population is projected to increase by 1.4 billion over the next 20 years, while its real income is likely to grow by 100% over the same period. This combination of factors is expected to increase world primary energy consumption by approximately 40% over the next 20 years, with non-OECD energy consumption as much as 70% higher by 2030. Energy and climate policies, efficiency gains and a long-term structural shift in fast-growing economies away from industry towards less energy-intensive activities may act to restrain consumption, but the overall trend is likely to be one of strong growth in energy demand.

Oil and gas are still expected to play a significant part in meeting this demand and we project they will represent 53% of total energy consumption in 2030 (compared with 57% in 2010). Even under the lEA’s most challenging climate policy scenario (450 Scenario) that might with difficulty still be achievable, oil and gas together still makes up 49% of the energy mix in 2030, with combined demand projected to exceed current levels.^a 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. We believe the political, technological, logistical, infrastructure and cost challenges presented by the 450 Scenario make it increasingly unlikely to occur, meaning that demand for fossil fuels would remain at a higher level for longer.

We also expect advances in technology to lead to new and more efficient ways to transform base hydrocarbons (including natural gas and coal) into usable forms of energy, petrochemicals and lubricants.

Beyond 2030, we believe it is currently very difficult to provide meaningful projections. We expect that growing population and per-capita incomes will continue to drive growing demand for the services that energy provides – including mobility, heat and light. The way those services are provided will be shaped by future technology developments, changes in tastes, and future policy choices – all of which are inherently uncertain. Concerns about affordability, energy security and environmental impacts – in particular climate change – are all likely to be important considerations for the future. These factors may accelerate the trend towards more diverse sources of energy supply, a lower average carbon footprint, increased efficiency of energy provision and use, and demand management.

We actively monitor developments and continually assess a range of potential outcomes and their implications for our long-term strategy.

        ^a From World Energy Outlook 2011^©, OECD/IEA 2011, page 545.

Above An engineer on

board the BP oil tanker

British Gannet. At the

end of 2011, we had 53

international vessels.

Below The control

room at BP's Atlantic

LNG facility in Trinidad,

where BP has been

operating since 1961.

Meeting the energy challenge

We estimate that there are enough energy resources available to meet the increases in demand. As a measure of this availability, 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 Meanwhile, new technologies are improving the availability and affordability of unconventional fossil resources such as shale gas, oil sands and coalbed methane. And emerging renewable resources have the potential for significant growth as their markets mature and technological advances make them more affordable and efficient.

While energy is available to meet demand, action is also required to limit the volumes of carbon dioxide and other greenhouse gases being emitted through energy use. Global economic challenges have reduced the focus of some governments on climate policy, at least in the short term. But the position set out at the UN's 2010 climate change conference in Cancun that deep cuts are required to hold global temperature rises to 2°C, and the commitment by both developed and developing countries in Durban in 2011 to negotiate an agreement by 2015 that requires action from all countries, suggests that in the medium to long term an emphasis on carbon policy will return and grow. We project that under known and probable policy and technology, global CO₂ emissions may be 28% higher in 2030 than they are today, partly as a consequence of coal use in rapidly-growing economies. More aggressive, but still plausible, energy policy and technology deployment could lead to slower growth in CO₂ emissions than expected, with emissions from energy use falling after 2020, but probably not to the extent of putting the world on a global warming trajectory that does not exceed 2°C. And even these policies would require concerted multilateral action from policymakers and a willingness by society to bear a significant cost.

Energy security also represents a major challenge. More than half of the world's natural gas is in just three countries, and more than 80% of global oil reserves are in 10 countries, most of which are located well away from the hubs of energy consumption. The ability and willingness of OPEC members to expand capacity and production is one of the main factors determining the dynamics of the oil market.

The dual challenges of emissions and energy security underline the value of energy efficiency. Increases in efficiency have the potential to reduce emissions without inhibiting economic growth, and they can help energy-importing countries to reduce their dependency on others. For these reasons, we expect efficiency to remain high on the agenda through to 2030.

A diverse energy mix

We believe the global energy challenge can only be met through a diverse mix of fuels and technologies. This is why BP's portfolio includes oil sands, shale gas, deepwater production, and alternative energies such as biofuels and wind power, in addition to conventional oil and gas. As well as simply meeting growth in overall demand, a diverse mix can help to provide enhanced national and global energy security while supporting the transition to a lower-carbon economy.

Within the energy mix, we see a key strategic role for natural gas as a lower-carbon fuel that is increasingly secure and affordable. Used in place of coal for power, it can reduce CO₂ emissions by half.

Renewables will be essential in addressing the challenges of climate change and energy security over the long term. Renewable energy is already the fastest-growing fuel and is projected to grow 8.2% per annum to 2030 – a rate similar to the emergence of nuclear power in the 1970s and 1980s. Renewable energies are starting from a low base however, and we project that they are only likely to meet around 6% of total energy demand by 2030. With a few exceptions, renewables are not yet competitive with conventional power and transportation fuels. Sufficient policy support is required to help the commercialization of effective options and technologies, but renewables must ultimately become free from subsidy and commercially self-sustaining. See Risk factors – climate change and carbon pricing on page 60.

The future for hydrocarbons

Given the vital role oil will continue to play in meeting demand, substantial investment in new technology will be required to boost recovery from declining fields and commercialize currently inaccessible resources. The industry's ability to increase recovery from mature assets will be profoundly important, particularly in the world's giant fields. Over time, it will become increasingly difficult to reach, extract and manage oil resources, and companies such as BP may be required to move yet further into technically challenging areas. Greater energy intensity could be required to extract these resources; operating costs and greenhouse gas emissions from operations are likely to increase. Along with increasing supply, we believe the energy industry will be required to make hydrocarbons cleaner and more efficient to use.

Carbon capture and storage (CCS) may help to provide a path to cleaner coal and gas, but CCS technologies still face significant technical and economic issues and are unlikely to be in operation at scale in the near future.

Policy and access

If industry and the market are to meet the world's growing demand for energy in a sustainable way, governments must set a stable and enduring framework. As part of this, governments will need to provide secure access for exploration and development of energy resources, define mutual benefits for resource owners and development partners, and establish and maintain an appropriate legal and regulatory environment. Within this framework, we believe that the most effective means of finding, producing and distributing diverse forms of energy is to foster the use of markets that are open and competitive, and in which carbon has a price.

BP's distinctive capabilities and sources of value

By operating across the full hydrocarbon value chain we believe we can create more value for shareholders, as benefits and costs can often be shared by our two segments. We can develop shared functional excellence more efficiently in areas such as safety and operational risk, environmental and social practices, procurement, technology and treasury management.

    We have a distinctive integrated supply and trading function, which aims to maximize the value of our production while ensuring our refineries are fully supplied. We buy and sell at each stage in the value chain to optimize value for the group, often selling our own production and buying from elsewhere to satisfy demand from our refineries and customers. The function also creates value through entrepreneurial trading, where our presence across the major energy trading hubs of the world provides access to vital information on the fundamentals of markets that are increasingly connected.

    We consider our ability to build a wide range of strong, long-term relationships to be both a key strength and crucial to our success. We form partnerships with national oil companies and our international oil company peers. We partner with universities and governments in pursuit of improving the technologies available to us, in order to enhance our operations and develop new products. We also actively participate in industry bodies such as the American Petroleum Institute and the Marine Well Containment Company in the US and the Oil Spill Preventions and Response Advisory Group in the UK. Regular review and audit processes enable us to maintain strong links with contractors and suppliers. We work with our partners through the management frameworks embedded in our joint venture and shareholder agreements to ensure safe and reliable operations, and for our mutual commercial benefit.

In detail

For more information,

see Technology.

Page 74

    We believe our development and application of technology represents a distinctive capability that is central to our reputation and competitive advantage. For us, technology is the practical application of scientific knowledge to manage risks, capture business value and inform strategy development. This includes the research, development, demonstration and acquisition of new technical capabilities and support for the deployment of BP's know-how.

    We monitor the potential opportunities and risks presented by emerging science, interdisciplinary innovation and new players; natural resource issues and climate concerns; and evolving policy concerns, including the current emphasis on energy security and efficiency.

    Our technology advisory council, which is comprised of eminent technology leaders from business and academia, advises the board and executive management on research and technology matters.

In detail

For more information on

Exploration and Production,

see BP in more depth.

Page 80

 Upstream and midstream – playing to our strengths

Our Exploration and Production segment is responsible for our activities in oil and natural gas exploration, field development and production; midstream transportation, storage and processing; and the marketing and trading of natural gas, including liquefied natural gas, together with power and natural gas liquids.

Our exploration division obtains access to and finds resources at scale in the world's key hydrocarbon basins. We are an industry leader in seismic imaging, a key technology in the identification of potential hydrocarbon resources. Our developments division develops our hydrocarbon resources, applying effective project execution and capital efficiency. Our production division then extracts resources efficiently and maximizes their recovery.

We focus on areas that play to our strengths – deepwater, gas value chains (including the infrastructure required from field to market) and giant fields. We are increasing investment with a particular focus on exploration. We actively manage our portfolio, including divesting assets when we believe they may be more valuable to others than to ourselves. This allows us to focus our leadership, technical resources, and organizational capability on the resources we believe are most likely to flourish in our portfolio.

In 2011, our upstream and midstream activities took place in 30 countries including Angola, Azerbaijan, Canada, Egypt, Norway, Russia, Trinidad & Tobago (Trinidad), the UK, the US and other locations within Asia, Australasia, South America, North Africa and the Middle East. Exploration and Production also includes gas marketing and trading activities, primarily in Canada, Europe and the US. In Russia, we have an important associate through our 50% shareholding in TNK-BP, a major oil company with exploration assets, refineries and other downstream infrastructure.

In detail

For more information on

Refining and Marketing,

see BP in more depth.

Page 94

Technology will continue to play a critical role in our upstream activities, as the upstream technology flagships diagram demonstrates. In addition, our Project 20K™ is a significant new initiative that illustrates how new advances have the potential to deliver material value. Through this, we are investing in technology to enable exploration, development and production of reservoirs that were previously beyond reach due to high reservoir pressures, including those at a pressure between 15,000 and 20,000 pounds per square inch. Successful deployment of these technologies would enable us to further develop a number of our existing resources substantially, and we also see opportunities to develop new onshore and offshore resources – both as BP and in partnership with national oil companies.

 Downstream – working across our value chains

Our Refining and Marketing segment 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.

We have significant operations in Europe, North America and Asia, and we also manufacture and market our products across Australasia, southern Africa and Central and South America. In total we market our products in more than 70 countries.

The segment comprises three main businesses: fuels, lubricants and petrochemicals. All of our businesses operate as value chains. Previously we discussed the segment under the headings of fuels value chains and international businesses, but we now report the value chains by business.

The fuels businesses sell refined petroleum products including gasoline, diesel and aviation fuel. Within this, the fuels value chains (FVCs) integrate the

Downstream technology

activities of refining, logistics, marketing, and supply and trading on a regional basis. This recognizes the geographic nature of the markets in which we compete, providing the opportunity to optimize our activities from crude oil purchases to end-consumer sales through our physical assets (refineries, terminals, pipelines and retail stations). In addition, we operate a global aviation fuels business and an LPG marketing business, from which we intend to divest the bulk and bottled LPG marketing operations.

We own or have a share in 16 refineries including five in the US and seven in Europe. Our focus is on complex, upgraded refineries that are able to process cheaper feedstocks yet yield more valuable products. We also market fuels through around 21,800 retail sites, principally in the US, Europe, Australia and southern Africa. Many of our retail sites are now operated by franchisees with whom we work in close partnership as we seek to ensure our standards and brand are consistently applied. We divest assets and businesses when we believe they will be of greater value to others. In 2011, we announced that we are seeking buyers for our Texas City refinery; and for our Carson refinery near Los Angeles, together with its associated integrated marketing business in southern California, Arizona and Nevada.

Our lubricants business is involved in manufacturing and marketing lubricants and related services to markets around the world. In 2011, approximately 45% of our profit from lubricants was generated from non-OECD markets, and we see good opportunities for further growth in these areas. We market lubricants to the automotive, industrial, marine, aviation and energy markets. The business blends and markets lubricants globally through our key brands of Castrol, BP and Aral. Our strategic relationships with our original equipment manufacturing partners provide the ongoing collaboration needed to develop the next generation of high-performance lubricants, such as Castrol EDGE.

Our petrochemicals business operates on a global basis and includes the manufacture and marketing of petrochemicals that are used in many everyday products, such as plastic bottles and textiles for clothing. Future growth in our business is focused on the demand centres of Asia, where our relationships with joint venture partners are key to our strategy in these increasingly important markets. From 2012 we plan to create a new revenue stream in petrochemicals through licensing some of our leading technology.

In detail

For more information on contractors, see Working with partners and contractors.

Page 69

Contractors and suppliers

Like our peers, BP rarely works in isolation. In 2011, for example, 55% of the 374 million hours worked were carried out by contractors. These individuals play an important role for BP. During the year we initiated a far-reaching review of the way we work with third parties, particularly those involved in potential high-consequence activities. We are now implementing a range of measures based on our findings, with a focus on six key themes: consistent standards and priorities; fewer suppliers to enable deeper, longer-term relationships; detailed and systematic selection of contractors; clear and specific contracts; intensive oversight and verification; and assurance that supplier personnel are competent.

Our values

“Our approach is built on respect, being consistent and having the courage to do the right thing. We believe success comes from the energy of our people. We have a determination to learn and to do things better. We depend upon developing and deploying the best technology, and building long-lasting relationships. We are committed to making a real difference in providing the energy the world needs today, and in the changing world of tomorrow. We are one team – a group of diverse individuals from around the world united by shared values and a drive to rebuild BP.”

These words, taken from the BP code of conduct, capture what we strive to stand for as a company – our renewed values. They are an expression of work done across BP in 2011 to define and renew our principles and values. This work was carried out in response to the events of recent years, which have caused us to reflect on what is important and how we do what we do.

We launched our renewed values in 2011. They represent the qualities and actions we wish to see in BP, and those that BP already demonstrates when it is at its best. The values are aligned with our code of conduct and are there to guide the way we do business and the decisions we take, every day. Safety has been re-emphasized as our number one priority.

In detail

Find out more online

bp.com/values

The values are much more than words – we are actively seeking to embed these values at the heart of the systems and processes we are introducing to unify and strengthen our business. We are both enforcing and incentivizing values-led behaviour. For example, our updated performance and reward system, which came into effect on 1 January 2012, now creates an explicit link between our values and the way individuals are judged and rewarded within BP.

Our code

The BP code of conduct sets the standard that we all work to. It is aligned with our values, group standards and legal requirements, and it clarifies the ethics and compliance expectations for everyone who works at BP. The code was updated in 2011 and now puts greater emphasis on a values-based approach. Where rules are not stated explicitly, our everyday business decisions will be guided by our values.

2011 saw BP streamline its operational footprint through divestments while increasing new access to resources. The map below shows the group's key operating sites in 2011.

Following the tragic events in the Gulf of Mexico in 2010, we initiated a wide-ranging programme designed to enhance safety and risk management within the group, earn back trust and restore value. Much was achieved in 2011, but there is a great deal more to do.

Below BP has a

significant presence

in Trinidad & Tobago,

operating 13 offshore

platforms and holding

an interest in Atlantic LNG.

In 2011, we put forward a clear 10-point plan that defines what you can expect from us, and what you will be able to measure, through to 2014.

Following the tragic Deepwater Horizon oil spill, we set out a strategy designed to deliver stability, and restore trust and value. Our first priority was to work to make BP a safer, more risk-aware business. We pursued that strategy with purpose through 2011 and have now laid out a 10-point plan for BP’s future.

Our renewed strategy is designed to make BP a simpler, stronger company that plays to its strengths. It concentrates our distinctive talents on high value, advantaged assets, with new and enhanced structures, process and discipline serving to support and sustain our businesses and operations. Our goal is to grow operating cash flows to enable us to both invest for future growth and increase distributions to shareholders.

Our upstream strategic focus is aligned with what we see as the five key drivers of value growth in our operations. These are: managing risk; increasing investment, with a particular focus on exploration; managing our portfolio actively; growing operating cash faster than production; and focusing on the major growth engines that capitalize on our strengths – deepwater, gas value chains and giant fields.

In the downstream, we are in the business of hydrocarbon value chains, and with an intense focus on safe and reliable operations, we believe we now have the platform to sustain and grow a world-class business capable of generating leading returns and cash flow growth.

Putting safety and risk management at the heart of the company is the foundation for building trust and creating value. In 2011 we began a process to review, refresh and enhance our management of risk.

The role of the board

The board is responsible for the direction and oversight of BP as set out in its governance principles, which include that it will satisfy itself that the material risks to BP are identified and understood and that systems of risk management, compliance and control are in place to mitigate such risks. The board, through its governance principles, requires the group chief executive to operate with a comprehensive system of controls and internal audit to identify and manage the risks that are material to BP. See Risk management: from operations to the board on page 122.

Our system of internal control

The system of internal control comprises the holistic set of management systems, organizational structures, processes, standards and behaviours that are employed to conduct the business of BP. The system is designed to meet the expectations of internal control of the Corporate Governance Code in the UK and of COSO (Committee of Sponsoring Organizations of the Treadway Commission) in the US.

Key elements of the system include: the control environment; the management of risk and operational performance; and the management of people and individual performance. As such, BP’s risk management system is an integral part of our system of internal control, and is designed to be a simple, consistent and clear framework for managing and reporting all risk from the group's operations to the board.

Review of risk management

In 2011, we initiated a review of our risk management system. The review considered the group’s existing risk management system, along with good practices in risk management from outside the company, with a view to identifying what might be done to enhance the clarity, simplicity and consistency of our risk management system.

Using the findings of this review, we have begun implementing enhancements to the way we manage and report risks. This has involved the development of common language, concepts and templates for consistent reporting on risks and risk management; designing enhancements to board and executive processes; and greater alignment of risk management activities and business processes. These improvements build from our existing management systems, standards and practices and we will continue to embed these in 2012. See the information on Safety and operational risk on page 65 for examples of enhancements to the S&OR function and management of safety and operational risks.

Above BP's Cooper River petrochemicals plant in South Carolina operates two PTA units. PTA is used in the production of plastic bottles.

Below Working with Falex Corporation, Air BP has developed a faster and more reliable way to test aviation lubricants.

During 2011, functions, strategic performance units, divisions and segments within BP were requested to prepare RMRs using the new, common approach. This helped provide an overall data set of the key risks identified, an assessment of their potential impact and likelihood on a consistent basis, information on how they are being managed and any actions planned or in progress to improve the management of risk. Based on these RMRs, together with additional executive overview, a single group RMR has been prepared. Those risks identified on the group RMR as requiring particular group-level oversight in the coming year have been allocated to specific board and executive committees for oversight and monitoring. These are discussed below. Also see Risk factors on pages 59-63 for a description of the material risks we face in our business.

Risk management can also be a foundation for creating value. The willingness to take and appropriately manage certain risk is fundamental to the success of any commercial enterprise. For example, in our upstream business we consciously place significant amounts of capital at risk in exploring for new hydrocarbon resources. Where this exploration is successful, we would generally expect it to lead to future increases in our proved reserves and future cash flows. However, exploration expenditure may not yield adequate returns, for example in the case of unproductive wells or discoveries that prove uneconomic to develop.

Safety and operational risk function

We have redefined and strengthened the scope and accountabilities of the group function for safety and operational risk (S&OR), creating a new team independent of business line management to drive safe, compliant and reliable operations in BP. The S&OR function, which continues to build towards its full staffing complement, includes S&OR teams which have been formed to work alongside line management but are independent of them. In pursuit of safe, compliant and reliable operations, S&OR personnel can assist, challenge and escalate or intervene as necessary to promote and assure the operating businesses' systematic and disciplined application of global standards on safety and operational risk. The function helps provide assurance as to whether line operations are carried out in accordance with the group's operating management system, and seeks to facilitate more comprehensive and assured S&OR risk action plans for operational units, more incisive interventions on emerging risk situations, and improved investigations and learning from significant incidents.

How we seek to manage our risks

The following is a summary of how we seek to manage the risks we have identified as having a high priority in 2012. There can be no guarantee that our risk management activities will mitigate or prevent these, or other, risks from occurring.

Strategic risks

In response to risks associated with the general macroeconomic outlook and changes in prices and markets, we monitor early warnings from our treasury team and customer-facing businesses. To manage our liquidity, financial capacity and financial exposure risks, we apply our financial framework (see Liquidity and capital resources on page 103) and we conduct liquidity stress testing and scenario-planning interventions.

Our current strategic priorities are set out in our 10-point plan (see pages 38-39). Among other things, this aims to target investments and disposals efficiently, renew and reposition our portfolio and deliver our major projects to plan. As part of managing the risks to delivery of the 10-point plan we conduct regular planning and performance-monitoring activity, including the planning of disposals; we focus on the delivery of major projects; and we pursue the development of continued technological advances and innovation.

The diverse locations of our operations around the world exposes us to a wide range of political developments and consequent changes to the economic and operating environment. For example, our investments in Russia could be adversely affected by heightened political and other environment risks. As such, we try to actively manage our relationships in Russia, including with the Russian federal government and with TNK-BP. We also seek to manage the group's exposure in Russia through our development of BP's overall portfolio.

Many of our major projects and operations are conducted through joint ventures or associates and through contracting and sub-contracting arrangements where BP may not have full operational control. We seek to manage such joint venture and contractor relationships actively, and this may include monitoring compliance with applicable standards.

As a result of the Deepwater Horizon oil spill there is significant uncertainty regarding the extent and timing of costs and liabilities relating to the incident, the impact of the incident on our reputation and the resulting possible impact on our licence to operate including, among other things, our ability to access new opportunities. In addressing these risks we seek to co-operate with investigators and we encourage the application of responsible and objective scientific analysis in determining outcomes. 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. We seek to engage with local communities in order to foster improved relationships and reputation.

In detail

For more information

on OMS, see Safety.

Page 65

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. See Safety on page 66 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 oversight and control as hostile actions against our staff, our activities 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. We also maintain business continuity plans.

Crisis-management plans are developed to help us to respond effectively to emergencies and to avoid a potentially severe disruption in our business and operations. For deepwater drilling, interim requirements for oil spill preparedness and response, including crisis management response capability, were introduced in 2011 in the Gulf of Mexico. The intention is to build on these interim requirements to put in place group-wide practices for both oil spill preparedness and response and crisis management.

Successful recruitment and development of staff is central to our plans. We have programmes to recruit both graduates and experienced staff and we maintain succession plans for key roles. We also operate training and development programmes, including relating to leadership, and we engage all employees in regular performance-management processes.

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 (see page 31), the requirements of which apply to all employees, supported by our various group standards covering issues such as anti-bribery and corruption, anti-money laundering and competition/anti-trust law compliance. 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.

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 and risk organizations. We also seek to maintain a positive and collaborative relationship with regulators and the industry at large.

2011 was a year of further stern tests for BP. Our challenge was to stabilize the company and meet our commitments in the Gulf of Mexico while laying firm foundations for the future.

We went into 2011 with a clear set of strategic priorities and determination to rebuild the company. Our employees have worked to make BP a safer business and to earn back trust. We also pushed forward on the journey to grow value over the short, medium and long term. The key measures in this section show our progress in numbers, and here you can also read about some of the significant actions and events that defined our year.

Left The BP-Husky refinery in Toledo, Ohio – in operation since 1919.

Right Azeri-Chirag-Guneshli is the largest oilfield under development in the Azerbaijan sector of the Caspian basin.

In detail

For more information, see Safer drilling.

Page 66

Safety

Our safety and operational risk function (S&OR) is driving the systematic and disciplined application of global standards in safety and operational risk across the company. We recruited 87 new employees into S&OR during the year, taking its total headcount to around 600 against a target headcount of 800.

During the year, as part of our enhanced focus on safety and operational risk management, we completed a programme of 47 major upstream turnarounds.

We set enhanced voluntary standards for how we drill in the Gulf of Mexico, and implemented new global standards in our operations worldwide. For example, in deepwater drilling, where we use drill rigs that are maintained in position by computer-controlled systems rather than fixed moorings, we require BP-contracted drill rigs to have no fewer than two blind shear rams and a casing shear ram^a in order to provide additional assurance.

We initiated a review of the way we work with contractors and other industry partners. Guided by our findings, we have implemented a range of new measures, starting with our offshore rigs. We also reviewed and updated our system of risk management – see Our management of risk on pages 42-46. And we reviewed and updated our values and behaviours, linked them explicitly to an enhanced code of conduct and embedded them in our approach to safety, performance management and reward.

In detail

For more information on the Gulf of Mexico oil spill, see BP in more depth.

Page 76

Our upstream business is now reorganized into three divisions – exploration, developments and production. We have also reorganized our drilling operations into a single global wells organization (GWO), which forms part of the developments division and takes a consistent, global approach to managing risk. GWO has implemented a number of standard processes since its formation, covering activities such as rig start-up and well cementing.

Trust

Released in January 2011, the report of the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling identified certain failures of management and decision-making within BP and its contractors, as well as regulatory failures, to be contributing factors to the accident. See Safety on page 65 and Legal proceedings on pages 160-166 for information on other investigations and reports. We are committed to working with government officials and other operators and contractors to identify and implement operational and regulatory changes that will enhance safety practices throughout the oil and gas industry. BP teams have travelled to 25 countries to share the lessons learned from events in the Gulf of Mexico with our industry, regulators and governments. We also shared equipment and technology developed during the response with the Marine Well Containment Company in the US.

On the ground, the focus of our work in the Gulf of Mexico shifted from response to recovery. The majority of the clean-up work required along the shoreline has now been completed. We are encouraged by local and state reports that indicate tourism in many areas of the region is rebounding. And all federal commercial fishing areas had been reopened by April 2011. We are still at work on the recovery and remain committed to meeting our responsibilities in the region.

By the end of 2011, we had paid $15.1 billion into the $20-billion Deepwater Horizon Oil Spill Trust fund (Trust) set up to meet the costs of the spill. In total, the Trust and BP had paid a total of $7.8 billion in claims, advances and other payments by the end of 2011.

Value

Our profit in 2011 was $25.7 billion compared with a loss of $3.7 billion in 2010. After adjusting for inventory holding gains, our replacement cost profit^a in 2011 was $23.9 billion compared with a loss of $4.9 billion in 2010. Cash and cash equivalents at the end of 2011 totalled $14.1 billion and our net debt ratio^b was 20.5%. See Financial review on pages 56-58 for further information on the group’s financial results.

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. Previously this disposal target had been set at $45 billion, however it was reduced in November 2011 when we received notice of termination from Bridas Corporation of the agreement for their purchase of BP’s 60% interest in Pan American Energy LLC. We intend to reduce our net debt ratio to the lower half of the 10-20% range over time. During 2011 we reached settlements with MOEX USA Corporation (MOEX), Weatherford U.S., L.P. (Weatherford), Anadarko Petroleum Corporation (Anadarko) and Cameron International Corporation (Cameron) totalling $5.5 billion related to the Deepwater Horizon oil spill. All cash received has been paid to the Trust.