CIOMA July 27th, 2006

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CIOMA July 27th, 2006

• Introduction to bpriskmanager

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Disclaimer

• This presentation and any services described in
  it are intended only for Market Counterparties or
  Intermediate Customers as those terms are defined
  by the UK Financial Services Markets Act 2000
  and the FSA Handbook, or only for Eligible
  Contract Participants as that term is defined in
  the U.S. Commodity Exchange Act.
• This presentation and its contents have been
  provided to you for informational purposes only.
  This information is not advice on or a
  recommendation of any of the matters described
  herein, whether they consist of financing
  structures (including, but not limited to senior
  debt, subordinated debt and equity, production
  payments and producer loans), investments,
  financial instruments, hedging strategies or any
  combination of such matters and no information
  contained herein constitutes an offer or
  solicitation by or on behalf of BP p.l.c. or any
  of its subsidiaries (collectively "BP") to enter
  into any contractual arrangement relating to such
  matters. BP makes no representations or
  warranties, express or implied, regarding the
  accuracy, adequacy, reasonableness or
  completeness of the information, assumptions or
  analysis contained herein or in any supplemental
  materials, and BP accepts no liability in
  connection therewith. The actual terms and
  conditions of any contract or specific
  arrangement that may be entered into between you
  and BP may differ from the arrangements described
  in this presentation. BP deals and trades in
  energy related products and may have positions
  consistent with or different from those discussed
  herein.
• There is no assurance that the structure
  described herein will hedge risks the recipient
  may incur in the operation of its business.
  Prior to dealing in any investment or financial
  instrument or entering into any risk management
  product arrangement, you should obtain your own
  tax, legal and other advice as they may expose
  you to inappropriate financial risk.

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Agenda
I
Market Overview
II
Introduction to bpriskmanager
III
Introduction to Risk Management
IV
Hedging Instruments
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Situation over the last few years

• Crude Oil
• Geopolitical events, threat of terrorist attacks
• OPEC quota management / communication
• Additional product heavier grade
• Products
• Market supported by
• Global bottleneck in refining capacity and
  available resources to build new units
• Tougher environmental legislation in USA and
  Europe
• Strong economic growth (China, USA, India)
• Funds
• Massive investment in commodities since 2004

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Crude Oil global supply

• Supply growth slowing down in 2h 2005
• Shortfall from OECD (hurricane impact) and slow
  down in OPEC export (Iraq)
• But some projects coming up in 2006, leading to
  additional crude in market
• global drilling spending up 44 in 2002-2006
• deepwater technology developing
• OPEC spare capacity expected to rise by 1 mb/d in
  2006

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Crude Oil fundamentals

• OPEC insist crude supplies are ample and
  downstream bottlenecks are a key source of recent
  high and volatile prices
• Demand seasonally lower in the 2nd and 3rd
  quarters, still 31st January meeting in Vienna
  resulted in no change to the 28.0 mb/d production
  target for the OPEC-10 (excluding Iraq).
• However, suggestions of a production curb have
  been aired by Iran, Venezuela and Libya, makes
  the decision at the next meeting more difficult,
  as stocks continue to rise amidst falling prices.

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Whats next ?

• Strong global demand
• 2005 growth revised down to 1.06 mb/d
• 2006 growth est. _at_ 1.78 mb/d especially 2nd half
  of the year
• Not showing any sign of weakening so far despite
  the high price environment.

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Source of demand
This slide is a sample
Source EIA
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Products recent market

• General weak end-user demand in Europe and demand
  still recovering from hurricanes in USA
  (especially diesel)
• Firm refinery runs comfortable stocks levels in
  Europe (especially Diesel), vs expectations post
  hurricanes
• But market still nervous about possible demand
  spike, hence contango structure heavy
  maintenance program coming up in Q1 in Europe
• Chinese demand quite strong for gas oil,
  especially diesel, requiring refiners to
  downblend jet to meet this demand.
• New refining units coming up in 2006 but need
  additional 2 to 3 yrs to see actual impacts

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New cash in Futures Market
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Crude oil futures attract funds
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Agenda
I
Market Overview
II
Introduction to bpriskmanager
III
Introduction to Risk Management
IV
Hedging Instruments
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bps Trading Activity Size and Scope

• One of the largest oil trading organisations in
  the industry
• Over 4,000 people worldwide
• Hub of bp, dealing with 100 Business Units
• Trading expertise and infrastructure
• Activities
• Market and trade crude and refinery products to
  maximise margin
• Supply and trade oil products, natural gas and
  power
• Managing price exposure in bps asset portfolio
  including forex
• Provision of third party risk management

One face to the energy market In excess of
100,000 Transactions per annum
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bpriskmanager Global presence

• bpriskmanager sits within FERM, Finance and
  Energy Risk Management
• FERM is a global business providing finance
  trading and energy risk management services to bp
  and external customers. It operates in a variety
  of global traded markets including money markets,
  finance and currency markets, commodity and
  derivative markets.
• bpriskmanager desks are located in London,
  Chicago and Singapore providing 24 hours/day
  trading capability

London
Chicago
Singapore
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bpriskmanager Structure
Customers
Marketing Unit
bpriskmanager marketers
GDIST
GGAS
WRES
Option
BP Finance
Structured Products
Freight
Crude
Gasoil Jet
Mogas Naphtha
Urals Dubai Dtd CFDs
Fuel Oil VGO
Forex
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bpriskmanagers offer

• With more than 15 years of experience in risk
  management for third parties, bpriskmanager can
  offer a range of structures from swaps and plain
  vanilla options to more structured derivatives
• Combination of its financial trading and physical
  market expertise
• Client base made up of
• Airlines
• Transport companies
• Mining
• Shipping companies
• State and Independent Producers
• Refiners
• Power Producers
• Other industrial companies (steel, paper)

Over 26 million tonnes hedged in 2005
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bpriskmanager website

• Clients can access the bpriskmanager website
  which provides information such as
• Forward market price indications on over 80
  grades (updated daily)
• Energy market news
• Daily newsletters customised made for different
  client sectors
• Oil Market Review reports detailed analysis of
  oil market developments
• Mark to Market calculations to follow any
  simulated positions
• Risk Management tools
• Glossary of derivative terminology, trading
  games, structured simulations
• Email price alerts, to signal when your target
  prices have been met
• 
  www.bpriskmanager.c
  om

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Agenda
I
Market Overview
II
Introduction to bpriskmanager
III
Introduction to Risk Management
IV
Hedging Instruments
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Objectives of Hedging
To achieve

• Complete or Partial Elimination of Energy Price
  Risk

• Helping to determine sales prices
• Providing insurance against force majeure
• Securing the companys competitive edge

• Stabilizing cash flows
• Diminishing the risk of financial distress
• Protecting companys budgets
• Providing profit margin protection

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Why use Risk Management
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Considerations of Hedging
Product Exposure
Hedge Ratios
Market Conditions
Tenor Exposure
Tolerance of Basis Risk
Volatility Conditions
Internal Risk Management Policy
Industry competition
Volume Exposure
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Getting started with Risk Management

• Quantify exposure and how it varies
• Does volume vary seasonally?
• Where is fuel taken / how is it priced?
• Location vs. Platts/OPIS indices
• Wet (physical) or paper?
• Percentage of fuel use to cover?
• How often to seek cover over which periods?
• Budget constraints, target price, floor/ceiling
  level?
• Management approval, control procedures

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Agenda
I
Market Overview
II
Introduction to bpriskmanager
III
Introduction to Risk Management
IV
Hedging Instruments
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Hedging instruments
Risk Management
PAPER
PHYSICAL (WET)

• Physical supply/offtake contract
• No offsetting cash payments, price paid is the
  protected one
• BP is the buyer / supplier of fuel
• Hedging instruments
• FPP (Fixed Price Physical)
• CPP (Capped Price Physical)

• Financial paper contract
• Exchange of cash to hedge the physical position
• Not linked to physical but related to pricing
  basis
• Hedging instruments
• Swaps
• Plain Vanilla options (cap, put, collar, 3 way,
  cap/put spread, participation)
• Event driven options (Extendible)

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Fixed Price Physical

• Objective
• The client wants to fix the future price of
  physically delivered fuel at an agreed level with
  BP. BP will invoice the client as for a normal
  physical contract.
• Strategy
• A customer agrees to enter a FPP at a fixed price
  with BP
• Customer fuels at agreed location for the agreed
  price regardless of how market performs
• Rewards vs Risks
• Rewards
• - Protection against rising market
• - No upfront premium
• - 100 pricing certainty
• - No basis and timing risk
• - No settlement transaction required
• - Guaranteed availability of supply from BP
• Risks
• - Opportunity costs if market falls

• Payout diagram

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Capped Price Physical

• Objective
• The client wants to determine his maximum bunker
  price, whilst benefiting from a decrease in
  bunker prices. BP will invoice the client as for
  a normal physical contract.
• Strategy
• The client and BP agree on a maximum future price
  for his bunker purchases
• While the client will be required to pay a fixed
  premium in return for this protection, they will
  have the benefit of lower prices should the
  market price fall.
• Rewards vs Risks
• Rewards
• - Protection against rising market
• - Benefit from falling market
• - 100 pricing certainty
• - No settlement transaction required
• - Guaranteed availability of supply from
  BP
• Risks
• - Upfront premium

• Payout diagram

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Swap Contracts

• A purely financial (paper) transaction between
  two parties who agree to make regular payments to
  each other in the future
• Allows the exchange of a variable or floating
  price for a schedule of fixed price payments
• Swaps can be fixed with different volumes per
  month
• Need to agree
• Floating price index
• Volume
• Time period
• Fixed price
• No upfront premium

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Swap (Fixed Price Paper)

• Objective
• Customer wants to have a fixed price against
  budget for fuel purchases
• Strategy
• Customer buys a financially settled swap from BP
  where BP agrees to pay Customer a floating fuel
  price in return for a fixed price for the
  specified quantity
• Value of the swap will depend on the forward
  markets at the moment of dealing
• Settlement price will, for example, reference the
  mean of Platts FOB Singapore Kerosene daily
  settlement price (monthly average Platts
  settlement price)

• Settlement
• Settlement is usually at the end of each month,
  referencing the actual monthly average Platts
  settlement price
• Rewards vs Risks
• Rewards
• - Protection against rising market
• - No upfront premium
• - Flexibility in physical supply
• Risks
• - Opportunity costs if market falls

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Swap (Fixed Price Paper)

• Payout diagram (Long swap)

Products
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Swap (Fixed Price Paper)
Payout Diagram
Hedged Price Diagram
Fixed Swap Price
Floating Market Price
BP Pays
Hedged Price (USD/BBL)
Fixed Swap Price
Payout Price (USD/BBL)
Customer Pays
Market Price (USD/BBL)
Market Price (USD/BBL)
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Strategies Options

• A right but not an obligation to buy or sell the
  underlying asset, for example fuel oil, at a
  certain price for a specified volume over a
  specified time period
• Need to agree on
• Fuel index (e.g. Platts FOB Singapore Kerosene
  daily settlement price)
• Strike price
• Volume
• Time period
• Premium to be paid

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Call Option (Cap)

• Objective
• Customer seeks to cap or limit the price of
  future fuel purchases at a certain level and at
  the same time seeks to benefit from falling
  market prices
• Strategy
• Customer fixes a maximum future fuel price at an
  agreed level through buying a financially settled
  call option from BP
• Customer agrees to pay BP an upfront fixed
  premium in return for protection from the fuel
  price rising above a certain level
• Settlement price will, for example, reference the
  mean of Platts FOB Singapore Kerosene daily
  settlement price (monthly average Platts
  settlement price )

• Settlement
• Settlement is usually at the end of each month,
  referencing the actual monthly average Platts
  settlement price
• Rewards and Risks
• Rewards
• - Protection against rising market prices
• - Full participation in falling market prices
• Risks
• - Upfront premium is required

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Call Option (Cap)

• Payout diagram

Products
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Call Option (Cap)
Payout Diagram
Hedged Price Diagram
Strike price of call option
Strike price of call option
Hedged Price (USD/BBL)
BP Pays
Floating Market Price
Payout Price (USD/BBL)
No payment made by the client
Upfront premium
Market Price (USD/BBL)
Market Price (USD/BBL)
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Put Option (Floor)

• Objective
• Customer sets a minimum price for fuel sales and
  at the same time seeks to benefit from rising
  market prices
• Strategy
• Customer fixes a minimum future fuel price at an
  agreed level through buying a financially settled
  put option from BP
• Customer agrees to pay BP an upfront fixed
  premium in return for protection from the fuel
  price falling below a certain level
• Settlement price will, for example, reference the
  mean of Platts FOB Singapore Kerosene daily
  settlement price (monthly average Platts
  settlement price )

• Settlement
• Settlement is usually at the end of each month,
  referencing the actual monthly average Platts
  settlement price
• Rewards and Risks
• Rewards
• - Protection against falling market prices
• - Full participation in rising market prices
• Risks
• - Upfront premium is required

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Put Option (Floor)

• Payout diagram

Products
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Put Option (Floor)
Payout Diagram
Hedged Price Diagram
Strike price of put option
Strike price of put option
BP Pays
Hedged Price (USD/BBL)
Upfront premium
Floating Market Price
Payout Price (USD/BBL)
No payment made by the client
Market Price (USD/BBL)
Market Price (USD/BBL)
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Collar (Cap and Floor)

• Objective
• Customer seeks to cap or limit the price of
  future fuel purchases and to benefit from falling
  prices and paying only low or zero upfront
  premium
• Strategy
• Customer fixes a maximum future fuel price at an
  agreed level through buying a financially settled
  call option from BP, and fixes a minimum future
  fuel price at an agreed level through selling a
  financially settled put option to BP (at a
  different strike price)
• Depending on the strike price of the call and the
  put options, Customer will pay either a low
  upfront premium or zero premium
• Settlement price will, for example, reference the
  monthly average of the mean of Platts FOB
  Singapore Kerosene daily settlement price
  (monthly average Platts settlement price)

• Settlement
• Settlement is usually at the end of each month,
  referencing the actual monthly average Platts
  settlement price
• Rewards vs Risks
• Rewards
• - Protection against rising market
• - Partial participation in a falling market
• - Low or zero upfront premium
• Risks

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Collar (Cap and Floor)

• Payout diagram

Products
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Collar (Cap and Floor)
Payout Diagram
Hedged Price Diagram
Put option strike
Call option strike
Call option strike
Put option strike
Floating Market Price
BP Pays
Hedged Price (USD/BBL)
No Payments made
Hedged Price _at_ call option strike
Payout Price (USD/BBL)
Hedged Price _at_ put option strike
Customer Pays
Market Price (USD/BBL)
Market Price (USD/BBL)
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Options vs. Swaps
Upside customer benefits from price move (up or
down) Downside customer suffers from price move
(up or down)