BP

BP Amoco PLC - Form 20-F Summary (Fiscal Year Ended December 31, 1998)

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 1998, for BP Amoco PLC, formed by the merger of The British Petroleum Company p.l.c. and Amoco Corporation effective December 31, 1998. The merger utilized the pooling-of-interests method under US GAAP and the merger method under UK GAAP. The Group operates three primary segments: Exploration and Production (upstream), Refining and Marketing (downstream), and Chemicals. Following the merger, BP Amoco became one of the world's top three oil companies by market capitalization and proved reserves, with a daily production of approximately 2.0 million barrels of crude oil and 5.8 billion cubic feet of natural gas.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue and Profit Decline: Group turnover decreased 26% to $68.3 billion, and profit for the year fell 46% to $3.3 billion. This was primarily driven by a 34% drop in average oil realizations and deteriorating margins in downstream and chemicals sectors.
• Inventory Holding Losses: Historical cost profit included inventory holding losses of $1.4 billion in 1998, compared to $0.9 billion in 1997, reflecting falling oil prices.
• Production Growth: Despite lower prices, total production increased 3.7% to 3.05 million barrels of oil equivalent per day (mboe/d), driven by new projects in the UK North Sea (ETAP, Foinaven, Schiehallion) and the US Gulf of Mexico.
• Reserve Replacement: The Group achieved a reserve replacement ratio of 132%, adding 1.34 billion barrels of oil equivalent (mmboe) to proved reserves, primarily in Angola, Egypt, and Trinidad.
• Asset Write-downs: Special charges of $597 million were recorded, including a $200 million write-down of the investment in AO Sidanco (Russia) and impairments related to the Opon field in Colombia.

Guidance, Outlook, and Risks

• Outlook: Management expects crude oil supply to remain in excess of demand, keeping prices under pressure. Downstream margins and chemicals volumes are expected to face continued pressure due to high inventory levels and new industry capacity.
• Cost Savings: The merger is projected to generate $2 billion per annum in pre-tax cost savings by early 2000, though restructuring costs of approximately $1.5 billion are expected in 1999.
• Capital Program: Capital expenditure for 1999 is targeted at approximately $7 billion, reflecting a sharper focus on core projects and reduced exploration spending due to low oil prices.
• Risks: Key risks include volatility in oil and natural gas prices, political instability in operating regions (particularly the Middle East and Russia), environmental liabilities, and the impact of the Year 2000 (Y2K) computer issue, for which an estimated $300 million remediation cost is budgeted.
• ARCO Merger: In April 1999, the Company announced an agreement to merge with Atlantic Richfield Company (ARCO), subject to regulatory and shareholder approval.

Investor Verification Checklist

• Merger Accounting: Verify the impact of the pooling-of-interests method on comparative financial data and the specific adjustments made to align Amoco's US GAAP figures with BP's UK GAAP.
• Inventory Valuation: Review the magnitude of inventory holding losses ($1.39 billion) and their effect on historical cost profit versus replacement cost operating profit.
• Asset Impairments: Examine the details of the $200 million write-down of AO Sidanco and the $214 million impairment of the Opon field in Colombia.
• Reserve Estimates: Confirm the 132% reserve replacement ratio and the geographic distribution of new reserves (Angola, Egypt, Trinidad).
• Year 2000 Costs: Assess the $300 million estimated cost for Y2K remediation and the status of testing and contingency planning.
• Environmental Provisions: Review the $8.8 billion in other provisions, specifically the $2.3 billion for environmental remediation and $3.3 billion for decommissioning.