BP (BP)

Credit Risk

        Credit risk is the potential exposure of the Group to loss in the event of non-performance by a counterparty. The credit risk arising from the Group's normal commercial operations is controlled by individual operating units within guidelines. In addition, as a result of its use of derivatives to manage market risk, the Group has credit exposures through its dealings in the financial and specialized oil, natural gas and power markets. The Group controls the related credit risk through credit approvals, limits, use of netting arrangements and monitoring procedures. Counterparty credit validation, independent of the dealers, is undertaken before contractual commitment.

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OUTLOOK

        World economic growth was sustained across all regions into the second quarter of 2005, albeit at slightly lower rates than in 2004. The current outlook is for continued moderation of economic growth towards the long-term trend. Growth is expected to remain positive, if less synchronized, across all regions in 2005.

        Oil prices reached a further record average of $47.62 per barrel (dated Brent) in the first quarter and have increased further during the second quarter to date, averaging $51.50 (April 1 to close June 28). Total Russian industry production growth has slowed to 3% over the first five months 2005 but Chinese import growth has also slowed. Prices remain supported by limited spare production capacity even though OECD commercial inventories are above seasonal five year average levels. OPEC's decision in mid June to raise quotas by 500,000 b/d is unlikely to increase actual production significantly.

        US gas prices averaged $6.27/mmbtu (Henry Hub first of month index) in the first quarter and have increased during the second quarter, averaging $6.75/mmbtu (April 1 to June 28). US working gas inventories remain above year-earlier and five year average levels but the futures market continues to signal a supply-constained market.

        Refining margins averaged $5.94/bbl during the first quarter and have increased sharply to $8.49/bbl during the second quarter to date (April 1 to June 28). Margin levels in April were a record for any month since 1990. Gasoline appears well-supplied ahead of the driving season but the refining environment continues to be underpinned by robust demand growth and recently by concerns over distillate supply this coming winter.

        After a very weak first quarter, retail margins improved significantly during the first six weeks of the second quarter. From late May, rising crude and product prices have since dampened marketing margins, and the outlook remains volatile.

105

CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS

Credit Risk

        Credit risk is the potential exposure of the Group to loss in the event of non-performance by a counterparty. The credit risk arising from the Group's normal commercial operations is controlled by individual operating units within guidelines. In addition, as a result of its use of derivatives to manage market risk, the Group has credit exposures through its dealings in the financial and specialized oil,

97

natural gas and power markets. The Group controls the related credit risk through credit approvals, limits, use of netting arrangements and monitoring procedures. Counterparty credit validation, independent of the dealers, is undertaken before contractual commitment.

98

OUTLOOK

        World economic growth was sustained across all regions into the second quarter of 2005, albeit at slightly lower rates than in 2004. The current outlook is for continued moderation of economic growth towards the long-term trend. Growth is expected to remain positive, if less synchronized, across all regions in 2005.

        Oil prices reached a further record average of $47.62 per barrel (dated Brent) in the first quarter and have increased further during the second quarter to date, averaging $51.50 (April 1 to close June 28). Total Russian industry production growth has slowed to 3% over the first five months 2005 but Chinese import growth has also slowed. Prices remain supported by limited spare production capacity even though OECD commercial inventories are above seasonal five year average levels. OPEC's decision in mid June to raise quotas by 500,000 b/d is unlikely to increase actual production significantly.

        US gas prices averaged $6.27/mmbtu (Henry Hub first of month index) in the first quarter and have increased during the second quarter, averaging $6.75/mmbtu (April 1 to June 28). US working gas inventories remain above year-earlier and five year average levels but the futures market continues to signal a supply-constained market.

        Refining margins averaged $5.94/bbl during the first quarter and have increased sharply to $8.49/bbl during the second quarter to date (April 1 to June 28). Margin levels in April were a record for any month since 1990. Gasoline appears well-supplied ahead of the driving season but the refining environment continues to be underpinned by robust demand growth and recently by concerns over distillate supply this coming winter.

        After a very weak first quarter, retail margins improved significantly during the first six weeks of the second quarter. From late May, rising crude and product prices have since dampened marketing margins, and the outlook remains volatile.

99

CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS