BP (BP)

Marketing and Trading Activities

        Gas and power trading and marketing activity is undertaken in the US, Canada and the UK to dispose of BP's gas and power production, manage market price risk, supply marketing customers as well as create incremental trading gains through the use of commodity derivative contracts. Additionally, this activity generates fee income and enhanced margins from sources such as the management of price risk on behalf of third party customers. These markets are large, liquid and volatile and the Group enters into these transactions on a large scale to meet these objectives.

        In connection with the above activities, the Group uses a range of commodity derivative contracts and storage and transport contracts. These include commodity derivatives such as futures, swaps and options to manage price risk and forward contracts used to buy and sell gas and power in the market place. Using these contracts in combination with rights to access storage and transportation capacity allows the Group to access advantageous pricing differences between locations, time periods and arbitrage between markets. Gas futures and options are traded through exchanges whilst over-the-counter options and swaps are used for both gas and power transactions through bilateral arrangements. Futures and options are primarily used to trade the key index prices such as Henry Hub, whilst swaps can be tailored to price with reference to specific delivery locations where gas and power can be bought and sold. Over-the-counter forward contracts have evolved in both the US and UK markets enabling gas and power to be sold forward in a variety of locations and future periods. These contracts are used to both sell production into the wholesale markets and as trading instruments to buy and sell gas and power in future periods. The contracts we use are described in more detail below. Capacity contracts allow the Group to store, transport gas and transmit power between these locations. Additionally, activity is undertaken to risk manage power generation margins related to the Texas City co-generation plant using a range of gas and power commodity derivatives

        Our gas marketing and trading activities are concentrated primarily in the markets of North America and the United Kingdom. Gas sales volumes have increased from 24.9 billion cubic feet per day (bcf/d) in 2002 to 30.4 bcf/d in 2003 and 31.7 bcf/d in 2004. Most of this growth was realized in the USA and Canada, a trend expected to continue in the near term. Canada volumes are reported in the Rest of World volumes.

        The range of transactions that the Group enters into is described below in more detail:

(a)

Exchange traded commodity derivatives

Exchange traded commodity derivatives include gas and power futures contracts. Though potentially settled physically, these contracts are typically settled financially. Gains and losses, otherwise referred to as variation margins, are settled on a daily basis with the relevant Exchange. Realized and unrealized gains and losses on exchange traded commodity derivatives are included in cost of sales for UK GAAP and within revenues for US GAAP.

(b)

Over-the-counter (OTC) contracts, excluding forward contracts

These contracts are typically in the form of swaps and options. OTC contracts are negotiated between two parties. They are not traded on an Exchange. Amounts are settled at expiry, typically through netting agreements, to limit credit exposure and support liquidity. Realized and unrealized gains and losses on OTC contracts (other than forward contracts) are included in cost of sales for UK GAAP and within revenues for US GAAP.

(c)

OTC forward contracts

Highly developed markets exist in North America and the UK where gas and power can be bought and sold for delivery in future periods. These contracts are negotiated between two parties to purchase and sell gas and power at a specified price with delivery and settlement at a future date. These contracts are not traded on an Exchange. Although these contracts specify delivery terms for

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the underlying commodity, in practice a significant volume of these transactions are not settled physically. This can be achieved by transacting offsetting sale or purchase contracts for the same location and delivery period that are offset during the scheduling of delivery or despatch. The contracts contain standard terms such as delivery point, pricing mechanism, settlement terms and specification of the commodity. Typically volume is the main variable term. For UK GAAP, OTC forward sales contracts are included in turnover when settled and OTC forward purchase contracts are included in cost of sales when settled. Unrealized gains and losses are included in cost of sales. For US GAAP, where OTC forward contracts are held for trading, realized and unrealized gains are included in revenues.

(d)

Spot and term contract

Spot contracts are contracts to purchase or sell a commodity at the market price prevailing on the delivery date. Term contracts are contracts to purchase or sell a commodity at regular intervals over an agreed term. Though spot and term contracts may have a standard form, there is no offsetting mechanism in place. Spot transactions price around the bill of lading date when we take title to the inventory. These transactions result in physical delivery with operational and price risk. Spot and term contracts relate typically to purchases of third party gas and sales of the Group's gas production to third parties. For UK and US GAAP, spot and term sales are included in turnover and revenues respectively, when title passes. Similarly, spot and term purchases are included in cost of sales for UK and US GAAP.

        Refer to Item 5 — Operating and Financial Review — Gas, Power and Renewables on page 95 and Item 11 — Quantitative and Qualitative Disclosures About Market Risk on page 168 for further information.

Marketing and Trading Activities

        Our gas marketing and trading activities are concentrated in the markets of North America and the United Kingdom. Gas sales volumes have increased from 24.9 billion cubic feet per day (bcf/d) in 2002 to 30.4 bcf/d in 2003 and 31.7 bcf/d in 2004. Most of this growth was realized in the USA and Canada. Canada volumes are reported in the Rest of World volumes.