BP p.l.c. (BP) 20-F2021 FY Annual report (foreign)

DeGolyer and MacNaughton 5001 Spring Valley Road Suite 800 East Dallas, Texas 75244 February 25, 2022 BP Russian Investments Limited Chertsey Road Sunbury on Thames, Middlesex, TW16 7BP United Kingdom Ladies and Gentlemen: Pursuant to your request, this report of third party presents an independent evaluation, as of December 31, 2021, of the extent of the estimated net proved oil, condensate, natural gas liquids (NGL), and gas reserves of certain fields in which PJSC Rosneft Oil Company (ROSNEFT) has represented it holds or controls an interest. This evaluation was completed on January 15, 2022. The fields evaluated consist of working interests located in the Russian Federation, Canada, Egypt, Kurdistan, and Iraq. ROSNEFT has represented that it holds or controls an interest in certain fields located in the Russian Federation either directly or through various subsidiary enterprises. ROSNEFT has represented that all fields are held at 100 percent by the respective subsidiary enterprise. ROSNEFT has represented that its working interest in all the subsidiary enterprises ranges between 20 and 100 percent. ROSNEFT has represented that these fields account for 100 percent on a net equivalent barrel basis of ROSNEFT’s net proved reserves as of December 31, 2021. The net proved reserves estimates have been prepared in accordance with the reserves definitions of Rules 4–10(a) (1)–(32) of Regulation S–X of the United States Securities and Exchange Commission (SEC). At the request of BP Russian Investments Limited (BP), a wholly owned subsidiary of BP p.l.c., this report was prepared in accordance with guidelines specified in Item 1202(a)(8) of Regulation S–K and is to be used for inclusion in certain SEC filings by BP p.l.c. Also included in this report are interests held through four production sharing agreements (PSA) and four joint ventures (JV). As represented by ROSNEFT, the PSA holdings include the Sakhalin-1 Project in Russia, the Zohr field in Egypt, the Bijeel field in Kurdistan, and the Salman field in Iraq. The JV holdings include NKG Slavneft, PJSC Udmurtneft im. V.I. Kudinova, and AO Messoyakhaneftegaz in the Russian Federation and the Harmattan field in Canada.

 

2 DeGolyer and MacNaughton These subsidiary enterprises, the ROSNEFT direct holdings in the Russian Federation, the Sakhalin-1 Project, the Egyptian PSA, the Kurdish PSA, the Iraqi PSA, the Russian JVs, and the Canadian JV are collectively referred to hereinafter as “ROSNEFT Holdings.” BP has represented that it holds a 22.03-percent interest in ROSNEFT Holdings. Certain fields in which ROSNEFT has an interest are subject to the terms of various PSAs. The terms of these PSAs generally allow for working interest participants to be reimbursed for portions of capital costs and operating expenses and to share in the profits. The reimbursements and profit proceeds are converted to a barrel of oil equivalent or standard cubic foot of gas equivalent by dividing by product prices to estimate the “entitlement quantities.” These entitlement quantities are equivalent in principle to net reserves and are used to calculate an equivalent net share, termed an “entitlement interest.” In this report, ROSNEFT net reserves or interest for certain fields subject to these PSAs is the entitlement based on ROSNEFT’s working interest. The reserves estimated herein are reported at 100 percent for those subsidiaries of which ROSNEFT has majority control, either through direct ownership or through voting rights. The estimated reserves for those subsidiaries which ROSNEFT does not control are reported at ROSNEFT’s working interest. All of the fields evaluated are located in the Russian Federation, Canada, Egypt, Kurdistan, or Iraq. ROSNEFT has represented that upon completion of the primary terms of its current licenses, each of the subsidiary enterprises intends to continue to extend these licenses until the end of the economic lives of the associated fields, and that they intend to proceed accordingly with development and operation of these fields. Based on these representations and consistent with Russian law, estimates of proved, reserves associated with the fields evaluated herein were not limited by the primary terms of their licenses. Reserves estimated herein are expressed as net reserves attributable to or controlled by ROSNEFT (ROSNEFT net). Gross reserves are defined as the total estimated petroleum remaining to be produced from these fields after December 31, 2021. ROSNEFT net reserves are defined as that portion of the gross reserves attributable to the interests held or controlled by ROSNEFT after deducting all interests held by others and interests, which ROSNEFT does not control. For the Sakhalin-1, Egyptian, Kurdish, and Iraqi PSAs, these reserves are expressed in terms

 

3 DeGolyer and MacNaughton of the barrel equivalent of the cost recovery and profit share (entitlement) after deducting interests held by others. Estimates of reserves should be regarded only as estimates that may change as further production history and additional information become available. Not only are such estimates based on that information which is currently available, but such estimates are also subject to the uncertainties inherent in the application of judgmental factors in interpreting such information. Information used in the preparation of this report was obtained from ROSNEFT. In the preparation of this report we have relied, without independent verification, upon such information furnished by ROSNEFT with respect to the field interests being evaluated, production from such fields, current costs of operation and development, current prices for production, agreements relating to current and future operations and sale of production, and various other information and data that were accepted as represented. A field examination was not considered necessary for the purposes of this report. Definition of Reserves Petroleum reserves estimated by us and included in this report are classified as proved. Only proved reserves have been evaluated for this report. Reserves classifications used by us in this report are in accordance with the reserves definitions of Rules 4–10(a) (1)–(32) of Regulation S–X of the SEC. Reserves are judged to be economically producible in future years from known reservoirs under existing economic and operating conditions and assuming continuation of current regulatory practices using conventional production methods and equipment. In the analyses of production-decline curves, reserves were estimated only to the limit of economic rates of production under existing economic and operating conditions using prices and costs consistent with the effective date of this report, including consideration of changes in existing prices provided only by contractual arrangements but not including escalations based upon future conditions. The petroleum reserves are classified as follows: Proved oil and gas reserves – Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods,

 

4 DeGolyer and MacNaughton and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. (i) The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data. (ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty. (iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty. (iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based;

 

5 DeGolyer and MacNaughton and (B) The project has been approved for development by all necessary parties and entities, including governmental entities. (v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. Developed oil and gas reserves – Developed oil and gas reserves are reserves of any category that can be expected to be recovered: (i) Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and (ii) Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well. Undeveloped oil and gas reserves – Undeveloped oil and gas reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. (i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. (ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time.

 

6 DeGolyer and MacNaughton (iii) Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, as defined in [section 210.4–10 (a) Definitions], or by other evidence using reliable technology establishing reasonable certainty. Methodology and Procedures Estimates of reserves were prepared by the use of appropriate geologic, petroleum engineering, and evaluation principles and techniques that are in accordance with the reserves definitions of Rules 4–10(a) (1)–(32) of Regulation S–X of the SEC and with practices generally recognized by the petroleum industry as presented in the publication of the Society of Petroleum Engineers entitled “Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information (revised June 2019) Approved by the SPE Board on 25 June 2019.” The method or combination of methods used in the analysis of each reservoir was tempered by experience with similar reservoirs, stage of development, quality and completeness of basic data, and production history. Based on the current stage of field development, production performance, the development plans provided by ROSNEFT, and analyses of areas offsetting existing wells with test or production data, reserves were classified as proved. The proved undeveloped reserves estimates were based on opportunities identified in the plan of development provided by ROSNEFT. ROSNEFT has represented that its senior management is committed to the development plan provided by ROSNEFT and that ROSNEFT has the financial capability to execute the development plan, including the drilling and completion of wells and the installation of equipment and facilities. The estimated reserves reported herein are those reserves attributed to the parts of the fields that lie within the license areas in which ROSNEFT or its subsidiary has represented it holds an interest. The volumetric method was used to estimate the original oil in place (OOIP) and the original gas in place (OGIP). Structure maps were prepared to delineate each reservoir, and isopach maps were constructed to estimate reservoir volume. Electrical logs, radioactivity logs, core analyses, and other available data were used to prepare

 

7 DeGolyer and MacNaughton these maps as well as to estimate representative values for porosity and water saturation. Estimates of ultimate recovery were obtained after applying recovery factors to OOIP or OGIP. These recovery factors were based on consideration of the type of energy inherent in the reservoirs, analyses of the petroleum, the structural positions of the fields, and the production histories. For depletion-type reservoirs or those whose performance disclosed a reliable decline in producing-rate trends or other diagnostic characteristics, reserves were estimated by the application of appropriate decline curves or other performance relationships. In the analyses of production-decline curves, reserves were estimated only to the limits of economic production as defined under the Definition of Reserves heading of this report or to the limit of the production licenses as appropriate. In certain cases, reserves were estimated by incorporating elements of analogy with similar wells or reservoirs for which more complete data were available. Data provided by ROSNEFT from wells drilled through December 2021 and made available for this evaluation were used to prepare the reserves estimates herein. These reserves estimates were based on consideration of monthly production data available for certain properties only through June 2021. Estimated cumulative production, as of December 31, 2021, was deducted from the estimated gross ultimate recovery to estimate gross reserves. This required that production be estimated for up to 6 months. Estimates of prices, as of December 31, 2021, were used in calculations to estimate the entitlement reserves for fields in the Sakhalin-1, Egyptian, Kurdish, and Iraqi PSAs. Oil and condensate reserves estimated herein are to be recovered by normal field separation. NGL reserves estimated herein include pentanes and heavier fractions (C5+) and liquefied petroleum gas (LPG), which consists primarily of propane and butane fractions, and are the result of low-temperature plant processing. Oil, condensate, and NGL reserves included in this report are expressed in thousands of barrels (103bbl). In these estimates, 1 barrel equals 42 United States gallons. For reporting purposes, oil and condensate reserves have been estimated separately and are presented herein as a summed quantity. Gas reserves estimated herein are expressed as fuel gas, sales gas, and marketable gas. Fuel gas is that portion of the total volume of gas to be produced from

 

8 DeGolyer and MacNaughton the reservoirs used in the operation of the field. In certain cases, fuel gas also represents the estimated volume of gas utilized in existing and future power-generation plants. ROSNEFT provided information about currently operating and future plants, including a schedule of operation, plant inlet rates, fields associated with each plant, and pertinent economic parameters. Sales gas is defined as the total volume of gas to be produced from the reservoirs, measured at the point of delivery, available for sales, after deduction for fuel usage, flare, and shrinkage resulting from field separation and processing. Marketable gas is defined as the sum of fuel gas and sales gas. The fuel gas reserves included as a portion of ROSNEFT net marketable gas reserves, as of December 31, 2021, are summarized as follows, expressed in millions of cubic feet (106ft3): Fuel Gas Portion of ROSNEFT Net Marketable Gas Reserves (106ft3) Proved Developed 3,016,879 Proved Undeveloped 1,111,278 Total Proved 4,128,157 Gas quantities are expressed at a temperature base of 20 degrees Celsius (°C) and at a pressure base of 1 atmosphere (atm). Gas quantities included in this report are expressed in millions of cubic feet (106ft3). Gas reserves are identified by the type of reservoir from which the gas will be produced. Nonassociated gas is gas at initial reservoir conditions with no oil present in the reservoir. Associated gas is both gas-cap gas and solution gas. Gas-cap gas is gas at initial reservoir conditions and is in communication with an underlying oil zone. Solution gas is gas dissolved in oil at initial reservoir conditions. Gas reserves estimated herein include both associated and nonassociated gas. ROSNEFT has represented that most of gas produced from the fields evaluated herein and located in the Unified gas supply system zone will be delivered to market through the Gazprom Gas Transmission System (GTS). In accordance with Russian Federation Resolution no. 858, dated July 14, 1997, ROSNEFT is entitled to access to the GTS for transportation and delivery of gas. Additionally, Russian Federation Resolution no. 1021, dated December 29, 2000, obligates Gazprom and its affiliates to sell gas, produced by Gazprom and its affiliates, at a price within a range of wholesale prices regulated by the Federal Anti-Monopoly Service with adjustment for the energy

 

9 DeGolyer and MacNaughton value of the gas, and permits Gazprom to collect a service charge for retail distribution. The range of prices is established for each Russian region where the gas is sold. ROSNEFT has represented that all gas not used for fuel will be sold, whether at an agreed-upon contract price or at the lower price associated with gas sales through the GTS. Sales gas reserves have been estimated herein on the basis of these representations. ROSNEFT provided sales gas prices to be used for the estimation of the value of the gas reserves reported herein, and it has represented that these prices are consistent with the conditions described above. Primary Economic Assumptions This report has been prepared using initial prices, expenses, and costs provided by ROSNEFT in Russian rubles (₽) or United States dollars (U.S.$). The netback sales prices of oil, gas, condensate, and NGL were provided by ROSNEFT. The netback price is the price received at the custody transfer point and includes the reductions for appropriate application of export tariff, value-added tax, transportation costs, and other commissions and fees. Future prices were estimated using guidelines established by the SEC and the Financial Accounting Standards Board (FASB). The following economic assumptions were used for estimating the reserves reported herein: Oil and Condensate Prices ROSNEFT has represented that the netback sales prices of oil and condensate were based on a 12-month average price (reference price), calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual agreements. ROSNEFT supplied netback oil and condensate prices based on a Urals reference price of ₽37,277 per metric ton (U.S.$69.23 per barrel). The Urals reference oil price is an average of the Urals (MED) and Urals (Rdam) prices as published in the Platts Oilgram Price Report. For the ROSNEFT Holdings in the Russian Federation (including those in both the Chechen Republic and the Sakhalin-1 Project), the volume-weighted average netback oil and condensate prices over the lives of the fields were U.S.$62.60 per barrel and U.S.$57.39 per barrel, respectively. For the JV holding in Canada, ROSNEFT supplied

 

10 DeGolyer and MacNaughton differentials to an Edmonton Light Oil reference price of U.S.$56.80 per barrel and the prices were held constant thereafter. The volume-weighted average netback oil price over the lives of the fields in the Canadian JV was U.S.$56.80 per barrel. For the PSA holdings in Egypt, ROSNEFT supplied differentials to the Brent oil reference price of U.S.$69.23 per barrel. The volume-weighted average netback price of condensate over the lives of the fields for the Egyptian holdings was U.S.$64.73 per barrel. NGL Prices For the ROSNEFT Holdings in the Russian Federation (including those in the Chechen Republic), the volume-weighted average netback NGL price over the lives of the fields was U.S.$29.90 per barrel. For the JV holding in Canada, ROSNEFT supplied a netback NGL price of U.S.$39.09 per barrel and the prices were held constant thereafter. Gas Prices For the ROSNEFT Holdings in the Russian Federation (including those in both the Chechen Republic and the Sakhalin-1 Project), the volume-weighted average netback price over the lives of the fields was U.S.$1.03 per thousand cubic feet (103ft3). For the JV holding in Canada, ROSNEFT supplied differentials to an Alberta Export Canadian metering outlet (AECO) reference price of U.S.$3.00 per 103ft3 and the prices were held constant thereafter. The volume-weighted average netback gas price over the lives of the fields in the Canadian JV was U.S.$3.00 per 103ft3. For the PSA holdings in Egypt, ROSNEFT has represented that sales gas is priced according to terms of a Gas Sales Agreement. The volume-weighted average netback gas price over the lives of the Egyptian fields was U.S.$5.80 per 103ft3.

 

11 DeGolyer and MacNaughton Expenses and Costs Current expenses and costs, and forecasts of expenses and costs, provided by ROSNEFT were used in estimating future expenditures required to operate the fields. In certain cases, future expenditures, either higher or lower than current expenditures, may have been used because of anticipated changes in operating conditions, but no general escalation that might result from inflation was applied. In our opinion, the information relating to estimated proved reserves of oil, condensate, NGL, and gas contained in this report has been prepared in accordance with Paragraphs 932-235-50-4 and 932-235-50-6 through 932-235-50-9 of the Accounting Standards Update 932-235-50, Extractive Industries – Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures (January 2010) of the FASB and Rules 4–10(a) (1)–(32) of Regulation S–X and Rules 302(b), 1201, 1202(a) (1), (2), (3), (4), (8), and 1203(a) of Regulation S–K of the SEC; provided, however, that (i) estimates of proved developed and proved undeveloped reserves are not presented at the beginning of the year, (ii) certain proved undeveloped reserves are scheduled for development more than 5 years after initial disclosure, and (iii) certain economically producible quantities of reserves beyond the primary term of the current production licenses have been classified as proved reserves in this report based on ROSNEFT’s representation that each of the subsidiary enterprises discussed therein has the ability to and intends to extend the applicable current production licenses to the end of the economic lives of the associated fields and that ROSNEFT believes with reasonable certainty that the inclusion of the reserves and revenue under extended license terms is consistent with SEC regulations. ROSNEFT has represented to us that the Russian Law on Subsoil requires that an operator develop a field according to a development plan that has been submitted to and approved by the appropriate government authority. Once approved, failure to follow the development plan is a violation of the Russian Law on Subsoil and may result in the cancellation of the operator’s production license for the field. Since the implementation of the approved development plan, including that portion that may occur more than 5 years after initial disclosure, is a requirement for maintaining the production license, we have included in certain of our estimates of SEC proved reserves those quantities associated with development activities that are part of the approved development plan and scheduled more than 5 years after initial disclosure. We believe that, since they must be developed to prevent the loss of

 

12 DeGolyer and MacNaughton licenses, there is reasonable certainty that the reserves will be developed. We believe it is reasonable therefore to include these quantities as SEC proved reserves. ROSNEFT has represented to us that the development plans provided to us are in accordance with the approved development plans. We cannot render an opinion regarding the actual possibility that a license will be terminated for failure to follow approved development plans nor an opinion on how many companies have lost their licenses for not following approved development plans. We are not in a position to offer an opinion on the duration of the subsidiary enterprises’ production licenses under the Russian Law on Subsoil, but, in light of the above, believe ROSNEFT’s view on the probability of license extensions to be reasonable, although such view may not be confirmed by the SEC. We believe it is reasonable therefore to include these quantities as SEC proved reserves. To the extent the above-enumerated rules, regulations, and statements require determinations of an accounting or legal nature, we, as engineers, are necessarily unable to express an opinion as to whether the above-described information is in accordance therewith or sufficient therefor.

 

13 DeGolyer and MacNaughton Summary of Conclusions The estimated ROSNEFT net proved reserves, as of December 31, 2021, of the fields evaluated herein were based on the definition of proved reserves of the SEC and are summarized as follows, expressed in thousands of barrels (103bbl) and millions of cubic feet (106ft3): ROSNEFT Net Reserves Rosneft Holdings Reserves Classification Oil and Condensate (103bbl) NGL (103bbl) Marketable Gas (106ft3) Sales Gas (106ft3) Russia Proved Developed 13,554,064 452,827 39,357,513 36,354,933 Proved Undeveloped 11,375,077 184,206 32,860,955 31,757,539 Total Proved 24,929,141 637,033 72,218,468 68,112,472 Canada Proved Developed 231 218 1,560 1,560 Proved Undeveloped 0 0 0 0 Total Proved 231 218 1,560 1,560 Egypt Proved Developed 2,068 0 1,099,935 1,085,636 Proved Undeveloped 1,137 0 604,733 596,871 Total Proved 3,205 0 1,704,668 1,682,507 Kurdistan Proved Developed 3,677 0 0 0 Proved Undeveloped 2,984 0 0 0 Total Proved 6,661 0 0 0 Iraq Proved Developed 0 0 0 0 Proved Undeveloped 0 0 0 0 Total Proved 0 0 0 0 Total Proved Developed 13,560,040 453,045 40,459,008 37,442,129 Proved Undeveloped 11,379,198 184,206 33,465,688 32,354,410 Total Proved 13,560,040 453,045 40,459,008 37,442,129 Note: ROSNEFT has represented that it controls the management of certain of the ROSNEFT Holdings in Russia through various subsidiary enterprises. For those ROSNEFT Holdings controlled by ROSNEFT, 100 percent of the reserves are reported herein as ROSNEFT net reserves and include those reserves not directly held by ROSNEFT.

 

 

 

16 DeGolyer and MacNaughton Thomas D. Scott, Jr., T.P.G., C.P.G. Senior Vice President DeGolyer and MacNaughton Michael A. Eubanks, P.E. Vice President DeGolyer and MacNaughton DeGolyer and MacNaughton is an independent petroleum engineering consulting firm that has been providing petroleum consulting services throughout the world since 1936. DeGolyer and MacNaughton does not have any financial interest, including stock ownership, in ROSNEFT or BP. Our fees were not contingent on the results of our evaluation. This report has been prepared at the request of BP. DeGolyer and MacNaughton has used all assumptions, data, procedures, and methods that it considers necessary and appropriate to prepare this report. Submitted, DeGOLYER and MacNAUGHTON Texas Registered Engineering Firm F-716