On 31 December 1998, BP and Amoco merged and

BP Amoco p.l.c. came into being. This report records

the progress made in our ‘leap’ year.

The goals for the newly merged group, which have

been defined and published, are set out here:

· The world’s need for energy is growing steadily day by day. Energy

and materials, used safely and efficiently, are essential to the prosperity

and growth of every country and every region in the world. Sustaining and

enhancing our quality of life depends on them.

· BP Amoco’s goal is to play a leading role in meeting these needs from oil,

gas, solar power and petrochemicals without damaging the environment.

· Ours is a positive, progressive involvement. Innovation will be the hallmark

of the way we work with people, technology, assets and relationships. We will

always be constructive, using our know-how to produce constructive and

creative solutions to every challenge.

· Our success depends on our making, and being seen to make, a distinctive

contribution to every activity in which we are involved.

BP Amoco is committed to reporting not only its financial

results but also its environmental and social performance.

For a full picture of our performance during the year,

this report should be read in conjunction with the

BP Amoco Environmental and Social Report 1998.

Details are given on page 88.

BP Amoco 1998 1

Welcome to BP Amoco

2 BP Amoco 1998

Dear ShareholderThe proposal in August to merge BP andAmoco was a groundbreaking deal forthe oil industry. Our aim was to create a new ‘super-major’ with significantlygreater competitive strengths than eitherpartner could achieve on its own – aglobal corporation for a global economy.

Naturally this required your approvalas owners. We are delighted that themerger was supported overwhelminglyby both groups of shareholders.

Following approval from regulatorson both sides of the Atlantic, the mergertook effect on 31 December 1998. Wethank our employees for their unstintingeffort which made this possible.

The new BP Amoco ranks in thevery top tier of international energycompanies. We have a world-class set ofassets, including nearly 15 billion barrels

Letter from the co-chairmen

of oil and natural gas reserves. In 1998our combined replacement cost profit before exceptional items was $4 billion.Our market value when the merger wascompleted was $146 billion, placing us among the top 15 companies in the world.

But this alliance was not driven bysize. What drove us was a belief that, by combining our market presence, thetalent of our people, our technologicalexpertise and our access to investmentopportunities, we could achievecontinuing improvements in ourperformance. Simply, we can do moretogether than separately.

The task of combining the skills andstrengths of the two companies is nowwell under way. We have put together a management team that is a superb

mix of people, chosen in a balanced way and reflecting a unique blend of worldwide experience.

We remain committed to actresponsibly and ethically, fostering two-way relationships with localcommunities, customers, contractors,partners, governments and employees.We believe our business should be bothcompetitively successful and a force forgood. To measure our success we willcontinue to set targets, submit the resultsto external verification and publishreports on our progress.

Markets

The decision to merge was taken in ayear when the global markets in whichwe operate could hardly have provedmore difficult or volatile.

profits1998 1997

Replacement cost profitbefore exceptional items $3,999m $6,649m

Replacement cost profitafter exceptional items $4,651m $6,969m

Historical cost profit after exceptional items $3,260m $6,030m

Earnings per ordinary share on replacement cost profit before exceptional items 42 cents 69 cents

external environment1998 1997

BP Amoco average oilrealizationsa $/barrel 12.1 18.3

Indicative global refining margin $/barrel 1.7 1.8

Chemicals integrated margin DM/tonne 812 890a Crude oil and natural gas liquid.

Financial highlights

8

6

2

0

94 95 96

Profit( replacement cost prof i t

before except ional i tems –

$ bi l l ion)

97 98

4

15

10

5

0

94 95 96

Net debt($ bi l l ion – end year)

97 98

40

30

20

10

0

94 95 96

Dividends(cents per share)

97 98

12

0

94 95 9796

Capital expenditure and acquisitions

($ bi l l ion)

98

9

6

3

Co-Chairmen Larry Fuller

(left) and Peter Sutherland

BP Amoco 1998 3

Our brands

Every day BP Amoco serves more than10 million customers across the globe.They have come to recognize and trusttwo of the world’s great brands. Our tasknow is to maximize their value, buildingon the strength they have accumulatedwith consumers over a century. There is much value to be gained by makingthe most of the stronger brand in aparticular territory through our jointdistribution network.

The board

Your board has the task of integratingthe staff and cultures of BP and Amoco– both of which have a long and proudhistory. We believe the board to be abalanced and fair representation of ourcombined strengths. Its members bringus a tremendous wealth of experiencefrom diverse backgrounds.

Sir Patrick Sheehy, Sir James Gloverand Dr Karen Horn retired from BP’s board at the end of December after fourteen, eleven and six yearsrespectively. Donald Beall andMartha Seger left the Amoco board after eight years, while Theodore Solsoand Arthur Martinez retired after twoyears as Amoco directors. Bill Lowrie resigned from the BP Amoco board in February 1999 after 33 years’ servicewith Amoco. We thank them all for theirconsiderable contribution over the years.

Letter from the co-chairmen

4 BP Amoco 1998

The problems in Asia, Russia andLatin America and the associatedturbulence in financial markets did notmake our life any easier. As key parts of the world economy slowed and oil production continued to exceedconsumption, crude oil prices fellsharply – declining by 34% against the previous year. After allowing forinflation, oil prices are now at theirlowest level since 1973.

Such conditions provide a severe testfor our industry and make it essential for BP Amoco to have the strength andflexibility to respond.

It is noteworthy that, in the monthssince we announced our merger, some of our competitors have started on asimilar journey. While this indicates that we have no room to be complacent,it also shows BP Amoco where youwould expect us to be – at the forefrontof change and improvement in ourbusiness.

As always, we need to think clearlyand act quickly to stay ahead of ourrivals. In today’s conditions, they willgive us very little breathing space. We believe that, in an industry that is restructuring and where competition is intense, we have put together one of the strongest participants.

Our task now is to ensure that ournew organization functions effectively.Many past mergers between othercompanies have not been fully effectivebecause of a lack of concern aboutemployee issues.

We are conscious that we have in our new group a uniquely valuableresource base of specialist skills. We are determined fully to tap the talentavailable by empowering our people to maximize their own capabilities.Ultimately, a corporation is dependenton the skills of its people. We believe wehave a winning combination. We shallcontinue to link performance to reward,performance being measured against the market.

Shareholders

We recognize that for you, our investors,the creation of our new group may entailsome initial unfamiliarity with the newreporting and shareholding structure.We believe, however, that BP Amoco isone of the best vehicles in the energybusiness.

As already indicated, we intend tomaintain our dividend policy of aimingto pay out around 50% of our estimatedaverage earnings through the businesscycle. All shareholders received increaseddividends in 1998, reflecting underlyingperformance improvements.

Conclusion

As we approach the new millennium, we find ourselves in a massively changing world economy which offersimmense challenges.

We have much to do to complete the enormous task we began in August –the blending of our talents and resources.There are still changes to implement,some of them asking a great deal fromour employees. But the problems arevastly outweighed by the opportunities,which we are determined to grasp onbehalf of shareholders.

Our pledge is to build a truly globalenterprise of which we can all be proud– one that takes an enlightened approachto public policy issues and continues tofoster a long-term relationship with ourinvestors – a corporation with values,delivering shareholder value.

Shareholder re turns comprise

annual share pr ice movements ,

with div idends re invested, for

investments he ld over the

per iod shown.

Shareholder re turns re la t ive to the

market re f lect the returns generated

above or be low returns f rom

equiva lent investments in the

overa l l market .

This methodology i s used in the

Long Term Per formance Plan

on page 81.

-50 -25 0 25 50

10 years

Shareholderreturns relative to

the market(%)

BP

Shel l

Mobi l

Chevron

Exxon

Texaco

Amoco

Arco

-50 -25 0 25 50 75

5 years

BP

Exxon

Shel l

Amoco

Mobi l

Chevron

Texaco

Arco

-30 -20 -10 0 10 20 30

3 years

BP

Exxon

Shel l

Amoco

Chevron

Texaco

Mobi l

Arco

Larry Fuller Peter Sutherland

Co-Chairmen17 February 1999

BP Amoco 1998 5

1998 was a momentous year for the oil industry, and forBP Amoco in particular

Despite the fact that oil prices ended the

year 34% below their December 1997 level,

we improved our underlying performance

and delivered on our promises. We also

took a crucial first step in the restructuring

of the oil and gas sector.

Group chief executive’s review

6 BP Amoco 1998

The merger of BP and Amoco wasannounced on 11 August, and completedon 31 December. To have secured fullregulatory approval in just 99 workingdays is a tremendous credit to all thoseinvolved and gives us an excellentopportunity to proceed rapidly with the process of integration.

Although the merger creates one of the world’s largest industrialorganizations, we are very aware that size alone is no guarantee of success.

All the available evidence suggeststhat big companies are commonlyregarded with suspicion, and that

mergers are often considered to besimply about the accumulation ofmarket power.

To be acceptable to the consumerand to society in general, mergers mustbe progressive – enhancing rather thanreducing the range of choices available to the customer, by combining the skillsand know-how to achieve things whichneither company could have deliveredon its own. That means we have to listenwith great care and be continuouslyresponsive to the changing pattern of customer needs and desires.

In our sector in particular thechallenge is to ensure that hydrocarbonscan be found, produced, refined,distributed and used without damagingthe natural environment. BP Amoco will aim to provide consumers with the choices that make that aspirationachievable.

Secondly, we have to organize andmanage a huge worldwide company in a way which excites and empowers the

BP Amoco 1998 7

people who work for us. We have toavoid rigidity and bureaucracy andensure that, within clear boundaries andstandards, individuals have the freedomto fulfil their potential and to make a difference.

Empowerment and adopting aprogressive and constructive approachwill help ensure that we can deliver thesustained improvement in performancewhich is the primary objective of themerger. Beyond the gains in terms of cost savings and the elimination ofduplication, the real challenge of anymerger is to use the new combination of people and assets to lift competitiveperformance to a new level. That is our central focus as we begin to plan for the next century, and we will beannouncing detailed targets as we go through 1999.

This report, which draws togetherthe activities of the two companies forthe first time, is an important step in theprocess of integration. As well as settingout the facts, it aims to tell the story ofan exceptional year, and of the peoplewho made that year possible – thepeople who work for BP Amoco. Theyprovided the magic that transformed a difficult year into a year when we made history.

Performance in 1998

The difficulties of the businessenvironment we faced in 1998 can be summed up in a few key statistics:• average realized oil prices fell by 34% from around $18 in 1997 toaround $12 in 1998• refining margins remained low, at under $2 a barrel for the third yearout of the last four• petrochemicals margins fell, in line with the progression of theeconomic cycle.

In the face of such difficulty theresults delivered represent a tremendous

achievement. BP delivered $3.0 billionof replacement cost profit beforeexceptional items, compared with$4.6 billion in 1997. Around $400 millionof the 1998 profit resulted from self-help, with another $100 millioncontributed by Amoco as part of its total profit of $1.0 billion. The self-helpincludes gains in productivity and involume in all our business streams.

BP’s return on capital was 11% – an industry top-tier performance.

BP’s oil and natural gas productionrose by 4%, and seven new developmentscame on stream, including Schiehallion,Loyal and the Eastern Trough AreaProject (ETAP). Amoco’s productionincreased by 3%, with output from LatinAmerica and the North Sea more thanoffsetting declines in the USA.

Amoco’s marketing sales rose by 2%, with a particularly strongperformance in gasoline sales, while the benefits originally foreseen from BP’s refining and marketing jointventure with Mobil in Europe have now been achieved.

In chemicals BP continued to buildnew business activity in Asia, as well asstrengthening leading positions in keycentres such as Grangemouth, Scotland.Amoco’s chemicals business brought on stream major expansions in the USA, further strengthening its globalleadership in core products.

BP’s oil and natural gas productionof 1,606,000 barrels of oil equivalent a day (boe/d) was more than fullyreplaced with new discoveries in Angola and the Gulf of Mexico andimproved recovery in the mature areas of the UK and USA. Further significantdiscoveries in Norway and Venezuela are now under appraisal. Amoco’sproduction of 1,444,000 boe/d wasmore than replaced by new discoveriesand other additions, principally inTrinidad and Egypt.

Group chief executive’s review

8 BP Amoco 1998

The newly merged group

Commitment to performance will be the driving force of the newly mergedgroup.

We start from a position of greatstrength. The merger of BP and Amocohas taken us into the top league of theoil industry. The newly merged group:• has daily production worldwide of 2.0 million barrels of crude oil and5.8 billion cubic feet of natural gas• is the largest producer of oil and gasin the USA and in the UK, producingrespectively 1.25 and 0.74 millionbarrels of oil equivalent a day• has reserves of more than 14.9 billionbarrels of oil and gas equivalent• has 15,500 service stations in theUSA and 11,500 in the rest of the world• has chemicals revenues of $9 billion a year• is one of the world’s leading businessesin photovoltaics and solar power• is founded on a secure base withmore than 70% of its capital invested inthe OECD world – in particular, in theUSA and the UK.

That is a great starting point but, of course, being big is not in itself anadequate response to the challenges we face.

The real value of the merger lies inthe potential it creates. We now have the strength to take substantial positionsin the key resource developments andmarkets of the world and also the abilityto combine our skills and know-how,learning from each other and applying

best practice across the whole of ourcombined asset base.

As we announced in February, we now aim to deliver the $2 billion pre-tax benefits of the merger in arounda year’s time, some nine months earlierthan originally planned. We also expect to bear a substantial part of the costsassociated with this restructuring during1999. These costs are likely to be around$1.5 billion pre-tax.

A dramatic change in corporateorganization is disruptive for everyone.We are determined to make the processof transition as rapid as possible tominimize uncertainty for all ouremployees and their families. By the end of 1998 we had already announcedappointments to more than 2,500 posts.By the end of the first quarter of 1999almost all individual members of staffshould know how they personally areaffected by the merger.

Both within the company andexternally, reaction has been positive.Despite the inevitable personaluncertainties, it is clear that our people seethe merger and the changes it is bringingas a moment of great opportunity. Their attitude is already helping to makeBP Amoco a truly progressive company.

Over the next few months we will bedeveloping our strategy for the combinedbusiness.

As we made clear when the mergerwas announced in August, BP Amocowill operate within a financial frameworkwe believe is prudent and progressive:

• our gearing – the ratio of net debt tonet debt plus equity – will be managedwith a target ceiling of around 30%• our dividend policy – of aiming topay out around 50% of our estimatedaverage earnings through the businesscycle – will be maintained• our net capital expenditure will be setto grow the company, with the objectiveof increasing returns on capital employed.

That financial framework is designed to be robust to a wide range of circumstances and to remain validdespite the difficult external environment.The last year appears to mark a point of discontinuity, with oil prices fallingbelow the range in which they tradedthroughout the last decade.

No one can predict the future but,with our recent experience of weak oilprices, we are taking the precaution ofensuring that new projects are viable at $11 a barrel for Brent crude.

Performance and standards

Our focus will be on performance,measured in terms of costs, return oncapital and growth in earnings per share.Those key measures of performance willform the basis for the remuneration ofall BP Amoco’s senior managers.

Performance against those keyfinancial criteria is imperative but we are determined to demonstrate that wecan simultaneously meet the higheststandard of care in all our dealings.Performance must be indivisible. Society expects a great deal from large

“We have no illusions. the forward but being bigger

from the challenges

BP Amoco 1998 9

and successful companies. To win trustwe have to live up to those expectationsand build a track record of delivery andcontinuous improvement on all therelevant performance measures.

In terms of the standard of care, BPand Amoco have a strong track record.In 1998 we achieved:• a 30% improvement in safety (BP and Amoco)• a 15% fall in hydrocarbon emissionsto air (BP)• a 6% reduction in discharges to water (BP).

Those achievements form the baselinefor BP Amoco.

We are already taking a number offurther steps to demonstrate that oil andnatural gas can be used and producedwithout damaging either people or theenvironment.

During 1998 BP established a long-term target to reduce its emissionsof greenhouse gases by at least 10% from a 1990 baseline in the period up to 2010. We have established a numberof steps to achieve that target, includingan internal emissions trading systemwhich began operating in September last year. As part of the process ofintegration following the merger, both the target and the trading systemare now being extended to all BP Amoco activities.

Reducing emissions is one small but important contribution to thechallenge posed by climate change and global warming.

We believe we can also use our skillsand technology to improve air quality.We believe we can demonstrate that,with modern refining technology anddistribution techniques, it is possible to give consumers a wider and cleanerchoice of fuels.

We will be working in closepartnership with the automotiveindustry to ensure that fuel improvementsmatch the progress being made in vehicletechnology. At the beginning of 1999 we announced a plan to introduce cleanfuels – including unleaded petrol andvery low-sulphur gasoline and diesel – to a group of cities around the world.

That is just the beginning and, aswith carbon dioxide emissions, our aimis to learn from experience and to setourselves progressively higher targetswhich extend and build on these earlysteps as we go into the new century.

Conclusion

BP Amoco has exceptional people atall levels. 1998 showed what they arecapable of achieving.

We improved our competitiveperformance despite all the difficulties of the operating environment.

We maintained a good track recordon safety and environmental protectionin our operations and set ourselves thechallenge of demonstrating that an oil,gas and petrochemicals company canmake a positive contribution to thequality of life without damage to theworld’s natural environment.

And, through the merger, we gaveourselves the opportunity to do more,and the potential to lead the process of change in the industry as a whole.

But we have no illusions. The mergeris a great step forward but being biggerdoes not exempt us from the challengesthe industry faces. Track record isimportant, but we are conscious that we have to keep delivering every year,year in and year out.

1999 shows no signs of being an easy year. Oil prices remain weak, and the development of the world economyremains uncertain.

Our strongest asset in the face ofsuch a tough environment is the qualityof our people. They bring the know-howand the standard of care which give usour reputation. They have built ourtrack record of performance. It is theirability and commitment which convinceme that, if any company can thrive inthese difficult times, it is BP Amoco.

Finally, may I thank you for yourcontinued support, which is crucial to our success and a source of greatencouragement. We will do everythingin our power to ensure that we continueto earn that confidence.

Sir John Browne

Group Chief Executive17 February 1999

merger is a great step does not exempt usthe industry faces”

10 BP Amoco 1998

1st row from leftLightweight production platforms in the North Sea. The British Vigilance approaches the Persian Gulf.2nd row from leftAutomatic card-reader pump at a service station in London.At work on the Ram Powell platform, Gulf of Mexico.Solar-powered service station in Lisbon, Portugal.3rd row from leftDelivering fuel for customers in North America.Change of shift on board a drilling barge during installation at the ETAP field.Engineer at Grangemouth chemicals plant, Scotland, tests valves for leaks.4th row from leftTechnician at the Green Lake chemicals plant, USA.Plotting a course on a BP Amoco tanker.

Never standing still

In a world that never stands still, BP Amoco keeps moving – around the clock, in more than 100 countries across six continents, always setting the pace for change.

On deep-water platforms in the Gulf of Mexico, on board a tanker in the Indian Ocean, at a solar-powered service station in Portugal – BP Amoco people are always at work across an extraordinary breadth of activities.

Together, we produce and move the equivalent of three million barrels of oil every day: energy for light, heat and transport, and chemicals to make everyday products, from fuel additives and food packaging to floppy disks.

We work hard, for all our customers, who demand the best in quality, value and service from BP Amoco.

12 BP Amoco 1998

BP Amoco 1998 13

In mature provinces suchas the North Sea, where wehave a track record reachingback more than 25 years, andAlaska, where we first foundcommercial oil 30 years ago,always doing better means

never being complacent. It meansharnessing advanced technologies to provide more effıcient methods

of recovery.

New fields such as Bruce Phase 2 in theNorth Sea are coming on stream, makingfull use of innovations such as lightweightproduction platforms and advanced seismictechniques to produce oil and natural gas for BP Amoco’s refineries and chemicals sites.

Always doing better

Opposite page The secondphase of the Bruce natural gas field in the North Sea came on stream during 1998.

14 BP Amoco 1998

Keeping in touch

Improving service for our customers means keeping in touch withtheir changing needs. Joint ventures with McDonald’s in the USA,Safeway and Sonae in Europe, and super mall developers Iseya Kosanin Japan are all initiatives that give customers what they want.

From downtown Chicago to downtown Shanghai, BP Amoco serves 10 million customers worldwide every single day.

BP Amoco 1998 15

The service station is where many customers meet BP Amoco face to face. In the USA, where we have 15,500 service stations, in Europe where we are market leaders through our joint venturewith Mobil, even in newer markets such as Poland and China, we are transforming the retail experience.

Faster, fuss-free service for those on the move, in-storebakeries, and now our ‘Split Second’ convenience stores –they all add up to better customer service.

Left Family-friendly service takes on a new meaning at many BP Amoco filling stations.Above We are expanding our retail network in China, where lubricants arealready an important market.

16 BP Amoco 1998

To be competitively successful and aforce for good BP Amoco must giveback more than it takes.

Many local initiatives make a positivedifference.

In Alaska, employees work with children at Young Scientists camps to show them how the oil industryprotects the environment from spills.

Alaska is also the test bed for wastereduction and recycling initiativesdeveloped by a BP Amoco action team.

In Papua New Guinea the focus hasbeen on health. In collaboration withthe World Health Organisation, we set up a vaccination programme that has almost eradicated malaria there.

At the corporate level this enthusiasm to give something back is matched byspecific commitments: • to bring the environmentalmanagement systems of our worldwideoperations in line with internationalcertification standards by the year 2000• to reduce greenhouse gas emissions by 10% based on 1990 levels by 2010 and • to strengthen our position as a leader in alternative energy provision.

Giving back more

Clockwise from topSolar power from BP Amocobrings energy to a remotevillage in the Philippines.Students participate in aBP Amoco-sponsored oil spill clean-up exercise.Huts are sprayed as part of our anti-malaria programme in Papua New Guinea.Our waste reduction project in Alaska is improving the local environment.

Business operating review

18 BP Amoco 1998

Gains in productivity and volume went some way to offset thesedifficulties. Replacement cost profitbefore exceptional items totalled$3,999 million against a combined total for BP and Amoco in 1997 of $6,649 million.

Year on year, refining and marketingoperating profit rose by 12% to$2,564 million. The benefits originallyforeseen from the joint venture withMobil in Europe have now beenachieved. Exploration and production

operating profit fell 50%, after adjusting for net special charges of$485 million, and seven new fields came on stream. Chemicals operatingprofit fell by 30%, after adjusting forspecial items, despite a 3% increase in production.

Capital expenditure in 1998 was$10,362 million. Operating cash flowwas $9,586 million. Net debt increasedto $12,880 million and the net debt to net debt plus equity ratio rose by 2% to 23%.

Exploration and Production

Our upstream business performed well in 1998 in a most difficult environment.Replacement cost operating profit, adjustedfor net special charges, declined by 50%.The special charges of $485 millionprincipally comprised $200 million forthe write-down of the group’s investmentin A O Sidanco and $214 million for theimpairment of the Opon field and powerplant in Colombia. Brent North Sea oilaveraged $6.4 a barrel below the 1997level while North American gas priceswere some 40 cents per thousand cubicfeet below the 1997 average.

Rising production volumes, coupledwith a sustained focus on costs, boostedthis performance. Production grew 3.7%to 3,050,000 barrels of oil equivalent aday. Production of oil, condensate andnatural gas liquid increased by 6.2% to2,049,000 barrels a day, while natural gas production fell 0.9% to 5.8 billionstandard cubic feet a day because of the decline at older UK offshore fields. This decline will be offset in 1999 by a full year’s production from the EasternTrough Area Project (ETAP) field.

This production growth wassupported by strong performance fromour 1997 start-ups, and completion of a large number of new projects in 1998.These included ETAP, Viking Phoenix,Brown and Bruce Phase 2 in the North Sea; Schiehallion and Loyal, west of Shetland; Hugoton natural gasplant in the USA; the second phase ofdevelopment of the Cusiana/Cupiaguaproject in Colombia; and Pedernales phase2 in Venezuela. Start-up of these projectscontributed towards the transfer of1.38 billion barrels of oil equivalent of reserves to developed status.

Amoco has been in Trinidad and Tobago

since 1961, but a series of major discoveries

in recent years has transformed the area’s

prospects. Natural gas production is now set

almost to quadruple to 1.4 billion cubic feet

a year by 2001, representing one-quarter

of BP Amoco’s combined gas production

in 1998.

In 1998 we continued to find big new

offshore fields, including Trinidad and

Tobago’s largest crude oil discovery in

25 years. The 15th find of 21 exploratory wells

drilled in Trinidad in the last five years was

announced in October. During this period we

have discovered 13 trillion cubic feet of natural

gas and more than 300 million barrels of

crude oil and condensate. New seismic

technology has played a key role in this

achievement.

Throughout the year construction work

continued on Atlantic LNG, a $1-billion

liquefied natural gas plant in which we hold

a 34% stake. Scheduled to come on stream

in the second quarter of 1999, this plant will

have an initial production capacity of 3 million

tons of liquefied natural gas, which will be

marketed in the northeastern USA and

in Spain.

The plant will also significantly boost

gas production and sales in Trinidad as part

of our commitment to help diversify the

local economy.

Trinidad: a crown jewel

For all our businesses, 1998 proved one of the toughestoperating environments in recent memory. Average realized oil prices fell by 34% to around $12 a barrel. Refinery marginsremained low at under $2 a barrel, and petrochemicals marginsdeclined in line with the global economic cycle.

BP Amoco 1998 19

Finding and development costsaveraged $4.7 a barrel of oil equivalent,within the targeted range of $4 to $5.Lifting costs averaged $3.2 a barrel of oil equivalent.

Reserve replacement exceededproduction by 32% in 1998, with1,339 million barrels of oil equivalentadded to proved reserves. This was the fifth consecutive year in which we successfully replaced our reserves.Within this growth, natural gas reservereplacement of 244% exceeded oilreserve replacement of 71%.

Discoveries occurred in many parts of the world. Our success in Angolacontinued with new finds in Kissanje,Marimba, Hungo and Dikanza in Block15. Together with previously announceddiscoveries in Block 17, offshore Angolapotential reserves are now estimated atone billion barrels.

In South America, there was asuccessful discovery at the Tropical-1Xwell on the Quiriquire block inVenezuela, in which we have a 45%stake. In Norway, the Barden wellconfirmed significant natural gas reservesin the southern extension of the OrmenLange Dome. Preliminary estimates are in the 7-14 trillion cubic feet range.Other substantial oil and natural gasdiscoveries were made off the coast ofTrinidad and in Egypt, Canada and the USA.

During the year we won somesignificant new business opportunities. In Azerbaijan, we were awarded operatingrights and 15% ownership of the Alov,Araz and Sharg production-sharingagreement. Another deal gave usexploration, development and production-sharing rights in an offshore Caspian

natural gas productionBP Amoco % BP Amoco share

Natural gas interest of production(million cf/d) end-1998 1998 1997

UKBruce 37.0 182 202Village Fields 100.0 153 282West Sole 100.0 102 99Armada 18.2 74 14East Leman 48.4 71 49‘V’ Fields Various 65 69Ravenspurn North 33.5 49 99Miller 40.0 49 72Other Various 513 537

Total UK 1,258 1,423

Rest of Europe Various 200 195

USAColorado Coal Various 172 154Hugoton Various 122 172Moxa Arch Various 110 59New Mexico Coal Various 104 93Red Oak Various 83 92Wamsutter Various 82 80Lower 48 onshore Various 1,070 1,299Alaska Various 10 12Gulf of Mexico Various 568 488

Total USA 2,321 2,449

Canada Various 767 764Trinidad

Flambouyant 100.0 187 121Immortelle 100.0 125 105Other Various 127 104

Australia 16.7 219 202Sharjah

Sajaa 40.0 157 134Other Various 62 97

Other Rest of World Various 164 151

Rest of World 1,808 1,678

Sub-total 5,587 5,745

Associated undertakings(equity interest) Various 221 113

Total BP Amoco 5,808 5,858

cf/d = cubic feet a day. All volumes are net of royalties.

crude oil productionBP Amoco % BP Amoco share

Oil and NGLa interest of production(thousand b/d) end-1998 1998 1997

UKForties 95.4 76 75Magnus 85.0 61 59Harding 70.0 60 50Foinaven 72.0 51 3Other Various 270 250

Total UK 518 437

Rest of Europe Various 105 115

USAPrudhoe Bay 51.2/13.8b 232 266Kuparuk 39.2 92 90Milne Point 91.2 43 40Alaska other Various 87 102Lower 48 onshore Various 262 285Gulf of Mexico Various 117 85

Total USA 833 868

Egypt Various 105 104Canada Various 68 61Colombia 19.0 53 33Trinidad Various 47 48Other Various 112 92

Rest of World 385 338

Sub-total 1,841 1,758

Associated undertakings(equity interest)Abu Dhabi Various 124 118Other Various 84 54

Total BP Amococ 2, 049 1,930

b/d = barrels a day.a Natural gas liquid.b Oil rim/gas cap.c Includes NGL from processing plants in which an ownership

interest is held of 67,000 b/d for 1998 and 42,000 b/d for 1997.

main fields in developmentBP Amoco % interest

Alaska Northstar 98

Gulf of Mexico Diana 33Europa 33Marlin 88Ursa 23

Angola Girassol 17

Azerbaijan Apsheron 34

Egypt HA’PY 29Temsah 25

Trinidad Corallita-Lantana 100

area which includes the Inam geologicalstructure. In Alaska, we added newacreage in August to complement ourexisting strong position, winning morethan 90% of the blocks for which we bid.

In other moves we agreed withSonatrach, the Algerian state oil and gas company, to develop fields in

Business operating review

20 BP Amoco 1998

the In Amenas area of southern Algeria. We signed several new natural gas salesagreements in Egypt to supply the localmarket, including the agreement for the Temsah natural gas field in the NileDelta. As a result of this we achieved sales agreements totalling 250 millioncubic feet of natural gas a day to theEgyptian market.

We are focusing resources on our most promising oil- and natural gas-producing areas. For example,during 1998 a $1.8 billion explorationand production divestment programmein North America was completed, as was the disposal of assets in PapuaNew Guinea.

Advanced and sophisticatedtechnology continued to underpin oursuccesses. Improved sand control duringthe completion of wells in the Troikafield in the Gulf of Mexico resulted inrecord productivity – a technique nowbeing applied elsewhere in the Gulf ofMexico and the North Sea. Our firsttrilateral well delivering 8,000 barrels aday moved ahead at the Wytch Farmfield in southern England. In Alaska, ahorizontal side-track well broke sevenPrudhoe Bay drilling records byintegrating subsurface and drillinginformation more fully.

In 1999, projects coming on streamwill include the Ursa, Europa andMarlin developments in the Gulf ofMexico which are on, or ahead of,schedule, and the Pascagoula natural gas liquid processing plant for deepwaterproduction will begin operations. We also plan to start construction of the Great Yarmouth power plant ineastern England.

Refining and Marketing

1998 was a year of strong performancefor the downstream business. Underlyingperformance delivered replacement cost operating profit of $2,564 million, an increase of 12% over 1997, with a competitive return on fixed assets of 12%. This outcome was achieved in spite of difficult trading conditions,characterized by reduced refiningmargins in the second half of the yearand the impact of economic slowdownin our growth markets.

Marketing volumes rose in spite ofdivestments across both the retail andcommercial segments, with continuedimprovement flowing from our US andEuropean operations. Progress was madein our emerging market businesses suchas Poland, where we have achieved aleading market position. Almost 200new branded sites have now been builtin Poland, Russia, Venezuela, Mexico,China and Japan, with average volumethroughputs significantly higher thanour portfolio average.

The retail business grew fast, withvolumes up 3%. The focus on growingour convenience retailing activity as oneof our key strategic objectives continued.The ‘Split Second’ US convenience store format was rolled out in Atlanta,Philadelphia, Chicago, Denver andsouth Florida, with high customersatisfaction ratings.

As part of the continued drive toimprove the asset base, the BP/Mobiljoint venture and BP Amoco divestedtheir retail networks in Belgium and theCzech Republic respectively.

Our commercial marketing activitiescontinued to deliver strong growth in income with the drive towardscustomer-focused marketing solutions.

The refining business achieved good results despite lower overallmargins. A combination of cost savingsand improved operating efficiencyproduced a significant marginimprovement compared with industrybenchmarks in the USA and Europe.

Major investment in theGrangemouth refinery in Scotland to increase middle distillate yields was completed successfully, while theprogramme to position the Toledo,Ohio, refinery to run on cheaper heavycrudes progressed as planned towardscommissioning in 1999. We alsosuccessfully completed the sale of theLima refinery in Ohio.

Environmental performancecontinues to be an area of focus. As a pilot exercise, 15 retail sites in 10 countries have been enhanced by theinstallation of solar equipment. Lookingto the future, we have formed an alliancewith General Motors to work on the co-development of clean-burning fuelsand advanced engines for use in the nextgeneration of high-mileage vehicles.

During 1998, a new business unitorganization was put in place, focusingon greater accountability for businessunit managers and decreased hierarchy.This contributed substantially toimproved performance and holds great potential for the company.

BP Amoco 1998 21

Chemicals

The benefits of our refashioned marketfocus, long-term investments inadvanced technology and a sustainedassault on costs contributed positively as the external business environmentdeteriorated. Replacement cost operatingprofit totalled $1,100 million.

Market pressures reduced marginsfor most commodity chemicals. Thissituation was exacerbated by the Asianfinancial crisis and weak demand inEurope. To help offset these developmentswe continued to focus on self-helpinitiatives. The total volume of productmanufactured rose by 3% in the year,principally reflecting our styrenicsacquisition in early 1998.

A number of new projectsunderlined our determination to investfor the future and achieve a world-scalecompetitive position.

We announced $825 million of newinvestment in chemicals manufacturingin the UK as part of our drive to boostthe competitiveness of our chemicalsbusiness and integrate it more fully into group activities. In Belgium wecompleted construction of a 500,000tonnes a year purified terephthalic acid(PTA) unit at Geel, continued work on a new 420,000 tonnes per year paraxylene(PX) unit, also at Geel, and announcedplans to increase production of linearalpha-olefins at Feluy by 50% in thesecond quarter of 1999.

A new metaxylene plant wascompleted in the USA at Texas City, and we began constructing a world-scale butanediol plant at Lima, Ohio.Work also started on a $10 milliondemonstration unit for our proprietary

In 1998 we created a joint venture company

to manage shipping operations connected

with the transportation of Alaskan crude oil

to customers in the western USA and in

North East Asia. The project will allow closer

management of vessels and the establishment

of a single set of performance standards.

Business is built on relationships, and

this joint venture – one among hundreds –

highlights the key role that partnerships

and alliances with organizations across the

business and social spectrum are now playing

in our global group-wide activities.

Today BP Amoco works with a diverse

set of companies. On the retail side, we have

close relationships with McDonald’s fast food

chain in the USA, Bovis construction company

within Europe, Safeway supermarkets in the

UK and the Iseya Kosan super mall developer

in Japan.

In exploration and production our

partners include Shell and Exxon in the Gulf

of Mexico, Statoil in the North Sea, Azerbaijan

and Angola, Repsol in Trinidad and Tobago,

and Northstar Energy in Canada.

A pan-European downstream venture

joins us with Mobil, while a technology project

partners us with oil services firm Schlumberger.

Constructive dialogue takes place with

a range of non-governmental organizations,

including Amnesty International, Christian Aid,

Friends of the Earth, Greenpeace, Human

Rights Watch, Oxfam, Save the Children

Fund and the World Wide Fund for Nature.

In February 1998 we announced an

agreement with General Motors which will

prepare the way for the next generation of

clean fuels. Later in 1998 we unveiled the

new BP Amoco Institute at the University of

Cambridge which will research science basic

to our industry. In September we launched

an internal trading system – created with

considerable help from the US-based

Environmental Defense Fund – to reduce

our greenhouse gas emissions.

Such wide-ranging relationships inject

new ideas into our operations, challenge the

status quo and have become integral to the

flexible, open way we seek to do business.

The power of working with others

Business operating review

22 BP Amoco 1998

petrochemicals intermediates. Ourtechnology alliance with a team ofscientists at Imperial College, Universityof London, led to the discovery of a new family of catalysts which in the long term could radically change therange of materials available from thepolymerization of olefins.

New projects worth $825 million announced

during 1998 signalled our continued

determination to transform the Grangemouth

facility in Scotland into one of the most

cost-efficient, environmentally responsible

petrochemicals complexes in Europe.

In April we announced the construction

of two world-class polymer plants and a

warehousing, packaging and distribution

facility with a combined investment of

$325 million. Designed to be the lowest-cost

producer in Europe, the polypropylene plant

will come on stream at the end of 1999.

The polyethylene plant, due to be completed

in 2000, will have the flexibility to change its

product mix to meet market demand.

In November three further projects

were announced, representing $500 million

of investment. The main venture will raise

ethylene capacity at Grangemouth to more

than one million tonnes a year by early 2001,

with a new ethanol plant designed to process

part of the additional output.

In addition an existing ethylene pipeline

from Grangemouth to Teesside will be

extended to Hull. Vinyl acetate monomer and

ethyl acetate plants will be constructed as

part of this programme, enabling our plants

at both Grangemouth and Hull to benefit

from close integration with North Sea liquid

gas feedstocks and new technologies.

The new projects at Grangemouth will

capitalize on the $1.6 billion invested across

the complex since 1990. With increasing

quantities of feedstocks available from the

North Sea, the 700-hectare complex is well

on the way to becoming one of Europe’s

most integrated and technologically advanced

petrochemicals sites.

single on-shore investment in thecountry. Elsewhere in China, we reachedagreement to supply technology andbasic engineering for an expandablepolystyrene plant being designed in Dalian.

New technologies announced orprogressed during the year included a new method of manufacturing vinylacetate monomer, one of the world’smost versatile and widely used

propane-to-acrylonitrile process at Green Lake, Texas. The unit is expectedto become operational in the second half of 1999.

Our commitment to long-termgrowth was underlined by three otherNorth American projects. We completedthe refurbishment and expansion of our PX unit at Decatur, Alabama, andpressed ahead with a polypropyleneexpansion at the Chocolate Bayou plantnear Alvin, Texas.

In other developments, we continuedto shift the core of our business towardspetrochemicals manufacturing. InFebruary we completed the purchase of Styrenix Kunststoffe, a styrene plasticsbusiness based in Germany. Divestmentsincluded the Adibis lubricants and fuel additives business and specialitychemicals distribution businesses in Europe and Australasia.

Among important marketingdevelopments, we formed an alliancewith DuPont Packaging and IndustrialPolymers to supply the European pipe-coating market. In Egypt we won acontract to supply Innovene technologyto boost the capacity of the country’sfirst polyethylene plant. A new jointventure with Sterling Chemicals willservice the acrylonitrile marketingoperations of both partners in Asia and South America.

In China an acetic acid plant was completed at Chongquin andcommissioned late in 1998. China’sbiggest operational chemicals jointventure, it is also BP Amoco’s largest

Grangemouth: an ideal site

BP Amoco 1998 23

Solar energy

Revenues for BP Solar, excluding Solarex,continued an unbroken run of 17 yearsof growth in 1998 as sales reached$95 million. Production for the yearoverall grew 18% to 13.2 megawatts,rising towards the end of 1998 ascapacity increases at our manufacturingfacility in Spain came on line.

BP Solar enhanced its reputation asan industry leader in May when it built a Solar Showcase unit for the opening of the G8 heads of government summitmeeting in Birmingham, England. Theshowcase was visited by 25,000 people,including British prime minister TonyBlair and US first lady Hillary Clinton.

Commercial highlights includedparticipation in the one megawatt solarsuburb near Utrecht, Netherlands.Technical milestones included thesuccessful launch of the Euclidesconcentrator project in Spain.

Solarex is a 50/50 joint ventureestablished between Amoco and Enron Corporation.

During 1998 the business had salesof $58 million. This represented unitgrowth of 15% over 1997.

Significant progress was made on the introduction of the new Millenniaamorphous silicon module, the world’sfirst large-area, monolithic double-junction thin-film module. The moduleswere used in grid-connected solar systemsinstalled in Japan, Germany, Sweden and the USA.

Everyone who works for BP Amoco

contributes to our success and to making

our company distinctive, not just in the

performance we achieve but also in the ways

we work together and with others. We want

BP Amoco to be a company that attracts the

best people, regardless of their background,

beliefs or lifestyle. It is the application of their

diverse skills and talents that will create a

successful future for our business.

Our goal is that everyone in the company

should understand what makes our business

successful and should share in that success.

Information about our company, its plans

and business performance is shared with

employees in a variety of ways. Employee

Consultation Councils are active throughout

our European operations. Together with team

briefings, presentations and regular employee

communications, this process ensures that

our employees have the opportunity to be

informed and to express their viewpoint.

We encourage employees to become

shareholders and participate in our employee

share ownership schemes. We are committed

to providing a working environment in which

everyone is treated fairly, has the assurance

of protection against any form of harassment

or unlawful discrimination, and is able to

compete openly for posts on the basis

of merit.

People matter

Solarex polycrystalline roofintegrated modules were incorporatedinto the new Hybrid Z house, anelectricity-neutral structure beingmarketed successfully by the leadingsolar house builder in Japan.

Environmental and social review

24 BP Amoco 1998

High standards of environmental andsocial performance are also integral tothe business performance of BP Amoco.Our commitment to these standards isset out in a new statement of businesspolicies, published in February 1999. It covers ethical conduct, employees,relationships, and finance and control, in addition to HSE.

Both BP and Amoco have producedenvironmental reports for many years. In 1998 BP published a social report aswell. This summarized the company’scommunity investment programmesaround the world and set out ourapproach to other aspects of socialperformance, including theimplementation of our business policiesand an analysis of the social impact of our activities.

BP Amoco’s new policies, our HSErecord and our social performancemanagement last year will be covered ina combined Environmental and SocialReport, to be published later in 1999.This report will demonstrate how we are responding to suggestions receivedlast year on ways to improve transparencystill further in these areas of ourperformance. The report will includeindependent commentary from thirdparties on the environmental and socialperformance of the operations featuredand a separate element of independentattestation.

Managing our environmental and social performance, as well asmonitoring and improving our safetyand health record, calls for measurementof our behaviour, assessment of ourimpact on society and analysis of oursocial contribution, which may includeskills and technology transfer in additionto community programmes.

In terms of HSE management, we have adopted a unified system whichis being applied at all operating sitesowned or controlled by BP Amocoaround the world. The system combinesthe best of BP and Amoco past practicesto create an integrated single systemwhich we believe is better than either ofits predecessors. Detailed risk assessmentand appropriate management responsesare now being implemented at every site.

Other developments made 1998 a momentous year for us.

In September BP announced itsintention to reduce its greenhouse gasemissions by 10% based on 1990 levelsby 2010 – a commitment now extendedto BP Amoco. At the same time we beganour pioneering emissions trading systemto demonstrate how market mechanismscan be used to achieve reductions cost-effectively.

Our commitment to activeinvolvement in the public discussion ofenvironmental issues saw us representedat the 1998 United Nations climate

change conference in Buenos Aires. We actively contribute to policydevelopment in market-based initiativessuch as the Clean DevelopmentMechanism. We created a climatechange game on CD-ROM which allows participants to explore the inter-relationships associated with climatechange policy-making.

During 1998 we held a Social Forumfor the first time alongside our well-established HSE Forum to enable groupsand individuals concerned with ethicaland social issues to discuss these matterswith senior management. This meetingwas a further demonstration of ourcommitment to greater transparency and openness in these areas.

Investing in the future and improvingthe quality of life where we operate

Since the Bulwer Island refinery was

constructed in 1965 on reclaimed land

near the mouth of the Brisbane River in

Queensland, Australia, minimizing its impact

on the fragile bayside environment has always

been important.

Committed since the mid-1990s to

upgrade discharge limits, the refinery has

initiated an imaginative phased project in the

last two years to improve its effluent pond

system and construct new wildlife wetlands.

Earthworks allowing for different water depths

have been built, and 17,000 seedlings planted.

Much of this activity has been undertaken

in collaboration with the local community.

Volunteers planted the seedlings while

technical advice was provided by the

environmental engineering department

at the University of Queensland.

Bulwer IslandFrom the first day of the merged group we have adopted clear goals based on best past practices. Stated simply, ourobjectives are: no accidents, no harm to people and no damageto the environment. The close alignment between the health,safety and environment (HSE) goals of BP and Amoco made this a straightforward exercise.

BP Amoco 1998 25

remain key aspects of our businessactivities. A special annexe to ourEnvironmental and Social Report thisyear will document many of theseprogrammes.

Examples of these activities rangefrom road safety campaigning – aconsistent theme in many countrieswhere we operate – to biodiversityconservation programmes andeducational support schemes. In the UK we celebrated the 30th anniversaryof the pioneering BP Schools Linkscheme during 1998, while elsewhereactivities ranged from the opening of a Young Ecologists Club at MoscowState University’s Botanical Gardens tobringing electricity to a remote village in the Sahara desert using our own solarpower technology.

Meanwhile the Amoco Foundation,based in Chicago, supported communityprogrammes in 30 countries. Among itsnew commitments in 1998 were supportfor disaster relief in the southern USAfollowing Hurricane Georges, a daycarecentre for disabled children in Malaysiaand a wetland area for wildlife alongsidea gas processing plant in Teesside,England.

In one of Chicago’s most under-privileged areas, the Foundation’s ‘Rootsto Wings’ tutoring and mentoringprogramme – designed to reduce schooldrop-out rates by improving theacademic and social skills of under-achieving students – continued to makeprogress. Since its inception in 1995 ithas helped nearly 900 children. Anevaluation in 1998 by the University ofIllinois showed a marked improvementin participants’ mathematical andreading skills.

Our HSE performance reflected asustained commitment to aim for thehighest standards. Operationally, wereduced hydrocarbon emissions to air by 15%, while discharges to water fell by 6%. Carbon dioxide emissionsremained constant. The safetyperformance of our workforce(employees and contractors) improvedby 30%, but we are disappointed thatthe number of oil spills increased by20%. Programmes to address oil spillreduction are in place.

In 1999 we intend to build on the strength of our commitment to excellence in HSE performance andsupport for the communities in whichwe operate.

HSE performance highlights1998a 1997

Safety recordb

Days away from work case frequencyEmployees 0.18 0.24c

Contractors 0.38 0.56c

Total workforce 0.27 0.39c

Environmentd

Hydrocarbon emissions to air (’000 tonnes) 266 313

Discharges to water(’000 tonnes) 10.1 10.7

Oil spills(number over 1 barrel)e 329 275

Carbon dioxide emissions(million tonnes)f 39 39a Provisional data. Finalized data will be published in the

BP Amoco Environmental and Social Report 1998.b Safety data is for BP Amoco. An injury or illness that results

in a person being unable to work for a day (shift) or more data is based on lost-time illnesses and injuries.The frequency is per 200,000 hours.

c Data for BP Amoco.d Environmental data for sites operated by BP only. 1997 data as

reported in BP HSE Facts 1997.e 1 barrel = 159 litres.f 100% direct emissions from operated sites.

community expenditurea

($ million) 1998

By regionUK 12.2(UK charities 5.1)Rest of Europe 2.6USA 37.0Rest of World 13.1

Total 64.9b

By themeCommunity development 15.8Education 14.6Environment 6.1Arts and culture 13.6Other 14.8

Total 64.9b

a Excludes BP Amoco’s operating costs and its own environmentalexpenditure, detailed on page 31 and fully reported in theBP Amoco Environmental and Social Report 1998.

b Includes Amoco Foundation expenditure of $23.4 million.

During 1998 work began on a scheme

to improve the wastewater system at Bulwer

Island. After planting 5,000 native trees and

shrubs, this will eventually create further

habitat.

Already the sub-tropical wetlands are

home to some 90 species of birds, and

visitors have come from all over Australia

and South East Asia to see how industry

and the environment can coexist and create

benefits for all.

Financial review

26 BP Amoco 1998

BP Amoco’s operations are substantiallyUS dollar-based. To reflect this, thereporting currency of the group has beenchanged to the US dollar. Financialinformation for all periods presented isshown in US dollars.

1998 financial performance remainedrobust in spite of general price deflationand margin erosion, with a 34% fall inaverage oil realizations and deteriorationin both the downstream and chemicals environments. Productivityimprovements, cost savings and highersales volumes provided some offset tothis significant downturn.

Replacement cost operating profitwas $6,437 million. Replacement costprofit before exceptional items was$3,999 million, 34% lower than a yearago after adjusting for net special charges.These amounted to $469 million aftertax (1997 $106 million), principally in respect of asset impairments. 1998results reflect the new requirement tocapitalize certain information technologyexpenditure which had been expensed in previous years. The return on averagecapital employed was 9%.

The US dollar was relatively stableagainst European currencies in 1998.

Exceptional items of $850 millionbefore tax (1997 $511 million) relatedmainly to disposal profits, including salesof exploration and production propertiesin the USA and Papua New Guinea, the refinery in Lima, Ohio, and the saleand leaseback of the Amoco building inChicago. These were partially offset by$198 million of merger transaction costsin respect of advisers’ fees and expenses.

Interest expense was $1,053 millioncompared with $908 million in 1997.The increase reflects higher average debt, partly offset by lower interest rates.

Corporate tax expense was $1,520 million (1997 $3,066 million),representing an effective tax rate on replacement cost profit beforeexceptional items of 25%, comparedwith 30% in the previous year, reflectingthe effects of tax relief on higher stockholding losses and timing benefits. Thisrate is likely to rise in the future as theseeffects are expected to be less marked.

Historical cost profit was$3,260 million, after the net exceptionalprofit of $652 million and stock holding losses of $1,391 million. The corresponding figures for 1997 were $6,030 million, $320 million and $939 million respectively.

Capital expenditure and acquisitionsamounted to $10,362 million, 9% downon 1997. Expenditure in 1998 includedthe acquisition of Styrenix Kunststoffe, a plastics business in Germany. In 1997expenditure included the acquisition of interests in A O Sidanco in Russia, Pan American Energy in Argentina and Empresa Petrolera Chaco in Bolivia. Capital expenditure net of divestments was $8,195 million (1997 $9,588 million). Expenditure in 1999 is likely to be around $7 billion,reflecting increased focus in the capitalprogramme.

Net cash flow for the year was anoutflow of $906 million, compared withan inflow of $878 million in 1997.The change reflects lower operating cashflow resulting from lower income andhigher working capital requirements,partially offset by a turnaround in thefunding position of the BP/Mobil jointventure, lower net capital expenditureand lower tax payments.

The merger between BP and Amoco became effective on 31 December 1998, resulting in the company being owned 60%by former BP shareholders and 40% by former Amoco stockholders. Consequently, the financial and operating informationand commentaries for 1998 and earlier periods are presented for BP Amoco on a combined basis. The separate results of each company are shown in Note 45 on the Accounts.

12

9

6

3

0

94 95 96

Capitalexpenditure and

acquisitions($ bi l l ion)

■ Explorat ion and Product ion

■ Ref ining and Market ing

■ Chemica l s

■ Other bus inesses

and corporate

97 98

BP Amoco 1998 27

The group’s net debt, that is debt less cash and liquid resources, was$12,880 million at the end of 1998, anincrease of $1,425 million over the year.The ratio of net debt to net debt plusequity was 23% compared with 21% a year ago. We expect to keep this ratiobelow a target ceiling of 30%.

Dividends

The total dividends in 1998 were $4,121 million, against $3,452 millionin 1997.

The company intends to announcedividends in the future with a payoutaround 50% of our estimated averageearnings through the business cycle.Underlying performance improvementswill underpin increases in the dividend.

During 1998 BP announced thetermination of its share dividend planowing to the abolition of UK AdvanceCorporation Tax. For those ordinaryshareholders who wish to continuetaking their dividend in the form of shares this is being replaced by a Dividend Reinvestment Plan (DRIP)with effect from the payment on 6 April1999. The BP Amoco Direct Access Planfor US and Canadian investors alsoincludes a dividend reinvestment feature.

15

10

5

0

94 95 96

Return on averagecapital employed

(%)

Based on replacement cost

prof i t before except ional

i tems.

97 98

80

60

40

20

0

94 95 96

Earnings anddividends per share

(cents)

Earnings per share on

replacement cost prof i t before

except ional i tems.

■ Earnings per share

■ Div idends per share

97 98

15

10

5

0

94 95 96

Net debt($ bi l l ion – end year)

97 98

financial highlights($ million) 1998 1997

Replacement cost operating profit 6,437 10,583

Replacement cost profit before exceptional items 3,999 6,649

Historical cost profit after exceptional items 3,260 6,030

Capital expenditure 10,362 11,420

Dividends (cents per share) 39.5 36.0

Dividends (pence per share) 23.869 22.0

Financial review

28 BP Amoco 1998

Share purchases

At the April 1998 annual generalmeeting, BP shareholders gave authorityfor the directors to repurchase up to 5%of the company’s ordinary share capitalfor cancellation. Prior to the completionof the merger with Amoco the boardresolved not to exercise this authority.

During 1998 BP completed itsprogramme to buy shares in the marketto the value of $500 million to meetfuture obligations under employee share schemes.

Amoco began a two-year, $2 billionstock repurchase programme in 1997which was terminated as a result of themerger. In 1998, 13.8 million shares ofcommon stock were repurchased andcancelled at a cost of $584 million.

Creditor payment policy

and practice

Statutory regulations issued under the UKCompanies Act 1985 require companiesto make a statement of their policy andpractice in respect of the payment oftrade creditors. BP Amoco p.l.c. is aholding company with no businessactivity other than the holding ofinvestments in the BP Amoco group and therefore had no trade creditors at 31 December 1998.

In view of the international nature of the group’s operations there is nospecific group-wide policy in respect of payments to suppliers. Relationshipswith suppliers are, however, governed bythe group’s policy commitment to long-term relationships founded on trust andmutual advantage. Within this overallpolicy, individual operating companiesare responsible for agreeing terms andconditions for their business transactionsand ensuring that suppliers are aware ofthe terms of payment. These terms areadhered to when payments are made,subject to the terms and conditionsbeing met by the supplier.

Internal financial control

Throughout 1998, BP and Amoco wereowned and managed separately. Eachcompany had a process for internalfinancial control, for which its directorswere responsible. The following generaldescription of BP Amoco’s ongoinginternal financial control reflects theprocesses operated by BP and Amocoduring 1998.

The process for internal financialcontrol has been designed to allow theboard to monitor the group’s overallfinancial position and to help protect itsassets. Its purpose is to give reasonableassurance against material financial

misstatement or loss. It cannot, however,provide absolute assurance. The directorsare responsible for this process, andappropriate authorities and guidelinesare in place.

The board approves the aggregatefinancial framework and performancetargets within which the executive hasbeen delegated authority to operate andformulate the component financialobjectives for individual operating units.Performance against these targets isreported quarterly and variancesanalysed. Financial forecasts are reviewedregularly and include analyses of materialsensitivities and changes.

BP Amoco’s policy on businessconduct, which covers ethical behaviour,compliance with legislation and soundaccounting practice, underpins theinternal financial control process. It isreinforced by an annual compliancecertification process throughout the group.

The Audit Committee reviews theeffectiveness of internal financial controlwith management and with internal andexternal auditors and reports on it to the board.

The directors consider that the BPand Amoco processes fulfilled theirpurpose in 1998.

Financial risk management

Fluctuations in exchange rates can have significant effects on BP Amoco’soperating results. The effects of mostexchange rate fluctuations are subsumedwithin business operating results throughchanging cost competitiveness, lags inmarket adjustment to movements inrates, and conversion differencesaccounted on specific transactions. Forthis reason the total effect of exchangerate fluctuations is not identifiableseparately in the group’s reported results.

The underlying economic currencyof the group’s cash flows is mainly theUS dollar. Our foreign exchangemanagement policy is to minimizeeconomic and material transactionalexposures from currency movementsagainst the US dollar. Wherever possible,BP Amoco nets exposures using naturaloffsets to reduce foreign exchange risk.Significant residual non-dollar exposuresare managed using a range of derivatives.In addition, most of the group’sborrowings are in US dollars, are hedgedwith respect to the US dollar, or areswapped into dollars where this achievesa lower cost of financing.

BP Amoco is exposed to market risksarising from the group’s normal businessactivities. Market risk is the possibilitythat changes in interest rates, currencyexchange rates or commodity prices will

adversely affect the value of the group’sfinancial assets, liabilities or expectedfuture cash flows. These risks aremanaged using a range of financial andcommodity instruments includingderivatives. We also trade derivatives inconjunction with these risk managementactivities.

BP Amoco is exposed to interest raterisk on short- and long-term floating rate instruments and as a result of therefinancing of fixed rate instrumentsincluded in the group’s finance debt.Consequently, as well as managing the currency and the maturity of debt,BP Amoco manages interest coststhrough the balance between lower-costfloating rate debt, which has inherentlyhigher risk, and more expensive, butlower-risk, fixed rate debt. The group is exposed predominantly to US dollarLIBOR (London Inter-Bank Offer Rate)interest rates as borrowings are mainlydenominated in, or are swapped into,US dollars.

Historically BP has used derivativesto achieve the required mix betweenfixed and floating rate debt. AlthoughAmoco was authorized to use derivativefinancial instruments as an additionaltool in this regard, no derivatives havebeen used. During 1998 BP’s upper limitfor the proportion of floating rate debt

was 65% of total net debt while Amoco’s upper limit was 60% of totaldebt outstanding. An appropriatestrategy for managing the interest raterisk of the new group is currently being formulated.

The group’s oil trading division uses financial and commodity derivativesas part of the overall optimization of the value of the group’s equity oilproduction and as part of the associatedtrading of crude oil, products and related instruments. The group also usesfinancial and commodity derivatives tomanage certain of its exposures to pricefluctuations on natural gas transactions.

In risk management and trading,only well-understood conventionalderivative instruments are used. Theseinclude futures and options traded onregulated exchanges, and ‘over-the-counter’ swaps, options and forwardcontracts.

Where derivatives constitute a hedge,the group’s exposure to market riskcreated by the derivative is offset by theopposite exposure arising from the asset,liability or transaction being hedged. By contrast, where derivatives are heldfor trading purposes, changes in marketrisk factors give rise to realized andunrealized gains and losses, which arerecognized in the current period.

BP Amoco 1998 29

Financial review

30 BP Amoco 1998

All material derivatives activity,whether for risk management or trading,is carried out by specialist teams whichhave the appropriate skills, experienceand supervision. These teams are subjectto close financial and managementcontrol, meeting generally acceptedindustry practice and reflecting theprinciples of the Group of Thirty GlobalDerivatives Study recommendations. Anindependent control function monitorscompliance with BP Amoco’s derivativemanagement policies. The controlframework includes prescribed tradinglimits that are reviewed regularly bysenior management, daily monitoring ofrisk exposure, marking trading exposuresto market and reviewing open positionsto assess BP Amoco’s exposure inpotentially adverse situations. Counter-party credit validation, independent of the dealers, is undertaken beforecontractual commitment.

Further details of BP Amoco’s use of derivatives appear in Note 26 on theAccounts, pages 48 and 49.

Insurance

Although practice differed in certainrespects between BP and Amoco in1998, the combined group will generallyrestrict its purchase of insurance tosituations where this is required for legalor contractual reasons. This is becauseexternal insurance is not consideredeconomic for BP Amoco. Losses willtherefore be borne as they arise, ratherthan being spread over time throughinsurance premia. The position will be reviewed each year.

Millennium IT risk

The Year 2000 issue, which stems from computer programs written usingtwo digits rather than four to define the applicable year, could result inprocessing faults on the change ofcentury, producing a wide range ofconsequences.

BP Amoco has conducted a risk-based review of its computer systems andcomputer-controlled processes and hasdeveloped plans to remediate potentialYear 2000-related faults by replacementor repair. The project is designed tominimize risks arising from the Year2000 problem which might endangerhealth, safety, the environment, thegroup’s reputation or its cash flow.

The group’s Year 2000 programmecovers IT application systems andinfrastructure, process control systemsand embedded microprocessors inplants, oil and gas fields and buildingfacilities, and an assessment of Year 2000readiness of critical suppliers, customers,joint venturers and partners.

The group has completed theinventory and risk analysis work, and a substantial part of the remediation and testing effort is also complete.Outstanding remediation dependent on planned plant shutdowns and otherremediation work consisting mainly of implementation of package softwarereleases are scheduled for completion by mid-1999. Systems rationalizationand organizational restructuring madenecessary by the BP Amoco merger arebeing managed to avoid any risks whichmight reduce the group’s ability to meet2000 with confidence.

To meet any unexpected failure by the group’s systems or by key thirdparties, contingency plans are beingdeveloped to deliver a flexible response,especially in the first days of 2000. Thegroup’s global operations will, however,remain exposed, to an unquantifiabledegree, to the failure of third parties to deal with their Year 2000 exposures;we will take all practical steps to mitigatethe effect.

BP Amoco 1998 31

The estimated total cost ofBP Amoco’s Year 2000 programme isapproximately $300 million. To date$210 million has been incurred and thebalance will be spent in 1999. Thesecosts are charged against income in theperiod in which they are incurred.

The euro

BP Amoco had adapted its commercialand financial processes so that itsEuropean operations were able toundertake transactions in the euro andcapture competitive advantages offeredby the new currency from 1 January1999. The currency of accountingrecords and the related systems will be converted as appropriate during the transition period, which ends on 1 January 2002. The capability toconduct business in national currencieswill be retained as long as necessary. The costs associated with these changesare estimated at $100 million, of whichsome $20 million had been incurred and expensed by the end of 1998.

Environmental expenditure

Operating and capital expenditure onthe prevention, control, abatement orelimination of air, water and solid wastepollution is often not incurred as aseparately identifiable transaction.Instead, it forms part of a largertransaction which includes, for example,normal maintenance expenditure. Thefigures for environmental operating andcapital expenditure in the table aretherefore estimates, based on thedefinitions and guidelines of theAmerican Petroleum Institute.

Operating and capital environmentalexpenditure and amounts spent onclean-ups was at much the same level asin 1997 and similar levels of operatingand capital expenditure are expected in the foreseeable future. In addition to operating and capital expenditure, the table shows the charges to currentprofits to create provisions for futureenvironmental remediation. Expenditureagainst such provisions is normallyincurred in subsequent periods and isnot included in environmental operatingexpenditure reported for such periods.

Provisions for environmentalremediation are made when a clean-up is probable and the amount reasonablydeterminable. Generally, their timingcoincides with commitment to a formalplan of action or, if earlier, on divestmentor on closure of inactive sites.

The extent and cost of futureremediation programmes are inherentlydifficult to estimate. They depend on the

scale of any possible contamination, thetiming and extent of corrective actions,and also BP Amoco’s share of theliability. Although the cost of any futureremediation could be significant, andmay be material to the result ofoperations in the period in which it is recognized, we do not expect that such costs will have a material effect on BP Amoco’s financial position orliquidity. We believe our provisions aresufficient for known requirements; andwe do not believe that our costs willdiffer significantly from those of othercompanies engaged in similar industriesor that our competitive position will beadversely affected as a result.

In addition, we make provisions over the useful lives of our oil- and gas-producing assets and relatedpipelines to meet the cost of eventualdecommissioning. The charge fordecommissioning made in 1998 isshown in the table and further details ofour environmental and decommissioningprovisions appear in Note 25 on theAccounts on page 48.

environmental expenditure($ million) 1998 1997

Operating expenditure 539 477

Capital expenditure 426 376

Clean-ups 129 129

Charge for environmental remediation 13 (21)a

Charge for decommissioning 130 162a Including write-back of Lavéra environmental provision.