15 May 2008

1. 15 May 2008 Asset-Liability Study:Summary ReportBP Canada Energy Company Employees’ Pension Plan – DB Portion David Zanutto, CFA, FSA, FCIADave Makarchuk, FSA, FCIA

2. Agenda • Objectives and Process • Liability Benchmark Portfolio and Efficient Frontier Analysis • ALM Projection Results – Going-Concern Liabilities • ALM Projection Results – Deterministic • ALM Projection Results – Stochastic • Recommendations Appendix A – Capital Market Assumptions Appendix B – Projection Modeling Parameters Appendix C – Asset Allocation Within Equities Appendix D – Asset Allocation Over Time Appendix E – Peer Group Practices

3. Objectives and Process

4. High Level Objectives of the ALM Study • Review and establish a long-term strategic asset mix policy which strikes an appropriate balance between the desire for higher returns (leading to lower contributions and lower pension expense) and lower risk (based on the key risk measures and risk budgets as defined by BP Canada) • Fulfil BP’s fiduciary responsibilities to prudently manage the Plan’s investments taking into account various factors including membership demographics, benefit structure, changing economic environment, capital market expectations, etc.

5. Guidance Provided by BP • Asset mix decisions for this Plan are more likely to be made to satisfy Plan objectives rather than corporate objectives, with security of benefits being a key consideration • Analysis should focus on cash contributions rather than pension expense • 50% ad hoc COLA policy is expected to continue, however the ALM modelling should be based on the No COLA scenario (which is the basis on which actuarial valuations are filed) • Discussion and agreement on assumptions (see Appendices A and B) • Private equity, infrastructure and small cap will not be considered due to liquidity, asset size and investment structure issues • BP Global’s position is to not hedge interest rate exposure due to corporate risk exposure considerations. Currently, this position extends to the BP Canada Plan. Therefore, the use of interest rate swaps to hedge interest rate exposure will not be considered.

6. Economic Economic Efficient Liability Sensitivity Sensitivity Projection Model Asset/ Liability Efficient Frontier Mixes Benchmark Tests Tests Evaluation of Risks and Rewards • Investment Objectives and Risk Budget • Asset Classes • Capital Market Assumptions Investment Investment Objectives and Objectives and Risk Tolerance Risk Tolerance ALM Process Meeting #2(20 March 2008) Demographics Benefit Design Benefit Design Meeting #3(28 April 2008) Plan Sponsor Input Plan Sponsor Input Meeting #1(21 February 2008) Final Asset Mix

7. Liability Benchmark Portfolio and Efficient Frontier Analysis

8. Liability Benchmark Portfolio • We define the Liability Benchmark Portfolio to be the asset portfolio that most closely tracks the liability changes of the Plan (resulting from interest rate movements) under the assumption that all demographic experience unfolds as assumed • The purpose of the Liability Benchmark Portfolio is: • To define a liability proxy to be used in portfolio optimization algorithms in a liability-driven context • To identify the composition of the “least risk” (or immunizing) portfolio assuming a funded ratio of 100% • To serve as a liability proxy in the on-going monitoring of the health of the Plan

9. Liability Benchmark Portfolio for BP Canada’s DB Plan • The results of our Liability Benchmark Portfolio analysis (based on the No COLA scenario) are summarized below:

10. Efficient Frontier Analysis • Asset-liability efficient frontier analysis generates asset mixes which are expected to optimize the performance of the Plan taking into account the nature of a plan’s liabilities • In a pension plan context, surplus (or funded status) volatility is a more relevant measure of “risk” than is investment return volatility • Optimizing asset mixes relative to liabilities is consistent with risk budgeting frameworks and liability-driven investing

11. Inputs for the Asset-Liability Efficient Frontier Asset Inputs: • Expected return and standard deviation of return for each asset class, along with expected correlations of return between each pair of asset classes (See Appendix A) • Beginning market value of assets ($525 million at 01 October 2007) • Various asset class constraints: • Real estate limited to 10% of the non-fixed income portfolio • Hedge funds limited to 10% of the non-fixed income portfolio • EM equity limited to 40% of total international equity exposure Liability Inputs: • Liability benchmark portfolio • Beginning going-concern liability value ($461 million at 01 October 2007 on a No COLA basis)

12. 9.0% 100% Equity 80% Equity 70% Equity All Asset Classes A-L Frontier 8.0% 60% Equity 50% Equity 40% Equity 7.0% Current 30% Equity 6.0% Expected Nominal Return (Long term) 10% Equity Current Asset Classes 5.0% A-L Frontier 0% Equity 4.0% 3.0% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Annual Surplus Volatility (% of Assets) A-L Efficient Frontier – No COLA Including allocations to Real Estate and Hedge Funds Permitting Real Estate and Hedge Funds Expands the Efficient Frontier

13. A-L Efficient Frontier Observations – No COLA Scenario • As risk levels increase from the Low Risk portfolio: • DEX Long Bonds dominate the fixed income portion of the portfolio • Real Return Bonds are replaced by higher returning equity assets • Major themes of the asset-liability efficient frontier analysis for a total equity allocation of between 50% and 70%: • Minimize cash holdings • Concentrate fixed income exposure on DEX Long Bonds • Increase foreign equity exposure • Maximize exposure to real estate and hedge funds

14. ALM Projection Results – Going-Concern Liabilities

15. Going-Concern Liability Projection Assumptions • The projections assume: • No new entrants (i.e., the Plan is closed) • Demographic assumptions terminations, retirements, deaths, etc. occur as assumed in the last actuarial valuation • Death benefits and termination payments are paid as lump sum transfers rather than deferred annuities • The going-concern actuarial assumptions remain fixed (including a discount rate of 6.5%, inflation of 3.0% and salary increases of 4.75%) • One set of results is labelled “No COLA”, which assumes that ad hoc COLA increases are not provided in future and are not reflected in valuation results • A second set of results is labelled “50% COLA”, which assumes that ad hoc COLA increases equal to 50% of CPI are provided every year in the future and that these benefits are reflected in valuation results

16. Going-Concern Liabilities No COLA 50% COLA

17. Increase in Going-Concern Liabilities of Guaranteeing 50% COLA

18. Assets and Going-Concern LiabilitiesCurrent Investment Policy (Year 1 return of -0.7%; 7.54% thereafter) No COLA 50% COLA If future 50% COLA increases are provided, no future ER contributions are made and expected long-term returns are achieved, the Plan is expected to fall into a significant deficit. Future ER contributions are likely necessary. If no future COLA is provided, no future ER contributions are made and expected long-term returns are achieved, the Plan is expected to remain in a surplus going-concern position * Liability projection is in accordance with valuation assumptions as at 01 October 2007

19. PV (discounted at 6.5%) of Future Current Service Costs

20. Increase in Going-Concern Liabilities of Guaranteeing 50% COLA Plus PV (discounted at 6.5%) of Future Current Service Costs

21. Benefit Payments No COLA 50% COLA

22. Active Liabilities as a % of Total Going-Concern Liabilities

23. COLA Implications • Continued provision of 50% COLA is expensive • Estimated cost is approximately $130M when considering past and future service accruals • Cost will certainly vary depending on future inflation rates • COLA projections were not stochastically modeled since, apart from very low risk asset mixes, efficient mixes were materially the same whether COLA was considered or not • The variation of funded positions and costs are much wider if COLA continues • Design questions for BP to consider (perhaps as part of the benefit review): • How committed is BP to continued provision of COLA? • How is COLA expected to be funded?

24. ALM Projection Results – Deterministic

25. Deterministic Projection Assumptions • The deterministic projection analysis assumes: • No new entrants (i.e., the Plan is closed) • Demographic assumptions terminations, retirements, deaths, etc. occur as assumed in the last actuarial valuation • Death benefits and termination payments are paid as lump sum transfers rather than deferred annuities • Nominal returns are -0.7% in Year 1, then 7.5% each year thereafter (inflation of 2.2% plus a real return of 5.3%) • The Year 1 return reflects the poor market returns experienced from 01 October 2007 to 31 March 2008 plus expected long-term experience for the subsequent six months • The current investment policy remains in place • The going-concern actuarial assumptions remain fixed (including a discount rate of 6.5% and salary increases of 4.75%) • BP resumes contributions 01 January 2009

26. Assets (MV) and Going-Concern LiabilitiesCurrent Policy

27. Assets (MV) and Solvency LiabilitiesCurrent Policy

28. Contributions to Fund the Normal CostCurrent Policy

29. Cash Inflow and OutflowCurrent Policy Benefit payments are expected to significantly exceed employer contributions. Even when estimates of bond interest and stock dividends (labelled “Cash Return”) are taken into account, the net cash flow remains negative.

30. ALM Projection Results – Stochastic

31. ECONOMIC SCENARIOS Inflation Productivity Pension Obligations Asset Class Returns Liabilities Interest Rates Asset Mix A / L RISK MEASURES Stochastic Modelling Dynamics • The economic environment impacts on both asset class returns and plan liabilities • Projection modeling parameters are described in Appendix B

32. How to Read the Charts • The top of the green box marks the 95th percentile. 95% of iterations in this example produced results below 1.42. • The bottom of the green box (top of yellow) marks the 75th percentile. 75% of iterations produced results below 1.25. • The bottom of the yellow box (top of red) marks the 50th percentile. 50% of iterations produced results below 1.15. • The bottom of the red box (top of blue) marks the 25th percentile. 25% of iterations produced results below 1.05. • The bottom of the blue box marks the 5th percentile. 5% of iterations produced results below 0.92.

33. Funded RatioFunded Ratio Distribution – Current Asset Mix Policy Expected funded ratio improvements over time due to returns in excess of the discount rate, salary increases less than assumed and active management value-added offsetting plan expenses Decline in expected funded ratio at 01 October 2008 due to poor returns in first six months

34. Comparison of Deterministic and Stochastic Results • The median and average stochastic results are more favourable than the deterministic results • In the stochastic simulations, on average, there are more employer contributions than in the deterministic results • Favourable scenarios still result in employer contribution holidays during the last six years (as in the deterministic case); however, unfavourable scenarios result in employer current service contributions and possible deficit financing contributions

35. Alternative Asset Mixes to Test in the Projection Modeling PhaseThe Recommendation is to shift from Current to Mix 3

36. Alternative Asset Mix Descriptions • Mix 1: Increase and shift exposure to long-term bonds and shift to 1/3rd Canadian equity and 2/3rds foreign equity exposure • Mix 2: Add real estate exposure, but maintain 50/50 Canadian equity and foreign equity mix • Mix 3: Shift to 1/3rd Canadian equity and 2/3rds foreign equity exposure from Mix 2 • Mix 4: Further increase fixed income exposure, add hedge fund exposure and shift to 1/3rd Canadian equity and 2/3rds foreign equity exposure

37. Alternative Asset Mix Statistics HigherHigherHigher LowerLowerLower ReturnReturn Volatility (Risk)Surplus Volatility (Risk)

38. Alternative Asset Mixes Plotted Against the Efficient Frontier Red A-L Frontier: Based on asset classes utilized in the current asset mix policy Green A-L Frontier: Based on all asset classes considered

39. Median Funded RatioComparison of Current Policy Benchmark (“CPB”) and Alternatives Funding liabilities in Year 1 have been adjusted for Mixes 1 through 4 to account for changes to the funding discount rate consistent with the change in investment policy

40. Funded RatioFunded Ratio Distribution in Year 5 (2012) and Year 10 (2017)

41. Comments • The Current Asset Mix Policy appears quite favourable relative to Mix 3 based on an analysis of funded ratio: • The Current Asset Mix Policy supports a higher discount rate • Alternative, lower risk asset mix policies would (likely) require lower actuarial discount rates • Over the short term, the lower discount rates associated with lower risk asset mix policies would increase liabilities and result in lower initial funded ratios • Over the longer term, the additional expected return from the Current Asset Mix Policy produces more favourable results at the median and with respect to the upside. The additional expected return also compensates for the deeper downside variability. • But, we caution against making policy decisions based on this analysis alone. Current actuarial practice – which provides immediate benefit to those plans taking on additional risk – distorts risk assessment.

42. Solvency RatioSolvency Ratio Distribution – Current Asset Mix Policy

43. Median Solvency RatioComparison of Current Policy Benchmark (“CPB”) and Alternatives Solvency liabilities are independent of asset mix, therefore the starting point for all asset mixes is the same

44. Solvency RatioSolvency Ratio Distribution in Year 5 (2012) and Year 10 (2017)

45. Solvency Ratio5th (Downside) Percentile

46. PV (discounted at 6.5%) of Next 5 and 10 Years of ER Contributions In BP’s view, is an extra $0.7 million (PV at October 1, 2007) in additional expected employer contributions over the next 10 years (based on Mix 3) worth reducing the 95th percentile 10-year employer contribution risk by $7.4 million (PV at October 1, 2007)?

47. Recommendations

48. Recommendations • Unless BP has an even greater desire to reduce risk than what we currently appreciate, we recommend Mix 3:

49. Recommendations (cont’d) • The recommended Mix 3 reflects the following: • An increase in fixed income allocation from 30% to 40% • We recommend this be allocated to long bonds from a long-term strategic point of view • A transition from the Plan’s current partial allocation to universe bonds to long bonds could take place over a timeline consistent with BP’s views on the direction of future mid term and long term bond yields in order to (hopefully) capture some additional yield at an opportune time • We would advise setting a maximum time limit for this transition (say, two years) in order that the transition not be postponed for an inordinately long period of time • The transition from equities to bonds could be staged in over time (dollar cost averaging) to reduce potential timing regret

50. Recommendations (cont’d) • Consideration of a 5% investment in real estate in order to diversify non-matched investments into less correlated asset classes • A final decision on this should be made in conjunction with an understanding of the real estate investment products available to BP Canada from an implementation perspective • We understand that BP will undertake this analysis in-house • We would be pleased to assist • A corresponding reduction in public market equities as a result of the shift towards more fixed income (and possibly real estate) • A reduction in Canadian equity and a corresponding increase in US and international equity in order to increase equity diversification • Further rationale for this is provided in Appendix C