BP 2008 Annual Report Download - page 111

BP Annual Report and Accounts 2008
Notes on financial statements
1. Significant accounting policies continued
Oil and natural gas exploration and development expenditure
Oil and natural gas exploration and development expenditure is
accounted for using the successful efforts method of accounting.
Licence and property acquisition costs
Exploration licence and leasehold property acquisition costs are
capitalized within intangible assets and are reviewed at each reporting
date to confirm that there is no indication that the carrying amount
exceeds the recoverable amount. This review includes confirming that
exploration drilling is still under way or firmly planned or that it has been
determined, or work is under way to determine, that the discovery is
economically viable based on a range of technical and commercial
considerations and sufficient progress is being made on establishing
development plans and timing. If no future activity is planned, the
remaining balance of the licence and property acquisition costs is written
off. Lower value licences are pooled and amortized on a straight-line
basis over the estimated period of exploration. Upon recognition of
proved reserves and internal approval for development, the relevant
expenditure is transferred to property, plant and equipment.
Exploration expenditure
Geological and geophysical exploration costs are charged against income
as incurred. Costs directly associated with an exploration well are initially
capitalized as an intangible asset until the drilling of the well is complete
and the results have been evaluated. These costs include employee
remuneration, materials and fuel used, rig costs, delay rentals and
payments made to contractors. If hydrocarbons are not found, the
exploration expenditure is written off as a dry hole. If hydrocarbons are
found and, subject to further appraisal activity, which may include the
drilling of further wells (exploration or exploratory-type stratigraphic test
wells), are likely to be capable of commercial development, the costs
continue to be carried as an asset. All such carried costs are subject to
technical, commercial and management review at least once a year to
confirm the continued intent to develop or otherwise extract value from
the discovery. When this is no longer the case, the costs are written off.
When proved reserves of oil and natural gas are determined and
development is sanctioned, the relevant expenditure is transferred to
property, plant and equipment.
Development expenditure
Expenditure on the construction, installation or completion of
infrastructure facilities such as platforms, pipelines and the drilling of
development wells, including unsuccessful development or delineation
wells, is capitalized within property, plant and equipment and is
depreciated from the commencement of production as described below
in the accounting policy for Property, plant and equipment.
Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated
depreciation and accumulated impairment losses.
The initial cost of an asset comprises its purchase price or
construction cost, any costs directly attributable to bringing the asset
into operation, the initial estimate of any decommissioning obligation, if
any, and, for qualifying assets, borrowing costs. The purchase price or
construction cost is the aggregate amount paid and the fair value of
any other consideration given to acquire the asset. The capitalized value
of a finance lease is also included within property, plant and equipment.
Exchanges of assets are measured at fair value unless the exchange
transaction lacks commercial substance or the fair value of neither the
asset received nor the asset given up is reliably measurable. The cost
of the acquired asset is measured at the fair value of the asset given up,
unless the fair value of the asset received is more clearly evident. Where
fair value is not used, the cost of the acquired asset is measured at the
carrying amount of the asset given up. The gain or loss on derecognition
of the asset given up is recognized in profit or loss.
Expenditure on major maintenance refits or repairs comprises the
cost of replacement assets or parts of assets, inspection costs and
overhaul costs. Where an asset or part of an asset that was separately
depreciated is replaced and it is probable that future economic benefits
associated with the item will flow to the group, the expenditure is
capitalized and the carrying amount of the replaced asset is
derecognized. Inspection costs associated with major maintenance
programmes are capitalized and amortized over the period to the next
inspection. Overhaul costs for major maintenance programmes are
expensed as incurred. All other maintenance costs are expensed
as incurred.
Oil and natural gas properties, including related pipelines, are
depreciated using a unit-of-production method. The cost of producing
wells is amortized over proved developed reserves. Licence acquisition,
field development and future decommissioning costs are amortized over
total proved reserves. The unit-of-production rate for the amortization of
field development costs takes into account expenditures incurred to date,
together with approved future development expenditure required to
develop reserves.
Other property, plant and equipment is depreciated on a straight-
line basis over its expected useful life.
The useful lives of the group’s other property, plant and
equipment are as follows:
Land improvements 15 to 25 years
Buildings 20 to 50 years
Refineries 20 to 30 years
Petrochemicals plants 20 to 30 years
Pipelines 10 to 50 years
Service stations 15 years
Office equipment 3 to 7 years
Fixtures and fittings 5 to 15 years
The expected useful lives of property, plant and equipment are reviewed
on an annual basis and, if necessary, changes in useful lives are
accounted for prospectively.
The carrying value of property, plant and equipment is reviewed
for impairment whenever events or changes in circumstances indicate
the carrying value may not be recoverable.
An item of property, plant and equipment is derecognized upon
disposal or when no future economic benefits are expected to arise from
the continued use of the asset. Any gain or loss arising on derecognition
of the asset (calculated as the difference between the net disposal
proceeds and the carrying amount of the item) is included in the income
statement in the period the item is derecognized.
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