BP 2012 Annual Report Download - page 173

Additional disclosures 171
BP Annual Report and Form 20-F 2012
as an abuse of process rather than be simply withdrawn. The hearing of
Rosneft’s appeal is scheduled to take place on 23 April 2013.
On 24 January 2012, the Republic of Bolivia issued a press statement
declaring its intent to nationalize Pan American Energy’s interests in the
Caipipendi Operations Contract. Nevertheless, no formal decision has
been issued or announced by the government, and no nationalization
process has commenced. Pan American Energy and its shareholders BP
and Bridas intend to vigorously defend their legal interests under the
Caipipendi Operations Contract and available Bilateral Investment Treaties.
Critical accounting policies
The significant accounting policies of the group are summarized in
Financial statements – Note 1 on page 186.
Inherent in the application of many of the accounting policies used in
preparing the financial statements is the need for BP management to
make judgements, estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the period.
Actual outcomes could differ from the estimates and assumptions used.
The following summary provides more information about the critical
accounting judgements and estimates that could have a significant impact
on the results of the group and should be read in conjunction with the
information provided in the Notes on financial statements, including
Note 1 Significant accounting policies.
The areas requiring the most significant judgement and estimation in the
preparation of the consolidated financial statements are in relation to oil
and natural gas accounting, including the estimation of reserves, the
recoverability of asset carrying values, business combinations, taxation,
derivative financial instruments, provisions and contingencies, and in
particular, provisions and contingencies related to the Gulf of Mexico oil
spill, and pensions and other post-retirement benefits.
Oil and natural gas accounting
The group follows the principles of the successful efforts method of
accounting for its oil and natural gas exploration, appraisal and
development expenditure. The group’s accounting policy for oil and
natural gas exploration, appraisal and development expenditure is
provided in Financial statements – Note 1 on page 186.
The accounting for oil and natural gas exploration, appraisal and
development expenditure requires the use of various judgements and
estimates in management’s determination of the economic viability of a
project based on a range of technical and commercial considerations, the
establishment of development plans and timing, and estimates of future
expenditure.
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.
For exploration wells and exploratory-type stratigraphic test wells, costs
directly associated with the drilling of wells are initially capitalized within
intangible assets, pending determination of whether potentially economic
oil and gas reserves have been discovered by the drilling effort. These
costs include employee remuneration, materials and fuel used, rig costs
and payments made to contractors. The determination is usually made
within one year after well completion, but can take longer, depending on
the complexity of the geological structure. If the well did not encounter
potentially economic oil and gas quantities, the well costs are expensed
as a dry hole and are reported in exploration expense. Exploration wells
that discover potentially economic quantities of oil and natural gas and are
in areas where major capital expenditure (e.g. offshore platform or a
pipeline) would be required before production could begin, and where the
economic viability of that major capital expenditure depends on the
successful completion of further exploration work in the area, remain
capitalized on the balance sheet as long as additional exploration appraisal
work is under way or firmly planned.
It is not unusual to have exploration wells and exploratory-type
stratigraphic test wells remaining suspended on the balance sheet for
several years while additional appraisal drilling and seismic work on the
potential oil and natural gas field is performed or while the optimum
development plans and timing are established.
All such carried costs are subject to regular technical, commercial and
management review on at least an annual basis to confirm the continued
intent to develop, or otherwise extract value from, the discovery. Where
this is no longer the case, the costs are immediately expensed.
The determination of the group’s estimated oil and gas reserves requires
significant judgements and estimates to be applied and these are regularly
reviewed and updated. Factors such as the availability of geological and
engineering data, reservoir performance data, acquisition and divestment
activity, drilling of new wells and commodity prices all impact on the
determination of the group’s estimates of its oil and gas reserves. BP
bases its proved reserves estimates on the requirement of reasonable
certainty with rigorous technical and commercial assessments based on
conventional industry practice.
The estimation of oil and natural gas reserves and BP’s process to
manage reserves bookings is described in Exploration and Production – Oil
and gas disclosures on page 263, which is unaudited. Details on BP’s
proved reserves and production compliance and governance processes
are provided on pages 84-89.
Estimates of oil and gas reserves are used to calculate depreciation,
depletion and amortization charges for the group’s oil and gas properties.
The impact of changes in estimated proved reserves is dealt with
prospectively by amortizing the remaining carrying value of the asset over
the expected future production. As discussed below, oil and natural gas
reserves also have a direct impact on the assessment of the recoverability
of asset carrying values reported in the financial statements.
If proved reserves estimates are revised downwards, earnings could be
affected by higher depreciation expense or an immediate write-down of
the property’s carrying value (see discussion of recoverability of asset
carrying values below).
The 2012 movements in proved reserves are reflected in the tables
showing movements in oil and gas reserves by region in Financial
statements – Supplementary information on oil and natural gas (unaudited)
on page 263. Information on the carrying amounts of the group’s oil and
gas properties, together with the amounts recognized in the income
statement as depreciation, depletion and amortization is contained in
Financial statements – Note 15 and Note 9 respectively.
Recoverability of asset carrying values
BP assesses its fixed assets, including goodwill, for possible impairment if
there are events or changes in circumstances that indicate that carrying
values of the assets may not be recoverable and, as a result, charges for
impairment are recognized in the group’s results from time to time, with
corresponding reductions in the carrying values of the group’s assets.
Such indicators include changes in the group’s business plans, changes in
commodity prices leading to sustained unprofitable performance, low
plant utilization, evidence of physical damage, significant downward
revisions of estimated volumes or increases in estimated future
development expenditure. If there are low oil prices, natural gas prices,
refining margins or marketing margins during an extended period, the
group may need to recognize significant impairment charges.
The assessment for impairment entails comparing the carrying value of
the asset or cash-generating unit with its recoverable amount, that is, the
higher of fair value less costs to sell and value in use. Value in use is
usually determined on the basis of discounted estimated future net cash
flows. Determination as to whether and how much an asset is impaired
involves management estimates on highly uncertain matters such as
future commodity prices, the effects of inflation on operating expenses,
discount rates, production profiles and the outlook for global or regional
market supply-and-demand conditions for crude oil, natural gas and
refined products.
Additional disclosures