BP 2012 Annual Report Download - page 175

Additional disclosures 173
BP Annual Report and Form 20-F 2012
occurs are uncertain. Decommissioning technologies and costs are
constantly changing, as well as political, environmental, safety and public
expectations. Consequently, the timing and amounts of future cash flows
are subject to significant uncertainty. Any changes in the expected future
costs are reflected in both the provision and the asset.
Decommissioning provisions associated with downstream and
petrochemicals facilities are generally not recognized, as such potential
obligations cannot be measured, given their indeterminate settlement
dates. The group performs periodic reviews of its downstream and
petrochemicals long-lived assets for any changes in facts and
circumstances that might require the recognition of a decommissioning
provision.
The timing and amount of future expenditures are reviewed annually,
together with the interest rate used in discounting the cash flows. The
interest rate used to determine the balance sheet obligation at the end of
2012 was 0.5% (2011 0.5%). The interest rate is based on the real rate
(i.e. excluding the impacts of inflation) on long-dated government bonds.
Other provisions and liabilities are recognized in the period when it
becomes probable that there will be a future outflow of funds resulting
from past operations or events and the amount of cash outflow can be
reliably estimated. The timing of recognition and quantification of the
liability require the application of judgement to existing facts and
circumstances, which can be subject to change. Since the actual cash
outflows can take place many years in the future, the carrying amounts of
provisions and liabilities are reviewed regularly and adjusted to take
account of changing facts and circumstances.
A change in estimate of a recognized provision or liability would result in a
charge or credit to net income in the period in which the change occurs
(with the exception of decommissioning costs as described above).
Provisions for environmental remediation are made when a clean-up is
probable and the amount of the obligation can be reliably estimated.
Generally, this coincides with commitment to a formal plan of action or, if
earlier, on divestment or on closure of inactive sites. The provision for
environmental liabilities is estimated based on current legal and
constructive requirements, technology, price levels and expected plans for
remediation. Actual costs and cash outflows can differ from estimates
because of changes in laws and regulations, public expectations, prices,
discovery and analysis of site conditions and changes in clean-up
technology.
The provision for environmental liabilities is reviewed at least annually.
The interest rate used to determine the balance sheet obligation at
31 December 2012 was 0.5% (2011 0.5%).
Information about the group’s provisions is provided in Financial
statements – Note 36.
As further described in Financial statements – Note 43 on page 253, the
group is subject to claims and actions. The facts and circumstances
relating to particular cases are evaluated regularly in determining whether
it is probable that there will be a future outflow of funds and, once
established, whether a provision relating to a specific litigation should be
established or revised. Accordingly, significant management judgement
relating to provisions and contingent liabilities is required, since the
outcome of litigation is difficult to predict.
Gulf of Mexico oil spill
Detailed information on the Gulf of Mexico oil spill, including the financial
impacts, is provided in Financial statements – Note 2 on page 194.
As a consequence of the Gulf of Mexico oil spill, as described on
pages 59-62, BP continues to incur various costs and has also recognized
liabilities for future costs. Liabilities of uncertain timing or amount and
contingent liabilities have been accounted for and/or disclosed in
accordance with IAS 37 ‘Provisions, contingent liabilities and contingent
assets’. BP’s rights and obligations in relation to the $20-billion trust fund
which was established in 2010, and in relation to the qualifying settlement
funds established pursuant to the agreement with the Plaintiffs’ Steering
Committee (PSC), are accounted for in accordance with IFRIC 5 ‘Rights to
interests arising from decommissioning, restoration and environmental
rehabilitation funds’.
The total amounts that will ultimately be paid by BP in relation to all
obligations relating to the incident are subject to significant uncertainty
and the ultimate exposure and cost to BP will be dependent on many
factors. Furthermore, significant uncertainty exists in relation to the
amount of claims that will become payable by BP, the amount of fines
that will ultimately be levied on BP (including any determination of BP’s
culpability based on any findings of negligence, gross negligence or wilful
misconduct), the outcome of litigation and arbitration proceedings, and
any costs arising from any longer-term environmental consequences of
the oil spill, which will also impact upon the ultimate cost for BP. The
amount and timing of any amounts payable could also be impacted by any
further settlements which may or may not occur.
Although the provision recognized is the current best reliable estimate of
expenditures required to settle certain present obligations at the end of
the reporting period, there are future expenditures for which it is not
possible to measure the obligation reliably as noted below under
Contingent liabilities.
The total amounts that will ultimately be paid by BP in relation to all the
obligations relating to the accident are subject to significant uncertainty
and the ultimate exposure and cost to BP will be dependent on many
factors, as discussed under Contingent liabilities in Financial statements –
Note 43 on page 253, including in relation to any new information or
future developments. These could have a material impact on our
consolidated financial position, results of operations and cash flows. The
risks associated with the accident could also heighten the impact of the
other risks to which the group is exposed, as further described in Risk
factors on pages 38-44.
Expenditure to be met from the $20-billion trust fund
In 2010, BP established the Deepwater Horizon Oil Spill Trust (the Trust)
to be funded in the amount of $20 billion over the period to the fourth
quarter of 2013, which is available to satisfy legitimate individual and
business claims that were previously administered by the Gulf Coast
Claims Facility (GCCF), state and local government claims resolved by BP,
final judgments and settlements, state and local response costs, and
natural resource damages and related costs. The Trust is available to
satisfy claims that were previously processed through the transitional
court-supervised claims facility, to fund the qualified settlement funds
established under the terms of the settlement agreements with the PSC
administered through the Deepwater Horizon Court Supervised
Settlement Program (DHCSSP), and the separate BP claims programme.
The funding of the Trust has now been completed, with the final
contribution of $860 million having been made in the fourth quarter of
2012. The income statement charge for 2010 included $20 billion in
relation to the trust fund, adjusted to take account of the time value of
money. Fines and penalties are not covered by the trust fund.
An asset has been recognized representing BP’s right to receive
reimbursement from the trust fund. This is the portion of the estimated
future expenditure provided for that will be settled by payments from the
trust fund. We use the term ‘reimbursement asset’ to describe this asset.
BP will not actually receive any reimbursements from the trust fund,
instead payments will be made directly to claimants from the trust fund,
and BP will be released from its corresponding obligation.
The $20-billion trust fund may not be sufficient to satisfy all claims under
the Oil Pollution Act 1990 (OPA 90) or otherwise that will ultimately be
paid.
Contingent liabilities relating to the Gulf of Mexico oil spill
It is not possible, at this time, to measure reliably other obligations arising
from the accident, namely any obligation in relation to Natural Resource
Damages claims (except for the estimated costs of the assessment phase
and the costs relating to early restoration agreements), the cost of
business economic loss claims under the PSC settlement not yet received
or processed by the DHCSSP, or any other potential litigation (including
through excluded parties from the PSC settlement and any obligation in
relation to other potential private or governmental litigation), fines or
penalties (except for the Clean Water Act civil penalty claims and
governmental claims), nor is it practicable to estimate their magnitude or
possible timing of payment. Therefore no amounts have been provided for
these obligations as at 31 December 2012.
Additional disclosures