BP 2015 Annual Report Download - page 113

1. Significant accounting policies, judgements, estimates and assumptions – continued
The expected useful lives of assets are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively.
Oil and natural gas exploration, appraisal and development expenditure
Oil and natural gas exploration, appraisal and development expenditure is accounted for using the principles of the successful efforts method of
accounting as described below.
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 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 and appraisal expenditure
Geological and geophysical exploration costs are recognized as an expense 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 and payments made to contractors. If potentially commercial quantities of hydrocarbons are not found,
the exploration well costs are written off as a dry hole. If hydrocarbons are found and, subject to further appraisal activity, are likely to be capable of
commercial development, the costs continue to be carried as an asset. If it is determined that development will not occur then the costs are expensed.
Costs directly associated with appraisal activity undertaken to determine the size, characteristics and commercial potential of a reservoir following the
initial discovery of hydrocarbons, including the costs of appraisal wells where hydrocarbons were not found, are initially capitalized as an intangible
asset. When proved reserves of oil and natural gas are determined and development is approved by management, the relevant expenditure is
transferred to property, plant and equipment.
Development expenditure
Expenditure on the construction, installation and completion of infrastructure facilities such as platforms, pipelines and the drilling of development
wells, including service and 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.
Significant estimate or judgement: oil and natural gas accounting
The determination of whether potentially economic oil and natural gas reserves have been discovered by an exploration well is usually made within
one year of well completion, but can take longer, depending on the complexity of the geological structure. Exploration wells that discover potentially
economic quantities of oil and natural gas and are in areas where major capital expenditure (e.g. an 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 or 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.
One of the facts and circumstances which indicate that an entity should test such assets for impairment is that the period for which the entity has a
right to explore in the specific area has expired or will expire in the near future, and is not expected to be renewed. BP has leases in the Gulf of
Mexico making up a prospect, some with terms which were scheduled to expire at the end of 2013 and some with terms which were scheduled to
expire at the end of 2014. A significant proportion of our capitalized exploration and appraisal costs in the Gulf of Mexico relate to this prospect. This
prospect requires the development of subsea technology to ensure that the hydrocarbons can be extracted safely. BP is in negotiation with the US
Bureau of Safety and Environmental Enforcement in relation to seeking extension of these leases so that the discovered hydrocarbons can be
developed. BP remains committed to developing this prospect and expects that the leases will be renewed and, therefore, continues to carry the
capitalized costs on its balance sheet.
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 the location and condition necessary for it to
be capable of operating in the manner intended by management, the initial estimate of any decommissioning obligation, if any, and, for assets that
necessarily take a substantial period of time to get ready for their intended use, finance 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.
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, and 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, common facilities and future decommissioning costs are amortized over total proved reserves.
The unit-of-production rate for the depreciation of common facilities takes into account expenditures incurred to date, together with estimated future
capital expenditure expected to be incurred relating to as yet undeveloped reserves expected to be processed through these common facilities.
BP Annual Report and Form 20-F 2015 109
Financial statements