BP Annual Report and Form 20-F 2011 - Company Reporting

Additional information for shareholdersProvisions and contingenciesThe group holds provisions for the future decommissioning of oil andnatural gas production facilities and pipelines at the end of their economiclives. The largest decommissioning obligations facing BP relate to theplugging and abandonment of wells and the removal and disposal of oiland natural gas platforms and pipelines around the world. The estimateddiscounted costs of performing this work are recognized as we drill thewells and install the facilities, reflecting our legal obligations at that time.A corresponding asset of an amount equivalent to the provision is alsocreated within property, plant and equipment. This asset is depreciatedover the expected life of the production facility or pipeline. Most of thesedecommissioning events are many years in the future and the preciserequirements that will have to be met when the removal event actuallyoccurs are uncertain. Decommissioning technologies and costs areconstantly changing, as well as political, environmental, safety and publicexpectations. Consequently, the timing and amounts of future cash flowsare subject to significant uncertainty. Any changes in the expected futurecosts are reflected in both the provision and the asset.Decommissioning provisions associated with downstream andpetrochemicals facilities are generally not recognized, as such potentialobligations cannot be measured, given their indeterminate settlementdates. The group performs periodic reviews of its downstreamand petrochemicals long-lived assets for any changes in facts andcircumstances that might require the recognition of a decommissioningprovision.The timing and amount of future expenditures are reviewedannually, together with the interest rate used in discounting the cash flows.The interest rate used to determine the balance sheet obligation at the endof 2011 was 0.5% (2010 1.5%). The interest rate represents the real rate(i.e. excluding the impacts of inflation) on long-dated government bonds.Other provisions and liabilities are recognized in the period whenit becomes probable that there will be a future outflow of funds resultingfrom past operations or events and the amount of cash outflow canbe reliably estimated. The timing of recognition and quantification ofthe liability require the application of judgement to existing facts andcircumstances, which can be subject to change. Since the actual cashoutflows can take place many years in the future, the carrying amountsof provisions and liabilities are reviewed regularly and adjusted to takeaccount of changing facts and circumstances.A change in estimate of a recognized provision or liability wouldresult in a charge or credit to net income in the period in which the changeoccurs (with the exception of decommissioning costs as described above).Provisions for environmental remediation are made when aclean-up is probable and the amount of the obligation can be reliablyestimated. Generally, this coincides with commitment to a formal planof action or, if earlier, on divestment or on closure of inactive sites. Theprovision for environmental liabilities is estimated based on current legaland constructive requirements, technology, price levels and expectedplans for remediation. Actual costs and cash outflows can differ fromestimates because of changes in laws and regulations, public expectations,prices, discovery and analysis of site conditions and changes in clean-uptechnology.The provision for environmental liabilities is reviewed at leastannually. The interest rate used to determine the balance sheet obligationat 31 December 2011 was 0.5% (2010 1.5%).Information about the group’s provisions is provided in Financialstatements – Note 36.As further described in Financial statements – Note 43 on page 249,the group is subject to claims and actions. The facts and circumstancesrelating to particular cases are evaluated regularly in determining whetherit is probable that there will be a future outflow of funds and, onceestablished, whether a provision relating to a specific litigation should beestablished or revised. Accordingly, significant management judgementrelating to provisions and contingent liabilities is required, since theoutcome of litigation is difficult to predict.Gulf of Mexico oil spillDetailed information on the Gulf of Mexico oil spill, including the financialimpacts, is provided in Financial statements – Note 2 on pages 190-194.As a consequence of the Gulf of Mexico oil spill, as described onpages 76-79, BP continues to incur costs and has also recognized liabilitiesfor future costs. Liabilities of uncertain timing or amount and contingentliabilities have been accounted for and/or disclosed in accordance with IAS37 ‘Provisions, contingent liabilities and contingent assets’. BP’s rights andobligations in relation to the $20-billion trust fund which was establishedin 2010 are accounted for in accordance with IFRIC 5 ‘Rights to interestsarising from decommissioning, restoration and environmental rehabilitationfunds’.The total amounts that will ultimately be paid by BP in relation to allobligations relating to the incident are subject to significant uncertainty andthe ultimate exposure and cost to BP will be dependent on many factors(including, with respect to certain of the obligations, any determination ofBP’s culpability based on any findings of negligence, gross negligence orwilful misconduct). Furthermore, significant uncertainty exists in relation tothe amount of claims that will become payable by BP, the amount of finesthat will ultimately be levied on BP, the outcome of litigation and arbitrationproceedings, the amount and timing of payments under any settlements,and any costs arising from any longer-term environmental consequencesof the oil spill, which will also impact upon the ultimate cost for BP. Anyfurther settlements which may be reached relating to the DeepwaterHorizon oil spill could impact the amount and timing of any futurepayments. Although the provision recognized is the current best reliableestimate of expenditures required to settle certain present obligations atthe end of the reporting period, there are future expenditures for whichit is not possible to measure the obligation reliably as noted below underContingent liabilities.The magnitude and timing of possible obligations in relation to theGulf of Mexico oil spill are subject to a very high degree of uncertaintyas described further in Risk factors on pages 59-63. Furthermore, othermaterial unanticipated obligations may arise in future in relation to theincident. Refer to Financial statements – Note 43 on page 249 for furtherinformation.Expenditure to be met from the $20-billion trust fundIn 2010, BP established the Deepwater Horizon Oil Spill Trust (the Trust) tobe funded in the amount of $20 billion over the period to the fourth quarterof 2013, which is available to satisfy legitimate individual and businessclaims administered by the Gulf Coast Claims Facility (GCCF), state andlocal government claims resolved by BP, final judgments and settlements,state and local response costs, and natural resource damages and relatedcosts. It is currently expected that the cost of the proposed settlementwill be payable from the Trust. In 2010, BP contributed $5 billion to thefund, and further regular contributions totalling $5 billion were made in2011. During 2011, BP also contributed the cash settlements receivedfrom MOEX, Weatherford and Anadarko amounting in total to $5.1 billion.A further cash settlement from Cameron was received in January 2012and was also contributed to the trust fund. As a result of these acceleratedcontributions, it is now expected that the $20-billion commitment will havebeen paid in full by the end of 2012.Fines, penalties and claims administration costs are not covered bythe trust fund. BP’s obligation to make contributions to the trust fund wasrecognized in full in the 2010 group income statement and the remainingliability to fund the Trust is included within other payables on the balancesheet after taking account of the time value of money. The establishmentof the trust fund does not represent a cap or floor on BP’s liabilities and BPdoes not admit to a liability of this amount.An asset has been recognized representing BP’s right to receivereimbursement from the trust fund. This is the portion of the estimatedfuture expenditure provided for that will be settled by payments fromthe trust fund. We use the term “reimbursement asset” to describe thisasset. 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.156 BP Annual Report and Form 20-F 2011