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

Notes on financial statementshttp://www.bp.com/downloads/gom2. Significant event – Gulf of Mexico oil spill continuedBP considers that it is not possible to measure reliably any other obligation in relation to Natural Resource Damages claims under OPA 90 or litigation forviolations of OPA 90 (other than as included within the proposed settlement). These items are therefore disclosed as contingent liabilities.The $20-billion trust fund described above is available to satisfy the OPA 90 claims and litigation referred to above, however claims administrationcosts associated with the existing GCCF organization are borne separately by BP. The administration costs of processing claims made under the proposedsettlement agreement with the PSC are expected to be paid from the trust fund. However, at this time, the provision for these costs is shown as payablefrom outside the trust fund as the proposed settlement agreement is subject to final written agreement and court approvals. BP’s rights and obligationsin relation to the trust fund have been recognized and $20 billion, adjusted to take account of the time value of money, was charged to the incomestatement in 2010.Other itemsProvisions at 31 December 2011 also include amounts in relation to completing the oil spill response, BP’s commitment to a 10-year research programmein the Gulf of Mexico, estimated penalties for liability under Clean Water Act Section 311 and estimated legal fees. These are not covered by the trust fund.The provision does not reflect any amounts in relation to fines and penalties except for those relating to the Clean Water Act, as it is not possibleto estimate reliably either the amount or timing of such additional items. BP also considers that it is not possible to measure reliably any obligation inrelation to litigation other than as included within the proposed settlement with the PSC. These items are therefore disclosed as contingent liabilities.Further information on provisions is provided below and in Note 36. Further information on contingent liabilities is provided in Note 43.A provision has been recognized for estimated future expenditure relating to the incident, for items that can be measured reliably at this time,including the increased estimate of the cost of Individual and Business Claims as a result of the proposed settlement with the PSC as described above, inaccordance with BP’s accounting policy for provisions, as set out in Note 1.The total amount recognized as a provision during the year was $5,183 million, including $4,038 million for items covered by the trust fund and$1,145 million for other items (2010 $30,261 million, including $12,567 million for items covered by the trust fund and $17,694 million for other items).After deducting amounts utilized during the year totalling $6,208 million, including payments from the trust fund of $3,707 million and payments madedirectly by BP of $2,501 million (2010 $13,935 million, including payments from the trust fund of $3,023 million and payments made directly by BP of$10,912 million), and after adjustments for discounting, the remaining provision as at 31 December 2011 was $15,333 million (2010 $16,335 million).Movements in the provision are presented in the table below.$ million2011 2010At 1 January 16,335 –Increase in provision – items not covered by the trust fund 1,145 17,694Increase in provision – items covered by the trust fund 4,038 12,567Unwinding of discount 6 4Change in discount rate 17 5Utilization – paid by BP (2,501) (10,912)Utilization – paid by the trust fund (3,707) (3,023)At 31 December 15,333 16,335Of which – current 9,437 7,938Of which – non-current 5,896 8,397The 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 ultimateexposure and cost to BP will be dependent on many factors (including, with respect to certain of the obligations, any determination of BP’s culpability basedon any findings of negligence, gross negligence or wilful misconduct). Significant uncertainty exists in relation to the amount of claims that will becomepayable by BP, the amount of fines that will ultimately be levied on BP, the outcome of litigation and arbitration proceedings, the amount and timing ofpayments under any settlements, and any costs arising from any longer-term environmental consequences of the oil spill, which will also impact uponthe ultimate cost for BP. BP is ready to settle any remaining matters on fair and reasonable terms, but will continue to prepare vigorously for trial. Anysettlements which may be reached relating to the Deepwater Horizon oil spill could impact the amount and timing of any future payments. Although theprovision 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 above.Impact upon the group income statementThe group income statement for 2011 includes a pre-tax credit of $3,742 million (2010 pre-tax charge of $40,935 million) in relation to the Gulf of Mexicooil spill. The amount charged to date comprises costs incurred up to 31 December 2011, settlements agreed with our co-owners of the Macondo welland other third parties, estimated obligations for future costs that can be estimated reliably at this time and rights and obligations relating to the trust fund.Finance costs of $58 million (2010 $77 million) reflect the unwinding of the discount on the trust fund liability and provisions.The amount of the provision recognized during the year can be reconciled to the income statement amount as follows:$ million2011 2010Increase in provision 5,183 30,261Change in discount rate relating to provisions 17 5Costs charged directly to the income statement 512 3,339Trust fund liability – discounted – 19,580Change in discounting relating to trust fund liability 43 240Recognition of reimbursement asset (4,038) (12,567)Settlements credited to the income statement (5,517) –(Profit) loss before interest and taxation (3,800) 40,858Financial statementsCosts charged directly to the income statement relate to expenditure prior to the establishment of a provision at the end of the second quarter 2010 andongoing operating costs of the Gulf Coast Restoration Organization (GCRO). The accounting associated with the recognition of the trust fund liability andthe expenditure which will be settled from the trust fund is described above.BP Annual Report and Form 20-F 2011 193