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

Notes on financial statements43. Contingent liabilities continuedThe magnitude and timing of possible obligations in relation to the Gulf of Mexico oil spill are subject to a very high degree of uncertainty asdescribed further in Risk factors on pages 59 to 63. Any such possible obligations are therefore contingent liabilities and, at present, it is notpracticable to estimate their magnitude or possible timing of payment. Certain items are subject to settlement discussions or may be subject tosettlement discussions in the future. Any settlements which may be reached relating to the Deepwater Horizon accident and oil spill could impact theamount and timing of any future payments. Furthermore, other material unanticipated obligations may arise in future in relation to the incident.Other contingent liabilitiesThere were contingent liabilities at 31 December 2011 in respect of guarantees and indemnities entered into as part of the ordinary course of the group‘sbusiness. No material losses are likely to arise from such contingent liabilities. Further information is included in Note 26.Lawsuits arising out of the Exxon Valdez oil spill in Prince William Sound, Alaska, in March 1989 were filed against Exxon (now ExxonMobil),Alyeska Pipeline Service Company (Alyeska), which operates the oil terminal at Valdez, and the other oil companies that own Alyeska. Alyeskainitially responded to the spill until the response was taken over by Exxon. BP owns a 46.9% interest (reduced during 2001 from 50% by a saleof 3.1% to Phillips) in Alyeska through a subsidiary of BP America Inc. and briefly indirectly owned a further 20% interest in Alyeska followingBP‘s combination with Atlantic Richfield Company (Atlantic Richfield). Alyeska and its owners have settled all the claims against them under theselawsuits. Exxon has indicated that it may file a claim for contribution against Alyeska for a portion of the costs and damages that Exxon has incurred.BP will defend any such claims vigorously. It is not possible to estimate any financial effect.In the normal course of the group‘s business, legal proceedings are pending or may be brought against BP group entities arising outof current and past operations, including matters related to commercial disputes, product liability, antitrust, premises-liability claims, generalenvironmental claims and allegations of exposures of third parties to toxic substances, such as lead pigment in paint, asbestos and other chemicals.BP believes that the impact of these legal proceedings on the group‘s results of operations, liquidity or financial position will not be material.With respect to lead pigment in paint in particular, Atlantic Richfield, a subsidiary of BP, has been named as a co-defendant in numerouslawsuits brought in the US alleging injury to persons and property. Although it is not possible to predict the outcome of the legal proceedings,Atlantic Richfield believes it has valid defences that render the incurrence of a liability remote; however, the amounts claimed and the costs ofimplementing the remedies sought in the various cases could be substantial. The majority of the lawsuits have been abandoned or dismissed againstAtlantic Richfield. No lawsuit against Atlantic Richfield has been settled nor has Atlantic Richfield been subject to a final adverse judgment in anyproceeding. Atlantic Richfield intends to defend such actions vigorously.The group files income tax returns in many jurisdictions throughout the world. Various tax authorities are currently examining the group‘sincome tax returns. Tax returns contain matters that could be subject to differing interpretations of applicable tax laws and regulations and theresolution of tax positions through negotiations with relevant tax authorities, or through litigation, can take several years to complete. While it isdifficult to predict the ultimate outcome in some cases, the group does not anticipate that there will be any material impact upon the group‘s resultsof operations, financial position or liquidity.The group is subject to numerous national and local environmental laws and regulations concerning its products, operations and otheractivities. These laws and regulations may require the group to take future action to remediate the effects on the environment of prior disposal orrelease of chemicals or petroleum substances by the group or other parties. Such contingencies may exist for various sites including refineries,chemical plants, oilfields, service stations, terminals and waste disposal sites. In addition, the group may have obligations relating to prior asset salesor closed facilities. The ultimate requirement for remediation and its cost are inherently difficult to estimate. However, the estimated cost of knownenvironmental obligations has been provided in these accounts in accordance with the group‘s accounting policies. While the amounts of futurecosts could be significant and could be material to the group‘s results of operations in the period in which they are recognized, it is not practical toestimate the amounts involved. BP does not expect these costs to have a material effect on the group‘s financial position or liquidity.The group also has obligations to decommission oil and natural gas production facilities and related pipelines. Provision is made for theestimated costs of these activities, however there is uncertainty regarding both the amount and timing of these costs, given the long-term natureof these obligations. BP believes that the impact of any reasonably foreseeable changes to these provisions on the group‘s results of operations,financial position or liquidity will not be material.The group generally restricts its purchase of insurance to situations where this is required for legal or contractual reasons. This is becauseexternal insurance is not considered an economic means of financing losses for the group. Losses will therefore be borne as they arise rather thanbeing spread over time through insurance premiums with attendant transaction costs. The position is reviewed periodically.44. Capital commitmentsAuthorized future capital expenditure for property, plant and equipment by group companies for which contracts had been placed at 31 December 2011amounted to $12,517 million (2010 $11,279 million). In addition, at 31 December 2011, the group had contracts in place for future capital expenditurerelating to investments in jointly controlled entities of $296 million (2010 $437 million) and investments in associates of $36 million (2010 $80 million).BP’s share of capital commitments of jointly controlled entities amounted to $1,244 million (2010 $1,117 million).250 BP Annual Report and Form 20-F 2011