BP 2006 Annual Report Download - page 126

124
13 Impairment and losses on sale of businesses and fixed assets continued
Other businesses and corporate
The impairment charge for 2006 relates to remaining chemical assets after the sale of Innovene. The impairment charge for 2005 relates to the write-off
of additional goodwill on the Solvay transactions. In 2004, in connection with the Solvay transactions, the group recognized impairment charges of
$325 million for goodwill and $270 million for property, plant and equipment in BP Solvay Polyethylene Europe. As part of a restructuring of the North
American Olefins and Derivatives businesses, decisions were taken to exit certain businesses and facilities, resulting in impairments and write-downs
of $294 million.
Loss on sale of businesses or termination of operations
The principal transactions that give rise to the losses for each business segment are described below.
Refining and Marketing
In 2004, activities included the closure of two manufacturing plants at Hull, UK, which produced acids; the sale of the European speciality intermediate
chemicals business; the closure of the lubricants operation of the Coryton refinery in the UK and of refining operations at the ATAS refinery in
Mersin, Turkey.
Other businesses and corporate
For 2004, activities included the sale of the US speciality intermediate chemicals business; the sale of the fabrics and fibres business; and the closure of
thelinearalpha-olefinsproductionfacilityatPasadena,Texas.
Loss on sale of fixed assets
The principal transactions that give rise to the losses for each business segment are described below.
Exploration and Production
The group divested interests in a number of oil and natural gas properties in all three years. For 2006, the largest component of the loss is attributed to
the sale of properties in the Gulf of Mexico Shelf which includes increases in decommissioning liability estimates associated with the
hurricane-damaged fields which were divested during the year. For 2004, this included interests in oil and natural gas properties in Indonesia and the
Gulf of Mexico.
Refining and Marketing
For 2006, the principal transactions contributing to the loss were retail churn. For 2004, the principal transactions contributing to the loss were
divestment of the Singapore refinery and retail churn.
14 Impairment of goodwill
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Goodwill at 31 December 2006 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Exploration and Production 4,282 4,371
Refining and Marketing 6,390 5,955
Gas, Power and Renewables 108 45
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10,780 10,371
Goodwill acquired through business combinations has been allocated first to business segments and then down to the next level of cash-generating unit
that is expected to benefit from the synergies of the acquisition. For Exploration and Production, goodwill has been allocated to each geographic region,
that is UK, Rest of Europe, US and Rest of World, and for Refining and Marketing, goodwill has been allocated to strategic performance units (SPUs),
namely Refining, Retail, Lubricants, Aromatics and Acetyls and Business Marketing.
In assessing whether goodwill has been impaired, the carrying amount of the cash-generating unit (including goodwill) is compared with the
recoverable amount of the cash-generating unit. The recoverable amount is the higher of fair value less costs to sell and value in use. In the absence of
any information about the fair value of a cash-generating unit, the recoverable amount is deemed to be the value in use.
The group generally estimates value in use using a discounted cash flow model. The future cash flows are usually adjusted for risks specific to the
asset and discounted using a pre-tax discount rate of 10% (2005 10%). This discount rate is derived from the group’s post-tax weighted average cost of
capital. A different pre-tax discount rate is used where the tax rate applicable to the region is significantly different from the average corporate taxrate
applicable to the group as a whole.
The four or five year business segment plans, which are approved on an annual basis by senior management, are the source for information for the
determination of the various values in use. They contain implicit forecasts for oil and natural gas production, refinery throughputs, sales volumes for
various types of refined products (e.g. gasoline and lubricants), revenues, costs and capital expenditure. As an initial step to the preparation of these
plans, various environmental assumptions, such as oil prices, natural gas prices, refining margins, refined product margins and cost inflation rates, are
set by senior management. These environmental assumptions take account of existing prices, global supply-demand equilibrium for oil and natural gas,
other macroeconomic factors and historical trends and variability.
For the purposes of impairment testing, the group’s Brent oil price assumption is an average $65 per barrel in 2007, $68 per barrel in 2008, $67 per
barrel in 2009, $66 per barrel in 2010, $64 per barrel in 2011 and $40 per barrel in 2012 and beyond (2005 $55 per barrel in 2005 decreasing in equal
annual steps over the following three years to $25 per barrel in 2009 and beyond). Similarly, the group’s assumption for Henry Hub natural gas prices is
an average of $8.10 per mmBtu in 2007, $8.31 per mmBtu in 2008, $7.88 per mmBtu in 2009, $8.21 per mmBtu in 2010, $7.50 per mmBtu in 2011 and
$5.50 per mmBtu in 2012 and beyond (2005 $8.65 per mmBtu in 2005 decreasing in equal annual steps over the following three years to $4.00 per
mmBtu in 2009 and beyond). These prices are adjusted to arrive at appropriate consistent price assumptions for different qualities of oil and gas.