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47 Contingent liabilities
There were contingent liabilities at 31 December 2006 in respect of guarantees and indemnities entered into as part of the ordinary course of the
group’s business. No material losses are likely to arise from such contingent liabilities. Group companies have issued guarantees under which amounts
outstanding at 31 December 2006 were $1,123 million (2005 $1,228 million) in respect of borrowings of jointly controlled entities and associates and
$789 million (2005 $736 million) in respect of liabilities of other third parties.
Approximately 200 lawsuits were filed in State and Federal Courts in Alaska seeking compensatory and punitive damages arising out of the Exxon
Valdez oil spill in Prince William Sound in March 1989. Most of those suits named Exxon (now ExxonMobil), Alyeska Pipeline Service Company
(Alyeska), which operates the oil terminal at Valdez, and the other oil companies that own Alyeska. Alyeska initially responded to the spill until the
response was taken over by Exxon. BP owns a 47% interest (reduced during 2001 from 50% by a sale of 3% to Phillips) in Alyeska through a subsidiary
of BP America Inc. and briefly indirectly owned a further 20% interest in Alyeska following BP’s combination with Atlantic Richfield Company (Atlantic
Richfield). Alyeska and its owners have settled all the claims against them under these lawsuits. Exxon has indicated that it may file a claim for
contribution against Alyeska for a portion of the costs and damages which it has incurred. If any claims are asserted by Exxon that affect Alyeska and its
owners, BP will defend the claims vigorously.
Since 1987, Atlantic Richfield, a current subsidiary of BP, has been named as a co-defendant in numerous lawsuits brought in the US alleging injury to
persons and property caused by lead pigment in paint. The majority of the lawsuits have been abandoned or dismissed as against Atlantic Richfield.
Atlantic Richfield is named in these lawsuits as alleged successor to International Smelting & Refining which, along with a predecessor company,
manufactured lead pigment during the period 1920-1946. Plaintiffs include individuals and governmental entities. Several of the lawsuits purport to be
class actions. The lawsuits (depending on plaintiff) seek various remedies, including: compensation to lead-poisoned children; cost to find and remove
lead paint from buildings; medical monitoring and screening programmes; public warning and education on lead hazards; reimbursement of government
healthcare costs and special education for lead-poisoned citizens; and punitive damages. No lawsuit against Atlantic Richfield has been settled nor has
Atlantic Richfield been subject to a final adverse judgment in any proceeding. The amounts claimed and, if such suits were successful, the costs of
implementing the remedies sought in the various cases could be substantial. While it is not possible to predict the outcome of these legal actions,
Atlantic Richfield believes that it has valid defences and it intends to defend such actions vigorously and thus the incurrence of a liability by Atlantic
Richfield is remote. Consequently, BP believes that the impact of these lawsuits on the group’s results of operations, financial position or liquidity will
not be material.
In addition, various group companies are parties to legal actions and claims that arise in the ordinary course of the group’s business. While the
outcome of such legal proceedings cannot be readily foreseen, BP believes that they will be resolved without material effect on the group’s results of
operations, financial position or liquidity.
The group is subject to numerous national and local environmental laws and regulations concerning its products, operations and other activities.
These laws and regulations may require the group to take future action to remediate the effects on the environment of prior disposal or release of
chemicals or petroleum substances by the group or other parties. Such contingencies may exist for various sites including refineries, chemical plants, oil
fields, service stations, terminals and waste disposal sites. In addition, the group may have obligations relating to prior asset sales or closed facilities.
The ultimate requirement for remediation and its cost are inherently difficult to estimate. However, the estimated cost of known environmental
obligations has been provided in these accounts in accordance with the group’s accounting policies. While the amounts of future costs could be
significant and could be material to the group’s results of operations in the period in which they are recognized, BP does not expect these costs to have
a material effect on the group’s financial position or liquidity.
The group generally restricts its purchase of insurance to situations where this is required for legal or contractual reasons. This is because external
insurance is not considered an economic means of financing losses for the group. Losses will therefore be borne as they arise rather than being spread
over time through insurance premiums with attendant transaction costs. The position is reviewed periodically.
48 Capital commitments
Authorized future capital expenditure for property, plant and equipment by group companies for which contracts had been placed at 31 December 2006
amounted to $9,773 million (2005 $7,596 million). Capital commitments of jointly controlled entities amounted to $1,217 million (2005 $576 million).
49 First-time adoption of International Financial Reporting Standards
For all periods up to and including the year ended 31 December 2004, BP prepared its financial statements in accordance with UK generally accepted
accounting practice (UK GAAP). BP, together with all other European Union (EU) companies listed on an EU stock exchange, was required to prepare
consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU with effect from 1 January
2005. The Annual Report and Accounts for the year ended 31 December 2005 comprised BP’s first consolidated financial statements prepared under
IFRS.
The general principle for first-time adoption of IFRS is that standards in force at the first reporting date (for BP, 31 December 2005) are applied
retrospectively. However, IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ contains a number of exemptions that companies
are permitted to apply. BP elected to take advantage of the exemption allowing comparative information on financial instruments to be prepared in
accordance with UK GAAP and the group adopted IAS 32 ‘Financial Instruments: Disclosure and Presentation’ (IAS 32) and IAS 39 ‘Financial
Instruments: Recognition and Measurement’ (IAS 39) from 1 January 2005.
Had IAS 32 and IAS 39 been applied from 1 January 2003, BP’s date of transition for all other IFRS in force at the first reporting date, the following
are the most significant adjustments that would have been necessary in the financial statements for the year ended 31 December 2004:
– All derivatives, including embedded derivatives, would have been brought on to the balance sheet at fair value, and changes in fair value would have
been recognized in the income statement.
– Available-for-sale investments would have been carried at fair value rather than at cost and changes in fair value would have been recognized directly
in equity.