BP 2008 Annual Report Download - page 129

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BP Annual Report and Accounts 2008
Notes on financial statements
11. Impairment and losses on sale of businesses and fixed assets
$ million
2008 2007 2006
Impairment losses
Exploration and Production 1,186 292 237
Refining and Marketing 159 1,186 155
Other businesses and corporate 227 83 69
1,572 1,561 461
Impairment reversals
Exploration and Production (155) (237) (340)
(155) (237) (340)
Loss on sale of fixed assets
Exploration and Production 18 42 195
Refining and Marketing 297 313 228
Other businesses and corporate 1–
316 355 428
Loss on remeasurement to fair value less costs to sell and on disposal of Innovene operations —– 184
1,733 1,679 733
Innovene operations —– (184)
Continuing operations 1,733 1,679 549
Impairment
In assessing whether a write-down is required in the carrying value of a potentially impaired intangible asset, item of property, plant and equipment or
an equity-accounted investment, its carrying value is compared with its recoverable amount. The recoverable amount is the higher of the asset’s fair
value less costs to sell and value in use. Given the nature of the group’s activities, information on the fair value of an asset is usually difficult to obtain
unless negotiations with potential purchasers are taking place. Consequently, unless indicated otherwise, the recoverable amount used in assessing
the impairment charges described below is value in use. The group estimates value in use using a discounted cash flow model. The future cash flows
are adjusted for risks specific to the asset and are discounted using a pre-tax discount rate. This discount rate is derived from the group’s post-tax
weighted average cost of capital and is adjusted where applicable to take into account any specific risks relating to the country where the
cash-generating unit is located. Typically rates of 11% or 13% are used (2007 11% or 13%). The rate to be applied for each country is reassessed each
year. For impairments of available-for-sale financial assets that are quoted investments, the fair value is determined by reference to bid prices at the
close of business at the balance sheet date. Any cumulative gain or loss previously recognized in equity is transferred to the income statement.
Exploration and Production
During 2008, the Exploration and Production segment recognized impairment losses of $1,186 million. The main elements were the writing down of
our investment in Rosneft by $517 million to its fair value determined by reference to an active market, due to a significant decline
in the market value of the investment, impairment of oil and gas properties in the Gulf of Mexico of $270 million triggered by downward revisions of
reserves, an impairment of exploration assets in Vietnam of $210 million following BP’s decision to withdraw from activities in the area concerned,
impairment of oil and gas properties in Egypt of $85 million triggered by cost increases and several other individually insignificant impairment charges
amounting to $104 million.
These charges were partly offset by reversals of previously recognized impairment charges amounting to $155 million. Of this total,
$122 million resulted from a reassessment of the economics of Rhourde El Baguel in Algeria.
During 2007, the Exploration and Production segment recognized impairment losses of $292 million. The main elements were a charge of
$112 million relating to the cancellation of the DF1 project in Scotland, a $103 million partner loan write-off as a result of unsuccessful drilling in the
West Shmidt licence block in Sakhalin and a $52 million write-off of the Whitney Canyon gas plant in US Lower 48 driven by management’s decision to
abandon this facility. In addition, there were several individually insignificant impairment charges, triggered by downward reserves revisions, amounting
to $25 million in total.
These charges were largely offset by reversals of previously recognized impairment charges amounting to $237 million. Of this total,
$208 million resulted from a reassessment of the decommissioning liability for damaged platforms in the Gulf of Mexico Shelf. The remaining
$29 million related to other individually insignificant impairment reversals, resulting from favourable revisions to the estimates used in determining the
assets’ recoverable amounts.
During 2006, Exploration and Production recognized a net gain on impairment. The main element was a $340 million credit for reversals of
previously booked impairments relating to the UK North Sea, US Lower 48 and China. These reversals resulted from a positive change in the estimates
used to determine the assets’ recoverable amount since the impairment losses were recognized. This was partially offset by impairment losses
totalling $237 million. The major element was a charge of $109 million against intangible assets relating to properties in Alaska. The trigger for the
impairment test was the decision of the Alaska Department of Natural Resources to terminate the Point Thompson Unit Agreement. We are defending
our right through the appeal process. In addition, there was a charge of $100 million relating to certain North American pipeline assets. The trigger for
impairment testing was the reduction in future pipeline tariff revenues and increased ongoing operational costs. The remaining $28 million relates to
other individually insignificant impairments, the impairment tests for which were triggered by downward reserves revisions and increased tax burden.
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