BP 2009 Annual Report Download - page 128

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BP Annual Report and Accounts 2009
Notes on financial statements
3. Disposals and impairment continued
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, the asset’s 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. 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,
although other rates may be used if appropriate to the specific circumstances. In 2009 the rates ranged from 9% to 13% (2008 11% to 13%). The rate
applied in each country is re-assessed each year. In certain circumstances the fair value less costs to sell may be available for an asset. On occasion,
an impairment assessment may be carried out using fair value less costs to sell as the recoverable amount when, for example, a recent market
transaction for a similar asset has taken place. 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 loss previously recognized in other
comprehensive income is transferred to the income statement.
Exploration and Production
During 2009, the Exploration and Production segment recognized impairment losses of $118 million. The main elements were the write-down of our
$42 million investment in the East Shmidt interest in Russia, triggered by a decision to not proceed to development; a $62 million charge associated
with our nErgize gas scheduling system; and several other individually insignificant impairment charges amounting to $14 million.
During 2008, the Exploration and Production segment recognized impairment losses of $1,186 million. The main elements were the write-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 (see Note 25), 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,
impaiment 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 losses 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.
Refining and Marketing
During 2009, an impairment loss of $1,579 million was recognized against the goodwill allocated to the US West Coast fuels value chain (FVC). The
goodwill was originally recognized at the time of the ARCO acquisition in 2000. The prevailing weak refining environment, together with a review of
future margin expectations in the FVC, has led to a reduction in the expected future cash flows. Further information, including details of the group’s
approach to impairment reviews of goodwill, is given in Note 8. Other impairment losses were also recognized by the segment on a number of assets
which amounted to $255 million.
During 2008, the Refining and Marketing segment recognized impairment losses on a number of assets which amounted to $159 million.
The main component of the 2007 impairment charge of $1,186 million arose because of a decision to sell our company-owned and company-
operated sites in the US resulting in a $610 million write-down of the carrying amount of the sites to fair value less costs to sell. Following a decision
to sell certain assets at our Acetyls plant in Hull, UK, we wrote down the carrying amount of these assets to fair value less costs to sell leading to an
impairment charge of $186 million. Changing marketing conditions led to impairments in Samsung Petrochemical Company, to fair value less costs to
sell, and in China American Petrochemical Company amounting to $165 million. The balance relates principally to the write-downs of assets elsewhere
in the segment portfolio.
Other businesses and corporate
During 2009 and 2008, Other businesses and corporate recognized impairment losses totalling $189 million and $227 million respectively related to
various assets in the Alternative Energy business. The impairment loss of $83 million in 2007 related to various individually insignificant write-downs.
4. Segmental analysis
The group’s organizational structure reflects the different activities in which BP is engaged. In 2009, BP had two reportable segments: Exploration and
Production and Refining and Marketing. BP’s activities in low-carbon energy are managed through our Alternative Energy business, which is reported
in Other businesses and corporate. The group is managed on an integrated basis.
Exploration and Production’s activities cover three key areas. Upstream activities include oil and natural gas exploration, field development and
production. Midstream activities include pipeline, transportation and processing activities related to our upstream activities. Marketing and trading
activities include the marketing and trading of natural gas, including liquefied natural gas (LNG), together with power and natural gas liquids (NGLs).
Refining and Marketing’s activities include the supply and trading, refining, manufacturing, marketing and transportation of crude oil, petroleum
and petrochemicals products and related services.