BP 2012 Annual Report Download - page 211

The group calculates the value in use using a discounted cash flow model. The future cash flows are adjusted for risks specific to the cash-generating
unit and are discounted using a pre-tax discount rate. The 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. The rate to be applied
to each country is reassessed each year. Discount rates of 12% and 14% have been used for goodwill impairment calculations performed in 2012 (2011
12% and 14%).
The business segment plans, which are approved on an annual basis by senior management, are the primary source of information for the determination
of value in use. They contain 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 in 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.
Upstream
$ million
2012 2011
Goodwill 7,533 7,931
Excess of recoverable amount over carrying amount 26,614 49,247
The value in use is based on the cash flows expected to be generated by the projected oil or natural gas production profiles up to the expected dates of
cessation of production of each producing field. As the production profile and related cash flows can be estimated from BP’s past experience,
management believes that the cash flows generated over the estimated life of field is the appropriate basis upon which to assess goodwill and
individual assets for impairment. The date of cessation of production depends on the interaction of a number of variables, such as the recoverable
quantities of hydrocarbons, the production profile of the hydrocarbons, the cost of the development of the infrastructure necessary to recover the
hydrocarbons, the production costs, the contractual duration of the production concession and the selling price of the hydrocarbons produced. As each
producing field has specific reservoir characteristics and economic circumstances, the cash flows of the fields are computed using appropriate individual
economic models and key assumptions agreed by BP’s management. Capital expenditure and operating costs for the first four years and expected
hydrocarbon production profiles up to 2020 are derived from the business segment plan. Estimated production quantities and cash flows up to the date
of cessation of production on a field-by-field basis are developed to be consistent with this. The production profiles used are consistent with the
resource volumes approved as part of BP’s centrally-controlled process for the estimation of proved reserves and total resources. Consistent with prior
years, the 2012 review for impairment was carried out during the fourth quarter.
The table above shows the carrying amount of the goodwill for the segment and the excess of the recoverable amount over the carrying amount (the
headroom). Consistent with prior periods, midstream and intangible oil and gas assets were excluded from the headroom calculation.
The Brent oil price assumption used in the impairment review of goodwill is shown in the table below.
2012
2013 2014 2015 2016 2017
2018 and
thereafter
Brent oil price ($/bbl) 105 100 96 93 91 90
2011
2012 2013 2014 2015 2016
2017 and
thereafter
Brent oil price ($/bbl) 106 101 97 94 92 90
Key assumptions for oil and gas prices for the first five years were derived from forward price curves in the fourth quarter. Prices in 2018 and beyond
were determined using long-term views of global supply and demand, building upon past experience of the industry and using information from external
sources. These prices were adjusted to arrive at appropriate consistent price assumptions for different qualities of oil and gas or, where appropriate,
contracted oil and gas prices were applied.
The key assumptions required for the value-in-use estimation are the oil and natural gas prices, production volumes and the discount rate. The sensitivity
of the headroom to changes in the key assumptions was estimated. A change in any one variable will impact multiple other inputs to the calculation
such that the relationship between any variables will not be linear. In order to simplify the sensitivity calculations they were performed assuming a
change to the variable being tested only. A detailed calculation on any given change in assumptions may therefore produce a different result.
It was estimated that if the oil price assumption for all future years was around 12% lower than the current assumption for 2018 and beyond, this would
cause the recoverable amount to be equal to the carrying amount of goodwill and related non-current assets of the segment. It was estimated that no
reasonably possible change in the long-term price of natural gas would cause the headroom to be reduced to zero.
Estimated production volumes are based on detailed data for the fields and take into account development plans for the fields agreed by management
as part of the long-term planning process. The average production for the purposes of goodwill impairment testing over the next 15 years is
563mmboe per year. In 2012, it was estimated that if this production were to be reduced by around 7% for the whole of this period then this would
cause the recoverable amount to be equal to the carrying amount of goodwill and related non-current assets of the segment.
Management believes that currently there is no reasonably possible change in discount rate that would cause the carrying amount to exceed the
recoverable amount.
Financial statements 209
BP Annual Report and Form 20-F 2012
Financial statements
10. Impairment review of goodwill continued