BP 2005 Annual Report Download - page 25

BP Annual Report and Accounts 2005 23
sheet, principally relating to the Atlantic Richfield and
Burmah Castrol acquisitions. In testing goodwill for
impairment, the group uses a similar approach to that
described above. The cash-generating units for impairment
testing in this case are one level below business segments.
As noted above, if there are low oil prices or natural gas
prices or refining margins or marketing margins for an
extended period, the group may need to recognize
significant goodwill impairment charges.
Provisions and liabilities The group holds provisions for the
future decommissioning of oil and natural gas production
facilities and pipelines at the end of their economic lives.
The largest asset removal obligations facing BP relate to
the removal and disposal of oil and natural gas platforms
and pipelines around the world. The estimated discounted
costs of dismantling and removing these facilities are
accrued on the installation of those facilities, reflecting our
legal obligations at that time. A corresponding tangible asset
of an amount equivalent to the provision is also created. This
asset is depreciated over the expected life of the production
facility or pipeline. Most of these removal events are many
years in the future and the precise requirements that will
have to be met when the removal event actually occurs
are uncertain. Asset removal technologies and costs are
constantly changing, as well as political, environmental,
safety and public expectations. Consequently, the timing
and amounts of future cash flows are subject to significant
uncertainty. Changes in the expected future costs are
reflected in both the provision and tangible asset.
Decommissioning provisions associated with
downstream and petrochemicals facilities are generally
not provided for, as such potential obligations cannot be
measured, given their indeterminate settlement dates.
The group performs periodic reviews of its downstream
and petrochemicals long-lived assets for any changes in
facts and circumstances that might require the recognition
of a decommissioning provision.
The timing and amount of future expenditures are
reviewed annually, together with the interest rate to be
used in discounting the cash flows. The interest rate used to
determine the balance sheet obligation at the end of 2005
was 2.0%, unchanged from the end of 2004. The interest
rate represents the real rate (i.e. adjusted for inflation) on
long-dated government bonds.
Other provisions and liabilities are recognized in the
period when it becomes probable that there will be a future
outflow of funds resulting from past operations or events
that can be reasonably estimated. The timing of recognition
requires the application of judgement to existing facts and
circumstances, which can be subject to change. Since the
actual cash outflows can take place many years in the
future, the carrying amounts of provisions and liabilities are
reviewed regularly and adjusted to take account of changing
facts and circumstances.
A change in estimate of a recognized provision or
liability would result in a charge or credit to net income in
the period in which the change occurs (with the exception
of decommissioning costs as described above).
Exchange Commission. Estimates of the group’s proved
reserves of oil and natural gas are shown on pages 131-136,
together with more information about the group’s process
for booking reserves and the difference between the
reserves determined for the group’s UK and US reporting.
Recoverability of asset carrying values BP assesses its
fixed assets, including goodwill, for possible impairment if
there are events or changes in circumstances that indicate
that carrying values of the assets may not be recoverable.
Such indicators include changes in the group’s business
plans, changes in commodity prices leading to unprofitable
performance and, for oil and gas properties, significant
downward revisions of estimated proved reserve quantities.
The assessment for impairment entails comparing the
carrying value of the cash generating unit and associated
goodwill with the recoverable amount of the asset, that
is, the higher of net realizable value and value in use. Value
in use is usually determined on the basis of discounted
estimated future net cash flows.
Determination as to whether and how much an asset
is impaired involves management estimates on highly
uncertain matters such as future commodity prices,
the effects of inflation and technology improvements on
operating expenses, production profiles and the outlook
for global or regional market supply-and-demand conditions
for crude oil, natural gas and refined products.
For oil and natural gas properties, the expected future
cash flows are estimated based on the group’s plans to
continue to produce and develop proved and associated risk-
adjusted probable and possible reserves. Expected future
cash flows from the sale or production of reserves are
calculated based on the group’s best estimate of future oil
and gas prices. Prices for oil and natural gas used for future
cash flow calculations are assumed to decline from existing
levels in equal steps during the next three years to the
long-term planning assumptions as at 31 December 2005
($25 per barrel and $4.00 per mmBtu for Brent and Henry
Hub respectively). Previously, the long-term planning
assumptions were a Brent oil price of $20 per barrel and a
Henry Hub gas price of $3.50 per mmBtu. These long-term
planning assumptions are subject to periodic review and
modification. The estimated future level of production is
based on assumptions about future commodity prices,
lifting and development costs, field decline rates, market
demand and supply, economic regulatory climates and
other factors.
Charges for impairment are recognized in the group’s
results from time to time as a result of, among other
factors, adverse changes in the recoverable reserves from
oil and natural gas fields, low plant utilization or reduced
profitability. If there are low oil prices or natural gas prices
or refining margins or marketing margins over an extended
period, the group may need to recognize significant
impairment charges.
Irrespective of whether there is any indication of
impairment, BP is required to test for impairment any
goodwill acquired in a business combination. The group
carries goodwill of approximately $10.4 billion on its balance