BP 2015 Annual Report Download - page 118

1. Significant accounting policies, judgements, estimates and assumptions – continued
Contingent liabilities are possible obligations whose existence will only be confirmed by future events not wholly within the control of the group, or
present obligations where it is not probable that an outflow of resources will be required or the amount of the obligation cannot be measured with
sufficient reliability. Contingent liabilities are not recognized in the financial statements but are disclosed unless the possibility of an outflow of
economic resources is considered remote.
Where the group makes contributions into a separately administered fund for restoration, environmental or other obligations, which it does not control,
and the group’s right to the assets in the fund is restricted, the obligation to contribute to the fund is recognized as a liability where it is probable that
such additional contributions will be made. The group recognizes a reimbursement asset separately, being the lower of the amount of the associated
restoration, environmental or other provision and the group’s share of the fair value of the net assets of the fund available to contributors.
Significant estimate or judgement: provision relating to the Gulf of Mexico oil spill
Detailed information on the Gulf of Mexico oil spill, including the financial impacts, is provided in Note 2.
During 2015, BP signed agreements in principle, which were subject to execution of definitive agreements, to settle all federal and state claims and
claims made by more than 400 local government entities. Further detail is provided in Note 2. Certain agreements are subject to approval by the
court of a Consent Decree. A provision for amounts payable under these agreements has, therefore, been recognized. The agreements significantly
reduce the uncertainties faced by BP following the Gulf of Mexico oil spill in 2010. However, there continues to be uncertainty regarding the
outcome or resolution of current or future litigation and the extent and timing of costs relating to the incident not covered by these agreements.
The provision recognized is the reliable estimate of expenditures required to settle certain present obligations at the end of the reporting period.
There are future expenditures, however, for which it is not possible to measure the obligation reliably. These are not provided for, are disclosed as
contingent liabilities, and are described in Note 2. Contingent liabilities are disclosed in relation to business economic loss (BEL) claims under the
Plaintiffs’ Steering Committee (PSC) settlement, securities-related litigation, other litigation, including claims from parties excluded from or who
opted out of the PSC settlement, and under the settlement agreements with Anadarko and MOEX and other agreements.
Management believes that no reliable estimate can currently be made of any BEL claims not yet processed or processed but not yet paid, except
where an eligibility notice has been issued and is not subject to appeal by BP within the claims facility. The submission deadline for BEL claims
passed on 8 June 2015; no further claims can be submitted. A significant number of BEL claims have been received but have not yet been
processed and it is not possible to quantify the total value of the claims. A revised policy for the matching of revenue and expenses for BEL claims
was introduced in May 2014 and, of the claims assessable under the new policy, the majority have not yet been determined at this time. For this
and other reasons set out in Note 2, we are unable to reliably estimate future trends of the number and proportion of claims that will be determined
to be eligible, nor can we reliably estimate the value of such claims. A provision for such BEL claims will be established when these uncertainties are
sufficiently reduced and a reliable estimate can be made of the liability.
Decommissioning
Liabilities for decommissioning costs are recognized when the group has an obligation to plug and abandon a well, dismantle and remove a facility or
an item of plant and to restore the site on which it is located, and when a reliable estimate of that liability can be made. Where an obligation exists for a
new facility or item of plant, such as oil and natural gas production or transportation facilities, this liability will be recognized on construction or
installation. Similarly, where an obligation exists for a well, this liability is recognized when it is drilled. An obligation for decommissioning may also
crystallize during the period of operation of a well, facility or item of plant through a change in legislation or through a decision to terminate operations;
an obligation may also arise in cases where an asset has been sold but the subsequent owner is no longer able to fulfil its decommissioning
obligations, for example due to bankruptcy. The amount recognized is the present value of the estimated future expenditure determined in accordance
with local conditions and requirements. The provision for the costs of decommissioning wells, production facilities and pipelines at the end of their
economic lives is estimated using existing technology, at current prices or future assumptions, depending on the expected timing of the activity, and
discounted using the real discount rate. The weighted average period over which these costs are generally expected to be incurred is estimated to be
approximately 17 years.
An amount equivalent to the decommissioning provision is recognized as part of the corresponding intangible asset (in the case of an exploration or
appraisal well) or property, plant and equipment. The decommissioning portion of the property, plant and equipment is subsequently depreciated at the
same rate as the rest of the asset. Other than the unwinding of discount on the provision, any change in the present value of the estimated
expenditure is reflected as an adjustment to the provision and the corresponding asset.
Environmental expenditures and liabilities
Environmental expenditures that are required in order for the group to obtain future economic benefits from its assets are capitalized as part of those
assets. Expenditures that relate to an existing condition caused by past operations that do not contribute to future earnings are expensed.
Liabilities for environmental costs are recognized when a clean-up is probable and the associated costs can be reliably estimated. Generally, the timing
of recognition of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites.
The amount recognized is the best estimate of the expenditure required to settle the obligation. Provisions for environmental liabilities have been
estimated using existing technology, at current prices and discounted using a real discount rate. The weighted average period over which these costs
are generally expected to be incurred is estimated to be approximately five years.
Significant estimate or judgement: provisions
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 decommissioning obligations facing BP relate to the plugging and abandonment of wells and the removal and disposal of oil and natural
gas platforms and pipelines around the world. Most of these decommissioning events are many years in the future and the precise requirements
that will have to be met when the removal event occurs are uncertain. Decommissioning technologies and costs are constantly changing, as well as
political, environmental, safety and public expectations. BP believes that the impact of any reasonably foreseeable change to these provisions on the
group’s results of operations, financial position or liquidity will not be material. If oil and natural gas production facilities and pipelines are soldtothird
parties and the subsequent owner is unable to meet their decommissioning obligations, judgement must be used to determine whether BP is then
responsible for decommissioning, and if so the extent of that responsibility. The timing and amounts of future cash flows are subject to significant
uncertainty. Any changes in the expected future costs are reflected in both the provision and the asset.
114 BP Annual Report and Form 20-F 2015