The group makes full provision for the future cost of decommissioning oil and natural gas production facilities and related pipelines on a discounted basis on the installation of those facilities. The provision for the costs of decommissioning these production facilities and pipelines at the end of their economic lives has been estimated using existing technology, at current prices or long-term assumptions, depending on the expected timing of the activity, and discounted using a real discount rate of 2.0% (2007: 2.0%). These costs are generally expected to be incurred over the next 30 years.

While the provision is based on the best estimate of future costs and the economic lives of the facilities and pipelines, there is uncertainty regarding both the amount and timing of incurring these costs. Where BP has entered into a contract for the execution of decommissioning activity, these amounts are generally reported within accruals or other payables.
Provisions for environmental remediation are made when a clean-up is probable and the amount of the obligation can be reliably estimated. Generally, this coincides with commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. The provision for environmental liabilities has been estimated using existing technology, at current prices and discounted using a real discount rate of 2.0% (2007: 2.0%). The majority of these costs are expected to be incurred over the next 10 years. The extent and cost of future remediation programmes are inherently difficult to estimate. They depend on the scale of any possible contamination, the timing and extent of corrective actions, and also the group’s share of the liability.
Included within the litigation and other category at 31 December 2008 are provisions for litigation of $1,446 million (2007: $1,737 million), for deferred employee compensation of $792 million (2007: $761 million) and for expected rental shortfalls on surplus properties of $251 million (2007: $320 million).
To the extent that these liabilities are not expected to be settled within the next three years, the provisions are discounted using either a nominal discount rate of 2.5% (2007: 4.5%) or a real discount rate of 2.0% (2007: 2.0%), as appropriate. No additional provisions were made during 2008 in respect of the Texas City incident (in 2007 the provision was increased by $500 million). Disbursements to claimants in 2008 were $410 million (2007: $314 million) and the provision at 31 December 2008 was $46 million (2007: $456 million).

Discussion points

1 Why is there a provision when the decommissioning will take place so far into the future?
2 What are the significant uncertainties in estimating the amounts of the provisions?

Transcribed Image Text:

At 1 January 2008 Exchange adjustments New or increased provisions Write-back of unused provisions Unwinding of discount Utilization Deletions At 31 December 2008 Of which - expected to be incurred within 1 year - expected to be incurred in more than 1 year Decommissioning Environmental 9,501 (1,208) 327 202 (402) (2) 8,418 322 8,096 2,107 (45) 270 (107) 43 (512) (65) 1,691 418 1,273 Litigation and other 3,487 15,095 (107) (1,360) 2,059 2,656 (513) 42 (1,424) 3,544 $ million Total 805 2,739 (620) 287 (2,338) (67) 13,653 1,545 12,108