BP p.l.c. – Annual report – 31 December 2021
Industry: oil and gas
Significant judgements: investments in Rosneft and Aker BP
Judgement is required in assessing the level of control or influence over another entity in which the group holds an interest. For bp, the judgements that the group had significant influence over Rosneft Oil Company (Rosneft), a Russian oil and gas company, and expects to continue to have significant influence over Aker BP, a Norwegian oil and gas company, following completion of Aker BP’s proposed acquisition of Lundin Energy, are significant.
Significant influence is defined in IFRS as the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. Significant influence is presumed when an entity owns 20% or more of the voting power of the investee. Significant influence is presumed not to be present when an entity owns less than 20% of the voting power of the investee. IFRS identifies several indicators that may provide evidence of significant influence, including representation on the board of directors of the investee and participation in policy-making processes.
At 31 December 2021, bp owned 19.75% of the voting shares of Rosneft. Rosneft’s largest shareholder is Rosneftegaz JSC (Rosneftegaz), which is wholly owned by the Russian government. At 31 December 2021, Rosneftegaz held 40.4% (2020 40.4%) of the voting shares of Rosneft. bp’s group chief executive, Bernard Looney, was approved as a member of the board of directors of Rosneft in June 2020 as one of bp’s two nominated directors. bp’s other nominated director, Bob Dudley, was approved as a member of the Rosneft board in 2013. He was also chairman of the Rosneft board’s Strategic and Sustainable Development Committee during 2021. bp also held the voting rights at general meetings of shareholders conferred by its 19.75% stake in Rosneft. bp’s economic interest in Rosneft at 31 December 2021 was 22.03% (2020 22.03%), which was higher than bp’s ownership stake due to transactions by Rosneft in its own shares in previous years. bp’s management considers, therefore, that the group has significant influence over Rosneft, as defined by IFRS, as at 31 December 2021. As a consequence of this judgement, bp used the equity method of accounting for its investment and bp’s share of Rosneft’s oil and natural gas reserves was included in the group’s estimated net proved reserves of equity-accounted entities.
On 27 February 2022, bp announced it will exit its shareholding in Rosneft. bp’s two nominated directors to the Rosneft board stepped down from that date and submitted letters of resignation. As a result, bp’s management considers that the group no longer has significant influence over Rosneft, as defined by IFRS, from that date. Following the loss of significant influence, bp’s equity accounting of its investment ceased from that date and the investment will be accounted for as an investment in an equity instrument measured at fair value, as described under ‘Financial assets’ below, instead. No share of Rosneft’s oil and natural gas reserves will be reported going forward. See Note 37 Events after the reporting period for further information.
bp owned 27.85% of the voting shares of Aker BP at 31 December 2021 and significant influence was presumed. On completion of Aker BP’s acquisition of Lundin Energy, which remains subject to shareholder and regulatory approval, bp expects its interest to be diluted to 15.9% of the voting shares of Aker BP as a result of new Aker BP shares being issued as partial consideration to Lundin Energy shareholders.
bp’s group chief financial officer, Murray Auchincloss, has been a member of the Aker BP board since 2017. bp’s other nominated director, Kate Thomson has been a member of the Aker BP board since formation of that company in 2016. She is also a member of the Aker BP board’s Audit and Risk Committee. These memberships are not expected to change following the transaction. bp also holds the voting rights at general meetings of shareholders conferred by its stake in Aker BP. bp’s management considers, therefore, that the group will retain significant influence, as defined by IFRS, over Aker BP following the acquisition of Lundin Energy.
As a consequence of this judgement, bp has classified $0.6 billion as an asset held for sale, reflecting the highly probable deemed disposal of a part of bp’s equity accounted interest as a result of the transaction. If significant influence was not present following completion, the carrying amount of bp’s entire interest in Aker BP would be classified as an asset held for sale.
16. Investments in associates
The following table provides aggregated summarized financial information for the group’s associates as it relates to the amounts recognized in the group income statement and on the group balance sheet.
The associate that is material to the group at both 31 December 2021 and 2020 is Rosneft.
bp owns 19.75% of the voting shares of Rosneft which are listed on the MICEX stock exchange in Moscow and its global depository receipts are listed on the London Stock Exchange. Rosneft’s largest shareholder is Rosneftegaz JSC (Rosneftegaz), which is wholly owned by the Russian government. At 31 December 2021, Rosneftegaz held 40.4% (2020 40.4%) of the voting shares of Rosneft.
At 31 December 2021 and 2020 bp classified its investment in Rosneft as an associate because, in management’s judgement, bp had significant influence over Rosneft; see Interests in other entities within Note 1 for further information. The group’s investment in Rosneft is a foreign operation whose functional currency is the Russian rouble. The increase in the group’s equity-accounted investment balance for Rosneft at 31 December 2021 compared with 31 December 2020 principally relates to earnings from Rosneft and bp’s share of Rosneft’s changes in equity offset by dividends.
bp retains 19.75% of the voting rights at meetings of Rosneft shareholders and will continue to be entitled to dividends based on its current shareholding. bp’s share of profit or loss of Rosneft reflects its economic interest. At 31 December 2021, bp’s economic interest was 22.03%.
The value of bp’s 19.75% shareholding in Rosneft based on the quoted market share price of $8.04 per share (2020 $5.64 per share) was $16,827 million at 31 December 2021 (2020 $11,804 million). The value of bp’s 22.03% (2020 22.03%) economic interest based on the quoted market share price was $18,773 million at 31 December 2021 (2020 $13,167 million).
See also Note 37 Events after the reporting period.
The following table provides summarized financial information relating to Rosneft. This information is presented on a 100% basis and reflects adjustments made by bp to Rosneft’s own results in applying the equity method of accounting. bp adjusts Rosneft’s results for the accounting required under IFRS relating to bp’s purchase of its interest in Rosneft and the amortization of the deferred gain relating to the disposal of bp’s interest in TNK-BP.
The group received dividends, net of withholding tax, of $640 million from Rosneft in 2021 (2020 $480 million and 2019 $785 million).
Summarized financial information for the group’s share of associates is shown below.
a In 2014-2019, Rosneft adopted hedge accounting in relation to a portion of highly probable future export revenue denominated in US dollars. Foreign exchange gains and losses arising on the retranslation of borrowings denominated in currencies other than the Russian rouble and designated as hedging instruments were recognized initially in other comprehensive income, and were reclassified to the income statement as the hedged revenue was recognized.
Transactions between the group and its associates are summarized below.
In the normal course of business, bp enters into various arm’s length transactions with associates including fixed price commitments to sell and to purchase commodities, forward sale and purchase contracts and agency agreements.
The terms of the outstanding balances receivable from associates are typically 30 to 45 days. The balances are unsecured and will be settled in cash. There are no significant provisions for doubtful debts relating to these balances and no significant expense recognized in the income statement in respect of bad or doubtful debts. Dividends receivable are not included in the table above.
The majority of purchases from associates relate to crude oil and oil products transactions with Rosneft. Sales to associates are related to various entities.
bp has commitments amounting to $9,930 million (2020 $10,777 million), primarily in relation to contracts with its associates for the purchase of transportation capacity. For information on capital commitments in relation to associates see Note 12.
bp’s share of impairment charges taken by associates in 2021 was $291 million (2020 $414 million).
12. Capital commitments
Authorized future capital expenditure for property, plant and equipment (excluding right-of-use assets) by group companies for which contracts had been signed at 31 December 2021 amounted to $8,208 million (2020 $8,009 million, 2019 $11,382 million). bp has contracted capital commitments amounting to $1,075 million (2020 $1,087 million, 2019 $77 million) in relation to joint ventures and $126 million (2020 $183 million, 2019 $787 million) in relation to associates. bp’s share of contracted capital commitments of joint ventures amounted to $1,383 million (2020 $900 million, 2019 $1,024 million).
37. Events after the reporting period
On 27 February 2022, following the military action in Ukraine, bp announced that bp it will exit its 19.75% shareholding in Rosneft Oil Company (Rosneft) a Russian oil and gas company. As of 27 February 2022, bp chief executive officer Bernard Looney also stepped down from the board of Rosneft with immediate effect and has submitted a letter of resignation as did the other Rosneft director nominated by bp, former bp group chief executive Bob Dudley.
As a result of bp’s nominated directors stepping down from the Rosneft board, bp has determined that as of 27 February 2022, the group no longer has significant influence over Rosneft taking into account the criteria set out in IAS 28 Investments in Associates and Joint Ventures, bp will therefore no longer equity account for its interest in Rosneft as of that date, treating the investment prospectively as a financial asset measured at fair value within ‘Other investments’ until the shareholding is derecognized.
Additionally, in response to sanctions imposed on Russia by a number of countries, Russia has implemented new counter-sanctions including restrictions on the divestment from Russian assets by foreign investors and a reported temporary prohibition on registrars and depositories from making payments on Russian securities in favour of foreign investors. Further details including confirmation of the precise terms or application of these counter-sanctions are not yet known.
The discontinuation of equity accounting combined with the market impact on Russian assets that has arisen following the military action in Ukraine will have a material effect on the group’s first quarter 2022 interim financial statements including on the carrying amount of bp’s investment in Rosneft, which at 31 December 2021 stood at approximately $14 billion. In addition, foreign exchange losses and other cumulative charges to other comprehensive income will be taken to the income statement. At 31 December 2021, these amounts stood at approximately $11 billion. The change in accounting treatment also means that bp will no longer recognize a share in Rosneft’s net income, production and reserves from 27 February 2022. The group will cease to report Rosneft as a separate segment in the group’s financial reporting for 2022.
Also, as of 27 February 2022, bp decided to exit its other businesses with Rosneft within Russia, the carrying value of which stood at $1.4 billion at 31 December 2021. The associated impacts will also be reflected in the group’s first quarter 2022 interim financial statements.