Under the SEC’s full cost accounting rules, we review the carrying value of our oil and gas
properties each quarter on a country-by-country basis. Under these rules, for each cost center,
capitalized costs of oil and gas properties (net of accumulated depreciation, depletion and amortization
and related deferred income taxes) may not exceed a “ceiling” equal to:
• the present value, discounted at 10%, of estimated future net cash flows from proved oil and
gas reserves, net of estimated future income taxes; plus
• the cost of unproved properties not being amortized; plus
• the lower of cost or estimated fair value of unproved properties included in the costs being
amortized (net of related tax effects).
These rules generally require that we price our future oil and gas production at the twelve-month
average of the first-day-of-the-month reference prices as adjusted for location and quality differentials.
Our reference prices are the West Texas Intermediate, or WTI, for oil and the Henry Hub spot price for
gas. Such prices are utilized except where different prices are fixed and determinable from applicable
contracts for the remaining term of those contracts. The reserve estimates exclude the effect of any
derivatives we have in place. The rules require an impairment if our capitalized costs exceed this
“ceiling”.
During the third quarter of 2011, we determined not to develop the Friesian prospect and the lease
terminated by its terms. The accumulated costs of approximately $460 million associated with the
project were transferred to the full cost pool.
During the second quarter of 2010, we completed our interpretation of seismic and drilling data
from our two offshore Vietnam exploratory wells and decided not to pursue additional exploratory
activities in this area. We terminated our production sharing contract in accordance with its terms. The
costs related to our Vietnam oil and gas properties not subject to amortization were transferred to our
Vietnam full cost pool where they were subject to the ceiling limitation
.
Because our Vietnam full cost
pool had no associated proved oil and gas reserves, we recorded a non-cash pre-tax impairment
charge of $59.5 million. We also recorded a corresponding tax benefit of $23.0 million.
Asset Retirement Obligation
. We record the fair value of a liability for a legal obligation to retire an
asset in the period in which the liability is incurred with an offsetting increase to proved oil and gas
properties. For oil and gas properties, this is the period in which the well is drilled or acquired. A legal
obligation is a liability that a party is required to settle as a result of an existing or enacted law, statute,
ordinance or contract. Each period we accrete the liability to its then present value and depreciate the
capitalized cost over the useful life of the related asset.
Other Property and Equipment.
Other property and equipment is recorded at cost and consists
primarily of land and real estate development costs, aircraft, office furniture and fixtures and computer
hardware and software. Acquisitions, renewals, and betterments are capitalized; maintenance and
repairs are expensed. Depreciation is calculated using the straight-line method over estimated useful
lives of three to twenty years. Net gains or losses on property and equipment disposed of are included
in operating income in the period in which the transaction occurs.
Cash and Cash Equivalents.
Cash and cash equivalents consist primarily of highly liquid money
market mutual funds that hold U.S. government securities and demand deposits with financial
institutions. The mutual funds are available to us upon demand. Accounts payable at December 31,
2011 and 2010 included $7.0 million and $4.3 million, respectively, representing outstanding checks
that had not been presented for payment.
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