Given the volatility of oil and gas prices, it is likely that our estimate of discounted future net
revenues from proved oil and gas reserves will change in the near term. If oil and gas prices decline in
the future, impairments of our oil and gas properties could occur. Impairments required by these rules
do not impact our cash flows from operating activities.
Oil and Natural Gas Properties Not Subject to Amortization
. The cost of unproved oil and natural
gas properties are excluded from amortization until the properties are evaluated. Costs are transferred
into the amortization base on an ongoing basis as the properties are evaluated and proved reserves are
established or impairment is determined. Unproved properties are assessed periodically, at least
annually, to determine whether impairment has occurred. We assess properties on an individual basis or
as a group if properties are individually insignificant. The assessment considers the following factors,
among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results
and activity, the assignment of proved reserves and the economic viability of development if proved
reserves are assigned. During any period in which these factors indicate an impairment, the cumulative
drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are
transferred to the full cost pool and are then subject to amortization. The transfer of costs into the
amortization base involves a significant amount of judgment and may be subject to changes over time
based on our drilling plans and results, geological and geophysical evaluations, the assignment of proved
reserves, availability of capital, and other factors. As of December 31, 2011, we had approximately $2.4
billion of costs excluded from amortization for our U.S. cost center. These costs consist primarily of costs
incurred for undeveloped acreage and wells in progress pending determination, together with capitalized
interest costs for these projects. Due to the nature of the reserves, the ultimate evaluation of the
properties will occur over a period of several years. We expect that 57% of the costs not subject to
amortization at December 31, 2011 will be transferred to the amortization base over the next five years
and the remainder in the next seven to ten years. The timing of these transfers into our amortization base
impacts our DD&A rate and full cost ceiling test.
DD&A.
Our rate for recording DD&A is dependent upon our estimate of proved reserves,
including future development and abandonment costs as well as our level of capital spending. See Oil
and Gas Reserves. If the estimates of proved reserves decline, the rate at which we record DD&A
expense increases, reducing our net income. This decline may result from lower market prices, which
may make it uneconomic to drill for and produce higher cost fields. The decline in proved reserve
estimates may impact the outcome of the full cost ceiling test previously discussed. In addition,
increases in costs required to develop our reserves would increase the rate at which we record DD&A
expense. We are unable to predict changes in future development costs as such costs are dependent
on the success of our development program, as well as future economic conditions.
Our oil and gas DD&A rate for 2012, after the effect of our fourth quarter 2011 divestments, is
expected to be $21.64 per BOE. Based on our estimated proved reserves and our net oil and gas
properties subject to amortization at December 31, 2011: (i) a 5.0% increase in our costs subject to
amortization would increase our DD&A rate by approximately $1.08 per BOE and (ii) a 5.0% negative
revision to proved reserves would increase our DD&A rate by approximately $1.14 per BOE.
Commodity Pricing and Risk Management Activities
. Prices for oil and gas have historically been
volatile. Decreases in oil and gas prices from current levels will adversely affect our revenues, results
of operations, cash flows and proved reserve volumes and value. Any substantial or extended decline
in the price of oil and gas below current levels could be materially adverse to our operations and our
ability to fund planned capital expenditures.
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