3. Property and Equipment and Asset Retirement Obligations
Property and equipment include the following:
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
| (In millions) | ||||||
| Oil and gas properties: Subject to amortization |
$ | 42,141 | 33,922 | |||
| Not subject to amortization | 3,417 | 3,293 | ||||
| Accumulated depreciation, depletion and amortization | (19,507 | ) | (15,756 | ) | ||
| Net oil and gas properties | 26,051 | 21,459 | ||||
| Other property and equipment | 2,915 | 2,370 | ||||
| Accumulated depreciation and amortization | (887 | ) | (673 | ) | ||
| Net other property and equipment | 2,028 | 1,697 | ||||
| Property and equipment, net of accumulated depreciation, depletion and amortization |
$ | 28,079 | 23,156 | |||
The costs not subject to amortization relate to unproved properties, which are excluded from amortized capital costs until it is determined whether or not proved reserves can be assigned to such properties. The excluded properties are assessed for impairment quarterly. Subject to industry conditions, evaluation of most of these properties, and therefore the inclusion of their costs in the amortized capital costs, is expected to be completed within five years.
The following is a summary of Devon's oil and gas properties not subject to amortization as of December 31, 2007:
| Costs Incurred In | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | Prior to 2005 |
Total | |||||||||||
| (In millions) | |||||||||||||||
| Acquisition costs | $ | 223 | 1,226 | 253 | 316 | 2,018 | |||||||||
| Exploration costs | 424 | 378 | 123 | 92 | 1,017 | ||||||||||
| Development costs | 94 | 114 | 22 | — | 230 | ||||||||||
| Capitalized interest | 68 | 49 | 30 | 5 | 152 | ||||||||||
| Total oil and gas properties not subject to amortization | $ | 809 | 1,767 | 428 | 413 | 3,417 | |||||||||
Chief Acquisition
On June 29, 2006, Devon acquired the oil and gas assets of privately-owned Chief Holdings LLC ("Chief"). Devon paid $2.0 billion in cash and assumed approximately $0.2 billion of net liabilities in the transaction for a total purchase price of $2.2 billion. Devon funded the acquisition price, and the immediate retirement of $180 million of assumed debt, with $718 million of cash on hand and approximately $1.4 billion of borrowings issued under its commercial paper program. The acquired oil and gas properties consisted of 99.7 MMBoe (Unaudited) of proved reserves and leasehold totaling 169,000 net acres located in the Barnett Shale area of north Texas. Devon allocated approximately $1.0 billion of the purchase price to proved reserves and approximately $1.2 billion to unproved properties.
Property Divestitures
In November 2006 and January 2007, Devon announced plans to divest its operations in Egypt and West Africa. In October 2007, Devon completed the sale of its Egyptian operations and received proceeds of $341 million. See Note 13 for more discussion regarding these divestitures.
Asset Retirement Obligations
Following is a reconciliation of the asset retirement obligation for the years ended December 31, 2007 and 2006.
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2007 | 2006 | |||||
| (In millions) | ||||||
| Asset retirement obligation as of beginning of year | $ | 857 | 636 | |||
| Liabilities incurred | 57 | 102 | ||||
| Liabilities settled | (68 | ) | (59 | ) | ||
| Liabilities assumed by others | (3 | ) | — | |||
| Revision of estimated obligation | 311 | 135 | ||||
| Accretion expense on discounted obligation | 74 | 47 | ||||
| Foreign currency translation adjustment | 90 | (4 | ) | |||
| Asset retirement obligation as of end of year | 1,318 | 857 | ||||
| Less current portion | 82 | 53 | ||||
| Asset retirement obligation, long-term | $ | 1,236 | 804 | |||
During 2007 and 2006, Devon recognized a $311 million and $135 million revision to its asset retirement obligation, respectively. The primary factors causing the 2007 fair value increase were an overall increase in abandonment cost estimates and an increase in the assumed inflation rate. The effect of these factors was partially offset by the effect of an increase in the discount rate used to calculate the present value of the obligations. The primary factor causing the 2006 fair value increase was an overall increase in abandonment cost estimates.