10. Reduction of Carrying Value of Oil and Gas Properties
During 2006 and 2005, Devon reduced the carrying value of certain of its oil and gas properties due to full cost ceiling limitations and unsuccessful exploratory activities. A summary of these reductions and additional discussion is provided below.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | |||||||||||
| Gross | Net of Taxes | Gross | Net of Taxes | |||||||||
| (In millions) | ||||||||||||
| Brazil - unsuccessful exploratory reduction | $ | 16 | 16 | 42 | 42 | |||||||
| Russia - ceiling test reduction | 20 | 10 | — | — | ||||||||
| Total | $ | 36 | 26 | 42 | 42 | |||||||
2006 Reductions
During the second quarter of 2006, Devon drilled two unsuccessful exploratory wells in Brazil and determined that the capitalized costs related to these two wells should be impaired. Therefore, in the second quarter of 2006, Devon recognized a $16 million impairment of its investment in Brazil equal to the costs to drill the two dry holes and a proportionate share of block-related costs. There was no tax benefit related to this impairment. The two wells were unrelated to Devon's Polvo development project in Brazil.
As a result of a decline in projected future net cash flows, the carrying value of Devon's Russian properties exceeded the full cost ceiling by $10 million at the end of the third quarter of 2006. Therefore, Devon recognized a $20 million reduction of the carrying value of its oil and gas properties in Russia, offset by a $10 million deferred income tax benefit.
2005 Reduction
Prior to the fourth quarter of 2005, Devon was capitalizing the costs of previous unsuccessful efforts in Brazil pending the determination of whether proved reserves would be recorded in Brazil. At the end of 2005, it was expected that a small initial portion of the proved reserves ultimately expected at Polvo would be recorded in 2006. Based on preliminary estimates developed in the fourth quarter of 2005, the value of this initial partial booking of proved reserves was not sufficient to offset the sum of the related proportionate Polvo costs plus the costs of the previous unrelated unsuccessful efforts. Therefore, Devon determined that the prior unsuccessful costs unrelated to the Polvo project should be impaired. These costs totaled approximately $42 million. There was no tax benefit related to this Brazilian impairment.