Hess 2008 Annual Report Download - page 49

capitalized well costs are charged to expense. Indicators of sufficient progress in assessing reserves and the
economic and operating viability of a project include: commitment of project personnel, active negotiations for
sales contracts with customers, negotiations with governments, operators and contractors and firm plans for
additional drilling and other factors.
Crude Oil and Natural Gas Reserves: The determination of estimated proved reserves is a significant
element in arriving at the results of operations of exploration and production activities. The estimates of proved
reserves affect well capitalizations, the unit of production depreciation rates of proved properties and wells and
equipment, as well as impairment testing of oil and gas assets and goodwill.
The Corporation’s oil and gas reserves are calculated in accordance with SEC regulations and interpretations
and the requirements of the Financial Accounting Standards Board. For reserves to be booked as proved they must
be commercially producible, government and project operator approvals must be obtained and, depending on the
amount of the project cost, senior management or the board of directors must commit to fund the project. The
Corporation’s oil and gas reserve estimation and reporting process involves an annual independent third party
reserve determination as well as internal technical appraisals of reserves. The Corporation maintains its own
internal reserve estimates that are calculated by technical staff that work directly with the oil and gas properties. The
Corporation’s technical staff updates reserve estimates throughout the year based on evaluations of new wells,
performance reviews, new technical data and other studies. To provide consistency throughout the Corporation,
standard reserve estimation guidelines, definitions, reporting reviews and approval practices are used. The internal
reserve estimates are subject to internal technical audits and senior management review.
The oil and gas reserve estimates reported in the Supplementary Oil and Gas Data in accordance with
Statement of Financial Accounting Standards (FAS) 69 Disclosures about Oil and Gas Producing Activities
(FAS 69) are determined independently by the consulting firm of DeGolyer and MacNaughton (D&M) and are
consistent with internal estimates. Annually, the Corporation provides D&M with engineering, geological and
geophysical data, actual production histories and other information necessary for the reserve determination. The
Corporation’s and D&M’s technical staffs meet to review and discuss the information provided. Senior management
and the Board of Directors review the final reserve estimates issued by D&M.
On December 31, 2008, the Securities and Exchange Commission published a final rule which revises its oil
and gas reserve estimation and disclosure requirements. The revisions are effective for filings on Form 10-K for
fiscal years ending December 31, 2009. The Corporation is evaluating the impact of these requirements on its oil
and gas reserve estimates and disclosures.
Impairment of Long-Lived Assets and Goodwill: As explained below there are significant differences in the
way long-lived assets and goodwill are evaluated and measured for impairment testing. The Corporation reviews
long-lived assets, including oil and gas fields, for impairment whenever events or changes in circumstances indicate
that the carrying amounts may not be recovered. Long-lived assets are tested based on identifiable cash flows that
are largely independent of the cash flows of other assets and liabilities. If the carrying amounts of the long-lived
assets are not expected to be recovered by undiscounted future net cash flow estimates, the assets are impaired and
an impairment loss is recorded. The amount of impairment is based on the estimated fair value of the assets
generally determined by discounting anticipated future net cash flows.
In the case of oil and gas fields, the present value of future net cash flows is based on management’s best
estimate of future prices, which is determined with reference to recent historical prices and published forward
prices, applied to projected production volumes and discounted at a risk-adjusted rate, The projected production
volumes represent reserves, including probable reserves, expected to be produced based on a stipulated amount of
capital expenditures. The production volumes, prices and timing of production are consistent with internal
projections and other externally reported information. Oil and gas prices used for determining asset
impairments will generally differ from those used in the standardized measure of discounted future net cash
flows, since the standardized measure requires the use of actual prices on the last day of the year.
The Corporation’s impairment tests of long-lived Exploration and Production producing assets are based on its
best estimates of future production volumes (including recovery factors), selling prices, operating and capital costs,
the timing of future production and other factors, which are updated each time an impairment test is performed. The
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