Hess 2011 Annual Report Download

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2011 ANNUAL REPORT

Table of contents

  • Page 1
    2011 ANNUAL REPORT

  • Page 2
    ... in which we do business. TABLE OF CONTENTS 1 2 4 6 12 FINANCIAL HIGHLIGHTS LETTER TO STOCKHOLDERS OUR GLOBAL OPERATIONS EXPLORATION AND PRODUCTION MARKETING AND REFINING 16 CORPORATE AND SOCIAL RESPONSIBILITY 20 BOARD OF DIRECTORS AND CORPORATE OFFICERS Cover: Drilling Operations, North Dakota

  • Page 3
    ... diluted shares outstanding FINANCIAL - AT YEAR END Total assets Total debt Total equity Debt to capitalization ratio Common stock price OPERATING - FOR THE YEAR Production - net Crude oil and natural gas liquids (thousands of barrels per day) United States International Total Natural gas (thousands...

  • Page 4
    ... TO STOCKHOLDERS John B. Hess Chairman of the Board and Chief Executive Officer While 2011 was a challenging year operationally, we continued to make significant progress in increasing our crude oil and natural gas reserves, acquiring strategic acreage and positioning our company for long-term...

  • Page 5
    ... strong operating results with increased sales volumes of natural gas and electricity. The Bayonne Energy Center, a 512-megawatt, natural gas fueled power plant that will provide electricity to New York City, will begin operations in 2012. John B. Hess Chairman of the Board and Chief Executive Of...

  • Page 6
    ... states MARKETING & REFINING AREA MAP DETAIL refinery terminal retail and energy Marketing COLOMBia peru BraziL OUR GLOBAL OPERATIONS We continue to make significant progress in increasing our crude oil and natural gas reserves, acquiring strategic acreage and positioning our company for long...

  • Page 7
    ... City area • Expanded Supply & Terminals marine diesel fuel sales to include Philadelphia harbor • Opened three new Hess Express locations and expanded our Dunkin' Donuts offering to a total of 555 sites • Achieved outstanding safety performance • Closed HOVENSA joint venture refinery in St...

  • Page 8
    EXPLORATION AND PRODUCTION With the addition of our newly acquired acreage position in the Utica Shale, the company now has the critical mass in shale resources to make a significant contribution to our future production and reserve growth. 6

  • Page 9
    ... gas plant expansion. In May, we commenced initial production in the Eagle Ford Shale in Texas, where we have more than 100,000 net acres. By year end, we had drilled 28 new wells in the Eagle Ford and completed 22. We plan to continue to delineate our acreage position, operating a three rig program...

  • Page 10
    ... production well. A second Shenzi production well and a water injection well were also drilled and completed. Additional wells are planned in 2012 and 2013. Equatorial Guinea Block G, in which Hess holds an 85 percent interest and is the operator, produced at a net rate of 54,000 barrels of oil...

  • Page 11
    drilling Operations, texas 9

  • Page 12
    10 exploration drilling, Ghana

  • Page 13
    ... interest in the area. A 2D seismic program commenced in 2011 and will continue in 2012. In Kurdistan, Hess and partner Petroceltic International signed production sharing contracts (PSE) with the Kurdistan Regional Government of Iraq for the Shakrok and Dinarta blocks. Hess is the operator and has...

  • Page 14
    Hess eXpress, new Brunswick, new Jersey MARKETING AND REFINING Our Retail and Energy Marketing businesses remain a strategic part of our portfolio with a well established brand that generates strong financial returns and offers selective growth opportunities. 12

  • Page 15
    ... addition, the low price of natural gas in the United States put HOVENSA, an oil-fueled refinery, at a competitive disadvantage. Hess' Port Reading, New Jersey, fluid catalytic cracking (FCC) facility located near New York Harbor produces gasoline and fuel oil primarily for markets in the Northeast...

  • Page 16
    ... States, as well as an oil storage facility in St. Lucia. Our East Coast terminals provide the company a competitive advantage in the supply of refined products to our Retail and Energy Marketing businesses. RETAIL MARKETING Retail Marketing is the leading independent gasoline convenience store...

  • Page 17
    Bayonne energy Center, new Jersey 15

  • Page 18
    ... local fishermen at its pangkah, indonesia operation CORPORATE AND SOCIAL RESPONSIBILITY We are committed to effective stakeholder engagement and strategic social investments in our host communities that lead to sustainable and measurable improvements, especially in education and health. 16

  • Page 19
    ...sustainable business practices, which we believe are essential to our license to operate. Employee safety performance improved for the seventh consecutive year in 2011. Contractor safety performance deteriorated, driven primarily by significantly increased activity in our North Dakota operations. We...

  • Page 20
    .... We decreased flaring from operations in Algeria and Equatorial Guinea by more than 50 percent during the past several years, achieving our flare reduction target ahead of schedule. Our climate change strategy also includes the purchase of certified renewable energy certificates equivalent to at...

  • Page 21
    Hess supported school, st. Lucia 19

  • Page 22
    ... (3) Member of Compensation and Management Development Committee (4) Member of Corporate Governance and Nominating Committee CORPORATE OFFICERS John B. Hess Chairman of the Board and Chief Executive Officer Gregory P. Hill Executive Vice President; President, Worldwide Exploration & Production...

  • Page 23
    ANNUAL REPORT FORM 10-K

  • Page 24

  • Page 25
    ... computed using the outstanding common shares and closing market price on June 30, 2011. At December 31, 2011, there were 339,975,610 shares of Common Stock outstanding. Part III is incorporated by reference from the Proxy Statement for the annual meeting of stockholders to be held on May 2, 2012.

  • Page 26

  • Page 27
    ... About Market Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation...

  • Page 28
    ...gasoline stations, most of which include convenience stores, that are located on the East Coast of the United States. Exploration and Production The Corporation's total proved developed and undeveloped reserves at December 31 were as follows: Crude Oil, Condensate & Natural Gas Liquids (c) 2011 2010...

  • Page 29
    ... crude oil, natural gas liquids and natural gas production was as follows: 2011 2010 2009 Crude oil (thousands of barrels per day) United States Offshore ...Onshore ...Europe Russia ...Norway* ...United Kingdom ...Denmark ...Africa Equatorial Guinea ...Libya ...Algeria ...Gabon ...Asia Azerbaijan...

  • Page 30
    ... located in the United States. During 2011, 35% of the Corporation's crude oil and natural gas liquids production and 16% of its natural gas production were from United States operations. The Corporation's production in the United States was from offshore properties in the Gulf of Mexico, as well...

  • Page 31
    ... Ford shale. First production from the Eagle Ford commenced in May 2011. During 2012, the Corporation plans to operate three rigs and drill approximately 25 to 30 wells. In 2011, the Corporation entered into agreements to acquire approximately 85,000 net acres in the Utica Shale play in eastern Ohio...

  • Page 32
    ...proved reserves were located in Africa (Equatorial Guinea 5%, Algeria 1% and Libya 11%). During 2011, 25% of the Corporation's crude oil and natural gas liquids production was from its African operations. Equatorial Guinea: The Corporation is operator and owns an interest in Block G (Hess 85%) which...

  • Page 33
    ... in Block CA-1 (Hess 14%). In 2011, the operator drilled the Julong Center exploration well which was subsequently expensed. The operator anticipates commencing further exploration drilling on this block in 2012. Kurdistan Region of Iraq: In July 2011, the Corporation signed production sharing...

  • Page 34
    ... The Corporation has not experienced any significant constraints in obtaining the required supply of purchased natural gas. Average selling prices and average production costs 2011 2010 2009 Average selling prices (a) Crude oil (per barrel) United States ...Europe (b) ...Africa ...Asia ...Worldwide...

  • Page 35
    ... of exploration activities. These scheduled expirations are largely in Asia, South America and the United States. Gross and net developed acreage and productive wells at December 31, 2011 Developed Acreage Applicable to Productive Wells Gross Net (In thousands) Productive Wells (a) Oil Gas Gross...

  • Page 36
    ... residual fuel oil and vacuum gas oil, operated at a rate of approximately 63,000 barrels per day in 2011 compared with 55,000 and 63,000 barrels per day, respectively in 2010 and 2009. Substantially all of Port Reading's production is gasoline and heating oil. During 2010, the Port Reading refining...

  • Page 37
    .... The Corporation has a 50% interest in Bayonne Energy Center, LLC, a joint venture established to build and operate a 512-megawatt natural gas fueled electric generating station in Bayonne, New Jersey. The joint venture plans to sell electricity into the New York City market by a direct connection...

  • Page 38
    ...that are studying better ways to assess the risk of and prevent onshore and offshore incidents, access and control blowouts in subsea environments, and improve containment and recovery methods. The task forces are working closely with the oil and gas industry and international government agencies to...

  • Page 39
    ...and the Corporate Governance and Nominating Committee of the Board of Directors are available on the Corporation's website and are also available free of charge upon request to the Secretary of the Corporation at its principal executive offices. The Corporation has also filed with the New York Stock...

  • Page 40
    ... impact on the oil markets. The commodities trading markets as well as other supply and demand factors may also influence the selling prices of crude oil, natural gas, refined petroleum products and electricity. To the extent that we engage in hedging activities to mitigate commodity price...

  • Page 41
    ... refined petroleum products, natural gas and electricity. Many competitors, including national oil companies, are larger and have substantially greater resources. We are also in competition with producers and marketers of other forms of energy. Increased competition for worldwide oil and gas assets...

  • Page 42
    ... their share of the gasoline market for damage to groundwater resources and are required to take remedial action to ameliorate the alleged effects on the environment of releases of MTBE. In 2008, the majority of the cases against the Corporation were settled. In 2010 and 2011, additional cases were...

  • Page 43
    ... the first quarter of 2012. In July 2004, Hess Oil Virgin Islands Corp. (HOVIC), a wholly owned subsidiary of the Corporation, and HOVENSA, each received a letter from the Commissioner of the Virgin Islands Department of Planning and Natural Resources and Natural Resources Trustees, advising of the...

  • Page 44
    ... Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Market Information The common stock of Hess Corporation is traded principally on the New York Stock Exchange (ticker symbol: HES). High and low sales prices were as follows: 2011 Quarter Ended High Low High 2010...

  • Page 45
    ...equity compensation plan. The Corporation has a Stock Award Program pursuant to which each non-employee director received approximately $150,000 in value of the Corporation's common stock in 2011. These awards were made from shares purchased by the Corporation in the open market. See Note 11, Share...

  • Page 46
    ... of purchased gas) ...Refined petroleum products ...Electricity ...Convenience store sales and other operating revenues ...Total ...Net income attributable to Hess Corporation ...Earnings per share Basic ...Diluted ...Total assets ...Total debt ...Total equity ...Dividends per share of common stock...

  • Page 47
    ...with the acquisition of seismic and the planned drilling of 29 wells. • The Corporation filed a Notice of Discovery with the Ministry for Energy of Ghana for the Paradise-1 exploration well in the Deepwater Tano Cape Three Points block. The well encountered an estimated 490 net feet of oil and gas...

  • Page 48
    ... production assets in Libya was approximately $500 million. Marketing and Refining The Corporation's strategy for the M&R segment is to deliver strong operating performance and generate free cash flow. In January 2012, HOVENSA announced a decision to shut down its refinery in St. Croix, U.S. Virgin...

  • Page 49
    ... (loss) by major operating activity is summarized below for the years ended December 31: 2011 2010 2009 (Millions of dollars, except per share data) Exploration and Production ...Marketing and Refining ...Corporate ...Interest expense ...Net income attributable to Hess Corporation ...Net income per...

  • Page 50
    ... 2009. The Corporation's average selling prices were as follows for the years ended December 31: 2011 2010 2009 Crude oil - per barrel (including hedging) United States ...Europe ...Africa ...Asia ...Worldwide ...Crude oil - per barrel (excluding hedging) United States ...Europe ...Africa ...Asia...

  • Page 51
    ... the impact of asset sales and any Libyan production. The Corporation's net daily worldwide production was as follows for the years ended December 31: 2011 2010 2009 (In thousands) Crude oil - barrels per day United States ...Europe ...Africa ...Asia ...Total ...Natural gas liquids - barrels...

  • Page 52
    ...by lower production from the Corporation's United Kingdom North Sea assets. Crude oil production was higher in 2010 compared with 2009, due to higher production in Russia and in Norway following the acquisition of additional interests in the Valhall and Hod fields in 2010. Natural gas production was...

  • Page 53
    ... Med Block), located offshore Egypt. This interest was acquired in 2006 and included four natural gas discoveries and additional exploration prospects. The Corporation and its partners subsequently explored and further evaluated the area, made a fifth discovery, conducted development planning, and...

  • Page 54
    .... The Corporation's future E&P earnings may be impacted by external factors, such as volatility in the selling prices of crude oil and natural gas, reserve and production changes, exploration expenses, industry cost inflation, changes in foreign exchange rates and income tax rates, the effects of...

  • Page 55
    ... income taxes) in 2009. U.S. Virgin Island income taxes have not been recorded on the Corporation's share of HOVENSA's 2011 results due to cumulative operating losses. These results reflect lower refining margins, higher fuel costs and lower sales volumes. During 2010, the fluid catalytic cracking...

  • Page 56
    ... Sold Sales and other operating revenues totaled $38,466 million in 2011, $33,862 million in 2010 and $29,614 million in 2009. The increase in Sales and other operating revenues of 14% year-on-year from 2009 to 2011 is primarily due to higher crude oil and refined petroleum product selling prices...

  • Page 57
    ... in eastern Ohio, $214 million for interests in two blocks in the Kurdistan Region of Iraq and $116 million for an additional 4% interest in the South Arne Field in Denmark. Capital expenditures in 2010 included acquisitions of 167,000 net acres in the Bakken oil shale play in North Dakota from TRZ...

  • Page 58
    ...including the effect of hedging, proceeds from asset sales and its available credit facilities. Crude oil and natural gas prices are volatile and difficult to predict. In addition, unplanned increases in the Corporation's capital expenditure program could occur. If conditions were to change, such as...

  • Page 59
    ...necessary to supply the Corporation's retail marketing system and feedstocks for the Port Reading refining facility. In addition, the Corporation has commitments to purchase refined petroleum products, natural gas and electricity to supply contracted customers in its energy marketing business. These...

  • Page 60
    ...Egypt, Equatorial Guinea, France, Ghana, Indonesia, the Kurdistan region of Iraq, Libya, Malaysia, Norway, Peru, Russia, Thailand and the United Kingdom. Therefore, the Corporation is subject to the risks associated with foreign operations, including political risk, tax law changes and currency risk...

  • Page 61
    ... 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...

  • Page 62
    ... value of exploration assets, and (3) an estimated market premium to reflect the market price an acquirer would pay for potential synergies including cost savings, access to new business opportunities, enterprise control, improved processes and increased market share. The Corporation also considers...

  • Page 63
    ..., in its energy marketing business, the Corporation sells natural gas and electricity to customers and offsets the price exposure by purchasing forward contracts. The fair value of these sales and purchases may be based on specific prices at less liquid delivered locations, which are classified...

  • Page 64
    ... for hedge accounting. The prospective and retrospective effectiveness calculations are performed using either historical simulation or other statistical models, which utilize historical observable market data consisting of futures curves and spot prices. Retirement Plans: The Corporation has funded...

  • Page 65
    ... as they relate to its Port Reading refinery facility, which is not expected to have a material adverse impact on the financial condition, results of operations or cash flows of the Corporation. The Corporation produces and distributes fuel oils in the United States. Many states and localities...

  • Page 66
    ... of its business, the Corporation is exposed to commodity risks related to changes in the price of crude oil, natural gas, refined petroleum products and electricity, as well as to changes in interest rates and foreign currency values. In the disclosures that follow, risk management activities are...

  • Page 67
    ... are used to obtain supply and reduce margin volatility or lower costs related to sales contracts with customers. Corporate risk management: Corporate risk management activities include transactions designed to reduce risk in the selling prices of crude oil, refined petroleum products or natural gas...

  • Page 68
    ... of sale. Net realized gains on trading activities amounted to $44 million in 2011 and $375 million in 2010. The following table provides an assessment of the factors affecting the changes in fair value of financial instruments and derivative commodity contracts used in trading activities: 2011 2010...

  • Page 69
    ... Data HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Page Number Management's Report on Internal Control over Financial Reporting ...Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheet at December 31, 2011 and 2010...

  • Page 70
    ... of the Corporation's internal control over financial reporting as of December 31, 2011, as stated in their report, which is included herein. By John P. Rielly Senior Vice President and Chief Financial Officer February 27, 2012 By John B. Hess Chairman of the Board and Chief Executive Officer 44

  • Page 71
    ... of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Hess Corporation We have audited Hess Corporation's internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the...

  • Page 72
    Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Hess Corporation We have audited the accompanying consolidated balance sheet of Hess Corporation and consolidated subsidiaries (the "Corporation") as of December 31, 2011 and 2010, and the related ...

  • Page 73
    ... ...LONG-TERM DEBT ...DEFERRED INCOME TAXES ...ASSET RETIREMENT OBLIGATIONS ...OTHER LIABILITIES AND DEFERRED CREDITS ...Total liabilities ...EQUITY Hess Corporation Stockholders' Equity Common stock, par value $1.00 Authorized - 600,000 shares Issued: 2011 - 339,976 shares; 2010 - 337,681 shares...

  • Page 74
    HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME Years Ended December 31, 2011 2010 2009 (Millions of dollars, except per share data) REVENUES AND NON-OPERATING INCOME Sales (excluding excise taxes) and other operating revenues ...Income (loss) from equity investment ...

  • Page 75
    ... impairment ...Stock compensation expense ...Gains on asset sales ...Provision (benefit) for deferred income taxes ...Changes in operating assets and liabilities: (Increase) decrease in accounts receivable ...(Increase) decrease in inventories ...Increase (decrease) in accounts payable and accrued...

  • Page 76
    ... net ...Employee stock options, including income tax benefits ...Cash dividends declared ...Noncontrolling interests, net ...Balance at December 31, 2010 ...Net income ...Deferred gains (losses) on cash flow hedges, after-tax Effect of hedge losses recognized in income ...Net change in fair value of...

  • Page 77
    ...the development, production, purchase, transportation and sale of crude oil and natural gas. These activities are conducted principally in Algeria, Australia, Azerbaijan, Brazil, Brunei, China, Denmark, Egypt, Equatorial Guinea, France, Ghana, Indonesia, the Kurdistan region of Iraq, Libya, Malaysia...

  • Page 78
    ... with governments, operators and contractors, firm plans for additional drilling and other factors. Depreciation, Depletion and Amortization: The Corporation records depletion expense for acquisition costs of proved properties using the units of production method over proved oil and gas reserves...

  • Page 79
    ... projections and other externally reported information. Oil and gas prices used for determining asset impairments will generally differ from the average prices used in the standardized measure of discounted future net cash flows. Impairment of Equity Investees: The Corporation reviews equity method...

  • Page 80
    ... its energy marketing business, the Corporation enters into contracts to sell natural gas and electricity to customers and offsets the price exposure by purchasing forward contracts. The fair value of these sales and purchases may be based on specific prices at less liquid delivered locations, which...

  • Page 81
    ... million. 2010: In December, the Corporation acquired approximately 167,000 net acres in the Bakken oil shale play (Bakken) in North Dakota from TRZ Energy, LLC for $1,075 million in cash. In December, the Corporation also completed the acquisition of American Oil & Gas Inc. (American Oil & Gas) for...

  • Page 82
    ... Joint Development Area of Malaysia/Thailand (JDA) and contain an extension of the Bumi Field. The Corporation also acquired 37 previously leased retail gasoline stations, primarily through the assumption of $65 million of fixed-rate notes. 3. Libyan Operations In response to civil unrest in Libya...

  • Page 83
    ... refinery in the U.S. Virgin Islands. The Corporation's investment in HOVENSA is accounted for using the equity method. In accordance with Rule 3-09 of Regulation S-X, the Corporation has filed the audited financial statements for HOVENSA in this report on Form 10-K. Summarized financial information...

  • Page 84
    ... based on an income approach using estimated refined petroleum product selling prices and volumes, related costs of product sold, capital and operating expenditures and a market based discount rate (a Level 3 fair value measurement). In February 2012, HOVENSA completed a tender offer to repurchase...

  • Page 85
    ...of a joint operating agreement, including working interest percentages for the partners, and planning for the field development are progressing. The project is now targeted for sanction in 2013. Approximately 30% relates to Block WA-390-P, offshore Western Australia, where further drilling and other...

  • Page 86
    ... Med Block), located offshore Egypt. This interest was acquired in 2006 and included four natural gas discoveries and additional exploration prospects. The Corporation and its partners subsequently explored and further evaluated the area, made a fifth discovery, conducted development planning, and...

  • Page 87
    ...due to updated work programs and higher service and equipment costs. In 2010, liabilities incurred mostly related to the acquisition of additional interests in the Valhall and Hod fields. Liabilities settled or disposed of primarily relate to assets held for sale and dispositions. 10. Long-term Debt...

  • Page 88
    ... capitalized interest of $13 million, $5 million and $6 million in 2011, 2010 and 2009, respectively. 11. Share-based Compensation The Corporation awards restricted common stock and stock options under its 2008 Long-term Incentive Plan. Generally, stock options vest in one to three years from the...

  • Page 89
    ... 2,036 8,841 $ 27.52 49.25 54.77 60.63 82.48 57.37 The intrinsic value (or the amount by which the market price of the Corporation's common stock exceeds the exercise price of an option) at December 31, 2011 totaled $51 million for both outstanding options and exercisable options. At December 31...

  • Page 90
    ... - (Continued) The Corporation uses the Black-Scholes model to estimate the fair value of employee stock options. The following weighted average assumptions were utilized for stock options awarded: 2011 2010 2009 Risk free interest rate ...Stock price volatility ...Dividend yield ...Expected life...

  • Page 91
    ... the Corporation's benefit obligations and the fair value of plan assets and shows the funded status of the pension and postretirement medical plans: Funded Pension Plans 2011 2010 Unfunded Pension Plan 2011 2010 (Millions of dollars) Postretirement Medical Plan 2011 2010 Change in benefit...

  • Page 92
    ... relates to the amortization of unrecognized net actuarial losses. The weighted average actuarial assumptions used by the Corporation's funded and unfunded pension plans were as follows: 2011 2010 2009 Weighted average assumptions used to determine benefit obligations at December 31 Discount rate...

  • Page 93
    ... ...Government related (b) ...Mortgage-backed securities (c) ...Corporate ...Other: Hedge funds ...Private equity funds ...Real estate funds ...Diversified commodities funds ...December 31, 2010 Cash and short-term investment funds ...Equities: U.S. equities (domestic) ...International equities (non...

  • Page 94
    ... information reported by the fund managers, which include inputs such as cost, operating results, discounted future cash flows, market based comparable data and independent appraisals from third-party sources with professional qualifications. Hedge funds, private equity and non-exchange-traded real...

  • Page 95
    HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Corporation has budgeted contributions of approximately $150 million to its funded pension plans in 2012. Estimated future benefit payments by the funded and unfunded pension plans and the ...

  • Page 96
    HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A summary of the components of deferred tax liabilities, deferred tax assets and taxes deferred at December 31 follows: 2011 2010 (Millions of dollars) Deferred tax liabilities Property, plant ...

  • Page 97
    ...the Corporation's effective income tax rate and the United States statutory rate is reconciled below: 2011 2010 2009 United States statutory rate ...Effect of foreign operations* ...State income taxes, net of Federal income tax ...Gains on asset sales ...Effect of equity loss and operations related...

  • Page 98
    ... stock totaled $0.40 per share ($0.10 per quarter) during 2011, 2010 and 2009. 16. Leased Assets The Corporation and certain of its subsidiaries lease gasoline stations, drilling rigs, tankers, office space and other assets for varying periods under contractual obligations accounted for as operating...

  • Page 99
    ...11 $255 17. Risk Management and Trading Activities In the normal course of its business, the Corporation is exposed to commodity risks related to changes in the prices of crude oil, natural gas, refined petroleum products and electricity, as well as to changes in interest rates and foreign currency...

  • Page 100
    ... Balance Sheet. Corporate Risk Management: Corporate risk management activities include transactions designed to reduce risk in the selling prices of crude oil, refined petroleum products or natural gas produced by the Corporation or to reduce exposure to foreign currency or interest rate movements...

  • Page 101
    ... be reclassified into earnings during 2012. In 2011, the amount of ineffectiveness from Brent crude oil hedges was a gain of $9 million. As a result of changes in the fair value of cash flow hedge positions used in the Corporation's Energy Marketing and Corporate Risk Management Activities, pre-tax...

  • Page 102
    ..., 2011 2010 Commodity Crude oil and refined petroleum products (millions of barrels) ...Natural gas (millions of mcf) ...Electricity (millions of megawatt hours) ...Foreign exchange (millions of U.S. Dollars) ...Other Interest rate (millions of U.S. Dollars) ...Equity securities (millions of shares...

  • Page 103
    ... Corporation's net physical derivative and financial assets and (liabilities) that are measured at fair value based on this hierarchy: Level 1 Collateral and counterparty Level 2 Level 3 netting (Millions of dollars) Balance December 31, 2011 Assets Derivative contracts Commodity ...Interest rate...

  • Page 104
    HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table provides changes in physical derivative and financial assets and liabilities that are measured at fair value based on Level 3 inputs: Year Ended December 31, 2011 2010 (...

  • Page 105
    HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The table below reflects the gross and net fair values of the Corporation's risk management and trading derivative instruments: Accounts Accounts Receivable Payable (Millions of dollars) December...

  • Page 106
    ... their share of the gasoline market for damage to groundwater resources and are required to take remedial action to ameliorate the alleged effects on the environment of releases of MTBE. In 2008, the majority of the cases against the Corporation were settled. In 2010 and 2011, additional cases were...

  • Page 107
    ...used by senior management to make key operating decisions and assess performance. These are (1) Exploration and Production and (2) Marketing and Refining. The Exploration and Production segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The Marketing...

  • Page 108
    ... financial data by segment for each of the three years ended December 31: Exploration and Production Marketing Corporate and and Refining Interest (Millions of dollars) Consolidated (a) 2011 Operating revenues Total operating revenues (b) ...Less: Transfers between affiliates ...Operating revenues...

  • Page 109
    ... equity plus debt. Financial information by major geographic area for each of the three years ended December 31, 2011: United States Europe Africa (Millions of dollars) Asia and Other Consolidated 2011 Operating revenues ...Property, plant and equipment (net) ...2010 Operating revenues ...Property...

  • Page 110
    ...in St. Croix as announced in January 2012, the Corporation will no longer purchase 50% of HOVENSA's production of refined petroleum products, after any sales to unaffiliated parties. The following table presents the Corporation's related party accounts receivable (payable) at December 31: 2011 2010...

  • Page 111
    ... of changes therein. The Corporation produces crude oil, natural gas liquids and/or natural gas principally in Algeria, Azerbaijan, Denmark, Equatorial Guinea, Gabon (until September 2010), Indonesia, Libya, Malaysia, Norway, Russia, Thailand, the United Kingdom and the United States. Exploration...

  • Page 112
    ...Ended December 31 Total United States Europe* Africa (Millions of dollars) Asia and Other 2011 Sales and other operating revenues Unaffiliated customers ...Inter-company ...Total revenues ...Costs and expenses Production expenses, including related taxes ...Exploration expenses, including dry holes...

  • Page 113
    ... December 31 Total United States Europe* Africa (Millions of dollars) Asia and Other 2010 Sales and other operating revenues Unaffiliated customers ...Inter-company ...Total revenues ...Costs and expenses Production expenses, including related taxes ...Exploration expenses, including dry holes...

  • Page 114
    ... project, either senior management or the Board of Directors must commit to fund the development. The Corporation's proved reserves are subject to certain risks and uncertainties, which are discussed in Item 1A, Risk Factors Related to Our Business and Operations of this Form 10-K. Internal Controls...

  • Page 115
    ... the impact of changes in selling prices on the reserve estimates for production sharing contracts with cost recovery provisions. Revisions included reductions to crude oil, condensate and natural gas liquids reserves of 11 million barrels, 11 million barrels and 18 million barrels in 2011, 2010 and...

  • Page 116
    ... in excess of five years relate to four offshore producing assets. Three natural gas projects in the Joint Development Area of Malaysia/Thailand (JDA) and Indonesia are being developed in phases to satisfy long-term natural gas sales contracts and an oil project in Azerbaijan is continuing to...

  • Page 117
    ... January 2012, the Corporation completed the sale of its interest in this field. Production sharing contracts The Corporation's proved reserves include crude oil and natural gas reserves relating to long-term agreements with governments or authorities in which the Corporation has the legal right to...

  • Page 118
    ... 31 Total United States Europe* Africa (Millions of dollars) Asia 2011 Future revenues ...Less: Future production costs ...Future development costs ...Future income tax expenses ...Future net cash flows ...Less: discount at 10% annual rate ...Standardized measure of discounted future net cash...

  • Page 119
    ... 31 2011 2010 2009 (Millions of dollars) Standardized measure of discounted future net cash flows at January 1 ...Changes during the year Sales and transfers of oil and gas produced during the year, net of production costs ...Development costs incurred during year ...Net changes in prices and...

  • Page 120
    ... for the years ended December 31: Sales and Other Operating Revenues Net Income (Loss) Diluted Net Gross Attributable to Income (Loss) Profit (a) Hess Corporation per Share (Million of dollars, except per share data) 2011 First ...Second ...Third ...Fourth ...2010 First ...Second ...Third ...Fourth...

  • Page 121
    ...for the annual meeting of stockholders to be held on May 2, 2012. The Corporation has adopted a Code of Business Conduct and Ethics applicable to the Corporation's directors, officers (including the Corporation's principal executive officer and principal financial officer) and employees. The Code of...

  • Page 122
    ...John P. Rielly ...John J. Scelfo ...Mykel J. Ziolo ...Robert M. Biglin ... 58 54 60 49 54 59 47 Chairman of the Board, Chief Executive Officer and Director Executive Vice President and President of Worldwide Exploration and Production and Director Executive Vice President and President of Marketing...

  • Page 123
    ...The financial statements filed as part of this Annual Report on Form 10-K are listed in the ...laws of Registrant incorporated by reference to Exhibit 3(1) of Form 8-K of Registrant dated February 2, 2011. Five-Year Credit Agreement dated as of April 14, 2011, among Registrant, certain subsidiaries...

  • Page 124
    ... 1998 and effective October 30, 1998 among Hess Oil Virgin Islands Corp., PDVSA V.I., Inc., HOVENSA L.L.C. and the Government of the Virgin Islands incorporated by reference to Exhibit 10(4) of Form 10-K of Registrant for the fiscal year ended December 31, 1998. Incentive Cash Bonus Plan description...

  • Page 125
    ...26, 1998, among PDVSA V.I., Inc., Hess Oil Virgin Islands Corp. and HOVENSA L.L.C. (including Glossary of definitions) incorporated by reference to Exhibit 2.1 of Form 8-K of Registrant filed on November 13, 1998. Amended and Restated Limited Liability Company Agreement of HOVENSA L.L.C. dated as of...

  • Page 126
    ... and 9.01, a news release dated October 26, 2011 reporting results for the third quarter of 2011 and furnishing under Item 7.01 and 9.01 the prepared remarks of John B. Hess, Chairman of the Board of Directors and Chief Executive Officer of Hess Corporation, and John P. Rielly, Senior Vice President...

  • Page 127
    ..., on the 27th day of February 2012. HESS CORPORATION (Registrant) By /S/ JOHN P. RIELLY (John P. Rielly) Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf...

  • Page 128
    Schedule II HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2011, 2010 and 2009 Additions Charged to Costs Charged Deductions and to Other from Expenses Accounts Reserves (Millions of dollars) Description Balance January 1 Balance ...

  • Page 129
    ...to the financial statements, the Company's decision to shut down refining operations and operate as an oil storage terminal raises substantial doubt about its ability to continue as a going concern. The Company's plans as to these matters are described in Note 1. The 2011 financial statements do not...

  • Page 130
    ...: Land ...Refinery facilities ...Other ...Construction in progress ...Total-at cost ...Less accumulated depreciation ...Property, plant and equipment-net ...Other assets ...Total assets ...Liabilities and members' equity Current liabilities: Accounts payable: Members and affiliates ...Trade ...Tax...

  • Page 131
    ... Deficit) Retained Earnings 2011 Year ended December 31 2010 (Dollars in Thousands) 2009 Sales ...Operating expenses: Product costs ...Operating expenses ...Depreciation and amortization ...Asset impairments and shutdown related charges ...Total operating expenses ...Operating loss ...Other non...

  • Page 132
    ... assets ...16,419 26,695 21,748 (Decrease) increase in accounts payable and accrued liabilities ...(218,068) 47,343 274,546 (Decrease) increase in taxes payable ...(509) 143 124 (Decrease) increase in other liabilities ...(25,473) (2,798) 13,926 Net cash provided by (used in) operating activities...

  • Page 133
    ... Hess Corporation ("Hess"), to own and operate the Company's refinery located in St. Croix, United States (U.S.) Virgin Islands. The Company's members are PDVSA V.I., Inc., a subsidiary of PDVSA, and Hess Oil Virgin Islands Corp. ("HOVIC"), a subsidiary of Hess. The Company purchases crude oil from...

  • Page 134
    .... Retirement Plans The Company recognizes on its balance sheet the underfunded status of its defined benefit retirement plans measured as the difference between the fair value of plan assets and the benefit obligations. The benefit obligation is the projected benefit obligation in the case of...

  • Page 135
    ...oil purchases, as well as accelerating payments from Hess for refined product sales. At December 31, 2011, interest bearing financial support from both members totaling $654,000 is recorded as a current liability in the balance sheet. Through the shutdown of refining operations, the Company had long...

  • Page 136
    ..., 50% of HOVENSA's gasoline, distillate, residual fuel and other products at market prices. A summary of all material transactions between the Company, its members and affiliates follows: 2011 2010 2009 Sale of petroleum products: Hess ...PDVSA ...Purchases of crude oil and products: Hess ...PDVSA...

  • Page 137
    ... in 2012, with subsequent operation as an oil storage terminal, the Company believes it will not be required to make material expenditures as outlined in the Consent Decree. Under the terms of the Consent Decree, the Company paid a penalty of $5,375 in 2011. In the normal course of its business, the...

  • Page 138
    ...place and meet future obligations in accordance with terms of the plan, but terminated employees will cease to earn service toward future benefits. The following table reconciles the projected benefit obligation and fair value of plan assets and shows the funded status of the pension plan: 2011 2010...

  • Page 139
    ...used in the Company's pension plan were as follows: 2011 2010 2009 Assumptions used to determine benefit obligations at December 31: Discount rate ...Rate of compensation increase ...Assumptions used to determine net costs for years ended December 31: Discount rate ...Expected return on plan assets...

  • Page 140
    ...per fund share. Equities consist of registered mutual fund investments whose diversified holdings primarily include common stock securities issued by U.S. and non-U.S. corporations, respectively. Mutual fund shares are valued daily, with the NAV per fund share published at the close of each business...

  • Page 141
    ... defining the rights of holders of long-term debt of Registrant and its subsidiaries upon request. Extension and Amendment Agreement between the Government of the Virgin Islands and Hess Oil Virgin Islands Corp. incorporated by reference to Exhibit 10(4) of Form 10-Q of Registrant for the three...

  • Page 142
    ... 1998 and effective October 30, 1998 among Hess Oil Virgin Islands Corp., PDVSA V.I., Inc., HOVENSA L.L.C. and the Government of the Virgin Islands incorporated by reference to Exhibit 10(4) of Form 10-K of Registrant for the fiscal year ended December 31, 1998. Incentive Cash Bonus Plan description...

  • Page 143
    ...26, 1998, among PDVSA V.I., Inc., Hess Oil Virgin Islands Corp. and HOVENSA L.L.C. (including Glossary of definitions) incorporated by reference to Exhibit 2.1 of Form 8-K of Registrant filed on November 13, 1998. Amended and Restated Limited Liability Company Agreement of HOVENSA L.L.C. dated as of...

  • Page 144
    ... Islands Hess Limited ...United Kingdom Hess Norge AS ...Norway Hess Oil and Gas Holdings Inc...Cayman Islands Hess Oil Company of Thailand (JDA) Limited ...Cayman Islands Hess Oil Virgin Islands Corp...Virgin Islands Hess West Africa Holdings Limited ...Cayman Islands Other subsidiaries (names...

  • Page 145
    ... subsidiaries and the effectiveness of internal control over financial reporting of Hess Corporation and our report dated February 27, 2012 with respect to the financial statements of HOVENSA L.L.C., included in this Annual Report (Form 10-K) for the year ended December 31, 2011. New York, New York...

  • Page 146
    ... DALLAS, TEXAS 75244 February 27, 2012 Hess Corporation 1185 Avenue of the Americas New York, New York 10036 Ladies and Gentlemen: We hereby consent to the use of the name DeGolyer and MacNaughton, to references to DeGolyer and MacNaughton as an independent petroleum engineering consulting firm, to...

  • Page 147
    ... report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By John B. Hess Chairman of the Board and Chief Executive Officer Date: February 27, 2012

  • Page 148
    ...31(2) I, John P. Rielly, certify that: 1. I have reviewed this annual report on Form 10-K of Hess Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the...

  • Page 149
    ...the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. By John B. Hess Chairman of the Board and Chief Executive Officer Date: February 27, 2012

  • Page 150
    ... with the Annual Report of Hess Corporation (the Corporation) on Form 10-K for the period ending December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, John P. Rielly, Senior Vice President and Chief Financial Officer of the Corporation, certify...

  • Page 151
    ...OPERATING OFFICES Exploration and Production Hess Corporation 1501 McKinney Street Houston, Texas 77010 Hess Limited The Adelphi Building 1-11 John Adam Street London WC2N 6AG England Marketing and Refining Hess Corporation 1 Hess Plaza Woodbridge, New Jersey 07095 Hess Web site www.hess.com ANNUAL...

  • Page 152
    1185 Avenue of the Americas New York, New York 10036 www.hess.com