Hess 2011 Annual Report Download - page 78

HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
in earnings. Derivatives may be designated as hedges of expected future cash flows or forecasted transactions
(cash flow hedges) or hedges of firm commitments (fair value hedges). The effective portion of changes in fair
value of derivatives that are designated as cash flow hedges is recorded as a component of other comprehensive
income (loss) while the ineffective portion of the changes in fair value is recorded currently in earnings. Amounts
included in Accumulated other comprehensive income (loss) for cash flow hedges are reclassified into earnings
in the same period that the hedged item is recognized in earnings. Changes in fair value of derivatives designated
as fair value hedges are recognized currently in earnings. The change in fair value of the related hedged
commitment is recorded as an adjustment to its carrying amount and recognized currently in earnings.
Cash and Cash Equivalents: Cash equivalents consist of highly liquid investments, which are readily
convertible into cash and have maturities of three months or less when acquired.
Inventories: Inventories are valued at the lower of cost or market. For refined petroleum product
inventories valued at cost, the Corporation uses principally the last-in, first-out (LIFO) inventory method. For the
remaining inventories, cost is generally determined using average actual costs.
Exploration and Development Costs: E&P activities are accounted for using the successful efforts
method. Costs of acquiring unproved and proved oil and gas leasehold acreage, including lease bonuses, brokers’
fees and other related costs, are capitalized. Annual lease rentals, exploration expenses and exploratory dry hole
costs are expensed as incurred. Costs of drilling and equipping productive wells, including development dry
holes, and related production facilities are capitalized. In production operations, costs of injected CO2for tertiary
recovery are expensed as incurred.
The costs of exploratory wells that find oil and gas reserves are capitalized pending determination of
whether proved reserves have been found. Exploratory drilling costs remain capitalized after drilling is
completed if (1) the well has found a sufficient quantity of reserves to justify completion as a producing well and
(2) sufficient progress is being made in assessing the reserves and the economic and operational viability of the
project. If either of those criteria is not met, or if there is substantial doubt about the economic or operational
viability of a project, the 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, 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. Depreciation
and depletion expense for oil and gas production equipment and wells is calculated using the units of production
method over proved developed oil and gas reserves. Provisions for impairment of undeveloped oil and gas leases
are based on periodic evaluations and other factors. Depreciation of all other plant and equipment is determined
on the straight-line method based on estimated useful lives. Retail gas stations and equipment related to a leased
property, are depreciated over the estimated useful lives not to exceed the remaining lease period. The
Corporation records the cost of acquired customers in its energy marketing activities as intangible assets and
amortizes these costs on the straight-line method over the expected renewal period based on historical
experience.
Capitalized Interest: Interest from external borrowings is capitalized on material projects using the
weighted average cost of outstanding borrowings until the project is substantially complete and ready for its
intended use, which for oil and gas assets is at first production from the field. Capitalized interest is depreciated
over the useful lives of the assets in the same manner as the depreciation of the underlying assets.
Asset Retirement Obligations: The Corporation has material legal obligations to remove and dismantle
long-lived assets and to restore land or seabed at certain exploration and production locations. The Corporation
recognizes a liability for the fair value of legally required asset retirement obligations associated with long-lived
assets in the period in which the retirement obligations are incurred. In addition, the fair value of any legally
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