Chesapeake Energy 2013 Annual Report Download - page 89

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Natural Gas and Oil Properties
Chesapeake follows the full cost method of accounting under which all costs associated with natural gas and oil
property acquisition, exploration and development activities are capitalized. We capitalize internal costs that can be
directly identified with these activities and do not capitalize any costs related to production, general corporate overhead
or similar activities (see Supplementary Information - Supplemental Disclosures About Natural Gas, Oil and NGL
Producing Activities). Capitalized costs are amortized on a composite unit-of-production method based on proved
natural gas and oil reserves. Estimates of our proved reserves as of December 31, 2013 were prepared by independent
engineering firms and Chesapeake's internal staff. Approximately 81% of these proved reserves estimates (by volume)
as of December 31, 2013 were prepared by independent engineering firms. In addition, our internal engineers review
and update our reserves on a quarterly basis.
Proceeds from the sale of natural gas and oil properties are accounted for as reductions of capitalized costs
unless such sales involve a significant change in proved reserves and significantly alter the relationship between costs
and proved reserves, in which case a gain or loss is recognized.
The costs of unproved properties are excluded from amortization until the properties are evaluated. We review
all of our unproved properties quarterly to determine whether or not and to what extent proved reserves have been
assigned to the properties and otherwise if impairment has occurred. Unproved properties are grouped by major
prospect area where individual property costs are not significant. In addition, we analyze our unproved leasehold and
transfer to proved properties leasehold that can be associated with reserves, leasehold that expired in the quarter or
leasehold that is not a part of our development strategy and will be abandoned.
The table below sets forth the cost of unproved properties excluded from the amortization base as of December 31,
2013 and the year in which the associated costs were incurred.
Year of Acquisition
2013 2012 2011 Prior Total
($ in millions)
Leasehold acquisition cost .......................... $ 229 $ 1,648 $ 2,113 $ 5,066 $ 9,056
Exploration cost........................................... 623 341 93 8 1,065
Capitalized interest...................................... 667 516 270 439 1,892
Total ...................................................... $ 1,519 $ 2,505 $ 2,476 $ 5,513 $ 12,013
We also review, on a quarterly basis, the carrying value of our natural gas and oil properties under the full cost
accounting rules of the SEC. This quarterly review is referred to as a ceiling test. Under the ceiling test, capitalized
costs, less accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum
of the present value of estimated future net revenues (adjusted for natural gas and oil derivatives designated as cash
flow hedges) less estimated future expenditures to be incurred in developing and producing the proved reserves, less
any related income tax effects. The ceiling test calculation uses costs as of the end of the applicable quarterly period
and the unweighted arithmetic average of natural gas, oil and NGL prices on the first day of each month within the 12-
month period prior to the ending date of the quarterly period. Such prices are utilized except where different prices are
fixed and determinable from applicable contracts for the remaining term of those contracts, including the effects of
derivatives designated as cash flow hedges. As of December 31, 2013, none of our open derivative instruments were
designated as cash flow hedges. Our natural gas and oil hedging activities are discussed in Note 11.
Two primary factors impacting the ceiling test are reserves levels and natural gas, oil and NGL prices, and their
associated impact on the present value of estimated future net revenues. Revisions to estimates of natural gas and
oil reserves and/or an extended increase or decrease in prices can have a material impact on the present value of
estimated future net revenues. Any excess of the net book value is written off as an expense.
We account for seismic costs as part of our natural gas and oil properties (i.e., full cost pool). Exploration costs
may be incurred both before acquiring the related property and after acquiring the property. Further, exploration costs
include, among other things, geological and geophysical studies and salaries and other expenses of geologists,
geophysical crews and others conducting those studies. Such costs are capitalized as incurred. The Company reviews
its unproved properties and associated seismic costs quarterly to determine whether impairment has occurred. To the
extent that seismic costs cannot be directly associated with specific unproved properties, they are included in the
amortization base as incurred.