Chesapeake Energy 2014 Annual Report Download - page 89

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Proceeds from the sale of oil and natural gas properties are accounted for as reductions of capitalized costs
unless these 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 proved 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,
2014 and the year in which the associated costs were incurred.
Year of Acquisition
2014 2013 2012 Prior Total
($ in millions)
Leasehold acquisition cost $ 577 $ 199 $ 1,462 $ 5,149 $ 7,387
Exploration cost 340 90 244 42 716
Capitalized interest 492 421 325 447 1,685
Total $ 1,409 $ 710 $ 2,031 $ 5,638 $ 9,788
We also review, on a quarterly basis, the carrying value of our oil and natural gas properties under the full cost
accounting rules of the Securities and Exchange Commission (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 oil and
natural gas 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 oil, natural gas and NGL prices
on the first day of each month within the 12-month period prior to the ending date of the quarterly period. These 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, 2014, none
of our open derivative instruments were designated as cash flow hedges. Our oil and natural gas hedging activities
are discussed in Note 11.
Two primary factors impacting the ceiling test are reserves levels and oil, natural gas and NGL prices, and their
associated impact on the present value of estimated future net revenues. Revisions to estimates of oil and natural gas
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 over the ceiling is written off as an expense.
We account for seismic costs as part of our oil and natural gas properties. 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. These 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.
Other Property and Equipment
Other property and equipment consists primarily of natural gas compressors, buildings and improvements, land,
vehicles, computer and office equipment, oil and natural gas gathering systems and treating plants. We have no
remaining oilfield services equipment as a result of the spin-off of our oilfield services business in 2014 as discussed
in Note 13, and substantially all of our natural gas gathering systems and treating plants were sold in 2013 and 2012
as discussed in Note 16. Major renewals and betterments are capitalized while the costs of repairs and maintenance
are charged to expense as incurred. The costs of assets retired or otherwise disposed of and the applicable accumulated
depreciation are removed from the accounts, and the resulting gain or loss is reflected in operating costs. See Note
16 for further discussion of our gains and losses on the sales of other property and equipment and a summary of our