Chevron 2006 Annual Report Download - page 73

CHEVRON CORPORATION 2006 ANNUAL REPORT 71CHEVRON CORPORATION 2006 ANNUAL REPORT 71
nized tax benefi ts and associated interest and penalties as of
J anuary 1, 2007. In connection with this increase in liability,
the company estimates retained earnings at the beginning of
2007 will be reduced by $250 or less. The amount of the liabil-
ity and impact on retained earnings will depend in part on
clarifi cation expected to be issued by the FASB related to the
criteria for determining the date of ultimate settlement with a
tax authority.
FASB Statement No. 157, Fair Value Measurements (FAS
157) In September 2006, the FASB issued FAS 157, which
will become effective for the company on January 1, 2008.
This standard defi nes fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. The Statement does not require any new fair
value measurements but would apply to assets and liabilities
that are required to be recorded at fair value under other
accounting standards. The impact, if any, to the company
from the adoption of FAS 157 in 2008 will depend on the
company’s assets and liabilities at that time that are required
to be measured at fair value.
FASB Statement No. 158, Employers’ Accounting for Defi ned
Benefi t Pension and Other Postretirement Plans – an Amend-
ment of FASB Statements No. 87, 88, 106 and 132(R) (FAS
158) In September 2006, the FASB issued FAS 158, which
was adopted by the company on December 31, 2006. Refer to
Note 21, beginning on page 72 for additional information.
NOTE 20.
ACCOUNTING FOR SUSPENDED EXPLORATORY WELLS
The company accounts for the cost of exploratory wells in
accordance with FASB Statement No. 19, Financial and Report-
ing by Oil and Gas Producing Companies (FAS 19), as amended
by FASB Staff Position (FSP) FAS 19-1, Accounting for Sus-
pended Well Costs, which provides that exploratory well costs
continue to be capitalized after the completion of drilling when
(a) the well has found a suffi cient quantity of reserves to justify
completion as a producing well and (b) the enterprise is making
suffi cient progress assessing the reserves and the economic and
operating viability of the project. If either condition is not met
or if an enterprise obtains information that raises substantial
doubt about the economic or operational viability of the proj-
ect, the exploratory well would be assumed to be impaired, and
its costs, net of any salvage value, would be charged to expense.
FAS 19 provides a number of indicators that can assist an entity
to demonstrate suffi cient progress is being made in assessing the
reserves and economic viability of the project.
The following table indicates the changes to the com-
pany’s suspended exploratory well costs for the three years
ended December 31, 2006. No capitalized exploratory well
costs were charged to expense upon the 2005 adoption of
FSP FAS 19-1.
Year ended December 31
2006 2005 2004
Beginning balance at January 1 $ 1,109 $ 671 $ 549
Additions associated with the
acquisition of Unocal – 317 –
Additions to capitalized exploratory
well costs pending the
determination of proved reserves 446 290 252
Reclassifi cations to wells, facilities
and equipment based on the
determination of proved reserves (171) (140) (64)
Capitalized exploratory well costs
charged to expense (121) (6) (66)
Other reductions* (24) (23) –
Ending balance at December 31 $ 1,239 $ 1,109 $ 671
*Represent property sales and exchanges.
The following table provides an aging of capitalized well
costs and the number of projects for which exploratory well
costs have been capitalized for a period greater than one year
since the completion of drilling. The aging of the former
Unocal wells is based on the date the drilling was completed,
rather than Chevron’s acquisition of Unocal in 2005.
Year ended December 31
2006 2005 2004
Exploratory well costs capitalized
for a period of one year or less $ 332 $ 259 $ 222
Exploratory well costs capitalized
for a period greater than one year 907 850 449
Balance at December 31 $ 1,239 $ 1,109 $ 671
Number of projects with exploratory
well costs that have been capitalized
for a period greater than one year* 44 40 22
* Certain projects have multiple wells or fi elds or both.
Of the $907 of exploratory well costs capitalized for a
period greater than one year at December 31, 2006, $447
(23 projects) is related to projects that had drilling activities
under way or fi rmly planned for the near future. An addi-
tional $63 (one project) had drilling activity during 2006.
The $397 balance related to 20 projects in areas requiring a
major capital expenditure before production could begin and
for which additional drilling efforts were not under way or
fi rmly planned for the near future. Additional drilling was
not deemed necessary because the presence of hydrocarbons
had already been established, and other activities were in
process to enable a future decision on project development.
The projects for the $397 referenced above had the fol-
lowing activities associated with assessing the reserves and
the projects’ economic viability: (a) $99 (two projects) –
development plans submitted to a government in early 2007;
(b) $80 (one project) – pre-FEED (front-end engineering and
design) studies are ongoing with FEED expected to com-
mence in 2007; (c) $75 (three projects) – continued to
pursue unitization opportunities on adjacent discoveries that
NOTE 19. NEW ACCOUNTING STANDARDS – Continued