Freeport-McMoRan 2013 Annual Report Download - page 37

MANAGEMENT’S DISCUSSION AND ANALYSIS
2013 ANNUAL REPORT | 35
Oil and
Natural Gas
(MMBOE)
Acquisitions of PXP and MMR 472
Extensions and discoveries 24
Revisions of previous estimates 7
Sales of reserves in-place (1)
Production (38)
Estimated proved reserves at December 31, 2013 464
Refer to Note 21 for further information regarding estimated proved
oil and natural gas reserves.
Changes to estimates of proved reserves could result in
changes to the prospective UOP amortization rate for our oil and
gas properties, which could have a significant impact on our
results of operations. Based on our estimated proved reserves
and our net oil and gas properties subject to amortization at
December 31, 2013, a 10 percent increase in our costs subject to
amortization would increase our amortization rate by
approximately $3.79 per BOE, and a 10 percent reduction to
proved reserves would increase our amortization rate by
approximately $4.21 per BOE. Changes in estimates of proved oil
and natural gas reserves may also affect our ceiling test
calculation (refer to Note 1).
Impairment of Long-Lived Mining Assets. As discussed in Note 1,
we evaluate our long-lived mining assets for impairment when
events or changes in circumstances indicate that the related
carrying amount of such assets may not be recoverable. In
evaluating our long-lived assets for recoverability, estimates of
after-tax undiscounted future cash flows of our individual mining
operations are used, with impairment losses measured by
reference to fair value. As quoted market prices are unavailable
for our individual mining operations, fair value is determined
through the use of discounted estimated future cash flows. The
estimated cash flows used to assess recoverability of our
long-lived assets and measure fair value of our mining operations
are derived from current business plans, which are developed
using near-term price forecasts reflective of the current price
environment and management’s projections for long-term
average metal prices. In addition to near- and long-term metal
price assumptions, other key assumptions include commodity-
based and other input costs; proven and probable reserves,
including the timing and cost to develop and produce the
reserves; and the use of appropriate escalation and discount
rates. We believe our estimates and models used to determine fair
value are similar to what a market participant would use.
Because the cash flows used to assess recoverability of our
long-lived assets and measure fair value of our mining operations
require us to make several estimates and assumptions that are
subject to risk and uncertainty, changes in these estimates and
assumptions could result in the impairment of our long-lived
asset values. Events that could result in impairment of our
“reasonable certainty” implies a high degree of confidence that
the quantities of oil and natural gas actually recovered will equal or
exceed the estimate. Engineering estimates of proved oil and
natural gas reserves directly impact financial accounting estimates,
including depreciation, depletion and amortization, and the ceiling
limitation under the full cost method. Estimates of total proved
reserves are determined using methods prescribed by the U.S.
Securities and Exchange Commission (SEC), which require the use
of an average reference price calculated as the twelve-month
average of the first-day-of-the-month historical market prices for
crude oil and natural gas. At December 31, 2013, our estimates
were based on reference prices of $96.94 per barrel (West Texas
Intermediate) and $3.67 per million British thermal units (MMBtu)
(Henry Hub spot natural gas) as adjusted for location and quality
differentials, which are held constant throughout the lives of the
oil and gas properties, except where such guidelines permit
alternate treatment, including the use of fixed and determinable
contractual price escalations. Actual future prices and costs may
be materially higher or lower than the average prices and costs as
of the date of the estimate.
There are numerous uncertainties inherent in estimating
quantities and values of proved oil and natural gas reserves and in
projecting future rates of production and the amount and timing
of development expenditures, including many factors beyond our
control. Future development and abandonment costs are
determined annually for each of our properties based upon its
geographic location, type of production structure, water depth,
reservoir depth and characteristics, currently available
procedures and consultations with engineering consultants.
Because these costs typically extend many years into the future,
estimating these future costs is difficult and requires
management to make judgments that are subject to future
revisions based upon numerous factors, including changing
technology and the political and regulatory environment. Reserve
engineering is a subjective process of estimating the recovery
from underground accumulations of oil and natural gas that
cannot be measured in an exact manner and the accuracy of any
reserve estimate is a function of the quality of available data and
of engineering and geological interpretation and judgment.
Because all reserve estimates are subjective, the quantities of oil
and natural gas that are ultimately recovered, production and
operating costs, the amount and timing of future development
expenditures and future oil and natural gas sales prices may all
differ from those assumed in our estimates.
The following table summarizes our changes in estimated
proved oil and natural gas reserves during 2013 based upon
reserve reports prepared by the independent petroleum
engineers of Netherland, Sewell & Associates, Inc. and Ryder
Scott Company, L.P.: