Freeport-McMoRan 2014 Annual Report Download - page 43

MANAGEMENT’S DISCUSSION AND ANALYSIS
41
losses recorded in revenues each period. Net credits (charges) to
revenues for net noncash mark-to-market gains (losses) on crude
oil and natural gas derivative contracts totaled $627 million in
2014 and $(312) million for the seven-month period from June 1,
2013, to December 31, 2013. Refer to Note 14 and “Disclosure
About Market Risks — Commodity Price Risk“ for further
discussion of crude oil and natural gas derivative contracts.
Production and Delivery Costs
Consolidated production and delivery costs totaled $11.9 billion in
2014, $11.8 billion in 2013 and $10.4 billion in 2012. Higher
production and delivery costs for 2014, compared with 2013, were
primarily associated with our oil and gas operations, which
included a full year of results for 2014, partly offset by lower costs
for our mining operations mostly associated with lower volumes
in South America and Indonesia. Higher consolidated production
and delivery costs in 2013, compared with 2012, primarily
reflected the addition of costs from our oil and gas operations and
higher copper purchases.
Mining Unit Site Production and Delivery Costs
Site production and delivery costs for our copper mining
operations primarily include labor, energy and commodity-based
inputs, such as sulphuric acid, reagents, liners, tires and
explosives. Consolidated unit site production and delivery costs
(before net noncash and other costs) for our copper mining
operations averaged $1.90 per pound of copper in 2014, $1.88 per
pound in 2013 and $2.00 per pound in 2012. Higher consolidated
unit site production and delivery costs in 2014, compared with
2013, primarily reflect the impact of lower copper sales volumes in
South America and Indonesia, partly offset by higher volumes in
North America. Consolidated production and delivery costs for
2014 also exclude fixed costs charged directly to cost of sales as a
result of the impact of export restrictions on PT-FI’s operating
rates totaling $0.04 per pound of copper. Lower consolidated unit
site production and delivery costs in 2013, compared with 2012,
primarily reflect higher copper sales volumes in Indonesia and
South America.
Assuming achievement of current 2015 volume and cost
estimates, consolidated site production and delivery costs are
expected to average $1.81 per pound of copper for 2015. Refer to
“Operations — Unit Net Cash Costs“ for further discussion of
unit net cash costs associated with our operating divisions, and
to “Product Revenues and Production Costs“ for reconciliations
of per pound costs by operating division to production and
delivery costs applicable to sales reported in our consolidated
financial statements.
Our copper mining operations require significant energy,
principally diesel, electricity, coal and natural gas, most of which
is obtained from third parties under long-term contracts. Energy
costs approximated 20 percent of our consolidated copper
production costs in 2014, including purchases of approximately
250 million gallons of diesel fuel; 7,600 gigawatt hours of
electricity at our North America, South America and Africa copper
mining operations (we generate all of our power at our Indonesia
mining operation); 600 thousand metric tons of coal for our coal
power plant in Indonesia; and 1 MMBtu of natural gas at certain of
our North America mines. Based on current cost estimates, we
estimate energy will approximate 16 percent of our consolidated
copper production costs for 2015.
Oil and Gas Production Costs per BOE
Production costs for our oil and gas operations primarily include
costs incurred to operate and maintain wells and related
equipment and facilities, such as lease operating expenses, steam
gas costs, electricity, production and ad valorem taxes, and
gathering and transportation expenses. Cash production costs for
our oil and gas operations of $20.08 per BOE were higher than
$17.14 per BOE for the seven-month period from June 1, 2013, to
December 31, 2013, primarily reflecting the sale of lower cost
Eagle Ford properties in June 2014 and higher operating costs in
California and the GOM.
Assuming achievement of current volume and cost estimates
for 2015, cash production costs are expected to approximate
$18 per BOE for the year 2015. Refer to “Operations“ for further
discussion of cash production costs at our oil and gas operations.
Depreciation, Depletion and Amortization
Depreciation will vary under the UOP method as a result of
changes in sales volumes and the related UOP rates at our mining
and oil and gas operations. Consolidated depreciation, depletion
and amortization (DD&A) totaled $3.9 billion in 2014, $2.8 billion
in 2013 and $1.2 billion in 2012. Higher DD&A in 2014 was
primarily associated with a full year of expense for oil and gas
operations ($2.3 billion in 2014, compared with $1.4 billion for the
seven-month period from June 1, 2013, to December 31, 2013).
Higher DD&A in 2013, compared with 2012, primarily reflected the
seven months of expense from our acquired oil and gas
operations, and asset additions and higher production at our
mining operations.
Impairment of Oil and Gas Properties
Under the full cost accounting rules, a “ceiling test“ is conducted
each quarter to review the carrying value of the oil and gas
properties for impairment. At September 30, 2014, and
December 31, 2014, net capitalized costs with respect to
FM O&G’s proved U.S. oil and gas properties exceeded the
related ceiling limitation, which resulted in the recognition of
impairment charges totaling $3.7 billion in 2014. Refer to Note 1
and “Critical Accounting Estimates — Impairment of Oil and Gas
Properties“ for further discussion.