Hess 2000 Annual Report Download - page 22

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On a barrel of oil equivalent basis, the Corporation’s oil
and gas production increased by 10% in 2000 and 12% in
1999. The increase in foreign crude oil production in 2000
was primarily due to a full year of production from the
South Arne Field in Denmark. United Kingdom produc-
tion was also higher, largely due to new production from
the Bittern Field and an increased interest in the Ivanhoe
and Rob Roy Fields. Increased natural gas production
from new and existing fields in the United Kingdom,
Denmark and Thailand offset declining natural gas pro-
duction in the United States. Late in 2000, production
commenced from the Conger and Northwestern Fields
in the Gulf of Mexico, which will increase United States
natural gas production in 2001.
The 1999 increase in crude oil production was primarily
attributable to the Baldpate Field in the Gulf of Mexico,
which commenced production in late 1998, and new pro-
duction from the South Arne Field. The 1999 increase in
foreign natural gas production reflected increases in the
North Sea, Indonesia and Thailand.
Production expenses were higher in 2000, primarily due
to increased oil and gas production volumes and, on a per
barrel basis, due to changes in the mix of producing fields.
Depreciation, depletion and amortization charges were
higher in 2000, also reflecting increased production vol-
umes, although the per barrel rate for depreciation and
related costs was comparable to the 1999 and 1998
amounts. Exploration expense was higher in 2000, primar-
ily due to increased drilling and seismic purchases in
the Gulf of Mexico and increased exploration activity in
international areas (outside of the North Sea). Explora-
tion expense in 1999 was lower than in 1998 as a result
of a planned reduction in the exploration program.
General and administrative expenses related to explo-
ration and production activities were comparable in
2000 and 1999, but somewhat lower than in 1998, due to
cost reduction initiatives in the United States and United
Kingdom. The total cost per barrel of production, depre-
ciation, exploration and administrative expenses was
$11.70 in 2000, $11.75 in 1999 and $13.80 in 1998 (exclud-
ing special charges).
The effective income tax rate on exploration and produc-
tion earnings in 2000 was 41%, compared to an effective
rate of 44% in 1999. Generally, this rate will exceed the
U.S. statutory rate because of special petroleum taxes,
principally in the United Kingdom and Norway. The effec-
tive rate in 2000 was lower than in 1999 due to the timing
of deductions for certain prior year foreign drilling costs.
Crude oil and natural gas selling prices continue to be
volatile, and should prices decline, there would be a nega-
tive effect on future earnings. However, the Corporation
has hedged a substantial amount of 2001 crude oil produc-
tion and, to a lesser extent 2002 production, which will
mitigate the effect if prices decline in those years.
Refining, Marketing and Shipping: Operating earnings for
refining, marketing and shipping activities increased
to $288 million in 2000 compared with income of
$133 million in 1999 and a loss of $18 million in 1998. The
Corporation’s downstream operations include HOVENSA
L.L.C. (HOVENSA), a 50% owned refining joint venture
with a subsidiary of Petroleos de Venezuela S.A. (PDVSA),
accounted for on the equity method. Additional refining
and marketing operations include a fluid catalytic crack-
ing facility in Port Reading, New Jersey, as well as retail
gasoline stations, energy marketing activities, shipping
and trading.
HOVENSA: The Corporation’s share of HOVENSA’s
income was $121 million in 2000 compared with $7
million in 1999 and $24 million in 1998, when the refinery
was wholly-owned for the first ten months of the year.
Refined product margins were significantly improved in
2000, particularly for gasolines and distillates. Through-
out most of 1999 refined product margins were weak. The
Corporation’s share of HOVENSA’s refinery runs
amounted to 211,000 barrels per day in 2000 and 209,000
in 1999. Income taxes on HOVENSA’s results are offset by
available loss carryforwards.
Operating earnings from refining, marketing and
shipping activities also include interest income on the
note received from PDVSA at the formation of the joint
venture. Interest on the PDVSA note amounted to $48 mil-
lion in 2000, $47 million in 1999 and $8 million in 1998.
Interest is reflected in non-operating income in the
income statement.