Hess 2002 Annual Report Download - page 33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amerada Hess Corporation and Consolidated Subsidiaries
31
Cash and Cash Equivalents: Cash equivalents consist of highly
liquid investments, which are readily convertible into cash and have
maturities of three months or less when acquired.
Inventories: Crude oil and refined product inventories are valued
at the lower of average cost or market. For inventories valued at
cost, the Corporation uses principally the last-in, first-out (LIFO)
inventory method.
Inventories of materials and supplies are valued at the lower of cost
or market.
Exploration and Development Costs: Oil and gas exploration and
production activities are accounted for using the successful efforts
method. Costs of acquiring unproved and proved oil and gas lease-
hold acreage, including lease bonuses, brokers’ fees and other
related costs, are capitalized.
Annual lease rentals and exploration expenses, including geological
and geophysical expenses and exploratory dry hole costs, are
charged against income as incurred.
Costs of drilling and equipping productive wells, including develop-
ment dry holes, and related production facilities are capitalized.
The costs of exploratory wells that find oil and gas reserves are
capitalized pending determination of whether proved reserves have
been found. In an area requiring a major capital expenditure before
production can begin, an exploration well is carried as an asset if
sufficient reserves are discovered to justify its completion as a
production well, and additional exploration drilling is underway
or firmly planned. The Corporation does not capitalize the cost
of other exploratory wells for more than one year unless proved
reserves are found.
Depreciation, Depletion and Amortization: The Corporation calcu-
lates depletion expense for acquisition costs of proved properties
using the units of production method over proved oil and gas
reserves. Depreciation and depletion expense for oil and gas produc-
tion equipment and wells is calculated using the units of production
method over proved developed oil and gas reserves. Depreciation
of all other plant and equipment is determined on the straight-line
method based on estimated useful lives.
Provisions for impairment of undeveloped oil and gas leases are
based on periodic evaluations and other factors.
The estimated costs of dismantlement, restoration and abandonment,
less estimated salvage values, of offshore oil and gas production
platforms and pipelines are accrued using the units-of-production
method and are reported as a component of depreciation expense
and accumulated depreciation (see Note 16).
1. Summary of Significant Accounting Policies
Nature of Business: Amerada Hess Corporation and subsidiaries
(the “Corporation”) engage in the exploration for and the production,
purchase, transportation and sale of crude oil and natural gas.These
activities are conducted primarily in the United States, United
Kingdom, Norway, Denmark and Equatorial Guinea. The Corporation
also has oil and gas activities in Algeria, Azerbaijan, Colombia, Gabon,
Indonesia, Malaysia, Thailand and other countries. In addition, the
Corporation manufactures, purchases, transports, trades and
markets refined petroleum and other energy products. The Corpora-
tion owns 50% of HOVENSA L.L.C., a refinery joint venture in the
United States Virgin Islands. An additional refining facility, terminals
and retail gasoline stations are located on the East Coast of the
United States.
In preparing financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and
liabilities in the balance sheet and revenues and expenses in the
income statement. Actual results could differ from those estimates.
Among the estimates made by management are: oil and gas
reserves, asset valuations and depreciable lives, pension liabilities,
environmental obligations, dismantlement costs and income taxes.
Principles of Consolidation: The consolidated financial statements
include the accounts of Amerada Hess Corporation and entities in
which the Corporation owns more than a 50% voting interest or
entities that the Corporation controls. The Corporation’s undivided
interests in unincorporated oil and gas exploration and production
ventures are proportionately consolidated.
Investments in affiliated companies, 20% to 50% owned, including
HOVENSA but excluding a trading partnership, are stated at cost of
acquisition plus the Corporation’s equity in undistributed net income
since acquisition. The change in the equity in net income of these
companies is included in non-operating income in the income state-
ment. The Corporation consolidates the trading partnership in which
it owns a 50% voting interest and over which it exercises control.
Intercompany transactions and accounts are eliminated
in consolidation.
Revenue Recognition: The Corporation recognizes revenues from
the sale of crude oil, natural gas, petroleum products and other
merchandise when title passes to the customer.
The Corporation recognizes revenues from the production of natural
gas properties in which it has an interest based on sales to cus-
tomers. Differences between natural gas volumes sold and the
Corporation’s share of natural gas production are not material.