Hess 2014 Annual Report Download - page 54

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Accounting Policies
Critical Accounting Policies and Estimates
Accounting policies and estimates affect the recognition of assets and liabilities in the Corporation’s Consolidated Balance
Sheet and revenues and expenses in the Statement of Consolidated Income. The accounting methods used can affect net
income, equity and various financial statement ratios. However, the Corporation’s accounting policies generally do not
change cash flows or liquidity.
Accounting for Exploration and Development Costs: E&P activities are accounted for using the successful efforts
method. Costs of acquiring unproved and proved oil and gas leasehold acreage, including lease bonuses, brokers’ fees and
other related costs are capitalized. Annual lease rentals, exploration expenses and exploratory dry hole costs are expensed as
incurred. Costs of drilling and equipping productive wells, including development dry holes, and related production facilities
are capitalized. In production operations, costs of injected CO2 for tertiary recovery are expensed as incurred.
The costs of exploratory wells that find oil and gas reserves are capitalized pending determination of whether proved
reserves have been found. Exploratory drilling costs remain capitalized after drilling is completed if (1) the well has found a
sufficient quantity of reserves to justify completion as a producing well and (2) sufficient progress is being made in assessing
the reserves and the economic and operational viability of the project. If either of those criteria is not met, or if there is
substantial doubt about the economic or operational viability of the project, the capitalized well costs are charged to expense.
Indicators of sufficient progress in assessing reserves, and the economic and operating viability of a project include:
commitment of project personnel, active negotiations for sales contracts with customers, negotiations with governments,
operators and contractors and firm plans for additional drilling and other factors.
Crude Oil and Natural Gas Reserves: The determination of estimated proved reserves is a significant element in arriving
at the results of operations of exploration and production activities. The estimates of proved reserves affect well
capitalizations, the unit of production depreciation rates of proved properties and wells and equipment, as well as impairment
testing of oil and gas assets and goodwill.
For reserves to be booked as proved they must be determined with reasonable certainty to be economically producible
from known reservoirs under existing economic conditions, operating methods and government regulations. In addition,
government and project operator approvals must be obtained and, depending on the amount of the project cost, senior
management or the Board of directors must commit to fund the project. The Corporation maintains its own internal reserve
estimates that are calculated by technical staff that work directly with the oil and gas properties. The Corporation’s technical
staff updates reserve estimates throughout the year based on evaluations of new wells, performance reviews, new technical
data and other studies. To provide consistency throughout the Corporation, standard reserve estimation guidelines,
definitions, reporting reviews and approval practices are used. The internal reserve estimates are subject to internal technical
audits and senior management review. The Corporation also engages an independent third party consulting firm to audit
approximately 80% of the Corporation’s total proved reserves each year.
Proved reserves are calculated using the average price during the twelve month period before December 31 determined as
an unweighted arithmetic average of the first-day-of-the-month price for each month within the year, unless prices are
defined by contractual agreements, excluding escalations based on future conditions. Crude oil prices remained at
significantly higher levels during the first ten months of 2014 and declined during the last two months of the year. As a
result, the average crude oil price used to calculate proved reserves at December 31, 2014 is significantly higher than the
year-end 2014 crude oil price. The year-end 2015 reserve estimates will be based on the same unweighted arithmetic average
formula using first-day-of-the-month prices for 2015 and will reflect the current low crude oil price environment from the
beginning of the year. If current strip crude oil prices hold through 2015, proved reserves at December 31, 2015 could be
significantly lower than proved reserves at December 31, 2014. It is difficult to estimate the magnitude of any net negative
change in proved reserves that may result from lower crude oil prices due to a number of factors that are currently unknown,
including 2015 crude oil prices, any revisions in proved reserves that may occur based on 2015 reservoir performance, the
levels to which industry costs will decline in response to lower prices, and management’s plans as of December 31, 2015 for
developing proved undeveloped reserves through the year 2020 which will be the five-year window for recognizing proved
undeveloped reserves as of December 31, 2015. Despite the uncertainties cited, based on facts and assumptions existing at
December 31, 2014 if Brent crude oil prices were to average $60 per barrel in 2015, the Corporation estimates that 2015
depreciation, depletion, and amortization expenses would increase by not more than $75 million, after-tax as a result of
changes in proved reserves compared with December 31, 2014. See the Supplementary Oil and Gas Data on pages 87
through 95 in the accompanying financial statements for additional information on the Corporation’s oil and gas reserves.