Note 4 – Property and Equipment

Property and equipment included the following at the dates indicated below:



		September 30,		December 31,
		2013		2012
Oil and gas properties under the full cost method:
Subject to amortization	$	1,028,380	$	915,801
Not subject to amortization:
Incurred in 2013		68,193		-
Incurred in 2012		142,218		141,837
Incurred in 2011		99,183		107,510
Incurred prior to 2011		79,023		100,086
		1,416,997		1,265,234
Computers, furniture and fixtures		8,733		8,863
Total property and equipment		1,425,730		1,274,097

Accumulated depreciation, depletion and amortization		(346,824)		(270,656)

Net property and equipment	$	1,078,906	$	1,003,441

The costs not subject to amortization include:

·	values assigned to unproved reserves acquired,

·	exploration costs such as drilling costs for projects awaiting approved development plans or the determination of whether or not proved reserves can be assigned, and

·	other seismic and geological and geophysical costs.

These costs are transferred to the amortization base when it is determined whether or not proved reserves can be assigned to such properties. This analysis is dependent upon well performance, results of infield drilling, approval of development plans, drilling results and development of identified projects and periodic assessment of reserves. We expect acquisition costs excluded from amortization to be transferred to the amortization base over the next five years due to a combination of well performance and results of infield drilling relating to currently producing assets and the drilling and development of identified projects, such as the Rochelle field. We expect exploration costs not subject to amortization to be transferred to the amortization base over the next three years as development plans are completed and production commences on existing discoveries. Because of the nature of offshore oil and gas activities, development activities, including sanctioning and regulatory approvals, may take a significant amount of time to implement. Even though our expectation is that costs not subject to amortization are to be transferred to the amortization base over the next three years, it is not uncommon for the cycle times to be longer.

For the three months ended September 30, 2013 and 2012, we capitalized $7.5 million and $8.3 million, respectively, in interest related to exploration and development. For the nine months ended September 30, 2013 and 2012, we capitalized $21.2 million and $20.1 million, respectively, in interest related to exploration and development, primarily related to our U.K. activities. For the three months ended September 30, 2013 and 2012, we capitalized $3.1 million and $4.9 million, respectively, in certain directly related employee costs. For the nine months ended September 30, 2013 and 2012, we capitalized $10.0 million, and $14.7 million, respectively, in certain directly related employee costs.

For the three months ended September 30, 2013, we recorded a pre-tax impairment of $6.0 million for our U.S. oil and gas properties after the application of the full cost ceiling test. For the nine months ended September 30, 2013, we recorded a pre-tax impairment of $9.6 million related to our U.S. oil and gas properties. The primary reason for the U.S. impairment was the evaluation of assets not subject to amortization which we no longer intend to pursue and accordingly are included in the full cost pool. The prices used for our U.S. impairment analysis were $95.06 per barrel for oil and $3.61 per Mcf for gas. We did not have an impairment of U.K. oil and gas properties through the application of the full cost ceiling test at the end of the third quarter of 2013, which utilized prices of $108.67 per barrel for oil and $10.51 per Mcf for gas.

For the third quarter of 2012, we recorded a pre-tax impairment of $11.4 million related to our U.S. oil and gas properties through the application of the full cost ceiling test at the end of the quarter. For the nine months ended September 30, 2012, we recorded a pre-tax impairment of $47.1 million related to our U.S. oil and gas properties. The impairment was primarily due to the decline in U.S. gas prices. The prices used to determine the impairment for our U.S. properties were $94.84 per barrel for oil and $2.78 per Mcf for gas. We did not have an impairment of U.K. oil and gas properties through the application of the full cost ceiling test at the end of the third quarter of 2012, which utilized prices of $110.17 per barrel for oil and $8.65 per Mcf for gas.