Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

Income Taxes

15. Income Taxes

        Kosmos Energy Ltd. is a Bermuda company that is not subject to taxation at the corporate level. Kosmos Energy Ltd.'s operating subsidiaries in the United States, Ghana, Cameroon, Morocco and Suriname are subject to taxation in their respective jurisdictions.

        The components of income (loss) before income taxes were as follows:

	Years Ended December 31,
	2011			2010			2009
	(In thousands)
Bermuda	$	(4,826	)	$	—		$	—
United States		8,808			1,476			2,497
Foreign—other		95,061			(324,256	)		(81,271	)
Income (loss) before income taxes	$	99,043		$	(322,780	)	$	(78,774	)

        The components of the provision for income taxes attributable to our income (loss) before income taxes consist of the following:

	Years Ended December 31,
	2011			2010			2009
	(In thousands)
Current:
Bermuda	$	—		$	—		$	—
United States		20,229			506			874
Foreign—other		—			—			—
Total current		20,229			506			874
Deferred:
Bermuda		—			—			—
United States		(16,857	)		(143	)		99
Foreign—other		73,314			(77,471	)		—
Total deferred		56,457			(77,614	)		99
Income tax expense (benefit)	$	76,686		$	(77,108	)	$	973

        The following table reconciles the differences between our applicable statutory tax rate and our effective income tax rate:

	Years Ended December 31,
	2011			2010			2009
Tax provision at statutory rate (Bermuda)		—	%		—	%		—	%
Income/loss subject to tax in excess of statutory rate		53.4			23.2			18.2
Change in valuation allowance		19.6			1.1			(19.2	)
Other		4.4			(0.4	)		(0.2	)
Consolidated effective tax rate		77.4	%		23.9	%		(1.2	)%

        Deferred taxes reflect the tax effects of differences between the amounts recorded as assets and liabilities for financial reporting purposes and the amounts recorded for income tax purposes. The tax effects of significant temporary differences giving rise to deferred tax assets and liabilities are as follows:

	December 31.
	2011			2010
	(In thousands)
Deferred tax assets:
Ghana foreign capitalized operating expenses	$	6,355		$	8,473
Foreign net operating losses		92,154			134,090
Equity compensation		17,282			—
Unrealized derivative losses		7,622			—
Other		7,354			6,007
Total deferred tax assets		130,767			148,570
Valuation allowance		(49,502	)		(30,140	)
Total deferred tax assets, net		81,265			118,430
Deferred tax liabilities:
Depletion, depreciation and amortization related to property and equipment		(60,635	)		(41,143	)
Other		—			(200	)
Total deferred tax liabilities		(60,635	)		(41,343	)
Net deferred tax asset	$	20,630		$	77,087

        The Company had net deferred tax assets in Ghana totaling approximately $20.6 million at December 31, 2009 primarily relating to capitalized operating expenses incurred during the development phase of the Jubilee Field. Prior to the commencement of production from the Jubilee Field on November 28, 2010, the Company maintained a full valuation allowance against its net deferred tax asset. However, at December 31, 2010, the Company determined that it was more likely than not that the deferred tax asset for its Ghana operations would be recognized, resulting in the valuation allowance no longer being necessary. Therefore, we released the $20.6 million deferred tax asset valuation allowance and recognized $56.9 million of deferred tax assets generated during 2010. The factors that the Company considered are discussed below. Based on these factors, the Company concluded that many of the considerations that previously led to the need for a valuation allowance related to the Ghana deferred tax assets no longer existed as of December 31, 2010.

        In determining that a valuation allowance was not needed for the Ghanaian deferred tax assets at December 31, 2010 we considered the requirements of ASC 740, including that all evidence, both positive and negative, should be considered to determine whether, based on all the weight of the available evidence, it is more-likely-than-not a deferred tax asset will or will not be realized. If it is more-likely-than-not that the deferred tax asset will be realized, a valuation allowance is not needed. In performing this assessment for the Ghanaian deferred tax assets, the Company determined that the factors that led to the creation of deferred tax assets while operating as a development stage entity changed significantly when the Company moved into the production phase. We considered the following evidence in assessing the realizability of the net deferred tax asset as of December 31, 2010:

• •

  The commencement of oil production on November 28, 2010. Equipment and infrastructure was fully in place in the fourth quarter of 2010 immediately prior to production commencing, and the November 28, 2010 successful commencement of production confirmed our expectations that these assets could be utilized to successfully produce from the field with an economical cost structure.

  •

  The recognition of our first revenues from oil production in January 2011. The Company was a development stage entity as of December 31, 2010, but upon recognition of our first revenues in January 2011, was no longer categorized as such.

  •

  The existence of significant proved reserves that had been independently verified.

  •

  The Company was producing a commodity (crude oil) with observable market demand capable of purchasing all barrels produced. Prices for oil could be estimated through forward pricing curves.

  •

  The ability to recover our deferred tax assets based on our projections of at such time taxable income for future years. Production volumes utilized in our projections were based on our proved reserve estimates as of December 31, 2010, which had been independently verified, and our schedule for production which was approved by the Jubilee Unit partners, and forecasted increased production during 2011 and future periods. Prices were estimated based on prices utilized to calculate our standardized measure as of December 31, 2010. We estimated our expenses based on current contracts and cost structures in place at that time. Based on the production plan and a price per barrel of $79.35, which is also used to calculate our standardized measure as of December 31, 2010, we anticipated realization of the net operating loss carryforward by the end of 2012.

  •

  The excess of appreciated asset value over the tax basis of our Ghanaian net assets of an amount sufficient to realize the deferred tax asset. Our estimates of the excess of the appreciated asset value were based upon the independently verified reserve report, third party offers for our Ghana assets, and other market indicators.

  •

  We tested the sensitivity of our projection of taxable income to changes in production volumes and prices, which indicated that future taxable income was sufficient to recover the deferred tax assets under various scenarios.

  •

  There is an unlimited net operating loss carryforward period under Ghanaian tax law, which provides flexibility in utilization of the net operating loss.

        ASC 740 provides a more-likely-than-not standard in evaluating whether a valuation allowance is necessary after weighing all of the available evidence. Using the more-likely-than-not standard and weighing all available positive and negative evidence, the Company believed that, as of December 31, 2010, considering the facts and circumstances at that time, the negative evidence of the cumulative losses incurred during the development stage was overcome by the positive evidence relating to the Company's ability to more-likely-than-not realize the deferred tax assets in Ghana. Accordingly, we determined that it is more likely than not that the deferred tax asset for our Ghanaian operations would be realized.

        As of December 31, 2011, our Ghana operations has a net deferred tax asset of approximately $4.2 million. In consideration of the realizability of our net deferred tax asset as of December 31, 2011, we considered the following, in addition to the aforementioned positive evidence:

• •

  Our operations subject to taxation in Ghana is no longer in a three year cumulative loss position.

  •

  For the year ended December 31, 2011, we expect to utilize approximately $164.0 million of our net operating loss carryforward.

  •

  The ability to recover our deferred tax assets based on our projections of taxable income for future years. Production volumes utilized in our projection were based on our proved reserve estimates as of December 31, 2011, which have been independently verified, and our schedule for production which was approved by the Jubilee Unit partners, and forecasted for increased production during 2012 and future periods. Prices were estimated based on prices utilized to calculate our standardized measure as of December 31, 2011. We estimated our expenses based on current contracts and cost structures in place at that time. Based on such projections, we estimate that we will utilize the remainder of the net operating loss during 2012.

        Based on our analysis, we concluded that it is more-likely-than-not that our remaining Ghana deferred tax asset as of December 31, 2011 will be realized in the future.

        The Company has recorded a full valuation allowance against the net deferred tax assets in Cameroon and Morocco. The net change in the valuation allowance of $19.4 million is due to the additional losses generated in Morocco and Cameroon.

        The Company has entered into various petroleum agreements in Morocco. These agreements provide for a tax holiday, at a 0% tax rate, for a period of 10 years beginning on the date of first production. The Company currently has recorded deferred tax assets of $10.9 million, recorded at the Moroccan statutory rate of 30%, with an offsetting valuation allowance of $10.9 million. We will re-evaluate our deferred tax position upon entering the tax holiday period and at such time may reduce the statutory rate applied to the deferred tax assets in Morocco to the extent those deferred tax assets are realized within the tax holiday period.

        The Company has foreign net operating loss carryforwards of approximately $89.6 million which begin to expire in 2011 through 2015 and approximately $137.4 million which do not expire.

        A subsidiary of the Company files a U.S. federal income tax return and a Texas margin tax return. In addition to the United States, the Company files income tax returns in the countries in which the Company operates. The Company is open to U.S. federal income tax examinations for tax years 2008 through 2011 and to Texas margin tax examinations for the tax years 2007 through 2011. In addition the Company is open to income tax examinations for years 2004 through 2011 in its significant other foreign jurisdictions (Ghana, Cameroon and Morocco).

        As of December 31, 2011, the Company had no material uncertain tax positions. The Company's policy is to recognize potential interest and penalties related to income tax matters in income tax expense, but has had no need to accrue any to date.