Note 7 - FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2011

Fair Value Disclosures [Text Block]

(7)           FAIR VALUE MEASUREMENTS

We apply the FASB’s fair value measurements and disclosures guidance to nonrecurring, nonfinancial assets and liabilities.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This guidance also establishes a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability.  Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The valuation hierarchy contains three levels:

● Level 1 – Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets.

● Level 2 – Valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets and other observable inputs directly or indirectly related to the asset or liability being measured.

● Level 3 – Valuation inputs are unobservable and significant to the fair value measurement.

We used the following fair value measurements for certain of our assets and liabilities during the six months ended June 30, 2011:

Level 1 Classification:

Investment in Global – Global’s ordinary shares are publicly traded on the AIM Exchange of the London Stock Exchange with quoted prices in active markets. Accordingly, the fair value measurements of these securities have been classified as Level 1.

Commodity contracts – Our purchased commodity derivatives have quoted prices in active markets. Accordingly, the fair value measurements of these securities have been classified as Level 1.

Level 3 Classification:

Asset Retirement Obligations - Our asset retirement obligation is classified as a Level 3 liability. The significant unobservable inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, inflation rates and the expected remaining life of wells. The inputs are calculated utilizing historical data, current estimated costs and expectations for the future costs and production of the wells.  See Note 9 – “Asset Retirement Obligation” for additional information on our asset retirement obligation as of June 30, 2011.

    Value of HKN shares issued for BWI investment - The fair value of the restricted common stock paid in exchange for our increased ownership of BWI is non-recurring and was estimated based on a discount for lack of marketability study which included an Asian put analysis and a Restricted Stock Study in combination with the market price of our common stock.

The following table presents recurring financial assets and liabilities which are carried at fair value as of June 30, 2011 (in thousands):

	Level 1		Level 2		Level 3
Investment in Global (cost method)	$	15,141	$	-	$	-
Commodity contracts		-		-		-
Total assets at fair value	$	15,141	$	-	$	-