Note 2. Basis of Presentation

Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the US (US GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. The accompanying consolidated financial statements at June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010 contain all normally recurring adjustments considered necessary for a fair presentation of our financial position, results of operations, cash flows and shareholders' equity for such periods. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. Certain reclassifications of amounts previously reported have been made to conform to current year presentations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Consolidation Our consolidated accounts include our accounts and the accounts of our wholly-owned subsidiaries. In addition, we use the equity method of accounting for investments in entities that we do not control but over which we exert significant influence. All significant intercompany balances and transactions have been eliminated upon consolidation.

Estimates The preparation of consolidated financial statements in conformity with US GAAP requires us to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Statements of Operations Information Other statements of operations information is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
(millions)
Other Revenues
Electricity Sales (1)	$	11		$	16		$	32		$	35
Other		-			1			1			1
Total	$	11		$	17		$	33		$	36
Production Expense
Lease Operating Expense	$	99		$	100		$	191		$	188
Production and Ad Valorem Taxes		38			34			70			67
Transportation Expense		18			16			35			34
Total	$	155		$	150		$	296		$	289
Other Operating (Income) Expense, Net
Deepwater Gulf of Mexico Moratorium Expense (2)	$	1		$	26		$	19		$	26
Electricity Generation Expense (1)		9			7			26			17
Gain on Divestitures (3)		(25	)		-			(26	)		-
Other, Net		4			8			(1	)		12
Total	$	(11	)	$	41		$	18		$	55
Other Non-Operating (Income) Expense, Net
Deferred Compensation (Income) Expense (4)	$	(7	)	$	(13	)	$	3		$	(11	)
Interest Income		(2	)		(2	)		(5	)		(4	)
Other (Income) Expense, Net		-			2			2			2
Total	$	(9	)	$	(13	)	$	-		$	(13	)

(1)

Electricity sales include sales from the Machala power plant located in Machala, Ecuador, through May 2011. Electricity generation expense includes all operating and non-operating expenses associated with the plant, including depreciation and changes in the allowance for doubtful accounts. See footnote (3) below.

(2)	Amounts relate to rig stand-by expense incurred prior to receiving permit to resume drilling activities in the deepwater Gulf of Mexico in 2011 and costs to terminate a deepwater Gulf of Mexico drilling rig contract due to the deepwater Gulf of Mexico drilling moratorium in 2010.

(3)

Amount relates primarily to the transfer of assets to the Ecuadorian government. We received cash proceeds of $73 million for the transfer of our offshore Amistad field assets and Block 3 production sharing contract (PSC), which was terminated by the government of Ecuador on November 25, 2010, and the assignment of the Machala Power Electricity concession and its associated assets. Our net book value for the assets had been reduced due to previous reductions for impairments, resulting in a gain of $26 million before tax. We did not consider the property disposition material for discontinued operations presentation.

(4)	Amount represents increases (decreases) in the fair value of shares of our common stock held in a rabbi trust.

Balance Sheet Information Other balance sheet information is as follows:

	June 30,			December 31,
	2011			2010
(millions)
Accounts Receivable, Net
Commodity Sales	$	270		$	291
Joint Interest Billings		241			259
Other		68			33
Allowance for Doubtful Accounts (1)		(8	)		(27	)
Total	$	571		$	556
Other Current Assets
Inventories, Current	$	122		$	112
Commodity Derivative Assets, Current		5			62
Deferred Income Taxes, Net, Current		33			8
Probable Insurance Claims (2)		25			-
Prepaid Expenses and Other Assets, Current		30			19
Total	$	215		$	201
Other Noncurrent Assets
Equity Method Investments	$	292		$	285
Mutual Fund Investments		118			112
Other Assets, Noncurrent		52			87
Total	$	462		$	484

(1)	The decrease from December 31, 2010 in the allowance for doubtful accounts is due to transfer of assets to the Ecuadorian government. See footnote (3) above.

(2)	We expect to receive insurance proceeds related to the Leviathan-2 appraisal well offshore Israel.

	June 30,		December 31,
	2011		2010
(millions)
Other Current Liabilities
Production and Ad Valorem Taxes	$	125	$	110
Commodity Derivative Liabilities, Current		61		24
Interest Rate Derivative Liability, Current		-		63
Income Taxes Payable		28		90
Asset Retirement Obligations, Current		45		45
Interest Payable		55		36
Current Portion of FPSO Lease Obligation		21		-
Other		95		127
Total	$	430	$	495
Other Noncurrent Liabilities
Deferred Compensation Liabilities, Noncurrent	$	241	$	229
Asset Retirement Obligations, Noncurrent		213		208
Accrued Benefit Costs, Noncurrent		79		76
Commodity Derivative Liabilities, Noncurrent		119		51
Other		42		66
Total	$	694	$	630

Recently Issued Accounting Standards Update In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-04: Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 clarifies application of fair value measurement and disclosure requirements and is effective for annual periods beginning after December 15, 2011. We are currently evaluating the provisions of ASU 2011-04 and assessing the impact, if any, it may have on our financial position and results of operations.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05: Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 provides that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one continuous financial statement or two consecutive financial statements. ASU 2011-05 is effective for annual periods beginning after December 15, 2011.