Note 19

Accounting for Suspended Exploratory Wells

Accounting standards for the costs of exploratory wells (ASC 932) provide that exploratory well costs continue to be capitalized after the completion of drilling when (a) the well has found a sufficient quantity of reserves to justify completion as a producing well and (b) the entity is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met or if an enterprise obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well would be assumed to be impaired, and its costs, net of any salvage value, would be charged to expense. (Note that an entity is not required to complete the exploratory well as a producing well.) The accounting standards provide a number of indicators that can assist an entity in demonstrating that sufficient progress is being made in assessing the reserves and economic viability of the project. The following table indicates the changes to the company’s suspended exploratory well costs for the three years ended December 31, 2011:


	2011			2010			2009

Beginning balance at January 1	$	2,718		$	2,435		$	2,118
Additions to capitalized exploratory well costs pending the determination of proved reserves		652			482			663
Reclassifications to wells, facilities and equipment based on the determination of proved reserves		(828	)		(129	)		(174	)
Capitalized exploratory well costs charged to expense		(45	)		(70	)		(172	)
Other reductions*		(63	)		–			–

Ending balance at December 31	$	2,434		$	2,718		$	2,435


*		Represents property sales.

The following table provides an aging of capitalized well costs and the number of projects for which exploratory well costs have been capitalized for a period greater than one year since the completion of drilling.


	At December 31
	2011		2010		2009

Exploratory well costs capitalized for a period of one year or less	$	557	$	419	$	564
Exploratory well costs capitalized for a period greater than one year		1,877		2,299		1,871

Balance at December 31	$	2,434	$	2,718	$	2,435

Number of projects with exploratory well costs that have been capitalized for a period greater than one year*		47		53		46


*		Certain projects have multiple wells or fields or both.

Of the $1,877 of exploratory well costs capitalized for more than one year at December 31, 2011, $939 (26 projects) is related to projects that had drilling activities under way or firmly planned for the near future. The $938 balance is related to 21 projects in areas requiring a major capital expenditure before production could begin and for which additional drilling efforts were not under way or firmly planned for the near future. Additional drilling was not deemed necessary because the presence of hydrocarbons had already been established, and other activities were in process to enable a future decision on project development.

The projects for the $938 referenced above had the following activities associated with assessing the reserves and the projects’ economic viability: (a) $322 (six projects) – development alternatives under review; (b) $283 (five projects) – development concept under review by government; (c) $208 (seven projects) – undergoing front-end engineering and design with final investment decision expected within three years; (d) $111 (one project) – project sanction approved and construction is in progress, with initial recognition of proved reserves expected upon reaching “economic producibility” per SEC guidelines; (e) $14 – miscellaneous activities for two projects with smaller amounts suspended. While progress was being made on all 47 projects, the decision on the recognition of proved reserves under SEC rules in some cases may not occur for several years because of the complexity, scale and negotiations connected with the projects. The majority of these decisions are expected to occur in the next three years.

The $1,877 of suspended well costs capitalized for a period greater than one year as of December 31, 2011, represents 161 exploratory wells in 47 projects. The tables below contain the aging of these costs on a well and project basis:


			Number
Aging based on drilling completion date of individual wells:	Amount		of wells

1997–2000	$	49		16
2001–2005		396		47
2006–2010		1,432		98

Total	$	1,877		161


Aging based on drilling completion date of last			Number
suspended well in project:	Amount		of projects

1999	$	8		1
2003–2006		345		10
2007–2011		1,524		36

Total	$	1,877		47