PROPERTY AND EQUIPMENT

Property and equipment includes the following:



	December 31,
	2018			2017
	(in thousands)
Oil and natural gas properties:
Subject to depletion	$	12,629,205		$	5,126,829
Not subject to depletion	9,669,977			4,105,865
Gross oil and natural gas properties	22,299,182			9,232,694
Accumulated depletion	(1,599,111		)	(1,009,893		)
Accumulated impairment	(1,143,498		)	(1,143,498		)
Oil and natural gas properties, net	19,556,573			7,079,303
Midstream assets	700,295			191,519
Other property, equipment and land	146,963			80,776
Accumulated depreciation	(31,856		)	(7,981		)
Property and equipment, net of accumulated depreciation, depletion, amortization and impairment	$	20,371,975		$	7,343,617

Balance of costs not subject to depletion:
Incurred in 2018	$	6,223,817
Incurred in 2017	2,500,003
Incurred in 2016	696,751
Incurred in 2015	182,194
Incurred in 2014	67,212
Total not subject to depletion	$	9,669,977

The Company uses the full cost method of accounting for its oil and natural gas properties. Under this method, all acquisition, exploration and development costs, including certain internal costs, are capitalized and amortized on a composite unit of production method based on proved oil, natural gas liquids and natural gas reserves. Internal costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. Costs, including related employee costs, associated with production and operation of the properties are charged to expense as incurred. All other internal costs not directly associated with exploration and development activities are charged to expense as they are incurred. Capitalized internal costs were approximately $28.7 million $22.0 million and $17.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. Costs associated with unevaluated properties are excluded from the full cost pool until the Company has made a determination as to the existence of proved reserves. The inclusion of the Company’s unevaluated costs into the amortization base is expected to be completed within three to five years. Acquisition costs not currently being amortized are primarily related to unproved acreage that the Company plans to prove up through drilling. The Company has no plans to let any acreage expire. Sales of oil and natural gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil, natural gas liquids and natural gas.

Under this method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the proved oil and natural gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes, or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the trailing 12-month unweighted average of the first-day-of-the-month price, adjusted for any contract provisions, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or non-cash writedown is required.

As a result of the significant decline in prices during 2016, the Company recorded a non-cash ceiling test impairment for the year ended December 31, 2016 of $245.5 million, which is included in accumulated depletion. No impairments on proved oil and natural gas properties was recorded for the years ended December 31, 2018 and 2017. For 2016, the impairment charges affected the Company’s reported net income but did not reduce its cash flow. In addition to commodity prices, the Company’s production rates, levels of proved reserves, future development costs, transfers of unevaluated properties and other factors will determine its actual ceiling test calculation and impairment analysis in future periods.

At December 31, 2018, there was $68.3 million in exploration costs and development costs and $54.9 million in capitalized interest that are not subject to depletion. At December 31, 2017, there were $26.0 million exploration costs and development costs and $22.1 million capitalized interest that are not subject to depletion.