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 September 30, 2011 and December 31, 2010 and for the three and nine months ended September 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 nine months ended September 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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
(millions)
Other Revenues
Electricity Sales (1)	$	-		$	19		$	32		$	53
Other		-			(2	)		1			(1	)
Total	$	-		$	17		$	33		$	52
Production Expense
Lease Operating Expense	$	98		$	95		$	288		$	283
Production and Ad Valorem Taxes		38			29			108			96
Transportation Expense		17			17			53			51
Total	$	153		$	141		$	449		$	430
Other Operating (Income) Expense, Net
Deepwater Gulf of Mexico Moratorium Expense (2)	$	(1	)	$	-		$	18		$	27
Electricity Generation Expense (1)		-			9			26			26
Loss on Involuntary Conversion (3)		-			-			4			-
Other, Net		3			(5	)		(3	)		6
Total	$	2		$	4		$	45		$	59
Other Non-Operating (Income) Expense, Net
Deferred Compensation (Income) Expense (4)	$	(18	)	$	15		$	(15	)	$	4
Interest Income		(2	)		(1	)		(7	)		(4	)
Other (Income) Expense, Net		4			(2	)		6			(1	)
Total	$	(16	)	$	12		$	(16	)	$	(1	)

(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 Note 3. Acquisitions and Divestitures.

(2)	Amounts relate to rig stand-by expense incurred prior to receiving a 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)

The loss on involuntary conversion represents our insurance deductible related to the Leviathan-2 appraisal well control incident. We suspended operations on the Leviathan-2 well, offshore Israel, in May 2011 when we identified water flowing to the sea floor from the wellbore. The incident was a covered event under our well control insurance. At this time, we expect to recover most of the costs from insurance, subject to a deductible. The final amount to be recovered will be based on the cost to drill the Leviathan-3 replacement well down to the same depth at which the incident occurred, possible remediation activities and/or abandonment activities at the Leviathan-2 well, which have not yet been determined, and other factors. See footnote (2) below.

(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:

	September 30,			December 31,
	2011			2010
(millions)
Accounts Receivable, Net
Commodity Sales	$	228		$	291
Joint Interest Billings		253			259
Other		73			33
Allowance for Doubtful Accounts (1)		(8	)		(27	)
Total	$	546		$	556
Other Current Assets
Inventories, Current	$	120		$	112
Commodity Derivative Assets, Current		87			62
Deferred Income Taxes, Net, Current		15			8
Probable Insurance Claims (2)		25			-
Prepaid Expenses and Other Assets, Current		32			19
Total	$	279		$	201
Other Noncurrent Assets
Equity Method Investments (3)	$	339		$	285
Mutual Fund Investments		101			112
Commodity Derivative Assets, Noncurrent		44			-
Other Assets, Noncurrent		64			87
Total	$	548		$	484
Other Current Liabilities
Production and Ad Valorem Taxes	$	128		$	110
Commodity Derivative Liabilities, Current		6			24
Interest Rate Derivative Liability, Current		-			63
Income Taxes Payable		143			90
Asset Retirement Obligations, Current		45			45
Interest Payable		18			36
CONSOL Installment Payment (4)		322			-
Current Portion of FPSO Lease Obligation		33			-
Other		131			127
Total	$	826		$	495
Other Noncurrent Liabilities
Deferred Compensation Liabilities, Noncurrent	$	210		$	229
Asset Retirement Obligations, Noncurrent		215			208
Accrued Benefit Costs, Noncurrent		63			76
Commodity Derivative Liabilities, Noncurrent		-			51
Other		63			66
Total	$	551		$	630

(1)	The decrease in the allowance for doubtful accounts from December 31, 2010 is due primarily to the transfer of assets to the Ecuadorian government. See Note 3. Acquisitions and Divestitures.

(2)	Amount represents the costs incurred to date of the Leviathan-2 appraisal well in excess of the insurance deductible. See footnote (3) above.

(3)	The increase in equity method investments from December 31, 2010 is due to our acquisition of a 50% interest in CONE Gathering LLC. See Note 3. Acquisitions and Divestitures.

(4)	See Note 3. Acquisitions and Divestitures and Note 5. Debt.

Recently Issued Accounting Standards Updates 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. We are currently evaluating the provisions of ASU 2011-05. We do not expect ASU 2011-05 to have any impact on our financial position and results of operations as it is a change in presentation only.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08: Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08). ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under ASU 2011-08, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 is effective for annual periods beginning after December 15, 2011. We expect to adopt the provisions of ASU 2011-08 for our annual impairment test as of December 31, 2011. We do not expect ASU 2011-08 to have any impact on our financial position and results of operations as it is a change in application of the goodwill impairment test only.