Oil And Gas Properties

9 Months Ended

Sep. 30, 2011

Note 4 – Oil and Gas Properties

We follow the successful efforts method of accounting for our interests in oil and gas properties. Under the successful efforts method, the costs of drilling and equipping successful wells and leases containing productive reserves are capitalized. Costs incurred to drill and equip development wells, including unsuccessful development wells, are capitalized. Costs incurred relating to unsuccessful exploratory wells are charged to expense in the period in which the drilling is determined to be unsuccessful.

Depletion expense is determined on a field-by-field basis using the units-of-production method, with depletion rates for leasehold acquisition costs based on estimated total remaining proved reserves. Depletion rates for well and related facility costs are based on estimated total remaining proved developed reserves associated with each individual field. The depletion rates are changed whenever there is an indication of the need for a revision, but at a minimum, are evaluated annually. Any such revisions are accounted for prospectively as a change in accounting estimate.

Impairments

During the third quarter of 2011, we recorded a total of $2.4 million of impairment charges primarily related to revisions in cost estimates for reclamation activities ongoing at two of our Gulf of Mexico oil and gas properties. For the three-month period ended June 30, 2011, we recorded impairment charges totaling $22.7 million, including $4.1 million for our only non-domestic oil and gas property (see "United Kingdom Property" below), and for six of our Gulf of Mexico oil and gas properties. These impairment charges primarily reflect a premature end of these fields' production life either through actual depletion or as a result of capital allocation decisions affecting our third party operated fields. We did not have any impairment of our oil and gas properties during the three-month period ended March 31, 2011.

Following the determination of a significant reduction in our estimates of proved reserves at June 30, 2010, we recorded oil and gas property impairment charges totaling $159.9 million which affected the carrying value of 15 of our Gulf of Mexico oil and gas properties. In the first quarter of 2010, we recorded $7.0 million of impairment charges primarily resulting from natural gas price declines since year end 2009. The three properties subject to these impairment charges produce natural gas almost entirely. Separately, we also recorded a $4.1 million impairment charge for our United Kingdom oil and gas property.

Exploration and Other

As of September 30, 2011, we capitalized approximately $4.6 million of costs associated with ongoing exploration and/or appraisal activities. Such capitalized costs may be charged against earnings in future periods if management determines that commercial quantities of hydrocarbons have not been discovered or that future appraisal drilling or development activities are not likely to occur.

The following table details the components of exploration expense for the three- and nine-month periods ended September 30, 2011 and 2010 (in thousands):


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2011			2010			2011			2010
Delay rental and geological and geophysical costs	$	522		$	497		$	2,176		$	2,025
Impairment of unproved properties		1,028			—			7,668	a		—
Dry hole expense and other		(2	)		(55	)		(11	)		(245	)
Total exploration expense	$	1,548		$	442		$	9,833		$	1,780

a.	Includes the costs ($6.6 million) associated with a deepwater lease the term of which expired during the second quarter of 2011.

United Kingdom Property

Since 2006, we have maintained an ownership interest in the Camelot field, located offshore in the North Sea. In 2007, we sold half of our 100% working interest in Camelot to a third party with whom we agreed to jointly pursue future development and production of the field. In February 2010, we acquired this third party and thereby assumed the obligations, most notably the asset retirement obligation, related to its 50% working interest in the field. We recorded an approximate $6.0 million gain on the acquisition of the remaining working interest in Camelot, including the acquired entity's $10.2 million of cash (see Note 5 of 2010 Form 10-K).

In connection with this acquisition, we reassessed the fair value associated with our original 50% interest in the field. Based on these evaluations, we concluded that the Camelot field was impaired based on the unlikely probability of our expending the additional capital necessary to further develop the field. As a result, we recorded a $4.1 million impairment charge to fully impair the property in the first quarter of 2010. We are currently abandoning the field in accordance with applicable United Kingdom regulations. In connection with these activities, we continue to evaluate our estimated future field abandonment costs for the field. These evaluations resulted in our recording an incremental $4.1 million impairment charge in the second quarter of 2011 to increase the field's estimated reclamation liability. Our current estimated asset retirement obligation for the Camelot field totals $11.6 million at September 30, 2011. We have incurred approximately $4.8 million of costs related to our reclamation activities at the Camelot field through September 30, 2011.

Asset retirement obligations

The following table describes the changes in our asset retirement obligations (both long term and current) since December 31, 2010 (in thousands):

Asset retirement obligations at December 31, 2010	$	234,936
Liability incurred during the period		1,372
Liability settled during the period		(36,591	)
Revision in estimated cash flows		22,276
Accretion expense (included in depreciation and amortization)		11,252
Asset retirement obligations at September 30, 2011	$	233,245

Insurance

We carry comprehensive insurance for our operated and non-operated producing and non-producing properties. We record our hurricane-related costs as incurred. Insurance reimbursements are recorded when the realization of the claim for recovery of a loss is deemed probable. In 2011, our hurricane-related costs have been immaterial. Hurricane-related costs, net of reimbursements totaled $0.9 million and $4.6 million for the three-month and nine-month periods ended September 30, 2010. Our insurance reimbursements totaled $5.0 million for the nine-month period ended September 30, 2011. On June 30, 2011, we renewed our hurricane catastrophic bond for the period from July 1, 2011 to June 30, 2012 and made a payment of $10.6 million. We recorded a charge of approximately $8.4 million to insurance expense in the third quarter of 2011 to reduce the value of our hurricane catastrophic bond to its intrinsic value at September 30, 2011. We will record a $2.0 million charge to insurance expense in the fourth quarter of 2011.