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 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.

Exploration and Other

As of September 30, 2012, we capitalized approximately $10.5 million of costs associated with ongoing exploration and/or appraisal activities, including $8.1 million associated with our Wang exploratory well that will commence drilling in the fourth quarter of 2012 and $2.3 million for our T-6 well that we expect to drill in 2013. Both of these wells are located at Green Canyon Block 237 within our Phoenix field. 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, 2012 and 2011:


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2012		2011		2012		2011

Delay rental and geological and geophysical costs	$	623	$	522	$	2,380	$	2,176
Impairment of unproved properties ⁽¹⁾		-		1,028		144		7,668
Dry hole expense		-		(1)		(55)		(11)
Total exploration expense	$	623	$	1,549		2,469		9,833

(1) Included in the nine-month period ended September 30, 2011 were costs of $6.6 million associated with a deepwater lease, the term of which expired during the second quarter of 2011.

Danny II

We hold a 50% interest in the Danny II prospect at Garden Banks Block 506 in our Bushwood field. The Danny II exploration well was drilled to a total depth of approximately 14,750 feet, in water depths of approximately 2,800 feet. The well encountered hydrocarbon pay and is expected to be predominately an oil producer. The well is currently in the final stages of being developed via a subsea tie back system to our 70% owned and operated East Cameron Block 381 platform.

Impairments

We did not record any oil and gas property impairments during the nine-month period ended September 30, 2012. During the nine-month period ended September 30, 2011, we recorded impairment charges totaling $11.6 million to reduce the carrying value of five of our Gulf of Mexico oil and gas properties to their estimated fair value of $2.9 million.

Asset retirement obligations

The following table describes the changes in our asset retirement obligations (both current and long-term) since December 31, 2011 (in thousands):


Asset retirement obligation at December 31, 2011	$	254,391
Liability incurred during the period		1,110
Liability settled during the period		(108,729)
Other revisions in estimated cash flows ⁽¹⁾		47,080
Accretion expense (included in depreciation and amortization)		9,743
Asset retirement obligations at September 30, 2012	$	203,595

(1) The increased amount of these liabilities includes revisions to both non-producing and producing oil and gas properties. Increases to liabilities associated with non-producing properties ($24.9 million) include a corresponding charge to cost of sales within our condensed consolidated statements of operations and comprehensive income while changes in estimates for producing properties are recorded as an increase to property and equipment carrying costs of the related oil and gas properties within our condensed consolidated balance sheets.

During the nine-month period ended September 30, 2012, we recorded $13.0 million of expense charges related to our only non-domestic oil and gas property, Camelot, which is located in the North Sea. The charges reflect an increase in our estimated costs to complete our abandonment activities at this non-producing field. These activities are substantially complete. During the nine-month period ended September 30, 2011, we recorded $13.5 million of expense charges to increase our asset retirement obligations related to seven non-producing fields, including $4.1 million related to Camelot.

Insurance

On June 30, 2012, we obtained a hurricane catastrophic bond for the period from July 1, 2012 to June 30, 2013 and made a payment of $10.6 million. We charged approximately $8.4 million of this payment to insurance expense in the third quarter of 2012 and we will record a $2.0 million charge in the fourth quarter of 2012 based upon the bond’s contractual intrinsic value at the end of each of these quarterly periods.