The company accounts for the cost of exploratory wells in accordance with FASB Statement No. 19, Financial and Reporting by Oil and Gas Producing Companies (FAS 19), as amended by FASB Staff Position (FSP) FAS 19-1, Accounting for Suspended Well Costs, which provides 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 enterprise 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. FAS 19 provides a number of indicators that can assist an entity to demonstrate 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, 2007. No capitalized exploratory well costs were charged to expense upon the 2005 adoption of FSP FAS 19-1.
|
2007 |
2006 |
2005 |
|
* Represent property sales and exchanges.
|
| Beginning balance at January 1 |
$1,239 |
$1,109 |
$671 |
| Additions associated with the acquisition of Unocal |
– |
– |
317 |
| Additions to capitalized exploratory well costs pending the determination of proved reserves |
486 |
446 |
290 |
| Reclassifications to wells, facilities and equipment based on the determination of proved reserves |
(23) |
(171) |
(140) |
| Capitalized exploratory well costs charged to expense |
(42) |
(121) |
(6) |
| Other reductions* |
– |
(24) |
(23) |
| Ending balance at December 31 |
$1,660 |
$1,239 |
$1,109 |
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. The aging of the former Unocal wells is based on the date the drilling was completed, rather than the date of Chevron's acquisition of Unocal in 2005.
|
At December 31 |
|
2007 |
2006 |
2005 |
|
*Certain projects have multiple wells or fields or both.
|
| Exploratory well costs capitalized for a period of one year or less |
$449 |
$332 |
$259 |
| Exploratory well costs capitalized for a period greater than one year |
1,211 |
907 |
850 |
| Balance at December 31 |
$1,660 |
$1,239 |
$1,109 |
| Number of projects with exploratory well costs that have been capitalized for a period greater than one year* |
54 |
44 |
40 |
Of the $1,211 of exploratory well costs capitalized for more than one year at December 31, 2007, $750 (32 projects) is related to projects that had drilling activities under way or firmly planned for the near future. An additional $8 (three projects) is related to projects that had drilling activity during
2007. The $453 balance related to 19 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 $453 referenced above had the following activities associated with assessing the reserves and the projects' economic viability: (a) $99 (one project) — combined two projects into a single development project and submitted plans to government in 2007; (b) $74 (three projects) — continued unitization efforts on adjacent discoveries that span international boundaries; (c) $74 (one project) — finalizing field development evaluation; (d) $74 (one project) — field rework continues to accommodate larger design capacity and finalize sales agreements; (e) $42 (one project) — finalizing development concept; (f) $90 — miscellaneous activities for 12 projects with smaller amounts suspended. While progress was being made on all 54 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 $1,211 of suspended well costs capitalized for a period greater than one year as of December 31, 2007, represents 127 exploratory wells in 54 projects. The tables below contain the aging of these costs on a well and project basis:
| Aging based on drilling completion date of individual wells: |
Amount |
Number
of wells |
| 1994-1996 |
$ 27 |
3 |
| 1997-2001 |
128 |
32 |
| 2002-2006 |
1,056 |
92 |
| Total |
$1,211 |
127 |
Aging based on drilling completion date of last suspended
well in project: |
Amount |
Number
of projects |
| 1999 |
$ 8 |
1 |
| 2003-2007 |
1,203 |
53 |
| Total |
$1,211 |
54 |