Anadarko Petroleum 10-K 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2008
For the transition period from to
Commission File No. 1-8968
ANADARKO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
1201 Lake Robbins Drive, The Woodlands, Texas 77380-1046
(Address of principal executive offices)
Registrants telephone number, including area code (832) 636-1000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x.
The aggregate market value of the Companys common stock held by non-affiliates of the registrant on June 30, 2008 was $34.9 billion based on the closing price as reported on the New York Stock Exchange.
The number of shares outstanding of the Companys common stock as of January 30, 2009 is shown below:
TABLE OF CONTENTS
Anadarko Petroleum Corporation is among the largest independent oil and gas exploration and production companies in the world, with 2.28 billion barrels of oil equivalent (BOE) of proved reserves as of December 31, 2008. Anadarkos primary business segments are vertically integrated within the oil and gas industry. These segments are managed separately because of the nature of their products and services, as well as unique technology, distribution and marketing requirements. The Companys three operating segments are:
Oil and gas exploration and production This segment explores for and produces natural gas, crude oil, condensate and natural gas liquids (NGLs). The Companys major areas of operation are located onshore in the United States, the deepwater of the Gulf of Mexico and Algeria. Anadarko also has production in China and is executing strategic exploration programs in several other countries, including Ghana and Brazil.
Midstream This segment engages in gathering, processing, treating and transporting Anadarko and third-party oil and gas production. The Company owns and operates natural gas gathering, treating and processing systems in the United States.
Marketing This segment sells most of Anadarkos production, as well as commodities purchased from third parties. The Company actively markets natural gas, oil and NGLs in the United States, and actively markets oil from Algeria and China.
The Company also has hard minerals properties that contribute to operating income through non-operated joint ventures and royalty arrangements in several coal, trona (natural soda ash) and industrial mineral mines located on lands within and adjacent to its Land Grant holdings. The Land Grant is an 8 million acre strip running through portions of Colorado, Wyoming and Utah and is where the Company owns most of its fee mineral rights. Anadarko is committed to minimizing its impact on the environment from exploration and production activities of its worldwide operations through programs such as carbon dioxide (CO2) sequestration and the reduction of surface area used for production facilities.
On August 10, 2006, Anadarko completed the acquisition of Kerr-McGee Corporation (Kerr-McGee) in an all-cash transaction totaling $16.5 billion, plus the assumption of approximately $2.6 billion in debt. On August 23, 2006, Anadarko completed the acquisition of Western Gas Resources, Inc. (Western) in an all-cash transaction totaling $4.8 billion plus the assumption of $625 million in debt. As part of an asset realignment associated with the acquisitions, the Company sold its wholly-owned Canadian oil and gas subsidiary, Anadarko Canada Corporation, in November 2006 for approximately $4 billion. Anadarko also divested, in 2007 and 2006, certain properties onshore in the United States, in the Gulf of Mexico and Qatar for total proceeds of approximately $13 billion before income taxes. The proceeds from these transactions were used to reduce debt.
In 2008, Anadarko divested certain properties in Brazil, onshore in the United States and the Gulf of Mexico for total proceeds of $2.5 billion before income taxes. Proceeds from these divestitures were used primarily to reduce debt by $2.4 billion in 2008. For additional information, see Acquisitions and Divestitures and Outlook under Item 7 of this Form 10-K.
During 2007, Anadarko changed its method of accounting for its oil and gas exploration and development activities from full cost to the successful efforts method. All financial information presented for prior periods has been recast to reflect retrospective application of the successful efforts method.
Unless the context otherwise requires, the terms Anadarko or Company refer to Anadarko Petroleum Corporation and its consolidated subsidiaries. The Companys corporate headquarters is located at 1201 Lake Robbins Drive, The Woodlands, Texas 77380, where the telephone number is (832) 636-1000. Additionally, unless noted otherwise, the following information relates to Anadarkos continuing operations and excludes the discontinued Canadian operations. For additional information, see Note 1Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
Available Information The Company files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, registration statements and other items with the Securities and Exchange
Commission (SEC). Anadarko provides access free of charge to all of these SEC filings, as soon as reasonably practicable after filing or furnishing, on its internet site located at www.anadarko.com. The Company will also make available to any stockholder, without charge, copies of its Annual Report on Form 10-K as filed with the SEC. For copies of this, or any other filing, please contact: Anadarko Petroleum Corporation, Investor Relations Department, P.O. Box 1330, Houston, Texas 77251-1330 or call (832) 636-1216.
In addition, the public may read and copy any materials Anadarko files with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers, like Anadarko, that file electronically with the SEC.
As of December 31, 2008, Anadarko had proved reserves of 8.1 trillion cubic feet (Tcf) of natural gas and 0.9 billion barrels of crude oil, condensate and NGLs. Combined, these proved reserves are equivalent to 2.28 billion barrels of oil or 13.7 Tcf of natural gas. Excluding the effect of divestitures, the Companys proved reserves increased during 2008 by approximately 188 million barrels of oil equivalent (MMBOE). During 2008, sales of proved reserves in place totaled 137 MMBOE. Reserve additions were primarily driven by successful drilling in the Rockies and developments and appraisals in the deepwater Gulf of Mexico and positive revisions associated with successful infill drilling onshore in the United States and the Peregrino heavy-oil field, offshore Brazil, which was sold in 2008. These positive revisions were partially offset by a decrease in prices for oil and NGLs. As of December 31, 2008, Anadarko had proved developed reserves of 6.1 Tcf of natural gas and 580 million barrels (MMBbls) of crude oil, condensate and NGLs. Proved developed reserves comprise 70% of total proved reserves.
Evaluation and Review Anadarkos estimates of proved reserves and associated future net cash flows as of December 31, 2008 were made solely by the Companys engineers and are the responsibility of management. The procedures and methods used in preparing the Companys estimates of proved reserves and future net cash flows, as of December 31, 2008, were reviewed by an independent engineering firm, Miller and Lents, Ltd. (M&L). The purpose of the review was to determine that procedures and methods used by Anadarko to estimate its proved reserves were based on generally accepted engineering and evaluation principles and are in accordance with definitions contained in the rules of the SEC. In each review, Anadarkos technical staff presented M&L with an overview of the data, methods and assumptions used in its reserve estimates. The data presented included pertinent seismic information, geologic maps, well logs, production tests, material balance calculations, reservoir simulation models, well performance data, operating procedures and relevant economic criteria. Subsequent to the reviews, M&L was provided with additional data and information that was requested in certain instances to satisfy M&L that the procedures and methods used were in accordance with standard industry practice. Managements intent in retaining M&L to review its procedures and methods is to provide for objective third-party input on these procedures and methods and to gather industry information applicable to its reserve estimation and reporting process.
The Companys estimates of proved reserves, proved developed reserves and proved undeveloped reserves (PUDs) at December 31, 2008, 2007 and 2006 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production ActivitiesUnaudited (Supplemental Information) in the Consolidated Financial Statements under Item 8 of this Form 10-K. Additional information with respect to the Companys methods and procedures employed in the reserve estimation process, are also found in the Supplemental Information. The Company files annual estimates of certain proved oil and gas reserves with the U.S. Department of Energy, which are within 5% of the amounts included in the above estimates.
In December 2008, the SEC released the final rule for Modernization of Oil and Gas Reporting (Modernization). The Modernization disclosure requirements will permit reporting of oil and gas reserves using an average price based upon the prior 12-month period rather than year-end prices and the use of new technologies to determine proved reserves, if those technologies have been demonstrated to result in reliable
conclusions about reserves volumes. Companies will also be allowed to disclose probable and possible reserves in SEC filed documents. In addition, companies will be required to report the independence and qualifications of its reserves preparer or auditor and file reports when a third party is relied upon to prepare reserves estimates or conduct a reserves audit. The Modernization disclosure requirements become effective for Anadarkos Annual Report on Form 10-K for the year ended December 31, 2009. The SEC is coordinating with the Financial Accounting Standards Board to obtain the revisions necessary to provide consistency with the Modernization. In the event that consistency is not achieved in time for companies to comply with the Modernization, the SEC will consider delaying the compliance date.
Also contained in the Supplemental Information in the Consolidated Financial Statements are the Companys estimates of future net cash flows and discounted future net cash flows from proved reserves. See Operating Results and Critical Accounting Policies and Estimates under Item 7 of this Form 10-K for additional information on the Companys proved reserves.
Sales Volumes and Prices
The following table shows the Companys annual sales volumes from continuing operations. Sales volumes for 2007 include approximately 15 MMBOE associated with properties that were divested during 2007. Volumes for natural gas are in billions of cubic feet (Bcf) at a pressure base of 14.73 pounds per square inch. For the computation of BOE, six thousand cubic feet (Mcf) of gas is the energy equivalent of one barrel of oil, condensate or NGLs.
The following table shows the Companys annual average sales prices and average production costs from continuing operations. The impact on average sales prices from derivative instruments, which the Company utilizes to manage price risk related to the Companys sales volumes, is shown separately in the table. Natural gas sales and oil and condensate sales include net unrealized gains (losses) related to these derivatives of $372 million and $520 million for 2008, $(395) million and $(653) million for 2007 and $579 million and $258 million for 2006, respectively. Production costs are costs incurred to operate and maintain the Companys wells and related equipment and include cost of labor, well service and repair, location maintenance, power and fuel, transportation, cost of product, property taxes, production and severance taxes and production related general and administrative costs. Additional information on volumes, prices, production costs and markets is contained in Financial Results and Marketing Strategies under Item 7 of this Form 10-K. Additional detail of production costs is contained in the Supplemental Information under Item 8 of this Form 10-K. Information on major customers is contained in Note 18Major Customers of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
Sales Prices and Production Costs
Properties and ActivitiesUnited States
Overview Anadarkos active areas in the United States include the Lower 48 states, Alaska and the deepwater Gulf of Mexico. Reserves in the United States comprised 90% of Anadarkos total proved reserves at year-end 2008. During 2008, the Companys drilling efforts in the United States resulted in 2,645 natural gas wells, 149 oil wells and 19 dry holes. The accompanying maps illustrate the locations of Anadarkos domestic onshore and offshore oil and gas producing operations.
The following table presents selected 2008 United States operating data by area.
ONSHORE PRODUCING PROPERTIES
Powder River Basin
Greater Natural Buttes
GAS FIELD (CONTAINS OPERATED WELLS)
OIL FIELD (CONTAINS OPERATED WELLS)
Colville River Unit
Note: Alaska not to scale
ACREAGE LOWER 48 ALASKA
UNDEVELOPED LEASEHOLD (Net) 2,969,868 1,231,683
DEVELOPED LEASEHOLD (Net) 3,151,048 8,448
FEE MINERAL (Net) 8,322,277 7,978
N SCALE 0 100MI. 200MI.
OnshoreLower 48 States At the end of 2008, about 75% of the Companys proved reserves were located onshore in the Lower 48 states. The Company has allocated approximately 45% of the 2009 capital budget to the Lower 48 states. Of this amount, approximately 65% is allocated to the Rockies and approximately 35% is allocated to the Southern Region.
Rockies Anadarkos properties in the Rockies are located in Colorado, Utah and Wyoming with a primary focus on natural gas plays. Anadarko is a large independent operator of tight gas and CBM natural gas assets as well as an operator of enhanced oil recovery (EOR) projects within the region.
Tight gas assets include the Greater Natural Buttes, Wattenberg, Wamsutter and Moxa fields. Pinedale is also a non-operated asset within Anadarkos tight gas portfolio in the Rockies.
In the Greater Natural Buttes field, located in the Uinta basin of northeast Utah, the Company continues to be primarily focused on development of the Wasatch and Mesa Verde formations through infill drilling operations and drilling additional wells adjacent to existing producing wells. Anadarko operates approximately 1,500 wells in the Greater Natural Buttes field area and has an interest in approximately 900 non-operated wells. In 2009, Anadarko plans to maintain an active drilling program in this area.
The Wattenberg natural gas and condensate field is located in the Denver-Julesburg basin in northeast Colorado on a portion of the Land Grant. Development activities in 2008 included infill drilling, re-completions, and re-fracture stimulations of pre-existing wells. The Land Grant affords the Company royalty revenues on many of the operated and non-operated wells in this and other fields. Anadarko operates approximately 4,200 wells and has an interest in approximately 300 non-operated wells in the Wattenberg field. In 2009, the Company expects to have several active drilling and workover rigs in the area.
Anadarko was active in the Wamsutter and Moxa tight gas fields in 2008, which are located in the Greater Green River basin (GGRB) area of southern Wyoming. Both fields are also on the Wyoming portion of the Land Grant which provides Anadarko with royalty revenues. The Company further benefits from the success of numerous third-party operators on the Wyoming portion of the Land Grant acreage and actively pursues farm-out projects to capture incremental royalty revenues in the GGRB from exploration and development activity. Anadarko operates approximately 700 wells and has an interest in approximately 2,200 non-operated wells in the Wamsutter and Moxa fields.
The Companys non-operated Pinedale asset is located in the GGRB in southwest Wyoming. The gas produced at Pinedale is transported through Company-owned gathering systems that deliver gas to an Anadarko processing facility located on the Land Grant. Anadarko has an interest in approximately 900 producing wells in the Pinedale field.
During 2008, the Company continued to pursue the phased development of the Rockies EOR assets at the Salt Creek, Monell and Sussex areas in Wyoming. Each area has demonstrated year-over-year increases in production due to CO2 injection operations. The Company expects that phased development will continue in 2009 for these assets.
The Companys CBM operations are primarily located in the Powder River basin in northeast Wyoming, but include activity on the Wyoming portion of the Land Grant at the Atlantic Rim in southern Wyoming, and in the Helper and Clawson fields in Utah. Anadarko operates approximately 4,600 shallow low-cost CBM wells and has an interest in approximately 5,200 outside-operated CBM wells in the Rockies.
Southern Region Anadarkos properties in the Southern Region are located primarily in Texas with a focus on natural gas plays. During 2008, production and development activities at the Companys properties in the east Texas area were concentrated in the Bossier and Carthage areas with the Company drilling 22 wells in the Bossier area and 121 wells in the Carthage area. In 2009, Anadarko plans to reduce activity in the Bossier and Carthage areas. Anadarkos east Texas Austin Chalk activity continues to focus on horizontal drilling in Tyler and Jasper counties. Anadarko drilled 25 wells in 2008 in this area. In 2009, the Company plans to remain active with the continued extension of field boundaries and drilling infill development wells to optimize well spacing in this area.
Operations in west Texas are concentrated on increasing production and reserves in the tight gas play of the Haley field. During 2007, the Company entered into a joint venture on a portion of the Haley field to reduce risk and increase acreage in the basin. The joint venture drilled 26 wells in 2008. Anadarko also drilled 52 wells in the Ozona field, which is located in the west Texas area, in 2008.
Other areas in the Southern Region include properties in South Texas and in the Hugoton field. In South Texas, the Company had an active drilling program in Starr and Hidalgo counties during 2008. The Hugoton field in southern Kansas continues to be a long-life, slow-decline asset for Anadarko with over 1,200 producing gas wells.
Exploration Anadarkos exploration program in the Southern Region is concentrated in Texas, Pennsylvania and Mississippi. Anadarko was successful in 13 of 18 exploratory wells in six different plays in these areas during 2008, with focus on shale gas, tight sands and fractured carbonate plays. Anadarko has completed a number of these wells in the Maverick basin and the Haynesville shale play in Texas, and the Marcellus shale play in Pennsylvania. The Company plans to explore and delineate these areas in 2009.
Alaska Anadarkos activity in Alaska is concentrated primarily on the North Slope. Approximately 2% of the Companys proved reserves at year-end 2008 were in Alaska. During 2008, development activity at the Colville River Unit (22% WI) was focused on new development at the Qannik field and continued drilling at the Alpine, Fiord and Nanuq fields. First production from Qannik was achieved in July 2008. During 2009, the Company anticipates that development planning will lead to the sanction of the Alpine West field. In 2009, the Company expects to continue to participate in exploration drilling in Alaska.
Gulf of Mexico At year-end 2008, about 13% of the Companys proved reserves were located offshore in the deepwater Gulf of Mexico where Anadarko owns an average 64% working interest in 596 blocks and has access to an additional 22 blocks through participation agreements. The Company holds interests in 26 producing fields and is in the process of developing two additional fields in the area. Anadarko has allocated approximately 20% of the capital budget to the deepwater Gulf of Mexico for 2009.
Independence Hub The Independence Hub, located in approximately 8,000 feet of water, began production in July 2007. Anadarko operates the facility, which is owned by third parties. The facility, capable of processing nearly 1 Bcf of gas per day, serves several ultra-deepwater natural gas fields, including eight field discoveries operated by Anadarko. Anadarkos working interests in these fields range from 20% to 100%. Production is from 16 wells, of which Anadarko has an interest in 15. During 2008, Anadarko successfully drilled one development well (100% WI) in the area. In 2009, the Company plans to drill two to four additional development wells in the area.
Marco Polo/K2 complex Anadarko operates, and a third party owns, the platform and production facilities for the Marco Polo deepwater development project. Six K2 subsea wells (42% WI) are tied-back to the Marco Polo platform, where four Marco Polo field wells (100% WI) are also producing. In 2008, the Company drilled a down-dip K2 field delineation well and three sidetrack wells. During 2009, the Company plans to drill one K2 well to test the southern portion of the field, and to complete two K2 wells later in the year. Two wells were completed in the Marco Polo field in 2008. The fields have had limited production since September 2008 because of damage caused by Hurricane Ike to the third-party-owned gas export pipelines that connect the platform to the shelf infrastructure. Production is expected to resume in the first half of 2009.
Constitution/Ticonderoga fields The Constitution field (100% WI) began production in 2006 utilizing a truss spar located in approximately 5,000 feet of water. The Ticonderoga field (50% WI) also began production in 2006 as a subsea tieback to the Constitution spar. During 2008, additional drilling and completion at Ticonderoga increased the field to three producing wells. Both fields have been shut-in since September 2008 because of damage caused by Hurricane Ike to the third-party-owned gas export pipelines that connect the spar to the shelf infrastructure. Production is expected to resume in the first half of 2009. The Company is planning to use the Constitution spar as a hub for the accelerated development of the Caesar/Tonga complex.
Caesar/Tonga complex (33.75% WI) The Company approved development of the Caesar/Tonga complex in December 2008 as a four-well subsea tieback to the Constitution spar, and production is expected to start in the first half of 2011. One development well was successfully drilled in 2008 and additional development drilling is expected in 2009.
Nansen field (50% WI) The Nansen field began production in 2002, and was developed with the worlds first truss spar in 3,700 feet of water. During 2008, Anadarko completed and tied-back four discoveries in the Northwest Nansen field area to the Nansen spar. Production from these four wells commenced during early 2008. Also during 2008, Anadarko drilled and completed two subsea wells. Production from both wells is expected to commence in mid-2009. In 2009, the Company plans to sidetrack and recomplete one subsea well and expects to initiate a three-well sidetrack or recompletion program with a platform rig.
Boomvang field (East Breaks Blocks 642, 643, and 688 (30% WI), Block 598 (100% WI), and Block 599 (33% WI)) The Boomvang field began production in 2002 and was developed with a truss spar in 3,450 feet of water. During 2008, the Company drilled a sidetrack well. Production from this well commenced in early 2008. In 2009, the Company plans to drill one development well in the proximity of the Drysdale discovery. Production from this well is expected to commence during mid-2009.
Gunnison field (50% WI) The Gunnison field has been producing since 2003 and incorporates a truss spar in 3,100 feet of water. During 2006, the Dawson Deep discovery began production as a subsea tieback to the Gunnison spar. In 2008, the Company drilled one well and recompleted two other wells. Gunnison was shut-in after Hurricane Ike because of damage to an onshore third-party-owned processing facility. Partial production was quickly restored and full production resumed in January 2009. The Company plans to recomplete one well in 2009 and is currently planning a platform-based rig program for late 2009 or 2010.
Red Hawk field (50% WI) The Red Hawk field, located in approximately 5,300 feet of water, began production in 2004 utilizing the worlds first cell spar designed for developing smaller reservoirs in deepwater basins. During 2007, the Company completed installation of compression equipment at the spar, which extended the life of the field. During 2008, the Company recompleted one well. However, at the end of 2008, both wells at Red Hawk had depleted reserves and were shut-in. The Company plans to continue evaluating potential opportunities in and around the Red Hawk field in 2009.
Power Play field (45% WI) The Power Play field is an Anadarko operated single-well subsea tieback to the Baldpate platform. The well was completed and tied-back during the second quarter of 2008.
Other The Neptune field (50% WI) is an Anadarko-operated property utilizing the worlds first floating production spar. During 2008, the Company drilled an appraisal well in the proximity of the Mission Deep discovery (50% WI). Anadarko is currently evaluating its options for the Mission Deep discovery. In 2008, a fourth well was drilled in the Blind Faith field (non-operated, 25% WI), where a deep-draft semi-submersible platform was installed and first production was achieved. Other Anadarko non-operated properties include Baldpate (50% WI), Conger (25% WI), Pompano (25% WI) and Tahiti (3% plus over-riding royalty interest).
Exploration Anadarkos exploration program in the Gulf of Mexico is currently focused on the extensive middle-to-lower Miocene play within the central Gulf of Mexico and the developing lower Tertiary play in the western Gulf of Mexico. During 2008, Anadarko participated in two wells which were still drilling at the end of the year and both resulted in discoveries (Heidelberg and Shenandoah) in early 2009. Anadarko also drilled two unsuccessful wells in the Gulf of Mexico in 2008. The Company expects to participate in approximately three to four exploration wells and several delineation wells in the area in 2009.
GULF OF MEXICO PRODUCING PROPERTIES
N 0 60 MILES
UNDEVELOPED (Net) 1,976,145
DEVELOPED (Net) 170,897
PRODUCING BLOCKS 65
EXPLORATORY BLOCKS 531
Properties and ActivitiesAlgeria
Overview Anadarko is engaged in exploration, development and production activities in Algerias Sahara Desert. At the end of 2008, about 9% of the Companys proved reserves were located in Algeria where a total of nine fields discovered by the Company were on production. In 2008, net sales volumes from the Companys properties in Algeria represented 10% of the Companys total sales volumes. During 2008, Anadarko participated in 11 development wells with an 82% success rate. During 2009, the Company expects to drill about 10 development wells, exclusive of water and gas injection wells, in Algeria.
Production and Development On Block 404, production from the HBNS field and its associated satellite fields averaged 139 MBbls/d of oil (gross) in 2008. Production from the HBN field, which extends from Block 404 into Block 403, averaged 64 MBbls/d of oil (gross) in 2008. Anadarko is also actively involved in the unitized Ourhoud field, which is located in portions of Block 404, Block 406a and Block 405. Production from this field averaged 230 MBbls/d of oil (gross) in 2008. Anadarko has an interest in several fields further south on Block 208 where development is expected to occur during the first half of 2009 and initial production is expected to occur in late 2011.
Contracts and Partners Anadarkos interest in the Production Sharing Agreement (PSA) for Blocks 404 and 208 is 50% before participation at the exploitation stage by Sonatrach, the national oil and gas company of Algeria. The Company has two partners, each with a 25% interest, also prior to participation by Sonatrach. Under the terms of the PSA, oil reserves that are discovered, developed and produced are shared by Sonatrach, Anadarko and its two partners. Sonatrach is responsible for 51% of the development and production costs. Anadarko and its partners have completed the exploration program on Blocks 404 and 208 and now participates only in development activity on these blocks. Anadarko and its joint-venture partners funded Sonatrachs share of exploration costs and are entitled to recover these exploration costs from production during the development phase.
Anadarkos operations in Algeria have been governed by the PSA since October 1989. In March 2006, Anadarko received from Sonatrach a letter purporting to give notice under the PSA that enactment of a law in 2005 (2005 Law) relating to hydrocarbons triggered Sonatrachs right under the PSA to renegotiate the PSA in order to re-establish the equilibrium of Anadarkos and Sonatrachs interests. Anadarko and Sonatrach reached an impasse over whether Sonatrach had a right to renegotiate the PSA based on the 2005 Law and entered into a formal non-binding conciliation process under the terms of the PSA in an attempt to resolve this dispute. The conciliation on the 2005 Law dispute was concluded in 2007 without a definitive resolution. There have been no further developments on the 2005 Law dispute. At this time, Anadarko is unable to reasonably estimate the economic impact under the PSA if Sonatrach were to succeed in modifying the PSA.
Anadarko and its partners still maintain an exploration license, under a separate production sharing agreement, for Block 403 c/e (67% interest).
Exceptional Profits Tax In July 2006, the Algerian parliament approved legislation establishing an exceptional profits tax on foreign companies Algerian oil production. In December 2006, implementing regulations regarding this legislation were issued. These regulations provide for an exceptional profits tax imposed on gross production at rates of taxation ranging from 5% to 50% based on average daily production volumes for each calendar month in which the price of Brent crude averages over $30 per barrel, retroactively effective to August 2006 production. Uncertainty existed at the time as to whether the exceptional profits tax would apply to the full value of production or only to the value of production in excess of $30 per barrel.
In January 2007, Sonatrach advised Anadarko that it would begin collecting the exceptional profits tax from Anadarkos share of production commencing with March 2007 liftings, including for the prior months since the new tax went into effect. In April 2007, ALNAFT, the new agency in the Algerian Ministry of Energy and Mines responsible for overseeing the Algerian hydrocarbons industry, issued the Application Procedure further defining the procedure and conditions under which the exceptional profits tax is applied and the methodology for its calculation. The Application Procedure and other information supplied by Sonatrach revealed that the exceptional profits tax was being applied to the full value of production rather than to the amount in excess of $30 per barrel. This was evidenced by changes in the Companys crude oil lifting schedule, which was conveyed to Anadarko by Sonatrach. As a result, Anadarko changed the measurement basis for the exceptional profits tax
liability in the first quarter of 2007 to reflect the application of the tax to the full value of production. For additional information, see Note 15Other Taxes of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
At December 31, 2008, Anadarko had 83 MMBbls of PUDs in Algeria, the economics of which are sensitive to the exceptional profits tax. Anadarko is continuing to evaluate the impact of the exceptional profits tax on the economic viability of its future projects in Algeria, as well as its legal remedies with regard to the exceptional profits tax.
In response to the Algerian governments imposition of the exceptional profits tax, the Company has notified Sonatrach of its disagreement with the collection of the exceptional profits tax. The Company believes that the PSA provides fiscal stability through several of its provisions that require Sonatrach to pay all taxes and royalties. To facilitate discussions between the parties in an effort to resolve the dispute, on October 31, 2007, the Company initiated a conciliation proceeding on the exceptional profits tax as provided in the PSA. Any recommendation issued by a conciliation board (Conciliation Board) arising out of the conciliation proceeding is non-binding on the parties. The Conciliation Board issued its non-binding recommendation on November 26, 2008, which the Company received on December 1, 2008. On February 15, 2009, the Company initiated arbitration against Sonatrach with regard to the exceptional profits tax. In conformance with the terms of the PSA, a notice of arbitration was submitted to Sonatrach.
Properties and ActivitiesOther International
Overview The Companys other international oil and gas production and/or development operations are located primarily in China. The Company has exploration acreage in China, Brazil, Ghana, Indonesia and other selected areas. About 1% of the Companys proved reserves were located in these other international locations at year-end 2008. During 2008, net sales volumes from the Companys other international properties accounted for 3% of the Companys total sales volumes. Anadarko drilled 17 wells in 2008 in other international areas. In 2009, the Company expects to drill about 20 development and 15 exploration wells at various other international locations.
China Anadarkos development and production project in China straddles Blocks 04/36 and 05/36 in Bohai Bay in approximately 75 feet of water. Anadarko drilled 11 wells in 2008 in this area. Development drilling and recompletion activity has been ongoing through 2008 and is anticipated to continue in 2009. Further investment is planned in 2009 on minor facility upgrades. At the end of 2008, net production from China was approximately 14 MBbls/d of oil. The Company has entered into a joint-venture agreement with the China National Offshore Oil Company to explore the South China Sea Contract Area 43/11. The joint venture has commenced exploration of Contract Area 43/11. During 2009, the Company plans to drill one deepwater exploration well in the South China Sea.
Brazil Anadarko holds exploration interests in several blocks located offshore in the Campos and Espírito Santo basins. Anadarko drilled two wells in 2008 in these areas, Wahoo and Serpa. The Serpa well was drilled in the BM-ES-24 block. Although encountering pay in the shallower pre-salt section, the well was determined to be non-commercial as a stand-alone development at this time. The Company announced the offshore pre-salt Wahoo discovery in the BM-C-30 block (30% WI) in 2008. Also in 2008, the Company divested its 50-percent interest in the Peregrino heavy-oil field in the Campos basin. In 2009, Anadarko expects to participate in three to four deepwater exploration and appraisal wells.
Ghana The Jubilee field was discovered offshore Ghana in 2007 and lies partly in the West Cape Three Points block (non-operated, 31% interest) and partly in the Deep Tano block (non-operated, 18% interest). In 2008, the Company drilled three additional wells on the blocks. In 2009, the Company and its partners expect to sanction the project and expect the operator to award contracts for a floating production, storage and offloading vessel and related equipment. The Company also plans to drill up to 11 development wells and to participate in three to five exploration wells in the two blocks. Production is expected to begin in late 2010.
Indonesia Anadarko has a participating interest in approximately 4.1 million exploration acres in Indonesia through a combination of several operated and non-operated Production Sharing Contracts. The Company did not participate in any wells in 2008, but plans to participate in two or three exploration wells in 2009.
Other Anadarko also has active exploration projects in Mozambique, Liberia, Sierra Leone and several other countries in West Africa, as well as activities in other potential exploration and new venture areas overseas.
The Companys 2008 drilling program focused on proven and emerging oil and natural gas basins in the United States (Lower 48 states, Alaska and Gulf of Mexico), Algeria and other countries where it holds acreage. Exploration activity consisted of 28 gross completed wells, including 21 wells in the Lower 48 states, 2 wells in Alaska, 2 wells offshore in the Gulf of Mexico, 2 wells in Algeria and 1 well in other international locations. Development activity consisted of 2,810 gross completed wells, which included 2,774 wells in the Lower 48 states, 9 wells in Alaska, 5 wells offshore in the Gulf of Mexico, 11 wells in Algeria and 11 wells in other international locations.
The following table shows the number of oil and gas wells completed in each of the last three years:
The following table shows the number of wells in the process of drilling or in active completion stages and the number of wells suspended or waiting on completion as of December 31, 2008:
As of December 31, 2008, the Company had an ownership interest in productive wells as follows:
Properties and Leases
The following schedule shows the number of developed lease, undeveloped lease and fee mineral acres in which Anadarko held interests at December 31, 2008:
Midstream Properties and Activities
Anadarko invests in midstream (gathering, treating and processing) facilities to complement its oil and gas operations in regions where the Company has natural gas production. The Company is better able to manage both the value received for, and cost of, gathering, treating and processing natural gas through its ownership and operation of these facilities. In addition, Anadarkos midstream business provides gathering, treating and processing services for third-party customers, including major and independent producers. Anadarko generates revenues in its gathering, treating and processing activities through various fee structures that include fixed-rate,
percent of proceeds, or keep-whole agreements. The Company also processes a portion of its gas at various third-party plants. During 2009, less than 10% of the Companys capital budget is allocated to midstream facilities.
In 2006, Anadarko significantly increased the size and scope of its midstream business through the acquisitions of Western and Kerr-McGee. During 2007, the Company divested control of its interests in two natural gas gathering systems and associated processing plants, in areas where Anadarko has limited or no oil and gas production, for $1.85 billion. At the end of 2008, Anadarko has 29 systems in seven states (Wyoming, Colorado, Utah, New Mexico, Kansas, Oklahoma and Texas) located in major onshore producing basins.
During the second quarter of 2008, Western Gas Partners, LP (WES) completed its initial public offering of 20.8 million common units for net proceeds of $321 million ($343 million less $22 million for underwriting discounts and structuring fees). WES is a Delaware limited partnership formed by Anadarko to own, operate, acquire and develop midstream assets. Anadarko contributed assets to WES in exchange for an aggregate 59.6% limited partner interest (consisting of common and subordinated limited partner units) in WES, a 2% general partner interest and incentive distribution rights (IDRs). IDRs entitle the holder to specified increasing percentages of cash distributions as WESs per-unit cash distributions increase. In addition, Anadarko maintains control over the assets owned by WES through sole indirect ownership of the general partner interests.
On December 19, 2008, WES acquired additional midstream assets from Anadarko for aggregate consideration of $210 million, consisting of a $175 million note payable to Anadarko and the issuance of 2.6 million common units of WES to Anadarko. In addition, WES issued additional general partner units to its general partner, a wholly-owned subsidiary of Anadarko, to allow it to maintain its 2% general partner interest in WES after contribution by Anadarko of its 2% undivided interest in the midstream assets. Anadarko currently holds an aggregate 61.3% limited partner interest in WES.
The following table provides key statistics for Company-owned gathering and processing facilities.
The Companys marketing department actively manages the sales of Anadarkos natural gas, crude oil and NGLs. In marketing its production, the Company attempts to minimize market-related shut-ins, maximize realized prices, and manage credit risk exposure. The Company also purchases natural gas, crude oil, condensate and NGLs volumes for resale primarily from partners and producers near Anadarkos production. These purchases allow Anadarko to aggregate larger volumes and attract larger, creditworthy customers, which enables the Company to maximize prices received for the Companys production and minimize balancing issues with customers and pipelines during operational disruptions.
The Company sells natural gas under a variety of contracts. The Company has the marketing capability to move large volumes of gas into and out of the daily gas market to capitalize on price volatility. The Company may also engage in trading activities for the purpose of generating profits from exposure to changes in market prices of natural gas, crude oil, condensate and NGLs. The Companys marketing strategy includes the use of leased natural gas storage facilities, firm transportation contracts and various derivative instruments. However,
the Company does not engage in market-making practices nor does it trade in any non-energy-related commodities. The Companys marketing function does not participate in any energy marketing-related partnerships.
The Company also engages in sales of greenhouse gas emission reduction credits (ERCs) derived from CO2 injection operations in Wyoming. The Company expects additional sales of ERCs in the future.
Segment and Geographic Information
For additional information on operations by segment and geographic location, see Note 19Segment and Geographic Information of the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
As of December 31, 2008, the Company had approximately 4,300 employees. Anadarko considers its relations with its employees to be satisfactory. The Company has had no significant work stoppages or strikes associated with its employees.
Regulatory Matters, Environmental and Additional Factors Affecting Business
See Risk Factors under Item 1A and Environmental under Item 7 of this Form 10-K.
Title to Properties
As is customary in the oil and gas industry, only a preliminary title review is conducted at the time properties believed to be suitable for drilling operations are acquired by the Company. Prior to the commencement of drilling operations, a thorough title examination of the drill site tract is conducted and curative work is performed with respect to significant defects, if any, before proceeding with operations. Anadarko believes the title to its leasehold properties is good and defensible in accordance with standards generally acceptable in the oil and gas industry subject to such exceptions that, in the opinion of legal counsel for the Company, are not so material as to detract substantially from the use of such properties.
The leasehold properties owned by the Company are subject to royalty, overriding royalty and other outstanding interests customary in the industry. The properties may be subject to burdens such as liens incident to operating agreements and current taxes, development obligations under oil and gas leases and other encumbrances, easements and restrictions. Anadarko does not believe any of these burdens will materially interfere with its use of these properties.
See Liquidity and Capital Resources under Item 7 of this Form 10-K.
Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends
These ratios were computed by dividing earnings by either fixed charges or combined fixed charges and preferred stock dividends. For this purpose, earnings include income from continuing operations before income taxes and fixed charges and excludes undistributed earnings of equity investees. Fixed charges include interest and amortization of debt expenses and the estimated interest component of rentals. Preferred stock dividends are adjusted to reflect the amount of pretax earnings required for payment.
Forward-Looking Statements The Company has made in this report, and may from time to time otherwise make in other public filings, press releases and discussions with Company management, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 concerning the Companys operations, economic performance and financial condition. These forward-looking statements include information concerning future production and reserves, schedules, plans, timing of development, contributions from oil and gas properties, marketing and midstream activities and those statements preceded by, followed by or that otherwise include the words believes, expects, anticipates, intends, estimates, projects, target, goal, plans, objective, should or similar expressions or variations on such expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Companys expectations include, but are not limited to, the Companys assumptions about energy markets, production levels, reserve levels, operating results, competitive conditions, technology, the availability of capital resources, capital expenditures and other contractual obligations, the supply and demand for and the price of natural gas, oil, NGLs and other products or services, volatility in the commodity futures market, the weather, inflation, the availability of goods and services, drilling risks, future processing volumes and pipeline throughput, general economic conditions, either internationally or nationally or in the jurisdictions in which the Company or its subsidiaries are doing business, legislative or regulatory changes, including changes in environmental regulation, environmental risks and liability under federal, state and foreign environmental laws and regulations, potential environmental or other obligations arising from Kerr-McGees former chemical business, the securities, capital or credit markets, our ability to repay debt, the outcome of any proceedings related to the Algerian exceptional profits tax, and other factors discussed below and elsewhere in this Form 10-K and in the Companys other public filings, press releases and discussions with Company management. Anadarko undertakes no obligation to publicly update or revise any forward-looking statements.
Oil, natural gas and NGLs prices are volatile. A substantial or extended decline in prices could adversely affect our financial condition and results of operations.
Prices for oil, natural gas and NGLs can fluctuate widely. Our revenues, operating results and future rate of growth are highly dependent on the prices we receive for our oil, natural gas and NGLs. Historically, the markets for oil, natural gas and NGLs have been volatile and may continue to be volatile in the future. The factors influencing the prices of oil, natural gas and NGLs are beyond our control. These factors include, among others:
The long-term effect of these and other factors on the prices of oil, natural gas and NGLs are uncertain. Prolonged or substantial declines in these commodity prices may have the following effects on our business:
Our debt and other financial commitments may limit our financial and operating flexibility.
As of December 31, 2008, our total debt was about $12.3 billion, which included a $1.7 billion note payable from a midstream subsidiary to a related party. We also have various commitments for operating leases, drilling contracts and transportation and purchase obligations for services and products. Our financial commitments could have important consequences to you. For example, they could:
A downgrade in our credit rating could negatively impact our cost of and ability to access capital.
As of December 31, 2008, Standard and Poors (S&P) and Moodys Investors Service (Moodys) rated our debt at BBB- with a positive outlook and Baa3 with a stable outlook, respectively. Although we are not aware of any current plans of S&P or Moodys to lower their respective ratings on our debt, we cannot be assured that such credit ratings will not be downgraded. A downgrade in our credit ratings could negatively impact our cost of capital or our ability to effectively execute aspects of our strategy. If we were to be downgraded, it could be difficult for us to raise debt in the public debt markets and the cost of that new debt could be much higher than our outstanding debt issued previously. The only outstanding debt that contains rating downgrade triggers that would accelerate the maturity dates of outstanding debt is a $1.7 billion midstream note held by one of Anadarkos subsidiaries, the maturity of which could accelerate if Anadarkos senior unsecured credit rating were to be rated below BB- by S&P or Ba3 by Moodys. The $1.7 billion midstream note is unconditionally guaranteed by Anadarko and, jointly and severally, by certain midstream subsidiaries.
We may incur substantial environmental and other costs arising from Kerr-McGees former chemical business.
Prior to its acquisition by the Company, Kerr-McGee through an initial public offering, spun off its chemical manufacturing business to a newly created and separate company, Tronox Incorporated (Tronox). Under the terms of a Master Separation Agreement (MSA), Kerr-McGee agreed to reimburse Tronox for certain qualifying environmental remediation costs, subject to certain limitations and conditions and up to a maximum aggregate reimbursement of $100 million. However, Kerr-McGee could be subject to liability for certain costs of cleaning up hazardous substance contamination attributable to the facilities and operations conveyed to Tronox if Tronox becomes insolvent or otherwise unable to pay for certain remediation costs. As a result of the acquisition of Kerr-McGee, we will be responsible to provide reimbursements to Tronox pursuant to the MSA, and we may be subject to potential liability, as the successor-in-interest to Kerr-McGee, if Tronox is unable to perform certain remediation obligations.
On January 12, 2009, Tronox and certain of its subsidiaries filed voluntary petitions to restructure under Chapter 11 of the United States Bankruptcy Code. As a result of this filing, third parties may seek to impose liability upon Kerr-McGee that is otherwise attributable to Tronox due to Kerr-McGees status as the former parent of Kerr-McGee Chemical Worldwide LLC, a predecessor-in-interest to Tronox. In addition, based on the information contained in the Tronox bankruptcy filings, it is also possible that third parties may pursue other claims against Kerr-McGee associated with the separation of Kerr-McGees former chemical business and the initial public offering of Tronox. Currently, we are unable to estimate the amount of these potential liabilities.
Declining general economic, business or industry conditions may have a material adverse effect on our results of operations, liquidity and financial condition.
Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the United States mortgage market and a declining real estate market in the United States have contributed to increased economic uncertainty and diminished expectations for the global economy.
These factors, combined with volatile oil, natural gas and NGLs prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and a recession. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad continues to deteriorate, demand for petroleum products could continue to diminish, which could impact the price at which we can sell our oil, natural gas and NGLs, affect our vendors, suppliers and customers ability to continue operations, and ultimately adversely impact our results of operations, liquidity and financial condition.
Our results of operations could be adversely affected by asset impairments.
If oil, natural gas and NGLs prices continue to decrease, we may be required to write-down the value of our oil and gas properties if the estimated future cash flows from these properties fall below their net book value. Future non-cash asset impairments could negatively affect our results of operations.
As a result of mergers and acquisitions, at December 31, 2008 we had approximately $5.3 billion of goodwill on our balance sheet. Goodwill is not amortized, but instead must be tested at least annually for impairment, and more frequently when circumstances indicate likely impairment, by applying a fair-value-based test. Goodwill is deemed impaired to the extent that its carrying amount exceeds its implied fair value. Various factors could lead to goodwill impairments that could have a substantial negative effect on our profitability, such as if the Company is unable to replace the value of its depleting asset base or if other adverse events, such as lower sustained oil and gas prices, reduce the fair value of the associated reporting unit.
We are subject to complex laws and regulations relating to environmental protection that can adversely affect the cost, manner and feasibility of doing business.
Our operations and properties are subject to numerous federal, state, tribal, local and foreign laws and regulations relating to environmental protection from the time projects commence until abandonment. These laws and regulations govern, among other things:
In addition, these laws and regulations may impose substantial liabilities for our failure to comply with them or for any contamination resulting from our operations. Future environmental laws and regulations, such as proposed legislation regulating climate change, may negatively impact our industry. The cost of meeting these requirements may have an adverse effect on our financial condition, results of operations and cash flows. For a description of certain environmental proceedings in which we are involved, see Legal Proceedings under Item 3 of this Form 10-K.
We are vulnerable to risks associated with operating in the Gulf of Mexico that could negatively impact our operations and financial results.
Our operations and financial results could be significantly impacted by conditions in the Gulf of Mexico because we explore and produce extensively in that area. As a result of this activity, we are vulnerable to the risks associated with operating in the Gulf of Mexico, including those relating to:
In addition, we are currently conducting some of our exploration in the deep waters (greater than 1,000 feet) of the Gulf of Mexico, where operations are more difficult and costly than in shallower waters. The deep waters in the Gulf of Mexico lack the physical and oilfield service infrastructure present in its shallower waters. As a result, deepwater operations may require a significant amount of time between a discovery and the time that we can market our production, thereby increasing the risk involved with these operations.
Further, production of reserves from reservoirs in the Gulf of Mexico generally declines more rapidly than from reservoirs in many other producing regions of the world. This results in recovery of a relatively higher percentage of reserves from properties in the Gulf of Mexico during the initial few years of production and, as a result, our reserve replacement needs from new prospects may be greater there than for our operations elsewhere. Also, our revenues and return on capital will depend significantly on prices prevailing during these relatively short production periods.
We operate in other countries and are subject to political, economic and other uncertainties.
Our operations in areas outside the United States are based primarily in Algeria, China, Brazil, Ghana and Indonesia. As a result, we face political and economic risks and other uncertainties with respect to our international operations. These risks may include, among other things:
Our international operations may also be adversely affected by laws and policies of the United States affecting foreign trade and taxation.
Realization of any of these factors could materially and adversely affect our financial position, results of operations and cash flows.
Our commodity price risk management and trading activities may prevent us from benefiting fully from price increases and may expose us to other risks.
To the extent that we engage in price risk management activities to protect ourselves from commodity price declines, we may be prevented from realizing the full benefits of price increases above the levels of the derivative instruments used to manage price risk. In addition, our commodity price management and trading activities may expose us to the risk of financial loss in certain circumstances, including instances in which:
In addition, we engage in limited speculative trading in hydrocarbon commodities, which subjects us to additional risk.
The credit risk of financial institutions could adversely affect us.
We have exposure to different counterparties, and we have entered into transactions with counterparties in the financial services industry, including, commercial banks, investment banks, insurance companies, other investment funds and other institutions. These transactions expose us to credit risk in the event of default of our counterparty. Continued deterioration in the credit markets may continue to impact the credit ratings of our current and potential counterparties and affect their ability to fulfill their existing obligations to us and their willingness to enter into future transactions with us. We have exposure to these financial institutions in the form of derivative transactions in connection with our hedges. We also maintain insurance policies with insurance companies to protect us against certain risks inherent in our business. In addition, if any lender under our credit facility is unable to fund its commitment, our liquidity will be reduced by an amount up to the aggregate amount of such lenders commitment under our credit facility.
Our proved reserves are estimates. Any material inaccuracies in our reserve estimates or assumptions underlying our reserve estimates could cause the quantities and net present value of our reserves to be overstated or understated.
There are numerous uncertainties inherent in estimating quantities of proved reserves, including many factors beyond our control that could cause the quantities and net present value of our reserves to be overstated. The reserve information included or incorporated by reference in this report represents estimates prepared by our internal engineers. The procedures and methods for estimating the reserves by our internal engineers were reviewed by independent petroleum consultants. Estimation of reserves is not an exact science. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, any of which may cause these estimates to vary considerably from actual results, such as:
Estimates of reserves based on risk of recovery and estimates of expected future net cash flows prepared or audited by different engineers, or by the same engineers at different times, may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and the variance may be material. The net present values referred to in this report should not be construed as the current market value of the estimated oil and natural gas reserves attributable to our properties. In accordance with SEC requirements, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower.
Failure to replace reserves may negatively affect our business.
Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves generally decline when reserves are produced, unless we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. We may be unable to find, develop or acquire additional reserves on an economic basis. Furthermore, if oil and natural gas prices increase, our costs for additional reserves could also increase.
We may not be insured against all of the operating risks to which our business is exposed.
Our business is subject to all of the operating risks normally associated with the exploration for and production, gathering, processing and transportation of oil and gas, including hurricanes, blowouts, cratering and fire, any of which could result in damage to, or destruction of, oil and natural gas wells or formations or production facilities and other property and injury to persons. As protection against financial loss resulting from these operating hazards, we maintain insurance coverage, including certain physical damage, employers liability, comprehensive general liability and workers compensation insurance. However, we are not fully insured against all risks in all aspects of our business, such as political risk, business interruption risk and risk of major terrorist attacks. The occurrence of a significant event against which we are not fully insured could have a material adverse effect on our financial position.
Material differences between the estimated and actual timing of critical events may affect the completion of and commencement of production from development projects.
We are involved in several large development projects. Key factors that may affect the timing and outcome of such projects include:
Delays and differences between estimated and actual timing of critical events may affect the forward looking statements related to large development projects.
Our domestic operations are subject to governmental risks that may impact our operations.
Our domestic operations have been, and at times in the future may be, affected by political developments and by federal, state, tribal and local laws and regulations such as restrictions on production, changes in taxes, royalties and other amounts payable to governments or governmental agencies, price or gathering rate controls and environmental protection regulations.
The oil and gas exploration and production industry is very competitive, and some of our exploration and production competitors have greater financial and other resources than we do.
The oil and gas business is highly competitive in the search for and acquisition of reserves and in the gathering and marketing of oil and gas production. Our competitors include national oil companies, major oil and gas companies, independent oil and gas companies, individual producers, gas marketers and major pipeline companies, as well as participants in other industries supplying energy and fuel to industrial, commercial and individual consumers. Some of our competitors may have greater and more diverse resources upon which to draw than we do. If we are not successful in our competition for oil and gas reserves or in our marketing of production, our financial condition and results of operations may be adversely affected.
The high cost or unavailability of drilling rigs, equipment, supplies, personnel and other oil field services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget.
Our industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies or qualified personnel. During these periods, the costs of rigs, equipment, supplies and personnel are substantially greater and their availability may be limited. Additionally, these services may not be available on commercially reasonable terms. As a result of the recent historically high levels of exploration and production in response to strong demand for crude oil and natural gas, the demand for oilfield services has risen and the costs of these services have also been increasing to historically high levels.
Our drilling activities may not be productive.
Drilling for oil and natural gas involves numerous risks, including the risk that we will not encounter commercially productive oil or gas reservoirs. The costs of drilling, completing and operating wells are often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including:
Certain of our future drilling activities may not be successful and, if unsuccessful, this failure could have an adverse effect on our future results of operations and financial condition. While all drilling, whether developmental or exploratory, involves these risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons. Because of the percentage of our capital budget devoted to higher-risk exploratory projects, it is likely that we will continue to experience significant exploration and dry hole expenses.
Repercussions from terrorist activities or armed conflict could harm our business.
Terrorist activities, anti-terrorist efforts or other armed conflict involving the United States or its interests abroad may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If events of this nature occur and persist, the attendant political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on prevailing oil and natural gas prices and causing a reduction in our revenues. Oil and natural gas production facilities, transportation systems and storage facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our operations is destroyed or damaged by such an attack. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.
We have limited control over the activities on properties we do not operate.
Other companies operate some of the properties in which we have an interest. We have limited ability to influence or control the operation or future development of these non-operated properties or the amount of capital expenditures that we are required to fund with respect to them. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could materially adversely affect the realization of our targeted returns on capital and lead to unexpected future costs.
Our ability to sell our natural gas and crude oil production could be materially harmed if we fail to obtain adequate services such as transportation.
The marketability of our production depends in part upon the availability, proximity and capacity of pipeline facilities and tanker transportation. If any of the pipelines or tankers become unavailable, we would be required to find a suitable alternative to transport the gas and oil, which could increase our costs and/or reduce the revenues we might obtain from the sale of the gas and oil.
Provisions in our corporate documents and Delaware law could delay or prevent a change of control of Anadarko, even if that change would be beneficial to our stockholders.
Our restated certificate of incorporation and by-laws contain provisions that may make a change of control of Anadarko difficult, even if it may be beneficial to our stockholders, including provisions governing the classification, nomination and removal of directors, prohibiting stockholder action by written consent and regulating the ability of our stockholders to bring matters for action before annual stockholder meetings, and the authorization given to our Board of Directors to issue and set the terms of preferred stock.
In addition, Section 203 of the Delaware General Corporation Law imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.
We may reduce or cease to pay dividends on our common stock.
We can provide no assurance that we will continue to pay dividends at the current rate or at all. The amount of cash dividends, if any, to be paid in the future will depend upon their declaration by our Board of Directors and upon our financial condition, results of operations, cash flow, the levels of our capital and exploration expenditures, our future business prospects and other related matters that our Board of Directors deems relevant.
The loss of key members of our management team, or difficulty attracting and retaining experienced technical personnel, could reduce our competitiveness and prospects for future success.
The successful implementation of our strategies and handling of other issues integral to our future success will depend, in part, on our experienced management team. The loss of key members of our management team, including James T. Hackett, our Chairman, President and Chief Executive Officer, could have an adverse effect on our business. We entered into an employment agreement with Mr. Hackett to secure his employment with us. We do not carry key man insurance. Our exploratory drilling success and the success of other activities integral to our operations will depend, in part, on our ability to attract and retain experienced explorationists, engineers and other professionals. Competition for such professionals is intense. If we cannot retain our technical personnel or attract additional experienced technical personnel, our ability to compete could be harmed.
The Company has no outstanding or unresolved SEC staff comments.
General The Company is a defendant in a number of lawsuits and is involved in governmental proceedings arising in the ordinary course of business, including, but not limited to, royalty claims, contract claims and environmental claims. The Company has also been named as a defendant in various personal injury claims, including claims by employees of third-party contractors alleging exposure to asbestos, silica and benzene while working at refineries (previously owned by predecessors of acquired companies) located in Texas, California and Oklahoma. While the ultimate outcome and impact on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material adverse effect on the consolidated financial position, results of operations or cash flow of the Company.
Environmental Matters The United States Environmental Protection Agency Region 8 (EPA) and the United States Department of Justice (DOJ) have alleged that a number of spills at the Companys Salt Creek and Elk Basin Fields violated provisions of the federal Clean Water Act and the facilities had inadequate Spill Prevention Control and Countermeasure (SPCC) plans and Facility Response Plans (FRP). The Company sold substantially all of Elk Basin to a third party in 2007, but the Company agreed to retain responsibility for the historical spills, SPCC and FRP issues at Elk Basin. The Company reached a tentative settlement with the EPA and DOJ to resolve these allegations by agreeing to pay a fine of approximately $1 million, plus agreeing to perform certain preventative actions, subject to negotiating a mutually agreeable settlement agreement. In the opinion of management, the liability with respect to these actions will not have a material effect on the consolidated financial position, results of operations or cash flow of the Company.
Other Matters The Company is subject to other legal proceedings, claims and liabilities which arise in the ordinary course of its business. In the opinion of Anadarko, the liability with respect to these actions will not have a material effect on the consolidated financial position, results of operations or cash flow of the Company.
There were no matters submitted to a vote of security holders during the fourth quarter of 2008.
Executive Officers of the Registrant
Mr. Hackett was named President and Chief Executive Officer in December 2003 and assumed the additional role of Chairman of the Board in January 2006. Prior to joining Anadarko, he served as President and Chief Operating Officer of Devon Energy Corporation following its merger with Ocean Energy, Inc. in April 2003. Mr. Hackett served as President and Chief Executive Officer of Ocean Energy, Inc. from March 1999 to April 2003 and as Chairman of the Board from January 2000 to April 2003. He currently serves as a director of Fluor Corporation and Halliburton Company and serves as Chairman of the Board of the Federal Reserve Bank of Dallas.
Mr. Kurz was named Chief Operating Officer in December 2006. Prior to this position, he served as Senior Vice President of North American Operations, Midstream and Marketing. He was named Senior Vice President of Marketing and General Manager, U.S. Onshore in May 2005, and from 2003 until that time he served as Vice President, Marketing. He joined Anadarko as Manager of Energy Marketing in 2000. Mr. Kurz has also served as a director of Western Gas Holdings, LLC, a subsidiary of Anadarko and the general partner of Western Gas Partners, LP since August 2007.
Mr. Daniels was named Senior Vice President, Worldwide Exploration in December 2006, Senior Vice President, Exploration and Production in 2004 and named Vice President, Canada in 2001. Prior to this position, he served in various managerial roles in the Exploration Department for Anadarko Algeria Company, LLC. He has worked for the Company since 1985.
Mr. Gwin was named Senior Vice President in March 2008. He also serves as President, Chief Executive Officer and a director of Western Gas Holdings, LLC. He joined Anadarko in January 2006 as Vice President, Finance and Treasurer. Prior to this position, he served as Chairman, President and CEO of Prosoft Learning Corporation from November 2002 to November 2004 and prior to that served as its Chief Financial Officer from 2000 to November 2002. Previously, Mr. Gwin spent 10 years at Prudential Capital Group in merchant banking roles of increasing responsibility, including serving as Managing Director with responsibility for the firms energy investments worldwide.
Mr. Meloy was named Senior Vice President, Worldwide Operations in December 2006 and had served as Senior Vice President, Gulf of Mexico and International Operations since the acquisition of Kerr-McGee in August 2006. Prior to joining Anadarko, he served Kerr-McGee as Vice President of Exploration and Production from 2005 to 2006, Vice President of Gulf of Mexico Exploration, Production and Development from 2004 to 2005, Vice President and Managing Director of Kerr-McGee North Sea (U.K.) Limited from 2002 to 2004 and Vice President of Gulf of Mexico Deep Water from 2000 to 2002.
Mr. Reeves was named Senior Vice President, General Counsel and Chief Administrative Officer in February 2007. He had previously served as Senior Vice President, Corporate Affairs & Law and Chief Governance Officer since 2004. Prior to joining Anadarko, he served as Executive Vice President, Administration and General Counsel of North Sea New Ventures from 2003 to 2004, and as Executive Vice
President, General Counsel and Secretary of Ocean Energy, Inc. and its predecessor companies from 1997 to 2003. He has also served as a director of Key Energy Services, Inc., a publicly traded oil field services company, since October 2007, and as a director of Western Gas Holdings, LLC since August 2007.
Mr. Walker was named Senior Vice President, Finance and Chief Financial Officer in September 2005. Prior to joining Anadarko, he served as Managing Director for the Global Energy Group of UBS Investment Bank from 2003 to 2005 and was President and Chief Financial Officer of 3TEC Energy Corporation from 2000 to 2003. From 1987 to 2000, he worked for Prudential Capital Group in a variety of merchant banking positions. He has also served as a director of Temple-Inland, Inc. since November 2008, and as the Chairman of Western Gas Holdings, LLC since August 2007. Mr. Walker also serves on the Board of Trustees of the United Way of Greater Houston and the Houston Museum of Natural Science.
Ms. Douglas was named Vice President, Chief Accounting Officer and Controller in November 2008 and had served as Controller since September 2007. She served as Assistant Controller from July 2006 to September 2007. Ms. Douglas also served as Director, Accounting, Policy and Coordination from October 2006 to September 2007 and Financial Reporting and Policy Manager from January 2003 to October 2006. She joined Anadarko in 1979.
Officers of Anadarko are elected at an organizational meeting of the Board of Directors following the annual meeting of stockholders, which is expected to occur on May 19, 2009, and hold office until their successors are duly elected and shall have qualified. There are no family relationships between any directors or executive officers of Anadarko.
As of January 30, 2009, there were approximately 17,010 record holders of Anadarko common stock. The common stock of Anadarko is traded on the New York Stock Exchange. The following shows information regarding the closing market price of and dividends declared and paid on the Companys common stock by quarter for 2008 and 2007.
The amount of future common stock dividends will depend on earnings, financial condition, capital requirements and other factors, and will be determined by the Board of Directors on a quarterly basis. For additional information, see Dividends under Item 7 and Note 11Stockholders Equity and Note 12Stock-Based Compensation under Item 8 of this Form 10-K.
Common Stock Repurchase Table The following table sets forth information with respect to repurchases by the Company of its shares of common stock during the fourth quarter of 2008.
The following performance graph and related information shall not be deemed soliciting material or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
The following graph compares the cumulative 5-year total return to shareholders on Anadarkos common stock relative to the cumulative total returns of the S&P 500 index and a customized peer group of eleven companies. The companies included in the customized peer group are: Apache Corporation, ConocoPhillips, Devon Energy Corporation, EnCana Corporation, EOG Resources, Inc., Hess Corporation, Marathon Oil Corporation, Noble Energy, Inc., Occidental Petroleum Corporation, Pioneer Natural Resources Company and Talisman Energy Inc.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN AMONG
ANADARKO PETROLEUM CORPORATION, THE S&P 500 INDEX,
AND A PEER GROUP
An investment of $100 (with reinvestment of all dividends) is assumed to have been made in the Companys common stock, in the index and in the peer group on December 31, 2003 and its relative performance is tracked through December 31, 2008.
The following discussion should be read together with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in this report in Item 8, and the Risk Factors information, which are set forth in Item 1A.
Anadarko Petroleum Corporation is among the worlds largest independent oil and natural gas exploration and production companies. Anadarkos primary line of business is the exploration, development, production, gathering, processing and marketing of natural gas, crude oil, condensate and NGLs. The Companys major areas of operations are located in the United States and Algeria, with additional activity in Brazil, China, Ghana, Indonesia, Mozambique and several other countries.
Anadarko achieved its key operational objectives in 2008, during a year marked by a downturn in the financial markets and a volatile commodity-price environment that included New York Mercantile Exchange (NYMEX) oil prices rising to highs above $140 per barrel, and falling to lows under $40 per barrel. The Company is managing its 2009 capital program consistent with a sustained lower-commodity-price environment. Anadarko ended 2008 with approximately $2.4 billion of cash on hand and retains the availability of its undrawn $1.3 billion revolving credit agreement (RCA), along with access to credit markets. Management expects this liquidity position and cash flow from operations to position the Company to meet its 2009 operational objectives and capital commitments.
Mission and Strategy
Anadarkos mission is to deliver a competitive and sustainable rate of return to shareholders by exploring for, acquiring and developing oil and natural gas resources vital to the worlds health and welfare. Anadarko employs the following strategy to achieve this mission:
The first portion of this strategy involves Anadarko developing its portfolio of primarily unconventional resources that give the Company a stable base of capital-efficient, predictable and repeatable development opportunities to consistently grow the Company at competitive rates.
Exploring in high-potential, proven and emerging basins worldwide provides the Company with differential growth. Anadarkos exploration success creates value by expanding its future resource potential, while providing the flexibility to manage risk by monetizing discoveries.
Anadarkos global business development approach transfers core skills across the globe to discover and develop world-class resources that are accretive to the Companys performance. These resources help form an optimized-global portfolio where both surface and subsurface risks are actively managed.
A strong balance sheet is essential for the development of the Companys assets, and Anadarko is committed to disciplined investments in its businesses to manage through commodity price cycles. Maintaining financial discipline enables the Company to capitalize on the flexibility of its global portfolio, while allowing the Company to pursue new strategic and tactical-growth opportunities.
The Company overcame significant weather events and third-party-related infrastructure issues in 2008 to achieve production growth, reserve additions, and production replacement. Significant operational highlights by area include:
United States Onshore
Gulf of Mexico
The Companys 2008 financial highlights include:
The following discussion pertains to Anadarkos financial condition, results of operations and changes in financial condition. Unless noted otherwise, the following information relates to continuing operations and excludes the discontinued Canadian operations. The primary factors that affect the Companys results of operations include, among other things, commodity prices for natural gas, crude oil and NGLs, production volumes, the Companys ability to find additional oil and natural gas reserves, as well as the cost of finding reserves and changes in the levels of costs and expenses required for continuing operations. Unless the context otherwise requires, the terms Anadarko or Company refer to Anadarko Petroleum Corporation and its consolidated subsidiaries. Following is an index by major category of discussion including a brief description of contents:
Results of Continuing Operations
Income from Continuing Operations Anadarkos income from continuing operations for 2008 totaled $3.2 billion, or $6.84 per share (diluted), compared to income from continuing operations for 2007 of $3.8 billion, or $8.05 per share (diluted). Anadarko had income from continuing operations in 2006 of $2.5 billion, or $5.33 per share (diluted). The decrease in income from continuing operations for 2008 compared to 2007 was primarily due to a decrease in gains on divestitures and higher costs and expenses, partially offset by higher natural gas, oil and NGLs sales, including the impact of derivatives, lower interest expense and lower income tax expense. The increase in 2007 income from continuing operations compared to 2006 was primarily due to gains on divestitures and higher sales volumes, partially offset by the impact of lower natural gas and oil and condensate prices, higher costs and expenses, including other taxes related to an Algerian exceptional profits tax, and higher interest expense. In 2008, the higher sales revenues and costs and expenses were due primarily to the impact of higher commodity prices, higher exploration expense related to impairments of unproved properties and higher other taxes related to the higher commodity prices. In 2007, the higher sales volumes and costs and expenses were due primarily to the impact of operations acquired with the third quarter 2006 acquisitions.
Anadarkos sales revenues for 2008 increased when compared to 2007 due to higher oil and condensate, natural gas and NGLs commodity prices and unrealized gains on derivatives, partially offset by lower sales volumes associated with properties that were divested in 2007. The increase in 2007 compared to 2006 was primarily due to higher sales volumes, partially offset by significantly lower natural gas and oil and condensate prices.
The Companys sales revenues for 2008, 2007 and 2006 include $930 million, $(1,100) million and $895 million, respectively, related to net unrealized gains (losses) on derivatives used to manage price risk on natural gas, crude oil, condensate and NGLs sales. The significant fluctuations in unrealized gains (losses) are due primarily to an increase in Anadarkos derivative portfolio as a result of the 2006 acquisition of Kerr-McGee, as well as the discontinuance of hedge accounting effective January 1, 2007. The majority of the unrealized gains recorded in 2006 related to derivatives assumed with the Kerr-McGee acquisition. Any realization of these gains or losses is expected to be substantially offset by the value realized from that portion of the Companys production covered by the derivative instruments.
Analysis of Oil and Gas Operations Sales Revenues
The following table provides a summary of the effects of changes in volumes, prices and derivatives gains and losses on Anadarkos sales revenues for the year ended December 31, 2008 compared to 2007 and 2006.
The Company utilizes derivative instruments to manage the risk of a decrease in the market prices for its anticipated sales of natural gas, crude oil, condensate and NGLs. This activity is referred to as price risk management. The impact of price risk management (including realized and unrealized gains and losses) increased revenues $586 million in 2008, decreased revenues $472 million in 2007 and increased revenues $1,131 million in 2006. See Energy Price Risk under Part II, Item 7A and Note 8Derivative Instruments under Part II, Item 8 of this Form 10-K.
Analysis of Oil and Gas Operations Sales Volumes
Anadarkos daily sales volumes increased in 2008 compared to 2007, excluding 2007 divested property volumes of 45 MBOE/d, primarily due to an increase in the United States of 38 MBOE/d related to higher sales volumes in the Rockies due to improved drilling efficiencies allowing for more overall drilling and the Gulf of Mexico. The sales volume increase in the Gulf of Mexico was realized despite prolonged repairs of third-party downstream infrastructure at the end of 2008 as a result of the 2008 hurricane activity. Volumes in Algeria decreased 7 MBOE/d primarily as a result of lower production due to maintenance, a statutory shutdown and current production constraints implemented by OPEC in the fourth quarter of 2008. During 2007, Anadarkos daily sales volumes increased compared to 2006 primarily due to higher sales volumes of 138 MBOE/d
associated with the full-period impact of the 2006 acquisitions and higher sales volumes in the Gulf of Mexico of 18 MBOE/d associated with production start up at Independence Hub in the second half of 2007, partially offset by a decrease in sales volumes of 64 MBOE/d associated with the impact of 2007 divestitures in the onshore United States, the Gulf of Mexico and Qatar.
Sales volumes represent actual production volumes adjusted for changes in commodity inventories. Anadarko employs marketing strategies to help manage volumes and mitigate the effect of price volatility, which is likely to continue in the future.
Natural Gas Sales Volumes, Average Prices and Revenues
The Companys daily natural gas sales volumes increased in 2008 compared to 2007, excluding 2007 divested property volumes of 156 MMcf/d, primarily due to higher sales volumes in the Gulf of Mexico of 175 MMcf/d as a result of the start up of the Independence Hub and increased production in the Rockies of 162 MMcf/d due to improved drilling efficiencies allowing for more overall drilling, partially offset by decreased production in the Southern Region of 44 MMcf/d. Anadarkos daily natural gas sales volumes in 2007 increased when compared to 2006. The increases were primarily due to higher sales volumes associated with the 2006 acquisitions of 491 MMcf/d and higher sales volumes of 106 MMcf/d in the Gulf of Mexico related to the start up of the Independence Hub, partially offset by decreases in sales volumes of 224 MMcf/d associated with 2007 divestitures in the onshore United States and Gulf of Mexico. Production of natural gas is generally not directly affected by seasonal swings in demand.
Excluding the impact of gains and losses on derivatives, Anadarkos average natural gas price for 2008 increased when compared to 2007. The relative difference in 2008 and 2007 prices is primarily attributable to strong prices in the first half of 2008. The strong price in 2008 stemmed from lower year-over-year natural gas storage volumes coupled with lower liquefied natural gas volumes available to the United States consumer, both of which were caused principally by increased demand and pricing in both Europe and Asia. Excluding the impact of both realized and unrealized gains and losses on derivatives, Anadarkos average natural gas price for 2007 decreased when compared to 2006. The lower natural gas price is attributable to a higher than average North America natural gas storage level in 2007, the full year effect in 2007 of the return of Gulf of Mexico gas production capacity in 2006 that was damaged during the 2005 hurricane season and a significant increase in liquefied natural gas supply into the United States. As of December 31, 2008, the Company has implemented price risk management on about 24% of its anticipated natural gas wellhead sales volumes for 2009.
Crude Oil and Condensate Sales Volumes, Average Prices and Revenues
Anadarkos daily crude oil and condensate sales volumes were lower in 2008 compared to 2007, excluding 2007 divested property volumes of 15 MBbls/d, primarily due to lower crude oil sales volumes of 13 MBbls/d in the Gulf of Mexico due to 2008 hurricane activity, lower crude oil sales volumes of 7 MBbls/d in Algeria, primarily as a result of lower production due to maintenance, a statutory shutdown and current production constraints implemented by OPEC in the fourth quarter of 2008, and lower crude oil sales volumes of 3 MBbls/d in Alaska, partially offset by higher crude oil sales volumes of 5 MBbls/d in the Rockies. Anadarkos daily crude oil and condensate sales volumes for 2007 were up when compared to the same period of 2006. The increases in 2007 compared to 2006 were primarily due to an increase in sales volumes of 48 MBbls/d associated with the 2006 acquisitions, partially offset by a decrease in sales volumes of 20 MBbls/d associated with 2007 divestitures in the onshore United States, the Gulf of Mexico and Qatar and a decrease in Venezuelan sales volumes due to contract changes in late 2006. Production of oil usually is not affected by seasonal swings in demand.
Excluding the impact of gains and losses on derivatives, Anadarkos average crude oil price for 2008 increased when compared to 2007. Crude oil prices were strong in the first half of 2008, primarily due to limited excess production capacity, heightened geopolitical tension and increased demand in Asia; particularly China and
India. Excluding the impact of both realized and unrealized gains and losses on derivatives, Anadarkos average crude oil price for 2007 increased when compared to 2006. The higher crude oil prices were attributed primarily to additional global demand, limited excess production capacity and heightened geopolitical tension. As of December 31, 2008, the Company has utilized price risk management on about 28% of its anticipated oil and condensate sales volumes for 2009.
Natural Gas Liquids Sales Volumes, Average Prices and Revenues
NGLs sales represent revenues derived from the processing of Anadarkos natural gas production. The Companys daily NGLs sales volumes were down in 2008 compared to 2007 primarily due to a 4 MBbls/d decrease associated with the 2007 divestitures. Anadarkos daily NGLs sales volumes were up in 2007 compared to 2006 primarily due to higher sales volumes of 8 MBbls/d associated with the 2006 acquisitions, partially offset by a decrease in sales volumes of 6 MBbls/d related to the 2007 divestitures.
Excluding the impact of gains and losses on derivatives, the average NGLs price increased in 2008 compared to 2007 primarily due to increased global petrochemical demand for the first three quarters of 2008. During 2007, average NGLs prices increased when compared to 2006 primarily due to increased petrochemical demand in 2007. NGLs production is dependent on natural gas and NGLs prices as well as the economics of processing the natural gas to extract NGLs. Production of NGLs usually is not affected by seasonal swings in demand.
Gathering, Processing and Marketing Revenues
Gathering and processing revenues represent revenues derived from gathering and processing natural gas from sources other than the Companys production. Marketing sales primarily represent the margin earned on sales of gas, oil and NGLs purchased from third parties. During 2008, gathering and processing sales decreased $174 million compared to 2007 primarily due to lower volumes as a result of the 2007 divestitures, partially offset by higher product prices and gathering rates. Marketing sales decreased $231 million during 2008 primarily due to lower margins on firm transportation contracts, write-down of storage inventory due to lower commodity prices in the fourth quarter of 2008 and less third-party marketing activity. During 2007, gathering and processing sales increased $721 million compared to 2006 due to gathering and processing operations acquired with the 2006 acquisitions, partially offset by a decrease associated with divestitures in 2007.
Gains (Losses) on Divestitures and Other, net
Gains on divestitures in 2008 were $1.2 billion, primarily related to the divestiture of certain oil and gas properties in Brazil, onshore in the United States and the Gulf of Mexico, in several unrelated transactions. Gains on divestitures in 2007 related primarily to the Companys asset realignment program. During 2007, net gains of $4.1 billion related to divestitures of oil and gas properties and net gains of $0.6 billion related to the divestiture of certain gathering and processing interests that were not affiliated with the Companys operating areas. Gains on divestitures in 2006 were $26 million. For additional information, see Acquisitions and Divestitures below.
In 2008, gains (losses) on divestitures and other, net includes a net $82 million ($52 million after tax) reduction related to corrections resulting from analysis of property records after the adoption of the successful efforts method of accounting. This net amount includes a reduction of $163 million related to 2007. Management concluded that this misstatement was not material relative to 2007 interim and annual results, or to the 2008 periods, and corrected the error in the first quarter of 2008.
Costs and Expenses
During 2008, Anadarkos costs and expenses increased when compared to 2007 due to the following factors:
During 2007, Anadarkos costs and expenses increased when compared to 2006 due to the following factors:
Other (Income) Expense
Interest Expense Anadarkos gross interest expense for 2008 decreased compared to 2007. The decrease was primarily due to lower average debt levels in 2008 and decreases in average floating interest rates in 2008. Anadarkos gross interest expense increased during 2007 compared to 2006. The increase was primarily due to higher average borrowings associated with the 2006 acquisitions and higher interest rates compared to 2006. For additional information see Acquisitions and Divestitures and Debt below and Interest Rate Risk under Item 7A of this Form 10-K.
The amount of capitalized interest in 2008 is comparable to capitalized interest in 2007. In 2007, capitalized interest increased compared to 2006. This increase was primarily due to increased costs for major projects.
Other (Income) Expense For 2008, the Company had total other expense of $51 million compared to total other income of $74 million for 2007. The decrease of $125 million was primarily related to lower interest income of $40 million due to lower average cash levels and lower interest rates in 2008, a $40 million loss related to environmental reserve adjustments and $54 million of impairment losses related to equity investments.
For 2007, the Company had total other income of $74 million compared to $6 million for 2006. The increase of $68 million was primarily due to higher interest income of $37 million, a $22 million loss on an impaired equity investment in 2006 and a $10 million loss related to environmental reserve adjustments in 2006.
Minority Interests For 2008, the Company had minority interests expense of $23 million primarily related to the public ownership of a 36.7% limited partnership interest in WES which completed its initial public offering in the second quarter of 2008. See Master Limited Partnership Initial Public Offering below.
Income Tax Expense
For 2008, income tax expense related to continuing operations decreased 16% compared to 2007 primarily due to a decrease in income before income taxes. For 2007, income tax expense related to continuing operations increased 103% compared to 2006 primarily due to an increase in income before income taxes and variances from the statutory rate.
The variance from the 35% statutory rate in 2008 is primarily attributable to the accrual of the Algerian exceptional profits tax, which is non-deductible for Algerian income tax purposes, U.S. tax on foreign inclusions and distributions, state income taxes and other items. This increase in the 35% statutory rate is offset by a foreign tax rate applicable to the Company's divestiture of its 50% interest in the Peregrino field offshore Brazil, which is a rate lower than the 35% U.S. statutory rate, and other items. The variance from the 35% statutory rate in 2007 was primarily caused by the Algerian exceptional profits tax, which is non-deductible for Algerian income tax purposes, other foreign taxes in excess of federal statutory rates, state income taxes and other items. For 2006, the variance from the 35% statutory rate was primarily caused by foreign taxes in excess of federal statutory rates, state income taxes, excess U.S. foreign tax credits and other items.
Texas House Bill 3, signed into law in May 2006, eliminates the taxable capital and earned surplus components of the existing franchise tax and replaces these components with a taxable margin tax calculated on a combined basis. The new tax is effective for reports due on or after January 1, 2008 (based on business activity during 2007). Anadarko is required to include the impact of the law change on its deferred state income taxes in income for the period which includes the date of enactment. The adjustment, a reduction in Anadarkos deferred state income taxes in the amount of approximately $14 million and $69 million, net of federal benefit, was included in the 2007 and 2006 tax provision, respectively.
Segment AnalysisAdjusted EBITDAX To assess the operating results of Anadarkos segments, management uses income from continuing operations before income taxes, interest expense, exploration expense, DD&A expense and impairments (Adjusted EBITDAX). Anadarkos definition of Adjusted EBITDAX, which is not a GAAP measure, excludes exploration expense, as exploration expense is not an indicator of operating efficiency for a given reporting period, but is monitored by management as part of costs incurred in exploration and development activities. Similarly, DD&A expense and impairments are excluded from Adjusted EBITDAX as a measure of segment operating performance, because capital expenditures are evaluated at the time capital costs are incurred. The Companys definition of Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Anadarkos financing methods or capital structure. Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Companys financial condition and results of operations and that Adjusted EBITDAX is a widely accepted financial indicator of a companys ability to incur and service debt, fund capital expenditures and make distributions to shareholders.
Adjusted EBITDAX, as defined by Anadarko, may not be comparable to similarly titled measures used by other companies. Therefore, Anadarkos consolidated Adjusted EBITDAX should be considered in conjunction with income from continuing operations and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDAX has important limitations as an analytical tool because it excludes certain items that affect income from continuing operations and net cash
provided by operating activities. Adjusted EBITDAX should not be considered in isolation or as a substitute for an analysis of Anadarkos results as reported under GAAP. Below is a reconciliation of consolidated Adjusted EBITDAX to income from continuing operations before income taxes.
Oil and Gas Exploration and Production The increase in Adjusted EBITDAX for 2008 compared to 2007 was primarily due to the impact of higher commodity prices and higher sales volumes primarily in the Rockies and the Gulf of Mexico, partially offset by a decrease in gains on divestitures and other, net of $3.1 billion and lower sales volumes as a result of the 2007 divestitures. The increase in Adjusted EBITDAX for 2007 compared to 2006 was primarily due to an increase in gains on divestitures of $4.1 billion and higher sales volumes, partially offset by the impact of lower natural gas and oil and condensate prices and higher costs and expenses, including the Algerian exceptional profits tax. The Companys sales revenues include the impact of price risk management activities (including realized and unrealized gains and losses) which increased oil and gas revenues $586 million during 2008, compared to a decrease of $472 million in 2007 and an increase of $1,131 million in 2006. Of these amounts for 2008, 2007, and 2006 $892 million, $(1,048) million, and $837 million, respectively, were related to the recognition of net unrealized gains (losses) on derivatives used to manage price risk on natural gas, crude oil, condensate and NGLs sales.
Midstream The decrease in Adjusted EBITDAX for 2008 compared to 2007 resulted primarily from a decrease in gains on divestitures and other, net of $531 million and lower volumes as a result of the 2007 divestitures, partially offset by higher product prices and gathering rates. The increase in Adjusted EBITDAX for 2007 compared to 2006 resulted primarily from an increase in gains on divestitures of $532 million related to midstream assets and an increased scope of midstream operations resulting from the 2006 acquisitions, partially offset by a decrease in earnings associated with the 2007 divestitures. During July 2007, the Company divested its interests in two natural gas gathering systems and associated processing plants that did not operate in areas where Anadarko has significant oil and gas production. These divested facilities accounted for $75 million, or 21%, of Anadarkos midstream segments Adjusted EBITDAX excluding gains on divestitures during 2007.
Marketing Marketing earnings primarily represent the margin earned on sales of gas, oil and NGLs purchased from third parties. The decrease in Adjusted EBITDAX for 2008 compared to 2007 was primarily due to lower margins on firm transportation contracts and the write-down of storage inventory due to lower commodity prices in the fourth quarter of 2008. The increase in Adjusted EBITDAX for 2007 compared to 2006, resulted primarily from the effects of higher volumes transported as a result of the 2006 acquisitions.
Other and Intersegment Eliminations Other and intersegment eliminations consists primarily of corporate costs that are not allocated to the operating segments and income from hard minerals investments and royalties. The increase in Adjusted EBITDAX for 2008 compared to 2007 was primarily due to a decrease in employee
severance and termination benefits, a decrease in compensation expense, and a decrease in contract labor expense, partially offset by higher benefit plans expense and impairment losses related to equity investments. The decrease in Adjusted EBITDAX for 2007 compared to 2006 was primarily due to increases in compensation expense from the increased average number of employees associated with the 2006 acquisitions.
Acquisitions and Divestitures
Acquisitions In August 2006, Anadarko acquired Kerr-McGee and Western in separate all-cash transactions. Anadarko initially financed $22.5 billion for the acquisitions through a 364-day committed acquisition facility with plans to repay it with proceeds from asset divestitures, free cash flow from operations and the issuance of equity, debt and bank financing during the term of the facility. Through February 29, 2008, the Company had repaid the initial amount financed under the acquisition facility of $22.5 billion using divestiture proceeds, long-term refinancing and cash flow from operations.
Kerr-McGee Transaction On August 10, 2006, Anadarko completed the acquisition of Kerr-McGee for $16.5 billion, or $70.50 per share, plus the assumption of $2.6 billion of debt.
Kerr-McGees legacy core properties are located in the deepwater Gulf of Mexico and onshore in Colorado and Utah. They include deepwater Gulf of Mexico blocks which are supported by Kerr-McGees hub-and-spoke infrastructure. In Colorado, Kerr-McGee held acreage in the Wattenberg natural gas play, located largely on Anadarkos Land Grant holdings, where Anadarko owns the royalty interest. In Utah, Kerr-McGee held acreage in the Uinta basins prolific Greater Natural Buttes gas play. In addition to its U.S. portfolio, Kerr-McGee produces oil and is continuing to develop and explore offshore China, has made discoveries offshore Brazil, and is exploring West Africa and the islands of Trinidad and Tobago.
Western Transaction On August 23, 2006, Anadarko completed the acquisition of Western for $4.8 billion, or $61.00 per share, plus the assumption of $625 million of debt.
Westerns CBM properties within the Powder River basin are directly adjacent to Anadarkos assets in this developing play. Anadarko believes that combining its properties with Westerns accelerated the development of these natural gas resources and will produce volume growth through the end of the decade, and possibly longer, with more than 12,000 identified drilling locations in inventory. The acquisition of Western also significantly increased the Companys holdings in gathering and processing systems.
Divestitures As a result of a portfolio refocusing effort stemming from the acquisitions of Kerr-McGee and Western, Anadarko divested certain properties during 2007 and 2006 for approximately $17 billion before income taxes. Net proceeds from these divestitures were used to retire debt.
During 2006, Anadarko sold its wholly-owned subsidiary, Anadarko Canada Corporation, for approximately $4 billion before taxes. See Discontinued Operations. On the acquisition date, Kerr-McGees other assets included approximately $1 billion of assets held for sale. The sale of these assets closed in August 2006 and the proceeds were also used to pay down debt incurred to fund the acquisitions.
During 2007, the Company closed several unrelated divestiture transactions representing approximately $11 billion before income taxes. The most significant of these transactions are discussed below.
In January 2007, the Company sold its interests in the Knotty Head and Big Foot oil discoveries, as well as the Big Foot North prospect in the Gulf of Mexico, for $0.9 billion. During February 2007, Anadarko also closed the sale of its Genghis Khan discovery in the deepwater Gulf of Mexico for $1.3 billion. In March 2007, Anadarko divested control of its interests in 28 Permian basin oil and gas fields in West Texas for $1.0 billion (see Off-Balance Sheet Arrangements), sold its Vernon and Ansley fields located in Jackson Parish, Louisiana, for $1.5 billion and sold substantially all of its interests in the Elk basin and Gooseberry area of the Northern Rockies for $0.4 billion.
In April 2007, Anadarko sold its interests in the Williston basin area of the Northern Rockies for $0.4 billion. In May 2007, Anadarko sold its interests in certain natural gas properties in Oklahoma and Texas for $0.9 billion and also sold a 23% working interest in the K2 Unit in the Gulf of Mexico for $1.2 billion. Anadarko remains the K2 Unit operator with a 42% working interest. In June 2007, Anadarko sold certain of its interests in the Austin Chalk play in central and east Texas for $0.8 billion.
In July 2007, the Company divested control of its interests in the Chaney Dell and Midkiff/Benedum natural gas gathering systems and associated processing plants for $1.9 billion (see Off-Balance Sheet Arrangements below).
In October 2007, the Company divested certain interests in Qatar for approximately $350 million.
In 2008, the Company divested certain oil and gas properties, primarily in Brazil, onshore in the United States and the Gulf of Mexico for approximately $2.5 billion. Proceeds from divestitures in 2008 were used to reduce debt.
In April 2008, Anadarko entered into an agreement to sell a wholly-owned subsidiary, which owns an 18% interest in Petroritupano, S.A. (Petroritupano), a Venezuelan mixed company whose other shareholders are Petróleos de Venezuela, S.A. (PDVSA) and Petrobras Energía, S.A., for $200 million. The closing of this transaction was subject to customary closing conditions, including receipt of approvals by Venezuelan authorities. Anadarko has been informed by the Venezuelan Ministry of Energy and Petroleum that it will not grant approval of the sale transaction because PDVSA intends to acquire Anadarkos equity interest in Petroritupano. Anadarko has subsequently received a letter from Corporacion Venezolana del Petroleo, S.A. (CVP), an affiliate of PDVSA, in which CVP states its interest in acquiring Anadarkos equity interest in Petroritupano. At this time, Anadarko is unable to determine when the sale to CVP may be consummated. Anadarkos investment in Petroritupano is included in other assets at December 31, 2008.
For additional information, see Note 2Acquisitions, Divestitures and Other under Item 8 of this Form 10-K.
Proved Reserves Anadarko focuses on growth and profitability. Reserve replacement is a key to growth. Future profitability depends partially upon the cost of finding and developing oil and gas reserves, among other factors. Reserve growth can be achieved through successful exploration and development drilling, improved recovery or acquisition of producing properties.
In conjunction with the August 2006 acquisition of Kerr-McGee and Western, Anadarko implemented an asset realignment program. The goal of the Kerr-McGee and Western acquisitions was to provide a more economically efficient platform with higher and more consistent growth potential, with the intent of divesting properties that were no longer deemed to be core to Anadarkos operations. During 2007, the Company successfully completed the majority of the divestiture stage of the realignment program. As expected, Anadarkos proved reserves at the end of 2007 were about equal to levels before the acquisitions.
The following discussion of proved reserves, reserve additions and revisions and future net cash flows from proved reserves includes both continuing and discontinued operations. A breakdown of reserve information by continuing and discontinued operations is contained in the Supplemental Information under Item 8 of this Form 10-K.
The Companys proved natural gas reserves at year-end 2008 were 8.1 Tcf compared to 8.5 Tcf at year-end 2007 and 10.5 Tcf at year-end 2006. Anadarkos proved crude oil, condensate and NGLs reserves at year-end 2008 were 0.9 billion barrels compared to 1.0 billion barrels at year-end 2007 and 1.3 billion barrels at year-end 2006. Crude oil, condensate and NGLs comprised about 41%, 42% and 42% of the Companys proved reserves at year-end 2008, 2007 and 2006 respectively.
The Companys estimates of proved reserves are made using available geological and reservoir data as well as production performance data. These estimates, made by the Companys engineers, are reviewed annually and revised, either upward or downward, as warranted by additional data. The available data reviewed include, among other things, seismic data, structure and isopach maps, well logs, production tests, material balance calculations, reservoir simulation models, reservoir pressures, individual well and field performance data, individual well and field projections, offset performance data, operating expenses, capital costs and product prices. Revisions are necessary due to changes in, among other things, reservoir performance, prices, economic conditions and governmental restrictions, as well as changes in the expected recovery rates associated with infill drilling. Sustained decreases in prices, for example, may cause a reduction in some proved reserves due to reaching economic limits sooner.
Reserve Additions and Revisions During 2008, the Company added 188 MMBOE of proved reserves as a result of additions (purchases in place, discoveries, improved recovery and extensions) and revisions. The Company expects the majority of future reserve adds to come from positive revisions associated with infill drilling and extensions of current fields and new discoveries onshore in North America and the deepwaters of the Gulf of Mexico, as well as through improved recovery operations, purchases of proved properties in strategic areas and successful exploration in international growth areas. The success of these operations will directly impact reserve additions or revisions in the future.
Additions During 2008, Anadarko added 102 MMBOE of proved reserves primarily as the result of successful drilling in the Rockies and developments and appraisals in the deepwater Gulf of Mexico. During 2007, Anadarko added 131 MMBOE of proved reserves. Of this amount, 130 MMBOE were as a result of successful drilling in CBM and conventional plays of the Rockies and the initial recognition of proved reserves at the Peregrino field in Brazil. During 2006, Anadarko added 1,118 MMBOE of proved reserves. Of this amount, 1,030 MMBOE were related to purchases in place primarily associated with the acquisitions of Kerr-McGee and Western in August 2006. In addition, the Company added 88 MMBOE of proved reserves primarily as a result of successful drilling in core areas onshore in the United States.
Revisions Total revisions in 2008 were 86 MMBOE or 3.5% of the beginning of year reserve base. The revisions included an increase of 188 MMBOE primarily related to the large onshore natural gas plays, such as the Greater Natural Buttes, Wattenberg and Pinedale fields, as a result of successful infill drilling, in addition to positive revisions to the Peregrino heavy-oil field, offshore Brazil, which was sold in 2008, partially offset by a decrease of 102 MMBOE related to prices for oil and NGLs. Total revisions for 2007 were 121 MMBOE. Revisions in 2007 related primarily to the large onshore natural gas plays such as Greater Natural Buttes, Wattenberg, and Pinedale and Jonah fields, where the reserve bookings for the infill wells are treated as a positive revision, and the increase in oil and natural gas prices. Total revisions for 2006 were (75) MMBOE. Revisions in 2006 related primarily to performance revisions of (136) MMBOE mainly due to downward revisions of the Companys reserves at the K2 complex in the Gulf of Mexico and adjustments in Algeria, and price revisions of (99) MMBOE primarily due to a significant decrease in natural gas prices since the end of 2005, partially offset by additional infill drilling reserve bookings of 160 MMBOE.
Sales in Place During 2008, the Company sold properties located in the United States and Brazil representing 46 MMBOE and 91 MMBOE of proved reserves, respectively. In 2007, the Company sold properties located in the United States and Qatar representing 609 MMBOE and 11 MMBOE of proved reserves, respectively. In 2006, the Company sold properties located in Canada representing 248 MMBOE of proved reserves. In addition, sales in place included 39 MMBOE of proved reserves related to government imposed contract changes which resulted in the Companys Venezuelan properties being exchanged for an equity interest in a new Venezuela operating entity.
Future Net Cash Flows At December 31, 2008, the present value (discounted at 10%) of future net cash flows from Anadarkos proved reserves was $12.0 billion (stated in accordance with the regulations of the SEC and the Financial Accounting Standards Board (FASB)). This present value was calculated based on prices at year-end
held flat for the life of the reserves, adjusted for any contractual provisions. The decrease of $16.9 billion or 59% in 2008 compared to 2007 is primarily due to lower commodity prices at year-end 2008. See Supplemental Information under Item 8 of this Form 10-K.
The present value of future net cash flows does not purport to be an estimate of the fair market value of Anadarkos proved reserves. An estimate of fair value would also take into account, among other things, anticipated changes in future prices and costs, the expected recovery of reserves in excess of proved reserves and a discount factor more representative of the time value of money and the risks inherent in producing oil and gas.
Anadarko invests in midstream (gathering, treating and processing) facilities to complement its oil and gas operations in regions where the Company has natural gas production. The Company is better able to control the timing of development of its oil and gas properties and manage both the value received for, and cost of, gathering, treating and processing natural gas through its ownership and operation of these facilities. In addition, Anadarkos midstream business provides gathering, treating and processing services for third-party customers, including major and independent producers. Anadarko generates revenues in its gathering and processing activities through various fee structures that include fixed-rate, percent of proceeds, or keep-whole agreements. The Company also processes a portion of its gas at various third-party plants.
In 2006, Anadarko significantly increased the size and scope of its midstream business through the acquisitions of Western and Kerr-McGee. Anadarko has 29 systems in seven states (Wyoming, Colorado, Utah, New Mexico, Kansas, Oklahoma and Texas) located in major producing basins of the onshore United States.
In December 2007, a midstream subsidiary issued a $2.2 billion note payable to a related party. At December 31, 2008, the midstream note payable to a related party had an outstanding balance of $1.7 billion, which is guaranteed by Anadarko. See Note 10Debt and Interest Expense of the Notes to Consolidated Financial Statements under Item 8 and Debt below for additional information.
During the second quarter of 2008, WES completed its initial public offering of 20.8 million common units for net proceeds of $321 million ($343 million less $22 million for underwriting discounts and structuring fees). WES is a Delaware limited partnership formed by Anadarko to own, operate, acquire and develop midstream assets. Anadarko contributed assets to WES in exchange for an aggregate 59.6% limited partner interest (consisting of common and subordinated limited partner units) in WES, a 2% general partner interest and IDRs. IDRs entitle the holder to specified increasing percentages of cash distributions as WESs per-unit cash distributions increase. In addition, Anadarko maintains control over the assets owned by WES through sole indirect ownership of the general partner interests. Proceeds from the initial public offering were used to reduce debt.
On December 19, 2008, WES acquired additional midstream assets from Anadarko for aggregate consideration of $210 million, consisting of a $175 million note payable to Anadarko and the issuance of 2.6 million common units of WES to Anadarko. In addition, WES issued additional general partner units to its general partner, a wholly-owned subsidiary of Anadarko, to allow it to maintain its 2% general partner interest in WES after contribution by Anadarko of its 2% undivided interest in the midstream assets. Anadarko currently holds an aggregate 61.3% limited partner interest in WES.
The Companys marketing department actively manages sales of its natural gas, crude oil and NGLs. The Companys sales of natural gas, crude oil, condensate and NGLs are generally made at the market prices of those products at the time of sale. In 2008, the Company also engaged in sales of greenhouse gas ERCs derived from CO2 injection operations in Wyoming. The Company expects additional sales of ERCs in the future.
The Company also purchases natural gas, crude oil, condensate and NGLs volumes for resale primarily from partners and producers near Anadarkos production. These purchases allow Anadarko to aggregate larger volumes, fully utilize transportation capacity, attract larger, creditworthy customers and facilitate its efforts to maximize prices received for the Companys production and minimize balancing issues with customers and pipelines during operational disruptions.
The Company may also engage in trading activities for the purpose of generating profits from exposure to changes in market prices of natural gas, crude oil, condensate and NGLs. The Company does not engage in market-making practices and limits its trading activities to natural gas, crude oil and NGLs commodity contracts. The Companys trading risk position, typically, is a net short position that is offset by the Companys natural long position as a producer. See Energy Price Risk under Item 7A of this Form 10-K.
In an effort to protect the Company from commodity price risk stemming from the 2006 acquisitions, the Company entered into derivatives covering 72% and 55% of the acquired companies then expected production volumes for 2007 and 2008, respectively. This price risk management program employed collars and other derivatives intended to help ensure a return on investment while maintaining upside potential that could result from higher commodity prices. In the past year, almost all segments of the global economy have experienced a downturn. This downturn, along with the commodity price volatility, have made the creditworthiness, liquidity and financial position of the Companys counterparties increasingly difficult to evaluate. For this reason, the Company has placed an increased emphasis on the monitoring of counterparty risk. Although Anadarko has not experienced any material financial losses associated with credit deterioration of third parties, in certain situations the Company has declined to transact with some counterparties and changed its sales terms to require some counterparties to pay in advance or post letters of credit for purchases.
Natural Gas Natural gas continues to fulfill a significant portion of North Americas energy needs and the Company believes the importance of natural gas in meeting this energy need will continue. Natural gas prices have varied over the last year, with the first three quarters of the year averaging higher than corresponding quarters in 2007 and a year-on-year decrease in the last quarter of 2008. Price volatility persists due to an increase in supply stemming principally from unconventional gas coupled with a decrease in domestic industrial demand. Anadarko markets its natural gas production to maximize the commodity value and reduce the inherent risks of the physical commodity markets. Anadarko Energy Services Company, a wholly-owned subsidiary of Anadarko, is a marketing company offering supply assurance, competitive pricing, risk management and other services tailored to its customers needs. The Company sells natural gas under a variety of contracts and may also receive a service fee related to the level of reliability and service required by the customer. The Company has the marketing capability to move large volumes of gas into and out of the daily gas market to take advantage of any price volatility.
The Company owns a significant amount of natural gas firm transportation capacity that is used to help ensure access to downstream markets which increases the ability to produce the Companys natural gas. This transportation capacity also provides the opportunity to capture incremental value when pricing differentials between physical locations occur. The Company also stores some of its purchased natural gas in contracted storage facilities with the intent of selling the gas at a higher price in the future. Normally, the Company will have forward contracts in place (physical delivery or financial derivative instruments) to sell the stored gas at a fixed price. The Company also utilizes these storage facilities to minimize operational disruptions to its ongoing operations.
Crude Oil, Condensate and NGLs Anadarkos crude oil, condensate and NGLs revenues are derived from production in the United States (U.S.), Algeria, China and other international areas. Most of the Companys U.S. crude oil and NGLs production is sold under contracts with prices based on market indices, adjusted for location, quality and transportation. Oil from Algeria is sold by tanker as Saharan Blend to customers primarily in the Mediterranean area. Saharan Blend is a high quality crude that provides refiners large quantities of premium products such as jet and diesel fuel. Oil from China is sold by tanker as Cao Fei Dian (CFD Blend) to customers primarily in the Far East markets. CFD Blend is a heavy sour crude oil which is sold into both the prime fuels refining market and the heavy fuel oil blend stock market. The Company also purchases and sells third-party produced crude oil, condensate and NGLs in the Companys domestic and international market areas. Included in this strategy is the use of contracted NGLs storage facilities. The Company utilizes this storage to capture market opportunities and to help minimize fractionation and downstream infrastructure disruptions.
Liquidity and Capital Resources
Overview Anadarkos primary sources of cash during 2008 were cash flow from operating activities, proceeds from divestitures and the initial public offering of WES. The Company used cash primarily to fund Anadarkos capital spending program, retire debt, pay income taxes, repurchase Anadarko common stock, pay dividends and redeem preferred stock. Anadarkos primary sources of cash during 2007 were divestiture transactions, cash flow from operating activities and proceeds from the midstream subsidiary note to a related party. The Company used cash primarily to retire debt, fund Anadarkos capital spending program and pay income taxes and dividends. Anadarkos primary sources of cash during 2006 were the issuance of debt, cash flow from operating activities and divestitures. During 2006, the Company used cash primarily to fund the acquisitions of Kerr-McGee and Western, fund its capital spending program, repurchase Anadarko common stock, pay dividends and retire debt as well as preferred stock.
The downturn in the global economy, along with the turmoil in the financial markets and reduced availability to capital, have increased the importance of maintaining ample liquidity. The pace with which the downturn has occurred made the evaluation of the Companys lenders creditworthiness, liquidity and financial position increasingly difficult. For this reason, the Company has increased its diligence in monitoring its lenders funding capabilities. The Company has in place a $1.3 billion RCA and as of December 31, 2008, the Company had no outstanding borrowings under its RCA. The Company may choose to refinance certain portions of its short-term borrowings by issuing long-term debt in the public or private debt markets. To facilitate such financings, the Company may sell securities under its shelf registration statement filed with the SEC in September 2006.
The Company continuously monitors its debt position and coordinates its capital expenditure program with expected cash flows and projected debt repayment schedules. The Company will continue to evaluate funding alternatives, including property divestitures and additional borrowings, to secure funds when needed.
Following is a discussion of significant sources and uses of cash flows during the period. Forward-looking information related to the Companys liquidity and capital resources are discussed in Outlook that follows.
Sources of Cash
Cash Flow from Operating Activities Anadarkos cash flow from continuing operating activities in 2008 was $6.4 billion compared to $2.8 billion in 2007 and $4.7 billion in 2006. The increase in 2008 cash flow was attributed to higher commodity prices and lower estimated income tax payments in 2008 compared to 2007 primarily related to the 2007 divestitures, partially offset by the effect of lower sales volumes primarily associated with the 2007 divestitures, and realized derivative losses in 2008. The decrease in 2007 cash flow from continuing operations compared to 2006 was attributed to the impact of income taxes on divestitures and higher costs and expenses, partially offset by the impact of higher sales volumes associated with the acquisitions.
Excluding the impact of acquisitions and divestitures, fluctuations in commodity prices have been the primary reason for the Companys short-term changes in cash flow from operating activities. Anadarko holds derivative instruments to help manage commodity price risk. Sales volume changes can also impact cash flow in the short-term, but have not been as volatile as commodity prices in prior years. Anadarkos long-term cash flow from operating activities is dependent on commodity prices, reserve replacement, the level of costs and expenses required for continued operations and the level of acquisition and divestiture activity.
Divestitures In 2008, Anadarko received proceeds of $2.5 billion from divestitures of certain oil and gas properties primarily in Brazil, onshore in the United States and the Gulf of Mexico. Proceeds from divestitures in 2008 were used to reduce debt. During 2007, Anadarko received proceeds of $11.1 billion from its divestiture program. Proceeds from the divestitures in 2007 were used to reduce debt and pay income taxes on taxable gains associated with the divestitures. See Acquisitions and Divestitures.
Master Limited Partnership Initial Public Offering During the second quarter of 2008, WES completed its initial public offering of 20.8 million common units for net proceeds of $321 million. WES is a Delaware limited partnership formed by Anadarko to own, operate, acquire and develop midstream assets. See Note 3-Minority Interests under Part II, Item 8 of this Form 10-K. Proceeds from the offering were used to reduce debt.
Pursuant to the terms of its partnership agreement, WES is required to pay a minimum quarterly distribution of $0.30 per unit to the extent it has sufficient cash available for distribution. During the third quarter of 2008, WES paid a prorated quarterly cash distribution of $0.1582 per unit for the second quarter of 2008, which corresponds to a quarterly distribution of $0.30 per unit on a full quarter basis. In the fourth quarter of 2008, WES paid a quarterly cash distribution of $0.30 per unit for the third quarter of 2008. On January 28, 2009, WES declared a quarterly cash distribution of $0.30 per unit for the fourth quarter of 2008 to be paid on February 13, 2009.
On December 19, 2008, WES acquired additional midstream assets from Anadarko for aggregate consideration of $210 million, consisting of a $175 million note payable to Anadarko and the issuance of 2.6 million common units of WES to Anadarko. In addition, WES issued additional general partner units to its general partner, a wholly-owned subsidiary of Anadarko, to allow it to maintain its 2% general partner interest in WES after contribution by Anadarko of its 2% undivided interest in the midstream assets. Anadarko currently holds an aggregate 61.3% limited partner interest in WES.
Margin Deposits The Company is required to provide margin deposits whenever its unrealized losses on derivative transactions with a counterparty exceed predetermined credit limits, and in some cases only until negotiated maximum limits are reached. Both exchange and over-the-counter traded derivative instruments may be subject to margin deposit requirements. Given the Companys price risk management position and price volatility, the Company may be required from time to time to deposit cash with or provide letters of credit to its counterparties in order to satisfy these deposit requirements. The Company manages its exposure to margin requirements through negotiated credit arrangements with counterparties, which may include collateral caps. If credit thresholds are exceeded, the Company utilizes available cash or letters of credit to satisfy margin requirements and maintains ample available committed credit facilities to meet its obligations. The Companys current derivative positions continue to ratably settle such that the Companys working capital along with its RCA could withstand margin calls resulting from a significant increase in commodity prices. The Company had net margin deposits (cash collateral) of $7 million and $51 million outstanding at December 31, 2008 and 2007, respectively. See Note 1Summary of Significant Accounting Policies and Note 8Derivative Instruments of the Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Uses of Cash
Capital Expenditures The following table shows the Companys capital expenditures relating to continuing operations by category.