5. OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT

Proved Properties

We review our oil and natural gas producing properties for impairment whenever events or changes in circumstances indicate that the carrying amount of such properties may not be recoverable. When it is determined that an oil and natural gas property’s estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge is recorded to reduce the carrying amount of the asset to its estimated fair value.

Declining forecasted oil prices throughout 2015 caused us to perform impairment reviews of our proved properties in each quarter of 2015 for the five fields comprising the Etame Marin block offshore Gabon and the Hefley field in North Texas. The impairment evaluations in each quarter used the most recently prepared independent prepared reserve report adjusted as necessary for reserve revisions based on drilling and production results and for the forward price curves near each quarter end. The discounted cash flow measurement model relies primarily on Level 3 inputs. Impairment was indicated for all fields in the Etame Marin block, as well as the Hefley field, primarily as a result of lower forecasted oil prices, as well as higher costs for planned development wells used in the impairment evaluation. 

For the Etame Marin fields, we recorded an aggregate impairment charge of $78.1 million for 2015, reducing the aggregate carrying value of these fields to an aggregate fair value of $12.7 million. The aggregate impairment includes $7.0 million to correct an error related to the impairment calculations of 2014 which were understated as discussed in Note 3. For the U.S. fields, we recorded an impairment charge of $3.2 million for 2015 reducing the aggregate carrying value of the field to $1.2 million.

The substantial decline in oil prices that began in the third quarter of 2014, triggered an impairment review at December 2014. Accordingly, impairment testing was performed using the year end 2014 independently prepared reserve report. The measurement of these assets at fair value was calculated using a discounted cash flow model based on estimates of future revenues and costs associated with the fields of the Etame Marin block. Significant Level 3 assumptions associated with the calculation of discounted cash flows used in the impairment analysis include our estimate of future crude oil and natural gas prices, production costs, and anticipated production of proved reserves, appropriate risk-adjusted discount rates and other relevant data. For crude oil, estimates were based on NYMEX Brent Ice Intermediate prices, adjusted for quality, transportation fees, and market differential. An aggregate impairment loss of $98.3 million was recorded in 2014 to write down Etame, Ebouri, Southeast Etame and North Tchibala fields to their fair value of $41.1 million. No proved property impairment charge was recorded in 2013.

Undeveloped Leasehold Costs

The continued depressed oil prices, the duration of our partner’s default, our lack of success to-date in farming-down our interest in Angola Block 5 and our current liquidity are preventing us from pursuing the project without a partner; therefore, we are recording a full impairment totaling $8.2 million of our undeveloped leasehold costs to exploration expense in the fourth quarter of 2015. In the first quarter of 2015, we recorded an impairment of $2.8 million of undeveloped leasehold costs in connection with the determination that the Kindele #1 was a dry hole.

In September 2011, we acquired an interest in the Middle Bakken and deeper formations in the East Poplar unit and the Northwest Poplar field in Roosevelt County, Montana. Exploratory drilling required by terms of the acquisition was unsuccessful. As of December 31, 2014, approximately $1.2 million in value remained for the undeveloped leasehold. Due to the sustained low oil prices and forward oil prices, we charged the full value to exploration expense in 2015.

Capitalized Exploratory Well Costs

The following table provides information about exploratory well costs capitalized pending the determination of proved reserves as of December 31, 2015, 2014 and 2013.

 

At December 31, 2014, the drilling costs of the N’Gongui No. 2 discovery that was drilled in the third and fourth quarters of 2012 in the Mutamba Iroru block onshore Gabon were capitalized pending the determination of proved reserves.

Since the discovery, we performed quarterly evaluations of the capitalized exploratory well costs for the N’Gongui No. 2 discovery to determine whether sufficient progress had been made towards development, as well as the economic and operational viability of the project. The evaluation of economic viability takes into account a number of factors, including alternative development scenarios, estimated reserves, projected drilling and development costs and projected oil price data. As a result of lower projected oil price data at September 30, 2015, the results from the economic modeling indicated that the costs for this well did not continue to meet the criteria for suspended well costs. Accordingly, all capitalized costs related to the project, including capitalized exploratory well costs were charged to exploration expense in the third quarter of 2015.

Capitalized Equipment Inventory

Capitalized equipment inventory located in Gabon and Angola was impaired in 2015. Our lack of success to-date in farming down our interest in Block 5 offshore Angola and our current liquidity is preventing us from pursuing the project without a partner; therefore, the $1.9 million in equipment inventory was written off. Equipment inventory in Gabon related to Mutamba was also written off because further drilling in the prospect is uneconomic, while equipment inventory related to the Etame Marin block was reduced in value due to obsolescence of some items.