| APACHE CORP ITEM 1A RISK FACTORS Our business activities and the value of our securities are subject to significant hazards and risks, including those described below |
| If any of such events should occur, our business, financial condition, liquidity and/or results of operations could be materially harmed, and holders and purchasers of our securities could lose part or all of their investments |
| Additional risks relating to our securities may be included in the prospectuses for securities we issue in the future |
| Our Profitability is Highly Dependent on the Prices of Crude Oil, Natural Gas and Natural Gas Liquids, Which Have Historically Been Very Volatile Our estimated proved reserves, revenues, profitability, operating cash flows and future rate of growth are highly dependent on the prices of crude oil, natural gas and NGLs, which are affected by numerous factors beyond our control |
| Historically, these prices have been very volatile |
| A significant downward trend in commodity prices would have a material adverse effect on our revenues, profitability and cash flow, and could result in a reduction in the carrying value of our oil and gas properties and the amounts of our estimated proved oil and gas reserves |
| Our Commodity Hedging May Prevent Us From Benefiting Fully From Price Increases and May Expose Us to Other Risks To the extent that we engage in hedging activities to protect ourselves from commodity price volatility, we may be prevented from realizing the benefits of price increases above the levels of the hedges |
| Acquisitions or Discoveries of Additional Reserves are Needed to Avoid a Material Decline in Reserves and Production The rate of production from oil and gas properties generally declines as reserves are depleted |
| Except to the extent that we acquire additional properties containing estimated proved reserves, conduct successful 13 _________________________________________________________________ [68]Table of Contents exploration and development activities or, through engineering studies, identify additional behind-pipe zones, secondary recovery reserves or tertiary recovery reserves, our estimated proved reserves will decline materially as reserves are produced |
| Future oil and gas production is, therefore, highly dependent upon our level of success in acquiring or finding additional reserves |
| Our Drilling Activities May Not Be Productive Drilling for oil and 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, but not limited to: • unexpected drilling conditions; • pressure or irregularities in formations; • equipment failures or accidents; • fires, explosions, blowouts and surface cratering; • marine risks such as capsizing, collisions and hurricanes; • other adverse weather conditions; and • shortages or delays in the delivery of equipment |
| Certain 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 |
| Risks Arising From the Failure to Fully Identify Potential Problems Related to Acquired Reserves or to Properly Estimate Those Reserves One of our primary growth strategies is the acquisition of oil and gas properties |
| Although we perform a review of the acquired properties that we believe is consistent with industry practices, such reviews are inherently incomplete |
| It generally is not feasible to review in depth every individual property involved in each acquisition |
| Ordinarily, we will focus our review efforts on the higher-value properties and will sample the remainder |
| However, even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential |
| Inspections may not always be performed on every well, and environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken |
| Even when problems are identified, we often assume certain environmental and other risks and liabilities in connection with acquired properties |
| There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and actual future production rates and associated costs with respect to acquired properties, and actual results may vary substantially from those assumed in the estimates |
| In addition, there can be no assurance that acquisitions will not have an adverse effect upon our operating results, particularly during the periods in which the operations of acquired businesses are being integrated into our ongoing operations |
| We Are Subject to Domestic 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 and local laws and regulations such as restrictions on production, changes in taxes, royalties and other amounts payable to governments or governmental agencies, price controls and environmental protection laws and regulations |
| 14 _________________________________________________________________ [69]Table of Contents Global Political and Economic Developments May Impact Our Operations Political and economic factors in international markets may have a material adverse effect on our operations |
| On an equivalent-barrel basis, approximately 62 percent of our oil, NGLs and natural gas production in 2005 was outside the United States, and approximately 58 percent of our estimated proved oil and gas reserves on December 31, 2005 were located outside of the United States |
| There are many risks associated with operations in international markets, including changes in foreign governmental policies relating to crude oil, NGLs, and natural gas pricing and taxation, other political, economic or diplomatic developments, changing political conditions and international monetary fluctuations |
| These risks include: political and economic instability or war; the possibility that a foreign government may seize our property with or without compensation; confiscatory taxation; legal proceedings and claims arising from our foreign investments or operations; a foreign government attempting to renegotiate or revoke existing contractual arrangements, or failing to extend or renew such arrangements; fluctuating currency values and currency controls; and constrained natural gas markets dependent on demand in a single or limited geographical area |
| On December 23, 2004, Apache entered into a 20-year insurance contract with the Overseas Private Investment Corporation (OPIC) which provides dlra300 million of political risk insurance for the Company’s Egyptian operations |
| This policy insures us against (1) non-payment by EGPC of arbitral awards covering amounts owed Apache on past due invoices and (2) expropriation of exportable petroleum when actions taken by the Government of Egypt prevent Apache from exporting our share of production |
| See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates, Allowance for Doubtful Accounts” in this Form 10-K for additional discussion of our Egyptian receivables |
| Actions of the United States government through tax and other legislation, executive order and commercial restrictions can adversely affect our operating profitability in the US as well as other countries |
| Various agencies of the United States and other governments have, from time to time, imposed restrictions which have limited our ability to gain attractive opportunities or even operate in various countries |
| These restrictions have in the past limited our foreign opportunities and may continue to do so in the future |
| Weather and Climate May Have a Significant Impact on Our Revenues and Productivity Demand for oil and natural gas are, to a significant degree, dependent on weather and climate, which impacts the price we receive for the commodities we produce |
| In addition, our exploration and development activities and equipment can be adversely affected by severe weather, such as hurricanes in the Gulf of Mexico, which may cause a loss of production from temporary cessation of activity or lost or damaged equipment |
| While our planning for normal climatic variation, insurance program, and emergency recovery plans mitigate the effects of the weather, not all such effects can be predicted, eliminated or insured against |
| Costs Incurred Related to Environmental Matters We, as an owner or lessee and operator of oil and gas properties, are subject to various federal, provincial, state, local and foreign country laws and regulations relating to discharge of materials into, and protection of the environment |
| These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations, subject the lessee to liability for pollution damages, and require suspension or cessation of operations in affected areas |
| We have made and will continue to make expenditures in our efforts to comply with these requirements, which we believe are necessary business costs in the oil and gas industry |
| We have established policies for continuing compliance with environmental laws and regulations, including regulations applicable to our operations in all countries in which we do business |
| We also have established operational procedures and training programs designed to minimize the environmental impact of our field facilities |
| The costs incurred by these policies and procedures are inextricably connected to normal operating expenses such that we are unable 15 _________________________________________________________________ [70]Table of Contents to separate the expenses related to environmental matters; however, we do not believe any such additional expenses are material to our financial position or results of operations |
| Apache manages its exposure to environmental liabilities on properties to be acquired by identifying existing problems and assessing the potential liability |
| The Company also conducts periodic reviews, on a company-wide basis, to identify changes in its environmental risk profile |
| These reviews evaluate whether there is a probable liability, its amount, and the likelihood that the liability will be incurred |
| The amount of any potential liability is determined by considering, among other matters, incremental direct costs of any likely remediation and the proportionate cost of our employees who are expected to devote a significant amount of time to any possible remediation effort |
| Our general policy is to limit any reserve additions to incidents or sites that are considered probable to result in an expected remediation cost exceeding dlra100cmam000 |
| In October 2003, Apache was issued a Findings of Violation and Order for Compliance (an “Administrative Order”) by the United States Environmental Protection Agency (EPA), which cited certain paperwork administrative errors and effluent violations reported by Apache during the period May 1, 1998 to June 30, 2003, as part of our offshore discharge permit monitoring |
| Apache signed a Consent Agreement and Final Order (CAFO) to pay a monetary penalty of dlra21cmam000 and undertake a Supplemental Environmental Project (SEP) with an estimated cost of dlra94cmam500 |
| The SEP Project was completed and certified on June 5, 2005, at which time we paid the amount of the penalty |
| We maintain insurance coverage, which we believe is customary in the industry, although we are not fully insured against all environmental risks |
| As described in Note 10, Commitments and Contingencies of Item 15, in this Form 10-K, on December 31, 2005, we had an accrued liability of dlra11dtta8 million for environmental remediation |
| We have not incurred any material environmental remediation costs in any of the periods presented and we are not aware of any future environmental remediation matters that would be material to our financial position or results of operations |
| Although environmental requirements have a substantial impact upon the energy industry, generally these requirements do not appear to affect us any differently, or to any greater or lesser extent, than other upstream companies in the industry |
| We do not believe that compliance with federal, provincial, state, local or foreign country provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have a material adverse effect upon the capital expenditures, earnings or competitive position of Apache or its subsidiaries; however, there is no assurance that changes in or additions to laws or regulations regarding the protection of the environment will not have such an impact |
| Industry Competition Strong competition exists in all sectors of the oil and gas exploration and production industry |
| We compete with major integrated and other independent oil and gas companies for acquisition of oil and gas leases, properties and reserves, equipment and labor required to explore, develop and operate those properties and the marketing of oil and natural gas production |
| Higher recent crude oil and natural gas prices have increased the costs of properties available for acquisition and there are a greater number of companies with the financial resources to pursue acquisition opportunities |
| Many of our competitors have financial and other resources substantially larger than those we possess and have established strategic long-term positions and maintain strong governmental relationships in countries in which we may seek new entry |
| As a consequence, we may be at a competitive disadvantage in bidding for drilling rights |
| In addition, many of our larger competitors may have a competitive advantage when responding to factors that affect demand for oil and natural gas production, such as changing worldwide prices and levels of production, the cost and availability of alternative fuels and the application of government regulations |
| We also compete in attracting and retaining personnel, including geologists, geo-physicists, engineers and other specialists |
| Insurance Does Not Cover All Risks Exploration for and production of oil and natural gas can be hazardous, involving unforeseen occurrences such as blowouts, cratering, fires and loss of well control, which can result in damage to or destruction of wells or production facilities, injury to persons, loss of life, or damage to property or the environment |
| We maintain 16 _________________________________________________________________ [71]Table of Contents insurance against certain losses or liabilities arising from our operations in accordance with customary industry practices and in amounts that management believes to be prudent; however, insurance is not available to us against all operational risks |
| In response to large underwriting losses caused by Hurricanes Katrina and Rita, the insurance industry has reduced capacity for windstorm damage and substantially increased premium rates |
| As a result, there is no assurance that Apache will be able to arrange insurance to cover fully its Gulf of Mexico exposures at a reasonable cost when the current policies expire |
| Investors In Our Securities May Encounter Difficulties in Obtaining, Or May Be Unable To Obtain, Recoveries From Arthur Andersen With Respect To Its Audits Of Our Financial Statements On March 14, 2002, our previous independent public accountant, Arthur Andersen LLP (Arthur Andersen), was indicted on federal obstruction of justice charges arising from the federal government’s investigation of Enron Corp |
| On June 15, 2002, a jury returned with a guilty verdict against Arthur Andersen following a trial, though the conviction was later overturned by the United States Supreme Court |
| As a public company, we are required to file with the SEC periodic financial statements audited or reviewed by an independent public accountant |
| On March 29, 2002, we decided not to engage Arthur Andersen as our independent auditors, and engaged Ernst & Young LLP (Ernst & Young) to serve as our new independent auditors for 2002 |
| Ernst & Young have served as our independent public accountants since that time |
| However, included in this annual report on Form 10-K are financial data and other information for 2001 that were audited by Arthur Andersen |
| Investors in our securities may encounter difficulties in obtaining, or be unable to obtain, from Arthur Andersen with respect to its audits of our financial statements, relief that may be available to investors under the federal securities laws against auditing firms |