JPMorgan - KASE

location and condition. Net realizable value represents the estimated selling price less all
estimated costs to completion and costs to be incurred in marketing, selling and distribution.
Capital assets
a) Petroleum and natural gas properties
Hurricane follows the full cost method of accounting for oil and gas operations whereby all
exploration and development expenditures are capitalized. Such expenditures include land
acquisition costs, geological and geophysical expenses, carrying charges for unproved properties,
costs of drilling both productive and nonproductive wells, gathering and production facilities and
equipment and overhead expenses related to exploration and development activities. Proceeds
from sales of oil and gas properties are recorded as reductions of capitalized costs, unless the cost
centre’s depreciation and depletion rate would change by a factor of 20% or more, whereupon
gains or losses are recognized as income. Maintenance and repair costs are expensed as incurred,
while improvements and major renovations to assets are capitalized.
Costs accumulated within each cost centre, including provision for future site restoration
expenditures, are depleted using the unit-of-production method based upon estimated proved
developed reserves before royalties. Significant development projects and expenditures on
exploration properties are excluded from the depletion calculation prior to assessment of the
existence of proved reserves. Costs for unproved properties and major developments are
evaluated periodically for impairment.
Capitalized costs are subject to a cost recovery test (the “ceiling test”). Under this test, costs
accumulated are limited to the estimate of future undiscounted net revenues from production of
estimated proved developed reserves at prices and costs in effect at the year end, plus the cost of
major developments and unproved developed properties less any impairment of such costs, and
less estimated future interest expense, administrative costs, future site restoration costs and
income taxes attributable to those operations. If the net carrying cost exceeds the ultimate
recoverable amount as computed under the test, a write down is recorded.
b) Refining facilities and properties
The refinery assets have been recorded at March 31, 2000 based upon the ascribed value assigned
to such assets resulting from accounting for the acquisition of ShNOS on that date, under the
purchase method of accounting for business combinations. Depreciation is recorded from April 1,
2000 based on the remaining useful lives of the respective assets or categories of assets.
Maintenance and repairs, including minor renewals and improvements are charged to income as
incurred. The cost of major renovations and improvements, which increase useful lives, are
capitalized. Direct costs incurred in the construction of fixed assets, including labour, materials
and supplies are capitalized.
c) Depreciation of refining facilities
Depreciation is calculated on the straight-line method using the following useful economic lives:
Buildings, warehouses and storage facilities .....................................................
Process machinery and equipment ..............................................................
Transport equipment .........................................................................
Other tangible fixed assets ....................................................................
20–40years
5–20years
5–30years
3–15years
d) Depreciation of other capital assets
Depreciation is provided on other capital assets using the declining balance method at the rate of
20% per annum.
Site restoration
Estimated future site restoration costs are provided for on the unit of production basis. Costs are
based on engineering estimates of the anticipated method and extent of site restoration, in
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