UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

For the fiscal year ended December 31, 2017

or

For the transition period from                 to                

Commission File Number 1-1204

 

Hess Corporation

(Exact name of Registrant as specified in its charter)

(Registrant’s telephone number, including area code, is (212) 997-8500)

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 ☑ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☑

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 ☑ No ☐

Indicate by check mark whether the registrant submitted electronically and posted on its Corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ 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 Registrant’s 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, a smaller reporting company or emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company” and “emerging growth company”  in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Ex-change Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The aggregate market value of voting stock held by non-affiliates of the Registrant amounted to $12,290,000,000, computed using the outstanding common shares and closing market price on June 30, 2017, the last business day of the Registrant’s most recently completed second fiscal quarter.

At December 31, 2017, there were 315,053,615 shares of Common Stock outstanding.

Part III is incorporated by reference from the Proxy Statement for the 2018 annual meeting of stockholders.

 

 

 

 

 

---

 

 

HESS CORPORATION

Form 10-K

TABLE OF CONTENTS

 

 

Unless the context indicates otherwise, references to “Hess”, the “Corporation”, “Registrant”, “we”, “us”, “our” and “its” refer to the consolidated business operations of Hess Corporation and its subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain sections in this Annual Report on Form 10-K, including information incorporated by reference herein, and those made under the captions Business and Properties, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk contain “forward-looking” statements, as defined under the Private Securities Litigation Reform Act of 1995.  Generally, the words “anticipate,” “estimate,” “expect,” “forecast,” “guidance,” “could,” “may,” “should,” “would,” “believe,” “intend,” “project,” “plan,” “predict,” “will,” “target” and similar expressions identify forward-looking statements, which generally are not historical in nature.  Forward-looking statements related to our operations are based on our current understanding, assessments, estimates and projections of relevant factors and reasonable assumptions about the future.  Forward-looking statements are subject to certain known and unknown risks and uncertainties that could cause actual results to differ materially from our historical experience and our current projections or expectations of future results expressed or implied by these forward-looking statements.  As and when made, we believe that these forward-looking statements are reasonable.  However, given these uncertainties, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made and there can be no assurance that such forward-looking statements will occur and actual results may differ materially from those contained in any forward-looking statement we make.  Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  Risk factors that could materially impact future actual results are discussed under Item 1A. Risk Factors within this document.

 

 

 

---

Glossary

Throughout this report, the following company or industry specific terms and abbreviations are used:

Appraisal well – An exploration well drilled to confirm the results of a discovery well, or a well used to determine the boundaries of a productive formation.

Bbl – One stock tank barrel, which is 42 United States gallons liquid volume.

Barrel of oil equivalent or Boe – This reflects natural gas reserves converted on the basis of relative energy content of six mcf equals one barrel of oil equivalent (one mcf represents one thousand cubic feet).  Barrel of oil equivalence does not necessarily result in price equivalence, as the equivalent price of natural gas on a barrel of oil equivalent basis has been substantially lower than the corresponding price for crude oil over the recent past.  See the average selling prices in the table on page 9.

Boepd – Barrels of oil equivalent per day.

Bopd – Barrels of oil per day.

Condensate – A mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure, but that when produced, is in the liquid phase at surface pressure and temperature.

Development well – A well drilled within the proved area of an oil and/or natural gas reservoir with the intent of producing oil and/or natural gas from that area of the reservoir.

Dry hole or dry well – An exploratory or development well that does not find oil or natural gas in commercial quantities.

Exploratory well – A well drilled to find oil or natural gas in an unproved area or find a new reservoir in a field previously found to be productive by another reservoir.

Fractionation – Fractionation is the process by which the mixture of NGLs that results from natural gas processing is separated into the NGL components, such as ethane, propane, butane, isobutane, and natural gasoline, prior to their sale to various petrochemical and industrial end users.  Fractionation is accomplished by controlling the temperature of the stream of mixed liquids in order to take advantage of the difference in boiling points of separate products.

Field – An area consisting of a single reservoir or multiple reservoirs all grouped or related to the same individual geological structural feature and/or stratigraphic condition.

Gross acreage – acreage in which a working interest is held by the Corporation.

Gross well – a well in which a working interest is held by the Corporation.

Mcf – One thousand cubic feet of natural gas.

Mmcfd – One thousand mcf of natural gas per day.

Net acreage or Net wells – The sum of the fractional working interests owned by us in gross acres or gross wells.

NGLs or Natural gas liquids – Naturally occurring substances that are separated and produced by fractionating natural gas, including ethane, butane, isobutane, propane and natural gasoline.  Natural gas liquids do not sell at prices equivalent to crude oil.  See the average selling prices in the table on page 9.

Non-operated – Projects in which the Corporation has a working interest but does not perform the role of Operator.

OPEC – Organization of Petroleum Exporting Countries.

Operator – The entity responsible for conducting and managing exploration, development, and/or production operations for an oil or gas project.

Participating interest – Reflects the proportion of exploration and production costs each party will bear or the proportion of production each party will receive, as set out in an operating agreement.

Production entitlement – The share of gross production the Corporation is entitled to receive under the terms of a production sharing contract.

Production sharing contract – An agreement between a host government and the owners (or co-owners) of a well or field regarding the percentage of production each party will receive after the parties have recovered a specified amount of capital and operational expenses.

 

2

 

---

Productive well – A well that is capable of producing hydrocarbons in sufficient quantities to justify commercial exploitation.

Proved properties – Properties with proved reserves.

Proved reserves – In accordance with Securities and Exchange Commission regulations and practices recognized in the publication of the Society of Petroleum Engineers entitled, “Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information,” those quantities of crude oil and condensate, NGLs and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.  The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

Proved developed reserves – Proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or for which the cost of the required equipment is relatively minor compared to the cost of a new well.

Proved undeveloped reserves – Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.  Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.

Unproved properties – Properties with no proved reserves.

Working interest – An interest in an oil and gas property that provides the owner of the interest the right to drill for and produce oil and gas on the relevant acreage and requires the owner to pay a share of the costs of drilling and production operations.

 

 

 

3

 

---

PART I

Items 1 and 2.  Business and Properties

Hess Corporation, incorporated in the State of Delaware in 1920, is a global Exploration and Production (E&P) company engaged in exploration, development, production, transportation, purchase and sale of crude oil, natural gas liquids, and natural gas with production operations located primarily in the United States (U.S.), Denmark, the Malaysia/Thailand Joint Development Area (JDA) and Malaysia.  The Corporation conducts exploration activities primarily offshore Guyana, Suriname, Canada and in the Gulf of Mexico, including at the Stabroek Block, offshore Guyana, where we have participated in six significant crude oil discoveries and sanctioned the first phase of a multi-phase development project at the Liza Field.  During 2017, we sold our interests in Equatorial Guinea, Norway and our enhanced oil recovery assets in the Permian Basin, onshore U.S.  The 2017 asset sales of higher cost, mature assets will provide funds toward our future development projects in the Stabroek Block, offshore Guyana.  In the fourth quarter of 2017, we announced that we would commence a process to sell our interests in Denmark in 2018.

The Corporation’s Midstream operating segment provides fee-based services, including gathering, compressing and processing natural gas and fractionating natural gas liquids (NGLs); gathering, terminaling, loading and transporting crude oil and NGLs; and storing and terminaling propane, primarily in the Bakken and Three Forks Shale plays in the Williston Basin area of North Dakota.  On January 1, 2017, the Corporation’s interests in a Permian Basin gas plant in West Texas and related CO₂ assets, and water handling assets in North Dakota were transferred from the E&P segment to the Midstream segment as a result of organizational changes to the management of those assets.  In the third quarter of 2017, we completed the sale of our Midstream assets in the Permian Basin.

See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further details.

Exploration and Production

Proved Reserves

Proved reserves are calculated using the average price during the twelve-month period ending December 31 determined as an unweighted arithmetic average of the price on the first day of each month within the year, unless prices are defined by contractual agreements, and exclude escalations based on future conditions.  Crude oil prices used in the determination of proved reserves at December 31, 2017 were $51.19 per barrel for WTI (2016: $42.68) and $54.87 per barrel for Brent (2016: $44.45).  Our total proved developed and undeveloped reserves at December 31 were as follows:

 

4

 

---

Proved undeveloped reserves were 37% of our total proved reserves at December 31, 2017 on a boe basis (2016: 28%).  Proved reserves held under production sharing contracts totaled 7% of our crude oil reserves and 44% of our natural gas reserves at December 31, 2017 (2016: 4% and 45%, respectively).

 

For additional information regarding our proved oil and gas reserves, see the Supplementary Oil and Gas Data to the Consolidated Financial Statements presented on pages 81 through 91.

Production

Worldwide crude oil, natural gas liquids, and natural gas net production was as follows:

 

 

5

 

---

 

 

 

E&P Operations

At December 31, 2017, our significant E&P assets include the following:

United States

Our production in the U.S. was from onshore properties, principally in the Bakken oil shale play in the Williston Basin of North Dakota (Bakken) and the Utica Basin of Ohio and from offshore properties in the Gulf of Mexico.

Onshore:

Bakken: At December 31, 2017, we held approximately 554,000 net acres in the Bakken with varying working interest percentages.  During 2017, we operated an average of 3.5 rigs, drilled 85 wells, completed 68 wells, and brought 68 wells on production, bringing the total operated production wells to 1,315 by year-end.  Drilling and completion costs per operated well averaged $5.6 million in 2017, based on a change in our standard well design during the year to a 60-stage completion with proppant loadings of 140,000 pounds per stage compared to an average well cost of $4.8 million in 2016 using a 50-stage completion with proppant loadings of 70,000 pounds per stage.  During 2018, we plan to increase our rig count in the second half of the year to six rigs from four rigs, to drill approximately 120 wells and bring approximately 95 wells on production.  In addition, our capital budget for 2018 will fund pad construction in preparation for 2019 drilling.  We forecast net production for full year 2018 to be in the range of 115,000 boepd to 120,000 boepd, compared to production of 105,000 boepd in 2017.

Utica: We own a 50% working interest in approximately 37,000 net acres in the wet gas area of the Utica Basin of Ohio.  There was no drilling activity in the Utica in 2017.  In 2018, we expect to complete and bring on production five previously drilled wells.

Offshore:  At December 31, 2017, we held interests in 73 blocks in the deepwater Gulf of Mexico.  Our production offshore in the Gulf of Mexico was principally from the Baldpate (Hess 50%), Conger (Hess 38%), Hack Wilson (Hess 25%), Llano (Hess 50%), Penn State (Hess 50%), Shenzi (Hess 28%) and Tubular Bells (Hess 57%) Fields.  In addition, we are operator of the Stampede development project (Hess 25%).  At December 31, 2017, we held approximately 210,000 net undeveloped acres, of which leases covering approximately 55,000 acres are due to expire in the next three years.

 

6

---

 

 

Significant events relating to operations in the Gulf of Mexico during 2017 were as follows:

Producing assets: Production from the Baldpate, Conger, Llano and Penn State Fields were shut-in following a fire at the third-party operated Enchilada platform in November 2017.  Prior to the shut-down, net production from these assets was approximately 30,000 boepd.  Production at the Baldpate Field restarted in mid-February and is expected to restart at the Penn State Field in the first quarter, at the Llano Field in the second quarter, and at the Conger Field in the third quarter of 2018.

Penn State:  At this Hess operated Field, we drilled one production well that was completed in November 2017.  

Stampede:  At this Hess operated project in the Green Canyon area of the Gulf of Mexico, in 2017 we completed installation of the tension leg platform and subsea equipment, finished drilling and completing three production wells, and received regulatory approval for production operations at the end of the year.  In January 2018, we commenced production from the field, which is expected to ramp up over the next 18 months as we continue a drilling program of three additional production wells and four water injection wells.

Europe

Denmark:  In 2017, we announced that we plan to commence a process to sell our interest in the Hess operated offshore South Arne Field (Hess 62%) in 2018.  Total proved reserves for Denmark were 64 million boe at December 31, 2017.

Africa

Ghana:  At the Hess operated offshore Deepwater Tano/Cape Three Points license (Hess 50% license interest), management determined in the fourth quarter of 2017 that it would not develop the previously discovered fields.  As a result, we recorded a charge of $280 million to write-off previously capitalized exploration wells and other lease costs. See Capitalized Exploratory Well Costs in Note 5, Property, Plant and Equipment, and Note 24, Subsequent Events in the Notes to Consolidated Financial Statements.  

Libya:  At the onshore Waha concession in Libya, which includes the Defa, Faregh, Gialo, North Gialo and Belhedan Fields (Hess 8%), production was shut-in by the operator for extended periods in 2016 and 2015 due to force majeure caused by civil unrest.  The national oil company of Libya lifted force majeure in September 2016 and production recommenced in October 2016.  Net production averaged approximately 10,000 boepd in 2017, 1,000 boepd in 2016, and zero in 2015.

Asia and Other

Malaysia/Thailand Joint Development Area (JDA):  At the Carigali Hess operated offshore Block A-18 in the Gulf of Thailand (Hess 50%), no drilling is planned for 2018 as contracted volumes are expected to be met as a result of the booster compression project that came online in 2016.

Malaysia:  Our production in Malaysia comes from our interest in Block PM301 (Hess 50%), which is adjacent to and is unitized with Block A‑18 of the JDA and our 50% interest in Blocks PM302, PM325 and PM326B located in the North Malay Basin (NMB), offshore Peninsular Malaysia, where we operate a multi‑phase natural gas development project.  In July 2017, production of natural gas commenced from the full-field development and net production for 2017 averaged 66 mmcfd, with the planned plateau rate of 165 mmcfd being achieved in the fourth quarter.  In 2018, we plan to drill three production wells and progress development activities related to future phases.

Guyana:  At the Esso Exploration and Production Guyana Limited operated offshore Stabroek Block (Hess 30% participating interest), the partners sanctioned the first phase of the Liza Field development in 2017.  This phase is expected to have a gross capital cost of approximately $3.2 billion for drilling and subsea infrastructure, of which we expect to incur $250 million net in 2018, with first production expected in March 2020.  The development plan includes a leased floating production, storage and offloading (FPSO) vessel that will have the capacity to process up to 120,000 barrels of oil per day from 17 wells, including eight producers, six water injectors and three gas injectors.  At December 31, 2017, we have proved reserves of 45 million boe, related to Liza Phase 1.  

An application for an environmental permit to develop the second phase at Liza has been submitted.  The concept for Phase 2 involves the use of a larger FPSO vessel and subsea systems that would have a production capacity of approximately 220,000 bopd, with first production expected by mid-2022.  Planning is also underway for a third phase of development with an FPSO vessel at the Payara Field with first production planned for 2023 or 2024.  The size of the third ship will depend upon the results of future exploration and appraisal drilling.

 

7

---

 

 

In 2017, the following wells were completed on the Stabroek Block (in chronological order):

Payara-1:  The well, located approximately 10 miles northwest of the Liza discovery, encountered 95 feet of high-quality, oil bearing sandstone reservoirs.

Snoek-1: The well encountered more than 82 feet of high-quality, oil-bearing sandstone reservoirs and is located approximately 5 miles southeast of the Liza-1 oil discovery.

Liza-4: The well encountered more than 197 feet of high-quality, oil-bearing sandstone reservoirs.

Payara-2: The well encountered 59 feet of high-quality, oil-bearing sandstone reservoirs and confirmed a second large oil field in addition to the Liza Field.  The well is located approximately 12 miles northwest from the Liza Phase 1 project.  

Turbot-1: The well encountered a reservoir of 75 feet of high-quality, oil-bearing sandstone in the primary objective.  The well is located approximately 30 miles to the southeast of the Liza Phase 1 project.  

In January 2018, the operator announced a sixth oil discovery at the Ranger prospect.  The Ranger-1 well encountered approximately 230 feet of high-quality, oil-bearing carbonate reservoir, and is located approximately 60 miles to the northwest of the Liza Field.  In 2018, additional drilling is planned, including appraisal of the Liza, Turbot and Ranger discoveries, as well as a wider exploration program that will target additional prospects and play types on the block.  Drilling of the Pacora prospect commenced in January. 

Suriname:  We hold a 33% non-operated participating interest in the Block 42 contract area, offshore Suriname.  The operator, Kosmos Energy Ltd., completed a 6,500-square kilometer 3D seismic shoot in 2017 and expects to drill its first exploration well in 2018.  In 2017, we entered into a 33% non-operated participating interest in the Block 59 contract area, offshore Suriname, where the operator, ExxonMobil Exploration and Production Suriname B.V., is planning a seismic program in 2018.  

Canada:  We hold a 50% participating interest in four exploration licenses offshore Nova Scotia.  In 2018, the operator, BP Canada, plans to drill its first exploration well.  In addition, in 2017 we were granted a 25% participating interest in three BP Canada operated exploration licenses offshore Newfoundland.

Sales Commitments

We have certain long-term contracts with fixed minimum sales volume commitments for natural gas and natural gas liquids production.  At the JDA in the Gulf of Thailand, we have annual minimum net sales commitments of approximately 85 billion cubic feet of natural gas per year through 2025 and approximately 40 billion cubic feet per year in 2026 and 2027.  At the North Malay Basin development project offshore Malaysia, we have annual net sales commitments of approximately 55 billion cubic feet per year through 2024.  Our estimated total volume of production subject to these sales commitments is approximately 1.2 trillion cubic feet of natural gas.  We also have natural gas liquids minimum delivery commitments, primarily in the Bakken through 2023, of approximately 10 million barrels per year, or approximately 60 million barrels over the remaining life of the contracts.

We have not experienced any significant constraints in satisfying the committed quantities required by our sales commitments, and we anticipate being able to meet future requirements from available proved and probable reserves and projected third-party supply.

 

8

---

 

 

Selling Prices and Production Costs

The following table presents our average selling prices and average production costs:

 

9

---

 

 

Gross and Net Undeveloped Acreage

At December 31, 2017, gross and net undeveloped acreage amounted to:

Gross and Net Developed Acreage, and Productive Wells

At December 31, 2017 gross and net developed acreage and productive wells amounted to:

Exploratory and Development Wells

Net exploratory and net development wells completed during the years ended December 31 were: