UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





x   QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended June 30, 2008





OR





 ̈   TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
transition period from _____to_____





Commission
file number: 001-07964





NOBLE
ENERGY, INC.


(Exact
name of registrant as specified in its charter)








Delaware
            
            73-0785597(State
      of incorporation)
            
            (I.R.S.
      employer identification number)100
      Glenborough Drive, Suite 100Houston,
      Texas
            
            77067(Address
      of principal executive offices)
            
            (Zip
      Code)





(281)
872-3100


(Registrant’s
telephone number, including area code)





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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large
      accelerated filer [X]
            Accelerated
      filer [  ]
            Non-accelerated
      filer [  ]
            Smaller
      reporting company [  ](Do
      not check if a smaller reporting
company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes
[  ]    No [X]





Number of
shares of common stock outstanding as of July 15, 2008:
172,697,075.

















PART
      I. FINANCIAL INFORMATIONITEM
      1. FINANCIAL STATEMENTSNoble
      Energy, Inc. and SubsidiariesConsolidated
      Statements of Operations(in
      millions, except per share amounts)(unaudited)Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007RevenuesOil,
      gas and NGL sales
              
              $
              1,130
              
              
              $
              727
              
              
              $
              2,074
              
              
              $
              1,394Income
      from equity method investees
              
              
              56
              
              
              
              49
              
              
              
              118
              
              
              
              95Other
      revenues
              
              
              19
              
              
              
              18
              
              
              
              38
              
              
              
              48Total
              
              
              1,205
              
              
              
              794
              
              
              
              2,230
              
              
              
              1,537Costs
      and ExpensesLease
      operating expense
              
              
              88
              
              
              
              83
              
              
              
              170
              
              
              
              161Production
      and ad valorem taxes
              
              
              51
              
              
              
              28
              
              
              
              94
              
              
              
              54Transportation
      expense
              
              
              16
              
              
              
              16
              
              
              
              29
              
              
              
              27Exploration
      expense
              
              
              103
              
              
              
              54
              
              
              
              143
              
              
              
              99Depreciation,
      depletion and amortization
              
              
              196
              
              
              
              183
              
              
              
              399
              
              
              
              349General
      and administrative
              
              
              61
              
              
              
              48
              
              
              
              121
              
              
              
              93Loss
      on involuntary conversion
              
              
              -
              
              
              
              38
              
              
              
              -
              
              
              
              51Other
      operating expense, net
              
              
              18
              
              
              
              16
              
              
              
              38
              
              
              
              32Total
              
              
              533
              
              
              
              466
              
              
              
              994
              
              
              
              866Operating
      Income
              
              
              672
              
              
              
              328
              
              
              
              1,236
              
              
              
              671Other
      (Income) ExpenseLoss
      (gain) on commodity derivative instruments
              
              
              828
              
              
              
              (1
              )
              
              
              1,065
              
              
              
              (2
              )Interest,
      net of amount capitalized
              
              
              17
              
              
              
              31
              
              
              
              34
              
              
              
              58Other
      expense, net
              
              
              25
              
              
              
              5
              
              
              
              18
              
              
              
              18Total
              
              
              870
              
              
              
              35
              
              
              
              1,117
              
              
              
              74Income
      (Loss) Before Income Taxes
              
              
              (198
              )
              
              
              293
              
              
              
              119
              
              
              
              597Income
      Tax Provision (Benefit)
              
              
              (54
              )
              
              
              84
              
              
              
              48
              
              
              
              176Net
      Income (Loss)
              
              $
              (144
              )
              
              $
              209
              
              
              $
              71
              
              
              $
              421Earnings
      (Loss) Per ShareBasic
              
              $
              (0.84
              )
              
              $
              1.22
              
              
              $
              0.41
              
              
              $
              2.46Diluted
              
              $
              (0.84
              )
              
              $
              1.21
              
              
              $
              0.41
              
              
              $
              2.43Weighted
      average number of shares outstandingBasic
              
              
              172
              
              
              
              171
              
              
              
              172
              
              
              
              171Diluted
              
              
              172
              
              
              
              173
              
              
              
              175
              
              
              
              173The
      accompanying notes are an integral part of these financial
      statements.





2





Noble
      Energy, Inc. and SubsidiariesConsolidated
      Balance Sheets(in
      millions, except share amounts)(Unaudited)June
      30,
              
              
              December
      31,2008
              
              
              2007ASSETSCurrent
      AssetsCash
      and cash equivalents
              
              $
              983
              
              
              $
              660Accounts
      receivable - trade, net
              
              
              864
              
              
              
              594Other
      current assets
              
              
              301
              
              
              
              315Total
      current assets
              
              
              2,148
              
              
              
              1,569Property,
      plant and equipmentOil
      and gas properties (successful efforts method of
    accounting)
              
              
              11,129
              
              
              
              10,217Other
      property, plant and equipment
              
              
              139
              
              
              
              112Total
      property, plant and equipment
              
              
              11,268
              
              
              
              10,329Accumulated
      depreciation, depletion and amortization
              
              
              (2,799
              )
              
              
              (2,384
              )Total
      property, plant and equipment, net
              
              
              8,469
              
              
              
              7,945Goodwill
              
              
              759
              
              
              
              761Other
      noncurrent assets
              
              
              561
              
              
              
              556Total
      Assets
              
              $
              11,937
              
              
              $
              10,831LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable - trade
              
              $
              921
              
              
              $
              781Commodity
      derivative instruments
              
              
              964
              
              
              
              540Other
      current liabilities
              
              
              320
              
              
              
              315Total
      current liabilities
              
              
              2,205
              
              
              
              1,636Deferred
      income taxes
              
              
              1,999
              
              
              
              1,984Asset
      retirement obligations
              
              
              146
              
              
              
              131Commodity
      derivative instruments
              
              
              390
              
              
              
              83Other
      noncurrent liabilities
              
              
              361
              
              
              
              337Long-term
      debt
              
              
              1,851
              
              
              
              1,851Total
      Liabilities
              
              
              6,952
              
              
              
              6,022Commitments
      and ContingenciesShareholders’
      EquityPreferred
      stock - par value $1.00; 4 million shares authorized, none
      issued
              
              
              -
              
              
              
              -Common
      stock - par value $3.33 1/3; 250 million shares
authorized;192
      million and 191 million shares issued, respectively
              
              
              641
              
              
              
              636Capital
      in excess of par value
              
              
              2,170
              
              
              
              2,106Accumulated
      other comprehensive loss
              
              
              (195
              )
              
              
              (284
              )Treasury
      stock, at cost; 19 million shares
              
              
              (613
              )
              
              
              (613
              )Retained
      earnings
              
              
              2,982
              
              
              
              2,964Total
      Shareholders’ Equity
              
              
              4,985
              
              
              
              4,809Total
      Liabilities and Shareholders’ Equity
              
              $
              11,937
              
              
              $
              10,831The
      accompanying notes are an integral part of these financial
      statements.







3




Noble
      Energy, Inc. and SubsidiariesConsolidated
      Statements of Cash Flows(in
      millions)(unaudited)Six
      Months EndedJune
      30,2008
              
              
              2007Cash
      Flows From Operating ActivitiesNet
      income
              
              $
              71
              
              
              $
              421Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion and amortization
              
              
              399
              
              
              
              349Dry
      hole expense
              
              
              69
              
              
              
              31Deferred
      income taxes
              
              
              10
              
              
              
              104Income
      from equity method investees
              
              
              (118
              )
              
              
              (95
              )Dividends
      received from equity method investees
              
              
              121
              
              
              
              97Unrealized
      loss (gain) on commodity derivative instruments
              
              
              934
              
              
              
              (2
              )Settlement
      of previously recognized hedge losses
              
              
              (101
              )
              
              
              (91
              )Loss
      on involuntary conversion
              
              
              -
              
              
              
              51Other
              
              
              59
              
              
              
              98Changes
      in operating assets and liabilities, net of acquisition:(Increase)
      in accounts receivable
              
              
              (276
              )
              
              
              (22
              )(Increase)
      decrease in other current assets
              
              
              (28
              )
              
              
              37Increase
      in accounts payable
              
              
              64
              
              
              
              30(Decrease)
      in other current liabilities
              
              
              (50
              )
              
              
              (235
              )Net
      Cash Provided by Operating Activities
              
              
              1,154
              
              
              
              773Cash
      Flows From Investing ActivitiesAdditions
      to property, plant and equipment
              
              
              (932
              )
              
              
              (695
              )Proceeds
      from property sales
              
              
              109
              
              
              
              -Net
      Cash Used in Investing Activities
              
              
              (823
              )
              
              
              (695
              )Cash
      Flows From Financing ActivitiesExercise
      of stock options
              
              
              24
              
              
              
              16Excess
      tax benefits from stock-based awards
              
              
              23
              
              
              
              10Cash
      dividends paid
              
              
              (53
              )
              
              
              (33
              )Purchases
      of treasury stock
              
              
              (2
              )
              
              
              (102
              )Proceeds
      from credit facility
              
              
              450
              
              
              
              280Repayment
      of credit facility
              
              
              (425
              )
              
              
              (115
              )Repayment
      of installment notes
              
              
              (25
              )
              
              
              -Proceeds
      from short term borrowings
              
              
              -
              
              
              
              15Net
      Cash (Used in) Provided by Financing Activities
              
              
              (8
              )
              
              
              71Increase
      in Cash and Cash Equivalents
              
              
              323
              
              
              
              149Cash
      and Cash Equivalents at Beginning of Period
              
              
              660
              
              
              
              153Cash
      and Cash Equivalents at End of Period
              
              $
              983
              
              
              $
              302The
      accompanying notes are an integral part of these financial
      statements.





4





Noble
      Energy, Inc. and SubsidiariesConsolidated
      Statements of Shareholders' Equity(in
      millions)(unaudited)AccumulatedShares
      of Stock
              
              
              
              
              
              Capital
      in
              
              
              Other
              
              
              
              Treasury
              
              
              
              TotalCommon
              
              
              Treasury
              
              
              Common
              
              
              Excess
      of
              
              
              Comprehensive
              
              
              
              Stock
              
              
              Retained
              
              
              Shareholders'Stock
              
              
              Stock
              
              
              Stock
              
              
              Par
      Value
              
              
              Loss
              
              
              
              at
      Cost
              
              
              Earnings
              
              
              EquityDecember
      31, 2007
              
              
              191
              
              
              
              19
              
              
              $
              636
              
              
              $
              2,106
              
              
              $
              (284
              )
              
              $
              (613
              )
              
              $
              2,964
              
              
              $
              4,809Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              71
              
              
              
              71Stock-based
      compensation expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              20
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              20Exercise
      of stock options
              
              
              1
              
              
              
              -
              
              
              
              4
              
              
              
              20
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              24Tax
      benefits related to exercise of stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              23
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              23Restricted
      stock awards, net
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Dividends
      ($0.30 per share)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (53
              )
              
              
              (53
              )Changes
      in treasury stock, net
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2Oil
      and gas cash flow hedges:Realized
      amounts reclassified into earnings
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              97
              
              
              
              -
              
              
              
              -
              
              
              
              97Interest
      rate cash flow hedges:Unrealized
      change in fair value
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7
              )
              
              
              -
              
              
              
              -
              
              
              
              (7
              )Net
      change in other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              (1
              )June
      30, 2008
              
              
              192
              
              
              
              19
              
              
              $
              641
              
              
              $
              2,170
              
              
              $
              (195
              )
              
              $
              (613
              )
              
              $
              2,982
              
              
              $
              4,985December
      31, 2006
              
              
              188
              
              
              
              17
              
              
              $
              629
              
              
              $
              2,041
              
              
              $
              (140
              )
              
              $
              (511
              )
              
              $
              2,095
              
              
              $
              4,114Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              421
              
              
              
              421Stock-based
      compensation expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12Exercise
      of stock options
              
              
              1
              
              
              
              -
              
              
              
              3
              
              
              
              13
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              16Tax
      benefits related to exercise of stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10Restricted
      stock awards, net
              
              
              1
              
              
              
              -
              
              
              
              2
              
              
              
              (2
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Dividends
      ($0.195 per share)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (33
              )
              
              
              (33
              )Purchases
      of treasury stock
              
              
              -
              
              
              
              2
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (102
              )
              
              
              -
              
              
              
              (102
              )Oil
      and gas cash flow hedges:Realized
      amounts reclassified into earnings
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3
              )
              
              
              -
              
              
              
              -
              
              
              
              (3
              )Unrealized
      change in fair value
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (51
              )
              
              
              -
              
              
              
              -
              
              
              
              (51
              )Net
      change in other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2
              
              
              
              -
              
              
              
              -
              
              
              
              2June
      30, 2007
              
              
              190
              
              
              
              19
              
              
              $
              634
              
              
              $
              2,074
              
              
              $
              (192
              )
              
              $
              (613
              )
              
              $
              2,483
              
              
              $
              4,386The
      accompanying notes are an integral part of these financial
      statements.










5





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





Note 1 – Organization and
Nature of Operations


Noble
Energy, Inc. (Noble Energy, we or us) is an independent energy company engaged
in the acquisition, exploration, development, production and marketing of crude
oil, natural gas and natural gas liquids (NGLs). We have exploration,
exploitation and production operations in the US and internationally. We operate
throughout major basins in the US including Colorado’s Wattenberg field and
Piceance basin, the Mid-continent region of western Oklahoma and the Texas
Panhandle, the San Juan Basin in New Mexico, the Gulf Coast and the Gulf of
Mexico. In addition, we conduct business internationally in China, Ecuador, the
Mediterranean Sea, the North Sea, West Africa (Equatorial Guinea and Cameroon)
and in other areas.





Note 2 – Basis of
Presentation


Presentation– The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the US for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by US generally accepted accounting principles (GAAP) for
complete financial statements. The accompanying consolidated financial
statements at June 30, 2008 (unaudited) and December 31, 2007 and for
the three months and six months ended June 30, 2008 and 2007 contain all
normally recurring adjustments considered necessary for a fair presentation of
our financial position, results of operations and cash flows for such periods.
Operating results for the six-month period ended June 30, 2008 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2008. Certain reclassifications of amounts previously reported have
been made to conform to current year presentations.  These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes included in our annual
report on Form 10-K, as amended, for the year ended
December 31, 2007.





Mid-continent Acquisition –
In July 2008, we acquired producing properties in western Oklahoma for $291
million in cash, subject to customary adjustments. Properties acquired cover
approximately 15,500 net acres and are currently producing 25
MMcfepd.





Statements of Operations Information
– Other statements of operations information is as follows:





Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Other
      RevenuesElectricity
      sales
              
              $
              14
              
              
              $
              14
              
              
              $
              29
              
              
              $
              37Gathering,
      marketing and processing revenues
              
              
              5
              
              
              
              4
              
              
              
              9
              
              
              
              11Total
              
              $
              19
              
              
              $
              18
              
              
              $
              38
              
              
              $
              48Other
      Operating Expense, netElectricity
      generation expense
              
              $
              13
              
              
              $
              12
              
              
              $
              28
              
              
              $
              28Gathering,
      marketing and processing expense
              
              
              4
              
              
              
              4
              
              
              
              8
              
              
              
              9Other
      operating (income) expense, net
              
              
              1
              
              
              
              -
              
              
              
              2
              
              
              
              (5
              )Total
              
              $
              18
              
              
              $
              16
              
              
              $
              38
              
              
              $
              32Other
      Expense, netDeferred
      compensation expense
              
              $
              29
              
              
              $
              3
              
              
              $
              22
              
              
              $
              15Interest
      income
              
              
              (6
              )
              
              
              (3
              )
              
              
              (12
              )
              
              
              (6
              )Other
      (income) expense, net
              
              
              2
              
              
              
              5
              
              
              
              8
              
              
              
              9Total
              
              $
              25
              
              
              $
              5
              
              
              $
              18
              
              
              $
              18







6








Balance Sheet Information –
Other balance sheet information is as follows:




June
      30,
              
              December
      31,2008
              
              2007(in
      millions)Other
      Current AssetsInventories
              $
              92
              
              $
              60Commodity
      derivative instruments
              
              52
              
              
              15Prepaid
      expenses and other current assets
              
              24
              
              
              27Deferred
      income taxes
              
              133
              
              
              131Assets
      held for sale
              
              -
              
              
              82Total
              $
              301
              
              $
              315Other
      Noncurrent AssetsEquity
      method investments
              $
              355
              
              $
              357Mutual
      fund investments
              
              117
              
              
              124Probable
      insurance claims
              
              37
              
              
              37Commodity
      derivative instruments
              
              22
              
              
              5Other
      noncurrent assets
              
              30
              
              
              33Total
              $
              561
              
              $
              556Other
      Current LiabilitiesAccrued
      and other current liabilities
              $
              233
              
              $
              206Current
      income taxes payable
              
              -
              
              
              52Current
      installment of long-term debt
              
              25
              
              
              25Asset
      retirement obligations
              
              15
              
              
              13Interest
      payable
              
              11
              
              
              18Interest
      rate lock derivative instrument
              
              12
              
              
              1Deferred
      gain on asset sale
              
              24
              
              
              -Total
              $
              320
              
              $
              315Other
      Noncurrent LiabilitiesDeferred
      compensation liability
              $
              243
              
              $
              225Accrued
      benefit costs
              
              59
              
              
              51Other
      noncurrent liabilities
              
              59
              
              
              61Total
              $
              361
              
              $
              337




Adoption of SFAS 157 – We
adopted Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (SFAS 157), as of January 1, 2008 as related to our financial
assets and liabilities. SFAS 157 establishes a single authoritative definition
of fair value based upon the assumptions market participants would use when
pricing an asset or liability and creates a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under the
standard, additional disclosures are required, including disclosures of fair
value measurements by level within the fair value hierarchy. As a result of
adoption, we have begun incorporating our own credit standing into the
measurement of certain liabilities. Adoption of SFAS 157 did not have a
significant impact on our consolidated financial statements. See Note 3 – Fair
Value Measurements. On January 1, 2009, we will adopt SFAS 157 as it relates to
non-financial assets and liabilities, including nonfinancial assets and
liabilities measured at fair value in a business combination; impaired
properties, plants and equipment; goodwill; and initial recognition of asset
retirement obligations. We do not expect any significant impact to our
consolidated financial statements when we implement SFAS 157 for these assets
and liabilities.




Adoption of FSP FIN 39-1 – We
adopted FASB Staff Position FIN 39-1, “An Amendment of FASB Interpretation No.
39” (FSP FIN 39-1), as of January 1, 2008. FSP FIN 39-1 addresses certain
modifications to FIN 39, “Offsetting of Amounts Related to Certain Contracts.”
FIN 39-1 allows companies to offset fair value amounts recognized for derivative
instruments and the fair value amounts recognized for the right to reclaim cash
collateral or the obligation to return cash collateral. The cash collateral
(commonly referred to as a “margin”) must arise from derivative instruments
recognized at fair value that are executed with the same counterparty under a
master netting arrangement. Upon adoption, we elected to offset the right to
reclaim cash collateral or the obligation to return cash collateral against our
net derivative positions for which master netting agreements exist. As of June
30, 2008 and December 31, 2007, we had no significant cash collateral
obligations.





7





Note 3 – Fair Value
Measurements


Measurement
information for financial assets and liabilities reported at fair value at June
30, 2008, includes the following:




Fair
      Value Measurements UsingQuoted
      Prices in
                Active
      Markets(Level 1)
              
              Significant
      Other
                Observable
      Inputs
                (Level
      2)
              
              Significant
                Unobservable
      Inputs
                (Level
      3)
              
              
              Netting
                Adjustment
      (1)
              
              
              Fair
                Value
                Measurement(in
      millions)Financial
      assets:Mutual
      fund investments
              $
              117
              
              $
              -
              
              $
              -
              
              
              $
              -
              
              
              $
              117Commodity
      derivative instruments
              
              -
              
              
              130
              
              
              -
              
              
              
              (56
              )
              
              
              74Financial
      liabilities:Commodity
      derivative instruments
              
              -
              
              
              (1,410
              )
              
              -
              
              
              
              56
              
              
              
              (1,354
              )Interest
      rate lock derivative instruments
              
              -
              
              
              (12
              )
              
              -
              
              
              
              -
              
              
              
              (12
              )







(1)
            Amount
      represents the impact of master netting agreements that allow us to settle
      asset and liability positions with the same
  counterparty.





SFAS 157,
which we adopted as of January 1, 2008, establishes a fair value hierarchy which
prioritizes the inputs to valuation techniques used to measure fair value into
three levels. The fair value hierarchy gives the highest priority to quoted
market prices (unadjusted) in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2
inputs are inputs, other than quoted prices included within Level 1, that are
observable for the asset or liability, either directly or indirectly. We use
Level 1 inputs when available as Level 1 inputs generally provide the most
reliable evidence of fair value. We use the following methods and
assumptions to estimate the fair values of the assets and liabilities in the
table above:





Mutual Fund Investments– Our mutual fund investments
consist of various publicly-traded mutual funds that include investments ranging
from equities to money market instruments. The fair values are based on quoted
market prices.





Commodity Derivative Instruments –Our commodity derivative instruments consist of variable to fixed price
swaps, costless collars and basis swaps. We estimate the fair values of these
instruments based on published forward commodity price curves for the underlying
commodities as of the date of the estimate. The discount rate used in the
discounted cash flow projections includes a measure of nonperformance risk. In
addition, for costless collars, we estimate the option value of the contract
floors and ceilings using an option pricing model which takes into account
market volatility, market prices and contract parameters. See Note 4 –
Derivative Instruments and Hedging Activities.





Interest Rate Lock Derivative
Instruments –At June 30, 2008, we had interest rate locks of $1 billion
notional value, based on US Treasury rates. We estimate the fair values of the
locks based on published interest rate yield curves as of the date of the
estimate. We settled the locks in July 2008. See Note 4 – Derivative
Instruments and Hedging Activities.





Note 4 – Derivative
Instruments and Hedging Activities


Commodity Derivative Instruments
– We use various derivative instruments in connection with forecasted
crude oil and natural gas sales to minimize the impact of commodity price
fluctuations. Such instruments include variable to fixed price swaps, costless
collars and basis swaps.





We
account for derivative instruments and hedging activities in accordance with
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended (SFAS 133), and all derivative instruments are reflected at fair value
on our consolidated balance sheets. We elected to designate certain of our
commodity derivative instruments as cash flow hedges through December 31, 2007.
However, effective January 1, 2008, we voluntarily discontinued cash flow
hedge accounting on all existing commodity derivative instruments. We made this
change to provide greater flexibility in our use of derivative instruments.
From January 1, 2008 forward, we recognize all gains and losses on such
instruments in earnings during the period in which they occur. Net derivative
losses that were deferred in accumulated other comprehensive income (loss)
(AOCL) as of December 31, 2007, as a result of previous cash flow hedge
accounting, will be reclassified to earnings in future periods as the original
hedged transactions occur. The discontinuance of cash flow hedge accounting for
commodity derivative instruments did not affect our net assets or cash flows at
December 31, 2007 and does not require adjustments to our previously reported
financial statements.





8





The
components of loss (gain) on commodity derivative instruments included in the
consolidated statements of operations are as follows:





Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Unrealized
      loss on commodity derivative instruments
              
              $
              716
              
              
              $
              -
              
              
              $
              934
              
              
              $
              -Realized
      loss on commodity derivative instruments
              
              
              112
              
              
              
              -
              
              
              
              131
              
              
              
              -Ineffectiveness
      gain
              
              
              -
              
              
              
              (1
              )
              
              
              -
              
              
              
              (2
              )Loss
      (gain) on commodity derivative instruments
              
              $
              828
              
              
              $
              (1
              )
              
              $
              1,065
              
              
              $
              (2
              )




Crude oil
and natural gas sales include amounts reclassified from AOCL as
follows:





Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Decrease
      in crude oil sales
              
              $
              (93
              )
              
              $
              (40
              )
              
              $
              (190
              )
              
              $
              (68
              )(Decrease)
      increase in natural gas sales
              
              
              (2
              )
              
              
              29
              
              
              
              35
              
              
              
              72Total
      (decrease) increase in oil and gas sales
              
              $
              (95
              )
              
              $
              (11
              )
              
              $
              (155
              )
              
              $
              4







9





As of
June 30, 2008, we had entered into the following crude oil derivative
instruments:





Variable
      to Fixed Price Swaps
              
              Costless
      CollarsWeighted
              
              
              
              
              
              
              Weighted
              
              
              WeightedProduction
              
              
              
              Bbls
              
              
              Average
              
              
              
              Bbls
              
              
              Average
              
              
              AveragePeriod
              
              Index
              
              Per
      Day
              
              
              Fixed
      Price
              
              Index
              
              Per
      Day
              
              
              Floor
      Price
              
              
              Ceiling
      Price3rd
      Qtr 2008
              
              NYMEX
      WTI
              
              
              16,500
              
              
              $
              38.11
              
              NYMEX
      WTI
              
              
              3,100
              
              
              $
              60.00
              
              
              $
              72.404th
      Qtr 2008
              
              NYMEX
      WTI
              
              
              16,500
              
              
              
              37.92
              
              NYMEX
      WTI
              
              
              3,100
              
              
              
              60.00
              
              
              
              72.403rd
      Qtr 2008
              
              Dated
      Brent
              
              
              2,000
              
              
              
              88.18
              
              Dated
      Brent
              
              
              3,848
              
              
              
              45.00
              
              
              
              66.194th
      Qtr 2008
              
              Dated
      Brent
              
              
              2,000
              
              
              
              88.18
              
              Dated
      Brent
              
              
              3,587
              
              
              
              45.00
              
              
              
              65.902009
              
              NYMEX
      WTI
              
              
              9,000
              
              
              
              88.43
              
              NYMEX
      WTI
              
              
              6,700
              
              
              
              79.70
              
              
              
              90.602009
              
              Dated
      Brent
              
              
              2,000
              
              
              
              87.98
              
              Dated
      Brent
              
              
              5,074
              
              
              
              70.62
              
              
              
              87.932010
              
              
              
              
              
              
              
              
              
              
              NYMEX
      WTI
              
              
              5,500
              
              
              
              69.00
              
              
              
              85.65




As of
June 30, 2008, we had entered into the following natural gas derivative
instruments:





Variable
      to Fixed Price Swaps(1)
              
              Costless
      CollarsWeighted
              
              
              
              
              
              
              Weighted
              
              
              WeightedProduction
              
              
              
              MMBtu
              
              
              Average
              
              
              
              MMBtu
              
              
              Average
              
              
              AveragePeriod
              
              Index
              
              Per
      Day
              
              
              Fixed
      Price
              
              Index
              
              Per
      Day
              
              
              Floor
      Price
              
              
              Ceiling
      Price3rd
      Qtr 2008
              
              NYMEX
      HH
              
              
              170,000
              
              
              $
              5.33
              
              IFERC
      CIG
              
              
              14,000
              
              
              $
              6.75
              
              
              $
              8.704th
      Qtr 2008
              
              NYMEX
      HH
              
              
              170,000
              
              
              
              5.63
              
              IFERC
      CIG
              
              
              14,000
              
              
              
              6.75
              
              
              
              8.702009
              
              
              
              
              
              
              
              
              
              
              NYMEX
      HH
              
              
              170,000
              
              
              
              9.15
              
              
              
              10.812009
              
              
              
              
              
              
              
              
              
              
              IFERC
      CIG
              
              
              15,000
              
              
              
              6.00
              
              
              
              9.902010
              
              
              
              
              
              
              
              
              
              
              IFERC
      CIG
              
              
              15,000
              
              
              
              6.25
              
              
              
              8.10




(1)
            In
      addition to the NYMEX HH variable to fixed price swaps shown above for
      2008, we have 100,000 MMBtu per day of IFERC CIG basis swaps with an
      average differential to NYMEX HH of $(1.66) per MMBtu, 40,000 MMBtu per
      day of IFERC ANR-OK basis swaps with an average differential to NYMEX HH
      of $(1.01) per MMBtu, and 10,000 MMBtu per day of  IFERC PEPL
      basis swaps with an average differential to NYMEX HH of $(0.98) per
      MMBtu.





Approximately
$130 million of deferred losses (net of tax) related to the fair values of the
commodity derivative instruments previously designated as cash flow hedges and
remaining in AOCL at June 30, 2008 will be reclassified to earnings during the
next 12 months as the forecasted transactions occur, and will be recorded as a
reduction in oil and gas sales.





InterestRate Lock Derivative Instruments–We entered into two interest rate swaps, or interest rate “locks”, each
in the notional amount of $500 million. The locks were based on five and ten
year US Treasury rates of 3.55% and 4.15%, respectively, and were scheduled to
expire in September 2008. We designated these locks as cash flow hedges and a
related deferred loss of $8 million, net of tax, was included in AOCL at
June 30, 2008. We settled the locks in July 2008 at a total cost of $0.2
million.








10





Note 5 – Capitalized
Exploratory Well Costs


Changes
in capitalized exploratory well costs during the period were as
follows:




Six
      Months EndedJune
      30, 2008 (1)(in
      millions)Capitalized
      exploratory well costs at beginning of period
              
              $
              249Additions
      to capitalized exploratory well costs pending determination of proved
      reserves
              
              
              137Reclassed
      to proved oil and gas properties based on determination of proved
      reserves
              
              
              -Capitalized
      exploratory well costs charged to expense
              
              
              -Capitalized
      exploratory well costs at end of period
              
              $
              386




(1)
            Changes
      in capitalized exploratory well costs exclude amounts that were
      capitalized and subsequently expensed in the same
  period.





The
following table provides an aging of capitalized exploratory well costs
(suspended well costs) based on the date the drilling was completed and the
number of projects for which exploratory well costs have been capitalized for a
period greater than one year since the completion of drilling:




June
      30,
              
              December
      31,2008
              
              2007(in
      millions, except
                number of projects)Capitalized
      exploratory well costs that have been capitalized for a period
      of one year or less
              
              $
              277
              
              
              $
              187Capitalized
      exploratory well costs that have been capitalized for a period
      greater than one year after completion of drilling
              
              
              109
              
              
              
              62Balance
      at end of period
              
              $
              386
              
              
              $
              249Number
      of projects that have exploratory well costs that have been capitalized
      for a period greater than one year after completion of
      drilling
              
              
              6
              
              
              
              5




The
following table provides a further aging of those exploratory well costs that
have been capitalized for a period greater than one year since the completion of
drilling as of June 30, 2008:




Suspended
      SinceTotal
              
              
              2007
              
              
              2006
              
              
              2005(in
      millions)ProjectRaton
      South (deepwater Gulf of Mexico)
              
              $
              27
              
              
              $
              4
              
              
              $
              23
              
              
              $
              -Redrock
      (deepwater Gulf of Mexico)
              
              
              17
              
              
              
              -
              
              
              
              17
              
              
              
              -Blocks
      O and I (West Africa)
              
              
              47
              
              
              
              27
              
              
              
              1
              
              
              
              19Flyndre
      (North Sea)
              
              
              15
              
              
              
              12
              
              
              
              3
              
              
              
              -Other
              
              
              3
              
              
              
              -
              
              
              
              3
              
              
              
              -Total
      capitalized exploratory well costs that have been capitalized for a
      period greater than one year since completion of
    drilling
              
              $
              109
              
              
              $
              43
              
              
              $
              47
              
              
              $
              19





11








Exploratory
well costs capitalized for more than one year at June 30, 2008 include six
projects, two of which include activity in the deepwater Gulf of
Mexico.  One project relates to Raton South (Mississippi Canyon Block
292) and includes $27 million of suspended exploratory well costs. We currently
have a rig on location to drill a sidetrack-appraisal well and further test this
prospect. The other project relates to Redrock (Mississippi Canyon Block 204)
and includes $17 million of suspended exploratory well costs. Redrock is
currently considered a co-development candidate to the planned
sidetrack-appraisal well at Raton South. In addition, we are currently
evaluating options to tie back to subsea pipelines and other
facilities.





We also
incurred exploratory well costs of $47 million for the Blocks O and I project in
West Africa. Since drilling the initial well for the project, additional seismic
work has been completed and exploration and appraisal wells have been drilled to
further evaluate our discoveries. The West Africa development team is proceeding
with a program to further define the resources in this area such that an optimal
development program may be designed. In addition to the amount of exploratory
well costs that have been capitalized for a period greater than one year for the
Blocks O and I project, we have incurred $187 million in suspended costs related
to additional drilling activity in West Africa through June 30,
2008.





Another
project, Flyndre, is located in the UK sector of the North Sea and incurred
exploratory well costs of $15 million.  We successfully completed an
exploratory appraisal well in 2007 and we are working with the operator to
formulate a development plan.





The
remaining two projects, which total $3 million in suspended exploratory well
costs, continue to be evaluated by various means including additional seismic
work, drilling additional wells and evaluating the potential of the exploration
wells.





Note 6 – Asset Retirement
Obligations


Asset
retirement obligations consist primarily of estimated costs of dismantlement,
removal, site reclamation and similar activities associated with our oil and gas
properties. Changes in asset retirement obligations were as
follows:




Six
      Months EndedJune
      30, 2008(in
      millions)Asset
      retirement obligations at beginning of period
              
              $
              144Liabilities
      incurred in current period
              
              
              14Liabilities
      settled in current period
              
              
              (7
              )Revisions
              
              
              6Accretion
      expense
              
              
              4Asset
      retirement obligations at end of period
              
              $
              161
  Accretion
expense is included in depreciation, depletion and amortizationexpense in the
consolidated statements ofoperations.





12





Note 7 – Employee Benefit
Plans


We have a
noncontributory, tax-qualified defined benefit pension plan covering employees
who were hired prior to May 1, 2006. We also have an unfunded, nonqualified
restoration plan that provides the pension plan formula benefits that cannot be
provided by the tax-qualified pension plan because of pay deferrals and the
compensation and benefit limitations imposed on the pension plan by the Internal
Revenue Code of 1986, as amended. Net periodic benefit cost related to the
pension and restoration plans is as follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Service
      cost
              
              $
              3
              
              
              $
              3
              
              
              $
              6
              
              
              $
              6Interest
      cost
              
              
              3
              
              
              
              2
              
              
              
              6
              
              
              
              5Expected
      return on plan assets
              
              
              (3
              )
              
              
              (2
              )
              
              
              (6
              )
              
              
              (5
              )Other
              
              
              1
              
              
              
              1
              
              
              
              1
              
              
              
              2Net
      periodic benefit cost
              
              $
              4
              
              
              $
              4
              
              
              $
              7
              
              
              $
              8




Note 8 – Stock-Based
Compensation


We
recognized stock-based compensation expense as follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Stock-based
      compensation expense
              
              $
              11
              
              
              $
              7
              
              
              $
              20
              
              
              $
              12Tax
      benefit recognized
              
              $
              (4
              )
              
              $
              (3
              )
              
              $
              (8
              )
              
              $
              (5
              )




During
the six months ended June 30, 2008, we granted 1.1 million stock options with a
weighted-average grant-date fair value of $20.65 per share and awarded 0.5
million shares of restricted stock subject to service conditions with a
weighted-average grant-date fair value of $73.63 per share.





Note 9 – Basic and Diluted
Earnings (Loss) Per Share


Basic
earnings (loss) per share of common stock is computed using the weighted average
number of shares of common stock outstanding during each period. The diluted
earnings per share of common stock include the effect of outstanding stock
options and restricted stock, except in periods in which there is a net loss.
The following table summarizes the calculation of basic and diluted earnings
(loss) per share:





Weighted
              
              
              
              
              
              WeightedNet
              
              
              Average
              
              
              Net
              
              
              AverageIncome
      (Loss)
              
              
              Shares
              
              
              Income
              
              
              Shares2008
              
              
              2007(in
      millions, except per share amounts)Three
      Months Ended June 30:Net
      income (loss)
              
              $
              (144
              )
              
              
              172
              
              
              $
              209
              
              
              
              171Basic
      Earnings (Loss) Per Share
              
              $
              (0.84
              )
              
              
              
              
              
              $
              1.22Net
      income (loss)
              
              $
              (144
              )
              
              
              172
              
              
              $
              209
              
              
              
              171Effect
      of dilutive stock options and restricted stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2Net
      income (loss) available to common shareholders
              
              $
              (144
              )
              
              
              172
              
              
              $
              209
              
              
              
              173Diluted
      Earnings (Loss) Per Share
              
              $
              (0.84
              )
              
              
              
              
              
              $
              1.21Six
      Months Ended June 30:Net
      income
              
              $
              71
              
              
              
              172
              
              
              $
              421
              
              
              
              171Basic
      Earnings Per Share
              
              $
              0.41
              
              
              
              
              
              
              $
              2.46Net
      income
              
              $
              71
              
              
              
              172
              
              
              $
              421
              
              
              
              171Effect
      of dilutive stock options and restricted stock
              
              
              -
              
              
              
              3
              
              
              
              -
              
              
              
              2Net
      income available to common shareholders
              
              $
              71
              
              
              
              175
              
              
              $
              421
              
              
              
              173Diluted
      Earnings Per Share
              
              $
              0.41
              
              
              
              
              
              
              $
              2.43




A total
of 1.1 million weighted average shares of our common stock held in a rabbi trust
and weighted average stock options were antidilutive for both the second quarter
and the first six months of 2008 and were excluded from the calculation of
diluted earnings per share.  A total of 2.8 million and 2.6 million
weighted average shares of our common stock held in a rabbi trust and weighted
average stock options were antidilutive for second quarter and the first six
months of 2007, respectively, and were excluded from the calculation of diluted
earnings per share.





13


Note 10–Income
Taxes


The
income tax (benefit) provision consists of the following:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Current
              
              $
              (28
              )
              
              $
              28
              
              
              $
              38
              
              
              $
              72Deferred
              
              
              (26
              )
              
              
              56
              
              
              
              10
              
              
              
              104Total
      income tax (benefit) provision
              
              $
              (54
              )
              
              $
              84
              
              
              $
              48
              
              
              $
              176




The
deferred tax assets associated with the foreign loss carryforwards of
certain controlled foreign corporations, primarily Suriname, have increased
during 2008.  In addition, because management currently does not
believe it is more likely than not that the deferred tax assets related to these
foreign loss carryforwards will be realized, the valuation allowance has been
increased.





In 2007,
China’s legislature, the National People’s Congress, enacted the China Corporate
Income Tax Law.  This new legislation decreased our tax rate in China
from 33% to 25% starting in 2008.





Unrecognized Tax Positions–We do not have
significant unrecognized tax benefits as of June 30, 2008. Our policy is to
recognize any interest and penalties related to unrecognized tax benefits in
income tax expense. We did not accrue interest or penalties at June 30, 2008,
because the jurisdiction in which we have unrecognized tax benefits does not
currently impose interest on underpayments of tax, and we believe that we are
below the minimum statutory threshold for imposition of penalties.




In our
major tax jurisdictions, the earliest years remaining open to examination are as
follows: US - 2004, Equatorial Guinea - 2006, China - 2006, Israel - 2000, UK -
2006 and the Netherlands - 2005.





Note 11 – Comprehensive
Income (Loss)


Comprehensive
income (loss) includes net income (loss) and certain items recorded directly to
shareholders’ equity and classified as AOCL. Comprehensive income (loss) was
calculated as follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Net
      income (loss)
              
              $
              (144
              )
              
              $
              209
              
              
              $
              71
              
              
              $
              421Other
      items of comprehensive income (loss)Oil
      and gas cash flow hedges:Realized
      amounts reclassified into earnings
              
              
              95
              
              
              
              11
              
              
              
              155
              
              
              
              (4
              )Less
      tax provision
              
              
              (36
              )
              
              
              (4
              )
              
              
              (58
              )
              
              
              1Unrealized
      change in fair value:
              
              
              -
              
              
              
              18
              
              
              
              -
              
              
              
              (82
              )Less
      tax provision
              
              
              -
              
              
              
              (7
              )
              
              
              -
              
              
              
              31Interest
      rate cash flow hedges:Unrealized
      change in fair value
              
              
              32
              
              
              
              -
              
              
              
              (11
              )
              
              
              -Less
      tax provision
              
              
              (12
              )
              
              
              -
              
              
              
              4
              
              
              
              -Net
      change in other:
              
              
              -
              
              
              
              1
              
              
              
              (1
              )
              
              
              2Other
      comprehensive income (loss)
              
              
              79
              
              
              
              19
              
              
              
              89
              
              
              
              (52
              )Comprehensive
      income (loss)
              
              $
              (65
              )
              
              $
              228
              
              
              $
              160
              
              
              $
              369




14


Note 12 – Segment
Information


We have
operations throughout the world and manage our operations by country. The
following information is grouped into five components that are all primarily in
the business of natural gas and crude oil acquisition, exploration and
production:  the US, West Africa, the North Sea, Israel, and Other
International, Corporate and Marketing. Other International includes Argentina
(through February 2008), China, Ecuador and Suriname.





In
February 2008, we closed on the sale of our interest in Argentina for a sales
price of $117.5 million, effective July 1, 2007. The gain on sale has been
deferred, as the sale is contingent upon approval of the Argentine government.
We are currently unable to predict when government approval will be obtained.
The Argentina operations, financial position and cash flows are not material for
the current or prior periods and have not been segregated as discontinued
operations.





The
following data was prepared on the same basis as our consolidated financial
statements and excludes the effects of income taxes.




Other
      Int'lUnited
              
              
              West
              
              
              North
              
              
              
              
              Corporate
      &Consolidated
              
              
              States
              
              
              Africa
              
              
              Sea
              
              
              Israel
              
              Marketing(in
      millions)Three
      Months Ended June 30, 2008Revenues
      from third parties
              
              $
              1,244
              
              
              $
              752
              
              
              $
              163
              
              
              $
              99
              
              
              $
              30
              
              $
              200Amount
      reclassified from AOCL (1)
              
              
              (95
              )
              
              
              (84
              )
              
              
              (11
              )
              
              
              -
              
              
              
              -
              
              
              -Intersegment
      revenue
              
              
              -
              
              
              
              144
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              (144
              )Income
      from equity method investees
              
              
              56
              
              
              
              -
              
              
              
              56
              
              
              
              -
              
              
              
              -
              
              
              -Total
      Revenues
              
              
              1,205
              
              
              
              812
              
              
              
              208
              
              
              
              99
              
              
              
              30
              
              
              56DD&A
              
              
              196
              
              
              
              165
              
              
              
              9
              
              
              
              12
              
              
              
              5
              
              
              5Loss
      on commodity derivative instruments
              
              
              828
              
              
              
              677
              
              
              
              151
              
              
              
              -
              
              
              
              -
              
              
              -Income
      (loss) before taxes
              
              
              (198
              )
              
              
              (214
              )
              
              
              38
              
              
              
              72
              
              
              
              23
              
              
              (117
              )Three
      Months Ended June 30, 2007Revenues
      from third parties
              
              $
              756
              
              
              $
              426
              
              
              $
              122
              
              
              $
              62
              
              
              $
              24
              
              $
              122Amount
      reclassified from AOCL (1)
              
              
              (11
              )
              
              
              (11
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -Intersegment
      revenue
              
              
              -
              
              
              
              71
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              (71
              )Income
      from equity method investees
              
              
              49
              
              
              
              -
              
              
              
              49
              
              
              
              -
              
              
              
              -
              
              
              -Total
      Revenues
              
              
              794
              
              
              
              486
              
              
              
              171
              
              
              
              62
              
              
              
              24
              
              
              51DD&A
              
              
              183
              
              
              
              149
              
              
              
              7
              
              
              
              15
              
              
              
              4
              
              
              8Loss
      on involuntary conversion
              
              
              38
              
              
              
              38
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -Gain
      on commodity derivative instruments
              
              
              (1
              )
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -Income
      (loss) before taxes
              
              
              293
              
              
              
              160
              
              
              
              142
              
              
              
              27
              
              
              
              18
              
              
              (54
              )Six
      Months Ended June 30, 2008Revenues
      from third parties
              
              $
              2,267
              
              
              $
              1,329
              
              
              $
              304
              
              
              $
              191
              
              
              $
              70
              
              $
              373Amount
      reclassified from AOCL (1)
              
              
              (155
              )
              
              
              (132
              )
              
              
              (23
              )
              
              
              -
              
              
              
              -
              
              
              -Intersegment
      revenue
              
              
              -
              
              
              
              260
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              (260
              )Income
      from equity method investees
              
              
              118
              
              
              
              -
              
              
              
              118
              
              
              
              -
              
              
              
              -
              
              
              -Total
      Revenues
              
              
              2,230
              
              
              
              1,457
              
              
              
              399
              
              
              
              191
              
              
              
              70
              
              
              113DD&A
              
              
              399
              
              
              
              329
              
              
              
              18
              
              
              
              28
              
              
              
              11
              
              
              13Loss
      on commodity derivative instruments
              
              
              1,065
              
              
              
              886
              
              
              
              179
              
              
              
              -
              
              
              
              -
              
              
              -Income
      (loss) before taxes
              
              
              119
              
              
              
              (68
              )
              
              
              188
              
              
              
              127
              
              
              
              54
              
              
              (182
              )Six
      Months Ended June 30, 2007Revenues
      from third parties
              
              $
              1,438
              
              
              $
              809
              
              
              $
              185
              
              
              $
              117
              
              
              $
              49
              
              $
              278Amount
      reclassified from AOCL (1)
              
              
              4
              
              
              
              4
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -Intersegment
      revenue
              
              
              -
              
              
              
              167
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              (167
              )Income
      from equity method investees
              
              
              95
              
              
              
              -
              
              
              
              95
              
              
              
              -
              
              
              
              -
              
              
              -Total
      Revenues
              
              
              1,537
              
              
              
              980
              
              
              
              280
              
              
              
              117
              
              
              
              49
              
              
              111DD&A
              
              
              349
              
              
              
              287
              
              
              
              10
              
              
              
              28
              
              
              
              8
              
              
              16Loss
      on involuntary conversion
              
              
              51
              
              
              
              51
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -Gain
      on commodity derivative instruments
              
              
              (2
              )
              
              
              (2
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              -Income
      (loss) before taxes
              
              
              597
              
              
              
              377
              
              
              
              226
              
              
              
              60
              
              
              
              37
              
              
              (103
              )Total
      assets at June 30, 2008(2)
              
              $
              11,937
              
              
              $
              8,693
              
              
              $
              1,605
              
              
              $
              707
              
              
              $
              267
              
              $
              665Total
      assets at December 31, 2007(2)
              
              
              10,831
              
              
              
              7,918
              
              
              
              1,355
              
              
              
              562
              
              
              
              268
              
              
              728




(1)
            Revenues
      include increases (decreases) resulting from hedging activities. The 2008
      decreases resulted from hedge gains and losses that were deferred in AOCL
      as of December 31, 2007 and subsequently reclassified to
      revenues.


(2)
            The
      US reporting unit includes goodwill of $759 million at June 30, 2008 and
      $761 million at December 31, 2007.





15


Note 13 – Commitments and
Contingencies


Purchaser Bankruptcy–We have a potential
exposure from crude oil sales for the months of June and July 2008 to SemCrude,
L.P. (SemCrude), a subsidiary of SemGroup, L.P. (SemGroup).  On July
21, 2008, SemGroup, including SemCrude, filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code under Case Number
08-11525 (BLS) in the United States Bankruptcy Court for the District of
Delaware.





As of
June 30, 2008, we had a receivable of approximately $42 million from SemCrude.
Including sales of crude oil production to SemCrude during the period July 1 –
21, 2008, we estimate the current receivable balance to be approximately $73
million. We are pursuing various legal remedies to protect our interests. We are
currently unable to quantify the amount of the receivable balance, if any, that
is uncollectible. However, we believe that ultimate disposition of this matter
will not have a material adverse affect on our liquidity or overall financial
position.





Legal Proceedings – We are
among a group of 18 defendants named in a lawsuit filed August 23, 2002 by Dore
Energy Corporation under Docket Number 10-16202 in the 38th Judicial District
Court, Cameron Parish, Louisiana.  The lawsuit alleges damage to
property owned by Dore resulting from oil and gas activities dating to the
1930’s.  Our predecessor, Samedan Oil Corporation, operated on a
portion of the property from 1989 to 1999.  Dore has delivered
documents alleging approximately $140 million in damages.  Trial is
currently set for September 29, 2008.  We intend to vigorously defend
against these allegations and believe that our share of damages, if any, will
not have a material adverse effect on our financial position, results of
operations, or cash flows.





We are
involved in various other legal proceedings in the ordinary course of
business.  These proceedings are subject to the uncertainties inherent
in any litigation.  We are defending ourselves vigorously in all such
matters and we believe that the ultimate disposition of such proceedings will
not have a material adverse effect on our financial position, results of
operations or cash flows.





Note 14 – Recently Issued
Pronouncements


SFAS 141(R) and SFAS 160 –In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS
141(R)) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” (SFAS 160). These statements require most identifiable assets,
liabilities and noncontrolling interests to be recorded at full fair value and
require noncontrolling interests to be reported as a component of equity. Both
statements are effective for periods beginning on or after December 15, 2008,
and earlier adoption is prohibited. SFAS 141(R) will be applied to business
combinations occurring after the effective date and SFAS 160 will be applied
prospectively to all noncontrolling interests, including any that arose before
the effective date. We are currently evaluating the provisions of SFAS 141(R)
and SFAS 160 and assessing the impact, if any, they may have on our financial
position and results of operations.





SFAS 161 –In March 2008, the
FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities” (SFAS 161). SFAS 161 amends and expands the disclosure requirements
of SFAS 133 and requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of
derivative instruments and related gains and losses, and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. We are currently evaluating the provisions of
SFAS 161. The statement provides only for enhanced disclosures. Therefore,
adoption will have no impact on our financial position or results of
operations.





SFAS 162 – In May 2008, the
FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (SFAS 162). SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP (the GAAP hierarchy). SFAS 162 is effective 60 days
following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU section 411, “The Meaning ofPresent Fairly in
Conformity With Generally
Accepted Accounting Principles.”We are
currently evaluating the provisions of SFAS 162 and assessing the impact, if
any, it may have on our financial position and results of
operations.











16





ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION


AND
RESULTS OF OPERATIONS





EXECUTIVE
OVERVIEW





We are a
worldwide producer of crude oil, natural gas and NGLs. Our strategy is to
achieve growth in earnings and cash flow through the development of a high
quality portfolio of producing assets that is diversified among US and
international projects.





Effective
January 1, 2008, we discontinued cash flow hedge accounting on all existing
commodity derivative instruments. We voluntarily made this change to provide
greater flexibility in our use of derivative instruments. From January 1, 2008
forward, we recognize all gains and losses on such instruments in earnings in
the period in which they occur. The discontinuance of cash flow hedge accounting
for commodity derivative instruments has no impact on our net assets or cash
flows and previously reported amounts have not been adjusted. However, the use
of mark-to-market accounting adds volatility to our reported earnings. For the
second quarter of 2008, we recognized an unrealized $716 million mark-to-market
loss on commodity derivative instruments.





Financial
results for second quarter 2008 also included the following:


·
            net
      loss of $144 million, as compared with net income of $209 million for
      2007;


·
            diluted
      loss per share of $0.84, as compared with diluted earnings per share of
      $1.21 for 2007; and


·
            cash
      flow from operating activities of $648 million, as compared with $351
      million for 2007.





Operational
results for second quarter 2008 included the following:


·
            9%
      overall increase in sales volumes over 2007 with growth in both the US and
      international operations;


·
            execution
      of agreement to acquire producing properties in western
      Oklahoma;


·
            successful
      Benita oil appraisal well, offshore Equatorial Guinea;
  and


·
            exploration
      discoveries offshore Equatorial Guinea at Diega and
    Felicita.





Mid-continent Acquisition –
In July 2008, we acquired producing properties in western Oklahoma for $291
million in cash, subject to customary adjustments. Properties acquired cover
approximately 15,500 net acres and are currently producing 25 MMcfepd with
approximately 75% natural gas and 25% liquids. We will operate the assets with
an average working interest of 83%, with plans to double production over the
next two years.





OUTLOOK





We expect
crude oil, natural gas and condensate production to increase in 2008 compared to
2007. The expected year-over-year increase in production is impacted by several
factors including:


·
            higher
      sales of natural gas from the Alba field in Equatorial
    Guinea;


·
            growing
      production from our Rocky Mountain assets, where we are continuing active
      drilling programs;


offset
by


·
            natural
      field decline in the Gulf Coast and Mid-continent areas of our US
      operations.




Factors
impacting our expected production profile for 2008 include:


·
            potential
      hurricane-related volume curtailments in the Gulf of Mexico and Gulf Coast
      areas of our US operations;


·
            potential
      winter storm-related volume curtailments in the Northern region of our US
      operations;


·
            potential
      pipeline and processing facility capacity constraints in the Rocky
      Mountain area of our US operations;


·
            infrastructure
      development and deliverability of Egyptian gas in
  Israel;


·
            potential
      downtime at the methanol, LPG and/or LNG facilities in Equatorial
      Guinea;


·
            seasonal
      variations in rainfall in Ecuador that affect our natural gas-to-power
      project;


·
            timing
      and success of capital expenditures, as discussed below, which are
      expected to result in near-term production;
and


·
            timing
      of significant project completion and initial
  production.





2008 Capital Expenditures –We have forecasted capital expenditures of approximately $2.4 billion for
2008.  Approximately 30% of the 2008 capital forecast has been
allocated to exploration opportunities, including additions for the deepwater
lease sale and other leasehold acquisitions.  Approximately 70% of the
2008 capital forecast has been allocated to acquisitions, production,
development and other projects. US expenditures are forecast at $1.835 billion,
international expenditures are forecast at $486 million and corporate
expenditures are forecast at $36 million. We expect that our 2008 capital
forecast will be funded primarily from cash flows from operations and borrowings
under our revolving credit facility. We will evaluate the level of capital
spending throughout the year based upon drilling results, commodity prices, cash
flows from operations, and property acquisitions and divestitures.





Recently Issued
Pronouncements–
See Item 1. Financial Statements – Note 14 – Recently Issued
Pronouncements.








17





RESULTS
OF OPERATIONS





Oil,
Gas and NGL Sales


Average
daily sales volumes and average realized sales prices were as
follows:





Sales
      Volumes
              
              Average
      Realized Sales PricesCrude
      Oil &
              
              
              Natural
              
              
              
              Crude
      Oil &
              
              
              NaturalCondensate
              
              
              Gas
      (1)
              
              NGLs
      (1)
              
              Condensate
              
              
              Gas
      (1)
              
              
              NGLs
      (1)(MBopd)
              
              
              (MMcfpd)
              
              (MBpd)
              
              (Per
      Bbl)
              
              
              (Per
      Mcf)
              
              
              (Per
      Bbl)Three
      Months Ended June 30, 2008United
      States (2)
              
              
              44
              
              
              
              402
              
              
              10
              
              
              $
              99.05
              
              
              $
              9.82
              
              
              $
              59.65West
      Africa (3)
              
              
              14
              
              
              
              222
              
              
              -
              
              
              
              112.32
              
              
              
              0.27
              
              
              
              -North
      Sea
              
              
              8
              
              
              
              5
              
              
              -
              
              
              
              126.05
              
              
              
              10.81
              
              
              
              -Israel
              
              
              -
              
              
              
              121
              
              
              -
              
              
              
              -
              
              
              
              2.72
              
              
              
              -Ecuador
      (4)
              
              
              -
              
              
              
              22
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      International
              
              
              4
              
              
              
              -
              
              
              -
              
              
              
              109.17
              
              
              
              -
              
              
              
              -Total
      Consolidated Operations
              
              
              70
              
              
              
              772
              
              
              10
              
              
              
              105.46
              
              
              
              5.86
              
              
              
              59.65Equity
      Investees (5)
              
              
              2
              
              
              
              -
              
              
              7
              
              
              
              118.95
              
              
              
              -
              
              
              
              69.70Total
              
              
              72
              
              
              
              772
              
              
              17
              
              
              $
              105.74
              
              
              $
              5.86
              
              
              $
              63.75Three
      Months Ended June 30, 2007United
      States (2)
              
              
              45
              
              
              
              418
              
              
              -
              
              
              $
              51.34
              
              
              $
              7.25
              
              
              $
              -West
      Africa (3)
              
              
              19
              
              
              
              116
              
              
              -
              
              
              
              69.23
              
              
              
              0.29
              
              
              
              -North
      Sea
              
              
              10
              
              
              
              5
              
              
              -
              
              
              
              67.88
              
              
              
              4.81
              
              
              
              -Israel
              
              
              -
              
              
              
              97
              
              
              -
              
              
              
              -
              
              
              
              2.70
              
              
              
              -Ecuador
      (4)
              
              
              -
              
              
              
              22
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      International
              
              
              7
              
              
              
              -
              
              
              -
              
              
              
              50.51
              
              
              
              -
              
              
              
              -Total
      Consolidated Operations
              
              
              81
              
              
              
              658
              
              
              -
              
              
              
              57.42
              
              
              
              5.27
              
              
              
              -Equity
      Investees (5)
              
              
              2
              
              
              
              -
              
              
              7
              
              
              
              70.76
              
              
              
              -
              
              
              
              44.60Total
              
              
              83
              
              
              
              658
              
              
              7
              
              
              $
              57.76
              
              
              $
              5.27
              
              
              $
              44.60Six
      Months Ended June 30, 2008United
      States (2)
              
              
              43
              
              
              
              397
              
              
              10
              
              
              $
              85.36
              
              
              $
              9.40
              
              
              $
              57.55West
      Africa (3)
              
              
              15
              
              
              
              221
              
              
              -
              
              
              
              100.16
              
              
              
              0.27
              
              
              
              -North
      Sea
              
              
              9
              
              
              
              6
              
              
              -
              
              
              
              112.36
              
              
              
              10.18
              
              
              
              -Israel
              
              
              -
              
              
              
              133
              
              
              -
              
              
              
              -
              
              
              
              2.90
              
              
              
              -Ecuador
      (4)
              
              
              -
              
              
              
              23
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      International
              
              
              5
              
              
              
              -
              
              
              -
              
              
              
              87.47
              
              
              
              -
              
              
              
              -Total
      Consolidated Operations
              
              
              72
              
              
              
              780
              
              
              10
              
              
              
              91.88
              
              
              
              5.60
              
              
              
              57.55Equity
      Investees (5)
              
              
              2
              
              
              
              -
              
              
              7
              
              
              
              107.01
              
              
              
              -
              
              
              
              65.50Total
              
              
              74
              
              
              
              780
              
              
              17
              
              
              $
              92.24
              
              
              $
              5.60
              
              
              $
              60.80Six
      Months Ended June 30, 2007United
      States (2)
              
              
              45
              
              
              
              413
              
              
              -
              
              
              $
              48.88
              
              
              $
              7.74
              
              
              $
              -West
      Africa (3)
              
              
              16
              
              
              
              86
              
              
              -
              
              
              
              64.15
              
              
              
              0.31
              
              
              
              -North
      Sea
              
              
              10
              
              
              
              6
              
              
              -
              
              
              
              64.45
              
              
              
              5.51
              
              
              
              -Israel
              
              
              -
              
              
              
              100
              
              
              -
              
              
              
              -
              
              
              
              2.72
              
              
              
              -Ecuador
      (4)
              
              
              -
              
              
              
              26
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      International
              
              
              7
              
              
              
              -
              
              
              -
              
              
              
              47.87
              
              
              
              -
              
              
              
              -Total
      Consolidated Operations
              
              
              78
              
              
              
              631
              
              
              -
              
              
              
              53.75
              
              
              
              5.83
              
              
              
              -Equity
      Investees (5)
              
              
              2
              
              
              
              -
              
              
              6
              
              
              
              65.46
              
              
              
              -
              
              
              
              42.34Total
              
              
              80
              
              
              
              631
              
              
              6
              
              
              $
              54.04
              
              
              $
              5.83
              
              
              $
              42.34






18





(1)
            In
      2007, US NGL sales volumes were included with natural gas
      volumes.  Effective in 2008, we began reporting US NGLs, which
      has lowered the comparative natural gas volumes from 2007 to
      2008.


(2)
            Average
      realized crude oil and condensate prices reflect reductions of $20.46 per
      Bbl and $9.74 per Bbl for second quarter 2008 and 2007, respectively, and
      reductions of $21.13 per Bbl and $8.30 per Bbl for the first six months of
      2008 and 2007, respectively, from hedging activities. Average realized
      natural gas prices reflect a reduction of $0.06 per Mcf and an increase of
      $0.77 per Mcf for second quarter 2008 and 2007, respectively, and
      increases of $0.49 per Mcf and $0.96 per Mcf for the first six months of
      2008 and 2007, respectively, from hedging activities.  The 2008
      price reductions resulted from hedge gains and losses that were deferred
      in AOCL as of December 31, 2007.


(3)
            Average
      realized crude oil and condensate prices reflect reductions of $8.20 per
      Bbl for second quarter 2008 and $8.42 per Bbl for the first six months of
      2008 from hedging activities.  The 2008 price reductions
      resulted from hedge gains and losses that were deferred in AOCL as of
      December 31, 2007.  Hedging activities had no effect on West
      Africa prices in the first six months of 2007.  Natural gas from
      the Alba field in Equatorial Guinea is under contract for $0.25 per MMBtu
      to a methanol plant, an LPG plant and an LNG facility. The methanol and
      LPG plants are owned by affiliated entities accounted for under the equity
      method of accounting.  Natural gas volumes sold to the LNG
      facility totaled 175 MMcfpd and 58 MMcfpd during second quarter 2008 and
      2007, respectively, and 174 MMcfpd and 30 MMcfpd during the first six
      months of 2008 and 2007, respectively. The natural gas sold to the LNG
      facility and methanol plant has a lower Btu content than the natural gas
      sold to the LPG plant. As a result of the increase in natural gas
      volumes sold to the LNG plant in 2008, the average price received on an
      Mcf basis is lower.


(4)
            The
      natural gas-to-power project in Ecuador is 100% owned by our subsidiaries
      and intercompany natural gas sales are eliminated for accounting purposes.
      Electricity sales are included in other revenues.


(5)
            Volumes
      represent sales of condensate and LPG from the Alba plant in Equatorial
      Guinea. See Equity Method Investees
below.





Crude oil
and condensate sales volumes in the table above differ from actual production
volumes due to the timing of liquid hydrocarbon tanker liftings. Crude oil and
condensate production volumes were as follows:




Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(MBopd)United
      States
            
            
            44
            
            
            
            45
            
            
            
            43
            
            
            
            45West
      Africa
            
            
            15
            
            
            
            16
            
            
            
            15
            
            
            
            16North
      Sea
            
            
            9
            
            
            
            11
            
            
            
            10
            
            
            
            10Other
      International
            
            
            4
            
            
            
            7
            
            
            
            5
            
            
            
            7Total
      Consolidated Operations
            
            
            72
            
            
            
            79
            
            
            
            73
            
            
            
            78Equity
      Investees
            
            
            2
            
            
            
            2
            
            
            
            2
            
            
            
            2Total
            
            
            74
            
            
            
            81
            
            
            
            75
            
            
            
            80


Revenues
from sales of commodities were as follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Crude
      oil and condensate sales
              
              $
              674
              
              
              $
              422
              
              
              $
              1,200
              
              
              $
              755Natural
      gas sales
              
              
              399
              
              
              
              305
              
              
              
              771
              
              
              
              639NGL
      sales (1)
              
              
              57
              
              
              
              -
              
              
              
              103
              
              
              
              -Total
              
              $
              1,130
              
              
              $
              727
              
              
              $
              2,074
              
              
              $
              1,394




(1)
            For
      2007, US NGL sales volumes were included with natural gas
      volumes.  Effective in 2008, we began reporting US NGLs, which
      has lowered the comparative natural gas volumes from 2007 to
      2008.


19




Crude Oil and Condensate Sales –During second quarter 2008,crude oil and condensate
sales increased a net $252 million, or 60%, as compared with second quarter
2007. US sales increased by $186 million, or 88%, and international sales
increased $66 million, or 31%.





During
the first six months of 2008, crude oil and condensate sales increased a net
$445 million, or 59%, as compared with the first six months of 2007. US sales
increased by $273 million, or 68%, from the first six months of 2007, and
international sales increased $172 million, or 49%.





Factors
contributing to the changes in crude oil and condensate sales
included:





·
            higher
      worldwide commodity prices; and


·
            growth
      in the Rocky Mountain area of our US
operations;


offset
by:


·
            declining
      production in the Gulf Coast onshore and Mid-continent areas of our US
      operations; and


·
            timing
      of hydrocarbon tanker liftings in Equatorial Guinea and the North
      Sea.





Revenues
include amounts reclassified from AOCL related to commodity derivative
instruments which were accounted for as cash flow hedges through December 31,
2007.  Amounts included decreases of $93 million and $40 million for
second quarter 2008 and 2007, respectively, and decreases of $190 million and
$68 million for the first six months of 2008 and 2007,
respectively.





Natural Gas Sales –During second quarter
2008, natural gas sales increased a net $94 million, or 31%, as compared with
second quarter 2007. US sales increased $83 million, or 30%, and international
sales increased $11 million, or 38%.





During
the first six months of 2008, natural gas sales increased a net $132 million, or
21%, as compared with the first six months of 2007. US sales increased $101
million, or 17%, and international sales increased $31 million, or
52%.





Factors
contributing to the changes in natural gas sales included:





·
            higher
      commodity prices;


·
            our
      successful drilling program in the Piceance basin along with less severe
      winter weather in the Rocky Mountain area of our US
      operations;


·
            increased
      natural gas sales volumes in Israel;
and


·
            increased
      sales from the Alba field in Equatorial Guinea to an LNG
      plant;


offset
by:


·
            a
      reduction for shrink gas associated with the natural gas liquids now being
      reported separately;


·
            declining
      production in the Gulf Coast onshore and Mid-continent areas of our US
      operations; and


·
            lower
      average realized prices in West
Africa.





Revenues
include amounts reclassified from AOCL related to commodity derivative
instruments which were accounted for as cash flow hedges through December 31,
2007.  Amounts included a decrease of $2 million and an increase of
$29 million for second quarter 2008 and 2007, respectively, and increases of $35
million and $72 million for the first six months of 2008 and 2007,
respectively.








20





Equity
Method Investees


Our share
of operations of equity method investees, Atlantic Methanol Production Company,
LLC (AMPCO) and Alba Plant LLC (Alba Plant), was as follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income (in millions)AMPCO
      and affiliates
              
              $
              17
              
              
              $
              11
              
              
              $
              45
              
              
              $
              36Alba
      Plant
              
              $
              39
              
              
              $
              38
              
              
              $
              73
              
              
              $
              59Distributions/Dividends
      (in millions)AMPCO
              
              $
              5
              
              
              $
              21
              
              
              $
              39
              
              
              $
              42Alba
      Plant
              
              $
              40
              
              
              $
              23
              
              
              $
              82
              
              
              $
              55Sales
      volumesMethanol
      (Mgal)
              
              
              36
              
              
              
              34
              
              
              
              70
              
              
              
              73Condensate
      (MBopd)
              
              
              2
              
              
              
              2
              
              
              
              2
              
              
              
              2LPG
      (MBpd)
              
              
              7
              
              
              
              7
              
              
              
              7
              
              
              
              6Production
      volumesMethanol
      (Mgal)
              
              
              31
              
              
              
              40
              
              
              
              63
              
              
              
              81Condensate
      (MBopd)
              
              
              2
              
              
              
              2
              
              
              
              2
              
              
              
              2LPG
      (MBpd)
              
              
              6
              
              
              
              7
              
              
              
              6
              
              
              
              6Average
      realized pricesMethanol
      (per gallon)
              
              $
              1.15
              
              
              $
              0.87
              
              
              $
              1.38
              
              
              $
              1.06Condensate
      (per Bbl)
              
              $
              118.95
              
              
              $
              70.76
              
              
              $
              107.01
              
              
              $
              65.46LPG
      (per Bbl)
              
              $
              69.70
              
              
              $
              44.60
              
              
              $
              65.50
              
              
              $
              42.34


Net
income from AMPCO increased $6 million, or 55%, during second quarter 2008 as
compared with second quarter 2007 and increased $9 million, or 25%, during the
first six months of 2008 as compared with the first six months of 2007 primarily
due to higher average realized methanol prices. The decreases in methanol
production volumes were due to down time for compressor and other equipment
maintenance.





Net
income from Alba Plant increased $1 million, or 3%, during second quarter 2008
as compared with second quarter 2007 and increased $14 million, or 24%, during
the first six months of 2008 as compared with the first six months of 2007
primarily due to higher average realized condensate and LPG prices, offset by
the expiration of the Alba Plant tax holiday. See Income Tax Provision
(Benefit) below.














21





Costs
and Expenses


Production Costs –Production
costs were as follows:




United
              
              
              West
              
              
              North
              
              
              
              
              
              Other
      Int'l /Consolidated
              
              
              States
              
              
              Africa
              
              
              Sea
              
              
              Israel
              
              
              Corp(1)(in
      millions)Three
      Months Ended June 30, 2008Oil
      and gas operating costs (2)
              
              $
              80
              
              
              $
              56
              
              
              $
              10
              
              
              $
              9
              
              
              $
              2
              
              
              $
              3Workover
      and repair expense
              
              
              8
              
              
              
              8
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Lease
      operating expense
              
              
              88
              
              
              
              64
              
              
              
              10
              
              
              
              9
              
              
              
              2
              
              
              
              3Production
      and ad valorem taxes
              
              
              51
              
              
              
              41
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10Transportation
      expense
              
              
              16
              
              
              
              14
              
              
              
              -
              
              
              
              2
              
              
              
              -
              
              
              
              -Total
      production costs
              
              $
              155
              
              
              $
              119
              
              
              $
              10
              
              
              $
              11
              
              
              $
              2
              
              
              $
              13Three
      Months Ended June 30, 2007Oil
      and gas operating costs (2)
              
              $
              77
              
              
              $
              51
              
              
              $
              11
              
              
              $
              7
              
              
              $
              2
              
              
              $
              6Workover
      and repair expense
              
              
              6
              
              
              
              6
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Lease
      operating expense
              
              
              83
              
              
              
              57
              
              
              
              11
              
              
              
              7
              
              
              
              2
              
              
              
              6Production
      and ad valorem taxes
              
              
              28
              
              
              
              24
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4Transportation
      expense
              
              
              16
              
              
              
              14
              
              
              
              -
              
              
              
              2
              
              
              
              -
              
              
              
              -Total
      production costs
              
              $
              127
              
              
              $
              95
              
              
              $
              11
              
              
              $
              9
              
              
              $
              2
              
              
              $
              10Six
      Months Ended June 30, 2008Oil
      and gas operating costs (2)
              
              $
              156
              
              
              $
              105
              
              
              $
              19
              
              
              $
              20
              
              
              $
              4
              
              
              $
              8Workover
      and repair expense
              
              
              14
              
              
              
              14
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Lease
      operating expense
              
              
              170
              
              
              
              119
              
              
              
              19
              
              
              
              20
              
              
              
              4
              
              
              
              8Production
      and ad valorem taxes
              
              
              94
              
              
              
              74
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              20Transportation
      expense
              
              
              29
              
              
              
              25
              
              
              
              -
              
              
              
              4
              
              
              
              -
              
              
              
              -Total
      production costs
              
              $
              293
              
              
              $
              218
              
              
              $
              19
              
              
              $
              24
              
              
              $
              4
              
              
              $
              28Six
      Months Ended June 30, 2007Oil
      and gas operating costs (2)
              
              $
              151
              
              
              $
              106
              
              
              $
              18
              
              
              $
              13
              
              
              $
              4
              
              
              $
              10Workover
      and repair expense
              
              
              10
              
              
              
              10
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Lease
      operating expense
              
              
              161
              
              
              
              116
              
              
              
              18
              
              
              
              13
              
              
              
              4
              
              
              
              10Production
      and ad valorem taxes
              
              
              54
              
              
              
              44
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10Transportation
      expense
              
              
              27
              
              
              
              22
              
              
              
              -
              
              
              
              4
              
              
              
              -
              
              
              
              1Total
      production costs
              
              $
              242
              
              
              $
              182
              
              
              $
              18
              
              
              $
              17
              
              
              $
              4
              
              
              $
              21


(1)
            Other
      international includes Ecuador, China, and
  Argentina.


(2)
            Oil
      and gas operating costs include labor, fuel, repairs, replacements,
      saltwater disposal and other related lifting
  costs.





Total
production costs increased $28 million, or 22%, during second quarter 2008 as
compared with second quarter 2007 and increased $51 million, or 21%, during the
first six months of 2008 as compared with the first six months of 2007. US lease
operating expense increased from 2007 primarily due to expenses relating to
increased workover activity and higher costs related to the continuing active
drilling program in the Northern region. These increases were partially offset
by a decrease in insurance costs for our Gulf of Mexico deepwater operations
related to a change in insurance coverage made second quarter 2007. North Sea
oil and gas operating costs for the second quarter and first six months of 2008
increased as compared with 2007 due to expanded operations and higher costs. The
increase in production and ad valorem taxes was driven primarily by higher
commodity prices and also by an increase in volumes subject to such
taxes.








22





Selected
expenses on a per BOE basis were as follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Oil
      and gas operating costs
              
              $
              4.23
              
              
              $
              4.41
              
              
              $
              4.05
              
              
              $
              4.58Workover
      and repair expense
              
              
              0.42
              
              
              
              0.35
              
              
              
              0.38
              
              
              
              0.30Lease
      operating expense
              
              
              4.65
              
              
              
              4.76
              
              
              
              4.43
              
              
              
              4.88Production
      and ad valorem taxes
              
              
              2.67
              
              
              
              1.66
              
              
              
              2.45
              
              
              
              1.63Transportation
      expense
              
              
              0.81
              
              
              
              0.93
              
              
              
              0.74
              
              
              
              0.82Total
      production costs(1) (2)
      (3)
              
              $
              8.13
              
              
              $
              7.35
              
              
              $
              7.62
              
              
              $
              7.33


(1)
            Consolidated
      unit rates exclude sales volumes and costs attributable to equity method
      investees.


(2)
            Sales
      volumes include natural gas sales to an LNG facility in Equatorial Guinea
      that began late first quarter 2007. Inclusion of these volumes reduced the
      unit rate by $1.32 per BOE and $0.40 per BOE for second quarter 2008 and
      2007, respectively, and $1.21 per BOE and $0.21 per BOE for the first six
      months of 2008 and 2007,
respectively.


(3)
            Natural
      gas volumes are converted to oil equivalent volumes on the basis of six
      thousand cubic feet of gas per barrel of
oil.





Oil and Gas Exploration Expense –Oil and gas exploration expense was as follows:





Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Oil
      and gas exploration expense (1)
              
              $
              103
              
              
              $
              54
              
              
              $
              143
              
              
              $
              99




(1)
            Oil
      and gas exploration expense includes dry hole expense, unproved lease
      amortization, seismic expense, staff expense, lease rentals and other
      miscellaneous exploration expense.





Oil and
gas exploration expense increased $49 million during second quarter 2008 as
compared with second quarter 2007 and $44 million during the first six months of
2008 as compared with the first six months of 2007. The increases were primarily
the result of increased dry hole expense. A significant portion of 2008 dry hole
expense relates to the West Tapir exploration well on Block 30 offshore Suriname
and the Stones River exploration well (Mississippi Canyon Block 285) in the
Gulf of Mexico.





Depreciation, Depletion and
Amortization –Depreciation, depletion and amortization (DD&A)
expense was as follows:





Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions, except unit rate)DD&A
      expense - property, plant and equipment
              
              $
              194
              
              
              $
              181
              
              
              $
              395
              
              
              $
              345Accretion
      of discount on asset retirement obligations
              
              
              2
              
              
              
              2
              
              
              
              4
              
              
              
              4Total
      DD&A expense
              
              $
              196
              
              
              $
              183
              
              
              $
              399
              
              
              $
              349Unit
      rate per BOE(1)
      (2)
              
              $
              10.30
              
              
              $
              10.58
              
              
              $
              10.36
              
              
              $
              10.57




(1)
            Consolidated
      unit rates exclude sales volumes and costs attributable to
      equity methodinvestees.


2)
            Sales
      volumes include natural gas sales to an LNG facility in Equatorial Guinea
      that began late first quarter 2007. Inclusion of these volumes reduced the
      unit rate by $1.34 per BOE and $0.46 per BOE for second quarter 2008 and
      2007, respectively, and $1.32 per BOE and $0.24 per BOE for the first six
      months of 2008 and 2007,
respectively.


23







Total
DD&A expense for the second quarter and first six months of 2008 increased
as compared with 2007 primarily due to the increase in sales volumes. The
decrease in the unit rate is due to a change in the mix of
production.  Increased production of lower-cost natural gas volumes
from the Alba field in Equatorial Guinea and Israel were partially offset by
production from areas with higher acquisition and/or development costs (the
Wattenberg field and deepwater Gulf of Mexico in the US).





General and Administrative
Expense – General and administrative expense (G&A) was as
follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007G&A
      expense (in millions)
              
              $
              61
              
              
              $
              48
              
              
              $
              121
              
              
              $
              93Unit
      rate per BOE (1)
      (2)
              
              $
              3.21
              
              
              $
              2.76
              
              
              $
              3.15
              
              
              $
              2.81


(1)
            Consolidated
      unit rates exclude sales volumes and costs attributable to equity method
      investees.


(2)
            Sales
      volumes include natural gas sales to an LNG facility in Equatorial Guinea
      that began late first quarter 2007. Inclusion of these volumes reduced the
      unit rate by $0.52 per BOE and $0.14 per BOE for second quarter 2008 and
      2007, respectively, and $0.50 per BOE and $0.07 per BOE for the first six
      months of 2008 and 2007,
respectively.





G&A
expense increased during the second quarter and first six months of 2008 as
compared with 2007.  Our increased activities require additional
personnel, which has resulted in higher payroll costs. In addition, we have
increased our incentive compensation accruals to align with current expectations
of achievement, and stock-based compensation increased $4 million and $8 million
during the second quarter and first six months of 2008, respectively, as
compared with 2007.





Other Operating Expense, Net –See Item I. Financial Statements – Note 2 – Basis of
Presentation.





Loss (Gain) on Commodity Derivative
Instruments– See Item 1. Financial Statements – Note 4 – Derivative
Instruments and Hedging Activities.





Interest Expense and Capitalized
Interest – Interest expense and capitalized interest were as
follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Interest
      expense
              
              $
              23
              
              
              $
              34
              
              
              $
              49
              
              
              $
              64Capitalized
      interest
              
              
              (6
              )
              
              
              (3
              )
              
              
              (15
              )
              
              
              (6
              )Interest
      expense, net
              
              $
              17
              
              
              $
              31
              
              
              $
              34
              
              
              $
              58
  Interest
expense decreased during the second quarter and first six months of 2008, as
compared with 2007 due to declining  interest rates applicable to our
credit facility from 5.67% at June 30, 2007 to 2.84% at June 30, 2008 and a
slightly lower average outstanding debt balance.





The
amount of interest capitalized increased due to long lead-time projects in West
Africa and the Gulf of Mexico.





Other Expense, Net –See Item
1. Financial Statements – Note 2 – Basis of Presentation.





24








Income Tax Provision (Benefit) –The income tax provision (benefit) was as follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Income
      tax provision (benefit) (in millions)
              
              $
              (54
              )
              
              $
              84
              
              
              $
              48
              
              
              $
              176Effective
      rate
              
              
              27.3
              %
              
              
              28.7
              %
              
              
              40.3
              %
              
              
              29.5
              %
  Our
effective tax rate increased during the first six months of 2008 as compared
with 2007. Certain tax items that normally have a small effect on the effective
rate have had a greater impact during 2008 due to our lower pretax income.
Pretax income was lower for the first six months of 2008 due to the impact of
mark to market commodity derivative losses. One tax item that affected the rate
was the recognition of losses from certain controlled foreign corporations,
primarily Suriname, for which no foreign tax benefit was recognized. This rate
increase was partially offset by the impact of an increase in earnings of our
equity method investees. Earnings from equity method investees represent a
favorable permanent difference in calculating income tax expense. These earnings
increased during the current period even though the tax holiday for the Alba
Plant in Equatorial Guinea expired at the end of 2007.





LIQUIDITY AND CAPITAL
RESOURCES





Overview


Our
primary cash needs are to fund operating expenses and capital expenditures
related to the acquisition, exploration and development of crude oil and natural
gas properties, to repay outstanding borrowings and associated interest payments
and other contractual commitments and to pay dividends. Traditional sources of
our liquidity are cash on hand, cash flows from operations and available
borrowing capacity under credit facilities. Occasional sales of non-strategic
crude oil and natural gas properties may also generate cash.





Cash and Cash Equivalents–
We had $983 million in cash and cash equivalents at June 30, 2008, compared with
$660 million at December 31, 2007. Approximately 90% of this cash is
attributable to our foreign subsidiaries and would be subject to additional US
income taxes if repatriated. The cash is denominated in US dollars and is
invested in highly liquid, investment-grade securities with original maturities
of three months or less at the time of purchase. We currently intend to use our
international cash to fund international projects, including the development of
West Africa.




We are
monitoring the current conditions in the credit markets. We have reviewed the
creditworthiness of the banks and financial institutions with which we maintain
our investments as well as the securities underlying our investments. Thus far,
our liquidity and financial position have not been negatively impacted. We
believe that losses from nonperformance are unlikely to occur; however, we are
not able to predict sudden changes in creditworthiness.





Commodity Derivative Instruments– As of June 30, 2008, we had a net liability of $1.3 billion relating to
commodity derivative instruments. We estimated the fair value of this liability
in accordance with SFAS 157, which we adopted as of January 1, 2008. In order to
determine the fair value at the end of each reporting period, we compute
discounted cash flows for the duration of each commodity derivative instrument
using the terms of the related contract. Inputs consist of published forward
commodity price curves for the underlying commodities as of the date of the
estimate. We compare these prices to the price parameters contained in our hedge
contracts to determine estimated future cash inflows or outflows. We then
discount the cash inflows or outflows using a combination of LIBOR rates,
Eurodollar futures rates and interest swap rates. We adjust the discount rate
used to value our commodity derivative liabilities to include a measure of
non-performance risk, consisting of the current published credit default swap
spread on our public debt. In addition, for costless collars, we estimate the
option value of the contract floors and ceilings using an option pricing model
which takes into account market volatility, market prices and contract
parameters.





25








Beginning
January 1, 2008, we use mark-to-market accounting for our commodity derivative
instruments and recognize all changes in fair value in earnings in the period
they occur. This can have a significant impact on our results of operations due
to the volatility of the underlying commodity prices. Our liquidity is impacted
by current period settlements since we are either paying cash to, or receiving
cash from, our counterparties. If actual commodity prices are higher than the
fixed or ceiling prices in our derivative instruments, our cash flows provided
by operating activities will be lower than if we had no derivative instruments.
As of June 30, 2008, the current portion of our commodity derivative liability
totaled $964 million. We are not subject to significant margin calls by our
counterparties. We expect that future settlements of these liabilities would be
funded from cash flows from operations, and would be substantially offset by
related increases in crude oil and natural gas revenues.  See
additional information included in Item 3. Quantitative and Qualitative
Disclosures About Market Risk.





Contractual Obligations–During
second quarter 2008, we entered into a drilling and equipment contract for our
international operations totaling $278 million.  Had this contract
been included in our contractual obligations table in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
annual report on Form 10-K, as amended, for the year ended
December 31, 2007, our international drilling and equipment
obligations would be $115 million in 2008, $75 million in 2009, $90 million in
2010 and $66 million in 2011 for a total of $346 million.





Cash
Flows


Cash flow
information is as follows:




Six
      Months EndedJune
      30,2008
              
              
              2007(in
      millions)Total
      cash provided by (used in):Operating
      activities
              
              $
              1,154
              
              
              $
              773Investing
      activities
              
              
              (823
              )
              
              
              (695
              )Financing
      activities
              
              
              (8
              )
              
              
              71Increase
      in cash and cash equivalents
              
              $
              323
              
              
              $
              149




Operating Activities – Net
cash provided by operating activities was $1.2 billion for the first six months
of 2008, as compared with $773 million for the first six months of
2007.  The increase was primarily due to higher commodity
prices.





Investing Activities –Net
cash used in investing activities was $823 million for the first six months of
2008, as compared with $695 million for the first six months of
2007.  Investing activities in 2008 consisted of $932 million in
capital expenditures offset by $109 million in proceeds from asset sales.
Investing activities in 2007 consisted entirely of capital expenditures. See
Acquisition, Capital and Other
Exploration Expenditures below.





Financing Activities – Net
cash used in financing activities was $8 million for the first six months of
2008, as compared with $71 million provided by financing activities for the
first six months of 2007.  During 2008 and 2007, cash flows provided
by financing activities included proceeds from the exercise of stock options and
related excess tax benefits. Cash flows used in financing activities during 2008
and 2007 included dividends paid on common stock. In addition, there were net
proceeds from borrowings of $180 million in 2007, while there were no net
proceeds from borrowings 2008. In 2008, $2 million was used to repurchase common
stock as compared with $102 million used in 2007.








26





Investing
Activities


Acquisition, Capital and Other
Exploration Expenditures– Expenditure information (on an accrual basis)
is as follows:




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      millions)Acquisition,
      Capital and Other Exploration ExpendituresUnproved
      property acquisition
              
              $
              87
              
              
              $
              103
              
              
              $
              263
              
              
              $
              106Proved
      property acquisition
              
              
              -
              
              
              
              6
              
              
              
              -
              
              
              
              6Exploration
      expenditures
              
              
              198
              
              
              
              91
              
              
              
              243
              
              
              
              152Development
      expenditures
              
              
              261
              
              
              
              271
              
              
              
              506
              
              
              
              482Corporate
      and other expenditures
              
              
              15
              
              
              
              10
              
              
              
              34
              
              
              
              19Total
      capital expenditures
              
              $
              561
              
              
              $
              481
              
              
              $
              1,046
              
              
              $
              765
  Unproved
property acquisition cost for the first six months of 2008 includes deepwater
lease blocks acquired in the March 2008 Gulf of Mexico lease sale and a
prepayment on the Mid-continent acquisition completed in July 2008.





Sale of Argentina Assets– In
February 2008, effective July 1, 2007, we sold our interest in Argentina for a
sales price of $117.5 million. The sale is subject to Argentine government
approval. We are currently unable to predict when government approval will be
obtained.





Financing
Activities


Long-Term Debt –Our
long-term debt totaled $1.9 billion (net of unamortized discount) at June
30, 2008. Maturities range from 2011 to 2097. Our ratio of debt-to-book
capital was 27% at June 30, 2008 as compared with 28% at December 31, 2007. We
define our ratio of debt-to-book capital as total debt (which includes both
long-term debt, excluding unamortized discount, and short-term borrowings)
divided by the sum of total debt plus shareholders’ equity.





Our
principal source of liquidity is a $2.1 billion unsecured revolving credit
facility.  The commitment is $2.1
billion until December 9, 2011 at which time the commitment reduces to $1.8
billion. The credit facility (i) provides for credit facility fee rates
that range from 5 basis points to 15 basis points per year depending upon our
credit rating, (ii) makes available short-term loans up to an aggregate amount
of $300 million and (iii) provides for interest rates that are based upon the
Eurodollar rate plus a margin that ranges from 20 basis points to 70 basis
points depending upon our credit rating and utilization of the credit facility.
The credit facility is with certain commercial lending institutions and is
available for general corporate purposes. At June 30, 2008, $1.2 billion in
borrowings were outstanding under the credit facility.  The weighted
average interest rate applicable to borrowings under the credit facility at June
30, 2008 was 2.84%.





Installment Payment Due– We
owe $25 million in the form of an installment payment to the seller of
properties we purchased in 2007. The amount is due May 11, 2009 and is included
in short-term borrowings in the consolidated balance sheets. Interest on the
unpaid amount is due quarterly and accrues at a LIBOR rate plus
..30%.  The interest rate was 3.00% at June 30, 2008.





Short-Term Borrowings – Our
credit facility is supplemented by short-term borrowings under various
uncommitted credit lines used for working capital purposes. Uncommitted credit
lines may be offered by certain banks from time to time at rates negotiated at
the time of borrowing.  Other than the installment payment discussed
above, there were no short-term borrowings outstanding at June 30,
2008.





Dividends –We paid cash
dividends of 30 cents per share of common stock during the first six months of
2008 and 19.5 cents per share of common stock during the first six months of
2007. On July 22, 2008, our Board of Directors declared a quarterly cash
dividend of 18.0 cents per common share, payable August 18, 2008 to shareholders
of record on August 4, 2008. The amount of future dividends will be determined
on a quarterly basis at the discretion of our Board of Directors and will depend
on earnings, financial condition, capital requirements and other
factors.





27







Exercise of Stock Options –We received $24 million from the exercise of stock options during the
first six months of 2008 as compared to $16 million during the first six months
of 2007.





Common Stock Repurchases –During the first six months of 2008, we received from employees 33,000
shares of common stock with a total value of $2 million for the payment of
withholding taxes due on shares issued under stock-based compensation
plans.  During the first six months of 2007, we repurchased 2 million
shares of our common stock at an aggregate cost of $102 million, pursuant to a
common stock repurchase program. The repurchase program was completed in
2007.











28





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES


ABOUT
MARKET RISK





Commodity
Price Risk


Derivative Instruments Held for
Non-Trading Purposes – We are exposed to market risk in the normal course
of business operations. We believe that we are well positioned with our mix of
crude oil and natural gas reserves to take advantage of future price increases
that may occur. However, the uncertainty of crude oil and natural gas prices
continues to impact the oil and gas industry. Due to the volatility of crude oil
and natural gas prices, we continue to use derivative instruments as a means of
managing our exposure to price changes.





At June
30, 2008, we had entered into variable to fixed price swaps, costless
collars and basis swaps related to crude oil and natural gas
sales.  Our open commodity derivative instruments were in a net
liability position with a fair value of $1.3 billion. Based on the June 30, 2008
published forward commodity price curves for the underlying commodities,
simultaneous price increases of $1.00 per Bbl for crude oil and $0.10 per MMBtu
for natural gas would increase the fair value of our net commodity derivative
liability by approximately $23 million. See Item 1. Financial Statements – Note
4 – Derivative Instruments and Hedging Activities.





Interest
Rate Risk


We are
exposed to interest rate risk related to our variable and fixed interest rate
debt. At June 30, 2008, we had $1.9 billion (excluding unamortized discount) of
long-term debt outstanding, of which $650 million was fixed-rate debt with a
weighted average interest rate of 6.92%. We believe that anticipated near term
changes in interest rates would not have a material effect on the fair value of
our fixed-rate debt and would not expose us to the risk of material earnings or
cash flow loss.





The
remainder of our long-term debt, $1.2 billion at June 30, 2008, was
variable-rate debt. We also had $25 million in a current installment payment at
June 30, 2008. Variable rate debt exposes us to the risk of earnings or cash
flow loss due to changes in market interest rates. We estimate that a
hypothetical 25 basis point change in the floating interest rates applicable to
our June 30, 2008 balance of variable-rate debt would result in a change in
annual interest expense of approximately $3 million.





We
occasionally enter into forward contracts or swap agreements to hedge exposure
to interest rate risk. Changes in fair value of interest rate swaps or interest
rate “locks” used as cash flow hedges are reported in AOCL, to the extent the
hedge is effective, until the forecasted transaction occurs, at which time they
are recorded as adjustments to interest expense. At June 30, 2008, AOCL
included $11 million, net of tax, related to interest rate locks. A portion
of this amount is currently being reclassified into earnings as adjustments to
interest expense over the term of our 51⁄4% Senior Notes due April 2014. The
remainder relates to interest rate locks that were settled in July 2008. See
Item 1. Financial Statements – Note 4 – Derivative Instruments and Hedging
Activities.





We are
also exposed to interest rate risk related to our short-term investments. As of
June 30, 2008, substantially all of our cash was invested in highly liquid,
short-term investment grade securities with original maturities of three months
or less at the time of purchase. A hypothetical 25 basis point change in the
floating interest rates applicable to the June 30, 2008 balance would result in
a change in annual interest income of approximately $2 million.





Foreign
Currency Risk


We have
not entered into foreign currency derivatives. The US dollar is considered the
functional currency for each of our international operations. Transactions that
are completed in a foreign currency are remeasured into US dollars and recorded
in the financial statements at prevailing currency exchange rates. We do not
have any significant monetary assets or liabilities denominated in a foreign
currency other than our foreign deferred tax liabilities in certain foreign tax
jurisdictions. An increase in exchange rates between the US dollar and the
currency of the foreign tax jurisdiction in which these liabilities are located
could result in the use of additional cash to settle these liabilities. However,
transaction gains or losses were not material in any of the periods presented
and we do not believe we are currently exposed to any material risk of loss on
this basis. Such gains or losses are included in other expense, net in the
consolidated statements of operations.





29







DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS





This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements give our
current expectations or forecasts of future events. These forward-looking
statements include, among others, the following:


·
            our
      growth strategies;


·
            our
      ability to successfully and economically explore for and develop crude oil
      and natural gas resources;


·
            anticipated
      trends in our business;


·
            our
      future results of operations;


·
            our
      liquidity and ability to finance our exploration and development
      activities;


·
            market
      conditions in the oil and gas
industry;


·
            our
      ability to make and integrate acquisitions;
and


·
            the
      impact of governmental regulation.





Forward-looking
statements are typically identified by use of terms such as “may,” “will,”
“expect,” “anticipate,” “estimate” and similar words, although some
forward-looking statements may be expressed differently. These forward-looking
statements are made based upon our current plans, expectations, estimates,
assumptions and beliefs concerning future events impacting us and therefore
involve a number of risks and uncertainties. We caution that forward-looking
statements are not guarantees and that actual results could differ materially
from those expressed or implied in the forward-looking statements. You should
consider carefully the statements under Item 1A. Risk Factors included herein,
if any, and included in our 2007 annual report on Form 10-K, as amended, which
describe factors that could cause our actual results to differ from those set
forth in the forward-looking statements.  Our 2007 annual report on
Form 10-K, as amended, is available on our website at www.nobleenergyinc.com.





ITEM
4.  CONTROLS AND PROCEDURES





Based on
the evaluation of our disclosure controls and procedures by Charles D. Davidson,
our principal executive officer, and Chris Tong, our principal financial
officer, as of the end of the period covered by this quarterly report, each of
them has concluded that our disclosure controls and procedures, as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, are
effective. There were no changes in internal control over financial reporting
that occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.








30





PART
II. OTHER INFORMATION


ITEM
1.  LEGAL PROCEEDINGS





See Item
I. Financial Statements – Note 13 – Commitments and
Contingencies.





ITEM
1A.  RISK FACTORS





None.





ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS








Period
              
              Total
      Numberof
      SharesPurchased
      (1)
              
              
              Average
      PricePaidPer
      Share
              
              
              Total
      Number ofShares
      Purchasedas
      Part of PubliclyAnnounced
      Plansor
      Programs
              
              
              ApproximateDollarValue
      of Shares that May Yet Be Purchased  Under the Plans or
      Programs(in
      millions)April
      1 - April 30, 2008
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              -May
      1 - May 31, 2008
              
              
              8,138
              
              
              
              99.23
              
              
              
              -
              
              
              
              -June
      1 - June 30, 2008
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              
              8,138
              
              
              $
              99.23
              
              
              
              -
              
              
              
              -




(1)
            Stock
      repurchases during the period related to stock received by us from
      employees for the payment of withholding taxes due on shares issued under
      stock-based compensation plans.








ITEM
3. DEFAULTS UPON SENIOR SECURITIES





None.





ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
  HOLDERS





(a)
            Our
      annual stockholders meeting was held at 9:30 a.m., Central Time, on
      Tuesday, April 22, 2008 in The Woodlands,
  Texas.





(b)
            Proxies
      were solicited by our Board of Directors pursuant to Regulation 14A under
      the Securities Exchange Act of 1934. There was no solicitation in
      opposition to the Board of Directors’ nominees as listed in the proxy
      statement and all such nominees were duly
  elected.





(c)
            Out
      of a total of 172,105,199 shares of our common stock outstanding and
      entitled to vote, 159,662,000 shares were present in person or by proxy,
      representing 92.77% of the outstanding shares of common
    stock.











31





The
      stockholder voting results are as
follows:


Proposal I.  Election of our
Board of Directors to serve until the next annual stockholders
meeting.





Number
      of Shares
              Voting
      for Election
              As
      Director
            
            Number
      of Shares
              Withholding
      Authority
              To
      Vote for Election
              As
      DirectorJeffrey
      L. Berenson
            
            145,897,440
            
            13,764,560Michael A. Cawley
            
            143,308,680
            
            16,353,320Edward
      F. Cox
            
            143,290,423
            
            16,371,577Charles
      D. Davidson
            
            144,994,224
            
            14,667,776Thomas
      J. Edelman
            
            145,421,648
            
            14,240,352Kirby
      L. Hedrick
            
            145,911,675
            
            13,750,325Scott
      D. Urban
            
            156,969,129
            
            2,692,871William
      T. Van Kleef
            
            145,988,031
            
            13,673,969





Proposal
      II.  Ratification of appointment of KPMG LLP as our independent
      auditors.


(For
      157,446,653; Against 1,163,741; Abstaining
  1,051,606)





ITEM
      5.  OTHER INFORMATION





None.





ITEM
6.  EXHIBITS





The
information required by this Item 6 is set forth in the Index to Exhibits
accompanying this quarterly report on Form 10-Q.





32








SIGNATURES








Pursuant
to the requirements of the Securities Exchange Act of 1934 as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



















NOBLE
      ENERGY, INC.(Registrant)








Date
            July
      30, 2008
            
            /s/
      CHRIS TONGCHRIS
      TONG
              Senior
      Vice President and Chief Financial
Officer














33











INDEX TO
EXHIBITS








Exhibit
              Number
            
            Exhibit





31.1
            Certification
      of the Company’s Chief Executive Officer Pursuant To Section 302 of the
      Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
  7241).





31.2
            Certification
      of the Company’s Chief Financial Officer Pursuant To Section 302 of the
      Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
  7241).





32.1
            Certification
      of the Company’s Chief Executive Officer Pursuant To Section 906 of the
      Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
  1350).





32.2
            Certification
      of the Company’s Chief Financial Officer Pursuant To Section 906 of the
      Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
  1350).





34